New Reporting Requirements for Distributions of Securities from Investment Partnerships

The IRS has recently released Form 7217, “Partner’s Report of Property Distributed by a Partnership,” as well as the accompanying instructions, reflecting a new reporting requirement for partners in investment partnerships, among others, for tax years beginning in 2024 or later. 

This new reporting requirement applies to any partner in any partnership that receives from the partnership distributions of property other than cash and marketable securities treated as cash. In the context of investment partnerships, it applies for investors in private equity, venture capital, and hedge funds that make in-kind distributions of securities or other property.  In addition, funds of funds that receive such distributions will also need to prepare this form.  This requirement could also come into play in the context of fund restructurings, such as the formation of continuation funds.

Tax-Free Distributions from Investment Partnerships

Investment partnerships that meet certain requirements can distribute marketable securities to partners on a tax-free basis.  The recipient partner can defer income recognition until the securities are later sold.  Other partnerships are required to treat marketable securities as cash, resulting in more immediate tax consequences. 

Each partner receiving a tax-free distribution of property, including marketable securities from an investment partnership, is required to file the new Form 7217.  A separate Form 7217 is required to be filed for each date during the tax year in which a distribution was received and will be attached to the recipient’s tax return. The information reported must include the basis of the distributed property and any required basis adjustments to such property.