The IRS on August 18 issued proposed regulations that would modify reporting requirements for partnerships with unrealized receivables or inventory items that are required to furnish Form 8308 by January 31 to the transferor and transferee in connection with certain partnership interest transfers that occurred in the previous calendar year.
For the past two years – after the IRS expanded Form 8038 reporting in late 2023 – the IRS has offered temporary relief relating to the new requirements. The relief, included in Notice 2025-02 and Notice 2024-19, responded to partnerships’ expressed concerns that they do not have the information necessary to complete the new Part IV of Form 8308 by the January 31 deadline.
The proposed regulations would modify the existing rules to remove the requirement to include Part IV in the statements generally required to be furnished by the January 31 deadline. Other Form 8308 requirements would remain.
Expanded Form 8308 Reporting
Partnerships file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to report the sale or exchange by a partner of all or part of a partnership interest where any money or other property received in exchange for the interest is attributable to unrealized receivables or inventory items (that is, where there has been a Section 751(a) exchange).
Final regulations published in November 2020, in Reg. §1.6050K-1(c)(2), require a partnership to furnish to a transferor partner the information necessary for the transferor to make the transferor partner’s required statement related to a Section 751(a) exchange. Under applicable regulations, a transferor partner in a Section 751(a) exchange must submit with the transferor partner’s income tax return for the tax year in which the sale or exchange occurs a statement separately stating the date of the sale or exchange, the amount of any gain or loss attributable to Section 751 property, and the amount of any gain or loss attributable to capital gain or loss on the sale of the partnership interest.
The IRS significantly expanded the Form 8308 reporting requirements in the revised form released in October 2023. For transfers occurring on or after January 1, 2023, the revised Form 8308 includes expanded Parts I and II and new Parts III and IV. Part IV is used to report specific types of partner gain or loss when there is a Section 751(a) exchange, including the partnership’s and the transferor partner’s share of Section 751 gain and loss, collectibles gain under Section 1(h)(5), and unrecaptured Section 1250 gain under Section 1(h)(6).
Furnishing Information to Transferors and Transferees
Partnerships with unrealized receivables or inventory items described in Section 751(a) (Section 751 property or “hot assets”) are required to provide information to each transferor and transferee that are parties to a Section 751(a) exchange.
Under the existing regulations, each partnership that is required to file a Form 8308 must furnish a statement to the transferor and transferee by the later of (1) January 31 of the year following the calendar year in which the Section 751(a) exchange occurred or (2) 30 days after the partnership has received notice of the Section 751(a) exchange.
Generally, partnerships must use the completed Form 8308 as the required statement, unless the form covers more than one Section 751 exchange. If the partnership is not providing the Form 8308 as the required statement, then it must furnish a statement with the information required to be shown on the form with respect to the Section 751(a) exchange to which the person is a party.
A penalty applies under Section 6722 for failure to furnish statements to transferors and transferees on or before the required date, or for failing to include all the required information or including incorrect information.
Previous Penalty Relief
Notices 2025-02 and 2024-19 stated that, with respect to Section 751(a) exchanges during calendar years 2024 and 2023, respectively, the IRS would not impose penalties under Section 6722 for failure to furnish Form 8308 with a completed Part IV by the regulatory due date (i.e., generally, January 31 of the following year) for partnerships that meet the relief requirements.
To qualify for relief, the partnership had to:
- Timely and correctly furnish to the transferor and transferee a copy of Parts I, II, and III of Form 8308, or a statement that includes the same information, by the later of January 31, or 30 days after the partnership is notified of the Section 751(a) exchange, and
- Furnish to the transferor and transferee a copy of the complete Form 8308, including Part IV, or a statement that includes the same information and any additional information required under the regulations, by the later of the due date of the partnership’s Form 1065 (including extensions) or 30 days after the partnership is notified of the Section 751(a) exchange.
Proposed Regulations
The proposed regulations would remove existing Reg. §1.6050K-1(c)(2) to eliminate the requirement that partnerships furnish the information required in Part IV of the Form 8308 by January 31 of the year following the calendar year in which the Section 751(a) exchange occurred. The IRS plans to update the instructions to Form 8308 in accordance with the proposed regulations.
Under the proposed regulations and modified Form 8308 instructions, partnerships would only be required to furnish the information in Parts I, II, and III of Form 8308 (or a statement with the same information) to the transferor and transferee in a Section 751(a) exchange by the later of (1) January 31 of the year following the calendar year in which the Section 751(a) exchange occurred, or (2) 30 days after the partnership has received notice of the exchange.
Partnerships would still be required to file the completed Form 8308, including Part IV, as an attachment to their Forms 1065, for the tax year of the partnership that includes the last day of the calendar year in which the Section 751(a) exchange took place.
The IRS states that partnerships may rely on the proposed regulations, and the described changes to the Form 8308 instructions, with respect to Section 751(a) exchanges occurring on or after January 1, 2025, and before the date final regulations are published.
BDO Insights
While the requirement of furnishing Form 8308 statements was not new, the inclusion of numerical “hot asset” (i.e., unrealized receivables or inventory items) information within Form 8308 for transactions in 2023 and later created difficulties, because, in many cases, partnerships do not have all the information required by Part IV of the Form 8308 by January 31 of the year following the calendar year in which the Section 751(a) exchange occurred.
Prior to 2023, this requirement could be satisfied by providing a taxpayer with a Form 8308 that merely notified the transferor that they will have some amount of hot asset recharacterization. With the new form, partnerships became required to provide actual recharacterization amounts.
The penalty relief related to the new requirements for the past two years was welcome – but it was temporary, and it was unclear whether such relief would continue to be offered in future years. The new rules ease the problematic portion of the Form 8308 information reporting requirements and give partnerships more certainty regarding compliance going forward.
Please visit BDO’s Partnership Tax Services page for more information on how BDO can help.