When a partner sells or exchanges ownership with another partner, the partnership has many tax reporting and calculation obligations to consider. For instance, to comply with IRC Section 6050K, a partnership that holds IRC Section 751(a) property, typically referred to as “hot assets,” must furnish a Form 8308 to the transferor and transferee by the later of Jan. 31 of the year following the calendar year in which the IRC Section 751(a) exchange occurred, or 30 days after the partnership has received notice of the exchange. Additionally, the partnership must attach a copy of Form 8308 to its Form 1065, “U.S. Return of Partnership Income.” The partnership also must include certain disclosures on Schedule K-1, “Partner’s Share of Current Year Income, Deductions, Credits, and Other Items,” to inform the transferor that a portion of the gain or loss recognized on the disposition of the partnership interest might be taxable at ordinary income rates rather than capital gain rates. Penalties apply for failure to comply with these requirements, including a penalty for failure to timely furnish a correct form to a transferor or transferee.
The IRS revised Form 8308 in October 2023, requiring partnerships to include a significant amount of additional information. Many partnerships, including those that were required to furnish forms on Jan. 31, 2024, had little time to gather the necessary information to comply. Notice 2024-19 provides limited penalty relief from the failure to timely furnish a correct Form 8308 to transferors and transferees.
Notable changes to Form 8308
Prior to the latest revision, Form 8308 had three parts: Part I asked for information about the transferor, Part II asked for information about the transferee, and Part III asked for the date of the sale or exchange. The updated Form 8308 adds several new reporting requirements. Following is a summary of the key changes:
- A check box was added to Part I to indicate whether the transferor is foreign.
- Part I and Part II were revised to require reporting of information regarding the record holder of the partnership interest, in addition to information about the beneficial owner. The prior version of the form only required reporting of beneficial owner information.
- Check boxes were added to Part III to indicate the type of interest transferred (for example, whether the interest was capital, preferred, profits, or other).
- New Part IV requires the partnership to report partnership-level information regarding the amount of the partner’s share of gain or loss under IRC Section 751(a), IRC Section 1(h)(5), and deemed Section 1250 unrecaptured gain or loss, as applicable, and either the percentage interest in the partnership that was transferred or the number of units in the partnership that were transferred. The selling partner’s share of gain or loss shown on Form 8308 is required to be reported in Box 20 (lines AB-AD) of the selling partner’s Schedule K-1.
Crowe observation
Further guidance is needed on the new section of the form. For example, it is unclear how to complete Part III of the form for a sale or exchange of more than one type of partnership interest by the same transferor in a single transaction.
Limited penalty relief
Because the form contains new reporting requirements and was released late in 2023, concerns were raised that partnerships would not have enough time to gather the additional information needed to complete the forms and furnish them by the due date.
In response to these concerns, in January 2024 the IRS released Notice 2024-19, which provides limited penalty relief for failure to timely furnish correct Form 8308 for sales and exchanges occurring during calendar year 2023. This relief applies only to incorrect information on Part IV of Form 8308 and only if the following conditions are met:
- Form 8308 must be timely furnished to transferors and transferees, and Parts I, II, and III must be correctly completed.
- The partnership must attach a Form 8308 with all parts accurately completed, including Part IV, to its timely filed Form 1065.
- A copy of Form 8308 with all parts accurately completed, including Part IV, must be furnished to the transferor and transferee by the later of the due date of the partnership’s Form 1065 or 30 days after the partnership is notified of the sale or exchange.
Looking ahead
The updated Form 8308 requires more time and effort to complete accurately due to the expanded reporting requirements. The new form also presents a challenge because it requires partnerships to gather additional information, including information from the transferor about the sale or exchange to complete Part III and partnership-level details like the total amount of IRC Section 751(a) gain or loss to complete Part IV. Partnerships should consult with their tax advisers about completing the new form and consider whether penalty relief might be appropriate.
