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IRS Grants Additional Penalty Relief to Partnerships Reporting Sec. 751(a) Exchanges
(Parker Tax Publishing December 2024)
The IRS provided penalty relief for failures by certain partnerships to furnish correct payee statements on Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to the transferor and transferee in a Code Sec. 751(a) exchange occurring in calendar year 2024. This relief, which is similar to the relief provided in Notice 2024-19, is being granted because partnerships continue to lack information needed to comply with the reporting requirements in a timely manner. Notice 2025-2.
Background
Generally, a partnership with unrealized receivables and inventory items (i.e., Section 751 property) is required to provide information to each transferor and transferee that are parties to a sale or exchange of an interest in the partnership (or portion thereof) in which any money or other property received by a transferor from a transferee in exchange for all or part of the transferor's interest in the partnership is attributable to Section 751 property (i.e., a Section 751(a) exchange). Under Reg. Sec. 1.6050K-1(a)(1), partnerships are required to report each Section 751(a) exchange on Form 8308, Report of a Sale or Exchange of Certain Partnership Interests. Generally, Reg. Sec. 1.6050K-1(f)(1) provides that a partnership is required to file Form 8308 as an attachment to its Form 1065, U.S. Return of Partnership Income, 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. Form 8308 is due at the time for filing the partnership return, including extensions.
In addition, Reg Sec. 1.6050K-1(c)(1) provides that 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 exchange as specified under Code Sec. 6050K and Reg. Sec. 1.6050K-1. A partnership must use a copy of the completed Form 8308 as the required statement unless the Form 8308 contains information for more than one Section 751(a) exchange. Reg. Sec. 1.6050K-1(c)(1) provides that if the partnership does not use the Form 8308 as the required statement, the partnership must furnish a statement that includes the information required to be shown on the Form 8308 with respect to the Section 751(a) exchange to which the person to whom the statement is furnished is a party.
Code Sec. 6722 imposes a penalty for failure to furnish correct payee statements on or before the required date, and for any failure to include all of the information required to be shown on the statement or the inclusion of incorrect information. For these purposes, payee statements include statements required to be furnished to transferors and transferees under Code Sec. 6050K. Code Sec. 6724 provides an exception to the imposition of a penalty under Code Sec. 6722 if it is shown that the failure is due to reasonable cause and not to willful neglect.
In November of 2020, the IRS issued final regulations in T.D. 9926 which amended Reg. Sec. 1.6050K-1(c)(2) to require a partnership to furnish to a transferor partner the information necessary for the transferor to make the transferor partner's required statement in Reg. Sec. 1.751-1(a)(3). Among other items, Reg. Sec. 1.751-1(a)(3) requires a transferor partner in a Section 751(a) exchange to submit with the transferor partner's income tax return a statement setting forth the amount of gain or loss attributable to Section 751 property.
In October of 2023, the IRS released a revised version of Form 8308. Consistent with the requirements in Reg. Sec. 1.6050K-1(c)(2), Part IV of the October 2023 Form 8308 requires a partnership to report, among other items, the partnership's deemed sale Code Sec. 751 gain or loss, deemed sale Code Sec. 1(h)(5) collectibles gain, and deemed sale Code Sec. 1(h)(6) unrecaptured Code Sec. 1250 gain, as well as the transferor partner's share of such amounts. In October of 2024, the IRS released a revised version of Form 8308. Part IV of the October 2024 Form 8308 still requires a partnership to report, among other items, the partnership's deemed sale Code Sec. 751 gain or loss, deemed sale Code Sec. 1(h)(5) collectibles gain, and deemed sale Code Sec. 1(h)(6) unrecaptured Code Sec. 1250 gain, as well as the transferor partner's share of such amounts.
Since the issuance of the October 2023 Form 8308, concerns have been expressed to the IRS that many partnerships will be unable to furnish the information required in Part IV of the Form 8308 to transferors and transferees by the January 31 due date, because, in many cases, partnerships will not have all of 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. On January 11, 2024, the IRS released Notice 2024-19, which provided relief from penalties under Code Sec. 6722 for partnerships with Section 751(a) exchanges occurring during calendar year 2023.
Notice 2025-2
The IRS is aware that many partnerships continue to lack information needed to comply with the reporting requirements in a timely manner. As a result, with respect to Section 751(a) exchanges occurring during calendar year 2024, the IRS states in Notice 2025-2 that it will not impose penalties under Code Sec. 6722 solely for failure to furnish Form 8308 with a completed Part IV by the due date specified in Reg. Sec. 1.6050K-1(c)(1) for a partnership that meets the following requirements:
(1) The partnership must 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 (i) January 31, 2025, or (ii) 30 days after the partnership is notified of the Section 751(a) exchange.
(2) The partnership must 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 Reg. Sec. 1.6050K-1(c), by the later of (i) the due date of the partnership's Form 1065 (including extensions), or (i) 30 days after the partnership is notified of the Section 751(a) exchange.
The relief provided in Notice 2025-2 applies only with respect to a partnerships' furnishing of a Form 8308 to the transferor and transferee in a Section 751(a) exchange made during calendar year 2024. The notice does not provide relief with respect to a transferor partner's failure to furnish the notification to the partnership required by Reg. Sec. 1.6050K-1(d). In addition, Notice 2025-2 notice does not provide relief with respect to filing Form 8308 as an attachment to a partnership's Form 1065; as such, this notice does not provide relief from penalties under Code Sec. 6721 for failure to file correct information returns.
For a discussion of dispositions of partnership interests involving unrealized receivables and inventory items, see Parker Tax ¶27,530.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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