The IRS recently released a draft new form which, if finalized, would be used by partners to report their tax basis in property distributed to them by a partnership.
In addition to disclosing the basis of distributed property, the new draft Form 7217 (Partner’s Report of Property Distributed by a Partnership) would also collect information about the inputs of the partner’s basis computation. The new form would not necessarily increase the amount of technical work required to compute basis for partners who receive property distributions. However, the draft Form 7217 represents another instance in an ongoing trend by the IRS to require more detailed information reporting by partnerships and partners.
Section 732 provides the rules for computing a partner’s basis in property distributed from a partnership to a partner. For a non-liquidating distribution, the partner’s basis in the property is equal to the partnership’s pre-distribution basis in the property but may not exceed the partner’s pre-distribution basis in its partnership interest (outside basis).
A partner’s basis in property received in a liquidating distribution is equal to the partner’s outside basis. For both current and liquidating distributions, the partner reduces the basis of its partnership interest first by the amount of money distributed to the partner (actual or deemed) in the same transaction. Section 732 also provides rules to allocate basis across multiple properties distributed as part of the same transaction. While the distributing partnership must report certain information to the distributee partner to enable it to compute its basis in the distributed property, currently the distributee partner is not required to specifically report its basis computation of the distributed property to the IRS.
The draft Form 7217 would require a partner who receives a property distribution to disclose information about the distribution, such as whether it was in liquidation of the partner’s interest and whether Section 751(b) applied to any part of the distribution. The draft form then provides space for the partner to report the inputs for a Section 732 computation on a property-by-property basis. Information required to be disclosed on the draft form includes (1) the partnership’s basis in the property immediately prior to the distribution, (2) the fair market value of the distributed property, (3) whether the partner’s basis computation was impacted by special basis adjustments (e.g., Section 743(b) or 734(b) adjustments) with respect to the property, and (4) finally the partner’s basis in the distributed property after application of Section 732.
The draft Form 7217, if finalized, would be required for partners’ tax years beginning in 2024 or later. Because the form is still in draft stage, taxpayers will need to watch for any revisions that are made when the form is finalized.
Grant Thornton Insight:
While the Form 7217 would impose an incremental compliance burden, the required information is generally information the partner would already be required to consider when computing its basis in distributed property. The new form may also focus taxpayers’ attention on properly applying the Section 732 rules to property distributions (rather than simply using carryover basis as a shortcut, for instance). As noted previously, the draft Form 7217 follows other efforts by the IRS in recent years (e.g., tax basis capital reporting, Schedules K-2 and K-3) to gather more granular information from partnerships and partners. It is also worth considering the draft Form 7217 in the light of the IRS’s recent efforts to target so-called “basis shifting” transactions, which implicate the basis allocation rules for certain property distributions under Section 732 by partnerships with related partners. It seems fair to assume that the information provided on Form 7217, if finalized, might be used by the IRS to select partnership distribution transactions for further scrutiny.
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