IRS provides relief for incomplete Form 8308

The IRS has provided penalty relief (Notice 2024-19) for partnerships issuing incomplete Form 8308 statements to partners by Jan. 31, 2024, for sales or exchanges of partnership interests in 2023 that include certain unrealized receivables or inventory items in a Section 751(a) exchange.

Section 6050K generally requires partnerships to file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, with the Form 1065 to report any sale or exchange of a partnership interest at a time when the partnership has any unrealized receivables or inventory items (“hot assets”) in a Section 751(a) exchange. Partnerships must also furnish a Form 8308 or an equivalent statement to both the transferor and transferee of a partnership interest by the later of Jan. 31 following the calendar year of the exchange, or 30 days after the partnership is notified of the transfer.

The IRS released a revised version of Form 8308 in October of 2023 that added a new Part IV requiring a partnership to report, among other items, the partnership’s and the transferor partner’s share of Section 751 gain and loss, any collectibles gain under Section 1(h)(5), and any unrecaptured Section 1250 gain under Section 1(h)(6). Taxpayers had expressed concerns to the IRS that many partnerships would be unable to furnish the new Part IV information for 2023 payments by Jan. 31, 2024, because, in many cases, they did not yet have the required information.

Notice 2024-19 provides penalty relief for failure to furnish a complete Form 8308 to transferees and transferors for 2023 transfers if the partnership fulfills both of the following requirements:

• Furnishing a timely and correct copy of Parts I, II, and III of Form 8308, or a statement that includes the same information by the later of (a) Jan. 31, 2024, or (b) 30 days after the partnership is notified of the Section 751(a) exchange.
  
• Furnishing a copy of the complete Form 8308, including Part IV, or a statement that includes the same information, by the later of (a) the due date of the partnership’s Form 1065 (including extensions), or (b) 30 days after the partnership is notified of the Section 751(a) exchange.

Background

Section 6050K generally requires partnerships to file Form 8308 with the Form 1065 if there has been a Section 751(a) exchange. Generally, any sale or exchange of a partnership interest at a time when the partnership has any unrealized receivables or inventory items is a Section 751(a) exchange. The form is not required if a transfer of a partnership interest is not a Section 751(a) exchange. For example, the form is not required if the transfer of a partnership interest is, in its entirety, a gift for federal income tax purposes. If a partnership is in doubt whether partnership property constitutes unrealized receivables or inventory items or whether a transfer constitutes a Section 751(a) exchange, the partnership may file Form 8308 to avoid the risk of incurring a penalty for failure to file.

Under Treas. Regs. Sec. 1.6050K-1, a partnership must file a separate Form 8308 for each Section 751(a) exchange of an interest in the partnership. Under Treas. Reg. Sec. 1.751-1(a)(3), transferors of partnership interests are required to attach a statement to their income tax return for the tax year of the sale or exchange, which must include, as of 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. A new Part IV of the Form 8308 issued in October 2023 requires a partnership to report, among other items, the partnership’s and the transferor partner’s share of Section 751 gain and loss, collectibles gain under Section 1(h)(5), and unrecaptured §1250 gain under §1(h)(6). The revisions to Form 8308 are consistent with the reporting requirements under final regulation for Treas. Reg. Sec. 1.6050K-1 and Treas. Reg. Sec. 1.751-1(a)(3) issued in 2020.

Form 8308 is required to be filed with the IRS when the Form 1065 is filed. However, there is a separate requirement to furnish Form 8308 to the transferor and transferee of a partnership interest by the later of following the calendar year of the exchange, or 30 days after the partnership is notified of the transfer. It is the separate requirement to furnish the Form 8308 with complete and accurate Section 751(a) information to the transferor and transferee of a partnership interest by Jan. 31, 2024, that has been a cause for concern and is the subject of the penalty relief.

Section 6722 imposes a penalty for failure to furnish complete and correct payee statements on or before the required date. The penalties are $310 per statement, subject to a calendar-year maximum of $3,783,000 for persons with average annual gross receipts for the most recent three taxable years of more than $5,000,000, or a calendar year maximum of $1,261,000 for persons with average gross receipts for the most recent three taxable years of $5,000,000 or less. Form 8308 is considered a payee statement subject to the requirements of Section 6722.

Penalty relief

Notice 2024-19 provides penalty relief under Section 6722 for failure to furnish a complete Form 8308 to transferees and transferors for 2023 transfers. In order to qualify for the penalty relief, a partnership must do both of the following:

• 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 (a) Jan. 31, 2024, or (b) 30 days after the partnership is notified of the Section 751(a) exchange
  
• Furnish to the transferor and transferee partner a copy of the complete Form 8308, including Part IV, or a statement that includes the same information, by the later of (a) the due date of the partnership’s Form 1065 (including extensions), or (b) 30 days after the partnership is notified of the Section 751(a) exchange.

Next steps

Partnerships should be proactive about identifying transfers of partnership interest that occurred during the 2023 tax year that resulted in a Section 751(a) exchange, and have a plan for providing Form 8308, with a minimum of Parts I-III completed, to the transferor and transferee partners by Jan. 31, 2024. Additionally, if a partnership is unable to complete Part IV of Form 8308 by Jan. 31, 2024, it should provide a Form 8308, with all parts completed, to the transferor and transferee partners by the date for the Form 1065.