Proposed Regulations Ease Hot Asset Reporting

The IRS issued proposed regulations on Aug. 19 that would remove the requirement that partnerships provide transferors and transferees information about the transferor’s gain from a Section 751(a) exchange by the later of Jan. 31 or 30 days after the partnership receives notice of the exchange (statutory deadline). Partnerships can rely on the proposed regulations for exchanges occurring on or after Jan. 1, 2025.

In practice, the proposed regulations remove the requirement that the partnership provide Part IV of Form 8308, “Report of a Sale or Exchange of Certain Partnership Interests,” to the transferor and transferee by the statutory deadline. Partnerships still must provide transferors and transferees Parts I-III of Form 8308 by the statutory deadline and must file a completed Form 8308, including Part IV, and related Schedule K-1, “Partner’s Share of Income, Deductions, Credits, Etc.,” disclosures with their timely filed Form 1065, “U.S. Return of Partnership Income.”

Background

Section 6050K requires partnerships to report Section 751(a) exchanges and to furnish statements to transferors and transferees by the statutory deadline. Treasury Regulation Section 1.6050K-1(c)(2) requires partnerships to furnish transferors and transferees information needed for the statement the transferor is required to include with its return under Treasury Regulation Section 1.751-1(a)(3). The regulations provide that partnerships use Form 8308 for this reporting. Part IV of Form 8308 reports information regarding the transferor’s gain.

For exchanges occurring on or after Jan. 1, 2023, the IRS revised Form 8308 to require partnerships to report the transferor’s Section 751(a) gain in Part IV. For exchanges occurring before Jan. 1, 2023, the transferor’s gain was only required to be included on the transferor’s Schedule K-1.

Many partnerships reported difficulty completing Part IV by Jan. 31, because year-end information was not finalized. The IRS acknowledged these challenges and provided limited penalty relief for 2023 (Notice 2024-19) and 2024 exchanges (Notice 2025-2) for partnerships that timely furnished Parts I, II, and III of Form 8308 by the statutory deadline and furnished Part IV by the due date of the partnership’s Form 1065. Despite this relief, the IRS continued to receive feedback that having to provide transferor gain information before the due date of the partnership return caused undue burden and misalignment with partners’ filing timelines.

Proposed regulations

The proposed regulations reduce the compliance burden and penalty risk associated with the prior accelerated deadline for providing Section 751(a) exchange gain information to transferors and transferees.

Key elements of the proposed regulations include:

• Removal of the requirement that the partnership provide the transferor’s gain information to the transferor and transferee by the later of Jan. 31 or 30 days after the partnership is notified of the exchange. Instead, the proposed regulations require that the partnership provide this information by the filing due date, including extension, of the partnership return.
• Partnerships still are required to file a completed Form 8308, including Part IV, as an attachment to Form 1065 for the relevant tax year. They also are required to complete related disclosures on the transferor’s Schedule K-1.
• Partnerships may rely on these proposed rules for Section 751(a) exchanges occurring on or after Jan. 1, 2025, and before final regulations are published.

Crowe observation

By aligning the timing of reporting to transferors and transferees with the partnership’s tax return due date and allowing reliance on the proposed rules for transactions occurring on or after Jan. 1, 2025, the proposed regulations provide meaningful relief to partnerships.

Looking ahead

The proposed regulations do not provide relief for Section 751(a) exchanges occurring in years prior to 2025. However, penalty relief for 2023 and 2024 is available under Notices 2024-19 and 2025-2. The IRS is expected to issue revised Form 8308 instructions to reflect the proposed regulations. In the meantime, partnerships should consult their tax adviser to determine how best to comply with their Section 6050K reporting obligations with respect to Section 751(a) exchanges.