Sale of Partnership Interest – Partner & Partnership Notification Requirement
Partnerships are required to report the sale or exchange of a partnership interest where the partnership holds IRC. Section 751 property. The information is reported on Form 8308 which is attached to the partnership tax return. Additionally, the partnership is required to provide a copy of Form 8308 (or other qualified statement) to the transferor and transferee of the partnership interest. The requirement to provide the Form 8308 or other qualified statement has a significantly more stringent reporting deadline which is the later of:
January 31st of the year following the calendar year in which the exchange occurred, or
30 days after the partnership has received a notice of the exchange.
What are IRC Section 751 assets that trigger the Form 8308 filing requirement upon the sale or exchange for a partnership interest? IRC Section 751 assets can generally be described as assets that generate ordinary income upon collection (receivables) or upon disposition. Some examples of potential IRC Section 751 assets include the following:
1. Rights to payment for services that have not previously been included in taxable income such as work in progress and accounts receivable of a cash basis taxpayer.
2. Recapture of previously taken depreciation or amortization.
3. Recapture of depletion, intangible drilling costs and mining and exploration costs.
4. Rights to payment for goods the partnership has not previously included in taxable income.
5. Certain uncompleted contracts accounted for as long-term contracts.
The above list is not a comprehensive listing of all potential IRC Section 751 assets.
The IRS imposes penalties for failure to furnish correct payee statements on or before the required date and for any failure to include all the information required to be shown on the statement or the inclusion of incorrect information.
Penalty relief – 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, IRS will not impose penalties for failure to furnish Form 8308 with a completed Part IV by the specified due date on a partnership that meets the following requirements:
The partnership timely and correctly furnishes to the transferor and transferee a copy of Form 8308, Parts I to III, or a statement that includes the same information, by the later of:
January 31, 2025, or
30 days after the partnership is notified of the IRC Section 751 exchange.
The partnership furnishes to the transferor and transferee a copy of the complete Form 8308, including Part IV, or a statement that includes the same information, by the later of:
The due date of the partnership’s Form 1065, including extensions, or
30 days after the partnership is notified of the Section 751 exchange.
Restrictions on penalty relief – This penalty relief only applies to a partnership’s furnishing of a Form 8308 to the transferor and transferee in a Section 751 exchange made during calendar year 2024. It does not apply to a transferor partner’s failure to furnish a partnership notification. In addition, there is no penalty relief from penalties for failure to file correct information returns.
Partner Reporting Requirements
When a partner disposes of an interest in a partnership holding Section 751 assets, that partner must notify the partnership within 30 days (or by January 15 following the calendar year in which the transfer took place, if earlier). The notification must contain the following:
- The transferor’s (former partner’s) name, address, and taxpay identification number (TIN).
- The transferee’s (new partner’s) name, address, and TIN, if known.
- The transfer date.
The transferring partner will be subject to a penalty for each failure to notify the partnership of an affected transfer.
In addition, a partner selling or exchanging a partnership interest that contains Section 751 hot assets must file a statement with its tax return for the year in which the transfer occurs. The statement should include the following information:
The transfer date.
The amount of gain or loss attributable to the Section 751 property.
The amount of gain or loss attributable to capital gain or loss on the sale of the partnership interest.
Takeaway
A partnership should institute procedures to meet these filing requirements. Those procedures should include notifying partners of their requirement to promptly notify the partnership of the sale or exchange of a partnership interest.
Caution: This explanation is general in nature and should not be used for specific planning. Contact a tax professional for your specific planning needs.