IRS Relaxes Reporting Burden on Sales and Exchanges of Certain Partnership Interests

(Parker Tax Publishing August 2025)

The IRS issued proposed regulations that would modify information reporting obligations with respect to sales or exchanges of interests in partnerships owning inventory or unrealized receivables (i.e., Code Sec. 751(a) assets). Partnerships may rely on the proposed regulations, as well as the description of anticipated changes to the instructions to Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, for Code Sec. 751(a) exchanges occurring on or after January 1, 2025, and before the date the regulations are finalized. REG-108822-25.

Background

Generally, under Code Sec. 741, the sale of an interest in a partnership is treated as the sale of a capital asset. However, special rules apply where there is an exchange described in Code Sec. 751(a). Under Code Sec. 751(a), the amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of the transferor partner's interest in the partnership attributable to (1) unrealized receivables of the partnership, or (2) inventory items of the partnership, is considered an amount realized from the sale or exchange of property other than a capital asset.

Reg. Sec. 1.6050K-1(a)(1) generally requires a partnership to make a separate return using Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, for each Code Sec. 751(a) exchange. Code Sec. 6050K(b) requires the partnership to provide the required information to transferors and transferees that are parties to a Code Sec. 751(a) exchange by January 31 of the year following the calendar year in which the Code Sec. 751(a) exchange occurs. However, Reg. Sec. 1.6050K-1(c)(1) clarifies 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 Code Sec. 751(a) exchange occurs, or (2) 30 days after the partnership receives notice of the exchange as specified under Code Sec. 6050K(c) and Reg. Sec. 1.6050K-1(e). A partnership generally must use a copy of the completed Form 8308 as the required statement.

In T.D. 9926, the IRS issued Reg. Sec. 1.6050K-1(c)(2), which requires 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). Reg. Sec. 1.751-1(a)(3) requires a transferor partner in a Code Sec. 751(a) exchange to submit with the transferor partner's income tax return for the tax year in which the sale or exchange occurs a statement separately stating the date of the sale or exchange, the amount of any gain or loss attributable to Code Sec. 751 property, and the amount of any gain or loss attributable to capital gain or loss on the sale of the partnership interest. After issuing this new regulation in November of 2020, the IRS revised Form 8308.

As a result of the subsequent changes to Part IV of Form 8308, a partnership's obligation to report to a transferor the gain or loss attributable to a Code Sec. 751(a) exchange was effectively accelerated to January 31 of the year following the Code Sec. 751(a) exchange, even though Reg. Sec. 1.751-1(a)(3) generally does not require the transferor partner to report such information to the IRS until the transferor partner files the partner's income tax return for the tax year in which the sale or exchange occurs, the due date of which can be several months after January 31. Practitioners complained to the IRS that many partnerships were 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 do not have all the information required by Form 8308, Part IV, by January 31 of the year following the calendar year in which the Code Sec. 751(a) exchange occurred.

The IRS then published Notice 2024-19, which provided limited relief from penalties for partnerships that failed to furnish a completed Part IV of Form 8308 by January 31, 2024, for Code Sec. 751(a) exchanges during calendar year 2023. In Notice 2025-2, the IRS extended the relief provided in Notice 2024-19 for partnerships that failed to complete Part IV of Form 8308 by January 31, 2025, with respect to Code Sec. 751(a) exchanges occurring during calendar year 2024. After considering practitioner feedback regarding the undue burdens imposed by Reg. Sec. 1.6050K-1(c)(2), the IRS proposed the removal of Reg. Sec. 1.6050K-1(c)(2).

REG-108822-25

On August 19, in REG-108822-25, the IRS issued proposed regulations that would remove Reg. Sec. 1.6050K-1(c)(2) and eliminate the requirement that partnerships furnish the information required in Part IV of the Form 8308 by January 31 of the year following the calendar year in which a Code Sec. 751(a) exchange occurred. The proposed regulations also modify Reg. Sec. 1.6050K-1(c)(1) by removing the reference to a "completed copy of Form 8308" and replacing it with a reference to "a copy of Form 8308 filled out in accordance with the instructions to the form." In addition, the IRS said it will update the instructions for Form 8308 to provide that only the information in Parts I, II, and III is required by the due dates of Code Sec. 6050K.

Thus, the proposed regulations delay the date by which partnerships must provide transferors of interests in the partnership the information necessary for the transferor to make the transferor's required statement under Reg. Sec. 1.751-1(a)(3). This delay will benefit partnerships by providing additional time to furnish the necessary return information. The IRS invites comments on the impact of the proposed regulations on small entities.

Partnerships may rely on the proposed regulations, and the description of the anticipated changes to the instructions to Form 8308 contained in the preamble to the proposed regulations, with respect to Code Sec. 751(a) exchanges occurring on or after January 1, 2025, and before the date the regulations are published as final regulations in Federal Register.

For a discussion of sales or exchanges of interests in partnerships owning inventory or unrealized receivables, see Parker Tax ¶ 27,530. For a discussion of the reporting requirements for sales or exchanges of partnership interests, see Parker Tax ¶27,590.

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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