The Internal Revenue Service (IRS) and the Department of the Treasury have issued proposed regulations (REG-108822-25) aimed at modifying information reporting obligations concerning sales or exchanges of certain partnership interests. These proposed changes affect partnerships and seek to alleviate existing compliance burdens by refining the timing of certain reporting requirements for Section 751(a) exchanges.

Items Covered by the Proposed Regulations

These proposed regulations specifically address returns relating to sales or exchanges of partnership interests where Section 751(a) of the Internal Revenue Code (Code) applies. A Section 751(a) exchange occurs when a transferor partner receives money or property in exchange for all or part of their partnership interest that is attributable to either unrealized receivables or inventory items of the partnership. The amount realized from such an exchange is considered as derived from the sale or exchange of property other than a capital asset.

Under current law, Section 6050K(a) generally requires a partnership to file a return if a Section 751(a) exchange of any interest in the partnership occurs during a calendar year. This return, typically Form 8308, "Report of a Sale or Exchange of Certain Partnership Interests," must include the names, addresses, and taxpayer identification numbers of the transferee, transferor, and the partnership, along with the date of the exchange and other information as prescribed by the form or its instructions. Form 8308 is filed as an attachment to the partnership’s Form 1065, "U.S. Return of Partnership Income," for the taxable year that includes the last day of the calendar year of the exchange.

Furthermore, partnerships are required by Section 6050K(b) to provide specific information to the transferor and transferee partners by January 31 of the year following the Section 751(a) exchange. This information must include what is reported on the partnership’s return under Section 6050K(a) for each person. The transferor partner also has an obligation under Section 6050K(c)(1) to notify the partnership of such an exchange, and the partnership is not required to file a return until it is notified. Currently, partnerships generally use a copy of the completed Form 8308 as the statement furnished to transferors and transferees.

Reasons for the Proposed Regulatory Changes

The primary impetus for these proposed regulations stems from significant stakeholder feedback regarding the undue burdens imposed by existing regulations, specifically §1.6050K-1(c)(2), following recent revisions to Form 8308. The November 30, 2020, final regulations (TD 9926) added §1.6050K-1(c)(2), which required partnerships to furnish transferor partners with information necessary to fulfill their required statement under §1.751-1(a)(3). This latter section mandates that a transferor partner report, on their income tax return, the date of sale, and separate amounts of gain or loss attributable to Section 751 property and capital gain or loss from the partnership interest sale.

After these changes, the IRS revised Form 8308 to include Part IV, which requires partnerships to report the partnership’s gain or loss from a deemed sale under Section 751 and the transferor partner’s share of that amount. As a result, the obligation to report gain or loss attributable to a Section 751(a) exchange to a transferor was effectively accelerated to January 31 of the year following the exchange. Many partnerships found this problematic because they did not have all the necessary information for Part IV of Form 8308 by the January 31 due date. This accelerated deadline significantly predates the transferor partner’s income tax return due date, which can be several months later.

Recognizing these challenges, the IRS issued Notice 2024-19 and Notice 2025-2, providing limited penalty relief for partnerships that failed to furnish a completed Part IV of Form 8308 by January 31, 2024 (for 2023 exchanges) and January 31, 2025 (for 2024 exchanges), respectively. This relief was contingent on timely furnishing Parts I, II, and III information by January 31 (or 30 days after notification) and then furnishing the complete Form 8308, including Part IV, by the partnership’s Form 1065 due date (including extensions). The proposed regulations aim to codify a permanent solution to this issue.

Agency’s Analysis of the Law

The proposed regulations are issued under the authority granted to the Secretary of the Treasury (Secretary) by various sections of the Code. Section 6050K(a) is the primary authority, explicitly requiring partnerships to file returns for Section 751(a) exchanges and empowering the Secretary to prescribe the information required, the manner of returns, and their due dates.

Further authority is derived from Section 6031(a), which broadly grants the Secretary the power to prescribe partnership reporting information necessary for carrying out the provisions of subtitle A of the Code. Additionally, Section 7805(a) provides the general authority for the Secretary to prescribe all needful rules and regulations for enforcing the Code, including those necessary due to alterations of internal revenue law.

The foundational statutory provisions governing the taxation of partnership interest sales are Section 741 and Section 751. Section 741 generally treats gain or loss from the sale or exchange of a partnership interest as capital gain or loss, unless Section 751 applies. Section 751 carves out the exception for "unrealized receivables" and "inventory items," ensuring that gain attributable to these "hot assets" is treated as ordinary income or loss, preventing conversion of ordinary income into capital gain. The reporting requirements under Section 6050K are designed to facilitate the proper tax treatment under Section 751(a).

How the Proposed Regulations Would Change Existing Guidance

The proposed regulations introduce several key modifications to existing guidance:

Removal of §1.6050K-1(c)(2): The most significant change is the proposed removal of §1.6050K-1(c)(2). This eliminates the requirement for partnerships to furnish the information required in Part IV of Form 8308 by January 31 of the year following the Section 751(a) exchange.
Modification to §1.6050K-1(c)(1): The language specifying the statement to be furnished to transferors and transferees will be revised. The reference to a "completed copy of Form 8308" will be replaced with "a copy of Form 8308 filled out in accordance with the instructions to the form".
Revised Form 8308 Instructions: The IRS plans to update the instructions for Form 8308 to clarify that only the information in Parts I, II, and III is required by the due dates of Section 6050K for furnishing to partners.
Clarified Due Dates for Partner Statements: As a result of these changes, a partnership would be required to furnish only the information reported on Parts I, II, and III of Form 8308, or a statement with the same information, to the transferor and transferee by the later of (1) January 31 of the year following the exchange, or (2) 30 days after the partnership is notified of the exchange.
Unchanged Filing of Completed Form 8308: The requirement for a partnership to file a completed Form 8308, including Part IV, as an attachment to its Form 1065, remains unchanged. The instructions for Form 8308 will be updated to make this clear.
Continued Schedule K-1 Reporting: Partnerships will continue to be required to report the information needed by the transferor under §1.751-1(a)(3) (which includes the information from Part IV of Form 8308) on the Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., issued to the transferor partner.
Substitute Statement Clarification: §1.6050K-1(c)(1)(i) will be modified to clarify that information on a substitute statement furnished in lieu of Form 8308 will be provided to the IRS.

Impact on Taxpayer Compliance Activities

If finalized, these proposed regulations are expected to have a deregulatory effect and provide significant relief for partnerships.

Reduced Burden for Partnerships: Partnerships will no longer be required to provide the complex calculations and information contained in Part IV of Form 8308 to transferors and transferees by the January 31 deadline. This will provide additional time and flexibility for partnerships to gather the necessary data and complete these calculations, as Part IV will only be required when the completed Form 8308 is filed as an attachment to Form 1065, which has a later due date. This directly addresses the stakeholder feedback about the difficulty of meeting the earlier deadline.
Streamlined Information Flow for Transferors: While transferors still need the Part IV information for their income tax returns, it will be provided to them through the Schedule K-1, which is typically issued closer to the Form 1065 filing deadline. This aligns the receipt of comprehensive information with the transferor’s own tax filing schedule, alleviating the previous acceleration of information receipt for partnerships.
Minimal Economic Impact on Small Entities: The IRS certifies that these proposed regulations would not have a significant economic impact on a substantial number of small entities. While they would affect many small entities organized as partnerships, the impact is considered limited because the changes primarily involve delaying the date by which certain information must be provided, which is a benefit rather than a burden.

Reliance on Proposed Regulations Prior to Final Adoption

Taxpayers are permitted to rely on these proposed regulations prior to their final adoption. Specifically, a partnership may rely on these proposed regulations, and the description of the anticipated changes to the instructions for Form 8308 contained in the preamble, with respect to Section 751(a) exchanges occurring on or after January 1, 2025, and before the date these regulations are published as final regulations in the Federal Register. The proposed removal of §1.6050K-1(c)(2) and the amendment to §1.6050K-1(c)(1)(i) are proposed to apply to returns filed for taxable years ending on or after the date these regulations are published as final regulations.

These proposed regulations represent a pragmatic response by the IRS and Treasury to address real-world compliance challenges faced by partnerships. By adjusting the timing of Part IV information sharing, the agencies aim to create a more workable reporting environment while still ensuring the necessary data is collected for tax administration.

Prepared with assistance from NotebookLM.