The IRS has issued guidance (Notice 2025-02) providing penalty relief for partnerships with unrealized receivables or inventory items that fail to furnish Form 8308, “Report of a Sale or Exchange of Certain Partnership Interests,” by January 31, 2025, to the transferor and transferee in certain partnership interest transfers that occurred in 2024.
This is the second year that the IRS has offered such relief since expanding the required reporting in Form 8308 in late 2023. Like last year’s relief, this year’s relief responds to concerns that partnerships will not have the information necessary to complete Part IV of Form 8308 by the January 2025 deadline. Part IV was added in the revised Form 8308 released in October 2023 and retained in the 2024 revision.
To qualify for the relief, among other requirements, partnerships generally still must furnish to the transferor and transferee Parts I, II, and III of Form 8308 by the January 31, 2025, deadline.
Expanded Form 8308 Reporting
Partnerships file Form 8308 to report the sale or exchange by a partner of all or part of a partnership interest where any money or other property received in exchange for the interest is attributable to unrealized receivables or inventory items (that is, where there has been a Section 751(a) exchange).
The IRS significantly expanded the Form 8308 reporting requirements in the revised form released in October 2023. For transfers occurring on or after January 1, 2023, the revised Form 8308 includes expanded Parts I and II and new Parts III and IV. Part IV is used to report specific types of partner gain or loss when there is a Section 751(a) exchange, including the partnership’s and the transferor partner’s share of Section 751 gain and loss, collectibles gain under Section 1(h)(5), and unrecaptured Section 1250 gain under Section 1(h)(6).
Furnishing Information to Transferors and Transferees
Partnerships with unrealized receivables or inventory items described in Section 751(a) (Section 751 property or “hot assets”) are also required to provide information to each transferor and transferee that are parties to a Section 751(a) exchange.
Under the regulations, 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 Section 751(a) exchange occurred or (2) 30 days after the partnership has received notice of the Section 751(a) exchange.
Generally, partnerships must use the completed Form 8308 as the required statement, unless the form covers more than one Section 751 exchange. If the partnership is not providing the Form 8308 as the required statement, then it must furnish a statement with the information required to be shown on the form with respect to the Section 751(a) exchange to which the person is a party.
A penalty applies under Section 6722 for failure to furnish statements to transferors and transferees on or before the required date, or for failing to include all the required information or including incorrect information.
Penalty Relief
Notice 2025-02 states that, with respect to Section 751(a) exchanges during calendar year 2024, the IRS will not impose penalties under Section 6722 for failure to furnish Form 8308 with a completed Part IV by the regulatory due date (i.e., generally, January 31, 2025) for partnerships that meet the relief requirements.
To qualify for relief, the partnership must:
- 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 January 31, 2025, or 30 days after the partnership is notified of the Section 751(a) exchange, and
- Furnish to the transferor and transferee a copy of the complete Form 8308, including Part IV, or a statement that includes the same information and any additional information required under the regulations, 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(a) exchange.
BDO Insight
While the requirement of furnishing Form 8308 statements was not new last year, the inclusion of actual “hot asset” (i.e., unrealized receivables or inventory items) information within Form 8308 for transactions in 2023 and later has created difficulties.
Prior to 2023, this requirement could be satisfied by providing a taxpayer with a Form 8308 that merely notifies the transferor that they will have some amount of hot asset recharacterization. With the new form, partnerships are now required to provide actual recharacterization amounts.
The extension of the penalty relief related to the new requirements for an additional year is welcome. However, to benefit from this relief, partnerships must provide a partially completed Form 8308 (except for Part IV) by January 31, 2025.
Please visit BDO’s Federal Tax Services page for more information on how BDO can help.