A look at revised Form 8308

Editor: Greg A. Fairbanks, J.D., LL.M.

In October 2023, the IRS released a revised Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, which is to be used for reporting transfers occurring on or after Jan. 1, 2023. The information that was previously required to be reported on Form 8308 has been expanded, and a new section has been added. Additionally, the instructions to Form 8308 have been enhanced to include a section on considerations of the centralized audit regime under the Bipartisan Budget Act of 2015 (BBA), P.L. 114-74, when an administrative adjustment request (AAR) may be required if a partnership determines that changes to Form 8308 are needed, or if Form 8308 was not included with an originally filed Form 1065, U.S. Return of Partnership Income.

The revisions to Form 8308 enable a partnership to comply with the reporting requirements for sales and exchanges of partnership interests when any money or other property received in exchange for the interest is attributable to “hot assets,” i.e., unrealized receivables or inventory items (a Sec. 751(a) exchange) under Regs. Sec. 1.6050K-1. Additionally, the revisions provide the transferor of a partnership interest with the information it is required to include on a statement in its own income tax return for the tax year of the sale or exchange required by Regs. Sec. 1.751-1(a)(3).

Basic aspects of Form 8308

Form 8308 is filed by a partnership only if there has been a Sec. 751(a) exchange. Said differently, the form is not required if a transfer of a partnership interest is not a Sec. 751(a) exchange. For example, the form is not required if the transfer of a partnership interest is in its entirety a gift for federal income tax purposes.

A partnership must file a separate Form 8308 for each Sec. 751(a) exchange of an interest in the partnership, per Regs. Sec. 1.6050K-1. Form 8308 is to be filed with the IRS (as an attachment to Form 1065 and due at the time for filing the partnership return, including extensions), and copies are to be furnished to both the transferor and the transferee by Jan. 31 of the year following the calendar year in which the Sec. 751(a) exchange occurred or, if later, 30 days after the partnership has notice of the exchange. Under Regs. Sec. 1.751-1(a)(3), transferors of partnership interests are required to attach a statement to their income tax return for the tax year of the sale or exchange, which must include information on the date of the sale or exchange, the amount of any gain or loss attributable to Sec. 751 property, and the amount of any gain or loss attributable to capital gain or loss on the sale of the partnership interest.

What’s new — Parts I and II

Parts I and II of Form 8308 have been expanded and now require partnerships to report the identifying information, including name, address, and identifying number, of the transferor record holder of the partnership interest immediately before transferring that interest. Previously, all that was required to be reported was the identifying information of the transferor beneficial owner of the partnership interest immediately before transferring that interest. The same information is also required to be reported for the transferee: the owner of the partnership interest immediately after the transfer of that interest, record holder, and beneficial owner.

This revision aligns with the reporting requirement under Regs. Sec. 1.6050K-1(a)(4)(iii), which provides that the term “transferor” means “the beneficial owner of a partnership interest immediately before the transfer of that interest,” and the term “transferee” means the “beneficial owner of a partnership interest immediately after the transfer of that interest.” Regs. Sec. 1.6050K-1(a)(4)(iii) also specifies that “if a partnership does not know the identity of the beneficial owner of an interest in the partnership, the record holder of such interest shall be treated as the transferor or transferee” for the form’s purposes.

The prior Form 8308 (revised September 2018) required only the information of the transferor and transferee beneficial owners to be reported, but partnerships completing this form may have known only the transferor and transferee record holder information. This change enables greater clarity in reporting which parties sold or exchanged certain partnership interests.

The revised instructions clarify how to report transferor and transferee information if one or both of the parties are disregarded entities for federal tax purposes. The disregarded entity is to be listed as the record holder, and the first regarded owner of the partnership interests is to be listed as the beneficial owner. Additionally, the instructions provide that if the transferor or transferee beneficial owner is also the record holder, only the beneficial owner information should be completed.

Part I has also been revised to include a box that should be checked if the transferor is foreign, and the instructions provide guidance on additional reporting that may then be required on Schedules K-2, Partners’ Distributive Share Items—International, and K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

What’s new — Part III

Part III of Form 8308 has also been expanded. In addition to reporting the date of sale or exchange of a partnership interest, taxpayers must also report the type of partnership interest transferred. The four types of transferred partnership interests listed in Part III are (A) Capital, (B) Preferred, (C) Profits, and (D) Other. The instructions provide that whether an interest is capital or profits is determined in accordance with Regs. Sec. 1.706-1(b)(4). Under Regs. Sec. 1.706-1(b)(4)(iii), taxpayers determine a partner’s interest in partnership capital by reference to the assets of the partnership that the partner would be entitled to upon withdrawal from the partnership or liquidation of the partnership. Presumably, if a partner would not be entitled to any assets of the partnership upon withdrawal or liquidation of the partnership, then (C) Profits should be checked.

The determination of a capital versus profits interest using Regs. Sec. 1.706-1(b)(4) is an interesting departure from the perhaps more common concept of a profits interest found in Rev. Proc. 93-27, for example. Preparers of the revised Form 8308 should be aware of how the IRS is instructing taxpayers to determine a capital versus a profits interest and report accordingly. Additionally, the instructions to Form 8308 provide that a “preferred” partnership interest is “a partnership interest having a preference in payment of distributions or on liquidation over other partners,” and “Other” is a partnership interest that “isn’t capital, profits, or preferred.”

What’s new — Part IV

The most significant revision to Form 8308 is the addition of Part IV. This section requires the reporting of the partnership-level deemed sale gain (or loss) and a partner’s share of gain (loss) required by Sec. 751(a) and Secs. 1(h)(5) and (6). Three categories of gain or loss are to be reported in Part IV: Sec. 751(a) gain or loss under Regs. Sec. 1.751-1(a)(2); collectibles gain or loss under Sec. 1(h)(5); and unrecaptured Sec. 1250 gain or loss under Sec. 1(h)(6). For each of these categories, taxpayers must report the partnership-level deemed sale gain or loss, the percentage interest or number of units in the partnership transferred, and the partner-level deemed sale gain or loss. The partner-level deemed sale gain or loss is further reported to the transferor partner in Box 20 of their Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., using the relevant code indicated on Form 8308.

An in-depth analysis of Sec. 751(a) and Secs. 1(h)(5) and (6) is beyond the scope of this item, but the additional reporting of these amounts on Form 8308 certainly warrants a review of these Code sections by anyone preparing this form. The instructions to Form 8308 provide a cursory explanation of the determination of Sec. 751(a) gain or loss under Regs. Sec. 1.751-1(a)(2). Paraphrasing the regulations, the instructions explain that it is “the amount of gain or loss as if the partnership had sold all of its property in a fully taxable transaction for cash in an amount equal to the fair market value of such property (taking into account Sec. 7701(g)) immediately prior to the partner’s transfer of the interest in the partnership.”

Partnerships may find it more challenging than before to provide Form 8308 to the transferor and the transferee by Jan. 31 as a result of the additional information that is required to be reported in Part IV. Partnerships should consider having a plan for identifying Sec. 751(a) exchanges in a timely manner and determining the transferor partner’s share of gain or loss required by Sec. 751(a).

BBA and AAR considerations

A helpful addition to the Form 8308 instructions is the inclusion of scenarios in which an AAR may be needed with respect to Form 8308 and Sec. 751(a) reporting. The instructions provide guidance on whether an AAR is required to be filed in the following situations:

1. Untimely or incorrect reporting of a Sec. 751(a) exchange by a partner to a partnership subject to the centralized partnership audit regime under the BBA (a BBA partnership);
2. Untimely or incorrect reporting of a Sec. 751(a) exchange by a partner to a non-BBA partnership;
3. Non-filing of Form 8308 by the partnership;
4. Incorrect reporting of a Sec. 751(a) exchange on Form 8308 by the partnership but correct reporting of the Sec. 751(a) exchange on Schedule K-1; and
5. Incorrect reporting of a Sec. 751(a) exchange on Schedule K-1 or K-3.

Untimely or incorrect reporting of a Sec. 751(a) exchange by a partner to a BBA partnership: If a BBA partnership is notified of a Sec. 751(a) exchange after it has filed its partnership return, and the amount of Sec. 751(a) gain (loss) was not reported on the transferor partner’s Schedule K-1, or if the Sec. 751(a) exchange was incorrectly reported, then the partnership must file an AAR and include Form 8308 as an attachment.

Untimely or incorrect reporting of a Sec. 751(a) exchange by a partner to a non–BBA partnership: If a non-BBA partnership is notified of a Sec. 751(a) exchange after it has filed its partnership return, and the amount of Sec. 751 gain (loss) was not reported on the transferor partner’s Schedule K-1, or if the Sec. 751(a) exchange was incorrectly reported, then the partnership must file Form 8308 with an amended Form 1065 within 30 days of notification and provide amended Schedules K-1 to the affected partners.

Non–filing of Form 8308 by the partnership: If a BBA or non-BBA partnership did not file Form 8308 with its Form 1065 but reported the correct Sec. 751 gain (loss) on its return and on its Schedules K-1 issued to the relevant partners, then the partnership must file Form 8308 separately and within 30 days of notification with the IRS service center where the Form 1065 was filed. No AAR is needed for BBA partnerships because there is no change to the originally reported Sec. 751 gain (or loss) amount.

Incorrect reporting of a Sec. 751(a) exchange on Form 8308 by the partnership but correct reporting of the Sec. 751(a) exchange on Schedule K–1: If a BBA or non-BBA partnership provided an incorrect Form 8308 to the transferor and transferee by Jan. 31 of the year following the calendar year in which the Sec. 751(a) exchange occurred (or, if later, 30 days after the partnership has notice of the exchange), but the partnership corrected the reporting of the Sec. 751(a) exchange on the Schedule K-1 and provided a correct Form 8308 with its Form 1065 filing, then the partnership should provide a corrected Form 8308 to the partners by the filing date of the Form 1065. No AAR or amended return is needed because there is no change to the Form 1065 filing.

Incorrect reporting of a Sec. 751(a) exchange on Schedule K–1 or K–3: If a BBA partnership incorrectly reported the Sec. 751(a) exchange on Schedule K-1 and the period for filing a superseding return has expired, the partnership must file an AAR to make the correction. A correct Form 8308 that also correctly reports the gain (or loss) should be attached to the AAR.

If a non-BBA partnership incorrectly reported the Sec. 751(a) exchange on Schedule K-1 or K-3 and the period for filing a superseding return has expired, the partnership must file an amended return to make the correction. A correct Form 8308 that also correctly reports the gain (or loss) should be attached to the amended return.

More reporting required, but information may be helpful

Although most of the new information required by the revised Form 8308 is not new to being reported on Form 1065 or its Schedule K-1, the additional reporting on Form 8308 enables the partnership to meet its reporting requirements of Regs. Sec. 1.6050K-1 without the need to attach a supplemental statement to the transferor partner’s Schedule K-1. Additionally, the information provided on Form 8308 provides the transferor of a partnership interest with the information it needs to meet its reporting requirements under Regs. Sec. 1.751-1(a)(3). The revisions to Form 8308 are helpful changes for these required reporting items, and partnerships reporting a sale or exchange by a partner of all or part of a partnership interest in a Sec. 751(a) exchange will need to review the revised Form 8308 and instructions along with the relevant Code and regulation provisions.

Editor Notes

Greg A. Fairbanks, J.D., LL.M., is a tax managing director with Grant Thornton LLP in Washington, D.C. For additional information about these items, contact Fairbanks at greg.fairbanks@us.gt.com. Contributors are members of or associated with Grant Thornton LLP.