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On August 18, the IRS and Treasury announced proposed regulations (REG–108822–25) aimed at making permanent the relief previously outlined in Notice 2026–19. These regulations address the reporting requirements for the sale or exchange of partnership interests related to partnerships holding Sec. 751(a) property, including inventory and unrealized receivables.
The existing framework under Sec. 6050K mandates that partnerships with Sec. 751 assets provide necessary information to both the transferor and transferee during a sale or exchange involving these properties. This compliance obligation can be burdensome, but the proposed changes seek to alleviate some of this burden.
Understanding the reporting obligations
Partnerships engaged in transactions involving Sec. 751(a) exchanges must report these activities using Form 8308, known as the Report of a Sale or Exchange of Certain Partnership Interests. This form is submitted alongside Form 1065, the U.S. Return of Partnership Income. According to Regs. Sec. 1.6050K–1(c)(1), partnerships must provide this information by January 31 of the year following the exchange or within 30 days after receiving notice of the exchange.
If a partnership fails to provide accurate and timely statements, it may incur penalties under Sec. 6722. To assist partnerships, the IRS updated Form 8308 in October, adding new requirements in Part IV that include the transferor partner’s share of Sec. 751 gain and other related gains.
Penalty relief for reporting delays
To support compliance, the IRS, through Notice 2026–19, declared that no penalties would apply under Sec. 6722 for partnerships that submitted payee statements without a Form 8308 for specific Sec. 751(a) exchanges that occurred during the calendar year, provided certain conditions were met. This relief was further extended to exchanges that took place in 2026 via Notice 2026–02.
Proposed changes to streamline reporting
The proposed regulations suggest removing Regs. Sec. 1.6050K–1(c)(2), which currently requires partnerships to furnish the information outlined in Part IV of Form 8308 by January 31 of the following year. This adjustment would eliminate the need for duplicate reporting, allowing partnerships to focus on the necessary information in Parts I, II, and III.
Moreover, modifications to Regs. Sec. 1.6050K–1(c)(1) will replace the phrase “completed copy of Form 8308” with “a copy of Form 8308 filled out in accordance with the instructions.” The IRS plans to update these instructions to clarify that only details from the first three parts of the form must be submitted by the deadlines specified in Sec. 6050K.
Ongoing requirements for partnerships
Despite these changes, partnerships must still file a completed Form 8308, including Part IV, along with their Form 1065 for the fiscal year that ends on the last day of the calendar year in which the Sec. 751(a) exchange occurred. Additionally, partnerships must provide the transferor partner with the necessary information on the Schedule K–1 (Form 1065), which outlines the partner’s share of income, deductions, credits, and includes details required under Regs. Sec. 1.751–1(a)(3).
The proposed adjustments to Regs. Sec. 1.6050K–1(c)(2) are expected to take effect once they are published as final regulations in the Federal Register. Partnerships will have the option to rely on these proposed regulations for Sec. 751(a) exchanges conducted on or after January 1, prior to the final regulations being published.
These proposed regulations represent a significant shift toward reducing the reporting burden on partnerships, enhancing clarity and compliance. The anticipated changes aim to relieve both taxpayers and tax professionals by eliminating redundancy in reporting, simplifying the complexities of Sec. 751(a) exchanges.