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IRS Delays Tax Basis Reporting of Partnership Capital Accounts Until 2020

The IRS has provided relief from the requirement that partners’ shares of partnership capital be reported on the tax basis method for 2019. The IRS’s draft 2019 forms required tax basis reporting, which triggered numerous comments expressing concern about the short deadline for implementation. The IRS, in Notice 2019-66, conceded that taxpayers may be unable to compile the required information in time for the 2019 filing season and is allowing partnerships to report partner capital accounts using the permissible 2018 methods.

Partnerships and other persons may continue to report partner capital accounts on Forms 1065, Schedule K-1, Item L, or 8865, Schedule K-1, Item F, using any method available in 2018, including tax basis, Section 704(b) book capital account, GAAP, or any other method for 2019. Partnerships must include a statement identifying the method used to report a partner’s capital account. Partnerships also must continue to report negative tax basis capital accounts on a partner-by-partner basis in 2019.

At-Risk Reporting

The Notice also delays for one year the new at-risk reporting requirements scheduled to take effect in 2019. Computation of at-risk basis for partners affects the amount of losses that may be deducted. Under the new reporting regime, additional information is required for each at-risk activity of the partnership, including separate reporting of each activity’s items of income, loss, or deduction, other items of income, loss or deduction, partnership liabilities, and related information, such as distributions or partner loans. At-risk activity information that was required to be reported previously is still  required for the 2019 tax year.

Net Unrecognized Gains and Losses

While the IRS provided relief from tax basis reporting, the agency did not delay the 2019 requirement for partnerships and other persons to report a partner’s share of “net unrecognized Sec. 704(c) gain or loss.” The Notice defines this term as the partner’s share of the net (aggregate or sum) of all unrecognized gains or losses under Section 704(c) in partnership property, including gains and losses arising from revaluations of partnership property.

Section 704(c) gains and losses result from property contributed to a partnership that has a fair market value (FMV) that differs from its adjusted tax basis. The property can have either a built-in gain or a built-in loss. Under the 704(c) rules, a partnership must allocate income, gain, loss, and deductions with respect to property contributed by a partner to take into account any variation between the adjusted basis of the property and its FMV upon contribution. These required allocations prevent the shifting of pre-contribution gain or loss away from the contributing partner to other partners in an effort to avoid taxes.

Publicly traded partnerships are exempt from the requirement to report their partners’ shares of net unrecognized Sec. 704(c) gain or loss until further notice, according to the IRS.

Penalty Relief

Taxpayers who follow the instructions in Notice 2019-66 will not be subject to any penalty if they report partnership items in accordance with the interim rules. The penalty waiver includes penalties under Code Sec. 6722 for failure to furnish correct payee statements, Code Sec. 6698 for failure to file a partnership return that shows required information, and Code Sec. 6038 for failure to furnish information required on a Schedule K-1 (Form 8865).

Because all partnerships will need to report tax basis capital account information beginning in 2020, taxpayers need to start working on the new reporting requirements now. More information will need to be gathered and new records and calculations will need to be compiled. The IRS has promised more guidance on the definition of partner tax basis capital before the 2020 taxable year.

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