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Notice 2019-66: Relief from broad partner tax basis capital account reporting for 2019

Broad partner tax basis capital account reporting

The IRS today released an advance version of Notice 2019-66 that provides relief from the requirement to report all partners’ shares of partnership capital on the tax basis method for 2019.

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The IRS notice states that the reporting of partners’ shares of partnership capital on the tax basis method will not be effective for 2019 (for partnership tax years beginning in calendar 2019) but will be effective beginning in 2020 (for partnership tax years that begin on or after January 1, 2020).

Notice 2019-66 [PDF 95 KB] states that for 2019, partnerships and other persons must report partner capital accounts consistent with the reporting requirements in the 2018 forms and instructions.  This means that partnerships and other persons must report negative tax basis capital accounts on a partner-by-partner basis for 2019.  All partnerships and other partners will need to report tax basis capital account information beginning in 2020.

Notice 2019-66 also:

  • Clarifies the 2019 requirement for partnerships and other persons to report a partner’s share of “net unrecognized section 704(c) gain or loss” by defining this term for purposes of the reporting requirement and allowing partnerships and other persons to make determinations in a reasonable manner consistent with prior years for 2019 and thereafter until further notice.
  • Exempts publicly traded partnerships from the requirement to report their partners’ shares of net unrecognized section 704(c) gain or loss until further notice.
  • Provides that the requirement added by the draft instructions for 2019 for partnerships to report to partners certain information about separate “section 465 at-risk activities” will not be effective until 2020. However, partnerships will still need to provide information regarding whether activities are aggregated and comply with Form 6198.
  • Provides relief from certain reporting penalties.

Notice 2019-66

Notice 2019-66 explains that draft versions of the 2019 Form 1065 and Form 8865, Schedule K-1, Item F and the related instructions (released in late September 2019) proposed to require partner tax basis capital reporting by all partnerships and certain other persons. These forms and instructions also proposed to prohibit the reporting of partner capital under section 704(b), under GAAP, or under any other method for 2019.

The IRS notice explains that based on comments received, the IRS and Treasury were made aware that certain persons required to file Forms 1065 or 8865 might be unable to timely comply with the requirement to report partner capital on the tax basis method for 2019.

Accordingly, today’s notice provides that partnerships and others required to furnish and file Form 1065, Schedule K-1 or Form 8865, Schedule K-1 will not be required to report partner capital accounts for 2019 using the tax basis method. Instead, partnerships and other persons must report partner capital accounts for 2019 “consistent with the reporting requirements” for the 2018 Form 1065, Schedule K-1 or Form 8865, Schedule K-1 (whichever is applicable). In other words, the reporting of partner capital accounts is to use any method available in 2018—such as tax basis, section 704(b), GAAP, or any other method. The IRS notice directs partnerships and other persons that they must include a statement identifying the method upon which a partner’s capital account is reported.

The IRS noted that the final instructions for the 2019 forms are expected to include additional details on how such reporting is to be done.

Section 465 “at-risk limitation” relief

Comments were also received with respect to the ability of taxpayers to comply with newly added reporting requirements regarding each at-risk activity for 2019. In response, Notice 2019-66 provides that partnerships and other persons required to furnish and file form 1065, Schedule K-1, or Form 8865, Schedule K-1, will not be required to report information for each at-risk activity separately for 2019 that was not previously required to be reported for the 2018 tax year. Partnership must still indicate in Item K on Form 1065 if they have aggregated activities for section 465 at-risk purposes for 2019. Partnerships must also continue to comply with the instructions for Form 6198 for 2019 which require partnerships to furnish their partners with a separate statement of income, expenses, and deductions for each at-risk and not-at-risk activity.

Net unrecognized section 704(c) gain or loss clarification

With respect to the requirement to report a partner’s share of “net unrecognized section 704(c) gain or loss,” Notice 2019-66 provides that such amount is the sum of all unrecognized gains or losses under section 704(c), including section 704(c) gains and losses arising from revaluations of partnership property. Commentators requested guidance with respect to certain section 704(c) computational matters.  In response, the notice provides that for purposes of reporting for 2019, partnerships and other persons generally need to make determinations in a reasonable manner consistent with prior years and thereafter, until further notice.

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