What Is IRS Form 8308 and How Do You File It?

When a partner sells their stake in a business, the partnership may have a reporting duty to the Internal Revenue Service (IRS) using Form 8308, Report of a Sale or Exchange of Certain Partnership Interests. It is filed by the partnership, not the individual partners involved in the transaction. The form’s function is to notify the IRS of the transfer, helping it track assets and ensure that income that should be taxed at ordinary rates is not improperly treated as a capital gain.

Determining When to File Form 8308

A partnership must file Form 8308 when a partner sells or exchanges their interest and receives payment for “Section 751 property.” This term covers assets that, if sold directly by the partnership, would generate ordinary income rather than capital gain. The presence of these assets, often called “hot assets,” triggers the filing requirement as they represent a potential for tax avoidance if not properly reported.

The first category of Section 751 property is “unrealized receivables.” For a cash-basis partnership, this means payments earned but not yet received for goods sold or services rendered. An example would be outstanding invoices for a consulting firm that has completed its work but has not yet been paid. These amounts represent future ordinary income.

The second category is “inventory items,” which includes more than a business’s stock-in-trade. It encompasses any property the partnership holds that would not qualify as a capital asset, such as land held by a developer for sale or accounts receivable acquired in business. When a partner sells their interest, the portion of the sale price for their share of these items is subject to ordinary income tax rates.

The partnership is considered to have notice of a Section 751 exchange when it receives written notification from the selling partner or otherwise has knowledge of the transfer. If a partnership is uncertain whether its assets qualify, it can file a protective Form 8308 to avoid potential penalties for non-filing.

Information Required to Complete Form 8308

To complete Form 8308, the partnership must gather specific details about the business, the selling partner (transferor), and the buying partner (transferee). The form requires precise information for each of its parts.

Parts I and II of the form gather identifying information. This includes the partnership’s name, address, and Employer Identification Number (EIN), as well as the names, addresses, and Taxpayer Identification Numbers for both the transferor and transferee. The form also requests details on the record holder and the beneficial owner of the interest.

Part III requires a description of the partnership interest that was transferred. Part IV requires the date of the exchange and the transferor’s share of specific gains and losses. This includes gain or loss from Section 751 property, collectibles gain, and any unrecaptured Section 1250 gain.

The Filing Process for Form 8308

The partnership must attach a separate Form 8308 for each applicable sale or exchange to its annual income tax return, Form 1065. The due date for Form 8308 coincides with the due date for Form 1065, which is generally the 15th day of the third month after the end of the partnership’s tax year, including extensions.

The partnership must also furnish a statement containing the information from Form 8308 to both the transferor and the transferee. This statement ensures both parties have the necessary information to correctly report their side of the transaction on their personal income tax returns.

The partnership must send these statements by January 31 of the year following the sale. An alternative deadline is 30 days after the partnership receives notice of the exchange, if that date is later.

Penalties for Non-Compliance

Failure to comply with Form 8308 requirements can lead to financial penalties from the IRS. Penalties can be assessed for two separate failures: failing to file the form with the IRS and failing to furnish the required statements to the partners.

A penalty may be imposed for each Form 8308 that a partnership fails to file with its Form 1065 tax return, with the amount based on how late the form is filed. An exception may apply if the partnership can show the failure was due to reasonable cause and not willful neglect.

A separate penalty can be assessed for each required statement the partnership fails to provide to the transferor and transferee by the deadline. This means a single transaction could result in two penalties. Penalties can also be imposed for incomplete or incorrect information and may increase for intentional disregard of the reporting requirements.