IRS Delays Effective Date of Draft Schedule K-1 Provisions

December 12, 2019

By Virginia Miller and Richard Shapiro

In response to numerous comments received with respect to its draft Schedule K-1, on December 9, 2019 the Department of the Treasury and the Internal Revenue Service issued IRS Notice 2019-66]. The Notice provides that the requirement to report partners’ share of partnership capital on the tax basis method will not be effective for 2019 (for partnership taxable years beginning in calendar 2019) but will be effective beginning in 2020 (for partnership taxable years that begin on or after January 1, 2020). For 2019, partnerships and other persons must report partner capital accounts consistent with the reporting requirements in the 2018 forms and instructions, including the requirement to report negative tax basis capital accounts on a partner-by-partner basis.

The Notice 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. Solely for purposes of completing the 2019 Forms 1065, Schedule K-1, Item N, and Form 8865, Schedule K-1, Item G, the Notice defines a partner’s share of “net unrecognized Section 704(c) gain or loss” as the partner’s share of the “net” (net means aggregate or sum) of all unrecognized gains or losses under Section 704(c) of the Code in partnership property, including Section 704(c) gains and losses arising from revaluations of partnership property. For purposes of reporting for 2019, partnerships and other persons should generally resolve these issues in a “reasonable manner,” consistent with prior years’ practice for purposes of applying Section 704(c) to partners. Additionally, the 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.

The Notice also provides that the requirement added by the draft instructions for 2019 for partnerships to report to partners information about separate Section 465 at-risk activities will not be effective until 2020. However, partnerships must still indicate in the 2019 Form 1065, Item K whether they have aggregated activities for Section 465 at-risk purposes.

Finally, the Notice provides relief from certain penalties.

About Richard J. Shapiro

Richard Shapiro, Tax Director and member of EisnerAmper Financial Services Group, has over 35 years' experience in federal income taxation, including the taxation of financial instruments and transactions, both domestic and international.

About Virginia C.S. Miller

Virginia Miller is a Tax Director and a member of the Financial Services Group with tax and business advisory experience providing tax planning and compliance services to hedge funds, private equity and investment advisors.

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