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In Notice 2019-66 (the Notice), the IRS has postponed by one year the requirement to report partners' shares of partnership capital on the tax-basis method. The requirement will now be effective for partnership tax years beginning on or after January 1, 2020, rather than for 2019 tax years, as proposed in 2019 draft Form 1065 and Schedule K-1 and related instructions.

The Notice also delays the requirement for partnerships to report to partners' information about separate "Section 465 at-risk activities" until partnership tax years beginning on or after January 1, 2020.

In addition, the Notice includes some clarifying guidance on reporting partners' shares of net unrecognized IRC Section 704(c) gain or loss, notably exempting publicly traded partnerships from the requirement to report their partners' shares of net unrecognized IRC Section 704(c) gain or loss.

The Notice did not address other proposed changes to the 2019 draft Schedule K-1, including disregarded entity reporting, guaranteed payment detail or disclosure of pass-through deductions claimed under IRC Section 199A.

Background

Before release of the 2018 Form 1065 instructions, partnerships had the option of reporting their partners' capital accounts under any one of several different methods (e.g., tax basis, GAAP or IRC Section 704(b) book). The 2018 Form 1065 instructions, however, required partnerships to report partners' tax basis capital account information for partners with negative tax basis capital accounts at the beginning or end of the tax year (see Tax Alerts 2019-0396 and 2019-0509). Draft 2019 forms and instructions released earlier this year went even further and proposed requiring partner tax basis capital reporting for 2019 regardless of whether a partner's tax basis capital account is positive or negative (see Tax Alerts 2019-1832 and 2019-2011).

Draft 2019 forms and instructions further proposed to require partnerships to report partners' shares of net unrecognized IRC Section 704(c) gain or loss as of the beginning and end of the partnership's 2019 tax year.

In addition, draft 2019 forms and instructions proposed a new requirement for 2019 for partnerships to report to partners certain information about separate IRC Section 465 at-risk activities.

Notice 2019-66 relief and clarifying guidance

Reporting partners' tax basis capital accounts

In response to comments received about difficulty complying with the new tax basis reporting requirement for partner capital accounts for 2019, the Notice states that partnerships will not be required to report partner capital accounts using the tax basis method for 2019. Instead, partnerships should report partner capital accounts for 2019 consistent with 2018 forms and instructions (including the requirement to report negative tax basis capital accounts on a partner-by-partner basis, the computation of which is clarified by the Notice). Partnerships will also be required to include a statement identifying the method upon which a partner's capital is reported (e.g., tax, IRC Section 704(b), GAAP or any other method).

Reporting partners' shares of net unrecognized IRC Section 704(c) gain or loss

Noting that the 2019 draft forms and instructions did not define "net unrecognized Section 704(c) gain or loss," the Notice defines the term — solely for purposes of completing the 2019 Forms 1065, Schedule K-1, Item N, and 8865, Schedule K-1, Item G — as the partner's share of the net (sum) of all unrecognized IRC Section 704(c) gains or losses in partnership property, including those arising from revaluations of partnership property. For purposes of reporting for 2019, the Notice instructs partnerships to resolve various questions regarding certain technical issues noted in Notice 2009-70 in a reasonable manner, consistent with prior years' practice for purposes of applying IRC Section 704(c) to partners.

The Notice further states that net unrecognized IRC Section 704(c) gain or loss reporting will not apply to publicly traded partnerships and their partners for 2019, and thereafter, until further notice.

IRC Section 465 at-risk activity reporting

In response to comments about difficulty complying with new at-risk activity reporting requirements in 2019 draft forms and instructions, the Notice does not require partnerships to report information for each at-risk activity separately for 2019 that was not previously required to be reported for the 2018 partnership tax year. Partnerships must still indicate, however, in Form 1065, Item K, whether they have aggregated activities for IRC Section 465 at-risk purposes for 2019.

Penalty relief

Taxpayers following the Notice will not be subject to any penalty for reporting in accordance with its guidance.

Implications

The relief granted by the IRS in postponing certain information reporting requirements will permit taxpayers and their advisors with much needed time to gather information. Deferring the reporting of positive tax capital will allow private equity and other alternative asset management funds structured as partnerships to report partner capital on 2019 Schedule K-1 using as GAAP, IRC Section 704(c) or other specified methods to report partner capital on Schedule K-1.

Considering the Notice contemplates future requests for comments, we expect additional clarification on complying with the reporting requirements when questions arise about methodology for determining the information, or perhaps guidance on safe harbor approaches in determining the information. The guidance permitting reasonable approaches for complying with the IRC Section 704(c) reporting requirements also provides relief when computational issues exist that have yet to be resolved through guidance. The relief from application of the net unrecognized IRC Section 704(c) gain or loss reporting for publicly traded partnerships and their partners for 2019 is also welcome, since publicly traded partnerships do not have the information to comply with this reporting requirement.

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