Form 7217 Requires Reporting Partnership Property Distributions

Aiming to improve the transparency of partnership property distributions, new Form 7217 is part of the IRS’s efforts to enhance reporting accuracy in line with recent changes in partnership tax compliance. Below is an in-depth look at what this new form entails, who needs to file it, and the potential implications for tax planning.

The IRS website currently has a final Form 7217, Partner’s Report of Property Distributed by a Partnership, and its instructions (https://www.irs.gov/forms-pubs/about-form-7217). It appears unchanged from the last version of the draft form which was watermarked as draft in December.

Overview of Form 7217

Form 7217 is designed to report property distributions to partners by partnerships, covering both non-liquidating and liquidating distributions. It may be mandatory for property distributions occurring in tax years beginning in 2024 and after. While previous IRS forms and schedules capture partnership activity, this form specifically reports on distributions that include an element of property and forms part of the tax return of the partner, rather than the partnership.

Who Must File

Partners who receive distributions of property from a partnership must complete Form 7217 and are required to report details of the distribution, even if no immediate tax liability arises. For purposes of the form, property is anything other than cash or marketable securities, such as inventory and capital assets. This distinction is significant, as property distributions often involve complex basis adjustments.

What Information Is Reported?

Form 7217 requires reporting of each property distributed, including:

Type of Property: Form 7217 is concerned with all non-cash distributions —whether or not cash is included in the distribution. The form includes separate sections for different categories. Property such as capital assets like real estate and machinery must be reported separately from inventory or proprietary technology. Each category may have differing tax treatment, either at the time of distribution or at the time when the partner disposes of the distributed property.For example, capital assets may have consequences when the partner disposes of the property based on depreciation recapture. Some items may have special valuation rules, such as artwork or patents. For distributions that include so-called “hot assets” (e.g., unrealized receivables, inventory items, or capital assts subject to depreciation recapture), additional reporting might be necessary to apply ordinary income recognition at the time of distribution, where appropriate.
Basis and Fair Market Value (FMV): The form captures both the adjusted basis and FMV of each distributed property, with fair market value being relevant in certain limited situations.
Partner Basis Adjustments: One of the more intricate aspects of Form 7217 is its treatment of basis adjustments. For distributions of property for which a basis adjustment occurred under §734 or §743 (where there was a partnership transfer or distribution of property at a point when the partnership has a §754 election in place or at a point when the partnership was in a substantial built-in loss position), partners must report how these adjustments affect their individual basis in the property received.

The form thusly provides information for the year of distribution and beyond, where partners will need to disclose any immediate gains or losses upon receipt and any deferred tax positions for future sales of the property.

Potentially Relevant Items Not Reported on the Form

Partnership Holding Period: The holding period determines whether the subsequent sale of distributed property results in short-term gains (taxed at ordinary income rates) or long-term gains (potentially taxed at preferential rates). Generally, a partner has a holding period of property distributed to them from a partnership that includes the period the partnership held the property.Without the holding period on Form 7217, partners may struggle to classify their gains correctly if they sell the distributed property within 12 months of the distribution.
Depreciation Recapture: Depreciation recapture arises when a depreciable asset is sold or exchanged, and the gain attributable to depreciation deductions previously claimed must be taxed as ordinary income, not capital gain. Reporting depreciation recapture on Form 7217 would ensure accurate characterization of a subsequent gain recognition event and prevention of underreporting or mischaracterization.

Implications for Partner and Partnership Accounting and Compliance

The introduction of Form 7217 imposes new compliance responsibilities on partners and, indirectly, partnerships.

Implications for Partners. For partners, Form 7217 requires meticulous tracking of basis that may not result in immediate tax but must be accounted for in future transactions. This calls for a stronger emphasis on record-keeping beyond the information currently reported on Schedule K-1.

A critical distinction arises between:

Outside Basis: Reflecting a partner’s basis in their partnership interest, this is key for determining the tax treatment of distributions, sales of partnership interests, and interest allocation.
Inside Basis: Representing the partnership’s tax capital accounts under §704(b), but may or may not reflect the impacts of certain property transactions and sales or other transfers of partnership interests between partners.

While Schedule K-1 provides much of the data needed to calculate and maintain outside basis, it does not directly report it, requiring partners to reconcile these figures independently.

Implications for Partnerships. The information that partners are required to report may not be known to partners, and the Schedule K-1, which summarizes distribution data, will not provide sufficient information to complete Form 7217.

As such, partnerships will likely expand their reporting beyond Form 1065 and Schedule K-1 and K-3 requirements.Currently, these only require the partnership to report adjusted basis and fair market value for distributed property.

Overall, Form 7217 reflects a shift toward more granular reporting, requiring partnerships and partners alike to adopt additional accounting practices and closer coordination (and yet another Schedule K-1 footnote unless that form is changed to add relevant information).

Common Industry Scenarios Where Form 7217 May Be Required

1. Private Equity and Venture Capital Firms

Scenario for Filing: While investment funds normally distribute cash after selling an investment, it is not uncommon to distribute publicly traded shares following an IPO exit event or residual assets or claims of a fund that has concluded its life.

2. Small Business and Family-Owned Partnerships

Scenario for Filing: Form 7217 is required if, for instance, real estate, equipment, or other tangible assets are distributed to a partner, especially in cases of dissolutions, partner buyouts, or retirements where certain assets are transferred to individual partners.

3. Multinational Firms with Cross-Border Partnerships

Scenario for Filing: Multinational corporate groups often have partnerships within their structures and may encounter property distributions subject to Form 7217 reporting when distributing assets to partners as part of internal restructuring activities.

Final Takeaways

Form 7217 brings new compliance requirements for partners (to file the form accurately) as well as partnerships (to provide all the correct required information). The IRS’s emphasis on accurate basis adjustments, detailed FMV reporting, and deferred gain tracking means that tax practitioners should start considering whether any of their clients have engaged in or received property distributions and begin discussions about the additional reporting requirements. By implementing proactive strategies for basis management and asset valuation, partnerships can assist their partners in meeting these reporting standards while optimizing tax outcomes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Marek Krawczyk is a partner and Head of US Business Tax and Prachi Gupta is an assistant manager at Andersen Tax in the UK.