Revised IRS instructions to Form 8865, Return of US Persons With

8 February 2013
Global
Tax Alert
Revised IRS instructions
to Form 8865, Return of
US Persons With Respect
to Certain Foreign
Partnerships
Executive summary
On 6 December 2012, the Internal Revenue Service (IRS) published
revised 2012 Form 8865, Return of US Persons With Respect to Certain
Foreign Partnerships and its accompanying instructions. The revised
Instructions are to be used with the revised 2012 Form 8865, which is
used to satisfy certain reporting requirements under Sections 6038,
6038B, and 6046A, and the Regulations thereunder.
The revised instructions add several new information reporting
requirements:
• The Form 8865 Schedule D has been eliminated, and replaced by the
requirement to attach Form 1065 Schedule D, along with detailed
transaction-by-transaction reporting on Form 8949;
• Mandatory use of the “Reference ID” field when completing information
returns of foreign legal entities (i.e., Forms 5471, 8865, and 8858)
without EINs; and
• Separate reporting of related-party lending on Schedule L.
Detailed discussion
Replacement of Schedule D and
addition of Form 8949 reporting
A significant change to Form
8865 for 2012 is the requirement
for category 1 filers to use the
Schedule D of Form 1065 to
report sales or dispositions of
capital assets, instead of using the
condensed version of Schedule D
that was formerly included within
Form 8865. The Form 1065
Schedule D also requires filers to
provide detailed transaction-bytransaction information on Form
8949.
The use of Form 8949 by
corporations and partnerships is
new. Form 8949 allows filers and
the IRS to reconcile the proceeds
and basis, if applicable, reported
on Forms 1099-B and 1099-S,
and requires filers to disclose the
underlying transactions reported
on either of these types of 1099s,
as well as the sale or disposition of
other capital assets not reported
on such Forms 1099. Form 8949
requires filers to disclose separately
information regarding each
transaction, including a description
of the property sold, the date
acquired, the date sold, the sale
proceeds and the tax basis, even
though much of this information
traditionally has been reported
in some manner on Schedule D.
Additionally, Form 8949 includes
a column for the amount of
adjustments, if any, to gain or
loss, such that all figures relevant
to the calculation of gain or loss
can be shown on the Form 8949.
A lettered code would have to be
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input, per the 8949 Instructions,
to indicate the nature of any such
adjustment.
More specifically, corporations and
partnerships use Form 8949 to
report:
• The sale or exchange of a capital
asset not reported on another
form or schedule;
• Nonbusiness bad debts; and
• Undistributed long-term capital
gains from Form 2439.
We note from the IRS Instructions
that electing large partnerships and
corporations also use Form 8949 to
report their share of gain or (loss)
from a partnership, S corporation,
estate or trust. The Instructions
also provide that if you e-file your
return but choose not to report
each transaction on a separate row
on the electronic return, you must
either (a) include Form 8949 as
a PDF attachment to your return
or (b) attach Form 8949 to Form
8453 (or the appropriate form in
the Form 8453 series) and mail
the forms to the IRS. Finally, the
Instructions provide that you can
attach one or more statements
containing all the same information
as Form 8949, instead of attaching
Form 8949, if the statements are in
a format similar to Form 8949.
Form 8949 Instructions for 2012
allow the detailed information for
the separate transactions to be
reported on one or more separate
statements, instead of on the Form
8949 itself, in which case only the
combined totals in Parts I & II would
need to be entered on the Form.
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However, importantly, the 8949
Instructions caution filers not to
enter “available upon request” for
any of the information called for by
the Form.
Reference ID
The December 2011 version
of Form 8865 (as well as Form
8858, Information Return of US
Persons With Respect to Foreign
Disregarded Entities and Form
5471, Information Return of US
Persons With Respect to Certain
Foreign Corporations) included a
new Reference ID field on page 1 of
the form for foreign partnerships
that do not have an assigned
employee identification number
(EIN). The instructions to the 2011
form stated that the new Reference
ID was established by the US person
filing the Form 8865 (so there is no
need to apply to the IRS to request
a Reference ID or for permission
to use a particular Reference ID),
it must be alphanumeric and no
more than 50 characters. The
instructions also stated that the
Reference ID was optional for
tax years beginning in 2011, but
would be mandatory for tax years
beginning after 2011. The revised
instructions confirm that this field,
when applicable, is mandatory for
tax years beginning after 2011
and note that new spaces are
also provided for reporting the
Reference ID on Schedules K-1, O
and P. The revised instructions also
incorporate previous guidance from
an irs.gov posting outlining specific
requirements for the Reference ID,
including the requirement to use
the same Reference ID consistently
from year to year, a restriction
against using a Reference ID that
was previously used by another
entity (whether or not still in
existence) and special rules for
situations (e.g., liquidations,
mergers, acquisitions, change in
entity classification) in which the
correlation of a new reference
ID to an previous reference ID is
warranted.
Disclosure of loans from partners
and related persons
The 2012 Form 8865 balance
sheet, Schedule L, has added a
new row 19a, on the liability side,
to report loans from partners or
persons related to partners. This
change parallels last year’s addition
of row 7a, to the asset side of the
balance sheet, to report loans
to partners. While row 7a of the
2011 Schedule L only indicated
loans made to partners, the 2012
Schedule L clarifies that filers are
supposed to report loans made to
both partners and persons related
to partners.
Implications
The requirement to report on a
transaction-by-transaction basis
may be cumbersome to some
taxpayers. While much of the
same information was required
to be reported in some manner
in prior years, it will be important
for the filers of Form 8865 to take
this change into consideration
to ensure full compliance with
the requirements. In particular,
compliance teams will need to
be aware of these requirements,
and be diligent about reporting
Global Tax Alert
transaction-by-transaction
information as set forth in the Form
8949 Instructions.
The reference ID requirement
generally may be fulfilled with
another set numbers that is
already in use by the taxpayer.
For example, if a company used a
particular set of reference numbers
for its foreign legal entities in tax
preparation software or other
accounting system, these reference
numbers likely can be used as the
company’s reference ID numbers
on the relevant international forms.
This will allow taxpayers continuity
in the use of reference numbers.
Using such a pre-existing set of
numbers in the compliance process
may minimize the inconvenience to
taxpayers of responding to this new
requirement.
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For additional information with respect to this Alert, please contact the
following:
Ernst & Young
Assurance | Tax | Transactions | Advisory
Ernst & Young LLP, International Tax Services, Chicago
• Sue Lippe
+1 312 879 4254
[email protected]
Ernst & Young LLP, International Tax Services, Washington, DC
• Yuelin Lee +1 202 327 6378
[email protected]
• David Macall +1 202 327 7055
[email protected]
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