Key Takeaways:
- IRS Form 7217 introduces new tax reporting requirements for investors in private equity, hedge funds, investment partnerships, or any other partnership.
- Partners receiving in-kind distributions must file Form7217 for each distribution and report basis of the distributed property, including any basis adjustments to such property.
- Fund managers should prepare for investor questions and compliance impacts as the IRS increases scrutiny of partnership transactions and basis shifting.
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New Filing Obligations for In-Kind Distributions
Beginning with tax years starting in 2024, the IRS now requires partners in partnerships to report in-kind distributions of property using a newly released form — Form 7217: Partner’s Report of Property Distributed by a Partnership. This rule applies broadly across the investment fund landscape, including private equity, venture capital, hedge funds, and fund-of-funds that receive securities or other property distributions not classified as cash.
If your fund structure allows for non-cash distributions — especially in restructuring scenarios or when forming continuation funds — your investors may now be required to attach Form 7217 to their tax returns for each distribution event. Making sure you’re compliant and clearly communicative with your investors will be critical.
When Does Form 7217 Apply?
Form 7217 applies when a partner receives a distribution of property other than cash or marketable securities treated as cash. Investment partnerships meeting certain criteria can distribute marketable securities tax-free, allowing partners to defer income recognition until those securities are sold. But this deferral still comes with added compliance: every qualifying distribution event now requires its own Form 7217.
Reporting includes:
- Date of each distribution
- Basis of distributed property
- Any basis adjustments related to the transaction
Importantly, a separate form is required for each distribution date. That means multiple distributions throughout the year will result in multiple Form 7217 attachments— raising complexity and potential audit exposure for recipients.
Why This Matters: IRS Focus on Partnership Scrutiny
This change is part of a larger trend: increased IRS scrutiny of basis-shifting and partnership transactions. Form 7217 represents another step in the agency’s efforts to monitor and track partnership activity more closely, especially in areas involving deferred tax treatment and in-kind distributions.
Fund managers should anticipate an uptick in questions and document requests from LPs and investor tax advisors as we quickly approach the 2024 tax season extended deadline. Being proactive now can reduce filing risk and streamline communication.
How Fund Managers Can Prepare
To help investors meet their compliance obligations and avoid downstream tax issues, your firm should consider the following steps:
1. Update Tax Reporting Workflows
Integrate Form 7217 requirements into your fund’s year-end tax packages and document handoffs.
2. Communicate Early with Investors
Inform LPs of their obligations under the new rules, especially if your fund strategy involves in-kind distributions.
3. Consult with Tax Advisors
Work with partnership tax professionals to ensure accurate tracking and address any gray areas involving property classification.
