If you are a US person who has a direct ownership in a foreign partnership controlled by US persons (e.g., where the allocated income from the Form 8865 flows directly into your US tax return), then you are covered by the requirements of Notice 2019-20 and need to comply by sending the information to Ogden, UT for 2018 and must include the negative tax basis information on the Form 8865 for 2019.


The reporting of tax basis for Partners’ capital accounts has been deferred until the 2020 tax year (See Notice 2019-66).  However, the reporting of partners with a negative tax basis was required for 2018.  There was penalty relief granted for failure to provide this information with the 2018 Schedule K-1 provided the information is sent to the IRS in Ogden, UT pursuant to the instructions in Notice 2019-20. A relief for section 6038 penalty (Form 8865 Schedule K-1) is included.

For foreign partnerships that file Form 8865, they are governed by specific instruction for Form 1065 when it comes to the Schedule K-1.  General instructions for the Form 8865 Schedule K-1 are included in the Instructions for Form 8865.

US persons may own a direct or indirect interest in a foreign partnership.  An indirect interest might occur when the US person owns a controlled foreign corporation (CFC) that is a partner in the foreign partnership.  Similar to the CFC rules, a controlled foreign partnership (CFP) occurs when a foreign partnership is owned over 50% by US persons.

A Category 1 filer of the Form 8865 results from a single US person owning (either directly or indirectly) over 50% of the CFP.  A Category 2 filer results from having enough 10% or more US persons owning the CFP to have control (but no single US person owing over 50%).  If there is a Category 1 filer, there cannot be a Category 2 filer.  There can be multiple Category 1 filers in a single year if different US persons have controlled the CFP during the year.

The instructions to Form 8865 state the following:
  • All Category 1 and 2 filers must complete Schedule K-1 (Form 8865) for any direct interest they hold in the partnership. A Category 1 or 2 filer that doesn’t own a direct interest is not required to complete Schedule K-1 (Form 8865).
  • Category 1 filers must also complete Schedule K-1 (Form 8865) for each U.S. person that directly owns a 10% or greater direct interest in the partnership.
  • Provide the partner's beginning and year-end percentage interest in partnership profits, losses, capital, or deductions. These percentages should include any interest constructively owned by the filer. Complete boxes 1 through 20 for any direct interest that the partner owns in the partnership.
  • Example. Partner A owns a 45% direct interest in a foreign partnership (FPS). Partner A also owns 100% of the stock of a domestic corporation (DC), which owns a 10% direct interest in FPS. Therefore, Partner A is considered to own a 55% interest in FPS and is thus a Category 1 filer. When Partner A completes Schedule K-1 (Form 8865) for itself, Partner A must report the distributive share of items allocated to Partner A's direct interest of 45% but not any items allocated to DC's 10% interest. When Partner A completes Schedule K-1 (Form 8865) for DC (which Partner A must do because DC owns a direct 10% interest), Partner A must report on DC's Schedule K-1 (Form 8865) only items allocated to DC's direct 10% interest.
Therefore, as long as there is no direct ownership by a US person of a CFP, there is no requirement to complete the schedule K-1 and the requirements under Notice 2019-20 do not apply.  There is no need to send the information to Ogden, UT for 2018 nor to provide this information in preparing the 2019 Form 8865. 
It’s interesting to note that as a result Form 8865 is filed by an eligible US person partner issuing a schedule K-1 to itself where the Form 1065 is filed by partnerships which will issue schedules K-1 to its partners. 


If you are covered by this Notice requirement and have not yet received an additional notice from your tax preparer related to the negative basis issue, you should contact the tax preparer and determine if any action is required and when it will be taken.  Moore Emerson GmbH can also walk you through this issue and answer your questions if you contact us.