PLR 1152002: IRS approves electronic delivery of substitute Schedule K-1s

Plain-English summary

The IRS approved a partnership's proposed electronic delivery of substitute Schedule K-1s to partners who affirmatively consent to electronic delivery. The substitute forms must meet the requirements for substitute forms, and the partnership must follow procedures for consent, withdrawal, notification, access, and retention modeled on the IRS rules for electronic delivery of other tax statements. The IRS concluded that these procedures satisfy the partnership's duty under IRC § 6031(b) to furnish the required information to partners. The partnership does not need separate IRS approval to use a substitute Schedule K-1 that is an exact copy of the official schedule.

Ruling snapshot

• Question: May the partnership furnish compliant substitute Schedule K-1s electronically under the described consent and notification procedures?
• Outcome: Approved.
• Key authorities: IRC §§ 6031, 6050S, 6051, 6110; Treas. Reg. §§ 1.6031(b)-1T, 1.6050S-2, 31.6051-1(j), 31.6501-1(j)(2)(v)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201152002 Third Party Communication: None
Release Date: 12/30/2011 Date of Communication: Not Applicable
Person To Contact:
Index Number: 6031.00-00, 6031.04-00 ---------------------, ID No. -------------
Telephone Number:
---------------------
------------------------------------------------------ Refer Reply To:
------------------------------------ CC:PA:01
--------------------------------------- PLR-108070-11
------------------------------ Date:
September 23, 2011

Legend

Partnership = ------------------------------------------------------
Parent = --------------------------------------------------------------------------

Dear ------------------------------------------------------:

This is in response to your request dated February 23, 2011, and supplemented on
September 7, 2011 and September 22, 2011, for a private letter ruling under section
6031 of the Internal Revenue Code (Code). Specifically, you request a ruling that
Partnership’s delivery in electronic format of substitute Schedule K-1s that you
represent satisfy the requirements of Section 7.1 of Rev. Proc. 2010-21, under
procedures that you represent satisfy the consent and notification requirements for
electronic delivery of statements set forth in Part B, Section 3 of Rev. Proc. 2010-24, will
satisfy the requirements of section 6031(b) of the Code and Treas. Reg. § 1.6031(b)-
1T(a)(1).

FACTS

Partnership is a calendar-year taxpayer and files Form 1065 with the Internal Revenue
Service (Service) electronically. Partnership currently satisfies its obligations under
Section 6031(b) of the Code to furnish information to its members by sending paper
Schedule K-1 (Form 1065), Partner’s Shares of Income, Deductions, Credits, etc., via
United States mail. Partnership also provides copies of Schedule K-1s to its partners
electronically via a secure website, for information purposes only.

Partnership currently provides certain electronic communications to its partners through
a website maintained by its Parent. Consents to electronic delivery of communications
between Partnership and its partners are set forth in a Subscription Agreement
executed by the partners upon their initial investment in the Partnership. Partners are
notified via e-mail that electronic communications are available to be accessed through
PLR-108070-11 2

the website. Each partner then logs into the website with a user ID and password, and
downloads the electronic communication. This is also how a partner accesses the copy
of the partner’s individual Schedule K-1 currently made available for information
purposes only. Partners may revoke or suspend consent to electronic delivery or
request paper copies of electronic communications at any time.

In the future, Partnership would like to furnish substitute Schedule K-1s exclusively in
electronic format to new partners who consent to electronic delivery under the
procedures described below. Partnership represents that the substitute Schedule K-1s
will meet the requirement for substitute forms set forth in section 7.1 of Rev. Proc. 2010-
21, 2010-13 I.R.B. 473. In addition, Partnership represents that it will follow procedures
regarding the delivery of substitute Schedule K-1s that satisfy the consent and
notification requirements for electronic delivery of other forms (e.g., Forms W-2) set
forth in Part B, Section 3 of Rev. Proc. 2010-42, 2010-47 I.R.B. 715. Specifically,
Partnership states that it will adhere to the following procedures:

1. The Partnership will obtain consent to electronic delivery from new partners
  pursuant to the Subscription Agreement. Each new partner will be sent an email
  requesting that the partner log on to Parent’s website and consent to receive all
  account communications, including the Schedule K-1, electronically.

2. If Parent changes the hardware or software used to furnish the electronic form,
  Parent, on behalf of the Partnership, will notify the partners of these changes and
  obtain a new consent prior to furnishing the Schedule K-1.

3. Prior to furnishing the Schedule K-1s electronically to new partners, Parent, on
  behalf of the Partnerships, will provide each recipient partner with a statement
  (the 30-day e-mail) that prominently displays the following information:

      a. that, if the recipient does not consent to receive the Schedule K-1
         electronically, a paper copy will be provided;

      b. the scope and duration of the consent;

      c. how to obtain a paper copy of the Schedule K-1 after giving consent;

      d. how to withdraw the consent;

      e. that the consent may be withdrawn at any time by furnishing the
         withdrawal in writing (electronically or on paper) to the person whose
         name appears on the statement or by contacting the designated Parent
         representative by telephone to verbally request withdrawal of consent, at
         which time Parent’s representative will withdraw the partner’s consent by
         adjusting the partner’s global preferences on Parent’s website;

PLR-108070-11 3

      f. that the partner can confirm withdrawal of consent by checking his or her
         global preferences set forth on the Parent’s website, and further that if the
         withdrawal was requested orally, Parent will contemporaneously send an
         e-mail to the recipient partner confirming their withdrawal request and
         providing instructions to contact Parent if it was not their intention to
         withdraw their consent.

      g. notice of termination (i.e., under what conditions the statements will no
         longer be furnished to the recipient);

      h. procedures to update the recipient’s information;

      i.   a description of the hardware and software required to access, print and
           retain the statement, and a date the statement will not longer be available
           on the partnership website.

LAW

Furnishing of Schedule K-1s

Section 6031(a) of the Code provides, in part, that every partnership shall make a return
for each taxable year, stating specifically the terms of its gross income and deductions,
and such other information as the Secretary may by forms and regulations prescribe,
and shall include in the return the names and addresses of the individuals who would be
entitled to share in the taxable income if distributed and the amount of the distributive
share of each individual.

Section 6031(b) of the Code provides, in part, that each partnership required to file a
return for any partnership taxable year shall (on or before the day on which the return
for such taxable year was required to be filed) furnish to each person who is a partner or
who holds an interest in such partnership as a nominee for another person at any time
during such taxable year a copy of such information required to be shown on such
return as may be required by regulations.

Section 1.6031(b)-1T of the Income Tax Regulations (regulations) provides, in part, that
each partnership required to file a return for any partnership taxable year shall (on or
before the day on which the return for such taxable year is required to be filed) furnish
to each person who is a partner or who holds an interest in such partnership as a
nominee for another person at any time during such taxable year a written statement
containing the information prescribed by section 1.6031(b)-1T(a)(3) and any additional
information required by form or accompanying instructions. This information includes
the partner’s distributive share of partnership income, gain, loss, deduction, or credit
required to be shown on the partnership return.
PLR-108070-11 4

The 2010 Instructions for Form 1065, U.S. Return of Partnership Income, provide, in
part, that the partnership furnish a copy of Schedule K-1 to each partner.

Substitute Schedule K-1s

Rev. Proc. 2010-21 provides guidance on the requirements for forms accepted as
substitutes for official Internal Revenue Service forms. Section 7.1 of Rev. Proc. 2010-
21 sets forth specific guidelines for substitute Schedule K-1s. Section 7.1.1 of Rev.
Proc. 2010-21 provides, in part, that substitute schedules K-1 should be as close as
possible to exact replicas of copies of the official IRS schedules. The 2010 Instructions
for Form 1065, U.S. Return of Partnership Income, provide, in part, that a partnership
does not need IRS approval to use a substitute Schedule K-1 if it is an exact copy of the
IRS schedule.

Electronic Furnishing of Statements

Section 6031 of the Code and the Treasury Regulations are silent on whether electronic
delivery of Schedule K-1s is permitted. Section 31.6051-1(j) of the Employment Tax
Regulations and Part B, Section 3 of Rev. Proc. 2010-42, 2010-47 I.R.B. 715 set forth
procedural consent and notification requirements for the electronic delivery of Form W-
2, Wage and Tax Statement. Section 4.5 of Rev. Proc. 2009-49, 2009-51 I.R.B. 879
sets forth procedural and notification requirements for the electronic delivery of Forms
1098, 1099, and 5498, among others. Finally, section 1.6050S-2 of the Income Tax
Regulations sets forth the procedural consent and notification requirements for the
electronic delivery of statements required by I.R.C. § 6050S regarding payments and
reimbursements or refunds of qualified tuition and related expenses.

ANALYSIS

Section 6031(b) and section 1.6031-1T(a) provide that each partnership must furnish to
each person who is a partner or who holds an interest in such partnership as a nominee
for another person at any time during the taxable year a copy of information required to
be shown on the partnership return, but does not prescribe the method of furnishing
such information. The Service has issued regulations and revenue procedures
authorizing the electronic furnishing of Forms W-2, providing for procedural consent and
notification that satisfy the needs of tax administration in ensuring that recipients
consent to receive these written statements electronically and that recipients actually
receive these statements electronically. The Service has also issued similar regulations
authorizing the electronic furnishing of statements required by I.R.C. § 6050S, as well
as revenue procedures authorizing the electronic furnishing of Forms 1098, 1099, 5498,
and W-2G.
PLR-108070-11 5

Partnership represents that it will follow the procedures in furnishing electronic Schedule
K-1s to its partners that satisfy the procedural consent and notification requirements
applicable to Forms W-2, as set forth in Rev. Proc. 2010-42. Partnership further
represents that the substitute K-1s furnished to its partners will meet the requirements
for substitute forms set forth in Section 7.1 of Rev. Proc. 2010-21. If the Partnership
electronically furnishes substitute Schedule K-1s that satisfy the requirements of
Section 7.1 of Rev. Proc. 2010-21, under procedures that satisfy the consent and
notification requirements for electronic delivery of statements set forth in Part B, Section
3 of Rev. Proc. 2010-42, the Partnership will satisfy the requirements of section 6031(b)
of the Code and Treas. Reg. 1.6031(b)-1T(a)(1).

The procedures outlined by Partnership satisfy the consent and notification
requirements for electronic delivery of statements set forth in Part B, Section 3 of Rev.
Proc. 2010-42, 2010-47 I.R.B. 715. The regulations and revenue procedures
authorizing electronic delivery of statements all require that the recipient of a statement
must affirmatively consent to receive the statement in an electronic format. The consent
may be made electronically in any manner that reasonably demonstrates that the
recipient can access the statement in the electronic format in which it will be furnished
to the recipient. See Treas. Reg. § 31.6051-1(j)(2); Treas. Reg. § 1.6050S-2(a)(2); Rev.
Proc. 2010-42, Part B, Section 3.02; and Rev. Proc. 2009-49, Section 4.5.1.
Partnership has represented that new partners will be required to affirmatively consent
to electronic delivery of the Form K-1 by logging onto the Parent’s web site and
agreeing to receive a number of communications electronically, including the Form K-1.
This satisfies the affirmative consent requirement.

In the area of withdrawal of consent, the regulations and the revenue procedures all
provide that consent may be withdrawn at any time by furnishing the withdrawal in
writing (electronically or on paper) to the person whose name appears on the statement.
Confirmation of the withdrawal also will be in writing (electronically or on paper). See
Treas. Reg. § 31.6501-1(j)(2)(v); Treas. Reg. § 1.6050S-2(a)(3)(v); Rev. Proc. 2010-42,
Part B, Section 3.02; Rev. Proc. 2009-49, Section 4.5.1. Partnership represents that
partners may withdraw consent by furnishing the withdrawal in writing (electronically or
on paper) to the person whose name appears on the statement. In addition, a partner
may withdraw by contacting a designated Parent representative by telephone to verbally
request withdrawal of consent, at which time Parent’s representative will withdraw the
partner’s consent by adjusting the partner’s global preferences on Parent’s website. If
the withdrawal is requested orally, Parent will contemporaneously send an e-mail to the
recipient partner confirming the withdrawal request and providing instructions to contact
Parent if he or she did not intend to withdraw consent. This procedure is sufficient to
meet the requirements of written withdrawal and confirmation. Although some partners
will not request withdrawal in writing, the contemporaneous written confirmation of
electronic withdrawal is sufficient to protect those partners from an unwanted or
inadvertent withdrawal.
PLR-108070-11 6

CONCLUSION

Based on the information provided and the representations made, we conclude
Partnership’s proposed delivery in electronic format of substitute Schedule K-1s
satisfies the consent and notification requirements set forth in the regulations and
revenue procedures authorizing electronic delivery of certain written statements. Thus,
these procedures will satisfy the requirements of section 6031(b) of the Code and
Treas. Reg. 1.6031(b)-1T(a)(1). The Partnership will not need Service approval to use
a substitute Schedule K-1 if it uses an exact copy of the Services Schedule K-1.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,



                                   James Coffey Gibbons
                                   Branch Chief, Branch 1
                                   (Procedure & Administration)

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