SECTION 2. BACKGROUND

Rev. Proc. 2002–16 provides procedures for certain partners to take into account on a monthly basis their distributive shares of partnership items if the partnership satisfies the definition of an eligible partnership and makes an election under the revenue procedure (Monthly Closing Election).

A partnership is generally eligible to make a Monthly Closing Election under Rev. Proc. 2002–16 if 95 percent of the partnership’s income for the taxable year is income that is exempt from tax under § 103 of the Internal Revenue Code and the partnership’s allocations of income, gain, loss, deduction, and credit are made in accordance with § 704(b). Only money market fund partners are eligible to consent to the Monthly Closing Election provided by Rev. Proc. 2002–16.

Since the issuance of Rev. Proc. 2002– 16, the Department of the Treasury and the Internal Revenue Service have received a number of comments. Commentators noted that medium- and long-term bond funds often own interests in eligible partnerships, that these funds are subject to the same partnership timing difficulties as money market fund partners, and that it is costly and unnecessary to require separate reporting for non-fund partners in situations where substantially all of the partnership’s income is exempt from taxation. Treasury and the Service agree that, in the interest of sound and efficient administration of the tax laws, all partners in eligible partnerships should be able to consent to the Monthly Closing Election.

Certain commentators noted that, to the extent that many otherwise eligible partnerships elected under § 761 to be excluded from subchapter K, these partnerships might not be able to elect into the procedures pro

vided in Rev. Proc. 2002–16 without first seeking and receiving permission from the Service to revoke their § 761 elections.

Two of the requirements for eligibility to elect to be excluded from all or a portion of subchapter K are that the partners must own the partnership property as coowners and the partners must be able to compute their income without the necessity of computing partnership taxable income. See § 1.761–2(a)(1) and (2) of the Income Tax Regulations. If a business entity (classified as a partnership) owns a taxexempt bond and issues membership interests that apportion the benefits and burdens of that property to its members in a manner that differs significantly from direct investment in the bond (such as the preferred and residual interests in eligible partnerships that are described in Rev. Proc. 2002–16), the holders of those interests do not satisfy the requirement that they own the partnership property as co-owners. Cf . § 301.7701–4(c) of the Procedure and Administration Regulations. Moreover, if (as in the case of partnerships described in Rev. Proc. 2002–16) one class of partners has a right to partnership income that is superior to the right of another class of partners, then the net partnership income or loss allocated to the partners with inferior rights to partnership income can be determined only by computing the net income or loss of the partnership and then by reducing that net income by income allocable to partners with superior rights to partnership income. These partnerships do not meet the requirement of § 1.761–2(a)(1) that the members of the organization be able to compute their incomes without the necessity of computing partnership income.

If a partnership does not satisfy the requirements for making a § 761(a) election, any purported election under § 761(a) by that partnership is not effective and, therefore, need not be revoked. However, because there was some confusion as to whether the partnerships described in Rev. Proc. 2002–16 qualified to make an election under § 761(a) to be excluded from subchapter K, section 9 of this revenue procedure provides transition relief for many of these taxpayers.

Commentators have requested that consideration be given to simplified reporting procedures for some or all of the partnerships described in Rev. Proc. 2002– 16. This revenue procedure eliminates the

.01 Eligible Partnership.

(1) Generally. An entity is an eligible partnership if all of the following conditions are met as of the test date:

(a) The entity is a partnership for federal tax purposes;

(b) All allocations of income, gain, loss, deduction, and credit of the partnership are made in accordance with § 704(b); and

(c) At least 95 percent of the partnership’s income for the test period was (or is reasonably expected to be) interest on taxexempt obligations within the meaning of § 103 and substantially all of the partnership’s expenses and deductions are properly allocable to producing or collecting that income or to managing, conserving, or maintaining property held for the production of that income.

(i) If, on the test date, the partnership has been in existence for at least 6 full calendar months, then the test period is the 6 full calendar months preceding the test date; and

(ii) If, on the test date, the partnership has not been in existence for at least

2002–43 I.R.B. 753 October 28, 2002

ments under § 707(c) in a manner that is consistent with the election;

(c) The signature of the partner; and

(d) The effective month of the consent. The consent is effective for the calendar month in which the partner acquires the partnership interest, unless the partner requests that the consent be effective for either of the two immediately following calendar months.

.02 Additional Requirements for Mak- ing a Valid Monthly Closing Consent . A partner does not qualify for the treatment described in section 4 of this revenue procedure unless:

(1) The partner provides the statement of consent described in section 6.01 of this revenue procedure to the custodian or manager of the partnership no later than the last day of the second calendar month after the calendar month in which the partner acquires the partnership interest; and

(2) The partnership’s Monthly Closing Election is effective no later than the second calendar month after the calendar month in which the partner acquires the partnership interest.

.03 Special Transitional Rule . For purposes of satisfying the requirements of section 6.02, if an eligible partnership makes an election under this revenue procedure effective on or before December 31, 2003, partners with an interest in the partnership as of the first day of the month the partnership’s election becomes effective will be treated as having acquired the interest in the partnership on the first day of that month.