SECTION 4. SCOPE

This revenue procedure applies to eligible partnerships (described in section 4.01 of this revenue procedure) that make a monthly closing election (described in section 5 of this revenue procedure).

.01 Eligible Partnership . An entity is an eligible partnership for a calendar month if all of the following conditions are met:

(1) As of the election test date and as of every operational test date that occurs on or before the end of such calendar month, the partnership satisfies both the income test and the expense test. The test dates are described in section 4.05 of this revenue procedure, and the income test and the expense test are described in section 4.02 and section 4.03, respectively.

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

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

(4) A written partnership agreement (or other governing document) provides that (a) the entity is making the monthly closing election under this revenue procedure; and,

(b) all partners consent to the election. .02 Income test . At least 95 percent of the partnership’s gross income (computed without regard to items described in section 4.04 of this revenue procedure) is or is reasonably expected to be from:

(1) interest on tax-exempt obligations as defined in § 1275(a)(3) and § 1.1275–1(e);

(2) exempt-interest dividends as defined in § 852(b)(5) that are paid by a RIC as defined in § 851(a); and

(3) gain from the sale, redemption, or other disposition of assets generating the income described in section 4.02(1) and (2) of this revenue procedure and income from the temporary investment (for a period no greater than 7 months) of the proceeds of the disposition, but only if the assets that are sold, redeemed, or disposed are original assets of the partnership. For this purpose, an asset is an original asset of the partnership if the asset is contributed to the partnership or is acquired with capital contributed to the partnership (and not with the proceeds of the sale, redemption, or other disposition of a partnership asset).

may not be allocated sufficient tax-exempt interest income from the partnership to pay exempt-interest dividends quarterly. See § 852.

To resolve this problem, many tax-exempt-bond partnerships attempted to make an election under § 761(a) to be excluded from the provisions of subchapter K. A tax-exempt-bond partnership is not eligible to elect to be wholly or partially excluded from subchapter K, however, and an attempted election has no effect. Two of the requirements for eligibility to make an election under § 761(a) are that the partners must own the partnership property as co-owners 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 tax-exempt bond and issues membership interests that apportion the benefits and burdens of that bond to its members in a manner that differs significantly from direct investment in the bond, the holders of those membership 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 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. Such a partnership does 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.

To assist tax-exempt-bond partnerships to meet the needs of the market for tax-exempt obligations within the requirements of the Internal Revenue Code, the Internal Revenue Service (Service) has issued two revenue procedures. Rev. Proc. 2002–16, 2002–1 C.B. 572, was issued to allow money market fund partners in tax-exempt-bond partnerships to take into account on a monthly basis their distributive shares of partnership items (monthly

closing) if the partnership made an effective election under that revenue procedure (monthly closing election).

Rev. Proc. 2002–68, 2002–2 C.B. 753, modified and superseded Rev. Proc. 2002–16 to extend the monthly closing election to all partners in tax-exempt-bond partnerships and established a transition rule. The transition rule provides that for any taxable year beginning before January 1, 2004, the Service will not challenge a partnership’s or a partner’s tax treatment that is consistent with an election to be excluded from the provisions of subchapter K under § 761(a), provided that the partnership would be an eligible partnership as defined in Rev. Proc. 2002–68 and the partners’ inclusion of income, gain, loss, deduction and credits is consistent with that permitted under the revenue procedure.

In Rev. Proc. 2002–68, the Service also requested comments on simplified income tax reporting procedures for some or all of the eligible tax-exempt-bond partnerships. This revenue procedure is issued in response to comments received.