SECTION 2. Background .

This revenue procedure provides a means for certain partnerships that invest in state or local governmental debt obligations the interest on which is excludable from gross income under § 103 (“tax-exempt bonds”) to elect to allow the partners to take into account monthly the inclusions required under §§ 702 and 707(c). This revenue procedure applies to certain partnerships used to create the economic equivalent of a variable-rate tax-exempt bond. To create this instrument, a sponsor that holds a tax-exempt bond may transfer the tax-exempt bond to an entity that qualifies as a partnership for federal tax purposes (“tax-exempt bond partnership”). The tax-exempt bond partnership issues two classes of equity interests: (1) interests that are entitled to a preferred variable return on its capital payable out of partnership income (“variable-rate interests”); and (2) interests that are entitled to all of the remaining income of the partnership (“inverse interests”). Owners of variable-rate interests and inverse interests are referred to as “variable-rate interest holders” and “inverse interest holders,” respectively. The variable return on the variable-rate interests tracks current short-term tax-exempt bond yields. Under § 702(b), tax-exempt interest income

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to a need in the tax-exempt bond market to address an imbalance between the traditional preferences of State and local governments to issue long-term, fixed-rate tax-exempt bonds and the significant demands of institutional investors, particularly money market funds, to purchase high-quality, short-term, variable-rate tax-exempt bonds. Tax-exempt bond partnerships also expand the investor base in, and enhance liquidity and investor pricing to, the tax-exempt bond market.