SECTION 4. Scope.

This revenue procedure applies to eligible partnerships under § 4.01 of this revenue procedure that make a monthly closing election under § 5 of this revenue procedure).

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

(1) Test Dates for Income and Expense Test . 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

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 IRS previously issued three revenue procedures on this topic of monthly closing elections. 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 certain transition rules. Rev. Proc. 2003–84 modified and superseded Rev. Proc. 2002–68 to provide certain simplified income tax reporting procedures in response to public

comment. This revenue procedure modifies and supersedes Rev. Proc. 2003–84 to provide certain additional eligibility conditions and to promote greater administrative certainty.

This revenue procedure generally is intended to cover tax-exempt bond partnerships with certain common characteristics. These tax-exempt bond partnerships create variable-rate interests that have characteristics of investment grade, highly-liquid, short-term tax-exempt bonds. These features often are intended to make the variable-rate interests eligible for investment by money market funds under Rule 2a–7, 17 C.F.R. § 270.2a–7, under the Investment Company Act of 1940 (“Rule 2a–7”). The holders of the variable-rate interests generally invest a substantial majority of the capital in the partnership (for example, often 99 percent of such capital) and the holders of the inverse interests invest the balance of such capital.

In general, the variable-rate interest holders are substantially protected against risk of loss of their capital investment, plus accrued distributive shares in the partnership by short-term tender option rights (for example, seven-day demand purchase options) supported by a creditworthy liquidity provider. The liquidity provider may be an unrelated third party, an affiliate of the partnership’s sponsor, or the inverse interest holder. If the liquidity provider purchases variable-rate interests under the liquidity facility, it typically has rights to reimbursement either from the inverse interest holder or from sales of partnership assets in its capacity as a partner. The variable-rate interest holders, however, typically are not fully protected against risk of loss of their capital investments because such tender options terminate if certain extraordinary events occur.

A tax-exempt bond partnership eligible for simplified reporting under this revenue procedure is a partnership whose primary purpose is to invest in a relatively fixed portfolio of investments in tax-exempt bonds, as contrasted with a partnership whose primary purpose is to engage in an active bond trading business which involves frequent trading in tax-exempt bond investments.

Tax-exempt bond partnerships have various unique features that provide broad benefits to the investing public. Tax-exempt bond partnerships efficiently respond

2008–40 I.R.B. 822 October 6, 2008

than 7 months) of the proceeds of such a 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).

4.03 Expense Test . Substantially all of the partnership’s expenses and deductions (computed without regard to items described in § 4.04 of this revenue procedure) are properly allocable to the following eligible expense activities:

(1) Expenses for Certain Income . Producing, collecting, managing, protecting, and conserving the income described in §§ 4.02(1), (2), or (3) of this revenue procedure or the assets generating the income.

(2) Expenses for Certain Property . Acquiring, managing, conserving, maintaining, or disposing of property held for the production of the income described in §§ 4.02(1), (2), or (3) of this revenue procedure.

(3) Expenses for Servicing . Servicing the equity in the partnership.

4.04 Exclusion . For the purposes of §§ 4.02 and 4.03 of this revenue procedure, reasonable amounts charged to persons requesting information from the partnership under § 8.03 of this revenue procedure and the costs of collecting, managing, computing, and supplying the information are not taken into account.

4.05 Test Dates and Test Periods . The income test described in § 4.02 of this revenue procedure and the expense test described in § 4.03 of this revenue procedure must be satisfied both as of the first day of the first month for which the partnership’s monthly closing election is effective (the “election test date”) and, beginning with the fourth month after the partnership’s monthly closing election becomes effective, on the last day of each month (the “operational test date”). The partnership determines whether the income test and the expense test are satisfied as of the election test date by reference to the election test period. The partnership determines whether the income test and expense test are satisfied as of each operational test date by reference to the operational test period. In applying the income and expense tests for a test period, a termination of the part

test and the expense test. The test dates are described in § 4.05 of this revenue procedure, and the income test and the expense test are described in §§ 4.02 and 4.03 of this revenue procedure, respectively.

(2) Partnership Entity . The entity is a partnership for federal tax purposes.

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

(4) Partnership Agreement . 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.

(5) Tender option termination events . The tender option or put option rights provided to the variable-rate interest holders are subject to termination without notice upon the occurrence of one of the following events with respect to a tax-exempt bond held by the partnership: (i) a bankruptcy filing by or against a tax-exempt bond issuer; (ii) a downgrade in the credit rating of a tax-exempt bond and a downgrade in the credit rating of any guarantor of the tax-exempt bond, if applicable, to a rating or ratings, as applicable, below investment grade; (iii) a payment default on a tax-exempt bond; or (iv) a final judicial determination or a final IRS administrative determination of taxability of a tax-exempt bond for Federal income tax purposes under § 103.

(6) Share in Appreciation . Upon any sale or other disposition of any tax-exempt bond held by the partnership, the variable-rate interest holders shall have the right to receive a share of the gain from any such sale or other disposition in an amount equal to not less than five percent (5%) of such gain. The partnership shall pay each required gain share to the variable-rate interest holders by distributing the proceeds of the sale or other disposition within a reasonable period.

(7) Gain Share Realization Event by 80 Percent of Remaining Weighted Aver- age Maturity Date . In order to provide variable-rate interest holders a reasonable opportunity to realize potential appreciation in the value of tax-exempt bonds held by a tax-exempt bond partnership, the partnership shall terminate or otherwise provide to such holders a right to require a sale, redemption, or other disposi

tion of such tax-exempt bonds, with attendant gain share realization potential, by a date that is no later than the date that represents 80 percent of the remaining weighted average maturity of the tax-exempt bonds held by the partnership, measured from the date of the partnership’s acquisition of the tax-exempt bonds, as determined generally in any reasonable manner that takes into account the parameters set forth in this § 4.01(7) (the “80 percent WAM test”). For this purpose, the weighted average maturity of applicable tax-exempt bonds generally shall be determined in a manner similar to the determination of the weighted average maturity of tax-exempt bonds under § 147(b), determined generally based on issue prices and mandatory sinking fund redemptions, with further adjustments to take into account optional redemptions at the first optional par redemption date and to take into account the partnership’s date or dates of acquisition of the tax-exempt bonds. Further, any reasonable, consistently applied measure may be used to weight the bonds in lieu of issue price, if different than the partnership’s acquisition price (for example, issue price, principal amount, cost, or fair market value). Further, for this purpose, a partnership may apply the 80 percent WAM test either separately on a “bond-by-bond” basis to each group of substantially identical tax-exempt bonds of the same maturity within the same “issue” (as defined in § 1.150–1(c)) held by the partnership, or collectively on a “portfolio” basis to all tax-exempt bonds held by the partnership.

4.02 Income Test . At least 95 percent of the partnership’s gross income (computed without regard to items described in § 4.04 of this revenue procedure) is or is reasonably expected to be from the following eligible sources:

(1) Tax-exempt Interest . Interest on tax-exempt obligations as defined in § 1275(a)(3) and § 1.1275–1(e).

(2) Exempt-interest Dividends . “Exempt-interest dividends,” as defined in § 852(b)(5), that are paid by a “regulated investment company” (“RIC”), as defined in § 851(a).

(3) Gains from Eligible Source Income . Gains from the sale, redemption, or other disposition of assets generating the income described in §§ 4.02(1) and (2) of this revenue procedure and income from the temporary investment (for a period no greater

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tax return for that taxable year would ordinarily be due and must be signed by a person with the authority to sign the partnership’s Form 1065. The words “Filed in Accordance with Rev. Proc. 2009– [IN- SERT NUMBER OF THIS REVENUE PROCEDURE] ” must be typed or printed across the top of the form. The partnership is required to provide only the following information on the abbreviated Form 1065: (1) A statement that the partnership has made an election under this revenue procedure to which all present and future partners consent;

(2) Identification of the partnership by name, address, and EIN;

(3) The name, title, address, and phone number of the contact person from whom partners, beneficial owners, middlemen, and the IRS may request information about the partnership;

(4) The issue date of the partnership interests and the CUSIP (Committee on Uniform Securities Identification Procedures) number or other identification of each class of partnership interest;

(5) A statement that the entity’s governing documents expressly provide that the entity is making a monthly closing election; and

(6) The effective month of the election and the start-up date of the partnership. See § 4.05(1) of this revenue procedure for a definition of the start-up date.

8.02 Annual Filing Requirements . (1) Elimination of Annual Filing Re- quirements . A partnership is not required to file a Form 1065, U.S. Return of Part- nership Income, or to issue Schedules K–1 (Form 1065) to its partners for any taxable year if the following requirements are satisfied:

(a) The partnership’s monthly closing election is effective for the partnership’s entire taxable year;

(b) The partnership makes the initial filing described in § 8.01 of this revenue procedure;

(c) A written partnership agreement (or other governing document) provides that (i) the entity and its partners will comply with the reporting requirements of §§ 8.02, 8.03, and 8.04 of this revenue procedure in lieu of complying with the requirements of § 6031(a) through (d); and (ii) all partners consent to such reporting; and

nership under § 708(b)(1)(B) during that period is ignored.

(1) The Election Test Period and Start-up Date . This § 4.05(1) defines the terms “election test period” and “start-up date.” The election test period differs depending upon how long the partnership has been in existence (determined from its start-up date). A partnership’s “start-up date” (“start-up date”) is the later of the date the entity had more than one owner and the date the entity had more than a de minimis amount of assets. If, on the election test date, the partnership has been in existence for at least six full calendar months, then the “election test period” is the longer of the six full calendar months preceding the election test date and the portion of the partnership’s taxable year that precedes the election test date. If, on the election test date, the partnership has not been in existence for at least six full calendar months, then the “election test period” is the first six full calendar months of the partnership’s existence.

(2) The Operational Test Period . The “operational test period” is the three-calendar-month period consisting of the calendar month within which the operational test date falls and the preceding two calendar months.