IRS SPECIFIES CONDITIONS FOR REQUESTING RULINGS ON CLASSIFICATION OF LLCs AS PARTNERSHIPS.

Rev. Proc. 95-10

SECTION 1. PURPOSE

.01 This revenue procedure specifies the conditions under which the Internal Revenue Service (Service) will consider a ruling request that relates to classification of a domestic or foreign limited liability company (LLC) as a partnership for federal tax purposes. This revenue procedure modifies Rev. Proc. 89-12, 1989-1 C.B. 798, which specifies the conditions under which the Service will consider a ruling request that relates to the classification of an organization as a partnership for federal tax purposes. Rev. Proc. 89-12 applies to organizations formed as partnerships and also applies to other organizations seeking partnership classification. It also provides that any reference to a "limited partnership" includes an organization formed as a limited partnership under applicable state law and any other organization formed under a law that limits the liability of any member for the organization's debts and other obligations to a determinable fixed amount. Rev. Proc. 89-12 no longer applies to LLCs. See section 6 of this revenue procedure.

.02 This revenue procedure applies to all organizations that are formed as LLCs under the laws of the United States or of any State or the District of Columbia (domestic law) providing for or allowing limited liability to any of their members and that are not incorporated organizations, trusts, or partnerships formed under statutes corresponding to the Uniform Partnership Act or the Revised Uniform Limited Partnership Act. This revenue procedure also applies to all organizations formed under a law other than domestic law (foreign law or foreign statute), where the foreign law or foreign statute provides for or allows limited liability to any of their members (whether or not the foreign organization is "incorporated" under a foreign statute). See Rev. Rul. 88-8, 1988-1 C.B. 403. This revenue procedure does not apply to a publicly traded LLC treated as a corporation under section 7704 of the Internal Revenue Code.

.03 Unless the context clearly indicates otherwise, references to the LLC's operating agreement include the articles of organization and all other controlling documents, however designated, entered into by the members of the LLC. If the applicable statute allows for management by one or more designated persons, managers are those persons designated or elected by the members to act on behalf of the LLC.

.04 The Service may decline to issue a ruling under this revenue procedure when warranted by the facts and circumstances of a particular case and when appropriate in the interest of sound tax administration.

SECTION 2 BACKGROUND

.01 Section 7701(a)(2) defines the term partnership to include a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of the Code, a trust or estate or a corporation. Sections 301.7701-2 and 301.7701-3 of the Procedure and Administration Regulations set forth rules for determining whether an organization is classified as a partnership or as an association taxable as a corporation for federal tax purposes.

.02 Rev. Rul. 73-254, 1973-1 C.B. 613, provides that the classification of a foreign unincorporated business organization for federal tax purposes will be determined under section 7701 and the regulations thereunder. However, it is the local law of the foreign jurisdiction that must be applied in determining the legal relationships of the members of the organization among themselves and with the public at large, as well as the interests of the members of the organization in its assets. Rev. Rul. 88-8 provides that an entity organized under foreign law is considered to be "unincorporated" for purposes of section 301.7701-2(a)(3) and, therefore, is classified for federal tax purposes solely on the basis of the characteristics set forth in section 301.7701-2.

.03 Rev. Proc. 94-1, 1994-1 C.B. 378, as updated annually, sets forth procedures for taxpayer requests and Service issuance of advance rulings; however, Rev. Proc. 94-3, 1994-1 C.B. 447, and Rev. Proc. 94-7, 1994-1 C.B. 542, as updated annually, list areas in which the Service will not issue, or will not ordinarily issue, advance rulings.

SECTION 3. INFORMATION TO BE SUBMITTED WITH RULING REQUEST

.01 Section 8 of Rev. Proc. 94-1 outlines general requirements concerning the information to be submitted as part of a ruling request, including a classification ruling request. For example, an LLC classification ruling request must contain a complete statement of all facts relating to the classification issue. Among those facts to be included in the statement are the items of information specified in this revenue procedure; therefore, the ruling request must provide all items of information specified below, or at least account for all the items. For example, if no registration statement is required to be filed with the U.S. Securities and Exchange Commission (SEC), the ruling request should so state.

.02 Submission of the documents and supplementary materials required by section 3.04 of this revenue procedure does not satisfy the information requirements contained in section 3.03 of this revenue procedure or in section 8 of Rev. Proc. 94-1. All material facts in documents, including those items required by section 3.03 of this revenue procedure, must be included in the ruling request and may not merely be incorporated by reference therein. All submitted documents and supplementary materials must contain applicable exhibits, attachments, and amendments.

.03 REQUIRED GENERAL INFORMATION. The following information must be included in the request for a ruling:

(1) The name and taxpayer identification number (if any) of the LLC;

(2) The business of the LLC;

(3) The date and place of filing of the LLC's articles of organization, or the anticipated date and place of filing;

(4) The identification of the domestic or foreign jurisdiction whose law controls the formation and operation of the LLC;

(5) A representation that the LLC has been, and will be at all times, in conformance with the controlling laws of the domestic or foreign jurisdiction;

(6) The nature, amount, and timing of capital contributions made and to be made by the members to the LLC;

(7) The extent of participation of the members and the managers in profits and losses of the LLC, including any possible shift in the profit and loss sharing ratios over time;

(8) A description of the relationships, direct and indirect, between the members and the managers (whether or not also members) that would suggest that the managers, individually or in the aggregate, may not at all times act independently of the members (because of individual or aggregate influence or control by the members in their capacity as such over the managers). These relationships include: (a) ownership by non-manager members of 5 percent or more of the stock or other beneficial interests in a manager; (b) control by non-manager members of 5 percent or more of the voting power in a manager; (c) ownership of 5 percent or more of the stock or other beneficial interests in any manager and in any non-manager members by the same person or persons acting as a group; and (d) control of 5 percent or more of the voting power in any manager and in any non-manager members by the same person or persons acting as a group. A person is considered to own any beneficial interest owned by a related person and is considered to control any voting power controlled by a related person. A person is treated as related to another person if they bear a relationship to each other specified in section 267(b) or section 707(b)(1). The relationships defined in the first sentence of this section 3.03(8) may also include a debtor-creditor relationship and an employer-employee relationship;

(9) If it is asserted that the LLC lacks the corporate characteristic of limited liability: (a) a description of the legal arrangements supporting the assertion that the LLC lacks limited liability, (b) a representation of the net worth (based on assets at current fair market value) of the member or members assuming personal liability for all obligations of the LLC (assuming member), excluding interests in the LLC held by that member or members, (c) a description of the assuming member's or members' assets and liabilities arising from transactions with the LLC or with a person related to any member or members under section 267(b) or section 707(b)(1), and (d) a description of all other organizations in which the member or members have an interest;

(10) A detailed description of how each of the applicable provisions of section 5 of this revenue procedure are satisfied;

(11) If the Service has issued a revenue ruling on the applicable domestic or foreign law, a discussion of how the revenue ruling applies to the taxpayer's ruling request.

.04 REQUIRED COPIES OF DOCUMENTS AND SUPPLEMENTARY MATERIALS. The following copies of documents and materials must be submitted with the ruling request:

(1) The LLC's articles of organization filed or to be filed with the domestic or foreign jurisdiction in which the LLC is formed;

(2) The LLC's operating agreement (exclusive of the articles of organization);

(3) The registration statement (or comparable document under foreign law) filed or to be filed with the SEC or comparable foreign regulatory body. (A draft that is final in all material respects is acceptable);

(4) If a registration statement (or comparable document under foreign law) is not required to be filed with the SEC or comparable foreign regulatory body, the documents filed or to be filed with any domestic federal or state (or comparable foreign) agency engaged in the regulation of securities and any private offering memorandum (or comparable documents under foreign law). (Drafts that are final in all material respects are acceptable);

(5) A copy of the applicable domestic or foreign law, and amendments, under which the LLC was or will be formed;

(6) An outline or copies of all promotional material used to sell interests in the LLC, highlighting statements about probable domestic and foreign tax consequences and the effect of the requested ruling upon the tax consequences;

(7) An English translation of all documents in a foreign language.

SECTION 4. GENERAL PROVISIONS AND OWNERSHIP TESTS

.01 GENERAL. The Service will consider a ruling request that relates to classification of an LLC as a partnership for federal tax purposes only if the LLC has at least two members and, to the extent applicable, the conditions in sections 4 and 5 of this revenue procedure are satisfied. The determination of whether the LLC has at least two members is based on all the facts and circumstances. Section 5.01 relates solely to the corporate characteristic of continuity of life described in section 301.7701-2(b); section 5.02 relates solely to the corporate characteristic of free transferability of interests described in section 301.7701-2(e); section 5.03 relates solely to the corporate characteristic of centralized management described in section 301.7701-2(c); and section 5.04 relates solely to the corporate characteristic of limited liability described in section 301.7701-2(d). Section 4.02 through 4.05 of this revenue procedure provides minimum ownership requirements that must be satisfied if the taxpayer requests a ruling that the LLC lacks continuity of life under section 5.01(1) (pertaining to dissolution events relating solely to member- managers), free transferability of interests under section 5.02(1) (pertaining to consent to transfer solely by member-managers), or limited liability under section 5.04. Failure to satisfy any of the above sections only precludes a ruling that the LLC lacks the particular corporate characteristic addressed by the relevant section and does not necessarily preclude the issuance of a partnership classification ruling by the Service. If the LLC is issued a ruling under this revenue procedure that it is classified as a partnership and the LLC subsequently has only one member, the letter ruling ceases to be effective because the LLC's status as a partnership for federal tax purposes terminates as of the relevant date specified in section 708 and section 736.

.02 GENERAL RULE AS TO PROFIT AND LOSS INTERESTS. Unless section 4.03 of this revenue procedure applies, if the taxpayer requests a ruling that the LLC lacks continuity of life under section 5.01(1) or free transferability of interests under section 5.02(1), the member-managers in the aggregate must own, pursuant to the express terms of the operating agreement, at least a 1 percent interest in each material item of the LLC's income, gain, loss, deduction, or credit during the entire existence of the LLC. Further, unless section 4.03 applies, if the taxpayer requests a ruling that the LLC lacks limited liability under section 5.04, the assuming member or members must in the aggregate own, pursuant to the express terms of the operating agreement, at least a 1 percent interest in each material item of the LLC's income, gain, loss, deduction, or credit during the entire existence of the LLC. However, it will generally not be considered a violation of this section 4.02 if a required allocation under either section 704(b) or section 704(c), or corresponding Income Tax Regulations, temporarily causes less than 1 percent of the LLC's income, gain, loss, deduction, or credit to be allocable to the party otherwise required under this section 4.02 to receive the allocation; in these cases, the ruling request must describe any required allocations and explain why the allocation is required under section 704(b) or section 704(c), as appropriate. Any other temporary allocation causing less than 1 percent of any material item of the LLC's income, gain, loss, deduction, or credit to be allocable to the necessary parties will be considered a violation of this section 4.02, unless the LLC clearly establishes in the ruling request that the member-managers or the assuming members (as the case may be) have a material interest in net profits and losses over the LLC's anticipated life. For this purpose, a profits interest generally will not be considered material unless it substantially exceeds 1 percent and will be in effect for a substantial period of time during which the LLC reasonably expects to generate profits. For example, a 20 percent interest in profits that begins 4 years after the LLC's formation and continues for the life of the LLC generally would be considered material if the LLC is expected to generate profits for a substantial period of time beyond the initial 4-year period.

.03 EXCEPTION TO GENERAL RULE AS TO MINIMUM PROFITS AND LOSS INTERESTS. If the LLC has total contributions exceeding $50 million, the member-managers (or assuming members) need not meet the 1 percent standard in section 4.02 of this revenue procedure. However, except for a temporary allocation or nonconformance specified in section 4.02, the member-managers (or assuming members) in the aggregate must maintain an interest at all times during the existence of the LLC in each material item of at least 1 percent divided by the ratio of total contributions to $50 million, and the LLC's operating agreement must expressly incorporate at least the computed percentage. For example, if total contributions are $125 million, the interest in each material item must be at least .4 percent, that is, 1 percent divided by 125/50. In no event, however, other than as a result of a temporary allocation or nonconformance specified in section 4.02, may the member-managers' (or assuming members') aggregate interest at any time during the existence of the LLC in any material item be less than .2 percent.

.04 GENERAL RULE AS TO CAPITAL ACCOUNT BALANCES. Unless section 4.05 of this revenue procedure applies, if the taxpayer requests a ruling that the LLC lacks continuity of life under section 5.01(1), or free transferability of interests under section 5.02(1), the member-managers, in the aggregate, must maintain throughout the entire existence of the LLC a minimum capital account balance equal to the lesser of 1 percent of total positive capital account balances or $500,000. Further, unless section 4.05 applies, if the taxpayer requests a ruling that the LLC lacks limited liability under section 5.04, the assuming member or members must maintain a minimum capital account balance in accordance with the rules of the preceding sentence. Whenever a non-managing member (or non-assuming member) makes a capital contribution, the member-managers (or assuming members) must be obligated, pursuant to the express terms of the operating agreement, to contribute immediately to the LLC capital equal to 1.01 percent of the non-managing members' (or non-assuming members') capital contributions or a lesser amount (including zero) that causes the sum of the member-managers' (or assuming members') capital account balances to equal the lesser of 1 percent of total positive capital account balances for the LLC or $500,000. If no member has a positive capital account balance, then the member- managers (or assuming members) in the LLC need not have a positive capital account balance to satisfy this section 4.04. Capital accounts and the value of contributions are determined under the rules of section 1.704-1(b)(2)(iv) of the Income Tax Regulations.

.05 EXCEPTION TO GENERAL RULE OF MINIMUM CAPITAL ACCOUNT BALANCES. If at least one member-manager (or assuming member) otherwise required under section 4.04 of this revenue procedure to have and maintain a minimum capital account balance has contributed or will contribute substantial services in the capacity as a member, apart from services for which guaranteed payments under section 707(c) are made, the capital account standard in section 4.04 does not apply to any of the member-managers (or assuming members). However, the operating agreement of the LLC must expressly provide that, upon the dissolution and termination of the LLC, the member- managers (or assuming members) will contribute capital to the LLC in an amount equal to the lesser of: (1) the aggregate deficit balance, if any, in their capital accounts, or (2) the excess of 1.01 percent of the total capital contributions of the non-managing members (or non-assuming members) over the aggregate capital previously contributed to the LLC by the member-managers (or assuming members). Those services that do not relate to day-to-day operations in the LLC's primary business activity, such as services related to the organization and syndication of the LLC, accounting, financial planning, general business planning, and services in the nature of investment management, will be closely scrutinized by the Service to determine if they are in fact substantial services. In making this determination, the nature of the LLC and its activities will be taken into account.

SECTION 5 RULING GUIDELINES FOR SPECIFIC CORPORATE CHARACTERISTICS

.01 CONTINUITY OF LIFE.

(1) DISSOLUTION EVENTS RELATING SOLELY TO MEMBER-MANAGERS. If the members of the LLC designate or elect one or more members as managers and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member-manager causes a dissolution of the LLC without further action of the members, unless the LLC is continued by the consent of not less than a majority in interest of the remaining members, the Service will generally rule that the LLC lacks continuity of life. For purposes of the preceding sentence all the member-managers must be subject to the specified dissolution events. For example, if the LLC is managed by A, B, and C, it must be provided that a dissolution event with respect to A, B, or C will dissolve the LLC, and not a dissolution event with respect to only one of the named managers (i.e., a dissolution event only with respect to A but not B or C).

(2) DISSOLUTION EVENTS RELATING TO MEMBERS. If the members of the LLC do not designate or elect one or more members as managers (or if the LLC requests a ruling under this section 5.01(2) despite the presence of member-managers) and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that the death, insanity, bankruptcy, retirement, resignation, or expulsion of any member dissolves the LLC without further action of the members, unless the LLC is continued by the consent of not less than a majority in interest of the remaining members, the Service generally will rule that the LLC lacks continuity of life. For purposes of the preceding sentence, all the members must be subject to the specified dissolution events.

(3) MAJORITY IN INTEREST. See Rev. Proc. 94-46, 1994-28 I.R.B. 129, pertaining to majority in interest, for purposes of applying section 5.01(1) and (2) of this revenue procedure.

(4) LIMITATION ON DISSOLUTION EVENTS. If the controlling statute, or the operating agreement pursuant to the controlling statute, provides that less than all of the dissolution events listed above with respect to the member-managers (when applying section 5.01(1)) or the members (when applying section 5.01(2)) dissolves the LLC, the Service will not rule that the LLC lacks continuity of life unless the taxpayer clearly establishes in the ruling request that the event or events selected provide a meaningful possibility of dissolution.

.02 FREE TRANSFERABILITY OF INTERESTS.

(1) CONSENT TO TRANSFER SOLELY BY MEMBER-MANAGERS. If the members of the LLC designate or elect one or more members as managers, and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that each member, or those members owning more than 20 percent of all interests in the LLC's capital, income, gain, loss, deduction, and credit, does not have the power to confer upon a non-member all the attributes of the member's interests in the LLC without the consent of not less than a majority of the non-transferring member-managers, the Service will generally rule that the LLC lacks free transferability of interests. See Rev. Proc. 92-33, 1992-1 C.B. 782.

(2) CONSENT TO TRANSFER BY MEMBERS. If the members of the LLC do not designate or elect one or more members as managers (or if the LLC requests a ruling under this section 5.02(2) despite the presence of member-managers), and the controlling statute, or the operating agreement pursuant to the controlling statute, provides that each member, or those members owning more than 20 percent of all interests in the LLC's capital, income, gain, loss, deduction, and credit, does not have the power to confer upon a non-member all the attributes of the member's interests in the LLC without the consent of not less than a majority of the non-transferring members, the Service will generally rule that the LLC lacks free transferability of interests. See Rev. Proc. 92-33.

(3) MAJORITY DEFINED. For purposes of applying sections 5.02(1) and 5.02(2) of this revenue procedure, consent of a majority includes either a majority in interest (see Rev. Proc. 94-46 pertaining to majority in interest), a majority of either the capital or profits interests in the LLC, or a majority determined on a per capita basis.

(4) MEANINGFUL CONSENT. The Service will not rule that the LLC lacks free transferability of interests unless the power to withhold consent to the transfer constitutes a meaningful restriction on the transfer of the interests. For example, a power to withhold consent to a transfer is not a meaningful restriction if the consent may not be unreasonably withheld.

.03 CENTRALIZATION OF MANAGEMENT.

(1) MEMBERS MANAGE LLC WITHOUT MANAGERS. If the controlling statute, or the operating agreement pursuant to the controlling statute, provides that the LLC is managed by the members exclusively in their membership capacity, the Service generally will rule that the LLC lacks centralized management.

(2) MEMBERS DESIGNATED OR ELECTED AS MANAGERS. If the members of the LLC designate or elect one or more members as managers of the LLC, the Service will not rule that the LLC lacks centralized management unless the member-managers in the aggregate own at least 20 percent of the total interests in the LLC. However, even if the aggregate ownership requirement is satisfied, the Service will consider all the relevant facts and circumstances, including, particularly, member control of the member-managers (whether direct or indirect), in determining whether the LLC lacks centralized management. The Service will not rule that the LLC lacks centralized management if the member-managers are subject to periodic elections by the members, or, alternatively, the non-managing members have a substantially non-restricted power to remove the member-managers.

.04 LIMITED LIABILITY. The Service generally will not rule that an LLC lacks limited liability unless at least one assuming member validly assumes personal liability for all (but not less than all) obligations of the LLC, pursuant to express authority granted in the controlling statute. In addition, the Service generally will not rule that an LLC lacks limited liability unless the assuming members have an aggregate net worth that, at the time of the ruling request, equals at least 10 percent of the total contributions to the LLC and is expected to continue to equal at least 10 percent of total contributions to the LLC throughout the life of the LLC. In the case of an LLC in which the assuming members do not satisfy the safe harbor described in the preceding sentence, close scrutiny will be applied to determine whether the LLC lacks limited liability. In that connection, it must be demonstrated that an assuming member has (or the assuming members collectively have) substantial assets (other than the member's interest in the LLC) that could be reached by a creditor of the LLC. In determining the net worth of the assuming member (or assuming members), the principles contained in section 4.03 of Rev. Proc. 92-88, 1992-2 C.B. 496, are to be applied.

SECTION 6 EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 89-12 is modified so that it does not apply to ruling requests submitted by LLCs described in this revenue procedure.

SECTION 7 EFFECTIVE DATE

This revenue procedure applies to all ruling requests received in the National Office on or after January 17, 1995.

DRAFTING INFORMATION

The principal author of this revenue procedure is D. Lindsay Russell of the Office of Assistant Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue procedure contact Mr. Russell at (202) 622-3050 (not a toll-free call).