IRS CLARIFIES PARTNERSHIP 'FREE TRANSFERABILITY OF INTERESTS' STANDARD TO BE APPLIED IN RULINGS.

Rev. Proc. 92-33

SECTION 1. PURPOSE

01 This revenue procedure supplements Rev. Proc. 89-12, 1989-1 C.B. 798, which contains the conditions under which the Internal Revenue Service will consider a ruling request that relates to classification of an organization as a partnership for federal tax purposes. This revenue procedure addresses the classification characteristic of free transferability and provides, for ruling purposes, a numerical interpretation of the phrase "substantially all" as that phrase appears in section 301.7701-2(e)(1) of the Procedure and Administration Regulations.

02 The provisions of this revenue procedure are not intended to be substantive rules for the determination of partner and partnership status and are not to be applied upon audit of taxpayers' returns.

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

SEC. 2. BACKGROUND

01 Section 7701(a)(2) of the Internal Revenue Code 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, estate, or corporation. Sections 301.7701-2 and 301.7701-3 of the regulations set forth rules for determining whether an organization is classified, for federal tax purposes, as a partnership or as an association taxable as a corporation.

02 Section 301.701-2(e)(1) of the regulations provides that an organization has the corporate characteristic of free transferability of interests if each of its members, or those members owning substantially all of the interests in the organization, have the power, without the consent of other members, to substitute for themselves in the same organization a person who is not a member of the organization. For this power of substitution to exist in the corporate sense, the member must be able, without the consent of other members, to confer upon the member's substitute all the attributes of the member's interest in the organization.

SEC. 3. APPLICATION

01 What constitutes "substantially all" of the interests in an organization generally depends upon the facts and circumstances and is not defined with reference to a particular percentage. See Rev. Rul. 57-518, 1957-2 C.B. 253, 254 (holding that what constitutes substantially all of the properties of a corporation for purposes of section 368(a)(1)(C) of the Code depends on the facts and circumstances rather than any particular percentage). However, for purposes of ruling whether an organization has the corporate characteristics of free transferability of interests, the Service will apply the standard set forth in section 3.02 of this revenue procedure.

02 Generally, the Service will rule that a partnership lacks free transferability of interests if, throughout the life of the partnership, the partnership agreement expressly restricts (within the meaning of section 301.7701-2(e)(1) of the regulations) the transferability of partnership interests representing more than 20 percent of all interests in partnership capital, income, gain, loss, deduction, and credit.

SEC. 4. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 89-12 is supplemented.

SEC. 5. EFFECTIVE DATE

This revenue procedure applies to ruling requests on hand or received in the National Office on or after April 27, 1992, the date of publication of this revenue procedure in the Internal Revenue Bulletin.

DRAFTING INFORMATION

The principal author of this revenue procedure is Ronald M. Gootzeit of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Mr. Gootzeit on (202) 566-3352 (not a toll-free call).