IRS PROVIDES GUIDELINES FOR LIMITED PARTNERSHIP QUALIFICATION.

Rev. Proc. 92-88

SECTION 1. PURPOSE

This revenue procedure provides guidance regarding the classification of limited partnerships. Organizations covered by this revenue are limited partnerships formed under a state limited partnership act that the Internal Revenue Service has determined in a published revenue ruling is a statute that corresponds to the Uniform Limited Partnership Act (ULPA).

SEC. 2. BACKGROUND

The Service regularly receives and responds to requests for rulings regarding the classification of limited partnerships as partnerships for federal tax purposes. Many of these requests do not present a material legal issue that needs resolution. Consequently, the Service is issuing this revenue procedure to save taxpayers and the Service the time and expense involved in obtaining a ruling on the classification of limited partnerships described in this revenue procedure.

SEC. 3. SCOPE AND OBJECTIVE

01 Section 301.7701-2 of the Procedure and Administration Regulations provides, in general, that if an unincorporated organization has associates and an objective to carry on business for joint profit, it will be classified either as an association taxable as a corporation or as a partnership. If the organization has a preponderance of the corporate characteristics of continuity of life, limited liability, centralization of management, and free transferability of interests, it will be classified as an association. If the organization lacks at least two of the four corporate characteristics, it will be classified as a partnership.

02 This revenue procedure sets forth guidelines under which a limited partnership will be treated as lacking the corporate characteristics of continuity of life and limited liability. Thus, a limited partnership that satisfies these guidelines will be treated as a partnership for federal tax purposes and does not ordinarily need to request a classification ruling.

03 Rev. Proc. 92-87, page 38, this Bulletin, provides that the Service will not ordinarily rule on whether a limited partnership lacks the corporate characteristics of limited liability and continuity of life if the limited partnership (i) is formed pursuant to a state limited partnership act that the Service has determined in a revenue ruling is a statute that corresponds to ULPA and (ii) has the other characteristics specified by this revenue procedure. However, in cases where the limited partnership does not fall within the guidelines set forth in this revenue procedure, the Service will generally consider a ruling request. See Rev. Proc. 89-12, 1989-1 C.B. 798, for the necessary requirements for obtaining a ruling.

04 This revenue procedure provides guidance regarding the classification of limited partnerships under section 301.7701-2 of the regulations. It does not apply to arrangements that are nominally formed as limited partnerships but that are not properly characterized as partnerships under other substantive tax principles. For example, this revenue procedure does not apply to a limited partnership all of whose partners consist of family members who are not treated as partners under the rules of section 704(e) of the Internal Revenue Code.

05 This revenue procedure is not applicable if any general partner whose net worth is used to satisfy the criteria in section 4.03 of this revenue procedure has an interest as a general partner in any other partnership.

SEC. 4. GUIDELINES

01 General Requirements.

(1) The general partners, taken together, must have at least a 1 percent interest in each material item of partnership income, gain, loss, deduction, or credit at all times during the existence of the partnership. This allocation must be expressly provided by the partnership agreement. Limited partnership interests held by the general partners are included in determining whether this 1 percent standard is satisfied. Allocations required under sections 704(b) or (c) of the Code are not taken into account in determining whether the general partners satisfy this requirement. This requirement generally follows section 4.01 of Rev. Proc. 89-12.

If the limited partnership has total contributions exceeding $50 million, the general partners need not meet the 1 percent standard. However, the general partners' aggregate interest at all times in each material item must be at least 1 percent divided by the ratio of total contributions to $50 million, and the partnership agreement must expressly incorporate at least the computed percentage. In no event, however, may the general partners' aggregate interest at any time in any material item be less than .2 percent. This provision generally follows section 4.02 of Rev. Proc. 89-12.

(2) The general partners, taken together, must maintain, at all times, a minimum capital account balance equal to either 1 percent of the total positive capital account balances for the partnership or $500,000, whichever is less. If no limited partner capital account has a positive balance, the general partners, taken together, need not have a positive capital account balance. Capital accounts and the value of contributions are determined by application of the capital accounting rules in section 1.704-1 (b)(2)(iv) of the regulations. This requirement generally follows section 4.03 of Rev. Proc. 89-12.

02 Continuity of Life. If the Service has determined in a revenue ruling that a state's limited partnership act corresponds to the ULPA, a limited partnership formed under that act will be treated as lacking the corporate characteristic of continuity of life. See Rev. Rul. 89-123, 1989-2 C.B. 261 (and any revenue rulings that supersede or amplify Rev. Rul. 89-123) for a list of states that have enacted legislation that corresponds to ULPA as of the legislation's effective date.

03 Limited Liability. If a limited partnership satisfies the requirements set forth below, it will lack the corporate characteristic of limited liability. In order to rely on this revenue procedure, a limited partnership must satisfy the net worth requirements set forth below on a continuing basis. A limited partnership may not rely on this revenue procedure for any period of time subsequent to the failure to satisfy the net worth standard. In determining the net worth of general partners, assets are valued at their current fair market value. See section 301.7701-2(d) of the regulations.

(1) If the sole general partner is a corporation, its net worth must equal or exceed 10 percent of the total contributions to the partnership. If the partnership has more than one corporate general partner, this requirement may be met on a collective basis. In determining the net worth of a corporate general partner any interest in the partnership is not included. This requirement generally follows section 4.07 of Rev. Proc. 89-12.

(2) If the sole general partner is an individual, the net worth of the general partner must equal or exceed the lesser of 10 percent of the total contributions to the partnership or $1 million. If the partnership has more than one individual general partner, this requirement may be met on a collective basis. In determining the net worth of an individual general partner, any interest in the partnership is not included.

(3) If the general partners of the partnership include one or more corporations and one or more individuals, the net worth of the general partners may be satisfied either by the corporation(s) and the individual(s), on a collective basis, meeting the 10 percent net worth requirement in Sec. 4.03(1), or by all the individual(s) in the aggregate meeting the requirement in Sec. 4.03(2).

(4) In determining the net worth of the general partners, the value of property included in determining the net worth of one general partner may not be taken into account in determining the net worth of any other general partner. For example, where a parent corporation and a wholly owned subsidiary are general partners in a partnership, the value of the stock held by the parent in the subsidiary is not counted in determining the parent's net worth.

SEC. 5. EFFECTIVE DATE

The revenue procedure is generally effective for all limited partnerships formed pursuant to a limited partnership act that the Service in a published ruling has determined is a statute that corresponds to the ULPA.

DRAFTING INFORMATION

The principal author of this revenue procedure is Stephen J. Coleman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure contact Stephen J. Coleman on (202) 622-3060 (not a toll- free call).