SERVICE TO ACCEPT REQUESTS FOR RULINGS ON ALLOCATION OF PARTNER'S DISTRIBUTIVE SHARE.

Rev. Proc. 87-35

SECTION 1. PURPOSE

The purpose of this revenue procedure is to announce that the Internal Revenue Service will consider requests for rulings on proposed transactions involving questions under section 704(b) of the Internal Revenue Code.

SEC. 2. BACKGROUND

Subchapter K of the Code, sections 701 through 761, sets forth the rules concerning the federal income tax treatment of partners and partnerships. Section 704(b) of the Code provides that a partner's distributive share of income, gain, loss, deduction, or credit shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances) if either (1) the partnership agreement fails to allocate such items or (2) the allocation provided in the agreement lacks substantial economic effect.

Section 1.704-1 of the Income Tax Regulations provides three tests for determining whether an allocation will be respected under section 704(b). They are as follows:

(1) if it has "substantial economic effect," i.e., if the allocation has "economic effect," and if such economic effect is "substantial," as determined under rules set forth in the regulations,

(2) if it is in accordance with the partner's interest in the partnership, and

(3) if it is deemed to be in accordance with the partner's interest in the partnership.

Satisfaction of any one of the tests is sufficient to find that an allocation will be respected under section 704(b).

The Service's existing practice is not to issue advance rulings regarding section 704(b)(2). See subsection 30 of section 3.01 of Rev. Proc. 87-3, 1987-1 I.R.B. 27:

30 Section 704(b)(2). -- Partner's Distributive Share Determined. -- Whether the allocation to a partner under the partnership agreement of income, gain, loss, deduction, or credit (or an item thereof) has substantial economic effect.

The Service will now consider requests for advance rulings on proposed transactions involving section 704(b)(2). However, pursuant to section 4.02(1) of Rev. Proc. 87-3, the Service will continue ordinarily to decline to rule on issues that are inherently factual; examples of factual questions include the determination of whether the economic effect of an allocation is "substantial" (the second part of the "substantial economic effect" test) and the determination of a partner's interest in the partnership. In addition, the Service will continue to decline to rule in areas where rulings would, for other reasons, be inappropriate, e.g. those in which the promulgation of regulations is pending.

SEC. 3. PROCEDURE

Rev. Proc. 87-3 is modified by deleting from section 3.01 the following subsection:

30 Section 704(b)(2). -- Partner's Distributive Share Determined. -- Whether the allocation to a partner under the partnership agreement of income, gain, or loss, deduction, or credit (or an item thereof) has substantial economic effect.

SEC. 4. REQUESTS FOR RULINGS UNDER SECTION 704(b)(2)

Requests for rulings should be sent to the Internal Revenue Service, Associate Chief Counsel (Technical), Attention CC:IND, Room 5019, 1111 Constitution Avenue, N.W., Washington, DC 20224.

SEC. 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 87-3 is modified.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective July 27, 1987, the date of its publication.