Final Regs Clarify 'Continuity of Life' for Limited Partnerships

 DEPARTMENT OF THE TREASURY

 ACTION: Final Regulations.

 SUMMARY: This document contains final regulations that amend the regulations under section 7701 of the Internal Revenue Code relating to the classification of organizations for tax purposes. The final regulations clarify the rule in the regulations regarding the characteristic of continuity of life of a limited partnership. The final regulations provide that a limited partnership lacks continuity of life if upon an event of withdrawal of a general partner from the partnership a dissolution of the partnership may be avoided by at least a majority in interest of the remaining partners agreeing to continue the partnership.

 EFFECTIVE DATE: June 14, 1993.

 FOR FURTHER INFORMATION CONTACT: James A. Quinn, (202) 622-3060 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains final regulations that amend part 301 of title 26 of the Code of Federal Regulations. The final regulations clarify the rule in 26 CFR 301.7701-2(b)(1) regarding the characteristic of continuity of life of a limited partnership.

 On July 22, 1992, a notice of proposed rulemaking amending the regulations under section 7701 of the Internal Revenue Code (Code) relating to the classification of organizations for tax purposes was published in the Federal Register (57 FR 32472). No public hearing on the proposed amendments was requested, and accordingly none was held. Six comments to the proposed regulations were received. These comments are discussed below.

EFFECTIVE DATES

 These final regulations are applicable to taxable years beginning on or after June 14, 1993. However, a taxpayer may apply the regulations for taxable years beginning before June 14, 1993.

EXPLANATION OF PROVISIONS AND COMMENTS

 For an explanation of the amendment to the regulations, see the notice of proposed rulemaking published July 22, 1992. The final regulations adopt the proposed amendment without change, except for the change in the effective date allowing a taxpayer to apply the regulations for taxable years beginning before June 14, 1993. One commentator suggested that rather than conforming the citation to Glensder Textile Co. v. Commissioner, 46 B.T.A. 176 (1942), acq., 1942-1 C.B. 8., the citation be deleted because the commentator felt that the case does not support the change to the regulations. The final regulations retain the citation to Glensder Textile because the Service interprets the case as standing for the proposition that the contingent continuity of existence of a limited partnership, as opposed to the chartered life of a corporation, causes a limited partnership to lack continuity of life. The requirement that a majority in interest of the partners must agree to continue the partnership upon an event of withdrawal of a general partner in order to prevent its dissolution is a meaningful contingency.

 Commentators also requested a number of clarifications to the regulations. A commentator requested that the regulations be clarified to state that the regulations apply to any unincorporated organization, not simply to limited partnerships. A commentator requested that a reference be made to limited liability companies in the regulations. Commentators also requested that the rule in the regulations be clarified to state that it applies to any one or more of the events of withdrawal of a member. Thus, if only one event of withdrawal causes a dissolution, for example bankruptcy, the limited partnership will lack continuity of life. A commentator requested that the regulations be clarified to indicate that an organization will lack continuity of life if a dissolution occurs upon an event of withdrawal of any member, and that "any" does not mean "each." A commentator requested that the regulations be clarified to indicate that unanimous agreement of the general partners is not required to continue the partnership in order for a limited partnership to lack continuity of life.

 Reflecting the limited approach described in the preamble to the notice of proposed rulemaking, the final regulations have not been amended in response to the comments set forth in the preceding paragraph. Although the requested clarifications submitted by the commentators may have merit, their concerns have been addressed to a significant degree in other published guidance or will be considered for future public guidance. See, for example, Rev. Rul. 93-4, 1993-3 I.R.B. 5, modifying and superseding Rev. Rul. 77-214, 1977-1 C.B. 408, (classifying a German Gesellschaft mit beschrankter Haftung (GmbH) as an association taxable as a corporation under section 301.7701-2 of the regulations); Rev. Rul. 88-76, 1988-2 C.B. 360 (classifying a Wyoming limited liability company as a partnership for federal tax purposes under section 301.7701-2); Rev. Rul. 93-5, 1993-3 I.R.B. 6 (classifying a Virginia limited liability company as a partnership for federal tax purposes under section 301.7701-2); Rev. Rul. 93-6, 1993-3 I.R.B. 8 (classifying a Colorado limited liability company as a partnership for federal tax purposes under section 301.7701-2); and Rev. Proc. 92-35, 1992-1 C.B. 790 (indicating that the Service will not take the position that a limited partnership has the corporate characteristic of continuity of life if under local law and the partnership agreement the bankruptcy or removal of a general partner of a limited partnership causes a dissolution of the partnership unless the remaining general partners or at least a majority in interest of the remaining general partners agree to continue the partnership).

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It also has been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is James A. Quinn of the Office of Assistant Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style.

LIST OF SUBJECTS IN 26 CFR PART 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

Treasury Decision 8475

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 301 is amended as follows:

PART 301 --PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.7701-2 is amended as follows:

1. Two sentences are added at the end of paragraph (a)(4).

2. The third and fourth sentences of paragraph (b)(1) are revised.

3. The added and revised provisions read as follows:

SECTION 301.7701-2 ASSOCIATIONS.

(a) * * *

(4) * * * The third sentence of paragraph (b)(1) of this section is applicable to taxable years beginning on or after June 14, 1993. However, a taxpayer may apply the third sentence of paragraph (b)(1) of this section for taxable years beginning before June 14, 1993.

* * * * *

(b) * * * (1) * * * If the death, insanity, bankruptcy, retirement, resignation, expulsion, or other event of withdrawal of a general partner of a limited partnership causes a dissolution of the partnership, continuity of life does not exist; furthermore, continuity of life does not exist notwithstanding the fact that a dissolution of the limited partnership may be avoided, upon such an event of withdrawal of a general partner, by the remaining general partners agreeing to continue the partnership or by at least a majority in interest of the remaining partners agreeing to continue the partnership. See Glensder Textile Co. v. Commissioner, 46 B.T.A. 176 (1942), acq., 1942-1 C.B. 8.

* * * * *