Rp 2002-16

1140, or via fax at [49] (30) 8305–1145;
the Paris office at [33] (1) 4312–2555, or
via fax at [33] (1) 4312–4758; the London office at [44] (207) 408–8077, or via
fax at [44] (207) 495–4224; the Singapore
office at [65] 476–9413, or via fax at [65]
476–9030; and the Tokyo office at [81]
(3) 3224–5466, or via fax at [81] (3)
3224–5274.

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, §§ 103, 702, 706, 707, 851, 852;
1.706–1.)

Rev. Proc. 2002–16
SECTION 1. PURPOSE
This revenue procedure allows certain
partnerships that invest in assets exempt
from taxation under § 103 of the Internal
Revenue Code to make an election that
enables money market fund partners to
take into account monthly the inclusions
required under §§ 702 and 707(c).
SECTION 2. BACKGROUND
Certain money market funds seek
investments with a yield that reflects current short-term exempt interest rates and
that is treated for federal income tax purposes as being composed of interest
exempt from tax under § 103. For purposes of this revenue procedure, a money
market fund is a fund described in the
Securities and Exchange Commission’s
Rule 2a–7 (Rule 2a–7), 17 CFR 270.2a–7,
issued under the Investment Company
Act of 1940, 15 U.S.C. 80a–1 et seq. One
investment that offers these advantages is
an instrument that might be described as
a synthetic tax-exempt variable-rate bond.
To create such an instrument, a sponsor or
an affiliate (the Sponsor) purchases
(either at original issue or on the secondary market) an obligation the interest
income on which is excluded under § 103
(§ 103 obligation) and transfers the § 103
obligation to an entity that qualifies as a
partnership for federal tax purposes (taxexempt bond partnership). The taxexempt bond partnership issues two
classes of equity interests: a preferred

2002–9 I.R.B.

interest that is entitled to a variable return
on its capital contribution (preferred interest), and a second class of ownership
interest that is entitled to all of the
remaining income of the partnership
(residual interest). The variable return on
the preferred interest tracks current shortterm exempt yields.
Under § 702(b), if a partnership
receives income that is exempt from tax
under § 103, the income retains its character when the partnership allocates it to
a partner. Under § 706(a), a partner
includes in taxable income for a taxable
year the partner’s allocable share of items
of partnership income, gain, loss, deduction, and credit for the partnership’s taxable year ending within or with the partner’s taxable year.
Section 852(a) provides generally that
a regulated investment company (RIC),
including a RIC that is a money market
fund, must distribute each taxable year at
least 90 percent of its net interest income
that is excludible from gross income
under § 103(a). Section 852(b)(5) provides that if, at the close of each quarter
of the RIC’s taxable year, at least 50 percent of the value (as defined in
§ 851(c)(4)) of the total assets of the RIC
consists of obligations described in
§ 103(a), the RIC is qualified to pay
exempt-interest dividends (as defined in
§ 852(b)(5)(A)) to its shareholders. Under
§ 852(b)(5)(A), an exempt-interest dividend means any dividend or part thereof
paid by a RIC and designated by the RIC
as an exempt-interest dividend in a written notice mailed to its shareholders not
later than 60 days after the close of the
RIC’s taxable year.
To maintain a constant net asset value
for each share of stock, as is described in
Rule 2a–7, money market funds commonly declare dividends daily and pay
dividends monthly. (In this paragraph and
the next, the word “dividend” refers to a
distribution that is treated as a dividend
for purposes of state corporate law and
federal securities law, whether or not the
distribution is also treated as a dividend
for purposes of the Code.) In the case of
a money market fund that intends to pay
exempt interest dividends, substantially
all of the fund’s income typically will be
exempt from tax under § 103. If, however, such a money market fund has a

572

taxable year that differs from that of a
tax-exempt bond partnership in which it
holds an interest, there may be a mismatch between the money market fund’s
monthly distribution of income and the
money market fund’s inclusion of its distributive share of partnership income
under § 706(a). As a result, the money
market fund’s distribution of tax-exempt
income may be treated as a return of capital. Alternatively, the money market fund
may distribute less than its entire distributive share of partnership income for the
taxable year.
For example, assume that on January
2, 2002, a money market fund with a taxable year ending June 30 acquires a preferred interest in a tax-exempt bond partnership with a taxable year ending
December 31. Under § 706(a), the money
market fund’s distributive share of the
tax-exempt bond partnership’s income for
the money market fund’s taxable year
ending June 30, 2002, is zero. If the
money market fund’s daily dividends do
not reflect its portion of the interest that
the partnership earns between January 2
and June 30, the fund will be unable to
maintain a constant net asset value for
each share of its stock. (Whether or not
the tax-exempt bond partnership distributes the exempt interest to the money
market fund as that interest is earned, the
per share net asset value of the fund will
rise if the fund does not make continual
distributions to its shareholders to reflect
those partnership earnings.) On the other
hand, if the money market fund’s daily
dividends are based in part on the income
earned by the partnership between January 2, 2002, and June 30, 2002, the distributions made by the money market fund
during its taxable year ending June 30,
2002, will exceed the includible taxexempt income for the year, causing all or
a portion of those distributions to be characterized as a return of capital.
The Treasury Department and the
Internal Revenue Service have determined that it is in the best interest of
sound tax administration to allow certain
money market funds to take into account
on a monthly basis their distributive
shares of partnership items if the partnership makes a proper election under this
revenue procedure.

March 4, 2002

SECTION 3. SCOPE
This revenue procedure applies to eligible partnerships (described in section
3.01 of this revenue procedure) that elect
to close their books monthly (the Monthly
Closing Election) and to eligible partners
(described in section 3.02 of this revenue
procedure) that consent to take into
account their distributive shares of partnership income on a monthly basis (the
Monthly Closing Consent).
.01 Eligible Partnership.
(1) Generally. An entity is an eligible partnership if all of the following
conditions are met as of the test date:
(a) The entity is a partnership for
federal tax purposes;
(b) All allocations of income,
gain, loss, deduction, and credit of the
partnership have substantial economic
effect; and
(c) At least 95 percent of the partnership’s income for the test period was
(or is reasonably expected to be) income
that is exempt from tax under § 103.
(i) If, on the test date, the partnership has been in existence for at least
6 full calendar months, then the test
period is the 6 full calendar months preceding the test date; and
(ii) If, on the test date, the partnership has not been in existence for at
least 6 full calendar months, then the test
period is the first 6 full calendar months
of the partnership’s existence.
(2) Test Date. The test date is the
first day of the month for which the
Monthly Closing Election is effective.
.02 Eligible Partner. A partner is an
eligible partner if it is a RIC, as defined
in § 851, that is entitled to hold itself out
as a money market fund, or the equivalent
of a money market fund, in accordance
with the provisions of Rule 2a–7(b).
SECTION 4. MONTHLY CLOSING
ELECTION AND CONSENT
.01 Effect of Election and Consent. If,
at the end of any calendar month, an eligible partnership has a Monthly Closing
Election in effect and one or more eligible partners of the partnership has a
Monthly Closing Consent in effect, then,
with respect to each such partner, the
partnership must close its books as
described in § 1.706 1(c)(2) of the
Income Tax Regulations as if the partner

March 4, 2002

had sold its entire interest in the partnership on the last day of that month. The
partner must include in its taxable income
for that month the partner’s distributive
share of items described in § 702(a)
earned by the partnership since the last
closing of the books with respect to that
partner and any guaranteed payments
under § 707(c) to the partner that are
deductible by the partnership since the
last closing of the books with respect to
that partner. If the partner is on a 52–53
week taxable year, then the provisions of
§ 1.441–2T(e) apply as if the last day of
the month was the last day of the partnership’s taxable year.
.02 Reporting Requirements. In connection with this monthly closing of the
books, the partnership must provide each
consenting eligible partner information
with respect to the partner’s distributive
share of items described in § 702(a) and
any guaranteed payments under § 707(c).
To satisfy this requirement, the partnership may use a Schedule K-1 (Form
1065), Partner’s Share of Income, Credits, Deductions, etc., or any other document or electronic communication that
provides substantially equivalent information (monthly statements). The partnership and each consenting eligible partner
must maintain the monthly statements but
should not file them with the Service. At
the end of its taxable year the partnership
must provide a single Schedule K-1
(Form 1065) to each of its partners (both
the consenting and the nonconsenting
partners). In the case of a consenting eligible partner, this single annual Schedule
K-1 must include all amounts shown on
the monthly statements issued to the partner.
SECTION 5. MONTHLY CLOSING
ELECTION
.01 Manner of Partnership Making the
Election. An eligible partnership may
make a Monthly Closing Election by filing a statement with the appropriate service center. The statement must be titled
“ELECTION UNDER REVENUE PROCEDURE 2002–16,” and must include:
(1) Identification of the partnership
by name, address, and EIN, and the name
and phone number of a contact person for
the partnership;

573

(2) A statement that the partnership
elects a monthly closing of the books for
all present and future consenting eligible
partners;
(3) The signature of a person with
authority to sign the partnership’s Form
1065, U.S. Return of Partnership Income;
and
(4) The effective month of the election. The election is effective for the calendar month in which the election is
filed, unless the partnership requests the
election to be effective for either of the
two immediately preceding calendar
months. For example, if a calendar year
partnership states that the monthly closing system is to begin for June, the partnership will close its books June 30. Consenting eligible partners must include
their shares of partnership items and guaranteed payments for the period from the
last closing of the books (generally
December 31 of the prior year) through
June 30. There will be a closing of the
books and a monthly inclusion of the
partner’s share of these items and guaranteed payments at the end of each future
month.
.02 Time for Making the Election. The
partnership’s Monthly Closing Election
may be made at any time. See, however,
section 6.03 of this revenue procedure for
limitations on the time for a partner to
effect a Monthly Closing Consent.
SECTION 6. MONTHLY CLOSING
CONSENT
.01 Manner of Partner Effecting the
Consent.
(1) An eligible partner effects a
Monthly Closing Consent by providing a
statement of consent to the custodian or
manager of the partnership. The statement
of consent should also be attached to the
partner’s Form 1120RIC, U.S. Income
Tax Return for Regulated Investment
Companies, for the first taxable year in
which the consent is effective. Failure to
attach the partner’s statement of consent
to the partner’s Form 1120RIC does not
invalidate the partner’s consent, however.
(2) The statement of consent must
be titled “STATEMENT OF CONSENT
TO ELECTION UNDER REVENUE
PROCEDURE 2002–16” and must
include:
(a) Identification of both the consenting partner and the partnership by

2002–9 I.R.B.

name, address, and EIN, and the name
and phone number of a contact person for
each;
(b) A statement that the partner
consents to the partnership’s election to a
monthly closing of the books and that the
partner will include in its taxable income
its distributive share of partnership items
described in § 702(a) and any guaranteed
payments under § 707(c) in a manner that
is consistent with the election;
(c) The signature of an officer of
the partner who is authorized to act on
behalf of the partner; and
(d) The effective month of the
consent. The consent is effective for the
calendar month in which the partner
acquires the partnership interest, unless
the partner requests that the consent be
effective for either of the two immediately following calendar months.
.02 Additional Requirements for Making a Valid Monthly Closing Consent. An
eligible partner does not qualify for the
treatment described in section 4 of this
revenue procedure unless:
(1) The partner provides the statement of consent described in section 6.01
of this revenue procedure to the custodian
or manager of the partnership no later
than the last day of the second calendar
month after the calendar month in which
the partner acquires the partnership interest; and
(2) The partnership’s Monthly
Closing Election is effective no later than
the second calendar month after the calendar month in which the partner acquires
the partnership interest.
SECTION 7. TERMINATION OF
MONTHLY CLOSING ELECTION OR
MONTHLY CLOSING CONSENT
.01 A Monthly Closing Election or
Monthly Closing Consent may be
revoked only with the consent of the
Commissioner.
.02 Each month after the first calendar
quarter in which a partnership’s Monthly
Closing Election is effective, the definition of eligible partnership in section 3.01
of this revenue procedure is reapplied to
the partnership, using the last day of the
month as the test date and that month and
the preceding 2 months as the test period.
If for any month the partnership fails to
satisfy the test mandated by the preceding
sentence, then the partnership’s Monthly

2002–9 I.R.B.

Closing Election is terminated as of first
day of the month. Even if the partnership
subsequently qualifies as an eligible partnership, it may not make another Monthly
Closing Election without the Commissioner’s consent.
.03 If a consenting partner’s status as
an eligible partner (as defined in section
3.02 of this revenue procedure) changes
at any time, the partner’s Monthly Closing Consent is ineffective on any day
when that definition is not satisfied and is
effective on any day when it is. Therefore, no new Monthly Closing Consent is
required when a consenting partner sells
one interest in an electing partnership and
acquires another interest in the same partnership at a time when the partnership
continues to have its Monthly Closing
Election in effect.
SECTION 8. TRANSITION RULES
FOR SOME ELECTIONS AND
CONSENTS THAT ARE REQUESTED
TO BECOME EFFECTIVE DURING
2002
.01 Certain Monthly Closing Elections
Filed During 2002. If, using March 1,
2002, as the test date, a partnership is an
eligible partnership, or is an existing but
ineligible partnership, and, at any time
during 2002, the partnership files the
statement described in section 5.01 of this
revenue procedure, then, in addition to
the permissible effective dates described
in section 5.01(4) of this revenue procedure, the partnership may request that the
Monthly Closing Election become effective for any month in 2002 in which the
partnership is an eligible partnership.
.02 Certain Monthly Closing Consents
Provided to an Eligible Partnership During 2002. In the case of any eligible partnership that is described in section 8.01
of this revenue procedure and that files its
Monthly Closing Election during 2002,
any RIC that is an eligible partner of that
partnership at any time during 2002 may
effect a Monthly Closing Consent by
either:
(1) Complying with the procedures
set forth in section 6 of this revenue procedure; or
(2) Satisfying section 6.01 of this
revenue procedure at any time during
2002. In this case, the consent is effective
for the month in which the partner provides the statement of consent to the cus-

574

todian or manager of the partnership,
unless the partner requests that the consent be effective for any other calendar
month of 2002.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective on
January 1, 2002. However, for the period
prior to January 1, 2003, the Service will
not challenge a money market fund’s
monthly inclusion of its distributive share
of partnership items described in § 702(a)
and guaranteed payments described in
§ 707(c) in a manner similar to that
described in section 4 of this revenue procedure, provided that, had this revenue
procedure been in effect at the time of the
inclusion, (1) the partnership to which the
items and payments are attributable
would have been an eligible partnership,
and (2) the partner would have been an
eligible partner.
SECTION 10. PAPERWORK
REDUCTION ACT
The collection of information contained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1768. An agency may not conduct
or sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information displays a valid OMB control number.
The collection of information is in sections 4, 5, and 6 of this revenue procedure. This information is required to
inform the Service which partners and
partnerships are making the designated
election and to report income appropriately. The collection of information is
required to obtain a benefit. The likely
respondents are businesses.
The estimated total annual reporting
and recordkeeping burden is 12000 hours.
The estimated annual burden per
respondent/recordkeeper is 12 hours. The
estimated number of respondents and
recordkeepers is 1000.
The estimated annual frequency of
responses (used for reporting requirements only) is once.
Books or records relating to a collection of information must be retained as

March 4, 2002

long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
SECTION 11. DRAFTING
INFORMATION
The principal author of this revenue
procedure is David A. Shulman of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact David A. Shulman at
202-622-3080 (not a toll-free call).

March 4, 2002

575

2002–9 I.R.B.