Rp 2002-68

26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement; determination of correct tax liability.
(Also Part I, §§ 103, 702, 704, 706, 707, 761,
1.441–2T, 1.706–1, 1.761–2, 301.7701–4.)

Rev. Proc. 2002–68
SECTION 1. PURPOSE
This revenue procedure modifies and supersedes Rev. Proc. 2002–16, 2002–9 I.R.B.
572.
SECTION 2. BACKGROUND
Rev. Proc. 2002–16 provides procedures for certain partners to take into account on a monthly basis their distributive
shares of partnership items if the partnership satisfies the definition of an eligible
partnership and makes an election under the
revenue procedure (Monthly Closing Election).
A partnership is generally eligible to
make a Monthly Closing Election under
Rev. Proc. 2002–16 if 95 percent of the
partnership’s income for the taxable year is
income that is exempt from tax under § 103
of the Internal Revenue Code and the partnership’s allocations of income, gain, loss,
deduction, and credit are made in accordance with § 704(b). Only money market
fund partners are eligible to consent to the
Monthly Closing Election provided by Rev.
Proc. 2002–16.
Since the issuance of Rev. Proc. 2002–
16, the Department of the Treasury and the
Internal Revenue Service have received a
number of comments. Commentators noted
that medium- and long-term bond funds often own interests in eligible partnerships,
that these funds are subject to the same partnership timing difficulties as money market fund partners, and that it is costly and
unnecessary to require separate reporting for
non-fund partners in situations where substantially all of the partnership’s income is
exempt from taxation. Treasury and the Service agree that, in the interest of sound and
efficient administration of the tax laws, all
partners in eligible partnerships should be
able to consent to the Monthly Closing
Election.
Certain commentators noted that, to the
extent that many otherwise eligible partnerships elected under § 761 to be excluded
from subchapter K, these partnerships might
not be able to elect into the procedures pro-

2002–43 I.R.B.

vided in Rev. Proc. 2002–16 without first
seeking and receiving permission from the
Service to revoke their § 761 elections.
Two of the requirements for eligibility
to elect to be excluded from all or a portion of subchapter K are that the partners
must own the partnership property as coowners and the partners must be able to
compute their income without the necessity of computing partnership taxable income. See § 1.761–2(a)(1) and (2) of the
Income Tax Regulations. If a business entity (classified as a partnership) owns a taxexempt bond and issues membership
interests that apportion the benefits and burdens of that property to its members in a
manner that differs significantly from direct investment in the bond (such as the preferred and residual interests in eligible
partnerships that are described in Rev. Proc.
2002–16), the holders of those interests do
not satisfy the requirement that they own
the partnership property as co-owners. Cf.
§ 301.7701–4(c) of the Procedure and Administration Regulations. Moreover, if (as
in the case of partnerships described in Rev.
Proc. 2002–16) one class of partners has a
right to partnership income that is superior to the right of another class of partners, then the net partnership income or loss
allocated to the partners with inferior rights
to partnership income can be determined
only by computing the net income or loss
of the partnership and then by reducing that
net income by income allocable to partners with superior rights to partnership income. These partnerships do not meet the
requirement of § 1.761–2(a)(1) that the
members of the organization be able to
compute their incomes without the necessity of computing partnership income.
If a partnership does not satisfy the requirements for making a § 761(a) election, any purported election under § 761(a)
by that partnership is not effective and,
therefore, need not be revoked. However,
because there was some confusion as to
whether the partnerships described in Rev.
Proc. 2002–16 qualified to make an election under § 761(a) to be excluded from
subchapter K, section 9 of this revenue procedure provides transition relief for many
of these taxpayers.
Commentators have requested that consideration be given to simplified reporting procedures for some or all of the
partnerships described in Rev. Proc. 2002–
16. This revenue procedure eliminates the

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monthly statements that were required under Rev. Proc. 2002–16 but does not eliminate the requirements that a partnership file
Form 1065, U.S. Return of Partnership Income, and provide a Schedule K–1 (Form
1065) to each partner. Electing partnerships and consenting partners must keep adequate books and records of income, gain,
loss, deduction, and credit relating to partnership items to enable the Service to determine each partner’s share of the
partnership’s monthly income and expenses.
Treasury and the Service request comments on additional simplified reporting
procedures that may be appropriate. Finally, section 9 of this revenue procedure
extends the transition period provided in
Rev. Proc. 2002–16.
SECTION 3. SCOPE
This revenue procedure applies to eligible partnerships (described in section 3.01
of this revenue procedure) that elect the
Monthly Closing Election and to partners
that consent (described in section 6 of this
revenue procedure) to take into account their
distributive shares of partnership income on
a monthly basis. In addition, section 9 of
this revenue procedure applies to all eligible partnerships, whether or not they make
the monthly closing election.
.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 are made in accordance with
§ 704(b); and
(c) At least 95 percent of the partnership’s income for the test period was (or
is reasonably expected to be) interest on taxexempt obligations within the meaning of
§ 103 and substantially all of the partnership’s expenses and deductions are properly allocable to producing or collecting that
income or to managing, conserving, or
maintaining property held for the production of that income.
(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

October 28, 2002

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 first month for which the
Monthly Closing Election is effective.
SECTION 4. EFFECT OF MONTHLY
CLOSING 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 partners of the partnership has a Monthly
Closing Consent in effect, then, with respect to each consenting partner, the partnership must close its books as described
in § 1.706–1(c)(2) as if the partner had sold
its entire interest in the partnership on the
last day of that month. The consenting 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 the 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 the partner. If the partner is on
a 52–53 week taxable year, then the provisions of § 1.441–2T(e) of the temporary Income Tax Regulations apply as if the
last day of the month were the last day of
the partnership’s taxable year.
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
2002–68,” 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;
(2) A statement that the partnership elects a monthly closing of the books
for all present and future consenting 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,

October 28, 2002

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 election is
to begin for June, the partnership will close
its books June 30. In computing taxable income for any year ending on or after June
30, a consenting partner must include the
partner’s share of partnership items and
guaranteed payments for the period from the
partnership’s 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 6.02 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) A partner effects a Monthly Closing Consent by providing a statement of
consent to the custodian or manager of the
partnership. A copy of the statement of consent should also be attached to the partner’s income tax return for the first taxable
year in which the consent is effective (for
example, if the partner is a Regulated Investment Company, the statement must be
attached to its Form 1120 RIC, U.S. Income Tax Return for Regulated Investment Companies). Failure to attach a copy
of the partner’s statement of consent to the
partner’s income tax return does not invalidate the partner’s consent.
(2) The statement of consent must be
titled “STATEMENT OF CONSENT TO
ELECTION UNDER REVENUE PROCEDURE 2002–68” and must include:
(a) Identification of both the consenting partner and the partnership by name,
address, and TIN, 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 pay-

754

ments under § 707(c) in a manner that is
consistent with the election;
(c) The signature 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. A
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.
.03 Special Transitional Rule. For purposes of satisfying the requirements of section 6.02, if an eligible partnership makes
an election under this revenue procedure effective on or before December 31, 2003,
partners with an interest in the partnership as of the first day of the month the
partnership’s election becomes effective will
be treated as having acquired the interest
in the partnership on the first day of that
month.
SECTION 7. TERMINATION OF
MONTHLY CLOSING ELECTION OR
MONTHLY CLOSING CONSENT
.01 A Monthly Closing Election or a
Monthly Closing Consent may be revoked
only with the consent of the Commissioner.
.02 Each month after the third month after a partnership’s Monthly Closing Election becomes 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 Clos-

2002–43 I.R.B.

ing Election is terminated as of first day of
the month. If the partnership subsequently
qualifies as an eligible partnership, it may
make another Monthly Closing Election
only after obtaining the Commissioner’s
consent.
.03 If a consenting partner transfers its
entire interest in a partnership with a
Monthly Closing Election in effect and the
consenting partner later acquires another interest in that partnership, then the partner’s Monthly Closing Consent continues
to be effective if the partnership continues to have its Monthly Closing Election
in effect.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
October 7, 2002. Partners and partnerships that consented and made elections under Rev. Proc. 2002–16 may continue
reporting as authorized in that revenue procedure; however, the partnerships are no
longer required to provide monthly statements.
SECTION 9. TRANSITION RULE
For any taxable year beginning before
January 1, 2004, the Service will not challenge a partnership’s or a partner’s tax treatment that is consistent with an election to
be excluded from the provisions of subchapter K under § 761(a), provided the partnership would be an eligible partnership as
defined in this revenue procedure and the
partners’ inclusion of income, gain, loss, de-

2002–43 I.R.B.

duction, and credits is consistent with that
permitted under this revenue procedure.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–16, 2002–9 I.R.B. 572,
is modified and superseded.
SECTION 11. REQUEST FOR
COMMENTS
Comments are requested regarding this
revenue procedure. In particular, comments
are requested concerning the establishment of modified income tax reporting procedures for eligible partnerships and
consenting partners. All comments will be
available for public inspection and copying. Comments should be sent to
CC:ITA:RU (Rev. Proc. 2002–68), Room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Comments may also be hand delivered between the hours of 8 a.m. and 5
p.m. to CC:ITA:RU (Rev. Proc. 2002–68),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC. In the alternative, e-mail your
comments to Notice.Comments@irscounsel.
treas.gov. Please submit comments by December 6, 2002.
SECTION 12. 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

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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 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 1,000 hours.
The estimated annual burden per
respondent/recordkeeper is 1 hour. 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 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 13. 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).

October 28, 2002