IRS EXPANDS AREAS IN WHICH IT WILL CONSIDER REQUESTS FOR RULINGS ON PARTNERSHIP ISSUES

Rev. Proc. 86-12

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide guidance to taxpayers concerning the preparation of ruling requests involving certain partnership issues.

SEC. 2. BACKGROUND

Subchapter K of the Internal Revenue Code, sections 701 through 761, sets forth the rules concerning the federal income tax treatment of partners and partnerships. Section 7701(a)(2) of the Code defines the term "partnership," and section 301.7701-2 and 301.7701-3 of the Procedure and Administration Regulations set forth the standards that must be satisfied for an organization to be classified as a partnership.

The Internal Revenue Service recently has reviewed its practice concerning the issuance of letter rulings on partnership issues arising under subchapter K of the Code and partnership classification issues arising under sections 301.7701-2 and 301.7701-3 of the regulations. As a result of this review, the Service has determined that it will expand the scope of its rulings program with regard to these issues.

SEC. 3. SCOPE AND OBJECTIVES

01 The Service presently considers ruling requests submitted by a newly formed organization concerning the classification of the organization as a partnership for federal income tax purposes and, if the organization is so classified, the Service also presently considers any partnership issues arising under subchapter K. If, however, the newly formed organization does not request a partnership classification ruling, but requests rulings only on partnership issues arising under subchapter K, the general practice of the Service has been not to rule in such circumstances.

The Service will now consider a ruling request concerning issues arising under subchapter K provided the newly formed organization declares in its ruling request that it is properly classified as a partnership for federal income tax purposes and that it will file federal income tax returns in a manner consistent with that declaration. When the Service issues a ruling concerning issues arising under subchapter K but does not issue a partnership classified ruling, the ruling will contain a provision that no opinion is expressed concerning the organization's classification for federal income tax purposes.

02 The Service presently considers ruling request submitted by an existing organization (an organization that was formed in, and has filed a tax return for, a taxable year before the taxable year in which the ruling request is filed) concerning partnership issues arising under subchapter K, provided that the organization declares in its ruling request (1) that is is properly classified as a partnership for federal income tax purposes, (2) that it has, for prior taxable years, filed federal income tax returns in a manner consistent with that declaration, and (3) that it will continue so to file its federal income tax returns. When the Service issues a ruling to an existing organization concerning issues arising under subchapter K but has not previously issued a partnership classification ruling to the organization, the ruling contains a provision that no opinion is expressed concerning the organization's classification for federal income tax purposes. The general practice of the Service has been not to issue partnership classification rulings to existing organization. See Rev. Proc. 86-1, section 5.01, 1986-1 I.R.B. 6, 8-9.

The Service will now consider ruling requests concerning the classification of an existing organization as a partnership. A ruling issued in response to such a request will be effective prospectively.

SEC. 4. AREAS NOT COVERED BY THIS REVENUE PROCEDURE

This revenue procedure is not intended to modify Rev. Proc. 86-3, 1986-1 I.R.B. 26, which sets forth a list of matters upon which the Service generally will decline to rule. Furthermore, this revenue procedure is not intended to modify any part of Rev. Proc. 86-1, other than the next to the last sentence of section 5.01.

SEC. 5. INQUIRIES

Inquiries concerning this revenue procedure should be addressed to the Internal Revenue Service, Associate Chief Council (Technical), Attention CC:IND:I, Room 5016, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 6. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 86-1 is modified.

SEC. 7. EFFECTIVE DATE

This revenue procedure applies to requests for rulings filed in the National Office after March 3, 1986.