IRS PROVIDES 'MAJORITY IN INTEREST' SAFE HARBOR FOR LIMITED PARTNERSHIPS.

Rev. Proc. 94-46

SECTION 1. PURPOSE

This revenue procedure provides a safe harbor that may be used to determine a "majority in interest" for purposes of section 301.7701-2(b)(1) of the Procedure and Administration Regulations.

SECTION 2. BACKGROUND

Section 301.7701-2(b)(1) provides that 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. The regulation further provides that 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. The regulations do not define the term "majority in interest" for purposes of section 301.7701-2(b)(1).

Section 4.05 of Rev. Proc. 89-12, 1989-1 C.B. 798, provides that for a limited partnership formed in a state with a statute corresponding to the Uniform Limited Partnership Act or the Revised Uniform Limited Partnership Act, in the case of the removal of a general partner, the partnership agreement may not permit less than a majority in interest of limited partners to elect a new general partner to continue the partnership, or the Service will not rule that the partnership lacks continuity of life.

Section 2 of Rev. Proc. 92-35, 1992-1 C.B. 790, provides that 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 all remaining partners agree to continue the partnership, the Service will not take the position that the limited partnership has the corporate characteristic of continuity of life.

SECTION 3. SCOPE

This revenue procedure provides a safe harbor that may be used to determine a "majority in interest" for purposes of section 301.7701-2(b)(1).

SECTION 4. APPLICATION OF THE SAFE HARBOR

The requirement in section 301.7701-2(b)(1) for continuity of life that at least a majority in interest of the remaining partners agree to continue the partnership upon a dissolution event will be satisfied if remaining partners owning a majority of the profits interests and a majority of the capital interests owned by all the remaining partners agree to continue the partnership. For purposes of this section, profits are determined and allocated based on any reasonable estimate of profits from the date of the dissolution event to the projected termination of the partnership, taking into account present and future allocations of profits under the partnership agreement that is in effect as of the date of the dissolution event. For purposes of this section, capital is determined as of the date of the dissolution event. If capital accounts are determined and maintained through the date of the dissolution event in accordance with the capital accounting rules of section 1.704-1(b)(2)(iv) of the Income Tax Regulations, then capital determined as of the date of the dissolution event represents the capital account balances determined on that date.

SECTION 5. EFFECT ON OTHER REVENUE PROCEDURES

Section 4.05 of Rev. Proc. 89-12 and section 2 of Rev. Proc. 92- 35 are amplified to provide a safe harbor for purposes of determining a "majority in interest" under section 301.7701-2(b)(1).

DRAFTING INFORMATION

The principal author of this revenue procedure is David McDonnell of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure contact Mr. McDonnell on (202) 622-3050 (not a toll-free call).