[15245]
October 9, 2002
TO: TAX COMMITTEE No. 30-02
MONEY MARKET FUNDS ADVISORY COMMITTEE No. 5-02
FIXED-INCOME ADVISORY COMMITTEE No. 11-02
RE: SUPPLEMENTAL GUIDANCE ON TAXATION OF SYNTHETIC TAX-EXEMPT
SECURITIES
We are pleased to inform you that the Internal Revenue Service (the “Service”)--in
response to comments submitted by the Institute1 and others--has released the attached
Revenue Procedure 2002-68 (the “new Revenue Procedure”) modifying and superceding
Revenue Procedure 2002-16 (the “old Revenue Procedure”) 2 relating to the taxation of synthetic
variable rate tax-exempt securities. The old Revenue Procedure provided a reporting
mechanism pursuant to which a money market fund could take into account each month its
allocable share of tax-exempt income from certain synthetic variable rate tax-exempt securities.
The new Revenue Procedure follows the general structure of the old Revenue Procedure, but
makes several important changes including: broadening the scope of the guidance to include all
partners of “eligible partnerships;” eliminating the monthly reporting statement requirements
set out in the old Revenue Procedure; and extending the transition relief date of the Revenue
Procedure. The new Revenue Procedure also requests comments regarding “the establishment
of modified income tax reporting procedures for eligible partnerships and consenting partners.”
Scope of the Guidance / Eligible Partners
Under the old Revenue Procedure, only money market funds partners were eligible for
the monthly closing election. The new Revenue Procedure extends the monthly closing election
to all partners of an eligible partnership. Accordingly, any long-term bond fund investing in an
eligible partnership would be eligible for the monthly closing election.
1 See, Institute Memorandum to Fixed-Income Advisory Committee No. 5-02, Money Market Funds Advisory
Committee No. 1-02, and Tax Committee No. 12-02, dated April 22, 2002.
2 See, Institute Memorandum to Tax Committee No. 6-02, dated February 22, 2002.
2
Reporting Issues
The new Revenue Procedure eliminates the monthly statement requirements set out
under the old Revenue Procedure. With respect to partnership tax returns, the new Revenue
Procedure indicates the Service’s view that these partnerships “do not meet the requirement of
1.761-2(a)(1)” and accordingly are subject to the reporting requirements of subchapter K.
However, the new Revenue Procedure requests comments regarding “the establishment of
modified income tax reporting procedures for eligible partnerships and consenting partners.”
Effective Date
While the new Revenue Procedure is effective October 7, 2002, it extends the date of the
transition relief provided under the old Revenue Procedure. Specifically, “[f]or 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, deduction
and credits is consistent with that permitted under this revenue procedure.”
ACTION REQUESTED
Comments on the new Revenue Procedure are due to the IRS on December 6, 2002.
Please contact the undersigned (cbarre@ici.org or 202/326/5821) by November 8, 2002, if you
have any comments.
Catherine Barre
Assistant Counsel
Attachment (in .pdf format)