[16745]
November 6, 2003
TO: TAX MEMBERS No. 60-03
MONEY MARKET FUNDS ADVISORY COMMITTEE No. 18-03
FIXED-INCOME ADVISORY COMMITTEE No. 16-03
RE: ADDITIONAL IRS GUIDANCE ON SYNTHETIC TAX-EXEMPT SECURITIES
The Internal Revenue Service (the “Service”) has issued Revenue Procedure 2003-841 (the
“new Revenue Procedure”) that modifies and supersedes Revenue Procedure 2002-68 (the “old
Revenue Procedure”)2 pursuant to which a regulated investment company (“RIC”) may take
into account each month its allocable share of tax-exempt income from certain synthetic variable
rate tax-exempt securities.
As you know, the Institute submitted comments to the Treasury Department
(“Treasury”) and the Service on the old Revenue Procedure and we are pleased to inform you
that the new Revenue Procedure is responsive to the Institute’s comments. 3 First, the new
Revenue Procedure clarifies that gains from the sale, redemption or other disposition of certain
assets are good income for purposes of the 95 percent “Income Test.”4 Second, the default rule
with respect to partner and partnership eligibility has been revised to ensure that partnerships
and partners do not inadvertently fail to be covered by the new Revenue Procedure. Under the
new Revenue Procedure, partners of eligible partnerships are eligible for the monthly closing
election by virtue of a binding provision in the partnership’s governing documents indicating
each partner’s consent to the election. Finally, the tax reporting burden at the partnership level
1 Revenue Procedure 2003-84 is available at http://www.irs.gov/pub/irs-drop/rp-03-84.pdf and is attached to the
electronic version of this memorandum.
2 See, Institute Memoranda (No. 15246) to Tax Members No. 43-02, dated October 8, 2002 and (No. 15245) to Fixed
Income Advisory Committee No. 11-02, Money Market Funds Advisory Committee No. 5-02, and Tax Committee
No. 30-02, dated October 9, 2002.
3 See, Institute Memoranda (No. 15444) to Tax Members No. 50-02, Fixed Income Advisory Committee No. 15-02, and
Money Market Funds Advisory Committee No. 9-02, dated December 10, 2002.
4 In order for a partnership to be an “eligible partnership,” inter alia, the Income Test generally requires that at least 95
percent of the partnership’s income must be tax-exempt. Under the new Revenue Procedure gain from the sale of
assets generating tax-exempt income is “good income” for purposes of this test.
2
is reduced through the modifications made by the new Revenue Procedure and the Treasury
Regulations issued November 5, 2003, that authorize the partnership reporting exemptions.5
The new Revenue Procedure contains a number of additional important changes
including record keeping requirements that may apply to RIC advisors. In order for the
partnership to be eligible for the reduced tax reporting requirements, certain beneficial owner
information must be retained. Section 8.04 of the new Revenue Procedure provides that “[i]n
the case of a group of RICs that is managed or advised by a common, or affiliated, manager or
advisor (the manager), the manager may elect to be responsible for collecting, retaining, and
providing the Service upon demand the beneficial ownership information.”
The new Revenue Procedure is effective November 5, 2003 but contains a grandfather
provision, subject to limitations, for eligible partnerships created prior to January 1, 2004. The
new Revenue Procedure also provides transition relief with respect to eligible partnerships that
completed monthly closing elections in accordance with Revenue Procedures 2002-166 or 2002-
68.
Catherine Barré
Associate Counsel
Note: Not all recipients receive the attachments. To obtain copies of the attachments, please visit our members
website (http://members.ici.org) and search for memo 16745, or call the ICI Library at (202) 326-8304 and request the
attachments for memo 16745.
Attachment no. 1 (in .pdf format)
5 The new final and temporary regulations, T.D. 9094, are available at http://www.irs.gov/pub/irs-regs/td9094.pdf
and are attached to the electronic version of this memorandum.
6 See, Institute Memorandum (No. 14476) to Tax Members No. 8-02, dated February 22, 2002.