rp-01-36.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund,
credit, or abatement; determination of correct tax liability.
(Also Part I, §§ 704; 1.704-1, 1.704-3.)
Rev. Proc. 2001-36
SECTION 1. PURPOSE
This revenue procedure grants automatic permission for
certain securities partnerships to aggregate contributed property
for purposes of making § 704(c) allocations. This revenue
procedure also describes the information that must be included
with ruling requests for permission to aggregate contributed
property for purposes of making § 704(c) allocations submitted by
partnerships that do not qualify for automatic permission.
SECTION 2. BACKGROUND
.01 To prevent the shifting of tax consequences among
partners with respect to precontribution gain or loss, § 704(c)
requires partnerships to allocate income, gain, loss, and

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deductions with respect to property contributed by a partner so
as to take into account any variation between the adjusted tax
basis of the property and its fair market value at the time of
the contribution. These allocations must be made using a
reasonable method that is consistent with the purpose of
§ 704(c). Similar rules apply to differences between book value
and tax basis that are created by a revaluation of partnership
assets pursuant to § 1.704-1(b)(2)(iv)(f)(reverse § 704(c)
allocations).
.02 Section 1.704-3(a)(10) provides that an allocation
method (or combination of methods) is not reasonable if the
contribution of property (or event that results in reverse
§ 704(c) allocations) and the corresponding allocation of tax
items with respect to the property are made with a view to
shifting the tax consequences of built-in gain or loss among the
partners in a manner that substantially reduces the present value
of the partners’ aggregate tax liability.
.03 Section 1.704-3(a)(2) provides that § 704(c) allocations
are generally made on a property-by-property basis. Therefore,
built-in gains and losses from different items of contributed or
revalued property generally cannot be aggregated.
.04 Section 1.704-3(e)(3) provides a special rule that
allows securities partnerships (as defined in § 1.704-
3(e)(3)(iii)) to make reverse § 704(c) allocations on an
aggregate basis. Specifically, § 1.704-3(e)(3)(i) provides that,

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for purposes of making reverse § 704(c) allocations, a securities
partnership may aggregate built-in gains and losses from
qualified financial assets (as defined in § 1.704-3(e)(3)(ii))
using any reasonable approach that is consistent with the purpose
of § 704(c). This rule, however, only applies to built-in gains
and losses from revaluations of partnership property; aggregation
of built-in gains and losses from contributed property is only
permitted pursuant to published guidance or by letter ruling.
Section 1.704-3(e)(4)(iii).
.05 Section 1.704-3(e)(3)(iv) and (v) describe two methods
of making § 704(c) allocations on an aggregate basis that are
generally reasonable, the partial netting and the full netting
approaches, respectively.
.06 Since the regulations under § 704(c) were issued, the
Service has received and responded to numerous ruling requests
from securities partnerships organized as part of a “Master-
Feeder Structure” for permission to aggregate contributed
property for purposes of making § 704(c) and reverse § 704(c)
allocations.
.07 In a typical Master-Feeder Structure, two or more Feeder
Funds or one or more Feeder Funds and an investment advisor,
principal underwriter, or manager contribute their assets,
consisting primarily of cash or financial investments, to a
single Master Portfolio in exchange for beneficial interests in
the Master Portfolio. In these cases, each Feeder Fund and the

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Master Portfolio is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940 (1940 Act).
The shares of these Feeder Funds are typically publicly offered
and widely held by individuals, corporations, and institutional
investors. Generally, each Feeder Fund is an open-end mutual
fund, which continuously offers to sell new shares or redeem
existing shares for a price equal to the net asset value of their
proportionate interest in the portfolio.
.08 The IRS and Treasury Department have determined that it
is in the best interest of sound tax administration to reduce the
burden on taxpayers of submitting ruling requests by granting to
certain Master-Feeder Structures automatic permission to
aggregate built-in gains and losses from contributed securities.
SECTION 3. SCOPE
.01 Automatic Permission. This revenue procedure provides
automatic permission to Qualified Master-Feeder Structures
(QMFSs), as described in section 4 of this revenue procedure, to
aggregate built-in gains and losses from contributed securities
for purposes of making § 704(c) and reverse § 704(c) allocations.
The Service will no longer issue letter rulings to QMFSs allowing
this type of aggregation. But see section 6.02 of this revenue
procedure.
.02 Securities Partnerships That Do Not Qualify for
Automatic Permission. The Service recognizes that there may be
securities partnerships not described in section 4 of this

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revenue procedure that should be allowed to aggregate built-in
gains and losses from contributed property where the burden of
making § 704(c) allocations is great and the likelihood of
character and timing distortions is minimal. Therefore, the
Service will continue to consider ruling requests from these
partnerships. Section 5 of this revenue procedure describes the
information to be submitted in such a ruling request.
SECTION 4. AUTOMATIC PERMISSION FOR QUALIFIED MASTER-FEEDER
STRUCTURES TO AGGREGATE CONTRIBUTED PROPERTIES
.01 In general. Permission is hereby granted for any QMFS,
as defined in section 4.02 of this revenue procedure, to
aggregate built-in gains and losses from contributed qualified
financial assets for purposes of making § 704(c) and reverse
§ 704(c) allocations.
.02 Qualified Master-Feeder Structure. A QMFS is created
where two or more investors contribute cash or qualified
financial assets to a Master Portfolio in exchange for beneficial
interests in the Master Portfolio. To qualify as a QMFS, the
following requirements must be met:
(1) Each partner in the Master Portfolio is a Feeder
Fund, or an investment advisor, principal underwriter, or manager
of the Master Portfolio;
(2) Each Feeder Fund contributes only cash and/or a
portfolio of diversified stocks and securities that satisfies the

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25 and 50 percent tests of § 368(a)(2)(F)(ii) in exchange for
beneficial interests in the Master Portfolio;
(3) Each partner in the Master Portfolio that is an
investment advisor, principal underwriter, or manager,
contributes only cash and/or services in exchange for beneficial
interests in the Master Portfolio;
(4) The Master Portfolio is treated as a partnership
for federal tax purposes and qualifies as a securities
partnership under § 1.704-3(e)(3)(iii);
(5) Each Feeder Fund is a publicly offered regulated
investment company, as defined in § 67(c)(2)(B) and § 1.67-
2T(g)(3)(iii);
(6) The Master Portfolio is registered as an investment
company under the 1940 Act.
(7) The Master Portfolio makes § 704(c) and reverse
§ 704(c) allocations under the partial netting approach or the
full netting approach as described in § 1.704-3(e)(3)(iv) or
§ 1.704-3(e)(3)(v), respectively, and;
(8) The contributions to the Master Portfolio and the
corresponding allocations of tax items with respect to the
property contributed to the Master Portfolio are not made with a
view to shifting the tax consequences of built-in gain or loss
among the partners in a manner that substantially reduces the
present value of the partners’ aggregate tax liability.

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SECTION 5. INFORMATION REQUIRED FOR RULING REQUESTS BY SECURITIES
PARTNERSHIPS THAT DO NOT QUALIFY FOR AUTOMATIC PERMISSION
.01 In general. This section describes the information and
representations that a securities partnership not described in
section 4 of this revenue procedure must submit when requesting a
ruling permitting the aggregation of built-in gains and losses
from contributed property for purposes of making § 704(c) and
reverse § 704(c) allocations. Taxpayers should be aware that
additional information may be required. See also section 8 of
Rev. Proc. 2001-1, 2001-1 I.R.B. 1 (or its successor), which
outlines the general requirements concerning the information to
be submitted as part of a ruling request.
.02 Representations. The ruling request must include the
following representations:
(1) The partnership qualifies as a “securities
partnership” as defined in § 1.704-3(e)(3)(iii);
(2) The partnership will make revaluations at least
annually in accordance with § 1.704-3(e)(3)(iii)(B)(2)(ii);
(3) The burden of making § 704(c) allocations
separately from reverse § 704(c) allocations is substantial; and
(4) The partnership’s contributions, revaluations, and
the corresponding allocations of tax items are not made with a
view to shifting the tax consequences of built-in gain or loss
among the partners in a manner that would substantially reduce
the present value of the partners’ aggregate tax liability.

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.03 Information. The following information must be submitted
with the ruling request:
(1) An explanation of the business and tax reasons for
the formation of the partnership;
(2) A detailed description of each partner;
(3) A detailed description of each type of property to
be contributed including its fair market value and adjusted
basis;
(4) The aggregate fair market value and adjusted basis
of the property to be contributed;
(5) The aggregate gross built-in gains and aggregate
gross built-in losses in the property to be contributed;
(6) A representation that the partner is contributing
all of its assets to the partnership or an explanation as to how
the assets to be contributed to the partnership were chosen;
(7) A description of the aggregation method that the
partnership will use;
(8) Copies of the partnership’s organizational
documents, if available; and
(9) Copies of any proxy statements, information
statements, marketing materials, or prospectuses filed,
distributed, or prepared by the partnership or any of its
partners in connection with the formation of, or contribution of
property to, the partnership.
SECTION 6. EFFECTIVE DATE

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.01 In general. Section 4 of this revenue procedure applies
to all contributions of property as part of a QMFS on or after
[INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE INTERNAL REVENUE
BULLETIN]. Section 5 of this revenue procedure applies to all
ruling requests pending in the National Office on[INSERT DATE
THIS DOCUMENT IS PUBLISHED IN THE INTERNAL REVENUE BULLETIN]and
to requests received thereafter.
.02 Transition rule for pending ruling requests. If a QMFS
has filed a request for a ruling allowing it to aggregate
contributed securities for purposes of making § 704(c) and
reverse § 704(c) allocations and that ruling request is pending
in the national office on[INSERT DATE THIS DOCUMENT IS PUBLISHED
IN THE INTERNAL REVENUE BULLETIN], the QMFS may withdraw that
ruling request and receive a refund of its user fee. However,
the national office will process ruling requests pending on
[INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE INTERNAL REVENUE
BULLETIN], unless, prior to the earlier of[INSERT DATE THAT IS
45 DAYS AFTER THE DATE THIS DOCUMENT IS PUBLISHED IN THE INTERNAL
REVENUE BULLETIN]or the issuance of the letter ruling, the QMFS
notifies the national office that it will withdraw its ruling
request.
DRAFTING INFORMATION
The principal author of this revenue procedure is Horace
Howells of the Office of Associate Chief Counsel (Passthroughs
and Special Industries). For further information regarding this

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revenue procedure, contact Horace Howells on (202) 622-3050 (not
a toll-free call).