Rev. Proc. 92-33 is applied to LLCs.

• Author: Hall, Randall
• Position: Limited liability companies

Letter Ruling 9306008 is the first time the IRS has applied the "free transferability of interests" test of Rev. Proc. 92-33 to a limited liability company (LLC). in the ruling, the Service classified the LLC, organized under the laws of an undisclosed foreign country, as a partnership for U.S. tax purposes.

Under Rev. Rul. 88-8, an entity organized under foreign laws is classified for Federal tax purposes on the same basis as a domestic organization, using the characteristics in Regs. Sec. 301.7701-2. To be classified as a partnership, an organization must lack at least two of the following four corporate characteristics: (1) limited liability, (2) continuity of life, (3) centralization of management and (4) free transferability of interests.

An organization has continuity of life if the death, insanity, bankruptcy, retirement, resignation or expulsion of any member will not cause its dissolution. Under the applicable foreign law and the company's governing instrument, the LLC in Letter Ruling 9306008 would dissolve on, among other things, the bankruptcy or pursuit of debtor relief by any member. Accordingly, the IRS held that the company lacked continuity of life.

An organization has free transferability of interests if each member or those members with substantially all of its interests have the power, without the consent of other members, to substitute for themselves a person who is not a member of the organization. Under Rev. Proc. 92-33, the Service will rule that a partnership lacks free transferability of interests if, throughout its life, the partnership agreement expressly restricts the transfer of interests representing more than 20% of all interests in partnership capital, income, gain, loss, deduction and credit.

In Letter Ruling 9306008, under the applicable foreign law, the LLC's governing instrument could condition transfer of interests on the company's consent, or restrict disposition in other ways. The company's governing instrument generally provided for disposition of...