PLR 1217005: IRS approves a qualified matching service for partnership interests

Plain-English summary

A broker-dealer proposed two private online services to facilitate transfers of nonpublicly traded limited partnership interests. The IRS ruled that the qualifying service was not an established securities market and met the requirements for a qualified matching service under section 1.7704-1(g). It also ruled that interests traded through the services would not be treated as publicly traded solely because of those transactions, subject to limits and continuing compliance with the described operations. The ruling allowed other qualifying matching services to use the nonqualifying service for certain listings without losing their own status, provided they otherwise met the regulatory requirements.

Ruling snapshot

• Question: Would two private matching services cause partnership interests to be publicly traded or prevent qualified matching service treatment?
• Outcome: Approved
• Key authorities: IRC § 7704; Treas. Reg. §§ 1.7704-1(b), 1.7704-1(c), 1.7704-1(e), 1.7704-1(g), 1.7704-1(k), and 6110.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201217005 Third Party Communication: None
Release Date: 4/27/2012 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
-------------------- --------------------, ID No. -----------------
------------------- Telephone Number:
------------------------------- ---------------------
---------------------------------- Refer Reply To:
CC:PSI:3
PLR-128414-11
Date: December 8, 2012

                                                LEGEND

X = ------------------------------------

Y = ---------------------

State = -------------

Dear ---------------:

  This letter responds to a letter dated July 6, 2011 requesting rulings under

§ 7704 of the Internal Revenue Code on behalf of Y.

                                                 FACTS

    According to the information submitted, X is a State limited liability company and

the sole owner of Y, also a State limited liability company, (together referred to
hereinafter as Y). Y is a registered broker-dealer which proposes to operate two
separate matching services — the Qualifying Service and the NonQualifying Service
(collectively “Services”) — that facilitate the buying and selling of nonpublicly traded
limited partnership interests. Listings on the Qualifying Service are separate from
listings on the NonQualifying Service. The same interests in a partnership will not be
simultaneously listed on both the Qualifying Service and the NonQualifying Service.
The Qualifying Service operates in a manner designed to satisfy the qualified matching
service requirements set forth in § 1.7704-1(g) of the Income Tax Regulations. The
NonQualifying Service fails to satisfy one or more of the requirements in § 1.7704-
1(g)(2).
PLR-128414-11 2

   The Services are not available to the public. In order to access one of the

Services, a potential seller or buyer of a partnership interest must become a member by
submitting a completed member application, be an accredited investor as defined under
Rule 501 of Regulation D of the Securities Act of 1933, and pass a background check.
In addition, Y ensures interests sold are valid limited partnership interests. The
Services provide transfer services through Y's password protected website online and
also offline. Y’s clients will use third party software to connect to Y’s Services in order
to see the limited partnership interests listed by Y.

   Y represents that neither of the Services is: 1) a national securities exchange

registered under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (the
'34 Act); 2) a national securities exchange exempt from registration under section 6 of the
'34 Act because of the limited volume of transactions; 3) a foreign securities
exchange that, under the law of the jurisdiction where it is organized, satisfies regulatory
requirements that are analogous to the regulatory requirements under the '34 Act; (4) a
regional or local exchange; or (5) an interdealer quotation system that regularly
disseminates firm buy or sell quotations by identified brokers or dealers by electronic
means or otherwise.

                DESCRIPTION OF THE QUALIFYING SERVICE

    A partner of a partnership may request that the Qualifying Service serve as a

qualified matching service under § 1.7704-1(g) for transfers of partnership interests.
The seller may list the interest on Y's Qualifying Service by having the interest listed on
Y's website. Y verifies interests are eligible for sale prior to listing them.

   The Qualifying Service displays only quotes that do not commit any person to

buy or sell an interest at a quoted price (nonfirm price quotes) or quotes that express an
indication of interest in an interest without an accompanying price (nonbinding
indications of interest), and does not display quotes at which any person is committed to
buy or sell a partnership interest at the quoted price (firm quotes). No binding contract
may be entered into until after the 15th calendar day after the date information
regarding an offering of a partnership interest is made available to potential buyers (the
“15-day period”). For listings on the Qualifying Service, Y also enters into its records the
45th day after the date of the initial entry, which is the earliest date that the closing for
the sale of interests through the Qualifying Service will occur.

   During the 15-day period, members of Y have the opportunity to view the

interests on the Qualifying Service, together with a nonbinding “asking price,” through
Y's website. Interested buyers can post an Indication of Interest (IOI) in purchasing a
partnership interest with or without specifying a purchase price for the interest. In
addition, during this 15-day period, sellers may view buyers’ non-binding IOI. Following
the 15-day period, if any non-binding IOIs have been received, the highest IOI will
become binding provided that such IOI is equal or greater than the minimum non-firm
PLR-128414-11 3

price initially listed by the seller. If the seller does not receive any non-binding IOIs
during the 15-day period that are equal to or greater than the minimum non-firm price,
then sellers may contact any persons that submitted an IOI to negotiate a price for the
sale of the partnership interest. In no case will parties be permitted to enter into a
binding agreement until after the 15-day period.

    If a buyer and seller are matched, Y will provide the parties with a buyer and

seller agreement in addition to an assignment agreement so that the parties may
complete the transfer of the limited partnership interest.

   If no match is found for a listing on the Qualifying Service, the Qualifying Service

will remove such interest on the 120th day after the listing date of the interest.

   Y will notify the partners of the partnership selling limited partnership interests so

that those partners can ensure that, in the aggregate, no more than 10% of the limited
partnership interests are sold within the selling partnership’s taxable year. This 10%
includes interests sold both through the Qualifying Service and any other venues the
partnership uses to sell limited partnership interests.

              DESCRIPTION OF THE NONQUALIFYING SERVICE

     The NonQualifying Service will execute transactions that do not satisfy the

requirements set forth in § 1.7704-1(g). The NonQualifying Service will not display firm
bids or offers, but may display IOIs to buy and sell positions in partnerships. At no time
will interests be listed on both the Qualifying Service and the NonQualifying Service.

                        OPERATION OF THE SERVICES

    Y will operate both the Qualifying Service and the NonQualifying Service through

the Internet. Interested parties must fill out an application to qualify to view partnership
interests on Y’s website. Clients will connect to Y’s services using third party software
that links them to Y’s Internet database. Y will establish separate transactional paths for
Qualifying and NonQualifying Services to route sellers and buyers to the Service they
want. At no time will Y simultaneously list interests on both the Qualifying Service and
the NonQualifying Service.

    Interests in a partnership may be listed on either Service on the first day of the

partnership’s taxable year (or, if not previously listed on either Service during such
taxable year, on any other date therein), and may be removed from that Service and
listed on the other Service not more than once during the partnership’s taxable year.
PLR-128414-11 4

                            RULINGS REQUESTED

1) The Qualifying Service and the NonQualifying Service are not established securities
markets for the purpose of § 7704 and § 1.7704-1(b).

2) The Qualifying Service meets the requirements to be a qualified matching service
under § 1.7704-1(g).

3) A partnership whose interests are displayed or offered for purchase or sale on the
Services will not be considered to be publicly traded for purposes of § 7704(b) solely by
reason of being offered for purchase or sale and/or sold through the Services.

4) Other matching services which otherwise qualify as qualified matching services will
not be disqualified as qualified matching services solely by listing interests on the
NonQualifying Service as long as all of the requirements for a qualified matching service
continue to be satisfied by and through that qualified matching service.

                             LAW AND ANALYSIS

  Section 7704(a) provides that a publicly traded partnership shall be treated as a

corporation.

   Section 7704(b) provides that for purposes of § 7704, the term “publicly traded

partnership” means any partnership if — (1) interests in such partnership are traded on
an established securities market, or (2) interests in such partnerships are readily
tradable on a secondary market (or the substantial equivalent thereof).

    Section 1.7704-1(b) provides, in part, that for purposes of § 7704(b) and

§ 1.7704-1, an established securities market includes — (1) A national securities
exchange registered under section 6 of the '34 Act; (2) A national securities exchange
exempt from registration under section 6 of the '34 Act because of the limited volume of
transactions; (3) A foreign securities exchange that, under the law of the jurisdiction
where it is organized, satisfies regulatory requirements that are analogous to the
regulatory requirements under the '34 Act; (4) A regional or local exchange; (5) An
interdealer quotation system that regularly disseminates firm buy or sell quotations by
identified brokers or dealers by electronic means or otherwise.

   Section 1.7704-1(c)(1) provides that for purposes of § 7704(b) and § 1.7704-1,

interests in a partnership that are not traded on an established securities market (within
the meaning of § 7704(b) and § 1.7704-1(b)) are readily tradable on a secondary
market or the substantial equivalent thereof if, taking into account all of the facts and
circumstances, the partners are readily able to buy, sell, or exchange their partnership
interests in a manner that is comparable, economically, to trading on an established
securities market.
PLR-128414-11 5

    Section 1.7704-1(c)(2) further clarifies that, for purposes of § 1.7704-1(c)(1),

interests in a partnership are readily tradable on a secondary market or the substantial
equivalent thereof if — (i) Interests in the partnership are regularly quoted by any
person, such as a broker or dealer, making a market in the interests; (ii) Any person
regularly makes available to the public (including customers or subscribers) bid or offer
quotes with respect to interests in the partnership and stands ready to effect buy or sell
transactions at the quoted prices for itself or on behalf of others; (iii) The holder of an
interest in the partnership has a readily available, regular, and ongoing opportunity to
sell or exchange the interest through a public means of obtaining or providing
information of offers to buy, sell, or exchange the interests in the partnership; or (iv)
Prospective buyers and sellers otherwise have the opportunity to buy, sell, or exchange
interests in the partnership in a time frame and with the regularity and continuity that is
comparable to that described in the other provisions of § 1.7704-1(c)(2).

  Section 1.7704-1 allows certain types of transfers of partnership interests to be

disregarded in determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof. However, these safe harbors do
not apply to any transfers of partnership interests on an established securities market.
One of these safe harbors is a qualified matching service under § 1.7704-1(g).

   Section 1.7704-1(g)(1) provides that for purposes of § 7704(b) and § 1.7704-1,

the transfer of an interest in a partnership through a qualified matching service is
disregarded in determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof.

    Section 1.7704-1(g)(2) provides that a matching service is a qualified matching

service only if — (i) The matching service consists of a computerized or printed listing
system that lists customers' bid and/or ask quotes in order to match partners who want to
sell their interests in a partnership (the selling partner) with persons who want to buy
those interests; (ii) Matching occurs either by matching the list of interested buyers with
the list of interested sellers or through a bid and ask process that allows interested
buyers to bid on the listed interest; (iii) The selling partner cannot enter into a binding
agreement to sell the interest until the 15th calendar day after the date information
regarding the offering of the interest for sale is made available to potential buyers and
such time period is evidenced by contemporaneous records ordinarily maintained by the
operator at a central location; (iv) The closing of the sale effected by virtue of the
matching service does not occur prior to the 45th calendar day after the date
information regarding the offering of the interest for sale is made available to potential
buyers and such time period is evidenced by contemporaneous records ordinarily
maintained by the operator at a central location; (v) The matching service displays only
quotes that do not commit any person to buy or sell a partnership interest at the quoted
price (nonfirm price quotes) or quotes that express interest in partnership interest
without an accompanying price (nonbinding indications of interest) and does not display
PLR-128414-11 6

quotes at which any person is committed to buy or sell a partnership interest at the
quoted price (firm quotes); (vi) The selling partner's information is removed from the
matching service within 120 calendar days after the date information regarding the
offering of the interest for sale is made available to potential buyers and, following any
removal (other than removal by reason of a sale of any part of such interest) of the
selling partner's information from the matching service, no offer to sell an interest in the
partnership is entered into the matching service by the selling partner for at least 60
calendar days; and (vii) The sum of the percentage interests in partnership capital or
profits transferred during the taxable year of the partnership (other than in private
transfers described in § 1.7704-1(e)) does not exceed 10 percent of the total interests in
partnership capital or profits.

    Section 1.7704-1(g)(4) provides that a qualified matching service may be

sponsored or operated by a partner of the partnership (either formally or informally), the
underwriter that handled the issuance of the partnership interests, or an unrelated third
party. In addition, a qualified matching service may offer the following features — (i) The
matching service may provide prior pricing information, including information regarding
resales of interests and actual prices paid for interests; a description of the business of
the partnership; financial and reporting information from the partnership's financial
statements and reports; and information regarding material events involving the
partnership, including special distributions, capital distributions, and refinancings or
sales of significant portions of partnership assets; (ii) The operator may assist with the
transfer documentation necessary to transfer the partnership interest; (iii) The operator
may receive and deliver funds for completed transactions; and (iv) The operator's fee
may consist of a flat fee for use of the service, a fee or commission based on completed
transactions, or any combination thereof.

                                 CONCLUSIONS

   Accordingly, based solely on the submitted facts and representations, we rule as

follows:

1) The Qualifying Service and the NonQualifying Service are not established securities
markets under § 1.7704-1(b).

2) The Qualifying Service meets the requirements to be a qualified matching service
under § 1.7704-1(g).

3) A partnership whose interests are displayed or offered for purchase or sale on the
Services will not be considered to be publicly traded solely by reason of being offered
for purchase or sale and/or sold through the Services and may rely on this ruling
provided (a) it is not revoked, (b) with respect to the Qualifying Service, that the sum of
the partnership interests transferred during the taxable year of the partnership (other
than through private transfers described in § 1.7704-1(e)) does not exceed 10 percent
PLR-128414-11 7

of the total interests in partnership capital or profits determined as provided in § 1.7704-
1(k), and (c) the Services continue to operate in a manner consistent with the facts as
represented. Maintenance of information required to permit a partnership to make the
calculations, and the actual making of the calculations, relating to qualification for any
applicable safe harbor in § 1.7704-1 will be the sole responsibility of the partnerships
whose interests are traded and not the responsibility of Y.

4) Although the NonQualifying Service does not meet the requirements to be a qualified
matching service under § 1.7704-1(g), other matching services eligible for participation
in the NonQualifying Service may utilize it to list nonfirm prices and unpriced indications
of interest without disqualifying themselves as a qualified matching service, provided
they otherwise meet all requirements for a qualified matching service under § 1.7704-
1(g). Compliance with the requirements for a qualified matching service will be the sole
responsibility of the matching service.

   Except as specifically ruled upon above, we express or imply no opinion

concerning the federal tax consequences of this transaction under any other provisions
of the Code.

   Pursuant to a power of attorney on file with this office, a copy of this letter is

being sent to X's authorized representatives.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                Sincerely,




                                _____________________________________
                                Richard T. Probst
                                Senior Technician Reviewer, Branch 3
                                Office of Associate Chief Counsel
                                (Passthroughs & Special Industries)

Enclosures (2)
A copy of this letter
A copy for § 6110 purposes