PLR 1236023: Auction platform qualifies as a matching service for partnership interests

Plain-English summary

A broker-dealer and its affiliated bank proposed an electronic auction platform for buying and selling third-party limited partnership interests. The platform would be limited to accredited investors, use nonbinding price quotes, delay binding sales for at least 15 days, and delay closing and payment for at least 45 days. The IRS ruled that the platform was not an established securities market and met the requirements for a qualified matching service under the publicly traded partnership rules. Partnerships using the platform would not be treated as publicly traded solely because their interests were offered or sold through it, subject to the stated conditions.

Ruling snapshot

• Question: Does the proposed auction platform qualify as a qualified matching service, and do trades through it cause partnerships to be publicly traded?
• Outcome: Approved
• Key authorities: IRC § 7704; Treas. Reg. § 1.7704-1(b), (c), (e), (g), and (k)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201236023 Third Party Communication: None
Release Date: 9/7/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.00-00 --------------------, ID No. -----------------
Telephone Number:
---------------------
------------------------------------------------ Refer Reply To:
----------------------------------------- CC:PSI:02
---------------------------------- PLR-152250-11
----------------------------- Date:
April 26, 2012

LEGEND

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

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

State 1 = -------------

State 2 = -------------

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

   This letter responds to a letter dated December 16, 2011, and subsequent

correspondence, submitted by X’s authorized representative requesting rulings under §
7704 of the Internal Revenue Code on behalf of X.

FACTS

     According to the information submitted, X is a State 1 corporation and a

registered broker-dealer. Y is a State 2 corporation, an FDIC-insured member bank,
and an affiliate of X. (This letter shall hereinafter refer to X and Y together as “Y”.) Y
proposes to operate an auction platform (the “Service”) that will facilitate the buying and
selling of third party limited partnership interests. Y intends to structure the Service to
satisfy the qualified matching service requirements set forth in § 1.7704-1(g) of the
PLR-152250-11 2

Procedure and Administration Regulations.

   The Service is not available to the public. In order to access the Service, a

potential seller or buyer of a partnership interest must be an “accredited investor” as
defined in the Securities Act of 1933.

   Y represents that Service is not: 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 SERVICE

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

matching service under § 1.7704-1(g) for transfers of partnership interests. The seller
may list the interest on the Service by having the interest listed on Y’s website. The
seller will list the interest on the Service, and establish an initial nonfirm price quote for
the interest.

    The Service displays only quotes that do not commit any person to buy or sell an

interest at a quoted price (nonfirm price quotes) and does not display quotes at which
any person is committed to buy or sell a partnership interest at the quoted price (firm
quotes). The Service will not permit a potential seller of a partnership interest to enter
into a binding agreement to sell its interest until after the 15th calendar day after the date
(the “Announcement Date”) information regarding an offering of a partnership interest is
made available to potential buyers (the “15-day period”). The Service also will not
permit the closing of any sale of a partnership interest for at least 45 days after the date
information regarding an offering of a partnership interest is made available to potential
buyers (the “45-day period”). No payment of purchase proceeds can occur until the end
of this 45-day period. Y will maintain contemporaneous records at a central location to
document compliance with the requirements of the 15-day and 45-day periods.

    For at least 15 days after the Announcement Date (the “Discovery Period”),

qualified participants in the Service will have the opportunity to view an interest on the
Service on the Service’s website. If the potential seller desires, qualified participants
will also have the opportunity to view the interest’s nonfirm minimum asking price. After
displaying a listed partnership interest for at least 15 days, Y will conduct a “Dutch
auction” for the interest. In no case will the Service permit parties to enter into a binding
agreement until after the 15-day period. Any trades executed with respect to a
partnership interest will not become effective on the books and records of that
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partnership until the end of the 45-day period.

     If no trade is executed for a particular interest within 120 calendar days after its

listing, the Service will cancel the listing. The Service will not permit the seller to re-list
an interest in the same partnership for at least 60 days after this cancellation.

    The Service will monitor the transfers it makes with respect to each partnership

such that the sum of percentage interests in partnership capital or profits transferred
during a taxable year of a partnership (other than private transfers described in
§1.7704-1(e)) does not exceed 10 percent of the total interests in partnership capital or
profits.

RULINGS REQUESTED

  1) The Service is not a established securities market for the purpose of § 7704

and § 1.7704-1(b).

  2) The 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 Service will not be considered to be publicly traded solely by reason of being offered
for purchase or sale and/or sold through the Service. The partnership may rely on this
ruling provided that (a) it is not revoked, (b) that the sum of a partnership’s interests
transferred during a taxable year of the partnership (other than through private transfers
described in § 1.7704-1(e)) does not exceed 10 percent of the total interests in
partnership capital or profits determined as provided in § 1.7704-1(k), and (c) the
Service continues 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.

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

PLR-152250-11 4

§ 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 section 7704(b) and paragraph (b) of this section) 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.

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

follows:

   1) The Service is not an established securities market under § 1.7704-1(b).

  2) The 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 Service will not be considered to be publicly traded solely by reason of being offered
for purchase or sale and/or sold through the Service and may rely on this ruling
provided (a) it is not revoked, (b) 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 of the total interests in
partnership capital or profits determined as provided in § 1.7704-1(k), and (c) the
Service continues 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.

   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 representative.

  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 yours,



                                               Bradford R. Poston
                                               Senior Counsel, Branch 2
                                               Office of the Associate Chief Counsel
                                               (Passthroughs and Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes