Partnership auction platform qualifies as matching service

Plain-English summary

A company proposed a restricted electronic auction platform for infrequent purchases and sales of third-party partnership interests. The platform would use nonfirm orders, minimum waiting periods before agreement and closing, listing-removal and relisting limits, contemporaneous records, and a 10 percent annual transfer cap. The IRS ruled that the platform was not an established securities market and met the qualified matching service requirements. A partnership would not be treated as publicly traded solely because its interests were offered or sold there, provided the platform and the partnership continued to satisfy the stated conditions.

Ruling snapshot

• Question: Does the auction platform qualify as a matching service that does not by itself make participating partnerships publicly traded?
• Outcome: approved
• Key authorities: IRC § 7704; Treas. Reg. §§ 1.7704-1(b), 1.7704-1(c), 1.7704-1(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201651008 Third Party Communication: None
Release Date: 12/16/2016 Date of Communication: Not Applicable
Index Number: 7704.00-00
Person To Contact:
---------------------------------------------- --------------------, ID No. ------------------
------------------ Telephone Number:
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---------------------------- Refer Reply To:
---------------------------------- CC:PSI:03
PLR-109436-16
Date: July 19, 2016

LEGEND

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

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

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

   This letter responds to a letter dated March 21, 2016, submitted by X’s

authorized representative requesting certain rulings under § 7704 of the Internal
Revenue Code on behalf of X.

FACTS

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

subsidiaries (collectively, “X”) propose to create and operate an auction platform (the
“Platform”) which will provide limited and infrequent opportunities to buy and sell third
party partnership interests. X intends to structure the Platform to satisfy the qualified
matching service requirements set forth in § 1.7704-1(g) of the Procedure and
Administration Regulations.

   X represents that the Platform 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.
PLR-109436-16 2

   Description of the Platform

    The Platform will be an electronic system that conducts auctions via a secure

internet-accessible application. The public will not be able to access the Platform or
view any information regarding auctions and partnership interests available on the
Platform. Instead, access to the Platform will only be available to certain appropriately
qualified investors that are represented by broker-dealers, financial advisors, or similar
representatives, and to certain qualified institutional buyers that are acting on their own
behalf.

    The general partner of a partnership may request that the Platform act as a

qualified matching service under § 1.7704-1(g) for transfers of partnership interests by
holders of such interests desiring to sell. The potential seller will then enter into an
agreement with X to obtain access to the Platform. On the date that a potential seller
requests that its interest be placed on the Platform (the “Announcement Date”),
information regarding the offering will be made available to potential buyers. Following
the Announcement Date, potential buyers will have a period of discovery to review
information about the partnership interest. Potential buyers and sellers will submit
orders to the Platform. The Platform will not display price quotes that commit a person
to buy or sell an interest at a quoted price.

   After a period of no fewer than 15 calendar days following the Announcement

Date, the platform will use an algorithm to pair potential buyers and sellers. The
Platform’s algorithm seeks to define a set of orders that maximizes the total amount of
interest paired. When determining what orders to pair, the algorithm prioritizes buy
orders with a high bidding price and sell orders with a low asking price. A buy order can
only be paired with a sell order that has the same or lower price. Proceeds will be
released to the seller 45 days or more after the Announcement Date.

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

Announcement Date, the Platform will remove the listing. The Platform will not permit
the potential seller to re-list an interest in the same partnership for 60 days after its
removal.

   X will maintain contemporaneous records to document the Announcement Date

and compliance with the 15-day and 45-day periods. The Platform will monitor the
transfers it makes with respect to each partnership such that the sum of percentage
interests in partnership capital or profits transferred on the Platform during a taxable
year of a partnership does not exceed 10 percent of the total interests in partnership
capital or profits.

LAW

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

corporation.
PLR-109436-16 3

   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 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.

    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(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
PLR-109436-16 4

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 a 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
PLR-109436-16 5

   Based solely on the submitted facts and representations, we rule as follows:

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

  2) The Platform 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 Platform will not be considered to be publicly traded solely by reason of being
offered for purchase or sale and/or sold through the Platform 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
Platform 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 X.

   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. The ruling contained in this
letter is based upon information and representations submitted by the taxpayer and
accompanied by a penalty of perjury statement executed by an appropriate party. While
this office has not verified any of the material submitted in support of the ruling request,
it is subject to verification on examination.

                                               Sincerely,

                                               _______________
                                               Holly A. Porter
                                               Chief, Branch 3
                                               Office of Associate Chief Counsel
                                               (Passthroughs & Special Industries)

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