Partnership-interest platform qualifies as a matching service

Plain-English summary

A limited liability company proposed a web platform for matching buyers and sellers of limited partnership interests. The platform would use nonfirm quotes, bar binding agreements for 15 days, delay closing until at least day 45, remove unmatched listings by day 120, and require a 60-day wait before relisting. General partners would monitor the annual 10 percent transfer limit for each partnership. The IRS ruled that the platform was not an established securities market and met the qualified matching service requirements. A partnership would not become publicly traded solely because its interests were offered or sold there, provided the platform followed its representations and the partnership satisfied the transfer-volume limit.

Ruling snapshot

• Question: Does the proposed online market for limited partnership interests qualify as a matching service rather than an established securities market?
• Outcome: approved
• Key authorities: IRC § 7704; Treas. Reg. § 1.7704-1

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

 Number: 202017008                                           Third Party Communication: None
 Release Date: 4/24/2020                                     Date of Communication: Not Applicable
 Index Number: 7704.00-00
                                                             Person To Contact:
 -------------------------------------                       ------------------------, ID No. -----------------
 --------------------------------------                      Telephone Number:
 -----------------------------------                         --------------------
 -------------------------------                             Refer Reply To:
                                                             CC:PSI:B03
                                                             PLR-117194-19
                                                             Date:
                                                             January 17, 2020




LEGEND

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

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



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

This letter responds to a letter dated June 3, 2019, and subsequent correspondence,
submitted by X’s authorized representative requesting certain rulings under § 7704 of
the Internal Revenue Code on behalf of X.

                                                     FACTS

X is a limited liability company formed under the laws of State. According to the
submission, X will provide a venue for the buying and selling of limited partnership
interests through a Platform that is intended to satisfy the requirements under § 1.7704-
1(g) of the Income Tax Regulations to be a qualified matching service.

X represents that the Platform is not: (i) a national securities exchange registered under
Section 6 of the 1934 Act; (ii) a national securities exchange exempt from registration
under Section 6 of the 1934 Act because of the limited volume of transactions; (iii) 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 1934 Act; (iv) a regional or local exchange; or (v) an interdealer quotation
system that regularly disseminates firm buy or sell quotations by identified brokers or
dealers by electronic means or otherwise.

PLR-117194-19                                  2



Description of the Platform

The Platform will be a web-based trading platform. Prospective buyers and sellers with
respect to limited partnership interests will be required to complete an account
application. If the account is approved, the subscriber will be required to execute a
Subscriber Agreement which defines the relationship between X and the subscriber.
The subscriber will then be given access to the trading platform via a password-
protected software application or website operated by X. Subscribers that have been
qualified to view listed interests will have access to a list of interests for which sellers
are seeking bids.

The Platform will operate as follows. A seller of partnership interests will be able to list
those interests for sale on the Platform. Upon initial listing, a non-firm price quote
indicating the price at which the selling partner is willing to sell the partnership interest
may be displayed to potential buyers. The listing will also show information about the
limited partnership interests for sale. In addition to displaying general information, X
may provide, upon request, prior pricing information, prior sale pricing, a description of
the partnership’s business, and financial and reporting information.

During the first 15 calendar days following the initial listing of a limited partnership
interest, potential buyers will be able to view the listing and post an indication that they
are interested in purchasing the interest, either with or without indicating the exact price.
The seller, during this 15-day window, will be able to view buyers’ non-binding
indications of interest but may not enter into a contract to sell. At the end of the 15-day
period, if any non-binding indications of interest have been received, the highest bid that
has been received will become binding, providing that the highest bid is equal to or
greater than the minimum non-firm ask price initially posted by the seller. However, if
the minimum asking price is not met the seller will be able to contact any party that
indicated an interest during the 15-day window to negotiate a price. No sale may be
closed prior to 45 days after the initial listing date.

If a buyer and seller are matched through this process, X will provide a purchase
agreement and an assignment so that the parties may complete the transfer of the
limited partnership interests. If the purchase and sale agreement is finalized by the
parties, X, if requested by the parties, will contact the general partner of the partnership
to obtain its consent to the transfer. If no matching buyer has been found for a listed
interest within 120 days after the initial posting, the posting will be removed from the
Platform and cannot be listed again for at least 60 calendar days.

X makes the following factual representations:
   1) The Platform will consist of computerized or printed listing system that lists
      customers’ bids and/or ask quotes in order to match partners who want to sell

PLR-117194-19                                3

      their interests in a partnership (the selling partner) with persons who want to buy
      those interests;
   2) Matching will occur 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;
   3) The selling partner will not be able to enter into a binding agreement to sell the
      interest until the 15th calendar day after the date information regarding the
      offering of the partnership interest for sale is made available to potential buyers
      and such time period will be evidenced by contemporaneous records ordinarily
      maintained by the taxpayer at a central location;
   4) The closing of the sale effected by virtue of the Platform will not occur prior to the
      45th calendar day after the date information regarding the offering of the
      partnership interest for sale is made available to potential buyers and such time
      period will be evidenced by contemporaneous records ordinarily maintained by X
      at a central location;
   5) The Platform will display only quotes that do not commit any person to buy or sell
      a partnership interest at the quoted price (non-firm price quotes) or quotes that
      express interest in a partnership interest without an accompanying price
      (nonbinding indications of interest) and will not display quotes at which any
      person is committed to buy or sell a partnership interest at the quoted price (firm
      quotes);
   6) The selling partner’s information will be removed from the Platform within 120
      calendar days after the date information regarding the offering of the partnership
      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 Platform, no offer to sell an interest in the
      partnership will be entered into the Platform by the selling partner for at least 60
      days; and
   7) The general partners of each partnership in which interests are sold over the
      Platform will be notified by X of the sale, and the general partners will be
      responsible for ensuring that those transactions executed through the Platform
      do not, when combined with any other transactions through the Platform or other
      venues, add up to greater than ten percent of the total interests in the
      partnership.


                                           LAW

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).

PLR-117194-19                                  4


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(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 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

PLR-117194-19                                 5

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)(3) provides that for purposes of § 1.7704-1(g)(2)(iv), the closing of
a sale occurs no later than the earlier of – (i) The passage of title to the partnership
interest; (ii) The payment of the purchase price (which does not include the delivery of
funds to the operator of the matching service or other closing agent to hold on behalf of
the seller pending closing); or (iii) The date, if any, that the operator of the matching
service (or any person related to the operator within the meaning of § 267(b) or
§ 707(b)(1)) loans, advances, or otherwise arranges for funds to be available to the
seller in anticipation of the payment of the purchase price.

Section 1.7704-1(g)(4) provides, in part, that 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

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) for
purposes of § 7704.

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

       3) A partnership whose interests are posted 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

PLR-117194-19                                  6

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.

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.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent
to X’s authorized representative.

                                                   Sincerely,


                                                   _______________
                                                   Caroline E. Hay
                                                   Senior Counsel, Branch 1
                                                   Office of Associate Chief Counsel
                                                   (Passthroughs & Special Industries)


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