The IRS rules a web platform for trading limited partnership interests is a "qualified matching service," so partnerships using it are not publicly traded

Plain-English summary

A company built a web-based platform where holders of limited partnership interests can list them for sale and prospective buyers can express interest. This matters because of section 7704: a partnership whose interests are "publicly traded" (traded on an established securities market or readily tradable on a secondary market) gets taxed as a corporation, which usually defeats the whole point of being a partnership. The tax rules provide a safe harbor: transfers through a "qualified matching service" are ignored when deciding whether interests are readily tradable, as long as the service follows specific timing and quoting rules. The platform was designed to fit that safe harbor: it shows only non-firm quotes and non-binding indications of interest (never firm quotes), a seller cannot enter a binding sale before the 15th day, closing cannot happen before the 45th day, listings are pulled after 120 days with a 60-day cooling-off period, and the general partners police the 10 percent annual transfer cap. The IRS ruled that the platform is not an established securities market, that it qualifies as a qualified matching service under Treas. Reg. § 1.7704-1(g), and that partnerships whose interests trade there will not be treated as publicly traded solely because of the platform, provided transfers stay under 10 percent per year and the platform operates as described. Sponsors of non-traded partnerships and secondary-market platforms care because this is the roadmap for providing liquidity without triggering corporate tax.

Ruling snapshot

• Question: Is the company's trading platform a "qualified matching service" under Treas. Reg. § 1.7704-1(g), so that partnerships whose interests are traded on it are not "publicly traded" under § 7704?
• Outcome: approved (platform is not an established securities market; it is a qualified matching service; partnerships are not publicly traded solely by using it, subject to the 10% cap and continued operation as represented)
• Key authorities: IRC § 7704(a), (b); Treas. Reg. § 1.7704-1(b), (c)(1), (g)(1)-(4); §§ 267(b), 707(b)(1) (relatedness cross-references)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202305003 Third Party Communication: None
Release Date: 2/3/2023 Date of Communication: Not Applicable
Index Number: 7704.00-00
Person To Contact:
--------------------------- ------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:

• ---

  
  ---------------------------------------- Refer Reply To:
  ---------------------------- CC:PSI:B03
  --------------------------------- PLR-109433-22
  Date:
  November 2, 2022

LEGEND

Company = ----------------------------------------------------------------------------------------------
-----------------------

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

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

  This letter responds to a letter dated May 5, 2022, and subsequent

correspondence, submitted by Company's authorized representative, requesting rulings
under § 7704 of the Internal Revenue Code (Code) on behalf of Company.

                                                FACTS

   Company is a limited liability company formed under the laws of State.

According to the submission, Company 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.

   Company represents that Platform is not: (i) a national securities exchange

registered under § 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); (ii) a
national securities exchange exempt from registration under § 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.

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 Company and
the subscriber. The subscriber will then be given access to the trading platform via a
password-protected software application or website operated by Company. 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,
Company 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, provided 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, Company 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, Company, 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 interest will be removed
from the Platform and cannot be listed again for at least 60 calendar days.

Company makes the following factual representations:

1) The Platform will consist 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;

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
Company 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 Company 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 10 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).

    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 § 6 of the 1934 Act; (2) A national securities exchange
exempt from registration under § 6 of the 1934 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 1934 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 (non-firm 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)(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.

                                   CONCLUSION

   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 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) 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 Company.

   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 requesting it. Section 6110(k)(3) of

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

  The rulings contained in this letter are 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 requested rulings, it is subject to verification on
examination.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to Company's authorized representatives.

                                  Sincerely,


                                  /S/
                                  Mary Beth Carchia
                                  Senior Technician Reviewer, Branch 3
                                  Office of Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes

cc: --------------------
------------------------------------------------------
--------------------------------------------
---------------------------
---------------------------------