Final regulations define publicly traded status for partnerships.

• Author: Dance, Glenn E.

Recent issued final regulations define when a partnership is "publicly traded" under Sec. 7704, and thus generally taxed as a corporation. (Even if it is taxed as a partnership, the income or loss from a publicly traded partnership's (PTP's) passive activities are subject to special limitations under Sec. 469(k).) The final regulations significantly relax the definition of publicly traded found in the May 1995 proposed regulations, but still define publicly traded more restrictively than does Notice 88-75. The regulations are generally effective for tax years beginning after 1995. However, certain existing partnerships qualify to use the less restrictive provisions of Notice 88-75 for a 10-year transition period.

The structure of the final regulations is basically the same as Notice 88-75 and the proposed regulations. The regulations specifically describe situations in which a partnership is automatically treated as publicly traded and situations in which a partnership is safe-harbored, i.e., not treated as publicly traded. The final regulations clarify that a facts-and-circumstances determination must be made in all other situations to determine if a partnership is publicly traded for these purposes. Closely held partnerships typically should not be concerned about these new rules absent extraordinary circumstances (such as interests in the partnership being offered on an interdealer quotation system).

Automatically Publicly Traded

A partnership is automatically treated as publicly traded if its interests are traded on an "established securities market." As in previous guidance, this term includes a national exchange (e.g., New York Stock Exchange), a foreign exchange (e.g., Tokyo Stock Exchange) and a regional or local exchange. However, Regs. Sec. 1.7704-1(b)(5) also provides that an "interdealer quotation system" that regularly disseminates "firm buy or sell quotations" by identified brokers or dealers represents an established securities market for this purpose.

Safe Harbors

If interests in a partnership are not traded through an interdealer quotation system or other established securities market (as described), the partnership may qualify for one of the following safe harbors. In all other situations, a facts-and-circumstances test must be applied to determine if interests in the partnership are traded on a secondary market or the substantial equivalent thereof. * Private placement safe harbor: As in Notice 88-75 and the proposed...