On Nov. 29, 1995, the Service issued final regulations under Sec. 7704 on the classification of certain publicly traded partnerships (PTPs) as corporations. Proposed regulations had been issued on May 2, 1995, and a public hearing had been held on July 31, 1995. The proposed regulations were adopted as final, with some revisions.
The final regulations contain two changes to the definition of a secondary market and the substantial equivalent thereof. The determination of whether interests in a partnership are readily tradable on a secondary market, or the substantial equivalent thereof, must be based on all the facts and circumstances. In addition, the final regulations eliminate the separate definitions of a secondary market and the substantial equivalent thereof. This distinction is relevant in the proposed regulations, since several of the safe harbors apply only to the substantial equivalent of a secondary market. This distinction is eliminated in the safe harbors. As a result, the separate definitions of a secondary market and the substantial equivalent thereof are no longer necessary, and they are combined into one definition in the final regulations (Regs. Sec. 1.7704-1 (c)).
Involvement of the Partnership Is Required
The proposed regulations provided that the transfer of an interest in a partnership is taken into account for purposes of Sec. 7704(b) only if the partnership recognizes the transfer of the interest or if the interest is redeemed by the partnership. The preamble to the proposed regulations explained that this provision is intended to prevent a partnership from becoming publicly traded without its knowledge or participation. Several commentators requested a clarification of this provision, since the definition of a secondary market requires only that the interests be readily tradable, thereby creating some concern that the partnership could be publicly traded--even if there were no actual transfers of an interest in the partnership.
The final regulations address this concern by providing more explicitly that interests in a partnership will not be treated as readily tradable on a secondary market or the substantial equivalent thereof unless (1) the partnership participates in the establishment of the market or the inclusion of its interest thereon or (2) the partnership recognizes transfers made on that market. This rule also applies to an established securities market that consists of an interdealer quotation...