Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules 21475

permitted use level of polymaleic acid

and its sodium salt to control mineral

scale during the production of beet and

cane sugar juice and liquor. FDA is also

announcing its tentative decision to

amend the specifications for the

additives and to revise the analytical

method for measuring those

specifications. This action is in response

to a petition filed by Ciba-Geigy, Inc.

DATES: Written comments by July 17,

1995.

ADDRESSES: Submit written comments

to the Dockets Management Branch

(HFA–305), Food and Drug

Administration, rm. 1–23, 12420

Parklawn Dr., Rockville, MD 20857.

FOR FURTHER INFORMATION CONTACT:

Vincent E. Zenger, Center for Food

Safety and Applied Nutrition (HFS–

206), Food and Drug Administration,

200 C St. SW., Washington, DC 20204,

202–418–3105.

SUPPLEMENTARY INFORMATION: In a notice

published in the Federal Register of

November 28, 1990 (55 FR 49426), FDA

announced that a food additive petition

(FAP 0A4226) had been filed by CibaGeigy Inc., proposing that § 173.45

Polymaleic acid and its sodium salt (21

CFR 173.45) be amended to provide for

the safe use of polymaleic acid and its

sodium salt to control mineral scale

during the production of beet and cane

sugar juice and liquor at higher levels

than the maximum currently permitted

under the regulation.

The petition also contained

information on a new manufacturing

process for polymaleic acid and its

sodium salt which results in a lower

weight-average molecular weight for the

additives and number-average

molecular weight than those currently

permitted. The molecular weight

determinations were based on an

improved analytical method.

FDA has evaluated data in the

petition (FAP 0A4226) and other

relevant material. The agency concludes

that the proposed increase in the food

additive use level is safe, and that the

regulations should be amended as set

forth below. The agency tentatively

concludes that the molecular weight

specifications for the additives should

be amended to allow for the use of

products manufactured by the new

technique, and that the molecular

weight determinations of the additives

are to be based on the improved

analytical method entitled

‘‘Determinations of Molecular Weight

Distribution of Poly(Maleic)Acid’’

submitted by Ciba-Geigy, Inc., and dated

March 17, 1992, which is incorporated

by reference in amended § 173.45(a).

This replaces the previous method with

the same title but different date that was

incorporated by reference in the current

§ 173.45(a).

In the filing notice for the petition, the

agency gave notice of the intent to

increase the permitted use levels of

polymaleic acid and its sodium salt but

did not anticipate amending the allowed

molecular weight range for the additives

or the method for determining the

molecular weight. The amended

specifications are not intended to place

new restrictions on the currently

approved products, but to allow use of

products manufactured by a new

method and to take into account an

improved method of molecular weight

determination. Therefore, because the

agency did not give notice of this

change, it is publishing this document

as a tentative final rule to allow

interested parties an opportunity to

comment on the amended product

specifications.

In accordance with § 171.1(h) (21 CFR

171.1(h)), the petition and the

documents that FDA considered and

relied upon in reaching its decision to

approve the petition are available for

inspection at the Center for Food Safety

and Applied Nutrition by appointment

with the information contact person

listed above. As provided in 21 CFR

171.1(h), the agency will delete from the

documents any materials that are not

available for public disclosure before

making the documents available for

inspection.

The agency has carefully considered

the potential environmental effects of

this action. FDA has concluded that the

action will not have a significant impact

on the human environment, and that an

environmental impact statement is not

required. The agency’s finding of no

significant impact and the evidence

supporting that finding, contained in an

environmental assessment, may be seen

in the Dockets Management Branch

(address above) between 9 a.m. and 4

p.m., Monday through Friday.

List of Subjects in 21 CFR Part 173

Food additives, Incorporation by

reference.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs and redelegated to

the Director, Center for Food Safety and

Applied Nutrition, it is proposed that 21

CFR part 173 is amended as follows:

PART 173—SECONDARY DIRECT

FOOD ADDITIVES PERMITTED IN

FOOD FOR HUMAN CONSUMPTION

1. The authority citation for 21 CFR

part 173 continues to read as follows:

Authority: Secs. 201, 402, 409 of the

Federal Food, Drug, and Cosmetic Act (21

U.S.C. 321, 342, 348).

2. Section 173.45 is amended by

revising paragraphs (a) and (c) to read as

follows:

§ 173.45 Polymaleic acid and its sodium

salt.

* * * * *

(a) The additives have a weightaverage molecular weight in the range of

540 to 850 and a number-average

molecular weight in the range of 520 to

650, calculated as the acid. Molecular

weights shall be determined by a

method entitled ‘‘Determination of

Molecular Weight Distribution of

Poly(Maleic) Acid’’, dated March 17,

1992, produced by Ciba-Geigy, Seven

Skyline Rd., Hathorne, NY 10532–2188,

which is incorporated by reference.

Copies are available from the Division of

Product Policy, Center for Food Safety

and Applied Nutrition (HFS–205), Food

and Drug Administration, 200 C St. SW.,

Washington, DC 20204, or available for

inspection at the Office of the Federal

Register, 800 North Capitol St. NW.,

suite 700, Washington, DC.

* * * * *

(c) The additives are to be used so that

the amount of either or both additives

does not exceed 4 parts per million

(calculated as the acid) by weight of the

beet or cane sugar juice or liquor

process stream.

Dated: April 19, 1995.

Fred R. Shank,

Director, Center for Food Safety and Applied

Nutrition.

[FR Doc. 95–10646 Filed 5–1–95; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS–013–88]

RIN 1545–AL57

Certain Publicly Traded Partnerships

Treated as Corporations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

classification of certain publicly traded

partnerships as corporations. These

proposed regulations would provide

guidance needed by taxpayers to

comply with changes to the law made
21476 Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules

by the Omnibus Budget Reconciliation

Act of 1987. The regulations would

affect the classification of certain

partnerships for federal tax purposes.

DATES: Written comments must be

received by July 31, 1995. Requests to

speak (with outlines of oral comments)

at a public hearing scheduled for July

31, 1995, at 10 a.m. must be received by

July 31, 1995.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (PS–013–88), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:T:R (PS–013–88),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC. The public hearing has

been scheduled to be held in the

Auditorium, Internal Revenue Building,

1111 Constitution Avenue NW,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Christopher

T. Kelley, (202) 622–3080; concerning

submissions and the hearing, Michael

Slaughter, (202) 622–7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document proposes to add

§ 1.7704–1 to the Income Tax

Regulations (26 CFR part 1) relating to

the definition of a publicly traded

partnership under section 7704(b) of the

Internal Revenue Code (Code).

Background

Section 7704 was added to the Code

by section 10211(a) of the Omnibus

Budget Reconciliation Act of 1987 (Pub.

L. 100–203), as amended by sections

2004(f)(1)–(5) of the Technical and

Miscellaneous Revenue Act of 1988

(Pub. L. 100–647). Section 7704(a)

provides that a publicly traded

partnership is treated as a corporation

for federal tax purposes unless the

partnership meets the 90 percent

qualifying income test of section 7704(c)

or qualifies as an existing partnership.

The term existing partnership is defined

in § 1.7704–2. Under section 7704(b), a

partnership is a publicly traded

partnership if interests in the

partnership are traded on an established

securities market or are readily tradable

on a secondary market or the substantial

equivalent thereof. Section 7704 applies

to all domestic and foreign entities

treated as partnerships under section

7701, including limited liability

companies and other entities treated as

partnerships for federal tax purposes.

No regulations have been issued

regarding the circumstances under

which interests in a partnership are

treated as publicly traded under section

7704(b). Notice 8875, 1988–2 C.B. 386,

however, provides guidance on the

definition of a publicly traded

partnership. Notice 88–75 provides that

interests in a partnership are not treated

as readily tradable on a secondary

market or the substantial equivalent

thereof for purposes of section

7704(b)(2) if the interests are: (1) issued

in certain private placements; (2)

transferred pursuant to transfers not

involving trading; (3) traded in amounts

that meet the requirements of a 5

percent or 2 percent safe harbor; (4)

transferred through a matching service

that meets certain requirements; or (5)

transferred pursuant to a qualifying

redemption or repurchase agreement.

Notice 88–75 does not address when

partnership interests are treated as

traded on an established securities

market for purposes of section

7704(b)(1).

Explanation of Provisions

Definitions

The proposed regulations define the

terms established securities market,

secondary market, and the substantial

equivalent of a secondary market for

purposes of section 7704(b). These

definitions reflect congressional intent

as articulated in the legislative history

to section 7704. See H.R. Conf. Rep. No.

495, 100th Cong., 1st Sess. 947–50

(1987) (Conference Report).

Under the proposed regulations, an

established securities market for

purposes of section 7704(b)(1) includes:

(1) A national securities exchange

registered under the Securities

Exchange Act of 1934; (2) a national

securities exchange exempt from

registration because of the limited

volume of transactions; (3) a foreign

securities exchange; (4) a regional or

local exchange; and (5) an interdealer

quotation system that regularly

disseminates firm buy or sell quotations

by identified brokers or dealers by

electronic means or otherwise.

Under the proposed regulations,

interests in a partnership that are not

traded on an established securities

market are readily tradable on a

secondary market or the substantial

equivalent of a secondary market for

purposes of section 7704(b)(2) if 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. The

proposed regulations further provide

that interests in a partnership are

readily tradable on a secondary market

if: (1) Interests in the partnership are

regularly quoted by any person, such as

a broker or dealer, making a market in

the interest, or (2) 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.

This provision clarifies that a secondary

market exists whenever interests in the

partnership are subject to firm-quote

trading.

The proposed regulations also provide

that, if there is no secondary market,

interests in a partnership are readily

tradable on the substantial equivalent of

a secondary market if: (1) 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 interests,

or (2) prospective buyers and sellers

have the opportunity to buy, sell, or

exchange interests in a time frame and

with the regularity and continuity that

the existence of a secondary market

would provide.

The proposed regulations define an

interest in a partnership for purposes of

section 7704(b) as any interest in the

capital or profits of the partnership

(including any right to partnership

distributions) and any financial

instrument or contract the value of

which is determined in whole or in part

by reference to the partnership

(including the amount of partnership

distributions, the value of partnership

assets, or the results of partnership

operations). This definition is intended

to prevent the avoidance of section

7704(b) through the creation and

transfer of interests other than

traditional partnership interests, such as

the creation and transfer of derivative

partnership interests. The proposed

regulations also provide several

exceptions to the definition of an

interest in the partnership. Under these

exceptions, an interest in the

partnership does not include nonconvertible debt or an interest in a

partnership or a corporation that holds

an interest in a lower-tier partnership.

For example, an interest in a regulated

investment company that holds an

interest in a partnership is not treated as

an interest in the partnership.

The proposed regulations also define

a transfer of an interest in a partnership

to include a transfer in any form,

including a redemption by the

partnership or the entering into of a
Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules 21477

financial instrument or contract

described above. This provision applies

only for purposes of determining when

a transaction is treated as a transfer for

purposes of section 7704(b) and does

not apply in determining any other

federal tax consequences of a

transaction, including whether the

transaction is a sale or exchange or

whether the transferee is a partner of the

partnership for any purpose other than

section 7704(b).

The proposed regulations also provide

that a transfer of an interest in a

partnership is taken into account for

purposes of section 7704(b) only if: (1)

The partnership redeems the interest;

(2) the transferee is admitted as a

partner; or (3) the partnership otherwise

recognizes any rights of the transferee,

such as a right of the transferee to

partnership distributions (directly or

indirectly) or the right of the transferee

to acquire an interest in the capital or

profits of the partnership. For example,

if a partner enters into a financial

contract providing for a payment by the

partner in an amount calculated by

reference to the amount of partnership

distributions, the financial contract is

treated as an interest in the partnership

and the entering into the contract is

treated as a transfer of an interest for

purposes of section 7704. The transfer is

not taken into account, however, unless

the partnership admits the transferee as

a partner or otherwise recognizes the

rights of the transferee to partnership

distributions by, for example, making

distributions directly to the transferee or

to a third party on behalf of the

transferee. This provision is intended to

limit transfers for purposes of section

7704(b) to transfers that the partnership

is aware of and has recognized, thereby

preventing a partnership from becoming

publicly traded without the knowledge

or participation of the partnership.

Transfers That Do Not Create Public

Trading

As discussed above, guidance issued

in Notice 88–75 provided certain

exclusions for purposes of section

7704(b)(2). The proposed regulations

generally adopt these exclusions with

certain modifications. The

modifications are necessary to more

appropriately implement congressional

intent and to ensure that any

partnership in which interests are

subject to firm-quote trading is treated

as a publicly traded partnership under

section 7704. As in Notice 88–75, none

of these exclusions apply in

determining whether interests in a

partnership are traded on an established

securities market.

The proposed regulations adopt the

exclusion in section II.A of Notice 88–

75 for partnership interests issued in

certain private placements with four

modifications. First, the proposed

regulations provide that the exclusion

applies only for purposes of

determining whether interests in a

partnership are readily tradable on the

substantial equivalent of a secondary

market. Unlike Notice 88–75, this

exclusion does not apply for purposes of

determining whether the interests are

readily tradable on a secondary market.

As a result, a private placement

partnership is treated as a publicly

traded partnership if the interests in the

partnership are readily tradable on a

secondary market. This modification

was made to ensure that, consistent

with the purpose of section 7704(b), all

partnerships, including private

placement partnerships, are treated as

publicly traded if interests in the

partnership are subject to firm-quote

trading.

Secondly, the proposed regulations

provide that the private placement

exclusion does not apply if the

partnership has more than 50 partners at

any time during its taxable year and 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 paragraph (d) of

this section) exceeds 10 percent of the

total interests in partnership capital or

profits. This modification was made

because transfers in excess of 10 percent

indicate the existence of the type of

market that section 7704(b) intended to

treat as public trading. This

modification does not apply to

partnerships with 50 or fewer partners

because such partnerships are unlikely

to develop any public trading.

Thirdly, as in Notice 88–75, the

private placement exclusion applies

only if the partnership does not have

more than 500 partners or the initial

offering price of each unit of partnership

interest is at least $20,000. The

proposed regulations clarify that a

partnership satisfies the 500 partner

requirement only if the partnership does

not have more than 500 partners at any

time during the taxable year of the

partnership. Finally, the proposed

regulations provide that the indirect

ownership rule for determining the

number of partners in a partnership

does not apply to persons owning

interests in a partnership through a

regulated investment company (as

defined in section 851) or a real estate

investment trust (as defined in section

865).

The proposed regulations adopt, with

two additions, the exclusion contained

in section II.B of Notice 88–75 for

transfers not involving trading (private

transfers). Under the proposed

regulations, private transfers include all

of the transfers described in section II.B

of Notice 88–75 plus: (1) distributions

from an individual retirement account,

and (2) transfers by one or more partners

of interests representing more than 50

percent of the total interests in

partnership capital and profits in one

transaction or a series of related

transactions. The proposed regulations

also provide that a block transfer means

the transfer by a partner in one or more

transactions during any 30 calendar day

period of partnership interests

representing in the aggregate more than

2 percent of the total interests in

partnership capital or profits, rather

than 5 percent as in Notice 88–75.

In lieu of the 5 percent and 2 percent

safe harbors contained in section II.C of

Notice 88–75, the proposed regulations

provide a more limited de minimis

trading exclusion. The percentage safe

harbors in Notice 88–75 applied in

determining whether interests in a

partnership were readily tradable on a

secondary market or the substantial

equivalent thereof. The Conference

Report, however, gives no indication

that a de minimis level of trading on a

secondary market should be permitted,

and the IRS and Treasury do not believe

that a broad-based de minimis rule that

allows firm-quote trading on a

secondary market is appropriate.

Furthermore, the percentage safe

harbors contained in Notice 88–75

apparently have encouraged the type of

firm-quote trading that Congress

intended to prohibit by enacting section

7704.

Accordingly, the proposed regulations

provide that interests in a partnership

are not readily tradable on a substantial

equivalent of a secondary market if the

sum of the percentage interests in

partnership capital or profits transferred

during the taxable year of the

partnership does not exceed 2 percent of

the total interests in partnership capital

or profits. All transfers of an interest in

a partnership (including redemptions)

are taken into account for purposes of

this 2 percent rule, except for: (1)

Private transfers; (2) transfers pursuant

to redemption and repurchase

agreements meeting certain

requirements as specified in the

regulations; and (3) transfers pursuant to

a qualified matching service, discussed

below. The 2 percent rule differs from

the percentage safe harbors in Notice

88–75 because the 2 percent rule applies

only for purposes of determining
21478 Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules

whether interests in a partnership are

readily tradable on the substantial

equivalent of a secondary market. As a

result, the 2 percent rule does not apply

in determining whether interests are

readily tradable on a secondary market

and thus does not apply to partnerships

with interests subject to firm quote

trading.

The proposed regulations contain a

qualified matching service exclusion

similar to the matching service

exclusion contained in section II.D of

Notice 88–75. The proposed regulations,

however, contain certain modifications

designed to prevent a qualified

matching service from operating as a

secondary market or the substantial

equivalent thereof. For example, the

matching service can display only

nonfirm quotes or nonbinding

indications of interest and cannot

provide firm quotes or two-sided quotes.

The selling partner cannot enter into a

binding agreement to sell an interest

until the 15th calendar day after the

date information regarding the offering

of an interest for sale is made available

to potential buyers, and closing of the

sale cannot occur prior to the 30th

calendar day after the first day that the

seller can enter into a binding

agreement to sell the interest. The

matching service must obtain written

representations from any subscribers

that the subscribers and their customers

will not act as market makers for any

partnership interest listed on the

matching service and that the

subscriber, acting on its own account or

on behalf of the same investor, will not

enter offers for interests in the same

partnership more than once in any 15

calendar day period.

As in Notice 88–75, this matching

service exclusion does not apply if more

than 10 percent of the total percentage

interests in partnership capital or profits

is transferred during the taxable year.

For purposes of this 10 percent

limitation, all transfers (other than

private transfers) are considered,

including transfers that do not take

place on the matching service and

transfers that are eligible for another

exclusion under the proposed

regulations. For example, if 1 percent of

the total partnership interests in capital

or profits is transferred on a

nonqualified matching service, the

amount of interests that can be

transferred pursuant to a qualified

matching service and still qualify for the

matching service exclusion is reduced

to 9 percent.

The proposed regulations clarify that

certain activities will not prevent a

matching service from qualifying for the

exclusion. Under the proposed

regulations, a qualifying matching

service may provide: (1) Prior pricing

information, including information

regarding resales of interests and actual

prices paid for interests; (2) a

description of the business of the

partnership; and (3) financial and

reporting information from the

partnership’s financial statements and

reports. The operator of the matching

service may also assist with the transfer

documentation necessary to transfer the

partnership interest. The operator may

receive and deliver funds for completed

transactions, and its fee may be a flat fee

for use of the service, a fee based on

completed transactions, or any

combination thereof. While these

activities may allow the operator of the

matching service to assist in the

completion of the transfer, the activities

should not, by themselves, result in the

type of activity that would cause the

matching service to be a secondary

market or the substantial equivalent

thereof under section 7704(b)(2).

The proposed regulations adopt the

exclusions for redemption and

repurchase agreements contained in

section II.E of Notice 88–75 with no

significant modifications.

The IRS and Treasury request

comments on the proposed regulations.

In particular, comments are requested

concerning: (1) Whether transitional

relief is necessary for partnerships that

qualified for an exclusion contained in

Notice 88–75, but do not qualify for an

exclusion contained in the proposed

regulations and, if so, what type of relief

would be appropriate; (2) whether

further modifications to the private

placement exclusion are necessary in

light of developments in the securities

laws since the issuance of Notice 88–75,

including the issuance of Rule 144A (17

CFR 230.144A) and Regulation S (17

CFR 230.901); and (3) which members

in a limited liability company or other

entity that is treated as a partnership for

federal tax purposes should be treated

as general partners for purposes of

determining the percentage interests in

partnership capital or profits transferred

during the taxable year of the

partnership under paragraph (j)(1) of the

proposed regulations.

Proposed Effective Date

These regulations are proposed to

apply for taxable years of a partnership

beginning on or after the date the final

regulations are published in the Federal

Register. The provisions of Notice 88–

75 regarding the definition of readily

tradable on a secondary market or the

substantial equivalent thereof for

purposes of section 7704(b) will

continue to apply until these regulations

are effective.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for July 31, 1995, at 10 a.m. in the

Auditorium, Internal Revenue Building,

1111 Constitution Avenue NW,

Washington, DC. Because of access

restrictions, visitors will not be

admitted beyond the Internal Revenue

Building lobby more than 15 minutes

before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments and an outline of the

topics to be discussed (a signed original

and eight (8) copies) by July 31, 1995.

A period of 10 minutes will be

allotted for each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information: The principal author

of these regulations is Christopher T. Kelley,

Office of Chief Counsel (Passthroughs and

Special Industries). However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.
Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules 21479

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *.

Par. 2. Section 1.7704–1 is added to

read as follows:

§ 1.7704–1 Publicly traded partnerships.

(a) In general—(1) Publicly traded

partnership. A domestic or foreign

partnership is a publicly traded

partnership for purposes of section

7704(b) and this section if—

(i) Interests in the partnership are

traded on an established securities

market; or

(ii) Interests in the partnership are

readily tradable on a secondary market

or the substantial equivalent thereof.

(2) Partnership interest—(i) In

general. For purposes of section 7704(b)

and this section, an interest in a

partnership includes—

(A) Any interest in the capital or

profits of the partnership (including the

right to partnership distributions); and

(B) Any financial instrument or

contract the value of which is

determined in whole or in part by

reference to the partnership (including

the amount of partnership distributions,

the value of partnership assets, or the

results of partnership operations).

(ii) Exception for non-convertible

debt. For purposes of section 7704(b)

and this section, an interest in a

partnership does not include any

financial instrument or contract that—

(A) Is treated as debt for federal tax

purposes; and

(B) Is not convertible into or

exchangeable for an interest in the

capital or profits of the partnership and

does not provide for a payment of

equivalent value.

(iii) Exception for tiered entities. For

purposes of section 7704(b) and this

section, an interest in a partnership or

a corporation (including a regulated

investment company as defined in

section 851 or a real estate investment

trust as defined in section 856) that

holds an interest in a partnership

(lower-tier partnership) is not

considered an interest in the lower-tier

partnership.

(3) Definition of transfer. For purposes

of section 7704(b) and this section, a

transfer of an interest in a partnership

means a transfer in any form, including

a redemption by the partnership or the

entering into of a financial instrument

or contract described in paragraph

(a)(2)(i)(B) of this section.

(4) Transfers taken into account. For

purposes of section 7704(b) and this

section, a transfer of an interest in a

partnership is taken into account only

if—

(i) The transferee is admitted as a

partner;

(ii) The partnership otherwise

recognizes any rights of the transferee,

such as a right of the transferee to

partnership distributions (directly or

indirectly) or the right of the transferee

to acquire an interest in the capital or

profits of the partnership; or

(iii) The partnership redeems or

repurchases the interest.

(b) Established securities market. For

purposes of section 7704(b) and this

section, an established securities market

includes—

(1) A national securities exchange

registered under section 6 of the

Securities Exchange Act of 1934 (15

U.S.C. 78f);

(2) A national securities exchange

exempt from registration under section

6 of the Securities Exchange Act of 1934

(15 U.S.C. 78f) 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

Securities Exchange Act of 1934

described in paragraph (b)(1) or (2) of

this section (such as the London

International Financial Futures

Exchange; the Marche a Terme

International de France; the

International Stock Exchange of the

United Kingdom and the Republic of

Ireland, Limited; the Frankfurt Stock

Exchange; and the Tokyo Stock

Exchange);

(4) A regional or local exchange; and

(5) An interdealer quotation system

that regularly disseminates firm buy or

sell quotations by identified brokers or

dealers by electronic means or

otherwise.

(c) Readily tradable on a secondary

market or the substantial equivalent

thereof—(1) In general. For purposes of

section 7704(b) and this section,

interests in a partnership that are not

traded on an established securities

market (within the meaning of section

7704(b) and paragraph (b) of this

section) are readily tradable on a

secondary market or the substantial

equivalent thereof if 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.

(2) Secondary market. For purposes of

paragraph (c)(1) of this section, interests

in a partnership are readily tradable on

a secondary market if-(i) Interests in the

partnership are regularly quoted by any

person, such as a broker or dealer,

making a market in the interests; or

(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.

(3) Substantial equivalent of a

secondary market. For purposes of

paragraph (c)(1) of this section, interests

that are not readily tradable on a

secondary market are readily tradable

on the substantial equivalent of a

secondary market if—

(i) 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 interests in the partnership; or

(ii) Prospective buyers and sellers

have the opportunity to buy, sell, or

exchange interests in the partnership in

a time frame and with the regularity and

continuity that the existence of a

secondary market would provide.

(d) Transfers not involving trading—

(1) In general. For purposes of section

7704(b) and this section, the following

transfers (private transfers) are

disregarded in determining whether

interests in a partnership are readily

tradable on a secondary market or the

substantial equivalent thereof—

(i) Transfers in which the basis of the

partnership interest in the hands of the

transferee is determined, in whole or in

part, by reference to its basis in the

hands of the transferor or is determined

under section 732;

(ii) Transfers at death;

(iii) Transfers between members of a

family (as defined in section 267(c)(4));

(iv) Transfers involving the issuance

of interests by (or on behalf of) the

partnership in exchange for cash,

property, or services;

(v) Transfers involving distributions

from a retirement plan qualified under

section 401(a) or an individual

retirement account;

(vi) Block transfers (as defined in

paragraph (d)(2) of this section);

(vii) Transfers pursuant to a right

under a redemption or repurchase

agreement (as defined in paragraph

(d)(3) of this section) that is exercisable

only—
21480 Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules

(A) Upon the death, disability, or

mental incompetence of the partner; or

(B) Upon the retirement or

termination of the performance of

services of an individual who actively

participated in the management of, or

performed services on a full-time basis

for, the partnership;

(viii) Transfers pursuant to a closed

end redemption plan (as defined in

paragraph (d)(4) of this section); and

(ix) Transfers by one or more partners

of interests representing more than 50

percent of the total interests in

partnership capital and profits in one

transaction or a series of related

transactions.

(2) Block transfers. For purposes of

paragraph (d)(1)(vi) of this section, a

block transfer means the transfer by a

partner in one or more transactions

during any 30 calendar day period of

partnership interests representing in the

aggregate more than 2 percent of the

total interests in partnership capital or

profits.

(3) Redemption or repurchase

agreement. For purposes of section

7704(b) and this section, a redemption

or repurchase agreement means a plan

of redemption or repurchase maintained

by a partnership whereby the partners

may tender their partnership interests

for purchase by the partnership, another

partner, or a person related to another

partner (within the meaning of section

267(b) or section 707(b)(1)).

(4) Closed end redemption plan. For

purposes of paragraph (d)(1)(viii) of this

section, a redemption or repurchase

agreement (as defined in paragraph

(d)(3) of this section) is a closed end

redemption plan if—

(i) The partnership does not issue any

interest after the initial offering (other

than the issuance of additional interests

prior to August 5, 1988); and

(ii) No partner or person related to

any partner (within the meaning of

section 267(b) or 707(b)(1)) provides

contemporaneous opportunities to

acquire interests in similar or related

partnerships which represent

substantially identical investments.

(e) Redemption and repurchase

agreements. For purposes of section

7704(b) and this section, the transfer of

an interest in a partnership pursuant to

a redemption or repurchase agreement

(as defined in paragraph (d)(3) of this

section) that is not described in

paragraph (d)(1) (vii) or (viii) of this

section is disregarded in determining

whether interests in the partnership are

readily tradable on a secondary market

or the substantial equivalent thereof

only if—

(1) The redemption or repurchase

agreement requires receipt of written

notification from the transferor partner

by the partnership or a partner (or an

agent thereof) at least 60 calendar days

before the redemption or repurchase

date of such partner’s intention to

exercise the redemption or repurchase

right;

(2) Either—

(i) The redemption or repurchase

agreement requires that the redemption

or repurchase price not be established

until at least 60 calendar days after

receipt of such notification by the

partnership or the partner; or

(ii) The redemption or repurchase

price is established not more than 4

times during the partnership’s taxable

year; and

(3) 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 paragraph (d) of

this section) does not exceed 10 percent

of the total interests in partnership

capital or profits.

(f) Qualified matching services—(1) In

general. For purposes of section 7704(b)

and this section, 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.

(2) Requirements. 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

prices 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 established by

contemporaneous records 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 30th calendar day

after the first day that the selling partner

can enter into a binding agreement to

sell the interest (as specified in

paragraph (f)(2)(iii) of this section) and

such time period is established by

contemporaneous records 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 (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 (firm quotes) or

two-sided quotes;

(vi) The operator of the matching

service (or any person related to the

operator within the meaning of section

267(b) or section 707(b)(1)) does not

quote prices at which the operator (or a

related person) stands ready to buy or

sell partnership interests for itself or on

behalf of others, make such quotes

available to the public (or customers or

subscribers), or buy or sell interests for

itself or on behalf of others;

(vii) The matching service obtains

written representations from any

subscribers to the service that—

(A) The subscriber and its customers

will not create or facilitate a secondary

market (within the meaning of

paragraph (c)(2) of this section) for any

partnership interest listed on the

matching service; and

(B) The subscriber, acting for its own

account or on behalf of the same

investor, will not enter offers for

interests in the same partnership more

than once in any 15 calendar day

period;

(viii) 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 interest in the

partnership is entered into the matching

service by the selling partner for at least

60 calendar days; and

(ix) 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 paragraph (d) of

this section) does not exceed 10 percent

of the total interests in partnership

capital or profits.

(3) Closing. For purposes of paragraph

(f)(2)(iv) of this section, 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; or

(iii) The date, if any, that the operator

of the matching service (or any person
Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules 21481

related to the operator within the

meaning of section 267(b) or section

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.

(4) Optional features. 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

based on completed transactions, or any

combination thereof.

(g) Private placements—(1) In general.

For purposes of section 7704(b) and this

section, interests in a partnership are

not readily tradable on the substantial

equivalent of a secondary market if—

(i) All interests in the partnership

were issued in a transaction (or

transactions) that was not required to be

registered under the Securities Act of

1933;

(ii) Either—

(A) The partnership does not have

more than 500 partners at any time

during the taxable year of the

partnership; or

(B) The initial offering price of each

unit of partnership interest is at least

$20,000 and the partnership agreement

provides that no unit of partnership

interest may be subdivided for resale

into units smaller than a unit the initial

offering price of which would have been

at least $20,000; and

(iii) If the partnership has more than

50 partners at any time during the

taxable year of the partnership, 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 paragraph (d) of

this section) does not exceed 10 percent

of the total interests in partnership

capital or profits.

(2) Number of partners. For purposes

of determining the number of partners

under paragraph (g)(1) of this section—

(i) Each person indirectly owning an

interest in the partnership through

another partnership, a grantor trust, or

an S corporation (but not through a

regulated investment company, as

defined in section 851, or a real estate

investment trust, as defined in section

865) is treated as a partner; and

(ii) Partnerships are aggregated when

they jointly operate one or more

businesses, or the operations of the

partnerships are interrelated, and a

principal purpose for the use of

multiple partnerships is to permit any of

the partnerships to qualify for the rule

provided under this paragraph (g).

(h) Lack of actual trading—(1)

General rule. For purposes of section

7704(b) and this section, interests in a

partnership are not readily tradable on

the substantial equivalent of a

secondary market if the sum of the

percentage interests in partnership

capital or profits transferred during the

taxable year of the partnership (other

than in transfers described in paragraph

(d), (e), or (f) of this section) does not

exceed 2 percent of the total interests in

partnership capital or profits.

(2) Examples. The following examples

illustrate the rules of this paragraph (h).

Example 1. Calculation of percentage

interest transferred. (i) ABC, a calendar year

limited partnership formed in 1995, has

9,000 units of limited partnership interests

outstanding at all times during 1996,

representing in the aggregate 95 percent of

the total interests in capital and profits of

ABC.

(ii) During 1996, the following transactions

occur with respect to the units of ABC’s

limited partnership interests—

(A) 800 units are sold through the use of

a qualified matching service that meets the

requirements of paragraph (f) of this section;

(B) 50 units are sold through the use of a

matching service that does not meet the

requirements of paragraph (f) of this section;

and

(C) 500 units are transferred as a result of

private transfers described in paragraph (d) of

this section.

(iii) The private transfers of 500 units and

the sale of 800 units through a qualified

matching service are disregarded under

paragraph (h)(1) of this section for purposes

of applying the 2 percent rule. As a result,

the total percentage interests in partnership

capital and profits transferred for purposes of

the 2 percent rule is .528 percent, determined

by—

(A) Dividing the number of units sold

through a matching service that did not meet

the requirements of paragraph (f) of this

section (50) by the total number of

outstanding limited partnership units (9,000);

and

(B) Multiplying the result by the

percentage of total interests represented by

limited partnership units (95 percent) ([50/

9,000] x .95 = .528 percent).

Example 2. Application of the 2 percent

rule. (i) ABC operates a service consisting of

computerized video display screens on

which subscribers view and publish quotes

that do not commit any person to buy or sell

a partnership interest and quotes that express

interest in a partnership interest without an

accompanying price. The ABC service does

not provide two-sided quotes or quotes at

which any person (including the operator of

the service) is committed to buy or sell a

partnership interest. Subscribers are limited

to broker-dealers registered with the National

Association of Securities Dealers.

(ii) The ABC service is not an established

securities market for purposes of section

7704(b)(1) and this section because the

service does not satisfy any of the definitions

of an established securities market in

paragraph (b) of this section. The ABC

service also is not a secondary market

because the service does not provide twosided quotes or quotes at which any person

(including the operator of the service) is

committed to buy or sell a partnership

interest. Therefore, partnerships whose

interests are listed and transferred on the

ABC service are not publicly traded for

purposes of section 7704(b) and this section

as a result of such listing or transfers if the

sum of the percentage interests in

partnership capital or profits transferred

during the taxable year of the partnership

(other than in transfers described in

paragraph (d), (e), or (f)) does not exceed 2

percent of the total interests in partnership

capital or profits. In addition, assuming the

ABC service complies with the necessary

requirements, the service may qualify as a

matching service described in paragraph (f)

of this section.

Example 3. Effect of firm quotes. Assume

the same facts as in Example 2, except that,

in addition to operating the matching service,

ABC regularly quotes prices at which it

stands ready to buy interests in certain

partnerships listed on the service. As a result

of the regular quotes, interests in the quoted

partnerships are readily tradable on a

secondary market under paragraph (c)(2) of

this section. The quoted partnerships are

therefore publicly traded partnerships for

purposes of section 7704 and this section,

regardless of whether the sum of the

percentage interests in partnership capital or

profits transferred during the taxable year of

the partnership exceeds 2 percent of the total

interests in partnership capital or profits.

(i) [Reserved].

(j) Percentage interests in partnership

capital or profits—(1) Interests

considered—(i) General rule. Except as

otherwise provided in this paragraph (j),

for purposes of this section, the total

interests in partnership capital or profits

are determined by reference to all

outstanding interests in the partnership.

(ii) Exceptions—(A) General partner

with greater than 10 percent interest. If
21482 Federal Register / Vol. 60, No. 84 / Tuesday, May 2, 1995 / Proposed Rules

the general partners and any person

related to the general partners (within

the meaning of section 267(b) or section

707(b)(1)) own, in the aggregate, more

than 10 percent of the outstanding

interests in partnership capital or profits

at any one time during the taxable year

of the partnership, the total interests in

partnership capital or profits are

determined without reference to the

interests owned by such persons.

(B) Derivative interests. Any

partnership interests described in

paragraph (a)(2)(ii) of this section are

taken into account for purposes of

determining the total interest in

partnership capital or profits only as

and to the extent that the transfer of the

interest is taken into account under

paragraph (a)(4) of this section.

(2) Monthly determination. For

purposes of this section, except in the

case of block transfers (as defined in

paragraph (d)(2) of this section), the

percentage interests in partnership

capital or profits represented by

partnership interests that are transferred

during a taxable year of the partnership

is equal to the sum of the percentage

interests transferred for each calendar

month during the taxable year of the

partnership in which a transfer of a

partnership interest occurs (other than a

private transfer as described in

paragraph (d) of this section). The

percentage interests in capital or profits

of interests transferred during a calendar

month is determined by reference to the

partnership interests outstanding during

that month.

(3) Monthly conventions. For

purposes of paragraph (j)(2) of this

section, a partnership may use any

reasonable convention in determining

the interests outstanding for a month,

provided the convention is consistently

used by the partnership from month to

month during a taxable year and from

year to year. Reasonable conventions

include, but are not limited to, a

determination by reference to the

interests outstanding at the beginning of

the month, on the 15th day of the

month, or at the end of the month.

(4) Block transfers. For purposes of

paragraph (d)(2) of this section (defining

block transfers), the partnership must

determine the percentage interests in

capital or profits for each transfer of an

interest during the 30 calendar day

period by reference to the partnership

interests outstanding immediately prior

to such transfer.

(5) Example. The following example

illustrates the rules of this paragraph (j).

Example. Conventions. (i) ABC limited

partnership, a calendar year partnership

formed in 1995, has 1,000 units of limited

partnership interests outstanding on January

1, 1996, representing in the aggregate 95

percent of the total interests in capital and

profits of ABC. The remaining 5 percent is

held by the general partner.

(ii) The following transfers take place

during 1996—

(A) On January 15, 10 units of limited

partnership interests are sold in a transaction

that is not a private transfer;

(B) On July 10, 1,000 additional units of

limited partnership interests are issued by

the partnership (the general partner’s

percentage interest is unchanged); and

(C) On July 20, 15 units of limited

partnership interests are sold in a transaction

that is not a private transfer.

(iii) For purposes of determining the sum

of the percentage interests in partnership

capital or profits transferred, ABC chooses to

use the end of the month convention. The

percentage interests in partnership capital

and profits transferred during January is .95

percent, determined by dividing the number

of transferred units (10) by the total number

of limited partnership units (1,000) and

multiplying the result by the percentage of

total interests represented by limited

partnership units ([10/1,000]×.95). The

percentage interests in partnership capital

and profits transferred during July is .7125

percent ([15/2,000]×.95). ABC is not required

to make determinations for the other months

during the year because no transfers of

partnership interests occurred during such

months. ABC may qualify for the 2 percent

rule for its 1996 taxable year because less

than 2 percent (.95 percent+.7125

percent=1.6625 percent) of its total interests

in partnership capital and profits was

transferred during that year.

(iv) If ABC had chosen to use the beginning

of the month convention, the interests in

capital or profits sold during July would have

been 1.425 percent [(15/1,000]×.95) and ABC

would not have satisfied the 2 percent rule

for its 1996 taxable year because 2.375

percent (.95+1.425) of ABC’s interests in

partnership capital and profits was

transferred during that year.

(k) Effective date. This section applies

for taxable years of a partnership

beginning on or after the date final

regulations are published in the Federal

Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–10765 Filed 5–1–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[FI–21–95]

RIN 1545–AT46

Definition of Personal Property for

Purposes of the Straddle Rules

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

definition of personal property for

purposes of the straddle rules. This

action is necessary to reflect changes in

the law made by the Tax Reform Act of

1984. The regulations provide guidance

to persons who enter into straddle

transactions.

DATES: Written comments must be

received by July 31, 1995. Requests to

appear and outlines of topics to be

discussed at the public hearing

scheduled for August 30, 1995, must be

submitted by August 9, 1995.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (FI–21–95), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:T:R (FI–21–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC. A public hearing

has been scheduled for Wednesday,

August 30, 1995, at 10 a.m. in the

Auditorium, Internal Revenue Building,

1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Robert B.

Williams, (202) 622–3960; concerning

submissions and the hearing, Michael

Slaughter, (202) 622–7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 1092(d) of the Internal

Revenue Code provides definitions and

special rules relating to straddles. Under

section 1092(d)(3)(B)(i)(II), an

ownership interest in stock, which

generally is not treated as personal

property subject to the straddle rules,

may be personal property if it is part of

a straddle at least one of the offsetting

positions of which is, under regulations,

a position with respect to substantially

similar or related property (other than

stock). On March 20, 1995, the IRS

published final regulations (§ 1.1092(d)–

2) under section 1092(d)(3)(B). Those

regulations generally apply the rules of

§ 1.246–5 to determine whether an

offsetting position is a position with

respect to substantially similar or

related property (other than stock)

within the meaning of section

1092(d)(3)(B)(i)(II).

Explanation of Provisions

The proposed regulations clarify the

definition of the term ‘‘personal

property’’ under section 1092(d)(1) as it

applies to stock. The proposed