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Noncompensatory Partnership Options; Correction

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Internal Revenue Service (IRS), Treasury.


Correcting Amendment.


This document contains corrections to final regulations (TD 9612) that were published in the Federal Register on Tuesday, February 5, 2013 (78 FR 7997) relating to the tax treatment of noncompensatory options and convertible instruments issued by a partnership. The final regulations generally provide that the exercise of a noncompensatory option does not cause the recognition of immediate income or loss by either the issuing partnership or the option holder. The final regulations also modify the regulations under section 704(b) regarding the maintenance of the partners' capital accounts and the determination of the partners' distributive shares of partnership items. The final regulations also contain a characterization rule providing that the holder of a noncompensatory option is treated as a partner under certain circumstances.


This correction is effective on June 13, 2013 and is applicable on or after February 5, 2013.

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Benjamin Weaver, at (202) 622-3050 (not a toll-free number).

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The final regulations that are the subject of this document are under sections 171, 704, 721, 761, 1272, 1273, and 1275 of the Internal Revenue Code.

Need for Correction

As published, the final regulations (TD 9612) contains an error that may prove to be misleading and is in need of clarification.

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List of Subjects in 26 CFR Part 1

  • Income taxes
  • Reporting and recordkeeping requirements
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Correction of Publication

Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments:

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Paragraph 1. The authority citation for part 1 continues to read in part as follows:

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

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Par. 2. Section 1.704-1 is amended by revising the third sentence of paragraph (b)(5) Example 32 (v) to read as follows:

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Partner's distributive share.
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(b) * * *

(5) * * *

Example 32.

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(v) * * * Under paragraph (b)(4)(x)(c) of this section, LLC must allocate the book gross income of $3,000 equally among A, B, and C, but for tax purposes, however, LLC must allocate all of its gross income ($3,000) to C. * * *

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Martin Franks,

Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration).

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[FR Doc. 2013-14018 Filed 6-12-13; 8:45 am]