[Federal Register Volume 78, Number 57 (Monday, March 25, 2013)]
[Rules and Regulations]
[Pages 17868-17869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06703]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9612]
RIN 1545-BA53


Noncompensatory Partnership Options; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendment.

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SUMMARY: 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.

DATES: This correction is effective on March 25, 2013 and is applicable 
on or after February 5, 2013.

FOR FURTHER INFORMATION CONTACT: Benjamin Weaver, at (202) 622-3050 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    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) contain errors that 
may prove to be misleading and are in need of clarification.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.704-1 is amended by revising the table in paragraph 
(b)(5) Example 35 (ii), and the first sentence of paragraph (b)(5) 
Example 35 (iii) to read as follows:


Sec.  1.704-1  Partner's distributive share.

* * * * *
    (b) * * *
    (5) * * *
    Example 35. * * *
    (ii) * * *

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                                                                         K                               L                               M
                                                         -----------------------------------------------------------------------------------------------
                                                                Tax            Book             Tax            Book             Tax            Book
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Initial capital account.................................         $10,000         $10,000         $10,000         $10,000               0               0
Year 1 net income.......................................           1,000           1,000           1,000           1,000               0               0
Year 2 net income.......................................           1,000           1,000           1,000           1,000               0               0
Year 3 net income.......................................           1,000           1,000           1,000           1,000               0               0
                                                         -----------------------------------------------------------------------------------------------
Year 4 initial capital account..........................          13,000          13,000          13,000          13,000               0               0
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[[Page 17869]]

    (iii) At the beginning of Year 4, at a time when property D, LLC's 
only asset, has a value of $33,000 and basis of $24,000 ($30,000 
original basis less $6,000 depreciation in Years 1 through 3), and LLC 
has accumulated undistributed cash of $12,000 ($15,000 gross income 
less $3,000 of interest payments) in LLC, M converts the debt into a 
\1/3\ interest in LLC. * * *
* * * * *

0
Par. 3. Section 1.761-3 is amended by:
0
a. Revising the second sentence of paragraph (b)(3);
0
b. Revising paragraph (f) introductory text;
0
c. Removing ``1'' from paragraph (f) Example heading; and
0
d. Revising the second sentence in the paragraph (f) Example.
    The revisions read as follows:


Sec.  1.761-3  Certain option holders treated as partners.

* * * * *
    (b) * * *
    (3) * * * In addition, an option includes convertible debt (as 
defined in Sec.  1.721-2(g)(2)) and convertible equity (as defined in 
Sec.  1.721-2(g)(3)). * * *
* * * * *
    (f) Example. The following example illustrates the provisions of 
this section. For purposes of the example, assume that PRS is a 
partnership for Federal tax purposes, none of the noncompensatory 
option holders or partners are related persons, and that general 
principles of law do not apply to treat the noncompensatory option as a 
partnership interest. The example reads as follows:

    Example. * * * In exchange for a premium of $10x, PRS issues a 
noncompensatory option to A to acquire a 10 percent interest in PRS 
for $110x at any time during a 3-year period commencing on the date 
on which the option is issued. * * *
* * * * *

LaNita VanDyke,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel, (Procedure and Administration).
[FR Doc. 2013-06703 Filed 3-22-13; 8:45 am]
BILLING CODE 4830-01-P