Academic journal article Journal of Accountancy

Long-Awaited Final Regs. Issued on Noncompensatory Partnership Options

Academic journal article Journal of Accountancy

Long-Awaited Final Regs. Issued on Noncompensatory Partnership Options

Article excerpt

The IRS issued regulations (T.D. 9612) finalizing proposed regulations (REG-103580-02), which were issued in January 2003, on the treatment of certain call options, warrants, convertible debt, and convertible equity that are not issued in connection with the performance of services, i.e., noncompensatory partnership options.

The final regulations apply to noncompensatory options that are issued on or after Feb. 5, the day they were published in the Federal Register.

The final rules, which explain the income tax consequences of issuing, transferring, and exercising noncompensatory partnership options, apply only if the call option, warrant, or conversion right grants the holder the right to acquire an interest in the issuer (or cash measured by the interest's value). The exercise of a noncompensatory option generally will not cause either the issuing partnership or the option holder to recognize gain or loss.

In addition, the final rules amend the Sec. 704(b) regulations governing the maintenance of the partners' capital accounts and the determination of the partners' distributive shares of partnership items. Finally, the final regulations contain a rule providing that the holder of a call option, warrant, convertible debt, or convertible equity issued by a partnership (or an entity eligible to elect to be treated as a partnership under Regs. …

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