IRS Issues Rules on Partnership Convertible Instruments, Options

The Internal Revenue Service releases final regulations and proposed rules on the tax treatment of noncompensatory options and convertible instruments issued by a partnership. The final regulations explain 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 rules also clarify the application of Section 721, on the nonrecognition of gain or loss on contribution, to the exercise of noncompensatory options. Effective Feb. 5, the final regulations also contain a characterization rule providing that the holder of a noncompensatory option is treated as a partner under certain circumstances.

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