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IRS Releases Final Regulations on the Tax Treatment of Noncompensatory Partnership Options

March 28, 2013

By DOUGLAS SCHAAF, THOMAS WISIALOWSKI & SARAH-JANE HORNBEEK

On February 4, 2013, the Internal Revenue Service issued final regulations relating to the tax treatment of noncompensatory partnership options. These regulations apply only to options that are not issued in connection with the performance of services. As a general matter, the regulations explain that the exercise of a noncompensatory partnership option does not cause the recognition of immediate income or loss by either the issuing partnership or the option holder. The regulations should generally add clarity for taxpayers on the federal income tax treatment of noncompensatory partnership options.