Advertisement

April 23, 2014

New IRS Regulations Regarding Noncompensatory Partnership Options Effective Immediately

On February 4th, the IRS issued final and further proposed regulations regarding noncompensatory partnership options, effective immediately.

Overview

A “noncompensatory partnership option” is any contractual right (other than a right issued in connection with the performance of services) to acquire an interest in a partnership, including a call option, warrant, or other similar arrangement, the conversion feature of convertible debt or the conversion feature of convertible equity. The IRS defines a “partnership” as a limited liability company, general or limited partnership, statutory or other trust or other entity or contractual arrangement treated as a partnership for federal income tax purposes.

Which partnership and LLC agreements are affected?

These new regulations may affect allocation provisions of a partnership or LLC agreement even if there is no option currently outstanding under such agreement.

Which entities are not affected?

An LLC or other entity eligible to be treated as a partnership but that has “checked the box” to be treated as a corporation is not considered a partnership for these purposes. In addition, the regulations do not apply to compensatory partnership options or to options issued by single-member LLCs or other disregarded entities (as to which, in each case, different tax principles apply).

How should the new rule be addressed?

Any new partnership or LLC agreement should be prepared with the provisions of these new regulations in mind. Also, it may be advisable to review the partnership or LLC agreement of an existing partnership or LLC that has a noncompensatory option outstanding in order to determine whether change is necessary or appropriate in light of the regulations.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

About the Author

One of the firm's core strengths, our Corporate practice, assists clients throughout the United States and abroad in maximizing their business opportunities. We represent clients that range from private to public companies and from startups and emerging businesses to international corporations. We are proud to offer CRADLE TO LIQUIDITY® services.

We provide general business legal advice, assist in structuring and implementing major transactions, prepare agreements to address unique business arrangements and consult with clients to resolve major business and...

858-720-8942

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.