Bulletin No. 2013-13March 25, 2013

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2013–6, page 701.Interest rates: underpayment and overpayments. Therates for interest determined under section 6621 of the Codefor the calendar quarter beginning April 1, 2013, will be 3 per-cent for overpayments (2 percent in the case of a corporation),3 percent for the underpayments, and 5 percent for large cor-porate underpayments. The rate of interest paid on the portionof a corporate overpayment exceeding $10,000 will be 0.5percent.

T.D. 9611, page 699.Final regulations under section 36B of the Code relate towhether health coverage under an employer-sponsored planis affordable for individuals who are eligible to enroll in theplan by reason of their relationship to an employee (relatedindividuals).

T.D. 9612, page 678.Final regulations under sections 704, 721, and 761 of theCode relate to the tax treatment of noncompensatory optionsand convertible instruments issued by a partnership. The finalregulations generally provide that the exercise of a noncom-pensatory option does not cause the recognition of immediateincome or loss by either the issuing partnership or the optionholder. The final regulations also modify the regulations undersection 704(b) regarding the maintenance of the partners’ cap-ital accounts and the determination of the partners’ distributiveshares of partnership items. The final regulations also containa characterization rule providing that the holder of a noncom-pensatory option is treated as a partner under certain circum-stances. The final regulations will affect partnerships that issuenoncompensatory options, the partners of such partnerships,and the holders of such options.

REG–106918–08, page 714.Proposed regulations under sections 761 and 1234 of theCode relate to the tax treatment of noncompensatory optionsand convertible instruments issued by a partnership. Specif-ically, the proposed regulations expand the characterizationrule measurement events to include certain transfers of inter-ests in the issuing partnership and other look-through entities,and provide additional guidance in determining the characterof the grantor’s gain or loss as a result of a closing transactionwith respect to, or a lapse of, an option on a partnership inter-est. The proposed regulations will affect partnerships that is-sue noncompensatory options, the partnerships, and the hold-ers of such options.

REG–148500–12, page 716.Proposed regulations relate to the shared responsibility pay-ment for not maintaining minimum essential coverage undersection 5000A of the Code, which was added by the PatientProtection and Affordable Care Act and the Health Care andEducation Reconciliation Act of 2010, as amended by the TRI-CARE Affirmation Act and Public Law 111–173. A public hear-ing is scheduled for May 29, 2013.

Notice 2013–14, page 712.This notice provides guidance on section 309 of the AmericanTaxpayer Relief Act of 2012, Pub. L. No. 112–240, enactedon January 2, 2013, which amends section 51 of the Code toextend the Work Opportunity Tax Credit through December 31,2013. The notice also provides employers additional timebeyond the 28-day deadline in section 51(d)(13) for submittingForm 8850, Pre-Screening Notice and Certification Request forthe Work Opportunity Credit, to Designated Local Agencies.

(Continued on the next page)

Finding Lists begin on page ii.Index for January through March begins on page iv.

EMPLOYMENT TAX

Notice 2013–14, page 712.This notice provides guidance on section 309 of the AmericanTaxpayer Relief Act of 2012, Pub. L. No. 112–240, enactedon January 2, 2013, which amends section 51 of the Code toextend the Work Opportunity Tax Credit through December 31,2013. The notice also provides employers additional timebeyond the 28-day deadline in section 51(d)(13) for submittingForm 8850, Pre-Screening Notice and Certification Request forthe Work Opportunity Credit, to Designated Local Agencies.

March 25, 2013 2013–13 I.R.B.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

2013–13 I.R.B. March 25, 2013

March 25, 2013 2013–13 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 704.—Partner’sDistributive Share26 CFR 1.171–1: Bond premium.

T.D. 9612

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

NoncompensatoryPartnership Options

AGENCY: Internal Revenue Service(IRS), Department of the Treasury.

ACTION: Final Regulations.

SUMMARY: This document contains fi-nal regulations relating to the tax treatmentof noncompensatory options and convert-ible instruments issued by a partnership.The final regulations generally providethat the exercise of a noncompensatoryoption does not cause the recognition ofimmediate income or loss by either theissuing partnership or the option holder.The final regulations also modify the reg-ulations under section 704(b) regardingthe maintenance of the partners’ capitalaccounts and the determination of thepartners’ distributive shares of partnershipitems. The final regulations also containa characterization rule providing that theholder of a noncompensatory option istreated as a partner under certain circum-stances. The final regulations will affectpartnerships that issue noncompensatoryoptions, the partners of such partnerships,and the holders of such options.

DATES: Effective Date: These regulationsare effective on February 5, 2013.

Applicability Date: These regulationsapply to noncompensatory options (as de-fined in §1.721–2(f)) that are issued on orafter February 5, 2013.

FOR FURTHER INFORMATIONCONTACT: Benjamin Weaver at (202)622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto 26 CFR part 1 under sections 171,704, 721, 761, 1272, 1273, and 1275of the Internal Revenue Code (Code).On January 22, 2003, proposed regula-tions (REG–103580–02, 2009–9 I.R.B.543) relating to the tax treatment of non-compensatory options and convertibleinstruments issued by a partnership werepublished in the Federal Register (68 FR2930). On March 28, 2003, corrections tothe proposed regulations were publishedin the Federal Register (68 FR 15118).Because no requests to speak were submit-ted by April 29, 2003, the public hearingscheduled for Tuesday, May 20, 2003,was cancelled (see 68 FR 24903). TheTreasury Department and the IRS receiveda number of comments in response to theproposed regulations. After considerationof the comments, the proposed regulationsare adopted as revised by this Treasurydecision. The final regulations apply tocertain call options, warrants, convert-ible debt, and convertible equity that arenot issued in connection with the per-formance of services (noncompensatoryoptions). All comments are available atwww.regulations.gov or upon request.

Summary of Comments andExplanation of Provisions

The final regulations describe certain ofthe income tax consequences of issuing,transferring, and exercising noncompen-satory partnership options. The final reg-ulations apply only if the call option, war-rant, or conversion right grants the holderthe right to acquire an interest in the is-suer (or cash measured by the value ofthe interest). The final regulations gener-ally provide that the exercise of a noncom-pensatory option does not cause recog-nition of gain or loss to either the issu-ing partnership or the option holder. Inaddition, the final regulations modify theregulations under section 704(b) regard-ing the maintenance of the partners’ cap-ital accounts and the determination of the

partners’ distributive shares of partnershipitems. Finally, the final regulations con-tain a characterization rule providing thatthe holder of a call option, warrant, con-vertible debt, or convertible equity issuedby a partnership (or an eligible entity, asdefined in §301.7701–3(a), that would be-come a partnership if the option holderwere treated as a partner) is treated as apartner under certain circumstances.

A number of comments were receivedregarding the proposed regulations. Thecomments included requests for clarifica-tion and recommendations relating to (1)the issuance and exercise of noncompen-satory options; (2) accounting for noncom-pensatory options; (3) the characterizationrule; (4) the convertible bond provision;and (5) the application of the original is-sue discount provisions. Significant com-ments are further discussed in this pream-ble.

1. Issuance, Exercise, Lapse,Repurchase, and other Terminationsof a Noncompensatory Option

Like the proposed regulations, the finalregulations under section 721 define a non-compensatory option as an option issuedby a partnership, other than an option is-sued in connection with the performanceof services. For this purpose, an option isdefined as a call option or warrant to ac-quire an interest in the issuing partnership,the conversion feature of convertible debt,or the conversion feature of convertible eq-uity.

A. Application of section 721 on issuanceof a noncompensatory option

The proposed regulations provide thatsection 721 does not apply to a transfer ofproperty to a partnership in exchange fora noncompensatory option. Several com-menters observed that the proposed regula-tions do not exclude options issued in satis-faction of interest or similar items, such asunpaid rent or royalties. Accordingly, thefinal regulations provide that section 721does not apply to the transfer of propertyto a partnership in exchange for a noncom-pensatory option, or to the satisfaction of a

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partnership obligation with a noncompen-satory option. The final regulations con-tain an example illustrating that a transferof appreciated or depreciated property to apartnership in exchange for a noncompen-satory option generally will result in therecognition of gain or loss by the optionrecipient. Under open transaction prin-ciples applicable to noncompensatory op-tions, the partnership will not recognize in-come for receipt of the property while theoption is outstanding. Notwithstanding thegeneral rule, the Treasury Department andIRS believe it is appropriate to take intoaccount the conversion right embedded inconvertible equity as part of the underly-ing partnership interest. Accordingly, thefinal regulations provide that section 721does apply to a contribution of property toa partnership in exchange for convertibleequity in a partnership.

B. Application of section 721 on exerciseof a noncompensatory option

i. Payment of the Exercise Price withProperty or Cash

The proposed regulations provide thatsection 721 applies to the holder and thepartnership upon the exercise of a noncom-pensatory option issued by the partnership.The final regulations generally adopt thisrule. However, in response to commentsrequesting clarification, the final regula-tions also provide that section 721 gener-ally applies to the exercise of a noncom-pensatory option when the exercise price issatisfied with property or cash contributedto the partnership, regardless of whetherthe terms of the option require or permita cash payment.

ii. Exercise of a Noncompensatory Optionin Satisfaction of a Partnership Obligation

The proposed regulations under section721 do not apply to any interest on con-vertible debt that has been accrued by thepartnership (including accrued original is-sue discount). A number of commentswere received requesting clarification onthe proper treatment of accrued but un-paid interest. Since the proposed regula-tions were issued and the comments re-ceived, final regulations under section 721were published on November 17, 2011(T.D. 9557, 2011–50 I.R.B. 838) address-

ing certain partnership debt-for-equity ex-changes. Section 1.721–1(d)(2) provides:

Section 721 does not apply to adebt-for-equity exchange to the extentthe transfer of the partnership interestto the creditor is in exchange for thepartnership’s indebtedness for unpaidrent, royalties, or interest (includingaccrued original issue discount) thataccrued on or after the beginning of thecreditor’s holding period for the indebt-edness. The debtor partnership will notrecognize gain or loss upon the transferof a partnership interest to a creditor ina debt-for-equity exchange for unpaidrent, royalties, or interest (includingaccrued original issue discount).

The preamble to T.D. 9557 explains thisprovision as follows: “The IRS and theTreasury Department believe that the ex-ception to section 721 for these items isnecessary to prevent the conversion of or-dinary income into capital gain.”

The Treasury Department and the IRSbelieve that similar considerations arise inthe context of the exercise of noncompen-satory options. Accordingly, the final reg-ulations provide that section 721 does notapply to the transfer of a partnership in-terest to a noncompensatory option holderupon conversion of convertible debt in thepartnership to the extent that the transfer isin satisfaction of the partnership’s indebt-edness for unpaid interest (including ac-crued original issue discount) on convert-ible debt that accrued on or after the begin-ning of the convertible debt holder’s hold-ing period for the indebtedness. Addition-ally, the final regulations provide that sec-tion 721 does not apply to the extent thatthe exercise price is satisfied with the part-nership’s obligation to the option holderfor unpaid rent, royalties, or interest (in-cluding accrued original issue discount)that accrued on or after the beginning ofthe option holder’s holding period for theobligation.

The proposed regulations do not spec-ify whether, upon conversion of convert-ible debt in the partnership, the partner-ship is treated as satisfying its obligationfor unpaid interest with a fractional interestin each partnership property. Under this“vertical slice” approach, the partnershipcould recognize gain or loss equal to thedifference between the fair market value ofeach partial property deemed transferred tothe creditor and the partnership’s adjusted

basis in that partial property. The Trea-sury Department and the IRS believe thatapproach would be difficult to administerand may inappropriately accelerate gain orloss recognition. Therefore, the final reg-ulations provide that the partnership willnot recognize gain or loss upon the trans-fer of a partnership interest to a noncom-pensatory option holder upon conversionof convertible debt in the partnership to theextent that the transfer is in satisfaction ofthe partnership’s indebtedness for unpaidinterest (including accrued original issuediscount) on convertible debt that accruedon or after the beginning of the convert-ible debt holder’s holding period for the in-debtedness. Additionally, the final regula-tions also provide that the issuing partner-ship will not recognize gain or loss uponthe transfer of a partnership interest to anexercising option holder in satisfaction ofthe partnership’s obligation to the optionholder for unpaid rent, royalties, or interest(including accrued original issue discount)that accrued on or after the beginning ofthe option holder’s holding period for theobligation. This treatment is consistentwith the rules under §1.721–1(d)(2).

iii. Options Issued by Disregarded Entities

The rule in the proposed regulationsproviding for nonrecognition of gain orloss on the exercise of a noncompen-satory option does not apply to any calloption, warrant, or convertible debt is-sued by an eligible entity, as defined in§301.7701–3(a), that would become apartnership under §301.7701–3(f)(2) ifthe option, warrant, or conversion rightwere exercised. The Treasury Departmentand the IRS requested and received com-ments on whether the nonrecognition ruleshould be extended to such instruments.Commenters recommended that the non-recognition rule should be extended tosuch instruments. However, some com-menters noted that the extension of theproposed regulations to include a non-compensatory option issued by an eligibleentity that would become a partnershipunder §301.7701–3(f)(2) upon exercise ofthe option would necessitate adjustmentsto the capital accounting requirements ofthe regulations, as applied to these entities.Without these adjustments, upon exerciseof the option, the owner of the eligibleentity would be treated as contributing all

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property owned by the eligible entity priorto exercise of the option to the new part-nership, while the option holder would betreated as contributing only the exerciseprice and premium to the new partnership.The new partnership would have no un-booked unrealized gain in its property thatit could allocate to the exercising optionholder. Accordingly, the Treasury De-partment and the IRS have decided not toapply the rules of the final regulations tothese instruments.

iv. Application of Section 721(b)

One commenter requested clarificationof whether section 721(b) could apply tothe exercise of a noncompensatory optionunder the regulations. Section 721(b) pro-vides that section 721(a) does not apply togain realized on a transfer of property toa partnership that would be treated as aninvestment company (within the meaningof section 351) if the partnership were in-corporated. The Treasury Department andthe IRS believe that section 721, includ-ing the provisions of section 721(b) and§1.721–1(a), applies to the exercise of non-compensatory options.

v. Cash Settled Options

Several commenters requested guid-ance on the treatment of cash-settled op-tions, particularly regarding whether thecash settlement of an option is treated asa sale or exchange of the option or as anexercise of the option followed by an im-mediate redemption of the newly-issuedpartnership interest. The Treasury Depart-ment and the IRS believe that the cashsettlement of a noncompensatory optionshould be treated as a sale or exchangeof the option and taxed under the rules ofsection 1234, rather than as a contribu-tion to the partnership under section 721,followed by an immediate redemption (al-though the latter may, in certain instances,be treated as a sale of the option under thedisguised sale rules). The final regulationsprovide that the settlement of a noncom-pensatory option in cash or property otherthan an interest in the issuing partnershipis not a transaction to which section 721applies.

C. Lapse, repurchase, sale, or exchange ofa noncompensatory option

The proposed regulations provide thatsection 721 does not apply to the lapseof a noncompensatory option. Accord-ingly, the lapse of a noncompensatory op-tion generally results in the recognition ofincome by the partnership and loss by theholder of the lapsed option in an amountequal to the option premium. However,the proposed regulations do not address thecharacter of the gain or loss recognizedupon lapse, repurchase, sale, or exchangeof the option.

While section 1234(b) provides thatgain or loss from any closing transactiongenerally is treated as short term capitalgain or loss to the grantor of an option,commenters were uncertain whether sec-tion 1234(b) applies to partnership inter-ests because it is unclear whether partner-ship interests qualified as “securities” forpurposes of section 1234(b). To eliminatethis uncertainty, proposed regulations un-der section 1234(b) (REG–106918–08) arebeing published concurrently with thesefinal regulations, which treat partnershipinterests as securities for this purpose. Thepreamble to those proposed regulationsalso addresses, and seeks comments on,the character of gain or loss to the optionholder on the sale or exchange of, or losson failure to exercise, an option.

D. Application of general tax principlesin certain situations

In the event that the exercise of a non-compensatory option is followed by a re-demption of the exercising option holder’spartnership interest, general tax principles,including the disguised sale rules of sec-tion 707(a)(2)(B), will apply in determin-ing whether the transaction is actually acash settlement of the noncompensatoryoption by the partnership.

The proposed regulations provide thatif the exercise price of a noncompen-satory option exceeds the capital accountreceived by the option holder on the ex-ercise of the noncompensatory option, thetransaction will be given tax effect in ac-cordance with its true nature. Similarly,the final regulations provide that, if theexercise price of a noncompensatory op-tion exceeds the capital account receivedby the option holder on the exercise of the

option, then general tax principles will ap-ply to determine the tax consequences ofthe transaction. The final regulations arebased on the premise that the partnershipand the option holder will act in an eco-nomically rational way, such that an optionholder generally will not exercise the op-tion unless the capital account receivedwill equal or exceed the exercise price. Itshould be noted that a noncompensatoryoption could be economically viable toexercise when the option holder receivesa right to share in partnership capital thatis less than the sum of the premium paidfor the option and the exercise price of theoption, provided that the exercise pricealone does not exceed the capital accountreceived. This simply reflects the fact thatthe premium is a sunk cost at the time theoption holder exercises the option.

2. Accounting for NoncompensatoryOptions

A. Accounting for the issuance of anoncompensatory option

Under the proposed regulations,issuance of a noncompensatory op-tion is not a permissive or mandatoryrevaluation event under Treas. Reg.§1.704–1(b)(2)(iv). One commenter notedthat, as a result, unrealized gain in partner-ship property arising prior to the issuanceof the option could be inappropriatelyshifted to the option holder upon exercise.The Treasury Department and the IRSagree. Therefore, the final regulationsprovide that the issuance by a partnershipof a noncompensatory option (other thanan option for a de minimis partnership in-terest) is a permissible revaluation event.

B. Revaluations while a noncompensatoryoption is outstanding

Under the proposed regulations, anyrevaluation during the period in whichthere are outstanding noncompensatoryoptions generally must take into accountthe fair market value of any outstandingnoncompensatory options. If the fair mar-ket value of outstanding noncompensatoryoptions as of the date of the adjustmentexceeds the consideration paid by the op-tion holders to acquire the options, thenthe value of partnership property reflectedon the partnership’s books must be re-duced by that excess to the extent of the

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unrealized income or gain in partnershipproperty (that has not been reflected in thecapital accounts previously). This reduc-tion is allocated only to properties withunrealized appreciation in proportion totheir respective amounts of unrealized ap-preciation. Conversely, if the price paid bythe option holders to acquire the outstand-ing noncompensatory options exceeds thefair market value of the options as of thedate of the adjustment, then the valueof partnership property reflected on thepartnership’s books must be increased bythat excess to the extent of the unrealizeddeduction or loss in partnership property(that has not been reflected in the capitalaccounts previously). This increase is al-located only to properties with unrealizeddepreciation in proportion to their respec-tive amounts of unrealized depreciation.

The Treasury Department and the IRShave decided to retain these rules with cer-tain modifications. The final regulationscontinue to provide that the adjustmentsto the value of partnership property re-flected on the partnership’s books shouldgenerally be made to partnership proper-ties on a pro rata basis. Several com-ments were received requesting additionalguidance when certain properties are sub-ject to special allocations to existing part-ners. The Treasury Department and theIRS agree that the final regulations shouldtake into account the economic arrange-ment of the parties. Therefore, the finalregulations provide that the adjustmentsmust take into account the economic ar-rangement of the partners with respect tothe property.

One commenter noted that, while theproposed regulations do not state how thefair market value of the outstanding optionshould be computed, the value that is con-sistently used in the examples in the pro-posed regulations is the liquidation valueof the option assuming exercise. The com-menter requested additional guidance onthe determination of the fair market valueof outstanding options. The Treasury De-partment and the IRS believe that addi-tional guidance on the determination offair market value is unnecessary and be-lieve that the examples sufficiently illus-trate that the fair market value of an out-standing option may be based on the liqui-dation value of the option assuming exer-cise.

C. Accounting for the exercise of anoncompensatory option

The proposed regulations provide thatan exercising noncompensatory optionholder’s initial capital account is equal tothe consideration paid to the partnershipto acquire the noncompensatory optionand the fair market value of any prop-erty (other than the option) contributed tothe partnership upon the exercise of thenoncompensatory option. The proposedregulations provide that upon the conver-sion of convertible equity, the fair marketvalue of property contributed to the part-nership includes the converting partner’scapital account immediately before theconversion. Because the converting part-ner’s pre-conversion capital account willnot be eliminated because of the conver-sion, the Treasury Department and theIRS believe that this provision from theproposed regulations is unnecessary andcould cause confusion. Therefore, theTreasury Department and the IRS havedecided to remove this provision to elim-inate confusion; no substantive change isintended by this revision.

Additionally, the proposed regulationsprovide that the capital account of a holderof convertible debt is credited with the ad-justed basis of the debt and the accrued butunpaid qualified stated interest on the debtimmediately before the conversion of thedebt. One commenter noted that the regu-lations should credit the debt holder’s cap-ital account with the adjusted issue pricerather than the adjusted basis of the debt.Using adjusted issue price avoids creat-ing a different tax result in cases in whichthe debt is converted by the original debtholder versus cases in which the debt isconverted after a transfer of the debt at aprice that reflected unrealized gain or lossattributable to the conversion right and/orchanges in market interest rates. The Trea-sury Department and the IRS agree withthis comment and, therefore, the final reg-ulations credit the capital account of a con-vertible debt holder with the adjusted is-sue price of the debt and the accrued butunpaid qualified stated interest on the debtimmediately before the conversion of thedebt.

The proposed regulations require apartnership to revalue its property im-mediately following the exercise of anoncompensatory option, after the option

holder has become a partner. The partner-ship must allocate the unrealized income,gain, loss, and deduction from this revalu-ation, first, to the noncompensatory optionholder on exercise to the extent necessaryto reflect the option holder’s right to sharein partnership capital under the partner-ship agreement and, then, to the historicpartners, to reflect the manner in whichthe unrealized income, gain, loss, or de-duction in partnership property would beallocated among those partners if therewere a taxable disposition of the propertyfor its fair market value on that date. Tothe extent that unrealized appreciation ordepreciation in the partnership’s propertyhas been allocated to the capital accountof the noncompensatory option holder onexercise, the holder will, under section704(c) principles, recognize any incomeor loss attributable to that appreciation ordepreciation as the underlying propertiesare sold, depreciated, or amortized. Thefinal regulations adopt these provisionswith some modifications.

Under the current section 704(b) reg-ulations, a revaluation of partnershipproperty pursuant to §1.704–1(b)(2)(iv)(f)is based on the fair market value ofpartnership property as of the date ofthe revaluation, as determined under§1.704–1(b)(2)(iv)(h). Several com-menters to the proposed regulations rec-ommended that the section 704(b) regula-tions be revised to permit revaluations ofpartnership property based on the fair mar-ket value of the partnership interest, ratherthan the fair market value of the partner-ship’s property. These values may differbecause of restrictions on the transferabil-ity or liquidity of the partnership interestor other factors. The Treasury Departmentand the IRS have decided to continuerequiring that revaluations be based onthe fair market value of the partnership’sproperty. The Treasury Department andthe IRS believe that changing the rulesfor all revaluations is beyond the scope ofthese final regulations.

Several comments were received re-questing additional guidance on adjustingcapital accounts upon exercise of an op-tion when certain partnership propertiesare subject to special allocations to exist-ing partners. The final regulations clarifythat the allocations must take into accountthe economic arrangement of the partnerswith respect to the property.

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Furthermore, several commenters re-quested additional guidance on how toadjust capital accounts upon exercise whenthe partnership owns multiple propertieswith unrealized income, gain, loss, or de-duction. The final regulations clarify thatallocations should be made on a pro ratabasis from partnership property, subject tothe requirement that the allocations takeinto account the economic arrangement ofthe partners. Thus, if the exercising part-ner’s right to share in partnership capitalunder the partnership agreement exceedsthe sum of the premium and exercise price,then only income or gain may be allocatedto the exercising partner from partnershipproperties with unrealized appreciation,in proportion to their respective amountsof unrealized appreciation (subject to therequirement that the allocations take intoaccount the economic arrangement of thepartners). Conversely, if the exercisingpartner’s right to share in partnership cap-ital under the partnership agreement isless than the premium and exercise price,then only loss may be allocated to theexercising partner from partnership prop-erties with unrealized loss, in proportionto their respective amounts of unrealizedloss (subject to the requirement that theallocations take into account the economicarrangement of the partners).

One commenter recommended that thefinal regulations provide that the partner-ship may revalue its assets immediatelybefore the exercise of the option (in addi-tion to the revaluation that occurs imme-diately following the exercise of the op-tion). This comment was made in responseto one issue that arises when a revalua-tion event under §1.704–1(b)(2)(iv)(f) or(s) occurs while a noncompensatory op-tion is outstanding and certain partnershipproperty has increased in value. If, fol-lowing the revaluation, but prior to theexercise of the option, the same propertydeclines in value before the option is ex-ercised, there may be insufficient unreal-ized income or gain in partnership prop-erty (that has not been allocated to the cap-ital accounts of other partners) to allocateto the option holder’s capital account uponexercise. To address this issue, one com-menter recommended that, for purposes ofpartnership property revaluations, the por-tion of the unrealized gain that is treatedas “reflected in the capital accounts previ-ously” be reduced by the historic partners’

share of the decline in asset value. TheTreasury Department and the IRS have de-cided not to adopt these changes becausethe increased complexity that these newrules would add to the regulations out-weighs the potential benefit.

Under the proposed regulations, if, af-ter the allocations of unrealized gain andloss items to an exercising option holder,the exercising option holder’s capital ac-count still does not reflect his right to sharein partnership capital under the partner-ship agreement, the partnership must real-locate capital between the existing partnersand the exercising option holder (a “capi-tal account reallocation”). This capital ac-count reallocation provision has been re-tained from the proposed regulations.

D. Corrective allocations

The proposed regulations require thepartnership to make corrective allocationsof gross income or loss to the partners inthe year in which the option is exercisedso as to take into account any shift in thepartners’ capital accounts that occurs asa result of a capital account reallocationpursuant to the exercise of a noncompen-satory option. Corrective allocations areallocations of tax items that differ from thepartnership’s allocations of book items. Ifthere are not sufficient actual partnershipitems in the year of exercise to conform thepartnership’s tax allocations to the capitalaccount reallocation, additional correctiveallocations are required in succeeding tax-able years until the capital account reallo-cation has been fully taken into account.

A number of comments were receivedregarding the requirement of correctiveallocations in the proposed regulations.Some commenters recommended elimi-nating or substantially limiting the scopeof corrective allocations. The TreasuryDepartment and the IRS considered otheralternatives but believe that correctiveallocations are the most administrable al-ternative means to address the potentialproblem of income shifting when, prior tothe exercise of a noncompensatory option,a partnership recognizes gain or loss thatis, in part, economically attributable tothe option holder, but is allocated entirelyto the existing partners. Therefore, thefinal regulations retain the requirement forcorrective allocations in certain circum-stances.

i. Corrective Allocations when HistoricPartners Depart

The final regulations require correctiveallocations to be made so as to take intoaccount any capital account reallocationupon exercise of a noncompensatory op-tion. Therefore, partnership items may becorrectively allocated to the exercising op-tion holder only of items properly alloca-ble to a partner that suffered a capital ac-count reduction and only to the extent suchpartner suffered a capital account reduc-tion. This approach may result in correc-tive allocations not being fully made if apartner that suffered a capital account re-duction on exercise is no longer a part-ner in the issuing partnership at the timea corrective allocation would otherwise bemade.

ii. Character Matching for CorrectiveAllocations

The proposed regulations provide thatcorrective allocations are pro rata al-locations of gross income and gain orgross loss and deduction. The proposedregulations do not require any matchingof character between the income or lossthat is correctively allocated, and gainsor losses that were allocated to existingpartners prior to the option’s exercise, butthat were economically attributable to theoption holder. Several commenters rec-ommended that the regulations providesome type of matching requirement. TheTreasury Department and the IRS believethat the complexity that could arise froma character matching requirement wouldoutweigh the potential benefit of obtaininga more precise tax result for correctiveallocations in some cases. Accordingly,the final regulations do not provide for acharacter matching requirement.

iii. Corrective Allocations UsingCombinations of Income and Loss

Additionally, some commenters re-quested guidance on making correctiveallocations in a year in which the partner-ship has both gross income and gain andgross loss and deduction. In some cases,a corrective allocation that completelytakes into account the capital shift may notbe possible in a given year if only grossincome and gain, or gross loss and de-duction, are used. However, commenters

2013–13 I.R.B. 682 March 25, 2013

noted that it may be possible to morefully take into account the capital shift ifcorrective allocations are made using acombination of gross income and gain andgross loss and deduction. The TreasuryDepartment and IRS agree that combina-tions of gross income and gain and grossloss and deduction should be available forcorrective allocations.

Accordingly, the final regulations pro-vide a mechanism for making correctiveallocations using combinations of gross in-come and gain and gross loss and deduc-tion in certain circumstances. If the capi-tal account reallocation is from the historicpartners to the exercising option holder,then the corrective allocations must first bemade with gross income and gain. If anallocation of gross income and gain alonedoes not completely take into account thecapital account reallocation in a given year,then the partnership must also make cor-rective allocations using a pro rata por-tion of items of gross loss and deduction asto further take into account the capital ac-count reallocation. Conversely, if the cap-ital account reallocation is from the exer-cising option holder to the historic part-ners, then the corrective allocations mustfirst be made with gross loss and deduc-tion. If an allocation of gross loss anddeduction alone does not completely takeinto account the capital account realloca-tion in a given year, then the partnershipmust also make corrective allocations us-ing a pro rata portion of items of gross in-come and gain as to further take into ac-count the capital account reallocation.

iv. Application of Section 706 toCorrective Allocations

One commenter requested clarificationon the application of section 706 to the cor-rective allocation provisions. Because theexercise of a noncompensatory option maycause the partners’ interests in the part-nership to vary, the Treasury Departmentand the IRS believe that section 706 shouldapply in determining which items may beused for corrective allocations. Therefore,the final regulations also clarify that sec-tion 706 and its regulations and principlesapply in determining the items of income,gain, loss, and deduction that may be sub-ject to corrective allocation.

E. The impact of partnership mergers,divisions, and terminations on outstandingnoncompensatory options

The proposed regulations do not ad-dress the impact of partnership mergers,divisions, and section 708 technical termi-nations on outstanding noncompensatoryoptions. Some commenters requestedguidance on these situations. The Trea-sury Department and the IRS believe thatthese issues are beyond the scope of thesefinal regulations.

3. Characterization Rule

The proposed regulations generally re-spect noncompensatory options as suchand do not characterize them as part-nership equity. However, the proposedregulations characterize the holder of anoncompensatory option as a partner ifthe option holder’s rights are substantiallysimilar to the rights afforded to a partner.This rule under the proposed regulationsapplies only if, as of the date that the non-compensatory option is issued, transferred,or modified, there is a strong likelihoodthat the failure to treat the option holderas a partner would result in a substantialreduction in the present value of the part-ners’ and the option holder’s aggregateFederal tax liabilities. The proposed regu-lations use a facts and circumstances testto determine whether a noncompensatoryoption holder’s rights are substantiallysimilar to the rights afforded to a partner.The facts and circumstances for makingthis determination under the proposed reg-ulations include, but are not limited to,whether the option is reasonably certainto be exercised and whether the optionholder has partner attributes. The TreasuryDepartment and the IRS have decided toretain these rules with certain modifica-tions.

A. The “substantially similar” test

Some commenters criticized thebreadth of the language in the proposedregulations that provides that all factsand circumstances will be considered indetermining whether a noncompensatoryoption provides the holder with rightsthat are substantially similar to the rightsafforded to a partner, suggesting insteadthat an exclusive list of factors be used.The Treasury Department and the IRS

agree that the regulations should morespecifically describe the circumstances inwhich an option holder will be consideredto possess these rights. Therefore, thefinal regulations provide that a noncom-pensatory option provides its holder withrights that are substantially similar to therights afforded to a partner if the option isreasonably certain to be exercised or if theoption holder possesses partner attributes.

i. The “reasonably certain to beexercised” test

The proposed regulations list a numberof non-exclusive factors that are used todetermine whether a noncompensatory op-tion is reasonably certain to be exercised,including the fair market value of the part-nership interest that is the subject of theoption, the exercise price of the option,the term of the option, the predictabilityand stability of the value of the underly-ing partnership interest, the fact that theoption premium and exercise price (if theoption is exercised) will become propertyof the partnership, and whether the part-nership is expected to make distributionsduring the term of the option. With oneexception, the final regulations adopt thesefactors and clarify that any other arrange-ments affecting or undertaken with a prin-cipal purpose of affecting the likelihoodthat the noncompensatory option will beexercised will be considered a factor indetermining whether an option is reason-ably certain to be exercised. Because theoption premium represents a sunk cost tothe option holder, and because the fact thatthe exercise price becomes property of thepartnership is already reflected in the valueof the partnership interest subject to the op-tion, the final regulations do not include asa factor in the reasonable certainty test thefact that the option premium and exerciseprice will become property of the partner-ship.

Some commenters suggested thatthe characterization rule in the regula-tions adopt standards similar to thosefound in §1.1361–1(l) for determiningwhether there is a second class of stockin an S corporation, or those found in§1.1504–4 for determining whether acorporation is a member of an affiliatedgroup. Commenters also recommendedthat the regulations provide for certainsafe harbors and bright line tests for

March 25, 2013 683 2013–13 I.R.B.

determining whether an option holder’srights are substantially similar to the rightsafforded to a partner, and whether there isa strong likelihood that the failure to treatthe holder as a partner would result in asubstantial reduction in the present valueof the partners’ and the holder’s aggregatetax liabilities. After careful considerationof these comments, the TreasuryDepartment and the IRS believe thatlimited safe harbors should be providedto limit the administrative burdens of thecharacterization rule. Accordingly, thefinal regulations provide two objectivesafe harbors, which are similar to twoof the safe harbors in §1.1504–4 and§1.1361–1(l). However, these safeharbors apply only to the determinationof whether a noncompensatory option isreasonably certain to be exercised, andnot to the determination of whether anoncompensatory option holder possessespartner attributes.

The first safe harbor provides that anoncompensatory option is not consideredreasonably certain to be exercised if it maybe exercised no more than 24 months af-ter the date of the applicable measurementevent and it has a strike price equal to orgreater than 110 percent of the fair marketvalue of the underlying partnership intereston the date of the measurement event. Thesecond safe harbor provides that a non-compensatory option is not considered rea-sonably certain to be exercised if the termsof the option provide that the strike priceof the option is equal to or greater than thefair market value of the underlying part-nership interest on the exercise date. Forpurposes of these safe harbors, an optionwhose strike price is determined by a for-mula is considered to have a strike priceequal to or greater than the fair marketvalue of the underlying partnership inter-est on the exercise date if the formula isagreed upon by the parties when the optionis issued in a bona fide attempt to arrive atthe fair market value on the exercise dateand is to be applied based on the facts andcircumstances in existence on the exercisedate.

The safe harbors do not apply, how-ever, if the parties to the noncompensatoryoption had a principal purpose of sub-stantially reducing the present value ofthe aggregate Federal tax liabilities of thepartners and the noncompensatory optionholder.

The final regulations provide that fail-ure of an option to satisfy one of thesesafe harbors does not affect the determi-nation of whether the option is treated asreasonably certain to be exercised. Thus,options that do not satisfy the safe harborsmay still be treated as not reasonably cer-tain to be exercised under the facts and cir-cumstances. Notwithstanding that an op-tion is treated as not reasonably certain tobe exercised on the date of one measure-ment event under either the safe harbors orthe facts and circumstances test, the optionmay be treated as reasonably certain to beexercised at the time of a subsequent mea-surement event if the safe harbors and factsand circumstances test are no longer sat-isfied. Furthermore, even if an option isnot reasonably certain to be exercised un-der either the safe harbors or the facts andcircumstances test, the noncompensatoryoption may still be found to provide itsholder with rights substantially similar tothose afforded a partner under the partnerattributes test.

The proposed regulations contain anexample describing an option issued bya partnership with reasonably predictableearnings and concluding, based on thefacts of the example, that the option de-scribed is reasonably certain to be exer-cised. Commenters stated that the exampleinvolved unrealistic facts demonstratingreasonably predictable earnings, and thatthe example wrongly implied that lowvolatility suggests a reasonable certaintyof exercise. Upon further considerationof this example, the Treasury Departmentand the IRS have decided to delete theexample from the final regulations.

ii. The “partner attributes” test

The proposed regulations provide thatpartner attributes include the extent towhich the option holder shares in the eco-nomic benefit and detriment of partnershipincome and loss and the extent to whichthe option holder has the right to controlor restrict the activities of the partnership.Some commenters requested clarificationof this definition of partner attributes. Be-cause all options issued by a partnershipallow the holder to share, to some extent,in the economic benefit and detriment ofpartnership income and loss, the TreasuryDepartment and the IRS agree that thislanguage should be clarified.

The final regulations provide that thedetermination of whether a noncompen-satory option holder possesses partnerattributes is based on all the facts and cir-cumstances, including whether the optionholder, directly or indirectly, through theoption agreement or a related agreement,is provided with voting or managerialrights in the partnership. Additionally,the final regulations provide that an op-tion holder has partner attributes if, basedon all the facts and circumstances, (1)the option holder is provided with rights(through the option agreement or a relatedagreement) that are similar to rights ordi-narily afforded to a partner to participatein partnership profits through present pos-sessory rights to share in current operatingor liquidating distributions with respect tothe underlying partnership interest; or (2)the option holder, directly or indirectly,undertakes obligations (through the optionagreement or a related agreement) thatare similar to obligations undertaken by apartner to bear partnership losses. In thisway, the Treasury Department and the IRSbelieve that the final regulations clarifythat the economic benefits and burdensrelevant to the partner attributes test arethose beyond the economic benefits andburdens inherent in basic option transac-tions.

As to an option holder’s ability tocontrol or restrict the activities of the part-nership, some commenters stated that anoption holder should not be considered topossess partner attributes solely becausethe holder has the ability to restrict part-nership distributions or dilutive issuancesof partnership equity while the option isoutstanding. Option holders often aregiven such rights as a means of protectingthe value of the option holder’s potentialfuture partnership interest. The TreasuryDepartment and the IRS agree that suchrights are reasonable restrictions that, bythemselves, should not automatically leadto a conclusion that the option holder pos-sesses partner attributes. Accordingly, thefinal regulations provide that a noncom-pensatory option holder will not ordinarilybe considered to possess partner attributessolely because the noncompensatory op-tion agreement significantly controls orrestricts, or the noncompensatory optionholder has the right to significantly controlor restrict, a partnership decision that couldsubstantially affect the value of the under-

2013–13 I.R.B. 684 March 25, 2013

lying partnership interest. In particular,the following rights of the option holderwill not be treated as partner attributes:(1) the ability to impose reasonable re-strictions on partnership distributions ordilutive issuances of partnership equityor options while the noncompensatoryoption is outstanding; and (2) the abilityto choose the partnership’s section 704(c)method for partnership properties.

Some commenters requested clarifica-tion on the analysis of partner attributesfor an option holder who is also a part-ner in the issuing partnership. The pro-posed regulations provide that rights pos-sessed by an option holder solely by virtueof owning a partnership interest and notby virtue of holding a noncompensatoryoption are not taken into account in de-termining whether the option holder haspartner attributes, provided those rights areno greater than those held by other part-ners owning substantially similar interests.Commenters noted that, in some cases,there may be partners, such as manag-ing or general partners, with unique in-terests that are not comparable to the in-terests of any other partners. The Trea-sury Department and the IRS agree thatthe regulations should address these sit-uations. Accordingly, the final regula-tions provide that rights in the issuing part-nership possessed by a noncompensatoryoption holder solely by virtue of owningan interest in the issuing partnership arenot taken into account, provided that thoserights are no greater than the rights grantedto other partners owning substantially sim-ilar interests in the partnership and who donot hold noncompensatory options in thepartnership. Additionally, the final regula-tions provide that if all of the partners own-ing substantially similar interests in the is-suing partnership also hold noncompen-satory options in the partnership, or if noneof the other partners owns substantiallysimilar interests in the partnership, then allfacts and circumstances will be consideredin determining whether the rights in thepartnership possessed by the option holderare possessed solely by virtue of owning apartnership interest. If those rights are pos-sessed solely by virtue of owning a partner-ship interest, the final regulations providethat they are not taken into account.

Additionally, in response to comments,the final regulations provide that for pur-

poses of determining whether an optionholder has partner attributes, the optionholder will be treated as owning all part-nership interests and noncompensatory op-tions issued by the partnership that areowned by any person related to the op-tion holder. For example, if the holder ofa noncompensatory option is related to aperson that owns an interest in the issuingpartnership, and the interest provides therelated person with partner attributes thatare greater than the rights granted to otherpartners owning substantially similar inter-ests in the partnership, the option will becharacterized as a partnership interest un-der the final regulations if the strong likeli-hood test is satisfied. This provision is in-tended to prevent avoidance of the partnerattributes test by planning among relatedparties. The Treasury Department and theIRS continue to study the extent to whichfinancial instruments and partnership in-terests owned by related persons shouldbe taken into account under the reasonablecertainty test.

The proposed regulations contain anexample describing a deep in the moneyoption and concluding, based on the factsof the example, that the option holderpossesses partner attributes. Commentersstated that the example added little to theexisting guidance provided by the com-mon law rule. Upon further considerationof this example, the Treasury Departmentand the IRS have decided to delete theexample from the final regulations.

B. The “strong likelihood” test

The Treasury Department and the IRSreceived a number of comments regard-ing the provision in the proposed regula-tions that the characterization rule appliesonly if there is a strong likelihood that thefailure to treat the option holder as a part-ner would result in a substantial reduc-tion in the present value of the partners’and the holder’s aggregate tax liabilities.Some commenters recommended that theregulations adopt language similar to thatcontained in §1.704–1(b)(2)(iii)(b)(2) and(c)(2), which provides that, in determiningwhether there is a reduction in the part-ners’ total tax liability, tax consequencesthat result from the interaction of the al-location(s) with partner tax attributes thatare unrelated to the partnership are taken

into account. Similarly, in determiningwhether there would be a substantial re-duction in the present value of the partners’and option holder’s aggregate tax liabili-ties, commenters noted that it is appropri-ate to consider partner and option holdertax attributes that are unrelated to the part-nership, and the interaction of those at-tributes with the option.

The Treasury Department and the IRSagree that it would be helpful for the reg-ulations to specify certain factors that areconsidered in determining whether thereis a strong likelihood that the failure totreat a noncompensatory option holder asa partner would result in a substantial re-duction in the present value of the part-ners’ and the option holder’s aggregateFederal tax liabilities. The final regula-tions provide that all facts and circum-stances should be considered in makingthis determination, including: (1) the in-teraction of the allocations of the issu-ing partnership and the partners’ and non-compensatory option holder’s Federal taxattributes (taking into account tax conse-quences that result from the interaction ofthe allocations with the partners’ and non-compensatory option holder’s Federal taxattributes that are unrelated to the partner-ship); (2) the absolute amount of the Fed-eral tax reduction; (3) the amount of thereduction relative to overall Federal tax li-ability; and (4) the timing of items of in-come and deductions.

Additionally, to more specifically ad-dress the application of the strong likeli-hood test when a look-through entity (asdefined in §1.704–1(b)(2)(iii)(d)(2)) is aparty, the final regulations provide that if apartner or option holder is a look-throughentity, such as a partnership or an S cor-poration, then the tax attributes of that en-tity’s ultimate owners (that are not look-through entities) will be taken into accountin determining whether there is a stronglikelihood of a substantial tax reduction.The final regulations also provide that, ifa partner is a member of a consolidatedgroup, then tax attributes of the consoli-dated group and of another member withrespect to a separate return year will betaken into account in determining whetherthere is a strong likelihood of a substantialtax reduction.

March 25, 2013 685 2013–13 I.R.B.

C. Events that trigger testing under thecharacterization rule

The proposed regulations test a non-compensatory option under the charac-terization rule upon issuance, transfer, ormodification of the option. A number ofcomments were received recommendingclarification, or narrowing of the list, ofevents that will trigger a testing of theoption after original issuance. Severalcommenters argued that only materialmodifications of an option should lead tore-testing under the characterization rule.Several commenters also recommendedrestricting the types of transfers that willtrigger testing of the option under thecharacterization rule, or removing the re-quirement to test upon transfer entirely.In response to these comments, the finalregulations provide a more detailed de-scription of the events that will triggerapplication of the characterization rule toa noncompensatory option.

The final regulations provide that thecharacterization rule will be applied uponthe occurrence of a measurement eventwith respect to the noncompensatory op-tion. The final regulations define a mea-surement event as: (1) issuance of the non-compensatory option; (2) an adjustment ofthe terms (modification) of the noncom-pensatory option or of the underlying part-nership interest (including an adjustmentpursuant to the terms of the noncompen-satory option or the underlying partnershipinterest); or (3) transfer of the noncompen-satory option if either (A) the term of theoption exceeds 12 months, or (B) the trans-fer is pursuant to a plan in existence at thetime of the issuance or modification of thenoncompensatory option that has as a prin-cipal purpose the substantial reduction ofthe present value of the aggregate Federaltax liabilities of the partners and the non-compensatory option holder.

Additionally, in response to the com-ments, the Treasury Department and theIRS believe that it is appropriate to limittesting under the characterization rule toprovide certainty for both taxpayers andthe IRS, particularly in circumstances inwhich there is little potential for abuse.Therefore, the final regulations do nottreat the following events as measurementevents: (1) a transfer of the noncompen-satory option that would otherwise bea measurement event if the transfer is

at death or between spouses or formerspouses under section 1041, or in a trans-action that is disregarded for Federal taxpurposes; (2) a modification that neithermaterially increases the likelihood that theoption will be exercised nor provides theoption holder with partner attributes; (3)a change in the strike price of a noncom-pensatory option, or in the interests in theissuing partnership that may be issued ortransferred pursuant to the option, madepursuant to a bona fide, reasonable adjust-ment formula that has the intended effectof preventing dilution of the interests ofthe option holder; and (4) any other eventas provided in guidance published in theInternal Revenue Bulletin. The TreasuryDepartment and the IRS believe that theselimitations will minimize the burden ontaxpayers that could arise from frequenttestings under the characterization rulein many situations, while preserving theability of the IRS to enforce the character-ization rule in appropriate circumstances.

Some commenters also requested thatthe regulations clarify whether the is-suance, transfer, or modification of onenoncompensatory option would triggertesting under the characterization rule ofall other outstanding noncompensatoryoptions issued by the same partnership.Under the final regulations, testing underthe characterization rule occurs only onthe date a measurement event occurs withrespect to a particular noncompensatoryoption. Measurement events should bedetermined individually for each noncom-pensatory option issued by a partnership.For example, the modification of one non-compensatory option generally would bea measurement event for that particularoption, and it would not be a measurementevent for all other noncompensatory op-tions issued by the partnership.

In addition, to address transfers ofinterests in the issuing partnership andsituations involving look-through entities,proposed regulations under section 761(REG–106918–08) are being publishedconcurrently with these final regulations.Those proposed regulations would addthree measurement events to the list above,but apply only if those measurementevents are pursuant to a plan in existenceat the time of the issuance or modificationof the noncompensatory option that has asa principal purpose the substantial reduc-tion of the present value of the aggregate

Federal tax liabilities of the partners andthe noncompensatory option holder. Theproposed measurement events are: (1)issuance, transfer, or modification of aninterest in, or liquidation of, the issuingpartnership; (2) issuance, transfer, or mod-ification of an interest in any look-throughentity that directly, or indirectly throughone or more look-through entities, ownsthe noncompensatory option; and (3) is-suance, transfer, or modification of aninterest in any look-through entity thatdirectly, or indirectly through one or morelook-through entities, owns an interest inthe issuing partnership. The Treasury De-partment and the IRS believe that the firstof these proposed measurement eventsis necessary because it is inconsistent totest a noncompensatory option under thecharacterization rule upon transfer of thenoncompensatory option, but not upontransfer of an interest in the issuing part-nership, because either type of transfermay change the analysis of whether thereis a strong likelihood that the failure totreat the option holder as a partner wouldresult in a substantial reduction in thepresent value of the partners’ and optionholder’s aggregate tax liabilities. TheTreasury Department and the IRS believethat the second and third proposed mea-surement events are necessary to preventavoidance of the characterization rulethrough the use of look-through entities.

D. Timing of characterization

Some commenters requested clarifica-tion regarding the timing of the charac-terization of a noncompensatory optionas a partnership interest under the regu-lations. For example, some commentersquestioned whether an option that wascharacterized as a partnership interestupon transfer would be treated as trans-ferred and then exercised by the transfereeor exercised by the transferor and thentransferred. The Treasury Departmentand the IRS believe that the tax conse-quences to the transferor and transfereeupon a transfer of the option should besimilar to the tax consequences upon atransfer of the underlying partnership in-terest. Accordingly, the final regulationsprovide that characterization of an optionas a partnership interest under the regu-lations applies upon the issuance of theoption, or immediately before any other

2013–13 I.R.B. 686 March 25, 2013

measurement event that gave rise to thecharacterization. Under this approach, ifthe characterization rule applied upon atransfer of a noncompensatory option, asection 743 adjustment for the benefit ofthe transferee would be made if the issuingpartnership had a section 754 election ineffect.

E. Effect of characterization

Some commenters questioned whether,once a noncompensatory option was char-acterized as a partnership interest under thecharacterization rule, the characterizationrule could ever operate to re-characterizethe interest as a noncompensatory optiononce again. The Treasury Department andthe IRS believe that the characterizationrule operates to treat noncompensatory op-tions as partnerships interests in appropri-ate circumstances, and it should not be in-terpreted to treat partners as noncompen-satory option holders. Accordingly, the fi-nal regulations provide that once a non-compensatory option is treated as a part-nership interest, in no event may it be char-acterized as an option thereafter.

F. Continuing applicability of general taxprinciples

Finally, some commenters questionedwhether general tax principles would con-tinue to apply to the characterization ofa noncompensatory option that, in sub-stance, represents a current partnership in-terest. Because these rules in the final reg-ulations are intended to supplement ratherthan supplant general tax principles, theTreasury Department and the IRS believeit is appropriate for general tax principlesto continue to apply, in addition to the char-acterization rule of the regulations. Thus,the final regulations clarify that an optionthat is not treated as a partnership interestunder the regulations may still be treated asa partnership interest under general princi-ples of law. For example, if upon the is-suance of a noncompensatory option, theoption in substance constitutes a partner-ship interest under general tax principles,then the option will be treated as a part-nership interest for Federal tax purposes,even if it is unlikely that the aggregate taxliabilities of the option holder and part-ners would be substantially reduced by thefailure to treat the option holder as a part-ner. For this purpose, general tax princi-

ples include principles of tax law derivedfrom the Internal Revenue Code, TreasuryRegulations, case law, and administrativeguidance issued by the IRS.

4. Convertible Bond Provision

Section 171(b)(1) provides that theamount of bond premium on a convertiblebond does not include any amount attrib-utable to the conversion features of thebond. A holder of partnership convertibledebt who purchases the debt at a premiumwould generally be subject to the section171 bond premium amortization rules.One commenter suggested that the regula-tions under §1.171–1(e)(1)(iii) be clarifiedto state that such regulations apply to debtthat is convertible into an interest in thepartnership issuing the debt. The finalregulations adopt this comment.

5. Original Issue Discount Provisions

The original issue discount (OID) pro-visions provide special rules for debtinstruments convertible into the stockof the issuer or a party related to the is-suer. See §§1.1272–1(e), 1.1273–2(j),and 1.1275–4(a)(4). The proposed reg-ulations proposed to apply these specialrules to debt instruments convertible intopartnership interests. These final regula-tions adopt these proposed amendments.Accordingly, the final regulations amendthe OID provisions to treat partnershipinterests as stock for purposes of the spe-cial rules for convertible debt instruments.Treating convertible debt issued by part-nerships and corporations differently forpurposes of these special rules could cre-ate unjustified distinctions between thetaxation of instruments that are economi-cally equivalent.

Effective/Applicability Date

These final regulations apply to non-compensatory options that are issued on orafter February 5, 2013.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866, as supplemented by Executive Or-der 13563. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Admin-

istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause the regulations do not impose acollection of information requirement onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking preced-ing these regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small businesses, and nocomments were received.

Drafting Information

The principal author of these reg-ulations is Benjamin Weaver of theOffice of the Associate Chief Counsel(Passthroughs and Special Industries).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Adoption of the Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.171–1 is amended by

adding a sentence at the end of paragraph(e)(1)(iii)(C) to read as follows:

§1.171–1 Bond premium.

* * * * *(e) * * *(1) * * *(iii) * * *(C) * * * For bonds issued on or after

February 5, 2013, the term stock in the pre-ceding sentence means an equity interest inany entity that is classified, for Federal taxpurposes, as either a partnership or a cor-poration.

* * * * *Par. 3. Section 1.704–1 is amended as

follows:1. Paragraph (b)(0) is amended by

adding entries to the table in numericalorder for paragraphs (b)(2)(iv)(d)(4),

March 25, 2013 687 2013–13 I.R.B.

(b)(2)(iv)(h)(1), (b)(2)(iv)(h)(2),(b)(2)(iv)(s), (b)(4)(ix), and (b)(4)(x).

2. The paragraph heading for paragraph(b)(1)(ii) is revised and a sentence is addedat the end of the paragraph.

3. Paragraph (b)(2)(iv)(d)(4) is added.4. Paragraph (b)(2)(iv)(f)(1) is revised.5. Paragraph (b)(2)(iv)(f)(5)(iii) is

amended by removing the “.” at the endof the paragraph and adding in its place “,or”.

6. Paragraph (b)(2)(iv)(f)(5)(iv) is re-designated as paragraph (b)(2)(iv)(f)(5)(v).

7. New paragraph (b)(2)(iv)(f)(5)(iv) isadded.

8. Paragraph (b)(2)(iv)(h) is redes-ignated as (b)(2)(iv)(h)(1) and a newparagraph heading is added for paragraph(b)(2)(iv)(h)(1).

9. Paragraph (b)(2)(iv)(h)(2) is added.10. The undesignated text following

paragraph (b)(2)(iv)(r)(2) is designated asparagraph (b)(2)(iv)(r)(3), and a paragraph

(b)(2)(iv)(s) is added after the newly des-ignated paragraph (b)(2)(iv)(r)(3).

11. Paragraphs (b)(4)(ix) and (b)(4)(x)are added.

12. Paragraph (b)(5) is amended byadding Examples 31 through 35.

The additions and revisions read as fol-lows:

§1.704–1 Partner’s distributive share.

* * * * *(b) * * * (0) * * *

Heading Section

* * * * *Exercise of noncompensatory options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(2)(iv)(d)(4)* * * * *In general . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(2)(iv)(h)(1)Adjustments for noncompensatory options. . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(2)(iv)(h)(2)* * * * *Adjustments on the exercise of a noncompensatory option . . . . . . . . . . . 1.704–1(b)(2)(iv)(s)* * * * *Allocations with respect to noncompensatory options . . . . . . . . . . . . . . . 1.704–1(b)(4)(ix)Corrective allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.704–1(b)(4)(x)* * * * *

(1) * * *(ii) Effective/applicability date. * * *

In addition, paragraph (b)(2)(iv)(d)(4),paragraph (b)(2)(iv)(f)(1), para-graph (b)(2)(iv)(f)(5)(iv), paragraph(b)(2)(iv)(h)(2), paragraph (b)(2)(iv)(s),paragraph (b)(4)(ix), paragraph (b)(4)(x),and Examples 31 through 35 in paragraph(b)(5) of this section apply to noncompen-satory options (as defined in §1.721–2(f))that are issued on or after February 5,2013.

* * * * *(2) * * *(iv) * * *(d) * * *(4) Exercise of noncompensatory op-

tions. Solely for purposes of paragraph(b)(2)(iv)(b)(2) of this section, the fairmarket value of the property contributedon the exercise of a noncompensatory op-tion (as defined in §1.721–2(f)) does notinclude the fair market value of the optionprivilege, but does include the consider-ation paid to the partnership to acquirethe option and the fair market value ofany property (other than the option) con-tributed to the partnership on the exerciseof the option. With respect to convertibledebt, the fair market value of the property

contributed on the exercise of the optionis the adjusted issue price of the debt andthe accrued but unpaid qualified stated in-terest (as defined in §1.1273–1(c)) on thedebt immediately before the conversion,plus the fair market value of any property(other than the convertible debt) con-tributed to the partnership on the exerciseof the option. See Examples 31 through35 of paragraph (b)(5) of this section.

* * * * *(f) * * *(1) The adjustments are based on the

fair market value of partnership property(taking section 7701(g) into account) onthe date of adjustment, as determined un-der paragraph (b)(2)(iv)(h) of this section.See Example 33 of paragraph (b)(5) of thissection.

* * * * *(5) * * *(iv) In connection with the issuance by

the partnership of a noncompensatory op-tion (other than an option for a de minimispartnership interest), or

* * * * *(h) Determinations of fair market

value—(1) In general. * * *(2) Adjustments for noncompensatory

options. The value of partnership prop-

erty as reflected on the books of the part-nership must be adjusted to account forany outstanding noncompensatory options(as defined in §1.721–2(f)) at the time ofa revaluation of partnership property un-der paragraph (b)(2)(iv)(f) or (s) of thissection. If the fair market value of out-standing noncompensatory options (as de-fined in §1.721–2(f)) as of the date of theadjustment exceeds the consideration paidto the partnership to acquire the options,then the value of partnership property asreflected on the books of the partnershipmust be reduced by that excess to the ex-tent of the unrealized income or gain inpartnership property (that has not been re-flected in the capital accounts previously).This reduction is allocated only to prop-erties with unrealized appreciation in pro-portion to their respective amounts of un-realized appreciation. If the considerationpaid to the partnership to acquire the out-standing noncompensatory options (as de-fined in §1.721–2(f)) exceeds the fair mar-ket value of such options as of the dateof the adjustment, then the value of part-nership property as reflected on the booksof the partnership must be increased bythat excess to the extent of the unrealizedloss in partnership property (that has notbeen reflected in the capital accounts pre-

2013–13 I.R.B. 688 March 25, 2013

viously). This increase is allocated only toproperties with unrealized loss in propor-tion to their respective amounts of unreal-ized loss. However, any reduction or in-crease shall take into account the economicarrangement of the partners with respect tothe property.

* * * * *(s) Adjustments on the exercise of a

noncompensatory option. A partnershipagreement may grant a partner, on the ex-ercise of a noncompensatory option (as de-fined in §1.721–2(f)), a right to share inpartnership capital that exceeds (or is lessthan) the sum of the consideration paidto the partnership to acquire and exercisesuch option. Where such an agreementexists, capital accounts will not be con-sidered to be determined and maintainedin accordance with the rules of this para-graph (b)(2)(iv) unless the following re-quirements are met:

(1) In lieu of revaluing partnershipproperty under paragraph (b)(2)(iv)(f)of this section immediately before theexercise of the option, the partnershiprevalues partnership property in accor-dance with the provisions of paragraphs(b)(2)(iv)(f)(1) through (f)(4) of this sec-tion immediately after the exercise of theoption.

(2) In determining the capital accountsof the partners (including the exercisingpartner) under paragraph (b)(2)(iv)(s)(1)of this section, the partnership first al-locates any unrealized income, gain, orloss in partnership property (that has notbeen reflected in the capital accounts pre-viously) to the exercising partner to theextent necessary to reflect that partner’sright to share in partnership capital underthe partnership agreement, and then allo-cates any remaining unrealized income,gain, or loss (that has not been reflectedin the capital accounts previously) to theexisting partners, to reflect the mannerin which the unrealized income, gain, orloss in partnership property would be allo-cated among those partners if there werea taxable disposition of such property forits fair market value on that date. Forpurposes of the preceding sentence, if theexercising partner’s initial capital accountas determined under §1.704–1(b)(2)(iv)(b)and (d)(4) of this section would be lessthan the amount that reflects the exercis-ing partner’s right to share in partnership

capital under the partnership agreement,then only income or gain may be allocatedto the exercising partner from partnershipproperties with unrealized appreciation,in proportion to their respective amountsof unrealized appreciation. If the exer-cising partner’s initial capital account, asdetermined under §1.704–1(b)(2)(iv)(b)and (d)(4) of this section, would be greaterthan the amount that reflects the exercis-ing partner’s right to share in partnershipcapital under the partnership agreement,then only loss may be allocated to theexercising partner from partnership prop-erties with unrealized loss, in proportionto their respective amounts of unrealizedloss. However, any allocation must takeinto account the economic arrangement ofthe partners with respect to the property.

(3) If, after making the allocations de-scribed in paragraph (b)(2)(iv)(s)(2) of thissection, the exercising partner’s capital ac-count does not reflect that partner’s right toshare in partnership capital under the part-nership agreement, then the partnership re-allocates partnership capital between theexisting partners and the exercising part-ner so that the exercising partner’s capi-tal account reflects the exercising partner’sright to share in partnership capital underthe partnership agreement (a capital ac-count reallocation). Any increase or de-crease in the capital accounts of existingpartners that occurs as a result of a capitalaccount reallocation under this paragraph(b)(2)(iv)(s)(3) must be allocated amongthe existing partners in accordance withthe principles of this section. See Exam-ple 32 of paragraph (b)(5) of this section.

(4) The partnership agreement requirescorrective allocations so as to take intoaccount all capital account reallocationsmade under paragraph (b)(2)(iv)(s)(3) ofthis section (see paragraph (b)(4)(x) of thissection). See Example 32 of paragraph(b)(5) of this section.

* * * * *(4) * * *(ix) Allocations with respect to non-

compensatory options—(a) In general. Apartnership agreement may grant to a part-ner that exercises a noncompensatory op-tion (as defined in §1.721–2(f)) a right toshare in partnership capital that exceeds(or is less than) the sum of the amountspaid to the partnership to acquire and exer-cise the option. In such a case, allocations

of income, gain, loss, and deduction to thepartners while the noncompensatory op-tion is outstanding cannot have economiceffect because, if the noncompensatory op-tion is exercised, the exercising partner,rather than the existing partners, may re-ceive the economic benefit or bear the eco-nomic detriment associated with that in-come, gain, loss, or deduction. However,allocations of partnership income, gain,loss, and deduction to the partners whilethe noncompensatory option is outstand-ing will be deemed to be in accordancewith the partners’ interests in the partner-ship only if—

(1) The holder of the noncompensatoryoption is not treated as a partner under§1.761–3;

(2) The partnership agreement requiresthat, while a noncompensatory optionis outstanding, the partnership complywith the rules of paragraph (b)(2)(iv)(f)of this section and that, on the exercise ofthe noncompensatory option, the partner-ship comply with the rules of paragraph(b)(2)(iv)(s) of this section; and

(3) All material allocations and capitalaccount adjustments under the partnershipagreement would be respected under sec-tion 704(b) if there were no outstandingnoncompensatory options issued by thepartnership. See Examples 31 through 35of paragraph (b)(5) of this section.

(b) Substantial economic effect undersections 168(h) and 514(c)(9)(E)(i)(ll).An allocation of partnership income, gain,loss, or deduction to the partners will bedeemed to have substantial economic ef-fect for purposes of sections 168(h) and514(c)(9)(E)(i)(ll) if—

(1) The allocation would meet the sub-stantial economic effect requirements ofparagraph (b)(2) of this section if therewere no outstanding noncompensatory op-tions issued by the partnership; and

(2) The partnership satisfies the require-ments of paragraph (b)(4)(ix)(a)(1), (2),and (3) of this section.

(x) Corrective allocations—(a)—Ingeneral. If partnership capital is real-located between existing partners and apartner exercising a noncompensatory op-tion under paragraph (b)(2)(iv)(s)(3) ofthis section (a capital account realloca-tion), then the partnership must, beginningwith the taxable year of the exercise andin all succeeding taxable years until therequired allocations are fully taken into

March 25, 2013 689 2013–13 I.R.B.

account, make corrective allocations soas to take into account the capital accountreallocation. A corrective allocation is anallocation (consisting of a pro rata portionof each item) for tax purposes of grossincome and gain, or gross loss and de-duction, that differs from the partnership’sallocation of the corresponding book item.See Example 32 of paragraph (b)(5) of thissection.

(b) Timing. Section 706 and the reg-ulations and principles thereunder applyin determining the items of income, gain,loss, and deduction that may be subject tocorrective allocation.

(c) Allocation of gross income and gainand gross loss and deduction. If the capi-tal account reallocation is from the historicpartners to the exercising option holder,then the corrective allocations must first bemade with gross income and gain. If anallocation of gross income and gain alone

does not completely take into account thecapital account reallocation in a given year,then the partnership must also make cor-rective allocations using a pro rata por-tion of items of gross loss and deduction asto further take into account the capital ac-count reallocation. Conversely, if the cap-ital account reallocation is from the exer-cising option holder to the historic part-ners, then the corrective allocations mustfirst be made with gross loss and deduc-tion. If an allocation of gross loss anddeduction alone does not completely takeinto account the capital account realloca-tion in a given year, then the partnershipmust also make corrective allocations us-ing a pro rata portion of items of gross in-come and gain as to further take into ac-count the capital account reallocation.

(5) * * *Example 31. (i) In Year 1, A and B each con-

tribute cash of $9,000 to LLC, a newly formed

limited liability company classified as a partnershipfor Federal tax purposes, in exchange for 100 units inLLC. Under the LLC agreement, each unit is entitledto participate equally in the profits and losses ofLLC. LLC uses the cash contributions to purchasea nondepreciable property, Property A, for $18,000.Later in Year 1, at a time when Property A is valuedat $20,000, LLC issues an option to C. The optionallows C to buy 100 units in LLC for an exerciseprice of $15,000 in Year 2. C pays $1,000 to LLCto purchase the option. Assume that the LLC agree-ment satisfies the requirements of paragraph (b)(2)of this section and requires that, on the exercise ofa noncompensatory option, LLC comply with therules of paragraph (b)(2)(iv)(s) of this section. Alsoassume that C’s option is a noncompensatory optionunder §1.721–2(f), and that C is not treated as apartner with respect to the option. Under paragraph(b)(2)(iv)(f)(5)(iv) of this section, LLC revalues itsproperty in connection with the issuance of the op-tion. The $2,000 unrealized gain in Property A isallocated equally to A and B under the LLC agree-ment. In Year 2, C exercises the option, contributingthe $15,000 exercise price to the partnership. At thetime the option is exercised, the value of Property Ais $35,000.

Year 1 After Issuance of the Option

Assets Liabilities and Capital

Basis Value Basis Value

Cash CashPremium $1,000 $1,000 Premium $1,000 $1,000

Property A $18,000 $20,000 A $9,000 $10,000B $9,000 $10,000

Total $19,000 $21,000 $19,000 $21,000

Year 2 After Exercise of the Option

Assets Liabilities and Capital

Basis ValueBasis Value

Property A $18,000 $35,000 A $9,000 $17,000Cash B $9,000 $17,000Premium $ 1,000 $ 1,000 C $16,000 $17,000Exercise Price $15,000 $15,000

Total $34,000 $51,000 $34,000 $51,000

(ii) In lieu of revaluing LLC’s property underparagraph (b)(2)(iv)(f) of this section immediatelybefore the option is exercised, under paragraph(b)(2)(iv)(s)(1) of this section LLC must revalueits property under the principles of paragraph(b)(2)(iv)(f) of this section immediately after the ex-ercise of the option. Under paragraphs (b)(2)(iv)(b)and (b)(2)(iv)(d)(4) of this section, C’s capitalaccount is credited with the amount paid for theoption ($1,000) and the exercise price of the option($15,000). Under the LLC agreement, however, C isentitled to LLC capital corresponding to 100 units ofLLC (1/3 of LLC’s capital). Immediately after theexercise of the option, LLC’s properties are cash of

$16,000 ($1,000 premium and $15,000 exercise pricecontributed by C) and Property A, which has a valueof $35,000. Thus, the total value of LLC’s propertyis $51,000. C is entitled to LLC capital equal to 1/3of this value, or $17,000. As C is entitled to $1,000more LLC capital than C’s capital contributions toLLC, the provisions of paragraph (b)(2)(iv)(s) of thissection apply.

(iii) Under paragraph (b)(2)(iv)(s)(2) of this sec-tion, LLC must increase C’s capital account from$16,000 to $17,000 by, first, revaluing LLC prop-erty in accordance with the principles of paragraph(b)(2)(iv)(f) of this section. The unrealized gain inLLC’s property (Property A) which has not been re-

flected in the capital accounts previously is $15,000($35,000 value less $20,000 book value). Underparagraph (b)(2)(iv)(s)(2) of this section, the first$1,000 of this gain must be allocated to C, and theremaining $14,000 of this gain is allocated equallyto A and B in accordance with the LLC agreement.Because the revaluation of LLC property under para-graph (b)(2)(iv)(s)(2) of this section increases C’scapital account to the amount agreed on by the mem-bers, LLC is not required to make a capital accountreallocation under paragraph (b)(2)(iv)(s)(3) of thissection. The $17,000 of unrealized booked gain inProperty A ($35,000 value less $18,000 basis) isshared $8,000 to each A and B, and $1,000 to C. Un-

2013–13 I.R.B. 690 March 25, 2013

der paragraph (b)(2)(iv)(f)(4) of this section, the taxitems from the revalued property must be allocatedin accordance with section 704(c) principles.

A B C

Tax Book Tax Book Tax BookCapital account after exercise . $9,000 $10,000 $9,000 $10,000 $16,000 $16,000

Revaluation amount . . . . . . . . . 0 $7,000 0 $7,000 0 $1,000

Capital account afterrevaluation . . . . . . . . . . . . . . . . .

$9,000 $17,000 $9,000 $17,000 $16,000 $17,000

Example 32. (i) Assume the same facts as in Ex-ample 31, except that, in Year 2, before the exerciseof the option, LLC sells Property A for $40,000, rec-ognizing gain of $22,000. LLC does not distributethe sale proceeds to its partners and it has no other

earnings in Year 2. With the proceeds ($40,000),LLC purchases Property B, a nondepreciable prop-erty. Also assume that C exercises the noncompen-satory option at the beginning of Year 3 and that, atthe time C exercises the option, the value of Property

B is $41,000. In Year 3, LLC has gross income of$3,000 and deductions of $1,500.

Year 2 After Purchase of Property B

Assets Liabilities and Capital

Basis Value Basis Value

Cash CashPremium $1,000 $1,000 Premium $1,000 $1,000

Property B $40,000 $40,000 A $20,000 $20,000B $20,000 $20,000

Total $41,000 $41,000 $41,000 $41,000

Year 3 After Exercise of the Option

Assets Liabilities and CapitalBasis Value Basis Value

Property B $40,000 $41,000 A $20,000 $19,000B $9,000 $17,000

Cash $16,000 $16,000 C $16,000 $19,000

Total $56,000 $57,000 $56,000 $57,000

(ii) Under paragraphs (b)(2)(iv)(b) and(b)(2)(iv)(d)(4) of this section, C’s capital account iscredited with the amount paid for the option ($1,000)and the exercise price of the option ($15,000). Underthe LLC agreement, however, C is entitled to LLCcapital corresponding to 100 units of LLC (1/3 ofLLC’s capital). Immediately after the exercise of theoption, LLC’s properties are $16,000 cash ($1,000option premium and $15,000 exercise price con-tributed by C) and Property B, which has a value of$41,000. Thus, the total value of LLC’s property is$57,000. C is entitled to LLC capital equal to 1/3 ofthis amount, or $19,000. As C is entitled to $3,000more LLC capital than C’s capital contributions toLLC, the provisions of paragraph (b)(2)(iv)(s) of thissection apply.

(iii) In lieu of revaluing LLC’s property underparagraph (b)(2)(iv)(f) of this section immediatelybefore the option is exercised, under paragraph

(b)(2)(iv)(s)(1) of this section LLC must revalueits property under the principles of paragraph(b)(2)(iv)(f) of this section immediately after theexercise of the option. Under paragraph (b)(2)(iv)(s)of this section, LLC must increase C’s capital ac-count from $16,000 to $19,000 by, first, revaluingLLC property in accordance with the principles ofparagraph (b)(2)(iv)(f) of this section, and allocatingall $1,000 of unrealized gain from the revaluation toC under paragraph (b)(2)(iv)(s)(2). This brings C’scapital account to $17,000.

(iv) Next, under paragraph (b)(2)(iv)(s)(3) of thissection, LLC must reallocate $2,000 of capital fromthe existing partners (A and B) to C to bring C’s cap-ital account to $19,000 (the capital account realloca-tion). As A and B shared equally in all items fromProperty A, whose sale gave rise to the need for thecapital account reallocation, each member’s capital

account is reduced by 1/2 of the $2,000 reduction($1,000).

(v) Under paragraph (b)(2)(iv)(s)(4) of this sec-tion, beginning in the year in which the option isexercised, LLC must make corrective allocationsso as to take into account the capital account re-allocation. In Year 3, LLC has gross income of$3,000 and deductions of $1,500. Under paragraph(b)(2)(x)(c), LLC must allocate the book gross in-come of $3,000 equally among A, B, and C, but fortax purposes, however, LLC must allocate all of itsgross income ($3,000) to C. LLC’s book and taxdeductions ($1,500) will then be allocated equallyamong A, B, and C. The $1,000 unrealized bookedgain in Property B has been allocated entirely toC. Under paragraph (b)(2)(iv)(f)(4) of this section,the tax items from Property B must be allocated inaccordance with section 704(c) principles.

March 25, 2013 691 2013–13 I.R.B.

A B C

Tax Book Tax Book Tax Book

Capital account after exercise . . . $20,000 $20,000 $20,000 $20,000 $16,000 $16,000Revaluation. . . . . . . . . . . . . . . . . . . 0 0 0 0 0 $1,000

Capital account after revaluation $20,000 $20,000 $20,000 $20,000 $16,000 $17,000

Capital account reallocation . . . . 0 ($1,000) 0 ($1,000) 0 $2,000

Capital account after capitalaccount reallocation . . . . . . . . . . .

$20,000 $19,000 $20,000 $19,000 $16,000 $19,000

Income allocation (Yr.3) . . . . . . . 0 $1,000 0 $1,000 $3,000 $1,000

Deduction allocation (Yr. 3) . . . . ($500) ($500) ($500) ($500) ($500) ($500)

Capital account at end of year 3 . $19,500 $19,500 $19,500 $19,500 $18,500 $19,500

Example 33. (i) In Year 1, D and E each con-tribute cash of $10,000 to LLC, a newly formed lim-ited liability company classified as a partnership forFederal tax purposes, in exchange for 100 units inLLC. Under the LLC agreement, each unit is entitledto participate equally in the profits and losses of LLC.LLC uses the cash contributions to purchase two non-

depreciable properties, Property A and Property B,for $10,000 each. Also in Year 1, at a time when Prop-erty A and Property B are still valued at $10,000 each,LLC issues an option to F. The option allows F to buy100 units in LLC for an exercise price of $15,000 inYear 2. F pays $2,000 to LLC to purchase the option.Assume that the LLC agreement satisfies the require-

ments of paragraph (b)(2) of this section and requiresthat, on the exercise of a noncompensatory option,LLC comply with the rules of paragraph (b)(2)(iv)(s)of this section. Also assume that F’s option is a non-compensatory option under §1.721–2(f), and that F isnot treated as a partner with respect to the option.

End of Year 1

Assets Liabilities and Capital

Basis Value Basis Value

Cash CashPremium $2,000 $2,000 Premium $2,000 $2,000

Property A $10,000 $10,000 D D DProperty B $10,000 $10,000 E $10,000 $10,000

Total $22,000 $22,000 $22,000 $22,000

(ii) In year 2, prior to the exercise of F’s option, Gcontributes $18,000 to LLC for 100 units in LLC. Atthe time of G’s contribution, Property A has a valueof $32,000 and a basis of $10,000, Property B has avalue of $5,000 and a basis of $10,000, and the fairmarket value of F’s option is $3,000. In year 2, LLChas no item of income, gain, loss, deduction, or credit.

(iii) Upon G’s admission to the partnership, thecapital accounts of D and E (which were $10,000 eachprior to G’s admission) are, in accordance with para-graph (b)(2)(iv)(f) of this section, adjusted upward toreflect their shares of the unrealized appreciation inthe partnership’s property. Property A has $22,000of unrealized gain and Property B has $5,000 of un-

realized loss. Under paragraph (b)(2)(iv)(f)(1) of thissection, the adjustments must be based on the fairmarket value of LLC property (taking section 7701(g)into account) on the date of the adjustment, as deter-mined under paragraph (b)(2)(iv)(h) of this section.The fair market value of partnership property mustbe reduced by the excess of the fair market value ofthe option as of the date of the adjustment over theconsideration paid by F to acquire the option ($3,000- $2,000 = $1,000) (under paragraph (b)(2)(iv)(h)(2)of this section), but only to the extent of the unreal-ized appreciation in LLC property that has not beenreflected in the capital accounts previously ($22,000).This $1,000 reduction is allocated entirely to Property

A, the only asset having unrealized appreciation notreflected in the capital accounts previously. There-fore, the book value of Property A is $31,000. Ac-cordingly, the revaluation adjustments must reflectonly $16,000 of the net appreciation in LLC’s prop-erty ($21,000 of unrealized gain in Property A and$5,000 of unrealized loss in Property B). Thus, D’sand E’s capital accounts (which were $10,000 eachprior to G’s admission) must be adjusted upward (by$8,000) to $18,000 each. The $21,000 of built-in gainin Property A and the $5,000 of built-in loss in Prop-erty B must be allocated equally between D and E inaccordance with section 704(c) principles.

2013–13 I.R.B. 692 March 25, 2013

Assets

Basis Value Option Adjustment 704(b) BookProperty A $10,000 $32,000 ($1,000) $31,000Property B $10,000 $5,000 0 $5,000Cash $2,000 $2,000 0 $2,000

Subtotal $22,000 $39,000 ($1,000) $38,000

Cash Contributedby G

$18,000 $18,000 0 $18,000

Total $40,000 $57,000 ($1,000) $56,000

Liabilities and Capital

Tax Value 704(b) Book

Cash

Premium

(option value) $2,000 $3,000 $2,000D $10,000 $18,000 $18,000E $10,000 $18,000 $18,000G $18,000 $18,000 $18,000

Total $40,000 $57,000 $56,000

(iv) In Year 2, after the admission of G, whenProperty A still has a value of $32,000 and a basisof $10,000 and Property B still has a value of $5,000and a basis of $10,000, F exercises the option. Onthe exercise of the option, F’s capital account is cred-ited with the amount paid for the option ($2,000) andthe exercise price of the option ($15,000). Under theLLC agreement, however, F is entitled to LLC capi-tal corresponding to 100 units of LLC (1/4 of LLC’scapital). Immediately after the exercise of the option,LLC’s properties are worth $72,000 ($15,000 con-tributed by F, plus the value of LLC property priorto the exercise of the option, $57,000). F is entitledto LLC capital equal to 1/4 of this value, or $18,000.

As F is entitled to $1,000 more LLC capital than F’scapital contributions to LLC, the provisions of para-graph (b)(2)(iv)(s) of this section apply.

(v) Under paragraph (b)(2)(iv)(s) of this section,LLC must increase F’s capital account from $17,000to $18,000 by, first, revaluing LLC property in accor-dance with the principles of paragraph (b)(2)(iv)(f) ofthis section and allocating the first $1,000 of unreal-ized gain to F. The total unrealized gain which hasnot been reflected in the capital accounts previouslyis $1,000 (the difference between the actual value ofProperty A, $32,000, and the book value of PropertyA, $31,000). The entire $1,000 of book gain is al-located to F under paragraph (b)(2)(iv)(s)(2) of this

section. Because the revaluation of LLC property un-der paragraph (b)(2)(iv)(s)(2) of this section increasesF’s capital account to the amount agreed on by themembers, LLC is not required to make a capital ac-count reallocation under paragraph (b)(2)(iv)(s)(3) ofthis section. The ($5,000) of unrealized booked lossin Property B has been allocated ($2,500) to each Dand E, and the $22,000 of unrealized booked gain inProperty A has been allocated $10,500 to each D andE, and $1,000 to F. Under paragraph (b)(2)(iv)(f)(4)of this section, the tax items from Properties A and Bmust be allocated in accordance with section 704(c)principles.

D E G F

Tax Book Tax Book Tax Book Tax Book

Capital account afteradmission of G . . . . . . . . .

$10,000 $18,000 $10,000 $18,000 $18,000 $18,000 0 0

Capital account afterexercise of F’s option . . . $10,000 $18,000 $10,000 $18,000 $18,000 $18,000 $17,000 $17,000

Revaluation. . . . . . . . . . . . 0 0 0 0 0 0 0 $1,000

Capital account afterrevaluation . . . . . . . . . . . . $10,000 $18,000 $10,000 $18,000 $18,000 $18,000 $17,000 $18,000

Example 34. (i) On the first day of Year 1, H, I,and J form LLC, a limited liability company classi-fied as a partnership for Federal tax purposes. H andI each contribute $10,000 cash to LLC for 100 units ofcommon interest in LLC. J contributes $10,000 cashfor a convertible preferred interest in LLC. J’s con-vertible preferred interest entitles J to receive an an-

nual allocation and distribution of cumulative LLCnet profits in an amount equal to 10 percent of J’sunreturned capital. J’s convertible preferred interestalso entitles J to convert, in Year 3, J’s preferred inter-est into 100 units of common interest. If J converts,J has the right to the same share of LLC capital as Jwould have had if J had held the 100 units of com-

mon interest since the formation of LLC. Under theLLC agreement, each unit of common interest has anequal right to share in any LLC net profits that re-main after payment of the preferred return. Assumethat the LLC agreement satisfies the requirements ofparagraph (b)(2) of this section and requires that, onthe exercise of a noncompensatory option, LLC com-

March 25, 2013 693 2013–13 I.R.B.

ply with the rules of paragraph (b)(2)(iv)(s) of thissection. Also assume that J’s right to convert the pre-ferred interest into a common interest qualifies as anoncompensatory option under §1.721–2(f), and that,prior to the exercise of the conversion right, the con-version right is not treated as a partnership interest.

(ii) LLC uses the $30,000 to purchase Property Z,a property that is depreciable on a straight-line basisover 15 years. In each of Years 1 and 2, LLC has netincome of $2,500, comprised of $4,500 of gross in-come and $2,000 of depreciation. It allocates $1,000of net income to J and distributes $1,000 to J in each

year. LLC allocates the remaining $1,500 of net in-come equally to H and I in each year but makes nodistributions to H and I.

H I J

Tax Book Tax Book Tax Book

Capital account upon formation . . . . . . . $10,000 $10,000 $10,000 $10,000 $10,000 $10,000

Allocation of income Years 1 and 2 . . . . $1,500 $1,500 $1,500 $1,500 $2,000 $2,000

DistributionsYears 1 and 2. . . . . . . . . . . . 0 0 0 0 ($2,000) ($2,000)

Capital account at end of Year 2 . . . . . . . $11,500 $11,500 $11,500 $11,500 $10,000 $10,000

(iii) At the beginning of Year 3, when PropertyZ has a value of $38,000 and a basis of $26,000($30,000 original basis less $4,000 of deprecia-tion) and LLC has accumulated undistributed cashof $7,000 ($9,000 gross receipts less $2,000 dis-tributions), J converts J’s preferred interest into acommon interest. Under paragraphs (b)(2)(iv)(b) and

(b)(2)(iv)(d)(4) of this section, J’s capital accountafter the conversion equals J’s capital account beforethe conversion, $10,000. On the conversion of thepreferred interest, however, J is entitled to LLC capi-tal corresponding to 100 units of common interest inLLC (1/3 of LLC’s capital). At the time of the con-version, the total value of LLC property is $45,000.

J is entitled to LLC capital equal to 1/3 of this value,or $15,000. As J is entitled to $5,000 more LLCcapital than J’s capital account immediately after theconversion, the provisions of paragraph (b)(2)(iv)(s)of this section apply.

Assets Liabilities and CapitalBasis Value Basis Value

Property Z $26,000 $38,000 H $11,500 $15,000Undistributed I $11,500 $15,000Income $7,000 $7,000 J $10,000 $15,000

Total $33,000 $45,000 Total $33,000 $45,000

(iv) Under paragraph (b)(2)(iv)(s) of this section,LLC must increase J’s capital account from $10,000to $15,000 by, first, revaluing LLC property in accor-dance with the principles of paragraph (b)(2)(iv)(f)of this section, and allocating the first $5,000 of un-realized gain from that revaluation to J. The unreal-ized gain in Property Z is $12,000 ($38,000 valueless $26,000 basis). The first $5,000 of this unre-

alized gain must be allocated to J under paragraph(b)(2)(iv)(s)(2) of this section. The remaining $7,000of the unrealized gain must be allocated equally to Hand I in accordance with the LLC agreement. Be-cause the revaluation of LLC property under para-graph (b)(2)(iv)(s)(2) of this section increases J’s cap-ital account to the amount agreed on by the members,LLC is not required to make a capital account reallo-

cation under paragraph (b)(2)(iv)(s)(3) of this section.The $12,000 of unrealized booked gain in Property Zhas been allocated $3,500 to each H and I, and $5,000to J. Under paragraph (b)(2)(iv)(f)(4) of this section,the tax items from the revalued property must be al-located in accordance with section 704(c) principles.

H I J

Tax Book Tax Book Tax Book

Capital account prior toconversion. . . . . . . . . . . . . . . . . . . .

$11,500 $11,500 $11,500 $11,500 $10,000 $10,000

Revaluation on conversion. . . . . . 0 $3,500 0 $3,500 0 $5,000

Capital account after conversion. $11,500 $15,000 $11,500 $15,000 $10,000 $15,000

Example 35. (i) On the first day of Year 1, K andL each contribute cash of $10,000 to LLC, a newlyformed limited liability company classified as a part-nership for Federal tax purposes, in exchange for 100units in LLC. Immediately after its formation, LLCborrows $10,000 from M. Under the terms of thedebt instrument, interest of $1,000 is uncondition-ally payable at the end of each year and the $10,000stated principal is repayable in five years. Through-out the term of the indebtedness, M has the right toconvert the debt instrument into 100 units in LLC.

If M converts, M has the right to the same share ofLLC capital as M would have had if M had held 100units in LLC since the formation of LLC. Under theLLC agreement, each unit participates equally in theprofits and losses of LLC and has an equal right toshare in LLC capital. Assume that the LLC agree-ment satisfies the requirements of paragraph (b)(2)of this section and requires that, on the exercise of anoncompensatory option, LLC comply with the rulesof paragraph (b)(2)(iv)(s) of this section. Also as-sume that M’s right to convert the debt into an interest

in LLC qualifies as a noncompensatory option under§1.721–2(f), and that, prior to the exercise of the con-version right, M is not treated as a partner with respectto the convertible debt.

(ii) LLC uses the $30,000 to purchase PropertyD, property that is depreciable on a straight-line basisover 15 years. In each of Years 1, 2, and 3, LLC hasnet income of $2,000, comprised of $5,000 of grossincome, $2,000 of depreciation, and interest expense(representing payments of interest on the loan from

2013–13 I.R.B. 694 March 25, 2013

M) of $1,000. LLC allocates this income equally toK and L but makes no distributions to either K or L.

K L M

Tax Book Tax Book Tax Book

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

(iii) At the beginning of Year 4, at a time whenProperty D, LLC’s only asset, has a value of $33,000and basis of $24,000 ($30,000 original basis less$6,000 depreciation in Years 1 through 3), andLLC has accumulated undistributed cash of $12,000($15,000 gross income less $3,000 of interest pay-ments) in LLC, M converts the debt into a 1/3

interest in LLC. Under paragraphs (b)(2)(iv)(b) and(b)(2)(iv)(d)(4) of this section, M’s capital accountafter the conversion is the adjusted issue price of thedebt immediately before M’s conversion of the debt,$10,000, plus any accrued but unpaid qualified statedinterest on the debt, $0. On the conversion of thedebt, however, M is entitled to receive LLC capital

corresponding to 100 units of LLC (1/3 of LLC’scapital). At the time of the conversion, the total valueof LLC’s property is $45,000. M is entitled to LLCcapital equal to 1/3 of this value, or $15,000. AsM is entitled to $5,000 more LLC capital than M’scapital contribution to LLC ($10,000), the provisionsof paragraph (b)(2)(iv)(s) of this section apply.

Assets Liabilities and Capital

Basis Value Basis Value

Property D $24,000 $33,000 K $13,000 $15,000Cash $12,000 $12,000 L $13,000 $15,000

M $10,000 $15,000

Total $36,000 $45,000 $36,000 $45,000

(iv) Under paragraph (b)(2)(iv)(s) of this sec-tion, LLC must increase M’s capital account from$10,000 to $15,000 by, first, revaluing LLC prop-erty in accordance with the principles of paragraph(b)(2)(iv)(f) of this section, and allocating the first$5,000 of unrealized gain from that revaluation toM. The unrealized gain in Property D is $9,000($33,000 value less $24,000 basis). The first $5,000

of this unrealized gain must be allocated to M underparagraph (b)(2)(iv)(s)(2) of this section, and theremaining $4,000 of the unrealized gain must beallocated equally to K and L in accordance with theLLC agreement. Because the revaluation of LLCproperty under paragraph (b)(2)(iv)(s)(2) of thissection increases M’s capital account to the amountagreed upon by the members, LLC is not required to

make a capital account reallocation under paragraph(b)(2)(iv)(s)(3) of this section. The $9,000 unrealizedbooked gain in property D has been allocated $2,000to each K and L, and $5,000 to M. Under paragraph(b)(2)(iv)(f)(4) of this section, the tax items from therevalued property must be allocated in accordancewith section 704(c) principles.

K L M

Tax Book Tax Book Tax Book

Year 4 capital account prior toexercise . . . . . . . . . . . . . . . . . . . . . .

$13,000 $13,000 $13,000 $13,000 0 0

Capital account after exercise . . . $13,000 $13,000 $13,000 $13,000 $10,000 $10,000

Revaluation. . . . . . . . . . . . . . . . . . . 0 $2,000 0 $2,000 0 $ 5,000

Capital account after revaluation $13,000 $15,000 $13,000 $15,000 $10,000 $15,000

Par. 4. Section 1.704–3 is amendedby revising the first sentence of paragraph(a)(6)(i) to read as follows:

§1.704–3 Contributed property.

(a) * * *(6) * * *(i) * * * The principles of

this section apply to allocations with

respect to property for which differ-ences between book value and ad-justed tax basis are created when apartnership revalues partnership prop-erty pursuant to §1.704–1(b)(2)(iv)(f)or 1.704–1(b)(2)(iv)(s) (reverse section704(c) allocations). * * *

* * * * *

Par. 5. Section 1.721–2 is added to readas follows:

§1.721–2 Noncompensatory options.

(a) Exercise of a noncompensatory op-tion—(1) In general. Notwithstanding§1.721–1(b)(1), section 721 applies to theexercise (as defined in paragraph (g)(4)

March 25, 2013 695 2013–13 I.R.B.

of this section) of a noncompensatory op-tion (as defined in paragraph (f) of thissection). Except as provided in paragraph(a)(2) of this section, section 721 applies tothe exercise of a noncompensatory optionwhen the holder pays the exercise pricewith either property or cash, regardless ofwhether the terms of the option require orpermit cash payment. However, if the ex-ercise price (as defined in paragraph (g)(5)of this section) of a noncompensatory op-tion exceeds the capital account receivedby the option holder on the exercise ofthe option, then general tax principles willapply to determine the tax consequencesof the transaction.

(2) Exception. Section 721 does not ap-ply to the exercise of a noncompensatoryoption to the extent that the exercise priceis satisfied with the partnership’s obliga-tion to the option holder for unpaid rent,royalties, or interest (including accruedoriginal issue discount) that accrued on orafter the beginning of the option holder’sholding period for the obligation. Theissuing partnership will not recognize gainor loss upon the transfer of a partnershipinterest to an exercising option holder insatisfaction of such unpaid rent, royalties,or interest (including accrued original is-sue discount).

(b) Transfer of property or satisfactionof an obligation in exchange for a non-compensatory option—(1) In general. Ex-cept as provided in paragraph (b)(2) of thissection, section 721 does not apply to atransfer of property to a partnership in ex-change for a noncompensatory option, orto the satisfaction of a partnership obliga-tion with a noncompensatory option.

(2) Exception. Section 721 does applyto a transfer of property to a partnershipin exchange for convertible equity (as de-fined in paragraph (g)(3) of this section).

(c) Lapse of a noncompensatory option.Section 721 does not apply to the lapse ofa noncompensatory option.

(d) Cash settlement of a noncompen-satory option. Section 721 does not applyto the settlement of a noncompensatory op-tion in cash or property other than a part-nership interest in the issuing partnership.

(e) Issuance of a partnership interest insatisfaction of indebtedness for interest onconvertible debt. Section 721 does not ap-ply to the transfer of a partnership interestto a noncompensatory option holder uponconversion of convertible debt in the part-

nership to the extent that the transfer is insatisfaction of the partnership’s indebted-ness for unpaid interest (including accruedoriginal issue discount) on the convertibledebt that accrued on or after the beginningof the convertible debt holder’s holding pe-riod for the indebtedness. The debtor part-nership will not, however, recognize gainor loss upon such conversion. For rules indetermining whether a partnership interesttransferred to a creditor is treated as pay-ment of interest or accrued original issuediscount, see §§1.446–2 and 1.1275–2, re-spectively.

(f) Scope. The provisions of this sectionapply only to noncompensatory options.For purposes of this section, the term non-compensatory option means an option (asdefined in paragraph (g)(1) of this section)issued by a partnership (the issuing part-nership), other than an option issued inconnection with the performance of ser-vices.

(g) Definitions. The following defini-tions apply for the purposes of this section:

(1) Option means a contractual rightto acquire an interest in the issuing part-nership, including a call option, warrant,or other similar arrangement, the conver-sion feature of convertible debt (as de-fined in paragraph (g)(2) of this section),or the conversion feature of convertibleequity (as defined in paragraph (g)(3) ofthis section). To achieve the purposes ofthis section, the Commissioner can treatother contractual agreements, including afutures contract, a forward contract, or anotional principal contract, as an option. Acontract that otherwise constitutes an op-tion will not fail to be treated as an optionfor purposes of this section merely becauseit may or must be settled in cash or prop-erty other than a partnership interest.

(2) Convertible debt is any indebted-ness of a partnership that is convertibleinto an interest in the partnership that is-sued the debt.

(3) Convertible equity is equity in apartnership that is convertible into a dif-ferent equity interest in the partnership thatissued the convertible equity.

(4) Exercise means the exercise of anoption in exchange for an interest in theissuing partnership or the conversion ofconvertible debt or convertible equity intoan interest in the issuing partnership.

(5) Exercise price means, in the caseof a call option, the exercise price of the

call option; in the case of convertible eq-uity, the converting partner’s capital ac-count with respect to that convertible eq-uity, increased by the fair market value ofcash or other property contributed to thepartnership in connection with the conver-sion; and, in the case of convertible debt,the adjusted issue price (within the mean-ing of §1.1275–1(b)) of the debt converted,increased by accrued but unpaid qualifiedstated interest on the debt and by the fairmarket value of cash or other property con-tributed to the partnership in connectionwith the conversion.

(h) Example. The following exampleillustrates the provisions of this section:

Example. In Year 1, L and M form generalpartnership LM with cash contributions of $5,000each, which are used to purchase land, Property D,for $10,000. In that same year, LM issues an optionto N to buy a one-third interest in LM at any timebefore the end of Year 3. The exercise price of theoption is $5,000, payable in either cash or property.N transfers Property E with a basis of $600 and avalue of $1,000 to the partnership in exchange forthe option. N provides no other consideration forthe option. Assume that N’s option is a noncompen-satory option under paragraph (f) of this section andthat N is not treated as a partner with respect to theoption. Under paragraph (b) of this section, section721(a) does not apply to N’s transfer of Property E toLM in exchange for the option. In accordance with§1.1001–1, upon N’s transfer of Property E to thepartnership in exchange for the option, N recognizes$400 of gain. Under open transaction principles ap-plicable to noncompensatory options, the partnershipdoes not recognize any income for the premium (theproperty received in exchange for the option). Thepartnership has a basis of $1,000 in Property E. InYear 3, when the partnership property is valued at$16,000, N exercises the option, contributing Prop-erty F with a basis of $3,000 and a fair market valueof $5,000 to the partnership. Under paragraph (a) ofthis section, neither the partnership nor N recognizesgain upon N’s contribution of property to the partner-ship upon the exercise of the option. Under section723, the partnership has a basis of $3,000 in PropertyF. The partnership does not recognize income for thepremium (Property E) upon exercise of the option.See §1.704–1(b)(2)(iv)(d)(4) and (s) for special rulesapplicable to capital account adjustments on theexercise of a noncompensatory option.

(i) Effective/applicability date. Thissection applies to noncompensatory op-tions that are issued on or after February5, 2013.

Par. 6. Section 1.761–3 is added to readas follows:

§1.761–3 Certain option holders treatedas partners.

(a) Noncompensatory option treated asa partnership interest—(1) General rule.

2013–13 I.R.B. 696 March 25, 2013

A noncompensatory option (as defined inparagraph (b)(2) of this section) is treatedas a partnership interest for all Federal taxpurposes if, on the date of a measurementevent (as defined in paragraph (c) of thissection) with respect to the option—

(i) The noncompensatory option (andany agreements associated with it) pro-vides the option holder with rights that aresubstantially similar to the rights affordeda partner (as determined under paragraph(d) of this section); and

(ii) There is a strong likelihood that thefailure to treat the holder of the noncom-pensatory option as a partner would resultin a substantial reduction in the presentvalue of the partners’ and noncompen-satory option holder’s aggregate Federaltax liabilities (as determined under para-graph (e) of this section).

(2) Continuing applicability of generalprinciples of law. The fact that an option isnot treated as a partnership interest underthis section does not prevent the optionfrom being treated as a partnership interestunder general principles of Federal tax law.

(3) Timing of characterization. If anoncompensatory option is treated underthis section as a partnership interest, thattreatment applies, as the case may be, uponthe issuance of the option, or immediatelybefore any other measurement event thatgave rise to the characterization underparagraph (a)(1) of this section.

(4) Effect of characterization. If anoncompensatory option is treated as apartnership interest under this section orunder general principles of law, the optionholder will be treated as a partner withrespect to the partnership interest and willreceive a distributive share of the partner-ship’s income, gain, loss, deduction, orcredit (or items thereof), as determinedin accordance with that partner’s interestin the partnership (taking into account allfacts and circumstances) in accordancewith §1.704–1(b)(3). Once a noncompen-satory option is treated as a partnershipinterest, in no event may it be character-ized as an option thereafter.

(b) Definitions. For purposes of thissection:

(1) Look-through entity. Look-throughentity means an entity described in§1.704–1(b)(2)(iii)(d)(2).

(2) Noncompensatory option. Non-compensatory option means an option (asdefined in paragraph (b)(3) of this sec-

tion) issued by a partnership, other thanan option issued in connection with theperformance of services. For purposesof applying this section, an option thatwould be a noncompensatory option un-der this paragraph if it had been issuedby a partnership is a noncompensatoryoption if the option was issued by an eligi-ble entity (as defined in §301.7701–3(a))that would become a partnership under§301.7701–3(f)(2) if the noncompensatoryoption holder were treated as a partner.Also for purposes of applying this section,if a noncompensatory option is issued bysuch an eligible entity, then the eligibleentity is treated as a partnership.

(3) Option. An option is a contractualright to acquire an interest in the issu-ing partnership, including a call option,warrant, or other similar arrangement.In addition, an option includes convert-ible debt (as defined in §1.721–2(g)(2))and convertible equity (as defined in§1.721–2(g)(3)). To achieve the purposesof this section, the Commissioner can treatother contractual agreements, including aforward contract, a futures contract, or anotional principal contract, as an option.A contract that otherwise constitutes anoption will not fail to be treated as anoption for purposes of this section merelybecause it may or must be settled in cash orproperty other than a partnership interest.

(4) Underlying partnership interest.Underlying partnership interest meansthe interest in the issuing partnership thatwould be acquired by the noncompen-satory option holder upon exercise of thenoncompensatory option.

(c) Measurement event—(1) Generalrule. Except as provided in paragraph(c)(2) of this section, a measurement eventwith respect to a noncompensatory optionis any of the following events:

(i) Issuance of the noncompensatoryoption;

(ii) An adjustment of the terms (modifi-cation) of the noncompensatory option orof the underlying partnership interest (asdefined in paragraph (b)(4) of this section)(including an adjustment pursuant to theterms of the noncompensatory option orthe underlying partnership interest);

(iii) Transfer of the noncompensatoryoption if either:

(A) The option may be exercised (orsettled) more than 12 months after its is-suance, or

(B) The transfer is pursuant to a planin existence at the time of the issuance ormodification of the noncompensatory op-tion that has as a principal purpose the sub-stantial reduction of the present value ofthe aggregate Federal tax liabilities of thepartners and the noncompensatory optionholder (under paragraph (a)(1)(ii) of thissection);

(2) Events not treated as measurementevents. A measurement event does not in-clude the following events:

(i) A transfer of the noncompensatoryoption at death, between spouses or formerspouses under section 1041, or in a trans-action that is disregarded for Federal taxpurposes;

(ii) A modification that neither materi-ally increases the likelihood that the non-compensatory option will be exercised (asdescribed in paragraph (d)(2) of this sec-tion) nor provides the noncompensatoryoption holder with partner attributes (asdescribed in paragraph (d)(3) of this sec-tion);

(iii) A change in the strike price of anoncompensatory option or in the interestsin the issuing partnership that may be is-sued or transferred pursuant to the non-compensatory option, made pursuant to abona fide, reasonable adjustment formulathat has the intended effect of preventingdilution of the interests of the noncompen-satory option holder;

(iv) Any other event as provided inguidance published in the Internal Rev-enue Bulletin.

(d) Rights substantially similar to part-ner rights—(1) In general. A noncom-pensatory option provides the holder withrights that are substantially similar to therights afforded to a partner if either the op-tion is reasonably certain to be exercisedor the option holder possesses partner at-tributes.

(2) Reasonable certainty of exer-cise—(i) General rule. The determinationof whether a noncompensatory option isreasonably certain to be exercised at thetime of a measurement event is based onall the facts and circumstances, includ-ing—

(A) The fair market value of the partner-ship interest that is the subject of the non-compensatory option;

(B) The strike price of the noncompen-satory option;

March 25, 2013 697 2013–13 I.R.B.

(C) The term of the noncompensatoryoption;

(D) The volatility of the value or in-come of the issuing partnership or the un-derlying partnership interest;

(E) Anticipated distributions by thepartnership during the term of the non-compensatory option;

(F) Any other special option features,such as a strike price that fluctuates;

(G) The existence of related options,including reciprocal options; and

(H) Any other arrangements affectingor undertaken with a principal purpose ofaffecting the likelihood that the noncom-pensatory option will be exercised.

(ii) Safe harbors—(A) Generalrule. Except as provided in paragraph(d)(2)(ii)(C) of this section, a noncompen-satory option is not considered reasonablycertain to be exercised if, as of the date ofa measurement event with respect to thenoncompensatory option—

(1) The option may be exercised nomore than 24 months after the date of themeasurement event and the strike price isequal to or greater than 110 percent of thefair market value of the underlying part-nership interest on the date of the measure-ment event; or

(2) The terms of the option provide thatthe strike price of the option is equal toor greater than the fair market value ofthe underlying partnership interest on theexercise date.

(B) Options exercisable at fair mar-ket value. For purposes of paragraph(d)(2)(ii)(A) of this section, an optionwhose strike price is determined by a for-mula is considered to have a strike priceequal to or greater than the fair marketvalue of the underlying partnership inter-est on the exercise date if the formula isagreed upon by the parties when the optionis issued in a bona fide attempt to arrive atthe fair market value on the exercise dateand is to be applied based on the facts andcircumstances in existence on the exercisedate.

(C) Exception. The safe harbors ofparagraph (d)(2)(ii)(A) of this section donot apply if the parties to the noncom-pensatory option had a principal purposedescribed in paragraph (c)(1)(iii)(B) ofthis section with respect to a measure-ment event for that option (or, if multipleoptions were issued pursuant to a plan,

a measurement event with respect to anyoption issued pursuant to that plan).

(D) Failure to satisfy safe harbor. Fail-ure of an option to satisfy one of the safeharbors of paragraph (d)(2)(ii)(A) does notaffect the determination of whether an op-tion is treated as reasonably certain to beexercised.

(3) Partner attributes—(i) Generalrule. The determination of whether aholder of a noncompensatory option pos-sesses partner attributes is based on allthe facts and circumstances, includingwhether the option holder, directly or indi-rectly, through the option agreement or arelated agreement, is provided with votingrights or managerial rights in the partner-ship.

(ii) Certain factors that conclusively es-tablish partner attributes. For purposesof this section, a noncompensatory optionholder has partner attributes if, based on allthe facts and circumstances—

(A) The option holder is provided withrights (through the option agreement or arelated agreement) that are similar to rightsordinarily afforded to a partner to partici-pate in partnership profits through presentpossessory rights to share in current oper-ating or liquidating distributions with re-spect to the underlying partnership inter-ests; or

(B) The option holder, directly or indi-rectly, undertakes obligations (through theoption agreement or a related agreement)that are similar to obligations undertakenby a partner to bear partnership losses.

(iii) Special rules. The following rulesapply for purposes of paragraphs (d)(3)(i)and (d)(3)(ii) of this section:

(A) Rights in the issuing partnershippossessed by a noncompensatory optionholder solely by virtue of owning an inter-est in the issuing partnership are not takeninto account, provided that those rights areno greater than the rights granted to otherpartners owning substantially similar inter-ests in the partnership and who do not holdnoncompensatory options in the partner-ship.

(B) If all of the partners owning sub-stantially similar interests in the issuingpartnership also hold noncompensatoryoptions in the partnership, or if none of theother partners owns substantially similarinterests in the partnership, then all factsand circumstances will be considered indetermining whether the rights in the part-

nership possessed by the option holderare possessed solely by virtue of owninga partnership interest. If those rights arepossessed solely by virtue of owning apartnership interest, they are not taken intoaccount.

(C) A noncompensatory option holderwill not ordinarily be considered to pos-sess partner attributes solely becausethe noncompensatory option agreementsignificantly controls or restricts, or thenoncompensatory option holder has theability to significantly control or restrict,a partnership decision that could substan-tially affect the value of the underlyingpartnership interest. In particular, the fol-lowing abilities of the option holder willnot be treated as partner attributes:

(1) The ability to impose reasonable re-strictions on partnership distributions ordilutive issuances of partnership equity oroptions while the noncompensatory optionis outstanding.

(2) The ability to choose the partner-ship’s section 704(c) method for partner-ship properties.

(D) When the applicable measurementevent is a transfer described in paragraph(c)(1) of this section, the partner attributesof the transferee, not the transferor, aretaken into account.

(E) The option holder will be treated asowning all partnership interests and non-compensatory options issued by the part-nership that are owned by any person re-lated to the option holder. For purposes ofthe preceding sentence, a person related tothe option holder is defined as any personbearing a relationship to the option holderdescribed in section 267(b) or 707(b).

(e) Substantial tax reduction require-ment—(1) General rule. The determina-tion of whether there is a strong likelihoodthat the failure to treat a noncompensatoryoption holder as a partner would result ina substantial reduction in the present valueof the partners’ and the noncompensatoryoption holder’s aggregate Federal tax lia-bilities is based on all the facts and circum-stances, including—

(i) The interaction of the allocations ofthe issuing partnership and the partners’and noncompensatory option holder’s Fed-eral tax attributes (taking into account taxconsequences that result from the interac-tion of the allocations with the partners’and noncompensatory option holder’s Fed-

2013–13 I.R.B. 698 March 25, 2013

eral tax attributes that are unrelated to thepartnership);

(ii) The absolute amount of the Federaltax reduction;

(iii) The amount of the reduction rela-tive to overall Federal tax liability; and

(iv) The timing of items of income anddeductions.

(2) Special rules. For purposes of ap-plying paragraph (e)(1) of this section to apartner or noncompensatory option holderthat is—

(i) A look-through entity (as defined inparagraph (b)(1) of this section), the Fed-eral tax consequences that result from theinteraction of allocations of the partnershipand the Federal tax attributes of any per-son that is an owner, or in the case of atrust or estate, the beneficiary, of an inter-est in such a partner or noncompensatoryoption holder, whether directly, or indi-rectly through one or more look-throughentities, must be taken into account; or

(ii) A member of a consolidated group(within the meaning of §1.1502–1(h)), thetax consequences that result from the inter-action of the issuing partnership’s alloca-tions and the tax attributes of the consol-idated group and the tax attributes of an-other member with respect to a separate re-turn year must be taken into account.

(f) Example. The following example il-lustrates the provisions of this section. Forpurposes of the example, assume that PRSis a partnership for Federal tax purposes,none of the noncompensatory option hold-ers or partners are related persons, and thatgeneral principles of law do not apply totreat the noncompensatory option as a part-nership interest. The example reads as fol-lows:

Example. Active trade or business. PRS is en-gaged in an active real estate business, the amount ofincome, gain, loss, and deductions from which can-not be predicted with any reasonable certainty. In ex-change for a premium of $10x, PRS issues a noncom-pensatory option to A to acquire a 10 percent inter-est in PRS for $110x at any time during a 3-year pe-riod commencing on the date on which the option isissued. At the time of the issuance of the noncom-pensatory option, a 10 percent interest in PRS hasa fair market value of $100x. Due to the nature ofPRS’s business, the value of a 10 percent PRS in-terest in 3 years is not reasonably predictable as ofthe time the noncompensatory option is issued. As-suming there are no other facts affecting the certaintyof the option’s exercise, it is not reasonably certainthat A’s option will be exercised. Therefore, assum-ing that A does not possess partner attributes as de-scribed in paragraph (d)(3) of this section, A’s non-

compensatory option is not treated as a partnershipinterest under paragraph (a)(1) of this section.

(g) Effective/applicability date. Thissection applies to noncompensatory op-tions issued on or after February 5, 2013.

Par. 7. Section 1.1272–1 is amended byadding a sentence at the end of paragraph(e) to read as follows:

§1.1272–1 Current inclusion of OID inincome.

* * * * *(e) * * * For debt instruments issued on

or after February 5, 2013, the term stockin the preceding sentence means an equityinterest in any entity that is classified, forFederal tax purposes, as either a partner-ship or a corporation.

* * * *Par. 8. Section 1.1273–2 is amended by

adding a sentence at the end of paragraph(j) to read as follows:

§1.1273–2 Determination of issue priceand issue date.

* * * * *(j) * * * For debt instruments issued on

or after February 5, 2013, the term stockin the preceding sentence means an equityinterest in any entity that is classified, forFederal tax purposes, as either a partner-ship or a corporation.

* * * * *Par. 9. Section 1.1275–4 is amended by

adding a sentence at the end of paragraph(a)(4) to read as follows:

§1.1275–4 Contingent payment debtinstruments.

(a) * * *(4) * * * For debt instruments issued on

or after February 5, 2013, the term stockin the preceding sentence means an equityinterest in any entity that is classified, forFederal tax purposes, as either a partner-ship or a corporation.

* * * * *

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved January 24, 2013.

Mark J. Mazur,Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on February 4,2013, 8:45 a.m., and published in the issue of the FederalRegister for February 5, 2013, 78 F.R. 7997)

Section 5000A.—Require-ment to Maintain MinimumEssential Coverage

Proposed regulations on the shared responsibilitypayment for not maintaining minimum essentialcoverage under Section 5000A, which was added bythe Patient Protection and Affordable Care Act andthe Health Care and Education Reconciliation Actof 2010, as amended by the TRICARE AffirmationAct and Public Law 111–173. See REG-148500-12,page 716.

26 CFR 1.36B–2: Eligibility for premium tax credit.

T.D. 9611

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Health Insurance PremiumTax Credit

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations relating to the health insur-ance premium tax credit enacted by the Pa-tient Protection and Affordable Care Actand the Health Care and Education Rec-onciliation Act of 2010. These final regu-lations provide guidance to individuals re-lated to employees who may enroll in el-igible employer-sponsored coverage andwho wish to enroll in qualified health plansthrough Affordable Insurance Exchanges(Exchanges) and claim the premium taxcredit.

DATES: Effective Date: These regulationsare effective on February 1, 2013.

Applicability Date: For date of applica-bility, see §1.36B–1(o).

FOR FURTHER INFORMATIONCONTACT: Andrew S. Braden, (202)622–4960 (not a toll-free number).

March 25, 2013 699 2013–13 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

This document contains final regula-tions that amend the Income Tax Regula-tions (26 CFR part 1) under section 36B ofthe Internal Revenue Code (Code) regard-ing whether health coverage under an em-ployer-sponsored plan is affordable for in-dividuals who are eligible to enroll in theplan by reason of their relationship to anemployee (related individuals).

On August 17, 2011, a notice of pro-posed rulemaking (REG–131491–10,2011–36 I.R.B. 208) was published inthe Federal Register (76 FR 50931). OnMay 23, 2012, final regulations (T.D.9590, 2012–24 I.R.B. 986) were pub-lished in the Federal Register (77 FR30377). The final regulations reserved arule (§1.36B–2(c)(3)(v)(A)(2)) for deter-mining affordability of employer-spon-sored coverage for related individuals.Written comments responding to the pro-posed and final regulations were received.The comments are available for publicinspection at www.regulations.gov or onrequest. A public hearing was held onNovember 17, 2011. After considerationof all the comments, the proposed rule isadopted without change by this Treasurydecision.

Explanation of Provisions andSummary of Comments

The proposed regulations providedthat, for taxable years beginning be-fore January 1, 2015, an eligibleemployer-sponsored plan is affordablefor related individuals if the portion ofthe annual premium the employee mustpay for self-only coverage (the requiredcontribution percentage) does not exceed9.5% of the taxpayer’s household income.While several comments supported thisrule, other comments asserted that theaffordability of coverage for relatedindividuals should be based on the portionof the annual premium the employee mustpay for family coverage.

These final regulations adopt the pro-posed rule without change. The languageof section 36B, through a cross-refer-ence to section 5000A(e)(1)(B), specifies

that the affordability test for related indi-viduals is based on the cost of self-onlycoverage. By contrast, section 5000A,which establishes the shared responsi-bility payment applicable to individualsfor failure to maintain minimum essen-tial coverage, addresses affordability foremployees in section 5000A(e)(1)(B)and, separately, for related individuals insection 5000A(e)(1)(C). Thus, proposedregulations under section 5000A, whichthe Treasury Department is releasing con-currently with these final regulations,provide that, for purposes of applying theaffordability exemption from the sharedresponsibility payment in the case of re-lated individuals, the required contributionis based on the premium the employeewould pay for employer-sponsored familycoverage.

Effective/Applicability Date

These final regulations apply to taxableyears ending after December 31, 2013.

Special Analyses

This Treasury decision is not a signif-icant regulatory action as defined in Ex-ecutive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. Sec-tion 553(b) of the Administrative Proce-dure Act (5 U.S.C. chapter 5) does not ap-ply to these regulations, and, because theregulations do not impose a collection ofinformation requirement on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant to sec-tion 7805(f) of the Code, the notice of pro-posed rulemaking that preceded these fi-nal regulations was submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Drafting Information

The principal authors of these finalregulations are Frank W. Dunham IIIand Stephen J. Toomey of the Office ofAssociate Chief Counsel (Income Tax andAccounting). However, other personnelfrom the IRS and the Treasury Departmentparticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.36B–2 is amended

by revising paragraphs (c)(3)(v)(A)(2) and(c)(3)(v)(D), Example 2 to read as follows:

§1.36B–2 Eligibility for premium taxcredit.

* * * * *(c) * * *(3) * * *(v) * * *(A) * * *(2) Affordability for related individ-

ual. Except as provided in paragraph(c)(3)(v)(A)(3) of this section, an eligibleemployer-sponsored plan is affordable fora related individual if the portion of theannual premium the employee must payfor self-only coverage does not exceedthe required contribution percentage, asdescribed in paragraph (c)(3)(v)(A)(1) ofthis section.

* * * * *(D) Examples.* * *

* * * * *Example 2. Basic determination of affordability

for a related individual. The facts are the same as inExample 1, except that C is married to J and X’s planrequires C to contribute $5,300 for coverage for C andJ for 2014 (11.3 percent of C’s household income).Because C’s required contribution for self-only cov-erage ($3,450) does not exceed 9.5 percent of house-hold income, under paragraph (c)(3)(v)(A)(2) of thissection, X’s plan is affordable for C and J, and C andJ are eligible for minimum essential coverage for allmonths in 2014.

* * * * *

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved January 25, 2013.

2013–13 I.R.B. 700 March 25, 2013

Mark J. Mazur,Assistant Secretary

of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on January 30,2013, 11:15 a.m., and published in the issue of the FederalRegister for February 1, 2013, 78 F.R. 7264)

Section 6621.—Determina-tion of Rate of Interest26 CFR 301.6621–1: Interest rate.

Interest rates: underpayment andoverpayments. The rates for interest de-termined under section 6621 of the Codefor the calendar quarter beginning April 1,2013, will be 3 percent for overpayments(2 percent in the case of a corporation), 3percent for the underpayments, and 5 per-cent for large corporate underpayments.The rate of interest paid on the portion of acorporate overpayment exceeding $10,000will be 0.5 percent.

Rev. Rul. 2013–6

Section 6621 of the Internal RevenueCode establishes the interest rates on over-payments and underpayments of tax. Un-der section 6621(a)(1), the overpaymentrate is the sum of the federal short-termrate plus 3 percentage points (2 percent-age points in the case of a corporation), ex-cept the rate for the portion of a corporateoverpayment of tax exceeding $10,000 fora taxable period is the sum of the federalshort-term rate plus 0.5 of a percentagepoint. Under section 6621(a)(2), the un-derpayment rate is the sum of the federalshort-term rate plus 3 percentage points.

Section 6621(c) provides that for pur-poses of interest payable under section6601 on any large corporate underpay-ment, the underpayment rate under section6621(a)(2) is determined by substituting“5 percentage points” for “3 percentagepoints.”

See section 6621(c) and section301.6621–3 of the Regulations on Proce-dure and Administration for the definitionof a large corporate underpayment andfor the rules for determining the appli-cable date. Section 6621(c) and section301.6621–3 are generally effective forperiods after December 31, 1990.

Section 6621(b)(1) provides that theSecretary will determine the federalshort-term rate for the first month in eachcalendar quarter. Section 6621(b)(2)(A)provides that the federal short-term ratedetermined under section 6621(b)(1) forany month applies during the first calen-dar quarter beginning after that month.Section 6621(b)(2)(B) provides that in de-termining the addition to tax under section6654 for failure to pay estimated tax forany taxable year, the federal short-termrate that applies during the third monthfollowing the taxable year also appliesduring the first 15 days of the fourthmonth following the taxable year. Sec-tion 6621(b)(3) provides that the federalshort-term rate for any month is the fed-eral short-term rate determined during thatmonth by the Secretary in accordance withsection 1274(d), rounded to the nearestfull percent (or, if a multiple of 1/2 of 1percent, the rate is increased to the nexthighest full percent).

Notice 88–59, 1988–1 C.B. 546, an-nounced that, in determining the quarterlyinterest rates to be used for overpaymentsand underpayments of tax under section6621, the Internal Revenue Service willuse the federal short-term rate based ondaily compounding because that rate ismost consistent with section 6621 which,pursuant to section 6622, is subject to dailycompounding

The federal short-term rate determinedin accordance with section 1274(d) duringJanuary 2013 is the rate published in Rev-enue Ruling 2013–3, 2013–8 I.R.B. 500,to take effect beginning February 1, 2013.

The federal short-term rate, rounded to thenearest full percent, based on daily com-pounding determined during the month ofJanuary 2013 is 0 percent. Accordingly, anoverpayment rate of 3 percent (2 percentin the case of a corporation) and an under-payment rate of 3 percent are establishedfor the calendar quarter beginning April 1,2013. The overpayment rate for the por-tion of a corporate overpayment exceeding$10,000 for the calendar quarter beginningApril 1, 2013, is 0.5 percent. The under-payment rate for large corporate underpay-ments for the calendar quarter beginningApril 1, 2013, is 5 percent. These rates ap-ply to amounts bearing interest during thatcalendar quarter.

The 3 percent rate also applies to esti-mated tax underpayments for the secondcalendar quarter in 2013.

Interest factors for daily compound in-terest for annual rates of 0.5 percent arepublished in Appendix A of this RevenueRuling. Interest factors for daily com-pound interest for annual rates of 2 percent,3 percent and 5 percent are published in Ta-bles 9, 11, and 15 of Rev. Proc. 95–17,1995–1 C.B. 563, 565, and 569.

Annual interest rates to be compoundeddaily pursuant to section 6622 that applyfor prior periods are set forth in the tablesaccompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Deborah Colbert-James of the Officeof Associate Chief Counsel (Procedure &Administration). For further informationregarding this revenue ruling, contactMs. Gulas at (202) 622–4570 (not atoll-free call).

March 25, 2013 701 2013–13 I.R.B.

APPENDIX A

365 Day Year

0.5% Compound Rate 184 Days

Days Factor Days Factor Days Factor

1 0.000013699 63 0.000863380 125 0.0017137842 0.000027397 64 0.000877091 126 0.0017275063 0.000041096 65 0.000890801 127 0.0017412284 0.000054796 66 0.000904512 128 0.0017549515 0.000068495 67 0.000918223 129 0.0017686736 0.000082195 68 0.000931934 130 0.0017823967 0.000095894 69 0.000945646 131 0.0017961198 0.000109594 70 0.000959357 132 0.0018098439 0.000123294 71 0.000973069 133 0.00182356610 0.000136995 72 0.000986781 134 0.00183729011 0.000150695 73 0.001000493 135 0.00185101312 0.000164396 74 0.001014206 136 0.00186473713 0.000178097 75 0.001027918 137 0.00187846214 0.000191798 76 0.001041631 138 0.00189218615 0.000205499 77 0.001055344 139 0.00190591016 0.000219201 78 0.001069057 140 0.00191963517 0.000232902 79 0.001082770 141 0.00193336018 0.000246604 80 0.001096484 142 0.00194708519 0.000260306 81 0.001110197 143 0.00196081120 0.000274008 82 0.001123911 144 0.00197453621 0.000287711 83 0.001137625 145 0.00198826222 0.000301413 84 0.001151339 146 0.00200198823 0.000315116 85 0.001165054 147 0.00201571424 0.000328819 86 0.001178768 148 0.00202944025 0.000342522 87 0.001192483 149 0.00204316626 0.000356225 88 0.001206198 150 0.00205689327 0.000369929 89 0.001219913 151 0.00207062028 0.000383633 90 0.001233629 152 0.00208434729 0.000397336 91 0.001247344 153 0.00209807430 0.000411041 92 0.001261060 154 0.00211180131 0.000424745 93 0.001274776 155 0.00212552932 0.000438449 94 0.001288492 156 0.00213925733 0.000452154 95 0.001302208 157 0.00215298534 0.000465859 96 0.001315925 158 0.00216671335 0.000479564 97 0.001329641 159 0.00218044136 0.000493269 98 0.001343358 160 0.00219416937 0.000506974 99 0.001357075 161 0.00220789838 0.000520680 100 0.001370792 162 0.00222162739 0.000534386 101 0.001384510 163 0.00223535640 0.000548092 102 0.001398227 164 0.00224908541 0.000561798 103 0.001411945 165 0.00226281542 0.000575504 104 0.001425663 166 0.00227654443 0.000589211 105 0.001439381 167 0.00229027444 0.000602917 106 0.001453100 168 0.00230400445 0.000616624 107 0.001466818 169 0.00231773446 0.000630331 108 0.001480537 170 0.00233146547 0.000644039 109 0.001494256 171 0.00234519548 0.000657746 110 0.001507975 172 0.00235892649 0.000671454 111 0.001521694 173 0.00237265750 0.000685161 112 0.001535414 174 0.00238638851 0.000698869 113 0.001549133 175 0.00240012052 0.000712578 114 0.001562853 176 0.00241385153 0.000726286 115 0.001576573 177 0.00242758354 0.000739995 116 0.001590293 178 0.00244131555 0.000753703 117 0.001604014 179 0.00245504756 0.000767412 118 0.001617734 180 0.002468779

2013–13 I.R.B. 702 March 25, 2013

365 Day Year

0.5% Compound Rate 184 Days

Days Factor Days Factor Days Factor

57 0.000781121 119 0.001631455 181 0.00248251158 0.000794831 120 0.001645176 182 0.00249624459 0.000808540 121 0.001658897 183 0.00250997760 0.000822250 122 0.001672619 184 0.00252371061 0.000835960 123 0.00168634062 0.000849670 124 0.001700062

366 Day Year

0.5% Compound Rate 184 Days

Days Factor Days Factor Days Factor

1 0.000013661 63 0.000861020 125 0.0017090972 0.000027323 64 0.000874693 126 0.0017227823 0.000040984 65 0.000888366 127 0.0017364674 0.000054646 66 0.000902040 128 0.0017501525 0.000068308 67 0.000915713 129 0.0017638376 0.000081970 68 0.000929387 130 0.0017775227 0.000095632 69 0.000943061 131 0.0017912088 0.000109295 70 0.000956735 132 0.0018048939 0.000122958 71 0.000970409 133 0.00181857910 0.000136620 72 0.000984084 134 0.00183226511 0.000150283 73 0.000997758 135 0.00184595112 0.000163947 74 0.001011433 136 0.00185963813 0.000177610 75 0.001025108 137 0.00187332414 0.000191274 76 0.001038783 138 0.00188701115 0.000204938 77 0.001052459 139 0.00190069816 0.000218602 78 0.001066134 140 0.00191438517 0.000232266 79 0.001079810 141 0.00192807318 0.000245930 80 0.001093486 142 0.00194176019 0.000259595 81 0.001107162 143 0.00195544820 0.000273260 82 0.001120839 144 0.00196913621 0.000286924 83 0.001134515 145 0.00198282422 0.000300590 84 0.001148192 146 0.00199651223 0.000314255 85 0.001161869 147 0.00201020124 0.000327920 86 0.001175546 148 0.00202388925 0.000341586 87 0.001189223 149 0.00203757826 0.000355252 88 0.001202900 150 0.00205126727 0.000368918 89 0.001216578 151 0.00206495728 0.000382584 90 0.001230256 152 0.00207864629 0.000396251 91 0.001243934 153 0.00209233630 0.000409917 92 0.001257612 154 0.00210602531 0.000423584 93 0.001271291 155 0.00211971532 0.000437251 94 0.001284969 156 0.00213340533 0.000450918 95 0.001298648 157 0.00214709634 0.000464586 96 0.001312327 158 0.00216078635 0.000478253 97 0.001326006 159 0.00217447736 0.000491921 98 0.001339685 160 0.00218816837 0.000505589 99 0.001353365 161 0.00220185938 0.000519257 100 0.001367044 162 0.00221555039 0.000532925 101 0.001380724 163 0.00222924240 0.000546594 102 0.001394404 164 0.00224293341 0.000560262 103 0.001408085 165 0.00225662542 0.000573931 104 0.001421765 166 0.00227031743 0.000587600 105 0.001435446 167 0.00228401044 0.000601269 106 0.001449127 168 0.00229770245 0.000614939 107 0.001462808 169 0.002311395

March 25, 2013 703 2013–13 I.R.B.

366 Day Year

0.5% Compound Rate 184 Days

Days Factor Days Factor Days Factor

46 0.000628608 108 0.001476489 170 0.00232508747 0.000642278 109 0.001490170 171 0.00233878048 0.000655948 110 0.001503852 172 0.00235247349 0.000669618 111 0.001517533 173 0.00236616750 0.000683289 112 0.001531215 174 0.00237986051 0.000696959 113 0.001544897 175 0.00239355452 0.000710630 114 0.001558580 176 0.00240724853 0.000724301 115 0.001572262 177 0.00242094254 0.000737972 116 0.001585945 178 0.00243463655 0.000751643 117 0.001599628 179 0.00244833156 0.000765315 118 0.001613311 180 0.00246202557 0.000778986 119 0.001626994 181 0.00247572058 0.000792658 120 0.001640678 182 0.00248941559 0.000806330 121 0.001654361 183 0.00250311060 0.000820003 122 0.001668045 184 0.00251680661 0.000833675 123 0.00168172962 0.000847348 124 0.001695413

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD RATEIn 1995–1 C.B.

DAILY RATE TABLE

Before Jul. 1, 1975 6% Table 2, pg. 557Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559Feb. 1, 1976—Jan. 31, 1978 7% Table 3, pg. 558Feb. 1, 1978—Jan. 31, 1980 6% Table 2, pg. 557Feb. 1, 1980—Jan. 31, 1982 12% Table 5, pg. 560Feb. 1, 1982—Dec. 31, 1982 20% Table 6, pg. 560Jan. 1, 1983—Jun. 30, 1983 16% Table 37, pg. 591Jul. 1, 1983—Dec. 31, 1983 11% Table 27, pg. 581Jan. 1, 1984—Jun. 30, 1984 11% Table 75, pg. 629Jul. 1, 1984—Dec. 31, 1984 11% Table 75, pg. 629Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581Jan. 1, 1986—Jun. 30, 1986 10% Table 25, pg. 579Jul. 1, 1986—Dec. 31, 1986 9% Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 — DEC. 31, 1998

OVERPAYMENTS UNDERPAYMENTS

1995–1 C.B. 1995–1 C.B.RATE TABLE PG RATE TABLE PG

Jan. 1, 1987—Mar. 31, 1987 8% 21 575 9% 23 577Apr. 1, 1987—Jun. 30, 1987 8% 21 575 9% 23 577Jul. 1, 1987—Sep. 30, 1987 8% 21 575 9% 23 577Oct. 1, 1987—Dec. 31, 1987 9% 23 577 10% 25 579Jan. 1, 1988—Mar. 31, 1988 10% 73 627 11% 75 629Apr. 1, 1988—Jun. 30, 1988 9% 71 625 10% 73 627Jul. 1, 1988—Sep. 30, 1988 9% 71 625 10% 73 627Oct. 1, 1988—Dec. 31, 1988 10% 73 627 11% 75 629

2013–13 I.R.B. 704 March 25, 2013

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 — DEC. 31, 1998

OVERPAYMENTS UNDERPAYMENTS

1995–1 C.B. 1995–1 C.B.RATE TABLE PG RATE TABLE PG

Jan. 1, 1989—Mar. 31, 1989 10% 25 579 11% 27 581Apr. 1, 1989—Jun. 30, 1989 11% 27 581 12% 29 583Jul. 1, 1989—Sep. 30, 1989 11% 27 581 12% 29 583Oct. 1, 1989—Dec. 31, 1989 10% 25 579 11% 27 581Jan. 1, 1990—Mar. 31, 1990 10% 25 579 11% 27 581Apr. 1, 1990—Jun. 30, 1990 10% 25 579 11% 27 581Jul. 1, 1990—Sep. 30, 1990 10% 25 579 11% 27 581Oct. 1, 1990—Dec. 31, 1990 10% 25 579 11% 27 581Jan. 1, 1991—Mar. 31, 1991 10% 25 579 11% 27 581Apr. 1, 1991—Jun. 30, 1991 9% 23 577 10% 25 579Jul. 1, 1991—Sep. 30, 1991 9% 23 577 10% 25 579Oct. 1, 1991—Dec. 31, 1991 9% 23 577 10% 25 579Jan. 1, 1992—Mar. 31, 1992 8% 69 623 9% 71 625Apr. 1, 1992—Jun. 30, 1992 7% 67 621 8% 69 623Jul. 1, 1992—Sep. 30, 1992 7% 67 621 8% 69 623Oct. 1, 1992—Dec. 31, 1992 6% 65 619 7% 67 621Jan. 1, 1993—Mar. 31, 1993 6% 17 571 7% 19 573Apr. 1, 1993—Jun. 30, 1993 6% 17 571 7% 19 573Jul. 1, 1993—Sep. 30, 1993 6% 17 571 7% 19 573Oct. 1, 1993—Dec. 31, 1993 6% 17 571 7% 19 573Jan. 1, 1994—Mar. 31, 1994 6% 17 571 7% 19 573Apr. 1, 1994—Jun. 30, 1994 6% 17 571 7% 19 573Jul. 1, 1994—Sep. 30, 1994 7% 19 573 8% 21 575Oct. 1, 1994—Dec. 31, 1994 8% 21 575 9% 23 577Jan. 1, 1995—Mar. 31, 1995 8% 21 575 9% 23 577Apr. 1, 1995—Jun. 30, 1995 9% 23 577 10% 25 579Jul. 1, 1995—Sep. 30, 1995 8% 21 575 9% 23 577Oct. 1, 1995—Dec. 31, 1995 8% 21 575 9% 23 577Jan. 1, 1996—Mar. 31, 1996 8% 69 623 9% 71 625Apr. 1, 1996—Jun. 30, 1996 7% 67 621 8% 69 623Jul. 1, 1996—Sep. 30, 1996 8% 69 623 9% 71 625Oct. 1, 1996—Dec. 31, 1996 8% 69 623 9% 71 625Jan. 1, 1997—Mar. 31, 1997 8% 21 575 9% 23 577Apr. 1, 1997—Jun. 30, 1997 8% 21 575 9% 23 577Jul. 1, 1997—Sep. 30, 1997 8% 21 575 9% 23 577Oct. 1, 1997—Dec. 31, 1997 8% 21 575 9% 23 577Jan. 1, 1998—Mar. 31, 1998 8% 21 575 9% 23 577Apr. 1, 1998—Jun. 30, 1998 7% 19 573 8% 21 575Jul. 1, 1998—Sep. 30, 1998 7% 19 573 8% 21 575Oct. 1, 1998—Dec. 31, 1998 7% 19 573 8% 21 575

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 — PRESENT

NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

1995–1 C.B.RATE TABLE PAGE

Jan. 1, 1999—Mar. 31, 1999 7% 19 573Apr. 1, 1999—Jun. 30, 1999 8% 21 575Jul. 1, 1999—Sep. 30, 1999 8% 21 575Oct. 1, 1999—Dec. 31, 1999 8% 21 575Jan. 1, 2000—Mar. 31, 2000 8% 69 623Apr. 1, 2000—Jun. 30, 2000 9% 71 625

March 25, 2013 705 2013–13 I.R.B.

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 — PRESENT

NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

1995–1 C.B.RATE TABLE PAGE

Jul. 1, 2000—Sep. 30, 2000 9% 71 625Oct. 1, 2000—Dec. 31, 2000 9% 71 625Jan. 1, 2001—Mar. 31, 2001 9% 23 577Apr. 1, 2001—Jun. 30, 2001 8% 21 575Jul. 1, 2001—Sep. 30, 2001 7% 19 573Oct. 1, 2001—Dec. 31, 2001 7% 19 573Jan. 1, 2002—Mar. 31, 2002 6% 17 571Apr. 1, 2002—Jun. 30, 2002 6% 17 571Jul. 1, 2002—Sep. 30, 2002 6% 17 571Oct. 1, 2002—Dec. 31, 2002 6% 17 571Jan. 1, 2003—Mar. 31, 2003 5% 15 569Apr. 1, 2003—Jun. 30, 2003 5% 15 569Jul. 1, 2003—Sep. 30, 2003 5% 15 569Oct. 1, 2003—Dec. 31, 2003 4% 13 567Jan. 1, 2004—Mar. 31, 2004 4% 61 615Apr. 1, 2004—Jun. 30, 2004 5% 63 617Jul. 1, 2004—Sep. 30, 2004 4% 61 615Oct. 1, 2004—Dec. 31, 2004 5% 63 617Jan. 1, 2005—Mar. 31, 2005 5% 15 569Apr. 1, 2005—Jun. 30, 2005 6% 17 571Jul. 1, 2005—Sep. 30, 2005 6% 17 571Oct. 1, 2005—Dec. 31, 2005 7% 19 573Jan. 1, 2006—Mar. 31, 2006 7% 19 573Apr. 1, 2006—Jun. 30, 2006 7% 19 573Jul. 1, 2006—Sep. 30, 2006 8% 21 575Oct. 1, 2006—Dec. 31, 2006 8% 21 575Jan. 1, 2007—Mar. 31, 2007 8% 21 575Apr. 1, 2007—Jun. 30, 2007 8% 21 575Jul. 1, 2007—Sep. 30, 2007 8% 21 575Oct. 1, 2007—Dec. 31, 2007 8% 21 575Jan. 1, 2008—Mar. 31, 2008 7% 67 621Apr. 1, 2008—Jun. 30, 2008 6% 65 619Jul. 1, 2008—Sep. 30, 2008 5% 63 617Oct. 1, 2008—Dec. 31, 2008 6% 65 619Jan. 1, 2009—Mar. 31, 2009 5% 15 569Apr. 1, 2009—Jun. 30, 2009 4% 13 567Jul. 1, 2009—Sep. 30, 2009 4% 13 567Oct. 1, 2009—Dec. 31, 2009 4% 13 567Jan. 1, 2010—Mar. 31, 2010 4% 13 567Apr. 1, 2010—Jun. 30, 2010 4% 13 567Jul. 1, 2010—Sep. 30, 2010 4% 13 567Oct. 1, 2010—Dec. 31, 2010 4% 13 567Jan. 1, 2011—Mar. 31, 2011 3% 11 565Apr. 1, 2011—Jun. 30, 2011 4% 13 567Jul. 1, 2011—Sep. 30, 2011 4% 13 567Oct. 1, 2011—Dec. 31, 2011 3% 11 565Jan. 1, 2012—Mar. 31, 2012 3% 59 613Apr. 1, 2012—Jun. 30, 2012 3% 59 613Jul. 1, 2012—Sep. 30, 2012 3% 59 613Oct. 1, 2012—Dec. 31, 2012 3% 59 613Jan. 1, 2013—Mar. 31, 2013 3% 11 565Apr. 1, 2013—Jun. 30, 2013 3% 11 565

2013–13 I.R.B. 706 March 25, 2013

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 — PRESENT

CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS UNDERPAYMENTS

1995–1 C.B. 1995–1 C.B.RATE TABLE PG RATE TABLE PG

Jan. 1, 1999—Mar. 31, 1999 6% 17 571 7% 19 573Apr. 1, 1999—Jun. 30, 1999 7% 19 573 8% 21 575Jul. 1, 1999—Sep. 30, 1999 7% 19 573 8% 21 575Oct. 1, 1999—Dec. 31, 1999 7% 19 573 8% 21 575Jan. 1, 2000—Mar. 31, 2000 7% 67 621 8% 69 623Apr. 1, 2000—Jun. 30, 2000 8% 69 623 9% 71 625Jul. 1, 2000—Sep. 30, 2000 8% 69 623 9% 71 625Oct. 1, 2000—Dec. 31, 2000 8% 69 623 9% 71 625Jan. 1, 2001—Mar. 31, 2001 8% 21 575 9% 23 577Apr. 1, 2001—Jun. 30, 2001 7% 19 573 8% 21 575Jul. 1, 2001—Sep. 30, 2001 6% 17 571 7% 19 573Oct. 1, 2001—Dec. 31, 2001 6% 17 571 7% 19 573Jan. 1, 2002—Mar. 31, 2002 5% 15 569 6% 17 571Apr. 1, 2002—Jun. 30, 2002 5% 15 569 6% 17 571Jul. 1, 2002—Sep. 30, 2002 5% 15 569 6% 17 571Oct. 1, 2002—Dec. 31, 2002 5% 15 569 6% 17 571Jan. 1, 2003—Mar. 31, 2003 4% 13 567 5% 15 569Apr. 1, 2003—Jun. 30, 2003 4% 13 567 5% 15 569Jul. 1, 2003—Sep. 30, 2003 4% 13 567 5% 15 569Oct. 1, 2003—Dec. 31, 2003 3% 11 565 4% 13 567Jan. 1, 2004—Mar. 31, 2004 3% 59 613 4% 61 615Apr. 1, 2004—Jun. 30, 2004 4% 61 615 5% 63 617Jul. 1, 2004—Sep. 30, 2004 3% 59 613 4% 61 615Oct. 1, 2004—Dec. 31, 2004 4% 61 615 5% 63 617Jan. 1, 2005—Mar. 31, 2005 4% 13 567 5% 15 569Apr. 1, 2005—Jun. 30, 2005 5% 15 569 6% 17 571Jul. 1, 2005—Sep. 30, 2005 5% 15 569 6% 17 571Oct. 1, 2005—Dec. 31, 2005 6% 17 571 7% 19 573Jan. 1, 2006—Mar. 31, 2006 6% 17 571 7% 19 573Apr. 1, 2006—Jun. 30, 2006 6% 17 571 7% 19 573Jul. 1, 2006—Sep. 30, 2006 7% 19 573 8% 21 575Oct. 1, 2006—Dec. 31, 2006 7% 19 573 8% 21 575Jan. 1, 2007—Mar. 31, 2007 7% 19 573 8% 21 575Apr. 1, 2007—Jun. 30, 2007 7% 19 573 8% 21 575Jul. 1, 2007—Sep. 30, 2007 7% 19 573 8% 21 575Oct. 1, 2007—Dec. 31, 2007 7% 19 573 8% 21 575Jan. 1, 2008—Mar. 31, 2008 6% 65 619 7% 67 621Apr. 1, 2008—Jun. 30, 2008 5% 63 617 6% 65 619Jul. 1, 2008—Sep. 30, 2008 4% 61 615 5% 63 617Oct. 1, 2008—Dec. 31, 2008 5% 63 617 6% 65 619Jan. 1, 2009—Mar. 31, 2009 4% 13 567 5% 15 569Apr. 1, 2009—Jun. 30, 2009 3% 11 565 4% 13 567Jul. 1, 2009—Sep. 30, 2009 3% 11 565 4% 13 567Oct. 1, 2009—Dec. 31, 2009 3% 11 565 4% 13 567Jan. 1, 2010—Mar. 31, 2010 3% 11 565 4% 13 567Apr. 1, 2010—Jun. 30, 2010 3% 11 565 4% 13 567Jul. 1, 2010—Sep. 30, 2010 3% 11 565 4% 13 567Oct. 1, 2010—Dec. 31, 2010 3% 11 565 4% 13 567Jan. 1, 2011—Mar. 31, 2011 2% 9 563 3% 11 565Apr. 1, 2011—Jun. 30, 2011 3% 11 565 4% 13 567Jul. 1, 2011—Sep. 30, 2011 3% 11 565 4% 13 567Oct. 1, 2011—Dec. 31, 2011 2% 9 563 3% 11 565Jan. 1, 2012—Mar. 31, 2012 2% 57 611 3% 59 613

March 25, 2013 707 2013–13 I.R.B.

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 — PRESENT

CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS UNDERPAYMENTS

1995–1 C.B. 1995–1 C.B.RATE TABLE PG RATE TABLE PG

Apr. 1, 2012—Jun. 30, 2012 2% 57 611 3% 59 613Jul. 1, 2012—Sep. 30, 2012 2% 57 611 3% 59 613Oct. 1, 2012—Dec. 31, 2012 2% 57 611 3% 59 613Jan. 1, 2013—Mar. 31, 2013 2% 9 563 3% 11 565Apr. 1, 2013—Jun. 30, 2013 2% 9 563 3% 11 565

TABLE OF INTEREST RATES FORLARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 — PRESENT

1995–1 C.B.RATE TABLE PG

Jan. 1, 1991—Mar. 31, 1991 13% 31 585Apr. 1, 1991—Jun. 30, 1991 12% 29 583Jul. 1, 1991—Sep. 30, 1991 12% 29 583Oct. 1, 1991—Dec. 31, 1991 12% 29 583Jan. 1, 1992—Mar. 31, 1992 11% 75 629Apr. 1, 1992—Jun. 30, 1992 10% 73 627Jul. 1, 1992—Sep. 30, 1992 10% 73 627Oct. 1, 1992—Dec. 31, 1992 9% 71 625Jan. 1, 1993—Mar. 31, 1993 9% 23 577Apr. 1, 1993—Jun. 30, 1993 9% 23 577Jul. 1, 1993—Sep. 30, 1993 9% 23 577Oct. 1, 1993—Dec. 31, 1993 9% 23 577Jan. 1, 1994—Mar. 31, 1994 9% 23 577Apr. 1, 1994—Jun. 30, 1994 9% 23 577Jul. 1, 1994—Sep. 30, 1994 10% 25 579Oct. 1, 1994—Dec. 31, 1994 11% 27 581Jan. 1, 1995—Mar. 31, 1995 11% 27 581Apr. 1, 1995—Jun. 30, 1995 12% 29 583Jul. 1, 1995—Sep. 30, 1995 11% 27 581Oct. 1, 1995—Dec. 31, 1995 11% 27 581Jan. 1, 1996—Mar. 31, 1996 11% 75 629Apr. 1, 1996—Jun. 30, 1996 10% 73 627Jul. 1, 1996—Sep. 30, 1996 11% 75 629Oct. 1, 1996—Dec. 31, 1996 11% 75 629Jan. 1, 1997—Mar. 31, 1997 11% 27 581Apr. 1, 1997—Jun. 30, 1997 11% 27 581Jul. 1, 1997—Sep. 30, 1997 11% 27 581Oct. 1, 1997—Dec. 31, 1997 11% 27 581Jan. 1, 1998—Mar. 31, 1998 11% 27 581Apr. 1, 1998—Jun. 30, 1998 10% 25 579Jul. 1, 1998—Sep. 30, 1998 10% 25 579Oct. 1, 1998—Dec. 31, 1998 10% 25 579Jan. 1, 1999—Mar. 31, 1999 9% 23 577Apr. 1, 1999—Jun. 30, 1999 10% 25 579Jul. 1, 1999—Sep. 30, 1999 10% 25 579Oct. 1, 1999—Dec. 31, 1999 10% 25 579Jan. 1, 2000—Mar. 31, 2000 10% 73 627Apr. 1, 2000—Jun. 30, 2000 11% 75 629Jul. 1, 2000—Sep. 30, 2000 11% 75 629Oct. 1, 2000—Dec. 31, 2000 11% 75 629

2013–13 I.R.B. 708 March 25, 2013

TABLE OF INTEREST RATES FORLARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 — PRESENT

1995–1 C.B.RATE TABLE PG

Jan. 1, 2001—Mar. 31, 2001 11% 27 581Apr. 1, 2001—Jun. 30, 2001 10% 25 579Jul. 1, 2001—Sep. 30, 2001 9% 23 577Oct. 1, 2001—Dec. 31, 2001 9% 23 577Jan. 1, 2002—Mar. 31, 2002 8% 21 575Apr. 1, 2002—Jun. 30, 2002 8% 21 575Jul. 1, 2002—Sep. 30, 2002 8% 21 575Oct. 1, 2002—Dec. 30, 2002 8% 21 575Jan. 1, 2003—Mar. 31, 2003 7% 19 573Apr. 1, 2003—Jun. 30, 2003 7% 19 573Jul. 1, 2003—Sep. 30, 2003 7% 19 573Oct. 1, 2003—Dec. 31, 2003 6% 17 571Jan. 1, 2004—Mar. 31, 2004 6% 65 619Apr. 1, 2004—Jun. 30, 2004 7% 67 621Jul. 1, 2004—Sep. 30, 2004 6% 65 619Oct. 1, 2004—Dec. 31, 2004 7% 67 621Jan. 1, 2005—Mar. 31, 2005 7% 19 573Apr. 1, 2005—Jun. 30, 2005 8% 21 575Jul. 1, 2005—Sep. 30, 2005 8% 21 575Oct. 1, 2005—Dec. 31, 2005 9% 23 577Jan. 1, 2006—Mar. 31, 2006 9% 23 577Apr. 1, 2006—Jun. 30, 2006 9% 23 577Jul. 1, 2006—Sep. 30, 2006 10% 25 579Oct. 1, 2006—Dec. 31, 2006 10% 25 579Jan. 1, 2007—Mar. 31, 2007 10% 25 579Apr. 1, 2007—Jun. 30, 2007 10% 25 579Jul. 1, 2007—Sep. 30, 2007 10% 25 579Oct. 1, 2007—Dec. 31, 2007 10% 25 579Jan. 1, 2008—Mar. 31, 2008 9% 71 625Apr. 1, 2008—Jun. 30, 2008 8% 69 623Jul. 1, 2008—Sep. 30, 2008 7% 67 621Oct. 1, 2008—Dec. 31, 2008 8% 69 623Jan. 1, 2009—Mar. 31, 2009 7% 19 573Apr. 1, 2009—Jun. 30, 2009 6% 17 571Jul. 1, 2009—Sep. 30, 2009 6% 17 571Oct. 1, 2009—Dec. 31, 2009 6% 17 571Jan. 1, 2010—Mar. 31, 2010 6% 17 571Apr. 1, 2010—Jun. 30, 2010 6% 17 571Jul. 1, 2010—Sep. 30, 2010 6% 17 571Oct. 1, 2010—Dec. 31, 2010 6% 17 571Jan. 1, 2011—Mar. 31, 2011 5% 15 569Apr. 1, 2011—Jun. 30, 2011 6% 17 571Jul. 1, 2011—Sep. 30, 2011 6% 17 571Oct. 1, 2011—Dec. 31, 2011 5% 15 569Jan. 1, 2012—Mar. 31, 2012 5% 63 617Apr. 1, 2012—Jun. 30, 2012 5% 63 617Jul. 1, 2012—Sep. 30, 2012 5% 63 617Oct. 1, 2012—Dec. 31, 2012 5% 63 617Jan. 1, 2013—Mar. 31, 2013 5% 15 569Apr. 1, 2013—Jun. 30, 2013 5% 15 569

March 25, 2013 709 2013–13 I.R.B.

TABLE OF INTEREST RATES FOR CORPORATEOVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 — PRESENT

1995–1 C.B.RATE TABLE PG

Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620Oct. 1, 1996—Dec. 31, 1996 6.5% 66 620Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570Jul. 1, 1998—Sep. 30, 1998 5.5% 16 570Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570Jan. 1, 2000—Mar. 31, 2000 5.5% 64 618Apr. 1, 2000—Jun. 30, 2000 6.5% 66 620Jul. 1, 2000—Sep. 30, 2000 6.5% 66 620Oct. 1, 2000—Dec. 31, 2000 6.5% 66 620Jan. 1, 2001—Mar. 31, 2001 6.5% 18 572Apr. 1, 2001—Jun. 30, 2001 5.5% 16 570Jul. 1, 2001—Sep. 30, 2001 4.5% 14 568Oct. 1, 2001—Dec. 31, 2001 4.5% 14 568Jan. 1, 2002—Mar. 31, 2002 3.5% 12 566Apr. 1, 2002—Jun. 30, 2002 3.5% 12 566Jul. 1, 2002—Sep. 30, 2002 3.5% 12 566Oct. 1, 2002—Dec. 31, 2002 3.5% 12 566Jan. 1, 2003—Mar. 31, 2003 2.5% 10 564Apr. 1, 2003—Jun. 30, 2003 2.5% 10 564Jul. 1, 2003—Sep. 30, 2003 2.5% 10 564Oct. 1, 2003—Dec. 31, 2003 1.5% 8 562Jan. 1, 2004—Mar. 31, 2004 1.5% 56 610Apr. 1, 2004—Jun. 30, 2004 2.5% 58 612Jul. 1, 2004—Sep. 30, 2004 1.5% 56 610Oct. 1, 2004—Dec. 31, 2004 2.5% 58 612Jan. 1, 2005—Mar. 31, 2005 2.5% 10 564Apr. 1, 2005—Jun. 30, 2005 3.5% 12 566Jul. 1, 2005—Sep. 30, 2005 3.5% 12 566Oct. 1, 2005—Dec. 31, 2005 4.5% 14 568Jan. 1, 2006—Mar. 31, 2006 4.5% 14 568Apr. 1, 2006—Jun. 30, 2006 4.5% 14 568Jul. 1, 2006—Sep. 30, 2006 5.5% 16 570Oct. 1, 2006—Dec. 31, 2006 5.5% 16 570Jan. 1, 2007—Mar. 31, 2007 5.5% 16 570Apr. 1, 2007—Jun. 30, 2007 5.5% 16 570Jul. 1, 2007—Sep. 30, 2007 5.5% 16 570Oct. 1, 2007—Dec. 31, 2007 5.5% 16 570Jan. 1, 2008—Mar. 31, 2008 4.5% 62 616Apr. 1, 2008—Jun. 30, 2008 3.5% 60 614Jul. 1, 2008—Sep. 30, 2008 2.5% 58 612

2013–13 I.R.B. 710 March 25, 2013

TABLE OF INTEREST RATES FOR CORPORATEOVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 — PRESENT

1995–1 C.B.RATE TABLE PG

Oct. 1, 2008—Dec. 31, 2008 3.5% 60 614Jan. 1, 2009—Mar. 31, 2009 2.5% 10 564Apr. 1, 2009—Jun. 30, 2009 1.5% 8 562Jul. 1, 2009—Sep. 30, 2009 1.5% 8 562Oct. 1, 2009—Dec. 31, 2009 1.5% 8 562Jan. 1, 2010—Mar. 31, 2010 1.5% 8 562Apr. 1, 2010—Jun. 30, 2010 1.5% 8 562Jul. 1, 2010—Sep. 30, 2010 1.5% 8 562Oct. 1, 2010—Dec. 31, 2010 1.5% 8 562Jan. 1, 2011—Mar. 31, 2011 0.5%*Apr. 1, 2011—Jun. 30, 2011 1.5% 8 562Jul. 1, 2011—Sep. 30, 2011 1.5% 8 562Oct. 1, 2011—Dec. 31, 2011 0.5%*Jan. 1, 2012—Mar. 31, 2012 0.5%*Apr. 1, 2012—Jun. 30, 2012 0.5%*Jul. 1, 2012—Sep. 30, 2012 0.5%*Oct. 1, 2012—Dec. 31, 2012 0.5%*Jan. 1, 2013—Mar. 31, 2013 0.5%*Apr. 1, 2013—Jun. 30, 2013 0.5%*

March 25, 2013 711 2013–13 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousWork Opportunity Tax Credit—Transition Relief

Notice 2013–14

I. PURPOSE

This notice provides guidance on § 309of the American Taxpayer Relief Act of2012 (the Act), Pub. L. No. 112–240,enacted on January 2, 2013, and tran-sition relief for employers claiming theWork Opportunity Tax Credit (the WOTC)under §§ 51 and 3111(e) of the InternalRevenue Code (the Code), as extended bythe Act. Section 309 of the Act amended§ 51 to extend the WOTC through De-cember 31, 2013, for taxable employersand for qualified tax-exempt organiza-tions. Specifically, this notice providesemployers that hire members of targetedgroups additional time beyond the 28-daydeadline in § 51(d)(13) of the Code forsubmitting Form 8850, Pre-Screening No-tice and Certification Request for the WorkOpportunity Credit, to Designated LocalAgencies (DLAs).

II. BACKGROUND

Section 51 of the Code provides for theWOTC for employers that hire individualswho are members of targeted groups. Anemployer must obtain certification thatan individual is a targeted group mem-ber before the employer may claim thecredit. Certification of an individual’stargeted group status is obtained from aDLA. A DLA is a State employment se-curity agency established in accordancewith 29 U.S.C. §§ 49–49n. An employermust submit Form 8850 to the DLA notlater than the 28th day after the individualbegins work for the employer.

The Returning Heroes and WoundedWarriors Work Opportunity Tax Credits,contained in § 261 of the VOW to Hire He-roes Act of 2011, Tit. II, subtitle D, of Pub.L. No. 112–056 (the VOW Act), enactedon November 21, 2011, amended § 51 ofthe Code to extend and expand the WOTCto employers hiring certain qualified vet-erans (as defined in § 51(d)(3)) before Jan-uary 1, 2013. The VOW Act did not extendthe WOTC for targeted group membersother than qualified veterans. Thus, the

WOTC was not available with respect totargeted group members who began workafter December 31, 2011, other than qual-ified veterans.

The VOW Act also amended §§ 52 and3111 to make a reduced WOTC availableto organizations described in § 501(c)and exempt from taxation under § 501(a)(“qualified tax-exempt organizations”) asa credit against the employer share of so-cial security tax imposed under § 3111(a).The reduced credit is available for qual-ified tax-exempt organizations that hirequalified veterans for which the WOTCwould have been allowable under § 51if the organization were not a qualifiedtax-exempt organization. The credit wasfirst available to qualified tax-exempt or-ganizations for qualified veterans hiredon or after November 21, 2011. For addi-tional guidance on the WOTC for qualifiedtax-exempt organizations and changesmade to the WOTC under the VOW Act,see Notice 2012–13, 2012–9 I.R.B. 421.

Notice 2012–13 provided transition re-lief for all employers that hired any quali-fied veteran described in § 51(d)(3) of theCode on or after November 22, 2011, andbefore May 22, 2012. Those employerswere considered to have satisfied the re-quirements of § 51(d)(13)(A)(ii) if theysubmitted the completed Form 8850 to theDLA to request certification not later thanJune 19, 2012.

III. AMENDMENTS MADE BY THEACT

The Act extends the WOTC throughDecember 31, 2013, for taxable employershiring individuals in targeted groups as de-fined in § 51(d)(1) through (d)(10) of theCode, and for qualified tax-exempt orga-nizations hiring qualified veterans as de-fined in § 51(d)(3) of the Code. This ex-tension does not apply to the “unemployedveterans” or “disconnected youth” targetedgroup categories (as defined in § 51(d)(14)of the Code), which had expired as of Jan-uary 1, 2011. As mentioned above, dur-ing 2012, the WOTC was available foremployers hiring qualified veterans, andnot for hiring members of other targetedgroups. Thus, the Act retroactively ex-tended the availability of the WOTC for

taxable employers who hired individualsfrom those other targeted groups in 2012.

Because the Act did not amend §§ 52or 3111(e), qualified tax-exempt organiza-tions may continue to claim the WOTC un-der § 3111(e) only for hiring qualified vet-erans, and not for hiring any other targetedgroup members.

IV. TRANSITION RELIEF

Section 51(d)(13)(A) of the Code pro-vides that an individual shall not be treatedas a member of a targeted group unless(1) on or before the day the individual be-gins work, the employer obtains certifica-tion from the DLA that the individual isa member of a targeted group; or (2) theemployer completes a pre-screening notice(Form 8850) on or before the day the indi-vidual is offered employment and submitssuch notice to the DLA to request certifi-cation not later than 28 days after the indi-vidual begins work.

Because the WOTC was extendedretroactively for 2012 for members oftargeted groups (other than qualifiedveterans), employers need additionaltime to comply with the requirements of§ 51(d)(13)(A) for those targeted groups.Similarly, because the WOTC for quali-fied veterans was set to expire for qualifiedveterans hired after December 31, 2012,employers that hire qualified veterans af-ter December 31, 2012, may also needadditional time to comply with the re-quirements of § 51(d)(13)(A). For thesereasons, the Treasury Department and theIRS have determined that it is appropriateto provide employers with additional timeto file Form 8850 with a DLA.

(1) Transition relief for taxable employersthat hire members of targeted groups(other than qualified veterans)

A taxable employer that hires a mem-ber of a targeted group (as defined in§ 51(d)(2) through (10), other than aqualified veteran described in § 51(d)(3))on or after January 1, 2012, and on orbefore March 31, 2013, will be consid-ered to have satisfied the requirements of§ 51(d)(13)(A)(ii) if it submits the com-pleted Form 8850 to the DLA to requestcertification not later than April 29, 2013.

2013–13 I.R.B. 712 March 25, 2013

(2) Transition relief for all employers thathire qualified veterans

An employer that hires any quali-fied veteran described in § 51(d)(3) onor after January 1, 2013, and on or be-fore March 31, 2013, will be consideredto have satisfied the requirements of§ 51(d)(13)(A)(ii) if it submits the

completed Form 8850 to the DLA torequest certification not later than April29, 2013.

DRAFTING INFORMATION

The principal authors of this notice areShoshanna Tanner and Ligeia Donis ofthe Office of Division Counsel/Associate

Chief Counsel (Tax Exempt andGovernment Entities). For furtherinformation regarding the WOTC, contactMs. Tanner at (202) 622–6080 (not atoll-free number). For further informationon how to claim the WOTC on behalfof tax-exempt organizations, contactMs. Donis at (202) 622–6040 (not atoll-free number).

March 25, 2013 713 2013–13 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking

Treatment of Grantor of anOption on a PartnershipInterest

REG–106918–08

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations relating to the taxtreatment of noncompensatory optionsand convertible instruments issued by apartnership. Specifically, the proposedregulations expand the characterizationrule measurement events to include certaintransfers of interests in the issuing part-nership and other look-through entities,and provide additional guidance in deter-mining the character of the grantor’s gainor loss as a result of a closing transactionwith respect to, or a lapse of, an option ona partnership interest. The proposed reg-ulations will affect partnerships that issuenoncompensatory options, the partners ofsuch partnerships, and the holders of suchoptions.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by May 6, 2013.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–106918–08),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–106918–08),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–106918–08).

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations under §1.761–3,

Benjamin Weaver at (202) 622–3050;concerning the proposed regulationsunder §1.1234–3, Shawn Tetelman at(202) 622–3930; concerning submissionsof comments and requests for a publichearing, Oluwafunmilayo (Funmi) Taylor,(202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 1 undersections 761 and 1234 of the Internal Rev-enue Code (Code). On January 22, 2003,proposed regulations (REG–103580–02,2003–9 I.R.B. 543) relating to the taxtreatment of noncompensatory optionsand convertible instruments issued by apartnership (noncompensatory partnershipoption regulations) were published in theFederal Register (68 FR 2930). Finalregulations in this issue of the Bulletincontain amendments to the Income TaxRegulations (26 CFR Part 1), which final-ize the proposed regulations. However,the Treasury Department and the IRS havedecided to propose amendments to theregulations expanding the characterizationrule measurement events to include certaintransfers of interests in the issuing partner-ship and other look-through entities.

Additionally, the Treasury Departmentand the IRS received comments on the pro-posed regulations expressing uncertaintyas to whether section 1234(b) applies to thegrantor of an option on a partnership inter-est on the lapse or repurchase of the option.The comments indicated that it was un-clear whether the term “securities,” as usedin section 1234(b)(2)(B), includes partner-ship interests. After consideration of allcomments received, the IRS and TreasuryDepartment believe that it is appropriateto propose an amendment to the regula-tions under section 1234(b) to expresslytreat partnership interests as securities forpurposes of section 1234(b).

Explanation of Provisions

1. Proposed Additions to theNoncompensatory Partnership OptionCharacterization Rule MeasurementEvents

The final regulations being publishedelsewhere in this issue of the Bulletin, re-lating to the tax treatment of noncompen-satory partnership options, contain a char-acterization rule providing that the holderof a noncompensatory option is treated asa partner under certain circumstances. Un-der the characterization rule, a noncom-pensatory option is treated as a partnershipinterest if, on the date of a measurementevent (1) the noncompensatory option pro-vides the option holder with rights that aresubstantially similar to the rights affordeda partner, and (2) there is a strong like-lihood that the failure to treat the holderof the noncompensatory option as a part-ner would result in a substantial reductionin the present value of the partners’ andnoncompensatory option holder’s aggre-gate Federal tax liabilities. The final regu-lations define a measurement event as: (1)issuance of the noncompensatory option;(2) an adjustment of the terms (modifica-tion) of the noncompensatory option or ofthe underlying partnership interest (includ-ing an adjustment pursuant to the termsof the noncompensatory option or the un-derlying partnership interest); or (3) trans-fer of the noncompensatory option if ei-ther (A) the option may be exercised (orsettled) more than 12 months after its is-suance, or (B) the transfer is pursuant to aplan in existence at the time of the issuanceor modification of the noncompensatoryoption that has as a principal purpose thesubstantial reduction of the present valueof the aggregate Federal tax liabilities ofthe partners and the noncompensatory op-tion holder.

The Treasury Department and the IRSbelieve it is appropriate to expand the listof measurement events to include certaintransfers of interests in the issuing part-nership and look-through entities. Theproposed regulations add three measure-ment events to the list above, but applyonly if those measurement events are pur-suant to a plan in existence at the time ofthe issuance or modification of the non-compensatory option that has as a prin-cipal purpose the substantial reduction of

2013–13 I.R.B. 714 March 25, 2013

the present value of the aggregate Federaltax liabilities of the partners and the non-compensatory option holder. The three ad-ditional measurement events are: (1) is-suance, transfer, or modification of an in-terest in, or liquidation of, the issuing part-nership; (2) issuance, transfer, or modifi-cation of an interest in any look-throughentity that directly, or indirectly throughone or more look-through entities, ownsthe noncompensatory option; and (3) is-suance, transfer, or modification of an in-terest in any look-through entity that di-rectly, or indirectly through one or morelook-through entities, owns an interest inthe issuing partnership. The Treasury De-partment and the IRS believe that the firstof these measurement events is necessarybecause it is inconsistent to test a noncom-pensatory option under the characteriza-tion rule upon transfer of the noncompen-satory option, but not upon transfer of aninterest in the issuing partnership, becauseeither type of transfer may change the anal-ysis of whether there is a strong likelihoodthat the failure to treat the option holderas a partner would result in a substantialreduction in the present value of the part-ners’ and option holder’s aggregate tax li-abilities. The Treasury Department andthe IRS believe that the second and thirdmeasurement events are necessary to pre-vent avoidance of the characterization rulethrough the use of look-through entities.

Like the measurement events in thefinal regulations, the three measurementevents in the proposed regulations are sub-ject to exceptions in §1.761–3(c)(2). TheTreasury Department and the IRS believethat the limitations on these measure-ment events will reduce the administrativeburden associated with testing under thecharacterization rule upon these events.

The Treasury Department and the IRSrequest comments on the appropriate pro-cedures for notifying the partners and thepartnership upon the occurrence of a mea-surement event.

2. Character of Gain or Loss on Lapse,Sale, or Exchange of Partnership Options

A. Character of gain or loss to the grantorof the option

In response to comments, the proposedregulations address the application of sec-tion 1234(b) to the grantor of an option on

a partnership interest on the lapse or repur-chase of the option. Section 1234(b) pro-vides that, in the case of the grantor of anoption, gain or loss from any closing trans-action with respect to, and gain on lapseof, an option in property shall be treatedas gain or loss from the sale or exchangeof a capital asset held not more than oneyear. Section 1234(b)(2)(B) defines theterm property to mean stock and securi-ties (including stocks and securities dealtwith on a when issued basis), commodi-ties, and commodity futures. Accordingly,for section 1234(b) to apply to a closingtransaction with respect to, or lapse of, anoption on a partnership interest, a partner-ship interest would have to be a securityand, thus, property within the meaning ofsection 1234(b)(2)(B). The proposed reg-ulations provide that the term “securities”as used in section 1234(b)(2)(B) includespartnership interests. As a result, in thecase of the grantor of an option on a part-nership interest, gain or loss from any clos-ing transaction with respect to, and gain onlapse of, the option is generally treated un-der the proposed regulations as gain or lossfrom the sale or exchange of a capital assetheld not more than 1 year.

B. Character of gain or loss to the optionholder

With respect to an option holder, un-der section 1234(a), gain or loss on thesale or exchange of, or loss on failure toexercise, an option is considered gain orloss from the sale or exchange of propertythat has the same character as the prop-erty to which the option relates would havein the hands of the taxpayer. Althougha partnership interest is generally consid-ered a capital asset, section 751(a) may ap-ply to recharacterize a portion of a part-ner’s gain on the sale or exchange of a part-nership interest as ordinary. A number ofcommenters on the noncompensatory part-nership option proposed regulations ques-tioned whether section 751 applies to thelapse, repurchase, sale, exchange, or othertermination of a noncompensatory option.

The Treasury Department and the IRScontinue to study this issue and requestcomments on (1) if section 751(a) appliesto the lapse, repurchase, sale, or exchangeof a noncompensatory option, (a) how theoption holder’s share of income or lossfrom section 751 property would be de-

termined under §1.751–1(a)(2), and (b)how a partner in the issuing partnershipthat transfers its partnership interest whilethe option is outstanding would determineits share of income or loss from section751 property under §1.751–1(a)(2) (thatis, should it be reduced by the amount ofincome or loss from section 751 propertyattributable to the option holder); and (2)if section 751(a) does not apply to thelapse, repurchase, sale, or exchange ofa noncompensatory option, what mea-sures, if any, should be taken to ensurethat ordinary income is not permanentlyeliminated.

Effective/Applicability Date

To coordinate the proposed regulationswith the final noncompensatory partner-ship option regulations, the proposed reg-ulations are proposed to have the same ef-fective date as the final noncompensatorypartnership option regulations. Therefore,the proposed regulations are proposed toapply to options issued on or after Febru-ary 5, 2013.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866, as supplemented by Execu-tive Order 13563. Therefore, a regulatoryassessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to this regulation, andbecause the regulation does not impose acollection of information requirement onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The Treasury Department and the IRS

March 25, 2013 715 2013–13 I.R.B.

request comments on all aspects of the pro-posed rules. All comments are availableat www.regulations.gov or upon request.A public hearing may be scheduled ifrequested in writing by any person thattimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the public hearingwill be published in the Federal Register.

Drafting Information

The principal authors of these pro-posed regulations are Benjamin Weaverof the Office of Associate Chief Counsel(Passthroughs and Special Industries) andShawn Tetelman of the Office of AssociateChief Counsel (Financial Institutions andProducts). However, other personnelfrom the IRS and Treasury Departmentparticipated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.761–3 is amended

by adding paragraph (c)(1)(iv) to read asfollows:

§1.761–3 Certain option holders treatedas partners.

* * * * *(c) * * *(1) * * *(iv) An event described in paragraphs

(c)(1)(iv)(A), (B), or (C) of this section,provided the event is pursuant to a planin existence at the time of the issuance ormodification of the noncompensatory op-tion that has as a principal purpose the sub-stantial reduction of the present value ofthe aggregate Federal tax liabilities of thepartners and the noncompensatory optionholder (under paragraph (a)(1)(ii) of thissection):

(A) Issuance, transfer, or modificationof an interest in, or liquidation of, the issu-ing partnership;

(B) Issuance, transfer, or modificationof an interest in any look-through entity (asdefined in paragraph (b)(1) of this section)that directly, or indirectly through one ormore look-through entities, owns the non-compensatory option;

(C) Issuance, transfer, or modificationof an interest in any look-through entitythat directly, or indirectly through one ormore look-through entities, owns an inter-est in the issuing partnership.

* * * * *Par. 3. Section 1.1234–3 is amended by

adding a sentence at the end of paragraph(b)(2) to read as follows:

§1.1234–3 Special rules for the treatmentof grantors of certain options grantedafter September 1, 1976.

* * * * *(b) * * *(2) * * * For purposes of the preceding

sentence, for options granted on or afterFebruary 5, 2013, the term securities in-cludes partnership interests.

* * * * *

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on February 4,2013, 8:45 a.m., and published in the issue of the FederalRegister for February 5, 2013, 78 F.R. 8060)

Notice of ProposedRulemaking and Notice ofPublic Hearing

Shared ResponsibilityPayment for Not MaintainingMinimum Essential Coverage

REG–148500–12

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations relating to the require-ment to maintain minimum essential cov-erage enacted by the Patient Protection andAffordable Care Act and the Health Care

and Education Reconciliation Act of 2010,as amended by the TRICARE AffirmationAct and Public Law 111–173. These pro-posed regulations provide guidance on theliability for the shared responsibility pay-ment for not maintaining minimum essen-tial coverage. This document also pro-vides notice of a public hearing on theseproposed regulations.

DATES: Comments must be received byMay 2, 2013. Outlines of topics to bediscussed at the public hearing scheduledfor May 29, 2013, at 10:00 a.m., must bereceived by May 3, 2013.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–148500–12),room 5203, Internal Revenue Service,PO Box 7604, Ben Franklin Station,Washington, DC 20044. Submissions maybe hand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–148500–12),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemakingPortal at www.regulations.gov (IRSREG–148500–12). The public hearingwill be held in the IRS Auditorium,Internal Revenue Building, 1111Constitution Avenue, NW, Washington,DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the pro-posed regulations, Sue-Jean Kim orJohn B. Lovelace, (202) 622–4960;concerning the submission of comments,the public hearing, and to be placed on thebuilding access list to attend the publichearing, Oluwafunmilayo Taylor, (202)622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)). Commentson the collection of information shouldbe sent to the Office of Managementand Budget, Attn: Desk Officer for

2013–13 I.R.B. 716 March 25, 2013

the Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503, with copiesto the Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:M:S, Washington, DC20224.

Comments on the collection of informa-tion should be received by April 2, 2013.Comments are specifically requested con-cerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the IRS, in-cluding whether the information will havepractical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation;

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collection of information may beminimized, including through the appli-cation of automated collection techniquesor other forms of information technology;and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of services to provide informa-tion.

The collection of information in theseproposed regulations is in §1.5000A–3and §1.5000A–4. The collection of infor-mation is necessary to determine whetherthe shared responsibility payment provi-sion applies to a taxpayer and compute anyshared responsibility payment imposedon a taxpayer. The likely respondents areindividuals required to file Federal incometax returns under section 6012(a)(1) of theInternal Revenue Code (Code).

The burden for the collection of infor-mation contained in proposed regulation§1.5000A–3 and §1.5000A–4 will be re-flected in the burden on a form that the IRSwill create to request the information in theproposed regulation.

An agency may not conduct or sponsor,and a person is not required to respond to, acollection of information unless it displaysa valid control number assigned by the Of-fice of Management and Budget.

Background

Under the Patient Protection and Af-fordable Care Act, Public Law 111–148(124 Stat. 119 (2010)) and the HealthCare and Education Reconciliation Actof 2010, Public Law 111–152 (124 Stat.1029 (2010)) (collectively, the Afford-able Care Act), the Federal government,State governments, insurers, employers,and individuals are entrusted with sharedresponsibility to reform and improve theavailability, quality, and affordability ofhealth insurance coverage in the UnitedStates. The Affordable Care Act expandsMedicaid eligibility for residents of elect-ing States and increases Federal fundingfor the expansion. The Affordable CareAct also provides individuals and smallbusinesses the ability to purchase pri-vate health insurance through State-based,State Partnership, or Federally facilitatedcompetitive market places called Afford-able Insurance Exchanges (Exchanges).Through Exchanges, insurance compa-nies will compete for business on a levelplaying field and qualified consumers willhave a choice of health plans to fit theirneeds.

In addition, the Affordable Care Act in-cludes various insurance market reforms toincrease the ability of individuals to en-roll in health insurance coverage regard-less of preexisting conditions and to elimi-nate the ability of insurers to charge higherpremium prices based on factors other thanage, tobacco use, rating area, or familysize. Moreover, the Affordable Care Actbuilds upon the existing private employer-based health insurance system to ensurecontinued access to high quality health in-surance coverage at low cost.

Finally, to ensure effective and efficientimplementation of the insurance marketreforms, the Affordable Care Act requiresa nonexempt individual to maintain mini-mum essential coverage or make a sharedresponsibility payment. Section 1501(b)of the Affordable Care Act added section5000A to a new chapter 48 of subtitleD (Miscellaneous Excise Taxes) of theCode effective for months beginning afterDecember 31, 2013. Section 5000A wassubsequently amended by the TRICAREAffirmation Act of 2010, Public Law111–159 (124 Stat. 1123) and Public Law111–173 (124 Stat. 1215).

Shared Responsibility Payment for NotMaintaining Minimum Essential Coverage

Section 5000A provides nonexemptindividuals with a choice: maintain min-imum essential coverage for themselvesand any nonexempt family membersor include an additional payment withtheir Federal income tax return. Section5000A(a) and section 5000A(b) providethat nonexempt individuals must haveminimum essential coverage for eachmonth beginning after December 31,2013, or make an additional payment (theshared responsibility payment) with theirFederal income tax return for the taxableyear that includes such month. Under sec-tion 5000A(b)(3)(A), a taxpayer is liablefor the shared responsibility payment ifany nonexempt individual who may beclaimed by the taxpayer as a dependentfor a taxable year does not have minimumessential coverage in a month included inthat taxable year. Married taxpayers fil-ing a joint return for any taxable year arejointly liable for any shared responsibilitypayment imposed for the year.

Exempt Individuals

Many individuals are exempt from theshared responsibility payment, includ-ing some whose religious beliefs conflictwith acceptance of the benefits of pri-vate or public insurance and those whodo not have an affordable health insur-ance coverage option available. Section1311(d)(4)(H) of the Affordable Care Act(42 U.S.C. 18031(d)(4)(H)) directs Ex-changes to issue to qualified individualscertificates of exemption from the re-quirement to maintain minimum essentialcoverage or the shared responsibility pay-ment under section 5000A. Section 1411of the Affordable Care Act (42 U.S.C.18081) generally provides proceduresfor determining an individual’s eligibil-ity for various benefits relating to healthcoverage, including exemptions from theapplication of section 5000A. The De-partment of Health and Human Servicesand the Department of the Treasury areworking in close coordination to releaseregulations and other guidance related toExchanges.

On March 27, 2012, the Departmentof Health and Human Services releasedfinal regulations related to the establish-

March 25, 2013 717 2013–13 I.R.B.

ment of, and the standards applicable to,Exchanges (45 CFR 155.10 and followingsections (Exchange regulations)). Section155.200(b) of the Exchange regulationsdirects an Exchange to issue exemptioncertificates in accordance with sections1311(d)(4)(H) and 1411 of the Afford-able Care Act (42 USC 18031(d)(4)(H),18081). The Department of Health andHuman Services is publishing proposedregulations detailing the standards bywhich Exchanges will issue certificatesof exemption under section 5000A. Pa-tient Protection and Affordable Care Act;Exchange Functions: Eligibility for Ex-emptions; Minimum Essential CoverageProvisions (to be codified at 45 CFR155.600 and following sections).

Section 5000A(d) and (e) describe in-dividuals who are exempt from makingthe shared responsibility payment even ifthey do not have minimum essential cov-erage for a given month. Under section5000A(d)(2)(A), an individual is exemptfor a month for which an Exchange cer-tifies that the individual is a member ofa recognized religious sect or a divisionthereof described in section 1402(g)(1)and is an adherent of established tenets orteachings of that sect or division. Section1402(g)(1) provides an exemption fromself-employment tax for members of aqualified religious sect or division thereof.A qualified religious sect or divisionthereof described in section 1402(g)(1) isa sect or division thereof that the Com-missioner of Social Security finds: (1) hasestablished tenets or teachings by reasonof which its members and adherents areconscientiously opposed to acceptance ofthe benefits of any private or public in-surance that makes payments in the eventof death, disability, old age, or retirementor makes payments toward the cost of,or provides services for, medical care(including the benefits of any insurancesystem established by the Social SecurityAct); (2) maintains, and has maintainedfor a substantial period of time, a practicewhereby its members make provision forits dependent members that is reasonablein view of their general level of living; and(3) has been in existence at all times sinceDecember 31, 1950.

Section 5000A(d)(2)(B) provides thatan individual is exempt for a month thatthe individual is a member of a health caresharing ministry. A health care sharing

ministry is an organization: (1) whichis described in section 501(c)(3) and ex-empt from tax under section 501(a); (2)members of which share a common setof ethical or religious beliefs and sharemedical expenses among themselves inaccordance with those beliefs, and regard-less of the State in which a member residesor is employed; (3) members of whichretain membership even after they developa medical condition; (4) which has itself(or a predecessor of which has) been inexistence at all times since December 31,1999; (5) members of which have con-tinuously and without interruption sharedmedical expenses since at least December31, 1999; and (6) which conducts an an-nual audit performed by an independentcertified public accounting firm in accor-dance with generally accepted accountingprinciples the report of which is madeavailable to members of the public uponrequest.

Section 5000A(d)(3) provides that anindividual is exempt for a month that theindividual is neither a citizen or nationalof the United States nor an alien lawfullypresent in the United States.

Section 5000A(d)(4) provides that anindividual is exempt for a month thatthe individual is incarcerated, except forincarceration pending the disposition ofcharges.

Section 5000A(e)(1) provides that anindividual is exempt for a month for whichthe individual lacks access to affordableminimum essential coverage. For this pur-pose, an individual lacks access to afford-able coverage if the individual’s requiredcontribution (determined on an annual ba-sis) for minimum essential coverage ex-ceeds a percentage (8 percent for 2014)of the individual’s household income forthe most recent taxable year for which theSecretary of Health and Human Services,in consultation with the Secretary, deter-mines information is available.

In general, section 5000A(c)(4)(B) de-fines a taxpayer’s household income as thesum of the taxpayer’s modified adjustedgross income and the modified adjustedgross income of any other member ofa taxpayer’s family (that is, individualsfor whom the taxpayer properly claims adeduction under section 151 (relating tothe personal exemption deduction)) whoare required to file a Federal income taxreturn. Under section 5000A(c)(4)(C),

modified adjusted gross income meansadjusted gross income (within the mean-ing of section 62) increased by amountsexcluded from gross income under section911 and tax-exempt interest a taxpayerreceives or accrues in the taxable year.Unlike section 36B(d)(2)(B), modifiedadjusted gross income for purposes ofsection 5000A does not include SocialSecurity benefits that are not includable ingross income. For purposes of determin-ing the affordability of minimum essentialcoverage under section 5000A(e)(1), thetaxpayer’s household income is increasedby the portion of the required contributionmade through a salary reduction arrange-ment and excluded from gross income.

For purposes of determining house-hold income, a taxpayer’s family includesall individuals for whom the taxpayerproperly claims a personal exemption de-duction under section 151 for the taxableyear. See also §1.36B–1(d). Taxpayersmay claim a personal exemption deductionfor themselves, a spouse, and each of theirdependents. Section 152 provides that ataxpayer’s dependent may be a qualifyingchild or qualifying relative, including anunrelated individual who lives with thetaxpayer.

For an employee eligible to purchasecoverage under an eligible employer-spon-sored plan, the required contribution forpurposes of the exemption under section5000A(e)(1) is the employee’s share ofthe annual premium for self-only cover-age. For an individual eligible to purchasecoverage under an eligible employer-spon-sored plan because the individual is re-lated to an employee, the determinationof whether the individual’s coverage is af-fordable is made by reference to the em-ployee’s required contribution. For all in-dividuals who are ineligible to purchasecoverage under an eligible employer-spon-sored plan, the required contribution is theannual premium for the lowest cost bronzeplan available on the Exchange where theindividual lives reduced by the credit al-lowable under section 36B for the taxableyear (determined as if the individual en-rolled in a plan through such Exchange forthe entire taxable year).

Section 5000A(e)(2) provides that anindividual is exempt for a month includedin a calendar year if the individual’s house-hold income for the most recent taxableyear for which information is available is

2013–13 I.R.B. 718 March 25, 2013

less than the amount of gross income spec-ified in section 6012(a)(1) for the taxpayer.Section 6012(a)(1) provides, for each fil-ing status, gross income thresholds abovewhich individuals are required to file Fed-eral income tax returns.

As described in this preamble, in-come-based exemptions under section5000A(e)(1) and section 5000A(e)(2) relyupon household income for the most recenttaxable year that the Secretary of Healthand Human Services, after consultationwith the Secretary of Treasury, determinesinformation is available. The Secretary ofHealth and Human Services, after consul-tation with the Secretary of the Treasury,determined that the household income forthese exemptions that is available and rel-evant is the household income for the yearfor which an exemption is being claimed.See section III.A.3.b. of the preamble toPatient Protection and Affordable CareAct; Exchange Functions: Eligibility forExemptions; Minimum Essential Cover-age Provisions (to be codified at 45 CFR155.600 and following sections, and 45CFR 156.600 and following sections). Thedetermination by the Secretary of Healthand Human Services is reflected in theproposed regulations.

Section 5000A(e)(3) provides that anindividual is exempt for a month that theindividual is a member of an Indian tribeas defined in section 45A(c)(6). Section45A(c)(6) describes certain Federally rec-ognized Indian tribes (including any qual-ified Alaska Native village or regional orvillage corporation). The Federally recog-nized Indian tribes are listed in Indian En-tities Recognized and Eligible to ReceiveServices from the United States Bureau ofIndian Affairs, 75 Fed. Reg. 60810 (Oct.1, 2010), as supplemented by 75 Fed. Reg.661124 (Oct. 27, 2010), or its successor.

Under section 5000A(e)(4), an individ-ual is exempt for a month the last day ofwhich occurs in a period when the indi-vidual does not have minimum essentialcoverage for a continuous period of lessthan three months (a short coverage gap).The length of a gap in coverage is deter-mined without regard to the calendar yearsin which months in the gap occur. If anindividual has more than one short cov-erage gap in a calendar year, the exemp-tion applies only to the earliest short cov-erage gap. Section 5000A(e)(4) authorizesthe Secretary to issue regulations that pro-

vide for collecting the shared responsibil-ity payment in cases where gaps in cover-age straddle more than one taxable year.

Section 5000A(e)(5) provides that anindividual is exempt for a month that theExchange determines, in accordance withguidance promulgated by the Secretary ofHealth and Human Services, the individ-ual suffered a hardship that prevented theindividual from obtaining coverage undera qualified health plan. The Departmentof Health and Human Services is propos-ing rules on the criteria for application ofthe hardship exemption. Patient Protectionand Affordable Care Act; Exchange Func-tions: Eligibility for Exemptions; Mini-mum Essential Coverage (to be codified at45 CFR 155.605(g)).

Computation of Shared ResponsibilityPayment

Under section 5000A(c), the amountof the shared responsibility payment forany taxable year is generally the sum ofmonthly penalty amounts for all months inthe taxable year in which any nonexemptindividual for whom the taxpayer is li-able under section 5000A(b) did not haveminimum essential coverage. The sharedresponsibility payment amount for anytaxable year may not exceed an amountequal to the national average premium forbronze-level qualified health plans offeredthrough Exchanges for the applicable fam-ily size involved.

The monthly penalty amount for amonth is equal to 1/12 of the greater ofthe following amounts: (1) the flat dollaramount or (2) the percentage of income.The flat dollar amount is the lesser of thefollowing amounts: (a) the sum of the ap-plicable dollar amounts for all nonexemptindividuals without minimum essentialcoverage for whom the taxpayer is liableor (b) 300 percent of the applicable dollaramount. The applicable dollar amount is$95 for 2014, $325 for 2015, and $695for 2016, and will be increased for cal-endar years beginning after 2016 by acost-of-living adjustment. If a nonexemptindividual has not attained the age of 18as of the beginning of a month, the appli-cable dollar amount for that individual isone-half of the regular applicable dollaramount.

The percentage of income is calculatedas the excess of the taxpayer’s household

income over the taxpayer’s Federal incometax return filing threshold under section6012(a)(1), multiplied by a percentage fig-ure. The percentage figure is 1 percent fortaxable years beginning in 2014, 2 percentfor taxable years beginning in 2015, and2.5 percent for taxable years beginning af-ter 2015.

Minimum Essential Coverage

Section 5000A(f) defines minimum es-sential coverage as one of the following:(1) coverage under a specified governmentsponsored program, (2) coverage under aneligible employer-sponsored plan, (3) cov-erage under a health plan offered in the in-dividual market within a State, (4) cover-age under a grandfathered health plan, and(5) other health benefits coverage that theSecretary of Health and Human Services,in coordination with the Secretary, recog-nizes for purposes of section 5000A(f).

Under section 5000A(f)(1)(A), spec-ified government sponsored programsinclude the following: (1) the Medicareprogram under part A of title XVIII of theSocial Security Act, (2) the Medicaid pro-gram under title XIX of the Social SecurityAct, (3) the Children’s Health InsuranceProgram (CHIP) under title XXI of theSocial Security Act, (4) medical coverageunder chapter 55 of title 10, United StatesCode, including the TRICARE program,(5) veterans health care programs underchapter 17 or 18 of title 38, as determinedby the Secretary of Veterans Affairs, incoordination with the Secretary of Healthand Human Services and the Secretaryof Treasury, (6) a health plan under sec-tion 2504(e) of title 22 relating to PeaceCorps volunteers, and (7) the Nonappro-priated Fund Health Benefits Program ofthe Department of Defense, establishedunder section 349 of the National DefenseAuthorization Act for Fiscal Year 1995,Public Law 103–337 (10 U.S.C. 1587note).

Under section 5000A(f)(2), an eligibleemployer-sponsored plan is, with respectto an employee, a group health plan orgroup health insurance coverage offeredby an employer to the employee that is:(1) a governmental plan, within the mean-ing of section 2791(d)(8) of the PublicHealth Service Act, or (2) any other planor coverage offered in the small or largegroup market within a State. An eligi-

March 25, 2013 719 2013–13 I.R.B.

ble employer-sponsored plan also includesa grandfathered health plan offered in agroup market.

Under section 1251 of the AffordableCare Act (42 U.S.C. 18011), a grandfa-thered health plan is a group health planor health insurance coverage that providedcoverage as of the enactment date of theAffordable Care Act (March 23, 2010) orin which an individual was enrolled as ofthat date. See also §54.9815–1251T(a)(providing guidance regarding grandfa-thered health plans).

As described in this preamble, the De-partment of Health and Human Services,in coordination with the Treasury Depart-ment, may designate other health bene-fits coverage as minimum essential cover-age. The Department of Health and Hu-man Services is proposing a regulation thatprovides criteria and a process by whichother types of coverage may be designatedas minimum essential coverage. PatientProtection and Affordable Care Act; Ex-change Functions: Eligibility for Exemp-tions; Minimum Essential Coverage Pro-visions (to be codified at 45 CFR 156.600and following sections).

Under section 5000A(f)(3), healthcoverage that consists of coverage ofcertain excepted benefits specified insection 2791(c) of the Public Health Ser-vice Act (42 U.S.C. 300gg–91(c)) is notminimum essential coverage. There arefour categories of excepted benefits. Thefirst category includes accidental deathand dismemberment coverage, disabil-ity insurance, general liability insurance,automobile liability insurance, workers’compensation, credit-only insurance (forexample, mortgage insurance), and cover-age for employer-provided on-site medicalclinics. See 42 U.S.C. 300gg–91(c)(1).The second category of excepted benefitsincludes limited-scope dental or visionbenefits, long-term care benefits, andbenefits provided under certain healthflexible spending arrangements. See 42U.S.C. 300gg–91(c)(2). The third cate-gory of excepted benefits includes, butonly if offered under a policy, certificate,or contract of insurance separate from,and not coordinated with, any group orindividual health plan maintained by thesame plan sponsor, coverage only for aspecified disease or illness (for example,cancer-only policies) or fixed indemnityinsurance (for example, a policy that pays

a fixed dollar amount, such as $100, perday of hospitalization or illness regard-less of the amount of medical expenseincurred). See 42 U.S.C. 300gg–91(c)(3).The last category of excepted benefitsincludes, but only if offered under a pol-icy, certificate, or contract of insuranceseparate from the primary health cover-age, Medicare supplemental polices (alsoknown as Medigap or MedSupp insur-ance), TRICARE supplemental policies,and similar supplemental coverage tocoverage under a group health plan. See42 U.S.C. 300gg–91(c)(4).

Under section 5000A(f)(4), an individ-ual is treated as having minimum essen-tial coverage for a month: (1) if the indi-vidual is a bona fide resident of a UnitedStates possession for the month or (2) ifthe month occurs during any period de-scribed in section 911(d)(1)(A) or section911(d)(1)(B) that is applicable to the indi-vidual. Section 911(d)(1)(A) is applicableto a citizen of the United States who hasa tax home outside the United States andis a bona fide resident of a foreign countryor countries during an uninterrupted periodthat includes an entire taxable year. Forexample, an individual who resides abroadfor an entire calendar year is treated as hav-ing minimum essential coverage for eachmonth of that calendar year regardless ofwhether the individual has health coverageof any type. Section 911(d)(1)(B) is ap-plicable to a U.S. citizen or U.S. resident(within the meaning of section 7701(b))who has a tax home outside the UnitedStates and is present in a foreign coun-try or countries for at least 330 full daysduring a period of 12 consecutive months.In general, an individual who meets ei-ther of the foregoing residency require-ments under section 911(d)(1) is treated asa qualified individual for purposes of sec-tion 911 and may elect to exclude certainforeign earned income and housing costsfrom gross income.

Administration and Procedure

Under section 5000A(b)(2), an individ-ual liable for the shared responsibility pay-ment under section 5000A must report thepayment with the individual’s Federal in-come tax return for the taxable year includ-ing the month or months for which the pay-ment is owed.

Under section 5000A(g)(1), the sharedresponsibility payment is payable upon no-tice and demand by the Secretary. Theshared responsibility payment is generallyassessed and collected in the same manneras an assessable penalty under subchap-ter B of chapter 68 (sections 6671 through6725). Unlike the assessable penalties,however, the Secretary may not file noticeof lien or levy on the taxpayer’s propertyfor failing to pay the assessed shared re-sponsibility payment. Further, a taxpayermay not be subject to criminal prosecutionor penalty for failing to pay the assessedshared responsibility payment in a timelymanner.

Explanation of Provisions

1. Maintenance of Minimum EssentialCoverage and Liability for SharedResponsibility Payment

The proposed regulations provide that,for a month, a nonexempt individual musteither have minimum essential coverage orpay the shared responsibility payment.

a. Coverage for a month

The proposed regulations provide that,for any calendar month, an individual istreated as having minimum essential cov-erage if the individual is enrolled in and en-titled to receive benefits under a programor plan that is minimum essential coveragefor at least one day during the month.

b. Liability for shared responsibilitypayment

i. Liability for dependents

Under section 5000A(b)(3)(A), if an in-dividual with respect to whom the sharedresponsibility payment is imposed for amonth is another individual’s dependent(as defined in section 152) for the taxableyear including that month, the other indi-vidual is liable for the shared responsibilitypayment for the dependent. The proposedregulations clarify that a taxpayer is liablefor the shared responsibility payment im-posed with respect to any individual for amonth in a taxable year for which the tax-payer may claim a personal exemption de-duction for the individual (that is, the de-pendent) for that taxable year. Whether thetaxpayer actually claims the individual as a

2013–13 I.R.B. 720 March 25, 2013

dependent for the taxable year does not af-fect the taxpayer’s liability for the sharedresponsibility payment for the individual.

The proposed regulations provide spe-cial rules for determining liability for theshared responsibility payment attributableto individuals who are adopted or placedin foster care during a taxable year. If ataxpayer legally adopts a child and is enti-tled to claim the child as a dependent un-der section 151 for the taxable year whenthe adoption occurs, the taxpayer is not li-able for a shared responsibility payment at-tributable to the child for the months be-fore the adoption. Conversely, if a tax-payer who is entitled to claim a child asa dependent under section 151 for the tax-able year places the child for adoption dur-ing the year, the taxpayer is not liable for ashared responsibility payment attributableto the child for the months after the adop-tion.

The proposed regulations define sharedresponsibility family to include all indi-viduals for whom a taxpayer (includinga spouse, if married filing jointly) is li-able for the shared responsibility payment.The proposed regulations clarify that a tax-payer who is an exempt individual remainsliable for a shared responsibility paymentimposed for a nonexempt dependent whodoes not have minimum essential cover-age.

ii. Joint liability

Section 5000A(b)(3)(B) provides that,if an individual for whom the shared re-sponsibility payment is imposed for amonth files a joint return for the taxableyear including that month, the individualand the individual’s spouse are jointlyliable for the shared responsibility pay-ment. The proposed regulations clarifythat whether one spouse is an exempt in-dividual does not affect the joint liabilityof the two spouses for the shared respon-sibility payment.

2. Minimum Essential Coverage

a. Government sponsored programs

Section 5000A(f)(1)(A) specifies sev-eral government sponsored programs asproviding minimum essential coverage byreferring to the Federal law authorizing aparticular program. In most cases, the rel-evant law describes a single program or a

discrete portion of a larger program. Forexample, section 5000A(f)(1)(A)(i) listsPart A of the Medicare program under ti-tle XVIII of the Social Security Act. How-ever, in some cases, the relevant law es-tablishes programs with limited coverage.For instance, some of the programs un-der title XIX of the Social Security Act donot provide a scope of benefits compara-ble to the primary Medicaid program underthe same title. In addition, the Secretaryof Veterans Affairs, in coordination withthe Secretaries of Health and Human Ser-vices and Treasury, determined that onlycertain health care programs under chap-ter 17 or 18 of title 38, United States Codeprovide comprehensive benefits. The pro-grams with limited coverage are similar tocoverage consisting of excepted benefitsthat is not minimum essential coverage un-der section 5000A(f)(3). Accordingly, theproposed regulations identify limited ben-efit programs under title XIX of the SocialSecurity Act that are not minimum essen-tial coverage and specify comprehensivehealth care programs under chapter 17 or18 of title 38, United States Code, that areminimum essential coverage.

b. Eligible employer-sponsored plans

In general

Section 5000A(f)(2) defines eligibleemployer-sponsored plan, for an em-ployee, as a group health plan or grouphealth insurance coverage offered by anemployer to the employee that is eitherof the following: (1) a governmental plan(within the meaning of section 2791(d)(8)of the Public Health Service Act (PHSA)(42 U.S.C. 300gg–91(d)(8)) or (2) anyother plan or coverage offered in the smallor large group market within a State. Theterms group health plan and group healthinsurance coverage are not defined in sec-tion 5000A. However, section 5000A(f)(5)provides that any term used in section5000A that is also used in title I of the Af-fordable Care Act has the same meaningas when used in that title.

Section 1301(b)(3) of the AffordableCare Act (42 U.S.C. 18021(b)(3)) providesthat group health plan has the same mean-ing as in section 2791(a) of the PHSA (42U.S.C. 301gg–91(a)(1)). Section 2791(a)of the PHSA provides that group healthplan means an employee welfare benefit

plan (as defined in section 3(1) of the Em-ployee Retirement Income Security Act of1974 (ERISA) (29 U.S.C. 1002(1)) to theextent that the plan provides medical care(as defined in section 2791(a)(2) of thePHSA and including items and servicespaid for as medical care) to employees andtheir dependents directly or through insur-ance, reimbursement, or otherwise. Sec-tion 3(1) of ERISA defines employee wel-fare benefit plan as any plan, fund, or pro-gram established or maintained by an em-ployer or by an employee organization, orby both, to the extent that the plan, fund,or program is established or maintainedfor the purpose of providing for its par-ticipants or their beneficiaries, through thepurchase of insurance or otherwise, vari-ous benefits, which may include medical,surgical, or hospital care or benefits.

Group health plans within the mean-ing of section 1301(b)(3) of the Afford-able Care Act (42 U.S.C. 18021(b)(3)) in-clude both insured health plans and self-in-sured health plans. Accordingly, a self-in-sured group health plan is an eligible em-ployer-sponsored plan.

ii. Continuation and retiree coverage

Employers are required to offer certainformer employees continuation coverageunder Federal or State law. Many em-ployers offer health benefits coverage toretired employees. Under the PHSA andERISA, group health plans and employeewelfare benefit plans, respectively, includeplans offered to former employees. Ac-cordingly, the proposed regulations clar-ify that coverage provided by an employerto a former employee, including cover-age under the Consolidated Omnibus Bud-get Reconciliation Act of 1985 (COBRA),Public Law 99–272 (100 Stat. 82), and re-tiree health coverage, qualifies as cover-age under an eligible employer-sponsoredplan.

c. Other health benefits coverage

Under section 5000A(f)(1)(E), the Sec-retary of Health and Human Services,in coordination with the Secretary ofthe Treasury, may designate other healthbenefits coverage as minimum essentialcoverage. The Department of Health andHuman Services is proposing rules pro-viding standards for determining whethercertain other types of health insurance

March 25, 2013 721 2013–13 I.R.B.

coverage constitute minimum essentialcoverage and procedures for plan sponsorsto follow for a plan to be identified asminimum essential coverage under section5000A. Patient Protection and AffordableCare Act; Exchange Functions: Eligibilityfor Exemptions; Minimum Essential Cov-erage Provisions (to be codified at 45 CFR156.600 and following sections).

3. Exempt Individuals

a. In general

The term applicable individual is usedin section 5000A to describe an indi-vidual who is subject to the minimumessential coverage provision under section5000A(a). Section 5000A(d)(2) throughsection 5000A(d)(4) describe one cate-gory of individuals who are not applicableindividuals for purposes of section 5000A.Section 5000A(e)(1) through 5000A(e)(5)describe another category of individu-als who are exempt from liability for theshared responsibility payment imposedunder section 5000A(b). Although thetwo categories are distinct in the statute,the consequence for individuals describedin either category is the same: individu-als in both categories are not subject tothe shared responsibility payment for notmaintaining minimum essential coverage.Accordingly, the proposed regulations re-fer to all individuals described in section5000A(d)(2), (d)(3), or (d)(4), or sec-tion 5000A(e)(1), (e)(2), (e)(3), (e)(4), or(e)(5), as exempt individuals. For a month,a nonexempt individual is any individualwho is alive for the entire month and is notan exempt individual for the month.

The proposed regulations provide that,in general, an individual is treated as an ex-empt individual for a month if the individ-ual is an exempt individual for at least oneday in the month. In the case of certainindividuals who are nonresident aliens (asdefined in section 7701(b)(1)(B)), individ-uals whose household income falls belowthe return filing threshold, and individualswho experience short coverage gaps, theproposed regulations provide rules on howto determine whether an individual is ex-empt for a particular month. An individ-ual is exempt for all months included in ataxable year when the individual is a non-resident alien. In the case of an individualwhose household income falls below the

return filing threshold for a taxable year,the individual is exempt for all months inthe taxable year. In the case of an individ-ual experiencing a coverage gap, the indi-vidual is exempt for a month included inthe first short coverage gap in a calendaryear.

b. Members of recognized religious sectsor divisions

Under section 5000A(d)(2)(A), an indi-vidual is exempt for a month that the indi-vidual has in effect a religious conscienceexemption certification. Only an Ex-change may grant a religious conscienceexemption certification. Individuals whoare members of a recognized religious sector division thereof described in section1402(g)(1) and who are adherents of theestablished tenets or teachings of the sector division are eligible to receive a reli-gious conscience exemption certification.

c. Exempt noncitizens

The proposed regulations clarify thatan individual who is not a citizen or na-tional of the United States is exempt fora month if the individual is not lawfullypresent in the United States in that monthwithin the meaning of 45 CFR 155.20 (re-ferring to lawful immigration status withinthe United States). In addition, an indi-vidual who is not a citizen or national ofthe United States is treated as not law-fully present in the United States for amonth in a taxable year if the individualis a nonresident alien as defined in section7701(b)(1)(B) for that taxable year.

d. Incarcerated individuals

Section 5000A(d)(4) provides that anindividual is exempt for a month for whichthe individual is incarcerated (other thanincarceration pending the disposition ofcharges). The proposed regulations clarifythat an individual confined for at least oneday in a jail, prison, or similar penal insti-tution or correctional facility after the dis-position of charges is exempt for the monththat includes the day.

e. Individuals who cannot afford coverage

Section 5000A(e)(1)(A) provides thatan individual is exempt for a month for

which the individual does not have ac-cess to affordable minimum essential cov-erage. For this purpose, an individualdoes not have access to affordable cover-age for a month if the individual’s requiredcontribution (determined on an annual ba-sis) for coverage for the month exceeds8 percent of the taxpayer’s household in-come for the taxable year. Under section5000A(e)(1)(D), for any plan year begin-ning after 2014, the 8 percent figure is re-placed by the percentage figure that theSecretary of Health and Human Servicesdetermines reflects the excess of the rateof premium growth between the precedingcalendar year and 2013 over the rate of in-come growth for the same period.

For purposes of determining affordabil-ity of coverage, in accordance with section5000A(e)(1)(A), the proposed regulationsrequire that the taxpayer’s household in-come be increased by the portion of the re-quired contribution made through a salaryreduction arrangement and excluded fromgross income. In many cases, informationon the excluded amount may not be avail-able to the IRS or to the employee. Com-ments are requested on practicable ways,if any, in which the required adjustmentto household income may be made withthe information available under sections6051, 6055, 6056, or other provisions ofthe Code.

i. Individuals eligible for minimumessential coverage under an eligibleemployer-sponsored plan

A. Eligibility for coverage under aneligible employer-sponsored plan

If an individual is eligible for cover-age under an eligible employer-sponsoredplan, whether as an employee or as an indi-vidual related to an employee, the individ-ual’s qualification for the lack of afford-able coverage exemption is determinedsolely by reference to the cost of coverageunder the eligible employer-sponsoredplan. The proposed regulations clarifythat an employee or related individual istreated as eligible for coverage under aneligible employer-sponsored plan for eachmonth included in the plan year if theemployee or related individual could haveenrolled in the plan for that month duringan open or special enrollment period.

2013–13 I.R.B. 722 March 25, 2013

The proposed regulations also clar-ify that an employed individual who iseligible for coverage under an eligibleemployer-sponsored plan offered by theindividual’s employer is not treated aseligible as a related individual for cover-age under a plan offered by the employerof another employed individual. Thus,if two or more members of a family areemployed and their respective employersoffer self-only and family coverage undereligible employer-sponsored plans, eachemployed individual determines the af-fordability of coverage using the premiumfor the self-only coverage offered by theindividual’s employer. Neither individ-ual may determine the affordability ofcoverage using the premium for familycoverage offered by the other individual’semployer. In these cases, each employedindividual’s self-only coverage may betreated as affordable, even though theaggregate cost of covering all employedindividuals may exceed 8 percent of thefamily’s household income. The Depart-ment of Health and Human Services isproposing rules that would permit familiesin these circumstances to qualify for thehardship exemption described in section5000A(e)(5). Patient Protection and Af-fordable Care Act; Exchange Functions:Eligibility for Exemptions; MinimumEssential Coverage Provisions (to be cod-ified at 45 CFR 155.605(g)).

The proposed regulations provide thatemployee includes a former employee.Thus, an individual eligible to enroll inretiree coverage under a group health planthat is an eligible employer-sponsoredplan as defined in section 5000A(f)(2) istreated as eligible to purchase minimumessential coverage under an eligible em-ployer-sponsored plan under the samerules applicable to current employees. Thetreatment of former employees is consis-tent with other provisions of the Code, thePHSA, and ERISA that apply to grouphealth plans of employers.

In addition, the proposed regulationsprovide that an individual eligible to enrollin continuation coverage required underFederal law, such as COBRA, or a compa-rable State law is eligible to purchase min-imum essential coverage under an eligibleemployer-sponsored plan only if the indi-vidual enrolls in the coverage. This treat-ment of former employees eligible for con-

tinuation coverage is consistent with therules provided in §1.36B–2(c)(3)(iv).

B. Required contribution for employeeseligible for coverage under anemployer-sponsored plan

Section 5000A(e)(1)(B)(i) providesthat, in the case of an employee eligibleto purchase minimum essential coveragethrough an eligible employer-sponsoredplan, the required contribution is the por-tion of the annualized premium that theindividual would pay (without regard towhether paid through salary reduction orotherwise) for self-only coverage. Theproposed regulations clarify that, for anemployee eligible for coverage under aneligible employer-sponsored plan, the re-quired contribution is the portion of theannual premium that the employee wouldpay for the lowest cost self-only coverage.

C. Required contribution for a relatedindividual eligible for coverage under aneligible employer-sponsored plan

Section 5000A(e)(1)(C) provides that,in the case of a related individual eligibleto purchase minimum essential coverageunder an eligible employer-sponsored planbecause of the individual’s relationshipwith an employee, the related individ-ual’s affordability determination is madeby reference to the employee’s requiredcontribution. The proposed regulationsprovide that a related individual is an indi-vidual who is eligible for coverage underan eligible employer-sponsored plan be-cause of a relationship to an employee andfor whom a personal exemption deductionunder section 151 is properly claimed onthe employee’s Federal income tax return.For example, an employee’s spouse istreated as a related individual if the spousefiles a joint return with the employee andis eligible for employer-sponsored cov-erage only under the plan offered to theemployee. An individual who is eligibleto enroll in an eligible employer-spon-sored plan by reason of a relationship toan employee, but who is not claimed as adependent by the employee, is not treatedas a related individual. For purposes ofsection 5000A, the unclaimed dependent’shousehold income is independently deter-mined.

The proposed regulations clarify that ifan employee or related individual is el-

igible to enroll in an eligible employer-sponsored plan, any eligibility for othercoverage (for example, government spon-sored minimum essential coverage) is dis-regarded for purposes of the exemption forlack of affordable coverage.

The proposed regulations further clar-ify that the required contribution for arelated individual’s coverage is deter-mined by reference to the premium forthe lowest cost coverage under the eli-gible employer-sponsored plan in whichthe employee and all related individualswho are included in the employee’s fam-ily and not otherwise exempt are eligibleto enroll. Thus, the required contribu-tion for a spouse and claimed dependents(who are not otherwise exempt) is thepremium that the employee would payfor the lowest cost coverage covering theemployee, the spouse, and the claimeddependents. The required contribution forself-only coverage under an eligible em-ployer-sponsored plan may cost less than8 percent of household income, while therequired contribution for family coverageunder the same employer plan may costmore than 8 percent of household income.In such a case, the employee is not exemptunder section 5000A(e)(1), while the em-ployee’s spouse and claimed dependentsare exempt.

Finally, some individuals who areclaimed as dependents by a taxpayer maynot be eligible for coverage under the tax-payer’s eligible employer-sponsored plan.The affordability of coverage for theseindividuals is determined in the mannerthat applies to them individually. Thus, ifa taxpayer is not allowed to enroll a niecewho is the taxpayer’s dependent in the tax-payer’s eligible employer-sponsored plan,the required contribution for the niece isnot determined by reference to the cost ofcoverage under the plan. Instead, unlessthe niece is eligible for coverage underanother eligible employer-sponsored plan,her required contribution is determinedunder the rules applicable to individualseligible only to purchase coverage in theindividual market.

ii. Individuals eligible only to purchasecoverage in the individual market

Section 5000A(e)(1)(B)(ii) defines theterm required contribution for an individ-ual eligible only to purchase coverage in

March 25, 2013 723 2013–13 I.R.B.

the individual market. The proposed regu-lations clarify that, for any individual whois not an employee or related individual el-igible for minimum essential coverage un-der an eligible employer-sponsored plan,the required contribution is the premiumfor the lowest cost bronze plan availablein the individual market through the Ex-change serving the rating area where theindividual resides, reduced by the maxi-mum amount of any premium tax creditthat would be allowable if the individualwere enrolled in the plan offered throughthe Exchange.

As explained in this preamble, underthe proposed regulations, both the annualpremium for the applicable lowest costbronze plan and the credit allowable undersection 36B are determined by referenceto coverage for those members of the indi-vidual’s family who are not otherwise ex-empt (nonexempt family). Consequently,the required contribution is the same forall members of a nonexempt family whoare ineligible for coverage under an eligi-ble employer-sponsored plan.

A. Premium for the lowest cost bronzeplan

The proposed regulations provide thatthe lowest cost bronze plan is the low-est cost bronze-level qualified health planavailable in the Exchange serving the rat-ing area that would cover all members ofthe nonexempt family who are ineligiblefor coverage under an eligible employer-sponsored plan. Accordingly, the premiumfor the lowest cost bronze plan is the samefor all individuals in a nonexempt family.

The proposed regulations provide spe-cial rules for determining the premiumfor the lowest cost bronze plan if the Ex-change does not offer a bronze-level planthat would cover the taxpayer’s entirenonexempt family. The proposed regula-tions provide that, in general, the premiumfor the lowest cost bronze plan is the sumof the premiums for the lowest cost bronzeplans that would, taken together, cover thetaxpayer’s nonexempt family (for exam-ple, for an uncle and two adult dependentnieces, a self-only plan for the uncle anda two-adult or family plan for the nieces).Alternatively, the proposed regulationsprovide that a taxpayer may elect to usethe premium for the lowest cost bronzeplan that would apply to a set of individ-

uals that have the same characteristics asthe taxpayer’s nonexempt family (such asone adult plus children) as if one plan cov-ered all members of the taxpayer’s sharedresponsibility family.

B. Credit allowable under section 36B

In general, a premium tax credit isallowable under section 36B for anycoverage month (within the meaning of§1.36B–3(c)) that occurs in a taxableyear in which a taxpayer is an appli-cable taxpayer (within the meaning of§1.36B–2(b)). A month is not a cover-age month for an individual, and thus nopremium tax credit is allowable for theindividual’s coverage, if the individual iseligible for minimum essential coverageother than coverage offered in the individ-ual market for that month. In general, anapplicable taxpayer is a taxpayer whosehousehold income for the taxable year isbetween 100 percent and 400 percent ofthe Federal poverty line for the taxpayer’sfamily size.

Section 36B(b)(1) provides that the pre-mium tax credit for any taxable year is thesum of the premium assistance amountswith respect to all coverage months oc-curring in the taxable year. Under section36B(b)(2), for any coverage month, thepremium assistance amount is the lesserof the following: (1) the monthly premi-ums for the month for one or more quali-fied health plans in which the taxpayer or amember of the taxpayer’s family (coveragefamily) is enrolled through the Exchangeserving the rating area where they reside or(2) any excess of the adjusted monthly pre-mium for the month for the applicable sec-ond lowest cost silver plan for the taxpayerover an amount equal to 1/12 of the productof the applicable percentage and the tax-payer’s household income for the taxpayer.Section 36B, therefore, calculates the al-lowable credit by treating the family as asingle, aggregated unit.

The proposed regulations take a simi-lar family-unit approach to determine theaffordability of Exchange coverage. Theproposed regulations provide that, for pur-poses of section 5000A, each individual inthe taxpayer’s nonexempt family is treatedas having enrolled in a qualified healthplan through the appropriate Exchangefor purposes of determining the creditallowable under section 36B. Therefore,

for each individual, a month is treatedas a coverage month if the individual isineligible for minimum essential cover-age other than coverage in the individualmarket for the month. The proposed reg-ulations further provide that the premiumassistance amount for the month is theamount that would be allowable underthe rules of section 36B if each memberof the individual’s nonexempt family en-rolled in a qualified health plan throughan Exchange. Accordingly, for a monththat an individual included in a nonexemptfamily is eligible for minimum essentialcoverage other than coverage in the indi-vidual market, the month is not a coveragemonth for that individual, the individualis not included in the coverage family forpurposes of section 36B, and no premiumassistance amount is allowable for thecoverage attributable to such individual.

f. Household income below return filingthreshold

Section 5000A(e)(2) provides that anindividual is exempt for a month in a cal-endar year if the individual’s householdincome for the taxable year is less thanthe amount of gross income specified insection 6012(a)(1) with respect to the tax-payer. The proposed regulations refer to“the amount of gross income specified insection 6012(a)(1) with respect to the tax-payer” (that is, the minimum amount ofgross income that triggers the individual’srequirement to file a Federal income tax re-turn under that section) as the applicablefiling threshold.

The proposed regulations further clar-ify that, for any individual who is prop-erly claimed as a dependent, the appli-cable filing threshold is that of the tax-payer who claims the individual as a de-pendent. Therefore, if a taxpayer is ex-empt under section 5000A(e)(2), any in-dividual the taxpayer properly claims asa dependent also is exempt as well. TheTreasury Department and the IRS recog-nize that some taxpayers who do not havesufficient gross income to trigger a returnfiling requirement nevertheless may havehousehold income that exceeds the returnfiling threshold. For example, if a taxpayerwhose gross income is below the applica-ble filing threshold files a Federal incometax return in order to claim certain tax ben-efits (such as the earned income credit or

2013–13 I.R.B. 724 March 25, 2013

additional child tax credit) and claims adependent whose gross income triggers areturn filing requirement, the householdincome (which combines the taxpayer’sand the dependent’s income) may exceedthe filing threshold. The Department ofHealth and Human Services is proposingrules providing that individuals in this cir-cumstance may qualify for a hardship ex-emption. Patient Protection and Afford-able Care Act; Exchange Functions: Eli-gibility for Exemptions; Minimum Essen-tial Coverage Provisions (to be codified at45 CFR 155.605(g)). The Treasury De-partment and the IRS are considering ad-ditional methods of accommodating indi-viduals in these circumstances.

g. Short coverage gap

The proposed regulations clarify that acontinuous period without minimum es-sential coverage is determined by refer-ence to calendar months (for example, Jan-uary or February) in conjunction with thecoverage rule in §1.5000A–1(b). There-fore, if an individual is enrolled in and en-titled to receive benefits under a plan iden-tified as minimum essential coverage forone day in a calendar month, the monthis not included in the continuous periodwhen determining the application of theshort coverage gap exemption. As a re-sult, the proposed regulations provide thatan individual qualifies for the short cover-age gap exemption if the continuous pe-riod without minimum essential coverageis less than three full calendar months andis the first short coverage gap in the indi-vidual’s taxable year.

i. Coverage gap straddling multipletaxable years

In general, section 5000A(e)(4)(B)(i)provides that the length of a continuousperiod is determined without regard to thecalendar years in which months in the pe-riod occur. However, whether an individ-ual had coverage during the last month, orthe last two months, of a taxable year af-fects the determination of whether any gapin coverage that the individual experiencesin the first month, or the first and secondmonths, of the following taxable year qual-ifies as a short coverage gap. Accordingly,if a calendar year taxpayer has a continu-ous period of 3 months or longer that starts

in November or December of one taxableyear and ends in the next taxable year, thenJanuary and any ensuing months of thesecond taxable year that are included in theperiod are ineligible for the short coveragegap exemption.

Section 5000A(e)(4) expressly autho-rizes the Secretary to prescribe rules forthe collection of the shared responsibilitypayment in cases in which continuous pe-riods include months in more than one tax-able year. Each Federal income tax returncovers a single taxable year and requiresthe taxpayer to account for coverage ofthe taxpayer’s shared responsibility familyduring the months included in that taxableyear. To require a taxpayer to take intoaccount months in the following taxableyear may delay or impede the taxpayer’sability to file a timely Federal income taxreturn. Accordingly, to provide taxpayerswith certainty when filing their Federal in-come tax returns, the proposed regulationsprovide that an individual who lacks min-imum essential coverage for a period nolonger than the last two months of a tax-able year will be deemed to have a shortcoverage gap exemption for those monthsif the short coverage gap is the first to oc-cur in that taxable year, without regard towhether the individual is covered duringthe first months of the following taxableyear.

ii. Coordination with other exemptions

The proposed regulations clarify that,for purposes of determining whether ashort coverage gap applies, an individualis treated as covered under minimum es-sential coverage for a month in which theindividual qualifies for a section 5000Aexemption (other than the short coveragegap exemption). Therefore, the short cov-erage exemption applies to a month inwhich no other section 5000A exemptionapplies, and a month in which an individ-ual is otherwise exempt is not taken intoaccount in determining the length of thecontinuous period without coverage.

h. Claiming section 5000A exemptions

The exemptions for members of recog-nized religious sects or divisions and forindividuals who have suffered a hardshipare available only to individuals who havebeen certified as meeting the relevant crite-

ria by the Exchange serving the rating areawhere the individuals seeking the exemp-tion reside.

In addition, Exchanges will provide,upon request, exemption certifications formembers of health care sharing ministries,incarcerated individuals, and members ofIndian tribes. If an individual receivesan exemption certification from an Ex-change, the taxpayer who is responsiblefor accounting for that individual’s cov-erage must provide information about thecertification on the taxpayer’s Federal in-come tax return. Alternatively, a taxpayermay claim any of these exemptions on thetaxpayer’s Federal income tax return forthe taxable year.

Finally, the income-based exemptionsfor individuals who lack affordable cover-age or have household income below theapplicable income tax return filing thresh-old and the exemption for short coveragegaps may be claimed only on the individ-ual’s Federal income tax return for the ap-plicable year. Thus, an individual claim-ing the affordability exemption under sec-tion 5000A(e)(1) for part or all of a tax-able year will do so on the Federal incometax return that reports the individual’s in-come establishing qualification for the ex-emption. An individual who has house-hold income below the applicable Federalincome tax return filing threshold and filesa Federal income tax return may claim theexemption under section 5000A(e)(2) onthe return. However, an individual whohas household income below the applica-ble Federal income tax return filing thresh-old is not required to file a Federal incometax return to claim the exemption undersection 5000A(e)(2).

Pursuant to section 6001, taxpayersare required to maintain all records andinformation substantiating any claim forexemption on the taxpayer’s Federal in-come tax return, regardless of whether theindividual was certified by an Exchangeas qualifying for an exemption or firstclaimed the exemption on a Federal in-come tax return.

4. Computation of Shared ResponsibilityPayment

Under section 5000A(b)(1) and5000A(b)(3)(A), a taxpayer is liable forthe shared responsibility payment withrespect to any nonexempt individual who

March 25, 2013 725 2013–13 I.R.B.

is included in the taxpayer’s shared re-sponsibility family. The maximum annualamount of the shared responsibility pay-ment for a taxpayer is the national averagepremium for the bronze level plan avail-able through Exchanges that providescoverage for the applicable family size in-volved. The proposed regulations clarifythat the applicable family size involvedfor purposes of identifying the appropriatebronze level plan includes only the nonex-empt members of the taxpayer’s sharedresponsibility family who do not haveminimum essential coverage.

Under section 5000A(c), the annualamount of the shared responsibility pay-ment is the lesser of the applicable na-tional average bronze plan premium orthe sum of the monthly penalty amounts.The monthly penalty amount may varymonth to month because of changes inthe composition of the taxpayer’s sharedresponsibility family. To provide a mean-ingful value with which the sum of themonthly penalty amounts are compared,the proposed regulations provide that theapplicable national average bronze planpremium must similarly be determinedfor each month and then aggregated forcomparison with the sum of the monthlypenalty amounts. Consequently, the ap-plicable national average bronze planpremium may vary from month to monthduring the year to account for changes inthe taxpayer’s shared responsibility fam-ily.

5. Procedure and Administration

a. Inclusion with Federal income taxreturn

Section 5000A(b)(2) provides that theshared responsibility payment for a monthmust be included with a taxpayer’s Federalincome tax return for the taxable year thatincludes the month. The proposed regula-tions clarify that the time for assessing theshared responsibility payment is the sametime as that prescribed by section 6501 forthe taxable year including the month forwhich the taxpayer is liable for the pay-ment.

b. Assessment and collection

Section 5000A(g)(1) provides that theshared responsibility payment is payable

upon notice and demand by the Secre-tary and, except as provided in section5000A(g)(2), is assessed and collectedin the same manner as an assessablepenalty under subchapter B of chapter68 of the Code (sections 6671 through6725). The proposed regulations clarifythat the shared responsibility payment isnot subject to deficiency procedures ofsubchapter B of chapter 63 of the Code. Inaddition, the proposed regulations clarifythat interest on the shared responsibilitypayment accrues in accordance with therules in section 6601. The proposed reg-ulations further provide that the Secretarymay offset any liability for the sharedresponsibility payment against any over-payment due the taxpayer, in accordancewith section 6402(a).

Applicability Date

These regulations are proposed to applyfor months beginning after December 31,2013.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866, as supplemented by Execu-tive Order 13563. Therefore, a regulatoryassessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to the proposed reg-ulations. Pursuant to the Regulatory Flex-ibility Act (RFA) (5 U.S.C. chapter 6), itis hereby certified that the proposed reg-ulations will not have a significant eco-nomic impact on a substantial number ofsmall entities. The applicability of the pro-posed regulations is limited to individuals,who are not small entities as defined bythe RFA (5 U.S.C. 601). Accordingly, theRFA does not apply. Therefore, a regu-latory flexibility analysis is not required.Pursuant to section 7805(f) of the Code,the proposed regulations have been sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.

Comments and Public Hearing

Before the proposed regulations areadopted as final regulations, consideration

will be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on all aspects ofthe proposed rules. All comments will beavailable at www.regulations.gov or uponrequest.

A public hearing has been scheduled forMay 29, 2013, beginning at 10:00 a.m., inthe Auditorium, Internal Revenue Build-ing, 1111 Constitution Avenue, NW, Wash-ington, DC. Due to building security pro-cedures, visitors must enter at the Consti-tution Avenue entrance. In addition, allvisitors must present photo identificationto enter the building. Because of accessrestrictions, visitors will not be admittedbeyond the immediate entrance area morethan 30 minutes before the hearing starts.For information about having your nameplaced on the building access list to attendthe hearing, see the “FOR FURTHER IN-FORMATION CONTACT” section of thispreamble.

The rules of §601.601(a)(3) of thischapter apply to the hearing. Personswho wish to present oral comments at thehearing must submit electronic or writtencomments, and an outline of the topics tobe discussed and the time to be devotedto each topic (signed original and eight(8) copies) by May 3, 2013. A period of10 minutes will be allotted to each personfor making comments. An agenda show-ing the scheduling of the speakers will beprepared after the deadline for receivingoutlines has passed. Copies of the agendawill be available free of charge at the hear-ing.

Drafting Information

The principal authors of the pro-posed regulations are William L. Candlerand Sue-Jean Kim, Office of theAssociate Chief Counsel (Income Tax& Accounting). Other personnel fromthe Treasury Department and the IRSparticipated in the development of theregulations.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto be amended to read as follows:

2013–13 I.R.B. 726 March 25, 2013

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805* * *Section 1.5000A–4 also issued under

26 U.S.C. 5000A(e)(4).Par 2. Sections 1.5000A–0 through

1.5000A–5 are added to read as follows:

§1.5000A–0 Table of Contents.

This section lists the captions containedin §§1.5000A–1 through 1.5000A–5.

§1.5000A–1 Maintenance of minimumessential coverage and liability for theshared responsibility payment.

(a) In general.(b) Coverage under minimum essential

coverage.(1) In general.(2) Special rule for United States cit-

izens or residents residing outside theUnited States or residents of territories.

(c) Liability for shared responsibilitypayment.

(1) In general.(2) Liability for dependents.(i) In general.(ii) Special rules for dependents

adopted or placed in foster care during thetaxable year.

(A) Taxpayers adopting an individual.(B) Taxpayers placing an individual for

adoption.(C) Examples.(3) Liability of individuals filing a joint

return.(d) Definitions.(1) Affordable Care Act.(2) Qualified health plan.(3) Exchange.(4) Rating area.(5) Shared responsibility family.(6) Family.(7) Household income.(i) In general.(ii) Modified adjusted gross income.(8) Self-only coverage.(9) Family coverage.(10) Employee.(11) Month.

§1.5000A–2 Minimum essential coverage.

(a) In general.

(b) Government sponsored program.(c) Eligible employer-sponsored plan.(1) In general.(2) Group health plan.(3) Group health insurance coverage.(4) Large and small group market.(5) Government sponsored program

not treated as eligible employer-sponsoredplan.

(d) Plan in the individual market.(e) Grandfathered health plan.(f) Other health benefits coverage.(g) Excepted benefits.

§1.5000A–3 Exempt individuals.

(a) Members of recognized religioussects.

(1) In general.(2) Exemption certification.(b) Member of health care sharing min-

istries.(1) In general.(2) Health care sharing ministry.(c) Exempt noncitizens.(1) In general.(2) Exempt noncitizens.(d) Incarcerated individuals.(1) In general.(2) Incarcerated.(e) Individuals with no affordable cov-

erage.(1) In general.(2) Required contribution percentage.(i) In general.(ii) Indexing.(iii) Plan year.(3) Individuals eligible for coverage un-

der eligible employer-sponsored plans.(i) Eligibility.(A) In general.(B) Special rule for continuation cover-

age.(ii) Required contribution for individu-

als eligible for coverage under an eligibleemployer-sponsored plan.

(A) Employees.(B) Individuals related to employees.(C) Required contribution for part-year

period.(D) Examples.(4) Individuals ineligible for coverage

under eligible employer-sponsored plans.(i) Eligibility for coverage other than an

eligible employer-sponsored plan.(ii) Required contribution for individu-

als ineligible for coverage under eligibleemployer-sponsored plans.

(A) In general.(B) Applicable plan.(1) In general.(2) Lowest cost bronze plan does not

cover all individuals included in the tax-payer’s nonexempt family.

(i) In general.(ii) Simplified method for applicable

plan identification.(C) Credit allowable under section 36B.(D) Required contribution for part-year

period.(iii) Examples.(f) Household income below filing

threshold.(1) In general.(2) Applicable filing threshold.(i) In general.(ii) Certain dependents.(g) Members of Indian tribes.(h) Individuals with hardship exemp-

tion certification.(1) In general.(2) Hardship exemption certification.(i) [Reserved](j) Individuals with certain short cover-

age gaps.(1) In general.(2) Short coverage gap.(i) In general.(ii) Coordination with other exemp-

tions.(iii) More than one short coverage gap

during calendar year.(3) Continuous period.(i) In general.(ii) Continuous period straddling more

than one taxable year.(4) Examples.(k) Claiming exemptions from the

shared responsibility payment.(1) Exemptions requiring certification

by an Exchange.(2) Exemptions that may be certified

by an Exchange or claimed on a Federalincome tax return.

(i) Exemption certified by an Exchange.(ii) Exemption claimed on a Federal in-

come tax return.(3) Exemptions that are claimed on Fed-

eral income tax returns.

§1.5000A–4 Computation of sharedresponsibility payment.

(a) In general.(b) Monthly penalty amount.(1) In general.

March 25, 2013 727 2013–13 I.R.B.

(2) Flat dollar amount.(i) In general.(ii) Applicable dollar amount.(iii) Special applicable dollar amount

for individuals under age 18.(iv) Indexing of applicable dollar

amount.(3) Excess income amount.(i) In general.(ii) Income percentage.(c) Monthly national average bronze

plan premium.(d) Examples.

§1.5000A–5 Administration andprocedure.

(a) In general.(b) Special rules.(1) Waiver of criminal penalties.(2) Limitations on liens and levies.(3) Authority to offset against overpay-

ment.(c) Effective/applicability date.

§1.5000A–1 Maintenance of minimumessential coverage and liability for theshared responsibility payment.

(a) In general. For each month duringthe taxable year, a nonexempt individualmust have minimum essential coverage orpay the shared responsibility payment. Fora month, a nonexempt individual is an in-dividual in existence for the entire monthwho is not an exempt individual describedin §1.5000A–3.

(b) Coverage under minimum essentialcoverage—(1) In general. An individ-ual has minimum essential coverage for amonth in which the individual is enrolledin and entitled to receive benefits under aprogram or plan identified as minimum es-sential coverage in §1.5000A–2 for at leastone day in the month.

(2) Special rule for United States cit-izens or residents residing outside theUnited States or residents of territories.An individual is treated as having mini-mum essential coverage for a month—

(i) If the month occurs during any pe-riod described in section 911(d)(1)(A) orsection 911(d)(1)(B) that is applicable tothe individual; or

(ii) If, for the month, the individual isa bona fide resident of a possession of theUnited States (as determined under section937(a)).

(c) Liability for shared responsibilitypayment—(1) In general. A taxpayer is li-able for the shared responsibility paymentfor a month for which—

(i) The taxpayer is a nonexempt individ-ual without minimum essential coverage;or

(ii) A nonexempt individual for whomthe taxpayer is liable under paragraph(c)(2) or (c)(3) of this section does nothave minimum essential coverage.

(2) Liability for dependents—(i) In gen-eral. For a month when a nonexempt in-dividual does not have minimum essen-tial coverage, if the nonexempt individualis a dependent (as defined in section 152)of another individual for the other individ-ual’s taxable year including that month, theother individual is liable for the shared re-sponsibility payment attributable to the de-pendent’s lack of coverage. An individualis a dependent of a taxpayer for a taxableyear if the individual satisfies the defini-tion of dependent under section 152, re-gardless of whether the taxpayer claims theindividual as a dependent on a Federal in-come tax return for the taxable year. Ifan individual may be claimed as a depen-dent by more than one taxpayer in the samecalendar year, the taxpayer who properlyclaims the individual as a dependent for thetaxable year is liable for the shared respon-sibility payment attributable to the individ-ual. If more than one taxpayer may claiman individual as a dependent in the samecalendar year but no one claims the indi-vidual as a dependent, the taxpayer withpriority under the rules of section 152 toclaim the individual as a dependent is li-able for the shared responsibility paymentfor the individual.

(ii) Special rules for dependentsadopted or placed in foster care during thetaxable year—(A) Taxpayers adopting anindividual. If a taxpayer adopts a nonex-empt dependent (or accepts a nonexemptdependent who is an eligible foster childas defined in section 152(f)(1)(C)) duringthe taxable year and is otherwise liable fora nonexempt dependent under paragraph(c)(2)(i) of this section, the taxpayer isliable under paragraph (c)(2)(i) of thissection for the nonexempt dependent onlyfor the full months in the taxable year thatfollow the month in which the adoption oracceptance occurs.

(B) Taxpayers placing an individual foradoption. If a taxpayer who is otherwise

liable for a nonexempt dependent underparagraph (c)(2)(i) of this section places(or, by operation of law, must place) thenonexempt dependent for adoption or fos-ter care during the taxable year, the tax-payer is liable under paragraph (c)(2)(i) ofthis section for the nonexempt dependentonly for the full months in the taxable yearthat precede the month in which the adop-tion or foster care placement occurs.

(C) Examples. The following examplesillustrate the provisions of this paragraph(c)(2)(ii). In each example the taxpayer’staxable year is a calendar year.

Example 1. Taxpayers adopting a child. (i) Eand F, married individuals filing a joint return, initi-ate proceedings for the legal adoption of a 2-year oldchild, G, in January 2016. On May 15, 2016, G be-comes the adopted child (within the meaning of sec-tion 152(f)(1)(B)) of E and F, and resides with themfor the remainder of 2016. G meets all requirementsunder section 152 to be E and F’s dependent for 2016.Prior to the adoption, G resides with H, an unmarriedindividual, with H providing all of G’s support.

(ii) Under paragraph (c)(2) of this section, E andF are not liable for a shared responsibility paymentattributable to G for January through May of 2016,but are liable for a shared responsibility payment at-tributable to G, if any, for June through December of2016. H is not liable for a shared responsibility pay-ment attributable to G for any month in 2016, becauseG is not H’s dependent for 2016 under section 152.

Example 2. Taxpayers placing a child for adop-tion. (i) The facts are the same as Example 1, ex-cept the legal adoption occurs on August 15, 2016.G meets all requirements under section 152 to be H’sdependent for 2016.

(ii) Under paragraph (c)(2) of this section, H is li-able for a shared responsibility payment attributableto G, if any, for January through July of 2016, but isnot liable for a shared responsibility payment attrib-utable to G for August through December of 2016.E and F are not liable for a shared responsibility pay-ment attributable to G for any month in 2016, becauseG is not E and F’s dependent for 2016 under section152.

(3) Liability of individuals filing a jointreturn. Married individuals (within themeaning of section 7703) who file a jointreturn for a taxable year are jointly liablefor any shared responsibility payment fora month included in the taxable year.

(d) Definitions. The definitions in thisparagraph (d) apply to this section and§§1.5000A–2 through 1.5000A–5.

(1) Affordable Care Act. AffordableCare Act refers to the Patient Protectionand Affordable Care Act, Public Law111–148 (124 Stat. 119 (2010)), and theHealth Care and Education ReconciliationAct of 2010, Public Law 111–152 (124Stat. 1029 (2010)), as amended.

2013–13 I.R.B. 728 March 25, 2013

(2) Qualified health plan. Qualifiedhealth plan has the same meaning as insection 1301(a) of the Affordable Care Act(42 U.S.C. 18021(a)).

(3) Exchange. Exchange has the samemeaning as in 45 CFR 155.20.

(4) Rating area. Rating area has thesame meaning as in §1.38B–1(n).

(5) Shared responsibility family.Shared responsibility family means, fora month, all nonexempt individuals forwhom the taxpayer (and the taxpayer’sspouse, if the taxpayer is married and filesa joint return with the spouse) is liable forthe shared responsibility payment underparagraph (c) of this section.

(6) Family. A taxpayer’s family meansthe individuals for whom the taxpayerproperly claims a deduction for a personalexemption under section 151 for the tax-able year.

(7) Household income—(i) In general.Household income means the sum of—

(A) A taxpayer’s modified adjustedgross income; and

(B) The aggregate modified adjustedgross income of all other individualswho—

(1) Are included in the taxpayer’s fam-ily under paragraph (d)(6) of this section;and

(2) Are required to file a Federal in-come tax return for the taxable year (de-termined without regard to the exceptionunder section 1(g)(7) to the requirement tofile a Federal income tax return).

(ii) Modified adjusted gross income.Modified adjusted gross income means ad-justed gross income (within the meaningof section 62) increased by—

(A) Amounts excluded from gross in-come under section 911; and

(B) Tax-exempt interest the taxpayer re-ceives or accrues during the taxable year.

(8) Self-only coverage. Self-only cover-age means health insurance that covers oneindividual.

(9) Family coverage. Family coveragemeans health insurance that covers morethan one individual.

(10) Employee. Employee includes for-mer employees.

(11) Month. Month means calendarmonth.

§1.5000A–2 Minimum essential coverage.

(a) In general. Minimum essentialcoverage means coverage under a gov-ernment sponsored program (described inparagraph (b) of this section), an eligibleemployer-sponsored plan (described inparagraph (c) of this section), a plan in theindividual market (described in paragraph(d) of this section), a grandfathered healthplan (described in paragraph (e) of thissection), or other health benefits coverage(described in paragraph (f) of this section).Minimum essential coverage does notinclude coverage described in paragraph(g) of this section. All terms defined inthis section apply for purposes of this sec-tion and §1.5000A–1 and §§1.5000A–3through 1.5000A–5.

(b) Government sponsored program.Government sponsored program meansany of the following:

(1) The Medicare program under part Aof title XVIII of the Social Security Act(42 U.S.C.1395c and following sections);

(2) The Medicaid program under titleXIX of the Social Security Act (42 U.S.C.1396 and following sections) other than—

(i) Optional coverage of fam-ily planning services under sec-tion 1902(a)(10)(A)(ii)(XXI) ofthe Social Security Act (42 U.S.C.1396a(a)(10)(A)(ii)(XXI));

(ii) Optional coverage of tubercu-losis-related services under section1902(a)(10)(A)(ii)(XII) (42 U.S.C.1396a(a)(10)(A)(ii)(XII));

(iii) Coverage of pregnancy-related ser-vices under section 1902(a)(10)(A)(i)(IV)and (a)(10)(A)(ii)(IX) (42U.S.C. 1396a(a)(10)(A)(i)(IV),(a)(10)(A)(ii)(IX)); or

(iv) Coverage of medical emergencyservices under 8 U.S.C. 1611(b)(1)(A), asauthorized by section 1903(v) of the SocialSecurity Act (42 U.S.C. 1396b(v)).

(3) The Children’s Health InsuranceProgram (CHIP) under title XXI of theSocial Security Act (42 U.S.C 1397aa andfollowing sections);

(4) Medical coverage under chapter 55of title 10, U.S.C., including coverage un-der the TRICARE program;

(5) The following health care programsunder chapter 17 or 18 of title 38, U.S.C.:

(i) The medical benefits package autho-rized for eligible veterans under 38 U.S.C.1710 and 38 U.S.C. 1705;

(ii) The Civilian Health and MedicalProgram of the Department of VeteransAffairs (CHAMPVA) authorized under38 U.S.C. 1781; and

(iii) The comprehensive health careprogram authorized under 38 U.S.C. 1803and 38 U.S.C. 1821 for certain children ofVietnam Veterans and Veterans of coveredservice in Korea who are suffering fromspina bifida.

(6) A health plan under section 2504(e)of title 22, U.S.C. (relating to Peace Corpsvolunteers); and

(7) The Nonappropriated Fund HealthBenefits Program of the Department ofDefense, established under section 349 ofthe National Defense authorization Actfor Fiscal Year 1995 (Public Law No.103–337; 10 U.S.C. 1587 note).

(c) Eligible employer-sponsoredplan—(1) In general. Eligible em-ployer-sponsored plan means, with respectto any employee, a group health plan(whether an insured group health plan ora self-insured group health plan) or grouphealth insurance coverage offered by anemployer to the employee, which is—

(i) A governmental plan (withinthe meaning of section 2791(d)(8)of the Public Health Service Act(42 U.S.C.300gg–91(d)(8)));

(ii) Any other plan or coverage offeredin the small or large group market within aState;

(iii) A grandfathered health plan (withinthe meaning of paragraph (e) of this sec-tion) offered in a group market.

(2) Group health plan. Group healthplan has the same meaning as in section2791(a) of the Public Health Service Act(42 U.S.C.300gg–91(a)(1)).

(3) Group health insurance cover-age. Group health insurance cover-age has the same meaning as in section2791(b) of the Public Health Service Act(42 U.S.C.300gg–91(b)).

(4) Large and small group market.Large group market and small group mar-ket have the same meanings as in section1304(a)(3) of the Affordable Care Act(42 U.S.C. 18024(a)(3)).

(5) Government sponsored program nottreated as eligible employer-sponsoredplan. A government sponsored programdescribed in paragraph (b) of this section isnot an eligible employer-sponsored plan.

(d) Plan in the individual market. Planin the individual market means health in-

March 25, 2013 729 2013–13 I.R.B.

surance coverage offered to individuals notin connection with a group health plan, in-cluding a qualified health plan offered byan Exchange.

(e) Grandfathered health plan. Grand-fathered health plan means any grouphealth plan or group health insurancecoverage to which section 1251 of theAffordable Care Act (42 U.S.C.18011)applies.

(f) Other health benefits coverage.Minimum essential coverage includes anyplan or arrangement recognized by theSecretary of Health and Human Servicesas minimum essential coverage for pur-poses of section 5000A under 45 CFR156.600 and following sections.

(g) Excepted benefits. Minimum es-sential coverage does not include anyhealth insurance coverage that consists ofexcepted benefits that are described in sec-tion 2791(c)(1), (c)(2), (c)(3), or (c)(4) ofthe Public Health Service Act (42 U.S.C.§300gg–91(c)).

§1.5000A–3 Exempt individuals.

(a) Members of recognized religioussects—(1) In general. An individual isan exempt individual for a month that in-cludes a day on which the individual hasin effect a religious conscience exemptioncertification described in paragraph (a)(2)of this section.

(2) Exemption certification. A religiousconscience exemption certification is is-sued by an Exchange in accordance withthe requirements of section 1311(d)(4)(H)of the Affordable Care Act (42 U.S.C.18031(d)(4)(H)) and 45 CFR 155.605(c),45 CFR 155.615(b) and certifies that anindividual is—

(i) A member of a recognized religioussect or division thereof that is described insection 1402(g)(1); and

(ii) An adherent of established tenetsor teachings of the sect or division as de-scribed in that section.

(b) Member of health care sharing min-istries—(1) In general. An individual isan exempt individual for a month that in-cludes a day on which the individual is amember of a health care sharing ministry.

(2) Health care sharing ministry. Forpurposes of this section, health care shar-ing ministry means an organization—

(i) That is described in section 501(c)(3)and is exempt from tax under section501(a);

(ii) Members of which share a commonset of ethical or religious beliefs and sharemedical expenses among themselves in ac-cordance with those beliefs and without re-gard to the State in which a member residesor is employed;

(iii) Members of which retain member-ship even after they develop a medical con-dition;

(iv) That (or a predecessor of which)has been in existence at all times since De-cember 31, 1999;

(v) Members of which have sharedmedical expenses continuously and with-out interruption since at least December31, 1999; and

(vi) That conducts an annual audit per-formed by an independent certified publicaccounting firm in accordance with gen-erally accepted accounting principles andmakes the annual audit report available tothe public upon request.

(c) Exempt noncitizens—(1) In general.An individual is an exempt individual fora month that the individual is an exemptnoncitizen.

(2) Exempt noncitizens. For purposesof this section, an individual is an exemptnoncitizen for a month if the individual—

(i) Is not a U.S. citizen or U.S. nationalfor any day during the month; and

(ii) Is either—(A) A nonresident alien (within the

meaning of section 7701(b)(1)(B)) for thetaxable year that includes the month; or

(B) An individual who is not lawfullypresent (within the meaning of 45 CFR155.20) in the United States on any day inthe month.

(d) Incarcerated individuals—(1) Ingeneral. An individual is an exempt indi-vidual for a month that includes a day onwhich the individual is incarcerated.

(2) Incarcerated. For purposes of thissection, the term incarcerated means con-fined, after the disposition of charges, in ajail, prison, or similar penal institution orcorrectional facility.

(e) Individuals with no affordable cov-erage—(1) In general. An individual is anexempt individual for a month in which theindividual lacks affordable coverage. Forpurposes of this paragraph (e), an individ-ual lacks affordable coverage in a month ifthe individual’s required contribution (de-

termined on an annual basis) for mini-mum essential coverage for the month ex-ceeds the required contribution percentage(as defined in paragraph (e)(2) of this sec-tion) of the individual’s household income.For purposes of this paragraph (e), an in-dividual’s household income is increasedby any amount of the required contributionmade through a salary reduction arrange-ment that is excluded from gross income.

(2) Required contribution percent-age—(i) In general. Except as providedin paragraph (e)(2)(ii) of this section, therequired contribution percentage is 8 per-cent.

(ii) Indexing. For plan years beginningin any calendar year after 2014, the re-quired contribution percentage is the per-centage determined by the Department ofHealth and Human Services that reflectsthe excess of the rate of premium growthbetween the preceding calendar year and2013 over the rate of income growth forthe period.

(iii) Plan year. For purposes of thisparagraph (e), plan year means the eli-gible employer-sponsored plan’s regular12-month coverage period (or the remain-der of a 12-month coverage period for anew employee or an individual who enrollsduring a special enrollment period).

(3) Individuals eligible for cover-age under eligible employer-sponsoredplans—(i) Eligibility—(A) In general. Ex-cept as provided in paragraph (e)(3)(i)(B)of this section, an employee or re-lated individual (as defined in paragraph(e)(3)(ii)(B) of this section) is treated aseligible for coverage under an eligibleemployer-sponsored plan for a month dur-ing a plan year if the employee or relatedindividual could have enrolled in the planfor any day in that month during an openor special enrollment period, regardless ofwhether the employee or related individualis eligible for any other type of minimumessential coverage. For purposes of thisparagraph (e)(3), an employee eligible forcoverage under an eligible employer-spon-sored plan offered by the employee’s em-ployer is not treated as eligible as a relatedindividual for coverage under an eligibleemployer-sponsored plan (for example, aneligible employer-sponsored plan offeredby the employer of the employee’s spouse)for any month included in the plan yearof the eligible employer-sponsored planoffered by the employee’s employer.

2013–13 I.R.B. 730 March 25, 2013

(B) Special rule for continuation cover-age. An individual who may enroll in con-tinuation coverage required under Federallaw or a State law that provides compa-rable continuation coverage is eligible forcoverage under an eligible employer-spon-sored plan only if the individual enrolls inthe coverage.

(ii) Required contribution for individu-als eligible for coverage under an eligibleemployer-sponsored plan—(A) Employ-ees. In the case of an employee who iseligible to purchase coverage under aneligible employer-sponsored plan spon-sored by the employee’s employer, therequired contribution is the portion of theannual premium that the employee wouldpay (whether though salary reduction orotherwise) for the lowest cost self-onlycoverage.

(B) Individuals related to employees. Inthe case of an individual who is eligible forcoverage under an eligible employer-spon-sored plan because of a relationship toan employee and for whom a personalexemption deduction under section 151is claimed on the employee’s Federal in-come tax return (related individual), therequired contribution is the portion of theannual premium that the employee wouldpay (whether through salary reduction orotherwise) for the lowest cost family cov-erage that would cover the employee andall related individuals who are included inthe employee’s family and are not other-wise exempt under §1.5000A–3.

(C) Required contribution for part-yearperiod. For each individual described inparagraph (e)(3)(ii)(A) or (e)(3)(ii)(B) ofthis section, affordability under paragraph(e)(3) of this section is determined sepa-rately for each employment period that isless than a full calendar year or for theportions of an employer’s plan year thatfall in different taxable years of the indi-vidual. Coverage under an eligible em-ployer-sponsored plan is affordable for apart-year period if the annualized requiredcontribution for self-only coverage (in thecase of the employee) or family coverage(in the case of a related individual) un-der the plan for the part-year period doesnot exceed the required contribution per-centage of the individual’s household in-come for the taxable year. The annual-ized required contribution is the requiredcontribution determined under paragraph

(e)(3)(ii)(A) or (e)(3)(ii)(B) of this sec-tion for the part-year period times a frac-tion, the numerator of which is 12 and thedenominator of which is the number ofmonths in the part-year period during theindividual’s taxable year. Only full calen-dar months are included in the computa-tion under this paragraph (e)(3)(ii)(C).

(D) Examples. The following examplesillustrate the application of this paragraph(e)(3). Unless stated otherwise, in eachexample, each individual’s taxable year isa calendar year, the individual is ineligi-ble for any other exemptions described inthis section for a month, the rate of pre-mium growth has not exceeded the rate ofincome growth since 2013, and the indi-vidual’s employer offers a single plan thatuses a calendar plan year and is an eligi-ble employer-sponsored plan as describedin §1.5000A–2(c).

Example 1. Unmarried employee with no depen-dents. Taxpayer A is an unmarried individual with nodependents. In November 2015, A is eligible to enrollin self-only coverage under a plan offered by A’s em-ployer for calendar year 2016. If A enrolls in the cov-erage, A is required to pay $5,000 of the total annualpremium. In 2016, A’s household income is $60,000.Under paragraph (e)(3)(ii)(A) of this section, A’s re-quired contribution is $5,000, the portion of the an-nual premium A pays for self-only coverage. Underparagraph (e)(1) of this section, A lacks affordablecoverage for 2016 because A’s required contribution($5,000) is greater than 8 percent of A’s household in-come ($4,800).

Example 2. Married employee with dependents.Taxpayers B and C are married and file a joint returnfor 2016. B and C have two children, D and E. InNovember 2015, B is eligible to enroll in self-onlycoverage under a plan offered by B’s employer forcalendar year 2016 at a cost of $5,000 to B. C, D,and E are eligible to enroll in family coverage un-der the same plan for 2016 at a cost of $20,000 toB. B, C, D, and E’s household income is $90,000.Under paragraph (e)(3)(ii)(A) of this section, B’s re-quired contribution is B’s share of the cost for self-only coverage, $5,000. Under paragraph (e)(1) ofthis section, B has affordable coverage for 2016 be-cause B’s required contribution ($5,000) does not ex-ceed 8 percent of B’s household income ($7,200).Under paragraph (e)(3)(ii)(B) of this section, the re-quired contribution for C, D, and E is B’s share ofthe cost for family coverage, $20,000. Under para-graph (e)(1) of this section, C, D, and E lack afford-able coverage for 2016 because their required contri-bution ($20,000) exceeds 8 percent of their householdincome ($7,200).

Example 3. Plan year is a fiscal year. (i) Tax-payer F is an unmarried individual with no depen-dents. In June 2015, F is eligible to enroll in self-onlycoverage under a plan offered by F’s employer forthe period July 2015 through June 2016 at a cost toF of $4,750. In June 2016, F is eligible to enroll inself-only coverage under a plan offered by F’s em-ployer for the period July 2016 through June 2017 at

a cost to F of $5,000. In 2016, F’s household incomeis $60,000.

(ii) Under paragraph (e)(3)(ii)(C) of this section,F’s annualized required contribution for the periodJanuary 2016 through June 2016 is $4,750 ($2,375paid for premiums in 2016 x 12/6). Under paragraph(e)(1) of this section, F has affordable coverage forJanuary 2016 through June 2016 because F’s annual-ized required contribution ($4,750) does not exceed8 percent of F’s household income ($4,800).

(iii) Under paragraph (e)(3)(ii)(C) of this section,F’s annualized required contribution for the periodJuly 2016 to December 2016 is $5,000 ($2,500 paidfor premiums in 2016 x 12/6). Under paragraph (e)(1)of this section, F lacks affordable coverage for July2016 through December 2016 because F’s annualizedrequired contribution ($5,000) exceeds 8 percent ofF’s household income ($4,800).

Example 4. Eligibility for coverage under an el-igible employer-sponsored plan and under govern-ment sponsored coverage. Taxpayer G is unmarriedand has one child, H. In November 2015, H is eligi-ble to enroll in family coverage under a plan offeredby G’s employer for 2016. H is also eligible to en-roll in the CHIP program for 2016. Under paragraph(e)(3)(i) of this section, H is treated as eligible forcoverage under an eligible employer-sponsored planfor each month in 2016, notwithstanding that H is eli-gible to enroll in government sponsored coverage forthe same period.

(4) Individuals ineligible for cover-age under eligible employer-sponsoredplans—(i) Eligibility for coverage otherthan an eligible employer-sponsored plan.An individual is treated as ineligible forcoverage under an eligible employer-spon-sored plan for a month that is not describedin paragraph (e)(3)(i) of this section.

(ii) Required contribution for individu-als ineligible for coverage under eligibleemployer-sponsored plans—(A) In gen-eral. In the case of an individual who isineligible for coverage under an eligibleemployer-sponsored plan, the requiredcontribution is the premium for the ap-plicable plan, reduced by the maximumamount of any credit allowable under sec-tion 36B for the taxable year (determinedas if the individual was covered for the en-tire taxable year by a qualified health planoffered through the Exchange serving therating area where the individual resides).

(B) Applicable plan—(1) In gen-eral. Except as provided in paragraph(e)(4)(ii)(B)(2) of this section, applicableplan means the single lowest cost bronzeplan available in the individual marketthrough the Exchange serving the ratingarea in which the individual resides (with-out regard to whether the individual pur-chased a qualified health plan though theExchange) that would cover all individu-

March 25, 2013 731 2013–13 I.R.B.

als in the individual’s nonexempt family.For purposes of this paragraph (e)(4), anindividual’s nonexempt family means thefamily (as defined in §1.5000A–1(d)(6))that includes the individual, excludingany family members who are otherwiseexempt under section 1.5000A–3 or aretreated as eligible for coverage under aneligible employer-sponsored plan underparagraph (e)(3)(i) of this section. Thepremium for the applicable plan takes intoaccount rating factors (for example, anindividual’s age) that an Exchange woulduse to determine the cost of coverage.

(2) Lowest cost bronze plan does notcover all individuals included in the tax-payer’s nonexempt family—(i) In general.If the Exchange serving the rating areawhere the individual resides does not of-fer a single bronze plan that would coverall individuals included in the individual’snonexempt family, the premium for the ap-plicable plan is the sum of the premiumsfor the lowest cost bronze plans that areoffered through the Exchanges serving therating areas where one or more of the in-dividuals reside and that would, in the ag-gregate, cover all the individuals in the in-dividual’s nonexempt family.

(ii) Simplified method for applicableplan identification. In lieu of the premiumfor the applicable plan determined underparagraph (e)(4)(ii)(B)(2)(i) of this sec-tion, a taxpayer may irrevocably elect touse the premium for the lowest cost bronzeplan offered by the Exchange serving therating area where the individual residesthat would cover individuals with the char-acteristics (for example, the individuals’ages) of the individuals in the taxpayer’snonexempt family. For example, if a tax-payer’s nonexempt family includes oneadult and two children, the taxpayer mayelect to use the premium for the lowestcost bronze plan that would cover indi-viduals having the same characteristicsas the adult and the two children in thetaxpayer’s nonexempt family. A taxpayermakes the election by using the simpli-fied method described in this paragraph(e)(4)(ii)(B)(2)(ii).

(C) Credit allowable under section 36B.For purposes of paragraph (e)(4)(ii)(A) ofthis section, credit allowable under section36B means the maximum amount of thecredit that would be allowable to the indi-vidual (or to the taxpayer who can prop-erly claim the individual as a dependent)

under section 36B if all members of the in-dividual’s nonexempt family enrolled in aqualified health plan through the Exchangeserving the rating area where the individ-ual resides.

(D) Required contribution for part-yearperiod. For each individual described inparagraph (e)(4)(ii)(A) of this section, af-fordability under paragraph (e)(4) of thissection is determined separately for eachperiod described in paragraph (e)(4)(ii)(E)of this section that is less than a 12-monthperiod. Coverage under a plan is afford-able for a part-year period if the annual-ized required contribution for coverage un-der the plan for the part-year period doesnot exceed the required contribution per-centage of the individual’s household in-come for the taxable year. The annual-ized required contribution is the requiredcontribution determined under paragraph(e)(4)(ii)(A) of this section for the part-year period times a fraction, the numer-ator of which is 12 and the denomina-tor of which is the number of months inthe part-year period during the individual’staxable year. Only full calendar monthsare included in the computation under thisparagraph (e)(4)(ii)(D).

(iii) Examples. The following exam-ples illustrate the provisions of this para-graph (e)(4). Unless stated otherwise, ineach example the taxpayer’s taxable yearis a calendar year, the rate of premiumgrowth has not exceeded the rate of in-come growth since 2013, and the taxpayeris ineligible for any of the exemptions de-scribed in paragraphs (b) through (i) of thissection for a month.

Example 1. Unmarried employee with no depen-dents. (i) Taxpayer G is an unmarried individual withno dependents. G is ineligible to enroll in any min-imum essential coverage other than coverage in theindividual market for all months in 2016. The annualpremium for the lowest cost bronze self-only plan inG’s rating area (G’s applicable plan) is $5,000. Theadjusted annual premium for the second lowest costsilver self-only plan in G’s rating area (G’s applicablebenchmark plan within the meaning of §1.36B–3(f))is $5,500. In 2016 G’s household income is $40,000,which is 358 percent of the Federal poverty line forG’s family size for the taxable year.

(ii) Under paragraph (e)(4)(ii)(C) of this section,the credit allowable under section 36B is determinedpursuant to section 36B. With household incomeat 358 percent of the Federal poverty line, G’s ap-plicable percentage is 9.5. Because each month in2016 is a coverage month (within the meaning of§1.36B–3(c)), G’s maximum credit allowable undersection 36B is the excess of G’s premium for theapplicable benchmark plan over the product of G’s

household income and G’s applicable percentage($1,700). Therefore, under paragraph (e)(4)(ii)(A)of this section, G’s required contribution is $3,300.Under paragraph (e)(1) of this section, G lacks af-fordable coverage for 2016 because G’s requiredcontribution ($3,300) exceeds 8 percent of G’shousehold income ($3,200).

Example 2. Family. (i) In 2016 Taxpayers M andN are married and file a joint return. M and N havetwo children, P and Q. M, N, P, and Q are ineligible toenroll in minimum essential coverage other than cov-erage in the individual market for a month in 2016.The annual premium for M, N, P, and Q’s applicableplan is $20,000. The adjusted annual premium forM, N, P, and Q’s applicable benchmark plan (withinthe meaning of §1.36B–3(f)) is $25,000. M and N’shousehold income is $80,000, which is 347 percentof the Federal poverty line for a family size of 4 forthe taxable year.

(ii) Under paragraph (e)(4)(ii)(C) of this section,the credit allowable under section 36B is determinedpursuant to section 36B. With household incomeat 347 percent of the Federal poverty line, the ap-plicable percentage is 9.5. Because each month in2016 is a coverage month (within the meaning of§1.36B–3(c)), the maximum credit allowable undersection 36B is the excess of the premium for theapplicable benchmark plan over the product of thehousehold income and the applicable percentage($17,400). Therefore, under paragraph (e)(4)(ii)(A)of this section, the required contribution for M, N,P, and Q is $2,600. Under paragraph (f)(2) of thissection, M, N, P, and Q have affordable coverage for2016 because their required contribution ($2,600)does not exceed 8 percent of their household income($6,400).

Example 3. Family with some members eligiblefor government sponsored coverage. (i) In 2016 Tax-payers U and V are married and file a joint return.U and V have two children, W and X. U and V areineligible to enroll in minimum essential coverageother than coverage in the individual market for allmonths in 2016; however, W and X are eligible forcoverage under CHIP for 2016 at an annual cost of$1,000 per child. The annual premium for U, V, W,and X’s applicable plan is $20,000. The adjusted an-nual premium for the second lowest cost silver planthat would cover U and V (the applicable benchmarkplan (within the meaning of §1.36B–3(f)) is $12,500.U and V’s household income is $50,000, which is 217percent of the Federal poverty line for a family sizeof 4 for the taxable year. W and X do not enroll inCHIP coverage.

(ii) Under paragraph (e)(4)(ii)(C) of this section,the credit allowable under section 36B is determinedpursuant to section 36B. With household income at217 percent of the Federal poverty line, the applica-ble percentage is 6.89. Each month in 2016 is a cov-erage month (within the meaning of §1.36B–3(c)) forU and V, but no months in 2016 are coverage monthsfor W and X because they are eligible for CHIP cov-erage. The maximum credit allowable under section36B is the excess of the premium for the applicablebenchmark plan over the product of the household in-come and the applicable percentage ($9,055). There-fore, under paragraph (e)(4)(ii)(A) of this section, therequired contribution is $10,945. Under paragraph(e)(1) of this section, U, V, W, and X lack affordablecoverage for 2016 because their required contribu-

2013–13 I.R.B. 732 March 25, 2013

tion ($10,945) exceeds 8 percent of their householdincome ($4,000).

Example 4. Family with some members enrolledin government sponsored minimum essential cover-age. The facts are the same as Example 3, except Wand X enroll in CHIP coverage on January 1, 2016.Under paragraph (e)(4)(ii)(B), U, V, W, and X aremembers of U and V’s nonexempt family for 2016.Therefore, the annual premium for the applicable planis the same as in Example 3 ($20,000). The maxi-mum credit allowable under section 36B is also thesame as in Example 3 ($9,055). Under paragraph(e)(4)(ii)(A) of this section, the required contributionis $10,945. Under paragraph (e)(1) of this section, Uand V lack affordable coverage for 2016 because theirrequired contribution ($10,945) exceeds 8 percent oftheir household income ($4,000).

Example 5. Simplified method for applicableplan identification. (i) In 2016 Taxpayer Y, a 42-yearold unmarried individual, lives with her 17-year oldnephew, Z. Y properly claims Z as a dependent for2016. Neither Y nor Z is eligible for minimum es-sential coverage other than coverage in the individualmarket in 2016. The Exchange serving the ratingarea where Y and Z reside does not offer any planthat would cover them both. For 2016, the annualpremium for the lowest cost bronze plan coveringY is $5,000, and the annual premium for the lowestcost bronze plan covering Z is $4,500. The premiumfor the lowest cost bronze plan that would coverindividuals with the characteristics of Y and Z that isoffered in the Exchange serving the rating area whereY and Z reside is $10,000.

(ii) Under paragraph (e)(4)(ii)(B), Z is in-cluded in Y’s nonexempt family. Under paragraph(e)(4)(ii)(B)(2)(i) of this section, the premium forthe applicable plan is the sum of the premiums forthe lowest cost bronze plans that would cover Yand Z, or $9,500 ($5,000 + $4,500). Alternatively,under paragraph (e)(4)(ii)(B)(2)(ii) of this section,Y may irrevocably elect to use the premium for thelowest cost bronze plan that would cover individualswith the characteristics of Y and Z that is offeredin the Exchange ($10,000) as the premium for theapplicable plan in determining qualification for theexemption described in paragraph (e)(1) of this sec-tion.

(f) Household income below filingthreshold—(1) In general. An individualis an exempt individual for any taxableyear for which the individual’s householdincome is less than the applicable filingthreshold.

(2) Applicable filing threshold—(i) Ingeneral. For purposes of this section, ap-plicable filing threshold means the amountof gross income that would trigger an in-dividual’s requirement to file a Federal in-come tax return under section 6012(a)(1).

(ii) Certain dependents. The applica-ble filing threshold for an individual whois properly claimed as a dependent by an-other taxpayer is equal to the other tax-payer’s applicable filing threshold.

(g) Members of Indian tribes. An indi-vidual is an exempt individual for a monththat includes a day on which the individualis a member of an Indian tribe. For pur-poses of this section, Indian tribe means agroup or community described in section45A(c)(6).

(h) Individuals with hardship exemptioncertification—(1) In general. An individ-ual is an exempt individual for a month thatincludes a day on which the individual hasin effect a hardship exemption certificationdescribed in paragraph (h)(2) of this sec-tion.

(2) Hardship exemption certification.A hardship exemption certification isissued by an Exchange under section1311(d)(4)(H) of the Affordable Care Act(42 U.S.C. 18031(d)(4)(H)) and 45 CFR155.605(g) and 45 CFR 155.615(f) andcertifies that an individual has suffered ahardship (as that term is defined in 45 CFR166.605(g)) with respect to the capabilityto obtain minimum essential coverage.

(i) [Reserved](j) Individuals with certain short cover-

age gaps—(1) In general. An individual isan exempt individual for a month the lastday of which is included in a short cover-age gap.

(2) Short coverage gap—(i) In general.Short coverage gap means a continuousperiod of less than three months in whichthe individual is not covered under mini-mum essential coverage. If the individualdoes not have minimum essential coveragefor a continuous period of three or moremonths, none of the months included in thecontinuous period is treated as included ina short coverage gap.

(ii) Coordination with other exemp-tions. For purposes of this paragraph (j),an individual is treated as having mini-mum essential coverage for a month inwhich an individual is exempt under anyof paragraphs (a) through (h) of this sec-tion.

(iii) More than one short coverage gapduring calendar year. If a calendar yearincludes more than one short coverage gap,the exemption provided by this paragraph(j) only applies to the earliest short cover-age gap.

(3) Continuous period—(i) In general.Except as provided in paragraph (j)(3)(ii)of this section, the number of monthsincluded in a continuous period is deter-mined without regard to the calendar years

in which months included in that periodoccur.

(ii) Continuous period straddling morethan one taxable year. If an individualdoes not have minimum essential coveragefor a continuous period that begins in onetaxable year and ends in the next, for pur-poses of applying this paragraph (j) to thefirst taxable year, the months in the secondtaxable year included in the continuous pe-riod are disregarded. For purposes of ap-plying this paragraph (j) to the second tax-able year, the months in the first taxableyear included in the continuous period aretaken into account.

(4) Examples. The following examplesillustrate the provisions of this paragraph(j). Unless stated otherwise, in each exam-ple the taxpayer’s taxable year is a calendaryear and the taxpayer is ineligible for anyof the exemptions described in paragraphs(a) through (h) of this section for a month.

Example 1. Short coverage gap. Taxpayer Dhas minimum essential coverage in 2016 from Jan-uary 1 through March 2. After March 2, D does nothave minimum essential coverage until D enrolls inan eligible employer-sponsored plan effective June15. Under §1.5000A–1(b), for purposes of section5000A, D has minimum essential coverage for Jan-uary, February, March, and June through December.D’s continuous period without coverage is 2 months,April and May. April and May constitute a short cov-erage gap under paragraph (j)(2)(i) of this section.

Example 2. Continuous period of 3 months ormore. The facts are the same as in Example 1, exceptD’s coverage is not effective until July 1. D’s con-tinuous period without coverage is 3 months, April,May, and June. Under paragraph (j)(2)(i) of this sec-tion, April, May, and June are not included in a shortcoverage gap.

Example 3. Short coverage gap following ex-empt period. Taxpayer E is incarcerated from Jan-uary 1 through June 2. E enrolls in an eligible em-ployer-sponsored plan effective September 15. Un-der paragraph (d) of this section, E is exempt forthe period January through June. Under paragraph(j)(2)(ii) of this section, E is treated as having mini-mum essential coverage for this period, and E’s con-tinuous period without minimum essential coverageis 2 months, July and August. July and August con-stitute a short coverage gap under paragraph (j)(2)(i)of this section.

Example 4. Continuous period covering morethan one taxable year. Taxpayer F, an unmarried in-dividual with no dependents, has minimum essentialcoverage for the period January 1 through October15, 2016. F is without coverage until enrolling in aneligible employer-sponsored plan effective February15, 2017. F files his Federal income tax return for2016 on March 10, 2017. Under paragraph (j)(3)(ii)of this section, November and December of 2016 aretreated as a short coverage gap. However, Novemberand December of 2016 are included in the continu-ous period that includes January 2017. The continu-

March 25, 2013 733 2013–13 I.R.B.

ous period for 2017 is over 3 months and, therefore,is not a short coverage gap.

Example 5. Enrollment following loss of cover-age. The facts are the same as in Example 4 except Floses coverage on June 15, 2017. F enrolls in a neweligible employer-sponsored plan effective Septem-ber 15, 2017. The continuous period without mini-mum essential coverage in July and August of 2017is two months and, therefore, is a short coverage gap.Because January 2017 was not part of a short cover-age gap, the earliest short coverage gap occurring in2017 is the gap that includes July and August.

Example 6. Multiple coverage gaps. (i) The factsare the same as in Example 5 except F has mini-mum essential coverage for November 2016. Underparagraph (j)(3)(ii) of this section, December 2016 istreated as a short coverage gap.

(ii) December 2016 is included in the continuousperiod that includes January 2017. This continuousperiod is two months and, therefore, January 2017 isthe earliest month in 2017 that is included in a shortcoverage gap. Under paragraph (j)(2)(iii) of this sec-tion, the exemption under this paragraph (j) appliesonly to January 2017. Thus, the continuous periodwithout minimum essential coverage in July and Au-gust of 2017 is not a short coverage gap.

(k) Claiming exemptions from theshared responsibility payment—(1) Ex-emptions requiring certification by anExchange. An individual obtains a reli-gious conscience exemption certification(described in paragraph (a) of this section)or a hardship exemption certification (de-scribed in paragraph (h) of this section)from the Exchange serving the rating areawhere the individual resides. To claimthe exemption, the individual includesthe information specified in publishedguidance of general applicability, see§601.601(d)(2) of this chapter, with theFederal income tax return for the taxableyear that includes the months for whichthe exemption is sought.

(2) Exemptions that may be certifiedby an Exchange or claimed on a Federalincome tax return—(i) Exemption certi-fied by an Exchange. The exemptions formembers of health care sharing ministries(described in paragraph (b) of this sec-tion), incarcerated individuals (describedin paragraph (d) of this section), and mem-bers of Indian tribes (described in para-graph (g) of this section) may be certifiedin the manner and within the time speci-fied in 45 CFR 155.610. To claim the ex-emption, an individual includes the infor-mation specified in published guidance ofgeneral applicability, see §601.601(d)(2)of this chapter, with the Federal income taxreturn for the taxable year that includes themonths for which the exemption is sought.

(ii) Exemption claimed on a Federal in-come tax return. Alternatively, an individ-ual, or a taxpayer who may claim the indi-vidual as a dependent for the taxable year,may claim the exemptions for members ofhealth care sharing ministries (described inparagraph (b) of this section), incarceratedindividuals (described in paragraph (d) ofthis section), and members of Indian tribes(described in paragraph (g) of this section)without certification by an Exchange byincluding the information specified in pub-lished guidance of general applicability,see §601.601(d)(2) of this chapter, with theFederal income tax return for the taxableyear that includes the months for which theexemption is sought.

(3) Exemptions that are claimed on Fed-eral income tax returns. The exemptionsfor individuals who lack affordable cover-age (described in paragraph (e) of this sec-tion), individuals with household incomebelow the applicable return filing thresh-old (described in paragraph (f) of this sec-tion), and individuals with short cover-age gaps (described in paragraph (j) ofthis section) may be claimed only by in-cluding the information specified in pub-lished guidance of general applicability,see §601.601(d)(2) of this chapter, with theFederal income tax return for the taxableyear that includes the months for which theexemption is sought. Taxpayers are not re-quired to file Federal income tax returnssolely to claim the exemption for individ-uals with household income below the ap-plicable return filing threshold (describedin paragraph (f) of this section).

§1.5000A–4 Computation of sharedresponsibility payment.

(a) In general. For each taxable year theshared responsibility payment is the lesserof—

(1) The sum of the monthly penaltyamounts for each individual in the sharedresponsibility family; or

(2) The sum of the monthly national av-erage bronze plan premiums for the sharedresponsibility family.

(b) Monthly penalty amount—(1) Ingeneral. Monthly penalty amount means,for a month that a nonexempt individualis not covered under minimum essentialcoverage, 1/12 multiplied by the greaterof—

(i) The flat dollar amount; or

(ii) The excess income amount.(2) Flat dollar amount—(i) In general.

Flat dollar amount means the lesser of—(A) The sum of the applicable dollar

amounts for all individuals included in thetaxpayer’s shared responsibility family; or

(B) 300 percent of the applicable dol-lar amount (determined without regard toparagraph (b)(2)(iii) of this section) for thecalendar year with or within which the tax-able year ends.

(ii) Applicable dollar amount. Exceptas provided in paragraphs (b)(2)(iii) and(b)(2)(iv) of this section, the applicabledollar amount is—

(A) $95 in 2014;(B) $325 in 2015; or(C) $695 in 2016.(iii) Special applicable dollar amount

for individuals under age 18. If an indi-vidual has not attained the age of 18 on thefirst day of a month, the applicable dol-lar amount for the individual is equal toone-half of the applicable dollar amount(as expressed in paragraph (b)(2)(ii) of thissection) for the calendar year in which themonth occurs. For purposes of this para-graph (b)(2)(iii), an individual attains theage of 18 on the anniversary of the datewhen the individual was born. For exam-ple, an individual born on March 1, 1999,attains the age of 18 on March 1, 2017.

(iv) Indexing of applicable dollaramount. In any calendar year after 2016,the applicable dollar amount is $695 asincreased by the product of $695 and thecost-of-living adjustment determined un-der section 1(f)(3) for the calendar year.For purposes of this paragraph (b)(2)(iv) ofthis section, the cost-of-living adjustmentis determined by substituting “calendaryear 2015” for “calendar year 1992” insection 1(f)(3)(B). If any increase underthis paragraph (b)(2)(iv) is not a multipleof $50, the increase is rounded to the nextlowest multiple of $50.

(3) Excess income amount—(i) In gen-eral. Excess income amount means theproduct of—

(A) The excess of the taxpayer’shousehold income over the taxpayer’sapplicable filing threshold (as defined in§1.5000A–3(f)(2)); and

(B) The income percentage.(ii) Income percentage. For purposes of

this section, income percentage means—(A) 1.0 percent for taxable years begin-

ning in 2013;

2013–13 I.R.B. 734 March 25, 2013

(B) 1.0 percent for taxable years begin-ning in 2014;

(C) 2.0 percent for taxable years begin-ning in 2015; or

(D) 2.5 percent for taxable years begin-ning after 2015.

(c) Monthly national average bronzeplan premium. Monthly national averagebronze plan premium means, for a monthfor which a shared responsibility paymentis imposed, 1/12 of the annual national av-erage premium for qualified health plansthat have a bronze level of coverage, wouldprovide coverage for the taxpayer’s sharedresponsibility family members who do nothave minimum essential coverage for themonth, and are offered through Exchangesfor plan years beginning in the calendaryear with or within which the taxable yearends.

(d) Examples. The following examplesillustrate the provisions of this section. Ineach example the taxpayer’s taxable yearis a calendar year and all members of thetaxpayer’s shared responsibility family areineligible for any of the exemptions de-scribed in §1.5000A–3 for a month.

Example 1. Unmarried taxpayer without mini-mum essential coverage. (i) In 2016 Taxpayer G is anunmarried individual with no dependents. G does nothave minimum essential coverage for any month in2016. G’s household income is $120,000. G’s appli-cable filing threshold is $12,000. The annual nationalaverage bronze plan premium for G is $5,000.

(ii) For each month in 2016, under paragraph(b)(2)(ii) of this section, G’s applicable dollar amountis $695. Under paragraph (b)(2) of this section,G’s flat dollar amount is $695 (the lesser of $695and $2,085 ($695 x 3)). Under paragraph (b)(3) ofthis section, G’s excess income amount is $2,700(($120,000 - $12,000) x 0.025). Therefore, underparagraph (b)(1) of this section, the monthly penaltyamount is $225 (the greater of $58 ($695/12) or $225($2,700/12)).

(iii) The sum of the monthly penalty amounts is$2,700 ($225 x 12). The sum of the monthly nationalaverage bronze plan premiums is $5,000 ($5,000/12x 12). Therefore, under paragraph (a) of this section,the shared responsibility payment imposed on G for2016 is $2,700 (the lesser of $2,700 or $5,000).

Example 2. Part-year coverage. The facts are thesame as in Example 1, except G has minimum essen-tial coverage for January through June. The sum ofthe monthly penalty amounts is $1,350 ($225 x 6).The sum of the monthly national average bronze planpremiums is $2,500 ($5,000/12 x 6). Therefore, un-der paragraph (a) of this section, the shared responsi-bility payment imposed on G for 2016 is $1,350 (thelesser of $1,350 or $2,500).

Example 3. Family without minimum essentialcoverage. (i) In 2016, Taxpayers H and J are mar-ried and file a joint return. H and J have three chil-dren: K, age 21, L, age 15, and M, age 10. No mem-ber of the family has minimum essential coverage for

any month in 2016. H and J’s household income is$120,000. H and J’s applicable filing threshold is$24,000. The annual national average bronze planpremium for a family of 5 (2 adults, 3 children) is$20,000.

(ii) For each month in 2016, under paragraphs(b)(2)(ii) and (b)(2)(iii) of this section, the appli-cable dollar amount is $2,780 (($695 x 3 adults) +(($695/2) x 2 children)). Under paragraph (b)(2)(i)of this section, the flat dollar amount is $2,085 (thelesser of $2,780 and $2,085 ($695 x 3)). Underparagraph (b)(3) of this section, the excess incomeamount is $2,400 (($120,000 - $24,000) x 0.025).Therefore, under paragraph (b)(1) of this section,the monthly penalty amount is $200 (the greater of$173.75 ($2,085/12) or $200 ($2,400/12)).

(iii) The sum of the monthly penalty amountsis $2,400 ($200 x 12). The sum of the monthlynational average bronze plan premiums is $20,000($20,000/12 x 12). Therefore, under paragraph (a)of this section, the shared responsibility paymentimposed on H and J for 2016 is $2,400 (the lesser of$2,400 or $20,000).

Example 4. Change in shared responsibility fam-ily during the year. (i) The facts are the same as inExample 3, except J has minimum essential coveragefor January through June. The annual national aver-age bronze plan premium for a family of 4 (1 adult, 3children) is $18,000.

(ii) For the period January through June 2016, un-der paragraphs (b)(2)(ii) and (b)(2)(iii) of this sec-tion the applicable dollar amount is $2,085 (($695x 2 adults) + (($695/2) x 2 children)). Under para-graph (b)(2)(i) of this section, the flat dollar amountis $2,085 (the lesser of $2,085 or $2,085 ($695 x 3)).

(iii) For the period July through December 2016,the applicable dollar amount is $2,780 (($695 x 3adults) + (($695/2) x 2 children)). Under paragraph(b)(2) of this section, the flat dollar amount is $2,085(the lesser of $2,780 or $2,085 ($695 x 3)). Underparagraph (b)(3) of this section, the excess incomeamount is $2,400 (($120,000 - $24,000) x 0.025).Therefore, under paragraph (b)(1) of this section, forJanuary through June the monthly penalty amountis $200 (the greater of $173.75 ($2,085/12) or $200($2,400/12)). The monthly penalty amount for Julythrough December is $200 (the greater of $173.75($2,085/12) or $200 ($2,400/12)).

(iv) The sum of the monthly penalty amountsis $2,400 ($200 x 12). The sum of the monthlynational average bronze plan premiums is $19,000((($18,000/12) x 6) + (($20,000/12) x 6))). There-fore, under paragraph (a) of this section, the sharedresponsibility payment imposed on H and J for 2016is $2,400 (the lesser of $2,400 or $19,000).

Example 5. Eighteenth birthday during the year.(i) In 2016 Taxpayers S and T are married and file ajoint return. S and T have one child, U, who turns 18years old on June 28. No member of the family hasminimum essential coverage for any month in 2016.S and T’s household income is $60,000. S and T’sapplicable filing threshold is $24,000. The annualnational average bronze plan premium for a familyof 3 (2 adults, 1 child) is $15,000.

(ii) For the period January through June 2016, un-der paragraphs (b)(2)(ii) and (b)(2)(iii) of this section,the applicable dollar amount is $1,737.50 (($695 x 2adults) + ($695/2) x 1 child)). Under paragraph (b)(2)

of this section, the flat dollar amount is $1,737.50 (thelesser of $1,737.50 or $2,085 ($695 x 3)).

(iii) For the period July through December 2016,the applicable dollar amount is $2,085 ($695 x 3).Under paragraph (b)(2) of this section, the flat dollaramount is $2,085 (the lesser of $2,085 or $2,085($695 x 3)). Under paragraph (b)(3) of this sec-tion, the excess income amount is $900 (($60,000- $24,000) x 0.025). Therefore, under paragraph(b)(1) of this section, for January through June themonthly penalty amount is $144.79 (the greater of$144.79 ($1,737.50/12) or $75 ($900/12)). Themonthly penalty amount for July through Decemberis $173.75 (the greater of $173.75 ($2,085/12) or $75($900/12)).

(iv) The sum of the monthly penalty amounts is$1,911.24 (($144.79 x 6) + ($173.75 x 6)). The sumof the monthly national average bronze plan premi-ums is $15,000 ($15,000/12 x 12). Therefore, underparagraph (a) of this section, the shared responsibil-ity payment imposed on H and J for 2016 is $1,911.24(the lesser of $1,911.24 or $15,000).

§1.5000A–5 Administration andprocedure.

(a) In general. A taxpayer’s liabilityfor the shared responsibility payment for amonth must be reported on the taxpayer’sFederal income tax return for the taxableyear that includes the month. The timefor assessing the shared responsibility pay-ment is the same as that prescribed by sec-tion 6501 for the taxable year to which theFederal income tax return on which theshared responsibility payment is to be re-ported relates. The shared responsibilitypayment is payable upon notice and de-mand by the Secretary, and except as pro-vided in paragraph (b) of this section, isassessed and collected in the same manneras an assessable penalty under subchapterB of chapter 68 of the Internal RevenueCode. Therefore, the shared responsibilitypayment is not subject to deficiency pro-cedures of subchapter B of chapter 63 ofthe Internal Revenue Code. Interest on thispayment accrues in accordance with therules in section 6601.

(b) Special rules. Notwithstanding anyother provision of law—

(1) Waiver of criminal penalties. In thecase of a failure by a taxpayer to timely paythe shared responsibility payment, the tax-payer is not subject to criminal prosecutionor penalty for the failure.

(2) Limitations on liens and levies. Ifa taxpayer fails to pay the shared respon-sibility payment imposed by this sectionand §§1.5000A–1 through 1.5000A–4, theSecretary will not file notice of lien withrespect to any property of the taxpayer, or

March 25, 2013 735 2013–13 I.R.B.

levy on any such property with respect tosuch failure.

(3) Authority to offset against overpay-ment. Nothing in this section prohibits theSecretary from offsetting any liability forthe shared responsibility payment against

any overpayment due the taxpayer, in ac-cordance with section 6402(a).

(c) Effective/applicability date. Thissection and §§1.5000A–1 through1.5000A–4 apply for months beginningafter December 31, 2013.

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on January 30,2013, 11:15 a.m., and published in the issue of the FederalRegister for February 1, 2013, 78 F.R. 7314)

2013–13 I.R.B. 736 March 25, 2013

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.

ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.

PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D. —Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z —Corporation.

March 25, 2013 i 2013–13 I.R.B.

Numerical Finding List1

Bulletins 2013–1 through 2013–13

Announcements:

2013-1, 2013-1 I.R.B. 251

2013-2, 2013-2 I.R.B. 271

2013-3, 2013-2 I.R.B. 271

2013-4, 2013-4 I.R.B. 440

2013-5, 2013-3 I.R.B. 306

2013-6, 2013-3 I.R.B. 307

2013-7, 2013-3 I.R.B. 308

2013-8, 2013-4 I.R.B. 440

2013-9, 2013-4 I.R.B. 441

2013-10, 2013-3 I.R.B. 311

2013-11, 2013-6 I.R.B. 483

2013-12, 2013-11 I.R.B. 651

2013-13, 2013-9 I.R.B. 532

2013-14, 2013-11 I.R.B. 651

2013-15, 2013-11 I.R.B. 652

Notices:

2013-1, 2013-3 I.R.B. 281

2013-2, 2013-6 I.R.B. 473

2013-3, 2013-7 I.R.B. 484

2013-4, 2013-9 I.R.B. 527

2013-5, 2013-9 I.R.B. 529

2013-6, 2013-10 I.R.B. 540

2013-7, 2013-6 I.R.B. 477

2013-8, 2013-7 I.R.B. 486

2013-9, 2013-9 I.R.B. 529

2013-10, 2013-8 I.R.B. 503

2013-11, 2013-11 I.R.B. 610

2013-12, 2013-10 I.R.B. 543

2013-13, 2013-12 I.R.B. 659

2013-14, 2013-13 I.R.B. 712

Proposed Regulations:

REG-155929-06, 2013-11 I.R.B. 650

REG-106918-08, 2013-13 I.R.B. 714

REG-141066-09, 2013-3 I.R.B. 289

REG-148873-09, 2013-7 I.R.B. 494

REG-102966-10, 2013-10 I.R.B. 579

REG-140649-11, 2013-12 I.R.B. 666

REG-122707-12, 2013-5 I.R.B. 450

REG-148500-12, 2013-13 I.R.B. 716

Revenue Procedures:

2013-1, 2013-1 I.R.B. 1

2013-2, 2013-1 I.R.B. 92

2013-3, 2013-1 I.R.B. 113

2013-4, 2013-1 I.R.B. 126

2013-5, 2013-1 I.R.B. 170

2013-6, 2013-1 I.R.B. 198

2013-7, 2013-1 I.R.B. 233

2013-8, 2013-1 I.R.B. 237

Revenue Procedures— Continued:

2013-9, 2013-2 I.R.B. 255

2013-10, 2013-2 I.R.B. 267

2013-11, 2013-2 I.R.B. 269

2013-12, 2013-4 I.R.B. 313

2013-13, 2013-6 I.R.B. 478

2013-14, 2013-3 I.R.B. 283

2013-15, 2013-5 I.R.B. 444

2013-16, 2013-7 I.R.B. 488

2013-17, 2013-11 I.R.B. 612

2013-18, 2013-8 I.R.B. 503

2013-19, 2013-11 I.R.B. 648

2013-21, 2013-12 I.R.B. 660

Revenue Rulings:

2013-1, 2013-2 I.R.B. 252

2013-2, 2013-10 I.R.B. 533

2013-3, 2013-8 I.R.B. 500

2013-4, 2013-9 I.R.B. 520

2013-5, 2013-9 I.R.B. 525

2013-6, 2013-13 I.R.B. 701

2013-7, 2013-11 I.R.B. 608

Treasury Decisions:

9601, 2013-10 I.R.B. 535

9603, 2013-3 I.R.B. 273

9605, 2013-11 I.R.B. 587

9606, 2013-11 I.R.B. 586

9607, 2013-6 I.R.B. 469

9608, 2013-3 I.R.B. 274

9609, 2013-12 I.R.B. 655

9611, 2013-13 I.R.B. 699

9612, 2013-13 I.R.B. 678

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin2012–52, dated December 27, 2012.

2013–13 I.R.B. ii March 25, 2013

Finding List of Current Actions onPreviously Published Items1

Bulletins 2013–1 through 2013–13

Notices:

2011-14

Amplified and supplemented by

Notice 2013-7, 2013-6 I.R.B. 477

2011-38

Obsoleted by

REG-148873-09, 2013-7 I.R.B. 494

2012-60

Superseded by

Notice 2013-1, 2013-3 I.R.B. 281

Proposed Regulations:

REG-140668-07

Corrected by

Ann. 2013-6, 2013-3 I.R.B. 307

Revenue Procedures:

87-57

Modified by

Rev. Proc. 2013-13, 2013-6 I.R.B. 478

2004-66

Modified and superseded by

Rev. Proc. 2013-11, 2013-2 I.R.B. 269

2008-35

Modified and superseded by

Rev. Proc. 2013-14, 2013-3 I.R.B. 283

2008-50

Modified and superseded by

Rev. Proc. 2013-12, 2013-4 I.R.B. 313

2011-49

Modified by

Rev. Proc. 2013-6, 2013-1 I.R.B. 198

2011-52

Modified and partly superseded by

Rev. Proc. 2013-15, 2013-5 I.R.B. 444

2011-55

Amplified and supplemented by

Notice 2013-7, 2013-6 I.R.B. 477

2011-61

Superseded by

Rev. Proc. 2013-17, 2013-11 I.R.B. 612

2011-62

Superseded by

Rev. Proc. 2013-18, 2013-8 I.R.B. 503

2012-1

Superseded by

Rev. Proc. 2013-1, 2013-1 I.R.B. 1

Revenue Procedures— Continued:

2012-2

Superseded by

Rev. Proc. 2013-2, 2013-1 I.R.B. 92

2012-3

Superseded by

Rev. Proc. 2013-3, 2013-1 I.R.B. 113

2012-4

Superseded by

Rev. Proc. 2013-4, 2013-1 I.R.B. 126

2012-5

Superseded by

Rev. Proc. 2013-5, 2013-1 I.R.B. 170

2012-6

Superseded by

Rev. Proc. 2013-6, 2013-1 I.R.B. 198

2012-7

Superseded by

Rev. Proc. 2013-7, 2013-1 I.R.B. 233

2012-8

Superseded by

Rev. Proc. 2013-8, 2013-1 I.R.B. 237

2012-9

Superseded by

Rev. Proc. 2013-9, 2013-2 I.R.B. 255

2012-10

Superseded by

Rev. Proc. 2013-10, 2013-2 I.R.B. 267

2012-30

Corrected and clarified by

Ann. 2013-3, 2013-2 I.R.B. 271

Updated by

Ann. 2013-10, 2013-3 I.R.B. 311

2012-46

Corrected by

Ann. 2013-11, 2013-6 I.R.B. 483

2013-1

Corrected by

Ann. 2013-9, 2013-4 I.R.B. 441

2013-6

Revised by

Ann. 2013-15, 2013-11 I.R.B. 652

Corrected by

Ann. 2013-13, 2013-9 I.R.B. 532

2013-14

Modified by

Rev. Proc. 2013-19, 2013-11 I.R.B. 648

Revenue Rulings:

92-19

Supplemented in part by

Rev. Rul. 2013-4, 2013-9 I.R.B. 520

Treasury Decisions:

9564

Corrected by

Ann. 2013-4, 2013-4 I.R.B. 440

Amended by

Ann. 2013-7, 2013-3 I.R.B. 308

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin 2012–52, dated December 27,2012.

March 25, 2013 iii 2013–13 I.R.B.

INDEXInternal Revenue Bulletins 2013–1 to 2013–13

The abbreviation and number in parenthesis following the index entryrefer to the specific item; numbers in roman and italic type followingthe parentheses refer to the Internal Revenue Bulletin in which the itemmay be found and the page number on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSClosing agreements (RP 12) 4, 313Defined benefit plans, funding (Notice 11) 11, 610Determination letters, issuing procedure (RP 6) 1, 1; correction

(Ann 13) 9, 441Elimination of single-sum distribution option (or other acceler-

ated benefits) under defined benefit plan of plan sponsor inbankruptcy (TD 9601) 10, 535

Full funding limitations, weighted average interest rates, seg-ment rates for:January 1, 2013 (Notice 2) 6, 473

Letter rulings:And determination letters, areas which will not be issued

from:Associates Chief Counsel and Division Counsel (TE/GE)

(RP 3) 1, 113Associate Chief Counsel (International ) (RP 7) 1, 233

And general information letters, procedures (RP 4) 1, 126User fees, request for letter rulings (RP 8) 1, 237

Proposed regulation:26 CFR 54.9815–2705, added; 54.9802–1, revised; rules

relating to incentives for nondiscriminatory wellness pro-grams (REG–122707–12) 5, 450

Qualified plans, determination letters (Ann 15) 11, 652Qualified retirement plans, covered compensation, permitted dis-

parity (RR 2) 10, 533Regulation:

26 CFR 1.1411(d)–4, amended; elimination of single-sum dis-tribution option (or other accelerated benefits) under de-fined benefit plan of plan sponsor in bankruptcy (TD 9601)10, 535

Rules relating to incentives for nondiscriminatory wellness pro-grams (REG–122707–12) 5, 450

Technical advice to IRS employees (RP 5) 1, 170

EMPLOYEE PLANS—Cont.Weighted average interest rates:

Segments rates for:February 2013 (Notice 6) 10, 540

EMPLOYMENT TAXEmployment tax obligations of a third party that enter into a ser-

vice agreement with an employer to take on the employer’semployment tax responsibilities (REG–102966–10) 10, 579

Letter rulings and information letters issued by Associate Of-fices, determination letters issued by Operating Divisions (RP1) 1, 1; correction (Ann 9) 3, 441

Proposed regulation:26 CFR 31.3504–2, added; employment tax obligations of a

third party that enter into a service agreement with an em-ployer to take on the employer’s employment tax responsi-bilities (REG–102966–10) 10, 579

Technical Advice Memoranda (TAMs) (RP 2) 1, 92Transit benefit adjustment for 2012 (Notice 8) 7, 486

ESTATE TAXCost-of-living adjustments for inflation for 2013 (RP 15) 5, 444Letter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions (RP1) 1, 1; correction (Ann 9) 3, 441

Technical Advice Memoranda (TAMs) (RP 2) 1, 92

EXCISE TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions (RP1) 1, 1; correction (Ann 9) 3, 441

Payout requirements for Type III supporting organizationsthat are not functionally integrated (TD 9605) 11, 587;(REG–155929–06) 11, 650

Proposed regulations:26 CFR 1.509(a)–4, amended; payout requirements for Type

III supporting organizations that are not functionally inte-grated (REG–155929–06) 11, 650

Regulations:26 CFR 1.509(a)–4, amended; 1.509(a)–4T, added;

53.4943–11, amended; payout requirements for Type IIIsupporting organizations that are not functionally inte-grated (REG–155929–06) 11, 650

Technical Advice Memoranda (TAMs) (RP 2) 1, 92

EXEMPT ORGANIZATIONSLetter rulings:

And determination letters:Areas which will not be issued from Associates Chief

Counsel and Division Counsel (TE/GE) (RP 3) 1, 113And general information letters, procedures (RP 4) 1, 126

2013–13 I.R.B. iv March 25, 2013

EXEMPT ORGANIZATIONS—Cont.Exemption application determination letter rulings under

sections 501, 509, 4940, 4942, and 4947 (RP 10) 2, 267Exemption application determination letter rulings under

sections 501 and 521 (RP 9) 2, 255User fees, request for letter rulings (RP 8) 1, 237

Payout requirements for Type III supporting organizationsthat are not functionally integrated (TD 9605) 11, 587;(REG–155929–06) 11, 650

Proposed regulations:26 CFR 1.509(a)–4, amended; payout requirements for Type

III supporting organizations that are not functionally inte-grated (REG–155929–06) 11, 650

Technical Advice Memoranda (TAMs) (RP 2) 1, 92

GIFT TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions (RP1) 1, 1; correction (Ann 9) 3, 441

Technical Advice Memoranda (TAMs) (RP 2) 1, 92

INCOME TAXAdjusted applicable Federal rates under section 1288, changes in

method of determination (Notice 4) 9, 527Applicability of de minimis partner rule (TD 9607) 6, 469Application of section 172(h) including consolidated groups,

correction (Ann 6) 3, 307Awards for information relating to detecting underpay-

ments of tax or violations of the Internal Revenue laws(REG–141066–09) 3, 289

Bonds:Premiums carryforwards (REG–140437–12) 12, 676Qualified Zone Academy Bonds limitation for year 2012 and

2013 (Notice 3) 7, 484Qualified exempt facility bonds and qualified residential

rental projects (Notice 9) 9, 529Business use of home, optional safe harbor method for expenses

(RP 13) 6, 478Cost-of-living adjustments for inflation for 2013 (RP 15) 5, 444Credits:

Qualifying Advanced Energy Project Credit Program – PhaseII Program (Notice 12) 10, 543

Deductions for qualified film and television production costs (TD9603) 3, 273

Depreciation deduction, 2013 automobile inflation adjustments(RP 21) 12, 660

Dual-Use property request for comments (Notice 13) 12, 659Elimination of the Cumulative Bulletin after volume 2008–2

(Ann 12) 11, 651E-signature standards (Ann 8) 4, 440Estimated tax penalty relief for farmers and fishermen (Notice 5)

9, 529Examination of returns and claims for return, credit, or abate-

ments, determination of correct tax liability (RP 16) 7, 488

INCOME TAX—Cont.Exceptions to loss transaction filter (RP 11) 2, 269Extension of the effective date of Rev. Proc. 2013–14 (RP 19)

11, 648Failure to file gain agreement and other required filings

(REG–140649–11) 12, 666Forms:

W-2 and W-3 (RP 18) 8, 5031097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G, re-

quirements for filing electronically, correction (Ann 3) 2,271

Guidance to tax return preparers consents to disclose and con-sents to use tax return information in the Form 1040 series,update to Rev. Proc. 2008–35 (TD 9608) 3, 275; (RP 14) 3,283

Gross income, per capita payments from proceeds of settlementsof Indian tribal trust cases (Notice 1) 3, 281

Information reporting:Mortgage assistance program (Notice 7) 6, 477By domestic entities under section 6083D (Notice 10) 8, 503

Insurance companies:Interest rate tables (RR 4) 9, 520

Interest:Investment:

Federal short-term, mid-term, and long-term rates for:January 2013 (RR 1) 2, 252February 2013 (RR 3) 8, 500March 2013 (RR 7) 11, 608

Rates:Underpayments and overpayments, quarter beginning:

April 1, 2013 (RR 6) 13, 701Letter rulings:

And determination letters, areas which will not be issuedfrom:Associates Chief Counsel and Division Counsel (TE/GE)

(RP 3) 1, 113Associate Chief Counsel (International ) (RP 7) 1, 233

And information letters issued by Associate Offices, determi-nation letters issued by Operating Divisions (RP 1) 1, 1;correction (Ann 9) 3, 441

Minimum essential coverage, shared responsibility payment fornot maintaining (REG–148500–12) 13, 716

Mortgage assistance programs, income exclusion, safe harbordeduction method (Notice 7) 6, 477

Noncompensatory partnership options (TD 9612) 13, 678Paper copies of the Internal Revenue Bulletin, elimination of the

Cumulative Bulletin (Ann 12) 11, 651Premium tax credit eligibility, affordability of employer-spon-

sored coverage for related individuals (TD 9611) 13, 699Proposed regulations:

26 CFR 1.171–2, amended; bond premiums carryforwards(REG–140437–12) 12, 676

26 CFR 1.367(a)–3, amended; 1.367(a)–8, amended;1.367–2, amended; 1.6038B–1, amended; failure to filegain recognition agreements and other required filings(REG–140649–11) 12, 666

March 25, 2013 v 2013–13 I.R.B.

INCOME TAX—Cont.26 CFR 1.761–3, amended; 1.1234–3, amended; treat-

ment of grantor of an option on a partnership interest(REG–106918–08) 13, 714

26 CFR 1.5000A–0 thru –5, added; shared responsibilitypayment for not maintaining minimum essential coverage(REG–148500–12) 13, 716

26 CFR 1.6042–4, amended; 1.6043–4, amended; 1.6044–5,amended; 1.6045–2 thru 5, amended; 1.6049–6, amended;1.6050A–1, amended; 1.6050E–1, amended; 1.6050N–1,amended; 1.6050P–1, amended; 1.6050S–1, –3, amended;301.6109–4, added; truncated taxpayer identification num-bers (REG–148873–09) 7, 494

26 CFR 301.7623–1, revised; 301.7623–2 thru –4, added;301.6103(h)(4)–1, added; awards for information relatingto detecting underpayments of tax or violations of the In-ternal Revenue laws (REG–141066–09) 3, 289

Publications:1141, General Rules and Specifications for Form W-2 and

W-3 (RP 18) 8, 5031167, General Rules and Specifications for Forms and Sched-

ules (RP 17) 11, 6121220, Specifications for Filing Forms 1097, 1098, 1099,

3921, 3922, 5498, 8935, and W-2G Electronically, correc-tion (Ann 3) 2, 271

4436, General Rules and Specifications for Substitute Form941 and Schedule B (Form 941), and Schedule R (Form941), correction (Ann 11) 6, 483

Qualified board or exchange (RR 5) 9, 525Qualifying advanced coal project program (Ann 2) 2, 271Regulations:

26 CFR 1.36B–2, amended; affordability of employer-spon-sored coverage for related individuals in determining pre-mium tax credit eligibility (TD 9611) 13, 699

26 CFR 1.171–1, amended; 1.704–1, –3, amended; 1.1721–2,added; 1.761–3, added; 1.1272–1, amended; 1.1273–2,amended; 1.1275–4, amended; noncompensatory partner-ship options (TD 9612) 13, 678

26 CFR 1.171–2T, added; 1.171–3, amended; 1.1275–7,amended; 1.1275–7T, removed; bond premium carryfor-ward (TD 9609) 12, 655

26 CFR 1.181–0, amended; 1.181–0T, removed; 1.181–1,amended; 1.181–1T, amended; 1.181–6, amended;1.181–6T, removed; deductions for qualified film andtelevision production costs (TD 9603) 3, 273

26 CFR 1.304–4, revised; 1.304–4T, removed; use of con-trolled corporations to avoid the application of section 304(TD 9606) 11, 586

26 CFR 1.704–1(b)(2)(iii)(e), revised; applicability of de min-imis partner rule (TD 9607) 6, 469

26 CFR 301.7216–0, amended; 301.7216–0T, removed;301.7216–2, amended; 301.7216–2T, removed; guidanceto tax return preparers, consents to disclose and consents touse tax returns information in the Form 1040 series, updateto Rev. Proc. 2008–35 (TD 9608) 3, 275

Substitute forms: W-2 (Copy A) and W-3 (RP 18) 8, 503

INCOME TAX—Cont.941, Schedule B (Form 941) and Schedule R (Form 941),

correction (Ann 11) 6, 483Tangible property, guidance regarding deduction and capitaliza-

tion of expenditures related to, corrections (Ann 7) 3, 308;(Ann 3) 4, 271

Tax conventions:U.S.-Norway agreements:

Regarding the sourcing of remuneration for governmentservices and social security payments (Ann 5) 3, 306

Regarding fiscally transparent entities (Ann 14) 11, 651Technical Advice Memoranda (TAMs) (RP 2) 1, 92Transition relief for submitting Form 8850 as a result of the

American Taxpayer Relief Act (Notice 14) 13, 712Treasury inflation-protected securities issued at a premium, bond

premium carryforward (TD 9609) 12, 655; (REG–140437–12)12, 676

Treatment of grantor of an option on a partnership interest(REG–106918–08) 13, 714

Truncated taxpayer identification numbers (REG–148873–09) 7,494

Use of controlled corporations to avoid the application of section304 (TD 9606) 11, 586

SELF-EMPLOYMENT TAXLetter rulings and information letters issued by Associate Of-

fices, determination letters issued by Operating Divisions (RP1) 1, 1; correction (Ann 9) 3, 441

Technical Advice Memoranda (TAMs) (RP 2) 1, 92

2013–13 I.R.B. vi March 25, 2013

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