n-00-29.pdf

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# Part III. - Administrative, Procedural, and Miscellaneous

## Partnership Options and Convertible Instruments

Notice 2000-29

### PURPOSE

This notice invites public comment on the federal income tax treatment of the
exercise of an option to acquire a partnership interest, the exchange of convertible debt
for a partnership interest, and the exchange of a preferred interest in a partnership for a
common interest in that partnership.

### BACKGROUND

In a variety of situations, partnerships issue options or convertible debt that
allow the holder to acquire by purchase or conversion an equity interest in an entity
classified as a partnership for federal tax purposes. Partnerships also issue
convertible preferred partnership interests that allow a partner to acquire a materially
different interest in the partnership upon conversion. Often, these instruments are
exercised or converted when the partnership interest to be received is more valuable
than the sum of consideration previously transferred to the partnership plus any
consideration transferred upon exercise or conversion. In addition, convertible

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preferred partnership interests often are converted at a time when the partnership
interest to be received is more valuable than the interest being converted (disregarding
the value of the conversion right). Taxpayers have noted significant uncertainties as to
the federal income tax consequences of using such instruments and have expressed a
need for guidance.

### REQUEST FOR PUBLIC COMMENT

The Internal Revenue Service and the Treasury Department request comments
on the tax consequences to the recipient of the partnership interest as well as to the
partnership upon the exercise of a partnership option or conversion of a debt or
preferred equity interest in that partnership.

Taxpayers may submit comments in writing to:

Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice 2000-29, Room 5226)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Alternatively, taxpayers may submit comments electronically at:

sharon.y.horn@M1.IRSCounsel.treas.gov

All comments should be received by September 15, 2000. The comments
submitted will be available for public inspection and copying.

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### DRAFTING INFORMATION

The principal author of this notice is Audrey W. Ellis of the Office of Assistant
Chief Counsel (Passthroughs and Special Industries). For further information
regarding this notice contact Ms. Ellis at (202) 622-3060 (not a toll-free call).