us-irs-revenue-rulings-irb-2013-13-pdf•Internal Revenue Bulletin 2013-13 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 2013-13 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-2013-13-pdfInternal Revenue Bulletin 2013-13 (PDF rendition): IRS Revenue RulingsGuidance
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Bulletin No. 201 3-13 March 25, 2013 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations. INCOME TAX Rev. Rul. 2013–6, page 701. Interest rates: underpayment and overpayments.The rates for interest determined under section 6621 of the Code for 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 portion of a corporate overpayment exceeding $10,000 will be 0.5 percent. T.D. 9611, page 699. Final regulations under section 36B of the Code relate to whether health coverage under an employer-sponsored plan is affordable for individuals who are eligible to enroll in the plan by reason of their relationship to an employee (related individuals). T.D. 9612, page 678. Final regulations under sections 704, 721, and 761 of the Code relate to the tax treatment of noncompensatory options and convertible instruments issued by a partnership. The final regulations generally provide that the exercise of a noncom- pensatory option does not cause the recognition of immediate income or loss by either the issuing partnership or the option holder. The final regulations also modify the regulations under section 704(b) regarding the maintenance of the partners’ cap- ital accounts and the determination of the partners’ distributive shares of partnership items. The final regulations also contain a 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 issue noncompensatory 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 the Code relate to the tax treatment of noncompensatory options and convertible instruments issued by a partnership. Specif- ically, the proposed regulations expand the characterization rule 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 character of the grantor’s gain or loss as a result of a closing transaction with 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 under section 5000A of the Code, which was added by the Patient Protection and Affordable Care Act and the Health Care and Education 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 American Taxpayer Relief Act of 2012, Pub. L. No. 112–240, enacted on January 2, 2013, which amends section 51 of the Code to extend the Work Opportunity Tax Credit through December 31, 2013. The notice also provides employers additional time beyond the 28-day deadline in section 51(d)(13) for submitting Form 8850,Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to Designated Local Agencies. (Continued on the next page) Fi nding Lists begin on page ii. IndexforJanuarythroughMarchbeginsonpageiv. EMPLOYMENT TAX Notice 2013–14, page 712. This notice provides guidance on section 309 of the American Taxpayer Relief Act of 2012, Pub. L. No. 112–240, enacted on January 2, 2013, which amends section 51 of the Code to extend the Work Opportunity Tax Credit through December 31, 2013. The notice also provides employers additional time beyond the 28-day deadline in section 51(d)(13) for submitting Form 8850,Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to Designated Local Agencies. March 25, 20132013–13 I.R.B. The IRS Mission Provide Americ a’s taxpayers top-quality service by helping them understa nd and meet their tax responsibilities and en- force the law wi th integrity and fairness to all. Introduction The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conven- tions, legislation, court decisions, and other items of general interest. It is published weekly. It is the poli cy of the Service to publish in the Bulletin all sub- stantive ru lings necessary to promote a uniform application of the tax laws , including all rulings that supersede, revoke, mod- ify, or amen d any of those previously published in the Bulletin. All publish ed rulings apply retroactively unless otherwise indi- cated. Pro cedures relating solely to matters of internal man- agement ar e not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published. Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements. Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the 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 of the 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 these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rul- ings. Bank Secrecy Act Administrative Rulings are issued by the 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 index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period. The cont ents 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, 20132013–13 I.R.B. Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 704.— Partner’s Distributive Share 26 CFR 1.171–1: Bond premium. T.D. 9612 DEPARTMENT O FTHE TREASURY Internal Rev enue Service 26 CFR Part 1 Noncompensatory Partnership Options AGENCY: Internal Revenue Service (IRS), Department of the Treasury. ACTION: Fi nal Regulations. SUMMARY: This document contains fi- nal regulations relating to the tax treatment of noncompensatory options and convert- ible instruments issued by a partnership. The final regulations generally provide that the exercise of a noncompensatory option does not cause the recognition of immediate income or loss by either the issuing partnership or the option holder. The final regulationsalso modify the reg- ulations under section 704(b) regarding the maintenance of the partners’ capital accounts and the determination of the partners’ distributive shares of partnership items. The final regulations also contain a characterization rule providing that the holder of a noncompensatory option is treated as a partner under certain circum- stances. The final regulations will affect partnerships that issue noncompensatory options, the partners of such partnerships, and the holders of such options. DATES: Effective Date: These regulations are effective on February 5, 2013. Applicability Date:These regulations apply to noncompensatory options (as de- fined in §1.721–2(f)) that are issued on or after February 5, 2013. FOR F URTHER INFORMATION CONT ACT: Benjamin Weaver at (202) 622 –3050 (not a toll-free number). SUPPLEMENTAR Y INFORMATION: Background This document contains amendments to 26 CFR part 1 under sections 171, 704, 721, 761, 1272, 1273, and 1275 of the Intern al Revenue Code (Code). On January 22 , 2003, proposed regula- tions (REG–1 03580–02, 2009–9 I.R.B. 543) relatin gtothetaxtreatmentofnon- compensator y options and convertible instrument s issued by a partnership were published i ntheFederal Register(68 FR 2930). On Ma rch 28, 2003, corrections to the propose d regulations were published in theFede ral Register(68 FR 15118). Because no requests to speak were submit- tedbyApri l 29, 2003, the public hearing scheduled for Tuesday, May 20, 2003, was cance lled (see 68 FR 24903). The Treasury Department and the IRS received a number o f comments in response to the proposed regulations. After consideration of the com ments, the proposed regulations are adop ted as revised by this Treasury decisio n. The final regulations apply to certain call options, warrants, convert- ible deb t, and convertible equity that are not issu ed in connection with the per- forman ce of services (noncompensatory option s). All comments are available at www.re gulations.govor upon request. Summar y of Comments and Explan ation of Provisions The fin al regulations describe certain of the inc ome tax consequences of issuing, trans ferring, and exercising noncompen- sator y partnership options. The final reg- ulati ons apply only if the call option, war- rant, or conversion right grants the holder the ri ght to acquire an interest in the is- suer (or cash measured by the value of the i nterest). The final regulations gener- ally provide that the exercise of a noncom- pens atory option does not cause recog- niti on of gain or loss to either the issu- ing p artnership or the option holder. In add ition, the final regulations modify the reg ulations under section 704(b) regard- ing the maintenance of the partners’ cap- ita l accounts and the determination of the partners’ dis tributive shares of partnership items. Finall y, the final regulations con- tain a charact erization rule providing that the holder of a call option, warrant, con- vertible deb t, or convertible equity issued by a partners hip (or an eligible entity, as definedin§3 01.7701–3(a), that would be- come a partn ership if the option holder were treate d as a partner) is treated as a partner und er certain circumstances. A number of c omments were received regarding t he proposed regulations. The comments in cluded requests for clarifica- tion and re commendations relating to (1) the issuan ce and exercise of noncompen- satory opt ions; (2) accounting for noncom- pensatory options; (3) the characterization rule; (4) t he convertible bond provision; and (5) th e application of the original is- sue disco unt provisions. Significant com- ments are further discussed in this pream- ble. 1.Issuan ce, Exercise, Lapse, Repurcha se, and other Terminations of a Nonc ompensatory Option Like the proposed regulations, the final regulat ions under section 721 define a non- compens atory option as an option issued by a part nership, other than an option is- sued in connection with the performance of serv ices. For this purpose, an option is define d as a call option or warrant to ac- quire a n interest in the issuing partnership, the con version feature of convertible debt, or the c onversion feature of convertible eq- uity. A.App lication of section 721 on issuance of a no ncompensatory option The pr oposed regulations provide that secti on 721 does not apply to a transfer of prope rty to a partnership in exchange for a nonc ompensatory option. Several com- ment ers observed that the proposed regula- tion s do not exclude options issued in satis- fact ion of interest or similar items, such as unpa id rent or royalties. Accordingly, the fina l regulations provide that section 721 doe s not apply to the transfer of property to a partnership in exchange for a noncom- pen satory option, or to the satisfaction of a 2013–13 I.R.B.678March 25, 2013 partnership obligation with a noncompen- satory option. The final regulations con- tain an example illustrating that a transfer of appreciated or depreciated property to a partnership in exchange for a noncompen- satory option generally will result in the recognition of gain or loss by the option recipient. Under opentransactionprin- ciples applicable tononcompensatory op- tions, the partnership will not recognize in- come for receipt of the property while the option is outstanding. Notwithstanding the general rule, the Treasury Department and IRS believe it is appropriate to take into account the conversion right embedded in convertible equity as part of the underly- ing partnership interest. Accordingly, the final regulations provide that section 721 doesapplytoacontributionofpropertyto a partnership in exchange for convertible equity in a partnership. B.Application of section 721 on exercise of a noncompensatory option i. Payment of the Exercise Price with Property or Cash The proposed regulations provide that section 721 applies to the holder and the partnership upon the exercise of a noncom- pensatory option issued by the partnership. The final regulations generally adopt this rule. However, in response to comments requesting 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 is satisfied with property or cash contributed to the partnership, regardless of whether the terms of the option require or permit a cash payment. ii. Exercise of a Noncompensatory Option in Satisfaction of a Partnership Obligation The proposed regulations under section 721 do not apply to any interest on con- vertible debt that has been accrued by the partnership (including accrued original is- sue discount). A number of comments were received requesting clarification on the proper treatment of accrued but un- paid interest. Since the proposed regula- tions were issued and the comments re- ceived, final regulations under section 721 were 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 a debt-for-equity exchange to the extent the transfer of the partnership interest to the creditor is in exchange for the partnership’s indebtedness for unpaid rent, royalties, or interest (including accrued original issue discount) that accrued on or after the beginning of the creditor’s holding period for the indebt- edness. The debtor partnership will not recognize gain or loss upon the transfer of a partnership interest to a creditor in a debt-for-equity exchange for unpaid rent, royalties, or interest (including accrued original issue discount). The preamble to T.D. 9557 explains this provision as follows: “The IRS and the Treasury Department believe that the ex- ception to section 721 for these items is necessary to prevent the conversion of or- dinary income into capital gain.” The Treasury Department and the IRS believe that similar considerations arise in the context of the exercise of noncompen- satory options. Accordingly, the final reg- ulations provide that section 721 does not apply to the transfer of a partnership in- terest to a noncompensatory option holder upon conversion of convertible debt in the partnership to the extent that the transfer is in 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 that the exercise price is satisfied with the part- nership’s obligation to the option holder for unpaid rent, royalties, or interest (in- cluding accrued original issue discount) that accrued on or after the beginning of the option holder’s holding period for the obligation. 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 obligation for unpaid interest witha fractional interest in each partnership property. Under this “vertical slice” approach, the partnership could recognize gain or loss equal to the difference between the fair market value of each partial property deemed transferred to the creditor and the partnership’s adjusted basis in that partial property. The Trea- sury Department and the IRS believe that approach would be difficult to administer and may inappropriately accelerate gain or loss recognition. Therefore, the final reg- ulations provide that the partnership will not recognize gain or loss upon the trans- fer of a partnership interest to a noncom- pensatory option holder upon conversion of convertible debt in the partnership to the extent that the transfer is in satisfaction of the partnership’s indebtedness for unpaid interest (including accrued original issue discount) on convertible debt that accrued on 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 upon the transfer of a partnership interest to an exercising option holder in satisfaction of the partnership’s obligation to the option holder for unpaid rent, royalties, or interest (including accrued original issue discount) that accrued on or after the beginning of the option holder’s holding period for the obligation. This treatment is consistent with the rules under §1.721–1(d)(2). iii. Options Issued by Disregarded Entities The rule in the proposed regulations providing for nonrecognition of gain or loss on the exercise of a noncompen- satory option does not apply to any call option, warrant, or convertible debt is- sued by an eligible entity, as defined in §301.7701–3(a), that would become a partnership under §301.7701–3(f)(2) if the option, warrant, or conversion right were exercised. The Treasury Department and the IRS requested and received com- ments on whether the nonrecognition rule should be extended to such instruments. Commenters recommended that the non- recognition rule should be extended to such instruments. However, some com- menters noted that the extension of the proposed regulations to include a non- compensatory option issued by an eligible entity that would become a partnership under §301.7701–3(f)(2) upon exercise of the option would necessitate adjustments to the capital accounting requirements of the regulations, as applied to these entities. Without these adjustments, upon exercise of the option, the owner of the eligible entity would be treated as contributing all March 25, 20136792013–13 I.R.B. property owned by the eligible entity prior to exercise of the option to the new part- nership, while the option holder would be treated as contributing only the exercise price and premium to the new partnership. The new partnership would have no un- booked unrealized gain in its property that it could allocate to the exercising option holder. Accordingly, the Treasury De- partment and the IRS have decided not to apply the rules of the final regulations to these instruments. iv. Application of Section 721(b) One commenter requested clarification of whether section 721(b) could apply to the exercise of a noncompensatory option under the regulations. Section 721(b) pro- vides that section 721(a) does not apply to gain realized on a transfer of property to a partnership that would be treated as an investment company (within the meaning of section 351) if the partnership were in- corporated. The Treasury Department and the 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 the cash settlement of an option is treated as asaleorexchangeoftheoptionorasan exercise of the option followed by an im- mediate redemption of the newly-issued partnership interest. The Treasury Depart- ment and the IRS believe that the cash settlement of a noncompensatory option should be treated as a sale or exchange of the option and taxed under the rules of section 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 the disguised sale rules). The final regulations provide that the settlement of a noncom- pensatoryoptionincashorpropertyother than an interest in the issuing partnership is not a transaction to which section 721 applies. C.Lapse, repurchase, sale, or exchange of a noncompensatory option The proposed regulations provide that section 721 does not apply to the lapse of a noncompensatory option. Accord- ingly, the lapse of a noncompensatory op- tion generally results in the recognition of income by the partnership and loss by the holderofthelapsedoptioninanamount equal to the option premium. However, the proposed regulations do not address the character of the gain or loss recognized upon lapse, repurchase, sale, or exchange of the option. While section 1234(b) provides that gain or loss from any closing transaction generally is treated as short term capital gain 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” for purposes of section 1234(b). To eliminate this uncertainty, proposed regulations un- der section 1234(b) (REG–106918–08) are being published concurrently with these final regulations, which treat partnership interests as securities for this purpose. The preamble to those proposed regulations also addresses, and seeks comments on, the character of gain or loss to the option holder on the sale or exchange of, or loss on failure to exercise, an option. D.Application of general tax principles in certain situations In the event that the exercise of a non- compensatory option is followed by a re- demption of the exercising option holder’s partnership 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 a cash settlement of the noncompensatory option by the partnership. The proposed regulations provide that iftheexercisepriceofanoncompen- satory option exceeds the capital account received by the option holder on the ex- ercise of the noncompensatory option, the transaction will be given tax effect in ac- cordance with its true nature. Similarly, the final regulations provide that, if the exercise price of a noncompensatory op- tion exceeds the capital account received by the option holder on the exercise of the option, then general tax principles will ap- ply to determine the tax consequences of the transaction. The final regulations are based on the premise that the partnership and the option holder will act in an eco- nomically rational way, such that an option holder generally will not exercise the op- tion unless the capital account received will equal or exceed the exercise price. It should be noted that a noncompensatory option could be economically viable to exercise when the option holder receives a right to share in partnership capital that is less than the sum of the premium paid for the option and the exercise price of the option, provided that the exercise price alone does not exceed the capital account received. This simply reflects the fact that the premium is a sunk cost at the time the option holder exercises the option. 2.Accounting for Noncompensatory Options A.Accounting for the issuance of a noncompensatory option Under the proposed regulations, issuance of a noncompensatory op- tion is not a permissive or mandatory revaluation event under Treas. Reg. §1.704–1(b)(2)(iv). One commenter noted that, as a result, unrealized gain in partner- ship property arising prior to the issuance of the option could be inappropriately shifted to the option holder upon exercise. The Treasury Department and the IRS agree. Therefore, the final regulations provide that the issuance by a partnership of a noncompensatory option (other than an option for ade minimispartnership in- terest) is a permissible revaluation event. B.Revaluations while a noncompensatory option is outstanding Under the proposed regulations, any revaluation during the period in which there are outstanding noncompensatory options generally must take into account the fair market value of any outstanding noncompensatory options. If the fair mar- ket value of outstanding noncompensatory options as of the date of the adjustment exceeds the consideration paid by the op- tion holders to acquire the options, then the value of partnership property reflected on the partnership’s books must be re- duced by that excess to the extent of the 2013–13 I.R.B.680March 25, 2013 unrealized income or gain in partnership property (that has not been reflected in the capital accounts previously). This reduc- tion is allocated only to properties with unrealized appreciation in proportion to their respective amounts of unrealized ap- preciation. Conversely, if the price paid by the option holders to acquire the outstand- ing noncompensatory options exceeds the fair market value of the options as of the date of the adjustment, then the value of partnership property reflected on the partnership’s books must be increased by that excess to the extent of the unrealized deduction or loss in partnership property (that has not been reflected in the capital accounts previously). This increase is al- located only to properties with unrealized depreciationinproportiontotheirrespec- tive amounts of unrealized depreciation. The Treasury Department and the IRS have decided to retain these rules with cer- tain modifications. The final regulations continue to provide that the adjustments to the value of partnership property re- flected on the partnership’s books should generally be made to partnership proper- ties on apro ratabasis. Several com- ments were received requesting additional guidance when certainproperties are sub- ject to special allocations to existing part- ners. The Treasury Department and the IRS agree that the final regulations should take into account the economic arrange- ment of the parties. Therefore, the final regulations provide that the adjustments must take into account the economic ar- rangement of the partners with respect to the property. One commenter noted that, while the proposed regulations do not state how the fair market value of the outstanding option should be computed, the value that is con- sistently used in the examples in the pro- posed regulations is the liquidation value of the option assuming exercise. The com- menter requested additional guidance on the determination of the fair market value of outstanding options. The Treasury De- partment and the IRS believe that addi- tional guidance on the determination of fair 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 a noncompensatory option The proposed regulations provide that an exercising noncompensatory option holder’s initial capital account is equal to the consideration paid to the partnership to acquire the noncompensatory option and the fair market value of any prop- erty (other than the option) contributed to the partnership upon the exercise of the noncompensatory option. The proposed regulations provide that upon the conver- sion of convertible equity, the fair market value of property contributed to the part- nership includes the converting partner’s capital account immediately before the conversion. Because the converting part- ner’s pre-conversion capital account will not be eliminated because of the conver- sion, the Treasury Department and the IRS believe that this provision from the proposed regulations is unnecessary and could cause confusion. Therefore, the Treasury Department and the IRS have decided to remove this provision to elim- inate confusion; no substantive change is intended by this revision. Additionally, the proposed regulations provide that the capital account of a holder of convertible debt is credited with the ad- justed basis of the debt and the accrued but unpaid qualified stated interest on the debt immediately before the conversion of the debt. One commenter noted that the regu- lations should credit the debt holder’s cap- ital account with the adjusted issue price rather than the adjusted basis of the debt. Using adjusted issue price avoids creat- ing a different tax result in cases in which the debt is converted by the original debt holder versus cases in which the debt is converted after a transfer of the debt at a price that reflected unrealized gain or loss attributable to the conversion right and/or changes in market interest rates. The Trea- sury Department and the IRS agree with this 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 but unpaid qualified stated interest on the debt immediately before the conversion of the debt. The proposed regulations require a partnership to revalue its property im- mediately following the exercise of a noncompensatory option, after the option holder has become a partner. The partner- ship must allocate theunrealized income, gain, loss, and deduction from this revalu- ation, first, to the noncompensatory option holder on exercise to the extent necessary to reflect the option holder’s right to share in partnership capital under the partner- ship agreement and, then, to the historic partners, to reflect the manner in which the unrealized income, gain, loss, or de- duction in partnership property would be allocated among those partners if there were a taxable disposition of the property for its fair market value on that date. To the extent that unrealized appreciation or depreciation in the partnership’s property has been allocated to the capital account of the noncompensatory option holder on exercise, the holder will, under section 704(c) principles, recognize any income or loss attributable to that appreciation or depreciation as the underlying properties are sold, depreciated, or amortized. The final regulations adopt these provisions with some modifications. Under the current section 704(b) reg- ulations, a revaluation of partnership property pursuant to §1.704–1(b)(2)(iv)(f) is based on the fair market value of partnership property as of the date of the 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 of partnership property based on the fair mar- ket value of the partnership interest, rather than the fair market value of the partner- ship’s property. These values may differ because of restrictions on the transferabil- ity or liquidity of the partnership interest or other factors. The Treasury Department and the IRS have decided to continue requiring that revaluations be based on the fair market value of the partnership’s property. The Treasury Department and the IRS believe that changing the rules for all revaluations is beyond the scope of these final regulations. Several comments were received re- questing additional guidance on adjusting capital accounts upon exercise of an op- tion when certain partnership properties are subject to special allocations to exist- ing partners. The finalregulations clarify that the allocations must take into account the economic arrangement of the partners with respect to the property. March 25, 20136812013–13 I.R.B. Furthermore, several commenters re- quested additional guidance on how to adjust capital accounts upon exercise when the partnership owns multiple properties with unrealized income, gain, loss, or de- duction. The final regulations clarify that allocations should be made on apro rata basis from partnership property, subject to the requirement that the allocations take into account the economic arrangement of the partners. Thus, if the exercising part- ner’s right to share in partnership capital under the partnership agreement exceeds the sum of the premium and exercise price, then only income or gain may be allocated to the exercising partner from partnership properties with unrealized appreciation, in proportion to their respective amounts of unrealized appreciation (subject to the requirement that the allocations take into account the economic arrangement of the partners). Conversely, if the exercising partner’s right to share in partnership cap- ital under the partnership agreement is less than the premium and exercise price, then only loss may be allocated to the exercising partner from partnership prop- erties with unrealized loss, in proportion to their respective amounts of unrealized loss (subject to the requirement that the allocations take into account the economic arrangement of the partners). One commenter recommended that the final regulations provide that the partner- ship may revalue its assets immediately before 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 response to 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 partnership property has increased in value. If, fol- lowing the revaluation, but prior to the exercise of the option, the same property declines 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 allocate to the option holder’s capital account upon exercise. To address this issue, one com- menter recommended that, for purposes of partnership property revaluations, the por- tion of the unrealized gain that is treated as “reflected in the capital accounts previ- ously” be reduced by the historic partners’ share of the decline in asset value. The Treasury Department and the IRS have de- cided not to adopt these changes because the increased complexity that these new rules would add to the regulations out- weighs the potential benefit. Under the proposed regulations, if, af- ter the allocations of unrealized gain and lossitemstoanexercisingoptionholder, the exercising option holder’s capital ac- count still does not reflect his right to share in partnership capital under the partner- ship agreement, the partnership must real- locate capital between the existing partners and 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 the partnership to make corrective allocations of gross income or loss to the partners in the year in which the option is exercised so as to take into account any shift in the partners’ capital accounts that occurs as a result of a capitalaccount reallocation pursuant to the exercise of a noncompen- satory option. Corrective allocations are allocations of tax items that differ from the partnership’s allocations of book items. If there are not sufficient actual partnership items in the year of exercise to conform the partnership’s tax allocations to the capital account reallocation, additional corrective allocations are required in succeeding tax- able years until thecapital account reallo- cation has been fully taken into account. A number of comments were received regarding the requirement of corrective allocations in the proposed regulations. Some commenters recommended elimi- nating or substantially limiting the scope of corrective allocations. The Treasury Department and the IRS considered other alternatives but believe that corrective allocations are the most administrable al- ternative means to address the potential problem of income shifting when, prior to the exercise of a noncompensatory option, a partnership recognizes gain or loss that is, in part, economically attributable to the option holder, but is allocated entirely to the existing partners. Therefore, the final regulations retain the requirement for corrective allocations in certain circum- stances. i. Corrective Allocations when Historic Partners Depart The final regulations require corrective allocations to be made so as to take into account any capital account reallocation upon exercise of a noncompensatory op- tion. Therefore, partnership items may be correctively 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 such partner suffered a capital account reduc- tion. This approach may result in correc- tive allocations not being fully made if a partner that suffered a capital account re- duction on exercise is no longer a part- ner in the issuing partnership at the time a corrective allocation would otherwise be made. ii. Character Matching for Corrective Allocations The proposed regulations provide that corrective allocations arepro rataal- locations of gross income and gain or gross loss and deduction. The proposed regulations do not require any matching of character between the income or loss that is correctively allocated, and gains or losses that were allocated to existing partners prior to the option’s exercise, but that were economicallyattributable to the option holder. Several commenters rec- ommended that the regulations provide some type of matching requirement. The Treasury Department and the IRS believe that the complexity that could arise from a character matching requirement would outweigh the potential benefit of obtaining a more precise tax result for corrective allocations in some cases. Accordingly, the final regulations do not provide for a character matching requirement. iii. Corrective Allocations Using Combinations of Income and Loss Additionally, some commenters re- quested guidance on making corrective allocations in a year in which the partner- ship has both gross income and gain and gross loss and deduction. In some cases, a corrective allocation that completely takes into account the capital shift may not be possible in a given year if only gross income and gain, or gross loss and de- duction, are used. However, commenters 2013–13 I.R.B.682March 25, 2013 noted that it may be possible to more fully take into account the capital shift if corrective allocations are made using a combination of gross income and gain and gross loss and deduction. The Treasury Department and IRS agree that combina- tions of gross income and gain and gross loss and deduction should be available for corrective allocations. Accordingly, the final regulations pro- vide a mechanism for making corrective allocations 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 historic partners to the exercising option holder, then the corrective allocations must first be made with gross income and gain. If an allocation of gross income and gain alone does not completely take into account the capital account reallocation in a given year, then the partnership must also make cor- rective allocations using apro ratapor- tion of items of gross loss and deduction as to 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 must first be made with gross loss and deduc- tion. If an allocation of gross loss and deduction alone does not completely take into account the capital account realloca- tion in a given year, then the partnership must also make corrective allocations us- ing apro rataportion of items of gross in- come and gain as to further take into ac- count the capital account reallocation. iv. Application of Section 706 to Corrective Allocations One commenter requested clarification on the application of section 706 to the cor- rective allocation provisions. Because the exercise of a noncompensatory option may cause the partners’ interests in the part- nership to vary, the Treasury Department and the IRS believe that section 706 should apply in determining which items may be used for corrective allocations. Therefore, the final regulations also clarify that sec- tion 706 and its regulations and principles apply in determining the items of income, gain, loss, and deduction that may be sub- ject to corrective allocation. E.Theimpactofpartnershipmergers, divisions, and terminations on outstanding noncompensatory options The proposed regulations do not ad- dress the impact of partnership mergers, divisions, and section 708 technical termi- nations on outstanding noncompensatory options. Some commenters requested guidance on these situations. The Trea- sury Department and the IRS believe that these issues are beyond the scope of these final regulations. 3.Characterization Rule The proposed regulations generally re- spect noncompensatory options as such and do not characterize them as part- nership equity. However, the proposed regulations characterize the holder of a noncompensatory option as a partner if the option holder’s rights are substantially similar to the rights afforded to a partner. This rule under the proposed regulations applies only if, as of the date that the non- compensatory option is issued, transferred, or modified, there is a strong likelihood that the failure to treat the option holder as a partner would result in a substantial reduction in the present value of the part- ners’ and the option holder’s aggregate Federal tax liabilities. The proposed regu- lations use a facts and circumstances test to determine whether a noncompensatory option holder’s rights are substantially similar to the rights afforded to a partner. The facts and circumstances for making this determination under the proposed reg- ulations include, but are not limited to, whether the option is reasonably certain to be exercised and whether the option holder has partner attributes. The Treasury Department and the IRS have decided to retain these rules with certain modifica- tions. A.The “substantially similar” test Some commenters criticized the breadth of the language in the proposed regulations that provides that all facts and circumstances will be considered in determining whether a noncompensatory option provides the holder with rights that are substantiallysimilar to the rights afforded to a partner, suggesting instead that an exclusive list of factors be used. The Treasury Department and the IRS agree that the regulations should more specifically describe the circumstances in which an option holder will be considered to possess these rights. Therefore, the final regulations provide that a noncom- pensatory option provides its holder with rights that are substantially similar to the rights afforded to a partner if the option is reasonably certain to be exercised or if the option holder possesses partner attributes. i.The “reasonably certain to be exercised” test The proposed regulations list a number of non-exclusive factors that are used to determine 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 the option, the exercise price of the option, the term of the option, the predictability and stability of the value of the underly- ing partnership interest, the fact that the option premium and exercise price (if the option is exercised) will become property of the partnership, and whether the part- nership is expected to make distributions during the term of the option. With one exception, the final regulations adopt these factors and clarify that any other arrange- ments affecting or undertaken with a prin- cipal purpose of affecting the likelihood that the noncompensatory option will be exercised will be considered a factor in determining whether an option is reason- ably certain to be exercised. Because the option premium represents a sunk cost to the option holder, and because the fact that the exercise price becomes property of the partnership is already reflected in the value of the partnership interest subject to the op- tion, the final regulations do not include as a factor in the reasonable certainty test the fact that the option premium and exercise price will become property of the partner- ship. Some commenters suggested that the characterization rule in the regula- tions adopt standards similar to those found in §1.1361–1(l) for determining whether there is a second class of stock in an S corporation, or those found in §1.1504–4 for determining whether a corporation is a member of an affiliated group. Commenters also recommended that the regulations provide for certain safe harbors and bright line tests for March 25, 20136832013–13 I.R.B. determining whether an option holder’s rights are substantially similar to the rights afforded to a partner, and whether there is a strong likelihood that the failure to treat the holder as a partner would result in a substantial reduction in the present value of the partners’ and the holder’s aggregate tax liabilities. After careful consideration of these comments, the Treasury Department and the IRS believe that limited safe harbors should be provided to limit the administrative burdens of the characterization rule. Accordingly, the final regulations provide two objective safe harbors, which are similar to two of the safe harbors in §1.1504–4 and §1.1361–1(l).However, these safe harbors apply only to the determination of whether a noncompensatory option is reasonably certain to be exercised, and not to the determination of whether a noncompensatory option holder possesses partner attributes. The first safe harbor provides that a noncompensatory option is not considered reasonably certain to be exercised if it may be exercised no more than 24 months af- ter the date of the applicable measurement event and it has a strike price equal to or greater than 110 percent of the fair market value of the underlying partnership interest on the date of the measurement event. The second safe harbor provides that a non- compensatory option is not considered rea- sonably certain to be exercised if the terms of the option provide that the strike price of the option is equal to or greater than the fair market value of the underlying part- nership interest on the exercise date. For purposes of these safe harbors, an option whose strike price is determined by a for- mula is considered to have a strike price equal to or greater than the fair market value of the underlying partnership inter- est on the exercise date if the formula is agreed upon by the parties when the option is issued in abona fideattempt to arrive at the fair market value on the exercise date and is to be applied based on the facts and circumstances in existence on the exercise date. The safe harbors do not apply, how- ever, if the parties to the noncompensatory option had a principal purpose of sub- stantially reducing the present value of the aggregate Federal tax liabilities of the partners and the noncompensatory option holder. The final regulations provide that fail- ureofanoptiontosatisfyoneofthese safe harbors does not affect the determi- nation of whether the option is treated as reasonably certain to be exercised. Thus, options that do not satisfy the safe harbors may 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 to be exercised on the date of one measure- ment event under either the safe harbors or the facts and circumstances test, the option may be treated as reasonably certain to be exercised at the time of a subsequent mea- surement event if the safe harbors and facts and circumstances test are no longer sat- isfied. Furthermore,evenifanoptionis not reasonably certain to be exercised un- der either the safe harbors or the facts and circumstances test, the noncompensatory option may still be found to provide its holder with rights substantially similar to those afforded a partner under the partner attributes test. The proposed regulations contain an example describing an option issued by a partnership with reasonably predictable earnings and concluding, based on the facts of the example, that the option de- scribed is reasonably certain to be exer- cised. Commenters stated that the example involved unrealistic facts demonstrating reasonably predictable earnings, and that the example wrongly implied that low volatility suggests a reasonable certainty of exercise. Upon further consideration of this example, the Treasury Department and the IRS have decided to delete the example from the final regulations. ii.The “partner attributes” test The proposed regulations provide that partner attributes include the extent to which the option holder shares in the eco- nomic benefit and detriment of partnership income and loss and the extent to which the option holder has the right to control or restrict the activities of the partnership. Some commenters requested clarification of this definition of partner attributes. Be- cause all options issued by a partnership allow the holder to share, to some extent, in the economic benefit and detriment of partnership income and loss, the Treasury Department and the IRS agree that this language should be clarified. The final regulations provide that the determination of whether a noncompen- satory option holder possesses partner attributes is based on all the facts and cir- cumstances, including whether the option holder, directly or indirectly, through the option agreement or a related agreement, is provided with voting or managerial rights in the partnership. Additionally, the final regulations provide that an op- tion holder has partner attributes if, based on all the facts and circumstances, (1) the option holder is provided with rights (through the option agreement or a related agreement) that are similar to rights ordi- narily afforded to a partner to participate in partnership profits through present pos- sessory rights to share in current operating or liquidating distributions with respect to the underlying partnership interest; or (2) the option holder, directly or indirectly, undertakes obligations (through the option agreement or a related agreement) that are similar to obligations undertaken by a partner to bear partnership losses. In this way, the Treasury Department and the IRS believe that the final regulations clarify that the economic benefits and burdens relevant to the partner attributes test are those beyond the economic benefits and burdens inherent in basic option transac- tions. As to an option holder’s ability to control or restrict the activities of the part- nership, some commenters stated that an option holder should not be considered to possess partner attributes solely because the holder has the ability to restrict part- nership distributions or dilutive issuances of partnership equity while the option is outstanding. Option holders often are given such rights as a means of protecting the value of the option holder’s potential future partnership interest. The Treasury Department and the IRS agree that such rights are reasonable restrictions that, by themselves, should notautomatically lead to a conclusion that the option holder pos- sesses partner attributes. Accordingly, the final regulations provide that a noncom- pensatory option holder will not ordinarily be considered to possess partner attributes solely because the noncompensatory op- tion agreement significantly controls or restricts, or the noncompensatory option holder has the right to significantly control or restrict, a partnership decision that could substantially affect the value of the under- 2013–13 I.R.B.684March 25, 2013 lying partnership interest. In particular, the following rights of the option holder will not be treated as partner attributes: (1) the ability to impose reasonable re- strictions on partnership distributions or dilutive issuances of partnership equity or options while the noncompensatory option is outstanding; and (2) the ability to choose the partnership’s section 704(c) method for partnership properties. Some commenters requested clarifica- tion on the analysis of partner attributes for an option holder who is also a part- ner in the issuing partnership. The pro- posed regulations provide that rights pos- sessedbyanoptionholdersolelybyvirtue of owning a partnership interest and not by virtue of holding a noncompensatory option are not taken into account in de- termining whether the option holder has partner attributes, provided those rights are no 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 that the regulations should address these sit- uations. Accordingly, the final regula- tions provide that rights in the issuing part- nership possessed by a noncompensatory option holder solely by virtue of owning an interest in the issuing partnership are not taken into account, provided that those rights are no greater than the rights granted to other partners owning substantially sim- ilar interests in the partnership and who do not hold noncompensatory options in the partnership. 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 none of the other partners owns substantially similar interests in the partnership, then all facts and circumstances will be considered in determining whether the rights in the partnership possessed by the option holder arepossessedsolelybyvirtueofowninga partnership interest. If those rights are pos- sessedsolelybyvirtueofowningapartner- ship interest, the final regulations provide that they are not taken into account. Additionally, in response to comments, the final regulations provide that for pur- poses of determining whether an option holder has partner attributes, the option holder will be treated as owning all part- nership interests and noncompensatory op- tions issued by the partnership that are owned by any person related to the op- tion holder. For example, if the holder of a noncompensatory option is related to a person that owns an interest in the issuing partnership, and the interest provides the related person with partner attributes that are greater than the rights granted to other partners owning substantially similar inter- ests in the partnership, the option will be characterized 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 partner attributes test by planning among related parties. The Treasury Department and the IRS continue to study the extent to which financial instruments and partnership in- terests owned by related persons should be taken into account under the reasonable certainty test. The proposed regulations contain an example describing a deep in the money option and concluding, based on the facts of the example, that the option holder possesses partner attributes. Commenters stated that the example added little to the existing guidance provided by the com- mon law rule. Upon further consideration of this example, the Treasury Department and the IRS have decided to delete the example from the final regulations. B.The “strong likelihood” test The Treasury Department and the IRS received a number of comments regard- ing the provision in the proposed regula- tions that the characterization rule applies only if there is a strong likelihood that the failure 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 the regulations adopt language similar to that contained in §1.704–1(b)(2)(iii)(b)(2)and (c)(2), which provides that, in determining whether there is a reduction in the part- ners’ total tax liability, tax consequences that result from the interaction of the al- location(s) with partner tax attributes that are unrelated to the partnership are taken into account. Similarly, in determining whether 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 holder tax attributes that are unrelated to the part- nership, and the interaction of those at- tributes with the option. The Treasury Department and the IRS agree that it would be helpful for the reg- ulations to specify certain factors that are considered in determining whether there is a strong likelihood that the failure to treat a noncompensatory option holder as a partner would result in a substantial re- duction in the present value of the part- ners’ and the option holder’s aggregate Federal tax liabilities. The final regula- tions provide that all facts and circum- stances should be considered in making this determination, including: (1) the in- teraction of the allocations of the issu- ing partnership and the partners’ and non- compensatory option holder’s Federal tax attributes (taking into account tax conse- quences that result from the interaction of the allocations with the partners’ and non- compensatory option holder’s Federal tax attributes that are unrelated to the partner- ship); (2) the absolute amount of the Fed- eral tax reduction; (3) the amount of the reduction 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 (as defined in §1.704–1(b)(2)(iii)(d)(2)) is a party, the final regulations provide that if a partner or option holder is a look-through entity,suchasapartnershiporanScor- poration, then the tax attributes of that en- tity’s ultimate owners (that are not look- through entities) will be taken into account in determining whether there is a strong likelihood of a substantial tax reduction. The final regulations also provide that, if a partner is a member of a consolidated group, then tax attributes of the consoli- dated group and of another member with respect to a separate return year will be taken into account in determining whether there is a strong likelihood of a substantial tax reduction. March 25, 20136852013–13 I.R.B. C.Events that trigger testing under the characterization rule The proposed regulations test a non- compensatoryoption under the charac- terization rule upon issuance, transfer, or modification of the option. A number of comments were received recommending clarification, or narrowing of the list, of events that will trigger a testing of the option after original issuance. Several commenters argued that only material modifications of an option should lead to re-testing under the characterization rule. Several commenters also recommended restricting the types of transfers that will trigger testing of the option under the characterization rule, or removing the re- quirement to test upon transfer entirely. In response to these comments, the final regulations provide a more detailed de- scription of the events that will trigger application of the characterization rule to a noncompensatory option. The final regulations provide that the characterization rule will be applied upon the occurrence of a measurement event with respect to the noncompensatory op- tion. The final regulations define a mea- surement event as: (1) issuance of the non- compensatoryoption; (2) an adjustment of the terms (modification) of the noncom- pensatory option or of the underlying part- nership interest (including an adjustment pursuant to the terms of the noncompen- satory option or the underlying partnership interest); or (3) transfer of the noncompen- satory option if either (A) the term of the option exceeds 12 months, or (B) the trans- fer is pursuant to a plan in existence at the time of the issuance or modification of the noncompensatory option that has as a prin- cipal purpose the substantial reduction of the present value of the aggregate Federal tax liabilities of the partners and the non- compensatory option holder. Additionally, in response to the com- ments, the Treasury Department and the IRS believe that it is appropriate to limit testing under the characterization rule to provide certainty for both taxpayers and the IRS, particularly in circumstances in which there is little potential for abuse. Therefore, the final regulations do not treat the following events as measurement events: (1) a transfer of the noncompen- satory option that would otherwise be a measurement event if the transfer is at death or between spouses or former spouses under section 1041, or in a trans- action that is disregarded for Federal tax purposes; (2) a modification that neither materially increases the likelihood that the option will be exercised nor provides the option holder with partner attributes; (3) a change in the strike price of a noncom- pensatory option, or in the interests in the issuing partnership that may be issued or transferred pursuant to the option, made pursuant to abona fide, reasonable adjust- ment formula that has the intended effect of preventing dilution of the interests of the option holder; and (4) any other event as provided in guidance published in the Internal Revenue Bulletin. The Treasury Department and the IRS believe that these limitations will minimize the burden on taxpayers that could arise from frequent testings under the characterization rule in many situations, while preserving the ability of the IRS to enforce the character- ization rule in appropriate circumstances. Some commenters also requested that the regulations clarify whether the is- suance, transfer, or modification of one noncompensatory option would trigger testing under the characterization rule of all other outstanding noncompensatory options issued by the same partnership. Under the final regulations, testing under the characterization rule occurs only on the date a measurement event occurs with respect to a particular noncompensatory option. Measurement events should be determined individually for each noncom- pensatory option issued by a partnership. For example, the modification of one non- compensatory option generally would be a measurement event for that particular option, and it would not be a measurement event for all other noncompensatory op- tions issued by the partnership. In addition, to address transfers of interests in the issuing partnership and situations involving look-through entities, proposed regulations under section 761 (REG–106918–08) are being published concurrently with these final regulations. Those proposed regulations would add three measurement events to the list above, but apply only if those measurement events are pursuant to a plan in existence at the time of the issuance or modification of the noncompensatory option that has as a principal purpose the substantial reduc- tion of the present value of the aggregate Federal tax liabilities of the partners and the noncompensatory option holder. The proposed measurement events are: (1) issuance, transfer, or modification of an interest in, or liquidation of, the issuing partnership; (2) issuance, transfer, or mod- ification of an interest in any look-through entity that directly, or indirectly through one or more look-through entities, owns the noncompensatory option; and (3) is- suance, transfer, or modification of an interest in any look-through entity that directly, or indirectly through one or more look-through entities, owns an interest in the issuing partnership. The Treasury De- partment and the IRS believe that the first of these proposed measurement events is necessary because it is inconsistent to test a noncompensatory option under the characterization rule upon transfer of the noncompensatory option, but not upon transfer of an interest in the issuing part- nership, because either type of transfer may change the analysis of whether there is a strong likelihood that the failure to treat the option holder as a partner would result in a substantial reduction in the present value of the partners’ and option holder’s aggregate tax liabilities. The Treasury Department and the IRS believe that the second and third proposed mea- surement events are necessary to prevent avoidance of the characterization rule through 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 option as a partnership interest under the regu- lations. For example, some commenters questioned whether an option that was characterized as a partnership interest upon transfer would be treated as trans- ferred and then exercised by the transferee or exercised by the transferor and then transferred. The Treasury Department and the IRS believe that the tax conse- quences to the transferor and transferee upon a transfer of the option should be similar to the tax consequences upon a transfer of the underlying partnership in- terest. Accordingly, the final regulations provide that characterization of an option as a partnership interest under the regu- lations applies upon the issuance of the option, or immediately before any other 2013–13 I.R.B.686March 25, 2013 measurement event that gave rise to the characterization. Under this approach, if the characterization rule applied upon a transfer of a noncompensatory option, a section 743 adjustment for the benefit of the transferee would be made if the issuing partnership had a section 754 election in effect. E.Effect of characterization Some commenters questioned whether, once a noncompensatory option was char- acterized as a partnership interest under the characterization rule,the characterization rule could ever operate to re-characterize the interest as a noncompensatory option once again. The Treasury Department and the IRS believe that the characterization rule 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 tax principles Finally, some commenters questioned whether general tax principles would con- tinue to apply to the characterization of a noncompensatory option that, in sub- stance, represents a current partnership in- terest. Because these rules in the final reg- ulations are intended to supplement rather than supplant general tax principles, the Treasury Department and the IRS believe it is appropriate for general tax principles to continue to apply, in addition to the char- acterization rule of the regulations. Thus, the final regulations clarify that an option that is not treated as a partnership interest under the regulations may still be treated as a partnership interestunder general princi- ples of law. For example, if upon the is- suance of a noncompensatory option, the option 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 tax liabilities of the option holder and part- ners would be substantially reduced by the failure to treat the option holder as a part- ner. For this purpose, general tax princi- ples include principles of tax law derived from the Internal Revenue Code, Treasury Regulations, case law, and administrative guidance issued by the IRS. 4.Convertible Bond Provision Section 171(b)(1) provides that the amount of bond premium on a convertible bond does not include any amount attrib- utable to the conversion features of the bond. A holder of partnership convertible debt who purchases the debt at a premium would generally be subject to the section 171 bond premium amortization rules. One commenter suggested that the regula- tions under §1.171–1(e)(1)(iii) be clarified to state that such regulations apply to debt that is convertible into an interest in the partnership issuing the debt. The final regulations adopt this comment. 5.Original Issue Discount Provisions The original issue discount (OID) pro- visions provide special rules for debt instruments convertible into the stock of 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 special rules to debt instruments convertible into partnership interests. These final regula- tions adopt these proposed amendments. Accordingly, the final regulations amend the OID provisions to treat partnership interests as stock for purposes of the spe- cial rules for convertible debt instruments. Treating convertible debt issued by part- nerships and corporations differently for purposes of these special rules could cre- ate unjustified distinctions between the taxation of instruments that are economi- cally equivalent. Effective/Applicability Date These final regulations apply to non- compensatory options that are issued on or after 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 Order 12866, 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. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information requirement on small entities, the Regulatory Flexibility Act (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 the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses, and no comments were received. Drafting Information The principal author of these reg- ulations is Benjamin Weaver of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development. ***** Adoption of the Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 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)***Forbondsissuedonorafter February 5, 2013, the termstockin the pre- ceding sentence means an equity interest in any entity that is classified, for Federal tax purposes, 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 numerical order for paragraphs (b)(2)(iv)(d)(4), March 25, 20136872013–13 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 added at the end of the paragraph. 3. Paragraph (b)(2)(iv)(d)(4)isadded. 4. Paragraph (b)(2)(iv)(f)(1) is revised. 5. Paragraph (b)(2)(iv)(f)(5)(iii)is amended by removing the “.” at the end of the paragraph and adding in its place “, or”. 6. Paragraph (b)(2)(iv)(f)(5)(iv)isre- designated as paragraph (b)(2)(iv)(f)(5)(v). 7. New paragraph (b)(2)(iv)(f)(5)(iv)is added. 8. Paragraph (b)(2)(iv)(h) is redes- ignated as (b)(2)(iv)(h)(1)andanew paragraph heading is added for paragraph (b)(2)(iv)(h)(1). 9. Paragraph (b)(2)(iv)(h)(2)isadded. 10. The undesignated text following paragraph (b)(2)(iv)(r)(2) is designated as paragraph (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 by addingExamples 31through35. The additions and revisions read as fol- lows: §1.704–1 Partner’s distributive share. ***** (b)***(0)*** HeadingSection ***** Exerciseofnoncompensatoryoptions............................. 1.704–1(b)(2)(iv)(d)(4) ***** Ingeneral ..................................................... 1.704–1(b)(2)(iv)(h)(1) Adjustmentsfornoncompensatoryoptions......................... 1.704–1(b)(2)(iv)(h)(2) ***** Adjustmentsontheexerciseofanoncompensatoryoption........... 1.704–1(b)(2)(iv)(s) ***** Allocationswithrespecttononcompensatoryoptions............... 1.704–1(b)(4)(ix) Correctiveallocations........................................... 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), andExamples 31through35in 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 fair market value of the property contributed on the exercise of a noncompensatory op- tion (as defined in §1.721–2(f)) does not include the fair market value of the option privilege, but does include the consider- ationpaidtothepartnershiptoacquire the option and the fair market value of any property (other than the option) con- tributed to the partnership on the exercise of the option. With respect to convertible debt, the fair market value of the property contributed on the exercise of the option is the adjusted issue price of the debt and the accrued but unpaid qualified stated in- terest (as defined in §1.1273–1(c)) on the debt immediately before the conversion, plus the fair market value of any property (other than the convertible debt) con- tributed to the partnership on the exercise of the option. SeeExamples 31through 35of 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) on the date of adjustment, as determined un- der paragraph (b)(2)(iv)(h) of this section. SeeExample 33of paragraph (b)(5) of this section. ***** (5)*** (iv)Inconnectionwiththeissuanceby the partnership of a noncompensatory op- tion (other than an option for ade minimis partnership 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 for any outstanding noncompensatory options (as defined in §1.721–2(f)) at the time of a revaluation of partnership property un- der paragraph (b)(2)(iv)(f)or(s)ofthis section. If the fair market value of out- standing noncompensatory options (as de- fined in §1.721–2(f)) as of the date of the adjustment exceeds the consideration paid to the partnership to acquire the options, then the value of partnership property as reflected on the booksof the partnership must be reduced by that excess to the ex- tent of the unrealized income or gain in partnership 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 consideration paid 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 date of the adjustment, then the value of part- nership property as reflected on the books of the partnership must be increased by that excess to the extent of the unrealized loss in partnership property (that has not been reflected in the capital accounts pre- 2013–13 I.R.B.688March 25, 2013 viously). This increase is allocated only to properties 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 economic arrangement of the partners with respect to the property. ***** (s)Adjustments on the exercise of a noncompensatory option. A partnership agreement may grant a partner, on the ex- ercise of a noncompensatory option (as de- fined in §1.721–2(f)), a right to share in partnership capital that exceeds (or is less than)thesumoftheconsideration paid to the partnership to acquire and exercise such option. Where such an agreement exists, capital accounts will not be con- sidered to be determined and maintained in accordance with the rules of this para- graph (b)(2)(iv) unless the following re- quirements are met: (1) In lieu of revaluing partnership property under paragraph (b)(2)(iv)(f) of this section immediately before the exercise of the option, the partnership revalues partnership property in accor- dance with the provisions of paragraphs (b)(2)(iv)(f)(1) through (f)(4)ofthissec- tion immediately after the exercise of the option. (2) In determining the capital accounts of the partners (including the exercising partner) under paragraph (b)(2)(iv)(s)(1) of this section, the partnership first al- locates any unrealized income, gain, or loss in partnership property (that has not been reflected in the capital accounts pre- viously) to the exercising partner to the extent necessary to reflect that partner’s right to share in partnership capital under the partnership agreement, and then allo- cates any remaining unrealized income, gain, or loss (that has not been reflected in the capital accounts previously) to the existing partners, to reflect the manner in which the unrealized income, gain, or loss in partnership property would be allo- cated among those partners if there were a taxable disposition of such property for its fair market value on that date. For purposes of the preceding sentence, if the exercising partner’s initial capital account as determined under §1.704–1(b)(2)(iv)(b) and (d)(4) of this section would be less than 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 allocated to the exercising partner from partnership properties with unrealized appreciation, in proportion to their respective amounts of unrealized appreciation. If the exer- cising partner’s initial capital account, as determined under §1.704–1(b)(2)(iv)(b) and (d)(4) of this section, would be greater than the amount that reflects the exercis- ing partner’s right to share in partnership capital under the partnership agreement, then only loss may be allocated to the exercising partner from partnership prop- erties with unrealized loss, in proportion to their respective amounts of unrealized loss. However, any allocation must take into account the economic arrangement of the partners with respect to the property. (3) If, after making the allocations de- scribed in paragraph (b)(2)(iv)(s)(2)ofthis section, the exercising partner’s capital ac- count does not reflect that partner’s right to share in partnership capital under the part- nership agreement, then the partnership re- allocates partnership capital between the existing partners and the exercising part- ner so that the exercising partner’s capi- tal account reflects the exercising partner’s right to share in partnership capital under the partnership agreement (a capital ac- count reallocation). Any increase or de- crease in the capital accounts of existing partners that occurs as a result of a capital account reallocation under this paragraph (b)(2)(iv)(s)(3) must be allocated among the existing partners in accordance with the principles of this section. SeeExam- ple 32of paragraph (b)(5) of this section. (4) The partnership agreement requires corrective allocations so as to take into account all capital account reallocations made under paragraph (b)(2)(iv)(s)(3)of this section (see paragraph (b)(4)(x) of this section). SeeExample 32 of paragraph (b)(5) of this section. ***** (4) * * * (ix)Allocations with respect to non- compensatory options—(a)In general.A partnership agreement may grant to a part- ner that exercises a noncompensatory op- tion (as defined in §1.721–2(f)) a right to share in partnership capital that exceeds (or is less than) the sum of the amounts paid to the partnership to acquire and exer- cise the option. In such a case, allocations of income, gain, loss, and deduction to the partners while the noncompensatory op- tion is outstanding cannot have economic effect 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 while the noncompensatory option is outstand- ing will be deemed to be in accordance with the partners’ interests in the partner- ship only if— (1) The holder of the noncompensatory option is not treated as a partner under §1.761–3; (2) The partnership agreement requires that, while a noncompensatory option is outstanding, the partnership comply with the rules of paragraph (b)(2)(iv)(f) of this section and that, on the exercise of the noncompensatory option, the partner- ship comply with the rules of paragraph (b)(2)(iv)(s) of this section; and (3) All material allocations and capital account adjustments under the partnership agreement would be respected under sec- tion 704(b) if there were no outstanding noncompensatory options issued by the partnership. SeeExamples 31through35 of paragraph (b)(5) of this section. (b)Substantial economic effect under sections 168(h) and 514(c)(9)(E)(i)(ll). An allocation of partnership income, gain, loss, or deduction to the partners will be deemed to have substantial economic ef- fect for purposes of sections 168(h) and 514(c)(9)(E)(i)(ll) if— (1) The allocation would meet the sub- stantial economic effect requirements of paragraph (b)(2) of this section if there were 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)ofthissection. (x)Corrective allocations—(a)—In general. If partnership capital is real- located between existing partners and a partner exercising a noncompensatory op- tion under paragraph (b)(2)(iv)(s)(3)of this section (a capital account realloca- tion), then the partnership must, beginning with the taxable year of the exercise and in all succeeding taxable years until the required allocations are fully taken into March 25, 20136892013–13 I.R.B. account, make corrective allocations so as to take into account the capital account reallocation. A corrective allocation is an allocation (consisting of apro rataportion of each item) for tax purposes of gross income and gain, or gross loss and de- duction, that differs from the partnership’s allocation of the corresponding book item. SeeExample 32of paragraph (b)(5) of this section. (b)Timing. Section 706 and the reg- ulations and principles thereunder apply in determining the items of income, gain, loss, and deduction that may be subject to corrective allocation. (c)Allocation of gross income and gain and gross loss and deduction. If the capi- tal account reallocation is from the historic partners to the exercising option holder, then the corrective allocations must first be made with gross income and gain. If an allocation of gross income and gain alone does not completely take into account the capital account reallocation in a given year, then the partnership must also make cor- rective allocations using apro ratapor- tion of items of gross loss and deduction as to 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 must first be made with gross loss and deduc- tion. If an allocation of gross loss and deduction alone does not completely take into account the capital account realloca- tion in a given year, then the partnership must also make corrective allocations us- ing apro rataportion 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- tributecashof$9,000toLLC,anewlyformed limited liability company classified as a partnership for Federal tax purposes,in exchange for 100 units in LLC. Under the LLC agreement, each unit is entitled to participate equally in the profits and losses of LLC. LLC uses the cash contributions to purchase a nondepreciable property, Property A, for $18,000. Later in Year 1, at a time when Property A is valued at $20,000, LLC issues an option to C. The option allows C to buy 100 units in LLC for an exercise price of $15,000 in Year 2. C pays $1,000 to LLC to 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 of a noncompensatory option, LLC comply with the rules of paragraph (b)(2)(iv)(s) of this section. Also assume that C’s option is a noncompensatory option under §1.721–2(f), and that C is not treated as a partner with respect to the option. Under paragraph (b)(2)(iv)(f)(5)(iv) of this section, LLC revalues its property in connection with the issuance of the op- tion. The $2,000 unrealized gain in Property A is allocated equally to A and B under the LLC agree- ment. In Year 2, C exercises the option, contributing the $15,000 exercise price to the partnership. At the time the option is exercised, the value of Property A is $35,000. Year 1 After Issuance of the Option AssetsLiabilities and Capital B asisValueBasisValue CashCash Premium $1,000$1,000 Premium $1,000$1,000 Property A $ 18,000$20,000 A $9,000$10,000 B $ 9,000$10,000 Total $19,000$21,000$19,000$21,000 Year 2 After Exercise of the Option AssetsLiabilities and Capital B asisValue BasisValue Property A $18,000$35,000 A $9,000$17,000 CashB $9,000$17,000 Premium $1,000$1,000 C $ 16,000$17,000 Exercise Price $ 15,000$15,000 Total $34,000$51,000$34,000$51,000 ( ii) In lieu of revaluing LLC’s property under paragraph (b)(2)(iv)(f) of this section immediately before the option is exercised, under paragraph (b)(2)(iv)(s)(1) of this section LLC must revalue its 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 capital account is credited with the amount paid for the option ($1,000) and the exercise price of the option ($15,000). Under the LLC agreement, however, C is entitled to LLC capital corresponding to 100 units of LLC (1/3 of LLC’s capital). Immediately after the exercise of the option, LLC’s properties are cash of $ 16,000 ($1,000 premium and $15,000 exercise price contributed by C) and Property A, which has a value of $35,000. Thus, the total value of LLC’s property is $51,000. C is entitled to LLC capital equal to 1/3 of this value, or $17,000. As C is entitled to $1,000 more LLC capital than C’s capital contributions to LLC, the provisions of paragraph (b)(2)(iv)(s)ofthis section apply. (iii) Under paragraph (b)(2)(iv)(s)(2)ofthissec- 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 in LLC’s property (Property A) which has not been re- f lected in the capital accounts previously is $15,000 ($35,000 value less $20,000 book value). Under paragraph (b)(2)(iv)(s)(2) of this section, the first $1,000 of this gain must be allocated to C, and the remaining $14,000 of this gain is allocated equally to 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’s capital account to the amount agreed on by the mem- bers, LLC is not required to make a capital account reallocation under paragraph (b)(2)(iv)(s)(3)ofthis section. The $17,000 of unrealized booked gain in Property A ($35,000 value less $18,000 basis) is shared $8,000 to each A and B, and $1,000 to C. Un- 2013–13 I.R.B.690March 25, 2013 der paragraph (b)(2)(iv)(f)(4) of this section, the tax items from the revalued property must be allocated in accordance with section 704(c) principles. ABC TaxBookTaxBookTaxBook Capital account after exercise . $9,000$10,000$9,000$10,000$16,000$16,000 Revaluationamount .........0 $7,000 0 $7,000 0 $1,000 Capital account after revaluation ................. $9,000$17,000$9,000$17,000$16,000$17,000 Example 32. (i) Assume the same facts as inEx- ample 31, except that, in Year 2, before the exercise of the option, LLC sells Property A for $40,000, rec- ognizing gain of $22,000. LLC does not distribute the 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, at the 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 AssetsLiabilities and Capital B asisValueBasisValue CashCash Premium $1,000$1,000 Premium $1,000$1,000 Property B $ 40,000$40,000 A $20,000$20,000 B $ 20,000$20,000 Total $41,000$41,000$41,000$41,000 Year 3 After Exercise of the Option AssetsLiabilities and Capital BasisValueBasisValue Property B $40,000$41,000 A $20,000$19,000 B $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 is credited with the amount paid for the option ($1,000) and the exercise price of the option ($15,000). Under the LLC agreement, however, C is entitled to LLC capital corresponding to 100 units of LLC (1/3 of LLC’s capital). Immediately after the exercise of the option, LLC’s properties are $16,000 cash ($1,000 option 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 of this amount, or $19,000. As C is entitled to $3,000 more LLC capital than C’s capital contributions to LLC, the provisions of paragraph (b)(2)(iv)(s)ofthis section apply. (iii) In lieu of revaluing LLC’s property under paragraph (b)(2)(iv)(f) of this section immediately before the option is exercised, under paragraph (b)(2)(iv)(s)(1) of this section LLC must revalue its property under the principles of paragraph (b)(2)(iv)(f) of this section immediately after the exercise 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, revaluing LLC property in accordancewith the principles of paragraph (b)(2)(iv)(f) of this section, and allocating all $1,000 of unrealized gain from the revaluation to C under paragraph (b)(2)(iv)(s)(2). This brings C’s capital account to $17,000. (iv) Next, under paragraph (b)(2)(iv)(s)(3)ofthis section, LLC must reallocate $2,000 of capital from the 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 from Property A, whose sale gave rise to the need for the capital 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)ofthissec- tion, beginning in the year in which the option is exercised, LLC must make corrective allocations so 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 for tax purposes, however, LLC must allocate all of its gross income ($3,000) to C. LLC’s book and tax deductions ($1,500) will then be allocated equally among A, B, and C. The $1,000 unrealized booked gain in Property B has been allocated entirely to C. Under paragraph (b)(2)(iv)(f)(4) of this section, the tax items from Property B must be allocated in accordance with section 704(c) principles. March 25, 20136912013–13 I.R.B. ABC TaxBookTaxBookTaxBook Capital account after exercise . . . $20,000$20,000$20,000$20,000$16,000$16,000 Revaluation...................00000 $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 capital accountreallocation ........... $20,000$19,000$20,000$19,000$16,000$19,000 Incomeallocation(Yr.3) .......0 $1,000 0 $1,000$3,000$1,000 Deductionallocation(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 for Federal tax purposes, in exchange for 100 units in LLC. Under the LLC agreement, each unit is entitled to 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, LLCissuesanoptiontoF.TheoptionallowsFtobuy 100 units in LLC for an exercise price of $15,000 in Year 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 requires that, 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 is not treated as a partner with respect to the option. End of Year 1 AssetsLiabilities and Capital B asisValueBasisValue CashCash Premium $2,000$2,000 Premium $2,000$2,000 Property A $10,000$10,000 DDD Property 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, G contributes $18,000 to LLC for 100 units in LLC. At the time of G’s contribution, Property A has a value of $32,000 and a basis of $10,000, Property B has a value of $5,000 and a basis of $10,000, and the fair market value of F’s option is $3,000. In year 2, LLC has no item of income, gain, loss, deduction, or credit. (iii) Upon G’s admission to the partnership, the capital accounts of D and E (which were $10,000 each prior to G’s admission) are, in accordance with para- graph (b)(2)(iv)(f) of this section, adjusted upward to reflect their shares of the unrealized appreciation in the partnership’s property. Property A has $22,000 of unrealized gain and Property B has $5,000 of un- realized loss. Under paragraph (b)(2)(iv)(f)(1)ofthis section, the adjustments must be based on the fair market 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)ofthissection. The fair market value of partnership property must be reduced by the excess of the fair market value of the option as of the date of the adjustment over the consideration 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 been reflected in the capital accounts previously ($22,000). This $1,000 reduction is allocated entirely to Property A, the only asset having unrealized appreciation not reflected in the capital accounts previously. There- fore, the book value of Property A is $31,000. Ac- cordingly, the revaluationadjustments must reflect only $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’s and E’s capital accounts (which were $10,000 each prior to G’s admission) must be adjusted upward (by $8,000) to $18,000 each. The $21,000 of built-in gain in Property A and the $5,000 of built-in loss in Prop- erty B must be allocated equally between D and E in accordance with section 704(c) principles. 2013–13 I.R.B.692March 25, 2013 Assets BasisValueOptionAdjustment704(b)Book Property A $10,000$32,000($1,000)$31,000 Property B $10,000$5,000 0 $5,000 Cash $ 2,000$2,000 0 $2,000 Subtotal $22,000$39,000($1,000)$38,000 Cash Contributed by G $18,000$18,000 0 $18,000 Total $40,000$57,000($1,000)$56,000 Liabilities and Capital T axValue704(b)Book Cash Premium (option value) $2,000$3,000$2,000 D $10,000$18,000$18,000 E $10,000$18,000$18,000 G $ 18,000$18,000$18,000 Total $40,000$57,000$56,000 (iv) In Year 2, after the admission of G, when Property A still has a value of $32,000 and a basis of $10,000 and Property B still has a value of $5,000 and a basis of $10,000, F exercises the option. On the exercise of the option, F’s capital account is cred- ited with the amount paid for the option ($2,000) and the exercise price of the option ($15,000). Under the LLC agreement, however, F is entitled to LLC capi- tal corresponding to 100 units of LLC (1/4 of LLC’s capital). 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 prior to the exercise of the option, $57,000). F is entitled to LLC capital equal to 1/4 of this value, or $18,000. As F is entitled to $1,000 more LLC capital than F’s capital contributions to LLC, the provisions of para- graph (b)(2)(iv)(s)ofthissectionapply. (v) Under paragraph (b)(2)(iv)(s)ofthissection, LLC must increase F’s capital account from $17,000 to $18,000 by, first, revaluing LLC property in accor- dance with the principles of paragraph (b)(2)(iv)(f)of this section and allocating the first $1,000 of unreal- ized gain to F. The total unrealized gain which has not been reflected in the capital accounts previously is $1,000 (the difference between the actual value of Property A, $32,000, and the book value of Property A, $31,000). The entire $1,000 of book gain is al- located to F under paragraph (b)(2)(iv)(s)(2)ofthis section. Because the revaluation of LLC property un- der paragraph (b)(2)(iv)(s)(2) of this section increases F’s capital account to the amount agreed on by the members, LLC is not required to make a capital ac- count reallocation under paragraph (b)(2)(iv)(s)(3)of this section. The ($5,000) of unrealized booked loss in Property B has been allocated ($2,500) to each D and E, and the $22,000 of unrealized booked gain in Property A has been allocated $10,500 to each D and E, and $1,000 to F. Under paragraph (b)(2)(iv)(f)(4) of this section, the tax items from Properties A and B must be allocated in accordance with section 704(c) principles. DEGF TaxBookTaxBookTaxBookTaxBook Capital account after admissionofG......... $10,000 $18,000$10,000 $18,000$18,000 $18,000 00 Capital account after exercise of F’s option . . . $10,000 $18,000$10,000 $18,000$18,000 $18,000$17,000 $17,000 Revaluation............0000000 $1,000 Capital account after revaluation ............ $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 and I each contribute $10,000 cash to LLC for 100 units of common interest in LLC. J contributes $10,000 cash for a convertible preferred interest in LLC. J’s con- vertible preferred interest entitles J to receive an an- nual allocation and distribution of cumulative LLC net profits in an amount equal to 10 percent of J’s unreturned capital. J’s convertible preferred interest also 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 J would have had if J had held the 100 units of com- mon interest since the formation of LLC. Under the LLC agreement, each unit of common interest has an equal right to share in any LLC net profits that re- main after payment of the preferred return. Assume that the LLC agreement satisfies the requirements of paragraph (b)(2) of this section and requires that, on the exercise of a noncompensatory option, LLC com- March 25, 20136932013–13 I.R.B. ply with the rules of paragraph (b)(2)(iv)(s)ofthis section. Also assume that J’s right to convert the pre- ferred interest into a common interest qualifies as a noncompensatory 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 basis over 15 years. In each of Years 1 and 2, LLC has net income of $2,500, comprised of $4,500 of gross in- come and $2,000 of depreciation. It allocates $1,000 of 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 no distributions to H and I. HI J TaxBookTaxBookTaxBook Capital account upon formation....... $10,000$10,000$10,000$10,000$10,000$10,000 AllocationofincomeYears1and2.... $1,500$1,500$1,500$1,500$2,000$2,000 DistributionsYears1and2............ 0000($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 Property Z 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 cash of $7,000 ($9,000 gross receipts less $2,000 dis- tributio ns), J converts J’s preferred interest into a common interest. Under paragraphs (b)(2)(iv)(b)and (b)(2)(iv)(d)(4) of this section, J’s capital account after the conversion equals J’s capital account before the conve rsion, $10,000. On the conversion of the preferred interest, however, J is entitled to LLC capi- tal corresponding to 100 units of common interest in LLC (1/3 o f 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 LLC capital t han J’s capital account immediately after the conversion, the provisions of paragraph (b)(2)(iv)(s) of this section apply. AssetsLiabilities and Capital B asisValueBasisValue Property Z $26,000$38,000 H $11,500$15,000 UndistributedI $11,500$15,000 Income $ 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 $10,000 to $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 value less $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 $7,000 of the unrealized gain must be allocated equally to H and 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)ofthissection. The $12,000 of unrealized booked gain in Property Z has been allocated $3,500 to each H and I, and $5,000 to J. Under paragraph (b)(2)(iv)(f)(4)ofthissection, the tax items from the revalued property must be al- located in accordance with section 704(c) principles. HI J TaxBookTaxBookTaxBook Capital account prior to conversion.................... $11,500$11,500$11,500$11,500$10,000$10,000 Revaluationonconversion......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 and L each contribute cash of $10,000 to LLC, a newly formed limited liability company classified as a part- nership for Federal tax purposes, in exchange for 100 units in LLC. Immediately after its formation, LLC borrows $10,000 from M. Under the terms of the debt instrument, interest of $1,000 is uncondition- ally payable at the end of each year and the $10,000 stated principal is repayable in five years. Through- out the term of the indebtedness, M has the right to convert the debt instrument into 100 units in LLC. If M converts, M has the right to the same share of LLC capital as M would have had if M had held 100 units in LLC since the formation of LLC. Under the LLC agreement, each unit participates equally in the profits and losses of LLC and has an equal right to share 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 a noncompensatory option, LLC comply with the rules of paragraph (b)(2)(iv)(s)ofthissection. Alsoas- 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 respect to the convertible debt. (ii) LLC uses the $30,000 to purchase Property D, property that is depreciable on a straight-line basis over 15 years. In each of Years 1, 2, and 3, LLC has net income of $2,000, comprised of $5,000 of gross income, $2,000 of depreciation, and interest expense (representing payments of interest on the loan from 2013–13 I.R.B.694March 25, 2013 M) of $1,000. LLC allocates this income equally to K and L but makes no distributions to either K or L. KLM TaxBookTaxBookTaxBook Initialcapitalaccount.......... $10,000$10,000$10,000$10,000 00 Year1netincome............. $1,000$1,000$1,000$1,000 00 Year2netincome............. $1,000$1,000$1,000$1,000 00 Year3netincome............. $1,000$1,000$1,000$1,000 00 Year 4 initial capital account.... $13,000$13,000$13,000$13,000 00 (iii) At the beginning of Year 4, at a time when Property D, LLC’s only asset, has a value of $33,000 and basis of $24,000 ($30,000 original basis less $6,000 depreciation in Years 1 through 3), and LLC 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 account after the conversion is the adjusted issue price of the debt immediately before M’s conversion of the debt, $10,000, plus any accrued but unpaid qualified stated interest on the debt, $0. On the conversion of the debt, however, M is entitled to receive LLC capital corresponding to 100 units of LLC (1/3 of LLC’s capital). At the time of the conversion, the total value of LLC’s property is $45,000. M is entitled to LLC capital equal to 1/3 of this value, or $15,000. As M is entitled to $5,000 more LLC capital than M’s capital contribution to LLC ($10,000), the provisions of paragraph (b)(2)(iv)(s) of this section apply. AssetsLiabilities and Capital BasisValueBasisValue Property D $24,000$33,000 K $13,000$15,000 Cash $ 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 to M. 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 under paragraph (b)(2)(iv)(s)(2) of this section, and the remaining $4,000 of the unrealized gain must be allocated equally to K and L in accordance with the LLC agreement. Because the revaluation of LLC property under paragraph (b)(2)(iv)(s)(2)ofthis section increases M’s capital account to the amount agreed 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 unrealized booked gain in property D has been allocated $2,000 to each K and L, and $5,000 to M. Under paragraph (b)(2)(iv)(f)(4) of this section, the tax items from the revalued property must beallocated in accordance with section 704(c) principles. KLM TaxBookTaxBookTaxBook Year 4 capital account prior to exercise...................... $13,000$13,000$13,000$13,000 00 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 amended by 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 a partnership revalues partnership prop- erty pursuant to §1.704–1(b)(2)(iv)(f) or 1.704–1(b)(2)(iv)(s) (reverse section 704(c) allocations). * * * ***** Par. 5. Section 1.721–2 is added to read as 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 the exercise (as defined in paragraph (g)(4) March 25, 20136952013–13 I.R.B. of this section) of a noncompensatory op- tion (as defined in paragraph (f) of this section). Except as provided in paragraph (a)(2) of this section, section 721 applies to the exercise of a noncompensatory option when the holder pays the exercise price with either property or cash, regardless of whether the terms of the option require or permit 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 received by the option holder on the exercise of the option, then general tax principles will apply to determine the tax consequences of the transaction. (2)Exception. Section 721 does not ap- ply to the exercise of a noncompensatory option to the extent that the exercise price is satisfied with the partnership’s obliga- tion to the option holder for unpaid rent, royalties, or interest (including accrued original issue discount) that accrued on or after the beginning of the option holder’s holding period for the obligation. The issuing partnership will not recognize gain or loss upon the transfer of a partnership interest to an exercising option holder in satisfaction of such unpaid rent, royalties, or interest (including accrued original is- sue discount). (b)Transfer of property or satisfaction of an obligation in exchange for a non- compensatory option—(1)In general.Ex- cept as provided in paragraph (b)(2) of this section, section 721 does not apply to a transfer of property toa partnership in ex- change for a noncompensatory option, or to the satisfaction of a partnership obliga- tion with a noncompensatory option. (2)Exception. Section 721 does apply to a transfer of property to a partnership in 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 of a noncompensatory option. (d)Cash settlement of a noncompen- satory option. Section 721 does not apply to 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 in satisfaction of indebtedness for interest on convertible debt. Section 721 does not ap- ply to the transfer of a partnership interest to a noncompensatory option holder upon conversion of convertible debt in the part- nership to the extent that the transfer is in satisfaction of the partnership’s indebted- ness for unpaid interest (including accrued original issue discount) on the convertible debt that accrued on or after the beginning of the convertible debt holder’s holding pe- riod for the indebtedness. The debtor part- nership will not, however, recognize gain or loss upon such conversion. For rules in determining whether a partnership interest transferred to a creditor is treated as pay- ment of interest or accrued original issue discount, see §§1.446–2 and 1.1275–2, re- spectively. (f)Scope. The provisions of this section apply only to noncompensatory options. For purposes of this section, the termnon- compensatory optionmeans an option (as defined in paragraph (g)(1) of this section) issued by a partnership (the issuing part- nership), other than an option issued in connection with the performance of ser- vices. (g)Definitions. The following defini- tions apply for the purposes of this section: (1)Optionmeans a contractual right to 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 convertible equity (as defined in paragraph (g)(3) of this section). To achieve the purposes of this section, the Commissioner can treat other contractual agreements, including a futures contract, a forward contract, or a notional principal contract, as an option. A contract that otherwise constitutes an op- tion will not fail to be treated as an option for purposes of this section merely because it may or must be settled in cash or prop- erty other than a partnership interest. (2)Convertible debtis any indebted- ness of a partnership that is convertible into an interest in the partnership that is- sued the debt. (3)Convertible equityis equity in a partnership that is convertible into a dif- ferent equity interest in the partnership that issued the convertible equity. (4)Exercisemeans the exercise of an option in exchange for an interest in the issuing partnership or the conversion of convertible debt or convertible equity into an interest in the issuing partnership. (5)Exercise pricemeans, in the case of 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 of cash or other property contributed to the partnership 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 butunpaid qualified stated interest on the debt and by the fair market value of cash or other property con- tributed to the partnership in connection with the conversion. (h)Example. The following example illustrates the provisions of this section: Example. In Year 1, L and M form general partnership LM with cash contributions of $5,000 each, which are used to purchase land, Property D, for $10,000. In that same year, LM issues an option to N to buy a one-third interest in LM at any time before the end of Year 3. The exercise price of the option is $5,000, payable in either cash or property. N transfers Property E with a basis of $600 and a value of $1,000 to the partnership in exchange for the option. N provides no other consideration for the option. Assume that N’s option is a noncompen- satory option under paragraph (f) of this section and that N is not treated as a partner with respect to the option. Under paragraph (b) of this section, section 721(a) does not apply to N’s transfer of Property E to LM in exchange for the option. In accordance with §1.1001–1, upon N’s transfer of Property E to the partnership in exchange for the option, N recognizes $400 of gain. Under open transaction principles ap- plicable to noncompensatory options, the partnership does not recognize any income for the premium (the property received in exchange for the option). The partnership has a basis of $1,000 in Property E. In Year 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 value of $5,000 to the partnership. Under paragraph (a) of this section, neither the partnership nor N recognizes gain upon N’s contribution of property to the partner- ship upon the exercise of the option. Under section 723, the partnership has a basis of $3,000 in Property F. The partnership does not recognize income for the premium (Property E) upon exercise of the option. See §1.704–1(b)(2)(iv)(d)(4)and(s) for special rules applicable to capital account adjustments on the exercise of a noncompensatory option. (i)Effective/applicability date.This section applies to noncompensatory op- tions that are issued on or after February 5, 2013. Par. 6. Section 1.761–3 is added to read as follows: §1.761–3 Certain option holders treated as partners. (a)Noncompensatory option treated as a partnership interest—(1)General rule. 2013–13 I.R.B.696March 25, 2013 A noncompensatory option (as defined in paragraph (b)(2) of this section) is treated as a partnership interest for all Federal tax purposes if, on the date of a measurement event (as defined in paragraph (c) of this section) with respect to the option— (i) The noncompensatory option (and any agreements associated with it) pro- vides the option holder with rights that are substantially similar to the rights afforded a partner (as determined under paragraph (d) of this section); and (ii) There is a strong likelihood that the failure to treat the holder of the noncom- pensatory option as a partner would result in a substantial reduction in the present value of the partners’ and noncompen- satory option holder’s aggregate Federal tax liabilities (as determined under para- graph (e) of this section). (2)Continuing applicability of general principles of law. The fact that an option is not treated as a partnership interest under this section does not prevent the option from being treated as a partnership interest under general principles of Federal tax law. (3)Timing of characterization.Ifa noncompensatory option is treated under this section as a partnership interest, that treatment applies, as the case may be, upon the issuance of the option, or immediately before any other measurement event that gave rise to the characterization under paragraph (a)(1) of this section. (4)Effect of characterization.Ifa noncompensatory option is treated as a partnership interest under this section or under general principles of law, the option holder will be treated as a partner with respect to the partnership interest and will receive a distributive share of the partner- ship’s income, gain, loss, deduction, or credit (or items thereof), as determined in accordance with that partner’s interest in the partnership (taking into account all facts and circumstances) in accordance with §1.704–1(b)(3). Once a noncompen- satory option is treated as a partnership interest,innoeventmayitbecharacter- ized as an option thereafter. (b)Definitions. For purposes of this section: (1)Look-through entity.Look-through entitymeans an entity described in §1.704–1(b)(2)(iii)(d)(2). (2)Noncompensatory option.Non- compensatory optionmeans an option (as defined in paragraph (b)(3) of this sec- tion) issued by a partnership, other than anoptionissuedinconnectionwiththe performance of services. For purposes of applying this section, an option that would be a noncompensatory option un- der this paragraph if it had been issued by a partnership is a noncompensatory option 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 noncompensatory option holder were treated as a partner. Also for purposes of applying this section, if a noncompensatory option is issued by such an eligible entity, then the eligible entity is treated as a partnership. (3)Option.Anoptionis a contractual right 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 purposes of this section, the Commissioner can treat other contractual agreements, including a forward contract, a futures contract, or a notional principal contract, as an option. A contract that otherwise constitutes an option will not fail to be treated as an option for purposes of this section merely because it may or must be settled in cash or property other than a partnership interest. (4)Underlying partnership interest. Underlying partnership interestmeans the interest in the issuing partnership that would be acquired by the noncompen- satory option holder upon exercise of the noncompensatory option. (c)Measurement event—(1)General rule. Except as provided in paragraph (c)(2) of this section, a measurement event with respect to a noncompensatory option is any of the following events: (i) Issuance of the noncompensatory option; (ii) An adjustment of the terms (modifi- cation) of the noncompensatory option or of the underlying partnership interest (as defined in paragraph (b)(4) of this section) (including an adjustment pursuant to the terms of the noncompensatory option or the underlying partnership interest); (iii) Transfer of the noncompensatory option if either: (A) The option may be exercised (or settled) more than 12 months after its is- suance, or (B) The transfer is pursuant to a plan in existence at the time of the issuance or modification of the noncompensatory op- tion that has as a principal purpose the sub- stantial reduction of the present value of the aggregate Federal tax liabilities of the partners and the noncompensatory option holder (under paragraph (a)(1)(ii) of this section); (2)Events not treated as measurement events. A measurement event does not in- clude the following events: (i) A transfer of the noncompensatory option at death, between spouses or former spouses under section 1041, or in a trans- action that is disregarded for Federal tax purposes; (ii) A modification that neither materi- ally increases the likelihood that the non- compensatory option will be exercised (as described in paragraph (d)(2) of this sec- tion) nor provides the noncompensatory option holder with partner attributes (as described in paragraph (d)(3) of this sec- tion); (iii) A change in the strike price of a noncompensatory option or in the interests in the issuing partnership that may be is- sued or transferred pursuant to the non- compensatory option, made pursuant to a bona fide, reasonable adjustment formula that has the intended effect of preventing dilution of the interests of the noncompen- satory option holder; (iv) Any other event as provided in guidance 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 with rights that are substantially similar to the rights afforded to a partner if either the op- tion is reasonably certain to be exercised or the option holder possesses partner at- tributes. (2)Reasonable certainty of exer- cise —(i)General rule. The determination of whether a noncompensatory option is reasonably certain to be exercised at the time of a measurement event is based on all 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, 20136972013–13 I.R.B. (C) The term of the noncompensatory option; (D) The volatility of the value or in- come of the issuing partnership or the un- derlying partnership interest; (E) Anticipated distributions by the partnership during the term of the non- compensatory option; (F) Any other special option features, such as a strike pricethat fluctuates; (G) The existence of related options, including reciprocal options; and (H) Any other arrangements affecting or undertaken with a principal purpose of affecting the likelihood that the noncom- pensatory option will be exercised. (ii)Safe harbors—(A)General rule. Except as provided in paragraph (d)(2)(ii)(C) of this section, a noncompen- satory option is not considered reasonably certain to be exercised if, as of the date of a measurement event with respect to the noncompensatory option— (1) The option may be exercised no more than 24 months after the date of the measurement event and the strike price is equal to or greater than 110 percent of the fair market value of the underlying part- nership interest on the date of the measure- ment event; or (2) The terms of the option provide that the strike price of the option is equal to or greater than the fair market value of the underlying partnership interest on the exercise date. (B)Options exercisable at fair mar- ket value. For purposes of paragraph (d)(2)(ii)(A) of this section, an option whose strike price is determined by a for- mula is considered to have a strike price equal to or greater than the fair market value of the underlying partnership inter- est on the exercise date if the formula is agreed upon by the parties when the option is issued in abona fideattempt to arrive at the fair market value on the exercise date and is to be applied based on the facts and circumstances in existence on the exercise date. (C)Exception. The safe harbors of paragraph (d)(2)(ii)(A) of this section do not apply if the parties to the noncom- pensatory option had a principal purpose described in paragraph (c)(1)(iii)(B) of this section with respect to a measure- ment event for that option (or, if multiple options were issued pursuant to a plan, a measurement event with respect to any option issued pursuant to that plan). (D)Failure to satisfy safe harbor.Fail- ure of an option to satisfy one of the safe harbors of paragraph (d)(2)(ii)(A) does not affect the determination of whether an op- tion is treated as reasonably certain to be exercised. (3)Partner attributes—(i)General rule. The determination of whether a holder of a noncompensatory option pos- sesses partner attributes is based on all the facts and circumstances, including whether the option holder, directly or indi- rectly, through the option agreement or a related agreement, is provided with voting rights or managerial rights in the partner- ship. (ii)Certain factors that conclusively es- tablish partner attributes. For purposes of this section, a noncompensatory option holder has partner attributes if, based on all the facts and circumstances— (A) The option holder is provided with rights (through the option agreement or a related agreement) that are similar to rights ordinarily afforded to a partner to partici- pate in partnership profits through present possessory 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 the option agreement or a related agreement) that are similar to obligations undertaken by a partner to bear partnership losses. (iii)Special rules. The following rules apply for purposes of paragraphs (d)(3)(i) and (d)(3)(ii) of this section: (A) Rights in the issuing partnership possessed by a noncompensatory option holder solely by virtue of owning an inter- est in the issuing partnership are not taken into account, provided that those rights are no greater than the rights granted to other partners owning substantially similar inter- ests in the partnership and who do not hold noncompensatory options in the partner- ship. (B) If all of the partners owning sub- stantially similar interests in the issuing partnership also hold noncompensatory options in the partnership, or if none of the other partners owns substantially similar interests in the partnership, then all facts and circumstances will be considered in determining whether the rights in the part- nership possessed by the option holder are possessed solely by virtue of owning a partnership interest. If those rights are possessedsolelybyvirtueofowninga partnership interest, they are not taken into account. (C) A noncompensatory option holder will not ordinarily be considered to pos- sess partner attributes solely because the noncompensatory option agreement significantly controls or restricts, or the noncompensatory option holder has the ability to significantly control or restrict, a partnership decision that could substan- tially affect the value of the underlying partnership interest.In particular, the fol- lowing abilities of the option holder will not be treated as partner attributes: (1) The ability to impose reasonable re- strictions on partnership distributions or dilutive issuances of partnership equity or options while the noncompensatory option is outstanding. (2) The ability to choose the partner- ship’s section 704(c) method for partner- ship properties. (D) When the applicable measurement event is a transfer described in paragraph (c)(1) of this section, the partner attributes of the transferee, not the transferor, are taken into account. (E) The option holder will be treated as owning 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 of the preceding sentence, a person related to the option holder is defined as any person bearing a relationship to the option holder described in section 267(b) or 707(b). (e)Substantial tax reduction require- ment—(1)General rule .Thedetermina- tion of whether there is a strong likelihood that the failure to treat a noncompensatory option holder as a partner would result in a substantial reduction in the present value of the partners’ and the noncompensatory option holder’s aggregate Federal tax lia- bilities is based on all the facts and circum- stances, including— (i) The interaction of the allocations of the issuing partnership and the partners’ and noncompensatory option holder’s Fed- eral tax attributes (taking into account tax consequences that result from the interac- tion of the allocations with the partners’ and noncompensatory option holder’s Fed- 2013–13 I.R.B.698March 25, 2013 eral tax attributes that are unrelated to the partnership); (ii) The absolute amount of the Federal tax reduction; (iii) The amount of the reduction rela- tive to overall Federal tax liability; and (iv) The timing of items of income and deductions. (2)Special rules. For purposes of ap- plying paragraph (e)(1) of this section to a partner or noncompensatory option holder that is— (i) A look-through entity (as defined in paragraph (b)(1) of this section), the Fed- eral tax consequences that result from the interaction of allocations of the partnership and the Federal tax attributes of any per- son that is an owner, or in the case of a trust or estate, the beneficiary, of an inter- est in such a partner or noncompensatory option holder, whether directly, or indi- rectly through one or more look-through entities, must be taken into account; or (ii) A member of a consolidated group (within the meaning of §1.1502–1(h)), the tax 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. For purposes of the example, assume that PRS is a partnership for Federal tax purposes, none of the noncompensatory option hold- ers or partners are related persons, and that general principles of law do not apply to treat the noncompensatory option as a part- nership interest. The example reads as fol- lows: Example.Active trade or business.PRSisen- gaged in an active real estate business, the amount of income, 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 is issued. At the time of the issuance of the noncom- pensatory option, a 10 percent interest in PRS has a fair market value of $100x. Due to the nature of PRS’s business, the value of a 10 percent PRS in- terest in 3 years is not reasonably predictable as of the time the noncompensatory option is issued. As- suming there are no other facts affecting the certainty of the option’s exercise, it is not reasonably certain that 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 partnership interest under paragraph (a)(1) of this section. (g)Effective/applicability date.This section applies to noncompensatory op- tions issued on or after February 5, 2013. Par. 7. Section 1.1272–1 is amended by adding a sentence at the end of paragraph (e) to read as follows: §1.1272–1 Current inclusion of OID in income. ***** (e)***Fordeb t instruments issued on or after Febru ary 5, 2013, the termstock in the precedi ng sentence means an equity interest in a ny entity that is classified, for Federal tax p urposes, as either a partner- ship or a corp oration. **** 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 price and issue date. ***** (j) * * * For debt instruments issued on or after February 5, 2013, the termstock in the preceding sentence means an equity interest in any entity that is classified, for Federal 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 debt instruments. (a) * * * (4) * * * For debt instruments issued on or after February 5, 2013, the termstock in the preceding sentence means an equity interest in any entity that is classified, for Federal tax purposes, as either a partner- ship or a corporation. ***** Steven T. Miller, Deputy Commissioner for Services and Enforcement. Appro ved January 24, 2013. Mark J. Mazur, Assistant Secretary oftheTreasury(TaxPolicy). (Filed by the Office of the Federal Register on February 4, 2013, 8:45 a.m., and published in the issue of the Federal Register for February 5, 2013, 78 F.R. 7997) Section 5000A.—Require- ment to Maintain Minimum Essential Coverage Proposed regulations on the shared responsibility payment for not maintaining minimum essential coverage under Section 5000A, which was added by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended by the TRICARE Affirmation Act 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 THE TREASURY Internal R evenue Service 26 CFR Part 1 Health In surance Premium Tax Credi t AGENCY: I nternal Revenue Service (IRS), Tr easury. ACTION: F inal regulations. SUMMARY: This document contains fi- nal regul ations relating to the health insur- ance prem ium tax credit enacted by the Pa- tient Pr otection and Affordable Care Act and the H ealth Care and Education Rec- oncilia tion Act of 2010. These final regu- lations provide guidance to individuals re- lated to employees who may enroll in el- igible employer-sponsored coverage and who wis h to enroll in qualified health plans throug h Affordable Insurance Exchanges (Excha nges) and claim the premium tax credit . DATES: Effective Date:These regulations are ef fective on February 1, 2013. Applic ability Date:For date of applica- bilit y, see §1.36B–1(o). FOR FU RTHER INFORMATION CONTA CT: Andrew S. Braden, (202) 622–4 960 (not a toll-free number). March 25, 20136992013–13 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 of the 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 the plan by reason of their relationship to an employee (related individuals). On August 17, 2011, a notice of pro- posed rulemaking (REG–131491–10, 2011–36 I.R.B. 208) was published in theFederal Register(76 FR 50931). On May 23, 2012, final regulations (T.D. 9590, 2012–24 I.R.B. 986) were pub- lished in theFederal Register(77 FR 30377). The final regulations reserved a rule (§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 public inspection atwww.regulations.govor on request. A public hearing was held on November 17, 2011. After consideration of all the comments, the proposed rule is adopted without change by this Treasury decision. Explanation of Provisions and Summary of Comments The proposed regulations provided that, for taxable years beginning be- fore January 1, 2015, an eligible employer-sponsored plan is affordable for related individuals if the portion of the annual premium the employee must pay for self-only coverage (the required contribution percentage) does not exceed 9.5% of the taxpayer’s household income. While several comments supported this rule, other comments asserted that the affordability of coverage for related individuals should be based on the portion of the annual premium the employee must pay for family coverage. These final regulations adopt the pro- posed rule without change. The language of 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-only coverage. By contrast, section 5000A, which establishes the shared responsi- bility payment applicable to individuals for failure to maintain minimum essen- tial coverage, addresses affordability for employees in section 5000A(e)(1)(B) and, separately, for related individuals in section 5000A(e)(1)(C). Thus, proposed regulations under section 5000A, which the Treasury Department is releasing con- currently with these final regulations, provide that, for purposes of applying the affordability exemption from the shared responsibility payment in the case of re- lated individuals, the required contribution is based on the premium the employee would pay for employer-sponsored family coverage. Effective/Applicability Date These final regulations apply to taxable years 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 by Executive 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 the regulations do not impose a collection of information 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 Chief Counsel for Advocacy of the Small Busi- ness Administration for comment on its impact on small business. Drafting Information The principal authors of these final regulations are Frank W. Dunham III and Stephen J. Toomey of the Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in their development. ***** Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 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 2to read as follows: §1.36B–2 Eligibility for premium tax credit. ***** (c) * * * (3) * * * (v) * * * (A) * * * (2)Affordability for related individ- ual. Except as provided in paragraph (c)(3)(v)(A)(3) of this section, an eligible employer-sponsored plan is affordable for a related individual if the portion of the annual premium the employee must pay for self-only coverage does not exceed the required contribution percentage, as described in paragraph (c)(3)(v)(A)(1)of this section. ***** (D)Examples.* * * ***** Example 2.Basic determination of affordability for a related individual. The facts are the same as in Example 1, except that C is married to J and X’s plan requires C to contribute $5,300 for coverage for C and J 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)ofthis section, X’s plan is affordable for C and J, and C and J are eligible for minimum essential coverage for all months in 2014. ***** Steven T. Miller, Deputy Commissioner for Services and Enforcement. Approved January 25, 2013. 2013–13 I.R.B.700March 25, 2013 Mark J. Mazur, Assistant Secretary oftheTreasury(TaxPolicy). (Filed by the Office of the Federal Register on January 30, 2013, 11:15 a.m., and published in the issue of the Federal Register for February 1, 2013, 78 F.R. 7264) Section 6621.—Determina- tion of Rate of Interest 26 CFR 301.6621–1: Interest rate. Interest rates: underpayment and overpayments.The rates for interest de- termined under section 6621 of the Code for the calendar quarter beginning April 1, 2013, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for the underpayments, and 5 per- cent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent. Rev. Rul. 2013–6 Section 6621 of the Internal Revenue Code establishes the interest rates on over- payments and underpayments of tax. Un- der section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percent- age points in the case of a corporation), ex- cept the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the un- derpayment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for pur- poses of interest payable under section 6601 on any large corporate underpay- ment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621–3 of the Regulations on Proce- dure and Administration for the definition of a large corporate underpayment and for the rules for determining the appli- cable date. Section 6621(c) and section 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any 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 section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year. Sec- tion 6621(b)(3) provides that the federal short-term rate for any month is the fed- eral short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent). Notice 88–59, 1988–1 C.B. 546, an- nounced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding The federal short-term rate determined in accordance with section 1274(d) during January 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 the nearest full percent, based on daily com- pounding determined during the month of January 2013 is 0 percent. Accordingly, an overpayment rate of 3 percent (2 percent in the case of a corporation) and an under- payment rate of 3 percent are established for 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 beginning April 1, 2013, is 0.5 percent. The under- payment rate for large corporate underpay- ments for the calendar quarter beginning April 1, 2013, is 5 percent. These rates ap- ply to amounts bearing interest during that calendar quarter. The 3 percent rate also applies to esti- mated tax underpayments for the second calendar quarter in 2013. Interest factors for daily compound in- terest for annual rates of 0.5 percent are published in Appendix A of this Revenue Ruling. 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 compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue rul- ing is Deborah Colbert-James of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Gulas at (202) 622–4570 (not a toll-free call). March 25, 20137012013–13 I.R.B. APPENDIX A 365 Day Year 0.5% Compound Ra te 184 Days DaysFactorDaysFactorDaysFactor 10.000013699630.000863380 125 0.001713784 20.000027397640.000877091126 0.001727506 30.000041096 65 0.0008908011270.001741228 4 0.000054796 66 0.000904512 128 0.001754951 50.000068495 670.0009182231290.001768673 6 0.000082195 680.0009319341300.001782396 7 0.000095894 69 0.000945646 1310.001796119 8 0.000109594 70 0.000959357 1320.001809843 90.000123294710.000973069133 0.001823566 10 0.000136995 720.0009867811340.001837290 11 0.000150695 730.001000493 1350.001851013 120.000164396740.0010142061360.001864737 130.00017809 7 75 0.00102791 8 1370.00187846 2 140.000191798760.0010416311380.001892186 150.0002054 99 77 0.0010553 44 139 0.0019059 10 160.0002192 01 78 0.001069057 140 0.001919635 170.000232902790.0010827701410.001933360 180.000246604800.001096484142 0.001947 085 190.000260 306 810.001110 197 1430.001960 811 200.000274008820.001123911144 0.001974536 210.00028771183 0.001137 625 145 0.001988262 220.000301 413 84 0.001151339 1460.002001 988 23 0.000315116850.001165054 147 0.002015714 240.000328819860.0011787681480.002029440 250.000342522 870.00119 2483 1490.00204 3166 26 0.000356225 880.001206198 1500.002056893 270.000369929890.001219913 151 0.002070620 280.0003 83633 900.0012 33629 152 0.0020 84347 290.000397336910.001247344 153 0.002098074 300.000411041920.001261060 154 0.002111801 31 0.000424745 930.001 274776 1550.002125529 320.000438449940.001288492 1560.002139257 33 0.00 0452154 95 0.001302208 1570.00 2152985 34 0.000465859 96 0.001315925158 0.00 2166713 350.000479564 970.001329641 159 0.002180441 360.00049326998 0.0 01343358 1600.002194169 37 0.000506974 99 0.001357075 1610.0 02207898 38 0.000520680 1000.0013707921620.002221627 39 0.0 00534386 101 0.0 01384510 163 0.0 02235356 40 0.000548092 10 2 0. 001398227 16 4 0.002249085 41 0.000561798 103 0.0014119451650.002262815 42 0. 000575504 104 0. 001425663 166 0. 002276544 43 0.000589211105 0. 001439381 16 7 0. 002290274 440.000602917106 0.001453100 1680.002304004 4 5 0.0006166241070.0014668181690.002317734 4 6 0 .000630331 1 08 0.001480537 1 70 0.002331465 470.000644039109 0.001494256 171 0.002345195 48 0.000657746 110 0.001507975 172 0.002358926 49 0.000671454 111 0.001521694 173 0.002372657 500.000685161 112 0.001535414 1740.002386388 51 0.000698869113 0.001549133175 0.002400120 520.000712578 114 0.001562853 176 0.002413851 53 0.000726286 1150.001576573 177 0.002427583 540.000739995 116 0.001590293 178 0.002441315 550.000753703 1170.001604014179 0.002455047 56 0.0007674121180.0016177341800.002468779 2013–13 I.R.B.702March 25, 2013 365 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 57 0.000781121119 0.001631455 181 0.002482511 58 0.000794831120 0.001645176 1820.002496244 590.000808540 121 0.001658897 183 0.002509977 60 0.000822250 1220.001672619184 0.002523710 61 0.000835960 1230.001686340 620.0008496701240.001700062 366 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 10.000013661630.000861020 125 0.001709097 20.000027323640.0008746931260.001722782 30.000040984 65 0.0008883661270.001736467 4 0.000054646 660.000902040128 0.001750152 5 0.00006830867 0.000915713 1290.001763837 60.000081970680.000929387130 0.001777522 7 0.000095632 690.0009430611310.001791208 8 0.000109295 70 0.000956735 1320.001804893 9 0.000122958 710.000970409133 0.001818579 100.000136620720.000984084134 0.001832265 11 0.000150283 73 0.0009977581350.001845951 120.000163947740.001011433136 0.001859638 130.000177610 750.001025108 1370.001873324 140.000191274760.0010387831380.001887011 15 0.00020493877 0.001052459 1390.001900698 160.000218602780.001066134140 0.001914385 170.000232266790.0010798101410.001928073 18 0.000245930 800.0010934861420.001941760 19 0.000259595 810.001107162143 0.001955448 200.000273260820.0011208391440.001969136 210.00028692483 0.001134515145 0.001982824 22 0.000300590 840.001148192146 0.001996512 23 0.00031425585 0.0011618691470.002010201 240.00032792086 0.001175546 1480.002023889 250.000341586 870.001189223149 0.002037578 26 0.000355252 880.001202900 1500.002051267 270.00036891889 0.0012165781510.002064957 28 0.000382584 90 0.001230256152 0.002078646 29 0.000396251 910.001243934 153 0.002092336 300.00040991792 0.0012576121540.002106025 31 0.000423584 930.001271291 1550.002119715 32 0.000437251 940.001284969 1560.002133405 33 0.00045091895 0.001298648 157 0.002147096 34 0.000464586 960.001312327 158 0.002160786 350.000478253 970.001326006 159 0.002174477 360.00049192198 0.001339685 1600.002188168 37 0.000505589 99 0.001353365 161 0.002201859 38 0.000519257 1000.001367044162 0.002215550 39 0.000532925 1010.0013807241630.002229242 40 0.000546594 1020.0013944041640.002242933 41 0.000560262 103 0.0014080851650.002256625 42 0.000573931 104 0.001421765 1660.002270317 43 0.0005876001050.001435446 1670.002284010 440.0006012691060.0014491271680.002297702 45 0.0006149391070.001462808169 0.002311395 March 25, 20137032013–13 I.R.B. 366 Day Year 0.5% Compound Rate 184 Days DaysFactorDaysFactorDaysFactor 460.0006286081080.001476489170 0.002325087 470.0006422781090.0014901701710.002338780 48 0.000655948 110 0.001503852 172 0.002352473 490.000669618111 0.001517533 1730.002366167 50 0.000683289112 0.001531215 1740.002379860 510.000696959 113 0.0015448971750.002393554 52 0.000710630114 0.001558580 1760.002407248 53 0.000724301 1150.001572262 1770.002420942 54 0.000737972116 0.001585945 1780.002434636 550.000751643 117 0.001599628 1790.002448331 560.000765315 1180.001613311180 0.002462025 57 0.0007789861190.001626994181 0.002475720 580.000792658 1200.001640678182 0.002489415 59 0.000806330121 0.001654361 183 0.002503110 600.000820003122 0.001668045 184 0.002516806 61 0.000833675 1230.001681729 620.000847348124 0.001695413 TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS PERIODRATE In 1995–1 C.B. DAILY RATE TABLE Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 19787% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 19806% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 198212% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 198220% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 198316% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 198311% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 198411% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 198411% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 198610% Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 19869% Table 23, pg. 577 TABLE OF INTEREST RATES FROM JAN. 1, 1987 — DEC. 31, 1998 OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1987—Mar. 31, 19878%21 575 9%23 577 Apr. 1, 1987—Jun. 30, 19878%21 575 9%23 577 Jul. 1, 1987—Sep. 30, 19878%21 575 9%23 577 Oct. 1, 1987—Dec. 31, 19879%23 577 10% 25579 Jan. 1, 1988—Mar. 31, 198810%7362711% 75 629 Apr. 1, 1988—Jun. 30, 19889%71 625 10%73627 Jul. 1, 1988—Sep. 30, 19889%71 625 10%73627 Oct. 1, 1988—Dec. 31, 198810%7362711% 75 629 2013–13 I.R.B.704March 25, 2013 TABLE OF INTEREST RATES FROM JAN. 1, 1987 — DEC. 31, 1998 OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1989—Mar. 31, 198910% 25579 11%27 581 Apr. 1, 1989—Jun. 30, 198911%27 581 12%29 583 Jul. 1, 1989—Se p. 30, 1989 11%27 581 12%29 583 Oct. 1, 1989—Dec. 31, 198910% 25579 11%27 581 Jan. 1, 1990—Mar. 31, 199010% 25579 11%27 581 Apr. 1, 1990—J un. 30, 1990 10% 25579 11%27 581 Jul. 1, 1990—Sep. 30, 199010% 25579 11%27 581 Oct. 1, 1990—Dec. 31, 199010% 25579 11%27 581 Jan. 1, 1991— Mar. 31, 1991 10% 25579 11%27 581 Apr. 1, 1991—Jun. 30, 19919%23 577 10% 25579 Jul. 1, 1991—Sep. 30, 19919%23 577 10% 25579 Oct. 1, 1991 —Dec. 31, 1991 9%23 577 10% 25579 Jan. 1, 1992—Mar. 31, 19928%696239%71 625 Apr. 1, 1992—Jun. 30, 19927%676218%69623 Jul. 1, 1992 —Sep. 30, 1992 7%676218%69623 Oct. 1, 1992—Dec. 31, 19926% 65 6197%67621 Jan. 1, 1993—Mar. 31, 19936%17 571 7%19 573 Apr. 1, 19 93—Jun. 30, 1993 6%17 571 7%19 573 Jul. 1, 1993—Sep. 30, 19936%17 571 7%19 573 Oct. 1, 1993—Dec. 31, 19936%17 571 7%19 573 Jan. 1, 19 94—Mar. 31, 1994 6%17 571 7%19 573 Apr. 1, 1994—Jun. 30, 19946%17 571 7%19 573 Jul. 1, 1994—Sep. 30, 19947%19 573 8%21 575 Oct. 1, 1 994—Dec. 31, 1994 8%21 575 9%23 577 Jan. 1, 1995—Mar. 31, 1995 8%21 575 9%23 577 Apr. 1, 1995—Jun. 30, 1995 9%23 577 10% 25579 Jul. 1, 1995—Sep. 30, 1995 8%21 575 9%23 577 Oct. 1, 1995—Dec. 31, 1995 8%21 575 9%23 577 Jan. 1, 1996—Mar. 31, 19968%696239%71 625 Apr. 1 , 1996—Jun. 30, 1996 7%676218%69623 Jul. 1, 1996—Sep. 30, 19968%696239%71 625 Oct. 1, 1996—Dec. 31, 19968%696239%71 625 Jan. 1, 1997—Mar. 31, 1997 8%21 575 9%23 577 Apr. 1, 1997—Jun. 30, 19978%21 575 9%23 577 Jul. 1, 1997—Sep. 30, 19978%21 575 9%23 577 Oct . 1, 1997—Dec. 31, 1997 8%21 575 9%23 577 Jan. 1, 1998—Mar. 31, 19988%21 575 9%23 577 Apr. 1, 1998—Jun. 30, 19987%19 573 8%21 575 Jul . 1, 1998—Sep. 30, 1998 7%19 573 8%21 575 Oct. 1, 1998—Dec. 31, 19987%19 573 8%21 575 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995–1 C.B. RATETABLEPAGE Jan. 1, 1999—Mar. 31, 19997%19 573 Apr . 1, 1999—Jun. 30, 1999 8%21 575 Jul. 1, 1999—Sep. 30, 19998%21 575 Oct. 1, 1999—Dec. 31, 19998%21 57 5 Ja n. 1, 2000—Mar. 31, 2000 8%6962 3 Apr. 1, 2000—Jun. 30, 20009%71 625 March 25, 20137052013–13 I.R.B. TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS 1995–1 C.B. RATETABLEPAGE Jul. 1, 2000—Sep. 30, 20009%71 625 Oct. 1, 2000—Dec. 31, 20009%71 625 Jan. 1, 2001—Mar. 31, 20019%23 577 Apr. 1, 2001—Jun. 30, 20018%21 575 Jul. 1, 2001—Sep. 30, 20017%19 573 Oct. 1, 2001—Dec. 31, 20017%19 573 Jan. 1, 2002—Mar. 31, 20026%17 571 Apr. 1, 2002—Jun. 30, 20026%17 571 Jul. 1, 2002—Sep. 30, 20026%17 571 Oct. 1, 2002—Dec. 31, 20026%17 571 Jan. 1, 2003—Mar. 31, 2003 5%15569 Apr. 1, 2003—Jun. 30, 2003 5%15569 Jul. 1, 2003—Sep. 30, 2003 5%15569 Oct. 1, 2003—Dec. 31, 20034%13 567 Jan. 1, 2004—Mar. 31, 20044%61 615 Apr. 1, 2004—Jun. 30, 2004 5% 63617 Jul. 1, 2004—Sep. 30, 20044%61 615 Oct. 1, 2004—Dec. 31, 2004 5% 63617 Jan. 1, 2005—Mar. 31, 20055%15569 Apr. 1, 2005—Jun. 30, 2005 6%17 571 Jul. 1, 2005—Sep. 30, 2005 6%17 571 Oct. 1, 2005—Dec. 31, 2005 7%19 573 Jan. 1, 2006—Mar. 31, 20067%19 573 Apr. 1, 2006—Jun. 30, 20067%19 573 Jul. 1, 2006—Sep. 30, 20068%21 575 Oct. 1, 2006—Dec. 31, 20068%21 575 Jan. 1, 2007—Mar. 31, 20078%21 575 Apr. 1, 2007—Jun. 30, 20078%21 575 Jul. 1, 2007—Sep. 30, 20078%21 575 Oct. 1, 2007—Dec. 31, 20078%21 575 Jan. 1, 2008—Mar. 31, 20087%67621 Apr. 1, 2008—Jun. 30, 20086% 65 619 Jul. 1, 2008—Sep. 30, 2008 5% 63617 Oct. 1, 2008—Dec. 31, 20086% 65 619 Jan. 1, 2009—Mar. 31, 2009 5%15569 Apr. 1, 2009—Jun. 30, 20094%13 567 Jul. 1, 2009—Sep. 30, 20094%13 567 Oct. 1, 2009—Dec. 31, 20094%13 567 Jan. 1, 2010—Mar. 31, 20104%13 567 Apr. 1, 2010—Jun. 30, 20104%13 567 Jul. 1, 2010—Sep. 30, 20104%13 567 Oct. 1, 2010—Dec. 31, 20104%13 567 Jan. 1, 2011—Mar. 31, 20113%11 565 Apr. 1, 2011—Jun. 30, 20114%13 567 Jul. 1, 2011—Sep. 30, 20114%13 567 Oct. 1, 2011—Dec. 31, 20113%11 565 Jan. 1, 2012—Mar. 31, 20123% 59 613 Apr. 1, 2012—Jun. 30, 20123% 59 613 Jul. 1, 2012—Sep. 30, 20123% 59 613 Oct. 1, 2012—Dec. 31, 20123% 59 613 Jan. 1, 2013—Mar. 31, 20133%11 565 Apr. 1, 2013—Jun. 30, 20133%11 565 2013–13 I.R.B.706March 25, 2013 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Jan. 1, 1999—Mar. 31, 19996%17 571 7%19 573 Apr. 1, 1999—Jun . 30, 1999 7%19 573 8%21 575 Jul. 1, 1999—Sep. 30, 19997%19 573 8%21 575 Oct. 1, 1999—Dec. 31, 19997%19 573 8%21 575 Jan. 1, 2000—Ma r. 31, 2000 7%676218%69623 Apr. 1, 2000—Jun. 30, 20008%696239%71 625 Jul. 1, 2000—Sep. 30, 20008%696239%71 625 Oct. 1, 2000—D ec. 31, 2000 8%696239%71 625 Jan. 1, 2001—Mar. 31, 20018%21 575 9%23 577 Apr. 1, 2001—Jun. 30, 20017%19 573 8%21 575 Jul. 1, 2001— Sep. 30, 2001 6%17 571 7%19 573 Oct. 1, 2001—Dec. 31, 20016%17 571 7%19 573 Jan. 1, 2002—Mar. 31, 2002 5%15569 6%17 571 Apr. 1, 2002 —Jun. 30, 2002 5%15569 6%17 571 Jul. 1, 2002—Sep. 30, 2002 5%15569 6%17 571 Oct. 1, 2002—Dec. 31, 2002 5%15569 6%17 571 Jan. 1, 200 3—Mar. 31, 2003 4%13 5675%15569 Apr. 1, 2003—Jun. 30, 20034%13 5675%15569 Jul. 1, 2003—Sep. 30, 20034%13 5675%15569 Oct. 1, 20 03—Dec. 31, 2003 3%11 565 4%13 567 Jan. 1, 2004—Mar. 31, 20043% 59 6134%61 615 Apr. 1, 2004—Jun. 30, 20044%61 6155% 63617 Jul. 1, 2 004—Sep. 30, 2004 3% 59 6134%61 615 Oct. 1, 2004—Dec. 31, 20044%61 6155% 63617 Jan. 1, 2 005—Mar. 31, 2005 4%13 5675%15569 Apr. 1, 2005—Jun. 30, 20055%15569 6%17 571 Jul. 1, 2005—Sep. 30, 20055%15569 6%17 571 Oct. 1, 2005—Dec. 31, 2005 6%17 571 7%19 573 Jan. 1, 2006—Mar. 31, 2006 6%17 571 7%19 573 Apr. 1, 2006—Jun. 30, 20066%17 571 7%19 573 Jul. 1, 2006—Sep. 30, 20067%19 573 8%21 575 Oct. 1 , 2006—Dec. 31, 2006 7%19 573 8%21 575 Jan. 1, 2007—Mar. 31, 20077%19 573 8%21 575 Apr. 1, 2007—Jun. 30, 20077%19 573 8%21 575 Jul. 1, 2007—Sep. 30, 2007 7%19 573 8%21 575 Oct. 1, 2007—Dec. 31, 20077%19 573 8%21 575 Jan. 1, 2008—Mar. 31, 20086% 65 6197%67621 Apr . 1, 2008—Jun. 30, 2008 5% 636176% 65 619 Jul. 1, 2008—Sep. 30, 20084%61 6155% 63617 Oct. 1, 2008—Dec. 31, 2008 5% 636176% 65 619 Jan . 1, 2009—Mar. 31, 2009 4%13 5675%15569 Apr. 1, 2009—Jun. 30, 20093%11 565 4%13 567 Jul. 1, 2009—Sep. 30, 20093%11 56 5 4%13 56 7 Oc t. 1, 2009—Dec. 31, 2009 3%11 565 4%13 567 Jan. 1, 2010—Mar. 31, 20103%11 565 4%13 567 Apr. 1, 2010—Jun. 30, 20103%11 5 65 4%13 5 67 J ul. 1, 2010—Sep. 30, 2010 3 % 1 1 565 4 % 1 3 567 Oct. 1, 2010—Dec. 31, 20103%11 565 4%13 567 Jan. 1, 2011—Mar. 31, 20112%9 563 3%11 565 Apr. 1, 2011—Jun. 30, 20113%11 565 4%13 567 Jul. 1, 2011—Sep. 30, 20113%11 565 4%13 567 Oct. 1, 2011—Dec. 31, 20112%9 563 3%11 565 Jan. 1, 2012—Mar. 31, 20122% 57 6113% 59 613 March 25, 20137072013–13 I.R.B. TABLE OF INTEREST RATES FROM JANUARY 1, 1999 — PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS OVERPAYMENTSUNDERPAYMENTS 1995–1 C.B.1995–1 C.B. RATE TABLEPGRATE TABLEPG Apr. 1, 2012—Jun. 30, 20122% 57 6113% 59 613 Jul. 1, 2012—Sep. 30, 20122% 57 6113% 59 613 Oct. 1, 2012—De c. 31, 2012 2% 57 6113% 59 613 Jan. 1, 2013—Mar. 31, 20132%9 563 3%11 565 Apr. 1, 2013—Jun. 30, 20132%9 563 3%11 565 TABLE OF INTERE ST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1991—Mar. 31, 199113%31 585 Apr. 1, 1991—J un. 30, 1991 12%29 583 Jul. 1, 1991—Sep. 30, 199112%29 583 Oct. 1, 1991—Dec. 31, 199112%29 583 Jan. 1, 1992—M ar. 31, 1992 11% 75 629 Apr. 1, 1992—Jun. 30, 199210%73627 Jul. 1, 1992—Sep. 30, 199210%73627 Oct. 1, 1992— Dec. 31, 1992 9%71 625 Jan. 1, 1993—Mar. 31, 19939%23 577 Apr. 1, 1993—Jun. 30, 19939%23 577 Jul. 1, 1993 —Sep. 30, 1993 9%23 577 Oct. 1, 1993—Dec. 31, 19939%23 577 Jan. 1, 1994—Mar. 31, 19949%23 577 Apr. 1, 199 4—Jun. 30, 1994 9%23 577 Jul. 1, 1994—Sep. 30, 199410% 25579 Oct. 1, 1994—Dec. 31, 199411%27 581 Jan. 1, 1995—Mar. 31, 1995 11%27 581 Apr. 1, 1995—Jun. 30, 1995 12%29 583 Jul. 1, 1 995—Sep. 30, 1995 11%27 581 Oct. 1, 1995—Dec. 31, 1995 11%27 581 Jan. 1, 1996—Mar. 31, 199611% 75 629 Apr. 1, 1996—Jun. 30, 199610%73627 Jul. 1, 1996—Sep. 30, 1996 11% 75 629 Oct. 1, 1996—Dec. 31, 199611% 75 629 Jan. 1, 1997—Mar. 31, 199711%27 581 Apr. 1 , 1997—Jun. 30, 1997 11%27 581 Jul. 1, 1997—Sep. 30, 199711%27 581 Oct. 1, 1997—Dec. 31, 199711%27 581 Jan. 1 , 1998—Mar. 31, 1998 11%27 581 Apr. 1, 1998—Jun. 30, 199810% 25579 Jul. 1, 1998—Sep. 30, 199810% 25579 Oct. 1, 1998—Dec. 31, 1998 10% 25579 Jan. 1, 1999—Mar. 31, 19999%23 577 Apr. 1, 1999—Jun. 30, 199910% 25579 Jul . 1, 1999—Sep. 30, 1999 10% 25579 Oct. 1, 1999—Dec. 31, 199910% 25579 Jan. 1, 2000—Mar. 31, 200010%73627 Ap r. 1, 2000—Jun. 30, 2000 11% 75 62 9 Jul. 1, 2000—Sep. 30, 200011% 75 629 Oct. 1, 2000—Dec. 31, 200011% 75 629 2013–13 I.R.B.708March 25, 2013 TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 2001—Mar. 31, 200111%27 581 Apr. 1, 2001—Jun. 30, 200110% 25579 Jul. 1, 2001—Sep. 30, 20019%23 577 Oct. 1, 2001—Dec. 31, 20019%23 577 Jan. 1, 2002—Mar. 31, 20028%21 575 Apr. 1, 2002—Jun. 30, 20028%21 575 Jul. 1, 2002—Sep. 30, 20028%21 575 Oct. 1, 2002—Dec. 30, 20028%21 575 Jan. 1, 2003—Mar. 31, 20037%19 573 Apr. 1, 2003—Jun. 30, 20037%19 573 Jul. 1, 2003—Sep. 30, 20037%19 573 Oct. 1, 2003—Dec. 31, 20036%17 571 Jan. 1, 2004—Mar. 31, 20046% 65 619 Apr. 1, 2004—Jun. 30, 20047%67621 Jul. 1, 2004—Sep. 30, 20046% 65 619 Oct. 1, 2004—Dec. 31, 20047%67621 Jan. 1, 2005—Mar. 31, 2005 7%19 573 Apr. 1, 2005—Jun. 30, 2005 8%21 575 Jul. 1, 2005—Sep. 30, 2005 8%21 575 Oct. 1, 2005—Dec. 31, 2005 9%23 577 Jan. 1, 2006—Mar. 31, 20069%23 577 Apr. 1, 2006—Jun. 30, 20069%23 577 Jul. 1, 2006—Sep. 30, 200610% 25579 Oct. 1, 2006—Dec. 31, 200610% 25579 Jan. 1, 2007—Mar. 31, 200710% 25579 Apr. 1, 2007—Jun. 30, 200710% 25579 Jul. 1, 2007—Sep. 30, 200710% 25579 Oct. 1, 2007—Dec. 31, 200710% 25579 Jan. 1, 2008—Mar. 31, 20089%71 625 Apr. 1, 2008—Jun. 30, 20088%69623 Jul. 1, 2008—Sep. 30, 20087%67621 Oct. 1, 2008—Dec. 31, 20088%69623 Jan. 1, 2009—Mar. 31, 20097%19 573 Apr. 1, 2009—Jun. 30, 20096%17 571 Jul. 1, 2009—Sep. 30, 20096%17 571 Oct. 1, 2009—Dec. 31, 20096%17 571 Jan. 1, 2010—Mar. 31, 20106%17 571 Apr. 1, 2010—Jun. 30, 20106%17 571 Jul. 1, 2010—Sep. 30, 20106%17 571 Oct. 1, 2010—Dec. 31, 20106%17 571 Jan. 1, 2011—Mar. 31, 2011 5%15569 Apr. 1, 2011—Jun. 30, 20116%17 571 Jul. 1, 2011—Sep. 30, 20116%17 571 Oct. 1, 2011—Dec. 31, 2011 5%15569 Jan. 1, 2012—Mar. 31, 2012 5% 63617 Apr. 1, 2012—Jun. 30, 2012 5% 63617 Jul. 1, 2012—Sep. 30, 2012 5% 63617 Oct. 1, 2012—Dec. 31, 2012 5% 63617 Jan. 1, 2013—Mar. 31, 2013 5%15569 Apr. 1, 2013—Jun. 30, 2013 5%15569 March 25, 20137092013–13 I.R.B. TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT 1995–1 C.B. RATETABLEPG Jan. 1, 1995—Mar. 31, 19956.5% 18 572 Apr. 1, 1995—Jun. 30, 19957.5% 20 574 Jul. 1, 1995—Sep. 30, 19956.5% 18 572 Oct. 1, 1995—Dec. 31, 19956.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1, 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570 Jan. 1, 1999—Mar. 31, 1999 4.5% 14 568 Apr. 1, 1999—Jun. 30, 1999 5.5% 16 570 Jul. 1, 1999—Sep. 30, 1999 5.5% 16 570 Oct. 1, 1999—Dec. 31, 1999 5.5% 16 570 Jan. 1, 2000—Mar. 31, 2000 5.5% 64618 Apr. 1, 2000—Jun. 30, 2000 6.5% 66620 Jul. 1, 2000—Sep. 30, 2000 6.5% 66620 Oct. 1, 2000—Dec. 31, 2000 6.5% 66620 Jan. 1, 2001—Mar. 31, 2001 6.5% 18 572 Apr. 1, 2001—Jun. 30, 2001 5.5% 16 570 Jul. 1, 2001—Sep. 30, 2001 4.5% 14 568 Oct. 1, 2001—Dec. 31, 2001 4.5% 14 568 Jan. 1, 2002—Mar. 31, 2002 3.5% 12 566 Apr. 1, 2002—Jun. 30, 2002 3.5% 12 566 Jul. 1, 2002—Sep. 30, 2002 3.5% 12 566 Oct. 1, 2002—Dec. 31, 2002 3.5% 12 566 Jan. 1, 2003—Mar. 31, 2003 2.5% 10 564 Apr. 1, 2003—Jun. 30, 2003 2.5% 10 564 Jul. 1, 2003—Sep. 30, 2003 2.5% 10 564 Oct. 1, 2003—Dec. 31, 2003 1.5% 8 562 Jan. 1, 2004—Mar. 31, 2004 1.5%56 610 Apr. 1, 2004—Jun. 30, 2004 2.5%58 612 Jul. 1, 2004—Sep. 30, 2004 1.5%56 610 Oct. 1, 2004—Dec. 31, 2004 2.5%58 612 Jan. 1, 2005—Mar. 31, 20052.5% 10 564 Apr. 1, 2005—Jun. 30, 20053.5% 12 566 Jul. 1, 2005—Sep. 30, 20053.5% 12 566 Oct. 1, 2005—Dec. 31, 20054.5% 14 568 Jan. 1, 2006—Mar. 31, 2006 4.5% 14 568 Apr. 1, 2006—Jun. 30, 2006 4.5% 14 568 Jul. 1, 2006—Sep. 30, 2006 5.5% 16 570 Oct. 1, 2006—Dec. 31, 2006 5.5% 16 570 Jan. 1, 2007—Mar. 31, 2007 5.5% 16 570 Apr. 1, 2007—Jun. 30, 2007 5.5% 16 570 Jul. 1, 2007—Sep. 30, 2007 5.5% 16 570 Oct. 1, 2007—Dec. 31, 2007 5.5% 16 570 Jan. 1, 2008—Mar. 31, 2008 4.5% 62616 Apr. 1, 2008—Jun. 30, 2008 3.5% 60614 Jul. 1, 2008—Sep. 30, 2008 2.5%58 612 2013–13 I.R.B.710March 25, 2013 TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS E XCEEDING $10,000 FROM JANUARY 1, 1995 — PRESENT 1995–1 C.B. RATETABLEPG Oct. 1, 2008—Dec. 31, 2008 3.5% 60614 Jan. 1, 2009—Mar. 31, 2009 2.5% 10 564 Apr. 1, 2009—Jun. 30, 2009 1.5% 8 562 Jul. 1, 2009—Sep. 30, 2009 1.5% 8 562 Oct. 1, 2009—Dec. 31, 2009 1.5% 8 562 Jan. 1, 2010—Mar. 31, 2010 1.5% 8 562 Apr. 1, 2010—Jun. 30, 2010 1.5% 8 562 Jul. 1, 2010—Sep. 30, 2010 1.5% 8 562 Oct. 1, 2010—Dec. 31, 2010 1.5% 8 562 Jan. 1, 2011—Mar. 31, 2011 0.5%* Apr. 1, 2011—Jun. 30, 2011 1.5% 8 562 Jul. 1, 2011—Sep. 30, 2011 1.5% 8 562 Oct. 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, 20137112013–13 I.R.B. Part III. Administrative, Procedural, and Miscellaneous Work Opportunity Tax Credit— Transition Relief Notice 2013–14 I. PURPOSE This notice provides guidance on § 309 of the American Taxpayer Relief Act of 2012 (the Act), Pub. L. No. 112–240, enacted on January 2, 2013, and tran- sition relief for employers claiming the Work Opportunity Tax Credit (the WOTC) under§§51and3111(e)oftheInternal Revenue Code (the Code), as extended by the Act. Section 309 of the Act amended §51toextendtheWOTCthroughDe- cember 31, 2013, for taxable employers and for qualified tax-exempt organiza- tions. Specifically, this notice provides employers that hire members of targeted groups additional time beyond the 28-day deadline in § 51(d)(13) of the Code for submitting Form 8850,Pre-Screening No- tice and Certification Request for the Work Opportunity Credit, to Designated Local Agencies (DLAs). II. BACKGROUND Section 51 of the Code provides for the WOTC for employers that hire individuals who are members of targeted groups. An employer must obtain certification that an individual is a targeted group mem- ber before the employer may claim the credit. Certification of an individual’s targeted group status is obtained from a DLA. A DLA is a State employment se- curity agency established in accordance with 29 U.S.C. §§ 49–49n. An employer must submit Form 8850 to the DLA not later than the 28th day after the individual begins work for the employer. The Returning Heroes and Wounded Warriors 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), enacted on November 21, 2011, amended § 51 of the Code to extend and expand the WOTC to employers hiring certain qualified vet- erans (as defined in § 51(d)(3)) before Jan- uary 1, 2013. The VOW Act did not extend the WOTC for targeted group members other than qualified veterans. Thus, the WOTC was not available with respect to targeted group members who began work after December 31, 2011, other than qual- ified veterans. The VOW Act also amended §§ 52 and 3111 to make a reduced WOTC available to organizations described in § 501(c) and exempt from taxation under § 501(a) (“qualified tax-exempt organizations”) as a 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 hire qualified veterans for which the WOTC would have been allowable under § 51 if the organization were not a qualified tax-exempt organization. The credit was first available to qualified tax-exempt or- ganizations for qualified veterans hired on or after November 21, 2011. For addi- tional guidance on the WOTC for qualified tax-exempt organizations and changes made 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 the Code on or after November 22, 2011, and before May 22, 2012. Those employers were considered to have satisfied the re- quirements of § 51(d)(13)(A)(ii) if they submitted the completed Form 8850 to the DLA to request certification not later than June 19, 2012. III. AMENDMENTS MADE BY THE ACT The Act extends the WOTC through December 31, 2013, for taxable employers hiring individuals in targeted groups as de- fined in § 51(d)(1) through (d)(10) of the Code, 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 “unemployed veterans” or “disconnected youth” targeted group 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 for employers hiring qualified veterans, and not for hiring members of other targeted groups. Thus, the Act retroactively ex- tended the availability of the WOTC for taxable employers who hired individuals from those other targeted groups in 2012. Because the Act did not amend §§ 52 or 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 targeted group members. IV. TRANSITION RELIEF Section 51(d)(13)(A) of the Code pro- vides that an individual shall not be treated as 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 is a member of a targeted group; or (2) the employer completes a pre-screening notice (Form 8850) on or before the day the indi- vidual is offered employment and submits such notice to the DLA to request certifi- cation not later than 28 days after the indi- vidual begins work. Because the WOTC was extended retroactively for 2012 for members of targeted groups (other than qualified veterans), employers need additional time 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 qualified veterans hired after December 31, 2012, employers that hire qualified veterans af- ter December 31, 2012, may also need additional time to comply with the re- quirements of § 51(d)(13)(A). For these reasons, the Treasury Department and the IRS have determined that it is appropriate to provide employers with additional time to file Form 8850 with a DLA. (1)Transition relief for taxable employers that 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 a qualified veteran described in § 51(d)(3)) on or after January 1, 2012, and on or before 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 request certification not later than April 29, 2013. 2013–13 I.R.B.712March 25, 2013 (2)Transition relief for all employers that hire qualified veterans An employer that hires any quali- fied veteran described in § 51(d)(3) on or after January 1, 2013, and on or be- fore March 31, 2013, will be considered to have satisfied the requirements of § 51(d)(13)(A)(ii) if it submits the completed Form 8850 to the DLA to request certification not later than April 29, 2013. DRAFTING INFORMATION The principal authors of this notice are Shoshanna Tanner and Ligeia Donis of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).For further information regarding the WOTC, contact Ms. Tanner at (202) 622–6080 (not a toll-free number). For further information on how to claim the WOTC on behalf of tax-exempt organizations, contact Ms. Donis at (202) 622–6040 (not a toll-free number). March 25, 20137132013–13 I.R.B. Part IV. Items o fGeneralInterest Notice of Proposed Rulemaking Treatment of Grantor of an Option on a Partnership Interest REG–106918–08 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to the tax treatment of noncompensatory options and convertible instruments issued by a partnership. Specifically, the proposed regulations expand the characterization rule measurement events to include certain transfers 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 gain or loss as a result of a closing transaction with respect to, or a lapse of, an option on a partnership interest. The proposed reg- ulations will affect partnerships that issue noncompensatory options, the partners of such partnerships, and the holders of such options. DATES: Written or electronic comments and requests for a public hearing must be received 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 may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–106918–08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically viatheFederaleRulemaking Portal atwww.regulations.gov(IRS REG–106918–08). FOR FURTHER INFORMATION CONTACT: Concerning the pro- posed regulations under §1.761–3, Benjamin Weaver at (202) 622–3050; concerning the proposed regulations under §1.1234–3, Shawn Tetelman at (202) 622–3930; concerning submissions of comments and requests for a public hearing, Oluwafunmilayo (Funmi) Taylor, (202) 622–7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to 26 CFR part 1 under sections 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 tax treatment of noncompensatory options and convertible instruments issued by a partnership (noncompensatory partnership option regulations) were published in the Federal Register(68 FR 2930). Final regulations in this issue of the Bulletin contain amendments to the Income Tax Regulations (26 CFR Part 1), which final- ize the proposed regulations. However, the Treasury Department and the IRS have decided to propose amendments to the regulations expanding the characterization rule measurement events to include certain transfers of interests in the issuing partner- ship and other look-through entities. Additionally, the Treasury Department and the IRS received comments on the pro- posed regulations expressing uncertainty as to whether section 1234(b) applies to the grantor 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 used in section 1234(b)(2)(B), includes partner- ship interests. After consideration of all comments received, the IRS and Treasury Department believe that it is appropriate to propose an amendment to the regula- tions under section 1234(b) to expressly treat partnership interests as securities for purposes of section 1234(b). Explanation of Provisions 1.Proposed Additions to the Noncompensatory Partnership Option Characterization Rule Measurement Events The final regulations being published elsewhere 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 holder of a noncompensatory option is treated as a partner under certain circumstances. Un- der the characterization rule, a noncom- pensatory option is treated as a partnership interest if, on the date of a measurement event (1) the noncompensatory option pro- vides the option holder with rights that are substantially similar to the rights afforded a partner, and (2) there is a strong like- lihood that the failure to treat the holder of the noncompensatory option as a part- ner would result in a substantial reduction in the present value of the partners’ and noncompensatory 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 of the underlying partnership interest (includ- ing an adjustment pursuant to the terms of 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 (or settled) more than 12 months after its is- suance, or (B) the transfer is pursuant to a plan in existence at the time of the issuance or modification of the noncompensatory option that has as a principal purpose the substantial reduction of the present value of the aggregate Federal tax liabilities of the partners and thenoncompensatory op- tion holder. The Treasury Department and the IRS believe it is appropriate to expand the list of measurement events to include certain transfers of interests in the issuing part- nership and look-through entities. The proposed regulations add three measure- ment events to the list above, but apply only if those measurement events are pur- suant to a plan in existence at the time of the issuance or modification of the non- compensatory option that has as a prin- cipal purpose the substantial reduction of 2013–13 I.R.B.714March 25, 2013 the present value of the aggregate Federal tax 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-through entity that directly, or indirectly through one or more look-through entities, owns the 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 more look-through entities, owns an interest in the issuing partnership. The Treasury De- partment and the IRS believe that the first of these measurement events is necessary because 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 an interest in the issuing partnership, because either type of transfer may change the anal- ysis of whether there is a strong likelihood that the failure to treat the option holder as a partner would result in a substantial reduction in the present value of the part- ners’ and option holder’s aggregate tax li- abilities. The Treasury Department and the IRS believe that the second and third measurement events are necessary to pre- vent avoidance of the characterization rule through the use of look-through entities. Like the measurement events in the final regulations, the three measurement events in the proposed regulations are sub- ject to exceptions in §1.761–3(c)(2). The Treasury Department and the IRS believe that the limitations on these measure- ment events will reduce the administrative burden associated with testing under the characterization rule upon these events. The Treasury Department and the IRS request comments on the appropriate pro- cedures for notifying the partners and the partnership 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 grantor of the option In response to comments, the proposed regulations 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 an option, gain or loss from any closing trans- action with respect to, and gain on lapse of,anoptioninpropertyshallbetreated as gain or loss from the sale or exchange of a capital asset held not more than one year. Section 1234(b)(2)(B) defines the term property to mean stock and securi- ties (including stocks and securities dealt with on a when issued basis), commodi- ties, and commodity futures. Accordingly, for section 1234(b) to apply to a closing transaction with respect to, or lapse of, an option on a partnership interest, a partner- ship interest would have to be a security and, thus, property within the meaning of section 1234(b)(2)(B). The proposed reg- ulations provide that the term “securities” as used in section 1234(b)(2)(B) includes partnership interests. As a result, in the caseofthegrantorofanoptiononapart- nership interest, gain or loss from any clos- ing transaction with respect to, and gain on lapse of, the option is generally treated un- der the proposed regulations as gain or loss from the sale or exchange of a capital asset held not more than 1 year. B.Character of gain or loss to the option holder With respect to an option holder, un- der section 1234(a), gain or loss on the sale or exchange of, or loss on failure to exercise, an option is considered gain or loss from the sale or exchange of property that has the same character as the prop- erty to which the option relates would have in the hands of the taxpayer. Although a 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 of commenters on the noncompensatory part- nership option proposed regulations ques- tioned whether section 751 applies to the lapse, repurchase, sale, exchange, or other termination of a noncompensatory option. The Treasury Department and the IRS continue to study this issue and request comments on (1) if section 751(a) applies to the lapse, repurchase, sale, or exchange of a noncompensatory option, (a) how the option holder’s share of income or loss from section 751 property would be de- termined under §1.751–1(a)(2), and (b) how a partner in the issuing partnership that transfers its partnership interest while the option is outstanding would determine its share of income or loss from section 751 property under §1.751–1(a)(2) (that is, should it be reduced by the amount of income or loss from section 751 property attributable to the option holder); and (2) if section 751(a) does not apply to the lapse, repurchase, sale, or exchange of a noncompensatory option, what mea- sures, if any, should be taken to ensure that ordinary income is not permanently eliminated. Effective/Applicability Date To coordinate the proposed regulations with the final noncompensatory partner- ship option regulations, the proposed reg- ulations are proposed to have the same ef- fective date as the final noncompensatory partnership option regulations. Therefore, the proposed regulations are proposed to apply to options issued on or after Febru- ary 5, 2013. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Execu- tive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Ad- ministrative Procedure Act (5 U.S.C. chap- ter 5) does not apply to this regulation, and because the regulation does not impose a collection of information requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, considera- tion will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS March 25, 20137152013–13 I.R.B. request comments on all aspects of the pro- posed rules. All comments are available atwww.regulations.govor upon request. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in theFederal Register. Drafting Information The principal authors of these pro- posed regulations are Benjamin Weaver of the Office of Associate Chief Counsel (Passthroughs and Special Industries) and Shawn Tetelman of the Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 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 as follows: §1.761–3 Certain option holders treated as 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 plan in existence at the time of the issuance or modification of the noncompensatory op- tion that has as a principal purpose the sub- stantial reduction of the present value of the aggregate Federal tax liabilities of the partners and the noncompensatory option holder (under paragraph (a)(1)(ii) of this section): (A) Issuance, transfer, or modification of an interest in, or liquidation of, the issu- ing partnership; (B) Issuance, transfer, or modification of an interest in any look-through entity (as defined in paragraph (b)(1) of this section) that directly, or indirectly through one or more look-through entities, owns the non- compensatory option; (C) Issuance, transfer, or modification of an interest in any look-through entity that directly, or indirectly through one or more 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 treatment of grantors of certain options granted after September 1, 1976. ***** (b) * * * (2) * * * For purposes of the preceding sentence, for optionsgranted on or after February 5, 2013, the termsecuritiesin- cludes partnership interests. ***** Steven T. Miller, Deputy Commissioner for Services 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 Federal Register for February 5, 2013, 78 F.R. 8060) Notice of Proposed Rulemaking and Notice of Public Hearing Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage REG–148500–12 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and 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 and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, as amended by the TRICARE Affirmation Act and Public Law 111–173. These pro- posed regulations provide guidance on the liability for the shared responsibility pay- ment for not maintaining minimum essen- tial coverage. This document also pro- vides notice of a public hearing on these proposed regulations. DATES: Comments must be received by May 2, 2013. Outlines of topics to be discussed at the public hearing scheduled for May 29, 2013, at 10:00 a.m., must be received 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 may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–148500–12), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically viatheFederaleRulemaking Portal atwww.regulations.gov(IRS REG–148500–12). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. FOR FURTHER INFORMATION CONTACT: Concerning the pro- posed regulations, Sue-Jean Kim or John B. Lovelace,(202) 622–4960; concerning the submission of comments, the public hearing, and to be placed on the building access list to attend the public hearing, 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 of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to theOffice of Management and Budget, Attn: Desk Officer for 2013–13 I.R.B.716March 25, 2013 the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to theInternal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:M:S, Washington, DC 20224. 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 have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be en- hanced; How the burden of complying with the proposed collection of information may be minimized, including through the appli- cation of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide informa- tion. The collection of information in these proposed regulations is in §1.5000A–3 and §1.5000A–4. The collection of infor- mation is necessary to determine whether the shared responsibility payment provi- sion applies to a taxpayer and compute any shared responsibility payment imposed on a taxpayer. The likely respondents are individuals required to file Federal income tax returns under section 6012(a)(1) of the Internal 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 IRS will create to request the information in the proposed regulation. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a 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 Health Care and Education Reconciliation Act of 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 shared responsibility to reform and improve the availability, quality, and affordability of health insurance coverage in the United States. The Affordable Care Act expands Medicaid eligibility for residents of elect- ing States and increases Federal funding for the expansion. The Affordable Care Act also provides individuals and small businesses the ability to purchase pri- vate health insurance through State-based, State Partnership, or Federally facilitated competitive market places called Afford- able Insurance Exchanges (Exchanges). Through Exchanges, insurance compa- nies will compete for business on a level playing field and qualified consumers will have a choice of health plans to fit their needs. In addition, the Affordable Care Act in- cludes various insurance market reforms to increase 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 higher premium prices based on factors other than age, tobacco use, rating area, or family size. Moreover, the Affordable Care Act builds upon the existing private employer- based health insurance system to ensure continued access to high quality health in- surance coverage at low cost. Finally, to ensure effective and efficient implementation of the insurance market reforms, the Affordable Care Act requires a nonexempt individual to maintain mini- mum essential coverage or make a shared responsibility payment. Section 1501(b) of the Affordable Care Act added section 5000A to a new chapter 48 of subtitle D (Miscellaneous Excise Taxes) of the Code effective for months beginning after December 31, 2013. Section 5000A was subsequently amended by the TRICARE Affirmation Act of 2010, Public Law 111–159 (124 Stat. 1123) and Public Law 111–173 (124 Stat. 1215). Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage Section 5000A provides nonexempt individuals with a choice: maintain min- imum essential coverage for themselves and any nonexempt family members or include an additional payment with their Federal incometax return. Section 5000A(a) and section 5000A(b) provide that nonexempt individuals must have minimum essential coverage for each month beginning after December 31, 2013, or make an additional payment (the shared responsibility payment) with their Federal income tax return for the taxable year that includes such month. Under sec- tion 5000A(b)(3)(A), a taxpayer is liable for the shared responsibility payment if any nonexempt individual who may be claimed by the taxpayer as a dependent for a taxable year does not have minimum essential coverage in a month included in that taxable year. Married taxpayers fil- ing a joint return for any taxable year are jointly liable for any shared responsibility payment imposed for the year. Exempt Individuals Many individuals are exempt from the shared responsibility payment, includ- ing some whose religious beliefs conflict with acceptance of the benefits of pri- vate or public insurance and those who do not have an affordable health insur- ance coverage option available. Section 1311(d)(4)(H) of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)) directs Ex- changes to issue to qualified individuals certificates of exemption from the re- quirement to maintain minimum essential coverage or the shared responsibility pay- ment under section 5000A. Section 1411 of the Affordable Care Act (42 U.S.C. 18081) generally provides procedures for determining an individual’s eligibil- ity for various benefits relating to health coverage, including exemptions from the application of section 5000A. The De- partment of Health and Human Services and the Department of the Treasury are working in close coordination to release regulations and other guidance related to Exchanges. On March 27, 2012, the Department of Health and Human Services released final regulations related to the establish- March 25, 20137172013–13 I.R.B. ment of, and the standards applicable to, Exchanges (45 CFR 155.10 and following sections (Exchange regulations)). Section 155.200(b) of the Exchange regulations directs an Exchange to issue exemption certificates in accordance with sections 1311(d)(4)(H) and 1411 of the Afford- able Care Act (42 USC 18031(d)(4)(H), 18081). The Department of Health and Human Services is publishing proposed regulations detailing the standards by which Exchanges will issue certificates of exemption under section 5000A. Pa- tient Protection and Affordable Care Act; Exchange Functions: Eligibility for Ex- emptions; Minimum Essential Coverage Provisions (to be codified at 45 CFR 155.600 and following sections). Section 5000A(d) and (e) describe in- dividuals who are exempt from making the shared responsibility payment even if they do not have minimum essential cov- erage for a given month. Under section 5000A(d)(2)(A), an individual is exempt for a month for which an Exchange cer- tifies that the individual is a member of a recognized religious sect or a division thereof described in section 1402(g)(1) and is an adherent of established tenets or teachings of that sect or division. Section 1402(g)(1) providesan exemption from self-employment tax for members of a qualified religious sect or division thereof. A qualified religious sect or division thereof described in section 1402(g)(1) is a sect or division thereof that the Com- missioner of Social Security finds: (1) has established tenets or teachings by reason of which its members and adherents are conscientiously opposed to acceptance of the benefits of any private or public in- surance that makes payments in the event of death, disability, old age, or retirement or makes payments toward the cost of, or provides services for, medical care (including the benefits of any insurance system established by the Social Security Act); (2) maintains, and has maintained for a substantial period of time, a practice whereby its members make provision for its dependent members that is reasonable in view of their general level of living; and (3) has been in existence at all times since December 31, 1950. Section 5000A(d)(2)(B) provides that an individual is exempt for a month that the individual is a member of a health care sharing ministry. A health care sharing ministry is an organization: (1) which is described in section 501(c)(3) and ex- empt from tax under section 501(a); (2) members of which share a common set of ethical or religious beliefs and share medical expenses among themselves in accordance with those beliefs, and regard- less of the State in which a member resides or is employed; (3) members of which retain membership even after they develop a medical condition; (4) which has itself (or a predecessor of which has) been in existence at all times since December 31, 1999; (5) members of which have con- tinuously and without interruption shared medical expenses since at least December 31, 1999; and (6) which conducts an an- nual audit performed by an independent certified public accounting firm in accor- dance with generally accepted accounting principles the report of which is made available to members of the public upon request. Section 5000A(d)(3) provides that an individual is exempt for a month that the individual is neither a citizen or national of the United States nor an alien lawfully present in the United States. Section 5000A(d)(4) provides that an individual is exempt for a month that the individual is incarcerated, except for incarceration pending the disposition of charges. Section 5000A(e)(1) provides that an individual is exempt for a month for which the individual lacks access to affordable minimum essential coverage. For this pur- pose, an individual lacks access to afford- able coverage if the individual’s required contribution (determined on an annual ba- sis) for minimum essential coverage ex- ceeds a percentage (8 percent for 2014) of the individual’s household income for the most recent taxable year for which the Secretary 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’shousehold incomeas the sum of the taxpayer’s modified adjusted gross income and the modified adjusted gross income of any other member of a taxpayer’s family (that is, individuals for whom the taxpayer properly claims a deduction under section 151 (relating to the personal exemption deduction)) who are required to file a Federal income tax return. Under section 5000A(c)(4)(C), modified adjusted gross incomemeans adjusted gross income (within the mean- ing of section 62) increased by amounts excluded from gross income under section 911 and tax-exempt interest a taxpayer receives or accrues in the taxable year. Unlike section 36B(d)(2)(B), modified adjusted gross income for purposes of section 5000A does not include Social Security benefits that are not includable in gross income. For purposes of determin- ing the affordability of minimum essential coverage under section 5000A(e)(1), the taxpayer’s household income is increased by the portion of the required contribution made through a salary reduction arrange- ment and excluded from gross income. For purposes of determining house- hold income, a taxpayer’s family includes all individuals for whom the taxpayer properly claims a personal exemption de- duction under section 151 for the taxable year.See also§1.36B–1(d). Taxpayers may claim a personal exemption deduction for themselves, a spouse, and each of their dependents. Section 152 provides that a taxpayer’s dependent may be a qualifying child or qualifying relative, including an unrelated individual who lives with the taxpayer. For an employee eligible to purchase coverage under an eligible employer-spon- sored plan, the required contribution for purposes of the exemption under section 5000A(e)(1) is the employee’s share of the annual premium for self-only cover- age. For an individual eligible to purchase coverage under an eligible employer-spon- sored plan because the individual is re- lated to an employee, the determination of 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 purchase coverage under an eligible employer-spon- sored plan, the required contribution is the annual premium for the lowest cost bronze plan available on the Exchange where the individual lives reduced by the credit al- lowable under section 36B for the taxable year (determined as if the individual en- rolled in a plan through such Exchange for the entire taxable year). Section 5000A(e)(2) provides that an individual is exempt for a month included in a calendar year if the individual’s house- hold income for the most recent taxable year for which information is available is 2013–13 I.R.B.718March 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 above which individuals are required to file Fed- eral income tax returns. As described in this preamble, in- come-based exemptions under section 5000A(e)(1) and section 5000A(e)(2) rely upon household income for the most recent taxable year that the Secretary of Health and Human Services, after consultation with the Secretary of Treasury, determines information is available. The Secretary of Health and Human Services, after consul- tation with the Secretary of the Treasury, determined that the household income for these exemptions that is available and rel- evant is the household income for the year for which an exemption is being claimed. See section III.A.3.b. of the preamble to Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Cover- age Provisions (to be codified at 45 CFR 155.600 and following sections, and 45 CFR 156.600 and following sections). The determination by the Secretary of Health and Human Services is reflected in the proposed regulations. Section 5000A(e)(3) provides that an individual is exempt for a month that the individual is a member of an Indian tribe as defined in section 45A(c)(6). Section 45A(c)(6) describes certain Federally rec- ognized Indian tribes (including any qual- ified Alaska Native village or regional or village corporation).The Federally recog- nized Indian tribes are listed in Indian En- tities Recognized and Eligible to Receive Services from the United States Bureau of Indian 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 of which occurs in a period when the indi- vidual does not have minimum essential coverage for a continuous period of less than three months (a short coverage gap). The length of a gap in coverage is deter- mined without regard to the calendar years in which months in the gap occur. If an individual 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) authorizes the Secretary to issue regulations that pro- vide for collecting theshared responsibil- ity payment in cases where gaps in cover- age straddle more than one taxable year. Section 5000A(e)(5) provides that an individual is exempt for a month that the Exchange determines, in accordance with guidance promulgated by the Secretary of Health and Human Services, the individ- ual suffered a hardship that prevented the individual from obtaining coverage under a qualified health plan. The Department of Health and Human Services is propos- ing rules on the criteria for application of the hardship exemption. Patient Protection and Affordable Care Act; Exchange Func- tions: Eligibility for Exemptions; Mini- mum Essential Coverage (to be codified at 45 CFR 155.605(g)). Computation of Shared Responsibility Payment Under section 5000A(c), the amount of the shared responsibility payment for any taxable year is generally the sum of monthly penalty amounts for all months in the taxable year in which any nonexempt individual for whom the taxpayer is li- able under section 5000A(b) did not have minimum essential coverage. The shared responsibility payment amount for any taxable year may not exceed an amount equal to the national average premium for bronze-level qualifiedhealth plans offered through Exchanges for the applicable fam- ily size involved. The monthly penalty amount for a month is equal to 1 /12of the greater of the following amounts: (1) the flat dollar amount or (2) the percentage of income. The flat dollar amount is the lesser of the following amounts: (a) the sum of the ap- plicable dollar amounts for all nonexempt individuals without minimum essential coverage for whom the taxpayer is liable or (b) 300 percent of the applicable dollar amount. The applicable dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016, and will be increased for cal- endar years beginning after 2016 by a cost-of-living adjustment. If a nonexempt individual has not attained the age of 18 as of the beginning of a month, the appli- cable dollar amount for that individual is one-half of the regular applicable dollar amount. The percentage of income is calculated as the excess of the taxpayer’s household income over the taxpayer’s Federal income tax return filing threshold under section 6012(a)(1), multiplied by a percentage fig- ure. The percentage figure is 1 percent for taxable years beginning in 2014, 2 percent for taxable years beginning in 2015, and 2.5 percent for taxable years beginning af- ter 2015. Minimum Essential Coverage Section 5000A(f) definesminimum es- sential coverageas one of the following: (1) coverage under a specified government sponsored program, (2) coverage under an eligible 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 the Secretary 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 programs include the following: (1) the Medicare program under part A of title XVIII of the Social Security Act, (2) the Medicaid pro- gram under title XIX of the Social Security Act, (3) the Children’s Health Insurance Program (CHIP) under title XXI of the Social Security Act, (4) medical coverage under chapter 55 of title 10, United States Code, including the TRICARE program, (5) veterans health care programs under chapter 17 or 18 of title 38, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of Health and Human Services and the Secretary of Treasury, (6) a health plan under sec- tion 2504(e) of title 22 relating to Peace Corps volunteers, and (7) the Nonappro- priated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995, Public Law 103–337 (10 U.S.C. 1587 note). Under section 5000A(f)(2), an eligible employer-sponsored plan is, with respect to an employee, a group health plan or group health insurance coverage offered by an employer to the employee that is: (1) a governmental plan, within the mean- ing of section 2791(d)(8) of the Public Health Service Act, or (2) any other plan or coverage offered in the small or large group market within a State. An eligi- March 25, 20137192013–13 I.R.B. ble employer-sponsored plan also includes a grandfathered health plan offered in a group market. Under section 1251 of the Affordable Care Act (42 U.S.C. 18011), a grandfa- thered health plan is a group health plan or health insurance coverage that provided coverage as of the enactment date of the Affordable Care Act (March 23, 2010) or in which an individual was enrolled as of that 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 withthe 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 that provides criteria and a process by which other types of coverage may be designated as minimum essential coverage. Patient Protection and Affordable Care Act; Ex- change Functions: Eligibility for Exemp- tions; Minimum Essential Coverage Pro- visions (to be codified at 45 CFR 156.600 and following sections). Under section 5000A(f)(3), health coverage that consists of coverage of certain excepted benefits specified in section 2791(c) of the Public Health Ser- vice Act (42 U.S.C. 300gg–91(c)) is not minimum essential coverage. There are four categories of excepted benefits. The first category includes accidental death and dismemberment coverage, disabil- ity insurance, general liability insurance, automobile liability insurance, workers’ compensation, credit-only insurance (for example, mortgage insurance), and cover- age for employer-provided on-site medical clinics.See42 U.S.C. 300gg–91(c)(1). The second category of excepted benefits includes limited-scope dental or vision benefits, long-term care benefits, and benefits provided under certain health flexible spending arrangements.See42 U.S.C. 300gg–91(c)(2). The third cate- gory of excepted benefits includes, but only if offered under a policy, certificate, or contract of insurance separate from, and not coordinated with, any group or individual health plan maintained by the same plan sponsor, coverage only for a specified disease or illness (for example, cancer-only policies) or fixed indemnity insurance (for example, a policy that pays a fixed dollar amount, such as $100, per day of hospitalization or illness regard- less of the amount of medical expense incurred).See42 U.S.C. 300gg–91(c)(3). The last category of excepted benefits includes, but only if offered under a pol- icy, certificate, or contract of insurance separate from the primary health cover- age, Medicare supplemental polices (also known as Medigap or MedSupp insur- ance), TRICARE supplemental policies, and similar supplemental coverage to coverage under a group health plan.See 42 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 abona fideresident of a United States possession for the month or (2) if the month occurs during any period de- scribed in section 911(d)(1)(A) or section 911(d)(1)(B) that is applicable to the indi- vidual. Section 911(d)(1)(A) is applicable to a citizen of the United States who has a tax home outside the United States and is abona fideresident of a foreign country or countries during an uninterrupted period that includes an entire taxable year. For example, an individual who resides abroad for an entire calendar year is treated as hav- ing minimum essential coverage for each month of that calendar year regardless of whether the individual has health coverage of 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 United States and is present in a foreign coun- try or countries for at least 330 full days during 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 as a qualified individual for purposes of sec- tion 911 and may elect to exclude certain foreign earned income and housing costs from 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 the payment 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 shared responsibility payment is payable upon no- tice and demand by the Secretary. The shared responsibility payment is generally assessed and collected in the same manner as an assessable penalty under subchap- ter B of chapter 68 (sections 6671 through 6725). Unlike the assessable penalties, however, the Secretary may not file notice of lien or levy on the taxpayer’s property for failing to pay the assessed shared re- sponsibility payment. Further, a taxpayer may not be subject to criminal prosecution or penalty for failing to pay the assessed shared responsibility payment in a timely manner. Explanation of Provisions 1.Maintenance of Minimum Essential Coverage and Liability for Shared Responsibility Payment The proposed regulations provide that, for a month, a nonexempt individual must either have minimum essential coverage or pay the shared responsibility payment. a.Coverage for a month The proposed regulations provide that, for any calendar month, an individual is treated as having minimum essential cov- erage if the individual is enrolled in and en- titled to receive benefits under a program or plan that is minimum essential coverage for at least one day during the month. b.Liability for shared responsibility payment i. Liability for dependents Under section 5000A(b)(3)(A), if an in- dividual with respect to whom the shared responsibility payment is imposed for a month is another individual’s dependent (as defined in section 152) for the taxable year including that month, the other indi- vidual is liable for the shared responsibility payment for the dependent. The proposed regulations clarify that a taxpayer is liable for the shared responsibility payment im- posed with respect to any individual for a month 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 the taxpayer actually claims the individual as a 2013–13 I.R.B.720March 25, 2013 dependent for the taxable year does not af- fect the taxpayer’s liability for the shared responsibility payment for the individual. The proposed regulations provide spe- cial rules for determining liability for the shared responsibility payment attributable to individuals who are adopted or placed in foster care during a taxable year. If a taxpayer legally adopts a child and is enti- tled to claim the child as a dependent un- der section 151 for the taxable year when the 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 as a dependent under section 151 for the tax- able year places the child for adoption dur- ing the year, the taxpayer is not liable for a shared responsibility payment attributable to the child for the months after the adop- tion. The proposed regulations defineshared responsibility familyto include all indi- viduals for whom a taxpayer (including a 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 remains liable for a shared responsibility payment imposed for a nonexempt dependent who does 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 a month files a joint return for the taxable year including that month, the individual and the individual’s spouse are jointly liable for the sharedresponsibility pay- ment. The proposed regulations clarify that whether one spouse is an exempt in- dividual does not affect the joint liability of 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 as providing minimum essential coverage by referring to the Federal law authorizing a particular program. In most cases, the rel- evant law describes a single program or a discrete portion of a larger program. For example, section 5000A(f)(1)(A)(i) lists Part 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 do not provide a scope of benefits compara- ble to the primary Medicaid program under the same title. In addition, the Secretary of Veterans Affairs, in coordination with the Secretaries of Health and Human Ser- vices and Treasury, determined that only certain health care programs under chap- ter17or18oftitle38,UnitedStatesCode provide comprehensive benefits. The pro- grams with limited coverage are similar to coverage consisting of excepted benefits that is not minimum essential coverage un- der section 5000A(f)(3). Accordingly, the proposed regulations identify limited ben- efit programs under title XIX of the Social SecurityActthatarenotminimumessen- tial coverage and specify comprehensive health care programs under chapter 17 or 18 of title 38, United States Code, that are minimum essential coverage. b.Eligible employer-sponsored plans In general Section 5000A(f)(2) defineseligible employer-sponsored plan, for an em- ployee, as a group health plan or group health insurance coverage offered by an employer to the employee that is either of 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) any other plan or coverage offered in the small or large group market within a State. The termsgroup health planandgroup health insurance coverageare not defined in sec- tion 5000A. However, section 5000A(f)(5) provides that any term used in section 5000A that is also used in title I of the Af- fordable Care Act has the same meaning as when used in that title. Section 1301(b)(3) of the Affordable Care Act (42 U.S.C. 18021(b)(3)) provides thatgroup health planhas the same mean- ingasinsection2791(a)ofthePHSA(42 U.S.C. 301gg–91(a)(1)). Section 2791(a) of the PHSA provides thatgroup health planmeans an employee welfare benefit plan (as defined in section 3(1) of the Em- ployee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1002(1)) to the extent that the plan provides medical care (as defined in section 2791(a)(2) of the PHSA and including items and services paid for as medical care) to employees and their dependents directly or through insur- ance, reimbursement, or otherwise. Sec- tion 3(1) of ERISA definesemployee wel- fare benefit planas any plan, fund, or pro- gram established or maintained by an em- ployer or by an employee organization, or by both, to the extent that the plan, fund, or program is established or maintained for the purpose of providing for its par- ticipants or their beneficiaries, through the purchase 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 certain former employees continuation coverage under Federal or State law. Many em- ployers offer health benefits coverage to retired employees. Under the PHSA and ERISA, group health plans and employee welfare benefit plans,respectively, include plans offered to former employees. Ac- cordingly, the proposed regulations clar- ify that coverage provided by an employer to 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-sponsored plan. c.Other health benefits coverage Under section 5000A(f)(1)(E), the Sec- retary of Health and Human Services, in coordination with the Secretary of the Treasury, may designate other health benefits coverage as minimum essential coverage. The Department of Health and Human Services is proposing rules pro- viding standards for determining whether certain other types of health insurance March 25, 20137212013–13 I.R.B. coverage constitute minimum essential coverage and procedures for plan sponsors to follow for a plan to be identified as minimum essential coverage under section 5000A. Patient Protection and Affordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Cov- erage Provisions (to be codified at 45 CFR 156.600 and following sections). 3.Exempt Individuals a.In general The termapplicable individualis used in section 5000A to describe an indi- vidual who is subject to the minimum essential coverage provision under section 5000A(a). Section 5000A(d)(2) through section 5000A(d)(4) describe one cate- gory of individuals who are not applicable individuals 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 the shared responsibility payment imposed under section 5000A(b). Although the two categories are distinct in the statute, the consequence for individuals described in either category is the same: individu- als in both categories are not subject to the shared responsibility payment for not maintaining minimum essential coverage. Accordingly, the proposed regulations re- fer to all individuals described in section 5000A(d)(2), (d)(3), or (d)(4), or sec- tion 5000A(e)(1), (e)(2), (e)(3), (e)(4), or (e)(5), asexempt individuals. For a month, a nonexempt individual is any individual who is alive for the entire month and is not an 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 one day in the month. In the case of certain individuals who are nonresident aliens (as defined in section 7701(b)(1)(B)), individ- uals whose household income falls below the return filing threshold, and individuals who experience short coverage gaps, the proposed regulations provide rules on how to determine whether an individual is ex- empt for a particular month. An individ- ual is exempt for all months included in a taxable year when the individual is a non- resident alien. In the case of an individual whose household income falls below the return filing threshold for a taxable year, the individual is exempt for all months in the taxable year. In the case of an individ- ual experiencing a coverage gap, the indi- vidual is exempt fora month included in the first short coverage gap in a calendar year. b.Members of recognized religious sects or divisions Under section 5000A(d)(2)(A), an indi- vidual is exempt for a month that the indi- vidual has in effect a religious conscience exemption certification. Only an Ex- change may grant a religious conscience exemption certification. Individuals who are members of a recognized religious sect or division thereof described in section 1402(g)(1) and who are adherents of the established tenets or teachings of the sect or division are eligible to receive a reli- gious conscience exemption certification. c.Exempt noncitizens The proposed regulations clarify that an individual who is not a citizen or na- tional of the United States is exempt for a month if the individual is not lawfully present in the United States in that month within the meaning of 45 CFR 155.20 (re- ferring to lawful immigration status within the United States). In addition, an indi- vidual who is not a citizen or national of the United States is treated as not law- fully present in the United States for a month in a taxable year if the individual is a nonresident alien as defined in section 7701(b)(1)(B) for that taxable year. d.Incarceratedindividuals Section 5000A(d)(4) provides that an individual is exempt for a month for which the individual is incarcerated (other than incarceration pending the disposition of charges). The proposed regulations clarify that an individual confined for at least one day in a jail, prison, or similar penal insti- tution or correctional facility after the dis- position of charges is exempt for the month that includes the day. e.Individuals who cannot afford coverage Section 5000A(e)(1)(A) provides that an 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 individual does not have access to affordable cover- age for a month if the individual’s required contribution (determined on an annual ba- sis) for coverage for the month exceeds 8 percent of the taxpayer’s household in- come for the taxable year. Under section 5000A(e)(1)(D), for any plan year begin- ning after 2014, the 8 percent figure is re- placed by the percentage figure that the Secretary of Health and Human Services determines reflects the excess of the rate of premium growth between the preceding calendar 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 section 5000A(e)(1)(A), the proposed regulations require that the taxpayer’s household in- come be increased by the portion of the re- quired contribution made through a salary reduction arrangement and excluded from gross income. In many cases, information on 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 adjustment to household income may be made with the information available under sections 6051, 6055, 6056, or other provisions of the Code. i. Individuals eligible for minimum essential coverage under an eligible employer-sponsored plan A. Eligibility for coverage under an eligible employer-sponsored plan If an individual is eligible for cover- age under an eligible employer-sponsored plan, 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 determined solely by reference to the cost of coverage under the eligible employer-sponsored plan. The proposed regulations clarify that an employee or related individual is treated as eligible for coverage under an eligible employer-sponsored plan for each month included in the plan year if the employee or related individual could have enrolled in the plan for that month during an open or special enrollment period. 2013–13 I.R.B.722March 25, 2013 The proposed regulations also clar- ify that an employed individual who is eligible for coverage under an eligible employer-sponsored plan offered by the individual’s employer is not treated as eligible as a related individual for cover- age under a plan offered by the employer of another employed individual. Thus, if two or more members of a family are employed and their respective employers offer self-only and family coverage under eligible employer-sponsored plans, each employed individual determines the af- fordability of coverage using the premium for the self-only coverage offered by the individual’s employer. Neither individ- ual may determine the affordability of coverage using the premium for family coverage offered by the other individual’s employer. In these cases, each employed individual’s self-only coverage may be treated as affordable, even though the aggregate cost of covering all employed individuals may exceed 8 percent of the family’s household income. The Depart- ment of Health and Human Services is proposing rules that would permit families in these circumstances to qualify for the hardship exemption described in section 5000A(e)(5). Patient Protection and Af- fordable Care Act; Exchange Functions: Eligibility for Exemptions; Minimum Essential Coverage Provisions (to be cod- ified at 45 CFR 155.605(g)). The proposed regulations provide that employeeincludes a former employee. Thus, an individual eligible to enroll in retiree coverage under a group health plan that is an eligible employer-sponsored plan as defined in section 5000A(f)(2) is treated as eligible to purchase minimum essential coverage under an eligible em- ployer-sponsored plan under the same rules applicable to current employees. The treatment of former employees is consis- tent with other provisions of the Code, the PHSA, and ERISA that apply to group health plans of employers. In addition, the proposed regulations provide that an individual eligible to enroll in continuation coverage required under Federal law, such as COBRA, or a compa- rable State law is eligible to purchase min- imum essential coverage under an eligible employer-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 the rules provided in §1.36B–2(c)(3)(iv). B. Required contribution for employees eligible for coverage under an employer-sponsored plan Section 5000A(e)(1)(B)(i) provides that, in the case of an employee eligible to purchase minimum essential coverage through an eligible employer-sponsored plan, the required contribution is the por- tion of the annualized premium that the individual would pay (without regard to whether paid through salary reduction or otherwise) for self-only coverage. The proposed regulations clarify that, for an employee eligible for coverage under an eligible employer-sponsored plan, the re- quired contribution is the portion of the annual premium that the employee would pay for the lowest cost self-only coverage. C. Required contribution for a related individual eligiblefor coverage under an eligible employer-sponsored plan Section 5000A(e)(1)(C) provides that, in the case of a related individual eligible to purchase minimum essential coverage under an eligible employer-sponsored plan because of the individual’s relationship with an employee, the related individ- ual’s affordability determination is made by reference to the employee’s required contribution. The proposed regulations provide that a related individual is an indi- vidual who is eligible for coverage under an eligible employer-sponsored plan be- cause of a relationship to an employee and for whom a personal exemption deduction under section 151 is properly claimed on the employee’s Federal income tax return. For example, an employee’s spouse is treated as a related individual if the spouse files a joint return with the employee and is eligible for employer-sponsored cov- erage only under the plan offered to the employee. An individual who is eligible to enroll in an eligible employer-spon- soredplanbyreasonofarelationshipto an employee, but who is not claimed as a dependent by the employee, is not treated as a related individual. For purposes of section 5000A, the unclaimed dependent’s household income is independently deter- mined. The proposed regulations clarify that if an employee or related individual is el- igible to enroll in an eligible employer- sponsored plan, any eligibility for other coverage (for example, government spon- sored minimum essential coverage) is dis- regarded for purposes of the exemption for lack of affordable coverage. The proposed regulations further clar- ify that the required contribution for a related individual’s coverage is deter- mined by reference to the premium for the lowest cost coverage under the eli- gible employer-sponsored plan in which the employee and all related individuals who are included in the employee’s fam- ily and not otherwise exempt are eligible to enroll. Thus, the required contribu- tion for a spouse and claimed dependents (who are not otherwise exempt) is the premium that the employee would pay for the lowest cost coverage covering the employee, the spouse, and the claimed dependents. The required contribution for self-only coverage under an eligible em- ployer-sponsored plan may cost less than 8 percent of household income, while the required contribution for family coverage under the same employer plan may cost more than 8 percent of household income. In such a case, the employee is not exempt under section 5000A(e)(1), while the em- ployee’s spouse and claimed dependents are exempt. Finally, some individuals who are claimed as dependents by a taxpayer may not be eligible for coverage under the tax- payer’s eligible employer-sponsored plan. The affordability of coverage for these individuals is determined in the manner that applies to them individually. Thus, if a taxpayer is not allowed to enroll a niece who is the taxpayer’s dependent in the tax- payer’s eligible employer-sponsored plan, the required contribution for the niece is not determined by reference to the cost of coverage under the plan. Instead, unless the niece is eligible for coverage under another eligible employer-sponsored plan, her required contribution is determined under the rules applicable to individuals eligible only to purchase coverage in the individual market. ii. Individuals eligible only to purchase coverage in the individual market Section 5000A(e)(1)(B)(ii) defines the termrequired contributionfor an individ- ual eligible only to purchase coverage in March 25, 20137232013–13 I.R.B. the individual market. The proposed regu- lations clarify that, for any individual who is not an employee or related individual el- igible for minimum essential coverage un- der an eligible employer-sponsored plan, the required contribution is the premium for the lowest cost bronze plan available in the individual market through the Ex- change serving the rating area where the individual resides, reduced by the maxi- mum amount of any premium tax credit that would be allowable if the individual were enrolled in the plan offered through the Exchange. As explained in this preamble, under the proposed regulations, both the annual premium for the applicable lowest cost bronze plan and the credit allowable under section 36B are determined by reference to 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 for all members of a nonexempt family who are ineligible for coverage under an eligi- ble employer-sponsored plan. A. Premium for the lowest cost bronze plan The proposed regulations provide that thelowestcostbronzeplanisthelow- est cost bronze-level qualified health plan available in the Exchange serving the rat- ing area that would cover all members of the nonexempt family who are ineligible for coverage under an eligible employer- sponsored plan. Accordingly, the premium for the lowest cost bronze plan is the same for all individuals in a nonexempt family. The proposed regulations provide spe- cial rules for determining the premium for the lowest cost bronze plan if the Ex- change does not offer a bronze-level plan that would cover the taxpayer’s entire nonexempt family. The proposed regula- tions provide that, in general, the premium for the lowest cost bronze plan is the sum of the premiums for the lowest cost bronze plans that would, taken together, cover the taxpayer’s nonexempt family (for exam- ple, for an uncle and two adult dependent nieces, a self-only plan for the uncle and a two-adult or family plan for the nieces). Alternatively, the proposed regulations provide that a taxpayer may elect to use the premium for the lowest cost bronze plan that would apply to a set of individ- uals that have the same characteristics as the taxpayer’s nonexempt family (such as one adult plus children) as if one plan cov- ered all members of the taxpayer’s shared responsibility family. B. Credit allowable under section 36B In general, a premium tax credit is allowable under section 36B for any coverage month (within the meaning of §1.36B–3(c)) that occurs in a taxable year 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 no premium tax credit is allowable for the individual’s coverage, if the individual is eligible for minimum essential coverage other than coverage offered in the individ- ual market for that month. In general, an applicable taxpayer is a taxpayer whose household income for the taxable year is between 100 percent and 400 percent of the Federal poverty line for the taxpayer’s family size. Section 36B(b)(1) provides that the pre- mium tax credit for any taxable year is the sum of the premium assistance amounts with respect to all coverage months oc- curring in the taxable year. Under section 36B(b)(2), for any coverage month, the premium assistance amount is the lesser of the following: (1) the monthly premi- ums for the month for one or more quali- fied health plans in which the taxpayer or a member of the taxpayer’s family (coverage family) is enrolled through the Exchange serving 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 taxpayer over an amount equal to 1 /12of the product of 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 a single, aggregated unit. The proposed regulations take a simi- lar family-unit approach to determine the affordability of Exchange coverage. The proposed regulations provide that, for pur- poses of section 5000A, each individual in the taxpayer’s nonexempt family is treated as having enrolled in a qualified health plan through the appropriate Exchange for purposes of determining the credit allowable under section 36B. Therefore, for each individual, a month is treated as a coverage month if the individual is ineligible for minimum essential cover- age other than coverage in the individual market for the month. The proposed reg- ulations further provide that the premium assistance amount for the month is the amount that would be allowable under the rules of section 36B if each member of the individual’s nonexempt family en- rolled in a qualified health plan through an Exchange. Accordingly, for a month that an individual included in a nonexempt family is eligible for minimum essential coverage other than coverage in the indi- vidual market, the month is not a coverage month for that individual, the individual is not included in the coverage family for purposes of section 36B, and no premium assistance amount is allowable for the coverage attributable to such individual. f.Household income below return filing threshold Section 5000A(e)(2) provides that an individual is exempt for a month in a cal- endar year if the individual’s household income for the taxable year is less than the amount of gross income specified in section 6012(a)(1) with respect to the tax- payer. The proposed regulations refer to “the amount of gross income specified in section 6012(a)(1) with respect to the tax- payer” (that is, the minimum amount of gross income that triggers the individual’s requirement to file a Federal income tax re- turn under that section) as the applicable filing 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 as a dependent also is exempt as well. The Treasury Department and the IRS recog- nize that some taxpayers who do not have sufficient gross income to trigger a return filing requirement nevertheless may have household income that exceeds the return filing threshold. For example, if a taxpayer whose gross income is below the applica- ble filing threshold files a Federal income tax return in order to claim certain tax ben- efits (such as the earned income credit or 2013–13 I.R.B.724March 25, 2013 additional child tax credit) and claims a dependent whose gross income triggers a return filing requirement, the household income (which combines the taxpayer’s and the dependent’s income) may exceed the filing threshold. The Department of Health and Human Services is proposing rules 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 at 45 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 a continuous period without minimum es- sential coverage is determined by refer- ence to calendar months (for example, Jan- uary or February) in conjunction with the coverage 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 for one day in a calendar month, the month is not included in the continuous period when determining the application of the short coverage gap exemption. As a re- sult, the proposed regulations provide that an individual qualifies for the short cover- age gap exemption if the continuous pe- riod without minimum essential coverage is less than three full calendar months and is the first short coverage gap in the indi- vidual’s taxable year. i. Coverage gap straddling multiple taxable years In general, section 5000A(e)(4)(B)(i) provides that the length of a continuous period is determined without regard to the calendar years in which months in the pe- riod occur. However, whether an individ- ual had coverage during the last month, or the last two months, of a taxable year af- fects the determination of whether any gap in coverage that the individual experiences in the first month, or the first and second months, 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 taxable year and ends in the next taxable year, then January and any ensuing months of the second taxable year that are included in the period are ineligible for the short coverage gap exemption. Section 5000A(e)(4) expressly autho- rizes the Secretary to prescribe rules for the collection of the shared responsibility payment in cases in which continuous pe- riods include months in more than one tax- able year. Each Federal income tax return covers a single taxable year and requires the taxpayer to account for coverage of the taxpayer’s shared responsibility family during the months included in that taxable year. To require a taxpayer to take into account months in the following taxable year may delay or impede the taxpayer’s ability to file a timely Federal income tax return. Accordingly, to provide taxpayers with certainty when filing their Federal in- come tax returns, the proposed regulations provide that an individual who lacks min- imum essential coverage for a period no longer than the last two months of a tax- able year will be deemed to have a short coverage gap exemption for those months if the short coverage gap is the first to oc- cur in that taxable year, without regard to whether the individual is covered during the first months of the following taxable year. ii. Coordination with other exemptions The proposed regulations clarify that, for purposes of determining whether a short coverage gap applies, an individual is treated as covered under minimum es- sential coverage for a month in which the individual qualifies for a section 5000A exemption (other than the short coverage gap exemption). Therefore, the short cov- erage exemption applies to a month in which no other section 5000A exemption applies, and a month in which an individ- ual is otherwise exempt is not taken into account in determining the length of the continuous period without coverage. h.Claiming section 5000A exemptions The exemptions for members of recog- nized religious sects or divisions and for individuals who have suffered a hardship are available only to individuals who have been certified as meeting the relevant crite- ria by the Exchange serving the rating area where the individuals seeking the exemp- tion reside. In addition, Exchanges will provide, upon request, exemption certifications for members of health care sharing ministries, incarcerated individuals, and members of Indian tribes. If an individual receives an exemption certificationfromanEx- change, the taxpayerwho is responsible for accounting for that individual’s cov- erage must provide information about the certification on the taxpayer’s Federal in- come tax return. Alternatively, a taxpayer may claim any of these exemptions on the taxpayer’s Federal income tax return for the taxable year. Finally, the income-based exemptions for individuals who lack affordable cover- age or have household income below the applicable income tax return filing thresh- old and the exemption for short coverage gaps 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 income tax return that reports the individual’s in- come establishing qualification for the ex- emption. An individual who has house- hold income below the applicable Federal income tax return filing threshold and files a Federal income tax return may claim the exemption under section 5000A(e)(2) on the return. However, an individual who has household income below the applica- ble Federal income tax return filing thresh- old is not required to file a Federal income tax return to claim the exemption under section 5000A(e)(2). Pursuant to section 6001, taxpayers are required to maintain all records and information substantiating any claim for exemption on the taxpayer’s Federal in- come tax return, regardless of whether the individual was certified by an Exchange as qualifying for an exemption or first claimed the exemption on a Federal in- come tax return. 4.Computation of Shared Responsibility Payment Under section 5000A(b)(1) and 5000A(b)(3)(A), a taxpayer is liable for the shared responsibility payment with respect to any nonexempt individual who March 25, 20137252013–13 I.R.B. is included in the taxpayer’s shared re- sponsibility family. The maximum annual amount of the shared responsibility pay- ment for a taxpayer is the national average premium for the bronze level plan avail- able through Exchanges that provides coverage for the applicable family size in- volved. The proposed regulations clarify that the applicable family size involved for purposes of identifying the appropriate bronze level plan includes only the nonex- empt members of the taxpayer’s shared responsibility family who do not have minimum essential coverage. Under section 5000A(c), the annual amount of the shared responsibility pay- ment is the lesser of the applicable na- tional average bronze plan premium or the sum of the monthly penalty amounts. The monthly penalty amount may vary month to month because of changes in the composition of the taxpayer’s shared responsibility family. To provide a mean- ingful value with which the sum of the monthly penalty amounts are compared, the proposed regulations provide that the applicable national average bronze plan premium must similarly be determined for each month and then aggregated for comparison with the sum of the monthly penalty amounts. Consequently, the ap- plicable national average bronze plan premium may vary from month to month during the year to account for changes in the taxpayer’s shared responsibility fam- ily. 5.Procedure and Administration a.Inclusion with Federal income tax return Section 5000A(b)(2) provides that the shared responsibility payment for a month must be included with a taxpayer’s Federal income tax return for the taxable year that includes the month. The proposed regula- tions clarify that the time for assessing the shared responsibility payment is the same time as that prescribed by section 6501 for the taxable year including the month for which the taxpayer is liable for the pay- ment. b.Assessment and collection Section 5000A(g)(1) provides that the shared responsibility payment is payable upon notice and demand by the Secre- tary and, except as provided in section 5000A(g)(2), is assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 of the Code (sections 6671 through 6725). The proposed regulations clarify that the shared responsibility payment is not subject to deficiency procedures of subchapter B of chapter 63 of the Code. In addition, the proposed regulations clarify that interest on the shared responsibility payment accrues in accordance with the rules in section 6601. The proposed reg- ulations further provide that the Secretary may offset any liability for the shared responsibility payment against any over- payment due the taxpayer, in accordance with section 6402(a). Applicability Date These regulations are proposed to apply for months beginning after December 31, 2013. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Execu- tive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined 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), it is hereby certified that the proposed reg- ulations will not have a significant eco- nomic impact on a substantial number of small entities. The applicability of the pro- posed regulations is limited to individuals, who are not small entities as defined by the RFA (5 U.S.C. 601). Accordingly, the RFA 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 Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Public Hearing Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “Addresses” heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available atwww.regulations.govor upon request. A public hearing has been scheduled for May 29, 2013, beginning at 10:00 a.m., in the 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, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediateentrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER IN- FORMATION CONTACT” section of this preamble. The rules of §601.601(a)(3) of this chapter apply to the hearing. Persons whowishtopresentoralcommentsatthe hearing must submit electronic or written comments, and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by May 3, 2013. A period of 10 minutes will be allotted to each person for making comments. An agenda show- ing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hear- ing. Drafting Information The principal authors of the pro- posed regulations are William L. Candler and Sue-Jean Kim, Office of the Associate Chief Counsel (Income Tax & Accounting). Other personnel from the Treasury Department and the IRS participated in the development of the regulations. ***** Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended to read as follows: 2013–13 I.R.B.726March 25, 2013 PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805* * * Section1.5000A–4alsoissuedunder 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 contained in §§1.5000A–1 through 1.5000A–5. §1.5000A–1 Maintenance of minimum essential coverage and liability for the shared 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 the United States or residents of territories. (c) Liability for shared responsibility payment. (1) In general. (2) Liability for dependents. (i) In general. (ii) Special rules for dependents adopted or placed in foster care during the taxable year. (A) Taxpayers adopting an individual. (B) Taxpayers placingan 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-sponsored plan. (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 religious sects. (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) Incarceratedindividuals. (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 eligible employer-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 eligible employer-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) Coordinationwith 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 Federal income tax return. (i) Exemption certified by an Exchange. (ii) Exemption claimed on a Federal in- come tax return. (3) Exemptions thatare claimed on Fed- eral income tax returns. §1.5000A–4 Computation of shared responsibility payment. (a) In general. (b) Monthly penalty amount. (1) In general. March 25, 20137272013–13 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 and procedure. (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 minimum essential coverage and liability for the shared responsibility payment. (a)In general. For each month during the taxable year, a nonexempt individual must have minimum essential coverage or pay the shared responsibility payment. For a month, a nonexempt individual is an in- dividual in existence for the entire month who is not an exempt individual described in §1.5000A–3. (b)Coverage under minimum essential coverage—(1)In general. An individ- ual has minimum essential coverage for a month in which the individual is enrolled in and entitled to receive benefits under a program or plan identified as minimum es- sential coverage in §1.5000A–2 for at least onedayinthemonth. (2)Special rule for United States cit- izens or residents residing outside the United States or residents of territories. An individual is treated as having mini- mum essential coverageforamonth— (i) If the month occurs during any pe- riod described in section 911(d)(1)(A) or section 911(d)(1)(B) that is applicable to the individual; or (ii) If, for the month, the individual is abona fideresident of a possession of the United States (as determined under section 937(a)). (c)Liability for shared responsibility payment—(1)In general. A taxpayer is li- able for the shared responsibility payment for a month for which— (i) The taxpayer is a nonexempt individ- ual without minimum essential coverage; or (ii) A nonexempt individual for whom the taxpayer is liable under paragraph (c)(2) or (c)(3) of this section does not have 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 individual is a dependent (as defined in section 152) of another individual for the other individ- ual’s taxable year including that month, the other individual is liable for the shared re- sponsibility payment attributable to the de- pendent’s lack of coverage. An individual is a dependent of a taxpayer for a taxable year if the individual satisfies the defini- tion of dependent under section 152, re- gardless of whether the taxpayer claims the individual as a dependent on a Federal in- come tax return for the taxable year. If an individual may be claimed as a depen- dent by more than one taxpayer in the same calendar year, the taxpayer who properly claims the individual as a dependent for the taxable year is liable for the shared respon- sibility payment attributable to the individ- ual. If more than one taxpayer may claim an individual as a dependent in the same calendar year but no one claims the indi- vidual as a dependent, the taxpayer with priority under the rules of section 152 to claim the individual as a dependent is li- able for the shared responsibility payment for the individual. (ii)Special rules for dependents adopted or placed in foster care during the taxable year—(A)Taxpayers adopting an individual. If a taxpayer adopts a nonex- empt dependent (or accepts a nonexempt dependent who is an eligible foster child as defined in section 152(f)(1)(C)) during the taxable year and is otherwise liable for a nonexempt dependent under paragraph (c)(2)(i) of this section, the taxpayer is liable under paragraph (c)(2)(i) of this section for the nonexempt dependent only for the full months in the taxable year that follow the month in which the adoption or acceptance occurs. (B)Taxpayers placing an individual for adoption. If a taxpayer who is otherwise liable for a nonexempt dependent under paragraph (c)(2)(i)of this section places (or, by operation of law, must place) the nonexempt dependent for adoption or fos- ter care during the taxable year, the tax- payer is liable under paragraph (c)(2)(i) of this section for the nonexempt dependent only for the full months in the taxable year that precede the month in which the adop- tion or foster care placement occurs. (C)Examples. The following examples illustrate the provisions of this paragraph (c)(2)(ii). In each example the taxpayer’s taxable year is a calendar year. Example 1.Taxpayers adopting a child.(i)E and F, married individuals filing a joint return, initi- ate proceedings for the legal adoption of a 2-year old child, 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 them for the remainder of 2016. G meets all requirements under section 152 to be E and F’s dependent for 2016. Prior to the adoption, G resides with H, an unmarried individual, with H providing all of G’s support. (ii) Under paragraph (c)(2) of this section, E and F are not liable for a shared responsibility payment attributable 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 of 2016. H is not liable for a shared responsibility pay- ment attributable to G for any month in 2016, because G 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 asExample 1,ex- cept the legal adoption occurs on August 15, 2016. G meets all requirements under section 152 to be H’s dependent for 2016. (ii) Under paragraph (c)(2) of this section, H is li- able for a shared responsibility payment attributable to G, if any, for January through July of 2016, but is not 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, because G is not E and F’s dependent for 2016 under section 152. (3)Liability of individuals filing a joint return. Married individuals (within the meaning of section 7703) who file a joint return for a taxable year are jointly liable for any shared responsibility payment for a month included in the taxable year. (d)Definitions. The definitions in this paragraph (d) apply to this section and §§1.5000A–2 through 1.5000A–5. (1)Affordable Care Act.Affordable Care Actrefers to the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), as amended. 2013–13 I.R.B.728March 25, 2013 (2)Qualified health plan.Qualified health planhas the same meaning as in section 1301(a) of the Affordable Care Act (42 U.S.C. 18021(a)). (3)Exchange.Exchangehas the same meaningasin45CFR155.20. (4)Rating area.Rating areahas the same meaning as in §1.38B–1(n). (5)Shared responsibility family. Shared responsibility familymeans, for a month, all nonexempt individuals for whom the taxpayer (and the taxpayer’s spouse, if the taxpayer is married and files a joint return with the spouse) is liable for the shared responsibility payment under paragraph (c) of this section. (6)Family. A taxpayer’s family means the individuals for whom the taxpayer properly claims a deduction for a personal exemption under section 151 for the tax- able year. (7)Household income—(i)In general. Household incomemeans the sum of— (A) A taxpayer’s modified adjusted gross income; and (B) The aggregate modified adjusted gross income of all other individuals who— (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 exception under section 1(g)(7)to the requirement to file a Federal income tax return). (ii)Modified adjusted gross income. Modified adjusted gross incomemeans ad- justed gross income (within the meaning of 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- agemeans health insurance that covers one individual. (9)Family coverage.Family coverage means health insurance that covers more than one individual. (10)Employee.Employeeincludes for- mer employees. (11)Month.Monthmeans calendar month. §1.5000A–2 Minimum essential coverage. (a)In general.Minimum essential coveragemeans coverage under a gov- ernment sponsored program (described in paragraph (b) of this section), an eligible employer-sponsored plan (described in paragraph (c) of this section), a plan in the individual market (described in paragraph (d)ofthissection),agrandfathered health plan (described in paragraph (e) of this section), or other health benefits coverage (described in paragraph (f) of this section). Minimum essential coverage does not include coverage described in paragraph (g) of this section. All terms defined in this section apply for purposes of this sec- tion and §1.5000A–1 and §§1.5000A–3 through 1.5000A–5. (b)Government sponsored program. Government sponsored programmeans any of the following: (1) The Medicare program under part A of title XVIII of the Social Security Act (42 U.S.C.1395c and following sections); (2) The Medicaid program under title XIX 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- tion1902(a)(10)(A)(ii)(XXI)of the Social Security Act (42 U.S.C. 1396a(a)(10)(A)(ii)(XXI)); (ii) Optional coverage of tubercu- losis-related services under section 1902(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)(42 U.S.C.1396a(a)(10)(A)(i)(IV), (a)(10)(A)(ii)(IX)); or (iv) Coverage of medical emergency services under 8 U.S.C. 1611(b)(1)(A), as authorized by section 1903(v) of the Social Security Act (42 U.S.C. 1396b(v)). (3) The Children’s Health Insurance Program (CHIP) under title XXI of the Social Security Act (42 U.S.C 1397aa and following sections); (4) Medical coverage under chapter 55 of title 10, U.S.C., including coverage un- der the TRICARE program; (5) The following health care programs under 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 Medical Program of the Department of Veterans Affairs (CHAMPVA) authorized under 38 U.S.C. 1781; and (iii) The comprehensive health care program authorized under 38 U.S.C. 1803 and 38 U.S.C. 1821 for certain children of Vietnam Veterans and Veterans of covered serviceinKoreawhoaresufferingfrom spina bifida. (6) A health plan under section 2504(e) of title 22, U.S.C. (relating to Peace Corps volunteers); and (7) The Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defenseauthorization Act for Fiscal Year 1995 (Public Law No. 103–337; 10 U.S.C. 1587 note). (c)Eligible employer-sponsored plan—(1)In general.Eligible em- ployer-sponsored planmeans, with respect to any employee, a group health plan (whether an insured group health plan or a self-insured group health plan) or group health insurance coverage offered by an employer to the employee, which is— (i) A governmental plan (within the 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 offered in the small or large group market within a State; (iii) A grandfathered health plan (within the meaning of paragraph (e) of this sec- tion) offered in a group market. (2)Group health plan.Group health planhas the same meaning as in section 2791(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- agehas the same meaning as in section 2791(b) of the Public Health Service Act (42 U.S.C.300gg–91(b)). (4)Large and small group market. Large group marketandsmall group mar- kethave the same meanings as in section 1304(a)(3) of the Affordable Care Act (42 U.S.C. 18024(a)(3)). (5)Government sponsored program not treated as eligible employer-sponsored plan. A government sponsored program described in paragraph (b) of this section is not an eligible employer-sponsored plan. (d)Plan in the individual market.Plan in the individual marketmeans health in- March 25, 20137292013–13 I.R.B. surance coverage offered to individuals not in connection with a group health plan, in- cluding a qualified health plan offered by an Exchange. (e)Grandfathered health plan.Grand- fathered health planmeans any group health plan or group health insurance coveragetowhichsection1251ofthe Affordable Care Act (42 U.S.C.18011) applies. (f)Other health benefits coverage. Minimum essential coverage includes any plan or arrangement recognized by the Secretary of Health and Human Services as minimum essential coverage for pur- poses of section 5000A under 45 CFR 156.600 and following sections. (g)Excepted benefits. Minimum es- sential coverage does not include any health insurance coverage that consists of excepted benefits that are described in sec- tion 2791(c)(1), (c)(2), (c)(3), or (c)(4) of the Public Health Service Act (42 U.S.C. §300gg–91(c)). §1.5000A–3 Exempt individuals. (a)Members of recognized religious sects—(1)In general. An individual is an exempt individual for a month that in- cludes a day on which the individual has in effect a religious conscience exemption certification describedin paragraph (a)(2) of this section. (2)Exemption certification. A religious conscience exemption certification is is- sued by an Exchange in accordance with the 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 an individual is— (i) A member of a recognized religious sect or division thereof that is described in section 1402(g)(1); and (ii) An adherent of established tenets or 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 is an exempt individual for a month that in- cludes a day on which the individual is a member of a health care sharing ministry. (2)Health care sharing ministry.For purposes of this section,health care shar- ing ministrymeans an organization— (i) That is described in section 501(c)(3) and is exempt from tax under section 501(a); (ii) Members of which share a common set of ethical or religious beliefs and share medical expenses among themselves in ac- cordance with those beliefs and without re- gard to the State in which a member resides or 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 shared medical expenses continuously and with- out interruption since at least December 31, 1999; and (vi) That conducts an annual audit per- formed by an independent certified public accounting firm in accordance with gen- erally accepted accounting principles and makes the annual audit report available to thepublicuponrequest. (c)Exempt noncitizens—(1)In general. An individual is an exempt individual for a month that the individual is an exempt noncitizen. (2)Exempt noncitizens. For purposes of this section, an individual is an exempt noncitizen for a month if the individual— (i) Is not a U.S. citizen or U.S. national for any day during the month; and (ii) Is either— (A) A nonresident alien (within the meaning of section 7701(b)(1)(B)) for the taxable year that includes the month; or (B) An individual who is not lawfully present (within the meaning of 45 CFR 155.20) in the United States on any day in the month. (d)Incarcerated individuals—(1)In general. An individual is an exempt indi- vidual for a month that includes a day on which the individual is incarcerated. (2)Incarcerated. For purposes of this section, the termincarceratedmeans con- fined, after the disposition of charges, in a jail, prison, or similar penal institution or correctional facility. (e)Individuals with no affordable cov- erage —(1)In general. An individual is an exempt individual for a month in which the individual lacks affordable coverage. For purposes of this paragraph (e), an individ- ual lacks affordable coverage in a month if the 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 increased by any amount of the required contribution made through a salary reduction arrange- ment that is excluded from gross income. (2)Required contribution percent- age—(i)In general. Except as provided in paragraph (e)(2)(ii) of this section, the required contribution percentage is 8 per- cent. (ii)Indexing. For plan years beginning in any calendar year after 2014, the re- quired contribution percentage is the per- centage determined by the Department of Health and Human Services that reflects the excess of the rate of premium growth between the preceding calendar year and 2013 over the rate of income growth for the period. (iii)Plan year. For purposes of this paragraph (e),plan yearmeans the eli- gible employer-sponsored plan’s regular 12-month coverage period (or the remain- der of a 12-month coverage period for a new employee or an individual who enrolls during a special enrollment period). (3)Individuals eligible for cover- age under eligible employer-sponsored plans—(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 thissection) is treated as eligible for coverage under an eligible employer-sponsored plan for a month dur- ing a plan year if the employee or related individual could have enrolled in the plan for any day in that month during an open or special enrollment period, regardless of whether the employee or related individual is eligible for any other type of minimum essential coverage. For purposes of this paragraph (e)(3), an employee eligible for coverage under an eligible employer-spon- sored plan offered by the employee’s em- ployer is not treated as eligible as a related individual for coverage under an eligible employer-sponsored plan (for example, an eligible employer-sponsored plan offered by the employer of the employee’s spouse) for any month included in the plan year of the eligible employer-sponsored plan offered by the employee’s employer. 2013–13 I.R.B.730March 25, 2013 (B)Special rule for continuation cover- age. An individual who may enroll in con- tinuation coverage required under Federal law or a State law that provides compa- rable continuation coverage is eligible for coverage under an eligible employer-spon- sored plan only if the individual enrolls in the coverage. (ii)Required contribution for individu- als eligible for coverage under an eligible employer-sponsored plan—(A)Employ- ees. In the case of an employee who is eligible to purchase coverage under an eligible employer-sponsored plan spon- sored by the employee’s employer, the required contribution is the portion of the annual premium that the employee would pay (whether though salary reduction or otherwise) for the lowest cost self-only coverage. (B)Individuals related to employees.In the case of an individual who is eligible for coverage under an eligible employer-spon- sored plan because of a relationship to an employee and for whom a personal exemption deductionunder section 151 is claimed on the employee’s Federal in- come tax return (related individual), the required contribution is the portion of the annual premium that the employee would pay (whether through salary reduction or otherwise) for the lowest cost family cov- erage that would cover the employee and all related individuals who are included in the employee’s family and are not other- wise exempt under §1.5000A–3. (C)Required contribution for part-year period. For each individual described in paragraph (e)(3)(ii)(A) or (e)(3)(ii)(B) of this section, affordability under paragraph (e)(3) of this section is determined sepa- rately for each employment period that is less than a full calendar year or for the portions of an employer’s plan year that fall in different taxable years of the indi- vidual. Coverage under an eligible em- ployer-sponsored plan is affordable for a part-year period if the annualized required contribution for self-only coverage (in the case of the employee) or family coverage (in the case of a related individual) un- der the plan for the part-year period does not exceed the required contribution per- centage of the individual’s household in- come for the taxable year. The annual- ized required contribution is the required contribution 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 the denominator of which is the number of months in the part-year period during the individual’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 examples illustrate the application of this paragraph (e)(3). Unless stated otherwise, in each example, each individual’s taxable year is a calendar year, the individual is ineligi- ble for any other exemptions described in this section for a month, the rate of pre- mium growth has not exceeded the rate of income growth since 2013, and the indi- vidual’s employer offers a single plan that uses a calendar plan year and is an eligi- ble employer-sponsored plan as described in §1.5000A–2(c). Example 1.Unmarried employee with no depen- dents. Taxpayer A is an unmarried individual with no dependents. In November 2015, A is eligible to enroll in 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 annual premium. 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. Under paragraph (e)(1) of this section, A lacks affordable coverage 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 return for2016. BandChavetwochildren,DandE.In November 2015, B is eligible to enroll in self-only coverage under a plan offered by B’s employer for calendar 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 to B. 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) of this 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 of the 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 household income ($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-only coverage under a plan offered by F’s employer for the period July 2015 through June 2016 at a cost to F of $4,750. In June 2016, F is eligible to enroll in self-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 income is $60,000. (ii) Under paragraph (e)(3)(ii)(C) of this section, F’s annualized required contribution for the period January 2016 through June 2016 is $4,750 ($2,375 paid for premiums in 2016 x 12/6). Under paragraph (e)(1) of this section, F has affordable coverage for January 2016 through June2016 because F’s annual- ized required contribution ($4,750) does not exceed 8 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 period July 2016 to December 2016 is $5,000 ($2,500 paid for premiums in 2016 x 12/6). Under paragraph (e)(1) of this section, F lacks affordable coverage for July 2016 through December 2016 because F’s annualized required contribution ($5,000) exceeds 8 percent of F’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 unmarried and has one child, H. In November 2015, H is eligi- ble to enroll in family coverage under a plan offered by 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 for coverage under an eligible employer-sponsored plan for each month in 2016, notwithstanding that H is eli- gible to enroll in government sponsored coverage for thesameperiod. (4)Individuals ineligible for cover- age under eligible employer-sponsored plans—(i)Eligibility for coverage other than an eligible employer-sponsored plan. An individual is treated as ineligible for coverage under an eligible employer-spon- sored plan for a month that is not described in paragraph (e)(3)(i) of this section. (ii)Required contribution for individu- als ineligible for coverage under eligible employer-sponsored plans—(A)In gen- eral. In the case of an individual who is ineligible for coverage under an eligible employer-sponsored plan, the required contribution is the premium for the ap- plicable plan, reduced by the maximum amount of any credit allowable under sec- tion 36B for the taxable year (determined as if the individual was covered for the en- tire taxable year by a qualified health plan offered through the Exchange serving the rating area where the individual resides). (B)Applicable plan—(1)In gen- eral. Except as provided in paragraph (e)(4)(ii)(B)(2)ofthissection,applicable planmeans the single lowest cost bronze plan available in the individual market through the Exchange serving the rating area in which the individual resides (with- out regard to whether the individual pur- chased a qualified health plan though the Exchange) that would cover all individu- March 25, 20137312013–13 I.R.B. als in the individual’s nonexempt family. For purposes of this paragraph (e)(4), an individual’snonexempt familymeans the family (as defined in §1.5000A–1(d)(6)) that includes the individual, excluding any family members who are otherwise exempt under section 1.5000A–3 or are treated as eligible for coverage under an eligible employer-sponsored plan under paragraph (e)(3)(i) of this section. The premium for the applicable plan takes into account rating factors (for example, an individual’s age) that an Exchange would use to determine the cost of coverage. (2)Lowest cost bronze plan does not cover all individuals included in the tax- payer’s nonexempt family—(i)In general. If the Exchange serving the rating area where the individual resides does not of- fer a single bronze plan that would cover all individuals included in the individual’s nonexempt family, thepremium for the ap- plicable plan is the sum of the premiums for the lowest cost bronze plans that are offered through the Exchanges serving the rating 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 applicable plan identification. In lieu of the premium for the applicable plan determined under paragraph (e)(4)(ii)(B)(2)(i) of this sec- tion, a taxpayer may irrevocably elect to use the premium for the lowest cost bronze plan offered by the Exchange serving the rating area where the individual resides that would cover individuals with the char- acteristics (for example, the individuals’ ages) of the individuals in the taxpayer’s nonexempt family. Forexample, if a tax- payer’s nonexempt family includes one adult and two children, the taxpayer may elect to use the premium for the lowest cost bronze plan that would cover indi- viduals having the same characteristics as the adult and the two children in the taxpayer’s nonexempt family. A taxpayer makes 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) of this section,credit allowable under section 36Bmeans the maximum amount of the credit 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 a qualified health plan through the Exchange serving the rating area where the individ- ual resides. (D)Required contribution for part-year period. For each individual described in paragraph (e)(4)(ii)(A) of this section, af- fordability under paragraph (e)(4) of this section is determined separately for each period described in paragraph (e)(4)(ii)(E) of this section that is less than a 12-month period. 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 does not exceed the required contribution per- centage of the individual’s household in- come for the taxable year. The annual- ized required contribution is the required contribution 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 in the part-year period during the individual’s taxable year. Only full calendar months are included in the computation under this paragraph (e)(4)(ii)(D). (iii)Examples. The following exam- ples illustrate the provisions of this para- graph (e)(4). Unless stated otherwise, in each example the taxpayer’s taxable year is a calendar year, the rate of premium growth has not exceeded the rate of in- come growth since 2013, and the taxpayer is ineligible for any of the exemptions de- scribed in paragraphs (b) through (i) of this section for a month. Example 1.Unmarried employee with no depen- dents. (i) Taxpayer G is an unmarried individual with no dependents. G is ineligible to enroll in any min- imum essential coverage other than coverage in the individual market for all months in 2016. The annual premium for the lowest cost bronze self-only plan in G’s rating area (G’s applicable plan) is $5,000. The adjusted annual premium for the second lowest cost silver self-only plan in G’s rating area (G’s applicable benchmark 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 for G’s family size for the taxable year. (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit allowable under section 36B is determined pursuant to section 36B. With household income at 358 percent of the Federal poverty line, G’s ap- plicable percentage is 9.5. Because each month in 2016 is a coverage month (within the meaning of §1.36B–3(c)), G’s maximum credit allowable under section 36B is the excess of G’s premium for the applicable 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 required contribution ($3,300) exceeds 8 percent of G’s household income ($3,200). Example 2.Family. (i) In 2016 Taxpayers M and N are married and file a joint return. M and N have two children, P and Q. M, N, P, and Q are ineligible to enroll 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 applicable plan is $20,000. The adjusted annual premium for M, N, P, and Q’s applicable benchmark plan (within the meaning of §1.36B–3(f)) is $25,000. M and N’s household income is $80,000, which is 347 percent of the Federal poverty line for a family size of 4 for the taxable year. (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit allowable under section 36B is determined pursuant to section 36B. With household income at 347 percent of the Federal poverty line, the ap- plicable percentage is 9.5. Because each month in 2016 is a coverage month (within the meaning of §1.36B–3(c)), the maximum credit allowable under section 36B is the excess of the premium for the applicable benchmark plan over the product of the household 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 this section, M, N, P, and Q have affordable coverage for 2016 because their required contribution ($2,600) does not exceed 8 percent of their household income ($6,400). Example 3.Family with some members eligible for 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 are ineligible to enroll in minimum essential coverage other than coverage in the individual market for all months in 2016; however, W and X are eligible for coverage 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 plan that would cover U and V (the applicable benchmark plan (within the meaning of §1.36B–3(f)) is $12,500. U and V’s household income is $50,000, which is 217 percent of the Federal poverty line for a family size of 4 for the taxable year. W and X do not enroll in CHIP coverage. (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit allowable under section 36B is determined pursuant to section 36B. With household income at 217 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)) for U and V, but no months in 2016 are coverage months for W and X because they are eligible for CHIP cov- erage. The maximum creditallowable under section 36B is the excess of the premium for the applicable benchmark 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, the required contribution is $10,945. Under paragraph (e)(1) of this section, U, V, W, and X lack affordable coverage for 2016 because their required contribu- 2013–13 I.R.B.732March 25, 2013 tion ($10,945) exceeds 8 percent of their household income ($4,000). Example 4.Family with some members enrolled in government sponsored minimum essential cover- age. The facts are the same asExample 3,exceptW and X enroll in CHIP coverage on January 1, 2016. Under paragraph (e)(4)(ii)(B), U, V, W, and X are members of U and V’s nonexempt family for 2016. Therefore, the annual premium for the applicable plan is the same as inExample 3($20,000). The maxi- mum credit allowable under section 36B is also the same as inExample 3($9,055). Under paragraph (e)(4)(ii)(A) of this section, the required contribution is $10,945. Under paragraph (e)(1) of this section, U and V lack affordable coverage for 2016 because their required contribution ($10,945) exceeds 8 percent of their household income ($4,000). Example 5.Simplified method for applicable plan identification. (i) In 2016 Taxpayer Y, a 42-year old unmarried individual, lives with her 17-year old nephew, Z. Y properly claims Z as a dependent for 2016. Neither Y nor Z is eligible for minimum es- sential coverage other than coverage in the individual market in 2016. The Exchange serving the rating area where Y and Z reside does not offer any plan that would cover them both. For 2016, the annual premium for the lowest cost bronze plan covering Y is $5,000, and the annual premium for the lowest cost bronze plan covering Z is $4,500. The premium for the lowest cost bronze plan that would cover individuals with the characteristics of Y and Z that is offered in the Exchange serving the rating area where Y 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 for the applicable plan is the sum of the premiums for the lowest cost bronze plans that would cover Y and Z, or $9,500 ($5,000 + $4,500). Alternatively, under paragraph (e)(4)(ii)(B)(2)(ii)ofthissection, Y may irrevocably elect to use the premium for the lowest cost bronze plan that would cover individuals with the characteristics of Y and Z that is offered in the Exchange ($10,000) as the premium for the applicable plan in determining qualification for the exemption described in paragraph (e)(1) of this sec- tion. (f)Household income below filing threshold—(1)In general. An individual is an exempt individual for any taxable year for which the individual’s household income is less than the applicable filing threshold. (2)Applicable filing threshold—(i)In general. For purposes of this section,ap- plicable filing thresholdmeans the amount of gross income that would trigger an in- dividual’s requirement to file a Federal in- come tax return undersection 6012(a)(1). (ii)Certain dependents. The applica- ble filing threshold for an individual who is 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 month that includes a day on which the individual is a member of an Indian tribe. For pur- poses of this section,Indian tribemeans a group or community described in section 45A(c)(6). (h)Individuals with hardship exemption certification—(1)In general. An individ- ual is an exempt individual for a month that includes a day on which the individual has in effect a hardship exemption certification described in paragraph (h)(2) of this sec- tion. (2)Hardship exemption certification. A hardship exemption certification is issued by an Exchange under section 1311(d)(4)(H) of the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)) and 45 CFR 155.605(g) and 45 CFR 155.615(f) and certifies that an individual has suffered a hardship (as that term is defined in 45 CFR 166.605(g)) with respect to the capability to obtain minimum essential coverage. (i) [Reserved] (j)Individuals with certain short cover- age gaps—(1)In general. An individual is an exempt individual for a month the last day of which is included in a short cover- age gap. (2)Short coverage gap—(i)In general. Short coverage gapmeans a continuous period of less than three months in which the individual is not covered under mini- mum essential coverage. If the individual does not have minimum essential coverage for a continuous period of three or more months, none of the months included in the continuous period istreated as included in a 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 in which an individual is exempt under any of paragraphs (a) through (h) of this sec- tion. (iii)More than one short coverage gap during calendar year. If a calendar year includes 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 months included in a continuous period is deter- mined without regard to the calendar years in which months included in that period occur. (ii)Continuous period straddling more than one taxable year. If an individual does not have minimum essential coverage for a continuous period that begins in one taxable year and ends in the next, for pur- poses of applying this paragraph (j) to the first taxable year, the months in the second taxable 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 taxable year included in the continuous period are taken into account. (4)Examples. The following examples illustrate the provisions of this paragraph (j). Unless stated otherwise, in each exam- ple the taxpayer’s taxable year is a calendar year and the taxpayer is ineligible for any of the exemptions described in paragraphs (a) through (h) of this section for a month. Example 1.Short coverage gap.TaxpayerD has minimum essential coverage in 2016 from Jan- uary 1 through March 2. After March 2, D does not have minimum essential coverage until D enrolls in an eligible employer-sponsored plan effective June 15. Under §1.5000A–1(b), for purposes of section 5000A, 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 or more. The facts are the same as inExample 1, except D’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 short coverage 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 for the 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 coverage is 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 more than one taxable year. Taxpayer F, an unmarried in- dividual with no dependents, has minimum essential coverage for the period January 1 through October 15, 2016. F is without coverage until enrolling in an eligible employer-sponsored plan effective February 15, 2017. F files his Federal income tax return for 2016 on March 10, 2017. Under paragraph (j)(3)(ii) of this section, November and December of 2016 are treated as a short coverage gap. However, November and December of 2016 are included in the continu- ous period that includes January 2017. The continu- March 25, 20137332013–13 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 inExample 4except F loses coverage on June 15, 2017. F enrolls in a new eligible employer-sponsored plan effective Septem- ber 15, 2017. The continuous period without mini- mum essential coverage in July and August of 2017 is 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 in 2017 is the gap that includes July and August. Example 6.Multiple coverage gaps. (i) The facts are the same as inExample 5except F has mini- mum essential coverage for November 2016. Under paragraph (j)(3)(ii) of this section, December 2016 is treated as a short coverage gap. (ii) December 2016 is included in the continuous period that includes January 2017. This continuous period is two months and, therefore, January 2017 is the earliest month in 2017 that is included in a short coverage gap. Under paragraph (j)(2)(iii) of this sec- tion, the exemption under this paragraph (j) applies only to January 2017. Thus, the continuous period without minimum essential coverage in July and Au- gust of 2017 is not a short coverage gap. (k)Claiming exemptions from the shared responsibility payment—(1)Ex- emptions requiring certification by an Exchange. 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 area where the individual resides. To claim the exemption, the individual includes the information specified in published guidance of general applicability, see §601.601(d)(2) of this chapter, with the Federal income tax return for the taxable year that includes the months for which the exemption is sought. (2)Exemptions that may be certified by an Exchange or claimed on a Federal income tax return—(i)Exemption certi- fied by an Exchange. The exemptions for members of health care sharing ministries (described in paragraph (b) of this sec- tion), incarcerated individuals (described in paragraph (d) of this section), and mem- bers of Indian tribes (described in para- graph (g) of this section) may be certified in 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 of general applicability, see §601.601(d)(2) of this chapter, with the Federal income tax return for the taxable year that includes the months 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 of health care sharing ministries (described in paragraph (b) of this section), incarcerated individuals (described in paragraph (d) of this section), and members of Indian tribes (described in paragraph (g) of this section) without certification by an Exchange by including the information specified in pub- lished guidance of general applicability, see §601.601(d)(2) of this chapter, with the Federal income tax return for the taxable year that includes the months for which the exemption is sought. (3)Exemptions that are claimed on Fed- eral income tax returns. The exemptions for individuals who lack affordable cover- age (described in paragraph (e) of this sec- tion), individuals with household income below 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) of this 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 the Federal income tax return for the taxable year that includes the months for which the exemption is sought. Taxpayers are not re- quired to file Federal income tax returns solely to claim the exemption for individ- uals with household income below the ap- plicable return filing threshold (described in paragraph (f) of this section). §1.5000A–4 Computation of shared responsibility payment. (a)In general. For each taxable year the shared responsibility payment is the lesser of— (1) The sum of the monthly penalty amounts for each individual in the shared responsibility family; or (2) The sum of the monthly national av- eragebronzeplanpremiumsfortheshared responsibility family. (b)Monthly penalty amount—(1)In general.Monthly penalty amountmeans, for a month that a nonexempt individual is not covered under minimum essential coverage, 1 /12multiplied by the greater of— (i) The flat dollar amount; or (ii) The excess income amount. (2)Flat dollar amount—(i)In general. Flat dollar amountmeans the lesser of— (A) The sum of the applicable dollar amounts for all individuals included in the taxpayer’s shared responsibility family; or (B) 300 percent of the applicable dol- lar amount (determined without regard to paragraph (b)(2)(iii) of this section) for the calendar year with or within which the tax- able year ends. (ii)Applicable dollar amount.Except as provided in paragraphs (b)(2)(iii) and (b)(2)(iv) of this section, the applicable dollar 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.Ifanindi- vidual has not attained the age of 18 on the first day of a month, the applicable dol- lar amount for the individual is equal to one-half of the applicable dollar amount (as expressed in paragraph (b)(2)(ii) of this section) for the calendar year in which the month occurs. For purposes of this para- graph (b)(2)(iii), an individual attains the age of 18 on the anniversary of the date when 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 dollar amount. In any calendar year after 2016, the applicable dollar amount is $695 as increased by the product of $695 and the cost-of-living adjustment determined un- der section 1(f)(3) for the calendar year. For purposes of this paragraph (b)(2)(iv) of this section, the cost-of-living adjustment is determined by substituting “calendar year 2015” for “calendar year 1992” in section 1(f)(3)(B). If any increase under this paragraph (b)(2)(iv) is not a multiple of $50, the increase is rounded to the next lowest multiple of $50. (3)Excess income amount—(i)In gen- eral.Excess income amountmeans the product of— (A) The excess of the taxpayer’s household income over the taxpayer’s applicable filing threshold (as defined in §1.5000A–3(f)(2)); and (B) The income percentage. (ii)Income percentage. For purposes of this section,income percentagemeans— (A) 1.0 percent for taxable years begin- ning in 2013; 2013–13 I.R.B.734March 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 bronze plan premium.Monthly national average bronze plan premiummeans, for a month for which a shared responsibility payment is imposed, 1/12 of the annual national av- erage premium for qualified health plans that have a bronze level of coverage, would provide coverage for the taxpayer’s shared responsibility family members who do not have minimum essential coverage for the month, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends. (d)Examples. The following examples illustrate the provisions of this section. In each example the taxpayer’s taxable year is a calendar year and all members of the taxpayer’s shared responsibility family are ineligible 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 an unmarried individual with no dependents. G does not have minimum essential coverage for any month in 2016. G’s household income is $120,000. G’s appli- cable filing threshold is $12,000. The annual national average 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 amount is $695. Under paragraph (b)(2) of this section, G’s flat dollar amount is $695 (the lesser of $695 and $2,085 ($695 x 3)). Under paragraph (b)(3) of this section, G’s excess income amount is $2,700 (($120,000 - $12,000) x 0.025). Therefore, under paragraph (b)(1) of this section, the monthly penalty amount 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 national average bronze plan premiums is $5,000 ($5,000/12 x 12). Therefore, under paragraph (a) of this section, the shared responsibility payment imposed on G for 2016 is $2,700 (the lesser of $2,700 or $5,000). Example 2.Part-year coverage. The facts are the same as inExample 1, except G has minimum essen- tial coverage for January through June. The sum of the monthly penalty amounts is $1,350 ($225 x 6). The sum of the monthly national average bronze plan premiums 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 (the lesser of $1,350 or $2,500). Example 3.Family without minimum essential coverage. (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 plan premium 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 (the lesser of $2,780 and $2,085 ($695 x 3)). Under paragraph (b)(3) of this section, the excess income amount 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 amounts is $2,400 ($200 x 12). The sum of the monthly national average bronze plan premiums is $20,000 ($20,000/12 x 12). Therefore, under paragraph (a) of this section, the shared responsibility payment imposedonHandJfor2016is$2,400(thelesserof $2,400 or $20,000). Example 4.Change in shared responsibility fam- ily during the year. (i) The facts are the same as in Example 3, except J has minimum essential coverage for January through June. The annual national aver- age bronze plan premium for a family of 4 (1 adult, 3 children) 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 (($695 x 2 adults) + (($695/2) x 2 children)). Under para- graph (b)(2)(i) of this section, the flat dollar amount is $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 3 adults) + (($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)). Under paragraph (b)(3) of this section, the excess income amount is $2,400 (($120,000 - $24,000) x 0.025). Therefore, under paragraph (b)(1) of this section, for January through June the monthly penalty amount is $200 (the greater of $173.75 ($2,085/12) or $200 ($2,400/12)). The monthly penalty amount for July through December is $200 (the greater of $173.75 ($2,085/12) or $200 ($2,400/12)). (iv) The sum of the monthly penalty amounts is $2,400 ($200 x 12). The sum of the monthly national 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 shared responsibility payment imposed on H and J for 2016 is $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 a joint return. S and T have one child, U, who turns 18 years old on June 28. No member of the family has minimum essential coverage for any month in 2016. S and T’s household income is $60,000. S and T’s applicable filing threshold is $24,000. The annual national average bronze plan premium for a family of3(2adults,1child)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 2 adults) + ($695/2) x 1 child)). Under paragraph (b)(2) of this section, the flat dollar amount is $1,737.50 (the lesser 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 dollar amount 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 the monthly penalty amount is $144.79 (the greater of $144.79 ($1,737.50/12) or $75 ($900/12)). The monthly penalty amount for July through December is $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 sum of the monthly national average bronze plan premi- ums is $15,000 ($15,000/12 x 12). Therefore, under paragraph (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 and procedure. (a)In general. A taxpayer’s liability for the shared responsibility payment for a month must be reported on the taxpayer’s Federal income tax return for the taxable year that includes the month. The time for assessing the shared responsibility pay- ment is the same as that prescribed by sec- tion 6501 for the taxable year to which the Federal income tax return on which the shared responsibility payment is to be re- ported relates. The shared responsibility payment is payable upon notice and de- mand by the Secretary, and except as pro- vided in paragraph (b) of this section, is assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 of the Internal Revenue Code. Therefore, the shared responsibility payment is not subject to deficiency pro- cedures of subchapter B of chapter 63 of the Internal Revenue Code. Interest on this payment accrues inaccordance with the rulesinsection6601. (b)Special rules. Notwithstanding any other provision of law— (1)Waiver of criminal penalties.Inthe case of a failure by a taxpayer to timely pay the shared responsibility payment, the tax- payer is not subject to criminal prosecution or penalty for the failure. (2)Limitations on liens and levies.If a taxpayer fails to pay the shared respon- sibility payment imposed by this section and §§1.5000A–1 through 1.5000A–4, the Secretary will not file notice of lien with respect to any property of the taxpayer, or March 25, 20137352013–13 I.R.B. levy on any such property with respect to such failure. (3)Authority to offset against overpay- ment. Nothing in this section prohibits the Secretary from offsetting any liability for the shared responsibility payment against any overpayment due the taxpayer, in ac- cordance with section 6402(a). (c)Effective/applicability date.This section and §§1.5000A–1 through 1.5000A–4 apply for months beginning after December 31, 2013. Steven T. Miller, Deputy Commissioner for Services 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 Federal Register for February 1, 2013, 78 F.R. 7314) 2013–13 I.R.B.736March 25, 2013 Definition of Terms Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the ef- fect: Amplifieddescribes a situation where no change is being made in a prior pub- lished position, but the prior position is be- ingextendedtoapplytoavariationofthe fact situation set forth therein. Thus, if an earlier ruling held that a principle ap- plied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare withmodi- fied,below). Clarifiedis used in those instances where the language in a prior ruling is be- ing made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed. Distinguisheddescribes a situation where a ruling mentions a previously pub- lished ruling and points out an essential difference between them. Modifiedis used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare withamplifiedandclarified, above). Obsoleteddescribes a previously pub- lished ruling that is not considered deter- minative with respect to future transac- tions. This term is most commonly used in a ruling that lists previously published rul- ings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted. Revokeddescribes situations where the position in the previously published ruling is not correct and the correct position is beingstatedinanewruling. Supersededdescribes a situation where the 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 the 1986 Code and regulations the same po- sition published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single rul- ing a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new rul- ing does more than restate the substance of a prior ruling, a combination of terms is used. For example,modifiedandsu- persededdescribes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously pub- lished ruling is first modified and then, as modified, is superseded. Supplementedis used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original rul- ing has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the ad- ditions, and supersedes all prior rulings in the series. Suspendedis used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Abbreviations The fol lowing abbreviations in current use and for merly used will appear in material publis hedintheBulletin. A—Individual. Acq.—A cquiescence. B—Individual. BE—Beneficiary. BK—Bank . B.T.A.—Board of Tax Appeals. C—Individual. C.B.—Cu mulative Bulletin. CFR—Code of Federal Regulations. CI—City. COOP—Coo perative. Ct.D.—Court Decision. CY—County. D—Decede nt. 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—Emp loyer. ERISA—Employee Retirement Income Security Act. EX—Executor. F—Fiduc iary. FC—Foreign Country. FICA—Federal Insurance Contributions Act. FISC—Fo reign International Sales Company. FPH—Foreign Personal Holding Company. F.R.—Federal Register. FUTA—Fed eral Unemployment Tax Act. FX—Foreign corporation. G.C.M.—Chief Counsel’s Memorandum. GE—Grante e. GP—General Partner. GR—Grantor. IC—Insura nce Company. I.R.B.—Internal Revenue Bulletin. LE—Lessee. LP—Limited Partner. LR—Lessor. M—Minor. Nonacq.—No nacquiescence. O—Organization. P—Parent Corporation. PHC—Persona l Holding Company. PO—Possession of the U.S. PR—Partner. PRS—Pa rtnership. PTE—Prohibited Transaction Exemption. Pub. L.—Public Law. REIT—Re al Estate Investment Trust. Rev. Proc.—Revenue Procedure. Rev. Rul.—Revenue Ruling. S—Subsi diary. S.P.R.—Statement of Procedural Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Trans feree. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpay er. TR—Trust. TT—Trustee. U.S.C.—Uni ted States Code. X—Corporation. Y—Corporation. Z—Corporat ion. March 25, 2013i2013–13 I.R.B. Numerical Finding List 1 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 Bulletin 2012–52, dated December 27, 2012. 2013–13 I.R.B.iiMarch 25, 2013 Finding List of Current Actions on Previously Published Items 1 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, 2013iii2013–13 I.R.B. INDEX Internal Revenue Bulletins 2013–1 to 2013–13 The abbreviation and number in parenthesis following the index entry refer to the specific item; numbers in roman and italic type following the parentheses refer to the Internal Revenue Bulletin in which the item may be found and the page number on which it appears. Key to Abbreviations: AnnAnnouncement CDCourt Decision DODelegation Order EOExecutive Order PLPublic Law PTEProhibited Transaction Exemption RPRevenue Procedure RRRevenue Ruling SPRStatement of Procedural Rules TCTax Convention TDTreasury Decision TDOTreasury Department Order EMPLOYEE PLANS Closing agreements (RP 12) 4,313 Defined benefit plans, funding (Notice 11) 11,610 Determination letters, issuing procedure (RP 6) 1,1; correction (Ann 13) 9,441 Elimination of single-sum distribution option (or other acceler- ated benefits) under defined benefit plan of plan sponsor in bankruptcy (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) 1,113 Associate Chief Counsel (International ) (RP 7) 1,233 And general information letters, procedures (RP 4) 1,126 User 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) 11,652 Qualified retirement plans, covered compensation, permitted dis- parity (RR 2) 10,533 Regulation: 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 TAX Employment tax obligations of a third party that enter into a ser- vice agreement with an employer to take on the employer’s employment tax responsibilities (REG–102966–10) 10,579 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1;correction(Ann9)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) 1,92 Transit benefit adjustment for 2012 (Notice 8) 7,486 ESTATE TAX Cost-of-living adjustments for inflation for 2013 (RP 15) 5,444 Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1;correction(Ann9)3,441 Technical Advice Memoranda (TAMs) (RP 2) 1,92 EXCISE TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1;correction(Ann9)3,441 Payout requirements for Type III supporting organizations that 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 organizationsthat 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; payoutrequirements for Type III supporting organizations that are not functionally inte- grated (REG–155929–06) 11,650 Technical Advice Memoranda (TAMs) (RP 2) 1,92 EXEMPT ORGANIZATIONS Letter rulings: And determination letters: Areas which will not be issued from Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,113 And general information letters, procedures (RP 4) 1,126 2013–13 I.R.B.ivMarch 25, 2013 EXEMPT ORGANIZATIONS—Cont. Exemption application determination letter rulings under sections 501, 509, 4940, 4942, and 4947 (RP 10) 2,267 Exemption application determination letter rulings under sections 501 and 521 (RP 9) 2,255 User fees, request for letter rulings (RP 8) 1,237 Payout requirementsfor Type III supporting organizations that 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 TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1;correction(Ann9)3,441 Technical Advice Memoranda (TAMs) (RP 2) 1,92 INCOME TAX Adjusted applicable Federal rates under section 1288, changes in method of determination (Notice 4) 9,527 Applicability of de minimis partner rule (TD 9607) 6,469 Application of section 172(h) including consolidated groups, correction (Ann 6) 3,307 Awards 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) 12,676 Qualified Zone Academy Bonds limitation for year 2012 and 2013 (Notice 3) 7,484 Qualified exempt facility bonds and qualified residential rental projects (Notice 9) 9,529 Business use of home, optional safe harbor method for expenses (RP 13) 6,478 Cost-of-living adjustments for inflation for 2013 (RP 15) 5,444 Credits: Qualifying Advanced EnergyProject Credit Program – Phase II Program (Notice 12) 10,543 Deductions for qualified film and television production costs (TD 9603) 3,273 Depreciation deduction, 2013 automobile inflation adjustments (RP 21) 12,660 Dual-Use property request for comments (Notice 13) 12,659 Elimination of the Cumulative Bulletin after volume 2008–2 (Ann 12) 11,651 E-signature standards (Ann 8) 4,440 Estimated tax penalty relief for farmers and fishermen (Notice 5) 9,529 Examination of returns and claimsfor return, credit, or abate- ments, determination of correct tax liability (RP 16) 7,488 INCOME TAX—Cont. Exceptions to loss transaction filter (RP 11) 2,269 Extension of the effective date of Rev. Proc. 2013–14 (RP 19) 11,648 Failure to file gain agreement and other required filings (REG–140649–11) 12,666 Forms: W-2 and W-3 (RP 18) 8,503 1097, 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- sentstousetaxreturninformationintheForm1040series, update to Rev. Proc. 2008–35 (TD 9608) 3,275;(RP14)3, 283 Gross income, per capita payments from proceeds of settlements of Indian tribal trust cases (Notice 1) 3,281 Information reporting: Mortgage assistance program (Notice 7) 6,477 By 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) 2,252 February 2013 (RR 3) 8,500 March 2013 (RR 7) 11,608 Rates: Underpayments and overpayments, quarter beginning: April 1, 2013 (RR 6) 13,701 Letter rulings: And determination letters, areas which will not be issued from: Associates Chief Counsel and Division Counsel (TE/GE) (RP 3) 1,113 Associate Chief Counsel (International ) (RP 7) 1,233 And information letters issued byAssociate Offices, determi- nation letters issued by Operating Divisions (RP 1) 1,1; correction (Ann 9) 3,441 Minimum essential coverage, shared responsibility payment for not maintaining (REG–148500–12) 13,716 Mortgage assistance programs, income exclusion, safe harbor deduction method (Notice 7) 6,477 Noncompensatory partnership options (TD 9612) 13,678 Paper copies of the Internal Revenue Bulletin, elimination of the Cumulative Bulletin (Ann 12) 11,651 Premium tax credit eligibility, affordability of employer-spon- sored coverage for related individuals (TD 9611) 13,699 Proposed 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 file gain recognition agreementsand other required filings (REG–140649–11) 12,666 March 25, 2013v2013–13 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 responsibility payment 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 relating to 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) 8,503 1167, General Rules and Specifications for Forms and Sched- ules (RP 17) 11,612 1220, 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 Form 941 and Schedule B (Form 941), and Schedule R (Form 941), correction (Ann 11) 6,483 Qualified board or exchange (RR 5) 9,525 Qualifying advanced coalproject program (Ann 2) 2,271 Regulations: 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 and television 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; guidance to tax return preparers, consents to disclose and consents to use tax returns information in the Form 1040 series, update to 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) 6,483 Tangible 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 government services and social security payments (Ann 5) 3,306 Regarding fiscally transparent entities (Ann 14) 11,651 Technical Advice Memoranda (TAMs) (RP 2) 1,92 Transition relief for submitting Form 8850 as a result of the American Taxpayer Relief Act (Notice 14) 13,712 Treasury inflation-protected securities issued at a premium, bond premium carryforward (TD 9609) 12,655; (REG–140437–12) 12,676 Treatment of grantor of an optiononapartnershipinterest (REG–106918–08) 13,714 Truncated taxpayer identification numbers (REG–148873–09) 7, 494 Use of controlled corporations to avoid the application of section 304 (TD 9606) 11,586 SELF-EMPLOYMENT TAX Letter rulings and information letters issued by Associate Of- fices, determination letters issued by Operating Divisions (RP 1) 1,1;correction(Ann9)3,441 Technical Advice Memoranda (TAMs) (RP 2) 1,92 2013–13 I.R.B.viMarch 25, 2013 Internal Revenue Service W ashington,DC20224 Official Business Penalty for Private Use, $300 INTERNAL REVENUE BULLETIN The Introduction at the beginning of this issue describes the purpose and content of this publication. 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