Internal Revenue Bulletin 2013-13 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

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

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