The Internal Revenue Service and Department of the Treasury published in the February 5, 2013 Federal Register final income tax regulations on noncompensatory partnership options (the “Regulations”). At the same time, the IRS and Treasury published a Notice of Proposed Rulemaking (NPRM) on noncompensatory partnership options. The Regulations generally follow proposed regulations published in January 2003, but the IRS and Treasury made changes in response to comments received.

This outline summarizes and provides observations on the Regulations with particular emphasis on items that are likely to be of interest to mezzanine debt funds and other funds that occasionally receive warrants in limited liability companies or limited partnerships in connections with loans.

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