[Federal Register Volume 81, Number 80 (Tuesday, April 26, 2016)]
[Rules and Regulations]
[Pages 24482-24484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09614]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9763]
RIN 1545-BM20


Determination of Adjusted Applicable Federal Rates Under Section 
1288 and the Adjusted Federal Long-Term Rate Under Section 382

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide the 
method to be used to adjust the applicable Federal rates (AFRs) to 
determine the corresponding rates under section 1288 of the Internal 
Revenue Code (Code) for tax-exempt obligations (adjusted AFRs) and the 
method to be used to determine the long-term tax-exempt rate and the 
adjusted Federal long-term rate under section 382. For tax-exempt 
obligations, the regulations affect the determination of original issue 
discount under section 1273 and of total unstated interest under 
section 483. In addition, the regulations affect the determination of 
the limitations under sections 382 and 383 on the use of certain 
operating loss carryforwards, tax credits, and other attributes of 
corporations following ownership changes.

DATES: Effective Date: These regulations are effective on April 26, 
2016.
    Applicability Dates: For the dates of applicability, see Sec. Sec.  
1.382-12(d) and 1.1288-1(c).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations under 
section 1288, Jason G. Kurth at (202) 317-6842; concerning the 
regulations under section 382, William W. Burhop at (202) 317-6847.

SUPPLEMENTARY INFORMATION:

Background

    On March 2, 2015, the IRS and the Treasury Department published a 
notice of proposed rulemaking (REG-136018-13) in the Federal Register 
(80 FR 11141) proposing the method to be used to determine the adjusted 
AFRs for tax-exempt obligations under section 1288 and the method to be 
used to determine the long-term tax-exempt rate and the adjusted 
Federal long-term rate under section 382. No comments were received on 
the notice of proposed rulemaking. No public hearing was requested or 
held. Accordingly, this Treasury decision adopts the proposed 
regulations without substantive change.

Explanation of Provisions

    The regulations in this Treasury decision provide the new method by 
which the Treasury Department and the IRS will determine the adjusted 
AFRs under section 1288 to take into account the tax exemption for 
interest on tax-exempt obligations (as defined in section 1275(a)(3) 
and Sec.  1.1275-1(e)). The regulations also provide that the Treasury 
Department and the IRS will use the new method to determine the long-
term tax-exempt rate and the adjusted Federal long-term rate under 
section 382(f) to take into account differences between rates on long-
term taxable and tax-exempt obligations.
    Since November 1986, the adjusted Federal long-term rate published 
under section 382(f)(2) has been equal to the long-term adjusted AFR 
with annual compounding published under section 1288(b) in the same 
month. See Rev. Rul. 86-133 (1986-2 CB 59). For calendar months from 
November 1986 to February 2013, the Treasury Department determined the 
adjusted Federal long-term rate and each adjusted AFR described in 
section 1288(b)(1) by multiplying the corresponding AFR by a fraction 
(the adjustment factor). The numerator of the adjustment factor was a 
composite yield of the highest-grade tax-exempt obligations available, 
which are prime, general obligation tax-exempt obligations. The 
denominator was a composite yield of U.S. Treasury obligations with 
maturities similar to those of the tax-exempt obligations. Each of the 
composite yields was measured over a one-month period.
    The IRS published Notice 2013-4 (2013-9 IRB 527) on February 25, 
2013, requesting comments on possible modifications to the method by 
which adjusted AFRs and the adjusted Federal long-term rate are 
determined. The IRS requested comments on these possible modifications 
because, since the beginning of 2008, market yields of prime, general 
obligation tax-exempt obligations had sometimes exceeded market yields 
of comparable U.S.

[[Page 24483]]

Treasury obligations, causing the adjusted Federal long-term rate and 
each adjusted AFR to exceed the corresponding AFRs. Adjusted rates that 
are higher than the corresponding AFRs indicate that the adjustment 
factor no longer served the purposes of sections 1288(b)(1) and 
382(f)(2), which were intended to adjust only for the tax exemption. 
These rates were also inconsistent with the express intention of 
Congress that the adjusted Federal long-term rate and the long-term 
tax-exempt rate be lower than the Federal long-term rate. See 2 H.R. 
Rep. No. 99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-188 (1986) (1986-
3 CB (Vol. 4) 1, 188).
    Notice 2013-4 also provided that, until the Treasury Department and 
the IRS issue further guidance, the adjusted AFRs and the long-term 
tax-exempt rate would continue to be calculated using the adjustment 
factor, except that the adjustment factor would equal one (1) for any 
month in which the adjustment factor would otherwise be greater than 
one or in which the denominator of the adjustment factor would 
otherwise be less than or equal to zero.
    After reviewing comments received in response to Notice 2013-4, the 
Treasury Department and the IRS issued a notice of proposed rulemaking 
(REG-136018-13) proposing the regulations that are adopted in this 
Treasury decision. The regulations use historical market data to create 
an appropriate adjustment factor based on individual tax rates. The 
regulations provide that the adjusted AFRs and the adjusted Federal 
long-term rate for each month will be determined from the appropriate 
AFRs for that month using the adjustment factor that results from the 
following calculation: 100 percent--[(a combined tax rate) x (a fixed 
percentage)].
    The tax rate in the adjustment factor is the sum of the maximum 
individual rate under section 1 and the maximum individual rate under 
section 1411 for the month to which the rate applies. The fixed 
percentage is the amount by which that combined tax rate must be 
multiplied to reflect the historical relationship between the maximum 
tax rate and the spread between yields of taxable and tax-exempt 
obligations. The fixed percentage in the adjustment factor is 59 
percent, because the yield on tax-exempt obligations from February 1986 
to July 2007 was lower than that of comparable taxable obligations by, 
on average, 59 percent of the maximum individual rate in effect under 
section 1.
    Therefore, the adjustment factor under current tax rates would be 
74.39 percent, the result of subtracting 25.61 percent (the product of 
43.4 percent (the sum of the current maximum individual rate under 
section 1 (39.6 percent) and the current maximum individual rate under 
section 1411 (3.8 percent)) and 59 percent) from 100 percent. If an AFR 
for a given month were 5 percent, under current tax rates, the 
corresponding adjusted AFR would be 3.72 percent: The product of 74.39 
percent and 5 percent. If that 5 percent AFR were the Federal long-term 
rate for debt instruments with annual compounding, the adjusted Federal 
long-term rate under section 382 would likewise be 3.72 percent.
    As noted previously, because no comments were received on the 
proposed regulations, the final regulations adopt the proposed 
regulations without substantive change.

Effective/Applicability Date

    These regulations apply to determine the adjusted AFRs, adjusted 
Federal long-term rate, and long-term tax-exempt rate beginning with 
the rates determined during August 2016 that apply during September 
2016.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative 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 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 proposed regulations preceding these final regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses. No 
comments were received.

Drafting Information

    The principal authors of these regulations are Jason G. Kurth, IRS 
Office of the Associate Chief Counsel (Financial Institutions and 
Products) and William W. Burhop, IRS Office of the Associate Chief 
Counsel (Corporate). However, other personnel from the Treasury 
Department and the IRS participated in their development.

Availability of IRS Documents

    The IRS revenue ruling and notice cited in this Treasury decision 
are made available by the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.382-12 also issued under 26 U.S.C. 382(f) and 26 
U.S.C. 382(m). * * *
    Section 1.1288-1 also issued under 26 U.S.C. 1288(b). * * *


0
Par. 2. Section 1.382-1 is amended by revising the introductory text 
and adding an entry for Sec.  1.382-12 to read as follows:


Sec.  1.382-1  Table of contents.

    This section lists the captions that appear in the regulations for 
Sec. Sec.  1.382-2 through 1.382-12.
* * * * *


Sec.  1.382-12  Determination of adjusted Federal long-term rate.

    (a) In general.
    (b) Adjusted Federal long-term rate.
    (c) Adjustment factor.
    (d) Effective/applicability date.

0
Par. 3. Section 1.382-12 is added to read as follows:


Sec.  1.382-12  Determination of adjusted Federal long-term rate.

    (a) In general. The long-term tax-exempt rate for an ownership 
change is the highest of the adjusted Federal long-term rates in effect 
for any month in the 3-calendar-month period ending with the calendar 
month in which the change date occurs. For purposes of the previous 
sentence, the adjusted Federal long-term rate is the Federal long-term 
rate determined under section 1274(d) (without regard to paragraphs (2) 
and (3) thereof), adjusted for differences between rates on long-term 
taxable and tax-exempt obligations. The Secretary calculates the 
adjusted Federal long-term rate as provided in paragraph (b) of this 
section. The Internal Revenue Service publishes the long-term tax-
exempt rate and the adjusted Federal long-term rate for each month in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii) of this 
chapter).
    (b) Adjusted Federal long-term rate. The adjusted Federal long-term 
rate for

[[Page 24484]]

a calendar month is the product of the Federal long-term rate 
determined under section 1274(d) for that month, based on annual 
compounding, multiplied by the adjustment factor described in paragraph 
(c) of this section.
    (c) Adjustment factor. The adjustment factor is a percentage equal 
to--
    (1) The excess of 100 percent, over
    (2) The product of--
    (i) 59 percent, and
    (ii) The sum of the maximum rate in effect under section 1 
applicable to individuals and the maximum rate in effect under section 
1411 applicable to individuals for the month to which the adjusted 
applicable Federal rate applies.
    (d) Effective/applicability date. The rules of this section apply 
to the determination of the long-term tax-exempt rate and the adjusted 
Federal long-term rate beginning with the rates determined during 
August 2016 that apply during September 2016.

0
Par. 4. Section 1.1288-1 is added to read as follows:


Sec.  1.1288-1  Adjustment of applicable Federal rate for tax-exempt 
obligations.

    (a) In general. In applying section 483 or section 1274 to a tax-
exempt obligation, the applicable Federal rate is adjusted to take into 
account the tax exemption for interest on the obligation. For each 
applicable Federal rate determined under section 1274(d), the Secretary 
computes a corresponding adjusted applicable Federal rate by 
multiplying the applicable Federal rate by the adjustment factor 
described in paragraph (b) of this section. The Internal Revenue 
Service publishes the applicable Federal rates and the adjusted 
applicable Federal rates for each month in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii) of this chapter).
    (b) Adjustment factor. The adjustment factor is a percentage equal 
to--
    (1) The excess of 100 percent, over
    (2) The product of--
    (i) 59 percent, and
    (ii) The sum of the maximum rate in effect under section 1 
applicable to individuals and the maximum rate in effect under section 
1411 applicable to individuals for the month to which the adjusted 
applicable Federal rate applies.
    (c) Effective/applicability date. The rules of this section apply 
to the determination of adjusted applicable Federal rates beginning 
with the rates determined during August 2016 that apply during 
September 2016.

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: April 8, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-09614 Filed 4-25-16; 8:45 am]
 BILLING CODE 4830-01-P