Determination of Adjusted Applicable Federal Rates Under Section 1288 and the Adjusted Federal Long-Term Rate Under Section 382, 11141-11145 [2015-04213]
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Federal Register / Vol. 80, No. 40 / Monday, March 2, 2015 / Proposed Rules
11141
Issued in Burlington, Massachusetts, on
February 20, 2015.
Colleen M. D’Alessandro,
Assistant Directorate Manager, Engine &
Propeller Directorate, Aircraft Certification
Service.
promoting safe flight of civil aircraft in
air commerce by prescribing regulations
for practices, methods, and procedures
the Administrator finds necessary for
safety in air commerce. This regulation
is within the scope of that authority
because it addresses an unsafe condition
that is likely to exist or develop on
products identified in this rulemaking
action.
(c) Applicability
Regulatory Findings
We determined that this proposed AD
would not have federalism implications
under Executive Order 13132. This
proposed AD would not have a
substantial direct effect on the States, on
the relationship between the national
Government and the States, or on the
distribution of power and
responsibilities among the various
levels of government.
For the reasons discussed above, I
certify this proposed regulation:
(1) Is not a ‘‘significant regulatory
action’’ under Executive Order 12866,
(2) Is not a ‘‘significant rule’’ under
the DOT Regulatory Policies and
Procedures (44 FR 11034, February 26,
1979),
(3) Will not affect intrastate aviation
in Alaska to the extent that it justifies
making a regulatory distinction, and
(4) Will not have a significant
economic impact, positive or negative,
on a substantial number of small entities
under the criteria of the Regulatory
Flexibility Act.
This AD was prompted by reports of
cracking in the LPT shaft. We are issuing this
AD to prevent failure of the LPT shaft, which
could lead to an uncontained engine failure
and damage to the airplane.
DEPARTMENT OF THE TREASURY
(e) Compliance
[REG–136018–13]
Comply with this AD within the
compliance times specified, unless already
done.
For engines with an LPT shaft part number
listed in paragraph (c) of this AD:
(1) If the LPT shaft has 15,000 or fewer
cycles since new (CSN) on the effective date
of this AD, remove it from service before it
accumulates 20,000 CSN.
(2) If the LPT shaft has more than 15,000
CSN on the effective date of this AD, remove
it from service before it accumulates 5,000
additional cycles in service, or at the next
piece-part exposure after accumulating
20,000 CSN, whichever occurs first.
(3) After the effective date of this AD, do
not install any LPT shaft listed in paragraph
(c) of this AD that is at piece-part exposure
and exceeds the new life limit of 20,000 CSN,
into any engine.
RIN 1545–BM20
List of Subjects in 14 CFR Part 39
Air transportation, Aircraft, Aviation
safety, Incorporation by reference,
Safety.
This AD applies to all Pratt & Whitney
(PW) JT8D–217C and JT8D–219 turbofan
engines with low-pressure turbine (LPT)
shaft part numbers 783319, 783319–001,
783319–003, 783319–004, 783320, 783320–
001, 783320–003, 783320–004, 820514–001,
820514–003, 820514–004, or 820514–005,
installed.
(f) Definitions
For the purpose of this AD, piece-part
exposure is when the LPT shaft is completely
disassembled from the engine.
(g) Alternative Methods of Compliance
(AMOCs)
The Manager, Engine Certification Office,
FAA, may approve AMOCs for this AD. Use
the procedures found in 14 CFR 39.19 to
make your request. You may email your
request to: ANE-AD-AMOC@faa.gov.
PART 39—AIRWORTHINESS
DIRECTIVES
(1) For more information about this AD,
contact Jo-Ann Theriault, Aerospace
Engineer, Engine Certification Office, FAA,
Engine & Propeller Directorate, 12 New
England Executive Park, Burlington, MA
01803; phone: 781–238–7105; fax: 781–238–
7199; email: jo-ann.theriault@faa.gov.
(2) PW Service Bulletin No. JT8D 6504,
dated November 5, 2014, which is not
incorporated by reference in this proposed
AD, can be obtained from PW using the
contact information in paragraph (h)(3) of
this proposed AD.
(3) For service information identified in
this proposed AD, contact Pratt & Whitney,
400 Main St., East Hartford, CT 06108;
phone: 860–565–8770; fax: 860–565–4503.
(4) You may view this service information
at the FAA, Engine & Propeller Directorate,
12 New England Executive Park, Burlington,
MA. For information on the availability of
this material at the FAA, call 781–238–7125.
1. The authority citation for part 39
continues to read as follows:
Authority: 49 U.S.C. 106(g), 40113, 44701.
§ 39.13
[Amended]
2. The FAA amends § 39.13 by adding
the following new airworthiness
directive (AD):
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■
Pratt & Whitney: Docket No. FAA–2014–
1127; Directorate Identifier 2014–NE–
16–AD.
(a) Comments Due Date
We must receive comments by May 1,
2015.
(b) Affected ADs
None.
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BILLING CODE 4910–13–P
(d) Unsafe Condition
The Proposed Amendment
Accordingly, under the authority
delegated to me by the Administrator,
the FAA proposes to amend 14 CFR part
39 as follows:
■
[FR Doc. 2015–04059 Filed 2–27–15; 8:45 am]
(h) Related Information
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Internal Revenue Service
26 CFR Part 1
Determination of Adjusted Applicable
Federal Rates Under Section 1288 and
the Adjusted Federal Long-Term Rate
Under Section 382
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
This document contains
proposed regulations that provide the
method to be used to adjust the
applicable Federal rates (AFRs) under
section 1288 of the Internal Revenue
Code (Code) (adjusted AFRs) for taxexempt obligations and the method to
be used to determine the long-term taxexempt rate and the adjusted Federal
long-term rate under section 382. For
tax-exempt obligations, the proposed
regulations affect the determination of
original issue discount under section
1273 and of total unstated interest under
section 483. In addition, the proposed
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. This document also
contains a request for comments and
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by June 1, 2015.
Outlines of topics to be discussed at the
public hearing scheduled for June 24,
2015 must be received by June 1, 2015.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–136018–13), Room
5203, Internal Revenue Service, P.O.
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–136018–
13), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
SUMMARY:
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Federal Register / Vol. 80, No. 40 / Monday, March 2, 2015 / Proposed Rules
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via the Federal eRulemaking portal at
www.regulations.gov (IRS REG–136018–
13). 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 proposed regulations
under section 1288, Jason G. Kurth at
(202) 317–6842; concerning the
proposed regulations under section 382,
William W. Burhop at (202) 317–6847;
concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the
hearing, Oluwafunmilayo (Funmi)
Taylor at (202) 317–6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 (Income
Tax Regulations) under sections 382 and
1288 of the Code. The proposed
regulations provide the new method by
which the Treasury Department and the
IRS propose to 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 § 1.1275–1(e))
and 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.
Section 1274(d) directs the Secretary
to determine the AFRs that are used for
determining the imputed principal
amount of debt instruments to which
section 1274 applies, computing total
unstated interest on payments to which
section 483 applies, and other purposes.
Under section 1274(d)(1), the AFR is: (i)
In the case of a debt instrument with a
term not over three years, the Federal
short-term rate; (ii) in the case of a debt
instrument with a term over three years
but not over nine years, the Federal
mid-term rate; and (iii) in the case of a
debt instrument with a term over nine
years, the Federal long-term rate.
Sections 1274(d)(2) and (3) provide
special rules for selecting the
appropriate AFR in specified
circumstances. Section 1274(d)(2)
provides that, in the case of a sale or
exchange, the AFR shall be the lowest
AFR in effect for any month in the 3calendar-month period ending with the
first calendar month in which there is
a binding contract in writing for the sale
or exchange. Section 1274(d)(3) requires
that options to renew or extend be taken
into account in determining the term of
a debt instrument. During each month,
the Treasury Department determines the
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AFRs that will apply during the
following calendar month based on the
average market yield of outstanding
marketable obligations of the United
States with appropriate maturities. See
§ 1.1274–4(b). The IRS publishes the
AFRs for each month in the Internal
Revenue Bulletin (see
§ 601.601(d)(2)(ii)).
Section 1288(b)(1) provides that, in
applying section 483 or section 1274 to
a tax-exempt obligation, under
regulations prescribed by the Secretary,
appropriate adjustments shall be made
to the AFR to take into account the tax
exemption for interest on the obligation.
The IRS publishes the adjusted AFRs for
each month in the Internal Revenue
Bulletin (see § 601.601(d)(2)(ii)).
In the case of a corporation that has
undergone an ownership change
described in section 382(g): (i) Section
382 places an annual limit (the section
382 limitation) on the amount of the
corporation’s taxable income that may
be offset by certain net operating loss
carryforwards and built-in losses; and
(ii) section 383 places a limit,
determined by reference to the section
382 limitation, on the amount of the
corporation’s income tax liability that
may be offset by certain tax credits and
other tax attributes. Under section
382(b)(1), the section 382 limitation
generally equals the product of (A) the
value of the stock of the corporation
immediately prior to the ownership
change and (B) the long-term tax-exempt
rate.
Section 382(f)(1) defines the long-term
tax-exempt rate as the highest of the
adjusted Federal long-term rates in
effect for any month in the threecalendar-month period ending with the
calendar month in which the ownership
change occurs. Section 382(f)(2)
provides that the term ‘‘adjusted Federal
long-term rate’’ means the Federal longterm rate determined under section
1274(d), except that sections 1274(d)(2)
and (3) shall not apply, and such rate
shall be properly adjusted for
differences between rates on long-term
taxable and tax-exempt obligations.
Section 382(f) was added to the Code
by the Tax Reform Act of 1986, Public
Law 99–514 (100 Stat. 2254). The Report
of the Committee on Ways and Means
on H.R. 3838, the Tax Reform Act of
1985 (the title of the Act as it passed the
House), states that the long-term taxexempt rate should be determined by
adjusting the Federal long-term rate
(determined under section 1274)
pursuant to section 1288 to take into
account tax exemption. H.R. Rep. No.
99–426, 99th Cong., 1st Sess. 268 (1985)
(1986–3 CB (Vol. 2) 1, 268). The
Conference Report for the Tax Reform
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Act of 1986 states that the adjusted
Federal long-term rate is to be computed
as the yield on a diversified pool of
prime, general obligation tax-exempt
bonds with remaining periods to
maturity of more than nine years. The
report also explains that it is necessary
to the purposes of section 382 that the
long-term tax-exempt rate be lower than
the Federal long-term rate. Further, the
Committee anticipated that the longterm tax-exempt rate would ordinarily
fall in a range between (i) the Federal
long-term rate multiplied by a
percentage equal to the difference
between 100 percent and the corporate
tax rate, and (ii) 100 percent of the
Federal long-term rate. 2 H.R. Rep. No.
99–841 (Conf. Rep.), 99th Cong., 2d
Sess. II–188 (1986) (1986–3 CB (Vol. 4)
1, 188). Under current tax rates, that
would be between 65 percent and 100
percent of the Federal long-term rate.
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) (see
§ 601.601(d)(2)(ii)). 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.
Since the beginning of 2008, market
yields of prime, general obligation taxexempt obligations have sometimes
exceeded market yields of comparable
U.S. Treasury obligations, causing the
adjusted Federal long-term rate and
each adjusted AFR to exceed the
corresponding AFRs. This relationship
between the adjusted rates and the
corresponding AFRs showed that the
adjustment factor no longer served the
purposes of sections 1288(b)(1) and
382(f)(2), which require adjustments to
reflect only tax exemption, not credit
quality. These rates are 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.
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Request for Comments and Summary of
Comments
In response, 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 notice solicited comments on
several potential adjustment factors.
One proposal was an adjustment factor
based on tax rates, under which each
adjusted AFR would be the product of
(A) the appropriate AFR, and (B) the
excess of (i) one hundred percent over
(ii) a tax rate or a fixed percentage of a
tax rate. Another proposal was an
adjustment factor based on historical
data, under which the adjustment factor
would be fixed at an amount that would
produce a spread between Federal longterm rates and adjusted Federal longterm rates equal to the average spread
between those rates during the period
from 1986 through 2007 (which is the
period before changes in market
conditions elevated the yields of many
obligations in relation to U.S. Treasury
obligations). The notice also requested
comments on whether the adjusted
Federal long-term rate described in
section 382(f)(2) should continue to be
determined in the same manner as the
adjusted AFRs described in section
1288(b)(1).
Notice 2013–4 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 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.
The IRS received two comments in
response to Notice 2013–4. One
commenter recommended an
adjustment factor based on tax rates for
purposes of section 1288, and made no
recommendation regarding section 382.
That commenter suggested that the
proper tax rate to use to calculate the
adjusted AFRs is the highest individual
tax rate set forth in section 1, increased
by the tax rate under section 1411
applicable to the investment income of
individuals.
The other commenter recommended
the use of historical data to determine
the lowest individual marginal tax rate
needed to attract sufficient investors to
clear the market supply of tax-exempt
obligations for purposes of section 1288.
That commenter recommended that
there be no change to the calculation of
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the long-term tax-exempt rate under
section 382. In the alternative, the
commenter recommended that the
adjusted Federal long-term rate
described in section 382(f) be subject to
a floor because the commenter argued
that section 382 is intended to defer
rather than eliminate net operating
losses, and the lower the long-term taxexempt rate, the greater the likelihood
that net operating losses subject to
section 382 limitation will expire before
they are used.
Explanation of Provisions
The language and purposes of
sections 382 and 1288 suggest that AFRs
are to be adjusted in the same manner
for purposes of both provisions.
Implementation of each provision
requires an adjustment to take into
account the effect of tax exemption on
market yields. Therefore, under these
proposed regulations, the adjusted
Federal long-term rate under section
382(f) would continue to be determined
in the same manner as the adjusted
AFRs under section 1288.
The Treasury Department and the IRS
recognize that, to be entirely consistent
with the language and legislative history
of sections 382 and 1288, the adjusted
Federal long-term rate and each
adjusted AFR should be determined
based on the current market yield on a
pool of tax-exempt obligations that have
terms, features, and credit quality
matching those of U.S. Treasury
obligations, which would result in an
adjusted Federal long-term rate or
adjusted AFR that is lower than the
corresponding AFR. However, under
recent market conditions tax-exempt
obligations with perceived credit
qualities approximating U.S. Treasury
obligations arguably no longer exist.
Because of the increasing spreads
between the yields of U.S. Treasury
obligations and other debt instruments,
the yield of a pool of tax-exempt
obligations will likely be higher than the
yield of similar U.S. Treasury
obligations and the AFR for the
corresponding term.
During the period from 1986 to 2007,
certain tax-exempt obligations satisfied
the criteria in the Code and the
legislative history. As discussed in this
preamble, the current adjustment factor
is based on the ratio of yields on prime,
general obligation tax-exempt
obligations to yields of U.S. Treasury
obligations with similar maturities.
From 1986 to 2007, that ratio (and, as
a result, the ratios of adjusted AFRs and
adjusted Federal long-term rates to
AFRs) was, on average, approximately
equal to one minus 59 percent of the
maximum individual tax rate under
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section 1. That relationship was
relatively stable over the period; the
ratio of the spread between the yields to
the maximum individual tax rate under
section 1 generally did not vary by more
than a few percentage points. In the
absence of current market data from taxexempt obligations and U.S. Treasury
obligations with similar maturities and
similar credit quality, the Treasury
Department and the IRS believe this
historical market data provides the best
indication of the effect of a tax
exemption on market yields.
The Treasury Department and the IRS
therefore propose use of this historical
market data to create an appropriate
adjustment factor based on individual
tax rates. Consistent with a proposal in
Notice 2013–4 and one commenter’s
suggestion regarding section 1288, the
proposed adjustment factor is one
minus the product of a tax rate and a
fixed percentage. The Treasury
Department would therefore determine
the adjusted AFRs and the adjusted
Federal long-term rate for each month
from the appropriate AFRs for that
month using the proposed adjustment
factor that results from the following
calculation: 100 percent ¥ [(a combined
tax rate) × (a fixed percentage)].
Consistent with both commenters’
suggestions regarding section 1288, the
tax rate is the maximum individual tax
rate.
Specifically, the tax rate in the
proposed 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. Using current
maximum individual tax rates under
sections 1 and 1411, the combined tax
rate in the calculation would be 43.4
percent, the sum of 39.6 percent and 3.8
percent. High-income individuals
purchase a large percentage of
municipal bonds because these
purchasers benefit the most from the tax
exemption. While individual and
corporate tax rates were relatively stable
from 1986 to 2007, data analyzed by the
Treasury Department indicate that the
differential between yields on taxexempt municipal bonds and
comparable U.S. Treasury obligations
was significantly more correlated with
the highest individual income tax rates
than with corporate tax rates. Thus, an
adjustment factor based on the
maximum individual tax rate allows a
better approximation of the marketbased adjustment that Congress
intended than would one based on a
corporate tax rate. The tax on net
investment income under section 1411
is included in the proposed adjustment
factor to account for the entire rate of
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federal tax imposed on high-income
individuals who hold taxable
obligations.
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
spread is less than 100% of the
maximum tax rate because, for example,
issuers of tax-exempt bonds need to
attract purchasers with effective tax
rates lower than the maximum
individual tax rate. The fixed percentage
in the proposed adjustment factor is 59
percent, because the yield on taxexempt 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 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.
The proposed regulations do not
adopt the suggestion of one commenter
that the adjusted Federal long-term rate
described in section 382(f) be subject to
a floor because that would be
inconsistent with the primary purpose
of section 382. The primary purpose of
section 382 is to preserve the integrity
of the carryover provisions by
discouraging tax-motivated corporate
acquisitions while allowing the
carryover provisions to perform their
intended averaging function. To
accomplish this purpose, section 382
seeks to limit the use of pre-change
losses by an acquiring corporation to no
more than the loss corporation’s ability
to use such losses, with that limit being
determined by multiplying the longterm tax-exempt rate—a rate below the
Federal long-term rate—by the value of
the loss corporation. The Conference
Report for the Tax Reform Act of 1986
explains:
The use of a rate lower than the long-term
Federal rate is necessary to ensure that the
value of NOL carryforwards to the buying
corporation is not more than their value to
the loss corporation. Otherwise there would
be a tax incentive for acquiring loss
corporations. If the loss corporation were to
sell its assets and invest in long-term
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Treasury obligations, it could absorb its NOL
carryforwards at a rate equal to the yield on
long-term government obligations. Since the
price paid by the buyer is larger than the
value of the loss company’s assets (because
of the value of NOL carryforwards are taken
into account), applying the long-term
Treasury rate to the purchase price would
result in faster utilization of NOL
carryforwards by the buying corporation.
Proposed Effective/Applicability Date
2 H.R. Rep. No. 99–841 (Conf. Rep.),
99th Cong., 2d Sess. II–188 (1986)
(1986–3 CB (Vol. 4) 1, 188).
Imposing a floor on the adjusted
Federal long-term rate, and thereby on
the long-term tax-exempt rate, would
reduce the effect of the mechanism
Congress established to ensure that the
value of net operating loss
carryforwards to the acquiring
corporation is not more than the value
of those carryforwards to the loss
corporation. Moreover, as a matter of
statutory interpretation, an upward
adjustment of the adjusted Federal longterm rate to comply with a fixed
minimum level would disregard the
express direction of Congress to
determine the adjusted Federal longterm rate based on the Federal long-term
rate determined under section 1274(d),
which is not subject to a floor, with
adjustments to take into account the
differences between rates on taxable and
tax-exempt obligations. Further, the
legislative history of section 382(f)
suggests that Congress intended that the
adjusted Federal long-term rate be
determined in a manner similar to the
adjusted AFR under section 1288.
The tax rate used to determine
adjusted AFRs under these proposed
regulations differs from the tax rate used
to determine the interest rate on
demand deposit securities under the
State and Local Government Series
(SLGS). Demand deposit SLGS
securities are one-day certificates of
indebtedness that are automatically
rolled over each day until the holder
requests redemption. See 31 CFR 344.7.
The interest rate on the securities is
based on yields of 13-week Treasury
bills, with a number of adjustments.
Among the adjustments is multiplying
the annualized Treasury bill yield by
the excess of one over the estimated
marginal tax rate of purchasers of taxexempt bonds. That estimated marginal
tax rate is published from time to time
in the Federal Register and is currently
39.6 percent. The Treasury Department
and the IRS request comments on
whether the interest rate on SLGS
should reflect the same correction for
tax exemption as the adjusted AFRs (the
product of the fixed percentage and the
combined tax rate).
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 Executive Order
13563. Therefore, a regulatory
assessment is not required. It also has
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, this notice
of proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comments on its
impact on small business.
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These regulations are proposed to
apply to calendar months beginning
after the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register.
Special Analyses
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic 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 for
public inspection and copying at
www.regulations.gov or upon request.
A public hearing has been scheduled
for June 24, 2015, at 10:00 a.m., in the
IRS Auditorium, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC. Due to building
security procedures, visitors must enter
through the Constitution 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
immediate entrance 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
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written (signed original
and eight (8) copies) or electronic
E:\FR\FM\02MRP1.SGM
02MRP1
Federal Register / Vol. 80, No. 40 / Monday, March 2, 2015 / Proposed Rules
comments and an outline of the topics
to be discussed and the time to be
devoted to each topic by June 1, 2015.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing 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 hearing.
Drafting Information
The principal authors of the proposed
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.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
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 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). * * *
■ Par. 2. Section 1.382–1 is amended by
revising the introductory text and
adding an entry for § 1.382–12 to read
as follows:
§ 1.382–1
Table of contents.
This section lists the captions that
appear in the regulations for §§ 1.382–
2 through 1.382–12.
*
*
*
*
*
wreier-aviles on DSK5TPTVN1PROD with PROPOSALS
§ 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.
■ Par. 3. Section 1.382–12 is added to
read as follows:
§ 1.382–12 Determination of adjusted
Federal long-term rate.
(a) In general. The long-term taxexempt rate for an ownership change is
the highest of the adjusted Federal longterm rates in effect for any month in the
VerDate Sep<11>2014
15:09 Feb 27, 2015
Jkt 235001
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 longterm rate as provided in paragraph (b)
of this section. The Internal Revenue
Service publishes the long-term taxexempt rate and the adjusted Federal
long-term rate for each month in the
Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii) of this chapter).
(b) Adjusted Federal long-term rate.
The adjusted Federal long-term rate for
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 taxexempt rate and the adjusted Federal
long-term rate during calendar months
beginning after the date of publication
of the Treasury decision adopting these
rules as final regulations in the Federal
Register.
■ Par. 4. Section 1.1288–1 is added to
read as follows:
§ 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
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
11145
Bulletin (see § 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 during calendar months
beginning after the date of publication
of the Treasury decision adopting these
rules as final regulations in the Federal
Register.
John M. Dalrymple,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2015–04213 Filed 2–27–15; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2015–0019]
RIN 1625–AA00
Safety Zone; Xterra Swim, Myrtle
Beach, SC
Coast Guard, DHS.
Notice of proposed rulemaking.
AGENCY:
ACTION:
The Coast Guard proposes to
issue a temporary safety zone on the
waters of the Intracoastal Waterway in
Myrtle Beach, South Carolina. The
Xterra Swim is scheduled to take place
on Sunday, May 3, 2015. The temporary
safety zone is necessary for the safety of
the swimmers, participant vessels,
spectators, and the general public
during the event. The temporary safety
zone will restrict vessel traffic in a
portion of the Intracoastal Waterway,
preventing non-participant vessels from
entering, transiting through, anchoring
in, or remaining within the regulated
area unless authorized by the Captain of
the Port Charleston or a designated
representative.
SUMMARY:
Comments and related material
must be received by the Coast Guard on
or before April 1, 2015.
ADDRESSES: You may submit comments
identified by docket number using any
one of the following methods:
DATES:
E:\FR\FM\02MRP1.SGM
02MRP1
]]>Agencies
[Federal Register Volume 80, Number 40 (Monday, March 2, 2015)]
[Proposed Rules]
[Pages 11141-11145]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-04213]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-136018-13]
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: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide the
method to be used to adjust the applicable Federal rates (AFRs) under
section 1288 of the Internal Revenue Code (Code) (adjusted AFRs) for
tax-exempt obligations 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 proposed regulations
affect the determination of original issue discount under section 1273
and of total unstated interest under section 483. In addition, the
proposed 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. This document also contains a request for
comments and provides notice of a public hearing on these proposed
regulations.
DATES: Written or electronic comments must be received by June 1, 2015.
Outlines of topics to be discussed at the public hearing scheduled for
June 24, 2015 must be received by June 1, 2015.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136018-13), Room
5203, Internal Revenue Service, P.O. 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-
136018-13), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically,
[[Page 11142]]
via the Federal eRulemaking portal at www.regulations.gov (IRS REG-
136018-13). 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 proposed regulations
under section 1288, Jason G. Kurth at (202) 317-6842; concerning the
proposed regulations under section 382, William W. Burhop at (202) 317-
6847; concerning submissions of comments, the hearing, and/or to be
placed on the building access list to attend the hearing,
Oluwafunmilayo (Funmi) Taylor at (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 (Income
Tax Regulations) under sections 382 and 1288 of the Code. The proposed
regulations provide the new method by which the Treasury Department and
the IRS propose to 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))
and 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.
Section 1274(d) directs the Secretary to determine the AFRs that
are used for determining the imputed principal amount of debt
instruments to which section 1274 applies, computing total unstated
interest on payments to which section 483 applies, and other purposes.
Under section 1274(d)(1), the AFR is: (i) In the case of a debt
instrument with a term not over three years, the Federal short-term
rate; (ii) in the case of a debt instrument with a term over three
years but not over nine years, the Federal mid-term rate; and (iii) in
the case of a debt instrument with a term over nine years, the Federal
long-term rate. Sections 1274(d)(2) and (3) provide special rules for
selecting the appropriate AFR in specified circumstances. Section
1274(d)(2) provides that, in the case of a sale or exchange, the AFR
shall be the lowest AFR in effect for any month in the 3-calendar-month
period ending with the first calendar month in which there is a binding
contract in writing for the sale or exchange. Section 1274(d)(3)
requires that options to renew or extend be taken into account in
determining the term of a debt instrument. During each month, the
Treasury Department determines the AFRs that will apply during the
following calendar month based on the average market yield of
outstanding marketable obligations of the United States with
appropriate maturities. See Sec. 1.1274-4(b). The IRS publishes the
AFRs for each month in the Internal Revenue Bulletin (see Sec.
601.601(d)(2)(ii)).
Section 1288(b)(1) provides that, in applying section 483 or
section 1274 to a tax-exempt obligation, under regulations prescribed
by the Secretary, appropriate adjustments shall be made to the AFR to
take into account the tax exemption for interest on the obligation. The
IRS publishes the adjusted AFRs for each month in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2)(ii)).
In the case of a corporation that has undergone an ownership change
described in section 382(g): (i) Section 382 places an annual limit
(the section 382 limitation) on the amount of the corporation's taxable
income that may be offset by certain net operating loss carryforwards
and built-in losses; and (ii) section 383 places a limit, determined by
reference to the section 382 limitation, on the amount of the
corporation's income tax liability that may be offset by certain tax
credits and other tax attributes. Under section 382(b)(1), the section
382 limitation generally equals the product of (A) the value of the
stock of the corporation immediately prior to the ownership change and
(B) the long-term tax-exempt rate.
Section 382(f)(1) defines the long-term tax-exempt rate as the
highest of the adjusted Federal long-term rates in effect for any month
in the three-calendar-month period ending with the calendar month in
which the ownership change occurs. Section 382(f)(2) provides that the
term ``adjusted Federal long-term rate'' means the Federal long-term
rate determined under section 1274(d), except that sections 1274(d)(2)
and (3) shall not apply, and such rate shall be properly adjusted for
differences between rates on long-term taxable and tax-exempt
obligations.
Section 382(f) was added to the Code by the Tax Reform Act of 1986,
Public Law 99-514 (100 Stat. 2254). The Report of the Committee on Ways
and Means on H.R. 3838, the Tax Reform Act of 1985 (the title of the
Act as it passed the House), states that the long-term tax-exempt rate
should be determined by adjusting the Federal long-term rate
(determined under section 1274) pursuant to section 1288 to take into
account tax exemption. H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 268
(1985) (1986-3 CB (Vol. 2) 1, 268). The Conference Report for the Tax
Reform Act of 1986 states that the adjusted Federal long-term rate is
to be computed as the yield on a diversified pool of prime, general
obligation tax-exempt bonds with remaining periods to maturity of more
than nine years. The report also explains that it is necessary to the
purposes of section 382 that the long-term tax-exempt rate be lower
than the Federal long-term rate. Further, the Committee anticipated
that the long-term tax-exempt rate would ordinarily fall in a range
between (i) the Federal long-term rate multiplied by a percentage equal
to the difference between 100 percent and the corporate tax rate, and
(ii) 100 percent of the Federal long-term rate. 2 H.R. Rep. No. 99-841
(Conf. Rep.), 99th Cong., 2d Sess. II-188 (1986) (1986-3 CB (Vol. 4) 1,
188). Under current tax rates, that would be between 65 percent and 100
percent of the Federal long-term rate.
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) (see Sec.
601.601(d)(2)(ii)). 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.
Since the beginning of 2008, market yields of prime, general
obligation tax-exempt obligations have sometimes exceeded market yields
of comparable U.S. Treasury obligations, causing the adjusted Federal
long-term rate and each adjusted AFR to exceed the corresponding AFRs.
This relationship between the adjusted rates and the corresponding AFRs
showed that the adjustment factor no longer served the purposes of
sections 1288(b)(1) and 382(f)(2), which require adjustments to reflect
only tax exemption, not credit quality. These rates are 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.
[[Page 11143]]
Request for Comments and Summary of Comments
In response, 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 notice solicited comments on several potential
adjustment factors. One proposal was an adjustment factor based on tax
rates, under which each adjusted AFR would be the product of (A) the
appropriate AFR, and (B) the excess of (i) one hundred percent over
(ii) a tax rate or a fixed percentage of a tax rate. Another proposal
was an adjustment factor based on historical data, under which the
adjustment factor would be fixed at an amount that would produce a
spread between Federal long-term rates and adjusted Federal long-term
rates equal to the average spread between those rates during the period
from 1986 through 2007 (which is the period before changes in market
conditions elevated the yields of many obligations in relation to U.S.
Treasury obligations). The notice also requested comments on whether
the adjusted Federal long-term rate described in section 382(f)(2)
should continue to be determined in the same manner as the adjusted
AFRs described in section 1288(b)(1).
Notice 2013-4 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 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.
The IRS received two comments in response to Notice 2013-4. One
commenter recommended an adjustment factor based on tax rates for
purposes of section 1288, and made no recommendation regarding section
382. That commenter suggested that the proper tax rate to use to
calculate the adjusted AFRs is the highest individual tax rate set
forth in section 1, increased by the tax rate under section 1411
applicable to the investment income of individuals.
The other commenter recommended the use of historical data to
determine the lowest individual marginal tax rate needed to attract
sufficient investors to clear the market supply of tax-exempt
obligations for purposes of section 1288. That commenter recommended
that there be no change to the calculation of the long-term tax-exempt
rate under section 382. In the alternative, the commenter recommended
that the adjusted Federal long-term rate described in section 382(f) be
subject to a floor because the commenter argued that section 382 is
intended to defer rather than eliminate net operating losses, and the
lower the long-term tax-exempt rate, the greater the likelihood that
net operating losses subject to section 382 limitation will expire
before they are used.
Explanation of Provisions
The language and purposes of sections 382 and 1288 suggest that
AFRs are to be adjusted in the same manner for purposes of both
provisions. Implementation of each provision requires an adjustment to
take into account the effect of tax exemption on market yields.
Therefore, under these proposed regulations, the adjusted Federal long-
term rate under section 382(f) would continue to be determined in the
same manner as the adjusted AFRs under section 1288.
The Treasury Department and the IRS recognize that, to be entirely
consistent with the language and legislative history of sections 382
and 1288, the adjusted Federal long-term rate and each adjusted AFR
should be determined based on the current market yield on a pool of
tax-exempt obligations that have terms, features, and credit quality
matching those of U.S. Treasury obligations, which would result in an
adjusted Federal long-term rate or adjusted AFR that is lower than the
corresponding AFR. However, under recent market conditions tax-exempt
obligations with perceived credit qualities approximating U.S. Treasury
obligations arguably no longer exist. Because of the increasing spreads
between the yields of U.S. Treasury obligations and other debt
instruments, the yield of a pool of tax-exempt obligations will likely
be higher than the yield of similar U.S. Treasury obligations and the
AFR for the corresponding term.
During the period from 1986 to 2007, certain tax-exempt obligations
satisfied the criteria in the Code and the legislative history. As
discussed in this preamble, the current adjustment factor is based on
the ratio of yields on prime, general obligation tax-exempt obligations
to yields of U.S. Treasury obligations with similar maturities. From
1986 to 2007, that ratio (and, as a result, the ratios of adjusted AFRs
and adjusted Federal long-term rates to AFRs) was, on average,
approximately equal to one minus 59 percent of the maximum individual
tax rate under section 1. That relationship was relatively stable over
the period; the ratio of the spread between the yields to the maximum
individual tax rate under section 1 generally did not vary by more than
a few percentage points. In the absence of current market data from
tax-exempt obligations and U.S. Treasury obligations with similar
maturities and similar credit quality, the Treasury Department and the
IRS believe this historical market data provides the best indication of
the effect of a tax exemption on market yields.
The Treasury Department and the IRS therefore propose use of this
historical market data to create an appropriate adjustment factor based
on individual tax rates. Consistent with a proposal in Notice 2013-4
and one commenter's suggestion regarding section 1288, the proposed
adjustment factor is one minus the product of a tax rate and a fixed
percentage. The Treasury Department would therefore determine the
adjusted AFRs and the adjusted Federal long-term rate for each month
from the appropriate AFRs for that month using the proposed adjustment
factor that results from the following calculation: 100 percent - [(a
combined tax rate) x (a fixed percentage)]. Consistent with both
commenters' suggestions regarding section 1288, the tax rate is the
maximum individual tax rate.
Specifically, the tax rate in the proposed 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. Using current maximum individual tax rates under sections 1
and 1411, the combined tax rate in the calculation would be 43.4
percent, the sum of 39.6 percent and 3.8 percent. High-income
individuals purchase a large percentage of municipal bonds because
these purchasers benefit the most from the tax exemption. While
individual and corporate tax rates were relatively stable from 1986 to
2007, data analyzed by the Treasury Department indicate that the
differential between yields on tax-exempt municipal bonds and
comparable U.S. Treasury obligations was significantly more correlated
with the highest individual income tax rates than with corporate tax
rates. Thus, an adjustment factor based on the maximum individual tax
rate allows a better approximation of the market-based adjustment that
Congress intended than would one based on a corporate tax rate. The tax
on net investment income under section 1411 is included in the proposed
adjustment factor to account for the entire rate of
[[Page 11144]]
federal tax imposed on high-income individuals who hold taxable
obligations.
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 spread is less than 100% of the maximum tax
rate because, for example, issuers of tax-exempt bonds need to attract
purchasers with effective tax rates lower than the maximum individual
tax rate. The fixed percentage in the proposed 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 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.
The proposed regulations do not adopt the suggestion of one
commenter that the adjusted Federal long-term rate described in section
382(f) be subject to a floor because that would be inconsistent with
the primary purpose of section 382. The primary purpose of section 382
is to preserve the integrity of the carryover provisions by
discouraging tax-motivated corporate acquisitions while allowing the
carryover provisions to perform their intended averaging function. To
accomplish this purpose, section 382 seeks to limit the use of pre-
change losses by an acquiring corporation to no more than the loss
corporation's ability to use such losses, with that limit being
determined by multiplying the long-term tax-exempt rate--a rate below
the Federal long-term rate--by the value of the loss corporation. The
Conference Report for the Tax Reform Act of 1986 explains:
The use of a rate lower than the long-term Federal rate is
necessary to ensure that the value of NOL carryforwards to the
buying corporation is not more than their value to the loss
corporation. Otherwise there would be a tax incentive for acquiring
loss corporations. If the loss corporation were to sell its assets
and invest in long-term Treasury obligations, it could absorb its
NOL carryforwards at a rate equal to the yield on long-term
government obligations. Since the price paid by the buyer is larger
than the value of the loss company's assets (because of the value of
NOL carryforwards are taken into account), applying the long-term
Treasury rate to the purchase price would result in faster
utilization of NOL carryforwards by the buying corporation.
2 H.R. Rep. No. 99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-188 (1986)
(1986-3 CB (Vol. 4) 1, 188).
Imposing a floor on the adjusted Federal long-term rate, and
thereby on the long-term tax-exempt rate, would reduce the effect of
the mechanism Congress established to ensure that the value of net
operating loss carryforwards to the acquiring corporation is not more
than the value of those carryforwards to the loss corporation.
Moreover, as a matter of statutory interpretation, an upward adjustment
of the adjusted Federal long-term rate to comply with a fixed minimum
level would disregard the express direction of Congress to determine
the adjusted Federal long-term rate based on the Federal long-term rate
determined under section 1274(d), which is not subject to a floor, with
adjustments to take into account the differences between rates on
taxable and tax-exempt obligations. Further, the legislative history of
section 382(f) suggests that Congress intended that the adjusted
Federal long-term rate be determined in a manner similar to the
adjusted AFR under section 1288.
The tax rate used to determine adjusted AFRs under these proposed
regulations differs from the tax rate used to determine the interest
rate on demand deposit securities under the State and Local Government
Series (SLGS). Demand deposit SLGS securities are one-day certificates
of indebtedness that are automatically rolled over each day until the
holder requests redemption. See 31 CFR 344.7. The interest rate on the
securities is based on yields of 13-week Treasury bills, with a number
of adjustments. Among the adjustments is multiplying the annualized
Treasury bill yield by the excess of one over the estimated marginal
tax rate of purchasers of tax-exempt bonds. That estimated marginal tax
rate is published from time to time in the Federal Register and is
currently 39.6 percent. The Treasury Department and the IRS request
comments on whether the interest rate on SLGS should reflect the same
correction for tax exemption as the adjusted AFRs (the product of the
fixed percentage and the combined tax rate).
Proposed Effective/Applicability Date
These regulations are proposed to apply to calendar months
beginning after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
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 Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has 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, this notice of proposed rulemaking has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comments on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic 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 for public inspection
and copying at www.regulations.gov or upon request.
A public hearing has been scheduled for June 24, 2015, at 10:00
a.m., in the IRS Auditorium, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter through the Constitution 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 immediate entrance 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 INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
(signed original and eight (8) copies) or electronic
[[Page 11145]]
comments and an outline of the topics to be discussed and the time to
be devoted to each topic by June 1, 2015. A period of 10 minutes will
be allotted to each person for making comments. An agenda showing 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 hearing.
Drafting Information
The principal authors of the proposed 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.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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 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 during calendar months beginning after the date
of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
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 during
calendar months beginning after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register.
John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-04213 Filed 2-27-15; 8:45 am]
BILLING CODE 4830-01-P
