The IRS has issued final regulations that provide the method to be used to adjust the applicable federal rates (AFRs) to determine the corresponding rates for tax-exempt obligations (adjusted AFRs) under Code Sec. 1288 and the method to be used to determine the long-term tax-exempt rate and the adjusted federal long-term rate under Code Sec. 382. The final regulations adopt, without substantive changes, rules that were proposed on March 2, 2015 (NPRM REG-136018-13, I.R.B. 2015-11, 759).
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)].
For tax-exempt obligations, the regulations affect the determination of original issue discount under Code Sec. 1273 and of total unstated interest under Code Sec. 483. In addition, the regulations affect the determination of the limitations under Code Secs. 382 and 383 on the use of certain operating loss carryforwards, tax credits, and other attributes of corporations following ownership changes. The regulations are effective on April 26, 2016, and the rules apply to the determination of adjusted applicable federal rates beginning with the rates determined during August 2016 that apply during September 2016. (T.D. 9763, 2016FED ¶47,021.)
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