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Adjusted Applicable Federal Rates and Adjusted Federal Long-Term Rates
I. PURPOSE
The Treasury Department and the Internal Revenue Service (IRS) are reconsidering the method used to determine the adjusted applicable Federal rates (adjusted AFRs) under section 1288(b) of the Internal Revenue Code (Code) and the adjusted Federal long-term rate under section 382(f)(2). This notice requests comments from the public on what modifications should be made to the current method of determining such rates. To limit unintended effects of the current method under certain market conditions, this notice also provides interim guidance modifying the current method, which will apply pending future guidance.
II. BACKGROUND
A. Applicable Federal Rates
Section 1274(d) governs the determination of applicable Federal rates (AFRs) that are used for determining the imputed principal amount of obligations to which section 1274 applies, for computing total unstated interest on payments to which section 483 applies, and for 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. Section 1274(d)(1)(B) requires the Secretary to determine during each calendar month the foregoing rates that shall apply during the following calendar month. The IRS publishes the AFRs for each month in the Internal Revenue Bulletin, as described in section 1.1274-4(b) of the Income Tax Regulations.
Section 1288(b) provides that, in applying section 483 or section 1274 to a taxexempt obligation (as defined in section 1275(a)(3)), under regulations prescribed by the Secretary, appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation. Although no regulations have been issued under section 1288, the IRS also publishes the adjusted AFRs (determined as described below under "Adjustment of Rates") for each month in the Internal Revenue Bulletin.
B. Section 382
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...