RR-2018-11

This revenue ruling provides the dollar amounts, increased by the 2018 adjustment for inflation, for § 1274A of the Internal Revenue Code.

In general, §§ 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments.

In the case of a “qualified debt instrument,” the discount rate used for purposes of §§ 483 and 1274 may not exceed nine percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash receipts and disbursements method of accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) in the case of a debt instrument arising out of a sale or exchange before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) § 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) an election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and the lender. Section 1.1274A–1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

For taxable years beginning on or before December 31, 2017, § 1274A(d)(2) provided that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) were increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment was rounded to the nearest multiple of $100 (or, if the increase was a multiple of $50 and not of $100, the increase was increased to the nearest multiple of $100). The inflation adjustment for any calendar year was the percentage (if any) by which the CPI for the preceding calendar year exceeded the CPI for calendar year 1988. Section 1274A(d)(2)(B) defined the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

For taxable years beginning after December 31, 2017, section 11002(d)(10) of An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub. L. 115–97 (the Act), amended § 1274A(d)(2) to change the calculation of the adjustments for inflation. As amended by the Act, § 1274A(d)(2) provides that the dollar amounts stated in § 1274A(b) and (c)(2)(A) are each increased by an adjustment for inflation determined by multiplying the stated amount by the cost-of-living (COL) adjustment determined under § 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1988” for “calendar year 2016” in § 1(f)(3)(A)(ii). Thus, for purposes of § 1274A(d)(2), the COL adjustment for any calendar year is the percentage (if any) by which (i) the C-CPI-U for the preceding calendar year exceeds (ii) the CPI for calendar year 1988, multiplied by the amount determined in § 1(f)(3)(B). The amount determined in § 1(f)(3)(B) is the C-CPI-U for calendar year 2016 divided by the CPI for calendar year 2016. Section 1(f)(4) defines the CPI for any calendar year as the average of the Consumer Price Index for All Urban Consumers as of the close of the 12-month period ending on August 31 of that calendar year. Section 1(f)(6)(B) defines the C-CPI-U for any calendar year as the average of the Chained Consumer Price Index for All Urban Consumers as of the close of the 12-month period ending on August 31 of such calendar year. Under § 1274A(d)(2), any increase in an adjustment for inflation is rounded to the nearest multiple of $100 (or, if such increase is a multiple of $50, such increase shall be increased to the nearest multiple of $100).

For debt instruments arising out of sales or exchanges after December 31, 1989, the inflation-adjusted amounts under § 1274A are shown in Table 1.

Rev. Rul. 2016–30, 2016–52 I.R.B. 876, is supplemented and superseded.

The author of this revenue ruling is Jason Eisenberg of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Jason Eisenberg at (202) 317-7053 (not a toll-free number).