[Federal Register Volume 80, Number 40 (Monday, March 2, 2015)]
[Proposed Rules]
[Pages 11141-11145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-04213]


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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.

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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