Part I. Rulings — Internal Revenue Bulletin 1999-38

Section 42.—Low-Income Housing Credit

26 CFR 1.42–16: Eligible basis reduced by federal grants.

Low-income housing tax credit. This revenue ruling advises taxpayers that certain rental assistance payments made to a building owner on behalf of, or in respect to, a tenant under the Housing Opportunities for Persons With AIDS (HOPWA) program are not grants made with respect to a building or its operation under section 42(d)(5) of the Code.

Rev. Rul. 99–39

Pursuant to § 1.42–16(b)(3) of the Income Tax Regulations, the Internal Revenue Service has determined that certain rental assistance payments made to a building owner on behalf or in respect of a tenant under the Housing Opportunities for Persons With AIDS (HOPWA) program (42 U.S.C. 12901–12912) are not grants made with respect to a building or its operation under § 42(d)(5) of the Internal Revenue Code. These rental assistance payments are provided under 24 C.F.R. 574.300(b)(5).

DRAFTING INFORMATION

The principal author of this revenue ruling is Christopher J. Wilson of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Wilson on (202) 6223040 (not a toll-free call).

Section 1275.—Other Definitions and Special Rules

26 CFR 1.1275–7: Inflation-indexed debt instruments.

T.D. 8838

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Inflation-Indexed Debt Instruments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the federal income tax treatment of inflation-indexed debt instruments, including Treasury Inflation-Indexed Securities. The regulations in this document provide needed guidance to holders and issuers of inflation-indexed debt instruments.

EFFECTIVE DATE: The regulations are effective September 7, 1999.

FOR FURTHER INFORMATION CONTACT: Helen Vanek-Bigelow or William E. Blanchard, (202) 622-3950 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

On January 6, 1997, temporary regulations (T.D. 8709, 1997–1 C.B. 167) relating to the federal income tax treatment of inflation-indexed debt instruments under sections 1275 and 1286 of the Internal Revenue Code (Code) were published in the Federal Register (62 F.R. 615). A notice of proposed rulemaking (REG– 242996–96, 1997–1 C.B. 784) cross-referencing the temporary regulations was published in the Federal Register for the same day (62 F.R. 694). A public hearing was held on April 30, 1997. However, no one requested to speak at the hearing.

No written comments responding to the notice were received. Therefore, the proposed regulations under sections 1275 and 1286 are adopted by this Treasury decision with no changes, and the corresponding temporary regulations are redesignated as final regulations.

Explanation of provisions

The following is a general explanation of the provisions in the final regulations, which are the same as the provisions in the temporary regulations.

A. In General.

The final regulations provide rules for the treatment of certain debt instruments that are indexed for inflation and deflation, including Treasury Inflation-Indexed Securities. The final regulations gener

ally require holders and issuers of inflation-indexed debt instruments to account for interest and original issue discount (OID) using constant yield principles. In addition, the final regulations generally require holders and issuers of inflation-indexed debt instruments to account for inflation and deflation by making current adjustments to their OID accruals.

B. Applicability.

The final regulations apply to inflation-indexed debt instruments. In general, an inflation-indexed debt instrument is a debt instrument that (1) is issued for cash, (2) is indexed for inflation and deflation (as described below), and (3) is not otherwise a contingent payment debt instrument. The final regulations do not apply, however, to certain debt instruments, such as debt instruments issued by qualified state tuition programs.

C. Indexing Methodology.

A debt instrument is considered indexed for inflation and deflation if the payments on the instrument are indexed by reference to the changes in the values of a general price or wage index over the term of the instrument. Specifically, the amount of each payment on an inflationindexed debt instrument must equal the product of (1) the amount of the payment that would be payable on the instrument (determined as if there were no inflation or deflation over the term of the instrument) and (2) the ratio of the value of the reference index for the payment date to the value of the reference index for the issue date.

The reference index for a debt instrument is the mechanism for measuring inflation and deflation over the term of the instrument. This mechanism associates the value of a single qualified inflation index for a particular month with a specified day of a succeeding month. For example, under the terms of the Treasury Inflation-Indexed Securities, the reference index for the first day of a month is the value of a qualified inflation index for the third preceding month. The reference index must be reset once a month to the current value of a qualified inflation index. Between reset dates, the value of

September 20, 1999 424 1999–38 I.R.B.

the reference index is determined through straight-line interpolation.

A qualified inflation index is a general price or wage index that is updated and published at least monthly by an agency of the United States Government. A general price or wage index is an index that measures price or wage changes in the economy as a whole. An index is not general if it only measures price or wage changes in a particular segment of the economy. For example, the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), which is published by the Bureau of Labor Statistics of the Department of Labor, is a qualified inflation index because it measures general price changes in the economy. By contrast, the gasoline price component of the CPI-U is not a qualified inflation index because it only measures price changes in a particular segment of the economy.

D. Coupon Bond Method.

The final regulations provide a simplified method of accounting for qualified stated interest and inflation adjustments on certain inflation-indexed debt instruments (the coupon bond method). To qualify for the coupon bond method, an inflation-indexed debt instrument must satisfy two conditions. First, there must be no more than a de minimis difference between the debt instrument’s issue price and its principal amount for the issue date. Second, all stated interest on the debt instrument must be qualified stated interest. Because Treasury Inflation-Indexed Securities that are not stripped into principal and interest components satisfy both of these conditions, the coupon bond method applies to these securities.

If an inflation-indexed debt instrument qualifies for the coupon bond method, the stated interest payable on the debt instrument is taken into account under the taxpayer’s regular method of accounting. Any increase in the inflation-adjusted principal amount is treated as OID for the period in which the increase occurs. Any decrease in the inflation-adjusted principal amount is taken into account under the rules for deflation adjustments described below.

For example, if a taxpayer holds a Trea

sury Inflation-Indexed Security for an entire calendar year and the taxpayer uses the cash receipts and disbursements method of accounting (cash method), the taxpayer generally includes in income the interest payments received on the security during the year. In addition, the taxpayer includes in income an amount of OID measured by subtracting the inflation-adjusted principal amount of the security at the beginning of the year from the inflation-adjusted principal amount of the security at the end of the year. If the taxpayer uses an accrual method of accounting rather than the cash method, the taxpayer includes in income the qualified stated interest that accrued on the debt instrument during the year and an amount of OID measured by subtracting the inflation-adjusted principal amount of the security at the beginning of the year from the inflation-adjusted principal amount of the security at the end of the year.

E. Discount Bond Method.

If an inflation-indexed debt instrument does not qualify for the coupon bond method (for example, because it is issued at a discount), the instrument is subject to the discount bond method. In general, the discount bond method requires holders and issuers to make current adjustments to their OID accruals to account for inflation and deflation.

Under the discount bond method, a taxpayer determines the amount of OID allocable to an accrual period by using steps similar to those provided in §1.1272– 1(b)(1). First, the taxpayer determines the yield to maturity of the debt instrument as if there were no inflation or deflation over the term of the instrument. Second, the taxpayer determines the length of the accrual periods to be used to allocate OID over the term of the debt instrument, provided no accrual period is longer than one month. Third, the taxpayer determines the percentage change in the value of the reference index during the accrual period by comparing the value at the beginning of the period to the value at the end of the period. Fourth, the taxpayer determines the OID allocable to the accrual period by using a formula that takes into account both the yield of the debt instrument and

the percentage change in the value of the reference index during the period. Fifth, the taxpayer allocates to each day in the accrual period a ratable portion of the OID for the accrual period (the daily portions). If the daily portions for an accrual period are positive amounts, these amounts are taken into account under section 163(e) by an issuer and under section 1272 by a holder. If the daily portions for an accrual period are negative amounts, these amounts are taken into account under the rules for deflation adjustments described below.

F. Deflation Adjustments.

The final regulations treat deflation adjustments in a manner consistent with the treatment of net negative adjustments on contingent payment debt instruments under §1.1275–4(b)(6)(iii). If a holder has a deflation adjustment for a taxable year, the deflation adjustment first reduces the amount of interest otherwise includible in income with respect to the debt instrument for the taxable year. If the amount of the deflation adjustment exceeds the interest otherwise includible in income for the taxable year, the holder treats the excess as an ordinary loss in the taxable year. However, the amount treated as an ordinary loss is limited to the amount by which the holder’s total interest inclusions on the debt instrument in prior taxable years exceed the total amount treated by the holder as an ordinary loss on the debt instrument in prior taxable years. If the deflation adjustment exceeds the interest otherwise includible in income by the holder with respect to the debt instrument for the taxable year and the amount treated as an ordinary loss for the taxable year, the excess is carried forward to offset interest income on the debt instrument in subsequent taxable years. Similar rules apply to determine an issuer’s interest deductions and income for the debt instrument.

G. Miscellaneous Rules.

The final regulations provide special rules for reopenings, strips, subsequent holders, and minimum guarantees.

H. Effective Date.

1999–38 I.R.B. 425 September 20, 1999

The final regulations apply to an inflation-indexed debt instrument issued on or after January 6, 1997.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. 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, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of the regulations is Helen Vanek-Bigelow, Office of Assistant Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

Part 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by removing the entries for §§1.1275–7T and 1.1286–2T and adding two entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1275–7 also issued under 26 U.S.C. 1275(d). * * * Section 1.1286–2 also issued under 26 U.S.C. 1286(f). * * *

§1.148–4 [Amended]

Par. 2. Section 1.148–4 is amended by:

Removing the “T” from the reference “§1.1275–7T” in paragraph (h)(2)(v)(A).
Removing the “T” from the refer

ence “§1.1275–7T” in paragraph (h)(2)(v)(B).

§1.163–13 [Amended]

Par. 3. Section 1.163–13 is amended by:

Removing the “T” from the reference “§1.1275–7T(f)(1)(ii)” in the next to the last sentence in paragraph (e)(2).
Removing the “T” from the reference “§1.1275–7T” in the last sentence in paragraph (e)(2).

§1.171–3 [Amended]

Par. 4. Section 1.171–3 is amended by:

Removing the “T” from the reference “§1.1275–7T(f)(1)(i)” in the next to last sentence in paragraph (b).
Removing the “T” from the reference “§1.1275–7T” in the last sentence in paragraph (b).

Par. 5. In §1.1271–0, paragraph (b) is amended by revising the entry for §1.1275–7T to read as follows:

§1.1271–0 Original issue discount; effective date; table of contents.

(b) * * *

§1.1275–7 Inflation-indexed debt instruments.

§1.1275–4 [Amended]

Par. 6. Section 1.1275–4 is amended by removing the “T” from the reference “§1.1275–7T” in paragraph (a)(2)(vii).

§1.1275–7T [Redesignated as §1.1275–7]

Par. 7. Section 1.1275–7T is redesignated as §1.1275–7 and the language “(temporary)” is removed from the section heading.

§1.1286–2T [Redesignated as §1.1286–2]

Par. 8. Section 1.1286–2T is redesignated as §1.1286–2 and the language “(temporary)” is removed from the section heading.

Par. 9. Newly designated §1.1286–2 is amended by removing the “T” from the reference “§1.1275–7T(e)”.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved August 25, 1999.

Jonathan Talisman, Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on September 3, 1999, 8:45 a.m., and published in the issue of the Federal Register for September 7, 1999, 64 F.R. 48545)

Section 6402.—Authority to Make Credits or Refunds

26 CFR 301.6402–5: Offset of past-due support against overpayments.

T.D. 8837

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Revision of the Tax Refund Offset Program

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the administration of the Tax Refund Offset Program (TROP). This action is necessary because effective January 1, 1999, TROP, which had been administered by the IRS, was fully merged into the centralized administrative offset program known as the Treasury Offset Program (TOP), which is administered by the Financial Management Service (FMS). These regulations will affect State and Federal agencies that participate in TROP.

DATES: Effective Dates: These regulations are effective September 7, 1999.

Dates of Applicability: For dates of applicability of these regulations, see §§301.6402–5(h) and 301.6402–6(n).

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, (202) 6224940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

September 20, 1999 426 1999–38 I.R.B.

chapter 5) does not apply to these regulations, and because these 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 Internal Revenue Code, the notice of proposed rulemaking that preceded these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Beverly A. Baughman of the Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in the development of the regulations.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.6402–5 is amended by adding paragraph (h) to read as follows:

§301.6402–5 Offset of past-due support against overpayments.

(h) Effective dates. This section applies to refunds payable on or before January 1, 1999. For the rules applicable after January 1, 1999, see 31 CFR part 285.

Par. 3. Section 301.6402–6 is amended by revising paragraph (n) to read as follows:

§301.6402–6 Offset of past-due, legally enforceable debt against overpayment.

(n) Effective dates. This section applies to refunds payable under section 6402 after April 15, 1992, and on or be

Background

This document contains final regulations on Procedure and Administration (26 CFR part 301) that revise the effective dates for regulations under section 6402(c) and (d). Those subsections provide rules relating to the offset of past-due support payments and debts owed to Federal agencies against Federal tax refunds, respectively.

On August 31, 1998, a notice of proposed rulemaking (REG–104565–97, 1998–39, I.R.B. 21) under section 6402(c) and (d) was published in the Fed- eral Register (63 F.R. 46205). Although written or electronic comments and requests for a public hearing were solicited, no comments were received and no public hearing was requested or held. The proposed regulations under section 6402(c) and (d) are adopted by this Treasury decision without revision.

Explanation of Provisions

Section 6402(c) provides, in general, that the amount of any overpayment to be refunded to the person making the overpayment must be reduced by the amount of any past-due support (as defined in section 464(c) of the Social Security Act) owed by that person of which the Secretary has been notified by a State in accordance with section 464 of the Social Security Act.

Section 6402(d) provides, in general, that upon receiving notice from any Federal agency that a named person owes a past-due, legally enforceable debt to that agency, the Secretary must reduce the amount of any overpayment payable to that person by the amount of the debt, pay the amount by which the overpayment is reduced to the agency, and notify the person making the overpayment that the overpayment has been reduced.

Prior to January 1, 1998, the IRS made offsets pursuant to section 6402(d) according to regulations prescribed under §301.6402–6. Prior to January 1, 1999, the IRS made offsets pursuant to section 6402(c) according to regulations prescribed under §301.6402–5.

Section 31001(v)(2) and (w) of the Debt Collection Improvement Act of 1996 (110 Stat. 1321–375), amended 42 U.S.C. 664(a)(2)(A) and 31 U.S.C.

3720A(h), respectively, to clarify that the disbursing agency of the Treasury Department may conduct tax refund offsets. The disbursing agency of the Treasury Department is the Financial Management Service (FMS).

The IRS and FMS agreed to merge the Tax Refund Offset Program (TROP), which had been administered by the IRS, into the centralized administrative offset program known as the Treasury Offset Program (TOP), which is administered by the FMS. The merger of the two programs is intended to maximize and improve the Treasury Department’s government-wide collection of nontax debts, including those subject to offset against the debtor’s federal tax refund. The full merger of TROP with TOP occurred on January 1, 1999.

Final rules concerning the manner in which the FMS will administer the collection of nontax Federal debts after the merger of TROP with TOP were published by the FMS in the Federal Regis- ter on August 28, 1998 (63 F.R. 46140) (codified at 31 CFR Part 285.2) effective for refunds payable after January 1, 1998. The regulations in this document provide an ending effective date for §301.6402–6 to accommodate the beginning effective date of the FMS regulations. Accordingly, §301.6402–6 does not apply to refunds payable after January 1, 1998.

Final rules concerning the manner in which the FMS will administer the collection of past-due support payments were published by the FMS in the Federal Register on December 30, 1998 (63 F.R. 72092) (codified at 31 CFR Part 285.3), effective for refunds payable after January 1, 1999. The regulations in this document provide an ending effective date for §301.6402–5 to accommodate the beginning date for the full merger of TROP with TOP. Accordingly, §301.6402–5 does not apply to refunds payable after January 1, 1999.

Special Analyses

1999–38 I.R.B. 427 September 20, 1999

fore January 1, 1998. For the rules applicable after January 1, 1998, see 31 CFR part 285.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved August 25, 1999.

Jonathan Talisman, Deputy Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on September 3, 1999, 8:45 a.m., and published in the issue of the Federal Register for September 7, 1999, 64 F.R. 48547)

Section 7121.—Closing Agreements

This notice specifies rates the Service will use for the purpose of computing the amount due pursuant to a closing agreement concerning failed life insurance contracts under §7702 of the Internal Revenue Code. See Notice 99–48, page 429.

Section 7702.—Life Insurance Contract Defined

September 20, 1999 428 1999–38 I.R.B.