Section 1274A.—Special Rules for Certain Transactions Where Stated Principal Amount…

(Also §§ 1274, 483; 1.1274A–1, 1.483–1.)

Section 1274A – inflation adjusted numbers for 2006. This ruling provides the dollar amounts, increased by the 2006 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2004–107 supplemented and superseded.

Rev. Rul. 2005–76

This revenue ruling provides the dollar amounts, increased by the 2006 inflation adjustment, for § 1274A of the Internal Revenue Code.

BACKGROUND

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 9 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 method of account

2005–49 I.R.B. 1072 December 5, 2005

INFLATION-ADJUSTED AMOUNTS

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

for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines 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.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2004–107, 2004–2 C.B. 852, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is David B. Silber of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, please contact Mr. Silber at (202) 622–3930 (not a toll-free call).