Part I. Rulings — Internal Revenue Bulletin 2007-3

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 451.—General Rule for Taxable Year of Inclusion

26 CFR 1.451–1: Taxable year of inclusion. (Also: §§ 61, 446.)

Credit card nonsufficient funds (NSF) fee. This ruling provides that a credit card nonsufficient funds (NSF) fee as described in the ruling is not interest for federal income tax purposes. Also, this ruling holds that a credit card NSF fee is includible in income by the issuer of the credit card when the NSF Event, as defined therein, occurs.

Rev. Rul. 2007–1

ISSUES

(1) If a credit card issuer becomes entitled to a fee if it refuses to honor a credit

card convenience check that, if honored, would leave the cardholder over the cardholder’s credit limit, is the fee interest income for federal income tax purposes?

(2) When is the credit card fee that is described in Issue (1) includible in gross income by the card issuer?

FACTS

X, a taxpayer that uses an overall accrual method of accounting for federal income tax purposes, issues a credit card to A . The credit card allows A to access a revolving line of credit to make purchases of goods and services and to obtain cash advances, including cash advances obtained through A ’s use of a convenience check made available through A’s credit card account (an “account check”).

There is a written agreement between X and A that sets forth the terms and conditions governing A ’s use of the credit card (the “Cardholder Agreement”). Under the terms and conditions of the Cardholder Agreement, X is not required to honor one of A ’s account checks if, when the account check is presented to X for payment, either A is overdrawn on A ’s line of credit or payment of the check would cause A to become overdrawn. Under the agreement X is entitled to impose a $25 fee (the “Credit Card NSF Fee”) on A if an account check is presented to X that, if honored, would leave A overdrawn and X does not in fact honor the check (the “NSF Event”).

A writes an account check and uses it to make a payment to a third party. X does not honor A ’s account check when the third party presents it for payment because A would be overdrawn on A ’s line of credit if X honored the account check at that time. X is therefore entitled to impose a $25 Credit Card NSF Fee on A in accordance with the terms of X ’s Cardholder Agreement with A .

LAW AND ANALYSIS

For federal income tax purposes, interest is an amount that is paid in compensation for the use or forbearance of money. Deputy v. DuPont, 308 U.S. 488 (1940); Old Colony Railroad Co. v. Commis- sioner, 284 U.S. 552 (1932). Neither the

label used for the fee nor a taxpayer’s treatment of the fee for financial or regulatory reporting purposes is determinative of the proper federal income tax characterization of that fee. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542–43 (1979); Rev. Rul. 72–315, 1972–1 C.B. 49. When X determines that it will not honor A ’s account check that the third party has presented for payment because A would be overdrawn on A ’s line of credit, X is denying A the use of X ’s funds. Thus, the $25 Credit Card NSF Fee does not compensate X for the use or forbearance of money, and it is not interest income for federal income tax purposes.

Under § 451(a) of the Internal Revenue Code, the amount of any item of gross income is includible in gross income for the taxable year in which it is received by the taxpayer, unless that amount is to be properly accounted for in a different period under the method of accounting used by the taxpayer in computing taxable income.

Under § 1.451–1(a) of the Income Tax Regulations, income is includible in gross income by a taxpayer that uses an accrual method of accounting when all events have occurred that fix the taxpayer’s right to receive that income and the amount of that income can be determined with reasonable accuracy. See also § 1.446–1(c)(1)(ii)(A). Generally, all the events that fix the right to receive income occur either when the required performance takes place, when payment is due, or when payment is made, whichever occurs first (the “All Events Test”). See, e.g., Rev. Rul. 2004–52, 2004–1 C.B. 973 (addressing credit card issuers’ treatment of credit card annual fees).

X is required to include the Credit Card NSF Fee in gross income under section 451 when the NSF Event occurs because the NSF Event fixes X ’s right to receive the income and the amount can be determined with reasonable accuracy. Thus, the All Events Test is satisfied when the NSF Event occurs.

A change in the treatment of Credit Card NSF fees to comply with this revenue ruling is a change in method of accounting within the meaning of §§ 446 and 481

2007–3 I.R.B. 265 January 16, 2007

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for January 2007.

Rev. Rul. 2007–2

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2007 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the deemed rate of return for transfers made during calendar year 2007 to pooled income funds described in section 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer was made.

and the regulations issued thereunder. Accordingly, a taxpayer wishing to change its treatment of Credit Card NSF fees to comply with this revenue ruling must obtain the consent of the Commissioner under § 446(e) and § 1.446–1(e)(2)(i) by following the procedures in Rev. Proc. 97–27, 1997–1 C.B. 680 (or its successor).

HOLDINGS

(1) The Credit Card NSF Fee is not interest for federal income tax purposes.

(2) The Credit Card NSF Fee is includible in gross income for federal income tax purposes when the NSF Event occurs.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Jonathan Silver and Tina Jannotta of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact the principal authors at (202) 622–3930 (not a toll-free call).

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 832.—Insurance Company Taxable Income

26 CFR 1.832–4: Gross income.

The salvage discount factors are set forth for 2006. These factors must be used to compute discounted estimated salvage recoverable for purposes of section 832 of the Code. See Rev. Proc. 2007-10, page 289.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

26 CFR 1.846–1: Application of discount factors.

The loss payment patterns and discount factors are set forth for the 2006 accident year. These factors will be used for computing discounted unpaid losses under section 846 of the Code. See Rev. Proc. 2007-9, page 278.

26 CFR 1.846–1: Application of discount factors.

January 16, 2007 266 2007–3 I.R.B.

REV. RUL. 2007–2 TABLE 1

Applicable Federal Rates (AFR) for January 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 4.88% 4.82% 4.79% 4.77% 110% AFR 5.37% 5.30% 5.27% 5.24% 120% AFR 5.86% 5.78% 5.74% 5.71% 130% AFR 6.37% 6.27% 6.22% 6.19%

Mid-term

AFR 4.58% 4.53% 4.50% 4.49% 110% AFR 5.04% 4.98% 4.95% 4.93% 120% AFR 5.51% 5.44% 5.40% 5.38% 130% AFR 5.98% 5.89% 5.85% 5.82% 150% AFR 6.92% 6.80% 6.74% 6.71% 175% AFR 8.09% 7.93% 7.85% 7.80%

Long-term

AFR 4.73% 4.68% 4.65% 4.64% 110% AFR 5.22% 5.15% 5.12% 5.10% 120% AFR 5.70% 5.62% 5.58% 5.56% 130% AFR 6.17% 6.08% 6.03% 6.00%

REV. RUL. 2007–2 TABLE 2

Adjusted AFR for January 2007

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted 3.39% 3.36% 3.35% 3.34% AFR

Mid-term adjusted AFR 3.54% 3.51% 3.49% 3.48%

Long-term adjusted 4.03% 3.99% 3.97% 3.96% AFR

REV. RUL. 2007–2 TABLE 3

Rates Under Section 382 for January 2007

Adjusted federal long-term rate for the current month 4.03%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.15%

REV. RUL. 2007–2 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for January 2007 Appropriate percentage for the 70% present value low-income housing credit 8.08%

Appropriate percentage for the 30% present value low-income housing credit 3.46%

2007–3 I.R.B. 267 January 16, 2007

REV. RUL. 2007–2 TABLE 5

Rate Under Section 7520 for January 2007

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 5.6%

REV. RUL. 2007–2 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2007

Deemed rate of return for transfers during 2007 to pooled income funds that have been in existence for less than 3 taxable years 4.8%

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2007. See Rev. Rul. 2007-2, page 266.

January 16, 2007 268 2007–3 I.R.B.