Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rates Update

Notice 2007–33

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code. In addition, it provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II).

CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE

Sections 412(b)(5)(B)(ii) and 412(l)(7) (C)(i), as amended by the Pension Funding

Equity Act of 2004 and by the Pension Protection Act of 2006, provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004–34, 2004–1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corpo

Corporate

rate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004–34 continues to apply in determining that rate. See Notice 2006–75, 2006–36 I.R.B. 366. The composite corporate bond rate for April 2007 is 5.98 percent. Pursuant to Notice 2004–34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

For Plan Years Bond 90% to 100%

Beginning in: Weighted Permissible Month Year Average Range

May 2007 5.80 5.22 to 5.80

Credit for Renewable Electricity Production, Refined Coal Production, and Indian Coal Production, and Publication of Inflation Adjustment Factors and Reference Prices for Calendar Year 2007

Notice 2007–40

This notice publishes the inflation adjustment factors and reference prices for calendar year 2007 for the renewable electricity production credit, the refined coal production credit, and the Indian coal production credit under § 45 of the Internal Revenue Code. The 2007 inflation adjustment factors and reference prices are used in determining the availability of the credits. The 2007 inflation adjustment factors and reference prices apply to calendar year 2007 sales of kilowatt-hours of electricity produced in the United States or a possession thereof from qualified energy resources and to calendar year 2007 sales of refined coal and Indian coal produced in the United States or a possession thereof.

30-YEAR TREASURY SECURITIES INTEREST RATE

Section 417(e)(3)(A)(ii)(II) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury securities for April 2007 is 4.87 percent. The Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2037.

Drafting Information

The principal authors of this notice are Paul Stern and Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please contact the Employee Plans’ taxpayer assistance telephone service at 877–829–5500 (a toll-free number), between the hours of 8:30 a.m. and 4:30 p.m. Eastern time, Monday through Friday. Mr. Stern may be reached at 202–283–9703. Mr. Montanaro may be reached at 202–283–9714. The telephone numbers in the preceding sentences are not toll-free.

May 21, 2007 1284 2007–21 I.R.B.

in service after the date of enactment of § 45(d)(5) and before January 1, 2009.

Section 45(d)(6) defines a qualified facility using gas derived from the biodegradation of municipal solid waste to produce electricity as any facility owned by the taxpayer which is originally placed in service after the date of enactment of § 45(d)(6) and before January 1, 2009.

Section 45(d)(7) defines a qualified facility that burns municipal solid waste to produce electricity as any facility owned by the taxpayer which is originally placed in service after the date of enactment of § 45(d)(7) and before January 1, 2009. A qualified facility burning municipal solid waste includes a new unit placed in service in connection with a facility placed in service on or before the date of enactment of § 45(d)(7), but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit.

Section 45(d)(8) provides in the case of a facility that produces refined coal, the term “refined coal production facility” means a facility which is placed in service after the date of enactment of § 45(d)(8) and before January 1, 2009.

Section 45(d)(9) defines a qualified facility producing qualified hydroelectric production described in § 45(c)(8) as (A) any facility producing incremental hydropower production, but only to the extent of its incremental hydropower production attributable to efficiency improvements or additions to capacity described in § 45(c)(8)(B) placed in service after the date of enactment of § 45(d)(9) and before January 1, 2009, and (B) any other facility placed in service after the date of enactment of § 45(d)(9) and before January 1, 2009. Section 45(d)(9)(C) provides that in the case of a qualified facility described in § 45(d)(9)(A), the 10-year period referred to in § 45(a) is treated as beginning on the date the efficiency improvements or additions to capacity are placed in service.

Section 45(d)(10) provides in the case of a facility that produces Indian coal, the term “Indian coal production facility” means a facility which is placed in service before January 1, 2009.

Section 45(e)(8)(A) provides that the refined coal production credit is an amount equal to $4.375 per ton of qualified refined coal (i) produced by the taxpayer at a refined coal production facility during the 10-year period beginning on the

BACKGROUND

Section 45(a) provides that the renewable electricity production credit for any tax year is an amount equal to the product of 1.5 cents multiplied by the kilowatt hours of specified electricity produced by the taxpayer and sold to an unrelated person during the tax year. This electricity must be produced from qualified energy resources and at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service.

Section 45(b)(1) provides that the amount of the credit determined under § 45(a) is reduced by an amount which bears the same ratio to the amount of the credit as (A) the amount by which the reference price for the calendar year in which the sale occurs exceeds 8 cents, bears to (B) 3 cents. Under § 45(b)(2), the 1.5 cent amount in § 45(a), the 8 cent amount in § 45(b)(1), the $4.375 amount in § 45(e)(8)(A), and in § 45(e)(8)(B)(i) the reference price of fuel used as feedstock (within the meaning of § 45(c)(7)(A)) in 2002 are each adjusted by multiplying the amount by the inflation adjustment factor for the calendar year in which the sale occurs. If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, the amount is rounded to the nearest multiple of 0.1 cent.

Section 45(c)(1) defines qualified energy resources as wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, and qualified hydropower production.

Section 45(d)(1) defines a qualified facility using wind to produce electricity as any facility owned by the taxpayer that is originally placed in service after December 31, 1993, and before January 1, 2009. See § 45(e)(7) for rules relating to the inapplicability of the credit to electricity sold to utilities under certain contracts.

Section 45(d)(2)(A) defines a qualified facility using closed-loop biomass to produce electricity as any facility (i) owned by the taxpayer that is originally placed in service after December 31, 1992, and before January 1, 2009, or (ii) owned by the taxpayer which before January 1, 2009, is originally placed in service and modified to use closed-loop biomass to co-fire with coal, with other biomass, or with both,

but only if the modification is approved under the Biomass Power for Rural Development Programs or is part of a pilot project of the Commodity Credit Corporation as described in 65 Fed. Reg. 63052. Section 45(d)(2)(B) provides that in the case of a qualified facility described in § 45(d)(2)(A)(ii), (i) the 10-year period referred to in § 45(a) is treated as beginning no earlier than the date of enactment of § 45(d)(2)(B)(i); (ii) the amount of the credit determined under § 45(a) with respect to the facility is an amount equal to the amount determined without regard to § 45(d)(2)(B)(ii) multiplied by the ratio of the thermal content of the closed-loop biomass used in the facility to the thermal content of all fuels used in the facility; and (iii) if the owner of the facility is not the producer of the electricity, the person eligible for the credit allowable under § 45(a) is the lessee or the operator of the facility.

Section 45(d)(3)(A) defines a qualified facility using open-loop biomass to produce electricity as any facility owned by the taxpayer which (i) in the case of a facility using agricultural livestock waste nutrients, (I) is originally placed in service after the date of enactment of § 45(d)(3)(A)(i)(I) and before January 1, 2009, and (II) the nameplate capacity rating of which is not less than 150 kilowatts; and (ii) in the case of any other facility, is originally placed in service before January 1, 2009. In the case of any facility described in § 45(d)(3)(A), if the owner of the facility is not the producer of the electricity, § 45(d)(3)(B) provides that the person eligible for the credit allowable under § 45(a) is the lessee or the operator of the facility.

Section 45(d)(4) defines a qualified facility using geothermal or solar energy to produce electricity as any facility owned by the taxpayer which is originally placed in service after the date of enactment of § 45(d)(4) and before January 1, 2009 (January 1, 2006, in the case of a facility using solar energy). A qualified facility using geothermal or solar energy does not include any property described in § 48(a)(3) the basis of which is taken into account by the taxpayer for purposes of determining the energy credit under § 48.

Section 45(d)(5) defines a qualified facility using small irrigation power to produce electricity as any facility owned by the taxpayer which is originally placed

2007–21 I.R.B. 1285 May 21, 2007

refined coal does not exceed the $31.90 reference price of such fuel in 2002 multiplied by the inflation adjustment factor and 1.7, the phaseout of credit provided in § 45(e)(8)(B) does not apply to refined coal sold during calendar year 2007. Further, for electricity produced from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, and qualified hydropower production, the phaseout of credit provided in § 45(b)(1) does not apply to such electricity sold during calendar year 2007.

CREDIT AMOUNT BY QUALIFIED ENERGY RESOURCE AND FACILITY, REFINED COAL, AND INDIAN COAL

As required by § 45(b)(2), the 1.5 cent amount in § 45(a)(1), the 8 cent amount in § 45(b)(1), and the $4.375 amount in § 45(e)(8)(A) are each adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale occurs. If any amount as increased under the preceding sentence is not a multiple of 0.1 cent, such amount is rounded to the nearest multiple of 0.1 cent. In the case of electricity produced in open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, trash combustion facilities, and qualified hydropower facilities, § 45(b)(4)(A) requires the amount in effect under § 45(a)(1) (before rounding to the nearest 0.1 cent) to be reduced by one-half. Under the calculation required by § 45(b)(2), the credit for renewable electricity production for calendar year 2007 under § 45(a) is 2.0 cents per kilowatt hour on the sale of electricity produced from the qualified energy resources of wind, closed-loop biomass, geothermal energy, and solar energy, and 1.0 cent per kilowatt hour on the sale of electricity produced in open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, trash combustion facilities, and qualified hydropower facilities. Under the calculation required by § 45(b)(2), the credit for refined coal production for calendar year 2007 under section 45(e)(8)(A) is $5.877 per ton on the sale of qualified refined coal. The credit for Indian coal production for calendar year 2007 under § 45(e)(10)(B) is $1.544 per ton on the sale of Indian coal.

date the facility was originally placed in service, and (ii) sold by the taxpayer (I) to an unrelated person and (II) during the 10-year period and the tax year. Section 45(e)(8)(B) provides that the amount of credit determined under § 45(e)(8)(A) is reduced by an amount which bears the same ratio to the amount of the increase as (i) the amount by which the reference price of fuel used as feedstock (within the meaning of § 45(c)(7)(A)) for the calendar year in which the sale occurs exceeds an amount equal to 1.7 multiplied by the reference price for such fuel in 2002, bears to (ii) $8.75.

Section 45(e)(10)(A) provides in the case of a producer of Indian coal, the credit determined under section 45 for any taxable year shall be increased by an amount equal to the applicable dollar amount per ton of Indian coal (i) produced by the taxpayer at an Indian coal production facility during the 7-year period beginning on January 1, 2006, and (ii) sold by the taxpayer (I) to an unrelated person, and (II) during such 7-year period and such taxable year.

Section 45(e)(10)(B)(i) defines “applicable dollar amount” for any taxable year as (I) $1.50 in the case of calendar years 2006 through 2009, and (II) $2.00 in the case of calendar years beginning after 2009. Section 45(e)(2)(A) requires the Secretary to determine and publish in the Federal Register each calendar year the inflation adjustment factor and the reference price for the calendar year. The inflation adjustment factors and the reference prices for the 2007 calendar year were published in the Federal Register on March 29, 2007 (72 Fed. Reg. 14862). Section 45(e)(2)(B) defines the inflation adjustment factor for a calendar year as the fraction the numerator of which is the GDP implicit price deflator for the preceding calendar year and the denominator of which is the GDP implicit price deflator for the calendar year 1992. The term “GDP implicit price deflator” means the most recent revision of the implicit price deflator for the gross domestic product as computed and published by the Department of Commerce before March 15 of the calendar year.

Section 45(e)(2)(C) provides that the reference price is the Secretary’s determination of the annual average contract price per kilowatt hour of electricity generated

from the same qualified energy resource and sold in the previous year in the United States. Only contracts entered into after December 31, 1989, are taken into account.

Under § 45(e)(8)(C), the determination of the reference price for fuel used as feedstock within the meaning of § 45(c)(7)(A) is made according to rules similar to the rules under § 45(e)(2)(C).

Under section 45(e)(10)(B)(ii), in the case of any calendar year after 2006, each of the dollar amounts under section 45(e)(10)(B)(i) shall be equal to the product of such dollar amount and the inflation adjustment factor determined under section 45(e)(2)(B) for the calendar year, except that section 45(e)(2)(B) shall be applied by substituting 2005 for 1992.

INFLATION ADJUSTMENT FACTORS AND REFERENCE PRICES

The inflation adjustment factor for calendar year 2007 for qualified energy resources and refined coal is 1.3433. The inflation adjustment factor for Indian coal is 1.0293. The reference price for calendar year 2007 for facilities producing electricity from wind (based upon information provided by the Department of Energy) is 3.29 cents per kilowatt hour. The reference prices for fuel used as feedstock within the meaning of § 45(c)(7)(A), relating to refined coal production (based upon information provided by the Department of Energy) are $31.90 per ton for calendar year 2002 and $48.35 per ton for calendar year 2007. The reference prices for facilities producing electricity from closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, and qualified hydropower production have not been determined for calendar year 2007. The IRS is exploring methods of determining those reference prices for calendar year 2008.

PHASE-OUT CALCULATION

Because the 2007 reference price for electricity produced from wind does not exceed 8 cents multiplied by the inflation adjustment factor, the phaseout of the credit provided in § 45(b)(1) does not apply to such electricity sold during calendar year 2007. Because the 2007 reference price of fuel used as feedstock for

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The periodic updates allow the Treasury Department and the Service to respond to the need for additional guidance that may arise during the plan year. Recommendations for guidance received after May 31, 2007, will be reviewed for inclusion in the next periodic update.

Taxpayers are not required to submit recommendations for guidance in any particular format. Taxpayers should, however, briefly describe the recommended guidance and explain the need for the guidance. In addition, taxpayers may include an analysis of how the issue should be resolved. It would be helpful if taxpayers suggesting more than one guidance project would prioritize the projects by order of importance. If a large number of projects are being suggested, it also would be helpful if the projects were grouped in terms of high, medium or low priority.

Taxpayers should send written comments to:

Internal Revenue Service Attn: CC:PA:LPD:PR

(Notice 2007–41) Room 5203 P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:

Courier’s Desk Internal Revenue Service Attn: CC:PA:LPD:PR

(Notice 2007–41) 1111 Constitution Avenue, N.W. Washington, D.C. 20224

Alternatively, taxpayers may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov . Taxpayers should include “Notice 2007–41” in the subject line. All comments will be available for public inspection and copying in their entirety.

For further information regarding this notice, contact Henry Schneiderman of the Office of Associate Chief Counsel (Procedure and Administration) at (202) 622–3400 (not a toll-free call).

DRAFTING AND CONTACT INFORMATION

The principal author of this notice is David A. Selig of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Mr. Selig at (202) 622–3040 (not a toll-free call).

Public Comment Invited on Recommendations for 2007–2008 Guidance Priority List

Notice 2007–41

The Department of Treasury and Internal Revenue Service invite public comment on recommendations for items that should be included on the 2007–2008 Guidance Priority List.

Treasury’s Office of Tax Policy and the Service use the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. The 2007–2008 Guidance Priority List will establish the guidance that the Treasury Department and the Service intend to issue from July 1, 2007, through June 30, 2008. The Treasury Department and the Service recognize the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration. Published guidance plays an important role in increasing voluntary compliance by helping to clarify ambiguous areas of the tax law.

As is the case whenever significant legislation is enacted, the Treasury Department and the Service have continued to dedicate substantial resources during the current plan year to published guidance projects necessary to implement the provisions of the American Jobs Creation Act of 2004, Pub. L. No. 108–357, 118 Stat. 1418, which was enacted on October 22, 2004; the Energy Policy Act of 2005, Pub. L. No. 109–58, 119 Stat. 594, which was enacted on August 8, 2005; the Gulf Opportunity Zone Act of 2005, Pub. L. No. 109–135, 119 Stat.

2577, which was enacted on December 21, 2005; and the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109–222, 120 Stat. 345, which was enacted on May 17, 2006. Similarly, the Treasury Department and the Service have devoted substantial resources to published guidance projects necessary to implement the provisions of additional tax legislation that was enacted during the current plan year, such as the Pension Protection Act of 2006, Pub. L. No. 109–280, 120 Stat. 780, which was enacted on August 17, 2006; and the Tax Relief and Health Care Act of 2006, Pub. L. No. 109–432, 120 Stat. 2922, which was enacted on December 20, 2006. The Treasury Department and the Service will continue to evaluate the priority of each guidance project in light of the above-mentioned tax legislation and other developments occurring during the 2007–2008 plan year. In reviewing recommendations and selecting projects for inclusion on the 2007–2008 Guidance Priority List, the Treasury Department and the Service will consider the following:

1. Whether the recommended guidance resolves significant issues relevant to many taxpayers;

2. Whether the recommended guidance promotes sound tax administration;

3. Whether the recommended guidance can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;

4. Whether the Service can administer the recommended guidance on a uniform basis; and

5. Whether the recommended guidance reduces controversy and lessens the burden on taxpayers or the Service.

Taxpayers may submit recommendations for guidance at any time during the year. Please submit recommendations by May 31, 2007, for possible inclusion on the original 2007–2008 Guidance Priority List. The Service plans to update the 2007–2008 Guidance Priority List periodically to reflect additional guidance that the Treasury Department and the Service intend to publish during the plan year.

2007–21 I.R.B. 1287 May 21, 2007

Treatment of Currency Gain That a Real Estate Investment Trust (REIT) Recognizes From a Qualified Business Unit (QBU) of the REIT

Notice 2007–42

This notice provides guidance with respect to the circumstances under which § 856(c)(2) or § 856(c)(3) characterizes § 987 gain as qualifying income for purposes of REIT qualification.

BACKGROUND

Under paragraph (3) of § 856(c), at least 75 percent of a REIT’s annual gross income must be derived from the types of income listed in that paragraph, often characterized as income from real estate sources. Under paragraph (2) of § 856(c), at least 95 percent of a REIT’s annual gross income must be derived from the types of income listed in that paragraph, often characterized as income from “passive” sources, including interest and dividends.

The Service is aware that some REITs have invested in real estate assets outside the United States through entities or partnerships that qualify as QBUs, as defined in § 989(a). The Service has explicitly ruled that otherwise-qualifying assets do not fail to satisfy § 856(c)(4) merely because the assets are foreign:

Neither section 856 of the Code nor the regulations thereunder restrict the term “real estate assets” to those located within the United States. Accordingly, it is held that, for purposes of section 856(c), the term “real property” includes land or improvements thereon located outside the United States and the term “mortgages on real property” includes a security interest which, under the laws of the jurisdiction in which the property is located, is the legal equivalent of a mortgage or deed of trust in the United States. Rev. Rul. 74–191, 1974–1 C.B. 170, 170. It follows from this holding both that rents on foreign real property qualify under § 856(c)(2)–(3) to the same extent that

they would qualify if the property were located in the United States, and that interest on foreign mortgage loans qualifies under § 856(c)(2)–(3) to the same extent that it would qualify if the loans were governed by United States law and the property were located in the United States. Thus, foreign situs of a REIT’s assets does not necessarily prevent the REIT from satisfying the income and asset tests of § 856(c), which must be met in order to qualify as a REIT. Rev. Rul. 74–191, however, does not address the treatment of foreign currency gain that may result from investing in real property or other assets through a QBU with a functional currency other than the dollar.

In general, § 985 provides that all determinations for federal income tax purposes are to be made in the taxpayer’s functional currency. Section 985(a). Section 1.985–1(b)(1)(iii) of the Income Tax Regulations provides that, except as otherwise provided by ruling or administrative pronouncement, the U.S. dollar is the functional currency of a QBU that has the United States as its residence, as defined in § 988(a)(3)(B). Section 1.989(a)–1(b)(2)(i) provides that a corporation is a QBU. Section 988(a)(3)(B)(i)(II) provides that the United States is the residence of a corporation that is a United States person. Section 7701(a)(30) provides, in part, that the term “United States person” includes a domestic corporation. Section 7701(a)(4) provides that the term “domestic,” as applied to a corporation, means created or organized in the United States or under the law of the United States or any State. Thus, absent a ruling to the contrary, a REIT has the dollar as its functional currency because § 856(a)(3) requires it to be taxable as a domestic corporation.

A REIT may have a QBU that is subject to § 987 and that has a functional currency other than the dollar. See § 1.985–1(c). In such a case, a REIT may recognize currency gain under § 987 when the QBU remits property to the REIT. Section 987(3).

Proposed regulations (REG–208270– 86, 2006–42 I.R.B. 698 [71 FR 52,876]) under § 987 were issued September 7,

2006. Section 1.987–6(b) of the proposed regulations generally provides that the owner of a § 987 QBU must determine the character of § 987 gain or loss in the year of remittance using the asset method provided in § 1.861–9T(g), as modified by the proposed regulations. The modified gross income method described in § 1.861–9T(j) cannot be used. If finalized as currently proposed, however, the regulations will not apply to REITs. See Prop. Treas. Reg. § 1.987–1(b)(1)(iii). Some REITs have requested guidance concerning the status under § 856(c)(2)–(3) of any foreign currency gain that is recognized under § 987 when a QBU remits property to a REIT.

INTERIM GUIDANCE

Because the currency gain from remittances is determined under § 987, the Service believes that it is appropriate for issues that arise in connection with that gain to be addressed under methods similar to those provided in § 987 and the regulations thereunder. The Treasury Department and the Service therefore intend to amend the proposed regulations under § 987 to include guidance concerning the characterization for purposes of § 856(c)(2) and (3) of § 987 gain recognized by a REIT on a remittance from a QBU of the REIT.

Until further guidance is published, if a REIT recognizes § 987 gain, the REIT may apply the principles of the proposed regulations under § 987 issued September 7, 2006 to determine whether that § 987 gain is derived from income that is described in § 856(c)(2)(A) - (H) or § 856(c)(3)(A) (I).

The principal author of this notice is Jonathan D. Silver of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice, contact Jonathan D. Silver at (202) 622–3930 (not a toll-free call).

May 21, 2007 1288 2007–21 I.R.B.

26 CFR 601.601: Rules and regulations. (Also, Part I, §§ 446, 451; 1.446–2, 1.451–1.)

Rev. Proc. 2007–33

TABLE OF CONTENTS

SECTION 1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 2. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1289

SECTION 3. SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 4. SAFE HARBOR METHOD OF ACCOUNTING FOR UNCOLLECTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 5. EXAMPLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 6. ADOPTION OF SAFE HARBOR METHOD OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1290

SECTION 7. REQUEST FOR COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 8. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

SECTION 9. EFFECT ON OTHER DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

DRAFTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1291

rules that prevent accrual of the interest for regulatory purposes. The ruling also provides guidance as to the period in which a taxpayer that has elected the conformity method of accounting under 1.166–2(d)(3) can treat uncollected interest as worthless.

.07 APPENDIX 5A of Rev. Proc. 2002–9, 2002–1 C.B. 327, modified and clarified by Announcement 2002–17, 2002–1 C.B. 561, modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432, states that “for interest to be determined uncollectible, the taxpayer must substantiate, taking into account all the facts and circumstances, that it has no reasonable expectation of payment of the interest.” APPENDIX 5A of Rev. Proc. 2002–9 also states that the “substantiation requirement is applied on a loan by loan basis.”

.08 Substantiation of uncollectible interest using a loan-by-loan facts and circumstances methodology can be administratively burdensome and impractical, particularly for smaller unsecured loans. For example, a bank may have a significant number of consumer loans. For these loans, the bank’s loan files often may not contain updated information regarding the debtors’ financial condition or the value of the collateral, if any, securing the loans.