SECTION 2. BACKGROUND

.01 For certain types of interest, § 1.446–2 provides rules for determining the amount of interest that accrues during an accrual period and the portion of a payment that consists of accrued interest. For descriptions of the types of interest ( e.g., original issue discount) to which the § 1.446–2 accrual rules do not apply, see 1.446–2(a)(2). .02 Section 1.446–2(b) provides that “qualified stated interest” accrues ratably over an accrual period (or periods) to which it is attributable and accrues at the stated rate for the period (or periods). In general, “qualified stated interest” is stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) at least annually at a single fixed rate that appropriately takes

into account the length of the interval between payments. See 1.1273–1(c).

.03 In the case of interest other than “qualified stated interest,” § 1.446–2(c) provides that the amount of interest that accrues for any accrual period is determined under rules similar to those in the regulations under sections 1272 and 1275 of the Internal Revenue Code for the accrual of original issue discount (subject to the modifications set forth in § 1.446–2(d)).

.04 Section 1.446–2(e) provides that each payment on a loan (other than payments of additional interest or similar charges with regard to amounts not paid when due) is treated as a payment of interest to the extent of the accrued but unpaid interest (determined under § 1.446–2(b) and § 1.446–2(c)) as of the date the payment becomes due.

.05 Section 1.446–2(a)(1) provides that a taxpayer determines the taxable year in which to include an amount of accrued interest (determined under § 1.446–2(b) or § 1.446–2(c)) in gross income under the taxpayer’s regular method of accounting.

.06 Rev. Rul. 2007–32, page 1278 of this Bulletin, requires an accrual method bank with a reasonable expectancy of receiving future payments on a loan to accrue interest in the taxable year in which the right to receive the interest becomes fixed, notwithstanding bank regulatory

2007–21 I.R.B. 1289 May 21, 2007

est for which there is a reasonable expectancy of payment, Bank X first calculates its recovery percentage for 2007. Bank X determines its recovery percentage by dividing the $73,048,313 of payments received during the 2002–2006 period by the $74,900,705 that was due and payable during the same period. Bank X’s 2007 recovery percentage is 97.5269%

[$73,048,313 ÷ $74,900,705 = 97.5269%]. Bank X determines the portion of the uncollected 2007 interest for which it is considered to have a reasonable expectancy of payment by multiplying the $51,600 of accrued but uncollected interest for that year by the 97.5269 recovery percentage. Bank X has a reasonable expectancy of payment for $50,323.88 of the uncollected 2007 interest [$51,600 × 97.5269% = $50,323.88]. Bank X includes the $50,323.88 of uncollected 2007 interest in gross income for 2007. (2) Bank X is considered not to have a reasonable expectancy of payment for $1,276.12 of the uncollected 2007 interest ($51,600 - $50,323.88 = $1,276.12). Bank X excludes $1,276.12 of the uncollected 2007 interest from its 2007 gross income.