Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income Housing Credit

Low-income housing credit; satis- factory bond; “bond factor” amounts for the period January through March 2008. This ruling provides the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through March 2008.

Rev. Rul. 2008–2

In Rev. Rul. 90–60, 1990–2 C.B. 3, the Internal Revenue Service provided

guidance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alternative to providing a surety bond for taxpayers to avoid or defer recapture of

the low-income housing tax credits under § 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low-income buildings or interests therein during the period January through March 2008.

DRAFTING INFORMATION

The principal author of this revenue ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling,

For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B. 255; Rev. Rul. 2001–53, 2001–2 C.B. 488; Rev. Rul. 2002–72,

2002–2 C.B. 759; Rev. Rul. 2003–117, 2003–2 C.B. 1051; Rev. Rul. 2004–100, 2004–2 C.B. 718; Rev. Rul. 2005–67, 2005–2 C.B. 771; Rev. Rul. 2006–51, 2006–2 C.B. 632; and Rev. Rul. 2007–62, 2007–41 I.R.B. 767.

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contact Mr. McDonnell at (202) 622–3040 (not a toll-free call).

Section 162.—Trade or Business Expenses

A notice provides rules under which a 2-percent shareholder-employee in an S corporation is entitled to the deduction under section 162(l) of the Internal Revenue Code for accident and health insurance premiums that are paid or reimbursed by the S corporation and included in the 2-percent shareholder-employee’s gross income. See Notice 2008-1, page 251.

Section 483.—Interest on Certain Deferred Payments

A ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. See Rev. Rul. 2008-3, page 249.

Section 988.—Treatment of Certain Foreign Currency Transactions

26 CFR 1.988–1: Certain definitions and special rules. (Also § 1.988–2.)

Foreign currency exchange traded notes. This ruling holds that a foreign currency exchange traded note is debt for U.S. federal tax purposes, even when the initial investment and repayment are made in U.S. dollars and the investor may get back fewer U.S. dollars than it invested. A companion publication to this ruling, Notice 2008–2, will ask for comments on prepaid forward contracts and similar arrangements that are not treated as debt for U.S. federal tax purposes.

Rev. Rul. 2008–1

ISSUE

What is the characterization for U.S. federal tax purposes of an instrument (described further below) that is issued and redeemed for U.S. dollars, but that provides an economic return that is determined by reference to the euro and market interest rates in respect of the euro?

FACTS

Assume that on January 1, 2007, the spot rate of exchange of U.S. dollars for

euros was $1 = € 0.75. On January 1, 2007, Holder delivered $100 to Issuer in exchange for the Issuer’s obligation (the “Instrument”) to deliver to Holder, on January 1, 2010, the U.S. dollar equivalent of an amount of euros (the “U.S. Dollar Equivalent Amount”). The U.S. Dollar Equivalent Amount is determinable on January 1, 2010, and is the sum of the following amounts translated into U.S. dollars at the spot rate on January 1, 2010: (i) € 75, and (ii) an amount of euros calculated by reference to a compound stated rate of return applied to € 75 from January 1, 2007, until January 1, 2010. The compound stated rate of return is the excess of a rate based on euro interest rates over a rate labeled as a “fee” for the benefit of the Issuer. (The U.S. Dollar Equivalent Amount to be paid by Issuer to Holder on January 1, 2010, may also be determined by reference to a mathematical formula that generates the same substantive effect as the methodology described above.)

Holder and Issuer expect that Issuer will pay the U.S. Dollar Equivalent Amount on January 1, 2010. The legal remedies provided in the Instrument are not materially different than legal remedies associated with instruments that are debt for federal tax purposes.

The U.S. dollar is the functional currency of Holder.

There is a significant possibility that the U.S. Dollar Equivalent Amount payable by Issuer to Holder on January 1, 2010, may be significantly less than $100.

ANALYSIS

An instrument that requires payments to be made in a foreign currency (that is, nonfunctional currency) can be debt for U.S. federal income tax purposes. See, e.g., section 988(c)(1)(B)(i) of the Internal Revenue Code. Thus, although nonfunctional currency is considered to be “property” for U.S. federal tax purposes ( see, e.g., Philip Morris Inc. v. Com- missioner, 71 F.3d 1040 (2d Cir. 1995), aff’g 104 T.C. 61 (1995); National-Stan- dard Company v. Commissioner, 749 F.2d 369 (6th Cir. 1984), aff’g 80 T.C. 551 (1983)), it is treated like money for purposes of determining the amount and timing of interest that accrues on debt. See §1.988–2(b)(2) of the Income Tax Regulations; S. Rep. No. 313, 99 ^th Cong.,

2d Sess., 1986–3 (Vol. 3) C.B. 461–463 (1986). Section 988 and regulations thereunder also provide that the acquisition of a debt instrument or becoming the obligor under a debt instrument is a section 988 transaction if the amount that a taxpayer is entitled to receive or is required to pay is determined by reference to the value of a nonfunctional currency. See, e.g., section 988(c)(1); §§ 1.988–1(a)(1) (flush language), 1.988–2(b)(2)(i)(B)(2). These provisions indicate that a financial instrument all the payments of which are determined by reference to a single currency can be debt, notwithstanding the fact that (i) all actual payments due under the instrument are made in a different payment currency, and (ii) the amount of the different payment currency that the issuer pays at maturity may be less than the amount of the different payment currency that was initially advanced. Indeed, section 988 was adopted, in part, to negate suggestions “that U.S. tax consequences can be manipulated by arranging to repay a foreign-currency denominated loan in U.S. dollars equivalent in value at repayment to the foreign currency borrowed.” S. Rep. No. 313, 99 ^th Cong., 2d Sess., 1986–3 (Vol. 3) C.B. 451 (1986). See also H.R. Rep. No. 426, 99 ^th Cong. 1 ^st Sess. 1986–3 (Vol. 2) C.B. 466 (1985) and General Explanation of the Tax Reform Act of 1986, 100 ^th Cong., 1 ^st Sess., 1087 (1987). The Instrument, in form, resembles a U.S. dollar denominated derivative contract in which the Holder prepays its obligations under the contract, and is entitled to receive a return based exclusively on the value of property at maturity. ( See Notice 2008–2, 2008–2 I.R.B. 252, dated January 14, 2008, requesting comments with respect to these types of derivative contracts.) However, the U.S. Dollar Equivalent Amount that is payable at maturity by the Issuer under the terms of the Instrument is determined exclusively by reference to (i) the U.S. dollar value of the euros at issuance and at maturity, and (ii) market interest rates in respect of the euro. At inception (on January 1, 2007), the Holder delivers the U.S. dollar equivalent of € 75, and at maturity (on January 1, 2010) the Issuer is required to pay the U.S. dollar equivalent of € 75, plus the U.S. dollar value at maturity of a return based on euro interest rates. The fact that intervening currency fluctuations may cause

January 14, 2008 248 2008–2 I.R.B.

the amount of U.S. dollars that Holder receives at maturity (on January 1, 2010) to be less than the amount of U.S. dollars that the Holder paid for the Instrument (on January 1, 2007) does not affect the characterization of the Instrument as debt, which is based on an analysis of payments with respect to the euro. The Issuer’s translation of U.S. dollars into euros (on January 1, 2007) and euros into U.S. dollars (on January 1, 2010) is not relevant to the Instrument’s characterization.

HOLDING

For U.S. federal tax purposes, the Instrument is euro-denominated indebtedness of Issuer. This result is not affected if the Instrument is (i) privately offered, (ii) publicly offered, or (iii) traded on an exchange.

DRAFTING INFORMATION

The principal authors of this revenue ruling are John W. Rogers III of the Office of the Associate Chief Counsel (Financial Institutions & Products) and Margaret Harris of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling, contact Mr. Rogers at (202) 622–3950 or Ms. Harris at 202–622–3870 (not toll-free calls).

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

A ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. See Rev. Rul. 2008-3, page 249.

Section 1274A.—Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000

26 CFR 1.1274A–1: Special rules for certain trans- actions where stated principal amount does not ex- ceed $2,800,000. (Also §§ 483, 1274.)

Section 1274A — Inflation adjusted numbers for 2008. This ruling provides the dollar amounts, increased by the 2008 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2007–4 supplemented and superseded.

Rev. Rul. 2008–3

This revenue ruling provides the dollar amounts, increased by the 2008 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 accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) § 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) an election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and lender. Section 1.1274A–1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment 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.

INFLATION-ADJUSTED AMOUNTS UNDER § 1274A

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

2008–2 I.R.B. 249 January 14, 2008

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2007–4, 2007–4 I.R.B. 351, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is Richard C. LaFalce of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further informa

tion regarding this revenue ruling, please contact Mr. LaFalce at (202) 622–3930 (not a toll-free call).

Section 1372.—Tax Treatment of S Corporations and Their Shareholders

This notice provides rules under which a 2-percent shareholder-employee in an S corporation is entitled

to the deduction under section 162(l) of the Internal Revenue Code for accident and health insurance premiums that are paid or reimbursed by the S corporation and included in the 2-percent shareholder-employee’s gross income. See Notice 2008-1, page 251.

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