rr-07-04.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part I

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 transactions where
stated principal amount does not exceed $2,800,000.
(Also '' 483, 1274, 7872)

Rev. Rul. 2007-4
This revenue ruling provides the dollar amounts, increased
by the 2007 inflation adjustment, for ' 1274A of the Internal
Revenue Code. This ruling also provides that the Internal
Revenue Service will no longer publish the inflation adjustment
under ' 7872(g)(2) because of amendments made to ' 7872 by the
Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),
Pub. L. No. 109-222, 120 Stat. 345, and the Tax Relief and Health
Care Act of 2006, Pub. L. No. 109-432, 120 Stat. 2922.
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.

-2-
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

-3-
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.

-4-

Rev. Rul. 2007 – 4 Table 1
Inflation-Adjusted Amounts Under ' 1274A

Calendar Year 1274A(b) Amount 1274A(c)(2)(A) Amount
of Sale (qualified debt (cash method debt
or Exchange instrument) instrument)
1990 $2,933,200 $2,095,100
1991 $3,079,600 $2,199,700
1992 $3,234,900 $2,310,600
1993 $3,332,400 $2,380,300
1994 $3,433,500 $2,452,500
1995 $3,523,600 $2,516,900
1996 $3,622,500 $2,587,500
1997 $3,723,800 $2,659,900
1998 $3,823,100 $2,730,800
1999 $3,885,500 $2,775,400
2000 $3,960,100 $2,828,700
2001 $4,085,900 $2,918,500
2002 $4,217,500 $3,012,500
2003 $4,280,800 $3,057,700
2004 $4,381,300 $3,129,500
2005 $4,483,000 $3,202,100
2006 $4,630,300 $3,307,400
2007 $4,800,800 $3,429,100
Note: These inflation adjustments were computed using the
All-Urban, Consumer Price Index, 1982-1984 base, published
by the Bureau of Labor Statistics.

INFLATION-ADJUSTED AMOUNTS UNDER ' 7872(g)(2)
The Service will no longer publish the inflation adjustment
under ' 7872(g)(2), regarding the amount that a taxpayer may lend
to a qualifying continuing care facility without incurring
imputed interest, because of amendments made to ' 7872 by TIPRA
and the Tax Relief and Health Care Act of 2006.
Section 7872(g)(2) provides an exception for certain below-
market loans to qualified continuing care facilities only to the
extent that the aggregate outstanding amount of any loan to which
§ 7872(g)(1) applies (determined without regard to § 7872(g)(2)),

-5-
when added to the aggregate outstanding amount of all other
previous loans between the lender (or the lender's spouse) and
any qualified continuing care facility to which § 7872(g)(1)
applies, does not exceed $90,000. Section 7872(g)(5) generally
provides that, for loans made during any calendar year after 1986
to which § 7872(g)(1) applies, the $90,000 limit specified in
§ 7872(g)(2) is increased by an inflation adjustment.
Section 7872(g)(6) generally suspends the application of
§ 7872(g) for any calendar year to which ' 7872(h), as amended by
TIPRA, applies. Section 7872(h) generally provides that ' 7872
shall not apply for any calendar year to any below-market loan
owed by a facility which on the last day of such year is a
qualified continuing care facility, if such loan was made
pursuant to a continuing care contract and if the lender (or the
lender’s spouse) attains age 62 before the close of such year.
Section 7872(h)(4) provided that paragraph (h) shall not apply
for any calendar year after 2010. Section 425 of the Tax Relief
and Health Care Act of 2006 amended ' 7872(h) by striking
subsection (4), making the ' 7872(h) exception for loans to
qualified continuing care facilities permanent.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 2005-76, 2005-49 I.R.B. 1072,
is supplemented and
superseded.
DRAFTING INFORMATION
The author of this revenue ruling is Richard C. LaFalce of

-6-
the Office of the Associate Chief Counsel (Financial Institutions
and Products). For further information regarding this revenue
ruling please contact Mr. LaFalce on (202) 622-3930 (not a toll-
free call).