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April 28, 2016

IRS Finalizes Change to the Adjusted Applicable Federal Rates

In the April 26, 2016 Federal Register the IRS and Treasury published final regulations (T.D. 9763) changing the way in which they calculate the adjusted applicable federal rates ("AFRs").

  • The adjusted AFRs are used in interest imputation and original issue discount calculations where interest on the underlying obligation is exempt from federal income tax (e.g., a tax-exempt municipal bond). I.R.C. § 1288. In addition, the adjusted long-term AFR is used by Internal Revenue Code section 382 in computing the limitation on utilization of net operating loss carryovers following a corporate "change of ownership." The statutory provisions and legislative history mandate that the "adjustment" is to reflect the yield differential arising from the exemption from federal income taxation of interest on the obligation.

  • The final regulations adopt the regulations proposed in March 2015 without substantive change. See our March 2, 2015 Quick Take, Proposed Changes to the Adjusted Applicable Federal Rates, for a discussion of the new computational methodology and the rationale for its adoption.

  • The final regulations apply beginning with the adjusted AFR for September 2016 determined during August 2016.

Available Material

For further information please contact Brian Wainwright (Palo Alto).

Quick Takes contain short summaries and highlights of recent tax developments often with links to underlying material and are not intended and cannot be construed as legal or tax advice.

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