Today the IRS released final regulations providing the new method to be used to adjust the applicable federal rates (AFRs) to determine the corresponding rates under section 1288 of the Code for tax-exempt obligations and to determine the long-term tax-exempt rate and the adjusted federal long-term rate under section 382. For tax-exempt obligations, the regulations affect the determination of original issue discount under section 1273 and of total unstated interest under section 483. In addition, the regulations affect the determination of the limitations under sections 382 and 383 on the use of certain operating loss carryforwards, tax credits, and other attributes of corporations following ownership changes.
The IRS indicates that changes to the method of calculating AFRs were necessary because since 2008, market yields of prime, general obligation tax-exempt obligations had sometimes exceeded market yields of comparable US Treasury obligations, causing the adjusted federal long-term rate and each adjusted AFR to exceed the corresponding AFRs. This result was inconsistent with the express congressional intent that the adjusted rates be lower than the federal long-term rate. The final rules are substantively the same as proposed rules released in March of last year and use historical market data to create an appropriate adjustment factor based on individual tax rates.