Rev. Rul. 98-58, 1998-52 I.R.B. 6.

                SECTION 1274A INFLATION-ADJUSTED NUMBERS FOR 1999

                          Released: December 10, 1998
                          Published: December 28, 1998

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

Section 1274. - Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property, 26 CFR 1.1274A-1: Special rules for certain transactions where stated principal amount does not exceed $2,800,000.

  As defined by section 1274A, the definitions for both "qualified debt instruments" and "cash method debt instruments" have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 1999 calendar year.

Section 483. - Interest on Certain Deferred Payments, 26 CFR 1.483-1: Computation of interest on certain deferred payments.

  As defined by section 1274A, the definitions for both "qualified debt instruments" and "cash method debt instruments" have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 1999 calendar year.

  Section 1274A inflation-adjusted numbers for 1999. This ruling provides the dollar amounts, increased by the 1999 inflation-adjustment, for section 1274A of the Code. Rev. Rul. 97-56 supplemented and superseded.

  This revenue ruling provides the dollar amounts, increased by the 1999 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 (in 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 at 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

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

                            Rev. Rul. 98-58 Table 1
                   Inflation-Adjusted Amounts Under § 1274A
   Calendar Year of    1274A(b) Amount (qualified   1274A(c)(2)(A) Amount (cash
   Sale or Exchange              debt instrument)       method debt 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

Note: These inflation adjustments were computed using the All-Urban, Consumer
  Price Index, 1982-1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 97-56, 1997-2 C.B. 107 is supplemented and superseded.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Diana A. Inhof of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Ms. Inhof on (202) 622-3930 (not a toll-free call).

Rev. Rul. 98-58, 1998-52 I.R.B. 6.