OID Inflation-Adjusted Dollar Amounts

The following figures are the original issue discount inflation-adjusted dollar amounts for Code Section 1274A transactions (Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000) :

BACKGROUND

In general, Code Sections 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. Interest on a debt instrument subject to section 1274 is also taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under Code Sections 483 and 1274 for certain types of debt instruments.

In the case of a "qualified debt instrument," the discount rate used for purposes of sections 483 and 1274 may not exceed 9 percent, compounded semiannually. A qualified debt instrument is defined as any debt instrument given in consideration for the sale or exchange of property (other than new section 38 property within the meaning of section 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 Code Section 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

EXCEPTION

In the case of a "cash method debt instrument," (as defined in Code Section 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, Code Section 1274 does not apply. 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 defined as a qualified debt instrument that meets the following additional requirements: (a) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (b) section 1274 would have applied to the debt instrument but for an election under section 1274A(c); and (c) an election under section 1274A(c) is jointly made with respect to the debt instrument by the borrower and lender. In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount must not exceed $2,000,000. Rules concerning the time for, and manner of, making this election can be found in Reg. Section 1.1274A- 1(c)(1).

The dollar amounts stated in section 1274A(b) and section 1274A(c)(2)(A) for any debt instrument arising out of a sale or exchange during any calendar year after 1989 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. The CPI for any calendar year is defined 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

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

Table 1
Inflation-Adjusted Amounts Under section 1274A

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