[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1274A-1]

[Page 539-540]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1274A-1  Special rules for certain transactions where stated 
principal amount does not exceed $2,800,000.

    (a) In general. Section 1274A allows the use of a lower test rate 
for purposes of sections 483 and 1274 in the case of a qualified debt 
instrument (as defined in section 1274A(b)) and, if elected by the 
borrower and the lender, the use of the cash receipts and disbursements 
method of accounting for interest on a cash method debt instrument (as 
defined in section 1274A(c)(2)). This section provides special rules for 
qualified debt instruments and cash method debt instruments.
    (b) Rules for both qualified and cash method debt instruments--(1) 
Sale-leaseback transactions. A debt instrument issued in a sale-
leaseback transaction (within the meaning of section 1274(e)) cannot be 
either a qualified debt instrument or a cash method debt instrument.
    (2) Debt instruments calling for contingent payments. A debt 
instrument that provides for contingent payments cannot be a qualified 
debt instrument unless it can be determined at the time of the sale or 
exchange that the maximum stated principal amount due under the debt 
instrument cannot exceed the amount specified in section 1274A(b). 
Similarly, a debt instrument that provides for contingent payments 
cannot be a cash method debt instrument unless it can be determined at 
the time of the sale or exchange that the maximum stated principal 
amount due under the debt instrument cannot exceed the amount specified 
in section 1274A(c)(2)(A).
    (3) Aggregation of transactions--(i) General rule. The aggregation 
rules of section 1274A(d)(1) are applied using a facts and circumstances 
test.
    (ii) Examples. The following examples illustrate the application of 
section 1274A(d)(1) and paragraph (b)(3)(i) of this section.

    Example 1. Aggregation of two sales to a single person. In two 
transactions evidenced by separate sales agreements, A sells undivided 
half interests in Blackacre to B. The sales are pursuant to a plan for 
the sale of a 100 percent interest in Blackacre to B. These sales or 
exchanges are part of a series of related transactions and, thus, are 
treated as a single sale for purposes of section 1274A.
    Example 2. Aggregation of two purchases by unrelated individuals. 
Pursuant to a plan, unrelated individuals X and Y purchase undivided 
half interests in Blackacre from A and subsequently contribute these 
interests to a partnership in exchange for equal interests in the 
partnership. These purchases are treated as part of the same transaction 
and, thus, are treated as a single sale for purposes of section 1274A.
    Example 3. Aggregation of sales made pursuant to a tender offer. 
Fifteen unrelated individuals own all of the stock of X Corporation. Y 
Corporation makes a tender offer to these 15 shareholders. The terms 
offered to each shareholder are identical. Shareholders holding a 
majority of the shares of X Corporation elect to tender their shares 
pursuant to Y Corporation's offer. These sales are part of the same 
transaction and, thus, are treated as a single sale for purposes of 
section 1274A.
    Example 4. No aggregation for separate sales of similar property to 
unrelated persons. Pursuant to a newspaper advertisement, X Corporation 
offers for sale similar condominiums in a single building. The prices of 
the units vary due to a variety of factors, but the financing terms 
offered by X Corporation

[[Page 540]]

to all buyers are identical. The units are purchased by unrelated buyers 
who decided whether to purchase units in the building at the price and 
on the terms offered by X Corporation, without regard to the actions of 
other buyers. Because each buyer acts individually, the sales are not 
part of the same transaction or a series of related transactions and, 
thus, are treated as separate sales.

    (4) Inflation adjustment of dollar amounts. Under section 
1274A(d)(2), the dollar amounts specified in sections 1274A(b) and 
1274A(c)(2)(A) are adjusted for inflation. The dollar amounts, adjusted 
for inflation, are published in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2)(ii) of this chapter).
    (c) Rules for cash method debt instruments--(1) Time and manner of 
making cash method election. The borrower and lender make the election 
described in section 1274A(c)(2)(D) by jointly signing a statement that 
includes the names, addresses, and taxpayer identification numbers of 
the borrower and lender, a clear indication that an election is being 
made under section 1274A(c)(2), and a declaration that the debt 
instrument with respect to which the election is being made fulfills the 
requirements of a cash method debt instrument. Both the borrower and the 
lender must sign this statement not later than the earlier of the last 
day (including extensions) for filing the Federal income tax return of 
the borrower or lender for the taxable year in which the debt instrument 
is issued. The borrower and lender should attach this signed statement 
(or a copy thereof) to their timely filed Federal income tax returns.
    (2) Successors of electing parties. Except as otherwise provided in 
this paragraph (c)(2), the cash method election under section 1274A(c) 
applies to any successor of the electing lender or borrower. Thus, for 
any period after the transfer of a cash method debt instrument, the 
successor takes into account the interest (including unstated interest) 
on the instrument under the cash receipts and disbursements method of 
accounting. Nevertheless, if the lender (or any successor thereof) 
transfers the cash method debt instrument to a taxpayer who uses an 
accrual method of accounting, section 1272 rather than section 1274A(c) 
applies to the successor of the lender with respect to the debt 
instrument for any period after the date of the transfer. The borrower 
(or any successor thereof), however, remains on the cash receipts and 
disbursements method of accounting with respect to the cash method debt 
instrument.
    (3) Modified debt instrument. In the case of a debt instrument 
issued in a debt-for-debt exchange that qualifies as an exchange under 
section 1001, the debt instrument is eligible for the election to be a 
cash method debt instrument if the other prerequisites to making the 
election in section 1274A(c) are met. However, if a principal purpose of 
the modification is to defer interest income or deductions through the 
use of the election, then the debt instrument is not eligible for the 
election.
    (4) Debt incurred or continued to purchase or carry a cash method 
debt instrument. If a debt instrument is incurred or continued to 
purchase or carry a cash method debt instrument, rules similar to those 
under section 1277 apply to determine the timing of the interest 
deductions for the debt instrument. For purposes of the preceding 
sentence, rules similar to those under section 265(a)(2) apply to 
determine whether a debt instrument is incurred or continued to purchase 
or carry a cash method debt instrument.

[T.D. 8517, 59 FR 4824, Feb. 2, 1994]