Interest rates; underpayment and overpayments. The rates for interest determined under section 6621 of the Code for the calendar quarter beginning July 1, 2010, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, and 6 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 1.5 percent.

Application of section 469 to the section 45D new markets tax credit. This ruling provides that the passive activity provisions under section 469 of the Code will not disallow a taxpayer’s new markets tax credit under section 45D, provided that a taxpayer’s acquisition of the qualified equity investment in a qualified community development entity (CDE) does not arise in connection with the conduct of a passive activity by the taxpayer, without regard to a taxpayer’s interest or extent of participation in the CDE’s trade or business.

New markets tax credit. This ruling provides that for purposes of determining the new markets tax credit allowable under section 45D of the Code, the amount of the qualified equity investment made by an LLC classified as a partnership includes cash from a recourse loan to the LLC that the LLC invests as equity in a qualified community development entity. Rev. Rul. 2003-20 amplified.

Final regulations under section 704(c) of the Code respond to the Joint Committee on Taxation’s recommendation that the partnership rules be strengthened to ensure that the allocation rules in the regulations are not used to generate unwarranted tax benefits. The regulations achieve this result by amending the section 1.704-3(a)(10) anti-abuse rule to provide that the tax effect of an allocation method (or combination of methods) on both direct and indirect partners is considered. In addition, the regulations include a cross-reference to the general partnership anti-abuse rule of section 1.701-2 to clarify that section 1.704-3 applies only to contributions of property that are otherwise respected and that one factor that will be considered is the use of remedial allocations between related partners.

Weighted average interest rate update; corporate bond indices; 30-year Treasury securities; segment rates. This notice contains updates for the corporate bond weighted average interest rate for plan years beginning in June 2010; the 24-month average segment rates; the funding transitional segment rates applicable for June 2010; and the minimum present value transitional rates for May 2010.

For purposes of determining the new markets tax credit allowable under § 45D of the Internal Revenue Code, does the amount of the qualified equity investment made by a limited liability company (LLC) classified as a partnership include cash from a recourse loan to the LLC that the LLC invests as equity in a qualified community development entity?

Section 45D(a) provides a new markets tax credit to taxpayers who hold a qualified equity investment in a qualified community development entity. Section 45D(b) provides that a qualified equity investment means any equity investment in a qualified community development entity if, among other requirements, the taxpayer acquired the investment solely in exchange for cash. Rev. Rul. 2003-20, 2003-1 C.B. 465, held that, on the facts presented in that revenue ruling, the amount of the qualified equity investment under § 45D(b) made by an LLC classified as a partnership included cash from a non-recourse loan to the LLC that the LLC invested as equity in a qualified community development entity. The rationale of Rev. Rul. 2003-20 applies equally where the loan is recourse.

For purposes of determining the new markets tax credit allowable under § 45D, the amount of the qualified equity investment made by an LLC classified as a partnership includes cash from a recourse loan to the LLC that the LLC invests as equity in a qualified community development entity.

Rev. Rul. 2003-20 is amplified.

The principal author of this revenue ruling is Benjamin H. Weaver of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Benjamin H. Weaver at (202) 622-3050. For information regarding issues under § 45D, contact Julie Hanlon Bolton of the Office of Associate Chief Counsel (Passthroughs & Special Industries) at (202) 622-3040. These are not toll-free calls.

Where the acquisition of the qualified equity investment in a qualified community development entity (CDE) is not in connection with the conduct of a trade or business (or in anticipation of a trade or business), is the new markets tax credit allowable under § 45D a passive activity credit under § 469?

Situation 1. On February 1, 2010, X, an individual, acquires a qualified equity investment (as defined in § 45D(b)) in a CDE (as defined in § 45D(c)). Because X holds the qualified equity investment on February 1, 2010, the initial credit allowance date (as defined in § 45D(a)(3)), a new markets tax credit under § 45D is allowable to X. X’s acquisition of the qualified equity investment in the CDE is not in connection with the conduct of a trade or business by X (or in anticipation of a trade or business).

Situation 2. On February 1, 2010, ABC, an entity treated as a partnership for federal tax purposes, acquires a qualified equity investment (as defined in § 45D(b)) in a CDE. Because ABC holds the qualified equity investment on February 1, 2010, the initial credit allowance date (as defined in § 45D(a)(3)), a new markets tax credit under § 45D is allowable to ABC. ABC allocates the new markets tax credit to its partners A, B, and C, in accordance with § 704(b). ABC’s acquisition of the qualified equity investment in the CDE is not in connection with the conduct of a trade or business by ABC (or in anticipation of a trade or business).

Section 45D(a)(1) provides that for purposes of § 38, in the case of a taxpayer who holds a qualified equity investment on a credit allowance date (as defined in § 45D(a)(3)) of the investment that occurs during the taxable year, the new markets tax credit determined under § 45D for the taxable year is an amount equal to the applicable percentage (as defined in § 45D(a)(2)) of the amount paid to the CDE for the investment at its original issue. Section 7701(a)(14) defines the term “taxpayer” to mean any person subject to any internal revenue tax. Section 7701(a)(1) provides that the term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company, or corporation.

Section 45D(b)(1) provides that an equity investment in a CDE is a “qualified equity investment” if, among other requirements, the CDE uses substantially all of the cash from the investment to make qualified low-income community investments.

Section 45D(d) defines the term “qualified low-income community investment” as (A) any capital or equity investment in, or loan to, any qualified active low-income community business, (B) the purchase from another CDE of any loan made by such entity which is a qualified low-income community investment, (C) financial counseling and other services specified in regulations prescribed by the Secretary to businesses located in, or residents of, low-income communities, and (D) any equity investment in, or loan to, any CDE.

Section 469(a) provides that for any taxable year of any individual, estate, trust, closely-held C corporation, or personal service corporation, neither the passive activity loss, nor the passive activity credit for the taxable year will be allowed.

Section 469(d)(2)(A) defines “passive activity credit” as the amount (if any) by which (A) the sum of the credits from all passive activities allowable for the taxable year under (i) subpart D of part IV of subchapter A, or (ii) subpart B (other than § 27(a)) of part IV, exceeds (b) the regular tax liability of the taxpayer for the taxable year allocable to all passive activities.

Section 469(c) defines a “passive activity” as (1) any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate, and (2) any rental activity, except as provided by § 469(c)(7).

Section 469(c)(6) provides that, to the extent provided in the regulations, “trade or business” includes (A) any activity in connection with a trade or business, or (B) any activity with respect to which expenses are allowable as a deduction under § 212.

Section 1.469-1(e)(2) of the Income Tax Regulations provides that trade or business activities are activities that constitute trade or business activities within the meaning of § 1.469-4(b)(1).

Section 1.469-4(b)(1) defines “trade or business activities” as activities, other than rental activities or activities that are treated under § 1.469-1T(e)(3)(vi)(B) as incidental to an activity of holding property for investment, that (i) involve the conduct of a trade or business (within the meaning of § 162), (ii) are conducted in anticipation of the commencement of a trade or business, or (iii) involve research or experimental expenditures that are deductible under § 174.

Section 1.469-9(b)(1) provides that a trade or business is any trade or business determined by treating the types of activities in § 1.469-4(b)(1) as if they involved the conduct of a trade or business, and any interest in rental real estate, including any interest in rental real estate that gives rise to deductions under § 212.

Section 469(h)(1) provides that a taxpayer will be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis that is regular, continuous, and substantial.

The new markets tax credit under § 45D is subject to the provisions of § 469 since it is a credit allowable under subpart D of part IV of subchapter A of the Code. A credit may be disallowed under § 469 for a taxable year if the credit attributable to the taxable year arises in connection with the conduct of a passive activity. Allowance of the new markets tax credit under § 45D is predicated on acquiring a qualified equity investment in the CDE. The CDE does not pass through the new markets tax credit to the person claiming the new markets tax credit. Rather, the amount of the new markets tax credit is determined based on a percentage of the amount paid to the CDE for the qualified equity investment at its original issue. Accordingly, in determining whether the new markets tax credit under § 45D is disallowed under § 469, the determination depends on whether the acquisition of the qualified equity investment in the CDE arises in connection with the conduct of a passive activity. The determination of whether the new markets tax credit under § 45D is disallowed under § 469 does not depend on the taxpayer’s interest or extent of participation in the CDE’s trade or business.

To be a passive activity, the activity of acquiring a qualified equity investment in the CDE must be in connection with the conduct of a trade or business in which the person claiming the new markets tax credit does not materially participate, or be a rental activity. Because the activity of acquiring an equity investment in a CDE is not a rental activity, the only issue is whether the acquisition activity is in connection with the conduct of a trade or business activity (or in anticipation of a trade or business) in which the person claiming the new markets tax credit does not materially participate.

The term “trade or business” is not defined in either the Code or the regulations. The determination of what constitutes a trade or business depends on the facts and circumstances of each case. The Supreme Court, in Commissioner v. Groetzinger, 480 U.S. 23 (1987), has held that there are generally two requirements for an activity to constitute a trade or business: the activity must be conducted for income or profit, and the activity must be engaged in with some regularity and continuity.

If it is determined that the acquisition of a qualified equity investment in a CDE is in connection with the conduct of a trade or business activity (or in anticipation of a trade or business), a determination must next be made as to whether the person claiming the new markets tax credit materially participates in the activity. If the person claiming the new markets tax credit materially participates in the activity, the new markets tax credit under § 45D will not be disallowed under § 469.

In Situation 1, X’s activity of acquiring a qualified equity investment in the CDE is not in connection with the conduct of X’s trade or business activity (or in anticipation of a trade or business). Consequently, X’s new markets tax credit under § 45D will not be disallowed under § 469.

In Situation 2, ABC allocates to A, B, and C the amount of the new markets tax credit that ABC claims. This allocation must be made in accordance with § 704(b) (which provides rules regarding a partnership’s allocation of income, gain, loss, deduction, or credit (or item thereof) among the partners). ABC’s activity of acquiring a qualified equity investment in the CDE is not in connection with the conduct of ABC’s trade or business activity (or in anticipation of a trade or business). Consequently, the new markets tax credit allowable to ABC, and claimed by A, B, and C, individually, will not be disallowed under § 469.

1. Where an individual’s acquisition of a qualified equity investment in a CDE is not in connection with the conduct of the individual’s trade or business (or in anticipation of the individual’s trade or business), the new markets tax credit allowable to an individual under § 45D will not be a passive activity credit under § 469.

2. Where a partnership’s acquisition of a qualified equity investment in a CDE is not in connection with the conduct of the partnership’s trade or business (or in anticipation of the partnership’s trade or business), the new markets tax credit allowable to the partnership under § 45D will not be a passive activity credit under § 469.

The principal author of this revenue ruling is Benjamin H. Weaver of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Benjamin H. Weaver at (202) 622-3050. For information regarding issues under § 45D, contact Julie Hanlon Bolton of the Office of Associate Chief Counsel (Passthroughs & Special Industries) at (202) 622-3040. These are not toll-free calls.

Internal Revenue Service (IRS), Treasury.

Final regulations.

This document contains final regulations under section 704(c) of the Internal Revenue Code (Code) providing that the section 704(c) anti-abuse rule takes into account the tax liabilities of both the partners in a partnership and certain direct and indirect owners of such partners. These final regulations further provide that a section 704(c) allocation method cannot be used to achieve tax results inconsistent with the intent of subchapter K of the Code. The final regulations affect partnerships and their partners.

Effective Date: These final regulations are effective June 9, 2010.

Applicability Date: These final regulations are applicable for taxable years beginning after June 9, 2010.

Bryan A. Rimmke at (202) 622-3050 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

The principal author of these final regulations is Bryan A. Rimmke, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of ¹/₂ of 1 percent, the rate is increased to the next highest full percent).

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

The federal short-term rate determined in accordance with section 1274(d) during April 2010 is the rate published in Revenue Ruling 2010-12, 2010-18 I.R.B. 617 to take effect beginning May 1, 2010. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of April 2010 is 1 percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning July 1, 2010. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning July 1, 2010, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning July 1, 2010, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

The principal author of this revenue ruling is Deborah Colbert-James of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Colbert-James at (202) 622-8143 (not a toll-free call).

This notice provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), the 24-month average segment rates, and the funding transitional segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to calculate current liability and to determine the required contribution under § 412(l) for plan years beginning in 2004 through 2007 must be within a permissible range based on the weighted average of the rates of interest on amounts invested conservatively in long term investment grade corporate bonds during the 4-year period ending on the last day before the beginning of the plan year.

Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability. That notice establishes that the corporate bond weighted average is based on the monthly composite corporate bond rate derived from designated corporate bond indices. The methodology for determining the monthly composite corporate bond rate as set forth in Notice 2004-34 continues to apply in determining that rate. See Notice 2006-75, 2006-2 C.B. 366.

The composite corporate bond rate for May 2010 is 5.67 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.

The following corporate bond weighted average interest rate was determined for plan years beginning in the month shown below.

Generally for plan years beginning after 2007 (except for delayed effective dates for certain plans under sections 104, 105, and 106 of PPA), § 430 of the Code specifies the minimum funding requirements that apply to single employer plans pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates. For plan years beginning in 2008 and 2009, a transitional rule under § 430(h)(2)(G) provides that the segment rates are blended with the corporate bond weighted average as specified above. An election may be made under § 430(h)(2)(G)(iv) to use the segment rates without applying the transitional rule.

Notice 2007-81, 2007-2 C.B. 899, provides guidelines for determining the monthly corporate bond yield curve, the 24-month average corporate bond segment rates, and the funding transitional segment rates used to compute the target normal cost and the funding target. Pursuant to Notice 2007-81, the monthly corporate bond yield curve derived from May 2010 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of May 2010 are, respectively, 2.34, 5.42, and 6.26. The three 24-month average corporate bond segment rates applicable for June 2010 under the election of § 430(h)(2)(G)(iv) are as follows:

The transitional segment rates under § 430(h)(2)(G) applicable for June 2010, taking into account the corporate bond weighted average of 6.34 stated above, are as follows:

The transitional rule of § 430(h)(2)(G) does not apply to plan years starting in 2010. Therefore, for a plan year starting in 2010 with a lookback month to June 2010, the funding segment rates are the three 24-month average corporate bond segment rates applicable for June 2010, listed above without blending for the transitional period.

Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual rate of interest on 30-year Treasury securities as specified by the Commissioner for that month in revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury securities for May 2010 is 4.29 percent. The Service has determined this rate as the average of the yield on the 30-year Treasury bond maturing in February 2040 determined each day through May 12, 2010, and the yield on the 30-year Treasury bond maturing in May 2040 determined each day for the balance of the month.

Generally for plan years beginning after 2007, § 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in section 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The following rates were determined for plan years beginning in the month shown below.

Generally for plan years beginning after December 31, 2007, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. For plan years beginning in 2008 through 2011, the applicable interest rates are the monthly spot segment rates blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning in 2007. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value transitional segment rates determined for May 2010, taking into account the May 2010 30-year Treasury rate of 4.29 stated above, are as follows:

The principal author of this notice is Tony Montanaro of the Employee Plans, Tax Exempt and Government Entities Division. Mr. Montanaro may be e-mailed at RetirementPlanQuestions@irs.gov.