Interest Rate AssumptionsApplicable to the Amortization & Annuity Methods Under IRC §72(t)(2)(A)(iv) From 1988 through 1999 their have been 56 private letter rulings relevant to §72(t)(2)(A)(iv). In 40 of these 54 PLR's the interest rate requested by the taxpayer is displayed within the text of the PLR. In the other 14 PLR's the interest rate was either not relevant; e.g. a PLR using the minimum method; or the interest rate was redacted for some reason. Those interest rates used have been compared to the long term applicable federal rate in effect for the same month as the PLR was issued. The results of those comparisons are as follows:(1) 16 of the PLR's were quoted as relative to either the applicable federal rate or Pension Benefit Guarantee Corporation (PBGC) rate in effect at that time. These relative quotes were either "on the rate" as quoted or the relevant rate plus or minus X%, where X was never greater than 20%. (2) 24 of the PLR's quoted absolute rates ranging from a low of 5% to high of 10.6%. When comparing these absolute rates to AFR's in force at the time, the following occurred: (A) 17 out of the 24 times, the absolute rate was within 20% (plus or minus) of the extant AFR. Of the 7 exceptions, 5 were high and 2 were low. (B) 19 out of the 24 times, the absolute rate was within 25% (plus or minus) of the extant AFR. Of the 5 exceptions, 3 were high and 2 were low. (C) 21 out of the 24 times, the absolute rate was within 30% (plus or minus) of the extant AFR Of the 3 exceptions, 2 were high and 1 was low.(3) On the presumption that the Service would be more likely to challenge a high rate than a low rate, extra examination of the high rates was done as identified in (2)(A) above. Of the 5 high exceptions, 4 were within 1% and 1 was beyond a 1% difference. The one high exception beyond 1% occurred in April, 1998 when the long term AFR was 5.98%; therefore AFR plus 20% was 7.18% and this particular taxpayer elected an absolute rate of 8.25%; 1.07% greater than AFR plus 20%. The average "high" exception was 6/10th's of 1% higher than AFR plus 20%. From the above data, it is reasonable to assume that we can come to some conclusions suggested following:(1) As a general observation, taxpayers seemed to act conservatively when explicitly suggesting an interest rate within their PLR request. Even the highest absolute rate quoted, 10.6%, was only 11/100th's higher than AFR plus 20% at that time of 10.49%.(2) In 35 of 40 observations, the interest rate was either relatively stated or within AFR plus 20%. This appears to be statistically significant such that we should consider AFR plus 20% as a material upper barrier that should not lightly be breached.(3) 97.5% of the time (remembering that there was the one exception which missed by 7/100th's), the explicit interest rate assumption in the PLR was never greater than AFR plus 20% plus 1%. (4) Based on (3) and (4) above, the upper limits become pretty clear. Risk adverse taxpayers should stay within AFR plus 20%; risk prone taxpayers might want to venture past AFR plus 20% but certainly not by more than 1%. Somewhere beyond AFR plus 20% a taxpayer should seriously consider applying for a new PLR to support that interest rate.
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