Revenue Ruling 97-39

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
Questions and answers about the application of
section 475 and the regulations thereunder. See Rev.
Rul. 97–39, page 4.
26 CFR 1.446–1: General rule for methods of
accounting.
What information must a taxpayer provide in
order to obtain automatic consent to change accounting method when section 475(a) becomes applicable as a result of the taxpayer making an election (i) to treat transactions within a consolidated
group as transactions with customers as provided by
section 1.475(c)–1(a), or (ii) not to be governed by
the exemptions from the status of a dealer in securities provided by section 1.475(c)–1(b) or –1(c)? See
Rev. Proc. 97–43, page 12.

Section 475.—Mark-to-Market
Accounting Method for Dealers
in Securities
26 CFR 1.475(b)–2: Exemptions—identification
requirements. (Also §§ 446, 475, 7805; 1.446–1,
1.475(c)–1, 301.7805–1.)

Mark-to-market accounting method
for dealers in securities. This ruling provides guidance to enable taxpayers to
comply with the mark-to-market requirements of section 475 of the Code. Rev.
Ruls. 94–7 and 93–76 clarified, modified,
partially obsoleted, and superseded.

Rev. Rul. 97–39
PURPOSE
This revenue ruling provides guidance
under § 475 of the Internal Revenue Code
to enable taxpayers to comply with the
mark-to-market requirements of § 475.
Rev. Rul. 93–76, 1993–2 C.B. 235 (which
was previously modified by Rev. Rul.
94–7, 1994–1 C.B. 151), is clarified,
modified, partially obsoleted, and superseded.
LAW
Section 475 of the Code was enacted
on August 10, 1993, in the Omnibus Budget Reconciliation Act of 1993 (the
“1993 Act”), section 13223, 1993-3 C.B.
1, 69. It requires mark-to-market accounting treatment for certain securities

September 29, 1997

held by a “dealer in securities” as defined
in § 475(c)(1). This requirement is effective for all taxable years ending on or
after December 31, 1993. Section 475
was amended on August 5, 1997, in the
Taxpayer Relief Act of 1997 (the “1997
Act”), section 1001(b) (redesignating
old § 475(e) as § 475(g) and adding new
§ 475(e) and (f) to allow dealers in commodities and traders in securities and
commodities to elect mark-to-market accounting, effective for taxable years ending after August 5, 1997). This revenue
ruling is limited to issues arising under
the 1993 Act and does not address issues
arising under the 1997 Act.
Section 475(a) sets forth two mark-tomarket rules. First, any security that is inventory in the hands of a dealer must be
included in inventory at its fair market
value. Second, any security that is not inventory in the hands of a dealer and that is
held at the close of any taxable year is
treated as sold by the dealer for its fair
market value on the last business day of
that taxable year, and any gain or loss is
required to be taken into account for that
taxable year.
Section 475(b)(1) provides that the
mark-to-market rules do not apply to: (1)
any security held for investment; (2) any
evidence of indebtedness that is acquired
(including originated), or any obligation
to acquire an evidence of indebtedness
that is entered into, by a dealer in the ordinary course of its trade or business, but
only if the evidence of indebtedness or
obligation to acquire an evidence of indebtedness is not held for sale; (3) any
security that is a hedge with respect to a
security that is not subject to the mark-tomarket rules; and (4) any security that is
a hedge of a position, right to income, or
liability that is not a security in the hands
of the taxpayer. Under § 475(b)(2), a security must be clearly identified in the
dealer’s records as being covered by one
of the exceptions described in §
475(b)(1) before the close of the day on
which the dealer acquired, originated, or
entered into the security.
In addition to the identification requirements in § 475(b), § 475(c)(2)(F)(iii) requires a dealer in securities to identify a
position that is not a security described in
§ 475(c)(2)(A)–(E), but that is treated as a

4

security because it is a hedge with respect
to such a security.
ISSUES AND HOLDINGS
Issue 1: If a taxpayer is not otherwise a
dealer in securities within the meaning of
§ 475(c)(1) but, nevertheless, timely identifies all of its securities as being covered
by one of the exceptions in § 475(b)(1),
does that “protective identification” cause
the taxpayer to be treated as a dealer?
Holding 1: No. A taxpayer that is not a
dealer in securities within the meaning of
§ 475(c)(1) does not become a dealer in
securities or create an inference that it is a
dealer in securities by making a protective
identification of its securities.
Issue 2: Is a bank or an insurance company excepted from the mark-to-market
rules on the grounds that it is, per se, not a
dealer in securities within the meaning of
§ 475(c)(1)?
Holding 2: No. A bank or an insurance company is subject to the mark-tomarket rules if its activities bring it
within the definition of a dealer in securities in § 475(c)(1). For example, many
banks are dealers because they regularly
originate and sell loans. As another example, an insurance company that regularly makes and sells policyholder loans
is a dealer for purposes of § 475.
Issue 3: If a taxpayer’s sole business
consists of trading in securities (that is,
the taxpayer does not purchase from,
sell to, or otherwise enter into transactions with customers), is the taxpayer a
dealer in securities within the meaning
of § 475(c)?
Holding 3: No. A taxpayer whose sole
business consists of trading in securities is
not a dealer in securities within the meaning of § 475(c) because that taxpayer does
not purchase from, sell to, or enter into
transactions with, customers in the ordinary course of a trade or business.
Issue 4: Does the classification of a security under financial accounting principles, including FASB Statement No. 115
(Accounting for Certain Investments in
Debt and Equity Securities), determine
whether the security qualifies for one of
the exceptions to the mark-to-market
rules under § 475(b)(1)?
Holding 4: No. The classification of
a security under financial accounting

1997–39 I.R.B.

principles is not dispositive of the treatment of the security for federal income
tax purposes. For example, for purposes
of § 475, a security may in certain cases
qualify for the held-for-investment exception to the mark-to-market rules even
though, under applicable financial accounting principles, the security is classified as available for sale.
Issue 5: Does an identification of a security as “held for investment” under
§ 1236 serve to identify that security as
“held for investment” (within the meaning of § 475(b)(1)(A)) or as “not held for
sale” (within the meaning of
§ 475(b)(1)(B))?
Holding 5: No. Taxpayers may choose
not to identify under § 475(b)(2) some or
all of the securities that they identify
under § 1236(a)(1). (For a transitional
rule applicable to securities held as of the
close of the last taxable year ending before December 31, 1993, however, see
§ 1.475(b)–4(a) of the Income Tax Regulations.) Accordingly, even if a § 1236
identification has been made, an identification of a security or hedge is a valid
identification for purposes of § 475(b)(2)
only if it contains a specific reference to
§ 475; this specific reference, however,
may be effected by any reasonable
method. For instance, certain accounts
may be identified in such a way that placing a security or hedge in the account
identifies the security or hedge for purposes of both § 1236(a)(1) and
§ 475(b)(1)(A), (B), or (C). See Holding
6 below. See Holding 15 below for a
transitional rule that requires less specificity for identification of securities held
by certain taxpayers that were not dealers
in securities under § 1.475(c)–1T (as contained in 26 CFR part 1 revised April 1,
1996).
Issue 6: Is a dealer in securities required to use a special procedure to comply with the identification requirements
under § 475?
Holding 6: No. Unless the Commissioner otherwise prescribes, a dealer may
comply with the identification requirements under § 475 using any reasonable
method (see, for example, guidance concerning identification requirements under
§§ 988(a)(1)(B), 1221, 1236(a)(1), and
1256(e)(2)(C)). The identification, however, must be made on, and retained as
part of, the dealer’s books and records.

1997–39 I.R.B.

The dealer’s books and records must
clearly indicate the specific security or
hedge being identified, and the identification must clearly indicate that it is being
made for purposes of § 475. Alternatively, the dealer may identify specific accounts as containing only securities or
hedges that are covered by a particular exception, so that placing a security or
hedge in the account identifies the security or hedge as being covered by that exception. Under § 1.475(b)–2(a), an identification need not distinguish between an
exception under § 475(b)(1)(A) (concerning certain securities held for investment)
and one under § 475(b)(1)(B) (concerning
securities not held for sale). Exceptions
under either of these provisions, however,
must be distinguished from exceptions
under § 475(b)(1)(C) (concerning securities held as hedges).
In addition, rather than identifying specific securities or accounts as being covered by an exception described in
§ 475(b)(1), a dealer may comply with the
identification requirement under § 475(b)
by clearly indicating the specific securities or accounts that are not covered by a
particular exception (that is, indicating
that they are covered by some other exception or that they are not exempt) and
identifying all other securities or accounts
as being covered by a particular exception.
For example, a dealer may place on its
books and records a statement that, unless otherwise identified, all of its securities for which an identification is still
timely (including securities yet to be acquired) are identified as exempt under
either § 475(b)(1)(A) or (B). This statement is effective to identify under
§ 475(b)(1)(A) or (B) each security covered by its terms unless, before the expiration of the period during which the security may be timely identified, the
dealer identifies it as not exempt or as
exempt under § 475(b)(1)(C).
Analogously, under Rev. Rul. 64–160,
1964–1 (Part I) C.B. 306, modified by
Rev. Rul. 76–489, 1976–2 C.B. 250,
dealers can identify specified accounts as
containing only securities held for investment for purposes of § 1236(a)(1). Accordingly, dealers can satisfy the identification requirements of § 475(b)(2) by
unambiguously indicating that all of the
securities in one or more of these ac-

5

counts are also described, for example, in
§ 475(b)(1)(A) or (B). Once such an
identification of an account is made,
placing a security in the account identifies the security not only as being “held
for investment” for purposes of § 1236
but also as being described in the applicable subparagraph of § 475(b)(1).
Issue 7 in Rev. Rul. 93–76 concerned
transitional identification issues for securities acquired, originated, or entered into
between August 10, 1993, and October
31, 1993. As the transition period has
now ended, Issue 7 is obsolete and is not
reprinted in this revenue ruling.
Issue 8: If a dealer in securities originates or acquires an evidence of indebtedness in the ordinary course of a trade or
business, are there any exceptions to the
requirement that the dealer make an identification under § 475(b)(2) before the
close of the day on which it originates or
acquires the security?
Holding 8: Yes. Pending further guidance, if a financial institution (as defined
in § 265(b)(5)) originates or acquires an
evidence of indebtedness in the ordinary
course of a trade or business, an identification of the evidence of indebtedness is
timely if it is made in accordance with the
dealer’s accounting practice, but no later
than 30 calendar days after the date of
origination, or acquisition, by the financial institution. The preceding sentence
applies to any dealer in securities for evidences of indebtedness that are mortgage
loans.
Also, pending further guidance, a
dealer in securities that enters into commitments to acquire mortgage loans may
identify those commitments as being held
for investment if the dealer acquires the
mortgage loans and holds the mortgages
as investments. This identification of
commitments to acquire mortgage loans
must be made in accordance with the
dealer’s accounting practice, but no later
than 30 calendar days after the date of acquisition of the mortgage loans.
Issues 9, 10, and 11 discussed transitional issues concerning proper identification, computation of adjustments, and the
period over which to spread any adjustments, for taxable years that included December 31, 1993. As the transition period
has now passed, Issues 9, 10, and 11 are
obsolete and are not reprinted in this revenue ruling.

September 29, 1997

Issue 12: May a taxpayer use an
amended return to make an election under
§ 1.475(c)–1(c)(1)(ii) (which concerns
taxpayers that purchase securities from
customers but make no more than negligible sales of securities)?
Holding 12: For any taxable year for
which an original federal income tax return is filed after October 31, 1997, an
election under § 1.475(c)–1(c)(1)(ii) must
be made on an original federal income tax
return that is filed on or before the due
date (including any extensions of time) for
that return. For any taxable year for which
an original federal income tax return was
filed on or before October 31, 1997, an
election under § 1.475(c)– 1(c)(1)(ii) also
may be made on an amended return filed
not later than October 31, 1997. Not later
than December 15, 1997, compliance with
§ 475 must be reflected on an original or
amended return for every other taxable
year which is subject to the election and
the original return for which is due on or
before October 31, 1997. Note that
amended returns must be filed before the
expiration of the statute of limitations on
assessment under § 6501(a).
As is noted in Holding 17 below, a taxpayer subject to more than one exemption
must affirmatively elect out of all applicable exemptions to be treated as a dealer in
securities.
Issue 13: If a taxpayer wishes to use an
amended return to make an election out of
the customer paper exemption under
§ 1.475(c)–1(b)(4)(i)(B), by what date
must the taxpayer file the amended return?
Holding 13: Section 1.475(c)–1(b)
(4)(i)(B) provides a June 23, 1997, deadline to make the customer paper election
on an amended return. Notice 97–37,
1997–27 I.R.B. 8, provides that additional
guidance will extend that deadline. Accordingly, that deadline to file an amended
return is extended to October 31, 1997.
Not later than December 15, 1997, compliance with § 475 must be reflected on an
original or amended return for every other
taxable year which is subject to the election and the original return for which is
due on or before October 31, 1997. Note
that amended returns must be filed before
the expiration of the statute of limitations
on assessment under § 6501(a).
Issue 14: What is the general rule for
identifying a security as excepted from
mark-to-market accounting?

September 29, 1997

Holding 14: For a security to be exempt
from mark-to-market accounting, the taxpayer must make an identification that is
timely under § 475(b)(2), which generally
requires a security to be identified before
the close of the day on which it is acquired.
For the only current exceptions to this rule,
see Holding 8 above (identifications of securities by financial institutions and dealers
in mortgages), § 1.475(b)–1(b)(4)(ii)(A)
(identification of securities to which
§ 1.475(b)–1(b)(1) ceases to apply), and
Holding 15 below (special identification
rules for taxpayers not treated as dealers
under § 1.475(c)–1T). For information
about the required specificity of the identification, see Holding 5 above.
Issue 15: If a taxpayer makes an election
out of either § 1.475(c)–1(b)(1) (customer
paper exemption) or § 1.475(c)–1(c)(1)
(negligible sales exemption) and the election has the effect of causing the taxpayer
to be treated as a dealer in securities for a
taxable year starting before the date the taxpayer filed the documentation effecting the
election (date of the election), how does the
taxpayer identify securities that were acquired before the date of the election?
Holding 15: A special identification
regime applies to taxpayers that satisfy
the following criteria:
First, the taxpayer is making an election out of the customer paper exemption,
the negligible sales exemption, or both.
Second, the taxpayer was not treated as
a dealer in securities under § 1.475(c)–1T
(as contained in 26 CFR part 1 revised
April 1, 1996).
The special identification regime applies
only to securities (“transition securities”)
for which an identification would have
been timely under the general rule (described in Holding 14 above) only if made
on or before October 31, 1997. In applying the preceding sentence, a taxpayer may
choose to substitute any earlier date that is
on or after December 24, 1996. To make
this substitution, the taxpayer must place in
its books and records no later than October
31, 1997, an unambiguous statement that
the taxpayer chooses to apply the general
identification rule described in Holding 14
for all securities acquired on or after the
specific date selected by the taxpayer.
Under the special identification regime,
a transition security was properly identified
as exempt for the purposes of § 475(b)(2)
or (c)(2)(F)(iii) if the information that is

6

contained in the taxpayer’s books and
records and that was entered substantially
contemporaneously with the date of acquisition of the transition security supports a
conclusion that the transition security was
described by § 475(b)(1)(A), (B), or (C).
This rule applies even if the information in
the books and records does not meet the
specificity that Holding 5 generally requires for identification. The status of a
transition security that was acquired before
the first day of the taxable year for which
the election is being made is determined by
examining the books and records as of the
last day of the preceding taxable year.
The taxpayer must, by October 31,
1997, place in its books and records a
statement resolving ambiguities, if any,
concerning which transition securities are
properly identified within the meaning of
the preceding paragraph. Any information that supports treating a transition security as being described in § 475(b)(2) or
(c)(2)(F)(iii) must be applied consistently.
A taxpayer, in determining whether a
transition security must be identified, must
apply the following principles: if the transition security was identified under
§ 1.1221–2 or § 1256(e) and the item
being hedged is described in
§ 475(b)(1)(C)(i) or (ii), the § 1.1221–2 or
§ 1256(e) identification constitutes an
identification for purposes of § 475(b)(2);
and, if the item being hedged was ordinary
property, as defined in § 1.1221–2, and the
taxpayer did not identify the transition security as a hedging transaction, the transition security cannot be identified under
§ 475(b)(1)(C).
If a taxpayer made a protective identification (as described in Issue 1 above) of a
transition security, and subsequent to the
protective identification the taxpayer
makes an election that causes the taxpayer
to be a dealer in securities for purposes of
§ 475, the protective identification is recognized and the taxpayer is subject to the
general rules governing identifications for
all transition securities that were eligible
to be timely identified after the date that
the taxpayer began making protective
identifications. Thus, if a transition security was properly and timely identified as
exempt from being marked to market and
remains eligible for the exemption
claimed, that transition security is not
marked to market even though § 475 applies to the taxpayer. If a transition secu-

1997–39 I.R.B.

rity was properly and timely identified
and thereafter ceases to be held for investment or as a hedge, see § 475(b)(3). If a
transition security was not eligible to be
identified as exempt, see § 475(d)(2).
Issue 16: If an issuer of an evidence of
indebtedness has the right to prepay at
any time without a penalty (for example,
a revolving credit card balance), does that
right preclude that indebtedness from
having a fair market value that is greater
than the face value of the obligation?
Holding 16: No. Securities must be
marked to fair market value based on all the
facts and circumstances. For example, in
light of contractual interest rates and general
payment history on customer obligations,
the fair market value of a customer obligation may be greater than the face amount,
even if the customer has the right to repay
the debt at its face amount at any time.
Issue 17: If a taxpayer would meet the
definition of a dealer in securities under
§ 475 but otherwise satisfies more than
one exemption from dealer status, must
the taxpayer elect out of all applicable
exemptions to be a dealer in securities
for the purpose of § 475?
Holding 17: Generally, a taxpayer must
make an election out of all applicable exemptions in order to be treated as a dealer
under § 475. A taxpayer subject to multiple exemptions from § 475 must file all
the documentation required to elect out of
each applicable exemption. Sometimes,
the documentation required for one election satisfies all of the filing requirements
for another election. For example, if a taxpayer is subject to both the customer paper
exemption under § 1.475(c)–1(b) and the
negligible sales exemption under
§ 1.475(c)–1(c), the taxpayer may make
an election under § 1.475(c)–1(b)(4) that
is effective as of January 1, 1993, and
timely file an amended 1993 federal income tax return using mark-to-market accounting for securities. The amended
1993 return itself represents an election
out of the negligible sales exemption.
Issue 18: How does a taxpayer that
is in its first year of existence elect out
of an exemption from dealer status
under § 475?
Holding 18: If a taxpayer decides for its
first year of existence to make an election
out of the negligible sales exemption to account for securities on a mark-to-market
basis, the taxpayer should attach to its orig-

1997–39 I.R.B.

inal return for that first year the following
statement: “[Insert name and taxpayer
identification number of the taxpayer]
hereby elects not to be governed by §
1.475(c)–1(c)(1)(i) of the income tax regulations for the taxable year ending [describe the last day of the year] and for subsequent taxable years.” If a taxpayer
decides for its first year of existence to
make an election out of the customer paper
exemption or to make the intragroup-customer election, the taxpayer must meet the
requirements of § 1.475(c)–1.
Issue 19: Which changes of accounting
method are covered by the consent provisions of § 13223(c)(2) of the 1993 Act?
Holding 19: Under § 13223(c)(2) of the
1993 Act, certain changes of accounting
method are treated as made with the consent of the Commissioner. This treatment
extends only to a change in method that
was effected by a taxpayer who (1) became
a dealer for the taxable year that includes
December 31, 1993, merely by virtue of
the passage of the 1993 Act, and (2) who
accounted for securities as a dealer under
§ 475 on its original federal income tax return for that year. Consent for other
changes of method to comply with § 475
must be obtained either on a taxpayer-bytaxpayer basis or as part of automatic consent contained in published guidance. See
Rev. Proc. 97–43, page 12, this Bulletin.
Issue 20: If a taxpayer is accounting
for securities by marking them to market
under § 475(a), may the taxpayer, without
the consent of the Commissioner, file a
federal income tax return for a later taxable year that does not account for securities on a mark-to-market basis?
Holding 20: No. Once a taxpayer has
used the § 475 mark-to-market method as
its method of accounting for securities,
the taxpayer may not change that method
of accounting without obtaining the consent of the Commissioner. See § 446(e).
Unless the Commissioner otherwise prescribes, to request consent the taxpayer
must comply with the requirements of
Rev. Proc. 97–27, 1997–21 I.R.B. 10. For
example, if a taxpayer accounts for securities by marking them to market because
the taxpayer made more than negligible
sales of securities and in a later year
makes only negligible sales of securities,
the taxpayer must obtain the consent of
the Commissioner to change its method of
accounting for securities. If a taxpayer

7

made no more than negligible sales of securities but, pursuant to § 1.475(c)–1(c)(1)(ii), accounted for securities on a
mark-to-market basis and the taxpayer
makes no more than negligible sales of
securities in a subsequent year, the taxpayer must obtain the consent of the
Commissioner to change its method of accounting for securities. Especially in the
latter example, consent for the change
will be granted only in unusual circumstances.
EFFECT ON OTHER DOCUMENTS
Rev. Rul. 93–76 as modified by Rev.
Rul. 94–7, is clarified, modified, partially
obsoleted, and superseded. Notice 97–37,
1997–27 I.R.B. 8, is obsoleted.
PROSPECTIVE APPLICATION
Pursuant to § 7805(b), if an identification is made on or before June 30, 1997,
and the identification complies with the
requirements set forth in the third paragraph of Holding 6 of Rev. Rul. 93-76,
the identification will not be treated as
failing to satisfy the requirements of §
475(b)(2) solely on the grounds that it
failed to identify the operative subparagraph of that provision.
PAPERWORK REDUCTION ACT
The collections of information contained in this revenue ruling have been reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1558.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The collections of information in this
revenue ruling are in sections 26 CFR
1.475(b)–2, 26 CFR 1.475(b)–4, and 26
CFR 1.475(c)–1. This information is required to facilitate the administration of §
475 of the Internal Revenue Code. This
information will be used to facilitate audits of taxpayers that elect to not be governed by certain exemptions under § 475
of the Code. The collections of information are required to obtain a benefit. The
likely respondents are business or other
for-profit institutions.

September 29, 1997

The recordkeeping burden described in
Holding 6 was reviewed and approved by
the Office of Management and Budget in
accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number
1545–1496.
The estimated total annual recordkeeping burden described in Holding 15 is
450,000 hours.
The estimated annual burden per
recordkeeper varies from 15 hours to 45
hours, depending on individual circumstances, with an estimated average of 22.5
hours. The estimated number of recordkeepers is 20,000.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are Pamela Lew and Robert B.
Williams of the Office of the Assistant
Chief Counsel (Financial Institutions
and Products). For further information
regarding this revenue ruling contact
Ms. Lew at (202) 622-3950 or Mr.
Williams at (202) 622-3960 (not tollfree calls)
26 CFR 1.475(c)–1: Exemptions—identification
requirements.
Questions and answers about the application of
section 475 and the regulations thereunder. See Rev.
Rul. 97–39, page 4.

26 CFR 1.475(c)–1; Definitions—dealer in
securities.
What information must a taxpayer provide in
order to obtain automatic consent to change accounting method when section 475(a) becomes applicable as a result of the taxpayer making an election (i) to treat transactions within a consolidated
group as transactions with customers as provided by
section 1.475(c)–1(a), or (ii) not to be governed by
the exemptions from the status of a dealer in securities provided by section 1.475(c)–1(b) or –1(c)? See
Rev. Proc. 97–43, page 12.

September 29, 1997

Section 6621.— Determination
of Interest Rate
26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and
overpayments. The rate of interest determined under section 6621 of the Code for
the calendar quarter beginning October 1,
1997, will be 8 percent for overpayments,
9 percent for underpayments, and 11 percent for large corporate underpayments.
The rate of interest paid on the portion of
a corporate overpayment exceeding
$10,000 is 6.5 percent.

Rev. Rul. 97–40
Section 6621 of the Internal Revenue
Code establishes different rates for interest on tax overpayments and interest on
tax underpayments. Under § 6621(a)(1),
the overpayment rate is the sum of the
federal short-term rate plus 2 percentage
points, 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 for interest computations
made after December 31, 1994. Under
§ 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 § 6601 on
any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substituting “5 percentage points”
for “3 percentage points.” See § 6621(c)
and § 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 rate. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal shortterm rate for the first month in each calendar quarter.
Section 6621(b)(2)(A) provides that the
federal short-term rate determined under
§ 6621(b)(1) for any month applies during
the first calendar quarter beginning after
such month.

8

Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in accordance with § 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 § 6621, the Internal Revenue Service will use the federal short-term rate
based on daily compounding because
that rate is most consistent with § 6621
which, pursuant to § 6622, is subject to
daily compounding.
Rounded to the nearest full percent, the
federal short-term rate based on daily compounding determined during the month of
July 1997 is 6 percent. Accordingly, an
overpayment rate of 8 percent and an underpayment rate of 9 percent are established for the calendar quarter beginning
October 1, 1997. The overpayment rate
for the portion of corporate overpayments
exceeding $10,000 for the calendar quarter
beginning October 1, 1997, is 6.5 percent.
The underpayment rate for large corporate
underpayments for the calendar quarter beginning October 1, 1997, is 11 percent.
These rates apply to amounts bearing interest during that calendar quarter.
Interest factors for daily compound interest for annual rates of 6.5 percent, 8
percent, 9 percent, and 11 percent are
published in Tables 18, 21, 23, and 27 of
Rev. Proc. 95–17, 1995–1 C.B. 556, 572,
575, 577, and 581.
Annual interest rates to be compounded
daily pursuant to § 6622 that apply for
prior periods are set forth in the accompanying tables.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Marcia Rachy of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue ruling, contact Ms.
Rachy on (202) 622-4940 (not a toll-free
call)

1997–39 I.R.B.