Final Loan Regs

[Guest lforesz]

I just read the final loan regs, and it seems to me that there is a typo of some sort in the last sentence of Q-20(a)(2) which talks about when the refinancing is treated as consisting of two separate loans. The sentence says that the new loan must also be repaid before the lastest permissable repayment date of the replaced loan, but example (B)(iii) allows the new loan (with payments of $416) to be paid over a 6 year period from the date of the replaced loan without both loans being treated as outstanding. Am I missing something? This example seems to contradict the last sentence of Q-20(a)(2). Does anyone else find this odd or can anyone explain it to me?

Many Thanks

Lori

[Guest Remysis]

I saw this as well and think this pretty clearly was a mistake. Paragraph (a)(2) by its terms only applies if the last day of the term of the replacement loan is later than the last day of the permissible term of the replaced loan. I take the examples to represent the scheme the IRS intends; the preambles to the proposed and final regs say as much.

This is isn't the only apparent mistake in this paragraph. The first sentence has a reference in the first paranthetical to "paragraph (a)(3) of this Q&A-20." There isn't one.

I hope we see a technical correction shortly.

[E as in ERISA]

I hadn't noticed before. But now that you point it out, I think that this is more than a simple typo at the end of Q&A 20 (a)(2)

From the examples, I think that they are trying to exempt two situations from both the five year/level amortization rules and the maximum loan amount rules of refinancings: (1) A refinancing where the replaced loan is amortized over the permissible term of the replaced loan and the additional amount is amortized over a new 5-year term starting at the date of refinancing ($2907 for 16 and $406 for 4), and (2) A refinancing where both the replaced loan and the additional amount are amortized over the permissible term of the replaced loan ($2990 for 16).

However, that is not what the preamble or Q&A 20 says. The preamble first indicates that you can use either of those methods to satisfy 72(p)(2)(B) and © (the five year and level amortization rules). But then it says if any portion of the loan extends beyond the permissible term of the replaced loan, then you must add the prior loan and replacement loans together (for the 72(p)(2)(A) maximum loan amount). (I'm reading "refinancing loan" to be the entire amount of the replacement loan -- both replaced loan and additional amount -- based on the statement "to the extent the refinancing loan exceeds the prior loan amount").

I read paragraph (a)(1) of Q&A 20 to say that you can apply (B) and © (the 5 year and level amortization rules) separately to the replaced loan and the additional loan amount, but that you apply (A) (the maximum loan amount) collectively to the replaced loan and the replacement loan. As you both indicate, paragraph (a)(2) seems to be internally inconsistent....However, I could read so that the two exceptions are: (1) A refinancing where the replaced loan is amortized over the permissible term of the replaced loan and the additional amount is amortized over a new 5-year term starting at the date of refinancing BUT ONLY IF the total of the replaced loan and the replacement loan is less than the maximum loan amount, and (2) A refinancing where both the replaced loan and the additional amount are amortized over the permissible term of the replaced loan. (Similar to what the preamble says).

(And when I look back at the 2000 proposed regulations now, the same issues surface...)

Are there really different exceptions for the (A) maximum amount limits and the (B)/© 5 year/level amortization rules....so that you don't have to add the replaced loan and the replacement loan together if you stay within the five year term, but you do have to add them together if go beyond the five years for even a small additional amount? That is not what the examples say!

[Guest Remysis]

I agree that is not what the examples say and that's why I continue to believe the last sentence contains a mistake. (Again, the reference to phantom paragraph (a)(3) doesn't give me the greatest confidence in the care that went into the final review of this paragraph, despite 2 1/2 years to get it right.)

I think the preamble to the proposed regs provides the most cogent summary of how this is intended to work and is consistent with the examples. In general, a refinancing loan that gets the benefit of a new 5 year term is viewed basically just as a new loan issued to pay off an existing loan. In this case, you generally need to run through the 72(p)(A) availability calculation, assuming the existing loan is still outstanding, to determine if you can borrow enough to pay off the existing loan. This rule -- i.e., applying 72(p)(A) assuming both old and new loans are still outstanding -- doesn't apply as long as the balance of outstanding loan is paid off within the original term. The underlying idea being: you only get the benefit of a new 5-year term to the extent you have enough borrowing capacity to get a separate new loan.

This reading of the original preamble is consistent with the examples and the proposed reg text (though the regs are admittedly opaque). I think it is also consistent with bulk of the final reg (a)(2) except for the last sentence, which I would argue is internally inconsistent with the rest of paragraph. Either the reg has a mistake in one word or the examples have a systematic mistake, repeated twice. I favor a mistake in the reg.

As a side note further undermining confidence the quality of the final review before if went out the door, did anyone else notice in the pdf downloaded from the IRS, Deputy Comm'r Robert Wenzel is misspelled as "Weazel." Seems like a Freudian typo, given "a" and "n" aren't even close on the keyboard

[Guest mpark]

Can anyone provide a link to the final regs for loans?

Thanks

[Guest alawyerinblack]

I do not believe that Q-20(a)(2) is internally inconsistent, or contains a typographical error.

I read the last sentence of (a)(2) as carving out an exception to the rest of the paragraph, and that example 2 demonstrates that exception.

The last sentence of (a)(2) that the replaced and replacement loan will not both be treated as outstanding if:

the replacement loan itself can be treated as two loans, amortized over two different periods -- the first a replacement loan amortized over five years from the date of the original loan, and a second loan taken on that date.

The regulation is recognizing that absent this exception, the rules could be easily used to achieve the same result (especially now that the two loan limit is eliminated).

First, take out a replacement loan to re-amortize the remaining loan over the remaining 16 quarters of the first term, and then, ten minutes later, take out a completely unrelated loan for $6,678 for 20 quarters.

This sentence is merely permitting in one loan transaction what would otherwise be equally attainable under the new regs in two transactions.

[Guest alawyerinblack]

Mpark,

The federal register has it all.

http://www.access.gpo.gov/su_docs/aces/aces140.html

Search for "loans" after 12/01/2002 and it should be your first hit.

[Fredman]

here's a link to the final loan regs:

http://benefitslink.com/taxregs/td9021.pdf

[Guest Remysis]

alawyerinblack - I completely agree with your description of the rule, the exception and the rationale. The exception is intended to permit you to take out a loan that is essentially two loans amortized over two different periods.

The problem I see is that the last sentence doesn't actually say two periods, just one. In the description of the two separate loans, the last sentence describes the same end date: "the last day of the latest permissible term of the REPLACED LOAN." (emphasis mine) This is five years from the original issue date of the old loan. To get the benefit of the new five year term for the "new" portion of the replacement loan (i.e., $6,678 repayable over 20 quarters in the example), the term of the "new" portion of loan should be measured with reference to the longest permitted term of the "replacement loan," not the "replaced loan." This is why I believe there is a typo.

(As to why I believe it is otherwise internally inconsistent is that paragraph (a)(2) applies only if the term of the replacement loan is longer than the term of the longest permissible term of the replaced loan. As written, the exception describes a replacement loan basically consisting of two loans with terms no longer than the replaced loan. How could it make sense that the exception describes a loan that would not even be subject to the rule to which the exception applies?)

[Guest Remysis]

If anyone is still interested, the IRS has recognized the typographical error I described above. They have issued a notice published in the federal register correcting the final regs. Changing "replaced loan" to "replacement loan" now makes sense of the example.

Below is a link to the federal register notice:

http://frwebgate6.access.gpo.gov/cgi-bin/w...action=retrieve

[jane123]

Remysis,

your link does not work- could you please repost?

Thanks

Jane

[E as in ERISA]

Does this work:

http://a257.g.akamaitech.net/7/257/2422/14...003/03-4546.htm

If not, you can go the web site for the government printing office (gpo) and pull up the Federal Register for February 28.