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They Did the Math: IRS Stands Behind Published 7520 Rate

Posted on Apr. 21, 2020

The IRS appeared to miscalculate on a recent revenue ruling, but the Service maintains otherwise.

The section 7520 interest rate, which is at the core of several estate and gift tax planning techniques like intrafamily loans or grantor-retained annuity trusts (GRATs), was set at 0.8 percent for May — the lowest it’s ever been. Some tax practitioners thought it should be even lower.

The section 7520 rate is calculated each month by multiplying the applicable federal midterm rate by 120 percent, and then rounding to the nearest two-tenths of 1 percent. In Rev. Rul. 2020-11, 2020-19 IRB 1, the applicable federal midterm rate for May is 0.58 percent, which when multiplied by 120 percent yields 0.696 percent. On its face, that would seem to suggest the figure should be rounded down to 0.6 percent, rather than rounded up to 0.8 percent.

Practitioners reached out to the IRS and Treasury to clarify that the 0.8 percent figure wasn’t a mistake.

However, in an April 20 statement, the IRS told Tax Notes that the 0.8 percent number is correct based on its internal procedures for computing the section 7520 rate, although the agency stopped short of specifying those procedures.

That outcome wasn’t much of a surprise to Ronald D. Aucutt of Bessemer Trust. “I think it’s possible to do the math and come up with either 0.6 or 0.8 depending on when you round and where,” he told Tax Notes, adding that the IRS’s formula has always been “kind of a black box to me.”

If IRS internal protocols require 0.696 to first be rounded to the nearest two decimal places, then that would bring it 0.70 percent, Aucutt explained. From there, the section 7520 regulations stipulate that a number between the two-tenths is to be rounded up, which could then reasonably bring it to the 0.8 percent that was published in the revenue ruling, he said.

Still Super Low

Even at 0.8 percent, the May section 7520 rate is the lowest since it was first published in 1989 — and that’s good news for estate tax planners and their clients.

Tax planning techniques such as GRATs, intrafamily loans, and installment sales work best when interest rates are low and values are low. With the economy in a tumble from the coronavirus pandemic, “we’ve got a twofer these days,” Aucutt said.

The section 7520 rate has ranged from a peak of 11.6 percent in May 1989 to 1 percent, most recently in January 2013.

Beth Shapiro Kaufman of Caplin & Drysdale Chtd. likewise noted that May is shaping up to be an especially advantageous time for tax planning, thanks in part to the low section 7520 rate.

“I’m already talking to clients about what I am calling ‘May Day GRATs!’” Kaufman said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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