rr-03-118.pdf

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Part I

Section 7872.--Treatment of Loans with Below-Market Interest Rates

Rev. Rul. 2003-118

This revenue ruling publishes the amount that §7872(g) of the Internal Revenue Code
permits a taxpayer to lend to a quali-fying continuing care facility without incurring
imputed interest. The amount is adjusted for inflation for the years after 1986.

Section 7872 generally treats loans bearing a below-market interest rate as if they bore
interest at the market rate.

Section 7872(g)(1) provides that, in general, § 7872 does not apply for any calendar year
to any below-market loan made by a lender to a qualified continuing care facility
pursuant to a continuing care contract if the lender (or the lender's spouse) attains age 65
before the close of the year.

Section 7872(g)(2) provides that, in the case of loans made after October 11, 1985, and
before 1987, § 7872(g)(1) applies only to the extent that the aggregate outstanding
amount of any loan to which § 7872(g) applies (determined without regard to §
7872(g)(2)), when added to the aggregate outstanding amount of all other previous loans
between the lender (or the lender's spouse) and any qualified continuing care facility to
which § 7872(g)(1) applies, does not exceed $90,000.

Section 7872(g)(5) provides that, for loans made during any calendar year after 1986 to
which § 7872(g)(1) applies, the $90,000 limit specified in § 7872(g)(2) is in-creased by
an inflation adjust-ment. The inflation adjust-ment for any calen-dar year is the
percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar
year exceeds the CPI for calendar year 1985. Section 7872(g)(5) states that the CPI for
any calendar year is the average of the CPI as of the close of the 12-month period ending
on September 30 of that calendar year.

Table 1 sets forth the amount specified in §7872(g)(2) of the Code. The amount is
increased by the infla-tion adjustment for the years 1987-2004.

REV. RUL. 2003-118

TABLE 1

Limit under § 7872(g)(2)

Year Amount

Before 1987 $ 90,000

1987 $ 92,200

1988 $ 94,800

1989 $ 98,800

1990 $103,500

1991 $108,600

1992 $114,100

1993 $117,500

1994 $121,100

1995 $124,300

1996 $127,800

1997 $131,300

1998 $134,800

1999 $137,000

2000 $139,700

2001 $144,100

2002 $148,800

2003 $151,000

2004 $154,500

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index 1982-1984
base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2002-78, 2002-48 I.R.B. 915, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is Avital Grunhaus of the Office of the Associate Chief
Counsel (Financial Institutions and Products). For further information regarding this
revenue ruling, please contact Mrs. Grunhaus on (202) 622-3940 (not a toll-free call).