internal revenue bulletin may 4, 1998notice 98–26, page 14. weighted average interest rate...

INCOME TAX

Rev. Rul. 98–23, page 5.Federal rates; adjusted federal rates; adjusted federallong-term rate, and the long-term exempt rate. Forpurposes of sections 1274, 1288, 382, and other sectionsof the Code, tables set forth the rates for May 1998.

Notice 98–27, page 14.Electricity produced from certain renewable re-sources; calendar year 1998 inflation adjustment fac-tor and reference prices. This notice announces the cal-endar year 1998 inflation adjustment factor and referenceprices for the renewable electricity production credit undersection 45 of the Code.

EMPLOYEE PLANSREG–243025–96, page 18.Proposed regulations would provide guidance on the circum-stances under which a cafeteria plan participant may revokean existing election and make a new election during a periodof coverage. A public hearing will be held on Tuesday, May5, 1998.

Notice 98–26, page 14.Weighted average interest rate update. Guidelines areset forth for determining for April 1998, the weighted aver-age interest rate and the resulting permissible range of in-terest rates used to calculate current liability for purposes ofthe full funding limitation of section 412(c)(7) of the Code asamended by the Omnibus Budget Reconciliation Act of 1987and by the Uruguay Round Agreements Act (GATT).

EXEMPT ORGANIZATIONSAnnouncement 98–36, page 18.A list is given of organizations now classified as private foun-dations.

GIFT TAXRev. Rul. 98–21, page 7.Transfer of nonstatutory stock option. This ruling pro-vides guidance on the time that a completed gift occurswhen a nonstatutory stock option is transferred without con-sideration by the optionee to a family member.

Rev. Proc. 98–34, page 15.Valuation of compensatory stock options. This proce-dure sets forth a methodology to value certain compen-satory stock options for gift, estate, and generation-skippingtransfer tax purposes.

ADMINISTRATIVENotice 98–23, page 9.This notice provides guidance regarding recent changes tothe taxation of social security benefits under the U.S.-Canada income tax treaty.

Notice 98–25, page 11.Election to treat trust as a United States person; do-mestic trust. This notice provides the procedures undersection 1161 of the Taxpayer Relief Act of 1997, P.L.105–34, 111 Stat. 788 (1997), for trusts that were in exis-tence on August 20, 1996, and that were treated as UnitedStates persons on August 19, 1996, to elect to continue tobe treated as United States persons notwithstanding section7701(a)(30)(E) of the Code.

Internal Revenue

bbuulllleettiinnBulletin No. 1998–18

May 4, 1998

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page 22.Announcement Relating to Court Decisions begins on page 4.Index for January-April begins on page 24.

Mission of the Service

The purpose of the Internal Revenue Service is to collectthe proper amount of tax revenue at the least cost; servethe public by continually improving the quality of our prod-

ucts and services; and perform in a manner warrantingthe highest degree of public confidence in our integrity, effi-ciency, and fairness.

2

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is to adminis-ter the Internal Revenue Code. Tax policy for raising revenueis determined by Congress.

With this in mind, it is the duty of the Service to carry out thatpolicy by correctly applying the laws enacted by Congress;to determine the reasonable meaning of various Code provi-sions in light of the Congressional purpose in enacting them;and to perform this work in a fair and impartial manner, withneither a government nor a taxpayer point of view.

At the heart of administration is interpretation of the Code. Itis the responsibility of each person in the Service, chargedwith the duty of interpreting the law, to try to find the truemeaning of the statutory provision and not to adopt astrained construction in the belief that he or she is “protect-ing the revenue.” The revenue is properly protected onlywhen we ascertain and apply the true meaning of the statute.

The Service also has the responsibility of applying andadministering the law in a reasonable, practical manner.Issues should only be raised by examining officers whenthey have merit, never arbitrarily or for trading purposes.At the same time, the examining officer should never hesi-tate to raise a meritorious issue. It is also important thatcare be exercised not to raise an issue or to ask a court toadopt a position inconsistent with an established Serviceposition.

Administration should be both reasonable and vigorous. Itshould be conducted with as little delay as possible andwith great courtesy and considerateness. It should nevertry to overreach, and should be reasonable within thebounds of law and sound administration. It should, howev-er, be vigorous in requiring compliance with law and itshould be relentless in its attack on unreal tax devices andfraud.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents of a permanent nature are consoli-dated semiannually into Cumulative Bulletins, which are soldon a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemakingand the disbarment and suspension list included in this part,none of these announcements are consolidated in the Cumu-lative Bulletins.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basisand are published in the first Bulletin of the succeeding semi-annual period, respectively.

3

Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

May 4, 1998 4 1998–18 I.R.B.

It is the policy of the Internal RevenueService to announce at an early datewhether it will follow the holdings in cer-tain cases. An Action on Decision is thedocument making such an announcement.An Action on Decision will be issued atthe discretion of the Service only on un-appealed issues decided adverse to thegovernment. Generally, an Action on De-cision is issued where its guidance wouldbe helpful to Service personnel workingwith the same or similar issues. Unlike aTreasury Regulation or a Revenue Ruling,an Action on Decision is not an affirma-tive statement of Service position. It is notintended to serve as public guidance andmay not be cited as precedent.

Actions on Decisions shall be reliedupon within the Service only as conclu-sions applying the law to the facts in theparticular case at the time the Action onDecision was issued. Caution should beexercised in extending the recommenda-tion of the Action on Decision to similarcases where the facts are different. More-over, the recommendation in the Actionon Decision may be superseded by newlegislation, regulations, rulings, cases, orActions on Decisions.

Prior to 1991, the Service published ac-quiescence or nonacquiescence only in

certain regular Tax Court opinions. TheService has expanded its acquiescenceprogram to include other civil tax caseswhere guidance is determined to be help-ful. Accordingly, the Service now may ac-quiesce or nonacquiesce in the holdingsof memorandum Tax Court opinions, aswell as those of the United States DistrictCourts, Claims Court, and Circuit Courtsof Appeal. Regardless of the court decid-ing the case, the recommendation of anyAction on Decision will be published inthe Internal Revenue Bulletin.

The recommendation in every Actionon Decision will be summarized as ac-quiescence, acquiescence in result only,or nonacquiescence. Both “acquies-cence” and “acquiescence in result only”mean that the Service accepts the holdingof the court in a case and that the Servicewill follow it in disposing of cases withthe same controlling facts. However, “ac-quiescence” indicates neither approvalnor disapproval of the reasons assignedby the court for its conclusions; whereas,“acquiescence in result only” indicatesdisagreement or concern with some or allof those reasons. Nonacquiescence signi-fies that, although no further review wassought, the Service does not agree withthe holding of the court and, generally,

will not follow the decision in disposingof cases involving other taxpayers. In ref-erence to an opinion of a circuit court ofappeals, a nonacquiescence indicates thatthe Service will not follow the holding ona nationwide basis. However, the Servicewill recognize the precedential impact ofthe opinion on cases arising within thevenue of the deciding circuit.

The announcements published in theweekly Internal Revenue Bulletins areconsolidated semiannually and annually.The semiannual consolidation appears inthe first Bulletin for July and in the Cu-mulative Bulletin for the first half of theyear, and the annual consolidation ap-pears in the first Bulletin for the follow-ing January and in the Cumulative Bul-letin for the last half of the year.

The Commissioner ACQUIESCES inthe following decisions:

Golden Belt Telephone Cooperativev. Commissioner,1

108 T.C. 498 (1997)

Paul A. Bilzerian v. United States,2

86 F.3d 1067 (11th Cir. 1996), rev’g887 F. Supp. 1509 (M.D. Fla. 1995),remanded sub nom. Steffen v. UnitedStates,952 F. Supp. 779 (M.D. Fla.1997)

Announcement Relating to Court Decisions

1 Acquiescence in result only relating to whether billing and collection services performed by a rural telephone cooperative on behalf of long-distance carriers con-stitute “communication services” as defined in Internal Revenue Code section 501(c)(12)(B).2 Acquiescence in result only relating to whether issuance of an erroneous refund following taxpayer’s payment of the original assessment revives that assessment topermit enforced collection of the amount erroneously refunded.

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof May 1998. See Rev. Rul. 98–23, on this page.

Section 86.—Social Securityand Tier 1 Railroad RetirementBenefits

Notice 98–23 provides guidance regarding recentchanges to the taxation of social security benefitsunder the U.S.-Canada income tax treaty. See Notice98–23, page 9.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of May 1998. SeeRev. Rul. 98–23, on this page.

Section 382.—Limitation on NetOperating Loss Carryforwardsand Certain Built-In LossesFollowing Ownership Change

The adjusted applicable federal long-term rate isset forth for the month of May 1998. See Rev. Rul.98–23, on this page.

Section 412.—Minimum FundingStandards


Section 467.—Certain Paymentsfor the Use of Property orServices

The adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof May 1998. See Rev. Rul. 98–23, on this page.

Section 468.—Special Rules forMining and Solid WasteReclamation and Closing Costs


Section 482.—Allocation ofIncome and Deductions AmongTaxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—Special Rules forCredits and Deductions


Section 807.—Rules for CertainReserves


Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-

term, and long-term rates are set forth for the monthof May 1998. See Rev. Rul. 98–23, on this page.

Section 1274.—Determinationof Issue Price in the Case ofCertain Debt Instruments Issuedfor Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate, andthe long-term exempt rate.For purposesof sections 1274, 1288, 382, and othersections of the Code, tables set forth therates for May 1998.

Rev. Rul. 98–23This revenue ruling provides various

prescribed rates for federal income taxpurposes for May 1998 (the currentmonth.) Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-term ad-justed applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,Table 5 contains the federal rate for deter-mining the present value of an annuity, aninterest for life or for a term of years, or aremainder or a reversionary interest forpurposes of section 7520.

1998–18 I.R.B. 5 May 4, 1998

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

May 4, 1998 6 1998–18 I.R.B.

REV. RUL. 98–23 TABLE 1

Applicable Federal Rates (AFR) for May 1998

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-TermAFR 5.50% 5.43% 5.39% 5.37%

110% AFR 6.06% 5.97% 5.93% 5.90%120% AFR 6.63% 6.52% 6.47% 6.43%130% AFR 7.18% 7.06% 7.00% 6.96%

Mid-TermAFR 5.69% 5.61% 5.57% 5.55%

110% AFR 6.27% 6.17% 6.12% 6.09%120% AFR 6.84% 6.73% 6.67% 6.64%130% AFR 7.42% 7.29% 7.22% 7.18%150% AFR 8.60% 8.42% 8.33% 8.28%175% AFR 10.06% 9.82% 9.70% 9.62%

Long-TermAFR 5.94% 5.85% 5.81% 5.78%

110% AFR 6.54% 6.44% 6.39% 6.36%120% AFR 7.14% 7.02% 6.96% 6.92%130% AFR 7.75% 7.61% 7.54% 7.49%


Adjusted AFR for May 1998

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-termadjusted AFR 3.73% 3.70% 3.68% 3.67%

Mid-termadjusted AFR 4.30% 4.25% 4.23% 4.21%

Long-termadjusted AFR 5.05% 4.99% 4.96% 4.94%


Rates Under Section 382 for May 1998

Adjusted federal long-term rate for the current month 5.05%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.05%

1998–18 I.R.B. 7 May 4, 1998


Appropriate Percentages Under Section 42(b)(2) for May 1998

Appropriate percentage for the 70% present value low-income housing credit 8.36%

Appropriate percentage for the 30% present value low-income housing credit 3.58%


Rate Under Section 7520 for May 1998

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 6.8%

Section 1288.—Treatment ofOriginal Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof May 1998. See Rev. Rul. 98–23, page 5.

Section 2511.—Transfers inGeneral

26 CFR 25.2511–1: Transfers in general.(Also Section 2512; 25.2512–1.)

Transfer of nonstatutory stock op-tion. This ruling provides guidance on thetime that a completed gift occurs when anonstatutory stock option is transferredwithout consideration by the optionee to afamily member.

Rev. Rul. 98–21

ISSUE

When is the transfer of a nonstatutorystock option (i.e., a compensatory stockoption that is not subject to the provisionsof § 421 of the Internal Revenue Code) bythe optionee to a family member, for noconsideration, a completed gift under § 2511?

FACTS

A is employed by Company. Companyhas one class of stock. Company has astock option plan under which employeescan be awarded nonstatutory stock op-

tions to purchase shares of Company’sstock. These stock options are not tradedon an established market. The shares ac-quired on the exercise of an option arefreely transferable, subject only to gener-ally applicable securities laws, and sub-ject to no other restrictions or limitations.

Company grants to A, in considerationfor services to be performed by A, a non-statutory stock option to purchase sharesof Company common stock. Company’sstock option plan provides that the stockoption is exercisable by A only after Aperforms additional services.

All options granted under Company’sstock option plan expire 10 years from thegrant date. The exercise price per share ofA’s option is the fair market value of oneshare of Company’s common stock on thegrant date. Company’s stock option planpermits the transfer of nonstatutory stockoptions to a member of an optionee’s im-mediate family or to a trust for the benefitof those individuals. The effect of such atransfer is that the transferee (after the re-quired service is completed and before theoption’s expiration date) will determinewhether and when to exercise the stockoption and will also be obligated to paythe exercise price.

Before A performs the additional ser-vices necessary to allow A’s option to beexercised, A transfers A’s option to B, oneof A’s children, for no consideration.

LAW AND ANALYSIS

Section 2501 imposes a tax on thetransfer of property by gift by any indi-

vidual. The gift tax is not imposed uponthe receipt of the property by the donee, isnot necessarily determined by the mea-sure of enrichment resulting to the doneefrom the transfer, and is not conditionedupon the ability to identify the donee atthe time of the transfer. The tax is a pri-mary and personal liability of the donor,is an excise upon the donor’s act of mak-ing the transfer, is measured by the valueof the property passing from the donor,and attaches regardless of the fact that theidentity of the donee may not then beknown or ascertainable. Section 25.2511–2(a) of the Gift Tax Regulations.

The gift tax applies to a transfer ofproperty by way of gift, whether thetransfer is in trust or otherwise, whetherthe gift is direct or indirect, and whetherthe property is real or personal, tangibleor intangible. Section 25.2511–1(a). Forthis purpose, the term property is used inits broadest and most comprehensivesense and reaches “every species of rightor interest protected by law and having anexchangeable value.” H.R. Rep. No. 708,72d Cong., 1st Sess. 27 (1932); S. Rep.No. 665, 72d Cong., 1st Sess. 39, (1932);both reprinted in 1939–1 (Part 2) C.B.476, 524. Some rights, however, are notproperty. See e.g., Estate of Howell v.Commissioner,15 T.C. 224 (1950) (non-vested pension rights were not propertyrights includible in gross estate under § 811(c) of the 1939 Code); Estate ofBarr v. Commissioner,40 T.C. 227 (1963)acq., 1964–1 C.B. 4 (death benefits

payable at discretion of board of directorswho usually but not always, agreed topayment, were in the nature of hope orexpectancy and not property rights in-cludible in gross estate for estate tax pur-poses).

Generally, a gift is complete when thedonor has so parted with dominion andcontrol over the property as to leave thedonor no power to change its disposition,whether for the donor’s own benefit or forthe benefit of another. Section 25.2511–2(b).

In Estate of Copley v. Commissioner,15 T.C. 17 (1950), aff ’d, 194 F.2d 364(7th Cir. 1952), acq.,1965–2 C.B. 4, thepetitioner entered into an antenuptialagreement in which the petitionerpromised to give the future spouse a sumof money in consideration of the marriageand in lieu of all the spouse’s maritalrights in the petitioner’s property. Theagreement became legally enforceableunder state law on the date of the mar-riage in 1931. The petitioner transferredpart of the sum of money in 1936 and therest in 1944. The court concluded that agift tax would have been due in 1931 ifthere had been a gift tax law in effect atthat time.

In Rev. Rul. 79–384, 1979–2 C.B. 344,a parent promised to pay a child $10,000if the child graduated from college. Rev.Rul. 79–384 holds that the parent made agift on the day the child graduated fromcollege, the date when the parent’spromise became enforceable and deter-minable in value.

In Rev. Rul. 80–186, 1980–2 C.B. 280,a parent transferred to a child, for nominalconsideration, an option to purchase realproperty for a specified period of time at aprice below fair value. Rev. Rul. 80–186holds that the transfer is a completed giftat the time the option is transferred pro-vided the option is binding and enforce-able under state law on the date of thetransfer.

In the present case, Company grants toA a nonstatutory stock option conditionedon the performance of additional servicesby A. If A fails to perform the services,the option cannot be exercised. There-fore, before A performs the services, therights that A possesses in the stock optionhave not acquired the character of en-forceable property rights susceptible oftransfer for federal gift tax purposes. Acan make a gift of the stock option to Bfor federal gift tax purposes only after Ahas completed the additional requiredservices because only upon completionof the services does the right to exercisethe option become binding and enforce-able. In the event the option were to be-come exercisable in stages, each portionof the option that becomes exercisable ata different time is treated as a separateoption for the purpose of applying thisanalysis. In the event that B is a skip per-son (within the meaning of § 2613(a)),the generation-skipping transfer taxwould apply at the same time as the gifttax. SeeRev. Proc. 98–34, 1998–18,which sets forth a methodology to valuecertain compensatory stock options for

gift, estate, and generation-skippingtransfer tax purposes.

HOLDING

On the facts stated above, the transferto a family member, for no consideration,of a nonstatutory stock option, is a com-pleted gift under § 2511 on the later of (i)the transfer or (ii) the time when thedonee’s right to exercise the option is nolonger conditioned on the performance ofservices by the transferor.

DRAFTING INFORMATION

The principal author of this revenueruling is Robert B. Hanson of the Officeof Assistant Chief Counsel (Passthroughsand Special Industries). For further infor-mation regarding this revenue ruling, con-tact Melissa C. Liquerman on (202) 622-3120 (not a toll-free call).

Section 7520.—Valuation Tables


Section 7872.—Treatment ofLoans with Below-MarketInterest Rates


May 4, 1998 8 1998–18 I.R.B.

1998–18 I.R.B. 9 May 4, 1998

Taxation of Social SecurityBenefits Under U.S.-CanadaIncome Tax Treaty

Notice 98–23This notice provides guidance, in a

question and answer format, regarding re-cent changes to the taxation of cross-bor-der social security benefits under the Con-vention Between the United States ofAmerica and Canada With Respect toTaxes on Income and on Capital Signed atWashington on September 26, 1980 asAmended by the Protocols Signed on June14, 1983, March 28, 1984, March 17,1995, and July 29, 1997 (the “Treaty”).For an overview of the changes, see Sec-tion I of this notice. For rules that apply toU.S. residents who receive Canadian socialsecurity benefits, see Section II. For rulesthat apply to Canadian residents who re-ceive U.S. social security benefits, see Sec-tion III. For information concerning thePaperwork Reduction Act, see Section IV.For drafting information, see Section V.

I. OVERVIEW OF CHANGES

Paragraph 5 of Article XVIII of theTreaty provides rules that govern the tax-ation of U.S. social security benefits paidto Canadian residents and Canadian socialsecurity benefits paid to U.S. residents.These rules were extensively revised bythe protocol signed on March 17, 1995(the “1995 Protocol”) and again by theprotocol signed on July 29, 1997 (the“1997 Protocol”).

Under the Treaty prior to amendmentby the 1995 Protocol, each country had theexclusive right to tax social security bene-fits paid to its residents by the other coun-try. The 1995 Protocol changed from aresidence-based system to a source-basedsystem, effective January 1, 1996. Underthe 1995 Protocol, the country that paidbenefits to residents of the other countryhad the exclusive right to tax the benefits.

The 1997 Protocol returned to a resi-dence-based system under which socialsecurity benefits are taxable exclusively inthe country where the recipient resides.The changes made by the 1997 Protocolare generally retroactive to January 1,1996. However, benefits paid during 1996and 1997 will not be subject to a higher

rate of tax than was imposed under the1995 Protocol. In addition, as explainedbelow, individuals who received benefitsduring 1996 and 1997 that would be sub-ject to a lower rate of tax under the 1997Protocol may be eligible for refunds.

II. U.S. RESIDENTS WHO RECEIVECANADIAN BENEFITS

WHICH CANADIAN BENEFITS ARECOVERED?

The changes made by the 1997 Proto-col affect the taxation of Old Age Security(OAS) pensions and Canada/Quebec Pen-sion Plan (CPP/QPP) benefits.

HOW WERE MY BENEFITS TAXEDDURING 1996 AND 1997?

Under the old rules (that is, the 1995Protocol), Canadian social security bene-fits paid to U.S. residents during 1996 and1997 were subject to a 25-percent Cana-dian withholding tax. However, Canadapermitted U.S. recipients of Canadianbenefits to file Canadian tax returns andpay tax at regular graduated rates on theirnet income. As a result, some U.S. recipi-ents of Canadian social security benefitsmay have paid little or no Canadian tax ontheir benefits.

HOW WILL MY BENEFITS BETAXED UNDER THE NEW RULES?

Under the new rules (that is, the 1997Protocol), Canadian social security bene-fits paid to U.S. residents generally willbe taxable, if at all, only by the UnitedStates. The benefits will be taxed at grad-uated rates on a net basis as if they werebenefits paid under the U.S. Social Secu-rity Act. Thus, under section 86 of the In-ternal Revenue Code, the portion of thebenefits that is taxable will depend oneach recipient’s income level. For moreinformation on the rules that apply to ben-efits paid under the U.S. Social SecurityAct, see IRS Publication 915 (Social Se-curity Benefits and Equivalent RailroadRetirement Benefits).

WHEN DO THE NEW RULES TAKEEFFECT?

The new rules must be applied to bene-fits received during 1998 and future

years. For 1996 and 1997, a U.S. residentwho received Canadian social securitybenefits may choose to be taxed in theUnited States under the new rules or to re-main taxable in Canada under the oldrules.

WILL I HAVE TO PAY ANYADDITIONAL TAX FOR 1996 OR1997?

The United States and Canada haveagreed that taxpayers’ 1996 and 1997benefits will not be subject to an in-creased rate of tax solely as a result of the1997 Protocol. Therefore, U.S. recipientsof Canadian social security benefits dur-ing 1996 or 1997 should not have to payany additional tax unless there is someother factor that alters their tax liability.

AM I ENTITLED TO A REFUND OFCANADIAN TAX?

U.S. residents who received Canadiansocial security benefits during 1996 and1997 on which Canadian tax was paidmay be entitled to refunds. Taxpayersshould calculate the amount of U.S. tax, ifany, they would have been required to payfor 1996 and 1997 under the new rules. Ifthis amount is less than the amount ofCanadian tax paid, they generally are en-titled to a refund of the Canadian tax.However, they will be required to reportthe benefits on U.S. returns (see below)and pay any U.S. tax that would be due.

WHAT SHOULD I DO TO OBTAINMY REFUND?

During February 1998, RevenueCanada mailed letters to U.S. residentswho received Canadian social securitybenefits during 1996 and 1997. Recipi-ents of such letters should follow the in-structions provided in the letter and sub-mit the attached Election Form toRevenue Canada if they elect to be taxedin the United States. Revenue Canadawill process the Election Forms and issuechecks in the appropriate amount. Rev-enue Canada will notify the Internal Rev-enue Service of the Canadian benefitspaid to the affected individuals and theamounts of the refunds issued.

Taxpayers who did not receive a letter,but believe they are entitled to a refund of

Part III. Administrative, Procedural, and Miscellaneous

Canadian tax, should contact RevenueCanada by calling 1-800-661-7896, bysending a fax to 613-941-6905, or bywriting to the International Tax ServicesOffice, 2204 Walkley Road, Ottawa, On-tario K1A 1A8. Under the 1997 Protocol,taxpayers must apply for any refund ofCanadian tax on or before December 16,2000, which is three years from the datethe 1997 Protocol entered into force.

CAN I REVOKE MY ELECTION TOBE TAXED IN THE UNITED STATESINSTEAD OF CANADA?

A taxpayer who receives a refund ofCanadian tax may later determine that theamount of U.S. tax owed for 1996 and1997 under the new rules is greater thanthe amount of Canadian tax that was orig-inally paid. In this case, the taxpayer maycontact Revenue Canada on or before De-cember 16, 2000 to revoke the electionand repay the Canadian tax. RevenueCanada will then advise the Internal Rev-enue Service that the taxpayer has re-voked the election to be taxed in theUnited States.

HOW SHOULD I REPORT BENEFITSFOR 1996 AND 1997 ON MY TAXRETURNS?

Taxpayers who are not applying for re-funds from Revenue Canada should notreport the Canadian social security bene-fits received during 1996 and 1997 onU.S. federal income tax returns for 1996and 1997. Taxpayers who are applyingfor refunds should report the benefits onU.S. returns as if the benefits had beenpaid under the U.S. Social Security Act.For more information on how to reportbenefits paid under the U.S. Social Secu-rity Act, see IRS Publication 915 (SocialSecurity Benefits and Equivalent RailroadRetirement Benefits).

Taxpayers who apply for refunds andhave not yet filed a 1996 or 1997 U.S. taxreturn must report the Canadian benefitson a 1996 or 1997 (as the case may be)U.S. tax return. Such a U.S. return mustbe filed even if a U.S. return would nototherwise be required and even if no U.S.tax is due. Taxpayers who were not previ-ously required to file U.S. returns will berequired to do so as a result of their elec-tion to be taxable in the United States. Atthe top of their return, taxpayers should

print or type the caption “CANADIANTREATY—SOCIAL SECURITY.”

Taxpayers who have already filed re-turns for 1996 and 1997 should fileamended returns after they have receivedtheir refund checks from Revenue Canadaand pay any U.S. tax that may be due. In-terest and penalties generally will not beimposed if the additional U.S. tax (if any)is paid by April 15, 1999. At the top oftheir amended return, taxpayers shouldprint or type the caption “CANADIANTREATY—SOCIAL SECURITY.”

Taxpayers will not be entitled to anyforeign tax credit for the Canadian taxthat will be refunded.

HOW SHOULD I REPORT BENEFITSFOR 1998 AND FUTURE YEARS ONMY TAX RETURNS?

Canadian social security benefits re-ceived during 1998 and future yearsshould be reported as if they were paidunder the U.S. Social Security Act. Formore information on how to report bene-fits paid under the U.S. Social SecurityAct, see IRS Publication 915 (Social Se-curity Benefits and Equivalent RailroadRetirement Benefits).

III. CANADIAN RESIDENTS WHORECEIVE U.S. BENEFITS

WHICH U.S. BENEFITS ARECOVERED?

The changes made by the 1997 Proto-col affect the taxation of monthly benefitsunder title II of the Social Security Actand tier 1 railroad retirement benefits.

HOW WERE MY BENEFITS TAXEDDURING 1996 AND 1997?

Under the old rules (that is, the 1995Protocol), U.S. social security benefitspaid to Canadian residents during 1996and 1997 were subject to a 25.5-percentU.S. withholding tax. This was a finalpayment of tax. Canadian recipients ofU.S. social security benefits, regardless oftheir level of income, could not elect to betaxed in the United States on a net basis atgraduated rates.

HOW WILL MY BENEFITS BETAXED UNDER THE NEW RULES?

Under the new rules (that is, the 1997Protocol), U.S. social security benefits

paid to Canadian residents generally willbe taxable only by Canada. An amountequal to 85 percent of the benefits that arereceived will be subject to Canadian taxon a net basis as if the benefits were paidunder the Canadian Pension Plan.

WHEN DO THE NEW RULES TAKE EFFECT?

The new rules must be applied to bene-fits received during 1998 and futureyears. For 1996 and 1997, RevenueCanada will determine whether it is morebeneficial for taxpayers to be taxed inCanada under the new rules or to remaintaxable in the United States under the oldrules. More information is providedbelow.

WILL I HAVE TO PAY ANYADDITIONAL TAX FOR 1996 OR 1997?

The United States and Canada haveagreed that taxpayers’ 1996 and 1997 ben-efits will not be subject to an increasedrate of tax solely as a result of the 1997Protocol. Therefore, Canadian recipientsof U.S. social security benefits during1996 or 1997 should not have to pay anyadditional tax unless there is some otherfactor that alters their tax liability.

AM I ENTITLED TO A REFUND OFU.S. TAX?

Canadian residents who received U.S.social security benefits during 1996 or1997 on which U.S. tax was paid may beentitled to a refund. Revenue Canada willcalculate the amount of Canadian tax, ifany, that would have been due for 1996and 1997 under the new rules. If thisamount is less than the amount of U.S. taxpaid, the taxpayer generally will be enti-tled to a refund of the excess amount.Revenue Canada will notify taxpayerswho are entitled to refunds.

WHAT SHOULD I DO TO OBTAINMY REFUND?

Taxpayers who believe they are entitledto a refund should not claim a refund fromthe Internal Revenue Service at this time.Revenue Canada has set up proceduresfor determining which Canadian residentsare entitled to refunds. Revenue Canadawill apply for and obtain the refunds from

May 4, 1998 10 1998–18 I.R.B.

the Internal Revenue Service on behalf ofthe affected individuals and will issuechecks to them as soon as possible in theappropriate amount.

IV. PAPERWORK REDUCTION ACT

The collections of information con-tained in this notice have been reviewedand approved by the Office of Manage-ment and Budget in accordance with thePaperwork Reduction Act (44 U.S.C.3507) under control number 1545–1602.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number.

The collections of information in thisnotice are in Sections II and III. This in-formation is required to implement the1997 Protocol. This information will beused to determine the amounts of refundsof U.S. tax to which certain Canadian res-idents are entitled and to notify the Inter-nal Revenue Service as to the amounts ofrefunds of Canadian tax paid to certainU.S. residents. The collections of infor-mation are mandatory. The likely respon-dents are individuals.

The estimated total annual reportingburden is 25,000 hours.

The estimated annual burden per re-spondent varies from .25 hours to 1 hour,depending on individual circumstances,with an estimated average of .5 hours.The estimated number of respondents is50,000.

The estimated annual frequency of re-sponses is one time.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

V. DRAFTING INFORMATION

The principal authors of this notice areM. Grace Fleeman of the Office of Asso-ciate Chief Counsel (International) andMargaret M. Gavaghan of the Office ofthe Assistant Commissioner (Interna-tional). For further information regardingthis notice, contact Ms. Gavaghan on(202) 874-1550 (not a toll-free call).

Election To Continue To TreatTrust as a United States Person

Notice 98–25

SECTION 1. PURPOSE

This notice provides guidance regard-ing the election under § 1161 of the Tax-payer Relief Act of 1997, Pub. L. No.105–34, 111 Stat. 788 (1997) (TaxpayerRelief Act). Section 1161(a) provides thatto the extent prescribed in regulations bythe Secretary of the Treasury or his dele-gate, a trust that was in existence on Au-gust 20, 1996 (other than a trust treated asowned by the grantor under subpart E ofpart I of subchapter J of chapter 1 of theInternal Revenue Code of 1986), and thatwas treated as a United States person onAugust 19, 1996, may elect to continue tobe treated as a United States personnotwithstanding § 7701(a)(30)(E). TheInternal Revenue Service and the Depart-ment of the Treasury will incorporate theguidance contained in this notice in regu-lations. Accordingly, trusts should followthe procedures set forth in this notice.

SECTION 2. BACKGROUND

Prior to the Small Business Job Protec-tion Act of 1996, Pub. L. 104–188, 110Stat. 1755 (1996) (SBJP Act), the statusof a trust as domestic or foreign turnedupon the subjective determination ofwhether the trust was more comparable toa resident or a nonresident alien individ-ual. See Rev. Rul. 60–181, 1960–1 C.B.257, citing B.W. Jones Trust v. Commis-sioner,46 B.T.A. 531 (1942), aff ’d, 132F.2d 914 (4th Cir. 1943) (prior law).

Section 1907(a) of the SBJP Actamended § 7701(a)(30) and (31) of theCode to provide more objective criteriafor determining the status of a trust. New§ 7701(a)(30)(E) provides that a trust willbe treated as a domestic trust if: (1) acourt within the United States is able toexercise primary supervision over the ad-ministration of the trust, and (2) one ormore United States persons1 have the au-

thority to control all substantial decisionsof the trust. New § 7701(a)(31) providesthat a foreign trust is any trust that is not adomestic trust.

New § 7701(a)(30) and (31) apply indetermining the status of a trust for tax-able years beginning after December 31,1996. A trust may, however, elect pur-suant to § 1907(a)(3)(B) of the SBJP Actto have the new criteria apply to the firsttaxable year of the trust ending after Au-gust 20, 1996 (the date of enactment ofthe SBJP Act).

A trust that qualified as a domestic trustunder prior law could fail to qualify as adomestic trust under new § 7701(a)(30)-(E). Thus, solely due to the change inlaw, a domestic trust could become a for-eign trust as of the first day of its first tax-able year beginning after December 31,1996. Such a change may have signifi-cant adverse tax consequences. A non-grantor trust whose status changed fromdomestic to foreign prior to August 5,1997 (the effective date of the repeal of§ 1491), was treated for purposes of § 1491 as having transferred, upon be-coming a foreign trust, all of its assets to aforeign trust, and therefore may havebeen subject to the § 1491 excise tax. Anongrantor trust whose status changedfrom domestic to foreign on or after Au-gust 5, 1997 (the effective date of § 684)is treated as having transferred all of itsassets to a foreign trust and must recog-nize as gain the excess of the fair marketvalue of the property transferred over itsadjusted basis under § 684.

To avoid the change from domestic toforeign status, a domestic trust needed toamend its provisions to meet the defini-tion set forth in new § 7701(a)(30)(E) bythe first day of its first taxable year begin-ning after December 31, 1996. To assistdomestic trusts that may have had diffi-culty conforming to the new domestictrust criteria, the Service published Notice96–65, 1996–2 C.B. 232. That notice per-mits a domestic trust in existence on Au-gust 20, 1996, to continue to file tax re-turns as a domestic trust for taxable yearsbeginning after December 31, 1996,notwithstanding the status of the trustunder new § 7701(a)(30)(E), if certainconditions are satisfied. See also § 1601(i)(4) of the Taxpayer Relief Act.To obtain the relief provided in Notice

1998–18 I.R.B. 11 May 4, 1998

1As originally enacted by the SBJP Act, new § 7701(a)(30)(E)(ii) required one or more UnitedStates fiduciaries to have the authority to control allsubstantial decisions of the trust. The Taxpayer Re-lief Act substituted the word “persons” for the word“fiduciaries.”

96–65, a trust is required to: (1) initiatemodification of the trust to conform tonew § 7701(a)(30)(E) by the due date (in-cluding extensions) for filing the trust’sincome tax return for its first taxable yearbeginning after December 31, 1996; (2)complete the modification within twoyears of that date; and (3) attach a state-ment to the trust’s income tax return, asdescribed in Notice 96–65.

Subsequent to the publication of Notice96–65, Congress enacted § 1161 of theTaxpayer Relief Act. Section 1161 allowsa trust that was in existence on August 20,1996 (other than a trust treated as ownedby the grantor), and that was treated as adomestic trust on August 19, 1996, toelect to continue treatment as a domestictrust, regardless of the result of the appli-cation of new § 7701(a)(30)(E) to thetrust.

SECTION 3. TRUSTS ELIGIBLE TOMAKE THE ELECTION

.01 Basic Rule.A trust that was in existence on August

20, 1996, and that was treated as a domes-tic trust on August 19, 1996, as providedin section 3.02, may elect to continuetreatment as a domestic trust notwith-standing § 7701(a)(30)(E). This electionis not available to a trust that was wholly-owned by its grantor under subpart E, partI, subchapter J, chapter 1, of the Code onAugust 20, 1996. (Wholly-owned grantortrusts may, however, follow the proce-dures in Notice 96–65.) The election isavailable to a trust if only a portion of thetrust was treated as owned by the grantorunder subpart E on August 20, 1996. If apartially-owned grantor trust makes theelection, the election is effective for theentire trust. Also, a trust may not makethe election if the trust has made an elec-tion pursuant to § 1907(a)(3)(B) of theSBJP Act to apply the new trust criteria tothe first taxable year of the trust endingafter August 20, 1996, because that elec-tion, once made, is irrevocable.

.02 Determining Whether a Trust wasTreated as a Domestic Trust on August19, 1996

(1) Trusts Filing Form 1041 for theTaxable Year that Includes August19, 1996

For purposes of the election, a trust isconsidered to have been treated as a do-

mestic trust on August 19, 1996, if: (i) thetrustee filed a Form 1041, U.S. IncomeTax Return for Estates and Trusts, for thetrust for the period that includes August19, 1996 (and did not file a Form 1040NR,U.S. Nonresident Alien Income Tax Re-turn, for that year); and (ii) the trust had areasonable basis (within the meaning of §6662) under the prior law for reporting asa domestic trust for that period.

(2) Trusts Not Filing a Form 1041Some domestic trusts are not required

to file Form 1041. For example, grouptrusts described in Rev. Rul. 81–100,1981–1 C.B. 326, are not required to fileForm 1041. Also, a domestic trust whosegross income for the taxable year is lessthan the amount required for filing an in-come tax return and that has no taxableincome is not required to file a Form1041. Section 6012(a)(4).

For purposes of the election, a trust thatfiled neither a Form 1041 nor a Form1040NR for the period that includes Au-gust 19, 1996, will be considered to havebeen treated as a domestic trust on August19, 1996, if the trust had a reasonablebasis (within the meaning of § 6662)under prior law (i) for being treated as adomestic trust for that period and (ii) forfiling neither a Form 1041 nor a Form1040NR for that period.

SECTION 4. PROCEDURE FORMAKING THE ELECTION

.01 Required Statement. To make the election, a statement must

be filed with the Service in the mannerand time described in this notice. Thestatement must be entitled “Election toRemain a Domestic Trust under § 1161 ofthe Taxpayer Relief Act of 1997,” besigned under penalties of perjury by atleast one trustee of the trust, and containthe following information:

(1) A statement that the trust is electingto continue to be treated as a domestictrust under § 1161 of the Taxpayer ReliefAct of 1997;

(2) A statement that the trustee had areasonable basis (within the meaning of §6662) under prior law for treating the trustas a domestic trust on August 19, 1996.(The trustee need not explain the reason-able basis on the election statement);

(3) A statement either that the trustfiled a Form 1041 treating the trust as a

domestic trust for the period that includesAugust 19, 1996, (and that the trust didnot file a Form 1040NR for that period),or that the trust was not required to file aForm 1041 or a Form 1040NR for the pe-riod that includes August 19, 1996, withan accompanying brief explanation as towhy a Form 1041 was not required to befiled; and

(4) The name, address, and employeridentification number of the trust.

.02 Filing the Required Statement withthe ServiceExcept as provided below, the trust

must attach the statement to a Form 1041.The statement may be attached to eitherthe Form 1041 that is filed for the firsttaxable year of the trust beginning afterDecember 31, 1996 (1997 taxable year),or to the Form 1041 filed for the first tax-able year of the trust beginning after De-cember 31, 1997 (1998 taxable year).The statement, however, must be filed nolater than the due date for filing a Form1041 for the 1998 taxable year, plus ex-tensions. The election will be effectivefor the 1997 taxable year, and thereafter,until revoked or terminated. If the trusthas already filed a Form 1041 for the1997 taxable year without the statementattached, the statement should be attachedto the Form 1041 filed for the 1998 tax-able year.

If the trust has insufficient gross in-come and no taxable income for its 1997or 1998 taxable year, or both, and there-fore is not required to file a Form 1041 foreither or both years, the trust must makethe election by filing a Form 1041 for ei-ther the 1997 or 1998 taxable year withthe statement attached (even though nototherwise required to file a Form 1041 forthat year). The trust should only provideon the Form 1041 the trust’s name, nameand title of fiduciary, address, employeridentification number, date created, andtype of entity. The statement must be at-tached to a Form 1041 that is filed no laterthan October 15, 1999.

If the trust files a Form 1040NR for the1997 taxable year based on application ofnew § 7701(a)(30)(E) to the trust, and sat-isfies Section 3.01 of this notice, in orderfor the trust to make the election the trustmust file an amended Form 1040NR re-turn for the 1997 taxable year. The trustmust note on the amended Form 1040NRthat it is making an election under § 1161

May 4, 1998 12 1998–18 I.R.B.

of the Taxpayer Relief Act of 1997. Thetrust must attach to the amended Form1040NR the statement required by this no-tice and a completed Form 1041 for the1997 taxable year. The items of income,deduction and credit of the trust must beexcluded from the amended Form1040NR and reported on the Form 1041.The amended Form 1040NR for the 1997taxable year, with the statement and theForm 1041 attached, must be filed withthe Philadelphia Service Center no laterthan the due date, plus extensions, for fil-ing a Form 1041 for the 1998 taxable year.

If a trust has made estimated tax pay-ments as a foreign trust based on applica-tion of new § 7701(a)(30)(E) to the trust,but has not yet filed a Form 1040NR forthe 1997 taxable year, when the trust filesits Form 1041 for the 1997 taxable year itmust note on its Form 1041 that it madeestimated tax payments based on treat-ment as a foreign trust. The Form 1041must be filed with the Philadelphia Ser-vice Center (and not with the service cen-ter where the trust ordinarily would file itsForm 1041).

If a trust forms part of a qualified stockbonus, pension, or profit sharing plan, theelection provided by this notice must bemade by attaching the statement to theplan’s annual return required under § 6058 (information return) for the firstplan year beginning after December 31,1996, or to the plan’s information returnfor the first plan year beginning after De-cember 31, 1997. The statement must beattached to the plan’s information returnthat is filed no later than the due date forfiling the plan’s information return for thefirst plan year beginning after December31, 1997, plus extensions. The electionwill be effective for the first plan year be-ginning after December 31, 1996, andthereafter, until revoked or terminated.

Any other type of trust that is not re-quired to file a Form 1041 for the taxableyear, but that is required to file an infor-mation return (for example, Form 5227)for the 1997 or 1998 taxable year must at-tach the statement to the trust’s informa-tion return for the 1997 or 1998 taxableyear. However, the statement must be at-tached to an information return that isfiled no later than the due date for filingthe trust’s information return for the 1998taxable year, plus extensions. The elec-tion will be effective for the 1997 taxable

year, and thereafter, until revoked or ter-minated.

A group trust under Rev. Rul. 81–100,1981–1 C.B. 326, (and any other trust thatis not described above and that is not re-quired to file a Form 1041 or an informa-tion return) need not attach the statementto any return and should file the statementwith the Philadelphia Service Center. Thetrust must make the election provided bythis notice by filing the statement by Oc-tober 15, 1999. The election will be ef-fective for the 1997 taxable year, andthereafter, until revoked or terminated.

.03 Failure to File the Statement in theRequired Manner and Time. If a trust fails to file the statement in the

manner or time provided in Section 4.01and 4.02, the trustee may provide a writ-ten statement to the district director hav-ing jurisdiction over the trust setting forththe reasons for failing to file the statementin the required manner or time. If the dis-trict director determines that the failure tofile the statement in the required manneror time was due to reasonable cause, thedistrict director may grant the trust an ex-tension of time to file the statement.Whether an extension of time is grantedshall be in the sole discretion of the dis-trict director. However, the relief pro-vided by this notice is not ordinarilyavailable if the statute of limitations forthe trust’s 1997 taxable year has expired.Additionally, if the district director grantsan extension of time, it may contain termswith respect to assessment as may be nec-essary to ensure that the correct amount oftax will be collected from the trust, itsowners, and its beneficiaries.

SECTION 5. REVOCATION ORTERMINATION OF THE ELECTIONAND PUBLIC COMMENTS

Section 1161(a) of the Taxpayer ReliefAct authorizes the Secretary to prescriberegulations regarding the election to re-main a domestic trust. The regulations willincorporate the rules contained in this no-tice and provide guidance with respect towhen the occurrence of certain significantchanges in circumstances related to thetrust will terminate the election (for exam-ple, changes in the trustees from UnitedStates persons to foreign persons). Theregulations will also contain procedures forrevoking the election. The Service and the

Treasury Department request comments onthe rules in this notice and, in particular,the change in circumstances that wouldcause a termination of the election.

Comments should be submitted byJune 30, 1998 to: Internal Revenue Ser-vice, P.O. Box 7604, Ben Franklin Sta-tion, Washington, DC 20044, Attn:CC:DOM:CORP:R (Notice 98–25CC:DOM:P&SI:2), Room 5226. Submis-sions may be hand-delivered between thehours of 8 a.m. and 5 p.m. to: Courier’sDesk, Internal Revenue Service, 1111Constitution Ave., NW, Washington, DC,Attn: CC:DOM:CORP:R (Notice 98–25CC:DOM:P&SI:2), Room 5226. Alterna-tively, taxpayers may submit commentselectronically at

http://www.irs.ustreas.gov/prod/tax__regs/comments.html

(the Service’s internet site). All com-ments submitted will be available for pub-lic inspection and copying. Please iden-tify the comments as relating to thisNotice 98–25.

SECTION 6. EFFECT OF THISNOTICE ON NOTICE 96–65

A trust that otherwise qualifies for therelief under this notice has the option ofproceeding under the provisions of Notice96–65 or this Notice 98–25, or both. Ifthe trustee has begun conforming a trust’sprovisions under Notice 96–65 to meetthe definition set forth in new § 7701(a)-(30)(E), the trustee may discontinue con-forming the trust’s provisions to meet thenew domestic trust criteria if the trusteeproceeds under this Notice 98–25 insteadof Notice 96–65.

SECTION 7. EFFECTIVE DATE

This notice applies to an election madefor the first taxable year of a trust begin-ning after December 31, 1996. The provi-sions of this notice will be incorporatedinto regulations that will be effective fortaxable years beginning after December31, 1996.

PAPERWORK REDUCTION ACT

The collections of information con-tained in this notice have been reviewedand approved by the Office of Manage-ment and Budget for review in accor-dance with the Paperwork Reduction Act

1998–18 I.R.B. 13 May 4, 1998

(44 U.S.C. 3507) under control number1545–1600.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number.

The collections of information in thisnotice are in section 4 headed Procedurefor Making the Election.This informa-tion is required by the IRS to assure com-pliance with the provisions of the SmallBusiness Job Protection Act of 1996 andthe Taxpayer Relief Act of 1997. Thelikely respondents are trusts.

The estimated total annual reportingburden is 250,000 hours.

The estimated average annual burdenper respondent is 30 minutes.

The estimated number of respondentsis 500,000.

The estimated annual frequency of re-sponses is once.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.


The principal authors of this notice areEliana Dolgoff and James A. Quinn of theOffice of Assistant Chief Counsel(Passthroughs & Special Industries). Forfurther information regarding this noticecontact Ms. Dolgoff or Mr. Quinn on(202) 622-3060 (not a toll-free call). Forfurther information about the interna-tional tax consequences of the electionthat is the subject of this notice contactTrina Dang of the Office of the AssociateChief Counsel (International) on (202)622-3880.

Weighted Average Interest RateUpdate

Notice 98–26Notice 88–73 provides guidelines for

determining the weighted average interestrate and the resulting permissible range ofinterest rates used to calculate current lia-bility for the purpose of the full fundinglimitation of § 412(c)(7) of the InternalRevenue Code as amended by the Om-nibus Budget Reconciliation Act of 1987and as further amended by the UruguayRound Agreements Act, Pub. L. 103–465(GATT).

The average yield on the 30-year Trea-sury Constant Maturities for March 1998is 5.95 percent.

The following rates were determinedfor the plan years beginning in the monthshown below.

May 4, 1998 14 1998–18 I.R.B.

90% to 106% 90% to 110%Weighted Permissible Permissible

Month Year Average Range Range April 1998 6.67 6.00 to 7.07 6.00 to 7.34

Drafting Information

The principal author of this notice isDonna Prestia of the Employee Plans Di-vision. For further information regardingthis notice, call (202) 622-6076 between2:30 and 3:30 p.m. Eastern time (not atoll-free number). Ms. Prestia’s numberis (202) 622-7377 (also not a toll-freenumber).

Renewable ElectricityProduction Credit, Publication ofInflation Adjustment Factor andReference Prices for CalendarYear 1998

Notice 98–27

This notice publishes the inflation ad-justment factor and reference prices forcalendar year 1998 for the renewableelectricity production credit under § 45(a)of the Internal Revenue Code. The 1998inflation adjustment factor and referenceprices are used in determining the avail-ability of the credit. The 1998 inflation

adjustment factor and reference pricesapply to calendar year 1998 sales of kilo-watt-hours of electricity produced in theUnited States or a possession thereof fromqualified energy resources.

BACKGROUND

Section 45(a) provides that the renew-able electricity production credit for anytax year is an amount equal to the productof 1.5 cents multiplied by the kilowatt-hours of specified electricity produced bythe taxpayer and sold to an unrelated per-son during the tax year. This electricitymust be produced from qualified energyresources and at a qualified facility duringthe 10-year period beginning on the datethe facility was originally placed in ser-vice.

Section 45(b)(1) provides that theamount of the credit determined under § 45(a) is reduced by an amount that bearsthe same ratio to the amount of the creditas (A) the amount by which the referenceprice for the calendar year in which thesale occurs exceeds 8 cents bears to (B) 3cents. Under § 45(b)(2), the 1.5 cents in

§ 45(a) and the 8 cents in § 45(b)(1) areeach adjusted by multiplying the amountby the inflation adjustment factor for thecalendar year in which the sale occurs.

Section 45(c)(1) defines qualified en-ergy resources as wind and closed-loopbiomass. Section 45(c)(3) defines a qual-ified facility as any facility owned by thetaxpayer that originally is placed in ser-vice after December 31, 1993 (December31, 1992, in the case of a facility usingclosed-loop biomass to produce electric-ity), and before July 1, 1999.

Section 45(d)(2)(A) requires the Secre-tary to determine and publish in the Fed-eral Register each calendar year the infla-tion adjustment factor and the referenceprices for the calendar year. The inflationadjustment factor and the reference pricesfor the 1998 calendar year were publishedin the Federal Register on April 1, 1998,(62 Fed. Reg. 15917).

Section 45(d)(2)(B) defines the infla-tion adjustment factor for a calendar yearas the fraction the numerator of which isthe GDP implicit price deflator for thepreceding calendar year and the denomi-

nator of which is the GDP implicit pricedeflator for the calendar year 1992. Theterm “GDP implicit price deflator” meansthe most recent revision of the implicitprice deflator for the gross domestic prod-uct as computed and published by the De-partment of Commerce before March 15of the calendar year.

Section 45(d)(2)(C) provides that thereference price is the Secretary’s determi-nation of the annual average contractprice per kilowatt hour of electricity gen-erated from the same qualified energy re-source and sold in the previous year in theUnited States. Only contracts enteredinto after December 31, 1989, are takeninto account.

INFLATION ADJUSTMENT FACTORAND REFERENCE PRICES

The inflation adjustment factor for cal-endar year 1998 is 1.1240. The referenceprices for calendar year 1998 are 4.95cents per kilowatt-hour for facilities pro-ducing electricity from wind energy re-sources and 0 cents per kilowatt-hour forfacilities producing electricity fromclosed-loop biomass energy resources.The reference price for electricity pro-duced from closed-loop biomass, as de-fined in § 45(c)(2), is based on a determi-nation under § 45(d)(2)(C) that incalendar year 1997 there were no sales ofelectricity generated from closed-loopbiomass energy resources under contractsentered into after December 31, 1989.

PHASE-OUT CALCULATION

Because the 1998 reference prices forelectricity produced from wind andclosed-loop biomass energy resources donot exceed 8 cents per kilowatt hour mul-tiplied by the inflation adjustment factor,the phaseout of the credit provided in § 45(b)(1) does not apply to electricityproduced from wind or closed-loop bio-mass energy resources sold during calen-dar year 1998.

CREDIT AMOUNT

As required by § 45(b)(2), the 1.5¢amount in § 45(a)(1) is adjusted by multi-plying such amount by the inflation ad-justment factor for the calendar year inwhich the sale occurs. If any amount asincreased under the preceding sentence isnot a multiple of 0.1¢, such amount is

rounded to the nearest multiple of 0.1¢.Under the calculation required by § 45(b)(2), the renewable electricity pro-duction credit for calendar year 1998 is1.7¢ per kilowatt hour on the sale of elec-tricity produced from closed-loop bio-mass and wind energy resources.

DRAFTING INFORMATIONCONTACT

The principal author of this notice isDavid A. Selig of the Office of AssistantChief Counsel (Passthroughs and SpecialIndustries). For further information re-garding this notice contact Mr. Selig at(202) 622-3040 (not a toll-free call).

26 CFR 601.105: Examination of returns andclaims for refund, credit or abatement;determination of correct tax liability.(Also Part I, Section 2512; Section 25.2512–1.)

Rev. Proc. 98–34

SECTION 1. PURPOSE

This revenue procedure sets forth amethodology to value for gift, estate, andgeneration-skipping transfer tax (“transfertax”) purposes certain compensatorystock options described in Section 3 ofthis revenue procedure. Taxpayers relyingon this revenue procedure may use an op-tion pricing model that takes into accounton the valuation date specific factors thatare similar to those established by the Fi-nancial Accounting Standards Board inAccounting for Stock-Based Compensa-tion, Statement of Financial AccountingStandards No. 123, (Fin. AccountingStandards Bd. 1995), (FAS 123). The In-ternal Revenue Service will treat thevalue of a compensatory stock option asproperly determined for transfer tax pur-poses, provided that the requirements ofthis revenue procedure are met.

SECTION 2. BACKGROUND

Section 2512(a) of the Internal Rev-enue Code provides that, if a gift is madein property, the value of the property atthe date of the gift is the amount of thegift.

Section 25.2512–1 of the Gift Tax Reg-ulations provides that for gift tax purposesthe value of property is the price at whichthe property would change hands betweena willing buyer and a willing seller, nei-

ther being under any compulsion to buyor to sell and both having reasonableknowledge of relevant facts.

Section 2031(a) provides that the valueof the gross estate is determined by in-cluding the value at the time of the dece-dent’s death of all property, real or per-sonal, tangible or intangible, whereversituated.

Section 20.2031–1(b) of the Estate TaxRegulations provides that the value ofevery item of property includible in adecedent’s gross estate is its fair marketvalue at the time of the decedent’s death.

Section 2032(a) provides that the ex-ecutor may elect to use an alternate valua-tion date. Under this election, the valueof all property included in the gross estategenerally is determined as of 6 monthsafter the decedent’s death. However,property distributed, sold, exchanged, orotherwise disposed of within 6 monthsafter death must be valued as of the dateof sale, exchange, or other disposition.

Section 2624(a) provides that, exceptas otherwise provided in Chapter 13,property is valued at the time of the gen-eration- skipping transfer.

FAS 123 establishes financial account-ing and reporting standards for stock-based employee compensation plans.Under FAS 123, the fair value of a stockoption granted by a public entity is esti-mated using an option pricing model (forexample, the Black-Scholes model or abinomial model) that takes into account asof the option grant date: (1) the exerciseprice of the option; (2) the expected life ofthe option; (3) the current price of the un-derlying stock; (4) the expected volatilityof the underlying stock; (5) the expecteddividends on the underlying stock; and (6)the risk-free interest rate for the expectedterm of the option.

FAS 123 generally requires a public en-tity to disclose in its financial statementsfor each year beginning after December15, 1994, a description of the method andsignificant assumptions used during theyear to estimate the fair value of stock op-tions granted during the year, includingthe following weighted-average informa-tion: (1) expected life of the options; (2)expected volatility; (3) expected divi-dends; and (4) risk-free interest rate. (Theforegoing is not a complete list of the dis-closures required by FAS 123. For exam-ple, FAS 123 also requires financial state-

1998–18 I.R.B. 15 May 4, 1998

ment disclosure of the weighted-averageexercise prices of options granted duringthe year.)

SECTION 3. SCOPE

This revenue procedure applies only tothe valuation for transfer tax purposes ofnonpublicly traded compensatory stockoptions (that is, stock options that aregranted in connection with the perfor-mance of services, including stock op-tions that are subject to the provisions of § 421), on stock that, on the valuationdate, is publicly traded on an establishedsecurities market. The options to whichthis revenue procedure applies are re-ferred to herein as “Compensatory StockOptions.”

SECTION 4. APPLICATION

.01 Taxpayers may determine the valueof Compensatory Stock Options for trans-fer tax purposes by using a generally rec-ognized option pricing model (for exam-ple, the Black-Scholes model or anaccepted version of the binomial model)that takes into account as of the valuationdate the following factors: (1) the exer-cise price of the option; (2) the expectedlife of the option; (3) the current tradingprice of the underlying stock; (4) the ex-pected volatility of the underlying stock;(5) the expected dividends on the underly-ing stock; and (6) the risk-free interestrate over the remaining option term.

.02 In order to rely on this revenueprocedure: (1) the taxpayer must use thefactors determined in section 4.03through 4.07 of this revenue procedure;(2) each of the factors used in applyingthe option pricing model must be reason-able (for this purpose, the use of the fac-tors in section 4.03 through 4.07 of thisrevenue procedure will be deemed rea-sonable); (3) the option pricing modelmust be properly applied; (4) the com-pany that granted the option must be sub-ject to FAS 123 in preparing its financialstatements for the fiscal year of the com-pany that includes the valuation date; (5)the underlying stock must be commonstock and must be the same stock forwhich the expected volatility and ex-pected dividends were estimated by thecompany for purposes of FAS 123; and(6) no discount can be applied to the valu-ation produced by the option pricing

model (for example, no discount can betaken due to lack of transferability or dueto the termination of the option within aspecified number of days following termi-nation of employment).

.03 Except as provided in section 4.04of this revenue procedure, in determiningthe factor for the expected life of the op-tion, taxpayers must use either (1) themaximum remaining term of the optionon the valuation date (Maximum Remain-ing Term), or (2) the expected life of theoption on the valuation date computed inaccordance with this section (ComputedExpected Life). The Maximum Remain-ing Term is the number of years roundeddown to the nearest 1/10th of a year fromthe valuation date until the option’s expi-ration date (assuming no condition orevent occurs that would shorten the life ofthe option).

The Computed Expected Life is deter-mined in the following manner:

Step one: Obtain the weighted-averageexpected life of options granted by thepublicly traded company that, for pur-poses of complying with FAS 123, is dis-closed in its financial statements for thefiscal year that includes the valuation date.(If, instead of disclosing a weighted-aver-age expected life for options granted dur-ing the fiscal year, the company discloseda method for computing the expected lifeof the options granted during the fiscalyear, the taxpayer must compute theweighted-average expected life for thetaxpayer’s option using the method dis-closed by the company.)

Step two: Divide the weighted-averageexpected life determined in step one bythe number of years, rounded up to thenearest 1/10th of a year, from the date theoption was granted (without regard to theapplication of § 424(h)(1)) until the op-tion’s expiration date (assuming no condi-tion or event occurs that would shortenthe life of the option).

Step three: Multiply the quotient ob-tained in step two by the Maximum Re-maining Term. The resulting numberrounded down to the nearest 1/10th is theComputed Expected Life expressed inyears.

This calculation can be demonstratedby the following example. Assume thaton September 1, 1998, A is granted astock option from Company that will ter-minate on the earlier of the date 10 years

from the date of grant or the date 90 daysafter the termination of A’s employmentwith Company. The option becomes fullyexercisable 3 years from the date of grant.For the fiscal year that includes Septem-ber 1, 2001, Company discloses in a foot-note to its financial statements, in accor-dance with FAS 123, that theweighted-average expected life of stockoptions granted by the Company duringthe fiscal year is 6 years. On September1, 2001, when A’s option becomes fullyexercisable, A makes a gift of a portion ofthe option. On September 1, 2001, A’soption qualifies as a Compensatory StockOption. For purposes of step one, theweighted-average expected life is 6 years,as disclosed by Company for purposes ofcomplying with FAS 123 for the fiscalyear that includes the valuation date. Forpurposes of step two, the weighted-aver-age expected life of 6 years is divided by10 years, the maximum term of A’s optionon the date the option was granted byCompany. The resulting quotient is 0.6 (6years divided by 10 years equals 0.6). Forpurposes of step three, the quotient in steptwo is multiplied by the Maximum Re-maining Term to determine the ComputedExpected Life. The result is 4.2 years(0.6 times 7 years equals 4.2 years).

.04 Taxpayers must use the MaximumRemaining Term (and may not use theComputed Expected Life) as the expectedlife of the option on the valuation date ifone (or more) of the following conditionsis present:

(1) the transferor of the option (or thedecedent, in the case of a transfer at death)is not the person to whom the option beingvalued was granted by the company;

(2) except in the case of a transfer atdeath, the transferor is not an employee ordirector of the company on the valuationdate;

(3) except in the case of the death ordisability (within the meaning of § 22(e)(3)) of the transferor, the optionbeing valued does not terminate within 6months of termination of employment (orservice as a director) of the transferorwith the company;

(4) the terms of the option being valuedpermit the option to be transferred to, orfor the benefit of, one or more personsother than either persons who are the nat-ural objects of the transferor’s bounty or acharitable organization;

May 4, 1998 16 1998–18 I.R.B.

(5) except in the case of the death of thetransferor, the option being valued has anexercise price that is not fixed on the val-uation date. The option does not have afixed exercise price if, for example, theexercise price is determined by a formulathe results of which might change afterthe valuation date. In addition, an optionwill be deemed not to have a fixed exer-cise price if the company issuing the op-tion has repriced options (that is, directlyor indirectly lowered the exercise price ofoutstanding compensatory stock options)within the 3-year period ending on thevaluation date;

(6) except in the case of the death of thetransferor, the option being valued hasterms and conditions such that if all theoptions granted in the fiscal year of thecompany that includes the valuation datehad the same terms and conditions, theweighted-average expected life for theyear would have been more than 120% ofthe weighted-average expected life actu-ally reported for the year; or

(7) the company is not required by FAS123 to disclose an expected life of the op-tions granted in the fiscal year of the com-pany that includes the valuation date.

.05 In determining the factor for theexpected volatility of the underlyingstock, taxpayers must use the expectedvolatility of the underlying stock that, forpurposes of complying with FAS 123, isdisclosed in the financial statements ofthe publicly traded company for the fiscalyear of the company that includes the val-uation date.

.06 In determining the factor for theexpected dividends on the underlyingstock, taxpayers must use the expecteddividends on the underlying stock that,for purposes of complying with FAS 123,is disclosed in the financial statements ofthe publicly traded company for the fiscalyear of the company that includes the val-uation date.

.07 In determining the factor for therisk-free interest rate, taxpayers must usethe yield to maturity on the valuation date

of zero-coupon U.S. Treasury Bonds witha remaining term (as of the valuationdate) nearest to the expected life of theoption on the valuation date as deter-mined in section 4.03 of this revenue pro-cedure.

.08 Taxpayers utilizing this revenueprocedure to value a Compensatory StockOption for transfer tax purposes shouldindicate on the applicable gift, estate, orgeneration-skipping transfer tax return:“FILED PURSUANT TO REV. PROC.98–34.”


The principal author of this revenueprocedure is Robert B. Hanson of the Of-fice of Assistant Chief Counsel(Passthroughs and Special Industries).For further information regarding thisrevenue procedure, contact Mr. Hansonon (202) 622-3050 or Melissa C. Liquer-man on (202) 622-3120 (not toll-freecalls).

1998–18 I.R.B. 17 May 4, 1998

May 4, 1998 18 1998–18 I.R.B.

Notice of Public Hearing onProposed Regulations

Tax Treatment of CafeteriaPlans; Hearing

REG–243025–96

AGENCY: Internal Revenue Service,Treasury.

ACTION: Notice of public hearing onproposed regulations.

SUMMARY: This document providesnotice of a public hearing on proposedamendments that would provide guidanceon the circumstances under which a cafe-teria plan participant may revoke an exist-ing election and make a new election dur-ing a period of coverage.

DATES: The public hearing will be heldon Tuesday, May 5, 1998, beginning at10:00 a.m. Requests to speak and out-lines of oral comments must be receivedby Tuesday, April 14, 1998.

ADDRESSES: The public hearing willbe held in room 2615, Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. Requests to speak andoutlines of oral comments should be sub-mitted to the CC:DOM:CORP:R (REG–243025–96), room 5226, Internal Rev-enue Service, POB 7604, Ben FranklinStation, Washington, DC 20044. Submis-sions may be hand delivered between thehours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–243025–96), Courier’sDesk, Internal Revenue Service, 1111Constitution Avenue NW, Washington,DC.

FOR FURTHER INFORMATION CON-TACT: Mike Slaughter of the Regula-tions Unit, Assistant Chief Counsel (Cor-porate), 202-622-7190 (not a toll-freenumber).

SUPPLEMENTARY INFORMATION:The subject of the public hearing is pro-posed regulations under section 125 of theInternal Revenue Code. These regulationsappeared in the Federal Register(62 F.R.60196) on Friday, November 7, 1997.

The rules of §601.601 (a)(3) of the“Statement of Procedural Rules” (26 CFR

part 601) shall apply with respect to thepublic hearing. Persons who have sub-mitted written comments within the timeprescribed in the notice of proposed rule-making and who also desire to presentoral comments at the hearing on the pro-posed regulations should submit not laterthan Tuesday, April 21, 1998, an outlineof the oral comments/testimony to be pre-sented at the hearing and the time theywish to devote to each subject.

Each speaker (or group of speakers rep-resenting a single entity) will be limited to10 minutes for an oral presentation exclu-sive of the time consumed by the ques-tions from the panel for the governmentand answers to these questions.

Because of controlled access restric-tions, attendees cannot be admitted be-yond the lobby of the Internal RevenueBuilding until 9:45 a.m.

An agenda showing the scheduling ofthe speakers will be made after outlinesare received from the persons testifying.Copies of the agenda will be availablefree of charge at the hearing.

Cynthia E. Grigsby,Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register onMarch 18, 1998, 8:45 a.m., and published in theissue of the Federal Register for March 19, 1998, 63F.R. 13383).

Foundations Status of CertainOrganizations

Announcement 98–36The following organizations have

failed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing of noticesunder section 508(b) of the Code. Thislisting does not indicate that the organiza-tions have lost their status as organiza-tions described in section 501(c)(3), eligi-ble to receive deductible contributions.

Former Public Charities.The followingorganizations (which have been treated as

organizations that are not private founda-tions described in section 509(a) of theCode) are now classified as private foun-dations:Christians for Renewed Family Values,

Inc., St. Petersburg, FLChristopher Area Youth Association,

Christopher, ILCincinnati Organization of Parents of

Suzuki, Cincinnati, OHCircle B. Blessings Therapeutic Riding

Center, Inc., Walkerton, INCitizens Against Ravaging Our

Environment, Inc., Clinton, MICitizens for Positive Affirmation Inc.,

Jacksonville, FLCitizens for Tomorrows Future Inc.,

Ivanhole, NCCitizens Housing and Motivation

Program-CHAMP, Houston, TXCitizens Island Bridge Company LTD,

Lake Havasu, AZCitizens Promoting Recycling, Rifle, COCoast of Judea Inc., Whitesboro, NJCoastal Area Home Providers

Association, Inc., Savannah, GACoastal Carolina HIV Care Consortium,

Inc., Jacksonville, NCCobb County Fire and Emergency

Services Benevolent Fund, Marietta,GA

Coffee Springs School DistrictFoundation, Inc., Coffee Springs, AL

Coker Volunteer Fire Department Inc.,Coker, AL

Colcord Little League Inc., Colcord, OKCollege Information Systems, Hickory,

NCCollegians Activated To Liberate Life

Call, Madison, WICollierville Rotary Foundation,

Collierville, TNCollirene Youth Recreation Inc., Tyler,

ALCollision Ministries Inc., Franklin, TNColony Library Foundation, The Colony,

TXColorado American Indian Foundation,

Denver, COColorado Assistance Center Inc., Denver,

COColorado Association for Healthcare

Quality, Inc., Fort Collins, COColorado Childrens Center for the

Cinematic & Performing Arts, Inc.,Denver, CO

Part IV. Items of General Interest

1998–18 I.R.B. 19 May 4, 1998

Colorado Foxes Recreational SoccerClub, Inc., Parker, CO

Colorado Senior Network Users Group,Colorado Springs, CO

Colorado Staff Development Council,Broomfield, CO

Colorado Teamsters Hispanic CaucusJoint Council 3, Denver, CO

Colorado Veterans for Housing Inc.,Denver, CO

Colorado Young Lawyers Christmas inJanuary Inc., Colorado Springs, CO

Columbia State U Inc., Metairie, LAColumbus-Copapayo Sister City Project,

Columbus, OHColumbus Quincentennial Foundation

Inc., Media, PAComing Together To Help Promotions,

Philadelphia, PAComites Inc., Miami, FLCommerce Enhancement Corporation,

Shelbyville, KYCommittee for the March on Washington,

Inc., Pittsburgh, PACommunity Access Centers Inc.,

Roanoke, VACommunity Access Television Inc.,

Fayetteville, ARCommunity Action Services, Provo,

UTCommunity Help Inc., Columbia, SCCommunity Housing Action Team

Incorporated, Indianapolis, INCommunity Housing Assistance

Program, Lebanon, OHCommunity Housing Corporation,

Southfield, MICommunity Impact Organization,

Greenville, NCCommunity Multi-Cultural Action Team,

Jackson, TNCommunity of Men, Chicago, ILCommunity Redevelopment Inc., Atlanta,

GACommunity Reinvestment Foundation

Inc., Indianapolis, INCommunity Relations Council in

Anderson County, Inc., Palestine, TXCommunity Resource Council Polk

Youth Institute, Inc., Raleigh, NCCommunity Resources Inc., Thomasville,

GACommunity Resources Unlimited Inc.,

Silver Spring, MDCommunity Social Service Inc., Baton

Rouge, LACommunity United Neighbors Against

Drugs, Philadelphia, PA

Community Volunteer Training, KansasCity, MO

Community Works, Charlotte, NCCommunity Youth Association, Nevada,

TXCompani, Richfield, UTCompass Ministries Inc., Glendale, AZCompass Theatre Company, Denver,

COCompassionate Heart Ministries Inc.,

Kansas City, MOComprehensive Care Center Memorial

Fund, Houston, TXComputer Awareness Foundation Inc.,

Edison, NJComputer Lifeskills Center Inc., Grand

Rapids, MIComsoft, Clemson, SCConcerned Citizens for a Better

Community, Harvey, ILConcerned Citizens of Central Texas

Sentinel Communications, Waco, TX

Concerned Clergy Foundation Inc.,Indianapolis, IN

Concerned Senior Citizens of Colorado,Inc., Fort Collins, CO

Concert Dance Ensemble, Waxahachie,TX

Concho Valley Regional HospitalAuxiliary, San Angelo, TX

Conneaut Education Foundation,Conneaut, OH

Connections for a Better World Inc.,Chevy Chase, MD

Connor Moran Childrens CancerFoundation, Inc., Tequesta, FL

Conquerors Quartet MinistriesIncorporated, Evansville, IN

Conway Youth Sports Club Inc., Conway,AR

Cook County Council on Child AbuseInc., Adel, GA

Cormagda Inc., Chicago, ILCornerstone Ministries Inc., Dodge City,

KSCorning Community Center Inc.,

Corning, ARCoulters Mill Baptist Fellowship, Oreana,

ILCouncil for Urban Peace and Justice,

Granville, OHCouncil of Friends Groups of Akron,

Akron, OHCounseling Advocacy Resources Inc.,

Kokomo, INCount & Countess De Hoernle, Deerfield

Beach, FL

Count It All Joy Inc., Seymour, INCountry Heights Playground,

Owensboro, KYCountry Kids Pre-School and Day,

Pocahontas, ARCourt Appointed Special Advocates,

Lewisville, TXCoweta Communities in Schools Inc.,

Newnan, GACowtown Opry, Fort Worth, TXCozad Youth Recreation, Cozad, NECraigs Divorced Kids, Craig, COCranberry Township Athletic, Cranberry

Twp, PACraven County Pirate Club, New Bern,

NCCreate Inc., Tallahassee, FLCreations Anew Inc., North Royalton,

OHCreative Learning Day-Care Inc., St.

Martinville, LACreative Playground of Ft. Pierce, Ft.

Pierce, FLCreek County Sheriff Reserve, Supulpa,

OKCreole Chapter 43 NAWCC, Metairie,

LACrime Stoppers of Carroll County,

Huntingdon, TNCrime Stoppers of Mayfield & Graves,

Mayfield, KYCrisis Pregnancy C A R ECenter Inc.,

Harrodsburg, KYCrisis Pregnancy Help-Line, Manistique,

MICrisis Pregnancy Services of ADA, Ada,

OKCritical Incident Stress Debriefing,

Winter Haven, FLCritical Thought Development, Grand

Rapids, MICro-Aid Corp, Fort Lee, NJCroatian Council of Kansas City Inc.,

Kansas City, KSCroation Youth of New Jersey Inc., Fort

Lee, NJCrofton Park Production Company,

Morristown, TNCrossroad Farms Inc., Newark, DECrossroads Career Services Inc., Atlanta,

GACrosstown Outreach Services, Detroit,

MICrown Broadcasting Company, Pella, IADreammakers International Education

Inc., Columbus, OHDreamstreets Press Incorporated,

Newark, DE

May 4, 1998 20 1998–18 I.R.B.

Driver of the Year Foundation Inc.,Pittsburgh, PA

Drug and AIDS Prevention AmongAfrican-Americans Inc., Smithfield,NC

Drug Free Housing Foundation Inc.,Jacksonville, FL

Drug Free Workplace Coalition of PalmBeach County Inc., West Palm Beach,FL

Drug Watch International, Elmhurst, ILDublin Irish Celebration, Dublin, OHDubuque Area Youth Leadership Council,

Dubuque, IADuke and Duchess Inc., Houston, TXDunbar Bulldog Academic and Athletic

Boosters Inc., Lexington, KYDuncanville Soccer Association,

Duncanville, TXDurand Farm Natural Preserve Inc.,

Decatur, GAEpiscopal Investment Corporation,

Houston, TXEpsilon Tau Omega Endowment Fund,

Greenville, SCEquestrian Challenge of Naples Inc.,

Naples, FLEquestrian Support Group, Hampton, AREquip and Unify to Reach, Altamonte

Springs, FLFous Inc., Decatur, GAFranciscan Service Program

Incorporated, Covington, KYFrank L. Rizzo Monument Committee,

Philadelphia, PAFranklin County Education Corporation,

Meadville, MSFranz Jaegerstaetter Memorial Fund Inc.,

Marion, SDFrazier Freedom Neighborhood

Association, Dallas, TXFred A. Link III Memorial Scholarship

Inc., Bridgeport, OH

Fred Demayo Scholarship Fund Inc.,Glenridge, NJ

Freddie Moore Memorial Care HomeInc., Memphis, TN

Frederick County Sheriffs Office CitizenAdvisory Committee Inc., Frederick,MD

Frederick Knight Ministries Inc.,Midfield, AL

Free Media Forum Inc., Atlanta, GAFriends of Kennesaw Mountain National

Battlefield Park Inc., Marietta, GAFriends of Martin Memorial Library,

Williamston, NCFriends of Mi Casa Inc., San Antonio, TXFriends of Nathan Goff House Inc.,

Clarksburg, WVFriends of Northville Parks & Recreation,

Northville, MIFriends of Q. A. Thorp, Chicago, ILFriends of the Blanchard Library Inc.,

Blanchard, OKFriends of the Coast Corporation, New

Braunfels, TXFriends of the Colon Township Library,

Colon, MIFriends of the Culinary Arts Foundation,

Cincinnati, OHFriends of the Danville Public Library,

Danville, ILFriends of the Davis Program Inc.,

Columbus, OHFriends of the Holy Cross, Washington,

DCFriends of the Kenyon Area Ambulance

Association, Kenyon, MNFriends of the Knox County Public

Library Incorporated, Vincennes, INFriends of the Lancaster Veterans

Memorial Library, Lancaster, TXFriends of the Marylou Reddick Public

Library, Fort Worth, TXFriends of the Sierra Leone Peoples

Organization, Washington, DC

Friends of the Topiary Park Inc.,Columbus, OH

Friends of Tijeras Pueblo, Tijeras, NMFuture Harvest, Jackson, MSFuture Leaders for a Better Philadelphia

Inc., Philadelphia, PAFootprints Only Inc., Timonium, MDFor a Better World Inc., New Orleans,

LAForesight Ministries Inc., Cascade, WIGreenwood Superfund Oversight

Coalition, Warrenton, VAGreg Mausz Evangelistic Association

Inc., Fayetteville, GAGresham Hills Inc., Florence, ALGulf Coast—A Journal of Literature &

Fine Arts, Houston, TXGulf Coast Cycling Association,

Houston, TXGulf Yachting Association Foundation

Inc., Mobile, ALGunsight Religious Conference Center &

Dude Ranch, San Antonio, TXGurleys Transportation Service Inc., New

Orleans, LAGuru Nanak Nam Foundation, Santa

Cruz, NMGwinnett County Mounted Patrol,

Lawrenceville, GAIf an organization listed above submits

information that warrants the renewal of itsclassification as a public charity or as a pri-vate operating foundation, the InternalRevenue Service will issue a ruling or de-termination letter with the revised classifi-cation as to foundation status. Grantors andcontributors may thereafter rely upon suchruling or determination letter as providedin section 1.509(a)–7 of the Income TaxRegulations. It is not the practice of theService to announce such revised classifi-cation of foundation status in the InternalRevenue Bulletin.

1998–18 I.R.B. 21 May 4, 1998

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

May 4, 1998 22 1998–18 I.R.B.

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1997–27 through1997–52 will be found in Internal Revenue Bulletin1998–1, dated January 5, 1998.

Numerical Finding List1Bulletins 1998–1 through 1998–17

Announcements:

98–1, 1998–2 I.R.B. 3898–2, 1998–2 I.R.B.3898–3, 1998–2 I.R.B.3898–4, 1998–4 I.R.B.3198–5, 1998–5 I.R.B. 2598–6, 1998–5 I.R.B. 2598–7, 1998–5 I.R.B. 2698–8, 1998–6 I.R.B. 9698–9, 1998–7 I.R.B. 3598–10, 1998–7 I.R.B. 3598–11, 1998–8 I.R.B. 4298–12, 1998–8 I.R.B. 4398–13, 1998–8 I.R.B. 4398–14, 1998–8 I.R.B. 4498–15, 1998–10 I.R.B.3698–16, 1998–9 I.R.B. 1798–17, 1998–9 I.R.B. 1698–18, 1998–10 I.R.B.4498–19, 1998–10 I.R.B.4498–20, 1998–11 I.R.B. 2598–21, 1998–11 I.R.B. 2698–22, 1998–12 I.R.B. 3398–23, 1998–12 I.R.B. 3498–24, 1998–12 I.R.B. 3598–25, 1998–13 I.R.B.4398–26, 1998–14 I.R.B. 2898–27, 1998–15 I.R.B. 3098–28, 1998–15 I.R.B. 3098–29, 1998–16 I.R.B. 4898–30, 1998–17 I.R.B. 3898–32, 1998–17 I.R.B. 3998–33, 1998–17 I.R.B. 3998–34, 1998–17 I.R.B. 3998–35, 1998–17 I.R.B. 40

Notices:

98–1, 1998–3 I.R.B. 4298–2, 1998–2 I.R.B. 2298–3, 1998–3 I.R.B. 4898–4, 1998–2 I.R.B. 2598–5, 1998–3 I.B.R.4998–6, 1998–3 I.R.B. 5298–7, 1998–3 I.R.B. 5498–8, 1998–4 I.R.B. 698–9, 1998–4 I.R.B. 898–10, 1998–6 I.R.B.998–11, 1998–6 I.R.B. 1898–12, 1998–5 I.R.B.1298–13, 1998–6 I.R.B.1998–14, 1998–8 I.R.B. 2798–15, 1998–9 I.R.B. 898–16, 1998–15 I.R.B. 1298–17, 1998–11 I.R.B. 698–18, 1998–12 I.R.B. 1198–19, 1998–13 I.R.B.2498–20, 1998–13 I.R.B.2598–21, 1998–15 I.R.B. 1498–22, 1998–17 I.R.B. 598–24, 1998–17 I.R.B. 5

Proposed Regulations:

PS–158–86, 1998–11 I.R.B. 13REG–100841–97, 1998–8 I.R.B. 30REG–102144–98, 1998–15 I.R.B.25

Proposed Regulations—Continued

REG–102894–97, 1998–3 I.R.B. 59REG–104062–97, 1998–10 I.R.B. 34REG–104537–97, 1998–16 I.R.B. 21REG–104691–97, 1998–11 I.R.B. 13REG–105163–97, 1998–8 I.R.B. 31REG–109333–97, 1998–9 I.R.B. 9REG–109704–97, 1998–3 I.R.B. 60REG–110965–97, 1998–13 I.R.B. 42REG–115795–97, 1998–8 I.R.B.33REG–119449–97, 1998–10 I.R.B. 35REG–120200–97, 1998–12 I.R.B. 32REG–120882–97, 1998–14 I.R.B. 25REG–121755–97, 1998–9 I.R.B. 13REG–208299–90, 1998–16 I.R.B. 26REG–209276–87, 1998–11 I.R.B. 18REG–209322–82, 1998–15 I.R.B. 26REG–209373–81, 1998–14 I.R.B. 26REG–209463–82, 1998–4 I.R.B. 27REG–209476–82, 1998–8 I.R.B. 36REG–209484–87, 1998–8 I.R.B.40REG–209485–86, 1998–11 I.R.B. 21REG–209682–94, 1998–17 I.R.B. 20REG–209807–95, 1998–8 I.R.B. 40REG–251502–96, 1998–9 I.R.B. 14

Revenue Procedures:

98–1, 1998–1 I.R.B. 798–2, 1998–1 I.R.B. 7498–3, 1998–1 I.R.B. 10098–4, 1998–1 I.R.B. 11398–5, 1998–1 I.R.B. 15598–6, 1998–1 I.R.B. 18398–7, 1998–1 I.R.B. 22298–8, 1998–1 I.R.B. 22598–9, 1998–3 I.R.B. 5698–10, 1998–2 I.R.B. 3598–11, 1998–4 I.R.B.998–12, 1998–4 I.R.B. 1898–13, 1998–4 I.R.B. 2198–14, 1998–4 I.R.B. 2298–15, 1998–4 I.R.B. 2598–16, 1998–5 I.R.B. 1998–17, 1998–5 I.R.B. 2198–18, 1998–6 I.R.B. 2098–19, 1998–7 I.R.B. 3098–20, 1998–7 I.R.B. 3298–21, 1998–8 I.R.B. 2798–22, 1998–12 I.R.B. 1198–23, 1998–10 I.R.B. 3098–24, 1998–10 I.R.B. 3198–25, 1998–11 I.R.B. 798–26, 1998–13 I.R.B.2698–27, 1998–15 I.R.B.1598–28, 1998–15 I.R.B.1498–29, 1998–15 I.R.B. 2298–30, 1998–17 I.R.B. 698–32, 1998–17 I.R.B. 11

Revenue Rulings:

98–1, 1998–2 I.R.B. 598–2, 1998–2 I.R.B. 1598–3, 1998–2 I.R.B. 498–4, 1998–2 I.R.B. 1898–5, 1998–2 I.R.B. 2098–6, 1998–4 I.R.B. 498–7, 1998–6 I.R.B.698–8, 1998–7 I.R.B. 2498–9, 1998–6 I.R.B. 5

Revenue Rulings—Continued

98–10, 1998–10 I.R.B. 1198–11, 1998–10 I.R.B. 1398–12, 1998–10 I.R.B. 598–13, 1998–11 I.R.B. 498–14, 1998–11 I.R.B. 498–15, 1998–12 I.R.B. 698–16, 1998–13 I.R.B. 1898–17, 1998–13 I.R.B. 2198–18, 1998–14 I.R.B. 2298–19, 1998–15 I.R.B. 598–20, 1998–15 I.R.B. 8

Treasury Decisions:

8740, 1998–3 I.R.B. 48741, 1998–3 I.R.B. 68742, 1998–5 I.R.B.48743, 1998–7 I.R.B. 268744, 1998–7 I.R.B. 208745, 1998–7 I.R.B. 158746, 1998–7 I.R.B. 48747, 1998–7 I.R.B. 188748, 1998–8 I.R.B. 248749, 1998–7 I.R.B. 168750, 1998–8 I.R.B. 48751, 1998–10 I.R.B. 238752, 1998–9 I.R.B. 48753, 1998–9 I.R.B. 68754, 1998–10 I.R.B. 158755, 1998–10 I.R.B. 218756, 1998–12 I.R.B.48757, 1998–13 I.R.B.48758, 1998–13 I.R.B. 158759, 1998–13 I.R.B. 198760, 1998–14 I.R.B. 48761, 1998–14 I.R.B. 138762, 1998–14 I.R.B. 158763, 1998–15 I.R.B. 58764, 1998–15 I.R.B. 98765, 1998–16 I.R.B. 118766, 1998–16 I.R.B. 178767, 1998–16 I.R.B. 4

1998–18 I.R.B. 23 May 4, 1998

Finding List of Current Action onPreviously Published Items1

Bulletins 1998–1 through 1998–17

Revenue Procedures:

91–59Updated and superseded by98–25, 1998–11 I.R.B. 7

94–16Modified and superseded by98–22, 1998–12 I.R.B. 11


95–3595–35ASuperseded by98–19, 1998–7 I.R.B. 30


97–1Superseded by98–1, 1998–1 I.R.B. 7









97–26Obsoleted by 98–28, 1998–15 I.R.B. 14


Revenue Rulings:

75–17Supplemented and superseded by98–5, 1998–2 I.R.B. 20

92–19Supplemented in part by98–2, 1998–2 I.R.B. 15

1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1997–27 through 1997–52 will be found in InternalRevenue Bulletin 1998–1, dated January 5, 1998.

IndexInternal Revenue Bulletins1998–1 Through 1998–17For the index of items published duringthe first six months of 1997, see I.R.B.1998–1, dated January 5, 1998.

The abbreviation and number in paren-thesis following the index entry refer tothe specific item; numbers in roman anditalic type following the parenthesis referto the Internal Revenue Bulletin in whichthe item may be found and the pagenumber on which it appears.

Key to Abbreviations:RR Revenue RulingRP Revenue ProcedureTD Treasury DecisionCD Court DecisionPL Public LawEO Executive OrderDO Delegation OrderTDO Treasury Department OrderTC Tax ConventionSPR Statement of Procedural

RulesPTE Prohibited Transaction

Exemption

EMPLOYMENT TAXElectronic filing; magnetic media; 1998

Form W–4 specifications (RP 26) 13,26

Proposed regulations:26 CFR 31.3121(v)(2)–1, revised;

FICA and FUTA taxation of amountsunder employee benefit plans (REG–209484–87; REG–209807–95) 8, 40

26 CFR 31.6053–1, –4; electronic tipreports (REG–104691–97) 11, 13

Student FICA exception (RP 16) 5,19

ESTATE TAXRegulations:

26 CFR 20.2041–3, 20.2056(d)–2,amended; 20.2046–1, revised; prop-erty interests and disclaimer (TD8744) 7, 20

26 CFR 25.2702–5, –7, amended; qual-ified prsonal residence trust, sale ofresidence (TD 8743) 7, 26

26 CFR 25.2511–1, 25.2514–3,25.2518–1, –2, amended; propertyinterests and disclaimers (TD 8744)7, 20

ESTATE TAX—ContinuedRevocable trust; election (RP 13) 4, 21Underpayment interest, interest expense

deduction, estates (RP 15) 4, 25

EXCISE TAXBows and arrows; taxable and nontaxable

articles (RR 5) 2, 20Proposed regulations:

26 CFR 40.0–1T, added; 40.6011(a)–1T, added; 40.6302(c)–2T, added;deposits of excise taxes (REG–102894–97) 3, 59

26 CFR 54.4980B–1, added; grouphealth plans continuation coveragerequirements (REG–209485–86) 11,21

Regulations:26 CFR 40.0–1(a), amended;

40.6011(a)–1(a)(2)(iii), 40.5302(c)–1, amended, 40.6302(c)–2(b)(2)(iii),added; deposits of excise taxes (TD8740) 3, 4

26 CFR 40.6011(a)–1(b)(2)(vi),amended; 48.4082–5T, removed;48.4082–5, added; 48.4081–1,amended; 48.4082–5T, redesignated;48.6416(b)(4)–1, removed; 48.6421–3(d)(2), amended; 48.6427–3(d)(2),amended; 48.6715–1(a)(3), revised;48.6715–2T, removed; gasoline anddiesel fuel excise tax; special rulesfor Alaska, definitions (TD 8748) 8,24

GIFT TAXQualifying income interest, disposition

(RR 8) 7, 24

INCOME TAXAdvance pricing agreements, small busi-

ness taxpayers (Notice 10) 6, 9Article XIII (8) Rev. Proc. (RP 21) 8, 27Automobile owners and lessees (RP 24)

10, 31; (RP 30) 17,6Books and records; automatic data pro-

cessing system (RP 25) 11, 7Capital gains and charitable remainder

trusts (Notice 20) 13, 25Classification settlement program:

Extended until further notice (Notice21) 15, 14

Education loans (Notice 7) 3, 54Elections under section 7704(g) (Notice

3) 3, 48

INCOME TAX—ContinuedElectronic Federal Tax Payment System:

Batch filers and bulk filers (RP 32) 17,11

Employee plans:Administrative programs; closing

agreements (RP 22) 12, 11Determination letters (RP 6) 1, 183;

(RP 14) 4,22Discrimination; CODAs (Notice 1) 3,

42Eligible deferred compensation plans

(Notice 8) 4, 6Group health plans; COBRA continua-

tion coverage; HIPAA portability(Notice 12) 5, 12

Net unrealized appreciation; capitalgains (Notice 24) 17, 5

Funding:Full funding limitations, weighted av-

erage interest rate for January 1998(Notice 9) 4, 8; February 1998 (No-tice 15) 9,8; March 1998 (Notice18) 12,11

Letter rulings, etc. (RP 4) 1, 113Limitations on benefits and contribu-

tions (RR 1) 2, 5Minimum Funding Standards (RP 10)

2, 35Proposed regulations:

26 CFR 1.401(a)(9)–1, amended; quali-fied plans and individual retirementplans, required distributions (REG–209463–82) 4, 27

Recovery of basis; retirees (Notice 2) 2,22SIMPLE-IRAs (Notice 4) 2,25Technical advice (RP 5) 1, 155User fees (RP 8) 1, 225

Environmental cleanup costs; letterrulings (RP 17) 5, 21

Exempt Organizations:Letter rulings, etc. (RP 4) 1, 113Organizations excepted from reporting

lobbying expenditures (RP 19) 7, 30

Tax consequences of physicians re-cruitment incentives provided byhospitals (RR 15) 12, 6

Technical advice (RP 5) 1, 155User fees (RP 8) 1, 225

Failure to deposit federal tax; penaltyabatement (Notice 14) 8, 27

Foreign partnerships, reporting transfer ofproperty by U.S. persons (Notice 17)11, 6

Foreign tax credit abuse (Notice 5) 3, 49

May 4, 1998 24 1998–18 I.R.B.

INCOME TAX—ContinuedFringe benefits aircraft valuation formula,

first half of 1998 (RR 14) 11, 4Insurance companies:

Discounting estimated salvage recover-able (RP 12) 4, 18

Interest rate tables (RR 2) 2,15Loss reserves; discounting unpaid

losses (RP 11) 4, 9Interest:

Investment:Federal short-term, mid-term, and

long-term rates for January 1998(RR4) 2, 18; February 1998(RR7) 6, 6; March 1998 (RR11)10, 13; April 1998 (RR 18) 14,22

Rates, underpayments and overpay-ments (RR 17) 13, 21

Inventory:LIFO:

Price indexes; department stores forNovember 1997 (RR 6) 4, 4; De-cember 1997 (RR 9) 6,5; January1998 (RR 16) 13,18; February1998 (RR 20) 15,8

Shrinkage estimates:Changing method of accounting for

estimating inventory shrinkage(RP 29) 15, 22

Letter rulings, determination letters, andinformation letters issued by AssociateChief Counsel (Domestic), AssociateChief Counsel (EBEO), AssociateChief Counsel (Enforcement Litiga-tion), and Associate Chief Counsel(International) (RP 1) 1, 7

Losses attributable to a disaster during1997 (RR 12) 10, 5

Low-income housing tax credit (Notice13) 6, 19Satisfactory bond; “bond factor”

amounts for the period Octoberthrough December 1997 (RR 3) 2, 4;January–March 1998 (RR 13) 11,4

Passive foreign investment companies:Shareholders may use rules of sec.

1.1295–1T(b)(4), (f), and (g) to tax-able years beginning before January1, 1998 (Notice 22) 17, 5

Proposed regulations:26 CFR 1.72(p)–1, amended; loans to

plan participants (REG–209476–82)8, 36

26 CFR 1.141–7, 1.142(f)(4)–1,1.150–5, added; 1.141–8, –15,amended; obligations of states andpolitical subdivisions (REG–110965–97) 13, 42

INCOME TAX—Continued26 CFR 1.195–1, added; election to

amortize start-up expenditures(REG–209373–81) 14,26

26 CFR 1.356–6, added; reorganiza-tions, nonqualified preferred stock(REG–121755–97) 9, 13

26 CFR 1.368–1, amended; corporatereorganizations, continuity of inter-est (REG–120882–97) 14, 25

26 CFR 1.460–6, amended; electionnot to apply look-back method in deminimis cases (REG–120200–97)12, 32

26 CFR 1.469–10, revised; 1.7704–1,added; investment income, passiveactivity income and loss rules forpublicly traded partnerships(REG–105163–97) 8, 31

26 CFR 1.475(g)–2, new; 1.482–8,added; 1.482–0, –1, –2, 1.863,1.863–7(a)(1), 1.864–4, –6, 1.894–1,amended; 1.482–9, redesignated;global dealing operation allocationand sourcing of income and deduc-tions among taxpayers (REG–208299–90) 16, 26

26 CFR 1.702–1, 1.954–1, 301.7701–3,amended; 1.952–1(b), (c), redesig-nated 1.954–2(a)(5), (6), 1.954–4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),added (REG–104537–97) 16, 21

26 CFR 1.732–1, amended; 1.732–2,amended; 1.734–1(e), added; 1.743–1, revised; 1.751–1, amended;1.755–1, revised; 1.1017–1, revised;adjustments to basis of partnershipproperty and partnership interest(REG–209682–94) 17, 20

26 CFR 1.925(a)–1, (b)–1, added;1.927(e)–1, amended; foreign salescorporation transfer pricing sourceand grouping rules (REG–102144–98) 15, 25

26 CFR 1.1291–1, 1.1293–1, 1.1295–1,–3, 1.1297–3(c), added; 1.1296–4,amended; passive foreign investmentcompany preferred shares, specialincome exclusion (REG–115795–97) 8, 33

26 CFR 1.1397E–1, added; qualifiedzone academy bonds (REG–119449–97) 10, 35

26 CFR 1.1502–3(c), revised; 1.1502–4(f)(3), (g)(3), added; 1.1502–9(b)-(1)(v), added; 1.1502–21(c)(1)(iii),amended; consolidated returns, limi-tations on the use of certain lossesand credits (REG–104062–97) 10, 34

INCOME TAX—Continued26 CFR 1.6031–1, removed;

1.6031(a)–1, added; 1.6063–1,amended; partnership returns(REG–209322–82) 15, 26

26 CFR 1.7702B–1, –2, added; quali-fied long-term care insurance con-tracts (REG–109333–97) 9, 9

26 CFR 301.6159–1, amended; agree-ments for tax liability installmentpayments (REG–100841–97) 8, 30

26 CFR 301.6404–2, added; abatementof interest (REG–209276–87) 11, 18

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collection ac-tions (REG–251502–96) 9, 14

26 CFR 54.9812–1, added; mentalhealth parity; HIPAA (REG–109704–97) 3, 60

Qualified Funeral Trust; guidance (Notice6) 3, 52

Qualified intermediary agreements:Guidance provided to foreign financial

institutions (RP 27) 15, 15Qualified mortgage bonds, mortgage

credit certificates:Guidance provided regarding use of na-

tional and area median gross incomefigures by issuers (RP 28) 15, 14

Qualified Subchapter S Trust (QSST)conversion to Electing Small BusinessTrust (ESBT) 10, 30

Qualified Zone Academy Zone Bonds(RP) 3, 100

Real estate transactions (RP 20) 7, 32Regulations:

26 CFR 1.61–12, 1.249–1, 1.1016–5,1.1275–1, amended; 1.163–13,1.171–5, added; 1.171–1, –2, –3, –4,revised; 1.1016–9, removed; amorti-zable bond premium (TD 8746) 7, 4

26 CFR 1.141–0, –2, amended;1.141–7, –8, removed; 1.141–7T,–8T, –15T, 1.142(f)(4)–1T, 1.150–5T, added; 1.141–15, revised; oblig-ations of states and political subdivi-sions (TD 8757) 13, 4

26 CFR 1.166–3(a)(3), 1.1001–4,added; 1.166–3T, 1.1001–4T, re-moved; modifications of bad debtsand dealer assignments of notionalprincipal contracts (TD 8763) 15, 5

26 CFR 1.280B–1, added; building de-molition, definition of structure (TD8745) 7, 15

26 CFR 1.338–2, 1.368–1, –2,amended; 1.368–1T, added; corpo-rate reorganizations, continuity of in-

1998–18 I.R.B. 25 May 4, 1998

terest, and continuity of business en-terprise (TD 8760) 14, 4; (TD 8761)14, 13

26 CFR 1.354–1, 1.355–1, 1.356–3,amended; reorganizations, treatmentof warrants as securities (TD 8752)9, 4

26 CFR 1.356–6T, added; reorganiza-tions, nonqualified preferred stock(TD 8753) 9, 6

26 CFR 1.446–1, amended; 1.446–1T,removed; 301.9100–0, added;301.9100–1, revised; 301.9100–2,–3, added; 301.9100–1T, –2T, –3T;removed extensions of time to makeelections (TD 8742) 5, 4

26 CFR 1.453.11; installment obliga-tions received from liquidating cor-porations (TD 8762) 14, 15

26 CFR 1.460–0, amended; 1.460–6T,added; election not to apply look-back method in de minimiscases(TD 8756) 12, 4

26 CFR 1.468A–2, –3, –8, amended;nuclear decommissioning funds; re-vised schedules of ruling amounts(TD 8758) 13, 15

26 CFR 1.904–5(o), 1.904–5T, 1.954–0(b), 1.954–1, amended; 1.954–1T,–2T, –9T, added; 301.7701–3(f)(1),amended; controlled foreign corpo-ration relating to partnerships andbranches (TD 8767) 16, 4

26 CFR 1.905–2, amended; foreign taxcredit filing requirements (TD 8759)13, 19

26 CFR 1.925(a)–1T, 1.925(b)–1T(b)(3)(i), amended; 1.927(e)–1T,

revised; foreign sales corporationtransfer pricing source and groupingrules (TD 8764) 15, 9

26 CFR 1.985–1, –5(a), amended;1.985–7, added; dollar approximateseparate transactions method of ac-counting (DASTM) to profit and lossmethod of accounting, change fromP&L method to DASTM (TD 8765)16, 11

26 CFR 1.1271–1, 1.1275–1, amended;debt instruments with original issuediscount, annuity contracts (TD8754) 10, 15

26 CFR 1.1202–0, –2, added; qualifiedsmall business stock (TD 8749) 7, 16

26 CFR 1.1290–0, amended; 1.1294–0,added; a. 1291–0T, amended;1.1291–1T, added; 1.1291–9,amended; 1.1293–0, –1T, added;1.1295–0, –1T, –3T, 1.1297–3T(c),added; passive foreign investmentcompany preferred shares, specialincome exclusion (TD 8750) 8, 4

26 CFR 1.1396–1; empowerment zoneemployment credit, qualified zoneemployees (TD 8747) 7, 18

26 CFR 1.1397E–1T, added; qualifiedzone academy bonds (TD 8755) 10,21

26 CFR 1.1502–3, –4, –9(a),–21T(c)(1)(iii), amended; 1.1502–3T, –4T, –9T, –55T, added; 1.1502–23T(b), (c), redesignated; consoli-dated returns, limitations on the useof certain losses and credits, overallforeign loss accounts (TD 8751) 10,23

26 CFR 54.9801–2T, amended;54.9801–4T, –5T, revised; 54.9804–1T, redesignated; 54.9806–1T, redes-ignated; 54.9812–1T, added; mentalhealth parity, interim rules (TD8741) 3, 6

Relocation payments:Authorized by sec. 105(a)(11) of Hous-

ing and Community DevelopmentAct, not includible in gross income(RR 19) 15, 5

Reorganizations; exchange of securities(RR 10) 10, 11

Rulings:Areas in which advance rulings will not

be issued:Associate Chief Counsel (Domes-

tic), Associate Chief Counsel(EBEO) (RP 3) 1, 100

Associate Chief Counsel (Interna-tional) (RP 7) 1, 222

Rural airports (RP 18) 6, 20Technical advice to district directors and

chiefs, appeals offices, Associate ChiefCounsel (Domestic), Associate ChiefCounsel (EBEO), Associate ChiefCounsel (Enforcement Litigation), andAssociate Chief Counsel (International)(RP 2) 1, 74

Tentative differential earnings rate for1997 (Notice 19) 13, 24

Treatment of hybrid arrangements undersubpart F (Notice 11) 6, 18

Withholding regulations:Effective date of sec. 1441 withholding

regulations amended (Notice 16) 15,12

May 4, 1998 26 1998–18 I.R.B.

INCOME TAX—ContinuedINCOME TAX—Continued INCOME TAX—Continued

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