Bulletin No. 1998–37
Agency decision
Ask Donna
What actually matters in this document.
Text
IRB 1998-37
9/10/98 4:04 PM
Page 1
Internal Revenue
bulletin
Bulletin No. 1998–37
September 14, 1998
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 98–44, page 4.
Section 355. This ruling declares Rev. Rul. 70–225 obsolete because it is no longer determinative following modifications made by the Taxpayer Relief Act of 1997, as amended
by the Tax Technical Corrections Act of 1998. Rev. Rul.
70–225 addresses a distribution of the stock of a newly
formed controlled corporation followed by an acquisition of
the stock of the controlled corporation. Rev. Rul. 70–225
obsoleted.
EXCISE TAX
Ct.D. 2064, page 4.
The Harbor Maintenance Tax of section 4461 of the Code violates the Export Clause by imposing an ad valorem fee
based on the value of the cargo and not on the use of federal harbor services. United States v. United States Shoe
Corporation.
ADMINISTRATIVE
REG–106177–97, page 33.
Proposed regulations under section 529 of the Code relate
to Qualified State Tuition Programs (QSTPs). A public hearing will be held on January 6, 1999.
Finding Lists begin on page 49.
Department of the Treasury
Internal Revenue Service
Rev. Proc. 98–47, page 8.
Business expenses; environmental remediation costs;
election. Procedures are provided for taxpayers to make
the election under section 198 of the Code to deduct any
qualified environmental remediation expenditure.
Rev. Proc. 98–49, page 9.
LIFO; price indexes; inventory price computation
method. Guidance is provided to taxpayers using the dollarvalue last-in, first-out (LIFO) inventory method and the inventory price index computation (IPIC) method regarding the
computation of a percent change for an index category that
is affected by revisions to the CPI Detailed Report or the PPI
Detailed Report.
Rev. Proc. 98–52, page 12.
Electronic filing; magnetic media. Specifications are set
forth for the magnetic or electronic filing of 1998 Forms
8027. The forms may be filed with the Service using 1⁄2 inch
magnetic tape; IBM 3480/3490 or AS400 compatible tape
cartridges; or 5 1⁄4-, 3 1⁄2-inch diskettes and electronic filing
through the Information Reporting Program Bulletin Board
System (IRB-BBS). Rev. Proc. 92–81 superseded.
Notice 98–47, page 8.
Timely filing or payment; private delivery services. An
updated list of designated private delivery services is provided for purposes of section 7502 of the Code. The list remains unchanged from the lists published in Notice 97–50,
1997–37 I.R.B. 21 and Notice 97–26, 1997–1 I.R.B. 413.
IRB 1998-37
9/10/98 4:04 PM
Page 2
Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
2
IRB 1998-37
9/10/98 4:04 PM
Page 3
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semiannual period, respectively.
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.
3
IRB 1998-37
9/10/98 4:04 PM
Page 4
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 355.—Distribution of
Stock and Securities of a
Controlled Corporation
7750 or Brendan P. O’Hara at (202) 6227530 (not toll-free calls).
26 CFR 1.355–2: Limitations.
Section 4461.—Harbor
Maintenance Tax: Imposition of
Tax
The revenue ruling declares Rev. Rul. 70–225
obsolete because it is no longer determinative following modifications made by the Taxpayer Relief
Act of 1997, as amended by the Tax Technical Corrections Act of 1998. See Rev Rul. 98–44, page 4.
Ct.D. 2064
SUPREME COURT
OF THE UNITED STATES
26 CFR 1.355–2: Limitations.
(Also section 7805; 301.7805–1.)
No. 97–372
Section 355. This ruling declares Rev.
Rul. 70–225 obsolete because it is no
longer determinative following modifications made by the Taxpayer Relief Act of
1997, as amended by the Tax Technical
Corrections Act of 1998. Rev. Rul.
70–225 addresses a distribution of the
stock of a newly formed controlled corporation followed by an acquisition of the
stock of the controlled corporation. Rev.
Rul. 70–225 obsoleted.
UNITED STATES v. UNITED STATES
SHOE CORP.
Rev. Rul. 98–44
The Harbor Maintenance Tax (HMT)
obligates exporters, importers, and domestic shippers, 26 U.S.C. §4461(c)(1),
to pay 0.125 percent of the value of the
commercial cargo they ship through the
Nation’s ports, §4461(a). The HMT is imposed at the time of loading for exports
and unloading for other shipments.
§4461(c)(2). It is collected by the Customs Service and deposited in the Harbor
Maintenance Trust Fund (Fund), from
which Congress may appropriate amounts
to pay for harbor maintenance and development projects and related expenses.
§9505. Respondent United States Shoe
Corporation (U.S. Shoe) paid the HMT
for articles the company exported during
the period April to June 1994 and then
filed a protest with the Customs Service
alleging that, to the extent the toll applies
to exports, it violates the Export Clause,
U.S. Const., Art. 1, §9, cl. 5, which states:
“No Tax or Duty shall be laid on Articles
exported from any State.” The Customs
Service responded to U.S. Shoe with a
form letter stating that the HMT is a statutorily mandated user fee, not an unconstitutional tax on exports. U. S. Shoe then
sued for a refund, asserting that the HMT
violates the Export Clause as applied to
Rev. Rul. 70–225, 1970–1 C.B. 80,
modified by Rev. Rul. 98–27, 1998–22
I.R.B. 4, addresses a distribution of the
stock of a newly formed controlled corporation followed by an acquisition of the
stock of the controlled corporation. Rev.
Rul. 70–225 is no longer determinative
following enactment of § 1012 of the Taxpayer Relief Act of 1997, Pub. L. No.
105–34, 111 Stat. 788, 914–18 (the
“Act”), as amended in § 6010(c) of the
Tax Technical Corrections Act of 1998,
Pub. L. No. 105–206, 112 Stat. 790, 813–
14, which modified certain provisions in
§§ 351, 355, and 368 of the Internal Revenue Code. Subject to certain transition
rules, § 1012(c) of the Act is effective for
transfers after August 5, 1997.
Accordingly, Rev. Rul. 70–225 is declared obsolete as of the effective date of
§ 1012(c) of the Act.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Phoebe Bennett of the Office of
Assistant Chief Counsel (Corporate). For
further information regarding this revenue
ruling, contact Ms. Bennett at (202) 622-
September 14, 1998
523 U.S.
(1998)
CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR
THE FEDERAL CIRCUIT
March 31, 1998
Syllabus
4
exports. In granting U.S. Shoe summary
judgment, the Court of International
Trade (CIT) held that it had jurisdiction
under 28 U.S.C. §1581(i) and that the
HMT qualifies as a tax. Rejecting the
Government’s characterization of the
HMT as a user fee, the CIT reasoned that
the tax is assessed ad valorem directly
upon the value of the cargo itself, not
upon any services rendered for the cargo.
The Federal Circuit affirmed.
Held:
1. The CIT properly entertained jurisdiction in this case. Section 1581(i)(4)
gives that court residual jurisdiction over
“any civil action . . . against the United
States . . . that arises out of any [federal]
law . . . providing for . . . administration
and enforcement with respect to the matters referred to in [§1581(i)(1)],” which in
turn applies to “revenue from imports.”
This dispute involves such a law. The
HMT statute, although applied to exports
here, applies equally to imports. That
§1581(i) does not use the word “exports”
is hardly surprising in view of the Export
Clause, which confines customs duties to
imports. Moreover, 26 U.S.C. §4462(f)(2)
directs that the HMT “be treated as . . . a
customs duty” for jurisdictional purposes.
Such duties, by their very nature, provide
for revenue from imports and are encompassed within §1581(i)(1). Accordingly,
CIT jurisdiction over controversies regarding HMT administration and enforcement accords with §1581(i)(4). Pp. 3–5.
2. Although the Export Clause categorically bars Congress from imposing any
tax on exports, United States v. International Business Machines Corp., 517 U.S.
843 (IBM), it does not rule out a “user
fee” that lacks the attributes of a generally
applicable tax or duty and is, instead, a
charge designed as compensation for government-supplied services, facilities, or
benefits, see Pace v. Burgess, 92 U.S.
372, 375–376. The HMT, however, is a
tax, and thus violates the Export Clause as
applied to exports. Pp. 3–9.
(a) The HMT bears the indicia of a tax:
Congress expressly described it as such,
26 U. S. C. §4461(a), codified it as part of
the Internal Revenue Code, and provided
that, for administrative, enforcement, and
jurisdictional purposes, it should be
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 5
treated “as if [it] were a customs duty,”
§§4462(f)(1),(2). Prior cases in which this
Court upheld flat and ad valorem charges
as valid user fees do not govern here because they involved constitutional provisions other than the Export Clause. IBM
plainly stated that the Export Clause’s
simple, direct, unqualified prohibition on
any taxes or duties distinguishes it from
other constitutional limitations on governmental taxing authority. 517 U.S., at 851,
852, 857, 861. Pp. 5–7.
(b) The guiding precedent for determining what constitutes a bona fide user
fee in the Export Clause context remains
this Court’s time-tested Pace decision.
The Pace Court upheld a fee for stamps
placed on tobacco packaged for export.
The stamp was required to prevent fraud,
and the charge for it, the Court said,
served as “compensation given for services [in fact] rendered.” 92 U.S., at 375.
In holding that the fee was not a duty, the
Court emphasized that the charge bore no
relationship to the quantity or value of the
goods stamped for export. Ibid. Pace establishes that, under the Export Clause,
the connection between a service the
Government renders and the compensation it receives for that service must be
closer than is present here. Unlike the fee
at issue in Pace, the HMT is determined
entirely on an ad valorem basis. The value
of export cargo, however, does not correlate reliably with the federal harbor services, facilities, and benefits used or usable by the exporter. The Court’s holding
does not mean that exporters are exempt
from any and all user fees designed to defray the cost of harbor development and
maintenance. It does mean, however, that
such a fee must fairly match the exporters’ use of port services and facilities.
Pp. 7–9.
114 F. 3d 1564, affirmed.
GINSBURG, J., delivered the opinion for
a unanimous Court.
SUPREME COURT
OF THE UNITED STATES
No. 97–372
UNITED STATES, PETITIONER v.
UNITED STATES SHOE
CORPORATION
1998–37 I.R.B.
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR THE
FEDERAL CIRCUIT
[March 31, 1998]
JUSTICE GINSBURG delivered the opinion of the Court.
The Export Clause of the Constitution
states: “No Tax or Duty shall be laid on
Articles exported from any State.” U.S.
Const., Art. 1, §9, cl. 5. We held in United
States v. International Business Machines
Corp., 517 U.S. 843 (1996) (IBM), that
the Export Clause categorically bars Congress from imposing any tax on exports.
The Clause, however, does not rule out a
“user fee,” provided that the fee lacks the
attributes of a generally applicable tax or
duty and is, instead, a charge designed as
compensation for government-supplied
services, facilities, or benefits. See Pace
v. Burgess, 92 U.S. 372, 375–376 (1876).
This case presents the question whether
the Harbor Maintenance Tax (HMT), 26
U.S.C. §4461(a), as applied to goods
loaded at United States ports for export, is
an impermissible tax on exports or, instead, a legitimate user fee. We hold, in
accord with the Federal Circuit, that the
tax, which is imposed on an ad valorem
basis, is not a fair approximation of services, facilities, or benefits furnished to
the exporters, and therefore does not qualify as a permissible user fee.
I
The HMT, enacted as part of the Water
Resources Development Act of 1986, 26
U.S.C. §§4461–4462, imposes a uniform
charge on shipments of commercial cargo
through the Nation’s ports. The charge is
currently set at 0.125 percent of the
cargo’s value. Exporters, importers, and
domestic shippers are liable for the HMT,
§4461(c)(1), which is imposed at the time
of loading for exports and unloading for
other shipments, §4461(c)(2). The HMT
is collected by the Customs Service and
deposited in the Harbor Maintenance
Trust Fund (Fund). Congress may appropriate amounts from the Fund to pay for
harbor maintenance and development
projects, including costs associated with
the St. Lawrence Seaway, or related expenses. §9505.
Respondent United States Shoe Corpo-
5
ration (U.S. Shoe) paid the HMT for articles the company exported during the period April to June 1994 and then filed a
protest with the Customs Service alleging
the unconstitutionality of the toll to the
extent it applies to exports. The Customs
Service responded with a form letter stating that the HMT is a statutorily mandated fee assessment on port users, not an
unconstitutional tax on exports. On November 3, 1994, U.S. Shoe brought this
action against the Government in the
Court of International Trade (CIT). The
company sought a refund on the ground
that the HMT is unconstitutional as applied to exports.
Sitting as a three-judge court, the CIT
held that its jurisdiction was properly invoked under 28 U.S.C. §1581(i); on the
merits, the CIT agreed with U.S. Shoe
that the HMT qualifies as a tax. 907 F.
Supp. 408 (1995). Rejecting the Government’s characterization of the HMT as a
user fee rather than a tax, the CIT reasoned: “The Tax is assessed ad valorem
directly upon the value of the cargo itself,
not upon any services rendered for the
cargo. . . . Congress could not have imposed the Tax any closer to exportation,
or more immediate to the articles exported.” Id., at 418. Relying on the Export
Clause, the CIT entered summary judgment for U. S. Shoe.
The Court of Appeals for the Federal
Circuit, sitting as a five-judge panel, affirmed. 114F.3d 1564 (1997). On auxiliary questions, the Federal Circuit upheld
the CIT’s exercise of jurisdiction under
§1581(i) and agreed with the lower court
that the HMT applied to goods in export
transit.1 Concluding that the HMT is not
based on a fair approximation of port use,
the Federal Circuit also agreed that the
HMT imposes a tax, not a user fee. In
making this determination, the Court of
Appeals emphasized that the HMT does
not depend on the amount or manner of
port use, but is determined solely by the
value of cargo. Judge Mayer dissented; in
his view, Congress properly designed the
HMT as a user fee, a toll on shippers that
supplies funds not for the general support
of government, but exclusively for the facilitation of commercial navigation.
1The Government does not here challenge the
determination that the HMT applies to goods in export transit.
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 6
Numerous cases challenging the constitutionality of the HMT as applied to exports are currently pending in the Court of
International Trade and the Court of Federal Claims.2 We granted certiorari, 522
(1997), to review the Federal CirU.S.
cuit’s determination that the HMT violates the Export Clause.
II
As an initial matter, we conclude that
the CIT properly entertained jurisdiction
in this case. The complaint alleged exclusive original jurisdiction in that tribunal
under 28 U.S.C. §1581(a) or, alternatively, §1581(i). App. 26. We agree with
the CIT and the Federal Circuit that
§1581(i) is the applicable jurisdictional
prescription. The key directive is stated in
26 U.S.C. §4462(f)(2), which instructs
that for jurisdictional purposes, the HMT
“shall be treated as if such tax were a customs duty.”
Section 1581(a) surely concerns customs duties. It confers exclusive original
jurisdiction on the Court of International
Trade in “any civil action commenced to
contest the [Customs Service’s] denial of
a protest.” A protest, as indicated in 19
U.S.C. §1514, is an essential prerequisite
when one challenges an actual Customs
decision. As to the HMT, however, the
Federal Circuit correctly noted that protests are not pivotal, for Customs “performs no active role,” it undertakes “no
analysis [or adjudication],” “issues no
directives,” “imposes no liabilities”;
instead, Customs “merely passively
collects” HMT payments. 114 F.3d, at
1569.
Section 1581(i) describes the Court of
International Trade’s residual jurisdiction
over
“any civil action commenced against
the United States . . . that arises out
of any law of the United States providing for —
“(1) revenue from imports or tonnage;
. . . . .
“(4) administration and enforcement
with respect to the matters referred
2According to the Government, some 4,000 cases
raising this claim are currently stayed in the CIT,
with more than 100 additional cases stayed in
the Court of Federal Claims. See Brief for United
States 4.
September 14, 1998
to in paragraphs (l)–(3) of this subsection. . . .”
This dispute, as the Federal Circuit stated,
“involve[s] the ‘administration and enforcement’ of a law providing for revenue
from imports because the HMT statute, although applied to exports here, does apply
equally to imports.” 114F.3d, at 1571.
True, §1581(i) does not use the word “exports.” But that is hardly surprising in
view of the Export Clause, which confines
customs duties to imports. Revenue from
imports and revenue from customs duties
are thus synonymous in this setting. In
short, as the CIT correctly concluded and
the Federal Circuit correctly affirmed,
“Congress [in §4462(f)(2)] directed [that]
the [HMT] be treated as a customs duty
for purposes of jurisdiction. Such duties,
by their very nature, provide for revenue
from imports, and are encompassed
within [§]1581(i)(1).” 907 F. Supp., at
421. Accordingly, CIT jurisdiction over
controversies regarding the administration and enforcement of the HMT accords
with §1581(i)(4).3
III
Two Terms ago, in IBM, this Court
considered the question whether a tax on
insurance premiums paid to protect exports against loss violated the Export
Clause. Distinguishing case law developed under the Commerce Clause, 517
U.S., at 850–852, and the Import-Export
Clause, id., at 857–861, the Court held
that the Export Clause allows no room for
any federal tax, however generally applicable or nondiscriminatory, on goods in
export transit. Before this Court’s decision in IBM, the Government argued that
the HMT, even if characterized as a “tax”
rather than a “user fee,” should survive
constitutional review “because it applies
without discrimination to exports, imports
and domestic commerce alike.” Reply
Brief for United States 9, n. 2. Recogniz3Because we determine that the Court of International Trade has exclusive jurisdiction over challenges to the HMT under §1581(i)(4), it follows that
the Court of Federal Claims lacks jurisdiction over
the challenges to the HMT currently pending there.
See 28 U.S.C. §1491(b). The plaintiffs in these challenges may invoke §1631, which authorizes intercourt transfers, when “in the interest of justice,” to
cure want of jurisdiction. See also §610 (as used in
Title 28, the term “court” includes the Court of Federal Claims and the CIT).
6
ing that IBM “rejected an indistinguishable contention,” the Government now
asserts only that HMT is “ ‘a permissible
user fee,’ ” ibid., a toll within the tolerance of Export Clause precedent. Adhering to the Court’s reasoning in IBM, we
reject the Government’s current position.
The HMT bears the indicia of a tax.
Congress expressly described it as “a tax
on any port use,” 26 U.S.C. §4461(a)
(emphasis added), and codified the HMT
as part of the Internal Revenue Code. In
like vein, Congress provided that, for administrative, enforcement, and jurisdictional purposes, the HMT should be
treated “as if [it] were a customs duty.”
§§4462(f)(1), (2). However, “we must regard things rather than names,” Pace v.
Burgess, 92 U.S., at 376, in determining
whether an imposition on exports ranks as
a tax. The crucial question is whether the
HMT is a tax on exports in operation as
well as nomenclature or whether, despite
the label Congress has put on it, the exaction is instead a bona fide user fee.
In arguing that the HMT constitutes a
user fee, the Government relies on our decisions in United States v. Sperry Corp.,
493 U.S. 52 (1989), Massachusetts v.
United States, 435 U.S. 444 (1978), and
Evansville-Vanderburgh Airport Authority Dist. v. Delta Airlines, Inc., 405 U.S.
707 (1972). In those cases, this Court upheld flat and ad valorem charges as valid
user fees. See United States v. Sperry
Corp., 493 U.S., at 62 (11⁄2 percent ad valorem fee applied to awards certified by
the Iran-United States Claims Tribunal
qualifies as a user fee and is not so excessive as to violate the Takings Clause);
Massachusetts v. United States, 435 U.S.,
at 463–467 (flat federal registration fee
imposed annually on all civil aircraft
meets genuine user fee standards and, as
applied to state-owned aircraft, does not
dishonor State’s immunity from federal
taxation); Evansville-Vanderburgh Airport Authority, 405 U.S., at 717–721 (flat
charge for each passenger enplaning,
levied for the maintenance of State’s airport facilities, does not run afoul of the
dormant Commerce Clause). Those decisions involved constitutional provisions
other than the Export Clause, however,
and thus do not govern here.
IBM plainly stated that the Export
Clause’s simple, direct, unqualified prohibition on any taxes or duties distinguishes
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 7
it from other constitutional limitations on
governmental taxing authority. The Court
there emphasized that the “text of the
Export Clause . . . expressly prohibits
Congress from laying any tax or duty on
exports.” 517 U.S., at 852; see also id.,
at 861 (“[T]he Framers sought to alleviate
. . . concerns [that Northern States would
tax exports to the disadvantage of Southern States] by completely denying to Congress the power to tax exports at all.”).
Accordingly, the Court reasoned in IBM,
“[o]ur decades-long struggle over the
meaning of the nontextual negative command of the dormant Commerce Clause
does not lead to the conclusion that our
interpretation of the textual command of
the Export Clause is equally fluid.” Id., at
851; see also id., at 857 (“We have good
reason to hesitate before adopting the
analysis of our recent Import-Export
Clause cases into our Export Clause jurisprudence. . . . [M]eaningful textual
differences exist [between the two
Clauses] and should not be overlooked.”).
In Sperry, moreover, we noted that the
Takings Clause imposes fewer constraints
on user fees than does the dormant Commerce Clause. See 493 U.S., at 61, n. 7
(analysis under Takings Clause is less
“exacting” than under the dormant Commerce Clause). A fortiori, therefore, the
Takings Clause is less restrictive than the
Export Clause.
1998–37 I.R.B.
The guiding precedent for determining
what constitutes a bona fide user fee in
the Export Clause context remains our
time-tested decision in Pace. Pace involved a federal excise tax on tobacco.
Congress provided that the tax would not
apply to tobacco intended for export. To
prevent fraud, however, Congress required that tobacco the manufacturer
planned to export carry a stamp indicating
that intention. Each stamp cost 25 cents
(later 10 cents) per package of tobacco.
Congress did not limit the quantity or
value of the tobacco packaged for export
or the size of the stamped package;
“[t]hese were unlimited, except by the description of the exporter or the convenience of handling.” 92 U.S., at 375.
The Court upheld the charge, concluding that it was “in no sense a duty on exportation,” but rather “compensation
given for services [in fact] rendered.”
Ibid. In so ruling, the Court emphasized
two characteristics of the charge: It “bore
no proportion whatever to the quantity or
value of the package on which [the stamp]
was affixed”; and the fee was not excessive, taking into account the cost of
arrangements needed both “to give to the
exporter the benefit of exemption from
taxation, and . . . to secure . . . against the
perpetration of fraud.” Ibid.
Pace establishes that, under the Export
Clause, the connection between a service
7
the Government renders and the compensation it receives for that service must be
closer than is present here. Unlike the
stamp charge in Pace, the HMT is determined entirely on an ad valorem basis.
The value of export cargo, however, does
not correlate reliably with the federal harbor services used or usable by the exporter. As the Federal Circuit noted, the
extent and manner of port use depend on
factors such as the size and tonnage of a
vessel, the length of time it spends in port,
and the services it requires, for instance,
harbor dredging. See 114 F. 3d, at 1572.
In sum, if we are “to guard against . . .
the imposition of a [tax] under the pretext
of fixing a fee,” Pace v. Burgess, 92 U.S.,
at 376, and resist erosion of the Court’s
decision in IBM, we must hold that the
HMT violates the Export Clause as applied to exports. This does not mean that
exporters are exempt from any and all
user fees designed to defray the cost of
harbor development and maintenance. It
does mean, however, that such a fee must
fairly match the exporters’ use of port services and facilities.
* * *
For the foregoing reasons, the judgment of the Court of Appeals for the Federal Circuit is
Affirmed.
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 8
Part III. Administrative, Procedural, and Miscellaneous
Designated Private Delivery
Services
Notice 98–47
This notice updates the list of private
delivery services (“PDSs”) designated
under Notice 97–26, 1997–1 C.B. 413,
and Notice 97–50, 1997–37 I.R.B. 21
(“designated PDSs”) for purposes of the
“timely mailing as timely filing/paying”
rule of § 7502 of the Internal Revenue
Code, effective September 1, 1998.
Section 7502(f) authorizes the Secretary to designate certain PDSs for the
“timely mailing as timely filing/paying”
rule of § 7502. Rev. Proc. 97–19, 1997–1
C.B. 644, provides the criteria currently
applicable for designation of a PDS. Notice 97–50, modifying Notice 97–26 and
Rev. Proc. 97–19, provides that each year
there will be only one application period,
which will end on June 30th. Notice
97–50 also provides that the Service will
issue a notice providing a new list of designated PDSs on or before September 1st
of each year for which Rev. Proc. 97–19
is in effect.
Effective September 1, 1998, the list of
designated PDSs is as follows:
1. Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, and Second Day
Service;
2. DHL Worldwide Express (DHL):
DHL “Same Day” Service and DHL
USA Overnight;
3. Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, and FedEx 2 Day; and
4. United Parcel Service (UPS): UPS
Next Day Air, UPS Next Day Air
Saver, UPS 2nd Day Air, and UPS
2nd Day Air A.M.
This list remains unchanged from the
lists published in Notice 97–26 and Notice 97–50. Airborne, DHL, FedEx, and
UPS are not designated with respect to
any type of delivery service not identified
above. Notice 97–26 also provides special
rules used to determine the date that will
be treated as the postmark date for purposes of § 7502.
EFFECT ON OTHER DOCUMENTS
Notice 97–50 is modified by updating
the list of designated PDSs.
September 14, 1998
EFFECTIVE DATE
This notice is effective on September 1,
1998.
FOR FURTHER INFORMATION
The principal author of this notice is
Renay France of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Ms. France at
(202) 622-6232 (not a toll-free call).
Section 198: Expensing of environmental
remediation costs.
Rev. Proc. 98–47
SECTION 1. PURPOSE
This revenue procedure provides procedures for taxpayers to make the election
under § 198 of the Code (“§ 198 election”) to deduct any qualified environmental remediation expenditure (“QER
expenditure”).
SECTION 2. BACKGROUND
.01 Section 198(a), as added by
§ 941(a) of the Taxpayer Relief Act of
1997, Pub. L. No. 105–34, 111 Stat. 788
(Aug. 5, 1997), provides that a taxpayer
may elect to treat any QER expenditure as
an expense that is not chargeable to the
capital account, but is deductible for the
taxable year in which it is paid or incurred.
.02 Section 198(b)(1) generally defines
a “qualified environmental remediation
expenditure” as any expenditure that is
otherwise chargeable to the capital account, and that is paid or incurred in connection with the abatement or control of
hazardous substances as a qualified contaminated site. However, under § 198(b)(2)
a QER expenditure does not include any
expenditure for property subject to an allowance for depreciation, except that the
portion of the allowance for depreciation
of such property that is otherwise allocated to a qualified contaminated site is
treated as a QER expenditure.
.03 Section 198(c)(1)(A) defines a
“qualified contaminated site” as any area:
(i) that is held by the taxpayer for use
in a trade or business or for the production
8
of income, or that is property described in
§ 1221(1) in the hands of the taxpayer;
(ii) that is within a targeted area (as
defined in § 198(c)(2)); and
(iii) at or on which there has been a
release (or threat of release) or disposal of
any hazardous substance.
Section 198(c)(1)(B) provides that an area
is treated as a qualified contaminated site
with respect to expenditures paid or incurred during any taxable year only if the
taxpayer receives a statement from an appropriate agency of the state (as defined
by § 198(c)(1)(C)) in which the area is located, verifying that the area meets the requirements of § 198(c)(1)(A)(ii) and (iii)
(described above).
.04 Section 198(d)(1) generally defines
“hazardous substance” as any substance
that is a hazardous substance as defined in
§ 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and any
substance that is designated as a hazardous
substance under § 102 of CERCLA.
.05 Section 198 is effective for expenditures paid or incurred after August 5,
1997, and on or before December 31,
2000. See § 198(h).
SECTION 3. PROCEDURE
.01 Time for Making the Election.
Except as provided in section
3.02(3) of this revenue procedure, a § 198
election must be made on or before the
due date (including extensions) for filing
the income tax return for the taxable year
in which the QER expenditures are paid
or incurred.
.02 Manner of Making the Election.
(1) Individuals. Individuals must include the total amount of § 198 expenses
on the line for “Other Expenses” on
Schedule C, E, or F (as appropriate) for
Form 1040, U.S. Individual Income Tax
Return. Wherever the schedule requires
that the taxpayer separately identify each
expense included in “Other Expenses,”
the taxpayer must write “Section 198
Election” on the line on which the § 198
expense amounts separately appear.
(2) All other entities. Persons other
than individuals (including S corporations, partnerships, and trusts) must include the total amount of § 198 expenses
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 9
on the line for “Other Deductions” (or the
equivalent thereof) on their appropriate
federal income tax return. On a schedule
attached to the return that separately identifies each expense included in “Other
Deductions” (or the equivalent thereof),
the taxpayer must write “Section 198
Election” on the line on which the § 198
expense amounts separately appear.
(3) Transition rule. Taxpayers that
claim a deduction for QER expenditures,
paid or incurred after August 5, 1997, on a
return filed on or before October 14,
1998, will be deemed to have made a §
198 election with respect to those expenditures, even if no reference to § 198 is
contained on the return. If a taxpayer did
not claim a deduction for such QER expenditures on such return, the taxpayer
may make the § 198 election for those expenditures for the taxable year covered by
the return only by filing an amended return (within the applicable period of limitations) that complies with section 3.02(1)
and (2) of this revenue procedure.
.03 Scope of Election.
If, for any taxable year, the taxpayer
pays or incurs more than one QER expenditure, the taxpayer may make a § 198
election for any one or more of such expenditures for that year. Thus, the taxpayer may make a § 198 election with respect to a QER expenditure even though
the taxpayer chooses to capitalize other
such expenditures (whether or not they
are of the same type or paid or incurred
with respect to the same qualified contaminated site). A § 198 election for one
year has no effect for other years. Thus, a
taxpayer must make a § 198 election for
each year in which the taxpayer intends to
deduct QER expenditures.
.04 Revocation.
A § 198 election is revocable only
with the prior written consent of the Commissioner. To obtain the Commissioner’s
consent, a taxpayer must submit a request
for a private letter ruling in accordance
with the provisions of Rev. Proc. 98–1,
1998–1 I.R.B. 7 (or its successor). The
taxpayer may submit a request for revocation for any taxable year for which the period of limitations for filing a claim for
credit or refund of overpayment of tax has
not expired.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for
1998–37 I.R.B.
QER expenditures paid or incurred after
August 5, 1997.
DRAFTING INFORMATION
The principal author of this revenue
procedure is J. Peter Baumgarten of the
office of Assistant Chief Counsel (Income
Tax and Accounting). For further information regarding this revenue procedure,
contact Mr. Baumgarten on (202) 6224950 (not a toll-free call).
26 CFR 601.602: Forms and instructions.
(Also Part I, sections 446, 471, 472, 1.446–1,
1.471–8, 1.472–1.)
Rev. Proc. 98–49
SECTION 1. PURPOSE
This revenue procedure provides guidance to taxpayers that use the dollar-value
last-in, first-out (LIFO) inventory method
and the inventory price index computation (IPIC) method regarding the computation of a percent change for the first taxable year in which such percent change is
computed with reference to a revised CPI
Detailed Report (CPI) or a PPI Detailed
Report (PPI) for any index category affected by such revisions. A revised CPI
or PPI is one that contains new index categories, eliminates some previously reported index categories, resets the base
year of some index categories, or does not
report the relative weights of some index
categories. Generally, under this revenue
procedure, any reasonable method of
computing a percent change for a selected
index category affected by revisions to
the CPI or PPI will be accepted by the Internal Revenue Service. This revenue
procedure also provides a specific safe
harbor method that will be considered a
reasonable method for these purposes.
SECTION 2. BACKGROUND
.01 Section 472(a) of the Internal Revenue Code authorizes a taxpayer to use
the LIFO inventory method in accordance
with regulations prescribed by the
Secretary.
.02 Section 1.472–8(a) of the Income
Tax Regulations provides that a taxpayer
may elect to determine the cost of its
LIFO inventories under the dollar-value
LIFO method, provided that method is
used consistently and clearly reflects the
taxpayer’s income.
9
.03 Section 1.472–8(e)(1) authorizes
three methods for computing the LIFO
value of a dollar-value inventory pool: (1)
the double-extension method, (2) an
index method, and (3) the link-chain
method.
.04 Section 1.472–8(e)(3)(i) authorizes
the use of the IPIC method to compute the
LIFO value of a dollar-value inventory
pool. An inventory price index computed
in the manner provided in § 1.472–8(e)(3)
will be accepted by the Commissioner as
an appropriate method of computing an
index, and the use of such index will
be accepted as accurate, reliable, and
suitable.
.05 Section 1.472–8(e)(3)(ii) provides
that an inventory price index computed
under the IPIC method must be a stated
percentage of the percent change in the
selected consumer or producer price
index or indexes. The stated percentage
for a taxpayer in a taxable year in which it
is an eligible small business is 100 percent of the percent change in the selected
price indexes. The stated percentage for
all other taxpayers is 80 percent of the
percent change in the selected price indexes. If it is necessary to select more
than one specific consumer or producer
price index for an inventory pool, the
stated percentage of the percent change is
the stated percentage of the weighted average percent change for such indexes.
Such weighed average is computed by
reference to the relative amounts of current-year costs in the inventory pool for
each index category of goods.
.06 Section 1.472–8(e)(3)(iii) describes
the process for selecting consumer and
producer price indexes under the IPIC
method. Inventory items in each of the
taxpayer’s pools are classified according
to the detailed listings in the appropriate
tables of the CPI or PPI (formerly known
as Producer Prices and Price Indexes)
and assigned to various index categories.
§ 1.472–8(e)(3)(iii)(B). Indexes and
weights published by the United States
Bureau of Labor Statistics (BLS) are used
to compute the percent change for each
index category to which inventory items
have been assigned. Id. In many cases,
the selected index for an index category
must be converted into a cost price index
prior to the computation of the percent
change for the index category. § 1.472–
8(e)(3)(iii)(C). In the case of a taxpayer
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 10
using the retail inventory method, the
index selected must be the index as of the
last month of the taxpayer’s taxable year.
Id. Taxpayers that do not use the retail
method must select indexes as of the
month or months most appropriate to the
taxpayer’s method of determining the current-year cost of the inventory pool under
§ 1.472–8(e)(2)(ii), or make a one-time
binding election of an appropriate representative month during the taxable year.
Id.
.07 The BLS frequently makes changes
to the categories included in the CPI or
PPI. For example, the BLS revised the
categories of goods listed in the January
1998 CPI by introducing some new categories as of January 1998 and eliminating
or resetting some existing categories as of
December 1997. Consequently, January
1999 will be the first month for which it is
possible to compute a percent change for
a 12-month period with reference to the
BLS published indexes for any affected
index category (as described in section 3
of this revenue procedure). Moreover, the
BLS did not publish weights for some
index categories.
SECTION 3. SCOPE
This revenue procedure applies to a
taxpayer that uses the dollar-value LIFO
inventory and IPIC methods pursuant to
§ 1.472–8(e)(3) for any taxable year in
which a percent change for an index category for the 12-month period ending with
the appropriate index month, as defined in
§ 1.472–8(e)(iii)(C) (“index month”), (or,
in the case of a short taxable year, the applicable period) cannot be computed by
the taxpayer in strict conformity with
§ 1.472–8(e)(3)(ii) or (iii) because of revisions to the CPI or PPI as described in
section 2.07 of this revenue procedure
(“affected index category”).
SECTION 4. APPLICATION
A taxpayer described in section 3 of
this revenue procedure may use any reasonable method of computing a percent
change for each affected index category,
provided such method is used consistently
for all affected index categories within a
particular taxable year. The procedure for
computing a percent change for an affected index category set forth in section 5
of this revenue procedure is deemed to be
a reasonable method for these purposes.
September 14, 1998
SECTION 5. PROCEDURE
.01 When a revised CPI or PPI includes
new index categories or eliminates or resets old index categories, a taxpayer may
compute a total percent change for each
affected index category represented in
the taxpayer’s ending inventory in accordance with the procedure provided in this
section 5.01. This total percent change
will be a combination of the percent
change for the second portion of the taxable year based on the revised index category and the corresponding percent
change for the first portion of the taxable
year based on the old index category.
(1) A taxpayer must first compute the
percent change for each affected index
category set forth in the revised CPI or
PPI for the period between the first month
covered by the revised CPI or PPI and the
index month (“the second portion”) as
follows:
(a) Using the appropriate table of
the revised CPI or PPI for the index
month, all specific inventory items must
be placed in the most detailed index category that includes that specific inventory
item (without regard to the index selection requirements in § 1.472–8(e)(3)(iii)(B)).
(b) The percent change of each revised CPI or PPI index category for the
second portion is determined using the
following formula:
[(A-B) / B) * 100]
where:
A = Cumulative index for index month
(adjusted, as necessary, to reflect a
cost or retail price index)
B = Cumulative index for last month of
old CPI or PPI as published for the
first month of revised CPI or PPI
(adjusted, as necessary, to reflect a
cost or retail price index).
(2) A taxpayer must then compute a
percent change for each affected index
category set forth in the old CPI or PPI for
the period between the preceding year’s
index month and the last month covered
by the old CPI or PPI (“the first portion”)
as follows:
(a) Using the appropriate table of
the old CPI or PPI for the preceding
year’s index month, all specific inventory
items must be placed in the most detailed
index category that includes that specific
10
inventory item (without regard to the
index selection requirements of § 1.472–
8(e)(3)(iii)(B)).
(b) The percent change of each old
CPI or PPI index category for the first
portion is determined using the following
formula:
[(C–D) / D) * 100]
where:
C = Cumulative index for last month of
old CPI or PPI as published for the
last month of old CPI or PPI (adjusted, as necessary, to reflect a
cost or retail price index)
D = Cumulative index for preceding
year’s index month (adjusted, as
necessary, to reflect a cost or retail
price index).
(3) The taxpayer will then determine
the total percent change for each index
category set forth in the revised CPI or
PPI represented in the ending inventory
by combining the percent change for the
second portion with the corresponding
percent change for the first portion using
the following formula:
({[(X + 100) * (Y + 100)] / 100} – 100)
where:
X = Percent change for the second portion
Y = Percent change for the first portion.
For purposes of computing the total percent change for each revised CPI or PPI
index category, the corresponding percent
change for the first portion is the percent
change for the old CPI or PPI index category that includes the specific inventory
item(s) included in the revised CPI or PPI
index category. If specific inventory
items included in a single revised CPI or
PPI index category were separately included in different old CPI or PPI index
categories, the corresponding percent
change for the first portion is the
weighted average percent change of such
old CPI or PPI percent changes. The
costs to be used in computing such
weighted average must be the relative
current-year costs in ending inventory.
.02 When § 1.472–8(e)(3)(iii)(B)(5) requires a taxpayer to compute a percent
change for a selected index category
using the BLS weights and the CPI or PPI
does not report the relative weights for
one or more of the taxpayer’s detailed
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 11
index categories within a selected index
category, the taxpayer may weight the detailed index categories actually present in
its ending inventory within such selected
index category using the taxpayer’s actual
inventory weights.
SECTION 6. EXAMPLE
.01 The following example illustrates
the index selection and computation procedure described in section 5 of this revenue procedure. X, a retailer, uses the retail inventory method along with the
dollar-value LIFO and IPIC inventory
methods and files its returns on the basis
of a taxable year ending on January 31.
Under § 1.472–8(e)(3)(iii)(C), X is required to select indexes from the CPI as
of January, the last month of X’s taxable
year. X has five items in its only dollarvalue LIFO pool on January 31, 1998—
tomatoes, bananas, lemons, oranges, and
peaches. The retail selling prices of the
goods were tomatoes, $1,000; bananas,
$80; lemons, $50; oranges, $50; and
peaches, $20.
.02 Pursuant to § 1.472–8(e)(3)(iii)(B),
X assigns the items to the most detailed
listings in the January 1998 CPI as follows: tomatoes are assigned to “Toma-
Items
1998
Category
bananas
lemons
oranges
peaches
Bananas
Citrus f
Oranges
Other ff
1997
Category
bananas
lemons
oranges
peaches
Bananas
Other ff
Oranges
Other ff
=
=
=
=
[(154.7 – 151.5) / 151.5)]
[(105.6 – 100.0) / 100.0)]
[(201.3 – 189.3) / 189.3)]
[( 96.6 – 100.0) / 100.0)]
% Change
*
*
*
*
100
100
100
100
lows: bananas are assigned to “Bananas;”
lemons are assigned to “Other fresh
fruits;” oranges are assigned to “Oranges,
including tangerines;” and peaches are as-
=
=
=
=
=
=
=
=
[(151.5 – 161.9) / 161.9)]
[(294.9 – 290.2) / 290.2)]
[(189.3 – 187.4) / 187.4)]
[(294.9 – 290.2) / 290.2)]
% Change
*
*
*
*
100
100
100
100
percent change for each 1998 CPI detailed index category by combining the
11
2.1122
5.6000
6.3391
–3.4000
signed to “Other fresh fruits.” Pursuant to
section 5.01(2)(b) of this revenue procedure, X computes the percent changes for
the first portion as follows:
Computation
.06 Pursuant to section 5.01(3) of this
revenue procedure, X computes the total
1998–37 I.R.B.
cent change for the “Fresh fruits” index
category using the BLS indexes and
weights published for the detailed index
categories actually present in its inventory. Id. However, the BLS did not publish a cumulative index for “Citrus fruits”
in the January 1997 CPI or weights for
“Oranges, including tangerines” in the
January 1998 CPI. Moreover, the BLS
reset the base year for “Other fresh fruits”
in the January 1998 CPI. Since X cannot
compute a total percent change for “Fresh
fruits” in strict conformity with §§ 1.4728(e)(3)(ii) and (iii), X chooses to compute
such total percent change using the
method described in section 5 of this revenue procedure.
.04 Pursuant to section 5.01(1)(a) of
this revenue procedure, X assigns the inventory items within the affected “Fresh
fruits” category to the most detailed index
categories in the 1998 CPI as follows: bananas are assigned to “Bananas;” lemons
are assigned to “Citrus fruits;” oranges
are assigned to “Oranges, including tangerines;” and peaches are assigned to
“Other fresh fruits.” Pursuant to section
5.01(1)(b) of this revenue procedure, X
computes the percent changes for the second portion as follows:
Computation
.05 Pursuant to section 5.01(2)(a) of
this revenue procedure, X assigns the
items to the most detailed index categories in the January 1997 CPI as fol-
Items
toes;” bananas are assigned to “Bananas;”
lemons are assigned to “Citrus fruits;” oranges are assigned to “Oranges, including
tangerines;” and peaches are assigned to
“Other fresh fruits.”
.03 X selects the index for “Tomatoes”
because tomatoes represent more than
10% of its total inventory value.
§§ 1.472–8(e)(3)(iii)(B)(1) and (4). X can
compute a total percent change for
“Tomatoes” in accordance with §§ 1.472–
8(e)(3)(ii) and (iii) using the information
contained in the CPI for January 1997 and
January 1998. Thus, the “Tomatoes”
index category is not an affected index
category, and X must compute the total
percent change for that index category in
accordance with §§ 1.472–8(e)(3)(ii) and
(iii). Because no remaining detailed
index category contains 10% or more of
X’s total inventory value, X must investigate successively less detailed index category levels. § 1.472–8(e)(3)(iii)(B)(2). X
discovers that the remainder of its inventory fits within the “Fresh fruits” index
category. X, however, may not use the
published “Fresh fruits” index for the remainder of its goods, because X’s inventory does not include apples. § 1.472–
8(e)(3)(iii)(B)(5). X must compute a per-
=
=
=
=
–6.4237
1.6196
1.0139
1.6196
corresponding percent changes for the
first and second portions as follows:
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 12
1998
Category
Bananas
Citrus f
Oranges
Other ff
Computation
=
=
=
=
{[(102.1122
{[(105.6000
{[(106.3391
{[( 96.6000
Because the BLS published the total percent change for “Bananas” and “Oranges,
including tangerines” in the January 1998
CPI, it was not necessary for X to com-
Bananas
Citrus fruits
Oranges
Other fresh fruits
Detailed
Category
Cost
=
=
=
=
SECTION 7. METHOD OF
ACCOUNTING
The selection of a new consumer or
producer price index for a specific inventory item to compute an inventory price
index as a result of revisions to the CPI or
PPI as described in section 2.07 of this
revenue procedure will not be treated as a
September 14, 1998
$80
$50
$50
$20
Selected
Category
Cost
/
/
/
/
$200
$200
$200
$200
Weight
=
=
=
=
=
=
=
=
enue procedure, X computes the weights
for each 1998 CPI detailed index category
as follows:
=
=
=
=
0.40
0.25
0.25
0.10
index category as follows:
Weighted
% Change
% Change
⫻
⫻
⫻
⫻
0.40
0.25
0.25
0.10
–4.4472
7.3103
7.4173
–1.8355
change in method of accounting. Any
other change in the selection of a consumer or producer price index for a specific inventory item is a change in method
of accounting for which the taxpayer must
secure the consent of the Commissioner
as provided in § 446(e). See § 1.472–
8(e)(3)(iii)(B).
12
–4.4472
7.3103
7.4173
–1.8355
Weight
and adds them together to determine the
total percent change for the “Fresh fruits”
1998
Detailed Category
Bananas
Citrus fruits
Oranges
Other fresh fruits
Total Percent Change
93.5763) / 100] – 100}
101.6196) / 100] – 100}
101.0139) / 100] – 100}
101.6196) / 100] – 100}
pute a total percent change for those detailed index categories pursuant to section
5.01 of this revenue procedure.
.07 Pursuant to section 5.02 of this rev-
1998
Detailed Category
Then, X weights the percent change for
each 1998 CPI detailed index category
*
*
*
*
% Change
=
=
=
=
–1.7789
1.8276
1.8543
–0.1836
+1.7194
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jeffery G. Mitchell of the Office of Assistant Chief Counsel (Income
Tax and Accounting). For further information regarding this revenue procedure,
contact Mr. Mitchell on (202) 622-4970
(not a toll free call).
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 13
Rev. Proc. 98–52
26 CFR 601.602: Tax forms and instructions.
TABLE OF CONTENTS
PART A. GENERAL
SECTION 1.
SECTION 2.
SECTION 3.
SECTION 4.
SECTION 5.
SECTION 6.
SECTION 7.
SECTION 8.
SECTION 9.
SECTION 10.
SECTION 11.
SECTION 12.
SECTION 13.
SECTION 14.
SECTION 15.
PURPOSE
NATURE OF CHANGES
WHERE TO FILE AND HOW TO CONTACT THE IRS MARTINSBURG COMPUTING CENTER
FILING REQUIREMENTS
REQUEST FOR WAIVER FROM FILING INFORMATION RETURNS ON MAGNETIC MEDIA
APPLICATION FOR MAGNETIC/ELECTRONIC REPORTING
TEST FILES
FILING OF FORM 8027 MAGNETICALLY/ELECTRONICALLY
FILING DATES
EXTENSIONS OF TIME TO FILE
PROCESSING OF MAGNETIC/ELECTRONIC RETURNS
PENALTIES
CORRECTED RETURNS, SUBSTITUTE FORMS, AND COMPUTER-GENERATED FORMS
EFFECT ON PAPER RETURNS
DEFINITIONS
PART B. MAGNETIC/ELECTRONIC SPECIFICATIONS
SECTION 1.
SECTION 2.
SECTION 3.
SECTION 4.
SECTION 5.
SECTION 6.
SECTION 7.
SECTION 8.
SECTION 9.
GENERAL
TAPE SPECIFICATIONS
DISKETTE SPECIFICATIONS
TAPE CARTRIDGE SPECIFICATIONS
8MM, 4MM, AND QUARTER INCH CARTRIDGE SPECIFICATIONS
ASYNCHRONOUS (IRP-BBS) ELECTRONIC FILING SPECIFICATIONS
RECORD FORMAT AND LAYOUT
EFFECT ON OTHER DOCUMENTS
EFFECTIVE DATE
PART A. GENERAL
SEC. 1. PURPOSE
.01 Form 8027 is used by large food or beverage establishments when the employer is required to make annual reports to the IRS
on receipts from food or beverage operations and tips reported by employees.
☛ Note: All employees receiving $20.00 or more a month in tips must report 100% of their tips to their employer
.02 The Internal Revenue Service Martinsburg Computing Center (IRS/MCC) has the responsibility of processing Forms 8027
submitted magnetically/electronically. The purpose of this revenue procedure is to provide the specifications for filing Form 8027,
Employer’s Annual Information Return of Tip Income and Allocated Tips, magnetically or electronically. This revenue procedure is
updated when legislative changes occur or reporting procedures are modified. Major changes have been emphasized by italics.
.03 This revenue procedure supersedes the following: Rev. Proc. 92–81 published as Publication 1239 (9–92), Specifications for
Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, on Magnetic Tape and 5 1⁄4 or 3 1⁄2 inch
Magnetic Diskettes.
SEC. 2. NATURE OF CHANGES
.01 Numerous editorial changes have been made to the revenue procedure. Please read the publication carefully and in its entirety
before attempting to prepare your magnetic media for submission. The changes are as follows:
(a) The title of Publication 1239 has changed from “Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, on Magnetic Tape and 5 1⁄4 or 3 1⁄2-Inch Magnetic Diskettes” to “Specifications for Filing
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips Magnetically/Electronically.”
(b) Updated information on IRS/MCC’s mailing addresses, telephone numbers and the Call Site are provided in Part A, Sec. 3.
1998–37 I.R.B.
13
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 14
(c) A note regarding denial of waivers in Part A, Section 5.06 was deleted. While IRS/MCC encourages filers to request
waivers at least 45 days prior to the due date of the return, we will accept waivers postmarked by the due date of the return.
(d) Part A, Section 10, Extensions of Time To File, has been completely revised. Form 8809, Request for Extension of Time To
File Information Returns, should be submitted to request an extension of time to file Form 8027.
.02 Starting with tax year 1997 returns, IRS/MCC will accept Forms 8027 via the following additional options:
(a) Tape cartridge specifications are in Part B, Sec. 4.
(b) 8mm, 4mm, quarter inch cartridges specifications are in Part B, Sec. 5.
(c) Asynchronous electronic filing specifications through the Information Reporting Program-Bulletin Board (IRP-BBS) are in
Part B, Sec. 6.
.03 Form 5064 media label has been obsoleted. Filers can now prepare their own self-sticking label. Notice 210 details what information should be included on the label.
.04 A page of cut out labels has been included for filers to use in mailing their media to MCC. A label should be affixed to the
outside of the package to help expedite handling.
.05 Part B, Section 7 is now titled Record Format and Layout. A record layout now follows the record format specifications.
SEC. 3. WHERE TO FILE AND HOW TO CONTACT THE IRS MARTINSBURG COMPUTING CENTER
.01 All Forms 8027 filed magnetically or electronically are processed at IRS/MCC and are to be sent to the following addresses:
✉
If by Postal Service:
IRS-Martinsburg Computing Center
Information Reporting Program
P. O. Box 1359
Martinsburg, WV 25402-1359
✈
or
If by truck or air freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Route 9 and Needy Road
Martinsburg, WV 25401
☛ Note: The ZIP Code has changed from 25401-1359 to 25402-1359 for the IRS P.O. Box address for Martinsburg, WV.
.02 Publication 1239 and other IRS publications concerning magnetic/electronic filing of information returns are available
through the IRP-BBS as “downloadable” files. Using IRP-BBS as a means of obtaining publications will provide faster access to
this information. Additionally, publications will be available from IRP-BBS much earlier than the printed version. The IRP-BBS is
operational 24 hours a day, 7 days a week. The telephone number is (304)264-7070.
.03 Requests for paper forms and publications should be requested by calling the “Forms Only Number” listed in your local telephone directory or by calling the IRS toll-free number 1-800-TAX- FORM (1-800-829-3676).
.04 Questions pertaining to magnetic media filing of Forms W-2 must be directed to the Social Security Administration (SSA).
Filers can call 1-800-SSA-1213 to obtain the phone number of the SSA Magnetic Media Coordinator for their area.
.05 A taxpayer or authorized representative may request a copy of a tax return or a Form W-2 filed with a return by submitting
Form 4506, Request for Copy or Transcript of Tax Form, to IRS. This form may be obtained by calling 1-800-TAX-FORM (1-800829-3676).
.06 The IRS/MCC Call Site, located in Martinsburg, WV, provides service to the payer/employer community (financial institutions, employers, and other transmitters of information returns). The IRS/MCC Call Site answers questions concerning tax law and
magnetic/electronic filing of Forms 8027 and other information returns (Forms 1096, 1098, 1099, 5498, W-2G, W-3, 1042-S), questionable Forms W-4, inquiries dealing with backup withholding due to missing and incorrect taxpayer identification numbers and
questions concerning paper filing of Forms W-2. Recipients of information returns (payees) should continue to contact 1-800-8291040 or other numbers specified in the tax return instructions with any questions on how to report tax returns.
The Call Site accepts calls from all areas of the country. The number to call is 304-263-8700 or Telecommunications Device for
the Deaf (TDD) 304-267-3367. These are toll calls. Hours of operation for the Call Site are Monday through Friday, 8:30 a.m. to
4:30 p.m. Eastern Time. The Call Site is in operation throughout the year to handle the questions of payers, transmitters, and employers. Due to the high demand for assistance at the end of January and February, it is advisable to call as soon as possible to
avoid these peak filing seasons.
.07 The telephone numbers for magnetic media inquiries or electronic submissions are:
☎
304-263-8700 – Call Site
304-264-7070 – IRP-BBS (Information Reporting ProgramBulletin Board System)
304-267-3367 – TDD (Telecommunication Device for the Deaf)
304-264-5602 – Fax Machine
(These are not toll-free telephone numbers.)
September 14, 1998
14
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 15
TO OBTAIN FORMS & PUBLICATIONS, CALL:
1-800-TAX-FORM(1-800-829-3676)
SEC. 4. FILING REQUIREMENTS
.01 Section 6011(e)(2)(A) of the Internal Revenue Code requires that any person, including corporations, partnerships, individuals, estates, and trusts, required to file 250 or more information returns must file such returns on magnetic media.
.02 The filing requirements apply separately to both original and corrected returns.
.03 Filing electronically through the Information Reporting Program-Bulletin Board System (IRP-BBS) fulfills the magnetic
media filing requirement.
.04 The above requirements do not apply if you establish undue hardship (see Part A, Sec. 5).
SEC. 5. REQUEST FOR WAIVER FROM FILING INFORMATION RETURNS ON MAGNETIC MEDIA
.01 If an employer is required to file on magnetic media but fails to do so (or fails to file electronically, in lieu of magnetic media
filing) and does not have an approved waiver on record, the employer will be subject to a penalty of $50 per return in excess of 250.
.02 If employers are required to file original or corrected returns on magnetic media, but such filing would create a hardship, they
may request a waiver from these filing requirements by submitting Form 8508, Request for Waiver From Filing Information Returns
on Magnetic Media, to IRS/MCC.
.03 Even though an employer may submit as many as 250 corrections on paper, IRS encourages magnetically or electronically
submitted corrections. Once the 250 threshold has been met, filers are required to submit any additional returns magnetically or
electronically. However, if a waiver for an original filing is approved, any corrections for the same type of returns will be covered
under this waiver.
.04 Generally, only the employer may sign the Form 8508. A transmitter may sign if given power of attorney; however, a letter
signed by the employer stating this fact must be attached to the Form 8508.
.05 A transmitter must submit a separate Form 8508 for each employer. Do not submit a list of employers.
.06 All information requested on the Form 8508 must be provided to IRS for the request to be processed.
.07 The waiver, if approved, will provide exemption from magnetic media filing for the current tax year only. Employers may not
apply for a waiver for more than one tax year at a time; application must be made each year a waiver is necessary.
.08 Form 8508 may be photocopied or computer-generated as long as it contains all the information requested on the original
form.
.09 Filers are encouraged to submit Form 8508 to IRS/MCC at least 45 days before the due date of the returns.
.10 File Form 8508 for Forms W–2 with IRS/MCC, not SSA.
.11 Waivers are evaluated on a case-by-case basis and are approved or denied based on criteria set forth under section 6011(e) of
the Internal Revenue Code. The transmitter must allow a minimum of 30 days for IRS/MCC to respond to a waiver request.
.12 If a waiver request is approved, the transmitter should keep the approval letter on file. The transmitter should not send a
copy of the approved waiver to the service center where the paper returns are filed.
.13 An approved waiver from filing information returns on magnetic media does not provide exemption from all filing. The employer must timely file information returns on acceptable paper forms with the appropriate service center.
SEC. 6. APPLICATION FOR MAGNETIC/ELECTRONIC REPORTING
.01 For the purposes of this revenue procedure, the EMPLOYER is the organization supplying the information and the TRANSMITTER is the organization preparing the magnetic/electronic file and/or sending the file to IRS/MCC. The employer and the transmitter may be the same entity. Employers or their transmitters are required to complete Form 4419, Application for Filing Information Returns Magnetically/Electronically.
.02 Form 4419 can be submitted at any time during the year; however, it should be submitted to IRS/MCC at least 30 days before
the due date of the return(s). IRS will act on an application and notify the applicant, in writing, of authorization to file. A five-character alpha/numeric Transmitter Control Code (TCC) will be assigned and included in an acknowledgment letter within 15 to 45
days of receipt of the application. Magnetic/electronic returns may not be filed with IRS until the application has been approved and
a TCC assigned. Include your TCC in any correspondence with IRS/MCC.
.03 If you file information returns other than Form 8027 on magnetic media, you must obtain a separate TCC for those types of returns. The TCC assigned for Forms 8027 is to be used for the processing of those forms only.
.04 Upon approval, a magnetic media reporting package containing the current revenue procedure, forms, and instructions will be
sent to the attention of the contact person indicated on Form 4419. Thereafter, IRS/MCC will send the transmitter a package containing the current revenue procedure and forms each year. This package will continue to be sent to the contact person indicated on
the Form 4419 unless IRS/MCC has been notified in writing of any changes or updates. After you have received approval to file on
magnetically/electronically, you do not need to reapply each year; however, notify IRS in writing if:
(a) You change your name or the name of your organization, so that your files may be updated to reflect the proper name;
(b) You discontinue filing on magnetic media for two years (your TCC may have been reassigned).
1998–37 I.R.B.
15
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 16
.05 If you plan to file for multiple employers, IRS encourages transmitters to submit one application and to use one TCC for all
employers.
.06 Only employers or transmitters using equipment compatible with IRS equipment will have their application approved.
.07 If your magnetic media files have been prepared for you in the past by a transmitter, and you now have computer equipment
compatible with that of IRS and wish to prepare your own files, you must request your own five-character alpha/numeric TCC by filing an application, Form 4419, as described in Sec. 6.02.
SEC. 7. TEST FILES
.01 IRS/MCC encourages new filers to submit test files for review in advance of the filing season. Employers or transmitters must
be approved to file magnetically/electronically before a test file is submitted (See Part A, Sec. 6 for application procedures.)
.02 All test files must be submitted between October 1 and December 15 of the year before the returns are due. If you are unable
to submit your test files by December 15, you may send a sample hard copy printout to IRS/MCC between December 16 and January 15. Clearly mark the hardcopy printout as “TEST DATA” and include the name, address, and telephone number of someone familiar with the test printout who may be contacted to discuss its acceptability.
SEC. 8. FILING OF FORM 8027 MAGNETICALLY/ELECTRONICALLY
.01 Form 4804, Transmittal of Information Returns Reported Magnetically/Electronically, must accompany all magnetic media
shipments. If you file for multiple employers and have the authority to sign the affidavit on Form 4804, you should also submit
Form 4802, Transmittal of Information Returns Reported Magnetically/Electronically (Continuation). For electronic transmissions,
the Form 4804 and Form 4802, if applicable, must be sent the same day as the electronic transmission.
.02 The employer MUST sign Form 4804, however, an agent (transmitter, service bureau, paying agent, or disbursing agent) may
sign Form 4804 for the employer. To do this, the agent must have the authority to sign for the employer under an agency agreement
(either oral, written, or implied) that is valid under the state law and must add to his or her signature the caption “For: (name of employer)”.
NOTE: Failure to sign the Form 4804 may delay processing or will result in your file being returned to you unprocessed.
.03 Although a duly authorized agent may sign the Form 4804, the employer is responsible for the accuracy of the Form 4804 and
the returns filed. The employer will be liable for penalties for failure to comply with filing requirements.
.04 Be sure to include Form 4804, 4802 or computer-generated substitutes with your magnetic media shipment. DO NOT MAIL
YOUR MAGNETIC MEDIA AND THE TRANSMITTAL DOCUMENTS SEPARATELY.
.05 Indicate on Form 4804, in the block captioned “Combined Total Payee Records,” the total number of establishments being reported in this shipment. This figure should match the total number of records in your magnetic media file.
.06 DO NOT SUBMIT THE SAME INFORMATION ON PAPER FORMS THAT YOU SUBMIT MAGNETICALLY/
ELECTRONICALLY. This does not mean that corrected documents are not to be filed. If a return has been prepared and submitted improperly, you must file a corrected return as soon as possible. Refer to Part A, Sec. 13 for requirements and instructions for filing corrected returns.
.07 If an allocation of tips is based on a good faith agreement, a copy of this agreement must accompany the submission.
.08 If, under Rev. Proc. 86–21, 1986–1 C.B. 560, the District Director granted the establishment a percentage of gross receipts of
less than 8%, a copy of the determination letter must be sent with the submission. Employers with more than one establishment can
receive approval from one district in each Internal Revenue Service region where the establishments are located (See sec. 31.6053–
3(h)(4) of the Employment Tax Regulations).
.09 Before submitting your magnetic/electronic file, include the following:
(a) A signed Form 4804, Transmittal of Information Returns Reported Magnetically/Electronically, along with a Form 4802,
Transmittal of Information Returns Reported Magnetically/Electronically(Continuation), if you submit data for multiple employers.
These forms must be mailed the same day electronic files are submitted.
(b) Your media (tape, diskette, or cartridge) with an external identifying label. Notice 210 describes the information which
should be included on this self-prepared label.
(c) On the outside of the shipping container, affix the label, IRB Special Projects. This label is included in the publication.
☛ Note: See Part B, Section 6 for electronic submission requirements.
.10 IRS/MCC will not pay or accept “Collect on Delivery” or “Charged to IRS” shipments of reportable tax information that an
individual or organization is legally required to submit.
SEC. 9. FILING DATES
.01 Magnetic media reporting to IRS for Form 8027 must be on a calendar year basis. The due date of either paper or magnetically/electronically reported Forms 8027 is the last day of February.
.02 If the due date falls on a Saturday, Sunday, or legal holiday, filing Form 8027 on the next day that is not a Saturday, Sunday, or
legal holiday will be considered timely.
September 14, 1998
16
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 17
SEC. 10. EXTENSIONS OF TIME TO FILE
.01 An extension of time to file may be requested for Forms 8027, 1099, 1098, 5498, W–2G, W–2, and 1042–S.
.02 Form 8809, Request for Extension of Time To File Information Returns, should be submitted to IRS/MCC. This form may be
used to request an extension of time to file information returns submitted on paper, magnetically or electronically.
.03 Requesting an extension of time for multiple employers may be done by submitting Form 8809 and attaching a list of the employer names and their TINs (EIN or SSN). The listing must be attached to ensure the extension is recorded for all employers.
Form 8809 may be computer-generated or photocopied. Be sure that all the pertinent information is included.
.04 Requests for extensions of time for multiple employers will be responded to with one approval letter, accompanied by a list of
employers covered under that approval.
.05 As soon as it is apparent that an extension of time to file is needed, Form 8809 may be submitted. When granted, the extension will be for 30 days. It will take a minimum of 30 days for IRS/MCC to respond to an extension request. Under certain circumstances, a request for an extension of time could be denied. When a denial letter is received, any additional or necessary information may be resubmitted within 20 days. When requesting an extension of time, do not hold your files waiting for a response.
.06 While very difficult to obtain, if an additional extension of time is needed, a second Form 8809 must be submitted before the
end of the initial extension period. Line 7 on the form should be checked to indicate that an additional extension is being requested.
A second 30-day extension will be approved only in cases of extreme hardship or catastrophic events.
.07 Form 8809 must be postmarked no later than the due date of the return for which an extension is requested. If requesting an extension of time to file several types of forms, use one Form 8809, but the Form 8809 must be postmarked no later than
the earliest due date. For example, if requesting an extension of time to file both Forms 8027 and 5498, submit Form 8809 postmarked on or before the last day of February.
.08 If an extension request is approved, the approval letter should be kept on file. The approval letter or copy of the approval letter for extension of time should not be sent to IRS/MCC with the magnetic/electronic file or to the service center where the paper returns are filed.
.09 Request an extension for only one tax year.
.10 The extension request must be signed by the employer or a person who is duly authorized to sign a return, statement or other
document for the employer.
.11 Failure to properly complete and sign the Form 8809 may cause delays in processing the request or result in a denial. Carefully read and follow the instructions on the back of the Form 8809.
.12 Form 8809 may be obtained by calling 1-800-TAX-FORM (1-800-829-3676).
☛ Note: AN EXTENSION OF TIME TO FILE IS NOT AN EXTENSION TO ISSUE THE FORM W–2 COPY TO THE
EMPLOYEE.
.13 Request an extension of time to furnish the statements to
recipients of Forms W–2 by submitting a letter to IRS/MCC containing the following information:
(a) Employer name
(b) TIN
(c) Address
(d) Type of return (W-2)
(e) Specify that the extension request is to provide W-2 statements to recipients
(f) Reason for delay
(g) Signature of employer or person duly authorized
Requests for an extension of time to furnish the statements for Forms W-2 to recipients are not automatically approved; however,
if approved, generally an extension will allow a maximum of 30 additional days from the due date to furnish the statements to the recipients. The request must be postmarked by the date on which the statements are due to the recipients.
SEC. 11. PROCESSING OF MAGNETIC/ELECTRONIC RETURNS
.01 All data received at IRS/MCC for processing will be given the same protection as individual returns (Form 1040). IRS/MCC
will process your magnetic/electronic files to ensure the records were formatted and coded according to this revenue procedure.
.02 If the data is formatted incorrectly, the file will be returned for replacement accompanied with a Media Tracking Slip (Form
9267). When media is returned, it is because IRS/MCC encountered errors (not limited to format) and was unable to process the
media; therefore, requiring a replacement. Open all packages immediately.
.03 Files must be corrected and returned with the Media Tracking Slip (Form 9267) to IRS/MCC within 45 days from the date of
the letter IRS/MCC included with the returned files. A penalty for failure to file correct information returns by the due date will be
assessed if the files are not corrected and returned within the 45 days or if the incorrect files are returned by IRS/MCC for replacement more than two times. A penalty for intentional disregard of filing requirements will be assessed if a replacement file is
not received.
.04 Files will not be returned to you after successful processing. Therefore, if you want proof that IRS/MCC received your shipment, you may use a carrier that provides proof of delivery.
1998–37 I.R.B.
17
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 18
.05 To distinguish between a correction and a replacement, the following definitions have been provided:
(a) A correction is a record submitted by the employer/transmitter to correct a record that was successfully processed by IRS,
but contained erroneous information.
(b) A replacement is media that IRS has returned because of format errors or data discrepancies encountered during processing.
After necessary changes have been made, the media must be returned to IRS/MCC for processing.
SEC. 12. PENALTIES
.01 The Revenue Reconciliation Act of 1989 changed the penalty provisions for any documents including corrections, which are
filed after the original filing date for the return. The penalty for failure to file correct information returns is “time sensitive,” in that
prompt correction of failures to file, or prompt correction of errors on returns that were filed, can lead to reduced penalties.
— The penalty generally is $50 for each information return that is not filed, or is not filed correctly, by the prescribed filing
date, with a maximum penalty of $250,000 per year ($100,000 for certain small businesses with average annual gross receipts, over
the most recent 3-year period, not in excess of $5,000,000). The penalty generally is reduced to:
— $30 for each failure to comply if the failure is corrected more than 30 days after the return was due, but on or before August
1 of the calendar year in which the return was due, with a maximum penalty of $150,000 per year ($50,000 for certain small businesses with average annual gross receipts, over the most recent 3-year period, not in excess of $5,000,000).
— $15 for each failure to comply if the failure is corrected within 30 days after the date the return was due, with a maximum
penalty of $75,000 per year ($25,000 for certain small businesses with average annual gross receipts, over the most recent 3-year period, not in excess of $5,000,000).
.02 Penalties can be waived if failures were due to reasonable cause and not to willful neglect. In addition, section 6721(c)of the
Code provides a de minimis rule that if:
(a) information returns have been filed but were filed with incomplete or incorrect information, and
(b) the failures are corrected on or before August 1 of the calendar year in which the returns were due, then the penalty for filing incorrect returns (but not the penalty for filing late) will not apply to the greater of 10 returns or one-half of 1 percent of the total
number of information returns you are required to file for the calendar year.
.03 Intentional Disregard of Filing Requirements — If any failure to file a correct information return is due to intentional disregard of the filing and correct information requirements, the penalty is at least $100 per information return with no maximum
penalty.
SEC. 13. CORRECTED RETURNS, SUBSTITUTE FORMS, AND COMPUTER-GENERATED FORMS
.01 If returns must be corrected, approved magnetic/electronic filers must provide such corrections magnetically/electronically if
you have 250 or more. If your information is filed magnetically/electronically, corrected returns are identified by using the “Corrected 8027 Indicator” in field position 370 of the employer record. Form 4804 must accompany the shipment, and the box for correction should be marked in Block 1 of the form. (See Part A, Sec. 11.05 for the definition of corrections.)
.02 If corrections are not submitted on magnetic media, employers must submit them on official Forms 8027. Substitute forms
that have been previously approved by IRS, or computer-generated forms that are exact facsimiles of the official form (except for
minor page size or print style deviations), may be submitted without obtaining IRS approval before using the form.
.03 Employers/establishments may send corrected paper Forms 8027 to IRS at the address shown in Part A, Sec. 14.01. Corrected
paper returns are identified by marking the “AMENDED” check box on Form 8027.
SEC. 14. EFFECT ON PAPER RETURNS
.01 If you are filing more than one paper Form 8027, you must attach a completed Form 8027–T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to the Forms 8027 and send to:
Internal Revenue Service Center
Andover, MA 05501
IRS/MCC processes Forms 8027 submitted magnetically/electronically only. Do not send paper Forms 8027 to IRS/MCC.
.02 If part of a submission is filed magnetically/electronically and the rest of the submission is filed on paper Forms 8027, send
the paper forms to the Andover Service Center. For example, you filed your Forms 8027 magnetically/electronically with
IRS/MCC, and later you found that some of the forms you filed need correcting. Because of the low volume of corrections, you submit the corrections on paper Forms 8027. You must send these corrected Forms 8027 along with Form 8027-T to the Andover Service Center.
September 14, 1998
18
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 19
SEC. 15. DEFINITIONS
ELEMENT
DESCRIPTION
EIN
A nine-digit Employer Identification Number which has been assigned by IRS to the reporting
entity.
Employer
The organization supplying the information.
Establishment
A large food or beverage establishment that provides food or beverage for consumption on the
premises; where tipping is a customary practice; and where there are normally more than 10 employees who work more than 80 hours on a typical business day during the preceding calendar
year.
More than 10
employees
An employer is considered to have more than 10 employees on a typical business day during the
calendar year if half the sum of: the average number of employee hours worked per business day
in the calendar month in which the aggregate gross receipts from food and beverage operations
were greatest, plus the average number of employee hours worked per business day in the calendar month in which the total aggregate gross receipts from food and beverage operations were
the least, equals more than 80 hours.
Employees hours
worked
The average number of employee hours worked per business day during a month is figured by
dividing the total hours worked during the month by all your employees who are employed in a
food or beverage operation by the average number of days in the month that each food or beverage operation at which these employees worked was open for business.
File
For the purpose of this revenue procedure, a file consists of all magnetic/electronic records submitted by an Employer or Transmitter.
Transmitter
Person or organization preparing magnetic/electronic file(s). May be Employer or agent of Employer.
Transmitter Control
Code (TCC)
A five-character alpha/numeric code assigned by IRS to the transmitter prior to actual filing
magnetically/electronically. This number is inserted in the record and must be present. An application (Form 4419) must be filed with IRS to receive this number.
Replacement
A replacement is an information return that IRS/MCC has returned to the transmitter due to errors encountered during processing.
Correction
A correction is an information return submitted by the transmitter to correct an information return that was previously submitted to and processed by IRS/MCC, but contained erroneous information.
PART B. MAGNETIC/ELECTRONIC SPECIFICATIONS
SEC. 1. GENERAL
.01 The magnetic/electronic specifications contained in this part of the revenue procedure define the required format and contents
of the records to be included in the file.
.02 A self prepared media label must be affixed to each piece of media submitted for processing. Notice 210 provides instructions
on how to complete a self-prepared media label.
.03 The record format in Part B, Sec. 7 applies to both magnetic and electronic files.
SEC. 2. TAPE SPECIFICATIONS
.01 In most instances, IRS/MCC can process any compatible tape files. Compatible tape files must meet any one set of the following:
(a) 9-track EBCDIC (Extended Binary Coded Decimal Interchange Code) with
1998–37 I.R.B.
19
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 20
(1) Odd Parity and
(2) A density of 1600 or 6250 BPI
(3) If you use Unisys Series 1100, you must submit an interchange tape.
(b) 9-track ASCII (American Standard Coded Information Interchange) with
(1) Odd Parity and
(2) A density of 1600 or 6250 BPI
Please be consistent in the use of recording codes and density on your files. If files are generated in more than one recording code
and/or density, multiple shipments would be appreciated.
.02 All compatible tape files must have the following characteristics:
(a) Type of Tape – 1⁄2 inch mylar base, oxide coated; computer grade magnetic tape on reels up to 2400 feet (731.52 m) within
the following specifications:
(1) Tape thickness: 1.0 or 1.5 mils
(2) Reel diameter: 10.5 inch (26.67 cm), 8.5 inch (21.59 cm), or 7 inch (17.78 cm).
.03 All records have a fixed record length of 372 positions.
.04 The tape record defined in this revenue procedure may be blocked or unblocked, subject to the following:
(a) All records except the header and trailer labels may be blocked.
(b) If records are blocked, the block can not exceed 32,736 tape positions. The block length must be evenly divisible by 372.
(c) If the use of blocked records would result in a short block, all remaining positions of the block MUST be filled with 9’s. DO
NOT PAD A BLOCK WITH BLANKS. Padding a block with blanks will result in a short record, which will cause math computation errors. Your tape will then be returned for correction.
.05 For the purposes of this revenue procedure the following conventions must be used:
Header label:
(a) Transmitters may use standard headers provided they begin with 1HDR, HDR1, VOL1, or VOL2.
(b) Consists of a maximum of 80 positions.
(c) Header and trailer labels are optional unless more than one reel is being submitted. If more than one reel is being submitted,
header and trailer labels are required. IRS/MCC PREFERS STANDARD OR ANSI LABELED TAPES. IF YOU SUBMIT
AN UNLABELED TAPE, THIS MUST BE INDICATED ON THE EXTERNAL LABEL AND ON THE FORM 4804 OR
COMPUTER-GENERATED SUBSTITUTE.
Trailer label:
(a) Standard trailer labels may be used provided that they begin with 1EOR, 1EOF, EOV1, or EOV2.
(b) Consists of a maximum of 80 positions.
(c) Header and trailer labels are optional unless more than one reel is being submitted. If more than one reel is being submitted, header and trailer labels are required.
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) May follow the header label and precede and/or follow the trailer label.
SEC. 3. DISKETTE SPECIFICATIONS
IRS-MCC will discontinue processing 5 1⁄4 inch diskettes in the future. Filers who use 5 1⁄4 inch diskettes are encouraged to
explore other methods of submitting information returns magnetically/electronically.
.01 To be compatible, a diskette file must meet the following specifications:
(a) 5 1⁄4 or 3 1⁄2 inches in diameter.
(b) Data must be recorded in standard ASCII code.
(c) Records must be fixed length of 372 bytes.
(d) Delimiter character commas (,) must not be used.
(e) Positions 371 and 372 of each record have been reserved for carriage return/line feed (cr/lf) characters.
(f) Filename of ATMTAX must be used. Do not enter any other data in this field. If a file will consist of more than one diskette,
the filename will contain a 3-digit extension. This extension will indicate the sequence of the diskette within the file. For
example, the first diskette will be named ATMTAX.001, the second diskette will be ATMTAX.002, etc.
(g) A file may contain more than one diskette as long as the filename conventions are adhered to.
(h) Diskettes must meet one of the following specifications:
Capacity
1.44 mb
1.44 mb
1.2 mb
720 kb
360 kb
September 14, 1998
Tracks
96tpi
135tpi
96tpi
48tpi
48tpi
Sides/Density
hd
hd
hd
ds/dd
ds/dd
20
Sector Size
512
512
512
512
512
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 21
.02 IRS requires that 5 1⁄4 and 3 1⁄2 inch diskettes be created using MS/DOS. Diskettes created using other operating systems are
not acceptable. We strongly recommend that you submit a test file if this will be your first time filing on diskette.
.03 Deviations from the prescribed format will not be acceptable.
Sec. 4. TAPE CARTRIDGE SPECIFICATIONS
.01 In most instances, IRS/MCC can process tape cartridges that meet the following specifications:
(a) Must be IBM 3480, 3490, 3490E, or AS400 compatible.
(b) Must meet American National Standard Institute (ANSI) standards, and have the following characteristics:
(1) Tape cartridges will be 1⁄2-inch tape contained in plastic cartridges which are approximately 4-inches by 5-inches by 1inch in dimension.
(2) Magnetic tape will be chromium dioxide particle based 1⁄2-inch tape.
(3) Cartridges must be 18-track or 36-track parallel (See Note).
(4) Cartridges will contain 37,871 CPI or 75,742 CPI (characters per inch).
(5) Mode will be full function.
(6) The data may be compressed using EDRC (Memorex) or IDRC (IBM) compression.
(7) Either EBCDIC (Extended Binary Coded Decimal Interchange Code) or ASCII (American Standard Coded Information Interchange) may be used.
.02 The tape cartridge records defined in this revenue procedure may be blocked subject to the following:
(a) A block must not exceed 32,736 tape positions.
(b) If the use of blocked records would result in a short block, all remaining positions of the block must be filled with 9s; however, the last block of the file may be filled with 9s or truncated. Do not pad a block with blanks.
(c) All records, except the header and trailer labels, may be blocked or unblocked. A record may not contain any control fields
or block descriptor fields which describe the length of the block or the logical records within the block. The number of logical
records within a block (the blocking factor) must be constant in every block with the exception of the last block which may be shorter
(see item b above). The block length must be evenly divisible by 372.
(d) Records may not span blocks.
.03 Tape cartridges may be labeled or unlabeled.
.04 For the purposes of this revenue procedure, the following must be used:
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) For even parity, use BCD configuration 001111 (8421).
(c) May follow the header label and precede and/or follow the trailer label.
☛
Note: Filers should indicate on the external media label and transmittal Form 4804 whether the cartridge is 36-track
or 18-track.
SEC. 5. 8MM, 4MM, AND QUARTER INCH CARTRIDGE SPECIFICATIONS
.01 In most instances, IRS/MCC can process 8mm tape cartridges that meet the following specifications:
(a) Must meet American National Standard Institute (ANSI) standards, and have the following characteristics:
(1) Created from an AS400 operating system only.
(2) 8mm (.315-inch) tape cartridges will be 2 1⁄2-inch by 3 3⁄4-inch.
(3) The 8mm tape cartridges must meet the following specifications:
Tracks
1
1
Density
20 (43245 BPI)
21 (45434 BPI)
Capacity
2.5 Gb
5 Gb
(4) Mode will be full function.
(5) Compressed data is not acceptable.
(6) Either EBCDIC (Extended Binary Coded Decimal Interchange Code) or ASCII (American Standard Coded Information Interchange) may be used. However, IRS/MCC encourages the use of EBCDIC. This information must appear on the external
media label affixed to the cartridge.
(7) A file may consist of more than one cartridge, however, no more than 250,000 documents may be transmitted per file or
per cartridge. The filename, for example; ATMTAX, will contain a three digit extension. The extension will indicate the sequence of
the cartridge within the file 1 of 3, 2 of 3, and 3 of 3 and would appear in the header label ATMTAX.001, ATMTAX.002, and ATMTAX.003 on each cartridge of the file.
.02 The 8mm (.315-inch) tape cartridge records defined in this revenue procedure may be blocked subject to the following:
(a) A block must not exceed 32,736 tape positions.
1998–37 I.R.B.
21
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 22
(b) If the use of blocked records would result in a short block, all remaining positions of the block must be filled with 9’s; however, the last block of the file may be filled with 9’s or truncated. Do not pad a block with blanks.
(c) All records, except the header and trailer labels, may be blocked or unblocked. A record may not contain any control fields
or block descriptor fields which describe the length of the block or the logical records within the block. The number of logical
records within a block (the blocking factor) must be constant in every block with the exception of the last block which may be shorter
(see item (b) above). The block length must be evenly divisible by 372.
(d) Records may not span blocks.
(e) No more than 250,000 documents per cartridge and per file.
.03 Various COPY commands have been successful, however, the SAVE OBJECT COMMAND is not acceptable.
.04 For faster processing, IRS/MCC encourages transmitters to use header labeled cartridges. ATMTAX may be used as a suggested filename.
.05 For the purposes of this revenue procedure, the following must be used:
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) For even parity, use BCD configuration 001111 (8421).
(c) May follow the header label and precede and/or follow the trailer label.
.06 IRS/MCC can only read one data file on a tape. A data file is a group of records which may or may not begin with a tapemark, but must end with a trailer label. Any data beyond the trailer label cannot be read by IRS programs.
.07 4mm (.157-inch) cassettes are now acceptable with the following specifications:
(a) 4 mm cassettes will be 2 1⁄4-inch by 3-inch.
(b) The tracks are 1 (one).
(c) The density is 19 (61000 BPI).
(d) The typical capacity is DDS (DAT data storage) at 1.3 Gb or 2 Gb, or DDS–2 at 4Gb.
(e) The general specifications for 8mm cartridges will also apply to the 4 mm cassettes.
.08 Various Quarter Inch Cartridges (QIC)(1⁄4-inch) are also acceptable.
(a) QIC cartridges will be 4” by 6”.
(b) QIC cartridges must meet the following specifications:
Size
QIC–11
QIC–24
QIC–120
QIC–150
QIC–320
QIC–525
QIC–1000
QIC–1350
QIC–2Gb
Tracks
4/5
8/9
15
18
26
26
30
30
42
Density
4 (8000 BPI)
5 (8000 BPI)
15 (10000 BPI)
16 (10000 BPI)
17 (16000 BPI)
17 (16000 BPI)
21 (36000 BPI)
18 (51667 BPI)
34 (40640 BPI)
Capacity
22Mb or 30Mb
45Mb or 60Mb
120Mb or 200Mb
150Mb or 250Mb
320Mb
525Mb
1Gb
1.3Gb
2Gb
(c) The general specifications that apply to 8mm cartridges will also apply to QIC cartridges.
SEC. 6. ASYNCHRONOUS (IRP-BBS) ELECTRONIC FILING SPECIFICATIONS
.01 Asynchronous electronic filing of Forms 8027, originals, corrections, and replacements is offered as an alternative to magnetic media (tape, tape cartridge, or diskette) or paper filing, but is not a requirement. Electronic filing using the Information Reporting Program-Bulletin Board System (IRP-BBS) will fulfill the magnetic media requirements for those employers who are required to file magnetically. It may also be used by employers who are under the filing threshold requirement, but would prefer to file
their information returns this way. If the original file was sent magnetically, but was returned for replacement, the replacement may
be transmitted electronically. Also, if the original file was submitted via magnetic media, any corrections may be transmitted electronically.
.02 The electronic filing of information returns is not affiliated with the Form 1040 electronic filing program. These two programs are totally independent, and filers must obtain separate approval to participate in each of them. All inquiries concerning the
electronic filing of information returns should be directed to IRS/MCC. IRS/MCC personnel cannot answer questions or assist taxpayers in the filing of Form 1040 tax returns. Filers with questions of this nature will be directed to the Customer Service toll-free
number (1-800-829-1040) for assistance.
.03 Filers participating in the electronic filing program for information returns will submit their returns to IRS/MCC electronically and not through magnetic media or paper filing. Files submitted in this manner must be in standard ASCII code.
.04 If a request for extension is approved, transmitters who file electronically will be granted an extension of 30 days to file. Part
A, Sec. 10, explains procedures for requesting extensions of time. Filers are encouraged to file their data as soon as possible.
September 14, 1998
22
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 23
.05 The format of the record is the same for electronically filed records as it is for 5 1⁄4 and 3 1⁄2 inch diskettes, tapes, and tape cartridges; however, it must be in standard ASCII code.
.06 Filers must obtain a Transmitter Control Code (TCC) prior to submitting their files electronically. (Filers who currently have
a TCC for filing Forms 8027 do not have to request a second TCC for electronic filing.) Refer to Part A, Sec. 6, for information on
how to obtain a TCC.
.07 Filers using IRP-BBS assign their own passwords and do not need special approval.
.08 With all passwords, it is the user’s responsibility to remember the password and not allow the password to be compromised.
However, if filers do forget their password, call 304-263-8700 for assistance.
☛ Note: Passwords on the IRP-BBS are case sensitive.
.09 Electronically filed information may be submitted to IRS/MCC 24 hours a day, 7 days a week. Technical assistance will be
available Monday through Friday between 8:30 a.m. and 4:30 p.m. Eastern Time by calling 304-263-8700.
.10 Filers may submit as many documents as they choose electronically. Filers are allowed 240 minutes a day; however, more
time may be requested if needed.
.11 Do not transmit data using IRP-BBS January 1 through January 7. This will allow time for the IRP-BBS to be updated to
reflect current year changes.
.12 Data compression is encouraged when submitting information returns by way of the IRP-BBS. MCC has the ability to decompress files created using several popular software compression programs such as ARC, LHARC, and PKZIP. Software data
compression can be done alone or in conjunction with V.42bis hardware compression.
The time required to transmit information returns electronically will vary depending on the modem speed and the type of data
compression used, if any. The time required to transmit a file can be reduced by as much as 85 percent by using software compression and hardware compression.
The following are actual transmission rates for forms 1099 achieved in test uploads at MCC using compressed files (PKZIP) and
the XMODEM-1K protocol. The actual transmission rates will vary depending on the protocol that is used. (ZMODEM is normally
the fastest protocol and XMODEM and KERMIT are the slower protocols.)
Transmission
Speed in bps
500 Records
2500 Records
10000 Records
9600
40 sec
2 min 50 sec
12 min 21 sec
19200
31 sec
1 min 34 sec
7 min 1 sec
38400
17 sec
36 sec
4 min 7 sec
.13 Files submitted to IRP-BBS must have a unique filename; therefore, the IRP-BBS will build the filename that must be used.
The name will consist of the filer’s TCC, submission type (T = Test, P = Production, C = Correction, and R = Replacement) and a
sequence number. Filers may call the file anything they choose on their end. The sequence number will be incremented every time
the filers send, or attempt to send, a file. Record the upload date, time, and filename. This information will be needed by MCC in
order to identify the file if assistance is required and to complete Form 4804.
.14 The results of the electronic transmission will be posted to the (F)ile Status area of the IRP-BBS; however, no further processing will occur until the signed Form 4804 is received. The transmitter must send or fax the signed Form 4804 the same day the electronic transmission is made. No return is considered filed until a Form 4804 is received by IRS/MCC.
.15 Form 4804 can be ordered by calling the IRS toll-free forms and publication order number 1-800-TAX-FORM, (1-800-8293676), downloaded from the IRP-BBS, or it may be computer-generated. A copy of the form is also available in the back of this publication. If a filer chooses to computer-generate Form 4804, all of the information contained on the original form, including the affidavit, must also be contained on the computer-generated form.
.16 Forms 4804 are to be mailed to the following addresses:
1998–37 I.R.B.
23
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 24
✉
If by Postal Service:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn.: Electronic Filing Coordinator
P. O. Box 1359
Martinsburg, WV 25402-1359
☛ Note: The ZIP Code has changed from 25401-1359 to 25402-1359 for the IRS P.O. Box addresses for Martinsburg, WV.
✈
If by air or truck freight:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn.: Electronic Filing Coordinator
Route 9 and Needy Road
Martinsburg, WV 25401
.17 A signed Form 4804 submitted for electronically filed information returns may be faxed to IRS/MCC at the following number:
304-264-5602. Faxed transmittals will allow IRS/MCC to begin processing the file immediately.
.18 The IRP-BBS is an electronic bulletin board system available to filers of information returns. In addition to filing information
returns electronically, the IRP-BBS provides other capabilities. Some of the advantages of IRP-BBS are as follows:
(1) Notification within two weeks as to the acceptability of the data transmitted.
(2) Immediate access to the latest changes and updates that affect the Information Reporting Program at IRS/MCC (program,
legislative, etc.).
(3) Access to publications such as the Publication 1239 as soon as they are available.
(4) Capability to communicate with IRS/MCC personnel.
(5) Ability to retrieve information and files applicable to the IRP-BBS.
.19 The IRP-BBS is available for public use and accessible using various personal computer communications equipment; however, electronic submission of information returns is limited to holders of valid TCCs. A TCC is not needed to access those portions
of the IRP-BBS that contain forms and publications or to leave questions or messages for IRS/MCC personnel.
.20 Filers using IRP-BBS can determine the acceptability of files submitted by checking the file status area of the bulletin board.
These reports are not immediately available but will be available within two weeks after the transmission is received by IRS/MCC.
.21 Contact the IRP-BBS by dialing 304-264-7070. The communication software settings for IRP-BBS are:
— No parity
— Eight data bits
— One stop bit
— Full duplex
The communication software should be set up to use the fastest speed allowed by the filer’s modem.
.22 Due to the large number of communication products available, it is impossible to provide specific information on a particular
software package or hardware configuration. Filers should contact their software or hardware supplier for assistance.
.23 IRP-BBS software provides a menu-driven environment allowing access to different parts of IRP-BBS. Whenever possible,
IRS/MCC personnel will provide assistance in resolving any communication problems with IRP-BBS.
.24 IRP-BBS can be accessed at speeds from 1200 to 28,800 bps. The speed is automatically negotiated for connection at the
speed of the calling modem. The communication standards supported include Industry Standard 212A, V.22bis, V.32, V.32bis, V.34,
and V.FC. Point-to-point error control is supported using the V.42 ITU–T standard or MNP 2–4. Data compression is supported
using V.42bis ITU–T standard or MNP5.
.25 The following information will be requested to set up the filer’s user profile when logging onto the IRP-BBS for the first time.
(1) Enter the letter that corresponds to the filer’s terminal from the following:
<A>
<D>
IBM PC
Terminal
<B>
<E>
IBM w/ANSI
VT-100
<C>
<F>
Hyperterm
<CR>
Most PCs, clones, etc., will select the IBM PC emulation. Machines with color, CGA, EGA, or VGA should select IBM w/ANSI.
(2) Upper/lower case, line feed needed, O (zero) nulls after each <CR>, do you wish to modify this? (Most users answer no.)
September 14, 1998
24
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 25
Common Problems
Problem
Probable Cause
Solution
File does not
upload/download
Not starting communication when
prompted by ‘Awaiting Start Signal’
Start upload/download on filers end
All files not
processed
Compressing several files into
one filename
Compress only one file for every filename
Replacement needed
Original data does not meet processing
and/or format requirements
Replacement must be submitted within 45
days of original transmission
Cannot determine
file status
Not dialing back thru IRP-BBS to
check the status of the file
Two weeks after sending a file, check under
(F)ile Status for notification of acceptability
Transfer aborts
before it starts
Transfer protocol mismatch
Ensure protocols match on both the sending
and receiving ends
Loss of carrier
during session
Incorrect modem settings on user’s
end
Reference your modem manual about increasing the value of the S10 register
Unreadable screens
after selecting IBM w/ANSI
ANSI.SYS driver not loaded in the
user’s PC
Select non ANSI under (Y)our settings
IRS cannot complete final
processing of data
User did not send the Form 4804
Send completed Form 4804 the same day
as the electronic transmission
IRS cannot determine
which file is being replaced
User did not indicate which file is
being replaced
Must enter the filename being replaced
under the replacement option
IRS cannot determine the type
of file being sent
User incorrectly indicated T, P, C,
or R for the type of file
When prompted, enter the correct type of file
being sent
Replacement file not
replaced within 45 days
User did not dial back thru IRP-BBS
to check status of file
Two weeks after sending file, check under
(F)ile Status for notification of acceptability
Duplicate data
Transmitter sends corrections for
entire file
Only submit corrections for incorrect records
SEC. 7. RECORD FORMAT AND LAYOUT
FORM 8027 RECORD FORMAT
Field
Position
1
Field Title
Establishment
Type
1998–37 I.R.B.
Length
1
Description and Remarks
REQUIRED. This digit identifies the kind of establishment. Enter the
number which describes the type of establishment, as shown below:
1 for an establishment that serves evening meals only (with or without alcoholic beverages).
2 for an establishment that serves evening meals and other meals (with or
without alcoholic beverages).
3 for an establishment that serves only meals other than evening meals
(with or without alcoholic beverages).
4 for an establishment that serves food, if at all, only as an incidental part
of the business of serving alcoholic beverages.
25
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 26
SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
Position
Field Title
Length
Description and Remarks
2–6
Establishment
Serial Numbers
5
REQUIRED. These five digit Serial Numbers are for identifying individual establishments of an employer reporting under the same EIN. The employer shall assign each establishment a unique number. NUMERICS
ONLY.
7–46
Establishment Name
40
REQUIRED. Enter the name of the establishment. Left justify and fill
unused positions with blanks. ALLOWABLE CHARACTERS ARE ALPHAS, NUMERICS, BLANKS, HYPHENS, AMPERSANDS, AND
SLASHES.
47–86
Establishment Street
Address
40
REQUIRED. Enter the mailing address of the establishment. Street address should include number, street, apartment or suite number (or P O Box
if mail is not delivered to street address). Left justify and blank fill.
☛ Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the address 210 N. Queen St.,
Suite #300 must be entered as 210 N Queen St Suite 300.
87–111
Establishment City
25
REQUIRED. Enter the city, town, or post office. Left justify and blank
fill.
☛ Note 1: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the city St. Louis must be entered as St Louis.
112–113
Establishment
State
2
REQUIRED. Enter state code of the establishment; must be one of
the following:
STATE
CODE
STATE
CODE
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
AL
AK
AZ
AR
CA
CO
CT
DE
DC
FL
GA
HI
ID
IL
IN
IA
KS
KY
LA
ME
MD
MA
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
MT
NE
NV
NH
NJ
NM
NY
NC
ND
OH
OK
OR
PA
RI
SC
SD
TN
TX
UT
VT
VA
WA
September 14, 1998
26
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 27
SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
Position
Field Title
Length
Description and Remarks
STATE
CODE
STATE
CODE
Michigan
Minnesota
Mississippi
Missouri
MI
MN
MS
MO
West Virginia
Wisconsin
Wyoming
WV
WI
WY
114–122
Establishment
ZIP Code
9
REQUIRED. Enter the complete nine-digit ZIP Code of the establishment. If using a five-digit ZIP Code, left justify the five-digit ZIP Code
and fill the remaining four positions with blanks.
☛ Note: MUST BE NINE NUMERICS OR FIVE NUMERICS AND FOUR BLANKS. DO NOT ENTER THE DASH.
123–131
Employer
Identification
Number
9
REQUIRED. Enter the nine digit number assigned to the employer by
IRS. DO NOT ENTER HYPHENS, ALPHAS, ALL 9’s, OR ALL
ZEROS.
132–171
Employer Name
40
REQUIRED. Enter the name of the employer as it appears on your tax
forms (e.g., Form 941). Any extraneous information must be deleted. Left
justify and blank fill. ALLOWABLE CHARACTERS ARE ALPHAS,
BLANKS, NUMERICS, AMPERSANDS, HYPHENS, AND
SLASHES.
172–211
Employer
Street Address
40
REQUIRED. Enter mailing address of employer. Street address should
include number, street, apartment or suite number (or P O Box if mail is not
delivered to street address). Left justify and blank fill.
☛ Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the address 210 N. Queen St.,
Suite #300 must be entered as 210 N Queen St Suite 300.
212–236
Employer City
25
REQUIRED. Enter the city, town, or post office. Left justify and blank
fill.
☛ Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the city St. Louis must be entered as St Louis.
237–238
Employer State
2
REQUIRED. Enter state code of employer. Must be one of the abbreviations shown in the state abbreviation table for Establishment State (field
positions 112–113).
239–247
Employer ZIP
Code
9
REQUIRED. Enter the complete nine-digit ZIP Code of the employer. If
using a five-digit ZIP Code, left justify the five-digit ZIP Code and fill the
remaining four positions with blanks.
☛ Note: MUST BE NINE NUMERICS OR FIVE NUMERICS AND FOUR BLANKS. DO NOT ENTER THE DASH.
248–259
Charged Tips
1998–37 I.R.B.
12
REQUIRED. Enter the total amount of tips that are shown on charge receipts for the calendar year. Amount must be entered in U.S. dollars and
cents. The right-most two positions represent cents. Right justify and zero
fill. If no entry, zero fill. NUMERICS ONLY. DO NOT ENTER DECIMAL POINTS, DOLLAR SIGNS, OR COMMAS.
27
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 28
SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
Position
Field Title
Length
Description and Remarks
260–271
Charged Receipts
12
REQUIRED. Enter the total sales for the calendar year other than carryout sales or sales with an added service charge of 10 percent or more, that
are on charge receipts with a charged tip shown. This includes credit card
charges, other credit arrangements, and charges to a hotel room unless the
employer’s normal accounting practice consistently excludes charges to a
hotel room. Do not include any state or local taxes in the amount reported.
Amount must be entered in U.S. dollars and cents. The right-most two positions represent cents. Right justify and zero fill. If no entry, zero fill.
NUMERICS ONLY. DO NOT INCLUDE DOLLAR SIGNS, DECIMAL POINTS, OR COMMAS.
272–283
Service Charge
Less Than 10
Percent
12
REQUIRED. Enter the total amount of service charges less than 10
percent added to customer’s bills and were distributed to your employees
for the calendar year. In general, service charges added to the bill are not
tips since the customer does not have a choice. These service charges are
treated as wages and are included on Form W–2. For a more detailed explanation, see Rev. Rul. 19–28, 1969–1 C.B. 270. Amount must be entered in
U.S. dollars and cents. The right-most two positions represent cents. Right
justify and zero fill. If no entry, zero fill. NUMERICS ONLY. DO NOT
ENTER DOLLAR SIGNS, DECIMAL POINTS, OR COMMAS.
284–295
Indirect Tips
Reported
12
REQUIRED. Enter the total amount of tips reported by indirectly tipped
employees (e.g., busboys, service bartenders, cooks) for the calendar year.
Do not include tips received by employees in December of the prior tax
year but not reported until January. Include tips received by employees in
December of the tax year being reported, but not reported until January of
the subsequent year. Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS.
296–307
Direct Tips
Reported
12
REQUIRED. Enter the total amount of tips reported by directly tipped
employees (e.g., waiters, waitresses, bartenders) for the calendar year. Do
not include tips received by employees in December of the prior tax year
but not reported until January. Include tips received by employees in December of the tax year being reported, but not reported until January of the
subsequent year. Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS
308–319
Total Tips
Reported
12
REQUIRED. Enter the total amount of tips reported by all employees
(both indirectly tipped and directly tipped) for the calendar year. Do not include tips received in December of the prior tax year but not reported until
January. Include tips received in December of the tax year being reported,
but not reported until January of the subsequent year. Amount must be entered in U.S. dollars and cents. The right-most two positions represent
cents. Right justify and zero fill. If no entry, zero fill. NUMERICS
ONLY. DO NOT ENTER DOLLAR SIGNS, DECIMAL POINTS, OR
COMMAS.
September 14, 1998
28
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 29
SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
Position
Field Title
Length
Description and Remarks
320–331
Gross Receipts
12
REQUIRED. Enter the total gross receipts from the provision of food
and/or beverages for this establishment for the calendar year. Do not include receipts for carry-out sales or sales with an added service charge of
10 percent or more. Do not include in gross receipts charged tips (field positions 248–259) shown on charge receipts unless you have reduced the
cash sales amount because you have paid cash to tipped employees for tips
they earned that were charged. Do not include state or local taxes in gross
receipts. If you do not charge separately for food or beverages along with
other services (such as a package deal for food and lodging), make a good
faith estimate of the gross receipts attributable to the food or beverages.
This estimate must reflect the cost of providing the food or beverages plus
a reasonable profit factor. Include the retail value of complimentary food or
beverages served to customers if tipping for them is customary and they are
provided in connection with an activity engaged in for profit whose receipts would not be included as gross receipts from the provision of food
or beverages (e.g., complimentary drinks served to customers at a gambling casino). Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS.
332–343
Tip Percentage
Rate Times
Gross Recipts
12
REQUIRED. Enter the amount determined by multiplying Gross Receipts
for the year (field positions 320–331) by the Tip Percentage Rate (field
positions 344–347). For example, if the value of Gross Receipts is
“000045678900” and Tip Percentage Rate is “0800”, multiply $456,789.00
by .0800 to get $36,543.12 and enter “000003654312”. If tips are allocated
using other than the calendar year, enter zeros; this may occur if you allocated tips based on the time period for which wages were paid or allocated
on a quarterly basis. Amount must be entered in U.S.dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR SIGNS, DECIMAL
POINTS, OR COMMAS.
344–347
Tip Percentage
Rate
4
REQUIRED. Enter 8 percent (0800) unless a lower rate has been granted
by the District Director. The determination letter must accompany the
magnetic/electronic submission. NUMERICS ONLY. DO NOT ENTER
DECIMAL POINT.
348–359
Allocated Tips
12
REQUIRED. If Tip Percentage Rate Times Gross Receipts (field positions 332–343)is greater than Total Tips Reported (field positions
308–319), then the difference becomes Allocated Tips. Otherwise, enter all
zeros. If tips are allocated using other than the calendar year, enter the
amount of allocated tips from your records. Amount must be entered in
U.S. dollars and cents. The right-most two positions represents cents.
Right justify and zero fill. NUMERICS ONLY. DO NOT ENTER
DOLLAR SIGNS, DECIMAL POINTS, OR COMMAS.
360
Allocation
Method
1
REQUIRED. Enter the allocation method used if Allocated Tips (field
positions 348–359) are greater than zero as follows:
1) for allocation based on hours worked.
2) for allocation based on gross receipts.
1998–37 I.R.B.
29
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 30
SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
Position
Field Title
Length
Description and Remarks
3) for allocation based on a good faith agreement. The good faith agreement must accompany the magnetic/electronic submission. If Allocated
Tips are equal to zero, enter 0 (zero).
☛ Note: Under Section 1571 of the Tax Reform Act of 1986, the method of allocation of tips based on the number of hours
worked as described in Section 31.6053–3(f)(1)(iv) may be utilized only by an employer that employs less than the equivalent
of 25 full-time employees at the establishment during the payroll period. Section 31.6053–3(j)(19) provides that an employer
is considered to employ less than the equivalent of 25 full-time employees at an establishment during a payroll period if the
average number of employee hours worked per business day during the payroll period is less than 200 hours.
361–364
Number of
Directly Tipped
Employees
4
REQUIRED. Enter the total number (must be greater than zero) of
directly tipped employees employed by the establishment for the calendar
year. Right justify and zero fill. NUMERICS ONLY.
365–369
Transmitter
Control Code
(TCC)
5
REQUIRED. Enter the 5-digit Transmitter Control Code assigned by the
IRS.
370
Corrected 8027
Indicator
1
REQUIRED. Enter blank for original return. Enter “G” for corrected
return. A corrected return must be a complete new return replacing the
original return.
371–372
Blank or cr/lf
2
Magnetic tape filers are required to enter blanks. Diskette filers may enter
blanks or the carriage return/line feed characters (cr/lf).
FORM 8027 RECORD LAYOUT
Establishment
Type
Establishment
Serial Number
Establishment
Name
Establishment
Street Address
1
2–6
7–46
47–86
Establishment
City
Establishment
State
Establishment
ZIP Code
Employer
Identification
Number
87–111
112–113
114–122
123–131
Employer Name
Employer Street
Address
Employer City
Employer State
132–171
172–211
212–236
237–238
September 14, 1998
30
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 31
FORM 8027 RECORD LAYOUT (Continued)
Employer Zip
Code
Charged Tips
Charged
Receipts
Service Charge
Less Than 10
Percent
239–247
248–259
260–271
272–283
Indirect Tips
Reported
Direct Tips
Reported
Total Tips
Reported
Gross Receipts
284–295
296–307
308–319
320–331
Tip Percentage
Rate Times
Gross Receipts
Tip Percentage
Rate
Allocated Tips
Allocation
Method
332–343
344–347
348–359
360
Number of Directly
Tipped Employees
Transmitter Control
Code (TCC)
Corrected
8027
Indicator
Blank or
cr/lf
361–364
365–369
370
371–372
SEC. 8. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 92-81 is superseded.
SEC. 9. EFFECTIVE DATE
.01 This revenue procedure is effective for Forms 8027 due the last day of February 1999 and any returns filed thereafter.
1998–37 I.R.B.
31
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 32
IRB
IRB
Special Projects
Special Projects
Box
Box
of
of
IRB
IRB
Special Projects
Special Projects
Box
Box
of
of
✄
IRB
IRB
Special Projects
Special Projects
Box
Box
of
of
Internal Revenue Service
Martinsburg Computing Center
Special Projects
P O Box 1359
Martinsburg WV 25402
Internal Revenue Service
Martinsburg Computing Center
Special Projects
Route 9 and Needy Road
Martinsburg WV 25401
(use this label for U S Postal deliveries)
(use this label for truck or air freight deliveries)
(Reproduce as needed)
To expedite handling, please affix this label, or a substitute
label, to your OUTSIDE shipping container.
September 14, 1998
32
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 33
Part IV. Items of General Interest
Notice of Proposed Rulemaking
and Notice of Public Hearing
Qualified State Tuition Programs
REG–106177–97
tions, Monice Rosenbaum, (202) 6226070; concerning the proposed estate and
gift tax regulations, Susan Hurwitz (202)
622-3090; concerning submissions and
the hearing, Michael Slaughter, (202)
622-7190 (not toll-free numbers).
AGENCY: Internal Revenue Service
(IRS), Treasury.
SUPPLEMENTARY INFORMATION:
ACTION: Notice of proposed rulemaking and notice of public hearing.
The collection of information
contained in this notice of proposed rulemaking has been submitted to the Office
of Management and Budget for review in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on the collection of information should be received
by October 23, 1998. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information;
How the quality, utility, and clarity of
the information to be collected may be enhanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the application of automated collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and purchase or services to provide information.
The collection of information in this
proposed regulation is in §§1.529–
2(e)(4), 1.529–2(f) and (i), 1.529–4, and
1.529–5(b)(2). This information is required by the IRS to verify compliance
with sections 529(b)(3), (4), (7) and (d).
This information will be used by the IRS
and individuals receiving distributions
SUMMARY: This document contains
proposed regulations relating to qualified
State tuition programs (QSTPs). These
proposed regulations reflect changes to
the law made by the Small Business Job
Protection Act of 1996 and the Taxpayer
Relief Act of 1997. The proposed regulations affect QSTPs established and maintained by a State or agency or instrumentality of a State, and individuals receiving
distributions from QSTPs. This document also provides notice of a public
hearing on these proposed regulations.
DATES: Written comments must be received by November 23, 1998. Outlines
of topics to be discussed at the public
hearing scheduled for Wednesday, January 6, 1999, at 10 a.m. must be received
by December 16, 1998.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–106177–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–106177–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regula-
1998–37 I.R.B.
Paperwork Reduction Act
33
from QSTPs to determine that the taxable
amount of the distribution has been computed correctly. The collection of information is required to obtain the benefit of
being a QSTP described in section 529.
The likely respondents and/or recordkeepers are state governments and distributees
who receive distributions under the programs. The burden for reporting distributions is reflected in the burden for Form
1099–G, Certain Government Payments.
The burden for electing to take certain
contributions to a QSTP into account ratably over a five year period in determining
the amount of gifts made during the calendar year is reflected in the burden for
Form 709, Federal Gift Tax Return.
Estimated total annual reporting/recordkeeping burden: 705,000 hours
Estimated average annual burden per respondent/recordkeeper: 35 hours, 10 minutes
Estimated number of respondents/recordkeepers: 20,051
Estimated annual frequency of responses:
On occasion
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it displays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regulations (26 CFR part 1) relating to qualified
State tuition programs described in section 529. Section 529 was added to the
Internal Revenue Code by section 1806 of
the Small Business Job Protection Act of
1996, Public Law 104–188, 110 Stat.
1895. Section 529 was modified by sections 211 and 1601(h) of the Taxpayer Relief Act of 1997, Public Law 105–34, 111
Stat. 810 and 1092.
Section 529 provides tax-exempt status
to qualified State tuition programs
(QSTPs) established and maintained by a
State (or agency or instrumentality
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 34
thereof) under which persons may (1)
purchase tuition credits or certificates on
behalf of a designated beneficiary entitling the beneficiary to a waiver or payment of qualified higher education expenses, or (2) contribute to an account
established exclusively for the purpose of
meeting qualified higher education expenses of the designated beneficiary.
Qualified higher education expenses, for
purposes of section 529, are tuition, fees,
books, supplies, and equipment required
for enrollment or attendance at an eligible
educational institution, as well as certain
room and board expenses for students
who attend an eligible educational institution at least half-time. An eligible educational institution is an accredited post-secondary educational institution offering
credit toward a bachelor’s degree, an associate’s degree, a graduate-level or professional degree, or another recognized
post-secondary credential. The institution
must be eligible to participate in Department of Education student aid programs.
QSTPs established and maintained by
a State (or agency or instrumentality
thereof) must require all contributions to
the program be made only in cash. Neither contributors nor designated beneficiaries may direct the investment of any
contributions or any earnings on contributions. No interest in the program may
be pledged as security for a loan. A separate accounting must be provided to each
designated beneficiary in the program. A
program must impose a more than de
minimis penalty on refunds that are not
used for qualified higher education expenses, not made on account of death or
disability of the designated beneficiary,
or not made on account of a scholarship
or certain other educational allowances.
A program must provide adequate safeguards to prevent contributions in excess
of those necessary to provide for the
qualified higher education expenses of
the beneficiary. A specified individual
must be designated as the beneficiary at
the commencement of participation in a
QSTP, unless the interests in the program
are purchased by a State or local government or a tax-exempt organization described in section 501(c)(3) as part of a
scholarship program operated by such
government or organization under which
beneficiaries to be named in the future
will receive the interests as scholarships.
September 14, 1998
Distributions under a QSTP are includible in the gross income of the distributee in the manner as provided under section 72 to the extent not excluded from
gross income under any other provision.
Distributions include in-kind benefits furnished to a designated beneficiary under a
QSTP. Any distribution, or portion of a
distribution, that is transferred within 60
days under a QSTP to the credit of a new
designated beneficiary who is a member
of the family of the old designated beneficiary shall not be treated as a distribution.
A change in the designated beneficiary of
an interest in a QSTP shall not be treated
as a distribution if the new beneficiary is a
member of the family of the old beneficiary. A member of the family means the
spouse of the designated beneficiary or an
individual who is related to the designated
beneficiary as described in section
152(a)(1) through (8) or is the spouse of
any of these individuals.
Section 529, as added to the Code by
the Small Business Job Protection Act of
1996 (1996 Act), contained provisions addressing the estate, gift, and generationskipping transfer tax. The provisions
were significantly revised, effective
prospectively, by the Taxpayer Relief Act
of 1997 (1997 Act).
A contribution on behalf of a designated beneficiary to a QSTP which is
made after August 20, 1996, and before
August 6, 1997, is not treated as a taxable
gift. Rather, the subsequent waiver (or
payment) of qualified higher education
expenses of a designated beneficiary by
(or to) an educational institution under the
QSTP is treated as a qualified transfer
under section 2503(e) and is not treated as
a transfer of property by gift for purposes
of section 2501. As such, the contribution
is not subject to the generation-skipping
transfer tax imposed by section 2601.
In contrast, under section 529 as
amended by the 1997 Act, a contribution
on behalf of a designated beneficiary to a
QSTP after August 5, 1997, is a completed gift of a present interest in property
under section 2503(b) from the contributor to the designated beneficiary and is
not a qualified transfer within themeaning
of section 2503(e). The portion of a contribution excludible from taxable gifts
under section 2503(b) also satisfies the requirements of section 2642(c)(2) and,
therefore, is also excludible for purposes
34
of the generation-skipping transfer tax
imposed under section 2601. For purposes of the annual exclusion, a contributor may elect to take certain contributions
to a QSTP into account ratably over a
five-year period in determining the
amount of gifts made during the calendar
year. Under section 529 as amended by
the 1997 Act, a transfer which occurs by
reason of a change in the designated beneficiary of a QSTP, or a rollover from the
account of one beneficiary to the account
of another beneficiary in a QSTP, is not a
taxable gift if the new beneficiary is a
member of the family, as defined in section 529(e)(2), of the old beneficiary, and
is assigned to the same generation, as defined in section 2651, as the old beneficiary. If the new beneficiary is assigned
to a lower generation than the old beneficiary, the transfer is a taxable gift from
the old beneficiary to the new beneficiary
regardless of whether the new beneficiary
is a member of the family of the old beneficiary. In addition, the transfer will be
subject to the generation-skipping transfer
tax if the new beneficiary is assigned to a
generation which is two or more levels
lower than the generation assignment of
the old beneficiary. The five-year averaging election for purposes of the gift tax
annual exclusion may be applied to the
transfer.
Regarding the application of the estate
tax, the value of any interest in any QSTP
which is attributable to contributions
made by a decedent who died after August 20, 1996, and before June 9, 1997, is
includible in the decedent’s gross estate.
In contrast, pursuant to the 1997 Act
amendments to section 529, the value of
such an interest is not includible in the
gross estate of a decedent who dies after
June 8, 1997, unless the decedent had
elected the five-year averaging rule for
purposes of the gift tax annual exclusion
and died before the close of the five-year
period. In that case, the portion of the
contribution allocable to calendar years
beginning after the decedent’s date of
death is includible in his gross estate.
Also, pursuant to the 1997 Act amendments to section 529, the value of any interest in a QSTP held for a designated
beneficiary who dies after June 8, 1997, is
includible in the designated beneficiary’s
gross estate.
The Federal estate and gift tax treat-
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 35
ment of QSTP interests has no effect on
the actual rights and obligations of the
parties pursuant to the terms of the contracts under State law. In addition, the estate and gift tax treatment of contributions
to a QSTP and interests in a QSTP is generally different from the treatment that
would otherwise apply under generally
applicable estate and gift tax principles.
For example, under most contracts, the
contributor may retain the right to change
the designated beneficiary of an account,
to designate any person other than the
designated beneficiary to whom funds
may be paid from the account, or to receive distributions from the account if no
such other person is designated. Such
rights would ordinarily cause the transfer
to the account to fail to be a completed
gift and mandate inclusion of the value of
the undistributed interest in the QSTP in
the gross estate of the contributor under
sections 2036 and/or 2038. However,
under section 529, the gross estate of a
contributor who dies after June 8, 1997,
does not include the value of any interest
in a QSTP attributable to contributions
from the contributor (except amounts attributable to calendar years after death
where the five-year averaging rule has
been elected). Also, because a contribution after August 5, 1997, is a completed
gift from the contributor to the designated
beneficiary, any subsequent transfer
which occurs by reason of a change in the
designated beneficiary or a rollover from
the account of the original designated
beneficiary to the account of another beneficiary is treated, to the extent it is subject to the gift and/or generation-skipping
transfer tax, as a transfer from the original
designated beneficiary to the new beneficiary. This is the result even though the
change in beneficiary or the rollover is
made at the direction of the contributor
under the terms of the contract.
Comments from Notice 96–58
In Notice 96–58, 1996–2 C.B. 226, the
Internal Revenue Service invited comments on section 529 including the requirements for reporting distributions by
QSTPs, the requirements for qualification
and operation of programs, and the treatment of distributions made by programs
for federal tax purposes. Eighteen comments were received. The comments addressed a broad range of issues, including
1998–37 I.R.B.
but not limited to, those outlined by Notice 96–58, the concept of account ownership and gift tax rules, enforcement of
penalties, accounting and recordkeeping,
and transition relief for programs in existence on August 20, 1996. The summary
below is not intended to be a complete
discussion of the comments. However,
all matters presented in the comments
were considered in the drafting of this notice of proposed rulemaking.
One commenter discussed in detail the
requirements that a QSTP be “established
and maintained” by a State or agency or
instrumentality of a State. The commenter recommended a list of factors to
be considered in determining whether a
State maintains the program. This commenter and others urged that the use of
outside contractors or the holding of program deposits at a private financial institution selected by the State not be determinative of whether the program was
maintained by the State.
One commenter was endorsed by several others for suggesting two specific
safe harbors to satisfy the requirement
that a program impose more than a de
minimis penalty on refunds. The first
safe harbor was a 5 percent of earnings
penalty on refunds of earnings prior to the
designated beneficiary matriculating, reduced to at least a 1 percent penalty on refunds of earnings only after the age of
matriculation. The second safe harbor
was a fixed-rate safe harbor equal to the
lesser of $50 or 1 percent of the assets distributed. Another commenter suggested
an additional safe harbor based on the return of Series EE savings bonds. That
commenter also suggested that safe harbors are not necessarily the minimum acceptable penalties and that all facts and
circumstances should be taken into account in determining the adequacy of
penalties that are less than the safe harbor
penalties.
Commenters urged that regulations
limit or avoid rules requiring programs to
enforce penalties or require substantiation
to ensure that disbursements are used to
pay for qualified higher education expenses. Recognizing however that there
may be some misuse in this area, commenters recommended that checks from
QSTPs be marked with a special endorsement or be payable to both the educational
institution and the designated beneficiary.
35
Commenters suggested that the prohibition on investment direction not include
a choice between a prepaid tuition program and a savings program (established
and maintained in one State), a choice
among options in a prepaid tuition program, a choice among options for the initial contribution to the program, or an opportunity to change investment strategies.
One commenter suggested that the prohibition on investment direction not apply
to prevent participation in the program by
program board and staff members.
Commenters suggested several approaches for satisfying the prohibition on
excess contributions. Two safe harbors
were proposed; one was based upon eight
times the average annual undergraduate
tuition and required fees at private fouryear universities; the other was based
upon five years of tuition, fees, books,
supplies, and equipment at the highest cost
institution allowed by the State’s program.
Other approaches proposed allowing the
provision of adequate safeguards to prevent excess contributions to be left to the
discretion of the program or allowing the
contributor to certify that no attempt
would be made to overfund the account.
Commenters made suggestions and
raised concerns regarding: separate accounting rules including, but not limited to,
the valuation and tracking of tuition units;
the operating rules treating all programs in
which an individual is a designated beneficiary as one program, and treating all distributions during a taxable year as one distribution; the application of section 72 to
calculate distributions; and, income tax
consequences relating to account ownership, penalties, and withholding.
The modifications made to section 529
by the Taxpayer Relief Act of 1997 have
addressed, in large part, the issues raised
by commenters concerning transition relief
for programs in existence on August 20,
1996, estate and gift tax consequences for
contributors and designated beneficiaries,
and definitions pertaining to family members and eligible educational institutions.
Explanation of Provisions
Qualification as Qualified State Tuition
Program (QSTP): Unrelated Business
Income Tax and Filing Requirements
The proposed regulations provide guidance on the requirements a program must
September 14, 1998
IRB 1998-37
9/10/98 4:04 PM
Page 36
satisfy in order to be a QSTP described in
section 529. A program that meets these
requirements generally is exempt from income taxation. However, a QSTP is subject to the taxes imposed by section 511
relating to imposition of tax on unrelated
business income. For purposes of section
529 and these regulations, an interest in a
QSTP shall not be treated as debt for purposes of section 514; consequently, investment income earned on contributions
to the program by purchasers will not
constitute debt-financed income subject
to the unrelated business income tax.
However, investment income of the
QSTP shall be subject to the unrelated
business income tax to the extent the program incurs indebtedness when acquiring
or improving income-producing property.
Earnings forfeited on educational contracts or savings, amounts collected as
penalties on refunds or excess contributions, and certain administrative and other
fees are not unrelated business income to
the QSTP. A QSTP is not required to file
Form 990, Return of Organization Exempt From Income Tax, however, this
does not affect the obligation of a QSTP
to file Form 990–T, Exempt Organization
Business Income Tax Return.
Established and Maintained
The proposed regulations provide that a
program is established by a State or
agency or instrumentality of the State if
the program is initiated by State statute or
regulation, or by an act of a State official
or agency with the authority to act on behalf of the State. A program is maintained
by a State or agency or instrumentality of
a State if all the terms and conditions of
the program are set by the State or agency
or instrumentality and the State or agency
or instrumentality is actively involved on
an ongoing basis in the administration of
the program, including supervising all decisions relating to the investment of assets
contributed to the program. The proposed
regulations set forth factors that are relevant in determining whether a State,
agency or instrumentality is actively involved in the administration of the program. Included in the factors is the manner and extent to which it is permissible
for the program to contract out for professional and financial services.
September 14, 1998
Penalties and Substantiation – Safe
Harbors
As required by section 529(b)(3), a
more than de minimis penalty must be imposed on the earnings portion of any distribution from the program that is not
used for the qualified higher education
expenses of the designated beneficiary,
not made on account of the death or disability of the designated beneficiary, or
not made on account of a scholarship or
certain other payments described in sections 135(d)(1)(B) and (C) that are received by the designated beneficiary to
the extent the amount of the refund does
not exceed the amount of the scholarship,
allowance, or payment. The penalty shall
also not apply to rollover distributions described in section 529(c)(3)(C) which are
discussed in the section titled Income Tax
Treatment of Distributees, below. The
proposed regulations provide that a
penalty is more than de minimis if it is
consistent with a program intended to assist individuals in saving exclusively for
qualified higher education expenses.
Whether any penalty is more than de minimis will depend upon the facts and circumstance of the particular program, including the extent to which the penalty
offsets the federal income tax benefit from
having deferred income tax liability on the
earnings portion of any distribution. The
proposed regulations provide a safe harbor
penalty that a program may adopt for satisfying this requirement. For purposes of
the safe harbor, a penalty imposed on the
earnings portion of a distribution is more
than de minimis if it is equal to or greater
than 10 percent of the earnings.
To be treated as imposing a more than
de minimis penalty as required by section
529(b)(3) a program must implement
practices and procedures for identifying
whether a distribution is subject to a
penalty and collecting any penalty that is
due. The proposed regulations, in the
form of a safe harbor, set forth practices
and procedures that may be implemented
by a program. The safe harbor provides
that distributions are treated as payments
of qualified higher education expenses if
the distribution is made directly to an eligible educational institution; the distribution is made in the form of a check
payable to both the designated beneficiary
36
and the eligible educational institution; the
distribution is made after the designated
beneficiary submits substantiation showing that the qualified higher education expenses were paid and the program reviews
the substantiation; or the designated beneficiary certifies prior to distribution the
amount to be used for qualified higher education expenses and the program requires
substantiation of payment within 30 days
of making the distribution, the program reviews the substantiation, and the program
retains an amount necessary to collect the
penalty owed on the distribution if valid
substantiation is not produced.
The safe harbor procedure provides that
a penalty be collected on all other distributions except where prior to distribution the
program receives written third party confirmation that the designated beneficiary
has died or become disabled or has received a scholarship or allowance or payment described in section 135(d)(1)(B) or
(C). Alternatively, distributions may be
made upon the certification of the account
owner that the designated beneficiary has
died or become disabled or has received a
scholarship or allowance or payment described above, if the program withholds a
portion of the distribution as a penalty.
The penalty may be refunded after receipt
of third party confirmation of the certification made by the account owner.
The safe harbor procedure provides that
a program may document amounts refunded from eligible educational institutions that were not used for qualified
higher education expenses by requiring a
signed written statement from the distributee identifying the amount of any refund
received from an eligible educational institution at the end of each year in which
distributions for qualified higher education expenses were made and of the next
year. A program must also have procedures to collect the penalty either by retaining a sufficient balance in the account
to pay the penalty, withholding an amount
equal to the penalty from a distribution, or
collecting the penalty on a State income
tax return.
Other Requirements for QSTP
Qualification
As described in section 529(b)(1)(A),
the proposed regulations provide that con-
1998–37 I.R.B.
IRB 1998-37
9/10/98 4:04 PM
Page 37
tributions to the program can be placed
into either a prepaid educational arrangement or contract, or an educational savings account, or both, but cannot be
placed into any other type of account.
Contributions may be made only in cash
and not in property as provided in section
529(b)(2), however, the proposed regulations provide that a program may accept
payment in cash, or by check, money
order, credit card, or similar methods.
Section 529(b)(4) requires that a program provide separate accounting for each
designated beneficiary. Separate accounting requires that contributions for the benefit of a designated beneficiary and earning attributable to those contributions are
allocated to the appropriate account. The
proposed regulations provide that if a program does not ordinarily provide each account owner an annual account statement
showing the transactions related to the account, the program must give this information to the account owner or designated
beneficiary upon request.
Section 529(b)(5) states that a program
shall not be treated as a QSTP unless it
provides that any contributor to, or designated beneficiary under, such program
may not directly or indirectly direct the
investment of any contributions to the
program or any earnings thereon. A program will not violate the requirement of
this paragraph if it permits a person who
establishes an account to select between a
prepaid educational services account and
an educational savings account, or to select among different investment strategies
designed exclusively by the program, at
the time that an educational savings account is established. However, the proposed regulations clarify that a program
will violate this requirement if, after an
account with the program initially is established, the account owner, a contributor, or the designated beneficiary subsequently is permitted to select among
different investment options or strategies.
A program will not violate this requirement merely because it permits its board
members, its employees, or the board
members or employees of a contractor it
hires to perform administrative services to
purchase tuition credits or certificates or
make contributions.
Section 529(b)(6) provides that a program may not allow any interest in the
program, or any portion of an interest in
1998–37 I.R.B.
the program, to be used as security for a
loan. The proposed regulations clarify
that this restriction includes, but is not
limited to, a prohibition on the use of any
interest in the program as security for a
loan used to purchase the interest in the
program.
Section 529(b)(7) requires a program to
establish adequate safeguards to prevent
contributions for the benefit of a designated beneficiary in excess of those necessary to provide for the qualified higher
education expenses of the designated beneficiary. The proposed regulations provide a safe harbor that permits a program
to satisfy this requirement if the program
will bar any additional contributions to an
account as soon as the account reaches a
specified limit applicable to all accounts
of designated beneficiaries with the same
expected year of enrollment. The total
contributions may not exceed the amount
determined by actuarial estimates that is
necessary to pay tuition, required fees,
and room and board expenses of the designated beneficiary for five years of undergraduate enrollment at the highest cost
institution allowed by the program. The
safe harbor in the proposed regulations
applies only to the program. Despite the
fact that a program has met the safe harbor, a particular account established under
the program may have a balance that exceeds the amount actually needed to cover
the particular designated beneficiary’s
qualified higher education expenses. Distributions made that are not used for qualified higher education expenses of the
designated beneficiary are subject to the
penalty provisions of section 529(b)(3).
Income Tax Treatment of Distributees
In accordance with section 529(c)(3),
the proposed regulations provide that distributions made by a QSTP, including any
benefit furnished in-kind, must be included in the gross income of the distributee to the extent that the distribution
consists of earnings. The proposed regulations clarify that term “distributee”
refers to the designated beneficiary or the
account owner who receives or is treated
as receiving a distribution from a QSTP.
As required by section 529(c)(3)(A), distributions under a QSTP must be included
in income in the manner as provided
under section 72. Therefore, deposits or
37
contributions made into an account under
a QSTP are recovered ratably over the period of time distributions are made. The
amount of taxable earnings shall be determined by applying an earnings ratio, generally the earnings allocable to the account as of the close of the calendar year
divided by the total account balance as of
the close of the calendar year, to the distribution. In the case of a prepaid educational services account, this method of
calculating taxable earnings utilizes an
average value for each unit of education
(e.g., credit, hour, semester, or other unit
of education) that is distributed rather
than the recovery of the cost of any particular unit of education.
In accordance with section 529(c)(3)(C), the proposed regulations permit nontaxable rollover distributions. A rollover
consists of a distribution or transfer from
an account of a designated beneficiary
that is transferred to or deposited within
60 days of the distribution into an account
of another individual who is a member of
the family of the designated beneficiary.
A distribution is not a rollover distribution
unless there is a change in beneficiary.
The new designated beneficiary’s account
may be in a QSTP established or maintained by the same State or by another
State. A transfer from the designated beneficiary to himself or herself, regardless
of whether the transfer is to an account
within the same QSTP or another QSTP
in the same or another Stat
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.