Bulletin No. 1998–33

Agency decision

Ask Donna

What actually matters in this document.

Text

IRB 1998-33

8/12/98 11:04 AM

Page 1

Internal Revenue

bulletin

Bulletin No. 1998–33

August 17, 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

EMPLOYMENT TAX

Rev. Rul. 98–39, page 4

Notice 98–43, page 13.

All events test; cooperative advertising. Under the all

events test of section 461 of the Code, an accrual method

manufacturer’s liability for cooperative advertising services

of a retailer is incurred in Year 1, the year the services are

performed, provided the manufacturer is able to reasonably

estimate the liability, even though the retailer does not submit the required claim form until Year 2. Rev. Proc. 97–37

modified and amplified.

Tax Court review of worker classification and section

530 determinations. This notice describes new procedures that the Service has implemented to comply with new

section 7436 of the Code.

Rev. Rul. 98–40, page 4.

Fringe benefits aircraft valuation formula. For purposes of section 1.61–21(g) of the Income Tax Regulations,

relating to the rule for valuing noncommercial flights on employer-provided aircraft, the Standard Industry Fare Level

(SIFL) cents-per-mile rates and terminal charges in effect for

the second half of 1998 are set forth.

T.D.8776, page 6.

REG–110332–98, page 18.

Final, proposed, and temporary regulations under section

985 of the Code provide guidance regarding certain federal

tax consequences arising from the introduction of the euro.

A public hearing on the proposed regulations will be held on

October 20, 1998.

Finding Lists begin on page 21.

Department of the Treasury

Internal Revenue Service

ADMINISTRATIVE

Notice 98–39, page 11.

Church plans; nondiscrimination; safe harbors. This notice extends the effective date of the applicable nondiscrimination regulations for certain church plans.

Notice 98–41, page 12.

1998 enhanced oil recovery credit. The enhanced oil

recovery credit for taxable years beginning in the 1998 calendar year is determined without regard to the phase-out for

crude oil price increases provided in section 43(b) of the

Code.

Notice 98–42, page 12.

1998 marginal production rates. This notice announces

the applicable percentage to be used in determining percentage depletion for marginal properties for the 1998 calendar year.

IRB 1998-33

8/12/98 11:04 AM

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.

IRB 1998-33

8/12/98 11:04 AM

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.

IRB 1998-33

8/12/98 11:04 AM

Page 4

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

Section 61.–Gross Income

Defined

26 CFR 1.61–21: Taxation of fringe benefits.

Fringe benefits aircraft valuation

formula. For purposes of section

1.61–21(g) of the Income Tax Regulations, relating to the rule for valuing noncommercial flights on employer-provided

aircraft, the Standard Industry Fare Level

(SIFL) cents-per-mile rates and terminal

charges in effect for the second half of

1998 are set forth.

Rev. Rul. 98–40

For purposes of the taxation of fringe

benefits under section 61 of the Internal

Revenue Code, section 1.61–21(g) of the

Income Tax Regulations provides a rule

for valuing noncommercial flights on

employer-provided aircraft. Section

1.61–21(g)(5) provides an aircraft valuation formula to determine the value of

such flights. The value of a flight is determined under the base aircraft valuation formula (also known as the Standard

Industry Fare Level formula or SIFL) by

multiplying the SIFL cents-per-mile

rates applicable for the period during

which the flight was taken by the appropriate aircraft multiple provided in section 1.61–21(g)(7) and then adding the

applicable terminal charge. The SIFL

cents-per-mile rates in the formula and

the terminal charge are calculated by the

Department of Transportation and are reviewed semi-annually.

The following chart sets forth the terminal charges and SIFL mileage rates:

fice of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding

this revenue ruling contact, Ms. Smith on

(202) 622-6050 (not a toll-free call).

FACTS

Section 451.—General Rule for

Taxable Year of Inclusion

26 CFR 1.451–1: General rule for taxable year of

inclusion.

Under the all events test of § 461 of the Code, is

an accrual method manufacturer’s liability to pay a

retailer for cooperative advertising services incurred

in Year 1 when those services are provided by the retailer, or in Year 2 when the retailer submits the required claim form for those services. See Rev. Rul.

98–39, page 4.

Section 461.—General Rule for

Taxable Year of Deduction

26 CFR 1.461–1: General rule for taxable year of

deduction.

(Also section 451; 1.451–1.)

All events test; cooperative advertising. Under the all events test of section

461 of the Code, an accrual method manufacturer’s liability for cooperative advertising services of a retailer is incurred in

Year 1, the year the services are performed, provided the manufacturer is able

to reasonably estimate the liability, even

though the retailer does not submit the required claim form until Year 2.

Rev. Rul. 98–39

ISSUE

Under the all events test of § 461 of the

Period During Which

the Flight Is Taken

Terminal

Charge

SIFL Mileage

Rates

7/1/98–12/31/98

$31.81

Up to 500 miles

= $.1740 per mile

501–1500 miles

= $.1327 per mile

Over 1500 miles

= $.1276 per mile

DRAFTING INFORMATION

The principal author of this revenue

ruling is Felicia Daniels Smith of the Of-

August 17, 1998

vices incurred in Year 1 when those services are provided by the retailer, or in

Year 2 when the retailer submits the required claim form for those services?

Internal Revenue Code, is an accrual

method manufacturer’s liability to pay a

retailer for cooperative advertising ser-

X, an accrual method taxpayer using a

calendar year as its taxable year, manufactures various consumer products, including

product M. Retailers engaged in the business of selling merchandise to consumers

purchase product M from X for resale. In

August of Year 1, X made a written offer to

pay each of these retailers $1 for each case

of product M that the retailer purchased

from X during September, October, and

November of Year 1, provided that the retailer advertised X’s product M during October or November of Year 1. To qualify

for X’s payment, the advertising provided

by the retailer had to satisfy the requirements set forth in X’s offer regarding the

format and content of the advertising (including the offering of a discount on product M), and the time for performance of the

advertising. X’s offer further required that,

to obtain payment, the retailer had to submit a claim form and proofs of performance within 90 days after the date that

the advertising was performed, verifying

that the advertising was performed in accordance with the terms of X’s offer.

Y, a retailer that accepted X’s offer, ordered 1,000 cases of product M from X

during September, October, and November of Year 1, and advertised product M in

November of Year 1 in a manner that satisfied the requirements of its agreement

with X. To obtain payment for that advertising, Y submitted its claim form and

proofs of performance to X in January of

Year 2.

X is able to make a reasonable estimate

of the amount that it is liable to pay Y for

the cooperative advertising services performed by Y in Year 1.

LAW AND ANALYSIS

Section 451 provides rules for determining the taxable year of inclusion for

items of gross income.

Section 1.451–1(a) of the Income Tax

Regulations provides that under an accrual method of accounting, income is includible in gross income when all the

events have occurred that fix the right to

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 5

receive such income and the amount

thereof can be determined with reasonable accuracy.

Section 461(a) provides that the

amount of any deduction or credit is taken

for the taxable year that is the proper taxable year under the method of accounting

used in computing taxable income.

Section 461(h) and § 1.461–1(a)(2)(i)

provide that, under the accrual method of

accounting, a liability is incurred, and is

generally taken into account for federal

income tax purposes, in the taxable year

in which (1) all the events have occurred

that establish the fact of the liability, (2)

the amount of the liability can be determined with reasonable accuracy, and (3)

economic performance has occurred with

respect to the liability.

Section 461(h)(2)(A)(i) provides that,

if the liability of the taxpayer arises out of

the providing of services to the taxpayer

by another person, economic performance

occurs as that person provides the services.

Generally, in a transaction where one

taxpayer is accruing a liability to pay

another taxpayer, the last event necessary to establish the fact of liability

under the all events test of §

1.461–1(a)(2)(i) is the same event that

fixes the right to receive income under

the all events test of § 1.451–1(a). See

Capital Investments of Hawaii, Inc. v.

Commissioner, T.C. Memo. 1982–80, n.

9 (the reasoning of cases analyzing §

451 is applicable to an analysis under §

461); Schneer v. Commissioner, 97 T.C.

643 at 650 (1991) (“the prerequisite of

performance of the services prior to any

liability on the part of the obligor is an

essential to satisfying the all-events test.

The right to receive income cannot become fixed before the obligor has an

obligation to pay”); see also Rev. Rul.

79–266, 1979–2 C.B. 203, and Rev. Rul.

79–410, 1979–2 C.B. 213.

Where a taxpayer’s obligations are set

forth in a written agreement, the terms of

the agreement are relevant in determining

the events that fix the taxpayer’s obligation to pay. See, e.g., Decision, Inc. v.

Commissioner, 47 T.C. 58 (1966), acq.,

1967–2 C.B. 2.

In general, the event fixing the fact of

liability pursuant to an agreement for the

provision of services is performance of

the services. See, e.g., National Bread

1998–33 I.R.B.

Wrapping Machine Co. v. Commissioner,

30 T.C. 550 (1958) (performance of services pursuant to a contract was necessary

to establish the taxpayer’s liability);

Charles Schwab v. Commissioner, 107

T.C. 282 (1996) (execution of a trade pursuant to a customer order fixes the broker’s right to receive the commission income).

Moreover, once the services are performed, the establishment of the fact of liability under the all events test is not delayed by an additional requirement in the

agreement that a claim or documentation

be submitted to obtain payment, if such

act is ministerial. See Dally v. Commissioner, 227 F.2d 724 (9th Cir. 1955), cert.

denied, 351 U.S. 908 (1956) (contractor’s

right to income was fixed in year it delivered houses, not in later year when a

properly certified invoice was submitted,

even though the contract specifically provided for payment upon the submission of

a properly certified invoice); Frank’s Casing Crew & Rental Tools, Inc. v. Commissioner, T.C. Memo. 1996–413 (contractor ’s preparation and sending of the

invoices were ministerial acts that did not

postpone accrual of income otherwise

earned). See also Continental Tie & Lumber Co. v. United States, 286 U.S. 290

(1932).

However, in some cases, the requirement that a claim for payment be filed is a

condition precedent that delays satisfaction of the all events test for § 461 purposes. In United States v. General Dynamics Corp., 481 U.S. 239 (1987), the

Court held that employees must file

claims with the employer to establish the

fact of the liability to reimburse employees for medical expenses under the all

events test. The Court noted that some

covered employees fail to file claims with

their employer for various reasons, such

that an employee’s receipt of covered

medical services was not sufficient to fix

the employer’s liability. Thus, the filing

of the claim was not a mere technicality.

In the cooperative advertising agreement between X and Y, the performance

required under the agreement is the provision of advertising services. Y’s submission of a claim form and proofs of performance substantiating that it has

performed the advertising according to

X’s specifications is merely the mechanism by which Y requests payment for ad-

vertising services already performed.

Thus, similar to Dally and Frank’s Casing, Y’s submission of the claim form and

proofs of performance is a ministerial act,

much like the submission of an invoice.

These facts distinguish the cooperative

advertising agreement between X and Y

from General Dynamics and demonstrate

that Y’s submission to X of the claim form

and proofs of performance is a mere technicality, not a condition precedent that is

necessary to establish X’s liability for

§ 461 purposes.

The last event necessary to establish

the fact of X’s liability under the all events

test occurred when Y performed the cooperative advertising services in Year 1 in

accordance with the terms of the contract.

X can reasonably estimate the amount of

its Year 1 liability for the cooperative advertising services performed by Y. Economic performance with respect to X’s liability occurred in Year 1 when Y

performed the cooperative advertising

services. Accordingly, X may deduct on

its Year 1 federal income tax return its liability for Y’s cooperative advertising services.

HOLDING

Under the all events test of § 461, an

accrual method manufacturer’s liability to

pay a retailer for cooperative advertising

services is incurred in Year 1, the year in

which the services are performed, provided the manufacturer is able to reasonably estimate this liability, and even

though the retailer does not submit the required claim form until Year 2.

APPLICATION

Any change in a taxpayer’s method of

accounting to conform with this revenue

ruling is a change in method of accounting

to which the provisions of §§ 446 and 481

and the regulations thereunder apply. A

taxpayer wanting to change its method of

accounting for its payments for cooperative advertising services provided by a retailer to conform with this revenue ruling

must follow the automatic change in accounting method provisions of Rev. Proc.

97–37, 1997–33 I.R.B. 18, except that the

scope limitations in section 4.02, as well

as the application procedures in sections

6.03, 6.04, and 6.05, of Rev. Proc. 97–37

do not apply. However, if the taxpayer is

under examination, before an appeals of-

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 6

fice, or before a federal court with respect

to any income tax issue, the taxpayer must

provide a copy of the Form 3115, Application for Change in Accounting Method, to

the examining agent(s), appeals officer, or

counsel for the government, as appropriate, at the same time that it files the copy

of the Form 3115 with the national office.

The Form 3115 must contain the name(s)

and telephone number(s) of the examining

agent(s), appeals officer, or counsel for the

government, as appropriate.

EFFECT ON OTHER DOCUMENTS

Rev. Proc. 97–37 is modified and amplified to include this accounting method

change in the APPENDIX.

these temporary regulations also serves as

the text of proposed regulations published

in REG–110332–98, page 18.

DATES: These regulations are effective

July 29, 1998.

FOR FURTHER INFORMATION CONTACT: Howard Wiener of the Office of

Associate Chief Counsel (International),

(202) 622-3870, regarding the change in

functional currency rules and Thomas

Preston of the Office of Assistant Chief

Counsel (Financial Institutions and Products), (202) 622-3930, regarding section

1001 (not toll free calls).

SUPPLEMENTARY INFORMATION:

DRAFTING INFORMATION

Background

The principal author of this revenue

ruling is John P. Moriarty of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Moriarty on (202) 622-4950 (not a tollfree call).

On March 9, 1998, the IRS issued Announcement 98–18 (1998–9 IRB 44) requesting comments relating to the tax issues for U.S. taxpayers operating,

investing or otherwise conducting business in a currency that is converting to the

euro. Numerous comments were received. After consideration of these comments, these regulations are adopted as a

temporary Treasury decision to provide

immediate guidance to taxpayers.

Section 985–Functional

Currency

26 CFR 1.985–1: Functional currency.

Explanation of Provisions

T.D. 8776

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Conversion to the Euro

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and Temporary regulations.

SUMMARY: This document contains

temporary Income Tax Regulations relating to U.S. taxpayers operating, investing

or otherwise conducting business in the

currencies of certain European countries

that are replacing their national currencies

with a single, multinational currency

called the euro. These regulations provide rules relating to adjustments required

for qualified business units operating in

such currencies and rules relating to the

tax effect of holding such currencies or financial instruments or contracts denominated in such currencies. The text of

August 17, 1998

I. Background

The Treaty on European Union signed

February 7, 1992, (31 I.L.M. 247) (entered into force November 1, 1993), sets

forth a plan to replace the national currencies of participating members (legacy currencies) that meet certain economic criteria with a single European currency

(euro). Pursuant to directives of the European Council, the process of converting

the legacy currencies into the euro will

take place in three phases.

On January 1, 1999, the currency of

participating member states of the European Union shall be the euro. At that time,

the euro will be substituted for the currency of each state at a conversion rate established pursuant to the Treaty on European Union. Thereafter, the bills and

coins of each of the legacy currencies will

remain in circulation but will cease to

have independent value apart from the

euro. On January 1, 2002, euro bills and

coins will be introduced into circulation.

From January 1, 1999, until June 30, 2002

(transition period), the legacy currencies

will remain in circulation as subunits of

the euro. The transition period is referred

to as the “no prohibition, no compulsion”

period because during this time amounts

may generally be denominated in the

legacy currencies and/or the euro at the

option of individuals and businesses. Finally, by July 1, 2002, the legacy currencies will no longer be accepted as legal

tender.

On May 3, 1998, the European Union

announced the eleven countries that

would initially participate in the conversion and the expected rates at which the

respective currencies would convert to the

euro. The eleven countries are Austria,

Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands,

Portugal, and Spain. Four current members of the European Union (Denmark,

Greece, Sweden, and the United Kingdom) will not participate in the initial

conversion to the euro. These countries,

along with other countries that later join

the European Union, however, may convert their currencies to the euro at some

future time.

II. Temporary Regulations

1. In General

These temporary regulations provide

guidance regarding certain of the federal

income tax consequences arising from the

introduction of the euro. Consistent with

comments received from taxpayers, the

regulations generally minimize the tax

consequences that arise by reason of the

euro conversion. In a limited number of

circumstances, however, the Treasury and

IRS determined that considerations, such

as administrative feasibility, made a different result more appropriate.

The regulations provide guidance with

respect to two issues: (i) the circumstances under which the euro conversion

creates a realization event with respect to

instruments and contracts denominated in

a legacy currency, and (ii) the circumstances under which the euro conversion

constitutes a change in functional currency for a qualified business unit (QBU)

whose functional currency is a legacy currency, and certain consequences thereof.

2. Realization

The temporary regulations provide that

the conversion of legacy currencies to the

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 7

euro does not result in a realization event

under section 1001. This rule is broadly

applicable to all situations where the

rights and obligations of a taxpayer are altered solely by reason of the euro conversion. Thus, conversion to the euro of

legacy currency held by a taxpayer and

conversion of legacy currency denominated contractual relationships, financial

instruments, and other claims or obligations are not realization events solely as a

result of the conversion. In addition, as a

result of this rule, exchange gains and

losses on section 988 transactions denominated in a legacy currency will not be

taken into account until a subsequent realization event with respect to the underlying instrument. For example, when the

Dutch guilder is converted into the euro, a

U.S. dollar functional currency taxpayer

will not recognize either market gain or

loss or exchange gain or loss on a fixed

interest rate Dutch guilder debt instrument.

Other aspects of the euro conversion

may result in taxable events. For example, if an unscheduled fractional principal

payment is made on a debt instrument in

order to facilitate a rounding convention,

this payment is accounted for under the

rules governing payments on debt instruments (such as §§1.446–2 and 1.1275–2)

and under section 988 (in the case of a

section 988 transaction). Other changes

may or may not constitute realization

events depending on the terms of the

changes. For example, accrual periods,

holiday conventions or indices on a floating rate instrument may be altered.

Whether these changes are realization

events must be determined under existing

law. See, e.g., §1.1001–3.

Limitations that under otherwise applicable principles prevent or defer the recognition of realized gains and losses continue

to apply. Thus, for example, recognition of

losses between related parties under section 267 and §1.988–1(a)(10) remain subject to the limitations set forth in those sections.

3. Change in Functional Currency

The regulations provide that QBUs

with a legacy functional currency will be

deemed to have automatically changed

their functional currency to the euro at the

beginning of the year they are required to

make such change. Because of the significant administrative burdens that will be

1998–33 I.R.B.

imposed on QBUs when they are required

to change their internal systems to accommodate the introduction of the euro, the

regulations provide that a QBU that currently uses a legacy functional currency is

deemed to automatically change its functional currency to the euro in the year the

QBU changes its books and records to the

euro. That change, however, must be

made no later than the last taxable year

beginning on or before the first day such

legacy currency is no longer valid legal

tender.

The euro conversion implicates the policy concerns underlying §1.985–5,

namely, the preservation of built-in exchange gains and losses arising from the

fact that positions that had once been denominated in a nonfunctional currency

will now be made or received in a QBU’s

functional currency.

In the context of the euro conversion,

two items are of particular concern in

properly accounting for exchange gains

and losses: (1) section 988 transactions

denominated in a legacy currency other

than the QBU’s legacy functional currency, and (2) unremitted earnings of a

branch with a legacy functional currency

different from the home office’s legacy

functional currency. In both these instances, positions that had previously

been accounted for in a nonfunctional

currency (against which exchange gains

and loses would be computed) will, after

the conversion, be accounted for in euros

(against which exchange gains and losses

would not be computed when a QBU’s

functional currency is also the euro).

Rather than requiring immediate recognition, as would be required under

§1.985–5, the temporary regulations provide special rules for the euro conversion.

These rules provide that for affected section 988 transactions (other than transactions in or holdings of nonfunctional currency cash), exchange gains and losses

that would have been recognized immediately if the §1.985–5 change in functional

currency rules applied will be deferred

until otherwise realized. This is accomplished by providing that section 988

transactions continue to be treated as nonfunctional currency transactions under the

principles of section 988 even though the

remaining payments on the asset or liability will be made in the QBU’s new functional currency (i.e., the euro).

In response to comments by taxpayers,

an election is provided for QBUs to realize exchange gain or loss on accounts receivable and payable immediately prior to

the year of change. A QBU making this

election must realize exchange gains and

losses on all of its accounts receivable and

payable that are legacy currency denominated section 988 transactions. The election responds to the administrative burdens associated with tracking exchange

gains and losses on large quantities of accounts receivable and payable. Taxpayers

not making the election will continue to

treat these positions as section 988 transactions under the general rule described

above.

Exchange gains and losses on transactions in, or holdings of, nonfunctional

currency cash are recognized immediately

because cash accounts are generally

turned over rapidly and the administrative

burdens in tracking exchange gains and

losses outweigh the benefits of deferral.

The regulations also provide special

rules for taking into account exchange

gain or loss when the taxpayer and a

branch of the taxpayer change their functional currencies to the euro. The rules

provide that exchange gains and losses on

unremitted earnings of affected branches

be recognized ratably over a four-year period beginning in the year of change.

Some commentators recommended that

the principles of section 987 continue to

be applied after the conversion. As in the

case with cash, however, the Treasury and

IRS believe that the administrative burdens for taxpayers and the government as

well as the potential for abuse, outweigh

the benefit of extended deferral.

These temporary regulations also provide rules for the proper translation of a

QBU’s balance sheet accounts in a manner that preserves any accrued but unrecognized currency gain or loss. These

rules are consistent with the existing

§1.985–5, change in functional currency

rules.

III. Other Issues

Finally, these regulations do not address certain issues that taxpayers have

commented upon that are not unique to

the euro conversion. In particular, these

regulations do not address the deductibility of costs associated with the euro conversion and foreign tax credit mismatches

that can occur as a result of tax account-

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 8

ing differences between the United States

and other countries.

Special Analysis

It has been determined that this Treasury

decision is not a significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not

required. It has also been determined that

section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6)

do not apply to these regulations, and therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of

the Internal Revenue Code, these temporary regulations will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

their impact on small business.

Drafting Information

The principal authors of these regulations are Howard A. Wiener of the Office

of the Associate Chief Counsel (International) and Thomas Preston of the Office

of Associate Chief Counsel (Domestic).

Other personnel from the IRS and Treasury Department also participated in their

development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.985–1, paragraph (c)(6) is

amended by adding a sentence at the end

to read as follows:

§1.985–1 Functional currency.

* * * * *

(6) * * * For special rules relating to

the conversion to the euro, see §1.985–8T.

§1.985–4 [Amended]

Par. 3. In §1.985–4, the last sentence of

paragraph (a) is amended by removing the

August 17, 1998

reference “§1.985–2” and adding

“§1.985–2 or 1.985–8T” in its place.

Par. 4. Section 1.985–8T is added to

read as follows:

§1.985–8T Special rules applicable to

the European Monetary Union (conversion to the euro)(temporary).

(a) Definitions—(1) Legacy currency.

A legacy currency is the national currency

of a participating member state of the European Union used prior to the substitution of the euro for the national currency

of that state in accordance with the Treaty

on European Union signed February 7,

1992. The term legacy currency shall also

include the European Currency Unit.

(2) Conversion rate. The conversion

rate is the rate at which the euro is substituted for a legacy currency.

(b) Operative rules—(1) Initial adoption. A QBU (as defined in §1.989(a)–1(b))

whose first taxable year begins after the

euro has been substituted for a legacy currency may not adopt that legacy currency

as its functional currency.

(2) QBU with a legacy functional currency—(i) Required change. A QBU with

a legacy currency as its functional currency is required to change its functional

currency to the euro beginning the first

day of the first taxable year:

(A) That begins on or after the day that

the euro is substituted for that legacy currency (in accordance with the Treaty on

European Union); and

(B) In which the QBU begins to maintain its books and records (as described in

§1.989(a)–1(d)) in the euro.

(ii) Notwithstanding paragraph

(b)(2)(i) of this section, a QBU with a

legacy currency as its functional currency

is required to change its functional currency to the euro no later than the last taxable year beginning on or before the first

day such legacy currency is no longer

valid legal tender.

(iii) Consent of Commissioner. A

change made pursuant to paragraph

(b)(2)(i) of this section shall be deemed to

be made with the consent of the Commissioner for purposes of §1.985–4. A QBU

changing its functional currency to the

euro pursuant to this paragraph (b)(2)

must make adjustments as provided in

paragraph (c) of this section.

(3) Statement to file upon change. With

respect to a QBU that changes its func-

tional currency to the euro under paragraph

(b)(2) of this section, an affected taxpayer

shall attach to its return for the taxable year

of change a statement that includes the following: “TAXPAYER CERTIFIES THAT

A QBU OF THE TAXPAYER HAS

CHANGED ITS FUNCTIONAL CURRENCY TO THE EURO PURSUANT TO

TREAS. REG. §1.985–8T.” For purposes

of this paragraph (b)(3), an affected taxpayer shall be in the case where the QBU

is: a QBU of an individual U.S. resident

(as a result of the activities of such individual), the individual; a QBU branch of a

U.S. corporation, the corporation; a controlled foreign corporation (as described in

section 957)(or QBU branch thereof), each

United States shareholder (as described in

section 951(b)); a partnership, each partner

separately; a noncontrolled section 902

corporation (as described in section

904(d)(2)(E)) (or branch thereof), each domestic shareholder as described in

§1.902–1(a)(1); or a trust or estate, the

fiduciary of such trust or estate.

currency to the euro pursuant to paragraph (b) of this section must make the

adjustments described in paragraphs

(c)(2) through (5) of this section. Section

1.985–5 shall not apply.

(2) Determining the euro basis of property and the euro amount of liabilities and

other relevant items. The euro basis in

property and the euro amount of liabilities

and other relevant items shall equal the

product of the legacy functional currency

adjusted basis or amount of liabilities

multiplied by the applicable conversion

rate.

(3) Taking into account exchange gain

or loss on legacy currency section 988

transactions—(i) In general. Except as

provided in paragraphs (c)(3)(iii) and (iv)

of this section, a legacy currency denominated section 988 transaction (determined

after applying section 988(d)) outstanding

on the last day of the taxable year immediately prior to the year of change shall

continue to be treated as a section 988

transaction after the change and the principles of section 988 shall apply.

(ii) Example. The application of this

paragraph (c)(3) may be illustrated by the

following examples:

Example 1. X, a calendar year QBU on the cash

method of accounting, uses the deutschmark as its

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 9

functional currency. X is not described in section

1281(b). On July 1, 1998, X converts 10,000

deutschmarks (DM) into Dutch guilders(fl) at the

spot rate of fl1 = DM1 and loans the 10,000 guilders

to Y (an unrelated party) for one year at a rate of

10% with principal and interest to be paid on June

30, 1999. On January 1, 1999, X changes its functional currency to the euro pursuant to §1.985–8T.

The euro/deutschmark conversion rate is set by the

European Council at =C1 = DM2. The euro/guilder

conversion rate is set at =C1 = fl2.25. Accordingly,

under the terms of the note, on June 30, 1999, X will

receive =C4444.44 (fl10,000/2.25) of principal and

=C444.44 (fl1,000/2.25) of interest. Pursuant to this

paragraph (c)(3), X will realize an exchange loss on

the principal computed under the principles of

§1.988–2(b)(5). For this purpose, the exchange rate

used under §1.988–2(b)(5)(i) shall be the

guilder/euro conversion rate. The amount under

§1.988–2(b)(5)(ii) is determined by translating the

fl10,000 at the guilder/deutschmark spot rate on July

1, 1998, and translating that deutschmark amount

into euros at the deutschmark/euro conversion rate.

Thus, X will compute an exchange loss for 1999 of

= 4444.44

C 555.56 determined as follows: [C

(fl10,000/2.25) – =

C 5000 ((fl10,000/1)/2) =

= 555.56]. Pursuant to this paragraph (c)(3), the

–C

character and source of the loss are determined pursuant to section 988 and regulations thereunder. Because X uses the cash method of accounting for the

interest on this debt instrument, X does not realize

exchange gain or loss on the receipt of that interest.

Example 2. (i) X, a calendar year QBU on the accrual method of accounting, uses the deutschmark as

its functional currency. On February 1, 1998, X

converts 12,000 deutschmarks into Dutch guilders at

the spot rate of fl1 = DM1 and loans the 12,000

guilders to Y (an unrelated party) for one year at a

rate of 10% with principal and interest to be paid on

January 31, 1999. In addition, assume the average

rate (deutschmark/guilder) for the period from February 1, 1998, through December 31, 1998 is fl1.07

= DMl. Pursuant to §1.988– 2(b)(2)(ii)(C), X will

accrue eleven months of interest on the note and recognize interest income of DM1028.04 (fl1100/1.07)

in the 1998 taxable year.

(ii) On January 1, 1999, the euro will replace the

deutschmark as the national currency of Germany

pursuant to the Treaty on European Union signed

February 7, 1992. Assume that on January 1, 1999,

X changes its functional currency to the euro pursuant to §1.985–8T. The euro/deutschmark conversion rate is set by the European Council at =C1 =

DM2. The euro/guilder conversion rate is set at =C1

= fl2.25. In 1999, X will accrue one month of interest equal to =C44.44 (fl100/2.25). On January 31,

1999, pursuant to the note, X will receive interest

denominated in euros of =C533.33 (fl1200/2.25).

Pursuant to this paragraph (c)(3), X will realize an

exchange loss in the 1999 taxable year with respect

to accrued interest computed under the principles of

§1.988–2(b)(3). For this purpose, the exchange rate

used under §1.988–2(b)(3)(i) is the guilder/euro

conversion rate and the exchange rate used under

§1.988–2(b)(3)(ii) is the deutschmark/euro conversion rate. Thus, with respect to the interest accrued

in 1998, X will realize exchange loss of =C25.13

= 488.89

under §1.988–2(b)(3) as follows: [C

(fl1100/2.25) – =

C 514.02 (DM1028.04/2) =

= 25.13]. With respect to the one month of interest

–C

1998–33 I.R.B.

accrued in 1999, X will realize no exchange gain or

loss since the exchange rate when the interest accrued and the spot rate on the payment date are the

same.

(iii) X will realize exchange loss of =C666.67 on

repayment of the loan principal computed in the

= 5333.33

same manner as in Example 1 [C

(fl12,000/2.25) – =C6000 (fl12,000/1)/2)]. The losses

with respect to accrued interest and principal are

characterized and sourced under the rules of section

988.

(iii) Special rule for legacy nonfunctional currency. The QBU shall realize or

otherwise take into account for all purposes of the Internal Revenue Code the

amount of any unrealized exchange gain or

loss attributable to nonfunctional currency

(as described in section 988(c)(1)(C)(ii))

that is denominated in a legacy currency as

if the currency were disposed of on the last

day of the taxable year immediately prior

to the year of change. The character and

source of the gain or loss are determined

under section 988.

(iv) Legacy currency denominated accounts receivable and payable—(A) In

general. A QBU may elect to realize or

otherwise take into account for all purposes of the Internal Revenue Code the

amount of any unrealized exchange gain

or loss attributable to a legacy currency

denominated item described in section

988(c)(1)(B)(ii) as if the item were terminated on the last day of the taxable year

ending prior to the year of change.

(B) Time and manner of election. With

respect to a QBU that makes an election

described in paragraph (c)(3)(iv)(A) of

this section, an affected taxpayer (as described in paragraph (b)(3) of this section)

shall attach a statement to its tax return

for the taxable year of change which includes the following: “TAXPAYER CERTIFIES THAT A QBU OF THE TAXPAYER HAS ELECTED TO REALIZE

CURRENCY GAIN OR LOSS ON

LEGACY CURRENCY DENOMINATED ACCOUNTS RECEIVABLE

AND PAYABLE UPON CHANGE OF

FUNCTIONAL CURRENCY TO THE

EURO.” A QBU making the election

must do so for all legacy currency denominated items described in section

988(c)(1)(B)(ii).

(4) Adjustments when a branch

changes its functional currency to the

euro—(i) Branch changing from a legacy

currency to the euro in a taxable year

during which taxpayer’s functional cur-

rency is other than the euro. If a branch

changes its functional currency from a

legacy currency to the euro for a taxable

year during which the taxpayer’s functional currency is other than the euro, the

branch’s euro equity pool shall equal the

product of the legacy currency amount of

the equity pool multiplied by the applicable conversion rate. No adjustment to the

basis pool is required.

(ii) Branch changing from a legacy

currency to the euro in a taxable year

during which taxpayer’s functional currency is the euro. If a branch changes its

functional currency from a legacy currency to the euro for a taxable year during

which the taxpayer’s functional currency

is the euro, the taxpayer shall realize gain

or loss attributable to the branch’s equity

pool under the principles of section 987,

computed as if the branch terminated on

the last day prior to the year of change.

Adjustments under this paragraph

(c)(4)(ii) shall be taken into account by

the taxpayer ratably over four taxable

years beginning with the taxable year of

change.

(5) Adjustments to a branch’s accounts

when a taxpayer changes to the euro—(i)

Taxpayer changing from a legacy currency to the euro in a taxable year during

which a branch’s functional currency is

other than the euro. If a taxpayer

changes its functional currency to the

euro for a taxable year during which the

functional currency of a branch of the

taxpayer is other than the euro, the basis

pool shall equal the product of the legacy

currency amount of the basis pool multiplied by the applicable conversion rate.

No adjustment to the equity pool is required.

(ii) Taxpayer changing from a legacy

currency to the euro in a taxable year

during which a branch’s functional currency is the euro. If a taxpayer changes

its functional currency from a legacy currency to the euro for a taxable year during

which the functional currency of a branch

of the taxpayer is the euro, the taxpayer

shall take into account gain or loss as determined under paragraph (c)(4)(ii) of this

section.

(6) Additional adjustments that are

necessary when a corporation changes its

functional currency to the euro. The

amount of a corporation’s euro currency

earnings and profits and the amount of its

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 10

euro paid-in capital shall equal the product of the legacy currency amounts of

these items multiplied by the applicable

conversion rate. The foreign income

taxes and accumulated profits or deficits

in accumulated profits of a foreign corporation that were maintained in foreign

currency for purposes of section 902 and

that are attributable to taxable years of the

foreign corporation beginning before January 1, 1987, also shall be translated into

the euro at the conversion rate.

(d) Effective date. This section applies

to tax years ending after July 29, 1998.

Par. 5. Section 1.1001–5T is added to

read as follows:

§1.1001–5T European Monetary Union

(conversion to the euro)(temporary).

August 17, 1998

(a) Conversion of currencies. For purposes of §1.1001–1(a), the conversion to

the euro of legacy currencies (as defined

in §1.985–8T(a)(1)) is not the exchange

of property for other property differing

materially in kind or extent.

(b) Effect of currency conversion on

other rights and obligations. For purposes of §1.1001–1(a), if, solely as the result of the conversion of legacy currencies

to the euro, rights or obligations denominated in a legacy currency become rights

or obligations denominated in the euro,

that event is not the exchange of property

for other property differing materially in

kind or extent. Thus, for example, when a

debt instrument that requires payments of

amounts denominated in a legacy currency becomes a debt instrument requir-

ing payments of euros, that alteration is

not a modification within the meaning of

§1.1001–3(c).

to tax years ending after July 29, 1998.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved July 17, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on July

28, 1998, 8:45 a.m., and published in the issue of the

Federal Register for July 29, 1998, 63 F.R. 40366)

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 11

Part III. Administrative, Procedural, and Miscellaneous

Effective Date of

Nondiscrimination Regulations

for Church Plans

Notice 98–39

I. PURPOSE

This notice extends, until the first day

of the first plan year beginning on or after

January 1, 2001, the effective date of certain nondiscrimination regulations for

nonelecting church plans. Specifically,

this notice extends the effective date of

the regulations under §§ 401(a)(4),

401(a)(5), 401(l), and 414(s) of the Internal Revenue Code. This notice also extends the TRA ’86 remedial amendment

period for such provisions, and other related administrative relief for nonelecting

church plans, until the last day of the first

plan year beginning on or after January 1,

2001.

II. BACKGROUND

A. Church Plans

Section 414(e)(1) of the Code provides

in general that the term “church plan”

means a plan established and maintained

for its employees (and their beneficiaries)

by a church or by a convention or association of churches which is exempt from tax

under § 501. Pursuant to § 410(d), a

church or convention or association of

churches which maintains any church

plan may make an election under § 410(d)

to have certain Code provisions relating

to participation, vesting, and funding,

etc., apply to such church plan (an “electing church plan”) as if such provisions did

not contain an exclusion for church plans.

A church plan for which such an election

has not been made (a “nonelecting church

plan”) is not subject to these provisions.

Section 1462(b) of the Small Business

Job Protection Act of 1996 (“SBJPA”)

provides that the Secretary of the Treasury may design nondiscrimination and

coverage safe harbors for church plans.

B. Announcement 95–48 and Notice

96–64

The nondiscrimination requirements

under the Code were substantially

changed by the Tax Reform Act of 1986

(“TRA ’86”). Announcement 95–48,

1995–23 I.R.B. 13, and Notice 96–64,

1998–33 I.R.B.

1996–2 C.B. 229, provided that the regulations under §§ 401(a)(4), 401(a)(5),

401(l) and 414(s) apply for nonelecting

church plans in plan years beginning on

or after January 1, 1999. For plan years

beginning before that effective date, nonelecting church plans must be operated in

accordance with a reasonable, good faith

interpretation of these statutory provisions.

The remedial amendment period described in § 401(b) is generally the period

during which a plan may be amended

retroactively to comply with certain plan

qualification requirements. Announcement 95–48 and Notice 96–64 extended

the remedial amendment period under §

401(b) for nonelecting church plans for

certain amendments (“TRA ’86 remedial

amendment period”) to the last day of the

first plan year beginning on or after January 1, 1999. The amendments to which

the TRA ’86 remedial amendment period

applies are those required to comply with

TRA ’86 and subsequent legislation

through the Omnibus Budget Reconciliation Act of 1993. Announcement 95–48

and Notice 96–64 also provided that, for a

nonelecting church plan during the TRA

’86 remedial amendment period, the additional administrative relief provided

under Notice 92–36, 1992–2 C.B. 364,

would continue to be available.

C. Revenue Procedure 97–41 and

Revenue Procedure 98–14

The Uruguay Round Agreements Act

of 1994 (“GATT”), SBJPA (including

§ 414(u) of the Code and the Uniformed

Services Employment and Reemployment

Rights Act of 1994 (“USERRA”)), and

the Taxpayer Relief Act of 1997 (“TRA

’97”) changed certain provisions of the

Code affecting qualified plans. Rev. Proc.

97–41, 1997–33 I.R.B. 51, and Rev. Proc.

98–14, 1998–4 I.R.B. 22, set forth the remedial amendment period for plans for

amendments relating to these statutes.

The remedial amendment period for these

statutes generally permits plan amendments to be made retroactively effective if

they are adopted on or before the last day

of the first plan year beginning on or after

January 1, 1999, and they relate to GATT,

SBJPA (including § 414(u) and

USERRA), and TRA ’97 changes that are

effective before the first day of that plan

year. (A later remedial amendment period

applies for governmental plans.)

III. EXTENSION OF EFFECTIVE

DATE OF NONDISCRIMINATION

REGULATIONS FOR NONELECTING

CHURCH PLANS

Under the extension provided by this

notice, the regulations under §§ 401(a)(4),

401(a)(5), 401(l), and 414(s) apply to

nonelecting church plans only for plan

years beginning on or after January 1,

2001. For plan years beginning before

this extended effective date, nonelecting

church plans must be operated in accordance with a reasonable, good faith interpretation of these sections.

IV. EXTENSION OF REMEDIAL

AMENDMENT PERIOD AND

ADMINISTRATIVE RELIEF FOR

NONELECTING CHURCH PLANS

FOR AMENDMENTS RELATING TO

NONDISCRIMINATION

REQUIREMENTS

Under this notice, the TRA ’86 remedial amendment period for nonelecting

church plans is extended to the last day of

the first plan year beginning on or after

January 1, 2001, but only for amendments

required to comply with the nondiscrimination requirements of §§ 401(a)(4),

401(a)(5), 401(l), and 414(s). The additional administrative relief provided

under Notice 92–36 also applies to these

plans through this extended remedial

amendment period with respect to these

nondiscrimination requirements. This notice does not extend the remedial amendment periods for any provisions applicable to nonelecting church plans other than

these nondiscrimination requirements.

V. SCOPE AND COMMENTS

The extensions described in this notice

are provided in anticipation of the development of nondiscrimination and coverage safe harbors for nonelecting church

plans to comply with §§ 401(a)(4),

401(a)(5), 401(l), and 414(s), as described

in § 1462(b) of SBJPA. The Treasury and

the Service recognize that certain issues

may arise for nonelecting church plans

that are attributable to unique features of

churches as sponsoring employers. Such

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 12

issues may arise, for instance, in the interaction of §§ 401(a)(4) and 410(c). The

Treasury and the Service invite specific

comments and suggestions regarding the

design of safe harbors for nonelecting

church plans.

The extensions provided by this notice

do not apply to electing church plans.

The Treasury and the Service do not

presently anticipate the development of

safe harbors for electing church plans

under § 1462(b) of SBJPA, but comments

are welcome regarding whether these

plans need safe harbors. Furthermore,

this notice does not apply to annuity contracts or other arrangements maintained

by churches pursuant to § 403(b), which

continue to be eligible for the relief described in § VI of Notice 96–64.

Comments or suggestions in response

to this notice should be addressed to

CC:DOM:CORP:R (Notice 98–39),

Room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, taxpayers may hand-deliver comments between

the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (Notice 98–39),

Courier’s desk, Internal Revenue Service,

1111 Constitution Ave., NW, Washington,

DC, or may submit comments electronically via the IRS internet site at

http://www.irs.ustreas.gov./prod/tax_regs/

comments.html

VI. EFFECT ON OTHER DOCUMENTS

Notices 96–64 and 92–36 are modified.

DRAFTING INFORMATION

The principal author of this notice is

Diane S. Bloom of the Employee Plans

Division. For further information regarding this notice, please contact the Employee Plans Division’s taxpayer assistance telephone service at (202) 622-6074

or (202) 622-6075, between the hours of

1:30 p.m. and 3:30 p.m. Eastern Time,

Monday through Thursday. Ms. Bloom

may be reached at (202) 622-6214. These

telephone numbers are not toll-free.

1998 Section 43 Inflation

Adjustment

Notice 98–41

Section 43(b)(3)(B) of the Internal

Revenue Code requires the Secretary to

publish an inflation adjustment factor.

August 17, 1998

The enhanced oil recovery credit under §

43 for any taxable year is reduced if the

“reference price,” determined under §

29(d)(2)(C), for the calendar year preceding the calendar year in which the taxable

year begins is greater than $28 multiplied

by the inflation adjustment factor for that

year.

The term “inflation adjustment factor”

means, with respect to any calendar year,

a fraction the numerator of which is the

GNP implicit price deflator for the preceding calendar year and the denominator

of which is the GNP implicit price deflator for 1990.

Because the reference price for the

1997 calendar year ($17.24) does not exceed $28 multiplied by the inflation adjustment factor for the 1998 calendar

year, the enhanced oil recovery credit for

qualified costs paid or incurred in 1998 is

determined without regard to the phaseout for crude oil price increases.

Table 1 contains the GNP implicit price

deflator used for the 1998 calendar year,

as well the previously published GNP implicit price deflators used for the 1991

through 1997 calendar years.

Notice 98–41 TABLE 1

GNP IMPLICIT PRICE DEFLATORS

Calendar Year

GNP Implicit

Price Deflator

1990

1991

1992

1993

1994

1995

1996

1997

112.9 (used for 1991)

117.0 (used for 1992)

120.9 (used for 1993)

124.1 (used for 1994)

126.0 (used for 1995)

107.5 (used for 1996)*

109.7 (used for 1997)

112.35 (used for 1998)**

* Beginning in 1995, the GNP implict

price deflator was rebased relative to

1992. The 1990 GNP implicit price

deflator used to compute the 1996 § 43

inflation adjustment factor is 93.6.

** Beginning in 1997, two digits follow the decimal point in the GNP implicit price deflator. The 1990 GNP

price deflator used to compute the

1998 § 43 inflation adjustment factor

is 93.63.

Table 2 contains the inflation adjustment factor and the phase-out amount for

taxable years beginning in the 1998 cal-

endar year as well as the previously published inflation adjustment factors and

phase-out amounts for the 1991 through

1997 calendar years.

Notice 98–41 TABLE 2

INFLATION ADJUSTMENT

FACTORS AND PHASE-OUT

AMOUNTS

Calendar

Year

Inflation

Adjustment

Factor

Phase-out

Amount

1991

1992

1993

1994

1995

1996

1997

1998

1.0000

1.0363

1.0708

1.0992

1.1160

1.1485

1.1720

1.1999

DRAFTING INFORMATION

The principal author of this notice is

Brenda M. Stewart of the Office of Assistant Chief Counsel (Passthroughs and

Special Industries). For further information regarding this notice contact Ms.

Stewart on (202) 622-3120 (not a toll-free

call).

1998 Marginal Production Rates

Notice 98–42

Section 613A(c)(6)(C) of the Internal

Revenue Code defines the term “applicable percentage” for purposes of

determining percentage depletion for

oil and gas produced from marginal

properties. The applicable percentage

is the percentage (not greater than 25

percent) equal to the sum of 15 percent,

plus one percentage point for each

whole dollar by which $20 exceeds the

reference price (determined under §

29(d)(2)(C)) for crude oil for the calendar year preceding the calendar year in

which the taxable year begins. The reference price determined under §

29(d)(2)(C) for the 1997 calendar year

is $17.24.

Table 1 contains the applicable percentages for marginal production for taxable

years beginning in calendar years 1991

through 1998.

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 13

BACKGROUND

Notice 98–42 TABLE 1

APPLICABLE PERCENTAGE FOR

MARGINAL PRODUCTION

Calendar Year

Applicable

Percentage

1991

1992

1993

1994

1995

1996

1997

1998

15 percent

18 percent

19 percent

20 percent

21 percent

20 percent

16 percent

17 percent

DRAFTING INFORMATION

The principal author of this notice is

Brenda M. Stewart of the Office of Assistant Chief Counsel (Passthroughs and

Special Industries). For further information regarding this notice contact Ms.

Stewart on (202) 622-3120 (not a toll-free

call).

Section 7436(a) of the Code provides

the Tax Court with jurisdiction to review

determinations by the Service that workers are employees for purposes of subtitle

C of the Code, or that the organization for

which services are performed is not entitled to relief from employment taxes

under § 530 of the Revenue Act of 1978.

Section 7436(a) requires that the determination involve an actual controversy and

that it be made as part of an examination.

Section 7436 became effective on August

5, 1997.

Proceedings under § 7436 may be conducted pursuant to the Tax Court’s simplified procedures for small tax cases set

forth in § 7463 of the Code and Rule 295

of the Tax Court’s Rules of Practice and

Procedure. Currently, taxpayers may

elect, with the concurrence of the Tax

Court, to use these simplified procedures

if the amount of employment taxes placed

in dispute is $50,000 or less for each calendar quarter involved.

ISSUES TO WHICH § 7436 APPLIES

New Procedures for Processing

Employment Tax Cases

Involving Worker Classification

and Section 530 of the Revenue

Act of 1978 Under Section

7436 of the Code

Notice 98–43

PURPOSE

The Taxpayer Relief Act of 1997

(TRA ’97), Pub. L. No. 105–34, 111 Stat.

788, created new § 7436 of the Internal

Revenue Code (the “Code”), which provides Tax Court review rights concerning certain employment tax determinations. This notice provides information

about how taxpayers may petition for

Tax Court review of employment tax determinations under § 7436. Attached to

this notice as Exhibit 1 is a “Notice of

Determination Concerning Worker Classification Under Section 7436” (a “Notice of Determination”). With respect to

taxpayers whose workers are the subject

of an employment tax determination, the

attached Notice of Determination addressed to a taxpayer will constitute the

“determination” that is a prerequisite to

invoking the Tax Court’s jurisdiction

under § 7436.

1998–33 I.R.B.

Section 7436(a) provides the Tax Court

with jurisdiction to review the Service’s

determinations that one or more individuals performing services for the taxpayer

are employees of the taxpayer for purposes of subtitle C of the Code, or that the

taxpayer is not entitled to relief under §

530 with respect to such individuals.

Thus, § 7436(a) does not provide the Tax

Court with jurisdiction to determine any

amount of employment tax or penalties.

Nor does § 7436(a) provide the Tax Court

with jurisdiction to review other employment tax issues. Moreover, the procedures set forth in § 7436 do not apply to

employment-related issues not arising

under subtitle C, such as the classification

of individuals with respect to pension

plan coverage or the proper treatment of

individual income tax deductions. Additionally, insofar as § 7436(a) only confers

jurisdiction upon the Tax Court to review

determinations that are made by the Service as part of an examination, other Service determinations that are not made as

part of an examination, including those

that are made in the context of private letter rulings or Forms SS–8, Determination

of Employee Work Status for Purposes of

Federal Employment Taxes and Income

Tax Withholding, are not subject to re-

view by the Tax Court under § 7436(a).

The Service will issue a Notice of Determination only after the Service has determined both that one or more individuals performing services for the taxpayer

are employees for purposes of subtitle C

and that the taxpayer is not entitled to relief under § 530. This will provide taxpayers with the opportunity to resolve

both issues in one judicial determination.

TAXPAYERS ELIGIBLE TO SEEK

JUDICIAL REVIEW

Section 7436(b) provides that a pleading seeking Tax Court review of the Service’s determination may be filed only by

“the person for whom the services are

performed.” Thus, workers may not seek

review of the Service’s determinations

under § 7436. In addition, because there

must be an actual controversy, review

may not be sought by a third party that

has not been determined by the Service to

be the employer.

NOTICE OF DETERMINATION

CONCERNING WORKER

CLASSIFICATION UNDER § 7436

The Service will inform taxpayers of a

determination described in § 7436(a) by

sending the taxpayer a Notice of Determination by certified or registered mail. A

copy of the current Notice of Determination, which may be revised from time to

time, is attached hereto as Exhibit 1.

The Notice of Determination will advise taxpayers of the opportunity to seek

Tax Court review and provides information on how to do so. Attached to the Notice of Determination will be a schedule

showing each kind of tax with its proposed employment tax adjustment by calendar quarter. The schedule will be provided to enable the taxpayer to determine

eligibility to elect use of the small tax

case procedures under § 7436(c). Currently, the small tax case procedures may

be available under § 7436(c) if the

amount of employment taxes placed in

dispute is $50,000 or less for each calendar quarter involved.

In most cases, a taxpayer who receives

a Notice of Determination will have previously received a “thirty-day letter,”

which the Service sends to taxpayers in

unagreed examination cases. The thirtyday letter lists the proposed employment

tax adjustments to be made and describes

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 14

the taxpayer’s right to either agree to the

proposed employment tax adjustments or,

alternatively, to protest the proposed adjustments to the Appeals Division of the

Service within thirty days of the date of

the letter. If the taxpayer does not respond to the thirty-day letter by agreeing

to the proposed adjustments or, alternatively, by filing a protest with the Appeals

Division, the taxpayer will receive, by

certified or registered mail, a Notice of

Determination. Under normal procedures, if the taxpayer does not respond to

the thirty-day letter, the taxpayer should

generally expect to receive a Notice of

Determination within sixty days after expiration of the thirty-day period beginning

with the date on the thirty-day letter. If no

Notice of Determination is received during this period, the taxpayer may wish to

contact the local Internal Revenue Service

office to check on the status of the case.

If the taxpayer responds to the thirtyday letter by filing a protest with the Appeals Division (or if the case proceeds to

Appeals by way of the employment tax

early referral procedures, see Announcement 97–52, 1997–21 I.R.B. 22; Announcement 96–13, 1996–12 I.R.B. 33;

and Rev. Proc. 96–9, 1996–1 C.B. 575),

and the worker classification and § 530 issues are not settled on an agreed basis in

the Appeals Division, the taxpayer will

thereafter receive a Notice of Determination. Taxpayers are encouraged to resolve

cases in nondocketed status by requesting

use of the early referral procedures in appropriate cases.

PREREQUISITE FOR SEEKING TAX

COURT REVIEW

Because a Notice of Determination

constitutes the Service’s determination

described in § 7436(a), the Notice of Determination is a jurisdictional prerequisite

for seeking Tax Court review of the Service’s determinations regarding worker

classification and § 530 issues. Tax Court

proceedings seeking review of these determinations may not be commenced

prior to the time the Service issues a Notice of Determination to the taxpayer.

TIME BY WHICH PETITION MUST BE

FILED

Section 7436(b)(2) provides that a taxpayer’s petition for review must be filed

with the Tax Court before the 91st day

August 17, 1998

after the Service mails its Notice of Determination to the taxpayer by certified or

registered mail. If the taxpayer discusses

the case with the Service during the period before the 91st day following the

mailing of the Notice of Determination,

the discussion will not extend the period

in which the taxpayer may file a petition

with the Tax Court.

A taxpayer who does not file a Tax

Court petition within the allotted time retains the right to seek judicial review of

the Service’s employment tax determinations by paying the tax and filing a claim

for refund, as required by § 7422(a) of the

Code. If the claim for refund is denied,

the taxpayer may file a refund suit in district court or the Court of Federal Claims.

APPEALS JURISDICTION

Cases docketed in the United States

Tax Court will be referred by District

Counsel to the Appeals Division for consideration of settlement unless the Notice

of Determination was issued by Appeals.

Cases in which Appeals issued such a Notice of Determination may be referred to

Appeals unless District Counsel determines that there is little likelihood that a

settlement of all or a part of the case can

be achieved in a reasonable period of

time. Appeals will have sole settlement

authority over docketed cases referred to

Appeals until the case is returned to District Counsel. See Rev. Proc. 87–24,

1987–1 C.B. 720.

SUSPENSION OF STATUTE OF

LIMITATIONS

Section 7436(d)(1) provides that the

suspension of the limitations period for

assessment in § 6503(a) of the Code applies in the same manner as if a notice of

deficiency had been issued. Thus, pursuant to § 6503(a), the mailing of the Notice of Determination by certified or registered mail will suspend the statute of

limitations for assessment of taxes attributable to the worker classification and §

530 issues. Generally, the statute of limitations for assessment of taxes attributable to the worker classification and §

530 issues is suspended for the 90-day

period during which the taxpayer can

begin a suit in Tax Court, plus an additional 60 days thereafter. Moreover, if

the taxpayer does file a timely petition in

the Tax Court, the statute of limitations

for assessment of taxes attributable to the

worker classification and § 530 issues

will be suspended under section 6503(a)

during the Tax Court proceedings, and

for 60 days after the Tax Court decision

becomes final.

RESTRICTIONS ON ASSESSMENT

Section 7436(d)(1) provides that the restrictions on assessment in § 6213 of the

Code apply in the same manner as if a notice of deficiency had been issued. Thus,

pursuant to § 6213(a), the Service is precluded from assessing the taxes attributable to the worker classification and § 530

issues prior to expiration of the 90-day

period during which the taxpayer may file

a timely Tax Court petition. If the taxpayer does file a timely Tax Court petition, § 6213(a) generally precludes the

Service from assessing taxes attributable

to the worker classification and § 530 issues until the decision of the Tax Court

has become final. If the taxpayer does not

file a timely Tax Court petition before the

91st day after the Notice of Determination

was mailed, the employment taxes attributable to the workers described in the Notice of Determination may thereafter be

assessed.

AGREED SETTLEMENTS

If the taxpayer wishes to settle the

worker classification and § 530 issues on

an agreed basis before issuance of a Notice of Determination, the taxpayer must

formally waive the restrictions on assessment contained in §§ 7436(d)(1) and

6213. This will generally be accomplished by execution of an agreed settlement that contains the following language:

I understand that, by signing this

agreement, I am waiving the restrictions on assessment provided in

sections 7436(d) and 6213(a) of the

Internal Revenue Code of 1986.

The Service will not assess employment taxes attributable to worker classification or § 530 issues unless either the

Service has issued a Notice of Determination to the taxpayer and the 90-day period

for filing a Tax Court petition has expired

or, alternatively, the taxpayer has waived

the restrictions on assessment. If the Service erroneously makes an assessment of

taxes attributable to worker classification

and § 530 issues without first either issu-

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 15

ing a Notice of Determination or obtaining a waiver of restrictions on assessment

from the taxpayer, the taxpayer is entitled

to an automatic abatement of the assessment. However, once any such procedural defects are corrected, the Service

may reassess the employment taxes to the

same extent as if the abated assessment

had not occurred.

EFFECTIVE DATE

Section 1454 of TRA ’97 is effective as

of August 5, 1997. Thus, assessments

that were made prior to the August 5,

1998–33 I.R.B.

1997, effective date of the Act are not

subject to the new legislation or the procedures discussed above. All employment tax examinations involving worker

classification and/or § 530 issues that

were pending as of August 5, 1997, are

subject to the new legislation.

DRAFTING INFORMATION

The principal author of this notice is

Lynne A. Camillo of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). The Service invites comments with respect to the

issues addressed in this notice, the form

of the attached Notice of Determination,

as well as with respect to any procedural

issues which should be addressed in forthcoming guidance. Written comments

should be submitted to Lynne A. Camillo

of the Employee Benefits and Exempt Organizations Division, Office of Chief

Counsel, Internal Revenue Service, 1111

Constitution Avenue, NW, Room 5329,

Washington, DC 20224. For further information regarding this notice contact

Lynne A. Camillo at (202) 622-6040 (not

a toll-free call).

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 16

Internal Revenue Service

Department of the Treasury

Date:

Taxpayer Identification Number:

Person to Contact:

Telephone Number:

NOTICE OF DETERMINATION

CONCERNING WORKER CLASSIFICATION UNDER SECTION 7436

As a result of an employment tax audit, we are sending you this NOTICE OF DETERMINATION CONCERNING

WORKER CLASSIFICATION UNDER SECTION 7436. We have determined that the individual(s) listed or described on the

attached schedule are to be classified as employees for purposes of federal employment taxes under subtitle C of the Internal

Revenue Code and that you are not entitled to relief from this classification pursuant to section 530 of the Revenue Act of 1978

with respect to such individual(s). This determination could result in employment taxes being assessed against you.

If you want to contest this determination in court, you may file a petition with the United States Tax Court for a redetermination of the above-referenced issues. If you wish to contest this determination in the United States Tax Court, your petition

must be filed before the 91st day after the date this letter was mailed by certified or registered mail. You can get a copy of the

rules for filing a petition by writing to the address below.

United States Tax Court

400 Second Street, NW

Washington, DC 20217

Send the completed petition, a copy of this letter, and copies of all statements and/or schedules you received with this letter to the Tax Court at the same address above. The Tax Court cannot consider your case if the petition is filed late. The petition is considered timely filed if the postmark date (either by the U.S. Postal Service or a designated private delivery service)

falls within the period for filing a petition described above and the envelope containing the petition is properly addressed with

the correct postage.

The time you have to file a petition with the Tax Court is set by law and cannot be extended. Thus, contacting the Internal

Revenue Service (IRS) for more information, or receiving other correspondence from the IRS, will not change the period for

filing a petition with the Tax Court.

EXHIBIT 1

If you are in bankruptcy, under Bankruptcy Code section 362(a)(8), the filing of a petition with the Tax Court is automatically stayed because of your bankruptcy case. When the automatic stay is in effect, you must ask the Bankruptcy Court (under

Bankruptcy Code section 362(d)(1)) to lift the stay so you can file a petition with the Tax Court. Your petition must be filed before

the 91st day after the date of this letter, plus any additional period provided by section 6213(f)(1) of the Internal Revenue Code (generally, the period that the automatic stay is in effect, plus 60 days) to file a petition with the Tax Court.

If this letter is addressed to both husband and wife, and both want to petition the Tax Court, both must sign and file the petition or each must file a separate, signed petition. If more than one tax period is shown on the attached schedule, you only need to

file one petition showing all of the periods you are contesting.

The Tax Court has a simplified procedure for small tax cases that will apply when the amount of employment taxes in dispute

is $50,000 or less for each calendar quarter involved. Attached is a preliminary calculation of the amounts that we think you might

owe as a result of this determination. We have included this calculation for your use in determining whether you are entitled to

request that your case be conducted under the Tax Court’s simplified procedures for small tax cases. You can get more information

about this procedure by writing to the Tax Court at the address listed above. You should write promptly if you intend to file a petition with the Court.

If you decide not to file a petition with the Tax Court, we may assess the amount of employment taxes owed. If you do file a

timely petition, we will not assess those taxes until the decision of the Tax Court is final.

If you do not file a Tax Court petition within the allotted time, you still may seek judicial review of the IRS’s employment tax

determinations by paying the tax and filing a claim for refund with the IRS. If the claim for refund is denied, you may file a refund

suit in district court or the Court of Federal Claims.

If you have any questions about this letter, you may write to the person whose name and IRS address are shown on the front

of this letter. If you write, please include your telephone number, the best time for us to call you if we need more information, and

August 17, 1998

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 17

a copy of this letter to help us identify your account. Keep the original letter for your records.

If you prefer, you may call the IRS contact person at the telephone number on the front page of this letter. If this number is

outside your local calling area, there will be a long distance charge to you. You may call the IRS telephone number listed in your

local directory. An IRS employee there may be able to help you, but the contact person at our address shown on this letter is most

familiar with your case.

Thank you for your cooperation.

Sincerely yours,

Commissioner

Enclosure:

Explanation of tax changes

1998–33 I.R.B.

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 18

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

Conversion to the Euro

REG–110332–98

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In T.D. 8776, page 6, the

IRS is issuing temporary regulations relating to the change to the euro. The text

of those temporary regulations also serves

as the text of these proposed regulations.

This document also provides a notice of

public hearing on these proposed regulations.

DATES: Written comments must be received by October 1, 1998. Requests to

speak and outlines of oral comments to be

discussed at the public hearing scheduled

for October 20, at 10 a.m., must be received by September 29, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–110332–98),

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–110332–98) 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 of 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 the IRS Auditorium, 7400 Corridor, Internal Revenue Building, 1111

Constitution Avenue NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Howard Wiener, (202)622-3870 or

Thomas Preston, (202) 622-3930; concerning submissions and the hearing,

LaNita VanDyke, 202-622-7190 (not tollfree numbers).

August 17, 1998

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in T.D. 8776

amend the Income Tax Regulations (26

CFR part 1) relating to sections 985 and

1001. The temporary regulations contain

rules relating to conversion to the euro.

The text of those temporary regulations

also serves as the text of these proposed

regulations. The preamble to the temporary regulations explains the temporary

regulations.

Request for Additional Comments

The Treasury and IRS request additional comments on the following issues.

(1) Whether the final regulations

should contain guidance (and the substance of any such guidance) concerning

the application of sections 1092 and 1259.

Comments should separately address the

rules for periods before May 3, 1998, between May 3, 1998 and December 31,

1998, and after December 31, 1998.

(2) Whether guidance is necessary with

respect to section 905, relating to the redetermination of taxes in post-conversion

years.

(3) Whether a QBU whose functional

currency was a currency other than a

legacy currency, but whose functional

currency should properly be the euro after

the conversion, should be deemed to have

automatically changed its functional currency to the euro.

(4) Whether the regulations adequately

address QBUs with functional currencies of

countries that adopt the euro in the future.

The Treasury and IRS also request comments regarding guidance clarifying the

treatment of section 988 transactions that

are held by euro functional currency QBUs

and that are denominated in a currency that

is replaced by the euro in the future.

(5) Whether guidance is necessary to

addresses integrated section 988 hedging

transactions. It is intended that these regulations be applied to section 988 integrated hedging transactions under section

988(d) on an integrated basis. If a QBU

subsequently legs out of a position of a

section 988 integrated hedging transaction after the euro conversion, a leg that

formerly was a legacy currency position

prior to the conversion will be a euro denominated position after the conversion,

and the section 988 rules should then be

applied to the euro denominated position.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility

Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analyses is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (preferably a signed original and

eight (8) copies) that are submitted timely

to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled

for Tuesday, October 20, 1998, at 10 a.m.,

in Room 2615, Internal Revenue Building, 1111 Constitution Avenue NW,

Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15

minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written

comments by October 1, 1998, and submit an outline of the topics to be discussed and the time to be devoted to each

topic (signed original and eight (8)

copies) by September 29, 1998.

A period of 10 minutes will be allotted

to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 19

Drafting Information

posed to be amended as follows:

The principal authors of these regulations are Howard A. Wiener, of the Office

of Associate Chief Counsel (International) and Thomas Preston of the Office

of Associate Chief Counsel (Domestic).

However, other personnel from the IRS

and Treasury Department participated in

their development.

PART 1—INCOME TAXES

Proposed Amendment to the Regulations

Accordingly, 26 CFR part 1 is pro-

1998–33 I.R.B.

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.985–8 is added to read

as follows:

§1.985–8 Special rules applicable to the

European Monetary Union (conversion to

the euro).

[The text of this proposed section is the

same as the text of T.D. 8776.]

Par. 3. Section 1.1001–5 is added to

read as follows:

§1.1001–5 European Monetary Union

(conversion to the euro).

[The text of this proposed section is the

same as the text of T.D. 8776.]

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on July

28, 1998, 8:45 a.m., and published in the issue of the

Federal Register for July 29, 1998, 63 F.R. 40383)

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 20

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and formerly used will appear in material published in the

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

August 17, 1998

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

Page 21

Numerical Finding List1

Bulletins 1998–29 through 32

Announcements:

98–62, 1998–29 I.R.B. 13

98–68, 1998–29 I.R.B. 14

98–69, 1998–30 I.R.B. 16

98–70, 1998–30 I.R.B. 17

98–71, 1998–30 I.R.B. 17

98–72, 1998–31 I.R.B. 14

98–73, 1998–31 I.R.B. 14

98–74, 1998–31 I.R.B. 15

98–75, 1998–31 I.R.B. 15

98–76, 1998–32 I.R.B. 64

Notices:

98–36, 1998–29 I.R.B. 8

98–37, 1998–30 I.R.B. 13

Railroad Retirement Quarterly Rate:

1998–31 I.R.B. 7

Proposed Regulations:

REG–104641–97, 1998–29 I.R.B. 9

REG–110403–98, 1998–29 I.R.B. 11

REG–116608–97, 1998–29 I.R.B. 12

REG–119227–97, 1998–30 I.R.B. 13

Revenue Procedures:

98–40, 1998–32 I.R.B. 6

98–41, 1998–32 I.R.B. 7

98–42, 1998–28 I.R.B. 9

98–43, 1998–29 I.R.B. 8

98–44, 1998–32 I.R.B. 11

Revenue Rulings:

98–34, 1998–31 I.R.B. 12

98–35, 1998–30 I.R.B. 4

98–36, 1998–31 I.R.B. 6

98–37, 1998–32 I.R.B. 5

98–38, 1998–32 I.R.B. 4

Treasury Decisions:

8771, 1998–29 I.R.B. 6

8772, 1998–31 I.R.B. 8

8773, 1998–29 I.R.B. 4

8774, 1998–30 I.R.B. 5

8775. 1998–31 I.R.B. 4

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1998–1 through 1998–28

will be found in Internal Revenue Bulletin 1998–29,

dated July 20, 1998.

1998–33 I.R.B.

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 22

Finding List of Current Action on

Previously Published Items1

Bulletins 1998–29 through 32

*Denotes entry since last publication

1 A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1998–1 through 1998–28 will be found in Internal

Revenue Bulletin 1998–29, dated July 20, 1998.

August 17, 1998

1998–33 I.R.B.

IRB 1998-33

8/12/98 11:04 AM

1998–33 I.R.B.

Page 23

August 17, 1998

IRB 1998-33

8/12/98 11:04 AM

Page 24

INTERNAL REVENUE BULLETIN

The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold

on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print

and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the

Superintendent of Documents.

HOW TO ORDER

Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please

allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page

(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC

20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

August 17, 1998

1998–33 I.R.B.

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.