# Bulletin No. 1998–15

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Internal Revenue

bulletin

Bulletin No. 1998–15
April 13, 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

EXEMPT ORGANIZATIONS

Rev. Rul. 98–19, page 5.

Announcement 98–28, page 30.

Relocation payments; Housing and Community Development Act. A relocation payment, authorized by section
105(a)(11) of the Housing and Community Development Act
and funded under the 1997 Emergency Supplemental Appropriations Act for Recovery From Natural Disasters, made by
a local jurisdiction to an individual moving from a flood-damaged residence to another residence, is not includible in the
individual’s gross income.

ADMINISTRATIVE

Rev. Rul. 98–20, page 8.
LIFO; price indexes; department stores. The February
1998 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, February 28,
1998.

T.D. 8763, page 5.
Final regulations under section 166 of the Code deem a
charge-off and allow a deduction for a partially worthless
debt when the terms of a debt instrument have been modified.

T.D. 8764, page 9.
REG–102144–98, page 25.
Temporary and proposed regulations under sections 925
and 927 of the Code provide guidance to taxpayers who
have made an election to be treated as a foreign sales corporation (FSC). A public hearing on the proposed regulations will be held on June 24, 1998.

A list is given of organizations now classified as private foundations.

REG–209322–82, page 26.
Proposed regulations under sections 6031 and 6063 of the
Code revise the partnership filing requirement to reflect
changes to the law made by the Taxpayer Relief Act of 1997
(TRA). LR–198–82, 1986–1 C.B. 778 is withdrawn. A public
hearing will be held on May 19, 1998.

Rev. Proc. 98–27, page 15.
This procedure provides guidance to foreign financial institutions that desire to enter into a withholding agreement
with the Service in order to be treated as qualified intermediaries under new section 1.1441–1(e)(5) of the Income Tax
Regulations. It describes the application procedures for becoming a qualified intermediary and the terms that the Service will ordinarily require in a withholding agreement.

Rev. Proc. 98–28, page 14.
Qualified mortgage bonds; mortgage credit certificates; national median gross income. Guidance is provided concerning the use of the national and area median
gross income figures by issuers of qualified mortgage
bonds and mortgage credit certificates in determining the
housing cost/income ratio described in section 143(f)(5) of
the Code. Rev. Proc. 97–26 is obsolete except as provided
in section 5.02 of this revenue procedure.

Continued on page 4

Finding Lists begin on page 35.

Department of the Treasury
Internal Revenue Service

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

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

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).

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

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

Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued

Notice 98–21, page 14.
Extension of the effective date of the Classification
Settlement Program. The Service is extending the Classification Settlement Program or “CSP” until further notice.

Rev. Proc. 98–29, page 22.
Inventory shrinkage estimates. Guidance, including a “retail safe harbor method,” is provided for a taxpayer that
wants to change to a method of accounting for estimating
inventory “shrinkage” in computing ending inventory.

Announcement 98–27, page 30.
The Service announces that Forms W–9 and W–9S can be
filed electronically.

Notice 98–16, page 12.
This notice announces that the Service will amend the effective date of the section 1441 withholding regulations to
apply to payments made after December 31, 1999.

April 13, 1998

4

1998–15 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 25.—Interest on Certain
Home Mortgages
26 CFR 1.25–4T: Qualified mortgage credit
certificate program (temporary).
Guidance is provided for the use of the national
and area median gross income figures by issuers of
qualified mortgage bonds and mortgage credit certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code. See
Rev. Proc. 98–28, page 14.

Section 61.—Gross Income
Defined
26 CFR 1.61–1: Gross income.

Relocation payments; Housing and
Community Development Act. A relocation payment, authorized by section
105(a)(11) of the Housing and Community Development Act and funded under
the 1997 Emergency Supplemental Appropriations Act for Recovery From Natural Disasters, made by a local jurisdiction to an individual moving from a
flood-damaged residence to another residence, is not includible in the individual’s
gross income.

Rev. Rul. 98–19
ISSUE
Is a relocation payment authorized pursuant to section 105(a)(11) of Title I of
the Housing and Community Development Act of 1974 (Act), 42 U.S.C.
§ 5305(a)(11), funded under the 1997
Emergency Supplemental Appropriations
Act for Recovery From Natural Disasters
(Supplemental Act), Pub. L. No. 105–18,
111 Stat. 158, 198–199, and made by a
local jurisdiction to an individual moving
from a flood-damaged residence to another residence, includible in the individual’s gross income under § 61 of the Internal Revenue Code?
FACTS
Pursuant to the Act and the Supplemental Act, a resident of a local jurisdiction,
within a Presidentially-declared disaster
area in the upper Midwest, received a relocation payment from the local jurisdiction to help defray the expenses of mov-

1998–15 I.R.B.

ing from the resident’s flood-damaged
residence to another residence.
According to section 101(c) of the Act,
the primary objective of Title I “is the development of viable urban communities,
by providing decent housing and a suitable
living environment and expanding economic opportunities, principally for persons of low and moderate income.” 42
U.S.C. § 5301(c). Section 105(a)(11) of
the Act provides, in part, that a community
development program may provide relocation payments and assistance for displaced
individuals and families as authorized
under the Act. 42 U.S.C. § 5305(a)(11).
The Supplemental Act provides funding, for displaced individuals and families
as authorized under the Act, to certain
communities affected by the flooding in
the upper Midwest and other Presidentially-declared disasters occurring during
the federal government’s fiscal year ending September 30, 1997.

of Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact Mr.
Iskow on (202) 622-4920 (not a toll-free
call).

Section 103.—State and Local
Bonds
26 CFR 1.103–1: Interest upon obligations of a
State, Territory, etc.
Guidance is provided for the use of the national
and area median gross income figures by issuers of
qualified mortgage bonds and mortgage credit certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code. See
Rev. Proc. 98–28, page 14.

Section 143.—Mortgage
Revenue Bonds: Qualified
Mortgage Bond and Qualified
Veterans’ Mortgage Bond

LAW AND ANALYSIS
Section 61 and the Income Tax Regulations thereunder provide that, except as
otherwise provided by law, gross income
means all income from whatever source
derived.
The Service has held that payments
made under legislatively provided social
benefit programs for the promotion of general welfare are not includible in a recipient’s gross income. See Rev. Rul. 76–373,
1976–2 C.B. 16, which holds that relocation payments received by individuals pursuant to section 105(a)(11) of the Act are in
the nature of general welfare and are not includible in the gross incomes of recipients.
HOLDING

26 CFR 6a.103A–2: Qualified mortgage bond.
Guidance is provided for the use of the national
and area median gross income figures by issuers of
qualified mortgage bonds and mortgage credit certificates in determining the housing cost/income
ratio described in section 143(f)(5) of the Code. See
Rev. Proc. 98–28, page 14.

Section 166.—Bad Debts
26 CFR 1.166–3: Partial or total worthlessness.

T.D. 8763
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1

A relocation payment authorized pursuant to section 105(a)(11) of the Act,
funded under the Supplemental Act, and
made by a local jurisdiction to an individual moving from a flood-damaged residence to another residence, is in the nature of general welfare and is not
includible in the individual’s gross income under § 61.

Modifications of Bad Debts and
Dealer Assignments of Notional
Principal Contracts

DRAFTING INFORMATION

SUMMARY: This document contains
regulations that deem a charge-off and
allow a deduction for a partially worthless
debt when the terms of a debt instrument

The principal author of this revenue
ruling is Sheldon A. Iskow of the Office

5

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.

April 13, 1998

have been modified. The regulations provide guidance to certain taxpayers that
have claimed a deduction for a partially
worthless debt and then modified the
terms of the debt instrument. This document also contains regulations relating to
certain assignments of notional principal
contracts by dealers in those contracts.
The regulations provide guidance to taxpayers relating to the consequences of
these assignments.
DATES: Effective date: These regulations are effective January 29, 1998.
Applicability date: These regulations
apply to significant modifications of debt
instruments and assignments of interest
rate swaps, commodity swaps, and other
notional principal contracts occurring on
or after September 23, 1996.
FOR FURTHER INFORMATION CONTACT: Concerning the modifications of
bad debts, Craig Wojay, (202) 622-3920,
and concerning dealer assignments of notional principal contracts, Thomas M.
Preston, (202) 622-3940 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
On June 25, 1996, temporary regulations (T.D. 8676 [1996–2 C.B. 9]) relating
to modifications of bad debts and dealer
assignments of notional principal contracts under sections 166 and 1001 of the
Internal Revenue Code (Code) were published in the Federal Register (61 F.R.
32653). A notice of proposed rulemaking
(REG–209743–94, formerly FI–59–94
[1996–2 C.B. 442]) cross-referencing the
temporary regulations was published in
the Federal Register for the same day
(61 F.R. 32728). No public hearing was
requested or held.
Written comments responding to the
notice were received. After consideration
of the comments, the regulations proposed by REG–209743–94 are adopted
by this Treasury decision, and the corresponding temporary regulations are removed.
Explanation of Provisions
The preamble to the temporary regulations sets forth limited circumstances
under which a taxpayer will be permitted

April 13, 1998

to deduct an amount on account of a partially worthless debt even though an
amount has not been charged off within
the taxable year.
Section 166(a)(2) and §1.166–3(a) provide that a deduction for a partially worthless debt is allowed only to the extent the
debt is charged off in the taxable year.
The charge-off requirement is satisfied
when a portion of the debt is removed
from the taxpayer’s books and records.
This generally is accomplished by reducing the debt’s book basis. Thus, when an
amount has been deducted for partial
worthlessness, there is generally a reduction of both the book basis and the tax
basis of a debt.
When a taxpayer is required to recognize gain under §1.1001–1 because of a
modification of a debt instrument, the taxpayer’s tax basis in the debt is increased
by the amount of gain recognized. However, regulatory and general accounting
principles generally would not permit a
corresponding increase in the book basis
of the debt. Because the prior charge-off
is not restored (that is, the book basis of
the debt is not increased), there is no opportunity for the taxpayer to take a new
charge-off for pre-existing worthlessness.
The purpose of the temporary regulations is to preserve a portion of a taxpayer’s bad debt deduction with respect to
a partially worthless debt. The portion
preserved corresponds to the amount the
taxpayer would have been entitled to
deduct for partial worthlessness with respect to the modified debt if the book
basis of the modified debt were increased
to the same extent as the tax basis of that
debt. Thus, if all the conditions of the
temporary regulations are satisfied, then a
modified debt is deemed to have been
charged off in the year in which gain is
recognized. The amount of the deemed
charge-off, however, is limited to the difference between the tax basis of the debt
and the greater of the book basis or the
fair market value of the debt. The temporary regulations also address debt that
constitutes transferred basis property
under section 7701(a)(43).
In addition, the temporary regulations
provide a limited rule dealing with a
dealer’s assignment of its position in an
interest rate swap, commodity swap, or
other notional principal contract to another dealer. If the assignment is permit-

6

ted by the terms of the contract, the assignment is not treated as a deemed exchange by the nonassigning party of the
original contract for a new contract that
differs materially either in kind or in extent. Thus, an assignment to which the
rule applies does not trigger gain or loss
to the dealer’s counterparty.
Three comments were received on the
§1.166–3T regulations. The first comment requests a deemed charge-off for a
taxpayer that purchased at a discount debt
for which a previous deduction for partial
worthlessness was claimed, and then significantly modified the debt under
§1.1001–3 and recognized gain on the
modification. Whenever debt is purchased for less than the stated redemption
price, recognized gain from a significant
modification is attributable to market discount as defined in section 1278(a)(2)(A)
and not to a previously claimed deduction
for partial worthlessness. In addition, the
temporary regulations refer to §1.166–
3(a)(1) and (2) for guidance relating to
prior charge-offs and deductions for partial worthlessness. Extending the temporary regulations to cover a discount purchase would significantly expand the
regulations beyond their intended scope
and create a situation that would be extremely difficult to administer. The regulations do not adopt the request to extend
the regulations to cover such a purchase.
The second comment requests a
deemed charge-off for a member of a consolidated group that purchased debt, for
which a previous deduction for partial
worthlessness was claimed, from another
member of the group, then significantly
modified the debt under §1.1001–3 and
recognized gain on the modification.
Whenever debt is purchased for less than
the stated redemption price, subsequently
recognized gain from a significant modification is attributable to market discount
as defined in section 1278(a)(2)(A) and
not to a previously claimed deduction for
partial worthlessness. Extending the temporary regulations to cover a purchase
from another member of the consolidated
group would significantly expand the regulations beyond their intended scope. The
regulations do not adopt the request to extend the regulations to cover an intercompany transaction.
The third comment requests expanding
the temporary regulations to include other

1998–15 I.R.B.

situations in which a taxpayer has tax basis
in a debt but no corresponding book basis.
The first situation involves the accrual of
interest income on loans that have been
placed on non-accrual status for book purposes. The second situation involves the
requirement to accrue interest on original
issue discount obligations even if the loan
has become uncollectible. This comment
deals with situations other than the modification of a debt instrument and is beyond
the scope of this regulation project.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
regulation does not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Small Business Administration for comment on its impact on small business.
Drafting Information
The principal author of the regulations
concerning the modifications of bad debts
is Craig Wojay, Office of the Assistant
Chief Counsel (Financial Institutions and
Products), IRS. The principal author of
the regulations concerning the dealer assignments of notional principal contracts
is Thomas M. Preston, Office of the Assistant Chief Counsel (Financial Institutions
and Products), IRS. However, other personnel from the IRS and Treasury Department 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 * * *

1998–15 I.R.B.

Par. 2. In §1.166–3, paragraph (a)(3) is
added to read as follows:
§1.166–3 Partial or total worthlessness.
(a) * * *
(3) Significantly modified debt—(i)
Deemed charge-off. If a significant modification of a debt instrument (within the
meaning of §1.1001–3) during a taxable
year results in the recognition of gain by a
taxpayer under §1.1001–1(a), and if the
requirements of paragraph (a)(3)(ii) of
this section are met, there is a deemed
charge-off of the debt during that taxable
year in the amount specified in paragraph
(a)(3)(iii) of this section.
(ii) Requirements for deemed chargeoff. A debt is deemed to have been
charged off only if—
(A) The taxpayer (or, in the case of a
debt that constitutes transferred basis
property within the meaning of section
7701(a)(43), a transferor taxpayer) has
claimed a deduction for partial worthlessness of the debt in any prior taxable year;
and
(B) Each prior charge-off and deduction for partial worthlessness satisfied the
requirements of paragraphs (a)(1) and (2)
of this section.
(iii) Amount of deemed charge-off. The
amount of the deemed charge-off, if any,
is the amount by which the tax basis of
the debt exceeds the greater of the fair
market value of the debt or the amount of
the debt recorded on the taxpayer’s books
and records reduced as appropriate for a
specific allowance for loan losses. The
amount of the deemed charge-off, however, may not exceed the amount of recognized gain described in paragraph
(a)(3)(i) of this section.
(iv) Effective date. This paragraph
(a)(3) applies to significant modifications
of debt instruments occurring on or after
September 23, 1996.
*

*

*

*

*

party on an interest rate or commodity
swap, or other notional principal contract
(as defined in §1.446–3(c)(1)), is not
treated as a deemed exchange by the
nonassigning party of the original contract for a modified contract that differs
materially either in kind or in extent if—
(1) The party assigning its rights and
obligations under the contract and the
party to which the rights and obligations
are assigned are both dealers in notional
principal contracts, as defined in
§1.446–3(c)(4)(iii); and
(2) The terms of the contract permit the
substitution.
(b) Effective date. This section applies
to assignments of interest rate swaps,
commodity swaps, and other notional
principal contracts occurring on or after
September 23, 1996.
§1.1001–4T [Removed]
Par. 5. Section 1.1001–4T is removed.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved January 14, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
January 28, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 29, 1998,
63 F.R. 4396)

Section 471.—General Rule for
Inventories
26 CFR 1.471–2: Valuation of inventories.
Guidance, including a “retail safe harbor
method,” is provided for a taxpayer that wants to
change to a method of accounting for estimating inventory “shrinkage” in computing ending inventory.
See Rev. Proc. 98–29, page 22.

§1.166–3T [Removed]
Par. 3. Section 1.166–3T is removed.
Par. 4. Section 1.1001–4 is added to
read as follows:

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.

§1.1001–4 Modifications of certain
notional principal contracts.
(a) Dealer assignments. For purposes
of §1.1001–1(a), the substitution of a new

7

LIFO; price indexes; department
stores. The February 1998 Bureau of
Labor Statistics price indexes are accepted for use by department stores em-

April 13, 1998

ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, February 28, 1998.

Rev. Rul. 98–20
The following Department Store Inventory Price Indexes for February 1998
were issued by the Bureau of Labor Sta-

tistics. The indexes are accepted by the
Internal Revenue Service, under § 1.472–
1(k) of the Income Tax Regulations and
Rev. Proc. 86–46, 1986–2 C.B. 739, for
appropriate application to inventories of
department stores employing the retail inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, February 28, 1998.
The Department Store Inventory Price

Indexes are prepared on a national basis
and include (a) 23 major groups of departments, (b) three special combinations
of the major groups - soft goods, durable
goods, and miscellaneous goods, and (c)
a store total, which covers all departments, including some not listed separately, except for the following: candy,
food, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Feb.
1997

Feb.
1998

Percent Change
from Feb. 1997
to Feb. 19981

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526.4
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650.4
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640.2
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897.7
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617.7
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534.2
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296.5
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546.9
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.6
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615.4
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585.1
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469.9
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1004.9
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772.0
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912.3
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662.0
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581.2
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817.0
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246.1
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78.6
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.1
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133.3
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.9
Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598.9
Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470.0
Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113.3
Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554.2

535.8
639.3
656.9
886.5
612.6
565.2
308.1
548.2
408.9
624.0
590.4
499.3
1001.0
802.0
926.5
668.3
583.7
810.3
242.0
73.6
107.7
134.0
107.7
601.1
462.4
111.0
552.3

1.8
–1.7
2.6
–1.2
–0.8
5.8
3.9
0.2
–2.1
1.4
0.9
6.3
–0.4
3.9
1.6
1.0
0.4
–0.8
–1.7
–6.4
–3.1
0.5
–0.2
0.4
–1.6
–2.0
–0.3

Groups

1Absence of a minus sign before percentage change in this column signifies price increase.
2Indexes on a January 1986=100 base.
3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.

April 13, 1998

8

1998–15 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue ruling, contact Mr.
Michaels on (202) 622-4970 (not a tollfree call).

Section 925.—Transfer Pricing
Rules
26 CFR 1.925(a)–1T: Temporary regulations;
transfer pricing rules for FSCs.

T.D. 8764
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Source and Grouping Rules for
Foreign Sales Corporation
Transfer Pricing

added by the Deficit Reduction Act of
1984, applicable for taxable years of foreign sales corporations beginning after
December 31, 1984. Temporary regulations were published in the Federal Register (52 F.R. 6468) as a Treasury Decision (T.D. 8126 [1987–1 C.B. 184]) on
March 3, 1987. Treasury and IRS believe
that immediate guidance in the form of
these temporary regulations is necessary
for the reasons stated below.
Explanation of Provisions
These regulations set a deadline for an
election to group transactions for purposes of the foreign sales corporation
(FSC) administrative pricing methods and
clarify that the foreign source limit for a
FSC’s related supplier extends to all
transactions giving rise to foreign trading
gross receipts.
I. Grouping Election Deadline.

Background

A. Current temporary regulations.
Current §1.925(a)–1T(c)(8) and
§1.925(b)–1T(b)(3) permit taxpayers annually to group transactions in applying
the administrative pricing (including the
marginal costing) rules to determine FSC
benefits. Current §1.925(a)–1T(c)(8)(i)
requires an election to group to be evidenced on the FSC income tax return for
the taxable year. Current §1.925(a)–
1T(e)(4) authorizes taxpayers to file
amended returns subsequently (within the
statute of limitations period) to redetermine FSC benefits based on a different
grouping of transactions than that originally elected. Pursuant to this provision,
taxpayers may change their grouping
basis, or change from a grouping to a
transaction-by-transaction basis. The IRS
and the Treasury have become increasingly aware of taxpayers who, through the
use of sophisticated computer programs,
substantially revise their transaction
groupings just prior to the expiration of
the statute of limitations and many years
after the original returns were filed.
These revised groupings typically employ
complex estimating techniques. The recent rise in this practice is placing a significant burden on the auditing process
and is creating a potential for abuse.

This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under sections 925 and 927 which were

B. Revised temporary regulations.
Under §1.925(a)–1T(c)(8)(i), the election to group must be made on Schedule P

AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations that provide guidance to taxpayers who have made an election to be treated as a foreign sales corporation (FSC). The regulations provide
rules that clarify the special sourcing rules
under section 927(e)(1) and provide a
deadline for the election to group transactions. The text of the temporary regulations also serves as the text of the proposed
regulations on this subject in REG–
102144–98, page 25 of this Bulletin.
DATES: Effective date: These regulations are effective March 3, 1998.
Applicability: For dates of applicability, see §§1.925(a)–1T(c)(8)(i) and
1.927(e)–1T(c).
FOR FURTHER INFORMATION CONTACT: Elizabeth Beck (202) 622-3880
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

1998–15 I.R.B.

9

of the FSC’s timely filed U.S. income tax
return (including extensions thereof) for
the taxable year. No untimely or
amended returns will be allowed to elect
to group, to change a grouping basis, or to
change from a grouping basis to a transaction-by-transaction basis for such year.
Conforming changes and cross-references are reflected in §1.925(a)–1T(e)(4)
and §1.925(b)–1T(b)(3).
The regulations apply to taxable years
beginning after December 31, 1997.
There is also a transition rule providing
that the regulations also apply to taxable
years beginning before January 1, 1998.
For these taxable years, the transition rule
allows taxpayers to redetermine their
grouping of transactions with respect to
such years provided such redetermination
is made no later than the due date of the
FSC’s timely filed U.S. income tax return
(including extensions thereof) for its first
taxable year beginning after December
31, 1997.
II. Scope of Related Supplier Foreign
Source Limit.
A. Current temporary regulations and
TRA 97.
Section 927(e)(1) provides that
“[u]nder regulations, the income of a person described in section 482 from a transaction giving rise to foreign trading gross
receipts of a FSC which is treated as from
sources outside the United States shall not
exceed the amount which would be
treated as foreign source income earned
by such person if the pricing rule under
section 994 which corresponds to the rule
used under section 925 with respect to
such transaction applied to such transaction.” Transactions giving rise to foreign
trading gross receipts include qualifying
sales, leases, licenses and services. Current §1.927(e)–1T restates the section
927(e)(1) rule as applicable on “the sale
of export property.” While the statute is
not limited to export sale transactions in
that it applies to any transaction giving
rise to foreign trading gross receipts of a
FSC, the current regulation might be interpreted to apply the special foreign
sourcing limit only to sales of export
property.
Section 1171 of the Taxpayer Relief
Act of 1997 (TRA 97) amended section
927(a)(2)(B) (without any inference intended regarding prior law) to provide

April 13, 1998

that computer software licensed for reproduction abroad is included within the definition of export property for purposes of
the FSC provisions. The amendment applies to gross receipts from computer software licenses attributable to periods after
December 31, 1997, in tax years ending
after such date.
In light of TRA 97, it is important to
clarify the scope of the related supplier’s
foreign source limit under the regulations.
This clarification needs to be implemented immediately in order to provide
clear guidance to taxpayers, including
those utilizing the TRA 97 amendment to
section 927(a)(2)(B).

Drafting Information

B.

Paragraph 1. The authority citation for
part 1 is amended by revising the entries
for sections 1.925(a)–1T and 1.925(b)–1T
to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.925(a)–1T is also issued
under 26 U.S.C. 925(b)(1) and (2) and
927(d)(2)(B).
Section 1.925(b)–1T is also issued
under 26 U.S.C. 925(b)(1) and (2) and
927(d)(2)(B) * * *
Par. 2. Section 1.925(a)–1T is
amended by:
1. Removing the last sentence of paragraph (c)(8)(i) and adding five sentences
in its place.
2. Paragraph (e)(4) is amended by:
a. Removing the language “or grouping of transactions” from the fourth sentence.
b. Adding a sentence to the end of the
paragraph.
The additions read as follows:

Revised temporary regulations.
Under §1.927(e)–1T(a)(1), the related
supplier’s foreign source limit applies to
any transaction, including but not limited
to any sale, lease, license or service, giving rise to foreign trading gross receipts
of a FSC. No inference is intended regarding the scope of application of the
prior regulation.
Conforming changes are reflected in
§1.927(e)–1T(a)(2) and (3). Special rules
are added in §1.927(e)–1T(a)(3)(ii) to
clarify how the corresponding DISC
transfer pricing rules are to be applied for
purposes of the foreign source limit.
Three examples set forth in §1.927(e)–
1T(b) illustrate how the limit is applied
under different transfer pricing methods
and for different types of transactions.
The regulations apply to taxable years
beginning after December 31, 1997.
Special Analyses
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 Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
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.

April 13, 1998

The principal author of these regulations is Elizabeth Beck of the Office of
the Associate Chief Counsel (International). Other personnel from the IRS and
Treasury Department also participated in
the development of these regulations.
*

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES

§1.925(a)–1T Temporary Regulations;
Transfer pricing rules for FSCs.
*

*

*

*

*

(c) * * *
(8) * * * (i) * * * The election to
group transactions shall be evidenced on
Schedule P of the FSC’s timely filed U.S.
income tax return (including extensions
thereof) for the taxable year. No untimely
or amended returns will be allowed to
elect to group, to change a grouping basis,
or to change from a grouping basis to a
transaction-by-transaction basis. The
rules of the previous two sentences of this
paragraph (c)(8)(i) are applicable to taxable years beginning after December 31,

10

1997. For any taxable year beginning before January 1, 1998, for which a redetermination is otherwise permissible under
paragraph (e)(4) of this section as in effect for taxable years beginning before
January 1, 1998, a redetermination of
grouping of transactions cannot be made
later than the due date of the FSC’s timely
filed U.S. income tax return (including
extensions thereof) for the FSC’s first taxable year beginning after December 31,
1997. The language “or grouping of
transactions” is removed from the fourth
sentence of paragraph (e)(4) of this section, applicable to taxable years beginning after December 31, 1997.
*

*

*

*

*

(e) * * *
(4) * * * For the election to group
transactions for purposes of applying the
administrative pricing methods, see paragraph (c)(8)(i) of this section.
*

*

*

*

*

Par. 3. In §1.925(b)–1T, paragraph
(b)(3)(i) is amended by adding at the end
of the paragraph the following sentence:
§1.925(b)–1T Temporary regulations;
marginal costing rules.
*

*

*

*

*

(b) * * *
(3) * * * (i) * * * For the election to
group transactions for purposes of applying the administrative pricing methods,
see §1.925(a)–1T(c)(8)(i).
*

*

*

*

*

Par. 4. Section 1.927(e)–1T is revised
to read as follows:
§1.927(e)–1T Temporary regulations;
special sourcing rule.
(a) Source rules for related persons—
(1) In general. The income of a person
described in section 482 from a transaction giving rise to foreign trading gross
receipts of a FSC which is treated as from
sources outside the United States shall not
exceed the amount which would be
treated as foreign source income earned
by such person if the pricing rule under
section 994 which corresponds to the rule
used under section 925 with respect to
such transaction applied to such transac-

1998–15 I.R.B.

tion. This section applies to any transaction, including but not limited to any sale,
lease, license or service, giving rise to foreign trading gross receipts of a FSC. This
special sourcing rule also applies if the
FSC is acting as a commission agent for
the related supplier with respect to the
transaction described above which gives
rise to foreign trading gross receipts and
the transfer pricing rules of section 925
are used to determine the commission
payable to the FSC. No limitation results
under this section with respect to a transaction to which the section 482 pricing
rule under section 925(a)(3) applies.
(2) Grouping of transactions. If, for
purposes of determining the FSC’s profits
under the administrative pricing rules of
sections 925(a)(1) and (2), grouping of
transactions under §1.925(a)–1T(c)(8)
was elected, the same grouping shall be
used for making the determinations under
this special sourcing rule.
(3) Corresponding DISC pricing
rules—(i) In general. For purposes of
this section—
(A) The DISC gross receipts pricing
rule of section 994(a)(1) corresponds to
the gross receipts pricing rule of section
925(a)(1);
(B) The DISC combined taxable income pricing rule of section 994(a)(2)
corresponds to the combined taxable income pricing rule of section 925(a)(2);
and
(C) The DISC section 482 pricing rule
of section 994(a)(3) corresponds to the
section 482 pricing rule of section
925(a)(3).
(ii) Special rules. For purposes of this
section—
(A) The DISC pricing rules of section
994(a)(1) and (2) shall be determined
without regard to export promotion expenses;
(B) Qualified export receipts under
section 994(a)(1) and (2) shall be deemed
to be an amount equal to the foreign trading gross receipts arising from the transaction; and
(C) Combined taxable income for purposes of section 994(a)(2) shall be deemed
to be an amount equal to the combined
taxable income for purposes of section
925(a)(2) arising from the transaction.

1998–15 I.R.B.

(b) Examples. The provisions of this
section may be illustrated by the following examples:
Example 1. (i) R and F are calendar year taxpayers. R, a domestic manufacturing company, owns all
the stock of F, which is a FSC acting as a commission agent for R. For the taxable year, R and F used
the combined taxable income pricing rule of section
925(a)(2). For the taxable year, the combined taxable income of R and F is $100 from the sale of export property, as defined in section 927(a), manufactured by R using production assets located in the
United States. Title to the export property passed
outside of the United States.
(ii) Under section 925(a)(2), 23 percent of the
$100 combined taxable income of R and F, that is
$23, is allocated to F and the remaining $77 is allocated to R. Absent the special sourcing rule, under
section 863(b) the $77 income allocated to R would
be sourced $38.50 U.S. source and $38.50 foreign
source. Under the special sourcing rule, the amount
of foreign source income earned by a related supplier of a FSC shall not exceed the amount that
would result if the corresponding DISC pricing rule
applied. The DISC combined taxable income pricing rule of section 994(a)(2) corresponds to the combined taxable income pricing rule of section
925(a)(2). Under section 994(a)(2), $50 of the combined taxable income ($100 x .50) would be allocated to the DISC and the remaining $50 would be
allocated to the related supplier. Under section
863(b), the $50 income allocated to the DISC’s related supplier would be sourced $25 U.S. source and
$25 foreign source. Accordingly, under the special
sourcing rule, the foreign source income of R shall
not exceed $25.
Example 2. (i) Assume the same facts as in Example 1 except that the combined taxable income
arises from the licensing of the copyright rights in
computer software for use outside of the United
States and that R developed the computer software
in the United States.
(ii) Under section 925(a)(2), 23 percent of the
$100 combined taxable income of R and F, that is
$23, is allocated to F and the remaining $77 is allocated to R. Absent the special sourcing rule, under
section 862(a)(4) the $77 income allocated to R
would be sourced $77 foreign source in its entirety.
Under the special sourcing rule, the amount of foreign source income earned by a related supplier of a
FSC shall not exceed the amount that would result if
the corresponding DISC pricing rule applied. The
DISC combined taxable income pricing rule of section 994(a)(2) corresponds to the combined taxable
income pricing rule of section 925(a)(2). Under section 994(a)(2), $50 of the combined taxable income
($100 x .50) would be allocated to the DISC and the
remaining $50 would be allocated to the related supplier. Under section 862(a)(4), the $50 income allocated to the DISC’s related supplier would be
sourced $50 foreign source in its entirety. Accordingly, under the special sourcing rule, the foreign
source income of R shall not exceed $50.
Example 3. (i) Assume the same facts as in Example 1 except that R and F used the gross receipts

11

pricing rule of section 925(a)(1). In addition, for the
taxable year foreign trading gross receipts derived
from the sale of the export property are $2,000.
(ii) Under section 925(a)(1), 1.83 percent of the
$2,000 foreign trading gross receipts, that is $36.60,
is allocated to F and the $63.40 remaining combined
taxable income ($100 - $36.60) is allocated to R.
Absent the special sourcing rule, under section
863(b) the $63.40 income allocated to R would be
sourced $31.70 U.S. source and $31.70 foreign
source. Under the special sourcing rule, the amount
of foreign source income earned by a related supplier of a FSC shall not exceed the amount that
would result if the corresponding DISC pricing rule
applied. The DISC gross receipts pricing rule of
section 994(a)(1) corresponds to the gross receipts
pricing rule of section 925(a)(1). Under section
994(a)(1), $80 ($2,000 x .04) would be allocated to
the DISC and the $20 remaining combined taxable
income would be allocated to the related supplier.
Under section 863(b), the $20 income allocated to
the DISC’s related supplier would be sourced $10
U.S. source and $10 foreign source. Accordingly,
under the special sourcing rule, the foreign source
income of R shall not exceed $10.

(c) Effective Date. The rules of this
section are applicable to taxable years beginning after December 31, 1997.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved February 20, 1998.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
March 2, 1998, 8:45 a.m., and published in the issue
of the Federal Register for March 3, 1998, 63 F.R.
10305)

Section 1441.—Withholding of
Tax
This notice announces that the Department of the
Treasury and the Internal Revenue Service will
amend the effective date of the section 1441 withholding regulations to apply to payments made after
December 31, 1999. The transition rules provided
under those regulations will also be amended to be
consistent with the later effective date of those regulations. This Notice also amends the related transition rule of Notice 97–66, 1997–48 I.R.B. 8, to be
consistent with the later effective date of the 1441
regulations. Finally, this Notice announces that the
Internal Revenue Service intends to develop model
withholding agreements for qualified intermediaries
on a country by country basis. See Notice 98–16,
page 12.

April 13, 1998

Part III. Administrative, Procedural, and Miscellaneous
Effective Date of Regulations
Under Section 1441 and
Qualified Intermediary
Procedures
Notice 98–16
Section 1. Scope
This notice announces that the Department of the Treasury (“Treasury”) and the
Internal Revenue Service (the “IRS”) will
extend the effective date of the section
1441 withholding regulations. As extended, those regulations will apply to
certain payments made to foreign persons
after December 31, 1999. This notice
also provides new transition rules for satisfying the withholding certificate or
statement requirements under the withholding regulations. Finally, this notice
describes the general procedure the IRS
will follow in entering into qualified intermediary withholding agreements in
order to expedite the process of making
such agreements as widely available as
possible.
Section 2. Background
On October 14, 1997, final Income Tax
Regulations (the “final withholding regulations”) substantially revising and replacing existing regulations regarding the
withholding of tax under chapter 3 (sections 1441–1464) of the Internal Revenue
Code (the “Code”) were published in the
Federal Register as T.D. 8734. Those regulations also significantly revise existing
information reporting and backup withholding regulations under chapter 61 and
section 3406 of the Code. As promulgated, the final withholding regulations
will apply to all payments made after December 31, 1998.
Section 3. Extended Effective Date
Treasury and the IRS will amend the
final withholding regulations to extend
the date of applicability of those regulations to payments made after December
31, 1999. Treasury and the IRS recognize
that the final withholding regulations contain substantial changes to existing rules
and will likely require significant changes
to business practices and information systems for many U.S. and foreign withhold-

April 13, 1998

ing agents. These changes come at a time
when many of these entities are also attempting to make significant changes to
business practices and information systems to conform to the Year 2000 date
change and the European Monetary
Union currency conversion.
Treasury and the IRS also must ensure
that qualified intermediary withholding
agreements are available to as many financial intermediaries as possible for the
final withholding regulations to be effectively implemented. As described more
fully below, Treasury and the IRS expect
that the process for making qualified intermediary withholding agreements
widely available will take several months
from the date the process begins.
Accordingly, Treasury and the IRS believe it is in the best interest of tax administration to extend the date of applicability
of the final withholding regulations to ensure that both taxpayers and the government can complete the changes necessary
to implement the new withholding
regime. As extended by this notice, the
final withholding regulations will apply to
payments made after December 31, 1999.
In addition, the IRS will regard the
1999 calendar year as a transition period
for the administration of the withholding
tax system. Accordingly, in enforcing
compliance with current withholding
rules for calendar year 1999, the IRS will
take into account the extent to which a
withholding agent makes a good faith effort during that period to transform its
business practices and information systems to comply with the final withholding
regulations. For example, the IRS will
take into account whether a U.S. withholding agent makes reasonable efforts
during 1999 to modify its account opening practices to conform to the new documentation requirements, obtain new documentation on existing accounts when
new withholding certificates become
available, and make appropriate systems
changes to comply with the final withholding regulations and, if appropriate,
Rev. Proc. 98–27 (relating to qualified intermediary withholding agreements). For
foreign withholding agents, the IRS will
also take into account whether or not the
withholding agent makes an effort to seek
qualified intermediary status. The IRS

12

will also take into account whether or not
a withholding agent (whether U.S. or foreign) effectively implements the final
withholding regulations beginning on
January 1, 2000.
Section 4. Modified Transition Rules
The final withholding regulations provide transition rules for obtaining new
withholding certificates and statements
containing the necessary information and
representations required by those regulations. The IRS released and requested
public comments on draft new withholding certificates in Announcement 98–15,
published in 1998–10 I.R.B. 36. The new
withholding certificates would replace
current Forms W–8, 1001, 4224, 8709,
and 1078, and statements described in
§1.1441–5 of the regulations in effect before January 1, 1999 (the “existing certificates or statements”).
Generally, under the transition rules
contained in the final withholding regulations, a withholding agent holding a valid
existing certificate or statement on December 31, 1998, may treat that certificate
or statement as valid until the earlier of its
expiration or December 31, 1999. In addition, the transition rules provide that
any existing withholding certificate or
statement that is valid on January 1, 1998,
and that expires during 1998, remains
valid until December 31, 1998. (These
rules cannot operate together, however, to
extend beyond December 31, 1998, the
validity of a certificate that, without the
transition rule, would expire in 1998.)
The IRS intends to modify the withholding certificate and statement transition rules of the final withholding regulations to provide that a withholding agent
holding a valid existing certificate or
statement on December 31, 1999, may
treat that certificate or statement as valid
until the earlier of its expiration or December 31, 2000. No existing certificates
or statements will be effective after December 31, 2000. As under the final regulations, existing certificates and statements that expire in 1999 will not be
effective after expiration. The existing
transition rule providing that any existing
withholding certificate or statement that is
valid on January 1, 1998, and that expires
during 1998 remains valid until Decem-

1998–15 I.R.B.

ber 31, 1998, will be retained. This rule
should ensure that withholding agents
will be able to replace existing withholding certificates or statements that expire
in 1998 with new certificates that will be
valid under the final withholding regulations when those regulations take effect.
The IRS anticipates that new withholding
certificates will be available before December 31, 1998.
New withholding certificates that are
valid under the final withholding regulations will be deemed to satisfy the requirements under the regulations in effect before January 1, 2000, to obtain Forms
W–8, 1001, 4224, 8709, or a statement
under section 1.1441–5. Therefore, in situations where existing certificates and
statements are not outstanding, or new
certificates or statements must be obtained
because of a change in circumstances, a
withholding agent may obtain new withholding certificates. New withholding
certificates will be valid for the period
specified in section 1.1441–1(e)(4)(ii) of
the final withholding regulations, regardless of when they are obtained.
Notice 97–66 (1997–48 I.R.B. 1) provides a related transition rule that is affected by the extended effective date of
the final withholding regulations. Notice
97–66 relates to final Income Tax Regulations on the source and character of
substitute interest and dividend payments
published in the Federal Register on October 14, 1997 as T.D. 8735 (the “final
substitute payment regulations”). The
notice provides guidance on complying
with the statement requirement of section
871(h)(5) for substitute interest payments
made after November 13, 1997, or, if an
election is made under section 6 of the
notice, for substitute interest payments
made after December 31, 1998. Substitute interest payments made by a foreign
person that are U.S. source interest must
satisfy the statement requirement of section 871(h)(5) to qualify as portfolio
interest.
The final substitute payment regulations referred taxpayers to §1.871–14(c)
of the final withholding regulations for
guidance on the statement requirement of
section 871(h)(5). Because §1.871–14(c)
of the final withholding regulations was
not to be effective before January 1, 1999,
however, Notice 97–66 provides a transition rule providing that the statement re-

1998–15 I.R.B.

quirement of section 871(h)(5) will be
satisfied with respect to substitute interest
payments made after November 13, 1997,
and before January 1, 1999, if any written, electronic, or oral statement that reasonably establishes that the payee is a foreign person is given or made to the payor
before, or within a reasonable period
after, the payment.
Because the IRS intends to make
§1.871–14(c) of the final withholding
regulations effective for payments made
after December 31, 1999, as announced
herein, the transition rule in Notice 97–66
is extended to apply to substitute interest
payments made after November 13, 1997
(or after December 31, 1998, if elected)
and before January 1, 2000. The remainder of Notice 97–66 remains unchanged.
On January 26, 1998, a notice of proposed rulemaking (REG–209322–82) was
published in the Federal Register that
would amend regulations under sections
6031 and 6063 regarding the filing of returns of partnership income (a “partnership return”). Under §1.6031(a)–1(b)(2)
of the proposed regulations, a partnership
return is not required of a foreign partnership if it meets certain conditions and
Forms 1042 and 1042–S are filed under
§1.1461–1(b) and (c), as amended by the
final withholding regulations, either by
the partnership or by another withholding
agent (or agents). The proposed date of
applicability for the exception is taxable
years of a partnership that begin on or
after January 1, 1999. If §1.6031(a)–
1(b)(2) is finalized, Treasury and IRS intend to amend the date of applicability for
that section to reflect the extended date of
applicability of §1.1461–1(b) and (c) of
the final withholding regulations.
Section 5. Qualified Intermediary
Procedures
As indicated above, for the final withholding regulations to be most effectively
implemented, it is desirable for qualified
intermediary withholding agreements to
be available to as many foreign financial
intermediaries as possible. A qualified intermediary is a foreign person, or a foreign branch of a U.S. person, that agrees
with the IRS in a qualified intermediary
withholding agreement to collect information regarding its account holders and
to make that information available as may
be required under the agreement. It is an-

13

ticipated that the qualified intermediary
regime will reduce the collection of information and reporting required of withholding agents under the current rules.
Simultaneously with this notice, Treasury and the IRS are releasing Revenue
Procedure 98–27, which provides guidance on entering into a qualified intermediary withholding agreement with the
IRS. Although the revenue procedure is
designed to provide specific guidance on
the application process for persons described in §1.1441–1(e)(5)(ii)(A) and (B)
(i.e., foreign financial institutions, foreign
clearing organizations, and foreign
branches of U.S. financial institutions and
U.S. clearing organizations), any person
desiring a qualified intermediary withholding agreement may submit a draft
agreement in the general manner described in the revenue procedure.
This notice announces that, although
any person is permitted to apply for and
negotiate an individual qualified intermediary withholding agreement with the
IRS, the IRS intends to issue a series of
model agreements of broad applicability
to make qualified withholding agreements
as widely available as possible. It is contemplated that, upon release of one of
these model agreements, any person
falling within the class of persons covered
by the model agreement would be able to
accept, sign, and submit the agreement to
the IRS, without the need for individual
negotiations. The IRS currently contemplates that each model agreement will be
specific to a particular country, or group
of countries with similar laws and practices, and will be specific to a class of persons conducting similar intermediary
businesses in a similar manner. Such an
approach enables each model agreement
to cover as broad a class of persons as
possible, while allowing uniform application of all material provisions among all
persons in the identified class.
Because of its intent to issue a series of
model agreements of broad applicability,
the IRS invites submissions of proposed
model agreements by groups or associations of potential qualified intermediaries.
As part of the submission, the IRS requests a description of the class of persons the proposed model agreement is intended to cover and why that class of
persons could operate under a single
model agreement.

April 13, 1998

In the interest of ensuring that as many
financial intermediaries as possible can
become qualified intermediaries well in
advance of the effective date of the final
withholding regulations, the IRS intends
to give submissions of proposed model
agreements of broad applicability first
consideration. Consequently, except in
unusual circumstances, proposed agreements by individual intermediaries, while
also invited, will not likely lead to negotiations with the IRS until sufficient
progress has been made in the process of
issuing model agreements. Moreover,
persons who are clearly within a class of
persons covered by an existing model
agreement will not be permitted to negotiate an individual agreement absent unusual circumstances.
The IRS currently contemplates releasing a group of model agreements simultaneously, rather than issuing them one-byone, and expects that this release will
occur before December 31, 1998. Additional model agreements and individual
agreements may be issued after that first
release of model agreements. Due to time
constraints, however, groups or associations of intermediaries desiring to submit
a proposed model agreement on behalf of
a class of persons should make such a
submission on or before July 3, 1998, to
ensure that such model agreement can be
released and individual agreements can be
concluded prior to December 31, 1998.
Persons submitting proposed model
agreements are advised that these submissions will be made available to the public.
Section 6. Contact Information
The principal author of this Notice is
Carl Cooper of the Office of the Associate
Chief Counsel (International) within the
Office of the Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue,
N.W., Washington, D.C. 20224. For further information regarding this Notice
contact Mr. Cooper at 202-622-3840 (not
a toll-free call).

Extension of the Effective Date
of the Classification Settlement
Program
Notice 98–21
The Internal Revenue Service is extending the Classification Settlement Pro-

April 13, 1998

gram or “CSP” until further notice. The
CSP is an optional settlement program that
allows businesses and tax examiners to resolve worker classification cases as early
in the administrative process as possible,
thereby reducing taxpayer burden. In the
CSP, examiners can offer a business under
audit a worker classification settlement
using a standard closing agreement developed for this purpose. The CSP procedures also ensure that the taxpayer relief
provisions under section 530 of the Revenue Act of 1978 are properly applied.
The Service implemented the CSP in
March 1996 on a two-year trial basis. Review of the program and feedback from
the public have indicated that the program
is successful in facilitating early resolution of cases.
Taxpayer participation in the CSP is entirely voluntary. A taxpayer declining to
accept a settlement offer retains all rights
to administrative appeal that exist under
the Service’s current IRS procedures and
all existing rights to judicial review.
DRAFTING INFORMATION
The principal author of this notice is
Greg Christensen of the Office of Employment Tax Administration and Compliance. For further information regarding this notice, please contact Mr.
Christensen at 202-622-3650 (not a tollfree number).

26 CFR 601.201: Rulings and determination
letters.
(Also Part I, Sections 25, 103, 143; 1.25–4T,
1.103–1, 6a.103A–2.)

Rev. Proc. 98–28
SECTION 1. PURPOSE
This revenue procedure provides guidance concerning the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage bonds, as defined in § 143(a) of the
Internal Revenue Code, and issuers of
mortgage credit certificates, as defined in
§ 25(c), in computing the housing cost/income ratio described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, except
as provided in § 103(b), gross income
does not include interest on any state or

14

local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any private
activity bond that is not a “qualified
bond” within the meaning of § 141. Section 141(e) provides that the term “qualified bond” includes any private activity
bond that (1) is a qualified mortgage
bond, (2) meets the volume cap requirements under § 146, and (3) meets the applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mortgage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be
used to finance owner-occupied residences; (ii) the issue meets the requirements of subsections (c),(d),(e),(f),(g),
(h),(i), and (m)(7) of § 143; (iii) the issue
does not meet the private business tests of
paragraphs (1) and (2) of § 141(b); and
(iv) with respect to amounts received
more than 10 years after the date of issuance, repayments of $250,000 or more
of principal on financing provided by the
issue are used not later than the close of
the first semi-annual period beginning
after the date the prepayment (or complete repayment) is received to redeem
bonds that are part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing may be provided by qualified mortgage bonds. Section 25(c)(2)(A)(iii)(IV)
provides that recipients of mortgage
credit certificates must meet the income
requirements of § 143(f). Generally,
under §§ 143(f)(1) and 25(c)(2)(A)(iii)(IV), these income requirements are met
only if all owner-financing under a qualified mortgage bond and all certified indebtedness amounts under a mortgage
credit certificate program are provided to
mortgagors whose family income is 115
percent or less of the applicable median
family income. Under § 143(f)(6), the income limitation is reduced to 100 percent
of the applicable median family income if
there are fewer than three individuals in
the family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”

1998–15 I.R.B.

means the greater of (A) the area median
gross income for the area in which the
residence is located or (B) the statewide
median gross income for the state in
which the residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limitations in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing cost
area is a statistical area for which the
housing cost/income ratio is greater than
1.2. The housing cost/income ratio is determined under § 143(f)(5)(D) by dividing (a) the applicable housing price ratio
by (b) the ratio that the area median gross
income bears to the median gross income
for the United States. The applicable
housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new
housing average purchase price for the
United States) or the existing housing
price ratio (existing housing average area
purchase price divided by the existing
housing average purchase price for the
United States), whichever results in the
housing cost/income ratio being closer to
1. This income adjustment applies only
to bonds issued and nonissued bond
amounts elected after December 31, 1988.
.06 The Department of Housing and
Urban Development (HUD) has computed the median gross income for the
United States, the states, and statistical
areas within the states. The income information was released to the HUD regional
offices on January 7, 1998, and may be
obtained by calling the HUD reference
service at 1-800-245-2691, or, in the
Washington, D.C., area, at 301-251-5154.
The Internal Revenue Service annually
publishes only the median gross income
for the United States.
.07 The most recent nationwide average purchase prices and average area purchase price safe harbor limitations were
published on September 6, 1994, in Rev.
Proc. 94–55, 1994–2 C.B. 716.

.02 When computing the housing
cost/income ratio under § 143(f)(5), issuers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures released by HUD on January 7, 1998. See
section 2.06 of this revenue procedure.

SECTION 3. APPLICATION

DRAFTING INFORMATION

.01 When computing the housing
cost/income ratio under § 143(f)(5), issuers of qualified mortgage bonds and
mortgage credit certificates must use
$45,300 as the median gross income for
the United States. See section 2.06 of this
revenue procedure.

The principal author of this revenue
procedure is Patricia M. Monahan of the
Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue
procedure contact Ms. Monahan at (202)
622-4122 (not a toll-free call).

1998–15 I.R.B.

Rev. Proc. 98–27
CONTENTS
SECTION 1.
SECTION 2.
SECTION 3.
SECTION 4.

SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 97–26, 1997–17 I.R.B.
17, is obsolete except as provided in section 5.02 of this revenue procedure.
.02 This revenue procedure does not affect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those effective date provisions will remain operative at least until the Service publishes a
new revenue ruling that conforms the approach to effective dates set forth in Rev.
Rul. 86–124 to the general approach
taken in this revenue procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specified in section 3 of this revenue procedure for commitments to provide financing that are made, or (if the purchase
precedes the financing commitment) for
residences that are purchased, in the period that begins on January 7, 1998, the
date HUD released the income figures,
and ends on the date when these United
States and area median gross income figures are rendered obsolete by a new revenue procedure.
.02 Notwithstanding section 5.01 of
this revenue procedure, issuers may continue to rely on the United States and area
median gross income figures specified in
Rev. Proc. 97–26 with respect to bonds
originally sold and nonissued bond
amounts elected not later than May 13,
1998, if the commitments or purchases
described in section 5.01 are made not
later than July 13, 1998.

15

SECTION 5.
SECTION 6.
SECTION 7.
SECTION 8.

PURPOSE AND SCOPE
BACKGROUND
DEFINITIONS
APPLICATION PROCEDURES FOR QI STATUS AND WITHHOLDING AGREEMENT
QI WITHHOLDING
AGREEMENT
EFFECTIVE DATE
PAPERWORK REDUCTION ACT
FURTHER INFORMATION

SECTION 1. PURPOSE AND SCOPE
.01 Purpose. This revenue procedure
gives guidance for entering into a withholding agreement with the Internal Revenue Service (IRS) to be treated as a
Qualified Intermediary (QI) under
§1.1441–1(e)(5) of the Income Tax Regulations. It describes the application procedures for becoming a QI and the terms
that the IRS will ordinarily require in a QI
withholding agreement. The objective of
a QI withholding agreement is to simplify
withholding and reporting obligations
with respect to payments of income (including interest, dividends, royalties, and
gross proceeds) made to an account
holder through one or more foreign intermediaries.
.02 Scope. This revenue procedure applies to persons described in §1.1441–
1(e)(5)(ii)(A) and (B)—foreign financial
institutions, foreign clearing organizations, and foreign branches of U.S. financial institutions and U.S. clearing organizations. It does not apply to foreign
corporations seeking to become a QI to
present claims of benefits under an income tax treaty on behalf of shareholders.
See §§1.1441–1(e)(5)(ii)(C) and 1.1441–
6(b)(4)(ii)(B). It does not apply to a foreign partnership seeking to qualify as a
withholding foreign partnership. See
§1.1441–5(c)(2)(ii). It also does not
apply to other persons that the IRS may
accept to be qualified intermediaries as
authorized under §1.1441–1(e)(5)(ii)(D).
A person that is not within the scope of
this revenue procedure but may seek QI

April 13, 1998

status under §1.1441–1(e)(5)(ii)(C) or
(D), or §1.1441–5(c)(2)(ii) should contact
the Office of the Assistant Commissioner
(International) at the address or telephone
number in section 4.01 of this revenue
procedure.
SECTION 2. BACKGROUND
.01 Withholding and reporting on payments to foreign persons. Under sections
1441 and 1442 of the Internal Revenue
Code (Code), a person that makes a payment of U.S. source interest, dividends,
royalties, and certain other types of income to a foreign person must generally
deduct and withhold 30 percent from the
payment. A lower rate of withholding
may apply under the Code (e.g., section
1443), the regulations, or an income tax
treaty. Generally, a payor of these types
of income must also report the payments
on Form 1042–S. See §1.1461–1(c).
Under sections 6042, 6045, 6049, and
6050N of the Code (the Form 1099 reporting provisions), payors of dividends,
gross proceeds, interest, and royalties
must report the payments on Form 1099
unless an exception applies. If a payor
must report a payment on Form 1099, it
must obtain a Form W–9 from the payee.
If the payor does not receive the Form
W–9, it must backup withhold at a 31percent rate under section 3406 of the
Code. One exception to the Form 1099
reporting provisions applies if the payee
is a foreign person. A payor can treat a
person as foreign if the payor can reliably
associate the payment with documentation that establishes that the person is a
foreign beneficial owner of the income or
a foreign payee. See §§1.6042–3(b)(1)(iii), 1.6045–1(g)(1)(i), 1.6049–5(b)(12),
and 1.6050N–1(c)(1)(i). Moreover, a
payor does not have to backup withhold
on payments to foreign beneficial owners
or foreign payees because backup withholding applies only to amounts that the
payor must report on Form 1099.
.02 Proof of foreign status. The regulations under section 1441 and the Form
1099 reporting provisions of the Code
prescribe the manner in which a beneficial owner or payee certifies to a payor
that it is a foreign or U.S. person and, if
foreign, whether a reduced rate of withholding applies. For proof of foreign status, a payor or a withholding agent may
rely on a Form W–8 or on documentary

April 13, 1998

evidence for payments made outside the
United States to an offshore account or, in
the case of broker proceeds, a sale effected outside the United States.
In addition, a payor or withholding
agent may rely on a QI’s certifications (as
described in §1.1441–1(e)(3)(ii) and section 5.02 of this revenue procedure) to determine whether a beneficial owner or
payee is foreign, and to determine the applicable rate of withholding and the appropriate type of reporting. The QI provides its certifications on a Form W–8.
By furnishing its own Form W–8 to a
payor or withholding agent, a QI may, for
example, act on behalf of its foreign account holders to claim a reduction of the
30-percent withholding rate without having to document or identify to the withholding agent each foreign account holder
individually.
SECTION 3. DEFINITIONS
For purposes of this revenue procedure,
the terms listed below are defined as follows.
.01 A “QI” is an eligible person as described in §1.1441–1(e)(5)(ii)(A) or (B)
(and paragraph .10 of this section) that
enters into a withholding agreement (described in section 5 of this revenue procedure) with the IRS. A person acting in its
capacity as a QI does not act as an agent
of the IRS, nor does it have the authority
to hold itself out as an agent of the IRS.
.02 A “QI-Form W–8” means a withholding certificate described in §1.1441–
1(e)(3)(ii).
.03 An “account holder” means any
person that has an account with a QI. It
includes a person that is the beneficial
owner of the account or a person that
holds the account as an intermediary (e.g.,
custodian, nominee or agent).
.04 An “exempt recipient” means, for
interest, dividends, and royalties, a person
described in §1.6049–4(c)(1)(ii). For broker proceeds, it is a person described in
§5f.6045–1(c)(3)(i)(B) or in §1.6045–
2(b)(2)(i).
.05 A “non-exempt recipient” or “nonexempt payee” means a person that is not
an exempt recipient under the definition
in paragraph .04 of this section.
.06 Any reference to “chapter 3 of the
Code” means sections 1441, 1442, and
1443 of the Code, and shall not include
references to sections 1445 and 1446 of

16

the Code, unless specifically indicated
otherwise.
.07 Any reference to “chapter 61 of the
Code” means sections 6041, 6041A,
6042, 6044, 6045, 6049, and 6050N of the
Code.
.08 A “reportable amount” means an
amount subject to withholding under
chapter 3 of the Code (within the meaning
of §1.1441–2(a)), U.S. source deposit interest (including original issue discount)
described in section 871(i)(2)(A) of the
Code, and U.S. source interest or original
issue discount on short-term obligations
described in section 871(g)(1)(B) of the
Code. The term does not include payments on deposits with banks and other financial institutions that remain on deposit
for two weeks or less. It also does not include amounts of original issue discount
arising from a sale and repurchase transaction completed within a period of two
weeks or less, or amounts described in
§1.6049–5(b)(7), (10), or (11) (relating to
certain obligations issued in bearer form).
See §1.1441–1(e)(3)(vi).
.09 A “withholding agent” has the same
meaning as set forth in §1.1441–7(a) and
includes a payor, as defined in
§1.6049–4(a)(2). As used in this revenue
procedure, the term generally refers to the
person making a payment to a QI.
.10 An “eligible person” means, as described in §1.1441–1(e)(5)(ii)(A) or (B),
any foreign financial institution, foreign
clearing organization, or foreign branch
of a U.S. financial institution or U.S.
clearing organization.
.11 A “branch” includes an office.
.12 A “financial institution” means a
person described in §1.165–12(c)(1)(iv)
(not including a person providing pension
or other similar benefits or a regulated investment company or other mutual fund,
unless otherwise indicated).
.13 A “clearing organization” means a
person described in §1.163–5(c)(2)(i)(D)(8).
.14 “Class of assets” and “withholding
pool,” have the meanings given to the
terms in section 5.02(4)(c) of this revenue
procedure.
.15 Any reference to “payments to a QI
or an account holder” includes crediting
an amount to the account of the QI or account holder.
.16 An “acceptance agent” is a person,
as described in §301.6109–1(d)(3)(iv)(B),

1998–15 I.R.B.

that is authorized to assist persons in obtaining individual taxpayer identification
numbers or employer identification numbers from the IRS. See Rev. Proc. 96–52,
1996–2 C.B. 372.
SECTION 4. APPLICATION FOR QI
STATUS AND WITHHOLDING
AGREEMENT
.01 Where to Apply and Pre-submission
Conferences. To apply for QI status and a
withholding agreement, an eligible person
must submit a written request to:
Assistant Commissioner (International), CP:IN:OO:WT 950 L’Enfant
Plaza South, SW
Washington DC 20024
FAX: (202) 874-1797
An eligible person may request one or
more pre-submission conferences by contacting the Office of the Assistant Commissioner (International) at (202) 8741800 (not a toll-free number).
.02 Content of Application. The application must establish to the satisfaction of
the IRS that the applicant has adequate resources and procedures to comply with
the terms of a withholding agreement. An
application must include the information
specified in this section 4.02, and any additional information and documentation
requested by the IRS.
(1) A statement that the applicant is an
eligible person and that it requests a QI
withholding agreement with the IRS.
(2) The applicant’s name, address, and
employer identification number (EIN), if
any.
(3) The country in which the applicant
was created or organized and a description of the applicant’s business.
(4) A list of the applicant’s officers and
directors and a list of the employees who
are responsible parties for performance
under the agreement.
(5) A list of the branches that the
agreement will cover and their location.
(6) An explanation and sample of the
account opening agreements and other
documents used to open and maintain the
accounts at each location covered by the
agreement.
(7) The type of account holders (e.g.,
U.S., foreign, treaty benefit claimant, or
intermediary), the approximate number of
account holders within each type, and the
estimated value of U.S. investments that
the QI-Form W–8 will cover.

1998–15 I.R.B.

(8) An explanation of the applicant’s
“know-your-customer” practices and procedures (under its local money-laundering
laws) for opening accounts, and identifying and communicating with customers at
each location covered by the agreement.
The explanation should include whether
local law mandates the “know-your-customer” procedures and the manner in
which local authorities verify compliance.
The applicant should also describe the
governmental or other supervisory authorities that regulate the “know-your-customer” procedures, and the sanctions that
apply under local law for failing to comply with the procedures. The applicant
must include supporting documentation.
(9) A list of assets in the United States
from which amounts owed to the IRS can
be collected, if necessary.
(10) A completed Form SS–4 (Application for Employer Identification Number) to apply for a QI Employer Identification Number (QI-EIN) to be used solely
for QI reporting and filing purposes. An
applicant must apply for a QI-EIN even if
it already has another EIN.
(11) A proposed QI withholding agreement drafted in accordance with section 5
of this revenue procedure.
SECTION 5. QI WITHHOLDING
AGREEMENT
.01 Scope of the agreement. An agreement may not cover U.S. branches of an
eligible person. An eligible person is not
required to include all of its foreign
branches in the agreement. The IRS may
require, however, that an eligible person
agree to include certain of its branches to
insure the disclosure of certain U.S. account holders. See §1.1441–1(e)(5)(iii)
and section 5.02(3), below. In appropriate cases, an eligible person may request
that the agreement cover its related nonU.S. affiliates or unrelated account holders that act as nominees, custodians, or
agents of beneficial owners. If the IRS
grants the request, each related non-U.S.
affiliate or unrelated account holder must
agree to be a signatory to the agreement.
.02 Terms and procedures regarding intermediary withholding certificate. (1)
Submission of QI-Form W–8. The agreement must specify that a QI will furnish
its QI-Form W–8, with its QI-EIN, to
withholding agents for reportable
amounts in lieu of furnishing a Form W-8

17

or Form W–9 from each of its account
holders to such withholding agents.
(2) Designation of primary withholding
responsibility. A QI is a withholding agent
under chapter 3 of the Code and a payor
under chapter 61 and section 3406 of the
Code for reportable amounts that it pays to
its account holders. Generally, a withholding agent that makes a payment to the
QI, however, will be responsible for actually withholding under chapter 3 and section 3406 of the Code. Thus, if the withholding agent has withheld and reported
on the reportable amounts paid to the QI,
the QI is not required to withhold except
to the extent required to correct any underwithholding. See §1.1441–1(b)(6). The
QI may, however, agree in its withholding
agreement to assume primary withholding
responsibility for payments to foreign account holders. See §1.1441–1(e)(5)(iv).
Generally, the IRS will not allow a QI to
assume primary withholding or reporting
responsibility for payments to U.S. persons unless the QI is a foreign branch of a
U.S. financial institution, or the QI has a
branch in the United States and establishes
that its U.S. branch can adequately comply with the provisions under chapter 61
and section 3406 of the Code.
(3) Disclosure of identity of beneficial
owner or payee by QI. Except as otherwise provided in this subparagraph (3), a
QI is not required to disclose the identity
of its account holders covered by a QIForm W–8 to a withholding agent. Further, the documentation given by an account holder to a QI supporting the
account holder’s claim of foreign status
and, if applicable, entitlement to a reduced rate of withholding does not need
to be attached to the QI-Form W–8. The
QI must, however, furnish a Form W–9
(or an acceptable substitute form) for each
of its account holders (or those of another
intermediary or of a foreign partnership)
that is a U.S. payee that is not an exempt
recipient. The identity of U.S. payees
who are exempt recipients is not required
to be disclosed to the withholding agent.
If the QI does not hold a Form W–9 for a
non-exempt U.S. payee, it must furnish to
the withholding agent any information the
QI has regarding the payee’s name, address, and taxpayer identifying number.
The requirement to disclose the identity
of non-exempt U.S. payees will apply despite local bank secrecy laws.

April 13, 1998

(4) Information to withholding agent.
(a) In general. A QI must agree to identify the classes of assets covered by the
QI-Form W–8 by following §1.1441–
1(e)(5)(v) and subparagraph (4)(c) of this
section. In addition, the QI must state the
rate of withholding for each class.
(b) Application of presumptions. To
identify the relevant classes of assets, a
QI may determine the status of its, or another intermediary’s, account holders by
following the presumptions in §§1.1441–
1(b)(3), 1.1441–5(d) and (e), and 1.6049–
5(d)(2) through (d)(5).
(c) Class of assets and withholding
pool. (i) Definition. Generally, a class of
assets is a group of assets that produces
the same type of income (e.g., interest or
dividends), is subject to the same rate of
withholding, and is associated with the
same type of payee or beneficial owner
(e.g., foreign, U.S., or undocumented
(i.e., a payee for whom the QI holds no or
unreliable documentation)). Notwithstanding the general rule that a class of
asset should produce the same type of income, a QI-Form W–8 may state that all
assets held in a particular account are
within a single class of assets if all the income from the assets in such account is
subject to the same rate of withholding
and the same type of information reporting. See, for example, subparagraph
(4)(c)(ii)(C) of this section. The QI withholding agreement must require the QI to
identify classes of assets on a country-bycountry basis. The income from each
class of assets is a separate “withholding
pool.” See section 5.07(3) for more information on withholding pools.
(ii) Application. (A) Foreign payees.
Assets that are associated with foreign
payees, that produce a specific type of income, and are subject to a particular withholding rate are a class of assets. Thus,
there may be numerous classes of assets
for the same type of income paid to foreign payees because of different withholding rates under the Code or an applicable treaty.
(B) U.S. payees. Assets associated
with each U.S. payee that is a non-exempt recipient are a separate class. Assets associated with all U.S. payees that
are exempt recipients are a single separate class.
(C) Undocumented payees. Assets associated with undocumented payees con-

April 13, 1998

stitute a separate class. A QI paying reportable amounts (other than U.S. source
bank deposit interest or short-term OID)
must presume that undocumented payees
of those amounts are foreign unless the QI
has actual knowledge that the payee is a
U.S. non-exempt recipient. For reportable amounts that are bank deposit interest from a U.S. branch of a U.S. bank
or similar financial institution or shortterm original issue discount, the QI must
presume that the undocumented payee is a
U.S. non-exempt recipient.
(D) QI assuming primary withholding
responsibility. Assets for which a QI assumes primary withholding responsibility
are a separate class. The QI does not have
to identify separate classes of assets within that class if the assumption of withholding responsibility makes such a disclosure unnecessary. The QI withholding
agreement may, however, require a QI to
identify the assets with respect to which it
assumes primary withholding responsibility on a country-by-country basis.
(iii) Example. (A) Facts. A QI
(“QI1”) has foreign account holders. The
QI1 also has account holders that are U.S.
non-exempt recipients. Another account
holder is a QI (“QI2”) that has assumed
primary withholding responsibility. Finally, QI1 has some account holders for
whom it does not have the required documentation. QI1 has not assumed primary
withholding responsibility for any assets.
All account holders earn U.S. source
interest that would qualify as portfolio interest if they gave the documentation required by §1.871–14(c)(2). They also
earn U.S. source dividends. Some of the
foreign account holders can benefit from
a 15-percent reduced withholding rate
under a tax treaty on dividend income
while others cannot.
(B) Analysis. QI1 has the following
classes of U.S. source assets and withholding pools:
(1) assets producing interest earned by
foreign account holders claiming the portfolio interest exemption at source (a withholding pool of interest - zero rate);
(2) assets producing dividend income
earned by foreign account holders claiming the 15-percent reduced rate at source
under an income tax treaty (a withholding
pool of dividends - 15% rate);
(3) assets producing dividend income
earned by foreign account holders resid-

18

ing in a non-treaty country (a withholding
pool of dividends - 30% rate);
(4) assets producing interest income
earned by each U.S. account holder (a
withholding pool per account holder of
interest reportable on a Form 1099 - zero
rate);
(5) assets producing dividends earned
by each U.S. account holder (a withholding pool per account holder for dividends
reportable on a Form 1099 - zero rate);
(6) assets producing dividends and interest income earned by account holders
for whom the QI1 does not hold all of the
required documentation as specified
under the agreement (a withholding pool
for undocumented payees - 30% rate (presumed foreign)—Note: QI1 could divide
this class of assets into one for dividends
and another for interest income); and
(7) assets producing dividends and interest payable to QI2 for its foreign account holders (a withholding pool for
which QI2 assumes withholding).
.03 Documentation requirements. (1)
In general. The agreement must contain
provisions covering the type of documentation a QI will obtain from its account
holders. Generally, the QI must agree to
the same documentation requirements
that apply to withholding agents under
chapters 3 and 61 of the Code. The QI
may use any substitute form for a Form
W–8 or Form W–9 that is acceptable to
the IRS. The QI may include a substitute
form in an account opening form. If a QI
relies on documentary evidence in place
of a Form W–8, the agreement must specify the type of documentary evidence
upon which the QI may rely.
(2) Documentary evidence from beneficial owners. Beneficial owner documentary evidence is acceptable if the QI
complies with the provisions of §1.6049–
5(c)(1). Generally, a QI will be permitted
to rely on the “know-your-customer” procedures (as submitted for review pursuant to section 4.02(8) of this revenue
procedure) if such procedures are acceptable to the IRS.
(3) Documentation supporting claim of
reduced rate. A QI may not reduce the
rate of withholding, or instruct a withholding agent to reduce the rate, unless it
can associate the payment with valid documentation described in the section 1441
regulations or in the QI withholding
agreement. If an account holder is not an

1998–15 I.R.B.

individual, the QI must obtain a certification that the account holder meets the
Limitations on Benefits article contained
in any treaty the account holder invokes.
See §1.1441–6(c)(5). If an account
holder, other than an individual, is acting
for its own account, the QI must also obtain a representation that the account
holder is not a partnership for U.S. tax
purposes. If the account holder is a partnership for U.S. tax purposes, then the QI
must obtain a Form W–9 as described in
§1.1441–1(d)(2) (if the partnership is a
domestic partnership) or a Form W–8 as
described in §1.1441–5(c) (if the partnership is a foreign partnership). In addition,
if an account holder, other than an individual, claims the benefit of a reduced rate of
withholding under a tax treaty, the QI
must obtain the representations set forth in
§§1.1441–6(b)(4)(i) and 1.894–1T(d).
(4) Documentation from intermediaries. When the QI receives a payment of
a reportable amount for an account holder
that is an intermediary (e.g., nominee,
custodian, or agent), the QI must obtain
beneficial owner documentation in the
following manner:
(a) Intermediary that is not a QI. If the
intermediary is not a QI, then the intermediary must give the QI a Form W–8 according to §1.1441–1(e)(3)(iii), including
a statement described in §1.1441–
1(e)(3)(iv) regarding the allocation of
payments. A QI that receives a non-QI intermediary Form W–8 may either give the
non-QI intermediary Form W–8, with all
the accompanying documentation, to the
withholding agent or may use the non-QI
intermediary Form W–8 as the basis for
the certifications that the QI includes in
its own QI-Form W–8 regarding the status of, and entitlement to benefits by, the
non-QI intermediary’s account holders.
(b) Intermediary that is a QI. If the
intermediary is a QI (i.e., a second tier
QI), the second tier QI must give the first
tier QI a QI-Form W–8. The first tier QI
may give the second tier QI’s QI-Form
W–8, and accompanying documentation,
to the withholding agent. Alternatively,
the first tier QI may use the second tier’s
QI-Form W–8 as the basis for the certifications that the first tier QI includes in its
own QI-Form W–8 regarding the status
of, and entitlement to benefits by, the second tier QI’s account holders. If the first
tier QI relies on the second tier QI’s QI-

1998–15 I.R.B.

Form W–8 to certify to the withholding
agent the withholding status of the second
tier QI’s account holders, then the first
tier QI must agree to allocate the assets
associated with the second tier QI’s QIForm W–8 to the classes that the first tier
QI has established for its own account
holders as if the account holders of the
second tier QI were the first tier QI’s own
account holders.
(c) Assumption of primary withholding
responsibility. If a QI has assumed primary withholding responsibility, it must
generally assume that responsibility for
all other intermediaries, whether or not
they are QIs, that are before it in the chain
of payment. If a second tier QI has
agreed to assume primary withholding responsibility, then a first tier QI that has
also assumed primary withholding responsibility does not have to withhold on
income paid to the second tier QI. If the
second tier QI has assumed primary withholding responsibility but the first tier QI
has not, the first tier QI must agree to
identify for the withholding agent those
assets associated with the second tier QI’s
QI-Form W–8 and on which there should
be no withholding (other than under section 3406 of the Code, if applicable). See
example under paragraph .02(4)(c)(iii),
above.
(5) Standards of reliability and due
diligence. A QI must agree to follow the
due diligence obligations of §1.1441–
7(b)(2)(ii). The reliability of any documentation will be evaluated by the type of
information contained in the documents,
the procedures under which the documents are issued, and the ease with which
the documents could be falsified.
(6) Renewal of documentation. Unless
specified otherwise in the agreement, a QI
must agree to follow the provisions of
§1.1441–1(e)(4)(ii) regarding the renewal
of the Forms W–8 and documentary evidence provided by its account holders.
.04 Assistance regarding taxpayer
identification numbers. (1) Acceptance
agents. A QI may agree to act as an acceptance agent, including a certifying acceptance agent, for purposes of section
6109 of the Code and the regulations
thereunder. See Rev. Proc. 96–52, 1996–
2 C.B. 372, for the duties and obligations
of an acceptance agent.
(2) TIN certifications. A QI may agree
to assist its account holders in complying

19

with the requirements for a certified TIN
under §1.1441–6(b). Only account holders claiming a reduced rate under an income tax treaty for certain payments (e.g.,
income from non-publicly traded securities) are required to obtain a certified TIN.
See §1.1441–6(b)(1) and (2)(i).
.05 Recordkeeping obligations. The
agreement must provide that the QI will
maintain a record of the documentation
obtained and reviewed under the agreement. The QI must maintain the documentation for any account holder for a period of three years after its validity
expires. The documentation must also be
available for inspection by the IRS or, if
applicable, an approved external auditor.
.06 Withholding obligations. (1) QI
assumes primary withholding responsibility. A QI that assumes primary withholding responsibility must agree to withhold
any amount due under section 1441,
1442, or 1443 of the Code in accordance
with §1.1441–1(b)(1) and §1.1443–1(b).
If applicable, the QI must also agree to
withhold any amount due under section
3406 of the Code. In addition, the QI
must agree to deposit the withheld
amounts following §1.1461–1(a) and all
other relevant deposit obligations. Under
the agreement, the IRS may agree to special deposit procedures to facilitate remittances from a foreign country.
(2) QI that does not assume primary
withholding responsibility. A QI that does
not assume primary withholding responsibility nevertheless must agree to withhold
if it knows that an amount should have
been withheld from the payment and the
full amount was not withheld. The QI
must also agree to comply with withholding and deposit procedures in the same
manner as described in paragraph .06(1)
of this section for amounts that it withholds.
.07 Reporting obligations. (1) In general. The regulations under section 1461
of the Code require a QI to make returns
on a Form 1042 and to provide information to the IRS and beneficial owners or
payees on a Form 1042–S on a calendar
year basis under the provisions of
§1.1461–1(b), subject to the following
modifications to which the IRS may agree.
(2) Form 1042 reporting. Generally,
every QI shall file an annual Form 1042
and the form must include the following
additional information:

April 13, 1998

(a) A schedule providing information
on reportable amounts of income subject
to withholding under chapter 3 of the
Code that the QI received during the calendar year. The schedule should list the
name, address, and EIN of each withholding agent from whom the reportable
amounts were received and the income
type and rate of withholding;
(b) Information regarding overpayments or balances due, adjustments under
§1.1461–2 and an explanation for the
over- or underwithholding;
(c) A statement regarding the audit
conducted by the QI’s internal auditors
under the audit guidelines specified in the
agreement (i.e., that the QI is complying
with the agreement in all material respects
or a description of the irregularities uncovered by the internal auditors and the
actions undertaken to correct such irregularities); and
(d) A statement that an approved external auditor conducted an audit, when required, with a copy of the report of audit
findings (see paragraph .09 of this section
regarding verification procedures).
(3) Form 1042–S reporting. The
agreement may waive the obligation for a
QI to report beneficial owner information
to the IRS on Forms 1042–S in appropriate cases. In place of beneficial owner information, the IRS may require the QI to
report by country and withholding pools.
An appropriate case may exist if beneficial owner information is otherwise available to the IRS, for example, pursuant to
treaty exchange of information provisions, or the IRS decides that access to
beneficial owner information is not necessary for compliance. Similarly, reporting
by withholding pools may be sufficient
for compliance purposes if the QI has
agreed to adequate verification procedures as described in paragraph .09 of this
section. The QI may provide the information on a Form 1042–S, as modified by
the IRS to adapt to the withholding pool
reporting requirements, on magnetic
media, by electronic means, or on any
form to which the IRS and the QI agree.
The information must include the number
of account holders in each pool. The type
of withholding pool subdivisions the IRS
may require for the payment of reportable
amounts under chapter 3 of the Code
(within the meaning of §1.1441–2(a)) includes the following:

April 13, 1998

(a) Type of income;
(b) Withholding rate;
(c) Country of residence of account
holder; and
(d) Type of recipients (e.g., undocumented payees, U.S. payees).
(4) Furnishing a Form 1042–S to the
beneficial owner or payee. The agreement
may modify or waive the obligation under
§1.1461–1(c)(1)(i) that the QI furnish a
statement to a beneficial owner or payee
on a Form 1042–S and provide for alternative reporting procedures.
(5) Reports related to claims of a reduced rate under a tax treaty. The QI
must agree to give the IRS, on request or
on an annual basis, the names and addresses of its account holders that received a reduced rate of withholding
under a tax treaty and that have certified
that they meet the Limitation on Benefits
provision and that they derive, within the
meaning of §1.894–1T(d), the income receiving the benefit. The QI must also
agree to disclose the names and addresses
of account holders of any non-QI intermediary that has given the QI a Form W–8 or
other documentation if the account holders have certified that they meet the Limitation on Benefits provision of a treaty
and derive the income receiving the benefit. Generally, the IRS will agree to limit
disclosure to account holders that receive
more than an agreed upon amount (not
less than $100,000) of treaty-benefited income in their QI account.
.08 Adjustments for under- and overwithholding, refund procedures, and underwithholding determined after the filing
of Form 1042. (1) Adjustments. If a QI
has not assumed primary withholding responsibility, it must agree that it will provide sufficient information to a withholding agent so that the withholding agent
can make the adjustments for over- and
under-withholding described in §1.1461–
2(a) and (b). If a QI has assumed primary
withholding responsibility, it may make
the adjustments itself in the manner described under §1.1461–2(a) and (b).
(2) Refunds. A QI withholding agreement may allow any net amount of overwithholding for a calendar year on a QI’s
account holders which remains outstanding after the due date for filing the QI’s
Form 1042 (not including extensions) to
be refunded to the QI for its account holders (under procedures as the IRS may pre-

20

scribe) if an adjustment under §1.1461–
2(a) cannot be made.
(3) Underwithholding determined after
filing a QI’s Form 1042. A QI, including a
QI that does not assume primary withholding responsibility, must agree to file an
amended Form 1042 to report any underwithheld tax which is determined after the
filing of the QI’s Form 1042 for the calendar year in which the tax was underwithheld. In addition, the QI must agree to pay
the tax due (including interest and penalties). This includes, but is not limited to,
instances where the underwithholding is
determined as a result of an audit by the
QI’s internal or external auditors.
.09 Verification procedures. (1) In
general. Unless the QI agreement allows
for verification by an external auditor, a
QI must agree to make records and account information specified in the QI
withholding agreement available to the
IRS for audit, and must agree to procedures for carrying out an audit of those
records and information. The IRS must
be able to verify that the QI has adequate
systems and control procedures in effect
to comply with the agreement. In addition, the IRS may require specific procedures to allow it to verify compliance
with the QI withholding agreement for
specific accounts.
(2) Verification of specific account information. If a QI is not subject to audit
under the approved external auditor procedure, described in paragraph .10(3) of
this section, then the QI withholding
agreement will contain procedures for
IRS audits of account information. Generally, a QI that complies with the filing
requirements on Forms 1042 and 1042–S
(or otherwise makes account holder information available to the IRS) may be
exempted from IRS audits or be subject
to abbreviated IRS audits. If a QI has
agreed to certify tax residence to the IRS
under §1.1441–6(c)(2)(iii) based upon
documentation the QI has obtained and
reviewed, it must also agree to give the
documentation to the IRS upon written
request in the manner agreed. To conduct
periodic compliance checks, the IRS may
rely on sampling techniques to assure reliability of the examination without
undue disruption to the QI. The agreement will specify the manner in which
IRS compliance checks will take place.
In appropriate cases, assistance may be

1998–15 I.R.B.

obtained from the tax authorities of the
countries where the QI activities are
located.
(3) Approved external auditors. If,
given local enforcement of know-yourcustomer procedures and local oversight
and controls over the QI and its external
auditors, the IRS determines it is appropriate, the following procedures will generally apply under the agreement.
(a) The QI must establish that it has implemented adequate internal procedures
and accounting systems to comply with
the QI withholding agreement and to verify its compliance with those procedures.
Internal auditors must review those procedures and accounting systems on an annual basis as a regular part of their audit
program. Their conclusions must be included in their annual audit report. A
statement certifying that the annual review has taken place and the results of
that review (including a notation of all irregularities observed and actions taken to
address those irregularities) must be attached to the QI’s annual Form 1042 filed
with the IRS.
(b) Verification must also be performed by external auditors. The QI must
agree to an external auditor’s review after
the first year of operation as a QI. Thereafter, the frequency and scope of compliance checks by external auditors will
occur only at the request of the IRS, generally based upon a review of the QI’s
Form 1042 or indicators that the QI may
have compliance problems (e.g., large refund requests, large pool of undocumented payees). The scope of review by
external auditors may be limited based on
the scope of annual internal audits. In
order for the external auditors to perform
their audit effectively, the QI must agree
to allow external auditors to have access
to all of its relevant records for purposes
of performing the audits.
(c) The external auditor must be approved by the IRS and designated in the
QI withholding agreement. Subsequent
changes of external auditors must also be
approved by the IRS. To be approved, an
auditor must be subject to regulatory supervision under the laws of the country or
countries in which the QI’s activities
under the agreement are expected to
occur. The external auditor’s procedures
must require it to verify that the QI complies with the terms of the agreement and

1998–15 I.R.B.

to report non-compliance findings under
the agreement.
(d) Upon completion of the audit, the
external auditors must issue a report of
audit findings (or incorporate their audit
findings as a separate part of a larger audit
report) and provide the report to the IRS
in English (and using U.S. dollars). The
report must explain the scope and objectives of the audit, state the methodology
used, and certify that the audit was conducted in accordance with applicable laws
and regulatory requirements. The report
must express the auditor’s opinion on the
QI’s compliance with the terms of the
agreement. The QI and the approved external auditor must agree to allow the IRS
to communicate with the external auditors
and review their workpapers, if necessary.
If the external auditor’s report identifies
compliance issues or if, based on a review
of the external auditor’s report, the IRS
determines that further checks are necessary, then the IRS may request that the external auditor perform additional audit
procedures.
(4) Special rules for foreign branches
of U.S. financial institutions. Generally, a
QI that is a foreign branch of a U.S. financial institution will be subject to the same
IRS audit procedures that apply to any
U.S. taxpayer.
.10 Guarantee of payment. To insure
collection of payments for underwithheld
amounts, the agreement may require a
guarantee to be furnished by the QI to the
IRS. The guarantee may include a letter
of credit, bond, or other surety in an
amount to which the QI and the IRS
agree. The amount of the bond or letter of
credit must be commensurate with the approximate risk of underwithholding. Factors to be considered in this regard include the amount of U.S. investments
made through the QI, the number of beneficial owners making U.S. investments,
the type of investment and the characteristics of the beneficial owners, and the degree of reporting by the QI to the IRS.
Generally, a QI that has substantial assets
in the United States will be considered to
have adequately guaranteed its withholding obligations.
.11 Approval and Execution. An agreement must be signed by the authorized
representative of the QI and by the IRS.
The Assistant Commissioner (International) will sign on behalf of the IRS upon

21

approval by the Associate Chief Counsel
(International). To the extent an agreement covers a QI’s related non-U.S. affiliate or unrelated account holder, that affiliate or account holder must be a signatory
to the agreement.
.12 Expiration, Termination and Default. (1) Term and events of termination.
The period of the agreement will be between three and six years. The agreement
may be renewed for further periods as
specified in paragraph .13 of this section.
Either the IRS or the QI may terminate
the agreement prior to its term by delivering a 30-day notice of termination to the
other party. The IRS will not give notice
of termination until thirty days after it has
delivered a notice of default to the QI.
The IRS may deliver a notice of default at
any time after an event of default under
the agreement has occurred or after a significant change in the circumstances of
the QI has occurred such as a merger,
changes in the business or operations of
the QI, or bankruptcy.
(2) Events of default. Events of default
include the determination upon audit or
otherwise that the QI has failed to comply
with the procedures required by the agreement in a way that (1) causes, or may
cause, significant underwithholding, excessive refunds, or an excessive number of
undocumented payees, or (2) impedes, or
may impede, the disclosure of the identity
of persons who are required to be disclosed under the agreement. An event of
default also includes the lack of cooperation by the QI or an approved external auditor in connection with an audit of the QI
or with inquiries by the IRS related to verifying compliance by the QI. The agreement will define when underwithholding
or inadequate reporting is deemed to be
significant. A QI will also be in default if
it makes material misrepresentations on its
Form W–8; it has actual knowledge at the
time a payment is made that documentation regarding a significant number of account holders is lacking, incorrect, or unreliable; or it fails to perform any other
material duty or obligation required of it
under the agreement. The QI may respond
to the notice of default by making an offer
to cure within thirty days. The IRS will
accept or reject the offer to cure, or make a
counter-proposal, within ten days.
.13 Renewal. A QI may renew a QI
withholding agreement by submitting an

April 13, 1998

application for renewal to the IRS no earlier than one year and no later than six
months prior to the expiration of the
agreement. In the application for renewal, the QI will update the information
it provided in the original application.
Before approval of any renewal of the
agreement, the IRS will require an audit
of the QI.
.14 Effective date of agreements. The
agreements entered into under §1.1441–
1(e)(5) will be effective for all accounts
opened on or after the date specified in
the agreement. For accounts existing on
the effective date of the agreement, the
requirements to obtain documentation
generally will not apply until the expiration of the one-year period beginning on
the agreement’s effective date. Until the
documentation is obtained for these accounts, the QI generally will be permitted
to rely on any documentation or information in an existing account file. In the absence of any documentation or indication, or actual knowledge, the QI will be
allowed to presume that an account
holder is a foreign person based on the
indicia of foreign status described in
§1.1441–1(b)(3)(iii)(A). The presumption shall not be effective for purposes of
obtaining the benefit of the portfolio interest exemption under section 871(h) or
881(c) of the Code or the benefit of a tax
treaty.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective on
the date of its publication in the Internal
Revenue Bulletin. The IRS may conclude
agreements under this revenue procedure
at any time after that date, but such agreements will not have effect before the date
specified in the agreement.
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1597.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.

April 13, 1998

The collections of information are contained in sections 4 and 5 of this revenue
procedure regarding (1) the application
procedures for QI status and withholding
agreements, and (2) the provisions of the
QI withholding agreement requiring
record retention or maintenance, and any
communication or contact with the IRS or
the account holders. This information
will be used to enable the IRS to determine whether to enter into a withholding
agreement with the QI applicant and, if
accepted, to verify the QI’s compliance
with the agreement. The collection of information is required to obtain a QI withholding agreement. The likely respondents are business or other for-profit
institutions.
The estimated total annual reporting
and/or recordkeeping burden is 301,393
hours.
The estimated average annual burden is
30 minutes for a QI account holder, and
2,093 hours for a QI, depending on individual circumstances. The estimated
number of respondents and/or recordkeepers is 88,504.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
SECTION 8. FURTHER
INFORMATION
For further information regarding this
revenue procedure, telephone the Office
of Assistant Commissioner (International)
at (202) 874-1800 (not a toll-free number).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, Sections 471; 1.471–2.)

Rev. Proc. 98–29
SECTION 1. PURPOSE
This revenue procedure provides guidance for a taxpayer that wants to

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A25a637060b7ce657. Public record. Not legal advice.