Bulletin No. 1998–18

Bulletin No. 1998–18

May 4, 1998

Internal Revenue

bulletin

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 98–23, page 5.

Federal rates; adjusted federal rates; adjusted federal

long-term rate, and the long-term exempt rate. For

purposes of sections 1274, 1288, 382, and other sections

of the Code, tables set forth the rates for May 1998.

Notice 98–27, page 14.

Electricity produced from certain renewable resources; calendar year 1998 inflation adjustment factor and reference prices. This notice announces the calendar year 1998 inflation adjustment factor and reference

prices for the renewable electricity production credit under

section 45 of the Code.

EMPLOYEE PLANS

REG–243025–96, page 18.

Proposed regulations would provide guidance on the circumstances under which a cafeteria plan participant may revoke

an existing election and make a new election during a period

of coverage. A public hearing will be held on Tuesday, May

5, 1998.

Notice 98–26, page 14.

Weighted average interest rate update. Guidelines are

set forth for determining for April 1998, the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for purposes of

the full funding limitation of section 412(c)(7) of the Code as

amended by the Omnibus Budget Reconciliation Act of 1987

and by the Uruguay Round Agreements Act (GATT).

Finding Lists begin on page 22.

Announcement Relating to Court Decisions begins on page 4.

Index for January-April begins on page 24.

Department of the Treasury

Internal Revenue Service

EXEMPT ORGANIZATIONS

Announcement 98–36, page 18.

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

GIFT TAX

Rev. Rul. 98–21, page 7.

Transfer of nonstatutory stock option. This ruling provides guidance on the time that a completed gift occurs

when a nonstatutory stock option is transferred without consideration by the optionee to a family member.

Rev. Proc. 98–34, page 15.

Valuation of compensatory stock options. This procedure sets forth a methodology to value certain compensatory stock options for gift, estate, and generation-skipping

transfer tax purposes.

ADMINISTRATIVE

Notice 98–23, page 9.

This notice provides guidance regarding recent changes to

the taxation of social security benefits under the U.S.Canada income tax treaty.

Notice 98–25, page 11.

Election to treat trust as a United States person; domestic trust. This notice provides the procedures under

section 1161 of the Taxpayer Relief Act of 1997, P.L.

105–34, 111 Stat. 788 (1997), for trusts that were in existence on August 20, 1996, and that were treated as United

States persons on August 19, 1996, to elect to continue to

be treated as United States persons notwithstanding section

7701(a)(30)(E) of the Code.

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

Announcement Relating to Court Decisions

It is the policy of the Internal Revenue

Service to announce at an early date

whether it will follow the holdings in certain cases. An Action on Decision is the

document making such an announcement.

An Action on Decision will be issued at

the discretion of the Service only on unappealed issues decided adverse to the

government. Generally, an Action on Decision is issued where its guidance would

be helpful to Service personnel working

with the same or similar issues. Unlike a

Treasury Regulation or a Revenue Ruling,

an Action on Decision is not an affirmative statement of Service position. It is not

intended to serve as public guidance and

may not be cited as precedent.

Actions on Decisions shall be relied

upon within the Service only as conclusions applying the law to the facts in the

particular case at the time the Action on

Decision was issued. Caution should be

exercised in extending the recommendation of the Action on Decision to similar

cases where the facts are different. Moreover, the recommendation in the Action

on Decision may be superseded by new

legislation, regulations, rulings, cases, or

Actions on Decisions.

Prior to 1991, the Service published acquiescence or nonacquiescence only in

certain regular Tax Court opinions. The

Service has expanded its acquiescence

program to include other civil tax cases

where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings

of memorandum Tax Court opinions, as

well as those of the United States District

Courts, Claims Court, and Circuit Courts

of Appeal. Regardless of the court deciding the case, the recommendation of any

Action on Decision will be published in

the Internal Revenue Bulletin.

The recommendation in every Action

on Decision will be summarized as acquiescence, acquiescence in result only,

or nonacquiescence. Both “acquiescence” and “acquiescence in result only”

mean that the Service accepts the holding

of the court in a case and that the Service

will follow it in disposing of cases with

the same controlling facts. However, “acquiescence” indicates neither approval

nor disapproval of the reasons assigned

by the court for its conclusions; whereas,

“acquiescence in result only” indicates

disagreement or concern with some or all

of those reasons. Nonacquiescence signifies that, although no further review was

sought, the Service does not agree with

the holding of the court and, generally,

will not follow the decision in disposing

of cases involving other taxpayers. In reference to an opinion of a circuit court of

appeals, a nonacquiescence indicates that

the Service will not follow the holding on

a nationwide basis. However, the Service

will recognize the precedential impact of

the opinion on cases arising within the

venue of the deciding circuit.

The announcements published in the

weekly Internal Revenue Bulletins are

consolidated semiannually and annually.

The semiannual consolidation appears in

the first Bulletin for July and in the Cumulative Bulletin for the first half of the

year, and the annual consolidation appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.

The Commissioner ACQUIESCES in

the following decisions:

Golden Belt Telephone Cooperative

v. Commissioner,1

108 T.C. 498 (1997)

Paul A. Bilzerian v. United States,2

86 F.3d 1067 (11th Cir. 1996), rev’g

887 F. Supp. 1509 (M.D. Fla. 1995),

remanded sub nom. Steffen v. United

States, 952 F. Supp. 779 (M.D. Fla.

1997)

1 Acquiescence in result only relating to whether billing and collection services performed by a rural telephone cooperative on behalf of long-distance carriers con-

stitute “communication services” as defined in Internal Revenue Code section 501(c)(12)(B).

2 Acquiescence in result only relating to whether issuance of an erroneous refund following taxpayer’s payment of the original assessment revives that assessment to

permit enforced collection of the amount erroneously refunded.

May 4, 1998

4

1998–18 I.R.B.

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

Section 42.—Low-Income

Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 86.—Social Security

and Tier 1 Railroad Retirement

Benefits

Notice 98–23 provides guidance regarding recent

changes to the taxation of social security benefits

under the U.S.-Canada income tax treaty. See Notice

98–23, page 9.

Section 280G.—Golden

Parachute Payments

Federal short-term, mid-term, and long-term

rates are set forth for the month of May 1998. See

Rev. Rul. 98–23, on this page.

Section 382.—Limitation on Net

Operating Loss Carryforwards

and Certain Built-In Losses

Following Ownership Change

The adjusted applicable federal long-term rate is

set forth for the month of May 1998. See Rev. Rul.

98–23, on this page.

Section 412.—Minimum Funding

Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 467.—Certain Payments

for the Use of Property or

Services

The adjusted applicable federal short-term, mid-

1998–18 I.R.B.

term, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

term, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 468.—Special Rules for

Mining and Solid Waste

Reclamation and Closing Costs

Section 1274.—Determination

of Issue Price in the Case of

Certain Debt Instruments Issued

for Property

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 482.—Allocation of

Income and Deductions Among

Taxpayers

Federal short-term, mid-term, and long-term

rates are set forth for the month of May 1998. See

Rev. Rul. 98–23, on this page.

Section 483.—Interest on

Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 642.—Special Rules for

Credits and Deductions

Federal short-term, mid-term, and long-term

rates are set forth for the month of May 1998. See

Rev. Rul. 98–23, on this page.

Section 807.—Rules for Certain

Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, on this page.

Section 846.—Discounted

Unpaid Losses Defined

(Also Sections 42, 280G, 382, 412, 467, 468, 482,

483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;

adjusted federal long-term rate, and

the long-term exempt rate. For purposes

of sections 1274, 1288, 382, and other

sections of the Code, tables set forth the

rates for May 1998.

Rev. Rul. 98–23

This revenue ruling provides various

prescribed rates for federal income tax

purposes for May 1998 (the current

month.) Table 1 contains the short-term,

mid-term, and long-term applicable federal rates (AFR) for the current month for

purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the

short-term, mid-term, and long-term adjusted applicable federal rates (adjusted

AFR) for the current month for purposes

of section 1288(b). Table 3 sets forth the

adjusted federal long-term rate and the

long-term tax-exempt rate described in

section 382(f). Table 4 contains the appropriate percentages for determining the

low-income housing credit described in

section 42(b)(2) for buildings placed in

service during the current month. Finally,

Table 5 contains the federal rate for determining the present value of an annuity, an

interest for life or for a term of years, or a

remainder or a reversionary interest for

purposes of section 7520.

The adjusted applicable federal short-term, mid-

5

May 4, 1998

REV. RUL. 98–23 TABLE 1

Applicable Federal Rates (AFR) for May 1998

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-Term

AFR

110% AFR

120% AFR

130% AFR

5.50%

6.06%

6.63%

7.18%

5.43%

5.97%

6.52%

7.06%

5.39%

5.93%

6.47%

7.00%

5.37%

5.90%

6.43%

6.96%

Mid-Term

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

5.69%

6.27%

6.84%

7.42%

8.60%

10.06%

5.61%

6.17%

6.73%

7.29%

8.42%

9.82%

5.57%

6.12%

6.67%

7.22%

8.33%

9.70%

5.55%

6.09%

6.64%

7.18%

8.28%

9.62%

Long-Term

AFR

110% AFR

120% AFR

130% AFR

5.94%

6.54%

7.14%

7.75%

5.85%

6.44%

7.02%

7.61%

5.81%

6.39%

6.96%

7.54%

5.78%

6.36%

6.92%

7.49%

REV. RUL. 98–23 TABLE 2

Adjusted AFR for May 1998

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term

adjusted AFR

3.73%

3.70%

3.68%

3.67%

Mid-term

adjusted AFR

4.30%

4.25%

4.23%

4.21%

Long-term

adjusted AFR

5.05%

4.99%

4.96%

4.94%

REV. RUL. 98–23 TABLE 3

Rates Under Section 382 for May 1998

Adjusted federal long-term rate for the current month

5.05%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the

adjusted federal long-term rates for the current month and the prior two months.)

5.05%

May 4, 1998

6

1998–18 I.R.B.

REV. RUL. 98–23 TABLE 4

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

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

8.36%

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

3.58%

REV. RUL. 98–23 TABLE 5

Rate Under Section 7520 for May 1998

Applicable federal rate for determining the present value of an annuity, an interest for life or a

term of years, or a remainder or reversionary interest

Section 1288.—Treatment of

Original Issue Discount on

Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, page 5.

Section 2511.—Transfers in

General

26 CFR 25.2511–1: Transfers in general.

(Also Section 2512; 25.2512–1.)

Transfer of nonstatutory stock option. This ruling provides guidance on the

time that a completed gift occurs when a

nonstatutory stock option is transferred

without consideration by the optionee to a

family member.

Rev. Rul. 98–21

ISSUE

When is the transfer of a nonstatutory

stock option (i.e., a compensatory stock

option that is not subject to the provisions

of § 421 of the Internal Revenue Code) by

the optionee to a family member, for no

consideration, a completed gift under

§ 2511?

FACTS

A is employed by Company. Company

has one class of stock. Company has a

stock option plan under which employees

can be awarded nonstatutory stock op-

1998–18 I.R.B.

tions to purchase shares of Company’s

stock. These stock options are not traded

on an established market. The shares acquired on the exercise of an option are

freely transferable, subject only to generally applicable securities laws, and subject to no other restrictions or limitations.

Company grants to A, in consideration

for services to be performed by A, a nonstatutory stock option to purchase shares

of Company common stock. Company’s

stock option plan provides that the stock

option is exercisable by A only after A

performs additional services.

All options granted under Company’s

stock option plan expire 10 years from the

grant date. The exercise price per share of

A’s option is the fair market value of one

share of Company’s common stock on the

grant date. Company’s stock option plan

permits the transfer of nonstatutory stock

options to a member of an optionee’s immediate family or to a trust for the benefit

of those individuals. The effect of such a

transfer is that the transferee (after the required service is completed and before the

option’s expiration date) will determine

whether and when to exercise the stock

option and will also be obligated to pay

the exercise price.

Before A performs the additional services necessary to allow A’s option to be

exercised, A transfers A’s option to B, one

of A’s children, for no consideration.

LAW AND ANALYSIS

Section 2501 imposes a tax on the

transfer of property by gift by any indi-

7

6.8%

vidual. The gift tax is not imposed upon

the receipt of the property by the donee, is

not necessarily determined by the measure of enrichment resulting to the donee

from the transfer, and is not conditioned

upon the ability to identify the donee at

the time of the transfer. The tax is a primary and personal liability of the donor,

is an excise upon the donor’s act of making the transfer, is measured by the value

of the property passing from the donor,

and attaches regardless of the fact that the

identity of the donee may not then be

known or ascertainable. Section 25.2511–

2(a) of the Gift Tax Regulations.

The gift tax applies to a transfer of

property by way of gift, whether the

transfer is in trust or otherwise, whether

the gift is direct or indirect, and whether

the property is real or personal, tangible

or intangible. Section 25.2511–1(a). For

this purpose, the term property is used in

its broadest and most comprehensive

sense and reaches “every species of right

or interest protected by law and having an

exchangeable value.” H.R. Rep. No. 708,

72d Cong., 1st Sess. 27 (1932); S. Rep.

No. 665, 72d Cong., 1st Sess. 39, (1932);

both reprinted in 1939–1 (Part 2) C.B.

476, 524. Some rights, however, are not

property. See e.g., Estate of Howell v.

Commissioner, 15 T.C. 224 (1950) (nonvested pension rights were not property

rights includible in gross estate under

§ 811(c) of the 1939 Code); Estate of

Barr v. Commissioner, 40 T.C. 227 (1963)

acq., 1964–1 C.B. 4 (death benefits

May 4, 1998

payable at discretion of board of directors

who usually but not always, agreed to

payment, were in the nature of hope or

expectancy and not property rights includible in gross estate for estate tax purposes).

Generally, a gift is complete when the

donor has so parted with dominion and

control over the property as to leave the

donor no power to change its disposition,

whether for the donor’s own benefit or for

the benefit of another. Section 25.2511–

2(b).

In Estate of Copley v. Commissioner,

15 T.C. 17 (1950), aff ’d, 194 F.2d 364

(7th Cir. 1952), acq., 1965–2 C.B. 4, the

petitioner entered into an antenuptial

agreement in which the petitioner

promised to give the future spouse a sum

of money in consideration of the marriage

and in lieu of all the spouse’s marital

rights in the petitioner’s property. The

agreement became legally enforceable

under state law on the date of the marriage in 1931. The petitioner transferred

part of the sum of money in 1936 and the

rest in 1944. The court concluded that a

gift tax would have been due in 1931 if

there had been a gift tax law in effect at

that time.

In Rev. Rul. 79–384, 1979–2 C.B. 344,

a parent promised to pay a child $10,000

if the child graduated from college. Rev.

Rul. 79–384 holds that the parent made a

gift on the day the child graduated from

college, the date when the parent’s

promise became enforceable and determinable in value.

May 4, 1998

In Rev. Rul. 80–186, 1980–2 C.B. 280,

a parent transferred to a child, for nominal

consideration, an option to purchase real

property for a specified period of time at a

price below fair value. Rev. Rul. 80–186

holds that the transfer is a completed gift

at the time the option is transferred provided the option is binding and enforceable under state law on the date of the

transfer.

In the present case, Company grants to

A a nonstatutory stock option conditioned

on the performance of additional services

by A. If A fails to perform the services,

the option cannot be exercised. Therefore, before A performs the services, the

rights that A possesses in the stock option

have not acquired the character of enforceable property rights susceptible of

transfer for federal gift tax purposes. A

can make a gift of the stock option to B

for federal gift tax purposes only after A

has completed the additional required

services because only upon completion

of the services does the right to exercise

the option become binding and enforceable. In the event the option were to become exercisable in stages, each portion

of the option that becomes exercisable at

a different time is treated as a separate

option for the purpose of applying this

analysis. In the event that B is a skip person (within the meaning of § 2613(a)),

the generation-skipping transfer tax

would apply at the same time as the gift

tax. See Rev. Proc. 98–34, 1998–18,

which sets forth a methodology to value

certain compensatory stock options for

8

gift, estate, and generation-skipping

transfer tax purposes.

HOLDING

On the facts stated above, the transfer

to a family member, for no consideration,

of a nonstatutory stock option, is a completed gift under § 2511 on the later of (i)

the transfer or (ii) the time when the

donee’s right to exercise the option is no

longer conditioned on the performance of

services by the transferor.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Robert B. Hanson of the Office

of Assistant Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue ruling, contact Melissa C. Liquerman on (202) 6223120 (not a toll-free call).

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, page 5.

Section 7872.—Treatment of

Loans with Below-Market

Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month

of May 1998. See Rev. Rul. 98–23, page 5.

1998–18 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Taxation of Social Security

Benefits Under U.S.-Canada

Income Tax Treaty

Notice 98–23

This notice provides guidance, in a

question and answer format, regarding recent changes to the taxation of cross-border social security benefits under the Convention Between the United States of

America and Canada With Respect to

Taxes on Income and on Capital Signed at

Washington on September 26, 1980 as

Amended by the Protocols Signed on June

14, 1983, March 28, 1984, March 17,

1995, and July 29, 1997 (the “Treaty”).

For an overview of the changes, see Section I of this notice. For rules that apply to

U.S. residents who receive Canadian social

security benefits, see Section II. For rules

that apply to Canadian residents who receive U.S. social security benefits, see Section III. For information concerning the

Paperwork Reduction Act, see Section IV.

For drafting information, see Section V.

I. OVERVIEW OF CHANGES

Paragraph 5 of Article XVIII of the

Treaty provides rules that govern the taxation of U.S. social security benefits paid

to Canadian residents and Canadian social

security benefits paid to U.S. residents.

These rules were extensively revised by

the protocol signed on March 17, 1995

(the “1995 Protocol”) and again by the

protocol signed on July 29, 1997 (the

“1997 Protocol”).

Under the Treaty prior to amendment

by the 1995 Protocol, each country had the

exclusive right to tax social security benefits paid to its residents by the other country. The 1995 Protocol changed from a

residence-based system to a source-based

system, effective January 1, 1996. Under

the 1995 Protocol, the country that paid

benefits to residents of the other country

had the exclusive right to tax the benefits.

The 1997 Protocol returned to a residence-based system under which social

security benefits are taxable exclusively in

the country where the recipient resides.

The changes made by the 1997 Protocol

are generally retroactive to January 1,

1996. However, benefits paid during 1996

and 1997 will not be subject to a higher

1998–18 I.R.B.

rate of tax than was imposed under the

1995 Protocol. In addition, as explained

below, individuals who received benefits

during 1996 and 1997 that would be subject to a lower rate of tax under the 1997

Protocol may be eligible for refunds.

years. For 1996 and 1997, a U.S. resident

who received Canadian social security

benefits may choose to be taxed in the

United States under the new rules or to remain taxable in Canada under the old

rules.

II. U.S. RESIDENTS WHO RECEIVE

CANADIAN BENEFITS

WILL I HAVE TO PAY ANY

ADDITIONAL TAX FOR 1996 OR

1997?

WHICH CANADIAN BENEFITS ARE

COVERED?

The changes made by the 1997 Protocol affect the taxation of Old Age Security

(OAS) pensions and Canada/Quebec Pension Plan (CPP/QPP) benefits.

HOW WERE MY BENEFITS TAXED

DURING 1996 AND 1997?

Under the old rules (that is, the 1995

Protocol), Canadian social security benefits paid to U.S. residents during 1996 and

1997 were subject to a 25-percent Canadian withholding tax. However, Canada

permitted U.S. recipients of Canadian

benefits to file Canadian tax returns and

pay tax at regular graduated rates on their

net income. As a result, some U.S. recipients of Canadian social security benefits

may have paid little or no Canadian tax on

their benefits.

HOW WILL MY BENEFITS BE

TAXED UNDER THE NEW RULES?

Under the new rules (that is, the 1997

Protocol), Canadian social security benefits paid to U.S. residents generally will

be taxable, if at all, only by the United

States. The benefits will be taxed at graduated rates on a net basis as if they were

benefits paid under the U.S. Social Security Act. Thus, under section 86 of the Internal Revenue Code, the portion of the

benefits that is taxable will depend on

each recipient’s income level. For more

information on the rules that apply to benefits paid under the U.S. Social Security

Act, see IRS Publication 915 (Social Security Benefits and Equivalent Railroad

Retirement Benefits).

WHEN DO THE NEW RULES TAKE

EFFECT?

The new rules must be applied to benefits received during 1998 and future

9

The United States and Canada have

agreed that taxpayers’ 1996 and 1997

benefits will not be subject to an increased rate of tax solely as a result of the

1997 Protocol. Therefore, U.S. recipients

of Canadian social security benefits during 1996 or 1997 should not have to pay

any additional tax unless there is some

other factor that alters their tax liability.

AM I ENTITLED TO A REFUND OF

CANADIAN TAX?

U.S. residents who received Canadian

social security benefits during 1996 and

1997 on which Canadian tax was paid

may be entitled to refunds. Taxpayers

should calculate the amount of U.S. tax, if

any, they would have been required to pay

for 1996 and 1997 under the new rules. If

this amount is less than the amount of

Canadian tax paid, they generally are entitled to a refund of the Canadian tax.

However, they will be required to report

the benefits on U.S. returns (see below)

and pay any U.S. tax that would be due.

WHAT SHOULD I DO TO OBTAIN

MY REFUND?

During February 1998, Revenue

Canada mailed letters to U.S. residents

who received Canadian social security

benefits during 1996 and 1997. Recipients of such letters should follow the instructions provided in the letter and submit the attached Election Form to

Revenue Canada if they elect to be taxed

in the United States. Revenue Canada

will process the Election Forms and issue

checks in the appropriate amount. Revenue Canada will notify the Internal Revenue Service of the Canadian benefits

paid to the affected individuals and the

amounts of the refunds issued.

Taxpayers who did not receive a letter,

but believe they are entitled to a refund of

May 4, 1998

Canadian tax, should contact Revenue

Canada by calling 1-800-661-7896, by

sending a fax to 613-941-6905, or by

writing to the International Tax Services

Office, 2204 Walkley Road, Ottawa, Ontario K1A 1A8. Under the 1997 Protocol,

taxpayers must apply for any refund of

Canadian tax on or before December 16,

2000, which is three years from the date

the 1997 Protocol entered into force.

CAN I REVOKE MY ELECTION TO

BE TAXED IN THE UNITED STATES

INSTEAD OF CANADA?

A taxpayer who receives a refund of

Canadian tax may later determine that the

amount of U.S. tax owed for 1996 and

1997 under the new rules is greater than

the amount of Canadian tax that was originally paid. In this case, the taxpayer may

contact Revenue Canada on or before December 16, 2000 to revoke the election

and repay the Canadian tax. Revenue

Canada will then advise the Internal Revenue Service that the taxpayer has revoked the election to be taxed in the

United States.

HOW SHOULD I REPORT BENEFITS

FOR 1996 AND 1997 ON MY TAX

RETURNS?

Taxpayers who are not applying for refunds from Revenue Canada should not

report the Canadian social security benefits received during 1996 and 1997 on

U.S. federal income tax returns for 1996

and 1997. Taxpayers who are applying

for refunds should report the benefits on

U.S. returns as if the benefits had been

paid under the U.S. Social Security Act.

For more information on how to report

benefits paid under the U.S. Social Security Act, see IRS Publication 915 (Social

Security Benefits and Equivalent Railroad

Retirement Benefits).

Taxpayers who apply for refunds and

have not yet filed a 1996 or 1997 U.S. tax

return must report the Canadian benefits

on a 1996 or 1997 (as the case may be)

U.S. tax return. Such a U.S. return must

be filed even if a U.S. return would not

otherwise be required and even if no U.S.

tax is due. Taxpayers who were not previously required to file U.S. returns will be

required to do so as a result of their election to be taxable in the United States. At

the top of their return, taxpayers should

May 4, 1998

print or type the caption “CANADIAN

TREATY—SOCIAL SECURITY.”

Taxpayers who have already filed returns for 1996 and 1997 should file

amended returns after they have received

their refund checks from Revenue Canada

and pay any U.S. tax that may be due. Interest and penalties generally will not be

imposed if the additional U.S. tax (if any)

is paid by April 15, 1999. At the top of

their amended return, taxpayers should

print or type the caption “CANADIAN

TREATY—SOCIAL SECURITY.”

Taxpayers will not be entitled to any

foreign tax credit for the Canadian tax

that will be refunded.

HOW SHOULD I REPORT BENEFITS

FOR 1998 AND FUTURE YEARS ON

MY TAX RETURNS?

Canadian social security benefits received during 1998 and future years

should be reported as if they were paid

under the U.S. Social Security Act. For

more information on how to report benefits paid under the U.S. Social Security

Act, see IRS Publication 915 (Social Security Benefits and Equivalent Railroad

Retirement Benefits).

paid to Canadian residents generally will

be taxable only by Canada. An amount

equal to 85 percent of the benefits that are

received will be subject to Canadian tax

on a net basis as if the benefits were paid

under the Canadian Pension Plan.

WHEN DO THE NEW RULES

TAKE EFFECT?

The new rules must be applied to benefits received during 1998 and future

years. For 1996 and 1997, Revenue

Canada will determine whether it is more

beneficial for taxpayers to be taxed in

Canada under the new rules or to remain

taxable in the United States under the old

rules. More information is provided

below.

WILL I HAVE TO PAY ANY

ADDITIONAL TAX FOR 1996

OR 1997?

III. CANADIAN RESIDENTS WHO

RECEIVE U.S. BENEFITS

The United States and Canada have

agreed that taxpayers’ 1996 and 1997 benefits will not be subject to an increased

rate of tax solely as a result of the 1997

Protocol. Therefore, Canadian recipients

of U.S. social security benefits during

1996 or 1997 should not have to pay any

additional tax unless there is some other

factor that alters their tax liability.

WHICH U.S. BENEFITS ARE

COVERED?

AM I ENTITLED TO A REFUND OF

U.S. TAX?

The changes made by the 1997 Protocol affect the taxation of monthly benefits

under title II of the Social Security Act

and tier 1 railroad retirement benefits.

Canadian residents who received U.S.

social security benefits during 1996 or

1997 on which U.S. tax was paid may be

entitled to a refund. Revenue Canada will

calculate the amount of Canadian tax, if

any, that would have been due for 1996

and 1997 under the new rules. If this

amount is less than the amount of U.S. tax

paid, the taxpayer generally will be entitled to a refund of the excess amount.

Revenue Canada will notify taxpayers

who are entitled to refunds.

HOW WERE MY BENEFITS TAXED

DURING 1996 AND 1997?

Under the old rules (that is, the 1995

Protocol), U.S. social security benefits

paid to Canadian residents during 1996

and 1997 were subject to a 25.5-percent

U.S. withholding tax. This was a final

payment of tax. Canadian recipients of

U.S. social security benefits, regardless of

their level of income, could not elect to be

taxed in the United States on a net basis at

graduated rates.

HOW WILL MY BENEFITS BE

TAXED UNDER THE NEW RULES?

Under the new rules (that is, the 1997

Protocol), U.S. social security benefits

10

WHAT SHOULD I DO TO OBTAIN

MY REFUND?

Taxpayers who believe they are entitled

to a refund should not claim a refund from

the Internal Revenue Service at this time.

Revenue Canada has set up procedures

for determining which Canadian residents

are entitled to refunds. Revenue Canada

will apply for and obtain the refunds from

1998–18 I.R.B.

the Internal Revenue Service on behalf of

the affected individuals and will issue

checks to them as soon as possible in the

appropriate amount.

Election To Continue To Treat

Trust as a United States Person

IV. PAPERWORK REDUCTION ACT

SECTION 1. PURPOSE

The collections of information contained in this notice 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 1545–1602.

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

control number.

The collections of information in this

notice are in Sections II and III. This information is required to implement the

1997 Protocol. This information will be

used to determine the amounts of refunds

of U.S. tax to which certain Canadian residents are entitled and to notify the Internal Revenue Service as to the amounts of

refunds of Canadian tax paid to certain

U.S. residents. The collections of information are mandatory. The likely respondents are individuals.

The estimated total annual reporting

burden is 25,000 hours.

The estimated annual burden per respondent varies from .25 hours to 1 hour,

depending on individual circumstances,

with an estimated average of .5 hours.

The estimated number of respondents is

50,000.

The estimated annual frequency of responses is one time.

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.

This notice provides guidance regarding the election under § 1161 of the Taxpayer Relief Act of 1997, Pub. L. No.

105–34, 111 Stat. 788 (1997) (Taxpayer

Relief Act). Section 1161(a) provides that

to the extent prescribed in regulations by

the Secretary of the Treasury or his delegate, a trust that was in existence on August 20, 1996 (other than a trust treated as

owned by the grantor under subpart E of

part I of subchapter J of chapter 1 of the

Internal Revenue Code of 1986), and that

was treated as a United States person on

August 19, 1996, may elect to continue to

be treated as a United States person

notwithstanding § 7701(a)(30)(E). The

Internal Revenue Service and the Department of the Treasury will incorporate the

guidance contained in this notice in regulations. Accordingly, trusts should follow

the procedures set forth in this notice.

V. DRAFTING INFORMATION

The principal authors of this notice are

M. Grace Fleeman of the Office of Associate Chief Counsel (International) and

Margaret M. Gavaghan of the Office of

the Assistant Commissioner (International). For further information regarding

this notice, contact Ms. Gavaghan on

(202) 874-1550 (not a toll-free call).

1998–18 I.R.B.

Notice 98–25

SECTION 2. BACKGROUND

Prior to the Small Business Job Protection Act of 1996, Pub. L. 104–188, 110

Stat. 1755 (1996) (SBJP Act), the status

of a trust as domestic or foreign turned

upon the subjective determination of

whether the trust was more comparable to

a resident or a nonresident alien individual. See Rev. Rul. 60–181, 1960–1 C.B.

257, citing B.W. Jones Trust v. Commissioner, 46 B.T.A. 531 (1942), aff’d, 132

F.2d 914 (4th Cir. 1943) (prior law).

Section 1907(a) of the SBJP Act

amended § 7701(a)(30) and (31) of the

Code to provide more objective criteria

for determining the status of a trust. New

§ 7701(a)(30)(E) provides that a trust will

be treated as a domestic trust if: (1) a

court within the United States is able to

exercise primary supervision over the administration of the trust, and (2) one or

more United States persons1 have the au1 As originally enacted by the SBJP Act, new

§ 7701(a)(30)(E)(ii) required one or more United

States fiduciaries to have the authority to control all

substantial decisions of the trust. The Taxpayer Relief Act substituted the word “persons” for the word

“fiduciaries.”

11

thority to control all substantial decisions

of the trust. New § 7701(a)(31) provides

that a foreign trust is any trust that is not a

domestic trust.

New § 7701(a)(30) and (31) apply in

determining the status of a trust for taxable years beginning after December 31,

1996. A trust may, however, elect pursuant to § 1907(a)(3)(B) of the SBJP Act

to have the new criteria apply to the first

taxable year of the trust ending after August 20, 1996 (the date of enactment of

the SBJP Act).

A trust that qualified as a domestic trust

under prior law could fail to qualify as a

domestic trust under new § 7701(a)(30)(E). Thus, solely due to the change in

law, a domestic trust could become a foreign trust as of the first day of its first taxable year beginning after December 31,

1996. Such a change may have significant adverse tax consequences. A nongrantor trust whose status changed from

domestic to foreign prior to August 5,

1997 (the effective date of the repeal of

§ 1491), was treated for purposes of

§ 1491 as having transferred, upon becoming a foreign trust, all of its assets to a

foreign trust, and therefore may have

been subject to the § 1491 excise tax. A

nongrantor trust whose status changed

from domestic to foreign on or after August 5, 1997 (the effective date of § 684)

is treated as having transferred all of its

assets to a foreign trust and must recognize as gain the excess of the fair market

value of the property transferred over its

adjusted basis under § 684.

To avoid the change from domestic to

foreign status, a domestic trust needed to

amend its provisions to meet the definition set forth in new § 7701(a)(30)(E) by

the first day of its first taxable year beginning after December 31, 1996. To assist

domestic trusts that may have had difficulty conforming to the new domestic

trust criteria, the Service published Notice

96–65, 1996–2 C.B. 232. That notice permits a domestic trust in existence on August 20, 1996, to continue to file tax returns as a domestic trust for taxable years

beginning after December 31, 1996,

notwithstanding the status of the trust

under new § 7701(a)(30)(E), if certain

conditions are satisfied. See also

§ 1601(i)(4) of the Taxpayer Relief Act.

To obtain the relief provided in Notice

May 4, 1998

96–65, a trust is required to: (1) initiate

modification of the trust to conform to

new § 7701(a)(30)(E) by the due date (including extensions) for filing the trust’s

income tax return for its first taxable year

beginning after December 31, 1996; (2)

complete the modification within two

years of that date; and (3) attach a statement to the trust’s income tax return, as

described in Notice 96–65.

Subsequent to the publication of Notice

96–65, Congress enacted § 1161 of the

Taxpayer Relief Act. Section 1161 allows

a trust that was in existence on August 20,

1996 (other than a trust treated as owned

by the grantor), and that was treated as a

domestic trust on August 19, 1996, to

elect to continue treatment as a domestic

trust, regardless of the result of the application of new § 7701(a)(30)(E) to the

trust.

SECTION 3. TRUSTS ELIGIBLE TO

MAKE THE ELECTION

.01 Basic Rule.

A trust that was in existence on August

20, 1996, and that was treated as a domestic trust on August 19, 1996, as provided

in section 3.02, may elect to continue

treatment as a domestic trust notwithstanding § 7701(a)(30)(E). This election

is not available to a trust that was whollyowned by its grantor under subpart E, part

I, subchapter J, chapter 1, of the Code on

August 20, 1996. (Wholly-owned grantor

trusts may, however, follow the procedures in Notice 96–65.) The election is

available to a trust if only a portion of the

trust was treated as owned by the grantor

under subpart E on August 20, 1996. If a

partially-owned grantor trust makes the

election, the election is effective for the

entire trust. Also, a trust may not make

the election if the trust has made an election pursuant to § 1907(a)(3)(B) of the

SBJP Act to apply the new trust criteria to

the first taxable year of the trust ending

after August 20, 1996, because that election, once made, is irrevocable.

.02 Determining Whether a Trust was

Treated as a Domestic Trust on August

19, 1996

(1) Trusts Filing Form 1041 for the

Taxable Year that Includes August

19, 1996

For purposes of the election, a trust is

considered to have been treated as a do-

May 4, 1998

mestic trust on August 19, 1996, if: (i) the

trustee filed a Form 1041, U.S. Income

Tax Return for Estates and Trusts, for the

trust for the period that includes August

19, 1996 (and did not file a Form 1040NR,

U.S. Nonresident Alien Income Tax Return, for that year); and (ii) the trust had a

reasonable basis (within the meaning of §

6662) under the prior law for reporting as

a domestic trust for that period.

(2) Trusts Not Filing a Form 1041

Some domestic trusts are not required

to file Form 1041. For example, group

trusts described in Rev. Rul. 81–100,

1981–1 C.B. 326, are not required to file

Form 1041. Also, a domestic trust whose

gross income for the taxable year is less

than the amount required for filing an income tax return and that has no taxable

income is not required to file a Form

1041. Section 6012(a)(4).

For purposes of the election, a trust that

filed neither a Form 1041 nor a Form

1040NR for the period that includes August 19, 1996, will be considered to have

been treated as a domestic trust on August

19, 1996, if the trust had a reasonable

basis (within the meaning of § 6662)

under prior law (i) for being treated as a

domestic trust for that period and (ii) for

filing neither a Form 1041 nor a Form

1040NR for that period.

SECTION 4. PROCEDURE FOR

MAKING THE ELECTION

.01 Required Statement.

To make the election, a statement must

be filed with the Service in the manner

and time described in this notice. The

statement must be entitled “Election to

Remain a Domestic Trust under § 1161 of

the Taxpayer Relief Act of 1997,” be

signed under penalties of perjury by at

least one trustee of the trust, and contain

the following information:

(1) A statement that the trust is electing

to continue to be treated as a domestic

trust under § 1161 of the Taxpayer Relief

Act of 1997;

(2) A statement that the trustee had a

reasonable basis (within the meaning of §

6662) under prior law for treating the trust

as a domestic trust on August 19, 1996.

(The trustee need not explain the reasonable basis on the election statement);

(3) A statement either that the trust

filed a Form 1041 treating the trust as a

12

domestic trust for the period that includes

August 19, 1996, (and that the trust did

not file a Form 1040NR for that period),

or that the trust was not required to file a

Form 1041 or a Form 1040NR for the period that includes August 19, 1996, with

an accompanying brief explanation as to

why a Form 1041 was not required to be

filed; and

(4) The name, address, and employer

identification number of the trust.

.02 Filing the Required Statement with

the Service

Except as provided below, the trust

must attach the statement to a Form 1041.

The statement may be attached to either

the Form 1041 that is filed for the first

taxable year of the trust beginning after

December 31, 1996 (1997 taxable year),

or to the Form 1041 filed for the first taxable year of the trust beginning after December 31, 1997 (1998 taxable year).

The statement, however, must be filed no

later than the due date for filing a Form

1041 for the 1998 taxable year, plus extensions. The election will be effective

for the 1997 taxable year, and thereafter,

until revoked or terminated. If the trust

has already filed a Form 1041 for the

1997 taxable year without the statement

attached, the statement should be attached

to the Form 1041 filed for the 1998 taxable year.

If the trust has insufficient gross income and no taxable income for its 1997

or 1998 taxable year, or both, and therefore is not required to file a Form 1041 for

either or both years, the trust must make

the election by filing a Form 1041 for either the 1997 or 1998 taxable year with

the statement attached (even though not

otherwise required to file a Form 1041 for

that year). The trust should only provide

on the Form 1041 the trust’s name, name

and title of fiduciary, address, employer

identification number, date created, and

type of entity. The statement must be attached to a Form 1041 that is filed no later

than October 15, 1999.

If the trust files a Form 1040NR for the

1997 taxable year based on application of

new § 7701(a)(30)(E) to the trust, and satisfies Section 3.01 of this notice, in order

for the trust to make the election the trust

must file an amended Form 1040NR return for the 1997 taxable year. The trust

must note on the amended Form 1040NR

that it is making an election under § 1161

1998–18 I.R.B.

of the Taxpayer Relief Act of 1997. The

trust must attach to the amended Form

1040NR the statement required by this notice and a completed Form 1041 for the

1997 taxable year. The items of income,

deduction and credit of the trust must be

excluded from the amended Form

1040NR and reported on the Form 1041.

The amended Form 1040NR for the 1997

taxable year, with the statement and the

Form 1041 attached, must be filed with

the Philadelphia Service Center no later

than the due date, plus extensions, for filing a Form 1041 for the 1998 taxable year.

If a trust has made estimated tax payments as a foreign trust based on application of new § 7701(a)(30)(E) to the trust,

but has not yet filed a Form 1040NR for

the 1997 taxable year, when the trust files

its Form 1041 for the 1997 taxable year it

must note on its Form 1041 that it made

estimated tax payments based on treatment as a foreign trust. The Form 1041

must be filed with the Philadelphia Service Center (and not with the service center where the trust ordinarily would file its

Form 1041).

If a trust forms part of a qualified stock

bonus, pension, or profit sharing plan, the

election provided by this notice must be

made by attaching the statement to the

plan’s annual return required under

§ 6058 (information return) for the first

plan year beginning after December 31,

1996, or to the plan’s information return

for the first plan year beginning after December 31, 1997. The statement must be

attached to the plan’s information return

that is filed no later than the due date for

filing the plan’s information return for the

first plan year beginning after December

31, 1997, plus extensions. The election

will be effective for the first plan year beginning after December 31, 1996, and

thereafter, until revoked or terminated.

Any other type of trust that is not required to file a Form 1041 for the taxable

year, but that is required to file an information return (for example, Form 5227)

for the 1997 or 1998 taxable year must attach the statement to the trust’s information return for the 1997 or 1998 taxable

year. However, the statement must be attached to an information return that is

filed no later than the due date for filing

the trust’s information return for the 1998

taxable year, plus extensions. The election will be effective for the 1997 taxable

1998–18 I.R.B.

year, and thereafter, until revoked or terminated.

A group trust under Rev. Rul. 81–100,

1981–1 C.B. 326, (and any other trust that

is not described above and that is not required to file a Form 1041 or an information return) need not attach the statement

to any return and should file the statement

with the Philadelphia Service Center. The

trust must make the election provided by

this notice by filing the statement by October 15, 1999. The election will be effective for the 1997 taxable year, and

thereafter, until revoked or terminated.

.03 Failure to File the Statement in the

Required Manner and Time.

If a trust fails to file the statement in the

manner or time provided in Section 4.01

and 4.02, the trustee may provide a written statement to the district director having jurisdiction over the trust setting forth

the reasons for failing to file the statement

in the required manner or time. If the district director determines that the failure to

file the statement in the required manner

or time was due to reasonable cause, the

district director may grant the trust an extension of time to file the statement.

Whether an extension of time is granted

shall be in the sole discretion of the district director. However, the relief provided by this notice is not ordinarily

available if the statute of limitations for

the trust’s 1997 taxable year has expired.

Additionally, if the district director grants

an extension of time, it may contain terms

with respect to assessment as may be necessary to ensure that the correct amount of

tax will be collected from the trust, its

owners, and its beneficiaries.

Treasury Department request comments on

the rules in this notice and, in particular,

the change in circumstances that would

cause a termination of the election.

Comments should be submitted by

June 30, 1998 to: Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, Attn:

CC:DOM:CORP:R (Notice 98–25

CC:DOM:P&SI:2), Room 5226. Submissions may be hand-delivered between the

hours of 8 a.m. and 5 p.m. to: Courier’s

Desk, Internal Revenue Service, 1111

Constitution Ave., NW, Washington, DC,

Attn: CC:DOM:CORP:R (Notice 98–25

CC:DOM:P&SI:2), Room 5226. Alternatively, taxpayers may submit comments

electronically at

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

regs/comments.html

(the Service’s internet site). All comments submitted will be available for public inspection and copying. Please identify the comments as relating to this

Notice 98–25.

SECTION 6. EFFECT OF THIS

NOTICE ON NOTICE 96–65

A trust that otherwise qualifies for the

relief under this notice has the option of

proceeding under the provisions of Notice

96–65 or this Notice 98–25, or both. If

the trustee has begun conforming a trust’s

provisions under Notice 96–65 to meet

the definition set forth in new § 7701(a)(30)(E), the trustee may discontinue conforming the trust’s provisions to meet the

new domestic trust criteria if the trustee

proceeds under this Notice 98–25 instead

of Notice 96–65.

SECTION 5. REVOCATION OR

TERMINATION OF THE ELECTION

AND PUBLIC COMMENTS

SECTION 7. EFFECTIVE DATE

Section 1161(a) of the Taxpayer Relief

Act authorizes the Secretary to prescribe

regulations regarding the election to remain a domestic trust. The regulations will

incorporate the rules contained in this notice and provide guidance with respect to

when the occurrence of certain significant

changes in circumstances related to the

trust will terminate the election (for example, changes in the trustees from United

States persons to foreign persons). The

regulations will also contain procedures for

revoking the election. The Service and the

PAPERWORK REDUCTION ACT

13

This notice applies to an election made

for the first taxable year of a trust beginning after December 31, 1996. The provisions of this notice will be incorporated

into regulations that will be effective for

taxable years beginning after December

31, 1996.

The collections of information contained in this notice have been reviewed

and approved by the Office of Management and Budget for review in accordance with the Paperwork Reduction Act

May 4, 1998

(44 U.S.C. 3507) under control number

1545–1600.

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

control number.

The collections of information in this

notice are in section 4 headed Procedure

for Making the Election. This information is required by the IRS to assure compliance with the provisions of the Small

Business Job Protection Act of 1996 and

the Taxpayer Relief Act of 1997. The

likely respondents are trusts.

The estimated total annual reporting

burden is 250,000 hours.

The estimated average annual burden

per respondent is 30 minutes.

The estimated number of respondents

is 500,000.

The estimated annual frequency of responses is once.

Month

April

Year

1998

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans Division. For further information regarding

this notice, call (202) 622-6076 between

2:30 and 3:30 p.m. Eastern time (not a

toll-free number). Ms. Prestia’s number

is (202) 622-7377 (also not a toll-free

number).

Renewable Electricity

Production Credit, Publication of

Inflation Adjustment Factor and

Reference Prices for Calendar

Year 1998

Notice 98–27

This notice publishes the inflation adjustment factor and reference prices for

calendar year 1998 for the renewable

electricity production credit under § 45(a)

of the Internal Revenue Code. The 1998

inflation adjustment factor and reference

prices are used in determining the availability of the credit. The 1998 inflation

May 4, 1998

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.

DRAFTING INFORMATION

The principal authors of this notice are

Eliana Dolgoff and James A. Quinn of the

Office of Assistant Chief Counsel

(Passthroughs & Special Industries). For

further information regarding this notice

contact Ms. Dolgoff or Mr. Quinn on

(202) 622-3060 (not a toll-free call). For

further information about the international tax consequences of the election

that is the subject of this notice contact

Trina Dang of the Office of the Associate

Chief Counsel (International) on (202)

622-3880.

90% to 106%

Permissible

Range

6.00 to 7.07

Weighted

Average

6.67

adjustment factor and reference prices

apply to calendar year 1998 sales of kilowatt-hours of electricity produced in the

United States or a possession thereof from

qualified energy resources.

BACKGROUND

Section 45(a) provides that the renewable electricity production credit for any

tax year is an amount equal to the product

of 1.5 cents multiplied by the kilowatthours of specified electricity produced by

the taxpayer and sold to an unrelated person during the tax year. This electricity

must be produced from qualified energy

resources and at a qualified facility during

the 10-year period beginning on the date

the facility was originally placed in service.

Section 45(b)(1) provides that the

amount of the credit determined under

§ 45(a) is reduced by an amount that bears

the same ratio to the amount of the credit

as (A) the amount by which the reference

price for the calendar year in which the

sale occurs exceeds 8 cents bears to (B) 3

cents. Under § 45(b)(2), the 1.5 cents in

14

Weighted Average Interest Rate

Update

Notice 98–26

Notice 88–73 provides guidelines for

determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal

Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987

and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103–465

(GATT).

The average yield on the 30-year Treasury Constant Maturities for March 1998

is 5.95 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

90% to 110%

Permissible

Range

6.00 to 7.34

§ 45(a) and the 8 cents in § 45(b)(1) are

each adjusted by multiplying the amount

by the inflation adjustment factor for the

calendar year in which the sale occurs.

Section 45(c)(1) defines qualified energy resources as wind and closed-loop

biomass. Section 45(c)(3) defines a qualified facility as any facility owned by the

taxpayer that originally is placed in service after December 31, 1993 (December

31, 1992, in the case of a facility using

closed-loop biomass to produce electricity), and before July 1, 1999.

Section 45(d)(2)(A) requires the Secretary to determine and publish in the Federal Register each calendar year the inflation adjustment factor and the reference

prices for the calendar year. The inflation

adjustment factor and the reference prices

for the 1998 calendar year were published

in the Federal Register on April 1, 1998,

(62 Fed. Reg. 15917).

Section 45(d)(2)(B) defines the inflation adjustment factor for a calendar year

as the fraction the numerator of which is

the GDP implicit price deflator for the

preceding calendar year and the denomi-

1998–18 I.R.B.

nator of which is the GDP implicit price

deflator for the calendar year 1992. The

term “GDP implicit price deflator” means

the most recent revision of the implicit

price deflator for the gross domestic product as computed and published by the Department of Commerce before March 15

of the calendar year.

Section 45(d)(2)(C) provides that the

reference price is the Secretary’s determination of the annual average contract

price per kilowatt hour of electricity generated from the same qualified energy resource and sold in the previous year in the

United States. Only contracts entered

into after December 31, 1989, are taken

into account.

INFLATION ADJUSTMENT FACTOR

AND REFERENCE PRICES

The inflation adjustment factor for calendar year 1998 is 1.1240. The reference

prices for calendar year 1998 are 4.95

cents per kilowatt-hour for facilities producing electricity from wind energy resources and 0 cents per kilowatt-hour for

facilities producing electricity from

closed-loop biomass energy resources.

The reference price for electricity produced from closed-loop biomass, as defined in § 45(c)(2), is based on a determination under § 45(d)(2)(C) that in

calendar year 1997 there were no sales of

electricity generated from closed-loop

biomass energy resources under contracts

entered into after December 31, 1989.

PHASE-OUT CALCULATION

Because the 1998 reference prices for

electricity produced from wind and

closed-loop biomass energy resources do

not exceed 8 cents per kilowatt hour multiplied by the inflation adjustment factor,

the phaseout of the credit provided in

§ 45(b)(1) does not apply to electricity

produced from wind or closed-loop biomass energy resources sold during calendar year 1998.

CREDIT AMOUNT

As required by § 45(b)(2), the 1.5¢

amount in § 45(a)(1) is adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in

which the sale occurs. If any amount as

increased under the preceding sentence is

not a multiple of 0.1¢, such amount is

1998–18 I.R.B.

rounded to the nearest multiple of 0.1¢.

Under the calculation required by

§ 45(b)(2), the renewable electricity production credit for calendar year 1998 is

1.7¢ per kilowatt hour on the sale of electricity produced from closed-loop biomass and wind energy resources.

DRAFTING INFORMATION

CONTACT

The principal author of this notice is

David A. Selig of the Office of Assistant

Chief Counsel (Passthroughs and Special

Industries). For further information regarding this notice contact Mr. Selig at

(202) 622-3040 (not a toll-free call).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement;

determination of correct tax liability.

(Also Part I, Section 2512; Section 25.2512–1.)

Rev. Proc. 98–34

SECTION 1. PURPOSE

This revenue procedure sets forth a

methodology to value for gift, estate, and

generation-skipping transfer tax (“transfer

tax”) purposes certain compensatory

stock options described in Section 3 of

this revenue procedure. Taxpayers relying

on this revenue procedure may use an option pricing model that takes into account

on the valuation date specific factors that

are similar to those established by the Financial Accounting Standards Board in

Accounting for Stock-Based Compensation, Statement of Financial Accounting

Standards No. 123, (Fin. Accounting

Standards Bd. 1995), (FAS 123). The Internal Revenue Service will treat the

value of a compensatory stock option as

properly determined for transfer tax purposes, provided that the requirements of

this revenue procedure are met.

SECTION 2. BACKGROUND

Section 2512(a) of the Internal Revenue Code provides that, if a gift is made

in property, the value of the property at

the date of the gift is the amount of the

gift.

Section 25.2512–1 of the Gift Tax Regulations provides that for gift tax purposes

the value of property is the price at which

the property would change hands between

a willing buyer and a willing seller, nei-

15

ther being under any compulsion to buy

or to sell and both having reasonable

knowledge of relevant facts.

Section 2031(a) provides that the value

of the gross estate is determined by including the value at the time of the decedent’s death of all property, real or personal, tangible or intangible, wherever

situated.

Section 20.2031–1(b) of the Estate Tax

Regulations provides that the value of

every item of property includible in a

decedent’s gross estate is its fair market

value at the time of the decedent’s death.

Section 2032(a) provides that the executor may elect to use an alternate valuation date. Under this election, the value

of all property included in the gross estate

generally is determined as of 6 months

after the decedent’s death. However,

property distributed, sold, exchanged, or

otherwise disposed of within 6 months

after death must be valued as of the date

of sale, exchange, or other disposition.

Section 2624(a) provides that, except

as otherwise provided in Chapter 13,

property is valued at the time of the generation- skipping transfer.

FAS 123 establishes financial accounting and reporting standards for stockbased employee compensation plans.

Under FAS 123, the fair value of a stock

option granted by a public entity is estimated using an option pricing model (for

example, the Black-Scholes model or a

binomial model) that takes into account as

of the option grant date: (1) the exercise

price of the option; (2) the expected life of

the option; (3) the current price of the underlying stock; (4) the expected volatility

of the underlying stock; (5) the expected

dividends on the underlying stock; and (6)

the risk-free interest rate for the expected

term of the option.

FAS 123 generally requires a public entity to disclose in its financial statements

for each year beginning after December

15, 1994, a description of the method and

significant assumptions used during the

year to estimate the fair value of stock options granted during the year, including

the following weighted-average information: (1) expected life of the options; (2)

expected volatility; (3) expected dividends; and (4) risk-free interest rate. (The

foregoing is not a complete list of the disclosures required by FAS 123. For example, FAS 123 also requires financial state-

May 4, 1998

ment disclosure of the weighted-average

exercise prices of options granted during

the year.)

SECTION 3. SCOPE

This revenue procedure applies only to

the valuation for transfer tax purposes of

nonpublicly traded compensatory stock

options (that is, stock options that are

granted in connection with the performance of services, including stock options that are subject to the provisions of

§ 421), on stock that, on the valuation

date, is publicly traded on an established

securities market. The options to which

this revenue procedure applies are referred to herein as “Compensatory Stock

Options.”

SECTION 4. APPLICATION

.01 Taxpayers may determine the value

of Compensatory Stock Options for transfer tax purposes by using a generally recognized option pricing model (for example, the Black-Scholes model or an

accepted version of the binomial model)

that takes into account as of the valuation

date the following factors: (1) the exercise price of the option; (2) the expected

life of the option; (3) the current trading

price of the underlying stock; (4) the expected volatility of the underlying stock;

(5) the expected dividends on the underlying stock; and (6) the risk-free interest

rate over the remaining option term.

.02 In order to rely on this revenue

procedure: (1) the taxpayer must use the

factors determined in section 4.03

through 4.07 of this revenue procedure;

(2) each of the factors used in applying

the option pricing model must be reasonable (for this purpose, the use of the factors in section 4.03 through 4.07 of this

revenue procedure will be deemed reasonable); (3) the option pricing model

must be properly applied; (4) the company that granted the option must be subject to FAS 123 in preparing its financial

statements for the fiscal year of the company that includes the valuation date; (5)

the underlying stock must be common

stock and must be the same stock for

which the expected volatility and expected dividends were estimated by the

company for purposes of FAS 123; and

(6) no discount can be applied to the valuation produced by the option pricing

May 4, 1998

model (for example, no discount can be

taken due to lack of transferability or due

to the termination of the option within a

specified number of days following termination of employment).

.03 Except as provided in section 4.04

of this revenue procedure, in determining

the factor for the expected life of the option, taxpayers must use either (1) the

maximum remaining term of the option

on the valuation date (Maximum Remaining Term), or (2) the expected life of the

option on the valuation date computed in

accordance with this section (Computed

Expected Life). The Maximum Remaining Term is the number of years rounded

down to the nearest 1/10th of a year from

the valuation date until the option’s expiration date (assuming no condition or

event occurs that would shorten the life of

the option).

The Computed Expected Life is determined in the following manner:

Step one: Obtain the weighted-average

expected life of options granted by the

publicly traded company that, for purposes of complying with FAS 123, is disclosed in its financial statements for the

fiscal year that includes the valuation date.

(If, instead of disclosing a weighted-average expected life for options granted during the fiscal year, the company disclosed

a method for computing the expected life

of the options granted during the fiscal

year, the taxpayer must compute the

weighted-average expected life for the

taxpayer’s option using the method disclosed by the company.)

Step two: Divide the weighted-average

expected life determined in step one by

the number of years, rounded up to the

nearest 1/10th of a year, from the date the

option was granted (without regard to the

application of § 424(h)(1)) until the option’s expiration date (assuming no condition or event occurs that would shorten

the life of the option).

Step three: Multiply the quotient obtained in step two by the Maximum Remaining Term. The resulting number

rounded down to the nearest 1/10th is the

Computed Expected Life expressed in

years.

This calculation can be demonstrated

by the following example. Assume that

on September 1, 1998, A is granted a

stock option from Company that will terminate on the earlier of the date 10 years

16

from the date of grant or the date 90 days

after the termination of A’s employment

with Company. The option becomes fully

exercisable 3 years from the date of grant.

For the fiscal year that includes September 1, 2001, Company discloses in a footnote to its financial statements, in accordance with FAS 123, that the

weighted-average expected life of stock

options granted by the Company during

the fiscal year is 6 years. On September

1, 2001, when A’s option becomes fully

exercisable, A makes a gift of a portion of

the option. On September 1, 2001, A’s

option qualifies as a Compensatory Stock

Option. For purposes of step one, the

weighted-average expected life is 6 years,

as disclosed by Company for purposes of

complying with FAS 123 for the fiscal

year that includes the valuation date. For

purposes of step two, the weighted-average expected life of 6 years is divided by

10 years, the maximum term of A’s option

on the date the option was granted by

Company. The resulting quotient is 0.6 (6

years divided by 10 years equals 0.6). For

purposes of step three, the quotient in step

two is multiplied by the Maximum Remaining Term to determine the Computed

Expected Life. The result is 4.2 years

(0.6 times 7 years equals 4.2 years).

.04 Taxpayers must use the Maximum

Remaining Term (and may not use the

Computed Expected Life) as the expected

life of the option on the valuation date if

one (or more) of the following conditions

is present:

(1) the transferor of the option (or the

decedent, in the case of a transfer at death)

is not the person to whom the option being

valued was granted by the company;

(2) except in the case of a transfer at

death, the transferor is not an employee or

director of the company on the valuation

date;

(3) except in the case of the death or

disability (within the meaning of

§ 22(e)(3)) of the transferor, the option

being valued does not terminate within 6

months of termination of employment (or

service as a director) of the transferor

with the company;

(4) the terms of the option being valued

permit the option to be transferred to, or

for the benefit of, one or more persons

other than either persons who are the natural objects of the transferor’s bounty or a

charitable organization;

1998–18 I.R.B.

(5) except in the case of the death of the

transferor, the option being valued has an

exercise price that is not fixed on the valuation date. The option does not have a

fixed exercise price if, for example, the

exercise price is determined by a formula

the results of which might change after

the valuation date. In addition, an option

will be deemed not to have a fixed exercise price if the company issuing the option has repriced options (that is, directly

or indirectly lowered the exercise price of

outstanding compensatory stock options)

within the 3-year period ending on the

valuation date;

(6) except in the case of the death of the

transferor, the option being valued has

terms and conditions such that if all the

options granted in the fiscal year of the

company that includes the valuation date

had the same terms and conditions, the

weighted-average expected life for the

year would have been more than 120% of

the weighted-average expected life actually reported for the year; or

1998–18 I.R.B.

(7) the company is not required by FAS

123 to disclose an expected life of the options granted in the fiscal year of the company that includes the valuation date.

.05 In determining the factor for the

expected volatility of the underlying

stock, taxpayers must use the expected

volatility of the underlying stock that, for

purposes of complying with FAS 123, is

disclosed in the financial statements of

the publicly traded company for the fiscal

year of the company that includes the valuation date.

.06 In determining the factor for the

expected dividends on the underlying

stock, taxpayers must use the expected

dividends on the underlying stock that,

for purposes of complying with FAS 123,

is disclosed in the financial statements of

the publicly traded company for the fiscal

year of the company that includes the valuation date.

.07 In determining the factor for the

risk-free interest rate, taxpayers must use

the yield to maturity on the valuation date

17

of zero-coupon U.S. Treasury Bonds with

a remaining term (as of the valuation

date) nearest to the expected life of the

option on the valuation date as determined in section 4.03 of this revenue procedure.

.08 Taxpayers utilizing this revenue

procedure to value a Compensatory Stock

Option for transfer tax purposes should

indicate on the applicable gift, estate, or

generation-skipping transfer tax return:

“FILED PURSUANT TO REV. PROC.

98–34.”

DRAFTING INFORMATION

The principal author of this revenue

procedure is Robert B. Hanson of the Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

For further information regarding this

revenue procedure, contact Mr. Hanson

on (202) 622-3050 or Melissa C. Liquerman on (202) 622-3120 (not toll-free

calls).

May 4, 1998

Part IV. Items of General Interest

Notice of Public Hearing on

Proposed Regulations

Tax Treatment of Cafeteria

Plans; Hearing

REG–243025–96

AGENCY: Internal Revenue Service,

Treasury.

ACTION: Notice of public hearing on

proposed regulations.

SUMMARY: This document provides

notice of a public hearing on proposed

amendments that would provide guidance

on the circumstances under which a cafeteria plan participant may revoke an existing election and make a new election during a period of coverage.

DATES: The public hearing will be held

on Tuesday, May 5, 1998, beginning at

10:00 a.m. Requests to speak and outlines of oral comments must be received

by Tuesday, April 14, 1998.

ADDRESSES: The public hearing will

be held in room 2615, Internal Revenue

Building, 1111 Constitution Avenue, NW,

Washington, DC. Requests to speak and

outlines of oral comments should be submitted to the CC:DOM:CORP:R (REG–

243025–96), room 5226, Internal Revenue Service, POB 7604, Ben Franklin

Station, Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:

CORP:R (REG–243025–96), Courier’s

Desk, Internal Revenue Service, 1111

Constitution Avenue NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Mike Slaughter of the Regulations Unit, Assistant Chief Counsel (Corporate), 202-622-7190 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

The subject of the public hearing is proposed regulations under section 125 of the

Internal Revenue Code. These regulations

appeared in the Federal Register (62 F.R.

60196) on Friday, November 7, 1997.

The rules of §601.601 (a)(3) of the

“Statement of Procedural Rules” (26 CFR

May 4, 1998

part 601) shall apply with respect to the

public hearing. Persons who have submitted written comments within the time

prescribed in the notice of proposed rulemaking and who also desire to present

oral comments at the hearing on the proposed regulations should submit not later

than Tuesday, April 21, 1998, an outline

of the oral comments/testimony to be presented at the hearing and the time they

wish to devote to each subject.

Each speaker (or group of speakers representing a single entity) will be limited to

10 minutes for an oral presentation exclusive of the time consumed by the questions from the panel for the government

and answers to these questions.

Because of controlled access restrictions, attendees cannot be admitted beyond the lobby of the Internal Revenue

Building until 9:45 a.m.

An agenda showing the scheduling of

the speakers will be made after outlines

are received from the persons testifying.

Copies of the agenda will be available

free of charge at the hearing.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

March 18, 1998, 8:45 a.m., and published in the

issue of the Federal Register for March 19, 1998, 63

F.R. 13383).

Foundations Status of Certain

Organizations

Announcement 98–36

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices

under section 508(b) of the Code. This

listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following

organizations (which have been treated as

18

organizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

Christians for Renewed Family Values,

Inc., St. Petersburg, FL

Christopher Area Youth Association,

Christopher, IL

Cincinnati Organization of Parents of

Suzuki, Cincinnati, OH

Circle B. Blessings Therapeutic Riding

Center, Inc., Walkerton, IN

Citizens Against Ravaging Our

Environment, Inc., Clinton, MI

Citizens for Positive Affirmation Inc.,

Jacksonville, FL

Citizens for Tomorrows Future Inc.,

Ivanhole, NC

Citizens Housing and Motivation

Program-CHAMP, Houston, TX

Citizens Island Bridge Company LTD,

Lake Havasu, AZ

Citizens Promoting Recycling, Rifle, CO

Coast of Judea Inc., Whitesboro, NJ

Coastal Area Home Providers

Association, Inc., Savannah, GA

Coastal Carolina HIV Care Consortium,

Inc., Jacksonville, NC

Cobb County Fire and Emergency

Services Benevolent Fund, Marietta,

GA

Coffee Springs School District

Foundation, Inc., Coffee Springs, AL

Coker Volunteer Fire Department Inc.,

Coker, AL

Colcord Little League Inc., Colcord, OK

College Information Systems, Hickory,

NC

Collegians Activated To Liberate Life

Call, Madison, WI

Collierville Rotary Foundation,

Collierville, TN

Collirene Youth Recreation Inc., Tyler,

AL

Collision Ministries Inc., Franklin, TN

Colony Library Foundation, The Colony,

TX

Colorado American Indian Foundation,

Denver, CO

Colorado Assistance Center Inc., Denver,

CO

Colorado Association for Healthcare

Quality, Inc., Fort Collins, CO

Colorado Childrens Center for the

Cinematic & Performing Arts, Inc.,

Denver, CO

1998–18 I.R.B.

Colorado Foxes Recreational Soccer

Club, Inc., Parker, CO

Colorado Senior Network Users Group,

Colorado Springs, CO

Colorado Staff Development Council,

Broomfield, CO

Colorado Teamsters Hispanic Caucus

Joint Council 3, Denver, CO

Colorado Veterans for Housing Inc.,

Denver, CO

Colorado Young Lawyers Christmas in

January Inc., Colorado Springs, CO

Columbia State U Inc., Metairie, LA

Columbus-Copapayo Sister City Project,

Columbus, OH

Columbus Quincentennial Foundation

Inc., Media, PA

Coming Together To Help Promotions,

Philadelphia, PA

Comites Inc., Miami, FL

Commerce Enhancement Corporation,

Shelbyville, KY

Committee for the March on Washington,

Inc., Pittsburgh, PA

Community Access Centers Inc.,

Roanoke, VA

Community Access Television Inc.,

Fayetteville, AR

Community Action Services, Provo,

UT

Community Help Inc., Columbia, SC

Community Housing Action Team

Incorporated, Indianapolis, IN

Community Housing Assistance

Program, Lebanon, OH

Community Housing Corporation,

Southfield, MI

Community Impact Organization,

Greenville, NC

Community Multi-Cultural Action Team,

Jackson, TN

Community of Men, Chicago, IL

Community Redevelopment Inc., Atlanta,

GA

Community Reinvestment Foundation

Inc., Indianapolis, IN

Community Relations Council in

Anderson County, Inc., Palestine, TX

Community Resource Council Polk

Youth Institute, Inc., Raleigh, NC

Community Resources Inc., Thomasville,

GA

Community Resources Unlimited Inc.,

Silver Spring, MD

Community Social Service Inc., Baton

Rouge, LA

Community United Neighbors Against

Drugs, Philadelphia, PA

1998–18 I.R.B.

Community Volunteer Training, Kansas

City, MO

Community Works, Charlotte, NC

Community Youth Association, Nevada,

TX

Compani, Richfield, UT

Compass Ministries Inc., Glendale, AZ

Compass Theatre Company, Denver,

CO

Compassionate Heart Ministries Inc.,

Kansas City, MO

Comprehensive Care Center Memorial

Fund, Houston, TX

Computer Awareness Foundation Inc.,

Edison, NJ

Computer Lifeskills Center Inc., Grand

Rapids, MI

Comsoft, Clemson, SC

Concerned Citizens for a Better

Community, Harvey, IL

Concerned Citizens of Central Texas

Sentinel Communications, Waco,

TX

Concerned Clergy Foundation Inc.,

Indianapolis, IN

Concerned Senior Citizens of Colorado,

Inc., Fort Collins, CO

Concert Dance Ensemble, Waxahachie,

TX

Concho Valley Regional Hospital

Auxiliary, San Angelo, TX

Conneaut Education Foundation,

Conneaut, OH

Connections for a Better World Inc.,

Chevy Chase, MD

Connor Moran Childrens Cancer

Foundation, Inc., Tequesta, FL

Conquerors Quartet Ministries

Incorporated, Evansville, IN

Conway Youth Sports Club Inc., Conway,

AR

Cook County Council on Child Abuse

Inc., Adel, GA

Cormagda Inc., Chicago, IL

Cornerstone Ministries Inc., Dodge City,

KS

Corning Community Center Inc.,

Corning, AR

Coulters Mill Baptist Fellowship, Oreana,

IL

Council for Urban Peace and Justice,

Granville, OH

Council of Friends Groups of Akron,

Akron, OH

Counseling Advocacy Resources Inc.,

Kokomo, IN

Count & Countess De Hoernle, Deerfield

Beach, FL

19

Count It All Joy Inc., Seymour, IN

Country Heights Playground,

Owensboro, KY

Country Kids Pre-School and Day,

Pocahontas, AR

Court Appointed Special Advocates,

Lewisville, TX

Coweta Communities in Schools Inc.,

Newnan, GA

Cowtown Opry, Fort Worth, TX

Cozad Youth Recreation, Cozad, NE

Craigs Divorced Kids, Craig, CO

Cranberry Township Athletic, Cranberry

Twp, PA

Craven County Pirate Club, New Bern,

NC

Create Inc., Tallahassee, FL

Creations Anew Inc., North Royalton,

OH

Creative Learning Day-Care Inc., St.

Martinville, LA

Creative Playground of Ft. Pierce, Ft.

Pierce, FL

Creek County Sheriff Reserve, Supulpa,

OK

Creole Chapter 43 NAWCC, Metairie,

LA

Crime Stoppers of Carroll County,

Huntingdon, TN

Crime Stoppers of Mayfield & Graves,

Mayfield, KY

Crisis Pregnancy C A R E Center Inc.,

Harrodsburg, KY

Crisis Pregnancy Help-Line, Manistique,

MI

Crisis Pregnancy Services of ADA, Ada,

OK

Critical Incident Stress Debriefing,

Winter Haven, FL

Critical Thought Development, Grand

Rapids, MI

Cro-Aid Corp, Fort Lee, NJ

Croatian Council of Kansas City Inc.,

Kansas City, KS

Croation Youth of New Jersey Inc., Fort

Lee, NJ

Crofton Park Production Company,

Morristown, TN

Crossroad Farms Inc., Newark, DE

Crossroads Career Services Inc., Atlanta,

GA

Crosstown Outreach Services, Detroit,

MI

Crown Broadcasting Company, Pella, IA

Dreammakers International Education

Inc., Columbus, OH

Dreamstreets Press Incorporated,

Newark, DE

May 4, 1998

Driver of the Year Foundation Inc.,

Pittsburgh, PA

Drug and AIDS Prevention Among

African-Americans Inc., Smithfield,

NC

Drug Free Housing Foundation Inc.,

Jacksonville, FL

Drug Free Workplace Coalition of Palm

Beach County Inc., West Palm Beach,

FL

Drug Watch International, Elmhurst, IL

Dublin Irish Celebration, Dublin, OH

Dubuque Area Youth Leadership Council,

Dubuque, IA

Duke and Duchess Inc., Houston, TX

Dunbar Bulldog Academic and Athletic

Boosters Inc., Lexington, KY

Duncanville Soccer Association,

Duncanville, TX

Durand Farm Natural Preserve Inc.,

Decatur, GA

Episcopal Investment Corporation,

Houston, TX

Epsilon Tau Omega Endowment Fund,

Greenville, SC

Equestrian Challenge of Naples Inc.,

Naples, FL

Equestrian Support Group, Hampton, AR

Equip and Unify to Reach, Altamonte

Springs, FL

Fous Inc., Decatur, GA

Franciscan Service Program

Incorporated, Covington, KY

Frank L. Rizzo Monument Committee,

Philadelphia, PA

Franklin County Education Corporation,

Meadville, MS

Franz Jaegerstaetter Memorial Fund Inc.,

Marion, SD

Frazier Freedom Neighborhood

Association, Dallas, TX

Fred A. Link III Memorial Scholarship

Inc., Bridgeport, OH

May 4, 1998

Fred Demayo Scholarship Fund Inc.,

Glenridge, NJ

Freddie Moore Memorial Care Home

Inc., Memphis, TN

Frederick County Sheriffs Office Citizen

Advisory Committee Inc., Frederick,

MD

Frederick Knight Ministries Inc.,

Midfield, AL

Free Media Forum Inc., Atlanta, GA

Friends of Kennesaw Mountain National

Battlefield Park Inc., Marietta, GA

Friends of Martin Memorial Library,

Williamston, NC

Friends of Mi Casa Inc., San Antonio, TX

Friends of Nathan Goff House Inc.,

Clarksburg, WV

Friends of Northville Parks & Recreation,

Northville, MI

Friends of Q. A. Thorp, Chicago, IL

Friends of the Blanchard Library Inc.,

Blanchard, OK

Friends of the Coast Corporation, New

Braunfels, TX

Friends of the Colon Township Library,

Colon, MI

Friends of the Culinary Arts Foundation,

Cincinnati, OH

Friends of the Danville Public Library,

Danville, IL

Friends of the Davis Program Inc.,

Columbus, OH

Friends of the Holy Cross, Washington,

DC

Friends of the Kenyon Area Ambulance

Association, Kenyon, MN

Friends of the Knox County Public

Library Incorporated, Vincennes, IN

Friends of the Lancaster Veterans

Memorial Library, Lancaster, TX

Friends of the Marylou Reddick Public

Library, Fort Worth, TX

Friends of the Sierra Leone Peoples

Organization, Washington, DC

20

Friends of the Topiary Park Inc.,

Columbus, OH

Friends of Tijeras Pueblo, Tijeras, NM

Future Harvest, Jackson, MS

Future Leaders for a Better Philadelphia

Inc., Philadelphia, PA

Footprints Only Inc., Timonium, MD

For a Better World Inc., New Orleans,

LA

Foresight Ministries Inc., Cascade, WI

Greenwood Superfund Oversight

Coalition, Warrenton, VA

Greg Mausz Evangelistic Association

Inc., Fayetteville, GA

Gresham Hills Inc., Florence, AL

Gulf Coast—A Journal of Literature &

Fine Arts, Houston, TX

Gulf Coast Cycling Association,

Houston, TX

Gulf Yachting Association Foundation

Inc., Mobile, AL

Gunsight Religious Conference Center &

Dude Ranch, San Antonio, TX

Gurleys Transportation Service Inc., New

Orleans, LA

Guru Nanak Nam Foundation, Santa

Cruz, NM

Gwinnett County Mounted Patrol,

Lawrenceville, GA

If an organization listed above submits

information that warrants the renewal of its

classification as a public charity or as a private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and

contributors may thereafter rely upon such

ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal

Revenue Bulletin.

1998–18 I.R.B.

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

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

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

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

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

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

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

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

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

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

subsequently adopted.

Revoked describes situations where the

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

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

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

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

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

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

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

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

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

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

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

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

1998–18 I.R.B.

21

May 4, 1998

Numerical Finding List1

Proposed Regulations—Continued

Revenue Rulings—Continued

Bulletins 1998–1 through 1998–17

REG–102894–97, 1998–3 I.R.B. 59

REG–104062–97, 1998–10 I.R.B. 34

REG–104537–97, 1998–16 I.R.B. 21

REG–104691–97, 1998–11 I.R.B. 13

REG–105163–97, 1998–8 I.R.B. 31

REG–109333–97, 1998–9 I.R.B. 9

REG–109704–97, 1998–3 I.R.B. 60

REG–110965–97, 1998–13 I.R.B. 42

REG–115795–97, 1998–8 I.R.B. 33

REG–119449–97, 1998–10 I.R.B. 35

REG–120200–97, 1998–12 I.R.B. 32

REG–120882–97, 1998–14 I.R.B. 25

REG–121755–97, 1998–9 I.R.B. 13

REG–208299–90, 1998–16 I.R.B. 26

REG–209276–87, 1998–11 I.R.B. 18

REG–209322–82, 1998–15 I.R.B. 26

REG–209373–81, 1998–14 I.R.B. 26

REG–209463–82, 1998–4 I.R.B. 27

REG–209476–82, 1998–8 I.R.B. 36

REG–209484–87, 1998–8 I.R.B. 40

REG–209485–86, 1998–11 I.R.B. 21

REG–209682–94, 1998–17 I.R.B. 20

REG–209807–95, 1998–8 I.R.B. 40

REG–251502–96, 1998–9 I.R.B. 14

98–10, 1998–10 I.R.B. 11

98–11, 1998–10 I.R.B. 13

98–12, 1998–10 I.R.B. 5

98–13, 1998–11 I.R.B. 4

98–14, 1998–11 I.R.B. 4

98–15, 1998–12 I.R.B. 6

98–16, 1998–13 I.R.B. 18

98–17, 1998–13 I.R.B. 21

98–18, 1998–14 I.R.B. 22

98–19, 1998–15 I.R.B. 5

98–20, 1998–15 I.R.B. 8

Announcements:

98–1, 1998–2 I.R.B. 38

98–2, 1998–2 I.R.B. 38

98–3, 1998–2 I.R.B. 38

98–4, 1998–4 I.R.B. 31

98–5, 1998–5 I.R.B. 25

98–6, 1998–5 I.R.B. 25

98–7, 1998–5 I.R.B. 26

98–8, 1998–6 I.R.B. 96

98–9, 1998–7 I.R.B. 35

98–10, 1998–7 I.R.B. 35

98–11, 1998–8 I.R.B. 42

98–12, 1998–8 I.R.B. 43

98–13, 1998–8 I.R.B. 43

98–14, 1998–8 I.R.B. 44

98–15, 1998–10 I.R.B. 36

98–16, 1998–9 I.R.B. 17

98–17, 1998–9 I.R.B. 16

98–18, 1998–10 I.R.B. 44

98–19, 1998–10 I.R.B. 44

98–20, 1998–11 I.R.B. 25

98–21, 1998–11 I.R.B. 26

98–22, 1998–12 I.R.B. 33

98–23, 1998–12 I.R.B. 34

98–24, 1998–12 I.R.B. 35

98–25, 1998–13 I.R.B. 43

98–26, 1998–14 I.R.B. 28

98–27, 1998–15 I.R.B. 30

98–28, 1998–15 I.R.B. 30

98–29, 1998–16 I.R.B. 48

98–30, 1998–17 I.R.B. 38

98–32, 1998–17 I.R.B. 39

98–33, 1998–17 I.R.B. 39

98–34, 1998–17 I.R.B. 39

98–35, 1998–17 I.R.B. 40

Notices:

98–1, 1998–3 I.R.B. 42

98–2, 1998–2 I.R.B. 22

98–3, 1998–3 I.R.B. 48

98–4, 1998–2 I.R.B. 25

98–5, 1998–3 I.B.R. 49

98–6, 1998–3 I.R.B. 52

98–7, 1998–3 I.R.B. 54

98–8, 1998–4 I.R.B. 6

98–9, 1998–4 I.R.B. 8

98–10, 1998–6 I.R.B. 9

98–11, 1998–6 I.R.B. 18

98–12, 1998–5 I.R.B. 12

98–13, 1998–6 I.R.B. 19

98–14, 1998–8 I.R.B. 27

98–15, 1998–9 I.R.B. 8

98–16, 1998–15 I.R.B. 12

98–17, 1998–11 I.R.B. 6

98–18, 1998–12 I.R.B. 11

98–19, 1998–13 I.R.B. 24

98–20, 1998–13 I.R.B. 25

98–21, 1998–15 I.R.B. 14

98–22, 1998–17 I.R.B. 5

98–24, 1998–17 I.R.B. 5

Proposed Regulations:

PS–158–86, 1998–11 I.R.B. 13

REG–100841–97, 1998–8 I.R.B. 30

REG–102144–98, 1998–15 I.R.B. 25

Revenue Procedures:

98–1, 1998–1 I.R.B. 7

98–2, 1998–1 I.R.B. 74

98–3, 1998–1 I.R.B. 100

98–4, 1998–1 I.R.B. 113

98–5, 1998–1 I.R.B. 155

98–6, 1998–1 I.R.B. 183

98–7, 1998–1 I.R.B. 222

98–8, 1998–1 I.R.B. 225

98–9, 1998–3 I.R.B. 56

98–10, 1998–2 I.R.B. 35

98–11, 1998–4 I.R.B. 9

98–12, 1998–4 I.R.B. 18

98–13, 1998–4 I.R.B. 21

98–14, 1998–4 I.R.B. 22

98–15, 1998–4 I.R.B. 25

98–16, 1998–5 I.R.B. 19

98–17, 1998–5 I.R.B. 21

98–18, 1998–6 I.R.B. 20

98–19, 1998–7 I.R.B. 30

98–20, 1998–7 I.R.B. 32

98–21, 1998–8 I.R.B. 27

98–22, 1998–12 I.R.B. 11

98–23, 1998–10 I.R.B. 30

98–24, 1998–10 I.R.B. 31

98–25, 1998–11 I.R.B. 7

98–26, 1998–13 I.R.B. 26

98–27, 1998–15 I.R.B. 15

98–28, 1998–15 I.R.B. 14

98–29, 1998–15 I.R.B. 22

98–30, 1998–17 I.R.B. 6

98–32, 1998–17 I.R.B. 11

Treasury Decisions:

8740, 1998–3 I.R.B. 4

8741, 1998–3 I.R.B. 6

8742, 1998–5 I.R.B. 4

8743, 1998–7 I.R.B. 26

8744, 1998–7 I.R.B. 20

8745, 1998–7 I.R.B. 15

8746, 1998–7 I.R.B. 4

8747, 1998–7 I.R.B. 18

8748, 1998–8 I.R.B. 24

8749, 1998–7 I.R.B. 16

8750, 1998–8 I.R.B. 4

8751, 1998–10 I.R.B. 23

8752, 1998–9 I.R.B. 4

8753, 1998–9 I.R.B. 6

8754, 1998–10 I.R.B. 15

8755, 1998–10 I.R.B. 21

8756, 1998–12 I.R.B. 4

8757, 1998–13 I.R.B. 4

8758, 1998–13 I.R.B. 15

8759, 1998–13 I.R.B. 19

8760, 1998–14 I.R.B. 4

8761, 1998–14 I.R.B. 13

8762, 1998–14 I.R.B. 15

8763, 1998–15 I.R.B. 5

8764, 1998–15 I.R.B. 9

8765, 1998–16 I.R.B. 11

8766, 1998–16 I.R.B. 17

8767, 1998–16 I.R.B. 4

Revenue Rulings:

98–1, 1998–2 I.R.B. 5

98–2, 1998–2 I.R.B. 15

98–3, 1998–2 I.R.B. 4

98–4, 1998–2 I.R.B. 18

98–5, 1998–2 I.R.B. 20

98–6, 1998–4 I.R.B. 4

98–7, 1998–6 I.R.B. 6

98–8, 1998–7 I.R.B. 24

98–9, 1998–6 I.R.B. 5

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1997–27 through

1997–52 will be found in Internal Revenue Bulletin

1998–1, dated January 5, 1998.

May 4, 1998

22

1998–18 I.R.B.

Finding List of Current Action on

Previously Published Items1

Bulletins 1998–1 through 1998–17

Revenue Procedures:

91–59

Updated and superseded by

98–25, 1998–11 I.R.B. 7

94–16

Modified and superseded by

98–22, 1998–12 I.R.B. 11

93–62

Modified and superseded by

98–22, 1998–12 I.R.B. 11

95–35

95–35A

Superseded by

98–19, 1998–7 I.R.B. 30

96–29

Modified and superseded by

98–22, 1998–12 I.R.B. 11

97–1

Superseded by

98–1, 1998–1 I.R.B. 7

97–2

Superseded by

98–2, 1998–1 I.R.B. 74

97–3

Superseded by

98–3, 1998–1 I.R.B. 100

97–4

Superseded by

98–4, 1998–1 I.R.B. 113

97–5

Superseded by

98–5, 1998–1 I.R.B. 155

97–6

Superseded by

98–6, 1998–1 I.R.B. 183

97–7

Superseded by

98–7, 1998–1 I.R.B. 222

97–8

Superseded by

98–8, 1998–1 I.R.B. 225

97–21

Superseded by

98–2, 1998–1 I.R.B. 74

97–26

Obsoleted by

98–28, 1998–15 I.R.B. 14

97–53

Superseded by

98–3, 1998–1 I.R.B. 100

Revenue Rulings:

75–17

Supplemented and superseded by

98–5, 1998–2 I.R.B. 20

92–19

Supplemented in part by

98–2, 1998–2 I.R.B. 15

1 A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1997–27 through 1997–52 will be found in Internal

Revenue Bulletin 1998–1, dated January 5, 1998.

1998–18 I.R.B.

23

May 4, 1998

Index

ESTATE TAX—Continued

INCOME TAX—Continued

Internal Revenue Bulletins

1998–1 Through 1998–17

Revocable trust; election (RP 13) 4, 21

Underpayment interest, interest expense

deduction, estates (RP 15) 4, 25

Electronic Federal Tax Payment System:

Batch filers and bulk filers (RP 32) 17,

11

Employee plans:

Administrative programs; closing

agreements (RP 22) 12, 11

Determination letters (RP 6) 1, 183;

(RP 14) 4, 22

Discrimination; CODAs (Notice 1) 3,

42

Eligible deferred compensation plans

(Notice 8) 4, 6

Group health plans; COBRA continuation coverage; HIPAA portability

(Notice 12) 5, 12

Net unrealized appreciation; capital

gains (Notice 24) 17, 5

Funding:

Full funding limitations, weighted average interest rate for January 1998

(Notice 9) 4, 8; February 1998 (Notice 15) 9, 8; March 1998 (Notice

18) 12, 11

Letter rulings, etc. (RP 4) 1, 113

Limitations on benefits and contributions (RR 1) 2, 5

Minimum Funding Standards (RP 10)

2, 35

Proposed regulations:

26 CFR 1.401(a)(9)–1, amended; qualified plans and individual retirement

plans, required distributions (REG–

209463–82) 4, 27

Recovery of basis; retirees (Notice 2) 2,

22

SIMPLE-IRAs (Notice 4) 2, 25

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Environmental cleanup costs; letter

rulings (RP 17) 5, 21

Exempt Organizations:

Letter rulings, etc. (RP 4) 1, 113

Organizations excepted from reporting

lobbying expenditures (RP 19) 7,

30

Tax consequences of physicians recruitment incentives provided by

hospitals (RR 15) 12, 6

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Failure to deposit federal tax; penalty

abatement (Notice 14) 8, 27

Foreign partnerships, reporting transfer of

property by U.S. persons (Notice 17)

11, 6

Foreign tax credit abuse (Notice 5) 3, 49

For the index of items published during

the first six months of 1997, see I.R.B.

1998–1, dated January 5, 1998.

The abbreviation and number in parenthesis following the index entry refer to

the specific item; numbers in roman and

italic type following the parenthesis refer

to the Internal Revenue Bulletin in which

the item may be found and the page

number on which it appears.

Key to Abbreviations:

RR

Revenue Ruling

RP

Revenue Procedure

TD

Treasury Decision

CD

Court Decision

PL

Public Law

EO

Executive Order

DO

Delegation Order

TDO

Treasury Department Order

TC

Tax Convention

SPR

Statement of Procedural

Rules

PTE

Prohibited Transaction

Exemption

EMPLOYMENT TAX

Electronic filing; magnetic media; 1998

Form W–4 specifications (RP 26) 13,

26

Proposed regulations:

26 CFR 31.3121(v)(2)–1, revised;

FICA and FUTA taxation of amounts

under employee benefit plans (REG–

209484–87; REG–209807–95) 8, 40

26 CFR 31.6053–1, –4; electronic tip

reports (REG–104691–97) 11, 13

Student FICA exception (RP 16) 5, 19

ESTATE TAX

Regulations:

26 CFR 20.2041–3, 20.2056(d)–2,

amended; 20.2046–1, revised; property interests and disclaimer (TD

8744) 7, 20

26 CFR 25.2702–5, –7, amended; qualified prsonal residence trust, sale of

residence (TD 8743) 7, 26

26 CFR 25.2511–1, 25.2514–3,

25.2518–1, –2, amended; property

interests and disclaimers (TD 8744)

7, 20

May 4, 1998

EXCISE TAX

Bows and arrows; taxable and nontaxable

articles (RR 5) 2, 20

Proposed regulations:

26 CFR 40.0–1T, added; 40.6011(a)–

1T, added; 40.6302(c)–2T, added;

deposits of excise taxes (REG–

102894–97) 3, 59

26 CFR 54.4980B–1, added; group

health plans continuation coverage

requirements (REG–209485–86) 11,

21

Regulations:

26 CFR 40.0–1(a), amended;

40.6011(a)–1(a)(2)(iii), 40.5302(c)–

1, amended, 40.6302(c)–2(b)(2)(iii),

added; deposits of excise taxes (TD

8740) 3, 4

26 CFR 40.6011(a)–1(b)(2)(vi),

amended; 48.4082–5T, removed;

48.4082–5, added; 48.4081–1,

amended; 48.4082–5T, redesignated;

48.6416(b)(4)–1, removed; 48.6421–

3(d)(2), amended; 48.6427–3(d)(2),

amended; 48.6715–1(a)(3), revised;

48.6715–2T, removed; gasoline and

diesel fuel excise tax; special rules

for Alaska, definitions (TD 8748) 8,

24

GIFT TAX

Qualifying income interest, disposition

(RR 8) 7, 24

INCOME TAX

Advance pricing agreements, small business taxpayers (Notice 10) 6, 9

Article XIII (8) Rev. Proc. (RP 21) 8, 27

Automobile owners and lessees (RP 24)

10, 31; (RP 30) 17, 6

Books and records; automatic data processing system (RP 25) 11, 7

Capital gains and charitable remainder

trusts (Notice 20) 13, 25

Classification settlement program:

Extended until further notice (Notice

21) 15, 14

Education loans (Notice 7) 3, 54

Elections under section 7704(g) (Notice

3) 3, 48

24

1998–18 I.R.B.

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

Fringe benefits aircraft valuation formula,

first half of 1998 (RR 14) 11, 4

Insurance companies:

Discounting estimated salvage recoverable (RP 12) 4, 18

Interest rate tables (RR 2) 2, 15

Loss reserves; discounting unpaid

losses (RP 11) 4, 9

Interest:

Investment:

Federal short-term, mid-term, and

long-term rates for January 1998

(RR4) 2, 18; February 1998

(RR7) 6, 6; March 1998 (RR11)

10, 13; April 1998 (RR 18) 14, 22

Rates, underpayments and overpayments (RR 17) 13, 21

Inventory:

LIFO:

Price indexes; department stores for

November 1997 (RR 6) 4, 4; December 1997 (RR 9) 6, 5; January

1998 (RR 16) 13, 18; February

1998 (RR 20) 15, 8

Shrinkage estimates:

Changing method of accounting for

estimating inventory shrinkage

(RP 29) 15, 22

Letter rulings, determination letters, and

information letters issued by Associate

Chief Counsel (Domestic), Associate

Chief Counsel (EBEO), Associate

Chief Counsel (Enforcement Litigation), and Associate Chief Counsel

(International) (RP 1) 1, 7

Losses attributable to a disaster during

1997 (RR 12) 10, 5

Low-income housing tax credit (Notice

13) 6, 19

Satisfactory bond; “bond factor”

amounts for the period October

through December 1997 (RR 3) 2, 4;

January–March 1998 (RR 13) 11, 4

Passive foreign investment companies:

Shareholders may use rules of sec.

1.1295–1T(b)(4), (f), and (g) to taxable years beginning before January

1, 1998 (Notice 22) 17, 5

Proposed regulations:

26 CFR 1.72(p)–1, amended; loans to

plan participants (REG–209476–82)

8, 36

26 CFR 1.141–7, 1.142(f)(4)–1,

1.150–5, added; 1.141–8, –15,

amended; obligations of states and

political subdivisions (REG–

110965–97) 13, 42

1998–18 I.R.B.

26 CFR 1.195–1, added; election to

amortize start-up expenditures

(REG–209373–81) 14, 26

26 CFR 1.356–6, added; reorganizations, nonqualified preferred stock

(REG–121755–97) 9, 13

26 CFR 1.368–1, amended; corporate

reorganizations, continuity of interest (REG–120882–97) 14, 25

26 CFR 1.460–6, amended; election

not to apply look-back method in de

minimis cases (REG–120200–97)

12, 32

26 CFR 1.469–10, revised; 1.7704–1,

added; investment income, passive

activity income and loss rules for

publicly traded partnerships

(REG–105163–97) 8, 31

26 CFR 1.475(g)–2, new; 1.482–8,

added; 1.482–0, –1, –2, 1.863,

1.863–7(a)(1), 1.864–4, –6, 1.894–1,

amended; 1.482–9, redesignated;

global dealing operation allocation

and sourcing of income and deductions among taxpayers (REG–

208299–90) 16, 26

26 CFR 1.702–1, 1.954–1, 301.7701–3,

amended; 1.952–1(b), (c), redesignated 1.954–2(a)(5), (6), 1.954–

4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),

added (REG–104537–97) 16, 21

26 CFR 1.732–1, amended; 1.732–2,

amended; 1.734–1(e), added; 1.743–

1, revised; 1.751–1, amended;

1.755–1, revised; 1.1017–1, revised;

adjustments to basis of partnership

property and partnership interest

(REG–209682–94) 17, 20

26 CFR 1.925(a)–1, (b)–1, added;

1.927(e)–1, amended; foreign sales

corporation transfer pricing source

and grouping rules (REG–102144–

98) 15, 25

26 CFR 1.1291–1, 1.1293–1, 1.1295–1,

–3, 1.1297–3(c), added; 1.1296–4,

amended; passive foreign investment

company preferred shares, special

income exclusion (REG–115795–

97) 8, 33

26 CFR 1.1397E–1, added; qualified

zone academy bonds (REG–

119449–97) 10, 35

26 CFR 1.1502–3(c), revised; 1.1502–

4(f)(3), (g)(3), added; 1.1502–9(b)(1)(v), added; 1.1502–21(c)(1)(iii),

amended; consolidated returns, limitations on the use of certain losses

and credits (REG–104062–97) 10, 34

25

26 CFR 1.6031–1, removed;

1.6031(a)–1, added; 1.6063–1,

amended; partnership returns

(REG–209322–82) 15, 26

26 CFR 1.7702B–1, –2, added; qualified long-term care insurance contracts (REG–109333–97) 9, 9

26 CFR 301.6159–1, amended; agreements for tax liability installment

payments (REG–100841–97) 8, 30

26 CFR 301.6404–2, added; abatement

of interest (REG–209276–87) 11, 18

26 CFR 301.7433–1(a), (d), (e), and

(f), revised; civil cause of action for

certain unauthorized collection actions (REG–251502–96) 9, 14

26 CFR 54.9812–1, added; mental

health parity; HIPAA (REG–

109704–97) 3, 60

Qualified Funeral Trust; guidance (Notice

6) 3, 52

Qualified intermediary agreements:

Guidance provided to foreign financial

institutions (RP 27) 15, 15

Qualified mortgage bonds, mortgage

credit certificates:

Guidance provided regarding use of national and area median gross income

figures by issuers (RP 28) 15, 14

Qualified Subchapter S Trust (QSST)

conversion to Electing Small Business

Trust (ESBT) 10, 30

Qualified Zone Academy Zone Bonds

(RP) 3, 100

Real estate transactions (RP 20) 7, 32

Regulations:

26 CFR 1.61–12, 1.249–1, 1.1016–5,

1.1275–1, amended; 1.163–13,

1.171–5, added; 1.171–1, –2, –3, –4,

revised; 1.1016–9, removed; amortizable bond premium (TD 8746) 7, 4

26 CFR 1.141–0, –2, amended;

1.141–7, –8, removed; 1.141–7T,

–8T, –15T, 1.142(f)(4)–1T, 1.150–

5T, added; 1.141–15, revised; obligations of states and political subdivisions (TD 8757) 13, 4

26 CFR 1.166–3(a)(3), 1.1001–4,

added; 1.166–3T, 1.1001–4T, removed; modifications of bad debts

and dealer assignments of notional

principal contracts (TD 8763) 15, 5

26 CFR 1.280B–1, added; building demolition, definition of structure (TD

8745) 7, 15

26 CFR 1.338–2, 1.368–1, –2,

amended; 1.368–1T, added; corporate reorganizations, continuity of in-

May 4, 1998

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

terest, and continuity of business enterprise (TD 8760) 14, 4; (TD 8761)

14, 13

26 CFR 1.354–1, 1.355–1, 1.356–3,

amended; reorganizations, treatment

of warrants as securities (TD 8752)

9, 4

26 CFR 1.356–6T, added; reorganizations, nonqualified preferred stock

(TD 8753) 9, 6

26 CFR 1.446–1, amended; 1.446–1T,

removed; 301.9100–0, added;

301.9100–1, revised; 301.9100–2,

–3, added; 301.9100–1T, –2T, –3T;

removed extensions of time to make

elections (TD 8742) 5, 4

26 CFR 1.453.11; installment obligations received from liquidating corporations (TD 8762) 14, 15

26 CFR 1.460–0, amended; 1.460–6T,

added; election not to apply lookback method in de minimis cases

(TD 8756) 12, 4

26 CFR 1.468A–2, –3, –8, amended;

nuclear decommissioning funds; revised schedules of ruling amounts

(TD 8758) 13, 15

26 CFR 1.904–5(o), 1.904–5T, 1.954–

0(b), 1.954–1, amended; 1.954–1T,

–2T, –9T, added; 301.7701–3(f)(1),

amended; controlled foreign corporation relating to partnerships and

branches (TD 8767) 16, 4

26 CFR 1.905–2, amended; foreign tax

credit filing requirements (TD 8759)

13, 19

26 CFR 1.925(a)–1T, 1.925(b)–

1T(b)(3)(i), amended; 1.927(e)–1T,

May 4, 1998

revised; foreign sales corporation

transfer pricing source and grouping

rules (TD 8764) 15, 9

26 CFR 1.985–1, –5(a), amended;

1.985–7, added; dollar approximate

separate transactions method of accounting (DASTM) to profit and loss

method of accounting, change from

P&L method to DASTM (TD 8765)

16, 11

26 CFR 1.1271–1, 1.1275–1, amended;

debt instruments with original issue

discount, annuity contracts (TD

8754) 10, 15

26 CFR 1.1202–0, –2, added; qualified

small business stock (TD 8749) 7, 16

26 CFR 1.1290–0, amended; 1.1294–0,

added; a. 1291–0T, amended;

1.1291–1T, added; 1.1291–9,

amended; 1.1293–0, –1T, added;

1.1295–0, –1T, –3T, 1.1297–3T(c),

added; passive foreign investment

company preferred shares, special

income exclusion (TD 8750) 8, 4

26 CFR 1.1396–1; empowerment zone

employment credit, qualified zone

employees (TD 8747) 7, 18

26 CFR 1.1397E–1T, added; qualified

zone academy bonds (TD 8755) 10,

21

26 CFR 1.1502–3, –4, –9(a),

–21T(c)(1)(iii), amended; 1.1502–

3T, –4T, –9T, –55T, added; 1.1502–

23T(b), (c), redesignated; consolidated returns, limitations on the use

of certain losses and credits, overall

foreign loss accounts (TD 8751) 10,

23

26

26 CFR 54.9801–2T, amended;

54.9801–4T, –5T, revised; 54.9804–

1T, redesignated; 54.9806–1T, redesignated; 54.9812–1T, added; mental

health parity, interim rules (TD

8741) 3, 6

Relocation payments:

Authorized by sec. 105(a)(11) of Housing and Community Development

Act, not includible in gross income

(RR 19) 15, 5

Reorganizations; exchange of securities

(RR 10) 10, 11

Rulings:

Areas in which advance rulings will not

be issued:

Associate Chief Counsel (Domestic), Associate Chief Counsel

(EBEO) (RP 3) 1, 100

Associate Chief Counsel (International) (RP 7) 1, 222

Rural airports (RP 18) 6, 20

Technical advice to district directors and

chiefs, appeals offices, Associate Chief

Counsel (Domestic), Associate Chief

Counsel (EBEO), Associate Chief

Counsel (Enforcement Litigation), and

Associate Chief Counsel (International)

(RP 2) 1, 74

Tentative differential earnings rate for

1997 (Notice 19) 13, 24

Treatment of hybrid arrangements under

subpart F (Notice 11) 6, 18

Withholding regulations:

Effective date of sec. 1441 withholding

regulations amended (Notice 16) 15,

12

1998–18 I.R.B.

INTERNAL REVENUE BULLETIN

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

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

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

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

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

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

Superintendent of Documents.

HOW TO ORDER

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

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

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

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

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

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

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

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