Bulletin No. 1997–52

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December 29, 1997

Internal Revenue

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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. 97–53, page 13.

Interest rates; underpayments and overpayments. The

rate of interest determined under section 6621 of the Code

for the calendar quarter beginning January 1, 1998, will be

8 percent for overpayments, 9 percent for underpayments,

and 11 percent for large corporate underpayments. The rate

of interest paid on the portion of a corporate overpayment

exceeding $10,000 is 6.5 percent.

Rev. Rul. 97–54, page 8.

Rev. Rul. 97–57, page 16.

CPI adjustment for below-market loans—1998. The

amount that section 7872(g) of the Code permits a taxpayer

to lend to a qualified continuing care facility without incurring

imputed interest is published and adjusted for inflation for

years 1987–1998. Rev. Rul. 96–64 supplemented and superseded.

EXEMPT ORGANIZATIONS

Announcement 97–125, page 60.

A list is provided of organizations now classified as private

foundations.

Line pack gas; cushion gas. The cost of recoverable line

pack gas or cushion gas is a capital expenditure and is not

depreciable. The cost of nonrecoverable line pack gas or

cushion gas is a capital expenditure and is depreciable.

Announcement 97–126, page 61.

Rev. Rul. 97–55, page 7.

EMPLOYMENT TAX

Certain cost-sharing payments. The Wetlands Reserve

Program, the Environmental Quality Incentives Program, and

the Wildlife Habitat Incentives Program are substantially similar to the type of programs described in section 126(a)(1)

through (8) of the Code so that cost-share payments made

under such programs and in connection with small watersheds are within the scope of section 126(a)(9) and,

thereby, cost-share payments received under the programs

are eligible for exclusion from gross income to the extent

permitted by section 126.

Rev. Rul. 97–56, page 10.

Section 1274A inflation-adjusted numbers for 1998.

This ruling provides the dollar amounts, increased by the

1998 inflation adjustment, for section 1274A of the Code.

Rev. Rul. 96–63 supplemented and superseded.

A list is provided of organizations that no longer qualify as

organizations for which contributions are deductible under

section 170 of the Code.

Page 12.

Railroad retirement; rate determination; quarterly. The

Railroad Retirement Board has determined that the rate of

tax imposed by section 3221 of the Code shall be 35 cents

for the quarter beginning October 1, 1997, and 35 cents for

the quarter beginning January 1, 1998.

Page 59.

Social security contribution and benefit base; domestic employee coverage threshold. The Commissioner of

the Social Security Administration has announced the OASDI

contribution and benefit base for remuneration paid in 1998

and self-employment income earned in taxable years beginning in 1998. The Commissioner has also determined the

domestic employee coverage threshold amount for 1998.

Continued on page 4.

Announcement Relating to Court Decisions begins on page 5.

Finding Lists begin on page 63.

Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 61.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect

the proper amount of tax revenue at the least cost; serve

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

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 quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and 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.

HIGHLIGHTS

OF THIS ISSUE—Continued

ADMINISTRATIVE

Rev. Proc. 97–59, page 31.

Per diem allowances. This procedure provides optional

rules for deeming substantiated the amount of certain reimbursed traveling expenses of an employee as well as for determining the amount of deductible meals while traveling

away from home. Rev. Proc. 96–64 superseded.

Rev. Proc. 97-56, page 18.

Penalties; substantial understatement. Guidance is provided concerning when information shown on a return in

accordance with the applicable forms and instructions will be

adequate disclosure for purposes of reducing an understatement of income tax under section 6662(d) of the Code.

Rev. Proc. 97–60, page 38.

Electronic filing program; Form 1040. Participants in

the 1998 Electronic Filing Program for the Form 1040 Series are informed of their obligations to the Service, taxpayers, and other participants.

Rev. Proc. 97–57, page 20.

Cost-of-living adjustments for 1998. The Service provides

cost-of-living adjustments for the tax rate tables for individuals,

estates, and trusts, the standard deduction amounts, the personal exemption, and several other items that use the adjustment method provided for the tax rate tables. The Service

also provides the adjustment for eligible long-term care premiums and another item that uses the adjustment method provided for eligible long-term care premiums.

Rev. Proc. 97–61, page 50.

On-line filing program; Form 1040. Participants in the

1998 On-Line Filing Program for the Form 1040 Series are

informed of their obligations to the Service, taxpayers, and

other participants.

Rev. Proc. 97–58, page 24.

Notice 97–77, page 18.

Optional standard mileage rates. This procedure announces 32.5 cents as the optional rate for deducting or accounting for expenses for business use of an automobile,

14 cents as the optional rate for deducting or accounting for

use of an automobile as a charitable contribution, and 10

cents as the optional rate for deducting or accounting for

use of an automobile as a medical or moving expense for

1998. It provides rules for substantiating the deductible expenses of using an automobile for business, moving, medical, or charitable purposes. Rev. Proc. 96–63 superseded.

December 29, 1997

Partnership magnetic media filing requirement. Guidance is provided to partnerships having more than 100 partners regarding the requirement to file partnership tax returns

on magnetic media.

Announcement 97–124, page 60.

The Service will extend the due date for federal tax deposits

due to the extra federal holiday.

1997–52 I.R.B.

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 ref-

erence 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:

Pacific Enterprises and Subsidiaries

v. Commissioner,

101 T.C. 1 (1993)1

William R. Jackson v. Commissioner,

108 T.C. 130 (1997)2

The Commissioner does not ACQUIESCE in the following decision:

Transwestern Pipeline Co. v. United

States,

639 F.2d 679 (Ct.Cl. 1980)3

1 Acquiescence relating to whether the cost of recoverable cushion gas and recoverable line pack gas, the gas used to maintain adequate pressure in a gas storage

facility and a pipeline, respectively, is properly treated as (i) merchandise and thus included in inventory; (ii) a depreciable capital asset; or (iii) a nondepreciable capital asset.

2 Acquiescence in result only relating to whether Termination Payments from an insurance company to a former insurance agent constitute net earnings from self-

employment within the meaning of section 1402(a) of the Internal Revenue Code (the Code) so as to be subject to tax under the Self-Employment Contributions Act

(SECA).

3 Nonacquiescence relating to whether the cost of recoverable line pack gas, the gas used to charge and operate an interstate natural gas pipeline system, is properly

treated as (i) merchandise and thus included in inventory; (ii) a depreciable capital asset, or (iii) a nondepreciable capital asset.

1997–52 I.R.B.

December 29, 1997

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

Section 1.—Tax Imposed

26 CFR 1.1–1: Income tax on individuals.

The Service provides adjusted tax tables for individuals, trusts, and estates for taxable years beginning in 1998 to reflect changes in the cost of living.

Also adjusted is the amount of certain reductions allowed against the unearned income of minor children in computing the “kiddie tax,” either on the

child’s return or, in the alternative, on a parent’s return. The amounts used to determine whether a parent may elect to report the “kiddie tax” on the parent’s return are also adjusted. See Rev. Proc. 97–57,

page 20.

Section 32.—Earned Income

26 CFR 1.32–2: Earned income credit for taxable

years beginning after December 31, 1978.

The Service provides inflation adjustments to the

limitations on the earned income tax credit for taxable years beginning in 1998. See Rev. Proc. 97–57,

page 20.

Section 62.—Adjusted Gross

Income Defined

26 CFR 1.62–2: Reimbursements and other expense

allowance arrangements.

Rules under which a reimbursement or other expense allowance arrangement for the cost of operating an automobile for business purposes will satisfy

the requirements of section 62(c) of the Code as to

business connection, substantiation, and returning

amounts in excess of expenses. See Rev. Proc.

97–58, page 24.

Rules are set forth under which a reimbursement

or other expense allowance arrangement for the cost

of lodging, meals, and incidental expenses or meal

and incidental expenses incurred by an employee

while traveling away from home will satisfy the requirements of § 62(c) of the Code as to substantiation of the amount of expenses. See Rev. Proc.

97–59, page 31.

Section 63.—Taxable Income

Defined

26 CFR 1.63–1: Change of treatment with respect

to the zero bracket amount and itemized deductions.

The Service provides inflation adjustments to the

standard deduction amounts (including the limitation in the case of certain dependents, and the additional standard deduction for the aged or blind) for

taxable years beginning in 1998. See Rev. Proc.

97–57, page 20.

1997–52 I.R.B.

Section 68.—Overall Limitation

on Itemized Deductions

The Service provides inflation adjustments to the

overall limitation on itemized deductions for taxable

years beginning in 1998. See Rev. Proc. 97–57,

page 20.

Section 126.—Certain

Cost-Sharing Payments

26 CFR 16A.126–1: Certain cost-sharing

payments—In general (Temporary).

Certain cost-sharing payments. The

Wetlands Reserve Program, the Environmental Quality Incentives Program, and

the Wildlife Habitat Incentives Program

are substantially similar to the type of

programs described in section 126(a)(1)

through (8) of the Code so that cost-share

payments made under such programs and

in connection with small watersheds are

within the scope of section 126(a)(9) and,

thereby, cost-share payments received

under the programs are eligible for exclusion from gross income to the extent permitted by section 126.

Rev. Rul. 97–55

ISSUE

Are the Wetlands Reserve Program, the

Environmental Quality Incentives Program, and the Wildlife Habitat Incentives

Program substantially similar to the type

of programs described in § 126(a)(1)

through (8) of the Internal Revenue Code

so that cost-share payments made under

such programs and in connection with

small watersheds are within the scope of §

126(a)(9) and, thereby, cost-share payments received under the programs are eligible for exclusion from gross income to

the extent permitted by § 126?

FACTS

The Wetlands Reserve Program

(WRP), authorized by Title XII of the

Food Security Act of 1985, Pub. L. No.

99–198, 99 Stat. 1504, reauthorized by

the Federal Agriculture Improvement and

Reform Act of 1996 (the 1996 Farm Act),

Pub. L. No. 104–127, 110 Stat. 995, is a

voluntary wetlands conservation program

to restore and protect wetlands on private

property. Landowners who participate in

the WRP may sell a conservation easement or enter into a restoration cost-share

agreement with the Department of Agriculture to restore and protect wetlands.

Under a restoration cost-share agreement,

a landowner agrees to undertake approved

conservation-related improvements on the

property in return for a cost-share payment, generally between 75 and 100 percent of the costs for restoring the wetland.

A conservation easement and a restoration

cost-share agreement may be combined in

one agreement with the Department of

Agriculture but separate payments are

made for the easement and for the costshare agreement.

The 1996 Farm Act also establishes the

Environmental Quality Incentives Program (EQIP) and the Wildlife Habitat Incentives Program (WHIP). EQIP and

WHIP are administered by the Department of Agriculture. EQIP combines the

functions of the Agricultural Conservation Program (ACP), the Great Plains

Conservation Program (GPCP), the

Water Quality Incentives Program

(WQIP), and the Colorado River Basin

Salinity Control Program (CRBSCP).

ACP and GPCP are programs enumerated

in § 126(a)(1) through (8) and the Commissioner determined in § 16A.126–

1(d)(1)(D) that CRBSCP was within the

scope of § 126(a)(9). WQIP was funded

through and administered under ACP.

WHIP was established to help participants develop habitat for upland wildlife,

wetland wildlife, threatened and endangered species, fish, and other types of

wildlife. Under WHIP, landowners enter

into wildlife habitat development costshare contracts for a minimum of 10

years.

The Secretary of Agriculture has made

the requisite determinations under

§ 126(b)(1)(A) that cost-share payments

made under WRP, EQIP, and WHIP are

primarily for purposes of conservation.

LAW AND ANALYSIS

Under § 126(a), gross income does not

include the excludable portion of payments made to taxpayers by federal and

state governments for a share of the cost

of improvements to property under cer-

December 29, 1997

tain conservation programs set forth in

§ 126(a)(1) through (8). Under § 126(a)(9), programs affecting small watersheds are eligible for § 126 treatment if

they are administered by the Secretary of

Agriculture and are determined by the

Secretary of the Treasury or the Secretary’s delegate to be substantially similar

to the type of programs described in

§ 126(a)(1) through (8). Even if the Secretary of the Treasury determines that a

particular program is within the scope of

§ 126(a)(9), not all cost-share payments

under such program will qualify for the

exclusion under § 126. In addition to the

determination requirement, the specific

project must be with respect to a small

watershed and then only the “excludable

portion” of any payment can qualify for

exclusion. See §§ 126(b)(1), 16A.126–

1(b)(5) and 16A.126–1(d)(3) for the definitions of “excludable portion” and

“small watershed.”

Section 135.—Income From

United States Savings Bonds

Used To Pay Higher Education

Tuition and Fees

HOLDING

Section 162.—Trade or

Business Expenses

The Commissioner has determined that

WRP, EQIP, and WHIP are substantially

similar to the type of programs described

in § 126(a)(1) through (8) so that costshare payments made under such programs and in connection with small

watersheds are within the scope of

§ 126(a)(9) and, thereby, cost-share payments received under the programs are eligible for exclusion from gross income to

the extent permitted by § 126. See

§ 16A.126–1 to determine what portion, if

any, of the cost-share payments are excludable from gross income under § 126.

The Service provides an inflation adjustment to

the limitation on the exclusion of income from

United States savings bonds for taxpayers who pay

qualified higher education expenses for taxable

years beginning in 1998. See Rev. Proc. 97–57,

page 20.

Section 151.—Allowance of

Deductions for Personal

Exemptions

26 CFR 1.151–4: Amount of deduction for each

exemption under section 151.

The Service provides inflation adjustments to the

personal exemption and to the threshold amounts of

adjusted gross income above which the exemption

amount phases out for taxable years beginning in

1998. See Rev.Proc. 97–57, page 20.

26 CFR 1.162–17: Reporting and substantiation of

certain business expenses of employees.

Rules are set forth for substantiating the amount

of a deduction or expense for business use of an automobile that most nearly represents current costs.

See Rev. Proc. 97–58, page 24.

Rules are set forth for substantiating the amount

of a deduction or expense for lodging, meals, and incidental expenses or meal and incidental expenses

incurred while traveling away from home that most

nearly represents current costs. See Rev. Proc.

97–59, page 31.

DRAFTING INFORMATION

Section 167.—Depreciation

The principal authors of this revenue

ruling are Leslie Finlow and Lisa Shuman

of the Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

For further information regarding this

revenue ruling contact Ms. Shuman at

(202) 622-3120 (not a toll-free call).

26 CFR 1.167(a) –1: Depreciation in general.

Section 132.—Certain Fringe

Benefits

The Service provides inflation adjustments to the

limitation on the exclusion of income for a qualified

transportation fringe for taxable years beginning in

1998. See Rev. Proc. 97–57, page 20.

December 29, 1997

The cost of recoverable line pack gas or cushion

gas is not depreciable, and the cost of nonrecoverable line pack gas or cushion gas is depreciable. See

Rev. Rul. 97–54, on this page.

Section 170.—Charitable, Etc.,

Contributions and Gifts

26 CFR 1.170–1: Charitable, etc., contributions

and gifts; allowance of deductions.

The Service provides inflation adjustments to the

“insubstantial benefit” guidelines for calendar year

1998. Under the guidelines, a charitable contribution

is fully deductible even though the contributor re-

ceives “insubstantial benefits” from the charity. See

Rev. Proc. 97–57, page 20.

26 CFR 1.170A–1: Charitable, etc., contributions

and gifts; allowance of deduction.

Rules are set forth for substantiating the amount

of a deduction or expense for charitable use of an

automobile. See Rev. Proc. 97–58, page 24.

Section 213.—Medical, Dental,

Etc., Expenses

The Service provides an inflation adjustment to

the limitation on the amount of eligible long-term

care premiums includible in the term “medical care”

for taxable years beginning in 1998. See Rev. Proc.

97–57, page 20.

26 CFR 1.213–1: Medical, dental, etc., expenses.

Rules are set forth for substantiating the amount

of a deduction or expense for use of an automobile

to obtain medical services. See Rev. Proc. 97–58,

page 24.

Section 217.—Moving Expenses

26 CFR 1.217–2: Moving expenses.

Rules are set forth for substantiating the amount

of a deduction or expense for use of an automobile

as part of a move. See Rev. Proc. 97–58, page 24.

Section 263.—Capital

Expenditures

26 CFR 1.263(a)–1: Capital expenditures;

in general.

The cost of recoverable and nonrecoverable line

pack gas or cushion gas is a capital expenditure. See

Rev. Rul. 97–54, on this page.

26 CFR 1.263(a)–1: Capital expenditures; in

general.

(Also sections 167, 168, 471; 1.167(a)–1, 1.471–1.)

Line pack gas; cushion gas. The cost

of recoverable line pack gas or cushion

gas is a capital expenditure and is not depreciable. The cost of nonrecoverable line

pack gas or cushion gas is a capital expenditure and is depreciable.

Rev. Rul. 97–54

ISSUES

(1) Is the cost of “line pack gas” or

“cushion gas” a capital expenditure under

§ 263 of the Internal Revenue Code or an

1997–52 I.R.B.

amount that is included in inventory

under § 471?

(2) If the cost of “line pack gas” or

“cushion gas” is a capital expenditure

under § 263, is that cost depreciable under

§§ 167 and 168?

FACTS

“Line pack gas” is the minimum volume of natural gas necessary to provide

the pressure to facilitate the flow of gas

through a pipeline. “Cushion gas” is the

minimum volume of natural gas necessary to provide the pressure to facilitate

the flow of gas from a storage reservoir to

a pipeline. Recoverable line pack gas and

recoverable cushion gas will be available

for sale or other use upon the abandonment of the pipeline or storage reservoir,

respectively. Unrecoverable line pack gas

and unrecoverable cushion gas will not be

available for sale or other use upon the

abandonment of the pipeline or storage

reservoir, but will become obsolete with

that abandonment.

LAW AND ANALYSIS

Section 263(a) provides that no deduction shall be allowed for amounts paid out

for permanent improvements or betterments made to increase the value of any

property or estate.

Section 1.263(a)–2 of the Income Tax

Regulations provides that a “capital expenditure” includes the cost of acquisition,

construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful

life substantially beyond the tax year.

Section 167(a) provides that there shall

be allowed as a depreciation deduction a

reasonable allowance for the exhaustion,

wear and tear (including a reasonable allowance for obsolescence) of property

used in a trade or business or held for the

production of income.

Generally, for tangible property, the depreciation deduction under § 167(a) is determined under § 168 by using the applicable depreciation method, the applicable

recovery period, and the applicable convention.

Section 471 provides that whenever, in

the opinion of the Secretary, the use of inventories is necessary in order clearly to

determine the income of any taxpayer, inventories shall be taken by that taxpayer,

1997–52 I.R.B.

on the basis the Secretary may prescribe as

conforming as nearly as may be to the best

accounting practice in the trade or business

and as most clearly reflecting income.

Section 1.471–1 provides that in order

to reflect income correctly, inventories at

the beginning and end of each tax year are

necessary in every case in which the production, purchase, or sale of merchandise

is an income-producing factor. Inventories should include all finished and partly

finished goods and, in the case of raw materials and supplies, only those that have

been acquired for sale or that will physically become a part of merchandise intended for sale.

Rev. Rul. 68–620, 1968–2 C.B. 199,

amplified by Rev. Rul. 78–352, 1978–2

C.B. 168, holds that line pack gas is merchandise in transit that is intended to be

sold to customers and therefore must be

included in the inventory of the taxpayer.

Rev. Rul. 75–233, 1975–1 C.B. 95,

holds that the cost of unrecoverable cushion gas is a capital expenditure under

§ 263, which is recoverable through an annual depreciation deduction under § 167.

With respect to both line pack gas and

cushion gas, several court decisions have

considered the capital expenditure-versus-inventory issue, as well as the depreciation issue. In Pacific Enterprises v.

Commissioner, 101 T.C. 1 (1993), the

United States Tax Court held that the

costs of line pack gas and cushion gas are

capital expenditures. Accord Transwestern Pipeline Co. v. United States, 639

F.2d 679 (Ct.Cl. 1980), regarding line

pack gas; Arkla, Inc. v. United States, 765

F.2d 487 (5th Cir. 1985), regarding cushion gas. The United States Court of Appeals for the Fifth Circuit in Arkla further

held that recoverable cushion gas was not

subject to depreciation because it was not

subject to exhaustion, wear, tear, or obsolescence. Accord Washington Energy Co.

v. United States, 94 F.3d 1557 (Fed. Cir.

1996). The Fifth Circuit in Arkla distinguished unrecoverable cushion gas as

being subject to depreciation because that

gas will become obsolete along with the

storage facility. Accord Rev. Rul. 75233. Finally, in Arkla, Inc. v. United

States, 37 F.3d 621 (Fed. Cir. 1994), the

United States Court of Appeals for the

Federal Circuit held that line pack gas

and cushion gas are treated the same for

purposes of depreciation. Accord Washington Energy Co. v. United States, 94

F.3d 1557.

Line pack gas or cushion gas is recoverable if it will be available for sale or

other use upon abandonment of a pipeline

or storage reservoir. See Arkla, Inc. v.

United States, 765 F.2d at 490. The Service will treat line pack gas or cushion gas

as being available for sale or other use to

the extent that such gas will be recovered

from an abandoned pipeline or storage

reservoir pursuant to a plan, a requirement of law, or economic feasibility,

whichever method projects the greatest

actual recovery of such gas.

The Service will follow the court decisions cited in this revenue ruling to the

extent they hold that the cost of line pack

gas or cushion gas is a capital expenditure, the cost of recoverable line pack gas

or recoverable cushion gas is not depreciable, and the cost of unrecoverable line

pack gas or unrecoverable cushion gas is

depreciable.

HOLDINGS

(1) The cost of line pack gas or cushion

gas is a capital expenditure under § 263.

(2) The cost of recoverable line pack

gas or recoverable cushion gas is not depreciable, but the cost of unrecoverable

line pack gas or unrecoverable cushion

gas is depreciable under §§ 167 and 168.

The Service will treat line pack gas or

cushion gas as recoverable to the extent

that such gas will be recovered from an

abandoned pipeline or storage reservoir

pursuant to a plan, a requirement of law,

or economic feasibility, whichever

method projects the greatest actual recovery of such gas.

APPLICATION

Any change in a taxpayer’s treatment

of the costs of line pack gas or cushion

gas to conform with this revenue ruling is

a change in method of accounting to

which the provisions of §§ 446 and 481

and the regulations thereunder apply. A

taxpayer wanting to change its method of

accounting for the cost of line pack gas or

cushion gas to conform with this revenue

ruling must follow the automatic change

in accounting method provisions of Rev.

Proc. 97–37, 1997–33 I.R.B. 18.

December 29, 1997

EFFECT ON OTHER DOCUMENTS

26 CFR 1.274–5T: Substantiation requirements

(temporary).

Rev. Rul. 68–620 and Rev. Rul. 78–352

are revoked. Rev. Rul. 75–233 is superseded. Rev. Proc. 97–37 is amplified to

include this change in the Appendix.

Simplified optional method for substantiating the

amount of a deduction or expense for business use

of an automobile. See Rev. Proc. 97–58, page 24.

PROSPECTIVE APPLICATION

The Service will not require a taxpayer

to change its method of accounting to

comply with the holding that the cost of

line pack gas or recoverable cushion gas

is a capital expenditure for any taxable

year beginning before December 29,

1997. In addition, the Service will not require a taxpayer to change its method of

accounting to comply with the holding for

determining the amount of recoverable

line pack gas or recoverable cushion gas

for any taxable year beginning before December 29, 1997, provided the method

used by the taxpayer projects recoverable

line pack gas or recoverable cushion gas

in an amount equal to or greater than an

amount that would be projected using an

economic feasibility of recovery standard.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Jennifer L. Nuding of the Office

of Assistant Chief Counsel (Income Tax

and Accounting). For further information

concerning this revenue ruling, contact

Ms. Nuding at (202) 622-4970 (not a tollfree call).

Section 267.—Losses, Expenses,

and Interest With Respect to

Transactions Between Related

Taxpayers

26 CFR 1.267(a)–1: Deductions disallowed.

When a payor provides a per diem allowance to

an employee who is a related party, the rules set forth

for the deemed substantiation to the payor of the

amount of the employee’s ordinary and necessary

business expenses for lodging, meal, and/or incidental expenses incurred while traveling away from

home, do not apply. See Rev. Proc. 97–59, page 31.

Section 274.—Disallowance of

Certain Entertainment, Etc.,

Expenses

26 CFR 1.274(d)–1(a): Substantiation requirements.

Simplified optional method for substantiating the

amount of a deduction or expense for business use

of an automobile. See Rev. Proc. 97–58, page 24.

December 29, 1997

26 CFR 1.274(d)–1(a): Substantiation

requirements.

Rules are set forth for substantiating the amount

of ordinary and necessary business expense of an

employee for lodging, meals, and incidental expenses or meal and incidental expenses incurred

while traveling away from home when a payor provides a per diem allowance under a reimbursement

or other expense allowance arrangement to pay for

such expenses. See Rev. Proc. 97–59, page 31.

26 CFR 1.274–5T: Substantiation requirements

(temporary).

Rules are set forth for substantiating the amount

of ordinary and necessary business expense of an

employee for lodging, meals, and incidental expenses or meal and incidental expenses incurred

while traveling away from home when a payor provides a per diem allowance under a reimbursement

or other expense allowance arrangement to pay for

such expenses. Rules are also set forth for an optional method for employees and self-employed individuals to use in computing the deductible costs of

business meal and incidental expenses paid or incurred while traveling away from home. See Rev.

Proc. 97–59, page 31.

Section 471—General Rule for

Inventories

26 CFR 1.471–1: Need for inventories.

The cost of recoverable and nonrecoverable line

pack gas or cushion gas is a capital expenditure.

Line pack gas or cushion gas in not inventory. See

Rev. Rul. 97–54, page 8.

Section 483.—Interest on

Certain Deferred Payments

26 CFR 1.483–1: Computation of interest on certain deferred payments.

As defined by section 1274A, the definitions for

both “qualified debt instruments” and “cash method

debt instruments” have dollar ceilings on the stated

principal amount. The limits to the stated principal

amount are adjusted for inflation for sales or exchanges occurring in the 1998 calendar year. See

Rev. Rul. 97–56, page 11.

or privileges available to members for taxable years

beginning in 1998. See Rev. Proc. 97–57, page 20.

Section 513.—Unrelated Trade

or Business

The Service provides an inflation adjustment to

the maximum amount of a “low cost article” for taxable years beginning in 1998. Funds raised through a

charity’s distribution of “low cost articles” will not

be treated as unrelated business income to the charity. See Rev. Proc. 97–57, page 20.

Section 877.—Expatriation to

Avoid Tax

The Service provides an inflation adjustment to

amounts used to determine whether an individual’s

loss of United States citizenship had the avoidance

of United States taxes as one of its principal purposes for calendar year 1998. See Rev. Proc. 97–57,

page 20.

Section 1274.—Determination

of Issue Price in the Case of

Certain Debt Instruments Issued

for Property

26 CFR 1.1274A–1: Special rules for certain transactions where stated principal amount does not exceed $2,800,000.

As defined by section 1274A, the definitions for

both “qualified debt instruments” and “cash method

debt instruments” have dollar ceilings on the stated

principal amount. The limits to the stated principal

amount are adjusted for inflation for sales or exchanges occurring in the 1998 calendar year. See

Rev. Rul. 97–56, page 10.

Section 1274A.—Special Rules

for Certain Transactions Where

Stated Principal Amount Does

Not Exceed $2,800,000

(Also §§ 1274, 483; 1.1274A–1)

Section 1274A inflation-adjusted

numbers for 1998. This ruling provides

the dollar amounts, increased by the 1998

inflation adjustment, for section 1274A of

the Code. Rev. Rul. 96–63 supplemented

and superseded.

Section 512.—Unrelated

Business Taxable Income

Rev. Rul. 97–56

The Service provides an inflation adjustment to

the maximum amount of annual dues that can be

paid to certain agricultural or horticultural organizations without any portion being treated as unrelated

trade or business income by reason of any benefits

This revenue ruling provides the dollar

amounts, increased by the 1998 inflation

adjustment, for § 1274A of the Internal

Revenue Code.

1997–52 I.R.B.

BACKGROUND

In general, §§ 483 and 1274 of the

Code determine the principal amount of a

debt instrument given in consideration for

the sale or exchange of nonpublicly

traded property. In addition, any interest

on a debt instrument subject to § 1274 is

taken into account under the original issue

discount provisions of the Code. Section

1274A, however, modifies the rules under

§§ 483 and 1274 for certain types of debt

instruments.

In the case of a “qualified debt instrument,” the discount rate used for purposes

of §§ 483 and 1274 of the Code may not

exceed 9 percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt

instrument given in consideration for the

sale or exchange of property (other than

new § 38 property within the meaning of

§ 48(b), as in effect on the day before the

date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b).

For debt instruments arising out of sales

or exchanges before January 1, 1990, this

amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c) of

the Code, the borrower and lender may

elect to use the cash receipts and disbursements method of accounting. In

particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for

by both the borrower and the lender

under the cash method of accounting. A

cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In

the case of instruments arising out of

sales or exchanges before January 1,

1990, the stated principal amount does

not exceed $2,000,000, (B) The lender

does not use an accrual method of accounting and is not a dealer with respect

to the property sold or exchanged, (C)

Section 1274 would have applied to the

debt instrument but for an election under

§ 1274A(c); and (D) An election under

§ 1274A(c) is jointly made with respect

to the debt instrument by the borrower

and lender. Section 1.1274A–1(c)(1) of

the Income Tax Regulations provides

rules concerning the time for, and manner

of, making this election.

Section 1274A(d)(2) of the Code provides that, for any debt instrument arising

out of a sale or exchange during any calendar year after 1989, the dollar amounts

stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation

adjustment for the calendar year. Any increase due to the inflation adjustment is

rounded to the nearest multiple of $100

(or, if the increase is a multiple of $50 and

not of $100, the increase is increased to

the nearest multiple of $100). The inflation adjustment for any calendar year is

the percentage (if any) by which the CPI

for the preceding calendar year exceeds

the CPI for calendar year 1988. Section

1274A(d)(2)(B) defines the CPI for any

calendar year as the average of the Consumer Price Index as of the close of the

12-month period ending on September 30

of that calendar year.

INFLATION-ADJUSTED AMOUNTS

For debt instruments arising out of

sales or exchanges after December 31,

1989, the inflation-adjusted amounts

under § 1274A are shown in Table 1.

Rev. Rul. 97–56 Table 1

Inflation-Adjusted Amounts Under § 1274A

Calendar Year

of Sale

or Exchange

1274A(b) Amount

(qualified debt

instrument)

1274A(c)(2)(A) Amount

(cash method debt

instrument)

1990

1991

1992

1993

1994

1995

1996

1997

1998

$2,933,200

$3,079,600

$3,234,900

$3,332,400

$3,433,500

$3,523,600

$3,622,500

$3,723,800

$3,823,100

$2,095,100

$2,199,700

$2,310,600

$2,380,300

$2,452,500

$2,516,900

$2,587,500

$2,659,900

$2,730,800

Note: These inflation adjustments were computed using the All-Urban, Consumer

Price Index, 1982-1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

DRAFTING INFORMATION

Rev. Rul. 96-63, 1996-2 C.B. 83, is

supplemented and superseded.

The principal author of this revenue

ruling is David B. Silber of the Office of

the Assistant Chief Counsel (Financial In-

1997–52 I.R.B.

stitutions and Products). For further information regarding this revenue ruling

contact Mr. Silber on (202) 622-3930 (not

a toll-free call).

December 29, 1997

Section 3221.—Rate of Tax

Determination of Quarterly Rate

of Excise Tax for Railroad

Retirement Supplemental

Annuity Program

In accordance with directions in Section 3221(c) of the Railroad Retirement

Tax Act (26 U.S.C., Section 3221(c)), the

Railroad Retirement Board has determined that the excise tax imposed by such

Section 3221(c) on every employer, with

respect to having individuals in his employ, for each work-hour for which compensation is paid by such employer for

services rendered to him during the quarter beginning October 1, 1997, shall be at

the rate of 35 cents.

In accordance with directions in Section 15(a) of the Railroad Retirement Act

of 1974, the Railroad Retirement Board

has determined that for the quarter beginning October 1, 1997, 31.4 percent of the

taxes collected under Sections 3211(b)

and 3221(c) of the Railroad Retirement

Tax Act shall be credited to the Railroad

Retirement Account and 68.6 percent of

the taxes collected under such Sections

3211 (b) and 3221(c) plus 100 percent of

the taxes collected under Section 3221(d)

of the Railroad Retirement Tax Act shall

be credited to the Railroad Retirement

Supplemental Account.

Dated: August 25, 1997.

By Authority of the Board.

Beatrice Ezerski,

Secretary to the Board.

(Filed by the Office of the Federal Register on September 2, 1997, 8:45 a.m., and published in the issue

of the Federal Register for September 3, 1997, 62

F.R. 46526)

In accordance with directions in Section 3221(c) of the Railroad Retirement

Tax Act (26 U.S.C., Section 3221(c)), the

Railroad Retirement Board has determined that the excise tax imposed by such

Section 3221(c) on every employer, with

respect to having individuals in his employ, for each work-hour for which compensation is paid by such employer for

services rendered to him during the quarter beginning January 1, 1998, shall be at

the rate of 35 cents.

December 29, 1997

In accordance with directions in Section 15(a) of the Railroad Retirement Act

of 1974, the Railroad Retirement Board

has determined that for the quarter beginning January 1, 1998, 31.6 percent of the

taxes collected under Sections 3211(b)

and 3221(c) of the Railroad Retirement

Tax Act shall be credited to the Railroad

Retirement Account and 68.4 percent of

the taxes collected under such Sections

3211 (b) and 3221(c) plus 100 percent of

the taxes collected under Section 3221(d)

of the Railroad Retirement Tax Act shall

be credited to the Railroad Retirement

Supplemental Account.

Dated: December 2, 1997.

By Authority of the Board.

Beatrice Ezerski,

Secretary to the Board.

(Filed by the Office of the Federal Register on December 9, 1997, 8:45 a.m., and published in the

issue of the Federal Register for December 10, 1997,

62 F.R. 65108)

Section 4001.—Passenger

Vehicles

The Service provides an inflation adjustment to

the price above which a passenger vehicle becomes

subject to an excise tax for transactions occurring in

calendar year 1998. See Rev. Proc. 97–57, page 20.

Section 4003.—Special Rules

The Service provides an inflation adjustment to

the price above which a passenger vehicle becomes

subject to an excise tax for transactions occurring in

calendar year 1998. (Price includes the price of installation of parts or accessories on a passenger vehicle within six months of the date after the vehicle

was first placed in service.) See Rev. Proc. 97–57,

page 20.

Section 6012.—Persons

Required To Make Returns of

Income

26 CFR 1.6012–1: Individuals required to make returns of income.

The Service provides adjusted tax tables for individuals and trusts and estates for taxable years beginning in 1998 to reflect changes in the cost of living. See Rev. Proc. 97–57, page 20.

26 CFR 1.6012–5: Composite return in lieu of

specified form.

For the requirements for participation in the 1998

Electronic Filing Program for the Form 1040 Series,

see Rev. Proc. 97–60, page 38.

26 CFR 1.6012–5: Composite return in lieu of

specified form.

For the requirements for participation in the 1998

On-Line Filing Program for the Form 1040 Series,

see Rev. Proc. 97–61, page 50.

Section 6013.—Joint Returns of

Income Tax by Husband and

Wife

26 CFR 1.6013–1: Joint returns.

The Service provides adjusted tax tables for individuals for taxable years beginning in 1998 to reflect

changes in the cost of living. See Rev. Proc. 97–57,

page 20.

Section 6033.—Returns by

Exempt Organizations

The Service provides an inflation adjustment to

the amount of dues certain exempt organizations can

charge and still be excepted from the reporting requirements for exempt organizations with nondeductible lobbying expenditures for taxable years beginning in 1998. See Rev. Proc. 97–57, page 20.

Section 6039F.—Notice of

Large Gifts Received From

Foreign Persons

The Service provides an inflation adjustment to

the amount of gifts in a taxable year from certain

foreign person(s) that may trigger a reporting requirement for a United States person for taxable

years beginning in 1998. See Rev. Proc. 97–57,

page 20.

Section 6061.—Signing of

Returns and Other Documents

26 CFR 1.6061–1: Signing of returns and other

documents by individuals.

For the requirements for participation in the 1998

Electronic Filing Program for the Form 1040 Series,

see Rev. Proc. 97–60, page 38.

26 CFR 1.6061–1: Signing of returns and other

documents by individuals.

For the requirements for participation in the 1998

On-Line Filing Program for the Form 1040 Series,

see Rev. Proc. 97–61, page 50.

Section 6334.—Property

Exempt From Levy

The Service provides inflation adjustments to the

value of certain property exempt from levy; for example, fuel, provisions, and personal effects as well

as books and tools of a trade, business, or profession

for calendar year 1998. See Rev. Proc. 97–57,

page 20.

1997–52 I.R.B.

Section 6621.— Determination

of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and

overpayments. The rate of interest determined under section 6621 of the Code for

the calendar quarter beginning January 1,

1998, will be 8 percent for overpayments,

9 percent for underpayments, and 11 percent for large corporate underpayments.

The rate of interst paid on the portion of a

corporate overpayment exceeding

$10,000 is 6.5 percent.

Rev. Rul. 97–53

Section 6621 of the Internal Revenue

Code establishes different rates for interest on tax overpayments and interest on

tax underpayments. Under § 6621(a)(1),

the overpayment rate is the sum of the

federal short-term rate plus 2 percentage

points, except the rate for the portion of a

corporate overpayment of tax exceeding

$10,000 for a taxable period is the sum of

the federal short-term rate plus 0.5 of a

percentage point for interest computations

made after December 31, 1994. Under

§ 6621(a)(2), the underpayment rate is the

sum of the federal short-term rate plus 3

percentage points.

Section 6621(c) provides that for purposes of interest payable under § 6601 on

any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substituting “5 percentage

points” for “3 percentage points.” See

§ 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration

for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c)

and § 301.6621–3 are generally effective

for periods after December 31, 1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal shortterm rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the

federal short-term rate determined under

§ 6621(b)(1) for any month applies during

the first calendar quarter beginning after

such month.

Section 6621(b)(2)(B) provides that in

determining the addition to tax under §

6654 for failure to pay estimated tax for

any taxable year, the federal short-term

rate that applies during the third month

following such taxable year also applies

during the first 15 days of the fourth

month following such taxable year.

Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

during such month by the Secretary in accordance with § 1274(d), rounded to the

nearest full percent (or, if a multiple of

1/2 of 1 percent, the rate is increased to

the next highest full percent).

Notice 88–59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under §

6621, the Internal Revenue Service will

use the federal short-term rate based on

daily compounding because that rate is

most consistent with § 6621 which, pursuant to § 6622, is subject to daily compounding.

Rounded to the nearest full percent, the

federal short-term rate based on daily compounding determined during the month of

October 1997 is 6 percent. Accordingly,

an overpayment rate of 8 percent and an

underpayment rate of 9 percent are established for the calendar quarter beginning

January 1, 1998. The overpayment rate for

the portion of a corporate overpayment exceeding $10,000 for the calendar quarter

beginning January 1, 1998, is 6.5 percent.

The underpayment rate for large corporate

underpayments for the calendar quarter beginning January 1, 1998, is 11 percent.

These rates apply to amounts bearing interest during that calendar quarter.

The 9 percent rate also applies to estimated tax underpayments for the first calendar quarter in 1998 and for the first 15

days in April 1998.

Interest factors for daily compound interest for annual rates of 6.5 percent, 8

percent, 9 percent, and 11 percent are

published in Tables 18, 21, 23, and 27 of

Rev. Proc. 95–17, 1995–1 C.B. 556, 572,

575, 577, and 581.

Annual interest rates to be compounded

daily pursuant to § 6622 that apply for

prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Raymond Bailey of the Office of

Assistant Chief Counsel (Income Tax and

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

Bailey on (202) 622-6226 (not a toll-free

call).

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS – PERIOD

RATE

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

1997–52 I.R.B.

12%

20%

16%

11%

DAILY RATE TABLE

IN 1995-1 C.B.

Table 2,

Table 4,

Table 3,

Table 2,

Table 5,

Table 6,

Table 37,

Table 27,

Table 75,

pg. 557

pg. 559

pg. 558

pg. 557

pg. 560

pg. 591

pg. 581

pg. 629

December 29, 1997

TABLE OF INTEREST RATES – Continued

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS – PERIOD

RATE

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

11%

13%

11%

10%

DAILY RATE TABLE

IN 1995-1 C.B.

Table 75,

Table 31,

Table 27,

Table 25

Table 23,

pg. 629

pg. 585

pg. 581

pg. 579

pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 - PRESENT

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

December 29, 1997

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995-1 C.B.

RATE TABLE PG

1995-1 C.B.

10%

11%

10%

575

577

627

625

627

579

581

579

577

623

621

619

571

573

575

10%

11%

10%

11%

12%

11%

10%

577

579

629

627

629

581

583

581

579

625

623

621

573

575

577

1997–52 I.R.B.

TABLE OF INTEREST RATES – Continued

FROM JAN. 1, 1987 - PRESENT

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995-1 C.B.

RATE TABLE PG

1995-1 C.B.

577

575

623

621

623

575

10%

579

577

625

623

625

577

TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

RATE TABLE PG

1995-1 C.B.

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

1997–52 I.R.B.

13%

12%

11%

10%

11%

12%

11%

10%

11%

585

583

629

627

625

577

579

581

583

581

629

627

629

581

December 29, 1997

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT

RATE TABLE PG

1995-1 C.B.

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Section 7430.—Awarding of

Costs and Certain Fees

The Service provides an inflation adjustment to

the hourly limit on attorney fees that may be

awarded in a judgment or settlement of an administrative or judicial proceeding concerning the determination, collection, or refund of tax, interest, or

penalty for calendar year 1998. See Rev. Proc.

97–57, page 20.

Section 7702B.—Treatment of

Qualified Long-Term Care

Insurance

The Service provides an inflation adjustment to

the stated dollar amount of the per diem limitation

regarding periodic payments received under a qualified long-term care insurance contract or periodic

payments received under a life insurance contract

that are treated as paid by reason of the death of a

chronically ill individual for calendar year 1998. See

Rev. Proc. 97–57, page 20.

Section 7872.—Treatment of

Loans With Below-Market

Interest Rates

CPI adjustment for below-market

loans–1998. The amount that section

7872(g) of the Code permits a taxpayer to

lend to a qualified continuing care facility

without incurring imputed interest is pub-

December 29, 1997

6.5%

7.5%

6.5%

5.5%

6.5%

lished and adjusted for inflation for years

1987–1998. Rev. Rul. 96–64 supplemented and superseded.

Rev. Rul. 97–57

This revenue ruling publishes the

amount that § 7872(g) of the Internal

Revenue Code permits a taxpayer to lend

to a qualifying continuing care facility

without incurring imputed interest. The

amount is adjusted for inflation for the

years after 1986.

Section 7872 of the Code generally

treats loans bearing a below-market interest rate as if they bore interest at the market rate.

Section 7872(g)(1) of the Code provides that, in general, § 7872 does not

apply for any calendar year to any belowmarket loan made by a lender to a qualified continuing care facility pursuant to a

continuing care contract if the lender (or

the lender’s spouse) attains age 65 before

the close of the year.

Section 7872(g)(2) of the Code provides that, in the case of loans made after

October 11, 1985, and before 1987,

§ 7872(g)(1) applies only to the extent

that the aggregate outstanding amount of

any loan to which § 7872(g) applies (determined without regard to § 7872(g)(2)),

572

574

572

620

618

620

572

when added to the aggregate outstanding

amount of all other previous loans between the lender (or the lender’s spouse)

and any qualified continuing care facility

to which § 7872(g)(1) applies, does not

exceed $90,000.

Section 7872(g)(5) of the Code provides that, for loans made during any calendar year after 1986 to which § 7872(g)(1) applies, the $90,000 limit specified

in § 7872(g)(2) is increased by an inflation adjustment. The inflation adjustment

for any calendar year is the percentage (if

any) by which the Consumer Price Index

(CPI) for the preceding calendar year exceeds the CPI for calendar year 1985.

Section 7872(g)(5) states that the CPI for

any calendar year is the average of the

CPI as of the close of the 12-month period

ending on September 30 of that calendar

year.

Rev. Rul. 96–64, 1996-2 C.B. 199,

publishes the amount specified in §

7872(g)(2) of the Code, increased by the

inflation adjustment, for the years 198797.

Table 1 sets forth the amount specified

in § 7872(g)(2) of the Code. The amount

is increased by the inflation adjustment

for the years 1987–98.

1997–52 I.R.B.

REV. RUL. 97–57 TABLE 1

Limit under 7872(g)(2)

Year

Amount

Before 1987

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

$ 90,000

$ 92,200

$ 94,800

$ 98,800

$103,500

$108,600

$114,100

$117,500

$121,100

$124,300

$127,800

$131,300

$134,800

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index 1982-1984 base, published

by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

DRAFTING INFORMATION

Rev. Rul. 96–64, 1996–2 C.B. 199, is

supplemented and superseded.

The author of this revenue ruling is

David B. Silber of the Office of Assistant

1997–52 I.R.B.

Chief Counsel (Financial Institutions and

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

on (202) 622-3930 (not a toll-free call).

December 29, 1997

Part III. Administrative, Procedural, and Miscellaneous

Partnership Magnetic Media

Filing Requirements

Notice 97–77

PURPOSE

This notice provides guidance to partnerships having more than 100 partners

regarding the requirement to file partnership tax returns on magnetic media under

§ 6011(e) of the Internal Revenue Code,

as amended by § 1224 of the Taxpayer

Relief Act of 1997 (Act), Pub. L. 105-34,

111 Stat. 788 (August 5, 1997).

BACKGROUND

Section 6011(e)(1) generally provides

that the Secretary will prescribe regulations providing standards for determining

which returns must be filed on magnetic

media or in other machine-readable form.

Section 6011(e)(2) defines the requirements of the regulations, and provides

that, in prescribing the regulations under

§ 6011(e)(1), the Secretary will not require any person to file returns on magnetic media unless such person is required to file at least 250 returns during

the calendar year, and will take into account (among other relevant factors) the

ability of the taxpayer to comply at reasonable cost with the requirements of

such regulations.

Section 1224 of the Act amended

§ 6011(e)(2) to provide that the Secretary

will require partnerships having more

than 100 partners to file returns on magnetic media. Section 1226 of the Act provides that § 1224 is effective for tax years

ending on or after December 31, 1997.

However, the legislative history of the

Act, as provided in H.R. Conf. Rep. No.

220, 105th Cong., 1st Sess. 675 (1997),

indicates that § 1224 is effective for tax

years beginning after December 31, 1997.

The Tax Technical Corrections Act of

1997, which is currently pending in Congress, provides that the effective date in §

1226 of the Act is for partnership tax

years beginning after December 31, 1997.

H.R. 2645, 105th Cong., 1st Sess. § 11(c)

(1997).

December 29, 1997

TAX YEARS BEGINNING AFTER

DECEMBER 31, 1997

The Service intends to implement

§ 1224 of the Act by issuing regulations

as required by § 6011(e). The regulations

will address the mandatory magnetic

media filing requirements for Form 1065,

U.S. Partnership Return of Income, for

Schedules K-1, Shareholder’s Share of Income, Credits, Deductions, etc., and for

all other related forms and schedules.

These regulations, however, will only address the requirements for tax years beginning after December 31, 1997.

TAX YEARS BEGINNING BEFORE

JANUARY 1, 1998

The Service will not require magnetic

media filing of partnership tax returns for

partnership tax years beginning before

January 1, 1998. Therefore, a partnership

with more than 100 partners will not be

required to file its partnership tax return

on magnetic media for a tax year ending

December 31, 1997, and no penalties will

be imposed on the partnership for not filing such partnership tax return on magnetic media.

DRAFTING INFORMATION

The principal author of this notice is

Bridget E. Finkenaur of the Office of Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this notice, contact Ms. Finkenaur

at (202) 622-4940 (not a toll-free number).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement; determination of correct tax liability.

(Also Part I, § 6662.)

Rev. Proc. 97–56

SECTION 1. PURPOSE

.01 This revenue procedure updates

Rev. Proc. 96-58, 1996–2 C.B. 390 and

identifies circumstances under which the

disclosure on a taxpayer’s return of a position with respect to an item is adequate

for the purpose of reducing the understatement of income tax under § 6662(d)

of the Internal Revenue Code (relating to

the substantial understatement aspect of

the accuracy-related penalty), and for the

purpose of avoiding the preparer penalty

under § 6694(a) (relating to understatements due to unrealistic positions). This

revenue procedure does not apply with respect to any other penalty provision (including the negligence or disregard provisions of the § 6662 accuracy-related

penalty).

.02 This revenue procedure applies to

any return filed on 1997 tax forms for a

taxable year beginning in 1997, and to

any return filed on 1997 tax forms in 1998

for short taxable years beginning in 1998.

SEC. 2. CHANGES FROM REV.

PROC. 96-58

Editorial changes only have been made

in this revenue procedure.

SEC. 3. BACKGROUND

.01 If § 6662 applies to any portion of

an underpayment of tax required to be

shown on a return, an amount equal to 20

percent of the portion of the underpayment to which the section applies is

added to the tax. (The penalty rate is 40

percent in the case of certain gross valuation misstatements.) Under § 6662(b)(2),

§ 6662 applies to the portion of an underpayment that is attributable to a substantial understatement of income tax.

.02 Section 6662(d)(1) provides that

there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of

the amount of tax required to be shown on

the return for the taxable year or $5,000

($10,000 in the case of a corporation

other than an S corporation or a personal

holding company). Section 6662(d)(2)

defines an understatement as the excess of

the amount of tax required to be shown on

the return for the taxable year over the

amount of the tax that is shown on the return reduced by any rebate (within the

meaning of § 6211(b)(2)).

.03 In the case of an item not attributable to a tax shelter, § 6662(d)(2)(B)(ii)

provides that the amount of the understatement is reduced by the portion of the

1997–52 I.R.B.

understatement attributable to any item

with respect to which the relevant facts

affecting the item’s tax treatment are adequately disclosed on the return or on a

statement attached to the return, and there

is a reasonable basis for the tax treatment

of such item by the taxpayer.

.04 In general, this revenue procedure

provides guidance in determining when

disclosure is adequate for purposes of

§ 6662(d). For purposes of this revenue

procedure, the taxpayer must furnish all

required information in accordance with

the applicable forms and instructions, and

the money amounts entered on these

forms must be verifiable. Guidance under

§ 6662(d) for returns filed in 1995, 1996,

and 1997 is provided in Rev. Proc. 94–74,

1994–2 C.B. 823; Rev. Proc. 95–55,

1995–2 C.B. 457; and Rev. Proc.96–58,

1996–2 C.B. 390, respectively.

SEC. 4. PROCEDURE

.01 Additional disclosure of facts relevant to, or positions taken with respect to,

issues involving any of the items set forth

below is unnecessary for purposes of reducing any understatement of income tax

under § 6662(d) provided that the forms

and attachments are completed in a clear

manner and in accordance with their instructions. The money amounts entered

on the forms must be verifiable, and the

information on the return must be disclosed in the manner described below.

For purposes of this revenue procedure, a

number is verifiable if, on audit, the taxpayer can demonstrate the origin of the

number (even if that number is not ultimately accepted by the Internal Revenue

Service) and the taxpayer can show good

faith in entering that number on the applicable form.

(1) Form 1040, Schedule A, Itemized

Deductions:

(a) Medical and Dental Expenses:

Complete lines 1 through 4, supplying all

required information.

(b) Taxes: Complete lines 5 through 9,

supplying all required information. Line

8 must list each type of tax and the

amount paid.

10 through 14, supplying all required information. This section 4.01(1)(c) does

1997–52 I.R.B.

not apply to (i) amounts disallowed under

§ 163(d) unless Form 4952, Investment

Interest Expense Deduction, is completed,

or (ii) amounts disallowed under § 265.

(d) Contributions: Complete lines 15

through 18, supplying all required information. Merely entering the amount of

the donation on Schedule A, however, will

not constitute adequate disclosure if the

taxpayer receives a substantial benefit

from the donation shown. If a contribution of property other than cash is made

and the amount claimed as a deduction exceeds $500, a properly completed Form

8283, Noncash Charitable Contributions,

must be attached to the return. This section 4.01(1)(d) will not apply to any contribution of $250 or more unless the contemporaneous written acknowledgement

requirement of § 170(f)(8) is satisfied.

(e) Casualty and Theft Losses: Complete Form 4684, Casualties and Thefts,

and attach to the return. Each item or article for which a casualty or theft loss is

claimed must be listed on Form 4684.

(2) Certain Trade or Business Expenses

(including, for purposes of this section

4.01(2), the following six expenses as

they relate to the rental of property):

(a) Casualty and Theft Losses: The

procedure outlined in section 4.01(1)(e)

above must be followed.

(b) Legal Expenses: The amount

claimed must be stated. This section

4.01(2)(b) does not apply, however, to

amounts properly characterized as capital

expenditures, personal expenses, or nondeductible lobbying or political expenditures, including amounts that are required

to be (or that are) amortized over a period

of years.

amount written off must be stated.

(d) Reasonableness of Officers’ Compensation: Form 1120, Schedule E, Compensation of Officers, must be completed

when required by its instructions. The

time devoted to business must be expressed as a percentage as opposed to

“part” or “as needed.” This section

4.01(2)(d) does not apply to “golden parachute” payments, as defined under § 280G.

This section 4.01(2)(d) will not apply to

the extent that remuneration paid or incurred exceeds the $1 million employee remuneration limitation, if applicable.

(e) Repair Expenses: The amount

claimed must be stated. This section

4.01(2)(e) does not apply, however, to

any repair expenses properly characterized as capital expenditures or personal

expenses.

(f) Taxes (other than foreign taxes):

The amount claimed must be stated.

(3) Form 1120, Schedule M–1, Reconciliation of Income (Loss) per Books With

Income per Return, provided:

(a) The amount of the deviation from

the financial books and records is not the

result of a computation that includes the

netting of items; and

(b) The information provided reasonably may be expected to apprise the Internal Revenue Service of the nature of the

potential controversy concerning the tax

treatment of the item.

(4) Foreign Tax Items:

(a) International Boycott Transactions:

Transactions disclosed on Form 5713, International Boycott Report.

(b) Intercompany Transactions: Transactions and amounts shown on Schedule

M (Form 5471), Transactions Between

Controlled Foreign Corporation and

Shareholders or Other Related Persons,

lines 19 and 20, and Form 5472, Part IV,

Monetary Transactions Between Reporting Corporations and Foreign Related

Party, lines 7 and 18.

(5) Other:

(a) Moving Expenses: Complete Form

3903, Moving Expenses, or Form 3903-F,

Foreign Moving Expenses, and attach to

the return.

(b) Sale or Exchange of Your Main

Home: Complete Form 2119, Sale of

Your Home, and attach to the return.

Complete Form 2106, Employee Business Expenses, or Form 2106–EZ, Unreimbursed Employee Business Expenses,

and attach to the return. This section

4.01(5)(c) does not apply to club dues, or

to travel expenses for any non-employee

accompanying the taxpayer on a trip.

(d) Fuels Credit: Complete Form

4136, Credit for Federal Tax Paid on

Fuels, and attach to the return.

(e) Investment Credit: Complete

Form 3468, Investment Credit, and attach to the return.

December 29, 1997

SEC. 5. EFFECTIVE DATE

.01 This revenue procedure applies to

any return filed on 1997 tax forms for a

taxable year beginning in 1997, and to any

return filed on 1997 tax forms in 1998 for

short taxable years beginning in 1998.

SEC. 6. DRAFTING

INFORMATION

regarding this revenue procedure, contact

Ms. Rachy on (202) 622-6232 (not a tollfree call).

The principal author of this revenue

procedure is Marcia Rachy of the Office

of Assistant Chief Counsel (Income Tax

and Accounting). For further information

26 CFR 601.602: Tax forms and instructions.

(Also Part I, §§ 1, 32, 63, 68, 132, 135, 151, 170, 213, 512, 513, 877, 4001, 4003, 6012, 6013, 6033, 6039F, 6334, 7430, 7702B; 1.1–1, 1.32–2, 1.63–1, 1.151–4,

1.170–1, 1.6012–1, 1.6013–1)

Rev. Proc. 97–57

Table of Contents

SECTION 1. PURPOSE

SECTION 2. CHANGES MADE FROM PRECEDING YEAR

SECTION 3. 1998 ADJUSTED ITEMS

Code Section

.01 Tax Rate Tables

.02 Unearned Income of Minor Children Taxed as if Parent’s Income (“Kiddie Tax”)

.03 Earned Income Tax Credit

.04 Standard Deduction

.05 Overall Limitation on Itemized Deductions

.06 Qualified Transportation Fringe

.07 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses

.08 Personal Exemption

.09 Eligible Long-Term Care Premiums

.10 Treatment of Dues Paid to Agricultural or Horticultural Organizations.

.11 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns

.12 Expatriation to Avoid Tax

.13 Luxury Automobile Excise Tax

.14 Reporting Exception for Certain Exempt Organizations with Nondeductible Lobbying Expenditures

.15 Notice of Large Gifts Received from Foreign Persons

.16 Property Exempt from Levy

.17 Attorney Fee Awards

.18 Periodic Payments Received under Qualified Long-Term Care Insurance Contracts

1(a)-(e)

1(g)

132(f)

135

151

213(d)(10)

512(d)

513(h)

877

4001 & 4003

6033(e)(3)

6039F

6334

7430

7702B(d)

SECTION 4. EFFECTIVE DATE

SECTION 5. DRAFTING INFORMATION

SECTION 1. PURPOSE

This revenue procedure sets forth inflation adjusted items for 1998.

SECTION 2. CHANGES MADE

FROM PRECEDING YEAR

.01 In preceding years, this revenue

procedure included a detailed description

of each inflation adjusted item in former

December 29, 1997

section 3, a technical explanation of the

authority for each inflation adjustment in

former section 4 and the inflation factors

used to make the inflation adjustments in

former section 5. To simplify this revenue

procedure, section 3 has been revised, and

sections 4 and 5 have been deleted.

.02 The limitations regarding the

amount of eligible long-term care premiums includible in the term “medical care”

under § 213(d)(10) of the Internal Revenue Code, as enacted by section 322 of

the Health Insurance Portability and Accountability Act of 1996, Pub. L. No.

104–191, 110 Stat. 1936 (1996), are adjusted for inflation for tax years beginning

in 1998 (section 3.09).

.03 The value of property exempt from

levy under § 6334(a)(2) (fuel, certain

household items, arms for personal use,

1997–52 I.R.B.

livestock, and poultry) and under §

6334(a)(3) (books and tools of a trade,

business, or profession), as amended by

section 502 of the Taxpayer Bill of Rights

2, Pub. L. No. 104–168, 110 Stat. 1452

(1996), is adjusted for inflation for calendar year 1998 (section 3.16).

.04 The stated dollar amount of the per

diem limitation under § 7702B(d)(4), as

enacted by section 321 of the Health Insurance Portability and Accountability

Act of 1996, Pub. L. No. 104–191, 110

Stat. 1936 (1996), regarding periodic payments received under a qualified longterm care insurance contract or periodic

payments received under a life insurance

contract that are treated as paid by reason

of the death of a chronically ill individual,

is adjusted for inflation for calendar year

1998 (section 3.18).

SECTION 3. 1998 ADJUSTED

ITEMS

.01 Tax Rate Tables. For tax years beginning in 1998, the tax rate tables under

§ 1 are as follows:

TABLE 1–Section 1(a).—MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES

If Taxable Income Is:

The Tax Is:

Not Over $42,350

15% of the taxable income

Over $42,350 but not over $102,300

$6,352.50 plus 28% of the excess over $42,350

Over $102,300 but not over $155,950

$23,138.50 plus 31% of the excess over $102,300

Over $155,950 but not over $278,450

$39,770 plus 36% of the excess over $155,950

Over $278,450

$83,870 plus 39.6% of the excess over $278,450

TABLE 2 - Section 1(b).—HEADS OF HOUSEHOLDS

If Taxable Income Is:

The Tax Is:

Not Over $33,950

15% of the taxable income

Over $33,950 but not over $87,700

$5,092.50 plus 28% of the excess over $33,950

Over $87,700 but not over $142,000

$20,142.50 plus 31% of the excess over $87,700

Over $142,000 but not over $278,450

$36,975.50 plus 36% of the excess over $142,000

Over $278,450

$86,097.50 plus 39.6% of the excess over $278,450

TABLE 3–Section 1(c).—UNMARRIED INDIVIDUALS (OTHER THAN SURVIVING SPOUSES

AND HEADS OF HOUSEHOLDS)

If Taxable Income Is:

The Tax Is:

Not Over $25,350

15% of the taxable income

Over $25,350 but not over $61,400

$3,802.50 plus 28% of the excess over $25,350

Over $61,400 but not over $128,100

$13,896.50 plus 31% of the excess over $61,400

Over $128,100 but not over $278,450

$34,573.50 plus 36% of the excess over $128,100

Over $278,450

$88,699.50 plus 39.6% of the excess over $278,450

1997–52 I.R.B.

December 29, 1997

TABLE 4–Section 1(d).—MARRIED INDIVIDUALS FILING SEPARATE RETURNS

If Taxable Income Is:

The Tax Is:

Not Over $21,175

15% of the taxable income

Over $21,175 but not over $51,150

$3,176.25 plus 28% of the excess over $21,175

Over $51,150 but not over $77,975

$11,569.25 plus 31% of the excess over $51,150

Over $77,975 but not over $139,225

$19,885 plus 36% of the excess over $77,975

Over $139,225

$41,935 plus 39.6% of the excess over $139,225

TABLE 5–Section 1(e).—ESTATES AND TRUSTS

If Taxable Income Is:

The Tax Is:

Not Over $1,700

15% of the taxable income

Over $1,700 but not over $4,000

$255 plus 28% of the excess over $1,700

Over $4,000 but not over $6,100

$899 plus 31% of the excess over $4,000

Over $6,100 but not over $8,350

$1,550 plus 36% of the excess over $6,100

Over $8,350

$2,360 plus 39.6% of the excess over $8,350

.02 Unearned Income of Minor Children Taxed as if Parent’s Income (the

“Kiddie Tax”). For tax years beginning

in 1998, the amount in § 1(g)(4)(A)(ii)(I),

which is used to reduce the net unearned

income reported on the child’s return that

is subject to the “kiddie tax,” is $700.

(This amount is the same as the $700

standard deduction amount provided in

section 3.04(2) of this revenue procedure.) In the alternative, the same $700

amount is used for purposes of § 1(g)(7)

(that is, determining whether a parent

may elect to include a child’s gross income in the parent’s gross income and for

calculating the “kiddie tax”).

.03 Earned Income Tax Credit.

(1) In general. For tax years beginning in 1998, the following amounts are

used to determine the earned income tax

credit under § 32(b). The “earned income

amount” is the amount of earned income

at or above which the maximum amount

of the earned income tax credit is allowed. The “threshold phaseout amount”

is the amount of modified adjusted gross

income (or, if greater, earned income)

above which the maximum amount of the

credit begins to phase out. The “completed phaseout amount” is the amount of

modified adjusted gross income (or if

greater, earned income) at or above which

no credit is allowed.

Number

of Children

Maximum

Amount of

the Credit

Earned Income

Amount

Threshold

Phaseout

Amount

Completed

Phaseout

Amount

2 or more

None

$2,271

$3,756

$ 341

$6,680

$9,390

$4,460

$12,260

$ 5,570

$26,473

$30,095

$10,030

The Internal Revenue Service, in the

instructions for the Form 1040 series, provides tables showing the amount of the

earned income tax credit for each type of

taxpayer.

(2) Excessive investment income.

For tax years beginning in 1998, the

earned income tax credit is denied under §

32(i) if the aggregate amount of certain

investment income exceeds $2,300.

.04 Standard Deduction.

(1) In general. For tax years begin-

December 29, 1997

ning in 1998, the standard deduction

amounts under § 63(c)(2) are as follows:

Standard

Deduction

Filing Status

MARRIED INDIVIDUALS

FILING JOINT RETURNS

AND SURVIVING SPOUSES

(§ 1(a))

$7,100

HEADS OF HOUSEHOLDS

(§ 1(b))

$6,250

UNMARRIED INDIVIDUALS

(OTHER THAN SURVIVING

SPOUSES AND HEADS OF

HOUSEHOLDS) (§ 1(c))

$4,250

MARRIED INDIVIDUALS

FILING SEPARATE

RETURNS (§ 1(d))

$3,550

(2) Dependent. For tax years beginning in 1998, the standard deduction

amount under § 63(c)(5) for an individual

who may be claimed as a dependent by

1997–52 I.R.B.

another taxpayer may not exceed the

greater of $700, or the sum of $250 and

the individual’s earned income.

(3) Aged and blind. For tax years

beginning in 1998, the additional standard

deduction amounts under § 63(f) for the

aged and for the blind are $850 for each.

These amounts are increased to $1,050 if

the individual is also unmarried and not a

surviving spouse.

.05 Overall Limitation on Itemized Deductions. For tax years beginning in

1998, the “applicable amount” of adjusted

gross income under § 68(b), above which

the amount of otherwise allowable itemized deductions is reduced under § 68, is

$124,500 (or $62,250 for a separate return

filed by a married individual).

.06 Qualified Transportation Fringe.

For tax years beginning in 1998, the

monthly limitation under § 132(f)(2)(A),

regarding the aggregate fringe benefit exclusion amount for transportation in a

commuter highway vehicle and any transit pass, is $65. The monthly limitation

under § 132(f)(2)(B) regarding the fringe

benefit exclusion amount for qualified

parking is $175.

.07 Income from United States Savings

Bonds for Taxpayers Who Pay Qualified

Higher Education Expenses. For tax

years beginning in 1998, the exclusion

under § 135, regarding income from

United States savings bonds for taxpayers

who pay qualified higher education expenses, begins to phase out for modified

adjusted gross income above $78,350 for

joint returns and $52,250 for other returns. This exclusion completely phases

out for modified adjusted gross income of

$108,350 or more for joint returns and

$67,250 or more for other returns.

.08 Personal Exemption.

(1) Exemption amount. For tax years

beginning in 1998, the personal exemption amount under § 151(d) is $2,700.

(2) Phaseout. For tax years beginning in 1998, the personal exemption

amount begins to phase out at, and is

completely phased out after, the following

adjusted gross income amounts:

Filing Status

Threshold

Phaseout

Amount

Completed

Phaseout

Amount After

Code § 1(a)

Code § 1(b

Code § 1(c)

Code § 1(d)

$186,800

$155,650

$124,500

$ 93,400

$309,300

$278,150

$247,000

$154,650

1997–52 I.R.B.

.09 Eligible Long-Term Care Premiums. For tax years beginning in 1998, the

limitations under § 213(d), regarding eligible long- term care premiums includible

in the term “medical care,” are as follows:

Attained age before

the close of the

taxable year:

40 or less . . . . . . . . . . . . . . . . . . . . . .$ 210

More than 40 but not more than 50 . . .$ 380

More than 50 but not more than 60 . . .$ 770

More than 60 but not more than 70 . .$2,050

More than 70 . . . . . . . . . . . . . . . . . . .$2,570

.10 Treatment of Dues Paid to Agricultural or Horticultural Organizations. For

tax years beginning in 1998, the limitation under § 512(d)(1), regarding the exemption of annual dues required to be

paid by a member to an agricultural or

horticultural organization, is $109.

.11 Insubstantial Benefit Limitations

for Contributions Associated with Charitable Fund-Raising Campaigns.

(1) Low cost article. For tax years

beginning in 1998, the unrelated business

income of certain exempt organizations

under § 513(h)(2) does not include a “low

cost article” of $7.10 or less.

(2) Other insubstantial benefits. For

tax years beginning in 1998, the $5, $25,

and $50 guidelines in section 3 of Rev.

Proc. 90-12, 1990-1 C.B. 471 (as amplified and modified), for disregarding the

value of insubstantial benefits received by

a donor in return for a fully deductible

charitable contribution under § 170, are

$7.10, $35.50, and $71, respectively.

12 Expatriation to Avoid Tax. For calendar year 1998, the thresholds used

under § 877(a)(2), regarding whether an

individual’s loss of United States citizenship had the avoidance of United States

taxes as one of its principal purposes, are

more than $109,000 for “average annual

net income tax” and $543,000 or more for

“net worth.”

.13 Luxury Automobile Excise Tax. For

calendar year 1998, the excise tax under

§§ 4001 and 4003 is imposed on the first

retail sale of a passenger vehicle (including certain parts or accessories installed

within six months of the date after the vehicle was first placed in service), to the

extent the price exceeds $36,000.

.14 Reporting Exception for Certain

Exempt Organizations with Nondeductible Lobbying Expenditures. For tax

years beginning in 1998, the annual per

person, family, or entity dues limitation to

qualify for the reporting exception under

§ 6033(e)(3) (and section 4.02 of Rev.

Proc. 95–35, 1995–2 C.B. 391), regarding

certain exempt organizations with nondeductible lobbying expenditures, is $55 or

less.

.15 Notice of Large Gifts Received from

Foreign Persons. For tax years beginning

in 1998, recipients of gifts from certain

foreign persons may have to report these

gifts under § 6039F if the aggregate value

of gifts received in a taxable year exceeds

$10,557.

.16 Property Exempt from Levy. For

calendar year 1998, the value of property

exempt from levy under § 6334(a)(2)

(fuel, provisions, furniture, and other

household personal effects, as well as

arms for personal use, livestock, and

poultry) may not exceed $2,570. The

value of property exempt from levy under

§ 6334(a)(3) (books and tools necessary

for the trade, business, or profession of

the taxpayer) may not exceed $1,280.

.17 Attorney Fee Awards. For calendar

year 1998, the attorney fee award limitation under § 7430(c)(1)(B)(iii) is $120 per

hour.

.18 Periodic Payments Received under

Qualified Long-Term Care Insurance

Contracts or under Certain Life Insurance Contracts. For calendar year 1998,

the stated dollar amount of the per diem

limitation under § 7702B(d)(4), regarding

periodic payments received under a qualified long-term care insurance contract or

periodic payments received under a life

insurance contract that are treated as paid

by reason of the death of a chronically ill

individual, is $180.

SECTION 4. EFFECTIVE DATE

.01 General Rule. Except as provided

in section 4.02, this revenue procedure

applies to tax years beginning in 1998.

.02 Calendar Year Rule. This revenue

procedure applies to transactions or

events occurring in calendar year 1998 for

purposes of section 3.12 (the expatriation

tax), section 3.13 (the excise tax on luxury automobiles), section 3.16 (the value

of certain property exempt from levy),

section 3.17 (the hourly limit on attorney

fee awards), and section 3.18 (the per

diem limitation for periodic payments re-

December 29, 1997

ceived under qualified long-term care insurance contracts).

SECTION 3. BACKGROUND AND

CHANGES

SECTION 5. DRAFTING

INFORMATION

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all the

ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business. Under that

provision, an employee or self-employed

individual may deduct the cost of operating an automobile to the extent that it is

used in a trade or business. However,

under § 262, no portion of the cost of operating an automobile that is attributable

to personal use is deductible.

.02 Section 274(d) provides, in part,

that no deduction shall be allowed under

§ 162 with respect to any listed property

(as defined in § 280F(d)(4) to include passenger automobiles and any other property

used as a means of transportation) unless

the taxpayer complies with certain substantiation requirements. The section further provides that regulations may

prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by such regulations.

.03 Section 1.274(d)–1, in part, grants

the Commissioner the authority to prescribe rules relating to mileage allowances

for ordinary and necessary expenses of

local travel and transportation away from

home. Pursuant to this grant of authority,

the Commissioner may prescribe rules

under which such allowances, if in accordance with reasonable business practice,

will be regarded as (1) equivalent to substantiation, by adequate records or other

sufficient evidence, of the amount of such

travel and transportation expenses for purposes of § 1.274–5T(c), and (2) satisfying

the requirements of an adequate accounting to the employer of the amount of such

expenses for purposes of § 1.274–5T(f).

.04 Section 62(a)(2)(A) allows an employee, in determining adjusted gross income, a deduction for the expenses allowed by Part VI (§ 161 and following),

subchapter B, chapter 1 of the Code, paid

or incurred by the employee in connection

with the performance of services as an employee under a reimbursement or other expense allowance arrangement with a payor.

.05 Section 62(c) provides that an

arrangement will not be treated as a reimbursement or other expense allowance

arrangement for purposes of § 62(a)(2)(A) if it—

The principal author of this revenue

procedure is John Moran of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue procedure, contact

Mr. Moran on (202) 622-4940 (not a tollfree call).

26 CFR 601.105: Examination of returns and

claims for refund, credit, or abatement; determination of correct tax liability.

(Also Part I, sections 62, 162, 274, 1016; 1.62–2,

1.162–17, 1.274–5T, 1.274(d)–1, 1.1016–3.)

Rev. Proc. 97–58

SECTION 1. PURPOSE

This revenue procedure updates Rev.

Proc. 96–63, 1996–2 C.B. 420, by providing optional standard mileage rates for

employees, self-employed individuals, or

other taxpayers to use in computing the

deductible costs paid or incurred on or

after January 1, 1998, of operating an automobile for business, charitable, medical,

or moving expense purposes. This revenue procedure also provides rules under

which the amount of ordinary and necessary expenses of local travel or transportation away from home that are paid or incurred by an employee will be deemed

substantiated under § 1.274–5T of the

temporary Income Tax Regulations when

a payor (the employer, its agent, or a third

party) provides a mileage allowance under

a reimbursement or other expense allowance arrangement to pay for such expenses. Use of a method of substantiation

described in this revenue procedure is not

mandatory and a taxpayer may use actual

allowable expenses if the taxpayer maintains adequate records or other sufficient

evidence for proper substantiation.

SECTION 2. SUMMARY OF

STANDARD MILEAGE RATES

Business

(section 5 below)

32.5 cents per mile

Charitable

(section 7 below)

14 cents per mile

Medical and Moving

(section 7 below)

10 cents per mile

December 29, 1997

(1) does not require the employee to

substantiate the expenses covered by the

arrangement to the payor, or

(2) provides the employee with the

right to retain any amount in excess of the

substantiated expenses covered under the

arrangement. Section 62(c) further provides that the substantiation requirements

described therein shall not apply to any

expense to the extent that, under the grant

of regulatory authority prescribed in §

274(d), the Commissioner has provided

that substantiation is not required for such

expense.

.06 Under § 1.62–2(c)(1), a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c)

if it meets the requirements of business

connection, substantiation, and returning

amounts in excess of expenses as specified in the regulations. Section 1.62–2(e)(2) specifically provides that substantiation of certain business expenses in

accordance with rules prescribed under

the authority of § 1.274(d)–1 will be

treated as substantiation of the amount of

such expenses for purposes of § 1.62-2.

Under § 1.62–2-(f)(2), the Commissioner

may prescribe rules under which an

arrangement providing mileage allowances will be treated as satisfying the

requirement of returning amounts in excess of expenses, even though the

arrangement does not require the employee to return the portion of such an allowance that relates to miles of travel

substantiated and that exceeds the

amount of the employee’s expenses

deemed substantiated pursuant to rules

prescribed under § 274(d), provided the

allowance is reasonably calculated not to

exceed the amount of the employee’s expenses or anticipated expenses and the

employee is required to return any portion of such an allowance that relates to

miles of travel not substantiated.

.07 Section 1.62–2(h)(2)(i)(B) provides

that if a payor pays a mileage allowance

under an arrangement that meets the requirements of § 1.62–-2(c)(1), the portion, if any, of the allowance that relates

to miles of travel substantiated in accordance with § 1.62–2(e), that exceeds the

amount of the employee’s expenses

deemed substantiated for such travel pursuant to rules prescribed under §§ 274(d)

and 1.274(d)–1, and that the employee is

not required to return, is subject to with-

1997–52 I.R.B.

holding and payment of employment

taxes. See §§ 31.3121(a)–3, 31.3231(e)–

1(a)(5), 31.3306(b)–2, and 31.3401-(a)–4.

Because the employee is not required to

return this excess portion, the reasonable

period of time provisions of § 1.62–2(g)

(relating to the return of excess amounts)

do not apply to this excess portion.

.08 Under § 1.62-2(h)(2)(i)(B)(4), the

Commissioner may, in his or her discretion, prescribe special rules regarding the

timing of withholding and payment of

employment taxes on mileage allowances.

.09 Significant changes to this revenue

procedure include:

(1) the increase in the charitable standard mileage rate (sections 2 and 7.01);

(2) the deletion of the rural mail carrier

special mileage rate (in sections 2 and 6 of

Rev. Proc. 96–63) and the addition of section 5.06(4) because of amendments made

to § 162(o) by § 1203 of the Taxpayer Relief Act of 1997, Pub. L. No. 105– 34, 111

Stat. 788 (August 5, 1997); and

(3) the extension of the rules for using

the business standard mileage rate or a

fixed and variable rate (FAVR) allowance

to apply to leased automobiles (sections

4, 5, 8, and 9).

SECTION 4. DEFINITIONS

.01 Standard mileage rate. The term

“standard mileage rate” means the applicable amount provided by the Service

for optional use by employees or selfemployed individuals in computing the

deductible costs of operating automobiles (including vans, pickups, or panel

trucks) owned or leased for business purposes, or by taxpayers in computing the

deductible costs of operating automobiles for charitable, medical, or moving

expense purposes.

.02 Transportation expenses. The term

“transportation expenses” means the expenses of operating an automobile for

local travel or transportation away from

home.

.03 Mileage allowance. The term

“mileage allowance” means a payment

under a reimbursement or other expense

allowance arrangement that meets the requirements specified in § 1.62-2(c)(1) and

that is

(1) paid with respect to the ordinary

and necessary business expenses incurred, or which the payor reasonably an-

1997–52 I.R.B.

ticipates will be incurred, by an employee

for transportation expenses in connection

with the performance of services as an

employee of the employer,

(2) reasonably calculated not to exceed

the amount of the expenses or the anticipated expenses, and

(3) paid at the applicable standard

mileage rate, a flat rate or stated schedule,

or in accordance with any other Servicespecified rate or schedule.

.04 Flat rate or stated schedule. A

mileage allowance is paid at a flat rate or

stated schedule if it is provided on a uniform and objective basis with respect to

the expenses described in section 4.03 of

this revenue procedure. Such allowance

may be paid periodically at a fixed rate, at

a cents-per-mile rate, at a variable rate

based on a stated schedule, at a rate that

combines any of these rates, or on any

other basis that is consistently applied and

in accordance with reasonable business

practice. Thus, for example, a periodic

payment at a fixed rate to cover the fixed

costs (including depreciation (or lease

payments), insurance, registration and license fees, and personal property taxes)

of driving an automobile in connection

with the performance of services as an

employee of the employer, coupled with a

periodic payment at a cents-per-mile rate

to cover the operating costs (including

gasoline and all taxes thereon, oil, tires,

and routine maintenance and repairs) of

using an automobile for such purposes, is

an allowance paid at a flat rate or stated

schedule. Likewise, a periodic payment

at a variable rate based on a stated schedule for different locales to cover the costs

of driving an automobile in connection

with the performance of services as an

employee is an allowance paid at a flat

rate or stated schedule.

SECTION 5. BUSINESS STANDARD MILEAGE RATE

.01 In general. The standard mileage

rate for transportation expenses paid or

incurred on or after January 1, 1998, is

32.5 cents per mile for all miles of use for

business purposes. This business standard mileage rate will be adjusted annually (to the extent warranted) by the

Service, and any such adjustment will be

applied prospectively.

.02 Use of the business standard

mileage rate. A taxpayer may use the

business standard mileage rate with respect to an automobile that is either

owned or leased by the taxpayer. A taxpayer generally may deduct an amount

equal to either the business standard

mileage rate times the number of business

miles traveled or the actual costs (both

operating and fixed) paid or incurred by

the taxpayer that are allocable to traveling

those business miles.

.03 Business standard mileage rate in

lieu of operating and fixed costs. A deduction using the standard mileage rate

for business miles is computed on a

yearly basis and is in lieu of all operating

and fixed costs of the automobile allocable to business purposes (except as provided in section 9.06 of this revenue

procedure). Such items as depreciation

(or lease payments), maintenance and repairs, tires, gasoline (including all taxes

thereon), oil, insurance, and license and

registration fees are included in operating

and fixed costs for this purpose.

.04 Parking fees, tolls, interest, and

taxes. Parking fees and tolls attributable

to use of the automobile for business purposes may be deducted as separate items.

Likewise, interest relating to the purchase

of the automobile as well as state and

local taxes (other than those included in

the cost of gasoline) may be deducted as

separate items, but only to the extent that

the interest or taxes are allowable deductions under § 163 or 164 respectively. If

the automobile is operated less than 100

percent for business purposes, an allocation is required to determine the business

and nonbusiness portion of the taxes and

interest deduction allowable. However,

§ 163(h)(2)(A) expressly provides that interest is nondeductible personal interest

when it is paid or accrued on indebtedness

properly allocable to the trade or business

of performing services as an employee.

Section 164 also expressly provides that

state and local taxes that are paid or accrued by a taxpayer in connection with an

acquisition or disposition of property will

be treated as part of the cost of the acquired property or as a reduction in the

amount realized on the disposition of such

property.

.05 Depreciation. For owned automobiles placed in service for business purposes, and for which the business standard mileage rate has been used for any

year, depreciation will be considered to

December 29, 1997

have been allowed at the rate of 12 cents a

mile for 1994, 1995, 1996, 1997, and

1998, for those years in which the business standard mileage rate was used. If

actual costs were used for one or more of

those years, the rates above will not apply

to any year in which such costs were

used. The depreciation described above

will reduce the basis of the automobile

(but not below zero) in determining adjusted basis as required by § 1016.

.06 Limitations.

(1) The business standard mileage rate

may not be used to compute the deductible expenses of (a) automobiles used

for hire, such as taxicabs, or (b) two or

more automobiles used simultaneously

(such as in fleet operations).

(2) The business standard mileage rate

may not be used to compute the deductible businsess expenses of an automobile leased by a taxpayer unless the

taxpayer uses either the business standard

mileage rate or a FAVR allowance (as

provided in section 8 of this revenue procedure) to compute the deductible business expenses of the automobile for the

entire lease period (including renewals).

For a lease commencing on or before December 31, 1997, the “entire lease period”

means the portion of the lease period (including renewals) remaining after that

date.

(3) The business standard mileage rate

may not be used to compute the deductible expenses of an automobile for

which the taxpayer has (a) claimed depreciation using a method other than straightline for its estimated useful life, (b)

claimed a § 179 deduction, or (c) used the

Accelerated Cost Recovery System

(ACRS) under former § 168 or the Modified Accelerated Cost Recovery System

(MACRS) under current § 168. By using

the business standard mileage rate, the

taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant

to § 168(f)(1). If, after using the business

standard mileage rate, the taxpayer uses

actual costs, the taxpayer must use

straight-line depreciation for the automobile’s remaining estimated useful life

(subject to the applicable depreciation deduction limitations under § 280F).

(4) The business standard mileage rate

and this revenue procedure may not be

used to compute the amount of the deductible automobile expenses of an em-

December 29, 1997

ployee of the United States Postal Service

incurred in performing services involving

the collection and delivery of mail on a

rural route if the employee receives qualified reimbursements (as defined in

§ 162(o)) for such expenses. See

§ 162(o), as amended by § 1203 of the

Taxpayer Relief Act of 1997, Pub. L. No.

105–34, 111 Stat. 788 (August 5, 1997)

for the rules that apply to these qualified

reimbursements.

SECTION 6. RESERVED

SECTION 7. CHARITABLE,

MEDICAL, AND MOVING

STANDARD MILEAGE RATE

.01 Charitable. Section 170(i), as

amended by § 973 of the Taxpayer Relief

Act of 1997, provides a standard mileage

rate of 14 cents per mile for purposes of

computing the charitable deduction for

use of an automobile in connection with

rendering gratuitous services to a charitable organization under § 170, for taxable

years beginning after December 31,

1997.

.02 Medical and moving. The standard

mileage rate is 10 cents per mile for use of

an automobile (a) to obtain medical care

described in § 213, or (b) as part of a

move for which the expenses are deductible under § 217. The standard

mileage rates for medical and moving

transportation expenses will be adjusted

annually (to the extent warranted) by the

Service, and any such adjustment will be

applied prospectively.

.03 Charitable, medical, or moving expense standard mileage rate in lieu of operating expenses. A deduction computed

using the applicable standard mileage rate

for charitable, medical, or moving expense miles is in lieu of all operating expenses (including gasoline and oil) of the

automobile allocable to such purposes.

Costs for such items as depreciation (or

lease payments), maintenance and repairs,

tires, insurance, and license and registration fees are not deductible, and are not

included in such standard mileage rates.

.04 Parking fees, tolls, interest, and

taxes. Parking fees and tolls attributable

to the use of the automobile for charitable, medical, or moving expense purposes

may be deducted as separate items. Likewise, interest relating to the purchase of

the automobile as well as state and local

taxes (other than those included in the

cost of gasoline) may be deducted as separate items, but only to the extent that the

interest and taxes are allowable deductions under § 163 or 164, respectively.

SECTION 8. FIXED AND

VARIABLE RATE ALLOWANCE

.01 In general.

(1) The ordinary and necessary expenses paid or incurred by an employee in

driving an automobile owned or leased by

the employee in connection with the performance of services as an employee of

the employer will be deemed substantiated (in an amount determined under section 9 of this revenue procedure) when a

payor reimburses such expenses with a

mileage allowance using a flat rate or

stated schedule that combines periodic

fixed and variable rate payments that

meet all the requirements of section 8 of

this revenue procedure (a FAVR allowance).

(2) The amount of a FAVR allowance

must be based on data that (a) is derived

from the base locality, (b) reflects retail

prices paid by consumers, and (c) is reasonable and statistically defensible in approximating the actual expenses employees receiving the allowance would incur

as owners of the standard automobile.

.02 Definitions.

(1) FAVR allowance. A FAVR allowance includes periodic fixed payments

and periodic variable payments. A payor

may maintain more than one FAVR allowance. A FAVR allowance that uses the

same payor, standard automobile (or an

automobile of the same make and model

that is comparably equipped), retention

period, and business use percentage is

considered one FAVR allowance, even

though other features of the allowance

may vary. A FAVR allowance also includes any optional high mileage payments; however, such optional high

mileage payments are included in the employee’s gross income, are reported as

wages or other compensation on the employee’s Form W–2, and are subject to

withholding and payment of employment

taxes when paid. See section 9.05 of this

revenue procedure. An optional high

mileage payment covers the additional

depreciation for a standard automobile attributable to business miles driven and

substantiated by the employee for a calen-

1997–52 I.R.B.

dar year in excess of the annual business

mileage for that year. If an employee is

covered by the FAVR allowance for less

than the entire calendar year, the annual

business mileage may be prorated on a

monthly basis for purposes of the preceding sentence.

(2) Periodic fixed payment. A periodic

fixed payment covers the projected fixed

costs (including depreciation (or lease

payments), insurance, registration and license fees, and personal property taxes)

of driving the standard automobile in connection with the performance of services

as an employee of the employer in a base

locality, and must be paid at least quarterly. A periodic fixed payment may be

computed by (a) dividing the total projected fixed costs of the standard automobile for all years of the retention period,

determined at the beginning of the retention period, by the number of periodic

fixed payments in the retention period,

and (b) multiplying the resulting amount

by the business use percentage.

(3) Periodic variable payment. A periodic variable payment covers the projected operating costs (including gasoline

and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a

standard automobile in connection with

the performance of services as an employee of the employer in a base locality,

and must be paid at least quarterly. The

rate of a periodic variable payment for a

computation period may be computed by

dividing the total projected operating

costs for the standard automobile for the

computation period, determined at the beginning of the computation period, by the

computation period mileage. A computation period can be any period of a year or

less. Computation period mileage is the

total mileage (business and personal) a

payor reasonably projects a standard automobile will be driven during a computation period and equals the retention

mileage divided by the number of computation periods in the retention period. For

each business mile substantiated by the

employee for the computation period, the

periodic variable payment must be paid at

a rate that does not exceed the rate for that

computation period.

(4) Base locality. A base locality is the

particular geographic locality or region of

the United States in which the costs of

driving an automobile in connection with

1997–52 I.R.B.

the performance of services as an employee of the employer are generally paid

or incurred by the employee. Thus, for

purposes of determining the amount of

fixed costs, the base locality is generally

the geographic locality or region in which

the employee resides. For purposes of determining the amount of operating costs,

the base locality is generally the geographic locality or region in which the

employee drives the automobile in connection with the performance of services

as an employee of the employer.

(5) Standard automobile. A standard

automobile is the automobile selected by

the payor on which a specific FAVR allowance is based.

(6) Standard automobile cost. The

standard automobile cost for a calendar

year may not exceed 95 percent of the

sum of (a) the retail dealer invoice cost of

the standard automobile in the base locality, and (b) state and local sales or use

taxes applicable on the purchase of such

an automobile. Further, the standard automobile cost may not exceed $27,100.

(7) Annual mileage. Annual mileage is

the total mileage (business and personal)

a payor reasonably projects a standard automobile will be driven during a calendar

year. Annual mileage equals the annual

business mileage divided by the business

use percentage.

(8) Annual business mileage. Annual

business mileage is the mileage a payor

reasonably projects a standard automobile

will be driven by an employee in connection with the performance of services as

an employee of the employer during the

calendar year, but may not be less than

6,250 miles for a calendar year. Annual

business mileage equals the annual

mileage multiplied by the business use

percentage.

(9) Business use percentage. A business use percentage is determined by dividing the annual business mileage by the

annual mileage. The business use percentage may not exceed 75 percent. In

lieu of demonstrating the reasonableness

of the business use percentage based on

records of total mileage and business

mileage driven by the employees annually, a payor may use a business use percentage that is less than or equal to the

following percentages for a FAVR allowance that is paid for the following annual business mileage:

Annual business

mileage

Business use

percentage

6,250 or more but

less than 10,000

10,000 or more but

less than 15,000

15,000 or more but

less than 20,000

20,000 or more

45 percent

55 percent

65 percent

75 percent

(10) Retention period. A retention period is the period in calendar years selected by the payor during which the

payor expects an employee to drive a

standard automobile in connection with

the performance of services as an employee of the employer before the automobile is replaced. Such period may not

be less than two calendar years.

(11) Retention mileage. Retention

mileage is the annual mileage multiplied

by the number of calendar years in the retention period.

(12) Residual value. The residual value

of a standard automobile is the projected

amount for which it could be sold at the

end of the retention period after being driven the retention mileage. The Service

will accept the following safe harbor

residual values for a standard automobile

computed as a percentage of the standard

automobile cost:

Retention period

Residual value

2-year

3-year

4-year

70 percent

60 percent

50 percent

.03 FAVR allowance in lieu of operating and fixed costs.

(1) A reimbursement computed using a

FAVR allowance is in lieu of the employee’s deduction of all the operating

and fixed costs paid or incurred by an employee in driving the automobile in connection with the performance of services

as an employee of the employer, except as

provided in section 9.06 of this revenue

procedure. Such items as depreciation (or

lease payments), maintenance and repairs,

tires, gasoline (including all taxes

thereon), oil, insurance, license and registration fees, and personal property taxes

are included in operating and fixed costs

for this purpose.

(2) Parking fees and tolls attributable to

an employee driving the standard automo-

December 29, 1997

bile in connection with the performance

of services as an employee of the employer are not included in fixed and operating costs and may be deducted as separate items. Similarly, interest relating to

the purchase of the standard automobile

may be deducted as a separate item, but

only to the extent that the interest is an allowable deduction under § 163.

.04 Depreciation.

(1) A FAVR allowance may not be paid

with respect to an automobile for which

the employee has (a) claimed depreciation

using a method other than straight-line for

its estimated useful life, (b) claimed a

§ 179 deduction, or (c) used the Accelerated Cost Recovery System (ACRS)

under former § 168 or the Modified

Accelerated Cost Recovery System

(MACRS) under current § 168. If an employee uses actual costs for an owned automobile that has been covered by a

FAVR allowance, the employee must use

straight-line depreciation for the automobile’s remaining estimated useful life

(subject to the applicable depreciation deduction limitations under § 280F).

(2) The total amount of the depreciation

component for the retention period taken

into account in computing the periodic

fixed payments for that retention period

may not exceed the excess of the standard

automobile cost over the residual value of

the standard automobile. In addition, the

total amount of such depreciation component may not exceed the sum of the annual

§ 280F limitations on depreciation (in effect at the beginning of the retention period) that apply to the standard automobile

during the retention period.

(3) The depreciation included in each

periodic fixed payment portion of a FAVR

allowance paid with respect to an automobile will reduce the basis of the automobile (but not below zero) in determining

adjusted basis as required by § 1016. See

section 8.07(2) of this revenue procedure

for the requirement that the employer report the depreciation component of a periodic fixed payment to the employee.

.05 FAVR allowance limitations.

(1) A FAVR allowance may be paid

only to an employee who substantiates to

the payor for a calendar year at least

5,000 miles driven in connection with the

performance of services as an employee

of the employer or, if greater, 80 percent

of the annual business mileage of that

December 29, 1997

FAVR allowance. If the employee is covered by the FAVR allowance for less than

the entire calendar year, these limits may

be prorated on a monthly basis.

(2) A FAVR allowance may not be paid

to a control employee (as defined in

§ 1.61–21(f)(5) and (6), excluding the

$100,000 limitation in paragraph

(f)(5)(iii)).

(3) At no time during a calendar year

may a majority of the employees covered

by a FAVR allowance be management

employees.

(4) At all times during a calendar year

at least 10 employees of an employer

must be covered by one or more FAVR allowances.

(5) A FAVR allowance may be paid

only with respect to an automobile (a)

owned or leased by the employee receiving the payment, (b) the cost of which,

when new, is at least 90 percent of the

standard automobile cost taken into account for purposes of determining the

FAVR allowance for the first calendar

year the employee receives the allowance

with respect to that automobile, and (c)

the model year of which does not differ

from the current calendar year by more

than the number of years in the retention

period.

(6) A FAVR allowance may not be paid

with respect to an automobile leased by

an employee for which the employee has

used actual expenses to compute the deductible business expenses of the automobile for any year during the entire lease

period. For a lease commencing on or before December 31, 1997, the “entire lease

period” means the portion of the lease period (including renewals) remaining after

that date.

(7) The insurance cost component of a

FAVR allowance must be based on the

rates charged in the base locality for insurance coverage on the standard automobile during the current calendar year without taking into account such

rate-increasing factors as poor driving

records or young drivers.

(8) A FAVR allowance may be paid

only to an employee whose insurance

coverage limits on the automobile with

respect to which the FAVR allowance is

paid are at least equal to the insurance

coverage limits used to compute the periodic fixed payment under that FAVR

allowance.

.06 Employee reporting. Within 30

days after an employee’s automobile is

initially covered by a FAVR allowance, or

is again covered by a FAVR allowance if

such coverage has lapsed, the employee

by written declaration must provide the

payor with the following information: (a)

the make, model, and year of the employee’s automobile, (b) written proof of

the insurance coverage limits on the automobile, (c) the odometer reading of the

automobile, (d) if owned, the purchase

price of the automobile or, if leased, the

price at which the automobile is ordinarily sold by retailers (the gross capitalized

cost of the automobile), and (e) if owned,

whether the employee has claimed depreciation with respect to the automobile

using any of the depreciation methods

prohibited by section 8.04(1) of this revenue procedure or, if leased, whether the

employee has computed deductible business expenses with respect to the automobile using actual expenses. The information described in (a), (b), and (c) of the

preceding sentence also must be supplied

by the employee to the payor within 30

days after the beginning of each calendar

year that the employee’s automobile is

covered by a FAVR allowance.

.07 Payor recordkeeping and reporting.

(1) The payor or its agent must maintain written records setting forth (a) the

statistical data and projections on which

the FAVR allowance payments are based,

and (b) the information provided by the

employees pursuant to section 8.06 of this

revenue procedure.

(2) Within 30 days of the end of each

calendar year, the employer must provide

each employee covered by a FAVR allowance during that year with a statement

that, for automobile owners, lists the

amount of depreciation included in each

periodic fixed payment portion of the

FAVR allowance paid during that calendar year and explains that by receiving a

FAVR allowance the employee has

elected to exclude the automobile from

MACRS pursuant to § 168(f)(1). For automobile lessees, the statement must explain that by receiving the FAVR allowance the employee may not compute

the deductible business expenses of the

automobile using actual expenses for the

entire lease period (including renewals).

For a lease commencing on or before December 31, 1997, the “entire lease pe-

1997–52 I.R.B.

riod” means the portion of the lease period (including renewals) remaining after

that date.

.08 Failure to meet section 8 requirements. If an employee receives a mileage

allowance that fails to meet one or more

of the requirements of section 8 of this

revenue procedure, the employee may not

be treated as covered by any FAVR allowance of the payor during the period of

such failure. Nevertheless, the expenses

to which that mileage allowance relates

may be deemed substantiated using the

method described in sections 5, 9.01(1),

and 9.02 of this revenue procedure to the

extent the requirements of those sections

are met.

SECTION 9. APPLICATION

.01 If a payor pays a mileage allowance

in lieu of reimbursing actual transportation expenses incurred or to be incurred

by an employee, the amount of the expenses that is deemed substantiated to the

payor is either:

(1) for any mileage allowance other

than a FAVR allowance, the lesser of the

amount paid under the mileage allowance

or the applicable standard mileage rate in

section 5.01 of this revenue procedure

multiplied by the number of business

miles substantiated by the employee; or

(2) for a FAVR allowance, the amount

paid under the FAVR allowance less the

sum of (a) any periodic variable rate payment that relates to miles in excess of the

business miles substantiated by the employee and that the employee fails to return to the payor although required to do

so, (b) any portion of a periodic fixed

payment that relates to a period during

which the employee is treated as not covered by the FAVR allowance and that the

employee fails to return to the payor although required to do so, and (c) any optional high mileage payments.

.02 If the amount of transportation expenses is deemed substantiated under the

rules provided in section 9.01 of this revenue procedure, and the employee actually substantiates to the payor the elements of time, place (or use), and

business purpose of the transportation expenses in accordance with paragraphs

(b)(2) (travel away from home), (b)(6)

(listed property, which includes passenger

automobiles and any other property used

1997–52 I.R.B.

as a means of transportation), and (c) of §

1.274–5T, the employee is deemed to satisfy the adequate accounting requirements

of § 1.274–5T(f), as well as the requirement to substantiate by adequate records

or other sufficient evidence for purposes

of § 1.274–5T(c). See § 1.62–2(e)(1) for

the rule that an arrangement must require

business expenses to be substantiated to

the payor within a reasonable period of

time.

.03 An arrangement providing mileage

allowances will be treated as satisfying

the requirement of § 1.62–2(f)(2) with respect to returning amounts in excess of

expenses as follows:

(1) For a mileage allowance other than

a FAVR allowance, the requirement to return excess amounts will be treated as

satisfied if the employee is required to return within a reasonable period of time

(as defined in § 1.62–2(g)) any portion of

such an allowance that relates to miles of

travel not substantiated by the employee,

even though the arrangement does not require the employee to return the portion

of such an allowance that relates to the

miles of travel substantiated and that exceeds the amount of the employee’s expenses deemed substantiated. For example, assume a payor provides an

employee an advance mileage allowance

of $70 based on an anticipated 200 business miles at 35 cents per mile (at a time

when the applicable business standard

mileage rate is 32.5 cents per mile), and

the employee substantiates 120 business

miles. The requirement to return excess

amounts will be treated as satisfied if the

employee is required to return the portion

of the allowance that relates to the 80 unsubstantiated business miles ($28) even

though the employee is not required to

return the portion of the allowance ($3)

that exceeds the amount of the employee’s expenses deemed substantiated

under section 9.01 of this revenue procedure ($39) for the 120 substantiated business miles. However, the $3 excess portion of the allowance is treated as paid

under a nonaccountable plan as discussed

in section 9.05.

(2) For a FAVR allowance, the requirement to return excess amounts will be

treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62–2(g)),

(a) the portion (if any) of the periodic

variable payment received that relates to

miles in excess of the business miles substantiated by the employee, and (b) the

portion (if any) of a periodic fixed payment that relates to a period during which

the employee was not covered by the

FAVR allowance.

.04 An employee is not required to include in gross income the portion of a

mileage allowance received from a payor

that is less than or equal to the amount

deemed substantiated under section 9.01

of this revenue procedure, provided the

employee substantiates in accordance

with section 9.02. See § 1.274–5T(f)(2)(i). In addition, such portion of the allowance is treated as paid under an accountable plan, is not reported as wages

or other compensation on the employee’s

Form W-2, and is exempt from the withholding and payment of employment

taxes. See §§ 1.62–2(c)(2) and (c)(4).

.05 An employee is required to include

in gross income only the portion of a

mileage allowance received from a payor

that exceeds the amount deemed substantiated under section 9.01 of this revenue

procedure, provided the employee substantiates in accordance with section 9.02

of this revenue procedure.

See

§ 1.274–5T(f)(2)(ii). In addition, the excess portion of the allowance is treated as

paid under a nonaccountable plan, is reported as wages or other compensation on

the employee’s Form W-2, and is subject

to withholding and payment of employment taxes. See §§ 1.62–2(c)(3)(ii),

(c)(5), and (h)(2)(i)(B).

.06

(1) Except as otherwise provided in

section 9.06(2) of this revenue procedure

with respect to leased automobiles, if the

amount of the expenses deemed substantiated under the rules provided in section

9.01 of this revenue procedure is less than

the amount of the employee’s business

transportation expenses, the employee

may claim an itemized deduction for the

amount by which the business transportation expenses exceed the amount that is

deemed substantiated, provided the employee substantiates all the business transportation expenses, includes on Form

2106, Employee Business Expenses, the

deemed substantiated portion of the

mileage allowance received from the

payor, and includes in gross income the

portion (if any) of the mileage allowance

December 29, 1997

received from the payor that exceeds

the amount deemed substantiated. See

§ 1.274–5T(f)(2)(iii). However, for purposes of claiming this itemized deduction,

substantiation of the amount of the expenses is not required if the employee is

claiming a deduction that is equal to or

less than the applicable standard mileage

rate multiplied by the number of business

miles substantiated by the employee

minus the amount deemed substantiated

under section 9.01 of this revenue procedure. The itemized deduction is subject

to the 2-percent floor on miscellaneous

itemized deductions provided in § 67.

(2) An employee whose business transportation expenses with respect to a

leased automobile are deemed substantiated under section 9.01(1) of this revenue

procedure (relating to an allowance other

than a FAVR allowance) may not claim a

deduction based on actual expenses unless the employee does so consistently beginning with the first business use of the

automobile after December 31, 1997.

However, an employee whose business

transportation expenses with respect to a

leased automobile are deemed substantiated under section 9.01(2) of this revenue

procedure (relating to a FAVR allowance)

may not claim a deduction based on actual expenses.

.07 An employee may deduct an

amount computed pursuant to section

5.01 of this revenue procedure only as an

itemized deduction. This itemized deduction is subject to the 2-percent floor on

miscellaneous itemized deductions provided in § 67.

.08 A self-employed individual may

deduct an amount computed pursuant to

section 5.01 of this revenue procedure in

determining adjusted gross income under

§ 62(a)(1).

.09 If a payor’s reimbursement or other

expense allowance arrangement evidences a pattern of abuse of the rules of

§ 62(c) and the regulations thereunder, all

payments under the arrangement will be

treated as made under a nonaccountable

plan. Thus, such payments are included

in the employee’s gross income, are reported as wages or other compensation on

the employee’s Form W–2, and are subject to withholding and payment of employment taxes. See §§ 1.62–2(c)(3),

(c)(5), and (h)(2).

December 29, 1997

SECTION 10. WITHHOLDING

AND PAYMENT OF

EMPLOYMENT TAXES.

.01 The portion of a mileage allowance

(other than a FAVR allowance), if any,

that relates to the miles of business travel

substantiated and that exceeds the amount

deemed substantiated for those miles

under section 9.01(1) of this revenue procedure is subject to withholding and

payment of employment taxes. See

§ 1.62–2(h)(2)(i)(B).

(1) In the case of a mileage allowance

paid as a reimbursement, the excess described in section 10.01 of this revenue

procedure is subject to withholding and

payment of employment taxes in the payroll period in which the payor reimburses

the expenses for the business miles substantiated. See § 1.62–2(h)(2)(i)(B)(2).

(2) In the case of a mileage allowance

paid as an advance, the excess described

in section 10.01 of this revenue procedure is subject to withholding and payment of employment taxes no later than

the first payroll period following the payroll period in which the business miles

with respect to which the advance was

paid are substantiated.

See §

1.62–2(h)(2)-(i)(B)(3). If some or all of

the business miles with respect to which

the advance was paid are not substantiated within a reasonable period of time

and the employee does not return the portion of the allowance that relates to those

miles within a reasonable period of time,

the portion of the allowance that relates

to those miles is subject to withholding

and payment of employment taxes no

later than the first payroll period following the end of the reasonable period. See

§ 1.62–2(h)(2)(i)(A).

(3) In the case of a mileage allowance

that is not computed on the basis of a

fixed amount per mile of travel (e.g., a

mileage allowance that combines periodic fixed and variable rate payments,

but that does not satisfy the requirements

of section 8 of this revenue procedure),

the payor must compute periodically (no

less frequently than quarterly) the

amount, if any, that exceeds the amount

deemed substantiated under section

9.01(1) of this revenue procedure by

comparing the total mileage allowance

paid for the period to the applicable standard mileage rate in section 5.01 of this

revenue procedure multiplied by the

number of business miles substantiated

by the employee for the period. Any excess is subject to withholding and payment of employment taxes no later than

the first payroll period following the payroll period in which the excess is computed. See § 1.62–2(h)(2)(i)(B)(4).

(4) For example, assume an employer

pays its employees a mileage allowance

at a rate of 35 cents per mile (when the

business standard mileage rate is 32.5

cents per mile). The employer does not

require the return of the portion of the allowance (2.5 cents) that exceeds the business standard mileage rate for the business miles substantiated. In June, the

employer advances an employee $175 for

500 miles to be traveled during the

month. In July, the employee substantiates to the employer 400 business miles

traveled in June and returns $35 to the

employer for the 100 business miles not

traveled. The amount deemed substantiated for the 400 miles traveled is $130

and the employee is not required to return

the remaining $10. No later than the first

payroll period following the payroll period in which the 400 business miles traveled are substantiated, the employer must

withhold and pay employment taxes on

$10.

.02 The portion of a FAVR allowance,

if any, that exceeds the amount deemed

substantiated for those miles under section 9.01(2) of this revenue procedure is

subject to withholding and payment of

employment taxes. See § 1.62–2(h)(2)(i)(B).

(1) Any periodic variable rate payment

that relates to miles in excess of the business miles substantiated by the employee

and that the employee fails to return

within a reasonable period, or any portion of a periodic fixed payment that relates to a period during which the employee is treated as not covered by the

FAVR allowance and that the employee

fails to return within a reasonable period,

is subject to withholding and payment of

employment taxes no later than the first

payroll period following the end of the

reasonable period. See § 1.62–2(h)(2)(i)(A).

(2) Any optional high mileage payment

is subject to withholding and payment of

employment taxes when paid.

1997–52 I.R.B.

SECTION 11. EFFECT ON