# Bulletin No. 1997–52

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Bulletin No. 1997–52
December 29, 1997

Internal Revenue

bulletin
HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 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 Rul. 96–64 supplemented and superseded.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 Rul. 96–63 supplemented and superseded.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.

2

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

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

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

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

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

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

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

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a 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.

3

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.

4

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.

5

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

7

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-

8

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

9

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.

10

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.

11

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.

12

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.

6%
9%
7%
6%
12%
20%
16%
11%
11%

13

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. 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%
9%

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.

8%
8%
8%
9%
10%
9%
9%
10%
10%
11%
11%
10%
10%
10%
10%
10%
10%
9%
9%
9%
8%
7%
7%
6%
6%
6%
6%
6%
6%
6%
7%
8%
8%

21
21
21
23
73
71
71
73
25
27
27
25
25
25
25
25
25
23
23
23
69
67
67
65
17
17
17
17
17
17
19
21
21

14

575
575
575
577
627
625
625
627
579
581
581
579
579
579
579
579
579
577
577
577
623
621
621
619
571
571
571
571
571
571
573
575
575

9%
9%
9%
10%
11%
10%
10%
11%
11%
12%
12%
11%
11%
11%
11%
11%
11%
10%
10%
10%
9%
8%
8%
7%
7%
7%
7%
7%
7%
7%
8%
9%
9%

23
23
23
25
75
73
73
75
27
29
29
27
27
27
27
27
27
25
25
25
71
69
69
67
19
19
19
19
19
19
21
23
23

577
577
577
579
629
627
627
629
581
583
583
581
581
581
581
581
581
579
579
579
625
623
623
621
573
573
573
573
573
573
575
577
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.

9%
8%
8%
8%
7%
8%
8%
8%
8%
8%
8%
8%

23
21
21
69
67
69
69
21
21
21
21
21

577
575
575
623
621
623
623
575
575
575
575
575

10%
9%
9%
9%
8%
9%
9%
9%
9%
9%
9%
9%

25
23
23
71
69
71
71
23
23
23
23
23

579
577
577
625
623
625
625
577
577
577
577
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%
12%
12%
11%
10%
10%
9%
9%
9%
9%
9%
9%
9%
10%
11%
11%
12%
11%
11%
11%
10%
11%
11%
11%
11%
11%
11%
11%

15

31
29
29
29
75
73
73
71
23
23
23
23
23
23
25
27
27
29
27
27
75
73
75
75
27
27
27
27
27

585
583
583
583
629
627
627
625
577
577
577
577
577
577
579
581
581
583
581
581
629
627
629
629
581
581
581
581
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%
6.5%
6.5%
5.5%
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
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)),

16

18
20
18
18
66
64
66
66
18
18
18
18
18

572
574
572
572
620
618
620
620
572
572
572
572
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.

17

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)

18

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.
(c) Interest Expense: Complete lines
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.
(c) Specific Bad Debt Charge-off: The
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.

19

(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.
(c) Employee Business Expenses:
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)
32
63
68
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”

20

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.

21

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

1
2 or more
None

$2,271
$3,756
$ 341

$6,680
$9,390
$4,460

$12,260
$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

22

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

23

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

24

(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

25

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

26

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:

27

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 f

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A2f5ca6bba7eb0cb0. Public record. Not legal advice.