Bulletin No. 1998–20

Internal Revenue

bulletin

Bulletin No. 1998–20

May 18, 1998

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

EXEMPT ORGANIZATIONS

REG–251698–96, page 14.

REG–121268–97, page 12.

Proposed regulations under sections 1361 and 1362 of the

Code interpret the rules permitting an S corporation to own

80 percent or more of the stock of a C corporation, and to

elect to treat a wholly owned subsidiary as a qualified subchapter S subsidiary (QSSS).

Proposed regulations under section 513 of the Code clarify

when the travel and tour activities of tax exempt organizations are substantially related to the purposes for which exemption was granted.

Announcement 98–41, page 25.

Announcement 98–39, page 24.

This announcement contains corrections to final regulations

T.D. 8765 (1998–16 I.R.B. 11) relating to adjustments required when a qualified business unit (QBU) that used the

profit and loss method of accounting (P&L) in a post-1986

year begins to use the dollar approximate separate transaction method of accounting (DASTM) and adjustments required when a QBU that used DASTM begins using P&L.

EMPLOYEE PLANS

T.D. 8768, page 4.

Final and temporary regulations under section 417(e) of the

Code provide guidance to employers in determining the present value of an employee’s benefit under a qualified defined benefit pension plan, for purposes of the applicable

consent rules and for determining the amount of a distribution made in any form other than certain nondecreasing annuity forms.

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

ADMINISTRATIVE

Announcement 98–40, page 24.

This announcement contains corrections to the notice of

proposed rulemaking REG–208299–90 (1998–16 I.R.B.

26). The proposed rulemaking under sections 482 and 864

of the Code relates to the allocation among controlled taxpayers and sourcing of income, deductions, and gains and

losses from a global dealing operation; rules applying these

allocation and sourcing rules to foreign currency transactions and to foreign corporations engaged in a U.S. trade or

business; and rules concerning the mark-to-market treatment resulting from hedging activities of a global dealing operation. The public hearing originally scheduled for July 9,

1998, has been rescheduled for July 14, 1998.

Finding Lists begin on page 31.

Announcement of the Consent Voluntary Suspension of Attorneys, Certified Public Accounts,

Enrolled Agents, etc., begins on page 28.

Department of the Treasury

Internal Revenue Service

Mission of the Service

ucts and services; and perform in a manner warranting

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

The purpose of the Internal Revenue Service is to collect

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

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

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

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

adopt a position inconsistent with an established Service

position.

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

is determined by Congress.

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

policy by correctly applying the laws enacted by Congress;

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

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

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

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

should be relentless in its attack on unreal tax devices and

fraud.

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

is the responsibility of each person in the Service, charged

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

meaning of the statutory provision and not to adopt a

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

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

2

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

will not be relied on, used, or cited as precedents by Service

personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis

and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

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

Section 417.—Definitions and

Special Rules for Purposes of

Minimum Survivor Annuity

Requirements

26 CFR 1.417(e)–1: Restrictions and valuations of

distributions from plans subject to sections

401(a)(11) and 417.

T.D. 8768

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Valuation of Plan Distributions

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final and temporary regulations that provide guidance to employers in determining the present value of an employee’s

benefit under a qualified defined benefit

pension plan, for purposes of the applicable consent rules and for purposes of determining the amount of a distribution

made in any form other than certain nondecreasing annuity forms. These regulations are issued to reflect changes to the

applicable law made by the Retirement

Protection Act of 1994 (RPA ’94), which

is part of the Uruguay Round Agreements

Act of 1994. RPA ’94 amended the law to

change the interest rate, and to specify the

mortality table, for the purposes described

above. These regulations affect employers that maintain qualified defined benefit

pension plans, and participants and beneficiaries in those plans.

DATES: Effective date: These regulations are effective April 3, 1998.

Applicability date: These regulations

apply to plan years beginning after December 31, 1994, except as provided in

§1.417(e)–1(d)(8) and (9).

FOR FURTHER INFORMATION CONTACT: Linda S. F. Marshall, (202) 6226030 (not a toll-free number).

May 18, 1998

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to

the Income Tax Regulations (26 CFR part

1) under section 417(e). Section 417(e)

was amended by the Retirement Protection Act of 1994 (RPA ’94). On April 5,

1995, temporary regulations (TD 8591)

under section 417(e) were published in

the Federal Register (60 F.R. 17216). A

notice of proposed rulemaking (EE–

12–95), cross-referencing the temporary

regulations, was published in the Federal

Register (60 F.R. 17286) on the same

day. The temporary regulations provide

guidance related to the determination of

the present value of an employee’s benefit

under a qualified defined benefit pension

plan in accordance with the rules of section 417(e)(3). After consideration of the

public comments received regarding the

temporary and proposed regulations, the

temporary regulations are replaced and

the proposed regulations are adopted as

revised by this Treasury decision.

Section 417(e)(3) sets forth rules to be

used in determining the present value of

an employee’s benefit under a qualified

defined benefit pension plan, for purposes

of the applicable consent rules and for

purposes of determining the amount of a

distribution. The rules of section

417(e)(3) are also relevant to the application of section 411(a)(11) and section

415(b). Section 411(a)(11) provides that

a participant’s benefit with a present value

that exceeds a statutory threshold can be

immediately distributed to a participant

only with the participant’s consent. The

level of this statutory threshold was

changed from $3,500 to $5,000 by the

Taxpayer Relief Act of 1997, effective for

plan years beginning after August 5,

1997. Under section 411(a)(11)(B), as

amended by RPA ’94, the present value of

a participant’s benefit is calculated using

the rules of section 417(e)(3).

Section 415(b) limits the maximum

benefit that can be provided under a qualified defined benefit plan. Under section

415(b)(2)(E)(ii), as amended by RPA ’94,

the minimum interest rate permitted to be

4

used for certain purposes to determine

compliance with the limit under section

415(b) is the applicable interest rate as defined in section 417(e)(3). Because the

rules of section 417(e)(3) affect the application of sections 411(a)(11)(B) and

415(b)(2)(E)(ii), the guidance provided

by these regulations is relevant to the application of those provisions.

Explanation of provisions

Section 417(e) restricts the ability of

certain qualified retirement plans to distribute a participant’s benefit under the

plan without the consent of the participant

and, in many cases, the participant’s

spouse. The application of these restrictions is determined based on the present

value of the participant’s benefit. Prior to

amendments made by RPA ’94, section

417(e)(3) restricted the interest rate to be

used under a plan to calculate the present

value of a participant’s benefit, but did

not impose any restrictions on the mortality table to be used for that purpose. Section 767 of RPA ’94 modified section

417(e)(3) to provide that the present value

of a participant’s benefit is not less than

the present value calculated by using the

applicable mortality table and the applicable interest rate.

In general, comments received on the

proposed and temporary regulations were

favorable. Thus, the final regulations retain the general structure and substance of

the proposed and temporary regulations.

Applicable mortality table

The applicable mortality table under

section 417(e)(3) is defined as the table

prescribed by the Secretary based on the

prevailing commissioners’ standard table

(described in section 807(d)(5)(A)) used

to determine reserves for group annuity

contracts issued on the date as of which

present value is being determined (without regard to any other subparagraph of

section 807(d)(5)). Currently, the prevailing commissioners’ standard table is the

1983 Group Annuity Mortality Table. See

Rev. Rul. 92–19 (1992–1 C.B. 227).

These regulations retain the provision in

the temporary regulation that the applica-

1998–20 I.R.B.

ble mortality table as described above is

to be prescribed by the Commissioner in

revenue rulings, notices or other guidance

published in the Internal Revenue Bulletin. The mortality table currently prescribed by the Commissioner is set forth

in Rev. Rul. 95–6 (1995–1 C.B. 80), and

is based on a fixed blend of 50 percent of

the male mortality rates and 50 percent of

the female mortality rates from the 1983

Group Annuity Mortality Table.

Applicable interest rate

Under section 417(e)(3), the applicable

interest rate is defined as the annual rate

of interest on 30-year Treasury securities

for the month before the date of distribution or such other time as the Secretary

may by regulations prescribe. These regulations retain the rule in the temporary

regulations that the applicable interest

rate for a month is the annual interest rate

on 30-year Treasury securities as specified by the Commissioner for that month.

The Commissioner publishes this interest

rate for each month by notice, after the

end of the month. Currently, this interest

rate is the interest rate published in Federal Reserve releases G.13 and H.15 as

the average yield on 30-year Treasury

Constant Maturities for the month.

The interest rate on 30-year Treasury

Constant Maturities published monthly in

Federal Reserve releases G.13 and H.15

can also be obtained by telephone from

the Public Information Department of the

Federal Reserve Bank of New York at

(212) 720-6130 (not a toll-free number),

or from the Federal Reserve Board of

Governors’ Internet site at http://www.

bog.frb.fed.us/releases. Information regarding subscriptions to Federal Reserve

releases G.13 and H.15 can be obtained

from the Publications Department of the

Federal Reserve Board of Governors at

(202) 452-3244 (not a toll-free number).

Time for determining applicable

interest rate

Section 417(e)(3)(A)(ii)(II) provides

that the applicable interest rate for distributions made during a month is the annual

rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary

1998–20 I.R.B.

may by regulations prescribe. As an alternative to this monthly change in the applicable interest rate, the temporary regulations permitted selection of a plan quarter

or a plan year as a stability period during

which the applicable interest rate remains

constant, thereby permitting plans to offer

greater benefit stability than is provided by

the statutory rule. One commentator suggested adding a calendar year and a calendar quarter as additional alternative stability periods for the applicable interest rate,

and another suggested adding a plan halfyear. The IRS and Treasury have weighed

the usefulness of the additional proposed

stability periods for taxpayers against the

additional complexity that would be added

to the regulation, and have added a calendar year and a calendar quarter as additional alternative stability periods.

These regulations retain the rule in the

temporary regulations that the applicable

interest rate for the stability period may be

determined as the 30-year Treasury rate for

any one of the five calendar months preceding the first day of the stability period.

Permitting this “lookback” of up to five

months provides added flexibility and

gives plan administrators and participants

more time to comply with applicable notice and election requirements using the

actual interest rate (instead of an estimate).

Several commentators suggested that

regulations permit an average of lookback

month interest rates to be used, in lieu of

the interest rate for a single lookback

month, to minimize interest rate fluctuations. These regulations adopt this suggestion, and permit an average interest

rate based on consecutive permitted lookback months to be used for this purpose.

Several commentators suggested that a

plan be allowed to provide for different

applicable interest rates for each portion

of the plan that independently meets the

requirements of sections 410(b) and

401(a)(26). The IRS and Treasury have

determined, however, that there is insufficient basis for adopting a definition of a

“plan” that is different from the general

definition set forth in §1.414(l)–1(b)(1).

Exceptions from the requirements of

section 417(e)(3)

The temporary regulations provided an

exception from the requirements of sec-

5

tion 417(e)(3) and §1.417(e)–1T(d) for

the amount of a distribution under a nondecreasing annuity payable for a period

not less than the life of the participant or,

in the case of a QPSA, the life of the surviving spouse. For purposes of this exception, a nondecreasing annuity included

a QJSA, a QPSA, and an annuity that decreased merely because of the cessation

or reduction of Social Security supplements or qualified disability payments (as

defined in section 411(a)(9)). This exception was identical to the exception provided under former final regulations.

Several commentators pointed out that

this exception did not cover several other

types of annuity forms of distribution that

were nondecreasing during the life of the

participant, and suggested that the regulations be changed to provide additional exceptions for these additional annuity

forms of distribution.

The IRS and Treasury have determined

that it is appropriate to provide additional

exceptions for these benefit forms. Accordingly, under the final regulations, section 417(e)(3) and §1.417(e)–1(d) do not

apply to the amount of a distribution paid

in the form of an annual benefit that does

not decrease during the life of the participant, or, in the case of a QPSA, the life of

the participant’s spouse; or that decreases

during the life of the participant merely

because of the death of the survivor annuitant (but only if the reduction is to a level

not below 50% of the annual benefit

payable before the death of the survivor

annuitant) or merely because of the cessation or reduction of Social Security supplements or qualified disability benefits.

Also, under Q&A–2 of Rev. Rul. 98–1

(1998–2 I.R.B. 1), the interest rate prescribed by section 415(b)(2)(E)(ii) does

not apply to these forms of benefit.

Effective dates

These regulations generally apply to

plan years beginning after December 31,

1994.

Under section 417(e)(3)(B) and these

regulations, the general effective date for

the RPA ’94 rules is delayed for certain

plans until the first plan year that begins

after December 31, 1999, unless an employer takes earlier action. The delayed

effective date applies to a plan adopted

May 18, 1998

and in effect before December 8, 1994, if

the provisions of the plan in effect on December 7, 1994, met the requirements of

section 417(e)(3) as in effect on December 7, 1994. For such a plan, the determination of whether a distribution made before the first day of the first plan year that

begins after December 31, 1999, satisfies

section 417(e) is made under the provisions of the plan in effect on December 7,

1994, if the annuity starting date for the

distribution occurs before the date a plan

amendment applying both the applicable

mortality table and the applicable interest

rate rules added by RPA ’94 is adopted or,

if later, is made effective. Thus, under

section 417(e)(3)(B) and these regulations, a plan that was adopted and in effect before December 8, 1994, and the

provisions of which, as in effect on December 7, 1994, met the requirements of

section 417(e)(3) as in effect on that date,

cannot be amended to provide a different

method of calculating the present value of

a distribution under section 417(e)(3) effective before the date a plan amendment

applying both the applicable mortality

table and the applicable interest rate rules

added by RPA ’94 is adopted or, if later, is

made effective.

One commentator inquired whether,

where a plan is spun off from another plan

during the optional delayed effective date

period, both plans are required to be

amended to apply the applicable mortality

table and the applicable interest rate rules

added by RPA ’94 effective on the same

date. Because these rules apply on a plan

by plan basis, the plans are not required to

be amended effective on the same date.

One other commentator suggested that the

regulations be changed to permit a plan to

provide for different optional delayed effective dates for each separate benefit

structure that independently meets the requirements of section 401(a)(4). Section

417(e)(3)(B) requires a single effective

date for a plan amendment applying the

applicable mortality table and the applicable interest rate rules added by RPA ’94.

Therefore, this suggestion is inconsistent

with the statute. Of course, a plan amendment that applies the applicable mortality

table and the applicable interest rate rules

added by RPA ’94 may provide for temporary or permanent use of interest and

mortality assumptions for specified participant groups that result in larger distrib-

May 18, 1998

utions than the minimum required under

these RPA ’94 rules, provided that other

qualification requirements (such as section 401(a)(4)) are satisfied.

These regulations restate the rules applicable to plan years beginning before

January 1, 1995, without substantive

change. Those pre-1995 rules also apply

to later plan years, to the extent that the

application of the RPA ’94 rules is delayed as described above.

In addition, section 767(d)(1) of RPA

’94 permits an employer to elect to accelerate the effective date of the RPA ’94

rules, and hence these regulations, in order

to apply the RPA ’94 rules to distributions

with annuity starting dates occurring after

December 7, 1994, in plan years beginning before January 1, 1995. An employer

that makes a plan amendment applying the

applicable mortality table and the applicable interest rate rules of these regulations

is treated as making this election as of the

date the plan amendment is adopted or, if

later, is made effective.

Relationship with section 411(d)(6)

Section 411(d)(6) provides that a plan

does not satisfy the requirements of section 411 if the accrued benefit of a participant is decreased by a plan amendment.

In general, a plan amendment that

changes the interest rate or the mortality

assumptions used for purposes of determining the amount of any accrued benefit

in any preexisting optional form is subject

to section 411(d)(6). Consistent with both

the temporary regulations and the prior

final regulations, these regulations provide limited section 411(d)(6) relief for

certain plan amendments that change the

time for determining the applicable interest rate. A plan amendment that changes

the time for determining the applicable interest rate will not be treated as violating

section 411(d)(6) if each distribution

made until one year after the later of the

effective date or the adoption date of the

amendment is calculated using the time

for determining the applicable interest

rate as provided before or after the

amendment, whichever produces the

larger benefit. For this purpose, all other

plan provisions must be applied as in effect after the amendment.

Section 767(d)(2) of RPA ’94 provides

that a participant’s accrued benefit is not

considered to be reduced in violation of

6

section 411(d)(6) merely because the benefit is determined in accordance with the

applicable interest rate rules and the applicable mortality table rules of section

417(e)(3)(A), as amended by RPA ’94.

These regulations provide that an amendment replacing an interest rate used for

purposes of section 417(e)(3) qualifies for

this section 411(d)(6) relief if the interest

rate replaced is the Pension Benefit Guaranty Corporation (PBGC) interest rate or

a rate based on the PBGC interest rate.

Pursuant to suggestions made by several

commentators, these regulations clarify

that the interest rates that may be replaced

pursuant to this section 411(d)(6) relief

include an interest rate based on the average of the PBGC interest rates over a

specified period. In addition, pursuant to

suggestions made by two commentators,

the final regulations clarify the relationship between the various types of section

411(d)(6) relief under the regulations, and

provide some additional flexibility to employers in determining how to transition

between the PBGC interest rate and the

applicable interest rate and applicable

mortality table, where the transition is

combined with a change in the time for

determining the interest rate.

One commentator asked whether the

section 411(d)(6) relief for plan amendments adopting the applicable mortality

table and the applicable interest rate rules

applies with respect to terminated vested

participants. Because the section

411(d)(6) relief provided under section

767(d)(2) of RPA ’94 applies in the same

manner with respect to active and terminated participants, the regulations likewise do not distinguish terminated vested

participants from other participants in this

regard.

Several commentators requested that

the regulations be amended to provide unconditional section 411(d)(6) relief for

plan amendments adopting the applicable

interest rate and applicable mortality table

rules of RPA ’94 regardless of changes in

the time for determining the applicable interest rate. The IRS and Treasury have

determined that providing some additional flexibility to employers in determining how to transition between the

PBGC interest rate and the applicable interest rate and applicable mortality table,

as discussed above, where the transition is

combined with a change in the time for

1998–20 I.R.B.

determining the interest rate, strikes an

appropriate balance between the practical

concerns of employers and the rights of

participants.

These regulations further provide that,

where a plan provided for the use of an interest rate not based on the PBGC interest

rate prescribed by section 417(e)(3) as in

effect before amendments made by RPA

’94, a plan amendment that eliminates the

use of that interest rate and the associated

mortality table may result in a reduction

of a participant’s accrued benefit, which

would violate the requirements of section

411(d)(6). Two commentators suggested

that final regulations provide section

411(d)(6) relief for plan amendments that

eliminate the use of an interest rate not

based on the PBGC interest rate, for plan

amendments that adopt the applicable interest rate and applicable mortality table

rules of RPA ’94. Another commentator

requested that final regulations provide

for similar section 411(d)(6) relief, but

only for mandatory distributions that are

permitted pursuant to the rules of section

411(a)(11). The IRS and Treasury have

determined that section 767(d)(2) of RPA

’94 does not support a grant of section

411(d)(6) relief with respect to plan

amendments eliminating interest rates

that are not based on the PBGC interest

rate.

These regulations provide examples of

the application of section 411(d)(6) and

the special rule of section 767(d)(2) of

RPA ’94, including an example illustrating

the use of a phase-in that provides for a

smoother transition from the plan’s former

terms to the new rules. In addition, these

regulations provide section 411(d)(6) relief for certain plan amendments that eliminate use of the applicable interest rate and

the applicable mortality table with respect

to distribution forms that are newly excepted from the application of section

417(e)(3) by these regulations.

The PBGC has advised the IRS and

Treasury that it has not made any decision

at this time on whether it will continue to

calculate and publish the relevant interest

rates after the year 2000. Therefore, in

amending plans to comply with these regulations, employers should not rely on the

continued determination and publication

of these rates by the PBGC beyond the

year 2000.

1998–20 I.R.B.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations, and because

the notice of proposed rulemaking preceding the regulations was issued prior to

March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the

Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel

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

small business.

Drafting Information

The principal author of these regulations is Linda S. F. Marshall, Office of the

Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their

development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

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

Section 1.417(e)–1 also issued under

26 U.S.C. 417(e)(3)(A)(ii)(II). * * *

Par. 2. In §1.417(e)–1, paragraph (d) is

revised to read as follows:

§1.417(e)–1 Restrictions and valuations

of distributions from plans subject to

sections 401(a)(11) and 417.

*

*

*

*

*

(d) Present value requirement—(1)

General rule. A defined benefit plan must

provide that the present value of any accrued benefit and the amount (subject to

sections 411(c)(3) and 415) of any distribution, including a single sum, must not be

7

less than the amount calculated using the

applicable interest rate described in paragraph (d)(3) of this section (determined

for the month described in paragraph

(d)(4) of this section) and the applicable

mortality table described in paragraph

(d)(2) of this section. The present value

of any optional form of benefit cannot be

less than the present value of the normal

retirement benefit determined in accordance with the preceding sentence. The

same rules used for the plan under this

paragraph (d) must also be used to compute the present value of the benefit for

purposes of determining whether consent

for a distribution is required under paragraph (b) of this section.

(2) Applicable mortality table. The applicable mortality table is the mortality

table based on the prevailing commissioners’ standard table (described in section

807(d)(5)(A)) used to determine reserves

for group annuity contracts issued on the

date as of which present value is being determined (without regard to any other

subparagraph of section 807(d)(5)), that is

prescribed by the Commissioner in revenue rulings, notices, or other guidance

published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this

chapter). The Commissioner may prescribe rules that apply in the case of a

change to the prevailing commissioners’

standard table (described in section

807(d)(5)(A)) used to determine reserves

for group annuity contracts, in revenue

rulings, notices, or other guidance published in the Internal Revenue Bulletin

(see §601.601(d)(2)(ii)(b) of this chapter).

(3) Applicable interest rate—(i) General rule. The applicable interest rate for

a month is the annual interest rate on 30year Treasury securities as specified by

the Commissioner for that month in revenue rulings, notices or other guidance

published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this

chapter).

(ii) Example. This example illustrates

the rules of this paragraph (d)(3):

Example. Plan A is a calendar year plan. For its

1995 plan year, Plan A provides that the applicable

mortality table is the table described in Rev. Rul.

95–6 (1995–1 C.B. 80), and that the applicable interest rate is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for

the first full calendar month preceding the calendar

month that contains the annuity starting date. Participant P is age 65 in January 1995, which is the

May 18, 1998

month that contains P’s annuity starting date. P has

an accrued benefit payable monthly of $1,000 and

has elected to receive a distribution in the form of a

single sum in January 1995. The annual interest rate

on 30-year Treasury securities as published by the

Commissioner for December 1994 is 7.87 percent.

To satisfy the requirements of section 417(e)(3) and

this paragraph (d), the single sum received by P may

not be less than $111,351.

(4) Time for determining interest

rate—(i) General rule. Except as provided in paragraph (d)(4)(iv) or (v) of this

section, the applicable interest rate to be

used for a distribution is the rate determined under paragraph (d)(3) of this section for the applicable lookback month.

The applicable lookback month for a distribution is the lookback month (as described in paragraph (d)(4)(iii) of this section) for the month (or other longer

stability period described in paragraph

(d)(4)(ii) of this section) that contains the

annuity starting date for the distribution.

The time and method for determining the

applicable interest rate for each participant’s distribution must be determined in

a consistent manner that is applied uniformly to all participants in the plan.

(ii) Stability period. A plan must specify the period for which the applicable interest rate remains constant. This stability

period may be one calendar month, one

plan quarter, one calendar quarter, one

plan year, or one calendar year.

(iii) Lookback month. A plan must

specify the lookback month that is used to

determine the applicable interest rate.

The lookback month may be the first, second, third, fourth, or fifth full calendar

month preceding the first day of the stability period.

(iv) Permitted average interest rate. A

plan may apply the rules of paragraph

(d)(4)(i) of this section by substituting a

permitted average interest rate with respect to the plan’s stability period for the

rate determined under paragraph (d)(3) of

this section for the applicable lookback

month for the stability period. For this

purpose, a permitted average interest rate

with respect to a stability period is an interest rate that is computed by averaging

the applicable interest rates determined

under paragraph (d)(3) of this section for

two or more consecutive months from

among the first, second, third, fourth, and

fifth calendar months preceding the first

day of the stability period. For this paragraph (d)(4)(iv) to apply, a plan must

May 18, 1998

specify the manner in which the permitted

average interest rate is computed.

(v) Additional determination dates.

The Commissioner may prescribe, in revenue rulings, notices or other guidance

published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b)), other

times that a plan may provide for determining the applicable interest rate.

(vi) Example. This example illustrates

the rules of this paragraph (d)(4):

Example. Employer X maintains Plan A, a calendar year plan. Employer X wishes to amend Plan A

so that the applicable interest rate will remain fixed

for each plan quarter, and so that the applicable interest rate for distributions made during each plan quarter can be determined approximately 80 days before

the beginning of the plan quarter. To comply with

the provisions of this paragraph (d)(4), Plan A is

amended to provide that the applicable interest rate is

the annual interest rate on 30-year Treasury securities

as specified by the Commissioner for the fourth calendar month preceding the first day of the plan quarter during which the annuity starting date occurs.

(5) Use of alternative interest rate and

mortality table. If a plan provides for use

of an interest rate or mortality table other

than the applicable interest rate or the applicable mortality table, the plan must

provide that a participant’s benefit must

be at least as great as the benefit produced

by using the applicable interest rate and

the applicable mortality table. For example, if a plan provides for use of an interest rate of 7% and the UP–1984 Mortality

Table (see §1.401(a)(4)–12, Standard

mortality table) in calculating single-sum

distributions, the plan must provide that

any single-sum distribution is calculated

as the greater of the single-sum benefit

calculated using 7% and the UP–1984

Mortality Table and the single-sum benefit calculated using the applicable interest

rate and the applicable mortality table.

(6) Exceptions. This paragraph (d)

(other than the provisions relating to section 411(d)(6) requirements in paragraph

(d)(10) of this section) does not apply to

the amount of a distribution paid in the

form of an annual benefit that—

(i) Does not decrease during the life of

the participant, or, in the case of a QPSA,

the life of the participant’s spouse; or

(ii) Decreases during the life of the participant merely because of—

(A) The death of the survivor annuitant

(but only if the reduction is to a level not

below 50% of the annual benefit payable

before the death of the survivor annui-

8

tant); or

(B) The cessation or reduction of Social Security supplements or qualified disability benefits (as defined in section

411(a)(9)).

(7) Defined contribution plans. Because the accrued benefit under a defined

contribution plan equals the account balance, a defined contribution plan is not

subject to the requirements of this paragraph (d), even though it is subject to section 401(a)(11).

(8) Effective date—(i) In general. This

paragraph (d) is effective for distributions

with annuity starting dates in plan years

beginning after December 31, 1994.

(ii) Optional delayed effective date of

Retirement Protection Act of 1994 (RPA

’94)(108 Stat. 5012) rules for plans

adopted and in effect before December 8,

1994. For a plan adopted and in effect before December 8, 1994, the application of

the rules relating to the applicable mortality table and applicable interest rate under

paragraphs (d)(2) through (4) of this section is delayed to the extent provided in

this paragraph (d)(8)(ii), if the plan provisions in effect on December 7, 1994, met

the requirements of section 417(e)(3) and

§1.417(e)–1(d) as in effect on December

7, 1994 (as contained in 26 CFR part 1 revised April 1, 1995). In the case of a distribution from such a plan with an annuity

starting date that precedes the optional delayed effective date described in paragraph (d)(8)(iv) of this section, and that

precedes the first day of the first plan year

beginning after December 31, 1999, the

rules of paragraph (d)(9) of this section

(which generally apply to distributions

with annuity starting dates in plan years

beginning before January 1, 1995) apply

in lieu of the rules of paragraphs (d)(2)

through (4) of this section. The interest

rate under the rules of paragraph (d)(9) of

this section is determined under the provisions of the plan as in effect on December

7, 1994, reflecting the interest rate or rates

published by the Pension Benefit Guaranty Corporation (PBGC) and the provisions of the plan for determining the date

on which the interest rate is fixed. The

above described interest rate or rates published by the PBGC are those determined

by the PBGC (for the date determined

under those plan provisions) pursuant to

the methodology under the regulations of

the PBGC for determining the present

1998–20 I.R.B.

value of a lump sum distribution on plan

termination under 29 CFR part 2619 that

were in effect on September 1, 1993 (as

contained in 29 CFR part 2619 revised

July 1, 1994).

(iii) Optional accelerated effective date

of RPA ’94 rules. This paragraph (d) is

also effective for a distribution with an annuity starting date after December 7, 1994,

during a plan year beginning before January 1, 1995, if the employer elects, on or

before the annuity starting date, to make

the rules of this paragraph (d) effective

with respect to the plan as of the optional

accelerated effective date described in

paragraph (d)(8)(iv) of this section. An

employer is treated as making this election

by making the plan amendments described

in paragraph (d)(8)(iv) of this section.

(iv) Determination of delayed or accelerated effective date by plan amendment

adopting RPA ’94 rules. The optional delayed effective date of paragraph

(d)(8)(ii) of this section, or the optional

accelerated effective date of paragraph

(d)(8)(iii) of this section, whichever is applicable, is the date plan amendments applying both the applicable mortality table

of paragraph (d)(2) of this section and the

applicable interest rate of paragraph

(d)(3) of this section are adopted or, if

later, are made effective.

(9) Plan years beginning before January 1, 1995—(i) Interest rate. (A) For

distributions made in plan years beginning after December 31, 1986, and before

January 1, 1995, the following interest

rate described in paragraph (d)(9)(i)(A)(1) or (2) of this section, whichever

applies, is substituted for the applicable

interest rate for purposes of this section—

(1) The rate or rates that would be used

by the PBGC for a trusteed single-employer plan to value the participant’s (or

beneficiary’s) vested benefit (PBGC interest rate) if the present value of such

benefit does not exceed $25,000; or

(2) 120 percent of the PBGC interest

rate, as determined in accordance with

paragraph (d)(9)(i)(A)(1) of this section,

if such present value exceeds $25,000. In

no event shall the present value determined by use of 120 percent of the PBGC

interest rate result in a present value less

than $25,000.

(B) The PBGC interest rate may be a

series of interest rates for any given date.

1998–20 I.R.B.

For example, the PBGC interest rate for

immediate annuities for November 1994

is 6%, and the PBGC interest rates for the

deferral period for that month are as follows: 5.25% for the first 7 years of the

deferral period, 4% for the following 8

years of the deferral period, and 4% for

the remainder of the deferral period. For

November 1994, 120 percent of the

PBGC interest rate is 7.2% (1.2 times 6%)

for an immediate annuity, 6.3% (1.2 times

5.25%) for the first 7 years of the deferral

period, 4.8% (1.2 times 4%) for the following 8 years of the deferral period, and

4.8% (1.2 times 4%) for the remainder of

the deferral period. The PBGC interest

rates are the interest rates that would be

used (as of the date of the distribution) by

the PBGC for purposes of determining the

present value of that benefit upon termination of an insufficient trusteed single

employer plan. Except as otherwise provided by the Commissioner, the PBGC interest rates are determined by PBGC regulations. See subpart B of 29 CFR part

4044 for the applicable PBGC rates.

(ii) Time for determining interest rate.

(A) Except as provided in paragraph

(d)(9)(ii)(B) of this section, the PBGC interest rate or rates are determined on either the annuity starting date or the first

day of the plan year that contains the annuity starting date. The plan must provide which date is applicable.

(B) The plan may provide for the use of

any other time for determining the PBGC

interest rate or rates provided that such

time is not more than 120 days before the

annuity starting date if such time is determined in a consistent manner and is applied uniformly to all participants.

(C) The Commissioner may, in revenue

rulings, notices or other guidance published in the Internal Revenue Bulletin

(see §601.601(d)(2)(ii)(b)), prescribe

other times for determining the PBGC interest rate or rates.

(iii) No applicable mortality table. In

the case of a distribution to which this

paragraph (d)(9) applies, the rules of this

paragraph (d) are applied without regard

to the applicable mortality table described

in paragraph (d)(2) of this section.

(10) Relationship with section

411(d)(6)—(i) In general. A plan amendment that changes the interest rate, the

time for determining the interest rate, or

9

the mortality assumptions used for the

purposes described in paragraph (d)(1) of

this section is subject to section 411(d)(6).

But see §1.411(d)–4, Q&A–2(b)(2)(v)

(regarding plan amendments relating to

involuntary distributions). In addition, a

plan amendment that changes the interest

rate or the mortality assumptions used for

the purposes described in paragraph

(d)(1) of this section merely to eliminate

use of the interest rate described in paragraph (d)(3) or paragraph (d)(9) of this

section, or the applicable mortality table,

with respect to a distribution form described in paragraph (d)(6) of this section,

for distributions with annuity starting

dates occurring after a specified date that

is after the amendment is adopted, does

not violate the requirements of section

411(d)(6) if the amendment is adopted on

or before the last day of the last plan year

ending before January 1, 2000.

(ii) Section 411(d)(6) relief for change

in time for determining interest rate.

Notwithstanding the general rule of paragraph (d)(10)(i) of this section, if a plan

amendment changes the time for determining the applicable interest rate (including an indirect change as a result of a

change in plan year), the amendment will

not be treated as reducing accrued benefits in violation of section 411(d)(6)

merely on account of this change if the

conditions of this paragraph (d)(10)(ii)

are satisfied. If the plan amendment is effective on or after the adoption date, any

distribution for which the annuity starting

date occurs in the one-year period commencing at the time the amendment is

effective must be determined using the interest rate provided under the plan determined at either the date for determining

the interest rate before the amendment or

the date for determining the interest rate

after the amendment, whichever results in

the larger distribution. If the plan amendment is adopted retroactively (that is, the

amendment is effective prior to the adoption date), the plan must use the interest

rate determination date resulting in the

larger distribution for the period beginning with the effective date and ending

one year after the adoption date.

(iii) Section 411(d)(6) relief for plan

amendments pursuant to changes to section 417 made by RPA ’94 providing for

statutory interest rate determination date.

May 18, 1998

Notwithstanding the general rule of paragraph (d)(10)(i) of this section, except as

provided in paragraph (d)(10)(vi)(B) of

this section, a participant’s accrued benefit is not considered to be reduced in violation of section 411(d)(6) merely because of a plan amendment that changes

any interest rate or mortality assumption

used to calculate the present value of a

participant’s benefit under the plan, if the

following conditions are satisfied—

(A) The amendment replaces the

PBGC interest rate (or an interest rate or

rates based on the PBGC interest rate) as

the interest rate used under the plan in determining the present value of a participant’s benefit under this paragraph (d);

and

(B) After the amendment is effective,

the present value of a participant’s benefit

under the plan cannot be less than the

amount calculated using the applicable

mortality table and the applicable interest

rate for the first full calendar month preceding the calendar month that contains

the annuity starting date.

(iv) Section 411(d)(6) relief for plan

amendments pursuant to changes to section 417 made by RPA ’94 providing for

prior determination date or up to two

months earlier. Notwithstanding the general rule of paragraph (d)(10)(i) of this

section, except as provided in paragraph

(d)(10)(vi)(B) of this section, a participant’s accrued benefit is not considered to

be reduced in violation of section

411(d)(6) merely because of a plan

amendment that changes any interest rate

or mortality assumption used to calculate

the present value of a participant’s benefit

under the plan, if the following conditions

are satisfied—

(A) The amendment replaces the

PBGC interest rate (or an interest rate or

rates based on the PBGC interest rate) as

the interest rate used under the plan in determining the present value of a participant’s benefit under this paragraph (d);

and

(B) After the amendment is effective,

the present value of a participant’s benefit

under the plan cannot be less than the

amount calculated using the applicable

mortality table and the applicable interest

rate, but only if the applicable interest rate

is the annual interest rate on 30-year Treasury securities for the calendar month that

contains the date as of which the PBGC

May 18, 1998

interest rate (or an interest rate or rates

based on the PBGC interest rate) was determined immediately before the amendment, or for one of the two calendar

months immediately preceding such

month.

(v) Section 411(d)(6) relief for plan

amendments pursuant to changes to section 417 made by RPA ‘94 providing for

other interest rate determination date.

Notwithstanding the general rule of paragraph (d)(10)(i) of this section, except as

provided in paragraph (d)(10)(vi)(B) of

this section, a participant’s accrued benefit is not considered to be reduced in violation of section 411(d)(6) merely because of a plan amendment that changes

any interest rate or mortality assumption

used to calculate the present value of a

participant’s benefit under the plan, if the

following conditions are satisfied—

(A) The amendment replaces the

PBGC interest rate (or an interest rate or

rates based on the PBGC interest rate) as

the interest rate used under the plan in determining the present value of a participant’s benefit under this paragraph (d);

(B) After the amendment is effective,

the present value of a participant’s benefit

under the plan cannot be less than the

amount calculated using the applicable

mortality table and the applicable interest

rate; and

(C) The plan amendment satisfies either the condition of paragraph (d)(10)(ii)

of this section (determined using the interest rate provided under the terms of the

plan after the effective date of the amendment) or the special early transition interest rate rule of paragraph (d)(10)(vi)(C) of

this section.

(vi) Special rules—(A) Provision of

temporary additional benefits. A plan

amendment described in paragraph

(d)(10)(iii), (iv), or (v) of this section is

not considered to reduce a participant’s

accrued benefit in violation of section

411(d)(6) even if the plan amendment

provides for temporary additional benefits

to accommodate a more gradual transition

from the plan’s old interest rate to the new

rules.

(B) Replacement of non-PBGC interest rate. The section 411(d)(6) relief provided in paragraphs (d)(10)(iii) through

(v) of this section does not apply to a plan

amendment that replaces an interest rate

other than the PBGC interest rate (or an

10

interest rate or rates based on the PBGC

interest rate) as an interest rate used under

the plan in determining the present value

of a participant’s benefit under this paragraph (d). Thus, the accrued benefit determined using that interest rate and the

associated mortality table is protected

under section 411(d)(6). For purposes of

this paragraph (d), an interest rate is based

on the PBGC interest rate if the interest

rate is defined as a specified percentage of

the PBGC interest rate, the PBGC interest

rate minus a specified number of basis

points, or an average of such interest rates

over a specified period.

(C) Special early transition interest

rate rule for paragraph (d)(10)(v). A plan

amendment satisfies the special rule of

this paragraph (d)(10)(vi)(C) if any distribution for which the annuity starting date

occurs in the one-year period commencing at the time the plan amendment is effective is determined using whichever of

the following two interest rates results in

the larger distribution—

(1) The interest rate as provided under

the terms of the plan after the effective

date of the amendment, but determined at

a date that is either one month or two

months (as specified in the plan) before

the date for determining the interest rate

used under the terms of the plan before

the amendment; or

(2) The interest rate as provided under

the terms of the plan after the effective

date of the amendment, determined at the

date for determining the interest rate after

the amendment.

(vii) Examples. The provisions of this

paragraph (d)(10) are illustrated by the

following examples:

Example 1. On December 31, 1994, Plan A provided that all single-sum distributions were to be

calculated using the UP–1984 Mortality Table and

100% of the PBGC interest rate for the date of distribution. On January 4, 1995, and effective on February 1, 1995, Plan A was amended to provide that all

single-sum distributions are calculated using the applicable mortality table and the annual interest rate

on 30-year Treasury securities for the first full calendar month preceding the calendar month that contains the annuity starting date. Pursuant to paragraph (d)(10)(iii) of this section, this amendment

of Plan A is not considered to reduce the accrued

benefit of any participant in violation of section

411(d)(6).

Example 2. On December 31, 1994, Plan B provided that all single-sum distributions were to be calculated using the UP–1984 Mortality Table and an

interest rate equal to the lesser of 100% of the PBGC

1998–20 I.R.B.

interest rate for the date of distribution, or 6%. On

January 4, 1995, and effective on February 1, 1995,

Plan B was amended to provide that all single-sum

distributions are calculated using the applicable mortality table and the annual interest rate on 30-year

Treasury securities for the second full calendar

month preceding the calendar month that contains

the annuity starting date. Pursuant to paragraph

(d)(10)(iv) of this section, this amendment of Plan B

is not considered to reduce the accrued benefit of any

participant in violation of section 411(d)(6) merely

because of the replacement of the PBGC interest

rate. However, under paragraph (d)(10)(vi)(B) of

this section, the section 411(d)(6) relief provided in

paragraphs (d)(10)(iii) through (v) of this section

does not apply to a plan amendment that replaces an

interest rate other than the PBGC interest rate (or a

rate based on the PBGC interest rate). Therefore,

pursuant to paragraph (d)(10)(vi)(B) of this section,

to satisfy the requirements of section 411(d)(6), the

plan must provide that the single-sum distribution

payable to any participant must be no less than the

single-sum distribution calculated using the

UP–1984 Mortality Table and an interest rate of 6%,

based on the participant’s benefits under the plan accrued through January 31, 1995, and based on the

participant’s age at the annuity starting date.

Example 3. On December 31, 1994, Plan C, a

calendar year plan, provided that all single sum distributions were to be calculated using the UP–1984

Mortality Table and an interest rate equal to the

PBGC interest rate for January 1 of the plan year.

On March 1, 1995, and effective on July 1, 1995,

Plan C was amended to provide that all single-sum

distributions are calculated using the applicable

mortality table and the annual interest rate on 30year Treasury securities for August of the year before the plan year that contains the annuity starting

date. The plan amendment provides that each distribution with an annuity starting date after June 30,

1995, and before July 1, 1996, is calculated using

the 30-year Treasury rate for August of the year before the plan year that contains the annuity starting

date, or the 30-year Treasury rate for January of the

plan year that contains the annuity starting date,

whichever produces the larger benefit. Pursuant to

paragraph (d)(10)(v) of this section, the amendment

1998–20 I.R.B.

of Plan C is not considered to have reduced the accrued benefit of any participant in violation of section 411(d)(6).

Example 4. (a) Employer X maintains Plan D, a

calendar year plan. As of December 7, 1994, Plan D

provided for single-sum distributions to be calculated

using the PBGC interest rate as of the annuity starting date for distributions not greater than $25,000,

and 120% of that interest rate (but not an interest rate

producing a present value less than $25,000) for distributions over $25,000. Employer X wishes to delay

the effective date of the RPA ’94 rules for a year, and

to provide for an extended transition from the use of

the PBGC interest rate to the new applicable interest

rate under section 417(e)(3). On December 1, 1995,

and effective on January 1, 1996, Employer X

amends Plan D to provide that single-sum distributions are determined as the sum of—

(i) The single-sum distribution calculated based

on the applicable mortality table and the annual interest rate on 30-year Treasury securities for the first

full calendar month preceding the calendar month

that contains the annuity starting date; and

(ii) A transition amount.

(b) The amendment provides that the transition

amount for distributions in the years 1996–99 is a

transition percentage of the excess, if any, of the

amount that the single-sum distribution would have

been under the plan provisions in effect prior to this

amendment over the amount of the single sum described in paragraph (a)(i) of this Example 4. The

transition percentages are 80% for 1996, decreasing

to 60% for 1997, 40% for 1998 and 20% for 1999.

The amendment also provides that the transition

amount is zero for plan years beginning on or after

the year 2000. Pursuant to paragraphs (d)(10)(iii)

and (vi)(A) of this section, the amendment of Plan D

is not considered to have reduced the accrued benefit of any participant in violation of section

411(d)(6).

Example 5. On December 31, 1994, Plan E, a

calendar year plan, provided that all single sum distributions were to be calculated using the UP-1984

Mortality Table and an interest rate equal to the

PBGC interest rate for January 1 of the plan year.

On March 1, 1995, and effective on July 1, 1995,

Plan E was amended to provide that all single-sum

11

distributions are calculated using the applicable

mortality table and the annual interest rate on 30year Treasury securities for August of the year before the plan year that contains the annuity starting

date. The plan amendment provides that each distribution with an annuity starting date after June 30,

1995, and before July 1, 1996, is calculated using

the 30-year Treasury rate for August of the year before the plan year that contains the annuity starting

date, or the 30-year Treasury rate for November of

the plan year preceding the plan year that contains

the annuity starting date, whichever produces the

larger benefit. Pursuant to paragraphs (d)(10)(v)

and (vi)(C) of this section, the amendment of Plan E

is not considered to have reduced the accrued benefit of any participant in violation of section

411(d)(6).

Par. 3. In §1.417(e)–1T, paragraph (d)

is revised to read as follows:

§1.417(e)–1T Restrictions and

valuations of distributions from plans

subject to sections 401(a)(11) and 417.

(Temporary)

*

*

*

*

*

(d) For rules regarding the present

value of a participant’s accrued benefit

and related matters, see §1.417(e)–1(d).

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved March 30, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on April

3, 1998, 8:45 a.m., and published in the issue of the

Federal Register for April 7, 1998, 63 F.R. 16895)

May 18, 1998

Part IV. Items of General Interest

Notice of Proposed Rulemaking

Travel and Tour Activities of Tax

Exempt Organizations

REG–121268–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations clarifying when the

travel and tour activities of tax exempt organizations are substantially related to the

purposes for which exemption was

granted. These proposed regulations are

intended to augment the guidance that

currently exists with respect to travel

tours and the unrelated business income

tax.

DATES: Written comments and requests

for a public hearing must be received by

July 22, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–121268–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

hand delivered between the hours of 8

a.m. and 5 p.m. to: CC:DOM:CORP:R

(REG–121268–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution

Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the internet by selecting

the “Tax Regs” option on the IRS Home

Page, or by submitting comments directly

to the IRS internet site at http://www.irs.

ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

An organization generally exempt from

tax under section 501(a) of the Internal

Revenue Code (“Code”) must pay tax on

its unrelated business taxable income, as

defined in section 512. Section 512(a)(1)

May 18, 1998

defines unrelated business taxable income

(“UBTI”) as the gross income derived by

any organization from any unrelated trade

or business (as defined in section 513)

regularly carried on by the organization,

less the deductions which are directly

connected with the conduct of the trade or

business. Gross income from an unrelated trade or business and any deductions

directly connected to that trade or business are both computed in accordance

with the general income tax rules of chapter 1 of the Internal Revenue Code, subject to the modifications provided in section 512(b).

Section 513(a) generally defines an unrelated trade or business as any trade or

business the conduct of which is not substantially related (aside from the need of

an organization for income or funds or the

use it makes of the profits derived) to the

exercise or performance by the organization of its charitable, educational, or other

purpose or function constituting the basis

for its exemption under section 501.

A “trade or business” is defined in Section 1.513–1(b) of the Income Tax Regulations as having the same meaning it has

for purposes of section 162, and “generally includes any activity carried on for

the production of income from the sale of

goods or performance of services.” The

key test of whether an activity constitutes

a trade or business is whether the activity

was conducted with a profit motive. See

U.S. v. American Bar Endowment, 477

U.S. 105 (1986); Professional Insurance

Agents of Michigan v. Commissioner 726

F.2d 1097 (6th Cir. 1983); National Water

Well Association v. Commissioner, 92 T.C.

75 (1989). The regulations further provide that an activity conducted for the

production of income does not lose its

character as a business “merely because

[it is] carried on within a larger aggregate

of similar activities or within a larger

complex of other endeavors which may,

or may not, be related to the exempt purposes of the organization.” This “fragmentation rule,” as it is commonly

known, may result in different treatment

of related activities under the unrelated

business income tax.

Section 1.513–1(d)(2) of the Income

Tax Regulations provides that a trade or

business is “substantially related” to ex-

12

empt purposes only where the conduct of

the business activities has a substantial

causal relationship to the achievement of

the exempt purposes (other than through

the production of income) of the organization conducting the trade or business.

Thus, a trade or business is substantially

related for purposes of section 513 only if

the conduct of the trade or business contributes importantly to the accomplishment of the organization’s exempt purposes.

In recent years, taxpayers and Congress

have asked the IRS to publish guidance

addressing questions relating to the unrelated business income tax treatment of income generated from travel tours conducted by tax exempt organizations.

Although the IRS has issued a number of

revenue rulings addressing situations in

which tax exempt organizations sponsor

travel tours, most of these rulings have

analyzed whether an organization that offers travel tours as its primary activity can

qualify as a charitable or educational organization described in section 501(c)(3)

of the Code.

Rev. Rul. 67–327, 1967–2 C.B. 187,

holds that an organization whose purpose

is to arrange group tours for students and

faculty of a university in order to allow

them to travel abroad does not qualify for

exemption because the organization operates essentially as a commercial travel

agency. The ruling concludes that the organization’s activities are not “educational” as that term is defined in Treas.

Reg. § 1.501(c)(3)–1(d)(3)(i)(a), because

they do not provide instruction or training

of individuals for the purpose of improving or developing their capabilities.

In contrast, in Rev. Rul. 69–400, 1969–

2 C.B. 114, an organization that selects

students and faculty members interested

in a certain foreign history and culture

and enrolls them at foreign universities

and arranges for on-site tours conducted

by local scholars that complement classroom studies, is held to be exempt. Rev.

Rul. 69–400 distinguishes Rev. Rul. 67–

327 on the basis that the organization in

the later ruling is arranging for instruction

not just travel.

Rev. Rul. 70–534, 1970–2 C.B. 113,

describes an organization that conducts

travel study tours as its primary activity.

1998–20 I.R.B.

Tours are geared toward students, but others can take the tours as long as they participate in the mandatory study programs.

Organized study, taught by certified

teachers, is conducted five to six hours a

day, and a library of materials related to

the courses being taught is available.

Exams are given, each student is graded

and a state board of education allows

credit for a student’s participation in the

study tour program. The revenue ruling

concludes that the organization furthers

educational purposes because it performs

training and instruction for the purpose of

allowing individuals to improve and develop their capabilities, and is, therefore,

described in section 501(c)(3).

Rev. Rul. 77–366, 1977–2 C.B. 192,

concerns an organization that arranges

and conducts ocean cruises for ministers,

church members and their families for the

purpose of providing continuing education in an atmosphere supporting spiritual

renewal. The organization’s activities include lectures, discussions, workshops

and some shore activities that further

charitable purposes. However, because of

the extensive resources the organization

devotes to social and recreational programs, the scheduling of those programs

relative to the schedule for the exempt

purpose programs, and other facts and circumstances, the organization was held to

be also serving a substantial nonexempt

purpose and, therefore, not to qualify for

exemption as an organization described in

section 501(c)(3).

The Tax Court applied a similar analysis to an organization operating a mountain lodge when it held that the organization failed to qualify as a religious

organization described in section

501(c)(3). Although religious activities

were offered to guests in addition to a

wide range of recreational activities,

guests were not required to participate in

the religious activities, and the record

failed to show that the recreational activities were insubstantial. See The Schoger

Foundation v. Commissioner, 76 T.C. 380

(1981).

In contrast, Rev. Rul. 77–430, 1977–2

C.B. 194, holds that an organization conducting weekend retreats is furthering its

stated purpose of advancing religion. Individuals come to participate in a program

of seminars, lectures, prayer sessions and

meditation led by ministers and priests

1998–20 I.R.B.

that are scheduled on an hourly basis

throughout the day. Recreational activities are not scheduled, but are available to

participants during their limited free time.

Under these facts and circumstances, the

ruling holds that the facilities are being

used to advance religion and that recreational activities are incidental to the accomplishment of this purpose.

The revenue rulings all focus on the degree of educational or religious content

participants are expected to receive in

each travel program in determining

whether the activity serves an exempt

purpose. The same approach was taken in

the one ruling that has specifically addressed the application of the unrelated

business income tax to income generated

by travel tours. Rev. Rul. 78–43, 1978–1

C.B. 164, describes the travel tour activity

of a university alumni association. The

association’s program of approximately

ten tours per year is open to all current

members and their immediate families

and is planned with various travel agencies. Each travel agency pays a per person fee to the association. The tours do

not include any formal educational program and do not differ substantially from

commercially operated tours. Rev. Rul.

78–43 concludes that there is no causal

relationship between arranging the travel

tours described in the ruling and the

achievement of an exempt purpose. Accordingly, the ruling holds that the sale of

tours to members is an unrelated trade or

business within the meaning of section

513.

These proposed regulations are intended to augment the guidance that currently exists with respect to travel tours

and the unrelated business income tax.

The proposed regulations also provide additional guidance regarding the fragmentation rule and the distinctions that may

be necessary among different tours or activities that are part of a single organization’s travel program.

The IRS and Treasury are soliciting

comments on these proposed regulations.

In particular, because the IRS relies heavily on review of records to determine

whether an organization’s trade or business activities further an exempt purpose,

comments are requested on whether the

IRS should specify the types of records

organizations should keep to establish the

activity’s purpose.

13

Explanation of Provisions

The proposed regulations add a new

§1.513–7 providing that the determination of whether travel tour activities of tax

exempt organizations are substantially related to an organization’s exempt purposes is a question of facts and circumstances. The proposed regulations set

forth a series of examples to illustrate

how various facts and circumstances

would be analyzed.

Proposed Effective Date

These regulations are proposed to be

effective for taxable years beginning after

the date final regulations are published in

the Federal Register. For prior taxable

years, the IRS will continue to apply principles of existing law.

Special Analyses

It has been determined that this notice

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

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

chapter 5) does not apply to these regulations, and because the regulation does not

impose a collection of information on

small entities, the Regulatory Flexibility

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

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

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

impact on small business.

Comments and Requests for a

Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying. A public

hearing may be scheduled if requested in

writing by a person that timely submits

written comments. If a public hearing is

scheduled, notice of the date, time, and

place for the hearing will be published in

the Federal Register.

May 18, 1998

Drafting Information

The principal author of these regulations is Robin Ehrenberg, Office of Associate Chief Counsel (Employee Benefits

and Exempt Organizations). However,

other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.513–7 is added to

read as follows:

§ 1.513-7 Travel and tour activities of tax

exempt organizations.

(a) Travel tour activities that constitute

a trade or business, as defined in § 1.5131(b), and that are not substantially related

to the purposes for which exemption has

been granted to the organization constitute an unrelated trade or business with

respect to that organization. Whether

travel tour activities conducted by an organization are substantially related to the

organization’s exempt purpose is determined by looking at all relevant facts and

circumstances. Section 513(c) and

§ 1.513–1(b) also apply to travel tour activity. Application of the rules of section

513(c) and § 1.513–1(b) may result in different treatment for individual tours within

an organization’s travel tour program.

(b) Examples. The provisions of this

section are illustrated by the following examples:

Example 1. O, a university alumni association, is

exempt from federal income tax under section

501(a) as an educational organization described in

section 501(c)(3). As part of its activities, O operates a travel tour program. The program is open to

all current members of O and their guests. O works

with travel agencies to schedule approximately 10

tours annually to various destinations around the

world. Members of O pay $X to the organizing

travel agency to participate in a tour. The travel

agency pays O a per person fee for each participant.

Although the literature advertising the tours encourages O’s members to continue their lifelong learning

by joining the tours, and a faculty member of O’s related university is invited to join the tour as a guest

of the alumni association, none of the tours includes

any scheduled instruction or curriculum related to

the destinations being visited. By arranging to make

May 18, 1998

travel tours available to its members, O is not contributing importantly to the accomplishment of its

educational purpose. Rather, O’s program is designed to generate revenues for O by regularly offering its members travel services. Accordingly, O’s

tour program is an unrelated trade or business within

the meaning of section 513(a) of the Code.

Example 2. N is an organization formed for the

purpose of educating individuals about the geography and culture of the United States. It is exempt

from federal income tax under section 501(a) as an

educational and cultural organization described in

section 501(c)(3). N engages in a number of activities to accomplish its purposes, including offering

courses and publishing periodicals and books. As

one of its activities, N conducts study tours to national parks and other locations within the United

States. The study tours are conducted by teachers

and other education professionals. The tours are

open to all who agree to participate in the required

study program. The study program consists of community college level courses related to the location

being visited by the tour. While the students are on

the tour, five or six hours per day are devoted to organized study, preparation of reports, lectures, instruction and recitation by the students. Each tour

group brings along a library of material related to

the subject being studied on the tour. Examinations

are given at the end of each tour and N’s state board

of education awards academic credit for tour participation. Because the tours offered by N include a

substantial amount of required study, lectures, report

preparation, examinations and qualify for academic

credit, the tours clearly further N’s educational purpose. Accordingly, N’s tour program is not an unrelated trade or business within the meaning of section

513(a) of the Code.

Example 3. R is a section 501(c)(4) social welfare organization devoted to advocacy on a particular issue. On a regular basis throughout the year, R

organizes a travel tour for its members to Washington, D.C.. The tours are priced to produce a profit

for R. While in Washington, the members follow a

schedule according to which they spend substantially all of their time over several days attending

meetings with legislators and government officials

and receiving briefings on policy developments related to the issue that is R’s focus. Bringing members to Washington to participate in advocacy on

behalf of the organization and learn about developments relating to the organization’s principal focus

is substantially related to R’s social welfare purpose.

Therefore, R’s operation of the travel tours does not

constitute an unrelated trade or business.

Example 4. S is a membership organization

formed to foster cultural unity and to educate X

Americans about X, their country of origin. It is exempt from federal income tax under section 501(a)

and is described in section 501(c)(3) as an educational and cultural organization. Membership in S is

open to all Americans interested in the X heritage.

As part of its activities, S sponsors a program of

travel tours to X. All of S’s tours are priced to produce a profit for S. The tours are divided into two

categories. Category A tours are trips to X that are

designed to immerse participants in the X history,

culture and language. The itinerary is designed to

have participants spend substantially all of their time

while in X receiving instruction on the X language,

history and cultural heritage. Destinations are se-

14

lected because of their historical or cultural significance or because of instructional resources they

offer. Category B tours are also trips to X, but rather

than offering scheduled instruction, participants are

given the option of taking guided tours of various X

locations included in their itinerary. Other than the

optional guided tours, Category B tours offer no instruction or curriculum. Even if participants take all

of the tours offered, they have a substantial amount

of time free to pursue their own interests once in X.

Destinations of principally recreational interest,

rather than historical or cultural interest, are regularly included on Category B tour itineraries. Based

on the facts and circumstances, sponsoring Category

A tours is an activity substantially related to S’s exempt purposes, and does not constitute an unrelated

trade or business with respect to S. However, sponsoring Category B tours does not contribute importantly to S’s accomplishment of its exempt purposes

and is designed to generate a profit for S. Therefore,

sponsoring the Category B tours constitutes an unrelated trade or business with respect to S.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on April

20, 1998, 2:48 p.m., and published in the issue of the

Federal Register for April 23, 1998, 63 F.R. 20156)

Notice of Proposed Rulemaking

S Corporation Subsidiaries

REG–251698–96

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the treatment of corporate subsidiaries of S corporations. The proposed regulations interpret the rules added to the Internal

Revenue Code by section 1308 of the

Small Business Job Protection Act of

1996. The proposed regulations affect S

corporations and their subsidiaries.

DATES: Written comments must be received by July 21, 1998.

ADDRESSES: Send submissions to

CC:DOM:CORP:R (REG–251698–96),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be

hand delivered between the hours of 8

a.m. and 5 p.m. to: CC:DOM:CORP:R

(REG–251698–96), Courier’s Desk, In-

1998–20 I.R.B.

ternal Revenue Service, 1111 Constitution

Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting

the “Tax Regs” option on the IRS Home

Page, or by submitting comments directly

to the IRS Internet site at http://www.irs.

ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations,

Deanna L. Walton, (202) 622-3050 (Subchapter S) or Lee A. Dean, (202) 6227540 (Subchapter C); concerning submissions, Michael Slaughter, (202) 622-7190

(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained

in this notice of proposed rulemaking

have been submitted to the Office of

Management and Budget for review in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)).

Comments on the collections of information should be sent to the Office of

Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with

copies to the Internal Revenue Service,

Attn: IRS Reports Clearance Officer,

T:FP, Washington, DC 20224. Comments

on the collections of information should

be received by June 22, 1998. Comments

are specifically requested concerning:

Whether the proposed collections of information are necessary for the proper performance of the functions of the Internal

Revenue Service, including whether the

collections will have a practical utility;

The accuracy of the estimated burden

associated with the proposed collections

of information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collections of information may

be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and

costs of operation, maintenance, and purchase of services to provide information.

1998–20 I.R.B.

The collections of information in these

proposed regulations are in §§1.1361–

3(a)(1), 1.1361–3(b)(1), 1.1361–5(a)(2),

and 1.1362–8. The collections of information are required to determine the manner in which a corporate subsidiary of an

S corporation will be treated under the Internal Revenue Code.

These collections of information are required to obtain a benefit. The likely respondents and/or recordkeepers are small

businesses or organizations, businesses or

other for-profit institutions, and farms.

Estimated total annual reporting/recordkeeping burden: 10,110 hours

Estimated average annual burden per respondent/recordkeeper: 57 minutes

Estimated number of respondents/recordkeepers: 10,660

Estimated annual frequency of responses:

On occasion

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This document contains proposed

amendments to the Income Tax Regulations (26 CFR Part 1) relating to S corporations and their subsidiaries under sections 1361 and 1362 of the Internal

Revenue Code (Code). Section 1308 of

the Small Business Job Protection Act of

1996, Public Law 104–188, 110 Stat.

1755 (the Act), modified section 1361 of

the Code to permit an S corporation (1) to

own 80 percent or more of the stock of a

C corporation, and (2) to elect to treat a

wholly owned subsidiary as a qualified

subchapter S subsidiary (QSSS). In Notice 97–4 (1997–2 I.R.B. 24), the IRS announced its intention to issue regulations

under section 1308 of the Act and requested comments on certain issues. Section 1601 of the Taxpayer Relief Act of

1997, Public Law 105–34, 111 Stat. 788

(the 1997 Act), made a technical correction to section 1361 to provide regulatory

15

authority regarding the consequences of

an election to be a QSSS.

Explanation of Provisions

Overview

Prior law prohibited an S corporation

from owning 80 percent or more of the

stock of another corporation. The Act repealed section 1362(b)(2)(A) of the Internal Revenue Code (Code), thereby allowing an S corporation to own 80 percent or

more of the stock of a C corporation. The

Act also added section 1504(b)(8) to the

Code to prevent an S corporation from

joining in the filing of a consolidated return with its affiliated C corporations. A

C corporation subsidiary of an S corporation, however, may file a consolidated return with its affiliated C corporations.

See H.R. Conf. Rep. No. 737, 104th

Cong., 2d Sess. 224 (1996).

New section 1361(b)(3)(B) defines the

term qualified subchapter S subsidiary as

any domestic corporation that is not an ineligible corporation if, (1) an S corporation holds 100 percent of the stock of the

corporation, and (2) that S corporation

elects to treat the subsidiary as a QSSS.

Except as otherwise provided in regulations, a corporation for which a QSSS

election is made is not treated as a separate corporation, and all assets, liabilities,

and items of income, deduction, and

credit of the QSSS are treated as assets, liabilities, and items of income, deduction,

and credit of the parent S corporation.

The legislative history accompanying section 1361(b)(3) indicates that, when the

parent corporation makes the election, the

subsidiary is deemed to have liquidated

under sections 332 and 337 immediately

before the election is effective. See S.

Rep. No. 281, 104th Cong., 2d Sess. 53

(1996); H.R. Rep. No. 586, 104th Cong.,

2d Sess. 89 (1996). However, the legislative history accompanying the technical

correction made by the 1997 Act indicates

that regulations may provide exceptions

to that general rule. See S. Rep. No. 33,

105th Cong., 1st Sess. 320 (1997).

Section 1361(b)(3)(C) provides that

any QSSS that ceases to meet the requirements of section 1361(b)(3)(B) will be

treated as a new corporation acquiring all

of its assets (and assuming all of its liabilities) immediately before the cessation

from its S corporation parent in exchange

May 18, 1998

for the subsidiary’s stock. Section

1361(b)(3)(D) provides that a QSSS

whose election has terminated (or a successor corporation) may not make an S

election or have a QSSS election made

with respect to it before its fifth taxable

year that begins after the first taxable year

for which the termination is effective, unless the Secretary consents to the election.

Under current and prior law, the S election of a corporation with subchapter C

corporation earnings and profits terminated if that S corporation received passive investment income, including dividends, in excess of 25 percent of gross

receipts for three consecutive years. Section 1362(d)(3)(E) modifies that general

rule by excluding dividends from passive

investment income to the extent that the

dividends are attributable to the active

conduct of a trade or business of a C corporation in which the S corporation has an

80 percent or greater ownership interest.

Neither the Act nor the legislative history

provides rules for determining the attribution of dividends to an active trade or

business.

QSSS Formation

Under the proposed regulations, an S

corporation makes a QSSS election with

respect to an eligible subsidiary by filing

a form to be developed by the IRS prior to

the time these regulations become final.

This proposes to change the temporary

election procedure provided in Notice 97–

4, which provides that a parent S corporation files a completed Form 966, Corporate Dissolution and Liquidation (with

some modifications), to make a QSSS

election. Until these proposed regulations

are finalized, taxpayers should continue

to use the temporary election procedure in

Notice 97–4 to make QSSS elections.

The proposed regulations also provide

that the effective date of a QSSS election

may be up to 2 months and 15 days prior

to the day the QSSS election is made.

This is a slight change from the 75 day

retroactive period provided in Notice 97–

4, but is consistent with the general time

period for making S elections. Unlike the

S election, however, a QSSS election

does not need to be made within 2 months

and 15 days of the beginning of a taxable

year. A similar retroactive period is provided for revocations of QSSS status. In

addition, a taxpayer may choose a

May 18, 1998

prospective effective date for a QSSS

election or revocation, so long as the date

selected is not more than 12 months after

the date the election or revocation is

made.

The proposed regulations provide that,

when an S corporation makes a valid

QSSS election with respect to a subsidiary, the subsidiary is deemed to have

liquidated into the parent. The tax treatment of this liquidation, alone or in the

context of any larger transaction (for example, a transaction that also includes the

acquisition of the subsidiary’s stock), is

generally determined under all relevant

provisions of the Code and general principles of tax law, including the step transaction doctrine. However, a special transition rule applies to certain elections

effective prior to the date that is 60 days

after publication of final regulations in the

Federal Register. The transition rule indicates the recognition of special concerns

that may have arisen as a result of transactions entered into by taxpayers relying on

the legislative history to the Act and without applying the step transaction doctrine

to the acquisition of the subsidiary’s stock

followed by a QSSS election. The IRS requests comments concerning other transactions occurring during the transitional

period for which relief from the effect of

application of the step transaction doctrine

may be warranted.

Special rules may apply when a QSSS

election is made following the transfer of

one S corporation’s stock to another S

corporation. For example, if an S corporation acquires the stock of another S corporation in a transaction in which the acquiring S corporation’s basis in the stock

received is determined by reference to the

transferor’s basis and makes a QSSS election with respect to the other corporation

effective on the day of acquisition, any

losses disallowed under section 1366(d)

with respect to a former shareholder of

the QSSS will be available to that shareholder as a shareholder of the acquiring S

corporation. Furthermore, when stock in

an S corporation is transferred to another

S corporation and a QSSS election is

made with respect to the subsidiary effective on the day of acquisition, the S election of the former corporation terminates

at the same moment as the QSSS election

becomes effective. This rule ensures that

the former S corporation is not treated as

16

a C corporation for any period solely because of the transfer.

Generally, the proposed regulations

treat the liquidation as occurring at the

close of the day before the QSSS election

is effective. Under this rule, if a parent

corporation makes an S election effective

on the same date as a QSSS election with

respect to a subsidiary, the deemed liquidation occurs at a time when the parent

corporation is still a C corporation. A

QSSS election satisfies the requirement of

adopting a plan of liquidation under section 332.

Following the deemed liquidation, the

QSSS is not treated as a separate corporation (except as otherwise provided in the

regulations), and all assets, liabilities, and

items of income, deduction, and credit are

treated as those of the S corporation. Accordingly, all such items must be reported

on the S corporation’s return required to

be filed under section 6037. A special

rule applies for the calculation of these

items where either an S corporation or its

QSSS is a bank (as defined in section

581). This special rule was first announced in Notice 97–5 (1997–2 I.R.B.

25). Until these proposed regulations are

finalized, taxpayers should continue to

follow Notice 97–5.

QSSS Termination

The QSSS status of a corporation continues until it terminates. The regulations

specify the date of termination for specific terminating events. Section 1361(b)(3)(D) provides that, if a QSSS election

terminates, the corporation is treated as a

new corporation acquiring all of its assets

(and assuming all of its liabilities) from

the S corporation in exchange for stock of

the new corporation immediately before

the termination. The tax treatment of this

transaction or of a larger transaction that

includes this transaction will be determined under the Code and general principles of tax law, including the step transaction doctrine. Examples are provided to

illustrate situations in which the formation of the new corporation will qualify as

a nonrecognition transaction under section 351. The proposed regulations also

provide that, under certain circumstances,

relief may be available under the standards established under section 1362(f)

for the inadvertent termination of an S

election.

1998–20 I.R.B.

Section 1361(b)(3)(D) provides that a

corporation whose QSSS election has terminated (or a successor corporation) may

not make an S election or have a QSSS

election made with respect to it for five

taxable years following the termination

without the consent of the Secretary. The

proposed regulations provide that, without requesting the Secretary’s consent, a

corporation may make an election to be

treated as an S corporation or may have a

QSSS election made with respect to it before the expiration of the five-year period

under certain circumstances. Consent is

not required if an otherwise valid S election or QSSS election is made for the former QSSS (or its successor corporation)

effective immediately following the disposition of its stock. Thus, the proposed

regulations allow corporations to move

freely between QSSS and S corporation

status, provided there is no intervening

period for which the corporation is treated

as a C corporation.

C Corporation Subsidiaries

The proposed regulations also provide

rules relating to certain C corporation

subsidiaries held by S corporations.

Under section 1362(d)(3)(E), dividends

received by an S corporation from a C

corporation in which the S corporation

has an 80 percent or greater ownership

interest are not treated as passive investment income for purposes of sections

1362 and 1375 to the extent the dividends

are attributable to the earnings and profits

of the C corporation derived from the active conduct of a trade or business. The

proposed regulations provide guidance

for attributing dividends to the active

conduct of a trade or business. Special

rules apply to dividends distributed by

the common parent of a consolidated

group.

Under the proposed regulations, earnings and profits of a C corporation derived from the active conduct of a trade or

business are the earnings and profits of

the corporation derived from activities

that would not produce passive investment income under section 1362(d)(3) if

the C corporation were an S corporation.

The proposed regulations provide a safe

harbor under which the corporation may

determine the amount of the active earnings and profits by comparing the corporation’s gross receipts derived from non-

1998–20 I.R.B.

passive investment income-producing activities with the corporation’s total gross

receipts in the year the earnings and profits are produced. If less than 10 percent

of the C corporation’s earnings and profits

for a taxable year are derived from activities that would produce passive investment income, all earnings and profits produced by the corporation during the

taxable year are considered active earnings and profits.

The proposed regulations also provide

that a C corporation may treat all earnings

and profits accumulated by the corporation prior to the time an S corporation

held stock meeting the requirements of

section 1504(a)(2) as active earnings and

profits in the same proportion as the C

corporation’s active earnings and profits

for the three taxable years ending prior to

the time when the S corporation acquired

80 percent of the C corporation bear to the

C corporation’s total earnings and profits

for those three taxable years. Provisions

also address the allocation of distributions

from current or accumulated earnings and

profits.

Proposed Effective Date

The regulations are proposed to be effective on the date that final regulations

are published in the Federal Register.

However, the IRS is considering whether

certain provisions should be made

retroactive. The IRS requests comments

concerning whether certain provisions

should be made effective for taxable years

beginning on or after January 1, 1997.

Special Analyses

It has been determined that this notice

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

12866. Therefore, a regulatory assessment is not required. Pursuant to section

7805(f) of the Internal Revenue Code,

this notice of proposed rulemaking will

be submitted to the Chief Counsel for

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

small business. It is hereby certified that

the collections of information contained

in these regulations will not have a significant economic impact on a substantial

number of small businesses. This certification is based on the fact that the economic burden imposed on taxpayers by

17

the collections of information and recordkeeping requirements of these regulations is insignificant. For example, the

estimated average annual burden per respondent is less than one hour. Furthermore, most taxpayers will only have to

respond to the requests for information

contained in §§1.1361–3(b)(1) and

1.1361–5(a)(2) one time in the life of the

corporation. Therefore, a Regulatory

Flexibility Analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is not

required.

Comments and Public Hearing

Before these proposed regulations are

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

eight (8) copies) that are timely submitted to the IRS. All comments will be

available for public inspection and

copying.

A public hearing will be scheduled in

the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

The IRS recognizes that persons outside

the Washington, DC, area also may wish

to testify at the public hearing through

teleconferencing. Requests to include

teleconferencing sites must be received

by June 22, 1998. If the IRS receives

sufficient indications of interest to warrant teleconferencing to a particular city,

and if the IRS has teleconferencing facilities available in that city on the date the

public hearing is to be scheduled, the IRS

will try to accommodate the requests.

The IRS will publish the time and date

of the public hearing and the locations of

any teleconferencing sites in an announcement in the Federal Register.

Drafting Information

The principal authors of these proposed

regulations are Deanna L. Walton, Office

of the Assistant Chief Counsel (Passthroughs and Special Industries); and Lee

A. Dean, Office of the Assistant Chief

Counsel (Corporate). However, other

personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

May 18, 1998

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Amend §1.1361–0 as follows:

1. Revise the introductory text.

2. Remove the entry for §1.1361–

1(d)(3).

3. Add entries for §§1.1361–2,

1.1361–3, 1.1361–4, 1.1361–5, and

1.1361–6.

The revisions and additions read as follows:

§1.1361–0 Table of contents.

This section lists captions contained in

§§1.1361–1, 1.1361–2, 1.1361–3,

1.1361–4, 1.1361–5, and 1.1361–6.

*

*

*

*

*

§1.1361–2 Definitions relating to S

corporation subsidiaries.

(a) In general.

(b) Stock treated as held by S corporation.

(c) Examples.

§1.1361–3 QSSS election.

(a) Time and manner of making election.

(1) In general.

(2) Time of making election.

(3) Effective date of election.

(4) Example.

(5) Extension of time for making a QSSS

election.

(b) Revocation of QSSS election.

(1) Manner of revoking QSSS election.

(2) Effective date of revocation.

(3) Revocation after termination.

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored.

(1) In general.

(2) Liquidation of subsidiary.

(3) Treatment of banks.

(i) In general.

(ii) Examples.

(4) Treatment of stock of QSSS.

(5) Transitional relief.

(i) General rule.

(ii) Examples.

(b) Timing of the liquidation.

(1) In general.

(2) Acquisitions.

(3) Coordination with section 338 election.

May 18, 1998

(c) Carryover of disallowed losses and

deductions.

(d) Examples.

§1.1361–5 Termination of QSSS election.

(a) In general.

(1) Effective date.

(2) Information to be provided upon termination of QSSS election by failure

to qualify as a QSSS.

(3) Examples.

(b) Effect of termination of QSSS election.

(1) Formation of new corporation.

(2) Carryover of disallowed losses and

deductions.

(3) Examples.

(c) Inadvertent terminations.

(d) Election after QSSS termination.

(1) In general.

(2) Exception.

(3) Examples.

§1.1361–6 Effective date.

Par. 3. Amend §1.1361–1 as follows:

1. Revise paragraph (b)(1)(i).

2. Remove paragraph (d)(1)(i).

3. Redesignate paragraphs (d)(1)(ii),

(d)(1)(iii), (d)(1)(iv), and (d)(1)(v) as

paragraphs (d)(1)(i), (d)(1)(ii), (d)(1)(iii),

and (d)(1)(iv), respectively.

4. Revise newly designated paragraph

(d)(1)(i).

5. Remove paragraph (d)(3).

6. Revise the first sentence of paragraph (e)(1).

The revisions read as follows:

§1.1361–1 S corporation defined.

*

*

*

*

*

(b) * * *

(1) * * *

(i) More than 75 shareholders (35 for

taxable years beginning before January 1,

1997);

* * * * *

(d) * * *

(1) * * *

(i) For taxable years beginning on or

after January 1, 1997, a financial institution that uses the reserve method of accounting for bad debts described in section 585 (for taxable years beginning

prior to January 1, 1997, a financial institution to which section 585 applies (or

would apply but for section 585(c)) or to

which section 593 applies);

*

*

*

18

*

*

(e) * * *

(1) General rule. A corporation does

not qualify as a small business corporation if it has more than 75 shareholders

(35 for taxable years beginning prior to

January 1, 1997). * * *

*

*

*

*

*

Par. 4. Add §§ 1.1361–2, 1.1361–3,

1.1361–4, 1.1361–5, and 1.1361–6 to

read as follows:

§1.1361–2 Definitions relating to S

corporation subsidiaries.

(a) In general. The term qualified subchapter S subsidiary (QSSS) means any

domestic corporation that is not an ineligible corporation (as defined in section

1361(b)(2) and the regulations thereunder), if—

(1) 100 percent of the stock of such

corporation is held by an S corporation;

and

(2) The S corporation properly elects

to treat the subsidiary as a QSSS under

§1.1361–3.

(b) Stock treated as held by S corporation. For purposes of satisfying the 100

percent stock ownership requirement in

section 1361(b)(3)(B)(i) and paragraph

(a)(1) of this section, stock of a corporation is treated as held by an S corporation

if the S corporation is the owner of that

stock for federal income tax purposes.

(c) Examples. The following examples

illustrate the application of this section:

Example 1. X, an S corporation, owns 100 percent of Y, a corporation for which a valid QSSS election is in effect for the taxable year. Y owns 100 percent of Z, a corporation otherwise eligible for QSSS

status. X may elect to treat Z as a QSSS under section 1361(b)(3)(B)(ii).

Example 2. Assume the same facts as in Example

1, except that Y is a business entity that is disregarded as an entity separate from its owner under

§301.7701–2(c)(2) of this chapter. X may elect to

treat Z as a QSSS.

Example 3. Assume the same facts as in Example

1, except that Y owns 50 percent of Z, and X owns

the other 50 percent. X may elect to treat Z as a

QSSS.

Example 4. Assume the same facts as in Example

1, except that Y is a C corporation. Although Y is a

domestic corporation that is otherwise eligible to be

a QSSS, no QSSS election has been made for Y.

Thus, X is not treated as holding the stock of Z.

Consequently, X may not elect to treat Z as a QSSS.

§1.1361–3 QSSS election.

(a) Time and manner of making election—(1) In general. Except as provided

1998–20 I.R.B.

in section 1361(b)(3)(D) and §1.1361–

5(d) (five-year prohibition on re-election), an S corporation may elect to treat

an eligible subsidiary as a QSSS by filing

a completed form to be prescribed by the

Internal Revenue Service. The election

form must be signed by a person authorized to sign the S corporation’s return required to be filed under section 6037 and

must be submitted to the service center

where the subsidiary filed its most recent

tax return (if applicable). If an S corporation forms a subsidiary and makes a valid

QSSS election (effective upon the date of

the subsidiary’s formation) for the subsidiary, the election should be submitted

to the service center where the S corporation filed its most recent return.

(2) Time of making election. A QSSS

election may be made by the S corporation parent at any time during the taxable

year.

(3) Effective date of election. A QSSS

election will be effective on the date specified on the election form or on the date

the election form is filed if no date is

specified. The effective date specified on

the form can not be more than 2 months

and 15 days prior to the date of filing and

can not be more than 12 months after the

date of filing. For this purpose, the definition of the term “month” found in

§1.1362–6(a)(2)(ii)(C) applies. If an

election form specifies an effective date

more than 2 months and 15 days prior to

the date on which the election form is

filed, it will be effective 2 months and 15

days prior to the date it is filed. If an election form specifies an effective date more

than 12 months after the date on which

the election is filed, it will be effective 12

months after the date it is filed. The corporation for which the QSSS election is

made must meet all the requirements of

section 1361(b)(3)(B) at the time the election is made and for all periods for which

the election is to be effective.

(4) Example. The following example

illustrates the application of paragraph

(a)(3) of this section:

Example. X has been a calendar year S corporation engaged in a trade or business for several years.

X acquires the stock of Y, a calendar year C corporation, on April 1, 1998. On August 10, 1998, X

makes an election to treat Y as a QSSS. Unless otherwise specified on the election form, the election

will be effective as of August 10, 1998. If specified

on the election form, the election may be effective

on some other date that is not more than 2 months

1998–20 I.R.B.

and 15 days prior to August 10, 1998, and not more

than 12 months after August 10, 1998.

(5) Extension of time for making a

QSSS election. An extension of time to

make a QSSS election may be available

under the procedures applicable under

§§301.9100–1 and 301.9100–3 of this

chapter.

(b) Revocation of QSSS election—(1)

Manner of revoking QSSS election. An S

corporation may revoke a QSSS election

under section 1361 by filing a statement

with the service center where the S corporation’s most recent tax return was properly filed. The revocation statement must

include the names, addresses, and taxpayer identification numbers of both the

parent S corporation and the QSSS. The

statement must be signed by a person authorized to sign the S corporation’s return

required to be filed under section 6037.

(2) Effective date of revocation. The

revocation of a QSSS election is effective

on the date specified on the revocation

statement or on the date the revocation

statement is filed if no date is specified.

The effective date specified on the revocation statement can not be more than 2

months and 15 days prior to the date on

which the revocation statement is filed

and can not be more than 12 months after

the date on which the revocation statement is filed. If a revocation statement

specifies an effective date more than 2

months and 15 days prior to the date on

which the statement is filed, it will be effective 2 months and 15 days prior to the

date it is filed. If a revocation statement

specifies an effective date more than 12

months after the date on which the statement is filed, it will be effective 12

months after the date it is filed.

(3) Revocation after termination. A revocation may not be made after the occurrence of an event that renders the subsidiary ineligible for QSSS status under

section 1361(b)(3)(B).

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored—(1) In

general. Except as otherwise provided in

paragraph (a)(3) of this section, for federal tax purposes—

(i) A corporation which is a QSSS shall

not be treated as a separate corporation;

and

(ii) All assets, liabilities, and items of

income, deduction, and credit of a QSSS

19

shall be treated as assets, liabilities, and

items of income, deduction, and credit of

the S corporation.

(2) Liquidation of subsidiary. If an S

corporation makes a valid QSSS election

with respect to a subsidiary, the subsidiary is deemed to have liquidated into

the S corporation. Except as provided in

paragraph (a)(5) of this section, the tax

treatment of the liquidation or of a larger

transaction that includes the liquidation

will be determined under the Internal

Revenue Code and general principles of

tax law, including the step transaction

doctrine. Thus, for example, if an S corporation forms a subsidiary and makes a

valid QSSS election (effective upon the

date of the subsidiary’s formation) for the

subsidiary, there will be no deemed liquidation of the new subsidiary. Instead, the

corporation will be deemed to be a QSSS

from its inception. For purposes of section 332, the making of a QSSS election

satisfies the requirement of adopting a

plan of liquidation.

(3) Treatment of banks—(i) In general.

If an S corporation is a bank, or if an S

corporation makes a valid QSSS election

for a subsidiary that is a bank, any special

rules applicable to banks under the Internal Revenue Code continue to apply separately to the bank parent or bank subsidiary as if the deemed liquidation of any

QSSS under paragraph (a)(2) of this section had not occurred. For any QSSS that

is a bank, however, all assets, liabilities,

and items of income, deduction, and credit

of the QSSS, as determined in accordance

with the special bank rules, are treated as

assets, liabilities, and items of income, deduction, and credit of the S corporation.

For purposes of this paragraph (a)(3)(i),

the term “bank” has the same meaning as

in section 581.

(ii) Examples. The following examples illustrate the application of this paragraph (a)(3):

Example 1. X, an S corporation, is a bank as defined in section 581. X owns 100 percent of Y and Z,

corporations for which valid QSSS elections are in

effect. Y is a bank as defined in section 581, and Z is

not a financial institution. Pursuant to paragraph

(a)(3)(i) of this section, any special rules applicable

to banks under the Internal Revenue Code continue

to apply separately to X and Y and do not apply to Z.

Thus, for example, section 265(b), which provides

special rules for interest expense deductions of

banks, applies separately to X and Y. That is, X and

Y each must make a separate determination under

section 265(b) of interest expense allocable to tax-

May 18, 1998

exempt interest, and no deduction is allowed for that

interest expense.

Example 2. X, an S corporation, is a bank holding company and thus is not a bank as defined in

section 581. X owns 100 percent of Y, a corporation

for which a valid QSSS election is in effect. Y is a

bank as defined in section 581. Pursuant to paragraph (a)(3)(i) of this section, any special rules applicable to banks under the Internal Revenue Code

continue to apply to Y and do not apply to X. However, all of Y’s assets, liabilities, and items of income, deduction, and credit, as determined in accordance with the special bank rules, are treated as

those of X. Thus, for example, section 582(c), which

provides special rules for sales and exchanges of

debt by banks, applies only to sales and exchanges

by Y. However, any gain or loss on such a transaction by Y that is considered ordinary income or ordinary loss pursuant to section 582(c) is treated as ordinary income or ordinary loss of X.

(4) Treatment of stock of QSSS. Except for purposes of section 1361(b)(3)(B)(i) and §1.1361–2(a)(1), the stock

of a QSSS shall be disregarded for all federal tax purposes.

(5) Transitional relief—(i) General

rule. If an S corporation and another corporation (the related corporation) are persons specified in section 267(b) prior to

an acquisition by the S corporation of

some or all of the stock of the related corporation followed by a QSSS election for

the related corporation, the step transaction doctrine will not apply to determine

the tax consequences of the acquisition.

This paragraph (a)(5) shall apply to QSSS

elections effective prior to the date that is

60 days after publication of final regulations in the Federal Register.

(ii) Examples. The following examples illustrate the application of this paragraph (a)(5):

Example 1. Individual A owns 100 percent of the

stock of X, an S corporation. X owns 79 percent of

the stock of Y, a solvent corporation, and A owns the

remaining 21 percent. On May 4, 1998, A contributes its Y stock to X in exchange for X stock. X

makes a QSSS election with respect to Y effective

immediately following the transfer. The liquidation

described in paragraph (a)(2) of this section is respected as an independent step separate from the

stock acquisition, and the tax consequences of the

liquidation are determined under sections 332 and

337. The contribution by A of the Y stock qualifies

under section 351, and no gain or loss is recognized

by A, X, or Y.

Example 2. Individual A owns 100 percent of the

stock of two solvent S corporations, X and Y. On

May 4, 1998, A contributes the stock of Y to X. X

makes a QSSS election with respect to Y immediately following the transfer. The liquidation described in paragraph (a)(2) of this section is respected as an independent step separate from the

stock acquisition, and the tax consequences of the

May 18, 1998

liquidation are determined under sections 332 and

337. The contribution by A of the Y stock to X qualifies under section 351, and no gain or loss is recognized by A, X, or Y. Y is not treated as a C corporation for any period solely because of the transfer of

its stock to X, an ineligible shareholder. See

§1.1362–2(b)(4).

(b) Timing of the liquidation—(1) In

general. Except as otherwise provided in

paragraphs (b)(2) or (b)(3) of this section,

the liquidation described in paragraph

(a)(2) of this section occurs at the close of

the day before the QSSS election is effective. Thus, for example, if a C corporation elects to be treated as an S corporation and makes a QSSS election (effective

the same date as the S election) with respect to a subsidiary, the liquidation occurs immediately before the S election becomes effective, while the S electing

parent is still a C corporation.

(2) Acquisitions. If an S corporation

does not own 100 percent of the stock of

the subsidiary on the day before the QSSS

election is effective, the liquidation described in paragraph (a)(2) of this section

occurs immediately after the time at

which the S corporation first owns 100

percent of the stock.

(3) Coordination with section 338

election. An S corporation that makes a

qualified stock purchase of a target may

make an election under section 338 with

respect to the acquisition if it meets the

requirements for the election, and may

make a QSSS election with respect to the

target. If an S corporation makes an election under section 338 with respect to a

subsidiary acquired in a qualified stock

purchase, a QSSS election made with respect to that subsidiary is not effective before the day after the acquisition date

(within the meaning of section 338(h)(2)).

If the QSSS election is effective on the

day after the acquisition date, the liquidation under paragraph (a)(2) of this section

occurs immediately after the deemed

asset purchase by the new target corporation under section 338. If an S corporation makes an election under section 338

(without a section 338(h)(10) election)

with respect to a target, the target must

file a final or deemed sale return as a C

corporation reflecting the deemed sale.

See §1.338–1(e).

(c) Carryover of disallowed losses and

deductions. If an S corporation (S1) acquires the stock of another S corporation

20

(S2) in a transaction in which the basis of

the S2 stock is determined in whole or in

part by reference to the transferor’s basis,

and S1 makes a QSSS election with respect to S2 effective on the day of the acquisition, any loss or deduction disallowed under section 1366(d) with respect

to a former shareholder of S2 is available

to that shareholder as a shareholder of S1.

Thus, a loss or deduction of a shareholder

of S2 disallowed prior to or during the

taxable year of the transaction is treated

as incurred by S1 with respect to that

shareholder if the shareholder is a shareholder of S1 after the transaction.

(d) Examples. The following examples illustrate the application of this section:

Example 1. X, an S corporation, owns 100 percent of the stock of Y, a C corporation. On June 2,

1998, X makes a valid QSSS election for Y, effective

June 2, 1998. Assume that, under general principles

of tax law, including the step transaction doctrine,

X’s acquisition of the Y stock and the subsequent

QSSS election would not be treated as related. The

liquidation described in paragraph (a)(2) of this section occurs at the close of the day on June 1, 1998,

the day before the QSSS election is effective, and

the plan of liquidation is considered adopted on that

date. Y’s taxable year and separate existence for federal tax purposes end at the close of June 1, 1998.

Example 2. X, a C corporation, owns 100 percent

of the stock of Y, another C corporation. On December 31, 1998, X makes an election under section

1362 to be treated as an S corporation and a valid

QSSS election for Y, both effective January 1, 1999.

Assume that, under general principles of tax law, including the step transaction doctrine, X’s acquisition

of the Y stock and the subsequent QSSS election

would not be treated as related. The liquidation described in paragraph (a)(2) of this section occurs at

the close of December 31, 1998, the day before the

QSSS election is effective. The QSSS election for Y

is effective on the same day that X’s S election is effective, and the deemed liquidation is treated as occurring before the S election is effective, when X is

still a C corporation. Y’s taxable year ends at the

close of December 31, 1998. See §1.381(b)–1.

Example 3. On June 1, 1998, X, an S corporation, acquires 100 percent of the stock of Y, an existing S corporation, for cash in a transaction meeting

the requirements of a qualified stock purchase

(QSP) under section 338. X immediately makes a

QSSS election for Y effective June 2, 1998, and also

makes a joint election under section 338(h)(10) with

the shareholder of Y. Under section 338(a) and

§1.338(h)(10)–1, Y is treated as having sold all of its

assets at the close of the acquisition date, June 1,

1998. Y is treated as a new corporation which purchased all of those assets as of the beginning of June

2, 1998, the day after the acquisition date. Section

338(a)(2). The QSSS election is effective on June 2,

1998, and the liquidation under paragraph (a)(2) of

this section occurs immediately after the deemed

asset purchase by the new corporation.

1998–20 I.R.B.

Example 4. X, an S corporation, owns 100 percent of Y, a corporation for which a QSSS election is

in effect. On May 12, 1998, a date on which the

QSSS election is in effect, X issues Y a $10,000 note

under state law that matures in ten years with a market rate of interest. Y is not treated as a separate corporation, and X’s issuance of the note to Y on May

12, 1998, is disregarded for federal tax purposes.

Example 5. X, an S corporation, owns 100 percent of the stock of Y, a C corporation. At a time

when Y is indebted to X in an amount which exceeds

the fair market value of Y’s assets, X makes a QSSS

election effective on the date it is filed with respect

to Y. The liquidation described in paragraph (a)(2)

of this section does not qualify under sections 332

and 337 and, thus, Y recognizes gain or loss on the

assets distributed, subject to the limitations of section 267.

§1.1361-5 Termination of QSSS election.

(a) In general—(1) Effective date.

The termination of a QSSS election is effective —

(i) On the effective date contained in

the revocation statement if a QSSS election is revoked under §1.1361–3(b);

(ii) At the close of the last day of the

parent’s last taxable year as an S corporation if the parent’s S election terminates

under §1.1362–2; or

(iii) At the close of the day on which

an event (other than an event described in

paragraph (a)(1)(ii) of this section) occurs

that renders the subsidiary ineligible for

QSSS status under section 1361(b)(3)(B).

(2) Information to be provided upon

termination of QSSS election by failure to

qualify as a QSSS. If a QSSS election terminates because an event renders the subsidiary ineligible for QSSS status, the S

corporation must attach to its return for

the taxable year in which the termination

occurs a notification that a QSSS election

has terminated, the date of the termination, and the names, addresses, and employer identification numbers of both the

parent corporation and the QSSS.

(3) Examples. The following examples illustrate the application of this paragraph (a):

Example 1. Termination because parent’s S election terminates. X, an S corporation, owns 100 percent of Y. A QSSS election is in effect with respect

to Y for 1998. Effective on January 1, 1999, X revokes its S election. Because X is no longer an S

corporation, Y no longer qualifies as a QSSS at the

close of December 31, 1998.

Example 2. Termination due to transfer of QSSS

stock. X, an S corporation, owns 100 percent of Y.

A QSSS election is in effect with respect to Y for

1998. On December 10, 1998, X sells one share of Y

stock to A, an individual. Because X no longer owns

1998–20 I.R.B.

100 percent of the stock of Y, Y no longer qualifies

as a QSSS. Accordingly, the QSSS election made

with respect to Y terminates at the close of December 10, 1998.

Example 3. No termination on stock transfer between QSSS and parent. X, an S corporation, owns

100 percent of the stock of Y and Y owns 100 percent of the stock of Z. QSSS elections are in effect

with respect to both Y and Z. Y transfers all of its Z

stock to X. Because X is treated as owning the stock

of Z both before and after the transfer of stock solely

for purposes of determining whether the requirements of section 1361(b)(3)(B)(i) and §1.1361–

2(a)(1) have been satisfied, the transfer of Z stock

does not terminate Z’s QSSS election. Because the

stock of Z is disregarded for all other federal tax purposes, no gain is recognized under section 311.

(b) Effect of termination of QSSS election—(1) Formation of new corporation.

If a QSSS election terminates under paragraph (a) of this section, the former QSSS

is treated as a new corporation acquiring

all of its assets (and assuming all of its liabilities) immediately before the termination from the S corporation parent in exchange for stock of the new corporation.

The tax treatment of this transaction or of

a larger transaction that includes this

transaction will be determined under the

Internal Revenue Code and general principles of tax law, including the step transaction doctrine.

(2) Carryover of disallowed losses and

deductions. If a QSSS terminates because

the S corporation distributes the QSSS

stock to some or all of the S corporation’s

shareholders in a transaction to which

section 368(a)(1)(D) applies by reason of

section 355 (or so much of section 356 as

relates to section 355), any loss or deduction disallowed under section 1366(d)

with respect to a shareholder of the S corporation immediately before the distribution is allocated between the S corporation and the former QSSS with respect to

the shareholder. The amount of the disallowed loss or deduction allocated to the S

corporation is an amount that bears the

same ratio to each item of disallowed loss

or deduction as the value of the shareholder’s stock in the S corporation bears

to the total value of the shareholder’s

stock in both the S corporation and the

former QSSS, in each case as determined

immediately after the distribution.

(3) Examples. The following examples illustrate the application of this paragraph (b):

Example 1. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a

21

QSSS election is in effect. X sells 21 percent of the

Y stock to Z, an unrelated corporation, for cash,

thereby terminating the QSSS election. Y is treated

as a new corporation acquiring all of its assets (and

assuming all of its liabilities) in exchange for Y

stock immediately before the termination from the S

corporation. The deemed exchange by X of assets

for Y stock does not qualify under section 351 because X is not in control of Y within the meaning of

section 368(c) immediately after the transfer as a result of the sale of stock to Z. Therefore, X must recognize gain, if any, on the assets transferred to Y in

exchange for its stock. X’s losses, if any, on the assets transferred are subject to the limitations of section 267.

Example 2. Assume the same facts as in Example

1, except that, instead of purchasing Y stock, Z contributes to Y an operating asset in exchange for 21

percent of the Y stock. Y is treated as a new corporation acquiring all of its assets (and assuming all of

its liabilities) in exchange for Y stock immediately

before the termination. Because X and Z are cotransferors that control the transferee immediately

after the transfer, the transaction qualifies under section 351.

Example 3. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a

QSSS election is in effect. X distributes all of the Y

stock pro rata to its shareholders, and the distribution terminates the QSSS election. The transaction

can qualify as a distribution to which sections

368(a)(1)(D) and 355 apply if the transaction otherwise satisfies the requirements of those sections.

Example 4. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a

QSSS election is in effect. X subsequently revokes

the QSSS election. Y is treated as a new corporation

acquiring all of its assets (and assuming all of its liabilities) immediately before the revocation from its

S corporation parent in a deemed exchange for Y

stock. On a subsequent date, X sells 21 percent of

the stock of Y to Z, an unrelated corporation, for

cash. Assume that under general principles of tax

law including the step transaction doctrine, the sale

is not taken into account in determining whether X is

in control of Y immediately after the deemed exchange of assets for stock. The deemed exchange by

X of assets for Y stock and the deemed assumption

by Y of its liabilities qualify under section 351 because, for purposes of that section, X is in control of

Y within the meaning of section 368(c) immediately

after the transfer.

(c) Inadvertent terminations. Relief

from the consequences of an inadvertent

termination of a QSSS election may be

available under the standards established

by the Commissioner for the inadvertent

termination of an S election under

§1.1362–4.

(d) Election after QSSS termination—

(1) In general. Absent the Commissioner’s consent, and except as provided

in paragraph (d)(2) of this section, a corporation whose QSSS election has terminated under paragraph (a) of this section

(or a successor corporation as defined in

May 18, 1998

§1.1362–5(b)) may not make an S election under section 1362 or have a QSSS

election under section 1361(b)(3)(B)(ii)

made with respect to it for five taxable

years (as described in section 1361(b)(3)(D)). The Commissioner may permit

an S election by the corporation or a new

QSSS election with respect to the corporation before the 5-year period expires.

The corporation requesting consent to

make the election has the burden of establishing that, under the relevant facts and

circumstances, the Commissioner should

consent to a new election.

(2) Exception. If a corporation’s QSSS

election terminates by reason of a disposition of the corporation’s stock, the corporation may, without requesting the Commissioner’s consent, make an S election

or have a QSSS election made with respect to it before the expiration of the

five-year period described in section

1361(b)(3)(D) and paragraph (d)(1) of

this section, provided that —

(i) Immediately following the disposition of its stock, the corporation (or its

successor corporation) is otherwise eligible to make an S election or have a QSSS

election made for it; and

(ii) The relevant election is made effective immediately following the disposition of the stock of the corporation.

(3) Examples. The following examples illustrate the application of this paragraph (d):

Example 1. Termination upon distribution of

QSSS stock to shareholders of parent. X, an S corporation, owns Y, a QSSS. X distributes all of its Y

stock to X’s shareholders. The distribution terminates the QSSS election because Y no longer satisfies the requirements of a QSSS. Assuming Y is otherwise eligible to be treated as an S corporation, Y’s

shareholders may elect to treat Y as an S corporation

effective on the date of the stock distribution without

requesting the Commissioner’s consent.

Example 2. Sale of 100 percent of QSSS stock.

X, an S corporation, owns Y, a QSSS. X sells 100

percent of the stock of Y to Z, an unrelated S corporation. Z may elect to treat Y as a QSSS effective on

the date of purchase without requesting the Commissioner’s consent.

§1.1361–6 Effective date.

Except as provided in §1.1361–4(a)(5)(i), the provisions of §§1.1361–2

through 1.1361–5 apply to taxable years

beginning on or after the date that final

regulations are published in the Federal

Register.

Par. 5. Amend §1.1362–0 as follows:

May 18, 1998

1. Add an entry for §1.1362–2(b)(4).

2. Add entries for §1.1362–8.

The additions read as follows:

§1.1362–0 Table of contents.

*

*

*

*

*

§1.13622 Termination of election.

*

*

*

*

*

(b) * * *

(4) Termination when stock transferred

to another S corporation.

*

*

*

*

*

§1.1362–8 Dividends received from

affiliated subsidiaries.

(a) In general.

(b) Determination of active or passive

earnings and profits.

(1) In general.

(2) Lower tier subsidiaries.

(3) De minimis exception.

(4) Special rules for earnings and profits

accumulated by a C corporation prior

to 80 percent acquisition.

(5) Gross receipts safe harbor.

(c) Allocating distributions to active or

passive earnings and profits.

(1) Distributions from current earnings

and profits.

(2) Distributions from accumulated earnings and profits.

(3) Adjustments to active earnings and

profits.

(4) Special rules for consolidated groups.

(d) Examples.

(e) Effective date.

Par. 6. Amend §1.1362–2 as follows:

1. Amend paragraph (b)(1) by adding a

sentence to the end of the paragraph.

2. Add paragraph (b)(4).

3. Amend paragraph (c)(5)(ii)(C) by

adding a sentence to the end of the paragraph.

The additions read as follows:

§1.1362–2 Termination of election.

*

*

*

*

*

(b) * * *

(1) * * * See paragraph (b)(4) of this

section for a special rule applying to the

termination of an S election caused by the

transfer of the corporation’s stock to another S corporation.

*

*

*

22

*

*

(4) Termination when stock transferred

to another S corporation. If all of the

stock of an S corporation (S1) is transferred to another S corporation (S2) and a

QSSS election for S1 is made effective as

of the day of the transfer, S1’s S election

terminates at the same time as the deemed

liquidation under §1.1361–4(a)(2). Accordingly, S1 is not treated as a C corporation for any period solely because of the

transfer of S1 stock to S2, an ineligible S

corporation shareholder. See, however,

§1.338–1(e)(3) if an election under section

338 (without an election under section

338(h)(10)) is made. This paragraph (b)(4)

is effective on the date final regulations are

published in the Federal Register.

(c) * * *

(5) * * *

(ii) * * *

(C) * * * See §1.1362–8 for special

rules regarding the treatment of dividends

received by an S corporation from a C

corporation in which the S corporation

holds stock meeting the requirements of

section 1504(a)(2).

*

*

*

*

*

Par. 7. Add §1.1362–8 to read as follows:

§1.1362–8 Dividends received from

affiliated subsidiaries.

(a) In general. For purposes of section

1362(d)(3), if an S corporation holds

stock in a C corporation meeting the requirements of section 1504(a)(2), the

term “passive investment income” does

not include dividends from the C corporation to the extent those dividends are attributable to the earnings and profits of

the C corporation derived from the active

conduct of a trade or business (“active

earnings and profits”). For purposes of

applying section 1362(d)(3), earnings and

profits of a C corporation are active earnings and profits to the extent that the earnings and profits are derived from activities that would not produce passive

investment income (as defined in section

1362(d)(3)) if the C corporation were an S

corporation.

(b) Determination of active or passive

earnings and profits—(1) In general. An

S corporation may use any reasonable

method to determine the amount of dividends that are not treated as passive in-

1998–20 I.R.B.

vestment income under section 1362(d)(3)(E). Paragraph (b)(5) of this section

describes a method of determining the

amount of dividends that are not treated

as passive investment income under section 1362(d)(3)(E) that is deemed to be

reasonable under all circumstances.

(2) Lower tier subsidiaries. If a C corporation subsidiary (upper tier corporation) holds stock in another C corporation

(lower tier subsidiary) meeting the requirements of section 1504(a)(2), the

upper tier corporation’s gross receipts attributable to a dividend from the lower

tier subsidiary are considered to be derived from the active conduct of a trade or

business to the extent the lower tier subsidiary’s earnings and profits are attributable to the active conduct of a trade or

business by the subsidiary under paragraph (b)(1), (b)(3), (b)(4), or (b)(5) of

this section. For purposes of this section,

distributions by the lower tier subsidiary

will be considered attributable to active

earnings and profits according to the rule

in paragraph (c) of this section. This

paragraph (b)(2) does not apply to any

member of a consolidated group (as defined in §1.1502–1(h)).

(3) De minimis exception. If less than

10 percent of a C corporation’s earnings

and profits for a taxable year are derived

from activities that would produce passive investment income if the C corporation were an S corporation, all earnings

and profits produced by the corporation

during that taxable year are considered

active earnings and profits.

(4) Special rules for earnings and

profits accumulated by a C corporation

prior to 80 percent acquisition. A C corporation may treat all earnings and profits

accumulated by the corporation in all taxable years ending before the S corporation

held stock meeting the requirements of

section 1504(a)(2) as active earnings and

profits in the same proportion as the C

corporation’s active earnings and profits

for the three taxable years ending prior to

the time when the S corporation acquired

80 percent of the C corporation bears to

the C corporation’s total earnings and

profits for those three taxable years.

(5) Gross receipts safe harbor. A corporation may treat its earnings and profits

for a year as active earnings and profits in

the same proportion as the corporation’s

gross receipts (as defined in §1.1362–

1998–20 I.R.B.

2(c)(4)) derived from activities that would

not produce passive investment income

(if the C corporation were an S corporation), including those that do not produce

passive investment income under paragraphs (b)(2) through (b)(4) of this section, bear to the corporation’s total gross

receipts for the year in which the earnings

and profits are produced.

(c) Allocating distributions to active or

passive earnings and profits—(1) Distributions from current earnings and profits.

Dividends distributed by a C corporation

from current earnings and profits are attributable to active earnings and profits in

the same proportion as current active

earnings and profits bear to total current

earnings and profits of the C corporation.

(2) Distributions from accumulated

earnings and profits. Dividends distributed by a C corporation out of accumulated earnings and profits for a taxable

year are attributable to active earnings

and profits in the same proportion as accumulated active earnings and profits for

that taxable year bear to total accumulated

earnings and profits for that taxable year

immediately prior to the distribution.

(3) Adjustments to active earnings and

profits. For purposes of applying paragraph (c)(1) or (c)(2) of this section to a

distribution, the active earnings and profits of a corporation shall be reduced by the

amount of any prior distribution properly

treated as attributable to active earnings

and profits from the same taxable year.

(4) Special rules for consolidated

groups. For purposes of applying section

1362(d)(3) and this section to dividends

received by an S corporation from the

common parent of a consolidated group

(as defined in §1.1502–1(h)), the following rules apply—

(i) The current earnings and profits, accumulated earnings and profits, and active earnings and profits of the common

parent shall be determined under the principles of §1.1502–33 (relating to earnings

and profits of any member of a consolidated group owning stock of another

member); and

(ii) The gross receipts of the common

parent shall be the sum of the gross receipts of each member of the consolidated

group (including the common parent), adjusted to eliminate gross receipts from intercompany transactions (as defined in

§1.1502-13(b)(1)(i)).

23

(d) Examples. The following examples illustrate the principles of this section:

Example 1. (i) X, an S corporation, owns 85 percent of the one class of stock of Y. On December 31,

1998, Y declares a dividend of $100 ($85 to X),

which is equal to Y’s current earnings and profits. In

1998, Y has total gross receipts of $1,000, $200 of

which would be passive investment income if Y

were an S corporation.

(ii) One-fifth ($200/$1,000) of Y’s gross receipts

for 1998 is attributable to activities that would produce passive investment income. Accordingly, onefifth of the $100 of earnings and profits is passive,

and $17 (1/5 of $85) of the dividend from Y to X is

passive investment income.

Example 2. (i) The facts are the same as in Example 1, except that Y owns 90 percent of the stock

of Z. Y and Z do not join in the filing of a consolidated return. In 1998, Z has gross receipts of

$15,000, $12,000 of which are derived from activities that would produce passive investment income.

On December 31, 1998, Z declares a dividend of

$1,000 ($900 to Y) from current earnings and profits.

(ii) Four-fifths ($12,000/15,000) of the dividend

from Z to Y are attributable to passive earnings and

profits. Accordingly, $720 (4/5 of $900) of the dividend from Z to Y is considered gross receipts from

an activity that would produce passive investment

income. The $900 dividend to Y gives Y a total of

$1,900 ($1,000 + $900) in gross receipts, $920

($200 + $720) of which is attributable to passive investment income-producing activities. Under these

facts, $41 ($920/1,900 of $85) of Y’s distribution to

X is passive investment income to X.

(e) Effective date. This section applies

to dividends received in taxable years beginning on or after the date that final regulations are published in the Federal

Register.

§1.1368–0 [Amended]

Par. 8. Amend §1.1368–0 in the entry

for §1.1368–2(d)(2) by revising “Reorganizations” to read “Liquidations and reorganizations”.

§1.1368–2 [Amended]

Par. 9. Amend §1.1368–2 in paragraph

(d)(2) by revising “Reorganizations” to

read “Liquidations and reorganizations”

in the heading and by revising “section

381(a)(2)” to read “section 381(a)” in the

first sentence.

Par. 10. Amend §1.1374–8 by adding

two sentences to the end of paragraph (b)

to read as follows:

§1.1374–8 Section 1374(d)(8)

transactions.

*

*

*

*

*

May 18, 1998

(b) Separate determination of tax. * *

* If a C corporation elects to be treated

as an S corporation, and also makes a

QSSS election under section 1361(b)(3)

(effective on the same date as the S election) with respect to a subsidiary, the assets held by the QSSS at the time of the

QSSS election will be treated as assets

held by the parent when it became an S

corporation. The preceding sentence applies to QSSS elections made after the

date final regulations are published in

the Federal Register.

*

*

*

*

*

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

April 21, 1998, 8:45 a.m., and published in the

issue of the Federal Register for April 22, 1998, 63

F.R. 19864)

Change From Dollar

Approximate Separate

Transaction Method of

Accounting (DASTM) to the

Profit and Loss Method of

Accounting/Change From the

Profit and Loss Method to

DASTM; Correction to T.D.

8765

Announcement 98–39

SUMMARY: This announcement contains corrections to final regulations

(T.D. 8765 [1998–16 I.R.B. 11] 63 F.R.

10772), relating to adjustments required

when a qualified business unit (QBU)

that used the profit and loss method of

accounting (P&L) in a post-1986 year

begins to use the dollar approximate separate transaction method of accounting

(DASTM) and adjustments required

when a QBU that used DASTM begins

using P&L.

DATES: This correction is effective

April 6, 1998.

FOR FURTHER INFORMATION CONTACT: Howard Wiener of the Office of

Chief Counsel (International), (202)

622-3870 (not a toll-free number).

May 18, 1998

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of these corrections are under section 985 of the Internal Revenue Code.

Need for Correction

As published, the final regulations

(T.D. 8765) contain errors which may

prove to be misleading and are in need of

clarification.

Correction of Publication

Accordingly, the publication of the

final regulations (TD 8765), which was

the subject of FR Doc. 98-5470, is corrected as follows:

§1.985–1 [Corrected]

1. On page 10774, column 2,

§1.985–1 (b)(2)(ii)(C) is corrected as

follows:

1. The paragraph heading for paragraph (b)(2)(ii)(C)(1) is added.

2. A new paragraph (b)(2)(ii)(C)(2) is

added.

The corrections read as follows:

§1.985–1 Functional currency.

*

*

*

*

*

(b) * * *

(2) * * *

(ii) * * *

(C) * * * (1) In general. * * *

(2) Effective date. This paragraph

(b)(2)(ii)(C) applies to taxable years beginning after April 6, 1998. However, a

taxpayer may choose to apply this paragraph to all open years after December

31, 1986, provided each person, and

each QBU branch of a person, that is related (within the meaning of

§1.985–2(d)(3)) also applies to this paragraph (b)(2)(ii)(C).

§1.985–7 [Corrected]

2. On page 10775, column 2,

§1.985–7 (b)(3), in the last three lines,

the language “had translated its assets

and liabilities under §1.985–3 during the

look-back period.” is corrected to read

“had translated its assets and liabilities

acquired and incurred during the lookback period under §1.985–3.”.

4. On page 10776, column 2,

24

§1.985–7 (c)(5), line 17, the language

“of change.) For purposes of section

960,” is corrected to read “of change).

For purposes of section 960,”.

5. On page 10776, column 2,

§1.985–7 (c)(5), the last line, the language “section.)” is corrected to read

“section).”.

6. On page 10776, column 3,

§1.985–7 (d)(5), the last two lines, the

language “assets and liabilities under

§1.985–3 during the look- back period.”

is corrected to read “assets and liabilities

acquired and incurred during the lookback period under §1.985–3.”.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Allocation and Sourcing of

Income and Deductions Among

Taxpayers Engaged in a Global

Dealing Operation; Correction

Announcement 98–40

SUMMARY: This announcement contains corrections, including a change to

the date of the public hearing, to the notice of proposed rulemaking (REG–

208299–90 [1998–16 I.R.B. 26] 63 F.R.

11177). The notice of proposed rulemaking relates to the allocation among

controlled taxpayers and sourcing of income, deductions, gains and losses from

a global dealing operation; rules applying these allocation and sourcing rules to

foreign currency transactions and to foreign corporations engaged in a U.S. trade

or business; and rules concerning the

mark-to-market treatment resulting from

hedging activities of a global dealing operation.

DATES: The public hearing originally

scheduled for July 9, 1998 has been

rescheduled for July 14, 1998.

ADDRESS: The public hearing will be

held in room 2615, Internal Revenue

Building, 1111 Constitution Avenue,

NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Ginny Chung, (202) 622-3870

(not a toll-free number).

1998–20 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking that

is subject to these corrections is under

sections 482 and 864 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed

rulemaking (REG–208299–90) contain

errors that may prove to be misleading

and are in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of proposed rulemaking (REG–

208299–90) which is the subject of F.R.

Doc. 98–5674 is corrected as follows:

1. On page 11182, column 2, in the

preamble under the heading “K. Source of

Global Dealing Income”, in the second

paragraph, line 5, the language “§1.863–3

which sources income from a” is corrected to read “§1.863–3(h) which

sources income from a”.

2. On page 11185, column 2, in the

preamble under the heading “Comments

and Public Hearing”, in the second paragraph, line 2, the language “for July 9,

1998, at 10 a.m. in room 2615,” is corrected to read “for July 14, 1998, at 10

a.m. in room 2615,”.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Foundations Status of Certain

Organizations

Announcement 98–41

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

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

under section 508(b) of the Code. This

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

1998–20 I.R.B.

Former Public Charities. The following

organizations (which have been treated as

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

Code) are now classified as private foundations:

Paddock Bath and Tennis Club Inc.,

Florissant, MO

Painted Desert Demonstration Projects

Inc., Flagstaff, AZ

Palo Pinto Humane Society Inc., Mineral

Wells, TX

Panhandle Crimestoppers Inc., Guymon,

OK

Panther Baseball Club Inc., Arlington,

TX

Panther Soccer Booster Club Inc., Miami,

FL

Paola Free Library Foundation, Paola, KS

Paramedic Relief Network, Maryland

Hts, MO

Pard Athletic Club Inc., Marrero, LA

Parent Relative Organization for

Oakwood Facilities Fund Inc.,

Covington, KY

Parent Support Network, Lansing, MI

Parenting Place, Southfield, MI

Parents Against Community Crime

Organization Pacco Inc., Houston, TX

Parents and Kids Together Inc., Potomac,

MD

Parents Empowered To Save Teens Inc.,

Mt. Pleasant, SC

Parents Re-Establishing Independent

Development and Encouragement

Pride, Phoenix, AZ

Parents Reaching Out, St. Charles, MO

Parents Who Care Inc., Tipp City, OH

Park Hill Literacy Inc., Denver, CO

Park Place Group Inc., Pinellas Park, FL

Parke-Vermillion Community Education

& Employment Corporation, Clinton,

IN

Parkway Pride Inc., Keslers Cross Lanes,

WV

Partners in Education Inc., Poneto, IN

Partners in Education Inc., Roanoke, AL

Partners With Youth Foundation,

Springfield, MO

Partnership Against Racism, Chicago, IL

Partnership for Families Inc., Greenville,

SC

Pat Rush Ministries Inc., Titusville, FL

Pathfinders of Indiana Inc., Goshen, IN

Pathway Ministries Inc., Louisville, KY

Pathway of Light, Columbus, OH

Patidar Cultural Association of USA Inc.,

Stanhope, NJ

25

Patrick M. Gagliardi Foundation, Sault

Ste Marie, MI

Paul Gage Ministries, Bedford, TX

Paul S. Morton Scholarship Foundation

Inc., New Orleans, LA

Paulding County Genealogical Society,

Paulding, OH

Payson Choral Society, Payson, AZ

Peace and Joy Ministries Inc., Haysville,

KS

Peaceful Dove Enterprises Incorporated,

Palm Bay, FL

Peaceful Valley Ranch, Westminster,

CO

Pediatric Assistance International Inc.,

Ann Arbor, MI

Pee Dee Electric Trust, Darlington, SC

Pegasus Incorporated of South Carolina,

Blacksburg, SC

Pennsylvania Elk Foundation, Reading,

PA

Pennsylvania Quality Leadership

Foundation Inc., Harrisburg, PA

Pennsylvania Religious Coalition for

Abortion Rights, Philadelphia, PA

Penumbra U S A Inc., Shaker Hts, OH

People Against Cigarette Smoke PACS

Inc., Destreham, LA

People First of Illinois, Wayne, IL

People Help People Face to Face Inc.,

Evanston, IL

People Helping People-Disaster Relief

Inc., Teaneck, NJ

People Organized for Excellence in

Education, Beaumont, TX

Peoples Community Hope for Homes

Inc., Westland, MI

Performing Artists Network Inc.,

Linwood, NJ

Performing Arts League Inc., Cleveland,

OH

Petoskey Youth Soccer Association,

Petoskey, MI

Petra Ministries Inc., Glendale, AZ

Pets for the Elderly Foundation,

Cleveland, OH

PFLAG Suburban Chicago—Parents

Families and Friends of Lesbians and

Gays Inc., Downers Grove, IL

Phase I Colorguard, St. Louis, MO

Phenix City Education Foundation Inc.,

Phenix City, AL

PHFD Womens Association, Prospect

Heights, IL

Philadelphia Korean War Veterans

Memorial Inc., Philadelphia, PA

Philadelphia Student Athletes Inc.,

Parkesburg, PA

May 18, 1998

Philip Simmons Foundation Inc.,

Charleston, SC

Philippine Development Forum,

Washington, DC

Phineas Newborn Jr. Fam Foundation,

Memphis, TN

PHS Community Development

Corporation, Detroit, MI

Pictorial Research LTD Inc., West Des

Moines, IA

PIN—People in Need, Gowen, MI

Pinellas Pioneer Settlement Inc., St.

Petersburg, FL

Pioneer Artists Inc., Dodge City, KS

Pioneer Historical Museum &

Interpretive Center, Ft. Laramie, WY

Pipestone Performing Arts Center Inc.,

Pipestone, MN

Pitre Vision Home, Dallas, TX

Pitt County Helping Hands Inc.,

Greenville, NC

Pitt-Greenville Opportunities

Industrialization Center Inc.,

Greenville, NC

Pittsburgh Ensemble Theatre Company,

Pittsburgh, PA

Pittsburgh Young Professionals Inc.,

Pittsburgh, PA

Plaisance Mortagage Corporation,

Opelousas, LA

Plano Housing Corporation, Plano, TX

Plants for Clean Air Council Inc.,

Mitchellville, MD

Plateau Youth Center, Olathe, CO

Pleasant Hill Child Enrichment Center,

Pleasant Hill, TN

Pleasant Prairie Professional Police

Association, Pleasant, WI

Poinciana Youth Baseball, Poinciana, FL

Poindexter Ministries Inc., Washington,

DC

Point Pleasant Community Association

Inc., Point Pleasant, PA

Police Athletic League of Port Orange

Inc., Port Orange, FL

Police Benevolent Fund Inc., Atlanta, GA

Porter County Champs Inc., Valparaiso,

IN

Portsmouth Inner City Development

Corporation Housing Association II,

Portsmouth, OH

Positive Approach Inc., Victoria, TX

Positive Changes Incorporated,

Lewisburg, PA

Positive Direction for Youth Inc.,

Greensboro, NC

Positive People Inc., Chicago, IL

Positive Support Institute, Trenton, MI

May 18, 1998

Possibilities Productions Unlimited,

Denver, CO

Postal Employees-John Miller

Scholarship Fund, Roseville, MN

Pottawatomie Indian Museum Polyak

Foundation Inc., Beverly Shores, IN

Power Connection Ministries Inc.,

Kingwood, TX

Power of Praise Ministries Inc.,

Cleveland, SC

Power Partenting Association Inc.,

Ellicott City, MD

Practical Christian Services Inc.,

Concord, NC

Prairie Dance Theatre, Clinton, IL

Praying Tobacco Charitable

Organization, Wakpala, SD

Preble County Dare Inc., New Paris, OH

Precinct 2 Mounted Patrol of Harris

County, Houston, TX

Pregnancy Care Center of Fairfield

County Inc., Lancaster, OH

Premiere Musical Theater Warehouse,

Denver, CO

Prep Alumni II, Waukegan, IL

Prespress Publishing of Michigan,

Kalamazoo, MI

Presby Tips Foundation, Cairo, IL

Presbyterian Coalition for Loving Justice,

Washington, DC

Preserve the Schuyler Colfax House,

Wayne, NJ

Press Club of Houston, Houston, TX

Press Club of Houston Educational

Foundation Inc., Houston, TX

Preventive Aging Center Inc., South

Amboy, NJ

Pride of Tennessee Education

Foundation, Nashville, TN

Primary Resource Developers Group

Inc., Norcross, GA

Prince Frederick Foundation, Raleigh,

NC

Prince Hall Foundation Inc., North

Brunswick, NJ

Prisoners Against Crime, Lakewood,

CO

Proclaim Ministries Inc., Rockford, IL

Professional Training Institute Inc., Silver

Spring, MD

Professionals for Houstons Homeless,

Spring, TX

Professions of Edgewood, San Antonio,

TX

Program of Emmanuels Hands,

Allentown, PA

Progress for Youth Inc., Mountain Home,

AR

26

Progressive Foundation for Social

Responsibility, Eden Prairie, MN

Project D A R E Drug Abuse Resistance

Education for Maury Co., Columbia,

TN

Project Help Inc., Sweetwater, TN

Project Independence Incorporated of

Sedgwick County, Wichita, KS

Project Intercept, Denver, CO

Project Jericho, New Orleans, LA

Project Kids Inc., Allen, TX

Project Match Incorporated, Smyrna, GA

Project Me Inc., Tucson, AZ

Project New Smile, Baltimore, MD

Project Playground—Central Park,

Beaumont, TX

Project Reach Out Incorporated Pro Inc.,

Indianapolis, IN

Project-Rescue Band, Sheffield Lake, OH

Project Safe House Inc., Atlanta, GA

Project Second Chance Inc., Cleveland,

OH

Project Self-Help, Beaumont, TX

Project Victory Inc., Pompano Beach,

FL

Promise Land Community Shelter,

Detroit, MI

Promises People Reaching Out

Ministering in Spiritual Emotional

Support Inc., Longmont, CO

Promoting African American Success in

Schools, Fort Worth, TX

Promoting Animal Welfare Society Inc.,

Muskogee, OK

Prophetic Insights Inc., Fletcher, NC

Prospect Plains Housing Corporation,

Monmouth Junction, NJ

Providers of Encouragement and

Assistance To Restructure Your Life,

Houston, TX

Providing for the Needy Inc., Louisville,

KY

Psychiatrists for Better Psychiatry Inc.,

Louisville, KY

Public Service Telecommunications

Corporation International, Arlington,

VA

Puebloans Against Violent Environment,

Pueblo, CO

Puerto Rico Society of Cleveland,

Lakewood, OH

Pulliam Ministries Inc., Tulsa, OK

Purr-Fect Haven Inc., San Antonio, TX

Pushkin Goncharov Historical

Foundation, Greenwood Village, CO

Quad Cities Womens Encouragement

Board Inc., Bettendorf, IA

Quality Nutrition for Kids, Houston, TX

1998–20 I.R.B.

Queen Annes County Watermans

Festivals, Inc., Queenstown, MD

Quilt Guild of Greater Victoria Inc.,

Victoria, TX

If an organization listed above submits

information that warrants the renewal of its

1998–20 I.R.B.

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

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

contributors may thereafter rely upon such

27

ruling or determination letter as provided

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

Regulations. It is not the practice of the

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

Revenue Bulletin.

May 18, 1998

Announcement of the Consent Voluntary Suspension of Attorneys,

Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries

From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations,

Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid the institution or

conclusion of a proceeding for his disbarment or suspension from practice before

the Internal Revenue Service, may offer

his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or

enrolled actuary in accordance with the

consent offered.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Ser-

vice matter from directly or indirectly employing, accepting assistance from, being

employed by, or sharing fees with any

practitioner disbarred or suspended from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled

actuaries to identify practitioners under

consent suspension from practice before the

In

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