# Bulletin No. 1998–20

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- **Document type:** Agency decision

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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 elect

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A49cd4a3925189239. Public record. Not legal advice.