Bulletin No. 1998–13

Agency decision

Ask Donna

What actually matters in this document.

Text

Internal Revenue

bulletin

Bulletin No. 1998–13

March 30, 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

Rev. Rul. 98–16, page 18.

LIFO; price indexes; department stores. The January

1998 Bureau of Labor Statistics price indexes are accepted

for use by department stores employing the retail inventory

and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference to, January 31,

1998.

Rev. Rul. 98–17, page 21.

Interest rates; underpayments and overpayments. The

rate of interest determined under section 6621 of the Code

for the calendar quarter beginning April 1, 1998, will be 7

percent for overpayments, 8 percent for underpayments,

and 10 percent for large corporate underpayments. The rate

of interest paid on the portion of a corporate overpayment

exceeding $10,000 is 5.5 percent.

T.D. 8757, page 4.

REG–110965–97, page 42.

Final, temporary, and proposed regulations under section

141 of the Code provide guidance to state and local governments that issue bonds for output facilities. A public

hearing on the proposed regulations will be held on April

28, 1998.

T.D. 8759, page 19.

Final regulations under section 905 of the Code relate to the

substantiation requirements for taxpayers claiming foreign

tax credits.

EXEMPT ORGANIZATIONS

Announcement 98–25, page 43.

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

EMPLOYMENT TAX

Rev. Proc. 98–26, page 26.

Electronic filing; magnetic media; 1998 Form W–4

specifications. Specifications for filing Form W–4, Employee’s Withholding Allowance Certificate, magnetically or

electronically, are set forth.

ADMINISTRATIVE

Notice 98–19, page 24.

The “differential earnings rate” under section 809 of the

Code is tentatively determined for 1997 together with the

“recomputed differential earnings rate” for 1996.

Notice 98–20, page 25.

T.D. 8758, page 15.

Final regulations under section 468A of the Code relate to

requests for revised schedules of ruling amounts for nuclear

decommissioning reserve funds.

Finding Lists begin on page 47.

Department of the Treasury

Internal Revenue Service

This notice provides guidance on the ordering and taxation

of capital gain distributions from a charitable remainder trust

in light of the changes made to section 1(h) of the Code by

the Taxpayer Relief Act of 1997.

Mission of the Service

ucts and services; and perform in a manner warranting

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

The purpose of the Internal Revenue Service is to collect

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

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

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

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

adopt a position inconsistent with an established Service

position.

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

is determined by Congress.

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

policy by correctly applying the laws enacted by Congress;

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

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

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

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

should be relentless in its attack on unreal tax devices and

fraud.

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

is the responsibility of each person in the Service, charged

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

meaning of the statutory provision and not to adopt a

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

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

Introduction

The Internal Revenue Bulletin is the authoritative instrument

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

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

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

on a single-copy basis.

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

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

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

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

modify, or amend any of those previously published in the

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

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

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

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

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

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

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

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

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

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

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

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a 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.

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

Section 141.—Private Activity

Bond; Qualified Bond

26 CFR 1.141–7T: Special rules for output facilities

(temporary).

T.D. 8757

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Obligations of States and

Political Subdivisions

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final

and temporary regulations that provide

guidance to state and local governments

that issue bonds for output facilities. This

document also contains temporary regulations that provide guidance to certain nongovernmental persons that are engaged in

the local furnishing of electric energy or

gas using facilities financed with state or

local government bonds. These temporary

regulations reflect changes made by the Tax

Reform Act of 1986 and the Small Business Job Protection Act of 1996. The temporary regulations will affect State and

local government issuers of obligations and

nongovernmental persons engaged in the

local furnishing of electric energy or gas

after the effective date of these regulations.

The text of these temporary regulations

also serves as the text of REG–110965–97.

DATES: These regulations are effective

January 22, 1998.

For dates of applicability, see §§1.141–

15T, 1.142(f)(4)–1T(g), and 1.150–5T(b)

of these regulations.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Allan

Seller (202) 622-3980 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income Tax

Regulations (26 CFR part 1) under sec-

March 30, 1998

tion 141 by providing special rules for

state and local bonds issued for output facilities. This document also amends the

Income Tax Regulations under section

142(f)(4) by providing rules for nongovernmental persons engaged in local

furnishing of electric energy or gas using

facilities financed with state or local

bonds to make the election provided in

that section. Proposed regulations

§§1.141–7 and 1.141–8, published on December 30, 1994, (59 FR 67658) addressed the application of the private activity bond tests under section 141(b)(2)

to output contracts for output facilities

and the application of the $15 million

limit under section 141(b)(4) to output facility financings. These sections (the

1994 proposed output regulations) are

withdrawn. Public comments submitted

on the 1994 proposed output regulations,

however, have been taken into account in

formulating these temporary regulations.

Explanation of Provisions

A. Section 1.141–7T Special Rules for

Output Facilities.

1. Basis for Special Rules for Output

Facilities.

The 1994 proposed output regulations

contain special rules for applying the private business tests to output contracts.

Among the reasons for special rules for

output facilities are that governmentallyowned utilities are often under an openended obligation to assure service to their

customers and that general public customers are ordinarily required to make

continuing payments for service. Output

facilities also require special rules because the economic benefit provided by

these facilities is usually the use of fungible property, such as electric power or

water. The temporary regulations continue the approach of the proposed regulations, but contain a number of new provisions, consistent with the general

principles of the existing regulations

under §1.103–7(b)(5), that take into account changes in the electric industry.

2. The Benefits and Burdens Standard.

The 1994 proposed output regulations

provide that a contract to sell output of a

financed facility to a nongovernmental

person may cause the private business

tests of section 141(b) to be met if it has

the effect of transferring to that nongovernmental person the benefits of owning the facility and the burdens of paying

debt service on the facility. The temporary regulations adopt this standard, but

clarify its application.

For purposes of the standard, the temporary regulations generally provide that

use of output on a basis different from the

general public has the effect of transferring the benefits of ownership. Similarly,

contracts that provide a substantial certainty that payments for output will be

made under the terms of the contract,

other than on a short-term basis, have the

effect of transferring the burden of paying

debt service on a facility. The standard

does not require that the burdens of ownership for general tax purposes be transferred to a nongovernmental person.

3. Requirements Contracts.

The 1994 proposed output regulations

provide that take or pay contracts, take

contracts, and certain requirements contracts meet the benefits and burdens standard. Many commentators, noting that

§1.103–7(b)(5) does not expressly refer to

requirements contracts, suggested that requirements contracts should never meet

the benefits and burdens standard.

The temporary regulations narrow the

rule for requirements contracts, by providing that a requirements contract meets

the benefits and burdens test only to the

extent that the issuer reasonably expects

that it is substantially certain that payments for output will be made under the

contract. Such a requirements contract is

in substance equivalent to a take contract.

A retail requirements contract generally

does not meet this standard, unless the

contract requires substantial termination

payments or contains other terms that establish substantial certainty of payment.

Whether the payments under a wholesale

requirements contract are substantially

certain to be made is determined on the

basis of all the facts and circumstances,

taking into account such factors as

whether the purchaser’s customer base

has significant indicators of stability,

whether the contract covers historical requirements of the purchaser, and whether

1998–13 I.R.B.

the purchaser has agreed not to construct

or acquire other power resources.

4. Special Rule for Output Contracts

With Specific Performance Rights.

The 1994 proposed output regulations

provide that a requirements contract

meets the benefits and burdens standard if

the purchaser has priority rights to the

output (or rights to control the allocation

of the available output).

The temporary regulations generally

provide that any output contract that provides the purchaser with specific rights to

control the output or with other specific

performance rights to the use of output of

a financed facility meets the benefits and

burdens test, even if the issuer reasonably

expects that it is not substantially certain

that payments will be made under the

contract. This different standard applies

to output contracts that provide the purchaser with specific performance rights

because those contracts closely resemble

leases, and, thus, provide more substantial

rights to the use of a financed facility.

5. Security Interest Test.

The 1994 proposed output regulations

do not address how the security interest

test applies to output contracts.

The temporary regulations provide that

payments made or to be made under an

output contract pledged as security for an

issue are taken into account under the private security or payment test even if payment under the contract is not substantially certain. This rule is appropriate

because it is reasonable to presume that

payments under a contract pledged as security for an issue are material to the payment of debt service on an issue.

6. Use of Nameplate Capacity to

Determine Available Output.

The 1994 proposed output regulations

measure the available output of a facility

by reference to nameplate capacity, but

further provide that, if nameplate capacity

or its equivalent is greater than 150 percent of the average expected output, average expected output is used instead of

nameplate capacity. In addition, nameplate capacity is reduced by scheduled

maintenance. Commentators suggested

that reference to nameplate capacity to

determine available output is a brightline, administrable test, and that the reductions to nameplate capacity in the

1998–13 I.R.B.

1994 proposed output regulations should

be deleted.

The temporary regulations generally

provide that nameplate capacity may be

used as a reference to determine available

output of a generating facility. This rule

acknowledges that, consistent with prudent utility practice, governmentallyowned utilities may be required to acquire

or construct facilities with excess capacity

for their current or future reserves. To

prevent tax-exempt financings that are inconsistent with the purposes of section

141, however, the temporary regulations

provide that this rule does not apply if the

issuer reasonably expects on the issue

date that nongovernmental persons that

are treated as private business users will

purchase 30 percent or more of the actual

output of the facility. In such a case, the

Commissioner may determine available

output on another reasonable basis. In addition, the temporary regulations clarify

that, if a limited source of supply constrains the output of a facility (for example, if seasonal differences in water flow

constrain output of a hydroelectric facility), the available output must be determined by taking into account these constraints. The temporary regulations also

delete the rule that nameplate capacity is

reduced by scheduled maintenance.

7. Exception for Swapping and Pooling

Arrangements.

The 1994 proposed output regulations

provide that certain arrangements to swap

and pool power do not meet the private

business tests.

The temporary regulations simplify this

exception and expand it, so that it includes swapping arrangements entered

into to enhance reliability of a system.

8. Exceptions for Short-term Sales of

Output.

The 1994 proposed output regulations

provide that 30-day agreements for spot

sales of excess capacity do not result in

private business use.

The temporary regulations provide that

the exceptions for short-term use that

apply to other types of arrangements

under the general private activity bond

rules in §1.141–3 also apply to output

contracts. Thus, in general an output contract that is available to the general public

may have a term up to 180 days; an output

contract that is not treated as general public use, but that is offered on the basis of

generally applicable or uniformly applied

rates, may have a term of up to 90 days;

and an output contract that is specially negotiated may have a term of up to 30

days.

9. Special Exceptions for Sales of Output

Attributable to Excess Generating

Capacity which Mitigate Stranded

Costs.

The 1994 proposed output regulations

provide that a single nonrenewable contract for a term of not greater than 1 year

is not treated as private business use.

Commentators suggested that longer

term, renewable contracts to sell output

attributable to excess generating capacity

should be disregarded under the private

business use test. Commentators noted

that the excess generating capacity problem may be exacerbated by the development of open-access regulatory policies

and other factors.

The temporary regulations respond to

these special considerations by providing

a more flexible exception for sales of output attributable to excess generating capacity that results from the offering of

nondiscriminatory, open access tariffs.

This exception is also consistent with the

Federal Energy Regulatory Commission

policy that utilities should take reasonable

steps to mitigate the imposition of charges

to recover legitimate, prudent, and verifiable stranded costs associated with providing open access. Under this exception, a

contract to sell excess power is not treated

as private business use if the term of the

contract (including all renewal options) is

not greater than 3 years, the issuer does

not issue tax-exempt bonds to increase the

capacity of its generation system during

the term of the contract, the governmental

owner offers non-discriminatory, open access transmission tariffs pursuant to the

FERC rules (or comparable state law provisions pursuant to a plan approved by the

FERC), all of the output sold under the

contract is excess capacity resulting from

participation in open access, the contract

mitigates stranded costs of the owner that

are attributable to entry into the open access system, and stranded costs recovered

under the contract by that owner are used

to redeem tax-exempt bonds as promptly

as reasonably practical.

March 30, 1998

10. Special Exceptions for Transmission

Facilities.

The 1994 proposed output regulations

provide special rules for transmission facilities, which are intended to respond to

the development of regulatory policies

that require or encourage open access to

transmission systems. Under these special rules, in general, the use of transmission facilities is not private business use

to the extent that it results from an order

or actions taken in response to (or to prevent) an anticipated order by the United

States that those facilities be used by a

particular nongovernmental person, provided that the transmission facilities were

sized based on the issuer’s reasonable expectations about the amount of wheeling.

The 1994 proposed output regulations

contain a number of exceptions to this

rule, which are designed to prevent the

tax-exempt financing of facilities constructed for use by nongovernmental persons. The 1994 proposed output regulations also provide that an issuer must take

remedial action if more than 20 percent of

a transmission facility is so used by a nongovernmental person.

Commentators suggested that the exceptions for use of transmission systems

should be made more flexible to accommodate the development of open access

regulatory policies. Commentators noted

that measurement of use of a transmission

system raises a number of complex technical issues. For example, capacity or

available output may be much more readily determined for a generating unit than

for a transmission system. Some commentators suggested that all use of a

transmission system pursuant to standard

tariffs should be treated as general public

use. Other commentators suggested that

any rules addressing open access required

by the FERC should also similarly address open access required by state public

utility commissions.

The temporary regulations broaden the

exceptions for use of transmission facilities, but do not treat all use of transmission facilities pursuant to standard tariffs

as general public use. Under § 1.141–

2(d), an action taken in response to a specific FERC order to wheel power under

sections 211 and 212 of the Federal

Power Act (16 U.S.C. 824j and 824k)

would otherwise qualify for an exception

from the deliberate action rule because it

March 30, 1998

is taken in response to a regulatory directive made by the federal government. The

temporary regulations additionally provide that an action taken in anticipation of

such an order is not a deliberate action.

The temporary regulations also provide

a special exception for transmission facilities pursuant to which an action is not

treated as a deliberate action if it is taken

to implement the offering of non-discriminatory, open access for the use of financed transmission facilities in a manner

consistent with FERC rules, including

reciprocity conditions of FERC Order No.

888 (61 F.R. 21540, May 10, 1996), pursuant to a plan approved by the FERC.

The special exception also applies to orders and rules of state regulatory authorities pursuant to a plan approved by the

FERC that are comparable to certain

FERC orders and rules. This exception

does not apply, however, to the sale, exchange, or other disposition of bond-financed transmission facilities to a nongovernmental person.

Section 1.141–2(d)(1) provides that an

issue is an issue of private activity bonds

if the issuer reasonably expects, as of the

issue date, that the issue will meet either

the private business tests or the private

loan financing test or if the issuer takes a

deliberate action, subsequent to the issue

date, that causes the conditions of either

the private business tests or the private

loan financing test to be met. Thus, reasonable expectations about private business use of transmission facilities under

non-discriminatory, open-access tariffs,

must be taken into account on the issue

date of bonds financing those facilities.

A special transition rule applies to bonds

(other than advance refunding bonds) that

refund bonds issued prior to July 9, 1996

(the effective date of FERC Order No.

888). Because an issuer is in general not

required to apply the temporary regulations to refunding bonds issued after the

effective date that do not have a weighted

average maturity longer than the remaining weighted average maturity of the refunded bonds, the special transition rule

will apply only if the issuer chooses to

apply the temporary regulations.

Whether bonds issued after July 9, 1996,

to finance output facilities met the reasonable expectations test of section 141

because of the possibility of actions taken

to implement open access tariffs is appro-

priately determined on a facts and circumstances basis.

These special rules for transmission facilities are appropriate because of the

unique statutory and regulatory regime

that applies to transmission facilities.

B. 1.141–8T $15 million Limitation for

Output Facilities.

1. Clarification of Computation of

Nonqualified Amount. The 1994 proposed

output regulations provide guidance on

the special $15 million limitation on output facilities of section 141(b)(4). In general, this limitation is based on the “nonqualified amount” of an issue or issues

that finance a single project.

The temporary regulations clarify that,

in determining the total nonqualified

amount for issues financing a project, the

nonqualified amount is first determined

on an issue-by-issue basis, and that these

amounts are then aggregated. The temporary regulations also provide a simpler

method for determining how much the

nonqualified amount of an issue is reduced when principal of the issue is paid.

Under this method, the nonqualified

amount of an issue is reduced by the ratio

of adjusted issue price over issue price.

C. Section 1.142(f)(4)–1T Manner of

Making Election to Terminate Taxexempt Bond Financing.

Section 142(f)(4) permits a person engaged in the local furnishing of electric energy or gas that uses facilities financed

with exempt facility bonds under section

142(a)(8) and that expands its service area

in a manner inconsistent with the requirements of sections 142(a)(8) and 142(f) to

make an election to ensure that those

bonds will continue to be treated as exempt facility bonds. In order to make the

election the person engaged in local furnishing must, among other things, agree to

redeem all outstanding bonds that financed

the facilities not later than 6 months after

the later of the earliest date on which the

bonds may be redeemed or the date of the

election. The temporary regulations set

forth the required time and manner of

making this election. In general, the election must be made on or before the 90th

day after the later of (i) the date of the service area expansion or (ii) the effective

date of the temporary regulations.

1998–13 I.R.B.

D. §1.150–5T Filing Notices and

Elections.

The temporary regulations specify that

notices and elections under section

142(f)(4)(B) and §1.141–12(d)(3) must

be filed with the Chief, Employee Plans

and Exempt Organizations Division of the

appropriate key district office.

E. Need for Temporary Regulations and

Request for Public Comments

Congress passed the Federal Energy

Act of 1992 to encourage deregulation of

the electric power industry. Since that

time, the Federal Energy Regulatory

Commission and various states have

adopted policies to open up access to

transmission facilities. Treasury and the

IRS are aware that these initiatives are

causing rapid changes in the electric

power industry, and have received many

comments asking for immediate guidance

under section 141 regarding the effect on

the tax-exempt status of bonds of certain

restructuring transactions necessary for

utilities to participate in a deregulated

electric utility environment. For example,

several comments state that the restructuring initiatives in various states and regions may not proceed until Treasury and

the IRS clarify the extent to which municipal utilities may transfer control of certain assets financed with tax-exempt

bonds to an independent system operator.

Based on these considerations, it has been

determined that immediate regulatory

guidance is necessary to ensure efficient

administration of the tax laws.

The regulations are published in both

temporary and proposed form to provide

immediate guidance on which issuers can

rely in evaluating their participation in

open access regimes, while providing the

opportunity for public comment. In addition, Treasury and the IRS believe that

providing guidance on the effect of open

access participation is more appropriately

accomplished by regulation than by private letter ruling. Treasury and the IRS

are also aware, however, that restructuring efforts are evolving and uncertain, and

that new types of arrangements may be

developed to implement restructuring.

Many of the issues that will arise may

need to be addressed legislatively. Accordingly, the regulations are published in

temporary form with the expectation the

1998–13 I.R.B.

Treasury and the IRS will reexamine

them in light of new developments within

the next three years.

Comments are invited on whether further guidance is needed to address the

new types of contractual arrangements

that are arising in the electric power industry. In particular, comments are invited on whether there are any instances

in which an option of a nongovernmental

purchaser to purchase output of a bond-financed facility should not be taken into

account as private business use.

Seller, Office of Assistant Chief Counsel

(Financial Institutions & Products), and

Nancy M. Lashnits, formerly of that office. However, other personnel from IRS

and the Treasury Department participated

in their development.

Effective Dates

PART 1—INCOME TAXES

Sections 1.141–7T and 1.141–8T are

applicable to bonds issued on or after

February 23, 1998.

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.141–0 is amended by

removing the entries for §§1.141–7 and

1.141–8 and adding entries to the table in

numerical order to read as follows:

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 has also been determined that

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

apply to these regulations.

It is hereby certified that the provisions

of these regulations that impose a collection of information requirement on small

entities do not have a significant impact

on a substantial number of small entities.

This certification is based upon the fact

that in the years 1987 through 1993 a total

of only 61 different state or local government issuers of exempt facility bonds issued under section 142(f) for facilities for

the local furnishing of electric energy or

gas filed information returns with the Internal Revenue Service under section

149(e). Further, an election under section

142(f)(4) is in no event required to be

filed with the Internal Revenue Service

more than once. Therefore, a Regulatory

Flexibility Analysis under the Regulatory

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

required. Pursuant to section 7805(f) of

the Internal Revenue Code, these temporary regulations will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment on

its impact on small business.

Drafting Information

The principal authors of these regulations are Michael G. Bailey and Allan

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

§1.141–0 Table of contents.

* * * * *

§1.141–7T Special rules for output

facilities (temporary).

(a) Overview.

(b) Definitions.

(1) Available output.

(2) Measurement period.

(3) Sale at wholesale.

(4) Stranded costs.

(5) Take contract and take or pay contract.

(6) Transmission facilities.

(7) Nonqualified amount.

(1) General rule.

(2) Benefits and burdens test.

(3) Take contract or take or pay contract.

(4) Requirements contracts.

(5) Contract with specific performance

rights.

(d) Measurement of private business use.

(e) Measurement of private security or

payment.

(f) Exceptions for certain contracts.

(1) Small purchases of output.

(2) Swapping and pooling arrangements.

(3) Short-term output contracts.

(4) Special 3-year exception for sales of

output attributable to excess generating capacity resulting from participation in open access.

(5) Special exceptions for transmission

facilities.

March 30, 1998

(6) Certain conduit parties disregarded.

(g) Allocations of output facilities and

systems.

(1) Facts and circumstances analysis.

(2) Illustrations.

(3) Transmission contracts.

(4) Allocation of payments.

(h) Examples.

§1.141–8T $15 million limitation for

output facilities (temporary).

(a) In general.

(1) General rule.

(2) Reduction in $15 million output limitation for outstanding issues.

(3) Benefits and burdens test applicable.

(b) Definition of project.

(1) General rule.

(2) Separate ownership.

(3) Generating property.

(4) Transmission.

(5) Subsequent improvements.

(6) Replacement property.

§1.141–15T Effective dates (temporary).

(a) through (e) [Reserved].

(f) Effective dates for certain regulations

relating to output facilities.

(1) General rule.

(2) Transition rule for requirement contracts.

(g) Refunding bonds.

(h) Permissive retroactive application.

(i) Permissive retroactive application of

certain regulations pertaining to output contracts.

Par. 3. Section 1.141–2 is amended by

adding a sentence at the end of paragraph

(d)(3)(ii)(B) to read as follows:

§1.141–2 Private activity bond tests.

(d) * * *

(3) * * *

(ii) * * *

(B) * * * See §1.141–7T(f)(5).

§§1.141–7 and 1.141–8 [Removed]

Par. 3a. Sections 1.141–7 and 1.141–8

are removed.

March 30, 1998

Par. 4. Sections 1.141–7T and 1.141–

8T are added to read as follows:

§1.141–7T Special rules for output

facilities (temporary).

(a) Overview. This section provides

special rules to determine whether

arrangements for purchases of output

from an output facility cause an issue of

bonds to meet the private business tests.

For this purpose, unless otherwise stated,

water facilities are treated as output facilities. Section 1.141–3 generally applies to

determine whether other types of arrangements for use of an output facility cause

an issue to meet the private business tests.

(b) Definitions. For purposes of this

section and §1.141–8T, the following definitions and rules apply:

(1) Available output. The available

output of a facility financed by an issue is

determined by multiplying the number of

units produced or to be produced by the

facility in one year by the number of years

in the measurement period of that facility

for that issue.

(i) Generating facilities. The number

of units produced or to be produced by a

generating facility in one year is determined by reference to its nameplate capacity or the equivalent (or where there is

no nameplate capacity or the equivalent,

its maximum capacity), which is not reduced for reserves or other unutilized capacity.

(ii) Transmission and other output facilities. (A) In general. For transmission,

cogeneration, and other output facilities,

available output must be measured in a

reasonable manner to reflect capacity.

(B) Electric transmission facilities.

Measurement of the available output of

all or a portion of electric transmission facilities may be determined in a manner

consistent with the reporting rules and requirements for transmission networks

promulgated by the Federal Energy Regulatory Commission (FERC). For example, for a transmission network, the use of

aggregate load and load share ratios in a

manner consistent with the requirements

of the FERC may be reasonable. In addition, depending on the facts and circumstances, measurement of the available

output of transmission facilities using

thermal capacity or transfer capacity may

be reasonable.

(iii) Special rule for facilities acquired

or constructed primarily for use by private business users. If an issuer reasonably expects on the issue date that persons that are treated as private business

users will purchase more than 30 percent

of the actual output of the facility financed with the issue, the Commissioner

may determine the number of units produced or to be produced by the facility in

one year on a reasonable basis other than

by reference to nameplate capacity, such

as the average expected annual output of

the facility. For example, the Commissioner may treat the reasonably expected

annual output of a financed peaking electric generating unit as the available output of that unit if the issuer reasonably

expects, on the issue date of bonds that

finance the unit, that an investor-owned

utility will purchase 30 percent of the actual output of the facility under a take or

pay contract, even if the amount of output purchased is less than 10 percent of

the available output determined by reference to nameplate capacity. The reasonably expected annual output of the generating facility must be consistent with the

capacity reported for prudent reliability

purposes.

(iv) Special rule for facilities with a

limited source of supply. If a limited

source of supply constrains the output of

an output facility, the number of units

produced or to be produced by the facility

must be determined by reasonably taking

into account those constraints. For example, the available output of a hydroelectric

unit must be determined by reference to

the reasonably expected annual flow of

water through the unit.

(2) Measurement period. The measurement period of an output facility financed

by an issue is determined under

§1.141–3(g).

(3) Sale at wholesale. For purposes of

this section, a sale at wholesale means a

sale of output to any person for resale.

(4) Stranded costs. For purposes of

this section, stranded costs means

stranded costs as defined in 18 CFR 35.26

and costs that an issuer incurred to provide service to a wholesale or retail customer that subsequently becomes, in

whole or in part, an unbundled transmission customer and that an issuer is authorized to recover by the FERC or a state

regulatory authority.

1998–13 I.R.B.

(5) Take contract and take or pay contract. A take contract is an output contract under which a purchaser agrees to

pay for the output under the contract if the

output facility is capable of providing the

output. A take or pay contract is an output

contract under which a purchaser agrees

to pay for the output under the contract,

whether or not the output facility is capable of providing the output.

(6) Transmission facilities. Transmission facilities are facilities for the transmission or distribution of output. Transmission facilities include facilities

necessary to provide ancillary services required to be offered as part of open access

transmission tariffs under rules promulgated by the FERC under sections 205

and 206 of the Federal Power Act (16

U.S.C. 824d and 824e). Thus, if a facility

also serves another function (for example,

a facility that provides for operating reserves for transmission and also provides

generation) an allocable portion of the facility is treated as a transmission facility.

(7) Nonqualified amount. The nonqualified amount with respect to an issue

is determined under section 141(b)(8).

rule. The purchase by a nongovernmental

person of the available output of an output

facility (output contract) financed with

the proceeds of an issue is taken into account under the private business tests if

the purchase has the effect of transferring

substantial benefits of owning the facility

and substantial burdens of paying the debt

service on bonds used (directly or indirectly) to finance the facility (the benefits

and burdens test). See paragraph (c)(5) of

this section for other output contract

arrangements that are taken into account

under the private business tests. See also

§1.141–8T for rules for when an issue

that finances an output facility (other than

a water facility) meets the private business tests because the nonqualified

amount of the issue exceeds $15 million.

(2) Benefits and burdens test—(i) Benefits of ownership. An output contract

transfers substantial benefits of owning a

facility if the contract gives the purchaser

(directly or indirectly) rights to capacity

of the facility on a basis that is preferential to the rights of the general public.

(ii) Burdens of paying debt service. An

output contract transfers substantial burdens of paying debt service on an issue to

1998–13 I.R.B.

the extent that the issuer reasonably expects that it is substantially certain that

payments will be made under the terms of

the contract (disregarding default, insolvency, or other similar circumstances).

For example, an output contract is treated

as transferring burdens of paying debt service on an issue if payments must be

made upon contract termination.

(iii) Payments pursuant to pledged contract. Payments made or to be made

under the terms of an output contract that

is pledged as security for an issue are

taken into account under the private business tests even if the issuer reasonably expects that it is not substantially certain

that payments will be made under the

contract (disregarding default, insolvency,

or other similar circumstances). For this

purpose, an output contract is pledged as

security only if the bond documents provide that the pledged contract cannot be

substantially amended without the consent of bondholders or a trustee for the

bondholders.

(3) Take contract or take or pay contract—(i) In general. The benefits and

burdens test is met if a nongovernmental

person agrees pursuant to a take contract

or a take or pay contract to purchase the

available output of a facility. See paragraphs (d) and (e) of this section for rules

regarding measuring the use of, and payments on debt service for, an output facility for determining whether the private

business tests are met.

(ii) Transmission contracts. In the case

of a transmission facility, an agreement

to provide firm or priority transmission

services is generally treated as a take contract or a take or pay contract. The extent

to which transmission services are interruptible is an important factor indicating

that a contract for transmission services is

not treated as a take contract or a take or

pay contract.

(4) Requirements contracts—(i) In general. A requirements contract under which

a nongovernmental person agrees to purchase all or part of its output requirements

is taken into account under the private

business tests only to the extent that, based

on all the facts and circumstances, the

contract meets the benefits and burdens

test. See §1.141–15T(f)(3) for special effective dates for the application of this

paragraph (c)(4) to issues financing facilities subject to requirements contracts.

(ii) Significant factors. Significant factors that tend to establish that the benefits

and burdens test is met under the rule set

forth in paragraph (c)(4)(i) of this section

include—

(A) The purchaser’s customer base has

significant indicators of stability, such as

large size, diverse composition, and a

substantial residential component;

(B) The contract covers historical requirements of the purchaser, rather than

only projected requirements that are in

addition to historical requirements; and

meet the requirements covered by the

contract.

(iii) Special rule for retail requirements

contracts. In general, a requirements contract that is not a sale at wholesale does

not meet the benefits and burdens test because the obligation to make payments on

the contract is contingent on the output requirements of a single user. Such a requirements contract in general meets the

benefits and burdens test, however, to the

extent that it contains contractual terms

that obligate the purchaser to make payments that are not contingent on the output

requirements of the purchaser (such as significant termination payments) or that obligate the purchaser to have output requirements. For example, a requirements

contract with an industrial purchaser

meets the benefits and burdens test if the

purchaser enters into additional contractual obligations with the issuer or another

governmental unit not to cease operations.

(5) Contract with specific performance

rights. An output contract that provides

the purchaser with specific rights to control the output of a facility or with other

specific performance rights to the use of

output of a facility is generally taken into

account under the private business tests,

even if the benefits and burdens test is not

met. Payments made and to be made

under such a contract are generally taken

into account under the private payment

test, even if the issuer does not reasonably

expect that it is substantially certain that

payments will be made under the contract

(disregarding default, insolvency, or other

similar circumstances). A customer’s normal entitlement to receive utility service

(for example, an entitlement to reasonable

protection against blackouts in times of

high demand through rotating the effects

March 30, 1998

of blackouts) is not treated as a specific

performance right for this purpose.

(d) Measurement of private business

use. If an output contract results in private business use under this section, the

amount of private business use generally

is the capacity that must be reserved for

the nongovernmental person under prudent reliability standards. For example, in

the case of a take contract for a peaking

electric generating unit, under which a

nongovernmental person has priority

rights to use capacity at any time for the

entire term of the bonds, but under which

the total energy purchases are limited in

any one year to 10 percent of annual

available output (determined by reference

to nameplate capacity), the amount of private business use is the amount of capacity that must be reserved for that nongovernmental person under prudent

reliability standards, which may be as

much as 100 percent.

(e) Measurement of private security or

payment. The measurement of payments

made or to be made by nongovernmental

persons under output contracts as a percent of the debt service of an issue is determined under the rules provided in

§1.141–4.

(f) Exceptions for certain contracts—

(1) Small purchases of output. An output

contract is not taken into account under

the private business tests if the purchaser

is not required under the contract to make

a payment that is substantially certain to

be made under paragraph (c)(2)(ii) of this

section in any year greater than 0.5 percent of the average annual debt service on

an issue that finances the output facility.

(2) Swapping and pooling arrangements. An agreement that provides for

swapping or pooling of output by one or

more governmental persons and one or

more nongovernmental persons does not

result in private business use of the output

facility owned by the governmental person to the extent that—

(i) The swapped output is reasonably

expected to be approximately equal in

value (determined over periods of one

year or less); and

(ii) The purpose of the agreement is to

enable each of the parties to satisfy different peak load demands, to accommodate

temporary outages, to diversify supply, or

to enhance reliability in accordance with

prudent reliability standards.

March 30, 1998

(3) Short-term output contracts. The

exceptions for short-term arrangements

provided in §1.141–3(c) and (d)(3) apply

to output contracts. For example, a spot

sale for use for a period of 90 days on the

basis of rates that are generally applicable

and uniformly applied generally does not

result in private business use, and a spot

sale for use for a period of 30 days on the

basis of rates that are specially negotiated

generally does not result in private business use.

(4) Special 3-year exception for sales

of output attributable to excess generating capacity resulting from participation

in open access. The purchase of output of

an output facility (not including a water

facility) by a nongovernmental person is

not treated as private business use if all of

the following requirements are met:

(i) The term of the contract is not longer

than 3 years, including all renewal options.

(ii) The issuer does not make expenditures to increase the generating capacity

of its system during the term of the contract that are, or will be, financed with

proceeds of tax-exempt bonds.

(iii) The governmental owner offers

non-discriminatory, open access transmission tariffs for use of its transmission system pursuant to rules promulgated by the

FERC under sections 205 and 206 of the

Federal Power Act (16 U.S.C. 824d and

824e) (or comparable provisions of state

law pursuant to a plan approved by the

FERC).

(iv) All of the output sold under the

contract is attributable to excess capacity

resulting from the offer of the non-discriminatory, open access transmission tariffs referred to in paragraph (f)(5)(ii) of

this section.

(v) The contract mitigates stranded

costs of the governmental owner that are

attributable to the offer of the non-discriminatory, open access transmission tariffs referred to in paragraph (f)(5)(ii) of

this section.

(vi) Any stranded costs recovered by

the governmental owner (including

amounts recovered under the contract)

with respect to the output facility under

rules promulgated by the FERC under the

Federal Power Act (or comparable provisions of state law) are applied as promptly

as is reasonably practical to redeem taxexempt bonds that financed that facility in

a manner consistent with §1.141–12.

(5) Special exceptions for transmission

facilities—(i) Mandated wheeling. Entering into a contract for the use of transmission facilities financed by an issue is

not treated as a deliberate action under

§1.141–2(d) if—

(A) The contract is entered into in response to (or in anticipation of) an order

by the United States under sections 211

and 212 of the Federal Power Act (16

U.S.C. 824j and 824k) (or a state regulatory authority under comparable provisions of state law pursuant to a plan approved by the FERC); and

(B) The terms of the contract are bona

fide and arm’s length, and the consideration paid is consistent with the provisions

of section 212(a) of the Federal Power

Act.

(ii) Actions taken to implement non-discriminatory, open access. An action is

not treated as a deliberate action under

§1.141–2(d) if it is taken to implement the

offering of non-discriminatory, open access tariffs for the use of transmission facilities financed by an issue in a manner

consistent with rules promulgated by the

FERC under sections 205 and 206 of the

Federal Power Act (16 U.S.C. 824d and

824e) (or by a state regulatory authority

under comparable provisions of state law

pursuant to a plan approved by the

FERC). This paragraph (f)(5)(ii) does not

apply, however, to the sale, exchange, or

other disposition of transmission facilities

to a nongovernmental person.

(iii) Application to reasonable expectations test to certain current refunding

bonds. An action taken or to be taken

with respect to transmission facilities refinanced by an issue is not taken into account under the reasonable expectations

test of §1.141–2(d) if—

(A) The action is described in paragraph (f)(5)(i) or (ii) of this section;

(B) The bonds of the issue are current

refunding bonds that, directly or indirectly, refund bonds issued before July 9,

1996; and

the refunding bonds is not greater than the

remaining weighted average maturity of

those prior bonds.

(6) Certain conduit parties disregarded. A nongovernmental person acting solely as a conduit for the exchange of

output among governmentally owned and

operated utilities is disregarded in deter-

1998–13 I.R.B.

mining whether the private business tests

are met with respect to financed facilities

owned by a governmental person. Use of

property by a power marketer in the trade

or business of purchasing and reselling

power, however, is taken into account

under the private business tests.

(g) Allocations of output facilities and

systems—(1) Facts and circumstances

analysis. Whether output sold under an

output contract is allocated to a particular

facility (for example, a generating unit),

to the entire system of the seller of that

output (net of any uses of that system output allocated to a particular facility), or to

a portion of a facility is based on all the

facts and circumstances. Significant factors to be considered in determining the

allocation of an output contract to financed property are the following:

(i) The extent to which it is physically

possible to deliver output to or from a particular facility or system.

(ii) The terms of a contract relating to

the delivery of output (such as delivery

limitations and options or obligations to

deliver power from additional sources).

(iii) Whether a contract is entered into

as part of a common plan of financing for

a facility.

(iv) The method of pricing output

under the contract, such as the use of market rates rather than rates designed to pay

debt service of tax-exempt bonds used to

finance a particular facility.

(2) Illustrations. The following illustrate the factors set forth in paragraph

(g)(1) of this section:

(i) Physical possibility. Output from a

generating unit that is fed directly into a

low voltage distribution system of the

owner of that unit and that cannot physically leave that distribution system generally must be allocated to those receiving

electricity through that distribution system. Output may be allocated without regard to physical limitations, however, if

exchange or similar agreements provide

output to a purchaser where, but for the

exchange agreements, it would not be

possible for the seller to provide output to

that purchaser.

(ii) Contract terms relating to performance. A contract to provide a specified

amount of electricity from a system, but

only when at least that amount of electricity is being generated by a particular unit,

is allocated to that unit. For example, a

1998–13 I.R.B.

contract to buy 20 MW of system power

with a right to take up to 40 percent of the

actual output of a specific 50 MW facility

whenever total system output is insufficient to meet all of the seller’s obligations

generally is allocated to the specific facility rather than to the system.

(iii) Common plan of financing. A contract entered into as part of a common

plan of financing for a facility generally is

allocated to the facility if debt service for

the issue of bonds is reasonably expected

to be paid, directly or indirectly, from

payments substantially certain to be made

under the contract (disregarding default,

insolvency, or other similar circumstances).

(iv) Pricing method. Pricing based on

the capital and generating costs of a particular turbine tends to indicate that output under the contract is properly allocated to that turbine.

(3) Transmission contracts. Whether

use under an output contract for transmission is allocated to a particular facility or

to a transmission network is based on all

the facts and circumstances, in a manner

similar to paragraphs (g)(1) and (2) of this

section. In general, the method used to

determine payments under a contract is a

more significant contract term for this

purpose than nominal contract path. In

general, if reasonable and consistently applied, the determination of use of transmission facilities under an output contract

may be based on a method used by third

parties, such as reliability councils.

(4) Allocation of payments. Payments

for output provided by an output facility

financed with two or more sources of

funding are generally allocated under the

rules in §1.141–4(c).

(h) Examples. The following examples

illustrate the application of this section:

Example 1. Joint ownership. Z, an investorowned electric utility, and City H agree to construct

an electric generating facility of a size sufficient to

take advantage of the economies of scale. H will

issue $50 million of its 25-year bonds, and Z will

use $100 million of its funds for construction of a facility they will jointly own as tenants in common.

Each of the participants will share in the ownership,

output, and operating expenses of the facility in proportion to its contribution to the cost of the facility,

that is, one-third by H and two-thirds by Z. H’s

bonds will be secured by H’s ownership interest in

the facility and by revenues to be derived from its

share of the annual output of the facility. H will

need only 50 percent of its share of the annual output of the facility during the first 20 years of opera-

tions. It agrees to sell 10 percent of its share of the

annual output to Z for a period of 20 years pursuant

to a contract under which Z agrees to take that

power if available. The facility will begin operation,

and Z will begin to receive power, 4 years after the

H bonds are issued. The measurement period for the

property financed by the issue is 21 years. H also

will sell the remaining 40 percent of its share of the

annual output to numerous other private utilities

under contracts of 90 days or less entered into under

a prevailing rate schedule, including demand

charges. No contracts will be executed obligating

any person other than Z to purchase any specified

amount of the power for any specified period of time.

No person (other than Z) will make payments substantially certain to be made (disregarding default,

insolvency, or other similar circumstances) under

paragraph (c)(2) of this section that will result in a

transfer of substantial burdens of paying debt service

on bonds used directly or indirectly to provide H’s

share of the facilities. The bonds are not private activity bonds, because H’s one-third interest in the facility is not treated as used by the other owners of the

facility. Although 10 percent of H’s share of the annual output of the facility will be used in the trade or

business of Z, a non-governmental person, under the

rule in paragraph (c) of this section, that portion constitutes not more than 10 percent of the available output of H’s ownership interest in the facility.

Example 2. Requirements contract treated as

take contract. (i) City J issues 20-year bonds to acquire an electric generating facility having a reasonably expected economic life substantially greater

than 20 years and a nameplate capacity of 100 MW.

The available output of the facility under paragraphs

(b)(1) of this section is approximately 17,520,000

MWh. On the issue date, J enters into a contract

with T, an investor-owned utility, to provide T with

all of its power requirements for a period of 10

years, commencing on the issue date. J reasonably

expects that T will actually purchase an average of

20 MW over the 10-year period. Based on all of the

facts and circumstances, including the size, diversity, and composition of T’s customer base, J reasonably expects that it is substantially certain (disregarding default, insolvency, or other similar

circumstances) that T will actually purchase only an

average of 16 MW over the 10-year period. The

contract is a requirements contract that must be

taken into account under the private business tests

pursuant to paragraph (c)(4) of this section because

it provides T with substantial benefits of ownership

(rights to capacity) and obligates T with substantial

burdens of making payments that the issuer reasonably expects are substantially certain.

(ii) J is required to reserve for T’s use 40 MW of

capacity in accordance with prudent reliability standards. Under paragraph (d) of this section, the

amount of private business use under this contract,

therefore, is approximately 20 percent (40 MW X 24

hours X 365 days X 10 years, or 3,504,000 MWh) of

the available output. Accordingly, the issue meets

the private business use test. J reasonably expects

that the amount to be paid for an average of 16 MW

of power (less the operation and maintenance costs

directly attributable to generating that 16 MW of

power), will be more than 10 percent of debt service

on the issue on a present-value basis. The payment

for 16 MW of power is an amount that J reasonably

expects is substantially certain to be made under

March 30, 1998

paragraph (c)(2) of this section. Accordingly, the

issue meets the private security or payment test because J reasonably expects that it is substantially certain that payment of more than 10 percent of the debt

service will be indirectly derived from payments by

T. The bonds are private activity bonds under paragraph (c) of this section. Further, if 20 percent of the

sale proceeds of the issue is greater than $15 million

and the issue meets the private security or payment

test with respect to the $15 million output limitation,

the bonds are also private activity bonds under section 141(b)(4). See §1.141–8T.

Example 3. Allocation of existing contracts to

new facilities. Power Authority K, a political subdivision created by the legislature in State X to own

and operate certain power generating facilities, sells

all of the power from its existing facilities to four

private utility systems under contracts executed in

1999, under which the four systems are required to

take or pay for specified portions of the total power

output until the year 2029. Existing facilities supply

all of the present needs of the four utility systems,

but their future power requirements are expected to

increase substantially beyond the capacity of K’s

current generating system. K issues 20-year bonds

in 2004 to construct a large generating facility. As

part of the financing plan for the bonds, a fifth private utility system contracts with K to take or pay

for 15 percent of the available output of the new facility. The balance of the output of the new facility

will be available for sale as required, but initially it

is not anticipated that there will be any need for that

power. The revenues from the contract with the fifth

private utility system will be sufficient to pay less

than 10 percent of the debt service on the bonds (determined on a present value basis). The balance,

which will exceed 10 percent of the debt service on

the bonds, will be paid from revenues derived from

the contracts with the four systems initially from

sale of power produced by the old facilities. The

output contracts with all the private utilities are allocated to K’s entire generating system. See paragraphs (g)(1) and (2) of this section. Thus, the

bonds meet the private business use test because

more than 10 percent of the proceeds will be used in

the trade or business of a nongovernmental person.

In addition, the bonds meet the private payment or

security test because payment of more than 10 percent of the debt service, pursuant to underlying

arrangements, will be derived from payments in respect of property used for a private business use.

Example 4. Allocation to displaced resource.

Municipal utility MU, a political subdivision, purchases all of the electricity required to meet the

needs of its customers (1,000 MW) from B, an investor-owned utility that operates its own electric

generating facilities, under a 50-year take or pay

contract. MU does not anticipate that it will require

additional electric resources, and any new resources

would produce electricity at a higher cost to MU

than its cost under its contract with B. Nevertheless,

B encourages MU to construct a new generating

plant sufficient to meet MU’s requirements. MU issues obligations to construct facilities that will produce 1,000 MW of electricity. MU, B, and I, another investor-owned utility, enter into an agreement

under which MU assigns to I its rights under MU’s

take or pay contract with B. Under this arrangement, I will pay MU, and MU will continue to pay

B, for the 1,000 MW. I’s payments to MU will at

March 30, 1998

least equal the amounts required to pay debt service

on MU’s bonds. In addition, under paragraph

(g)(1)(iii) of this section, the contract among MU, B,

and I is entered into as part of a common plan of financing of the MU facilities. Under all the facts and

circumstances, MU’s assignment to I of its rights

under the original take or pay contract is allocable to

MU’s new facilities under paragraph (g) of this section. Because I is a nongovernmental person, MU’s

bonds are private activity bonds.

Example 5. Transmission facilities transferred to

independent system operator. (i) In 1998, the public

utilities commission of State C adopts a plan for restructuring its electric power industry. The plan fosters competition by providing both wholesale and

retail customers with non-discriminatory access to

transmission facilities within the State. The plan

provides that investor-owned utilities will transfer

operating control over all of their transmission assets to an independent system operator (ISO), which

is a nongovernmental person that will operate those

combined assets as a single, state-wide system. Municipally-owned utilities are eligible for, but are not

required to participate in, the open access system

implemented by the ISO. The functions of the ISO

include control of transmission access and pricing,

scheduling transmission, control area operations,

and settlements and billing. In addition, under certain circumstances the ISO may order the transmission owners to construct additional transmission facilities. The restructuring plan is approved by the

FERC pursuant to sections 205 and 206 of the Federal Power Act.

(ii) In 1994 City D had issued bonds to finance

improvements to its transmission system. In 1998, D

transfers operating control of its transmission system

to the ISO pursuant to the restructuring plan. At the

same time, D chooses to apply the private activity

bond regulations of §§1.141–0 through 1.141–15 to

the 1994 bonds. The operation of the financed facilities by the ISO does not meet the exception for management contracts that do not give rise to private

business use under §1.141–3(b)(4)(iii)(C) because it

is not a contract solely for the operation of a facility

under that exception. Under the special exception in

paragraph (f)(5) of this section, however, the transfer

of control is not treated as a deliberate action. Accordingly, the transfer of control does not cause the

1994 bonds to meet the private activity bond tests.

Example 6. Current refunding. The facts are the

same as in Example 5 of this paragraph (h), and in

addition D issues bonds in 1999 to currently refund

the 1994 bonds. The weighted average maturity of

the 1999 bonds is not greater than the remaining

weighted average maturity of the 1994 bonds. D

chooses to apply the private activity bond regulations of §§1.141–0 through 1.141–15 to the refunding bonds. In general, reasonable expectations must

be separately tested on the date that refunding bonds

are issued under §1.141–2(d). Under the special exception in paragraph (f)(5) of this section, however,

the transfer of the financed facilities to the ISO need

not be taken into account in applying the reasonable

expectations test to the refunding bonds.

§1.141–8T $15 million limitation for

output facilities (temporary).

(a) In general—(1) General rule. Section 141(b)(4) provides a special private

activity bond limitation (the $15 million

output limitation) for issues 5 percent or

more of the proceeds of which are to be

used to finance output facilities (other

than a facility for the furnishing of water).

Under this rule, a bond is a private activity bond under the private business tests

of section 141(b)(1) and (2) if the nonqualified amount with respect to output

facilities financed by the proceeds of the

issue exceeds $15 million. The $15 million output limitation applies in addition

to the private business tests of section

141(b)(1) and (2). Under section

141(b)(4) and paragraph (a)(2) of this section, the $15 million output limitation is

reduced in certain cases. Specifically, an

issue meets the test in section 141(b)(4) if

both of the following tests are met:

(i) More than $15 million of the proceeds of the issue to be used with respect

to an output facility are to be used for a

private business use. Investment proceeds are disregarded for this purpose if

they are not allocated disproportionately

to the private business use portion of the

issue.

(ii) The payment of the principal of, or

the interest on, more than $15 million of

the sales proceeds of the portion of the

issue used with respect to an output facility is (under the terms of the issue or any

underlying arrangement) directly or indirectly—

(A) Secured by any interest in an output facility used or to be used for a private

business use (or payments in respect of

such an output facility); or

(B) To be derived from payments

(whether or not to the issuer) in respect of

an output facility used or to be used for a

private business use.

(2) Reduction in $15 million output

limitation for outstanding issues—(i)

General rule. In determining whether an

issue more than 5 percent of the proceeds

of which are to be used with respect to an

output facility consists of private activity

bonds under the $15 million output limitation, the $15 million limitation on private business use and private security or

payments is applied by taking into account the aggregate nonqualified amounts

of any outstanding bonds of other issues 5

percent or more of the proceeds of which

are or will be used with respect to that

output facility or any other output facility

that is part of the same project.

1998–13 I.R.B.

(ii) Bonds taken into account. For purposes of this paragraph (a)(2), in applying

the $15 million output limitation to an

issue (the later issue), a tax-exempt bond

of another issue (the earlier issue) is taken

into account if—

(A) That bond is outstanding on the

issue date of the later issue;

(B) That bond will not be redeemed

within 90 days of the issue date of the

later issue in connection with the refunding of that bond by the later issue; and

(C) More than 5 percent of the sale proceeds of the earlier issue financed an output facility that is part of the same project

as the output facility that is financed by

more than 5 percent of the sale proceeds

of the later issue.

(3) Benefits and burdens test applicable—(i) In general. In applying the $15

million output limitation, the benefits and

burdens test of §1.141–7T applies, except

that “$15 million” is substituted for “10

percent”, or “5 percent” as appropriate.

(ii) Earlier issues for the project. If

bonds of an earlier issue are outstanding

and must be taken into account under paragraph (a)(2) of this section, the nonqualified amount for that earlier issue is multiplied by a fraction, the numerator of which

is the adjusted issue price of the earlier

issue as of the issue date of the later issue,

and the denominator of which is the issue

price of the earlier issue. Pre-issuance accrued interest as defined in §1.148–1(b) is

disregarded for this purpose.

(b) Definition of project—(1) General

rule. For purposes of paragraph (a)(2) of

this section, project has the meaning provided in this paragraph. Facilities that are

functionally related and subordinate to a

project are treated as part of that same

project. Facilities having different purposes or serving different customer bases

are not ordinarily part of the same project.

For example, the following are generally

not part of the same project—

(i) Generation and transmission facilities;

(ii) Separate facilities designed to serve

wholesale customers and retail customers;

and

(iii) A peaking unit and a baseload unit.

(2) Separate ownership. Except as otherwise provided in this paragraph (b)(2),

facilities that are not owned by the same

person are not part of the same project. If

different governmental persons act in

1998–13 I.R.B.

concert to finance a project, however (for

example as participants in a joint powers

authority), their interests are aggregated

with respect to that project to determine

whether the $15 million output limitation

is met. In the case of undivided ownership interests in a single output facility,

property that is not owned by different

persons is treated as separate projects

only if the separate interests are financed—

(i) With bonds of different issuers; and

(ii) Without a principal purpose of

avoiding the limitation in this section.

(3) Generating property—(i) Property

on same site. In the case of generation

and related facilities, project means property located at the same site.

(ii) Special rule for generating units.

Separate generating units are not part of

the same project, if one unit is reasonably

expected, on the date of each issue that finances the project, to be placed in service

more than 3 years before the other. Common facilities or property that will be

functionally related to more than one generating unit must be allocated on a reasonable basis. If a generating unit already is

constructed or is under construction (the

first unit) and bonds are to be issued to finance an additional generating unit (the

second unit), all costs for any common facilities paid or incurred before the earlier

of the issue date of bonds to finance the

second unit or the commencement of construction of the second unit are allocated

to the first unit. At the time that bonds are

issued to finance the second unit (or, if

earlier, upon commencement of construction of that unit), any remaining costs of

the common facilities may be allocated

among the first and second units so that in

the aggregate the allocation is reasonable.

(4) Transmission. In the case of transmission facilities, project means functionally related or contiguous property and

property for ancillary services, such as

property required to be included in open

access transmission tariffs under rules of

the FERC. Separate transmission facilities are not part of the same project if one

facility is reasonably expected, on the

issue date of each issue that finances the

project, to be placed in service more than

2 years before the other.

(5) Subsequent improvements—(i) In

general. An improvement to generating

or transmission facilities that is not part of

the original design of those facilities (the

original project) is not part of the same

project as the original project if the construction, reconstruction, or acquisition of

that improvement commences more than

3 years after the original project was

placed in service and the bonds issued to

finance that improvement are issued more

than 3 years after the original project was

placed in service.

(ii) Special rule for transmission facilities. An improvement to transmission facilities that is not part of the original design of that property is not part of the

same project as the original project if the

issuer did not reasonably expect the need

to make that improvement when it commenced construction of the original project and the construction, reconstruction,

or acquisition of that improvement is

mandated by the federal government or a

state regulatory authority to accommodate

requests for wheeling.

(6) Replacement property. For purposes of this section, property that replaces existing property of an output facility is treated as part of the same project

as the replaced property unless—

(i) The need to replace the property was

not reasonably expected on the issue date

or the need to replace the property occurred more than 3 years before the issuer

reasonably expected (determined on the

issue date of the bonds financing the

property) that it would need to replace the

property; and

(ii) The bonds that finance (and refinance) the replaced property have a

weighted average maturity that is not

greater than 120 percent of the reasonably

expected economic life of the replaced

property.

provisions of this section is illustrated by

the following example:

Example. (i) Power Authority K, a political subdivision, intends to issue a single issue of tax-exempt bonds at par with a stated principal amount and

sales proceeds of $500 million to finance the acquisition of an electric generating facility. No portion

of the facility will be used for a private business use,

except that L, an investor-owned utility, will purchase 10 percent of the output of the facility under a

take contract and will pay 10 percent of the debt service on the bonds. The nonqualified amount with

respect to the bonds is $50 million.

(ii) The maximum amount of tax-exempt bonds

that may be issued for the acquisition of an interest

in the facility in paragraph (i) of this Example is

$465 million (that is, $450 million for the 90 percent

March 30, 1998

of the facility that is governmentally owned and

used plus a nonqualified amount of $15 million).

Par. 5. Section 1.141–15 is revised to

read as follows:

§1.141–15 Effective dates.

(a) Scope. The effective dates of this

section apply for purposes of §§1.141–1

through 1.141–6(a), 1.141–9 through

1.141–14, 1.145–1 through 1.145–2,

1.150–1(a)(3) and the definition of bond

documents contained in §1.150–1(b).

(b) Effective dates. Except as otherwise provided in this section, §§1.141–1

through 1.141–6(a), 1.141–9 through

1.141–14, 1.145–1 through 1.145–2,

1.150–1(a)(3) and the definition of bond

documents contained in §1.150–1(b) apply

to bonds issued on or after May 16, 1997,

that are subject to section 1301 of the Tax

Reform Act of 1986 (100 Stat. 2602).

1 through 1.141–6(a), 1.141–9 through

1.141–14, 1.145–1 through 1.145–2,

1.150–1(a)(3) and the definition of bond

documents contained in §1.150–1(b) do

not apply to any bonds issued on or after

May 16, 1997, to refund a bond to which

those sections do not apply unless—

(1) The weighted average maturity of

the refunding bonds is longer than—

(i) The weighted average maturity of

the refunded bonds; or

(ii) In the case of a short-term obligation that the issuer reasonably expects to

refund with a long-term financing (such

as a bond anticipation note), 120 percent

of the weighted average reasonably expected economic life of the facilities financed; or

(2) A principal purpose for the issuance

of the refunding bonds is to make one or

more new conduit loans.

(d) Permissive application of regulations. Except as provided in paragraph (e)

of this section, §§1.141–1 through

1.141–6(a), 1.141–9 through 1.141–14,

1.145–1 through 1.145–2, 1.150–1(a)(3)

and the definition of bond documents contained in §1.150–1(b) may be applied in

whole, but not in part, to actions taken before February 23, 1998 with respect to—

(1) Bonds that are outstanding on May

16, 1997, and subject to section 141; or

(2) Refunding bonds issued on or after

May 16, 1997.

(e) Permissive retroactive application

of certain sections. The following sec-

March 30, 1998

tions may each be applied to any bonds issued before May 16, 1997—

(1) Section 1.141–3(b)(4);

(2) Section 1.141–3(b)(6); and

(3) Section 1.141–12.

Par. 6. Section 1.141–15T is added to

read as follows:

§1.141–15T Effective dates (temporary).

(a) through (e) [Reserved]. For guidance see §1.141–15.

(f) Effective dates for certain regulations relating to output facilities—(1)

General rule. Except as otherwise provided in this section, §§ 1.141–7T and

1.141–8T apply to bonds issued on or

after February 23, 1998 that are subject to

section 1301 of the Tax Reform Act of

1986 (100 Stat. 2602).

(2) Transition rule for requirements

contracts. Section 1.141–7T(c)(4) applies to output contracts entered into on

or after February 23, 1998. An output

contract is treated as entered into on or

after that date if its term is extended, the

parties to the contract change, or other

material terms are amended on or after

that date.

(g) Refunding bonds in general. Except as otherwise provided in paragraph

(h) or (i) of this section, §§1.141–7T and

1.141–8T do not apply to bonds issued on

or after February 23, 1998, to refund a

bond to which the §§1.141–7T and

1.141–8T do not apply unless—

(1) The weighted average maturity of

the refunding bonds is longer than—

(i) The weighted average maturity of

the refunded bonds; or

(ii) In the case of a short-term financings (such as a bond anticipation note),

120 percent of the weighted average reasonably expected economic life of the facilities financed; or

(2) A principal purpose of the issuance

of the refunding bonds is to make one or

more new conduit loans.

(h) Permissive retroactive application.

Except as provided in §1.141–15 (d) or

(e) or paragraph (i) of this section,

§§1.141–1 through 1.141–6, 1.141–7T

through 1.141–8T, 1.141–9 through

1.141–14, 1.145–1 through 1.145–2,

1.150–1(a)(3) and the definition of bond

documents contained in §1.150–1(b) may

be applied in whole, but not in part to—

(1) Bonds that are outstanding on May

16, 1997, and subject to section 141; or

(2) Refunding bonds issued on or after

May 16, 1997.

(i) Permissive retroactive application

of certain regulations pertaining to output

contracts. Section 1.141–7T(f)(4) and (5)

may be applied to any bonds issued before February 23, 1998.

Par. 7. Section 1.142(f)(4)–1T is added

to read as follows: §1.142(f)(4)–1T Manner of making election to terminate taxexempt bond financing (temporary).

(a) Overview. Section 142(f)(4) permits a person engaged in the local furnishing of electric energy or gas (a local

furnisher) that uses facilities financed

with exempt facility bonds under section

142(a)(8) and that expands its service area

in a manner inconsistent with the requirements of sections 142(a)(8) and 142(f) to

make an election to ensure that those

bonds will continue to be treated as exempt facility bonds. The election must

meet the requirements of paragraphs (b)

and (c) of this section.

(b) Time for making election—(1) In

general. An election under section

142(f)(4)(B) must be filed with the Internal Revenue Service on or before 90 days

after the later of—

(i) The date of the service area expansion that causes bonds to cease to meet

the requirements of sections 142(a)(8)

and 142(f); or

(ii) February 23, 1998.

(2) Date of service area expansion. For

the purposes of this section, the date of

the service area expansion is the first date

on which the local furnisher is authorized

to collect revenue for the provision of service in the expanded area.

election under section 142(f)(4)(B) must

be captioned “ELECTION TO TERMINATE TAX-EXEMPT BOND FINANCING”, must be signed under penalties of

perjury by a person who has authority to

sign on behalf of the local furnisher, and

must contain the following information—

(1) The name of the local furnisher;

(2) The tax identification number of the

local furnisher;

(3) The complete address of the local

furnisher;

(4) The date of the service area expansion;

(5) Identification of each bond issue

subject to the election, including the complete name of each issue, the tax identifi-

1998–13 I.R.B.

cation number of each issuer, the issue

date of each issue, the issue price of each

issue, the adjusted issue price of each

issue as of the date of the election, the

earliest date on which the bonds of each

issue may be redeemed, and the principal

amount of bonds of each issue to be redeemed on the earliest redemption date;

(6) A statement that the local furnisher

making the election agrees to the conditions stated in section 142(f)(4)(B); and

(7) A statement that each issuer of the

bonds subject to the election has received

written notice of the election.

(d) Effect on section 150(b). Except as

provided in paragraph (e) of this section,

if a local furnisher files an election within

the period specified in paragraph (b) of

this section, section 150(b) does not apply

to bonds identified in the election during

and after that period.

(e) Effect of failure to meet agreements.

If a local furnisher fails to meet any of the

conditions stated in an election pursuant

to paragraph (c)(6) of this section, the

election is invalid.

(f) Corresponding provisions of the Internal Revenue Code of 1954. Section

103(b)(4)(E) of the Internal Revenue

Code of 1954 set forth corresponding requirements for the exclusion from gross

income of the interest on bonds issued for

facilities for the local furnishing of electric energy or gas. For the purposes of

this section any reference to sections

142(a)(8) and (f) of the Internal Revenue

Code of 1986 includes a reference to the

corresponding portion of section

103(b)(4)(E) of the Internal Revenue

Code of 1954.

(g) Effective dates. Section 1.142(f)(4)–1 applies to elections made on or after

February 23, 1998.

Par. 8. Section 1.150–5T is added to

read as follows:

§1.150–5T Filing notices and elections

(temporary).

(a) In general. Notices and elections

under the following sections must be filed

with the Chief, Employee Plans and Exempt Organizations) of the appropriate

key district office—

(1) Section 1.141–12(d)(3); and

(2) Section 1.142(f)(4)–1T.

(b) Effective dates. This section applies

to notices and elections filed on or after

February 23, 1998.

1998–13 I.R.B.

Michael P. Dolan,

Acting Commissioner of

Internal Revenue.

Approved December 23, 1997.

Jonathan Talisman,

Deputy Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

January 21, 1998, 8:45 a.m., and published in the

issue of the Federal Register for January 22, 1998,

63 F.R. 3256)

Section 468A.—Special Rules

for Nuclear Decommissioning

Costs

26 CFR 1.468A–3: Ruling amount.

T.D. 8758

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Nuclear Decommissioning

Funds; Revised Schedules of

Ruling Amounts

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to requests for revised

schedules of ruling amounts for nuclear

decommissioning reserve funds. The regulations amend existing regulations to ease

the burden on affected taxpayers by permitting electing taxpayers with qualifying

interests in nuclear power plants to adjust

their ruling amounts under a formula or

method rather than by filing a request for a

revised schedule of ruling amounts.

DATES: The final regulations are effective January 20, 1998.

FOR FURTHER INFORMATION CONTACT: Peter Friedman, (202) 622-3110

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under the control number

1545–1511. Responses to this collection

of information are voluntary.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

control number.

The estimated average annual burden

per recordkeeper is 5 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20024, and 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.

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

return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains final regulations under section 468A of the Internal

Revenue Code. Section 468A was added

to the Internal Revenue Code by section

91(c) of the Tax Reform Act of 1984

(Public Law 98–369). Significant amendments were made to section 468A by section 1917 of the Energy Policy Act of

1992 (Public Law 102–486).

Section 468A(a) allows an electing taxpayer to deduct the amount of payments

made by the taxpayer to a nuclear decommissioning reserve fund. Section

468A(b) limits the amount of these payments for any taxable year to the lesser of

the ruling amount or the amount of decommissioning costs included in the taxpayer’s cost of service for ratemaking

purposes for that taxable year.

Section 468A(d) provides that no deduction shall be allowed unless the taxpayer requests, and receives, a schedule

of ruling amounts from the Secretary. A

ruling amount is, with respect to any taxable year, the amount determined by the

Secretary as necessary to (1) fund that

March 30, 1998

portion of the nuclear decommissioning

costs of the taxpayer with respect to the

nuclear power plant which bears the same

ratio to the total nuclear decommissioning

costs with respect to the nuclear power

plant as the period for which the nuclear

decommissioning fund is in effect bears to

the estimated useful life of such nuclear

power plant; and (2) prevent any excessive funding of such costs or the funding

of such costs at a rate more rapid than

level funding, taking into account such

discount rates as the Secretary deems appropriate. Section 468A(d)(3) provides

that the Secretary shall, at least once during the useful life of the nuclear power

plant (or more frequently, upon the request

of the taxpayer), review and, if necessary,

revise the schedule of ruling amounts.

Section 1.468A–3 sets forth the rules

relating to the determination of ruling

amounts. The regulations permit the use

of a formula or method for determining a

schedule of ruling amounts (in lieu of a

schedule of ruling amounts specifying a

dollar amount for each taxable year), but

only if the public utility commission establishing or approving the amount of decommissioning costs to be included in

cost of service for ratemaking does not estimate the cost of decommissioning in future dollars.

The regulations contain provisions for

the review and revision of schedules of

ruling amounts and set forth circumstances under which a taxpayer must request a revision to its schedule of ruling

amounts. In general, a schedule of ruling

amounts must be reviewed at 10 year intervals. If the schedule is determined

under a formula or method, however, the

period between reviews may not exceed 5

years.

The regulations provide that a taxpayer

may request an elective review of its

schedule of ruling amounts. A taxpayer

seeking to maximize its deductions under

section 468A generally needs to request an

elective review of its schedule of ruling

amounts each time a public utility commission changes previously established

amounts of decommissioning costs. A notice of proposed rulemaking (REG–

09828–96) relating to these rules was published in the Federal Register on December

23, 1996 (61 F.R. 67510). The notice proposes to amend §1.468A–3(a)(4) by eliminating the restriction on the use of a for-

March 30, 1998

mula or method for determining a schedule

of ruling amounts and to revise the mandatory review requirements.

Written comments were received in response to the notice of proposed rulemaking, and a public hearing was held on

May 13, 1997. After considering the written comments and the statements made at

the public hearing, the proposed rules are

adopted as modified by this Treasury

Decision.

Explanation of Provisions

The final regulations provide that a taxpayer may request approval of a formula

or method for determining a schedule of

ruling amounts (rather than a schedule

specifying a dollar amount for each taxable year) that is consistent with the principles and provisions of the rules relating

to the determination of ruling amounts.

The final regulations ease the filing

burden on taxpayers by permitting them

to adjust their ruling amounts under a formula or method (rather than by filing a request for a revised schedule of ruling

amounts). Thus, a taxpayer may maximize its deductions under section 468A

without requesting a revised schedule of

ruling amounts each time a public utility

commission changes the amount of decommissioning costs included in the taxpayer’s cost of service if, under the taxpayer ’s formula or method, the

commission’s action results in a corresponding change in ruling amounts. The

commentators all agreed with the expanded availability of ruling amounts

based on formulas or methods.

In addition, the final regulations modify the mandatory review provisions applicable to schedules of ruling amounts

determined under a formula or method.

The proposed regulations eliminate the

rule requiring review of those schedules

after 5 years but make those schedules

subject to the general rule requiring review at 10 year intervals. In addition, the

proposed regulations require taxpayers to

request a revised schedule of ruling

amounts if, beginning with the second

taxable year during which the most recently issued formula or method is in effect, the ruling amount for a taxable year

(1) differs by more than 25 percent from

the ruling amount for any preceding taxable year during which such formula or

method was in effect; or (2) differs by

more than 10 percent from the ruling

amount for the immediately preceding

taxable year. The commentators generally favored either a retention of the 5

year review period without limits on differences in ruling amounts or an increase

in the percentage by which ruling

amounts are permitted to differ. In response to these suggestions, the final regulations retain the 5 year review requirement, increase the overall percentage by

which ruling amounts may differ, and

eliminate the 10 percent limitation on

changes from one year to the next.

Some commentators suggested that all

elements of a formula should be permitted

to be variable. Nothing in the proposed

regulations was meant to suggest otherwise. In order to afford different taxpayers maximum flexibility in using a formula, the regulations do not specify

which elements must be fixed and which

must be variable. Instead, the formula, itself, will determine whether an element is

fixed or variable. A fixed element is one

that is assumed to retain the same value

regardless of action by the applicable

public utility commission.

Some commentators suggested that a

taxpayer that recently received a schedule

of ruling amounts should be permitted to

vary this schedule using a formula or

method that has not been approved by the

Service. This suggestion is inconsistent

with the Service’s obligation to issue and

review schedules of ruling amounts and is

not adopted.

Several commentators requested that

the existing user fee for obtaining a

schedule of ruling amounts under section

468A is excessive and should be waived

or reduced. Because this subject is not

within the scope of this regulations project, it is not addressed in the final regulations.

Finally, some commentators suggested

that the regulations should address the situation where a taxpayer, based on a good

faith but erroneous calculation of the percentage limitations, fails to comply with

the mandatory review provisions. Partly

in response to this suggestion, the percentage limitation has been simplified.

Effective date

These regulations are applicable for requests for schedules of ruling amounts

made on or after January 20, 1998.

1998–13 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

has also been determined that section

553(b) of the Administrative Procedure

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

these regulations. It is hereby certified

that the collection of information in the

regulation will not have a significant impact on a substantial number of small entities. This certification is based on the fact

that taxpayers with qualifying interests in a

nuclear power plant are generally large entities. Thus, because the regulation applies

only to these taxpayers and 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, 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 Peter Friedman, Office of Assistant Chief Counsel (Passthroughs and

Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are 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 1.468A–2 is amended

as follows:

1. The text of paragraph (f)(3) following the heading is designated as paragraph

(f)(3)(i).

2. Paragraph (f)(3)(ii) is added.

The addition reads as follows:

§1.468A–2 Treatment of electing

taxpayer.

1998–13 I.R.B.

(f) * * *

(3) * * * (i) * * *

(ii) The requirement of this paragraph

(f)(3) does not apply if the taxpayer determines its schedule of ruling amounts

under a formula or method obtained under

§1.468A–3(a)(4) and the cost of service

amount is a variable element of that formula or method.

Par. 3. Section 1.468A–3 is amended

as follows:

1. Paragraph (a)(4) is revised.

2. Paragraph (e)(5) is added.

3. Paragraphs (i)(1)(ii)(A), (i)(1)(iii)(A)(3), and (i)(1)(iii)(B) are revised.

4. Paragraph (i)(1)(iii)(C) is added.

The revisions and additions read as follows:

§1.468A–3 Ruling amount.

(a) * * *

(4) The Internal Revenue Service will

approve, at the request of the taxpayer, a

formula or method for determining a

schedule of ruling amounts (rather than a

schedule specifying a dollar amount for

each taxable year) that is consistent with

the principles and provisions of this section. See paragraph (i)(1)(ii) of this section for a special rule relating to the

mandatory review of ruling amounts that

are determined pursuant to a formula or

method.

(e) * * *

(5) A formula or method obtained under

paragraph (a)(4) of this section may provide for changes in an estimated date described in paragraph (e)(1) or (2) of this

section to reflect changes in the ratemaking assumptions used to determine rates

(whether interim or final) that are established or approved by the applicable public

utility commission after the filing of the request for approval of a formula or method.

(i) * * *

(1) * * *

(ii)(A) Any taxpayer that has obtained a

formula or method for determining a

schedule of ruling amounts for any taxable year under paragraph (a)(4) of this

section must file a request for a revised

schedule on or before the earlier of the

deemed payment deadline for the fifth taxable year that begins after its taxable year

in which the most recent formula or

method was approved or the deemed payment deadline for the first taxable year

that begins after a taxable year in which

there is a substantial variation in the ruling

amount determined under the most recent

formula or method. There is a substantial

variation in the ruling amount determined

under the formula or method in effect for a

taxable year if the ruling amount for the

year and the ruling amount for any earlier

year since the most recent formula or

method was approved differ by more than

50 percent of the smaller amount.

(iii) * * *

(A) * * *

(3) Reduces the amount of decommissioning costs to be included in cost of service for any taxable year;

(B) The taxpayer’s most recent request

for a schedule of ruling amounts did not

provide notice to the Internal Revenue

Service of such action by the public utility

commission; and

under a formula or method obtained under

paragraph (a)(4) of this section, the item

increased, adjusted, or reduced is a fixed

(rather than a variable) element of that

formula or method.

Par. 4. Section 1.468A–8 is amended

by adding paragraph (b)(12) to read as

follows:

§1.468A–8 Effective date and transitional

rules.

(b) * * *

(12) Use of formula or method. Section 1.468A–2(f)(3)(ii) and §1.468A–

3(a)(4) (to the extent it permits a formula

or method when the applicable public

utility commission estimates the cost of

decommissioning in future dollars),

(e)(5), (i)(1)(ii)(A) (to the extent it requires the taxpayer to file a request for a

revised schedule because of a substantial

variation in ruling amounts), and

(i)(1)(iii)(C) apply only to requests for a

March 30, 1998

formula or method submitted on or after

January 20, 1998, and to formulas and

methods obtained in response to those requests.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 5. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 6. In §602.101(c), the entry for

1.468A–3 in the table is revised to read as

follows:

§602.101 OMB Control numbers.

Current OMB

control No.

1.468A–3 . . . . . . . . . . . . . . . .1545–1269

1545–1378

1545–1511

Approved January 9, 1998.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on

January 16, 1998, 8:45 a.m., and published in the

issue of the Federal Register for January 20, 1998,

63 F.R. 2892)

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

CFR part or section

where identified

or described

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Revenue Service, under § 1.472–1(k) of

the Income Tax Regulations and Rev.

Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory

methods for tax years ended on, or with

reference to, January 31, 1998.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of departments, (b) three special combinations of

the major groups - soft goods, durable

goods, and miscellaneous goods, and (c) a

store total, which covers all departments,

including some not listed separately, except for the following: candy, food,

liquor, tobacco, and contract departments.

LIFO; price indexes; department stores. The

January 1998 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years

ended on, or with reference to, January 31, 1998.

Rev. Rul. 98–16

The following Department Store Inventory Price Indexes for January 1998 were

issued by the Bureau of Labor Statistics.

The indexes are accepted by the Internal

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups

Jan.

1997

Jan.

1998

Percent Change

from Jan. 1997

to Jan. 19981

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

536.5

648.0

636.8

895.6

622.7

522.0

291.3

539.6

404.3

614.3

580.0

478.5

993.2

773.4

906.5

658.4

579.1

818.0

246.8

536.7

627.9

656.3

890.5

619.0

558.3

304.6

544.1

395.6

614.6

584.2

504.4

981.2

803.3

929.7

662.8

583.9

811.8

241.8

0.0

–3.1

3.1

–0.6

7.0

4.6

0.8

–2.2

0.0

0.7

5.4

–1.2

3.9

2.6

0.7

0.8

–0.8

–2.0

March 30, 1998

1998–13 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS—Continued

(January 1941 = 100, unless otherwise noted)

Groups

20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jan.

1997

78.4

111.7

132.9

107.6

592.0

469.9

113.6

550.0

Jan.

1998

73.5

108.3

134.0

107.8

593.1

461.9

111.5

547.5

Percent Change

from Jan. 1997

to Jan. 19981

–6.3

–3.0

0.8

0.2

–1.7

–1.8

–0.5

1Absence of a minus sign before percentage change in this column signifies price increase.

2Indexes on a January 1986=100 base.

3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

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

Michaels on (202) 622-4970 (not a tollfree call).

Applicability dates: This regulation is

applicable for tax returns whose original

due date falls on or after January 1, 1988.

FOR FURTHER INFORMATION CONTACT: Joan Thomsen, (202) 622-3850

(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

Section 905.—Applicable Rules

26 CFR 1.905–2: Conditions of allowance of credit.

T.D. 8759

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Filing Requirements for Returns

Claiming the Foreign Tax Credit

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final Regulation.

SUMMARY: This document contains a

final regulation relating to the substantiation requirements for taxpayers claiming

foreign tax credits. The regulation is necessary to provide guidance to U.S. taxpayers who claim foreign tax credits.

DATES: Effective date: This regulation

is effective January 27, 1998.

1998–13 I.R.B.

On January 13, 1997, the IRS published in the Federal Register a notice of

proposed rulemaking (REG–208288–90

[1997–1 C.B. 722]) at 62 F.R. 1700, relating to the filing requirements for returns

claiming the foreign tax credit (the proposed regulation).

Written comments responding to the

proposed regulation were received. A

public hearing was requested and scheduled but was later canceled when the one

requester withdrew the request to testify.

After consideration of all of the written

comments, the proposed regulation under

section 905(b) is adopted as revised by

this Treasury Decision.

Summary of Comments and Final

Regulations

The commenters argued that the interim credit notion incorporated in the

proposed regulations from Continental

Illinois, T.C. Memo 1991–66, 61 T.C.M.

(CCH) 1916 (1991), aff ’d in part and

rev’d in part, 998 F.2d 513, 516–17 (7th

Cir. 1993), was misapplied and that the

proposed amendment to §1.905–2(b)(3)

denied district directors the flexibility to

find compliance with section 905(b) unless the taxpayer produces receipts (or

other direct evidence of payment) in order

to prove that the taxes actually were paid

to the foreign government. They argued

that, even if the district director should be

able to require such proof in cases such as

Continental Illinois, district directors

must have the flexibility to accept lesser

proof. They argued that a portfolio holder

of publicly-traded foreign securities, for

example, will not be able to obtain proof

in the form of receipts evidencing that the

issuer of the securities actually paid the

withheld taxes to the foreign government.

The comment letters are correct that the

regulations historically have allowed the

district director flexibility to determine

that section 905(b) is satisfied without the

production of tax receipts evidencing that

the tax has been paid to the foreign government. Treasury and the IRS did not intend that the amendment to §1.905–

2(b)(3), as proposed, deny the district director the flexibility to accept secondary

evidence of the foreign tax payment

where it has been established to the satisfaction of the district director that it is impossible to furnish a receipt for such foreign tax payment. The amendment was

merely intended to clarify that proof of

the act of withholding through secondary

evidence is not, per se, equivalent to proof

March 30, 1998

of payment of the foreign tax. Treasury

and the IRS have now concluded, however, that such clarification is not necessary. Continental Illinois v. Commissioner, supra.

Therefore, in response to comments, the

proposed regulation is finalized without its

proposed amendment to §1.905– 2(b)(3).

Thus, the final regulations are identical to

the final regulations currently in effect,

except §1.905–2(a)(2) no longer requires

a foreign receipt or return to be attached

to a Form 1116 or Form 1118.

Treasury and the IRS will continue to

review the foreign tax credit substantiation rules to assure that they are functioning adequately. For example, Treasury

and the IRS are concerned that U.S. holders of foreign securities, including American Depositary Receipts (ADRs), may be

claiming foreign tax credits in situations

where an intermediary in the chain of

ownership between the holder of a foreign

security or an ADR and the issuer of the

security (or the security underlying the

ADR) has taken actions inconsistent with

the ownership of the underlying security

by the person claiming the credit, such as

a disposition of such security. One approach to address this issue would involve

modifying the substantiation, documentation and reporting rules with respect to

payments on such securities and taxes

withheld therefrom. For example, in

order for a U.S. owner to be entitled to a

credit for foreign taxes imposed on income with respect to a security, financial

intermediaries (including custodians)

could be required to substantiate that they

have not taken any action inconsistent

with beneficial ownership of the relevant

security by such U.S. owner.

It should be noted that portfolio investors are not necessarily entitled to foreign tax credits for the full amount indicated on the Form 1099 as foreign taxes

paid. Portfolio investors are only entitled

to a foreign tax credit for the amount of

tax that is legally owed, which may not be

the same as the amount withheld. If, for

example, a portfolio investor is entitled to

a refund of foreign tax withheld because

of a reduced treaty withholding rate, the

investor is only entitled to a foreign tax

credit for the reduced amount, whether or

not the investor files a refund claim with

the foreign tax authorities. The IRS has

made changes to the Form 1116 Instructions and Publication 514 to clarify this

March 30, 1998

point and intends to make similar changes

to the Form 1118 Instructions.

Explanation of Provisions

§§1.905–2(a)(1), 1.905–2(b)(1),(2), and

(3), and 1.905–2(c)

Sections 1.905–2(a)(1), 1.905–2(b)(1),

(2) and (3), and 1.905–2(c) are unchanged

from the current final regulations.

Paragraph 1. The authority citation for

26 CFR part 1 continues to read in part as

follows:

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

Par. 2. Section 1.905–2 is amended by

revising the second through fourth sentences in paragraph (a)(2) to read as follows:

§1.905–2 Conditions of allowance of

credit.

§1.905–2(a)(2)

Under former §1.905–2(a)(2), taxpayers generally were required to attach to

their income tax returns either (1) the receipt for the foreign tax payment or (2) a

foreign tax return for accrued foreign

taxes. Section 1.905–2(a)(2) removes the

requirement that the documentation be attached to the income tax return. The regulation now provides that such evidence of

payment of foreign taxes must be presented to the district director upon request.

Special Analyses

It has been determined that this Treasury

decision is not a significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not

required. It has also been determined that

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

apply to this regulation, 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, the notice of

proposed rulemaking preceding this regulation 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 this regulation

is Joan Thomsen of the Office of the Associate Chief Counsel (International),

IRS. However, other personnel from the

IRS and Treasury Department participated in their development.

PART 1—INCOME TAXES

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

(a) * * *

(2) * * * Except where it is established

to the satisfaction of the district director

that it is impossible for the taxpayer to

furnish such evidence, the taxpayer must

provide upon request the receipt for each

such tax payment if credit is sought for

taxes already paid or the return on which

each such accrued tax was based if credit

is sought for taxes accrued. The receipt

or return must be either the original, a duplicate original, or a duly certified or authenticated copy. The preceding two sentences are effective for returns whose

original due date falls on or after January

1, 1988. * * *

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved January 13, 1998.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

January 26, 1998, 8:45 a.m., and published in the

issue of the Federal Register for January 27, 1998,

63 F.R. 3812)

Section 6621.—Determination

of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and overpayments. The rate of interest determined under section

6621 of the Code for the calendar quarter beginning

April 1, 1998, will be 7 percent for overpayments, 8

percent for underpayments, and 10 percent for large

corporate underpayments. The rate of interest paid

on the portion of a corporate overpayment exceeding $10,000 is 5.5 percent.

1998–13 I.R.B.

Rev. Rul. 98–17

Section 6621 of the Internal Revenue

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

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

the overpayment rate is the sum of the

federal short-term rate plus 2 percentage

points, except the rate for the portion of a

corporate overpayment of tax exceeding

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

the federal short-term rate plus 0.5 of a

percentage point for interest computations

made after December 31, 1994. Under

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

sum of the federal short-term rate plus 3

percentage points.

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

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

points” for “3 percentage points.” See

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

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

and § 301.6621–3 are generally effective

for periods after December 31, 1990.

Section 6621(b)(1) provides that the

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

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

federal short-term rate determined under

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

the first calendar quarter beginning after

such month.

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

determining the addition to tax under

§ 6654 for failure to pay estimated tax for

any taxable year, the federal short-term

rate that applies during the third month

following such taxable year also applies

during the first 15 days of the fourth

month following such taxable year.

Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

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

nearest full percent (or, if a multiple of

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

the next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly

interest rates to be used for overpayments

and underpayments of tax under § 6621,

the Internal Revenue Service will use the

federal short-term rate based on daily

compounding because that rate is most

consistent with § 6621 which, pursuant to

§ 6622, is subject to daily compounding.

Rounded to the nearest full percent, the

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

January 1998 is 5 percent. Accordingly, an

overpayment rate of 7 percent and an underpayment rate of 8 percent are established for the calendar quarter beginning

April 1, 1998. The overpayment rate for

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

beginning April 1, 1998, is 5.5 percent.

The underpayment rate for large corporate

underpayments for the calendar quarter beginning April 1, 1998, is 10 percent. These

rates apply to amounts bearing interest

during that calendar quarter.

Under § 6621(b)(2)(B), the 9 percent

rate that applies to estimated tax underpayments for the first calendar quarter in

1998, as provided in Rev. Rul. 97–53,

1997–52 I.R.B. 13, also applies to such

underpayments for the first 15 days in

April 1998.

Interest factors for daily compound interest for annual rates of 5.5 percent, 7

percent, 8 percent, and 10 percent are

published in Tables 16, 19, 21, and 25 of

Rev. Proc. 95–17, 1995–1 C.B. 556, 570,

573, 575, and 579.

Annual interest rates to be compounded

daily pursuant to § 6622 that apply for

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

DRAFTING INFORMATION

The principal author of this revenue ruling is Raymond Bailey of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information

regarding this revenue ruling, contact Mr.

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

call).

TABLE OF INTEREST RATES

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

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

RATE

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

12%

20%

16%

11%

13%

11%

10%

1998–13 I.R.B.

DAILY RATE TABLE

IN 1995–1 C.B.

Table 2,

Table 4,

Table 3,

Table 2,

Table 5,

Table 6,

Table 37,

Table 27,

Table 75,

Table 31,

Table 27,

Table 25

Table 23,

pg. 557

pg. 559

pg. 558

pg. 557

pg. 560

pg. 591

pg. 581

pg. 629

pg. 585

pg. 581

pg. 579

pg. 577

March 30, 1998

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 - PRESENT

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

March 30, 1998

OVERPAYMENTS

UNDERPAYMENTS

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

10%

11%

10%

575

577

627

625

627

579

581

579

577

623

621

619

571

573

575

577

575

623

621

623

575

573

10%

11%

10%

11%

12%

11%

10%

577

579

629

627

629

581

583

581

579

625

623

621

573

575

577

579

577

625

623

625

577

575

1998–13 I.R.B.

TABLE OF INTEREST RATES FOR

LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

13%

12%

11%

10%

11%

12%

11%

10%

11%

10%

585

583

629

627

625

577

579

581

583

581

629

627

629

581

579

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

1998–13 I.R.B.

6.5%

7.5%

6.5%

5.5%

6.5%

5.5%

572

574

572

620

618

620

572

570

March 30, 1998

Part III. Administrative, Procedural, and Miscellaneous

Differential Earnings Rate for

Mutual Life Insurance

Companies

Notice 98–19

This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the “differential earnings

rate” for 1997 and the rate that is used to

calculate the “recomputed differential

earnings amount” for 1996. (The latter

rate is referred to in this notice as the “recomputed differential earnings rate” for

1996.) These rates are used by mutual

life insurance companies to calculate their

federal income tax liability for taxable

years beginning in 1997.

BACKGROUND

Section 809(a) provides that, in the

case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder dividends is reduced (but not below zero) by

the “differential earnings amount.” Any

excess of the differential earnings amount

over the amount of the deduction allowable under § 808 is taken into account as a

reduction in the closing balance of reserves under subsections (a) and (b) of

§ 807. The “differential earnings

amount” for any taxable year is the

amount equal to the product of (a) the life

insurance company’s average equity base

for the taxable year multiplied by (b) the

“differential earnings rate” for that taxable year. The “differential earnings rate”

for the taxable year is the excess of (a) the

“imputed earnings rate” for the taxable

year over (b) the “average mutual earnings rate” for the second calendar year

preceding the calendar year in which the

taxable year begins. The “imputed earnings rate” for any taxable year is the

amount that bears the same ratio to 16.5

percent as the “current stock earnings

rate” for the taxable year bears to the

“base period stock earnings rate.”

Section 809(f) provides that, in the case

of any mutual life insurance company, if

the “recomputed differential earnings

amount” for any taxable year exceeds the

differential earnings amount for that taxable year, the excess is included in life in-

March 30, 1998

surance gross income for the succeeding

taxable year. If the differential earnings

amount for any taxable year exceeds the

recomputed differential earnings amount

for that taxable year, the excess is allowed

as a life insurance deduction for the succeeding taxable year. The “recomputed

differential earnings amount” for any taxable year is an amount calculated in the

same manner as the differential earnings

amount for that taxable year, except that

the average mutual earnings rate for the

calendar year in which the taxable year

begins is substituted for the average mutual earnings rate for the second calendar

year preceding the calendar year in which

the taxable year begins.

The stock earnings rates and mutual

earnings rates taken into account under §

809 generally are determined by dividing

statement gain from operations by the average equity base. For this purpose, the

term “statement gain from operations”

means “the net gain or loss from operations required to be set forth in the annual

statement, determined without regard to

Federal income taxes, and ... properly adjusted for realized capital gains and

losses. . . .” See § 809(g)(1). The term

“equity base” is defined as an amount determined in the manner prescribed by regulations equal to surplus and capital increased by the amount of nonadmitted

financial assets, the excess of statutory reserves over the amount of tax reserves,

the sum of certain other reserves, and 50

percent of any policyholder dividends (or

other similar liability) payable in the following taxable year. See § 809(b)(2), (3),

(4), (5) and (6). Section 1.809–10 of the

Income Tax Regulations provides that the

equity base includes both the asset valuation reserve and the interest maintenance

reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations

provides that neither the differential earnings rate under § 809(c) nor the recomputed differential earnings rate that is

used in computing the recomputed differential earnings amount under § 809(f)(3)

may be less than zero.

As described above, the differential

earnings rate for 1997 and the recomputed

differential earnings rate for 1996 affect

the income and deductions reported by

mutual life insurance companies on their

federal income tax returns for the 1997

taxable year.

Data necessary to determine the tentative differential earnings rate for 1997 and

the tentative recomputed differential earnings rate for 1996 have been compiled

from returns filed by mutual life insurance

companies and certain stock life insurance

companies. The Internal Revenue Service

is currently examining these returns. This

examination will not be completed before

the March 16, 1998, due date for filing

1997 calendar year returns.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the differential earnings rate

for 1997 and of the recomputed differential earnings rate for 1996. This notice

also publishes a tentative determination of

the rates on which the calculation of the

differential earnings rate for 1997 and the

recomputed differential earnings rate for

1996 are based. The final determination

of these rates is expected to be published

before September 1, 1998.

The tentative determination of the differential earnings rate for 1997 and the

tentative determination of the recomputed

differential earnings rate for 1996 that are

published in this notice should be used by

mutual life insurance companies to calculate the amount of tax liability for taxable

years beginning in 1997 (in the case of

companies that file returns before publication of the final determination of these

rates) or to calculate the amount of estimated unpaid tax liability for taxable

years beginning in 1997 (in the case of

companies that are allowed an extension

of time to file returns). Companies that

file returns before publication of the final

determination of these rates should file

amended returns after the final determination of these rates is published. If there is

a failure to pay tax for a taxable year beginning in 1997 and the failure is attributable to a difference between (a) the tentative determination of the differential

earnings rate for 1997 and recomputed

differential earnings rate for 1996 and (b)

the final determination of these rates, then

any such failure through September 15,

1998, will be treated as due to reasonable

1998–13 I.R.B.

cause and will not give rise to any addition to tax under § 6651.

The tentative determination of the rates

is set forth in Table 1.

Notice 98–19

Table 1

Tentative Determination of Rates To Be

Used for Taxable Years Beginning in

1997

Differential earnings rate for 1997 . . 0

Recomputed differential earnings

rate for 1996 . . . . . . . . . . . . . . . . . . .0

Imputed earnings rate for

1996 . . . . . . . . . . . . . . . . . . . .15.669

Imputed earnings rate for

1997 . . . . . . . . . . . . . . . . . . . .13.813

Base period stock earnings

rate . . . . . . . . . . . . . . . . . . . . .18.221

Current stock earnings rate

for 1997 . . . . . . . . . . . . . . . . .15.254

Stock earnings rate for 1994 . . .11.437

Stock earnings rate for 1995 . . .17.087

Stock earnings rate for 1996 . . .17.238

Average mutual earnings rate

for 1995 . . . . . . . . . . . . . . . . .16.477

Average mutual earnings rate

for 1996 . . . . . . . . . . . . . . . . .16.225

Capital Gains and Charitable

Remainder Trusts

Notice 98–20

This notice provides guidance on the

ordering and taxation of distributions

under § 664(b)(2) of the Internal Revenue

Code from a charitable remainder trust

(CRT) in light of the changes made to

§ 1(h) by the Taxpayer Relief Act of 1997

(TRA 1997). Pub. L. 105–34, § 311, 111

Stat. 788, 831. Section § 1(h) provides

that the Treasury may issue regulations to

implement the provisions of § 1(h) for

passthrough entities. The Treasury Department and the Internal Revenue Service plan to issue regulations incorporating the guidance contained in this notice.

BACKGROUND

Generally, a CRT is a trust that provides for a specified distribution at least

annually over a specified period to one or

more noncharitable recipients (a CRT distribution), with the remainder interest in

the trust held irrevocably for a charitable

organization.

1998–13 I.R.B.

TRA 1997 amended § 1(h) to provide

for new capital gain tax rates for noncorporate taxpayers. Notice 97–59, 1997–45

I.R.B. 7, explains that a noncorporate taxpayer’s long-term capital gains and losses

are separated into three tax rate groups:

(1) the 28-percent group, (2) the 25-percent group, and (3) the 20-percent group.

The present notice uses these terms in explaining how a CRT characterizes its capital gain distribution for taxable years beginning on or after January 1, 1998. The

definitions of net capital gain, net longterm capital gain or loss, and net shortterm capital gain or loss were not changed

by TRA 1997. Like Notice 97–59, this

notice takes into account the pending

retroactive legislative corrections. H.R.

2676, 105th Cong., § 605(d) (1997).

ADDITIONAL NETTING RULES

CRTs will be expected to follow the

netting rules in Notice 97-59 when determining net short-term and net long-term

capital gains. The rules in § 1.664–1(d)(1)(i)(b)(2) and (3) of the Income Tax

Regulations continue to apply in determining capital gains or losses carried forward to the succeeding taxable year.

GENERAL PRINCIPLES OF THE

ORDERING RULE

Section 664(b) contains the ordering

rule for determining the character of a

CRT distribution in the hands of the recipient. The character of a CRT’s income is

determined at the time the income is realized by the trust. Under § 664(b), the following ordering rule applies for determining the character of a distribution in the

hands of the recipient: (1) first, as ordinary income to the extent of the trust’s ordinary income for the trust’s taxable year

and its undistributed ordinary income for

prior years, (2) second, as capital gain to

the extent of the trust’s capital gain for the

trust’s taxable year and its undistributed

capital gain for prior years, (3) third, as

other income to the extent of the trust’s

other income for the trust’s taxable year

and its undistributed other income for

prior years, and (4) fourth, as a distribution of trust corpus.

The underlying policy in the ordering

rule of § 664(b) and the existing regulations thereunder is that a CRT distribution

is deemed to consist first of income that is

subject to the highest federal income tax

rate in effect at the time of the distribution

and then of income that is subject to progressively lower (or no) federal income

tax rates in effect at the time of distribution. The same policy applies in the regulations under § 664 when different income tax rates apply to different groups

of income within a category of the items

described in § 664(b), such as short-term

and long-term capital gains. Therefore,

income from a group that is subject to a

higher federal income tax rate is deemed

distributed before other income from a

group, within the same category, that is

subject to a lower federal income tax rate.

The following example illustrates how

this principle applies to capital gain distributions after TRA 1997. Assume for the

1998 taxable year, a CRT has undistributed

long-term capital gain in each of the three

groups of long-term capital gain, i.e., the

28-percent group, the 25-percent group,

and the 20-percent group, and also has

undistributed short-term capital gain. To

the extent capital gains are deemed distributed for the 1998 taxable year, the shortterm capital gain is deemed distributed

prior to any long-term capital gain. The

long-term capital gain is deemed distributed in the following order: (1) the gain in

the 28-percent group is deemed distributed

prior to any other long-term capital gain;

(2) the gain in the 25-percent group is

deemed distributed prior to any gain in the

20-percent group; and (3) the gain in the

20-percent group is deemed distributed

last of any long-term capital gain.

A trustee of a CRT will be required to

report each group of long-term capital

gain separately on the Form 5227, SplitInterest Trust Information Return. The

trustee may use any reasonable method

for determining the amount of each type

of gain within a group that has been distributed when doing the required reporting or associated recordkeeping.

PRE-1997 LONG-TERM CAPITAL

GAIN

As of January 1, 1997, many CRTs had

undistributed long-term capital gains that

the CRT properly took into account before January 1, 1997 (pre-1997 long-term

capital gains). These pre-1997 long-term

capital gains must be assigned to one of

the three groups of long-term capital

gains. Section 1(h) does not specifically

assign pre-1997 long-term capital gains to

March 30, 1998

one group of long-term capital gain.

However, § 1(h) gives the Treasury broad

regulatory authority to implement the provisions of § 1(h) for passthrough entities.

Pre-1997 long-term capital gains were

characterized by the CRT based on the definitions of short-term and long-term capital gains applicable at the time the CRT

sold a capital asset. CRTs have never

been required to segregate these gains

based upon the tax rate or holding period

in effect at the time the gains were realized by the CRT. Thus, the undistributed

pre-1997 long-term capital gains reflect

gains realized when various tax rates and

holding periods were in effect. Treasury

will exercise its regulatory authority to

treat undistributed CRT pre-1997 longterm capital gains as falling within the 20percent group.

1997 PRE-EFFECTIVE DATE LONGTERM CAPITAL GAINS

Long-term capital gains properly taken

into account from January 1, 1997, through

May 6, 1997, are covered by the rules in §

1(h) regarding pre-effective date gains.

Under § 1(h), for the taxable year that includes May 7, 1997, gains and losses properly taken into account by the CRT for the

portion of the taxable year before May 7,

1997, must be taken into account in determining long-term capital gain in the 28percent group. Because the taxable year

for CRTs is the calendar year, long-term

capital gains properly taken into account

by a CRT from January 1, 1997, through

May 6, 1997, are treated as long-term capital gains in the 28-percent group.

EXAMPLE ILLUSTRATING

ORDERING AND CHARACTER

RULES

The following example illustrates how

these rules will apply to the 1998 taxable

year. At the end of the 1998 taxable year,

CRT X has no current or undistributed ordinary income and has the following net

short-term and long-term capital gains:

Net short-term capital gain

Net long-term capital gain

$50

By tax rate group:

28-percent group gain – $15

($12 of gain recognized from 1/1/97

through 5/6/97; and $3 of gain recognized after 7/28/97 from an asset

held for more than one year and less

than 18 months)

25-percent group gain – $ 5

20-percent group gain – $30

($10 of gain recognized before

1/1/97)

X makes a CRT distribution of $25 for the

1998 taxable year. The CRT distribution

is deemed to have the following characteristics in the recipient’s hands:

Short-term capital gain $ 5

28-percent group gain $15

25-percent group gain $ 5

20-percent group gain $ 0

The undistributed 20-percent group gain

of $30 is carried forward to 1999.

EFFECTIVE DATE

The proposed regulations when published will be effective for taxable years

beginning on or after January 1, 1998.

CRTs and their recipients, however, may

rely on the rules in this notice for the 1997

taxable year.

DRAFTING INFORMATION

The principal authors of this notice are

Mary Beth Collins and Jeff Erickson of

the Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

For further information regarding this notice contact Ms. Collins or Mr. Erickson

on (202) 622-3070 (not a toll-free call).

26 CFR 601.602: Tax forms and instructions.

Rev. Proc. 98–26

TABLE OF CONTENTS

PART A. GENERAL

SECTION 1.

SECTION 2.

SECTION 3.

SECTION 4.

SECTION 5.

PURPOSE

NATURE OF CHANGES

WHERE TO FILE AND HOW TO CONTACT THE IRS, MARTINSBURG COMPUTING CENTER

FILING REQUIREMENTS

FORM 4419, APPLICATION FOR FILING INFORMATION RETURNS MAGNETICALLY/ELECTRONICALLY

SECTION 6. FILING DUE DATES

SECTION 7. FILING FORMS W-4 MAGNETICALLY/ELECTRONICALLY

SECTION 8. REPLACEMENT FILES

SECTION 9. EFFECT ON PAPER DOCUMENTS

SECTION 10. DEFINITION OF TERMS

PART B. MAGNETIC MEDIA /ELECTRONIC SPECIFICATIONS

SECTION 1.

SECTION 2.

SECTION 3.

SECTION 4.

SECTION 5.

GENERAL

TAPE SPECIFICATIONS

5 1⁄4-INCH AND 3 1⁄2-INCH DISKETTE SPECIFICATIONS

TAPE CARTRIDGE SPECIFICATIONS

8MM, 4MM and QUARTER INCH CARTRIDGE SPECIFICATIONS

March 30, 1998

1998–13 I.R.B.

SECTION 6.

SECTION 7.

SECTION 8.

SECTION 9.

ASYNCHRONOUS (IRP-BBS) ELECTRONIC FILING SPECIFICATIONS

FORM W-4 RECORD FORMAT AND RECORD LAYOUT

EFFECT ON OTHER DOCUMENTS

EFFECTIVE DATE

PART A. GENERAL

SEC. 1. PURPOSE

.01 The purpose of this revenue procedure is to update Rev. Proc. 92–80, 1992–2 C.B. 465, (IRS Pub. 1245), which outlines the

requirements and conditions for submitting certain Forms W–4, Employee’s Withholding Allowance Certificate, magnetically or

electronically to the Internal Revenue Service (IRS), Martinsburg Computing Center (MCC).

.02 Revenue procedures are generally revised to reflect legislative and form changes. Comments concerning this revenue procedure or suggestions for making it more helpful can be addressed to Internal Revenue Service, Martinsburg Computing Center, P.O.

Box 1359, Martinsburg, WV 25402, ATTN: IRBInformation Support Section.

.03 The following revenue procedures and publications provide more detailed filing procedures for certain information returns

and can be obtained by contacting your local IRS office or by calling 1-800-829-3676:

(a) “Instructions for Forms 1099, 1098, 5498, and W–2G” provides specific instructions on completing and submitting information returns to IRS.

(b) Rev. Proc. 84–33, 1984–1 C.B. 502, regarding the optional method for agents to report and deposit backup withholding.

(c) Publication 1179, Specifications for Paper Document Reporting and Paper Substitutes for Forms 1096, 1098, 1099 Series,

5498, and W–2G.

(d) Publication 1220, Specifications for Filing Form 1098, 1099, 5498, and W–2G Magnetically or Electronically.

(e) Publication 1239, Specifications for Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, on Magnetic Tape and 3 1⁄2- or 5 1⁄4-Inch Magnetic Diskettes.

(f) Publication 1187, Specifications for Filing Form 1042S, Foreign Person’s U.S. Source Income Subject to Withholding,

Magnetically or Electronically

(g) Publication 1527, IRP–BBS (Information Reporting Program Bulletin Board System).

.04 Refer to Part A, Sec. 10, for definitions of terms used in this publication.

SEC. 2. NATURE OF CHANGES

In this publication, major changes have been emphasized by using italics. This has been done to assist filers in identifying new information. Filers are still advised to read the publication in its entirety.

The changes are as follow:

.01 EDITORIAL CHANGES

(a) The title of the publication has changed from “Specifications for Filing Form W–4, Employee’s Withholding Allowance

Certificate, on Magnetic Tape, and 5 1⁄4-, and 3 1⁄2-Inch Magnetic Diskettes” to “Specifications for Filing Form W–4, Employee’s Withholding Allowance Certificate, Magnetically or Electronically.” This revenue procedure now contains specifications for reporting electronically through the Information Reporting Program Bulletin Board System (IRP–BBS), and

magnetically using AS400 compatible tape cartridges, 8mm, 4mm, and Quarter Inch Cartridges.

(b) Under Part A, Sec. 3, “WHERE TO FILE AND HOW TO CONTACT THE IRS, MARTINSBURG COMPUTING CENTER”, the ZIP code for the P O Box address was changed to 25402.

have changed. The IRP–BBS telephone number is now 304-264-7070. The IRS/MCC fax number is 304-264-5602.

(d) Under Part B, Sec. 2, tape specifications, modifications have been made which simplify requirements. Please read carefully.

(e) Part B, Sec. 7, Form W–4 record format, has been changed to Form W–4 record format and record layout. A record layout

has been added at the end of the format specifications.

.02 PROGRAMMING CHANGES

(a) Added Part B, Sec. 4,“Tape Cartridge Specifications”

(b) Added Part B, Sec. 5, “8MM, 4MM, and QUARTER INCH CARTRIDGE Specifications”

(d) Revised Part B, Sec. 7, “Form W–4 Record Format and Record Layout.”

(1) Form W–4 Date field is expanded to 8 positions. The format will be YYYYMMDD, (e.g. 19981231).

(2) The date field was moved from positions 164–169 to positions 324–331. Field positions 164–169 will now be blank

filled.

(3) Employer Zip Code has expanded from 5 positions to 9 positions. The field positions are now 310–318.

(4) Due to the change in the Employer Zip Code, the Transmitter Control Code has shifted 4 positions. The field positions

are now 319–323.

1998–13 I.R.B.

March 30, 1998

SEC. 3. WHERE TO FILE AND HOW TO CONTACT THE IRS, MARTINSBURG COMPUTING CENTER

.01 All Forms W–4 filed magnetically or electronically are processed at IRS/MCC. Magnetic media containing Forms W–4 are

to be sent to the following addresses:

If by Postal Service:

✉

IRS-Martinsburg Computing Center

Information Reporting Program

P. O. Box 1359

Martinsburg, WV 25402-1359

If by truck or air freight:

IRS-Martinsburg Computing Center

Information Reporting Program

Route 9 and Needy Road

Martinsburg, WV 25401

☞ Note: The ZIP Code has changed from 25401-1359 to 25402-1359 for the IRS P.O. Box addresses for Martinsburg, WV.

.02 Publication 1245 and other IRS publications concerning magnetic/electronic filing of information returns are available

through the IRP–BBS as “downloadable” files. Using IRP–BBS as a means of obtaining publications will provide faster access to

this information. Additionally, publications will be available from IRP–BBS much earlier than the printed version. The IRP–BBS is

operational 24 hours a day, 7 days a week. The telephone number is (304) 264-7070.

.03 Requests for paper forms and publications unrelated to magnetic media/electronic filing should be requested by calling the

“Forms Only Number” listed in your local telephone directory or by calling the IRS toll-free number 1-800-TAX-FORM (1-800829-3676).

.04 Questions pertaining to magnetic media/electronic filing of Forms W–2 must be directed to the Social Security Administration (SSA). Filers can call 1-800-SSA-1213 to obtain the phone number of the SSA Magnetic Media Coordinator for their area.

.05 A taxpayer or authorized representative may request a copy of a tax return or a Form W–2 filed with a return by submitting

Form 4506, Request for Copy or Transcript of Tax Form, to IRS. This form may be obtained by calling 1-800-TAX-FORM (1-800829-3676).

.06 The IRS/MCC Call Site, located in Martinsburg, WV provides service to the payer/employer community (financial institutions, employers, and other transmitters of information returns). The IRS/MCC Call Site answers question concerning tax law and

the magnetic/electronic filing of questionable Forms W–4 as well as information returns (Forms 1096, 1098, 1099, 5498,

5498–MSA, 8027, W–2G, W–3, and 1042S), inquiries dealing with backup withholding due to missing and incorrect taxpayer identification numbers and questions concerning paper filing of Forms W–2. Recipients of information returns (payees) should continue

to contact 1-800-829-1040 or other numbers specified in the tax return instructions with any questions on how to report information

returns.

The Call Site accepts calls from all areas of the country. The number to call is 304-263-8700 or Telecommunications Device for

the Deaf (TDD) 304-267-3367. These are toll calls. The Call Site is in operation throughout the year to handle the questions of payers, transmitters, and employers. Due to the high demand for assistance at the end of January and February, it is advisable to call

as soon as possible to avoid these peak filing seasons.

.07 Telephone inquiries may be made Monday through Friday between 8:30 a.m. and 4:30 p.m. Eastern time. The telephone

numbers for magnetic media/electronic inquiries or electronic submissions are:

☎

304-263-8700 - Call Site

304-264-7070 - IRP–BBS (Information Reporting Program Bulletin Board System)

304-267-3367 - TDD (Telecommunication Device for the Deaf)

304-264-5602 - Fax Machine

(These are not toll-free telephone numbers.)

TO OBTAIN FORMS & PUBLICATIONS, CALL:

1-800-TAX-FORM

(1-800-829-3676)

SEC. 4. FILING REQUIREMENTS

.01 Employers are required to send to IRS quarterly, copies of all Forms W–4 received during the quarter from employees still

employed at the end of the quarter who claim the following:

(a) More than 10 withholding allowances, or

(b) Exempt status and are expected to earn more than $200 a week.

.02 Employers are not required to send other Forms W–4 unless notified by IRS in writing to do so.

March 30, 1998

1998–13 I.R.B.

.03 Employers may submit all information magnetically or electronically; or a combination of magnetic/electronic files and paper

documents is acceptable, provided there are no duplications or omissions of documents. However magnetic/electronic filing is preferred and strongly encouraged.

.04 A Form W–4 with a written statement attached from the employee must be filed on paper, not on magnetic media. If filing

paper Forms W–4, the employer may send them in each quarter with paper Forms 941. If the employer submits the paper Forms

W–4 at any time other than quarterly, a cover letter must be submitted giving the employer’s name, address, employer identification

number (EIN), and the number of Forms W–4 included.

NOTE: MCC DOES NOT PROCESS PAPER RETURNS. PAPER RETURNS MUST BE FILED WITH THE APPROPRIATE SERVICE CENTER. SEE FORM 941 INSTRUCTIONS FOR THE APPROPRIATE SERVICE

CENTER

SEC. 5. FORM 4419, APPLICATION FOR FILING INFORMATION RETURNS MAGNETICALLY/ELECTRONICALLY

.01 Employers, or their transmitters, who wish to file magnetically or electronically, must submit a Form 4419, Application for

Filing Information Returns Magnetically/Electronically. Instructions for its completion are on the reverse of the form.

.02 Magnetic/electronic files may not be filed with IRS/MCC until authorization to file is received. Requests will be approved or

disapproved within 30 days of receipt.

.03 Only applications of employers or transmitters, whose equipment meets the specifications in Part B, Sec. 2, 3, 4, 5 or 6 will be

approved.

.04 Once authorization to file has been granted, a five-character alpha/numeric Transmitter Control Code (TCC) will be assigned.

Approval will continue in effect in succeeding years provided the requirements of the current revenue procedure are met and there

are no equipment changes by the employer or transmitter. Although a TCC may have already been assigned to a transmitter for the

filing of information returns, the Form W–4 requires a separate TCC of its own. This TCC must appear on all transmittal forms submitted with magnetic/electronic files as well as other correspondence. The TCC must also be coded into positions 319–323 of the

Form W–4 record. (See Part B, Sec. 7.)

.05 New applications (Forms 4419) are required whenever:

(a) You discontinue filing on magnetically/electronically for a year, in which case your TCC may have been reassigned. You

may call IRS/MCC to verify if your TCC is still valid.

(b) You have used a service agency in the past, and they had their own TCC, to prepare your files but you now have computer

equipment compatible with that of IRS, in which case you must request your own TCC.

SEC. 6. FILING DUE DATES

.01 Magnetic/electronic reporting of Forms W–4 to IRS must be at least quarterly (monthly reporting is encouraged). The following are the quarter end dates:

Period Covered

Due Date

January 1 thru March 31

April 1 thru June 30

July 1 thru September 30

October 1 thru December 31

April 30

July 31

October 31

January 31

.02 If any due date falls on a Saturday, Sunday, or legal holiday, the Forms W–4 are considered timely if they are filed on the next

day that is not a Saturday, Sunday, or legal holiday.

SEC. 7. FILING FORMS W–4 MAGNETICALLY/ELECTRONICALLY

.01 A Magnetic media/electronic Reporting Package which includes the current revenue procedure and the necessary transmittal

forms will be mailed to approved filers each year.

.02 If the employer chooses to file magnetically/electronically, then a Form 6466, Transmittal of Forms W–4 Reported Magnetically/Electronically, must be sent to the IRS/MCC as prescribed in Part A, Sec. 3.

.03 Form 6466 MUST be signed by the employer or the transmitter, service bureau, paying agent, or disbursing agent (all hereafter referred to as agent), on behalf of the employer if the agent has the authority to sign the affidavit under an agency agreement

(either oral, written, or implied) that is valid under state law and adds the caption “FOR: (name of employer).”

.04 Although a duly authorized agent signs the affidavit, the employer(s) is held responsible for the accuracy of the Forms W–4

filed magnetically or electronically.

.05 DO NOT REPORT THE SAME INFORMATION ON PAPER DOCUMENTS THAT YOU REPORT MAGNETICALLY/ELECTRONICALLY. If you report part of your returns on paper and part magnetically or electronically, be sure that duplicate returns are not included on both.

1998–13 I.R.B.

March 30, 1998

.06 Before submitting your magnetic/electronic file, include the following:

(a) A signed Form 6466, Transmittal of Forms W–4 Reported Magnetically/Electronically along with a Form 6467, Transmittal of Forms W–4 Reported Magnetically/Electronically(Continuation), if you submit data for multiple employers. These

forms must be mailed the same day electronic files are submitted.

(b) Your media (tape, diskette, or cartridge with an external identifying label.) Form 6468 describes the information which

should be included on this self-prepared label.

(c) On the outside of the shipping container, affix the label IRB Special Projects. This label is included in the publication.

.07 IRS/MCC will not return filers’ magnetic media after it has been successfully processed. Should filers wish to know if their

media was received by IRS/MCC, a delivery service that provides certification of delivery is recommended.

.08 IRS cannot accept any Cash-On-Delivery (COD) or Charged-to-IRS shipments of reportable tax information that

an individual or organization is legally required to file. Because of the high volume of data received and shipping cost

involved, special shipping containers will not be returned.

.09 Use this record format and processing capabilities to file Forms W–4 submitted for the quarter ending 06-30-1998 and for all

subsequent filings.

SEC. 8. REPLACEMENT FILES

THE MAGNETIC MEDIA/ELECTRONIC SPECIFICATIONS CONTAINED IN PART B OF THIS REVENUE PROCEDURE MUST BE STRICTLY ADHERED TO. If files are unprocessable, they will be returned to you for replacement and resubmission, or submission of paper Forms W–4. Replacement files must be resubmitted to IRS/MCC within 45 days of the date of

the letter. The media should be identified as replacement data by writing, typing or printing “Magnetic Media Replacement” on the

external label used on the magnetic media and marking the replacement box on the Form 6466. If filing electronically, you will be

prompted to enter an “R” in type of submission to identify a replacement file before transmission begins.

SEC. 9. EFFECT ON PAPER DOCUMENTS

.01 Magnetic/electronic reporting to IRS eliminates the need to submit copies of paper Forms W–4.

.02 If part of the Forms W–4 are reported magnetically/electronically and the remainder are reported on paper forms, the paper

Forms W–4 must be mailed to the appropriate service center.

SEC. 10. DEFINITION OF TERMS

Employer

Generally, an employer is a person or organization for whom a worker performs a service as an employee. The employer has the right to direct and control the worker. A person or organization paying wages to a former employee after the work ends is also considered an employer.

Employee

One who performs services for an employer.

Denotes a blank position. Enter blank(s) when this symbol is used (“b”). This appears

throughout the record descriptions.

EIN

Employer Identification Number that has been assigned by IRS.

File

For purposes of this procedure, a file consists of all magnetic/electronic records submitted by an

employer or transmitter.

Special Character

Any character that is not a numeral, an alpha or a blank.

Taxpayer

Identification

Number (TIN)

May be either an Employer Identification Number (EIN); a Social Security Number (SSN); an IRS

Individual Taxpayer Identification Number (ITIN) issued to an alien individual; or an IRS

Adoption Taxpayer Identification Number (ATIN) assigned to children who are in the process of

being adopted.

Transmitter

Person or organization preparing and/or submitting magnetic/electronic file(s).

Transmitter

Control Code

(TCC)

A five-character alpha/numeric number assigned by IRS to the transmitter prior to actual filing

mag

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.