Bulletin No. 1998–44

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Bulletin No. 1998–44

November 2, 1998

Internal Revenue

bulletin

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

T.D. 8786, page 4.

Final regulations under section 863 of the Code govern the

source of income from sales of inventory produced in the

United States and sold in a possession of the United States

or produced in a possession of the United States and sold in

the United States and from sales of inventory purchased in a

possession of the United States and sold in the United

States. Final regulations under section 936 of the Code govern the source of income from sales in the United States of

property purchased from a corporation that has an election

under section 936 in effect.

EMPLOYEE PLANS

Notice 98–50, page 10.

Roth IRAs; recharacterizations; conversions. This notice sets forth examples and a proposed rule with respect to

the recharacterization and reconversion of amounts converted from a traditional IRA to a Roth IRA.

Notice 98–51, page 11.

Weighted average interest rate update. The weighted

average interest rate for October 1998 and the resulting

permissible range of interest rates used to calculate current

Finding Lists begin on page 21.

Index for January-October begins on page 23.

Department of the Treasury

Internal Revenue Service

liability for purposes of the full funding limitation of section

412(c)(7) of the Code are set forth.

EXEMPT ORGANIZATIONS

Announcement 98–98, page 18.

A list is provided of organizations that no longer qualify as

organizations for which contributions are deductible under

section 170 of the Code.

ADMINISTRATIVE

Announcement 98–95, page 13.

The Service announces a proposed revision to Form 8857,

Request for Innocent Spouse Relief (And Allocation of Liability

and Equitable Relief) and requests comments on the revision.

Announcement 98–96, page 18.

T.D. 8776, 1998–33 I.R.B. 6, relating to U.S. taxpayers operating, investing, or otherwise conducting business in the

currencies of certain European countries that are replacing

their national currencies with a single, multinational currency

called the euro, is corrected.

Announcement 98–97, page 18.

REG–245256–96, 1998–34 I.R.B. 9, relating to the excise

taxes on excess benefit transactions, is corrected.

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The IRS Mission

and by applying the tax law with integrity and fairness to

all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

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.

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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.

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

Section 863.—Special Rules for

Determining Source

26 CFR 1.863–3: Allocation and apportionment of

income from certain sales of inventory.

T.D. 8786

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Source of Income From Sales of

Inventory Partly From Sources

Within a Possession of the

United States; Also, Source of

Income Derived From Certain

Purchases From a Corporation

Electing Section 936

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations under section 863 governing the source of income from sales of

inventory produced in the United States

and sold in a possession of the United

States or produced in a possession of the

United States and sold in the United

States; final regulations under section

863 governing the source of income from

sales of inventory purchased in a possession of the United States and sold in the

United States; and final regulations under

section 936 governing the source of income of a taxpayer from the sale in the

United States of property purchased from

a corporation that has an election under

section 936 in effect. This document affects persons who produce (in whole or

in part) inventory in the United States

and sell in a possession, or produce (in

whole or in part) inventory in a possession and sell in the United States, as well

as persons who purchase inventory in a

possession and sell in the United States,

and also persons who sell in the United

States property purchased from a corporation that has a section 936 election in

effect.

DATES: Effective Date. These regulations are effective November 13, 1998.

November 2, 1998

Applicability Date. These regulations

apply to taxable years beginning on or

after November 13, 1998.

FOR FURTHER INFORMATION CONTACT: Anne Shelburne, (202) 874-1305

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this final regulation has been reviewed and approved by the Office of

Management and Budget in accordance

with the requirements of the Paperwork

Reduction Act of 1995 (44 U.S.C.

3507(d)) under control number 1545–

1556. Responses to this collection of information are mandatory.

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 respondent is approximately 2.5

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, OP:FS:FP,

Washington, DC 20224, and the Office of

Management and Budget, Attn: Desk

Officer for the Department of 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

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This document contains final regulations under section 863 of the Internal

Revenue Code (Code), providing rules to

source income from cross-border sales of

certain property, where the property is

manufactured in a possession of the

United States and sold in the United

States, or vice versa, or purchased in a

4

possession and sold in the United States.

These regulations also contain rules under

section 936 to source income of a taxpayer from the sale in the United States of

property purchased from a corporation

that has an election under section 936 in

effect.

On October 10, 1997, proposed regulations [REG–251985–96] were published

in the Federal Register (62 F.R. 52953).

Having considered the comments, the IRS

and the Treasury Department adopt the

proposed regulations without significant

change in this Treasury decision.

Explanation of Provisions

I. Income Partly From Sources Within a

Possession

Section 863 authorizes the Secretary to

promulgate regulations allocating or apportioning, to sources within or without

the United States, all items of gross income, expenses, losses, and deductions

other than those items specified in sections 861(a) and 862(a).

Guidance in these regulations to determine the source of possession income

under section 863 concerns two types of

transactions: transactions described in

section 863(b)(2) for property produced

in the United States and sold in a possession (or vice versa), and transactions described in section 863(b)(3) for property

purchased in a possession and sold in the

United States (collectively, Section 863

Possession Sales).

1. Methods for allocating or

apportioning gross income from

Section 863 Possession Sales

a. Property produced and sold

Under the final regulations, income

from sales of inventory produced in the

United States and sold in a possession of

the United States or produced in a possession and sold in the United States (collectively, Possession Production Sales), is allocated or apportioned according to one

of three methods.

Paragraph (f)(2)(i)(A) of the regulations makes the 50/50 method the general

rule to allocate gross income from Possession Production Sales between production

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activity and business sales activity, so that

the income from each type of activity can

then be apportioned between U.S. and

foreign sources. The taxpayer, however,

may elect to apply the independent factory price (IFP) method (described in

paragraph (f)(2)(i)(B)), or, with the consent of the District Director, the books

and records method (described in paragraph (f)(2)(i)(C)).

Under the possession 50/50 method,

the final regulations allocate half of the

taxpayer’s gross income from Possession

Production Sales to production activity

and half to business sales activity. The income is then apportioned between U.S.

and possession sources based on a property fraction and a business sales activity

fraction.

The final regulations apply the property

fraction in §1.863–3(c) to apportion the

half of a taxpayer’s income allocated to

production activity. Thus, income is apportioned to the United States or to a possession or to other foreign sources based

on the location of the taxpayer’s production assets. Consistent with the changes

made to the regulations under §1.863–

3(c), production assets are defined as tangible and intangible assets owned directly

by the taxpayer that are directly used by

the taxpayer to produce inventory sold in

Possession Production Sales. Production

assets are included in the fraction at their

adjusted tax basis, consistent with the

changes made to the regulations under

§1.863–3(c).

The other half of the taxpayer’s gross

income, allocated to business sales activity, is apportioned according to a business

sales activity fraction. The portion of this

income that is possession source income

is determined by multiplying the income

by a fraction, the numerator being the

business sales activity of the taxpayer in

the possession, and the denominator

being the business sales activity of the

taxpayer within the possession and outside the possession. The remaining income is sourced in the United States. Although some of the business sales

activity factors not incurred in a possession may be incurred in a foreign country,

Treasury and the IRS believe that the

business sales activity fraction is only intended to source the business sales activity portion of Possession Production

Sales outside the United States to the ex-

1998–44 I.R.B.

tent of business sales activity located in a

possession.

Under the final regulations, as opposed

to the current regulations, business sales

activity is measured by the sum of certain

expenses, including amounts paid for

labor, materials, advertising, and marketing (but excluding any expenses or other

amounts that are nondeductible under section 263A, interest, and research and development), plus receipts for the sale of

goods. This formula is intended to reflect

better the business sales activity producing the income by including more of the

factors responsible for producing that income. Also, cost of goods sold is now excluded from the business sales activity

fraction apportioning income from Possession Production Sales, because such

costs generally reflect production activity.

Production activity is already represented

in the formula by the one-half of the taxpayer’s income apportioned according to

the location of production assets.

The final regulations provide explicit

guidance for attributing business sales activity between the United States and a

possession. In attributing business sales

activity between the United States and a

possession, expenses are allocated and

apportioned between the United States

and a possession based on the rules in

§§1.861–8 through 1.861–14T. Gross

sales are allocated to the United States or

a possession based on the place of sale.

The final regulations make the IFP

method elective, and thus eliminate any

bias against taxpayers choosing to export

through independent distributors. The

regulations rely upon the regulations

under §1.863–3 for rules in applying the

IFP method.

The final regulations permit taxpayers

to request permission from the District

Director to use their books and records to

determine the source of their income. The

final regulations refer to §1.863-3(b)(3) in

applying the method to Possession Production Sales.

chase Sales). The taxpayer may, however, elect to apply, with consent of the

District Director, the books and records

method.

The final regulations apportion the taxpayer’s income from Possession Purchase

Sales on the basis of a business activity

fraction. The portion of this income that

is possession source income is determined

by multiplying the income by a fraction,

the numerator being the business of the

taxpayer in the possession, and the denominator being the business of the taxpayer within the possession and outside

the possession. The remaining income is

sourced in the United States.

The business activity fraction is similar

to the business sales activity fraction discussed previously, used to apportion the

taxpayer’s income in Possession Production Sales, except that the fraction applies

only to expenses, cost of goods sold, and

sales attributable to Possession Purchase

Sales. In addition, the business activity

fraction apportioning Possession Purchase Sales includes amounts paid for

cost of goods sold. Such costs are attributed to the possession, however, only to

the extent the property purchased is manufactured, produced, grown, or extracted

in the possession. Treasury and the Internal Revenue Service anticipate that if a

taxpayer acts in the reasonable belief that

the products were manufactured in the

possession, the taxpayer could act on that

basis in preparing its tax return. The business activity fraction reflects the view of

Treasury and the IRS that the purchase

rule of section 863(b)(3) was intended to

apply only to purchase and resale transactions where the goods purchased are created or derived from the possession.

The final regulations permit taxpayers

to request permission from the District

Director to use their books and records to

determine the source of their income. The

proposed regulations refer to §1.863–

3(b)(3) in applying the method to Possession Purchase Sales.

b. Property purchased and sold

2. Determination of source of gross

income

Paragraph (f)(3)(i)(A) makes the business activity method the general rule to

apportion income between the United

States and a possession, from sales of

property purchased in a possession and

sold in the United States (Possession Pur-

5

Under the final regulations, once gross

income attributable to production activity,

business activity, or sales activity has

been determined under one of the prescribed methods, the source of the gross

November 2, 1998

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income is determined separately for each

type of income. The source of gross income attributable to production activity

(when applying the possession 50/50

method) is determined under paragraph

(c)(1), based on the location of production

assets. The source of gross income attributable to sales activity (when applying the

IFP method or the books and records

method) is determined under paragraph

(c)(2), based generally on the location of

the sale. The source of gross income attributable to business sales activity (when

applying the possession 50/50 method) is

determined under paragraph (f)(2)(ii)(B),

based on expenses and gross sales attributable to Possession Production Sales.

The source of gross income attributable to

business activity (when applying the business activity method) is determined under

paragraph (f)(3)(ii), based on expenses,

cost of goods sold, and gross sales attributable to Possession Purchase Sales.

3. Determination of source of taxable

income

Once the source of gross income is determined under paragraph (f)(2) or (3),

taxpayers then determine the source of

taxable income. Under paragraph (f)(4),

taxpayers must allocate and apportion

under §§1.861–8 through 1.861-–14T the

amounts of expenses, losses and other deductions to gross income determined

under each of the prescribed methods. In

the case of amounts of expenses, losses

and other deductions allocated and apportioned to gross income determined under

the IFP method or the books and records

method, the taxpayer must apply the rules

of §§1.861–8 through 1.861–14T to allocate and apportion these amounts between

gross income from sources within the

United States and within a possession.

However, for expenses, losses and other

deductions allocated and apportioned to

gross income determined under the possessions 50/50 method or gross income

from Possession Purchase Sales determined under the business activity method,

taxpayers must apportion expenses and

other deductions pro rata based on the relative amounts of U.S. and possession

source gross income. Nevertheless, the

research and experimental (R&E) expense allocation rules in §1.861–17 apply

to taxpayers using the 50/50 method, so

that the R&E set aside (described in

November 2, 1998

§1.861–17) remains available to such taxpayers.

and foreign sources, in a statement attached to its tax return.

4. Treatment of gross income derived

from certain purchases from a

corporation that has an election in

effect under section 936

II. Income Derived From Certain

Purchases From a Corporation That

Has an Election in Effect Under

Section 936

The final regulations clarify that section 863 does not apply to determine the

source of a taxpayer’s gross income derived from a purchase of inventory from a

corporation that has an election in effect

under section 936, if the taxpayer’s income from sales of that inventory is taken

into account to determine benefits under

section 936(h)(5)(C) for the section 936

corporation.

These regulations clarify that, where a

taxpayer purchases a product from a corporation that has an election in effect

under section 936, the source of the taxpayer’s gross income derived from sales

of that product (in whatever form sold) in

the United States is U.S. source, if the taxpayer’s income from sales of that product

is taken into account to determine benefits

under section 936(h)(5)(C)(i) for the section 936 corporation. The taxpayer’s income is U.S. source without regard to

whether a possession product is a component, end-product form, or integrated

product. No inference should be drawn

concerning the treatment of transactions

involving sales of property purchased

from a section 936 corporation entered

into before the regulations are applicable.

5. Treatment of partners and partnerships

The final regulations rely on the rules

in §1.863–3(g) for determining the appropriate treatment in transactions involving

partnerships. Under those rules, the aggregate approach applies to a partnership’s production and sales activity for

two purposes only. First, the aggregate

approach applies in determining the character of a partner’s distributive share of

partnership income. Second, the aggregate approach applies in sourcing income

from sales of inventory property that is

transferred in-kind from or to a partnership.

6. Election and reporting rules

Under paragraph (f)(6)(i) of the final

regulations, a taxpayer must use the 50/50

method to determine the source of income

from Possession Production Sales unless

the taxpayer elects to use the IFP method,

or elects the books and records method.

For Possession Purchase Sales, a taxpayer

must use the business activity method,

unless the taxpayer elects the books and

records method. The taxpayer makes an

election by using the method on its timely

filed original tax return. That method

must be used in later taxable years unless

the Commissioner or his delegate consents to a change. Permission to change

methods in later years will be granted unless the change would result in a substantial distortion of the source of income.

A taxpayer must fully explain the

methodology used in applying either

paragraph (f)(2) or (3), and the amount of

income allocated or apportioned to U.S.

6

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 is hereby certified that these

regulations will not have a significant

economic impact on a substantial number

of small entities. This certification is

based on the fact that the rules of this section principally impact large multinationals who pay foreign taxes on substantial

foreign operations and therefore the rules

will impact very few small entities.

Moreover, in those few instances where

the rules of this section impact small entities, the economic impact on such entities

is not likely to be significant. Accordingly, a regulatory flexibility analysis is

not required. 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 Anne Shelburne, Office of Associ-

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Page 7

ate Chief Counsel (International). 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 is amended by revising the entry for

“Section 1.863–3”, removing the entry for

“Sections 1.936–4 through 1.936–7” and

adding entries in numerical order to read

as follows:

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

Section 1.863–3 also issued under 26

U.S.C. 863(a) and (b), and 26 U.S.C.

936(h).***

Section 1.936–4 also issued under 26

U.S.C. 936(h).

Section 1.936–5 also issued under 26

U.S.C. 936(h).

Section 1.936–6 also issued under 26

U.S.C. 863(a) and (b), and 26 U.S.C.

936(h).

Section 1.936–7 also issued under 26

U.S.C. 936(h).***

Par. 2 Section 1.863–3 is amended as

follows:

1. Paragraph (f) is revised.

2. Paragraph (h) is amended by adding

a sentence at the end of the paragraph.

The revision and addition read as follows:

§1.863–3 Allocation and apportionment

of income from certain sales of inventory.

* * * * *

(f) Income partly from sources within a

possession of the United States—(1) In

general. This paragraph (f) relates to

gains, profits, and income, which are

treated as derived partly from sources

within the United States and partly from

sources within a possession of the United

States (Section 863 Possession Sales).

This paragraph (f) applies to determine

the source of income derived from the

sale of inventory produced (in whole or in

part) by the taxpayer within the United

States and sold within a possession, or

produced (in whole or in part) by a tax-

1998–44 I.R.B.

payer in a possession and sold within the

United States (Possession Production

Sales). It also applies to determine the

source of income derived from the purchase of personal property within a possession of the United States and its sale

within the United States (Possession Purchase Sales). A taxpayer subject to this

paragraph (f) must divide gross income

from Section 863 Possession Sales using

one of the methods described in either

paragraph (f)(2)(i) of this section (in the

case of Possession Production Sales) or

paragraph (f)(3)(i) of this section (in the

case of Possession Purchase Sales). Once

a taxpayer has elected a method, the taxpayer must separately apply that method

to the applicable category of Section 863

Possession Sales in the United States and

to those in a possession. The source of

gross income from each type of activity

must then be determined under either

paragraph (f)(2)(ii) or (3)(ii) of this section, as appropriate. The source of taxable

income from Section 863 Possession

Sales is determined under paragraph

(f)(4) of this section. The taxpayer must

apply the rules for computing gross and

taxable income by aggregating all Section

863 Possession Sales to which a method

in this section applies after separately applying that method to Section 863 Possession Sales in the United States and to Section 863 Possession Sales in a possession.

This section does not apply to determine

the source of a taxpayer’s gross income

derived from a sale of inventory purchased from a corporation that has an

election in effect under section 936, if the

taxpayer’s income from sales of that inventory is taken into account to determine

benefits under section 936 for the section

936 corporation. For rules to be applied

to determine the source of such income,

see §1.936–6(a)(5) Q&A 7a and 1.936–

6(b)(1) Q&A 13.

(2) Allocation or apportionment for

Possession Production Sales—(i) Methods for determining the source of gross

income for Possession Production

Sales—(A) Possession 50/50 method.

Under the possession 50/50 method, gross

income from Possession Production Sales

is allocated between production activity

and business sales activity as described in

this paragraph (f)(2)(i)(A). Under the

possession 50/50 method, one-half of the

taxpayer’s gross income will be consid-

7

ered income attributable to production activity and the source of that income will

be determined under the rules of paragraph (f)(2)(ii)(A) of this section. The remaining one-half of such gross income

will be considered income attributable to

business sales activity and the source of

that income will be determined under the

rules of paragraph (f)(2)(ii)(B) of this section.

(B) IFP method. In lieu of the possession 50/50 method, a taxpayer may elect

the independent factory price (IFP)

method. Under the IFP method, gross income from Possession Production Sales is

allocated to production activity or sales

activity using the IFP method, as described in paragraph (b)(2) of this section,

if an IFP is fairly established under the

rules of paragraph (b)(2) of this section.

See paragraphs (f)(2)(ii)(A) and (C) of

this section for rules for determining the

source of gross income attributable to

production activity and sales activity.

(C) Books and records method. A taxpayer may elect to allocate gross income

using the books and records method described in paragraph (b)(3) of this section,

if it has received in advance the permission of the District Director having audit

responsibility over its return. See paragraph (f)(2)(ii) of this section for rules for

determining the source of gross income.

(ii) Determination of source of gross

income from production, business sales,

and sales activity—(A) Gross income attributable to production activity. The

source of gross income from production

activity is determined under the rules of

paragraph (c)(1) of this section, except

that the term possession is substituted for

foreign country wherever it appears.

(B) Gross income attributable to business sales activity—(1) Source of gross

income. Gross income from the taxpayer’s business sales activity is sourced

in the possession in the same proportion

that the amount of the taxpayer’s business

sales activity for the taxable year within

the possession bears to the amount of the

taxpayer’s business sales activity for the

taxable year both within the possession

and outside the possession, with respect

to Possession Production Sales. The remaining income is sourced in the United

States.

(2) Business sales activity. For purposes of this paragraph (f)(2)(ii)(B), the

November 2, 1998

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taxpayer’s business sales activity is equal

to the sum of—

(i) The amounts for the taxable period

paid for wages, salaries, and other compensation of employees, and other expenses attributable to Possession Production Sales (other than amounts that are

nondeductible under section 263A, interest, and research and development); and

(ii) Possession Production Sales for the

taxable period.

(3) Location of business sales activity.

For purposes of determining the location

of the taxpayer’s business activity within

a possession, the following rules apply:

(i) Sales. Receipts from gross sales

will be attributed to a possession under

the provisions of paragraph (c)(2) of this

section.

(ii) Expenses. Expenses will be attributed to a possession under the rules of

§§1.861–8 through 1.861–14T.

(C) Gross income attributable to sales

activity. The source of the taxpayer’s income that is attributable to sales activity,

as determined under the IFP method or

the books and records method, will be determined under the provisions of paragraph (c)(2) of this section.

(3) Allocation or apportionment for

Possession Purchase Sales—(i) Methods

for determining the source of gross income for Possession Purchase Sales—

(A) Business activity method. Gross income from Possession Purchase Sales is

allocated in its entirety to the taxpayer’s

business activity, and is then apportioned

between U.S. and possession sources

under paragraph (f)(3)(ii) of this section.

(B) Books and records method. A taxpayer may elect to allocate gross income

using the books and records method described in paragraph (b)(3) of this section,

subject to the conditions set forth in paragraph (b)(3) of this section. See paragraph (f)(2)(ii) of this section for rules for

determining the source of gross income.

(ii) Determination of source of gross

income from business activity—(A)

Source of gross income. Gross income

from the taxpayer’s business activity is

sourced in the possession in the same proportion that the amount of the taxpayer’s

business activity for the taxable year

within the possession bears to the amount

of the taxpayer’s business activity for the

taxable year both within the possession

and outside the possession, with respect

November 2, 1998

to Possession Purchase Sales. The remaining income is sourced in the United

States.

(B) Business activity. For purposes of

this paragraph (f)(3)(ii), the taxpayer’s

business activity is equal to the sum of—

(1) The amounts for the taxable period

paid for wages, salaries, and other compensation of employees, and other expenses attributable to Possession Purchase Sales (other than amounts that are

nondeductible under section 263A, interest, and research and development);

(2) Cost of goods sold attributable to

Possession Purchase Sales during the taxable period; and

(3) Possession Purchase Sales for the

taxable period.

(C) Location of business activity. For

purposes of determining the location of

the taxpayer’s business activity within a

possession, the following rules apply:

(1) Sales. Receipts from gross sales

will be attributed to a possession under

the provisions of paragraph (c)(2) of this

section.

(2) Cost of goods sold. Payments for

cost of goods sold will be properly attributable to gross receipts from sources

within the possession only to the extent

that the property purchased was manufactured, produced, grown, or extracted in

the possession (within the meaning of

section 954(d)(1)(A)).

(3) Expenses. Expenses will be attributed to a possession under the rules of

§§1.861–8 through 1.861–14T.

(iii) Examples. The following examples illustrate the rules of paragraph

(f)(3)(ii) of this section relating to the determination of source of gross income

from business activity:

Example 1. (i) U.S. Co. purchases in a possession product X for $80 from A. A manufactures X in

the possession. Without further production, U.S.

Co. sells X in the United States for $100. Assume

U.S. Co. has sales and administrative expenses in

the possession of $10.

(ii) To determine the source of U.S. Co.’s gross

income, the $100 gross income from sales of X is allocated entirely to U.S. Co.’s business activity.

Forty-seven dollars of U.S. Co.’s gross income is

sourced in the possession. [Possession expenses

($10) plus possession purchases (i.e., cost of goods

sold) ($80) plus possessions sales ($0), divided by

total expenses ($10) plus total purchases ($80) plus

total sales ($100).] The remaining $53 is sourced in

the United States.

Example 2. (i) Assume the same facts as in Example 1, except that A manufactures X outside the

possession.

8

(ii) To determine the source of U.S. Co.’s gross

income, the $100 gross income is allocated entirely

to U.S. Co.’s business activity. Five dollars of U.S.

Co.’s gross income is sourced in the possession.

[Possession expenses ($10) plus possession purchases ($0) plus possession sales ($0), divided by

total expenses ($10) plus total purchases ($80) plus

total sales ($100).] The $80 purchase is not included

in the numerator used to determine U.S. Co.’s business activity in the possession, since product X was

not manufactured in the possession. The remaining

$95 is sourced in the United States.

(4) Determination of source of taxable

income. Once the source of gross income

has been determined under paragraph

(f)(2) or (3) of this section, the taxpayer

must properly allocate and apportion separately under §§1.861–8 through 1.861–

14T the amounts of its expenses, losses,

and other deductions to its respective

amounts of gross income from Section

863 Possession Sales determined separately under each method described in

paragraph (f)(2) or (3) of this section. In

addition, if the taxpayer deducts expenses

for research and development under section 174 that may be attributed to its Section 863 Possession Sales under §1.861–

17, the taxpayer must separately allocate

or apportion expenses, losses, and other

deductions to its respective amounts of

gross income from each relevant product

category that the taxpayer uses in applying the rules of §1.861–17. Thus, in the

case of gross income from Section 863

Possession Sales determined under the

IFP method or books and records method,

a taxpayer must apply the rules of

§§1.861–8 through 1.861–14T to properly

allocate or apportion amounts of expenses, losses and other deductions, allocated and apportioned to such gross income, between gross income from

sources within and without the United

States. However, in the case of gross income from Possession Production Sales

determined under the possessions 50/50

method or gross income from Possession

Purchase Sales computed under the business activity method, the amounts of expenses, losses, and other deductions allocated and apportioned to such gross

income must be apportioned between

sources within and without the United

States pro rata based on the relative

amounts of gross income from sources

within and without the United States determined under those methods, except

that the rules regarding the allocation and

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apportionment of research and experimental expenditures in §1.861–17 shall

apply to such expenditures of taxpayers

using the 50/50 method.

(5) Special rules for partnerships. In

applying the rules of this paragraph (f) to

transactions involving partners and partnerships, the rules of paragraph (g) of this

section apply.

(6) Election and reporting rules—(i)

Elections under paragraph (f)(2) or (3) of

this section. If a taxpayer does not elect

one of the methods specified in paragraph

(f)(2) or (3) of this section, the taxpayer

must apply the possession 50/50 method

in the case of Possession Production Sales

or the business activity method in the case

of Possession Purchase Sales. The taxpayer may elect to apply a method specified in either paragraph (f)(2) or (3) of

this section by using the method on a

timely filed original return (including extensions). Once a method has been used,

that method must be used in later taxable

years unless the Commissioner consents

to a change. Permission to change methods from one year to another year will be

granted unless the change would result in

a substantial distortion of the source of

the taxpayer’s income.

(ii) Disclosure on tax return. A taxpayer who uses one of the methods described in paragraph (f)(2) or (3) of this

section must fully explain in a statement

attached to the tax return the methodology

used, the circumstances justifying use of

that methodology, the extent that sales are

aggregated, and the amount of income so

allocated.

* * * * *

1998–44 I.R.B.

(h) Effective dates. * * * However,

the rules of paragraph (f) of this section

apply to taxable years beginning on or

after November 13, 1998.

Par. 3. In §1.936–6, paragraph (a)(5)

Q&A 7a is added to read as follows:

§1.936–6 Intangible property income

when an election out is made: Cost

sharing and profit split options; covered

intangibles.

* * * * *

(a) * * *

(5) * * *

Q.7a: What is the source of the taxpayer’s gross income derived from a sale

in the United States of a possession product purchased by the taxpayer (or an affiliate) from a corporation that has an election in effect under section 936, if the

income from such sale is taken into account to determine benefits under cost

sharing for the section 936 corporation?

Is the result different if the taxpayer (or an

affiliate) derives gross income from a sale

in the United States of an integrated product incorporating a possession product

purchased by the taxpayer (or an affiliate)

from the section 936 corporation, if the

taxpayer (or an affiliate) processes the

possession product or an excluded component in the United States?

A.7a: Under either scenario, the income is U.S. source, without regard to

whether the possession product is a component, end-product, or integrated product. Section 863 does not apply in determining the source of the taxpayer ’s

income. This Q&A 7a is applicable for

9

taxable years beginning on or after November 13, 1998.

* * * * *

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. In §602.101, paragraph (c) is

amended in the table by revising the entry

for 1.863–3 to read as follows:

§602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section

where identified and

described

Current OMB

control No.

* * * * *

1.863–3 . . . . . . . . . . . . . . . . . 1545–1476

1545–1556

* * * * *

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved September 18, 1998.

Donald C. Lubick,

Assistant Secretary of the

Treasury for Tax Policy.

(Filed by the Office of the Federal Register on

October 13, 1998, at 8:45 a.m., and published in the

issue of the Federal Register for October 14, 1998,

63 F.R. 55020)

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Part III. Administrative, Procedural, and Miscellaneous

Roth IRA Guidance

Notice 98–50

PURPOSE

This notice responds to questions that

have arisen regarding whether a taxpayer

who has converted an amount from a traditional IRA to a Roth IRA may not only

transfer the amount back to a traditional

IRA in a recharacterization but also subsequently “reconvert” that amount from

the traditional IRA to a Roth IRA.

scribed by law for filing the taxpayer’s

Federal income tax return, including extensions, (the “due date”) for the taxable

year of the contribution is treated as made

to the transferee IRA and not the transferor IRA. The proposed regulations interpret § 408A(d)(6) to make its application elective by the taxpayer, permit the

taxpayer to recharacterize most types of

IRA contributions, and permit the taxpayer to recharacterize all or any portion

of an IRA contribution.

BACKGROUND

TREATMENT OF

RECONVERSIONS

Section 408A of the Internal Revenue

Code (the “Code”), which was added by

§ 302 of the Taxpayer Relief Act of 1997,

Pub. L. 105–34, establishes the Roth IRA

as a new type of individual retirement

plan, effective for taxable years beginning

on or after January 1, 1998. The provisions of § 408A were amended by the Internal Revenue Service Restructuring and

Reform Act of 1998, Pub. L. 105–206.

On September 3, 1998, proposed regulations relating to Roth IRAs, §§ 1.408A–1

through 1.408A–9, were published in the

Federal Register (63 F.R. 46937). This

notice incorporates definitions and terms

used in those proposed regulations.

Section 408A(d)(3) of the Code and

§ 1.408A–4 of the proposed regulations

prescribe rules for the conversion of an

amount from a traditional IRA to a Roth

IRA. Any amount converted from a traditional IRA to a Roth IRA is treated as distributed from the traditional IRA and

rolled over to the Roth IRA and is generally includible in gross income for the

year in which the amount is distributed or

transferred from the traditional IRA (subject to a “4-year spread” for 1998 conversions, unless the taxpayer elects otherwise).

Section 408A(d)(6) of the Code and

§ 1.408A–5 of the proposed regulations

prescribe rules for “recharacterizations”

of IRA contributions, including Roth IRA

conversion contributions. Section

408A(d)(6) provides that, except as otherwise provided by the Secretary of the

Treasury, an IRA contribution that is

transferred to another IRA in a trustee-totrustee transfer on or before the date pre-

The question has arisen whether a taxpayer who has converted an amount from

a traditional IRA to a Roth IRA may not

only transfer the amount back to a traditional IRA in a recharacterization but also

subsequently “reconvert” that amount

from the traditional IRA to a Roth IRA.

The proposed regulations do not specifically address this question, and the Service and Treasury are considering

whether final regulations should permit

reconversions under any circumstances.

However, effective as of November 1,

1998, the interim rules set forth below

will apply for 1998 and 1999. Any future

guidance that either prohibits reconversions or imposes conditions on reconversions more restrictive than those imposed

under this notice will not apply to reconversions completed before issuance of

that guidance.

If a taxpayer converts (or reconverts)

an amount, transfers that amount back to

a traditional IRA by means of a recharacterization, and reconverts that amount in a

transaction for which the taxpayer is not

eligible under the interim rules set forth in

this notice, the reconversion will be

deemed an “excess reconversion.” However, any reconversions that a taxpayer

has made before November 1, 1998, will

not be treated as excess reconversions and

will not be taken into account in determining whether any later reconversion is

an excess reconversion.

A taxpayer who converts an amount

from a traditional IRA to a Roth IRA during 1998 and then transfers that amount

back to a traditional IRA by means of a

recharacterization is eligible to reconvert

November 2, 1998

10

that amount to a Roth IRA once (but no

more than once) on or after November 1,

1998, and on or before December 31,

1998; the taxpayer also is eligible to reconvert that amount once (but no more

than once) during 1999. (Any conversion

of that amount during 1999 would constitute a reconversion because the taxpayer

previously converted that amount during

1998.) This rule applies without regard to

whether the taxpayer’s initial conversion

or recharacterization of the amount occurs

before, on, or after November 1, 1998,

and (as indicated above) even if the taxpayer has made one or more reconversions before November 1, 1998.

A taxpayer who converts an amount

from a traditional IRA to a Roth IRA during 1999 that has not been converted previously and then transfers that amount

back to a traditional IRA by means of a

recharacterization is eligible to reconvert

that amount to a Roth IRA once (but no

more than once) on or before December

31, 1999. In determining whether a taxpayer has made a previous conversion for

purposes of these interim rules, a failed

conversion, as described in proposed regulations § 1.408A–4, Q&A–3 (that is, an

attempted conversion for which the taxpayer is not eligible for reasons set forth

in proposed regulations § 1.408A–4), will

not be treated as a conversion.

Any excess reconversion of an amount

during 1998 or 1999 will not change the

taxpayer’s taxable conversion amount (as

defined in proposed regulations

§ 1.408A–8, Q&A–1(b)(7)). Instead, the

excess reconversion and the last preceding recharacterization will not be taken

into account for purposes of determining

the taxpayer’s taxable conversion amount,

and the taxpayer’s taxable conversion

amount will be based on the last reconversion that was not an excess reconversion

(unless, after the excess reconversion, the

amount is transferred back to a traditional

IRA by means of a recharacterization).

An excess reconversion will otherwise be

treated as a valid reconversion.

Any conversion, recharacterization, or

reconversion of an amount under this notice must satisfy the provisions of § 408A

and the proposed regulations. For example, a taxpayer making a conversion or reconversion must satisfy the $100,000

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modified AGI limitation of § 408A(c)(3)(B)(i) and proposed regulations

§ 1.408A–4, Q&A-2, and a taxpayer

transferring a contribution from one IRA

to another IRA by means of a recharacterization must make the transfer on or before the due date for the taxable year of

the contribution, as required by

§ 408A(d)(6) and proposed regulations

§ 1.408A–5, Q&A–1. In determining the

portion of any amount held in a Roth IRA

or a traditional IRA that a taxpayer is not

eligible to reconvert under the interim

rules set forth in this notice, any amount

previously converted (or reconverted) is

adjusted for subsequent net gains or

losses thereon.

Example 1. On May 1, 1998, T converted an

amount in a traditional IRA (Traditional IRA 1) to a

Roth IRA (Roth IRA 1). T did not contribute any

other amount to Roth IRA 1. On October 15, 1998, T

transferred the amount in Roth IRA 1 to a traditional

IRA (Traditional IRA 2) by means of a recharacterization. T is eligible to reconvert the amount in Traditional IRA 2 to a Roth IRA once (but no more than

once) at any time on or after November 1, 1998, and

on or before December 31, 1998. Any additional reconversion during 1998 would be an excess reconversion. This result would not be different if the

recharacterization had occurred on or after November 1, 1998, instead of before November 1, 1998.

Example 2. The facts are the same as in Example

1, except that, on November 25, 1998, T reconverts

the amount in Traditional IRA 2 to a Roth IRA (Roth

IRA 2). After that reconversion, T may transfer the

amount from Roth IRA 2 back to a traditional IRA

by means of a recharacterization, but any subsequent

reconversion of that amount to a Roth IRA before

January 1, 1999, would be an excess reconversion.

If T does transfer the amount from Roth IRA 2 back

to a traditional IRA by means of a recharacterization, T is eligible to reconvert that amount once (but

no more than once) during 1999. Any additional reconversion of that amount during 1999 would be an

excess reconversion.

Example 3. The facts are the same as in Example

2, except that, on December 4, 1998, T transfers the

amount from Roth IRA 2 back to a traditional IRA

(Traditional IRA 3) by means of a recharacterization. If T does not reconvert that amount to a Roth

IRA on or before December 31, 1998, T cannot use

the 4-year spread available for 1998 conversions.

Example 4. The facts are the same as in Example

3. The value of the amount converted on May 1,

1998, was $X, and the value of the amount converted on November 25, 1998, was $Y. On December 8, 1998, T reconverts the amount in Traditional

IRA 3 (which then has a value of $Z) to a Roth IRA

(Roth IRA 3). Under the interim rules set forth in

this notice, T is not eligible to make the December 8,

1998, reconversion, and that excess reconversion

will not be taken into account for purposes of determining T’s taxable conversion amount (although it is

otherwise treated as a valid conversion). Instead,

T’s taxable conversion amount will be based on T’s

1998–44 I.R.B.

November 25, 1998, reconversion. Therefore, T’s

taxable conversion amount will be $Y. Because it is

a 1998 conversion, the November 25, 1998, reconversion is eligible for the 4-year spread (unless T

again transfers the amount from Roth IRA 3 to a traditional IRA by means of a recharacterization).

Example 5. The facts are the same as in Example

2, except that T’s modified AGI for 1998 was

$110,000. Therefore, T was not eligible to convert

an amount from a traditional IRA to a Roth IRA in

1998, and T’s attempted conversion (on May 1,

1998) and reconversion (on November 25, 1998) are

failed conversions, as described in proposed regulations § 1.408A–4, Q&A–3. Therefore, if T transfers

the amount of the failed conversion in Roth IRA 2

back to a traditional IRA by means of a recharacterization and converts that amount from the traditional

IRA to a Roth IRA during 1999, T will be eligible to

reconvert that amount once (but no more than once)

on or before December 31, 1999. Any additional reconversion of that amount during 1999 would be an

excess reconversion.

Example 6. On November 5, 1998, R converts an

amount in a traditional IRA (Traditional IRA 1) to a

Roth IRA (Roth IRA 1). On November 25, 1998, R

transfers the amount in Roth IRA 1 back to a traditional IRA (Traditional IRA 2) by means of a recharacterization. R is then eligible to reconvert the

amount in Traditional IRA 2 to a Roth IRA at any

time on or before December 31, 1998. After that reconversion, R may transfer the amount back to a traditional IRA by means of a recharacterization, but

any subsequent reconversion of that amount to a

Roth IRA before January 1, 1999, would be an excess reconversion. If R does transfer the amount

back to a traditional IRA by means of a recharacterization (whether before or after the end of 1998), R

will be eligible to reconvert that amount once (but

no more than once) during 1999. Any additional reconversion of that amount during 1999 would be an

excess reconversion.

Example 7. On January 5, 1999, S converts an

amount in a traditional IRA (Traditional IRA 1) to a

Roth IRA (Roth IRA 1). S had not previously converted that amount. On February 17, 1999, S transfers the amount in Roth IRA 1 back to a traditional

IRA (Traditional IRA 2) by means of a recharacterization. After the recharacterization, S is eligible

to reconvert the amount in Traditional IRA 2 once

(but no more than once) at any time on or before

December 31, 1999. Any additional reconversion

of that amount during 1999 would be an excess reconversion.

This notice is intended to clarify and

supplement the guidance provided in the

proposed regulations under § 408A and

may be relied upon as if it were incorporated in those regulations. In accordance

with the procedures for submitting comments on the proposed regulations, interested parties are invited to submit comments on whether final regulations should

permit reconversions (and, if so, under

what circumstances and conditions). Possible approaches to reconversions in final

regulations might include providing that a

11

taxpayer is not eligible to reconvert an

amount before the end of the taxable year

in which the amount was first converted

(or the due date for that taxable year) or

that a taxpayer who transfers a converted

amount back to a traditional IRA in a

recharacterization must wait until the passage of a fixed number of days (e.g., 30 or

60 days) before reconverting. Additionally, such approaches might include providing that an excess reconversion would

be treated as a failed conversion that

would be subject to the consequences described in proposed regulations

§ 1.408A–4, Q&A–3, and that could be

remedied as described therein.

DRAFTING INFORMATION

The principal authors of this notice are

Roger Kuehnle of the Employee Plans Division and Cathy A. Vohs of the Office of

the Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the Internal Revenue Service and the Treasury Department participated in its development.

For further information regarding this notice, please contact the Employee Plans

Division’s taxpayer assistance telephone

service at (202) 622-6074/6075 (not tollfree numbers), between the hours of 1:30

and 3:30 p.m. Eastern Time, Monday

through Thursday, or Ms. Vohs at (202)

622-6030 (also not toll-free).

Weighted Average Interest Rate

Update

Notice 98–51

Notice 88–73 provides guidelines for

determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current liability for the purpose of the full funding

limitation of § 412(c)(7) of the Internal

Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987

and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103–465

(GATT).

The average yield on the 30-year Treasury Constant Maturities for September

1998 is 5.20 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

November 2, 1998

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Month

Year

Weighted

Average

October

1998

6.40

Drafting Information

The principal author of this notice is

Todd Newman of the Employee Plans Di-

November 2, 1998

90% to 106%

Permissible

Range

90% to 110%

Permissible

Range

5.76 to 6.79

5.76 to 7.05

vision. For further information regarding

this notice, call (202) 622-6076 between

2:30 and 3:30 p.m. Eastern time (not a

12

toll-free number). Mr. Newman’s number

is (202) 622-8458 (also not a toll-free

number).

1998–44 I.R.B.

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Part IV. Items of General Interest

Announcement 98–95

Revisions to Form 8857

Purpose

The purpose of this announcement is to request public comments on the revised Form 8857, Request

for Innocent Spouse Relief (And Allocation of Liability and Equitable Relief). Form 8857 is being revised to reflect section 3201 of the IRS Restructuring and Reform Act of 1998.

Note: The revised Form 8857 in this announcement is subject to change and OMB approval before

final release.

Revisions to Form

8857

The revisions include the following:

• The requirement that filers need to have over $500 of additional tax due in order to request relief is

eliminated.

• Procedures are provided for requesting innocent spouse relief, allocation of liability, and equitable

relief.

• Explanations of the law changes and types of relief are added to the instructions.

Benefits of the

revisions

The revised Form 8857 will:

• Help filers become aware of the new tax law.

• Provide filers a means to request the various types of relief.

• Help filers by providing simple explanations of the new tax law and guidance for completing the

form.

• Allow the IRS to improve control and processing of the requests by highlighting the Cincinnati Service Center filing address.

Comments requested

The IRS would like to receive comments on the proposed revisions to Form 8857 from interested parties by November 30, 1998. Send written comments to:

Chairman, Tax Forms Coordinating Committee

Internal Revenue Service, OP:FS:FP, Room 5577

1111 Constitution Avenue, NW

Washington, D.C. 20224

Alternatively, you may send comments to the Chairman, TFCC, by fax at (202) 622-5025, or e-mail to

tfpmail@publish.no.irs.gov

After the end of the comment period, the IRS will evaluate the documents received and announce the

final changes to Form 8857. Although we will not be able to respond to each comment, we will carefully consider all of them.

1998–44 I.R.B.

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16

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Conversion to the Euro;

Correction

Announcement 98–96

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to temporary regulations.

SUMMARY: This document contains a

correction to Treasury Decision 8776,

which was published in the Federal Register on Wednesday, July 29, 1998 (63

F.R. 40366 [1998–33 I.R.B. 6]) relating to

U.S. taxpayers operating, investing or

otherwise conducting business in the currencies of certain European countries that

are replacing their national currencies

with a single, multinational currency

called the euro.

DATES: This correction is effective July

29, 1998.

FOR FURTHER INFORMATION CONTACT: Howard Weiner, (202) 622-3870

(not a toll-free number).

(Filed by the Office of the Federal Register on

October 14, 1998, 8:45 a.m., and published in the

issue of the Federal Register for October 15, 1998,

63 F.R. 55333)

Failure by Certain Charitable

Organizations to Meet Certain

Qualification Requirements;

Taxes on Excess Benefit

Transactions; Correction

Announcement 98–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking.

SUMMARY: This document contains a

correction to REG–245256–94, which

was published in the Federal Register on

Tuesday, August 4, 1998 (63 F.R. 41486

[1998–34 I.R.B. 9]), relating to the excise

taxes on excess benefit transactions.

SUPPLEMENTARY INFORMATION:

FOR FURTHER INFORMATION CONTACT: Phyllis D. Haney, (202) 622-4290

(not a toll-free number).

Background

SUPPLEMENTARY INFORMATION:

The temporary regulations that are the

subject of this correction are under section 1001 of the Internal Revenue Code.

Background

Need for Correction

As published, TD 8776 contains an

error which may prove to be misleading

and is in need of clarification.

Correction of Publication

Accordingly, the publication of the

temporary regulations (TD 8776), which

was the subject of FR Doc. 98–20023, is

corrected as follows:

§1.985–8T [Corrected]

On page 40369, column 2, §1.985–

8T(c)(3)(iv)(B), third line from the top of

the column, the language “year of change

which includes the” is corrected to read

“year ending immediately prior to the

year of change which includes the”.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

November 2, 1998

The notice of proposed rulemaking that

is the subject of this correction is under

section 4958 of the Internal Revenue

Code.

Need for Correction

As published, REG–246256–96 contains an error which may prove to be misleading and is in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of proposed rulemaking (REG–

246256–96), which is the subject of FR

Doc. 98–20419, is corrected as follows:

§53.4958–4 [Corrected]

On page 41502, column 1, §53.4958–

4(b)(3)(iii), Example 2, ninth line from

the bottom of the paragraph, the language

“determination of whether N’s compensation” is corrected to read “determination

of whether K’s compensation”.

18

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on

October 6, 1998, 8:45 a.m., and published in the

issue of the Federal Register for October 7, 1998, 63

F.R. 53862)

Deletions From Cumulative List

of Organizations Contributions

to Which Are Deductible Under

Section 170 of the Code

Announcement 98–98

The names of organizations that no

longer qualify as organizations described

in section 170(c)(2) of the Internal Revenue Code of 1986 are listed below.

Generally, the Service will not disallow

deductions for contributions made to a

listed organization on or before the date

of announcement in the Internal Revenue

Bulletin that an organization no longer

qualifies. However, the Service is not

precluded from disallowing a deduction

for any contributions made after an organization ceases to qualify under section

170(c)(2) if the organization has not

timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter,

(2) was aware that such revocation was

imminent, or (3) was in part responsible

for or was aware of the activities or omissions of the organization that brought

about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that

are otherwise allowable will continue to

be deductible. Protection under section

7428(c) would begin on November 2,

1998, and would end on the date the court

first determines that the organization is

not described in section 170(c)(2) as more

particularly set forth in section

7428(c)(1). For individual contributors,

the maximum deduction protected is

$1,000, with a husband and wife treated

as one contributor. This benefit is not extended to any individual who was responsible, in whole or in part, for the acts or

omissions of the organization that were

the basis for revocation.

1998–44 I.R.B.

IRB 1998-44

10/28/98 9:33 AM

Page 19

Crossreach of the Holy Cross Society,

Lake Orion, MI

Flynn Home for Alcoholic Addiction,

Inc., Portsmouth, VA

Senior Housing, Inc.,

Hampton, VA

Senior Meals, Inc.,

Hampton, VA

1998–44 I.R.B.

19

November 2, 1998

IRB 1998-44

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Page 20

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and formerly used will appear in material published in the

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

November 2, 1998

20

1998–44 I.R.B.

IRB 1998-44

10/28/98 9:33 AM

Page 21

Numerical Finding List1

Proposed Regulations—Continued

Bulletins 1998–29 through 43

REG–118926–97, 1998–39 I.R.B. 23

REG–118966–97, 1998–39 I.R.B. 29

REG–119227–97, 1998–30 I.R.B. 13

REG–122488–97, 1998–42 I.R.B. 19

REG–101363–98, 1998–40 I.R.B. 10

REG–106221–98, 1998–41 I.R.B. 10

REG–110332–98, 1998–33 I.R.B. 18

REG–110403–98, 1998–29 I.R.B. 11

REG–115393–98, 1998–39 I.R.B. 34

Announcements:

98–62, 1998–29 I.R.B. 13

98–68, 1998–29 I.R.B. 14

98–69, 1998–30 I.R.B. 16

98–70, 1998–30 I.R.B. 17

98–71, 1998–30 I.R.B. 17

98–72, 1998–31 I.R.B. 14

98–73, 1998–31 I.R.B. 14

98–74, 1998–31 I.R.B. 15

98–75, 1998–31 I.R.B. 15

98–76, 1998–32 I.R.B. 64

98–77, 1998–34 I.R.B. 30

98–78, 1998–34 I.R.B. 30

98–79, 1998–34 I.R.B. 31

98–80, 1998–34 I.R.B. 32

98–81, 1998–36 I.R.B. 35

98–82, 1998–35 I.R.B. 17

98–83, 1998–36 I.R.B. 36

98–84, 1998–38 I.R.B. 30

98–85, 1998–38 I.R.B. 30

98–86, 1998–38 I.R.B. 31

98–87, 1998–40 I.R.B. 11

98–88, 1998–41 I.R.B. 14

98–89, 1998–40 I.R.B. 11

98–90, 1998–42 I.R.B. 22

98–91, 1998–40 I.R.B. 12

98–92, 1998–41 I.R.B. 15

98–93, 1998–43 I.R.B. 10

98–94, 1998–43 I.R.B. 32

Court Decisions:

2063, 1998–36 I.R.B. 13

2064, 1998–37 I.R.B. 4

2065, 1998–39 I.R.B. 7

Notices:

98–36, 1998–29 I.R.B. 8

98–37, 1998–30 I.R.B. 13

98–38, 1998–34 I.R.B. 7

98–39, 1998–33 I.R.B. 11

98–40, 1998–35 I.R.B. 7

98–41, 1998–33 I.R.B. 12

98–42, 1998–33 I.R.B. 12

98–43, 1998–33 I.R.B. 13

98–44, 1998–34 I.R.B. 7

98–45, 1998–35 I.R.B. 7

98–46, 1998–36 I.R.B. 21

98–47, 1998–37 I.R.B. 8

98–48, 1998–39 I.R.B. 17

98–49, 1998–38 I.R.B. 5

Railroad Retirement Quarterly Rate:

1998–31 I.R.B. 7

Proposed Regulations:

REG–209446–82, 1998–36 I.R.B. 24

REG–209060–86, 1998–39 I.R.B. 18

REG–209769–95, 1998–41 I.R.B. 8

REG–209813–96, 1998–35 I.R.B. 9

REG–246256–96, 1998–34 I.R.B. 9

REG–104641–97, 1998–29 I.R.B. 9

REG–104565–97, 1998–39 I.R.B. 21

REG–106177–97, 1998–37 I.R.B. 33

REG–115446–97, 1998–36 I.R.B. 23

REG–116608–97, 1998–29 I.R.B. 12

Revenue Procedures:

98–40, 1998–32 I.R.B. 6

98–41, 1998–32 I.R.B. 7

98–42, 1998–28 I.R.B. 9

98–43, 1998–29 I.R.B. 8

98–44, 1998–32 I.R.B. 11

98–45, 1998–34 I.R.B. 8

98–46, 1998–36 I.R.B. 21

98–47, 1998–37 I.R.B. 8

98–48, 1998–38 I.R.B. 7

98–49, 1998–37 I.R.B. 9

98–50, 1998–38 I.R.B. 8

98–51, 1998–38 I.R.B. 20

98–52, 1998–37 I.R.B. 12

98–53, 1998–40 I.R.B. 9

98–54, 1998–43 I.R.B. 7

Revenue Rulings:

98–34, 1998–31 I.R.B. 12

98–35, 1998–30 I.R.B. 4

98–36, 1998–31 I.R.B. 6

98–37, 1998–32 I.R.B. 5

98–38, 1998–32 I.R.B. 4

98–39, 1998–33 I.R.B. 4

98–40, 1998–33 I.R.B. 4

98–41, 1998–35 I.R.B. 6

98–42, 1998–35 I.R.B. 5

98–43, 1998–36 I.R.B. 9

98–44, 1998–37 I.R.B. 4

98–45, 1998–38 I.R.B. 4

98–46, 1998–39 I.R.B. 10

98–47, 1998–39 I.R.B. 4

98–48, 1998–39 I.R.B. 6

98–49, 1998–40 I.R.B. 4

98–50, 1998–40 I.R.B. 7

98–51, 1998–43 I.R.B. 4

Tax Conventions:

1998–43 I.R.B. 6

Treasury Decisions:

8771, 1998–29 I.R.B. 6

8772, 1998–31 I.R.B. 8

8773, 1998–29 I.R.B. 4

8774, 1998–30 I.R.B. 5

8775, 1998–31 I.R.B. 4

8776, 1998–33 I.R.B. 6

8777, 1998–34 I.R.B. 4

8778, 1998–36 I.R.B. 4

8779, 1998–36 I.R.B. 11

8780, 1998–39 I.R.B. 14

8781, 1998–40 I.R.B. 4

8782, 1998–41 I.R.B. 5

8783, 1998–41 I.R.B. 4

8784, 1998–42 I.R.B. 4

8785, 1998–42 I.R.B. 5

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1998–1 through 1998–28

will be found in Internal Revenue Bulletin 1998–29,

dated July 20, 1998.

1998–44 I.R.B.

21

November 2, 1998

IRB 1998-44

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Page 22

Finding List of Current Action on

Previously Published Items1

Bulletins 1998–29 through 43

*Denotes entry since last publication

Notices:

87–13

Modified by

98–49, 1998–38 I.R.B. 5

87–16

Modified by

98–49, 1998–38 I.R.B. 5

Revenue Procedures:

83–58

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–17

Clarified, modified, and superseded by

98–54, 1998–43 I.R.B. 7

97–60

Superseded by

98–50, 1998–38 I.R.B. 8

97–61

Superseded by

98–51, 1998–38 I.R.B. 20

98–14

Modified by

98–53, 1998–40 I.R.B. 9

Revenue Rulings:

57–271

Obsoleted by

98–37, 1998–32 I.R.B. 5

67–301

Modified by

98–41, 1998–35 I.R.B. 6

70–225

Obsoleted by

98–44, 1998–37 I.R.B. 4

71–277

Obsoleted by

98–37, 1998–32 I.R.B. 5

71–434

Obsoleted by

98–37, 1998–32 I.R.B. 5

71–574

Obsoleted by

98–37, 1998–32 I.R.B. 5

72–75

Obsoleted by

98–37, 1998–32 I.R.B. 5

72–120

Obsoleted by

98–37, 1998–32 I.R.B. 5

72–121

Obsoleted by

98–37, 1998–32 I.R.B. 5

72–122

Obsoleted by

98–37, 1998–32 I.R.B. 5

74–77

Obsoleted by

98–37, 1998–32 I.R.B. 5

Revenue Rulings—Continued

Revenue Rulings—Continued

75–19

Obsoleted by

98–37, 1998–32 I.R.B. 5

76–562

Obsoleted by

98–37, 1998–32 I.R.B. 5

77–214

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–93

Obsoleted by

98–37, 1998–32 I.R.B. 5

79–106

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–30

Obsoleted by

98–37, 1998–32 I.R.B. 5

83–113

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–51

Obsoleted by

98–37, 1998–32 I.R.B. 5

85–143

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–79

Obsoleted by

98–37, 1998–32 I.R.B. 5

95–2

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–8

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–76

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–79

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–5

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–6

Obsoleted by

98–37, 1998–32 I.R.B. 5

95–9

Obsoleted by

98–37, 1998–32 I.R.B. 5

97–37

Obsoleted by

98–39, 1998–33 I.R.B. 4

93–4

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–5

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–6

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–30

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–38

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–49

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–50

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–53

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–81

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–91

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–92

Obsoleted by

98–37, 1998–32 I.R.B. 5

1 A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1998–1 through 1998–28 will be found in Internal

Revenue Bulletin 1998–29, dated July 20, 1998.

November 2, 1998

22

1998–44 I.R.B.

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Page 23

Index

Internal Revenue Bulletins

1998–1 Through 1998–43

The abbreviation and number in parenthesis following the index entry refer to

the specific item; numbers in roman and

italic type following the parenthesis refer

to the Internal Revenue Bulletin in which

the item may be found and the page

number on which it appears.

Key to Abbreviations:

RR

Revenue Ruling

RP

Revenue Procedure

TD

Treasury Decision

CD

Court Decision

PL

Public Law

EO

Executive Order

DO

Delegation Order

TDO

Treasury Department Order

TC

Tax Convention

SPR

Statement of Procedural

Rules

PTE

Prohibited Transaction

Exemption

EMPLOYMENT TAX

Magnetic media; electronic filing:

1998 Form W–4 specifications (RP 26)

13, 26

1998 Form 8027 (RP 52) 37, 12

Proposed regulations:

26 CFR 31.3121(v)(2)–1, revised;

FICA and FUTA taxation of amounts

under employee benefit plans (REG–

209484–87; REG–209807–95) 8, 40

26 CFR 31.3221–4, added; exception

from supplemental annuity tax on

railroad employers (REG–209769–

95) 41, 8

26 CFR 31.6053–1, –4; electronic tip

reports (REG–104691–97) 11, 13

Student FICA exception (RP 16) 5, 19

26 CFR 31.6302–1(f)(4), revised; federal employment tax deposits de

minimis rule (REG–110403–98) 29,

11

Railroad retirement; rate determination;

quarterly beginning April 1, 1998 and

July 1, 1998 31, 7

Regulations:

26 CFR 1.6045–1T, –2T, removed;

1.6045–1, –2, amended; 301.6011–2,

amended; 301.6011–2T, removed;

magnetic filing requirements for information returns (TD 8772) 31, 8

1998–44 I.R.B.

EMPLOYMENT TAX—

Continued

26 CFR 31.6302–1(f)(4), 31.6302–1T,

added; federal employment tax deposits de minimis rule (TD 8771) 29,

6

Worker classification; section 530; Tax

Court review (Notice 43) 33, 13

ESTATE TAX

Regulations:

26 CFR 20.2041–3, 20.2056(d)–2,

amended; 20.2046–1, revised; property interests and disclaimer (TD

8744) 7, 20

26 CFR 20.2044–1(e), added; 20.2044–

1T, removed; 20.2056(b)–7, revised;

20.2056(b)–7T, removed; 20.2056(b)–

10, revised; 20.2056(b)–10T, removed; certain property for which

marital deduction was previously allowed (TD 8779) 36, 11

26 CFR 25.2702–5, –7, amended; qualified prsonal residence trust, sale of

residence (TD 8743) 7, 26

26 CFR 25.2511–1, 25.2514–3,

25.2518–1, –2, amended; property

interests and disclaimers (TD 8744)

7, 20

Revocable trust; election (RP 13) 4, 21

Special use value; farms; interest rates

(RR 22) 19, 5

Underpayment interest, interest expense

deduction, estates (RP 15) 4, 25

Valuation of compensatory stock options

(RP 34) 18, 15

EXCISE TAX

Ad valorem tax, export clause (Ct.D.

2064) 37, 4

Bows and arrows; taxable and nontaxable

articles (RR 5) 2, 20

Deposit of excise taxes, amendment (Notice 36) 29, 8

Federal excise taxes for consular officers

and employees, exemption (RR 24) 19, 6

Proposed regulations:

26 CFR 40.0–1T, added; 40.6011(a)–

1T, added; 40.6302(c)–2T, added;

deposits of excise taxes (REG–

102894–97) 3, 59

26 CFR 48.4052–1, added; 48.4081–1,

amended; 48.4082–6 through –10

and intermediary sections, 48.4091–

3, added; 48.4101–2, amended;

23

EXCISE TAX—Continued

48.4101–3, 48.6427–10, –11, added;

kerosene tax, aviation fuel tax, tax

on heavy trucks and trailers (REG–

119227–97) 30, 13

26 CFR 53.4958; 301.6213–1,

301.6501(e)–1, 301.6501(n)–1,

301.7422–1, amended; 53.4958–0

through –7 and intermediary sections,

added; failure by certain charitable organizations to meet certain qualification requirements, taxes on excess

benefit transactions (REG–246256–

96) 34, 9

26 CFR 54.4980B–1, added; group

health plans continuation coverage

requirements (REG–209485–86) 11,

21

Regulations:

26 CFR 40.0–1(a), amended; 40.6011(a)

–1(a)(2)(iii), 40.5302(c)– 1, amended,

40.6302(c)–2(b)(2)(iii), added; deposits of excise taxes (TD 8740) 3, 4

26 CFR 40.6011(a)–1(b)(2)(vi),

amended; 48.4082–5T, removed;

48.4082–5, added; 48.4081–1,

amended; 48.4082–5T, redesignated;

48.6416(b)(4)–1, removed; 48.6421–

3(d)(2), amended; 48.6427–3(d)(2),

amended; 48.6715–1(a)(3), revised;

48.6715–2T, removed; gasoline and

diesel fuel excise tax; special rules for

Alaska, definitions (TD 8748) 8, 24

Regulations:

26 CFR 48.4081–1T, 48.4082–6T

through –10T and intermediary sections, 48.4091–3T, 48.4101–2T, –3T,

48.6427–10T, –11T, added; 145.4052–

1, amended; kerosene, aviation fuel,

heavy trucks and trailers tax (TD

8774) 30, 5

GIFT TAX

Nonstatutory stock option, transfer (RR

21) 18, 7

Qualifying income interest, disposition

(RR 8) 7, 24

Valuation of compensatory stock options

(RP 34) 18, 15

INCOME TAX

Advance pricing agreements, small business taxpayers (Notice 10) 6, 9

Article XIII (8) Rev. Proc. (RP 21) 8, 27

Automobile owners and lessees (RP 24)

10, 31; (RP 30) 17, 6

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IRB 1998-44

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INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

Below-market loans; exempted loans;

second mortgage loans under the

MAHRA Act (RR 34) 31, 12

Books and records; automatic data processing system (RP 25) 11, 7

Business expenses:

Environmental remediation expenditures (RP 47) 37, 8

Underground waste storage tank (RR

25) 19, 4

Capital gains and charitable remainder

trusts (Notice 20) 13, 25

Classification settlement program:

Extended until further notice (Notice

21) 15, 14

Common Trust Funds, unrelated business

taxable income (RR 41) 35, 6

Deductions:

When taken:

All events test; accrued cooperative

advertising expenses (RR 39) 33,

4

Definition of former Indian reservations

in Oklahoma (Notice 45) 35, 7

Disclosure authorization list (RP 43) 29, 8

Distribution of stock and securities of a

newly formed controlled corporation;

limitations (RR 44) 37, 4

Domestic assets/liability and investment

yield percentages (RP 31) 23, 9

Education loans (Notice 7) 3, 54

Effective date of consolidated overall foreign loss provisions (Notice 40) 35, 7

Elections under section 7704(g) (Notice

3) 3, 48

Electronic Federal Tax Payment System:

Batch filers and bulk filers (RP 32) 17,

11

Electronic funds transfer; failure to deposit penalty (Notice 30) 22, 9

Employee plans:

Administrative programs; closing

agreements (RP 22) 12, 11

Determination letters (RP 6) 1, 183;

(RP 14) 4, 22

Determination letter requests, remedial

amendments (RP 53) 40, 9

Discrimination; CODAs (Notice 1) 3,

42

Eligible deferred compensation plans

(Notice 8) 4, 6

Funding:

Full funding limitations, weighted

average interest rate for January 1998 (Notice 9) 4, 8; February 1998 (Notice 15) 9, 8;

March 1998 (Notice 18) 12, 11;

November 2, 1998

April 1998 (Notice 26) 18, 14;

May 1998 (Notice 32) 22, 23;

June 1998 (Notice 33) 25, 10;

July 1998 (Notice 37) 30, 13;

August 1998 (Notice 44) 34, 7;

September 1998 (Notice 48)

39, 17

Group health plans; COBRA continuation coverage; HIPAA portability

(Notice 12) 5, 12

Individual retirement arrangements,

Roth IRAs (Notice 49) 38, 5

Letter rulings, etc. (RP 4) 1, 113

Limitations on benefits and contributions (RR 1) 2, 5

Minimum Funding Standards (RP 10)

2, 35

Minimum:

Remedial amendments (RP 42) 28, 9

Net unrealized appreciation; capital

gains (Notice 24) 17, 5

Qualification (Notice 29) 22, 8;

CODAs (RR 30) 25, 8

Qualification:

Church plans (Notice 39) 33, 11

Recovery of basis; retirees (Notice 2)

2, 22

Section 457 model amendments (RP

41) 32, 7

Section 457 ruling program (RP 40)

32, 6

SIMPLE-IRAs (Notice 4) 2, 25

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Enhanced oil recovery credit (Notice 41)

33, 12

Environmental cleanup costs; letter

rulings (RP 17) 5, 21

Exempt Organizations:

Letter rulings, etc. (RP 4) 1, 113

Organizations excepted from reporting

lobbying expenditures (RP 19) 7,

30

Tax consequences of physicians recruitment incentives provided by

hospitals (RR 15) 12, 6

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Failure to deposit federal tax; penalty

abatement (Notice 14) 8, 27

Foreign partnerships, reporting transfer of

property by U.S. persons (Notice 17)

11, 6

Foreign tax credit abuse (Notice 5) 3, 49

Form 1040:

e-file program (RP 50) 38, 8

On-line filing program (RP 51) 38, 20

24

Fringe benefits aircraft valuation formula,

first half of 1998 (RR 14) 11, 4;

second half of 1998 (RR 40) 33, 4

Fuel from a nonconventional source,

credit; section 29 inflation adjustment;

reference price for 1997 (Notice 28)

19, 7

Hybrid arrangements, treatment under

subpart F (Notice 35) 27, 35

Information reporting:

Hope Scholarship and Lifetime Learning credits (Notice 46) 36, 21

Insurance companies:

Differential earnings rate and recomputed differential earnings rate for

mutual life insurance companies (RR

38) 32, 4

Discounting estimated salvage recoverable (RP 12) 4, 18

Interest rate tables (RR 2) 2, 15

Loss reserves; discounting unpaid

losses (RP 11) 4, 9

“Reserve strengthening,” reasonable

interpretation (Ct.D. 2065) 39, 7

International operation of ships and/or

aircraft, United Arab Emirates, 43, 6

Interest:

Investment:

Federal short-term, mid-term, and

long-term rates for January 1998

(RR4) 2, 18; February 1998 (RR

7) 6, 6; March 1998 (RR 11) 10,

13; April 1998 (RR 18) 14, 22;

May (RR 23) 18, 5; June 1998

(RR 28) 22, 5; July 1998 (RR 33)

27, 26; August 1998 (RR 36) 31,

6; September 1998 (RR 43) 36, 9;

October 1998 (RR 50) 40, 7

Rates, underpayments and overpayments (RR 17) 13, 21; calendar

quarter beginning July 1, 1998

(RR 32) 25, 4; calendar quarter

beginning October 1, 1998 (RR

46) 39, 10

Inventory:

LIFO:

Automobile and truck dealers (RP

46) 36, 21

Price indexes; department stores for

November 1997 (RR 6) 4, 4; December 1997 (RR 9) 6, 5; January

1998 (RR 16) 13, 18; February

1998 (RR 20) 15, 8; March 1998

(RR 26) 21, 4; April 1998 (RR

29) 24, 4; May 1998 (RR 35) 30,

4; June 1998 (RR 42) 35, 5; July

1998–44 I.R.B.

IRB 1998-44

10/28/98 9:33 AM

Page 25

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

1998 (RR 48) 39, 6; August 1998

(RR 51) 43, 4

Price indexes; inventory price computation method (RP 49) 37, 9

Shrinkage estimates:

Changing method of accounting for

estimating inventory shrinkage

(RP 29) 15, 22

Letter rulings, determination letters, and

information letters issued by Associate

Chief Counsel (Domestic), Associate

Chief Counsel (EBEO), Associate

Chief Counsel (Enforcement Litigation), and Associate Chief Counsel

(International) (RP 1) 1, 7

Lien for taxes; validity and priority against

third parties; judgment creditor (Ct.D.

2063) 36, 13

Losses attributable to a disaster during

1997 (RR 12) 10, 5

Low-income housing tax credit (Notice

13) 6, 19; (RP 45) 34, 8

Low-income housing credit:

HUD programs (RR 49) 40, 4

Satisfactory bond; “bond factor”

amounts for the period October

through December 1997 (RR 3) 2, 4;

January–March 1998 (RR 13) 11, 4;

April-June 1998 (RR 31) 25, 4; JulySeptember 1998 (RR 45) 38, 4

Magnetic media/electronic filing:

1998 Forms 1098, 1099, 5498, and

W–2G specifications (RP 35) 19,

6

Form 1040NR (RP 36) 23, 10

Marginal production rates (Notice 42) 33,

12

Methods of accounting; involuntary

changes (Notice 31) 22, 10

Package design; amortization; capitalization; amortizable section 197 intangible

(RP 39) 26, 36

Passive foreign investment companies:

Shareholders may use rules of sec.

1.1295–1T(b)(4), (f), and (g) to taxable years beginning before January

1, 1998 (Notice 22) 17, 5

Private letter rulings under sections 877,

2107, and 2501(a)(3)(Notice 34) 27, 30

Proposed regulations:

26 CFR 1.32–3, added; EIC eligibility

requirements (REG–116608–97) 29,

12

26 CFR 1.62–2(e)(2), revised; 1.62–2T,

removed; 1.274–5, added; –5T,

1.274(d)–1, amended; substantiation

of business expenses, use of mileage

1998–44 I.R.B.

rates to substantiate automobile expenses (REG–122488–97) 42, 19

26 CFR 1.72(p)–1, amended; loans to

plan participants (REG–209476–82)

8, 36

26 CFR 1.83–6, 1.1032–2, amended;

1.1032–3, added; treatment of a disposition by one corporation of the

stock of another corporation in a taxable transaction (REG–106221–98)

41, 10

26 CFR 1.141–7, 1.142(f)(4)–1, 1.150–

5, added; 1.141–8, –15, amended;

obligations of states and political

subdivisions (REG–110965–97) 13,

42

26 CFR 1.195–1, added; election to

amortize start-up expenditures

(REG–209373–81) 14, 26

26 CFR 1.356–6, added; reorganizations, nonqualified preferred stock

(REG–121755–97) 9, 13

26 CFR 1.368–1, amended; corporate

reorganizations, continuity of interest (REG–120882–97) 14, 25

26 CFR 1.401(a)(9)–1, amended; qualified plans and individual retirement

plans, required distributions (REG–

209463–82) 4, 27

26 CFR 1.408A–0 through –9 and intermediary sections, added; Roth

IRAs, questions and answers

(REG–115393–98) 39, 34

26 CFR 1.417(e)–1 and paragraph (d),

revised; 1.417(e)–1T and paragraph

(d), revised; valuation of plan distributrions (TD 8768) 20, 4

26 CFR 1.460–6, amended; election

not to apply look-back method in de

minimis cases (REG–120200–97)

12, 32

26 CFR 1.469–10, revised; 1.7704–1,

added; investment income, passive

activity income and loss rules for

publicly traded partnerships

(REG–105163–97) 8, 31

26 CFR 1.475(g)–2, new; 1.482–8,

added; 1.482–0, –1, –2, 1.863,

1.863–7(a)(1), 1.864–4, –6, 1.894–1,

amended; 1.482–9, redesignated;

global dealing operation allocation

and sourcing of income and deductions among taxpayers (REG–

208299–90) 16, 26

26 CFR 1.513–7, added; travel and tour

activities of tax exempt organizations (REG–121268–97) 20, 12

25

26 CFR 1.529–0 through –6 and intermediary sections, added; Qualified

State Tuition Programs (REG–

106177–97) 37, 33

26 CFR 1.671–4, 1.6049–7, 301.6109–

1, amended; reporting requirements

for widely held fixed investment

trusts (REG–209813–96) 35, 9

26 CFR 1.702–1, 1.954–1, 301.7701–3,

amended; 1.952–1(b), (c), redesignated 1.954–2(a)(5), (6), 1.954–

4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),

added (REG–104537–97) 16, 21

26 CFR 1.732–1, amended; 1.732–2,

amended; 1.734–1(e), added; 1.743–

1, revised; 1.751–1, amended;

1.755–1, revised; 1.1017–1, revised;

adjustments to basis of partnership

property and partnership interest

(REG–209682–94) 17, 20

26 CFR 1.864(b)–1; trading safe harbors (REG–106031–98) 26, 38

26 CFR 1.925(a)–1, (b)–1, added;

1.927(e)–1, amended; foreign sales

corporation transfer pricing source

and grouping rules (REG–102144–

98) 15, 25

26 CFR 1.936–1T, added; termination

of Puerto Rico and possession tax

credit, new lines of business prohibited (REG–115446–97) 36, 23

26 CFR 1.985–8, 1.1001–5, added;

conversion to the euro (REG–

110332–98) 33, 18

26 CFR 1.1092(c)–1, added; equity options without standard terms, special

rules and definitions (REG–104641–

97) 29, xx

26 CFR 1.1291–1, 1.1293–1, 1.1295–1,

–3, 1.1297–3(c), added; 1.1296–4,

amended; passive foreign investment

company preferred shares, special

income exclusion (REG–115795–

97) 8, 33

26 CFR 1.1361–0, amended; 1.1361–1,

amended; 1.1361–1(d)(3), removed;

1.1361–2 through –6 and intermediary sections, added; 1.1362–0,

amended; 1.1362–2, amended;

1.1362–8, added; 1.1368–0,

amended; 1.1368–2(d)(2), amended;

1.1374–8(b), amended; S corporation subsidiaries (REG–251698–96)

20, 14

26 CFR 1.1366–1, –2, removed;

1.1366–0 through –5 and intermediary sections, added; 1.1367–0, –1,

amended; 1.1367–3, removed;

November 2, 1998

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10/28/98 9:33 AM

Page 26

INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

1.1368–0, –1, –2, –3, amended;

1.1368–4, revised; pass through of

items of an S corporation to its shareholders (REG–209446– 82) 36, 24

26 CFR 1.1397E–1, added; qualified

zone academy bonds (REG–

119449–97) 10, 35

26 CFR 1.1502–3(c), revised; 1.1502–

4(f)(3), (g)(3), added; 1.1502–9(b)(1)(v), added; 1.1502–21(c)(1)(iii),

amended; consolidated returns, limitations on the use of certain losses

and credits (REG–104062–97) 10, 34

26 CFR 1.6031–1, removed; 1.6031(a)–

1, added; 1.6063–1, amended; partnership returns (REG–209322–82)

15, 26

26 CFR 1.6038B–1, amended; 1.6038B–

2, added; reporting of certain transfers

to foreign corporations and foreign

partnerships (REG– 118926–97) 39,

23

26 CFR 1.6038–3, added; information

returns for certain foreign partnerships (REG–118966–97) 39, 29

26 CFR 1.6046A–1, added; return requirement for U.S. persons owning

interests in foreign partnerships

(REG–209060–86) 39, 18

26 CFR 1.7702B–1, –2, added; qualified long-term care insurance contracts (REG–109333–97) 9, 9

26 CFR 301.6159–1, amended; agreements for tax liability installment

payments (REG–100841–97) 8, 30

26 CFR 301.6402–5(h), added; –6(n),

revised; tax refund offset program

(REG–104565–97) 39, 21

26 CFR 301.6404–2, added; abatement

of interest (REG–209276–87) 11, 18

26 CFR 301.7433–1(a), (d), (e), and

(f), revised; civil cause of action for

certain unauthorized collection actions (REG–251502–96) 9, 14

26 CFR 54.9812–1, added; mental

health parity; HIPAA (REG–

109704–97) 3, 60

Qualified Funeral Trust; guidance (Notice

6) 3, 52

Qualified intermediary agreements:

Guidance provided to foreign financial

institutions (RP 27) 15, 15

Qualified mortgage bonds, mortgage

credit certificates:

Guidance provided regarding use of national and area median gross income

figures by issuers (RP 28) 15, 14

November 2, 1998

Qualified Subchapter S Trust (QSST)

conversion to Electing Small Business

Trust (ESBT) 10, 30

Qualified Zone Academy Zone Bonds

(RP) 3, 100

Real estate transactions (RP 20) 7, 32

Regulations:

26 CFR 1.32–3T, added; EIC eligibility

requirements (TD 8773) 29, 4

26 CFR 1.61–12, 1.249–1, 1.1016–5,

1.1275–1, amended; 1.163–13,

1.171–5, added; 1.171–1, –2, –3, –4,

revised; 1.1016–9, removed; amortizable bond premium (TD 8746) 7, 4

26 CFR 1.141–0, –2, amended;

1.141–7, –8, removed; 1.141–7T,

–8T, –15T, 1.142(f)(4)–1T, 1.150–

5T, added; 1.141–15, revised; obligations of states and political subdivisions (TD 8757) 13, 4

26 CFR 1.166–3(a)(3), 1.1001–4,

added; 1.166–3T, 1.1001–4T, removed; modifications of bad debts

and dealer assignments of notional

principal contracts (TD 8763) 15, 5

26 CFR 1.280B–1, added; building demolition, definition of structure (TD

8745) 7, 15

26 CFR 1.338–2, 1.368–1, –2,

amended; 1.368–1T, added; corporate reorganizations, continuity of interest, and continuity of business enterprise (TD 8760) 14, 4; (TD 8761)

14, 13

26 CFR 1.354–1, 1.355–1, 1.356–3,

amended; reorganizations, treatment

of warrants as securities (TD 8752)

9, 4

26 CFR 1.356–6T, added; reorganizations, nonqualified preferred stock

(TD 8753) 9, 6

26 CFR 1.367(a)–1T, –3, amended;

1.367(a)–3T, removed; 1.367(a)–8,

1.367(b)–1, –4, added; 1.367(d)–1T,

amended; 1.6038B–1, added;

1.6038B–1T; 7.367(b)–1, –4, –7,

amended; certain transfers of stock

or securities by U.S. persons to foreign corporations (TD 8770) 27, 4

26 CFR 1.368–1(e)(6), revised; continuity of interest requirement for corporate reorganizations (TD 8783) 41,

4

26 CFR 1.411(d)–4, amended; permitted elimination of preretirement optional forms of benefit (TD 8769)

28, 4

26

26 CFR 1.446–1, amended; 1.446–1T,

removed; 301.9100–0, added;

301.9100–1, revised; 301.9100–2,

–3, added; 301.9100–1T, –2T, –3T;

removed extensions of time to make

elections (TD 8742) 5, 4

26 CFR 1.453.11; installment obligations received from liquidating corporations (TD 8762) 14, 15

26 CFR 1.460–0, amended; 1.460–6T,

added; election not to apply lookback method in de minimis cases

(TD 8756) 12, 4

26 CFR 1.460–6T, removed;

1.460–6(i), (j), added; election not to

apply look-back method in de minimis cases (TD 8775) 31, 4

26 CFR 1.465–27, added; qualified

nonrecourse financing under section

465(b)(6) (TD 8777) 34, 4

26 CFR 1.468A–2, –3, –8, amended;

nuclear decommissioning funds; revised schedules of ruling amounts

(TD 8758) 13, 15

26 CFR 1.861–18, added; classification

of certain transactions involving

computer programs (TD 8785) 42, 5

26 CFR 1.904–5(o), 1.904–5T, 1.954–

0(b), 1.954–1, amended; 1.954–1T,

–2T, –9T, added; 301.7701–3(f)(1),

amended; controlled foreign corporation relating to partnerships and

branches (TD 8767) 16, 4

26 CFR 1.905–2, amended; foreign tax

credit filing requirements (TD 8759)

13, 19

26 CFR 1.925(a)–1T, 1.925(b)–

1T(b)(3)(i), amended; 1.927(e)–1T,

revised; foreign sales corporation

transfer pricing source and grouping

rules (TD 8764) 15, 9

26 CFR 1.927(e)–1T, removed;

1.927(e)(1), added; source rules for

foreign sales corporation transfer

pricing (TD 8782) 41, 5

26 CFR 1.936–11T, added; termination

of Puerto Rico and possession tax

credit; new lines of business prohibited (TD 8778) 36, 4

26 CFR 1.985–1, –5(a), amended;

1.985–7, added; dollar approximate

separate transactions method of accounting (DASTM) to profit and loss

method of accounting, change from

P&L method to DASTM (TD 8765)

16, 11

1998–44 I.R.B.

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INCOME TAX—Continued INCOME TAX—Continued INCOME TAX—Continued

26 CFR 1.1271–1, 1.1275–1, amended;

debt instruments with original issue

discount, annuity contracts (TD

8754) 10, 15

26 CFR 1.1202–0, –2, added; qualified

small business stock (TD 8749) 7,

16

26 CFR 1.1290–0, amended; 1.1294–0,

added; a. 1291–0T, amended;

1.1291–1T, added; 1.1291–9,

amended; 1.1293–0, –1T, added;

1.1295–0, –1T, –3T, 1.1297–3T(c),

added; passive foreign investment

company preferred shares, special

income exclusion (TD 8750) 8, 4

26 CFR 1.1396–1; empowerment zone

employment credit, qualified zone

employees (TD 8747) 7, 18

26 CFR 1.1397E–1T, added; qualified

zone academy bonds (TD 8755) 10,

21

26 CFR 1.1502–3, –4, –9(a), –21T(c)(1)(iii), amended; 1.1502– 3T, –4T,

–9T, –55T, added; 1.1502– 23T(b),

(c), redesignated; consolidated returns, limitations on the use of certain losses and credits, overall foreign loss accounts (TD 8751) 10, 23

26 CFR 54.9801–2T, amended;

54.9801–4T, –5T, revised; 54.9804–

1T, redesignated; 54.9806–1T, redesignated; 54.9812–1T, added; mental

1998–44 I.R.B.

health parity, interim rules (TD

8741) 3, 6

26 CFR 301.7623–1, revised;

301.7623–1T, removed; rewards for

information relating to violations of

internal revenue laws (TD 8780) 39,

14

Relocation payments:

Authorized by sec. 105(a)(11) of Housing and Community Development

Act, not includible in gross income

(RR 19) 15, 5

Renewable electricity production credit;

calendar year 1998 inflation adjustment

factor and reference prices. (Notice 27)

18, 14

Reorganizations; exchange of securities

(RR 10) 10, 11

Reproduction of Forms 1096, 1098, 1099,

5498, and W–2G (RP 37) 26, 6

Rescission of notice deficiency (RP 54)

43, 7

Residential rental property, exempt facility bond (RR 47) 39, 4

Rulings:

Areas in which advance rulings will not

be issued:

Associate Chief Counsel (Domestic), Associate Chief Counsel

(EBEO) (RP 3) 1, 100

Associate Chief Counsel (International) (RP 7) 1, 222

27

Obsolete (RR 37) 32, 5

Rural airports (RP 18) 6, 20

Sales or exchanges:

Qualified small business stock (RP 48)

38, 7

Social security benefits under U.S.Canada treaty, recent changes (Notice

23) 18, 9

Specifications for filing Form 1042–S

(RP 44) 32, 11

Spin-off of subsidiary (RR 27) 22, 4

SRLY notice (Notice 38) 34, 7

Technical advice to district directors and

chiefs, appeals offices, Associate Chief

Counsel (Domestic), Associate Chief

Counsel (EBEO), Associate Chief

Counsel (Enforcement Litigation), and

Associate Chief Counsel (International)

(RP 2) 1, 74

Tentative differential earnings rate for

1997 (Notice 19) 13, 24

Timely filing or payment; private delivery

services (Notice 47) 37, 8

Treatment of hybrid arrangements under

subpart F (Notice 11) 6, 18

Trust, election to treat U.S. person;

domestic trust (Notice 25) 18, 11

Waiver of period of stay in foreign country (RP 38) 27, 29

Withholding regulations:

Effective date of sec. 1441 withholding

regulations amended (Notice 16) 15,

12

November 2, 1998

IRB 1998-44

10/28/98 9:33 AM

Page 28

Notes

November 2, 1998

28

1998–44 I.R.B.

IRB 1998-44

10/28/98 9:33 AM

Page 29

Notes

1998–44 I.R.B.

29

November 2, 1998

IRB 1998-44

10/28/98 9:33 AM

Page 30

Notes

November 2, 1998

30

1998–44 I.R.B.

IRB 1998-44

10/28/98 9:33 AM

Page 31

IRB 1998-44

10/28/98 9:33 AM

Page 32

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