Bulletin No. 1998–42

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Bulletin No. 1998–42

October 19, 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

EXCISE TAX

T.D. 8784, page 4.

Announcement 98–90, page 21.

Final and temporary regulations under section 274 of the

Code relate to the use of mileage allowances to substantiate

automobile business expenses.

Public comments are requested on proposed changes to

Form 8849, Claim for Refund of Excise Taxes.

T.D. 8785, page 5.

REG–122488–97, page 19.

Final regulations under section 861 of the Code relate to the

tax treatment of certain transactions involving the transfer of

computer programs.

Proposed regulations under section 274 of the Code relate

to the use of mileage rates to substantiate automobile business expenses.

ADMINISTRATIVE

Finding Lists begin on page 33.

Announcement of Disbarments and Suspensions begins on page 29.

Department of the Treasury

Internal Revenue Service

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Mission of the Service

ucts and services; and perform in a manner warranting

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

The purpose of the Internal Revenue Service is to collect

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

the public by continually improving the quality of our prod-

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

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

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

adopt a position inconsistent with an established Service

position.

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

is determined by Congress.

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

policy by correctly applying the laws enacted by Congress;

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

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

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

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

should be relentless in its attack on unreal tax devices and

fraud.

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

is the responsibility of each person in the Service, charged

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

meaning of the statutory provision and not to adopt a

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

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

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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 274.—Disallowance of

Certain Entertainment, Etc.,

Expenses

26 CFR 1.274(d)–1: Substantiation requirements.

T.D. 8784

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

Substantiation of Business

Expenses—Use of Mileage

Allowances to Substantiate

Automobile Expenses

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary and final regulations.

SUMMARY: This document contains

temporary and final regulations relating to

the use of mileage allowances to substantiate automobile business expenses. The

regulations affect payors who make payments and employees who receive payments under reimbursement or other expense allowance arrangements for the

business use of an automobile.

DATES: Effective date: These regulations are effective October 1, 1998.

Applicability date: These regulations

apply to transportation expenses paid or

incurred after December 31, 1997.

FOR FURTHER INFORMATION CONTACT: Donna M. Crisalli, (202) 6224920 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of

Provisions

Section 274(d) provides that a taxpayer

is not allowed a deduction or credit for

certain expenses unless the expense is

substantiated. These substantiation requirements apply to the expenses of use

of any listed property (defined in section

280F(d)(4)), which includes any passenger automobile and any other property

used as a means of transportation. The

October 19, 1998

Secretary may issue regulations that provide that some or all of the substantiation

requirements will not apply to expenses

that do not exceed a prescribed amount.

Section 1.274(d)–1 provides, in part,

that the Commissioner may prescribe

rules under which mileage allowances reimbursing ordinary and necessary expenses of local travel and transportation

while traveling away from home will satisfy the substantiation requirements of

§1.274–5T(c), and the requirements of an

adequate accounting to the employer for

purposes of §1.274–5T(f)(4). However,

§1.274(d)–1(a)(3) provides that such

mileage allowances are available only to

the owner of a vehicle.

New §1.274(d)–1T applies these substantiation rules to mileage allowances for

business use of an automobile after December 31, 1997, without the limitation in

§1.274(d)–1(a)(3) that a mileage allowance is available only to the owner of

a vehicle. See Rev. Proc. 97–59 (1997–

52 I.R.B. 24), for rules that implement

these regulations. The regulations also

adopt new §1.62–2T(e)(2) to incorporate

this new rule.

Special Analyses

It has been determined that these temporary and final regulations are not a significant regulatory action as defined in

EO 12866. Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.

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

impose a collection of information on

small entities, the Regulatory Flexibility

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

Pursuant to section 7805(f) of the Internal

Revenue Code, these temporary and final

regulations will be submitted to the Chief

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

impact on small business.

Drafting Information

The principal authors of these regulations are Edwin B. Cleverdon and Donna

M. Crisalli of the Office of the Assistant

Chief Counsel (Income Tax and Accounting). However, other personnel from the

4

IRS and Treasury Department participated in their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in numerical order to read as follows:

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

Section 1.274(d)–1 also issued under

26 U.S.C. 274(d).

Section 1.274(d)–1T also issued under

26 U.S.C. 274(d). * * *

Par. 2. In §1.62–2, paragraph (m) is

amended by adding a sentence at the end

of the paragraph to read as follows:

§1.62–2 Reimbursement and other

expense allowance arrangements.

* * * * *

(m) * * * Paragraph (e)(2) of this section applies to payments made under reimbursement or other expense allowance

arrangements received by an employee

with respect to expenses paid or incurred

on or before December 31, 1997. For

payments with respect to expenses paid or

incurred after December 31, 1997, see

§1.62–2T(e)(2).

Par. 3. Section 1.62–2T is added to

read as follows:

§1.62–2T Reimbursement and other

expense allowance arrangements

(temporary).

(a) through (e)(1) [Reserved]. For further guidance, see §1.62–2(a) through

(e)(1).

(e)(2) Expenses governed by section

274(d). For further guidance, see §1.62–

2(e)(2) except that each reference to

§1.274(d)–1 is deemed to be a reference

to §1.274(d)–1T.

(e)(3) through (l) [Reserved]. For further guidance, see §1.62–2(e)(3) through

(l).

(m) Effective dates. Paragraph (e)(2)

of this section applies to payments made

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under reimbursement or other expense allowance arrangements received by an employee with respect to expenses paid or

incurred after December 31, 1997. For

payments with respect to expenses paid or

incurred on or before December 31, 1997,

see §1.62–2(e)(2).

Par. 4. Section 1.274(d)–1 is amended

by adding paragraph (b) to read as follows:

§1.274(d)–1 Substantiation

requirements.

* * * * *

(b) Effective date. This section applies

to allowances described in paragraph

(a)(2) of this section for expenses paid or

incurred on or before December 31, 1997.

For allowances for expenses paid or incurred after December 31, 1997, see

§1.274(d)–1T.

Par. 5. Section 1.274(d)–1T is added to

read as follows:

§1.274(d)–1T Substantiation

requirements (temporary).

(a)(1) and (2) [Reserved]. For further

guidance, see §1.274(d)–1(a)(1).

(a)(3) [Reserved].

(b) Effective date. This section applies

to allowances described in §1.274(d)–

1(a)(2) for expenses paid or incurred after

December 31, 1997. For allowances for

expenses paid or incurred on or before

December 31, 1997, see §1.274(d)–1(a).

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved September 14, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

September 30, 1998, 8:45 a.m., and published in the

issue of the Federal Register for October 1, 1998, 63

F.R. 52600)

Section 861.—Income From

Sources Within the United States

T.D. 8785

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Classification of Certain

Transactions Involving Computer

Programs

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains regulations relating to the tax treatment of certain transactions involving the transfer of

computer programs. The regulations provide rules for classifying such transactions

as sales or licenses of copyright rights,

sales or leases of copyrighted articles, or

the provision of services, or of know-how,

under certain provisions of the Internal

Revenue Code and tax treaties. These regulations are necessary to give taxpayers

guidance on the taxation of computer program transactions. These regulations affect taxpayers engaging in certain transactions involving computer programs.

DATES: Effective date. These regulations

are effective October 2, 1998.

Applicability date. These regulations

apply to transactions occurring pursuant to

contracts entered into on or after December 1, 1998. Taxpayers may elect to apply

this section to transactions occurring pursuant to contracts entered into in taxable

years ending on or after October 2, 1998.

Taxpayers may also elect to apply this section to transactions occurring in taxable

years ending on or after October 2, 1998,

pursuant to contracts entered into before

October 2, 1998, provided the taxpayer

would not be required under this section to

change its method of accounting, or the

taxpayer would be required to change its

method of accounting but the resulting

section 481 adjustment would be zero.

FOR FURTHER INFORMATION CONTACT: Anne Shelburne, (202) 622-3880

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

26 CFR 1.861–18: Classification of transactions

involving computer programs.

1998–42 I.R.B.

The collection of information in this

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final rule has been reviewed and, pending

receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under the

Paperwork Reduction Act (44 U.S.C.

3507) and assigned control number 1545–

1594. 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 assigned by

OMB.

The collection of information in this

regulation is in §1.861–18(k) of the regulations. This information is required to

permit taxpayers to obtain an automatic

change in method of accounting. This information will be used to enable the IRS

to determine if taxpayers were entitled to

an automatic change in method of accounting. The likely respondents are organizations.

Comments concerning the collection of

information should be directed to OMB,

Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington,

DC 20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, OP:FS:FP, Washington, DC 20224. Any such comments

should be submitted not later than December 1, 1998. Comments are specifically requested concerning:

Whether the collection of information is

necessary for the proper performance of

the functions of the IRS, including

whether the information will have practical utility;

The accuracy of the estimated burden associated with the collection of information (see below);

How to enhance the quality, utility, and

clarity of the information collected;

How to minimize the burden of complying with the collection of information, including the application of automated collection techniques or other forms of

information technology; and

Estimates of capital or start-up costs and

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

The burden per respondent is reflected in

the burden of Form 3115.

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

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

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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 to be added to the Income Tax Regulations (26 CFR part 1) under section 861

of the Internal Revenue Code (Code).

These regulations clarify the treatment

under certain provisions of the Code and

tax treaties of income from transactions

involving computer programs.

On November 13, 1996, proposed regulations [REG–251520–96 (1996–2 C.B.

511)] were published in the Federal Register (61 F.R. 58152). The IRS received

written comments on the proposed regulations and held a public hearing on March

19, 1997. Having considered the comments and the statements made at the

hearing, the IRS and Treasury Department adopt the proposed regulations as

modified by this Treasury decision. The

comments and revisions are discussed

below.

I. The Proposed Regulations.

The proposed regulations clarify certain rules for classifying transactions involving computer programs. The regulations generally require that a transaction

involving a computer program be treated

as being within one of four possible categories: (1) transfer of copyright rights, (2)

transfer of a copyrighted article, (3) provision of services relating to development

or modification of a computer program,

or (4) provision of know-how relating to

computer programming techniques.

The regulations distinguish between

transfers of copyright rights and transfers

of copyrighted articles based on the type

of rights transferred to the transferee.

They recognize that computer programs

are subject to copyright protection under

both U.S. and foreign copyright law. See

the Copyright Act of 1976, as amended

(17 U.S.C. 101 et. seq.); see also, EC Directive on Legal Protection of Computer

Programs, Council Directive 91–250,

1991 J.O. (L 122), and the Berne Convention for the Capital Protection of Literary

and Artistic Works, 25 U.S.T. 1341 (Paris

Text, July 24, 1971). Copyright law

grants certain exclusive rights to a copyright owner. The regulations classify a

October 19, 1998

transaction as the transfer of a copyright

right if the transferee acquires one or

more of the copyright rights identified in

§1.861–18(c)(2) of the proposed regulations. If the transferee acquires a copy of

a computer program but does not acquire

any of the rights identified in §1.861–

18(c)(2), the regulations classify the

transaction as the transfer of a copyrighted article.

The proposed regulations further classify transfers of copyright rights as either

a sale or a license of copyright rights.

The proposed regulations require that this

classification be made by examining

whether, taking into account all facts and

circumstances, all substantial rights in

the copyright have passed to the transferee. The proposed regulations also require that transfers of copyrighted articles be further classified as either a sale

or a lease of a copyrighted article. This

classification is made by examining

whether the benefits and burdens of ownership of the copyrighted article have

passed to the transferee.

The specific rules of the proposed regulations are based on certain key principles: that the special features of computer

programs should be recognized and that

functionally equivalent transactions

should be treated similarly. The regulations are also based on the principle that

copyright law should be a factor in classifying transactions for tax purposes, but

should not be determinative.

Finally, the proposed regulations contain 18 examples illustrating the rules.

II. Comments and Final Regulations.

1. Scope and Application of the

Regulations.

a. General Scope.

The proposed regulations classify

transactions in computer programs for

certain international provisions of the

Code. A number of comments addressed

two types of issues involving the scope of

the regulations: the treatment of computer programs under other tax provisions

of the Code and the application of the

principles of the proposed regulations to

products other than computer programs.

As to the treatment of computer programs under other Code sections, comments were mixed. Several commenta-

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tors requested that Treasury expand the

scope of the final regulations to apply the

regulations’ principles for all U.S. tax

purposes. Other commentators, however,

urged caution, stating that issues raised

under other Code sections should be resolved only by legislation or by revising

the regulations under those other sections.

Most commentators recommended applying the regulations for tax accounting

purposes.

Some commentators requested that

Treasury specifically address the relevance of the regulations in a specific context. For example, some commentators

requested that the regulations clarify how

the principles apply in determining the

consequences of computer program transactions under tax treaties.

After consideration of these comments,

the final regulations retain the scope of

the proposed regulations. However, Treasury and the IRS are considering whether

the principles of these regulations should

apply to other tax provisions of the Code.

These regulations are intended to apply

for purposes of applying and interpreting

U.S. tax treaties. United States tax

treaties provide that terms not defined in

the treaty are defined by reference to domestic law. See e.g., U.S. Model Income

Tax Convention of September 20, 1996,

Article 3(2).

The second group of comments generally addressed expanding the scope of the

regulations to apply to transactions in

other types of digitized information. The

proposed regulations are limited to classifying transactions in computer programs.

Section 1.861–18(a)(3) of the proposed

regulations defines a computer program

as “...a set of statements or instructions to

be used directly or indirectly in a computer in order to bring about a certain result.” The definition includes any data

base or similar item only “. . . if the data

base or similar item is incidental to the

operation of the computer program.”

Commentators expressed differing views

as to how to define computer programs.

Several commentators recommended that

the definition be expanded to include data

bases and content provided as part of the

transaction. They note that advances in

technology now permit significant

amounts of content, that are not merely

incidental, to be included in even inexpensive mass-marketed programs. Some

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commentators recommended that the definition be expanded to include data bases

or similar items even if not incidental,

while some stated that data base products

containing only a de minimis amount of

software programming to facilitate access

to the data should be excluded from the

definition.

Several commentators requested that

Treasury expand the regulations more

generally, by applying the same or analogous principles in determining the tax

consequences of transactions involving

copyright rights and copyrighted articles

to entertainment products, or to other digitized information.

The suggestions to expand the scope of

the regulations, either by expanding the

definition of computer programs or by applying the regulations to other types of

digitized information, were not adopted.

Instead, the final regulations generally retain the definition of computer programs

found in the proposed regulations. It is

intended that a computer program includes any media, user manuals or documentation, or similar items (in addition to

data bases) if incidental to and routinely

transferred along with the computer program. Treasury and the IRS are not aware

of specific instances where the failure to

expand the definition of computer program would result in inappropriate consequences to taxpayers for the portion of the

transaction not governed by these regulations. Treasury and the IRS invite comments on this point.

The regulations also continue to apply

only to cross-border transactions involving

computer programs because Treasury and

the IRS believe that such transactions raise

the most pressing need for guidance. Treasury and the IRS may consider whether to

apply the principles of these regulations to

all transactions in digitized information as

part of a separate guidance project.

b. Relationship with Section 482.

Numerous commentators requested

clarification regarding the application of

the regulations for purposes of section

482, requesting that transactions in copyright rights be treated as transactions in

intangibles and transactions in copyrighted articles be treated as transactions

in tangible property, even if delivered

electronically.

1998–42 I.R.B.

This suggestion has not been adopted.

Treasury and the IRS intend to further

consider this issue and may provide additional guidance in the future. See generally, §1.482–3(f).

regulations, income from electronic transfers of computer programs that constitute

inventory property, classified as sales of

copyrighted articles, will be sourced

under similar principles.

c. Source of Income.

2. Relevance of Foreign Law.

Several commentators requested that

Treasury provide explicit guidance in

final regulations on how to source income

arising from transactions in computer programs. Generally, under the current rules,

the source of income from sales of property depends to varying extents upon both

the type of property and, for inventory

property, the place of sale, with the place

of sale generally determined by the place

where title to the property passes. See

§1.861–7(c). Several commentators requested clarification of which source rule

applies to various transactions in computer programs. The commentators also

pointed out that the place of sale can be

problematic when dealing with sales of

computer programs, in part because typical license agreements do not refer to a

transfer of property, and in part because

an electronic transfer is generally not accompanied by the usual indicia of the

transfer of title. Several commentators

suggested that the place of sale should be

deemed to be the location of the customer,

or the place where the customer first obtains the opportunity to install the program onto its computer.

In response to comments, the final regulations provide specific source rules.

The regulations provide that income from

transactions that are classified as sales or

exchanges of copyrighted articles will be

sourced under sections 861(a)(6),

862(a)(6), 863, 865(a), 865(b), 865(c), or

865(e), as appropriate. Income derived

from the sale or exchange of a copyright

right will be sourced under sections

865(a), 865(c), 865(d), 865(e), or 865(h),

as appropriate. Income derived from either the leasing of a computer program or

the licensing of copyright rights in a computer program will be sourced under section 861(a)(4) or section 862(a)(4), as appropriate. As to the issue of determining

the place of sale under the title passage

rule of §1.861–7(c), the parties in many

cases can agree on where title passes for

sales of inventory property generally.

Consistent with the overall policy of the

Several commentators requested that

Treasury clarify that classification of a

transaction involving computer programs

for U.S. tax purposes does not depend on

foreign copyright law. In addition, one

commentator requested that the regulations explicitly state that the terms used in

the regulations, although taken from

copyright law, will be interpreted in a

manner consistent with the purposes of

the regulations and Internal Revenue

Code. In certain cases, terms taken from

copyright law are specifically defined in

the regulations so as to properly implement the regulations’ underlying policy.

Unless specifically defined in the regulations, legal standards taken from copyright law are intended to be given the

same interpretation as under U.S. copyright law. Factual predicates for application of those standards, however, may be

provided by referring to foreign copyright

law. For example, if it were necessary to

determine whether the transferee had acquired the right to create a derivative

work based on a computer program protected under French copyright law, the

facts of the case, i.e. the rights that the

transferee may exercise, are determined

under French law and the agreement between the parties. However, whether or

not the transferee’s rights constitute the

right to create a derivative work for purposes of this regulation is determined by

comparing those rights created under

French law and the agreement between

the parties to the U.S. law definition of

the right to create a derivative work.

In addition, commentators requested

clarification that the determination of

whether a foreign tax imposed on transactions in computer programs is a compulsory payment, eligible for a foreign tax

credit, is not affected by these regulations.

Treasury believes clarification is unnecessary. These regulations do not in any way

modify the requirement of §1.901-2(e)(5)

that substantive and procedural provisions

of foreign law (including applicable tax

treaties) determine the taxpayer’s liability

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under foreign law for tax and thus

whether an amount paid is a compulsory

payment. Moreover, the regulations

under section 904 recognize that a creditable foreign tax may be imposed on an

item of income that is taxed at a different

time or in a different manner in a foreign

country than in the United States. See

§1.904–6(a)(1).

3. Copyright Rights.

The proposed regulations, in §1.861–

18(c)(2), describe four copyright rights:

(i) the right to make copies for distribution to the public, (ii) the right to prepare

derivative programs, (iii) the right to

make a public performance of the program, and (iv) the right to publicly display the program. If a transfer of a computer program results in a transferee

acquiring any one or more of the four

listed rights, the regulations classify the

transaction as a transfer of a copyright

right. Although the commentators agreed

that the right to make copies for distribution to the public is properly included,

they made a number of comments regarding the three other copyright rights.

a. Derivative Programs.

Commentators stated that final regulations should clarify the right to prepare

derivative programs. They recommended

that the regulations more specifically describe the circumstances resulting in the

transfer of such a copyright right.

Some commentators recommended that

a transfer of the right to prepare a derivative program should not be treated as the

transfer of a copyright right unless it is

coupled with the right to distribute the derivative program to the public. That

change, they say, would make the right

more consistent with the right to reproduce copies, which results in the transfer

of a copyright right only if it is coupled

with the right to distribute to the public.

The final regulations do not adopt this

recommendation. Although the final regulations disregard the de minimis right to

make a derivative work, a substantial

right to make a derivative work is appropriately treated as the transfer of a copyright right, regardless of whether it is coupled with the right to distribute to the

public. The regulations generally follow

copyright law in this respect. Although

October 19, 1998

the right to make copies constitutes the

transfer of a copyright right only if coupled with the right to distribute to the public, the regulations treat the right to make

copies differently from the other copyright rights because of the unique characteristics of computer programs, including

the ease by which computer programs can

be copied.

Another set of comments requests clarification of the effect of the transfer of

programs that permit the user to distribute

certain ancillary programs in conjunction

with works created using the underlying

program, or to incorporate certain program elements into new programs created

using the underlying program. For example, certain programs, such as software

development tools, permit the transferee

to distribute certain ancillary programs or

include certain segments of computer

code in new programs created by the

transferee using the development program. Similarly, transferees of computer

programs are sometimes granted access to

the program’s source code in order to permit the transferee to correct minor errors

or incompatibilities in the program.

Under the proposed regulations, the

transfer of a software development tool or

the grant of the right to correct minor errors by modifying the source code might

constitute the right to create a derivative

computer program, resulting in the transfer of a copyright right. Commentators

argued, however, that in both cases, the

overall character of the transaction was

analogous to the transfer of a copyrighted

article. Several commentators recommended that where limited portions of a

development tool are included in an application program, the inclusion should be

considered de minimis, and the resulting

application program not treated as a derivative program of the program development tool.

In addition, several commentators recommended that where no independent

value attaches to exploitation of the right

to prepare derivative computer programs,

such right should be treated as de minimis, and not considered in classifying the

transaction.

In response to these comments, the

final regulations provide in paragraph

(c)(1)(ii) that the de minimis transfer of a

copyright right will not be taken into account in determining whether a transac-

8

tion is considered the transfer solely of a

copyrighted article. Example 17 clarifies

that the right to use software development

tools to create an insubstantial component

of a new program constitutes such a de

minimis copyright right. Example 18

clarifies that the right to modify the

source code to correct minor errors and

make minor adaptations to a computer

program also constitutes a de minimis

copyright right.

However, the final regulations do not

provide that where no independent value

attaches to the exploitation of the right to

prepare derivative computer programs,

such right must be treated as de minimis.

Treasury and the IRS believe that in most

cases where no independent value attaches to the grant of the right to prepare

derivative computer programs, the right is

de minimis. However, this may not be

true in all cases and, therefore, this comment has not been adopted.

b. Public Performance and Display.

Several commentators urged Treasury

to reserve in final regulations on two of

the copyright rights, the right to make a

public performance and the right to public

display of the copyrighted work. Several

commentators recommended that, if Treasury elects not to reserve, a transaction involving either right should result in treatment as a transfer of a copyright right

only if the transfer is for commercial exploitation rather than for internal use.

Commentators also requested clarification of these rights in the entertainment

area. They recommended the regulations

state that the right to publicly perform or

display the computer program should not

be considered the transfer of a copyright

right if the performance or display is limited to the advertisement of a copyrighted

article, and does not permit the public display of the entire article.

These suggestions have not been

adopted. However, Treasury and the IRS

recognize that the definition of these

rights in the context of computer programs is still developing, and in the future

it may be necessary to revisit this issue.

At the present time, Treasury and the IRS

believe it is appropriate to continue to follow copyright law as to these rights. In

many cases, however, the transfer of a

right for public display or performance of

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a computer program, such as marketing or

advertising the program, to the extent it

constitutes the transfer of a copyright

right, would be considered a de minimis

grant of a copyright right under §1.861–

18(c)(1)(ii) of the final regulations, so

that the transaction would not result in the

transfer of a copyright right.

c. Definition of to the Public.

The proposed regulations list the right

to make copies for distribution to the

public as one of the four copyright rights.

Commentators recommended that the regulations clarify the meaning of “to the

public.” They recommended the definition exclude distribution to a related

party, with related party defined to ensure

that transfers to a non-controlled joint

venture would not be considered distribution to the public. They also recommended that distribution to identified distributees not be considered distribution to

the public.

Commentators also recommended the

regulations state that distribution to the

public does not mean distribution to employees. In addition, they urge Treasury

to make explicit that internal distribution

includes distribution to many employees,

including employees of affiliates, at multiple locations.

In light of these comments, the final

regulations provide in new paragraph

(g)(3) that distribution to the public does

not include distribution to a related person, which is defined for purposes of the

regulation as a person who bears a relationship to the transferee specified in section 267(b)(3), (10), (11), or (12), or section 707(b)(1)(B), with “10 percent”

substituted for “50 percent.” The term

also excludes distribution to certain identified persons or to those with a legal relationship to the original transferee. The

number of employees or independent contractors who are permitted to use the program in performance of services for the

transferee is not relevant. The examples

have also been amended to clarify that the

number of permitted users, which includes employees of the transferee, within

the group of related persons is not taken

into account in determining whether the

transferee has the right to distribute

copies of the program to the public. See

e.g., paragraph (h), Example 11.

1998–42 I.R.B.

4. Definition of Copyrighted Article.

The comments on this issue fell into

two categories. One group of comments

recommended that final regulations clarify the consequences of transferring a de

minimis copyright right along with the

transfer of a copyrighted article. The proposed regulations state in §1.861–

18(c)(1)(ii) that if a person acquires a

copy of a computer program but does not

acquire any of the four copyright rights,

the transfer is classified as a transfer of a

copyrighted article. Several commentators requested that the regulations clarify

the statement to say that if the transfer includes only a de minimis copyright right,

the transfer is classified as a transfer of a

copyrighted article. As discussed above,

in response, the final regulations provide

that if the transfer includes only a de minimis copyright right, the transfer is classified as a transfer of a copyrighted article.

The second category of comments concerned the definition of a copyrighted article. Section 1.861–18(c)(3) defines a

copyrighted article as a copy of a computer

program from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a

machine or device. Several commentators

recommended the regulations be modified

to say that the copy of the program need

not be fixed in a tangible medium, and thus

electronically transferred copies also constitute copyrighted articles.

Treasury and the IRS believe that the

regulations clearly indicate that electronically transferred copies also constitute the

transfer of a copyrighted article. Section

1.861–18(g)(2) of the final regulations

continues to provide that the physical or

electronic medium used to effectuate a

transfer of a computer program shall not

be taken into account. Also, the examples

contained in the regulations, including

paragraph (h), Examples 2, 3, and 4,

specifically conclude that the electronic

transfer of software can constitute the

transfer of copyrighted articles.

One commentator suggested that the

words “carrier medium” should be substituted for the words “the magnetic medium

of a floppy disk” because computer programs may be distributed on a non-magnetic medium, such as a CD-ROM. This

comment has been adopted in §1.861–

18(c)(3) of the final regulations.

9

5. Further Classification of a Copyright

Right as a Sale or License.

In classifying a copyright right as a sale

or license, the proposed regulations look

to whether, considering all the facts and

circumstances, all substantial rights in a

copyright right are transferred. Commentators raised a number of issues regarding

the all substantial rights test, commenting

on the effect of exclusivity, term of transfer, geographic area, and time and manner

of payment.

Several commentators stated that exclusivity is the most important factor in

determining whether all substantial rights

have been transferred. They pointed out

that two examples, Examples 5 and 6, discuss other factors, the term of the transfer

and a transfer in a limited geographic

area, in addition to exclusivity, and requested that the regulations explicitly

state that exclusivity is the most important

factor. One commentator suggested that

the term of the transfer may not be relevant since the useful life of the program

may be shorter than originally believed

due to technological advances.

The final regulations do not incorporate

these comments. The regulations were

not intended to change the generally applicable “all substantial rights” test used

in determining whether a transfer of an intangible, including copyright rights, is a

sale of the intangible or a license of the

intangible.

Another fact mentioned in the examples is the manner of payment. Several

commentators stated that the term over

which payments are made should be irrelevant in characterizing the transaction,

and requested that this be made explicit.

Although the regulations are not intended

to depart from what is the generally applicable rule on this issue, this comment

has been reflected in paragraph (h), Example 5 of the final regulations, thus clarifying that the payment term is irrelevant

on the facts of this example.

Several commentators pointed out that,

in determining whether all substantial

rights are transferred, the regulations state

the principles of section 1222 and section

1235 shall apply. They seek clarification

that section 1222, not section 1235, applies to transfers of copyrights, with section 1235 only applying to qualifying

transfers of patents.

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Although section 1235 by its terms

only applies to patent transfers, the proposed regulations state that “the principles of sections 1222 and 1235” (emphasis added) shall apply. Treasury and the

IRS believe that the all substantial rights

test in the regulations under section 1235,

although a safe harbor under that section,

nevertheless reflects the all substantial

rights test arising from case law generally,

and is, therefore, an appropriate standard

that may be applied. However, in applying the all substantial rights test to transactions in computer programs under these

regulations, relevant case law, other than

that specifically addressing section 1235

or section 1222, may also be applied, and

the final regulations clarify this point.

transferred. One commentator stated that

this test is not helpful here, and proposed

an economic substance test instead, focusing on the right to use a computer program as the economically valuable right.

Under that standard, a copyrighted article

would be considered sold if transferred

with the right to use it indefinitely.

Other commentators, however, believed that the existing authorities applying the benefits and burdens test provide

the correct analytical approach for distinguishing a sale from a lease of a copyrighted article.

The final regulations preserve the benefits and burdens test, and are not intended

to change the generally applicable benefits and burdens test.

6. Further Classification of a

Copyrighted Article as a Sale or

Lease.

7. Related Parties.

a. Lease Character for Copyrighted

Articles.

The proposed regulations treat a nonsale transfer of a copy of a computer program as a lease. Some commentators

urged Treasury to reconsider its decision

to adopt lease characterization for transactions that traditionally have been characterized as licenses. They submitted that

the change creates confusion, is inconsistent with established commercial practice,

and implies that all lease transactions involve tangible property. One commentator asked the IRS to clarify that the regulation is not intended to produce any

differences in income tax consequences

by treating a transfer of a program as a

lease instead of a license.

These comments have not been

adopted. Treasury and the IRS continue

to believe that lease characterization is

correct for non-sale transfers of copies of

computer programs. Any income tax consequences from such characterization

under these regulations will result from

application of generally applicable tax

law to the leasing transaction.

b. Benefits and Burdens Test.

In determining whether the transfer of a

copyrighted article results in a sale, or instead as a lease generating rental income,

the proposed regulations look to whether,

based on the facts and circumstances, the

benefits and burdens of ownership are

October 19, 1998

The examples to the proposed regulations state that they assume the parties are

unrelated. Several commentators requested that final regulations clarify the

treatment of related parties under the regulations. They state that the regulations

should apply to related and unrelated parties in the same way, and that Treasury

should specify any particular concerns.

In response to these comments, the examples to the final regulations do not contain an assumption that the parties are unrelated. The regulations are intended to

apply to related and unrelated parties in

the same manner. The relationship between the parties does not affect the character of the transaction, with the exception of special rules regarding definition

of the term “distribution to the public.”

Of course, if the parties are related for

purposes of section 482, that section may

apply to determine the proper amount of

consideration for the transfer.

Code sections. Thus, the relevance of the

distinction between services and knowhow must be determined under other

Code sections. Compare sections

861(a)(3) and 862(a)(3), looking to place

of performance in sourcing income from

services, with sections 861(a)(4) and

862(a)(4), sourcing income derived from

the transfer of certain know-how based on

where the know-how is used. The distinction between services and know-how

may also be relevant under income tax

treaties. Compare Convention Between

the United States of America and Japan

for the Avoidance of Double Taxation and

the Prevention of Fiscal Evasion with Respect to Taxes on Income, Article 8 (Business Profits) and Article 14 (Royalties).

Some commentators suggested the final

regulations eliminate the requirement in

paragraph (e) of the proposed regulations,

requiring that know-how not be copyrightable as a prerequisite to being treated

as know-how for purposes of this section.

This comment has been adopted to eliminate any inference that only orally transmitted information could be classified as

know-how. The final regulations, however, add two other requirements. Knowhow is of the type covered by these regulations only if the information is

information relating to computer programming techniques, is furnished under conditions preventing unauthorized disclosure,

specifically contracted for between the

parties, and is considered property subject

to trade secret protection. Know-how is

considered a property interest under applicable law, and only if the know-how is

specifically contracted for between the

parties. These additional requirements

should help clarify the definition of knowhow described in these regulations.

9. Mixed Transactions.

8. Services and Know-How.

Some commentators suggested that

final regulations clarify the relevancy of

the distinction between the provision of

services and the provision of know-how.

This suggestion has not been incorporated

in the final regulations. The purpose of

the regulations is only to characterize

transactions involving computer programs. Once the character of the transaction is determined under the regulations,

the taxation of the income arising from

the transaction is determined under other

10

The proposed regulations state that if a

transaction in a computer program consists of transactions in more than one category listed in §1.861–18(b)(1), the transactions, unless de minimis, will be treated

as separate transactions, with the rules applied separately to each. Several commentators requested further guidance on

how to treat transactions that include payments for updates, support, consulting,

education, and training. They pointed out

that in many cases, the extent to which

such transactions or services will be re-

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quired by the transferee are unknown at

the time of the initial contract. They

asked that regulations clarify the factors

that will sustain an allocation where these

various options are made available, or

that Treasury consider bundling rules.

These comments have not been

adopted. These regulations are limited to

characterizing transactions relating to

computer programs, and are not intended

to provide rules for allocating income

arising from mixed transactions. Mixed

transactions occur in many circumstances

outside of transactions involving computer programs. Whether income arising

from a mixed transaction, involving computer programs or otherwise, must be allocated to its separate components under

generally applicable principles of taxation, and the method by which such income is allocated to the transaction’s

components, must be determined under

other Code sections.

10. Shrink Wrap License.

Several commentators stated that the

reference to the term shrink wrap license

in the proposed regulations should be

deleted, because the reference can be misinterpreted as ascribing some legal significance to the term. They suggested a

more general reference to a user agreement or a user license. In response to

these comments, the final regulations now

indicate in Example 1 that the term

shrink-wrap license is merely illustrative.

The regulations’ analysis is based on the

terms of the agreement between the parties, and on the nature and extent of the

rights transferred, not the means of packaging or distributing the computer program. In particular, the use of the term

shrink-wrap license in the proposed regulations was not intended to create an inference that the regulations apply only to

mass-marketed software.

11. Pre-Effective Date Transactions.

The proposed regulations draw no inference for transactions prior to the regulations’ effective date. One commentator

recommended that the regulations permit

taxpayers to elect retroactive application

of the regulations. Another commentator

requested a statement that a taxpayer’s

prior treatment of a transaction would be

respected as long as it is reasonably supportable. Another commentator recom-

1998–42 I.R.B.

mended the IRS remedy double tax problems for transactions prior to the effective

date.

The final regulations apply to transactions occurring pursuant to contracts entered into on or after the effective date of

the regulations. A special transition rule

permits taxpayers to elect to apply the

regulations to transactions occurring pursuant to contracts entered into in taxable

years ending on or after the date of publication of this document in the Federal

Register. Taxpayers may also elect to

apply this section to transactions occurring in taxable years ending on or after the

date of publication of this document in the

Federal Register, for contracts entered

into before the date of publication of this

document in the Federal Register, provided the taxpayer would not be required

under this section to change its method of

accounting, or the taxpayer would be required to change its method of accounting

but the resulting section 481 adjustment

would be zero.

With regard to double taxation, taxpayers who believe they are subject to double

taxation may pursue competent authority

relief.

12. Accounting Method Changes.

Commentators suggested that the IRS

issue, simultaneously with the issuance of

the final regulations, a revenue procedure

permitting an automatic change of accounting to allow taxpayers to apply the

principles of these regulations for purposes of accounting for prepaid income

under software maintenance agreements.

Different rules apply depending on

whether the income from such agreements is considered to be derived from

the sale of goods or the performance of

services. Compare, §1.451–5 (sale of

goods) and Rev. Proc. 71–21 (1971–2 CB

549) (performance of services).

In response to comments, the final regulations grant taxpayers consent to

change their method of accounting if necessary to conform the classification of

transactions with these regulations, where

the taxpayer elects one of the transtion

rules in paragraph (i)(2) of the regulations. To obtain automatic consent to

change a method of accounting, the regulations direct taxpayers to file Form 3115

with their returns and send a copy to the

national office.

11

13. Reverse Engineering and

Decompilation.

One commentator stated that the right

to reverse engineer (or decompile) a computer program (i.e., the right to reconstruct the source code from the object

code) should be irrelevant in classifying

transactions in computer programs, and

that references to that right should be

eliminated from the examples.

This comment has not been adopted.

The decompilation of a computer program can result in the creation of a derivative work. Under the regulations, the

right to create a derivative work is a copyright right. Therefore, whether the transferee is prohibited from reverse engineering a computer program could be relevant

in determining if a copyrighted article has

been transferred.

14. Effect of Practices Used to Control

Piracy.

One commentator suggested that certain practices used to control software

piracy, such as a requirement that the

transferee annually contact the transferor

and pay an annual fee, be disregarded in

determining whether a transaction results

in a sale or lease of a computer program.

This comment has not been adopted.

Such a transaction must be analyzed

under the benefits and burdens test, taking

into account all the facts and circumstances. Under that test, the requirement

that the transferee contact the transferor

and pay an annual fee might not result in

lease characterization, if other significant

benefits and burdens of ownership pass to

the transferee.

15. Definition of Computer.

One commentator urged Treasury to

adopt a flexible definition of the term

computer. However, the final regulations

do not define computer. The definition of

software used in the regulations is based

on the definition in the Copyright Act.

The Copyright Act does not define the

term computer.

16. Comments (not otherwise addressed

above) Regarding Specific Examples.

a. Paragraph (h), Examples 6 and 7.

Commentators requested that, given

the ease of reproduction, the distinction

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between paragraph (h), Examples 6 and 7

should be removed. This comment has

not been adopted. Although computer

programs can be easily reproduced, a fact

which the regulations recognize, there is

still an important commercial and legal

distinction between persons who are

granted the right to make copies of a program for distribution and persons who do

not have that right.

b. Example 6.

In response to comments, the final regulations make clear that the party exercising reproduction rights can exercise that

right indirectly by contracting out the reproduction function.

c. Example 8.

In response to a comment, Example 8

has been clarified to indicate that the right

to make back-up copies of the program,

or the fact that a back-up copy of the program is transferred on a disk, is irrelevant

to classification.

d. Example 9.

In response to a comment, paragraph

(h), Example 9 is clarified to indicate that

the mechanics of copying a computer program are irrelevant.

e. Example 10.

Some commentators suggested that in

the case of so-called enterprise licenses,

the fact the transferee can use the program

at multiple locations should not affect the

character of the transaction as the sale of

copyrighted articles. This comment has

been adopted, and paragraph (h), Example

10(ii)(C) of the final regulations has been

amended accordingly.

f. Examples 12 and 13.

Some commentators suggested adding

examples to illustrate so-called software

maintenance or subscription agreements.

Paragraph (h), Examples 12 and 13 of the

proposed regulations, however, were intended to illustrate such agreements, and,

in response to comments, these examples

have been modified in the final regulations. Generally, the provision of an updated program pursuant to a maintenance

agreement is intended to be treated as the

transfer of a copyrighted article. How-

October 19, 1998

ever, this may not always be the case, and

maintenance agreements must be analyzed in the same way as other transactions under the regulations.

g. Example 15.

Associate Chief Counsel (International),

IRS. However, other personnel from the

IRS and Treasury Department participated in their development.

* * * * *

A commentator suggested that the example’s use of a derivative computer program adds complexity, and recommends

the example be redrafted to purely illustrate services. This comment has been

adopted and the example has been revised

accordingly.

h. Additional Examples.

Commentators suggested additional examples. The final regulations add additional examples where clarification was

believed necessary.

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 the collection

of information contained in 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 impact

taxpayers who engage in international

transactions in computer programs, 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

of the collection of information on such

small entities is not likely to be significant

because it merely requires a copy of the

Form 3115 to be filed with the National

Office. Accordingly, a regulatory flexibility analysis is not required under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6).

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, of the Office of

12

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.861–18 is added to

read as follows:

§1.861–18 Classification of transactions

involving computer programs.

(a) General—(1) Scope. This section

provides rules for classifying transactions

relating to computer programs for purposes of subchapter N of chapter 1 of the

Internal Revenue Code, sections 367,

404A, 482, 551, 679, 1059A, chapter 3,

chapter 5, sections 842 and 845 (to the extent involving a foreign person), and

transfers to foreign trusts not covered by

section 679.

(2) Categories of transactions. This

section generally requires that such transactions be treated as being solely within

one of four categories (described in paragraph (b)(1) of this section) and provides

certain rules for categorizing such transactions. In the case of a transfer of a

copyright right, this section provides rules

for determining whether the transaction

should be classified as either a sale or exchange, or a license generating royalty income. In the case of a transfer of a copyrighted article, this section provides rules

for determining whether the transaction

should be classified as either a sale or exchange, or a lease generating rental income.

(3) Computer program. For purposes

of this section, a computer program is a

set of statements or instructions to be used

directly or indirectly in a computer in

order to bring about a certain result. For

purposes of this paragraph (a)(3), a computer program includes any media, user

manuals, documentation, data base or

similar item if the media, user manuals,

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documentation, data base or similar item

is incidental to the operation of the computer program.

(b) Categories of transactions—(1)

General. Except as provided in paragraph (b)(2) of this section, a transaction

involving the transfer of a computer program, or the provision of services or of

know-how with respect to a computer

program (collectively, a transfer of a computer program) is treated as being solely

one of the following—

(i) A transfer of a copyright right in the

computer program;

(ii) A transfer of a copy of the computer program (a copyrighted article);

(iii) The provision of services for the

development or modification of the computer program; or

(iv) The provision of know-how relating to computer programming techniques.

(2) Transactions consisting of more

than one category. Any transaction involving computer programs which consists of more than one of the transactions

described in paragraph (b)(1) of this section shall be treated as separate transactions, with the appropriate provisions of

this section being applied to each such

transaction. However, any transaction

that is de minimis, taking into account the

overall transaction and the surrounding

facts and circumstances, shall not be

treated as a separate transaction, but as

part of another transaction.

(c) Transfers involving copyright

rights and copyrighted articles—(1)

Classification—(i) Transfers treated as

transfers of copyright rights. A transfer

of a computer program is classified as a

transfer of a copyright right if, as a result

of the transaction, a person acquires any

one or more of the rights described in

paragraphs (c)(2)(i) through (iv) of this

section. Whether the transaction is

treated as being solely the transfer of a

copyright right or is treated as separate

transactions is determined pursuant to

paragraph (b)(1) and (b)(2) of this section. For example, if a person receives a

disk containing a copy of a computer program which enables it to exercise, in relation to that program, a non-de minimis

right described in paragraphs (c)(2)(i)

through (iv) of this section (and the transaction does not involve, or involves only

a de minimis provision of services as described in paragraph (d) of this section or

1998–42 I.R.B.

of know-how as described in paragraph

(e) of this section), then, under paragraph

(b)(2) of this section, the transfer is classified solely as a transfer of a copyright

right.

(ii) Transfers treated solely as transfers of copyrighted articles. If a person

acquires a copy of a computer program

but does not acquire any of the rights described in paragraphs (c)(2)(i) through

(iv) of this section (or only acquires a de

minimis grant of such rights), and the

transaction does not involve, or involves

only a de minimis, provision of services

as described in paragraph (d) of this section or of know-how as described in paragraph (e) of this section, the transfer of

the copy of the computer program is classified solely as a transfer of a copyrighted

article.

(2) Copyright rights. The copyright

rights referred to in paragraph (c)(1) of

this section are as follows—

(i) The right to make copies of the computer program for purposes of distribution

to the public by sale or other transfer of

ownership, or by rental, lease or lending;

(ii) The right to prepare derivative

computer programs based upon the copyrighted computer program;

(iii) The right to make a public performance of the computer program; or

(iv) The right to publicly display the

computer program.

(3) Copyrighted article. A copyrighted

article includes a copy of a computer program from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a

machine or device. The copy of the program may be fixed in the magnetic

medium of a floppy disk, or in the main

memory or hard drive of a computer, or in

any other medium.

(d) Provision of services. The determination of whether a transaction involving

a newly developed or modified computer

program is treated as either the provision

of services or another transaction described in paragraph (b)(1) of this section

is based on all the facts and circumstances

of the transaction, including, as appropriate, the intent of the parties (as evidenced

by their agreement and conduct) as to

which party is to own the copyright rights

in the computer program and how the

risks of loss are allocated between the

parties.

13

(e) Provision of know-how. The provision of information with respect to a computer program will be treated as the provision of know-how for purposes of this

section only if the information is—

(1) Information relating to computer

programming techniques;

(2) Furnished under conditions preventing unauthorized disclosure, specifically contracted for between the parties;

and

(3) Considered property subject to

trade secret protection.

(f) Further classification of transfers

involving copyright rights and copyrighted articles—(1) Transfers of copyright rights. The determination of

whether a transfer of a copyright right is a

sale or exchange of property is made on

the basis of whether, taking into account

all facts and circumstances, there has

been a transfer of all substantial rights in

the copyright. A transaction that does not

constitute a sale or exchange because not

all substantial rights have been transferred

will be classified as a license generating

royalty income. For this purpose, the

principles of sections 1222 and 1235 may

be applied. Income derived from the sale

or exchange of a copyright right will be

sourced under section 865(a), (c), (d), (e),

or (h), as appropriate. Income derived

from the licensing of a copyright right

will be sourced under section 861(a)(4) or

862(a)(4), as appropriate.

(2) Transfers of copyrighted articles.

The determination of whether a transfer

of a copyrighted article is a sale or exchange is made on the basis of whether,

taking into account all facts and circumstances, the benefits and burdens of ownership have been transferred. A transaction that does not constitute a sale or

exchange because insufficient benefits

and burdens of ownership of the copyrighted article have been transferred, such

that a person other than the transferee is

properly treated as the owner of the copyrighted article, will be classified as a

lease generating rental income. Income

from transactions that are classified as

sales or exchanges of copyrighted articles

will be sourced under sections 861(a)(6),

862(a)(6), 863, 865(a), (b), (c), or (e), as

appropriate. Income derived from the

leasing of a copyrighted article will be

sourced under section 861(a)(4) or section

862(a)(4), as appropriate.

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(3) Special circumstances of computer

programs. In connection with determinations under this paragraph (f), consideration must be given as appropriate to the

special characteristics of computer programs in transactions that take advantage

of these characteristics (such as the ability

to make perfect copies at minimal cost).

For example, a transaction in which a person acquires a copy of a computer program on disk subject to a requirement that

the disk be destroyed after a specified period is generally the equivalent of a transaction subject to a requirement that the

disk be returned after such period. Similarly, a transaction in which the program

deactivates itself after a specified period

is generally the equivalent of returning

the copy.

(g) Rules of operation—(1) Term applied to transaction by parties. Neither

the form adopted by the parties to a transaction, nor the classification of the transaction under copyright law, shall be determinative. Therefore, for example, if there

is a transfer of a computer program on a

single disk for a one-time payment with

restrictions on transfer and reverse engineering, which the parties characterize as

a license (including, but not limited to,

agreements commonly referred to as

shrink-wrap licenses), application of the

rules of paragraphs (c) and (f) of this section may nevertheless result in the transaction being classified as the sale of a

copyrighted article.

(2) Means of transfer not to be taken

into account. The rules of this section shall

be applied irrespective of the physical or

electronic or other medium used to effectuate a transfer of a computer program.

(3) To the public—(i) In general. For

purposes of paragraph (c)(2)(i) of this section, a transferee of a computer program

shall not be considered to have the right to

distribute copies of the program to the

public if it is permitted to distribute copies

of the software to only either a related person, or to identified persons who may be

identified by either name or by legal relationship to the original transferee. For

purposes of this subparagraph, a related

person is a person who bears a relationship to the transferee specified in section

267(b)(3), (10), (11), or (12), or section

707(b)(1)(B). In applying section 267(b),

267(f), 707(b)(1)(B), or 1563(a), “10 percent” shall be substituted for “50 percent.”

October 19, 1998

(ii) Use by individuals. The number of

employees of a transferee of a computer

program who are permitted to use the program in connection with their employment is not relevant for purposes of this

paragraph (g)(3). In addition, the number

of individuals with a contractual agreement to provide services to the transferee

of a computer program who are permitted

to use the program in connection with the

performance of those services is not relevant for purposes of this paragraph (g)(3).

(h) Examples. The provisions of this

section may be illustrated by the following examples:

Example 1. (i) Facts. Corp A, a U.S. corporation, owns the copyright in a computer program,

Program X. It copies Program X onto disks. The

disks are placed in boxes covered with a wrapper on

which is printed what is generally referred to as a

shrink-wrap license. The license is stated to be perpetual. Under the license no reverse engineering,

decompilation, or disassembly of the computer program is permitted. The transferee receives, first, the

right to use the program on two of its own computers (for example, a laptop and a desktop) provided

that only one copy is in use at any one time, and,

second, the right to make one copy of the program

on each machine as an essential step in the utilization of the program. The transferee is permitted by

the shrink-wrap license to sell the copy so long as it

destroys any other copies it has made and imposes

the same terms and conditions of the license on the

purchaser of its copy. These disks are made available for sale to the general public in Country Z. In

return for valuable consideration, P, a Country Z resident, receives one such disk.

(ii) Analysis. (A) Under paragraph (g)(1) of this

section, the label license is not determinative. None

of the copyright rights described in paragraph (c)(2)

of this section have been transferred in this transaction. P has received a copy of the program, however,

and, therefore, under paragraph (c)(1)(ii) of this section, P has acquired solely a copyrighted article.

(B) Taking into account all of the facts and circumstances, P is properly treated as the owner of a

copyrighted article. Therefore, under paragraph

(f)(2) of this section, there has been a sale of a copyrighted article rather than the grant of a lease.

Example 2. (i) Facts. The facts are the same as

those in Example 1, except that instead of selling

disks, Corp A, the U.S. corporation, decides to make

Program X available, for a fee, on a World Wide

Web home page on the Internet. P, the Country Z

resident, in return for payment made to Corp A,

downloads Program X (via modem) onto the hard

drive of his computer. As part of the electronic communication, P signifies his assent to a license agreement with terms identical to those in Example 1, except that in this case P may make a back-up copy of

the program on to a disk.

(ii) Analysis. (A) None of the copyright rights

described in paragraph (c)(2) of this section have

passed to P. Although P did not buy a physical copy

of the disk with the program on it, paragraph (g)(2)

of this section provides that the means of transfer-

14

ring the program is irrelevant. Therefore, P has acquired a copyrighted article.

(B) As in Example 1, P is properly treated as the

owner of a copyrighted article. Therefore, under

paragraph (f)(2) of this section, there has been a sale

of a copyrighted article rather than the grant of a

lease.

Example 3. (i) Facts. The facts are the same as

those in Example 1, except that Corp A only allows

P, the Country Z resident, to use Program X for one

week. At the end of that week, P must return the

disk with Program X on it to Corp A. P must also

destroy any copies made of Program X. If P wishes

to use Program X for a further period he must enter

into a new agreement to use the program for an additional charge.

(ii) Analysis. (A) Under paragraph (c)(2) of this

section, P has received no copyright rights. Because

P has received a copy of the program under paragraph (c)(1)(ii) of this section, he has, therefore, received a copyrighted article.

(B) Taking into account all of the facts and circumstances, P is not properly treated as the owner of

a copyrighted article. Therefore, under paragraph

(f)(2) of this section, there has been a lease of a

copyrighted article rather than a sale. Taking into

account the special characteristics of computer programs as provided in paragraph (f)(3) of this section,

the result would be the same if P were required to

destroy the disk at the end of the one week period instead of returning it since Corp A can make additional copies of the program at minimal cost.

Example 4. (i) Facts. The facts are the same as

those in Example 2, where P, the Country Z resident,

receives Program X from Corp A’s home page on the

Internet, except that P may only use Program X for a

period of one week at the end of which an electronic

lock is activated and the program can no longer be

accessed. Thereafter, if P wishes to use Program X,

it must return to the home page and pay Corp A to

send an electronic key to reactivate the program for

another week.

(ii) Analysis. (A) As in Example 3, under paragraph (c)(2) of this section, P has not received any

copyright rights. P has received a copy of the program, and under paragraph (g)(2) of this section, the

means of transmission is irrelevant. P has, therefore,

under paragraph (c)(1)(ii) of this section, received a

copyrighted article.

(B) As in Example 3, P is not properly treated as

the owner of a copyrighted article. Therefore, under

paragraph (f)(2) of this section, there has been a

lease of a copyrighted article rather than a sale.

While P does retain Program X on its computer at

the end of the one week period, as a legal matter P

no longer has the right to use the program (without

further payment) and, indeed, cannot use the program without the electronic key. Functionally, Program X is no longer on the hard drive of P’s computer. Instead, the hard drive contains only a series

of numbers which no longer perform the function of

Program X. Although in Example 3, P was required

to physically return the disk, taking into account the

special characteristics of computer programs as provided in paragraph (f)(3) of this section, the result in

this Example 4 is the same as in Example 3.

Example 5. (i) Facts. Corp A, a U.S. corporation, transfers a disk containing Program X to Corp

B, a Country Z corporation, and grants Corp B an

exclusive license for the remaining term of the copy-

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right to copy and distribute an unlimited number of

copies of Program X in the geographic area of

Country Z, prepare derivative works based upon

Program X, make public performances of Program

X, and publicly display Program X. Corp B will pay

Corp A a royalty of $y a year for three years, which

is the expected period during which Program X will

have commercially exploitable value.

(ii) Analysis. (A) Although Corp A has transferred a disk with a copy of Program X on it to Corp

B, under paragraph (c)(1)(i) of this section because

this transfer is accompanied by a copyright right

identified in paragraph (c)(2)(i) of this section, this

transaction is a transfer solely of copyright rights,

not of copyrighted articles. For purposes of paragraph (b)(2) of this section, the disk containing a

copy of Program X is a de minimis component of

the transaction.

(B) Applying the all substantial rights test under

paragraph (f)(1) of this section, Corp A will be

treated as having sold copyright rights to Corp B.

Corp B has acquired all of the copyright rights in

Program X, has received the right to use them exclusively within Country Z, and has received the rights

for the remaining life of the copyright in Program X.

The fact the payments cease before the copyright

term expires is not controlling. Under paragraph

(g)(1) of this section, the fact that the agreement is

labelled a license is not controlling (nor is the fact

that Corp A receives a sum labelled a royalty). (The

result in this case would be the same if the copy of

Program X to be used for the purposes of reproduction were transmitted electronically to Corp B, as a

result of the application of the rule of paragraph

(g)(2) of this section.)

Example 6. (i) Facts. Corp A, a U.S. corporation, transfers a disk containing Program X to Corp

B, a Country Z corporation, and grants Corp B the

non exclusive right to reproduce (either directly or

by contracting with either Corp A or another person

to do so) and distribute for sale to the public an unlimited number of disks at its factory in Country Z in

return for a payment related to the number of disks

copied and sold. The term of the agreement is two

years, which is less than the remaining life of the

copyright.

(ii) Analysis. (A) As in Example 5, the transfer of

the disk containing the copy of the program does not

constitute the transfer of a copyrighted article under

paragraph (c)(1) of this section because Corp B has

also acquired a copyright right under paragraph

(c)(2)(i) of this section, the right to reproduce and distribute to the public. For purposes of paragraph (b)(2)

of this section, the disk containing Program X is a de

minimis component of the transaction.

(B) Taking into account all of the facts and circumstances, there has been a license of Program X

to Corp B, and the payments made by Corp B are

royalties. Under paragraph (f)(1) of this section,

there has not been a transfer of all substantial rights

in the copyright to Program X because Corp A has

the right to enter into other licenses with respect to

the copyright of Program X, including licenses in

Country Z (or even to sell that copyright, subject to

Corp B’s interest). Corp B has acquired no right itself to license the copyright rights in Program X. Finally, the term of the license is for less than the remaining life of the copyright in Program X.

Example 7. (i) Facts. Corp C, a distributor in

Country Z, enters into an agreement with Corp A, a

1998–42 I.R.B.

U.S. corporation, to purchase as many copies of Program X on disk as it may from time-to-time request.

Corp C will then sell these disks to retailers. The

disks are shipped in boxes covered by shrink-wrap

licenses (identical to the license described in Example 1).

(ii) Analysis. (A) Corp C has not acquired any

copyright rights under paragraph (c)(2) of this section with respect to Program X. It has acquired individual copies of Program X, which it may sell to

others. The use of the term license is not dispositive

under paragraph (g)(1) of this section. Under paragraph (c)(1)(ii) of this section, Corp C has acquired

copyrighted articles.

(B) Taking into account all of the facts and circumstances, Corp C is properly treated as the owner

of copyrighted articles. Therefore, under paragraph

(f)(2) of this section, there has been a sale of copyrighted articles.

Example 8. (i) Facts. Corp A, a U.S. corporation, transfers a disk containing Program X to Corp

D, a foreign corporation engaged in the manufacture

and sale of personal computers in Country Z. Corp

A grants Corp D the non-exclusive right to copy

Program X onto the hard drive of an unlimited number of computers, which Corp D manufactures, and

to distribute those copies (on the hard drive) to the

public. The term of the agreement is two years,

which is less than the remaining life of the copyright

in Program X. Corp D pays Corp A an amount

based on the number of copies of Program X it loads

on to computers.

(ii) Analysis. The analysis is the same as in Example 6. Under paragraph (c)(2)(i) of this section,

Corp D has acquired a copyright right enabling it to

exploit Program X by copying it on to the hard drives of the computers that it manufactures and then

sells. For purposes of paragraph (b)(2) of this section, the disk containing Program X is a de minimis

component of the transaction. Taking into account

all of the facts and circumstances, Corp D has not,

however, acquired all substantial rights in the copyright to Program X (for example, the term of the

agreement is less than the remaining life of the

copyright). Under paragraph (f)(1) of this section,

this transaction is, therefore, a license of Program X

to Corp D rather than a sale and the payments made

by Corp D are royalties. (The result would be the

same if Corp D included with the computers it sells

an archival copy of Program X on a floppy disk.)

Example 9. (i) Facts. The facts are the same as

in Example 8, except that Corp D, the Country Z

corporation, receives physical disks. The disks are

shipped in boxes covered by shrink-wrap licenses

(identical to the licenses described in Example 1).

The terms of these licenses do not permit Corp D to

make additional copies of Program X. Corp D uses

each individual disk only once to load a single copy

of Program X onto each separate computer. Corp D

transfers the disk with the computer when it is sold.

(ii) Analysis. (A) As in Example 7 (unlike Example 8) no copyright right identified in paragraph

(c)(2) of this section has been transferred. Corp D

acquires the disks without the right to reproduce and

distribute publicly further copies of Program X.

This is therefore the transfer of copyrighted articles

under paragraph (c)(1)(ii) of this section.

(B) Taking into account all of the facts and circumstances, Corp D is properly treated as the owner

of copyrighted articles. Therefore, under paragraph

15

(f)(2) of this section, the transaction is classified as

the sale of a copyrighted article. (The result would

be the same if Corp D used a single physical disk to

copy Program X onto each computer, and transferred an unopened box containing Program X with

each computer, if Corp D were not permitted to copy

Program X onto more computers than the number of

individual copies purchased.)

Example 10. (i) Facts. Corp A, a U.S. corporation, transfers a disk containing Program X to Corp E,

a Country Z corporation, and grants Corp E the right

to load Program X onto 50 individual workstations

for use only by Corp E employees at one location in

return for a one-time per-user fee (generally referred

to as a site license or enterprise license). If additional

workstations are subsequently introduced, Program X

may be loaded onto those machines for additional

one-time per-user fees. The license which grants the

rights to operate Program X on 50 workstations also

prohibits Corp E from selling the disk (or any of the

50 copies) or reverse engineering the program. The

term of the license is stated to be perpetual.

(ii) Analysis. (A) The grant of a right to copy,

unaccompanied by the right to distribute those

copies to the public, is not the transfer of a copyright

right under paragraph (c)(2) of this section. Therefore, under paragraph (c)(1)(ii) of this section, this

transaction is a transfer of copyrighted articles (50

copies of Program X).

(B) Taking into account all of the facts and circumstances, P is properly treated as the owner of

copyrighted articles. Therefore, under paragraph

(f)(2) of this section, there has been a sale of copyrighted articles rather than the grant of a lease.

Notwithstanding the restriction on sale, other factors

such as, for example, the risk of loss and the right to

use the copies in perpetuity outweigh, in this case,

the restrictions placed on the right of alienation.

(C) The result would be the same if Corp E were

permitted to copy Program X onto an unlimited

number of workstations used by employees of either

Corp E or corporations that had a relationship to

Corp E specified in paragraph (g)(3) of this section.

Example 11. (i) Facts. The facts are the same as

in Example 10, except that Corp E, the Country Z

corporation, acquires the right to make Program X

available to workstation users who are Corp E employees by way of a local area network (LAN). The

number of users that can use Program X on the LAN

at any one time is limited to 50. Corp E pays a onetime fee for the right to have up to 50 employees use

the program at the same time.

(ii) Analysis. Under paragraph (g)(2) of this section the mode of utilization is irrelevant. Therefore,

as in Example 10, under paragraph (c)(2) of this section, no copyright right has been transferred, and,

thus, under paragraph (c)(1)(ii) of this section, this

transaction will be classified as the transfer of a

copyrighted article. Under the benefits and burdens

test of paragraph (f)(2) of this section, this transaction is a sale of copyrighted articles. The result

would be the same if an unlimited number of Corp E

employees were permitted to use Program X on the

LAN or if Corp E were permitted to copy Program

X onto LANs maintained by corporations that had a

relationship to Corp E specified in paragraph (g)(3)

of this section.

Example 12. (i) Facts. The facts are the same as

in Example 11, except that Corp E pays a monthly

fee to Corp A, the U.S. corporation, calculated with

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reference to the permitted maximum number of

users (which can be changed) and the computing

power of Corp E’s server. In return for this monthly

fee, Corp E receives the right to receive upgrades of

Program X when they become available. The agreement may be terminated by either party at the end of

any month. When the disk containing the upgrade is

received, Corp E must return the disk containing the

earlier version of Program X to Corp A. If the contract is terminated, Corp E must delete (or otherwise

destroy) all copies made of the current version of

Program X. The agreement also requires Corp A to

provide technical support to Corp E but the agreement does not allocate the monthly fee between the

right to receive upgrades of Program X and the technical support services. The amount of technical support that Corp A will provide to Corp E is not foreseeable at the time the contract is entered into but is

expected to be de minimis. The agreement specifically provides that Corp E has not thereby been

granted an option to purchase Program X.

(ii) Analysis. (A) Corp E has received no copyright rights under paragraph (c)(2) of this section.

Corp A has not provided any services described in

paragraph (d) of this section. Based on all the facts

and circumstances of the transaction, Corp A has

provided de minimis technical services to Corp E.

Therefore, under paragraph (c)(1)(ii) of this section,

the transaction is a transfer of a copyrighted article.

(B) Taking into account all facts and circumstances, under the benefits and burdens test Corp E is

not properly treated as the owner of the copyrighted

article. Corp E does not receive the right to use Program X in perpetuity, but only for so long as it continues to make payments. Corp E does not have the

right to purchase Program X on advantageous (or, indeed, any) terms once a certain amount of money has

been paid to Corp A or a certain period of time has

elapsed (which might indicate a sale). Once the

agreement is terminated, Corp E will no longer possess any copies of Program X, current or superseded.

Therefore under paragraph (f)(2) of this section there

has been a lease of a copyrighted article.

Example 13. (i) Facts. The facts are the same as

in Example 12, except that, while Corp E must return copies of Program X as new upgrades are received, if the agreement terminates, Corp E may

keep the latest version of Program X (although Corp

E is still prohibited from selling or otherwise transferring any copy of Program X).

(ii) Analysis. For the reasons stated in Example

10, paragraph (ii)(B), the transfer of the program

will be treated as a sale of a copyrighted article

rather than as a lease.

Example 14. (i) Facts. Corp G, a Country Z

corporation, enters into a contract with Corp A, a

U.S. corporation, for Corp A to modify Program X

so that it can be used at Corp G’s facility in Country

Z. Under the contract, Corp G is to acquire one

copy of the program on a disk and the right to use

the program on 5,000 workstations. The contract requires Corp A to rewrite elements of Program X so

that it will conform to Country Z accounting standards and states that Corp A retains all copyright

rights in the modified Program X. The agreement

between Corp A and Corp G is otherwise identical as

to rights and payment terms as the agreement described in Example 10.

(ii) Analysis. (A) As in Example 10, no copyright rights are being transferred under paragraph

October 19, 1998

(c)(2) of this section. In addition, since no copyright

rights are being transferred to Corp G, this transaction does not involve the provision of services by

Corp A under paragraph (d) of this section. This

transaction will be classified, therefore, as a transfer

of copyrighted articles under paragraph (c)(1)(ii) of

this section.

(B) Taking into account all facts and circumstances, Corp G is properly treated as the owner of

copyrighted articles. Therefore, under paragraph

(f)(2) of this section, there has been the sale of a

copyrighted article rather than the grant of a lease.

Example 15. (i) Facts. Corp H, a Country Z corporation, enters into a license agreement for a new

computer program. Program Q is to be written by

Corp A, a U.S. corporation. Corp A and Corp H

agree that Corp A is writing Program Q for Corp H

and that, when Program Q is completed, the copyright in Program Q will belong to Corp H. Corp H

gives instructions to Corp A programmers regarding

program specifications. Corp H agrees to pay Corp

A a fixed monthly sum during development of the

program. If Corp H is dissatisfied with the development of the program, it may cancel the contract at the

end of any month. In the event of termination, Corp

A will retain all payments, while any procedures,

techniques or copyrightable interests will be the

property of Corp H. All of the payments are labelled

royalties. There is no provision in the agreement for

any continuing relationship between Corp A and

Corp H, such as the furnishing of updates of the program, after completion of the modification work.

(ii) Analysis. Taking into account all of the facts

and circumstances, Corp A is treated as providing

services to Corp H. Under paragraph (d) of this section, Corp A is treated as providing services to Corp

H because Corp H bears all of the risks of loss associated with the development of Program Q and is the

owner of all copyright rights in Program Q. Under

paragraph (g)(1) of this section, the fact that the

agreement is labelled a license is not controlling

(nor is the fact that Corp A receives a sum labelled a

royalty).

Example 16. (i) Facts. Corp A, a U.S. corporation, and Corp I, a Country Z corporation, agree that

a development engineer employed by Corp A will

travel to Country Z to provide know-how relating to

certain techniques not generally known to computer

programmers, which will enable Corp I to more efficiently create computer programs. These techniques

represent the product of experience gained by Corp

A from working on many computer programming

projects, and are furnished to Corp I under nondisclosure conditions. Such information is property

subject to trade secret protection.

(ii) Analysis. This transaction contains the elements of know-how specified in paragraph (e) of

this section. Therefore, this transaction will be

treated as the provision of know-how.

Example 17 (i) Facts. Corp A, a U.S. corporation, transfers a disk containing Program Y to Corp

E, a Country Z corporation, in exchange for a single

fixed payment. Program Y is a computer program

development program, which is used to create other

computer programs, consisting of several components, including libraries of reusable software components that serve as general building blocks in new

software applications. No element of these libraries

is a significant component of any overall new program. Because a computer program created with the

16

use of Program Y will not operate unless the libraries are also present, the license agreement between Corp A and Corp E grants Corp E the right to

distribute copies of the libraries with any program

developed using Program Y. The license agreement

is otherwise identical to the license agreement in Example 1.

(ii) Analysis. (A) No non-de minimis copyright

rights described in paragraph (c)(2) of this section

have passed to Corp E. For purposes of paragraph

(b)(2) of this section, the right to distribute the libraries in conjunction with the programs created

using Program Y is a de minimis component of the

transaction. Because Corp E has received a copy of

the program under paragraph (c)(1)(ii) of this section, it has received a copyrighted article.

(B) Taking into account all the facts and circumstances, Corp E is properly treated as the owner of a

copyrighted article. Therefore, under paragraph

(f)(2) of this section, there has been the sale of a

copyrighted article rather than the grant of a lease.

Example 18 (i) Facts. (A) Corp A, a U.S. corporation, transfers a disk containing Program X to

Corp E, a country Z Corporation. The disk contains

both the object code and the source code to Program

X and the license agreement grants Corp E the right

to—

(1) Modify the source code in order to correct

minor errors and make minor adaptations to Program X so it will function on Corp E’s computer;

and

(2) Recompile the modified source code.

(B) The license does not grant Corp E the right

to distribute the modified Program X to the public.

The license is otherwise identical to the license

agreement in Example 1.

(ii) Analysis. (A) No non-de minimis copyright

rights described in paragraph (c)(2) of this section

have passed to Corp E. For purposes of paragraph

(b)(2) of this section, the right to modify the source

code and recompile the source code in order to create new code to correct minor errors and make

minor adaptations is a de minimis component of the

transaction. Because Corp E has received a copy of

the program under paragraph (c)(1)(ii) of this section, it has received a copyrighted article.

(B) Taking into account all the facts and circumstances, Corp E is properly treated as the owner of a

copyrighted article. Therefore, under paragraph

(f)(2) of this section, there has been the sale of a

copyrighted article rather than the grant of a lease.

(i) Effective date—(1) General. This

section applies to transactions occurring

pursuant to contracts entered into on or

after December 1, 1998.

(2) Elective transition rules—(i) Contracts entered into in taxable years ending

on or after October 2, 1998. A taxpayer

may elect to apply this section to transactions occurring pursuant to contracts entered into in taxable years ending on or

after October 2, 1998. A taxpayer that

makes an election under this paragraph

(i)(2)(i) must apply this section to all contracts entered into in taxable years ending

on or after October 2, 1998.

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(ii) Contracts entered into before October 2, 1998. A taxpayer may elect to

apply this section to transactions occurring in taxable years ending on or after

October 2, 1998, pursuant to contracts entered into before October 2, 1998, provided the taxpayer would not be required

under this section to change its method of

accounting as a result of such election, or

the taxpayer would be required to change

its method of accounting but the resulting

section 481(a) adjustment would be zero.

A taxpayer that makes an election under

this paragraph (i)(2)(ii) must apply this

section to all transactions occurring in

taxable years ending on or after October

2, 1998, pursuant to contracts entered into

before October 2, 1998.

(3) Manner of making election. Taxpayers may elect, under paragraph

(i)(2)(i) or (i)(2)(ii) of this section, to

apply this section, by treating the transactions in accordance with these regulations

on their original tax return.

(4) Examples. The following examples illustrate application of the transition

rule of paragraph (i)(2)(ii) of this section:

Example 1. Corp A develops computer programs for sale to third parties. Corp A uses an overall accrual method of accounting and files its tax return on a calendar-year basis. In year 1, Corp A

enters into a contract to deliver a computer program

in that year, and to provide updates for each of the

following four years. Under the contract, the computer program and the updates are priced separately,

and Corp A is entitled to receive payments for the

computer program and each of the updates upon delivery. Assume Corp A properly accounts for the

contract as a contract for the provision of services.

Corp A properly includes the payments under the

contract in gross income in the taxable year the payments are received and the computer program or updates are delivered. Corp A properly deducts the

cost of developing the computer program and updates when the costs are incurred. Year 3 includes

October 2, 1998. Assume under the rules of this section, the provision of updates would properly be accounted for as the transfer of copyrighted articles. If

Corp A made an election under paragraph (i)(2)(ii)

of this section, Corp A would not be required to

change its method of accounting for income under

the contract as a result of the election. Corp A would

also not be required to change its method of accounting for the cost of developing the computer

program and the updates under the contract as a result of the election. Therefore, under paragraph

(i)(2)(ii) of this section, Corp A may elect to apply

the provisions of this section to the updates provided

in years 3, 4, and 5, because Corp A is not required

to change from its accrual method of accounting for

the contract as a result of the election.

Example 2. Corp A develops computer programs

for sale to third parties. Corp A uses an overall accrual method of accounting and files its tax return on

1998–42 I.R.B.

a calendar-year basis. In year 1, Corp A enters into a

contract to deliver a computer program and to provide one update the following year. Under the contract, the computer program and the update are

priced separately, and Corp A is entitled to receive

payment for the computer program and the update

upon delivery of the computer program. Assume

Corp A properly accounts for the contract as a contract for the provision of services. Corp A properly

includes the portion of the payment relating to the

computer program in gross income in year 1, the

taxable year the payment is received and the program delivered. Corp A properly includes the portion of the payment relating to the update in gross

income in year 2, the taxable year the update is provided, under Rev. Proc. 71–21, 1971–2 CB 549 (see

§601.601 (d)(2) of this chapter). Corp A properly

deducts the cost of developing the computer program and update when the costs are incurred. Year 2

includes October 2, 1998. Assume under the rules

of this section, provision of the update would properly be accounted for as the transfer of a copyrighted

article. If Corp A made an election under paragraph

(i)(2)(ii) of this section, Corp A would be required to

change its method of accounting for deferring income under its contract as a result of the election.

However, the section 481(a) adjustment would be

zero because the portion of the payment relating to

the update would be includible in gross income in

year 2, the taxable year the update is provided, under

both Rev. Proc. 71–21 and §1.451–5. Corp A would

not be required to change its method of accounting

for the cost of developing the computer program and

the update under the contract as a result of the election. Therefore, under paragraph (i)(2)(ii) of this

section, Corp A may elect to apply the provisions of

this section to the update in year 2, because the section 481(a) adjustment resulting from the change in

method of accounting for deferring advance payments under the contract is zero, and because Corp

A is not required to change from its accrual method

of accounting for the cost of developing the computer program and updates under the contract as a

result of the election.

Example 3. Assume the same facts as in Example

1 except that Corp A is entitled to receive payments

for the computer program and each of the updates 30

days after delivery. Corp A properly includes the

amounts due under the contract in gross income in

the taxable year the computer program or updates

are provided. Assume that Corp A properly uses the

nonaccrual-experience method described in section

448(d)(5) and §1.448–2T to account for income on

its contracts. If Corp A made an election under paragraph (i)(2)(ii) of this section, Corp A would be required to change from the nonaccrual-experience

method for income as a result of the election, because the method is only available with respect to

amounts to be received for the performance of services. Therefore, Corp A may not elect to apply the

provisions of this section to the updates provided in

years 3, 4, and 5, under paragraph (i)(2)(ii) of this

section, because Corp A would be required to

change from the nonaccrual-experience method of

accounting for income on the contract as a result of

the election.

(j) Change in method of accounting required by this section—(1) Consent. A

taxpayer is granted consent to change its

17

method of accounting for contracts involving computer programs, to conform

with the classification prescribed in this

section. The consent is granted for contracts entered into on or after December 1,

1998, or in the case of a taxpayer making

an election under paragraph (i)(2)(i) of

this section, the consent is granted for

contracts entered into in taxable years

ending on or after October 2, 1998. In addition, a taxpayer that makes an election

under paragraph (i)(2)(ii) of this section is

granted consent to change its method of

accounting for any contract with transactions subject to the election, if the taxpayer is required to change its method of

accounting as a result of the election.

(2) Year of change. The year of change

is the taxable year that includes December

1, 1998, or in the case of a taxpayer making an election under paragraph (i)(2)(i)

or (i)(2)(ii) of this section, the taxable

year that includes October 2, 1998.

(k) Time and manner of making change

in method of accounting—(1) General.

A taxpayer changing its method of accounting in accordance with this section

must file a Form 3115, Application for

Change in Method of Accounting, in duplicate. The taxpayer must type or print

the following statement at the top of page

1 of the Form 3115: “FILED UNDER

TREASURY REGULATION §1.861–

18.” The original Form 3115 must be attached to the taxpayers original return for

the year of change. A copy of the Form

3115 must be filed with the National Office no later than when the original Form

3115 is filed for the year of change.

(2) Copy of Form 3115. The copy required by this paragraph (k)(l) to be sent

to the national office should be sent to the

Commissioner of Internal Revenue, Attention: CC:DOM:IT&A, P.O. Box 7604,

Benjamin Franklin Station, Washington,

DC 20044 (or in the case of a designated

private delivery service: Commissioner

of Internal Revenue, Attention: CC:

DOM:IT&A, 1111 Constitution Avenue,

NW, Washington, DC 20224).

(3) Effect of consent and Internal Revenue Service review. A change in method

of accounting granted under this section is

subject to review by the district director

and the national office and may be modified or revoked in accordance with the

provisions of Rev. Proc. 97–37 (1997–33

IRB 18) (or its successors) (see

§601.601(d)(2) of this chapter).

October 19, 1998

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Page 18

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. In §602.101, paragraph (c) is

amended by adding an entry to the table

in numerical order to read as follows:

§602.101 OMB Control numbers.

* * * * *

(c) * * *

October 19, 1998

CFR part or section

where identified and

described

Current OMB

control No.

* * * * *

1.861–18 . . . . . . . . . . . . . . . . 1545–1594

* * * * *

Approved April 1, 1998.

Donald C. Lubick,

Deputy Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

September 30, 1998, 8:45 a.m., and published in the

issue of the Federal Register for October 2, 1998, 63

F.R. 52971)

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

18

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Page 19

Part IV. Items of General Interest

Notice of Proposed Rulemaking

Substantiation of Business

Expenses—Use of Mileage Rates

to Substantiate Automobile

Expenses

REG–122488–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the use

of mileage rates to substantiate automobile business expenses. The regulations

affect taxpayers who deduct expenses,

and payors who make payments and employees who receive payments under reimbursement or other expense allowance

arrangements, for the business use of an

automobile.

DATES: Written or electronically generated comments and requests for a public

hearing must be received by December

30, 1998.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, contact Edwin B. Cleverdon or Donna M.

Crisalli, (202) 622-4920 (not a toll-free

number).

ADDRESSES: Send submissions to

CC:DOM:CORP:R (REG–122488–97),

room 5228, Internal Revenue Service,

P.O. Box 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m. to

CC:DOM:CORP:R (REG–122488–97),

Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,

Washington, DC.

Additionally, taxpayers may submit

comments electronically via INTERNET

by selecting the “Tax Regs” option on the

IRS INTERNET site at: http://www.irs.

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

SUPPLEMENTARY INFORMATION

Background and Explanation of

Provisions

Section 274(d) provides that a taxpayer

1998–42 I.R.B.

is not allowed a deduction or credit for

certain expenses unless the expense is

substantiated. These substantiation requirements apply to the expenses of use

of any listed property (defined in section

280F(d)(4)), which includes any passenger automobile and any other property

used as a means of transportation. The

Secretary may issue regulations that provide that some or all of the substantiation

requirements will not apply to expenses

that do not exceed a prescribed amount.

Section 1.274–5T(b)(6) sets forth the

elements of an expenditure or use, i.e., the

amount, time, and business purpose, that

are required to be substantiated with

respect to listed property. Section

1.274(d)–1 provides, in part, that the

Commissioner may prescribe rules under

which mileage allowances reimbursing

ordinary and necessary expenses of local

travel and transportation while traveling

away from home will satisfy the substantiation requirements of §1.274–5T(c), and

the requirements of an adequate accounting to the employer for purposes of

§1.274–5T(f)(4). However, §1.274(d)–

1(a)(3) provides that such mileage allowances are available only to the owner

of a vehicle.

Proposed §1.274–5(g) applies these

substantiation rules to mileage allowances

for business use of an automobile without

the limitation in §1.274(d)–1(a)(3) that a

mileage allowance is available only to the

owner of a vehicle. Proposed §1.274–

5(j)(1) continues to authorize the Commissioner to establish a method for computing meal expenses while traveling

away from home (see current §1.274–

5T(j)), while §1.274–5(j)(2) authorizes

the Commissioner to establish a method

under which a taxpayer may use mileage

rates to determine the amount of the ordinary and necessary business expenses of

using an automobile for local transportation and transportation to, from, and at the

destination while traveling away from

home in lieu of substantiating the actual

costs. The mileage rate method may include appropriate limitations and conditions in order to reflect more accurately

automobile expenses over the entire period of usage. The taxpayer would not,

however, be relieved of substantiating the

amount of each business use (i.e., the

19

business mileage) and the time and business purpose of each use. See Rev. Proc.

97–59 (1997–52 I.R.B. 24), for rules for

using the mileage rate method. This proposed §1.274–5(g), (j), and (m) supplement §1.274–5(c) and (f) as proposed on

March 25, 1997, in the Federal Register

(62 F.R. 14051). Conforming changes to

§1.62–2 are also proposed.

Special Analyses

It has been determined that this notice

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

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

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

impose a collection of information on

small entities, the Regulatory Flexibility

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

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

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

impact on small business.

Comments and Requests for a Public

Hearing

Before adopting these proposed regulations as final regulations, consideration

will be given to any comments that are

submitted timely (and in the manner described in the ADDRESSES portion of

this preamble) to the IRS. All comments

will be available for public inspection and

copying. A public hearing will be scheduled and held upon request by any person

who submits comments on the proposed

rules. Notice of the time and place for the

hearing will be published in the Federal

Register.

Drafting Information

The principal authors of these proposed

regulations are Edwin B. Cleverdon and

Donna M. Crisalli, Office of the Assistant

Chief Counsel (Income Tax and Accounting). However, personnel from other offices of the IRS and Treasury Department

participated in their development.

October 19, 1998

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Page 20

*****

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. In §1.62–2, paragraph (e)(2) is

revised to read as follows:

§1.62–2 Reimbursement and other

expense allowance arrangements.

* * * * *

(e) * * *

(2) Expenses governed by section

274(d). An arrangement that reimburses

travel, entertainment, use of a passenger

automobile or other listed property, or

other business expenses governed by section 274(d) meets the requirements of this

paragraph (e)(2) if information sufficient

to satisfy the substantiation requirements

of section 274(d) and the regulations

thereunder is submitted to the payor. See

§1.274–5T. Under section 274(d), information sufficient to substantiate the requisite elements of each expenditure or use

must be submitted to the payor. For example, with respect to travel away from

home, §1.274–5T(b)(2) requires that information sufficient to substantiate the

amount, time, place, and business purpose

of the expense must be submitted to the

payor. Similarly, with respect to use of a

passenger automobile or other listed property, §1.274–5T(b)(6) requires that information sufficient to substantiate the

amount, time, use, and business purpose

of the expense must be submitted to the

payor. See §1.274–5(g), however, which

grants the Commissioner authority to prescribe rules permitting the amount of certain expenses to be deemed substantiated

to the payor (in lieu of substantiating the

actual amount of such expenses) by

means of per diem or mileage rates for

travel away from home or transportation

expenses. See also §1.274–5(j)(1), which

grants the Commissioner the authority to

establish a method under which a taxpayer may use a specified amount for

meals while traveling away from home in

lieu of substantiating the actual cost of

October 19, 1998

meals, and §1.274–5(j)(2), which grants

the Commissioner the authority to establish a method under which a taxpayer may

use mileage rates to determine the amount

of the ordinary and necessary expenses of

using an automobile for local transportation and transportation to, from, and at the

destination while traveling away from

home in lieu of substantiating the actual

costs. Substantiation of the amount of a

business expense in accordance with rules

prescribed pursuant to the authority

granted by §1.274–5(g) or (j) will be

treated as substantiation of the amount of

such expense for purposes of this section.

* * * * *

§1.62–2T [Removed]

Par. 3. Section 1.62–2T is removed.

Par. 4. Section 1.274–5 is added to

read as follows:

§1.274–5 Substantiation requirements.

(a) through (f) [Reserved]. For further

guidance, see §1.274–5T(a) through (f).

(g) Substantiation by reimbursement

arrangements or per diem, mileage, and

other traveling allowances—(1) In general. The Commissioner may, in his or her

discretion, prescribe rules in pronouncements of general applicability under which

allowances for expenses described in paragraph (g)(2) of this section will, if in accordance with reasonable business practice,

be regarded as equivalent to substantiation

by adequate records or other sufficient evidence for purposes of §1.274–5T(c) of the

amount of such expenses and as satisfying,

with respect to the amount of such expenses, the requirements of an adequate

accounting to the employer for purposes of

§1.274– 5T(f)(4). If the total allowance received exceeds the deductible expenses

paid or incurred by the employee, such excess must be reported as income on the

employee’s return. See paragraph (j)(1) of

this section relating to the substantiation of

meal expenses while traveling away from

home, and paragraph (j)(2) of this section

relating to the substantiation of expenses

for the business use of an automobile.

(2) Allowances for expenses described.

An allowance for expenses is described in

this paragraph (g)(2) if it is a—

(i) Reimbursement arrangement covering ordinary and necessary expenses of

20

traveling away from home (exclusive of

transportation expenses to and from destination);

(ii) Per diem allowance providing for

ordinary and necessary expenses of traveling away from home (exclusive of

transportation costs to and from destination); or

(iii) Mileage allowance providing for

ordinary and necessary expenses of local

transportation and transportation to, from,

and at the destination while traveling

away from home.

(3) Limitation. For expenses paid or

incurred on or before December 31, 1997,

a mileage allowance described in paragraph (g)(2)(iii) of this section is available only to the owner of a vehicle.

(h) and (i) [Reserved]. For further

guidance, see §1.274- 5T(h) and (i).

(j) Authority for optional methods of

computing certain expenses—(1) Meal

expenses while traveling away from

home. The Commissioner may establish a

method under which a taxpayer may use a

specified amount or amounts for meals

while traveling away from home in lieu of

substantiating the actual cost of meals.

The taxpayer would not be relieved of the

requirement to substantiate the actual cost

of other travel expenses as well as the

time, place, and business purpose of the

travel. See §1.274–5T(b)(2) and (c).

(2) Use of mileage rates for automobile expenses. The Commissioner may

establish a method under which a taxpayer may use mileage rates to determine

the amount of the ordinary and necessary

expenses of using an automobile for local

transportation and transportation to, from,

and at the destination while traveling

away from home in lieu of substantiating

the actual costs. Such method may include appropriate limitations and conditions in order to reflect more accurately

automobile expenses over the entire period of usage. The taxpayer would not be

relieved of the requirement to substantiate

the amount of each business use (i.e., the

business mileage), or the time and business purpose of each use. See §1.274–

5T(b)(2) and (c).

(k) and (l) [Reserved]. For further

guidance, see §1.274–5T(k) and (l).

(m) Effective date. Paragraphs (g) and

(j) of this section apply to expenses paid

or incurred after December 31, 1997.

1998–42 I.R.B.

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Page 21

§1.274–5T [Amended]

Par. 5. Paragraphs (g) and (j) of

§1.274–5T are removed and reserved.

§1.274(d)–1T [Removed]

Par. 7. Section 1.274(d)–1T is removed.

§1.274(d)–1 [Amended]

Par. 6. Section 1.274(d)–1 is amended

by removing paragraph (a)(3).

(Filed by the Office of the Federal Register on

September 30, 1998, 8:45 a.m., and published in the

issue of the Federal Register for October 1, 1998, 63

F.R. 52660)

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Announcement 98-90

Proposed Changes to Form 8849

Purpose

The purpose of this announcement is to request public comments on the proposed changes to Form 8849,

Claim for Refund of Excise Taxes.

Note: The Form 8849 and Schedules shown are subject to change and OMB approval before final release.

Proposed changes

to Form 8849

The proposed changes include the following:

• Six schedules are provided, five for fuel tax claims and one for other claims.

• Fuel tax claims that have similar requirements are made on the same schedule.

• Entry boxes are provided for data on the form and schedules.

Benefits of the

changes

The revised Form 8849 will:

• Allow the claimant to use only the applicable schedules;

• Reduce the number of separate statements and attachments required to be prepared by the claimant;

• Reduce the amount of correspondence with IRS because of incomplete claims;

• Provide adequate space to enter the required information; and

• Allow the IRS to use improved data processing techniques for increased efficiency.

Comments

requested

The IRS would like to receive comments on the proposed changes to Form 8849 from interested parties by

November 15, 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 the Form 8849. Although we will not be able to respond to each comment, we will carefully consider all of them.

1998–42 I.R.B.

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25

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26

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27

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Page 28

28

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Announcement of the Disbarment and Suspension of Attorneys, Certified

Public Accountants, Enrolled Agents, and Enrolled Actuaries From

Practice Before the Internal Revenue Service

Under 330, Title 31 of the United

States Code, the Secretary of the Treasury, after due notice and opportunity for

hearing, is authorized to suspend or disbar from practice before the Internal Revenue Service any person who has violated the rules and regulations governing

the recognition of attorneys, certified

public accountants, enrolled agents, or

enrolled actuaries to practice before the

Internal Revenue Service.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

matter from directly or indirectly employ-

ing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or suspended from practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled

actuaries to identify such disbarred or suspended practitioners, the Director

of Practice will announce in the Internal

Revenue Bulletin the names and addresses of practitioners who have been

suspended from such practice, their designation as attorney, certified public accountant, enrolled agent, or enrolled actuary, and date or period of suspension. This

announcement will appear in the weekly

Bulletin at the earliest practicable date

after such action and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is

practicable for each attorney, certified

public accountant, enrolled agent, or enrolled actuary so suspended or disbarred

and will be consolidated and published in

the Cumulative Bulletin.

After due notice and opportunity for

hearing before an administrative law

judge, the following individuals have

been disbarred from further practice before the Internal Revenue Service:

Name

Address

Designation

Effective Date

Galt, Edward G.

Lopez, Andrew L.

Branch, Jimmie L.

Harrison, Rebecca A.

Mayer, Robert J.

Monterey, CA

Albuquerque, NM

Jacksonville, FL

Carmichael, CA

Wexford, PA

CPA

CPA

CPA

Enrolled Agent

CPA

October 25, 1997

December 11, 1997

January 15, 1998

March 4, 1998

June 4, 1998

1998–42 I.R.B.

29

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Announcement of the Expedited Suspension of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries From Practice

Before the Internal Revenue Service

Under title 31 of the Code of Federal

Regulations, section 10.76, the Director

of Practice is authorized to immediately

suspend from practice before the Internal

Revenue Service any practitioner who,

within five years from the date the expedited proceeding is instituted, (1) has had

a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause; or (2) has

been convicted of any crime under title 26

of the United States Code or, of a felony

under title 18 of the United States Code

involving dishonesty or breach of trust.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Service

matter from directly or indirectly employing, accepting assistance from, being employed by, or sharing fees with, any practitioner disbarred or suspended from practice

before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled actuaries to identify practitioners under expedited suspension from practice before the

Internal Revenue Service, the Director of

Practice will announce in the Internal Revenue Bulletin the names and addresses of

practitioners who have been suspended

from such practice, their designation as attorney, certified public accountant, en-

rolled agent, or enrolled actuary, and date

or period of suspension. This announcement will appear in the weekly Bulletin at

the earliest practicable date after such action and will continue to appear in the

weekly Bulletins for five successive weeks

or for as many weeks as is practicable for

each attorney, certified public accountant,

enrolled agent, or enrolled actuary so suspended and will be consolidated and published in the Cumulative Bulletin.

The following individuals have been

placed under suspension from practice before the Internal Revenue Service by virtue

of the expedited proceeding provisions of

the applicable regulations:

Name

Address

Designation

Date of Suspension

Clark, Sheila

Houston, TX

CPA

Indefinite from April 21, 1998

Kimes, Larry W.

Austin, TX

Attorney

Indefinite from May 5, 1998

Braiteman, Sheldon

Baltimore, MD

Attorney

Indefinite from June 5, 1998

Pollack, Michael

Guttenberg, NJ

Attorney

Indefinite from June 11, 1998

Eichenbaum, Irving

Huntingdon Valley, PA

CPA

Indefinite from August 4, 1998

Corley, Francis R.

Irmo, SC

CPA

Indefinite from August 4, 1998

Scott, Richard

Lincoln, NE

Attorney

Indefinite from August 4, 1998

Wilson, Douglas D.

Roanoke, VA

Attorney

Indefinite from August 4, 1998

Watkins, Brian R.

Lincoln, NE

Attorney

Indefinite

Congdon Jr., Byron E.

San Bernadino, CA

Attorney

Indefinite from August 4, 1998

Abrams, Robert

Elmsford, NY

CPA

Indefinite from August 4, 1998

Robinson, Doane

Rapid City, SD

CPA

Indefinite from August 4, 1998

Szarwark, Ernest

Nashville, TN

Attorney

Indefinite from August 4, 1998

Roberts, Mark

Norman, OK

CPA

Indefinite from August 4, 1998

Wood, Randall K.

Springfield, MO

Attorney

Indefinite from August 5, 1998

Chappell, Ronald L.

Antelope, CA

CPA

Indefinite from August 12, 1998

October 19, 1998

30

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Announcement of the Consent Voluntary Suspension of Attorneys,

Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries

From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations,

Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid the institution or

conclusion of a proceeding for his disbarment or suspension from practice before

the Internal Revenue Service, may offer

his consent to suspension from such practice. The Director of Practice, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or

enrolled actuary in accordance with the

consent offered.

Attorneys, certified public accountants,

enrolled agents, and enrolled actuaries are

prohibited in any Internal Revenue Ser-

vice matter from directly or indirectly employing, accepting assistance from, being

employed by, or sharing fees with any

practitioner disbarred or suspended from

practice before the Internal Revenue Service.

To enable attorneys, certified public accountants, enrolled agents, and enrolled

actuaries to identify practitioners under

consent suspension from practice before the

Internal Revenue Service, the Director

of Practice will announce in the Internal

Revenue Bulletin the names and addresses of practitioners who have been

suspended from such practice, their designation as attorney, certified public ac-

countant, enrolled agent, or enrolled actuary, and date or period of suspension. This

announcement will appear in the weekly

Bulletin at the earliest practicable date

after such action and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is

practicable for each attorney, certified

public accountant, enrolled agent, or enrolled actuary so suspended and will be

consolidated and published in the Cumulative Bulletin.

The following individuals have been

placed under consent suspension from

practice before the Internal Revenue Service:

Name

Address

Designation

Date of Suspension

Makula, John G.

Slomski, Michael

Bozeman Jr., T. Alvin

Parness, Richard A.

Register, Billy

Cooper, Michael E.

Minello, Michael J.

Holden, William W.

Freeman, Samuel

Anders, Kevin

Breed, Robert M.

Sandirk, Paula Brooks

Neuhaus Jr., George

Park Ridge, IL

Gross Pointe Woods, MI

Sylvester, GA

Westfield, NJ

Havana, FL

Edina, MN

Clarks Summit, PA

Fairfield, CT

Bedford, NH

Williamport, MD

Concord, MA

Chehalis, WA

Brewster, NY

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

CPA

April 1, 1998 to March 31, 2003

April 1, 1998 to March 31, 2001

May 22, 1998 to November 21, 1999

June 1, 1998 to December 31, 1998

Indefinite from July 10, 1998

August 19, 1998 to February 18, 1999

August 28, 1998 to April 27, 2001

September 1, 1998 to March 31, 1999

September 1, 1998 to August 31, 1999

September 1, 1998 to August 31, 2001

September 1, 1998 to February 28, 2001

November 1, 1998 to April 30, 2000

November 1, 1998 to April 30, 2000

1998–42 I.R.B.

31

October 19, 1998

IRB 1998-42

10/14/98 11:05 AM

Page 32

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.

October 19, 1998

32

1998–42 I.R.B.

IRB 1998-42

10/14/98 11:05 AM

Page 33

Numerical Finding List1

Proposed Regulations—Continued

Bulletins 1998–29 through 41

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

98–91, 1998–40 I.R.B. 12

98–92, 1998–41 I.R.B. 15

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

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

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

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

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

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.

1998–42 I.R.B.

33

October 19, 1998

IRB 1998-42

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Page 34

Finding List of Current Action on

Previously Published Items1

Revenue Rulings—Continued

Revenue Rulings—Continued

76–562

Obsoleted by

98–37, 1998–32 I.R.B. 5

77–214

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–5

Obsoleted by

98–37, 1998–32 I.R.B. 5

87–13

Modified by

98–49, 1998–38 I.R.B. 5

87–16

Modified by

98–49, 1998–38 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

Revenue Procedures:

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

Bulletins 1998–29 through 41

*Denotes entry since last publication

Notices:

83–58

Obsoleted by

98–37, 1998–32 I.R.B. 5

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

75–19

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

94–6

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

93–93

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.

October 19, 1998

34

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Page 35

IRB 1998-42

10/14/98 11:05 AM

Page 36

INTERNAL REVENUE BULLETIN

The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold

on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are

sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print

and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the

Superintendent of Documents.

HOW TO ORDER

Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,

detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please

allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page

(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC

20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.