Bulletin No. 1998–50

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Bulletin No. 1998–50

December 14, 1998

Internal Revenue

bulletin

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

T.D. 8790, page 4.

Final regulations under section 6662 of the Code relate to

the accuracy-related penalty.

EMPLOYEE PLANS

Rev. Proc. 98–59, page 8.

Roth IRAs; prototypes. This procedure describes the

method for obtaining approval of prototype Roth IRAs (including dual-purpose IRAs) by a prototype sponsor. It also

provides guidance on transitional relief for users of Roth

IRAs that have not been approved by the Service.

Railroad Retirement Board has determined that the rate of

tax imposed by section 3221 of the Code shall be 35 cents

per work-hour for the quarter beginning October 1, 1998.

ADMINISTRATIVE

REG–105170–97, page 10.

Proposed regulations under section 41 of the Code relate to

the computation of the credit for increasing research activities and the definition of qualified research.

Announcement 98–109, page 20.

EXEMPT ORGANIZATIONS

T.D. 8785, 1998–42 I.R.B. 5, under section 861 of the

Code relating to the tax treatment of certain transactions involving the transfer of computer programs, is corrected.

Announcement 98–111, page 21.

Announcement 98–110, page 21.

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

EMPLOYMENT TAX

Page 4.

Railroad retirement; rate determination; quarterly. The

Finding Lists begin on page 24.

Department of the Treasury

Internal Revenue Service

T.D. 8784, 1998–42 I.R.B. 4, under section 274 of the

Code relating to the use of mileage allowances to substantiate automobile business expenses, is corrected.

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The IRS Mission

and by applying the tax law with integrity and fairness to

all.

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

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

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

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

adopt a position inconsistent with an established Service

position.

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

is determined by Congress.

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

policy by correctly applying the laws enacted by Congress;

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

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

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

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

should be relentless in its attack on unreal tax devices and

fraud.

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

is the responsibility of each person in the Service, charged

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

meaning of the statutory provision and not to adopt a

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

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

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Introduction

The Internal Revenue Bulletin is the authoritative instrument

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

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

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

on a single-copy basis.

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

are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

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

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

modify, or amend any of those previously published in the

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

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

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

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

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

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

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

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

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have

the force and effect of Treasury Department Regulations,

but they may be used as precedents. Unpublished rulings

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

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

The first Bulletin for each month includes a cumulative index

for the matters published during the preceding months.

These monthly indexes are cumulated on a semiannual basis

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

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

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

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

Section 3221.—Rate of Tax

Definition of Reasonable Basis

Determination of Quarterly Rate

of Excise Tax for Railroad

Retirement Supplemental

Annuity Program

AGENCY: Internal Revenue Service

(IRS), Treasury.

In accordance with directions in Section 3221(c) of the Railroad Retirement

Tax Act (26 U.S.C. 3221(c)), the Railroad

Retirement Board has determined that the

excise tax imposed by such Section

3221(c) on every employer, with respect

to having individuals in his employ, for

each work-hour for which compensation

is paid by such employer for services rendered to him during the quarter beginning

October 1, 1998, shall be at the rate of 35

cents.

In accordance with directions in Section 15(a) of the Railroad Retirement Act

of 1974, the Railroad Retirement Board

has determined that for the quarter beginning October 1, 1998, 28.6 percent of the

taxes collected under Sections 3211(b)

and 3221(c) of the Railroad Retirement

Tax Act shall be credited to the Railroad

Retirement Account and 71.4 percent of

the taxes collected under such Sections

3211(b) and 3221(c) plus 100 percent of

the taxes collected under Section 3221(d)

of the Railroad Retirement Tax Act shall

be credited to the Railroad Retirement

Supplemental Account.

Dated August 24, 1998.

By the Authority of the Board

Beatrice Ezerski,

Secretary to the Board.

(Filed by the Office of the Federal Register on

August 31, 1998, 8:45 a.m., and published in the

issue of the Federal Register for September 1, 1998,

63 F.R. 46494)

Section 6662.—Imposition of

Accuracy-Related Penalty

26 CFR 1.6662–2: Accuracy-related penalty.

T.D. 8790

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

December 14, 1998

ACTION: Final regulations.

SUMMARY: This document contains

final regulations relating to the accuracyrelated penalty. These amendments are

necessary to define reasonable basis and

to make conforming changes to existing

regulations. These regulations affect any

taxpayer that files a tax return.

DATES: Effective date. These regulations

are effective December 2, 1998.

Applicability date. For dates of applicability, see §§1.6662–2(d) and 1.6664–

1(b)(2).

FOR FURTHER INFORMATION CONTACT: Beverly A. Baughman, 202-6224940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On September 1, 1995, the IRS issued

final regulations [T.D. 8617 (60 F.R.

45661 [1995–2 C.B. 274])], relating to the

accuracy-related penalty under chapter 1

of the Internal Revenue Code. Those regulations provided guidance concerning the

reasonable basis standard for purposes of

(1) the negligence penalty under section

6662(b)(1), and (2) the disclosure exception to the penalties for disregarding rules

or regulations under section 6662(b)(1)

and the substantial understatement of income tax under section 6662(b)(2). In the

preamble to the final regulations, the IRS

and Treasury Department requested comments and suggestions on providing further guidance on the reasonable basis standard. On November 12, 1996, proposed

regulations [IA–42–95 (1996–49 I.R.B.

21) (see §601.601(d)(2)(ii)(b) of this

chapter)] defining reasonable basis and

making conforming changes to the final

regulations relating to the accuracy-related

penalty were published in the Federal

Written comments responding to the

notice of proposed rulemaking were received. A public hearing was held on

February 25, 1997. After consideration

of all the comments, the proposed regulations under section 6662 relating to the

definition of reasonable basis for purposes of the accuracy-related penalty are

adopted as revised by this Treasury

decision.

In addition, on August 5, 1997, the Taxpayer Relief Act (TRA) of 1997, Pub. L.

105–34 (111 Stat. 788), was enacted. The

Act added a restriction regarding whether

or not a corporation has a reasonable basis

for its tax treatment of an item for purposes of reducing the amount of the substantial understatement penalty. This restriction has been incorporated into the

final regulations.

Explanation of Provisions and Summary

of Comments

These final regulations provide that a

return position will have a reasonable

basis for purposes of the accuracy-related

penalties if it is reasonably based on one

or more certain authorities. Also, if the

return position does not satisfy the reasonable basis standard, a reasonable cause

and good faith exception may still apply.

One commentator suggested that the

substantial authority standard in §1.6662–

4(d)(3)(ii) of existing regulations and the

reasonable basis standard in §1.6662–

3(b)(3) of the proposed regulations be expanded to include as authority a wellreasoned construction of the applicable

regulatory provisions in addition to the

statutory provisions. The substantial authority standard in §1.6662–4(d)(3)(ii)

has not been expanded to reflect this comment. However, the definition of reasonable basis in §1.6662–3(b)(3) has been

clarified to include an explicit cross-reference to the nature of the analysis discussion in §1.6662–4(d)(3)(ii) of the substantial authority regulations.

Several commentators suggested that

the final regulations explain where the

reasonable basis standard ranks in the hierarchy of return position standards. This

suggestion was not adopted. The final

regulations do not rank the standards formally because such a comparison would

change the focus of the reasonable basis

regulations from the taxpayer’s obligation

to determine his or her tax liability in accordance with the internal revenue laws to

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the probability of the return position prevailing in litigation.

Several commentators supported the

exclusion of a numerical qualification of

the reasonable basis standard in the proposed regulations because they believed

that such a qualification would encourage

arbitrary and mechanical application of

the standards and create bad precedent

outside the scope of the reasonable basis

standard. The final regulations do not include a numerical qualification.

One commentator requested that the

final regulations refer specifically to Rev.

Rul. 59–60 (1959–1 C.B. 237) (see

§601.601(d)(2)(ii)(b) of this chapter),

which provides guidance regarding the

valuation of stock of closely held corporations for estate and gift tax purposes. The

final regulations do not adopt this suggestion. It is not necessary to include a reference to a specific revenue ruling because

§1.6662–4(d)(3)(iii) of the existing regulations already lists revenue rulings as an

acceptable type of authority.

One commentator requested that the

final regulations clarify the effect of the

Omnibus Budget Reconciliation Act of

1993, Pub. L. 103–66 (107 Stat. 312), and

the reasonable cause and good faith exception under section 6664 on a taxpayer’s

access to prepayment litigation in Tax

Court. The final regulations do not adopt

this suggestion. It is not necessary to clarify that a taxpayer has access to prepayment litigation in Tax Court because under

section 6665 the Tax Court has jurisdiction to redetermine additions to tax in the

same manner as the underlying tax.

Pursuant to the Taxpayer Relief Act of

1997, Pub. L. 105–34 (111 Stat. 788),

§1.6662–4(e)(3) has been added to the

final regulations. That section provides

that for purposes of reducing the amount

of the substantial understatement penalty

by making an adequate disclosure, a corporation will not be treated as having a

reasonable basis for its tax treatment of an

item attributable to a multi-party financing transaction entered into after August

5, 1997, if the treatment does not clearly

reflect the income of the corporation.

The Chief Counsel for Advocacy of the

Small Business Administration requested

that the preamble to the regulations explain why the IRS has concluded that this

regulation is not subject to the Regulatory

Flexibility Act (5 U.S.C. chapter 6). The

1998–50 I.R.B.

Chief Counsel for Advocacy submits that

the regulations tighten the definition of

reasonable basis and, thus, impose a de

facto recordkeeping requirement because

they may require small businesses to keep

and maintain records (such as the documents referred to in §1.6662–4(d)(3)(iii))

to support tax reporting decisions.

After carefully considering these comments, the IRS and Treasury have concluded that this regulation is not subject to

the Regulatory Flexibility Act, 5 U.S.C.

§ 603 (1994). That section requires a regulatory flexibility analysis for an interpretative rule involving the internal revenue

laws only to the extent the interpretative

rule imposes a collection of information

requirement on small entities. A collection of information requirement is defined

in 5 U.S.C. § 601(7) (1994) to mean the

obtaining, causing to be obtained, soliciting, or requiring the disclosure to third

parties or the public, of facts or opinions

by or for an agency, regardless of form or

format, calling for either (i) answers to

identical questions posed to, or identical

reporting or recordkeeping requirements

imposed on, ten or more persons, other

than agencies, instrumentalities, or employees of the United States, or (ii) answers to questions posed to agencies, instrumentalities, or employees of the

United States that are to be used for general statistical purposes.

Furthermore, the phrase, recordkeeping

requirement, is defined in 5 U.S.C.

601(8) (1994) as a requirement imposed

by an agency on persons to maintain specified records. Ever since this term was

first used in the Paperwork Reduction Act

of 1980 (44 U.S.C. chapter 35), the IRS

and Treasury have consistently interpreted the phrase as applying only when

Treasury regulations directly require persons to maintain specified records. We

believe this interpretation is consistent

with the explicit statutory language as

well as Congressional intent to apply the

law only to situations in which government agencies require persons to maintain

particular records.

Thus, we believe the final regulations

do not impose a recordkeeping requirement or other collection of information

requirement, as defined in 5 U.S.C.

§§ 601(7), (8) (1994). The regulations do

not impose on taxpayers additional requirements to either report information to

the IRS or to keep specified records. Because the regulations do not contain a reporting requirement or other collection of

information requirement, the provisions

of the Regulatory Flexibility Act do not

apply.

Special Analyses

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

Therefore, a regulatory assessment is not

required. It also has been determined that

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

apply to these regulations.

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 the impact of the

proposed regulations on small business.

The Chief Counsel for Advocacy submitted comments on these regulations, which

are discussed above.

Drafting Information

The principal author of these regulations is Beverly A. Baughman, Office of

the Assistant Chief Counsel (Income Tax

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

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

Par. 2. Section 1.6662–0 is amended

by:

1. Adding the entry for §1.6662–

2(d)(4).

2. Removing the entries for §1.6662–

3(b)(3)(i) and (ii).

3. Adding the entry for §1.6662–

4(e)(3).

4. Revising the entry for §1.6662–7(d).

5. Removing the entries for §1.6662–

7(d)(1) and (2).

December 14, 1998

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The revision and additions read as follows:

§1.6662–0 Table of contents.

* * * * *

§1.6662–2 Accuracy-related penalty.

* * * * *

(d) * * *

(4) Special rule for reasonable basis.

* * * * *

§1.6662–4 Substantial understatement of

income tax.

* * * * *

(e) * * *

(3) Restriction for corporations.

* * * * *

§1.6662–7 Omnibus Budget

Reconciliation Act of 1993 changes to the

accuracy-related penalty.

* * * * *

(d) Reasonable basis.

Par 3. Section 1.6662–2 is amended

by:

1. Revising the second sentence in

paragraph (d)(1).

2. Revising the first sentence in paragraph (d)(2).

3. Adding paragraph (d)(4).

The addition and revisions read as follows:

§1.6662–2 Accuracy-related penalty.

* * * * *

(d) * * * (1) * * * Except as provided in

the preceding sentence and in paragraphs

(d)(2), (3), and (4) of this section,

§§1.6662–1 through 1.6662–5 apply to

returns the due date of which (determined

without regard to extensions of time for

filing) is after December 31, 1989, but before January 1, 1994. * * *

(2) Returns due after December 31,

1993. Except as provided in paragraphs

(d)(3) and (4) of this section and the last

sentence of this paragraph (d)(2), the provisions of §§1.6662–1 through 1.6662–4

and §1.6662–7 (as revised to reflect the

changes made to the accuracy-related

penalty by the Omnibus Budget Reconciliation Act of 1993) and of §1.6662–5

apply to returns the due date of which (de-

December 14, 1998

termined without regard to extensions of

time for filing) is after December 31,

1993. * * *

* * * * *

(4) Special rules for reasonable basis.

Section 1.6662–3(b)(3) applies to returns

filed on or after December 2, 1998.

Par. 4. Section §1.6662–3 is amended

by:

1. Revising the third sentence in paragraph (b)(1) introductory text.

2. Revising paragraph (b)(3).

The revisions read as follows:

§1.6662–3 Negligence or disregard of

rules or regulations.

* * * * *

(b)* * * (1) * * * A return position that

has a reasonable basis as defined in paragraph (b)(3) of this section is not attributable to negligence. * * *

* * * * *

(3) Reasonable basis. Reasonable

basis is a relatively high standard of tax

reporting, that is, significantly higher than

not frivolous or not patently improper.

The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim.

If a return position is reasonably based on

one or more of the authorities set forth in

§1.6662-4(d)(3)(iii) (taking into account

the relevance and persuasiveness of the

authorities, and subsequent developments), the return position will generally

satisfy the reasonable basis standard even

though it may not satisfy the substantial

authority standard as defined in §1.6662–

4(d)(2). (See §1.6662–4(d)(3)(ii) for

rules with respect to relevance, persuasiveness, subsequent developments, and

use of a well-reasoned construction of an

applicable statutory provision for purposes of the substantial understatement

penalty.) In addition, the reasonable

cause and good faith exception in

§1.6664–4 may provide relief from the

penalty for negligence or disregard of

rules or regulations, even if a return position does not satisfy the reasonable basis

standard.

* * * * *

Par. 5. Section 1.6662–4 is amended

by:

1. Revising the second sentence in

paragraph (d)(2).

2. Adding paragraph (e)(3).

The addition and revision reads as follows:

§1.6662–4 Substantial understatement of

income tax.

* * * * *

(d) * * * (1) * * *

(2) * * * The substantial authority standard is less stringent than the more likely

than not standard (the standard that is met

when there is a greater than 50-percent

likelihood of the position being upheld),

but more stringent than the reasonable

basis standard as defined in §1.66623(b)(3). * * *

* * * * *

(e) * * * (1) * * *

(3) Restriction for corporations. For

purposes of paragraph (e)(2)(i) of this

section, a corporation will not be treated

as having a reasonable basis for its tax

treatment of an item attributable to a

multi-party financing transaction entered

into after August 5, 1997, if the treatment

does not clearly reflect the income of the

corporation.

* * * * *

Par. 6. In §1.6662–7, paragraph (d) is

revised to read as follows:

§1.6662–7 Omnibus Budget

Reconciliation Act of 1993 changes to the

accuracy-related penalty.

* * * * *

(d) Reasonable basis. For purposes of

§§1.6662–3(c) and 1.6662–4(e) and (f)

(relating to methods of making adequate

disclosure), the provisions of §1.6662–

3(b)(3) apply in determining whether a return position has a reasonable basis.

Par. 7. Section 1.6664–0 is amended

by:

1. Revising the entry for §1.6664–

4(c)(2).

2. Removing the entries for §§1.6664–

4(c)(1)(iii), (c)(2)(i), and (c)(2)(ii).

3. Adding the entry for §1.6664–

4(g)(3).

The revision and addition reads as follows:

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§1.6664-0 Table of contents.

* * * * *

§1.6664–4 Reasonable cause and good

faith exception to section 6662 penalties.

* * * * *

(2) Advice defined.

* * * * *

(g) * * *

(3) Special rules.

* * * * *

Par. 8. In §1.6664–4, paragraph (g) is

revised to read as follows:

§1.6664-4 Reasonable cause and good

faith exception to section 6662 penalties.

* * * * *

(g) Valuation misstatements of charitable deduction property—(1) In general.

There may be reasonable cause and good

1998–50 I.R.B.

faith with respect to a portion of an underpayment that is attributable to a substantial (or gross) valuation misstatement of

charitable deduction property (as defined

in paragraph (g)(2) of this section) only

if—

(i) The claimed value of the property

was based on a qualified appraisal (as defined in paragraph (g)(2) of this section)

by a qualified appraiser (as defined in

paragraph (g)(2) of this section); and

(ii) In addition to obtaining a qualified

appraisal, the taxpayer made a good faith

investigation of the value of the contributed property.

(2) Definitions. For purposes of this

paragraph (g):

Charitable deduction property means

any property (other than money or publicly traded securities, as defined in

§1.170A–13(c)(7)(xi)) contributed by the

taxpayer in a contribution for which a deduction was claimed under section 170.

Qualified appraisal means a qualified

appraisal as defined in §1.170A–13(c)(3).

Qualified appraiser means a qualified

appraiser as defined in §1.170A–13(c)(5).

(3) Special rules. The rules of this

paragraph (g) apply regardless of whether

§1.170A–13 permits a taxpayer to claim a

charitable contribution deduction for the

property without obtaining a qualified appraisal. The rules of this paragraph (g)

apply in addition to the generally applicable rules concerning reasonable cause and

good faith.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved November 17, 1998.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

December 1, 1998, 8:45 a.m., and published in the

issue of the Federal Register for December 2, 1998,

63 F.R. 66433)

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Page 8

Part III. Administrative, Procedural, and Miscellaneous

26 CFR 601.201: Rulings and determination

letters.

Rev. Proc. 98–59

SECTION 1. PURPOSE

This revenue procedure (1) provides

guidance on obtaining opinion letters to

drafters of Roth IRAs and (2) provides

transitional relief for users of Roth IRAs

that have not been approved by the Internal Revenue Service.

SECTION 2. BACKGROUND AND

GENERAL INFORMATION

.01 Internal Revenue Code § 408A,

added by § 302 of the Taxpayer Relief Act

of 1997, Pub. L. 105–34, permits the establishment of a new type of individual

retirement arrangement, a Roth IRA, that

taxpayers can use, beginning in 1998, to

save money for their retirement or their

beneficiaries. Except as otherwise provided in § 408A and the regulations thereunder, a Roth IRA is treated the same as a

traditional IRA.

.02 Subsections (a) and (b) of § 408 set

forth general requirements for individual

retirement accounts and individual retirement annuities, respectively.

.03 Section 408(c) provides that a trust

established by an employer or an association of employees for the benefit of employees or members, respectively, is

treated as an IRA if there is a separate accounting for each employee or member

and the trust otherwise satisfies the requirements of § 408(a) (a “section 408(c)

IRA”).

.04 In 1997, the Service issued two

model forms, Form 5305–R and Form

5305–RA that may be used to establish a

Roth IRA as a trust account or a custodial

account, respectively. In 1998, the Service

issued Form 5305–RB, a model endorsement that can be used to establish a Roth

individual retirement annuity. Model

forms issued by the Service contain preapproved language that, if followed, will

satisfy the applicable statutory requirements. Model forms should not be submitted to the Service, even if additional

provisions are added to Article IX of the

forms, provided that the additional provisions comply with the instructions for Ar-

December 14, 1998

ticle IX. (But see section 3.05 of this revenue procedure regarding automatic approval of Roth IRA documents that contain language identical to a model form.)

.05 Announcement 97–122, 1997–50

I.R.B. 63 (December 15, 1997), which

was issued at the same time as Forms

5305–R and 5305–RA, announced the issuance of these forms and provided interim guidance on Roth IRAs.

.06 On September 3, 1998, proposed

Income Tax Regulations under § 408A

were published in the Federal Register

(63 F.R. 46937).

.07 Notice 98–49, 1998–38 I.R.B. 5

(September 21, 1998), provides guidance

on Service-approved Roth IRA documents and IRA reporting requirements.

.08 Notice 98–50, 1998–44 I.R.B. 10

(November 2, 1998), provides guidance

on reconverting amounts from a traditional IRA to a Roth IRA.

.09 Rev. Proc. 87–50, 1987–2 C.B.

647, provides the procedures for a sponsoring organization or a mass submitter (a

“prototype sponsor”) to apply to the Service for an opinion letter on whether a

prototype traditional IRA meets the requirements of § 408(a) or (b). Rev. Proc.

87–50 also contains procedures for employers and employee associations to

apply for a ruling on a section 408(c)

IRA.

.10 Rev. Proc. 98–8, 1998–1 I.R.B.

225 (January 5, 1998), provides guidance

to taxpayers for complying with the userfee program as it pertains to matters under

the jurisdiction of the Assistant Commissioner (Employee Plans and Exempt Organizations).

SECTION 3. OPINION LETTERS

FOR ROTH IRAS

.01 Prototype program. A prototype

sponsor may apply to the Service for an

opinion letter for a Roth IRA submitted

pursuant to this section 3. The same procedures and user fees apply to a submission for an opinion letter for a Roth IRA

as those that apply for a traditional IRA,

with the exceptions described in sections

3.02 and 3.03 below. (See Rev. Procs.

87–50 and 98–8.)

.02 Procedural requirements. An application for approval of a prototype Roth

IRA must be submitted using Form 5306,

Application for Approval of a Prototype

Individual Retirement Arrangement, with

the words “Roth IRA” written in the

upper margin of the form. The application must be accompanied by a user fee in

the same amount as set by Rev. Proc. 98-8

for a traditional IRA.

.03 Dual-purpose prototype documents. A prototype document can only

be used as one type of IRA (traditional,

SIMPLE, or Roth). However, a prototype

document may be designed for use as either a traditional IRA or a Roth IRA provided the conditions in (1) and (2) below

are satisfied:

(1) The document is designed so

that, upon execution, the owner must explicitly and unambiguously indicate

whether the IRA is to be a Roth IRA or a

traditional IRA, and it is clear that designation as one type precludes its use as the

other type.

(2) Contributions to a Roth IRA are

maintained in a separate trust, custodial

account or annuity from contributions to a

traditional IRA.

Application for approval of such a

dual-purpose prototype document must be

submitted using Form 5306, with the

words “Dual-purpose IRA” written in the

upper margin of the form. Except in the

case of a sponsoring organization’s wordfor-word identical adoption of a mass

submitter’s prototype dual-purpose IRA,

the application must be accompanied by a

user fee in the amount of 200 percent of

the applicable fee set by Rev. Proc. 98-8

for a prototype IRA.

.04 Section 408(c) IRA program. An

employer or employee association may

apply to the Service for an opinion letter

for a section 408(c) IRA that is a Roth

IRA using the same procedures in sections 3.01 and 3.02 above that apply for a

prototype Roth IRA.

.05 Model form language. The Service

will not issue an opinion letter on a document which terms are word-for-word

identical to the operative provisions of

one of the model forms described in section 2.04 of this revenue procedure (other

than any provisions which may be added

as Article IX to the form). Such a document is deemed to meet the statutory requirements for a Roth IRA. However, the

1998–50 I.R.B.

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Page 9

document should indicate which model

form it is identical to and the revision date

of the form.

.06 Sample language. Sample language (also known as Listing of Required

Modifications, or LRMs) that the Service

finds acceptable for Roth IRAs may be

obtained by writing to the Service at: Internal Revenue Service, 1111 Constitution

Avenue NW, Attention OP:E:EP, Room

6550, Washington, D.C. 20224. “LRM

Request” should be clearly printed on the

envelope. Alternatively, a request for an

LRM may be faxed to Nancy Arrington at

(202) 622-6199.

SECTION 4. TRANSITIONAL

RELIEF

.01 Prototype IRAs. An individual

who establishes a trust, custodial account

or annuity contract as a Roth IRA after

December 31, 1997, and before the applicable date in section 4.01(3) below

using a document that has not been approved by the Service for use as a Roth

IRA is deemed to have used a document

that has been approved by the Service for

this use provided the conditions in sections 4.01(1) through 4.01(4) below are

satisfied:

(1) The individual used a document

provided by a prototype sponsor and the

document, or associated written material,

clearly designated the trust, custodial account or annuity as a Roth IRA at the time

of establishment.

(2) On or before June 30, 1999, the

prototype sponsor applies to the Service

for an opinion letter on the document described in section 4.01(1) above using the

procedures described in section 3 of this

revenue procedure.

(3) The individual adopts the ap-

1998–50 I.R.B.

proved document within 120 days after

the later of: (a) the date the Service issues

a favorable opinion letter on the document to the prototype sponsor and (b) if

the prototype sponsor seeks approval of

the document from one or more state insurance departments not later than 90

days after the Service issues a favorable

opinion letter on the document, the date

the document is approved by all such state

insurance departments. If, as a result of

amendments to the document required by

a state insurance department, the prototype sponsor applies to the Service for an

opinion letter on the amended document

within 90 days after it is approved by such

state insurance department, the date in (a)

in the preceding sentence is the date the

Service issues a favorable opinion letter

on the amended document.

(4) For the period beginning with

the establishment of the Roth IRA and

ending on the date the Service-approved

document is adopted, the individual and

the trustee, custodian or issuer comply in

operation with § 408A.

.02 Section 408(c) IRAs. An employer

or employee association that establishes a

trust or custodial account under § 408(c)

for use as a Roth IRA after December 31,

1997, and before June 30, 1999, using a

document that has not been approved by

the Service for use as a Roth IRA is

deemed to have used a document that has

been approved by the Service for this use

provided the conditions in sections

4.02(1) through 4.02(4) below are satisfied.

(1) The employer or employee association used a document that clearly designated the trust or custodial account as a

Roth IRA at the time of establishment.

(2) On or before June 30, 1999, the

employer or employee association applies

to the Service for an opinion letter on the

document described in section 4.02(1)

above using the procedures described in

section 3 of this revenue procedure.

(3) The employer or employee association adopts the approved document

within 30 days after the date the Service

issues a favorable opinion letter on the

document to the employer or employee

association.

(4) For the period beginning with

the establishment of the Roth IRA and

ending on the date the Service-approved

document is adopted, the employer or employee association, the employee for

whose benefit the Roth IRA is established, and the trustee or custodian comply in operation with § 408A.

SECTION 5. EFFECT ON OTHER

DOCUMENTS

Section 6.06 of Rev. Proc. 98–8 is

modified by sections 3.02 and 3.03 of this

revenue procedure, and section 6.02 of

Rev. Proc. 87–50 is modified by section 3

of this revenue procedure.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective on

November 30, 1998.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Roger Kuehnle of the Employee Plans Division. For further information regarding this revenue procedure,

please contact the Employee Plans Division’s taxpayer assistance telephone service at (202) 622-6074/75 (not toll-free

numbers) between 1:30 and 3:30 p.m.,

Eastern Time, Monday through Thursday.

December 14, 1998

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Page 10

Part IV. Items of General Interest

Notice of Proposed Rulemaking

SUPPLEMENTARY INFORMATION:

Credit for Increasing Research

Activities

Paperwork Reduction Act

REG–105170–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the computation of the credit under section 41(c)

and the definition of qualified research

under section 41(d). The proposed regulations reflect changes to section 41 made

by the Tax Reform Act of 1986, the Revenue Reconciliation Act of 1989, the

Small Business Job Protection Act of

1996, and the Taxpayer Relief Act of

1997. The proposed regulations also provide certain technical amendments to the

regulations.

DATES: Written comments must be received no later than March 2, 1999.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–105170–97),

room 5228, Internal Revenue Service,

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

hand delivered Monday through Friday

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

CC:DOM:CORP:R (REG–105170–97),

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

Washington, DC. Alternatively, taxpayers

may submit comments electronically via

the Internet by selecting the “Tax Regs”

option of the IRS Home Page, or by submitting comments directly to the IRS Internet site at: http://www.irs.ustreas.gov/

prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Lisa J. Shuman or Leslie H. Finlow

at (202)622-3120 (not a toll-free number);

concerning submission of comments, the

hearing, and/or to be placed on the building access list to attend the hearing, La

Nita Van Dyke at (202)622-7190 (not a

toll-free number).

December 14, 1998

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of

Management and Budget for review in accordance with the Paperwork Reduction

Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information

should be sent to the Office of Management and Budget, Attn: Desk Officer for

the Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, OP:FS:FP,

Washington, DC 20224. Comments on

the collection of information should be received by March 2, 1999. Comments are

specifically requested concerning:

Whether the proposed 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 proposed collection of

information (see below);

How the quality, utility, and clarity of

the information to be collected may be enhanced;

How the burden of complying with the

proposed collection of information may

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

Estimates of capital or start-up costs

and costs of operation, maintenance, and

purchase of services to provide information.

The collection of information in this

proposed regulation is in §§1.41–4(a) and

1.41–8(b). The information is required by

the IRS to ensure that taxpayers have engaged in qualified research and to ensure

the proper computation of the credit for

increasing research activities under section 41. Section 1.41–4(a) defines a

process of experimentation, as required

for credit eligibility, to include the recording of the results of the experiments. This

requirement imposes no additional

recordkeeping burden, because taxpayers

engaging in a bona fide process of experimentation already record the results in

any event (see discussion under Explanation of Provisions, 3. Documentation, in

this preamble). The information required

by §1.41–8 will be used to determine if

the taxpayer has elected or revoked the

election to use the alternative incremental

credit allowed under section 41(c)(4).

The collection of information is mandatory. The likely respondents are businesses or other for-profit institutions and

organizations. Responses to this collection of information are required to elect to

use and to revoke the election to use the

alternative incremental credit computation allowed under section 41(c)(4).

The reporting burden contained in

§1.41–8(b)(2) (relating to the election of

the alternative incremental credit) is reflected in the burden of Form 6765.

Estimated total annual reporting burden

under §1.41–8(b)(3) (relating to the revocation of the election to use the alternative

incremental credit): 250 hours.

Estimated average annual burden hours

per respondent: 50 hours.

Estimated number of respondents: 5.

Estimated frequency of responses: On

occasion.

An agency may not conduct or sponsor,

and a person is not required to respond to,

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

the Office of Management and Budget.

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

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

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

The research credit provisions originally appeared in section 44F of the Internal Revenue Code of 1954 (the 1954

Code), as added to the 1954 Code by section 221 of the Economic Recovery Tax

Act of 1981. Section 471(c) of the Tax

Reform Act of 1984 redesignated section

44F as section 30. Section 231 of the Tax

Reform Act of 1986 (the 1986 Act) redesignated section 30 as section 41 and substantially modified the research credit

1998–50 I.R.B.

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provisions. The amendments made to

section 41 by the 1986 Act primarily relate to the definition of qualified research

in section 41(d) and the computation of

basic research payments under section

41(e). The Revenue Reconciliation Act of

1989 (the 1989 Act), the Revenue Reconciliation Act of 1993 (the 1993 Act), the

Small Business Job Protection Act of

1996 (the 1996 Act), and the Taxpayer

Relief Act of 1997 (the 1997 Act) also

amended the research credit provisions.

These amendments primarily relate to the

trade or business requirement in section

41(b) and the computation of the credit

under sections 41(c) and 41(f).

On May 17, 1989, the IRS published in

the Federal Register (54 F.R. 21203)

final regulations under section 41. The

1989 final regulations generally do not reflect the amendments to section 41 made

by the 1986 Act, the 1989 Act, the 1993

Act, the 1996 Act, and the 1997 Act. The

amendments proposed by this document

contain rules relating primarily to the

amendments to section 41(d) made by the

1986 Act. The amendments proposed by

this document also contain some rules relating to amendments to section 41 made

by the 1989 Act, the 1996 Act, and the

1997 Act.

On January 2, 1997, the IRS published

in the Federal Register (62 F.R. 81) proposed regulations (the 1997 proposed regulations) under section 41 describing

when computer software that is developed

by (or for the benefit of) a taxpayer primarily for the taxpayer’s internal use can

qualify for the credit for increasing research activities. The 1997 proposed regulations reflect a change to section 41

made by the 1986 Act. The proposed regulations set forth in this notice of proposed rulemaking complement but otherwise do not affect the 1997 proposed

regulations.

The Tax and Trade Relief Extension

Act of 1998 extended the research credit

from June 30, 1998 through June 30,

1999. In the Conference Report, H.R.

Rep. No. 105–825, at 1547–49 (1998), the

conferees address the scope of the term

qualified research, comment on an aspect

of the process of experimentation requirement, and note a lack of clarity in the interpretation of the distinction between internal-use software and other software.

These proposed regulations reflect the

1998–50 I.R.B.

views expressed by the conferees, as well

as prior legislative history, regarding the

term qualified research and the process of

experimentation. The IRS and Treasury

request comments on the distinction between internal-use software and other

software.

Explanation of Provisions

1. Qualified Research

Congress enacted the research credit to

encourage business firms to perform the

research necessary to increase the innovative qualities and efficiency of the U.S.

economy. H.R. Rep. No. 99-426, at 177

(1985); S. Rep. No. 99–313, at 694

(1986). In extending the research credit

in the 1986 Act, Congress expressed concern that, in practice, taxpayers had applied the existing definition of qualified

research too broadly and some taxpayers

had claimed the credit for virtually any

expense relating to product development.

H.R. Rep. No. 99–426, at 178; S. Rep.

No. 99–313, at 694–95. Many taxpayers

claiming the credit were not in industries

that involved high technology or its application in developing technologically new

and improved products or methods of production. H.R. Rep. No. 99–426, at 178;

S. Rep. No. 99–313, at 695.

To address these concerns, Congress

narrowed the scope of the research credit

by providing in the Internal Revenue

Code (Code) an express definition of the

term qualified research. In determining

eligibility for the research credit, section

41(d) requires that qualified research activities satisfy a multi-part test. First, the

taxpayer’s expenditures must be eligible

to be treated as expenses under section

174. See §1.174–2(a)(1) (defining research and experimental expenditures).

Second, the expenditures must relate to

research undertaken for the purpose of

discovering information that is both technological in nature and the application of

which is intended to be useful in developing a new or improved business component of the taxpayer. The proposed regulations provide that research is undertaken

for the purpose of discovering information that is technological in nature only if

the research activities are undertaken to

obtain knowledge that exceeds, expands,

or refines the common knowledge of

skilled professionals in the particular field

of technology or science and the process

of experimentation utilized fundamentally

relies on principles of physical or biological sciences, engineering, or computer

science. Consistent with the requirement

that the research activities be undertaken

to obtain knowledge that exceeds, expands, or refines the common knowledge

of skilled professionals in the particular

field of technology or science, the credit

may be available where the technological

advance sought by the taxpayer is evolutionary, and, in certain circumstances,

where the taxpayer is not the first to

achieve the same advance. Moreover, the

credit is available regardless of whether

the taxpayer succeeds or fails in achieving

the desired advance.

Third, section 41(d) requires that substantially all of the activities of the research constitute elements of a process of

experimentation that relates to a new or

improved function, performance, reliability or quality. As noted in the previous

paragraph, the process of experimentation

utilized must fundamentally rely on principles of physical or biological sciences,

engineering, or computer science.

In developing a process of experimentation rule applicable to all scientific disciplines, IRS personnel met with personnel from the National Science Foundation

and the National Institute of Standards

and Technology. The proposed regulation

explains that a process of experimentation

is a process involving the evaluation of

more than one alternative designed to

achieve a result where the means of

achieving that result are uncertain at the

outset. This requires that the taxpayer (i)

develop one or more hypotheses designed

to achieve the intended result; (ii) design

a scientific experiment (that, where appropriate to the particular field of research, is intended to be replicable with

an established experimental control) to

test and analyze those hypotheses

(through, for example, modeling, simulation, or a systematic trial and error

methodology); (iii) conduct the experiment and record the results; and (iv) refine or discard the hypotheses as part of a

sequential design process to develop or

improve the business component.

The proposed regulation does not require that the results of the experiments

be recorded in any specific manner. The

results of the experiments should be

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recorded in a manner that is appropriate

for the particular field of science in which

the experiment is conducted and for the

type of experimentation involved. In

some fields, for example, experiments are

recorded in lab books. When developing

computer software, by contrast, the experiments might be recorded in comment

lines contained in the source code.

In the 1986 Act, Congress also specified that expenditures incurred in certain

research, research-related, or non-research activities are not eligible for the

credit. The excluded activities are: postproduction activities, adaptation, duplication, surveys and studies, research outside

the United States, research in the social

sciences, funded research, and research

related to certain internal-use computer

software.

Section 1.41–4 of this proposed regulation contains rules that clarify the definition of the term qualified research and

other terms used in section 41(d). The

proposed regulation also provides rules

relating to activities for which the research credit is not allowed.

2. Application of Tests

In the legislative history to the 1986

Act, Congress stated that if the requirements of section 41(d) are not met for an

entire product, the term business component means the most significant set of elements of that product for which all the requirements of section 41(d) are met. The

legislative history provides that this

“shrinking back” is to continue until either a subset of elements of the product

that satisfies the requirements is reached,

or the most basic element of the product is

reached and such element fails to satisfy

the test.

Consistent with the legislative history,

§1.41–4(b) of the proposed regulation explains that the “shrinking-back” concept

is the method for applying the tests in section 41(d) to a business component.

3. Documentation

Taxpayers must (a) record the results of

their scientific experiments (in a manner

that is appropriate for the particular field

of science in which the experiment is conducted and for the type of experiment involved) and (b) comply with the recordkeeping requirements of section 6001 and

the regulations thereunder. The requirement that taxpayers record the results of

December 14, 1998

their scientific experiments is not intended to cause taxpayers to create

records that otherwise would not be created. Rather, the recording of results is

inherent in a process of experimentation

to discover information that is technological in nature. Limiting the availability of

the credit to taxpayers who record the results of their scientific experiments is not

intended to change taxpayer behavior, but

to identify taxpayers who engage in a

bona fide process of experimentation and

thus may be eligible for the credit.

4. Election of the Alternative Incremental

Credit

The notice of proposed rulemaking

provides rules for electing the alternative

incremental credit, which may be elected

under section 41(c)(4). Section 1.41-8 of

the proposed regulation provides that the

election is made on Form 6765, “Credit

for Increasing Research Activities,” and

that the completed form must be attached

to the taxpayer’s timely filed original return (including extensions) for the taxable

year to which the election applies.

Proposed Effective Date

In general, the regulations are proposed

to be effective for expenditures paid or incurred on or after the date final regulations are published in the Federal Register. The regulations addressing the base

amount are proposed to be effective for

taxable years beginning on or after the

date final regulations are published in the

Federal Register. The regulations providing for the election and revocation of

the alternative incremental credit are proposed to be effective for taxable years

ending on or after the date final regulations are published in the Federal Register. No inference should be drawn from

the proposed effective date concerning

the application of section 41 to expenditures paid or incurred or the computation

of the base amount before the proposed

effective date.

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. 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. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)

is not required. This certification is based

on the information that follows. The economic impact of the collection of information contained in these regulations on

any small entity would result from the entity being required to (1) record the results

of experiments related to its qualified research activities, (2) elect on Form 6765

to use the alternative incremental credit if

the entity desires to use that method, and

(3) obtain permission to revoke the alternative incremental credit election, if so

desired. Because taxpayers record results

in conducting their research activities in

any event (see discussion under Explanation of Provisions, 3. Documentation, in

this preamble), the economic impact of

the recordkeeping requirement in the regulation would not be significant. The

economic impact of electing the alternative incremental credit on Form 6765 also

would not be significant because the election is made on the same form and is

based on the same information that is

used to claim the research credit. Pursuant to section 7805(f), 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 Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration

will be given to any written comments

(preferably a signed original and eight (8)

copies) that are submitted timely (in the

manner described in the ADDRESSES

portion of this preamble) to the IRS. Submissions might include comments on the

definition of gross receipts, comments regarding the exclusion for post-production

activities, comments on whether and how

the definition of a process of experimentation should be refined to ensure that it is

appropriate for all scientific fields, and

comments on the interaction of the discovery requirement and the duplication exclusion and the effect of such interaction on

specific industries. Also, submissions

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Page 13

might include comments on clarifying the

distinction between internal-use software

(i.e., software described in section

41(d)(4)(E)) and other software. All comments will be available for public inspection and copying.

A public hearing will be scheduled in

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

The IRS recognizes that persons outside

the Washington, DC area also may wish

to testify at the public hearing through

teleconferencing. Requests to include

teleconferencing sites must be received

by January 18, 1999. If the IRS receives

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

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

public hearing is to be scheduled, the IRS

will try to accommodate the requests.

The IRS will publish the time and date

of the public hearing and the locations of

any teleconferencing sites in an announcement in the Federal Register. The

announcement will include the date by

which persons that wish to present oral

comments at the hearing must submit requests to speak, outlines of the topics to

be discussed, and the time to be devoted

to each topic.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

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

Par. 2. Revise the undesignated centerheading immediately before §1.30–1 to

read as follows:

CREDITS ALLOWABLE UNDER

SECTION 30 THROUGH 44B

Par. 3. Remove the undesignated centerheading immediately before §1.41–0.

Par. 4. Section 1.41–0 is revised to

read as follows:

§1.41–0 Table of contents.

This section lists the paragraphs contained in §§1.41–0 through 1.41–8.

§1.41–0 Table of contents.

§1.41–1 Credit for increasing research

activities.

(a) Basic principles.

(b) Amount of credit.

section 41.

§1.41–2 Qualified research expenses.

(a)

(1)

(2)

(3)

(i)

(ii)

(4)

(i)

(ii)

(b)

Drafting Information

The principal authors of these proposed

regulations are Lisa J. Shuman and Leslie

H. Finlow of the Office of the Assistant

Chief Counsel (Passthroughs and Special

Industries). However, personnel from

other offices of the IRS and the Treasury

Department participated in their development.

* * * * *

Proposed Amendments to the Regulations

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

The proposed amendments complement

the proposed amendments published at 62

F.R. 83, January 2, 1997.)

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

1998–50 I.R.B.

(1)

(2)

(i)

(ii)

(3)

(4)

(c)

(1)

(2)

(3)

(d)

(1)

(2)

(e)

(1)

(2)

(3)

(4)

(5)

Trade or business requirements.

In general.

New business.

Research performed for others.

Taxpayer not entitled to results.

Taxpayer entitled to results.

Partnerships.

In general.

Special rule for certain partnerships

and joint ventures.

Supplies and personal property used

in the conduct of qualified research.

In general.

Certain utility charges.

In general.

Extraordinary expenditures.

Right to use personal property.

Use of personal property in taxable

years beginning after December 31,

1985.

Qualified services.

Engaging in qualified research.

Direct supervision.

Direct support.

Wages paid for qualified services.

In general.

“Substantially all.”

Contract research expenses.

In general.

Performance of qualified research.

“On behalf of.”

Prepaid amounts.

Examples.

§1.41–3 Base amount for taxable years

beginning on or after the date final

regulations are published in the Federal

(a)

(c)

(1)

(2)

(3)

(d)

(1)

(2)

and (b) [Reserved]

Definition of gross receipts.

In general.

Amounts excluded.

Foreign corporations.

Consistency requirement.

In general.

Illustrations.

§1.41–4 Qualified research for

expenditures paid or incurred on or after

the date final regulations are published in

the Federal Register.

(a)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

Qualified research.

General rule.

Requirements of section 41(d)(1).

Discovering information.

Technological in nature.

Process of experimentation.

Substantially all requirement.

Use of computers and information

technology.

(8) Illustrations.

(b) Application of requirements for

qualified research.

(1) In general.

(2) Shrinking-back rule.

(3) Illustration.

(1) In general.

(2) Research after commercial production.

(i) In general.

(ii) Certain additional activities related

to the business component.

(iii) Activities related to production process or technique.

(3) Adaptation of existing business components.

(4) Duplication of existing business

component.

(5) Surveys, studies, research relating to

management functions, etc.

(6) Internal-use computer software.

(7) Activities outside the United States.

(i) In general.

(ii) Apportionment of in-house research

expenses.

(iii) Apportionment of contract research

expenses.

(8) Research in the social sciences, etc.

(9) Research funded by any grant, contract, or otherwise.

(10) Illustrations.

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(d) Documentation.

§1.41–5 Basic research for taxable years

beginning after December 31, 1986.

[Reserved]

§1.41–6 Aggregation of expenditures.

(a) Controlled group of corporations;

trades or businesses under common

control.

(1) In general.

(2) Definition of trade or business.

(3) Determination of common control.

(4) Examples.

(b) Minimum base period research expenses.

(1) In general.

(2) Special rule where timing of research is manipulated.

(d) Membership during taxable year in

more than one group.

(e) Intra-group transactions.

(1) In general.

(2) In-house research expenses.

(3) Contract research expenses.

(4) Lease payments.

(5) Payment for supplies.

§1.41–8 Special rules for taxable years

ending on or after the date final

regulations are published in the Federal

(a) Alternative incremental credit.

(b) Election.

(1) In general.

(2) Time and manner.

(3) Revocation.

Par. 5. Section 1.41–1 is revised to

read as follows:

§1.41–1 Credit for increasing research

activities.

§1.41–7 Special rules.

(a) Allocations.

(1) Corporation making an election

under subchapter S.

(i) Pass-through for taxable years beginning after December 31, 1982, in

the case of an S corporation.

(ii) Pass-through, for taxable years beginning before January 1, 1983, in

the case of a subchapter S corporation.

December 14, 1998

(2) Pass-through in the case of an estate

or trust.

(3) Pass-through in the case of a partnership.

(i) In general.

(ii) Certain expenditures by joint ventures.

(4) Year in which taken into account.

(5) Credit allowed subject to limitation.

(b) Adjustments for certain acquisitions

and dispositions—Meaning of terms.

credit.

(d) Carryback and carryover of unused

credits.

(a) Basic principles. Section 41 provides a credit for increasing research activities. The credit is intended to encourage

business firms to perform the technological research necessary to increase the innovative qualities and efficiency of the U.S.

economy. The credit provides an incentive

for business firms to increase their expenditures for research to obtain new knowl-

edge through a scientific process of experimentation. Consequently, the credit is not

to be applied too broadly or in a manner

such that virtually any expense relating to

the development of a product is eligible for

the credit, even if some portion of the expense of developing the product does qualify for the credit. Similarly, the credit is

not available for an expenditure merely because the expenditure may be treated as an

expense under section 174. On the other

hand, the credit may be available even

though the technological advance sought

by the taxpayer is evolutionary, and, in certain circumstances, even if another taxpayer has previously achieved the same

advance. Moreover, the credit is available

regardless of whether the taxpayer succeeds or fails in achieving the desired advance. The credit is limited to eligible expenditures paid or incurred for qualified

research, as defined in section 41(d) and

§1.41–4.

(b) Amount of credit. The amount of a

taxpayer’s credit is determined under section 41(a). For taxable years beginning

after June 30, 1996, and at the election of

the taxpayer, the portion of the credit determined under section 41(a)(1) may be

calculated using the alternative incremental credit set forth in section 41(c)(4).

section 41. (1) Sections 1.41–2 through

1.41–8 and 1.41–3A through 1.41–5A address only certain provisions of section

41. The following table identifies the

provisions of section 41 that are addressed, and lists each provision with the

section of the regulations in which it is

covered.

Section of the regulation

Section of the Internal Revenue Code

§1.41–2

41(b)

§1.41–3

41(c)

§1.41–4

41(d)

§1.41–5

41(e)

§1.41–6

41(f)

§1.41–7

41(f)

41(g)

§1.41–8

41(c)

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Section of the regulation

Section of the Internal Revenue Code

§1.41–3A

41(c) (taxable years beginning before January 1, 1990)

§1.41–4A

41(d) (taxable years beginning before January 1, 1986)

§1.41–5A

41(e) (taxable years beginning before January 1, 1987)

(2) Section 1.41–3A also addresses the

special rule in section 221(d)(2) of the

Economic Recovery Tax Act of 1981 relating to taxable years overlapping the effective dates of section 41. Section 41

was formerly designated sections 30 and

44F. Sections 1.41–0 through 1.41–8 and

1.41–0A through 1.41–5A refer to these

sections as section 41 for conformity purposes. Whether section 41, former section 30, or former section 44F applies to a

particular expenditure depends upon

when the expenditure was paid or incurred.

§1.41–2 [Amended]

Par. 6. Section 1.41–2 is amended as

follows:

1. The last sentence of paragraph

(a)(3)(i) is amended by removing the language “§1.41–5(d)(2)” and adding

“§1.41–4A(d)(2)” in its place.

2. The last sentence of paragraph

(a)(3)(ii) is amended by removing the language “§1.41–5(d)(3)” and adding

“§1.41–4A(d)(3)” in its place.

3. The last sentence of paragraph

(a)(4)(ii)(F) is amended by removing the

language “§1.41–9(a)(3)(ii)” and adding

“§1.41–7(a)(3)(ii)” in its place.

4. Paragraph (e)(1)(i) is amended by

removing the language “§1.41–5” and

adding “§1.41–4 or 1.41–4A, whichever

is applicable” in its place.

Par. 7. An undesignated centerheading

is added immediately following §1.44B–1

to read as follows:

RESEARCH CREDIT—FOR TAXABLE

YEARS BEGINNING BEFORE JANUARY 1, 1990

§1.41–3 [Redesignated as §1.41–3A]

Par. 8. Section 1.41–3 is redesignated

as §1.41–3A and added under the new undesignated centerheading “RESEARCH

CREDIT—FOR TAXABLE YEARS BE-

1998–50 I.R.B.

GINNING BEFORE JANUARY 1,

1990.”

Par. 9. New §1.41-3 is added to read as

follows:

§1.41–3 Base amount for taxable years

beginning on or after the date final

regulations are published in the Federal

(a) and (b) [Reserved]

general. For purposes of section 41,

gross receipts means the total amount, as

determined under the taxpayer’s method

of accounting, derived by the taxpayer

from all its activities and from all sources

(e.g., revenues derived from the sale of

inventory before reduction for cost of

goods sold).

(2) Amounts excluded. For purposes of

this paragraph (c), gross receipts do not

include amounts representing—

(i) Returns or allowances;

(ii) Receipts from the sale or exchange

of capital assets, as defined in section

1221;

(iii) Repayments of loans or similar instruments (e.g., a repayment of the principal amount of a loan held by a commercial lender);

(iv) Receipts from a sale or exchange

not in the ordinary course of business,

such as the sale of an entire trade or business or the sale of property used in a trade

or business as defined under section

1221(2); and

(v) Amounts received with respect to

sales tax or other similar state and local

taxes if, under the applicable state or local

law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the tax to

the taxing authority.

(3) Foreign corporations. For purposes of section 41, in the case of a foreign corporation, gross receipts include

only gross receipts that are effectively

connected with the conduct of a trade or

business within the United States. See

section 864(c) and applicable regulations

thereunder for the definition of effectively

connected income.

(d) Consistency requirement—(1) In

general. In computing the credit for increasing research activities for taxable

years beginning after December 31, 1989,

qualified research expenses and gross receipts taken into account in computing a

taxpayer’s fixed-base percentage and a

taxpayer’s base amount must be determined on a basis consistent with the definition of qualified research expenses and

gross receipts for the credit year, without

regard to the law in effect for the taxable

years taken into account in computing the

fixed-base percentage or the base amount.

This consistency requirement applies

even if the period for filing a claim for

credit or refund has expired for any taxable year taken into account in computing

the fixed-base percentage or the base

amount.

(2) Illustrations. The following examples illustrate the application of the consistency rule of paragraph (d)(1) of this

section:

Example 1. (i) X, an accrual method taxpayer

using the calendar year as its taxable year, incurs

qualified research expenses in 1990. X wants to

compute its research credit under section 41 for the

tax year ending December 31, 1990. As part of the

computation, X must determine its fixed-base percentage, which depends in part on X’s qualified research expenses incurred during the fixed-base period, the taxable years beginning after December 31,

1983, and before January 1, 1989.

(ii) During the fixed-base period, X reported the

following amounts as qualified research expenses on

its Form 6765:

1984 . . . . . . . . . . . . . . . . . . . $ 100x

1985 . . . . . . . . . . . . . . . . . . . . . 120x

1986 . . . . . . . . . . . . . . . . . . . . . 150x

1987 . . . . . . . . . . . . . . . . . . . . . 180x

1988 . . . . . . . . . . . . . . . . . . . . . 170x

Total . . . . . . . . . . . . . . . . . . . .$ 720x

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(iii) For the taxable years ending December 31,

1984, and December 31, 1985, X based the amounts

reported as qualified research expenses on the definition of qualified research in effect for those taxable

years. The definition of qualified research changed

for taxable years beginning after December 31,

1985. If X used the definition of qualified research

applicable to its taxable year ending December 31,

1990, the credit year, its qualified research expenses

for the taxable years ending December 31, 1984, and

December 31, 1985, would be reduced to $ 80x and

$ 100x, respectively. Under the consistency rule in

section 41(c)(5) and paragraph (d)(1) of this section,

to compute the research credit for the tax year ending December 31, 1990, X must reduce its qualified

research expenses for 1984 and 1985 to reflect the

change in the definition of qualified research for taxable years beginning after December 31, 1985.

Thus, X’s total qualified research expenses for the

fixed-base period (1984-1988) to be used in computing the fixed-base percentage is $ 80 + 100 + 150 +

180 + 170 = $ 680x.

Example 2. The facts are the same as in Example

1, except that, in computing its qualified research expenses for the taxable year ending December 31,

1999, X claimed that a certain type of expenditure incurred in 1999 was a qualified research expense. X’s

claim reflected a change in X’s position, because X

had not previously claimed that similar expenditures

were qualified research expenses. The consistency

rule requires X to adjust its qualified research expenses in computing the fixed-base percentage to include any similar expenditures not treated as qualified research expenses during the fixed-base period,

regardless of whether the period for filing a claim for

credit or refund has expired for any year taken into

account in computing the fixed-base percentage.

Par. 10. Section 1.41–4 is revised to

read as follows:

§1.41–4 Qualified research for

expenditures paid or incurred on or after

the date final regulations are published in

the Federal Register.

(a) Qualified research—(1) General

rule. Research activities related to the development or improvement of a business

component constitute qualified research

only if the research activities meet all of

the requirements of section 41(d)(1) and

this section, and are not otherwise excluded under section 41(d)(3)(B) or (4),

or this section.

(2) Requirements of section 41(d)(1).

Research constitutes qualified research

only if it is research—

(i) With respect to which expenditures

may be treated as expenses under section

174, see §1.174–2;

(ii) That is undertaken for the purpose

of discovering information that is technological in nature, and the application of

which is intended to be useful in the de-

December 14, 1998

velopment of a new or improved business

component of the taxpayer; and

(iii) Substantially all of the activities of

which constitute elements of a process of

experimentation that relates to a new or

improved function, performance, reliability or quality.

(3) Discovering information. For purposes of section 41(d) and this section,

the term discovering information means

obtaining knowledge that exceeds, expands, or refines the common knowledge

of skilled professionals in a particular

field of technology or science.

(4) Technological in nature. For purposes of section 41(d) and this section,

information is technological in nature if

the process of experimentation used to

discover such information fundamentally

relies on principles of physical or biological sciences, engineering, or computer

science.

(5) Process of experimentation. For

purposes of section 41(d) and this section,

a process of experimentation is a process

to evaluate more than one alternative designed to achieve a result where the

means of achieving that result are uncertain at the outset. A process of experimentation in the physical or biological

sciences, engineering, or computer science requires that the taxpayer—

(i) Develop one or more hypotheses designed to achieve the intended result;

(ii) Design a scientific experiment

(that, where appropriate to the particular

field of research, is intended to be replicable with an established experimental control) to test and analyze those hypotheses

(through, for example, modeling, simulation, or a systematic trial and error

methodology);

(iii) Conduct the experiment and record

the results; and

(iv) Refine or discard the hypotheses as

part of a sequential design process to develop or improve the business component.

(6) Substantially all requirement. The

substantially all requirement of section

41(d)(1)(C) and paragraph (a)(2)(iii) of

this section is satisfied only if 80 percent

or more of the research activities, measured on a cost or other consistently applied reasonable basis, constitute elements of a process of experimentation for

a purpose described in section 41(d)(3).

The substantially all requirement is ap-

plied separately to each business component.

(7) Use of computers and information

technology. The employment of computers or information technology, or the reliance on principles of computer science

or information technology to store, collect, manipulate, translate, disseminate,

produce, distribute, or process data or information, and similar uses of computers

and information technology does not itself establish that qualified research has

been undertaken.

(8) Illustrations. The following examples illustrate the application of paragraph

(a) of this section:

Example 1. (i) Facts. X undertakes to develop

for sale a tool that would improve its suite of application development products. The desired tool

would handle connectivity problems for software

application developers by providing data access via

a layer of software that is more effective than existing software at finding data in various locations and

forms within a network, translating it if need be, and

then delivering the result to whatever application or

user requested it. The means of developing such

versatile database access middleware are not in the

common knowledge of skilled professionals in the

relevant technological fields. In order to determine

whether it can successfully develop the desired tool,

X develops, tests, and discards or refines various algorithms and protocols.

(ii) Conclusion. X’s activities to develop the

technology to build the new software development

tool may be qualified research within the meaning of

section 41(d)(1) and paragraph (a) of this section. In

developing the technology, X undertook to obtain

knowledge that exceeds, expands, or refines the

common knowledge of skilled professionals in the

relevant technological fields.

Example 2. (i) Facts. X acquired a new software

environment, including a new operating system and

a new database management system with related

tools. X undertook a project to redeploy its data processing systems to the new software environment.

X anticipated that, relative to the old system, the

new system would significantly increase the timesharing capabilities of its computer system. The

project activities included redesign of databases and

user interfaces, and translation of code from one

programming language to another. In migrating to

the new software environment, X relied on techniques and approaches that were within the common

knowledge of skilled professionals in the relevant

technological fields.

(ii) Conclusion. X’s activities to redeploy its data

processing systems to the new software environment

are not qualified research within the meaning of section 41(d)(1) and paragraph (a) of this section. X

did not undertake to obtain knowledge that exceeds,

expands, or refines the common knowledge of

skilled professionals in the relevant technological

fields.

Example 3. (i) Facts. X operates a computer

system that does not recognize dates beginning in

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the year 2000. In order to ensure that its computer

system will not malfunction in the year 2000, X incurs substantial costs having its employees manually

search its computer programs to find all date fields

used in the programs and replace all of the date

fields with year 2000 compliant date fields.

(ii) Conclusion. Because the activities of X’s

employees were not undertaken to obtain knowledge

that exceeds, expands, or refines the common

knowledge of skilled professionals in the relevant

technological fields and do not involve a process of

experimentation, the activities are not qualified research within the meaning of section 41(d)(1) and

paragraph (a) of this section.

Example 4. (i) Facts. X is engaged in the business of developing and manufacturing widgets. X

wants to manufacture an improved widget made out

of a material that X has not previously used. Although X is uncertain how to use the material to

manufacture an improved widget, the viability and

means of using the material to manufacture such

widgets are within the common knowledge of

skilled professionals in the relevant technological

fields.

(ii) Conclusion. Even though X’s expenditures

for the activities to resolve the uncertainty in manufacturing the improved widget may be treated as expenses for research activities under section 174 and

§1.174–2, X’s activities to resolve the uncertainty in

manufacturing the improved widget are not qualified research within the meaning of section 41(d)

and paragraph (a) of this section. Although X’s activities were intended to eliminate uncertainty, the

activities were not undertaken to obtain knowledge

that exceeds, expands, or refines the common

knowledge of skilled professionals in the relevant

technological fields.

Example 5. (i) Facts. X desires to build a bridge

that can sustain greater traffic flow without deterioration than can existing bridges. The technology

used to build such a bridge is not in the common

knowledge of skilled professionals in the relevant

technological fields. X eventually abandons the project after attempts to develop the technology prove

unsuccessful.

(ii) Conclusion. X’s activities to develop the

technology to build the bridge may be qualified research within the meaning of section 41(d)(1) and

paragraph (a) of this section, regardless of the fact

that X did not actually succeed in developing that

technology. In seeking to develop the technology, X

undertook to obtain knowledge that exceeds, expands, or refines the common knowledge of skilled

professionals in the relevant technological fields.

Example 6. (i) Facts. The facts are the same as

in Example 5, except that Y successfully builds a

bridge that can sustain the greater traffic flow.

Thereafter, Z seeks to build a bridge that can also

sustain such greater traffic flow. The technology

used by Y to build its bridge is a closely guarded secret that is not known to Z and remains beyond the

common knowledge of skilled professionals in the

relevant technological fields.

(ii) Conclusion. Z’s activities to develop the

technology to build the bridge may be qualified research within the meaning of section 41(d)(1) and

paragraph (a) of this section, even if it so happens

that the technology used by Z to build its bridge is

similar or identical to the technology used by Y. In

developing the technology, Z undertook to obtain

1998–50 I.R.B.

knowledge that exceeds, expands, or refines the

common knowledge of skilled professionals in the

relevant technological fields.

Example 7. (i) Facts. X and other manufacturing

companies have previously designed and manufactured a particular kind of machine using Material S.

Material T is less expensive than Material S. X

wishes to design a new machine that appears and

functions exactly the same as its existing machines,

but that is made of Material T instead of Material S.

The technology necessary to achieve this objective

is not within the common knowledge of skilled professionals in the relevant technological fields.

(ii) Conclusion. X’s activities to design the new

machine using Material T may be qualified research

within the meaning of section 41(d)(1) and paragraph (a) of this section. In seeking to design the

machine, X undertook to obtain knowledge that exceeds, expands, or refines the common knowledge

of skilled professionals in the relevant technological

fields.

Example 8. (i) Facts. X, a tire manufacturer,

seeks to build a tire that will not deteriorate as

rapidly under certain conditions of high speed and

temperature as do existing tires. The design of such

a tire is not within the common knowledge of skilled

professionals in the relevant technological fields. X

commences laboratory research on January 1. On

April 1, X determines in the laboratory that a certain

combination of materials and additives can withstand higher rotational speeds and temperatures than

the combination of materials and additives used in

existing tires. On the basis of this determination, X

undertakes further research activities to determine

how to design a tire using those materials and additives, and to determine whether such a tire functions

outside the laboratory as intended under various actual road conditions. By September 1, but not prior

to September 1, X’s research has progressed to the

point where, applying X’s knowledge to date, both

the viability and means of producing the desired tire

would be within the common knowledge of skilled

professionals in the relevant technological fields.

However, X continues to engage in certain research

activities related to the tire after September 1, and

until the first tire rolls off the assembly line on December 1.

(ii) Conclusion. Some or all of X’s research activities until September 1 may be qualified research

within the meaning of section 41(d)(1) and paragraph (a) of this section. In seeking to design the

tire, X undertook to obtain knowledge that exceeds,

expands, or refines the common knowledge of

skilled professionals in the relevant technological

fields. The activities conducted after September 1

are not qualified research within the meaning of section 41(d)(1) and paragraph (a) of this section, because those activities were not undertaken to obtain

knowledge that exceeds, expands, or refines the

common knowledge of skilled professionals in the

relevant technological fields.

(b) Application of requirements for

qualified research—(1) In general. The

requirements for qualified research in section 41(d)(1) and paragraph (a) of this

section, must be applied separately to

each business component, as defined in

section 41(d)(2)(B). In cases involving

development of both a product and a manufacturing or other commercial production process for the product, research activities relating to development of the

process are not qualified research unless

the requirements of section 41(d) and this

section are met for the research activities

relating to the process without taking into

account the research activities relating to

development of the product. Similarly,

research activities relating to development of the product are not qualified research unless the requirements of section

41(d) and this section are met for the research activities relating to the product

without taking into account the research

activities relating to development of the

manufacturing or other commercial production process.

(2) Shrinking-back rule. The requirements of section 41(d) and paragraph (a)

of this section are to be applied first at the

level of the discrete business component

to be held for sale, lease or license, or

used by the taxpayer in a trade or business

of the taxpayer. If all aspects of the requirements are not met at the first level,

the requirements are to be applied at the

next most significant subset of elements

of the business component. The shrinking-back of the applicable business component continues until a subset of elements of the business component satisfies

the requirements of section 41(d) and

paragraph (a) of this section (treating that

subset of elements as a business component) or the most basic element fails to

satisfy the requirements.

(3) Illustration. The following example illustrates the application of this paragraph (b):

Example. X, a motorcycle engine builder, develops a new carburetor for use in a motorcycle engine.

X also modifies an existing engine design for use

with the new carburetor. Under the shrinking-back

rule, the requirements of section 41(d)(1) and paragraph (a) of this section are applied first to the engine. If the modifications to the engine when

viewed as a whole, including the development of the

new carburetor, do not satisfy the requirements of

section 41(d)(1) and paragraph (a) of this section,

those requirements are applied to the next most significant subset of elements of the business component. For purposes of this example, it is assumed

that the new carburetor is the next most significant

subset of elements of the business component. The

research activities in developing the new carburetor

may constitute qualified research within the meaning of section 41(d)(1) and paragraph (a) of this section.

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Qualified research does not include any

activity described in sections 41(d)(3)(B)

and (4), this paragraph (c), and paragraph

(e) of this section.

(2) Research after commercial production—(i) In general. Activities conducted

after the beginning of commercial production of a business component are not

qualified research. Activities are conducted after the beginning of commercial

production of a business component if

such activities are conducted after the

component is developed to the point

where it is ready for commercial sale or

use, or meets the basic functional and

economic requirements of the taxpayer

for the component’s sale or use.

(ii) Certain additional activities related

to the business component. The following activities are deemed to occur after

the beginning of commercial production

of a business component—

(A) Preproduction planning for a finished business component;

(B) Tooling-up for production;

(D) Trouble shooting involving detecting faults in production equipment or

processes;

(E) Accumulating data relating to production processes; and

(F) Debugging or correcting flaws in a

business component.

(iii) Activities related to production

process or technique. In cases involving

development of both a product and a manufacturing or other commercial production process for the product, the exclusion

described in section 41(d)(4)(A) and paragraphs (c)(2)(i) and (ii) of this section applies separately for the activities relating

to the development of the product and the

activities relating to the development of

the process. For example, even after a

product meets the taxpayer’s basic functional and economic requirements, activities relating to the development of the

manufacturing process still may constitute qualified research, provided that the

development of the process itself separately satisfies the requirements of section

41(d) and this section, and the activities

are conducted before the process meets

the taxpayer’s basic functional and economic requirements or is ready for commercial use.

December 14, 1998

(3) Adaptation of existing business

components. Activities relating to adapting an existing business component to a

particular customer’s requirement or need

are not qualified research. This exclusion

does not apply merely because a business

component is intended for a specific customer.

(4) Duplication of existing business

component. Activities relating to reproducing an existing business component

(in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed

specifications, or publicly available information about the business component are

not qualified research. This exclusion

does not apply merely because the taxpayer inspects an existing business component in the course of developing its

own business component.

(5) Surveys, studies, research relating

to management functions, etc. Qualified

research does not include activities relating to—

(i) Efficiency surveys;

(ii) Management functions (except for

the direct supervision of qualified research as defined in §1.41–2(c)(2)) or

techniques, including such items as

preparation of financial data and analysis,

development of employee training programs and management organization

plans, and management-based changes in

production processes (such as rearranging

work stations on an assembly line);

(iii) Market research, testing, or development (including advertising or promotions);

(iv) Routine data collections; or

(v) Routine or ordinary testing or inspections for quality control.

(6) Internal-use computer software.

[Reserved].1

(7) Activities outside the United

States—(i) In general. Research conducted outside the United States, as defined in section 7701(a)(9), does not constitute qualified research.

(ii) Apportionment of in-house research

expenses. In-house research expenses

paid or incurred for qualified services per1Section 1.41–4(e), proposed on January 2, 1997

(62 F.R. 83), including any revisions to that proposed rule will be incorporated as this paragraph

(c)(6) in the final rule.

formed both in the United States and outside the United States must be apportioned between the services performed in

the United States and the services performed outside the United States. Only

those in-house research expenses apportioned to the services performed within

the United States are eligible to be treated

as qualified research expenses, unless the

in-house research expenses are wages

and the 80 percent rule of §1.41–2(d)(2)

applies.

(iii) Apportionment of contract research expenses. If contract research is

performed partly in the United States and

partly outside the United States, only 65

percent (or 75 percent in the case of

amounts paid to qualified research consortia) of the portion of the contract

amount that is attributable to the research

activity performed in the United States

may qualify as a contract research expense (even if 80 percent or more of the

contract amount is for research performed

in the United States).

(8) Research in the social sciences, etc.

Qualified research does not include research in the social sciences (including

economics, business management, and

behavioral sciences), arts, or humanities.

(9) Research funded by any grant, contract, or otherwise. Qualified research

does not include any research to the extent funded by any grant, contract, or otherwise by another person (or governmental entity). To determine the extent to

which research is so funded, §1.41-4A(d)

applies.

(10) Illustrations. The following examples illustrate provisions contained in

paragraphs (c)(1) through (9) of this section. No inference should be drawn from

these examples concerning the application of section 41(d)(1) and paragraph (a)

of this section to these facts:

Example 1. (i) Facts. X, a pharmaceutical company, performs additional clinical tests on one of its

products after that product has been approved for a

specific therapeutic use by the FDA and is ready for

commercial production and sale. The clinical tests

study the drug’s long-term morbidity and mortality

profile, and are undertaken to develop information

to use in the marketing materials for the drug.

(ii) Conclusion. Because the additional tests are

performed after the drug is ready for commercial

sale, X’s activities in connection with the tests are

excluded from the definition of qualified research

under section 41(d)(4)(A) and paragraph (c)(2) of

this section.

1998–50 I.R.B.

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Page 19

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

in Example 1, except that, while studying the longterm morbidity and mortality profile of the drug

product, X discovers that the product may be useful

in treating a different medical condition. X begins

new clinical studies to establish the compound’s

new potential therapeutic use.

(ii) Conclusion. Because the new clinical studies

are performed to establish a new therapeutic use of

the drug product, the additional clinical studies performed to establish the new therapeutic use are not

excluded from the definition of qualified research

under section 41(d)(4)(A) and paragraph (c)(2) of

this section.

Example 3. (i) Facts. X, a domestic corporation

that manufactures paper, develops and markets a

new type of paper containing a different chemical

composition than the paper generally available for

commercial sale. Prior to manufacturing the paper,

X conducts preproduction planning for the finished

paper product, tools up for production, conducts trial

production runs, engages in trouble shooting involving detecting problems in production equipment, accumulates production process data, and debugs the

product.

(ii) Conclusion. X’s activities of preproduction

planning, tooling up for production, trial production

runs, trouble shooting, accumulation of production

process data, and product debugging do not constitute qualified research with respect to development

of the paper product because the activities are

deemed to occur after the beginning of commercial

production of the product. Whether any activities

engaged in by X to develop a process for manufacturing the paper constitute qualified research depends on whether the development of the process itself separately satisfies the requirements of section

41(d) and this section, and whether the process

meets the taxpayer’s basic functional and economic

requirements or is ready for commercial use.

Example 4. (i) Facts. X, a computer software

development firm, owns all substantial rights in a

general ledger accounting software core program

that X markets and licenses to customers. After entering into a contractual agreement with a customer,

X incurs expenditures in modifying the core software program to adapt the program to the customer’s requirement or need.

(ii) Conclusion. Because X’s activities represent

activities to modify an existing software program to

adapt the program to a particular customer’s requirement, X’s activities are excluded from the definition

of qualified research under section 41(d)(4)(B) and

paragraph (c)(3) of this section.

Example 5. (i) Facts. An existing gasoline additive is manufactured by Y using three ingredients, A,

B, and C. X seeks to develop and manufacture its

own gasoline additive that appears and functions in

a manner similar to Y’s additive. To develop its own

additive, X first inspects the composition of Y’s additive, and uses knowledge gained from the inspection to reproduce A and B in the laboratory. Any differences between ingredients A and B that are used

in Y’s additive and those reproduced by X are insignificant and are not material to the viability, effectiveness, or cost of A and B. X desires to use

with A and B an ingredient that has a materially

lower cost than ingredient C. Accordingly, X engages in a process of experimentation to discover

potential alternative formulations of the additive

1998–50 I.R.B.

(i.e., the development and use of various ingredients

other than C to use with A and B).

(ii) Conclusion. X’s activities in analyzing and

reproducing ingredients A and B involve duplication

of existing business components and are excluded

from qualified research under section 41(d)(4)(C)

and paragraph (c)(4) of this section. X’s experimentation activities to discover potential alternative formulations of the additive do not involve duplication

of an existing business component and are not excluded from qualified research under section

41(d)(4)(C) and paragraph (c)(4) of this section.

Example 6. (i) Facts. X, an appliance manufacturer, rearranges employee work stations in its manufacturing assembly line and develops a new employee training program to train employees for the

rearranged work stations.

(ii) Conclusion. X’s activities associated with rearranging the work stations and developing a new

employee training program represent activities related to management functions or techniques and are

excluded from qualified research under section

41(d)(4)(D) and paragraph (c)(5) of this section.

Example 7. (i) Facts. X, an insurance company,

develops a new life insurance product. In the course

of developing the product, X engages in research

with respect to the effect of pricing and tax consequences on demand for the product, the expected

volatility of interest rates, and the expected mortality

rates (based on published data and prior insurance

claims).

(ii) Conclusion. X’s activities related to the new

product represent research in the social sciences, and

are thus excluded from qualified research under section 41(d)(4)(G) and paragraph (c)(7) of this section.

(d) Documentation. See section 6001

and the regulations thereunder for the

recordkeeping requirements that must be

satisfied.

§1.41–5 [Redesignated as §1.41–4A,

and Amended]

Par. 11. Section 1.41–5 is redesignated

as §1.41–4A, and the last sentence of

paragraph (d)(1) is amended by removing

the language “§1.41–8(e)” and adding

“§1.41–6(e)” in its place.

§1.41–6 [Redesignated as §1.41–5 and

Amended]

Par. 12. Section 1.41–6 is redesignated

as §1.41–5 and the section heading is

amended by removing the language “December 31, 1985” and adding “December

31, 1986” in its place.

§1.41–7 [Redesignated as §1.41–5A,

and Amended]

Par. 13. Section 1.41–7 is redesignated

as §1.41–5A, and amended as follows:

1. The section heading is amended by

removing the language “January 1, 1986”

and adding “January 1, 1987” in its place.

2. Paragraph (e)(2) is amended by removing the language “§1.41–5(c)” and

adding “1.41–4A(c)” in its place.

§1.41–8 [Redesignated as §1.41–6, and

Amended]

Par. 14. Section 1.41–8 is redesignated

as §1.41–6, and the last sentence of paragraph (c) is amended by removing the

language “§1.41–3, except that §1.41–

3(c)(2)” and adding “§1.41–3A, except

that §1.41–3A(c)(2)” in its place.

§1.41–9 [Redesignated as §1.41–7]

Par. 15. Section 1.41–9 is redesignated

as §1.41–7.

Par. 16. New §1.41–8 is added to read

as follows:

§1.41–8 Special rules for taxable years

ending on or after the date final

regulations are published in the Federal

(a) Alternative incremental credit. At

the election of the taxpayer, the credit determined under section 41(a)(1) equals

the amount determined under section

41(c)(4).

(b) Election—(1) In general. A taxpayer may elect to apply the provisions of

the alternative incremental credit in section 41(c)(4) for any taxable year of the

taxpayer beginning after June 30, 1996.

If a taxpayer makes an election under section 41(c)(4), the election applies to the

taxable year for which made and all subsequent taxable years.

(2) Time and manner of election. An

election under section 41(c)(4) is made by

completing the portion of Form 6765,

“Credit for Increasing Research Activities,” relating to the election of the alternative incremental credit, and attaching

the completed form to the taxpayer’s

timely filed original return (including extensions) for the taxable year to which the

election applies.

(3) Revocation. An election under this

section may not be revoked except with

the consent of the Commissioner. A taxpayer must attach the Commissioner’s

consent to revoke an election under section 41(c)(4) to the taxpayer’s timely filed

original return (including extensions) for

the taxable year of the revocation.

Par. 17. Section 1.41–0A is added

under the new undesignated centerhead-

December 14, 1998

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Page 20

ing “RESEARCH CREDIT—FOR TAXABLE YEARS BEGINNING BEFORE

JANUARY 1, 1990” to read as follows:

§1.41–0A Table of contents.

This section lists the paragraphs contained in §§1.41–0A, 1.41–3A, 1.41–4A

and 1.41–5A.

§1.41–0A Table of contents.

§1.41–3A Base period research

expenses.

(a) Number of years in base period.

(b) New taxpayers.

expenses.

(d) Special rules for short taxable years.

(1) Short determination year.

(2) Short base period year.

(3) Years overlapping the effective dates

of section 41 (section 44F).

(i) Determination years.

(ii) Base period years.

(4) Number of months in a short taxable

year.

(e) Examples.

§1.41–4A Qualified research for taxable

years beginning before January 1, 1986.

(a)

(b)

(1)

(2)

(c)

(d)

General rule.

Activities outside the United States.

In-house research.

Contract research.

Social sciences or humanities.

Research funded by any grant, contract, or otherwise.

(1) In general.

(2) Research in which taxpayer retains

no rights.

(3) Research in which the taxpayer retains substantial rights.

(i) In general.

(ii) Pro rata allocation.

(iii) Project-by-project determination.

(4) Independent research and development under the Federal Acquisition

Regulations System and similar provisions.

(5) Funding determinable only in subsequent taxable year.

(6) Examples.

§1.41–5A Basic research for taxable

years beginning before January 1, 1987.

(a) In general.

(b) Trade or business requirement.

December 14, 1998

(c)

(1)

(2)

(d)

(1)

(2)

(i)

(ii)

(3)

(e)

(1)

(2)

(f)

Prepaid amounts.

In general.

Transfers of property.

Written research agreement.

In general.

Agreement between a corporation

and a qualified organization after

June 30, 1983.

In general.

Transfers of property.

Agreement between a qualified fund

and a qualified educational organization after June 30, 1983.

Exclusions.

Research conducted outside the

United States.

Research in the social sciences or

humanities.

Procedure for making an election to

be treated as a qualified fund.

§1.218–0 [Removed]

Par. 18. Section 1.218–0 is removed.

§1.482–7 [Amended]

Par. 19. In §1.482–7, the sixth sentence

of paragraph (h)(1) is amended by removing the language “§1.41–8(e)” and adding

“§1.41–6(e)” in its place.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on

December 1, 1998, 8:45 a.m., and published in the

issue of the Federal Register for December 2, 1998,

63 F.R. 66503)

Classification of Certain

Transactions Involving Computer

Programs; Correction

Announcement 98–109

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document contains a

correction to Treasury Decision 8785

(1998–42 I.R.B. 5), which was published

in the Federal Register on Friday, October 2, 1998 (63 F.R. 52971) relating to the

tax treatment of certain transactions involving the transfer of computer programs.

DATES: This correction is effective October 2, 1998.

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

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this correction are under section

861 of the Internal Revenue Code.

Need for Correction

As published, T.D. 8785 contains errors

which may prove to be misleading and are

in need of clarification.

Correction of Publication

Accordingly, the publication of the

final regulations (T.D. 8785), which were

the subject of F.R. Doc. 98–26475, is corrected as follows:

1. On page 52971, column 1, in the

preamble under the caption heading

“FOR FURTHER INFORMATION

CONTACT”, line 1, the language “Anne

Shelburne, (202) 622-3880 (not a” is corrected to read “Anne Shelburne, (202)

874-1305 (not a”.

2. On page 52975, column 3, in the

preamble under the paragraph heading

“8. Services and Know-How”, second

paragraph, lines 21 through 25, the language “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” is corrected to

read “secret protection. These additional”.

§1.861–18 [Corrected]

3. On page 52982, column 1, §1.861–

18(i)(4) Example 1, line three from the

bottom of the paragraph, the language “A

is not required to change from its accrual”

is corrected to read “A is not required to

change from its”.

4. On page 52982, column 2, §1.861–

18(i)(4) Example 2, line five from the bottom of the paragraph, the language “A is

not required to change from its accrual” is

corrected to read “A is not required to

change from its”.

1998–50 I.R.B.

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Page 21

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Substantiation of Business

Expenses—Use of Mileage

Allowances to Substantiate

Automobile Expenses;

Correction

Announcement 98–110

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Correction to temporary regulations.

SUMMARY: This document contains a

correction to Treasury Decision 8784

(1998–42 I.R.B. 4), which was published

in the Federal Register on Thursday, October 1, 1998 (63 F.R. 52600) relating to

the use of mileage allowances to substantiate automobile business expenses.

DATES: This correction is effective October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Donna Crisalli, (202) 622-4920

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The temporary regulations that are the

subject of this correction are under section 274 of the Internal Revenue Code.

Need for Correction

As published, T.D. 8784 contains an

error which may prove to be misleading

and is in need of clarification.

Correction of Publication

Accordingly, the publication of the

temporary regulations (T.D. 8784), which

were the subject of F.R. Doc. 98–26226,

is corrected as follows:

§1.274(d)–1T [Corrected]

On page 52601, column 1, §1.274(d)–

1T(a)(1) and (2), the last line of the paragraph, the language “guidance, see

§1.274(d)–1(a)(1).” is corrected to read

1998–50 I.R.B.

“guidance, see §1.274(d)–1(a)(1) and

(2).”.

Cynthia E. Grigsby,

Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Foundations Status of Certain

Organizations

Announcement 98–111

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices

under section 508(b) of the Code. This

listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following

organizations (which have been treated as

organizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

G & H Visual and Performing Arts

Educational Center, St. Louis, MO

G R E C O M, Richmond, VA

Gainesville Area Aids Project Inc.,

Gainesville, FL

Gainesville Chess Club Inc., Gainesville,

Gainesville Pride Arts Inc., Gainesville,

Galen Enterprises Inc., Suffolk, VA

Galena Park Police Auxiliary Association

Inc., Galena Park, TX

Galion Area Betterment Commission

Inc., Galion, OH

Gallegos Lane Residents Association,

Santa Fe, NM

Galveston County Employers for Quality

Health Care, Texas City, TX

Gamma Lambda Educational Foundation

Inc., Carmel, IN

Gang Alternatives Partnership Inc.,

Sparks, NV

Gardnermontachusett Childrens Museum

Inc., Gardner, MA

Garrison Childrens Education Fund,

Garrison, NY

Gay and Lesbian Community Center of

Greater Cincinnati Inc., Cincinnati, OH

Gaza American Economic Development

Foundation, Columbus, OH

Geared for Life Inc., Birmingham, MI

Geary Foundation Inc., Geary, OK

Generations Adult Day Care Inc.,

St. Louis, MO

Genesee Region Home Care Association

Inc., Rochester, NY

Genesis Center, Manteca, CA

Genesis Housing Corporation, Baltimore,

Genesis Rehabilitation Inc., Pittsburgh,

George Aiken Ministries Inc.,

Okeechobee, FL

Georgia Equine Rescue League Ltd.,

Jersey, GA

Georgia Somali Community Inc., Stone

Mountain, GA

Gerald M. Bowers Study Club in

Periodontology, Inc., Westminster, MD

Gerald Walker Memorial Scholarship

Foundation Inc., Garland, TX

Gift of Life Inc., Landover Hills, MD

Ginger Thomas Broadcasting Corp.,

St. Thomas, VI

Girls and Boys Against Gangs,

San Francisco, CA

Gita in Thought and Action, Palos

Heights, IL

Give Them a Second Chance Inc.,

Plantation, FL

Glendale Educational Opportunity Inc.,

Glendale, CO

Global Community Inc., New York, NY

Global Concern Inc., Lenexa, KS

Global Ministry Resources, Portland, OR

Global Reconstruction Organization for

Kids, Spokane, WA

Global Share, Prescott, AZ

Global Support Connection Inc., New

York, NY

Global Youth Resources Organization

Inc., Burnsville, MN

Globallove Inc., a Colorado Non-Profit

Corporation, Denver, CO

Globe-Link Productions Inc., Miami, FL

Glorias Teensy Weensy Learning Center,

Ferriday, LA

Gloucester Pride Stride Committee Inc.,

Gloucester, MA

God is Moving Inc., Houston, TX

Gods Christian Missionary Service Inc.,

Rochester, NY

Gods Way for Today Inc., Denver, CO

December 14, 1998

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Page 22

Golden Child Care, Stafford, TX

Golf for Childrens Charities Inc.,

Newtown, PA

Good News Gospel Missions Inc., Port

St. Lucie, FL

Good Ole Boys, Cincinnati, OH

Good Samaritan Housing Inc., Balm, FL

Good Samaritan Medical Clinic Inc.,

Roswell, GA

Goodnow Library Foundation Inc.,

Boston, MA

Gospel Evangelistic Ministries,

St. Joseph, MO

Gospel Extended Ministries, Broken

Arrow, OK

Gospel of Deliverance Christian Group

Home, Sonora, CA

Gospel Wings International Inc.,

Okanogan, WA

Government and Community Together

for Legal Lives Inc., Brooklyn, NY

Grace Restoration Ministries Inc.,

Thomasville, GA

Grand Ledge Swim Club Inc., Eagle, MI

Grand Ledge Wrestling Club Inc.,

Lansing, MI

Grand Prairie Rape Crisis Coalition,

Grand Prairie, TX

Granite State All-State Shoot Out,

Manchester, NH

Grant Day Care Corp., Overland Park,

Grant School Community Foundation,

San Diego, CA

Grants Pass Childrens Center, Grants

Pass, OR

Grassroots Tennis of New Haven Inc.,

New Haven, CT

December 14, 1998

Grateful Daycare Team Parenting and

Learning Center, Pickens, MS

Gray Foundation, Santa Rosa, CA

Grayson County Fair Association,

Sherman, TX

Great Commission Comunications of

North Iowa Inc., Mason City, IA

Great Plains Football League Inc.,

Wichita, KS

Great Pond Mountain Conservation

Trust, Orland, ME

Great River Road Arts Coalition

Corporation, Prescott, WI

Great Things Incorporated Foundation,

St. Louis, MO

Greater Brimingham Fair Housing Center

Inc., Brimingham, AL

Greater Boston Athletic Association Inc.,

Quincy, MA

Greater Cincinnati Earth Angel Cruise

Foundation, Cincinnati, OH

Greater Detroit Islamic Alliance,

Southfield, MI

Greater Loup Valley Activities Inc., Ord,

Greater Provo Open, Provo, UT

Greater Resources and Aids Awareness

Community, Kansas City, MO

Greater Rochester Christian Gathering

Inc., Rochester, NY

Greater San Diego Chamber of

Commerce Foundation, San Diego, CA

Greater Shelby County Ministerial

Coalition Inc., Shelbyville, KY

Greater Shreveport Human Relations

Commission, Shreveport, LA

Greater Tulsa Luis Palau Crusades Inc.,

Tulsa, OK

Greater Wauzeka Enterprise Association

Incorporated, Wauzeka, WI

Green Bay Swim Club Inc., Green Bay,

Green Futures Inc., Assonet, MA

Green Hill K-9 Search & Rescue Inc.,

Enosburg Falls, VT

Greene & Beyond Inc., South Bend, IN

Greene Youth Athletic Assn. Inc., Greene,

Greenville Area Alliance for the Mentally

Ill, Greenville, AL

Gretna Community Youth Association

Inc., Gretna, NE

Greyhound Rescue Society Inc., Sugar

Loaf, NY

Grid Ink CA Nonprofit Corporation,

Pittsburgh, PA

Groton Mystic Falcons Youth Football

League Inc., Groton, CT

If an organization listed above submits

information that warrants the renewal of

its classification as a public charity or as a

private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors

and contributors may thereafter rely upon

such ruling or determination letter as provided in section 1.509(a)–7 of the Income

Tax Regulations. It is not the practice of

the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.

1998–50 I.R.B.

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Page 23

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.

1998–50 I.R.B.

December 14, 1998

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Page 24

Numerical Finding List1

Notices—Continued

Revenue Rulings—Continued

Bulletins 1998–29 through 49

98–50, 1998–44 I.R.B. 10

98–51, 1998–44 I.R.B. 11

98–52, 1998–46 I.R.B. 16

98–53, 1998–46 I.R.B. 24

98–54, 1998–46 I.R.B. 25

98–55, 1998–46 I.R.B. 26

98–56, 1998–47 I.R.B. 9

98–57, 1998–47 I.R.B. 9

98–58, 1998–49 I.R.B. 13

98–59, 1998–49 I.R.B. 16

98–60, 1998–49 I.R.B. 16

98–39, 1998–33 I.R.B. 4

98–40, 1998–33 I.R.B. 4

98–41, 1998–35 I.R.B. 6

98–42, 1998–35 I.R.B. 5

98–43, 1998–36 I.R.B. 9

98–44, 1998–37 I.R.B. 4

98–45, 1998–38 I.R.B. 4

98–46, 1998–39 I.R.B. 10

98–47, 1998–39 I.R.B. 4

98–48, 1998–39 I.R.B. 6

98–49, 1998–40 I.R.B. 4

98–50, 1998–40 I.R.B. 7

98–51, 1998–43 I.R.B. 4

98–52, 1998–45 I.R.B. 4

98–53, 1998–46 I.R.B. 12

98–54, 1998–46 I.R.B. 14

98–55, 1998–47 I.R.B. 5

98–56, 1998–47 I.R.B. 5

98–57, 1998–49 I.R.B. 4

Announcements:

98–62, 1998–29 I.R.B. 13

98–68, 1998–29 I.R.B. 14

98–69, 1998–30 I.R.B. 16

98–70, 1998–30 I.R.B. 17

98–71, 1998–30 I.R.B. 17

98–72, 1998–31 I.R.B. 14

98–73, 1998–31 I.R.B. 14

98–74, 1998–31 I.R.B. 15

98–75, 1998–31 I.R.B. 15

98–76, 1998–32 I.R.B. 64

98–77, 1998–34 I.R.B. 30

98–78, 1998–34 I.R.B. 30

98–79, 1998–34 I.R.B. 31

98–80, 1998–34 I.R.B. 32

98–81, 1998–36 I.R.B. 35

98–82, 1998–35 I.R.B. 17

98–83, 1998–36 I.R.B. 36

98–84, 1998–38 I.R.B. 30

98–85, 1998–38 I.R.B. 30

98–86, 1998–38 I.R.B. 31

98–87, 1998–40 I.R.B. 11

98–88, 1998–41 I.R.B. 14

98–89, 1998–40 I.R.B. 11

98–90, 1998–42 I.R.B. 22

98–91, 1998–40 I.R.B. 12

98–92, 1998–41 I.R.B. 15

98–93, 1998–43 I.R.B. 10

98–94, 1998–43 I.R.B. 32

98–95, 1998–44 I.R.B. 13

98–96, 1998–44 I.R.B. 18

98–97, 1998–44 I.R.B. 18

98–98, 1998–44 I.R.B. 18

98–99, 1998–46 I.R.B. 34

98–100, 1998–46 I.R.B. 42

98–101, 1998–45 I.R.B. 27

98–102, 1998–45 I.R.B. 28

98–103, 1998–47 I.R.B. 12

98–104, 1998–47 I.R.B. 13

98–105, 1998–49 I.R.B. 21

98–106, 1998–48 I.R.B. 10

98–107, 1998–48 I.R.B. 10

98–108, 1998–48 I.R.B. 12

Court Decisions:

2063, 1998–49 I.R.B. 6

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–109708–97, 1998–45 I.R.B. 29

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

REG–122488–97, 1998–42 I.R.B. 19

REG–101363–98, 1998–40 I.R.B. 10

REG–102023–98, 1998–48 I.R.B. 6

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

Revenue Procedures:

98–40, 1998–32 I.R.B. 6

98–41, 1998–32 I.R.B. 7

98–42, 1998–28 I.R.B. 9

98–43, 1998–29 I.R.B. 8

98–44, 1998–32 I.R.B. 11

98–45, 1998–34 I.R.B. 8

98–46, 1998–36 I.R.B. 21

98–47, 1998–37 I.R.B. 8

98–48, 1998–38 I.R.B. 7

98–49, 1998–37 I.R.B. 9

98–50, 1998–38 I.R.B. 8

98–51, 1998–38 I.R.B. 20

98–52, 1998–37 I.R.B. 12

98–53, 1998–40 I.R.B. 9

98–54, 1998–43 I.R.B. 7

98–55, 1998–46 I.R.B. 27

98–56, 1998–46 I.R.B. 33

98–57, 1998–48 I.R.B. 5

98–58, 1998–49 I.R.B. 19

Tax Conventions:

1998–43 I.R.B. 6

Treasury Decisions:

8771, 1998–29 I.R.B. 6

8772, 1998–31 I.R.B. 8

8773, 1998–29 I.R.B. 4

8774, 1998–30 I.R.B. 5

8775, 1998–31 I.R.B. 4

8776, 1998–33 I.R.B. 6

8777, 1998–34 I.R.B. 4

8778, 1998–36 I.R.B. 4

8779, 1998–36 I.R.B. 11

8780, 1998–39 I.R.B. 14

8781, 1998–40 I.R.B. 4

8782, 1998–41 I.R.B. 5

8783, 1998–41 I.R.B. 4

8784, 1998–42 I.R.B. 4

8785, 1998–42 I.R.B. 5

8786, 1998–44 I.R.B. 4

8787, 1998–46 I.R.B. 5

8788, 1998–45 I.R.B. 6

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

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.

December 14, 1998

1998–50 I.R.B.

IRB 1998-50

12/9/98 3:47 PM

Page 25

Finding List of Current Action on

Previously Published Items1

Bulletins 1998–29 through 49

*Denotes entry since last publication

Notices:

87–13

Modified by

98–49, 1998–38 I.R.B. 5

87–16

Modified by

98–49, 1998–38 I.R.B. 5

Revenue Procedures:

83–58

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–17

Clarified, modified, and superseded by

98–54, 1998–43 I.R.B. 7

94–23

Amplified and superseded by

98–55, 1998–46 I.R.B. 27

97–40

Amplified and superseded by

98–55, 1998–46 I.R.B. 27

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

Revenue Rulings—Continued

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

76–562

Obsoleted by

98–37, 1998–32 I.R.B. 5

77–214

Obsoleted by

98–37, 1998–32 I.R.B. 5

79–106

Obsoleted by

98–37, 1998–32 I.R.B. 5

83–113

Obsoleted by

98–37, 1998–32 I.R.B. 5

85–143

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

93–81

Obsoleted by

98–37, 1998–32 I.R.B. 5

88–79

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–4

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–5

Obsoleted by

98–37, 1998–32 I.R.B. 5

70–225

Obsoleted by

98–44, 1998–37 I.R.B. 4

93–6

Obsoleted by

98–37, 1998–32 I.R.B. 5

71–277

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–30

Obsoleted by

98–37, 1998–32 I.R.B. 5

71–434

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–38

Obsoleted by

98–37, 1998–32 I.R.B. 5

71–574

Obsoleted by

98–37, 1998–32 I.R.B. 5

93–49

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

93–50

Obsoleted by

98–37, 1998–32 I.R.B. 5

3–91

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

94–5

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–6

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–30

Obsoleted by

98–37, 1998–32 I.R.B. 5

94–51

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

95–9

Obsoleted by

98–37, 1998–32 I.R.B. 5

97–37

Obsoleted by

98–39, 1998–33 I.R.B. 4

93–53

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.

1998–50 I.R.B.

December 14, 1998

IRB 1998-50

12/9/98 3:47 PM

Page 26

Notes

December 14, 1998

1998–50 I.R.B.

IRB 1998-50

12/9/98 3:47 PM

Page 27

IRB 1998-50

12/9/98 3:47 PM

Page 28

INTERNAL REVENUE BULLETIN

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