Bulletin No. 1998–52

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December 28, 1998

Internal Revenue

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HIGHLIGHTS

OF THIS ISSUE

relied upon as authoritative interpretations.

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

INCOME TAX

Rev. Rul. 98–58, page 6.

Section 1274A inflation-adjusted numbers for 1999.

This ruling provides the dollar amounts, increased by the

1999 inflation-adjustment, for section 1274A of the Code.

Rev. Rul. 97–56 supplemented and superseded.

Rev. Rul. 98–59, page 8.

CPI adjustment for below-market loans for 1999. The

amount that section 7872(g) of the Code permits a taxpayer

to lend to a qualified continuing care facility without incurring

imputed interest is published and adjusted for inflation for

years 1987 – 1999. Rev. Rul. 97–57 supplemented and superseded.

EMPLOYEE PLANS

Notice 98–64, page 10.

Weighted average interest rate update. The weighted

average interest rate for December 1998 and the resulting

permissible range of interest rates used to calculate current

liability for purposes of the full funding limitation of section

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

EXEMPT ORGANIZATIONS

Announcement 98–114, page 88.

A list is provided of organizations that no longer qualify as

organizations to which contributions are deductible under

section 170 of the Code.

EMPLOYMENT TAX

Page 87.

1999 social security contribution and benefit base;

domestic employee coverage threshold. The Commissioner of the Social Security Administration has announced

the OASDI contribution and benefit base paid in 1999, the

self-employment income earned in taxable years beginning

in 1999, and the domestic employee coverage amount for

1999.

ADMINISTRATIVE

Rev. Proc. 98–61, page 18.

Cost-of-living adjustments for 1999. The Service provides cost-of-living adjustments for the tax rate tables for individuals, estates, and trusts, the standard deduction

amounts, the personal exemption, and several other items

that use the adjustment method provided for the tax rate tables. The Service also provides the adjustment for eligible

long-term care premiums and another item that uses the adjustment method provided for eligible long-term care premiums.

Rev. Proc. 98–62, page 23.

Penalties; substantial understatement. Guidance is provided concerning when information shown on a return in accordance with the applicable forms and instructions will be

adequate disclosure for purposes of reducing an understatement of income tax under section 6662(d) of the Code.

Rev. Proc. 98–63, page 25.

Option standard mileage rates. This procedure announces 31 cents as the optional rate for deducting or accounting for expenses for business use of an automobile,

14 cents as the optional rate for deducting or accounting for

use of an automobile as a charitable contribution, and 10

cents as the optional rate for deducting or accounting for

use of an automobile as a medical or moving expense for

1999. It provides rules for substantiating the deductible expenses of using an automobile for business, moving, medical, or charitable purposes. Rev. Proc. 97–58 superseded.

Finding Lists begin on page 90.

Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 88.

Department of the Treasury

Internal Revenue Service

(Continued on page 4)

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.

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.

HIGHLIGHTS

OF THIS ISSUE—Continued

ADMINISTRATIVE—Continued

small business taxpayers to obtain Advance Pricing Agreements are finalized. Rev. Proc. 96–53 modified.

Rev. Proc. 98–64, page 32.

Per diem allowances. This procedure provides optional

rules for deeming substantiated the amount of certain reimbursed traveling expenses of an employee as well as for determining the amount of deductible meals while traveling

away from home. Rev. Proc. 97–59 superseded.

Notice 98–66, page 17.

Qualified Funeral Trusts. This notice provides information

and guidance on amendments make by the Internal Revenue

Service Restructuring and Reform Act of 1998 to the Qualified Funeral Trust (QFT) provisions of section 685 of the

Code.

Rev. Proc. 98–65, page 40.

Substitute printed, computer-prepared, and computer-generated tax forms and schedules for 1998.

Requirements are set forth for privately designed and

printed federal tax forms and conditions under which the

Service will accept computer-prepared and computer-generated tax forms and schedules. Rev. Proc. 97–54 superseded.

Notice 98–67, page 18.

Early closing of courier’s desk. Guidance is provided for

when the Courier’s Desk at the national office of the Service

closes early on the last day prescribed for filing an application to change an accounting method or accounting period

with the national office.

Notice 98–65, page 10.

Advance Pricing Agreements. Special procedures for

December 28, 1998

1998–52 I.R.B.

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

Section 1.—Tax Imposed

26 CFR 1.1–1: Income tax on individuals.

The Service provides adjusted tax tables for individuals, trusts, and estates for taxable years beginning in 1999 to reflect changes in the cost of living.

Also adjusted is the amount of certain reductions allowed against the unearned income of minor children in computing the “kiddie tax,” either on the

child’s return or, in the alternative, on a parent’s return. The amounts used to determine whether a parent may elect to report the “kiddie tax” on the parent’s return are also adjusted. See Rev. Proc. 98–61,

page 18.

Section 32.—Earned Income

26 CFR 1.32–2: Earned income credit for taxable

years beginning after December 31, 1978.

The Service provides inflation adjustments to the

limitations on the earned income tax credit for taxable years beginning in 1999. See Rev. Proc. 98–61,

page 18.

Section 59.—Other Definitions

and Special Rules for the

Alternative Minimum Tax

The Service provides an inflation adjustment to

the exemption amount used in computing the alternative minimum tax for a minor child subject to the

“kiddie tax” for taxable years beginning in 1999.

See Rev. Proc. 98–61, page 18.

Section 62.—Adjusted Gross

Income Defined

26 CFR 1.62–2: Reimbursements and other expense

allowance arrangements.

Rules under which a reimbursement or other expense allowance arrangement for the cost of operating an automobile for business purposes will satisfy

the requirements of section 62(c) of the Code as to

business connection, substantiation, and returning

amounts in excess of expenses. See Rev. Proc.

98–63, page 25.

Rules are set forth under which a reimbursement

or other expense allowance arrangement for the cost

of lodging, meal, and incidental expenses or meal

and incidental expenses incurred by an employee

while traveling away from home will satisfy the requirements of § 62(c) of the Code as to substantiation of the amount of the expenses. See Rev. Proc.

98–64, page 32.

26 CFR 1.62–2T: Reimbursements and other

expense allowance arrangements (temporary).

Rules under which a reimbursement or other expense allowance arrangement for the cost of operat-

1998–52 I.R.B.

ing an automobile for business purposes will satisfy

the requirements of section 62(c) of the Code as to

business connection, substantiation, and returning

amounts in excess of expenses. See Rev. Proc.

98–63, page 25.

Rules are set forth under which a reimbursement

or other expense allowance arrangement for the cost

of lodging, meal, and incidental expenses or meal

and incidental expenses incurred by an employee

while traveling away from home will satisfy the requirements of § 62(c) of the Code as to Substantiation of the amount of the expenses. See Rev. Proc.

98–64, page 32.

Section 63.—Taxable Income

Defined

Section 162.—Trade or Business

Expenses

26 CFR 1.162–17: Reporting and substantiation of

certain business expenses of employees.

Rules are set forth for substantiating the amount

of a deduction or an expense for business use of an

automobile that most nearly represents current costs.

See Rev. Proc. 98–63, page 25.

Rules are set forth for substantiating the amount

of a deduction or an expense for lodging, meal, and

incidental expenses or meal and incidental expenses

incurred while traveling away from home that most

nearly represents current costs. See Rev. Proc.

98–64, page 32.

26 CFR 1.63–1: Change of treatment with respect

to the zero bracket amount and itemized deductions.

Section 170.—Charitable, Etc.,

Contributions and Gifts

The Service provides inflation adjustments to the

standard deduction amounts (including the limitation in the case of certain dependents, and the additional standard deduction for the aged or blind) for

taxable years beginning in 1999. See Rev. Proc.

98–61, page 18.

26 CFR 1.170–1: Charitable, etc., contributions

and gifts; allowance of deductions.

Section 68.—Overall Limitation

on Itemized Deductions

The Service provides inflation adjustments to the

overall limitation on itemized deductions for taxable

years beginning in 1999. See Rev. Proc. 98–61, page

18.

Section 135.—Income From

United States Savings Bonds

Used To Pay Higher Education

Tuition and Fees

The Service provides an inflation adjustment to

the limitation on the exclusion of income from

United States savings bonds for taxpayers who pay

qualified higher education expenses for taxable

years beginning in 1999. See Rev. Proc. 98–61, page

18.

The Service provides inflation adjustments to the

“insubstantial benefit” guidelines for calendar year

1999. Under the guidelines, a charitable contribution

is fully deductible even though the contributor receives “insubstantial benefits” from the charity. See

Rev. Proc. 98–61, page 18.

26 CFR 1.170A–1: Charitable, etc., contributions

and gifts; allowance of deduction.

Rules are set forth for substantiating the amount

of a deduction or an expense for charitable use of an

automobile. See Rev. Proc. 98–63, page 25.

Section 213.—Medical, Dental,

Etc., Expenses

The Service provides an inflation adjustment to the

limitation on the amount of eligible long-term care

premiums includible in the term “medical care” for

taxable years beginning in 1999. See Rev. Proc.

98–61, page 18.

26 CFR 1.213–1: Medical, dental, etc., expenses.

Section 151.—Allowance of

Deductions for Personal

Exemptions

Rules are set forth for substantiating the amount

of a deduction or an expense for use of an automobile to obtain medical services. See Rev. Proc.

98–63, page 25.

26 CFR 1.151–4: Amount of deduction for each

exemption under section 151.

Section 217.—Moving Expenses

The Service provides inflation adjustments to the

personal exemption and to the threshold amounts of

adjusted gross income above which the exemption

amount phases out for taxable years beginning in

1999. See Rev. Proc. 98–61, page 18.

26 CFR 1.217–2: Moving expenses.

Rules are set forth for substantiating the amount

of a deduction or an expense for use of an automobile as part of a move. See Rev. Proc. 98–63, page

25.

December 28, 1998

Section 220.—Medical Saving

Accounts

The Service provides inflation adjustments to the

amounts used to determine whether a health plan is a

“high deductible health plan” for purposes of determining whether an individual is eligible for a deduction for cash paid to a medical savings account for

taxable years beginning in 1999. See Rev. Proc.

98–61, page 18.

Section 267.—Losses,

Expenses, and Interest With

Respect to Transactions

Between Related Taxpayers

26 CFR 1.267(a)–1: Deductions disallowed.

When a payor provides a per diem allowance to

an employee who is a related party, the rules set

forth for the deemed substantiation to the payor of

the amount of the employee’s ordinary and necessary business expenses for lodging, meal, and incidental expenses or meal and incidental expenses incurred while traveling away from home do not

apply. See Rev. Proc. 98–64, page 32.

Section 274.—Disallowance of

Certain Entertainment, Etc.,

Expenses

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

(temporary).

Simplified optional method for substantiating the

amount of the ordinary and necessary business expenses of an employee for business use of an automobile when a payor provides a mileage allowance

for such expenses. See Rev. Proc. 98–63, page 25.

Rules are set forth for an optional method for

substantiating the amount of ordinary and necessary

business expenses of an employee for lodging, meal,

and incidental expenses or meal and incidental expenses incurred while traveling away from home

when a payor provides a per diem allowance under a

reimbursement or other expense allowance arrangement to pay for such expenses. See Rev. Proc.

98–64, page 32.

26 CFR 1.274–5T: Substantiation requirements

(temporary).

Simplified optional method for substantiating the

amount of the ordinary and necessary business expenses of an employee for business use of an automobile when a payor provides a mileage allowance

for such expenses. See Rev. Proc. 98–63, page 25.

Rules are set forth for an optional method for

substantiating the amount of ordinary and necessary

business expenses of an employee for lodging, meal,

and incidental expenses or meal and incidental expenses incurred while traveling away from home

when a payor provides a per diem allowance under a

reimbursement or other expense allowance arrangement to pay for such expenses. Rules are also set

forth for an optional method for employees and selfemployed individuals to use in computing the de-

December 28, 1998

ductible costs of business meal and incidental expenses paid or incurred while traveling away from

home. See Rev. Proc. 98–64, page 32.

Section 482.—Advance Pricing

Agreements

Notice 98–10, 1998–6 I.R.B. 9, is updated and finalized providing guidance regarding special procedures for small business taxpayers to obtain an

advance pricing agreement. See Notice 98–65, on

page 10.

Section 483.—Interest on

Certain Deferred Payments

26 CFR 1.483–1: Computation of interest on

certain deferred payments.

As defined by section 1274A, the definitions for

both “qualified debt instruments” and “cash method

debt instruments” have dollar ceilings on the stated

principal amount. The limits to the stated principal

amount are adjusted for inflation for sales or exchanges occurring in the 1999 calendar year. See

Rev. Rul. 98–58, page. 6.

Section 512.—Unrelated

Business Taxable Income

The Service provides an inflation adjustment to

the maximum amount of annual dues that can be

paid to certain agricultural or horticultural organizations without any portion being treated as unrelated

trade or business income by reason of any benefits

or privileges available to members for taxable years

beginning in 1999. See Rev. Proc. 98–61, page 18.

Section 1274.—Determination

of Issue Price in the Case of

Certain Debt Instruments Issued

for Property

26 CFR 1.1274A–1: Special rules for certain

transactions where stated principal amount does

not exceed $2,800,000.

As defined by section 1274A, the definitions for

both “qualified debt instruments” and “cash method

debt instruments” have dollar ceilings on the stated

principal amount. The limits to the stated principal

amount are adjusted for inflation for sales or exchanges occurring in the 1999 calendar year. See

Rev. Rul. 98–58, page 6.

Section 1274A.—Special Rules

for Certain Transactions Where

Stated Principal Amount Does

Not Exceed $2,800,000

(Also Sections 1274, 483; 1.1274A–1.)

Section 1274A inflation-adjusted

numbers for 1999. This ruling provides

the dollar amounts, increased by the 1999

inflation-adjustment, for section 1274A of

the Code. Rev Rul. 97–56 supplemented

and superseded.

Rev. Rul. 98–58

This revenue ruling provides the dollar

amounts, increased by the 1999 inflation

adjustment, for § 1274A of the Internal

Revenue Code.

BACKGROUND

Section 685.—Treatment of

Funeral Trusts

The Service provides an inflation adjustment to

the maximum amount of contributions that may be

made to a qualified funeral trust for contracts entered in calendar year 1999. See Rev. Proc. 98–61,

page 18.

Section 877.—Expatriation to

Avoid Tax

The Service provides an inflation adjustment to

amounts used to determine whether an individual’s

loss of United States citizenship had the avoidance

of United States taxes as one of its principal purposes for calendar year 1999. See Rev. Proc. 98–61,

page 18.

In general, §§ 483 and 1274 determine

the principal amount of a debt instrument

given in consideration for the sale or exchange of nonpublicly traded property. In

addition, any interest on a debt instrument

subject to § 1274 is taken into account

under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and

1274 for certain types of debt instruments.

In the case of a “qualified debt instrument,” the discount rate used for purposes

of §§ 483 and 1274 may not exceed 9 percent, compounded semiannually. Section

1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of

property (other than new § 38 property

1998–52 I.R.B.

within the meaning of § 48(b), as in effect

on the day before the date of enactment of

the Revenue Reconciliation Act of 1990)

if the stated principal amount of the instrument does not exceed the amount

specified in § 1274A(b). For debt instruments arising out of sales or exchanges

before January 1, 1990, this amount is

$2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the

borrower and lender may elect to use the

cash receipts and disbursements method

of accounting. In particular, for any cash

method debt instrument, § 1274 does not

apply, and interest on the instrument is accounted for by both the borrower and the

lender under the cash method of accounting. A cash method debt instrument is a

qualified debt instrument that meets the

following additional requirements: (A) In

calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is

a multiple of $50 and not of $100, the increase is increased to the nearest multiple

of $100). The inflation adjustment for

any calendar year is the percentage (if

any) by which the CPI for the preceding

calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B)

defines the CPI for any calendar year as

the average of the Consumer Price Index

as of the close of the 12-month period

ending on September 30 of that calendar

year.

the case of instruments arising out of sales

or exchanges before January 1, 1990, the

stated principal amount does not exceed

$2,000,000; (B) the lender does not use an

accrual method of accounting and is not a

dealer with respect to the property sold or

exchanged; (C) § 1274 would have applied to the debt instrument but for an

election under § 1274A(c); and (D) an

election under § 1274A(c) is jointly made

with respect to the debt instrument by the

borrower and lender. Section 1.1274A–

1(c)(1) of the Income Tax Regulations

provides rules concerning the time for,

and manner of, making this election.

Section 1274A(d)(2) provides that, for

any debt instrument arising out of a sale

or exchange during any calendar year

after 1989, the dollar amounts stated in

§ 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the

INFLATION-ADJUSTED AMOUNTS

For debt instruments arising out of

sales or exchanges after December 31,

1989, the inflation-adjusted amounts

under § 1274A are shown in Table 1.

Rev. Rul. 98–58 Table 1

Inflation-Adjusted Amounts Under § 1274A

Calendar Year

of Sale

or Exchange

1274A(b) Amount

(qualified debt

instrument)

1274A(c)(2)(A) Amount

(cash method debt

instrument)

1990

$2,933,200

$2,095,100

1991

$3,079,600

$2,199,700

1992

$3,234,900

$2,310,600

1993

$3,332,400

$2,380,300

1994

$3,433,500

$2,452,500

1995

$3,523,600

$2,516,900

1996

$3,622,500

$2,587,500

1997

$3,723,800

$2,659,900

1998

$3,823,100

$2,730,800

1999

$3,885,500

$2,775,400

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982–

1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 97–56, 1997–2 C.B. 107 is

supplemented and superseded.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Diana A. Inhof of the Office of

the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling

1998–52 I.R.B.

contact Ms. Inhof on (202) 622-3930 (not

a toll-free call).

dying in calendar year 1999. See Rev. Proc. 98–62,

page 18.

Section 2032A.—Valuation of

Certain Farm, etc., Real

Property

Section 2503.—Taxable Gifts

The Service provides an inflation adjustment to

the maximum amount by which the value of qualified real property included in a decedent’s gross estate may be decreased for the estate of a decedent

The Service provides an inflation adjustment to

the amount of gifts that may be made to a person in a

calendar year without including the amount in taxable gifts for calendar year 1999. See Rev. Proc.

98–61, page 18.

December 28, 1998

Section 2523.—Gift to Spouse

The Service provides an inflation adjustment to

the amount of gifts that may be made to a spouse

who is not a citizen of the United States in a calendar

year without including the amount in taxable gifts for

calendar year 1999. See Rev. Proc. 98–61, page 18.

Section 2631.—GST Exemption

The Service provides an inflation adjustment to

the amount of the generation-skipping transfer tax

exemption for calendar year 1999. See Rev. Proc.

98–61, page 18.

Section 4001.—Passenger

Vehicles

foreign person(s) that may trigger a reporting requirement for a United States person for taxable

years beginning in 1999. See Rev. Proc. 98–61, page

18.

Section 6323.—Validity and

Priority Against Certain Persons

The Service provides inflation adjustments for

calendar year 1999 to the maximum amount of a casual sale of personal property below which a federal

tax lien will not be valid against a purchaser of the

property, and to the maximum amount of a contract

for the repair or improvement of certain residential

property at or below which a federal tax lien will not

be valid against a mechanic’s lienor. See Rev. Proc.

98–61, page 18.

Section 6601.—Interest on

Underpayment, Nonpayment, or

Extension of Time for Payment

of Tax

Section 4003.—Special Rules

The Service provides an inflation adjustment to

the amount used to determine the amount of interest

charged on a certain portion of the estate tax payable

in installments for the estate of a decedent dying in

calendar year 1999. See Rev. Proc. 98–61, page 18.

Section 4261.—Transportation

by Air

The Service provides an inflation adjustment to

the amount of the excise tax on passenger air transportation beginning or ending in the United States

for calendar year 1999. See Rev. Proc. 98–61, page

18.

Section 6033.—Returns by

Exempt Organizations

The Service provides an inflation adjustment to

the amount of dues certain exempt organizations can

charge and still be excepted from the reporting requirements for exempt organizations with nondeductible lobbying expenditures for taxable years beginning in 1999. See Rev. Proc. 98–61, page 18.

Section 6039F.—Notice of Large

Gifts Received From Foreign

Persons

The Service provides an inflation adjustment to

the amount of gifts in a taxable year from certain

December 28, 1998

Section 7872.—Treatment of

Loans with Below-Market

Interest Rates

CPI adjustment for below-market

loans for 1999. The amount that section

7872(g) of the Code permits a taxpayer to

lend to a qualified continuing care facility

without incurring imputed interest is published and adjusted for inflation for years

1987–1999. Rev. Rul. 97–57 supplemented and superseded.

Rev. Rul. 98–59

The Service provides an inflation adjustment to

the price above which a passenger vehicle becomes

subject to an excise tax for transactions occurring in

calendar year 1999. See Rev. Proc. 98–61, page 18.

The Service provides an inflation adjustment to

the price above which a passenger vehicle becomes

subject to an excise tax for transactions occurring in

calendar year 1999. (Price includes the price of installation of parts or accessories on a passenger vehicle within six months of the date after the vehicle

was first placed in service.) See Rev. Proc. 98–61,

page 18.

chronically ill individual for calendar year 1999. See

Rev. Proc. 98–61, page 18.

Section 6662.—Imposition of

Accuracy-Related Penalty

When information shown on a return in accordance with the applicable forms and instructions

will be adequate disclosure for purposes of reducing

an understatement of income tax. See Rev. Proc.

98–62, page 23.

Section 7430.—Awarding of

Costs and Certain Fees

The Service provides an inflation adjustment to

the hourly limit on attorney fees that may be

awarded in a judgment or settlement of an administrative or judicial proceeding concerning the determination, collection, or refund of tax, interest, or

penalty for calendar year 1999. See Rev. Proc.

98–61, page 18.

Section 7702B.—Treatment of

Qualified Long-Term Care

Insurance

The Service provides an inflation adjustment to

the stated dollar amount of the per diem limitation

regarding periodic payments received under a qualified long-term care insurance contract or periodic

payments received under a life insurance contract

that are treated as paid by reason of the death of a

This revenue ruling publishes the

amount that § 7872(g) of the Internal

Revenue Code permits a taxpayer to lend

to a qualifying continuing care facility

without incurring imputed interest. The

amount is adjusted for inflation for the

years after 1986.

Section 7872 generally treats loans

bearing a below-market interest rate as if

they bore interest at the market rate.

Section 7872(g)(1) provides that, in

general, § 7872 does not apply for any

calendar year to any below-market loan

made by a lender to a qualified continuing

care facility pursuant to a continuing care

contract if the lender (or the lender’s

spouse) attains age 65 before the close of

the year.

Section 7872(g)(2) provides that, in the

case of loans made after October 11,

1985, and before 1987, § 7872(g)(1) applies only to the extent that the aggregate

outstanding amount of any loan to which

§ 7872(g) applies (determined without regard to § 7872(g)(2)), when added to the

aggregate outstanding amount of all other

previous loans between the lender (or the

lender’s spouse) and any qualified continuing care facility to which § 7872(g)(1)

applies, does not exceed $90,000.

Section 7872(g)(5) provides that, for

loans made during any calendar year after

1986 to which § 7872(g)(1) applies, the

$90,000 limit specified in § 7872(g)(2) is

increased by an inflation adjustment. The

inflation adjustment for any calendar year

is the percentage (if any) by which the

Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for

1998–52 I.R.B.

calendar year 1985. Section 7872(g)(5)

states that the CPI for any calendar year is

the average of the CPI as of the close of

the 12-month period ending on September

30 of that calendar year.

Table 1 sets forth the amount specified

in § 7872(g)(2) of the Code. The amount

is increased by the inflation adjustment

for the years 1987-99.

REV. RUL. 98–59 TABLE 1

Limit under 7872(g)(2)

Year

Amount

Before 1987

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

$ 90,000

$ 92,200

$ 94,800

$ 98,800

$103,500

$108,600

$114,100

$117,500

$121,100

$124,300

$127,800

$131,300

$134,800

$137,000

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index 1982–1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

DRAFTING INFORMATION

Rev. Rul. 97–57, 1997–2 C.B. 275, is

supplemented and superseded.

The author of this revenue ruling is

Diana A. Inhof of the Office of Assistant

1998–52 I.R.B.

Chief Counsel (Financial Institutions and

Products). For further information regarding this revenue ruling, contact Ms. Inhof

on (202) 622-3930 (not a toll-free call).

December 28, 1998

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 98–64

Notice 88–73 provides guidelines for

determining the weighted average interest

rate and the resulting permissible range of

interest rates used to calculate current lia-

bility for the purpose of the full funding

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

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

and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103–465

(GATT).

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

Month

Year

Weighted

Average

December

1998

6.29

Drafting Information

The principal author of this notice is

Todd Newman of the Employee Plans Division. For further information regarding

this notice, call (202) 622-6076 between

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

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

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

number).

Small Business Taxpayer

Advance Pricing Agreements

Notice 98–65

INTRODUCTION

On February 9, 1998, the Internal Revenue Service (“Service”) issued Notice

98–10, 1998–6 I.R.B. 9, which set forth

proposed special procedures for small

business taxpayer (“SBT”) Advance Pricing Agreements (“APAs”). Notice 98–10

also solicited comments from the public

prior to finalizing the special procedures

for SBT APAs.

After consideration of all the comments

received, the final procedures for SBT

APAs are adopted as revised by this Notice. It is the Service’s intention to incorporate the final SBT procedures in any revisions or successor to the general

procedures for obtaining an APA from the

Service, currently contained in Rev. Proc.

96–53, 1996–2 C.B. 375.

December 28, 1998

90% to 106%

Permissible

Range

90% to 110%

Permissible

Range

5.66 to 6.67

5.66 to 6.92

EXPLANATION OF REVISIONS AND

SUMMARY OF COMMENTS

Most of the comments focused on expanding the situations in which the SBT

special procedures could be employed, including (i) expanding the definition of an

SBT to permit more taxpayers to qualify;

(ii) clarifying that small transactions (as

defined in § 5.14(4) of Rev. Proc. 96–53),

without regard to the size of the taxpayer,

would qualify; and (iii) permitting transactions that involve non-routine intangibles to qualify. This Notice doubles the

gross income amount from $100 million

to $200 million for determining which entities will be considered an SBT for purposes of implementing SBT APA special

procedures. So that all taxpayers who

qualify as SBTs are treated uniformly

with respect to APA user fees, this Notice

also increases, from $100 million to $200

million, the gross income amount in the

definition of taxpayers that qualify for the

reduced user fee of $5,000 contained in

§ 5.14(3) of Rev. Proc. 96–53.

This Notice also clarifies that the special procedures can apply, when appropriate, to the small transactions described in

§ 5.14(4) of Rev. Proc. 96–53. With respect to applying the special procedures

to transactions involving intangibles, this

Notice clarifies that the Service will consider such application on a case by case

basis.

In addition, the Service believes the

SBT procedures could be beneficial for

1998 is 5.25 percent. Notice 98–58,

1998–47 I.R.B. 9, contains a printing

error. It should have read that the average

yield on 30-year Treasury Constant Maturities for October 1998 is 5.01 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

start-up companies and new lines of business for existing companies. Accordingly, transactions involving such companies or such lines of business are

mentioned among the types of transactions for which SBT procedures would be

appropriate.

It was also requested that the initial

term of an SBT APA have the potential to

be greater than three years. As reflected

in this Notice, depending on the facts and

circumstances of each case, an SBT APA

term can generally range from three to

five years.

Other commentators requested that the

Notice address the policy for “rollbacks”

(i.e., rolling back the transfer pricing

methodology (“TPM”) to years prior to

those covered in the APA). The requests

involved clarifying how rollback requests

would be treated in an SBT APA context

generally, and more specifically, in situations where a rollback year in a bilateral

SBT APA request is under the jurisdiction

of Appeals and the simultaneous Appeals

and competent authority procedure as described in § 8 of Rev. Proc. 96–13,

1996–1 C.B. 616, 622, is applicable. As

with all policies and procedures not

specifically addressed by this Notice,

such policies and procedures, including

the rollback procedures, remain the same

as described in Rev. Proc. 96–53. (For

the rollback procedures, see § 8 of Rev.

Proc. 96–53).

Other comments expressed concern regarding coordination with treaty partners

1998–52 I.R.B.

in the case of bilateral SBT APA requests.

As with all bilateral APA requests, the

Service has worked, and will continue to

work, diligently with treaty partners to effectuate bilateral APAs (SBT or otherwise) as quickly as possible.

Finally, some comments addressed internal Service procedures, such as the

staffing of APA Teams. The APA Program appreciates all suggestions to make

the APA process more efficient. However,

since the purpose of this Notice is to provide guidance to SBTs seeking an APA

and not to address internal procedures,

these comments have not been addressed

in this Notice.

PURPOSE

The Service instituted the APA Program to assist all taxpayers in their efforts

to comply with I.R.C. § 482. Under an

APA, the Service and a taxpayer agree on

a TPM to be prospectively applied to an

apportionment or allocation of income,

deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled, directly or indirectly, by the same

interests. Provided the taxpayer complies

with the terms and conditions of the APA,

the Service will regard the results of applying the TPM as satisfying the arm’s

length standard under § 482. Rev. Proc.

96–53, 1996–2 C.B. 375, explains how a

taxpayer may secure an APA from the

Service.

To date, the Service has concluded

more than 160 APAs with U.S. taxpayers,

the majority of which have been large

business taxpayers with substantial income and/or assets. In an effort to reduce

the § 482 compliance burden of, and to

make the APA Program more accessible

to, small business taxpayers (“SBTs”), the

Service is adopting special APA procedures for SBTs (“SBT procedures”). For

purposes of this Notice, a “small business

taxpayer” is any U.S. taxpayer with total

gross income of $200 million or less (determined pursuant to § 5.14(7) of Rev.

Proc. 96–53 or its successor). In addition,

for taxpayers not able to meet the gross

income threshold, if deemed appropriate

by the Service, SBT procedures will be

available for the small transactions described in § 5.14(4) of Rev. Proc. 96–53,

subject to the limitations regarding intangibles discussed below.

1998–52 I.R.B.

The SBT procedures seek to address

the SBT’s need to achieve the compliance

certainty an APA provides at a cost that is

reasonable relative to the size and complexity of the transactions involved. This

Notice describes the circumstances under

which an SBT may request special procedures in seeking an APA, the nature of the

special procedures, and other provisions

designed to assist SBTs in the APA

process.

BACKGROUND

The Service has indicated a desire to alleviate the § 482 compliance burden for

SBTs. For example, under the 1993 temporary regulations, § 1.482–1T set forth a

safe harbor for small taxpayers. That provision, however, was not retained in the

final regulations due to deficiencies with

the safe harbor. See “Explanation of Revisions and Summary of Comments” of

the § 482 final regulations, T.D. 8552,

1994–2 C.B. 93, 104. At that time, the

Service solicited suggestions from the

public for alternative approaches to assist

small taxpayers with their § 482 compliance burden. Id. No comments were received as a result of this solicitation.

The Service also attempted to assist all

taxpayers, including SBTs, with their

§ 482 compliance efforts by implementing the APA Program under Rev. Proc.

91–22, 1991–1 C.B. 526. The Program’s

experience, however, indicates that SBTs

are not participating in the Program to the

same extent as larger taxpayers, due at

least in part to cost concerns (in terms of

internal staff time, external legal, accounting, and consulting fees, and Service

user fees).

As a consequence, the Service established additional incentives for SBTs to

seek APAs. Section 3.09 of Rev. Proc.

96–53 provides that the Service and a

small business taxpayer may agree to special procedures for obtaining an APA, including simplified procedures that depart

from standard procedures, to meet the

needs of the particular SBT. In addition,

§ 5.14 of Rev. Proc. 96–53 establishes a

reduced user fee for many SBTs seeking

an APA. The APA Program has successfully applied the approach referenced in §

3.09 in several cases to assist SBTs in receiving APAs.

The Service believes that maintaining

the ability to adapt procedures to the facts

and circumstances of a particular SBT is

better than establishing formal procedures

that may not be applicable to all SBTs.

However, it is important for the Service to

furnish guidance regarding the types of

procedures it deems appropriate for SBT

APAs. Accordingly, the provisions in this

Notice expand upon § 3.09 of Rev. Proc.

96–53 by providing examples of simplified procedures the Service believes may

be appropriate. It is hoped that the flexibility underlying this approach will encourage more small business taxpayers to

participate in the APA Program.

PRINCIPLES FOR SMALL BUSINESS

TAXPAYER APA REQUESTS

The Service intends to maintain flexibility in the APA process to address the

particular needs of SBTs. Accordingly,

the special procedures set forth below are

the types of procedures the Service will

entertain for SBT APA requests; they are

not exclusive, and the Service will consider other procedures that are consistent

with the objectives of the APA Program

and the SBT. In addition, different procedures may apply to different SBTs, depending upon the facts and circumstances

of each APA case.

To address the concern that the perceived costs to secure an APA are high in

proportion to the size of the transactions

involved, the special procedures focus on

simplifying the APA process for SBT

transactions. This simplification is intended to reduce costs in terms of the

amount of time required to evaluate the

request, while permitting the Service to

satisfy its due diligence requirements.

This objective can be accomplished,

and use of special procedures is encouraged, when the SBT proposes to cover

less complicated transactions with which

the APA Program has had experience

(such as those involving the manufacture

or distribution of tangible property under

§ 1.482–3 and the performance of administrative and technical services under

§ 1.482–2(b)) and proposes a “best

method” that is specified under the regulations. In addition, use of special procedures is encouraged for start-up companies or lines of business. Although

transactions involving non-routine intangibles, including research and development cost sharing arrangements under §

1.482–7, would not ordinarily be

December 28, 1998

amenable to such special procedures due

to the complexity of valuing such intangibles, the Service will consider employing

special procedures for such transactions

on a case by case basis.

In addition, to the extent practical, the

Service will coordinate the special procedures with the SBT’s other tax compliance efforts so as to minimize the costs to

the SBT. For example, an SBT’s I.R.C.

§ 6662(e) documentation may be accepted as the APA submission materials,

and such documentation could form the

primary foundation for the Service’s evaluation of the SBT’s APA request.

SPECIAL PROVISIONS FOR SBT

APAs

At the request of an SBT, the Service

will apply any or all of the following provisions under the principles of this Notice, if deemed appropriate by the APA

Director:

1. Under ordinary conditions, a taxpayer contemplating an APA may (but is

not required to) request a prefiling conference with the Service. If a prefiling conference is requested, the Service provides

informal advice to the taxpayer regarding

the taxpayer’s proposal, but ordinarily

does not begin its due diligence evaluation in earnest until the taxpayer formally

files an APA request along with the appropriate user fee. Once the formal APA request is received, the APA Program targets finalizing the negotiating position for

bilateral APAs in nine months and concluding unilateral APAs in 12 months. In

contrast, for SBT transactions the Service

intends, if requested, to commence its due

diligence analysis at the front-end of the

process to accelerate the conclusion of the

APA negotiations.

(a) The Service and SBT may hold a

prefiling conference (before a user fee is

paid) to determine as early as possible the

best method for the SBT’s proposed covered transactions. To accomplish this, the

Service will need a detailed description of

the underlying facts of, and the proposed

December 28, 1998

TPM for, the SBT’s requested covered

transactions at least 60 days prior to the

scheduled conference. For purposes of

this Notice, the SBT may provide the information it is required to maintain under

I.R.C. § 6662(e) to satisfy this requirement. Prior to its prefiling submission,

the SBT must consult with APA Program

personnel to determine the information

the Service deems necessary to evaluate

the SBT’s particular covered transactions.

(b) An APA Team will evaluate the

SBT APA prefiling submittal to determine

items of concern and the additional documentation, if any, needed to evaluate the

request. The SBT will be advised of the

APA Team’s initial conclusions before the

prefiling conference so that it can address

these items before or at the conference.

SBT and Service will negotiate the case

management plan with the objective of

concluding a unilateral APA, or finalizing

the recommended negotiating position for

a bilateral APA, within six months of the

date the SBT files its APA request. The

Service’s efforts to perform more of its

analysis earlier in the process should result in a reduced number of post-filing

meetings and supplemental information

requests.

2. The Service and SBT may negotiate

the reduction or elimination of specific elements otherwise required under § 5 of

Rev. Proc. 96–53. Examples of the types

of information that the Service may determine the SBT could exclude from its APA

request include those described in the following subsections of Rev. Proc. 96–53:

(a) § 5.04(3); (b) § 5.04(5); (c) § 5.04(6);

(d) § 5.08; and (e) § 5.09.

3. The Service will hold all meetings

with the SBT at a location convenient to

the SBT. To minimize the number of

meetings, teleconferences will be employed whenever feasible.

4. The Service will reasonably assist

the SBT in the selection and evaluation of

comparables or the computation of adjustments to comparables under § 1.482–1(e),

as well as, if appropriate, assist the SBT

in determining other adjustments.

5. The initial term of an SBT APA will

generally be from three to five years, depending upon the facts and circumstances

of the SBT.

6. For unilateral APA requests, an SBT

may submit a proposed draft APA in a

form substantially identical to the current

APA model agreement attached to this

Notice (the APA model is subject to

change; SBTs should check with the APA

Program for updated versions). To expedite review of the proposed draft APA, the

SBT should also include a “redline” version showing the differences between the

APA model and the SBT’s proposed draft.

In addition, SBTs should also submit the

draft on a computer disk in a word processing format acceptable to the Service.

7. The Service will consider other procedures suggested by the SBT to reduce

the SBT’s administrative and financial

burden, consistent with the objectives of

the APA Program and the requirements of

§ 482.

EFFECT ON OTHER DOCUMENTS

Section 5.14(3) of Rev. Proc. 96–53,

1996–2 C.B. 375, 379, is modified by increasing the gross income amount contained therein from $100,000,000 to

$200,000,000.

EFFECTIVE DATE

This Notice is effective immediately

and will apply to all SBT APA requests,

including requests for renewal, received

on or after the date this Notice is published.

DRAFTING INFORMATION

The principal author of this Notice is

David J. Canale of the Advance Pricing

Agreement Program, Office of Associate

Chief Counsel (International). For further

information regarding this Notice, contact

Mr. Karl Kellar at (202) 874-4360 (not a

toll-free call).

1998–52 I.R.B.

ADVANCE PRICING AGREEMENT

between

TAXPAYER

and

THE INTERNAL REVENUE SERVICE

THIS ADVANCE PRICING AGREEMENT (“APA”) is made by and between Taxpayer and the Internal Revenue

Service (“Service”), acting through the Associate Chief Counsel (International).

WHEREAS, Taxpayer and the Service (the “Parties”) wish to establish a method for determining whether certain prices

used in international transactions involving Taxpayer are in accordance with the principles of section 482 of the Internal Revenue

Code of 1986 as amended (the “Code”) and attendant Regulations and, to the extent applicable, income tax conventions to which

the United States is a party;

NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties agree as follows:

Identifying Information. Taxpayer’s EIN is __________. [Taxpayer is included in the consolidated federal

income tax return filed by ________________, EIN ________. All references to Taxpayer’s United States income tax return in this

APA refer to that consolidated return, and all references in this APA to “Taxpayer” shall refer to the ______________ consolidated

return group.]

Covered Transactions. This APA governs the pricing of the transactions specified in Appendix A (the “Covered

Transactions”).

Legal Effect.

3.1.

Taxpayer agrees to comply with the terms and conditions of this APA, including the transfer pricing methodology

(“TPM”) that is described in Appendix A. If Taxpayer complies with the terms and conditions of this APA, then the Service will not

contest the application of the TPM to the Covered Transactions and will not make or propose any reallocation or adjustment under

section 482 of the Code with respect to Taxpayer concerning the Transfer Prices in Covered Transactions for the years covered by

this APA (the “APA Years”).

3.2.

Regardless of the date on which Taxpayer filed its request for this APA, Taxpayer and the Service agree, unless

otherwise specified to the contrary in this APA, that Rev. Proc. 96–53, 1996–2 C.B. 375, and not any predecessor to Rev. Proc.

96–53, governs the interpretation and administration of this APA.

3.3.

If, for any APA Year, Taxpayer does not comply with the terms and conditions of this APA, then the Service may:

enforce the terms of this APA and propose adjustments to the income, expenses, deductions, credits, or allowances

reported on Taxpayer’s U.S. federal income tax return in keeping with the terms of this APA;

ii.

cancel or revoke this APA pursuant to section 11.05 or 11.06 of Rev. Proc. 96–53; or

iii.

revise this APA, upon agreement on revision with Taxpayer.

3.4.

[This APA addresses the arm’s length nature of prices charged or received in the aggregate between Taxpayer and

[name of foreign group], and except as explicitly provided in this APA does not address, and does not bind the Service with respect

to, prices charged or received, or the relative amounts of income or loss realized, by particular legal entities that are members of

Taxpayer or that are members of [foreign group]. The true taxable income of a member of an affiliated group filing a U.S. consolidated return shall be determined under the regulations governing consolidated returns. See, e.g., Treas. Reg. section 1.1502–12.

Similarly, to the extent relevant for United States tax purposes, and except as explicitly provided in this APA, the relative amounts

of income of different entities that are members of [foreign group] shall be determined under the arm’s length standard of section

482 without reference to this APA.]

1998–52 I.R.B.

December 28, 1998

3.5.

The Parties agree that nonfactual oral and written representations, within the meaning of sections 10.04 and 10.05

of Rev. Proc. 96–53 (including any proposals to use particular TPMs), made in conjunction with this request constitute statements

made in compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.

Term.

This APA shall apply only to the APA Years, which shall include only ________________.

Financial Statements and APA Records. The determination whether Taxpayer has complied with this APA will

be based on its United States income tax return; its financial statements as prepared in accordance with generally accepted accounting principles (“GAAP”) on a consistent basis (the “Financial Statements”); the additional records (“APA Records”) specified in

Appendix B; and all information referenced in section 8 of this APA. Taxpayer will be in compliance with the TPM only if a certified public accountant renders an opinion that the Financial Statements present fairly, in all material respects, the financial position

of Taxpayer and the results of its operations, in accordance with GAAP. Taxpayer agrees to maintain the Financial Statements and

APA Records and to make them available within thirty days of a request by the Service in connection with an examination described

in section 11.03 of Rev. Proc. 96–53. Compliance with this section 5 will constitute compliance with the provisions of sections

6038A and 6038C of the Code, with respect to the Covered Transactions during the APA Years.

Critical Assumptions.

96–53, are listed in Appendix C.

The Critical Assumptions of this APA, within the meaning of section 5.07 of Rev. Proc.

Compensating Adjustments.

To the extent necessary to bring Taxpayer into compliance with this APA,

Taxpayer may make Compensating Adjustments as described in and subject to the rules of section 11.02 of Rev. Proc. 96–53, and

subject to any restrictions stated in this APA.

Annual Report. Taxpayer shall file a timely Annual Report for each APA Year pursuant to the rules of section

11.01 of Rev. Proc. 96–53. However, no Annual Report will be due less than 90 days after this APA becomes effective. The Annual

Report shall contain the information described in Appendix D. In connection with an examination described in section 11.03 of Rev.

Proc. 96-53, the District Director may request and Taxpayer shall provide additional facts, computations, data or information reasonably necessary to clarify the Annual Report or verify compliance with the APA.

Disputes.

Should a dispute arise concerning the interpretation, application or enforcement of this APA, the

Parties agree to seek resolution of the dispute by the Associate Chief Counsel (International), to the extent reasonably practicable,

prior to seeking alternative remedies.

10.

Section Captions.

The section captions contained in this APA are for convenience and reference only and

shall not affect in any way the interpretation or application of this APA.

11.

Notice. Any notices required by this APA or Rev. Proc. 96–53 shall be in writing. Taxpayer shall send notices to

the Service at the address and in the manner prescribed in section 5.13(2) of Rev. Proc. 96–53. The Service shall send notices to

Taxpayer at:

12.

Effective Date. This APA shall become binding when both Parties have executed the APA.

13.

Counterparts.

This APA may be executed in counterparts, with each counterpart deemed an original.

IN WITNESS WHEREOF, the Parties have executed this APA on the dates indicated below.

TAXPAYER

By:_________________________________Date:__________________________

INTERNAL REVENUE SERVICE

By:_________________________________Date:__________________________

Associate Chief Counsel (International)

December 28, 1998

1998–52 I.R.B.

APPENDIX A

TRANSFER PRICING METHODOLOGY

For each APA Year:

Covered Transactions.

The Covered Transactions for this APA consist of _______________________.

Transfer Pricing Methodology (“TPM”).

*****

APPENDIX B

APA RECORDS

All documents listed in Appendix D for inclusion in the Annual Report, as well as all documents, notes,

work papers, records, or other writings that support the information provided in such documents.

[Insert here other records].

*****

APPENDIX C

CRITICAL ASSUMPTIONS

The business activities, financial and tax accounting methods and classifications, and methods of estimation, of Taxpayer shall remain materially the same as described or used in Taxpayer’s request for this APA.

[Insert here other Critical Assumptions.]

1998–52 I.R.B.

December 28, 1998

APPENDIX D

ANNUAL REPORT

Taxpayer shall include the following in its Annual Report for each APA Year:

A statement identifying all material differences between Taxpayer’s business operations during the APA

Year and the description of Taxpayer’s business operations contained in Taxpayer’s request for this APA, or if there

have been no such material differences a statement to that effect.

A statement identifying all material changes in the Taxpayer’s accounting methods and classifications,

and methods of estimation, from those described or used in Taxpayer’s request for this APA, or if there have been

no such material changes a statement to that effect.

The Financial Statements.

A financial analysis demonstrating Taxpayer’s compliance with the TPM.

A description of any failure to meet Critical Assumptions or, if there have been no such failures, a statement to that effect.

10.

A description of the reason for, and financial analysis of, any Compensating Adjustments with respect to

the APA Year, including the means by which any such Compensating Adjustment has been or will be satisfied.

11.

A copy of the certified public accountant’s opinion, described in section 5 of this APA, for the APA Year.

12.

[Insert here other items to be included in Annual Report.]

December 28, 1998

1998–52 I.R.B.

Qualified Funeral Trusts

Notice 98–66

PURPOSE

Section 6013(b) of the Internal Revenue Service Restructuring and Reform

Act of 1998 (1998 Act), Pub. L. No. 105–

206, 112 Stat. 685, amended the Qualified

Funeral Trust (QFT) provisions of § 685

of the Internal Revenue Code: (1) to allow

pre-need funeral trusts to continue to

qualify as QFTs for a 60-day period beginning on the date of death of the grantor

of the trust; and (2) to extend the Secretary’s authority to prescribe rules for simplified reporting of QFTs that terminate

during the taxable year. This notice provides guidance on the 1998 Act amendments to § 685. The amendments are effective for taxable years ending after

August 5, 1997.

BACKGROUND

A “pre-need funeral trust” is an

arrangement in which funeral or cemetery

merchandise or services are purchased before the beneficiary’s death. The purchaser enters into a contract with the

seller whereby the purchaser selects, and

pays for, the desired merchandise or services. Upon the death of the beneficiary,

the seller provides the selected merchandise or services. Most states have laws or

regulations that govern pre-need funerals

trusts. These laws and regulations protect

the beneficiary and provide for the investment of the money transferred to the

seller. Usually, the seller is required to

deposit a percentage of the money received into a pre-need funeral trust to be

invested and held by the trust for the beneficiary until the funeral or cemetery merchandise or services are provided. The

terms of the trust arrangements vary from

seller to seller and the provisions governing pre-need funeral trusts vary from state

to state.

In Rev. Rul. 87–127, 1987–2 C.B. 156,

the Service addresses the taxation of preneed funeral trusts in four situations. The

ruling concludes that in all four situations

the trust is a grantor trust and the purchaser of the trust is treated as the owner

of the trust for federal tax purposes. The

ruling further concludes that any payment

received by the seller from the trust is a

1998–52 I.R.B.

payment for merchandise or services and

is includible under § 61 in the seller’s

gross income in the year received or properly accrued, depending on the seller’s

method of accounting.

The Taxpayer Relief Act of 1997, Pub.

L. No. 105–34, 111 Stat. 788, created the

QFT provisions. Section 685 permits the

trustees of certain pre-need funeral trusts

to elect QFT status on behalf of the trusts.

If a valid QFT election is made and the

trust otherwise qualifies as a QFT under §

685, the trustee is liable for the tax on the

taxable income of the trust. The amount

of tax is determined in accordance with

the income tax rate schedule generally applicable to trusts and estates. A QFT election may be made for an eligible trust for

any taxable year ending after August 5,

1997.

In Notice 98–6, 1998–3 I.R.B. 52, the

Service provided guidance on QFT eligibility requirements, election procedures,

and simplified reporting requirements.

The notice recognizes that pre-need trusts

for cemetery merchandise and services,

like pre-need trusts for funeral merchandise and services, may be treated as QFTs

if they meet the requirements of § 685.

The trustees of QFTs are required to file a

trust return on behalf of the QFT. Form

1041–QFT, U.S. Income Tax Return for

Qualified Funeral Trusts, is used to file

the return and to make the QFT election.

A trustee responsible for multiple QFTs

may report the income for all of the QFTs

on one composite Form 1041–QFT. A

QFT election, once made, cannot be revoked without the consent of the Commissioner of Internal Revenue.

LOSS OF GRANTOR TRUST STATUS

One of the necessary qualifications for

a QFT is that it would be treated, but for

the QFT election, as a grantor trust for

federal income tax purposes. Section

685(b)(6). Prior to the 1998 Act amendment, a trust would have lost its QFT status upon the death of the grantor because

it would no longer have been a grantor

trust. However, because actual distribution of the trust assets to the seller of the

merchandise or services usually does not

occur immediately upon the death of the

decedent, the 1998 Act provides that a

QFT retains its QFT status for the period

of time between the decedent’s death and

the actual distribution of the trust assets to

the seller, but not to exceed a 60-day period beginning on the date of the decedent’s death. Any income earned by the

QFT during this period must be reported

by the trustee on the Form 1041–QFT.

SHORT YEAR QFTS

Section 685(f), as originally enacted,

provided that the Secretary may prescribe

rules for simplified reporting of all QFTs

having a single trustee. The 1998 Act

amendment to § 685(f) extends the Secretary’s authority to prescribe rules for simplified reporting of QFTs terminated during the taxable year (for example, upon

the beneficiary’s death).

As a general rule, § 6072(a) provides

that trust returns must be filed by the 15th

day of the fourth month following the

close of the taxable year. QFTs are required to adopt a calendar year. Therefore, QFTs generally are required to file

an income tax return by April 15th of the

year following the close of the calendar

year. Under § 443, a trust that is in existence during only part of a year is required to file a return for that short period.

QFTs that terminate during the year,

therefore, would be required to file a return by the 15th day of the fourth month

following the close of the short taxable

year. For example, if the beneficiary of a

QFT died on March 3rd and all the trust

assets were distributed prior to the end of

March, the trustee would be required to

file the tax return by July 15th.

The Service recognizes that a trustee of

multiple QFTs often has many QFTs that

terminate during the calendar year. To

simplify the reporting requirements for

these trustees, a single, composite Form

1041-QFT may be filed for all QFTs managed by the same trustee, including short

period QFTs. Therefore, a trustee of multiple QFTs is not required to file a separate tax return for any QFT that terminates during the year. The trustee of

multiple QFTs has until April 15th of the

year following the close of the calendar

year to file a composite Form 1041–QFT,

even when the return includes QFTs that

terminate during the calendar year.

REQUESTS FOR COMMENTS

The Treasury and the Service invite

comments from the public on issues that

may arise in implementing the amend-

December 28, 1998

ments to § 685. Send written comments

to the following address:

Internal Revenue Service

CC:DOM:CORP (NT 98-66;

CC:DOM:P&SI:1)

P.O. Box 7604, Ben Franklin Station

Washington, D.C. 20044

Alternatively, send written comments electronically via the Internet to the IRS Internet site at http://www.irs.ustreas.gov/prod/

tax_regs/comments.html. Please identify

the comments as relating to this notice.

fice, the Service will consider the application timely filed if it is filed at that desk

during the next succeeding day (other

than a Saturday, Sunday, or legal holiday)

that the national office is open for business.

SECTION 2. BACKGROUND

Notice 98–67

The Service permits taxpayers to file

certain applications for a change in accounting method or accounting period at

the Courier’s Desk at the national office

of the Service, located at 1111 Constitution Avenue, NW, Washington, DC, between 8:15 AM and 5:00 PM. For example, Rev. Proc. 97–27, 1997–1 C.B. 680,

as provided in Rev. Proc. 98–1, 1998–1

I.R.B. 3, permits a taxpayer requesting a

change in method of accounting to file the

Form 3115, Application for Change in

Accounting Method, at the Courier ’s

Desk. Similarly, Rev. Proc. 98–60,

1998–51 I.R.B. 16, permits a taxpayer

changing its method of accounting automatically to file the copy of the application at the Courier’s Desk.

SECTION 1. PURPOSE

SECTION 3. PROCEDURE

This notice provides that when the

Courier’s Desk at the national office of

the Internal Revenue Service closes early

on the last day prescribed for filing an application to change an accounting method

or accounting period with the national of-

.01 For applications to change an accounting method or accounting period

that are permitted to be filed at the

Courier’s Desk at the national office of

the Service, if that desk closes early (before 5:00 PM) on the last day prescribed

DRAFTING INFORMATION

The principal author of this notice is

Shannon Cohen of the Office of Assistant

Chief Counsel (Passthroughs and Special

Industries). For further information regarding this notice, contact Shannon

Cohen on (202) 622-3050 (not a toll-free

call).

Filing Procedure for Early

Closing of Courier’s Desk

for filing the application, the Service will

consider the application timely filed provided it is filed at that desk during the

next succeeding day (other than a Saturday, Sunday, or legal holiday) that the national office is open for business.

.02 In order to obtain the relief provided by this notice, the taxpayer should

write at the top of the application “FILED

PURSUANT TO NOTICE 98– 67.”

.03 For an example of the relief provided by this notice, assume that a taxpayer wanting to change its method of accounting for calendar year 1998 under

Rev. Proc. 97–27 is required to file a

Form 3115 with the Service on or before

December 31, 1998. If the Courier’s

Desk closes before 5 PM on December

31, 1998, the taxpayer may timely file the

copy of the Form 3115 at that desk on

Monday, January 4, 1999 (because Friday,

January 1, 1999, is a legal holiday and

January 2 and 3, 1999, are a Saturday and

Sunday (see § 7503 of the Internal Revenue Code)).

DRAFTING INFORMATION

The principal author of this notice is

Robert A. Testoff of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Mr. Testoff at

(202) 622-4800 (not a toll-free call).

26 CFR 601.602: Tax forms and instructions.

(Also Part I, §§ 1, 32, 59, 63, 68, 135, 151, 170, 213, 220, 512, 513, 685, 877, 2032A, 2503, 2523, 2631, 4001, 4003, 4261, 6033, 6039F, 6323, 6601, 7430, 7702B)

Rev. Proc. 98–61

Table of Contents

SECTION 1. PURPOSE

SECTION 2. CHANGES MADE FROM PRECEDING YEAR

SECTION 3. 1999 ADJUSTED ITEMS

Code Section

.01 Tax Rate Tables

1(a)–(e)

.02 Unearned Income of Minor Children Taxed as if Parent’s Income (“Kiddie Tax”)

1(g)

.03 Earned Income Credit

.04 Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax”

59(j)

.05 Standard Deduction

December 28, 1998

1998–52 I.R.B.

.06 Overall Limitation on Itemized Deductions

.07 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher

Education Expenses

135

.08 Personal Exemption

151

.09 Eligible Long-Term Care Premiums

213(d)(10)

.10 Medical Savings Accounts

220

.11 Treatment of Dues Paid to Agricultural or Horticultural Organizations.

512(d)

.12 Insubstantial Benefit Limitations for Contributions Associated with Charitable

Fund-Raising Campaigns

513(h)

.13 Funeral Trusts

685

.14 Expatriation to Avoid Tax

877

.15 Valuation of Qualified Real Property in Decedent’s Gross Estate

2032A

.16 Annual Exclusion for Gifts

2503 & 2523

.17 Generation-Skipping Transfer Tax Exemption

2631

.18 Luxury Automobile Excise Tax

4001 & 4003

.19 Passenger Air Transportation Excise Tax

4261

.20 Reporting Exception for Certain Exempt Organizations with Nondeductible

Lobbying Expenditures

6033(e)(3)

.21 Notice of Large Gifts Received from Foreign Persons

6039F

.22 Persons against Which a Federal Tax Lien is Not Valid

6323

.23 Interest on a Certain Portion of the Estate Tax Payable in Installments

6601(j)

.24 Attorney Fee Awards

7430

.25 Periodic Payments Received under Qualified Long-Term Care Insurance

Contracts or under Certain Life Insurance Contracts

7702B(d)

SECTION 4. EFFECTIVE DATE

SECTION 5. DRAFTING INFORMATION

SECTION 1. PURPOSE

This revenue procedure sets forth inflation adjusted items for 1999.

SECTION 2. CHANGES MADE

FROM PRECEDING YEAR

.01 The amount used in determining

the exemption under §§ 55 and 59(j), as

amended by section 1201(b) of the Taxpayer Relief Act of 1997 (the “TRA of

1997”), Pub. L. No. 105–34, 111 Stat. 788

(1997), from the alternative minimum tax

under § 55 for a child subject to the “kiddie tax” under § 1(g), is adjusted for inflation for tax years beginning in 1999 (section 3.04).

1998–52 I.R.B.

.02 The amounts used to determine

whether a health plan is a “high deductible

health plan” for purposes of determining

whether an individual is eligible for a deduction for cash paid to a medical savings

account under § 220, as enacted by section

301(a) of the Health Insurance Portability

and Accountability Act of 1996, Pub. L.

No. 104–191, 110 Stat. 1936 (1996), are

adjusted for inflation for tax years beginning in 1999 (section 3.10).

.03 The maximum amount of contributions that may be made to a qualified funeral trust defined in § 685, as enacted by

section 1309(a) of the TRA of 1997, is adjusted for inflation for calendar year 1999

(section 3.13).

.04 The maximum amount by which

the estate tax valuation method under §

2032A, as amended by section 501(b) of

the TRA of 1997, may decrease the value

of certain farm and other qualified real

property included in a decedent’s gross

estate, is adjusted for inflation for calendar year 1999 (section 3.15).

.05 The amount of gifts that may be

made to a person in a calendar year without including the amount in taxable gifts

under § 2503, as amended by section

501(c) of the TRA of 1997, is adjusted for

inflation for calendar year 1999. Also,

under § 2523(i)(2) by cross reference to §

2503, the amount of gifts that may be

made to a spouse who is not a citizen of

December 28, 1998

the United States in a calendar year without including the amount in taxable gifts

under § 2503 is adjusted for inflation for

calendar year 1999 (section 3.16).

.06 The amount of the generation-skipping transfer tax exemption under § 2631,

as amended by section 501(d) of the TRA

of 1997, which was technically corrected

by section 6007(a)(1) of the Internal Revenue Service Restructuring and Reform

Act of 1998 (the “RRA of 1998”), Pub. L.

No. 105–206, 112 Stat. 685 (1998), is adjusted for inflation for calendar year 1999

(section 3.17).

.07 The amount of the excise tax on

passenger air transportation beginning or

ending in the United States under § 4261,

as amended by section 1031(c) of the

TRA of 1997, is adjusted for inflation for

calendar year 1999 (section 3.19).

.08 The maximum amount of a casual

sale of personal property below which a

federal tax lien will not be valid against a

purchaser of the property under

§ 6323(b)(4), and the maximum amount

of a contract for the repair or improvement of certain residential property at or

below which a federal tax lien will not be

valid against a mechanic’s lienor under

§ 6323(b)(7), each as amended by section

3435(a) of the RRA of 1998, are adjusted

for inflation for calendar year 1999 (section 3.22).

.09 For purposes of calculating interest

charged under § 6601(j), as amended by

section 501(e) of the TRA of 1997, the

dollar amount used to determine the “2

percent portion” of the estate tax payable

in installments under § 6166 is adjusted

for inflation for calendar year 1999 (sec-

tion 3.23).

.10 The amount of the limit on the

hourly rate at which attorney fees may be

awarded under § 7430 in a judgment or

settlement of an administrative or judicial

proceeding concerning the determination,

collection, or refund of tax, interest, or

penalty under the Code was increased to

$125, as adjusted for inflation, effective

for costs incurred after January 18, 1999,

by section 3101(a)(1) of the RRA of 1998

(section 3.24).

SECTION 3. 1999 ADJUSTED ITEMS

.01 Tax Rate Tables. For tax years beginning in 1999, the tax rate tables under

§ 1 are as follows:

TABLE 1 - Section 1(a). — MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES

If Taxable Income Is:

The Tax Is:

Not Over $43,050

15% of the taxable income

Over $43,050 but not over $104,050

$6,457.50 plus 28% of the excess over $43,050

Over $104,050 but not over $158,550

$23,537.50 plus 31% of the excess over $104,050

Over $158,550 but not over $283,150

$40,432.50 plus 36% of the excess over $158,550

Over $283,150

$85,288.50 plus 39.6% of the excess over $283,150

TABLE 2 - Section 1(b). — HEADS OF HOUSEHOLDS

If Taxable Income Is:

The Tax Is:

Not Over $34,550

15% of the taxable income

Over $34,550 but not over $89,150

$5,182.50 plus 28% of the excess over $34,550

Over $89,150 but not over $144,400

$20,470.50 plus 31% of the excess over $89,150

Over $144,400 but not over $283,150

$37,598 plus 36% of the excess over $144,400

Over $283,150

$87,548 plus 39.6% of the excess over $283,150

TABLE 3 - Section 1(c). — UNMARRIED INDIVIDUALS (OTHER THANSURVIVING SPOUSES AND HEADS OF HOUSEHOLDS)

If Taxable Income Is:

The Tax Is:

Not Over $25,750

15% of the taxable income

Over $25,750 but not over $62,450

$3,862.50 plus 28% of the excess over $25,750

Over $62,450 but not over $130,250

$14,138.50 plus 31% of the excess over $62,450

December 28, 1998

1998–52 I.R.B.

Over $130,250 but not over $283,150

$35,156.50 plus 36% of the excess over $130,250

Over $283,150

$90,200.50 plus 39.6% of the excess over $283,150

TABLE 4 - Section 1(d). — MARRIED INDIVIDUALS FILING SEPARATE RETURNS

If Taxable Income Is:

The Tax Is:

Not Over $21,525

15% of the taxable income

Over $21,525 but not over $52,025

$3,228.75 plus 28% of the excess over $21,525

Over $52,025 but not over $79,275

$11,768.75 plus 31% of the excess over $52,025

Over $79,275 but not over $141,575

$20,216.25 plus 36% of the excess over $79,275

Over $141,575

$42,644.25 plus 39.6% of the excess over $141,575

TABLE 5 - Section 1(e). — ESTATES AND TRUSTS

If Taxable Income Is:

The Tax Is:

Not Over $1,750

15% of the taxable income

Over $1,750 but not over $4,050

$262.50 plus 28% of the excess over $1,750

Over $4,050 but not over $6,200

$906.50 plus 31% of the excess over $4,050

Over $6,200 but not over $8,450

$1,573 plus 36% of the excess over $6,200

Over $8,450

$2,383 plus 39.6% of the excess over $8,450

.02 Unearned Income of Minor Children Taxed as if Parent’s Income (the

“Kiddie Tax”). For tax years beginning

in 1999, the amount in § 1(g)(4)(A)(ii)(I),

which is used to reduce the net unearned

income reported on the child’s return that

is subject to the “kiddie tax,” is $700.

(This amount is the same as the $700

standard deduction amount provided in

section 3.05(2) of this revenue procedure.) In the alternative, the same $700

amount is used for purposes of § 1(g)(7)

(that is, determining whether a parent

may elect to include a child’s gross income in the parent’s gross income and for

calculating the “kiddie tax”).

.03 Earned Income Credit.

(1) In general. For tax years beginning in 1999, the following amounts are

used to determine the earned income

credit under § 32(b). The “earned income

amount” is the amount of earned income

at or above which the maximum amount

of the earned income credit is allowed.

The “threshold phaseout amount” is the

amount of modified adjusted gross income (or, if greater, earned income)

above which the maximum amount of the

credit begins to phase out. The “completed phaseout amount” is the amount of

modified adjusted gross income (or if

greater, earned income) at or above which

no credit is allowed.

Number

of Children

Maximum

Amount of

the Credit

Earned Income

Amount

Threshold

Phaseout

Amount

Completed

Phaseout

Amount

2 or more

None

$2,312

$3,816

$ 347

$6,800

$9,540

$4,530

$12,460

$ 5,670

$26,928

$30,580

$10,200

The Internal Revenue Service, in the

instructions for the Form 1040 series, provides tables showing the amount of the

earned income credit for each type of taxpayer.

(2) Excessive investment income.

For tax years beginning in 1999, the

1998–52 I.R.B.

earned income credit is denied under

§ 32(i) if the aggregate amount of certain

investment income exceeds $2,350.

.04 Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie

Tax.” For tax years beginning in 1999, in

the case of a child to whom the § 1(g)

“kiddie tax” applies, the exemption

amount under § 55 and § 59(j) for purposes of the alternative minimum tax

under § 55 may not exceed the sum of (A)

such child’s earned income for the taxable

year, plus (B) $5,100.

.05 Standard Deduction.

December 28, 1998

(1) In general. For tax years beginning in 1999, the standard deduction

amounts under § 63(c)(2) are as follows:

Filing Status

Standard

Deduction

MARRIED INDIVIDUALS

FILING JOINT RETURNS

AND SURVIVING SPOUSES

(§ 1(a))

$7,200

HEADS OF HOUSEHOLDS

(§ 1(b))

$6,350

UNMARRIED INDIVIDUALS

(OTHER THAN SURVIVING

SPOUSES AND HEADS

OF HOUSEHOLDS) (§ 1(c)) $4,300

MARRIED INDIVIDUALS

FILING SEPARATE

RETURNS (§ 1(d))

$3,600

(2) Dependent. For tax years begin-

ning in 1999, the standard deduction

amount under § 63(c)(5) for an individual

who may be claimed as a dependent by

another taxpayer may not exceed the

greater of $700, or the sum of $250 and

the individual’s earned income.

(3) Aged and blind. For tax years

beginning in 1999, the additional standard

deduction amounts under § 63(f) for the

aged and for the blind are $850 for each.

These amounts are increased to $1,050 if

the individual is also unmarried and not a

surviving spouse.

.06 Overall Limitation on Itemized Deductions. For tax years beginning in

1999, the “applicable amount” of adjusted

gross income under § 68(b), above which

the amount of otherwise allowable itemized deductions is reduced under § 68, is

$126,600 (or $63,300 for a separate return

filed by a married individual).

.07 Income from United States Savings

Bonds for Taxpayers Who Pay Qualified

Higher Education Expenses. For tax

years beginning in 1999, the exclusion

under § 135, regarding income from

United States savings bonds for taxpayers

who pay qualified higher education expenses, begins to phase out for modified

adjusted gross income above $79,650 for

joint returns and $53,100 for other returns. This exclusion completely phases

out for modified adjusted gross income of

$109,650 or more for joint returns and

$68,100 or more for other returns.

.08 Personal Exemption.

(1) Exemption amount. For tax years

beginning in 1999, the personal exemption amount under § 151(d) is $2,750.

(2) Phaseout. For tax years beginning in 1999, the personal exemption

amount begins to phase out at, and is

completely phased out after, the following

adjusted gross income amounts:

Filing Status

Threshold

Phaseout Amount

Completed

Phaseout Amount After

Code § 1(a)

Code § 1(b)

Code § 1(c)

Code § 1(d)

$189,950

$158,300

$126,600

$ 94,975

$312,450

$280,800

$249,100

$156,225

.09 Eligible Long-Term Care Premiums. For tax years beginning in 1999, the

limitations under § 213(d), regarding eligible long-term care premiums includible

in the term “medical care,” are as follows:

Attained age before the close of the taxable year:

40 or less. . . . . . . . . . . . . . . . . . . $ 210

More than 40 but not more

than 50 . . . . . . . . . . . . . . . . . . . . . $ 400

More than 50 but not more

than 60 . . . . . . . . . . . . . . . . . . . . . $ 800

More than 60 but not more

than 70 . . . . . . . . . . . . . . . . . . . . . $2,120

More than 70. . . . . . . . . . . . . . . . $2,660

.10 Medical Savings Accounts.

(1) Self-only coverage. For tax years

beginning in 1999, the term “high deductible health plan” as defined in

§ 220(c)(2)(A) means, in the case of selfonly coverage, a health plan which has an

annual deductible that is not less than

$1,550 and not more than $2,300, and

under which the annual out-of-pocket ex-

December 28, 1998

penses required to be paid (other than for

premiums) for covered benefits does not

exceed $3,050.

(2) Family coverage. For tax years

beginning in 1999, the term “high deductible health plan” means, in the case of

family coverage, a health plan which has

an annual deductible that is not less than

$3,050 and not more than $4,600, and

under which the annual out-of-pocket expenses required to be paid (other than for

premiums) for covered benefits does not

exceed $5,600.

.11 Treatment of Dues Paid to Agricultural or Horticultural Organizations. For

tax years beginning in 1999, the limitation under § 512(d)(1), regarding the exemption of annual dues required to be

paid by a member to an agricultural or

horticultural organization, is $110.

.12 Insubstantial Benefit Limitations

for Contributions Associated with Charitable Fund-Raising Campaigns.

(1) Low cost article. For tax years

beginning in 1999, the unrelated business

income of certain exempt organizations

under § 513(h)(2) does not include a “low

cost article” of $7.20 or less.

(2) Other insubstantial benefits. For

tax years beginning in 1999, the $5, $25,

and $50 guidelines in section 3 of Rev.

Proc. 90–12, 1990–1 C.B. 471 (as amplified and modified), for disregarding the

value of insubstantial benefits received by

a donor in return for a fully deductible

charitable contribution under § 170, are

$7.20, $36, and $72, respectively.

.13 Funeral Trusts. For a contract entered into during calendar year 1999 for a

“qualified funeral trust,” as defined in

§ 685, the trust may not accept aggregate

contributions by or for the benefit of an

individual in excess of $7,100.

.14 Expatriation to Avoid Tax. For calendar year 1999, the thresholds used

under § 877(a)(2), regarding whether an

individual’s loss of United States citizenship had the avoidance of United States

taxes as one of its principal purposes, are

more than $110,000 for “average annual

net income tax” and $552,000 or more for

“net worth.”

1998–52 I.R.B.

.15 Valuation of Qualified Real Property in Decedent’s Gross Estate. For an

estate of a decedent dying in calendar

year 1999, if the executor elects to use the

special use valuation method under

§ 2032A for qualified real property, the

aggregate decrease in the value of qualified real property resulting from electing

to use § 2032A that is taken into account

for purposes of the estate tax may not exceed $760,000.

.16 Annual Exclusion for Gifts.

(1) For calendar year 1999, the first

$10,000 of gifts to any person (other than

gifts of future interests in property) are

not included in the total amount of taxable

gifts under § 2503 made during that year.

(2) For calendar year 1999, the first

$101,000 of gifts to a spouse who is not a

citizen of the United States (other than

gifts of future interests in property) are

not included in the total amount of taxable

gifts under §§ 2503 and 2523(i)(2) made

during that year.

.17 Generation-Skipping Transfer Tax

Exemption. For calendar year 1999, the

generation-skipping transfer tax exemption under § 2631, which is allowed in determining the “inclusion ratio” defined in

§ 2642, is $1,010,000.

.18 Luxury Automobile Excise Tax. For

calendar year 1999, the excise tax under

§§ 4001 and 4003 is imposed on the first

retail sale of a passenger vehicle (including certain parts or accessories installed

within six months of the date after the vehicle was first placed in service), to the

extent the price exceeds $36,000.

.19 Passenger Air Transportation Excise Tax. For calendar year 1999, the tax

under § 4261(c) on any amount paid

(whether within or without the United

States) for any transportation of any person by air, if such transportation begins or

ends in the United States, generally is

$12.20. However, in the case of a domestic segment beginning or ending in Alaska

or Hawaii as described in § 4261(c)(3),

the tax only applies to departures and is at

the rate of $6.10.

.20 Reporting Exception for Certain

Exempt Organizations with Nondeductible Lobbying Expenditures. For tax

years beginning in 1999, the annual per

person, family, or entity dues limitation to

qualify for the reporting exception under

§ 6033(e)(3) (and section 5.05 of Rev.

Proc. 98–19, 1998–7 I.R.B. 30), regarding

1998–52 I.R.B.

certain exempt organizations with nondeductible lobbying expenditures, is $77 or

less.

.21 Notice of Large Gifts Received from

Foreign Persons. For tax years beginning

in 1999, recipients of gifts from certain

foreign persons may have to report these

gifts under § 6039F if the aggregate value

of gifts received in a taxable year exceeds

$10,735.

.22 Persons against Which a Federal

Tax Lien is Not Valid. For calendar year

1999, a federal tax lien is not valid against

(1) certain purchasers under § 6323(b)(4)

that purchased personal property in a casual sale for less than $1,040, or (2) a mechanic’s lienor under § 6323(b)(7) that repaired or improved certain residential

property if the contract price with the

owner is not more than $5,220.

.23 Interest on a Certain Portion of the

Estate Tax Payable in Installments. For

an estate of a decedent dying in calendar

year 1999, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under

§ 6601(j)) of the estate tax payable in installments under § 6166 is $1,010,000.

.24 Attorney Fee Awards. For calendar

year 1999, for costs incurred on or before

January 18, 1999, the attorney fee award

limitation under § 7430(c)(1)(B)(iii) is

$120 per hour. For costs incurred after

January 18, 1999, the attorney fee award

limitation under § 7430(c)(1)(B)(iii) is

$130 per hour.

.25 Periodic Payments Received under

Qualified Long-Term Care Insurance

Contracts or under Certain Life Insurance Contracts. For calendar year 1999,

the stated dollar amount of the per diem

limitation under § 7702B(d)(4), regarding

periodic payments received under a qualified long-term care insurance contract or

periodic payments received under a life

insurance contract that are treated as paid

by reason of the death of a chronically ill

individual, is $190.

SECTION 4. EFFECTIVE DATE

.01 General Rule. Except as provided

in section 4.02, this revenue procedure

applies to tax years beginning in 1999.

.02 Calendar Year Rule. This revenue

procedure applies to transactions or

events occurring in calendar year 1999 for

purposes of section 3.13 (funeral trusts),

section 3.14 (expatriation to avoid tax),

section 3.15 (valuation of qualified real

property in decedent’s gross estate), section 3.16 (annual exclusion for gifts), section 3.17 (generation-skipping transfer

tax exemption), section 3.18 (luxury automobile excise tax), section 3.19 (passenger air transportation excise tax), section

3.22 (persons against which a federal tax

lien is not valid), section 3.23 (interest on

a certain portion of the estate tax payable

in installments), section 3.24 (attorney fee

awards), and section 3.25 (periodic payments received under qualified long-term

care insurance contracts or under certain

life insurance contracts).

SECTION 5. DRAFTING

INFORMATION

The principal author of this revenue

procedure is John Moran of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue procedure, contact

Mr. Moran on (202) 622-4940 (not a tollfree call).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement;

determination of correct tax liability.

(Also Part I, section 6662.)

Rev. Proc. 98–62

SECTION 1. PURPOSE

.01 This revenue procedure updates

Rev. Proc. 97–56, 1997–2 C.B. 582, and

identifies circumstances under which the

disclosure on a taxpayer’s return of a position with respect to an item is adequate

for the purpose of reducing the understatement of income tax under § 6662(d)

of the Internal Revenue Code (relating to

the substantial understatement aspect of

the accuracy-related penalty), and for the

purpose of avoiding the preparer penalty

under § 6694(a) (relating to understatements due to unrealistic positions). This

revenue procedure does not apply with respect to any other penalty provision (including the negligence or disregard provisions of the § 6662 accuracy-related

penalty).

.02 This revenue procedure applies to

any return filed on 1998 tax forms for a

taxable year beginning in 1998, and to

any return filed on 1998 tax forms in 1999

for short taxable years beginning in 1999.

December 28, 1998

SEC. 2. CHANGES FROM REV.

PROC. 97–56

.01 Editorial changes have been made

to update the revenue procedure for returns filed on 1998 tax forms for a taxable

year beginning in 1998, and returns filed

on 1998 tax forms in 1999 for short taxable years beginning in 1999.

.02 Section 4.01(4)(c) has been added

with regard to transactions and amounts

under §§ 6114 and 7701(b) as disclosed

on Form 8833, Treaty-Based Return Position Disclosure.

.03 Section 4.01(5)(a) of this revenue

procedure has been revised to eliminate

the reference to Form 3903-F, Foreign

Moving Expenses, because that form is

now obsolete.

.04 Section 4.01(5)(b) of Rev. Proc.

97–56 has been eliminated from this revenue procedure because Form 2119, Sale

of Your Home, has been eliminated.

SEC. 3. BACKGROUND

.01 If § 6662 applies to any portion of

an underpayment of tax required to be

shown on a return, an amount equal to 20

percent of the portion of the underpayment to which the section applies is

added to the tax. (The penalty rate is 40

percent in the case of certain gross valuation misstatements.) Under § 6662(b)(2),

§ 6662 applies to the portion of an underpayment that is attributable to a substantial understatement of income tax.

.02 Section 6662(d)(1) provides that

there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of 10 percent of

the amount of tax required to be shown on

the return for the taxable year or $5,000

($10,000 in the case of a corporation

other than an S corporation or a personal

holding company). Section 6662(d)(2)

defines an understatement as the excess of

the amount of tax required to be shown on

the return for the taxable year over the

amount of the tax that is shown on the return reduced by any rebate (within the

meaning of § 6211(b)(2)).

.03 In the case of an item not attributable to a tax shelter, § 6662(d)(2)(B)(ii)

provides that the amount of the understatement is reduced by the portion of the

understatement attributable to any item

with respect to which the relevant facts

affecting the item’s tax treatment are ade-

December 28, 1998

quately disclosed on the return or on a

statement attached to the return, and there

is a reasonable basis for the tax treatment

of such item by the taxpayer.

.04 In general, this revenue procedure

provides guidance in determining when

disclosure is adequate for purposes of

§ 6662(d). For purposes of this revenue

procedure, the taxpayer must furnish all

required information in accordance with

the applicable forms and instructions, and

the money amounts entered on these

forms must be verifiable. Guidance under

§ 6662(d) for returns filed in 1996, 1997,

and 1998 is provided in Rev. Proc. 95–55,

1995–2 C.B. 457; Rev. Proc.96–58,

1996–2 C.B. 390, and Rev. Proc. 97–56,

1997–2 C.B. 582, respectively.

SEC. 4. PROCEDURE

.01 Additional disclosure of facts relevant to, or positions taken with respect to,

issues involving any of the items set forth

below is unnecessary for purposes of reducing any understatement of income tax

under § 6662(d) provided that the forms

and attachments are completed in a clear

manner and in accordance with their instructions. The money amounts entered

on the forms must be verifiable, and the

information on the return must be disclosed in the manner described below.

For purposes of this revenue procedure, a

number is verifiable if, on audit, the taxpayer can demonstrate the origin of the

number (even if that number is not ultimately accepted by the Internal Revenue

Service) and the taxpayer can show good

faith in entering that number on the applicable form.

(1) Form 1040, Schedule A, Itemized

Deductions:

(a) Medical and Dental Expenses:

Complete lines 1 through 4, supplying all

required information.

(b) Taxes: Complete lines 5 through

9, supplying all required information.

Line 8 must list each type of tax and the

amount paid.

lines 10 through 14, supplying all required information. This section

4.01(1)(c) does not apply to (i) amounts

disallowed under § 163(d) unless Form

4952, Investment Interest Expense Deduction, is completed, or (ii) amounts disallowed under § 265.

(d) Contributions: Complete lines

15 through 18, supplying all required information. Merely entering the amount of

the donation on Schedule A, however,

will not constitute adequate disclosure if

the taxpayer receives a substantial benefit

from the donation shown. If a contribution of property other than cash is made

and the amount claimed as a deduction

exceeds $500, a properly completed Form

8283, Noncash Charitable Contributions,

must be attached to the return. This section 4.01(1)(d) will not apply to any contribution of $250 or more unless the contemporaneous written acknowledgment

requirement of § 170(f)(8) is satisfied.

(e) Casualty and Theft Losses:

Complete Form 4684, Casualties and

Thefts, and attach to the return. Each

item or article for which a casualty or

theft loss is claimed must be listed on

Form 4684.

(2) Certain Trade or Business Expenses

(including, for purposes of this section

4.01(2), the following six expenses as

they relate to the rental of property):

(a) Casualty and Theft Losses: The

procedure outlined in section 4.01(1)(e)

above must be followed.

(b) Legal Expenses: The amount

claimed must be stated. This section

4.01(2)(b) does not apply, however, to

amounts properly characterized as capital

expenditures, personal expenses, or nondeductible lobbying or political expenditures, including amounts that are required

to be (or that are) amortized over a period

of years.

The amount written off must be stated.

(d) Reasonableness of Officers’

Compensation: Form 1120, Schedule E,

Compensation of Officers, must be completed when required by its instructions.

The time devoted to business must be expressed as a percentage as opposed to

“part” or “as needed.” This section

4.01(2)(d) does not apply to “golden parachute” payments, as defined under § 280G.

This section 4.01(2)(d) will not apply to

the extent that remuneration paid or incurred exceeds the $1 million employee remuneration limitation, if applicable.

(e) Repair Expenses: The amount

claimed must be stated. This section

4.01(2)(e) does not apply, however, to any

repair expenses properly characterized as

capital expenditures or personal expenses.

1998–52 I.R.B.

(f) Taxes (other than foreign taxes):

The amount claimed must be stated.

(3) Form 1120, Schedule M-1, Reconciliation of Income (Loss) per Books With

Income per Return, provided:

(a) The amount of the deviation

from the financial books and records is

not the result of a computation that includes the netting of items; and

(b) The information provided reasonably may be expected to apprise the

Internal Revenue Service of the nature of

the potential controversy concerning the

tax treatment of the item.

(4) Foreign Tax Items:

(a) International Boycott Transactions: Transactions disclosed on Form

5713, International Boycott Report.

(b) Intercompany Transactions:

Transactions and amounts shown on

Schedule M (Form 5471), Transactions

Between Controlled Foreign Corporation

and Shareholders or Other Related Persons, lines 19 and 20, and Form 5472,

Part IV, Monetary Transactions Between

Reporting Corporations and Foreign Related Party, lines 7 and 18.

Transactions and amounts under §§ 6114

or 7701(b) as disclosed on Form 8833,

Treaty-Based Return Position Disclosure.

(5) Other:

(a) Moving Expenses: Complete

Form 3903, Moving Expenses, and attach

to the return.

(b) Employee Business Expenses:

Complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses,

and attach to the return. This section

4.01(5)(b) does not apply to club dues, or

to travel expenses for any non-employee

accompanying the taxpayer on a trip.

4136, Credit for Federal Tax Paid on

Fuels, and attach to the return.

(d) Investment Credit: Complete

Form 3468, Investment Credit, and attach

to the return.

SEC. 5. EFFECTIVE DATE

This revenue procedure applies to any

return filed on 1998 tax forms for a taxable year beginning in 1998, and to any

return filed on 1998 tax forms in 1999 for

short taxable years beginning in 1999.

1998–52 I.R.B.

SEC. 6. DRAFTING INFORMATION

The principal author of this revenue

procedure is Marc C. Porter of the Office

of Assistant Chief Counsel (Income Tax

and Accounting). For further information

regarding this revenue procedure, contact

Mr. Porter on (202) 622-4940 (not a tollfree call).

26 CFR 601.105: Examination of returns and

claims for refund, credit, or abatement;

determination of correct tax liability.

(Also Part I, Sections 62, 162, 274, 1016; 1.62–2,

1.162–7, 1.274–5T, 1.274(d)–1T, 1.1016–3.)

Rev. Proc. 98–63

SECTION 1. PURPOSE

This revenue procedure updates Rev.

Proc. 97–58, 1997–2 C.B. 587, by providing optional standard mileage rates for

employees, self-employed individuals, or

other taxpayers to use in computing the

deductible costs paid or incurred on or

after January 1, 1999, of operating an automobile for business, charitable, medical, or moving expense purposes. This

revenue procedure also provides rules

under which the amount of ordinary and

necessary expenses of local travel or

transportation away from home that are

paid or incurred by an employee will be

deemed substantiated under § 1.274–5T

of the temporary Income Tax Regulations

when a payor (the employer, its agent, or

a third party) provides a mileage allowance under a reimbursement or other

expense allowance arrangement to pay for

such expenses. Use of a method of substantiation described in this revenue procedure is not mandatory and a taxpayer

may use actual allowable expenses if the

taxpayer maintains adequate records or

other sufficient evidence for proper substantiation.

SECTION 2. SUMMARY OF

STANDARD MILEAGE RATES

.01 Standard mileage rates.

(1) Business

(section 5 below)

31 cents per mile

(2) Charitable

(section 7 below)

14 cents per mile

(3) Medical and

Moving

(section 7 below)

10 cents per mile

.02 Determination of standard mileage

rates. The business, medical, and moving

standard mileage rates reflected in this

revenue procedure are based on an annual

study of the fixed and variable costs of

operating an automobile conducted on behalf of the Service by an independent contractor, and the charitable standard

mileage rate is provided in § 170(i) of the

Internal Revenue Code. In connection

with its study, the contractor has suggested that a change be made to the study

methodology regarding the business standard mileage rate. This suggested change

would include the cost of personal rather

than business automobile insurance because taxpayers who use the business

standard mileage rate generally carry personal rather than business insurance on

their automobiles. Had it been adopted,

this suggested change would have further

decreased the business standard mileage

rate for 1999. The Service is currently reviewing this suggested change for purposes of determining the business standard mileage rate for the year 2000.

SECTION 3. BACKGROUND AND

CHANGES

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all the

ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business. Under that

provision, an employee or self-employed

individual may deduct the cost of operating an automobile to the extent that it is

used in a trade or business. However,

under § 262, no portion of the cost of operating an automobile that is attributable

to personal use is deductible.

.02 Section 274(d) provides, in part,

that no deduction shall be allowed under §

162 with respect to any listed property (as

defined in § 280F(d)(4) to include passenger automobiles and any other property

used as a means of transportation) unless

the taxpayer complies with certain substantiation requirements. The section further provides that regulations may prescribe that some or all of the

substantiation requirements do not apply

to an expense that does not exceed an

amount prescribed by such regulations.

.03 Section 1.274(d)–1T, in part, grants

the Commissioner the authority to prescribe rules relating to mileage al-

December 28, 1998

lowances for ordinary and necessary expenses of local travel and transportation

away from home. Pursuant to this grant

of authority, the Commissioner may prescribe rules under which such allowances,

if in accordance with reasonable business

practice, will be regarded as (1) equivalent to substantiation, by adequate records

or other sufficient evidence, of the

amount of such travel and transportation

expenses for purposes of § 1.274–5T(c),

and (2) satisfying the requirements of an

adequate accounting to the employer of

the amount of such expenses for purposes

of § 1.274–5T(f).

.04 Section 62(a)(2)(A) allows an employee, in determining adjusted gross income, a deduction for the expenses allowed by Part VI (§ 161 and following),

subchapter B, chapter 1 of the Code, paid

or incurred by the employee in connection

with the performance of services as an

employee under a reimbursement or other

expense allowance arrangement with a

payor.

.05 Section 62(c) provides that an

arrangement will not be treated as a reimbursement or other expense allowance

arrangement for purposes of § 62(a)(2)(A) if it—

(1) does not require the employee to

substantiate the expenses covered by the

arrangement to the payor, or

(2) provides the employee with the

right to retain any amount in excess of the

substantiated expenses covered under the

arrangement. Section 62(c) further provides that the substantiation requirements

described therein shall not apply to any

expense to the extent that, under the grant

of regulatory authority prescribed in

§ 274(d), the Commissioner has provided

that substantiation is not required for such

expense.

.06 Under § 1.62–2(c)(1), a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c)

if it meets the requirements of business

connection, substantiation, and returning

amounts in excess of expenses as specified in the regulations. Section 1.62–

2T(e)(2) specifically provides that substantiation of certain business expenses in

accordance with rules prescribed under

the authority of § 1.274(d)–1T will be

treated as substantiation of the amount of

such expenses for purposes of § 1.62–2.

Under § 1.62–2(f)(2), the Commissioner

December 28, 1998

may prescribe rules under which an

arrangement providing mileage allowances will be treated as satisfying the

requirement of returning amounts in excess of expenses, even though the

arrangement does not require the employee to return the portion of such an allowance that relates to miles of travel substantiated and that exceeds the amount of

the employee’s expenses deemed substantiated pursuant to rules prescribed under

§ 274(d), provided the allowance is reasonably calculated not to exceed the

amount of the employee’s expenses or anticipated expenses and the employee is required to return any portion of such an allowance that relates to miles of travel not

substantiated.

.07 Section 1.62–2(h)(2)(i)(B) provides

that if a payor pays a mileage allowance

under an arrangement that meets the requirements of § 1.62–2(c)(1), the portion,

if any, of the allowance that relates to

miles of travel substantiated in accordance with § 1.62–2(e), that exceeds the

amount of the employee’s expenses

deemed substantiated for such travel pursuant to rules prescribed under §§ 274(d)

and 1.274(d)–1, and that the employee is

not required to return, is subject to withholding and payment of employment

taxes. See §§ 31.3121(a)–3, 31.3231(e)–

1(a)(5), 31.3306(b)–2, and 31.3401(a)–4.

Because the employee is not required to

return this excess portion, the reasonable

period of time provisions of § 1.62–2(g)

(relating to the return of excess amounts)

do not apply to this excess portion.

.08 Under § 1.62–2(h)(2)(i)(B)(4), the

Commissioner may, in his or her discretion, prescribe special rules regarding the

timing of withholding and payment of

employment taxes on mileage allowances.

.09 Significant changes to this revenue

procedure include:

(1) the addition of a business standard mileage test under which a FAVR allowance is treated as meeting the requirements of § 280F (section 8.04(3)); and

(2) the decrease in the minimum

number of employees that must be covered by a FAVR allowance (section

8.05(4)).

SECTION 4. DEFINITIONS

.01 Standard mileage rate. The term

“standard mileage rate” means the applic-

able amount provided by the Service for

optional use by employees or self-employed individuals in computing the deductible costs of operating automobiles

(including vans, pickups, or panel trucks)

owned or leased for business purposes, or

by taxpayers in computing the deductible

costs of operating automobiles for charitable, medical, or moving expense purposes.

.02 Transportation expenses. The term

“transportation expenses” means the expenses of operating an automobile for

local travel or transportation away from

home.

.03 Mileage allowance. The term

“mileage allowance” means a payment

under a reimbursement or other expense

allowance arrangement that meets the requirements specified in § 1.62-2(c)(1) and

that is

(1) paid with respect to the ordinary

and necessary business expenses incurred, or which the payor reasonably anticipates will be incurred, by an employee

for transportation expenses in connection

with the performance of services as an

employee of the employer,

(2) reasonably calculated not to exceed the amount of the expenses or the

anticipated expenses, and

(3) paid at the applicable standard

mileage rate, a flat rate or stated schedule,

or in accordance with any other Servicespecified rate or schedule.

.04 Flat rate or stated schedule. A

mileage allowance is paid at a flat rate or

stated schedule if it is provided on a uniform and objective basis with respect to

the expenses described in section 4.03 of

this revenue procedure. Such allowance

may be paid periodically at a fixed rate, at

a cents-per-mile rate, at a variable rate

based on a stated schedule, at a rate that

combines any of these rates, or on any

other basis that is consistently applied and

in accordance with reasonable business

practice. Thus, for example, a periodic

payment at a fixed rate to cover the fixed

costs (including depreciation (or lease

payments), insurance, registration and license fees, and personal property taxes)

of driving an automobile in connection

with the performance of services as an

employee of the employer, coupled with a

periodic payment at a cents-per-mile rate

to cover the operating costs (including

gasoline and all taxes thereon, oil, tires,

1998–52 I.R.B.

and routine maintenance and repairs) of

using an automobile for such purposes, is

an allowance paid at a flat rate or stated

schedule. Likewise, a periodic payment

at a variable rate based on a stated schedule for different locales to cover the costs

of driving an automobile in connection

with the performance of services as an

employee is an allowance paid at a flat

rate or stated schedule.

SECTION 5. BUSINESS STANDARD

MILEAGE RATE

.01 In general. The standard mileage

rate for transportation expenses is 31

cents per mile for all miles of use for business purposes. This business standard

mileage rate will be adjusted annually (to

the extent warranted) by the Service, and

any such adjustment will be applied

prospectively.

.02 Use of the business standard

mileage rate. A taxpayer may use the

business standard mileage rate with respect to an automobile that is either

owned or leased by the taxpayer. A taxpayer generally may deduct an amount

equal to either the business standard

mileage rate times the number of business

miles traveled or the actual costs (both

operating and fixed) paid or incurred by

the taxpayer that are allocable to traveling

those business miles.

.03 Business standard mileage rate in

lieu of operating and fixed costs. A deduction using the standard mileage rate

for business miles is computed on a

yearly basis and is in lieu of all operating

and fixed costs of the automobile allocable to business purposes (except as provided in section 9.06 of this revenue procedure). Such items as depreciation (or

lease payments), maintenance and repairs,

tires, gasoline (including all taxes

thereon), oil, insurance, and license and

registration fees are included in operating

and fixed costs for this purpose.

.04 Parking fees, tolls, interest, and

taxes. Parking fees and tolls attributable

to use of the automobile for business purposes may be deducted as separate items.

Likewise, interest relating to the purchase

of the automobile as well as state and

local taxes (other than those included in

the cost of gasoline) may be deducted as

separate items, but only to the extent that

the interest or taxes are allowable deductions under § 163 or 164 respectively. If

1998–52 I.R.B.

the automobile is operated less than 100

percent for business purposes, an allocation is required to determine the business

and nonbusiness portion of the taxes and

interest deduction allowable. However,

§ 163(h)(2)(A) expressly provides that interest is nondeductible personal interest

when it is paid or accrued on indebtedness

properly allocable to the trade or business

of performing services as an employee.

Section 164 also expressly provides that

state and local taxes that are paid or accrued by a taxpayer in connection with an

acquisition or disposition of property will

be treated as part of the cost of the acquired property or as a reduction in the

amount realized on the disposition of such

property.

.05 Depreciation. For owned automobiles placed in service for business purposes, and for which the business standard mileage rate has been used for any

year, depreciation will be considered to

have been allowed at the rate of 12 cents a

mile for 1995, 1996, 1997, 1998, and

1999, for those years in which the business standard mileage rate was used. If

actual costs were used for one or more of

those years, the rates above will not apply

to any year in which such costs were

used. The depreciation described above

will reduce the basis of the automobile

(but not below zero) in determining adjusted basis as required by § 1016.

.06 Limitations.

(1) The business standard mileage

rate may not be used to compute the deductible expenses of (a) automobiles used

for hire, such as taxicabs, or (b) two or

more automobiles used simultaneously

(such as in fleet operations).

(2) The business standard mileage

rate may not be used to compute the deductible business expenses of an automobile leased by a taxpayer unless the taxpayer uses either the business standard

mileage rate or a FAVR allowance (as

provided in section 8 of this revenue procedure) to compute the deductible business expenses of the automobile for the

entire lease period (including renewals).

For a lease commencing on or before December 31, 1997, the “entire lease period”

means the portion of the lease period (including renewals) remaining after that

date.

(3) The business standard mileage

rate may not be used to compute the de-

ductible expenses of an automobile for

which the taxpayer has (a) claimed depreciation using a method other than straightline for its estimated useful life, (b)

claimed a § 179 deduction, or (c) used the

Accelerated Cost Recovery System

(ACRS) under former § 168 or the Modified Accelerated Cost Recovery System

(MACRS) under current § 168. By using

the business standard mileage rate, the

taxpayer has elected to exclude the automobile (if owned) from MACRS pursuant

to § 168(f)(1). If, after using the business

standard mileage rate, the taxpayer uses

actual costs, the taxpayer must use

straight-line depreciation for the automobile’s remaining estimated useful life

(subject to the applicable depreciation deduction limitations under § 280F).

(4) The business standard mileage

rate and this revenue procedure may not

be used to compute the amount of the deductible automobile expenses of an employee of the United States Postal Service

incurred in performing services involving

the collection and delivery of mail on a

rural route if the employee receives qualified reimbursements (as defined in

§ 162(o)) for such expenses. See § 162(o)

for the rules that apply to these qualified

reimbursements.

SECTION 6. RESERVED

SECTION 7. CHARITABLE,

MEDICAL, AND MOVING

STANDARD MILEAGE RATE

.01 Charitable. Section 170(i) provides a standard mileage rate of 14 cents

per mile for purposes of computing the

charitable deduction for use of an automobile in connection with rendering gratuitous services to a charitable organization under § 170.

.02 Medical and moving. The standard

mileage rate is 10 cents per mile for use of

an automobile (a) to obtain medical care

described in § 213, or (b) as part of a

move for which the expenses are deductible under § 217. The standard

mileage rates for medical and moving

transportation expenses will be adjusted

annually (to the extent warranted) by the

Service, and any such adjustment will be

applied prospectively.

.03 Charitable, medical, or moving expense standard mileage rate in lieu of operating expenses. A deduction computed

December 28, 1998

using the applicable standard mileage rate

for charitable, medical, or moving expense miles is in lieu of all operating expenses (including gasoline and oil) of the

automobile allocable to such purposes.

Costs for such items as depreciation (or

lease payments), maintenance and repairs,

tires, insurance, and license and registration fees are not deductible, and are not

included in such standard mileage rates.

.04 Parking fees, tolls, interest, and

taxes. Parking fees and tolls attributable

to the use of the automobile for charitable, medical, or moving expense purposes

may be deducted as separate items. Likewise, interest relating to the purchase of

the automobile as well as state and local

taxes (other than those included in the

cost of gasoline) may be deducted as separate items, but only to the extent that the

interest and taxes are allowable deductions under § 163 or 164, respectively.

SECTION 8. FIXED AND VARIABLE

RATE ALLOWANCE

.01 In general.

(1) The ordinary and necessary expenses paid or incurred by an employee in

driving an automobile owned or leased by

the employee in connection with the performance of services as an employee of

the employer will be deemed substantiated (in an amount determined under section 9 of this revenue procedure) when a

payor reimburses such expenses with a

mileage allowance using a flat rate or

stated schedule that combines periodic

fixed and variable rate payments that

meet all the requirements of section 8 of

this revenue procedure (a FAVR allowance).

(2) The amount of a FAVR allowance

must be based on data that (a) is derived

from the base locality, (b) reflects retail

prices paid by consumers, and (c) is reasonable and statistically defensible in approximating the actual expenses employees receiving the allowance would incur

as owners of the standard automobile.

.02 Definitions.

(1) FAVR allowance. A FAVR allowance includes periodic fixed payments

and periodic variable payments. A payor

may maintain more than one FAVR allowance. A FAVR allowance that uses the

same payor, standard automobile (or an

automobile of the same make and model

December 28, 1998

that is comparably equipped), retention

period, and business use percentage is

considered one FAVR allowance, even

though other features of the allowance

may vary. A FAVR allowance also includes any optional high mileage payments; however, such optional high

mileage payments are included in the employee’s gross income, are reported as

wages or other compensation on the employee’s Form W-2, and are subject to

withholding and payment of employment

taxes when paid. See section 9.05 of this

revenue procedure. An optional high

mileage payment covers the additional

depreciation for a standard automobile attributable to business miles driven and

substantiated by the employee for a calendar year in excess of the annual business

mileage for that year. If an employee is

covered by the FAVR allowance for less

than the entire calendar year, the annual

business mileage may be prorated on a

monthly basis for purposes of the preceding sentence.

(2) Periodic fixed payment. A periodic fixed payment covers the projected

fixed costs (including depreciation (or

lease payments), insurance, registration

and license fees, and personal property

taxes) of driving the standard automobile

in connection with the performance of

services as an employee of the employer

in a base locality, and must be paid at

least quarterly. A periodic fixed payment

may be computed by (a) dividing the total

projected fixed costs of the standard automobile for all years of the retention period, determined at the beginning of the

retention period, by the number of periodic fixed payments in the retention period, and (b) multiplying the resulting

amount by the business use percentage.

(3) Periodic variable payment. A

periodic variable payment covers the projected operating costs (including gasoline

and all taxes thereon, oil, tires, and routine maintenance and repairs) of driving a

standard automobile in connection with

the performance of services as an employee of the employer in a base locality,

and must be paid at least quarterly. The

rate of a periodic variable payment for a

computation period may be computed by

dividing the total projected operating

costs for the standard automobile for the

computation period, determined at the be-

ginning of the computation period, by the

computation period mileage. A computation period can be any period of a year or

less. Computation period mileage is the

total mileage (business and personal) a

payor reasonably projects a standard automobile will be driven during a computation period and equals the retention

mileage divided by the number of computation periods in the retention period. For

each business mile substantiated by the

employee for the computation period, the

periodic variable payment must be paid at

a rate that does not exceed the rate for that

computation period.

(4) Base locality. A base locality is

the particular geographic locality or region of the United States in which the

costs of driving an automobile in connection with the performance of services as

an employee of the employer are generally paid or incurred by the employee.

Thus, for purposes of determining the

amount of fixed costs, the base locality is

generally the geographic locality or region in which the employee resides. For

purposes of determining the amount of

operating costs, the base locality is generally the geographic locality or region in

which the employee drives the automobile in connection with the performance

of services as an employee of the employer.

(5) Standard automobile. A standard

automobile is the automobile selected by

the payor on which a specific FAVR allowance is based.

(6) Standard automobile cost. The

standard automobile cost for a calendar

year may not exceed 95 percent of the

sum of (a) the retail dealer invoice cost of

the standard automobile in the base locality, and (b) state and local sales or use

taxes applicable on the purchase of such

an automobile. Further, the standard automobile cost may not exceed $27,100.

(7) Annual mileage. Annual mileage

is the total mileage (business and personal) a payor reasonably projects a standard automobile will be driven during a

calendar year. Annual mileage equals the

annual business mileage divided by the

business use percentage.

(8) Annual business mileage. Annual business mileage is the mileage a

payor reasonably projects a standard automobile will be driven by an employee in

1998–52 I.R.B.

connection with the performance of services as an employee of the employer during the calendar year, but may not be less

than 6,250 miles for a calendar year. Annual business mileage equals the annual

mileage multiplied by the business use

percentage.

(9) Business use percentage. A business use percentage is determined by dividing the annual business mileage by the

annual mileage. The business use percentage may not exceed 75 percent. In

lieu of demonstrating the reasonableness

of the business use percentage based on

records of total mileage and business

mileage driven by the employees annually, a payor may use a business use percentage that is less than or equal to the

following percentages for a FAVR allowance that is paid for the following annual business mileage:

Annual business

mileage

6,250 or more but less

than 10,000

10,000 or more but less

than 15,000

15,000 or more but less

than 20,000

20,000 or more

Business use

percentage

45 percent

55 percent

65 percent

75 percent

(10) Retention period. A retention

period is the period in calendar years selected by the payor during which the

payor expects an employee to drive a

standard automobile in connection with

the performance of services as an employee of the employer before the automobile is replaced. Such period may not

be less than two calendar years.

(11) Retention mileage. Retention

mileage is the annual mileage multiplied

by the number of calendar years in the retention period.

(12) Residual value. The residual

value of a standard automobile is the projected amount for which it could be sold

at the end of the retention period after

being driven the retention mileage. The

Service will accept the following safe harbor residual values for a standard automobile computed as a percentage of the standard automobile cost:

Retention period

Residual value

2-year

3-year

4-year

70 percent

60 percent

50 percent

1998–52 I.R.B.

.03 FAVR allowance in lieu of operating and fixed costs.

(1) A reimbursement computed using

a FAVR allowance is in lieu of the employee’s deduction of all the operating

and fixed costs paid or incurred by an employee in driving the automobile in connection with the performance of services

as an employee of the employer, except as

provided in section 9.06 of this revenue

procedure. Such items as depreciation (or

lease payments), maintenance and repairs,

tires, gasoline (including all taxes

thereon), oil, insurance, license and registration fees, and personal property taxes

are included in operating and fixed costs

for this purpose.

(2) Parking fees and tolls attributable

to an employee driving the standard automobile in connection with the performance of services as an employee of the

employer are not included in fixed and

operating costs and may be deducted as

separate items. Similarly, interest relating

to the purchase of the standard automobile may be deducted as a separate item,

but only to the extent that the interest is an

allowable deduction under § 163.

.04 Depreciation.

(1) A FAVR allowance may not be

paid with respect to an automobile for

which the employee has (a) claimed depreciation using a method other than

straight- line for its estimated useful life,

(b) claimed a § 179 deduction, or (c) used

the Accelerated Cost Recovery System

(ACRS) under former § 168 or the Modified Accelerated Cost Recovery System

(MACRS) under current § 168. If an employee uses actual costs for an owned automobile that has been covered by a

FAVR allowance, the employee must use

straight-line depreciation for the automobile’s remaining estimated useful life

(subject to the applicable depreciation deduction limitations under § 280F).

(2) Except as provided in section

8.04(3) of this revenue procedure, the

total amount of the depreciation component for the retention period taken into account in computing the periodic fixed

payments for that retention period may

not exceed the excess of the standard automobile cost over the residual value of

the standard automobile. In addition, the

total amount of such depreciation component may not exceed the sum of the annual § 280F limitations on depreciation

(in effect at the beginning of the retention

period) that apply to the standard automobile during the retention period.

(3) If the depreciation component of

periodic fixed payments exceeds the limitations in section 8.04(2) of this revenue

procedure, that section will be treated as

satisfied in any year during which the

total annual amount of the periodic fixed

payments and the periodic variable payments made to an employee driving 80

percent of the annual business mileage of

the standard automobile does not exceed

the amount obtained by multiplying 80

percent of the annual business mileage of

the standard automobile by the applicable

business standard mileage rate for that

year (see, e.g., section 5.01 of this revenue procedure).

(4) The depreciation included in

each periodic fixed payment portion of a

FAVR allowance paid with respect to an

automobile will reduce the basis of the

automobile (but not below zero) in determining adjusted basis as required by

§ 1016. See section 8.07(2) of this revenue procedure for the requirement that

the employer report the depreciation component of a periodic fixed payment to the

employee.

.05 FAVR allowance limitations.

(1) A FAVR allowance may be paid

only to an employee who substantiates to

the payor for a calendar year at least

5,000 miles driven in connection with the

performance of services as an employee

of the employer or, if greater, 80 percent

of the annual business mileage of that

FAVR allowance. If the employee is covered by the FAVR allowance for less than

the entire calendar year, these limits may

be prorated on a monthly basis.

(2) A FAVR allowance may not be

paid to a control employee (as defined in

§ 1.61–21(f)(5) and (6), excluding the

$100,000 limitation in paragraph

(f)(5)(iii)).

(3) At no time during a calendar year

may a majority of the employees covered

by a FAVR allowance be management

employees.

(4) At all times during a calendar

year at least five employees of an employer must be covered by one or more

FAVR allowances.

(5) A FAVR allowance may be paid

only with respect to an automobile (a)

owned or leased by the employee receiv-

December 28, 1998

ing the payment, (b) the cost of which,

when new, is at least 90 percent of the

standard automobile cost taken into account for purposes of determining the

FAVR allowance for the first calendar

year the employee receives the allowance

with respect to that automobile, and (c)

the model year of which does not differ

from the current calendar year by more

than the number of years in the retention

period.

(6) A FAVR allowance may not be

paid with respect to an automobile leased

by an employee for which the employee

has used actual expenses to compute the

deductible business expenses of the automobile for any year during the entire lease

period. For a lease commencing on or before December 31, 1997, the “entire lease

period” means the portion of the lease period (including renewals) remaining after

that date.

(7) The insurance cost component of

a FAVR allowance must be based on the

rates charged in the base locality for

insurance coverage on the standard automobile during the current calendar year

without taking into account such rate-increasing factors as poor driving records or

young drivers.

(8) A FAVR allowance may be paid

only to an employee whose insurance

coverage limits on the automobile with

respect to which the FAVR allowance is

paid are at least equal to the insurance

coverage limits used to compute the periodic fixed payment under that FAVR allowance.

.06 Employee reporting. Within 30

days after an employee’s automobile is

initially covered by a FAVR allowance, or

is again covered by a FAVR allowance if

such coverage has lapsed, the employee

by written declaration must provide the

payor with the following information: (a)

the make, model, and year of the employee’s automobile, (b) written proof of

the insurance coverage limits on the automobile, (c) the odometer reading of the

automobile, (d) if owned, the purchase

price of the automobile or, if leased, the

price at which the automobile is ordinarily sold by retailers (the gross capitalized

cost of the automobile), and (e) if owned,

whether the employee has claimed depreciation with respect to the automobile

using any of the depreciation methods

prohibited by section 8.04(1) of this rev-

December 28, 1998

enue procedure or, if leased, whether the

employee has computed deductible business expenses with respect to the automobile using actual expenses. The information described in (a), (b), and (c) of the

preceding sentence also must be supplied

by the employee to the payor within 30

days after the beginning of each calendar

year that the employee’s automobile is

covered by a FAVR allowance.

.07 Payor recordkeeping and reporting.

(1) The payor or its agent must maintain written records setting forth (a) the

statistical data and projections on which

the FAVR allowance payments are based,

and (b) the information provided by the

employees pursuant to section 8.06 of this

revenue procedure.

(2) Within 30 days of the end of each

calendar year, the employer must provide

each employee covered by a FAVR allowance during that year with a statement

that, for automobile owners, lists the

amount of depreciation included in each

periodic fixed payment portion of the

FAVR allowance paid during that calendar

year and explains that by receiving a

FAVR allowance the employee has elected

to exclude the automobile from MACRS

pursuant to § 168(f)(1). For automobile

lessees, the statement must explain that by

receiving the FAVR allowance the employee may not compute the deductible

business expenses of the automobile using

actual expenses for the entire lease period

(including renewals). For a lease commencing on or before December 31, 1997,

the “entire lease period” means the portion

of the lease period (including renewals)

remaining after that date.

.08 Failure to meet section 8 requirements. If an employee receives a mileage

allowance that fails to meet one or more

of the requirements of section 8 of this

revenue procedure, the employee may not

be treated as covered by any FAVR allowance of the payor during the period of

such failure. Nevertheless, the expenses

to which that mileage allowance relates

may be deemed substantiated using the

method described in sections 5, 9.01(1),

and 9.02 of this revenue procedure to the

extent the requirements of those sections

are met.

SECTION 9. APPLICATION

.01 If a payor pays a mileage allowance

in lieu of reimbursing actual transportation expenses incurred or to be incurred

by an employee, the amount of the expenses that is deemed substantiated to the

payor is either:

(1) for any mileage allowance other

than a FAVR allowance, the lesser of the

amount paid under the mileage allowance

or the applicable standard mileage rate in

section 5.01 of this revenue procedure

multiplied by the number of business

miles substantiated by the employee; or

(2) for a FAVR allowance, the

amount paid under the FAVR allowance

less the sum of (a) any periodic variable

rate payment that relates to miles in excess of the business miles substantiated

by the employee and that the employee

fails to return to the payor although required to do so, (b) any portion of a periodic fixed payment that relates to a period

during which the employee is treated as

not covered by the FAVR allowance and

that the employee fails to return to the

payor although required to do so, and (c)

any optional high mileage payments.

.02 If the amount of transportation expenses is deemed substantiated under the

rules provided in section 9.01 of this

revenue procedure, and the employee actually substantiates to the payor the elements of time, place (or use), and business purpose of the transportation

expenses in accordance with paragraphs

(b)(2) (travel away from home), (b)(6)

(listed property, which includes passenger

automobiles and any other property used

as a means of transportation), and (c) of

§ 1.274–5T, the employee is deemed to

satisfy the adequate accounting requirements of § 1.274–5T(f), as well as the requirement to substantiate by adequate

records or other sufficient evidence for

purposes of § 1.274–5T(c). See § 1.62–

2(e)(1) for the rule that an arrangement

must require business expenses to be substantiated to the payor within a reasonable

period of time.

.03 An arrangement providing mileage

allowances will be treated as satisfying

the requirement of § 1.62–2(f)(2) with respect to returning amounts in excess of

expenses as follows:

(1) For a mileage allowance other

than a FAVR allowance, the requirement

to return excess amounts will be treated as

satisfied if the employee is required to re-

1998–52 I.R.B.

turn within a reasonable period of time (as

defined in § 1.62–2(g)) any portion of

such an allowance that relates to miles of

travel not substantiated by the employee,

even though the arrangement does not require the employee to return the portion

of such an allowance that relates to the

miles of travel substantiated and that exceeds the amount of the employee’s expenses deemed substantiated. For example, assume a payor provides an employee

an advance mileage allowance of $70

based on an anticipated 200 business

miles at 35 cents per mile (at a time when

the applicable business standard mileage

rate is 31 cents per mile), and the employee substantiates 120 business miles.

The requirement to return excess amounts

will be treated as satisfied if the employee

is required to return the portion of the allowance that relates to the 80 unsubstantiated business miles ($28) even though the

employee is not required to return the portion of the allowance ($4.80) that exceeds

the amount of the employee’s expenses

deemed substantiated under section 9.01

of this revenue procedure ($37.20) for the

120 substantiated business miles. However, the $4.80 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed in section

9.05.

(2) For a FAVR allowance, the requirement to return excess amounts will

be treated as satisfied if the employee is

required to return within a reasonable period of time (as defined in § 1.62–2(g)),

(a) the portion (if any) of the periodic

variable payment received that relates to

miles in excess of the business miles substantiated by the employee, and (b) the

portion (if any) of a periodic fixed payment that relates to a period during which

the employee was not covered by the

FAVR allowance.

.04 An employee is not required to include in gross income the portion of a

mileage allowance received from a payor

that is less than or equal to the amount

deemed substantiated under section 9.01

of this revenue procedure, provided the

employee substantiates in accordance

with section 9.02. See § 1.274–5T(f)(2)(i). In addition, such portion of the allowance is treated as paid under an accountable plan, is not reported as wages

or other compensation on the employee’s

Form W-2, and is exempt from the with-

1998–52 I.R.B.

holding and payment of employment

taxes. See §§ 1.62–2(c)(2) and (c)(4).

.05 An employee is required to include

in gross income only the portion of a

mileage allowance received from a payor

that exceeds the amount deemed substantiated under section 9.01 of this revenue

procedure, provided the employee substantiates in accordance with section 9.02

of this revenue procedure. See § 1.274–

5T(f)(2)(ii). In addition, the excess portion of the allowance is treated as paid

under a nonaccountable plan, is reported

as wages or other compensation on the

employee’s Form W–2, and is subject to

withholding and payment of employment

taxes. See §§ 1.62–2(c)(3)(ii), (c)(5), and

(h)(2)(i)(B).

.06

(1) Except as otherwise provided in

section 9.06(2) of this revenue procedure

with respect to leased automobiles, if the

amount of the expenses deemed substantiated under the rules provided in section

9.01 of this revenue procedure is less than

the amount of the employee’s business

transportation expenses, the employee

may claim an itemized deduction for the

amount by which the business transportation expenses exceed the amount that is

deemed substantiated, provided the employee substantiates all the business transportation expenses, includes on Form

2106, Employee Business Expenses, the

deemed substantiated portion of the

mileage allowance received from the

payor, and includes in gross income the

portion (if any) of the mileage allowance

received from the payor that exceeds the

amount deemed substantiated. See

§ 1.274–5T(f)(2)(iii). However, for purposes of claiming this itemized deduction,

substantiation of the amount of the expenses is not required if the employee is

claiming a deduction that is equal to or

less than the applicable standard mileage

rate multiplied by the number of business

miles substantiated by the employee

minus the amount deemed substantiated

under section 9.01 of this revenue procedure. The itemized deduction is subject

to the 2-percent floor on miscellaneous

itemized deductions provided in § 67.

(2) An employee whose business

transportation expenses with respect to a

leased automobile are deemed substantiated under section 9.01(1) of this revenue

procedure (relating to an allowance other

than a FAVR allowance) may not claim a

deduction based on actual expenses unless the employee does so consistently beginning with the first business use of the

automobile after December 31, 1997.

However, an employee whose business

transportation expenses with respect to a

leased automobile are deemed substantiated under section 9.01(2) of this revenue

procedure (relating to a FAVR allowance)

may not claim a deduction based on actual expenses.

.07 An employee may deduct an

amount computed pursuant to section

5.01 of this revenue procedure only as an

itemized deduction. This itemized deduction is subject to the 2-percent floor on

miscellaneous itemized deductions provided in § 67.

.08 A self-employed individual may

deduct an amount computed pursuant to

section 5.01 of this revenue procedure in

determining adjusted gross income under

§ 62(a)(1).

.09 If a payor’s reimbursement or other

expense allowance arrangement evidences a pattern of abuse of the rules of

§ 62(c) and the regulations thereunder, all

payments under the arrangement will be

treated as made under a nonaccountable

plan. Thus, such payments are included

in the employee’s gross income, are reported as wages or other compensation on

the employee’s Form W–2, and are subject to withholding and payment of employment taxes. See §§ 1.62–2(c)(3),

(c)(5), and (h)(2).

SECTION 10. WITHHOLDING AND

PAYMENT OF EMPLOYMENT

TAXES.

.01 The portion of a mileage allowance

(other than a FAVR allowance), if any,

that relates to the miles of business travel

substantiated and that exceeds the amount

deemed substantiated for those miles

under section 9.01(1) of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62–

2(h)(2)(i)(B).

(1) In the case of a mileage allowance paid as a reimbursement, the excess described in section 10.01 of this

revenue procedure is subject to withholding and payment of employment taxes in

the payroll period in which the payor reimburses the expenses for the business

December 28, 1998

miles substantiated. See § 1.62–2(h)(2)(i)(B)(2).

(2) In the case of a mileage allowance paid as an advance, the excess

described in section 10.01 of this revenue

procedure is subject to withholding and

payment of employment taxes no later

than the first payroll period following the

payroll period in which the business miles

with respect to which the advance was

paid are substantiated. See § 1.62–2(h)(2)(i)(B)(3). If some or all of the business

miles with respect to which the advance

was paid are not substantiated within a

reasonable period of time and the employee does not return the portion of the

allowance that relates to those miles

within a reasonable period of time, the

portion of the allowance that relates to

those miles is subject to withholding and

payment of employment taxes no later

than the first payroll period following the

end of the reasonable period. See § 1.622(h)(2)(i)(A).

(3) In the case of a mileage allowance that is not computed on the basis

of a fixed amount per mile of travel (e.g.,

a mileage allowance that combines periodic fixed and variable rate payments, but

that does not satisfy the requirements of

section 8 of this revenue procedure), the

payor must compute periodically (no less

frequently than quarterly) the amount, if

any, that exceeds the amount deemed substantiated under section 9.01(1) of this

revenue procedure by comparing the total

mileage allowance paid for the period to

the applicable standard mileage rate in

section 5.01 of this revenue procedure

multiplied by the number of business

miles substantiated by the employee for

the period. Any excess is subject to withholding and payment of employment

taxes no later than the first payroll period

following the payroll period in which the

excess is computed. See § 1.62–2(h)(2)(i)(B)(4).

(4) For example, assume an employer pays its employees a mileage allowance at a rate of 35 cents per mile

(when the business standard mileage rate

is 31 cents per mile). The employer does

not require the return of the portion of the

allowance (4 cents) that exceeds the business standard mileage rate for the business miles substantiated. In June, the employer advances an employee $175 for

500 miles to be traveled during the

December 28, 1998

month. In July, the employee substantiates to the employer 400 business miles

traveled in June and returns $35 to the

employer for the 100 business miles not

traveled. The amount deemed substantiated for the 400 miles traveled is $124

and the employee is not required to return

the remaining $16. No later than the first

payroll period following the payroll period in which the 400 business miles traveled are substantiated, the employer must

withhold and pay employment taxes on

$16.

.02 The portion of a FAVR allowance,

if any, that exceeds the amount deemed

substantiated for those miles under section 9.01(2) of this revenue procedure is

subject to withholding and payment of

employment taxes. See § 1.62–2(h)(2)(i)(B).

(1) Any periodic variable rate payment that relates to miles in excess of the

business miles substantiated by the employee and that the employee fails to return within a reasonable period, or any

portion of a periodic fixed payment that

relates to a period during which the employee is treated as not covered by the

FAVR allowance and that the employee

fails to return within a reasonable period,

is subject to withholding and payment of

employment taxes no later than the first

payroll period following the end of the

reasonable period. See § 1.62–2(h)(2)(i)(A).

(2) Any optional high mileage payment is subject to withholding and payment of employment taxes when paid.

SECTION 11. EFFECT ON OTHER

DOCUMENTS

Rev. Proc. 97–58, 1997–2 C.B. 587, is

hereby superseded for mileage allowances paid to an employee on or after

January 1, 1999, with respect to transportation expenses paid or incurred on or

after January 1, 1999, and, for purposes of

computing the amount allowable as a deduction, for transportation expenses paid

or incurred on or after January 1, 1999.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Edwin B. Cleverdon of the

Office of Assistant Chief Counsel (Income Tax and Accounting). For further

information regarding this revenue proce-

dure, contact Mr. Cleverdon at (202) 6224920 (not a toll-free call).

26 CFR 601.105: Examination of returns and

claims for refund, credit, or abatement;

determination of correct tax liability.

(Also Part I, §§ 62, 162, 267, 274; 1.62–2,

1.162–17, 1.267(a)–1, 1.274–5T, 1.274(d)–1T.)

Rev. Proc. 98–64

SECTION 1. PURPOSE

This revenue procedure updates Rev.

Proc. 97–59, 1997–2 C.B. 594, by providing rules under which the amount of ordinary and necessary business expenses of

an employee for lodging, meal, and incidental expenses or for meal and incidental

expenses incurred while traveling away

from home will be deemed substantiated

under § 1.274–5T of the temporary Income Tax Regulations when a payor (the

employer, its agent, or a third party) provides a per diem allowance under a reimbursement or other expense allowance

arrangement to pay for such expenses.

This revenue procedure also provides an

optional method for employees and selfemployed individuals to use in computing

the deductible costs of business meal and

incidental expenses paid or incurred while

traveling away from home. Use of a

method described in this revenue procedure is not mandatory and a taxpayer may

use actual allowable expenses if the taxpayer maintains adequate records or other

sufficient evidence for proper substantiation. This revenue procedure does not

provide rules under which the amount of

an employee’s lodging expenses will be

deemed substantiated when a payor provides an allowance to pay for those expenses but not meal and incidental expenses.

SECTION 2. BACKGROUND AND

CHANGES

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all the

ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or business. Under that

provision, an employee or self-employed

individual may deduct expenses paid or

incurred while traveling away from home

in pursuit of a trade or business. However, under § 262, no portion of such

travel expenses that is attributable to per-

1998–52 I.R.B.

sonal, living, or family expenses is deductible.

.02 Section 274(n) generally limits the

amount allowable as a deduction under

§ 162 for any expense for food, beverages, or entertainment to 50 percent of the

amount of the expense that otherwise

would be allowable as a deduction. In the

case of any expenses for food or beverages consumed while away from home

(within the meaning of § 162(a)(2)) by an

individual during, or incident to, the period of duty subject to the hours of service

limitations of the Department of Transportation, § 274(n)(3) gradually increases

the deductible percentage to 80 percent

for taxable years beginning in 2008. For

taxable years beginning in 1999, the deductible percentage for these expenses is

55 percent.

.03 Section 274(d) provides, in part,

that no deduction shall be allowed under

§ 162 for any traveling expense (including meals and lodging while away from

home) unless the taxpayer complies with

certain substantiation requirements. The

section further provides that regulations

may prescribe that some or all of the substantiation requirements do not apply to

an expense that does not exceed an

amount prescribed by such regulations.

.04 Section 1.274(d)–1T(a) of the regulations, in part, grants the Commissioner

the authority to prescribe rules relating to

reimbursement arrangements or per diem

allowances for ordinary and necessary expenses paid or incurred while traveling

away from home. Pursuant to this grant

of authority, the Commissioner may prescribe rules under which such arrangements or allowances, if in accordance

with reasonable business practice, will be

regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of such

travel expenses for purposes of § 1.274–

5T(c), and (2) as satisfying the requirements of an adequate accounting to the

employer of the amount of such travel expenses for purposes of § 1.274–5T(f).

.05 For purposes of determining adjusted gross income, § 62(a)(2)(A) allows

an employee a deduction for expenses allowed by Part VI (§ 161 and following),

subchapter B, chapter 1 of the Code, paid

or incurred by the employee in connection

with the performance of services as an

employee under a reimbursement or other

1998–52 I.R.B.

expense allowance arrangement with a

payor.

.06 Section 62(c) provides that an

arrangement will not be treated as a reimbursement or other expense allowance

arrangement for purposes of § 62(a)(2)(A) if it—

(1) does not require the employee to

substantiate the expenses covered by the

arrangement to the payor, or

(2) provides the employee with the

right to retain any amount in excess of the

substantiated expenses covered under the

arrangement.

Section 62(c) further provides that the

substantiation requirements described

therein shall not apply to any expense to

the extent that, under the grant of regulatory authority prescribed in § 274(d), the

Commissioner has provided that substantiation is not required for such expense.

.07 Under § 1.62–2(c)(1) a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c)

if it meets the requirements of business

connection, substantiation, and returning

amounts in excess of expenses as specified in the regulations. Section 1.62–

2T(e)(2) specifically provides that substantiation of certain business expenses in

accordance with rules prescribed under

the authority of § 1.274(d)–1T(a) or

1.274–5T(j) will be treated as substantiation of the amount of such expenses for

purposes of § 1.62–2. Under § 1.62–

2(f)(2), the Commissioner may prescribe

rules under which an arrangement providing per diem allowances will be treated as

satisfying the requirement of returning

amounts in excess of expenses, even

though the arrangement does not require

the employee to return the portion of such

an allowance that relates to days of travel

substantiated and that exceeds the amount

of the employee’s expenses deemed substantiated pursuant to rules prescribed

under § 274(d), provided the allowance is

reasonably calculated not to exceed the

amount of the employee’s expenses or anticipated expenses and the employee is required to return any portion of such an allowance that relates to days of travel not

substantiated.

.08 Section 1.62–2(h)(2)(i)(B) provides

that if a payor pays a per diem allowance

that meets the requirements of § 1.62–

2(c)(1), the portion, if any, of the allowance that relates to days of travel sub-

stantiated in accordance with § 1.62–2(e),

that exceeds the amount of the employee’s expenses deemed substantiated

for such travel pursuant to rules prescribed under § 274(d) and § 1.274(d)–

1(a) or § 1.274–5T(j), and that the employee is not required to return, is subject

to withholding and payment of employment taxes. See §§ 31.3121(a)–3,

31.3231(e)–1(a)(5), 31.3306(b)–2, and

31.3401(a)–4. Because the employee is

not required to return this excess portion,

the reasonable period of time provisions

of § 1.62–2(g) (relating to the return of

excess amounts) do not apply to this portion.

.09 Under § 1.62–2(h)(2)(i)(B)(4), the

Commissioner may, in his or her discretion, prescribe special rules regarding the

timing of withholding and payment of

employment taxes on per diem allowances.

.10 Section 1.274–5T(j) grants the

Commissioner the authority to establish a

method under which a taxpayer may elect

to use a specified amount for meals paid

or incurred while traveling away from

home in lieu of substantiating the actual

cost of meals.

.11 Section 5.04 of this revenue procedure contains revisions to the list of highcost localities and to the high-low rates

for purposes of section 5.

SECTION 3. DEFINITIONS

.01 Per diem allowance. The term “per

diem allowance” means a payment under

a reimbursement or other expense allowance arrangement that meets the requirements specified in § 1.62-2(c)(1) and

that is

(1) paid with respect to ordinary and

necessary business expenses incurred, or

which the payor reasonably anticipates

will be incurred, by an employee for lodging, meal, and incidental expenses or for

meal and incidental expenses for travel

away from home in connection with the

performance of services as an employee

of the employer,

(2) reasonably calculated not to exceed the amount of the expenses or the

anticipated expenses, and

(3) paid at or below the applicable

Federal per diem rate, a flat rate or stated

schedule, or in accordance with any other

Service-specified rate or schedule.

December 28, 1998

.02 Federal per diem rate.

(1) General rule. The Federal per

diem rate is equal to the sum of the Federal lodging expense rate and the Federal

meal and incidental expense (M&IE) rate

for the locality of travel. Each of these

rates for a particular locality in the continental United States (“CONUS”) is set

forth in Appendix A of 41 C.F.R., Chapter

301, as amended. See 41 C.F.R. Part 3017 (1998), as amended, for specific rules

regarding these Federal rates. Each of

these rates is established by the Secretary

of Defense for a particular nonforeign locality outside the continental United

States (“OCONUS”) (including Alaska,

Hawaii, Puerto Rico, the Northern Mariana Islands, and the possessions of the

United States), and by the Secretary of

State for a particular foreign OCONUS

locality. Each of these OCONUS rates is

published in the Per Diem Supplement to

the Standardized Regulations (Government Civilians, Foreign Areas). See, e.g.,

Maximum Travel Per Diem Allowances

for Foreign Areas, PD Supplement 415,

issued December 1, 1998.

(2) Locality of travel. The term “locality of travel” means the locality where

an employee traveling away from home in

connection with the performance of services as an employee of the employer

stops for sleep or rest.

(3) Incidental expenses. The term

“incidental expenses” includes, but is not

limited to, expenses for laundry, cleaning

and pressing of clothing, and fees and tips

for services, such as for porters and baggage carriers. The term “incidental expenses” does not include taxicab fares,

lodging taxes, or the costs of telegrams or

telephone calls.

.03 Flat rate or stated schedule.

(1) In general. Except as provided

in section 3.03(2) of this revenue procedure, an allowance is paid at a flat rate or

stated schedule if it is provided on a uniform and objective basis with respect to

the expenses described in section 3.01 of

this revenue procedure. Such allowance

may be paid with respect to the number of

days away from home in connection with

the performance of services as an employee or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for

example, an hourly payment to cover

meal and incidental expenses paid to a

December 28, 1998

pilot or flight attendant who is traveling

away from home in connection with the

performance of services as an employee is

an allowance paid at a flat rate or stated

schedule. Likewise, a payment based on

the number of miles traveled (e.g., cents

per mile) to cover meal and incidental expenses paid to an over-the-road truck driver who is traveling away from home in

connection with the performance of services as an employee is an allowance paid

at a flat rate or stated schedule.

(2) Limitation. For purposes of this

revenue procedure, an allowance that is

computed on a basis similar to that used

in computing the employee’s wages or

other compensation (e.g., the number of

hours worked, miles traveled, or pieces

produced) does not meet the business

connection requirement of § 1.62–2(d), is

not a per diem allowance, and is not paid

at a flat rate or stated schedule, unless, as

of December 12, 1989, (a) the allowance

was identified by the payor either by making a separate payment or by specifically

identifying the amount of the allowance,

or (b) an allowance computed on that

basis was commonly used in the industry

in which the employee is employed. See

§ 1.62–2(d)(3)(ii).

SECTION 4. PER

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