# Bulletin No. 1998–52

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Bulletin No. 1998–52
December 28, 1998

Internal Revenue

bulletin
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 Rul. 97–56 supplemented and superseded.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 Rul. 97–57 supplemented and superseded.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.

2

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.

3

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

4

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.

5

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.

6

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

7

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

8

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.

9

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

10

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

11

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.
(c) At the prefiling conference, the
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),

12

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:
1.
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.]
2.
Covered Transactions. This APA governs the pricing of the transactions specified in Appendix A (the “Covered
Transactions”).
3.

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:

i.

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.

13

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.
4.

Term.

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

5.
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.
6.
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.

7.
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.
8.
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.
9.
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

14

1998–52 I.R.B.

APPENDIX A
TRANSFER PRICING METHODOLOGY

For each APA Year:
A.

Covered Transactions.
The Covered Transactions for this APA consist of _______________________.

B.

Transfer Pricing Methodology (“TPM”).

*****
APPENDIX B
APA RECORDS
3.

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.

2.

[Insert here other records].

*****
APPENDIX C
CRITICAL ASSUMPTIONS
4.

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.

2.

[Insert here other Critical Assumptions.]

1998–52 I.R.B.

15

December 28, 1998

APPENDIX D
ANNUAL REPORT

Taxpayer shall include the following in its Annual Report for each APA Year:
5.

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.

6.

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.

7.

The Financial Statements.

8.

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

9.

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

16

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

17

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

32

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

59(j)

.05 Standard Deduction

63

December 28, 1998

18

1998–52 I.R.B.

.06 Overall Limitation on Itemized Deductions

68

.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).

19

.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

20

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

1
2 or more
None

$2,312
$3,816
$ 347

$6,800
$9,540
$4,530

$12,460
$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)

21

“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

22

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),

23

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.
(c) Interest Expense: Complete
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.

24

(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.
(c) Specific Bad Debt Charge-off:
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.
(c) Treaty-Based Return Position:
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.
(c) Fuels Credit: Complete Form
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

25

.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-

26

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-

27

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,

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A9f567ae96dc60b8b. Public record. Not legal advice.