# Bulletin No. 1998–17

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ab5eb1c835d8c93aa

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Internal Revenue

bulletin

Bulletin No. 1998–17
April 27, 1998

HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
REG–209682–94, page 20.
Proposed regulations under sections 743, 755, and 1017
of the Code provide guidance to partnerships and their partners concerning the optional adjustments to the basis of
partnership property, the allocation of basis adjustments
among partnership assets, and the computation of a partner’s share of the adjusted basis of depreciable partnership
property.

Rev. Proc. 98–30, page 6.
Automobile owners and lessees. This procedure provides
owners and lessees of passenger automobiles (including
electric automobiles) with tables detailing the limitations on
depreciation deductions for automobiles first placed in service during calendar year 1998 and the amounts to be included in income for automobiles first leased during calendar year 1998. In addition, this revenue procedure provides
the maximum allowable value of employer-provided automobiles first made available to employees for personal use in
calendar year 1998 for which the vehicle cents-per-mile valuation rule provided under section 1.61–21(e) of the Income
Tax Regulations may be applicable.

EMPLOYEE PLANS
Notice 98–24, page 5.
Qualified plans; net unrealized appreciation; capital
gains. This notice describes the holding period to be used
for determining the capital gains tax treatment of net unrealized appreciation in the distribution of employer securities
from a qualified plan as a result of section 311 of the Taxpayer Relief Act of 1997, Pub. L. No. 105–34.

EXEMPT ORGANIZATIONS
Announcement 98–33, page 39.
A list is provided of organizations that no longer qualify as

organizations to which contributions are deductible under
section 170 of the Code.

Announcement 98–34, page 39.
A list is given of organizations now classified as private foundations.

ADMINISTRATIVE
Rev. Proc. 98–32, page 11.
Information is provided about the Electronic Federal Tax Payment System (EFTPS) programs for Batch Filers and Bulk Filers (Filers). EFTPS is an electronic remittance processing
system for making federal tax deposits (FTDs) and federal
tax payments (FTPs). The Batch Filer and Bulk Filer programs are used by Filers for electronically submitting enrollments, FTDs, and FTPs on behalf of multiple taxpayers.

Notice 98–22, page 5.
This notice announces that shareholders of passive foreign
investment companies may apply the rules of section
1.1295–1T(b)(4), (f), and (g) of the Income Tax Regulations
to taxable years beginning before January 1, 1998.

Announcement 98–30, page 38.
The penalty under section 6677 of the Code will not be imposed on a U.S. owner of a foreign trust for failure to timely
file if the foreign trust files Form 3520–A and furnishes the
required statements to the U.S. owners and U.S. beneficiaries in accordance with this announcement.

Announcement 98–32, page 39.
This announcement withdraws the notice issued under section 7428(c) of the Code in Internal Revenue Bulletin
1997–52, dated December 29, 1997, with respect to the
organization At Cost Services, Inc.

Announcement 98–35, page 40.
An updated edition of Publication 954, Tax Incentives for Empowerment Zones and Other Distressed Communities (revised March 1998), is now available.

Finding Lists begin on page 43.
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 41.

Department of the Treasury
Internal Revenue Service

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

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

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined
26 CFR 61–21: Taxation of fringe benefits.
This procedure provides the maximum value of
employer-provided automobiles first made available
to employees for personal use in calendar year 1998
for which the vehicle cents-per-mile valuation rule
provided under § 1.61–21(e) of the Income Tax Regulations may be applicable. See Rev. Proc. 98–30,
page 6.

Section 280F.—Limitation on
Depreciation for Luxury
Automobiles; Limitation Where
Certain Property Used for
Personal Purposes

service during calendar year 1998 and the amounts
to be included in income for automobiles first leased
during calendar year 1998. See Rev. Proc. 98–30,
page 6.

Section 1295.—Qualified
Electing Funds
Notice 98–22 announces that final regulations
under section 1295 will permit shareholders of passive foreign investment companies treated as qualified electing funds to apply the rules of
§ 1.1295–1T(b)(4) (joint return elections), the rules
of § 1.1295–1T(f) and (g) (simplified filing and reporting procedures), or both sets of rules to a taxable
year beginning before January 1, 1998. See Notice
98–22, page 5.

26 CFR 280F–7: Property leased after December
31, 1986.

Section 6302.—Mode or Time of
Collection

This procedure provides owners and lessees of
passenger automobiles (including electric automobiles) with tables detailing the limitations on depreciation deductions for automobiles first placed in

26 CFR 31.6302–1: Federal tax deposit rules for
withheld income taxes and taxes under the Federal
Insurance Contributions Act (FICA) attributable to
payments made after December 31, 1992.

April 27, 1998

Information is provided about the Electronic Federal Tax Payment System (EFTPS) programs for
Batch Filers and Bulk Filers (Filers). EFTPS is an
electronic remittance processing system for making
federal tax deposits (FTDs) and federal tax payments (FTPs). The Batch Filer and Bulk Filer programs are used by Filers for electronically submitting enrollments, FTDs, and FTPs on behalf of
multiple taxpayers. See Rev. Proc. 98–32, page 11.

4

1998–17 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Application of Section 1.1295–
1T(b)(4), (f), and (g) to Taxable
Years Beginning Before
January 1, 1998
Notice 98–22
This notice provides guidance to direct
or indirect shareholders of passive foreign
investment companies (PFICs), as defined in section 1297 of the Internal Revenue Code, concerning the effective date
of § 1.1295–1T(b)(4), (f), and (g) of the
temporary regulations published in the
Federal Register on January 2, 1998, as
T.D. 8750. As described below, final regulations under section 1295 will permit
shareholders of PFICs to apply the rules
of § 1.1295–1T(b)(4), the rules of
§ 1.1295–1T(f) and (g), or both sets of
rules to a taxable year beginning before
January 1, 1998, for which the period of
limitations has not run as of the date of
publication of this notice, provided that,
in the case of § 1.1295–1T(b)(4), the
shareholders consistently apply the rules
to all subsequent taxable years.
BACKGROUND
Section 1.1295–1T(b)(4) of the temporary regulations provides rules concerning a section 1295 election made by a taxpayer in a joint return under section 6013.
Section 1.1295–1T(f) and (g) provide
simplified rules concerning the manner of
making and maintaining a section 1295
election to treat a PFIC as a qualified
electing fund (QEF). Prior to the publication of § 1.1295–1T(f) and (g), Notice
88–125, 1988–2 C.B. 535, provided such
guidance. Under § 1.1295–1T(k),
§ 1.1295–1T(b)(4), (f), and (g) is effective
for taxable years of shareholders beginning after December 31, 1997.
APPLICATION TO EARLIER
TAXABLE YEARS
Commenters have requested that
§ 1.1295–1T(b)(4) apply on an elective
basis to taxable years beginning before
January 1, 1998, to provide taxpayers certainty with respect to elections made on
joint returns for such years. Commenters
also requested that § 1.1295–1T(f) and (g)
apply on an elective basis to taxable years

1998–17 I.R.B.

beginning before January 1, 1998, to enable taxpayers to use the simplified reporting procedures for 1997. In response
to these comments, the final regulations
will permit taxpayers to apply the rules of
temporary regulations § 1.1295–1T(b)(4),
the rules of § 1.1295–1T(f) and (g), or
both sets of rules, to a taxable year beginning before January 1, 1998, for which
the statute of limitations on the assessment of tax has not expired as of the date
of publication of this notice. Taxpayers
that filed a joint return in which the section 1295 election was made may only
apply the rules of §1.1295–1T(b)(4) if
they have consistently applied the rules of
that section to all taxable years following
the year in which the election was made
and for which the statute of limitations for
the assessment of tax is open. Subject to
this consistency requirement, the rule of
§1.1295–1T(b)(4) may be applied to any
open year even if the section 1295 election was made in a year for which the
statute of limitations has expired. No action other than treatment consistent with
an effective section 1295 election is necessary for the section 1295 election to be
treated as made by both spouses.
PAPERWORK REDUCTION ACT
The collections of information requirements contained in the temporary regulations to which this notice applies were reviewed and, pending receipt and
evaluation of public comments, approved
by the Office of Management and Budget
(OMB) in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545-1555.
FOR FURTHER INFORMATION CONTACT Teresa Hughes at (202) 622-3840
(not a toll-free call).

Net Unrealized Appreciation in
Employer Securities
Notice 98–24
PURPOSE
This notice provides guidance concerning the tax treatment of net unrealized appreciation in employer securities distrib-

5

uted from a qualified retirement plan, to
the extent such appreciation is realized in
a subsequent taxable transaction. Specifically, this notice provides guidance regarding the holding period to be used for
determining the capital gains tax rate that
applies with regard to net unrealized appreciation under § 1(h) of the Internal
Revenue Code (“Code”) as amended by
§ 311 of the Taxpayer Relief Act of 1997
(“TRA ’97”), Pub. L. 105–34. This guidance applies to sales or other dispositions
of employer securities that occur before
the later of January 1, 2001, or the date
further guidance is issued.
BACKGROUND
Section 402(e)(4)(A) of the Code provides that in the case of a distribution
other than a lump sum distribution, the
amount actually distributed to a distributee from a trust described in § 401(a)
which is exempt from tax under § 501(a)
shall not include any net unrealized appreciation in employer securities attributable to amounts contributed by the employee.
Section 402(e)(4)(B) provides that in
the case of a lump sum distribution which
includes employer securities, there shall
be excluded from gross income the net
unrealized appreciation attributable to the
employer securities.
Section 402(e)(4)(C) provides that, for
purposes of § 402(e)(4)(A) and (B), net
unrealized appreciation and the resulting
adjustments to basis are determined in accordance with regulations.
Section 1.402(a)–1(b)(1)(i) of the Income Tax Regulations provides that the
amount of net unrealized appreciation
which is not included in the basis of the
securities in the hands of the distributee at
the time of distribution is considered a
gain from the sale or exchange of a capital
asset held for more than six months to the
extent such appreciation is realized in a
subsequent taxable transaction. Net gain
realized by the distributee in a subsequent
taxable transaction that exceeds the
amount of the net unrealized appreciation
at the time of distribution shall constitute
a long-term or short-term capital gain, depending on the holding period of the securities in the hands of the distributee. In

April 27, 1998

1956, when this regulation was issued, the
long-term capital gains tax rate applied to
the sale or exchange of a capital asset held
for more than six months.
Rev. Rul. 81–122, 1981–1 C.B. 202,
states that the amount of net unrealized
appreciation that is not included in the
basis of the securities in the hands of a
distributee at the time of distribution is
considered a gain from the sale or exchange of a capital asset held for more
than one year to the extent it is realized in
a subsequent transaction. When this revenue ruling was published, the long-term
capital gains tax rate applied to the sale or
exchange of a capital asset held for more
than one year.
Section 311 of TRA ’97 reduces the
capital gains tax rate on the sale or exchange of certain assets held for more
than 18 months from 28 percent to 20 percent (10 percent in the case of gain that
would otherwise be taxed at 15 percent),
effective generally for amounts properly
taken into account after May 6, 1997. See
Notice 97–59, 1997–45 I.R.B. 7. The 28percent maximum capital gains tax rate
continues to apply to the sale or exchange
of assets held for 18 months or less but
more than one year.
CAPITAL GAINS RATE APPLICABLE
TO NET UNREALIZED
APPRECIATION
Under this notice, the amount of net
unrealized appreciation which is not included in the basis of the securities in the
hands of the distributee at the time of distribution is considered a gain from the
sale or exchange of a capital asset held for
more than 18 months to the extent that
such appreciation is realized in a subsequent taxable transaction. Accordingly,
for a sale or other disposition of employer
securities that occurs after May 6, 1997,
the actual period that an employer security was held by a qualified plan need not
be calculated in order to determine
whether, with respect to the net unrealized
appreciation, the disposition qualifies for
the rate for capital assets held for more
than 18 months. However, with respect to
any further appreciation in the employer
securities after distribution from the plan,
the actual holding period in the hands of
the distributee determines the capital
gains rate that applies.

April 27, 1998

The guidance provided in this notice
applies to sales or other dispositions of
employer securities that occur before the
later of January 1, 2001, or the date further guidance is issued. This guidance is
for purposes of the Code and regulation
sections cited above. No inference is intended with regard to any other section of
the Code or regulations that deals with
capital gains treatment.
COMMENTS
Beginning in 2001, § 311 of TRA ’97
reduces the capital gains tax rates for gain
from certain assets that are held for more
than 5 years (“qualified 5-year gain”).
The 10-percent rate is reduced to 8 percent for taxable years beginning after December 31, 2000. The 20-percent rate is
reduced to 18 percent for property the
holding period for which begins after December 31, 2000.
The Service invites comments with respect to the computation of the holding
period for purposes of the reduced capital
gains tax rates for qualified 5-year gain as
these rates apply to net unrealized appreciation (for example, whether to use an
actual holding period, a deemed holding
period, or a combination). Comments
should be submitted by October 24, 1998.
Comments can be addressed to
CC:DOM:CORP:R (Notice 98–24), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the hours
of 8 a.m. and 5 p.m. to CC:DOM:CORP:
R (Notice 98–24), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alternatively, taxpayers may transmit comments
electronically via the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
DRAFTING INFORMATION
The principal author of this notice is
Steven Linder of the Employee Plans Division. For further information regarding this
notice, please contact the Employee Plans
Division’s taxpayer assistance telephone
service at (202) 622-6074 or (202) 6226075, between the hours of 1:30 p.m. and
3:30 p.m. Eastern time, Monday through
Thursday, or Mr. Linder at (202) 6226214. These are not toll-free numbers.

6

26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, § 280F; 1.280F–7, 1.61–21.)

Rev. Proc. 98–30
SECTION 1. PURPOSE
This revenue procedure provides: (1)
limitations on depreciation deductions for
owners of passenger automobiles first
placed in service during calendar year
1998, including separate limitations on
passenger automobiles designed to be
propelled primarily by electricity and
built by an original equipment manufacturer (electric automobiles); (2) the
amounts to be included in income by
lessees of passenger automobiles first
leased during calendar year 1998, including separate inclusion amounts for electric automobiles; and (3) the maximum
allowable value of employer-provided automobiles first made available to employees for personal use in calendar year 1998
for which the vehicle cents-per-mile valuation rule provided under § 1.61–21(e) of
the Income Tax Regulations may be applicable. The tables detailing these depreciation limitations and lessee inclusion
amounts reflect the automobile price
inflation adjustments required by
§ 280F(d)(7) of the Internal Revenue
Code. The maximum allowable automobile value for applying the vehicle centsper-mile valuation rule reflects the automobile price inflation adjustment of
§ 280F(d)(7) as required by § 1.61–21(e)(1)(iii)(A).
SECTION 2. BACKGROUND
For owners of automobiles, § 280F(a)
imposes dollar limitations on the depreciation deduction for the year that the automobile is placed in service and each succeeding year. In the case of electric
automobiles placed in service after August 5, 1997, and before January 1, 2005,
§ 280F(a)(1)(C) requires tripling of these
limitation amounts. Section 280F(d)(7)
requires the amounts allowable as depreciation deductions to be increased by a
price inflation adjustment amount for passenger automobiles placed in service after
calendar year 1988.
For leased automobiles, § 280F(c) requires a reduction in the deduction allowed to the lessee of the automobile.

1998–17 I.R.B.

The reduction must be substantially
equivalent to the limitations on the depreciation deductions imposed on owners of
automobiles. Under § 1.280F–7(a), this
reduction requires the lessees to include
in gross income an inclusion amount determined by applying a formula to the
amount obtained from a table. There is a
table for lessees of electric automobiles
and a table for all other passenger automobiles. Each table shows inclusion
amounts for a range of fair market values
for each tax year after the automobile is
first leased.
For automobiles first provided by employers to employees that meet the requirements of § 1.61–21(e)(1), the value
to the employee of the use of the automobile may be determined under the vehicle
cents-per-mile valuation rule of § 1.61–
21(e). Section 1.61-21(e)(1)(iii)(A) provides that for an automobile first made
available after 1988 to any employee of
the employer for personal use, the value
of the use of the automobile may not be
determined under the vehicle cents-permile valuation rule for a calendar year if
the fair market value of the automobile
(determined pursuant to § 1.61–21(d)(5)(i) through (iv)) on the first date the automobile is made available to the employee exceeds $12,800 as adjusted by
§ 280F(d)(7).
SECTION 3. SCOPE AND OBJECTIVE
01. The limitations on depreciation deductions in section 4.02 of this revenue
procedure apply to automobiles (other
than leased automobiles) that are placed
in service in calendar year 1998 and continue to apply for each tax year that the
automobile remains in service.
02. The tables in section 4.03 of this
revenue procedure apply to leased automobiles for which the lease term begins in
calendar year 1998. Lessees of such automobiles must use these tables to determine the inclusion amount for each tax
year during which the automobile is
leased.
03. See Rev. Proc. 96–25, 1996–1 C.B.
681, for information on determining inclusion amounts for automobiles first
leased before January 1, 1997; Rev. Proc.
97–20, 1997–11 I.R.B. 10, for automobiles first leased during calendar year

1998–17 I.R.B.

1997, including electric automobiles first
leased on or after January 1, 1997, and before August 6, 1997; and Rev. Proc.
98–24, 1998-10 I.R.B. 31, for electric automobiles first leased after August 5,
1997, and before January 1, 1998.
04. The maximum fair market value
figure in section 4.04(2) of this revenue
procedure applies to employer-provided
automobiles first made available to any
employee for personal use in calendar
year 1998. See Rev. Proc. 97–20, for the
maximum fair market value figure for automobiles first made available in calendar
year 1997.
SECTION 4. APPLICATION
01. A taxpayer placing an automobile
in service for the first time during calendar year 1998 is limited to the depreciation deduction shown in Table 1 of section 4.02(2) or, in the case of an electric
automobile, Table 2. A taxpayer first
leasing an automobile in calendar year
1998 must determine the inclusion
amount that is added to gross income
using Table 3 of section 4.03 or, in the
case of an electric automobile, Table 4.
Otherwise, the procedures of § 1.280F–
7(a) must be followed. An employer providing an automobile for the first time in
calendar year 1998 for the personal use of
any employee may determine the value of
the use of the automobile by using the
cents-per-mile valuation rule in § 1.61–
21(e) if the fair market value of the automobile does not exceed the amount specified in section 4.04(2). If the fair market
value of the automobile exceeds the
amount specified in section 4.04(2), the
employer may determine the value of the
use of the automobile under the general
valuation rules of § 1.61–21(b) or under
the special valuation rules of § 1.61–21(d)
(Automobile lease valuation) or § 1.61–
21(f) (Commuting valuation) if the applicable requirements are met.
02. Limitations on Depreciation Deductions for Certain Automobiles.
(1) Amount of the Inflation Adjustment. Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any
calendar year is the percentage (if any) by
which the CPI automobile component for
October of the preceding calendar year
exceeds the CPI automobile component

7

for October 1987. The term “CPI automobile component” is defined in
§ 280F(d)(7)(B)(ii) as the “automobile
component” of the Consumer Price Index
for all Urban Consumers published by the
Department of Labor (the CPI). The new
car component of the CPI was 115.2 for
October 1987 and 140.6 for October
1997. The October 1997 index exceeded
the October 1987 index by 25.4. The Internal Revenue Service has, therefore, determined that the automobile price inflation adjustment for 1998 is 22.05 percent
(25.4/115.2 ⫻ 100%). This adjustment is
applicable to all automobiles that are first
placed in service in calendar year 1998.
The dollar limitations in § 280F(a) must
therefore be multiplied by a factor of
0.2205, and the resulting increases, after
rounding to the nearest $100, are added to
the 1988 limitations to give the depreciation limitations applicable to passenger
automobiles (other than electric automobiles) for 1998. To determine the dollar
limitations applicable to an electric automobile first placed in service during calendar year 1998, the dollar limitations in
§ 280F(a) are tripled in accordance with
§ 280F(a)(1)(C) and are then multiplied
by a factor of 0.2205; the resulting increases, after rounding to the nearest
$100, are added to the tripled 1988 limitations to give the depreciation limitations
for 1998.
(2) Amount of the Limitation. For
automobiles (other than electric automobiles) placed in service in calendar year
1998, Table 1 contains the dollar amount
of the depreciation limitations for each
tax year. For electric automobiles placed
in service in calendar year 1998, Table 2
contains these amounts.
REV. PROC. 98–30 TABLE 1
DEPRECIATION LIMITATIONS
FOR AUTOMOBILES (OTHER
THAN ELECTRIC AUTOMOBILES) FIRST PLACED IN SERVICE IN CALENDAR YEAR 1998
Tax Year

Amount

1st Tax Year
2nd Tax Year
3rd Tax Year
Each Succeeding Year

$3,160
$5,000
$2,950
$1,775

April 27, 1998

REV. PROC. 98–30 TABLE 2
DEPRECIATION LIMITATIONS FOR ELECTRIC AUTOMOBILES
FIRST PLACED IN SERVICE IN CALENDAR YEAR 1998
Tax Year

Amount

1st Tax Year
2nd Tax Year
3rd Tax Year
Each Succeeding Year

$9,380
$15,000
$8,950
$5,425

03. Inclusions in Income of Lessees of
Automobiles.
The inclusion amounts for automobiles
first leased in calendar year 1998 are cal-

culated under the procedures described in
§ 1.280F-7(a). Lessees of automobiles
other than electric automobiles should use
Table 3 in applying these procedures,

while lessees of electric automobiles
should use Table 4.

REV. PROC. 98–30 TABLE 3
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1998
Fair Market Value of Automobile

Tax Year During Lease

Over

Not Over

1st

2nd

3rd

4th

5th and Later

$ 15,800
16,100
16,400
16,700
17,000
17,500
18,000
18,500
19,000
19,500
20,000
20,500
21,000
21,500
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
39,000

16,100
16,400
16,700
17,000
17,500
18,000
18,500
19,000
19,500
20,000
20,500
21,000
21,500
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
38,000
39,000
40,000

1
4
6
9
12
16
20
24
28
32
36
40
45
49
55
63
71
79
88
96
104
112
120
128
137
145
153
161
169
178
186
194

5
10
15
20
28
37
46
55
64
73
82
91
99
108
122
140
158
176
193
211
229
247
265
283
301
319
337
355
373
391
409
427

8
16
25
33
43
56
70
83
96
110
123
36
150
163
183
210
236
263
290
317
343
370
396
423
449
476
502
529
556
582
608
635

12
22
31
41
53
70
85
101
117
133
149
165
181
197
221
252
285
316
348
380
412
444
476
508
540
571
604
635
667
699
731
763

14
25
36
47
62
80
99
117
136
154
173
191
209
228
255
292
329
366
403
439
477
513
550
587
624
661
697
735
771
808
845
882

April 27, 1998

8

1998–17 I.R.B.

REV. PROC. 98–30 TABLE 3—Continued
DOLLAR AMOUNTS FOR AUTOMOBILES (OTHER THAN ELECTRIC AUTOMOBILES)
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1998
Fair Market Value of Automobile

Tax Year During Lease

Over

Not Over

1st

2nd

3rd

4th

5th and Later

40,000
41,000
42,000
43,000
44,000
45,000
46,000
47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000

41,000
42,000
43,000
44,000
45,000
46,000
47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000
250,000

202
210
218
227
235
243
251
259
268
276
284
292
300
308
317
325
333
341
349
358
370
386
403
419
435
452
468
484
501
517
546
587
627
668
730
812
893
975
1,057
1,139
1,221
1,302
1,384
1,466
1,548
1,630
1,712
1,793
1,875

445
463
481
498
516
534
552
570
588
606
624
642
660
678
695
713
732
750
768
785
812
848
884
920
956
991
1,027
1,063
1,099
1,135
1,198
1,287
1,377
1,467
1,601
1,780
1,960
2,139
2,318
2,498
2,677
2,857
3,036
3,215
3,394
3,574
3,753
3,932
4,112

662
688
715
742
769
795
822
849
875
901
928
955
981
1,008
1,035
1,062
1,087
1,114
1,140
1,168
1,207
1,261
1,313
1,367
1,420
1,474
1,527
1,580
1,633
1,686
1,779
1,913
2,046
2,178
2,378
2,644
2,910
3,176
3,443
3,708
3,974
4,240
4,506
4,772
5,039
5,304
5,570
5,837
6,102

794
827
859
891
922
955
986
1,018
1,050
1,082
1,114
1,145
1,178
1,209
1,241
1,273
1,305
1,337
1,369
1,400
1,449
1,512
1,577
1,640
1,704
1,767
1,832
1,896
1,959
2,023
2,134
2,294
2,453
2,613
2,852
3,172
3,490
3,810
4,128
4,447
4,766
5,085
5,404
5,724
6,042
6,361
6,680
6,999
7,318

919
955
992
1,028
1,066
1,102
1,140
1,176
1,213
1,250
1,286
1,324
1,360
1,398
1,434
1,471
1,508
1,544
1,582
1,619
1,674
1,747
1,821
1,894
1,968
2,042
2,115
2,189
2,263
2,337
2,466
2,649
2,834
3,018
3,294
3,662
4,031
4,398
4,767
5,135
5,504
5,872
6,241
6,608
6,977
7,345
7,714
8,082
8,450

1998–17 I.R.B.

9

April 27, 1998

REV. PROC. 98–30 TABLE 4
DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES
WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 1998
Fair Market Value of Automobile

Tax Year During Lease

Over

Not Over

1st

2nd

3rd

4th

5th and Later

$ 47,000
48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000

48,000
49,000
50,000
51,000
52,000
53,000
54,000
55,000
56,000
57,000
58,000
59,000
60,000
62,000
64,000
66,000
68,000
70,000
72,000
74,000
76,000
78,000
80,000
85,000
90,000
95,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
220,000
230,000
240,000
250,000

5
13
21
29
38
46
54
62
70
79
87
95
103
115
132
148
164
181
197
214
230
246
263
291
332
373
414
475
557
639
721
803
884
966
1,048
1,130
1,212
1,293
1,375
1,457
1,539
1,621

11
29
47
65
83
101
119
137
155
172
190
208
226
253
289
325
361
396
432
468
504
540
576
639
728
818
908
1,042
1,221
1,401
1,580
1,759
1,939
2,118
2,297
2,477
2,656
2,835
3,015
3,194
3,373
3,552

18
45
71
98
124
151
177
204
231
258
284
311
338
378
430
484
537
591
644
697
750
803
856
949
1,083
1,215
1,348
1,548
1,814
2,080
2,346
2,612
2,878
3,144
3,410
3,676
3,942
4,209
4,474
4,740
5,006
5,273

21
52
85
116
148
180
212
244
275
307
340
372
403
451
515
578
643
706
770
834
898
962
1,025
1,137
1,296
1,456
1,615
1,855
2,174
2,492
2,812
3,131
3,450
3,769
4,088
4,406
4,726
5,044
5,364
5,683
6,002
6,320

23
60
96
134
171
207
244
281
318
355
391
428
465
520
594
668
741
815
888
962
1,035
1,109
1,183
1,312
1,496
1,681
1,865
2,141
2,509
2,878
3,245
3,614
3,982
4,350
4,719
5,087
5,455
5,824
6,191
6,560
6,928
7,297

April 27, 1998

10

1998–17 I.R.B.

04. Maximum Automobile Value for
Using the Cents-per-mile Valuation Rule.
(1) Amount of Adjustment. Under
§ 1.61–21(e)(1)(iii)(A), the limitation on
the fair market value of an employer-provided automobile first made available to
any employee for personal use after 1988
is to be adjusted in accordance with
§ 280F(d)(7). Accordingly, the adjustment for any calendar year is the percentage (if any) by which the CPI automobile
component for October of the preceding
calendar year exceeds the CPI automobile
component for October 1987 (See, section
4.02(1).) The new car component of the
CPI was 115.2 for October 1987 and
140.6 for October 1997. The October
1997 index exceeded the October 1987
index by 25.4. The Internal Revenue Service has, therefore, determined that the
adjustment for 1998 is 22.05 percent
(25.4/115.2 ⫻ 100%). This adjustment is
applicable to all employer-provided automobiles first made available to any employee for personal use in calendar year
1998. The maximum fair market value
specified in § 1.61–21(e)(1)(iii)(A) must
therefore be multiplied by a factor of
0.2205, and the resulting increase, after
rounding to the nearest $100, is added to
$12,800 to give the maximum value for
1998.
(2) The Maximum Automobile Value.
For automobiles first made available in
calendar year 1998 to any employee of
the employer for personal use, the vehicle
cents-per-mile valuation rule may be applicable if the fair market value of the automobile on the date it is first made available does not exceed $15,600.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
automobiles (other than leased automobiles) that are first placed in service during calendar year 1998, to leased automobiles that are first leased during calendar
year 1998, and to employer-provided automobiles first made available to employees for personal use in calendar year
1998.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Bernard P. Harvey of the Office of the Assistant Chief Counsel
(Passthroughs and Special Industries).

1998–17 I.R.B.

For further information regarding the depreciation limitations and lessee inclusion
amounts in this revenue procedure, contact Mr. Harvey at (202) 622-3110; for
further information regarding the maximum automobile value for applying the
vehicle cents-per-mile valuation rule,
contact Ms. Janine Cook of the Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations) at
(202) 622-6040 (not toll-free calls).

26 CFR 601.602: Tax forms and instructions.
(Also Part I, §§ 6302; 31.6302–1)

Rev. Proc. 98–32
Table of Contents
SECTION 1. PURPOSE
SECTION 2. BACKGROUND
SECTION 3. DEFINITIONS
SECTION 4. OVERVIEW
SECTION 5. REGISTRATION
SECTION 6. ASSIGNMENT TO A FINANCIAL AGENT
SECTION 7. AUTHORIZATIONS
SECTION 8. ENROLLMENT
SECTION 9. ACH DEBIT ENTRY
SECTION 10. ACH CREDIT ENTRY
SECTION 11. ELECTRONIC TAX APPLICATION TRANSACTION
SECTION 12. PROOF OF PAYMENT
SECTION 13. REFUNDS
SECTION 14. DISASTER PROCEDURES
SECTION 15. RESPONSIBILITIES OF
A FILER
SECTION 16. ADVERTISING STANDARDS
SECTION 17. REASONS FOR SUSPENSION
SECTION 18. ADMINISTRATIVE REVIEW PROCESS FOR
PROPOSED SUSPENSION
SECTION 19. EFFECT OF SUSPENSION
SECTION 20. APPEAL OF SUSPENSION
SECTION 21. PENALTIES
SECTION 22. FORMS, PUBLICATIONS, IMPLEMENTATION GUIDES, AND
ADDITIONAL INFORMATION
SECTION 23. EFFECT ON OTHER
DOCUMENTS

11

SECTION 24. EFFECTIVE DATE
SECTION 25. PAPERWORK REDUCTION ACT
SECTION 1. PURPOSE
This revenue procedure provides information about the Electronic Federal Tax
Payment System (EFTPS) programs for
Batch Filers and Bulk Filers (Filers).
EFTPS is an electronic remittance processing system for making federal tax deposits (FTDs) and federal tax payments
(FTPs). The Batch Filer and Bulk Filer
programs are used by Filers for electronically submitting enrollments, FTDs, and
FTPs on behalf of multiple taxpayers.
SECTION 2. BACKGROUND
.01 Section 6302(c) of the Internal
Revenue Code provides that the Secretary
of the Treasury (Secretary) may authorize
Federal Reserve banks, and incorporated
banks and other financial institutions that
are depositories or financial agents of the
United States, to receive any tax imposed
under the internal revenue laws, in such
manner, at such times, and under such
conditions as the Secretary may prescribe.
Section 6302(c) also provides that the
Secretary shall prescribe the manner,
times, and conditions under which the receipt of such tax by such banks and other
financial institutions is to be treated as a
payment of such tax to the Secretary.
.02 Section 6302(h) requires the Secretary to establish an electronic funds transfer (EFT) system to collect depositary
taxes (FTDs). EFTPS is the EFT system
developed by the Secretary to collect federal taxes (FTDs and FTPs). See
§ 31.6302–1(h)(4)(i) of the Employment
Tax and Collection of Income Tax at
Source Regulations, and Rev. Proc. 97–
33, 1997–30 I.R.B. 10.
.03 Some taxpayers are required by the
regulations issued under § 6302(h)
to make FTDs using EFTPS. See
§ 31.6302–1(h)(2)(i)(A). Taxpayers not
required to make FTDs using EFTPS may
choose to do so voluntarily. Taxpayers
also may choose to make FTPs using
EFTPS.
.04 All Filers using the Batch Filer or
Bulk Filer programs must comply with
this revenue procedure, and with the Implementation Guide for EFTPS Batch Filers, or the Implementation Guide for

April 27, 1998

EFTPS Bulk Filers, whichever is applicable.
.05 The two primary remittance methods in EFTPS are an Automated Clearing
House (ACH) debit entry and an ACH
credit entry. Filers may also use an Electronic Tax Application (ETA) transaction.
These remittance methods are defined in
section 3 and described in sections 9, 10,
and 11 of this revenue procedure.
.06 Filers participating in EFTPS must
ensure that taxpayers’ funds are remitted
on a timely basis. See § 31.6302–1(h)(8)
for rules regarding when an FTD remitted
by EFTPS is deemed made. For FTDs
and FTPs remitted by EFTPS, see
§ 31.6302–1(h)(9) for rules regarding
when the tax is deemed paid.
.07 If a taxpayer is required by regulations to make an FTD by EFTPS, a Filer
may not use a paper FTD coupon (Form
8109, Federal Tax Deposit Coupon) or the
magnetic tape FTD program (described in
Rev. Proc. 89–48, 1989–2 C.B. 599) to
make an FTD for the taxpayer. If a taxpayer is a voluntary participant in EFTPS
(that is, a participant not required by regulations to make an FTD by EFTPS) and
the Filer is unable, for any reason, to
make an FTD using EFTPS or chooses
not to use EFTPS to make an FTD, the
Filer may make a timely FTD for the taxpayer by using a paper FTD coupon, or
the magnetic tape FTD program if authorized by the taxpayer.
.08 EFTPS does not change the computation of tax liability, interest or penalties,
or FTD or FTP due dates.
SECTION 3. DEFINITIONS
.01 The definitions provided in this section will be used for the Batch Filer and
Bulk Filer programs.
.02 Administrative FRB Head Office
Local Zone Time. “Administrative FRB
Head Office Local Zone Time” is the
local zone time of the Administrative Federal Reserve Bank head office through
which a financial institution, or its authorized correspondent bank, sends a SameDay Payment.
.03 Authorization. An “Authorization”
is an instrument used by a taxpayer to
designate a Filer as the taxpayer’s agent
for submitting enrollments and for making FTDs or FTPs.
.04 Automated Clearing House (ACH).
“Automated Clearing House” is a funds

April 27, 1998

transfer system, governed by the ACH
Rules (the Operating Rules and the Operating Guidelines published by National
Automated Clearing House Association
(NACHA)) that provides for the interbank
clearing of electronic entries for participating financial institutions.
.05 ACH credit entry. An “ACH credit
entry” is a transaction in which a financial
institution, upon instructions from a Filer,
originates an FTD or FTP to the appropriate Treasury Department account through
the ACH system. An ACH credit entry is
a transfer of funds representing one FTD
or FTP. There are no “bulk” ACH credit
entries. See section 10 of this revenue
procedure for information on an ACH
credit entry.
.06 ACH debit entry. An “ACH debit
entry” is a transaction in which one of the
Financial Agents, upon instructions from
a Filer, instructs the Filer’s or the taxpayer’s financial institution to withdraw
funds from a designated account for an
FTD or FTP and to route the FTD or FTP
to the appropriate Treasury Department
account through the ACH system. A single ACH debit entry is a transfer of funds
representing one FTD or FTP. A bulk
ACH debit entry (a remittance method
available only in the Bulk Filer program)
is a transfer of funds representing multiple FTDs or FTPs. See section 9 of this
revenue procedure for information on an
ACH debit entry.
.07 Batch Filer. A Batch Filer is a Filer
that is registered under the Batch Filer
program. A Batch Filer submits multiple
electronic enrollment files at one time and
uses a personal computer or telephone for
making FTDs or FTPs.
.08 Bulk Filer. A Bulk Filer is a Filer
that is registered under the Bulk Filer program. A Bulk Filer uses Electronic Data
Interchange (EDI) files to transmit and receive enrollment or payment information.
A Bulk Filer also has additional remittance methods (bulk ACH debit entries
and bulk ETA entries).
.09 Electronic tax application (ETA)
transaction. An “ETA transaction” (also
referred to as “Same-Day Payment”) is a
transfer of funds through the ETA subsystem of EFTPS that receives, processes,
and transmits an FTD or FTP and the related tax payment information for SameDay Payments through Fedwire value
transfers, Fedwire non-value transactions,

12

and Direct Access transactions. A single
ETA transaction is a transfer of funds representing one FTD or FTP. A bulk ETA
transaction (a remittance method available only in the Bulk Filer program) is a
transfer of funds representing multiple
FTDs or FTPs. See section 11 of this revenue procedure for information on an
ETA transaction.
.10 Employer identification number
(EIN). An “EIN” is a unique nine digit
taxpayer identifying number issued by the
Internal Revenue Service to business taxpayers for the purpose of reporting tax related information.
.11 Federal Reserve Bank (FRB). The
“FRB” is the U.S. Government’s fiscal
agent. The FRB also processes ACH
transactions to a commercial financial institution account or to a Treasury Department account.
.12 Filer. A “Filer” is a person making
FTDs or FTPs on behalf of multiple taxpayers in the Batch Filer or Bulk Filer
program. Each Filer must be either the
taxpayer or a person authorized to act on
behalf of the taxpayer.
.13 Financial Agent. For purposes of
EFTPS, a “Financial Agent” (also referred to as a “Treasury Financial Agent”)
is a financial institution that is designated
as an agent of the Treasury Department.
The Secretary has designated NationsBank and First National Bank of Chicago
(First Chicago) to be the Financial Agents
for EFTPS. A Financial Agent processes
Batch Filer and Bulk Filer registrations,
processes taxpayer enrollments, receives
payment information, originates ACH
debit entries upon instructions from taxpayers or Filers, and provides customer
service assistance for EFTPS enrollment
and payment information.
.14 IRS individual taxpayer identification number (ITIN). An “ITIN” is a taxpayer identifying number issued by the
Service to an alien individual who is ineligible to receive a social security number
(SSN) for the purpose of reporting tax related information.
.15 Prenotification ACH credit. “Prenotification ACH credit” is a process
whereby a financial institution verifies the
appropriate Treasury Routing Transit
Number (RTN), the Treasury Department’s account number, and the taxpayer’s taxpayer identification number
(TIN).

1998–17 I.R.B.

.16 Prenotification ACH debit. “Prenotification ACH debit” is a process
whereby the appropriate Financial Agent
verifies the RTN of the financial institution, the account number, and the account
type.
.17 Social security number (SSN). An
“SSN” is a taxpayer identifying number
assigned to an individual or estate by the
Social Security Administration.
.18 Taxpayer identification number
(TIN). A “TIN” is a taxpayer identifying
number assigned to a taxpayer for the purpose of reporting tax related information.
A TIN includes an EIN, ITIN, or SSN.
SECTION 4. OVERVIEW
Filers must follow the following procedures to participate in the Batch Filer or
Bulk Filer programs:
(1) register as a Filer with the appropriate Financial Agent (see sections 5 and 6
of this revenue procedure);
(2) obtain an Authorization from each
taxpayer for which the Filer will be submitting enrollments and making FTDs or
FTPs, and submit these Authorizations to
the Service (see section 7 of this revenue
procedure); and
(3) enroll each of those taxpayers with
the appropriate Financial Agent (see section 8 of this revenue procedure).
SECTION 5. REGISTRATION
.01 A Filer may register for the Batch

Filer or Bulk Filer program if the Filer anticipates making FTDs or FTPs for multiple taxpayers.
.02 The Batch Filer program is recommended for Filers who anticipate submitting 50 or more enrollments. Additional
information for Batch Filers is furnished
in the Implementation Guide for EFTPS
Batch Filers. A copy of this implementation guide may be obtained from EFTPS
Customer Service (see section 22 of this
revenue procedure).
.03 The Bulk Filer program is recommended for Filers who anticipate making
750 or more FTDs or FTPs on a peak day.
Additional information for Bulk Filers is
furnished in the Implementation Guide
for EFTPS Bulk Filers. A copy of this implementation guide may be obtained from
EFTPS Customer Service (see section 22
of this revenue procedure).
.04 A Filer wanting to participate in either the Batch Filer or Bulk Filer program
must submit the appropriate registration
letter (also referred to as an “Agreement”). Some Bulk Filers may wish to
use the Batch Filer program as a backup.
To participate in both programs, a Filer
must submit a Batch Filer registration letter and a Bulk Filer registration letter.
Blank registration letter(s) may be obtained by contacting the appropriate Financial Agent (listed in section 6 of this
revenue procedure).
.05 A Filer must submit the registration
letter to the address designated in the in-

NationsBank (800) 555-4477
Alabama
American Samoa
Arizona
Arkansas
California (Los Angeles,
Orange, San Bernardino, Riverside, San Diego, and
Imperial counties only)
Commonwealth of the Northern Mariana Islands
Commonwealth of Puerto Rico
Delaware
District of Columbia
Florida
Georgia
Guam
Kentucky
Louisiana
Maryland
Mississippi
Nevada
New Mexico

1998–17 I.R.B.

structions accompanying the registration
letter.
.06 If an unregistered entity acquires a
registered Filer, a new registration letter
must be submitted by the unregistered entity if it wants to participate in either the
Batch Filer or Bulk Filer program.
.07 A Filer should notify the appropriate Financial Agent if the Filer chooses to
withdraw from either the Batch Filer or
Bulk Filer program. A Filer that is inactive in the Batch Filer or Bulk Filer program (that is, the Filer has submitted no
enrollments, FTDs, or FTPs in that program) for 6 months or more is treated as
having withdrawn from that program. If
a Bulk Filer uses the Batch Filer program
as a backup, the Filer must submit an
FTD or FTP through the Batch Filer program at least once every six months to
prevent the Filer from being treated as
having withdrawn from the Batch Filer
program. If a Filer withdraws (or is
treated as having withdrawn) from a program, the Filer must reregister to participate in that program.
SECTION 6. ASSIGNMENT TO A
FINANCIAL AGENT
.01 A Filer’s assignment to a Financial
Agent is based on the location of the
Filer’s principal place of business. Each
Financial Agent has responsibility for
certain geographic locations as listed
below:

First Chicago (800) 945-0966
Alaska
California (except Los Angeles, Orange, San Bernardino,
Riverside, San Diego, and Imperial counties)
Colorado
Connecticut
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Maine
Massachusetts
Michigan
Minnesota
Missouri
Montana
Nebraska
New Hampshire
New Jersey

13

April 27, 1998

NationsBank (800) 555-4477
North Carolina
Ohio
Oklahoma
Pennsylvania
South Carolina
Tennessee
Texas
U.S. Virgin Islands
Virginia
West Virginia

.02 If a Filer wants to use the other Financial Agent, the Filer must submit a
written request detailing the reasons for
the request and providing the name and
telephone number of a contact person.
This request may be submitted to:
FTD & Electronic Payments Section,
T:S:C:F
Internal Revenue Service
5000 Ellin Rd
Lanham, MD 20706
or faxed to FTD & Electronic Payments
Section at (202) 283-7434 (not a toll-free
number).
.03 A Filer, registered with a Financial
Agent on April 27, 1998, may continue
using the services of that Financial Agent,
regardless of the geographic assignments
in section 6.01 of this revenue procedure.
SECTION 7. AUTHORIZATIONS
.01 If a Filer is not the taxpayer, the
Filer must submit a taxpayer’s Authorization to the Service before submitting the
taxpayer’s enrollment to the Financial
Agent.
.02 Except as provided under the
grandfather rule in section 24.02 of this
revenue procedure, an Authorization must
be submitted on Form 8655, Reporting
Agent Authorization for Magnetic
Tape/Electronic Filers, or any other instrument that complies with Rev. Proc.
96–17, 1996–1 C.B. 633, as modified by
Rev. Proc. 97–47, 1997–42 I.R.B. 19.
.03 A Filer that acquires all or some of
the clients of another Filer must obtain
new Authorizations from those clients and
submit the new Authorizations to the Service before making FTDs and FTPs on
behalf of those clients.
.04 An Authorization permits a Filer to
submit enrollments and to make FTDs or
FTPs on behalf of a taxpayer. An Authorization may also permit the Filer to re-

April 27, 1998

First Chicago (800) 945-0966
New York
North Dakota
Oregon
Rhode Island
South Dakota
Utah
Vermont
Washington
Wisconsin
Wyoming
Foreign countries
ceive certain tax information on behalf of
the taxpayer. Although EFTPS is designed for the payment of various types of
tax, the Authorization may limit the types
of tax information the Filer is permitted to
receive. For example, a Filer may make
FTDs and FTPs on behalf of the taxpayer,
but may be authorized to receive only notices regarding FTDs for Form 941, Employer’s Quarterly Federal Tax Return,
and Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
.05 Except as provided in section 7.07
of this revenue procedure, a Filer submitting Authorizations to the Service for the
Batch Filer and Bulk Filer programs on or
after April 27, 1998, must include a list of
all taxpayers for whom the Filer is submitting Authorizations. The list must include each taxpayer’s complete name (for
example, business name on file with Service), address (including zip code), and
TIN. EINs, SSNs, and ITINs should each
be grouped separately. Within each
group, the taxpayers must be listed in TIN
number sequence.
.06 Except as provided in section 7.07
of this revenue procedure, the Authorizations and the accompanying list must be
submitted to:
EFTPS Coordinator—Authorizations
5333 Getwell Road
Stop 532
Memphis, TN 38118
or faxed to the EFTPS Coordinator at
(901) 546-4112 (not a toll-free number).
.07 If a Filer has submitted Authorizations to the Service for the Form 941 ELF
program, as described in Rev. Proc. 97–
47, or the Form 941 or Form 940 Mag
Tape Programs, as described in Rev. Proc.
96–18, 1996–1 C.B. 637, and these Authorizations allow the Filer to make payments on behalf of the taxpayer, the Filer
is not required to resubmit the Authoriza-

14

tions or to submit a list containing those
Authorizations to the Service. Similarly,
if a Filer has submitted Authorizations to
the Service for the magnetic tape FTD
program, as described in Rev. Proc. 89–
48, the Filer is not required to resubmit
the Authorizations or to submit a list containing those Authorizations to the Service.
.08 To delete Authorizations that a Filer
previously submitted to the Service, the
Filer must submit a list of the taxpayers to
be deleted to the EFTPS Coordinator.
The list must be submitted in the format
prescribed in section 7.05 of this revenue
procedure and to the address (or fax number) provided in section 7.06 of this revenue procedure.
SECTION 8. ENROLLMENT
.01 A Filer must submit electronic taxpayer enrollments to the appropriate Financial Agent in accordance with the applicable implementation guide. As part of
completing each taxpayer enrollment, the
Filer may choose to use the ACH debit
entry or ACH credit entry remittance
method on a taxpayer-by-taxpayer basis.
In both the Batch Filer and the Bulk Filer
programs, enrollment of a taxpayer in the
ACH Debit remittance method will automatically enroll the taxpayer in the ACH
Credit remittance method. In the Bulk
Filer program, enrollment of a taxpayer in
the ACH Credit remittance method will
automatically enroll the taxpayer in the
ACH Debit remittance method. However, in the Batch Filer program, enrollment of a taxpayer in the ACH Credit remittance method will not automatically
enroll the taxpayer in the ACH Debit remittance method.
.02 The Financial Agent will verify the
accuracy of the enrollment information
for each taxpayer and enter the verified

1998–17 I.R.B.

enrollment information in its enrollment
record database. As part of the verification process for an ACH debit entry in the
Batch Filer program, the Financial Agent
will originate a prenotification ACH
debit, if requested by the Batch Filer. In
the Bulk Filer program, prenotification
ACH debits are not available. When a
prenotification ACH debit is not made,
the Filer assumes responsibility for the
accuracy of the information, including the
RTN of the financial institution.
.03 When the enrollment process for a
taxpayer is completed, the Financial
Agent will provide the Filer with an enrollment response record that either accepts or rejects the taxpayer’s enrollment.
A rejected enrollment will identify necessary corrections. Any necessary corrections must be submitted by the Filer as a
new enrollment of that taxpayer.
.04 If a Filer attempts to make an FTD
or FTP through EFTPS before a taxpayer
is enrolled, the FTD or FTP generally will
be rejected and the taxpayer may be subject to a penalty for a late FTD or FTP.
SECTION 9. ACH DEBIT ENTRY
.01 For an FTD or FTP to be timely, a
Filer must complete the initiation of an
ACH debit entry with a Financial Agent at
least one business day prior to the FTD or
FTP due date.
.02 A Filer may “warehouse” an ACH
debit entry for a business taxpayer by arranging for the entry up to 30 days in advance of the due date. A Filer may warehouse an ACH debit entry for an
individual taxpayer by arranging for the
entry up to 105 days in advance of the due
date.
.03 After a Batch Filer or a Bulk Filer
initiates a single ACH debit entry, the Financial Agent will validate the taxpayer’s
payment information and issue an acknowledgment number to the Filer. The
acknowledgment number verifies when
the necessary payment information was
received by a Financial Agent but does
not constitute proof of payment. See section 12 of this revenue procedure regarding proof of payment.
.04 After a Bulk Filer initiates a bulk
ACH debit entry, the Financial Agent will
validate the taxpayers’ payment information and issue acknowledgment numbers
to the Filer for accepted payments. The
Bulk Filer will receive an acknowledg-

1998–17 I.R.B.

ment number for the bulk ACH debit
entry and separate acknowledgement
numbers for each accepted FTD or FTP
included in the bulk ACH debit entry.
The acknowledgment numbers verify
when the necessary payment information
was received by a Financial Agent but do
not constitute proof of payment. See section 12 of this revenue procedure regarding proof of payment.
.05 In a bulk ETA debit entry, any rejected payment will be returned to the
Bulk Filer without an acknowledgement
number and subtracted from the bulk
ACH debit entry, as specified in the Implementation Guide for EFTPS Bulk Filers. The Bulk Filer assumes responsibility for reinitiating any rejected payments.
.06 Pursuant to the Filer’s instructions,
the Financial Agent, on the date designated by the Filer, will originate the transfer of funds from the taxpayer’s or Filer’s
account to the appropriate Treasury Department account. The Financial Agent
also will transmit the related payment information, supplied by the Filer, to the
Service for posting to the tax account(s)
of the taxpayer(s).
.07 The Service will deem an FTD or
FTP made by an ACH debit entry to have
been made at the time of the debit (that is,
when the amount is withdrawn from the
taxpayer’s or Filer’s account and not returned or reversed).
.08 When a timely ACH debit entry
cannot be made, a Filer may instruct the
Financial Agent to complete the transaction at the next opportunity to submit an
ACH debit entry. The Filer may also use
an ACH credit entry or an ETA transaction. If a taxpayer is not required to use
EFTPS for FTDs, the Filer may use a
paper FTD coupon or, if authorized by the
taxpayer, the magnetic tape FTD program.
To avoid penalties, the FTD or FTP must
be received by an appropriate means on or
before the FTD or FTP due date.
.09 The ACH Rules will govern ACH
debit entry returns and reversals.
SECTION 10. ACH CREDIT ENTRY
.01 If a Filer chooses the ACH credit
entry remittance method to make an FTD
or FTP, the Filer may use any financial institution capable of originating an ACH
credit entry.
.02 For each TIN used in making ACH
credit entries through a financial institu-

15

tion, the Filer may request that the financial institution originate a prenotification
ACH credit.
.03 To initiate a timely ACH credit
entry, a Filer must take into account the
financial institution’s deadline for originating an ACH credit entry.
.04 When a timely ACH credit entry
cannot be made, a Filer may instruct the
financial institution to complete the transaction at the next opportunity to submit an
ACH credit entry. The Filer may also
use an ETA transaction. A Bulk Filer may
initiate an ACH debit entry. However, a
Batch Filer may initiate an ACH debit
entry only if the taxpayer is enrolled for
the ACH debit remittance method. If a
taxpayer is not required to use EFTPS for
FTDs, the Filer may use a paper FTD
coupon or, if authorized by the taxpayer,
the magnetic tape FTD program. To
avoid penalties, the FTD or FTP must be
received by an appropriate means on or
before the FTD or FTP due date.
.05 The Financial Agent will receive
and process the ACH credit entry payment information. The Financial Agent
will compare the transaction’s payment
information with the taxpayer’s enrollment record. If they match, the Financial
Agent will send the payment information
to the Service for posting to the taxpayer’s tax account.
.06 If the Financial Agent cannot identify the taxpayer, the ACH credit entry
will be returned to the originating financial institution.
.07 Failure to provide correct, complete, and properly formatted payment information may cause an ACH credit entry
to be returned. In the event of a return, a
Filer may instruct the financial institution
to submit a corrected ACH credit entry at
the next opportunity to submit an ACH
credit entry. The Filer may also use an
ETA transaction. A Bulk Filer may initiate an ACH debit entry. However, a
Batch Filer may initiate an ACH debit
entry only if the taxpayer is enrolled for
the ACH debit remittance method. If a
taxpayer is not required to use EFTPS for
FTDs, the Filer may use a paper FTD
coupon or, if authorized by the taxpayer,
the magnetic tape FTD program. To
avoid penalties, the FTD or FTP must be
received by an appropriate means on or
before the FTD or FTP due date.
.08 An ACH Credit entry that is not returned or reversed will be deemed made

April 27, 1998

at the time that the funds are paid into the
appropriate Treasury Department account.
.09 The ACH Rules will govern ACH
credit entry returns and reversals.
SECTION 11. ELECTRONIC TAX
APPLICATION TRANSACTION
.01 A Filer may use an ETA transaction
to make an FTD or FTP. The Filer should
contact the financial institution through
which the ETA payment will be made to
determine if the financial institution is capable of making an ETA payment.
.02 A Bulk Filer may use a bulk ETA
transaction to make FTDs or FTPs. The
Bulk Filer should contact the financial institution through which the bulk ETA payment will be made to determine if the financial institution is capable of making a
bulk ETA payment.
.03 If a Filer uses a single ETA transaction, the transfer of funds and the transmission of the related payment information occur together. If a Bulk Filer uses a
bulk ETA transaction, the transmission of
the payment information precedes the related transfer of funds, both of which
occur on the same day.
.04 The Service generally will deem an
ETA payment to have been made on the
date the payment is received by the FRB.
A Filer should contact the financial institution through which the ETA payment
will be made to determine the deadline for
initiating ETA payments for a particular
day. ETA payments received by the FRB
after the deadline set forth in the Treasury
Financial Manual, Volume IV (IV TFM),
will not be accepted. Currently, the deadline in IV TFM is 2:00 p.m. Administrative FRB Head Office Local Zone Time.
If a payment is not accepted, the Filer
must reoriginate the payment using an
ETA transaction or any other permissible
remittance method.
.05 Additional ETA information may be
found in the sections on Same-Day Payments in the Implementation Guide for
EFTPS Bulk Filers and the EFTPS Payment Instruction Booklets for businesses.
SECTION 12. PROOF OF PAYMENT
.01 For an ACH debit or credit entry
posted to the taxpayer’s account in a financial institution, a statement prepared

April 27, 1998

by that financial institution showing a
transfer (that is, a decrease to the taxpayer’s account balance) will be accepted
as proof of payment if the statement:
(1) shows the amount and the date of
the transfer; and
(2) identifies the U.S. Government
as the payee (for example, “USA tax”).
.02 For an ETA payment posted to the
taxpayer’s account in a financial institution, a taxpayer may request that its financial institution obtain a statement from the
FRB that executed the transfer. This
statement will be accepted as proof of
payment if the statement:
(1) shows the amount and the date of
the transfer; and
(2) identifies the U.S. Government
as the payee (for example, “USA tax”).
.03 For purposes of this section, statements prepared by a financial institution
include statements prepared by a third
party that is contractually obligated to
prepare statements for the financial institution.
.04 A taxpayer’s payment to a Filer (including a subsidiary’s payment to its parent) is not a payment of tax by the taxpayer. Therefore, a statement prepared by
the taxpayer’s financial institution showing a transfer from the taxpayer’s account
to the Filer as payee is not proof of payment. Further, a statement prepared by
the Filer’s financial institution showing a
transfer of funds from the Filer’s account
to the U.S. Government is not proof of
payment because the payment may not
have been made on behalf of the taxpayer.
The taxpayer will need the acknowledgement number for an FTD or FTP made
from the Filer’s account to establish that
the FTD or FTP was made on behalf of
the taxpayer. The acknowledgement
number allows the Service to trace the
payment. The Filer has the acknowledgement number or may obtain it from the Financial Agent.
SECTION 13. REFUNDS
No refunds of FTDs or FTPs will be
made through EFTPS. However, a refund
request may be made using existing tax
refund procedures. If a taxpayer’s error
results in a significant hardship, the taxpayer may contact the Service at (800)
829-1040 for assistance.

16

SECTION 14. DISASTER
PROCEDURES
.01 A taxpayer’s ability to make FTDs
and FTPs timely may be affected by the
time, severity, and extent of a major disaster. In such circumstances, the Service
provides relief through the nonassertion
or abatement of certain penalties. The
Service publicizes the relief for a particular disaster area through the publication of
a News Release, Notice, or Announcement. Generally, the Service identifies
the taxpayers who qualify for this disaster
relief.
.02 If a disaster affects a Filer, the Filer
should provide the Service with the information necessary to identify those FTDs
and FTPs of taxpayers outside the disaster
area which were or will be late due to the
disaster. The Service will then determine
if the nonassertion or abatement of certain
penalties is appropriate.
.03 In addition, if a Bulk Filer’s primary processing system is affected by a
disaster and the Bulk Filer’s backup processing system fails, the Bulk Filer may
use an emergency bulk ETA transaction
under which the transfer of funds occurs
before the transmission of the related payment information.
SECTION 15. RESPONSIBILITIES OF
A FILER
.01 Each Filer must:
(1) comply with this revenue procedure and the applicable implementation
guide (Implementation Guide for EFTPS
Batch Filers or Implementation Guide for
EFTPS Bulk Filers);
(2) maintain a high degree of integrity, compliance, and accuracy;
(3) ensure that FTDs and FTPs are
accurately and timely made;
(4) ensure the security of all transmitted information; and
(5) ensure that after a disabling event
the Filer is able to operate its Batch Filer
or Bulk Filer programs with minimal interruption (generally, less than 24 hours).
.02 A Filer that is not the taxpayer
must:
(1) retain copies of each Authorization and each enrollment at its principal
place of business for 4 years after the prescribed due date of the last return to
which the any FTD or FTP relates, unless

1998–17 I.R.B.

the Filer is otherwise notified by the Service;
(2) retain any payment information
(including acknowledgement numbers) at
its principal place of business for 4 years
after the prescribed due date of the return
to which the FTD or FTP relates, unless
the Filer is otherwise notified by the Service. A shorter retention period for payment information may be substituted for
this “4-year” retention period, provided
the Filer notifies the taxpayer in writing
that the Filer will not be retaining the payment information after the shorter retention period and the Filer gives such information to the taxpayer. The shorter
retention period must be at least 90 days;
and
(3) advise the taxpayer to enroll itself separately in EFTPS. If the Filer is
not authorized to make all the taxpayer’s
required FTDs and FTPs, the taxpayer’s
separate enrollment will allow the taxpayer to make its own FTDs and FTPs
through EFTPS. To enroll separately, a
taxpayer must submit a completed Form
9779, EFTPS Business Enrollment Form,
or Form 9783, EFTPS Individual Enrollment Form, to the EFTPS Enrollment
Processing Center at the address provided
in the applicable form’s instructions. See
Rev. Proc. 97-33 for more information.
.03 A Filer that is the taxpayer must:
(1) absent a specific retention period
prescribed by regulations, retain the payment information and any supporting material at its principal place of business for
as long as the contents thereof may become material in the administration of
any internal revenue law; and
(2) retain copies of each enrollment
at its principal place of business for 4
years after the prescribed due date of the
return to which the last FTD or FTP relates, unless otherwise notified by the
Service.
SECTION 16. ADVERTISING
STANDARDS
.01 A Filer must comply with the advertising and solicitation provisions of 31
C.F.R. Part 10 (Treasury Department Circular No. 230). This circular prohibits the
use or participation in the use of any form
of public communication containing a
false, fraudulent, misleading, deceptive,
unduly influencing, coercive, or unfair
statement or claim.

1998–17 I.R.B.

.02 A Filer must adhere to all relevant
federal, state, and local consumer protection laws that relate to advertising and soliciting.
.03 A Filer must not use the Service’s
name, “Internal Revenue Service” or
“IRS”, within a firm’s name.
.04 A Filer must not use improper or
misleading advertising in relation to
EFTPS.
.05 Advertising materials must not
carry the Service, FMS, or other Treasury
Seals.
.06 If a Filer uses radio or television
broadcasting to advertise, the broadcast
must be pre-recorded. The Filer must
keep a copy of the pre-recorded advertisement for a period of at least 36 months
from the date of the last transmission or
use.
.07 If a Filer uses direct mail or fax
communications to advertise, the Filer
must retain a copy of the actual mailing or
fax, along with a list or other description
of the firms, organizations, or individuals
to whom the communication was mailed,
faxed, or otherwise distributed for a period of at least 36 months from the date of
the last mailing, fax, or distribution.
.08 If a Filer uses a Web site or print
media (including newspapers, magazines,
or yellow pages) to advertise, the Filer
must retain a copy of the advertising for a
period of at least 36 months from the date
of the last posting or publication.
.09 Acceptance in the Batch Filer or
Bulk Filer programs is not an endorsement by the Service, FMS, or the Treasury Department of the quality of the services provided by the Filer.
SECTION 17. REASONS FOR
SUSPENSION
.01 The Service reserves the right to
suspend a Filer from the Batch Filer or
Bulk Filer programs for the following reasons (this list is not all-inclusive):
(1) failing to submit payment information in accordance with this revenue
procedure and the applicable implementation guides;
(2) failing to maintain and make
available the required records for the period specified in section 15 of this revenue procedure;
(3) submitting payment information
on behalf of taxpayers for which the Service did not receive Authorizations;

17

(4) failing to abide by the advertising
standards in section 16 of this revenue
procedure;
(5) failing to cooperate with the Service’s efforts to monitor Filers and investigate abuse in the Batch Filer or Bulk
Filer programs; or
(6) generating significant complaints
about the Filer’s performance in the Batch
Filer or Bulk Filer programs.
.02 If the Service informs a Filer that a
certain action is a reason for suspension
and the action continues, the Service may
send the Filer a notice proposing suspension of the Filer from the Batch Filer or
Bulk Filer program. However, a notice
proposing suspension may be sent without a warning if the Filer’s action indicates an intentional disregard of rules. A
notice proposing suspension will describe
the reason(s) for the proposed suspension,
and indicate the length of the suspension
and the conditions that need to be met before the suspension will terminate.
SECTION 18. ADMINISTRATIVE
REVIEW PROCESS FOR PROPOSED
SUSPENSION
.01 A Filer that receives a notice
proposing suspension from the Batch
Filer or Bulk Filer program, as described
in section 17.02 of this revenue procedure, may request an administrative review prior to the proposed suspension
taking effect.
.02 The request for an administrative
review must be in writing and contain detailed reasons, with supporting documentation, for withdrawal of the proposed
suspension.
.03 The written request for an administrative review and a copy of the notice
proposing suspension must be delivered
to the address designated in the notice
within 30 days of the effective date on the
notice.
.04 After consideration of the written
request for an administrative review, the
Service will either issue a suspension letter or notify the Filer in writing that the
proposed suspension is withdrawn.
.05 If a Filer receives a suspension letter, the Service’s subsequent determination of whether a reason for suspension
has been corrected is not subject to administrative review or appeal.
.06 Failure to submit a written request
for an administrative review within the

April 27, 1998

30-day period described in section 18.03
of this revenue procedure irrevocably terminates the Filer’s right to an administrative review of the proposed suspension,
and the Service will issue a suspension
letter.

.03 Failure to appeal within the 30-day
period described in section 20.02 of this
revenue procedure irrevocably terminates
the Filer’s right to appeal the suspension
under section 20.01 of this revenue procedure.

SECTION 19. EFFECT OF
SUSPENSION

SECTION 21. PENALTIES

.01 The Filer’s suspension will continue for the length of time specified in
the suspension letter, or until the conditions for terminating the suspension have
been met, whichever is later.
.02 After suspension, a Filer may submit an FTD under the Batch Filer or Bulk
Filer program only if the FTD is due not
more than 30 days after the effective date
on the suspension letter. No FTPs may be
submitted by the Filer under the Batch
Filer or Bulk Filer programs during the
suspension period.
.03 A Filer must provide written notification of a suspension from the Batch
Filer or Bulk Filer programs to each taxpayer in the program(s) within 10 days
from the date on the suspension letter.
This notification must be provided even
though the Filer may believe that the Filer
will be able to meet the conditions for terminating the suspension within the 30day period provided in section 19.02 of
this revenue procedure.
.04 A Filer will be able to submit payment information under the Batch Filer or
Bulk Filer programs without reregistering
for those programs after:
(1) the stated suspension period expires; and
(2) the reason(s) for suspension are
corrected.
SECTION 20. APPEAL OF A
SUSPENSION
.01 If a Filer receives a suspension letter from the Service, the Filer is entitled
to appeal, by written protest, to the Service. The written protest must be delivered to the address designated on the suspension letter. During the appeals
process, the suspension remains in effect.
.02 The written protest must be received by the Service within 30 days of
the effective date on the suspension letter.
The written protest must contain detailed
reasons, with supporting documentation,
for withdrawal of the suspension.

April 27, 1998

.01 Section 6656 imposes a failure-todeposit penalty if a taxpayer does not
make a timely FTD, unless such failure is
due to reasonable cause and not due to
willful neglect. See Rev. Rul. 94–46,
1994–2 C.B. 278. Absent reasonable
cause, a taxpayer that is required to deposit federal taxes by EFTPS is subject to
the failure-to-deposit penalty if FTDs are
made by means other than EFTPS (for example, using a paper FTD coupon). See
Rev. Rul. 95–68, 1995–2 C.B. 272. However, for a taxpayer that was first required
to deposit by EFTPS on or after July 1,
1997, this penalty will not be imposed
solely by reason of a failure to deposit by
EFTPS prior to July 1, 1998.
.02 Section 6655 imposes a penalty for
underpayments of estimated tax by a corporation, private foundation, tax-exempt
organization, or qualified settlement fund.
.03 Section 6651 imposes a failure-topay penalty if a taxpayer does not make a
timely FTP, unless such failure is due to
reasonable cause and not due to willful
neglect.
SECTION 22. FORMS,
PUBLICATIONS, IMPLEMENTATION
GUIDES, AND ADDITIONAL
INFORMATION
.01 A Filer may obtain copies of this
revenue procedure, enrollment forms
(Forms 9779 and 9783), implementation
guides, payment instruction booklets, registration letters, and additional information on EFTPS by calling EFTPS Customer Service at (800) 945-0966 (First
Chicago) or (800) 555-4477 (NationsBank).
.02 A Filer may obtain enrollment
forms and Authorizations (Forms 8655)
by calling the IRS Distribution Center at
(800) TAX-FORM ((800) 829-3676).
.03 A Filer may obtain information on
the submission of Authorizations by calling the EFTPS Coordinator at (901) 5464103 (not a toll-free call).

18

SECTION 23. EFFECT ON OTHER
DOCUMENTS
Section 9.03 of Rev. Proc. 97–33,
1997–30 I.R.B. 10, 13, is modified to provide the same rule (regarding the FRB’s
nonacceptance of late ETA payments) as
set forth in section 11.04 of this revenue
procedure.
SECTION 24. EFFECTIVE DATE
.01 In general. This revenue procedure
is effective April 27, 1998.
.02 Grandfather rule. A power of attorney on Form 2848, Power of Attorney and
Declaration of Representative, or other
document that satisfies the requirements
of § 601.503(a) of the Statement of Procedural Rules, that was submitted to the
Service on or before April 27, 1998, will
be treated as an Authorization for purposes of this revenue procedure, even
though it does not comply with section
7.02 of this revenue procedure.
SECTION 25. PAPERWORK
REDUCTION ACT
The collections of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545-1601.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
The collections of information in this
revenue procedure are in sections 5, 6, 7,
8, 12, 14, 15, and 16 of this revenue procedure. This information is required to
implement EFTPS, and verify that taxpayers have met their obligations to pay
their taxes and make FTDs by EFTPS.
This information will be used to identify
persons paying taxes and making FTDs
on behalf of taxpayers and to credit taxpayers’ tax accounts for FTDs and FTPs
made through EFTPS. The collections of
information are mandatory. The likely respondents are business or other for-profit
institutions.
The estimated total annual reporting
and recordkeeping burden will be 51,885
hours.

1998–17 I.R.B.

The estimated annual burden per respondent/recordkeeper will vary from 71
hours to 91 hours, depending on individual circumstances, with an estimated average of 74.33 hours. The estimated number

1998–17 I.R.B.

of respondents and recordkeepers is 620.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as

19

long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

April 27, 1998

Part IV. Items of General Interest
Partial Withdrawal of, and
Amendment to, Notice of
Proposed Rulemaking; Notice
of Proposed Rulemaking and
Notice of Public Hearing
Adjustments Following Sales of
Partnership Interests
REG–209682–94
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of notice of
proposed rulemaking, amendment to notice of proposed rulemaking; notice of
proposed rulemaking and notice of public
hearing.
SUMMARY: This document withdraws
a portion of the notice of proposed rulemaking published in the Federal Register, February 16, 1984 (49 F.R. 5940);
contains proposed regulations relating to
the optional adjustments to the basis of
partnership property following certain
transfers of partnership interests under
section 743, the calculation of gain or
loss under section 751(a) following the
sale or exchange of a partnership interest,
the allocation of basis adjustments
among partnership assets under section
755, and the allocation of a partner’s
basis in its partnership interest to properties distributed to the partner by the partnership under section 732(c); and, finally,
amends proposed regulations relating to
the computation of a partner’s proportionate share of the adjusted basis of depreciable property (or depreciable real
property) under section 1017. The
changes are necessary to provide clearer
guidance on the the proper application of
these sections and will effect partnerships
and partners where there are transfers of
partnership interests, distributions of
property, or elections under sections
108(b)(5) or (c). In addition, the proposed regulations under section 732(c)
reflect changes to the law made by the
Taxpayer Relief Act of 1997.
DATES: Written comments must be received by April 29, 1998. Outlines of topics to be discussed at the public hearing
scheduled for Wednesday, July 8, 1998, at

April 27, 1998

10 a.m. must be received by Wednesday,
June 24, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209682–94),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–209682–94), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC.
Alternatively, taxpayers may submit
comments electronically via the internet
by selecting the “Tax Regs” option on the
IRS Home Page, or by submitting comments directly to the IRS internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
The public hearing will be held in the
IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Terri
A. Belanger, (202) 622-3070; concerning
submissions and the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of
Management and Budget for review in accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget, Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collection of information should be received
by March 30, 1998. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal

20

Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be enhanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the application of automated collection techniques or other forms of information technology; and
Estimates of capital or start-up cost and
costs of operation, maintenance, and purchase of service to provide information.
The collection of information in this
proposed regulation is in §§1.743–1(b),
1.743–1(k), and 1.755–1. This information is required in order for partners to
have adequate knowledge to comply with
section 743 and for the IRS to verify compliance with section 743. This information will be used to determine whether the
amount of tax has been computed correctly. Responses to this collection of information are mandatory for partnerships
that have made an election under section
754 and for which a section 743 transfer
has been made. The likely respondents
are businesses or other for-profit institutions.
Estimated total annual recordkeeping burden under §1.743–1(b): 600,000 hours
The estimated annual burden per recordkeeper varies from 1 hour to 300 hours,
depending on the individual circumstances, with an estimated average of 4
hours.
Estimated number of recordkeepers:
150,000
Estimated total annual reporting burden
under §1.743–1(k)(1): 225,000 hours
The estimated annual burden per respondent is estimated at an average of 3 hours.
Estimated number of respondents:
75,000
Estimated frequency of responses: On
occasion.
Estimated total annual reporting burden
under §1.743–1(k)(2): 75,000 hours
The estimated annual burden per respondent is estimated at an average of 1 hour.
Estimated number of respondents:
75,000

1998–17 I.R.B.

Estimated frequency of responses: On
occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document proposes to (a) revise
§§1.743–1 and 1.755–1 of the Income
Tax Regulations (26 CFR part 1), (b)
withdraw §1.168–2(n) of the proposed Income Tax Regulations published on February 16, 1984 (49 F.R. 5940), and (c)
amend §§1.732–1, 1.732–2, 1.734–1,
1.751–1 of the Income Tax Regulations,
and §1.1017–1 of the proposed Income
Tax Regulations published January 7,
1997 (62 F.R. 955).
Section 743(b) provides for an optional
adjustment to the basis of partnership
property following certain transfers of
partnership interests. The Code provides
for basis adjustments in an attempt to coordinate the transferee’s tax consequences
and economic consequences. The amount
of the basis adjustment is the difference
between the transferee’s basis in the partnership interest (outside basis) and its
share of the partnership’s basis in the partnership’s assets (inside basis). Once the
amount of the basis adjustment is determined, it is allocated among the partnership’s various assets pursuant to section
755.
The proposed regulations coordinate
sections 704(c), 743, 751, and 755, and
reflect changes in the Code and Income
Tax Regulations since the adoption of
the current regulations. The proposed
regulations also provide rules concerning
adjustments to the basis of partnership
property made pursuant to section
1017(b)(3)(C). The proposed regulations
describe how to determine a partner’s
proportionate share of the adjusted basis
of depreciable property (or depreciable
real property) under section 1017, and
clarify that an adjustment to the basis of

1998–17 I.R.B.

partnership property made under section
1017(b)(3)(C) is treated in the same manner as an adjustment to the basis of partnership property made under section 743.
Section 732(c) provides for the allocation of a partner’s basis in its partnership
interest upon certain distributions of property to the partner by the partnership.
Section 732(c) was amended by the Taxpayer Relief Act of 1997, Pub. L. No.
105–34, §1061, 111 Stat. 788, 945–46
(1997). Under prior law, the allocation
was made based on the adjusted basis of
the distributed property to the partnership
immediately before the distribution.
Under the new law, the allocation is
made, in general, based on the fair market
value of the distributed property on the
date of distribution. The proposed regulations amend the existing regulations
under section 732 to reflect this change.
Explanation of Provisions
A. Section 743
In General
If an election is in effect under section
754, section 743 requires the partnership
to adjust the basis of partnership property
upon the transfer of an interest in the partnership by sale or exchange or on the
death of a partner. The partnership is required to increase the adjusted basis of
partnership property by the excess of the
transferee’s basis in the transferred partnership interest over the transferee’s share
of the adjusted basis to the partnership of
the partnership’s property. The partnership is also required to decrease the adjusted basis of partnership property by the
excess of the transferee’s share of the adjusted basis to the partnership of partnership property over the transferee’s basis in
the transferred partnership interest.
The proposed regulations address a
number of issues raised in connection
with the calculation, treatment, and reporting of basis adjustments under section
743. In particular, the proposed regulations (i) clarify the manner in which the
partnership calculates a transferee’s income, gain, loss, or deduction when the
transferee has a basis adjustment under
section 743 (including the recovery of
negative basis adjustments) and (ii) coordinate sections 743 and 704(c) when partnerships elect the remedial allocation
method under §1.704–3(d). The proposed

21

regulations also provide that partnerships
(rather than partners) are required to make
and report the basis adjustments under
section 743(b). Partnerships are required
to adjust the transferee’s distributive share
of partnership tax items so that the information reported on the transferee’s
Schedule K–1 reflects the adjustments to
the transferee’s distributive share of the
partnership items affected by the basis adjustment.
Determining the Amount of the Basis
Adjustment
The amount of the basis adjustment
with respect to partnership property under
section 743 is the difference between the
transferee’s share of the partnership’s inside basis and the transferee’s outside
basis. The current regulations provide
that a partner’s share of the adjusted basis
of partnership property is equal to the sum
of the partner’s interest as a partner in
partnership capital and surplus, plus the
partner’s share of partnership liabilities.
The current regulations also provide that
where section 704(c) applies to property
contributed to the partnership, section
704(c) is taken into account in determining a partner’s share of the adjusted basis
of partnership property.
The current regulations do not provide,
other than by example, specific guidance
on how to determine a transferee partner’s
share of the adjusted basis of partnership
property. The proposed regulations provide that a transferee’s share of the adjusted basis to the partnership of partnership property is equal to the sum of the
transferee’s interest as a partner in the
partnership’s previously taxed capital,
plus the transferee’s share of partnership
liabilities. The partner’s share of the partnership’s previously taxed capital is determined by reference to a hypothetical
transaction in which (immediately after
the transfer of the partnership interest) the
partnership is assumed to have sold all of
its assets in a fully taxable transaction for
cash equal to the fair market value of the
assets. The partner’s share of the partnership’s previously taxed capital is equal to
(i) the amount of cash that the transferee
would receive on liquidation of the partnership immediately following the hypothetical transaction, increased by (ii) the
amount of tax loss that would be allocated

April 27, 1998

to the transferee from the hypothetical
transaction, and decreased by (iii) the
amount of tax gain that would be allocated to the transferee from the hypothetical transaction.
Calculation of Income, Gain, or Loss
The basis adjustment under section
743, like any other basis amount, is a reference used to calculate income, gain,
loss, and deduction. However, generally
the basis adjustment under section 743 is
an adjustment with respect to the transferee. No adjustment is made to the common basis of partnership property (i.e.,
the partnership’s adjusted basis for the
property). Thus, for purposes of income,
deduction, gain, loss, and distribution, the
transferee will have a special basis for
those partnership properties that are adjusted under section 743(b). The proposed regulations clarify the rules contained in the current regulations.
The basis adjustment under section 743
does not affect the partnership’s computation of any item under section 703, and
does not have any effect on the partners’
capital accounts. Partnerships compute
their tax items at the partnership level
under section 703 without regard to the
basis adjustments. Partnership level tax
items (including any remedial allocations
under §1.704–3(d)) are then allocated
among the partners, including the transferee, in accordance with section 704. Finally, the partnership adjusts the transferee’s distributive share of partnership
tax items to reflect the transferee’s special
basis in the properties that give rise to the
tax items. A transferee’s income, gain, or
loss from the sale of partnership property
in which the transferee has a basis adjustment is equal to the transferee’s distributive share of partnership income, gain, or
loss (including any remedial allocations
under §1.704–3(d)) from the sale of the
property adjusted to account for the
amount of the transferee’s basis adjustment with respect to the property.
Coordination of Section 743 with
Section 704(c)
Section 704(c) is taken into account in
determining a transferee’s share of the
partnership’s basis in the partnership’s assets. As a result, some or all of a transferee’s basis adjustment may be attributable to section 704(c) built-in gain or loss

April 27, 1998

when a transferee purchases a partnership
interest from a partner that contributed
section 704(c) property to the partnership.
For example, assume that A contributes
property with a fair market value of $100
and an adjusted tax basis of $10 to a partnership for a fifty percent interest and B
contributes $100 of cash for the remaining fifty percent interest. Immediately
after the formation of the partnership, A’s
share of the partnership’s basis in the partnership property is $10, while B’s share is
$100. The contributed asset then appreciates in value to $120, and A transfers its
entire interest to T for $110 while an election is in effect under section 754. T will
have a basis adjustment of $100. The first
$90 of the basis adjustment is attributable
to the section 704(c) built-in gain, while
the remaining $10 of the basis adjustment
is attributable to T’s fifty percent share of
the $20 of post-contribution appreciation
in the contributed property.
Despite the fact that a portion of the
basis adjustment may be attributable to a
property’s section 704(c) built-in gain,
section 704(c) and section 743 operate independently. Section 1.704–1(b)(2)(iv)(g)(3) requires a partnership to recover
the value of section 704(c) property on
the books of the partnership over the
property’s remaining useful life, determined with reference to the property’s
useful life in the hands of the contributing
partner. At the same time, §1.168–2(n)(1)
of the proposed Income Tax Regulations
provides that the entire basis adjustment
is recovered as though it is new property.
Cf. Sections 168(i)(7) and 197(f)(2). As a
result, the book and tax items representing the section 704(c) built-in gain are recovered over different periods.
Although a portion of the basis adjustment may represent actual tax basis equal
to the amount of the section 704(c) builtin gain, the deductions attributable to the
basis adjustment cannot be allocated to
the noncontributing partner. The basis adjustment does not, therefore, eliminate
any book-tax disparities that result from
ceiling rule problems relating to the section 704(c) property. Because the basis
adjustment only affects the transferee, the
Service and Treasury believe that it is appropriate for sections 704(c) and 743(b)
to operate independently.
When a partnership adopts the remedial
allocation method, however, the partners

22

may be viewed as agreeing to shift, over
time, a portion of the partnership’s basis
in its assets from the noncontributing
partner to the contributing partner. Partnership basis that was considered part of
the noncontributing partner’s share of the
partnership’s basis at the time the adjustment to basis was made will be transferred to the contributing partner as the
property is recovered on the partnership’s
books. In addition, a partnership that
adopts the remedial allocation method
with respect to contributed property must
depreciate or amortize the portion of the
contributed property’s book basis that is
attributable to section 704(c) built-in gain
as though it is new property at the time of
contribution. As a result, the Service and
Treasury believe that it is appropriate to
coordinate the recovery periods of the
section 704(c) built-in gain and the builtin gain portion of the basis adjustment
where the partnership uses the remedial
allocation method.
Where a partnership adopts the remedial allocation method, the proposed regulations treat the portion of any basis adjustment that is attributable to section
704(c) built-in gain differently from the
rest of the basis adjustment. Instead of
treating the section 704(c) built-in gain
portion of the basis adjustment and the
basis adjustment in excess of such amount
as newly acquired property, the section
704(c) built-in gain portion of the basis
adjustment is recovered over the remaining cost recovery period for the section
704(c) built-in gain. The recovery period
for the partner’s share of common basis
continues to be determined by reference
to the property’s useful life in the hands of
the contributing partner, and the remaining basis adjustment in excess of the section 704(c) built-in gain portion of the
basis adjustment is recovered as if it were
new property.
If a partnership receives remedial allocations of income under §1.704–3(d) with
respect to an item of adjusted partnership
property, the partner does not offset the
cost recovery deductions from the property against the remedial allocations of income. Rather, the partner will receive an
allocation of remedial income and a separate cost recovery deduction. If a partner
receives remedial allocations of deductions under §1.704–3(d) with respect to
an item of partnership property that has a

1998–17 I.R.B.

negative basis adjustment, the partner
first adds the amount of the remedial allocation of deduction to any common basis
deductions received from the property.
The partner then reduces the total amount
of deductions from the property by the
amount of the negative basis adjustment
recovered in that year.
One result of this proposal is that the
interests in a partnership will generally be
fungible (i.e. the tax consequences that
stem from the purchase of a partnership
interest do not vary with the identity of
the transferor), if (i) each partnership interest has an identical right in capital and
profits, and (ii) each item of the partnership’s section 704(c) property is subject to
the remedial allocation method. The Service and Treasury request comments on
situations in which the fungibility of partnership interests may otherwise be accommodated without significantly adding
to the complexity of subchapter K. In addition, comments are requested concerning the application of the remedial allocation method to contributed property
where there are no distortions caused by
the ceiling rule at the time the property is
contributed to the partnership.
Recovery of Negative Basis Adjustments
Section 1.168–2(n)(2) of the proposed
Income Tax Regulations provides that a
negative basis adjustment to depreciable
property is recovered over the property’s
remaining recovery period in the hands of
the partnership (i.e., the adjustment made
to the common basis of the partnership
property). The portion of the adjustment
that is recovered in any year is equal to
the product of (i) the amount of the decrease to the item’s adjusted basis (determined as of the date of the transfer), multiplied by (ii) a fraction, the numerator of
which is the portion of the adjusted basis
of the item recovered by the partnership
in that year, and the denominator of which
is the adjusted basis of the item on the
date of transfer (determined prior to any
basis adjustments).
Because the basis adjustment under
section 743 is personal to the transferee,
the primary method adopted by the proposed regulations for recovering a negative basis adjustment provides that the
basis adjustment does not affect the common basis of partnership property and
does not affect the tax consequences of

1998–17 I.R.B.

partners other than the transferee. Under
this method, the recovery of the negative
basis adjustment may generate ordinary
income to the extent that it exceeds the
transferee’s share of the depreciation deductions. The proposed regulations provide that, unless the partnership elects to
make a common basis adjustment, as described below, the amount of the basis adjustment recovered in any year first decreases the transferee’s distributive share
of the partnership’s deductions from the
adjusted item of property for that year. If,
in any year, a partnership does not allocate to a transferee sufficient deductions
from the adjusted property to offset the
recovery of the negative basis adjustment,
then the transferee’s distributive share of
the deductions from other items of partnership property is decreased. The transferee then recognizes income equal to the
excess of the amount of the negative basis
adjustment recovered in the year over the
transferee’s share of deductions from the
other items of property for the year.
As an alternative, the proposed regulations also allow partnerships to elect to
follow the approach of the old proposed
regulations. If this election is made, the
partnership treats the amount of the negative basis adjustment as an item of built-in
gain, decreasing the total amount of depreciation or amortization that the partnership may allocate for tax purposes.
This election would prevent the transferee
from ever recognizing income in situations where the partnership did not allocate to the transferee sufficient depreciation to offset the negative basis
adjustment. It should be noted, however,
that this election has no effect on the partners’ capital accounts, which continue to
be adjusted to reflect the depreciation or
amortization of the adjusted property as
though there was no basis adjustment to
the property. Consequently, to the extent
that the basis adjustment causes the
amount of the deductions allocated to the
non-transferee partners for book purposes
to exceed the amount of tax depreciation
available to be allocated to them by the
partnership, a book-tax disparity results
for the non-transferee partners.
The Service and Treasury request comments concerning the recovery of negative basis adjustments under section 743.
Specifically, the Service and Treasury request comments regarding whether there

23

are other possible ways of accounting for
the recovery of negative basis adjustments that treat the basis adjustment as
personal to the transferee and, at the same
time, do not interfere with the economic
agreement among the partners.
Reporting and Returns
The statutory language of section
743(b) indicates that partnerships are responsible for making the basis adjustments. This mandate is repeated in the
language of the current regulations issued
under both sections 743 and 755. Notwithstanding that partnerships are required to make and allocate basis adjustments under the current regulations,
transferees are required to report the basis
adjustments. Transferees accomplish this
by attaching statements to their returns
that show how the section 743(b) adjustment was determined and how the adjustment was allocated among the various
partnership properties. No existing guidance indicates when (i.e., before or after
the Schedule K–1) the effect of the basis
adjustment to specific partnership items is
to be determined or who is required to
make and report the adjustments to the
partnership items.
The proposed regulations clarify that
partnerships are required to make the
basis adjustments. In addition, the proposed regulations place the responsibility
for reporting basis adjustments on partnerships. Partnerships report basis adjustments by attaching statements to their
partnership returns when they acquire
knowledge of transfers subject to section
743. In addition, partnerships are required to adjust specific partnership items
in light of the basis adjustments. Consequently, amounts reported on the transferee’s Schedule K–1 are adjusted
amounts.
Transferees are subject to an affirmative obligation to notify partnerships of
their basis in acquired partnership interests. To accommodate partnership concerns about the reliability of the information provided, partnerships are entitled to
rely on the written representations of
transferees concerning either the amount
paid for the partnership interest or the
transferee’s basis in the partnership interest under section 1014 (unless clearly erroneous).

April 27, 1998

B. Section 751

C. Section 755

Section 751(a) provides that to the extent an amount realized on the sale or exchange of a partnership interest is attributable to the transferor ’s interest in
unrealized receivables or inventory items
of the partnership, the amount realized is
considered to be an amount realized from
the sale or exchange of property other
than a capital asset. Thus, the transferor
partner may recognize ordinary income or
loss on the sale or exchange of its partnership interest. Under the current section
751 regulations, the amount of income or
loss realized by a partner on the sale or
exchange of an interest in section 751
property is equal to the difference between (i) the portion of the total amount
realized for the partnership interest allocated to section 751 property, and (ii) the
portion of the transferor partner’s basis in
its partnership interest allocated to the
property. Generally, the portion of the
total amount realized allocated to section
751 property is determined by the seller
and purchaser in an arm’s length agreement. The portion of the partner’s adjusted basis in the partnership interest allocated to the section 751 property equals
the basis that the property would have had
under section 732 if the transferor partner
had received its proportionate share of the
property in a current distribution immediately before the sale.
The proposed regulations amend these
rules for determining the transferor partner’s gain or loss from the sale or exchange of its interest in section 751 property. Rather than attempting to allocate a
portion of the transferor partner’s amount
realized and adjusted basis to the section
751 property, the proposed regulations
adopt a hypothetical sale approach.
Thus, the income or loss realized by a
partner from section 751 property upon
the sale or exchange of its interest is the
amount of income or loss that would
have been allocated to the partner from
section 751 property (to the extent attributable to the partnership interest sold or
exchanged) if the partnership had sold all
of its property in a fully taxable transaction for fair market value immediately
prior to the partner’s transfer of the partnership interest.

In General
The current regulations under section
755 contain a number of problems that
prevent partnerships from allocating the
section 743(b) basis adjustments to appropriate assets. The proposed regulations
resolve these problems and implement the
purposes of section 743(b) by focusing on
the items that the transferee partner would
receive upon a fair market value sale of
all of the partnership’s assets.
At the same time, the proposed regulations recognize that adjustments under
section 734 differ significantly from adjustments under section 743. Specifically,
adjustments under section 743(b) are intended to affect the transferee partner
only. In contrast, adjustments under section 734 affect all of the partners. As a
result, the proposed regulations under
section 755 contain two separate
regimes—one that applies to adjustments
under section 734, and another that applies to adjustments under section 743.
While the regime allocating adjustments
under section 743 focuses on the transferee, the regime allocating adjustments
under section 734 focuses on the difference between value and basis at the partnership entity level.

April 27, 1998

Allocating Adjustments under
Section 743(b)
The proposed regulations provide that
allocations of basis adjustments under
section 743 among partnership assets are
made based on the amount of income,
gain, or loss (including remedial allocations under §1.704–3(d)) that the transferee would be allocated if, immediately
after the section 743(b) transfer, all of the
partnership’s assets were disposed of in a
fully taxable transaction at fair market
value. By adopting this method, in some
situations the proposed regulations will
require adjustments to be made that increase the basis of some assets and decrease the basis of others.
Hypothetical sale
The current regulations do not take
each partner’s interest in specific assets
into account. The amount of the section
743 adjustment is allocated among part-

24

nership properties to reduce the difference
between the fair market value and the adjusted basis of partnership properties at
the partnership entity level rather than at
the partner level. This formulation of the
rule fails to take into account special allocations or the varying treatment of different partners by virtue of the operation of
section 704(c) or the minimum gain
chargeback. Therefore, basis adjustments
will often be made to the wrong assets,
exposing the partners to tax consequences
that may vary significantly from the partners’ economic consequences.
Rather than attempt to define a partner’s share of the basis or fair market
value of a specific partnership asset, the
proposed regulations focus on the actual
tax items that would be allocated to the
transferee in a fully taxable, fair market
value sale. Under the proposed regulations, partnerships are required to adjust
the basis of partnership assets in a manner
that reflects the amount of income, gain,
or loss that the transferee would recognize
if all of the partnership’s assets were sold
in the hypothetical transaction.
Two-way Adjustments
Under the current regulations, the partnership may not increase the basis of assets that have a fair market value in excess of basis and, at the same time,
decrease the basis of assets that have a
basis in excess of fair market value.
Thus, if the section 743(b) adjustment is
positive, the partnership may only increase the basis of assets that have a basis
that is less than their fair market value.
This restriction prevents the partnership
from adjusting the basis of its assets in a
manner that coordinates a transferee’s tax
consequences with its economic consequences.
The proposed regulations remove this
restriction. Instead, the amount of the
section 743 adjustment is viewed as a net
adjustment. This net amount is then allocated between the partnership’s two
classes of assets (capital gain property
and ordinary income property). The
amount of the adjustment allocated to ordinary income property may be an increase while the amount of the adjustment
allocated to capital gain property is a decrease. The amount of the adjustment al-

1998–17 I.R.B.

located to each class is then allocated
among the assets within each class. The
amount of the adjustment allocated to one
item within the class may also be an increase even if the amount allocated to another item is a decrease.
Allocation between Classes
The amount of the basis adjustment allocated to the class of ordinary income
property is equal to the total amount of income, gain, or loss (including any remedial allocations under §1.704–3(d)) that
would be allocated to the transferee from
the sale of all ordinary income property in
the hypothetical transaction. The amount
of the basis adjustment to capital gain
property is equal to (i) the total amount of
the basis adjustment under section 743,
less (ii) the amount of the basis adjustment allocated to ordinary income; provided, however, that in no event may the
amount of any decrease in basis allocated
to capital gain property exceed the partnership’s basis in capital gain property. In
the event that a decrease in basis allocated
to capital gain property exceeds the partnership’s basis in capital gain property,
the excess is applied to reduce the basis of
ordinary income property.
Allocation within Classes
The amount of the basis adjustment allocated to each item of property within
the class of ordinary income property
equals:
(a) the amount of income, gain, or loss
(including any remedial allocations under
§1.704–3(d)) that would be allocated to
the transferee from the hypothetical sale
of the item, minus
(b) the product of (1) any decrease to
the amount of the basis adjustment to ordinary income property required because
the partnership did not have enough basis
in capital gain property to reduce, multiplied by (2) a fraction, the numerator of
which is the fair market value of the item
of property to the partnership and the denominator of which is the total fair market
value of all items of the partnership’s ordinary income property.
The amount of the basis adjustment allocated to each item of property within
the class of capital gain property equals:
(a) the amount of income, gain, or loss
(including any remedial allocations under

1998–17 I.R.B.

§1.704–3(d)) that would be allocated to
the transferee from the hypothetical sale
of the item, minus
(b) the product of (1) the total amount of
gain or loss (including any remedial allocations under §1.704–3(d)) that would be
allocated to the transferee from the hypothetical sale of all items of capital gain
property, minus the amount of the positive
basis adjustment to all items of capital gain
property or plus the amount of the negative
basis adjustment to all items of capital gain
property, multiplied by (2) a fraction, the
numerator of which is the fair market value
of the item of property to the partnership
and the denominator of which is the total
fair market value of all of the partnership’s
items of capital gain property.
Allocating Adjustments under
Section 734
As under the current regulations, the
proposed regulations provide that allocations of section 734 adjustments among
partnership assets are made based on the
difference between the value of the property and the property’s basis. Where there
is a distribution of partnership property
resulting in an adjustment to the basis of
undistributed partnership property under
section 734(b)(1)(B) or (b)(2)(B), the adjustment must be allocated to remaining
partnership property of a character similar
to that of the distributed property with respect to which the adjustment arose. If
there is an increase in basis to be allocated
within a class of property, the increase
must be allocated first to properties with
unrealized appreciation in proportion to
their respective amounts of unrealized appreciation before such increase (but only
to the extent of each property’s unrealized
appreciation). Any remaining increase
must be allocated among the properties
within the class in proportion to their fair
market values. If there is a decrease in
basis to be allocated within a class, the
decrease must be allocated first to properties with unrealized depreciation in proportion to their respective amounts of unrealized depreciation before such
decrease (but only to the extent of each
property’s unrealized depreciation). Any
remaining decrease must be allocated
among the properties within the class in
proportion to their adjusted bases (as adjusted under the preceding sentence).

25

D. Section 1017
Section 1017 provides rules concerning
basis reductions resulting from a taxpayer’s exclusion of cancellation of indebtedness income. In general, under
§1.1017–1(f) of the proposed Income Tax
Regulations, if a partner makes an election under section 108(b)(5) or section
108(c), the partner may treat a partnership
interest as depreciable property (or depreciable real property) to the extent the partnership correspondingly reduces the partner’s proportionate share of the adjusted
basis of dep

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ab5eb1c835d8c93aa. Public record. Not legal advice.