Bulletin No. 1997–35

Internal Revenue

bulletin

Bulletin No. 1997–35

September 2, 1997

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.

SPECIAL ANNOUNCEMENT

Announcement 97–86, page 9.

The Tenth Annual Institute on Current Issues in International

Taxation, co-sponsored with The George Washington

University, will be held December 11 and 12, 1997, at the

J.W. Marriott Hotel in Washington, DC.

the Code as amended by the Omnibus Budget Reconciliation

Act of 1987 and by the Uruguay Round Agreements Act

(GATT).

EXEMPT ORGANIZATIONS

Announcement 97–85, page 8.

INCOME TAX

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

Rev. Rul. 97–35, page 4.

ADMINISTRATIVE

Mutual life insurance companies; differential earnings

rate. The differential earnings rate for 1996 and the recomputed differential earnings rate for 1995 are set forth for use

by mutual life insurance companies to compute their income

tax liabilities for 1996.

Announcement 97–88, page 9.

Qualified personal service corporations that used the incorrect tax rates on their income tax returns should promptly

file amended returns.

Notice 97–48, page 5.

This notice sets forth the 1997 changes to Publication

1187, Specifications for Filing Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding, Magnetically or Electronically (Rev. Proc. 96–11, 1996–1 C.B.

578).

Announcement 97–79, page 8.

EMPLOYEE PLANS

The number of medical savings accounts established as of

April 30, 1997, used to determine whether 1997 is a “cutoff” year, is provided.

Notice 97–47, page 5.

Announcement 97–87, page 9.

Guidelines are set forth for determining for August 1997 the

weighted average interest rate and the resulting permissible

range of interest rates used to calculate current liability for

purposes of the full funding limitation of section 412(c)(7) of

The Collection Financial Standards used by the Service as

the basis for determining collection actions, including installment agreements and offers in compromise, are now on the

Internet.

Finding Lists begin on page 12.

Index for July and August begins on page 14.

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 quarterly and

semiannual basis, and are published in the first Bulletin of the

succeeding quarterly and 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 809. — Reduction in

Certain Deductions of Mutual

Life Insurance Companies

26 CFR 1.809–9: Computation of the differential

earnings rate and the recomputed differential earnings rate.

Mutual life insurance companies;

differential earnings rate. The differential earnings rate for 1996 and the recomputed differential earnings rate for 1995

are set forth for use by mutual life insurance companies to compute their income

tax liabilities for 1996.

Rev. Rul. 97–35

This revenue ruling contains the differential earnings rate for 1996 and the recomputed differential earnings rate for

1995. Under § 809 of the Internal Revenue Code, mutual life insurance companies use these rates in computing their

Federal income tax liability for taxable

years beginning in 1996. This revenue

ruling also contains the figures on which

the determinations of these rates are

based. Notice 97–17, 1997–10 I.R.B. 34,

contained tentative determinations of

these rates.

Section 809(a) provides that, in the

case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder dividends is reduced (but not below zero) by

the “differential earnings amount.” Any

excess of the differential earnings amount

over the amount of the deduction allowable under § 808 is taken into account as a

reduction in the closing balance of reserves under subsections (a) and (b) of §

807. The “differential earnings amount”

for any taxable year is the amount equal

to the product of (a) the life insurance

company’s average equity base for the

taxable year multiplied by (b) the “differential earnings rate” for that taxable year.

The “differential earnings rate” for the

taxable year is the excess of (a) the “imputed earnings rate” for the taxable year

over (b) the “average mutual earnings

rate” for the second calendar year preceding the calendar year in which the taxable

year begins. The “imputed earnings rate”

September 2, 1997

for any taxable year is the amount that

bears the same ratio to 16.5 percent as the

“current stock earnings rate” for the taxable year bears to the “base period stock

earnings rate.”

Section 809(f) provides that, in the case

of any mutual life insurance company, if

the “recomputed differential earnings

amount” for any taxable year exceeds the

differential earnings amount for that taxable year, the excess is included in life insurance gross income for the succeeding

taxable year. If the differential earnings

amount for any taxable year exceeds the

recomputed differential earnings amount

for that taxable year, the excess is allowed

as a life insurance deduction for the succeeding taxable year. The “recomputed

differential earnings amount” for any taxable year is an amount calculated in the

same manner as the differential earnings

amount for that taxable year, except that

the average mutual earnings rate for the

calendar year in which the taxable year

begins is substituted for the average mutual earnings rate for the second calendar

year preceding the calendar year in which

the taxable year begins.

The stock earnings rates and mutual

earnings rates taken into account under §

809 generally are determined by dividing

statement gain from operations by the average equity base. For this purpose, the

term “statement gain from operations”

means “the net gain or loss from operations required to be set forth in the annual

statement, determined without regard to

Federal income taxes, and ... properly adjusted for realized c apital gains and

losses....” See § 809(g)(1). The term “equity base” is defined as an amount determined in the manner prescribed by regulations equal to s urplus and capital

increased by the amount of nonadmitted

financial assets, the excess of statutory reserves over the amount of tax reserves,

the sum of certain other reserves, and 50

percent of any policyholder dividends (or

other similar liability) payable in the following taxable year. See § 809(b)(2), (3),

(4), (5) and (6). Section 1.809–10 of the

Income Tax Regulations provides that the

equity base includes both the asset valua-

4

tion reserve and the interest maintenance

reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations

provides that neither the differential earnings rate under § 809(c) nor the recomputed differential earnings rate that is

used in computing the recomputed differential earnings amount under § 809(f)(3)

may be less than zero.

For purposes of § 809, the differential

earnings rate for 1996 and the rate used to

calculate the recomputed diff e r e n t i a l

earnings amount for 1995 (the recomputed differential earnings rate for 1995),

and the figures on which these two rates

are based are set forth in Table 1.

Rev. Rul. 97–35 Table 1

Determination of Rates To Be Used for

Taxable Years Beginning in 1996

Differential earnings rate

for 1996 . . . . . . . . . . . . . . . . . . . 6.447

Recomputed differential

earnings rate for 1995 . . . . . . . . . . . . 0

Imputed earnings rate

for 1995 . . . . . . . . . . . . . . . . . . 12.625

Imputed earnings rate

for 1996 . . . . . . . . . . . . . . . . . . 15.669

Base period stock earnings

rate . . . . . . . . . . . . . . . . . . . . . . 18.221

Current stock earnings rate for

1996 . . . . . . . . . . . . . . . . . . . . . 17.303

Stock earnings rate for 1993 . . . . 23.385

Stock earnings rate for 1994 . . . . 11.437

Stock earnings rate for 1995 . . . . 17.087

Average mutual earnings rate

for 1994 . . . . . . . . . . . . . . . . . . . 9.222

Average mutual earnings rate

for 1995 . . . . . . . . . . . . . . . . . . 16.477

DRAFTING INFORMATION

The principal author of this revenue

ruling is Katherine A. Hossofsky of the

Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Ms. Hossofsky on (202) 622-3477

(not a toll-free number).

1997–35 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate Update

Notice 97–47

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest

rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as

amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay Round Agreements Act, Pub. L.

103–465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for July 1997 is 6.51 percent.

The following rates were determined for the plan years beginning in the month shown below.

Month

August

Year

1997

90% to 107%

Permissible

Range

6.16 to 7.33

Weighted

Average

6.85

90% to 110%

Permissible

Range

6.16 to 7.53

DRAFTING INFORMATION

The principal author of this notice is Donna Prestia of the Employee Plans Division. For further information regarding this notice, call

(202) 622-6076 between 2:30 and 4:00 p.m. Eastern time (not a toll-free number). Ms. Prestia’s number is (202) 622-7377 (also not a

toll-free number).

Notice 97–48

Revenue Procedure 96–11, Publication 1187, Specifications for Filing Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding, Magnetically or Electronically, will not be reissued for Tax Year (TY) 97 filing, which is processed in 1998.

Following are the changes that have occurred since the 1/96 revision:

1. The ZIP Code has changed from 25401–1359 to 25402–1359 for the IRS P.O. Box address for the Martinsburg Computing Center.

✉

If by Postal Service:

IRS-Martinsburg Computing Center

Information Reporting Program

P. O. Box 1359, MS–360

Martinsburg, WV 25402-1359

or

If by private delivery service:

IRS-Martinsburg Computing Center

Information Reporting Program

Route 9 and Needy Road, MS–360

Martinsburg, WV 25401

2. To provide clarification of the correction process for Forms 1042–S, the following definitions have been provided:

a. A void record is an information return (Form 1042–S) submitted by the transmitter to replace a previously filed incorrect original return. A void record must be a duplicate of the original successfully processed return with the exception of a “V” in field

position 371 of the “Q” record. This record can be filed with or without a corresponding “C” record. For example, a Form

1042–S was submitted, and it should have been prepared as a Form 1099. A “Q” record with the original Form 1042–S information would be filed with a “V” in position 371. In this instance, a corresponding “C” coded “Q” record would NOT be necessary.

b. A correction is an information return (Form 1042–S) submitted by the transmitter to correct a return that was successfully

processed by IRS/MCC, but contained erroneous information. A “C” in field position 371 of the “Q” record identifies a correction record. This record must always have a corresponding “V” coded record.

Following is a chart showing the steps to be taken for correcting Forms 1042–S:

1997–35 I.R.B.

5

September 2, 1997

Guidelines for Filing Corrected Returns Magnetically/Electronically

Transaction 1: Identify incorrect returns (void process)

The record sequence for filing corrections is the same as for original returns. Create the file in the following order exactly the

same as the original transmission:

a. Transmitter “T” Record

b. Recipient “Q” Record with the exact information as submitted originally, however,

c. Place a “V” (See Note) in field position 371 of the “Q” Record

d. Prepare a Withholding Agent “W” Record summarizing the preceding “V” Coded “Q” Records. (See sample format below.)

☞ Note: A “V” coded “Q” Record may or may not have a corresponding “C” Coded “Q” Record.

Transaction 2: Report the correct information (correction process)

On the same media or electronic submission, prepare:

a. Recipient “Q” Record with the correct information

b. Place a “C” (See Note) in Field Position 371 of the “Q” Record

c. Prepare a Withholding Agent “W” Record summarizing the preceding “C” coded “Q” records

d. Prepare an End of Transmission “Y” record

e. “V” and “C” Coded Corrected returns submitted to IRS/MCC must be in the same submission.

☞ Note : Each “C” Coded “Q” Record MUST have a corresponding “V” Coded Record

Sample data sequences for void/ correction records:

T

Q with V

Q with V

Q with V

Q with V

Q with V

Q with V

W

Q with C

Q with C

Q with C

Q with C

W

Y

3. “T” Record—Change Tax Year (positions 2–3) to 97 for income and withholding reported for 1997 (unless reporting for a different tax year). All other “T” record data fields in the 1/96 revision remain the same.

4. “Q” Record Changes—The following fields (items A–E) indicate changes made to the information contained in the 1/96 revision.

All other “Q” record data fields remain the same.

Positions

Field Title

Length

Description and Remarks

(A) Field Position 112 has changed to include the definition for the Individual Taxpayer Identification Number.

112

Type of TIN

1

This field is used to identify the Taxpayer Identification

Number (TIN) in positions 112–121 as either an Employer Identification Number (EIN), or a Social Security

Number (SSN) or an Individual Taxpayer Identification

Number (ITIN). Enter the appropriate code from the following table:

Type of TIN Type of Account

1

September 2, 1997

6

EIN

A business, organization, sole proprietor,

or other entity

1997–35 I.R.B.

2

SSN

ITIN

Blank

An individual, including a sole proprietor

OR

An individual required to have a taxpayer

identification number, but who is not eligible to obtain an SSN

If the type of TIN is not determinable,

enter a blank.

(B) The Form 1042–S Paper instructions are updated each year. Changes are made to the list of Country Codes at that time.

137–138

Country Code

2

The list of country codes included in the 1997 Paper Instructions for Forms 1042–S should be used to ensure the

proper coding of the country code field.

(C) In addition to the Income Code information provided in the Publication 1187, the following information is included as a

result of the tax law change in the reporting of Canadian Interest.

355–356

Income Code

2

Use Income Co de 1 for the reporting of inte rest

payments to Canadian residents who are not U.S. citizens

(D) In addition to the Exemption Code information provided in the Publication 1187, the following information is included

as a result of the tax law change in the reporting of Canadian Interest.

370

Exemption Code

1

Use Exemption Code 2 for the reporting of interest

payments to Canadian residents who are not U.S. citizens.

1

Required. Enter the one position code below to identify

an Original, Incorrect or Corrected Return. (See Part A.

Sec. 13.)

(E) The title of this field position changed.

371

Original, Void,

or Corrected

Return Indicator

Code

Description

Zero

V

If this is an Original Return.

Enter a “V” to void the incorrect original

return submitted. (See Transaction 1)

Enter a “C” if this is to identify the Correct Return. (See Transaction 2)

C

5. “W” Record—Change Tax Year (positions 2–3) to 97 for income and withholding reported for 1997 (unless reporting

for a different tax year).

6. In all records, alpha characters entered must be upper case.

7. Notice to filers:

Format changes to accommodate Year 2000 will occur for TY98 in calendar year 1999.

Treasury has mandated that all electronic year dates exchanged with non-IRS organizations, both government and

private, both input and output, shall adhere to the following:

— All Gregorian date formats will be in the format ‘YYYYMMDD’.

— All other year date formats (e.g., Julian, Tax Period, Cycle Dates) will expand representations from two-digit

year to four-digit year: ‘YYYY’.

1997–35 I.R.B.

7

September 2, 1997

Part IV. Items of General Interest

Medical Savings Accounts

Announcement 97–79

Purpose

Sections 220(i) and (j) of the Internal

Revenue Code provide that if the number

of medical savings accounts (MSAs) established as of April 30, 1997, exceeds

375,000, then September 1, 1997, is a

“cut-off” date for the MSA pilot project.

The Internal Revenue Service has determined that the applicable number of

MSAs established as of April 30, 1997, is

7,383. Consequently, September 1, 1997

is not a “cut-off” date for the MSA pilot

project. A second determination of

whether 1997 will be a cut-off year, based

on whether the number of MSAs established as of J une 30, 1997 exceeds

525,000, will be made by October 1, 1997.

See section 220(j)(1)(B) of the Code.

Background

The Health Insurance Portability and

Accountability Act of 1996 added section

220 to the Code to permit eligible individuals to establish MSAs under a pilot project effective January 1, 1997. The pilot

project has a scheduled “cut-off” year of

2000, but may have an earlier “cut-off”

year if the number of individuals who

have established MSAs exceeds certain

numerical limitations. See sections 220(i)

and (j).

If a year is a “cut-off” year, section

220(i)(1) generally provides that no individual will be eligible for a deduction or

exclusion for MSA contributions for any

taxable year beginning after the cut-off

year unless the individual (A) was an active MSA participant for any taxable year

ending on or before the close of the cuto ff year, or (B) first became an active

MSAparticipant for a taxable year ending

after the cut-off year by reason of coverage under a high deductible health plan of

an MSA-participating employer.

Section 220(j)(1) provides that the numerical limitation for 1997 is exceeded if

the number of MSAs established as of

April 30, 1997, is more than 375,000, or if

the number of MSAs established as of

June 30, 1997, is more than 525,000.

Under section 220(j)(3), in determining

whether any calendar year is a cut-off

September 2, 1997

year, the MSA of any previously uninsured individual is not taken into account.

In addition, section 220(j)(4)(D) specifies

that, to the extent practical, all MSAs established by an individual are aggregated

and two married individuals opening separate MSAs are to be treated as having a

single MSA for purposes of determining

the number of MSAs.

Based on Forms 8851 provided by

MSA trustees and custodians, it has been

determined that 9,720 taxpayers have established MSAs as of April 30, 1997. Of

this total, 1,787 taxpayers were reported

as previously uninsured, and are therefore

not taken into account in determining

whether 1997 is a cut-off year. In addition, 550 taxpayers were reported as excludable from the count because their

spouse also established an MSA. Accordingly, because the applicable number of

MSAs established as of April 30, 1997,

7,383 (9,720 minus (1,787 plus 550)) is

less than 375,000, 1997 is not a cut-off

year for the MSA pilot project. The Service intends to publish another announcement, not later than October 1, 1997, concerning whether 1997 is a cut-off year

based on the number of MSAs established

as of June 30, 1997.

Questions regarding this announcement

may be directed to Felix Zech in the Office of Associate Chief Counsel (Employee Benefits and Exempt Organizations) at (202) 622-4606 (not a toll free

number).

Foundations Status of Certain

Organizations

Announcement 97–85

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

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

under section 508(b) of the Code. This

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

8

Former Public Charities. The following organizations (whic h have bee n

treated as organizations that are not private foundations described in section

509(a) of the Code) are now classified as

private foundations:

Advanced Communications Technology

Training Youth Inc., Chelsea, MA

All Pakistan Womens Association, Inc.,

New York, NY

Back Bay Lacrosse, Inc., Portland, ME

Boy Scouts of America Troop 73 BSA,

Hillsboro, NH

Broadway Fillmore Area Council, Inc.,

Buffalo, NY

Brockton City Arts, Inc., Brockton, MA

Budget Counseling and Education Centers

of North Carolina, Inc., Richmond, VA

Butler County Crime Stoppers Inc.,

David City, NE

California Book Exchange and Recyclery,

Rancho Santa Fe, CA

California Podiatric Medical Foundation,

Sacramento, CA

Charles and Margaret Mraz Foundation,

Clinton, WA

Chelmsford Odyssey of the Mind, Inc.,

Chelmsford, MA

Community Conciliation Center, Inc.,

Flushing, NY

Crossroads Ministries and Publications,

Rancho Cordova, CA

Downriver Theatre Company, Machias, ME

Drum Corps East, Inc.,

South Weymouth, MA

Eagles of Dixon School, Chicago, IL

East End Rural Preservation Corporation,

Shelter Island, NY

Eastern Mass Jr Drum & Bugle Corps,

Quincy, MA

Eco Village at Ithaca Inc., Ithaca, NY

Ecoworld-Ekomir, Olympia, WA

Eleanor Roosevelt Institute for Justice &

Peace, Washington, DC

Errol W. Ross and Eaden Ross Silverton

Union High School No. 7J Graduate

Assistance Fund, Inc., Salem, OR

Fisheries Defense Fund, Inc.,

New York, NY

Formosa Center, Inc., Flushing, NY

George Snively Research Foundation,

Wakefield, RI

Geogroup, Inc., Menlo Park, CA

Green Hornets of Valley Stream, Inc.,

Valley Stream, NY

Gods Glory Missions Ministries Church

1997–35 I.R.B.

of God in Christ, Lakewood, CA

Gay Men and Lesbians Opposing

Violence, Washington, DC

Harvard World Model United Nations,

Cambridge, MA

Hinsdale Commercial & Industrial

Development Corporation,

Hinsdale, NH

Kafanm, Inc., Dorchester, MA

K & M New Life Home Inc., Stockton, CA

Keren Hatzole Institute, Ltd.,

Brooklyn, NY

Le Studio Theatre C A, Inc.,

New York, NY

Life House, Inc., Worcester, MA

Mass Metrowest Chapter Black Data

Processing Associates, Northboro, MA

Medical Outcomes Trust, Inc., Boston,

MA

Micah Housing, Inc., Fairfield, CT

Middlesex Industrial Development

Council, Ltd., Middletown, CT

Morningside Community Association,

Inc., New York, NY

National Federation of the Blind of

Maine, Portland, ME

New York Association of Suicidology,

Bronx, NY

Palabras De Vida, Inc., North Haven, CT

Peaceable Kindom, Inc.,

Long Beach, NY

Pomfret House, Inc., Woodstock, NY

Portland Environmental Watch,

Portland, ME

Prevention Point Buffalo, Inc.,

Buffalo, NY

PTA New Hampshire, Londonderry, NH

Renacer Rebirth, Inc., New York, NY

Rockingham Optimist Foundation, Inc.,

Rockingham, NC

Sadat Peace Institute, Cambridge, MA

Self Development Group, Inc.,

Roslindale, MA

Serving Our Youth Through AdultsSOYA, New York, NY

Shalheves Incorporated,

Spring Valley, NY

Simsbury Sterring Committee for Alcohol

& Drug-Free Use, Simsbury, CT

Stillhouse Trestle Corporation,

Danville, VA

10 Penny Productions, Inc., New York, NY

Theatre Investment Fund Limited,

New York, NY

Unity Productions, Inc., New York, NY

Western New York Lacrosse Association,

Inc., Blasedell, NY

Westlands Schools Association, Inc.,

Chelmsford, MA

1997–35 I.R.B.

Weston Friendly Society of the

Performing Arts, Inc., Weston, MA

Youthbrook Project Inc., Cambridge, MA

Yvonne Carroll Parente Presents the

Company, Inc., Glen Head, NY

If an organization listed above submits information that warrants the renewal of its

classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as

to foundation status. Grantors and contributors may thereafter rely upon such ruling or

determination letter as provided in section

1.509(a)–7 of the Income Tax Regulations. It

is not the practice of the Service to announce

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

Announcement 97–86

Assistant Commissioner (International)

John T. Lyons has announced The Tenth

Annual Institute on Current Issues in International Taxation, co-sponsored with

The George Washington University, to be

held December 11 and 12, 1997, at the

J.W. Marriott Hotel in Washington, DC.

Designed for professionals in international tax law, The Institute will include, on

the first day, a panel on mutual agreement

procedures with the U.S., Canadian and

Mexican Competent Authorities and a representative from the Organization for Economic Cooperation and Development

(OECD). Additional sessions include interpreting tax treaties, revisiting check-the-box

regulations and joint venture issues, and

hedging for multinationals. Acting Commissioner Michael P. Dolan will be a featured speaker. The second day will include

sessions on controversial cross-border transactions, “Ask the IRS” panel, U.S. multinational update, and inbound developments.

Those interested in attending may obtain more information from The George

Washington University, Conference Management Services, by calling (202) 9731110 or visit ing the Internet site at

http://www.gwu.edu/~cms/tax/.

The Collection Financial

Standards on the Internet

Announcement 97–87

The standards used by the Internal Revenue Service as the basis for determining

9

collection actions, including installment

agreements and offers in compromise, are

now on the Internet. The Collection Financial Standards are on the IRS’ World

Wide Web site “The Digital Daily,”, under

“Tax Info for You.”

The Collection Financial Standards are

used when a taxpayer claims an inability

to pay a delinquent tax liability.

Allowa nces for food, clothing and

other items, known as the National Standards, apply nationwide except for Alaska

and Hawaii, which have their own tables.

Taxpayers are allowed the total National

Standards amount for their family size

and income level, without questioning

amounts actually spent.

Maximum allowances for housing and

utilities and transportation, known as the

Local Standards, vary by location. Unlike

the National Standards, the taxpayer is allowed the amount actually spent or the

standard, whichever is less.

Qualified Personal Service

Corporations That Used

Incorrect Tax Rates Should

Promptly File Amended Returns

Announcement 97–88

The Internal Revenue Service has found

that many qualified personal service corporations had filed using the incorrect tax

rate. Instead of computing tax using the

flat Qualified Personal Service Corporation rate, the graduated corporate rate was

used which understated the corporations’

tax liabilities. Some practitioners have attributed the problem to difficulties with

using certain computer tax software programs, while others acknowledged the

mistakes as unintentional oversights.

A qualified personal service corporation is taxed at a flat rate of 35% on its

taxable income. A corporation is a qualified personal service corporation if it

meets both of the following tests:

• Substantially all of the corporation’s

activities involve the performance of

services in the fields of health, law,

engineering, architecture, accounting, actuarial science, performing

arts, or consulting, and

• At least 95% of the corporation’s

stock, by value, is owned, directly or

indirectly, by (1) employees performing the services, (2) retired employees

who had performed the services listed

September 2, 1997

above, (3) any estate of the employee

or retiree described above, or (4) any

person who acquired the stock of the

corporation as a result of the death of

an employee or retiree (but only for

the 2-year period beginning on the

date of the employee’s or retiree’s

death). See Temporary Regulations

section 1.448-1T(e) for details.

September 2, 1997

The Service has been looking closely

into this matter, and will continue to pursue

compliance activities to identify taxpayers

with the issue and bring them into compliance. In our ongoing efforts to foster taxpayer education and voluntary compliance,

we would like to alert taxpayers and practitioners about the problem, and ask any

qualified personal service corporations that

10

did not file using the qualified personal

service corporation rate to promptly file

amended returns with their respective IRS

service center to correct the error. Prompt

filing will minimize interest assessments.

1997–35 I.R.B.

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”) that

have an effect on previous rulings use the

following defined terms to describe the

effect:

Amplified describes a situation where

no change is being made in a prior published position, but the prior position is

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

has caused, or may cause, some confusion. It is not used where a position in a

prior ruling is being changed.

D i s t i n g u i s h e d describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

to B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

may also be obsoleted because the substance has been included in regulations

subsequently adopted.

Revoked describes situations where the

position in the previously published ruling is not correct and the correct position

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

that were previously published over a period of time in separate rulings. If the

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

where the substance of a previously published ruling is being changed in part and

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

which a list, such as a list of the names of

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

several times, a new ruling may be published that includes the list in the original

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

X—Corporation.

Y—Corporation.

Z—Corporation.

The following abbreviations in current use and for merly used will appear in material published in the

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

1997–35 I.R.B.

11

September 2, 1997

Numerical Finding List 1

Bulletins 1997–27 through 1997–34

Announcements:

97–61, 1997–29 I.R.B. 13

97–67, 1997–27 I.R.B. 37

97–68, 1997–28 I.R.B. 13

97–69, 1997–28 I.R.B. 13

97–70, 1997–29 I.R.B. 14

97–71, 1997–29 I.R.B. 15

97–72, 1997–29 I.R.B. 15

97–73, 1997–30 I.R.B. 86

97–74, 1997–31 I.R.B. 16

97–75, 1997–32 I.R.B. 28

97–76, 1997–32 I.R.B. 28

97–77, 1997–33 I.R.B. 58

97–78, 1997–34 I.R.B. 11

97–80, 1997–34 I.R.B. 12

97–81, 1997–34 I.R.B. 12

97–82, 1997–34 I.R.B. 12

97–83, 1997–34 I.R.B. 13

97–84, 1997–34 I.R.B. 13

97–30, 1997–31 I.R.B. 12

97–31, 1997–32 I.R.B. 4

97–32, 1997–33 I.R.B. 4

97–33, 1997–34 I.R.B. 4

97–34, 1997–34 I.R.B. 14

Treasury Decisions:

8722, 1997–29 I.R.B. 4

8723, 1997–30 I.R.B. 4

8726, 1997–34 I.R.B. 7

8727, 1997–34 I.R.B. 5

Court Decisions:

2061, 1997–31 I.R.B. 5

2062, 1997–32 I.R.B. 8

Delegation Orders:

172 (Rev. 5), 1997–28 I.R.B. 6

Notices:

97–37, 1997–27 I.R.B. 4

97–38, 1997–27 I.R.B. 8

97–39, 1997–27 I.R.B. 8

97–40, 1997–28 I.R.B. 6

97–41, 1997–28 I.R.B. 6

97–42, 1997–29 I.R.B. 12

97–43, 1997–30 I.R.B. 9

97–44, 1997–31 I.R.B. 15

97–45, 1997–33 I.R.B. 7

97–46, 1997–34 I.R.B. 10

Railroad Retirement Quarterly Rate:

1997–28 I.R.B. 5

Proposed Regulations:

REG–104893–97, 1997–29 I.R.B. 13

REG–107644–97, 1997–32 I.R.B. 24

Revenue Procedures:

97–32, 1997–27 I.R.B. 9

97–32A, 1997–34 I.R.B. 10

97–33, 1997–30 I.R.B. 10

97–34, 1997–30 I.R.B. 14

97–35, 1997–33 I.R.B. 11

97–36, 1997–33 I.R.B. 14

97–37, 1997–33 I.R.B. 18

97–38, 1997–33 I.R.B. 43

97–39, 1997–33 I.R.B. 48

97–40, 1997–33 I.R.B. 50

97–41, 1997–33 I.R.B. 5

97–42, 1997–33 I.R.B. 57

Revenue Rulings:

97–27, 1997–27 I.R.B. 4

97–28, 1997–28 I.R.B. 4

97–29, 1997–28 I.R.B. 4

1

A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1997–1 through 1997–26

will be found in Internal Revenue Bulletin 1997–27,

dated July 7, 1997.

September 2, 1997

12

1997–35 I.R.B.

Finding List of Current Action on

Previously Published Items1

Bulletins 1997–27 through 1997–34

*Denotes entry since last publication

Revenue Procedures:

96–36

Superseded by

97–34, 1997–30 I.R.B. 14

96–42

Superseded by

97–27, 1997–27 I.R.B. 9

97–32

Modified and amplified by

97–32A, 1997–34 I.R.B. 10

Revenue Rulings:

89–42

Supplemented by

97–31, 1997–32 I.R.B. 4

1

A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1997–1 through 1997–26 will be found in Internal

Revenue Bulletin 1997–27, dated July 7, 1997.

1997–35 I.R.B.

13

September 2, 1997

Index

EXCISE TAX

Internal Revenue Bulletins

1997–27 Through 1997–34

Group health plans; access, portability,

and renewability requirements; correction (Notice 41) 28, 6

For the index of items published during

the first six months of 1997, see I.R.B.

1997–27, dated July 7, 1997.

The abbreviation and number in parenthesis following the index entry refer to

the specific item; numbers in roman and

italic type following the parenthesis refer

to the Internal Revenue Bulletin in which

the item may be found and the page

number on which it appears.

Key to Abbreviations:

RR

Revenue Ruling

RP

Revenue Procedure

TD

Treasury Decision

CD

Court Decision

PL

Public Law

EO

Executive Order

DO

Delegation Order

TDO

Treasury Department Order

TC

Tax Convention

SPR

Statement of Procedural

Rules

PTE

Prohibited Transaction

Exemption

EMPLOYMENT TAX

Penalty:

Guidance regarding waiver of failure to

deposit penalty for certain taxpayers

required to begin using electronic

funds transfer on or after July 1,

1997 (Notice 43) 30, 86

Railroad retirement:

Rate determination; quarterly (July 1,

1997) 28, 5

Regulations:

26 CFR 31.0–1(a), 31.0–3(f), amended;

31.6302–1(h), added; 31.6302–1(i),

redesignated; 31.6302–1T, removed;

31.6302(c)–3, amended; 31.6302–3T,

removed; federal tax deposits by electronic funds transfer (TD 8723) 30, 4

ESTATE TAX

Marital or charitable bequests (CtD 2062)

32, 8

September 2, 1997

Regulations:

26 CFR 40.6302(c)–1, amended;

40.6302(c)–1T, removed; federal tax

deposits by electronic funds transfer

(TD 8723) 30, 4

INCOME TAX

Allocation of interest expense among taxpayer’s expenditures (Notice 46) 34, 10

Depreciation:

Retail motor fuels outlet (RR29) 28, 4

Elections into mark-to-market accounting (Notice 37) 27, 8

Electronic or magnetic media filing:

Specifications for 1997 Forms 1098,

1099, 5498, and W–2G (RP 34) 30, 14

Employee plans:

Funding:

Full funding limitations, weighted average interest rate, July 1997 (Notice 44) 31, 15

Highly compensated employee, definition (Notice 45) 33, 7

Organizations, functions, and authority

delegations; director, Employee Plans

Division (DO 172(Rev. 5)) 28, 6

Remedial amendment period extension

(RP 41) 33, 51

Enhanced oil recovery credit for 1997

(Notice 39) 27, 8

Extension of time to file, Form 926 (Notice 42) 29, 12

Forms 1096, 1098, 1099 series, 5498,

W–2G:

Reproduction of forms; RP 97–32, modified and amplified (RP 97–32A) 34,

1 0 ; Requirements for reproducing

paper substitutes (RP27) 27, 9

Fringe benefits aircraft valuation formula

(RR 33) 34, 4

Interest:

Investment:

Federal short-term, mid-term, and

long-term rates for July 1997 (RR 27)

27, 4; August 1997 (RR 30) 31, 12

International operation of ships and aircraft; income exempt from tax (RR 31)

32, 4

14

Inventories:

LIFO:

Price indexes, department stores,

May 1997 (RR 28) 28, 4; June 1997

(RR 32) 33, 4

Late S corporation elections (RP 40) 33,

50

Low-income housing:

Bond factor amounts, July–September

1997 (RR 34) 34, 4

Tax credit (RP 42) 33, 57

Marginal production rates for 1997 (Notice 38) 27, 8

Methods of accounting:

Automatic consent to change (RP 37)

33, 18

Last-in, first-out inventory method (RP

36) 33, 14

Original issue discount (RP 39) 33, 48

Package design costs (RP 35) 33, 11

Warranty contracts (RP 38) 33, 43

Proposed regulations:

26 CFR 1.411(d)–4, amended; permitted

elimination of preretirement optional

forms benefit (REG–107644–97)

32, 24

26 CFR 1.894–1(d), added; guidance

regarding claims for certain income

tax convention (REG–104893–97)

29, 13

Punitive damages for personal injuries

(CtD 2061) 31, 5

Regulations:

26 CFR 1.401(b)–1, amended;

1 . 4 0 1 ( b ) – 1 T, adde d; re me dial

amendment period (TD 8727) 34, 5

26 CFR 1.501(c)(5)–1, amended; taxexempt organizations, requirements

(TD 8726) 34, 7

26 CFR 1.894–1T(a) through (c),

added; guidance regarding claims for

certain income tax convention (TD

8722) 29, 4

26 CF R 1.6302–1, –2, amended;

1.6302–1T, –2T, –3T, –4T, removed;

1.6302–3(c), revised; 1.6302–4,

added; federal tax deposits by electronic funds transfer (TD 8723) 30, 4

Tax forms and instructions:

Electronic Federal Tax Payment System (EFTPS); electronic remittance

system for federal tax deposits and

payments (RP 33) 30, 10

Treatment of Hong Kong and China (Notice 40) 28, 6

1997–35 I.R.B.

INTERNAL REVENUE BULLETIN

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

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

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

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

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

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

Superintendent of Documents.

HOW TO ORDER

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

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

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

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

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

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

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

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

Internal Revenue Service

Washington, DC 20224

Official Business

Penalty for Private Use, $300

First Class Mail

Postage and Fees Paid

IRS

Permit No. G–48

INTERNAL REVENUE BULLETIN

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

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

Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS

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

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

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

Superintendent of Documents.

HOW TO ORDER

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

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

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

WE WELCOME COMMENTS ABOUT THE

INTERNAL REVENUE BULLETIN

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

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

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

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

Superintendent of Documents

U.S. Government Printing Office

Washington, DC 20402

Official Business

Penalty for Private Use, $300

First Class Mail

Postage and Fees Paid

GPO

Permit No. G–26