Bulletin No. 1998–12

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Internal Revenue

bulletin

Bulletin No. 1998–12

March 23, 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

Announcement 98–22, page 33.

T.D. 8756, page 4.

REG–120200–97, page 32.

The Service provides guidance on continued reliance on proposed regulations regarding the issues raised by Geissal v.

Moore Medical Corp., which is currently before the Supreme

Court.

Final, temporary, and proposed regulations under section

460 of the Code explain how a taxpayer elects not to apply

the look-back method to long-term contracts in de minimis

cases.

EXEMPT ORGANIZATIONS

EMPLOYEE PLANS

Rev. Rul. 98–15, page 6.

Rev. Proc. 98–22, page 11.

Tax consequences of participation by hospitals described in section 501(c)(3) of the Code in joint ventures with for-profit entities. This ruling provides examples illustrating whether nonprofit hospitals that participate

in joint ventures with for-profit entities continue to qualify for

exemption as organizations described in section 501(c)(3)

of the Code.

Administrative programs; closing agreements. This

procedure consolidates and expands upon the following current Employee Plans programs: the Administrative Policy Regarding Self-Correction, the Walk-in Closing Agreement Program, the Audit Closing Agreement Program, the Voluntary

Compliance Resolution (VCR) Program, and the Standardized VCR Procedure. Rev. Procs. 94–16, 94–62, and 96–29

modified and superseded.

Notice 98–18, page 11.

Weighted average interest rate update. Guidelines are

set forth for determining for March 1998, 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 Code as

amended by the Omnibus Budget Reconciliation Act of 1987

and by the Uruguay Round Agreements Act (GATT).

Finding Lists begin on page 38.

Department of the Treasury

Internal Revenue Service

Announcement 98–23, page 34.

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

ADMINISTRATIVE

Announcement 98–24, page 35.

New Publication 970, Tax Benefits for Higher Education, will

be available in March 1998.

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.

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.

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

Section 170.—Charitable, Etc.,

Contributions and Gifts

Whether an organization that operates an acute

care hospital constitutes an organization whose principal purpose is providing hospital care within the

meaning of § 170(b)(1)(A)(iii) of the Internal Revenue Code for purposes of § 509(a)(1) when it forms

a limited liability company (LLC) with a for-profit

corporation and then contributes its hospital and all

of its related operating assets to the LLC, which then

operates the hospital. See Rev. Rul. 98–15, page 6.

Section 460.—Special Rules for

Long-Term Contracts

26 CFR 1.460–6T: Look-back method (temporary).

T.D. 8756

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

Election Not to Apply Look-Back

Method in De Minimis Cases

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final and temporary regulations explaining

how a taxpayer elects under section

460(b)(6) not to apply the look-back

method to long-term contracts in de minimis cases. The regulations reflect changes

to the law made by the Taxpayer Relief Act

of 1997 and affect manufacturers and construction contractors whose long-term contracts otherwise are subject to the lookback method. The text of the temporary

regulations also serves as the text of the

proposed regulations set forth in the notice

of REG–120200–97, page 32.

DATES: These regulations are effective

January 13, 1998.

These regulations apply to long-term

contracts completed in taxable years ending after August 5, 1997.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued

without prior notice and public procedure

pursuant to the Administrative Procedure

Act (5 U.S.C. 553). For this reason, the

collection of information contained in

these regulations has been reviewed and,

pending receipt and evaluation of public

comments, approved by the Office of

Management and Budget (OMB) under

control number 1545–1572. Responses to

this collection of information are required

for a taxpayer to elect not to apply the

look-back method to long-term contracts

in de minimis cases.

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.

For further information concerning

this collection of information, and where

to submit comments on the collection of

information and the accuracy of the estimated burden, and suggestions for reducing the burden, please refer to the preamble in the cross-referencing notice of

REG–120200–97.

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 contains amendments to

the Income TaxRegulations (26 CFR Part

1). Section 460(b)(6) of the Internal Revenue Code was added by section 1211 of

the Taxpayer Relief Act of 1997, Public

Law 105–34, 111 Stat. 788, 998, to provide an election not to apply the lookback method of section 460(b)(2) to longterm contracts in de minimis cases. These

regulations provide guidance concerning

this new election.

Explanation of Provisions

FOR FURTHER INFORMATION CONTACT: Leo F. Nolan II or John M.

Aramburu at (202) 622-4960 (not a tollfree number).

March 23, 1998

Section 460(b) provides that, upon the

completion of any long-term contract, the

look-back method is applied to amounts

reported under the contract using the percentage-of-completion method (PCM).

The PCM requires the use of estimates of

total contract price and total contract costs

for reporting income in taxable years preceding the year of contract completion.

The look-back method is intended to offset the time-value-of-money effects of

using estimates during the life of a contract that differ from the actual amounts

determined in the year of contract completion.

Under the look-back method, taxpayers

are required to pay interest if a tax liability is deferred as a result of underestimating the total contract price or overestimating total contract costs. Conversely,

taxpayers are entitled to receive interest if

a tax liability is accelerated as a result of

overestimating the total contract price or

underestimating total contract costs.

Section 1.460–6(e) contains an elective

relief provision concerning the look-back

method, which is called the delayed reapplication method. Under the delayed

reapplication method, a taxpayer does not

apply the look-back method to any postcompletion taxable year until the first of

the following conditions is met: (1) the

net undiscounted value of increases or decreases in the contract price occurring

since the last application of the look-back

method exceeds the lesser of $1,000,000

or 10 percent of the total contract price as

of that time; (2) the net undiscounted

value of increases or decreases in the contract costs occurring since the last application of the look-back method exceeds

the lesser of $1,000,000 or 10 percent of

the total actual contract costs as of that

time; (3) the taxpayer goes out of existence; (4) the taxpayer reasonably believes the contract is finally settled and

closed; or (5) five taxable years have

passed since the last application of the

look-back method.

In the Taxpayer Relief Act of 1997,

section 460(b)(6) was added to provide

taxpayers with an election not to apply the

look-back method to long-term contracts

in either of the following cases (de minimis cases). First, a taxpayer does not

apply the look-back method in the completion year if, for each prior contract

year, the cumulative taxable income (or

loss) actually reported under the contract

1998–12 I.R.B.

is within 10 percent of the cumulative

look-back income (or loss). Cumulative

look-back income (or loss) is the amount

of taxable income (or loss) that the taxpayer would have reported if the taxpayer

had used actual contract price and costs

instead of estimated contract price and

costs. Second, a taxpayer does not apply

the look-back method in a post-completion taxable year if, as of the close of the

post-completion taxable year, the cumulative taxable income (or loss) under the

contract is within 10 percent of the cumulative look-back income (or loss) under

the contract as of the close of the most recent year in which the look-back method

was applied to the contract (or would

have been applied but for this election).

These temporary regulations provide

that a taxpayer may elect not to apply the

look-back method to long-term contracts

in de minimis cases by attaching a statement to the taxpayer’s timely filed federal

income tax return (including extensions)

for the taxable year the election is effective or to an amended return for that year,

provided the amended return is filed on or

before March 31, 1998.

This election applies to all long-term

contracts completed during and after the

year of election, unless the Commissioner

consents to the revocation of the election.

These temporary regulations apply to

long-term contracts completed in taxable

years ending after August 5, 1997.

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

Special Analyses

§1.460– Outline of regulations under

section 460.

It has been determined that this final

and temporary regulation is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It is hereby certified

that the collection of information in these

regulations will not have a significant

economic impact on a substantial number

of small entities. This certification is

based on the fact that the time required to

prepare and file an election statement is

minimal and will not have a significant

impact on those small entities that choose

to make the election. In addition, the

election need only be made once by a taxpayer. Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility

Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, this final and temporary

regulation will be submitted to the Chief

1998–12 I.R.B.

Drafting Information

The principal author of these final and

temporary regulations is Leo F. Nolan II,

Office of Assistant Chief Counsel (Income Tax and Accounting). However,

other personnel from the IRS and Treasury Department participated in their development.

* * * * *

26 CFR Part 602

Reporting and recordkeeping

requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry for

Section 1.460-6T in numerical order to

read in part as follows:

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

§1.460–6T also issued under 26 U.S.C.

460(h). * * *

Par. 2. Section 1.460–0 is amended by

adding an entry for §1.460–6T to read as

follows:

§1.460–6T Look-back method

(temporary).

Par. 3. Section 1.460–6T is added to

read as follows:

§1.460–6T Look-back method

(temporary).

(a) through (h) [Reserved] For further

guidance, see §1.460–6(a) through (h).

(i) [Reserved]

(j) Election not to apply look-back

method in de minimis cases. Section

460(b)(6) provides taxpayers with an

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. In §602.101, paragraph (c) is

amended by adding an entry to the table

in numerical order to read as follows:

§602.101 OMB Control numbers.

(a) through (i) [Reserved]

(j) Election not to apply look-back

method in de minimis cases.

election not to apply the look-back method

to long-term contracts in de minimis cases,

effective for contracts completed in taxable

years ending after August 5, 1997. To

make an election, a taxpayer must attach a

statement to its timely filed original federal

income tax return (including extensions)

for the taxable year the election is to become effective or to an amended return for

that year, provided the amended return is

filed on or before March 31, 1998. This

statement must have the legend “NOTIFICATION OF ELECTION UNDER SECTION 460(b)(6)”; provide the taxpayer’s

name and identifying number and the effective date of the election; and identify the

trades or businesses that involve long-term

contracts. An election applies to all longterm contracts completed during and after

the taxable year for which the election is

effective. An election may not be revoked

without the Commissioner’s consent. A

consolidated group of corporations, as defined in §1.1502–1(h), is subject to consistency rules analogous to those in §1.460–

6(e)(2) (concerning election to use delayed

reapplication method) and in §1.460–

6(d)(4)(ii)(C) (concerning election to use

simplified marginal impact method).

CFR part or section

where identified

and described

Current OMB

control No.

1.460–6T(j) . . . . . . . . . . . . . .1545–1572

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

March 23, 1998

Approved December 18, 1997.

Donald C. Lubick,

Acting Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

January 12, 1998, 8:45 a.m., and published in the

issue of the Federal Register for January 13, 1998,

63 F.R. 1917)

Section 501.—Exemption From

Tax on Corporations, Certain

Trusts, Etc.

26 CFR 1.501(c)(3)–1: Organizations organized

and operated for religious, charitable, scientific,

testing for public safety, literary, or educational

purposes, or for the prevention of cruelty to

children or animals.

(Also §§ 170 and 509.)

Tax consequences of participation by

hospitals described in section 501(c)(3)

of the Code in joint ventures with forprofit entities. This ruling provides examples illustrating whether nonprofit hospitals that participate in joint ventures

with for-profit entities continue to qualify

for exemption as organizations described

in section 501(c)(3) of the Code.

Rev. Rul. 98–15

ISSUE

Whether, under the facts described

below, an organization that operates an

acute care hospital continues to qualify

for exemption from federal income tax as

an organization described in § 501(c)(3)

of the Internal Revenue Code when it

forms a limited liability company (LLC)

with a for-profit corporation and then

contributes its hospital and all of its other

operating assets to the LLC, which then

operates the hospital.

FACTS

Situation 1

A is a nonprofit corporation that owns

and operates an acute care hospital. A has

been recognized as exempt from federal

income tax under § 501(a) as an organization described in § 501(c)(3) and as other

than a private foundation as defined in

§ 509(a) because it is described in

§ 170(b)(1)(A)(iii). B is a for-profit corporation that owns and operates a number

of hospitals.

March 23, 1998

A concludes that it could better serve its

community if it obtained additional funding. B is interested in providing financing

for A’s hospital, provided it earns a reasonable rate of return. A and B form a limited liability company, C. A contributes all

of its operating assets, including its hospital to C. B also contributes assets to C. In

return, A and B receive ownership interests in C proportional and equal in value

to their respective contributions.

C’s Articles of Organization and Operating Agreement (“governing documents”) provide that C is to be managed

by a governing board consisting of three

individuals chosen by A and two individuals chosen by B. A intends to appoint

community leaders who have experience

with hospital matters, but who are not on

the hospital staff and do not otherwise engage in business transactions with the

hospital.

The governing documents further provide that they may only be amended with

the approval of both owners and that a

majority of three board members must approve certain major decisions relating to

C’s operation, including decisions relating to any of the following topics:

A. C’s annual capital and operating

budgets;

B. Distributions of C’s earnings;

C. Selection of key executives;

D. Acquisition or disposition of health

care facilities;

E. Contracts in excess of $x per year;

F. Changes to the types of services offered by the hospital; and

G. Renewal or termination of management agreements.

The governing documents require that

C operate any hospital it owns in a manner that furthers charitable purposes by

promoting health for a broad cross section

of its community. The governing documents explicitly provide that the duty of

the members of the governing board to

operate C in a manner that furthers charitable purposes by promoting health for a

broad cross section of the community

overrides any duty they may have to operate C for the financial benefit of its owners. Accordingly, in the event of a conflict between operation in accordance

with the community benefit standard and

any duty to maximize profits, the members of the governing board are to satisfy

the community benefit standard without

regard to the consequences for maximizing profitability.

The governing documents further provide that all returns of capital and distributions of earnings made to owners of C

shall be proportional to their ownership

interests in C. The terms of the governing

documents are legal, binding, and enforceable under applicable state law.

C enters into a management agreement

with a management company that is unrelated to A or B to provide day-to-day management services to C. The management

agreement is for a five-year period, and

the agreement is renewable for additional

five-year periods by mutual consent. The

management company will be paid a

management fee for its services based on

C’s gross revenues. The terms and conditions of the management agreement, including the fee structure and the contract

term, are reasonable and comparable to

what other management firms receive for

similar services at similarly situated hospitals. C may terminate the agreement for

cause.

None of the officers, directors, or key

employees of A who were involved in

making the decision to form C were

promised employment or any other inducement by C or B and their related entities if the transaction were approved.

None of A’s officers, directors, or key employees have any interest, including any

interest through attribution determined in

accordance with the principles of § 318,

in B or any of its related entities.

Pursuant to § 301.7701–3(b) of the

Procedure and Administrative Regulations, C will be treated as a partnership

for federal income tax purposes.

A intends to use any distributions it receives from C to fund grants to support

activities that promote the health of A’s

community and to help the indigent obtain health care. Substantially all of A’s

grantmaking will be funded by distributions from C. A’s projected grantmaking

program and its participation as an owner

of C will constitute A’s only activities.

Situation 2

D is a nonprofit corporation that owns

and operates an acute care hospital. D has

been recognized as exempt from federal

income tax under § 501(a) as an organization described in § 501(c)(3) and as other

than a private foundation as defined in

1998–12 I.R.B.

§ 509(a) because it is described in

§ 170(b)(1)(A)(iii). E is a for-profit hospital corporation that owns and operates a

number of hospitals and provides management services to several hospitals that

it does not own.

D concludes that it could better serve its

community if it obtained additional funding. E is interested in providing financing

for D’s hospital, provided it earns a reasonable rate of return. D and E form a

limited liability company, F. D contributes all of its operating assets, including its hospital to F. E also contributes assets to F. In return, D and E receive

ownership interests proportional and equal

in value to their respective contributions.

F’s Articles of Organization and Operating Agreement (“governing documents”) provide that F is to be managed

by a governing board consisting of three

individuals chosen by D and three individuals chosen by E. D intends to appoint

community leaders who have experience

with hospital matters, but who are not on

the hospital staff and do not otherwise engage in business transactions with the

hospital.

The governing documents further provide that they may only be amended with

the approval of both owners and that a

majority of board members must approve

certain major decisions relating to F’s operation, including decisions relating to

any of the following topics:

A. F’s annual capital and operating

budgets;

B. Distributions of F’s earnings over a

required minimum level of distributions set forth in the Operating

Agreement;

C. Unusually large contracts; and

D. Selection of key executives.

F’s governing documents provide that

F’s purpose is to construct, develop, own,

manage, operate, and take other action in

connection with operating the health care

facilities it owns and engage in other health

care-related activities. The governing documents further provide that all returns of

capital and distributions of earnings made

to owners of F shall be proportional to

their ownership interests in F.

F enters into a management agreement

with a wholly-owned subsidiary of E to

provide day-to-day management services

to F. The management agreement is for a

five-year period, and the agreement is re-

1998–12 I.R.B.

newable for additional five-year periods

at the discretion of E’s subsidiary. F may

terminate the agreement only for cause.

E’s subsidiary will be paid a management

fee for its services based on gross revenues. The terms and conditions of the

management agreement, including the fee

structure and the contract term other than

the renewal terms, are reasonable and

comparable to what other management

firms receive for similar services at similarly situated hospitals.

As part of the agreement to form F, D

agrees to approve the selection of two individuals to serve as F’s chief executive officer and chief financial officer. These individuals have previously worked for E in

hospital management and have business

expertise. They will work with the management company to oversee F’s day-today management. Their compensation is

comparable to what comparable executives

are paid at similarly situated hospitals.

Pursuant to § 301.7701–3(b), F will be

treated as a partnership for federal tax income purposes.

D intends to use any distributions it receives from F to fund grants to support

activities that promote the health of D’s

community and to help the indigent obtain health care. Substantially all of D’s

grantmaking will be funded by distributions from F. D’s projected grantmaking

program and its participation as an owner

of F will constitute D’s only activities.

LAW

Section 501(c)(3) provides, in part, for

the exemption from federal income tax of

corporations organized and operated exclusively for charitable, scientific, or educational purposes, provided no part of the

organization’s net earnings inures to the

benefit of any private shareholder or individual.

Section 1.501(c)(3)–1(c)(1) of the Income Tax Regulations provides that an

organization will be regarded as operated

exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of

such exempt purposes specified in

§ 501(c)(3). An organization will not be

so regarded if more than an insubstantial

part of its activities is not in furtherance

of an exempt purpose. In Better Business

Bureau of Washington, D.C. v. United

States, 326 U.S. 279, 283 (1945), the

Court stated that “the presence of a single

. . . [non-exempt] purpose, if substantial

in nature, will destroy the exemption regardless of the number or importance of

truly . . . [exempt] purposes.”

Section 1.501(c)(3)–1(d)(1)(ii) provides that an organization is not organized

or operated exclusively for exempt purposes unless it serves a public rather than a

private interest. It further states that “to

meet the requirement of this subdivision,

it is necessary for an organization to establish that it is not organized and operated

for the benefit of private interests . . . .”

Section 1.501(c)(3)–1(d)(2) provides

that the term “charitable” is used in

§ 501(c)(3) in its generally accepted legal

sense. The promotion of health has long

been recognized as a charitable purpose.

See Restatement (Second) of Trusts,

§§ 368, 372 (1959); 4A Austin W. Scott

and William F. Fratcher, The Law of

Trusts §§ 368, 372 (4th ed. 1989). However, not every activity that promotes

health supports tax exemption under

§ 501(c)(3). For example, selling prescription pharmaceuticals certainly promotes health, but pharmacies cannot qualify for recognition of exemption under

§ 501(c)(3) on that basis alone. Federation Pharmacy Services, Inc. v. Commissioner, 72 T.C. 687 (1979), aff’d, 625 F.2d

804 (8th Cir. 1980) (“Federation Pharmacy”). Furthermore, “an institution for

the promotion of health is not a charitable

institution if it is privately owned and is

run for the profit of the owners.” 4A

Austin W. Scott and William F. Fratcher,

The Law of Trusts § 372.1 (4th ed. 1989).

See also Restatement (Second) of Trusts,

§ 376 (1959). This principle applies to

hospitals and other health care organizations. As the Tax Court stated, “[w]hile

the diagnosis and cure of disease are indeed purposes that may furnish the foundation for characterizing the activity as

‘charitable,’ something more is required.”

Sonora Community Hospital v. Commissioner, 46 T.C. 519, 525-526 (1966), aff’d

397 F.2d 814 (9th Cir. 1968) (“Sonora”).

See also Federation Pharmacy; Sound

Health; and Geisinger. In the absence of

a binding obligation in F’s governing documents for F to serve charitable purposes

or otherwise provide its services to the

community as a whole, F will be able to

deny care to segments of the community,

such as the indigent. Because D will

share control of F with E, D will not be

able to initiate programs within F to serve

new health needs within the community

without the agreement of at least one governing board member appointed by E. As

a business enterprise, E will not necessarily give priority to the health needs of the

community over the consequences for F’s

profits. The primary source of information for board members appointed by D

will be the chief executives, who have a

prior relationship with E and the management company, which is a subsidiary of E.

The management company itself will

have broad discretion over F’s activities

and assets that may not always be under

the board’s supervision. For example, the

management company is permitted to

enter into all but “unusually large” contracts without board approval. The management company may also unilaterally

renew the management agreement. Based

on all these facts and circumstances, D

cannot establish that the activities it conducts through F further exempt purposes.

“[I]n order for an organization to qualify

for exemption under § 501(c)(3) the organization must ‘establish’ that it is neither

organized nor operated for the ‘benefit of

private interests.’” Federation Pharmacy,

625 F.2d at 809. Consequently, the benefit to E resulting from the activities D

conducts through F will not be incidental

to the furtherance of an exempt purpose.

Thus, D will fail the operational test when

it forms F, contributes its operating assets

to F, and then serves as an owner of F.

HOLDING

A will continue to qualify as an organization described in § 501(c)(3) when it

forms C and contributes all of its operating assets to C because A has established

that A will be operating exclusively for a

charitable purpose and only incidentally

for the purpose of benefiting the private

interests of B. Furthermore, A’s principal

activity will continue to be the provision

March 23, 1998

of hospital care when C begins operations. Thus, A will be an organization described in § 170(b)(1)(A)(iii) and thus,

will not be classified as a private foundation in accordance with § 509(a)(1), as

long as hospital care remains its principal

activity.

D will violate the requirements to be an

organization described in § 501(c)(3)

when it forms F and contributes all of its

operating assets to F because D has failed

March 23, 1998

to establish that it will be operated exclusively for exempt purposes.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Judith E. Kindell of the Exempt

Organizations Division. For further information regarding this revenue ruling contact Judith E. Kindell on (202) 622-6494

(not a toll-free call).

Section 509.—Private

Foundation Defined

Whether an organization that operates an acute

care hospital constitutes an organization whose principal purpose is providing hospital care within the

meaning of § 170(b)(1)(A)(iii) of the Internal Revenue Code for purposes of § 509(a)(1) when it forms

a limited liability company (LLC) with a for-profit

corporation and then contributes its hospital and all

of its related operating assets to the LLC, which then

operates the hospital. See Rev. Rul. 98–15, page 6.

1998–12 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average Interest Rate

Update

Notice 98–18

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).

Month

Year

Weighted

Average

March

1998

6.71

Drafting Information

The principal author of this notice is

Donna Prestia of the Employee Plans Di-

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

1998 is 5.89 percent.

The following rates were determined

for the plan years beginning in the month

shown below.

90% to 106%

Permissible

Range

90% to 110%

Permissible

Range

6.04 to 7.11

6.04 to 7.38

vision. For further information regarding

this notice, call (202) 622-6076 between

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

toll-free number). Ms. Prestia’s number

is (202) 622-7377 (also not a toll-free

number).

26 CFR 601.202: Closing agreements.

Rev. Proc. 98–22

TABLE OF CONTENTS

PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM

SECTION 1. PURPOSE AND OVERVIEW

.01 Purpose.

.02 General principles underlying EPCRS.

.03 Overview.

.04 TVC program.

.05 Further changes and request for comments.

SECTION 2. CHANGES TO PROGRAMS

.01 Changes affecting all programs.

.02 Changes affecting specific programs.

PART II. PROGRAM EFFECT AND ELIGIBILITY

SECTION 3. EFFECT OF EPCRS; RELIANCE

.01 Effect of EPCRS.

.02 Reliance.

SECTION 4. PROGRAM ELIGIBILITY

.01 General program eligibility.

.02 Effect of examination.

.03 Favorable Letter requirement.

.04 Established practices and procedures.

.05 Plan amendments.

.06 Egregious failures.

.07 Diversion or misuse of plan assets.

.08 Operational Failures in § 403(b) Plans.

1998–12 I.R.B.

March 23, 1998

PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY

SECTION 5. DEFINITIONS

.01 Qualification Failure.

.02 Favorable Letter.

.03 Maximum Payment Amount.

.04 Qualified Plan.

.05 § 403(b) Plan.

.06 Under Examination.

SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY

.01 Correction principles; rules of general applicability.

.02 Correction.

.03 Correction under statute or regulations.

.04 Matters subject to excise taxes.

.05 Confidentiality and disclosure.

.06 No effect on other law.

PART IV. SELF-CORRECTION (APRSC)

SECTION 7. IN GENERAL

SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES

.01 Requirements.

.02 Factors.

.03 Multiple failures.

.04 Examples.

SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES

.01 Requirements.

.02 Correction period.

.03 Substantial completion of correction.

.04 Example.

PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCR AND WALK-IN CAP)

SECTION 10. VCR PROGRAM

.01 VCR requirements.

.02 Identification of failures.

.03 No concurrent examination activity.

.04 Insufficient information.

.05 Closing agreements with respect to the excise tax under § 4974.

.06 Initial processing.

.07 Processing of acceptable submission.

.08 Failures discovered after initial submission.

.09 Conference right.

.10 Failure to reach resolution.

.11 Concurrent processing of determination letter applications.

.12 Special rules relating to SVP.

.13 General description of compliance statement.

.14 Compliance statement conditioned upon timely correction.

.15 Compliance statement for new plans conditioned upon timely amendment.

.16 Acknowledgement letter.

.17 Verification.

SECTION 11. WALK-IN CAP

.01 Walk-in CAP requirements.

.02 Failures discovered after initial submission.

.03 Failure to reach resolution.

.04 Effect of closing agreement.

March 23, 1998

1998–12 I.R.B.

SECTION 12. APPLICATION PROCEDURES FOR VCR AND WALK-IN CAP

.01 General rules.

.02 Multiemployer and multiple employer plans.

.03 Submission requirements.

.04 Required documents.

.05 Fee.

.06 Signed submission.

.07 Power of attorney requirements.

.08 Penalty of perjury statement.

.09 Checklist.

.10 Designation.

.11 VCR/SVP mailing address.

.12 Walk-in CAP mailing address.

.13 Maintenance of copies of submissions.

SECTION 13. FEES

.01 Rev. Proc. 98–8 modified.

.02 VCR fee.

.03 Establishing number of plan participants.

.04 SVP fee.

.05 Walk-in CAP compliance correction fee .

PART VI. CORRECTION ON AUDIT (AUDIT CAP)

SECTION 14. DESCRIPTION OF AUDIT CAP

.01 Audit CAP requirements.

.02 Payment of sanction.

.03 Additional requirements.

.04 Failure to reach resolution.

.05 Effect of closing agreement.

.06 Other procedural rules.

SECTION 15. AUDIT CAP SANCTION

.01 Determination of sanction.

.02 Factors considered.

PART VII. CHRONOLOGY, EFFECT ON OTHER DOCUMENTS, AND EFFECTIVE DATE

SECTION 16. CHRONOLOGY

.01 APRSC.

.02 VCR program.

.03 Walk-in CAP.

.04 Audit CAP.

SECTION 17. EFFECT ON OTHER DOCUMENTS

.01 Revenue procedures modified and superseded.

.02 Revenue procedure 98–8 modified.

.03 APRSC modified.

.04 Audit CAP modified.

SECTION 18. EFFECTIVE DATE

SECTION 19. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION

APPENDIX A

APPENDIX B

1998–12 I.R.B.

March 23, 1998

PART I. INTRODUCTION TO

EMPLOYEE PLANS COMPLIANCE

RESOLUTION SYSTEM

SECTION 1. PURPOSE AND

OVERVIEW

.01 Purpose. This revenue procedure

provides a comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the

requirements of § 401(a) or § 403(a) of

the Internal Revenue Code (the “Code”),

but that have not met these requirements

for a period of time. This system permits

plan sponsors to correct these qualification failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis. The Internal

Revenue Service (the “Service”) previously established several programs allowing correction of qualification failures, including the Administrative Policy

Regarding Self-Correction (“APRSC”),

the Voluntary Compliance Resolution

(“VCR”) program, the Walk-in Closing

Agreement Program (“Walk-in CAP”),

and the Audit Closing Agreement Program (“Audit CAP”).

This revenue procedure modifies these

programs and consolidates them into a coordinated Employee Plans Compliance

Resolution System (“EPCRS”). In response to requests by practitioners, this

revenue procedure sets forth and assembles in one place the specific rules and

procedures applicable to the programs, including illustrative examples.

.02 General principles underlying

EPCRS. EPCRS is based on the following general principles:

• Sponsors of tax-qualified retirement

plans should be encouraged to establish

administrative practices and procedures

that ensure that plans are operated properly in accordance with the tax qualification requirements.

• Sponsors of tax-qualified retirement

plans should maintain plan documents

satisfying the tax qualification requirements.

• Plan sponsors should make voluntary

and timely correction of any plan qualification failures, whether involving discrimination in favor of highly compensated employees, plan operations, or the

terms of the plan document. Timely and

efficient correction protects participating

March 23, 1998

employees by providing them with their

expected retirement benefits, including

favorable tax treatment.

• Voluntary compliance is promoted by

providing for limited fees for voluntary

corrections approved by the Service,

thereby reducing employers’ uncertainty

regarding their potential liability.

• Sanctions for qualification failures

identified on audit should be reasonable

in light of the nature, extent, and severity

of the violation.

• Administration of EPCRS should be

consistent and uniform.

• Taxpayers should be able to rely on

the availability of EPCRS in taking corrective actions to maintain the qualified

status of their plans.

.03 Overview. EPCRS includes the

following basic elements:

• Self-correction. A plan sponsor that

has established compliance practices and

procedures may, at any time, correct insignificant operational failures without

paying any fee or sanction. In addition,

where a plan is the subject of a favorable

determination letter from the Service, the

plan sponsor generally may correct even

significant operational failures within a

two-year period without payment of any

fee or sanction. (APRSC)

• Voluntary correction with Service

approval. In the case of any other qualification failure, a plan sponsor, at any time

before audit, may pay a limited fee and

receive the Service’s approval for the correction. (VCR and Walk-in CAP)

• Correction on audit. If a qualification failure (other than a failure corrected

as described above) is identified on audit

and corrected, the sanction imposed will

bear a reasonable relationship to the nature, extent and severity of the failure,

taking into account the extent to which

correction occurred before audit. (Audit

CAP)

.04 TVC program. This revenue procedure does not incorporate or modify the

Tax Sheltered Annuity Voluntary Correction program (“TVC”). TVC enables a

sponsor of a § 403(b) Plan to voluntarily

disclose to the Service certain operational

defects it has discovered in its § 403(b)

plans and pay both a fixed fee and a monetary sanction negotiated with the Service. The TVC program procedures

under Rev. Proc. 95–24, 1995–1 C.B.

694, continue to apply, pending future

modifications to the TVC program (which

may include consolidation with EPCRS).

.05 Further changes and request for

comments. The Service believes it is important to update EPCRS periodically to

reflect changing circumstances and make

other improvements. Accordingly, it is

anticipated that EPCRS will continue to

be monitored and improved in light of experience and comments from those who

use it, and that this consolidated revenue

procedure will be revised periodically for

that purpose. The Service specifically solicits comments or suggestions relating to

this revenue procedure and the administration of EPCRS. In particular, the Service requests (1) comments regarding the

extent to which a fixed (as opposed to an

indefinite) self-correction period encourages prompt, voluntary correction, (2)

suggestions for items that should be included in forthcoming guidance on permissible correction methods, and (3)

comments on possible improvements to

the TVC program.

It is requested that comments or suggestions be submitted by June 21, 1998, addressed to CC:DOM:CORP:R (Rev. Proc.

98–22), 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 (Rev. Proc. 98–22),

Courier’s Desk, Internal Revenue Service,

1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may

transmit comments electronically via the

Service’s Internet site at http://www.irs.

ustreas.gov/prod/tax_regs/comments.html

SECTION 2. CHANGES TO

PROGRAMS

.01 Changes affecting all programs.

This revenue procedure makes the following changes affecting all of the programs

comprising EPCRS:

• provides a uniform set of correction

principles;

• clarifies that there may be more than

one appropriate method of correcting

Qualification Failures;

• permits, in appropriate circumstances, the use of reasonable adjustments

in making corrections; and

• permits taxpayers to rely on the

availability of EPCRS in correcting Qualification Failures.

1998–12 I.R.B.

.02 Changes affecting specific programs. This revenue procedure makes the

following specific changes to the APRSC,

VCR, Walk-in CAP, and Audit CAP correction programs:

(1) APRSC. APRSC enables a sponsor of a Qualified Plan or a § 403(b) Plan

to self-correct Operational Failures it discovers in its plans. The provisions of

APRSC are modified and restated to:

• incorporate the recent extension of

the period for correcting significant Operational Failures from the end of the first

plan year following the plan year in which

the Operational Failure occurred to the

end of the second plan year following the

plan year in which the Operational Failure

occurred, as set forth in Announcement

97–121, 1997–50 I.R.B. 62;

• clarify that, for purposes of correcting

a failure to satisfy the actual deferral percentage (“ADP”) or actual contribution

percentage (“ACP”) test, the two-year correction period begins after the expiration

of the statutory correction period; and

• permit correction of an Operational

Failure to be completed after the end of

the correction period if correction was

substantially completed by the end of the

correction period.

(2) VCR. The VCR program enables a sponsor of a Qualified Plan to voluntarily disclose to the Service Operational Failures it has discovered in its

plans and to pay a fixed fee to the Service.

The provisions of VCR are modified to:

• reduce the specificity required in the

calculations supporting plan sponsors’

proposed correction methods;

• revise the circumstances under which

closing agreements will be entered into

with respect to the excise tax under

§ 4974 (applicable to the failure to satisfy

the minimum distribution requirements

under § 401(a)(9));

• extend the time period within which

corrections are to be effected to 150 days;

• clarify and simplify permissible correction methods under the Standardized

VCR Procedure (SVP) (see Appendix A

of this revenue procedure); and

• provide a checklist for use by plan

sponsors in preparing VCR and SVP requests (see Appendix B to this revenue

procedure).

(3) Walk-in CAP. Walk-in CAP enables a sponsor of a Qualified Plan to voluntarily disclose to the Service Qualifica-

1998–12 I.R.B.

tion Failures it has discovered in its plans

and to pay a compliance correction fee.

The provisions of Walk-in CAP are modified to:

• discontinue the use of 40% (or any

other percentage) of the Maximum Payment Amount as the basis for calculating

sanctions (except for egregious failures);

• provide for greater predictability and

consistency by replacing the prior sanction structure with a limited range of compliance correction fees, with the lowest

fees provided for small plans; and

• provide a checklist for use by plan

sponsors in preparing Walk-in CAP requests (see Appendix B to this revenue

procedure).

(4) Audit CAP. Audit CAP, a program established in the key district offices

that is available on examination of a

Qualified Plan, enables the plan sponsor

to negotiate a monetary sanction. The

provisions of Audit CAP are modified and

restated to:

• clarify that the sanction imposed

under Audit CAP will not be excessive

and will bear a reasonable relationship to

the nature, extent, and severity of the failure; and

• provide assurance that correction

made before audit, even for failures corrected outside of the APRSC, VCR, and

Walk-in CAP programs, will be an important factor in reducing the potential sanction under Audit CAP.

PART II. PROGRAM EFFECT AND

ELIGIBILITY

SECTION 3. EFFECT OF EPCRS;

RELIANCE

.01 Effect of EPCRS. If the eligibility

requirements of section 4 are satisfied and

the plan sponsor corrects a Qualification

Failure in accordance with the requirements of APRSC in section 7, the VCR

program in section 10, Walk-in CAP in section 11, or Audit CAP in section 14, the

Service will not treat the plan as disqualified on account of the Qualification Failure.

.02 Reliance. Taxpayers may rely on

this revenue procedure, including the relief described in section 3.01.

SECTION 4. PROGRAM

ELIGIBILITY

.01 General program eligibility.

EPCRS includes three specific voluntary

correction programs and an audit correction program for Qualified Plans. The

voluntary correction programs are

APRSC and VCR, both of which are

available for Operational Failures, and

Walk-in CAP, which applies to Plan Document and Demographic Failures and to

Operational Failures that are not eligible

for APRSC and VCR. APRSC is a voluntary employer-initiated procedure that

generally does not involve Service approval, whereas VCR and Walk-in CAP

are voluntary employer-initiated procedures that involve Service approval. The

audit correction program is Audit CAP,

which is available for all types of Qualification Failures found on examination that

cannot be corrected under APRSC. Additional, specific rules are set forth below.

.02 Effect of examination. If the plan

or plan sponsor is Under Examination, the

VCR and Walk-in CAP programs are not

available; insignificant Operational Failures can be corrected under APRSC; and

significant Operational Failures can be

corrected under APRSC in limited circumstances. See section 9.

.03 Favorable Letter requirement. The

VCR program and the provisions of

APRSC relating to significant Operational Failures (see section 9) are available only for a plan that is the subject of a

Favorable Letter.

.04 Established practices and procedures. In order to be eligible for APRSC,

the plan sponsor or administrator of a plan

must have established practices and procedures (formal or informal) reasonably

designed to promote and facilitate overall

compliance with the requirements of

§ 401(a) or § 403(b). For example, the

plan administrator might use a check

sheet for tracking allocations and indicate

on that check sheet whether a particular

employee was a key employee for topheavy purposes. A plan document alone

will not constitute evidence of established

procedures. These established procedures

must have been in place and routinely followed, but through an oversight or mistake in applying them, or because of an

inadequacy in the procedures, an Operational Failure occurred.

.05 Plan amendments. (1) Correction

by plan amendment not permitted in

APRSC or VCR. Neither APRSC nor the

VCR program is available for a plan

sponsor to correct an Operational Failure

March 23, 1998

by a plan amendment that conforms the

terms of the plan to the plan’s prior operations. Thus, if loans were made to participants, but the plan document did not permit loans to be made to participants, the

failure cannot be corrected under VCR by

retroactively amending the plan to provide for the loans. Nevertheless, if a plan

sponsor corrects under APRSC or VCR, it

may amend the plan to the extent necessary to reflect operational correction. For

example, if the plan failed to satisfy the

ADP test required under § 401(k)(3) and

the employer must make qualified nonelective contributions not already provided for under the plan, the plan may be

amended to provide for qualified nonelective contributions. The issuance of a

compliance statement does not constitute

a determination as to the effect of any

plan amendment on the qualification of

the plan.

(2) Limited availability of correction by plan amendment in Walk-in CAP.

In appropriate circumstances, a plan

sponsor may use Walk-in CAP to correct

an Operational Failure by a plan amendment to conform the terms of the plan to

the plan’s prior operations, provided that

the amendment complies with the requirements of § 401(a), including the requirements of §§ 401(a)(4), 410(b), and

411(d)(6). Future guidance will be issued

regarding circumstances under which correction of an Operational Failure through

plan amendment may be appropriate

under Walk-in CAP.

.06 Egregious failures. Neither

APRSC nor the VCR program is available

to correct Operational Failures that are

egregious. For example, if an employer

has consistently and improperly covered

only highly compensated employees or if

a contribution to a defined contribution

plan for a highly compensated individual

is several times greater than the dollar

limit set forth in § 415, the failure would

be considered egregious.

.07 Diversion or misuse of plan assets.

The APRSC, VCR, Walk-in CAP and

Audit CAP programs are not available for

Qualification Failures relating to the diversion or misuse of plan assets.

.08 Operational Failures in § 403(b)

Plans. APRSC is also available to correct

an Operational Failure in a § 403(b) Plan

(other than a failure that would result

solely in income inclusion for affected

March 23, 1998

employees). Thus, Operational Failures

involving contributions to a § 403(b) Plan

in excess of the § 415 limit and the maximum exclusion allowance (failures that

result solely in the inclusion in income for

affected participants) are not eligible for

APRSC.

PART III. DEFINITIONS,

CORRECTION PRINCIPLES, AND

RULES OF GENERAL

APPLICABILITY

SECTION 5. DEFINITIONS

The following definitions apply for

purposes of this revenue procedure:

.01 Qualification Failure. A Qualification Failure is any failure that adversely

affects the qualification of a plan. There

are three types of Qualification Failures:

(1) Plan Document Failures, (2) Operational Failures, and (3) Demographic

Failures.

(1) Plan Document Failure. The

term “Plan Document Failure” means a

plan provision (or the absence of a plan

provision) that, on its face, violates the requirements of § 401(a) or § 403(a). Thus,

for example, the failure of a plan to be

amended to reflect a new qualification requirement within the plan’s applicable remedial amendment period under § 401(b)

is a Plan Document Failure. For purposes

of this revenue procedure, a Plan Document Failure includes any Qualification

Failure that is a violation of the requirements of § 401(a) or § 403(a) and that is

neither an Operational Failure nor a Demographic Failure.

(2) Operational Failure. The term

“Operational Failure” means, with respect

to a Qualified Plan, a Qualification Failure that arises solely from the failure to

follow plan provisions.

A failure to follow the terms of the plan

providing for the satisfaction of the requirements of § 401(k) and § 401(m) is

considered to be an Operational Failure.

A plan does not have an Operational Failure to the extent the plan is permitted to

be amended retroactively pursuant to

§ 401(b) or another statutory provision to

reflect the plan’s operations. However, if

within an applicable remedial amendment

period under § 401(b), a plan has been

properly amended for statutory or regulatory changes, and, on or after the later of

the date the amendment is effective or is

adopted, the amended provisions are not

followed, then the plan is considered to

have an Operational Failure.

An Operational Failure with respect to

a § 403(b) Plan is a failure that would result in the loss of the exclusion allowance

under § 403(b).

(3) Demographic Failure. The term

“Demographic Failure” means a failure to

satisfy the requirements of § 401(a)(4),

§ 401(a)(26), or § 410(b) that is not an

Operational Failure.

The correction of a Demographic Failure generally requires a substantive corrective amendment to the plan adding

more benefits or increasing existing benefits (see, for example, § 1.401(a)(4)–11(g)

of the Income Tax Regulations).

.02 Favorable Letter. The term “Favorable Letter” means a current favorable

determination letter for an individually

designed plan (including a volume submitter plan), a current favorable opinion

letter for a plan sponsor that has adopted a

master or prototype plan, or a current favorable notification letter for a plan sponsor that has adopted a regional prototype

plan. A plan has a current favorable determination letter, opinion letter, or notification letter if either (1), (2), or (3) below

is satisfied:

(1) The plan has a favorable determination, opinion, or notification letter that

considers the Tax Reform Act of 1986

(“TRA ’86”).

(2) The plan has a favorable determination, opinion, or notification letter

that considers the Tax Equity and Fiscal

Responsibility Act of 1982 (“TEFRA”),

the Deficit Reduction Act of 1984

(“DEFRA”), and the Retirement Equity

Act of 1984 (“REA”), and the § 401(b)

remedial amendment period for TRA ’86

has not yet expired. (The remedial

amendment period for TRA ’86 may not

have expired either because the plan has a

timely submitted, pending request for a

determination, opinion, or notification letter that considers TRA ’86, or because the

plan is an adoption of a master or prototype plan, regional prototype plan, or volume submitter plan, described in section 3

of Rev. Proc. 95–12, 1995–1 C.B. 508; a

governmental plan described in Notice

96–64, 1996–2 C.B. 229; or a plan maintained by a tax-exempt organization, including a non-electing church plan, described in Notice 96–64.)

1998–12 I.R.B.

(3) The plan is initially adopted or

effective after December 7, 1994, and the

plan sponsor timely submits an application for a determination, opinion, or notification letter within the plan’s remedial

amendment period under § 401(b).

.03 Maximum Payment Amount. The

term “Maximum Payment Amount”

means a monetary amount that is approximately equal to the tax the Service could

collect upon plan disqualification and is

the sum for the open taxable years of the:

(1) tax on the trust (Form 1041),

(2) additional income tax resulting

from the loss of employer deductions for

plan contributions (and any interest or

penalties applicable to the plan sponsor’s

return), and

(3) additional income tax resulting

from income inclusion for participants in

the plan (Form 1040).

For purposes of determining the maximum compliance correction fee applicable under section 13.05(3), relating to

egregious failures under Walk-in CAP,

paragraph (2) above is modified to exclude interest or penalties applicable to

the plan sponsor’s return, and paragraph

(3) above is modified to include only the

additional income tax resulting from income inclusion for highly compensated

employees, as defined in § 414(q).

.04 Qualified Plan. The term “Qualified Plan” means a plan intended to satisfy the requirements of § 401(a) or

§ 403(a).

.05 § 403(b) Plan. The term “§ 403(b)

Plan” means a plan intended to satisfy the

requirements of § 403(b).

.06 Under Examination. The term

“Under Examination” means: (1) a plan

that is under an Employee Plans examination (that is, an examination of a Form

5500 series or other Employee Plans examination), or (2) a plan sponsor that is

under an Exempt Organizations examination (that is, an examination of a Form

990 series or other Exempt Organizations

examination).

A plan that is under an Employee Plans

examination includes any plan for which

the plan sponsor, or a representative, has

received verbal or written notification

from the Employee Plans Division of an

impending Employee Plans examination,

or of an impending referral for an Employee Plans examination, and also includes any plan that has been under an

1998–12 I.R.B.

Employee Plans examination and is now

in Appeals or in litigation for issues

raised in an Employee Plans examination. A plan is considered to be Under

Examination if it is aggregated for purposes of satisfying the nondiscrimination

requirements of § 401(a)(4), the minimum participation requirements of

§ 401(a)(26), or the minimum coverage

requirements of § 410(b), or the requirements of § 403(b)(12), with a plan(s) that

is Under Examination. In addition, a

plan is considered to be Under Examination with respect to a failure of a qualification requirement (other than those described in the preceding sentence) if the

plan is aggregated with another plan for

purposes of satisfying that qualification

requirement (for example, § 402(g),

§ 415, or § 416) and that other plan is

Under Examination. For example, assume Plan A has a § 415 failure, Plan A is

aggregated with Plan B only for purposes

of § 415, and Plan B is Under Examination. In this case, Plan A is considered to

be Under Examination with respect to the

§ 415 failure. However, if Plan A has a

failure relating to the spousal consent

rules under § 417 or the vesting rules of

§ 411, Plan A is not considered to be

Under Examination with respect to the

§ 417 or § 411 failure. For purposes of

this revenue procedure, the term aggregation does not include consideration of

benefits provided by various plans for

purposes of the average benefits test set

forth in § 410(b)(2).

An Employee Plans examination also

includes a case in which a plan sponsor

has submitted a Form 5310, Application

for Determination of Qualification Upon

Termination, and the Employee Plans

agent notifies the plan sponsor, or a representative, of possible Qualification Failures, whether or not the plan sponsor is

officially notified of an “examination.”

This would include the case where, for

example, a plan sponsor has applied for a

determination letter on plan termination,

and an Employee Plans agent notifies the

plan sponsor that there are partial termination concerns.

A plan sponsor that is under an Exempt

Organizations examination includes any

plan sponsor that has received (or its representative has received) verbal or written

notification from the Exempt Organizations Division of an impending Exempt

Organizations examination or of an impending referral for an Exempt Organizations examination and also includes any

plan sponsor that has been under an Exempt Organizations examination and is

now in Appeals or in litigation for issues

raised in an Exempt Organizations examination.

SECTION 6. CORRECTION

PRINCIPLES AND RULES OF

GENERAL APPLICABILITY

.01 Correction principles; rules of

general applicability. The following general correction principles and rules of

general applicability apply for purposes

of this revenue procedure.

.02 Correction. Generally, a Qualification Failure is not corrected unless full

correction is made with respect to all participants and beneficiaries, and for all taxable years (whether or not the taxable

year is closed). In the case of an Operational Failure, correction is determined

taking into account the terms of the plan

at the time of the failure. Correction

should be accomplished taking into account the following principles:

(1) Restoration of benefits. The correction method should restore the plan to

the position it would have been in had the

Qualification Failure not occurred, including restoration of current and former

participants and beneficiaries to the benefits and rights they would have had if the

Qualification Failure had not occurred.

(2) Reasonable and appropriate correction. The correction should be reasonable and appropriate for the Qualification

Failure. Depending on the nature of the

Qualification Failure, there may be more

than one reasonable and appropriate correction for the failure. Any standardized

correction method permitted under SVP

(see Appendix A) is deemed to be a reasonable and appropriate method of correcting the related Qualification Failure.

Whether any other particular correction

method is reasonable and appropriate is

determined taking into account the applicable facts and circumstances and the following principles:

(a) The correction method should, to

the extent possible, resemble one already

provided for in the Code, Income Tax

Regulations, or other guidance of general

applicability. For example, the defined

contribution plan correction methods set

March 23, 1998

forth in § 1.415–6(b)(6) would be the typical means of correcting a failure under

§ 415. Likewise, the correction method

set forth in § 1.402(g)–1(e)(2) would be

the typical means of correcting a failure

under § 402(g).

(b) The correction method for Qualification Failures relating to nondiscrimination should provide benefits for nonhighly compensated employees. For

example, the correction method set forth

in § 1.401(a)(4)–11(g) (rather than methods making use of the special testing provisions set forth in § 1.401(a)(4)–8 or

1.401(a)(4)–9) would be the typical

means of correcting a failure to satisfy

nondiscrimination requirements. Similarly, the correction of a failure to satisfy

the requirements of § 401(k)(3),

401(m)(2), or 401(m)(9) (relating to

nondiscrimination) solely by distributing

excess amounts to highly compensated

employees would not be the typical

means of correcting such a failure.

keep plan assets in the plan, except to the

extent the Code, regulations, or other guidance of general applicability provide for

correction by distribution to participants or

beneficiaries or return of assets to the employer or plan sponsor. For example, if an

excess allocation (not in excess of the

§ 415 limits) was made for a participant

under a plan (other than a cash or deferred

arrangement), the excess should be reallocated to other participants or, depending on

the facts and circumstances, used to reduce

future employer contributions.

(d) The correction method should

not violate another applicable specific requirement of § 401(a) (for example,

§ 401(a)(4) or 411(d)(6)).

(3) Principles regarding corrective

allocations and corrective distributions.

The following principles apply where an

appropriate correction method includes

the use of corrective allocations or corrective distributions.

(a) Corrective allocations under a

defined contribution plan should be based

upon the terms of the plan and other applicable information at the time of the

Qualification Failure (including the compensation that would have been used

under the plan for the period with respect

to which a corrective allocation is being

made) and should be adjusted for earnings

and forfeitures that would have been allo-

March 23, 1998

cated to the participant’s account if the

failure had not occurred. The corrective

allocation need not be adjusted for losses.

For administrative convenience, in the

case of corrective allocations, if the plan

permitted directed investments for the

years at issue, and thus had a number of

funds, the plan would be permitted to use

the highest rate earned in the plan for a

particular year as the rate used for all corrections, provided that most of the employees receiving the corrective allocations are nonhighly compensated

employees. Similar rules apply with respect to corrective distributions.

(b) A corrective allocation to a participant’s account because of a failure to

make a required allocation in a prior limitation year will not be considered an annual addition with respect to the participant for the limitation year in which the

correction is made, but will be considered

an annual addition for the limitation year

to which the corrective allocation relates.

However, the normal rules of § 404, regarding deductions, apply.

come only from employer contributions

(including forfeitures if the plan permits

their use to reduce employer contributions).

(d) In the case of a defined benefit

plan, a corrective distribution for an individual should be increased to take into account the delayed payment, consistent

with the plan’s actuarial adjustments.

(4) Special exceptions to full correction. In general, a Qualification Failure

must be fully corrected. Although the

mere fact that correction is inconvenient

or burdensome is not enough to relieve a

plan sponsor of the need to make full correction, full correction may not be required in certain situations because it is

unreasonable or not feasible. Even in

these situations, the correction method

adopted must be one that does not have

significant adverse effects on participants

and beneficiaries or the plan, and that

does not discriminate significantly in

favor of highly compensated employees.

The exceptions described below specify

those situations in which full correction is

not required.

(a) Reasonable estimates. If it is not

possible to make a precise calculation, or

the probable difference between the approximate and the precise restoration of a

participant’s benefits is insignificant and

the administrative cost of determining

precise restoration would significantly exceed the probable difference, reasonable

estimates may be used in calculating appropriate correction.

(b) Delivery of very small benefits.

If the total corrective distribution due a

participant or beneficiary is $20 or less,

the plan sponsor is not required to make

the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or

beneficiary would exceed the amount of

the distribution.

current and former participants and beneficiaries to whom additional benefits are

due, but who have not been located after a

mailing to the last known address. In

general, such actions include use of the

Internal Revenue Service Letter Forwarding Program (see Rev. Proc. 94–22,

1994–1 C.B. 608) or the Social Security

Administration Reporting Service. A plan

will not be considered to have failed to

correct a failure due to the inability to locate an individual if either of these programs is used; provided that, if the individual is later located, the additional

benefits must be provided to the individual at that time.

(5) Reporting. Any distributions from

the plan should be properly reported.

(6) Additional guidance. The Service

may publish additional rules regarding

appropriate correction methods.

.03 Correction under statute or regulations. Generally, none of the correction

programs are needed to correct failures

that can be corrected under the Code and

related regulations. For example, as a

general rule, a Plan Document Failure

that is a disqualifying provision for which

the remedial amendment period under

§ 401(b) has not expired can be corrected

by operation of the Code through retroactive remedial amendment.

.04 Matters subject to excise taxes.

Excise taxes and additional taxes, to the

extent applicable, are not waived merely

because the underlying failure has been

corrected or because the taxes result from

the correction. Thus, for example, the excise tax on certain excess contributions

under § 4979 is not waived under these

correction programs.

1998–12 I.R.B.

The correction programs are not available for events for which the Code provides tax consequences other than plan

disqualification (such as the imposition of

an excise tax or additional income tax).

For example, funding deficiencies (failures to make the required contributions to

a plan subject to § 412), prohibited transactions, and failures to file the Form 5500

cannot be corrected under the correction

programs. However, if the event is also

an Operational Failure (for example, if

the terms of the plan document relating to

plan loans to participants were not followed and loans made under the plan did

not satisfy § 72(p)(2)), the correction programs will be available to correct the Operational Failure, even though the excise

or income taxes generally still will apply.

(In limited circumstances, as described in

section 10.05, if the failure involves the

failure to satisfy the minimum distribution requirements of § 401(a)(9), the Service may enter into a closing agreement,

as part of the VCR program, with respect

to the excise tax under § 4974 applicable

to plan participants.)

.05 Confidentiality and disclosure.

Because each correction program relates

directly to the enforcement of the qualification requirements, the information received or generated by the Service under

the program is subject to the confidentiality requirements of § 6103, and is not a

written determination within the meaning

of § 6110.

.06 No effect on other law. Compliance under these programs has no effect

on the rights of any party under any other

law, including Title I of the Employee Retirement Income Security Act of 1974.

PART IV. SELF-CORRECTION

(APRSC)

SECTION 7. IN GENERAL

The requirements of this section are satisfied with respect to an Operational Failure if the plan sponsor satisfies the requirements of section 8 (relating to insignificant

Operational Failures), or section 9 (relating

to significant Operational Failures).

SECTION 8. SELF-CORRECTION OF

INSIGNIFICANT OPERATIONAL

FAILURES

.01 Requirements. The requirements

of this section are satisfied with respect to

1998–12 I.R.B.

an Operational Failure if the Operational

Failure is corrected and, given all the

facts and circumstances, the Operational

Failure is insignificant. This section is

available for correcting an insignificant

Operational Failure even if the plan or

plan sponsor is Under Examination.

.02 Factors. The factors to be considered in determining whether or not an Operational Failure under a plan is insignificant include, but are not limited to: (1)

whether other failures occurred during the

period being examined (for this purpose, a

failure is not considered to have occurred

more than once merely because more than

one participant is affected by the failure);

(2) the percentage of plan assets and contributions involved in the failure; (3) the

number of years the failure occurred; (4)

the number of participants affected relative to the total number of participants in

the plan; (5) the number of participants affected as a result of the failure relative to

the number of participants who could have

been affected by the failure; (6) whether

correction was made within a reasonable

time after discovery of the failure; and (7)

the reason for the failure (for example,

data errors such as errors in the transcription of data, the transposition of numbers,

or minor arithmetic errors). No single factor is determinative.

.03 Multiple failures. In the case of a

plan with more than one Operational Failure in a single year, or Operational Failures that occur in more than one year, the

Operational Failures are eligible for correction under this section only if all of the

Operational Failures (other than Operational Failures that are not treated as resulting in disqualification of the plan

under section 9, the VCR program in section 10, or Walk-in CAP in section 11) are

insignificant in the aggregate.

.04 Examples. The following examples illustrate the application of this section. It is assumed, in each example, that

the eligibility requirements of section 4

relating to APRSC have been satisfied

and that no Operational Failures occurred

other than the Operational Failures identified below.

Example 1: In 1984, Employer X established Plan A, a profit-sharing plan

that satisfies the requirements of § 401(a)

in form. In 1999, the benefits of 50 of the

250 participants in Plan A were limited by

§ 415(c). However, when the Service ex-

amined Plan A in 2002, it discovered that,

during the 1999 limitation year, the annual additions allocated to the accounts of

3 of these employees exceeded the maximum limitations under § 415(c). Employer X contributed $3,500,000 to the

plan for the plan year. The amount of the

excesses totalled $4,550. Based on data

provided by Employer X, the Service did

not find any evidence of other failures in

the plan. Under these facts, because the

number of participants affected by the

failure relative to the total number of participants who could have been affected by

the failure, and the monetary amount of

the failure relative to the total employer

contribution to the plan for the 1999 plan

year, are insignificant, the § 415(c) failure

in Plan A that occurred in 1999 would be

eligible for correction under this section.

Example 2: The facts are the same as in

Example 1, except that the failure to satisfy § 415 occurred during each of the

1998, 1999, and 2000 limitation years. In

addition, the three participants affected by

the § 415 failure were not identical each

year. The fact that the § 415 failures occurred during more than one limitation

year did not cause the failures to be significant; accordingly, the failures are still

eligible for correction under this section.

Example 3: The facts are the same as

in Example 1, except that the annual additions of 18 of the 50 employees whose

benefits were limited by § 415(c) nevertheless exceeded the maximum limitations under § 415(c) during the 1999 limitation year, and the amount of the

excesses ranged from $1,000 to $9,000,

and totalled $150,000. Under these facts,

taking into account the number of participants affected by the failure relative to the

total number of participants who could

have been affected by the failure for the

1999 limitation year (and the monetary

amount of the failure relative to the total

employer contribution), the failure is significant. Accordingly, the § 415(c) failure

in Plan A that occurred in 1999 is ineligible for correction under this section as an

insignificant failure.

Example 4: Employer J maintains Plan

C, a money purchase pension plan established in 1992. The plan document satisfies the requirements of § 401(a) of the

Code. The formula under the plan provides for an employer contribution equal

to 10% of compensation, as defined in the

March 23, 1998

plan. During its examination of the plan

for the 1999 plan year, the Service discovered that the employee responsible for entering data into the employer’s computer

made minor arithmetic errors in transcribing the compensation data with respect to

6 of the plan’s 40 participants, resulting in

excess allocations to those 6 participants’

accounts. Under these facts, the number

of participants affected by the failure relative to the number of participants that

could have been affected is insignificant,

and the failure is due to minor data errors.

Thus, the failure occurring in 1999 would

be insignificant and therefore eligible for

correction under this section.

Example 5: Public School maintains

for its 200 employees a salary reduction

403(b) plan (the “Plan”) which satisfies

the requirements of § 403(b). The business manager has primary responsibility

for administering the Plan, in addition to

other administrative functions within

Public School. During the 1998 plan

year, a former employee should have received an additional minimum distribution of $278 under § 403(b)(10). Another

participant received an impermissible

hardship withdrawal of $2,500. Another

participant made elective deferrals of

$11,000, $1,000 of which was in excess

of the § 402(g) limit. Under these facts,

even though multiple failures occurred in

a single plan year, the failures will be eligible for correction under this section because in the aggregate the failures are insignificant.

SECTION 9. SELF-CORRECTION OF

SIGNIFICANT OPERATIONAL

FAILURES

.01 Requirements. The requirements

of this section are satisfied with respect to

an Operational Failure (even if significant) if the Operational Failure is corrected and the correction is either completed or substantially completed (in

accordance with section 9.03) by the last

day of the correction period described in

section 9.02.

.02 Correction period. The last day of

the correction period for an Operational

Failure is the last day of the second plan

year following the plan year for which the

failure occurred. However, in the case of

a failure to satisfy the requirements of §

401(k)(3), 401(m)(2), or 401(m)(9), the

plan year that includes the last day of the

March 23, 1998

additional period for correction permitted

under § 401(k)(8) or 401(m)(6) is treated,

for this purpose, as the plan year for

which the Operational Failure occurs.

The correction period for an Operational

Failure that occurs for any plan year ends,

in any event, on the first date the plan or

plan sponsor is Under Examination for

that plan year (determined without regard

to the exception in the preceding sentence). (But see section 9.03 for special

rules permitting completion of correction

after the end of the correction period.)

.03 Substantial completion of correction. Correction of an Operational Failure

is substantially completed by the last day

of the correction period only if the requirements of either paragraph (1) or (2)

are satisfied.

(1) The requirements of this paragraph (1) are satisfied if:

(a) during the correction period, the

plan sponsor is reasonably prompt in

identifying the Operational Failure, formulating a correction method, and initiating correction in a manner that demonstrates a commitment to completing

correction of the Operational Failure as

expeditiously as practicable, and

(b) within 90 days after the last day

of the correction period, the plan sponsor

completes correction of the Operational

Failure.

(2) The requirements of this paragraph (2) are satisfied if:

(a) during the correction period, correction is completed with respect to 85%

of all participants affected by the Operational Failure, and

(b) thereafter, the plan sponsor completes correction of the Operational Failure with respect to the remaining affected

participants in a diligent manner.

.04 Example. The following example

illustrates the application of this section.

Assume that the eligibility requirements

of section 4 relating to APRSC have been

met.

Employer Z established a qualified defined contribution plan in 1986 and received a favorable determination letter for

TRA ’86. During 1999, while doing a

self-audit of the operation of the plan for

the 1998 plan year, the plan administrator

discovered that, despite the practices and

procedures established by Employer Z

with respect to the plan, several employees eligible to participate in the plan were

excluded from participation. The administrator also found that for 1998 the elective deferrals of additional employees exceeded the § 402(g) limit and discovered

Operational Failures in 1998 with respect

to the top-heavy provisions of the plan.

During the 1999 plan year, the plan sponsor made corrective contributions on behalf of the excluded employees, distributed the excess deferrals to the affected

participants, and made a top-heavy minimum contribution to all participants entitled to that contribution for the 1999 plan

year. Each corrective contribution and

distribution was credited with earnings at

a rate appropriate for the plan from the

date the corrective contribution or distribution should have been made to the date

of correction. The Service subsequently

found, upon an examination of the plan,

that the Operational Failures for the 1998

plan year were corrected by the plan administrator within the correction period

and thus satisfied the requirements of this

section.

PART V. VOLUNTARY

CORRECTION WITH SERVICE

APPROVAL (VCR AND WALK-IN

CAP)

SECTION 10. VCR PROGRAM

.01 VCR requirements. The requirements of this section are satisfied with respect to an Operational Failure if the submission requirements of section 12 below

are satisfied and the plan sponsor corrects

the failures identified in accordance with

the compliance statement described in

section 10.13.

.02 Identification of failures. VCR is

not based upon an examination of the plan

by the Service. The Service will not

make any investigation or finding under

the VCR program concerning whether

there are Operational Failures. Only the

Operational Failures raised by the plan

sponsor or Operational Failures identified

by the Service in processing the application will be addressed under the program,

and only those failures will be covered by

the program. However, because the VCR

program does not arise out of an examination, consideration under the VCR program does not preclude or impede (under

§ 7605(b) or any administrative provisions adopted by the Service) a subsequent examination of the plan sponsor or

1998–12 I.R.B.

the plan by the Service with respect to the

taxable year (or years) involved with respect to matters that are outside the compliance statement. A plan sponsor’s statements describing Operational Failures are

made only for purposes of the VCR program and will not be regarded by the Service as an admission of a failure for purposes of any subsequent examination.

.03 No concurrent examination activity.

Except in unusual circumstances, a plan

that has been properly submitted under the

VCR program will not be examined while

the submission is pending. This practice

regarding concurrent examinations does

not extend to other plans of the plan sponsor. Thus, any plan of the plan sponsor

that is not pending under the VCR program could be subject to examination by

the appropriate Key District Office.

.04 Insufficient information. Where it

is not possible to obtain sufficient information to properly determine the nature

or extent of a failure or there is insufficient information to effect proper correction, or in other special circumstances

where the application of the VCR program would be inappropriate or impractical, the failure cannot be corrected under

the VCR program.

.05 Closing agreements with respect to

the excise tax under § 4974. As a general

rule, a plan sponsor is not required to

enter into a closing agreement with the

Service with respect to the excise tax due

under § 4974 because of the failure to satisfy the minimum distribution requirements under § 401(a)(9). However, the

Service retains the discretion to require a

plan sponsor to enter into a closing agreement in rare or unusual cases. The Service will enter into a closing agreement at

the request of the plan sponsor only in

cases where 10 or more plan participants

are subject to the excise tax under § 4974.

In such cases, the closing agreement entered into will require the plan sponsor to

pay 100 percent of the excise tax due

under § 4974.

.06 Initial processing. (1) The Service

will review whether the eligibility requirements of section 4 and the submissions requirements of section 12 are satisfied.

(2) If the plan is not the subject of a

Favorable Letter or the failure is not an

Operational Failure, the compliance fee

will be returned to the plan sponsor, and

the plan sponsor will be informed of the

1998–12 I.R.B.

option to voluntarily request consideration under Walk-in CAP in the appropriate Key District Office.

(3) If a plan sponsor requests a compliance statement under the VCR program

for a plan with egregious failures described in section 4.06, the compliance

fee will be returned and the plan sponsor

will be given 60 days to voluntarily request consideration under Walk-in CAP in

the appropriate Key District Office. If by

the end of the 60-day period, a request for

consideration under Walk-in CAP has not

been received in the appropriate Key District Office, the VCR request will be forwarded to that office for examination consideration.

(4) If the Service determines that a

submission is seriously deficient, the Service reserves the right to return the submission and the compliance fee without

contacting the plan sponsor.

(5) If a request for consideration

under the VCR program is not described

in paragraph (2), (3), or (4) above, but

nevertheless fails to comply with the provisions of this revenue procedure or if additional information is required, a Service

representative will generally contact the

plan sponsor or the plan sponsor’s representative and explain what is needed to

complete the submission. The plan sponsor will have 21 calendar days from the

date of this contact to provide the requested information. If the information is

not received within 21 days, the matter

will be closed, the compliance fee will not

be returned, and the case may be referred

to the appropriate Key District Office in

accordance with section 10.06(5). Any

request for an extension of the 21-day

time period must be made in writing

within the 21-day time period and must be

approved by the Service.

.07 Processing of acceptable submission. Once the Service determines that a

request for consideration under the VCR

program is acceptable, the Service will

consult with the plan sponsor or the plan

sponsor’s representative to discuss the

proposed corrections and the plan’s administrative procedures. If agreement is

reached, the Service will issue a compliance statement with an enclosed acknowledgment letter for signature by the plan

sponsor. The case will not be closed favorably until the Service has received the

signed acknowledgement letter from the

plan sponsor. The Service will discuss

the appropriateness of the plan’s existing

administrative procedures with the plan

sponsor. Where current procedures are

inadequate for operating the plan in conformance with the qualification requirements of the Code, the compliance statement will be conditioned upon the

implementation of stated procedures

within the stated time period. The Service may prescribe appropriate administrative procedures in the compliance

statement.

.08 Failures discovered after initial

submission.

(1) A plan sponsor that discovers additional, unrelated Operational Failures

after its initial submission may request

that such failures be added to its submission. The Service retains the discretion to

reject the inclusion of such failures if the

request is not timely, for example, if the

plan sponsor makes its request when processing of the VCR submission is substantially complete.

(2) If the Service discovers an unrelated Operational Failure while the request

is pending under the VCR program, the

failure generally will be added to the failures under consideration in the submission. The Service retains the discretion to

determine that a failure is outside the

scope of the voluntary request for consideration because it was not voluntarily

brought forward by the plan sponsor. In

this case, the plan may be forwarded to the

appropriate Key District Office for consideration on examination, but forwarding to

the Key District Office will occur only in

rare or unusual circumstances.

.09 Conference right. If the Service

initially determines that it cannot issue a

compliance statement because the parties

cannot agree upon correction or a change

in administrative procedures, the plan

sponsor or the plan sponsor’s representative will be contacted by the Service representative and offered a conference with

the Service. The conference can be held

either in person or by telephone, and must

be held within 21 calendar days of the

date of contact. The plan sponsor will

have 21 calendar days after the date of the

conference to submit additional information in support of the submission. Any request for an extension of the 21-day time

period must be made in writing within the

21-day time period and must be approved

March 23, 1998

by the Service. Additional conferences

may be held at the discretion of the Service.

.10 Failure to reach resolution. If resolution cannot be reached (for example,

where information is not timely provided

to the Service or because agreement cannot

be reached on correction or a change in administrative procedures), the compliance

fee will not be returned, and the case may

be referred to the appropriate Key District

Office for examination consideration.

.11 Concurrent processing of determination letter applications. The Service

may process a determination letter application (including an application requested

on Form 5310, Application for Determination of Qualification Upon Termination) concurrently with a VCR submission for the same plan. However,

issuance of the determination letter in response to an application made on a Form

5310 will be suspended pending the closure of the VCR submission.

.12 Special rules relating to SVP. (1)

Under the VCR program, certain Operational Failures may be corrected under the

Standardized VCR Procedure (“SVP”)

rules in this section. SVP is available if

the plan’s only identified Operational

Failure or Failures are ones that are listed

in Appendix A of this revenue procedure

and the failures are corrected in accordance with the applicable correction

method set forth in Appendix A. The plan

sponsor must request an SVP compliance

statement and pay the reduced compliance fee set forth in section 13.04.

(2) The correction methods set forth

in Appendix A are strictly construed and

are the only acceptable correction methods

for SVP failures. If the plan sponsor

wishes to modify a correction method provided in Appendix A or to propose another

method, the plan sponsor may not use

SVP, but may request a compliance statement under the regular VCR procedures.

(3) SVP is not available if the plan

sponsor has identified more than two SVP

failures in a single SVP request. If there

are one or two failures that can be corrected under SVP and other failures that

cannot be corrected under SVP, SVP is

not available. The Service reserves the

right to shift a request for consideration

under SVP into the regular VCR program

if the plan sponsor submits a second SVP

request with respect to the same plan

March 23, 1998

while the first SVP request is being considered or during the 12 months after the

first SVP compliance statement is issued.

(4) The Service will review an SVP

request within 120 days of the date the

submission is received and determined to

be complete. If the Service determines

that the request is acceptable, the Service

will issue a compliance statement on the

plan sponsor’s proposed correction.

.13 General description of compliance

statement. Under the VCR program, a

plan sponsor receives a compliance statement from the Service. The compliance

statement addresses the failures identified, the terms of correction, and any revision of administrative procedures, and

provides that the Service will not treat the

plan as disqualified on account of the Operational Failures described in the compliance statement. In addition, the time period within which proposed corrections

and changes in administrative procedures

must be implemented are set forth in the

compliance statement. The compliance

statement is conditioned on the accuracy

or acceptability of any calculations or

other material submitted in connection

with the request.

.14 Compliance statement conditioned

upon timely correction. The compliance

statement is conditioned upon the implementation of the specific corrections and

administrative changes set forth in the

compliance statement within 150 days of

the date of the compliance statement. Any

request for an extension of this time period

must be made in advance and in writing

and must be approved by the Service.

.15 Compliance statement for new

plans conditioned upon timely amendment. Reliance on any compliance statement issued for a plan initially adopted or

effective after December 7, 1994, other

than an adoption of a master or prototype

or regional prototype plan, is conditioned

upon the plan being timely submitted for

a determination letter within the plan’s remedial amendment period under § 401(b).

.16 Acknowledgement letter. Within

30 calendar days after the compliance

statement is issued, a plan sponsor that

wishes to agree to the terms of the compliance statement must send a signed acknowledgement letter to the Service,

agreeing to the terms of the compliance

statement. If the plan sponsor does not

send the Service a signed acknowledge-

ment letter within 30 calendar days, the

plan may be referred to the appropriate

Key District Office for examination consideration. Once the compliance statement has been issued (based on the information provided), the plan sponsor cannot

request a modification of the compliance

terms except by a new request for a compliance statement. However, if the requested modification is minor and is postmarked no later than 30 days after the

compliance statement is issued, the VCR

compliance fee for the modification will

be the lesser of the original compliance

fee or $1,250.

.17 Verification. Once the compliance

statement has been issued, the Service

may require verification that the corrections have been made and that any plan

administrative procedures required by the

statement have been implemented. This

verification does not constitute an examination of the books and records of the employer or the plan (within the meaning of

§ 7605(b)). If the Service determines that

the plan sponsor did not implement the

corrections and procedures within the

stated time period, the Service may consider the issues in an examination.

SECTION 11. WALK-IN CAP

.01 Walk-in CAP requirements. (1) The

requirements of this section are satisfied

with respect to a Plan Document, an eligible Operational (see section 4), or a Demographic Failure if the submission requirements of section 12 are satisfied, the plan

sponsor pays the compliance correction

fee, and the plan sponsor corrects the failures identified in accordance with a closing agreement entered into by the Service

and the plan sponsor. Payment of the compliance correction fee is generally required

at the time the closing agreement is signed.

(2) A determination letter application is not a submission under Walk-in

CAP.

(3) Depending on the nature of the

failure, the Service will discuss the appropriateness of the plan’s existing administrative procedures with the plan sponsor.

Where current administrative procedures

are inadequate for operating the plan in

conformance with the qualification requirements of the Code, the closing

agreement may be conditioned upon the

implementation of stated administrative

procedures.

1998–12 I.R.B.

(4) In addition, the plan sponsor is

required to obtain a Favorable Letter before the closing agreement is signed unless the Service determines that it is unnecessary based on the facts and

circumstances (for example, because the

plan already has a Favorable Letter and

no significant amendments are adopted).

If a Favorable Letter is required, the plan

sponsor would be required to pay the applicable user fee for obtaining the letter.

.02 Failures discovered after initial

submission. (1) A plan sponsor that discovers additional, unrelated failures after

its initial submission may request that

such failures be added to its submission.

However, the Service retains the discretion to reject the inclusion of such failures

if the request is not timely, for example, if

the plan sponsor makes its request when

processing of the submission is substantially complete.

(2) If the Service discovers an unrelated plan failure while the request is

pending, the failure generally will be

added to the failures under consideration.

However, the Service retains the discretion to determine that a failure is outside

the scope of the voluntary request for consideration because it was not voluntarily

brought forward by the plan sponsor. In

this case, if the additional failure is significant, all aspects of the plan will be examined, and the rules pertaining to Audit

CAP will apply.

.03 Failure to reach resolution. If the

Service and the plan sponsor cannot reach

agreement with respect to the submission,

all aspects of the plan may be examined,

and the rules pertaining to Audit CAP will

apply.

.04 Effect of closing agreement. The

closing agreement is binding upon both

the Service and the plan sponsor with respect to the specific tax matters identified

therein for the periods specified, but does

not preclude or impede an examination of

the plan by the Service relating to matters

outside the closing agreement, even with

respect to the same taxable year or years

to which the closing agreement relates.

SECTION 12. APPLICATION

PROCEDURES FOR VCR AND WALKIN CAP

.01 General rules. This section sets

forth the procedures for requesting a compliance statement from the Service under

1998–12 I.R.B.

the VCR program (including SVP) and

for requesting a closing agreement under

Walk-in CAP. In general, a request under

the VCR program or Walk-in CAP consists of a letter from the plan sponsor or

the plan sponsor’s representative to the

Service that contains a description of the

failures, a description of the proposed

methods of correction, and other procedural items, and includes supporting information and documentation as described below.

.02 Multiemployer and multiple employer plans. In the case of a multiemployer or multiple employer plan, the plan

administrator (rather than any contributing or adopting employer) must request

consideration of the plan under the programs. The request must be with respect

to the plan, rather than a portion of the

plan affecting any particular employer.

.03 Submission requirements. The letter from the plan sponsor or the plan

sponsor’s representative must contain the

following:

(1) A complete description of the

failures and the years in which the failures

occurred, including closed years (that is,

years for which the statutory period has

expired).

(2) A description of the administrative procedures in effect at the time the

failures occurred.

(3) An explanation of how and why

the failures arose.

(4) A detailed description of the

method for correcting the failures that the

plan sponsor has implemented or proposes to implement. Each step of the correction method must be described in narrative form. The description must include

the specific information needed to support

the suggested correction method. This information includes, for example, the number of employees affected and the expected cost of correction (both of which

may be approximated if the exact number

cannot be determined at the time of the request), the years involved, and calculations or assumptions the plan sponsor

used to determine the amounts needed for

correction. See section 10.12 for special

procedures regarding SVP.

(5) A description of the methodology that will be used to calculate earnings

or actuarial adjustments on any corrective

contributions or distributions (indicating

the computation periods and the basis for

determining earnings or actuarial adjustments, in accordance with section

6.02(3)).

(6) Specific calculations for each affected employee or a representative sample of affected employees. The sample

calculations must be sufficient to demonstrate each aspect of the correction

method proposed. For example, if a plan

sponsor requests a compliance statement

with respect to a failure to satisfy the contribution limits of § 415(c) and proposes a

correction method that involves elective

contributions (both matched and unmatched) and matching contributions, the

plan sponsor must submit calculations illustrating the correction method proposed

with respect to each type of contribution.

As another example, with respect to a

failure to satisfy the actual deferral percentage (“ADP”) test in § 401(k)(3), the

plan sponsor must submit the ADP test results both before the correction and after

the correction.

(7) The method that will be used to

locate and notify former employees and

beneficiaries, or an affirmative statement

that no former employees or beneficiaries

were affected by the failures.

(8) A description of the measures

that have been or will be implemented to

ensure that the same failures will not

recur.

(9) A statement that, to the best of

the plan sponsor’s knowledge, neither the

plan nor the plan sponsor is Under Examination.

(10) In the case of a VCR submission, a statement (if applicable) that the

plan is currently being considered in a determination letter application. If the request for a determination letter is made

while a request for consideration under

VCR is pending, the plan sponsor must

update the VCR request to add this information.

(11) In the case of an SVP submission, a statement that it is an SVP request,

a description of the applicable correction

in accordance with Appendix A, and a

statement that the plan sponsor proposes

to implement (or has implemented) the

correction(s).

.04 Required documents. The submission must be accompanied by the following documents:

(1) In the case of a VCR submission,

a copy of the first page and a copy of the

March 23, 1998

page containing employee census information (currently, line 7f of the 1997 Form

5500) and a copy of the page containing

the total amount of plan assets (currently,

line 31f of the 1997 Form 5500) of the

most recently filed Form 5500 series return, or in the case of a Walk-in CAP submission, a copy of the most recently filed

Form 5500 series return.

(2) A copy of the relevant portions

of the plan document. For example, in a

case involving improper exclusion of eligible employees from a profit-sharing

plan with a cash or deferred arrangement,

relevant portions of the plan document include the eligibility, allocation, and cash

or deferred arrangement provisions of the

basic plan document (and the adoption

agreement, if applicable), along with applicable definitions in the plan.

(3) In the case of a VCR submission, a copy of the determination letter,

opinion letter, or notification letter that

considered TRA ’86, except:

(a) individually designed plans (including volume submitter plans) for

which the TRA ’86 remedial amendment

period under § 401(b) would have expired

but for the fact that an application for a

determination or notification letter that

considers TRA ’86 was timely submitted

to the Service and is pending at the time

of the application to the VCR program

should submit a copy of the determination

letter that considered TEFRA, DEFRA,

and REA and a copy of the letter from the

Service acknowledging receipt of the

TRA ’86 determination letter application

(Form 2693),

(b) plans for which the TRA ’86 remedial amendment period has not yet expired should submit a copy of the determination, opinion, or notification letter that

considered TEFRA, DEFRA, and REA

and a statement that explains the reason

why the period has not yet expired (for example, because the plan is a governmental

plan, or because it is an adopter of a master or prototype plan that is still entitled to

continued or interim reliance under Rev.

Proc. 89–9, 1989–1 C.B. 780), and

will be submitted timely for a determination, opinion, or notification letter within

the plan’s remedial amendment period

under § 401(b).

.05 Fee. The VCR submission must include the appropriate fee described in section 13.02 or 13.04 below. (The Walk-in

CAP compliance correction fee is due at

the time the closing agreement is signed.)

.06 Signed submission. The submission must be signed by the plan sponsor

or the sponsor’s representative.

.07 Power of attorney requirements.

To sign the submission or to appear before the Service in connection with the

submission, the plan sponsor’s representative must comply with the requirements

of section 9.02(11) and (12) of Rev. Proc.

98–4, 1998–1 I.R.B. 113.

.08 Penalty of perjury statement. The

following declaration must accompany a

request and any factual information or

change in the submission at a later time:

“Under penalties of perjury, I declare that

NORTHEAST REGION

SOUTHEAST REGION

MIDSTATES REGION

March 23, 1998

I have examined this submission, including accompanying documents, and, to the

best of my knowledge and belief, the facts

presented in support of this submission

are true, correct, and complete.” The declaration must be signed by the plan sponsor, not the sponsor’s representative.

.09 Checklist. The Service will be able

to respond more quickly to a VCR or

Walk-in CAP request if the request is

carefully prepared and complete. The

checklist in Appendix B is designed to assist plan sponsors and their representatives in preparing a submission that contains the information and documents

required under this revenue procedure.

The checklist in Appendix B must be

completed, signed, and dated by the plan

sponsor or the plan sponsor’s representative, and should be placed on top of the

submission. A photocopy of this checklist

may be used.

.10 Designation. The letter to the Service should be designated “VCR PROGRAM,” “SVP/VCR PROGRAM,” or

“WALK-IN CAP PROGRAM,” as appropriate, in the upper right hand corner of

the letter.

.11 VCR/SVP mailing address. VCR/

SVP submissions should be mailed to:

Internal Revenue Service

Attention: CP:E:EP:VCR

P.O. Box 14073

Ben Franklin Station

Washington, DC 20044

.12 Walk-in CAP mailing address. Walkin CAP submissions should be mailed to

the Closing Agreement Coordinator in the

appropriate Key District Office:

EP/EO Division Review Staff

Internal Revenue Service

10 Metro Tech Center

625 Fulton Street

Brooklyn, NY 11201

Office (718) 488-2372

FAX (718) 488-2405

EP/EO Division Technical Branch

Internal Revenue Service

Room 1520

P.O. Box 13163

Baltimore, MD 21203

Office (410) 962-3499

FAX (410) 962-0882

EP/EO Division Branch Office

Internal Revenue Service

230 S. Dearborn

Chicago, IL 60604

Office (312) 886-4700

1998–12 I.R.B.

FAX (312) 886-3275

EP/EO Division

Internal Revenue Service

Attention: EP Walk-in CAP Coordinator

McCaslin Industrial Park

2 Cupania Circle

Monterey Park, CA 91755-7431

Office (213) 725-1852

FAX (213) 725-7065

WESTERN

.13 Maintenance of copies of submissions. Plan sponsors and their representatives should maintain copies of all correspondence submitted to the Service with

respect to their VCR and Walk-in CAP requests.

SECTION 13. FEES

.01 Rev. Proc. 98–8 modified. The

VCR compliance fee is processed under

the user fee program described in Rev.

Proc. 98–8, 1998–1 I.R.B. 225, as modified by this revenue procedure.

.02 VCR fee. Unless SVP is applicable, the VCR compliance fee depends on

the assets of the plan and the number of

plan participants.

(1) The fee for a plan with assets of

less than $500,000, and no more than

1,000 plan participants, is $500.

(2) The fee for a plan with assets of

at least $500,000, and no more than 1,000

plan participants, is $1,250.

(3) The fee for a plan with more

than 1,000 plan participants but less than

10,000 plan participants is $5,000.

(4) The fee for a plan with 10,000 or

more plan participants is $10,000.

.03 Establishing number of plan participants. The compliance fee is calculated by the plan sponsor using the numbers from the most recently filed Form

5500 series to establish the fee. Thus,

with respect to the 1997 Form 5500, the

plan sponsor would use the number

shown on line 7(f) (or the equivalent line

on the Form 5500 C/R or EZ) to establish

the number of plan participants and would

use line 31(f) (or the equivalent line on

the Form 5500 C/R or EZ) to establish the

amount of plan assets.

.04 SVP fee. The SVP compliance fee

is $350.

.05 Walk-in CAP compliance correction fee. (1) Compliance correction fee

chart. The compliance correction fee for a

Walk-in CAP application is determined in

accordance with the chart below. The

chart contains a graduated range of fees

based on the size of the plan (with the

number of participants determined as provided in section 13.03). Each range includes a minimum amount, a maximum

amount, and a presumptive amount. In

each case, the minimum amount is the applicable VCR fee in section 13.02. It is

expected that in most instances the compliance correction fee imposed will be at

or near the presumptive amount in each

range; however, the fee may be a higher or

lower amount within the range, depending

on the factors in paragraph (2) below.

WALK-IN CAP COMPLIANCE CORRECTION FEES

# of participants

Fee range

Presumptive Amount

10 or fewer

VCR fee* to $4,000

$2,000

11 to 50

VCR fee* to $8,000

$4,000

51 to 100

VCR fee* to $12,000

$6,000

101 to 300

VCR fee* to $16,000

$8,000

301 to 1000

VCR fee* to $30,000

$15,000

over 1,000

VCR fee* to $70,000

$35,000

* Items marked by asterisk refer to the VCR compliance fee that would apply under section 13.02 if the

plan had been submitted under the VCR program.

(2) Factors considered. Consideration of whether the compliance correction

fee should be equal to, greater than, or

less than the presumptive amount will depend on factors relating to the nature, extent, and severity of the failure. These

factors include: (a) whether the failure is a

failure to satisfy the requirements of

§ 401(a)(4), § 401(a)(26), or § 410(b), (b)

whether the plan has both Operational and

Plan Document Failures, (c) the period

1998–12 I.R.B.

over which the violation occurred (for example, the time that has elapsed since the

end of the applicable remedial amendment period under § 401(b) for a Plan

Document Failure), and (d) whether the

plan has a Favorable Letter.

(3) Egregious failures. In cases involving failures that are egregious (as described in section 4.06), (a) the maximum

compliance correction fee applicable to

the plan under the chart in 13.05(1) is in-

creased to 40 percent of the Maximum

Payment Amount, and (b) no presumptive

amount applies.

PART VI. CORRECTION ON AUDIT

(AUDIT CAP)

SECTION 14. DESCRIPTION OF

AUDIT CAP

.01 Audit CAP requirements. In the

event the Service identifies a Qualifica-

March 23, 1998

tion Failure (other than a failure that is not

treated as resulting in disqualification of

the plan under APRSC, VCR, or Walk-in

CAP) upon an Employee Plans or Exempt

Organizations examination of a Qualified

Plan, the requirements of this section are

satisfied with respect to the failure if the

plan sponsor corrects the failure, pays a

sanction in accordance with section

14.02, satisfies any additional requirements of section 14.03, and enters into a

closing agreement with the Service.

.02 Payment of sanction. Under Audit

CAP, the plan sponsor is subject to a sanction determined in accordance with section 15. Payment of the sanction generally will be required at the time the

closing agreement is signed.

.03 Additional requirements. Depending on the nature of the failure, the Service

will discuss the appropriateness of the

plan’s existing administrative procedures

with the plan sponsor. Where existing administrative procedures are inadequate for

operating the plan in conformance with the

qualification requirements of the Code, the

closing agreement may be conditioned

upon the implementation of stated procedures. In addition, the plan sponsor may

be required to obtain a Favorable Letter

before the closing agreement is signed unless the Service determines that it is unnecessary based on the facts and circumstances (for example, because the plan

already has a Favorable Letter and no significant amendments are adopted). If a Favorable Letter is required, the plan sponsor

would be required to pay the applicable

user fee for obtaining the letter.

.04 Failure to reach resolution. If the

Service and the plan sponsor cannot reach

an agreement with respect to the correction of the failure(s) or the amount of the

sanction, the plan will be disqualified.

.05 Effect of closing agreement. A

closing agreement constitutes an agreement between the Service and the plan

sponsor that is binding with respect to the

tax matters identified therein for the periods specified.

.06 Other procedural rules. The procedural rules for Audit CAP are set forth

in chapter 11 of Internal Revenue Manual

(“IRM”) 7(10)54. This revenue procedure modifies and replaces the portions of

IRM 7(10)54 that relate to eligibility (section 4.2 and section 4.3.1) and sanctions

(section 4.3.3) under Audit CAP. The

March 23, 1998

other provisions of IRM 7(10)54, relating

mostly to matters of internal procedure,

remain unchanged.

SECTION 15. AUDIT CAP SANCTION

.01 Determination of sanction. The

sanction under Audit CAP is a negotiated

percentage of the Maximum Payment

Amount. Sanctions will not be excessive

and will bear a reasonable relationship to

the nature, extent, and severity of the failures.

.02 Factors considered. The amount of

the sanction will depend on factors relating

to the nature, extent, and severity of the

failures, including the extent to which correction had progressed before the examination was initiated. Other factors relating to

the nature, extent, and severity of the failures include: (1) the number and type of

employees affected by the failure, (2) the

number of nonhighly compensated employees who would be adversely affected

if the plan was not treated as qualified,

(3) whether the failure is a failure to satisfy

the requirements of § 401(a)(4), § 401(a)(26), or § 410(b), (4) whether the plan has

both Operational and Plan Document Failures, (5) the period over which the failure

occurred (for example, the time that has

elapsed since the end of the applicable remedial amendment period under § 401(b)

for a Plan Document Failure), (6) the reason for the failure (for example, data errors

such as errors in transcription of data, the

transposition of numbers, or minor arithmetic errors), and (7) whether the plan is

the subject of a Favorable Letter.

PART VII. CHRONOLOGY, EFFECT

ON OTHER DOCUMENTS, AND

EFFECTIVE DATE

SECTION 16. CHRONOLOGY

.01 APRSC. (1) On March 26, 1991,

the Service established the Administrative

Policy Regarding Sanctions (APRS),

under which, at the discretion of the applicable Key District Office, certain

minor Operational Failures of the qualification requirements for pension, profitsharing and stock bonus plans could be

treated as not resulting in either plan disqualification or the related adverse tax

consequences. To be eligible for relief

under APRS, Operational Failures had to

satisfy six narrowly drawn criteria.

(2) On December 23, 1996, the Service replaced APRS with APRSC, an administrative policy that broadened the

scope of APRS in three significant ways:

(a) it expanded the original criteria for eligibility, (b) it established a self-correction

procedure whereby plan sponsors may

correct their plans for Operational Failures within a specified time period, and

(3) Announcement 97–121 extended

the period for correcting Operational Failures under Part IV of APRSC from the

end of the first plan year following the

plan year in which the Operational Failure

occurred, to the end of the second plan

year following the plan year in which the

Operational Failure occurred.

.02 VCR program. (1) On November

16, 1992, the Service established the VCR

program as a temporary, experimental

program ending on December 31, 1993.

On September 20, 1993, Rev. Proc.

93–36, 1993–2 C.B. 474, extended the expiration date of the VCR program to December 31, 1994, and added SVP, a simplified correction procedure for certain

listed failures.

(2) On September 26, 1994, Rev.

Proc. 94–62, 1994–2 C.B. 778, extended

the VCR program indefinitely and provided that the VCR program would continue to be administered in the Headquarters Office. In addition, Rev. Proc. 94–62

expanded the types of failures that could

be corrected under SVP, modified the

VCR eligibility standards, and made other

administrative and technical changes.

(3) On April 15, 1996, Rev. Proc.

96–29, 1996–1 C.B. 693, modified Rev.

Proc. 94–62 to change the eligibility standards of the VCR program relating to

whether or not a plan is Under Examination and whether a plan is considered to

have a favorable letter.

.03 Walk-in CAP. (1) The Service established the Walk-in CAP program under

Rev. Proc. 94-16, 1994-1 C.B. 455, in response to requests by sponsors of plans

that were not eligible for the VCR program, but were not under Employee Plans

examination, to be given an opportunity,

similar to the VCR program, to voluntarily correct their plan failures. Rev. Proc.

94-16 enabled sponsors of plans with Plan

Document or certain Operational Failures

to correct failures in their plans and pay a

limited monetary sanction.

1998–12 I.R.B.

(2) On April 15, 1996, Rev. Proc.

96–29 modified Rev. Proc. 94–16 to

change the definition of when a plan is ineligible for Walk-in CAP because the plan

is under an Employee Plans or Exempt

Organizations examination.

.04 Audit CAP. Audit CAP, established

as a pilot program in 1990, permitted a

sponsor of a Qualified Plan to avoid disqualification of its plan by entering into a

closing agreement with the Service conditioned upon correction of plan failure(s)

discovered upon an Employee Plans or

Exempt Organizations examination and

the payment of a monetary sanction.

Audit CAP was expanded and made permanent in 1991.

SECTION 17. EFFECT ON OTHER

DOCUMENTS

.01 Revenue procedures modified and

superseded. Rev. Procs. 94–16, 94–62,

and 96–29 are modified and superseded

by this revenue procedure.

.02 Revenue procedure 98–8 modified.

Rev. Proc. 98–8 is modified as provided

in section 13.

.03 APRSC modified. APRSC is modified and restated in this revenue procedure.

.04 Audit CAP modified. Audit CAP is

modified and restated, in part, in this revenue procedure.

SECTION 18. EFFECTIVE DATE

To provide a full opportunity for public

comment and for the Service to consider

comments, this revenue procedure is generally effective September 1, 1998; however, plan sponsors are permitted, at their

option, to apply the provisions of this revenue procedure on or after March 9, 1998.

Specifically, unless a plan sponsor applies the provisions of this revenue procedure earlier, this revenue procedure is effective:

(1) with respect to VCR and Walk-in

CAP, for applications submitted on or

after September 1, 1998;

(2) with respect to Audit CAP, for

examinations begun on or after September 1, 1998; and

(3) with respect to APRSC, for failures for which correction is not complete

before January 1, 1999.

SECTION 19. PAPERWORK

REDUCTION ACT

The collection of information contained in this revenue procedure has been

1998–12 I.R.B.

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

1545–1598.

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 collection of information in this

revenue procedure is in sections 4.05,

6.02(4)(c), 10.01, 10.02, 10.05–10.09,

10.12, 10.16, 11.01–11.03, 12.01–12.04,

and 12.06–12.13, and Appendix B. This

information is required to enable the Office of Assistant Commissioner (Employee Plans and Exempt Organizations)

of the Internal Revenue Service to make

determinations regarding the issuance of

various types of closing agreements and

compliance statements. This information will be used to issue closing agreements and compliance statements to

allow individual plans to continue to

maintain their tax qualified status. As a

result, favorable tax treatment of the

benefits of the eligible employees is retained. The likely respondents are individuals, state or local governments, business or other for-profit institutions,

nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting

and/or recordkeeping burden is 43,000

hours.

The estimated annual burden per respondent/recordkeeper varies from .5 to

42.5 hours, depending on individual circumstances, with an estimated average of

21.5 hours. The estimated number of respondents and/or recordkeepers is 2,000.

The estimated frequency of responses

is occasionally.

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.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Joyce Kahn of the Employee

Plans Division. For further information

concerning this revenue procedure, please

contact the Employee Plans Division’s

taxpayer assistance telephone service between 1:30 and 3:30 p.m., Eastern Time,

Monday through Thursday at (202) 6226074/6075. (These telephone numbers

are not toll-free numbers). Ms. Kahn may

be reached at (202) 622-6214 (also not a

toll-free number). For specific information regarding Walk-in CAP and APRSC,

you may call Carlton Watkins, also at

(202) 622-6214.

APPENDIX A

OPERATIONAL FAILURES AND

CORRECTIONS UNDER SVP

.01 General rule. This appendix sets

forth Operational Failures and corrections

under SVP in accordance with section

10.12. In each case, the method described

corrects the Operational Failure identified

in the headings below. Corrective allocations and distributions should reflect earnings and actuarial adjustments in accordance with section 6.02(3)(a).

.02 Failure to properly provide the minimum top-heavy benefit under § 416 of the

Code to non-key employees. In a defined

contribution plan, the permitted correction

method is to properly contribute and allocate the required top-heavy minimums to

the plan in the manner provided for in the

plan on behalf of the non-key employees

(and any other employees required to receive top-heavy allocations under the

plan). In a defined benefit plan, the minimum required benefit must be accrued in

the manner provided in the plan.

.03 Failure to satisfy the ADP test set

forth in § 401(k)(3), the ACP test set forth

in § 401(m)(2), or the multiple use test of

§ 401(m)(9). The permitted correction

method is to make qualified nonelective

contributions (QNCs) (as defined in

§ 1.401(k)–1(g)(13)) on behalf of the

nonhighly compensated employees to the

extent necessary to raise the actual deferral percentage or actual contribution percentage of the nonhighly compensated

employees to the percentage needed to

pass the test or tests. The contributions

must be made on behalf of all eligible

nonhighly compensated employees (to the

extent permitted under § 415) and must

either be the same flat dollar amount or

the same percentage of compensation.

QNCs contributed to satisfy the ADP test

need not be matched. Employees who

would have been eligible for a matching

March 23, 1998

contribution had they made elective contributions must be counted as eligible employees for the ACP test, and the plan

must satisfy the ACP test. Under this

SVP correction method, a plan may not be

treated as two separate plans, one covering otherwise excludable employees and

the other covering all other employees (as

permitted in § 1.410(b)–6(b)(3)) in order

to reduce the number of employees eligible to receive QNCs. Likewise, under

this SVP correction method, the plan may

not be restructured into component plans

(as permitted in § 1.401(k)–1(h)(3)(iii)

for plan years before January 1, 1992) in

order to reduce the number of employees

eligible to receive QNCs.

.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). The permitted correction method is to distribute the

excess deferral to the employee and to report the amount as taxable in the year of

deferral and the year distributed. In accordance with § 1.402(g)–1(e)(1)(ii), a

distribution to a highly compensated employee is included in the ADP test; a distribution to a nonhighly compensated employee is not included in the ADP test.

.05 Exclusion of an eligible employee

from all contributions or accruals under

the plan for one or more plan years. The

permitted correction method is to make a

contribution to the plan on behalf of the

employees excluded from a defined contribution plan or to provide benefit accruals

for the employees excluded from a defined

benefit plan. If the employee should have

been eligible to make an elective contribution under a cash or deferred arrangement,

the employer must make a QNC to the plan

on behalf of the employee that is equal to

the actual deferral percentage for the employee’s group (either highly compensated

or nonhighly compensated). If the employee should have been eligible to make

employee contributions or for matching

contributions (on either elective contributions or employee contributions), the employer must make a QNC to the plan on

behalf of the employee that is equal to the

actual contribution percentage for the employee’s group (either highly compensated

or nonhighly compensated). Contributing

the actual deferral or contribution percentage for such employees eliminates the

need to rerun the ADP or ACP test to account for the previously excluded employees. Under this SVP correction method, a

March 23, 1998

plan may not be treated as two separate

plans, one covering otherwise excludable

employees and the other covering all other

employees (as permitted in § 1.410(b)–

6(b)(3)) in order to reduce the number of

employees eligible to receive QNCs. Likewise, restructuring the plan into component plans under § 1.401(k)–1(h)(3)(iii) is

not permitted in order to reduce the number of employees eligible to receive QNCs.

.06 Failure to timely pay the minimum

distribution required under § 401(a)(9). In

a defined contribution plan, the permitted

correction method is to distribute the required minimum distributions. The

amount to be distributed for each year in

which the failure occurred should be determined by dividing the adjusted account

balance on the applicable valuation date by

the applicable divisor. For this purpose,

adjusted account balance means the actual

account balance, determined in accordance

with § 1.401(a)(9)–1 Q&A F-5 of the proposed regulations, reduced by the amount

of the total missed minimum distributions

for prior years. In a defined benefit plan,

the permitted correction method is to distribute the required minimum distributions,

plus an interest payment representing the

loss of use of such amounts.

.07 Failure to obtain participant

and/or spousal consent for a distribution

subject to the participant and spousal

consent rules under §§ 401(a)(11),

411(a)(11) and 417. The permitted correction method is to give each affected

participant a choice between providing informed consent for the distribution actually made or receiving a qualified joint

and survivor annuity. In order to use this

SVP correction method, the plan sponsor

must have contacted each affected participant and spouse (to whom the participant

was married at the annuity starting date)

and received responses from each such individual before requesting consideration

under SVP. In the event that participant

and/or spousal consent is required but

cannot be obtained, the participant must

receive a qualified joint and survivor annuity based on the monthly amount that

would have been provided under the plan

at his or her retirement date. This annuity

may be actuarially reduced to take into

account distributions already received by

the participant. However, the portion of

the qualified joint and survivor annuity

payable to the spouse upon the death of

the participant may not be actuarially re-

duced to take into account prior distributions to the participant. Thus, for example, if in accordance with the automatic

qualified joint and survivor annuity option under a plan, a married participant

who retired would have received a qualified joint and survivor annuity of $600

per month payable for life with $300 per

month payable to the spouse upon the participant’s death but instead received a single-sum distribution equal to the actuarial

present value of the participant’s accrued

benefit under the plan, then the $600

monthly annuity payable during the participant’s lifetime may be actuarially reduced to take the single-sum distribution

into account. However, the spouse must

be entitled to receive an annuity of $300

per month payable for life beginning at

the participant’s death.

.08 Failure to satisfy the § 415(c) limits in a defined contribution plan. The

permitted correction for failure to limit

annual additions (other than elective deferrals and employee contributions) allocated to participants in a defined contribution plan as required in § 415(c) (even if

the excess did not result from the allocation of forfeitures or from a reasonable

error in estimating compensation) is to

place the excess annual additions into an

unallocated account, similar to the suspense account described in § 1.415–6(b)(6)(iii), to be used as an employer contribution in the succeeding year(s). While

such amounts remain in the unallocated

account, the employer is not permitted to

make additional contributions to the plan.

The permitted SVP correction for failure

to limit annual additions that are elective

deferrals or employee contributions (even

if the excess did not result from a reasonable error in determining the amount of

elective deferrals or employee contributions that could be made with respect to

an individual under the § 415 limits) is to

distribute the elective deferrals or employee contributions using a method similar to that described under § 1.415–6(b)(6)(iv). Elective deferrals and employee

contributions that are matched may be returned, provided that the matching contributions relating to such contributions are

forfeited (which will also reduce excess

annual additions for the affected individuals). The forfeited matching contributions

are to be placed into an unallocated account to be used as an employer contribution in succeeding periods.

1998–12 I.R.B.

APPENDIX B

VCR/SVP/WALK-IN CAP CHECKLIST

IS YOUR SUBMISSION COMPLETE?

INSTRUCTIONS

The Service will be able to respond more quickly to your VCR, SVP, or Walk-in CAP request if it is carefully prepared and

complete. To ensure that your request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or

N/A, if appropriate, in the blank next to the item. Sign and date the checklist (as taxpayer or authorized representative) and

place it on top of your request.

You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,

substantive consideration of your submission will be deferred until a completed checklist is received.

TAXPAYER’S NAME

TAXPAYER’S I.D. NO.

PLAN NAME & NO.

ATTORNEY/P.O.A.

The following items relate to all submissions:

______

1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred (including

the years for which the statutory period has expired)? (See section 12.03(1) of Rev. Proc. 98–22.) (Hereafter, all section

references are to Rev. Proc. 98–22.)

______

2. Have you included an explanation of how and why the failure(s) arose, including a description of the administrative

procedures for the plan in effect at the time the failure(s) occurred? (See section 12.03(2) and (3).)

______

3. Have you included a detailed description of the method for correcting the failure(s) identified in your submission?

This description must include, for example, the number of employees affected and the expected cost of correction (both

of which may be approximated if the exact number cannot be determined at the time of the request), the years involved,

and calculations or assumptions the plan sponsor used to determine the amounts needed for correction. In lieu of providing correction calculations with respect to each employee affected by a failure, you may submit calculations with respect to a representative sample of affected employees. However, the representative sample calculations must be sufficient to demonstrate each aspect of the correction method proposed. Note that each step of the correction method must

be described in narrative form. (See section 12.03(4).)

______

4. Have you described the earnings or interest methodology (indicating computation period and basis for determining

earnings or interest rates) that will be used to calculate earnings or interest on any corrective contributions or distributions? (As a general rule, the interest rate (or rates) earned by the plan during the applicable period(s) should be used in

determining the earnings for corrective contributions or distributions.) (See section 12.03(5).)

If you inserted “N/A” for item 4, enter explanation:

______

5. Have you submitted specific calculations for each affected employee or a representative sample of affected employees? (See section 12.03(6).)

______

6. Have you described the method that will be used to locate and notify former employees or, if there are no former employees affected by the failure(s), provided an affirmative statement to that effect? (See section 12.03(7).)

1998–12 I.R.B.

March 23, 1998

______

7. Have you provided a description of the administrative measures that have been or will be implemented to ensure that

the same failure(s) do not recur? (See section 12.03(8).)

______

8. Have you included a statement that, to the best of the plan sponsor’s knowledge, the plan is not currently under an

Employee Plans examination? (See section 12.03(8).)

______

9. Have you included a statement that, to the best of the plan sponsor’s knowledge, the plan sponsor is not under an Exempt Organizations examination? (See section 12.03(8).)

______

10. If the plan is currently being considered in a determination letter application on a Form 5310, have you included a

statement to that effect? (See section 12.03(10).)

______

11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) relevant to

the failure(s) and method(s) of correction? (See section 12.04(2).)

______

12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable document(s)?

(See section 12.04(3).)

______

13. Have you included the appropriate voluntary compliance fee? (See section 12.05.)

______

14. Have you included the original signature of the sponsor or the sponsor’s representative? (See section 12.06.)

_____

15. Have you included a Power of Attorney (Form 2848)? Note: (representation under the VCR/SVP and Walk-in CAP

is limited to attorneys, certified public accountants, enrolled agents, and enrolled actuaries; unenrolled return preparers

are not eligible to act as representatives under the VCR program). (See section 12.07.)

______

16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the plan sponsor?

(See section 12.08.)

______

17. Have you designated your submission as a VCR, SVP, or Walk-in CAP submission, as appropriate? (See section

12.10.)

The following items relate only to submissions under VCR (including SVP):

______

18. Have you included a copy of the first page, the page containing employee census information (currently line 7f of

the 1997 Form 5500), and the information relating to plan assets (currently line 31f of the 1997 Form 5500) of the most

recently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of the

plan, and the census information required of Form 5500 series filers. (See section 12.04(1).)

______

19. Have you proposed a time period of correction that is limited to 150 days from the date the compliance statement is

issued? (See section 12.14.)

The following items relate only to submissions under SVP:

______

20. Have you included a statement identifying your request as an SVP request? (See section 12.03(11).)

______

21. Are each of the failures you have identified eligible for correction under SVP? (See Appendix A.)

______

22. Have you identified no more than two SVP failures? (If more than two failures were identified, SVP is not available, but you may make a submission under VCR.) (See section 10.12(3).)

______

23. Have you proposed to correct the failure(s) identified in your request using the permitted correction method(s) set

forth in Appendix A? (See Appendix A.)

The following item relates only to submissions under Walk-in CAP:

______

24. Have you included a copy of the most recently filed Form 5500? (See section 12.04(1).)

March 23, 1998

1998–12 I.R.B.

______

25. Have you submitted an application for a determination letter? (See section 11.01(4).)

Signature

Date

Title or Authority

Typed or printed name of person signing checklist

1998–12 I.R.B.

March 23, 1998

Part IV. Items of General Interest

Notice of Proposed Rulemaking

SUPPLEMENTARY INFORMATION

Paperwork Reduction Act

Election Not to Apply Look-Back

Method in De Minimis Cases

REG–120200–97

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking

by cross-reference to temporary regulations.

SUMMARY: In T.D. 8756, page 4, the

IRS is issuing temporary regulations

under section 460 relating to the lookback method. The temporary regulations

provide rules for electing not to apply the

look-back method to long-term contracts

in de minimis cases. The temporary regulations reflect changes to the law made by

the Taxpayer Relief Act of 1997 and affect electing manufacturers and construction contractors whose long-term contracts otherwise are subject to the

look-back method. The text of those temporary regulations also serves as the text

of these proposed regulations.

DATES: Written comments and requests

for a public hearing must be received by

April 13, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–120200–97),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between

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

CC:DOM:CORP:R (REG–120200–97),

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

Washington, DC, or sent 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.

FOR FURTHER INFORMATION CONTACT: John M.Aramburu or Leo F.

Nolan II at (202) 622-4960 (not a toll-free

number).

March 23, 1998

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

Management and Budget for review in accordance with the Paperwork Reduction

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

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

the Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503, with copies to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collection of information should be received

by March 16, 1998. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal

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 costs

and costs of operation, maintenance, and

purchase of services to provide information.

The collection of information in this

proposed regulation is in §1.460–6(j).

This information is required to notify the

Commissioner of taxpayers’ elections

under section 460(b)(6). This information

will be used to determine whether taxpayers have properly elected under section

460(b)(6). This collection of information

is required for a taxpayer to elect not to

apply the look-back method to long-term

contracts in de minimis cases. The likely

respondents are for-profit entities.

Estimated total annual reporting burden: 4,000 hours.

Estimated average annual burden hours

per respondent: 0.2 hours.

Estimated number of respondents:

20,000.

Estimated frequency of responses: Once.

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

Temporary regulations in T.D. 8756

amend the Regulations on Income Taxes

(26 CFR part 1) relating to section 460.

The text of those temporary regulations

also serves as the text of these proposed

regulations. The preamble to the temporary regulations explains the regulations.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It is hereby certified

that the collection of information in these

regulations will not have a significant

economic impact on a substantial number

of small entities. This certification is

based on the fact that the time required to

prepare and file an election statement is

minimal and will not have a significant

impact on those small entities that choose

to make the election. In addition, the election need only be made once by a taxpayer. Therefore, a Regulatory Flexibility

Analysis under the Regulatory Flexibility

Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal

Revenue Code, this notice of proposed

rulemaking will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small business.

1998–12 I.R.B.

Comments and Requests for a Public

hearing

Before these proposed regulations are

adopted

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.