These synopses are intended only as aids to the reader in

Agency decision

Ask Donna

What actually matters in this document.

Text

Bulletin No. 1998–5

February 2, 1998

Internal Revenue

bulletin

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

T.D. 8742, page 4.

Final regulations under section 7805 of the Code provide

procedures for requesting an extension of time to make certain elections under the Code.

EMPLOYEE PLANS

Notice 98–12, page 12.

Group health plans; COBRA continuation coverage;

HIPAA portability. Information is provided on how the

HIPAA portability provisions may affect an individual’s decision whether to elect COBRA continuation coverage.

EXEMPT ORGANIZATIONS

Announcement 98–7, page 26.

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

EMPLOYMENT TAXES

Rev. Proc. 98–16, page 19.

General standards for student FICA exception under

section 3121(b)(10) of the Code. This procedure sets

Finding Lists begin on page 29.

Index for January on page 31.

Department of the Treasury

Internal Revenue Service

forth generally applicable standards for determining whether

services performed by students in the employ of certain institutions of higher education qualify for the exception from

FICA tax provided under section 3121(b)(10) of the Code.

ADMINISTRATIVE

Rev. Proc. 98–17, page 21.

Environmental cleanup costs; letter rulings. Special procedures are provided for requesting written guidance from

the Service on the tax treatment under sections 162, 165,

198, and 263 of the Code of environmental cleanup costs

incurred in projects that span several years.

Announcement 98–5, page 25.

This announcement informs the public of the Information Reporting Program’s Year 2000 date compliance changes for

tax year 1998 reporting.

Announcement 98–6, page 25.

This announcement clarifies Part B, Section 8 of Rev. Proc.

97–34, 1997–30, I.R.B. 14, regarding the use of the Form

5498, IRA, SEP, and SIMPLE Indicators to be used in the

magnetic or electronic filing of rollovers and fair market

value.

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 162.—Trade or

Business Expenses

26 CFR 1.162–1: Trade or business expenses.

What are the procedures for taxpayers to obtain

written guidance from the Service on the tax treatment under § 162 of the Code of environmental

cleanup costs incurred in projects that span several

years? See Rev. Proc. 98–17, page 21.

Section 165.—Losses

26 CFR 1.165–1: Losses.

What are the procedures for taxpayers to obtain

written guidance from the Service on the tax treatment under § 165 of the Code of environmental

cleanup costs incurred in projects that span several

years? See Rev. Proc. 98–17, page 21.

Section 198.—Expensing of

Environmental Remediation

Costs

What are the procedures for taxpayers to obtain

written guidance from the Service on the tax treatment under § 198 of the Code of environmental

cleanup costs incurred in projects that span several

years? See Rev. Proc. 98–17, page 21.

Section 263.—Capital

Expenditures

26 CFR 1.263(a)–1: Capital expenditures; in

general.

What are the procedures for taxpayers to obtain

written guidance from the Service on the tax treatment under § 263 of the Code of environmental

cleanup costs incurred in projects that span several

years? See Rev. Proc. 98–17, page 21.

Section 7805.—Rules and

Regulations

26 CFR 301.9100–1: Extensions of time to make

elections.

T.D. 8742

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, 601, and

602

February 2, 1998

Requirements Respecting the

Adoption or Change of

Accounting Method; Extensions

of Time To Make Elections

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations providing the procedures

for requesting an extension of time to

make certain elections under the Internal

Revenue Code. In addition, the regulations provide the standards that the Commissioner will use in determining whether

to grant taxpayers extensions of time to

make certain elections including changes

in accounting method and accounting period. The regulations also set forth the

time for filing a Form 3115, Application

for Change in Accounting Method, with

the Commissioner. The regulations affect

taxpayers requesting an extension of time

to make certain elections and taxpayers

requesting to change their method of accounting for federal income tax purposes.

EFFECTIVE DATE: These regulations

are effective December 31, 1997.

FOR FURTHER INFORMATION CONTACT: Cheryl Lynn Oseekey, (202) 6224970 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number

1545–1488. Responses to this collection

of information are required to obtain an

extension of time to make an election.

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 estimated annual burden per respondent is 10 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to the

Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP, Washington, DC 20224, and 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.

Books or records relating to this collection of information must be retained as

long as their contents may be 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

On June 27, 1996, temporary regulations relating to the standards the Commissioner will use to grant taxpayers

extensions of time to make certain elections were published in the Federal Register (TD 8680, 61 FR 33365 [1996–2

C.B. 194]), and cross-referenced to a notice of proposed rulemaking published in

the Federal Register on the same date

(61 FR 33408 [IA–29–96 C.B. 483]).

The regulations, §§301.9100–1T through

301.9100–3T, provide an automatic 6month extension from the due date of the

return excluding extensions to make

statutory and regulatory elections whose

due dates are the due date of the return or

the due date of the return including extensions. The regulations also provide an automatic 12-month extension of time to

make certain regulatory elections. For

regulatory elections not eligible for the

automatic extensions of time, the regulations provide the standards the Commissioner will use to determine whether to

grant an extension of time to make the

election. A public hearing on the regulations was held on October 30, 1996.

On May 15, 1997, temporary regulations setting forth the time for requesting

a change in accounting method and the

standards the Commissioner will use to

grant an extension of time to request a

1998–5 I.R.B.

change in accounting method were published in the Federal Register (TD 8719,

62 FR 26740), and cross-referenced to a

notice of proposed rulemaking published

in the Federal Register on the same date

(62 FR 26755). On May 27, 1997, corrections to TD 8719 were published in the

Federal Register (62 FR 28630). The

regulations extend the time for filing a

Form 3115, Application for Change in

Accounting Method, pursuant to

§§1.446–1(e)(3)(i) and 601.204(b) by allowing a taxpayer to file its Form 3115

with the Commissioner anytime during

the taxable year in which the taxpayer desires to make the change in method of accounting. The regulations also revised

§§301.9100–1T and 301.9100–3T to provide that an extension of time to file a

Form 3115 beyond the year provided in

the regulations will be granted only in unusual and compelling circumstances. No

public hearing on the regulations was requested or held.

One comment responding to the notice

of proposed rulemaking published in the

Federal Register on June 27, 1996 (61

FR 33408) was received. No comments

responding to the notice of proposed rulemaking published in the Federal Register on May 15, 1997 (62 FR 26755) were

received. After consideration of the comment received, the regulations are

adopted as modified by this Treasury decision.

Public Comment

The commentator recommended several modifications to the regulations prior

to their adoption as final regulations.

The commentator suggested that a request for extension of time to make an

election should not be denied on the basis

that the taxpayer fails to qualify for the

underlying election. The commentator

noted that the regulations provide that the

granting of §301.9100 relief is not a determination that the taxpayer is otherwise

eligible to make the election. This suggested modification has not been adopted.

The IRS and the Treasury Department believe it is in the interest of sound tax administration to deny §301.9100 relief

when it becomes apparent in considering

the request for an extension of time that

the taxpayer is not otherwise eligible to

make the election. This ensures that the

1998–5 I.R.B

resources of the IRS are brought to bear in

the resolution of the issue regarding eligibility at the earliest stage of the administrative process.

The commentator recommended that

an extension of time to make an election

be made available even when alternative

relief is provided by a statute, a regulation

published in the Federal Register, or a

revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. This suggested

modification has not been adopted. The

IRS and the Treasury Department want to

retain the ability to tailor relief for specific elections.

The commentator recommended measuring the 12-month automatic extension

for eligible regulatory elections whose

deadlines are the due date of the return or

the due date of the return including extensions from the extended due date when

the taxpayer has obtained an extension.

This suggested modification has been

adopted. The commentator also recommended that the automatic 6-month extension for statutory and regulatory elections be available even when the return

for the year of the election was not timely

filed. This suggested modification has

not been adopted.

The commentator recommended that

the regulations not provide that the interests of the Government are ordinarily

prejudiced if the taxable year in which the

regulatory election should have been

made or any affected taxable years are

closed by the period of limitations on assessment. This suggested modification

was not adopted. There are two policies

that must be balanced in formulating the

standards for §301.9100 relief. The first

is the policy of promoting efficient tax administration by providing limited time periods for taxpayers to choose among alterative tax treatments and encouraging

prompt tax reporting. The second is the

policy of permitting taxpayers that are in

reasonable compliance with the tax laws

to minimize their tax liability by collecting from them only the amount of tax they

would have paid if they had been fully informed and well advised. The IRS and

the Treasury Department believe that the

regulation achieves an appropriate balance between these policies. Furthermore, the language of the regulation does

not foreclose in all circumstances consid-

eration of whether the interests of the

Government will not be prejudiced.

The commentator questioned the special rules for accounting method and accounting period regulatory elections. The

regulations provide limited relief for accounting methods or periods subject to

advance written consent from the Commissioner ordinarily not to exceed 90

days from the deadline for filing the Form

3115, Application for Change in Accounting Method, or the Form 1128, Application to Adopt, Change, or Retain a Tax

Year. The commentator suggested that

the 90-day period be extended. The regulations published in the Federal Register

on May 15, 1997 (TD 8719, 62 FR

26740) and corrected on May 27, 1997

(62 FR 28630) effectively extended the

90-day period for accounting methods by

allowing the Form 3115 to be filed anytime during the taxable year in which the

taxpayer desires to make the change in

method of accounting. This rule is incorporated into the final regulations. However, a similar amendment was not made

in regard to accounting period elections

because extending the 90-day period

would delay the filing of the short period

return and result in less efficient tax administration.

The commentator recommended that

the special rules for other accounting

method regulatory elections be modified

by eliminating the rule that, ordinarily, the

interests of the Government are deemed

to be prejudiced when the election requires an adjustment under section

481(a). This suggested modification was

not adopted. The IRS and the Treasury

Department believe it is in the interest of

sound tax administration to generally preclude taxpayers from requesting, or otherwise making, a retroactive change in an

adopted method of accounting, whether

the change is from a permissible or impermissible method. See generally, Rev. Rul.

90–38 (1990–1 C.B. 57). In considering

an exception, the IRS and the Treasury

Department believe that §301.9100 relief

is most appropriate for accounting

method elections that relate to nonrecurring transactions. These elections are

generally made on a cut-off basis and a

missed election would preclude accounting for a transaction in the year of the

missed election under the elective

method. In contrast, accounting method

February 2, 1998

elections subject to section 481(a) generally will provide the benefit of the elective method for a transaction in the year

of the missed election through an adjustment under section 481(a).

The commentator suggested that the

regulations clarify when taxpayers may

obtain an extension of time to file a request to change an accounting method or

an accounting period under an unusual

and compelling circumstances standard.

This suggested modification was not

adopted. What are unusual and compelling circumstances must be decided on

a case-by-case basis in light of all applicable facts and circumstances.

Effective Date

The rules relating to the time for filing

an application for change in accounting

method apply to Forms 3115 submitted

on or after December 31, 1997.

The rules relating to requests for an extension of time apply to requests submitted to the IRS on or after December 31,

1997. The rules relating to automatic extensions apply to elections for which corrective action is taken on or after December 31, 1997.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866.

Therefore, a regulatory assessment is not

required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations.

Sections 1.446–1(e)(3)(i) and

601.204(b) in this regulation, originally

published in the Federal Register for

May 15, 1997 as a temporary regulation

and cross-reference notice of proposed

rulemaking, merely extend the time for

filing a Form 3115, Application for

Change in Accounting Method, with the

Commissioner and, therefore, do not contain a new collection of information. Sections 301.9100–2 and 301.9100–3 of this

regulation, originally published in the

Federal Register for June 27, 1996 as a

temporary regulation and cross-reference

notice of proposed rulemaking, contain a

collection of information. However, an

initial regulatory flexibility analysis was

not required because the regulations were

February 2, 1998

published within 90 days of the enactment

of Subtitle D of the Contract with America Advancement Act of 1996 (Public

Law 104–21, 110 Stat. 847, 868 (1996)).

With respect to these final regulations, it

is hereby certified that the collection of

information in those sections will not

have a significant economic impact on a

substantial number of small entities. This

certification is based on the fact that, on

average, no more than 500 requests for an

extension of time to make an election are

received on an annual basis. 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, these regulations were

submitted to the Small Business Administration for comment on their impact on

small business.

Drafting Information

The principal author of these regulations is Cheryl Lynn Oseekey, Office of

Assistant Chief Counsel (Income Tax and

Accounting). However, other personnel

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

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 301, 601,

and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

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

§1.446–1 [Amended]

Par. 2. Section 1.446–1 is amended as

follows:

1. The first sentence of paragraph

(e)(3)(i) is amended by removing the language “within 180 days after the beginning of” and adding “during” in its place.

2. Paragraph (e)(3)(iii) is revised to

read as follows:

§1.446–1 General rule for methods of

accounting.

(e) * * *

(3) * * *

(iii) This paragraph (e)(3) applies to

Forms 3115 filed on or after December

31, 1997. For other Forms 3115, see

§1.446–1(e)(3) in effect prior to December 31, 1997 (§1.446–1(e)(3) as contained

in the 26 CFR part 1 edition revised as of

April 1, 1997).

§1.446–1T [Removed]

Par. 3. Section 1.446–1T is removed.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read in part as follows:

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

Par. 5. Section 301.9100–0 is added to

read as follows:

§301.9100–0 Outline of regulations.

This section lists the paragraphs in

§§301.9100–1 through 301.9100–3.

§301.9100–1 Extensions of time to make

elections.

(a)

(b)

(c)

(d)

(e)

Introduction.

Terms.

General standards for relief.

Exceptions.

Effective dates.

§301.9100–2 Automatic extensions.

(a) Automatic 12-month extension.

(1) In general.

(2) Elections eligible for automatic

12-month extension.

(b) Automatic 6-month extension.

(d) Procedural requirements.

(e) Examples.

§301.9100–3 Other extensions.

(a)

(b)

(1)

(2)

(3)

(c)

(1)

(i)

(ii)

In general.

Reasonable action and good faith.

In general.

Reasonable reliance on a qualified

tax professional.

Taxpayer deemed to have not

acted reasonably or in good faith.

Prejudice to the interests of the

Government.

In general.

Lower tax liability.

Closed years.

1998–5 I.R.B.

(2) Special rules for accounting

method regulatory elections.

(3) Special rules for accounting period regulatory elections.

(d) Effect of amended returns.

(1) Second examination under section

7605(b).

(2) Suspension of the period of limitations under section 6501(a).

(e) Procedural requirements.

(1) In general.

(2) Affidavit and declaration from

taxpayer.

(3) Affidavits and declarations from

other parties.

(4) Other information.

(5) Filing instructions.

(f) Examples.

Par. 6. Section 301.9100–1 is revised

to read as follows:

§301.9100–1 Extensions of time to make

elections.

(a) Introduction. The regulations

under this section and §§301.9100–2 and

301.9100–3 provide the standards the

Commissioner will use to determine

whether to grant an extension of time to

make a regulatory election. The regulations under this section and §301.9100–2

also provide an automatic extension of

time to make certain statutory elections.

An extension of time is available for elections that a taxpayer is otherwise eligible

to make. However, the granting of an extension of time is not a determination that

the taxpayer is otherwise eligible to make

the election. Section 301.9100–2 provides automatic extensions of time for

making regulatory and statutory elections

when the deadline for making the election

is the due date of the return or the due

date of the return including extensions.

Section 301.9100–3 provides extensions

of time for making regulatory elections

that do not meet the requirements of

§301.9100–2.

(b) Terms. The following terms have

the meanings provided below—

Election includes an application for relief in respect of tax; a request to adopt,

change, or retain an accounting method or

accounting period; but does not include

an application for an extension of time for

filing a return under section 6081.

Regulatory election means an election

whose due date is prescribed by a regulation published in the Federal Register, or

1998–5 I.R.B

a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter).

Statutory election means an election

whose due date is prescribed by statute.

Taxpayer means any person within the

meaning of section 7701(a)(1).

Commissioner in exercising the Commissioner’s discretion may grant a reasonable

extension of time under the rules set forth

in §§301.9100–2 and 301.9100–3 to make

a regulatory election, or a statutory election (but no more than 6 months except in

the case of a taxpayer who is abroad),

under all subtitles of the Internal Revenue

Code except subtitles E, G, H, and I.

(d) Exceptions. Notwithstanding the

provisions of paragraph (c) of this section, an extension of time will not be

granted—

(1) For elections under section

4980A(f)(5); or

(2) For elections that are expressly excepted from relief or where alternative relief is provided by a statute, a regulation

published in the Federal Register, or a

revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin (see §601.601(d)(2) of this chapter).

(e) Effective dates. In general, this

section and §§301.9100–2 and 301.9100–

3 apply to all requests for an extension of

time submitted to the Internal Revenue

Service (IRS) on or after December 31,

1997. However, the automatic 12-month

and 6-month extensions provided in

§301.9100–2 apply to elections for which

corrective action is taken on or after December 31, 1997. For other requests for

an extension of time, see §§301.9100–1T

through 301.9100–3T in effect prior to

December 31, 1997 (§§301.9100–1T

through 301.9100–3T as contained in the

26 CFR part 1 edition revised as of April

1, 1997).

Par. 7. Sections 301.9100–2 and

301.9100–3 are added to read as follows:

§301.9100–2 Automatic extensions.

(a) Automatic 12-month extension—

(1) In general. An automatic extension

of 12 months from the due date for making a regulatory election is granted to

make elections described in paragraph

(a)(2) of this section provided the tax-

payer takes corrective action as defined in

paragraph (c) of this section within that

12-month extension period. For purposes

of this paragraph (a), the due date for

making a regulatory election is the extended due date of the return if the due

date of the election is the due date of the

return or the due date of the return including extensions and the taxpayer has obtained an extension of time to file the return. This extension is available

regardless of whether the taxpayer timely

filed its return for the year the election

should have been made.

(2) Elections eligible for automatic 12month extension. The following regulatory elections are eligible for the automatic 12-month extension described in

paragraph (a)(1) of this section—

(i) The election to use other than the

required taxable year under section 444;

(ii) The election to use the last-in, firstout (LIFO) inventory method under section 472;

(iii) The 15-month rule for filing an

exemption application for a section

501(c)(9), 501(c)(17), or 501(c)(20) organization under section 505;

(iv) The 15-month rule for filing an exemption application for a section

501(c)(3) organization under section 508;

(v) The election to be treated as a

homeowners association under section

528;

(vi) The election to adjust basis on

partnership transfers and distributions

under section 754;

(vii) The estate tax election to specially value qualified real property (where

the Internal Revenue Service (IRS) has

not yet begun an examination of the filed

return) under section 2032A(d)(1);

(viii) The chapter 14 gift tax election

to treat a qualified payment right as other

than a qualified payment under section

2701(c)(3)(C)(i); and

(ix) The chapter 14 gift tax election to

treat any distribution right as a qualified

payment under section 2701(c)(3)(C)(ii).

(b) Automatic 6-month extension. An

automatic extension of 6 months from the

due date of a return excluding extensions

is granted to make regulatory or statutory

elections whose due dates are the due date

of the return or the due date of the return

including extensions provided the taxpayer timely filed its return for the year

the election should have been made and

February 2, 1998

the taxpayer takes corrective action as defined in paragraph (c) of this section

within that 6-month extension period.

This paragraph (b) does not apply to regulatory or statutory elections that must be

made by the due date of the return excluding extensions.

this section, corrective action means

taking the steps required to file the election in accordance with the statute or the

regulation published in the Federal Register, or the revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin

(see §601.601(d)(2) of this chapter). For

those elections required to be filed with a

return, corrective action includes filing an

original or an amended return for the year

the regulatory or statutory election should

have been made and attaching the appropriate form or statement for making the

election. Taxpayers who make an election under an automatic extension (and all

taxpayers whose tax liability would be affected by the election) must file their return in a manner that is consistent with the

election and comply with all other requirements for making the election for the

year the election should have been made

and for all affected years; otherwise, the

IRS may invalidate the election.

(d) Procedural requirements. Any return, statement of election, or other form

of filing that must be made to obtain

an automatic extension must provide the

following statement at the top of the

document: “FILED PURSUANT TO

§ 301.9100–2.” Any filing made to obtain

an automatic extension must be sent to the

same address that the filing to make the

election would have been sent had the filing been timely made. No request for a

letter ruling is required to obtain an automatic extension. Accordingly, user fees

do not apply to taxpayers taking corrective

action to obtain an automatic extension.

(e) Examples. The following examples

illustrate the provisions of this section:

Example 1. Automatic 12-month extension. Taxpayer A fails to make an election described in paragraph (a)(2) of this section when filing A’s 1997 income tax return on March 16, 1998, the due date of

the return. This election does not affect the tax liability of any other taxpayer. The applicable regulation

requires that the election be made by attaching the

appropriate form to a timely filed return including

extensions. In accordance with paragraphs (a) and

February 2, 1998

tion by taking the corrective action of filing an

amended return with the appropriate form by March

15, 1999 (12 months from the March 16, 1998 due

date of the return). If A obtained a 6-month extension to file its 1997 income tax return, A may make

the regulatory election by taking the corrective action

of filing an amended return with the appropriate form

by September 15, 1999 (12 months from the September 15, 1998 extended due date of the return).

Example 2. Automatic 6-month extension. Taxpayer B fails to make an election not described in

paragraph (a)(2) of this section when filing B’s 1997

income tax return on March 16, 1998, the due date

of the return. This election does not affect the tax liability of any other taxpayer. The applicable regulation requires that the election be made by attaching

the appropriate form to a timely filed return including extensions. In accordance with paragraphs (b)

and (c) of this section, B may make the regulatory

election by taking the corrective action of filing an

amended return with the appropriate form by September 15, 1998 (6 months from the March 16, 1998

due date of the return).

§301.9100–3 Other extensions.

(a) In general. Requests for extensions of time for regulatory elections

that do not meet the requirements of

§301.9100–2 must be made under the

rules of this section. Requests for relief

subject to this section will be granted

when the taxpayer provides the evidence

(including affidavits described in paragraph (e) of this section) to establish to

the satisfaction of the Commissioner that

the taxpayer acted reasonably and in good

faith, and the grant of relief will not prejudice the interests of the Government.

(b) Reasonable action and good

faith—(1) In general. Except as provided in paragraphs (b)(3)(i) through (iii)

of this section, a taxpayer is deemed to

have acted reasonably and in good faith if

the taxpayer—

(i) Requests relief under this section

before the failure to make the regulatory

election is discovered by the Internal Revenue Service (IRS);

(ii) Failed to make the election because

of intervening events beyond the taxpayer’s control;

(iii) Failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer’s

experience and the complexity of the return or issue), the taxpayer was unaware

of the necessity for the election;

(iv) Reasonably relied on the written

advice of the Internal Revenue Service

(IRS); or

(v) Reasonably relied on a qualified

tax professional, including a tax profes-

sional employed by the taxpayer, and the

tax professional failed to make, or advise

the taxpayer to make, the election.

(2) Reasonable reliance on a qualified

tax professional. For purposes of this

paragraph (b), a taxpayer will not be considered to have reasonably relied on a

qualified tax professional if the taxpayer

knew or should have known that the professional was not—

(i) Competent to render advice on the

regulatory election; or

(ii) Aware of all relevant facts.

(3) Taxpayer deemed to have not acted

reasonably or in good faith. For purposes

of this paragraph (b), a taxpayer is

deemed to have not acted reasonably and

in good faith if the taxpayer—

(i) Seeks to alter a return position for

which an accuracy-related penalty has

been or could be imposed under section

6662 at the time the taxpayer requests relief (taking into account any qualified

amended return filed within the meaning

of §1.6664–2(c)(3) of this chapter) and

the new position requires or permits a regulatory election for which relief is requested;

(ii) Was informed in all material respects of the required election and related

tax consequences, but chose not to file the

election; or

(iii) Uses hindsight in requesting relief. If specific facts have changed since

the due date for making the election that

make the election advantageous to a taxpayer, the IRS will not ordinarily grant relief. In such a case, the IRS will grant relief only when the taxpayer provides

strong proof that the taxpayer’s decision

to seek relief did not involve hindsight.

Government—(1) In general. The Commissioner will grant a reasonable extension of time to make a regulatory election

only when the interests of the Government will not be prejudiced by the granting of relief. This paragraph (c) provides

the standards the Commissioner will use

to determine when the interests of the

Government are prejudiced.

(i) Lower tax liability. The interests of

the Government are prejudiced if granting

relief would result in a taxpayer having a

lower tax liability in the aggregate for all

taxable years affected by the election than

the taxpayer would have had if the election had been timely made (taking into ac-

1998–5 I.R.B.

count the time value of money). Similarly, if the tax consequences of more than

one taxpayer are affected by the election,

the Government’s interests are prejudiced

if extending the time for making the election may result in the affected taxpayers,

in the aggregate, having a lower tax liability than if the election had been timely

made.

(ii) Closed years. The interests of the

Government are ordinarily prejudiced if

the taxable year in which the regulatory

election should have been made or any

taxable years that would have been affected by the election had it been timely

made are closed by the period of limitations on assessment under section 6501(a)

before the taxpayer’s receipt of a ruling

granting relief under this section. The

IRS may condition a grant of relief on the

taxpayer providing the IRS with a statement from an independent auditor (other

than an auditor providing an affidavit pursuant to paragraph (e)(3) of this section)

certifying that the interests of the Government are not prejudiced under the standards set forth in paragraph (c)(1)(i) of

this section.

(2) Special rules for accounting

method regulatory elections. The interests of the Government are deemed to be

prejudiced except in unusual and compelling circumstances if the accounting

method regulatory election for which relief is requested—

(i) Is subject to the procedure described in §1.446–1(e)(3)(i) of this chapter (requiring the advance written consent

of the Commissioner);

(ii) Requires an adjustment under section 481(a) (or would require an adjustment under section 481(a) if the taxpayer

changed to the method of accounting for

which relief is requested in a taxable year

subsequent to the taxable year the election

should have been made);

(iii) Would permit a change from an

impermissible method of accounting that

is an issue under consideration by examination, an appeals office, or a federal

court and the change would provide a

more favorable method or more favorable

terms and conditions than if the change

were made as part of an examination; or

(iv) Provides a more favorable method

of accounting or more favorable terms

and conditions if the election is made by a

certain date or taxable year.

1998–5 I.R.B

(3) Special rules for accounting period

regulatory elections. The interests of the

Government are deemed to be prejudiced

except in unusual and compelling circumstances if an election is an accounting period regulatory election (other than the

election to use other than the required taxable year under section 444) and the request for relief is filed more than 90 days

after the due date for filing the Form 1128,

Application to Adopt, Change, or Retain a

Tax Year (or other required statement).

(d) Effect of amended returns—(1)

Second examination under section

7605(b). Taxpayers requesting and receiving an extension of time under this

section waive any objections to a second

examination under section 7605(b) for the

issue(s) that is the subject of the relief request and any correlative adjustments.

(2) Suspension of the period of limitations under section 6501(a). A request for

relief under this section does not suspend

the period of limitations on assessment

under section 6501(a). Thus, for relief to

be granted, the IRS may require the taxpayer to consent under section 6501(c)(4)

to an extension of the period of limitations on assessment for the taxable year in

which the regulatory election should have

been made and any taxable years that

would have been affected by the election

had it been timely made.

(e) Procedural requirements—(1) In

general. Requests for relief under this

section must provide evidence that satisfies the requirements in paragraphs (b)

and (c) of this section, and must provide

additional information as required by this

paragraph (e).

(2) Affidavit and declaration from taxpayer. The taxpayer, or the individual

who acts on behalf of the taxpayer with

respect to tax matters, must submit a detailed affidavit describing the events that

led to the failure to make a valid regulatory election and to the discovery of the

failure. When the taxpayer relied on a

qualified tax professional for advice, the

taxpayer’s affidavit must describe the engagement and responsibilities of the professional as well as the extent to which

the taxpayer relied on the professional.

The affidavit must be accompanied by a

dated declaration, signed by the taxpayer,

which states: “Under penalties of perjury,

I declare that I have examined this request, including accompanying docu-

ments, and, to the best of my knowledge

and belief, the request contains all the relevant facts relating to the request, and

such facts are true, correct, and complete.” The individual who signs for an

entity must have personal knowledge of

the facts and circumstances at issue.

(3) Affidavits and declarations from

other parties. The taxpayer must submit

detailed affidavits from the individuals

having knowledge or information about

the events that led to the failure to make a

valid regulatory election and to the discovery of the failure. These individuals must

include the taxpayer’s return preparer, any

individual (including an employee of the

taxpayer) who made a substantial contribution to the preparation of the return, and

any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer with regard to the election. An affidavit must describe the engagement and

responsibilities of the individual as well as

the advice that the individual provided to

the taxpayer. Each affidavit must include

the name, current address, and taxpayer

identification number of the individual,

and be accompanied by a dated declaration, signed by the individual, which

states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to

the best of my knowledge and belief, the

request contains all the relevant facts relating to the request, and such facts are true,

correct, and complete.”

(4) Other information. The request for

relief filed under this section must also

contain the following information—

(i) The taxpayer must state whether the

taxpayer’s return(s) for the taxable year in

which the regulatory election should have

been made or any taxable years that

would have been affected by the election

had it been timely made is being examined by a district director, or is being considered by an appeals office or a federal

court. The taxpayer must notify the IRS

office considering the request for relief if

the IRS starts an examination of any such

return while the taxpayer’s request for relief is pending;

(ii) The taxpayer must state when the

applicable return, form, or statement used

to make the election was required to be

filed and when it was actually filed;

(iii) The taxpayer must submit a copy of

any documents that refer to the election;

February 2, 1998

(iv) When requested, the taxpayer

must submit a copy of the taxpayer’s return for any taxable year for which the

taxpayer requests an extension of time to

make the election and any return affected

by the election; and

(v) When applicable, the taxpayer

must submit a copy of the returns of other

taxpayers affected by the election.

(5) Filing instructions. A request for

relief under this section is a request for a

letter ruling. Requests for relief should be

submitted in accordance with the applicable procedures for requests for a letter ruling and must be accompanied by the applicable user fee.

(f) Examples. The following examples

illustrate the provisions of this section:

Example 1. Taxpayer discovers own error. Taxpayer A prepares A’s 1997 income tax return. A is

unaware that a particular regulatory election is available to report a transaction in a particular manner. A

files the 1997 return without making the election

and reporting the transaction in a different manner.

In 1999, A hires a qualified tax professional to prepare A’s 1999 return. The professional discovers

that A did not make the election. A promptly files

for relief in accordance with this section. Assume

paragraphs (b)(3)(i) through (iii) of this section do

not apply. Under paragraph (b)(1)(i) of this section,

A is deemed to have acted reasonably and in good

faith because A requested relief before the failure to

make the regulatory election was discovered by the

IRS.

Example 2. Reliance on qualified tax professional. Taxpayer B hires a qualified tax professional

to advise B on preparing B’s 1997 income tax return.

The professional was competent to render advice on

the election and B provided the professional with all

the relevant facts. The professional fails to advise B

that a regulatory election is necessary in order for B

to report income on B’s 1997 return in a particular

manner. Nevertheless, B reports this income in a

manner that is consistent with having made the election. In 2000, during the examination of the 1997

return by the IRS, the examining agent discovers

that the election has not been filed. B promptly files

for relief in accordance with this section, including

attaching an affidavit from B’s professional stating

that the professional failed to advise B that the election was necessary. Assume paragraphs (b)(3)(i)

through (iii) of this section do not apply. Under

paragraph (b)(1)(v) of this section, B is deemed to

have acted reasonably and in good faith because B

reasonably relied on a qualified tax professional and

the tax professional failed to advise B to make the

election.

Example 3. Accuracy-related penalty. Taxpayer

C reports income on its 1997 income tax return in a

manner that is contrary to a regulatory provision. In

2000, during the examination of the 1997 return, the

IRS raises an issue regarding the reporting of this income on C’s return and asserts the accuracy-related

penalty under section 6662. C requests relief under

this section to elect an alternative method of report-

February 2, 1998

ing the income. Under paragraph (b)(3)(i) of this

section, C is deemed to have not acted reasonably

and in good faith because C seeks to alter a return

position for which an accuracy-related penalty could

be imposed under section 6662.

Example 4. Election not requiring adjustment

under section 481(a). Taxpayer D prepares D’s

1997 income tax return. D is unaware that a particular accounting method regulatory election is available. D files D’s 1997 return without making the

election and uses another permissible method of accounting. The applicable regulation provides that

the election is made on a cut-off basis (without an

adjustment under section 481(a)). In 1998, D requests relief under this section to make the election

under the regulation. If D were granted an extension

of time to make the election, D would pay no less

tax than if the election had been timely made. Assume that paragraphs (c)(2)(i), (iii), and (iv) of this

section do not apply. Under paragraph (c)(2)(ii) of

this section, the interests of the Government are not

deemed to be prejudiced because the election does

not require an adjustment under section 481(a).

Example 5. Election requiring adjustment under

section 481(a). The facts are the same as in Example 4 of this paragraph (f) except that the applicable

regulation provides that the election requires an adjustment under section 481(a). Under paragraph

(c)(2)(ii) of this section, the interests of the Government are deemed to be prejudiced except in unusual

or compelling circumstances.

Example 6. Under examination by the IRS. A

regulation permits an automatic change in method of

accounting for an item on a cut-off basis. Taxpayer

E reports income on E’s 1997 income tax return

using an impermissible method of accounting for the

item. In 2000, during the examination of the 1997

return by the IRS, the examining agent notifies E in

writing that its method of accounting for the item is

an issue under consideration. Any change from the

impermissible method made as part of an examination is made with an adjustment under section

481(a). E requests relief under this section to make

the change pursuant to the regulation for 1997. The

change on a cut-off basis under the regulation would

be more favorable than if the change were made

with an adjustment under section 481(a) as part of

an examination. Under paragraph (c)(2)(iii) of this

section, the interests of the Government are deemed

to be prejudiced except in unusual and compelling

circumstances because E seeks to change from an

impermissible method of accounting that is an issue

under consideration in the examination on a basis

that is more favorable than if the change were made

as part of an examination.

Authority: 26 U.S.C. 301 and 552, unless otherwise noted.

§§301.9100–1T, 301.9100–2T, and

301.9100–3T [Removed]

CFR part or section

where identified

and described

Par. 8. Sections 301.9100–1T,

301.9100–2T, and 301.9100–3T are removed.

PART 601—STATEMENT OF

PROCEDURAL RULES

Par. 9. The authority citation for part

601 continues to read as follows:

§601.204 [Amended]

Par. 10. Section 601.204 is amended as

follows:

1. In paragraph (b), the fourth sentence

is amended by removing the language

“within 180 days after the beginning of”

and adding “during” in its place.

2. In paragraph (b), the last sentence is

removed.

§601.204T [Removed]

Par. 11. Section 601.204T is removed.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 12. The authority citation for part

602 continues to read as follows:

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

Par. 13. Section 602.101(c) is amended

by removing the entries for §§301.9001–

2T and 301.9001–3T, and adding the following entry in numerical order to the

table to read as follows:

§602.101 OMB Control numbers

CFR part or section

where identified

and described

Current OMB

control No.

301.9100–1 . . . . . . . . . . . . . .1545–1488

(2) Removing the following entries

from the table:

Current OMB

control No.

§301.9100–1T . . . . . . . . . . . .1545–1488

§301.9100–2T . . . . . . . . . . . .1545–1488

§301.9100–3T . . . . . . . . . . . .1545–1488

1998–5 I.R.B.

Michael P. Dolan,

Deputy Commissioner of

Internal Revenue.

Approved December 10, 1997.

Donald C. Lubick,

Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on

December 30, 1997, 8:45 a.m., and published in the

issue of the Federal Register for December 31, 1997,

62 F.R. 68167)

1998–5 I.R.B

February 2, 1998

Part III. Administrative, Procedural, and Miscellaneous

Deciding Whether to Elect COBRA Health Care Continuation Coverage After Enactment of HIPAA

Notice 98–12

INTRODUCTION

A key decision that millions of Americans face each year is whether to elect “COBRA1” health care continuation coverage. The

purpose of this notice is to help people decide whether to elect COBRA coverage. In order to make that decision, they need to know

about two laws, COBRA and HIPAA.2 This notice provides information — in the form of questions and answers — about some factors that employees and their families should take into account in deciding whether to elect COBRA continuation coverage.

An employer maintaining a group health plan is not required to provide this notice. The information in this notice may be used by

employers and plan administrators who want to supplement the information they are required to give to covered employees and beneficiaries. The notice may be modified to provide information specific to a plan. The information in this notice is not a substitute for

any of the notices required to be furnished under COBRA or for any other information required by law to be furnished to participants

or beneficiaries in employer group health plans.

SHOULD I ELECT COBRA HEALTH CARE CONTINUATION COVERAGE?

Questions and Answers

If you lose or leave your job, or if another event occurs that would cause you to lose coverage under an employer’s group health

plan, you may have the right to elect COBRA health care continuation coverage under the plan. In making this important decision,

there are a number of considerations you should take into account, including:

• whether other group health coverage — such as coverage under another employer’s plan — is available;

• whether any other available health coverage would exclude benefits for a medical condition that you or a family member has;

• when you will have the right to enroll in the other coverage;

• the cost, scope, and level of COBRA coverage compared with that of any other available group coverage or individual health coverage; and

• whether a guaranteed right to buy individual health coverage is important to you.

The following questions and answers are divided into three parts. Read Part I for background information about COBRA coverage and an important recent law, HIPAA, that might affect your COBRA decision. Read Part II if group health coverage other than

COBRA coverage is available to you. Read Part III if you do not have other group health coverage available. These questions and

answers reflect the law as in effect in January 1998.3

These questions and answers are available at the IRS Internet site at:

http://www.irs.ustreas.gov

These questions and answers are also available at the Department of Labor (DOL) Internet site at:

http://www.dol.gov/dol/pwba

and at the Health Care Financing Administration (HCFA) Internet site at:

http://www.hcfa.gov

1COBRA is the Consolidated Omnibus Budget Reconciliation Act of 1985, the law that added the health care continuation coverage requirements.

2HIPAA is the Health Insurance Portability and Accountability Act of 1996.

3In most cases, HIPAA is effective by January 1998.

However, a later effective date applies to certain employer group health plans and certain health coverage.

The questions and answers below assume that HIPAA is in effect.

February 2, 1998

1998–5 I.R.B.

PART I: Overview of COBRA and HIPAA

COBRA

What rights to health care continuation coverage does COBRA provide?

If you are covered by an employer’s group health plan, COBRA may give you the right to stay covered even if something happens, like losing your job, that would otherwise cause you to lose coverage. This continuation coverage under an employer’s plan is

called “COBRA coverage.” COBRA coverage usually lasts only for a limited time, and you usually have to pay for it.

If you are covered by an employer’s group health plan, and an event occurs that would otherwise cause you to lose that group

health coverage, you need to understand whether COBRA applies to your specific situation and, if so, what your rights are under

COBRA.

Which employer plans are subject to COBRA?

COBRA applies to most employer group health plans but not to all of them. For example, it does not apply to plans of employers

with fewer than 20 employees or to church plans. Many plans of small employers, though, are subject to State laws similar to

COBRA. If you are covered under a plan of an employer with fewer than 20 employees, you can contact the department or commission of insurance in your State to find out if you have rights to continuation coverage under your State’s insurance laws. (Federal

employees, while not protected by COBRA, have similar continuation coverage rights under another federal law.)

What events result in COBRA rights and for how long is COBRA coverage available?

Even if COBRA applies to your group health plan, it gives rights only to certain people who would be losing health coverage for

certain specific reasons. Some of the most common situations that give people COBRA rights are:

• Loss of job. If you are covered by your employer’s group health plan and you lose or leave your job, COBRA generally gives

you the right to stay in the employer’s plan for up to 18 months. The same rights apply if you are the spouse or dependent child

of an employee who loses his or her job. (The 18-month period can be increased to 29 months if someone in the family is disabled.)

• Reduced hours. If you are covered by your employer’s group health plan and your hours are reduced, the employer’s plan may

provide that you lose coverage unless you elect COBRA. In this case, COBRA generally gives you the right to stay in the employer’s plan for up to 18 months. The same rights apply if you are the spouse or dependent child of an employee whose hours

are reduced. (The 18-month period can be increased to 29 months if someone in the family is disabled.)

• Death or divorce of spouse. You have the right to COBRA coverage if you are covered by a group health plan of your spouse’s

employer and you would lose coverage because your spouse dies or you and your spouse divorce or legally separate. In these

cases, COBRA gives you the right to stay in the plan for up to 36 months.

• Death or divorce of parent. You have the right to COBRA coverage if you are a dependent child covered by a group health

plan of your parent’s employer and you would lose coverage because your parent dies or your parents divorce or legally separate. In these cases, COBRA gives you the right to stay in the plan for up to 36 months.

• Change of Status as Dependent. COBRA also gives you rights if you are a dependent child covered by a group health plan of

your parent’s employer and you would lose coverage because you reach an age or condition that causes you to no longer be

covered as a dependent under the plan. In these cases, COBRA gives you the right to stay in the plan for up to 36 months.

If you become covered by another group health plan or by Medicare before your COBRA coverage would otherwise end, you usually lose the right to COBRA coverage. However, you do not lose the right to COBRA coverage if the new group health plan does

not cover illnesses or conditions because you had them before you became covered under the plan.

What are the requirements for obtaining COBRA coverage?

If you want COBRA coverage, you can be required to elect it within 60 days after your coverage would otherwise end. If you

elect COBRA coverage, the plan is required to continue the same coverage for you but can charge you for it.

1998–5 I.R.B

February 2, 1998

• Cost of COBRA coverage. If you elect COBRA coverage, the plan can require you to pay for the entire cost of coverage, plus

a small (2%) additional charge for administration. (If you are getting a longer period of coverage because of disability, you

may have to pay more.) The cost of COBRA coverage will probably be more than what you were paying for coverage before.

You can pay for COBRA coverage in monthly installments.

How can I get more information about COBRA ?

COBRA has a number of special rules, and the information above covers only basic points. The plan administrator of your group

health plan is required to give you information about your COBRA rights. You should read that information carefully. If you have

any questions about your COBRA rights or would like additional information about COBRA and your group health plan, contact

your plan administrator.

If you want to know more, the Department of Labor has a booklet called “Health Benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA).” You can request this booklet free of charge by calling 1-800-998-7542. The booklet is also

available on the Internet at:

http://www.dol.gov/dol/pwba

HIPAA

What is HIPAA and why is it important in deciding whether to elect COBRA coverage?

HIPAA is a federal law that regulates employer group health plans and health insurance companies. HIPAA is important to your

decision whether to elect COBRA coverage because HIPAA may affect when other coverage is available to you and the types of

other coverage available to you, including the extent to which coverage can be restricted under a “preexisting condition exclusion.”

What is a preexisting condition exclusion?

Some employer group health plans do not provide coverage for an illness or condition you had before you became covered under

the plan. These illnesses or conditions are commonly called “preexisting conditions.” A special limit on coverage for a preexisting

condition is called a “preexisting condition exclusion.”

How are preexisting condition exclusions limited by HIPAA?

HIPAA imposes the following limits on the situations in which employer group health plans may have preexisting condition exclusions and the length of time that such exclusions can apply:

• Treatment or advice received in 6 months before enrollment. An employer group health plan cannot exclude coverage for a preexisting condition you have unless medical advice, diagnosis, care, or treatment was received by you (or recommended to you)

for the condition during a 6-month period. If there is a waiting period to get into the plan, the 6-month period is the 6 months before the start of the waiting period. If the plan has no waiting period, the 6-month period is the 6 months before you enter the

plan.

• Preexisting condition exclusion cannot last for more than 12 (or 18) months. An employer group health plan cannot exclude

coverage for a preexisting condition for more than 12 months after the start of the waiting period for coverage. If there is no waiting period, the plan cannot exclude coverage for a preexisting condition for more than 12 months after you enter the plan. However, if you do not enroll when you are first eligible and do not enroll when you have “special enrollment rights” (as described

below), the plan can refuse to cover preexisting conditions for up to 18 months after you enter the plan.

• Previous coverage reduces length of exclusion. If you had other health coverage — for example, under another group health

plan (including COBRA coverage) or under an individual insurance policy, Medicare, or Medicaid — your new plan’s preexisting

condition exclusion period generally must be reduced by the period of your other coverage. For example, if you were covered by

your old employer’s plan for 4 months and your new employer’s plan has a 12-month preexisting condition exclusion, your new

employer’s plan cannot exclude coverage for you for any preexisting condition for more than 8 months. However, your new employer’s plan does not have to count coverage before a 63-day break in coverage.

• 63-day break in coverage. If there has been a break of 63 days or more during which you had no health coverage, then the plan

can disregard your old coverage that preceded this break. Thus, if you had no coverage for at least 63 days just before you began

working for your new employer, the new employer’s plan can refuse to cover any preexisting conditions for up to 12 months (or

February 2, 1998

1998–5 I.R.B.

18 months, depending on when you enroll in the new plan). Time spent in any waiting period for coverage does not count toward

the 63-day break.

• No preexisting condition exclusion permitted for pregnancy, or for newborn and adopted children. A plan cannot impose a preexisting condition exclusion relating to pregnancy. In addition, a plan cannot impose a preexisting condition exclusion on newborn children, adopted children, and children placed for adoption who are covered under a plan on the 30th day after their birth,

adoption, or placement for adoption.

• State insurance laws. State insurance laws may further limit the extent to which insurance under an employer’s plan can exclude

coverage for preexisting conditions.

How does HIPAA affect my ability to enroll in an employer’s plan?

• Special enrollment rights. HIPAA gives you and your family a special opportunity to enroll in your employer’s plan in two situations: (1) if you lose other coverage (including COBRA coverage) or (2) if you have a new spouse or dependent. In these two

situations, you (or your spouse or dependent) can be enrolled in your employer’s plan even if the plan normally would not allow

enrollment at that time.

• Special enrollment because of loss of other coverage. You (and your spouse and dependents) might have been eligible to enroll in your employer’s plan at an earlier time but you decided not to because at that time you (or your family members) had

other coverage (say, under the plan of your spouse’s employer). In that case, if you (or your family members) later lose the

other coverage, your employer’s plan generally must allow you (and your family members) to enroll. The plan has to give you

at least 30 days after that other coverage is lost to request enrollment, and must allow enrollment by the first day of the month

after the plan receives your completed request.

• This special enrollment right generally is available only if the coverage is lost because it is no longer available (and

not lost because of failure to pay for it or for cause, such as making a fraudulent claim). You are not required to elect

COBRA coverage in order to have a special enrollment right; however, if you do elect COBRA coverage, you must

continue it for the entire period it is available to you in order to preserve this special enrollment right.

• Special enrollment because of a new spouse or dependent. If you marry, then you, your spouse, and any new dependents

you get as a result of the marriage have special rights to enroll. If a new child is born, you adopt a child, or a child is placed for

adoption with you, then you, your spouse, and the new child also get special rights to enroll.

• To be entitled to special enrollment on account of a new spouse or dependent, you must either be covered under the

plan or be eligible to be covered under the plan. The plan has to give you at least 30 days after the marriage, birth,

adoption, or placement for adoption to request enrollment.

• If you get married, the plan must cover you, your spouse, and any new dependent by the first day of the month after

the plan receives your completed request.

• If you have a new child, the plan must cover you and your spouse and the child from the date of birth, adoption, or

placement for adoption.

• The plan cannot exclude you (or make you pay more) based on health status. HIPAA prohibits employer group health plans

from discriminating in their eligibility rules on the basis of your health.

• For example, a plan cannot require you to pass a physical examination before you can enroll in the plan, or prevent you from enrolling because of your medical claims experience, medical history, genetic information, evidence of insurability, or disability.

In addition, a plan generally cannot require you to pay a higher contribution than similarly situated people covered under the plan

due to your health or any of these other factors.

Which Employer Plans Are Subject to HIPAA?

HIPAA’s limits on preexisting condition exclusions, special enrollment rights, and restrictions on discrimination based on health

status apply to most but not all employer group health plans. For example, HIPAA generally does not apply to plans where fewer

than 2 of the participants are current employees. In addition, special exceptions apply to certain plans maintained by State or local

governments and certain plans maintained by church organizations. Further, the HIPAA rules generally do not apply to coverage for

certain types of excepted benefits.

1998–5 I.R.B

February 2, 1998

Where can I get more information about HIPAA?

HIPAA has a number of special rules, and the information above covers only basic points. If you want to know more about how

HIPAA applies to group health plans, the Department of Labor has a booklet called “Questions and Answers: Recent Changes in

Health Care Law.” You may request this booklet free of charge by calling 1-800-998-7542. The booklet is also available on the Internet at:

http://www.dol.gov/dol/pwba

More information about HIPAA is also available at the Health Care Financing Administration (HCFA) Internet site at:

http://www.hcfa.gov

PART II: Should I Elect COBRA Coverage If I Have Other Group Health Coverage Available?

The questions and answers in this Part are designed to assist you if you have group health coverage available in addition to

COBRA coverage. In deciding whether to elect COBRA coverage, an important factor is whether the other group health coverage

has a preexisting condition exclusion that applies to you.

How do I know if an employer group health plan has a preexisting condition exclusion that applies to me?

You should first determine whether you received medical advice, diagnosis, care, or treatment (or they were recommended to you)

for a medical condition during the 6-month period before the start of the plan’s waiting period (or before you enter the plan, if there

is no waiting period). For this purpose, only medical advice, diagnosis, care, or treatment from a physician or other licensed or authorized person counts.

• If not, the employer’s group health plan cannot apply a preexisting condition exclusion to you.

• If so, contact the plan administrator to find out whether and for how long the plan excludes your condition. Then, determine

whether and to what extent your prior health coverage will reduce any preexisting condition exclusion period.

• While you must be notified if the plan has a preexisting condition exclusion before the exclusion can be applied to you, the plan is

not required to give you this notice before your coverage begins. You have to ask for the information if you need it earlier.

How do I know how long I will be subject to the plan’s preexisting condition exclusion?

A plan with a preexisting condition exclusion should specify the maximum period that the exclusion can apply. That period is reduced by your prior health coverage, so you will need to determine how much prior health coverage you had. Remember that if there

has been a break of 63 days or more during which you had no health coverage, then the plan may be able to disregard your old coverage. Time spent in any waiting period for coverage does not count toward the 63-day break.

• Proof of Previous Health Coverage. Your old plan must give you a certificate showing how much coverage you had under that

plan. The plan must give you the certificate shortly after you become eligible for COBRA coverage, shortly after your coverage

ends, and at any other time you request it while you are covered or up to 24 months after your coverage ends. If you become covered by a plan that has a preexisting condition exclusion, you may use the certificate to show your new plan how long you had

coverage under your old plan.

• If you do not have a certificate, you can prove your prior coverage by producing documentation or other evidence.

• The new plan must notify you of any length of time that a preexisting condition exclusion may apply to you after counting

your previous coverage.

What should I consider in deciding whether to elect COBRA coverage if I have other group health coverage available with

a preexisting condition exclusion that applies to me?

If you have other group health coverage available, and that coverage has a preexisting condition exclusion that applies to you,

your choices are to have (1) COBRA coverage instead of that other group coverage, (2) the other coverage instead of COBRA coverage (despite the preexisting condition exclusion), or (3) both COBRA coverage and the other coverage.

February 2, 1998

1998–5 I.R.B.

Your decision may depend on several factors, such as:

• how long your new coverage will be subject to the preexisting condition exclusion;

• how likely you are to need treatment for the preexisting condition before it is covered;

• the seriousness of your preexisting condition, how much the treatment would cost you in the absence of coverage, and the risks

to you if treatment is delayed;

• the cost, level and scope of benefits of the COBRA coverage compared to the other coverage; and

• the HIPAA rules that require plans to offer special enrollment rights in certain cases and prohibit enrollment restrictions based

on your health status (as discussed in Part I and below in this Part II).

What should I consider in deciding whether to elect COBRA coverage if I have other group health coverage available with

no preexisting condition exclusion that applies to me?

If you have other group health coverage available that does not exclude coverage for a preexisting medical condition you have,

your decision whether to elect COBRA coverage may be influenced by a variety of factors, including —

• COBRA cut-off due to other coverage. In general, if you get coverage from another employer’s group health plan that is not

subject to a preexisting condition exclusion, or from Medicare, your COBRA coverage can be cut off. This means that in most

situations you would have to decline the other coverage if you decide you prefer the COBRA coverage. (Note that if you have

been receiving disability payments from Social Security, you should not decline Medicare coverage without first consulting

your Social Security office or the Medicare program.)

• Cost, scope, and level of coverage. Plans differ in their cost, and in the level and scope of benefits (such as particular medical

services) they cover. You should take these differences into account in comparing the COBRA coverage with the other available coverage.

• Employers often pay for a large portion of the cost of group health coverage for employees, while people on COBRA coverage typically have to pay for the entire cost of the coverage. This means it usually is cheaper to pay for the employee share

of the cost of the other coverage than to pay for COBRA coverage. However, you might prefer more costly coverage if it

provides more comprehensive benefits for treatment you may need.

• Waiting period before other coverage begins. If you (or your spouse or parent) get a new job that offers health coverage after

some waiting period, you might want to elect to have COBRA coverage for that waiting period.

• Special enrollment rights. If you elect COBRA coverage instead of taking other available group health plan coverage, HIPAA

generally gives you the right to enroll in the new plan within 30 days after the COBRA coverage ends, or within 30 days after

you get married or have a new dependent child — even if the plan would not otherwise allow you to enroll at that time.

• But, once you have elected COBRA coverage, your special enrollment right for the loss of the coverage applies only if you

keep the COBRA coverage for the entire period it is available to you. (Thus, this special enrollment right does not apply if

the COBRA coverage ends because you stop paying for it.)

• HIPAA Limits on Enrollment Restrictions Based on Health Status. If you elect COBRA coverage instead of taking other

group health plan coverage, but you later decide you want to enroll in the new plan, your new plan cannot exclude you (or

charge you more) on the basis of your health.

PART III: Should I Elect COBRA Coverage If I Do Not Have Other Group Health Coverage Available?

The questions and answers in this Part are designed to assist you if you do not have other group health coverage available.

Why do I need health coverage?

You need health coverage to help pay for medical services for any health problems you might have after your current plan coverage ends.

1998–5 I.R.B

February 2, 1998

Does HIPAA give me the right to buy individual health coverage?

If you meet certain requirements, HIPAA gives you the right to buy individual health coverage with no preexisting condition exclusion, without having to give evidence of good health. Depending on the State, the individual health coverage may be a policy issued by an insurance company, or coverage through a State high-risk pool or other governmental program. You must meet all of the

following requirements to have this right:

• Your most recent period of health coverage must have been under an employer group health plan.

• If you were eligible for COBRA coverage (or coverage due to a similar State provision) under that plan, you must have elected

and continued that coverage for the entire period it was available to you.

• You would not have to continue COBRA coverage for the entire period to maintain these rights if the only COBRA coverage

available was in an HMO and you ceased to reside, live, or work in the HMO service area.

• You must have at least 18 months of prior health coverage, disregarding coverage before a break of 63 days or more during

which you had no health coverage.

• You must not have lost your most recent health coverage because you failed to pay the premiums or because you committed

fraud.

• You must not now be eligible for coverage under any employer group health plan, Medicare, or Medicaid.

• You must not now have any other health insurance coverage.

For more information on your right to buy individual health coverage, contact your State’s department or commission of insurance.

What should I consider in deciding whether to elect COBRA coverage?

• COBRA coverage compared to individual health coverage. In comparing COBRA coverage with any individual coverage you

have available, consider differences in cost and in the level and scope of benefits (such as particular medical services) covered.

• COBRA coverage compared to no health coverage. You may want to elect COBRA coverage to make sure you are covered for

any medical services you need. Many people consider the benefits from having the protection that COBRA coverage provides to

be well worth the cost of COBRA coverage.

• You might also want to elect COBRA coverage because, in the future, you could become covered under an employer group

health plan that has a preexisting condition exclusion. If you have a 63-day break in coverage, then your existing coverage

may be disregarded. COBRA coverage can help you avoid having a 63-day break in coverage and also counts toward reducing any preexisting condition exclusion. See Part I for more information on these rules.

• COBRA coverage to protect your right to buy individual health coverage with no preexisting condition exclusion. As described

above, if certain requirements are met, you and your family may have the right to buy individual health coverage with no preexisting condition exclusion, without having to give evidence of good health. These requirements include electing COBRA coverage as long as it is available to you. THUS, FAILURE TO ELECT COBRA COVERAGE MAY CAUSE YOU TO LOSE YOUR

GUARANTEED RIGHTS TO PURCHASE INDIVIDUAL HEALTH COVERAGE.

Is there any State-sponsored coverage available to me?

Individuals in a family whose income is temporarily reduced (for example, due to loss of a job) may be eligible for low-cost or nocost health insurance through public programs. Children are especially likely to be eligible for low-cost coverage. Eligibility for these

programs varies by State and sometimes within a State. You can contact State government officials to find out if you are eligible.

CONCLUSION

There are many factors to consider in making the important decision whether to elect COBRA continuation coverage for you and

each of the members of your family. The information above highlights factors that people in typical circumstances may want to take

into account in deciding whether to elect COBRA coverage. You will need to consider your own family’s circumstances in making

your decision.

February 2, 1998

1998–5 I.R.B.

26 CFR 401: Employment taxes.

(Also Part I, §§ 3121; 31.3121(b)(10)–2.)

Rev. Proc. 98–16

SECTION 1. PURPOSE

This revenue procedure sets forth generally applicable standards for determining whether service in the employ of certain public or private nonprofit schools,

colleges, universities, or affiliated organizations described in § 509(a)(3) of the Internal Revenue Code (the Code) performed by a student qualifies for the

exception from Federal Insurance Contributions Act (FICA) tax provided under

§ 3121(b)(10) of the Code (Student FICA

exception). These standards are intended

to provide objective and administrable

guidelines for determining employment

tax liability. The Student FICA exception

standards were developed in response to

requests for guidance by many public and

private nonprofit institutions of higher education.

SECTION 2. SCOPE

.01 Institutions of higher education typically distinguish between career employees and student employees. Sections 5

and 6 of this revenue procedure contain

generally applicable standards for determining whether or not services performed

by career employees and student employees are eligible for the Student FICA exception.

.02 The standards contained in this revenue procedure do not apply to employees

who are postdoctoral students, postdoctoral fellows, medical residents, or medical interns because the services performed by these employees cannot be

assumed to be incidental to and for the

purpose of pursuing a course of study.

.03 The standards contained in this revenue procedure do not constitute the exclusive method for determining whether

the Student FICA exception applies.

Thus, for example, if the standard for

qualifying for the exclusion described in

section 6 of this revenue procedure is not

met, whether or not service in the employ

of a school, college, university, or affiliated organization described in § 509(a)(3)

of the Code will qualify for the Student

FICA exception will depend on consideration of all the facts and circumstances.

1998–5 I.R.B

SECTION 3. BACKGROUND

.01 Sections 3101 and 3111 of the Code

impose social security and Medicare taxes

(FICA taxes) on employees and employers, respectively, equal to a percentage of

the wages received by an individual with

respect to employment.

.02 Section 3121(a) of the Code defines

“wages” for purposes of FICA taxes as all

remuneration for employment, with certain exceptions. Section 3121(b) of the

Code defines “employment” as services

performed by an employee for an employer, with certain exceptions.

.03 Section 3121(b)(10) of the Code

excepts from the definition of employment services performed in the employ of

a school, college, or university (whether

or not that organization is exempt from

income tax), or an affiliated organization

described in § 509(a)(3) of the Code, if

the service is performed by a student who

is enrolled and regularly attending classes

at that school, college or university. Remuneration for services excluded from

the definition of employment under

§ 3121(b)(10) of the Code is not subject

to FICA taxes.

.04 Section 31.3121(b)(10)–2 of the

Employment Tax Regulations provides

that whether an employee has the status of

a student is determined on the basis of the

employee’s relationship with the school,

college, or university for which the services are being performed. An employee

who performs services in the employ of a

school, college, or university as an incident to and for the purpose of pursuing a

course of study at the school, college, or

university has the status of a student in the

performance of those services. Employment that is not incident to and for the

purpose of pursuing a course of study

does not qualify for the exception. If the

employee does perform services as an incident to and for the purpose of pursuing a

course of study and, therefore, has the status of a student, the amount of remuneration for services performed by the employee, the type of services performed by

the employee, and the place where the

services are performed are immaterial for

purposes of the Student FICA exception.

.05 Section 218 of the Social Security

Act (the Act), 42 U.S.C. section 418, allows states to provide Social Security

coverage for services performed by stu-

dents for the public school the student is

attending under agreements established

with the Social Security Administration.

If a state has exercised its option under

§ 218 of the Act to provide for coverage

of student services, § 3121(b)(10) of the

Code provides that those services will not

qualify for the Student FICA exception.

SECTION 4. INSTITUTIONS OF

HIGHER EDUCATION

.01 The standards contained in this revenue procedure apply to institutions of

higher education. For purposes of this

revenue procedure, the term “institution

of higher education” includes any public

or private nonprofit school, college, university, or affiliated organization described in § 509(a)(3) of the Code that

meets the requirements set forth in Department of Education regulations at 34

C.F.R. § 600.4 (1997), as amended from

time to time, and that is accredited or

preaccredited by a nationally recognized

accrediting agency as defined in the Department of Education regulations at 34

C.F.R. § 600.2 (1997).

.02 Services for other institutions may

also be eligible for the Student FICA exception. Thus, for example, services performed by a student for a secondary

school may be eligible for the Student

FICA exception. Whether or not services

for other institutions, such as secondary

schools, qualify for the Student FICA exception is determined based on the facts

and circumstances of each case.

SECTION 5. STANDARDS

APPLICABLE TO CAREER

EMPLOYEES

.01 Services performed by career employees are not eligible for the Student

FICA exception under the standard in section 6 of this revenue procedure because

their employment cannot generally be

considered to be incident to and for the

purpose of pursuing a course of study.

However, a career employee may be eligible for the Student FICA exception, based

on consideration of all the facts and circumstances.

.02 For purposes of this revenue procedure, the term “career employee” is defined as any individual performing services for an institution of higher

education who—

February 2, 1998

(1) is eligible to participate in any retirement plan described in § 401(a) of the

Code that is established or maintained by

the institution, or would be eligible to participate if age and service requirements

were met;

(2) is eligible to receive an allocation of

employer contributions other than contributions described in § 402(g) of the Code

under an arrangement described in

§ 403(b) of the Code, or would be eligible

to receive such allocations if age and service requirements were met, or if contributions described in § 402(g) of the Code

were made by the employee;

(3) is eligible for reduced tuition (other

than qualified tuition reduction under

§ 117(d)(5) of the Code provided to a

teaching or research assistant who is a

graduate student as described in section

7.03 of this revenue procedure) because

of the individual’s employment relationship with the institution; or

(4) is classified by the institution of

higher education as a career employee.

.03 If an individual performs services

in multiple job positions, the individual

will be deemed a career employee with

respect to all of the positions if the individual is a career employee in any one or

more of the job positions.

SECTION 6. STANDARDS

APPLICABLE TO UNDERGRADUATE

AND GRADUATE STUDENTS

.01 An individual who is a half-time

undergraduate student or a half-time graduate or professional student and who is

not a career employee will qualify for the

Student FICA exception under this revenue procedure with respect to services

performed at or for institutions of higher

education in which they are enrolled or at

affiliated organizations described in

§ 509(a)(3) of the Code. Services performed by a student for any other employer do not qualify for this exception.

.02 An individual is deemed to be a

half-time undergraduate or half-time

graduate or professional student if the individual is not a career employee and is

an undergraduate or graduate student who

is in the last semester, trimester, or quarter

of a course of study requiring at least two

semesters, trimesters, or quarters to complete and is enrolled in the number of

credit or unit hours needed to complete

February 2, 1998

the requirements for obtaining a degree,

certificate, or other recognized educational credential offered by that institution

of higher education even if enrolled in

less than half the number required of fulltime students.

.03 The determination of student status

should be made at the end of the drop-add

period and may be adjusted thereafter at

the institution of higher education’s option. The determination of student status

for payroll periods ending before the end

of the drop-add period may be based on

the number of semester, trimester, or

quarter hours being taken at the end of the

registration period for that semester,

trimester, or quarter.

.04 If an individual is described in section 6.01 or 6.02 of this revenue procedure, services performed by the individual are eligible for the Student FICA

exception with respect to all services performed during all payroll periods of a

month or less that fall wholly or partially

within the academic term.

.05 The Student FICA exception does

not apply to services performed by an individual who is not enrolled in classes

during school breaks of more than five

weeks (including summer breaks of more

than five weeks), other than services described in section 6.04. See Rev. Rul. 72–

142, 1972–1 C.B. 317, and Rev. Rul. 74–

109, 1974–1 C.B. 288. However, the Student FICA exception applies to employment which continues during normal

school breaks of 5 weeks or less during

which the individual is not eligible for the

Student FICA exception pursuant to section 6.01 of this revenue procedure provided that the individual qualifies for the

Student FICA exception pursuant to section 6.01 of this revenue procedure on the

last day of classes or examinations preceding the break and is eligible to enroll

in classes for the first academic period

following the break.

.06 If the standards of this revenue procedure are met (and section 8 does not

apply), the amount of remuneration for

services performed by the employee, the

type of services performed by the employee, the place where the services are

performed, and the number of hours

worked by the employee are immaterial.

If the services performed by a student otherwise described in section 6.01 or 6.02

are covered under an agreement pursuant

to § 218 of the Act, the Student FICA exception does not apply.

.07 For provisions relating to domestic

service performed by a student in a local

college club, or local chapter of a college

fraternity or sorority, see § 31.3121(b)2–1.

SECTION 7. DEFINITIONS

For purposes of the standard contained

in section 6 of this revenue procedure, the

following definitions must be used.

.01 Undergraduate student. The term

“undergraduate student” has the meaning

attributed to that term in the Department

of Education regulations at 34 C.F.R.

§ 674.2 (1997).

.02 Half-time undergraduate student.

The term “half-time undergraduate student” has the meaning attributed to that

term in the Department of Education regulations at 34 C.F.R. § 674.2 (1997).

.03 Graduate or professional student.

The term “graduate or professional student” means a student who—

(1) is enrolled at an institution of higher

education for the purpose of obtaining a

degree, certificate, or other recognized

educational credential above the baccalaureate level or is enrolled in a program leading to a professional degree;

(2) has completed the equivalent of at

least three years of full-time study at an

institution of higher education, either

prior to entrance into the program or as

part of the program itself; and

(3) is not a postdoctoral student, postdoctoral fellow, medical resident, or medical intern.

.04 Half-time graduate or professional

student. The term “half-time graduate or

professional student” means an enrolled

graduate or professional student, as defined in section 7.03 of this revenue procedure, who is carrying at least a halftime academic workload at an institution

of higher education as determined by that

institution according to its own standards

and practices.

SECTION 8. ANTI-ABUSE RULE

The standards in this revenue procedure must be applied in a reasonable

manner, consistent with the purpose of

excluding from employment only services that are performed as an incident to

and for the purpose of pursuing a course

of study at a school, college or university.

1998–5 I.R.B.

See § 31.3121(b)(10)–2(c). If the standards are inappropriately applied in a

manner that conflicts with this underlying purpose so as to manipulate or mischaracterize the nature of the relationship

between an employee and an institution

of higher education, resulting in the improper avoidance of payment of FICA

taxes, then whether the Student FICA exception applies will be determined on the

basis of all the facts and circumstances,

rather than on the basis of the specific

standards set forth in sections 5 and 6 of

this revenue procedure. For example, the

standards would be inappropriately applied through the manipulation of the relationship between employees and the institution of higher education if a

university claimed that the Student FICA

exception applied to research laboratory

workers, who had been career employees, but were converted to non-career status and required to enroll in a certificate

program granting six credit hours per semester for work experience in the laboratory. As another example, if an individual who was not a student worked for a

university on a full-time basis for many

years, in a job generally performed by

non-students (but nonetheless failed to

meet the literal definition of career employee), and then enrolled at the university for six credit hours of course work

per semester while continuing the fulltime work in the same job, it may not be

appropriate to apply the standards of this

revenue procedure to conclude that the

individual’s work has become incident to

and for the purpose of pursuing a course

of study solely because the individual enrolled for this course work. In both of

these examples, whether the work is performed incident to and for the purpose of

pursuing a course of study must be determined on the basis of all the relevant

facts and circumstances.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Neil D. Shepherd of the Office of Assistant Chief Counsel (Employee Benefits & Exempt Organizations). For further information regarding

this revenue procedure, please contact Mr.

Shepherd at (202) 622-4606 (not a tollfree number).

1998–5 I.R.B

26 CFR 601.201: Rulings and determination letters.

(Also Part I, §§ 162, 165, 198, 263.)

Rev. Proc. 98–17

SECTION 1. PURPOSE

This revenue procedure provides special procedures for requesting written

guidance from the Internal Revenue Service on the tax treatment under §§ 162,

165, 198, and 263 of the Internal Revenue

Code of environmental cleanup costs incurred in projects that span several years,

including future years and prior years

(whether or not under examination).

These special procedures are available for

letter ruling requests submitted during the

two-year period beginning on February 2,

1998. The purpose of this revenue procedure is to facilitate the resolution of issues

involving the capitalization or deduction

of environmental cleanup costs for both

prior and future years of an environmental

cleanup project.

SECTION 2. BACKGROUND

.01 Section 162(a) allows a deduction

for all the ordinary and necessary expenses paid or incurred during the taxable

year in carrying on any trade or business.

.02 Section 165(a) allows a deduction

for any loss sustained during the taxable

year and not compensated by insurance or

otherwise.

.03 Section 198 permits a taxpayer to

elect to treat any qualified environmental

remediation expenditure that is paid or incurred by the taxpayer as an expense that

is not chargeable to capital account. Section 198(b) provides that the term “qualified environmental remediation expenditure” means any expenditure that is

otherwise chargeable to capital account

and that is paid or incurred in connection

with the abatement or control of hazardous substances at a qualified contaminated site.

.04 Section 263 generally prohibits deductions for capital expenditures. Section

263(a)(1) provides that no deduction is

generally allowed for any amount paid

out for permanent improvements or betterments made to increase the value of

any property or estate. Under § 263(a)(2),

no deduction is allowed for any amount

expended in restoring property or in mak-

ing good the exhaustion thereof for which

an allowance is or has been made.

.05 Rev. Proc. 98–1, 1998–1 I.R.B. 7

(Jan. 5, 1998), provides procedures under

which the Service issues letter rulings, determination letters, and information letters on specific issues. Section 2.01 of

Rev. Proc. 98–1 defines a “letter ruling”

as a written statement issued to a taxpayer

by the national office that interprets and

applies the tax laws to the taxpayer’s specific set of facts. Ordinarily, the national

office issues letter rulings on income tax

issues only on prospective transactions or

completed transactions if the letter ruling

request is submitted before the return is

filed for the year in which the transaction

was completed. All references to Rev.

Proc. 98–1 in this revenue procedure shall

include Rev. Proc. 98–1’s successors.

.06 Rev. Proc. 98–2, 1998–1 I.R.B. 74

(Jan. 5, 1998), provides procedures under

which the national office issues technical

advice to a district director or a chief, appeals office. Section 2 of Rev. Proc. 98–2

defines “technical advice” as advice or

guidance in the form of a memorandum

furnished by the national office upon the

request of a district director or a chief, appeals office, submitted in accordance with

Rev. Proc. 98–2 in response to any technical or procedural question that develops

during any proceeding on the interpretation and proper application of tax law, tax

treaties, regulations, revenue rulings, notices, or other precedents published by the

national office to a specific set of facts.

All references to Rev. Proc. 98–2 in this

revenue procedure shall include Rev.

Proc. 98–2’s successors.

SECTION 3. SCOPE

.01 In general. Except as provided in

section 3.06 below, this revenue procedure applies to a request for guidance on

the deductibility (under §§ 162, 165, or

198) or capitalization (under § 263) of environmental cleanup costs incurred in a

continuing project (e.g., one that occurs

over prior and future taxable years). Generally, a taxpayer may request a letter ruling under this revenue procedure that will

cover all tax years in which the costs of

the environmental cleanup project that are

the subject of the request are taken into

account for federal income tax purposes

(“project years”). Thus, the letter ruling

February 2, 1998

may cover project years for which a return has been filed, even if such return is

under examination or before an appeals

office.

.02 Environmental cleanup costs. For

purposes of this revenue procedure, environmental cleanup costs include, in general, any costs associated with the assessment, mitigation, removal or remediation

of environmental hazards, whether latent

or imminent, on the taxpayer’s property

or on the property of another.

.03 Environmental cleanup project. An

environmental cleanup project may consist of one or more related environmental

cleanup activities. For example, a taxpayer may request a letter ruling under

this procedure on the tax treatment of

costs paid or incurred over several years:

(1) to study, remediate, and monitor

soil and groundwater at a former manufacturing site;

(2) to remove and replace asbestos in

manufacturing equipment located at several of the taxpayer’s operating plants; or

(3) to remove underground storage

tanks, treat contaminated soil and groundwater, and remove asbestos from a retail

facility where the taxpayer intends to

begin operations.

A letter ruling issued under this revenue procedure will cover only the costs

of activities described in the taxpayer’s

request.

.04 Factual nature of question. Section

7.01 of Rev. Proc. 98–1 provides that the

national office ordinarily will not issue

letter rulings in certain areas because of

the factual nature of the problem. Although the question of whether amounts

are deductible or must be capitalized is

generally dependent upon the taxpayer’s

specific facts, only in rare or unusual circumstances will the national office decline to issue a letter ruling under this revenue procedure solely because of the

factual nature of the question.

.05 Alternative plans and hypothetical

situations. Section 7.02 of Rev. Proc. 98–

1 provides that the national office ordinarily will not issue a letter ruling on alternative plans of proposed transactions or on

hypothetical situations. Thus, the taxpayer must have a proposed environmental cleanup plan on which to base the ruling request. However, the Service

recognizes that all aspects of any environmental cleanup project may not be defi-

February 2, 1998

nite at the time of the request, particularly

if the assessment of the contamination is

not yet complete. Ordinarily, this will not

preclude issuance of a letter ruling, provided that the Service is given sufficient

facts to reach a determination. If the taxpayer’s environmental cleanup project

changes after the letter ruling is issued,

the taxpayer may request that the national

office modify or supplement its letter ruling to address the changes to the project.

See section 8 of this revenue procedure.

.06 Identical issue in litigation. Taxpayers may not request guidance under

this revenue procedure if the identical environmental cleanup issue is in the taxpayer’s return for an earlier period and

that issue is pending in litigation in a case

involving the taxpayer (or a related taxpayer within the meaning of § 267, or a

member of an affiliated group of which

the taxpayer is also a member within the

meaning of § 1504).

.07 Requests more appropriately made

under Rev. Proc. 98–1 or 98–2. The national office may determine that a request

for written guidance under this revenue

procedure would be more appropriately

made under Rev. Proc. 98–1 or 98–2. In

such a case, the taxpayer will be notified

and given an opportunity to explain why

the request is more appropriately made

under this revenue procedure.

SECTION 4. REQUESTING A LETTER

RULING

.01 Taxpayers not under examination or

before appeals office. A taxpayer requesting a letter ruling on the tax treatment of

environmental cleanup costs may do so

under this section 4.01 if no return for any

project year is under examination or before an appeals office. Except as provided

by this revenue procedure, a request under

this section 4.01 must meet the requirements of Rev. Proc. 98–1 for a letter ruling

request. In addition, if a taxpayer submits

a letter ruling request under this section

4.01 covering a project year for which a

return has already been filed, a copy of the

letter ruling request must also be submitted to the district office having jurisdiction

over the taxpayer’s return.

.02 Taxpayers under examination or

before appeals office. A taxpayer requesting a letter ruling on the tax treatment of

environmental cleanup costs incurred

under a continuing project must do so

under this section 4.02 if any project year

is under examination or before an appeals

office. Except as provided in this revenue

procedure, a letter ruling request made

under this subsection must meet the general requirements of Rev. Proc. 98–2 for a

taxpayer-initiated request for technical

advice. Once an environmental cleanup

issue is identified, all requests for letter

rulings should be made at the earliest possible stage in any proceeding. The taxpayer must submit its request (and the applicable user fee) for each letter ruling

under this section 4.02 to the district or

appeals office having jurisdiction over its

return. The district or appeals office will,

in all cases, forward the original request,

and any additional statements of the taxpayer and the district or appeals office, to

the national office using Form 4463 (Request for Technical Advice), with the following statement typed or printed at the

top of the form: “REQUESTED UNDER

REV. PROC. 98–17.”

SECTION 5. PROCESSING THE

RULING REQUEST

.01 Taxpayers not under examination

or before appeals office. A letter ruling

request submitted under section 4.01 of

this revenue procedure generally will be

processed under the procedures set forth

in Rev. Proc. 98–1. Thus, the procedures

for requesting additional information,

conferences, withdrawal of requests, etc.

are the same as those provided in Rev.

Proc. 98–1. The original letter ruling will

be issued to the taxpayer that requested it,

and a copy of the letter ruling, whether favorable or adverse, will be sent to the district director that has jurisdiction over the

taxpayer’s return.

.02 Taxpayers under examination or

before appeals office. A letter ruling request submitted under section 4.02 of this

revenue procedure generally will be

processed under the procedures set forth

in Rev. Proc. 98–2 for a taxpayer-initiated

request for technical advice, except as

provided in this section.

(1) Contacting the taxpayer. Usually,

within 21 calendar days after the national

office receives a taxpayer’s letter ruling

request, a Service representative will contact both the taxpayer (or the taxpayer’s

authorized representative) and the examining or appeals officer to discuss the substantive or procedural issues in the letter

1998–5 I.R.B.

ruling request and to ask for any additional information necessary in order to

process the request.

(2) Coordination with district and appeals office. During the processing of a

taxpayer’s letter ruling request, the national office will continuously coordinate

the evaluation of the request with the district or appeals office having jurisdiction

over the case. If the district or appeals office either determines that the national office should not consider the taxpayer’s request or disagrees with the taxpayer’s

statement of facts and issues, then the district or appeals office will notify the taxpayer in writing. For these purposes, the

Service will follow the procedures set

forth in section 10.04 of Rev. Proc. 98–2,

except that the district or appeals office

will, in all cases, forward the taxpayer’s

request, with any additional statements, to

the national office as provided in section

4.02 of this revenue procedure.

(3) Withdrawing the ruling request.

The district director or chief, appeals office, may not withdraw a request for a letter ruling submitted under section 4.02 of

this revenue procedure. However, a taxpayer may withdraw such a request at any

time before the letter ruling is signed by

the national office, provided that the district director or the chief, appeals office,

consents to the withdrawal. If the district

director or the chief, appeals office, consents to this withdrawal, the national office will send its views to the district director or the chief, appeals office. If the

district director or the chief, appeals office, does not consent to the withdrawal,

then the letter ruling request will be

processed as a request for technical advice under Rev. Proc. 98–2 and the scope

of the technical advice memorandum will

be limited to years under examination.

Pursuant to the principles of Rev. Proc.

98–1, including but not limited to section

15.10 thereof, the user fee generally will

not be refunded if the taxpayer withdraws

its request for a letter ruling under this

section.

(4) Reply by national office. Replies to

letter ruling requests issued under section

4.02 are made in two parts. Each part

identifies the taxpayer by name, address,

taxpayer identification number, and the

years under examination by the district director or under consideration by an appeals office. The first part is a transmittal

1998–5 I.R.B

memorandum addressed to the district or

appeals office. The second part is a letter

ruling as defined in section 2.01 of Rev.

Proc. 98–1 that covers the project years

addressed in the taxpayer’s request. The

national office will forward the transmittal

memorandum and a copy of the letter ruling to the district director or the chief, appeals office, having jurisdiction over the

taxpayer’s return. At the same time, the

national office will issue the original letter

ruling to the taxpayer that requested it.

.03 Coordination with industry specialization program. Prior to issuance of a

letter ruling to a taxpayer under this revenue procedure, the national office will

coordinate review of the proposed letter

ruling with a representative of the environmental cleanup costs issue specialization team.

.04 Disclosure. The text of a letter ruling issued under this revenue procedure is

open to public inspection under § 6110.

The Service will make appropriate deletions from the text before it is made available for inspection. To help the Service

make the deletions required by § 6110, a

request made under this revenue procedure must be accompanied by the statement described in section 8.01(9) of Rev.

Proc. 98–1.

SECTION 6. EFFECT OF THE LETTER

RULING

.01 General rule. A taxpayer ordinarily

may rely on a letter ruling issued by the

Service pursuant to this revenue procedure subject to the conditions and limitations described in section 12 of Rev. Proc.

98–1. A letter ruling issued on a specific

environmental cleanup project represents

a holding by the Service on that project

only. It will not apply to any project not

specifically addressed in the letter ruling.

.02 Return previously filed. The conclusion in the letter ruling, whether adverse or favorable to the taxpayer, will

generally be applied prospectively to all

future project years. In addition, if a letter

ruling involves tax years for which a return has already been filed, it will generally apply retroactively to all open years

unless the Service exercises discretionary

authority under § 7805(b) to limit the

retroactive effect of the conclusion.

.03 Use in examining the taxpayer’s return. If a taxpayer is under examination

or is later selected for examination, the

letter ruling will be used by the district director in examining the taxpayer’s returns

for prior and future project years in the

manner described in section 12.03 of Rev.

Proc. 98–1.

.04 Prior settlement or closing agreement. A letter ruling issued under this

revenue procedure will not affect any taxable year(s) that are the subject of a prior

settlement or closing agreement entered

into with a district director or an appeals

office.

SECTION 7. REVOCATION OR

MODIFICATION

A letter ruling found to be in error or

not in accord with the current views of

the Service may be revoked or modified.

If a letter ruling under this revenue procedure is revoked or modified, the revocation or modification applies to all open

years under the statute of limitations unless the Service uses its discretionary authority under § 7805(b) to limit the

retroactive effect of the revocation or

modification. The criteria and procedures for revoking or modifying a letter

ruling issued under this revenue procedure are the same as those provided in

section 12 of Rev. Proc. 98–1. In addition, the procedures for requesting

§ 7805(b) relief, and the criteria for

granting it, are the same as those provided in section 12.11 of Rev. Proc. 98–1.

SECTION 8. REQUESTING

SUPPLEMENTAL LETTER RULINGS

If the material facts underlying a letter

ruling issued under this revenue procedure

change after the letter ruling is issued, the

taxpayer may request that the Service

modify or supplement the letter ruling.

The request must comply with the requirements of sections 4.01 or 4.02 of this revenue procedure, whichever applies.

SECTION 9. CHANGE IN

ACCOUNTING METHOD

Under § 446(e), a taxpayer receiving a

letter ruling under this revenue procedure

may be required to seek the Commissioner’s consent to change its method of

accounting, and § 481 may be applicable.

In these cases, the national office will inform the taxpayer of the procedures for

obtaining this consent.

February 2, 1998

SECTION 10. USER FEE

REQUIREMENTS

Except as provided in sections 15.03

and 15.04 of Rev. Proc. 98–1, all requests

submitted under this revenue procedure

(including supplemental letter ruling requests under section 8 of this revenue procedure) must be accompanied by a user

fee. The appropriate user fee is determined from the fee schedule provided in

Appendix A of Rev. Proc. 98–1.

SECTION 11. ADDRESS FOR

SUBMISSION

.01 Taxpayers not under examination

or before an appeals office. All requests

for letter rulings submitted under section

4.01 of this revenue procedure (including

February 2, 1998

the applicable user fee) should be sent to

the Associate Chief Counsel (Domestic)

at the addresses provided in section

8.03(1) of Rev. Proc. 98–1.

.02 Taxpayers under examination or

before appeals office. All requests for letter rulings submitted under section 4.02

of this revenue procedure (including the

applicable user fee) should be sent to the

examining or appeals officer, who must

forward the request to the national office

using the same address provided in section 9.03 of Rev. Proc. 98–2.

SECTION 12. EFFECT ON OTHER

DOCUMENTS

SECTION 13. EFFECTIVE DATE

This revenue procedure is effective for

requests for letter rulings submitted during the two-year period from February 2,

1998 to February 2, 2000.

DRAFTING INFORMATION

The principal author of this revenue

procedure is Merrill D. Feldstein of the

Office of Assistant Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Ms. Feldstein on (202)

622-4950 (not a toll-free call).

Rev. Proc. 98–1 is amplified. Rev.

Proc. 98–2 is amplified and modified.

1998–5 I.R.B.

Part IV. Items of General Interest

Year 2000 Changes

Announcement 98–5

The purpose of this announcement is to

identify forms and date fields that will be

affected by the impending expansion of

the date field to accommodate the Year

2000.

The Information Reporting Program

has date fields within the information return records filed magnetically/electronically to the Martinsburg Computing Center. Currently we allow a two-position

field for the year (YY) which appears in

both the Payer “A” Record and Payee “B”

Record. All other dates within the Payee

Records are currently six-digit fields in

the format of MMDDYY.

For Tax Year 1998, the information returns date fields will be expanded and reformatted by changing the two-digit tax

year field to four-digits in preparation for

the Year 2000. To accommodate the

change, the four-digit tax year field in the

Payer “A” Record will be in positions 25. The sequence number field will be

eliminated due to the date expansion. The

tax year will be dropped in the Payee “B”

record since the tax year of the return can

be determined by the tax year provided in

the Payer “A” Record. By expanding the

tax year field to four-positions, the Information Reporting Program will be consistent with the industry standard.

The record format for information returns filed magnetically/electronically

will have the following changes:

In addition to the necessary Year 2000

changes, there are changes that will be

made as a result of legislative requirements. The current 420 position record

will be expanded to accommodate this

new information. It is our intention to

make the Publication 1220, which will

identify these changes, available as soon

as possible.

This announcement refers specifically

to the information returns designated

below that are received and processed

magnetically/electronically at the Internal

Revenue Service, Martinsburg Computing Center. The related publications will

be revised accordingly.

1098

Mortgage Interest Statement

1099–A

Acquisition and Abandonment of Secured

Property

1099–B

Proceeds From Broker

and Barter Exchange

Transactions

1099–C

Cancellation of Debt

1099–DIV Dividends and Distributions

1099–G

Certain Government Payments

1099–INT Interest Income

1099–LTC Long Term Care and Accelerated Death Benefits

1099–MISC Miscellaneous Income

1099–MSA Distributions from Medical Savings Accounts

1099–OID Original Issue Discount

1099–PATR Taxable Distributions

Received from Cooperatives

1099–R

Distributions From Pension, Annuities, Retirement or Profit-Sharing

— Two-digit date fields (YY) will be

expanded to four-digits (YYYY)

— Six-digit date fields (MMDDYY)

will be changed to eight-digits

(YYYYMMDD)

Plans, IRAs, Insurance

Contracts, Etc.

1099–S

Proceeds From Real Estate Transactions

5498

Individual Retirement

Arrangement Information

5498MSA Medical Savings Account Information

W–2G

Certain Gambling Winnings

1042S

Foreign Person’s U.S.

Source Income Subject

to Withholding

W–4

Employee’s Withholding

Allowance Certificate

The date field expansion will be effective for Tax Year 1998 data filed in Calendar Year 1999.

Announcement 98–6

The Form 5498 IRA/SEP/SIMPLE Indicator instructions on page 42 of the

TY97 Publication 1220 are causing confusion to both filers and to the Internal

Revenue Bulletin (I.R.B.). In your publication, please cross out the phrase “and

not reporting contributions in Amount

Codes 1, 6, or 7”. (See below.)

The TY97 paper instructions advise filers to use the IRA/SEP/SIMPLE Indicators

with Payment Amount Fields 2 and 4 only

if there is no money reported in Payment

Amount Fields 1, 6, or 7. Our program requires an indicator if there is money in

Payment Amount Fields 2 and 4. For filing

information returns magnetically or electronically, the Publication 1220 instructions

take precedent over the paper instructions.

An I.R.B. will be issued to clarify the

problem.

Please notify ISS if there are any other

areas of concern with the new pub.

141

Form 5498 IRA

Indicator (Individual

Retirement Arrangement)

Required. Form 5498 only. Enter ‘1’ if reporting a rollover (Amount Code 2)

or Fair Market Value (Amount Code 4) for an IRA.Otherwise, enter a blank.

142

Form 5498 SEP Indicator

(Simplified Employee Pension)

Required. Form 5498 only. Enter ‘1’ if reporting a rollover (Amount Code 2)

or Fair Market Value (Amount Code 4) for a SEP. Otherwise, enter a blank.

143

Form 5498 SIMPLE

Indicator (Savings Incentive

Match Plan for Employees

of Small employers)

Required. Form 5498 only. Enter ‘1’ if reporting a rollover (Amount Code 2)

or Fair Market Value (Amount Code 4) for a SIMPLE. Otherwise, enter a

blank.

1998–5 I.R.B

February 2, 1998

Foundations Status of Certain

Organizations

Announcement 98–7

The following organizations have

failed to establish or have been unable to

maintain their status as public charities or

as operating foundations. Accordingly,

grantors and contributors may not, after

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

under section 508(b) of the Code. This

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

Former Public Charities. The following

organizations (which have been treated as

organizations that are not private foundations described in section 509(a) of the

Code) are now classified as private foundations:

Anchorage Education Community

Winning With Stronger Education,

Anchorage, AK

Armenian Film Society, Northridge, CA

Association of Alpha Development

Corporations, Los Angeles, CA

Association of Black Families for

Cultural and Educational

Development, Oakland, CA

Auburn Resident Council, Auburn, CA

Ayuda Homes, Walnut, CA

Bakersfield Korean Academy,

Bakersfield, CA

Bardia Foundation Inc., Westlake, CA

Bay Area Black Professionals, Oakland,

Believers Quartet Inc., Sacramento, CA

Berkeley Community Homes, Oakland,

Big Blue Foundation Inc., Los Angeles,

Big Rock Productions Inc., Malibu, CA

Black Eyes Productions Inc., San Jose,

Boise Blue Society, Inc., Boise, ID

Borinquen Culture Through Agriculture

Learning Center, Holualoa, HI

Broader Horizon Inc., Cupertino, CA

Business and Employment Training

Foundation of Napa County Inc.,

Napa, CA

The California Citizenship Foundation,

Sacramento, CA

February 2, 1998

Calistoga Music Ministries, Angwin, CA

Caring Friends Foundation Incorporated,

Rialto, CA

Carson Community Emergency Shelter,

Carson, CA

Celebrity AIDS Benefit, Wrightwood,

Center for A New Generation, East Palo

Alto, CA

Central Area Business Development

Center, Seattle, WA

Central Recovery & Development

Project, Los Angeles, CA

Champions Foundation Inc., Athens, GA

Chandler Parents Club Inc., Chandler, OK

Change Masters Inc., Greeley, CO

Channel Housing Ministries Inc., New

Era, MI

Channel Vision Inc., Los Angeles, CA

Chapel Foundation, Nashville, TN

Chapel Perilous Theater Ensemble,

Chicago, IL

Charity of the Three Fishermen, Houston,

Charleston Stage Company, Charleston,

Chase Homeless Assistance Fund Inc.,

Montpelier, OH

Chassidic Center Nusach Ari of the West

Inc., Denver, CO

Chattanooga Hamilton Area Community

Development Corporation,

Chattanooga, TN

Circus Earth Foundation, San Diego, CA

Council for Safer Communities, Chicago,

Farish Street Historic District

Neighborhood Foundation Inc.,

Jackson, MS

Farm Plan Advocates Inc., Charlotte, NC

Farmers Harvest Inc., Philadelphia, PA

Farragut Dugout Club Inc., Knoxville,

Fast Food Inc., Tulsa, OK

Father & Son Mission Housing

Corporation, Memphis, TN

Fauquier County Soccer Clubs,

Gainesville, VA

Fawn Ridge Wildlife Refuge Inc., Cream

Ridge, NJ

Halifax County HIV AIDS Task Force,

Inc., Halifax, NC

Harrison County Drug and Alcohol

Council Inc., Clarksburg, WV

Highlands Forum Inc., Highlands, NC

Highview Resident Council Inc.,

Maryland Heights, MO

Highways and Hedges Inc., Onalaska, WI

Hill Country Childrens Advocacy Center,

Llano, TX

Hill Country Social Services Inc., Sachse,

Hill Country Victims Inc., Burnett, TX

Hillcrest Community Development Inc.,

Bentonia, MS

Hillsborough County Law Enforcement

Charity Inc., Tampa, FL

Hillsdale County Celebration of Christ,

Hillsdale, MI

Hilton Head Island Soccer Club, Hilton

Head Island, SC

Hilton Head Wildlife Rescue Service

Inc., Hilton Head Island, SC

His House Ministries Inc., Warner

Robins, GA

Hispanic American Association of SA

Rasota Manatee Counties Inc.,

Sarasota, FL

Hispanic American Construction Industry

Ed & Civic Awareness Org., Chicago,

Hispanic American Foundation

Corporation, Miami, FL

Hispanic Sports Hall of Fame and

Hispanic Oldtimers All-Star Base,

Chicago, IL

Hispanic Veterans Project of Kansas Inc.,

Olathe, KS

I N K Investing N Kids, Hilmar, CA

Institution of Housing and Community

Development, Maywood, IL

NAIOP Charities Inc., McLean, VA

Nasau Volunteer Dive Rescue Team,

Fernandina Beach, FL

National Arthrogryposis Foundation Inc.,

Birmingham, AL

National Association for Grass Roots

Program, Chicago, IL

National Association of African

American Entrepreneurs, Inc.,

Indianapolis, IN

North American Institute for International

Communications, Washington, DC

Northern Virginia Interdenominational

Mass Choir, Alexandria, VA

Northland Homes and Properties Inc.,

Fostoria, OH

Northland Partners in Progress, Duluth,

Northside Athletes Foundation

Corporation, Atlanta, GA

Northside Community Development

Corporation, Houston, TX

1998–5 I.R.B.

Northside Rotary Foundation Inc.,

Fayetteville, AR

Northwest Athletic Association, Houston,

Northwest Education Coalition, Houston,

Northwest Houston Education

Foundation, Inc., Houston, TX

Northwest Independent Living Group

Inc., Schaumburg, IL

Northwest Nutritional Center, Houston,

Northwest Ohio Youth Soccer League,

Maumee, OH

Northwest Striders Track and Field,

Towson, MD

Northwoods Wilderness Recovery Inc.,

Houghton, MI

1998–5 I.R.B

Nosotros Unidos Multicultural Gang, Ft.

Worth, TX

Novice Volunteer Fire Department Inc.,

Paris, TX

Novus Foundation Incorporated,

Mountainside, NJ

Nowata’s Historical Main Street Inc.,

Nowata, OK

NTID Alumni Chapter of Greater

Houston, Houston, TX

Nueva Esperanza Childrens Home Inc.,

Plano, TX

Nursing Health Center, Cleveland, OH

Salem Elementary Academic Foundation

Inc., Salem, IL

Stop Up the Cracks and Let Them Learn,

Houston, TX

Stretch for Greatness Inc., Richardson, TX

Texas Neurosciences Foundation, San

Antonio, TX

If an organization listed above submits

information that warrants the renewal of its

classification as a public charity or as a private operating foundation, the Internal

Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and

contributors may thereafter rely upon such

ruling or determination letter as provided

in section 1.509(a)–7 of the Income Tax

Regulations. It is not the practice of the

Service to announce such revised classification of foundation status in the Internal

Revenue Bulletin.

February 2, 1998

Definition of Terms

Revenue rulings and revenue procedures

(hereinafter referred to as “rulings”)

that have an effect on previous rulings

use the following defined terms to describe the effect:

Amplified describes a situation where

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

being extended to apply to a variation of

the fact situation set forth therein. Thus,

if an earlier ruling held that a principle

applied to A, and the new ruling holds

that the same principle also applies to B,

the earlier ruling is amplified. (Compare

with modified, below).

Clarified is used in those instances

where the language in a prior ruling is

being made clear because the language

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

prior ruling is being changed.

Distinguished describes a situation

where a ruling mentions a previously

published ruling and points out an essential difference between them.

Modified is used where the substance

of a previously published position is

being changed. Thus, if a prior ruling

held that a principle applied to A but not

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

plies to both A and B, the prior ruling is

modified because it corrects a published

position. (Compare with amplified and

clarified, above).

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

in a ruling that lists previously published

rulings that are obsoleted because of

changes in law or regulations. A ruling

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

subsequently adopted.

Revoked describes situations where the

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

is being stated in the new ruling.

Superseded describes a situation where

the new ruling does nothing more than

restate the substance and situation of a

previously published ruling (or rulings).

Thus, the term is used to republish under

the 1986 Code and regulations the same

position published under the 1939 Code

and regulations. The term is also used

when it is desired to republish in a single

ruling a series of situations, names, etc.,

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

new ruling does more than restate the

substance of a prior ruling, a combination

of terms is used. For example, modified

and superseded describes a situation

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

is continued without change in part and it

is desired to restate the valid portion of

the previously published ruling in a new

ruling that is self contained. In this case

the previously published ruling is first

modified and then, as modified, is superseded.

Supplemented is used in situations in

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

countries, is published in a ruling and

that list is expanded by adding further

names in subsequent rulings. After the

original ruling has been supplemented

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

ruling and the additions, and supersedes

all prior rulings in the series.

Suspended is used in rare situations to

show that the previous published rulings

will not be applied pending some future

action such as the issuance of new or

amended regulations, the outcome of

cases in litigation, or the outcome of a

Service study.

Abbreviations

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Proc..—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

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

Bulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

February 2, 1998

1998–5 I.R.B.

Numerical Finding List1

Bulletins 1998–1 through 1998–4

Announcements:

98–1, 1998–2 I.R.B. 38

98–2, 1998–2 I.R.B. 38

98–3, 1998–2 I.R.B. 38

98–4, 1998–4 I.R.B. 31

Notices:

98–1, 1998–3 I.R.B. 42

98–2, 1998–2 I.R.B. 22

98–3, 1998–3 I.R.B. 48

98–4, 1998–2 I.R.B. 25

98–5, 1998–3 I.B.R. 49

98–6, 1998–3 I.R.B. 52

98–7, 1998–3 I.R.B. 54

98–8, 1998–4 I.R.B. 6

98–9, 1998–4 I.R.B. 8

Proposed Regulations:

REG–102894–97, 1998–3 I.R.B. 59

REG–109704–97, 1998–3 I.R.B. 60

REG–209463–82, 1998–4 I.R.B. 27

Revenue Procedures:

98–1, 1998–1 I.R.B. 7

98–2, 1998–1 I.R.B. 74

98–3, 1998–1 I.R.B. 100

98–4, 1998–1 I.R.B. 113

98–5, 1998–1 I.R.B. 155

98–6, 1998–1 I.R.B. 183

98–7, 1998–1 I.R.B. 222

98–8, 1998–1 I.R.B. 225

98–9, 1998–3 I.R.B. 56

98–10, 1998–2 I.R.B. 35

98–11, 1998–4 I.R.B. 9

98–12, 1998–4 I.R.B. 18

98–13, 1998–4 I.R.B. 21

98–14, 1998–4 I.R.B. 22

98–15, 1998–4 I.R.B. 25

Revenue Rulings:

98–1, 1998–2 I.R.B. 5

98–2, 1998–2 I.R.B. 15

98–3, 1998–2 I.R.B. 4

98–4, 1998–2 I.R.B. 18

98–5, 1998–2 I.R.B. 20

98–6, 1998–4 I.R.B. 4

Treasury Decisions:

8740, 1998–3 I.R.B. 4

8741, 1998–3 I.R.B. 6

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 1997–27 through

1997–52 will be found in Internal Revenue Bulletin

1998–1, dated January 5, 1998.

1998–5 I.R.B

February 2, 1998

Finding List of Current Action on

Previously Published Items1

Bulletins 1998–1 through 1998–4

Revenue Procedures:

97–1

Superseded by

98–1, 1998–1 I.R.B. 7

97–2

Superseded by

98–2, 1998–1 I.R.B. 74

97–3

Superseded by

98–3, 1998–1 I.R.B. 100

97–4

Superseded by

98–4, 1998–1 I.R.B. 113

97–5

Superseded by

98–5, 1998–1 I.R.B. 155

97–6

Superseded by

98–6, 1998–1 I.R.B. 183

97–7

Superseded by

98–7, 1998–1 I.R.B. 222

97–8

Superseded by

98–8, 1998–1 I.R.B. 225

97–21

Superseded by

98–2, 1998–1 I.R.B. 74

97–53

Superseded by

98–3, 1998–1 I.R.B. 100

Revenue Rulings:

75–17

Supplemented and superseded by

98–5, 1998–2 I.R.B. 20

92–19

Supplemented in part by

98–2, 1998–2 I.R.B. 15

1 A cumulative finding list for previously published

items mentioned in Internal Revenue Bulletins

1997–27 through 1997–52 will be found in Internal

Revenue Bulletin 1998–1, dated January 5, 1998.

February 2, 1998

1998–5 I.R.B.

Index

INCOME TAX

INCOME TAX—Continued

Internal Revenue Bulletins

1998–1 through 1998–4

Education loans (Notice 7) 3, 54

Elections under section 7704(g) (Notice

3) 3, 48

Employee Plans:

Determination letters (RP 6) 1, 183;

(RP 14) 4, 22

Discrimination; CODAs (Notice 1) 3,

Eligible deferred compensation plans

(Notice 8) 4, 6

Funding:

Full funding limitations, weighted average interest rate (Notice 9) 4, 8

Letter rulings, etc. (RP 4) 1, 113

Limitations on benefits and contributions (RR 1) 2, 5

Minimum funding standards (RP 10)

2, 35

Proposed regulations:

26 CFR 1.401(a)(9)–1, amended;

qualified plans and individual retirement plans, required distributions (REG– 209463–82) 4, 27

Recovery of basis; retirees (Notice

2) 2, 22

SIMPLE-IRAs (Notice 4) 2, 25

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Exempt Organizations:

Letter rulings, etc. (RP 4) 1, 113

Technical advice (RP 5) 1, 155

User fees (RP 8) 1, 225

Foreign tax credit abuse (Notice 5) 3, 49

Insurance companies:

Discounting estimated salvage recoverable (RP 12) 4, 18

Interest rate tables (RR 2) 2, 15

Loss reserves; discounting unpaid

losses (RP 11) 4, 9

Inventory:

LIFO:

Price indexes; department stores for

November 1997 (RR 6) 4, 4

Letter rulings, determination letters, and

information letters issued by Associate

Chief Counsel (Domestic), Associate

Chief Counsel (EBEO), Associate

Chief Counsel (Enforcement Litigation), and Associate Chief Counsel

(International) (RP 1) 1, 7

Low-income housing credit:

Satisfactory bond; “bond factor”

amounts for the period October

through December 1997 (RR 3) 2, 4

Proposed regulations:

26 CFR 54.9812–1, added; mental

health parity; HIPAA (REG–

109704–97) 3, 60

Qualified Funeral Trust; guidance (Notice

6) 3, 52

Qualified Zone Academy Zone Bonds

(RP 9) 3, 56

Regulations:

26 CFR 54.9801–2T, amended;

54.9801–4T, –5T, revised; 54.9804–

1T, redesignated; 54.9806–1T, redesignated; 54.9812–1T, added; mental

health parity, interim rules (TD

8741) 3, 6

Rulings:

Areas in which advance rulings will not

be issued:

Associate Chief Counsel (Domestic), Associate Chief Counsel

(EBEO) (RP 3) 1, 100

Associate Chief Counsel (International) (RP 7) 1, 222

Technical advice to district directors and

chiefs, appeals offices, Associate Chief

Counsel (Domestic), Associate Chief

Counsel (EBEO), Associate Chief

Counsel (Enforcement Litigation), and

Associate Chief Counsel (International)

(RP 2) 1, 74

For the index of items published during

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

1998–1, dated January 5, 1998.

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

the specific item; numbers in roman and

italic type following the parenthesis refer

to the Internal Revenue Bulletin in which

the item may be found and the page

number on which it appears.

Key to Abbreviations:

Revenue Ruling

Revenue Procedure

Treasury Decision

Court Decision

Public Law

Executive Order

Delegation Order

TDO

Treasury Department Order

Tax Convention

SPR

Statement of Procedural

Rules

PTE

Prohibited Transaction

Exemption

ESTATE TAX

Revocable trust; election (RP 13) 4, 21

Underpayment interest, interest expense

deduction, estates (RP 15) 4, 25

EXCISE TAX

Bows and arrows; taxable and nontaxable

articles (RR 5) 2, 20

Proposed regulations:

26 CFR 40.0–1T, added; 40.6011(a)–

1T, added; 40.6302(c)–2T, added;

deposits of excise taxes (REG–

102894–97) 3, 59

Regulations:

26 CFR 40.0–1(a), amended; 40.6011(a)–

1(a)(2)(iii), 40.5302(c)–1, amended;

40.6302(c)–2(b)(2)(iii), added; deposits of excise taxes (TD 8740) 3, 4

1998–5 I.R.B

February 2, 1998

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.