Bulletin No. 1998–46

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Bulletin No. 1998–46

November 16, 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

ADMINISTRATIVE

Rev. Rul. 98–54, page 14.

Notice 98–54, page 25.

LIFO; price indexes; department stores. The September

1998 Bureau of Labor Statistics price indexes are accepted for

use by department stores employing the retail inventory and

last-in, first-out inventory methods for valuing inventories for tax

years ended on, or with reference to, September 30, 1998.

Information reporting; qualified student loan interest.

Taxpayers are informed that the Service and Treasury are

extending the application of Notice 98–7, 1998–3 I.R.B. 54,

to information reporting required under section 6050S of

the Code for 1999. Further, no reporting is required with respect to “mixed use” loans.

T.D. 8787, page 5.

Final and temporary regulations provide ordering rules for

the reduction of basis of property under sections 108 and

1017 of the Code.

Notice 98–55, page 26.

EMPLOYEE PLANS

Qualified offer rule. Public comment is requested on several issues raised by the recently enacted qualified offer rule

regarding the award of reasonable administrative and litigation costs to a taxpayer in connection with an administrative

or court proceeding.

Rev. Rul. 98–53, page 12.

Rev. Proc. 98–55, page 27.

Covered compensation tables; 1999. The covered compensation tables for the 1999 calendar year for determining

contributions to defined benefit plans and permitted disparity are set forth.

Late election relief for S corporations. If an S election or

other related election is filed after the due date for the desired effective date of that election, special procedures permit taxpayers meeting the eligibility requirements outlined in

this revenue procedure to request relief through the service

center instead of applying for a private letter ruling. This revenue procedure extends the special procedure for late S

corporation elections described in Rev. Proc. 97–40 from 6

months to 12 months (but in no event to later than the unextended due date of the tax return for the first year the corporation intended to be an S corporation), provides similar

relief for certain QSub elections, and extends the application

of Rev. Proc. 94–23 to ESBT elections. Rev. Procs. 94–23

and 97–40 amplified and superseded.

Notice 98–52, page 16.

Nondiscriminatory safe harbors; ADP test; ACP test.

This notice provides guidance on the safe harbor methods

contained in sections 401(k)(12) and 401(m)(11) of the

Code for satisfying the nondiscrimination tests contained in

sections 401(k) and 401(m) for plan years beginning after

December 31, 1998.

Notice 98–53, page 24.

Retirement plans; 1999 section 415(d) limitations.

Cost-of-living adjustments effective January 1, 1999, applicable to the dollar limits on benefits under qualified defined

benefit pension plans and to other provisions affecting (1)

certain plans of deferred compensation and (2) “control employees” are set forth.

Finding Lists begin on page 44.

Department of the Treasury

Internal Revenue Service

Rev. Proc. 98–56, page 33.

Section 1374 no-rule. This procedure amplifies the “No

Rule” revenue procedure, Rev. Proc. 98–3, 1998–1 I.R.B.

(Continued on page 4)

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The IRS Mission

and by applying the tax law with integrity and fairness to

all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

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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.

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HIGHLIGHTS

OF THIS ISSUE—Continued

ADMINISTRATIVE—Continued

Announcement 98–100, page 42.

The Service announces that in order to fully consider comments received in response to draft training materials on the

application of section 119 of the Code to the hospitality industry, it will not release final training materials by October

31, 1998. The Service confirms that taxpayers will have

until 30 days after the final materials are issued to indicate

interest in accepting the related settlement initiative, and the

Service responds to a question about the terms of the settlement initiative.

100, to include certain issues arising in the timber, coal, and

domestic iron ore industries under sections 631 and 1374

of the Code.

Announcement 98–99, page 34.

Test of mediation procedure for appeals. Appeals is

conducting an additional two-year test of its mediation procedure. This announcement contains the procedures that

taxpayers may use to request mediation for certain issues

that are in the Appeals administrative process and that are

not docketed in any court.

November 16, 1998

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

Section 108.—Income From

Discharge of Indebtedness

26 CFR 1.108–4: Election to reduce basis of

depreciable property under section 108(b)(5) of the

Internal Revenue Code.

T.D. 8787

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

Basis Reduction Due to

Discharge of Indebtedness

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final

and temporary regulations that provide ordering rules for the reduction of bases of

property under sections 108 and 1017 of

the Internal Revenue Code of 1986. The

regulations will affect taxpayers that exclude discharge of indebtedness income

from gross income under section 108.

DATES: Effective Date: These regulations are effective,

October 22, 1998.

Applicability Date: These regulations

apply to discharges of indebtedness occurring on or after, October 22, 1998 and

to elections under section 108(b)(5) concerning discharges of indebtedness occurring on or after, October 22, 1998.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations generally, Sharon L. Hall or Christopher F.

Kane of the Office of Assistant Chief

Counsel (Income Tax & Accounting) at

(202) 622-4930; concerning partnership

adjustments under section 1017,

Matthew Lay of the Office of Assistant

Chief Counsel (Passthroughs & Special

Industries) at (202) 622-3050.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this final regulation have been

reviewed and approved by the Office of

1998–46 I.R.B.

Management and Budget in accordance

with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507(d)) under control

number 1545–1539. Responses to these

collections of information are required to

obtain a benefit.

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 1 hour.

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, OP:FS: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 a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Background

This final regulation contains amendments to the income tax regulations (26

CFR Parts 1 and 301) under sections 108

and 1017 of the Internal Revenue Code of

1986 (Code). The amendments conform

the regulations to amendments to sections

108 and 1017 made by the Bankruptcy

Tax Act of 1980, Public Law 96–589, §§2,

94 (Stat. 3389 (1980)); 1980–2 C.B. 607

(Bankruptcy Tax Act); the Technical Corrections Act of 1982, Public Law 97–448,

§102(h)(1), 96 (Stat. 2365, 2372 (1983));

1983–1 C.B. 451; the Deficit Reduction

Act of 1984, Public Law 98–369, sections

474(r)(5) and 721(b)(2), 98 (Stat. 494,

839, 966 (1984)); 1984–3 C.B. (Vol. 1) 1;

the Tax Reform Act of 1986, Public Law

99–514, sections 104(b)(2), 231(d)(3)(D),

822, and 1171(b)(4), 100 (Stat. 2085,

2105, 2179, 2373, 2513 (1986)); 1986–3

C.B. (Vol. 1) 2; and the Omnibus Budget

Reconciliation Act of 1993, Public Law

103–66, section 13150, 107 (Stat. 312,

446 (1993)); 1993–3 C.B. 1.

On January 7, 1997, proposed regulations (REG–208172–91), were published

in the Federal Register (62 F.R. 955).

Written comments were received in response to the notice of proposed rulemaking. One speaker provided testimony at a

public hearing held on May 29, 1997.

After consideration of all the comments, the proposed regulations under

sections 108 and 1017 are adopted, as revised by this Treasury decision.

Explanation of Revisions and Summary

of Comments

1. Basis Reduction Limited to Fair

Market Value

One commentator requested that basis

reduction be limited to fair market value

as provided by §1.1016–7(a) (as removed

by this regulation). The final regulations

do not adopt this recommendation. Section 1017, as enacted by the Bankruptcy

Tax Act, fundamentally changed the rules

relating to basis reduction where discharge of indebtedness income (cancellation of debt (COD) income) is excluded

from gross income. The revised statute,

in section 1017(b)(2), provides only one

limitation on basis reduction for insolvent

and bankrupt taxpayers who do not make

an election under section 108(b)(5).

Under that rule, the basis reduction may

not exceed the excess of the aggregate of

the bases of the property held by the taxpayer immediately after the discharge

over the aggregate of the liabilities of the

taxpayer immediately after the discharge.

The fair market value limitation found in

the regulations removed by this Treasury

decision is not reflected in section 1017.

Accordingly, the IRS and Treasury Department do not believe that a rule limiting basis reduction to fair market value

would be appropriate.

2. Section 108(c)(2)(A) Limitation

Section 1.108–5(a) of the proposed

regulations described the limitation under

section 108(c)(2)(A) and provided that

the amount excluded under section

108(a)(1)(D) (concerning discharges of

qualified real property business indebtedness) could not exceed the excess of the

outstanding principal amount of that indebtedness immediately before the dis-

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charge over the net fair market value of

the qualifying real property (as defined

under §1.1017–1(c)(1)) immediately before the discharge. Two commentators requested that the regulations clarify that

any outstanding accrued and unpaid interest is included in determining the outstanding principal amount of the indebtedness for purposes of this limitation.

Given the purpose of this limitation,

which is to prevent taxpayers from using

the section 108(a)(1)(D) exclusion to the

extent that debt cancellation would create

equity in property (H.R. Rep. 103–111,

103d Cong., 1st Sess., 622–23 (1993)),

the IRS and Treasury Department believe

that it is inappropriate to strictly limit the

exclusion by reference to the amount

stated as principal in the debt instrument.

Accordingly, the final regulations provide

that, for purposes of section 108(c)(2)(A)

and §1.108–6 only, outstanding principal

amount means the principal amount of an

indebtedness and all additional amounts

owed that, immediately before the discharge, are equivalent to principal, in that

interest on such amounts would accrue

and compound in the future. Amounts

that are subject to section 108(e)(2) are

excepted from the definition of principal

amount. In addition, principal amount

must be adjusted to account for unamortized premium and discount consistent

with section 108(e)(3).

3. Allocation of Basis Reduction of

Multiple Properties Within the Same

Class

The proposed regulations incorporated

the limitation described in section

1017(b)(2) which provides that the basis

reduction for bankrupt and insolvent taxpayers may not exceed the excess of the

aggregate of the bases of the property

held by the taxpayer immediately after the

discharge over the aggregate of the liabilities of the taxpayer immediately after the

discharge. A commentator suggested that

this limitation be applied on a class by

class basis, so that when a basis reduction

applied within a single class of properties

described in §1.1017–1(a) exceeds the

amount of basis over the debt secured by

the properties in that class, the basis reduction in excess of that amount should

default to the next class.

The final regulations do not adopt this

comment.

November 16, 1998

The overall limitation on basis reduction is determined by reference to the adjusted basis of property and the amount of

money held by the taxpayer over the liabilities of the taxpayer “immediately after

the discharge.” By contrast, under the

basis reduction rules applicable for purposes of section 108(b)(2)(E), the taxpayer must reduce the adjusted basis of

property “held by the taxpayer at the beginning of the taxable year following the

year in which the discharge occurs.” Section 1017(a). Given the difference in the

relevant time for applying the basis limitation and the basis reduction rules, and

the relative complexity of the calculations

necessary to implement the proposal, the

IRS and Treasury Department believe that

the suggested limitation is not workable.

Accordingly, the final regulations continue to apply the limitation based on the

aggregate bases and liabilities of the taxpayer consistent with section 1017(b)(2).

The proposed regulations also provided

that a taxpayer must treat a distributive

share of a partnership’s COD income as

attributable to a discharged indebtedness

secured by the taxpayer’s interest in that

partnership. The rule in the proposed regulations for allocating basis reduction

among multiple properties under section

108(b)(2)(E) contained parenthetical language cross-referencing the partnership

provision for the property classes that included secured real and personal property

used in a trade or business or held for investment. This parenthetical language

was intended to remind taxpayers that

partnership indebtedness is treated as indebtedness secured by the taxpayer’s interest in the partnership.

One commentator stated that the crossreference with respect to secured real

property was confusing since a partnership interest presumably should be treated

as personal property in reducing basis

under section 108(b)(2)(E). This is contrasted with the modified basis reduction

rules under sections 108(b)(5) and 108(c)

which, assuming the appropriate requests

are made and consents are granted, apply

a look-through rule to reduce the inside

basis of depreciable property or depreciable real property held by a partnership.

In order to eliminate this confusion, the

parenthetical language is not included in

the final regulations. However, as under

the proposed regulations, the final regula-

tions continue to treat a distributive share

of a partnership’s COD income as attributable to a discharged indebtedness secured by the taxpayer’s partnership interest. Accordingly, the elimination of the

parenthetical language is not intended to

change the substantive results obtained in

allocating a basis reduction among multiple properties.

4. Meaning of “In Connection With” In

Section 108(c)(3)

A commentator requested that the final

regulations provide that the phrase “in

connection with” in section 108(c)(3)

does not require that the proceeds of debt

incurred or assumed before January 1,

1993 be traced to real property used in a

trade or business, but only requires that

the debt be secured by real property used

in a trade or business as of January 1,

1993. The final regulations do not adopt

this comment. Section 108(c)(3)(A) defines qualified real property business indebtedness as indebtedness which “was

incurred or assumed by the taxpayer inconnection with real property used in a

trade or business and is secured by such

real property”. The IRS and Treasury Department do not believe that this sentence

should be interpreted to mean only that

the debt must be secured by real property

used in a trade or business as of January

1, 1993.

5. Basis Reduction With Respect to a

Residence

A commentator requested that when the

basis of a taxpayer’s residence is reduced

under section 1017 and is disposed of in a

transaction subject to section 1034

(which provided for the deferral of gain

on the sale of a personal residence), the

potential recapture income arising under

section 1245 should be carried into the replacement property. This comment is not

adopted in the final regulations. Section

1034 was repealed by the Taxpayer Relief

Act of 1997. New section 121, enacted

by the Taxpayer Relief Act of 1997, exempts certain gain on the sale of a residence, but does not provide that the potential gain will be transferred to a

replacement residence. Therefore, under

the new law, there is no mechanism to

preserve the potential recapture income

with respect to a new residence, and the

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potential recapture income must be recognized on the sale of the residence under

section 1245.

6. Mandatory Request and Consent

The proposed regulations provided that

a partner may treat a partnership interest

as depreciable property under section

108(b)(5) (or as depreciable real property

under section 108(c)) only if the partnership consents to make corresponding adjustments to the basis of the partnership’s

depreciable property (or depreciable real

property). The IRS and Treasury Department generally believe, in this context,

that whether or not a partnership consents

to make the corresponding adjustments to

the basis of its property should be a matter

of agreement between the partner and the

partnership. Therefore, the proposed regulations generally provided that a partner

is free to choose whether or not to request

that a partnership reduce the basis of partnership property and that the partnership

is free to grant or withhold its consent.

The ability to freely choose whether or

not to request or grant consent, however,

provides opportunities to avoid the general ordering rules of the proposed regulations through the use of a partnership.

Therefore, the proposed regulations provided that, in a limited number of situations; (i) a partner is required to request

the partnership’s consent, and (ii) the

partnership is required to grant that consent. Specifically, the proposed regulations provided that a partner is required to

request consent if the partner owns (directly or indirectly) more than 50 percent

of the capital and profits interests of the

partnership, or if the partner receives a

distributive share of COD income from

the partnership. In addition, the partnership is required to grant consent if requests are made by partners owning (directly or indirectly) an aggregate of more

than 50 percent of the capital and profits

interests of the partnership.

One commentator requested revisions

to the mandatory request and consent

rules contained in the proposed regulations. This commentator argued that the

proposed regulations, as written, could

unduly burden certain large partnerships

in situations where the partnership’s refusal to consent was not motivated by tax

avoidance. The commentator requested

1998–46 I.R.B.

that the mandatory consent rule be revised

to require a partnership to consent only if

the partnership receives requests from

five or fewer partners who own, in the aggregate, more than 50 percent of the capital and profits of the partnership.

To ensure that partnerships are not unduly burdened by the mandatory request

and consent rules, the commentator’s proposal has been adopted, in part, in the

final regulations. However, to preserve

the general ordering rules of the regulations, the IRS and Treasury Department

believe that it is appropriate to require a

partnership to consent to reduce the basis

of its depreciable property (or depreciable

real property) where a substantial majority of its partners elect to exclude the

COD income under sections 108(b)(5) or

108(c). Therefore, the final regulations

provide that a partnership must consent to

reduce its partners’ shares of the partnership’s depreciable basis in depreciable

property (or depreciable real property) if

consent is requested by; (i) partners owning (directly or indirectly) an aggregate of

more than 80 percent of the capital and

profits interests of the partnership, or (ii)

five or fewer partners owning (directly or

indirectly) an aggregate of more than 50

percent of the capital and profits interests

of the partnership.

As in the proposed regulations, the

final regulations do not require a partnership to reduce the basis of its depreciable

property (or depreciable real property) in

all situations where the partnership is the

source of the COD income. However,

where a partnership is the source of the

COD income and partners elect to exclude such income, such partners are required to request that the partnership reduce its basis in such property.

Accordingly, if partners meeting the

requirements in (i) or (ii) above elect to

exclude such income, the partnership

must consent to reduce the basis of its depreciable property (or depreciable real

property).

Commentators also requested that the

final regulations clarify that a partnership’s consent is not required for basis adjustments under section 108(b)(2)(E).

The final regulations make it clear that a

partnership’s consent to reduce the basis

of the partnership’s depreciable property

(or depreciable real property) is neither

required nor relevant where a partner re-

duces the basis in its partnership interest

under section 108(b)(2)(E).

7. Treatment of the Adjustment to the

Basis of Partnership Property Under

Subchapter K

One commentator requested that the

final regulations address a number of issues concerning the treatment of the partnership’s adjustments to the basis of partnership property under subchapter K. The

final regulations do not address these issues. Instead, the IRS and Treasury Department have addressed these issues in

the proposed regulations recently promulgated under sections 743 and 755.

8. Timing and Reporting

The proposed regulations provided that

a partner requesting a reduction in inside

basis must make the request and receive

consent before the due date (including extensions) for filing the partner’s Federal

income tax return for the taxable year in

which the partner has COD income. The

proposed regulations also provided that a

partnership that consents to a basis reduction must include a consent statement

with its Form 1065, U.S. Partnership Return of Income, and provide a copy of that

statement to the affected partner on or before the date the Form 1065 is filed. One

commentator stated that the final regulations should provide that; (i) partners

should not be required to request consent,

and (ii) neither the partner nor the partnership should be required to attach statements to their returns, until the filing date

of their respective returns for the taxable

year following the year that the partner

excludes COD income.

The IRS and Treasury Department continue to believe that a partner electing

under sections 108(b)(5) or 108(c) must

receive the consent of the partnership before the partner excludes the COD income. Therefore, the final regulations

provide that the partner must request and

receive the consent of the partnership

prior to the due date (including extensions) for filing the partner’s Federal income tax return for the taxable year in

which the partner has COD income. The

final regulations do, however, adopt the

commentator’s suggestion that the partnership is not required to attach a statement to its return until the filing date of its

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Federal income tax return for the taxable

year following the year that ends with or

within the taxable year that the partner excludes the COD income.

The commentator also stated that the

final regulations should provide that when

a partnership recognizes any COD income from qualified real property business indebtedness it should attach a statement to its partners’ Forms K–1 stating

that the COD income is from qualified

real property business indebtedness and

the date the cancellation occurred. The

final regulations do not adopt this proposal. The IRS and Treasury Department

believe that §1.703–1(a)(1) currently requires partnerships to separately state

qualified real property business indebtedness and identify it as such.

The IRS and Treasury Department recognize that a partner might not always

have sufficient information with which to

decide to request a basis reduction until

on, or shortly before, the due date (including extensions) for filing the partner’s

Federal income tax return. Therefore,

comments were requested as to whether

additional rules (such as requiring a partnership to inform partners of COD income prior to the date the Form 1065 is

filed) are necessary to ensure that information is exchanged between the partnership and its partners in a timely fashion.

The final regulations do not require partnerships to inform their partners of COD

income prior to the date the Form 1065 is

filed. Instead, the IRS and Treasury Department believe that any additional administrative burdens imposed on partnerships should be the result of an

understanding between the partners and

the partnership.

9. Methods Used Prior to Issuance of

Final Regulations

A commentator requested that, for cancellation of debt events occurring prior to

the issuance of final regulations, taxpayers be allowed to use any reasonable

method that conforms with existing regulations or the proposed regulations in determining which properties are subject to

the basis adjustments under sections 108

and 1017. This suggestion to provide for

retroactive application of these regulations has not been adopted.

November 16, 1998

Special Analyses

It has been determined that this final

regulation is not a significant regulatory

action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has been determined that a final

regulatory flexibility analysis is required

for the collection of information in this

Treasury decision under 5 U.S.C. 604. A

summary of the analysis is set forth below

under the heading “Summary of Final

Regulatory Flexibility Act Analysis.”

Pursuant to section 7805(f) of the Internal

Revenue Code, this final regulation has

been submitted to the Chief Counsel for

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

small business.

Summary of Final Regulatory Flexibility

Act Analysis

This analysis is required under the Regulatory Flexibility Act (5 U.S.C. chapter

6). In certain circumstances, the final regulations will require a partnership to include a statement with its Form 1065,

U.S. Partnership Return of Income, for

the taxable year following the year that

ends with or within the taxable year the

taxpayer excludes COD income from

gross income, and provide a statement to

the taxpayer on or before the due date of

the requesting partner’s return (including

extensions) for the taxable year in which

the COD income is excluded under section 108(a), stating the amount of the

partner’s share of the reduction in the

partnership’s adjusted bases of depreciable real or personal property (inside

basis). This requirement will ensure that

the partner knows it is entitled to reduce

the adjusted basis of the partnership interest and that the affected partnership

knows it must reduce the partner’s interest in inside basis. The legal basis for this

requirement is contained in sections

1017(b), 6001, and 7805(a).

Though the final regulations might affect any partnership owning depreciable

property, the IRS and Treasury Department believe that partnerships owning depreciable real property are the most likely

to be affected. Approximately 1,560,000

partnership returns were filed for 1993.

Approximately 620,000 of these were for

partnerships owning real property. It is

unlikely, however, that many of these

partnerships or partners in these partnerships will have COD income in any given

year, so it is anticipated that only a small

number of these partnerships will be affected by the final regulations in a particular year.

After a partner conveys information

concerning the amount of COD income

excluded from gross income under section 108(a) to the affected partnership, the

partnership must reduce the partner’s interest in inside basis. Accordingly, the

partnership must prepare and maintain

special entries on its books because this

basis reduction will reduce the partner’s

share of the partnership’s depreciation deductions, and ultimate gain or loss on the

sale of the property, in subsequent years.

In many cases, partnership returns are

prepared using computer software that

can prepare and maintain these special entries after the initial year.

The IRS and Treasury Department are

not aware of any federal rules that may

duplicate, overlap, or conflict with the

rule in the final regulation.

As an alternative to the disclosure described above, the IRS and Treasury Department considered, but rejected as too

burdensome, a rule that would have required an affected partnership to disclose

the reductions of adjusted basis on a property-by-property basis. There are no

known alternative rules that are less burdensome to small entities but that accomplish the purpose of the statute.

Drafting Information

The principal authors of these regulations are Sharon L. Hall, Office of Assistant Chief Counsel (Income Tax and Accounting) and Brian Blum, Office of

Assistant Chief Counsel (Passthroughs and

Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 301 and

602 are amended as follows:

1998–46 I.R.B.

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Page 9

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding entries in numerical order to read as follows:

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

Section 1.108–4 also issued under 26

U.S.C. 108.

Section 1.108–5 also issued under 26

U.S.C. 108. * * *

Section 1.1017–1 also issued under 26

U.S.C. 1017. * * *

Par. 2. Section 1.108-4 is added to read

as follows.

§1.108–4 Election to reduce basis of

depreciable property under section

108(b)(5) of the Internal Revenue Code .

(a) Description. An election under section 108(b)(5) is available whenever a

taxpayer excludes discharge of indebtedness income (COD income) from gross

income under sections 108(a)(1)(A), (B),

or (C) (concerning title 11 cases, insolvency, and qualified farm indebtedness,

respectively). See sections 108(d)(2) and

(3) for the definitions of title 11 case and

insolvent. See section 108(g)(2) for the

definition of qualified farm indebtedness.

(b) Time and manner. To make an election under section 108(b)(5), a taxpayer

must enter the appropriate information on

Form 982, Reduction of Tax Attributes

Due to Discharge of Indebtedness (and

Section 1082 Basis Adjustment), and attach the form to the timely filed (including

extensions) Federal income tax return for

the taxable year in which the taxpayer has

COD income that is excluded from gross

income under section 108(a). An election

under this section may be revoked only

with the consent of the Commissioner.

to elections concerning discharges of indebtedness occurring on or after October

22, 1998.

§1.108(c)–1 [Redesignated as §1.108–5]

Par. 3. Section 1.108(c)–1 is redesignated as §1.108–5.

Par. 4. Section 1.108–6 is added to

read as follows:

§1.108–6 Limitations on the exclusion of

income from the discharge of qualified

real property business indebtedness.

(a) Indebtedness in excess of value.

With respect to any qualified real prop-

1998–46 I.R.B.

erty business indebtedness that is discharged, the amount excluded from gross

income under section 108(a)(1)(D) (concerning discharges of qualified real property business indebtedness) shall not exceed the excess, if any, of the outstanding

principal amount of that indebtedness immediately before the discharge over the

net fair market value of the qualifying real

property, as defined in §1.1017–1(c)(1),

immediately before the discharge. For

purposes of this section, net fair market

value means the fair market value of the

qualifying real property (notwithstanding

section 7701(g)), reduced by the outstanding principal amount of any qualified real property business indebtedness

(other than the discharged indebtedness)

that is secured by such property immediately before and after the discharge. Also,

for purposes of section 108(c)(2)(A) and

this section, outstanding principal amount

means the principal amount of indebtedness together with all additional amounts

owed that, immediately before the discharge, are equivalent to principal, in that

interest on such amounts would accrue

and compound in the future, except that

outstanding principal amount shall not include amounts that are subject to section

108(e)(2) and shall be adjusted to account

for unamortized premium and discount

consistent with section 108(e)(3).

(b) Overall limitation. The amount excluded from gross income under section

108(a)(1)(D) shall not exceed the aggregate adjusted bases of all depreciable real

property held by the taxpayer immediately before the discharge (other than depreciable real property acquired in contemplation of the discharge) reduced by

the sum of any—

(1) Depreciation claimed for the taxable year the taxpayer excluded discharge

of indebtedness from gross income under

section 108(a)(1)(D); and

(2) Reductions to the adjusted bases of

depreciable real property required under

section 108(b) or section 108(g) for the

same taxable year.

to discharges of qualified real property

business indebtedness occurring on or

after, October 22, 1998.

§1.108(a)–1 [Removed]

Par. 5. Section 1.108(a)–1 is removed.

§1.108(a)–2 [Removed]

Par. 6. Section 108(a)–2 is removed.

§1.108(b)–1 [Removed]

Par. 7. Section 1.108–(b)-1 is removed.

§1.1016–7 [Removed]

Par. 8. Section 1.1016–7 is removed.

§1.1016–8 [Removed]

Par. 9. Section 1.1016–8 is removed.

Par. 10. Section 1.1017–1 is revised to

read as follows:

§1.1017–1 Basis reductions following a

discharge of indebtedness.

(a) General rule for section 108(b)(2)(E). This paragraph (a) applies to basis

reductions under section 108(b)(2)(E) that

are required by section 108(a)(1)(A) or (B)

because the taxpayer excluded discharge of

indebtedness (COD income) from gross income. A taxpayer must reduce in the following order, to the extent of the excluded

COD income (but not below zero), the adjusted bases of property held on the first

day of the taxable year following the taxable year that the taxpayer excluded COD

income from gross income (in proportion

to adjusted basis)—

(1) Real property used in a trade or

business or held for investment, other

than real property described in section

1221(1), that secured the discharged indebtedness immediately before the discharge;

(2) Personal property used in a trade or

business or held for investment, other

than inventory, accounts receivable, and

notes receivable, that secured the discharged indebtedness immediately before

the discharge;

(3) Remaining property used in a trade

or business or held for investment, other

than inventory, accounts receivable, notes

receivable, and real property described in

section 1221(1);

(4) Inventory, accounts receivable,

notes receivable, and real property described in section 1221(1); and

(5) Property not used in a trade or business nor held for investment.

(b) Operating rules—(1) Prior tax-attribute reduction. The amount of excluded COD income applied to reduce

basis does not include any COD income

applied to reduce tax attributes under sec-

November 16, 1998

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Page 10

tions 108(b)(2)(A) through (D) and, if applicable, section 108(b)(5). For example,

if a taxpayer excludes $100 of COD income from gross income under section

108(a) and reduces tax attributes by $40

under sections 108(b)(2)(A) through (D),

the taxpayer is required to reduce the adjusted bases of property by $60 ($100 –

$40) under section 108(b)(2)(E).

(2) Multiple discharged indebtednesses. If a taxpayer has COD income attributable to more than one discharged indebtedness resulting in the reduction of

tax attributes under sections 108(b)(2)(A)

through (D) and, if applicable, section

108(b)(5), paragraph (b)(1) of this section

must be applied by allocating the tax-attribute reductions among the indebtednesses in proportion to the amount of

COD income attributable to each discharged indebtedness. For example, if a

taxpayer excludes $20 of COD income attributable to secured indebtedness A and

excludes $80 of COD income attributable

to unsecured indebtedness B (a total exclusion of $100), and if the taxpayer reduces tax attributes by $40 under sections

108(b)(2)(A) through (D), the taxpayer

must reduce the amount of COD income

attributable to secured indebtedness A to

$12 ($20 – ($20 / $100 ⫻ $40)) and must

reduce the amount of COD income attributable to unsecured indebtedness B to $48

($80 – ($80 / $100 ⫻ $40)).

(3) Limitation on basis reductions

under section 108(b)(2)(E) in bankruptcy

or insolvency. If COD income arises

from a discharge of indebtedness in a title

11 case or while the taxpayer is insolvent,

the amount of any basis reduction under

section 108(b)(2)(E) shall not exceed the

excess of—

(i) The aggregate of the adjusted bases

of property and the amount of money held

by the taxpayer immediately after the discharge; over

(ii) The aggregate of the liabilities of

the taxpayer immediately after the discharge.

basis reductions under sections 108(b)(5)

and 108(c)—(1) In general. The ordering

rules prescribed in paragraph (a) of this

section apply, with appropriate modifications, to basis reductions under sections

108(b)(5) and (c). Thus, a taxpayer that

elects to reduce basis under section

108(b)(5) may, to the extent that the elec-

November 16, 1998

tion applies, reduce only the adjusted

basis of property described in paragraphs

(a)(1), (2), and (3) of this section and, if

an election is made under paragraph (f) of

this section, paragraph (a)(4) of this section. Within paragraphs (a)(1),(2), (3) and

(4) of this section, such a taxpayer may reduce only the adjusted bases of depreciable property. A taxpayer that elects to

apply section 108(c) may reduce only the

adjusted basis of property described in

paragraphs (a)(1) and (3) of this section

and, within paragraphs (a)(1) and (3) of

this section, may reduce only the adjusted

bases of depreciable real property. Furthermore, for basis reductions under section 108(c), a taxpayer must reduce the adjusted basis of the qualifying real property

to the extent of the discharged qualified

real property business indebtedness before

reducing the adjusted bases of other depreciable real property. The term qualifying

real property means real property with respect to which the indebtedness is qualified real property business indebtedness

within the meaning of section 108(c)(3).

See paragraphs (f) and (g) of this section

for elections relating to section 1221(1)

property and partnership interests.

(2) Partial basis reductions under section 108(b)(5). If the amount of basis reductions under section 108(b)(5) is less

than the amount of the COD income excluded from gross income under section

108(a), the taxpayer must reduce the balance of its tax attributes, including any remaining adjusted bases of depreciable and

other property, by following the ordering

rules under section 108(b)(2). For example, if a taxpayer excludes $100 of COD

income from gross income under section

108(a) and elects to reduce the adjusted

bases of depreciable property by $10

under section 108(b)(5), the taxpayer

must reduce its remaining tax attributes

by $90, starting with net operating losses

under section 108(b)(2).

(3) Modification of fresh start rule for

prior basis reductions under section

108(b)(5). After reducing the adjusted

bases of depreciable property under section 108(b)(5), a taxpayer must compute

the limitation on basis reductions under

section 1017(b)(2) using the aggregate of

the remaining adjusted bases of property.

For example, if, immediately after the discharge of indebtedness in a title 11 case, a

taxpayer’s adjusted bases of property is

$100 and its undischarged indebtedness is

$70, and if the taxpayer elects to reduce

the adjusted bases of depreciable property

by $10 under section 108(b)(5), section

1017(b)(2) limits any further basis reductions under section 108(b)(2)(E) to $20

(($100 – $10) – $70).

(d) Changes in security. If any property

is added or eliminated as security for an

indebtedness during the one-year period

preceding the discharge of that indebtedness, such addition or elimination shall be

disregarded where a principal purpose of

the change is to affect the taxpayer’s basis

reductions under section 1017.

(e) Depreciable property. For purposes

of this section, the term depreciable property means any property of a character

subject to the allowance for depreciation

or amortization, but only if the basis reduction would reduce the amount of depreciation or amortization which otherwise would be allowable for the period

immediately following such reduction.

Thus, for example, a lessor cannot reduce

the basis of leased property where the

lessee’s obligation in respect of the property will restore to the lessor the loss due

to depreciation during the term of the

lease, since the lessor cannot take depreciation in respect of such property.

(f) Election to treat section 1221(1)

real property as depreciable—(1) In general. For basis reductions under section

108(b)(5) and basis reductions relating to

qualified farm indebtedness, a taxpayer

may elect under sections 1017(b)(3)(E)

and (4)(C), respectively, to treat real property described in section 1221(1) as depreciable property. This election is not

available, however, for basis reductions

under section 108(c).

(2) Time and manner. To make an election under section 1017(b)(3)(E) or

(4)(C), a taxpayer must enter the appropriate information on Form 982, Reduction of Tax Attributes Due to Discharge of

Indebtedness (and Section 1082 Basis Adjustment), and attach the form to a timely

filed (including extensions) Federal income tax return for the taxable year in

which the taxpayer has COD income that

is excluded from gross income under section 108(a). An election under this paragraph (f) may be revoked only with the

consent of the Commissioner.

(g) Partnerships—(1) Partnership

COD income. For purposes of paragraph

1998–46 I.R.B.

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Page 11

(a) of this section, a taxpayer must treat a

distributive share of a partnership’s COD

income as attributable to a discharged indebtedness secured by the taxpayer’s interest in that partnership.

(2) Partnership interest treated as depreciable property—(i) In general. For

purposes of making basis reductions, if a

taxpayer makes an election under section

108(b)(5) (or 108(c)), the taxpayer must

treat a partnership interest as depreciable

property (or depreciable real property) to

the extent of the partner’s proportionate

share of the partnership’s basis in depreciable property (or depreciable real property), provided that the partnership consents to a corresponding reduction in the

partnership’s basis (inside basis) in depreciable property (or depreciable real property) with respect to such partner.

(ii) Request by partner and consent of

partnership—(A) In general. Except as

otherwise provided in this paragraph

(g)(2)(ii), a taxpayer may choose whether

or not to request that a partnership reduce

the inside basis of its depreciable property

(or depreciable real property) with respect

to the taxpayer, and the partnership may

grant or withhold such consent, in its sole

discretion. A request by the taxpayer

must be made before the due date (including extensions) for filing the taxpayer’s

Federal income tax return for the taxable

year in which the taxpayer has COD income that is excluded from gross income

under section 108(a).

(B) Request for consent required. A

taxpayer must request a partnership’s consent to reduce inside basis if, at the time

of the discharge, the taxpayer owns (directly or indirectly) a greater than 50 percent interest in the capital and profits of

the partnership, or if reductions to the

basis of the taxpayer’s depreciable property (or depreciable real property) are

being made with respect to the taxpayer’s

distributive share of COD income of the

partnership.

partnership must consent to reduce its

partners’ shares of inside basis with respect to a discharged indebtedness if consent is requested with respect to that indebtedness by partners owning (directly

or indirectly) an aggregate of more than

80 percent of the capital and profits interests of the partnership or five or fewer

1998–46 I.R.B.

partners owning (directly or indirectly) an

aggregate of more than 50 percent of the

capital and profits interests of the partnership. For example, if there is a cancellation of partnership indebtedness that is

secured by real property used in a partnership’s trade or business, and if partners

owning (in the aggregate) 90 percent of

the capital and profits interests of the partnership elect to exclude the COD income

under section 108(c), the partnership must

make the appropriate reductions in those

partners’ shares of inside basis.

(iii) Partnership consent statement—

(A) Partnership requirement. A consenting partnership must include with the

Form 1065, U.S. Partnership Return of

Income, for the taxable year following the

year that ends with or within the taxable

year the taxpayer excludes COD income

from gross income under section 108(a),

and must provide to the taxpayer on or before the due date of the taxpayer’s return

(including extensions) for the taxable year

in which the taxpayer excludes COD income from gross income, a statement

that—

(1) Contains the name, address, and

taxpayer identification number of the

partnership; and

(2) States the amount of the reduction

of the partner’s proportionate interest in

the adjusted bases of the partnership’s depreciable property or depreciable real

property, whichever is applicable.

(B) Taxpayer’s requirement. Statements described in paragraph (g)(2)(iii)(A) of this section must be attached to a

taxpayer’s timely filed (including extensions) Federal income tax return for the

taxable year in which the taxpayer has

COD income that is excluded from gross

income under section 108(a).

(iv) Partner’s share of partnership’s

adjusted basis. [Reserved]

(3) Partnership basis reduction. The

rules of this section (including this paragraph (g)) apply in determining the properties to which the partnership’s basis reductions must be made.

(h) Special allocation rule for cases to

which section 1398 applies. If a bankruptcy estate and a taxpayer to whom section 1398 applies (concerning only individuals under Chapter 7 or 11 of title 11

of the United States Code) hold property

subject to basis reduction under section

108(b)(2)(E) or (5) on the first day of the

taxable year following the taxable year of

discharge, the bankruptcy estate must reduce all of the adjusted bases of its property before the taxpayer is required to reduce any adjusted bases of property.

(i) Effective date. This section applies

to discharges of indebtedness occurring

on or after October 22, 1998.

§1.1017–2 [Removed]

Par. 11. Section 1.1017–2 is removed.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 12. The authority citation for part

301 continues to read as follows:

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

§301.9100–13T [Removed]

Par. 13. Section 301.9100–13T is removed.

PART 602—OMB CONTROL

NUMBERS UNDER THE

PAPERWORK REDUCTION ACT

Par. 14. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 15. Section 602.101(c) is amended

by:

1. Adding the following entries in numerical order to the table:

§602.101 OMB Control numbers.

* * * * *

CFR part or section

where identified and

described

Current OMB

control No.

* * * * *

1.108–4 . . . . . . . . . . . . . . . . . 1545–1539

1.108–5 . . . . . . . . . . . . . . . . . 1545–1421

* * * * *

1.1017–1 . . . . . . . . . . . . . . . .1 545–1539

* * * * *

2. Removing the following entries in

numerical order from the table:

* * * * *

November 16, 1998

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11/12/98 10:45 AM

CFR part or section

where identified and

described

Page 12

Current OMB

control No.

* * * * *

1.108(a)–1 . . . . . . . . . . . . . . .1545–0046

1.108(a)–2 . . . . . . . . . . . . . . .1545–0046

1.108(c)–1 . . . . . . . . . . . . . . .1545–1421

* * * * *

1.1017–2 . . . . . . . . . . . . . . . .1545–0028

1545–0046

* * * * *

301.9100–13T . . . . . . . . . . . .1545–0046

Michael P. Dolan,

Commissioner of

Internal Revenue.

Approved September 14, 1998.

Donald C. Lubick,

Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on

October 21, 1998, at 8:45 a.m., and published in the

issue of the Federal Register for October 22, 1998,

63 F.R. 56559)

Section 401.—Qualified

Pension, Profit-Sharing, and

Stock Bonus Plans

26 CFR 1.401(l)–1: Permitted disparity with

respect to employer-provided contributions or

benefits.

Covered compensation tables; 1999.

The covered compensation tables for the

1999 calendar year for determining contributions to defined benefit plans and

permitted disparity are set forth.

Rev. Rul. 98–53

This revenue ruling provides tables of

covered compensation under § 401(l)(5)(E) of the Internal Revenue Code (the

“Code”) and the Income Tax Regulations,

thereunder, for the 1999 plan year.

Section 401(l)(5)(E)(i) defines covered

compensation with respect to an employee, as the average of the contribution

and benefit bases in effect under § 230 of

the Social Security Act (the “Act”) for

each year in the 35-year period ending

with the year in which the employee attains social security retirement age.

Section 401(l)(5)(E)(ii) of the Code

states that the determination for any year

preceding the year in which the employee

attains social security retirement age shall

be made by assuming that there is no increase in covered compensation after the

determination year and before the employee attains social security retirement

age.

Section 1.401(l)–1(c)(34) of the regulations defines the taxable wage base as the

contribution and benefit base under § 230

of the Act.

Section 1.401(l)–1(c)(7)(i) defines covered compensation for an employee as the

average (without indexing) of the taxable

wage bases in effect for each calendar

year during the 35-year period ending

with the last day of the calendar year in

which the employee attains (or will attain)

social security retirement age. A 35-year

period is used for all individuals regardless of the year of birth of the individual.

In determining an employee’s covered

compensation for a plan year, the taxable

wage base for all calendar years beginning after the first day of the plan year is

assumed to be the same as the taxable

wage base in effect as of the beginning of

the plan year. An employee’s covered

compensation for a plan year beginning

after the 35-year period applicable under

§ 1.401(l)–1(c)(7)(i) is the employee’s

covered compensation for a plan year during which the 35-year period ends. An

employee’s covered compensation for a

plan year beginning before the 35-year

period applicable under this § 1.401(l)–

1(c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.

Section 1.401(l)–1(c)(7)(ii) provides

that, for purposes of determining the

amount of an employee’s covered compensation under § 1.401(l)–1(c)(7)(i), a

plan may use tables, provided by the

Commissioner, that are developed by

rounding the actual amounts of covered

compensation for different years of birth.

For purposes of determining covered

compensation for the 1999 year the taxable wage base is $72,600.

The following tables provide covered

compensation for 1999:

1999 Covered Compensation Table

Calendar

Year of

Birth

Calendar Year of

Social Security

Retirement Age

1999 Covered

Compensation

1907

1908

1909

1910

1911

1912

1913

1914

1915

1916

1917

1918

1919

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

$4,488

4,704

5,004

5,316

5,664

6,060

6,480

7,044

7,692

8,460

9,300

10,236

11,232

November 16, 1998

1998–46 I.R.B.

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Page 13

1999 Covered Compensation Table (Continued)

Calendar

Year of

Birth

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966 or later

1998–46 I.R.B.

Calendar Year of

Social Security

Retirement Age

1999 Covered

Compensation

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

12,276

13,368

14,520

15,708

16,968

18,312

19,728

21,192

22,716

24,312

25,920

27,576

29,304

31,128

33,060

34,992

36,888

38,772

42,468

44,328

46,176

47,988

49,752

51,456

53,124

54,768

56,364

57,936

59,352

60,684

61,920

63,060

64,116

65,112

66,060

67,752

68,544

69,240

69,852

70,404

70,884

71,316

71,664

71,988

72,264

72,480

72,600

November 16, 1998

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1999 Rounded Covered Compensation Table

Year of Birth

Covered Compensation

1934

1935 – 1936

1937

1938

1939 – 1940

1941

1942 – 1943

1944 – 1945

1946 – 1947

1948 – 1949

1950 – 1952

1953 – 1954

1955 – 1959

1960 – 1964

1965 or later

33,000

36,000

39,000

42,000

45,000

48,000

51,000

54,000

57,000

60,000

63,000

66,000

69,000

72,000

72,600

Drafting Information

The principal author of this revenue ruling is Todd Newman of the Employee

Plans Division. For further information

regarding this revenue ruling, call (202)

622-6076 between 2:30 and 3:30 Eastern

time (not a toll free number) Monday thru

Thursday. Mr. Newman’s number is (202)

622-8458 (also not a toll free number).

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The September 1998 Bureau of

Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in,

first-out inventory methods for valuing

inventories for tax years ended on, or with

reference to, September 30, 1998.

Rev. Rul. 98–54

The following Department Store Inventory Price Indexes for September 1998

were issued by the Bureau of Labor Statistics. The indexes are accepted by the

Internal Revenue Service, under § 1.472–

1(k) of the Income Tax Regulations and

Rev. Proc. 86–46, 1986–2 C.B. 739, for

appropriate application to inventories of

department stores employing the retail inventory and last-in, first-out inventory

methods for tax years ended on, or with

reference to, September 30, 1998.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of departments, (b) three special combinations of

the major groups - soft goods, durable

goods, and miscellaneous goods, and (c) a

store total, which covers all departments,

including some not listed separately, except for the following: candy, food,

liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . .

3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . .

4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . .

7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . .

8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . .

9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . .

10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . .

November 16, 1998

Sept.

1997

Sept.

1998

Percent Change

from Sept.1997

to Sept. 19981

521.1

646.6

652.0

902.9

623.3

557.8

304.3

544.1

422.2

620.2

603.1

542.3

634.0

664.9

915.1

621.4

569.3

308.7

545.7

419.3

614.9

595.5

4.1

–1.9

2.0

1.4

–0.3

2.1

1.4

0.3

–0.7

–0.9

–1.3

1998–46 I.R.B.

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Page 15

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE (Continued)

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Sept.

1997

Sept.

1998

Percent Change

from Sept.1997

to Sept. 19981

12. Boys’ Clothing and Furnishings

498.7

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1009.5

14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

842.0

15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . .

904.6

16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . .

662.7

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . .

583.2

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

816.8

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . .

243.4

20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . .

74.9

21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . .

108.9

22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . .

131.7

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . .

108.3

511.6

973.7

754.8

939.8

673.8

602.1

807.8

236.9

71.0

103.2

129.9

107.5

2.6

–3.5

–10.4

3.9

1.7

3.2

–1.1

–2.7

–5.2

–1.4

–0.7

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . .

606.4

605.4

–0.2

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . .

465.3

458.1

–1.5

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . .

111.8

107.6

–3.8

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

556.7

551.9

–0.9

Groups

1Absence of a minus sign before percentage change in this column signifies price increase.

2Indexes on a January 1986=100 base.

3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Michaels on (202) 622-4970 (not a tollfree call).

sired effective date but within 12 months of that

due date, may the taxpayer obtain relief under

§301.9100 of the regulations without applying for a

private letter ruling? See Rev. Proc. 98–55,

page 27.

Section 1362.—Election;

Revocation; Termination

26 CFR 1.1362–4: Inadvertent terminations.

Section 1361.—S Corporation

Defined

If a taxpayer files a qualified subchapter S subsidiary (QSub) election after the due date for a de-

1998–46 I.R.B.

relief under §1362(f) without applying for a private

letter ruling? See Rev. Proc. 98–55, page 27.

26 CFR 1.1362–6: Elections and consents.

If a taxpayer files an S corporation election after

the statutory due date but within 12 months of that

statutory due date, may the taxpayer obtain relief

under § 1362(b)(5) of the Internal Revenue Code

without applying for a private letter ruling? See

Rev. Proc. 98–55, page 27.

If a qualified subchapter S trust election or an

electing small business trust election is filed after

the required due date but within 24 months of that

due date, may the beneficiary (in the case of a

QSST) or the trustee (in the case of an ESBT) obtain

November 16, 1998

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Page 16

Part III. Administrative, Procedural, and Miscellaneous

Cash or Deferred Arrangements;

Nondiscrimination

Notice 98–52

I. PURPOSE

This notice provides guidance on the

design-based alternative or “safe harbor”

methods in § 401(k)(12) and § 401(m)(11)

of the Internal Revenue Code for satisfying the § 401(k) and § 401(m) nondiscrimination tests.

Specifically, under this notice:

• A section 401(k) plan generally satisfies

the actual deferral percentage (“ADP”)

test if a prescribed level of safe harbor

matching or nonelective contributions

are made on behalf of all eligible nonhighly compensated employees

(“NHCEs”) and if employees are provided a timely notice describing their

rights and obligations under the plan.

See section V.

• Employee notices for the 1999 plan

year are not required to be provided before March 1, 1999. See the transition

rule in section V.C.2.

• A plan that satisfies the ADP test safe

harbor by providing a basic level of safe

harbor matching contributions automatically satisfies the actual contribution

percentage (“ACP”) test with respect to

matching contributions. Plans that provide additional matching contributions

satisfy the ACP test if matching contributions do not exceed specified limitations. See section VI.

• A special rule allows § 403(b) plans to

take advantage of the ACP test safe harbor. See section VI.C.

• Plan amendments needed to implement

the safe harbor methods generally may

be deferred until the date other SBJPA

plan amendments are required (for calendar year plans, December 31, 1999).

See section XI.

Among other matters, this notice also

addresses the timing of safe harbor contributions (section VII), the interaction of

the safe harbor methods with other qualification rules and testing methods (section

VIII), and how the safe harbor methods

work where an employer maintains multiple CODAs or plans (section IX).

November 16, 1998

II. BACKGROUND

Section 1433(a) of the Small Business

Job Protection Act of 1996 (“SBJPA”),

Pub. L. 104–188, added new §§ 401(k)(12) and 401(m)(11) to the Code, effective

for plan years beginning after December

31, 1998, which provide design-based safe

harbor methods for satisfying the ADP test

contained in § 401(k)(3)(A)(ii) and the

ACP test contained in § 401(m)(2). Section 401(k)(12) provides that a cash or deferred arrangement (“CODA”) is treated

as satisfying the ADP test if the CODA

meets certain contribution and notice requirements. Section 401(m)(11) provides

that a defined contribution plan is treated

as satisfying the ACP test with respect to

matching contributions if the plan meets

the contribution and notice requirements

contained in § 401(k)(12) and, in addition, meets certain limitations on the

amount and rate of matching contributions available under the plan.

Previous guidance on other SBJPA

amendments to §§ 401(k) and 401(m) was

provided in Notice 97–2, 1997–1 C.B.

348, and Notice 98–1, 1998–3 I.R.B. 42.

III. EFFECT ON REGULATIONS

Because of the amendments made to

§§ 401(k) and 401(m) by SBJPA, as well

as by other recent legislation, certain portions of §§ 1.401(k)–1, 1.401(m)–1 and

1.401(m)–2 of the Income Tax Regulations no longer reflect current law. However, these regulations continue to apply

to the extent they are not inconsistent with

the Code, Notices 97–2 and 98–1, this notice, and any subsequent guidance.

IV. DEFINITIONS

A. In General

Except as provided in this section IV,

any term used in this notice that is defined

in Notice 98–1 or the regulations under

§§ 401(k) and 401(m) has the same meaning as in Notice 98–1 or those regulations.

For example, the definition of “plan” in

§ 1.401(k)–1(g)(11) applies for purposes

of this notice.

B. Compensation

Except as provided in section

V.B.1.c.iii, “compensation” for purposes

of this notice means compensation as defined in § 1.401(k)–1(g)(2) (which incorporates by reference the definition of compensation in § 414(s) and § 1.414(s)–1);

provided, however, that the rule in the last

sentence of § 1.414(s)–1(d)(2)(iii) (which

generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not

apply in determining the compensation of

NHCEs. The annual compensation limit

under § 401(a)(17) applies for purposes of

the safe harbor methods.

Thus, a uniform definition of compensation described in this section IV.B must

be used for purposes of the basic matching

formula or an enhanced matching formula

under section V.B.1.a, the nonelective

contribution requirement under section

V.B.2, and the matching contribution limitations under section VI.B. As provided

under § 1.401(k)–1(g)(2), an employer

may limit the period used to determine

compensation for a plan year to that portion of the plan year in which the employee is an eligible employee, provided

that this limit is applied uniformly to all

eligible employees under the plan for the

plan year.

C. Basic Matching Formula

For purposes of this notice, the “basic

matching formula” is the formula described in section V.B.1.a.i.

D. Enhanced Matching Formula

For purposes of this notice, an “enhanced matching formula” is a formula

described section V.B.1.a.ii.

E. Rate of Elective Contributions

For purposes of this notice, an employee’s “rate of elective contributions”

means the ratio of an employee’s elective

contributions under the plan for a plan

year to the employee’s compensation for

that plan year.

F. Rate of Employee Contributions

For purposes of this notice, an employee’s “rate of employee contributions”

means the ratio of an employee’s employee contributions under the plan for a

plan year to the employee’s compensation

for that plan year.

1998–46 I.R.B.

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Page 17

G. Rate of Matching Contributions

For purposes of the ADP test safe harbor under section V, a “rate of matching

contributions” means the ratio of matching contributions on behalf of an employee under the plan for a plan year to

the employee’s elective contributions for

that plan year. For purposes of the ACP

test safe harbor under section VI, a “rate

of matching contributions” means the

ratio of matching contributions on behalf

of an employee under the plan for a plan

year to the employee’s respective employee contributions or elective contributions for that plan year.

H. Safe Harbor Matching Contributions and Safe Harbor Nonelective

Contributions

For purposes of this notice, safe harbor

matching contributions and safe harbor

nonelective contributions are matching

and nonelective contributions, respectively, that (1) are nonforfeitable within

the meaning of § 1.401(k)–1(c), (2) are

subject to the withdrawal restrictions of

§ 401(k)(2)(B) and § 1.401(k)–1(d), and

(3) are used to satisfy the safe harbor contribution requirement of section V.B. Accordingly, pursuant to § 401(k)(2)(B) and

§ 1.401(k)–1(d), such contributions (and

earnings thereon) must not be distributable

earlier than separation from service, death,

disability, an event described in

§ 401(k)(10), or, in the case of a profitsharing or stock bonus plan, the attainment of age 591⁄2. Pursuant to § 401(k)(2)(B) and § 1.401(k)-1(d)(2)(ii), hardship

is not a distributable event for contributions other than elective contributions.

V. ADP TEST SAFE HARBOR

A. General Rule

A CODA is treated as satisfying the

ADP test under § 401(k)(3)(A)(ii) and

§ 1.401(k)–1(b)(2) for a plan year if, for

the entire plan year, the arrangement satisfies the safe harbor contribution requirement of subsection B of this section V and

the notice requirement of subsection C of

this section V.

B. Safe Harbor Contribution

Requirement

The safe harbor contribution requirement of this section V.B is satisfied for a

plan year if the plan satisfies either (1) the

1998–46 I.R.B.

matching contribution requirement of

paragraph 1 of this section V.B or (2) the

nonelective contribution requirement of

paragraph 2 of this section V.B. Pursuant

to § 401(k)(12)(E)(ii), the safe harbor

contribution requirement of this section

V.B must be satisfied without regard to

§ 401(l).

1. Matching Contribution

Requirement

a. In General

The matching contribution requirement

of this section V.B.1 is satisfied if, under

the terms of the plan, safe harbor matching contributions under either the basic

matching formula or an enhanced matching formula described below are required

to be made on behalf of each NHCE who

is an eligible employee.

i. Basic Matching Formula

The basic matching formula provides

matching contributions on behalf of each

NHCE who is an eligible employee in an

amount equal to (A) 100 percent of the

amount of the employee’s elective contributions that do not exceed 3 percent of the

employee’s compensation and (B) 50 percent of the amount of the employee’s

elective contributions that exceed 3 percent of the employee’s compensation but

that do not exceed 5 percent of the employee’s compensation.

ii. Enhanced Matching Formula

An enhanced matching formula provides matching contributions on behalf of

each NHCE who is an eligible employee

under a formula that, at any rate of elective contributions, provides an aggregate

amount of matching contributions at least

equal to the aggregate amount of matching

contributions that would have been provided under the basic matching formula.

In addition, under an enhanced matching

formula, the rate of matching contributions may not increase as an employee’s

rate of elective contributions increases.

b. Limitation on Matching

Contributions for HCEs

The matching contribution requirement

of this section V.B.1 is not satisfied if, at

any rate of elective contributions, the rate

of matching contributions that would

apply with respect to any highly compen-

sated employee (“HCE”) who is an eligible employee is greater than the rate of

matching contributions that would apply

with respect to any NHCE who is an eligible employee and who has the same rate

of elective contributions.

c. Permissible Restrictions on

Elective Contributions by

NHCEs

The matching contribution requirement

of this section V.B.1 is not satisfied if

elective contributions by NHCEs are restricted, unless the restrictions are permitted as described below.

i. Restrictions on Election Periods

A plan sponsor may limit the frequency

and duration of periods in which eligible

employees may make or change cash or

deferred elections under a plan, provided

that, after receipt of the notice described

in subsection C of this section V, an employee has a reasonable opportunity (including a reasonable period) to make or

change a cash or deferred election for the

plan year. For purposes of the preceding

sentence, a 30-day period is deemed to be

a reasonable period.

ii. Restrictions on Amount of

Elective Contributions

A plan sponsor may limit the amount of

elective contributions that may be made

by an eligible employee under a plan, provided that each NHCE who is an eligible

employee is permitted (unless the employee is restricted under paragraph 1.c.iv

of this section V.B) to make elective contributions in an amount that is at least sufficient to receive the maximum amount of

matching contributions available under

the plan for the plan year, and the employee is permitted to elect any lesser

amount of elective contributions.

iii. Restrictions on Types of

Compensation That May be

Deferred

A plan sponsor may limit the types of

compensation that may be deferred by an

eligible employee under a plan, provided

that each NHCE who is an eligible employee is permitted to make elective contributions under a definition of compensation that would be a reasonable definition

of compensation within the meaning of

§ 1.414(s)–1(d)(2). (Thus, the definition

November 16, 1998

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Page 18

is not required to satisfy the nondiscrimination requirement of § 1.414(s)-1(d)(3).)

However, see section IV.B regarding the

definition of compensation for purposes

of the basic matching formula or an enhanced matching formula under paragraph 1.a of this section V.B, the nonelective contribution requirement under

paragraph 2 of this section V.B, and the

matching contribution limitations under

section VI.B.

iv. Restrictions Due to Limitations

under the Code

A plan sponsor may limit the amount of

elective contributions made by an eligible

employee under a plan (A) because of the

limitations under § 402(g) or § 415 or (B)

because, on account of a hardship distribution, an employee’s ability to make elective contributions has been suspended for

12 months in accordance with § 1.401(k)–

1(d)(2)(iv)(B)(4) or limited in accordance

with § 1.401(k)–1(d)(2)(iv)(B)(3).

2. Nonelective Contribution

Requirement

The nonelective contribution requirement of this section V.B.2 is satisfied if,

under the terms of the plan, the employer

is required to make a safe harbor nonelective contribution on behalf of each NHCE

who is an eligible employee equal to at

least 3 percent of the employee’s compensation.

3. Examples

The safe harbor contribution requirement of this section V.B is illustrated by

the following examples:

Example 1

(a) Beginning January 1, 1999, Employer A maintains Plan L covering employees (including HCEs and NHCEs) in

Divisions D and E. Plan L contains a

CODA and provides a required matching

contribution equal to 100 percent of each

eligible employee’s elective contributions

up to 4 percent of compensation. For purposes of the matching contribution formula, compensation is defined as all compensation within the meaning of

§ 415(c)(3) (a definition that satisfies

§ 414(s)). Also, each employee is permitted to make elective contributions from

all compensation within the meaning of

November 16, 1998

§ 415(c)(3) and may change a cash or deferred election at any time. Plan L limits

the amount of an employee’s elective contributions for purposes of § 402(g) and

§ 415, and, in the case of a hardship distribution, suspends an employee’s ability to

make elective contributions for 12 months

in accordance with § 1.401(k)–1(d)(2)(iv)(B)(4) and limits an employee’s elective contributions in accordance with

§ 1.401(k)–1(d)(2)(iv)(B)(3). All contributions under Plan L are nonforfeitable

and are subject to the withdrawal restrictions of § 401(k)(2)(B). Plan L provides

for no other contributions and Employer

A maintains no other plans. Plan L is

maintained on a calendar-year basis and

all contributions for a plan year are made

within 12 months after the end of the plan

year.

(b) Based on these facts, matching

contributions under Plan L are safe harbor

matching contributions because they are

nonforfeitable, are subject to the withdrawal restrictions of § 401(k)(2)(B), and

are used to satisfy the safe harbor contribution requirement of section V.B.

matching formula because each NHCE

who is an eligible employee receives

matching contributions at a rate that, at

any rate of elective contributions, provides an aggregate amount of matching

contributions at least equal to the aggregate amount of matching contributions

that would have been received under the

basic matching formula, and the rate of

matching contributions does not increase

as the rate of an employee’s elective contributions increases.

(d) Plan L satisfies the safe harbor contribution requirement of this section V.B

because safe harbor matching contributions under an enhanced matching formula are required to be made on behalf of

each NHCE who is an eligible employee.

(e) Plan L would satisfy the ADP test

safe harbor if Plan L also satisfied the notice requirement of subsection C of this

section V. (Plan L then would also satisfy

the ACP test safe harbor. See section VI.)

Example 2

(a) The facts are the same as in Example 1, except that instead of providing a

required matching contribution equal to

100 percent of each eligible employee’s

elective contributions up to 4 percent of

compensation, Plan L provides a matching contribution equal to 150 percent of

each eligible employee’s elective contributions up to 3 percent of compensation.

(b) Plan L’s formula is an enhanced

matching formula and Plan L satisfies the

safe harbor contribution requirement of

this section V.B.

safe harbor if Plan L also satisfied the notice requirement of subsection C of this

section V. (Plan L then would also satisfy

the ACP test safe harbor. See section VI.)

Example 3

(a) The facts are the same as in Example 1, except that instead of permitting

each employee to make elective contributions from compensation within the

meaning of § 415(c)(3), each employee’s

elective contributions under Plan L are

limited to 15 percent of the employee’s

“basic compensation.” Basic compensation is defined under Plan L as compensation within the meaning of § 415(c)(3),

but excluding overtime pay.

(b) The definition of basic compensation under Plan L is a reasonable definition of compensation within the meaning

of § 1.414(s)–1(d)(2).

safe harbor contribution requirement of

this section V.B merely because Plan L

limits the amount of elective contributions and the types of compensation that

may be deferred by eligible employees,

provided that each NHCE who is an eligible employee may make elective contributions equal to at least 4 percent of the

employee’s compensation under

§ 415(c)(3) (that is, the amount of elective

contributions that is sufficient to receive

the maximum amount of matching contributions available under the plan).

Example 4

(a) The facts are the same as in Example 1, except that Plan L provides that

only employees employed on the last day

of the plan year will receive a safe harbor

matching contribution.

(b) Even if the section 401(m) plan satisfies the minimum coverage requirements of § 410(b)(1) taking into account

this last-day requirement, Plan L would

not satisfy the safe harbor contribution requirement of this section V.B because safe

1998–46 I.R.B.

IRB 1998-46

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Page 19

harbor matching contributions are not

made on behalf of all NHCEs who are eligible employees and who make elective

contributions.

contributions under an enhanced formula,

Plan L provides for a 3-percent safe harbor nonelective contribution that is restricted to eligible employees under the

CODA who are employed on the last day

of the plan year.

Example 5

(a) The facts are the same as in Example 1, except that instead of providing

safe harbor matching contributions under

the enhanced matching formula to employees in both Divisions D and E, employees in Division E are provided safe

harbor matching contributions under the

basic matching formula, while matching

contributions continue to be provided to

employees in Division D under the enhanced matching formula.

(b)

Even if Plan L satisfies

§ 1.401(a)(4)–4 with respect to each rate

of matching contributions available to employees under the plan, the plan would fail

to satisfy the safe harbor contribution requirement of this section V.B because the

rate of matching contributions with respect to HCEs in Division D at a rate of

elective contributions between 3 and 5

percent would be greater than that with respect to NHCEs in Division E at the same

rate of elective contributions. For example, an HCE in Division D who would

have a 4-percent rate of elective contributions would have a rate of matching contributions of 100 percent while an NHCE

in Division E who would have the same

rate of elective contributions would have a

lower rate of matching contributions.

C. Notice Requirement

The notice requirement of this section

V.C is satisfied if each eligible employee

for the plan year is given written notice of

the employee’s rights and obligations

under the plan and the notice satisfies the

content requirement of paragraph 1 of this

section V.C and the timing requirement of

paragraph 2 of this section V.C.

1. Content Requirement

a. General Rule

The content requirement of this section

1998–46 I.R.B.

V.C.1 is satisfied if the notice (1) is sufficiently accurate and comprehensive to inform the employee of the employee’s

rights and obligations under the plan and

(2) is written in a manner calculated to be

understood by the average employee eligible to participate in the plan. For purposes of the preceding sentence, a notice

is not considered sufficiently accurate and

comprehensive unless the notice accurately describes (i) the safe harbor matching or nonelective contribution formula

used under the plan (including a description of the levels of matching contributions, if any, available under the plan); (ii)

any other contributions under the plan (including the potential for discretionary

matching contributions) and the conditions under which such contributions are

made; (iii) the plan to which safe harbor

contributions will be made (if different

than the plan containing the CODA); (iv)

the type and amount of compensation that

may be deferred under the plan; (v) how

to make cash or deferred elections, including any administrative requirements

that apply to such elections; (vi) the periods available under the plan for making

cash or deferred elections; and (vii) withdrawal and vesting provisions applicable

to contributions under the plan.

b. 1999 Transition Relief for Content Requirement

For a plan adopting the safe harbor provisions for a plan year that begins before

January 1, 2000, a notice will not fail to

satisfy the content requirement for that

plan year merely because the notice does

not include all of the items listed in paragraph 1.a of this section V.C, provided

that the notice satisfies a reasonable good

faith interpretation of the notice requirements under §§ 401(k)(12) and

401(m)(11).

2. Timing Requirement

a. General rule

The timing requirement of this section

V.C.2 is satisfied if the notice is provided

within a reasonable period before the beginning of the plan year (or, in the year an

employee becomes eligible, within a reasonable period before the employee becomes eligible). The determination of

whether a notice satisfies the timing requirement of this section V.C.2 is based

on all of the relevant facts and circumstances.

b. Deemed Satisfaction of Timing

Requirement

The timing requirement of this section

V.C.2 is deemed to be satisfied if at least

30 days (and no more than 90 days) before the beginning of each plan year, the

notice is given to each eligible employee

for the plan year. In the case of an employee who does not receive the notice

within the period described in the previous sentence because the employee becomes eligible after the 90th day before

the beginning of the plan year, the timing

requirement is deemed to be satisfied if

the notice is provided no more than 90

days before the employee becomes eligible (and no later than the date the employee becomes eligible). Thus, for example, the preceding sentence would

apply in the case of any employee eligible

for the first plan year under a newly established section 401(k) plan, or would apply

in the case of the first plan year in which

an employee becomes eligible under an

existing section 401(k) plan.

c. 1999 Transition Relief for Timing

Requirement

For a plan year that begins on or before

April 1, 1999, the notice described in this

section V.C satisfies the timing requirement for that plan year (with respect to an

existing section 401(k) plan or a newly

established one) if the notice is given on

or before March 1, 1999. However, in

order to satisfy the ADP or ACP test safe

harbor for the plan year, a plan that is

using the transition relief provided under

this section V.C.2.c still must satisfy the

otherwise applicable requirements of this

Notice 98-52 with respect to the entire

plan year.

VI. ACP TEST SAFE HARBOR

A. General Rule

A defined contribution plan is treated

as satisfying the ACP test under §

401(m)(2) and § 1.401(m)-1(b) with respect to matching contributions for a plan

year if, for the entire plan year, (i) each

NHCE eligible to receive an allocation of

matching contributions under the plan is

also an eligible employee under a CODA

that satisfies the ADP test safe harbor of

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section V and (ii) the plan satisfies the

matching contribution limitations of subsection B of this section VI. See section

VIII.F.1 regarding the continued application of the ACP test to employee contributions.

B. Matching Contribution Limitations

1. Harbor Matching Contributions

Under Basic Matching Formula

A plan satisfies the matching contribution limitations of this section VI.B if (i)

the plan satisfies the matching contribution requirement of section V.B.1 using

the basic matching formula and (ii) no

other matching contributions are provided

under the plan.

2. Safe Harbor Matching Contributions Under an Enhanced Matching Formula

A plan satisfies the matching contribution limitations of this section VI.B if (i)

the plan satisfies the matching contribution requirement of section V.B.1 using an

enhanced matching formula under which

matching contributions are only made

with respect to elective contributions that

do not exceed 6 percent of the employee’s

compensation and (ii) no other matching

contributions are provided under the plan.

3. Other Matching Contributions

In the case of any other plan, the

matching contribution limitations of this

section VI.B are satisfied if, under the

plan, (i) matching contributions are not

made with respect to employee contributions or elective contributions that in the

aggregate exceed 6 percent of the employee’s compensation, (ii) the rate of

matching contributions does not increase

as the rate of employee contributions or

elective contributions increases, and (iii)

at any rate of employee contributions or

elective contributions, the rate of matching contributions that would apply with

respect to any HCE who is an eligible employee is no greater than the rate of

matching contributions that would apply

with respect to an NHCE who is an eligible employee and who has the same rate

of employee contributions or elective

contributions. If a plan provides matching contributions with respect to employee contributions or elective contributions, those employee contributions or

November 16, 1998

elective contributions may be restricted

only to the extent permitted under section

V.B.1.c.

4. Matching Contributions Generally Must be Required Under

Plan Terms

a. ADP Test Safe Harbor

As provided under section V.B.1.a, a

matching contribution may be taken into

account in determining whether the

matching contribution requirement of the

ADP test safe harbor is satisfied only if

the contribution is required to made under

the terms of a plan. Even though matching contributions made at the employer’s

discretion may not be taken into account

in determining whether the matching contribution requirement of section V.B.1 is

satisfied, a plan that satisfies the safe harbor contribution requirement of section

V.B will not fail to satisfy the ADP test

safe harbor merely because additional

matching contributions are made at the

employer’s discretion.

b. ACP Test Safe Harbor

A plan fails to satisfy the ACP test safe

harbor for a plan year if the plan provides

for matching contributions made at the

employer’s discretion on behalf of any

employee that, in the aggregate, could exceed a dollar amount equal to 4 percent of

the employee’s compensation. This limitation on matching contributions made at

the employer’s discretion does not apply

to plan years beginning before January 1,

2000.

C. Special Rule for Matching Contributions Under a § 403(b) Plan

For purposes of § 403(b)(12)(A)(i), a

§ 403(b) plan is treated as satisfying the

requirements of § 401(m) with respect to

matching contributions if the plan satisfies the safe harbor contribution requirement of section V.B, the notice requirement of section V.C, and the matching

contribution limitations of subsection B

of this section VI. For purposes of applying the requirements of section V and this

section VI, salary reduction contributions

under a § 403(b) plan are treated as elective contributions under a CODA.

D. Examples

The following examples illustrate the

requirements of the ACP test safe harbor

described in this section VI:

Example 1

(a) An employer’s only plan, Plan M,

contains a CODA that satisfies the ADP

test safe harbor using safe harbor matching contributions under the basic matching formula. No contributions, other than

elective contributions and contributions

under the basic matching formula, are

made to Plan M.

(b) Because the CODA under Plan M

satisfies the ADP test safe harbor using

the basic matching formula and Plan M

provides for no other matching contributions, Plan M automatically satisfies the

ACP test safe harbor.

Example 2

(a) Beginning January 1, 2000, Employer B maintains Plan N, the only plan

maintained by Employer B. Plan N contains a CODA that satisfies the ADP test

safe harbor using a 3-percent safe harbor

nonelective contribution. Plan N also

provides matching contributions equal to

50 percent of each eligible employee’s

elective contributions up to 6 percent of

compensation. Under Plan N, elective

contributions are limited to 10 percent of

an employee’s compensation and are limited in accordance with § 402(g) and

§ 415. Under Plan N, an employee may

change a cash or deferred election at any

time. Plan N provides a definition of

compensation that satisfies § 414(s) and

that same definition is used for all purposes under Plan N. Matching contributions under Plan N are fully vested after 3

years of service. No other matching contributions are provided for under Plan N.

The plan is maintained on a calendar-year

basis and all contributions for a plan year

are made within 12 months after the end

of the plan year.

(b) Based on these facts, Plan N satisfies the ACP test safe harbor with respect

to matching contributions because each

NHCE eligible to receive an allocation of

matching contributions under Plan N is

also an eligible employee under a CODA

that satisfies the ADP test safe harbor of

section V and because the matching contribution limitations of subsection B of

this section VI are satisfied.

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Example 3

(a) The facts are the same as in Example 2, except that Plan N also provides

matching contributions equal to 50 percent of each eligible employee’s employee contributions up to 6 percent of

compensation.

(b) Plan N does not satisfy the matching contribution limitations of subsection

B of this section VI because matching

contributions can be made with respect to

elective contributions and employee contributions that, in the aggregate, equal 12

percent of compensation (and thus exceed

6 percent of compensation).

Example 4

(a) The facts are the same as in Example 2, except that Plan N also provides

that Employer B, in its discretion, may

make additional matching contributions

up to 50 percent of each eligible employee’s elective contributions that do not

exceed 6 percent of compensation.

(b) Plan N does not fail to satisfy the

ACP test safe harbor on account of discretionary matching contributions, because,

under Plan N, the amount of discretionary

matching contributions cannot exceed 4

percent of an employee’s compensation.

VII. TIMING OF PLAN

CONTRIBUTIONS

A. In General

As provided in subsections B and C of

this section VII, matching and nonelective

contributions under a plan using the safe

harbor methods must be made to the plan

within the same time period that would

apply if these contributions were made to

a plan using the current year testing

method for ADP or ACP testing purposes

(that is, no later than 12 months after the

close of the plan year).

Matching and nonelective contributions also may be made from time to time

during the plan year, instead of at one

time after the close of the plan year. Regardless of the timing of employer contributions, however, the total amount of

matching or nonelective contributions for

the plan year still must satisfy the requirements of sections V and VI, taking into

account the total amount of compensation

for the plan year, in order for a CODA to

satisfy the ADP test safe harbor.

1998–46 I.R.B.

B. Contributions Under the ADP Test

Safe Harbor

A CODA will not satisfy the ADP test

safe harbor for a plan year unless safe harbor matching and nonelective contributions needed to satisfy the safe harbor

contribution requirement of section V.B

are made in accordance with the allocation and timing rules of § 1.401(k)–

1(b)(4).

C. Matching Contributions Under the

ACP Test Safe Harbor

Matching contributions are taken into

account for a plan year under the ACP test

safe harbor of section VI in accordance

with the allocation and timing rules of §

1.401(m)-1(b)(4)(ii)(A).

VIII. INTERACTION WITH OTHER

RULES AND TESTING METHODS

A. In General

A CODA that is treated as satisfying the

ADP test under § 401(k)(3)(A)(ii) and

§ 1.401(k)-1(b)(2) will not be treated as a

qualified CODA unless the arrangement

satisfies the other requirements of

§ 401(k). For example, under § 401(k)(3)(A)(i), the group of eligible employees

under the section 401(k) plan must satisfy

the requirements of § 410(b), under

§ 401(k)(4)(A), benefits (other than matching contributions) must not be contingent

on an election to defer, and elective contributions must satisfy the allocation and timing rules of § 1.401(k)–1(b)(4). A plan that

satisfies the ADP or ACP test safe harbor

must satisfy all other qualification requirements of the Code that are applicable to the

plan, such as the nondiscriminatory availability of benefits, rights, and features

under § 401(a)(4) and the limitations of

§§ 401(a)(17), 401(a)(30) and 415.

B. Use of Safe Harbor Nonelective

Contributions to Satisfy Other

Nondiscrimination Tests

A safe harbor nonelective contribution

used to satisfy the nonelective contribution requirement under section V.B.2 may

also be taken into account for purposes of

determining whether a plan satisfies

§ 401(a)(4). Thus, these contributions are

not subject to the limitations on qualified

nonelective contributions under

§ 1.401(k)–1(b)(5)(ii), but are subject to

the rules generally applicable to nonelective employer contributions under §

401(a)(4). See § 1.401(a)(4)–1(b)(2)(ii).

However, pursuant to § 401(k)(12)(E)(ii),

to the extent they are needed to satisfy the

safe harbor contribution requirement of

section V.B, safe harbor nonelective contributions may not be taken into account

under any plan for purposes of § 401(l)

(including the imputation of permitted

disparity under § 1.401(a)(4)–7).

C. Top-Heavy Rules

1. Safe Harbor Nonelective Contributions

Safe harbor nonelective contributions

may be counted under § 416 toward the

minimum contribution requirement for

top-heavy plans. Thus, if a plan allocates

to all eligible employees a 3-percent safe

harbor nonelective contribution, the plan

generally would also satisfy the top-heavy

minimum contribution requirement. See

§ 1.416–1, M-18 for a similar rule applicable to qualified nonelective contributions.

2. Safe Harbor Matching

Contributions

If a plan uses contributions allocated to

employees on the basis of elective contributions or employee contributions to satisfy the top-heavy minimum contribution

requirement under § 416, these contributions are not treated as matching contributions for purposes of §§ 401(k) and

401(m). Therefore, safe harbor matching

contributions may not be counted toward

the minimum contribution requirement

for top-heavy plans under § 416. See

§ 1.416–1, M–19.

D. Qualified Matching Contributions

and Qualified Nonelective Contributions

To the extent they are needed to satisfy

the safe harbor contribution requirement

of section V.B, safe harbor matching and

nonelective contributions may not be used

as qualified matching contributions and

qualified nonelective contributions, respectively, under any plan for any plan

year. For example, if a plan satisfies the

safe harbor contribution requirement

using a safe harbor nonelective contribution by allocating a 7-percent safe harbor

nonelective contribution to all eligible

November 16, 1998

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employees, contributions in an amount

equal to the first 3 percent of each employee’s compensation may not be used

as a qualified nonelective contribution

under the ACP test. However, safe harbor

nonelective contributions in an amount

equal to the remaining 4 percent of each

employee’s compensation may be used to

satisfy the ACP test (subject to the requirements of § 1.401(m)–1(b)(5)).

E. Testing Methods Under Notice 98–1

For purposes of Notice 98–1, a plan

that uses the safe harbor methods to satisfy the ADP or ACP test for a plan year is

treated as using the current year testing

method for that year and, thus, is subject

to the rules contained in section VII of

Notice 98–1 (relating to changes from

current year to prior year testing).

In addition, in the case of a plan that is

not maintained on a calendar plan year

basis, the anti-abuse provision of section

VIII of Notice 98–1 applies in a similar

manner to changes between the safe harbor methods and the current or prior year

testing method.

F. Continued Application of the ACP

Test to Certain Contributions

1. Employee Contributions

Even if a defined contribution plan satisfies the ACP test safe harbor of section

VI with respect to matching contributions,

the plan still must satisfy the ACP test in

the manner described in paragraph 3 of

this section VIII.F with respect to employee contributions made under the plan.

2. Matching Contributions that Fail to

Satisfy the ACP Test Safe Harbor

If a plan satisfies the ADP test safe harbor of section V.A, but fails to satisfy the

ACP test safe harbor with respect to

matching contributions under the plan,

then the plan must satisfy the ACP test in

the manner described in paragraph 3 of

this section VIII.F.

3. Special Rules for ACP Test

If paragraph 1 or 2 of this section

VIII.F applies, then the plan must satisfy

the ACP test under § 401(m)(2), and

under § 1.401(m)–1(b), as modified by

Notices 97–2 and 98–1, using the current

year testing method. However, in applying the ACP test, an employer may elect

November 16, 1998

to disregard with respect to all eligible

employees (i.e., all HCEs and NHCEs)

(1) all matching contributions, if the ACP

test safe harbor of section VI is satisfied

or (2) matching contributions that do not

exceed 4 percent of each employee’s

compensation, if the matching contribution requirement of section V.B.1 is satisfied. Except as otherwise provided in

section VIII.D, qualified nonelective contributions may be treated as matching

contributions to the extent permitted

under § 1.401(m)–1(b)(5). Finally, in applying the ACP test (i) matching contributions may not be treated as elective contributions under § 401(k)(3)(D) to a CODA

that satisfies the ADP test safe harbor

(and thus excluded from the ACP test

under § 401(m)(3)) and (ii) elective contributions under a CODA that satisfies the

ADP test safe harbor may not be treated

as matching contributions under

§ 401(m)(3).

G. Multiple Use Test

The restrictions on multiple use under

§ 1.401(m)–2 do not apply to a CODA that

satisfies the ADP test safe harbor. In addition, the restrictions on multiple use under

§ 1.401(m)–2 do not apply to a defined

contribution plan that satisfies the ACP test

safe harbor, if the plan does not permit employee contributions. In determining

whether multiple use of the alternative limitation under § 401(k)(3)(A)(ii)(II) or

§ 401(m)(2)(A)(ii) occurs with respect to

another plan of an employer, (1) a CODA

that satisfies the ADP test safe harbor and

(2) a defined contribution plan that satisfies the ACP test safe harbor and does not

permit employee contributions, are disregarded for purposes of § 1.401(m)–2(b).

In the case of a defined contribution plan to

which subsection F.1 or F.2 of this section

VIII applies (that is, a defined contribution

plan that satisfies the ACP test safe harbor

but permits employee contributions, or a

defined contribution plan that fails to satisfy the ACP test safe harbor), the special

rules of subsection F.3 of this section VIII

(relating to ACP testing) also apply for

purposes of § 1.401(m)–2(b) in determining whether the multiple use of the alternative limitation occurs.

H. Early Participation Rules

Sections 401(k)(3)(F) and 401(m)(5)(C), which provide alternative nondis-

crimination rules for certain plans that

provide for early participation, do not

apply for purposes of the safe harbor

methods. However, see section IX.B.1

for application of the § 410(b)(4)(B) rule

permitting the separate testing of employees who satisfy age and service conditions

under the plan that are lower than the

greatest age and service conditions permitted under § 410(a).

IX. MULTIPLE CODAS OR

MULTIPLE PLANS

A. Satisfying Safe Harbor Contribution Requirement Under Another

Defined Contribution Plan

1. In General

Safe harbor matching or nonelective

contributions may be made to the plan

that contains the CODA or to another defined contribution plan that satisfies §

401(a) or § 403(a). If safe harbor contributions are made to another defined contribution plan, the safe harbor contribution requirement of section V.B must be

satisfied in the same manner as if the contributions were made to the plan that contains the CODA. Consequently, each employee eligible under the plan containing

the CODA must be eligible under the

same conditions under the other defined

contribution plan.

2. Plan Year Requirement

In order for safe harbor contributions to

be made to another defined contribution

plan, that plan must have the same plan

year as the plan containing the CODA.

However, for plan years of plans containing CODAs beginning before January 1,

2000, contributions used to satisfy the

safe harbor contribution requirement of

section V.B for a CODA also may be

made to another defined contribution plan

that does not have the same plan year as

the plan containing the CODA, provided

that the safe harbor contribution is allocated as of a date within the plan year of

the plan containing the CODA and is

made no later than 12 months after the

close of that plan year.

3. Section 410(b) Aggregation Not

Required

In order for safe harbor contributions to

be made to another defined contribution

1998–46 I.R.B.

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Page 23

plan, it is not necessary that the other plan

be capable of being aggregated with the

plan containing the CODA for purposes

of § 410(b). Therefore, notwithstanding

§§ 1.410(b)–7(c)(2) and 54.4975–11(e), a

contribution to an ESOP may be used to

satisfy the safe harbor contribution requirement of section V.B for a CODA that

is not part of the ESOP.

4. Contributions Used Only Once

Safe harbor matching or nonelective

contributions cannot be used to satisfy the

safe harbor contribution requirement of

section V.B with respect to more than one

plan.

B. Aggregation and Disaggregation

Rules

1. Plans

The rules that apply for purposes of aggregating and disaggregating CODAs and

plans under §§ 401(k) and 401(m) also

apply for purposes of §§ 401(k)(12)

and 401(m)(11), respectively. See

§§ 1.401(k)–1(b)(3) and 1.401(m)–1(b)(3).

Accordingly, all CODAs included in a

plan are treated as a single CODA that

must satisfy the safe harbor contribution

requirement of section V.B and the notice

requirement of section V.C. Moreover,

two plans (within the meaning of

§ 1.410(b)–7(b)) that are treated as a single plan pursuant to the permissive aggregation rules of § 1.410(b)–7(d) are treated

as a single plan for purposes of the safe

harbor methods. Conversely, a plan

(within the meaning of § 414(l)) that includes a CODA covering both collectively bargained employees and noncollectively bargained employees is treated

as two separate plans for purposes of

§ 401(k), and the ADP test safe harbor

need not be satisfied with respect to both

plans in order for one of the plans to take

advantage of the ADP test safe harbor.

Similarly, if, pursuant to § 410(b)(4)(B),

an employer applies § 410(b) separately

to the portion of a plan (within the meaning of § 414(l)) that benefits only employees who satisfy age and service conditions

under the plan that are lower than the

greatest minimum age and service conditions permitted under § 410(a), the plan is

treated as two separate plans for purposes

of § 401(k), and the ADP test safe harbor

need not be satisfied with respect to both

1998–46 I.R.B.

plans in order for one of the plans to take

advantage of the ADP test safe harbor.

2. Highly Compensated Employees

In accordance with §§ 401(k)(3) and

401(m)(2), elective or matching contributions under a plan made on behalf of an

HCE who is eligible to participate in more

than one plan of the same employer providing such contributions must generally

be aggregated and treated as made under

each of the plans, even if one or more of

the plans is intended to satisfy the ADP or

ACP test safe harbor. Thus, for example,

if an HCE is simultaneously an eligible

employee under two plans maintained by

an employer for a plan year, only one of

which one is intended to satisfy the ADP

and ACP tests using the safe harbor methods, and the matching contribution formula of the plan that is not using the safe

harbor methods provides greater matching contributions than the formula under

the plan that is intended to satisfy the

ADP and ACP tests using the safe harbor

methods, the rules in sections V.B.1.b and

VI.B.3 (prohibiting an HCE from receiving a greater rate of matching contributions than an NHCE) could be violated.

These issues could also arise, for example, when an HCE is transferred from a

plan maintained for one group of employees to a plan maintained for another group

of employees.

X. PLAN YEARS OF FEWER THAN

12 MONTHS

A plan will fail to satisfy the ADP test

safe harbor or the ACP test safe harbor for

a plan year unless (i) the plan year is 12

months long or (ii) in the case of the first

plan year of a newly established plan

(other than a successor plan), the plan

year is at least 3 months long (or, any

shorter period in the case of a newly established employer that establishes the

plan as soon as administratively feasible

after the employer comes into existence).

XI. PLAN PROVISIONS RELATING

TO SAFE HARBORS

A. General Rules

1. Plan Must Include Safe Harbor

Provisions

Sections 1.401(k)–1(b)(2)(iii) and

1.401(m)–1(b)(2) require that a plan to

which § 401(k) or § 401(m) applies provide that the ADP or ACP test will be met.

Because, effective for plan years beginning after December 31, 1998, a plan may

use the SIMPLE 401(k) plan formula or

safe harbor provisions as alternatives to

the ADP and ACP tests, a plan must specify which of these alternatives it is using.

Generally, a plan sponsor that intends to

use the safe harbor provisions for a plan

year must adopt those provisions before

the first day of that plan year. However,

see section XI.B for the remedial amendment period applicable to plan changes

incorporating the safe harbor provisions.

2. Safe Harbor Contributions Made to

Another Plan

If, pursuant to section IX.A, safe harbor matching or nonelective contributions

will be made to another plan, the name of

the other plan must be specified in the

plan containing the CODA. Moreover, if

safe harbor matching or nonelective contributions will be made to another plan for

a plan year, the other plan must also

adopt, before the first day of that plan

year, provisions specifying that the safe

harbor contributions will be made and

providing for the withdrawal and vesting

restrictions required by § 401(k)(12)(E)(i). However, see section XI.B for the

remedial amendment period applicable to

plan changes incorporating the safe harbor provisions.

3. Disaggregated Plans

If a plan, within the meaning of

§ 414(l), is composed of disaggregated

plans under § 1.410(b)–7(c), the plan provisions must specify which disaggregated

plans are subject to the safe harbor provisions.

B. Remedial Amendment Period

Section 1.401(b)–1T(b)(3) authorizes

the Commissioner to designate a plan provision as a disqualifying provision that either (1) results in the failure of the plan to

satisfy the qualification requirements of

the Code by reason of a change in those

requirements or (2) is integral to a qualification requirement that has been changed.

Section 1.401(b)–1T(c)(3) authorizes the

Commissioner, in the case of a disqualifying provision designated as described in

the preceding sentence, to impose limits

November 16, 1998

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and provide additional rules regarding the

amendments that may be made with respect to that disqualifying provision.

Pursuant to § 1.401(b)-1T(b)(3) and

(c)(3), a plan provision is hereby designated as a disqualifying provision if the

plan provision is integral to a qualification requirement changed by a provision

of SBJPA that becomes effective on the

first day of the first plan year beginning

after December 31, 1998, provided that

the following conditions are satisfied.

First, the plan provision must be amended

to reflect the change made by SBJPA by

no later than the last day of the first plan

year beginning after December 31, 1998.

(If an employer or plan administrator files

a request for a determination letter on the

qualified status of a plan by the last day of

the first plan year beginning after December 31, 1998, then the date by which the

plan provision must be amended shall be

extended through the 91st day following

the applicable date under § 1.401(b)–

1(e)(3)(i) or (ii).) Second, the plan provision as amended must be effective as of

the first day of the first plan year beginning after December 31, 1998. Thus, if a

plan uses the safe harbor methods for the

plan year beginning in 1999, the plan generally must be amended no later than the

end of that plan year, retroactive to the

first day of that year, to reflect the safe

harbor methods. This remedial amendment period also applies to a plan amendment reflecting the use of the early participation rules under §§ 401(k)(3)(F) and

401(m)(5)(C).

The preceding paragraph does not permit a CODA to be adopted retroactively.

See § 1.401(k)–1(a)(3)(ii).

A plan amendment described in this

section XI.B shall not be treated as violating the requirements of § 411(d)(6)

merely because the plan amendment imposes the withdrawal restrictions required

by § 401(k)(12)(E)(i), provided that those

withdrawal restrictions do not apply with

respect to contributions allocated as of a

date before the first day of the first plan

year beginning after December 31, 1998.

REQUEST FOR COMMENTS

The Service and Treasury invite comments and suggestions concerning the

guidance provided in this notice. Comments are specifically requested as to

whether there are circumstances (in addi-

November 16, 1998

tion to the first plan year of a newly established plan) in which the use of the safe

harbor methods would be appropriately

allowed for a plan year of less than 12

months (e.g., certain corporate merger or

acquisition transactions involving a plan

sponsor maintaining a plan using the safe

harbor methods, if appropriate conditions

are satisfied).

Comments can be addressed to

CC:DOM:CORP:R (Notice 98–52), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, comments

may be hand delivered between the hours

of 8 a.m. and 5 p.m. to CC:DOM:

CORP:R (Notice 98–52), Courier’s Desk,

Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet

site at: http://www.irs.ustreas.gov/prod/

tax_regs/comments.html.

PAPERWORK REDUCTION ACT

The collection of information contained in this notice has been reviewed

and approved by the Office of Management and Budget (OMB) in accordance

with the Paperwork Reduction Act (44

U.S.C. 3507) under control number 15451624.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

OMB control number.

The collection of information in this

notice is in section V.C, “Notice Requirement,” and section XI, “Plan Provisions

Relating to Safe Harbors.” The collection

of information is required to obtain a benefit. The likely respondents are businesses or other for-profit institutions, and

not-for-profit institutions.

The estimated total annual reporting/

recordkeeping burden is 80,000 hours.

The estimated annual burden per respondent/recordkeeper is 1 hour and 20

minutes. The estimated number of respondents/recordkeepers is 60,000.

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

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

tax return information are confidential, as

required by 26 U.S.C. 6103.

Drafting Information

The principal author of this notice is

Roger Kuehnle of the Employee Plans Division. For further information regarding

this notice, please contact the Employee

Plans Division’s taxpayer assistance telephone service at (202) 622-6074/6075

(not toll-free numbers), between the hours

of 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday.

1999 Limitations Adjusted As

Provided in Section 415(d),

Etc.1

Notice 98–53

Section 415 of the Internal Revenue

Code (the Code) provides for dollar limitations on benefits and contributions

under qualified plans. Section 415 also

requires that the Commissioner annually

adjust these limits for cost-of-living increases. Other limitations applicable to

deferred compensation plans are also affected by these adjustments.

Effective January 1, 1999, the limitation for the annual benefit under

§ 415(b)(1)(A) for defined benefit plans

remains unchanged at $130,000. For participants who separated from service before January 1, 1999, the limitation for

defined benefit plans under § 415(b)(1)(B) is computed by multiplying the

participant’s compensation limitation, as

adjusted through 1998 by 1.0160. The

limitation for defined contribution plans

under § 415(c)(1)(A) remains unchanged

at $30,000.

The Code provides that various other

dollar amounts are to be adjusted at the

same time and in the same manner as the

dollar limitation of § 415(b)(1)(A) is adjusted. These dollar amounts and the adjusted amounts are as follows:

The limitation on the exclusion for

elective deferrals under § 402(g)(1) remains unchanged at $10,000.

The

dollar

amount

under

§ 409(o)(1)(C)(ii) for determining the

maximum account balance in an employee stock ownership plan subject to a

5-year distribution period is increased

from $725,000 to $735,000, while the

1Based on News Release IR-98-63, dated October 23, 1998.

1998–46 I.R.B.

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Page 25

dollar amount used to determine the

lengthening of the 5-year distribution remains unchanged at $145,000.

The limitation used in the definition of

a highly compensated employee under

§ 414(q)(1)(B) remains unchanged at

$80,000.

The annual compensation limit under

§§ 401(a)(17) and 404(l) remains unchanged at $160,000. The annual compensation limit under § 401(a)(17) for eligible participants in certain governmental

plans that, under the plan as in effect on

July 1, 1993, allowed cost-of-living adjustments to the compensation limitation

under the plan under § 401(a)(17) to be

taken into account, is increased from

$265,000 to $270,000.

The compensation amount under

§ 408(k)(2)(C) regarding simplified employee pension plans (SEPs) remains unchanged at $400. The compensation

amount under § 408(k)(3)(C) for SEPs remains unchanged at $160,000.

The limitation under § 408(p)(2)(A) regarding simple retirement accounts remains unchanged at $6,000.

The limitation on deferrals under

§ 457(b)(2) and (c)(1) concerning eligible

deferred compensation plans of state and

local governments and of tax-exempt organizations remains unchanged at $8,000.

The compensation amounts under

§ 1.61–21(f)(5)(i) and (iii) of the Income

Tax Regulations concerning the definition

of “control employee” for fringe benefit

valuation purposes are $70,000 and

$145,000, respectively.

Administrators of defined benefit or

defined contribution plans that have received favorable determination letters

should not request new determination letters solely because of yearly amendments

to adjust maximum limitations in the

plans.

Returns Relating to Interest on

Education Loans

Notice 98–54

PURPOSE

This notice modifies Notice 98–7,

1998–3 I.R.B. 54, which describes the information reporting requirements under

§ 6050S of the Internal Revenue Code for

1998–46 I.R.B.

1998 that apply in the case of payments of

interest on qualified education loans.

Specifically, this notice provides that no

information reporting is required with respect to “mixed use” loans in light of

amendments made to § 221(e)(1) by the

Internal Revenue Service Restructuring

and Reform Act of 1998 (RRA 1998),

Pub. L. No. 105–206, § 6004(b)(1), 112

Stat. 792. This notice also provides that

the Internal Revenue Service and the

Treasury Department are extending the

application of Notice 98–7 to information

reporting required under § 6050S for

1999.

BACKGROUND

Section 6050S, as enacted by the Taxpayer Relief Act of 1997, Pub. L. No.

105–34, § 202(c), 111 Stat. 808, requires

the filing of information returns by persons who receive payments of interest

that may be deductible as interest on a

qualified education loan (“payees”). Section 6050S(e) provides that, except as

provided in regulations, the term “qualified education loan” has the meaning

given such term by § 221(e)(1). Section

6050S requires that payees file the specified information returns with the Service

and provide a corresponding statement to

the individuals named on the information

return (“payor”) showing the information

that has been reported.

The requirements for reporting qualified education loan interest under § 6050S

are generally described in Notice 98–7,

along with specific information reporting

requirements for 1998. Section D of the

Discussion portion of Notice 98–7 provides a rule for reporting payments of interest made on or after January 1, 1998,

on mixed use loans or revolving accounts,

such as credit card accounts. Payments of

interest on these loans are treated under

Notice 98–7 as interest paid with respect

to a qualified education loan (and must be

reported as such) only if the mixed use

loan or revolving account is certified by

the payor to be, in part, a qualified education loan, and the payee has a reasonable

method for allocating the interest payments to the part of the loan that is certified to be a qualified education loan. In

addition, Section E of the Discussion provides that, with respect to loans made on

or after January 1, 1998, that are secured

by real property, if a payor certifies all or

part of such a loan as a qualified education loan, only the certified portion of the

loan may be treated as a qualified education loan for purposes of information reporting. The remaining portion must be

treated as a mortgage subject to information reporting under § 6050H.

DISCUSSION

Section 221(e)(1), as amended by RRA

1998, provides that the term “qualified

education loan” means any indebtedness

incurred by the taxpayer solely to pay

qualified higher education expenses. The

amendment to § 221(e)(1) is effective as

if included in the Taxpayer Relief Act of

1997 and applies to interest payments due

and paid after December 31, 1997. Thus,

the payee must not report under § 6050S

information on mixed use loans (whether

or not secured by real property) because

they are not qualified education loans

under § 221(e)(1) as amended. However,

information reporting under § 6050S continues to be required for any loan (including a loan secured by real property) or revolving account, such as credit card

account, that the payor certifies is used

solely for the purpose of paying qualified

higher education expenses. The payee

may rely on this certification when filing

Form 1098–E, Student Loan Interest

Statement, for 1998 and need not verify

the payor’s actual use of the funds. In all

other respects, the requirements of

§ 6050S with respect to qualified education loan interest reporting for 1998 remain the same as described in Notice

98–7.

The Service is currently revising Form

W–9S, Request for Student’s or Borrower’s Social Security Number and Certification, to remove the certification for

mixed use loans. In addition, payees

should disregard the instructions regarding mixed use loans and revolving accounts, which are found in the Form

1098-E section of the 1998 Instructions

for Forms 1099, 1098, 5498, and W–2G.

Those instructions will be revised for

1999.

The Treasury Department intends to

issue regulations soon on the information

reporting requirements of § 6050S. Pending issuance of those regulations, the Service is extending the application of Notice

November 16, 1998

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Page 26

98–7, as modified by this notice, for an

additional year, i.e., to information reporting required under § 6050S for 1999.

For 1999, payees must follow the rules

provided in Notice 98–7, as modified by

this notice, for information reporting

under § 6050S. For example, a payee that

receives payments of interest on a qualified education loan in 1999 must file a

Form 1098–E that includes the same information that was required by Notice

98–7, as modified by this notice. The

Forms 1098-E for 1999 must be filed with

the Service by February 28, 2000, if filed

on paper or by magnetic media, or by

March 31, 2000, if filed electronically. A

statement containing the same information as the Form 1098-E filed with the

Service must be furnished to the payor by

January 31, 2000. Similarly, Notice 98–7,

as modified by this notice, applies for

1999 with respect to how penalties will be

administered under §§ 6721 and 6722 for

information returns required under

§ 6050S.

EFFECT ON OTHER DOCUMENTS

Notice 98–7 is modified.

DRAFTING INFORMATION

The principal author of this notice is

John J. McGreevy of the Office of the Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this notice contact him on (202)

622-4910 (not a toll-free call).

Awards of Costs and Certain

Fees in Tax Litigation

Notice 98–55

Section 3101(e) of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. No. 105–206,

amended § 7430 of the Internal Revenue

Code to add a “qualified offer rule” that

treats certain taxpayers as prevailing parties when the United States has rejected

their offer to settle their tax controversy.

Treatment as a prevailing party is a necessary element for a taxpayer to receive an

award of reasonable administrative and

litigation costs in connection with an administrative or court proceeding. The

Service and the Treasury Department intend to publish guidance to address sev-

November 16, 1998

eral issues raised by the new qualified

offer rule and invite public comment on

these issues.

BACKGROUND

Under § 7430, as amended, a taxpayer

qualifying as a prevailing party under this

new qualified offer rule may be eligible to

receive an award for reasonable administrative and litigation costs in connection

with an administrative or court proceeding, even when the position of the United

States is reasonable and even though the

taxpayer does not substantially prevail in

the tax controversy. To qualify as a prevailing party under this new rule, a taxpayer must meet the net worth requirements and make a “qualified offer” during

the “qualified offer period.” If the Service rejects the taxpayer’s last qualified

offer made during the qualified offer period, and the tax liability of the taxpayer

(as determined by a court judgment) is

less than the tax liability would have been

had the last qualified offer been accepted,

the taxpayer qualifies as a prevailing

party under § 7430. A “qualified offer” is

a written offer that is made by the taxpayer to the United States during the qualified offer period, specifies the amount of

the taxpayer’s tax liability (determined

without regard to interest), is designated a

qualified offer when made, and remains

open until the earliest of: (1) the date the

offer is rejected, (2) the date the trial begins, or (3) 90 days from the date of the

offer. The “qualified offer period,” during

which a qualified offer may be made, begins on the date the 30-day letter is mailed

by the Service to the taxpayer and ends on

the date which is 30 days before the date

the case is first set for trial.

ISSUES FOR COMMENT

The Service and Treasury invite public

comments on the following issues (and

any others) raised by the new qualified

offer rule:

Comparison of Liability:

In multiple issue tax cases, partial settlements involving discrete issues often

occur throughout both the administrative

and court proceedings. Depending upon

when a qualified offer is made, issues involved in the proceeding at the time of the

offer may not be part of the court’s adju-

dication but may still be part of the judgment entered by the court. If settlement

occurs before the court proceeding is

commenced, those issues would not be

part of the judgment. The Service and

Treasury are interested in receiving comments on how the settlement of issues at

the various stages of the proceedings

should be taken into account in comparing the taxpayer’s liability under the judgment with that under the qualified offer.

(1) In comparing a taxpayer’s tax liability under a qualified offer with the taxpayer’s tax liability under a court judgment, should the comparison be limited to

court-determined issues or should settled

issues also be taken into account?

(2) If settled issues are included in the

comparison, should issues settled before

the court proceeding is commenced be included in the comparison?

Content of Offer:

If it is determined that settled issues

are not to be taken into account, in whole

or in part, a meaningful comparison will

only be possible if the qualified offer is

specific enough to carve out those issues

from the comparison. On the other hand,

if all settled issues are to be included in

the comparison, a lump-sum offer could

be compared with the liability under the

judgment as modified to take into account

the settled issues not included in the judgment. The Service and Treasury are interested in receiving comments on how the

qualified offer rule should be applied in

such multiple issue cases.

(1) May a qualified offer be in the form

of a lump-sum amount when the case involves multiple tax issues (one or more of

which may be settled while others may be

determined by the court)?

(2) How much specificity should a

qualified offer be required to contain

when the case involves multiple tax issues

(one or more of which may be settled

while others may be determined by the

court)?

Timing of Offer:

In the U.S. Tax Court, the court places

cases on a trial calendar that lists the cases

to be heard by the court during the designated trial session. Notices informing the

parties that their respective cases are set

for trial during the designated trial session

1998–46 I.R.B.

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Page 27

are usually sent by the court five or six

months prior to the beginning of the trial

session. Not infrequently, cases are continued, stricken or otherwise removed

from the calendar on which they were

originally set for trial and placed on another trial calendar relating to a different

trial session. At the start of each trial session, all cases appearing on the trial calendar that have not been previously disposed of will be called by the court.

Thereafter, the court announces the dates

and times that the cases will be tried during the trial session. Thus, the actual trial

date is often unknown until after the calendar call. Depending on how the phrase

“first set for trial” is interpreted with respect to a Tax Court case, the length of the

period during which a qualified offer may

be made may vary significantly. The Service and Treasury are interested in receiving comments on whether the settlement

process is better promoted by interpreting

the phrase “first set for trial” to provide a

longer qualified offer period or by interpreting that phrase to provide a shorter

qualified offer period.

(1) When should a U.S. Tax Court case

be considered “first set for trial”: (a) on

the date of the calendar call for the first

trial session during which the case is originally set for trial; (b) on the date the case

is actually called for trial; or (c) on some

other date?

(2) When should a U.S. district court,

U.S. bankruptcy court, or Court of Federal Claims case be considered “first set

for trial”?

(3) What effect, if any, should a continuance have on when a case is considered

“first set for trial”?

ADDRESS FOR COMMENTS

Written comments on the new qualified

offer rule issues should be submitted by

November 30, 1998, should reference Notice 98-55, and may be submitted by mail

to:

Internal Revenue Service

Attn: CC:DOM:CORP:T:R

(DOM:FS:IT&A) Room 5226

P.O. Box 7604

Ben Franklin Station

Washington, DC 20044

or may be hand-delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:

CORP:R (DOM:FS:IT&A) at the

Courier’s Desk, Internal Revenue Build-

1998–46 I.R.B.

ing, 1111 Constitution Avenue NW, Washington, DC. Alternatively, comments may

be submitted electronically via:

http://www.irs.ustreas.gov/prod/tax_regs/

comments.html (the Service’s Internet

site).

DRAFTING INFORMATION

The principal authors of this notice are

Tom Moffitt and Henry Schneiderman of

the Office of the Assistant Chief Counsel

(Field Service). For further information

regarding this notice, please contact Mr.

Moffitt at (202) 622-7900 or Mr. Schneiderman at (202) 622-7820 (not toll-free

calls).

26 CFR 601.105: Examination of returns and

claims for refund, credit or abatement;

determination of correct tax liability.

(Also Part I, §§ 1361, 1362; 1.1361–1, 1.1362–4,

1.1362–6, 301.9100–1, 301.9100–3.)

Rev. Proc. 98–55

SECTION 1. PURPOSE

This revenue procedure amplifies and

supersedes the provisions of Rev. Proc.

94–23, 1994–1 C.B. 609, and Rev. Proc.

97–40, 1997–33 I.R.B. 50. This revenue

procedure is intended to provide guidance

for taxpayers requesting relief for late S

corporation elections and certain untimely

elections required to be filed by or with

respect to an S corporation. Accompanying this document is a flowchart designed

to aid taxpayers in applying this revenue

procedure.

SECTION 2. BACKGROUND

Section 1361(a)(1) of the Internal Revenue Code defines an “S corporation,”

with respect to any taxable year, as a

small business corporation for which an S

corporation election is in effect for that

year.

Section 1361(b)(1) defines a “small

business corporation” as a domestic corporation that is not an ineligible corporation and that does not (A) have more than

75 shareholders, (B) have as a shareholder a person (other than an estate, a

trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who

is not an individual, (C) have a nonresident alien as a shareholder, and (D) have

more than one class of stock.

Section 1362(a)(1) provides that, except in a situation described in § 1362(g),

a small business corporation may elect to

be treated as an S corporation.

Section 1362(b)(1) provides that the

corporation may make an election to be

treated as an S corporation (A) at any time

during the preceding taxable year, or (B)

at any time during the taxable year and on

or before the 15th day of the 3rd month of

the taxable year. Under § 1362(b)(3), if

an S corporation election is made for a

taxable year after the 15th day of the 3rd

month of that taxable year and on or before the 15th day of the 3rd month of the

following taxable year, then the S corporation election is treated as made for the

following taxable year.

Section 1362(b)(5) provides that if (A)

an election under § 1362(a) is made for

any taxable year (determined without regard to § 1362(b)(3)) after the date prescribed by § 1362(b) for making the election for the taxable year or no election is

made for any taxable year, and (B) the

Secretary determines that there was reasonable cause for the failure to timely

make the election, the Secretary may treat

the election as timely made for the taxable

year (and § 1362(b)(3) shall not apply).

Rev. Proc. 97–40 provides a special

procedure to request relief for a late S corporation election. That revenue procedure applies only to a corporation (1) that

has not filed a timely S corporation election under § 1362(a)(1), (2) for which an

S corporation election is filed within 6

months of the original due date for the

election, and (3) for which the due date of

the tax return (excluding extensions) for

the first year the corporation intended to

be an S corporation has not passed.

Rev. Proc. 97–48, 1997–43 I.R.B. 19,

provides special procedures to obtain automatic relief for certain late S corporation elections in two situations. In both

situations, relief is available only where

the due date for the tax return for the first

year the corporation intended to be an S

corporation has passed and other eligibility requirements are met. Rev. Proc. 97–

48 does not provide relief for late electing

small business trust (ESBT), qualified

subchapter S trust (QSST), or qualified

subchapter S subsidiary (QSub) elections.

Section 1362(f) grants the Service authority to provide relief in situations

where a corporation’s S election was not

November 16, 1998

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Page 28

effective for the taxable year for which it

was made by reason of a failure to meet

the requirements of § 1361(b), or where

the corporation’s S election terminates

under § 1362(d)(2) or (3). A corporation

is eligible for relief under this provision if

(1) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (2)

no later than a reasonable period of time

after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken so that the S corporation is a small business corporation, and

(3) the corporation, and each person who

was a shareholder of the corporation at

any time during the period specified pursuant to § 1362(f), agrees to make any adjustments (consistent with the treatment

of the corporation as an S corporation) as

may be required by the Secretary with respect to the period. If a corporation is eligible for relief under this provision, then,

notwithstanding the circumstances resulting in the ineffectiveness or termination,

the corporation will be treated as an S corporation during the period specified by

the Secretary.

Section 1.1362–4 of the Income Tax

Regulations sets forth additional guidance

regarding inadvertent termination relief.

Section 1.1362–4(b) provides that the corporation has the burden of establishing

that under the relevant facts and circumstances the Commissioner should determine that the termination was inadvertent.

The fact that the terminating event was not

reasonably within the control of the corporation and was not part of a plan to terminate the election, or the fact that the event

took place without the knowledge of the

corporation, notwithstanding its due diligence to safeguard against such an event,

tends to establish that the termination was

inadvertent. Section 1.1362–4(c) provides

that a taxpayer may request inadvertent

termination relief by submitting a request

for a private letter ruling. Section

1.1362–4(d) provides that the Commissioner may condition the granting of a ruling request on any adjustments that are appropriate. Section 1.1362–4(e) requires

the corporation and all persons who were

shareholders of the corporation at any time

during the time specified by the Commissioner to consent to any adjustments that

the Commissioner may require.

November 16, 1998

Section 1361(d)(1)(A) provides that in

the case of a QSST with respect to which

a beneficiary makes an election under

§ 1361(d)(2), the trust will be treated as a

trust described in § 1361(c)(2)(A)(i) (relating to trusts that may be a shareholder

of a small business corporation under

§ 1361(b)(1)). Pursuant to § 1361(d)(2)(A) and § 1.1361–1(j)(6)(i), the election by a current income beneficiary of a

QSST may be made by the beneficiary’s

legal representative (or a natural or an

adoptive parent of the current income

beneficiary if a legal representative has

not been appointed and the current income beneficiary is a minor).

Section 1361(d)(2) provides for the

time and manner in which the beneficiary

of a QSST may elect to have the provisions of § 1361(d) apply. Included is the

requirement that the QSST election must

be filed within the 2 month and 16 day period beginning on the day that the stock is

transferred to the trust.

Section 1361(d)(3) sets forth the provisions a trust instrument must contain for

the trust to qualify as a QSST. Under

§ 1361(d)(3)(A), the terms of the trust

must require that: (i) during the life of the

current income beneficiary, there is only

one income beneficiary; (ii) any corpus

distributed during the life of the current

beneficiary may be distributed only to that

beneficiary; (iii) the current income beneficiary’s interest terminates on the earlier

of the beneficiary’s death or the trust’s termination; and (iv) if the trust terminates

during the current income beneficiary’s

life, the trust assets must be distributed to

that beneficiary. In addition, § 1361(d)(3)(B) requires that the trust must distribute all of its income (within the meaning

of § 643(b)) currently to one individual

who is a United States resident or citizen.

Rev. Proc. 94–23 provides automatic

inadvertent termination relief to certain

corporations whose S corporation election

terminates because stock of the corporation was transferred to a trust whose current income beneficiary (or the legal representative of the current income

beneficiary) inadvertently failed to file a

timely election with respect to a QSST

under § 1361(d)(2). Section 4 of that revenue procedure provides the prerequisites

for automatic relief and the procedural requirements for obtaining it.

Section 1361(c)(2)(A)(v) provides that

an ESBT (as defined in § 1361(e)) is a

permitted S corporation shareholder.

Generally, an ESBT is any trust if: (1) the

trust does not have as a beneficiary any

person other than an individual, an estate,

or an organization described in §

170(c)(2), (3), (4), or (5); (2) no interest

in the trust was acquired by purchase; and

(3) an election to be an ESBT has been

filed with respect to the trust.

Section 1361(b)(3)(B) provides that a

QSub is a domestic corporation that is not

an ineligible corporation, if (1) an S corporation holds 100 percent of the stock of

the corporation, and (2) that S corporation

elects to treat the subsidiary as a QSub.

Under § 301.9100–1(c) of the Procedure and Administration Regulations, the

Commissioner may grant a reasonable extension of time to make a regulatory election or certain statutory elections under all

subtitles of the Code, except subtitles E,

G, H, and I, if the taxpayer demonstrates

to the satisfaction of the Commissioner

that the taxpayer acted reasonably and in

good faith, and that granting the relief

will not prejudice the interests of the Government. Section 301.9100–1(b) defines

the term “regulatory election” as an election whose due date is prescribed by a

regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published

in the Internal Revenue Bulletin.

SECTION 3. SCOPE

.01 In General. This revenue procedure extends the special procedure for late

S corporation elections described in Rev.

Proc. 97–40 from 6 months to 12 months

(but in no event later than the unextended

due date of the tax return for the first year

the corporation intended to be an S corporation), provides similar relief for certain

QSub elections, and extends the application of Rev. Proc. 94–23 to ESBT elections.

.02 Late S Corporation Elections. With

respect to late S corporation election s,

this revenue procedure applies only to a

corporation (1) that has not filed a timely

S corporation election under § 1362(a)(1),

(2) for which an S corporation election is

filed within 12 months of the original due

date for the election, and (3) for which the

due date for the tax return (excluding ex-

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Page 29

tensions) for the first year the corporation

intended to be an S corporation has not

passed. Section 4 of this revenue procedure describes a simplified method for

obtaining relief where the corporation can

demonstrate reasonable cause for the failure to file a timely S corporation election.

Section 4 also provides automatic relief

for ESBT, QSST, and QSub elections intended to be effective as of the first date

the corporation intended to elect S corporation status for itself.

.03 Untimely QSub Elections. This

revenue procedure also applies to certain

QSub elections for which the automatic

relief described above is not available because the parent corporation’s S election

was timely filed. For those situations, this

revenue procedure applies only to a corporation (1) for which a timely QSub

election under § 1361(b)(3)(B) was not

filed for the desired effective date, (2) for

which a QSub election is filed within 12

months of the date that an election for the

desired effective date should have been

filed, and (3) for which the due date for

the S corporation’s tax return (excluding

extensions) for the first taxable year for

which the S corporation desired QSub status for the subsidiary has not passed. Section 5 of this revenue procedure describes

a simplified method, similar to that for a

late S corporation election, for filing an

untimely QSub election.

.04 Late ESBT and QSST Elections.

For late ESBT or QSST elections, this

revenue procedure applies to corporations

that, but for (1) a trust beneficiary’s inadvertent failure to make a timely QSST

election or (2) a trustee’s inadvertent failure to make a timely ESBT election,

would otherwise meet or continue to meet

the criteria for S corporation status. Section 6.02 of this revenue procedure provides an automatic grant of relief for certain corporations that satisfy the criteria

therein.

.05 Alternate Relief. This revenue procedure provides alternatives to the letter

ruling process ordinarily used to obtain

relief for late S corporation and related

elections under § 1362(b)(5), § 1362(f),

or §§ 301.9100–1 and 301.9100–3. Accordingly, user fees do not apply to corrective action under this revenue procedure. However, a corporation or trust that

does not meet the requirements for relief

or is denied relief under this revenue pro-

1998–46 I.R.B.

cedure may request inadvertent termination, inadvertent invalid election, or late

election relief (as appropriate) by requesting a private letter ruling. The Service

will not ordinarily issue a private letter

ruling if the period of limitations on assessment under § 6501(a) has lapsed for

any taxable year for which an election

should have been made or any taxable

year that would have been affected by the

election had it been timely made. The

procedural requirements for requesting a

private letter ruling are described in Rev.

Proc. 98–1, 1998–1 I.R.B. 7 (or its successor).

SECTION 4. RELIEF FOR LATE S

CORPORATION ELECTIONS UNDER

THIS REVENUE PROCEDURE

.01 Relief When Late S Election is Sole

Defect.

(1) Eligibility for Relief. A corporation is eligible for relief under section

4.03 of this revenue procedure if the following requirements are met:

(a) The corporation fails to qualify

as an S corporation on the first day that S

corporation status was desired solely because the Form 2553 (Election by a Small

Business Corporation) was not filed

timely pursuant to § 1362(b)(1),

(b) The due date for the tax return

(excluding extensions) for the first year

the corporation intended to be an S corporation has not passed, and

cause for its failure to timely make the S

corporation election.

(2) Procedural Requirements for Relief. Within 12 months of the original due

date for the S corporation election (but in

no event later than the due date for the tax

return (excluding extensions) for the first

year the corporation intended to be an S

corporation), the corporation must file

with the applicable service center a completed Form 2553, signed by an officer of

the corporation authorized to sign and all

persons who were shareholders at any

time during the period that began on the

first day of the taxable year for which the

election is to be effective and ends on the

day the election is made. For purposes of

signing the shareholder consent, any trust

that qualifies for relief under section 6 of

this revenue procedure, but did not hold

stock on the first day the corporation in-

tended S corporation status, is considered

an eligible shareholder. In this situation,

the corporation must also file a request for

relief pursuant to section 6 of this revenue

procedure and attach it to the Form 2553.

The Form 2553 must state at the top of the

document “FILED PURSUANT TO REV.

PROC. 98–55.” Attached to the Form

2553 must be a statement explaining the

reason for the failure to file a timely S

corporation election.

.02 Relief for Late S Election and Automatic Relief for Invalid Elections and

Late Elections.

(1) Eligibility for Relief.

(a) Late S Election and Late ESBT

or QSST Election. A corporation is eligible for relief under section 4.03 of this

revenue procedure, and the trustee of a

trust that would otherwise qualify as an

ESBT or the beneficiary of a QSST is eligible to make an ESBT or QSST election,

respectively, effective on the first day of

the relevant corporation’s first taxable

year as an S corporation under section

4.04 of this revenue procedure, if the following requirements are met:

(i) The corporation fails to qualify

as an S corporation because the Form

2553 was not filed timely pursuant to

§ 1362(b)(1);

(ii) The trust fails to qualify as an

ESBT or to be taxable as described in

§ 1361(d)(1)(B) (relating to a QSST and

its current income beneficiary) on the first

day of the related corporation’s first taxable year as an S corporation solely because a proper ESBT or QSST election,

whichever is applicable, was not filed

timely;

(iii) The due date for the tax return

of the corporation (excluding extensions)

for the first taxable year the corporation

intended to be an S corporation has not

passed; and

(iv) The corporation has reasonable cause for its failure to timely make

the S corporation election.

(b) Late S Election and Untimely

QSub Election. A parent corporation is

eligible for relief under section 4.03 of

this revenue procedure, and may make a

QSub election with respect to a subsidiary

effective on the first day of the parent corporation’s first taxable year as an S corporation under section 4.04 of this revenue

procedure, if the following requirements

are met:

November 16, 1998

IRB 1998-46

11/12/98 10:45 AM

Page 30

(i) The parent corporation fails to

qualify as an S corporation because the

Form 2553 was not filed timely pursuant

to § 1362(b)(1);

(ii) The subsidiary corporation

fails to qualify as a QSub on the first day

of the parent corporation’s first taxable

year as an S corporation solely because a

proper QSub election was not filed timely

(after giving effect to the relief provided

in section 4.03 of this revenue procedure);

(iii) The due date for the parent S

corporation’s tax return (excluding extensions) for the first taxable year the parent

corporation intended to be an S corporation has not passed; and

(iv) The parent corporation has

reasonable cause for its failure to timely

make the S corporation election.

(2) Procedural Requirements for Relief. Within 12 months of the original due

date for the S corporation election (but in

no event later than the due date for the tax

return (excluding extensions) for the first

year the corporation intended to be an S

corporation), the corporation must file

with the applicable service center a completed Form 2553, signed by an officer of

the corporation authorized to sign and all

persons who were shareholders at any

time during the period that began on the

first day of the taxable year for which the

election is to be effective and ends on the

day the election is made. Accompanying

the Form 2553 must be all applicable

ESBT, QSST, or QSub elections, completed in accordance with the proper procedure for the election as provided in regulation, revenue procedure, or notice. All

of the above elections must state at the top

of the document “FILED PURSUANT

TO REV. PROC. 98–55.” Attached to the

Form 2553 must be a statement explaining the reason for the failure to file a

timely S corporation election.

.03 Relief for Late S Corporation Election. Upon receipt of a completed application requesting relief under section 4.01

or 4.02 of this revenue procedure, the Service will determine whether the requirements for granting an additional time to

file an S corporation election have been

satisfied and will notify the corporation of

the result of this determination.

.04 Automatic Relief for Late ESBT,

QSST, and QSub Elections. If relief for a

late S corporation election is granted pursuant to section 4.03 of this revenue pro-

November 16, 1998

cedure, any request for relief submitted

pursuant to the terms of section 4.02 of

this revenue procedure will be automatically approved by the Service.

.05 Automatic Relief for Late S Corporation Elections Provided in Other Documents. Certain corporations may be eligible for automatic late S corporation

election relief pursuant to Rev. Proc.

97–48.

SECTION 5. RELIEF FOR CERTAIN

QSUB ELECTIONS UNDER THIS

REVENUE PROCEDURE

.01 Eligibility for Relief. A corporation

that is not requesting relief under section

4 of this revenue procedure (because the

corporation has a valid S corporation

election) may be granted additional time

under section 5.03 of this revenue procedure to file a QSub election with respect

to a subsidiary if the following requirements are met:

(1) The subsidiary corporation fails

to qualify as a QSub on the desired effective date solely because the parent S corporation failed to file a timely (with respect to the desired effective date)

election to treat the subsidiary as a QSub;

(2) The due date for the S corporation’s tax return (excluding extensions)

for the first taxable year of the S corporation for which it intended to treat the subsidiary as a QSub has not passed; and

(3) The S corporation has reasonable cause for its failure to timely make

the QSub election.

.02 Procedural Requirements for Relief. Within 12 months of the due date for

filing a QSub election to be effective on

the desired effective date (but in no event

later than the due date for the S corporation’s tax return (excluding extensions)

for the first taxable year of the S corporation for which the S corporation intended

to treat the subsidiary as a QSub), the corporation must file with the applicable service center a completed QSub election.

The QSub election must state at the top of

the form “FILED PURSUANT TO REV.

PROC. 98–55.” Attached to the form

must be a statement explaining the reason

for the failure to file a QSub election

within the time period required for the desired effective date. For purposes of this

section 5, if a corporation is seeking (or

has sought) relief under section 4.01 of

this revenue procedure for a late S corpo-

ration election, and also did not make a

timely (with respect to the desired effective date) election to treat a subsidiary as

a QSub effective on a date other than the

first day the corporation intended to be an

S corporation, the corporation will be

treated as having made a valid S corporation election. In this situation, the corporation must also file (or have filed) a request for relief pursuant to section 4.01 of

this revenue procedure.

.03 Grant of Additional Time for Filing

Certain QSub Elections. Upon receipt of

a completed application requesting relief

under section 5.02 of this revenue procedure, the Service will determine whether

the requirements for granting an additional time to file a QSub election have

been satisfied and will notify the corporation of the result of this determination.

SECTION 6. RELIEF FOR CERTAIN

LATE ESBT AND QSST ELECTIONS

UNDER THIS REVENUE

PROCEDURE

.01 Eligibility for Automatic Relief. A

corporation is eligible for inadvertent invalid election relief or inadvertent termination relief under section 6.03 of this

revenue procedure if it meets the following requirements:

(1) The corporation’s S corporation

election was invalid or terminated solely

because the beneficiary of a QSST (or the

beneficiary’s legal representative) failed

to file a timely QSST election pursuant to

§ 1361(d)(2) or the trustee of a trust that

would otherwise qualify as an ESBT

failed to file a timely ESBT election pursuant to § 1361(e)(3);

(2) All taxpayers whose tax liability

and tax returns would be affected by the

QSST or ESBT election (including the

trust itself and, in the case of a QSST, the

beneficiary of the trust) have reported

their income (on all affected returns) consistent with the corporation’s S corporation election for the year the QSST or

ESBT election should have been made, as

well as fo

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