INCOME TAX

REG–251698–96, page 14.Proposed regulations under sections 1361 and 1362 of theCode interpret the rules permitting an S corporation to own80 percent or more of the stock of a C corporation, and toelect to treat a wholly owned subsidiary as a qualified sub-chapter S subsidiary (QSSS).

Announcement 98–39, page 24.This announcement contains corrections to final regulationsT.D. 8765 (1998–16 I.R.B. 11) relating to adjustments re-quired when a qualified business unit (QBU) that used theprofit and loss method of accounting (P&L) in a post-1986year begins to use the dollar approximate separate transac-tion method of accounting (DASTM) and adjustments re-quired when a QBU that used DASTM begins using P&L.

EMPLOYEE PLANS

T.D. 8768, page 4.Final and temporary regulations under section 417(e) of theCode provide guidance to employers in determining the pre-sent value of an employee’s benefit under a qualified de-fined benefit pension plan, for purposes of the applicableconsent rules and for determining the amount of a distribu-tion made in any form other than certain nondecreasing an-nuity forms.

EXEMPT ORGANIZATIONS

REG–121268–97, page 12.Proposed regulations under section 513 of the Code clarifywhen the travel and tour activities of tax exempt organiza-tions are substantially related to the purposes for which ex-emption was granted.

Announcement 98–41, page 25.A list is given of organizations now classified as private foun-dations.

ADMINISTRATIVE

Announcement 98–40, page 24.This announcement contains corrections to the notice ofproposed rulemaking REG–208299–90 (1998–16 I.R.B.26). The proposed rulemaking under sections 482 and 864of the Code relates to the allocation among controlled tax-payers and sourcing of income, deductions, and gains andlosses from a global dealing operation; rules applying theseallocation and sourcing rules to foreign currency transac-tions and to foreign corporations engaged in a U.S. trade orbusiness; and rules concerning the mark-to-market treat-ment resulting from hedging activities of a global dealing op-eration. The public hearing originally scheduled for July 9,1998, has been rescheduled for July 14, 1998.

Internal Revenue

bbuulllleettiinnBulletin No. 1998–20

May 18, 1998

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Finding Lists begin on page 31.Announcement of the Consent Voluntary Suspension of Attorneys, Certified Public Accounts, Enrolled Agents, etc., begins on page 28.

Mission of the Service

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

ucts and services; and perform in a manner warrantingthe highest degree of public confidence in our integrity, effi-ciency, and fairness.

2

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is to adminis-ter the Internal Revenue Code. Tax policy for raising revenueis determined by Congress.

With this in mind, it is the duty of the Service to carry out thatpolicy by correctly applying the laws enacted by Congress;to determine the reasonable meaning of various Code provi-sions in light of the Congressional purpose in enacting them;and to perform this work in a fair and impartial manner, withneither a government nor a taxpayer point of view.

At the heart of administration is interpretation of the Code. Itis the responsibility of each person in the Service, chargedwith the duty of interpreting the law, to try to find the truemeaning of the statutory provision and not to adopt astrained construction in the belief that he or she is “protect-ing the revenue.” The revenue is properly protected onlywhen we ascertain and apply the true meaning of the statute.

The Service also has the responsibility of applying andadministering the law in a reasonable, practical manner.Issues should only be raised by examining officers whenthey have merit, never arbitrarily or for trading purposes.At the same time, the examining officer should never hesi-tate to raise a meritorious issue. It is also important thatcare be exercised not to raise an issue or to ask a court toadopt a position inconsistent with an established Serviceposition.

Administration should be both reasonable and vigorous. Itshould be conducted with as little delay as possible andwith great courtesy and considerateness. It should nevertry to overreach, and should be reasonable within thebounds of law and sound administration. It should, howev-er, be vigorous in requiring compliance with law and itshould be relentless in its attack on unreal tax devices andfraud.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents of a permanent nature are consoli-dated semiannually into Cumulative Bulletins, which are soldon a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemakingand the disbarment and suspension list included in this part,none of these announcements are consolidated in the Cumu-lative Bulletins.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basisand are published in the first Bulletin of the succeeding semi-annual period, respectively.

3

Introduction

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.

May 18, 1998 4 1998–20 I.R.B.

Section 417.—Definitions andSpecial Rules for Purposes ofMinimum Survivor AnnuityRequirements

26 CFR 1.417(e)–1: Restrictions and valuations ofdistributions from plans subject to sections401(a)(11) and 417.

T.D. 8768

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 1

Valuation of Plan Distributions

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsfinal and temporary regulations that pro-vide guidance to employers in determin-ing the present value of an employee’sbenefit under a qualified defined benefitpension plan, for purposes of the applica-ble consent rules and for purposes of de-termining the amount of a distributionmade in any form other than certain non-decreasing annuity forms. These regula-tions are issued to reflect changes to theapplicable law made by the RetirementProtection Act of 1994 (RPA ’94), whichis part of the Uruguay Round AgreementsAct of 1994. RPA ’94 amended the law tochange the interest rate, and to specify themortality table, for the purposes describedabove. These regulations affect employ-ers that maintain qualified defined benefitpension plans, and participants and bene-ficiaries in those plans.

DATES: Effective date: These regula-tions are effective April 3, 1998.

Applicability date: These regulationsapply to plan years beginning after De-cember 31, 1994, except as provided in§1.417(e)–1(d)(8) and (9).

FOR FURTHER INFORMATION CON-TACT: Linda S. F. Marshall, (202) 622-6030 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments tothe Income Tax Regulations (26 CFR part1) under section 417(e). Section 417(e)was amended by the Retirement Protec-tion Act of 1994 (RPA ’94). On April 5,1995, temporary regulations (TD 8591)under section 417(e) were published inthe Federal Register(60 F.R. 17216). Anotice of proposed rulemaking (EE–12–95), cross-referencing the temporaryregulations, was published in the FederalRegister (60 F.R. 17286) on the sameday. The temporary regulations provideguidance related to the determination ofthe present value of an employee’s benefitunder a qualified defined benefit pensionplan in accordance with the rules of sec-tion 417(e)(3). After consideration of thepublic comments received regarding thetemporary and proposed regulations, thetemporary regulations are replaced andthe proposed regulations are adopted asrevised by this Treasury decision.

Section 417(e)(3) sets forth rules to beused in determining the present value ofan employee’s benefit under a qualifieddefined benefit pension plan, for purposesof the applicable consent rules and forpurposes of determining the amount of adistribution. The rules of section417(e)(3) are also relevant to the applica-tion of section 411(a)(11) and section415(b). Section 411(a)(11) provides thata participant’s benefit with a present valuethat exceeds a statutory threshold can beimmediately distributed to a participantonly with the participant’s consent. Thelevel of this statutory threshold waschanged from $3,500 to $5,000 by theTaxpayer Relief Act of 1997, effective forplan years beginning after August 5,1997. Under section 411(a)(11)(B), asamended by RPA ’94, the present value ofa participant’s benefit is calculated usingthe rules of section 417(e)(3).

Section 415(b) limits the maximumbenefit that can be provided under a qual-ified defined benefit plan. Under section415(b)(2)(E)(ii), as amended by RPA ’94,the minimum interest rate permitted to be

used for certain purposes to determinecompliance with the limit under section415(b) is the applicable interest rate as de-fined in section 417(e)(3). Because therules of section 417(e)(3) affect the appli-cation of sections 411(a)(11)(B) and415(b)(2)(E)(ii), the guidance providedby these regulations is relevant to the ap-plication of those provisions.

Explanation of provisions

Section 417(e) restricts the ability ofcertain qualified retirement plans to dis-tribute a participant’s benefit under theplan without the consent of the participantand, in many cases, the participant’sspouse. The application of these restric-tions is determined based on the presentvalue of the participant’s benefit. Prior toamendments made by RPA ’94, section417(e)(3) restricted the interest rate to beused under a plan to calculate the presentvalue of a participant’s benefit, but didnot impose any restrictions on the mortal-ity table to be used for that purpose. Sec-tion 767 of RPA ’94 modified section417(e)(3) to provide that the present valueof a participant’s benefit is not less thanthe present value calculated by using theapplicable mortality table and the applica-ble interest rate.

In general, comments received on theproposed and temporary regulations werefavorable. Thus, the final regulations re-tain the general structure and substance ofthe proposed and temporary regulations.

Applicable mortality table

The applicable mortality table undersection 417(e)(3) is defined as the tableprescribed by the Secretary based on theprevailing commissioners’ standard table(described in section 807(d)(5)(A)) usedto determine reserves for group annuitycontracts issued on the date as of whichpresent value is being determined (with-out regard to any other subparagraph ofsection 807(d)(5)). Currently, the prevail-ing commissioners’ standard table is the1983 Group Annuity Mortality Table. SeeRev. Rul. 92–19 (1992–1 C.B. 227).These regulations retain the provision inthe temporary regulation that the applica-

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

ble mortality table as described above isto be prescribed by the Commissioner inrevenue rulings, notices or other guidancepublished in the Internal Revenue Bul-letin. The mortality table currently pre-scribed by the Commissioner is set forthin Rev. Rul. 95–6 (1995–1 C.B. 80), andis based on a fixed blend of 50 percent ofthe male mortality rates and 50 percent ofthe female mortality rates from the 1983Group Annuity Mortality Table.

Applicable interest rate

Under section 417(e)(3), the applicableinterest rate is defined as the annual rateof interest on 30-year Treasury securitiesfor the month before the date of distribu-tion or such other time as the Secretarymay by regulations prescribe. These reg-ulations retain the rule in the temporaryregulations that the applicable interestrate for a month is the annual interest rateon 30-year Treasury securities as speci-fied by the Commissioner for that month.The Commissioner publishes this interestrate for each month by notice, after theend of the month. Currently, this interestrate is the interest rate published in Fed-eral Reserve releases G.13 and H.15 asthe average yield on 30-year TreasuryConstant Maturities for the month.

The interest rate on 30-year TreasuryConstant Maturities published monthly inFederal Reserve releases G.13 and H.15can also be obtained by telephone fromthe Public Information Department of theFederal Reserve Bank of New York at(212) 720-6130 (not a toll-free number),or from the Federal Reserve Board ofGovernors’ Internet site at http://www.bog.frb.fed.us/releases. Information re-garding subscriptions to Federal Reservereleases G.13 and H.15 can be obtainedfrom the Publications Department of theFederal Reserve Board of Governors at(202) 452-3244 (not a toll-free number).

Time for determining applicable interest rate

Section 417(e)(3)(A)(ii)(II) providesthat the applicable interest rate for distribu-tions made during a month is the annualrate of interest on 30-year Treasury securi-ties for the month before the date of distri-bution or such other time as the Secretary

may by regulations prescribe. As an alter-native to this monthly change in the applic-able interest rate, the temporary regula-tions permitted selection of a plan quarteror a plan year as a stability period duringwhich the applicable interest rate remainsconstant, thereby permitting plans to offergreater benefit stability than is provided bythe statutory rule. One commentator sug-gested adding a calendar year and a calen-dar quarter as additional alternative stabil-ity periods for the applicable interest rate,and another suggested adding a plan half-year. The IRS and Treasury have weighedthe usefulness of the additional proposedstability periods for taxpayers against theadditional complexity that would be addedto the regulation, and have added a calen-dar year and a calendar quarter as addi-tional alternative stability periods.

These regulations retain the rule in thetemporary regulations that the applicableinterest rate for the stability period may bedetermined as the 30-year Treasury rate forany one of the five calendar months pre-ceding the first day of the stability period.Permitting this “lookback” of up to fivemonths provides added flexibility andgives plan administrators and participantsmore time to comply with applicable no-tice and election requirements using theactual interest rate (instead of an estimate).

Several commentators suggested thatregulations permit an average of lookbackmonth interest rates to be used, in lieu ofthe interest rate for a single lookbackmonth, to minimize interest rate fluctua-tions. These regulations adopt this sug-gestion, and permit an average interestrate based on consecutive permitted look-back months to be used for this purpose.

Several commentators suggested that aplan be allowed to provide for differentapplicable interest rates for each portionof the plan that independently meets therequirements of sections 410(b) and401(a)(26). The IRS and Treasury havedetermined, however, that there is insuffi-cient basis for adopting a definition of a“plan” that is different from the generaldefinition set forth in §1.414(l)–1(b)(1).

Exceptions from the requirements ofsection 417(e)(3)

The temporary regulations provided anexception from the requirements of sec-

tion 417(e)(3) and §1.417(e)–1T(d) forthe amount of a distribution under a non-decreasing annuity payable for a periodnot less than the life of the participant or,in the case of a QPSA, the life of the sur-viving spouse. For purposes of this ex-ception, a nondecreasing annuity includeda QJSA, a QPSA, and an annuity that de-creased merely because of the cessationor reduction of Social Security supple-ments or qualified disability payments (asdefined in section 411(a)(9)). This excep-tion was identical to the exception pro-vided under former final regulations.Several commentators pointed out thatthis exception did not cover several othertypes of annuity forms of distribution thatwere nondecreasing during the life of theparticipant, and suggested that the regula-tions be changed to provide additional ex-ceptions for these additional annuityforms of distribution.

The IRS and Treasury have determinedthat it is appropriate to provide additionalexceptions for these benefit forms. Ac-cordingly, under the final regulations, sec-tion 417(e)(3) and §1.417(e)–1(d) do notapply to the amount of a distribution paidin the form of an annual benefit that doesnot decrease during the life of the partici-pant, or, in the case of a QPSA, the life ofthe participant’s spouse; or that decreasesduring the life of the participant merelybecause of the death of the survivor annu-itant (but only if the reduction is to a levelnot below 50% of the annual benefitpayable before the death of the survivorannuitant) or merely because of the cessa-tion or reduction of Social Security sup-plements or qualified disability benefits.Also, under Q&A–2 of Rev. Rul. 98–1(1998–2 I.R.B. 1), the interest rate pre-scribed by section 415(b)(2)(E)(ii) doesnot apply to these forms of benefit.

Effective dates

These regulations generally apply toplan years beginning after December 31,1994.

Under section 417(e)(3)(B) and theseregulations, the general effective date forthe RPA ’94 rules is delayed for certainplans until the first plan year that beginsafter December 31, 1999, unless an em-ployer takes earlier action. The delayedeffective date applies to a plan adopted

1998–20 I.R.B. 5 May 18, 1998

and in effect before December 8, 1994, ifthe provisions of the plan in effect on De-cember 7, 1994, met the requirements ofsection 417(e)(3) as in effect on Decem-ber 7, 1994. For such a plan, the determi-nation of whether a distribution made be-fore the first day of the first plan year thatbegins after December 31, 1999, satisfiessection 417(e) is made under the provi-sions of the plan in effect on December 7,1994, if the annuity starting date for thedistribution occurs before the date a planamendment applying both the applicablemortality table and the applicable interestrate rules added by RPA ’94 is adopted or,if later, is made effective. Thus, undersection 417(e)(3)(B) and these regula-tions, a plan that was adopted and in ef-fect before December 8, 1994, and theprovisions of which, as in effect on De-cember 7, 1994, met the requirements ofsection 417(e)(3) as in effect on that date,cannot be amended to provide a differentmethod of calculating the present value ofa distribution under section 417(e)(3) ef-fective before the date a plan amendmentapplying both the applicable mortalitytable and the applicable interest rate rulesadded by RPA ’94 is adopted or, if later, ismade effective.

One commentator inquired whether,where a plan is spun off from another planduring the optional delayed effective dateperiod, both plans are required to beamended to apply the applicable mortalitytable and the applicable interest rate rulesadded by RPA ’94 effective on the samedate. Because these rules apply on a planby plan basis, the plans are not required tobe amended effective on the same date.One other commentator suggested that theregulations be changed to permit a plan toprovide for different optional delayed ef-fective dates for each separate benefitstructure that independently meets the re-quirements of section 401(a)(4). Section417(e)(3)(B) requires a single effectivedate for a plan amendment applying theapplicable mortality table and the applica-ble interest rate rules added by RPA ’94.Therefore, this suggestion is inconsistentwith the statute. Of course, a plan amend-ment that applies the applicable mortalitytable and the applicable interest rate rulesadded by RPA ’94 may provide for tem-porary or permanent use of interest andmortality assumptions for specified par-ticipant groups that result in larger distrib-

utions than the minimum required underthese RPA ’94 rules, provided that otherqualification requirements (such as sec-tion 401(a)(4)) are satisfied.

These regulations restate the rules ap-plicable to plan years beginning beforeJanuary 1, 1995, without substantivechange. Those pre-1995 rules also applyto later plan years, to the extent that theapplication of the RPA ’94 rules is de-layed as described above.

In addition, section 767(d)(1) of RPA’94 permits an employer to elect to accel-erate the effective date of the RPA ’94rules, and hence these regulations, in orderto apply the RPA ’94 rules to distributionswith annuity starting dates occurring afterDecember 7, 1994, in plan years begin-ning before January 1, 1995. An employerthat makes a plan amendment applying theapplicable mortality table and the applica-ble interest rate rules of these regulationsis treated as making this election as of thedate the plan amendment is adopted or, iflater, is made effective.

Relationship with section 411(d)(6)

Section 411(d)(6) provides that a plandoes not satisfy the requirements of sec-tion 411 if the accrued benefit of a partici-pant is decreased by a plan amendment.In general, a plan amendment thatchanges the interest rate or the mortalityassumptions used for purposes of deter-mining the amount of any accrued benefitin any preexisting optional form is subjectto section 411(d)(6). Consistent with boththe temporary regulations and the priorfinal regulations, these regulations pro-vide limited section 411(d)(6) relief forcertain plan amendments that change thetime for determining the applicable inter-est rate. A plan amendment that changesthe time for determining the applicable in-terest rate will not be treated as violatingsection 411(d)(6) if each distributionmade until one year after the later of theeffective date or the adoption date of theamendment is calculated using the timefor determining the applicable interestrate as provided before or after theamendment, whichever produces thelarger benefit. For this purpose, all otherplan provisions must be applied as in ef-fect after the amendment.

Section 767(d)(2) of RPA ’94 providesthat a participant’s accrued benefit is notconsidered to be reduced in violation of

section 411(d)(6) merely because the ben-efit is determined in accordance with theapplicable interest rate rules and the ap-plicable mortality table rules of section417(e)(3)(A), as amended by RPA ’94.These regulations provide that an amend-ment replacing an interest rate used forpurposes of section 417(e)(3) qualifies forthis section 411(d)(6) relief if the interestrate replaced is the Pension Benefit Guar-anty Corporation (PBGC) interest rate ora rate based on the PBGC interest rate.Pursuant to suggestions made by severalcommentators, these regulations clarifythat the interest rates that may be replacedpursuant to this section 411(d)(6) reliefinclude an interest rate based on the aver-age of the PBGC interest rates over aspecified period. In addition, pursuant tosuggestions made by two commentators,the final regulations clarify the relation-ship between the various types of section411(d)(6) relief under the regulations, andprovide some additional flexibility to em-ployers in determining how to transitionbetween the PBGC interest rate and theapplicable interest rate and applicablemortality table, where the transition iscombined with a change in the time fordetermining the interest rate.

One commentator asked whether thesection 411(d)(6) relief for plan amend-ments adopting the applicable mortalitytable and the applicable interest rate rulesapplies with respect to terminated vestedparticipants. Because the section411(d)(6) relief provided under section767(d)(2) of RPA ’94 applies in the samemanner with respect to active and termi-nated participants, the regulations like-wise do not distinguish terminated vestedparticipants from other participants in thisregard.

Several commentators requested thatthe regulations be amended to provide un-conditional section 411(d)(6) relief forplan amendments adopting the applicableinterest rate and applicable mortality tablerules of RPA ’94 regardless of changes inthe time for determining the applicable in-terest rate. The IRS and Treasury havedetermined that providing some addi-tional flexibility to employers in deter-mining how to transition between thePBGC interest rate and the applicable in-terest rate and applicable mortality table,as discussed above, where the transition iscombined with a change in the time for

May 18, 1998 6 1998–20 I.R.B.

1998–20 I.R.B. 7 May 18, 1998

determining the interest rate, strikes anappropriate balance between the practicalconcerns of employers and the rights ofparticipants.

These regulations further provide that,where a plan provided for the use of an in-terest rate not based on the PBGC interestrate prescribed by section 417(e)(3) as ineffect before amendments made by RPA’94, a plan amendment that eliminates theuse of that interest rate and the associatedmortality table may result in a reductionof a participant’s accrued benefit, whichwould violate the requirements of section411(d)(6). Two commentators suggestedthat final regulations provide section411(d)(6) relief for plan amendments thateliminate the use of an interest rate notbased on the PBGC interest rate, for planamendments that adopt the applicable in-terest rate and applicable mortality tablerules of RPA ’94. Another commentatorrequested that final regulations providefor similar section 411(d)(6) relief, butonly for mandatory distributions that arepermitted pursuant to the rules of section411(a)(11). The IRS and Treasury havedetermined that section 767(d)(2) of RPA’94 does not support a grant of section411(d)(6) relief with respect to planamendments eliminating interest ratesthat are not based on the PBGC interestrate.

These regulations provide examples ofthe application of section 411(d)(6) andthe special rule of section 767(d)(2) ofRPA ’94, including an example illustratingthe use of a phase-in that provides for asmoother transition from the plan’s formerterms to the new rules. In addition, theseregulations provide section 411(d)(6) re-lief for certain plan amendments that elim-inate use of the applicable interest rate andthe applicable mortality table with respectto distribution forms that are newly ex-cepted from the application of section417(e)(3) by these regulations.

The PBGC has advised the IRS andTreasury that it has not made any decisionat this time on whether it will continue tocalculate and publish the relevant interestrates after the year 2000. Therefore, inamending plans to comply with these reg-ulations, employers should not rely on thecontinued determination and publicationof these rates by the PBGC beyond theyear 2000.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in EO 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations, and becausethe notice of proposed rulemaking pre-ceding the regulations was issued prior toMarch 29, 1996, the Regulatory Flexibil-ity Act (5 U.S.C. chapter 6) does notapply. Pursuant to section 7805(f) of theInternal Revenue Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

The principal author of these regula-tions is Linda S. F. Marshall, Office of theAssociate Chief Counsel (Employee Ben-efits and Exempt Organizations). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read as follows:

Authority 26 U.S.C. 7805 * * *Section 1.417(e)–1 also issued under

26 U.S.C. 417(e)(3)(A)(ii)(II). * * *Par. 2. In §1.417(e)–1, paragraph (d) is

revised to read as follows:

§1.417(e)–1 Restrictions and valuationsof distributions from plans subject tosections 401(a)(11) and 417.

* * * * *

(d) Present value requirement—(1)General rule.A defined benefit plan mustprovide that the present value of any ac-crued benefit and the amount (subject tosections 411(c)(3) and 415) of any distrib-ution, including a single sum, must not be

less than the amount calculated using theapplicable interest rate described in para-graph (d)(3) of this section (determinedfor the month described in paragraph(d)(4) of this section) and the applicablemortality table described in paragraph(d)(2) of this section. The present valueof any optional form of benefit cannot beless than the present value of the normalretirement benefit determined in accor-dance with the preceding sentence. Thesame rules used for the plan under thisparagraph (d) must also be used to com-pute the present value of the benefit forpurposes of determining whether consentfor a distribution is required under para-graph (b) of this section.

(2) Applicable mortality table.The ap-plicable mortality table is the mortalitytable based on the prevailing commission-ers’ standard table (described in section807(d)(5)(A)) used to determine reservesfor group annuity contracts issued on thedate as of which present value is being de-termined (without regard to any othersubparagraph of section 807(d)(5)), that isprescribed by the Commissioner in rev-enue rulings, notices, or other guidancepublished in the Internal Revenue Bul-letin (see §601.601(d)(2)(ii)(b) of thischapter). The Commissioner may pre-scribe rules that apply in the case of achange to the prevailing commissioners’standard table (described in section807(d)(5)(A)) used to determine reservesfor group annuity contracts, in revenuerulings, notices, or other guidance pub-lished in the Internal Revenue Bulletin(see §601.601(d)(2)(ii)(b) of this chapter).

(3) Applicable interest rate—(i) Gen-eral rule. The applicable interest rate fora month is the annual interest rate on 30-year Treasury securities as specified bythe Commissioner for that month in rev-enue rulings, notices or other guidancepublished in the Internal Revenue Bul-letin (see §601.601(d)(2)(ii)(b) of thischapter).

(ii) Example. This example illustratesthe rules of this paragraph (d)(3):

Example. Plan A is a calendar year plan. For its1995 plan year, Plan A provides that the applicablemortality table is the table described in Rev. Rul.95–6 (1995–1 C.B. 80), and that the applicable inter-est rate is the annual interest rate on 30-year Trea-sury securities as specified by the Commissioner forthe first full calendar month preceding the calendarmonth that contains the annuity starting date. Partic-ipant P is age 65 in January 1995, which is the

month that contains P’s annuity starting date. P hasan accrued benefit payable monthly of $1,000 andhas elected to receive a distribution in the form of asingle sum in January 1995. The annual interest rateon 30-year Treasury securities as published by theCommissioner for December 1994 is 7.87 percent.To satisfy the requirements of section 417(e)(3) andthis paragraph (d), the single sum received by P maynot be less than $111,351.

(4) Time for determining interestrate—(i) General rule. Except as pro-vided in paragraph (d)(4)(iv) or (v) of thissection, the applicable interest rate to beused for a distribution is the rate deter-mined under paragraph (d)(3) of this sec-tion for the applicable lookback month.The applicable lookback month for a dis-tribution is the lookback month (as de-scribed in paragraph (d)(4)(iii) of this sec-tion) for the month (or other longerstability period described in paragraph(d)(4)(ii) of this section) that contains theannuity starting date for the distribution.The time and method for determining theapplicable interest rate for each partici-pant’s distribution must be determined ina consistent manner that is applied uni-formly to all participants in the plan.

(ii) Stability period. A plan must spec-ify the period for which the applicable in-terest rate remains constant. This stabilityperiod may be one calendar month, oneplan quarter, one calendar quarter, oneplan year, or one calendar year.

(iii) Lookback month.A plan mustspecify the lookback month that is used todetermine the applicable interest rate.The lookback month may be the first, sec-ond, third, fourth, or fifth full calendarmonth preceding the first day of the sta-bility period.

(iv) Permitted average interest rate. Aplan may apply the rules of paragraph(d)(4)(i) of this section by substituting apermitted average interest rate with re-spect to the plan’s stability period for therate determined under paragraph (d)(3) ofthis section for the applicable lookbackmonth for the stability period. For thispurpose, a permitted average interest ratewith respect to a stability period is an in-terest rate that is computed by averagingthe applicable interest rates determinedunder paragraph (d)(3) of this section fortwo or more consecutive months fromamong the first, second, third, fourth, andfifth calendar months preceding the firstday of the stability period. For this para-graph (d)(4)(iv) to apply, a plan must

specify the manner in which the permittedaverage interest rate is computed.

(v) Additional determination dates.The Commissioner may prescribe, in rev-enue rulings, notices or other guidancepublished in the Internal Revenue Bul-letin (see §601.601(d)(2)(ii)(b)), othertimes that a plan may provide for deter-mining the applicable interest rate.

(vi) Example. This example illustratesthe rules of this paragraph (d)(4):

Example.Employer X maintains Plan A, a calen-dar year plan. Employer X wishes to amend Plan Aso that the applicable interest rate will remain fixedfor each plan quarter, and so that the applicable inter-est rate for distributions made during each plan quar-ter can be determined approximately 80 days beforethe beginning of the plan quarter. To comply withthe provisions of this paragraph (d)(4), Plan A isamended to provide that the applicable interest rate isthe annual interest rate on 30-year Treasury securitiesas specified by the Commissioner for the fourth cal-endar month preceding the first day of the plan quar-ter during which the annuity starting date occurs.

(5) Use of alternative interest rate andmortality table. If a plan provides for useof an interest rate or mortality table otherthan the applicable interest rate or the ap-plicable mortality table, the plan mustprovide that a participant’s benefit mustbe at least as great as the benefit producedby using the applicable interest rate andthe applicable mortality table. For exam-ple, if a plan provides for use of an inter-est rate of 7% and the UP–1984 MortalityTable (see §1.401(a)(4)–12, Standardmortality table) in calculating single-sumdistributions, the plan must provide thatany single-sum distribution is calculatedas the greater of the single-sum benefitcalculated using 7% and the UP–1984Mortality Table and the single-sum bene-fit calculated using the applicable interestrate and the applicable mortality table.

(6) Exceptions. This paragraph (d)(other than the provisions relating to sec-tion 411(d)(6) requirements in paragraph(d)(10) of this section) does not apply tothe amount of a distribution paid in theform of an annual benefit that—

(i) Does not decrease during the life ofthe participant, or, in the case of a QPSA,the life of the participant’s spouse; or

(ii) Decreases during the life of the par-ticipant merely because of—

(A) The death of the survivor annuitant(but only if the reduction is to a level notbelow 50% of the annual benefit payablebefore the death of the survivor annui-

tant); or(B) The cessation or reduction of So-

cial Security supplements or qualified dis-ability benefits (as defined in section411(a)(9)).

(7) Defined contribution plans.Be-cause the accrued benefit under a definedcontribution plan equals the account bal-ance, a defined contribution plan is notsubject to the requirements of this para-graph (d), even though it is subject to sec-tion 401(a)(11).

(8) Effective date—(i) In general. Thisparagraph (d) is effective for distributionswith annuity starting dates in plan yearsbeginning after December 31, 1994.

(ii) Optional delayed effective date ofRetirement Protection Act of 1994 (RPA’94)(108 Stat. 5012) rules for plansadopted and in effect before December 8,1994. For a plan adopted and in effect be-fore December 8, 1994, the application ofthe rules relating to the applicable mortal-ity table and applicable interest rate underparagraphs (d)(2) through (4) of this sec-tion is delayed to the extent provided inthis paragraph (d)(8)(ii), if the plan provi-sions in effect on December 7, 1994, metthe requirements of section 417(e)(3) and§1.417(e)–1(d) as in effect on December7, 1994 (as contained in 26 CFR part 1 re-vised April 1, 1995). In the case of a dis-tribution from such a plan with an annuitystarting date that precedes the optional de-layed effective date described in para-graph (d)(8)(iv) of this section, and thatprecedes the first day of the first plan yearbeginning after December 31, 1999, therules of paragraph (d)(9) of this section(which generally apply to distributionswith annuity starting dates in plan yearsbeginning before January 1, 1995) applyin lieu of the rules of paragraphs (d)(2)through (4) of this section. The interestrate under the rules of paragraph (d)(9) ofthis section is determined under the provi-sions of the plan as in effect on December7, 1994, reflecting the interest rate or ratespublished by the Pension Benefit Guar-anty Corporation (PBGC) and the provi-sions of the plan for determining the dateon which the interest rate is fixed. Theabove described interest rate or rates pub-lished by the PBGC are those determinedby the PBGC (for the date determinedunder those plan provisions) pursuant tothe methodology under the regulations ofthe PBGC for determining the present

May 18, 1998 8 1998–20 I.R.B.

value of a lump sum distribution on plantermination under 29 CFR part 2619 thatwere in effect on September 1, 1993 (ascontained in 29 CFR part 2619 revisedJuly 1, 1994).

(iii) Optional accelerated effective dateof RPA ’94 rules. This paragraph (d) isalso effective for a distribution with an an-nuity starting date after December 7, 1994,during a plan year beginning before Janu-ary 1, 1995, if the employer elects, on orbefore the annuity starting date, to makethe rules of this paragraph (d) effectivewith respect to the plan as of the optionalaccelerated effective date described inparagraph (d)(8)(iv) of this section. Anemployer is treated as making this electionby making the plan amendments describedin paragraph (d)(8)(iv) of this section.

(iv) Determination of delayed or accel-erated effective date by plan amendmentadopting RPA ’94 rules.The optional de-layed effective date of paragraph(d)(8)(ii) of this section, or the optionalaccelerated effective date of paragraph(d)(8)(iii) of this section, whichever is ap-plicable, is the date plan amendments ap-plying both the applicable mortality tableof paragraph (d)(2) of this section and theapplicable interest rate of paragraph(d)(3) of this section are adopted or, iflater, are made effective.

(9) Plan years beginning before Janu-ary 1, 1995—(i) Interest rate. (A) Fordistributions made in plan years begin-ning after December 31, 1986, and beforeJanuary 1, 1995, the following interestrate described in paragraph (d)(9)(i)-(A)(1) or (2) of this section, whicheverapplies, is substituted for the applicableinterest rate for purposes of this section—

(1) The rate or rates that would be usedby the PBGC for a trusteed single-em-ployer plan to value the participant’s (orbeneficiary’s) vested benefit (PBGC in-terest rate) if the present value of suchbenefit does not exceed $25,000; or

(2) 120 percent of the PBGC interestrate, as determined in accordance withparagraph (d)(9)(i)(A)(1) of this section,if such present value exceeds $25,000. Inno event shall the present value deter-mined by use of 120 percent of the PBGCinterest rate result in a present value lessthan $25,000.

(B) The PBGC interest rate may be aseries of interest rates for any given date.

For example, the PBGC interest rate forimmediate annuities for November 1994is 6%, and the PBGC interest rates for thedeferral period for that month are as fol-lows: 5.25% for the first 7 years of thedeferral period, 4% for the following 8years of the deferral period, and 4% forthe remainder of the deferral period. ForNovember 1994, 120 percent of thePBGC interest rate is 7.2% (1.2 times 6%)for an immediate annuity, 6.3% (1.2 times5.25%) for the first 7 years of the deferralperiod, 4.8% (1.2 times 4%) for the fol-lowing 8 years of the deferral period, and4.8% (1.2 times 4%) for the remainder ofthe deferral period. The PBGC interestrates are the interest rates that would beused (as of the date of the distribution) bythe PBGC for purposes of determining thepresent value of that benefit upon termi-nation of an insufficient trusteed singleemployer plan. Except as otherwise pro-vided by the Commissioner, the PBGC in-terest rates are determined by PBGC reg-ulations. See subpart B of 29 CFR part4044 for the applicable PBGC rates.

(ii) Time for determining interest rate.(A) Except as provided in paragraph(d)(9)(ii)(B) of this section, the PBGC in-terest rate or rates are determined on ei-ther the annuity starting date or the firstday of the plan year that contains the an-nuity starting date. The plan must pro-vide which date is applicable.

(B) The plan may provide for the use ofany other time for determining the PBGCinterest rate or rates provided that suchtime is not more than 120 days before theannuity starting date if such time is deter-mined in a consistent manner and is ap-plied uniformly to all participants.

(C) The Commissioner may, in revenuerulings, notices or other guidance pub-lished in the Internal Revenue Bulletin(see §601.601(d)(2)(ii)(b)), prescribeother times for determining the PBGC in-terest rate or rates.

(iii) No applicable mortality table. Inthe case of a distribution to which thisparagraph (d)(9) applies, the rules of thisparagraph (d) are applied without regardto the applicable mortality table describedin paragraph (d)(2) of this section.

(10) Relationship with section411(d)(6)—(i) In general. A plan amend-ment that changes the interest rate, thetime for determining the interest rate, or

the mortality assumptions used for thepurposes described in paragraph (d)(1) ofthis section is subject to section 411(d)(6).But see §1.411(d)–4, Q&A–2(b)(2)(v)(regarding plan amendments relating toinvoluntary distributions). In addition, aplan amendment that changes the interestrate or the mortality assumptions used forthe purposes described in paragraph(d)(1) of this section merely to eliminateuse of the interest rate described in para-graph (d)(3) or paragraph (d)(9) of thissection, or the applicable mortality table,with respect to a distribution form de-scribed in paragraph (d)(6) of this section,for distributions with annuity startingdates occurring after a specified date thatis after the amendment is adopted, doesnot violate the requirements of section411(d)(6) if the amendment is adopted onor before the last day of the last plan yearending before January 1, 2000.

(ii) Section 411(d)(6) relief for changein time for determining interest rate.Notwithstanding the general rule of para-graph (d)(10)(i) of this section, if a planamendment changes the time for deter-mining the applicable interest rate (in-cluding an indirect change as a result of achange in plan year), the amendment willnot be treated as reducing accrued bene-fits in violation of section 411(d)(6)merely on account of this change if theconditions of this paragraph (d)(10)(ii)are satisfied. If the plan amendment is ef-fective on or after the adoption date, anydistribution for which the annuity startingdate occurs in the one-year period com-mencing at the time the amendment is effective must be determined using the in-terest rate provided under the plan deter-mined at either the date for determiningthe interest rate before the amendment orthe date for determining the interest rateafter the amendment, whichever results inthe larger distribution. If the plan amend-ment is adopted retroactively (that is, theamendment is effective prior to the adop-tion date), the plan must use the interestrate determination date resulting in thelarger distribution for the period begin-ning with the effective date and endingone year after the adoption date.

(iii) Section 411(d)(6) relief for planamendments pursuant to changes to sec-tion 417 made by RPA ’94 providing forstatutory interest rate determination date.

1998–20 I.R.B. 9 May 18, 1998

Notwithstanding the general rule of para-graph (d)(10)(i) of this section, except asprovided in paragraph (d)(10)(vi)(B) ofthis section, a participant’s accrued bene-fit is not considered to be reduced in vio-lation of section 411(d)(6) merely be-cause of a plan amendment that changesany interest rate or mortality assumptionused to calculate the present value of aparticipant’s benefit under the plan, if thefollowing conditions are satisfied—

(A) The amendment replaces thePBGC interest rate (or an interest rate orrates based on the PBGC interest rate) asthe interest rate used under the plan in de-termining the present value of a partici-pant’s benefit under this paragraph (d);and

(B) After the amendment is effective,the present value of a participant’s benefitunder the plan cannot be less than theamount calculated using the applicablemortality table and the applicable interestrate for the first full calendar month pre-ceding the calendar month that containsthe annuity starting date.

(iv) Section 411(d)(6) relief for planamendments pursuant to changes to sec-tion 417 made by RPA ’94 providing forprior determination date or up to twomonths earlier. Notwithstanding the gen-eral rule of paragraph (d)(10)(i) of thissection, except as provided in paragraph(d)(10)(vi)(B) of this section, a partici-pant’s accrued benefit is not considered tobe reduced in violation of section411(d)(6) merely because of a planamendment that changes any interest rateor mortality assumption used to calculatethe present value of a participant’s benefitunder the plan, if the following conditionsare satisfied—

(A) The amendment replaces thePBGC interest rate (or an interest rate orrates based on the PBGC interest rate) asthe interest rate used under the plan in de-termining the present value of a partici-pant’s benefit under this paragraph (d);and

(B) After the amendment is effective,the present value of a participant’s benefitunder the plan cannot be less than theamount calculated using the applicablemortality table and the applicable interestrate, but only if the applicable interest rateis the annual interest rate on 30-year Trea-sury securities for the calendar month thatcontains the date as of which the PBGC

interest rate (or an interest rate or ratesbased on the PBGC interest rate) was de-termined immediately before the amend-ment, or for one of the two calendarmonths immediately preceding suchmonth.

(v) Section 411(d)(6) relief for planamendments pursuant to changes to sec-tion 417 made by RPA ‘94 providing forother interest rate determination date.Notwithstanding the general rule of para-graph (d)(10)(i) of this section, except asprovided in paragraph (d)(10)(vi)(B) ofthis section, a participant’s accrued bene-fit is not considered to be reduced in vio-lation of section 411(d)(6) merely be-cause of a plan amendment that changesany interest rate or mortality assumptionused to calculate the present value of aparticipant’s benefit under the plan, if thefollowing conditions are satisfied—

(A) The amendment replaces thePBGC interest rate (or an interest rate orrates based on the PBGC interest rate) asthe interest rate used under the plan in de-termining the present value of a partici-pant’s benefit under this paragraph (d);

(B) After the amendment is effective,the present value of a participant’s benefitunder the plan cannot be less than theamount calculated using the applicablemortality table and the applicable interestrate; and

(C) The plan amendment satisfies ei-ther the condition of paragraph (d)(10)(ii)of this section (determined using the in-terest rate provided under the terms of theplan after the effective date of the amend-ment) or the special early transition inter-est rate rule of paragraph (d)(10)(vi)(C) ofthis section.

(vi) Special rules—(A) Provision oftemporary additional benefits.A planamendment described in paragraph(d)(10)(iii), (iv), or (v) of this section isnot considered to reduce a participant’saccrued benefit in violation of section411(d)(6) even if the plan amendmentprovides for temporary additional benefitsto accommodate a more gradual transitionfrom the plan’s old interest rate to the newrules.

(B) Replacement of non-PBGC inter-est rate.The section 411(d)(6) relief pro-vided in paragraphs (d)(10)(iii) through(v) of this section does not apply to a planamendment that replaces an interest rateother than the PBGC interest rate (or an

interest rate or rates based on the PBGCinterest rate) as an interest rate used underthe plan in determining the present valueof a participant’s benefit under this para-graph (d). Thus, the accrued benefit de-termined using that interest rate and theassociated mortality table is protectedunder section 411(d)(6). For purposes ofthis paragraph (d), an interest rate is basedon the PBGC interest rate if the interestrate is defined as a specified percentage ofthe PBGC interest rate, the PBGC interestrate minus a specified number of basispoints, or an average of such interest ratesover a specified period.

(C) Special early transition interestrate rule for paragraph (d)(10)(v).A planamendment satisfies the special rule ofthis paragraph (d)(10)(vi)(C) if any distri-bution for which the annuity starting dateoccurs in the one-year period commenc-ing at the time the plan amendment is ef-fective is determined using whichever ofthe following two interest rates results inthe larger distribution—

(1) The interest rate as provided underthe terms of the plan after the effectivedate of the amendment, but determined ata date that is either one month or twomonths (as specified in the plan) beforethe date for determining the interest rateused under the terms of the plan beforethe amendment; or

(2) The interest rate as provided underthe terms of the plan after the effectivedate of the amendment, determined at thedate for determining the interest rate afterthe amendment.

(vii) Examples.The provisions of thisparagraph (d)(10) are illustrated by thefollowing examples:

Example 1.On December 31, 1994, Plan A pro-vided that all single-sum distributions were to becalculated using the UP–1984 Mortality Table and100% of the PBGC interest rate for the date of distri-bution. On January 4, 1995, and effective on Febru-ary 1, 1995, Plan A was amended to provide that allsingle-sum distributions are calculated using the ap-plicable mortality table and the annual interest rateon 30-year Treasury securities for the first full calen-dar month preceding the calendar month that con-tains the annuity starting date. Pursuant to para-graph (d)(10)(iii) of this section, this amendment of Plan A is not considered to reduce the accruedbenefit of any participant in violation of section411(d)(6).

Example 2.On December 31, 1994, Plan B pro-vided that all single-sum distributions were to be cal-culated using the UP–1984 Mortality Table and aninterest rate equal to the lesser of 100% of the PBGC

May 18, 1998 10 1998–20 I.R.B.

interest rate for the date of distribution, or 6%. OnJanuary 4, 1995, and effective on February 1, 1995,Plan B was amended to provide that all single-sumdistributions are calculated using the applicable mor-tality table and the annual interest rate on 30-yearTreasury securities for the second full calendarmonth preceding the calendar month that containsthe annuity starting date. Pursuant to paragraph(d)(10)(iv) of this section, this amendment of Plan Bis not considered to reduce the accrued benefit of anyparticipant in violation of section 411(d)(6) merelybecause of the replacement of the PBGC interestrate. However, under paragraph (d)(10)(vi)(B) ofthis section, the section 411(d)(6) relief provided inparagraphs (d)(10)(iii) through (v) of this sectiondoes not apply to a plan amendment that replaces aninterest rate other than the PBGC interest rate (or arate based on the PBGC interest rate). Therefore,pursuant to paragraph (d)(10)(vi)(B) of this section,to satisfy the requirements of section 411(d)(6), theplan must provide that the single-sum distributionpayable to any participant must be no less than thesingle-sum distribution calculated using theUP–1984 Mortality Table and an interest rate of 6%,based on the participant’s benefits under the plan ac-crued through January 31, 1995, and based on theparticipant’s age at the annuity starting date.

Example 3. On December 31, 1994, Plan C, acalendar year plan, provided that all single sum dis-tributions were to be calculated using the UP–1984Mortality Table and an interest rate equal to thePBGC interest rate for January 1 of the plan year.On March 1, 1995, and effective on July 1, 1995,Plan C was amended to provide that all single-sumdistributions are calculated using the applicablemortality table and the annual interest rate on 30-year Treasury securities for August of the year be-fore the plan year that contains the annuity startingdate. The plan amendment provides that each distri-bution with an annuity starting date after June 30,1995, and before July 1, 1996, is calculated usingthe 30-year Treasury rate for August of the year be-fore the plan year that contains the annuity startingdate, or the 30-year Treasury rate for January of theplan year that contains the annuity starting date,whichever produces the larger benefit. Pursuant toparagraph (d)(10)(v) of this section, the amendment

of Plan C is not considered to have reduced the ac-crued benefit of any participant in violation of sec-tion 411(d)(6).

Example 4. (a) Employer X maintains Plan D, acalendar year plan. As of December 7, 1994, Plan Dprovided for single-sum distributions to be calculatedusing the PBGC interest rate as of the annuity start-ing date for distributions not greater than $25,000,and 120% of that interest rate (but not an interest rateproducing a present value less than $25,000) for dis-tributions over $25,000. Employer X wishes to delaythe effective date of the RPA ’94 rules for a year, andto provide for an extended transition from the use ofthe PBGC interest rate to the new applicable interestrate under section 417(e)(3). On December 1, 1995,and effective on January 1, 1996, Employer Xamends Plan D to provide that single-sum distribu-tions are determined as the sum of—

(i) The single-sum distribution calculated basedon the applicable mortality table and the annual in-terest rate on 30-year Treasury securities for the firstfull calendar month preceding the calendar monththat contains the annuity starting date; and

(ii) A transition amount.(b) The amendment provides that the transition

amount for distributions in the years 1996–99 is atransition percentage of the excess, if any, of theamount that the single-sum distribution would havebeen under the plan provisions in effect prior to thisamendment over the amount of the single sum de-scribed in paragraph (a)(i) of this Example 4. Thetransition percentages are 80% for 1996, decreasingto 60% for 1997, 40% for 1998 and 20% for 1999.The amendment also provides that the transitionamount is zero for plan years beginning on or afterthe year 2000. Pursuant to paragraphs (d)(10)(iii)and (vi)(A) of this section, the amendment of Plan Dis not considered to have reduced the accrued bene-fit of any participant in violation of section411(d)(6).

Example 5. On December 31, 1994, Plan E, acalendar year plan, provided that all single sum dis-tributions were to be calculated using the UP-1984Mortality Table and an interest rate equal to thePBGC interest rate for January 1 of the plan year.On March 1, 1995, and effective on July 1, 1995,Plan E was amended to provide that all single-sum

distributions are calculated using the applicablemortality table and the annual interest rate on 30-year Treasury securities for August of the year be-fore the plan year that contains the annuity startingdate. The plan amendment provides that each distri-bution with an annuity starting date after June 30,1995, and before July 1, 1996, is calculated usingthe 30-year Treasury rate for August of the year be-fore the plan year that contains the annuity startingdate, or the 30-year Treasury rate for November ofthe plan year preceding the plan year that containsthe annuity starting date, whichever produces thelarger benefit. Pursuant to paragraphs (d)(10)(v)and (vi)(C) of this section, the amendment of Plan Eis not considered to have reduced the accrued bene-fit of any participant in violation of section411(d)(6).

Par. 3. In §1.417(e)–1T, paragraph (d)is revised to read as follows:

§1.417(e)–1T Restrictions andvaluations of distributions from planssubject to sections 401(a)(11) and 417.(Temporary)

* * * * *

(d) For rules regarding the presentvalue of a participant’s accrued benefitand related matters, see §1.417(e)–1(d).

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

Approved March 30, 1998.

Donald C. Lubick,Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on April3, 1998, 8:45 a.m., and published in the issue of theFederal Register for April 7, 1998, 63 F.R. 16895)

1998–20 I.R.B. 11 May 18, 1998

May 18, 1998 12 1998–20 I.R.B.

Notice of Proposed Rulemaking

Travel and Tour Activities of TaxExempt Organizations

REG–121268–97

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing.

SUMMARY: This document containsproposed regulations clarifying when thetravel and tour activities of tax exempt or-ganizations are substantially related to thepurposes for which exemption wasgranted. These proposed regulations areintended to augment the guidance thatcurrently exists with respect to traveltours and the unrelated business incometax.

DATES: Written comments and requestsfor a public hearing must be received byJuly 22, 1998.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (REG–121268–97),room 5226, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–121268–97), Courier’s Desk, In-ternal Revenue Service, 1111 ConstitutionAvenue NW, Washington, DC. Alterna-tively, taxpayers may submit commentselectronically via the internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS internet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-TACT: Robin Ehrenberg, (202) 622-6080(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

An organization generally exempt fromtax under section 501(a) of the InternalRevenue Code (“Code”) must pay tax onits unrelated business taxable income, asdefined in section 512. Section 512(a)(1)

defines unrelated business taxable income(“UBTI”) as the gross income derived byany organization from any unrelated tradeor business (as defined in section 513)regularly carried on by the organization,less the deductions which are directlyconnected with the conduct of the trade orbusiness. Gross income from an unre-lated trade or business and any deductionsdirectly connected to that trade or busi-ness are both computed in accordancewith the general income tax rules of chap-ter 1 of the Internal Revenue Code, sub-ject to the modifications provided in sec-tion 512(b).

Section 513(a) generally defines an un-related trade or business as any trade orbusiness the conduct of which is not sub-stantially related (aside from the need ofan organization for income or funds or theuse it makes of the profits derived) to theexercise or performance by the organiza-tion of its charitable, educational, or otherpurpose or function constituting the basisfor its exemption under section 501.

A “trade or business” is defined in Sec-tion 1.513–1(b) of the Income Tax Regu-lations as having the same meaning it hasfor purposes of section 162, and “gener-ally includes any activity carried on forthe production of income from the sale ofgoods or performance of services.” Thekey test of whether an activity constitutesa trade or business is whether the activitywas conducted with a profit motive. SeeU.S. v. American Bar Endowment,477U.S. 105 (1986); Professional InsuranceAgents of Michigan v. Commissioner726F.2d 1097 (6th Cir. 1983); National WaterWell Association v. Commissioner,92 T.C.75 (1989). The regulations further pro-vide that an activity conducted for theproduction of income does not lose itscharacter as a business “merely because[it is] carried on within a larger aggregateof similar activities or within a largercomplex of other endeavors which may,or may not, be related to the exempt pur-poses of the organization.” This “frag-mentation rule,” as it is commonlyknown, may result in different treatmentof related activities under the unrelatedbusiness income tax.

Section 1.513–1(d)(2) of the IncomeTax Regulations provides that a trade orbusiness is “substantially related” to ex-

empt purposes only where the conduct ofthe business activities has a substantialcausal relationship to the achievement ofthe exempt purposes (other than throughthe production of income) of the organi-zation conducting the trade or business.Thus, a trade or business is substantiallyrelated for purposes of section 513 only ifthe conduct of the trade or business con-tributes importantly to the accomplish-ment of the organization’s exempt pur-poses.

In recent years, taxpayers and Congresshave asked the IRS to publish guidanceaddressing questions relating to the unre-lated business income tax treatment of in-come generated from travel tours con-ducted by tax exempt organizations.Although the IRS has issued a number ofrevenue rulings addressing situations inwhich tax exempt organizations sponsortravel tours, most of these rulings haveanalyzed whether an organization that of-fers travel tours as its primary activity canqualify as a charitable or educational or-ganization described in section 501(c)(3)of the Code.

Rev. Rul. 67–327, 1967–2 C.B. 187,holds that an organization whose purposeis to arrange group tours for students andfaculty of a university in order to allowthem to travel abroad does not qualify forexemption because the organization oper-ates essentially as a commercial travelagency. The ruling concludes that the or-ganization’s activities are not “educa-tional” as that term is defined in Treas.Reg. § 1.501(c)(3)–1(d)(3)(i)(a), becausethey do not provide instruction or trainingof individuals for the purpose of improv-ing or developing their capabilities.

In contrast, in Rev. Rul. 69–400, 1969–2 C.B. 114, an organization that selectsstudents and faculty members interestedin a certain foreign history and cultureand enrolls them at foreign universitiesand arranges for on-site tours conductedby local scholars that complement class-room studies, is held to be exempt. Rev.Rul. 69–400 distinguishes Rev. Rul. 67–327 on the basis that the organization inthe later ruling is arranging for instructionnot just travel.

Rev. Rul. 70–534, 1970–2 C.B. 113,describes an organization that conductstravel study tours as its primary activity.

Part IV. Items of General Interest

1998–20 I.R.B. 13 May 18, 1998

Tours are geared toward students, but oth-ers can take the tours as long as they par-ticipate in the mandatory study programs.Organized study, taught by certifiedteachers, is conducted five to six hours aday, and a library of materials related tothe courses being taught is available.Exams are given, each student is gradedand a state board of education allowscredit for a student’s participation in thestudy tour program. The revenue rulingconcludes that the organization furtherseducational purposes because it performstraining and instruction for the purpose ofallowing individuals to improve and de-velop their capabilities, and is, therefore,described in section 501(c)(3).

Rev. Rul. 77–366, 1977–2 C.B. 192,concerns an organization that arrangesand conducts ocean cruises for ministers,church members and their families for thepurpose of providing continuing educa-tion in an atmosphere supporting spiritualrenewal. The organization’s activities in-clude lectures, discussions, workshopsand some shore activities that furthercharitable purposes. However, because ofthe extensive resources the organizationdevotes to social and recreational pro-grams, the scheduling of those programsrelative to the schedule for the exemptpurpose programs, and other facts and cir-cumstances, the organization was held tobe also serving a substantial nonexemptpurpose and, therefore, not to qualify forexemption as an organization described insection 501(c)(3).

The Tax Court applied a similar analy-sis to an organization operating a moun-tain lodge when it held that the organiza-tion failed to qualify as a religiousorganization described in section501(c)(3). Although religious activitieswere offered to guests in addition to awide range of recreational activities,guests were not required to participate inthe religious activities, and the recordfailed to show that the recreational activi-ties were insubstantial. See The SchogerFoundation v. Commissioner, 76 T.C. 380(1981).

In contrast, Rev. Rul. 77–430, 1977–2C.B. 194, holds that an organization con-ducting weekend retreats is furthering itsstated purpose of advancing religion. In-dividuals come to participate in a programof seminars, lectures, prayer sessions andmeditation led by ministers and priests

that are scheduled on an hourly basisthroughout the day. Recreational activi-ties are not scheduled, but are available toparticipants during their limited free time.Under these facts and circumstances, theruling holds that the facilities are beingused to advance religion and that recre-ational activities are incidental to the ac-complishment of this purpose.

The revenue rulings all focus on the de-gree of educational or religious contentparticipants are expected to receive ineach travel program in determiningwhether the activity serves an exemptpurpose. The same approach was taken inthe one ruling that has specifically ad-dressed the application of the unrelatedbusiness income tax to income generatedby travel tours. Rev. Rul. 78–43, 1978–1C.B. 164, describes the travel tour activityof a university alumni association. Theassociation’s program of approximatelyten tours per year is open to all currentmembers and their immediate familiesand is planned with various travel agen-cies. Each travel agency pays a per per-son fee to the association. The tours donot include any formal educational pro-gram and do not differ substantially fromcommercially operated tours. Rev. Rul.78–43 concludes that there is no causalrelationship between arranging the traveltours described in the ruling and theachievement of an exempt purpose. Ac-cordingly, the ruling holds that the sale oftours to members is an unrelated trade orbusiness within the meaning of section513.

These proposed regulations are in-tended to augment the guidance that cur-rently exists with respect to travel toursand the unrelated business income tax.The proposed regulations also provide ad-ditional guidance regarding the fragmen-tation rule and the distinctions that maybe necessary among different tours or ac-tivities that are part of a single organiza-tion’s travel program.

The IRS and Treasury are solicitingcomments on these proposed regulations.In particular, because the IRS relies heav-ily on review of records to determinewhether an organization’s trade or busi-ness activities further an exempt purpose,comments are requested on whether theIRS should specify the types of recordsorganizations should keep to establish theactivity’s purpose.

Explanation of Provisions

The proposed regulations add a new§1.513–7 providing that the determina-tion of whether travel tour activities of taxexempt organizations are substantially re-lated to an organization’s exempt pur-poses is a question of facts and circum-stances. The proposed regulations setforth a series of examples to illustratehow various facts and circumstanceswould be analyzed.

Proposed Effective Date

These regulations are proposed to beeffective for taxable years beginning afterthe date final regulations are published inthe Federal Register. For prior taxableyears, the IRS will continue to apply prin-ciples of existing law.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has been de-termined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because the regulation does notimpose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, this notice of proposedrulemaking will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (a signed original and eight (8)copies) that are submitted timely to theIRS. All comments will be available forpublic inspection and copying. A publichearing may be scheduled if requested inwriting by a person that timely submitswritten comments. If a public hearing isscheduled, notice of the date, time, andplace for the hearing will be published inthe Federal Register.

May 18, 1998 14 1998–20 I.R.B.

Drafting Information

The principal author of these regula-tions is Robin Ehrenberg, Office of Asso-ciate Chief Counsel (Employee Benefitsand Exempt Organizations). However,other personnel from the IRS and Trea-sury Department participated in their de-velopment.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.513–7 is added to

read as follows:

§ 1.513-7 Travel and tour activities of taxexempt organizations.

(a) Travel tour activities that constitutea trade or business, as defined in § 1.513-1(b), and that are not substantially relatedto the purposes for which exemption hasbeen granted to the organization consti-tute an unrelated trade or business withrespect to that organization. Whethertravel tour activities conducted by an or-ganization are substantially related to theorganization’s exempt purpose is deter-mined by looking at all relevant facts andcircumstances. Section 513(c) and § 1.513–1(b) also apply to travel tour ac-tivity. Application of the rules of section513(c) and § 1.513–1(b) may result in dif-ferent treatment for individual tours withinan organization’s travel tour program.

(b) Examples. The provisions of thissection are illustrated by the following ex-amples:

Example 1. O, a university alumni association, isexempt from federal income tax under section501(a) as an educational organization described insection 501(c)(3). As part of its activities, O oper-ates a travel tour program. The program is open toall current members of O and their guests. O workswith travel agencies to schedule approximately 10tours annually to various destinations around theworld. Members of O pay $X to the organizingtravel agency to participate in a tour. The travelagency pays O a per person fee for each participant.Although the literature advertising the tours encour-ages O’s members to continue their lifelong learningby joining the tours, and a faculty member of O’s re-lated university is invited to join the tour as a guestof the alumni association, none of the tours includesany scheduled instruction or curriculum related tothe destinations being visited. By arranging to make

travel tours available to its members, O is not con-tributing importantly to the accomplishment of itseducational purpose. Rather, O’s program is de-signed to generate revenues for O by regularly offer-ing its members travel services. Accordingly, O’stour program is an unrelated trade or business withinthe meaning of section 513(a) of the Code.

Example 2. N is an organization formed for thepurpose of educating individuals about the geogra-phy and culture of the United States. It is exemptfrom federal income tax under section 501(a) as aneducational and cultural organization described insection 501(c)(3). N engages in a number of activi-ties to accomplish its purposes, including offeringcourses and publishing periodicals and books. Asone of its activities, N conducts study tours to na-tional parks and other locations within the UnitedStates. The study tours are conducted by teachersand other education professionals. The tours areopen to all who agree to participate in the requiredstudy program. The study program consists of com-munity college level courses related to the locationbeing visited by the tour. While the students are onthe tour, five or six hours per day are devoted to or-ganized study, preparation of reports, lectures, in-struction and recitation by the students. Each tourgroup brings along a library of material related tothe subject being studied on the tour. Examinationsare given at the end of each tour and N’s state boardof education awards academic credit for tour partici-pation. Because the tours offered by N include asubstantial amount of required study, lectures, reportpreparation, examinations and qualify for academiccredit, the tours clearly further N’s educational pur-pose. Accordingly, N’s tour program is not an unre-lated trade or business within the meaning of section513(a) of the Code.

Example 3.R is a section 501(c)(4) social wel-fare organization devoted to advocacy on a particu-lar issue. On a regular basis throughout the year, Rorganizes a travel tour for its members to Washing-ton, D.C.. The tours are priced to produce a profitfor R. While in Washington, the members follow aschedule according to which they spend substan-tially all of their time over several days attendingmeetings with legislators and government officialsand receiving briefings on policy developments re-lated to the issue that is R’s focus. Bringing mem-bers to Washington to participate in advocacy on behalf of the organization and learn about develop-ments relating to the organization’s principal focusis substantially related to R’s social welfare purpose.Therefore, R’s operation of the travel tours does notconstitute an unrelated trade or business.

Example 4.S is a membership organizationformed to foster cultural unity and to educate XAmericans about X, their country of origin. It is ex-empt from federal income tax under section 501(a)and is described in section 501(c)(3) as an educa-tional and cultural organization. Membership in S isopen to all Americans interested in the X heritage.As part of its activities, S sponsors a program oftravel tours to X. All of S’s tours are priced to pro-duce a profit for S. The tours are divided into twocategories. Category A tours are trips to X that aredesigned to immerse participants in the X history,culture and language. The itinerary is designed tohave participants spend substantially all of their timewhile in X receiving instruction on the X language,history and cultural heritage. Destinations are se-

lected because of their historical or cultural signifi-cance or because of instructional resources theyoffer. Category B tours are also trips to X, but ratherthan offering scheduled instruction, participants aregiven the option of taking guided tours of various Xlocations included in their itinerary. Other than theoptional guided tours, Category B tours offer no in-struction or curriculum. Even if participants take allof the tours offered, they have a substantial amountof time free to pursue their own interests once in X.Destinations of principally recreational interest,rather than historical or cultural interest, are regu-larly included on Category B tour itineraries. Basedon the facts and circumstances, sponsoring CategoryA tours is an activity substantially related to S’s ex-empt purposes, and does not constitute an unrelatedtrade or business with respect to S. However, spon-soring Category B tours does not contribute impor-tantly to S’s accomplishment of its exempt purposesand is designed to generate a profit for S. Therefore,sponsoring the Category B tours constitutes an unre-lated trade or business with respect to S.

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on April20, 1998, 2:48 p.m., and published in the issue of theFederal Register for April 23, 1998, 63 F.R. 20156)

Notice of Proposed Rulemaking

S Corporation Subsidiaries

REG–251698–96

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing.

SUMMARY: This document containsproposed regulations relating to the treat-ment of corporate subsidiaries of S corpo-rations. The proposed regulations inter-pret the rules added to the InternalRevenue Code by section 1308 of theSmall Business Job Protection Act of1996. The proposed regulations affect Scorporations and their subsidiaries.

DATES: Written comments must be re-ceived by July 21, 1998.

ADDRESSES: Send submissions toCC:DOM:CORP:R (REG–251698–96),room 5228, Internal Revenue Service,POB 7604, Ben Franklin Station, Wash-ington, DC 20044. Submissions may behand delivered between the hours of 8a.m. and 5 p.m. to: CC:DOM:CORP:R(REG–251698–96), Courier’s Desk, In-

ternal Revenue Service, 1111 ConstitutionAvenue, NW, Washington, DC. Alterna-tively, taxpayers may submit commentselectronically via the Internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS Internet site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Deanna L. Walton, (202) 622-3050 (Sub-chapter S) or Lee A. Dean, (202) 622-7540 (Subchapter C); concerning submis-sions, Michael Slaughter, (202) 622-7190(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information containedin this notice of proposed rulemakinghave been submitted to the Office ofManagement and Budgetfor review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).

Comments on the collections of infor-mation should be sent to the Office ofManagement and Budget,Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, DC 20503, withcopies to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,T:FP, Washington, DC 20224. Commentson the collections of information shouldbe received by June 22, 1998. Commentsare specifically requested concerning:

Whether the proposed collections of in-formation are necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether thecollections will have a practical utility;

The accuracy of the estimated burdenassociated with the proposed collectionsof information (see below);

How the quality, utility, and clarity ofthe information to be collected may be en-hanced;

How the burden of complying with theproposed collections of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of services to provide information.

The collections of information in theseproposed regulations are in §§1.1361–3(a)(1), 1.1361–3(b)(1), 1.1361–5(a)(2),and 1.1362–8. The collections of infor-mation are required to determine the man-ner in which a corporate subsidiary of anS corporation will be treated under the In-ternal Revenue Code.

These collections of information are re-quired to obtain a benefit. The likely re-spondents and/or recordkeepers are smallbusinesses or organizations, businesses orother for-profit institutions, and farms.Estimated total annual reporting/record-keeping burden: 10,110 hoursEstimated average annual burden per re-spondent/recordkeeper: 57 minutesEstimated number of respondents/record-keepers: 10,660Estimated annual frequency of responses:On occasion

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless it dis-plays a valid control number assigned bythe Office of Management and Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR Part 1) relating to S corpo-rations and their subsidiaries under sec-tions 1361 and 1362 of the InternalRevenue Code (Code). Section 1308 ofthe Small Business Job Protection Act of1996, Public Law 104–188, 110 Stat.1755 (the Act), modified section 1361 ofthe Code to permit an S corporation (1) toown 80 percent or more of the stock of aC corporation, and (2) to elect to treat awholly owned subsidiary as a qualifiedsubchapter S subsidiary (QSSS). In No-tice 97–4 (1997–2 I.R.B. 24), the IRS an-nounced its intention to issue regulationsunder section 1308 of the Act and re-quested comments on certain issues. Sec-tion 1601 of the Taxpayer Relief Act of1997, Public Law 105–34, 111 Stat. 788(the 1997 Act), made a technical correc-tion to section 1361 to provide regulatory

authority regarding the consequences ofan election to be a QSSS.

Explanation of Provisions

OverviewPrior law prohibited an S corporation

from owning 80 percent or more of thestock of another corporation. The Act re-pealed section 1362(b)(2)(A) of the Inter-nal Revenue Code (Code), thereby allow-ing an S corporation to own 80 percent ormore of the stock of a C corporation. TheAct also added section 1504(b)(8) to theCode to prevent an S corporation fromjoining in the filing of a consolidated re-turn with its affiliated C corporations. AC corporation subsidiary of an S corpora-tion, however, may file a consolidated re-turn with its affiliated C corporations.See H.R. Conf. Rep. No. 737, 104thCong., 2d Sess. 224 (1996).

New section 1361(b)(3)(B) defines theterm qualified subchapter S subsidiary asany domestic corporation that is not an in-eligible corporation if, (1) an S corpora-tion holds 100 percent of the stock of thecorporation, and (2) that S corporationelects to treat the subsidiary as a QSSS.Except as otherwise provided in regula-tions, a corporation for which a QSSSelection is made is not treated as a sepa-rate corporation, and all assets, liabilities,and items of income, deduction, andcredit of the QSSS are treated as assets, li-abilities, and items of income, deduction,and credit of the parent S corporation.The legislative history accompanying sec-tion 1361(b)(3) indicates that, when theparent corporation makes the election, thesubsidiary is deemed to have liquidatedunder sections 332 and 337 immediatelybefore the election is effective. See S.Rep. No. 281, 104th Cong., 2d Sess. 53(1996); H.R. Rep. No. 586, 104th Cong.,2d Sess. 89 (1996). However, the legisla-tive history accompanying the technicalcorrection made by the 1997 Act indicatesthat regulations may provide exceptionsto that general rule. See S. Rep. No. 33,105th Cong., 1st Sess. 320 (1997).

Section 1361(b)(3)(C) provides thatany QSSS that ceases to meet the require-ments of section 1361(b)(3)(B) will betreated as a new corporation acquiring allof its assets (and assuming all of its liabil-ities) immediately before the cessationfrom its S corporation parent in exchange

1998–20 I.R.B. 15 May 18, 1998

for the subsidiary’s stock. Section1361(b)(3)(D) provides that a QSSSwhose election has terminated (or a suc-cessor corporation) may not make an Selection or have a QSSS election madewith respect to it before its fifth taxableyear that begins after the first taxable yearfor which the termination is effective, un-less the Secretary consents to the election.

Under current and prior law, the S elec-tion of a corporation with subchapter Ccorporation earnings and profits termi-nated if that S corporation received pas-sive investment income, including divi-dends, in excess of 25 percent of grossreceipts for three consecutive years. Sec-tion 1362(d)(3)(E) modifies that generalrule by excluding dividends from passiveinvestment income to the extent that thedividends are attributable to the activeconduct of a trade or business of a C cor-poration in which the S corporation has an80 percent or greater ownership interest.Neither the Act nor the legislative historyprovides rules for determining the attribu-tion of dividends to an active trade orbusiness.

QSSS FormationUnder the proposed regulations, an S

corporation makes a QSSS election withrespect to an eligible subsidiary by filinga form to be developed by the IRS prior tothe time these regulations become final.This proposes to change the temporaryelection procedure provided in Notice 97–4, which provides that a parent S corpora-tion files a completed Form 966, Corpo-rate Dissolution and Liquidation (withsome modifications), to make a QSSSelection. Until these proposed regulationsare finalized, taxpayers should continueto use the temporary election procedure inNotice 97–4 to make QSSS elections.

The proposed regulations also providethat the effective date of a QSSS electionmay be up to 2 months and 15 days priorto the day the QSSS election is made.This is a slight change from the 75 dayretroactive period provided in Notice 97–4, but is consistent with the general timeperiod for making S elections. Unlike theS election, however, a QSSS electiondoes not need to be made within 2 monthsand 15 days of the beginning of a taxableyear. A similar retroactive period is pro-vided for revocations of QSSS status. Inaddition, a taxpayer may choose a

prospective effective date for a QSSSelection or revocation, so long as the dateselected is not more than 12 months afterthe date the election or revocation ismade.

The proposed regulations provide that,when an S corporation makes a validQSSS election with respect to a sub-sidiary, the subsidiary is deemed to haveliquidated into the parent. The tax treat-ment of this liquidation, alone or in thecontext of any larger transaction (for ex-ample, a transaction that also includes theacquisition of the subsidiary’s stock), isgenerally determined under all relevantprovisions of the Code and general princi-ples of tax law, including the step transac-tion doctrine. However, a special transi-tion rule applies to certain electionseffective prior to the date that is 60 daysafter publication of final regulations in theFederal Register. The transition rule in-dicates the recognition of special concernsthat may have arisen as a result of transac-tions entered into by taxpayers relying onthe legislative history to the Act and with-out applying the step transaction doctrineto the acquisition of the subsidiary’s stockfollowed by a QSSS election. The IRS re-quests comments concerning other trans-actions occurring during the transitionalperiod for which relief from the effect ofapplication of the step transaction doctrinemay be warranted.

Special rules may apply when a QSSSelection is made following the transfer ofone S corporation’s stock to another Scorporation. For example, if an S corpo-ration acquires the stock of another S cor-poration in a transaction in which the ac-quiring S corporation’s basis in the stockreceived is determined by reference to thetransferor’s basis and makes a QSSS elec-tion with respect to the other corporationeffective on the day of acquisition, anylosses disallowed under section 1366(d)with respect to a former shareholder ofthe QSSS will be available to that share-holder as a shareholder of the acquiring Scorporation. Furthermore, when stock inan S corporation is transferred to anotherS corporation and a QSSS election ismade with respect to the subsidiary effec-tive on the day of acquisition, the S elec-tion of the former corporation terminatesat the same moment as the QSSS electionbecomes effective. This rule ensures thatthe former S corporation is not treated as

a C corporation for any period solely be-cause of the transfer.

Generally, the proposed regulationstreat the liquidation as occurring at theclose of the day before the QSSS electionis effective. Under this rule, if a parentcorporation makes an S election effectiveon the same date as a QSSS election withrespect to a subsidiary, the deemed liqui-dation occurs at a time when the parentcorporation is still a C corporation. AQSSS election satisfies the requirement ofadopting a plan of liquidation under sec-tion 332.

Following the deemed liquidation, theQSSS is not treated as a separate corpora-tion (except as otherwise provided in theregulations), and all assets, liabilities, anditems of income, deduction, and credit aretreated as those of the S corporation. Ac-cordingly, all such items must be reportedon the S corporation’s return required tobe filed under section 6037. A specialrule applies for the calculation of theseitems where either an S corporation or itsQSSS is a bank (as defined in section581). This special rule was first an-nounced in Notice 97–5 (1997–2 I.R.B.25). Until these proposed regulations arefinalized, taxpayers should continue tofollow Notice 97–5.

QSSS TerminationThe QSSS status of a corporation con-

tinues until it terminates. The regulationsspecify the date of termination for spe-cific terminating events. Section 1361(b)-(3)(D) provides that, if a QSSS electionterminates, the corporation is treated as anew corporation acquiring all of its assets(and assuming all of its liabilities) fromthe S corporation in exchange for stock ofthe new corporation immediately beforethe termination. The tax treatment of thistransaction or of a larger transaction thatincludes this transaction will be deter-mined under the Code and general princi-ples of tax law, including the step transac-tion doctrine. Examples are provided toillustrate situations in which the forma-tion of the new corporation will qualify asa nonrecognition transaction under sec-tion 351. The proposed regulations alsoprovide that, under certain circumstances,relief may be available under the stan-dards established under section 1362(f)for the inadvertent termination of an Selection.

May 18, 1998 16 1998–20 I.R.B.

Section 1361(b)(3)(D) provides that acorporation whose QSSS election has ter-minated (or a successor corporation) maynot make an S election or have a QSSSelection made with respect to it for fivetaxable years following the terminationwithout the consent of the Secretary. Theproposed regulations provide that, with-out requesting the Secretary’s consent, acorporation may make an election to betreated as an S corporation or may have aQSSS election made with respect to it be-fore the expiration of the five-year periodunder certain circumstances. Consent isnot required if an otherwise valid S elec-tion or QSSS election is made for the for-mer QSSS (or its successor corporation)effective immediately following the dis-position of its stock. Thus, the proposedregulations allow corporations to movefreely between QSSS and S corporationstatus, provided there is no interveningperiod for which the corporation is treatedas a C corporation.

C Corporation SubsidiariesThe proposed regulations also provide

rules relating to certain C corporationsubsidiaries held by S corporations.Under section 1362(d)(3)(E), dividendsreceived by an S corporation from a Ccorporation in which the S corporationhas an 80 percent or greater ownershipinterest are not treated as passive invest-ment income for purposes of sections1362 and 1375 to the extent the dividendsare attributable to the earnings and profitsof the C corporation derived from the ac-tive conduct of a trade or business. Theproposed regulations provide guidancefor attributing dividends to the activeconduct of a trade or business. Specialrules apply to dividends distributed bythe common parent of a consolidatedgroup.

Under the proposed regulations, earn-ings and profits of a C corporation de-rived from the active conduct of a trade orbusiness are the earnings and profits ofthe corporation derived from activitiesthat would not produce passive invest-ment income under section 1362(d)(3) ifthe C corporation were an S corporation.The proposed regulations provide a safeharbor under which the corporation maydetermine the amount of the active earn-ings and profits by comparing the corpo-ration’s gross receipts derived from non-

passive investment income-producing ac-tivities with the corporation’s total grossreceipts in the year the earnings and prof-its are produced. If less than 10 percentof the C corporation’s earnings and profitsfor a taxable year are derived from activi-ties that would produce passive invest-ment income, all earnings and profits pro-duced by the corporation during thetaxable year are considered active earn-ings and profits.

The proposed regulations also providethat a C corporation may treat all earningsand profits accumulated by the corpora-tion prior to the time an S corporationheld stock meeting the requirements ofsection 1504(a)(2) as active earnings andprofits in the same proportion as the Ccorporation’s active earnings and profitsfor the three taxable years ending prior tothe time when the S corporation acquired80 percent of the C corporation bear to theC corporation’s total earnings and profitsfor those three taxable years. Provisionsalso address the allocation of distributionsfrom current or accumulated earnings andprofits.

Proposed Effective Date

The regulations are proposed to be ef-fective on the date that final regulationsare published in the Federal Register.However, the IRS is considering whethercertain provisions should be maderetroactive. The IRS requests commentsconcerning whether certain provisionsshould be made effective for taxable yearsbeginning on or after January 1, 1997.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. Pursuant to section7805(f) of the Internal Revenue Code,this notice of proposed rulemaking willbe submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business. It is hereby certified thatthe collections of information containedin these regulations will not have a sig-nificant economic impact on a substantialnumber of small businesses. This certifi-cation is based on the fact that the eco-nomic burden imposed on taxpayers by

the collections of information and record-keeping requirements of these regula-tions is insignificant. For example, theestimated average annual burden per re-spondent is less than one hour. Further-more, most taxpayers will only have torespond to the requests for informationcontained in §§1.1361–3(b)(1) and1.1361–5(a)(2) one time in the life of thecorporation. Therefore, a RegulatoryFlexibility Analysis under the RegulatoryFlexibility Act (5 U.S.C. chapter 6) is notrequired.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written com-ments (preferably a signed original andeight (8) copies) that are timely submit-ted to the IRS. All comments will beavailable for public inspection andcopying.

A public hearing will be scheduled inthe Internal Revenue Building, 1111 Con-stitution Avenue, NW, Washington, DC.The IRS recognizes that persons outsidethe Washington, DC, area also may wishto testify at the public hearing throughteleconferencing. Requests to includeteleconferencing sites must be receivedby June 22, 1998. If the IRS receivessufficient indications of interest to war-rant teleconferencing to a particular city,and if the IRS has teleconferencing facili-ties available in that city on the date thepublic hearing is to be scheduled, the IRSwill try to accommodate the requests.

The IRS will publish the time and dateof the public hearing and the locations ofany teleconferencing sites in an an-nouncement in the Federal Register.

Drafting Information

The principal authors of these proposedregulations are Deanna L. Walton, Officeof the Assistant Chief Counsel (Pass-throughs and Special Industries); and LeeA. Dean, Office of the Assistant ChiefCounsel (Corporate). However, otherpersonnel from the IRS and Treasury De-partment participated in their develop-ment.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

1998–20 I.R.B. 17 May 18, 1998

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Amend §1.1361–0 as follows:1. Revise the introductory text.2. Remove the entry for §1.1361–

1(d)(3).3. Add entries for §§1.1361–2,

1.1361–3, 1.1361–4, 1.1361–5, and1.1361–6.

The revisions and additions read as fol-lows:

§1.1361–0 Table of contents.

This section lists captions contained in§§1.1361–1, 1.1361–2, 1.1361–3,1.1361–4, 1.1361–5, and 1.1361–6.

* * * * *

§1.1361–2 Definitions relating to Scorporation subsidiaries.

(a) In general.(b) Stock treated as held by S corpora-

tion.(c) Examples.

§1.1361–3 QSSS election.

(a) Time and manner of making election.(1) In general.(2) Time of making election.(3) Effective date of election.(4) Example.(5) Extension of time for making a QSSS

election.(b) Revocation of QSSS election.(1) Manner of revoking QSSS election.(2) Effective date of revocation.(3) Revocation after termination.

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored.(1) In general.(2) Liquidation of subsidiary.(3) Treatment of banks.(i) In general.(ii) Examples.(4) Treatment of stock of QSSS.(5) Transitional relief.(i) General rule.(ii) Examples.(b) Timing of the liquidation.(1) In general.(2) Acquisitions.(3) Coordination with section 338 elec-

tion.

(c) Carryover of disallowed losses anddeductions.

(d) Examples.

§1.1361–5 Termination of QSSS election.

(a) In general.(1) Effective date.(2) Information to be provided upon ter-

mination of QSSS election by failureto qualify as a QSSS.

(3) Examples.(b) Effect of termination of QSSS elec-

tion.(1) Formation of new corporation.(2) Carryover of disallowed losses and

deductions.(3) Examples.(c) Inadvertent terminations.(d) Election after QSSS termination.(1) In general.(2) Exception.(3) Examples.

§1.1361–6 Effective date.

Par. 3. Amend §1.1361–1 as follows:1. Revise paragraph (b)(1)(i).2. Remove paragraph (d)(1)(i).3. Redesignate paragraphs (d)(1)(ii),

(d)(1)(iii), (d)(1)(iv), and (d)(1)(v) asparagraphs (d)(1)(i), (d)(1)(ii), (d)(1)(iii),and (d)(1)(iv), respectively.

4. Revise newly designated paragraph(d)(1)(i).

5. Remove paragraph (d)(3).6. Revise the first sentence of para-

graph (e)(1).The revisions read as follows:

§1.1361–1 S corporation defined.

* * * * *

(b) * * *(1) * * *(i) More than 75 shareholders (35 for

taxable years beginning before January 1,1997);

* * * * *

(d) * * *(1) * * *(i) For taxable years beginning on or

after January 1, 1997, a financial institu-tion that uses the reserve method of ac-counting for bad debts described in sec-tion 585 (for taxable years beginningprior to January 1, 1997, a financial insti-tution to which section 585 applies (orwould apply but for section 585(c)) or towhich section 593 applies);

* * * * *

(e) * * *(1) General rule. A corporation does

not qualify as a small business corpora-tion if it has more than 75 shareholders(35 for taxable years beginning prior toJanuary 1, 1997). * * *

* * * * *

Par. 4. Add §§ 1.1361–2, 1.1361–3,1.1361–4, 1.1361–5, and 1.1361–6 toread as follows:

§1.1361–2 Definitions relating to Scorporation subsidiaries.

(a) In general.The term qualified sub-chapter S subsidiary(QSSS) means anydomestic corporation that is not an ineli-gible corporation (as defined in section1361(b)(2) and the regulations thereun-der), if—

(1) 100 percent of the stock of suchcorporation is held by an S corporation;and

(2) The S corporation properly electsto treat the subsidiary as a QSSS under§1.1361–3.

(b) Stock treated as held by S corpora-tion. For purposes of satisfying the 100percent stock ownership requirement insection 1361(b)(3)(B)(i) and paragraph(a)(1) of this section, stock of a corpora-tion is treated as held by an S corporationif the S corporation is the owner of thatstock for federal income tax purposes.

(c) Examples.The following examplesillustrate the application of this section:

Example 1. X, an S corporation, owns 100 per-cent of Y, a corporation for which a valid QSSS elec-tion is in effect for the taxable year. Yowns 100 per-cent of Z, a corporation otherwise eligible for QSSSstatus. X may elect to treat Z as a QSSS under sec-tion 1361(b)(3)(B)(ii).

Example 2.Assume the same facts as in Example1, except that Y is a business entity that is disre-garded as an entity separate from its owner under§301.7701–2(c)(2) of this chapter. X may elect totreat Z as a QSSS.

Example 3.Assume the same facts as in Example1, except that Y owns 50 percent of Z, and X ownsthe other 50 percent. X may elect to treat Z as aQSSS.

Example 4.Assume the same facts as in Example1, except that Y is a C corporation. Although Y is adomestic corporation that is otherwise eligible to bea QSSS, no QSSS election has been made for Y.Thus, X is not treated as holding the stock of Z.Consequently, X may not elect to treat Z as a QSSS.

§1.1361–3 QSSS election.

(a) Time and manner of making elec-tion—(1) In general. Except as provided

May 18, 1998 18 1998–20 I.R.B.

in section 1361(b)(3)(D) and §1.1361–5(d) (five-year prohibition on re-elec-tion), an S corporation may elect to treatan eligible subsidiary as a QSSS by filinga completed form to be prescribed by theInternal Revenue Service. The electionform must be signed by a person autho-rized to sign the S corporation’s return re-quired to be filed under section 6037 andmust be submitted to the service centerwhere the subsidiary filed its most recenttax return (if applicable). If an S corpora-tion forms a subsidiary and makes a validQSSS election (effective upon the date ofthe subsidiary’s formation) for the sub-sidiary, the election should be submittedto the service center where the S corpora-tion filed its most recent return.

(2) Time of making election.A QSSSelection may be made by the S corpora-tion parent at any time during the taxableyear.

(3) Effective date of election. A QSSSelection will be effective on the date spec-ified on the election form or on the datethe election form is filed if no date isspecified. The effective date specified onthe form can not be more than 2 monthsand 15 days prior to the date of filing andcan not be more than 12 months after thedate of filing. For this purpose, the defin-ition of the term “month” found in§1.1362–6(a)(2)(ii)(C) applies. If anelection form specifies an effective datemore than 2 months and 15 days prior tothe date on which the election form isfiled, it will be effective 2 months and 15days prior to the date it is filed. If an elec-tion form specifies an effective date morethan 12 months after the date on whichthe election is filed, it will be effective 12months after the date it is filed. The cor-poration for which the QSSS election ismade must meet all the requirements ofsection 1361(b)(3)(B) at the time the elec-tion is made and for all periods for whichthe election is to be effective.

(4) Example. The following exampleillustrates the application of paragraph(a)(3) of this section:

Example. Xhas been a calendar year S corpora-tion engaged in a trade or business for several years.X acquires the stock of Y, a calendar year C corpora-tion, on April 1, 1998. On August 10, 1998, Xmakes an election to treat Y as a QSSS. Unless oth-erwise specified on the election form, the electionwill be effective as of August 10, 1998. If specifiedon the election form, the election may be effectiveon some other date that is not more than 2 months

and 15 days prior to August 10, 1998, and not morethan 12 months after August 10, 1998.

(5) Extension of time for making aQSSS election.An extension of time tomake a QSSS election may be availableunder the procedures applicable under§§301.9100–1 and 301.9100–3 of thischapter.

(b) Revocation of QSSS election—(1)Manner of revoking QSSS election. An Scorporation may revoke a QSSS electionunder section 1361 by filing a statementwith the service center where the S corpo-ration’s most recent tax return was prop-erly filed. The revocation statement mustinclude the names, addresses, and tax-payer identification numbers of both theparent S corporation and the QSSS. Thestatement must be signed by a person au-thorized to sign the S corporation’s returnrequired to be filed under section 6037.

(2) Effective date of revocation.Therevocation of a QSSS election is effectiveon the date specified on the revocationstatement or on the date the revocationstatement is filed if no date is specified.The effective date specified on the revo-cation statement can not be more than 2months and 15 days prior to the date onwhich the revocation statement is filedand can not be more than 12 months afterthe date on which the revocation state-ment is filed. If a revocation statementspecifies an effective date more than 2months and 15 days prior to the date onwhich the statement is filed, it will be ef-fective 2 months and 15 days prior to thedate it is filed. If a revocation statementspecifies an effective date more than 12months after the date on which the state-ment is filed, it will be effective 12months after the date it is filed.

(3) Revocation after termination.A re-vocation may not be made after the occur-rence of an event that renders the sub-sidiary ineligible for QSSS status undersection 1361(b)(3)(B).

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored—(1) Ingeneral. Except as otherwise provided inparagraph (a)(3) of this section, for fed-eral tax purposes—

(i) A corporation which is a QSSS shallnot be treated as a separate corporation;and

(ii) All assets, liabilities, and items ofincome, deduction, and credit of a QSSS

shall be treated as assets, liabilities, anditems of income, deduction, and credit ofthe S corporation.

(2) Liquidation of subsidiary. If an Scorporation makes a valid QSSS electionwith respect to a subsidiary, the sub-sidiary is deemed to have liquidated intothe S corporation. Except as provided inparagraph (a)(5) of this section, the taxtreatment of the liquidation or of a largertransaction that includes the liquidationwill be determined under the InternalRevenue Code and general principles oftax law, including the step transactiondoctrine. Thus, for example, if an S cor-poration forms a subsidiary and makes avalid QSSS election (effective upon thedate of the subsidiary’s formation) for thesubsidiary, there will be no deemed liqui-dation of the new subsidiary. Instead, thecorporation will be deemed to be a QSSSfrom its inception. For purposes of sec-tion 332, the making of a QSSS electionsatisfies the requirement of adopting aplan of liquidation.

(3) Treatment of banks—(i) In general.If an S corporation is a bank, or if an Scorporation makes a valid QSSS electionfor a subsidiary that is a bank, any specialrules applicable to banks under the Inter-nal Revenue Code continue to apply sepa-rately to the bank parent or bank sub-sidiary as if the deemed liquidation of anyQSSS under paragraph (a)(2) of this sec-tion had not occurred. For any QSSS thatis a bank, however, all assets, liabilities,and items of income, deduction, and creditof the QSSS, as determined in accordancewith the special bank rules, are treated asassets, liabilities, and items of income, de-duction, and credit of the S corporation.For purposes of this paragraph (a)(3)(i),the term “bank” has the same meaning asin section 581.

(ii) Examples. The following exam-ples illustrate the application of this para-graph (a)(3):

Example 1. X, an S corporation, is a bank as de-fined in section 581. X owns 100 percent of Yand Z,corporations for which valid QSSS elections are ineffect. Y is a bank as defined in section 581, and Z isnot a financial institution. Pursuant to paragraph(a)(3)(i) of this section, any special rules applicableto banks under the Internal Revenue Code continueto apply separately to X and Y and do not apply to Z.Thus, for example, section 265(b), which providesspecial rules for interest expense deductions ofbanks, applies separately to X and Y. That is, X andY each must make a separate determination undersection 265(b) of interest expense allocable to tax-

1998–20 I.R.B. 19 May 18, 1998

exempt interest, and no deduction is allowed for thatinterest expense.

Example 2. X, an S corporation, is a bank hold-ing company and thus is not a bank as defined insection 581. X owns 100 percent of Y, a corporationfor which a valid QSSS election is in effect. Y is abank as defined in section 581. Pursuant to para-graph (a)(3)(i) of this section, any special rules ap-plicable to banks under the Internal Revenue Codecontinue to apply to Y and do not apply to X. How-ever, all of Y’s assets, liabilities, and items of in-come, deduction, and credit, as determined in accor-dance with the special bank rules, are treated asthose of X. Thus, for example, section 582(c), whichprovides special rules for sales and exchanges ofdebt by banks, applies only to sales and exchangesby Y. However, any gain or loss on such a transac-tion by Y that is considered ordinary income or ordi-nary loss pursuant to section 582(c) is treated as or-dinary income or ordinary loss of X.

(4) Treatment of stock of QSSS.Ex-cept for purposes of section 1361(b)-(3)(B)(i) and §1.1361–2(a)(1), the stockof a QSSS shall be disregarded for all fed-eral tax purposes.

(5) Transitional relief—(i) Generalrule. If an S corporation and another cor-poration (the related corporation) are per-sons specified in section 267(b) prior toan acquisition by the S corporation ofsome or all of the stock of the related cor-poration followed by a QSSS election forthe related corporation, the step transac-tion doctrine will not apply to determinethe tax consequences of the acquisition.This paragraph (a)(5) shall apply to QSSSelections effective prior to the date that is60 days after publication of final regula-tions in the Federal Register.

(ii) Examples. The following exam-ples illustrate the application of this para-graph (a)(5):

Example 1. Individual A owns 100 percent of thestock of X, an S corporation. X owns 79 percent ofthe stock of Y, a solvent corporation, and A owns theremaining 21 percent. On May 4, 1998, A con-tributes its Y stock to X in exchange for X stock. Xmakes a QSSS election with respect to Y effectiveimmediately following the transfer. The liquidationdescribed in paragraph (a)(2) of this section is re-spected as an independent step separate from thestock acquisition, and the tax consequences of theliquidation are determined under sections 332 and337. The contribution by A of the Y stock qualifiesunder section 351, and no gain or loss is recognizedby A, X, or Y.

Example 2.Individual A owns 100 percent of thestock of two solvent S corporations, X and Y. OnMay 4, 1998, A contributes the stock of Y to X. Xmakes a QSSS election with respect to Y immedi-ately following the transfer. The liquidation de-scribed in paragraph (a)(2) of this section is re-spected as an independent step separate from thestock acquisition, and the tax consequences of the

liquidation are determined under sections 332 and337. The contribution by A of the Y stock to X qual-ifies under section 351, and no gain or loss is recog-nized by A, X, or Y. Y is not treated as a C corpora-tion for any period solely because of the transfer ofits stock to X, an ineligible shareholder. See§1.1362–2(b)(4).

(b) Timing of the liquidation—(1) Ingeneral. Except as otherwise provided inparagraphs (b)(2) or (b)(3) of this section,the liquidation described in paragraph(a)(2) of this section occurs at the close ofthe day before the QSSS election is effec-tive. Thus, for example, if a C corpora-tion elects to be treated as an S corpora-tion and makes a QSSS election (effectivethe same date as the S election) with re-spect to a subsidiary, the liquidation oc-curs immediately before the S election be-comes effective, while the S electingparent is still a C corporation.

(2) Acquisitions. If an S corporationdoes not own 100 percent of the stock ofthe subsidiary on the day before the QSSSelection is effective, the liquidation de-scribed in paragraph (a)(2) of this sectionoccurs immediately after the time atwhich the S corporation first owns 100percent of the stock.

(3) Coordination with section 338election. An S corporation that makes aqualified stock purchase of a target maymake an election under section 338 withrespect to the acquisition if it meets therequirements for the election, and maymake a QSSS election with respect to thetarget. If an S corporation makes an elec-tion under section 338 with respect to asubsidiary acquired in a qualified stockpurchase, a QSSS election made with re-spect to that subsidiary is not effective be-fore the day after the acquisition date(within the meaning of section 338(h)(2)).If the QSSS election is effective on theday after the acquisition date, the liquida-tion under paragraph (a)(2) of this sectionoccurs immediately after the deemedasset purchase by the new target corpora-tion under section 338. If an S corpora-tion makes an election under section 338(without a section 338(h)(10) election)with respect to a target, the target mustfile a final or deemed sale return as a Ccorporation reflecting the deemed sale.See §1.338–1(e).

(c) Carryover of disallowed losses anddeductions. If an S corporation (S1) ac-quires the stock of another S corporation

(S2) in a transaction in which the basis ofthe S2 stock is determined in whole or inpart by reference to the transferor’s basis,and S1 makes a QSSS election with re-spect to S2 effective on the day of the ac-quisition, any loss or deduction disal-lowed under section 1366(d) with respectto a former shareholder of S2 is availableto that shareholder as a shareholder of S1.Thus, a loss or deduction of a shareholderof S2 disallowed prior to or during thetaxable year of the transaction is treatedas incurred by S1 with respect to thatshareholder if the shareholder is a share-holder of S1 after the transaction.

(d) Examples. The following exam-ples illustrate the application of this sec-tion:

Example 1. X, an S corporation, owns 100 per-cent of the stock of Y, a C corporation. On June 2,1998, X makes a valid QSSS election for Y, effectiveJune 2, 1998. Assume that, under general principlesof tax law, including the step transaction doctrine,X’s acquisition of the Y stock and the subsequentQSSS election would not be treated as related. Theliquidation described in paragraph (a)(2) of this sec-tion occurs at the close of the day on June 1, 1998,the day before the QSSS election is effective, andthe plan of liquidation is considered adopted on thatdate. Y’s taxable year and separate existence for fed-eral tax purposes end at the close of June 1, 1998.

Example 2. X, a C corporation, owns 100 percentof the stock of Y, another C corporation. On Decem-ber 31, 1998, X makes an election under section1362 to be treated as an S corporation and a validQSSS election for Y, both effective January 1, 1999.Assume that, under general principles of tax law, in-cluding the step transaction doctrine, X’s acquisitionof the Y stock and the subsequent QSSS electionwould not be treated as related. The liquidation de-scribed in paragraph (a)(2) of this section occurs atthe close of December 31, 1998, the day before theQSSS election is effective. The QSSS election for Yis effective on the same day that X’s S election is ef-fective, and the deemed liquidation is treated as oc-curring before the S election is effective, when X isstill a C corporation. Y’s taxable year ends at theclose of December 31, 1998. See §1.381(b)–1.

Example 3. On June 1, 1998, X, an S corpora-tion, acquires 100 percent of the stock of Y, an exist-ing S corporation, for cash in a transaction meetingthe requirements of a qualified stock purchase(QSP) under section 338. X immediately makes aQSSS election for Y effective June 2, 1998, and alsomakes a joint election under section 338(h)(10) withthe shareholder of Y. Under section 338(a) and§1.338(h)(10)–1, Y is treated as having sold all of itsassets at the close of the acquisition date, June 1,1998. Y is treated as a new corporation which pur-chased all of those assets as of the beginning of June2, 1998, the day after the acquisition date. Section338(a)(2). The QSSS election is effective on June 2,1998, and the liquidation under paragraph (a)(2) ofthis section occurs immediately after the deemedasset purchase by the new corporation.

May 18, 1998 20 1998–20 I.R.B.

Example 4. X, an S corporation, owns 100 per-cent of Y, a corporation for which a QSSS election isin effect. On May 12, 1998, a date on which theQSSS election is in effect, X issues Y a $10,000 noteunder state law that matures in ten years with a mar-ket rate of interest. Y is not treated as a separate cor-poration, and X’s issuance of the note to Y on May12, 1998, is disregarded for federal tax purposes.

Example 5. X, an S corporation, owns 100 per-cent of the stock of Y, a C corporation. At a timewhen Y is indebted to X in an amount which exceedsthe fair market value of Y’s assets, X makes a QSSSelection effective on the date it is filed with respectto Y. The liquidation described in paragraph (a)(2)of this section does not qualify under sections 332and 337 and, thus, Y recognizes gain or loss on theassets distributed, subject to the limitations of sec-tion 267.

§1.1361-5 Termination of QSSS election.

(a) In general—(1) Effective date.The termination of a QSSS election is ef-fective —

(i) On the effective date contained inthe revocation statement if a QSSS elec-tion is revoked under §1.1361–3(b);

(ii) At the close of the last day of theparent’s last taxable year as an S corpora-tion if the parent’s S election terminatesunder §1.1362–2; or

(iii) At the close of the day on whichan event (other than an event described inparagraph (a)(1)(ii) of this section) occursthat renders the subsidiary ineligible forQSSS status under section 1361(b)(3)(B).

(2) Information to be provided upontermination of QSSS election by failure toqualify as a QSSS.If a QSSS election ter-minates because an event renders the sub-sidiary ineligible for QSSS status, the Scorporation must attach to its return forthe taxable year in which the terminationoccurs a notification that a QSSS electionhas terminated, the date of the termina-tion, and the names, addresses, and em-ployer identification numbers of both theparent corporation and the QSSS.

(3) Examples. The following exam-ples illustrate the application of this para-graph (a):

Example 1. Termination because parent’s S elec-tion terminates. X, an S corporation, owns 100 per-cent of Y. A QSSS election is in effect with respectto Y for 1998. Effective on January 1, 1999, X re-vokes its S election. Because X is no longer an Scorporation, Y no longer qualifies as a QSSS at theclose of December 31, 1998.

Example 2. Termination due to transfer of QSSSstock. X,an S corporation, owns 100 percent of Y.A QSSS election is in effect with respect to Y for1998. On December 10, 1998, X sells one share of Ystock to A, an individual. Because X no longer owns

100 percent of the stock of Y, Yno longer qualifiesas a QSSS. Accordingly, the QSSS election madewith respect to Y terminates at the close of Decem-ber 10, 1998.

Example 3. No termination on stock transfer be-tween QSSS and parent. X, an S corporation, owns100 percent of the stock of Y and Y owns 100 per-cent of the stock of Z. QSSS elections are in effectwith respect to both Y and Z. Ytransfers all of its Zstock to X. Because X is treated as owning the stockof Z both before and after the transfer of stock solelyfor purposes of determining whether the require-ments of section 1361(b)(3)(B)(i) and §1.1361–2(a)(1) have been satisfied, the transfer of Z stockdoes not terminate Z’s QSSS election. Because thestock of Z is disregarded for all other federal tax pur-poses, no gain is recognized under section 311.

(b) Effect of termination of QSSS elec-tion—(1) Formation of new corporation.If a QSSS election terminates under para-graph (a) of this section, the former QSSSis treated as a new corporation acquiringall of its assets (and assuming all of its li-abilities) immediately before the termina-tion from the S corporation parent in ex-change for stock of the new corporation.The tax treatment of this transaction or ofa larger transaction that includes thistransaction will be determined under theInternal Revenue Code and general prin-ciples of tax law, including the step trans-action doctrine.

(2) Carryover of disallowed losses anddeductions.If a QSSS terminates becausethe S corporation distributes the QSSSstock to some or all of the S corporation’sshareholders in a transaction to whichsection 368(a)(1)(D) applies by reason ofsection 355 (or so much of section 356 asrelates to section 355), any loss or deduc-tion disallowed under section 1366(d)with respect to a shareholder of the S cor-poration immediately before the distribu-tion is allocated between the S corpora-tion and the former QSSS with respect tothe shareholder. The amount of the disal-lowed loss or deduction allocated to the Scorporation is an amount that bears thesame ratio to each item of disallowed lossor deduction as the value of the share-holder’s stock in the S corporation bearsto the total value of the shareholder’sstock in both the S corporation and theformer QSSS, in each case as determinedimmediately after the distribution.

(3) Examples. The following exam-ples illustrate the application of this para-graph (b):

Example 1. X, an S corporation, owns 100 per-cent of the stock of Y, a corporation for which a

QSSS election is in effect. X sells 21 percent of theY stock to Z, an unrelated corporation, for cash,thereby terminating the QSSS election. Y is treatedas a new corporation acquiring all of its assets (andassuming all of its liabilities) in exchange for Ystock immediately before the termination from the Scorporation. The deemed exchange by X of assetsfor Y stock does not qualify under section 351 be-cause X is not in control of Y within the meaning ofsection 368(c) immediately after the transfer as a re-sult of the sale of stock to Z. Therefore, X must rec-ognize gain, if any, on the assets transferred to Y inexchange for its stock. X’s losses, if any, on the as-sets transferred are subject to the limitations of sec-tion 267.

Example 2.Assume the same facts as in Example1, except that, instead of purchasing Y stock, Z con-tributes to Y an operating asset in exchange for 21percent of the Ystock. Y is treated as a new corpora-tion acquiring all of its assets (and assuming all ofits liabilities) in exchange for Y stock immediatelybefore the termination. Because X and Z are co-transferors that control the transferee immediatelyafter the transfer, the transaction qualifies under sec-tion 351.

Example 3. X, an S corporation, owns 100 per-cent of the stock of Y, a corporation for which aQSSS election is in effect. X distributes all of the Ystock pro rata to its shareholders, and the distribu-tion terminates the QSSS election. The transactioncan qualify as a distribution to which sections368(a)(1)(D) and 355 apply if the transaction other-wise satisfies the requirements of those sections.

Example 4. X, an S corporation, owns 100 per-cent of the stock of Y, a corporation for which aQSSS election is in effect. X subsequently revokesthe QSSS election. Y is treated as a new corporationacquiring all of its assets (and assuming all of its lia-bilities) immediately before the revocation from itsS corporation parent in a deemed exchange for Ystock. On a subsequent date, X sells 21 percent ofthe stock of Y to Z, an unrelated corporation, forcash. Assume that under general principles of taxlaw including the step transaction doctrine, the saleis not taken into account in determining whether X isin control of Y immediately after the deemed ex-change of assets for stock. The deemed exchange byX of assets for Y stock and the deemed assumptionby Y of its liabilities qualify under section 351 be-cause, for purposes of that section, X is in control ofY within the meaning of section 368(c) immediatelyafter the transfer.

(c) Inadvertent terminations.Relieffrom the consequences of an inadvertenttermination of a QSSS election may beavailable under the standards establishedby the Commissioner for the inadvertenttermination of an S election under§1.1362–4.

(d) Election after QSSS termination—(1) In general. Absent the Commis-sioner’s consent, and except as providedin paragraph (d)(2) of this section, a cor-poration whose QSSS election has termi-nated under paragraph (a) of this section(or a successor corporation as defined in

1998–20 I.R.B. 21 May 18, 1998

§1.1362–5(b)) may not make an S elec-tion under section 1362 or have a QSSSelection under section 1361(b)(3)(B)(ii)made with respect to it for five taxableyears (as described in section 1361(b)-(3)(D)). The Commissioner may permitan S election by the corporation or a newQSSS election with respect to the corpo-ration before the 5-year period expires.The corporation requesting consent tomake the election has the burden of estab-lishing that, under the relevant facts andcircumstances, the Commissioner shouldconsent to a new election.

(2) Exception.If a corporation’s QSSSelection terminates by reason of a disposi-tion of the corporation’s stock, the corpo-ration may, without requesting the Com-missioner’s consent, make an S electionor have a QSSS election made with re-spect to it before the expiration of thefive-year period described in section1361(b)(3)(D) and paragraph (d)(1) ofthis section, provided that —

(i) Immediately following the disposi-tion of its stock, the corporation (or itssuccessor corporation) is otherwise eligi-ble to make an S election or have a QSSSelection made for it; and

(ii) The relevant election is made ef-fective immediately following the dispo-sition of the stock of the corporation.

(3) Examples. The following exam-ples illustrate the application of this para-graph (d):

Example 1. Termination upon distribution ofQSSS stock to shareholders of parent. X, an S cor-poration, owns Y, a QSSS. X distributes all of its Ystock to X’s shareholders. The distribution termi-nates the QSSS election because Y no longer satis-fies the requirements of a QSSS. Assuming Y is oth-erwise eligible to be treated as an S corporation, Y’sshareholders may elect to treat Y as an S corporationeffective on the date of the stock distribution withoutrequesting the Commissioner’s consent.

Example 2. Sale of 100 percent of QSSS stock.X, an S corporation, owns Y, a QSSS. X sells 100percent of the stock of Y to Z, an unrelated S corpo-ration. Z may elect to treat Yas a QSSS effective onthe date of purchase without requesting the Com-missioner’s consent.

§1.1361–6 Effective date.

Except as provided in §1.1361–4(a)-(5)(i), the provisions of §§1.1361–2through 1.1361–5 apply to taxable yearsbeginning on or after the date that finalregulations are published in the FederalRegister.

Par. 5. Amend §1.1362–0 as follows:

1. Add an entry for §1.1362–2(b)(4).2. Add entries for §1.1362–8.The additions read as follows:

§1.1362–0 Table of contents.

* * * * *

§1.13622 Termination of election.

* * * * *

(b) * * * (4) Termination when stock transferred

to another S corporation.

* * * * *

§1.1362–8 Dividends received fromaffiliated subsidiaries.

(a) In general.(b) Determination of active or passive

earnings and profits.(1) In general.(2) Lower tier subsidiaries.(3) De minimisexception.(4) Special rules for earnings and profits

accumulated by a C corporation priorto 80 percent acquisition.

(5) Gross receipts safe harbor.(c) Allocating distributions to active or

passive earnings and profits.(1) Distributions from current earnings

and profits.(2) Distributions from accumulated earn-

ings and profits.(3) Adjustments to active earnings and

profits.(4) Special rules for consolidated groups.(d) Examples.(e) Effective date.

Par. 6. Amend §1.1362–2 as follows:1. Amend paragraph (b)(1) by adding a

sentence to the end of the paragraph.2. Add paragraph (b)(4).3. Amend paragraph (c)(5)(ii)(C) by

adding a sentence to the end of the para-graph.

The additions read as follows:

§1.1362–2 Termination of election.

* * * * *

(b) * * *(1) * * * See paragraph (b)(4) of this

section for a special rule applying to thetermination of an S election caused by thetransfer of the corporation’s stock to an-other S corporation.

* * * * *

(4) Termination when stock transferredto another S corporation.If all of thestock of an S corporation (S1) is trans-ferred to another S corporation (S2) and aQSSS election for S1 is made effective asof the day of the transfer, S1’s S electionterminates at the same time as the deemedliquidation under §1.1361–4(a)(2). Ac-cordingly, S1 is not treated as a C corpora-tion for any period solely because of thetransfer of S1 stock to S2, an ineligible Scorporation shareholder. See, however,§1.338–1(e)(3) if an election under section338 (without an election under section338(h)(10)) is made. This paragraph (b)(4)is effective on the date final regulations arepublished in the Federal Register.

(c) * * *(5) * * *(ii) * * *(C) * * * See §1.1362–8 for special

rules regarding the treatment of dividendsreceived by an S corporation from a Ccorporation in which the S corporationholds stock meeting the requirements ofsection 1504(a)(2).

* * * * *

Par. 7. Add §1.1362–8 to read as fol-lows:

§1.1362–8 Dividends received fromaffiliated subsidiaries.

(a) In general. For purposes of section1362(d)(3), if an S corporation holdsstock in a C corporation meeting the re-quirements of section 1504(a)(2), theterm “passive investment income” doesnot include dividends from the C corpora-tion to the extent those dividends are at-tributable to the earnings and profits ofthe C corporation derived from the activeconduct of a trade or business (“activeearnings and profits”). For purposes ofapplying section 1362(d)(3), earnings andprofits of a C corporation are active earn-ings and profits to the extent that the earn-ings and profits are derived from activi-ties that would not produce passiveinvestment income (as defined in section1362(d)(3)) if the C corporation were an Scorporation.

(b) Determination of active or passiveearnings and profits—(1) In general. AnS corporation may use any reasonablemethod to determine the amount of divi-dends that are not treated as passive in-

May 18, 1998 22 1998–20 I.R.B.

vestment income under section 1362(d)-(3)(E). Paragraph (b)(5) of this sectiondescribes a method of determining theamount of dividends that are not treatedas passive investment income under sec-tion 1362(d)(3)(E) that is deemed to bereasonable under all circumstances.

(2) Lower tier subsidiaries.If a C cor-poration subsidiary (upper tier corpora-tion) holds stock in another C corporation(lower tier subsidiary) meeting the re-quirements of section 1504(a)(2), theupper tier corporation’s gross receipts at-tributable to a dividend from the lowertier subsidiary are considered to be de-rived from the active conduct of a trade orbusiness to the extent the lower tier sub-sidiary’s earnings and profits are attribut-able to the active conduct of a trade orbusiness by the subsidiary under para-graph (b)(1), (b)(3), (b)(4), or (b)(5) ofthis section. For purposes of this section,distributions by the lower tier subsidiarywill be considered attributable to activeearnings and profits according to the rulein paragraph (c) of this section. Thisparagraph (b)(2) does not apply to anymember of a consolidated group (as de-fined in §1.1502–1(h)).

(3) De minimis exception. If less than10 percent of a C corporation’s earningsand profits for a taxable year are derivedfrom activities that would produce pas-sive investment income if the C corpora-tion were an S corporation, all earningsand profits produced by the corporationduring that taxable year are consideredactive earnings and profits.

(4) Special rules for earnings andprofits accumulated by a C corporationprior to 80 percent acquisition. A C cor-poration may treat all earnings and profitsaccumulated by the corporation in all tax-able years ending before the S corporationheld stock meeting the requirements ofsection 1504(a)(2) as active earnings andprofits in the same proportion as the Ccorporation’s active earnings and profitsfor the three taxable years ending prior tothe time when the S corporation acquired80 percent of the C corporation bears tothe C corporation’s total earnings andprofits for those three taxable years.

(5) Gross receipts safe harbor. A cor-poration may treat its earnings and profitsfor a year as active earnings and profits inthe same proportion as the corporation’sgross receipts (as defined in §1.1362–

2(c)(4)) derived from activities that wouldnot produce passive investment income(if the C corporation were an S corpora-tion), including those that do not producepassive investment income under para-graphs (b)(2) through (b)(4) of this sec-tion, bear to the corporation’s total grossreceipts for the year in which the earningsand profits are produced.

(c) Allocating distributions to active orpassive earnings and profits—(1) Distri-butions from current earnings and profits.Dividends distributed by a C corporationfrom current earnings and profits are at-tributable to active earnings and profits inthe same proportion as current activeearnings and profits bear to total currentearnings and profits of the C corporation.

(2) Distributions from accumulatedearnings and profits.Dividends distrib-uted by a C corporation out of accumu-lated earnings and profits for a taxableyear are attributable to active earningsand profits in the same proportion as ac-cumulated active earnings and profits forthat taxable year bear to total accumulatedearnings and profits for that taxable yearimmediately prior to the distribution.

(3) Adjustments to active earnings andprofits. For purposes of applying para-graph (c)(1) or (c)(2) of this section to adistribution, the active earnings and prof-its of a corporation shall be reduced by theamount of any prior distribution properlytreated as attributable to active earningsand profits from the same taxable year.

(4) Special rules for consolidatedgroups. For purposes of applying section1362(d)(3) and this section to dividendsreceived by an S corporation from thecommon parent of a consolidated group(as defined in §1.1502–1(h)), the follow-ing rules apply—

(i) The current earnings and profits, ac-cumulated earnings and profits, and ac-tive earnings and profits of the commonparent shall be determined under the prin-ciples of §1.1502–33 (relating to earningsand profits of any member of a consoli-dated group owning stock of anothermember); and

(ii) The gross receipts of the commonparent shall be the sum of the gross re-ceipts of each member of the consolidatedgroup (including the common parent), ad-justed to eliminate gross receipts from in-tercompany transactions (as defined in§1.1502-13(b)(1)(i)).

(d) Examples. The following exam-ples illustrate the principles of this sec-tion:

Example 1. (i) X, an S corporation, owns 85 per-cent of the one class of stock of Y. On December 31,1998, Y declares a dividend of $100 ($85 to X),which is equal to Y’s current earnings and profits. In1998, Y has total gross receipts of $1,000, $200 ofwhich would be passive investment income if Ywere an S corporation.

(ii) One-fifth ($200/$1,000) of Y’s gross receiptsfor 1998 is attributable to activities that would pro-duce passive investment income. Accordingly, one-fifth of the $100 of earnings and profits is passive,and $17 (1/5 of $85) of the dividend from Y to X ispassive investment income.

Example 2. (i) The facts are the same as in Ex-ample 1,except that Y owns 90 percent of the stockof Z. Y and Z do not join in the filing of a consoli-dated return. In 1998, Z has gross receipts of$15,000, $12,000 of which are derived from activi-ties that would produce passive investment income.On December 31, 1998, Z declares a dividend of$1,000 ($900 to Y) from current earnings and profits.

(ii) Four-fifths ($12,000/15,000) of the dividendfrom Z to Y are attributable to passive earnings andprofits. Accordingly, $720 (4/5 of $900) of the divi-dend from Z to Y is considered gross receipts froman activity that would produce passive investmentincome. The $900 dividend to Y gives Y a total of$1,900 ($1,000 + $900) in gross receipts, $920($200 + $720) of which is attributable to passive in-vestment income-producing activities. Under thesefacts, $41 ($920/1,900 of $85) of Y’s distribution toX is passive investment income to X.

(e) Effective date.This section appliesto dividends received in taxable years be-ginning on or after the date that final reg-ulations are published in the FederalRegister.

§1.1368–0 [Amended]

Par. 8. Amend §1.1368–0 in the entryfor §1.1368–2(d)(2) by revising “Reorga-nizations” to read “Liquidations and reor-ganizations”.

§1.1368–2 [Amended]

Par. 9. Amend §1.1368–2 in paragraph(d)(2) by revising “Reorganizations” toread “Liquidations and reorganizations”in the heading and by revising “section381(a)(2)” to read “section 381(a)” in thefirst sentence.

Par. 10. Amend §1.1374–8 by addingtwo sentences to the end of paragraph (b)to read as follows:

§1.1374–8 Section 1374(d)(8)transactions.

* * * * *

1998–20 I.R.B. 23 May 18, 1998

(b) Separate determination of tax. * ** If a C corporation elects to be treatedas an S corporation, and also makes aQSSS election under section 1361(b)(3)(effective on the same date as the S elec-tion) with respect to a subsidiary, the as-sets held by the QSSS at the time of theQSSS election will be treated as assetsheld by the parent when it became an Scorporation. The preceding sentence ap-plies to QSSS elections made after thedate final regulations are published inthe Federal Register.

* * * * *

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register onApril 21, 1998, 8:45 a.m., and published in theissue of the Federal Register for April 22, 1998, 63F.R. 19864)

Change From DollarApproximate SeparateTransaction Method ofAccounting (DASTM) to theProfit and Loss Method ofAccounting/Change From theProfit and Loss Method toDASTM; Correction to T.D.8765

Announcement 98–39

SUMMARY: This announcement con-tains corrections to final regulations(T.D. 8765 [1998–16 I.R.B. 11] 63 F.R.10772), relating to adjustments requiredwhen a qualified business unit (QBU)that used the profit and loss method ofaccounting (P&L) in a post-1986 yearbegins to use the dollar approximate sep-arate transaction method of accounting(DASTM) and adjustments requiredwhen a QBU that used DASTM beginsusing P&L.

DATES: This correction is effectiveApril 6, 1998.

FOR FURTHER INFORMATION CON-TACT: Howard Wiener of the Office ofChief Counsel (International), (202)622-3870 (not a toll-free number).

SUPPLEMENTARY INFORMATION: Background

The final regulations that are the sub-ject of these corrections are under sec-tion 985 of the Internal Revenue Code.

Need for Correction

As published, the final regulations(T.D. 8765) contain errors which mayprove to be misleading and are in need ofclarification.

Correction of Publication

Accordingly, the publication of thefinal regulations (TD 8765), which wasthe subject of FR Doc. 98-5470, is cor-rected as follows:

§1.985–1 [Corrected]

1. On page 10774, column 2,§1.985–1 (b)(2)(ii)(C) is corrected asfollows:

1. The paragraph heading for para-graph (b)(2)(ii)(C)(1) is added.

2. A new paragraph (b)(2)(ii)(C)(2) isadded.

The corrections read as follows:

§1.985–1 Functional currency.

* * * * *

(b) * * *(2) * * *(ii) * * *(C) * * * ( 1) In general.* * *(2) Effective date. This paragraph

(b)(2)(ii)(C) applies to taxable years be-ginning after April 6, 1998. However, ataxpayer may choose to apply this para-graph to all open years after December31, 1986, provided each person, andeach QBU branch of a person, that is re-lated (within the meaning of§1.985–2(d)(3)) also applies to this para-graph (b)(2)(ii)(C).

§1.985–7 [Corrected]

2. On page 10775, column 2,§1.985–7 (b)(3), in the last three lines,the language “had translated its assetsand liabilities under §1.985–3 during thelook-back period.” is corrected to read“had translated its assets and liabilitiesacquired and incurred during the look-back period under §1.985–3.”.

4. On page 10776, column 2,

§1.985–7 (c)(5), line 17, the language“of change.) For purposes of section960,” is corrected to read “of change).For purposes of section 960,”.

5. On page 10776, column 2,§1.985–7 (c)(5), the last line, the lan-guage “section.)” is corrected to read“section).”.

6. On page 10776, column 3,§1.985–7 (d)(5), the last two lines, thelanguage “assets and liabilities under§1.985–3 during the look- back period.”is corrected to read “assets and liabilitiesacquired and incurred during the look-back period under §1.985–3.”.

Cynthia E. Grigsby, Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Allocation and Sourcing ofIncome and Deductions AmongTaxpayers Engaged in a GlobalDealing Operation; Correction

Announcement 98–40

SUMMARY: This announcement con-tains corrections, including a change tothe date of the public hearing, to the no-tice of proposed rulemaking (REG–208299–90 [1998–16 I.R.B. 26] 63 F.R.11177). The notice of proposed rule-making relates to the allocation amongcontrolled taxpayers and sourcing of in-come, deductions, gains and losses froma global dealing operation; rules apply-ing these allocation and sourcing rules toforeign currency transactions and to for-eign corporations engaged in a U.S. tradeor business; and rules concerning themark-to-market treatment resulting fromhedging activities of a global dealing op-eration.

DATES: The public hearing originallyscheduled for July 9, 1998 has beenrescheduled for July 14, 1998.

ADDRESS: The public hearing will beheld in room 2615, Internal RevenueBuilding, 1111 Constitution Avenue,NW, Washington, DC 20224.

FOR FURTHER INFORMATION CON-TACT: Ginny Chung, (202) 622-3870(not a toll-free number).

May 18, 1998 24 1998–20 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking thatis subject to these corrections is undersections 482 and 864 of the Internal Rev-enue Code.

Need for Correction

As published, the notice of proposedrulemaking (REG–208299–90) containerrors that may prove to be misleadingand are in need of clarification.

Correction of Publication

Accordingly, the publication of the no-tice of proposed rulemaking (REG–208299–90) which is the subject of F.R.Doc. 98–5674 is corrected as follows:

1. On page 11182, column 2, in thepreamble under the heading “K. Source ofGlobal Dealing Income”, in the secondparagraph, line 5, the language “§1.863–3which sources income from a” is cor-rected to read “§1.863–3(h) whichsources income from a”.

2. On page 11185, column 2, in thepreamble under the heading “Commentsand Public Hearing”, in the second para-graph, line 2, the language “for July 9,1998, at 10 a.m. in room 2615,” is cor-rected to read “for July 14, 1998, at 10a.m. in room 2615,”.

Cynthia E. Grigsby,Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

Foundations Status of CertainOrganizations

Announcement 98–41The following organizations have

failed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing of noticesunder section 508(b) of the Code. Thislisting does not indicate that the organiza-tions have lost their status as organiza-tions described in section 501(c)(3), eligi-ble to receive deductible contributions.

Former Public Charities.The followingorganizations (which have been treated asorganizations that are not private founda-tions described in section 509(a) of theCode) are now classified as private foun-dations:Paddock Bath and Tennis Club Inc.,

Florissant, MOPainted Desert Demonstration Projects

Inc., Flagstaff, AZPalo Pinto Humane Society Inc., Mineral

Wells, TXPanhandle Crimestoppers Inc., Guymon,

OKPanther Baseball Club Inc., Arlington,

TXPanther Soccer Booster Club Inc., Miami,

FLPaola Free Library Foundation, Paola, KSParamedic Relief Network, Maryland

Hts, MOPard Athletic Club Inc., Marrero, LAParent Relative Organization for

Oakwood Facilities Fund Inc.,Covington, KY

Parent Support Network, Lansing, MIParenting Place, Southfield, MIParents Against Community Crime

Organization Pacco Inc., Houston, TXParents and Kids Together Inc., Potomac,

MDParents Empowered To Save Teens Inc.,

Mt. Pleasant, SCParents Re-Establishing Independent

Development and EncouragementPride, Phoenix, AZ

Parents Reaching Out, St. Charles, MOParents Who Care Inc., Tipp City, OHPark Hill Literacy Inc., Denver, COPark Place Group Inc., Pinellas Park, FLParke-Vermillion Community Education

& Employment Corporation, Clinton,IN

Parkway Pride Inc., Keslers Cross Lanes,WV

Partners in Education Inc., Poneto, INPartners in Education Inc., Roanoke, ALPartners With Youth Foundation,

Springfield, MOPartnership Against Racism, Chicago, ILPartnership for Families Inc., Greenville,

SCPat Rush Ministries Inc., Titusville, FLPathfinders of Indiana Inc., Goshen, INPathway Ministries Inc., Louisville, KYPathway of Light, Columbus, OHPatidar Cultural Association of USA Inc.,

Stanhope, NJ

Patrick M. Gagliardi Foundation, SaultSte Marie, MI

Paul Gage Ministries, Bedford, TXPaul S. Morton Scholarship Foundation

Inc., New Orleans, LAPaulding County Genealogical Society,

Paulding, OHPayson Choral Society, Payson, AZPeace and Joy Ministries Inc., Haysville,

KSPeaceful Dove Enterprises Incorporated,

Palm Bay, FLPeaceful Valley Ranch, Westminster,

COPediatric Assistance International Inc.,

Ann Arbor, MIPee Dee Electric Trust, Darlington, SCPegasus Incorporated of South Carolina,

Blacksburg, SCPennsylvania Elk Foundation, Reading,

PAPennsylvania Quality Leadership

Foundation Inc., Harrisburg, PAPennsylvania Religious Coalition for

Abortion Rights, Philadelphia, PAPenumbra U S A Inc., Shaker Hts, OHPeople Against Cigarette Smoke PACS

Inc., Destreham, LAPeople First of Illinois, Wayne, ILPeople Help People Face to Face Inc.,

Evanston, ILPeople Helping People-Disaster Relief

Inc., Teaneck, NJPeople Organized for Excellence in

Education, Beaumont, TXPeoples Community Hope for Homes

Inc., Westland, MIPerforming Artists Network Inc.,

Linwood, NJPerforming Arts League Inc., Cleveland,

OHPetoskey Youth Soccer Association,

Petoskey, MIPetra Ministries Inc., Glendale, AZPets for the Elderly Foundation,

Cleveland, OHPFLAG Suburban Chicago—Parents

Families and Friends of Lesbians andGays Inc., Downers Grove, IL

Phase I Colorguard, St. Louis, MOPhenix City Education Foundation Inc.,

Phenix City, ALPHFD Womens Association, Prospect

Heights, ILPhiladelphia Korean War Veterans

Memorial Inc., Philadelphia, PAPhiladelphia Student Athletes Inc.,

Parkesburg, PA

1998–20 I.R.B. 25 May 18, 1998

Philip Simmons Foundation Inc.,Charleston, SC

Philippine Development Forum,Washington, DC

Phineas Newborn Jr. Fam Foundation,Memphis, TN

PHS Community DevelopmentCorporation, Detroit, MI

Pictorial Research LTD Inc., West DesMoines, IA

PIN—People in Need, Gowen, MIPinellas Pioneer Settlement Inc., St.

Petersburg, FLPioneer Artists Inc., Dodge City, KSPioneer Historical Museum &

Interpretive Center, Ft. Laramie, WYPipestone Performing Arts Center Inc.,

Pipestone, MNPitre Vision Home, Dallas, TXPitt County Helping Hands Inc.,

Greenville, NCPitt-Greenville Opportunities

Industrialization Center Inc.,Greenville, NC

Pittsburgh Ensemble Theatre Company,Pittsburgh, PA

Pittsburgh Young Professionals Inc.,Pittsburgh, PA

Plaisance Mortagage Corporation,Opelousas, LA

Plano Housing Corporation, Plano, TXPlants for Clean Air Council Inc.,

Mitchellville, MDPlateau Youth Center, Olathe, COPleasant Hill Child Enrichment Center,

Pleasant Hill, TNPleasant Prairie Professional Police

Association, Pleasant, WIPoinciana Youth Baseball, Poinciana, FLPoindexter Ministries Inc., Washington,

DCPoint Pleasant Community Association

Inc., Point Pleasant, PAPolice Athletic League of Port Orange

Inc., Port Orange, FLPolice Benevolent Fund Inc., Atlanta, GAPorter County Champs Inc., Valparaiso,

INPortsmouth Inner City Development

Corporation Housing Association II,Portsmouth, OH

Positive Approach Inc., Victoria, TXPositive Changes Incorporated,

Lewisburg, PAPositive Direction for Youth Inc.,

Greensboro, NCPositive People Inc., Chicago, ILPositive Support Institute, Trenton, MI

Possibilities Productions Unlimited,Denver, CO

Postal Employees-John MillerScholarship Fund, Roseville, MN

Pottawatomie Indian Museum PolyakFoundation Inc., Beverly Shores, IN

Power Connection Ministries Inc.,Kingwood, TX

Power of Praise Ministries Inc.,Cleveland, SC

Power Partenting Association Inc.,Ellicott City, MD

Practical Christian Services Inc.,Concord, NC

Prairie Dance Theatre, Clinton, ILPraying Tobacco Charitable

Organization, Wakpala, SDPreble County Dare Inc., New Paris, OHPrecinct 2 Mounted Patrol of Harris

County, Houston, TXPregnancy Care Center of Fairfield

County Inc., Lancaster, OHPremiere Musical Theater Warehouse,

Denver, COPrep Alumni II, Waukegan, ILPrespress Publishing of Michigan,

Kalamazoo, MIPresby Tips Foundation, Cairo, ILPresbyterian Coalition for Loving Justice,

Washington, DCPreserve the Schuyler Colfax House,

Wayne, NJPress Club of Houston, Houston, TXPress Club of Houston Educational

Foundation Inc., Houston, TXPreventive Aging Center Inc., South

Amboy, NJPride of Tennessee Education

Foundation, Nashville, TNPrimary Resource Developers Group

Inc., Norcross, GAPrince Frederick Foundation, Raleigh,

NCPrince Hall Foundation Inc., North

Brunswick, NJPrisoners Against Crime, Lakewood,

COProclaim Ministries Inc., Rockford, ILProfessional Training Institute Inc., Silver

Spring, MDProfessionals for Houstons Homeless,

Spring, TXProfessions of Edgewood, San Antonio,

TXProgram of Emmanuels Hands,

Allentown, PAProgress for Youth Inc., Mountain Home,

AR

Progressive Foundation for SocialResponsibility, Eden Prairie, MN

Project D A R E Drug Abuse ResistanceEducation for Maury Co., Columbia,TN

Project Help Inc., Sweetwater, TNProject Independence Incorporated of

Sedgwick County, Wichita, KSProject Intercept, Denver, COProject Jericho, New Orleans, LAProject Kids Inc., Allen, TXProject Match Incorporated, Smyrna, GAProject Me Inc., Tucson, AZProject New Smile, Baltimore, MDProject Playground—Central Park,

Beaumont, TXProject Reach Out Incorporated Pro Inc.,

Indianapolis, INProject-Rescue Band, Sheffield Lake, OHProject Safe House Inc., Atlanta, GAProject Second Chance Inc., Cleveland,

OHProject Self-Help, Beaumont, TXProject Victory Inc., Pompano Beach,

FLPromise Land Community Shelter,

Detroit, MIPromises People Reaching Out

Ministering in Spiritual EmotionalSupport Inc., Longmont, CO

Promoting African American Success inSchools, Fort Worth, TX

Promoting Animal Welfare Society Inc.,Muskogee, OK

Prophetic Insights Inc., Fletcher, NCProspect Plains Housing Corporation,

Monmouth Junction, NJProviders of Encouragement and

Assistance To Restructure Your Life,Houston, TX

Providing for the Needy Inc., Louisville,KY

Psychiatrists for Better Psychiatry Inc.,Louisville, KY

Public Service TelecommunicationsCorporation International, Arlington,VA

Puebloans Against Violent Environment,Pueblo, CO

Puerto Rico Society of Cleveland,Lakewood, OH

Pulliam Ministries Inc., Tulsa, OKPurr-Fect Haven Inc., San Antonio, TXPushkin Goncharov Historical

Foundation, Greenwood Village, COQuad Cities Womens Encouragement

Board Inc., Bettendorf, IAQuality Nutrition for Kids, Houston, TX

May 18, 1998 26 1998–20 I.R.B.

Queen Annes County WatermansFestivals, Inc., Queenstown, MD

Quilt Guild of Greater Victoria Inc.,Victoria, TXIf an organization listed above submits

information that warrants the renewal of its

classification as a public charity or as a pri-vate operating foundation, the InternalRevenue Service will issue a ruling or de-termination letter with the revised classifi-cation as to foundation status. Grantors andcontributors may thereafter rely upon such

ruling or determination letter as providedin section 1.509(a)–7 of the Income TaxRegulations. It is not the practice of theService to announce such revised classifi-cation of foundation status in the InternalRevenue Bulletin.

1998–20 I.R.B. 27 May 18, 1998

May 18, 1998 28 1998–20 I.R.B.

Name Address Designation Date of Suspension

Soulides, James C. Berwyn, IL CPA January 1, 1998 to June 30, 2000

Bujan, Frank Orland Park, IL CPA January 1, 1998 to June 30, 2000

Field, Edward L. Topeka, KS CPA January 27, 1998 to April 26, 1999

Cito, Paul J. West Orange, NJ CPA February 21, 1998 to May 20, 1999

Sproul, Jerry Idaho Falls, ID CPA February 25, 1998 to October 24, 1998

Hunt, Russell Pauls Valley, OK CPA March 1, 1998 to June 30, 1998

Oertli, William Rochester, MN CPA Mach 4, 1998 to March 3, 2000

Maynard, Richard Reno, NV CPA March 10, 1998 to March 9, 2002

McDonald, Bill Reno, NV Attorney March 10, 1998 to March 9, 2002

Komendant, Howard Passaic, NJ CPA March 10, 1998 to September 9, 1998

Kwiatek, Fabian A. Silver Spring, MD CPA March 16, 1998 to March 15, 2001

Brown, Patricia DeKalb, IL CPA March 16, 1998 to September 15, 1999

Marshall, Robert Woodland Hills, CA Attorney March 18, 1998 to November 17, 2000

Baloun, Donald J. Palatine, IL CPA March 25, 1998 to November 24, 1998

Goldman, Harold J. Summit, NJ CPA March 27 , 1998 to September 26, 1998

Garner, Darrow C. Austin, TX CPA April 1, 1998 to March 30, 2000

Klein, Charles U. Dunedin, FL CPA April 1, 1998 to September 30, 1999

Morgan, Robert I. Brownsville, VT Attorney April 2, 1998 to April 1, 2000

Teel, Jeffrey J. Hollis, NH CPA April 2, 1998 to April 1, 2001

Hancock, Randall M. Gardendale, AL CPA Indefinite from April 13, 1998

Allison Jr., Dale A. Blairsville, GA Attorney April 15, 1998 to July 14, 2001

Gogel, William A. North Hills, NY Attorney April 21, 1998 to April 20, 2002

Bose, Gautem Oak Brook, IL CPA May 1, 1998 to April 30, 2001

Woods, W. Rex Belleville, KS CPA May 1, 1998 to January 31, 1999

Monahan, John Seattle, WA Attorney May 1, 1998 to April 30, 2001

Swartz, Lewis A. Syosset, NY CPA May 1, 1998 to April 30, 2002

Announcement of the Consent Voluntary Suspension of Attorneys,Certified Public Accountants, Enrolled Agents, and Enrolled ActuariesFrom Practice Before the Internal Revenue Service

Under 31 Code of Federal Regulations,Part 10, an attorney, certified public ac-countant, enrolled agent, or enrolled ac-tuary, in order to avoid the institution orconclusion of a proceeding for his disbar-ment or suspension from practice beforethe Internal Revenue Service, may offerhis consent to suspension from such prac-tice. The Director of Practice, in his dis-cretion, may suspend an attorney, certi-fied public accountant, enrolled agent, orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public accountants,enrolled agents, and enrolled actuaries areprohibited in any Internal Revenue Ser-

vice matter from directly or indirectly em-ploying, accepting assistance from, beingemployed by, or sharing fees with anypractitioner disbarred or suspended frompractice before the Internal Revenue Ser-vice.

To enable attorneys, certified public ac-countants, enrolled agents, and enrolledactuaries to identify practitioners underconsent suspension from practice before theInternal Revenue Service, the Directorof Practice will announce in the InternalRevenue Bulletin the names and ad-dresses of practitioners who have beensuspended from such practice, their desig-nation as attorney, certified public ac-

countant, enrolled agent, or enrolled actu-ary, and date or period of suspension. Thisannouncement will appear in the weeklyBulletin at the earliest practicable dateafter such action and will continue to ap-pear in the weekly Bulletins for five suc-cessive weeks or for as many weeks as ispracticable for each attorney, certifiedpublic accountant, enrolled agent, or en-rolled actuary so suspended and will beconsolidated and published in the Cumu-lative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal Revenue Ser-vice:

1998–20 I.R.B. 29 May 18, 1998

Name Address Designation Date of Suspension

Eckert, Bruce G. Cleveland, OH CPA May 2, 1998 to May 1, 1999

Rozanski, Lawrence J. Pittsburgh, PA CPA June 1, 1998 to May 30, 2000

Mangum, Carl E. Morris Plains, NJ CPA July 1, 1998 to December 31, 1999

Reeser, Richard M. Thornton, CO CPA July 1, 1998 to September 30, 1999

Bailey, Thomas O. Dallas, TX CPA July 1, 1998 to June 30, 2001

Johnson, Kenneth E. Forest Lake, MN CPA July 1, 1998 to November 30, 1999

Deren, Joseph Lackawanna, NY Attorney July 1, 1998 to June 30, 2001

May 18, 1998 30 1998–20 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

1998–20 I.R.B. 31 May 18, 1998

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1997–27 through1997–52 will be found in Internal Revenue Bulletin1998–1, dated January 5, 1998.

Numerical Finding List1Bulletins 1998–1 through 1998–19

Announcements:

98–1, 1998–2 I.R.B. 3898–2, 1998–2 I.R.B.3898–3, 1998–2 I.R.B.3898–4, 1998–4 I.R.B.3198–5, 1998–5 I.R.B. 2598–6, 1998–5 I.R.B. 2598–7, 1998–5 I.R.B. 2698–8, 1998–6 I.R.B. 9698–9, 1998–7 I.R.B. 3598–10, 1998–7 I.R.B. 3598–11, 1998–8 I.R.B. 4298–12, 1998–8 I.R.B. 4398–13, 1998–8 I.R.B. 4398–14, 1998–8 I.R.B. 4498–15, 1998–10 I.R.B.3698–16, 1998–9 I.R.B. 1798–17, 1998–9 I.R.B. 1698–18, 1998–10 I.R.B.4498–19, 1998–10 I.R.B.4498–20, 1998–11 I.R.B. 2598–21, 1998–11 I.R.B. 2698–22, 1998–12 I.R.B. 3398–23, 1998–12 I.R.B. 3498–24, 1998–12 I.R.B. 3598–25, 1998–13 I.R.B.4398–26, 1998–14 I.R.B. 2898–27, 1998–15 I.R.B. 3098–28, 1998–15 I.R.B. 3098–29, 1998–16 I.R.B. 4898–30, 1998–17 I.R.B. 3898–32, 1998–17 I.R.B. 3998–33, 1998–17 I.R.B. 3998–34, 1998–17 I.R.B. 3998–35, 1998–17 I.R.B. 4098–36, 1998–18 I.R.B. 1898–37, 1998–19 I.R.B. 2498–38, 1998–19 I.R.B. 26

Notices:

98–1, 1998–3 I.R.B. 4298–2, 1998–2 I.R.B. 2298–3, 1998–3 I.R.B. 4898–4, 1998–2 I.R.B. 2598–5, 1998–3 I.B.R.4998–6, 1998–3 I.R.B. 5298–7, 1998–3 I.R.B. 5498–8, 1998–4 I.R.B. 698–9, 1998–4 I.R.B. 898–10, 1998–6 I.R.B.998–11, 1998–6 I.R.B. 1898–12, 1998–5 I.R.B.1298–13, 1998–6 I.R.B.1998–14, 1998–8 I.R.B. 2798–15, 1998–9 I.R.B. 898–16, 1998–15 I.R.B. 1298–17, 1998–11 I.R.B. 698–18, 1998–12 I.R.B. 1198–19, 1998–13 I.R.B.2498–20, 1998–13 I.R.B.2598–21, 1998–15 I.R.B. 1498–22, 1998–17 I.R.B. 598–23, 1998–18 I.R.B. 998–24, 1998–17 I.R.B. 598–25, 1998–18 I.R.B. 1198–26, 1998–18 I.R.B. 14

Notices—Continued

98–27, 1998–18 I.R.B. 1498–28, 1998–19 I.R.B.7

Proposed Regulations:

PS–158–86, 1998–11 I.R.B. 13REG–100841–97, 1998–8 I.R.B. 30REG–102144–98, 1998–15 I.R.B.25REG–102894–97, 1998–3 I.R.B. 59REG–104062–97, 1998–10 I.R.B. 34REG–104537–97, 1998–16 I.R.B. 21REG–104691–97, 1998–11 I.R.B. 13REG–105163–97, 1998–8 I.R.B. 31REG–109333–97, 1998–9 I.R.B. 9REG–109704–97, 1998–3 I.R.B. 60REG–110965–97, 1998–13 I.R.B. 42REG–115795–97, 1998–8 I.R.B.33REG–119449–97, 1998–10 I.R.B. 35REG–120200–97, 1998–12 I.R.B. 32REG–120882–97, 1998–14 I.R.B. 25REG–121755–97, 1998–9 I.R.B. 13REG–208299–90, 1998–16 I.R.B. 26REG–209276–87, 1998–11 I.R.B. 18REG–209322–82, 1998–15 I.R.B. 26REG–209373–81, 1998–14 I.R.B. 26REG–209463–82, 1998–4 I.R.B. 27REG–209476–82, 1998–8 I.R.B. 36REG–209484–87, 1998–8 I.R.B.40REG–209485–86, 1998–11 I.R.B. 21REG–209682–94, 1998–17 I.R.B. 20REG–209807–95, 1998–8 I.R.B. 40REG–243025–96, 1998–18 I.R.B. 18REG–251502–96, 1998–9 I.R.B. 14

Revenue Procedures:

98–1, 1998–1 I.R.B. 798–2, 1998–1 I.R.B. 7498–3, 1998–1 I.R.B. 10098–4, 1998–1 I.R.B. 11398–5, 1998–1 I.R.B. 15598–6, 1998–1 I.R.B. 18398–7, 1998–1 I.R.B. 22298–8, 1998–1 I.R.B. 22598–9, 1998–3 I.R.B. 5698–10, 1998–2 I.R.B. 3598–11, 1998–4 I.R.B.998–12, 1998–4 I.R.B. 1898–13, 1998–4 I.R.B. 2198–14, 1998–4 I.R.B. 2298–15, 1998–4 I.R.B. 2598–16, 1998–5 I.R.B. 1998–17, 1998–5 I.R.B. 2198–18, 1998–6 I.R.B. 2098–19, 1998–7 I.R.B. 3098–20, 1998–7 I.R.B. 3298–21, 1998–8 I.R.B. 2798–22, 1998–12 I.R.B. 1198–23, 1998–10 I.R.B. 3098–24, 1998–10 I.R.B. 3198–25, 1998–11 I.R.B. 798–26, 1998–13 I.R.B.2698–27, 1998–15 I.R.B.1598–28, 1998–15 I.R.B.1498–29, 1998–15 I.R.B. 2298–30, 1998–17 I.R.B. 698–32, 1998–17 I.R.B. 1198–33, 1998–19 I.R.B. 798–34, 1998–18 I.R.B. 15

Revenue Rulings:

98–1, 1998–2 I.R.B. 598–2, 1998–2 I.R.B. 1598–3, 1998–2 I.R.B. 498–4, 1998–2 I.R.B. 1898–5, 1998–2 I.R.B. 2098–6, 1998–4 I.R.B. 498–7, 1998–6 I.R.B.698–8, 1998–7 I.R.B. 2498–9, 1998–6 I.R.B. 598–10, 1998–10 I.R.B. 1198–11, 1998–10 I.R.B. 1398–12, 1998–10 I.R.B. 598–13, 1998–11 I.R.B. 498–14, 1998–11 I.R.B. 498–15, 1998–12 I.R.B. 698–16, 1998–13 I.R.B. 1898–17, 1998–13 I.R.B. 2198–18, 1998–14 I.R.B. 2298–19, 1998–15 I.R.B. 598–20, 1998–15 I.R.B. 898–21, 1998–18 I.R.B. 798–22, 1998–19 I.R.B.598–23, 1998–18 I.R.B. 598–24, 1998–19 I.R.B. 698–25, 1998–19 I.R.B.4

Treasury Decisions:

8740, 1998–3 I.R.B. 48741, 1998–3 I.R.B. 68742, 1998–5 I.R.B.48743, 1998–7 I.R.B. 268744, 1998–7 I.R.B. 208745, 1998–7 I.R.B. 158746, 1998–7 I.R.B. 48747, 1998–7 I.R.B. 188748, 1998–8 I.R.B. 248749, 1998–7 I.R.B. 168750, 1998–8 I.R.B. 48751, 1998–10 I.R.B. 238752, 1998–9 I.R.B. 48753, 1998–9 I.R.B. 68754, 1998–10 I.R.B. 158755, 1998–10 I.R.B. 218756, 1998–12 I.R.B.48757, 1998–13 I.R.B.48758, 1998–13 I.R.B. 158759, 1998–13 I.R.B. 198760, 1998–14 I.R.B. 48761, 1998–14 I.R.B. 138762, 1998–14 I.R.B. 158763, 1998–15 I.R.B. 58764, 1998–15 I.R.B. 98765, 1998–16 I.R.B. 118766, 1998–16 I.R.B. 178767, 1998–16 I.R.B. 4

May 18, 1998 32 1998–20 I.R.B.

Finding List of Current Action onPreviously Published Items1

Bulletins 1998–1 through 1998–19

Revenue Procedures:

91–59Updated and superseded by98–25, 1998–11 I.R.B. 7

94–16Modified and superseded by98–22, 1998–12 I.R.B. 11

93–62Modified and superseded by98–22, 1998–12 I.R.B. 11

95–3595–35ASuperseded by98–19, 1998–7 I.R.B. 30

96–29Modified and superseded by98–22, 1998–12 I.R.B. 11

97–1Superseded by98–1, 1998–1 I.R.B. 7

97–2Superseded by98–2, 1998–1 I.R.B. 74

97–3Superseded by98–3, 1998–1 I.R.B. 100

97–4Superseded by98–4, 1998–1 I.R.B. 113

97–5Superseded by98–5, 1998–1 I.R.B. 155

97–6Superseded by98–6, 1998–1 I.R.B. 183

97–7Superseded by98–7, 1998–1 I.R.B. 222

97–8Superseded by98–8, 1998–1 I.R.B. 225

97–21Superseded by98–2, 1998–1 I.R.B. 74

97–2497–24ASuperseded by98–33, 1998–19 I.R.B. 7

97–26Obsoleted by 98–28, 1998–15 I.R.B. 14

97–53Superseded by98–3, 1998–1 I.R.B. 100

Revenue Rulings:

68–352Obsoleted by98–24, 1998–19 I.R.B. 6

73–198Modified by98–24, 1998–19 I.R.B. 6

75–17Supplemented and superseded by98–5, 1998–2 I.R.B. 20

92–19Supplemented in part by98–2, 1998–2 I.R.B. 15

1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1997–27 through 1997–52 will be found in InternalRevenue Bulletin 1998–1, dated January 5, 1998.

1998–20 I.R.B. 33 May 18, 1998

Notes

Notes

May 18, 1998 34 1998–20 I.R.B.

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