INCOME TAXT.D. 8786, page 4.Final regulations under section 863 of the Code govern thesource of income from sales of inventory produced in theUnited States and sold in a possession of the United Statesor produced in a possession of the United States and sold inthe United States and from sales of inventory purchased in apossession of the United States and sold in the UnitedStates. Final regulations under section 936 of the Code gov-ern the source of income from sales in the United States ofproperty purchased from a corporation that has an electionunder section 936 in effect.

EMPLOYEE PLANSNotice 98–50, page 10.Roth IRAs; recharacterizations; conversions. This no-tice sets forth examples and a proposed rule with respect tothe recharacterization and reconversion of amounts con-verted from a traditional IRA to a Roth IRA.

Notice 98–51, page 11.Weighted average interest rate update. The weightedaverage interest rate for October 1998 and the resultingpermissible range of interest rates used to calculate current

liability for purposes of the full funding limitation of section412(c)(7) of the Code are set forth.

EXEMPT ORGANIZATIONSAnnouncement 98–98, page 18.A list is provided of organizations that no longer qualify asorganizations for which contributions are deductible undersection 170 of the Code.

ADMINISTRATIVEAnnouncement 98–95, page 13.The Service announces a proposed revision to Form 8857,Request for Innocent Spouse Relief (And Allocation of Liabilityand Equitable Relief) and requests comments on the revision.

Announcement 98–96, page 18.T.D. 8776, 1998–33 I.R.B. 6, relating to U.S. taxpayers op-erating, investing, or otherwise conducting business in thecurrencies of certain European countries that are replacingtheir national currencies with a single, multinational currencycalled the euro, is corrected.

Announcement 98–97, page 18.REG–245256–96, 1998–34 I.R.B. 9, relating to the excisetaxes on excess benefit transactions, is corrected.

Internal Revenue

bbuulllleettiinnBulletin No. 1998–44

November 2, 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 21.Index for January-October begins on page 23.

IRB 1998-44 10/28/98 9:32 AM Page 1

The IRS Mission

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

and by applying the tax law with integrity and fairness toall.

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.

IRB 1998-44 10/28/98 9:32 AM Page 2

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.

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Section 863.—Special Rules forDetermining Source

26 CFR 1.863–3: Allocation and apportionment ofincome from certain sales of inventory.

T.D. 8786

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 602

Source of Income From Sales ofInventory Partly From SourcesWithin a Possession of theUnited States; Also, Source ofIncome Derived From CertainPurchases From a CorporationElecting Section 936

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations under section 863 gov-erning the source of income from sales ofinventory produced in the United Statesand sold in a possession of the UnitedStates or produced in a possession of theUnited States and sold in the UnitedStates; final regulations under section863 governing the source of income fromsales of inventory purchased in a posses-sion of the United States and sold in theUnited States; and final regulations undersection 936 governing the source of in-come of a taxpayer from the sale in theUnited States of property purchased froma corporation that has an election undersection 936 in effect. This document af-fects persons who produce (in whole orin part) inventory in the United Statesand sell in a possession, or produce (inwhole or in part) inventory in a posses-sion and sell in the United States, as wellas persons who purchase inventory in apossession and sell in the United States,and also persons who sell in the UnitedStates property purchased from a corpo-ration that has a section 936 election ineffect.

DATES: Effective Date. These regula-tions are effective November 13, 1998.

Applicability Date. These regulationsapply to taxable years beginning on orafter November 13, 1998.

FOR FURTHER INFORMATION CON-TACT: Anne Shelburne, (202) 874-1305(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in this final regulation has been re-viewed and approved by the Office ofManagement and Budget in accordancewith the requirements of the PaperworkReduction Act of 1995 (44 U.S.C.3507(d)) under control number 1545–1556. Responses to this collection of in-formation are mandatory.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number.

The estimated average annual burdenper respondent is approximately 2.5hours.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service,Attn: IRSReports Clearance Officer, OP:FS:FP,Washington, DC 20224, and the Office ofManagement and Budget,Attn: DeskOfficer for the Department of Treasury,Office of Information and Regulatory Af-fairs, Washington, DC 20503.

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 final regula-tions under section 863 of the InternalRevenue Code (Code), providing rules tosource income from cross-border sales ofcertain property, where the property ismanufactured in a possession of theUnited States and sold in the UnitedStates, or vice versa, or purchased in a

possession and sold in the United States.These regulations also contain rules undersection 936 to source income of a tax-payer from the sale in the United States ofproperty purchased from a corporationthat has an election under section 936 ineffect.

On October 10, 1997, proposed regula-tions [REG–251985–96] were publishedin the Federal Register(62 F.R. 52953).Having considered the comments, the IRSand the Treasury Department adopt theproposed regulations without significantchange in this Treasury decision.

Explanation of Provisions

I. Income Partly From Sources Within aPossession

Section 863 authorizes the Secretary topromulgate regulations allocating or ap-portioning, to sources within or withoutthe United States, all items of gross in-come, expenses, losses, and deductionsother than those items specified in sec-tions 861(a) and 862(a).

Guidance in these regulations to deter-mine the source of possession incomeunder section 863 concerns two types oftransactions: transactions described insection 863(b)(2) for property producedin the United States and sold in a posses-sion (or vice versa), and transactions de-scribed in section 863(b)(3) for propertypurchased in a possession and sold in theUnited States (collectively, Section 863Possession Sales).

1. Methods for allocating orapportioning gross income fromSection 863 Possession Sales

a. Property produced and sold

Under the final regulations, incomefrom sales of inventory produced in theUnited States and sold in a possession ofthe United States or produced in a posses-sion and sold in the United States (collec-tively, Possession Production Sales), is al-located or apportioned according to oneof three methods.

Paragraph (f)(2)(i)(A) of the regula-tions makes the 50/50 method the generalrule to allocate gross income from Posses-sion Production Sales between production

November 2, 1998 4 1998–44 I.R.B.

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

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activity and business sales activity, so thatthe income from each type of activity canthen be apportioned between U.S. andforeign sources. The taxpayer, however,may elect to apply the independent fac-tory price (IFP) method (described inparagraph (f)(2)(i)(B)), or, with the con-sent of the District Director, the booksand records method (described in para-graph (f)(2)(i)(C)).

Under the possession 50/50 method,the final regulations allocate half of thetaxpayer’s gross income from PossessionProduction Sales to production activityand half to business sales activity. The in-come is then apportioned between U.S.and possession sources based on a prop-erty fraction and a business sales activityfraction.

The final regulations apply the propertyfraction in §1.863–3(c) to apportion thehalf of a taxpayer’s income allocated toproduction activity. Thus, income is ap-portioned to the United States or to a pos-session or to other foreign sources basedon the location of the taxpayer’s produc-tion assets. Consistent with the changesmade to the regulations under §1.863–3(c), production assets are defined as tan-gible and intangible assets owned directlyby the taxpayer that are directly used bythe taxpayer to produce inventory sold inPossession Production Sales. Productionassets are included in the fraction at theiradjusted tax basis, consistent with thechanges made to the regulations under§1.863–3(c).

The other half of the taxpayer’s grossincome, allocated to business sales activ-ity, is apportioned according to a businesssales activity fraction. The portion of thisincome that is possession source incomeis determined by multiplying the incomeby a fraction, the numerator being thebusiness sales activity of the taxpayer inthe possession, and the denominatorbeing the business sales activity of thetaxpayer within the possession and out-side the possession. The remaining in-come is sourced in the United States. Al-though some of the business salesactivity factors not incurred in a posses-sion may be incurred in a foreign country,Treasury and the IRS believe that thebusiness sales activity fraction is only in-tended to source the business sales activ-ity portion of Possession ProductionSales outside the United States to the ex-

tent of business sales activity located in apossession.

Under the final regulations, as opposedto the current regulations, business salesactivity is measured by the sum of certainexpenses, including amounts paid forlabor, materials, advertising, and market-ing (but excluding any expenses or otheramounts that are nondeductible under sec-tion 263A, interest, and research and de-velopment), plus receipts for the sale ofgoods. This formula is intended to reflectbetter the business sales activity produc-ing the income by including more of thefactors responsible for producing that in-come. Also, cost of goods sold is now ex-cluded from the business sales activityfraction apportioning income from Pos-session Production Sales, because suchcosts generally reflect production activity.Production activity is already representedin the formula by the one-half of the tax-payer’s income apportioned according tothe location of production assets.

The final regulations provide explicitguidance for attributing business sales ac-tivity between the United States and apossession. In attributing business salesactivity between the United States and apossession, expenses are allocated andapportioned between the United Statesand a possession based on the rules in§§1.861–8 through 1.861–14T. Grosssales are allocated to the United States ora possession based on the place of sale.

The final regulations make the IFPmethod elective, and thus eliminate anybias against taxpayers choosing to exportthrough independent distributors. Theregulations rely upon the regulationsunder §1.863–3 for rules in applying theIFP method.

The final regulations permit taxpayersto request permission from the DistrictDirector to use their books and records todetermine the source of their income. Thefinal regulations refer to §1.863-3(b)(3) inapplying the method to Possession Pro-duction Sales.

b. Property purchased and sold

Paragraph (f)(3)(i)(A) makes the busi-ness activity method the general rule toapportion income between the UnitedStates and a possession, from sales ofproperty purchased in a possession andsold in the United States (Possession Pur-

chase Sales). The taxpayer may, how-ever, elect to apply, with consent of theDistrict Director, the books and recordsmethod.

The final regulations apportion the tax-payer’s income from Possession PurchaseSales on the basis of a business activityfraction. The portion of this income thatis possession source income is determinedby multiplying the income by a fraction,the numerator being the business of thetaxpayer in the possession, and the de-nominator being the business of the tax-payer within the possession and outsidethe possession. The remaining income issourced in the United States.

The business activity fraction is similarto the business sales activity fraction dis-cussed previously, used to apportion thetaxpayer’s income in Possession Produc-tion Sales, except that the fraction appliesonly to expenses, cost of goods sold, andsales attributable to Possession PurchaseSales. In addition, the business activityfraction apportioning Possession Pur-chase Sales includes amounts paid forcost of goods sold. Such costs are attrib-uted to the possession, however, only tothe extent the property purchased is man-ufactured, produced, grown, or extractedin the possession. Treasury and the Inter-nal Revenue Service anticipate that if ataxpayer acts in the reasonable belief thatthe products were manufactured in thepossession, the taxpayer could act on thatbasis in preparing its tax return. The busi-ness activity fraction reflects the view ofTreasury and the IRS that the purchaserule of section 863(b)(3) was intended toapply only to purchase and resale transac-tions where the goods purchased are cre-ated or derived from the possession.

The final regulations permit taxpayersto request permission from the DistrictDirector to use their books and records todetermine the source of their income. Theproposed regulations refer to §1.863–3(b)(3) in applying the method to Posses-sion Purchase Sales.

2. Determination of source of grossincome

Under the final regulations, once grossincome attributable to production activity,business activity, or sales activity hasbeen determined under one of the pre-scribed methods, the source of the gross

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income is determined separately for eachtype of income. The source of gross in-come attributable to production activity(when applying the possession 50/50method) is determined under paragraph(c)(1), based on the location of productionassets. The source of gross income attrib-utable to sales activity (when applying theIFP method or the books and recordsmethod) is determined under paragraph(c)(2), based generally on the location ofthe sale. The source of gross income at-tributable to business sales activity (whenapplying the possession 50/50 method) isdetermined under paragraph (f)(2)(ii)(B),based on expenses and gross sales attrib-utable to Possession Production Sales.The source of gross income attributable tobusiness activity (when applying the busi-ness activity method) is determined underparagraph (f)(3)(ii), based on expenses,cost of goods sold, and gross sales attrib-utable to Possession Purchase Sales.

3. Determination of source of taxableincome

Once the source of gross income is de-termined under paragraph (f)(2) or (3),taxpayers then determine the source oftaxable income. Under paragraph (f)(4),taxpayers must allocate and apportionunder §§1.861–8 through 1.861-–14T theamounts of expenses, losses and other de-ductions to gross income determinedunder each of the prescribed methods. Inthe case of amounts of expenses, lossesand other deductions allocated and appor-tioned to gross income determined underthe IFP method or the books and recordsmethod, the taxpayer must apply the rulesof §§1.861–8 through 1.861–14T to allo-cate and apportion these amounts betweengross income from sources within theUnited States and within a possession.However, for expenses, losses and otherdeductions allocated and apportioned togross income determined under the pos-sessions 50/50 method or gross incomefrom Possession Purchase Sales deter-mined under the business activity method,taxpayers must apportion expenses andother deductions pro rata based on the rel-ative amounts of U.S. and possessionsource gross income. Nevertheless, theresearch and experimental (R&E) ex-pense allocation rules in §1.861–17 applyto taxpayers using the 50/50 method, sothat the R&E set aside (described in

§1.861–17) remains available to such tax-payers.

4. Treatment of gross income derivedfrom certain purchases from acorporation that has an election ineffect under section 936

The final regulations clarify that sec-tion 863 does not apply to determine thesource of a taxpayer’s gross income de-rived from a purchase of inventory from acorporation that has an election in effectunder section 936, if the taxpayer’s in-come from sales of that inventory is takeninto account to determine benefits undersection 936(h)(5)(C) for the section 936corporation.

5. Treatment of partners and partnerships

The final regulations rely on the rulesin §1.863–3(g) for determining the appro-priate treatment in transactions involvingpartnerships. Under those rules, the ag-gregate approach applies to a partner-ship’s production and sales activity fortwo purposes only. First, the aggregateapproach applies in determining the char-acter of a partner’s distributive share ofpartnership income. Second, the aggre-gate approach applies in sourcing incomefrom sales of inventory property that istransferred in-kind from or to a partner-ship.

6. Election and reporting rules

Under paragraph (f)(6)(i) of the finalregulations, a taxpayer must use the 50/50method to determine the source of incomefrom Possession Production Sales unlessthe taxpayer elects to use the IFP method,or elects the books and records method.For Possession Purchase Sales, a taxpayermust use the business activity method,unless the taxpayer elects the books andrecords method. The taxpayer makes anelection by using the method on its timelyfiled original tax return. That methodmust be used in later taxable years unlessthe Commissioner or his delegate con-sents to a change. Permission to changemethods in later years will be granted un-less the change would result in a substan-tial distortion of the source of income.

A taxpayer must fully explain themethodology used in applying eitherparagraph (f)(2) or (3), and the amount ofincome allocated or apportioned to U.S.

and foreign sources, in a statement at-tached to its tax return.

II. Income Derived From CertainPurchases From a Corporation ThatHas an Election in Effect UnderSection 936

These regulations clarify that, where ataxpayer purchases a product from a cor-poration that has an election in effectunder section 936, the source of the tax-payer’s gross income derived from salesof that product (in whatever form sold) inthe United States is U.S. source, if the tax-payer’s income from sales of that productis taken into account to determine benefitsunder section 936(h)(5)(C)(i) for the sec-tion 936 corporation. The taxpayer’s in-come is U.S. source without regard towhether a possession product is a compo-nent, end-product form, or integratedproduct. No inference should be drawnconcerning the treatment of transactionsinvolving sales of property purchasedfrom a section 936 corporation enteredinto before the regulations are applicable.

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 is hereby certified that theseregulations will not have a significanteconomic impact on a substantial numberof small entities. This certification isbased on the fact that the rules of this sec-tion principally impact large multination-als who pay foreign taxes on substantialforeign operations and therefore the ruleswill impact very few small entities.Moreover, in those few instances wherethe rules of this section impact small enti-ties, the economic impact on such entitiesis not likely to be significant. Accord-ingly, a regulatory flexibility analysis isnot required. Pursuant to section 7805(f)of the Internal Revenue Code, the noticeof proposed rulemaking preceding theseregulations was submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Drafting Information

The principal author of these regula-tions is Anne Shelburne, Office of Associ-

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ate Chief Counsel (International). How-ever, other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 602are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the entry for“Section 1.863–3”, removing the entry for“Sections 1.936–4 through 1.936–7” andadding entries in numerical order to readas follows:

Authority: 26 U.S.C. 7805 * * *Section 1.863–3 also issued under 26U.S.C. 863(a) and (b), and 26 U.S.C.936(h).***Section 1.936–4 also issued under 26U.S.C. 936(h).Section 1.936–5 also issued under 26U.S.C. 936(h).Section 1.936–6 also issued under 26U.S.C. 863(a) and (b), and 26 U.S.C.936(h).Section 1.936–7 also issued under 26U.S.C. 936(h).***

Par. 2 Section 1.863–3 is amended asfollows:

1. Paragraph (f) is revised.2. Paragraph (h) is amended by adding

a sentence at the end of the paragraph.The revision and addition read as fol-

lows:

§1.863–3 Allocation and apportionmentof income from certain sales of inventory.

* * * * *

(f) Income partly from sources within apossession of the United States—(1) Ingeneral. This paragraph (f) relates togains, profits, and income, which aretreated as derived partly from sourceswithin the United States and partly fromsources within a possession of the UnitedStates (Section 863 Possession Sales).This paragraph (f) applies to determinethe source of income derived from thesale of inventory produced (in whole or inpart) by the taxpayer within the UnitedStates and sold within a possession, orproduced (in whole or in part) by a tax-

payer in a possession and sold within theUnited States (Possession ProductionSales). It also applies to determine thesource of income derived from the pur-chase of personal property within a pos-session of the United States and its salewithin the United States (Possession Pur-chase Sales). A taxpayer subject to thisparagraph (f) must divide gross incomefrom Section 863 Possession Sales usingone of the methods described in eitherparagraph (f)(2)(i) of this section (in thecase of Possession Production Sales) orparagraph (f)(3)(i) of this section (in thecase of Possession Purchase Sales). Oncea taxpayer has elected a method, the tax-payer must separately apply that methodto the applicable category of Section 863Possession Sales in the United States andto those in a possession. The source ofgross income from each type of activitymust then be determined under eitherparagraph (f)(2)(ii) or (3)(ii) of this sec-tion, as appropriate. The source of taxableincome from Section 863 PossessionSales is determined under paragraph(f)(4) of this section. The taxpayer mustapply the rules for computing gross andtaxable income by aggregating all Section863 Possession Sales to which a methodin this section applies after separately ap-plying that method to Section 863 Posses-sion Sales in the United States and to Sec-tion 863 Possession Sales in a possession.This section does not apply to determinethe source of a taxpayer’s gross incomederived from a sale of inventory pur-chased from a corporation that has anelection in effect under section 936, if thetaxpayer’s income from sales of that in-ventory is taken into account to determinebenefits under section 936 for the section936 corporation. For rules to be appliedto determine the source of such income,see §1.936–6(a)(5) Q&A 7a and 1.936–6(b)(1) Q&A 13.

(2) Allocation or apportionment forPossession Production Sales—(i) Meth-ods for determining the source of grossincome for Possession ProductionSales—(A) Possession 50/50 method.Under the possession 50/50 method, grossincome from Possession Production Salesis allocated between production activityand business sales activity as described inthis paragraph (f)(2)(i)(A). Under thepossession 50/50 method, one-half of thetaxpayer’s gross income will be consid-

ered income attributable to production ac-tivity and the source of that income willbe determined under the rules of para-graph (f)(2)(ii)(A) of this section. The re-maining one-half of such gross incomewill be considered income attributable tobusiness sales activity and the source ofthat income will be determined under therules of paragraph (f)(2)(ii)(B) of this sec-tion.

(B) IFP method. In lieu of the posses-sion 50/50 method, a taxpayer may electthe independent factory price (IFP)method. Under the IFP method, gross in-come from Possession Production Sales isallocated to production activity or salesactivity using the IFP method, as de-scribed in paragraph (b)(2) of this section,if an IFP is fairly established under therules of paragraph (b)(2) of this section.See paragraphs (f)(2)(ii)(A) and (C) ofthis section for rules for determining thesource of gross income attributable toproduction activity and sales activity.

(C) Books and records method.A tax-payer may elect to allocate gross incomeusing the books and records method de-scribed in paragraph (b)(3) of this section,if it has received in advance the permis-sion of the District Director having auditresponsibility over its return. See para-graph (f)(2)(ii) of this section for rules fordetermining the source of gross income.

(ii) Determination of source of grossincome from production, business sales,and sales activity—(A) Gross income at-tributable to production activity.Thesource of gross income from productionactivity is determined under the rules ofparagraph (c)(1) of this section, exceptthat the term possession is substituted forforeign country wherever it appears.

(B) Gross income attributable to busi-ness sales activity—(1) Source of grossincome. Gross income from the tax-payer’s business sales activity is sourcedin the possession in the same proportionthat the amount of the taxpayer’s businesssales activity for the taxable year withinthe possession bears to the amount of thetaxpayer’s business sales activity for thetaxable year both within the possessionand outside the possession, with respectto Possession Production Sales. The re-maining income is sourced in the UnitedStates.

(2) Business sales activity.For pur-poses of this paragraph (f)(2)(ii)(B), the

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taxpayer’s business sales activity is equalto the sum of—

(i) The amounts for the taxable periodpaid for wages, salaries, and other com-pensation of employees, and other ex-penses attributable to Possession Produc-tion Sales (other than amounts that arenondeductible under section 263A, inter-est, and research and development); and

(ii ) Possession Production Sales for thetaxable period.

(3) Location of business sales activity.For purposes of determining the locationof the taxpayer’s business activity withina possession, the following rules apply:

(i) Sales. Receipts from gross saleswill be attributed to a possession underthe provisions of paragraph (c)(2) of thissection.

(ii ) Expenses.Expenses will be attrib-uted to a possession under the rules of§§1.861–8 through 1.861–14T.

(C) Gross income attributable to salesactivity. The source of the taxpayer’s in-come that is attributable to sales activity,as determined under the IFP method orthe books and records method, will be de-termined under the provisions of para-graph (c)(2) of this section.

(3) Allocation or apportionment forPossession Purchase Sales—(i) Methodsfor determining the source of gross in-come for Possession Purchase Sales—(A) Business activity method.Gross in-come from Possession Purchase Sales isallocated in its entirety to the taxpayer’sbusiness activity, and is then apportionedbetween U.S. and possession sourcesunder paragraph (f)(3)(ii) of this section.

(B) Books and records method.A tax-payer may elect to allocate gross incomeusing the books and records method de-scribed in paragraph (b)(3) of this section,subject to the conditions set forth in para-graph (b)(3) of this section. See para-graph (f)(2)(ii) of this section for rules fordetermining the source of gross income.

(ii) Determination of source of grossincome from business activity—(A)Source of gross income.Gross incomefrom the taxpayer’s business activity issourced in the possession in the same pro-portion that the amount of the taxpayer’sbusiness activity for the taxable yearwithin the possession bears to the amountof the taxpayer’s business activity for thetaxable year both within the possessionand outside the possession, with respect

to Possession Purchase Sales. The re-maining income is sourced in the UnitedStates.

(B) Business activity.For purposes ofthis paragraph (f)(3)(ii), the taxpayer’sbusiness activity is equal to the sum of—

(1) The amounts for the taxable periodpaid for wages, salaries, and other com-pensation of employees, and other ex-penses attributable to Possession Pur-chase Sales (other than amounts that arenondeductible under section 263A, inter-est, and research and development);

(2) Cost of goods sold attributable toPossession Purchase Sales during the tax-able period; and

(3) Possession Purchase Sales for thetaxable period.

(C) Location of business activity.Forpurposes of determining the location ofthe taxpayer’s business activity within apossession, the following rules apply:

(1) Sales. Receipts from gross saleswill be attributed to a possession underthe provisions of paragraph (c)(2) of thissection.

(2) Cost of goods sold.Payments forcost of goods sold will be properly attrib-utable to gross receipts from sourceswithin the possession only to the extentthat the property purchased was manufac-tured, produced, grown, or extracted inthe possession (within the meaning ofsection 954(d)(1)(A)).

(3) Expenses.Expenses will be attrib-uted to a possession under the rules of§§1.861–8 through 1.861–14T.

(iii) Examples. The following exam-ples illustrate the rules of paragraph(f)(3)(ii) of this section relating to the de-termination of source of gross incomefrom business activity:

Example 1. (i) U.S. Co. purchases in a posses-sion product X for $80 from A. A manufactures X inthe possession. Without further production, U.S.Co. sells X in the United States for $100. AssumeU.S. Co. has sales and administrative expenses inthe possession of $10.

(ii) To determine the source of U.S. Co.’s grossincome, the $100 gross income from sales of X is al-located entirely to U.S. Co.’s business activity.Forty-seven dollars of U.S. Co.’s gross income issourced in the possession. [Possession expenses($10) plus possession purchases (i.e., cost of goodssold) ($80) plus possessions sales ($0), divided bytotal expenses ($10) plus total purchases ($80) plustotal sales ($100).] The remaining $53 is sourced inthe United States.

Example 2. (i) Assume the same facts as in Ex-ample 1, except that A manufactures X outside thepossession.

(ii) To determine the source of U.S. Co.’s grossincome, the $100 gross income is allocated entirelyto U.S. Co.’s business activity. Five dollars of U.S.Co.’s gross income is sourced in the possession.[Possession expenses ($10) plus possession pur-chases ($0) plus possession sales ($0), divided bytotal expenses ($10) plus total purchases ($80) plustotal sales ($100).] The $80 purchase is not includedin the numerator used to determine U.S. Co.’s busi-ness activity in the possession, since product X wasnot manufactured in the possession. The remaining$95 is sourced in the United States.

(4) Determination of source of taxableincome. Once the source of gross incomehas been determined under paragraph(f)(2) or (3) of this section, the taxpayermust properly allocate and apportion sep-arately under §§1.861–8 through 1.861–14T the amounts of its expenses, losses,and other deductions to its respectiveamounts of gross income from Section863 Possession Sales determined sepa-rately under each method described inparagraph (f)(2) or (3) of this section. Inaddition, if the taxpayer deducts expensesfor research and development under sec-tion 174 that may be attributed to its Sec-tion 863 Possession Sales under §1.861–17, the taxpayer must separately allocateor apportion expenses, losses, and otherdeductions to its respective amounts ofgross income from each relevant productcategory that the taxpayer uses in apply-ing the rules of §1.861–17. Thus, in thecase of gross income from Section 863Possession Sales determined under theIFP method or books and records method,a taxpayer must apply the rules of§§1.861–8 through 1.861–14T to properlyallocate or apportion amounts of ex-penses, losses and other deductions, allo-cated and apportioned to such gross in-come, between gross income fromsources within and without the UnitedStates. However, in the case of gross in-come from Possession Production Salesdetermined under the possessions 50/50method or gross income from PossessionPurchase Sales computed under the busi-ness activity method, the amounts of ex-penses, losses, and other deductions allo-cated and apportioned to such grossincome must be apportioned betweensources within and without the UnitedStates pro rata based on the relativeamounts of gross income from sourceswithin and without the United States de-termined under those methods, exceptthat the rules regarding the allocation and

November 2, 1998 8 1998–44 I.R.B.

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apportionment of research and experi-mental expenditures in §1.861–17 shallapply to such expenditures of taxpayersusing the 50/50 method.

(5) Special rules for partnerships.Inapplying the rules of this paragraph (f) totransactions involving partners and part-nerships, the rules of paragraph (g) of thissection apply.

(6) Election and reporting rules—(i)Elections under paragraph (f)(2) or (3) ofthis section. If a taxpayer does not electone of the methods specified in paragraph(f)(2) or (3) of this section, the taxpayermust apply the possession 50/50 methodin the case of Possession Production Salesor the business activity method in the caseof Possession Purchase Sales. The tax-payer may elect to apply a method speci-fied in either paragraph (f)(2) or (3) ofthis section by using the method on atimely filed original return (including ex-tensions). Once a method has been used,that method must be used in later taxableyears unless the Commissioner consentsto a change. Permission to change meth-ods from one year to another year will begranted unless the change would result ina substantial distortion of the source ofthe taxpayer’s income.

(ii) Disclosure on tax return.A tax-payer who uses one of the methods de-scribed in paragraph (f)(2) or (3) of thissection must fully explain in a statementattached to the tax return the methodologyused, the circumstances justifying use ofthat methodology, the extent that sales areaggregated, and the amount of income soallocated.

* * * * *

(h) Effective dates.* * * However,the rules of paragraph (f) of this sectionapply to taxable years beginning on orafter November 13, 1998.

Par. 3. In §1.936–6, paragraph (a)(5)Q&A 7a is added to read as follows:

§1.936–6 Intangible property incomewhen an election out is made: Costsharing and profit split options; coveredintangibles.

* * * * *

(a) * * * (5) * * *Q.7a: What is the source of the tax-

payer’s gross income derived from a salein the United States of a possession prod-uct purchased by the taxpayer (or an affil-iate) from a corporation that has an elec-tion in effect under section 936, if theincome from such sale is taken into ac-count to determine benefits under costsharing for the section 936 corporation?Is the result different if the taxpayer (or anaffiliate) derives gross income from a salein the United States of an integrated prod-uct incorporating a possession productpurchased by the taxpayer (or an affiliate)from the section 936 corporation, if thetaxpayer (or an affiliate) processes thepossession product or an excluded com-ponent in the United States?

A.7a: Under either scenario, the in-come is U.S. source, without regard towhether the possession product is a com-ponent, end-product, or integrated prod-uct. Section 863 does not apply in deter-mining the source of the taxpayer ’sincome. This Q&A 7a is applicable for

taxable years beginning on or after No-vember 13, 1998.

* * * * *

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 4. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 5. In §602.101, paragraph (c) is

amended in the table by revising the entryfor 1.863–3 to read as follows:

§602.101 OMB Control numbers.

* * * * *(c) * * *

CFR part or section Current OMBwhere identified and control No.described

* * * * * 1.863–3 . . . . . . . . . . . . . . . . . 1545–1476

1545–1556* * * * *

Michael P. Dolan,Deputy Commissioner of

Internal Revenue.

Approved September 18, 1998.

Donald C. Lubick,Assistant Secretary of the

Treasury for Tax Policy.

(Filed by the Office of the Federal Register onOctober 13, 1998, at 8:45 a.m., and published in theissue of the Federal Register for October 14, 1998,63 F.R. 55020)

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November 2, 1998 10 1998–44 I.R.B.

Roth IRA Guidance

Notice 98–50

PURPOSE

This notice responds to questions thathave arisen regarding whether a taxpayerwho has converted an amount from a tra-ditional IRA to a Roth IRA may not onlytransfer the amount back to a traditionalIRA in a recharacterization but also sub-sequently “reconvert” that amount fromthe traditional IRA to a Roth IRA.

BACKGROUND

Section 408A of the Internal RevenueCode (the “Code”), which was added by § 302 of the Taxpayer Relief Act of 1997,Pub. L. 105–34, establishes the Roth IRAas a new type of individual retirementplan, effective for taxable years beginningon or after January 1, 1998. The provi-sions of § 408A were amended by the In-ternal Revenue Service Restructuring andReform Act of 1998, Pub. L. 105–206.On September 3, 1998, proposed regula-tions relating to Roth IRAs, §§ 1.408A–1through 1.408A–9, were published in theFederal Register (63 F.R. 46937). Thisnotice incorporates definitions and termsused in those proposed regulations.

Section 408A(d)(3) of the Code and § 1.408A–4 of the proposed regulationsprescribe rules for the conversion of anamount from a traditional IRA to a RothIRA. Any amount converted from a tradi-tional IRA to a Roth IRA is treated as dis-tributed from the traditional IRA androlled over to the Roth IRA and is gener-ally includible in gross income for theyear in which the amount is distributed ortransferred from the traditional IRA (sub-ject to a “4-year spread” for 1998 conver-sions, unless the taxpayer elects other-wise).

Section 408A(d)(6) of the Code and § 1.408A–5 of the proposed regulationsprescribe rules for “recharacterizations”of IRA contributions, including Roth IRAconversion contributions. Section408A(d)(6) provides that, except as other-wise provided by the Secretary of theTreasury, an IRA contribution that istransferred to another IRA in a trustee-to-trustee transfer on or before the date pre-

scribed by law for filing the taxpayer’sFederal income tax return, including ex-tensions, (the “due date”) for the taxableyear of the contribution is treated as madeto the transferee IRA and not the trans-feror IRA. The proposed regulations in-terpret § 408A(d)(6) to make its applica-tion elective by the taxpayer, permit thetaxpayer to recharacterize most types ofIRA contributions, and permit the tax-payer to recharacterize all or any portionof an IRA contribution.

TREATMENT OFRECONVERSIONS

The question has arisen whether a tax-payer who has converted an amount froma traditional IRA to a Roth IRA may notonly transfer the amount back to a tradi-tional IRA in a recharacterization but alsosubsequently “reconvert” that amountfrom the traditional IRA to a Roth IRA.The proposed regulations do not specifi-cally address this question, and the Ser-vice and Treasury are consideringwhether final regulations should permitreconversions under any circumstances.However, effective as of November 1,1998, the interim rules set forth belowwill apply for 1998 and 1999. Any futureguidance that either prohibits reconver-sions or imposes conditions on reconver-sions more restrictive than those imposedunder this notice will not apply to recon-versions completed before issuance ofthat guidance.

If a taxpayer converts (or reconverts)an amount, transfers that amount back toa traditional IRA by means of a recharac-terization, and reconverts that amount in atransaction for which the taxpayer is noteligible under the interim rules set forth inthis notice, the reconversion will bedeemed an “excess reconversion.” How-ever, any reconversions that a taxpayerhas made before November 1, 1998, willnot be treated as excess reconversions andwill not be taken into account in deter-mining whether any later reconversion isan excess reconversion.

A taxpayer who converts an amountfrom a traditional IRA to a Roth IRA dur-ing 1998 and then transfers that amountback to a traditional IRA by means of arecharacterization is eligible to reconvert

that amount to a Roth IRA once (but nomore than once) on or after November 1,1998, and on or before December 31,1998; the taxpayer also is eligible to re-convert that amount once (but no morethan once) during 1999. (Any conversionof that amount during 1999 would consti-tute a reconversion because the taxpayerpreviously converted that amount during1998.) This rule applies without regard towhether the taxpayer’s initial conversionor recharacterization of the amount occursbefore, on, or after November 1, 1998,and (as indicated above) even if the tax-payer has made one or more reconver-sions before November 1, 1998.

A taxpayer who converts an amountfrom a traditional IRA to a Roth IRA dur-ing 1999 that has not been converted pre-viously and then transfers that amountback to a traditional IRA by means of arecharacterization is eligible to reconvertthat amount to a Roth IRA once (but nomore than once) on or before December31, 1999. In determining whether a tax-payer has made a previous conversion forpurposes of these interim rules, a failedconversion, as described in proposed reg-ulations § 1.408A–4, Q&A–3 (that is, anattempted conversion for which the tax-payer is not eligible for reasons set forthin proposed regulations § 1.408A–4), willnot be treated as a conversion.

Any excess reconversion of an amountduring 1998 or 1999 will not change thetaxpayer’s taxable conversion amount (asdefined in proposed regulations § 1.408A–8, Q&A–1(b)(7)). Instead, theexcess reconversion and the last preced-ing recharacterization will not be takeninto account for purposes of determiningthe taxpayer’s taxable conversion amount,and the taxpayer’s taxable conversionamount will be based on the last reconver-sion that was not an excess reconversion(unless, after the excess reconversion, theamount is transferred back to a traditionalIRA by means of a recharacterization).An excess reconversion will otherwise betreated as a valid reconversion.

Any conversion, recharacterization, orreconversion of an amount under this no-tice must satisfy the provisions of § 408Aand the proposed regulations. For exam-ple, a taxpayer making a conversion or re-conversion must satisfy the $100,000

Part III. Administrative, Procedural, and Miscellaneous

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modified AGI limitation of § 408A(c)-(3)(B)(i) and proposed regulations § 1.408A–4, Q&A-2, and a taxpayertransferring a contribution from one IRAto another IRA by means of a recharacter-ization must make the transfer on or be-fore the due date for the taxable year ofthe contribution, as required by § 408A(d)(6) and proposed regulations § 1.408A–5, Q&A–1. In determining theportion of any amount held in a Roth IRAor a traditional IRA that a taxpayer is noteligible to reconvert under the interimrules set forth in this notice, any amountpreviously converted (or reconverted) isadjusted for subsequent net gains orlosses thereon.

Example 1. On May 1, 1998, T converted anamount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). T did not contribute anyother amount to Roth IRA 1. On October 15, 1998, Ttransferred the amount in Roth IRA 1 to a traditionalIRA (Traditional IRA 2) by means of a recharacteri-zation. T is eligible to reconvert the amount in Tradi-tional IRA 2 to a Roth IRA once (but no more thanonce) at any time on or after November 1, 1998, andon or before December 31, 1998. Any additional re-conversion during 1998 would be an excess recon-version. This result would not be different if therecharacterization had occurred on or after Novem-ber 1, 1998, instead of before November 1, 1998.

Example 2. The facts are the same as in Example1, except that, on November 25, 1998, T reconvertsthe amount in Traditional IRA 2 to a Roth IRA (RothIRA 2). After that reconversion, T may transfer theamount from Roth IRA 2 back to a traditional IRAby means of a recharacterization, but any subsequentreconversion of that amount to a Roth IRA beforeJanuary 1, 1999, would be an excess reconversion.If T does transfer the amount from Roth IRA 2 backto a traditional IRA by means of a recharacteriza-tion, T is eligible to reconvert that amount once (butno more than once) during 1999. Any additional re-conversion of that amount during 1999 would be anexcess reconversion.

Example 3.The facts are the same as in Example2, except that, on December 4, 1998, T transfers theamount from Roth IRA 2 back to a traditional IRA(Traditional IRA 3) by means of a recharacteriza-tion. If T does not reconvert that amount to a RothIRA on or before December 31, 1998, T cannot usethe 4-year spread available for 1998 conversions.

Example 4. The facts are the same as in Example3. The value of the amount converted on May 1,1998, was $X, and the value of the amount con-verted on November 25, 1998, was $Y. On Decem-ber 8, 1998, T reconverts the amount in TraditionalIRA 3 (which then has a value of $Z) to a Roth IRA(Roth IRA 3). Under the interim rules set forth inthis notice, T is not eligible to make the December 8,1998, reconversion, and that excess reconversionwill not be taken into account for purposes of deter-mining T’s taxable conversion amount (although it isotherwise treated as a valid conversion). Instead,T’s taxable conversion amount will be based on T’s

November 25, 1998, reconversion. Therefore, T’staxable conversion amount will be $Y. Because it isa 1998 conversion, the November 25, 1998, recon-version is eligible for the 4-year spread (unless Tagain transfers the amount from Roth IRA 3 to a tra-ditional IRA by means of a recharacterization).

Example 5.The facts are the same as in Example2, except that T’s modified AGI for 1998 was$110,000. Therefore, T was not eligible to convertan amount from a traditional IRA to a Roth IRA in1998, and T’s attempted conversion (on May 1,1998) and reconversion (on November 25, 1998) arefailed conversions, as described in proposed regula-tions § 1.408A–4, Q&A–3. Therefore, if T transfersthe amount of the failed conversion in Roth IRA 2back to a traditional IRA by means of a recharacteri-zation and converts that amount from the traditionalIRA to a Roth IRA during 1999, T will be eligible toreconvert that amount once (but no more than once)on or before December 31, 1999. Any additional re-conversion of that amount during 1999 would be anexcess reconversion.

Example 6.On November 5, 1998, R converts anamount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). On November 25, 1998, Rtransfers the amount in Roth IRA 1 back to a tradi-tional IRA (Traditional IRA 2) by means of a rechar-acterization. R is then eligible to reconvert theamount in Traditional IRA 2 to a Roth IRA at anytime on or before December 31, 1998. After that re-conversion, R may transfer the amount back to a tra-ditional IRA by means of a recharacterization, butany subsequent reconversion of that amount to aRoth IRA before January 1, 1999, would be an ex-cess reconversion. If R does transfer the amountback to a traditional IRA by means of a recharacteri-zation (whether before or after the end of 1998), Rwill be eligible to reconvert that amount once (butno more than once) during 1999. Any additional re-conversion of that amount during 1999 would be anexcess reconversion.

Example 7. On January 5, 1999, S converts anamount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). S had not previously con-verted that amount. On February 17, 1999, S trans-fers the amount in Roth IRA 1 back to a traditionalIRA (Traditional IRA 2) by means of a recharacter-ization. After the recharacterization, S is eligibleto reconvert the amount in Traditional IRA 2 once(but no more than once) at any time on or beforeDecember 31, 1999. Any additional reconversionof that amount during 1999 would be an excess re-conversion.

This notice is intended to clarify andsupplement the guidance provided in theproposed regulations under § 408A andmay be relied upon as if it were incorpo-rated in those regulations. In accordancewith the procedures for submitting com-ments on the proposed regulations, inter-ested parties are invited to submit com-ments on whether final regulations shouldpermit reconversions (and, if so, underwhat circumstances and conditions). Pos-sible approaches to reconversions in finalregulations might include providing that a

taxpayer is not eligible to reconvert anamount before the end of the taxable yearin which the amount was first converted(or the due date for that taxable year) orthat a taxpayer who transfers a convertedamount back to a traditional IRA in arecharacterization must wait until the pas-sage of a fixed number of days (e.g., 30 or60 days) before reconverting. Addition-ally, such approaches might include pro-viding that an excess reconversion wouldbe treated as a failed conversion thatwould be subject to the consequences de-scribed in proposed regulations § 1.408A–4, Q&A–3, and that could beremedied as described therein.

DRAFTING INFORMATION

The principal authors of this notice areRoger Kuehnle of the Employee Plans Di-vision and Cathy A. Vohs of the Office ofthe Associate Chief Counsel (EmployeeBenefits and Exempt Organizations).However, other personnel from the Inter-nal Revenue Service and the Treasury De-partment participated in its development.For further information regarding this no-tice, please contact the Employee PlansDivision’s taxpayer assistance telephoneservice at (202) 622-6074/6075 (not toll-free numbers), between the hours of 1:30and 3:30 p.m. Eastern Time, Mondaythrough Thursday, or Ms. Vohs at (202)622-6030 (also not toll-free).

Weighted Average Interest RateUpdate

Notice 98–51

Notice 88–73 provides guidelines fordetermining the weighted average interestrate and the resulting permissible range ofinterest rates used to calculate current lia-bility for the purpose of the full fundinglimitation of § 412(c)(7) of the InternalRevenue Code as amended by the Om-nibus Budget Reconciliation Act of 1987and as further amended by the UruguayRound Agreements Act, Pub. L. 103–465(GATT).

The average yield on the 30-year Trea-sury Constant Maturities for September1998 is 5.20 percent.

The following rates were determinedfor the plan years beginning in the monthshown below.

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November 2, 1998 12 1998–44 I.R.B.

90% to 106% 90% to 110%Weighted Permissible Permissible

Month Year Average Range Range

October 1998 6.40 5.76 to 6.79 5.76 to 7.05

Drafting Information

The principal author of this notice isTodd Newman of the Employee Plans Di-

vision. For further information regardingthis notice, call (202) 622-6076 between2:30 and 3:30 p.m. Eastern time (not a

toll-free number). Mr. Newman’s numberis (202) 622-8458 (also not a toll-freenumber).

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Announcement 98–95

Revisions to Form 8857

Purpose The purpose of this announcement is to request public comments on the revised Form 8857, Requestfor Innocent Spouse Relief (And Allocation of Liability and Equitable Relief). Form 8857 is being re-vised to reflect section 3201 of the IRS Restructuring and Reform Act of 1998.

Note: The revised Form 8857 in this announcement is subject to change and OMB approval beforefinal release.

Revisions to Form The revisions include the following:8857

• The requirement that filers need to have over $500 of additional tax due in order to request relief iseliminated.

• Procedures are provided for requesting innocent spouse relief, allocation of liability, and equitablerelief.

• Explanations of the law changes and types of relief are added to the instructions.

Benefits of the The revised Form 8857 will:revisions

• Help filers become aware of the new tax law.• Provide filers a means to request the various types of relief.• Help filers by providing simple explanations of the new tax law and guidance for completing the

form.• Allow the IRS to improve control and processing of the requests by highlighting the Cincinnati Ser-

vice Center filing address.

Comments requested The IRS would like to receive comments on the proposed revisions to Form 8857 from interested par-ties by November 30, 1998. Send written comments to:

Chairman, Tax Forms Coordinating CommitteeInternal Revenue Service, OP:FS:FP, Room 55771111 Constitution Avenue, NWWashington, D.C. 20224

Alternatively, you may send comments to the Chairman, TFCC, by fax at (202) 622-5025, or e-mail totfpmail@publish.no.irs.gov

After the end of the comment period, the IRS will evaluate the documents received and announce thefinal changes to Form 8857. Although we will not be able to respond to each comment, we will care-fully consider all of them.

1998–44 I.R.B. 13 November 2, 1998

Part IV. Items of General Interest

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Conversion to the Euro;Correction

Announcement 98–96

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correction to temporary regu-lations.

SUMMARY: This document contains acorrection to Treasury Decision 8776,which was published in the Federal Reg-ister on Wednesday, July 29, 1998 (63F.R. 40366 [1998–33 I.R.B. 6]) relating toU.S. taxpayers operating, investing orotherwise conducting business in the cur-rencies of certain European countries thatare replacing their national currencieswith a single, multinational currencycalled the euro.

DATES: This correction is effective July29, 1998.

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

SUPPLEMENTARY INFORMATION:

Background

The temporary regulations that are thesubject of this correction are under sec-tion 1001 of the Internal Revenue Code.

Need for Correction

As published, TD 8776 contains anerror which may prove to be misleadingand is in need of clarification.

Correction of Publication

Accordingly, the publication of thetemporary regulations (TD 8776), whichwas the subject of FR Doc. 98–20023, iscorrected as follows:

§1.985–8T [Corrected]

On page 40369, column 2, §1.985–8T(c)(3)(iv)(B), third line from the top ofthe column, the language “year of changewhich includes the” is corrected to read“year ending immediately prior to theyear of change which includes the”.

Cynthia E. Grigsby,Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register onOctober 14, 1998, 8:45 a.m., and published in theissue of the Federal Register for October 15, 1998,63 F.R. 55333)

Failure by Certain CharitableOrganizations to Meet CertainQualification Requirements;Taxes on Excess BenefitTransactions; Correction

Announcement 98–97

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Correction to notice of pro-posed rulemaking.

SUMMARY: This document contains acorrection to REG–245256–94, whichwas published in the Federal RegisteronTuesday, August 4, 1998 (63 F.R. 41486[1998–34 I.R.B. 9]), relating to the excisetaxes on excess benefit transactions.

FOR FURTHER INFORMATION CON-TACT: Phyllis D. Haney, (202) 622-4290(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking thatis the subject of this correction is undersection 4958 of the Internal RevenueCode.

Need for Correction

As published, REG–246256–96 con-tains an error which may prove to be mis-leading and is in need of clarification.

Correction of Publication

Accordingly, the publication of the no-tice of proposed rulemaking (REG–246256–96), which is the subject of FRDoc. 98–20419, is corrected as follows:

§53.4958–4 [Corrected]

On page 41502, column 1, §53.4958–4(b)(3)(iii), Example 2,ninth line fromthe bottom of the paragraph, the language“determination of whether N’s compensa-tion” is corrected to read “determinationof whether K’s compensation”.

Cynthia E. Grigsby,Chief, Regulations Unit,

Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register onOctober 6, 1998, 8:45 a.m., and published in theissue of the Federal Register for October 7, 1998, 63F.R. 53862)

Deletions From Cumulative Listof Organizations Contributionsto Which Are Deductible UnderSection 170 of the Code

Announcement 98–98

The names of organizations that nolonger qualify as organizations describedin section 170(c)(2) of the Internal Rev-enue Code of 1986 are listed below.

Generally, the Service will not disallowdeductions for contributions made to alisted organization on or before the dateof announcement in the Internal RevenueBulletin that an organization no longerqualifies. However, the Service is notprecluded from disallowing a deductionfor any contributions made after an orga-nization ceases to qualify under section170(c)(2) if the organization has nottimely filed a suit for declaratory judg-ment under section 7428 and if the con-tributor (1) had knowledge of the revoca-tion of the ruling or determination letter,(2) was aware that such revocation wasimminent, or (3) was in part responsiblefor or was aware of the activities or omis-sions of the organization that broughtabout this revocation.

If on the other hand a suit for declara-tory judgment has been timely filed, con-tributions from individuals and organiza-tions described in section 170(c)(2) thatare otherwise allowable will continue tobe deductible. Protection under section7428(c) would begin on November 2,1998, and would end on the date the courtfirst determines that the organization isnot described in section 170(c)(2) as moreparticularly set forth in section7428(c)(1). For individual contributors,the maximum deduction protected is$1,000, with a husband and wife treatedas one contributor. This benefit is not ex-tended to any individual who was respon-sible, in whole or in part, for the acts oromissions of the organization that werethe basis for revocation.

November 2, 1998 18 1998–44 I.R.B.

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Crossreach of the Holy Cross Society,Lake Orion, MI

Flynn Home for Alcoholic Addiction,Inc., Portsmouth, VA

Senior Housing, Inc.,Hampton, VA

Senior Meals, Inc.,Hampton, VA

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November 2, 1998 20 1998–44 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

IRB 1998-44 10/28/98 9:33 AM Page 20

1998–44 I.R.B. 21 November 2, 1998

Numerical Finding List1Bulletins 1998–29 through 43

Announcements:

98–62, 1998–29 I.R.B. 1398–68, 1998–29 I.R.B. 1498–69, 1998–30 I.R.B. 1698–70, 1998–30 I.R.B. 1798–71, 1998–30 I.R.B. 1798–72, 1998–31 I.R.B.1498–73, 1998–31 I.R.B.1498–74, 1998–31 I.R.B.1598–75, 1998–31 I.R.B.1598–76, 1998–32 I.R.B.6498–77, 1998–34 I.R.B.3098–78, 1998–34 I.R.B.3098–79, 1998–34 I.R.B.3198–80, 1998–34 I.R.B.3298–81, 1998–36 I.R.B.3598–82, 1998–35 I.R.B. 1798–83, 1998–36 I.R.B. 3698–84, 1998–38 I.R.B.3098–85, 1998–38 I.R.B.3098–86, 1998–38 I.R.B.3198–87, 1998–40 I.R.B.1198–88, 1998–41 I.R.B. 1498–89, 1998–40 I.R.B.1198–90, 1998–42 I.R.B.2298–91, 1998–40 I.R.B.1298–92, 1998–41 I.R.B.1598–93, 1998–43 I.R.B.1098–94, 1998–43 I.R.B.32

Court Decisions:

2063, 1998–36 I.R.B. 132064, 1998–37 I.R.B. 42065, 1998–39 I.R.B.7

Notices:

98–36, 1998–29 I.R.B. 898–37, 1998–30 I.R.B.1398–38, 1998–34 I.R.B.798–39, 1998–33 I.R.B.1198–40, 1998–35 I.R.B. 798–41, 1998–33 I.R.B.1298–42, 1998–33 I.R.B.1298–43, 1998–33 I.R.B.1398–44, 1998–34 I.R.B.798–45, 1998–35 I.R.B.798–46, 1998–36 I.R.B. 2198–47, 1998–37 I.R.B. 898–48, 1998–39 I.R.B.1798–49, 1998–38 I.R.B.5

Railroad Retirement Quarterly Rate:

1998–31 I.R.B. 7

Proposed Regulations:

REG–209446–82, 1998–36 I.R.B. 24REG–209060–86, 1998–39 I.R.B. 18REG–209769–95, 1998–41 I.R.B.8REG–209813–96, 1998–35 I.R.B. 9REG–246256–96, 1998–34 I.R.B.9REG–104641–97, 1998–29 I.R.B. 9REG–104565–97, 1998–39 I.R.B.21REG–106177–97, 1998–37 I.R.B.33REG–115446–97, 1998–36 I.R.B. 23REG–116608–97, 1998–29 I.R.B. 12

Proposed Regulations—Continued

REG–118926–97, 1998–39 I.R.B.23REG–118966–97, 1998–39 I.R.B.29REG–119227–97, 1998–30 I.R.B. 13REG–122488–97, 1998–42 I.R.B. 19REG–101363–98, 1998–40 I.R.B.10REG–106221–98, 1998–41 I.R.B.10REG–110332–98, 1998–33 I.R.B.18REG–110403–98, 1998–29 I.R.B.11REG–115393–98, 1998–39 I.R.B.34

Revenue Procedures:

98–40, 1998–32 I.R.B. 698–41, 1998–32 I.R.B. 798–42, 1998–28 I.R.B. 998–43, 1998–29 I.R.B. 898–44, 1998–32 I.R.B. 1198–45, 1998–34 I.R.B.898–46, 1998–36 I.R.B. 2198–47, 1998–37 I.R.B. 898–48, 1998–38 I.R.B.798–49, 1998–37 I.R.B. 998–50, 1998–38 I.R.B.898–51, 1998–38 I.R.B.2098–52, 1998–37 I.R.B. 1298–53, 1998–40 I.R.B.998–54, 1998–43 I.R.B.7

Revenue Rulings:

98–34, 1998–31 I.R.B. 1298–35, 1998–30 I.R.B. 498–36, 1998–31 I.R.B.698–37, 1998–32 I.R.B.598–38, 1998–32 I.R.B.498–39, 1998–33 I.R.B.498–40, 1998–33 I.R.B.498–41, 1998–35 I.R.B.698–42, 1998–35 I.R.B. 598–43, 1998–36 I.R.B. 998–44, 1998–37 I.R.B.498–45, 1998–38 I.R.B.498–46, 1998–39 I.R.B. 1098–47, 1998–39 I.R.B. 498–48, 1998–39 I.R.B. 698–49, 1998–40 I.R.B.498–50, 1998–40 I.R.B.798–51, 1998–43 I.R.B.4

Tax Conventions:

1998–43 I.R.B. 6

Treasury Decisions:

8771, 1998–29 I.R.B. 68772, 1998–31 I.R.B. 88773, 1998–29 I.R.B. 48774, 1998–30 I.R.B. 58775, 1998–31 I.R.B.48776, 1998–33 I.R.B.68777, 1998–34 I.R.B.48778, 1998–36 I.R.B. 48779, 1998–36 I.R.B. 118780, 1998–39 I.R.B.148781, 1998–40 I.R.B. 48782, 1998–41 I.R.B.58783, 1998–41 I.R.B.48784, 1998–42 I.R.B.48785, 1998–42 I.R.B.5

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1998–1 through 1998–28will be found in Internal Revenue Bulletin 1998–29,dated July 20, 1998.

IRB 1998-44 10/28/98 9:33 AM Page 21

November 2, 1998 22 1998–44 I.R.B.

Finding List of Current Action onPreviously Published Items1

Bulletins 1998–29 through 43

*Denotes entry since last publication

Notices:

87–13Modified by98–49, 1998–38 I.R.B. 5

87–16Modified by98–49, 1998–38 I.R.B. 5

Revenue Procedures:

83–58Obsoleted by98–37, 1998–32 I.R.B. 5

88–17Clarified, modified, and superseded by98–54, 1998–43 I.R.B. 7

97–60Superseded by98–50, 1998–38 I.R.B. 8

97–61Superseded by98–51, 1998–38 I.R.B. 20

98–14Modified by98–53, 1998–40 I.R.B. 9

Revenue Rulings:

57–271Obsoleted by98–37, 1998–32 I.R.B. 5

67–301Modified by98–41, 1998–35 I.R.B. 6

70–225Obsoleted by98–44, 1998–37 I.R.B. 4

71–277Obsoleted by98–37, 1998–32 I.R.B. 5

71–434Obsoleted by98–37, 1998–32 I.R.B. 5

71–574Obsoleted by98–37, 1998–32 I.R.B. 5

72–75Obsoleted by98–37, 1998–32 I.R.B. 5

72–120Obsoleted by98–37, 1998–32 I.R.B. 5

72–121Obsoleted by98–37, 1998–32 I.R.B. 5

72–122Obsoleted by98–37, 1998–32 I.R.B. 5

74–77Obsoleted by98–37, 1998–32 I.R.B. 5

Revenue Rulings—Continued

75–19Obsoleted by98–37, 1998–32 I.R.B. 5

76–562Obsoleted by98–37, 1998–32 I.R.B. 5

77–214Obsoleted by98–37, 1998–32 I.R.B. 5

79–106Obsoleted by98–37, 1998–32 I.R.B. 5

83–113Obsoleted by98–37, 1998–32 I.R.B. 5

85–143Obsoleted by98–37, 1998–32 I.R.B. 5

88–8Obsoleted by98–37, 1998–32 I.R.B. 5

88–76Obsoleted by98–37, 1998–32 I.R.B. 5

88–79Obsoleted by98–37, 1998–32 I.R.B. 5

93–4Obsoleted by98–37, 1998–32 I.R.B. 5

93–5Obsoleted by98–37, 1998–32 I.R.B. 5

93–6Obsoleted by98–37, 1998–32 I.R.B. 5

93–30Obsoleted by98–37, 1998–32 I.R.B. 5

93–38Obsoleted by98–37, 1998–32 I.R.B. 5

93–49Obsoleted by98–37, 1998–32 I.R.B. 5

93–50Obsoleted by98–37, 1998–32 I.R.B. 5

93–53Obsoleted by98–37, 1998–32 I.R.B. 5

93–81Obsoleted by98–37, 1998–32 I.R.B. 5

93–91Obsoleted by98–37, 1998–32 I.R.B. 5

93–92Obsoleted by98–37, 1998–32 I.R.B. 5

Revenue Rulings—Continued

93–93Obsoleted by98–37, 1998–32 I.R.B. 5

94–5Obsoleted by98–37, 1998–32 I.R.B. 5

94–6Obsoleted by98–37, 1998–32 I.R.B. 5

94–30Obsoleted by98–37, 1998–32 I.R.B. 5

94–51Obsoleted by98–37, 1998–32 I.R.B. 5

94–79Obsoleted by98–37, 1998–32 I.R.B. 595–2Obsoleted by98–37, 1998–32 I.R.B. 5

95–9Obsoleted by98–37, 1998–32 I.R.B. 5

97–37Obsoleted by98–39, 1998–33 I.R.B. 4

1 A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1998–1 through 1998–28 will be found in InternalRevenue Bulletin 1998–29, dated July 20, 1998.

IRB 1998-44 10/28/98 9:33 AM Page 22

IndexInternal Revenue Bulletins1998–1 Through 1998–43

The abbreviation and number in paren-thesis following the index entry refer tothe specific item; numbers in roman anditalic type following the parenthesis referto the Internal Revenue Bulletin in whichthe item may be found and the pagenumber on which it appears.

Key to Abbreviations:RR Revenue RulingRP Revenue ProcedureTD Treasury DecisionCD Court DecisionPL Public LawEO Executive OrderDO Delegation OrderTDO Treasury Department OrderTC Tax ConventionSPR Statement of Procedural

RulesPTE Prohibited Transaction

Exemption

EMPLOYMENT TAXMagnetic media; electronic filing:

1998 Form W–4 specifications (RP 26)13, 26

1998 Form 8027 (RP 52) 37, 12Proposed regulations:

26 CFR 31.3121(v)(2)–1, revised;FICA and FUTA taxation of amountsunder employee benefit plans (REG–209484–87; REG–209807–95) 8, 40

26 CFR 31.3221–4, added; exceptionfrom supplemental annuity tax onrailroad employers (REG–209769–95) 41, 8

26 CFR 31.6053–1, –4; electronic tipreports (REG–104691–97) 11, 13

Student FICA exception (RP 16) 5,1926 CFR 31.6302–1(f)(4), revised; fed-

eral employment tax deposits deminimis rule (REG–110403–98) 29,11

Railroad retirement; rate determination;quarterly beginning April 1, 1998 andJuly 1, 1998 31, 7

Regulations:26 CFR 1.6045–1T, –2T, removed;

1.6045–1, –2, amended; 301.6011–2,amended; 301.6011–2T, removed;magnetic filing requirements for in-formation returns (TD 8772) 31, 8

EMPLOYMENT TAX—Continued

26 CFR 31.6302–1(f)(4), 31.6302–1T,added; federal employment tax de-posits de minimisrule (TD 8771) 29,6

Worker classification; section 530; TaxCourt review (Notice 43) 33, 13

ESTATE TAXRegulations:

26 CFR 20.2041–3, 20.2056(d)–2,amended; 20.2046–1, revised; prop-erty interests and disclaimer (TD8744) 7, 20

26 CFR 20.2044–1(e), added; 20.2044–1T, removed; 20.2056(b)–7, revised;20.2056(b)–7T, removed; 20.2056(b)–10, revised; 20.2056(b)–10T, re-moved; certain property for whichmarital deduction was previously al-lowed (TD 8779) 36, 11

26 CFR 25.2702–5, –7, amended; qual-ified prsonal residence trust, sale ofresidence (TD 8743) 7, 26

26 CFR 25.2511–1, 25.2514–3,25.2518–1, –2, amended; propertyinterests and disclaimers (TD 8744)7, 20

Revocable trust; election (RP 13) 4, 21Special use value; farms; interest rates

(RR 22) 19, 5Underpayment interest, interest expense

deduction, estates (RP 15) 4, 25Valuation of compensatory stock options

(RP 34) 18, 15

EXCISE TAXAd valoremtax, export clause (Ct.D.

2064) 37, 4Bows and arrows; taxable and nontaxable

articles (RR 5) 2, 20Deposit of excise taxes, amendment (No-

tice 36) 29, 8Federal excise taxes for consular officers

and employees, exemption (RR 24) 19, 6Proposed regulations:

26 CFR 40.0–1T, added; 40.6011(a)–1T, added; 40.6302(c)–2T, added;deposits of excise taxes (REG–102894–97) 3, 59

26 CFR 48.4052–1, added; 48.4081–1,amended; 48.4082–6 through –10and intermediary sections, 48.4091–3, added; 48.4101–2, amended;

48.4101–3, 48.6427–10, –11, added;kerosene tax, aviation fuel tax, taxon heavy trucks and trailers (REG–119227–97) 30, 13

26 CFR 53.4958; 301.6213–1,301.6501(e)–1, 301.6501(n)–1,301.7422–1, amended; 53.4958–0through –7 and intermediary sections,added; failure by certain charitable or-ganizations to meet certain qualifica-tion requirements, taxes on excessbenefit transactions (REG–246256–96) 34, 9

26 CFR 54.4980B–1, added; grouphealth plans continuation coveragerequirements (REG–209485–86) 11,21

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

–1(a)(2)(iii), 40.5302(c)– 1, amended,40.6302(c)–2(b)(2)(iii), added; de-posits of excise taxes (TD 8740) 3, 4

26 CFR 40.6011(a)–1(b)(2)(vi),amended; 48.4082–5T, removed;48.4082–5, added; 48.4081–1,amended; 48.4082–5T, redesignated;48.6416(b)(4)–1, removed; 48.6421–3(d)(2), amended; 48.6427–3(d)(2),amended; 48.6715–1(a)(3), revised;48.6715–2T, removed; gasoline anddiesel fuel excise tax; special rules forAlaska, definitions (TD 8748) 8, 24

Regulations:26 CFR 48.4081–1T, 48.4082–6T

through –10T and intermediary sec-tions, 48.4091–3T, 48.4101–2T, –3T,48.6427–10T, –11T, added; 145.4052–1, amended; kerosene, aviation fuel,heavy trucks and trailers tax (TD8774) 30, 5

GIFT TAXNonstatutory stock option, transfer (RR

21) 18, 7Qualifying income interest, disposition

(RR 8) 7, 24Valuation of compensatory stock options

(RP 34) 18, 15

INCOME TAXAdvance pricing agreements, small busi-

ness taxpayers (Notice 10) 6, 9Article XIII (8) Rev. Proc. (RP 21) 8, 27Automobile owners and lessees (RP 24)

10, 31; (RP 30) 17,6

1998–44 I.R.B. 23 November 2, 1998

EXCISE TAX—Continued

IRB 1998-44 10/28/98 9:33 AM Page 23

INCOME TAX—ContinuedBelow-market loans; exempted loans;

second mortgage loans under theMAHRA Act (RR 34) 31, 12

Books and records; automatic data pro-cessing system (RP 25) 11, 7

Business expenses:Environmental remediation expendi-

tures (RP 47) 37, 8Underground waste storage tank (RR

25) 19, 4Capital gains and charitable remainder

trusts (Notice 20) 13, 25Classification settlement program:

Extended until further notice (Notice21) 15, 14

Common Trust Funds, unrelated businesstaxable income (RR 41) 35, 6

Deductions:When taken:

All events test; accrued cooperativeadvertising expenses (RR 39) 33,4

Definition of former Indian reservationsin Oklahoma (Notice 45) 35, 7

Disclosure authorization list (RP 43) 29, 8Distribution of stock and securities of a

newly formed controlled corporation;limitations (RR 44) 37, 4

Domestic assets/liability and investmentyield percentages (RP 31) 23, 9

Education loans (Notice 7) 3, 54Effective date of consolidated overall for-

eign loss provisions (Notice 40) 35, 7Elections under section 7704(g) (Notice

3) 3, 48Electronic Federal Tax Payment System:

Batch filers and bulk filers (RP 32) 17,11

Electronic funds transfer; failure to de-posit penalty (Notice 30) 22, 9

Employee plans:Administrative programs; closing

agreements (RP 22) 12, 11Determination letters (RP 6) 1, 183;

(RP 14) 4,22Determination letter requests, remedial

amendments (RP 53) 40, 9Discrimination; CODAs (Notice 1) 3,

42Eligible deferred compensation plans

(Notice 8) 4, 6Funding:

Full funding limitations, weightedaverage interest rate for Janu-ary 1998 (Notice 9) 4, 8; Feb-ruary 1998 (Notice 15) 9,8;March 1998 (Notice 18) 12,11;

April 1998 (Notice 26) 18, 14;May 1998 (Notice 32) 22,23;June 1998 (Notice 33) 25,10;July 1998 (Notice 37) 30, 13;August 1998 (Notice 44) 34,7;September 1998 (Notice 48)39,17

Group health plans; COBRA continua-tion coverage; HIPAA portability(Notice 12) 5, 12

Individual retirement arrangements,Roth IRAs (Notice 49) 38, 5

Letter rulings, etc. (RP 4) 1, 113Limitations on benefits and contribu-

tions (RR 1) 2, 5Minimum Funding Standards (RP 10)

2, 35Minimum:

Remedial amendments (RP 42) 28, 9Net unrealized appreciation; capital

gains (Notice 24) 17, 5Qualification (Notice 29) 22, 8;

CODAs (RR 30) 25, 8Qualification:

Church plans (Notice 39) 33, 11Recovery of basis; retirees (Notice 2)

2, 22Section 457 model amendments (RP

41) 32, 7Section 457 ruling program (RP 40)

32, 6SIMPLE-IRAs (Notice 4) 2,25Technical advice (RP 5) 1, 155User fees (RP 8) 1, 225

Enhanced oil recovery credit (Notice 41)33, 12

Environmental cleanup costs; letterrulings (RP 17) 5, 21

Exempt Organizations:Letter rulings, etc. (RP 4) 1, 113Organizations excepted from reporting

lobbying expenditures (RP 19) 7, 30

Tax consequences of physicians re-cruitment incentives provided byhospitals (RR 15) 12, 6

Technical advice (RP 5) 1, 155User fees (RP 8) 1, 225

Failure to deposit federal tax; penaltyabatement (Notice 14) 8, 27

Foreign partnerships, reporting transfer ofproperty by U.S. persons (Notice 17)11, 6

Foreign tax credit abuse (Notice 5) 3, 49Form 1040:

e-fileprogram (RP 50) 38, 8On-line filing program (RP 51) 38, 20

Fringe benefits aircraft valuation formula,first half of 1998 (RR 14) 11, 4;second half of 1998 (RR 40) 33,4

Fuel from a nonconventional source,credit; section 29 inflation adjustment;reference price for 1997 (Notice 28)19, 7

Hybrid arrangements, treatment undersubpart F (Notice 35) 27, 35

Information reporting:Hope Scholarship and Lifetime Learn-

ing credits (Notice 46) 36, 21Insurance companies:

Differential earnings rate and recom-puted differential earnings rate formutual life insurance companies (RR38) 32, 4

Discounting estimated salvage recover-able (RP 12) 4, 18

Interest rate tables (RR 2) 2,15Loss reserves; discounting unpaid

losses (RP 11) 4, 9“Reserve strengthening,” reasonable

interpretation (Ct.D. 2065) 39,7International operation of ships and/or

aircraft, United Arab Emirates, 43, 6Interest:

Investment:Federal short-term, mid-term, and

long-term rates for January 1998(RR4) 2, 18; February 1998 (RR7) 6, 6; March 1998 (RR 11) 10,13; April 1998 (RR 18) 14,22;May (RR 23) 18,5; June 1998(RR 28) 22,5; July 1998 (RR 33)27, 26; August 1998 (RR 36) 31,6; September 1998 (RR 43) 36,9;October 1998 (RR 50) 40,7

Rates, underpayments and overpay-ments (RR 17) 13, 21; calendarquarter beginning July 1, 1998(RR 32) 25,4; calendar quarterbeginning October 1, 1998 (RR46) 39,10

Inventory:LIFO:

Automobile and truck dealers (RP46) 36, 21

Price indexes; department stores forNovember 1997 (RR 6) 4, 4; De-cember 1997 (RR 9) 6,5; January1998 (RR 16) 13,18; February1998 (RR 20) 15,8; March 1998(RR 26) 21,4; April 1998 (RR29) 24,4; May 1998 (RR 35) 30,4; June 1998 (RR 42) 35, 5; July

November 2, 1998 24 1998–44 I.R.B.

INCOME TAX—Continued INCOME TAX—Continued

IRB 1998-44 10/28/98 9:33 AM Page 24

1998 (RR 48) 39,6; August 1998(RR 51) 43, 4

Price indexes; inventory price com-putation method (RP 49) 37, 9

Shrinkage estimates:Changing method of accounting for

estimating inventory shrinkage(RP 29) 15, 22

Letter rulings, determination letters, andinformation letters issued by AssociateChief Counsel (Domestic), AssociateChief Counsel (EBEO), AssociateChief Counsel (Enforcement Litiga-tion), and Associate Chief Counsel(International) (RP 1) 1, 7

Lien for taxes; validity and priority againstthird parties; judgment creditor (Ct.D.2063) 36, 13

Losses attributable to a disaster during1997 (RR 12) 10, 5

Low-income housing tax credit (Notice13) 6, 19; (RP 45) 34,8

Low-income housing credit:HUD programs (RR 49) 40, 4Satisfactory bond; “bond factor”

amounts for the period Octoberthrough December 1997 (RR 3) 2, 4;January–March 1998 (RR 13) 11,4;April-June 1998 (RR 31) 25,4; July-September 1998 (RR 45) 38, 4

Magnetic media/electronic filing:1998 Forms 1098, 1099, 5498, and

W–2G specifications (RP 35) 19, 6

Form 1040NR (RP 36) 23,10Marginal production rates (Notice 42) 33,

12Methods of accounting; involuntary

changes (Notice 31) 22, 10Package design; amortization; capitaliza-

tion; amortizable section 197 intangible(RP 39) 26, 36

Passive foreign investment companies:Shareholders may use rules of sec.

1.1295–1T(b)(4), (f), and (g) to tax-able years beginning before January1, 1998 (Notice 22) 17, 5

Private letter rulings under sections 877,2107, and 2501(a)(3)(Notice 34) 27, 30

Proposed regulations:26 CFR 1.32–3, added; EIC eligibility

requirements (REG–116608–97) 29,12

26 CFR 1.62–2(e)(2), revised; 1.62–2T,removed; 1.274–5, added; –5T,1.274(d)–1, amended; substantiationof business expenses, use of mileage

rates to substantiate automobile ex-penses (REG–122488–97) 42, 19

26 CFR 1.72(p)–1, amended; loans toplan participants (REG–209476–82)8, 36

26 CFR 1.83–6, 1.1032–2, amended;1.1032–3, added; treatment of a dis-position by one corporation of thestock of another corporation in a tax-able transaction (REG–106221–98)41,10

26 CFR 1.141–7, 1.142(f)(4)–1, 1.150–5, added; 1.141–8, –15, amended;obligations of states and politicalsubdivisions (REG–110965–97) 13,42

26 CFR 1.195–1, added; election toamortize start-up expenditures(REG–209373–81) 14,26

26 CFR 1.356–6, added; reorganiza-tions, nonqualified preferred stock(REG–121755–97) 9, 13

26 CFR 1.368–1, amended; corporatereorganizations, continuity of inter-est (REG–120882–97) 14, 25

26 CFR 1.401(a)(9)–1, amended; quali-fied plans and individual retirementplans, required distributions (REG–209463–82) 4, 27

26 CFR 1.408A–0 through –9 and in-termediary sections, added; RothIRAs, questions and answers(REG–115393–98) 39, 34

26 CFR 1.417(e)–1 and paragraph (d),revised; 1.417(e)–1T and paragraph(d), revised; valuation of plan dis-tributrions (TD 8768) 20, 4

26 CFR 1.460–6, amended; electionnot to apply look-back method in deminimis cases (REG–120200–97)12, 32

26 CFR 1.469–10, revised; 1.7704–1,added; investment income, passiveactivity income and loss rules forpublicly traded partnerships(REG–105163–97) 8, 31

26 CFR 1.475(g)–2, new; 1.482–8,added; 1.482–0, –1, –2, 1.863,1.863–7(a)(1), 1.864–4, –6, 1.894–1,amended; 1.482–9, redesignated;global dealing operation allocationand sourcing of income and deduc-tions among taxpayers (REG–208299–90) 16, 26

26 CFR 1.513–7, added; travel and touractivities of tax exempt organiza-tions (REG–121268–97) 20, 12

26 CFR 1.529–0 through –6 and inter-mediary sections, added; QualifiedState Tuition Programs (REG–106177–97) 37, 33

26 CFR 1.671–4, 1.6049–7, 301.6109–1, amended; reporting requirementsfor widely held fixed investmenttrusts (REG–209813–96) 35, 9

26 CFR 1.702–1, 1.954–1, 301.7701–3,amended; 1.952–1(b), (c), redesig-nated 1.954–2(a)(5), (6), 1.954–4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),added (REG–104537–97) 16, 21

26 CFR 1.732–1, amended; 1.732–2,amended; 1.734–1(e), added; 1.743–1, revised; 1.751–1, amended;1.755–1, revised; 1.1017–1, revised;adjustments to basis of partnershipproperty and partnership interest(REG–209682–94) 17, 20

26 CFR 1.864(b)–1; trading safe har-bors (REG–106031–98) 26, 38

26 CFR 1.925(a)–1, (b)–1, added;1.927(e)–1, amended; foreign salescorporation transfer pricing sourceand grouping rules (REG–102144–98) 15, 25

26 CFR 1.936–1T, added; terminationof Puerto Rico and possession taxcredit, new lines of business prohib-ited (REG–115446–97) 36, 23

26 CFR 1.985–8, 1.1001–5, added;conversion to the euro (REG–110332–98) 33, 18

26 CFR 1.1092(c)–1, added; equity op-tions without standard terms, specialrules and definitions (REG–104641–97) 29, xx

26 CFR 1.1291–1, 1.1293–1, 1.1295–1,–3, 1.1297–3(c), added; 1.1296–4,amended; passive foreign investmentcompany preferred shares, specialincome exclusion (REG–115795–97) 8, 33

26 CFR 1.1361–0, amended; 1.1361–1,amended; 1.1361–1(d)(3), removed;1.1361–2 through –6 and intermedi-ary sections, added; 1.1362–0,amended; 1.1362–2, amended;1.1362–8, added; 1.1368–0,amended; 1.1368–2(d)(2), amended;1.1374–8(b), amended; S corpora-tion subsidiaries (REG–251698–96)20, 14

26 CFR 1.1366–1, –2, removed;1.1366–0 through –5 and intermedi-ary sections, added; 1.1367–0, –1,amended; 1.1367–3, removed;

1998–44 I.R.B. 25 November 2, 1998

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IRB 1998-44 10/28/98 9:33 AM Page 25

1.1368–0, –1, –2, –3, amended;1.1368–4, revised; pass through ofitems of an S corporation to its share-holders (REG–209446– 82) 36, 24

26 CFR 1.1397E–1, added; qualifiedzone academy bonds (REG–119449–97) 10, 35

26 CFR 1.1502–3(c), revised; 1.1502–4(f)(3), (g)(3), added; 1.1502–9(b)-(1)(v), added; 1.1502–21(c)(1)(iii),amended; consolidated returns, limi-tations on the use of certain lossesand credits (REG–104062–97) 10, 34

26 CFR 1.6031–1, removed; 1.6031(a)–1, added; 1.6063–1, amended; part-nership returns (REG–209322–82)15, 26

26 CFR 1.6038B–1, amended; 1.6038B–2, added; reporting of certain transfersto foreign corporations and foreignpartnerships (REG– 118926–97) 39,23

26 CFR 1.6038–3, added; informationreturns for certain foreign partner-ships (REG–118966–97) 39, 29

26 CFR 1.6046A–1, added; return re-quirement for U.S. persons owninginterests in foreign partnerships(REG–209060–86) 39, 18

26 CFR 1.7702B–1, –2, added; quali-fied long-term care insurance con-tracts (REG–109333–97) 9, 9

26 CFR 301.6159–1, amended; agree-ments for tax liability installmentpayments (REG–100841–97) 8, 30

26 CFR 301.6402–5(h), added; –6(n),revised; tax refund offset program(REG–104565–97) 39, 21

26 CFR 301.6404–2, added; abatementof interest (REG–209276–87) 11, 18

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collection ac-tions (REG–251502–96) 9, 14

26 CFR 54.9812–1, added; mentalhealth parity; HIPAA (REG–109704–97) 3, 60

Qualified Funeral Trust; guidance (Notice6) 3, 52

Qualified intermediary agreements:Guidance provided to foreign financial

institutions (RP 27) 15, 15Qualified mortgage bonds, mortgage

credit certificates:Guidance provided regarding use of na-

tional and area median gross incomefigures by issuers (RP 28) 15, 14

Qualified Subchapter S Trust (QSST)conversion to Electing Small BusinessTrust (ESBT) 10, 30

Qualified Zone Academy Zone Bonds(RP) 3, 100

Real estate transactions (RP 20) 7, 32Regulations:

26 CFR 1.32–3T, added; EIC eligibilityrequirements (TD 8773) 29, 4

26 CFR 1.61–12, 1.249–1, 1.1016–5,1.1275–1, amended; 1.163–13,1.171–5, added; 1.171–1, –2, –3, –4,revised; 1.1016–9, removed; amorti-zable bond premium (TD 8746) 7, 4

26 CFR 1.141–0, –2, amended;1.141–7, –8, removed; 1.141–7T,–8T, –15T, 1.142(f)(4)–1T, 1.150–5T, added; 1.141–15, revised; oblig-ations of states and political subdivi-sions (TD 8757) 13, 4

26 CFR 1.166–3(a)(3), 1.1001–4,added; 1.166–3T, 1.1001–4T, re-moved; modifications of bad debtsand dealer assignments of notionalprincipal contracts (TD 8763) 15, 5

26 CFR 1.280B–1, added; building de-molition, definition of structure (TD8745) 7, 15

26 CFR 1.338–2, 1.368–1, –2,amended; 1.368–1T, added; corpo-rate reorganizations, continuity of in-terest, and continuity of business en-terprise (TD 8760) 14, 4; (TD 8761)14, 13

26 CFR 1.354–1, 1.355–1, 1.356–3,amended; reorganizations, treatmentof warrants as securities (TD 8752)9, 4

26 CFR 1.356–6T, added; reorganiza-tions, nonqualified preferred stock(TD 8753) 9, 6

26 CFR 1.367(a)–1T, –3, amended;1.367(a)–3T, removed; 1.367(a)–8,1.367(b)–1, –4, added; 1.367(d)–1T,amended; 1.6038B–1, added;1.6038B–1T; 7.367(b)–1, –4, –7,amended; certain transfers of stockor securities by U.S. persons to for-eign corporations (TD 8770) 27, 4

26 CFR 1.368–1(e)(6), revised; conti-nuity of interest requirement for cor-porate reorganizations (TD 8783) 41,4

26 CFR 1.411(d)–4, amended; permit-ted elimination of preretirement op-tional forms of benefit (TD 8769)28, 4

26 CFR 1.446–1, amended; 1.446–1T,removed; 301.9100–0, added;301.9100–1, revised; 301.9100–2,–3, added; 301.9100–1T, –2T, –3T;removed extensions of time to makeelections (TD 8742) 5, 4

26 CFR 1.453.11; installment obliga-tions received from liquidating cor-porations (TD 8762) 14, 15

26 CFR 1.460–0, amended; 1.460–6T,added; election not to apply look-back method in de minimiscases(TD 8756) 12, 4

26 CFR 1.460–6T, removed;1.460–6(i), (j), added; election not toapply look-back method in de min-imis cases (TD 8775) 31, 4

26 CFR 1.465–27, added; qualifiednonrecourse financing under section465(b)(6) (TD 8777) 34, 4

26 CFR 1.468A–2, –3, –8, amended;nuclear decommissioning funds; re-vised schedules of ruling amounts(TD 8758) 13, 15

26 CFR 1.861–18, added; classificationof certain transactions involvingcomputer programs (TD 8785) 42, 5

26 CFR 1.904–5(o), 1.904–5T, 1.954–0(b), 1.954–1, amended; 1.954–1T,–2T, –9T, added; 301.7701–3(f)(1),amended; controlled foreign corpo-ration relating to partnerships andbranches (TD 8767) 16, 4

26 CFR 1.905–2, amended; foreign taxcredit filing requirements (TD 8759)13, 19

26 CFR 1.925(a)–1T, 1.925(b)–1T(b)(3)(i), amended; 1.927(e)–1T,revised; foreign sales corporationtransfer pricing source and groupingrules (TD 8764) 15, 9

26 CFR 1.927(e)–1T, removed;1.927(e)(1), added; source rules forforeign sales corporation transferpricing (TD 8782) 41, 5

26 CFR 1.936–11T, added; terminationof Puerto Rico and possession taxcredit; new lines of business prohib-ited (TD 8778) 36, 4

26 CFR 1.985–1, –5(a), amended;1.985–7, added; dollar approximateseparate transactions method of ac-counting (DASTM) to profit and lossmethod of accounting, change fromP&L method to DASTM (TD 8765)16, 11

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26 CFR 1.1271–1, 1.1275–1, amended;debt instruments with original issuediscount, annuity contracts (TD8754) 10, 15

26 CFR 1.1202–0, –2, added; qualifiedsmall business stock (TD 8749) 7, 16

26 CFR 1.1290–0, amended; 1.1294–0,added; a. 1291–0T, amended;1.1291–1T, added; 1.1291–9,amended; 1.1293–0, –1T, added;1.1295–0, –1T, –3T, 1.1297–3T(c),added; passive foreign investmentcompany preferred shares, specialincome exclusion (TD 8750) 8, 4

26 CFR 1.1396–1; empowerment zoneemployment credit, qualified zoneemployees (TD 8747) 7, 18

26 CFR 1.1397E–1T, added; qualifiedzone academy bonds (TD 8755) 10,21

26 CFR 1.1502–3, –4, –9(a), –21T(c)-(1)(iii), amended; 1.1502– 3T, –4T,–9T, –55T, added; 1.1502– 23T(b),(c), redesignated; consolidated re-turns, limitations on the use of cer-tain losses and credits, overall for-eign loss accounts (TD 8751) 10, 23

26 CFR 54.9801–2T, amended;54.9801–4T, –5T, revised; 54.9804–1T, redesignated; 54.9806–1T, redes-ignated; 54.9812–1T, added; mental

health parity, interim rules (TD8741) 3, 6

26 CFR 301.7623–1, revised;301.7623–1T, removed; rewards forinformation relating to violations ofinternal revenue laws (TD 8780) 39,14

Relocation payments:Authorized by sec. 105(a)(11) of Hous-

ing and Community DevelopmentAct, not includible in gross income(RR 19) 15, 5

Renewable electricity production credit;calendar year 1998 inflation adjustmentfactor and reference prices. (Notice 27)18, 14

Reorganizations; exchange of securities(RR 10) 10, 11

Reproduction of Forms 1096, 1098, 1099,5498, and W–2G (RP 37) 26, 6

Rescission of notice deficiency (RP 54)43, 7

Residential rental property, exempt facili-ty bond (RR 47) 39, 4

Rulings:Areas in which advance rulings will not

be issued:Associate Chief Counsel (Domes-

tic), Associate Chief Counsel(EBEO) (RP 3) 1, 100

Associate Chief Counsel (Interna-tional) (RP 7) 1, 222

Obsolete (RR 37) 32, 5Rural airports (RP 18) 6, 20Sales or exchanges:

Qualified small business stock (RP 48)38, 7

Social security benefits under U.S.-Canada treaty, recent changes (Notice23) 18, 9

Specifications for filing Form 1042–S(RP 44) 32, 11

Spin-off of subsidiary (RR 27) 22, 4SRLY notice (Notice 38) 34, 7Technical advice to district directors and

chiefs, appeals offices, Associate ChiefCounsel (Domestic), Associate ChiefCounsel (EBEO), Associate ChiefCounsel (Enforcement Litigation), andAssociate Chief Counsel (International)(RP 2) 1, 74

Tentative differential earnings rate for1997 (Notice 19) 13, 24

Timely filing or payment; private deliveryservices (Notice 47) 37, 8

Treatment of hybrid arrangements undersubpart F (Notice 11) 6, 18

Trust, election to treat U.S. person;domestic trust (Notice 25) 18, 11

Waiver of period of stay in foreign coun-try (RP 38) 27, 29

Withholding regulations:Effective date of sec. 1441 withholding

regulations amended (Notice 16) 15,12

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Notes

November 2, 1998 28 1998–44 I.R.B.

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Notes

1998–44 I.R.B. 29 November 2, 1998

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Notes

November 2, 1998 30 1998–44 I.R.B.

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IRB 1998-44 10/28/98 9:33 AM Page 32