Internal Revenue Bulletin 1998-14 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
Rev. Rul. 98–18, page 22.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate.For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for April 1998.
T.D. 8760, page 4.
T.D. 8761, page 13.
REG–120882–97, page 25.
Final, temporary, and proposed regulations under section
368 of the Code provide guidance regarding satisfaction of
the continuity of interest and continuity of business enter-
prise requirements for corporate reorganizations. A public
hearing on the proposed regulations will be held on May 26,
1998.
T.D. 8762, page 15.
Final regulations under section 453 of the Code relate to
the use of the installment method to report the gain recog-
nized by a shareholder who receives, in exchange for the
shareholder’s stock, certain installment obligations that are
distributed upon the complete liquidation of a corporation.
EXEMPT ORGANIZATIONS
Announcement 98–26, page 28.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
REG–209373–81, page 26.
Proposed regulations under section 195 of the Code provide
rules and procedures for electing to amortize start-up ex-
penditures. A public hearing will be held on June 2, 1998.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–14
April 6, 1998
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 32.
Index for January-March begins on page 34.

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on 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 application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying 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 circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding 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.

Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 1998. See
Rev. Rul. 98–18, page 22.
Section 368.—Definitions
Relating to Corporate
Reorganizations
26 CFR 1.368–1: Purpose and scope of exception of
reorganization exchanges.
T.D. 8760
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Continuity of Interest and
Continuity of Business
Enterprise
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations providing guidance re-
garding satisfaction of the continuity of
interest and continuity of business enter-
prise requirements for corporate reorgani-
zations. The final regulations affect cor-
porations and their shareholders.
DATES: These regulations are effective
January 28, 1998.
Applicability: These regulations apply
to transactions occurring after January 28,
1998, except that they do not apply to any
transaction occurring pursuant to a writ-
ten agreement which is (subject to cus-
tomary conditions) binding on January
28, 1998, and at all times thereafter.
FOR FURTHER INFORMATION CON-
TACT: Regarding §1.368–1(e) (continu-
ity of interest), §§1.338–2 and 1.368–1(a)
and (b): Phoebe Bennett, (202) 622-7750
(not a toll-free number); regarding
§1.368–1(d) (continuity of business enter-
prise), §§1.368–1(a) and (b), and 1.368–
2(k): Marlene Peake Oppenheim, (202)
622-7750 (not a toll free number).
SUPPLEMENTARY INFORMATION:
Background
On December 23, 1996, the IRS pub-
lished a notice of proposed rulemaking
(REG–252231–96 [1997–1 C.B. 800]) in
the Federal Register(61 F.R. 67512) re-
lating to the continuity of interest (COI)
requirement (proposed COI regulations).
On January 3, 1997, the IRS published a
notice of proposed rulemaking (REG–
252233–96 [1997–1 C.B. 802]) in the
Federal Register(62 F.R. 36101) (pro-
posed COBE regulations) relating to (1)
the continuity of business enterprise
(COBE) requirement; and (2) transfers of
acquired assets or stock following certain
otherwise qualifying reorganizations (re-
mote continuity of interest). Many writ-
ten comments were received in response
to these notices of proposed rulemaking.
A public hearing on both proposed regula-
tions was held on May 7, 1997. After
consideration of all comments, the regula-
tions proposed by REG–252231–96 and
REG–252233–96 are adopted as revised
by this Treasury decision, along with tem-
porary regulations and proposed regula-
tions cross-referencing the temporary reg-
ulations regarding COI published in T.D.
8761, page 13 of this Bulletin.
Explanation of Provisions
The Internal Revenue Code of 1986
provides general nonrecognition treatment
for reorganizations specifically described
in section 368. In addition to complying
with the statutory requirements and certain
other requirements, a transaction generally
must satisfy the continuity of interest re-
quirement and the continuity of business
enterprise requirement.
A. Continuity of Interest
The purpose of the continuity of inter-
est requirement is to prevent transactions
that resemble sales from qualifying for
nonrecognition of gain or loss available to
corporate reorganizations. The final regu-
lations provide that the COI requirement
is satisfied if in substance a substantial
part of the value of the proprietary interest
in the target corporation (T) is preserved
in the reorganization. A proprietary inter-
est in T is preserved if, in a potential reor-
ganization, it is exchanged for a propri-
etary interest in the issuing corporation
(P), it is exchanged by the acquiring cor-
poration for a direct interest in the T en-
terprise, or it otherwise continues as a
proprietary interest in T. The issuing cor-
porationmeans the acquiring corporation
(as the term is used in section 368(a)), ex-
cept that, in determining whether a reor-
ganization qualifies as a triangular reorga-
nization (as defined in §1.358–6(b)(2)),
the issuing corporation means the corpo-
ration in control of the acquiring corpora-
tion. However, a proprietary interest in T
is not preserved if, in connection with the
potential reorganization, it is acquired by
P for consideration other than P stock, or
P stock furnished in exchange for a pro-
prietary interest in T in the potential reor-
ganization is redeemed. All facts and cir-
cumstances must be considered in
determining whether, in substance, a pro-
prietary interest in T is preserved.
Rationale for the COI regulations
The proposed and final regulations per-
mit former T shareholders to sell P stock
received in a potential reorganization to
third parties without causing the reorgani-
zation to fail to satisfy the COI require-
ment. Some commentators have ques-
tioned whether the regulations are
consistent with existing authorities.
The COI requirement was applied first
to reorganization provisions that did not
specify that P exchange a proprietary in-
terest in P for a proprietary interest in T.
Supreme Court cases imposed the COI re-
quirement to further Congressional intent
that tax-free status be accorded only to
transactions where P exchanges a sub-
stantial proprietary interest in P for a pro-
prietary interest in T held by the T share-
holders rather than to transactions
resembling sales. See LeTulle v. Scofield,
308 U.S. 415 (1940); Helvering v. Min-
nesota Tea Co.,296 U.S. 378 (1935);
Pinellas Ice & Cold Storage Co. v. Com-
April 6, 199841998–14 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

missioner, 287 U.S. 462 (1933). See also
Cortland Specialty Co. v. Commissioner,
60 F.2d 937 (2d Cir. 1932), cert. denied
288 U.S. 599 (1933).
None of the Supreme Court cases estab-
lishing the COI requirement addressed the
issue of whether sales by former T share-
holders of P stock received in exchange
for T stock in the potential reorganization
cause the COI requirement to fail to be
satisfied. Since then, however, some
courts have premised decisions on the as-
sumption that sales of P stock received in
exchange for T stock in the potential reor-
ganization may cause the COI require-
ment to fail to be satisfied. McDonald’s
Restaurants of Illinois, Inc. v. Commis-
sioner,688 F.2d 520 (7th Cir. 1982);
Penrod v. Commissioner,88 T.C. 1415
(1987); Heintz v. Commissioner,25 T.C.
132 (1955), nonacq.,1958–2 C.B. 9; Es-
tate of Elizabeth Christian v. Commis-
sioner,57 T.C.M. (CCH) 1231 (1989).
The apparent focus of these cases is on
whether the T shareholders intended on
the date of the potential reorganization to
sell their P stock and the degree, if any, to
which P facilitates the sale. Based on an
intensive inquiry into nearly identical
facts, some of these cases held that as a
result of the subsequent sale the potential
reorganization did not satisfy the COI re-
quirement; others held that satisfaction of
the COI requirement was not adversely
affected by the subsequent sale. The IRS
and Treasury Department have concluded
that the law as reflected in these cases
does not further the principles of reorga-
nization treatment and is difficult for both
taxpayers and the IRS to apply consis-
tently.
Therefore, consistent with Congres-
sional intent and the Supreme Court
precedent which distinguishes between
sales and reorganizations, the final regula-
tions focus the COI requirement generally
on exchanges between the T shareholders
and P. Under this approach, sales of P
stock by former T shareholders generally
are disregarded.
The final regulations will greatly en-
hance administrability in this area by both
taxpayers and the government. The regu-
lations will prevent “whipsaw” of the
government, such as where the former T
shareholders treat the transaction as a tax-
free reorganization, and P later disavows
reorganization treatment to step up its
basis in the T assets based on the position
that sales of P stock by the former T
shareholders did not satisfy the COI re-
quirement. See, e.g., McDonald’s Restau-
rants, supra.In addition, this approach
will prevent unilateral sales of P stock by
former majority T shareholders from ad-
versely affecting the section 354 non-
recognition treatment expected by former
minority T shareholders.
Dispositions of T stock
The proposed COI regulations do not
specifically address the effect upon COI
of dispositions of T stock prior to a poten-
tial reorganization, but ask for comments
on that issue. The IRS and Treasury De-
partment believe that issues concerning
the COI requirement raised by disposi-
tions of T stock before a potential reorga-
nization correspond to those raised by
subsequent dispositions of P stock fur-
nished in exchange for T stock in the po-
tential reorganization. As requested by
commentators, the final regulations apply
the rationale of the proposed COI regula-
tions to transactions occurring both prior
to and after a potential reorganization.
Cf. J.E. Seagram Corp. v. Commissioner,
104 T.C. 75 (1995) (sales of T stock prior
to a potential reorganization do not affect
COI if not part of the plan of reorganiza-
tion). The final regulations provide that,
for COI purposes, a mere disposition of T
stock prior to a potential reorganization to
persons not related to P is disregarded and
a mere disposition of P stock received in a
potential reorganization to persons not re-
lated to P is disregarded. But see §1.368–
1T(e)(1)(ii)(A) and (B).
In soliciting comments on the effect
upon COI of dispositions of T stock prior
to a potential reorganization, the preamble
to the proposed COI regulations specifi-
cally requests comments on King Enter-
prises, Inc. v. United States,418 F.2d 511
(Ct. Cl. 1969) (COI requirement satisfied
where, pursuant to a plan, P acquires the T
stock for 51 percent P stock and 49 per-
cent debt and cash, and T merges up-
stream into P), and Yoc Heating Corp. v.
Commissioner,61 T.C. 168 (1973) (COI
requirement not satisfied where, pursuant
to a plan, P acquires 85 percent of the T
stock for cash and notes, and T merges
into P’s newly formed subsidiary with mi-
nority shareholders receiving cash). Con-
sistent with these cases, where the step
transaction doctrine applies to link T
stock purchases with later acquisitions of
T, the final regulations provide that a pro-
prietary interest in T is not preserved if, in
connection with the potential reorganiza-
tion, it is acquired by P for consideration
other than P stock. Whether a stock ac-
quisition is made in connection with a po-
tential reorganization will be determined
based on the facts and circumstances of
each case. See generally §1.368–1(a).
This regulation does not address the ef-
fect, if any, of section 338 on corporate
transactions (except for conforming
changes to §1.338–2(c)(3)). See gener-
ally §1.338–2(c)(3) (certain tax effects of
a qualified stock purchase without a sec-
tion 338 election on the post-acquisition
elimination of T).
Related person rule
The proposed COI regulations provide
that “[i]n determining whether [COI is sat-
isfied], all facts and circumstances must
be considered, including any plan or
arrangement for the acquiring corporation
or its successor corporation (or a person
related to the acquiring corporation or its
successor corporation within the meaning
of section 707(b)(1) or 267(b) (without re-
gard to section 267(e))) to redeem or ac-
quire the consideration provided in the re-
organization.” The final regulations
provide a more specific rule that a propri-
etary interest in T is not preserved if, in
connection with a potential reorganiza-
tion, a person related (as defined below) to
P acquires, with consideration other than a
proprietary interest in P, T stock or P stock
furnished in exchange for a proprietary in-
terest in T in the potential reorganization.
The IRS and Treasury Department be-
lieve, however, that certain related party
acquisitions preserve a proprietary interest
in T and therefore, the rule includes an ex-
ception to the related party rule. Under
this exception, a proprietary interest in T is
preserved to the extent those persons who
were the direct or indirect owners of T
prior to the potential reorganization main-
tain a direct or indirect proprietary inter-
est in P. See, e.g., Rev. Rul. 84–30
(1984–1 C.B. 114).
Commentators stated that the proposed
COI regulations’ rule, which employs sec-
tions 707(b)(1) and 267(b) to define per-
sons related to P, is too broad. In re-
sponse, the final regulations adopt a
1998–14 I.R.B.5April 6, 1998

narrower related person definition which
has two components in order to address
two separate concerns.
First, the IRS and Treasury Department
were concerned that acquisitions of T or P
stock by a member of P’s affiliated group
were no different in substance from an ac-
quisition or redemption by P, because of
the existence of various provisions in the
Code that permit members to transfer
funds to other members without signifi-
cant tax consequences. Accordingly,
§1.368–1(e)(3)(i)(A) includes as related
persons corporations that are members of
the same affiliated group under section
1504, without regard to the exceptions in
section 1504(b).
Second, because the final regulations
take into account whether, in substance, P
has redeemed the stock it exchanged for T
stock in the potential reorganization, the
final regulations treat two corporations as
related persons if a purchase of the stock
of one corporation by another corporation
would be treated as a distribution in re-
demption of the stock of the first corpora-
tion under section 304(a)(2) (determined
without regard to §1.1502–80(b)).
Because the final regulations focus gen-
erally on the consideration P exchanges,
related persons do not include individual
or other noncorporate shareholders. Thus,
the IRS will no longer apply the holdings
of South Bay Corporation v. Commis-
sioner,345 F.2d 698 (2d Cir. 1965), and
Superior Coach of Florida, Inc. v. Com-
missioner,80 T.C. 895 (1983), to transac-
tions governed by these regulations.
T stock not acquired in connection with a
potential reorganization
Commentators requested clarification
of whether P must actually furnish stock
to T shareholders that own T stock which
was not acquired in connection with a po-
tential reorganization. The final regula-
tions provide that a proprietary interest in
T is preserved if it is exchanged by the ac-
quiring corporation (which may or may
not also be P) for a direct interest in the T
enterprise, or otherwise continues as a
proprietary interest in T.
Redemptions of T stock or extraordinary
distributions with respect to T stock
In addition to the final regulations, the
IRS and Treasury Department are con-
temporaneously issuing temporary regu-
lations and proposed regulations cross-
referencing the temporary regulations
published in T.D. 8761 with the same ef-
fective date as these final regulations.
The temporary and proposed regulations
provide that a proprietary interest in T is
not preserved if, in connection with a po-
tential reorganization, it is redeemed or
acquired by a person related to T, or to
the extent that, prior to and in connection
with a potential reorganization, an extra-
ordinary distribution is made with re-
spect to it.
Transactions following a qualified stock
purchase
As stated above, these final regulations
focus the COI requirement generally on
exchanges between the T shareholders
and P. Accordingly, the language of
§1.338–2(c)(3) is conformed to these
final COI regulations to treat the stock of
T acquired by the purchasing corporation
in the qualified stock purchase as though
it was not acquired in connection with the
transfer of the T assets.
Effect on other authorities
The IRS and Treasury Department con-
tinue to study the role of the COI require-
ment in section 368(a)(1)(D) reorganiza-
tions and section 355 transactions.
Therefore, these final COI regulations do
not apply to section 368(a)(1)(D) reorga-
nizations and section 355 transactions.
See §1.355–2(c).
These COI regulations apply solely for
purposes of determining whether the COI
requirement is satisfied. No inference
should be drawn from any provision of
this regulation as to whether other reorga-
nization requirements are satisfied, for
example, whether P has issued solely vot-
ing stock for purposes of section 368(a)-
(1)(B) or (C).
Effect on other documents
Rev. Proc. 77–37 (1977–2 C.B. 568)
and Rev. Proc. 86–42 (1986–2 C.B. 722)
will be modified to the extent inconsistent
with these regulations.
Rev. Rul. 66–23 (1966–1 C.B. 67) is
hereby obsoleted because it indicates that
a plan or arrangement in connection with
a potential reorganization for disposition
of stock to unrelated persons does not sat-
isfy the COI requirement.
B. Continuity of Business Enterprise
The COBE requirement is fundamental
to the notion that tax-free reorganizations
merely readjust continuing interests in
property. In §1.368–1(d), as effective
prior to these final regulations, COBE
generally required the acquiring corpora-
tion to either continue a significant his-
toric T business or use a significant por-
tion of T’s historic business assets in a
business. However, a valid reorganiza-
tion may qualify as tax-free even if the ac-
quiring corporation does not directly
carry on the historic T business or use the
historic T assets in a business. See sec-
tion 368(a)(2)(C). See also Rev. Rul. 68–
261 (1968–1 C.B. 147); Rev. Rul. 81–247
(1981–1 C.B. 87).
Consistent with the view that the ac-
quiring corporation need not directly con-
duct the T business or use the T assets, the
final regulations provide rules under
which, in an otherwise qualifying corpo-
rate reorganization, the assets and the
businesses of the members of a qualified
group of corporations are treated as assets
and businesses of the issuing corporation.
Accordingly, in the final regulations,
COBE requires that the issuing corpora-
tion either continue T’s historic business
or use a significant portion of T’s historic
business assets in a business.
A qualified group is one or more chains
of corporations connected through stock
ownership with the issuing corporation,
but only if the issuing corporation owns
directly stock meeting the requirements of
section 368(c) in at least one of the corpo-
rations, and stock meeting the require-
ments of section 368(c) in each of the cor-
porations is owned directly by one of the
other corporations.
The judicial continuity of interest doc-
trine historically included a concept com-
monly known as remote continuity of in-
terest. Commonly viewed as arising out
of Groman v. Commissioner,302 U.S. 82
(1937), and Helvering v. Bashford,302
U.S. 454 (1938), remote continuity of in-
terest focuses on the link between the T
shareholders and the former T business
assets following the reorganization. In
§1.368–1(d), as effective prior to these
final regulations, COBE focuses on the
continuation of T’s business, or the use of
April 6, 199861998–14 I.R.B.

T’s business assets, by the acquiring cor-
poration. Section 1.368–1(d), as revised
herein, expands this concept by treating
the issuing corporation as conducting a T
business or owning T business assets if
these activities are conducted by a mem-
ber of the qualified group or, in certain
cases, by a partnership that has a member
of the qualified group as a partner.
The proposed COBE regulations sepa-
rately address COBE (§1.368–1(d)) and
remote continuity of interest (§1.368–
1(f)). The IRS and Treasury Department
believe the COBE requirements ade-
quately address the issues raised in Gro-
manand Bashfordand their progeny.
Thus, these final regulations do not sepa-
rately articulate rules addressing remote
continuity of interest.
Definition of the qualified group
The proposed COBE regulations define
the qualified group using a control test
based on section 368(c). The IRS and
Treasury Department received comments
suggesting the replacement of the section
368(c) definition of control by the affili-
ated group definition of control stated in
section 1504, without regard to section
1504(b). However, because section 368
generally determines control by reference
to section 368(c), the final regulations re-
tain the approach of the proposed COBE
regulations.
Rules for aggregation of interests in
historic T assets and businesses held in
partnership solution
In determining whether COBE is satis-
fied, the proposed COBE regulations ag-
gregate the interests of the members of a
qualified group. In addition, the proposed
COBE regulations attribute a business of
a partnership to a corporate transferor
partner if the partner has a sufficient
nexus with that partnership business.
However, the proposed COBE regulations
only consider the transferor partner’s in-
terest in the partnership business, and do
not aggregate this interest with interests in
the partnership held by other members of
the qualified group.
In response to comments requesting a
partnership aggregation rule, the final
regulations, through a system of attribu-
tion, aggregate the interests in a partner-
ship business held by all the members of a
qualified group. The final regulations
provide rules under which a corporate
partner may be treated as holding assets
of a business of a partnership. Addition-
ally, P is treated as holding all the assets,
and conducting all the businesses of its
qualified group. Furthermore, in certain
circumstances, P will be treated as con-
ducting a business of a partnership. Once
the relevant T businesses and T assets are
attributed to P, COBE is tested under the
general rule of the final COBE regula-
tions. See §1.368–1(d)(1).
The proposed COBE regulations do not
discuss tiered partnerships. In response to
comments, the final regulations provide
guidance on this issue. See §1.368–
1(d)(5), Example 12.
C. Transfers of Assets or Stock to
Controlled Corporations as Part of a
Plan of Reorganization
The proposed COBE regulations are
limited in their application to COBE and
remote continuity of interest. The rules of
the proposed COBE regulations provide
that for certain reorganizations, transfers
of acquired assets or stock among mem-
bers of the qualified group, and in certain
cases, transfers of acquired assets to part-
nerships, do not disqualify a transaction
from satisfying the COBE and remote
continuity of interest requirements. The
preamble to the proposed COBE regula-
tions states that these rules do not address
any other issues concerning the qualifica-
tion of a transaction as a reorganization.
Comments suggest that the proposed
COBE regulations are ambiguous as they
could be interpreted to mean that a trans-
fer of stock or assets to a qualified group
member after an otherwise tax-free reor-
ganization would be given independent
significance and the step transaction doc-
trine would not apply. Under such an in-
terpretation, the potential reorganization
would not be recast as a taxable acquisi-
tion or another type of reorganization. To
eliminate this ambiguity, §1.368–1(a) of
the final regulations provides that, in de-
termining whether a transaction qualifies
as a reorganization under section 368(a),
the transaction must be evaluated under
relevant provisions of law, including the
step transaction doctrine. Section 1.368–
1(d) of the final regulations is limited to a
discussion of the COBE requirement, and
does not address satisfaction of the ex-
plicit statutory requirements of a reorga-
nization, which is the subject of §1.368–
2. However, §1.368–2(k) of the final
regulations does provide guidance in this
regard, extending the application of sec-
tion 368(a)(2)(C) to certain successive
transfers.
Section 1.368–2(k) of the final regula-
tions states that a transaction otherwise
qualifying under section 368(a)(1)(A), (B),
(C), or (G) (where the requirements of sec-
tions 354(b)(1)(A) and (B) are met) shall
not be disqualified by reason of the fact
that part or all of the acquired assets or
stock acquired in the transaction are trans-
ferred or successively transferred to one or
more corporations controlled in each trans-
fer by the transferor corporation. Control
is defined under section 368(c). The final
regulations also provide a rule for transfers
of assets following a reorganization quali-
fying under section 368(a)(1)(A) by reason
of section 368(a)(2)(E). No inference is to
be drawn as to whether transactions not de-
scribed in §1.368–2(k) otherwise qualify
as reorganizations.
The final regulations also provide that,
if a transaction otherwise qualifies as a re-
organization, a corporation remains a
party to the reorganization even though
stock or assets acquired in the reorganiza-
tion are transferred in a transaction de-
scribed in §1.368–2(k). See §1.368–2(f).
Furthermore, if a transaction otherwise
qualifies as a reorganization, a corpora-
tion shall not cease to be a party to the re-
organization solely because acquired as-
sets are transferred to a partnership in
which the transferor is a partner if the
COBE requirement is satisfied.
Section 368(a)(1)(D), 368(a)(1)(F), and
355 transactions
The proposed COBE regulations, ap-
plying only to the COBE and remote con-
tinuity of interest requirements, are lim-
ited to transactions otherwise qualifying
for reorganization treatment under section
368(a)(1)(A), (B), (C), or (G) (where the
requirements of sections 354(b)(1)(A)
and (B) are met). The IRS and Treasury
Department received comments stating
that the final regulations should apply to
reorganizations qualifying under section
368(a)(1)(D) or (F) or to transactions
qualifying under section 355.
The final regulations do not limit the
application of §1.368–1(d) to the transac-
1998–14 I.R.B.7April 6, 1998

tions enumerated in section 368(a)(2)(C).
The COBE provisions in the final regula-
tions apply to all reorganizations for
which COBE is relevant.
Section 1.368–2(k)(1) of the final regu-
lations, however, is limited in its applica-
tion to the transactions described in sec-
tion 368(a)(2)(C), and does not apply in
determining whether a reorganization
qualifies under section 368(a)(1)(D), sec-
tion 368(a)(1)(F), or section 355. The
IRS and Treasury Department believe that
further study is needed prior to extending
§1.368–2(k)(1) to one or more of these
provisions.
Effective Date
The amendments to these regulations
apply to transactions occurring after Janu-
ary 28, 1998, except that they do not
apply to any transaction occurring pur-
suant to a written agreement which is
(subject to customary conditions) binding
on January 28, 1998, and at all times
thereafter. Commentators requested that
the effective date be changed to allow
these regulations to apply to transactions
occurring on or before January 28, 1998.
The IRS and Treasury Department believe
that adopting an earlier effective date in-
creases the likelihood that T, P, and each
of the former T shareholders would report
the transaction inconsistently (in some
cases using hindsight), and would reduce
administrability of the regulation. No in-
ference should be drawn from any provi-
sion of this regulation as to application of
the COI or COBE requirements to trans-
actions occurring on or before January 28,
1998.
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 not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the regulation does not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notices of proposed rulemaking
preceding these regulations were submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on their impact on small busi-
ness.
Drafting Information
The principal authors of these regula-
tions are Phoebe Bennett, regarding
§1.368–1(e) (continuity of interest), and
Marlene Peake Oppenheim, regarding
§1.368–1(d) (continuity of business enter-
prise) and §1.368–2(k), both of the Office
of the Assistant Chief Counsel (Corpo-
rate), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.338-2 is amended:
1. By revising paragraph (c)(3)(ii).
2. In paragraph (c)(3)(iv) Example by
revising the first sentence of paragraph
(B).
The revisions read as follows:
§1.338–2 Miscellaneous issues under
section 338.
* * * * *
(c) * * *
(3) * * *
(ii) Continuity of interest.By virtue of
section 338, in determining whether the
continuity of interest requirement of
§1.368–1(b) and (e) is satisfied on the
transfer of assets from target to the trans-
feree, the purchasing corporation’s target
stock acquired in the qualified stock pur-
chase shall be treated as though it was not
acquired in connection with the transfer
of target assets.
* * * * *
(iv) Example. * * *
(B) Status of transfer as a reorganiza-
tion. By virtue of section 338, for the
purpose of determining whether the conti-
nuity of interest requirement of §1.368–
1(b) is satisfied, P’s T stock acquired in
the qualified stock purchase shall be
treated as though it was not acquired in
connection with the transfer of T assets to
X. * * *
* * * * *
Par. 3. Section 1.368–1 is amended by:
1. Adding three sentences immediately
following the first sentence of paragraph
(a).
2. Removing the third sentence and
adding four sentences in its place to para-
graph (b).
3. Removing paragraph (d)(1).
4. Redesignating paragraphs (d)(2),
(d)(3), and (d)(4) as paragraphs (d)(1),
(d)(2), and (d)(3), respectively.
5. Removing the first sentence of
newly designated paragraph (d)(1) and
adding two sentences in its place.
6. Adding new paragraph (d)(4).
7. Paragraph (d)(5) is amended by:
a. Adding two sentences to the end of
paragraph (d)(5) introductory text.
b. Removing the parentheses around
the numbers in the paragraph headings for
Example (1)through Example (5).
c. Adding Example 6through Example
12.
8. Adding paragraph (e).
The additions and revisions read as fol-
lows:
§1.368–1 Purpose and scope of
exception of reorganization exchanges.
(a) * * * In determining whether a
transaction qualifies as a reorganization
under section 368(a), the transaction must
be evaluated under relevant provisions of
law, including the step transaction doc-
trine. But see §§1.368–2(f) and (k) and
1.338–2(c)(3). The preceding two sen-
tences apply to transactions occurring
after January 28, 1998, except that they
do not apply to any transaction occurring
pursuant to a written agreement which is
binding on January 28, 1998, and at all
times thereafter. * * *
(b) * * * Requisite to a reorganization
under the Internal Revenue Code are a
continuity of the business enterprise
through the issuing corporation under the
modified corporate form as described in
paragraph (d) of this section, and (except
April 6, 199881998–14 I.R.B.

as provided in section 368(a)(1)(D)) a
continuity of interest as described in para-
graph (e) of this section. (For rules re-
garding the continuity of interest require-
ment under section 355, see §1.355–2(c).)
For purposes of this section, the term is-
suing corporationmeans the acquiring
corporation (as that term is used in section
368(a)), except that, in determining
whether a reorganization qualifies as a tri-
angular reorganization (as defined in
§1.358–6(b)(2)), the issuing corporation
means the corporation in control of the
acquiring corporation. The preceding
three sentences apply to transactions oc-
curring after January 28, 1998, except that
they do not apply to any transaction oc-
curring pursuant to a written agreement
which is binding on January 28, 1998, and
at all times thereafter. * * *
* * * * *
(d) Continuity of business enterprise—
(1) General rule.Continuity of business
enterprise (COBE) requires that the issu-
ing corporation (P), as defined in para-
graph (b) of this section, either continue
the target corporation’s (T’s) historic
business or use a significant portion of T’s
historic business assets in a business. The
preceding sentence applies to transactions
occurring after January 28, 1998, except
that it does not apply to any transaction
occurring pursuant to a written agreement
which is binding on January 28, 1998, and
at all times thereafter. * * *
* * * * *
(4) Acquired assets or stock held by
members of the qualified group or part-
nerships.The following rules apply in
determining whether the COBE require-
ment of paragraph (d)(1) of this section is
satisfied:
(i) Businesses and assets of members
of a qualified group.The issuing corpora-
tion is treated as holding all of the busi-
nesses and assets of all of the members of
the qualified group, as defined in para-
graph (d)(4)(ii) of this section.
(ii) Qualified group.A qualified group
is one or more chains of corporations con-
nected through stock ownership with the
issuing corporation, but only if the issuing
corporation owns directly stock meeting
the requirements of section 368(c) in at
least one other corporation, and stock
meeting the requirements of section
368(c) in each of the corporations (except
the issuing corporation) is owned directly
by one of the other corporations.
(iii) Partnerships—(A) Partnership
assets. Each partner of a partnership will
be treated as owning the T business assets
used in a business of the partnership in ac-
cordance with that partner’s interest in the
partnership.
(B) Partnership businesses. The issu-
ing corporation will be treated as conduct-
ing a business of a partnership if —
(1) Members of the qualified group, in
the aggregate, own an interest in the part-
nership representing a significant interest
in that partnership business; or
(2) One or more members of the quali-
fied group have active and substantial
management functions as a partner with
respect to that partnership business.
(C) Conduct of the historic T business
in a partnership.If a significant historic
T business is conducted in a partnership,
the fact that P is treated as conducting
such T business under paragraph (d)(4)-
(iii)(B) of this section tends to establish
the requisite continuity, but is not alone
sufficient.
(iv) Effective date.This paragraph
(d)(4) applies to transactions occurring
after January 28, 1998, except that it does
not apply to any transaction occurring
pursuant to a written agreement which is
binding on January 28, 1998, and at all
times thereafter.
(5) * * * All corporations have only
one class of stock outstanding. The pre-
ceding sentence and paragraph (d)(5) Ex-
ample 6through Example 12apply to
transactions occurring after January 28,
1998, except that they do not apply to any
transaction occurring pursuant to a writ-
ten agreement which is binding on Janu-
ary 28, 1998, and at all times thereafter.
* * * * *
Example 6. Use of a significant portion of T’s
historic business assets by the qualified group. (i)
Facts.T operates an auto parts distributorship. P
owns 80 percent of the stock of a holding company
(HC). HC owns 80 percent of the stock of ten sub-
sidiaries, S–1 through S–10. S–1 through S–10 each
separately operate a full service gas station. Pur-
suant to a plan of reorganization, T merges into P
and the T shareholders receive solely P stock. As
part of the plan of reorganization, P transfers T’s as-
sets to HC, which in turn transfers some of the T as-
sets to each of the ten subsidiaries. No one sub-
sidiary receives a significant portion of T’s historic
business assets. Each of the subsidiaries will use the
T assets in the operation of its full service gas sta-
tion. No P subsidiary will be an auto parts distribu-
tor.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(i) of this section, P is treated as
conducting the ten gas station businesses of S–1
through S–10 and as holding the historic T assets
used in those businesses. P is treated as holding all
the assets and conducting the businesses of all of the
members of the qualified group, which includes S–1
through S–10 (paragraphs (d)(4)(i) and (ii) of this
section). No member of the qualified group contin-
ues T’s historic distributorship business. However,
subsidiaries S–1 through S–10 continue to use the
historic T assets in a business. Even though no one
corporation of the qualified group is using a signifi-
cant portion of T’s historic business assets in a busi-
ness, the COBE requirement of paragraph (d)(1) of
this section is satisfied because, in the aggregate, the
qualified group is using a significant portion of T’s
historic business assets in a business.
Example 7. Continuation of the historic T busi-
ness in a partnership satisfies continuity of business
enterprise.(i) Facts. T manufactures ski boots. P
owns all of the stock of S–1. S–1 owns all of the
stock of S–2, and S–2 owns all of the stock of S–3.
T merges into P and the T shareholders receive con-
sideration consisting of P stock and cash. The T ski
boot business is to be continued and expanded. In
anticipation of this expansion, P transfers all of the T
assets to S–1, S–1 transfers all of the T assets to S–2,
and S–2 transfers all of the T assets to S–3. S–3 and
X (an unrelated party) form a new partnership
(PRS). As part of the plan of reorganization, S–3
transfers all the T assets to PRS, and S–3, in its ca-
pacity as a partner, performs active and substantial
management functions for the PRS ski boot busi-
ness, including making significant business deci-
sions and regularly participating in the overall su-
pervision, direction, and control of the employees of
the ski boot business. S–3 receives a 20 percent in-
terest in PRS. X transfers cash in exchange for an
80 percent interest in PRS.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(iii)(B)(2) of this section, P is
treated as conducting T’s historic business because
S–3 performs active and substantial management
functions for the ski boot business in S–3’s capacity
as a partner. P is treated as holding all the assets and
conducting the businesses of all of the members of
the qualified group, which includes S–3 (paragraphs
(d)(4)(i) and (ii) of this section). The COBE re-
quirement of paragraph (d)(1) of this section is satis-
fied.
Example 8. Continuation of the historic T busi-
ness in a partnership does not satisfy continuity of
business enterprise. (i) Facts.The facts are the
same as Example 7except that S–3 transfers the his-
toric T business to PRS in exchange for a 1 percent
interest in PRS.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(iii)(B)(2) of this section, P is
treated as conducting T’s historic business because
S–3 performs active and substantial management
functions for the ski boot business in S–3’s capacity
as a partner. The fact that a significant historic T
business is conducted in PRS, and P is treated as
conducting such T business under (d)(4)(iii)(B)
tends to establish the requisite continuity, but is not
alone sufficient (paragraph (d)(4)(iii)(C) of this sec-
1998–14 I.R.B.9April 6, 1998

tion). The COBE requirement of paragraph (d)(1) of
this section is not satisfied.
Example 9. Continuation of the T historic busi-
ness in a partnership satisfies continuity of business
enterprise. (i) Facts. The facts are the same as Ex-
ample 7 except that S–3 transfers the historic T busi-
ness to PRS in exchange for a 33
1
⁄
3
percent interest
in PRS, and no member of P’s qualified group per-
forms active and substantial management functions
for the ski boot business operated in PRS.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(iii)(B)(1) of this section, P is
treated as conducting T’s historic business because
S–3 owns an interest in the partnership representing
a significant interest in that partnership business. P
is treated as holding all the assets and conducting the
businesses of all of the members of the qualified
group, which includes S–3 (paragraphs (d)(4)(i) and
(ii) of this section). The COBE requirement of para-
graph (d)(1) of this section is satisfied.
Example 10. Use of T’s historic business assets
in a partnership business.(i) Facts.T is a fabric
distributor. P owns all of the stock of S–1. T merges
into P and the T shareholders receive solely P stock.
S–1 and X (an unrelated party) own interests in a
partnership (PRS). As part of the plan of reorganiza-
tion, P transfers all of the T assets to S–1, and S–1
transfers all the T assets to PRS, increasing S–1’s
percentage interest in PRS from 5 to 33
1
⁄
3
percent.
After the transfer, X owns the remaining 66
2
⁄
3
per-
cent interest in PRS. Almost all of the T assets con-
sist of T’s large inventory of fabric, which PRS uses
to manufacture sportswear. All of the T assets are
used in the sportswear business. No member of P’s
qualified group performs active and substantial
management functions for the sportswear business
operated in PRS.
(ii) Continuity of business enterprise. Under
paragraph (d)(4)(iii)(A) of this section, S–1 is
treated as owning 33
1
⁄
3
percent of the T assets used in
the PRS sportswear manufacturing business. Under
paragraph (d)(4)(iii)(B)(1) of this section, P is
treated as conducting the sportswear manufacturing
business because S–1 owns an interest in the part-
nership representing a significant interest in that
partnership business. P is treated as holding all the
assets and conducting the businesses of all of the
members of the qualified group, which includes S–1
(paragraphs (d)(4)(i) and (ii) of this section). The
COBE requirement of paragraph (d)(1) of this sec-
tion is satisfied.
Example 11. Aggregation of partnership inter-
ests among members of the qualified group: use of
T’s historic business assets in a partnership busi-
ness. (i) Facts.The facts are the same as Example
10, except that S–1 transfers all the T assets to PRS,
and P and X each transfer cash to PRS in exchange
for partnership interests. After the transfers, P owns
11 percent, S–1 owns 22
1
⁄
3
percent, and X owns 66
2
⁄
3
percent of PRS.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(iii)(B)(1) of this section, P is
treated as conducting the sportswear manufacturing
business because members of the qualified group, in
the aggregate, own an interest in the partnership rep-
resenting a significant interest in that business. P is
treated as owning 11 percent of the assets directly,
and S–1 is treated as owning 22
1
⁄
3
percent of the as-
sets, used in the PRS sportswear business (paragraph
(d)(4)(iii)(A) of this section). P is treated as holding
all the assets of all of the members of the qualified
group, which includes S–1, and thus in the aggre-
gate, P is treated as owning 33
1
⁄
3
of the T assets
(paragraph (d)(4)(i) and (ii) of this section). The
COBE requirement of paragraph (d)(1) of this sec-
tion is satisfied because P is treated as using a signif-
icant portion of T’s historic business assets in its
sportswear manufacturing business.
Example 12. Tiered partnerships: use of T’s his-
toric business assets in a partnership business.(i)
Facts.T owns and manages a commercial office
building in state Z. Pursuant to a plan of reorganiza-
tion, T merges into P, solely in exchange for P stock,
which is distributed to the T shareholders. P trans-
fers all of the T assets to a partnership, PRS–1,
which owns and operates television stations nation-
wide. After the transfer, P owns a 50 percent interest
in PRS–1. P does not have active and substantial
management functions as a partner with respect to
the PRS–1 business. X, not a member of P’s quali-
fied group, owns the remaining 50 percent interest in
PRS–1. PRS–1, in an effort to expand its state Z
television operation, enters into a joint venture with
U, an unrelated party. As part of the plan of reorga-
nization, PRS–1 transfers all the T assets and its
state Z television station to PRS–2, in exchange for a
75 percent partnership interest. U contributes cash
to PRS–2 in exchange for a 25 percent partnership
interest and oversees the management of the state Z
television operation. PRS–1 does not actively and
substantially manage PRS–2’s business. PRS–2’s
state Z operations are moved into the acquired T of-
fice building. All of the assets that P acquired from
T are used in PRS–2’s business.
(ii) Continuity of business enterprise.Under
paragraph (d)(4)(iii)(A) of this section, PRS–1 is
treated as owning 75 percent of the T assets used in
PRS–2’s business. P, in turn, is treated as owning 50
percent of PRS–1’s interest the T assets. Thus, P is
treated as owning 37
1
⁄
2
percent (50 percent 375 per-
cent) of the T assets used in the PRS-2 business.
Under paragraph (d)(4)(iii)(B)(1) of this section, P is
treated as conducting PRS–2’s business, the opera-
tion of the state Z television station, and under para-
graph (d)(4)(iii)(A) of this section, P is treated as
using 37
1
⁄
2
percent of the historic T business assets in
that business. The COBE requirement of paragraph
(d)(1) of this section is satisfied because P is treated
as using a significant portion of T’s historic business
assets in its television business.
(e) Continuity of interest—(1) General
rule.(i) The purpose of the continuity of
interest requirement is to prevent transac-
tions that resemble sales from qualifying
for nonrecognition of gain or loss avail-
able to corporate reorganizations. Conti-
nuity of interest requires that in substance
a substantial part of the value of the pro-
prietary interests in the target corporation
be preserved in the reorganization. A pro-
prietary interest in the target corporation is
preserved if, in a potential reorganization,
it is exchanged for a proprietary interest in
the issuing corporation (as defined in para-
graph (b) of this section), it is exchanged
by the acquiring corporation for a direct
interest in the target corporation enter-
prise, or it otherwise continues as a propri-
etary interest in the target corporation.
However, a proprietary interest in the tar-
get corporation is not preserved if, in con-
nection with the potential reorganization,
it is acquired by the issuing corporation
for consideration other than stock of the
issuing corporation, or stock of the issuing
corporation furnished in exchange for a
proprietary interest in the target corpora-
tion in the potential reorganization is re-
deemed. All facts and circumstances must
be considered in determining whether, in
substance, a proprietary interest in the tar-
get corporation is preserved. For purposes
of the continuity of interest requirement, a
mere disposition of stock of the target cor-
poration prior to a potential reorganization
to persons not related (as defined in para-
graph (e)(3) of this section determined
without regard to paragraph (e)(3)(i)(A) of
this section) to the target corporation or to
persons not related (as defined in para-
graph (e)(3) of this section) to the issuing
corporation is disregarded and a mere dis-
position of stock of the issuing corporation
received in a potential reorganization to
persons not related (as defined in para-
graph (e)(3) of this section) to the issuing
corporation is disregarded.
(ii) [Reserved] For further guidance
see §1.368–1T(e)(1)(ii)(A) and (B).
(2) Related person acquisitions.(i) A
proprietary interest in the target corpora-
tion is not preserved if, in connection with
a potential reorganization, a person re-
lated (as defined in paragraph (e)(3) of
this section) to the issuing corporation ac-
quires, with consideration other than a
proprietary interest in the issuing corpora-
tion, stock of the target corporation or
stock of the issuing corporation furnished
in exchange for a proprietary interest in
the target corporation in the potential re-
organization, except to the extent those
persons who were the direct or indirect
owners of the target corporation prior to
the potential reorganization maintain a di-
rect or indirect proprietary interest in the
issuing corporation.
(ii) [Reserved] For further guidance
see §1.368–1T(e)(2)(ii).
(3) Definition of related person—(i)
In general. For purposes of this para-
April 6, 1998101998–14 I.R.B.

graph (e), two corporations are related
persons if either—
(A) The corporations are members of
the same affiliated group as defined in
section 1504 (determined without regard
to section 1504(b)); or
(B) A purchase of the stock of one cor-
poration by another corporation would be
treated as a distribution in redemption of
the stock of the first corporation under
section 304(a)(2) (determined without re-
gard to §1.1502-80(b)).
(ii) Special rules.The following rules
apply solely for purposes of this para-
graph (e)(3):
(A) A corporation will be treated as re-
lated to another corporation if such rela-
tionship exists immediately before or im-
mediately after the acquisition of the
stock involved.
(B) A corporation, other than the target
corporation or a person related (as defined
in paragraph (e)(3) of this section deter-
mined without regard to paragraph
(e)(3)(i)(A) of this section) to the target
corporation, will be treated as related to
the issuing corporation if the relationship
is created in connection with the potential
reorganization.
(4) Acquisitions by partnerships.For
purposes of this paragraph (e), each part-
ner of a partnership will be treated as
owning or acquiring any stock owned or
acquired, as the case may be, by the part-
nership in accordance with that partner’s
interest in the partnership. If a partner is
treated as acquiring any stock by reason
of the application of this paragraph (e)(4),
the partner is also treated as having fur-
nished its share of any consideration fur-
nished by the partnership to acquire the
stock in accordance with that partner’s in-
terest in the partnership.
(5) Successors and predecessors. For
purposes of this paragraph (e), any refer-
ence to the issuing corporation or the tar-
get corporation includes a reference to
any successor or predecessor of such cor-
poration, except that the target corpora-
tion is not treated as a predecessor of the
issuing corporation and the issuing corpo-
ration is not treated as a successor of the
target corporation.
(6) Examples.For purposes of the ex-
amples in this paragraph (e)(6), P is the is-
suing corporation, T is the target corpora-
tion, S is a wholly owned subsidiary of P,
all corporations have only one class of
stock outstanding, A and B are individu-
als, PRS is a partnership, all reorganiza-
tion requirements other than the continu-
ity of interest requirement are satisfied,
and the transaction is not otherwise sub-
ject to recharacterization. The following
examples illustrate the application of this
paragraph (e):
Example 1. Sale of stock to third party. (i) Sale
of issuing corporation stock after merger.A owns
all of the stock of T. T merges into P. In the merger,
A receives P stock having a fair market value of
$50x and cash of $50x. Immediately after the
merger, and pursuant to a preexisting binding con-
tract, A sells all of the P stock received by A in the
merger to B. Assume that there are no facts and cir-
cumstances indicating that the cash used by B to
purchase A’s P stock was in substance exchanged by
P for T stock. Under paragraphs (e)(1) and (2) of
this section, the sale to B is disregarded because B is
not a person related to P within the meaning of para-
graph (e)(3) of this section. Thus, the transaction
satisfies the continuity of interest requirement be-
cause 50 percent of A’s T stock was exchanged for P
stock, preserving a substantial part of the value of
the proprietary interest in T.
(ii) Sale of target corporation stock before
merger.The facts are the same as paragraph (i) of
this Example 1, except that B buys A’s T stock prior
to the merger of T into P and then exchanges the T
stock for P stock having a fair market value of $50x
and cash of $50x. The sale by A is disregarded. The
continuity of interest requirement is satisfied be-
cause B’s T stock was exchanged for P stock, pre-
serving a substantial part of the value of the propri-
etary interest in T.
Example 2. Relationship created in connection
with potential reorganization. A owns all of the
stock of T. X, a corporation which owns 60 percent
of the P stock and none of the T stock, buys A’s T
stock for cash prior to the merger of T into P. X ex-
changes the T stock solely for P stock in the merger
which, when combined with X’s prior ownership of
P stock, constitutes 80 percent of the stock of P. X is
a person related to P under paragraphs (e)(3)(i)(A)
and (ii)(B) of this section, because X becomes affili-
ated with P in the merger. The continuity of interest
requirement is not satisfied, because X acquired a
proprietary interest in T for consideration other than
P stock, and a substantial part of the value of the
proprietary interest in T is not preserved. See para-
graph (e)(2) of this section.
Example 3. Participation by issuing corporation
in post-merger sale.A owns 80 percent of the T
stock and none of the P stock, which is widely held.
T merges into P. In the merger, A receives P stock.
In addition, A obtains rights pursuant to an arrange-
ment with P to have P register the P stock under the
Securities Act of 1933, as amended. P registers A’s
stock, and A sells the stock shortly after the merger.
No person who purchased the P stock from A is a
person related to P within the meaning of paragraph
(e)(3) of this section. Under paragraphs (e)(1) and
(2) of this section, the sale of the P stock by A is dis-
regarded because no person who purchased the P
stock from A is a person related to P within the
meaning of paragraph (e)(3) of this section. The
transaction satisfies the continuity of interest re-
quirement because A’s T stock was exchanged for P
stock, preserving a substantial part of the value of
the proprietary interest in T.
Example 4. Redemptions and purchases by issu-
ing corporation or related persons.(i) Redemption
by issuing corporation.A owns 100 percent of the
stock of T and none of the stock of P. T merges into
S. In the merger, A receives P stock. In connection
with the merger, P redeems all of the P stock received
by A in the merger for cash. The continuity of interest
requirement is not satisfied, because, in connection
with the merger, P redeemed the stock exchanged for
a proprietary interest in T, and a substantial part of the
value of the proprietary interest in T is not preserved.
See paragraph (e)(1) of this section.
(ii) Purchase of target corporation stock by issu-
ing corporation.The facts are the same as paragraph
(i) of this Example 4, except that, instead of P re-
deeming its stock, prior to and in connection with the
merger of T into S, P purchases 90 percent of the T
stock from A for cash. The continuity of interest re-
quirement is not satisfied, because in connection with
the merger, P acquired a proprietary interest in T for
consideration other than P stock, and a substantial
part of the value of the proprietary interest in T is not
preserved. See paragraph (e)(1) of this section.
However, see §1.338–2(c)(3) (which may change the
result in this case by providing that, by virtue of sec-
tion 338, continuity of interest is satisfied for certain
parties after a qualified stock purchase).
(iii) Purchase of issuing corporation stock by
person related to issuing corporation.The facts are
the same as paragraph (i) of this Example 4,except
that, instead of P redeeming its stock, S buys all of
the P stock received by A in the merger for cash. S
is a person related to P under paragraphs (e)(3)(i)(A)
and (B) of this section. The continuity of interest re-
quirement is not satisfied, because S acquired P
stock issued in the merger, and a substantial part of
the value of the proprietary interest in T is not pre-
served. See paragraph (e)(2) of this section.
Example 5. Redemption in substance by issuing
corporation. A owns 100 percent of the stock of T
and none of the stock of P. T merges into P. In the
merger, A receives P stock. In connection with the
merger, B buys all of the P stock received by A in the
merger for cash. Shortly thereafter, in connection
with the merger, P redeems the stock held by B for
cash. Based on all the facts and circumstances, P in
substance has exchanged solely cash for T stock in
the merger. The continuity of interest requirement is
not satisfied, because in substance P redeemed the
stock exchanged for a proprietary interest in T, and a
substantial part of the value of the proprietary inter-
est in T is not preserved. See paragraph (e)(1) of
this section.
Example 6. Purchase of issuing corporation
stock through partnership.A owns 100 percent of
the stock of T and none of the stock of P. S is an 85
percent partner in PRS. The other 15 percent of PRS
is owned by unrelated persons. T merges into P. In
the merger, A receives P stock. In connection with
the merger, PRS purchases all of the P stock re-
ceived by A in the merger for cash. Under paragraph
(e)(4) of this section, S, as an 85 percent partner of
PRS, is treated as having acquired 85 percent of the
P stock exchanged for A’s T stock in the merger, and
as having furnished 85 percent of the cash paid by
PRS to acquire the P stock. S is a person related to P
1998–14 I.R.B.11April 6, 1998

under paragraphs (e)(3)(i)(A) and (B) of this section.
The continuity of interest requirement is not satis-
fied, because S is treated as acquiring 85 percent of
the P stock issued in the merger, and a substantial
part of the value of the proprietary interest in T is not
preserved. See paragraph (e)(2) of this section.
Example 7. Exchange by acquiring corporation
for direct interest. A owns 30 percent of the stock of
T. P owns 70 percent of the stock of T, which was
not acquired by P in connection with the acquisition
of T’s assets. T merges into P. A receives cash in the
merger. The continuity of interest requirement is
satisfied, because P’s 70 percent proprietary interest
in T is exchanged by P for a direct interest in the as-
sets of the target corporation enterprise.
Example 8. Effect of general stock repurchase
program.T merges into P, a corporation whose
stock is widely held and publicly traded and that has
one class of common stock outstanding. In the
merger, T shareholders receive common stock of P.
Immediately after the merger, P repurchases a small
percentage of its common stock in the open market
as part of its ongoing stock repurchase program.
The repurchase program was not created or modi-
fied in connection with the acquisition of T. Conti-
nuity of interest is satisfied, because based on all of
the facts and circumstances, the redemption of a
small percentage of the P stock does not affect the T
shareholders’ proprietary interest in T, because it
was not in connection with the merger, and the value
of the proprietary interest in T is preserved. See
paragraph (e)(1) of this section.
Example 9. Maintenance of direct or indirect in-
terest in issuing corporation. X, a corporation,
owns all of the stock of each of corporations P and
Z. Z owns all of the stock of T. T merges into P. Z
receives P stock in the merger. Immediately there-
after and in connection with the merger, Z distrib-
utes the P stock received in the merger to X. X is a
person related to P under paragraph (e)(3)(i)(A) of
this section. The continuity of interest requirement
is satisfied, because X was an indirect owner of T
prior to the merger who maintains a direct or indirect
proprietary interest in P, preserving a substantial part
of the value of the proprietary interest in T. See
paragraph (e)(2) of this section.
(7) Effective date. This paragraph (e)
applies to transactions occurring after
January 28, 1998, except that it does not
apply to any transaction occurring pur-
suant to a written agreement which is
binding on January 28, 1998, and at all
times thereafter.
Par. 4. Section 1.368–2 is amended by:
1. Removing the second sentence of
paragraph (a) and adding two sentences in
its place.
2. Removing the second sentence of
paragraph (f) and adding four sentences in
its place.
3. Removing the second sentence in
paragraph (j)(1).
4. Revising paragraph (j)(3)(ii).
5. Revising the first sentence in para-
graph (j)(3)(iii).
6. Adding paragraph (j)(3)(iv).
7. Removing paragraph (j)(4).
8. Redesignating paragraphs (j)(5),
(j)(6), and (j)(7) as (j)(4), (j)(5), and
(j)(6), respectively.
9. Removing the parentheses around
the numbers in the paragraph headings for
Example (1) through Example (9)in
newly designated paragraph (j)(6).
10. Adding paragraph (k).
The additions and revisions read as fol-
lows:
§1.368–2 Definition of terms.
(a) * * * The term does not embrace
the mere purchase by one corporation of
the properties of another corporation. The
preceding sentence applies to transactions
occurring after January 28, 1998, except
that it does not apply to any transaction
occurring pursuant to a written agreement
which is binding on January 28, 1998, and
at all times thereafter. * * *
* * * * *
(f) * * * If a transaction otherwise
qualifies as a reorganization, a corporation
remains a party to the reorganization even
though stock or assets acquired in the reor-
ganization are transferred in a transaction
described in paragraph (k) of this section.
If a transaction otherwise qualifies as a re-
organization, a corporation shall not cease
to be a party to the reorganization solely
by reason of the fact that part or all of the
assets acquired in the reorganization are
transferred to a partnership in which the
transferor is a partner if the continuity of
business enterprise requirement is satis-
fied. See §1.368–1(d). The preceding
three sentences apply to transactions oc-
curring after January 28, 1998, except that
they do not apply to any transaction occur-
ring pursuant to a written agreement
which is binding on January 28, 1998, and
at all times thereafter. * * *
* * * * *
(j) * * *
(3) * * *
(ii) Except as provided in paragraph
(k)(2) of this section, the controlling cor-
poration must control the surviving corpo-
ration immediately after the transaction.
(iii) After the transaction, except as
provided in paragraph (k)(2) of this sec-
tion, the surviving corporation must hold
substantially all of its own properties and
substantially all of the properties of the
merged corporation (other than stock of
the controlling corporation distributed in
the transaction). * * *
(iv) Paragraphs (j)(3)(ii) and (iii) of
this section apply to transactions occur-
ring after January 28, 1998, except that
they do not apply to any transaction oc-
curring pursuant to a written agreement
which is binding on January 28, 1998, and
at all times thereafter.
* * * * *
(k) Transfer of assets or stock in sec-
tion 368(a)(1)(A), (B), (C), or (G) reorga-
nizations—(1) General rule for transfers
to controlled corporations.Except as
otherwise provided in this section, a
transaction otherwise qualifying under
section 368(a)(1)(A), (B), (C), or (G)
(where the requirements of sections
354(b)(1)(A) and (B) are met) shall not be
disqualified by reason of the fact that part
or all of the acquired assets or stock ac-
quired in the transaction are transferred or
successively transferred to one or more
corporations controlled in each transfer
by the transferor corporation. Control is
defined under section 368(c).
(2) Transfers following a reverse trian-
gular merger.A transaction qualifying
under section 368(a)(1)(A) by reason of
the application of section 368(a)(2)(E) is
not disqualified by reason of the fact that
part or all of the stock of the surviving
corporation is transferred or successively
transferred to one or more corporations
controlled in each transfer by the trans-
feror corporation, or because part or all of
the assets of the surviving corporation or
the merged corporation are transferred or
successively transferred to one or more
corporations controlled in each transfer
by the transferor corporation.
(3) Examples.The following exam-
ples illustrate the application of this para-
graph (k). P is the issuing corporation and
T is the target corporation. P has only one
class of stock outstanding. The examples
are as follows:
Example 1. Transfers of acquired assets to con-
trolled corporations.(i) Facts.T operates a bakery
which supplies delectable pastries and cookies to
local retail stores. The acquiring corporate group
produces a variety of baked goods for nationwide
distribution. P owns 80 percent of the stock of S–1.
Pursuant to a plan of reorganization, T transfers all
of its assets to S–1 solely in exchange for P stock,
which T distributes to its shareholders. S–1 owns 80
April 6, 1998121998–14 I.R.B.

percent of the stock of S–2; S–2 owns 80 percent of
the stock of S–, which also makes and supplies pas-
tries and cookies. Pursuant to the plan of reorgani-
zation, S–1 transfers the T assets to S–2; S–2 trans-
fers the T assets to S–3.
(ii) Analysis.Under this paragraph (k), the trans-
action, otherwise qualifying as a reorganization
under section 368(a)(1)(C), is not disqualified by
reason of the fact of the successive transfers of all of
the acquired assets from S–1 to S–2, and from S–2
to S–3 because in each transfer, the transferee corpo-
ration is controlled by the transferor corporation.
Control is defined under section 368(c).
Example 2. Transfers of acquired stock to con-
trolled corporations.(i) Facts.The facts are the
same as Example 1 except that S–1 acquires all of the
T stock rather than the T assets, and as part of the plan
of reorganization, S–1 transfers all of the T stock to
S–2, and S–2 transfers all of the T stock to S–3.
(ii) Analysis.Under this paragraph (k), the trans-
action, otherwise qualifying as a reorganization
under section 368(a)(1)(B), is not disqualified by
reason of the fact of the successive transfers of all of
S–2, and from S–2 to S–3 because in each transfer,
the transferee corporation is controlled by the trans-
feror corporation.
Example 3. Transfers of acquired stock to part-
nerships.(i) Facts.The facts are the same as in Ex-
ample 2.However, as part of the plan of reorganiza-
tion, S–2 and S–3 form a new partnership, PRS.
Immediately thereafter, S–3 transfers all of the T
stock to PRS in exchange for an 80 percent partner-
ship interest, and S–2 transfers cash to PRS in ex-
change for a 20 percent partnership interest.
(ii) Analysis.This paragraph (k) describes the
successive transfer of the T stock to S–3, but does
not describe S–3’s transfer of the T stock to PRS.
Therefore, the characterization of this transaction
must be determined under the relevant provisions of
law, including the step transaction doctrine. See
§1.368–1(a). The transaction fails to meet the con-
trol requirement of a reorganization described in
section 368(a)(1)(B) because immediately after the
acquisition of the T stock, the acquiring corporation
does not have control of T.
(4) This paragraph (k) applies to trans-
actions occurring after January 28, 1998,
except that it does not apply to any trans-
action occurring pursuant to a written
agreement which is binding on January
28, 1998, and at all times thereafter.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved January 12, 1998.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
January 23, 1998, 12:15 p.m., and published in the
issue of the Federal Register for January 28, 1998,
63 F.R. 4174)
26 CFR 1.368–1T: Purpose and scope of exception
of reorganization exchanges (temporary).
T.D. 8761
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Continuity of Interest
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations providing guidance
regarding satisfaction of the continuity of
interest requirement for corporate reorga-
nizations. The temporary regulations af-
fect corporations and their shareholders.
Final regulations published in T.D. 8760,
page 4 of this Bulletin, also provide guid-
ance regarding satisfaction of the continu-
ity of interest requirement for corporate
reorganizations. These temporary regula-
tions amplify the final regulations. The
text of these temporary regulations also
serves as the text of proposed regulations
published in REG–120882–97, page 25 of
this Bulletin.
DATES: These regulations are effective
January 28, 1998.
Applicability: These regulations apply
to transactions occurring after January 28,
1998, except that they do not apply to any
transaction occurring pursuant to a writ-
ten agreement which is (subject to cus-
tomary conditions) binding on January
28, 1998, and at all times thereafter.
FOR FURTHER INFORMATION CON-
TACT: Phoebe Bennett, (202) 622-7750
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under section 368. These temporary
regulations provide that, in determining
whether the continuity of interest require-
ment for corporate reorganizations is sat-
isfied with respect to a potential reorgani-
zation, a proprietary interest in the target
corporation is not preserved if, in connec-
tion with a potential reorganization, it is
redeemed or acquired by a person related
to the target corporation, or to the extent
that, prior to and in connection with a po-
tential reorganization, an extraordinary
distribution is made with respect to it.
Background
On December 23, 1996, the IRS pub-
lished a notice of proposed rulemaking
(REG–252231–96 [1997–1 C.B. 800]) in
the Federal Register(61 F.R. 67512) re-
lating to the continuity of interest require-
ment. Many written comments were re-
ceived in response to this notice of
proposed rulemaking. A public hearing
on the proposed regulations was held on
May 7, 1997. After consideration of all
comments, the regulations proposed by
REG–252231–96 are adopted as final reg-
ulations, and published in T.D. 8760.
These temporary regulations supplement
the final regulations.
Explanation of Provisions
Final regulations published in T.D.
8760 provide that in determining whether
the continuity of interest (COI) require-
ment for corporate reorganizations is sat-
isfied, dispositions of stock of the target
corporation (T) by a T shareholder gener-
ally are not taken into account.
Redemptions of T Stock or Extraordinary
Distributions with Respect to T Stock
Commentators requested guidance on
the circumstances under which a redemp-
tion by T of its stock would adversely af-
fect satisfaction of the COI requirement.
Some commentators suggested that the
IRS and Treasury Department adopt an
approach that would identify either the is-
suing corporation (P) or T as the source of
the funds for the redemption. If, in con-
nection with an acquisition of T, the facts
and circumstances indicate that P did not
directly or indirectly furnish funds used
by T to redeem T shareholders, these
commentators suggested that satisfaction
of the COI requirement should not be ad-
versely affected. In many transactions,
however, such a tracing approach would
be extremely difficult to administer. For
example, if P acquired the assets, rather
than the stock, of T or if T redeemed stock
for a note, it would be unclear in many
circumstances whether in substance T or
P assets were used to fund the redemption
or to repay the note.
Another commentator suggested that
redemptions by T in connection with a
1998–14 I.R.B.13April 6, 1998

potential reorganization should adversely
affect satisfaction of the COI requirement
because the effect on COI is the same as if
P had furnished the redemption consider-
ation in the transaction. The temporary
regulations generally adopt this approach
because it reflects that T and P will be
combined economically and because of
the difficulties of administering a tracing
approach, as previously described.
Treatment of stock redeemed by T as
proprietary interests that are not preserved
in the reorganization also accords the
same tax result to transactions that reach
the same result by different steps. For ex-
ample, T could merge into P for a combi-
nation of consideration, of which 30 per-
cent is P stock and 70 percent is a P
promissory note. Conversely, T could
issue its promissory note to redeem 70
percent of the T stock and then P would
assume the T note in the merger, in which
the remaining T shareholders receive
solely P stock. From the perspective of P,
T, and the T shareholders, these two trans-
actions are substantively identical, and the
COI requirement is not satisfied in the first
transaction. The temporary regulations
provide that the second transaction like-
wise does not satisfy the COI requirement.
In addition, this approach corresponds
with the rule of the final regulations that a
proprietary interest in T is not preserved if,
in connection with the potential reorgani-
zation, P stock furnished in exchange for a
proprietary interest in T in the potential re-
organization is redeemed. Because the
final regulations do not inquire, in the case
of a subsequent P redemption, whether the
source of consideration furnished in the
redemption was former T assets or historic
P assets, the temporary regulations simi-
larly do not make an inquiry in the case of
a prior T redemption. Instead, for pur-
poses of the COI requirement, the tempo-
rary regulations treat T and P as a com-
bined economic enterprise. In an asset
acquisition, this approach avoids the diffi-
cult process of identifying the source of
payments as between T and P.
Commentators have suggested that this
approach is inconsistent with authorities
which hold that redemptions of stock of
the target corporation with assets of the
target corporation do not violate the
solely-for-voting-stock requirement ap-
plicable to section 368(a)(1)(B) reorgani-
zations. See, e.g., Rev. Rul. 55–440
(1955–2 C.B. 226). None of these author-
ities address the effect on continuity of in-
terest of such redemptions. For the rea-
sons stated above, the temporary
regulations take such redemptions into ac-
count for continuity purposes.
The temporary regulations provide that
a proprietary interest in T is not preserved
if, in connection with a potential reorgani-
zation, it is redeemed or to the extent that,
prior to and in connection with a potential
reorganization, an extraordinary distribu-
tion is made with respect to it. An extra-
ordinary distribution with respect to T
stock, followed by a sale of the remaining
T stock to P, has the same effect on the
value of the proprietary interest in T as a
pro rata redemption by T followed by a
sale of the outstanding T stock to P.
The temporary regulations do not pro-
vide guidance on the determination of
whether a distribution will be treated as
an extraordinary distribution, except that
the rules of section 1059 do not apply for
this purpose. The IRS and Treasury De-
partment invite comments on whether the
regulations should provide more specific
guidance in this area.
A section 355 distribution of controlled
corporation stock by T will preserve a
proprietary interest in T, except to the ex-
tent that the T shareholders receive other
property or money to which section
356(a) applies or the distribution is extra-
ordinary in amount and is a distribution of
property or money to which section
356(b) applies.
Related Person Rule
In determining whether the COI re-
quirement is satisfied, dispositions of T
stock to persons that are not related to T
or P are disregarded. The final regula-
tions provide that a proprietary interest in
T is not preserved if, in connection with a
potential reorganization, a person related
to P acquires, with consideration other
than a proprietary interest in P, T stock or
P stock furnished in exchange for a pro-
prietary interest in T in the potential reor-
ganization. Consistent with the final reg-
ulations, the temporary regulations
provide that a proprietary interest in T is
not preserved if, prior to and in connec-
tion with a potential reorganization, a per-
son related to T acquires T stock with
consideration other than T stock or P
stock.
Definition of Related Person of T
The final regulations include as related
persons any corporation that is a member
of the affiliated group, within the meaning
of section 1504, of which P is a member,
and any corporation whose purchase of P
stock would be treated as a redemption of
that stock under section 304(a)(2). The
section 1504 test was adopted because the
IRS and Treasury Department were con-
cerned that acquisitions of T stock or P
stock by P affiliated corporations were no
different in substance than acquisitions or
redemptions by P. This concern does not
generally extend to members of T’s affili-
ated group that are not also considered re-
lated to T under section 304(a)(2) because
such corporations are T shareholders par-
ticipating in the potential reorganization
along with the other shareholders of the
target corporation. The temporary regula-
tions treat two corporations as related per-
sons if a purchase of the stock of one cor-
poration by another corporation would be
treated as a distribution in redemption of
the stock of the first corporation under
section 304(a)(2) (determined without re-
gard to §1.1502–80(b)).
Effect on Other Authorities
These COI regulations apply solely for
purposes of determining whether the COI
requirement is satisfied. No inference
should be drawn from any provision of
this regulation as to whether other reorga-
nization requirements are satisfied, or as
to the characterization of a related trans-
action. See, e.g., §1.301–1(l).
Effect on Other Documents
Rev. Proc. 77–37 (1977–2 C.B. 568)
and Rev. Proc. 86–42 (1986–2 C.B. 722)
will be modified to the extent inconsistent
with these temporary regulations.
Effective Date
These regulations apply to transactions
occurring after January 28, 1998, except
that they do not apply to any transaction
occurring pursuant to a written agreement
which is (subject to customary condi-
tions) binding on January 28, 1998, and at
all times thereafter.
Special Analyses
It has been determined that these tem-
porary regulations are not a significant
April 6, 1998141998–14 I.R.B.

regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these temporary regulations and,
because the temporary regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, these regulations will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Phoebe Bennett of the Office of
the Assistant Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.368–1T is added to
read as follows:
§1.368–T Purpose and scope of exception
of reorganization exchanges (temporary).
(a) through (e)(1)(i) [Reserved] For
further guidance see §1.368–1(a) through
(e)(1)(i).
(e)(1)(ii)(A) General rule.A propri-
etary interest in the target corporation
(other than one held by the acquiring cor-
poration) is not preserved if, prior to and
in connection with a potential reorganiza-
tion, it is redeemed or to the extent that,
prior to and in connection with a potential
reorganization, an extraordinary distribu-
tion is made with respect to it. The deter-
mination of whether a distribution with
respect to stock of the target corporation
is an extraordinary distribution for pur-
poses of this paragraph (e)(1)(ii) will be
made on the basis of all of the facts and
circumstances, but the treatment of the
distribution under section 1059 (relating
to extraordinary dividends) will not be
taken into account.
(B) Exception. Paragraph (e)(1)(ii)(A)
of this section does not apply to a distrib-
ution of stock by the target corporation to
which section 355(a) (or so much of sec-
tion 356 as relates to section 355) applies,
except to the extent that—
(1) The target corporation shareholders
receive other property or money to which
section 356(a) applies; or
(2) The distribution is extraordinary in
amount and is a distribution of property or
money to which section 356(b) applies.
(2)(i) [Reserved] For further guid-
ance, see §1.368–1(e)(2)(i).
(ii) A proprietary interest in the target
corporation is not preserved if, prior to
and in connection with a potential reorga-
nization, a person related (as defined in
§1.368–1(e)(3) determined without re-
gard to §1.368–1(e)(3)(i)(A)) to the target
corporation acquires stock of the target
corporation, with consideration other than
stock of either the target corporation or
the issuing corporation.
(e)(3) through (e)(6) Example 9.[Re-
served] For further guidance, see §1.368-
1(e)(3) through (e)(6) Example 9.
(e)(6) Example 10. Acquisition of target corpo-
ration stock before merger.(i) Redemption by target
corporation.A owns 85 percent and B owns 15 per-
cent of the stock of T. The fair market value of T is
$100x. Neither A nor B own stock of P. Prior to and
in connection with the merger of T into P, T redeems
A’s T stock for $85x and issues to A its promissory
note in exchange for the stock. At the time of the
merger T has a value of $15x, after giving effect to
the redemption of its stock. In the merger, B re-
ceives solely P stock. The continuity of interest re-
quirement is not satisfied because T redeemed A’s
stock, and a substantial part of the value of the pro-
prietary interest in T is not preserved. See paragraph
(e)(1)(ii)(A) of this section.
(ii) Purchase by person related to target corpo-
ration. The facts are the same as paragraph (i) of
this Example 10,except that X, T’s wholly owned
subsidiary, acquires A’s T stock prior to and in con-
nection with the merger for cash of $85x. Under
paragraph (e)(2)(ii) of this section and §1.368–
1(e)(3)(i)(B), X’s acquisition of A’s T stock is an ac-
quisition by a related person. The continuity of in-
terest requirement is not satisfied, because X ac-
quired T stock, for consideration other than P stock,
and a substantial part of the value of the proprietary
interest in T is not preserved. See paragraph
(e)(2)(ii) of this section.
Example 11. Extraordinary distribution before
merger.A owns all of the stock of T. The fair mar-
ket value of T is $100x. Prior to and in connection
with the merger of T into P, T pays A an extraordi-
nary distribution of an $85x note. T merges into P,
and A receives solely P stock. P assumes T’s obliga-
tion on the note. The continuity of interest require-
ment is not satisfied, because T paid A an extraordi-
nary distribution, and a substantial part of the value
of the proprietary interest in T is not preserved. See
paragraph (e)(1)(ii)(A) of this section.
(f) Effective date. This section applies
to transactions occurring after January 28,
1998, except that it does not apply to any
transaction occurring pursuant to a writ-
ten agreement which is (subject to cus-
tomary conditions) binding on January
28, 1998, and at all times thereafter.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved January 12, 1998.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
January 23, 1998, 12:15 p.m., and published in the
issue of the Federal Register for January 28, 1998,
63 F.R. 4183)
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted federal long-term rate is set forth
for the month of April 1998. See Rev. Rul. 98–18,
page 22.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 453.—Installment
Method
26 CFR 1.453–11: Installment obligations received
from a liquidation corporation.
T.D. 8762
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
1998–14 I.R.B.15April 6, 1998

Installment Obligations Received
From Liquidating Corporations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the use of the
installment method to report the gain rec-
ognized by a shareholder who receives, in
exchange for the shareholder’s stock, cer-
tain installment obligations that are dis-
tributed upon the complete liquidation of
a corporation. Changes to the applicable
tax law were made by the Installment
Sales Revision Act of 1980 and the Tax
Reform Act of 1986. These regulations
affect taxpayers who receive installment
obligations in exchange for their stock
upon the complete liquidation of a corpo-
ration.
DATES: This regulation is effective Jan-
uary 28, 1998.
For dates of applicability, see §1.453–
11(e) of these regulations.
FOR FURTHER INFORMATION CON-
TACT: George F. Wright, (202) 622-4950
(not a toll-free number).
SUPPLEMENTARY INFORMATION
Background
Section 453(h), relating to the tax treat-
ment of installment obligations received
by a shareholder from a liquidating corpo-
ration, was added to the Internal Revenue
Code of 1954 by the Installment Sales Re-
vision Act of 1980, Public Law 96–471,
94 Stat. 2247, 2250. Proposed regula-
tions under section 453(h) were published
in the Federal Registerfor January 13,
1984 (49 F.R. 1742). Subsequently, sec-
tion 453(h) was amended as part of the
Tax Reform Act of 1986, Public Law 99-
514, 100 Stat. 2085, 2274, pursuant to
which both C and S corporations became
subject to tax upon making liquidating
distributions of installment obligations to
shareholders. The Technical and Miscel-
laneous Revenue Act of 1988, Public Law
100–647, 102 Stat. 3342, 3403, added
section 453B(h), which provides that no
gain or loss is recognized by S corpora-
tions with respect to certain liquidating
distributions of installment obligations.
The regulations proposed on January 13,
1984 (49 F.R. 1742), were withdrawn by
the notice of proposed rulemaking pub-
lished on January 22, 1997 (62 F.R.
3244), except for paragraph (e) relating to
liquidating distributions received in more
than one taxable year, and paragraph (g)
containing the effective date provision.
The notice of proposed rulemaking pub-
lished in the Federal Registerfor Janu-
ary 22, 1997, reserved paragraph (d) for
liquidating distributions received in more
than one taxable year. Written comments
responding to this notice were received.
No public hearing was held because no
hearing was requested. After considera-
tion of all comments received, the pro-
posed regulations are adopted as revised
by this Treasury decision.
Explanation of Provisions
A. Overview of Provisions
Prior to the Installment Sales Revision
Act of 1980, a shareholder recognized
gain or loss on receipt of an installment
obligation that was distributed by a liqui-
dating corporation in exchange for the
shareholder’s stock. Gain could not be re-
ported under the installment sale provi-
sions of section 453 as payments were re-
ceived on the obligation distributed by the
corporation in the liquidation.
As enacted by the Installment Sales Re-
vision Act of 1980 and amended by the
Tax Reform Act of 1986, section 453(h)
provides a different treatment for certain
installment obligations that are distributed
in a complete liquidation to which section
331 applies. Under section 453(h), a
shareholder that does not elect out of the
installment method treats the payments
under the obligation, rather than the
obligation itself, as consideration re-
ceived in exchange for the stock. The
shareholder then takes into account the in-
come from the payments under the oblig-
ation using the installment method. In
this manner, the shareholder generally is
treated as if the shareholder sold the
shareholder’s stock to an unrelated pur-
chaser on the installment method.
This treatment under section 453(h) ap-
plies generally to installment obligations
received by a shareholder (in exchange
for the shareholder’s stock) in a complete
liquidation to which section 331 applies if
(a) the installment obligations are quali-
fying installment obligations, i.e., the in-
stallment obligations are acquired in re-
spect of a sale or exchange of property by
the corporation during the 12-month pe-
riod beginning on the date a plan of com-
plete liquidation is adopted, and (b) the
liquidation is completed within that 12-
month period. However, an installment
obligation acquired in a sale or exchange
of inventory, stock in trade, or property
held for sale in the ordinary course of
business qualifies for this treatment only
if the obligation arises from a single bulk
sale of substantially all of such property
attributable to a trade or business of the
corporation. If an installment obligation
arises from both a sale or exchange of in-
ventory, etc., that does not comply with
the requirements of the preceding sen-
tence and a sale or exchange of other as-
sets, the portion of the installment obliga-
tion that is attributable to the sale or
exchange of other assets is a qualifying
installment obligation.
B. Discussion of Comments
Interaction of section 453(h) and
limitations on the installment method
The regulations provide that, if the stock
of a liquidating corporation is traded on an
established securities market, an install-
ment obligation received by a shareholder
from that corporation as a liquidating dis-
tribution is not a qualifying installment
obligation and does not qualify for install-
ment reporting, regardless of whether the
requirements of section 453(h) are other-
wise satisfied. However, if an installment
obligation is received by a shareholder
from a liquidating corporation whose stock
is not publicly traded, and the obligation
arose from a sale by the corporation of
stock or securities that are traded on an es-
tablished market, then the obligation gen-
erally is a qualifying installment obligation
in the hands of the transferor. An excep-
tion to the above rule applies if the liqui-
dating corporation is formed or availed of
for a principal purpose of avoiding limita-
tions on the availability of installment sales
treatment, such as section 453(k), through
the use of a related party.
One commentator suggested that the
anti-abuse rule directed at cases in which
there is a principal purpose to avoid sec-
tion 453(k) is not necessary. The com-
mentator suggests that the effect of a con-
tribution of publicly-traded stock to a
nonpublicly-traded corporation, followed
April 6, 1998161998–14 I.R.B.

by the sale of the publicly-traded stock for
an installment obligation and the liquida-
tion of the nonpublicly-traded corpora-
tion, is the creation of two levels of tax
because the liquidating corporation must
recognize gain on the distribution of the
installment obligation. Accordingly, the
commentator does not believe that the
transaction offers any tax avoidance op-
portunities that warrant a specific anti-
abuse rule.
The anti-abuse rule is directed at cir-
cumvention of the prohibition in section
453(k) against the use of the installment
method for a sale of publicly-traded secu-
rities. It is designed to prevent a share-
holder from indirectly entering into such a
sale on the installment method when the
shareholder could not have done so
through a direct sale. Accordingly, the
anti-abuse rule has been retained.
Liquidating distributions received in
more than one year
Under §1.453–2(e) proposed on Janu-
ary 13, 1984, if liquidating distributions,
including qualifying installment obliga-
tions, are received in more than one tax-
able year, a shareholder must file an
amended return if the reallocation of basis
required under section 453(h)(2) affects
the computation of gain recognized in an
earlier year. If the shareholder has trans-
ferred the installment obligation to a per-
son whose basis in the obligation is deter-
mined by reference to the shareholder’s
basis, then the transferee generally is
required to reallocate basis and, if neces-
sary, file an amended return. The pro-
posed effective date applied to distribu-
tions of qualifying installment obligations
made after March 31, 1980.
In the preamble to the 1997 proposed
regulations, the IRS and Treasury Depart-
ment suggested that an alternative to the
amended return requirement would be to
require the shareholder to recognize in the
current year the additional amount of gain
that would have been recognized in the
earlier year had the total amount of the
liquidating distributions been known in
the earlier year. Comments were re-
quested regarding these and any other
methods of accomplishing the basis real-
location. Proposed §1.453–11(d) relating
to liquidating distributions received in
more than one taxable year was reserved.
One commentator questioned whether
amended returns were necessary and
noted that the alternative method dis-
cussed in the preamble is simpler and less
burdensome for taxpayers. The commen-
tator then suggested an ordering rule as
another method of achieving the intended
purpose. Under the proposed ordering
rule, basis first would be allocated to as-
sets other than installment obligations dis-
tributed in the liquidation with the re-
mainder allocated to the installment
obligations. The commentator acknowl-
edged that it might not be appropriate to
implement this approach by regulation
without amending the statute.
The proposed ordering rule does not
satisfy the basis reallocation requirement
of section 453(h)(2) and would require
complex provisions to implement it. Ac-
cordingly, the suggested approach is not
adopted in the final regulations.
The purpose underlying section 453(h)-
(2) is to ensure that gain is recognized in
the appropriate year when liquidating dis-
tributions are received in more than one
taxable year. The IRS and Treasury De-
partment believe that this purpose can be
substantially fulfilled without imposing
the burden of filing amended returns. Ac-
cordingly, the final regulations incorporate
a current-year recognition rule. Under the
current-year recognition rule, a share-
holder is required to recognize in the cur-
rent year the additional amount of gain
that would have been recognized in the
earlier year had the total amount of the liq-
uidating distributions been known in the
earlier year. In allocating basis to calcu-
late the gain to be reported in the first year
in which a liquidating distribution is re-
ceived, a shareholder is required to rea-
sonably estimate the anticipated aggregate
distributions. For this purpose, the share-
holder must take into account distributions
and other events occurring up to the time
at which the return for the first taxable
year is filed. Section §1.453–2(e) of the
1984 proposal is adopted as revised by
this Treasury decision. The effective date
provision in §1.453–2(g) of the proposal is
not adopted.
Recognition of gain or loss to the
distributing corporation under section
453B
Under section 453B, the disposition of
an installment obligation generally results
in the recognition of gain or loss to the
transferor. Thus, in accordance with sec-
tions 453B and 336, a C corporation gen-
erally recognizes gain or loss upon the
distribution of an installment obligation to
a shareholder in exchange for the share-
holder’s stock, including complete liqui-
dations covered by section 453(h). Sec-
tion 453B(d) provides an exception to this
general rule if the installment obligation
is distributed in a liquidation to which
section 337(a) applies (regarding certain
complete liquidations of 80 percent or
more owned subsidiaries). However, that
exception does not apply to liquidations
under section 331.
In the case of a liquidating distribution
by an S corporation, however, section
453B(h) provides that if an S corporation
distributes an installment obligation in ex-
change for a shareholder’s stock, and pay-
ments under the obligation are treated as
consideration for the stock pursuant to
section 453(h)(1), then the distribution
generally is not treated as a disposition of
the obligation by the S corporation. Thus,
except for purposes of sections 1374 and
1375 (relating to certain built-in gains and
passive investment income), the S corpo-
ration does not recognize gain or loss on
the distribution of the installment obliga-
tion to a shareholder in a complete liquida-
tion covered by section 453(h). One com-
mentator believed that it is inequitable to
allow a shareholder to recognize gain on
the installment basis while the liquidating
C corporation has immediate recognition
upon distribution of an obligation. As an
alternative, the commentator suggested
that the corporation’s tax liability arising
from the distribution of an obligation carry
over to the shareholders and be taken into
account by them as payments are received
on the obligation. The suggested ap-
proach would be inconsistent with the
statutory provisions of sections 336 and
453B and, accordingly, is not adopted in
the final regulations.
Another commentator requested that
the regulations provide relief from a
bunching of income that occurs for share-
holders receiving liquidating distributions
from S corporations. The bunching can
occur, for example, by virtue of the inter-
relationship of the S corporation and in-
stallment sale provisions if, in the year in
which assets are sold, an S corporation re-
ceives a payment on an installment oblig-
ation arising from the sale before the cor-
1998–14 I.R.B.17April 6, 1998

poration liquidates. The commentator
suggested that the regulations allow a
shareholder first to apply the basis in the
stock against the initial payment received,
with any remaining basis allocated to any
additional payments to be received. Since
the bunching of income results from the
successive application of section 453(c) at
the corporate and shareholder levels and
no statutory exception for shareholders of
S corporations is provided, this issue can-
not be appropriately addressed in these
final regulations.
Incorporation of guidance on section
338(h)(10) elections
Three commentators suggested that the
regulations be expanded to address the
use of the installment method to the sale
of stock of a corporation with respect to
which an election under section
338(h)(10) has been made. This issue
does not arise under section 453(h) and is
beyond the scope of these regulations.
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 not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regula-
tions is George F. Wright of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and Treasury Department
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
§1.453–11 also issued under 26 U.S.C.
453(j)(1) and (k). * * *
Par. 2. Section 1.453–11 is added to
read as follows:
§1.453–11 Installment obligations
received from a liquidating corporation.
(a) In general—(1) Overview. Except
as provided in section 453(h)(1)(C) (relat-
ing to installment sales of depreciable
property to certain closely related per-
sons), a qualifying shareholder (as de-
fined in paragraph (b) of this section) who
receives a qualifying installment obliga-
tion (as defined in paragraph (c) of this
section) in a liquidation that satisfies sec-
tion 453(h)(1)(A) treats the receipt of
payments in respect of the obligation,
rather than the receipt of the obligation it-
self, as a receipt of payment for the share-
holder’s stock. The shareholder reports
the payments received on the installment
method unless the shareholder elects oth-
erwise in accordance with §15a.453–1(d)
of this chapter.
(2) Coordination with other
provisions—(i) Deemed sale of stock for
installment obligation.Except as specifi-
cally provided in section 453(h)(1)(C), a
qualifying shareholder treats a qualifying
installment obligation, for all purposes of
the Internal Revenue Code, as if the oblig-
ation is received by the shareholder from
the person issuing the obligation in ex-
change for the shareholder’s stock in the
liquidating corporation. For example, if
the stock of a corporation that is liquidat-
ing is traded on an established securities
market, an installment obligation distrib-
uted to a shareholder of the corporation in
exchange for the shareholder’s stock does
not qualify for installment reporting pur-
suant to section 453(k)(2).
(ii) Special rules to account for the
qualifying installment obligation—(A)
Issue price.A qualifying installment
obligation is treated by a qualifying share-
holder as newly issued on the date of the
distribution. The issue price of the quali-
fying installment obligation on that date is
equal to the sum of the adjusted issue
price of the obligation on the date of the
distribution (as determined under
§1.1275–1(b)) and the amount of any
qualified stated interest (as defined in
§1.1273–1(c)) that has accrued prior to
the distribution but that is not payable
until after the distribution. For purposes
of the preceding sentence, if the qualify-
ing installment obligation is subject to
§1.446–2 (e.g., a debt instrument that has
unstated interest under section 483), the
adjusted issue price of the obligation is
determined under §1.446–2(c) and (d).
(B) Variable rate debt instrument. If
the qualifying installment obligation is a
variable rate debt instrument (as defined
in §1.1275–5), the shareholder uses the
equivalent fixed rate debt instrument
(within the meaning of §1.1275–5(e)-
(3)(ii)) constructed for the qualifying in-
stallment obligation as of the date the
obligation was issued to the liquidating
corporation to determine the accruals of
original issue discount, if any, and interest
on the obligation.
(3) Liquidating distributions treated as
selling price.All amounts distributed or
treated as distributed to a qualifying
shareholder incident to the liquidation, in-
cluding cash, the issue price of qualifying
installment obligations as determined
under paragraph (a)(2)(ii)(A) of this sec-
tion, and the fair market value of other
property (including obligations that are
not qualifying installment obligations) are
considered as having been received by the
shareholder as the selling price (as de-
fined in §15a.453–1(b)(2)(ii) of this chap-
ter) for the shareholder’s stock in the liq-
uidating corporation. For the proper
method of reporting liquidating distribu-
tions received in more than one taxable
year of a shareholder, see paragraph (d) of
this section. An election not to report on
the installment method an installment
obligation received in the liquidation ap-
plies to all distributions received in the
liquidation.
(4) Assumption of corporate liability by
shareholders.For purposes of this sec-
tion, if in the course of a liquidation a
shareholder assumes secured or unsecured
liabilities of the liquidating corporation, or
receives property from the corporation
subject to such liabilities (including any
tax liabilities incurred by the corporation
on the distribution), the amount of the lia-
bilities is added to the shareholder’s basis
in the stock of the liquidating corporation.
April 6, 1998181998–14 I.R.B.

These additions to basis do not affect the
shareholder’s holding period for the
stock. These liabilities do not reduce the
amounts received in computing the sell-
ing price.
(5) Examples.The provisions of this
paragraph (a) are illustrated by the follow-
ing examples. Except as otherwise pro-
vided, assume in each example that A, an
individual who is a calendar-year taxpayer,
owns all of the stock of T corporation. A’s
adjusted tax basis in that stock is $100,000.
On February 1, 1998, T, an accrual method
taxpayer, adopts a plan of complete liqui-
dation that satisfies section 453(h)(1)(A)
and immediately sells all of its assets to un-
related B corporation in a single transac-
tion. The examples are as follows:
Example 1. (i) The stated purchase price for T’s
assets is $3,500,000. In consideration for the sale, B
makes a down payment of $500,000 and issues a 10-
year installment obligation with a stated principal
amount of $3,000,000. The obligation provides for
interest payments of $150,000 on January 31 of each
year, with the total principal amount due at maturity.
(ii) Assume that for purposes of section 1274, the
test rate on February 1, 1998, is 8 percent, com-
pounded semi-annually. Also assume that a semi-
annual accrual period is used. Under §1.1274–2, the
issue price of the obligation on February 1, 1998, is
$2,368,450. Accordingly, the obligation has
$631,550 of original issue discount ($3,000,000 –
$2,368,450). Between February 1 and July 31,
$19,738 of original issue discount and $75,000 of
qualified stated interest accrue with respect to the
obligation and are taken into account by T.
(iii) On July 31, 1998, T distributes the install-
ment obligation to A in exchange for A’s stock. No
other property is ever distributed to A. On January
31, 1999, A receives the first annual payment of
$150,000 from B.
(iv) When the obligation is distributed to A on
July 31, 1998, it is treated as if the obligation is re-
ceived by A in an installment sale of shares directly
to B on that date. Under §1.1275–1(b), the adjusted
issue price of the obligation on that date is
$2,388,188 (original issue price of $2,368,450 plus
accrued original issue discount of $19,738). Ac-
cordingly, the issue price of the obligation under
paragraph (a)(2)(ii)(A) of this section is $2,463,188,
the sum of the adjusted issue price of the obligation
on that date ($2,388,188) and the amount of accrued
but unpaid qualified stated interest ($75,000).
(v) The selling price and contract price of A’s
stock in T is $2,463,188, and the gross profit is
$2,363,188 ($2,463,188 selling price less A’s ad-
justed tax basis of $100,000). A’s gross profit ratio
is thus 96 percent (gross profit of $2,363,188 di-
vided by total contract price of $2,463,188).
(vi) Under §§1.446–2(e)(1) and 1.1275–2(a),
$98,527 of the $150,000 payment is treated as a pay-
ment of the interest and original issue discount that
accrued on the obligation from July 31, 1998, to Jan-
uary 31, 1999 ($75,000 of qualified stated interest
and $23,527 of original issue discount). The balance
of the payment ($51,473) is treated as a payment of
principal. A’s gain recognized in 1999 is $49,414
(96 percent of $51,473).
Example 2.(i) T owns Blackacre, unimproved
real property, with an adjusted tax basis of $700,000.
Blackacre is subject to a mortgage (underlying mort-
gage) of $1,100,000. A is not personally liable on
the underlying mortgage and the T shares held by A
are not encumbered by the underlying mortgage.
The other assets of T consist of $400,000 of cash
and $600,000 of accounts receivable attributable to
sales of inventory in the ordinary course of business.
The unsecured liabilities of T total $900,000.
(ii) On February 1, 1998, T adopts a plan of com-
plete liquidation complying with section
453(h)(1)(A), and promptly sells Blackacre to B for
a 4-year mortgage note (bearing adequate stated in-
terest and otherwise meeting all of the requirements
of section 453) in the face amount of $4 million.
Under the agreement between T and B, T (or its suc-
cessor) is to continue to make principal and interest
payments on the underlying mortgage. Immediately
thereafter, T completes its liquidation by distributing
to A its remaining cash of $400,000 (after payment
of T’s tax liabilities), accounts receivable of
$600,000, and the $4 million B note. A assumes T’s
$900,000 of unsecured liabilities and receives the
distributed property subject to the obligation to
make payments on the $1,100,000 underlying mort-
gage. A receives no payments from B on the B note
during 1998.
(iii) Unless A elects otherwise, the transaction is
reported by A on the installment method. The sell-
ing price is $5 million (cash of $400,000, accounts
receivable of $600,000, and the B note of $4 mil-
lion). The total contract price also is $5 million. A’s
adjusted tax basis in the T shares, initially $100,000,
is increased by the $900,000 of unsecured T liabili-
ties assumed by A and by the obligation (subject to
which A takes the distributed property) to make pay-
ments on the $1,100,000 underlying mortgage on
Blackacre, for an aggregate adjusted tax basis of
$2,100,000. Accordingly, the gross profit is
$2,900,000 (selling price of $5 million less aggre-
gate adjusted tax basis of $2,100,000). The gross
profit ratio is 58 percent (gross profit of $2,900,000
divided by the total contract price of $5 million).
The 1998 payments to A are $1 million ($400,000
cash plus $600,000 receivables) and A recognizes
gain in 1998 of $580,000 (58 percent of $1 million).
(iv) In 1999, A receives payment from B on the B
note of $1 million (exclusive of interest). A’s gain
recognized in 1999 is $580,000 (58 percent of $1
million).
(b) Qualifying shareholder.For pur-
poses of this section, qualifying share-
holdermeans a shareholder to which,
with respect to the liquidating distribu-
tion, section 331 applies. For example, a
creditor that receives a distribution from a
liquidating corporation, in exchange for
the creditor’s claim, is not a qualifying
shareholder as a result of that distribution
regardless of whether the liquidation sat-
isfies section 453(h)(1)(A).
(c) Qualifying installment obligation—
(1) In general.For purposes of this sec-
tion, qualifying installment obligation
means an installment obligation (other
than an evidence of indebtedness de-
scribed in §15a.453–1(e) of this chapter,
relating to obligations that are payable on
demand or are readily tradable) acquired
in a sale or exchange of corporate assets
by a liquidating corporation during the
12-month period beginning on the date
the plan of liquidation is adopted. See
paragraph (c)(4) of this section for an ex-
ception for installment obligations ac-
quired in respect of certain sales of inven-
tory. Also see paragraph (c)(5) of this
section for an exception for installment
obligations attributable to sales of certain
property that do not generally qualify for
installment method treatment.
(2) Corporate assets.Except as pro-
vided in section 453(h)(1)(C), in para-
graph (c)(4) of this section (relating to
certain sales of inventory), and in para-
graph (c)(5) of this section (relating to
certain tax avoidance transactions), the
nature of the assets sold by, and the tax
consequences to, the selling corporation
do not affect whether an installment
obligation is a qualifying installment
obligation. Thus, for example, the fact
that the fair market value of an asset is
less than the adjusted basis of that asset
in the hands of the corporation; or that
the sale of an asset will subject the corpo-
ration to depreciation recapture (e.g.,
under section 1245 or section 1250); or
that the assets of a trade or business sold
by the corporation for an installment
obligation include depreciable property,
certain marketable securities, accounts
receivable, installment obligations, or
cash; or that the distribution of assets to
the shareholder is or is not taxable to the
corporation under sections 336 and 453B,
does not affect whether installment oblig-
ations received in exchange for those as-
sets are treated as qualifying installment
obligations by the shareholder. However,
an obligation received by the corporation
in exchange for cash, in a transaction un-
related to a sale or exchange of noncash
assets by the corporation, is not treated as
a qualifying installment obligation.
(3) Installment obligations distributed
in liquidations described in section
453(h)(1)(E)—(i) In general. In the case
of a liquidation to which section
453(h)(1)(E) (relating to certain liquidat-
ing subsidiary corporations) applies, a
1998–14 I.R.B.19April 6, 1998

qualifying installment obligation acquired
in respect of a sale or exchange by the liq-
uidating subsidiary corporation will be
treated as a qualifying installment obliga-
tion if distributed by a controlling corpo-
rate shareholder (within the meaning of
section 368(c)) to a qualifying share-
holder. The preceding sentence is applied
successively to each controlling corporate
shareholder, if any, above the first con-
trolling corporate shareholder.
(ii) Examples.The provisions of this
paragraph (c)(3) are illustrated by the fol-
lowing examples:
Example 1.(i) A, an individual, owns all of the
stock of T corporation, a C corporation. T has an
operating division and three wholly-owned sub-
sidiaries, X, Y, and Z. On February 1, 1998, T, Y,
and Z all adopt plans of complete liquidation.
(ii) On March 1, 1998, the following sales are
made to unrelated purchasers: T sells the assets of
its operating division to B for cash and an install-
ment obligation. T sells the stock of X to C for an
installment obligation. Y sells all of its assets to D
for an installment obligation. Z sells all of its assets
to E for cash. The B, C, and D installment obliga-
tions bear adequate stated interest and meet the re-
quirements of section 453.
(iii) In June 1998, Y and Z completely liquidate,
distributing their respective assets (the D installment
obligation and cash) to T. In July 1998, T completely
liquidates, distributing to A cash and the installment
obligations respectively issued by B, C, and D. The
liquidation of T is a liquidation to which section
453(h) applies and the liquidations of Y and Z into T
are liquidations to which section 332 applies.
(iv) Because T is in control of Y (within the
meaning of section 368(c)), the D obligation ac-
quired by Y is treated as acquired by T pursuant to
section 453(h)(1)(E). A is a qualifying shareholder
and the installment obligations issued by B, C, and
D are qualifying installment obligations. Unless A
elects otherwise, A reports the transaction on the in-
stallment method as if the cash and installment
obligations had been received in an installment sale
of the stock of T corporation. Under section
453B(d), no gain or loss is recognized by Y on the
distribution of the D installment obligation to T.
Under sections 453B(a) and 336, T recognizes gain
or loss on the distribution of the B, C, and D install-
ment obligations to A in exchange for A’s stock.
Example 2. (i) A, a cash-method individual tax-
payer, owns all of the stock of P corporation, a C
corporation. P owns 30 percent of the stock of Q
corporation. The balance of the Q stock is owned by
unrelated individuals. On February 1, 1998, P
adopts a plan of complete liquidation and sells all of
its property, other than its Q stock, to B, an unrelated
purchaser for cash and an installment obligation
bearing adequate stated interest. On March 1, 1998,
Q adopts a plan of complete liquidation and sells all
of its property to an unrelated purchaser, C, for cash
and installment obligations. Q immediately distrib-
utes the cash and installment obligations to its share-
holders in completion of its liquidation. Promptly
thereafter, P liquidates, distributing to A cash, the B
installment obligation, and a C installment obliga-
tion that P received in the liquidation of Q.
(ii) In the hands of A, the B installment obliga-
tion is a qualifying installment obligation. In the
hands of P, the C installment obligation was a quali-
fying installment obligation. However, in the hands
of A, the C installment obligation is not treated as a
qualifying installment obligation because P owned
only 30 percent of the stock of Q. Because P did not
own the requisite 80 percent stock interest in Q, P
was not a controlling corporate shareholder of Q
(within the meaning of section 368(c)) immediately
before the liquidation. Therefore, section 453(h)-
(1)(E) does not apply. Thus, in the hands of A, the C
obligation is considered to be a third-party note (not
a purchaser’s evidence of indebtedness) and is
treated as a payment to A in the year of distribution.
Accordingly, for 1998, A reports as payment the
cash and the fair market value of the C obligation
distributed to A in the liquidation of P.
(iii) Because P held 30 percent of the stock of Q,
section 453B(d) is inapplicable to P. Under sections
453B(a) and 336, accordingly, Q recognizes gain or
loss on the distribution of the C obligation. P also
recognizes gain or loss on the distribution of the B
and C installment obligations to A in exchange for
A’s stock. See sections 453B and 336.
(4) Installment obligations attributable
to certain sales of inventory—(i) In gen-
eral.An installment obligation acquired
by a corporation in a liquidation that satis-
fies section 453(h)(1)(A) in respect of a
broken lot of inventory is not a qualifying
installment obligation. If an installment
obligation is acquired in respect of a bro-
ken lot of inventory and other assets, only
the portion of the installment obligation
acquired in respect of the broken lot of in-
ventory is not a qualifying installment
obligation. The portion of the installment
obligation attributable to other assets is a
qualifying installment obligation. For
purposes of this section, the term broken
lot of inventorymeans inventory property
that is sold or exchanged other than in
bulk to one person in one transaction in-
volving substantially all of the inventory
property attributable to a trade or business
of the corporation. See paragraph (c)(4)-
(ii) of this section for rules for determin-
ing what portion of an installment obliga-
tion is not a qualifying installment
obligation and paragraph (c)(4)(iii) of this
section for rules determining the applica-
tion of payments on an installment obliga-
tion only a portion of which is a qualify-
ing installment obligation.
(ii) Rules for determining nonqualify-
ing portion of an installment obligation.
If a broken lot of inventory is sold to a
purchaser together with other corporate
assets for consideration consisting of an
installment obligation and either cash,
other property, the assumption of (or tak-
ing property subject to) corporate liabili-
ties by the purchaser, or some combina-
tion thereof, the installment obligation is
treated as having been acquired in respect
of a broken lot of inventory only to the
extent that the fair market value of the
broken lot of inventory exceeds the sum
of unsecured liabilities assumed by the
purchaser, secured liabilities which en-
cumber the broken lot of inventory and
are assumed by the purchaser or to which
the broken lot of inventory is subject, and
the sum of the cash and fair market value
of other property received. This rule ap-
plies solely for the purpose of determin-
ing the portion of the installment obliga-
tion (if any) that is attributable to the
broken lot of inventory.
(iii) Application of payments.If, by
reason of the application of paragraph
(c)(4)(ii) of this section, a portion of an
installment obligation is not a qualifying
installment obligation, then for purposes
of determining the amount of gain to be
reported by the shareholder under section
453, payments on the obligation (other
than payments of qualified stated interest)
shall be applied first to the portion of the
obligation that is not a qualifying install-
ment obligation.
(iv) Example.The following example
illustrates the provisions of this paragraph
(c)(4). In this example, assume that all
obligations bear adequate stated interest
within the meaning of section 1274(c)(2)
and that the fair market value of each non-
qualifying installment obligation equals
its face amount.
The example is as follows:
Example.(i) P corporation has three operating
divisions, X, Y, and Z, each engaged in a separate
trade or business, and a minor amount of investment
assets. On July 1, 1998, P adopts a plan of complete
liquidation that meets the criteria of section
453(h)(1)(A). The following sales are promptly
made to purchasers unrelated to P: P sells all of the
assets of the X division (including all of the inven-
tory property) to B for $30,000 cash and installment
obligations totalling $200,000. P sells substantially
all of the inventory property of the Y division to C
for a $100,000 installment obligation, and sells all of
the other assets of the Y division (excluding cash but
including installment receivables previously ac-
quired in the ordinary course of the business of the Y
division) to D for a $170,000 installment obligation.
P sells 1/3 of the inventory property of the Z division
April 6, 1998201998–14 I.R.B.

to E for $100,000 cash, 1/3 of the inventory property
of the Z division to F for a $100,000 installment
obligation, and all of the other assets of the Z divi-
sion (including the remaining 1/3 of the inventory
property worth $100,000) to G for $60,000 cash, a
$240,000 installment obligation, and the assumption
by G of the liabilities of the Z division. The liabili-
ties assumed by G, which are unsecured liabilities
and liabilities encumbering the inventory property
acquired by G, aggregate $30,000. Thus, the total
purchase price G pays is $330,000.
(ii) P immediately completes its liquidation, dis-
tributing the cash and installment obligations, which
otherwise meet the requirements of section 453, to
A, an individual cash-method taxpayer who is its
sole shareholder. In 1999, G makes a payment to A
of $100,000 (exclusive of interest) on the $240,000
installment obligation.
(iii) In the hands of A, the installment obligations
issued by B, C, and D are qualifying installment
obligations because they were timely acquired by P
in a sale or exchange of its assets. In addition, the
installment obligation issued by C is a qualifying in-
stallment obligation because it arose from a sale to
one person in one transaction of substantially all of
the inventory property of the trade or business en-
gaged in by the Y division.
(iv) The installment obligation issued by F is not
a qualifying installment obligation because it is in
respect of a broken lot of inventory. A portion of the
installment obligation issued by G is a qualifying in-
stallment obligation and a portion is not a qualifying
installment obligation, determined as follows: G
purchased part of the inventory property (with a fair
market value of $100,000) and all of the other assets
of the Z division by paying cash ($60,000), issuing
an installment obligation ($240,000), and assuming
liabilities of the Z division ($30,000). The assumed
liabilities ($30,000) and cash ($60,000) are attrib-
uted first to the inventory property. Therefore, only
$10,000 of the $240,000 installment obligation is at-
tributed to inventory property. Accordingly, in the
hands of A, the G installment obligation is a qualify-
ing installment obligation to the extent of $230,000,
but is not a qualifying installment obligation to the
extent of the $10,000 attributable to the inventory
property.
(v) In the 1998 liquidation of P, A receives a liq-
uidating distribution as follows:
Qualifying Install-Cash and
Itemment ObligationsOther Property
cash$190,000
B note$200,000
C note$100,000
D note$170,000
F note$100,000
G note
1
$230,000$ 10,000
Total$700,000$300,000
(vi) Assume that A’s adjusted tax basis in the
stock of P is $100,000. Under the installment
method, A’s selling price and the contract price are
both $1 million, the gross profit is $900,000 (selling
price of $1 million less adjusted tax basis of
$100,000), and the gross profit ratio is 90 percent
(gross profit of $900,000 divided by the contract
price of $1 million). Accordingly, in 1998, A reports
gain of $270,000 (90 percent of $300,000 payment
in cash and other property). A’s adjusted tax basis in
each of the qualifying installment obligations is an
amount equal to 10 percent of the obligation’s re-
spective face amount. A’s adjusted tax basis in the F
note, a nonqualifying installment obligation, is
$100,000, i.e., the fair market value of the note when
received by A. A’s adjusted tax basis in the G note, a
mixed obligation, is $33,000 (10 percent of the
$230,000 qualifying installment obligation portion
of the note, plus the $10,000 nonqualifying portion
of the note).
(vii) With respect to the $100,000 payment re-
ceived from G in 1999, $10,000 is treated as the re-
covery of the adjusted tax basis of the nonqualifying
portion of the G installment obligation and $9,000
(10 percent of $90,000) is treated as the recovery of
the adjusted tax basis of the portion of the note that
is a qualifying installment obligation. The remain-
ing $81,000 (90 percent of $90,000) is reported as
gain from the sale of A’s stock. See paragraph
(c)(4)(iii) of this section.
(5) Installment obligations attributable
to sales of certain property—(i) In gen-
eral.An installment obligation acquired
by a liquidating corporation, to the extent
attributable to the sale of property de-
scribed in paragraph (c)(5)(ii) of this sec-
tion, is not a qualifying obligation if the
corporation is formed or availed of for a
principal purpose of avoiding section
453(b)(2) (relating to dealer dispositions
and certain other dispositions of personal
property), section 453(i) (relating to sales
of property subject to recapture), or sec-
tion 453(k) (relating to dispositions under
a revolving credit plan and sales of stock
or securities traded on an established se-
curities market) through the use of a party
bearing a relationship, either directly or
indirectly, described in section 267(b) to
any shareholder of the corporation.
(ii) Covered property.Property is de-
scribed in this paragraph (c)(5)(ii) if,
within 12 months before or after the adop-
tion of the plan of liquidation, the prop-
erty was owned by any shareholder and—
(A) The shareholder regularly sold or
otherwise disposed of personal property
of the same type on the installment plan
or the property is real property that the
shareholder held for sale to customers in
the ordinary course of a trade or business
(provided the property is not described in
section 453(l)(2) (relating to certain ex-
ceptions to the definition of dealer dispo-
sitions));
(B) The sale of the property by the
shareholder would result in recapture in-
come (within the meaning of section
453(i)(2)), but only if the amount of the
recapture income is equal to or greater
than 50 percent of the property’s fair mar-
ket value on the date of the sale by the
corporation;
(C) The property is stock or securities
that are traded on an established securities
market; or
(D) The sale of the property by the
shareholder would have been under a re-
volving credit plan.
(iii) Safe harbor. Paragraph (c)(5)(i)
of this section will not apply to the liqui-
dation of a corporation if, on the date the
plan of complete liquidation is adopted
and thereafter, less than 15 percent of the
fair market value of the corporation’s as-
sets is attributable to property described
in paragraph (c)(5)(ii) of this section.
(iv) Example.The provisions of this
paragraph (c)(5) are illustrated by the fol-
lowing example:
Example. Ten percent of the fair market value of
the assets of T is attributable to stock and securities
traded on an established securities market. T owns
no other assets described in paragraph (c)(5)(ii) of
this section. T, after adopting a plan of complete liq-
uidation, sells all of its stock and securities holdings
to C corporation in exchange for an installment
obligation bearing adequate stated interest, sells all
of its other assets to B corporation for cash, and dis-
tributes the cash and installment obligation to its sole
shareholder, A, in a complete liquidation that satis-
fies section 453(h)(1)(A). Because the C installment
obligation arose from a sale of publicly traded stock
and securities, T cannot report the gain on the sale
under the installment method pursuant to section
453(k)(2). In the hands of A, however, the C install-
ment obligation is treated as having arisen out of a
sale of the stock of T corporation. In addition, the
general rule of paragraph (c)(5)(i) of this section
does not apply, even if a principal purpose of the liq-
uidation was the avoidance of section 453(k)(2), be-
cause the fair market value of the publicly traded
stock and securities is less than 15 percent of the total
fair market value of T’s assets. Accordingly, section
453(k)(2) does not apply to A, and A may use the in-
stallment method to report the gain recognized on the
payments it receives in respect of the obligation.
(d) Liquidating distributions received
in more than one taxable year.If a quali-
fying shareholder receives liquidating dis-
tributions to which this section applies in
more than one taxable year, the share-
holder must reasonably estimate the gain
attributable to distributions received in
each taxable year. In allocating basis to
calculate the gain for a taxable year, the
shareholder must reasonably estimate the
anticipated aggregate distributions. For
1998–14 I.R.B.21April 6, 1998
1
Face amount $240,000.

this purpose, the shareholder must take
into account distributions and other rele-
vant events or information that the share-
holder knows or reasonably could know
up to the date on which the federal income
tax return for that year is filed. If the gain
for a taxable year is properly taken into ac-
count on the basis of a reasonable estimate
and the exact amount is subsequently de-
termined the difference, if any, must be
taken into account for the taxable year in
which the subsequent determination is
made. However, the shareholder may file
an amended return for the earlier year in
lieu of taking the difference into account
for the subsequent taxable year.
(e) Effective date.This section is ap-
plicable to distributions of qualifying in-
stallment obligations made on or after
January 28, 1998.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved December 18, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
January 27, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 28, 1998,
63 F.R. 4168)
Section 467.—Certain Payments
for the Use of Property or
Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 1998. See
Rev. Rul. 98–18, page 22.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of April 1998. See
Rev. Rul. 98–18, page 22.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate.For purposes
of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the
rates for April 1998.
Rev. Rul. 98–18
This revenue ruling provides various
prescribed rates for federal income tax
purposes for April 1998 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the In-
ternal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (ad-
justed AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4 con-
tains the appropriate percentages for de-
termining the low-income housing credit
described in section 42(b)(2) for build-
ings placed in service during the current
month. Finally, Table 5 contains the fed-
eral rate for determining the present
value of an annuity, an interest for life or
for a term of years, or a remainder or a
reversionary interest for purposes of sec-
tion 7520.
April 6, 1998221998–14 I.R.B.

1998–14 I.R.B.23April 6, 1998
REV. RUL. 98–18 TABLE 1
Applicable Federal Rates (AFR) for April 1998
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR5.51%5.44%5.40%5.38%
110% AFR6.07%5.98%5.94%5.91%
120% AFR6.64%6.53%6.48%6.44%
130% AFR7.19%7.07%7.01% 6.97%
Mid-Term
AFR5.70% 5.62%5.58%5.56%
110% AFR6.28%6.18%6.13%6.10%
120% AFR6.85%6.74%6.68%6.65%
130% AFR7.44%7.31%7.24%7.20%
150% AFR8.61%8.43%8.34%8.29%
175% AFR 10.08%9.84%9.72% 9.64%
Long-Term
AFR5.98%5.89%5.85%5.82%
110% AFR6.58%6.48%6.43%6.39%
120% AFR7.19%7.07%7.01%6.97%
130% AFR7.81%7.66%7.59%7.54%
REV. RUL. 98–18 TABLE 2
Adjusted AFR for April 1998
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR3.67%3.64%3.62%3.61%
Mid-term
adjusted AFR4.24%4.20%4.18%4.16%
Long-term
adjusted AFR5.04%4.98%4.95%4.93%
REV. RUL. 98–18 TABLE 3
Rates Under Section 382 for April 1998
Adjusted federal long-term rate for the current month5.04%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)5.04%

April 6, 1998241998–14 I.R.B.
REV. RUL. 98–18 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for April 1998
Appropriate percentage for the 70% present value low-income housing credit8.37%
Appropriate percentage for the 30% present value low-income housing credit3.59%
REV. RUL. 98–18 TABLE 5
Rate Under Section 7520 for April 1998
Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest6.8%
Section 1288.—Treatment of
Original Issue Discount on Tax-
Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.
Section 7872.—Treatment of
Loans with Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 1998. See Rev. Rul. 98–18, page 22.

1998–14 I.R.B.25April 6, 1998
Notice of Proposed Rulemaking
and Notice of Public Hearing
Continuity of Interest
REG–120882–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations and notice of public hearing.
SUMMARY: In T.D. 8761, page 13 of
this Bulletin, the IRS is issuing temporary
regulations providing guidance regarding
satisfaction of the continuity of interest
requirement for corporate reorganiza-
tions. The temporary regulations affect
corporations and their shareholders. The
text of those temporary regulations also
serves as the text of these proposed regu-
lations. In addition, this document pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written comments and outlines
of topics to be discussed at the hearing
scheduled for Tuesday, May 26, 1998,
must be received by Tuesday, May 5,
1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–120882–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to CC:DOM:CORP:R
(REG–120882–97), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Phoebe Bennett, (202) 622-7750; con-
cerning submissions and the hearing,
LaNita Van Dyke, (202) 622-7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
In T.D. 8761, temporary regulations
amend the Income Tax Regulations (26
CFR part 1) under section 368. The tem-
porary regulations provide that in deter-
mining whether the continuity of interest
requirement for corporate reorganizations
is satisfied with respect to a potential reor-
ganization, a proprietary interest in the tar-
get corporation is not preserved if, in con-
nection with a potential reorganization, it
is redeemed or acquired by a person re-
lated to the target corporation, or to the ex-
tent that, prior to and in connection with a
potential reorganization, an extraordinary
distribution is made with respect to it.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations describes the temporary
regulations.
The temporary regulations do not pro-
vide guidance on the determination of
whether a distribution will be treated as
an extraordinary distribution, except that
the rules of section 1059 do not apply for
this purpose. The IRS and Treasury De-
partment invite comments on whether the
regulations should provide more specific
guidance in this area.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments that
are submitted timely to the IRS. All com-
ments will be available for public inspec-
tion and copying.
A public hearing has been scheduled at
10 a.m. on Tuesday, May 26, 1998, in
room 2615, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC. Because of access restrictions,
visitors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit written
comments by Tuesday, May 5, 1998 and
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (a signed original and eight (8)
copies) by Tuesday, May 5, 1998.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Proposed Effective Date
These regulations are proposed to
apply to transactions occurring after Janu-
ary 28, 1998, except that they do not
apply to any transaction occurring pur-
suant to a written agreement which is
(subject to customary conditions) binding
on January 28, 1998, and at all times
thereafter.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.368–1 is amended as
follows:
Part IV. Items of General Interest

1. Revising paragraphs (e)(1)(ii)(A),
(e)(1)(ii)(B), (e)(2)(ii), and (f).
2. Adding paragraph (e)(6) Example
10and Example 11.
The addition and revisions read as fol-
lows:
§1.368-– Purpose and scope of exception
of reorganization exchanges.
[The text of proposed paragraphs
(e)(1)(ii)(A) and (B), (e)(2)(ii), (e)(6) Ex-
ample 10and Example 11,and (f) is the
same as the text of §1.368–1T published
in T.D. 8761.]
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 23, 1998, 12:15 p.m., and published in the
issue of the Federal Register for January 28, 1998,
63 F.R. 4204)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Election to Amortize Start-Up
Expenditures
REG–209373–81
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations concerning start-up
expenditures under section 195. The pro-
posed regulations provide rules and pro-
cedures for electing to amortize start-up
expenditures under section 195. The reg-
ulations affect all taxpayers wishing to
amortize start-up expenditures under sec-
tion 195. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Comments and outlines of top-
ics to be discussed at the public hearing
scheduled for June 2, 1998, at 10 a.m.,
must be received by April 13, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (PS–36–81), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submis-
sions may be hand-delivered between the
hours of 8:15 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–209373–81),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue NW,
Washington, DC, or electronically, via the
IRS Internet site at: http://www.irs.us-
treas.gov/prod/tax_regs/comments.html.
The public hearing will be held in the
NYU Classroom, Room 2615, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
David Selig, (202) 622-3040; concerning
submissions and the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budgetfor review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
T:FP, Washington, DC 20224. Comments
on the collection of information should be
received by March 16, 1998.
Comments are specifically requested con-
cerning:
Whether the proposed collection of infor-
mation is necessary for the proper perfor-
mance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of
information (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs of
operation, maintenance, and purchase of
services to provide information.
The requirement for the collection of
information in this notice of proposed
rulemaking is in §1.195-1(c). This infor-
mation is required by the IRS to establish
that a taxpayer properly has made an elec-
tion to amortize start-up expenditures
under section 195. This information will
be used to determine whether the amount
amortized under section 195 has been
computed properly. The likely respon-
dents are businesses and other for-profit
organizations. Responses to this collec-
tion of information are required to make
an election to amortize start-up expendi-
tures under section 195.
Estimated total annual reporting burden:
37,500 hours.
The estimated annual burden per respon-
dent varies from .10 hours to .50 hour, de-
pending on individual circumstances,
with an estimated average of .25 hours.
Estimated number of respondents :
150,000.
Estimated annual frequency of responses:
one-time election.
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 valid
OMB control number.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) to provide regula-
tions under section 195 of the Internal
Revenue Code. Section 195 was added to
the Internal Revenue Code of 1954 by
section 102 of the Miscellaneous Revenue
Act of 1980, and amended by section 94
of the Tax Reform Act of 1984.
Section 195 generally provides that no
deduction is allowed for start-up expendi-
tures unless the taxpayer elects to amor-
tize the expenditures. If the taxpayer
elects to amortize start-up expenditures
under section 195(b)(1), the expenditures
April 6, 1998261998–14 I.R.B.

are amortizable over a period of not less
than 60 months beginning with the month
when the active trade or business begins.
Under section 195(d), an election to
amortize start-up expenditures must be
made not later than the time prescribed by
law for filing the return for the taxable
year in which the active trade or business
begins (including extensions thereof).
Announcement 81–43 (1981–1 I.R.B. 52)
described the time and manner for making
this election.
An expense is a start-up expenditure if
it satisfies two conditions. First, the ex-
pense must be paid or incurred in connec-
tion with any one of the following: (1)
creating an active trade or business, (2)
investigating the creation or acquisition of
an active trade or business, or (3) any ac-
tivity entered into for profit and for the
production of income before the day on
which the active trade or business begins,
in anticipation of the activity becoming an
active trade or business (expenditures in
this last category are start-up expenditures
only if they are attributable to periods
after June 30, 1984).
Second, the expenditure must be of the
type that, if paid or incurred in connection
with the operation of an existing active
trade or business in the same field as that
being entered into by the taxpayer, would
be allowable as a deduction for the tax-
able year when paid or incurred.
Explanation of Provisions
The proposed regulations provide that
an election to amortize start-up expendi-
tures is made by attaching a statement to
the taxpayer’s income tax return. The in-
come tax return and statement must be
filed not later than the date prescribed by
law for filing the income tax return (in-
cluding any extensions of time) for the
taxable year when the active trade or busi-
ness begins.
The IRS is interested in ways to sim-
plify the filing of elections. The proposed
regulations are intended to simplify the
filing of section 195 elections in two
ways. First, the proposed regulations
clarify that a taxpayer who is uncertain as
to the year in which the active trade or
business begins need not file an election
for each possible taxable year. Rather, a
section 195 election for a particular trade
or business will be effective if the trade or
business becomes active in the year for
which the election is filed or in any subse-
quent year. In developing this notice of
proposed rulemaking, more burdensome
methods of making the election were con-
sidered and rejected. For example, an ap-
proach that would have required taxpay-
ers to file an election statement each year
was rejected. Second, the proposed regu-
lations also allow taxpayers who have
made timely elections under section 195
to file a revised statement with a subse-
quent return to include any start-up ex-
penditures not included in the original
statement.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that these regulations do not have a signif-
icant impact on a substantial number of
small entities. This certification is based
upon the fact that the time required to pre-
pare and file the election statement is
minimal and will not have a significant
impact on those small entities that choose
to make the election. Therefore, a Regu-
latory Flexibility Analysis under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments that
are submitted (in the manner described in
the ADDRESSES caption) timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Tuesday, June 2, 1998, at 10 a.m. in
the NYU Classroom, Room 2615, Inter-
nal Revenue Building, 1111 Constitution
Avenue, NW, Washington DC. Because
of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Building lobby more than 15 minutes be-
fore the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit com-
ments by April 13, 1998 and submit an
outline of the topics to be discussed and
the time to be devoted to each topic by
April 13, 1998.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is David Selig, Office of the Assis-
tant Chief Counsel (Passthroughs and
Special Industries), IRS. However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.195–1 is added to
read as follows:
§1.195–1 Election to amortize start-up
expenditures.
(a) In general.Under section 195(b), a
taxpayer may elect to amortize start-up
expenditures (as defined in section
195(c)(1)). A taxpayer who elects to
amortize start-up expenditures must, at
the time of the election, select an amorti-
zation period of not less than 60 months,
beginning with the month the active trade
or business begins. The election applies
to all of the taxpayer’s start-up expendi-
tures. The election is irrevocable and the
amortization period selected by the tax-
payer in making the election may not sub-
sequently be changed.
(b) Time and manner of making elec-
tion. The election to amortize start-up ex-
penditures under section 195 shall be
made by attaching a statement containing
the information described in paragraph (c)
1998–14 I.R.B.27April 6, 1998

of this section to the taxpayer’s return.
The statement must be filed no later than
the date prescribed by law for filing the
return (including any extensions of time)
for the taxable year when the active trade
or business begins. The statement may be
filed with a return for any taxable year
prior to the year in which the taxpayer’s
active trade or business begins, but no
later than the date prescribed in the pre-
ceding sentence. Accordingly, an election
under section 195 filed in a taxable year
prior to the year in which the taxpayer’s
active trade or business begins will be-
come effective in the month for the later
year in which the taxpayer’s active trade
or business begins.
(c) Information required. The state-
ment shall set forth a description of the
trade or business to which it relates with
sufficient detail so that expenses relating
to the trade or business can be identified
properly for the taxable year in which the
statement is filed and for all future taxable
years to which it relates. To the extent
known at the time the statement is filed,
the statement also shall include a descrip-
tion of each start-up expenditure incurred
(whether or not paid); the month when the
active trade or business began (or was ac-
quired); and the number of months (not
less than 60) over which the expenditures
are to be amortized. A revised statement
to include any start-up expenditures not
included in the taxpayer’s original elec-
tion statement may be filed with a return
filed after the return that contained the
election.
(d) Effective date.This section applies
to elections filed on or after the date final
regulations are published in the Federal
Register.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 12, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1998,
63 F.R. 1933)
Foundations Status of Certain
Organizations
Announcement 98–26
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
Centro De Intercambio Cultural Mexico-
Americano, Brownsville, TX
Century Plaza Housing Corporation of
Topeka, Topeka, KS
CFIDS Central Support Network, West
Chester, PA
Chaldean Assyrian Foundation, Ferndale,
MI
Challengers Baseball Booster Club Inc.,
Miami, FL
Chamber Foundation Inc., Kissimmee,
FL
Chamber Music Outreach Foundation,
Chicago, IL
Chamber Orchestra Arizona Limited,
Phoenix, AZ
Chambers & Valentine Daycare Inc.,
Baton Rouge, LA
Champaign Free Press Inc., Champaign,
IL
City of Lakes Girls Basketball,
Minneapolis, MN
Cityvision Services Inc., Fort Worth, TX
Civitas Associates Inc., St. Louis, MO
Clarendon School District Two Education
Foundation, Manning, SC
Clarksdale Law Enforcement
Association, Inc., Clarksdale, MS
Clarksville-Montgomery County Council
of Commuity Services, Clarksville, TN
Class of 1937, Lexington, MI
Clay Center Day Care Inc., Clay Center,
NE
Clean Air Vehicle Association Inc.,
Atlanta, GA
Clear Creek Education Foundation,
League City, TX
Daybreak Inc., Jackson, MS
Dayspring Ministries Inc., Greenville,
MS
Daystar Foundation Inc., Toledo, OH
Dayton Academy Boosters Club,
Fairborn, OH
Deaf and Hard of Hearing Outreach
Services Inc., Anderson, IN
Dearborn Fire Fighters Burn Drive,
Dearborn, MI
Decatur Cadet Core Inc., Decatur, AL
Deep East Texas Fine Arts Series Inc.,
Jasper, TX
Deer Park Christian Child Development
Center Inc., Cincinnati, OH
Defense Readiness Foundation,
Washington, DC
Dekalb Co-Ops Inc., Atlanta, GA
Del City Youth Park Inc., Del City, OK
Delaware Action for Families and
Children Inc., Wilmington, DE
Delaware Foundation for Literacy Inc.,
Wilmington, DE
Deloach Ministries Inc., Houston, TX
De Novo Systems Inc., Tempe, AZ
Earthdance Institute Inc., Asheville, NC
Earth Education Council Inc., Miami, FL
Earth Shakers Inc., Blytheville, AR
Earth Shuttle Foundation Inc., Reston,
VA
Earth Village Foundation, Houston, TX
East Bay Senior Housing Inc., Denver,
CO
East Central Community Arts,
Cambridge, MN
East Denver Eruv Committee, Denver,
CO
East End Ball Association Emma St.,
Bigelow, AR
East Green Bay Lightning Soccer Club,
Green Bay, WI
East Green Enrichment Center Inc.,
Wilson, NC
East Liverpool Area Youth, E. Liverpool,
OH
East Post Oak Volunteer Fire
Department, Detroit, TX
East St. Louis Community Athletic Club
Inc., E. St. Louis, IL
East West Oneness Foundation, Houston,
TX
Eastern Chester County EMS Committee,
Richburg, SC
Eastern Europe Outreach, Pueblo West,
CO
Eastern Shore Womens Fast Pitch,
Salisbury, MD
Eastern Wildlife Center Inc., Greensville,
NC
Echos of Life Inc., Irving, TX
Family Ancestral Research Association,
Sandy, UT
April 6, 1998281998–14 I.R.B.

Family Church of God Inc., Columbus,
IN
Family Complex East Inc., Pittsburgh, PA
Family Counseling and Resource of
Mississippi Inc., Brandon, MS
Family Health Services of Lumberton
Inc., Lumberton, MS
Family Leadership Project Inc., Little
Rock, AR
Family-Owned Business Institute,
Denver, CO
Family Rescue Coalition of Citrus
County Inc., Homosassa Springs, FL
Family Strategies Inc., Clancy, MT
Family Tree Ministries Inc., Wichita, KS
Family YMCA of McNairy & Hardin
Counties, Adamsville, TN
Famli First Inc., Richmond, VA
Fannin County Youth Softball
Association Inc., Blue Ridge, GA
Far Northeast Neighbors Inc., Denver,
CO
Far South Side Community Health
Center, Chicago Heights, IL
Gem City Senior Olympics Inc., Quincy,
IL
Gemini Nutriential Services Inc.,
Bellaire, TX
General Baptist Home Mission Center,
Detroit, MI
Generations United of Michigan,
Southfield, MI
Genesis House, Richmond, VA
Genesius Guild West Theatre Inc., Salt
Lake City, UT
Georgetown Sportfishing Association
Inc., Georgetown, SC
Georgia Foundation for Athletic
Excellence Inc., Atlanta, GA
Georgia Hooved Animal Humane Society
Inc., Canton, GA
Georgia Legal Foundation Inc., Atlanta,
GA
Georgia Metros Athletic Foundation Inc.,
Decatur, GA
Georgia Providers for Non Profits Inc.,
Sandy Springs, GA
Georgia Veterinary Medical Association
Foundation Inc., Norcross, GA
Georgia Youth Leadership Council Inc.,
Fairfax Station, VA
Germantown Touchdown Club,
Germantown, TN
Get a Life Inc., Fort Worth, TX
Ghana Neurological Foundation Inc.,
Tampa, FL
Gilbert and Sullivan Society of
Rochester, Rochester, MN
Giles County Humane Association Inc.,
Pulaski, TN
Gill Creek Baptist Church Inc.,
Columbia, SC
Gillespie County Law Enforcement Youth
Activities League, Fredericksburg, TX
Gillis Foundation, Biloxi, MS
Gils Professional Youth Services,
Albuquerque, NM
Ginosko Ministries Inc., Charlotte, NC
Girls Incorporated of Orange County,
Orlando, FL
Glad Tiding Ministries Inc., Lebanon, MO
Gladiators Inc., Stone Mtn, GA
Glasgow Independent Schools Education
Foundation Inc., Glasgow, KY
Gleaning for Jesus Recycling Year 2000,
Saginaw, MI
Akademeia Inc., Cleveland, OH
Ambassadors in Mashiyach, Azle, TX
Avicultural Society of Tucson, Tucson,
AZ
Canaday Ministries, Inc., Fort Smith, AR
Catholic Evidence Guild, Ann Arbor, MI
Catholic Radio Broadcasting, Saint
Johns, MI
Catoosa Senior Citizens Association Inc.,
Catoosa, OK
Cedar Social, St. Paul, MN
Celebrate Kids Inc., Fort Worth, TX
Celebrate Two in 92, Ashdown, AR
Celebration of Pianos, Denver, CO
Celtic-American Heritage Society,
Jackson, MS
Celuni Inc., Miami, FL
Center for Disfigured Children, Ann
Arbor, MI
Center for Health Care Access & Reform,
St. Paul, MN
Center for Jewish Medical Heritage,
Cleveland, OH
Center for Media in the Public Interest at
the Grosvener Institute, Carlisle, PA
Center for Research in Human Ecology,
Houston, TX
Center for Sustainable Living Inc.,
Shenandoah Junction, WV
Center for the Development of Pluralistic
Leadership, Inc., Eden Prairie, MN
Center for Trauma Information and
Education, Inc., Cincinnati, OH
Center of Perpetual Help Inc., Stow, OH
Center-Peace Ministries Inc., Palm City,
FL
Central Florida Earth Alliance Inc.,
Orlando, FL
Central Florida Police Stress Unit Inc.,
Winter Park, FL
Central Iowa Mens Chorus Inc., Des
Moines, IA
Central Surgical Association Foundation,
Ann Arbor, MI
Central Texas Hot Spurs Soccer Club,
Georgetown, TX
Central Texas Quality Quorum Inc.,
Temple, TX
Central Texas Volunteer Firefighters
Association, Blanket, TX
Centro Cultural Mexicano, Denver, CO
Dallas County Education Fund Inc.,
Selma, AL
Dallas County Save Our Communities
Inc., Rockwall, TX
Dallas CV Inc., Dallas, TX
Dallas Life Ministries Inc., Dallas, TX
Dallas Neighbors a Non-Profit
Corporation, Dallas, TX
Dalton Stewart Evangelistic Music,
Abilene, TX
Dalton Village Outreach Center,
Charlotte, NC
Dance Expressions Inc., Florissant, MO
Dance Project Inc., Tampa, FL
Dancer Scholarship Foundation Inc.,
Coconut Grove, FL
Daniel Catarisano Ministries, Houston, TX
Danny Hood Evangelistic Association,
Kingsford, MI
Danville Literacy Council, Danville, VA
Darla Johnson Andrew Long and
Company, Austin, TX
Darrons Oak Inc., Oklahoma City, OK
Dartmouth Club of Houston Inc.,
Houston, TX
David L. Stone Wildlife Rehab Clinc
Inc., Lordsburg, NM
Davids Mighty Men, Beaumont, TX
Davidson Transit Organization,
Nashville, TN
Dawson Foundation Inc., Lynwood, IL
Developmental Planning Associates of
Greater New York Inc., Staten Island,
NY
E.J. Charities Inc., Little Rock, AR
Each One Teach One Learning Center
Inc., Nashville, TN
Eagle Star Inc., Scottsbluff, NE
Eagle-Union Youth Soccer Association
Inc., Zionsville, IN
Eagle Wing Estates Inc., Jackson, MS
Earl Carl Institute for Legal and Social
Policy Inc., Houston, TX
Early Bird Child Care Food Program
Inc., Baton Rouge, LA
Early Childhood Autism Project Inc.,
Overland Park, KS
1998–14 I.R.B.29April 6, 1998

Earning by Learing of Mississippi Bucks
for Books, Jackson, MS
Earth Day Arizona Earth Day Phoenix,
Phoenix, AZ
Facility Committee, Jackson, AL
Fair Havens Missionary Mission Inc.,
Pompano Beach, FL
Fairfield Ambulance Service Inc.,
Fairfield, TX
Fairhope Historical Museum Inc.,
Fairhope, AL
Fairview Dixie Youth Inc., Grant, LA
Faith Out Reach Center Inc., Kenova,
WV
Falls City Community Art Gallery Inc.,
Louisville, KY
Families Access Inc., Atlanta, GA
Families Against Drugs Inc., Osceola,
MO
Families of Truckers Support Group,
Joplin, MO
Gabriel Foundation Inc., Wall, NJ
Gainsville Volleyball Officials
Association Inc., Gainesville, FL
Galveston Club Inc., Galveston, TX
Galveston County Medical Society Inc.,
Galveston, TX
Gangbusters, Inc., Tucson, AZ
Garden County Community Foundation
Inc., Oshkosk, NE
Garfield Development Corporation,
Grand Rapids, MI
Gary Accord Inc., Gary, IN
Gary Freedom House Inc., Gary, IN
Gary Oliver Ministries Inc., Nashville,
TN
Gathering Place of Wilmington NC Inc.,
Wilmington, NC
Gay and Lesbian Organization of
Professional Inc., Huntsville, AL
Gays and Lesbians United for Equality
Inc., Louisville, KY
G I F T Non Profit, Jackson, MS
G P H S Alumni Association Inc., Grand
Praire, TX
Greater Atlanta Billy Graham Crusade
Inc., Atlanta, GA
Guntersville VOA Elderly Housing, Inc.,
Metairie, LA
High Aspirations Home for Teens, Los
Angeles, CA
Infinite Sun Recycling, Kansas City, MO
Interamerica Institute for Border Health
& Environment, El Paso, TX
Manitowoc County Crimestoppers Inc.,
Manitowoc, WI
Mills Station Foundation, Sacramento,
CA
Nicaraguan Atlantic Development
Association Inc., Miami, FL
Sexton Mountain Parent Teacher Club,
Beaverton, OR
Vaad Hakashruth of San Antonio, San
Antonio, TX
Vitamin E Research and Information
Service, Inc., LaGrange, IL
Wekaf USA World Eskrima Kali Arnis,
Torrance, CA
World Cultural Exchange Foundation,
Burbank, CA
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.
April 6, 1998301998–14 I.R.B.

1998–14 I.R.B.31April 6, 1998
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
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

April 6, 1998321998–14 I.R.B.
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.
Numerical Finding List
1
Bulletins 1998–1 through 1998–13
Announcements:
98–1, 1998–2 I.R.B. 38
98–2, 1998–2 I.R.B.38
98–3, 1998–2 I.R.B.38
98–4, 1998–4 I.R.B.31
98–5, 1998–5 I.R.B. 25
98–6, 1998–5 I.R.B. 25
98–7, 1998–5 I.R.B. 26
98–8, 1998–6 I.R.B. 96
98–9, 1998–7 I.R.B. 35
98–10, 1998–7 I.R.B. 35
98–11, 1998–8 I.R.B. 42
98–12, 1998–8 I.R.B. 43
98–13, 1998–8 I.R.B. 43
98–14, 1998–8 I.R.B. 44
98–15, 1998–10 I.R.B.36
98–16, 1998–9 I.R.B. 17
98–17, 1998–9 I.R.B. 16
98–18, 1998–10 I.R.B.44
98–19, 1998–10 I.R.B.44
98–20, 1998–11 I.R.B. 25
98–21, 1998–11 I.R.B. 26
98–22, 1998–12 I.R.B. 33
98–23, 1998–12 I.R.B. 34
98–24, 1998–12 I.R.B. 35
98–25, 1998–13 I.R.B.43
Notices:
98–1, 1998–3 I.R.B. 42
98–2, 1998–2 I.R.B. 22
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25
98–5, 1998–3 I.B.R.49
98–6, 1998–3 I.R.B. 52
98–7, 1998–3 I.R.B. 54
98–8, 1998–4 I.R.B. 6
98–9, 1998–4 I.R.B. 8
98–10, 1998–6 I.R.B.9
98–11, 1998–6 I.R.B. 18
98–12, 1998–5 I.R.B.12
98–13, 1998–6 I.R.B.19
98–14, 1998–8 I.R.B. 27
98–15, 1998–9 I.R.B. 8
98–17, 1998–11 I.R.B. 6
98–18, 1998–12 I.R.B. 11
98–19, 1998–13 I.R.B.24
98–20, 1998–13 I.R.B.25
Proposed Regulations:
PS–158–86, 1998–11 I.R.B. 13
REG–100841–97, 1998–8 I.R.B. 30
REG–102894–97, 1998–3 I.R.B. 59
REG–104062–97, 1998–10 I.R.B. 34
REG–104691–97, 1998–11 I.R.B. 13
REG–105163–97, 1998–8 I.R.B. 31
REG–109333–97, 1998–9 I.R.B. 9
REG–109704–97, 1998–3 I.R.B. 60
REG–110965–97, 1998–13 I.R.B. 42
REG–115795–97, 1998–8 I.R.B.33
REG–119449–97, 1998–10 I.R.B. 35
REG–120200–97, 1998–12 I.R.B. 32
REG–121755–97, 1998–9 I.R.B. 13
REG–209276–87, 1998–11 I.R.B. 18
REG–209463–82, 1998–4 I.R.B. 27
REG–209476–82, 1998–8 I.R.B. 36
REG–209484–87, 1998–8 I.R.B.40
Proposed Regulations—Continued
REG–209485–86, 1998–11 I.R.B. 21
REG–209807–95, 1998–8 I.R.B. 40
REG–251502–96, 1998–9 I.R.B. 14
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
98–11, 1998–4 I.R.B.9
98–12, 1998–4 I.R.B. 18
98–13, 1998–4 I.R.B. 21
98–14, 1998–4 I.R.B. 22
98–15, 1998–4 I.R.B. 25
98–16, 1998–5 I.R.B. 19
98–17, 1998–5 I.R.B. 21
98–18, 1998–6 I.R.B. 20
98–19, 1998–7 I.R.B. 30
98–20, 1998–7 I.R.B. 32
98–21, 1998–8 I.R.B. 27
98–22, 1998–12 I.R.B. 11
98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
98–25, 1998–11 I.R.B. 7
98–26, 1998–13 I.R.B.26
Revenue Rulings:
98–1, 1998–2 I.R.B. 5
98–2, 1998–2 I.R.B. 15
98–3, 1998–2 I.R.B. 4
98–4, 1998–2 I.R.B. 18
98–5, 1998–2 I.R.B. 20
98–6, 1998–4 I.R.B. 4
98–7, 1998–6 I.R.B.6
98–8, 1998–7 I.R.B. 24
98–9, 1998–6 I.R.B. 5
98–10, 1998–10 I.R.B. 11
98–11, 1998–10 I.R.B. 13
98–12, 1998–10 I.R.B. 5
98–13, 1998–11 I.R.B. 4
98–14, 1998–11 I.R.B. 4
98–15, 1998–12 I.R.B. 6
98–16, 1998–13 I.R.B. 18
98–17, 1998–13 I.R.B. 21
Treasury Decisions:
8740, 1998–3 I.R.B. 4
8741, 1998–3 I.R.B. 6
8742, 1998–5 I.R.B.4
8743, 1998–7 I.R.B. 26
8744, 1998–7 I.R.B. 20
8745, 1998–7 I.R.B. 15
8746, 1998–7 I.R.B. 4
8747, 1998–7 I.R.B. 18
8748, 1998–8 I.R.B. 24
8749, 1998–7 I.R.B. 16
8750, 1998–8 I.R.B. 4
8751, 1998–10 I.R.B. 23
8752, 1998–9 I.R.B. 4
8753, 1998–9 I.R.B. 6
8754, 1998–10 I.R.B. 15
8755, 1998–10 I.R.B. 21
Treasury Decisions—Continued
8756, 1998–12 I.R.B.4
8757, 1998–13 I.R.B.4
8758, 1998–13 I.R.B. 15
8759, 1998–13 I.R.B. 19

1998–14 I.R.B.33April 6, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–1 through 1998–13
Revenue Procedures:
91–59
Updated and superseded by
98–25, 1998–11 I.R.B. 7
94–16
Modified and superseded by
98–22, 1998–12 I.R.B. 11
93–62
Modified and superseded by
98–22, 1998–12 I.R.B. 11
95–35
95–35A
Superseded by
98–19, 1998–7 I.R.B. 30
96–29
Modified and superseded by
98–22, 1998–12 I.R.B. 11
97–1
Superseded by
98–1, 1998–1 I.R.B. 7
97–2
Superseded by
98–2, 1998–1 I.R.B. 74
97–3
Superseded by
98–3, 1998–1 I.R.B. 100
97–4
Superseded by
98–4, 1998–1 I.R.B. 113
97–5
Superseded by
98–5, 1998–1 I.R.B. 155
97–6
Superseded by
98–6, 1998–1 I.R.B. 183
97–7
Superseded by
98–7, 1998–1 I.R.B. 222
97–8
Superseded by
98–8, 1998–1 I.R.B. 225
97–21
Superseded by
98–2, 1998–1 I.R.B. 74
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:
75–17
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
92–19
Supplemented in part by
98–2, 1998–2 I.R.B. 15
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–27 through 1997–52 will be found in Internal
Revenue Bulletin 1998–1, dated January 5, 1998.

Index
Internal Revenue Bulletins
1998–1 Through 1998–13
For the index of items published during
the first six months of 1997, see I.R.B.
1998–1, dated January 5, 1998.
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page
number on which it appears.
Key to Abbreviations:
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Electronic filing; magnetic media; 1998
Form W–4 specifications (RP 26) 13,
26
Proposed regulations:
26 CFR 31.3121(v)(2)–1, revised;
FICA and FUTA taxation of amounts
under employee benefit plans (REG–
209484–87; REG–209807–95) 8, 40
26 CFR 31.6053–1, –4; electronic tip
reports (REG–104691–97) 11, 13
Student FICA exception (RP 16) 5,19
ESTATE TAX
Regulations:
26 CFR 20.2041–3, 20.2056(d)–2,
amended; 20.2046–1, revised; prop-
erty interests and disclaimer (TD
8744) 7, 20
26 CFR 25.2702–5, –7, amended; qual-
ified prsonal residence trust, sale of
residence (TD 8743) 7, 26
26 CFR 25.2511–1, 25.2514–3,
25.2518–1, –2, amended; property
interests and disclaimers (TD 8744)
7, 20
ESTATE TAX—Continued
Revocable trust; election (RP 13) 4, 21
Underpayment interest, interest expense
deduction, estates (RP 15) 4, 25
EXCISE TAX
Bows and arrows; taxable and nontaxable
articles (RR 5) 2, 20
Proposed regulations:
26 CFR 40.0–1T, added; 40.6011(a)–
1T, added; 40.6302(c)–2T, added;
deposits of excise taxes (REG–
102894–97) 3, 59
26 CFR 54.4980B–1, added; group
health plans continuation coverage
requirements (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; deposits 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 and
diesel fuel excise tax; special rules
for Alaska, definitions (TD 8748) 8,
24
GIFT TAX
Qualifying income interest, disposition
(RR 8) 7, 24
INCOME TAX
Advance pricing agreements, small busi-
ness taxpayers (Notice 10) 6, 9
Article XIII (8) Rev. Proc. (RP 21) 8, 27
Automobile owners and lessees (RP 24)
10, 31
Books and records; automatic data pro-
cessing system (RP 25) 11, 7
Capital gains and charitable remainder
trusts (Notice 20) 13, 25
Education loans (Notice 7) 3, 54
Elections under section 7704(g) (Notice
3) 3, 48
Employee Plans:
Administrative programs; closing
agreements (RP 22) 12, 11
INCOME TAX—Continued
Determination letters (RP 6) 1, 183;
(RP 14) 4,22
Discrimination; CODAs (Notice 1) 3,
42
Eligible deferred compensation plans
(Notice 8) 4, 6
Group health plans; COBRA continua-
tion coverage; HIPAA portability
(Notice 12) 5, 12
Funding:
Full funding limitations, weighted av-
erage interest rate for January 1998
(Notice 9) 4, 8; February 1998 (No-
tice 15) 9,8; March 1998 (Notice
18) 12,11
Letter rulings, etc. (RP 4) 1, 113
Limitations on benefits and contribu-
tions (RR 1) 2, 5
Minimum Funding Standards (RP 10)
2, 35
Proposed regulations:
26 CFR 1.401(a)(9)–1, amended; quali-
fied plans and individual retirement
plans, required distributions (REG–
209463–82) 4, 27
Recovery of basis; retirees (Notice 2) 2,
22
SIMPLE-IRAs (Notice 4) 2,25
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225
Environmental cleanup costs; letter
rulings (RP 17) 5, 21
Exempt Organizations:
Letter rulings, etc. (RP 4) 1, 113
Organizations excepted from reporting
lobbying expenditures (RP 19) 7,
30
Tax consequences of physicians re-
cruitment incentives provided by
hospitals (RR 15) 12, 6
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225
Failure to deposit federal tax; penalty
abatement (Notice 14) 8, 27
Foreign partnerships, reporting transfer of
property by U.S. persons (Notice 17)
11, 6
Foreign tax credit abuse (Notice 5) 3, 49
Fringe benefits aircraft valuation formula,
first half of 1998 (RR 14) 11, 4
Insurance companies:
Discounting estimated salvage recover-
able (RP 12) 4, 18
Interest rate tables (RR 2) 2,15
Loss reserves; discounting unpaid
losses (RP 11) 4, 9
April 6, 1998341998–14 I.R.B.

1998–14 I.R.B.35April 6, 1998
INCOME TAX—Continued
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1998
(RR4) 2, 18; February 1998
(RR7) 6, 6; March 1998 (RR11)
10, 13
Rates, underpayments and overpay-
ments (RR 17) 13, 21
Inventory:
LIFO:
Price indexes; department stores for
November 1997 (RR 6) 4, 4; De-
cember 1997 (RR 9) 6,5; January
1998 (RR 16) 13,18
Letter rulings, determination letters, and
information letters issued by Associate
Chief Counsel (Domestic), Associate
Chief Counsel (EBEO), Associate
Chief Counsel (Enforcement Litiga-
tion), and Associate Chief Counsel
(International) (RP 1) 1, 7
Losses attributable to a disaster during
1997 (RR 12) 10, 5
Low-income housing tax credit (Notice
13) 6, 19
Satisfactory bond; “bond factor”
amounts for the period October
through December 1997 (RR 3) 2, 4;
January–March 1998 (RR 13) 11,4
Proposed regulations:
26 CFR 1.72(p)–1, amended; loans to
plan participants (REG–209476–82)
8, 36
26 CFR 1.141–7, 1.142(f)(4)–1,
1.150–5, added; 1.141–8, –15,
amended; obligations of states and
political subdivisions (REG–
110965–97) 13, 42
26 CFR 1.356–6, added; reorganiza-
tions, nonqualified preferred stock
(REG–121755–97) 9, 13
26 CFR 1.460–6, amended; election
not to apply look-back method in de
minimiscases (REG–120200–97)
12, 32
26 CFR 1.469–10, revised; 1.7704–1,
added; investment income, passive
activity income and loss rules for
publicly traded partnerships
(REG–105163–97) 8, 31
26 CFR 1.1291–1, 1.1293–1, 1.1295–1,
–3, 1.1297–3(c), added; 1.1296–4,
amended; passive foreign investment
company preferred shares, special
income exclusion (REG–115795–
97) 8, 33
26 CFR 1.1397E–1, added; qualified
zone 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 losses
and credits (REG–104062–97) 10, 34
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 installment
payments (REG–100841–97) 8, 30
26 CFR 301.6404–2, added; abatement
of interest (REG–209276–87) 11, 18
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection ac-
tions (REG–251502–96) 9, 14
26 CFR 54.9812–1, added; mental
health parity; HIPAA (REG–
109704–97) 3, 60
Qualified Funeral Trust; guidance (Notice
6) 3, 52
Qualified Subchapter S Trust (QSST)
conversion to Electing Small Business
Trust (ESBT) 10, 30
Qualified Zone Academy Zone Bonds
(RP) 3, 100
Real estate transactions (RP 20) 7, 32
Regulations:
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 1.280B–1, added; building de-
molition, definition of structure (TD
8745) 7, 15
26 CFR 1.354–1, 1.355–1, 1.356–3,
amended; reorganizations, treatment
of warrants as securities (TD 8752)
9, 4
26 CFR 1.356–6T, added; reorganiza-
tions, nonqualified preferred stock
(TD 8753) 9, 6
26 CFR 1.446–1, 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 make
elections (TD 8742) 5, 4
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 1.468A–2, –3, –8, amended;
nuclear decommissioning funds; re-
vised schedules of ruling amounts
(TD 8758) 13, 15
26 CFR 1.905–2, amended; foreign tax
credit filing requirements (TD 8759)
13, 19
26 CFR 1.1271–1, 1.1275–1, amended;
debt instruments with original issue
discount, annuity contracts (TD
8754) 10, 15
26 CFR 1.1202–0, –2, added; qualified
small 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 investment
company preferred shares, special
income exclusion (TD 8750) 8, 4
26 CFR 1.1396–1; empowerment zone
employment credit, qualified zone
employees (TD 8747) 7, 18
26 CFR 1.1397E–1T, added; qualified
zone 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; consoli-
dated returns, limitations on the use
of certain losses and credits, overall
foreign 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 (TD
8741) 3, 6
Reorganizations; exchange of securities
(RR 10) 10, 11
Rulings:
Areas in which advance rulings will not
be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(EBEO) (RP 3) 1, 100
INCOME TAX—ContinuedINCOME TAX—Continued

Rulings—Continued
Areas in which advance rulings will not
be issued—Continued
Associate Chief Counsel (Interna-
tional) (RP 7) 1, 222
Rural airports (RP 18) 6, 20
Technical advice to district directors and
chiefs, appeals offices, Associate Chief
Counsel (Domestic), Associate Chief
Counsel (EBEO), Associate Chief
Counsel (Enforcement Litigation), and
Associate Chief Counsel (International)
(RP 2) 1, 74
Tentative differential earnings rate for
1997 (Notice 19) 13, 24
Treatment of hybrid arrangements under
subpart F (Notice 11) 6, 18
April 6, 1998361998–14 I.R.B.
INCOME TAX—Continued

1998–14 I.R.B.37April 6, 1998
Notes

Notes
April 6, 1998381998–14 I.R.B.

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