us-irs-announcements-irb-1998-10-pdf•Internal Revenue Bulletin 1998-10 (PDF rendition): IRS Announcements
Internal Revenue Bulletin 1998-10 (PDF rendition): IRS Announcements
us-irs-announcements-irb-1998-10-pdfInternal Revenue Bulletin 1998-10 (PDF rendition): IRS AnnouncementsGuidance
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. 98–10, page 11. Reorganizations; exchange of securities.An acquisition of stock for solely voting stock, accompanied under the re- organization plan by an exchange of securities for securities that are of equal fair market value and equal principal amount, qualifies as a corporate reorganization under sec- tion 368(a)(1)(B) of the Code. Section 354(a)(1) nonrecogni- tion applies to the securities-for-securities exchange. Rev. Rul. 98–11, page 13. 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 March 1998. Rev. Rul. 98–12, page 5. Election in respect of losses attributable to a disaster. This ruling lists the areas declared by the President to qualify as major disaster areas under the Disaster Relief and Emer- gency Assistance Act since the publication of Rev. Rul. 97–11. T.D. 8751, page 23. REG–104062–97, page 34. Temporary and proposed regulations under section 1502 of the Code relate to the use of tax credits of a consolidated group and its members. A public hearing on the proposed regulations will be held on May 7, 1998. T.D. 8754, page 15. Final regulations under section 1275 of the Code relate to the federal income tax treatment of certain annuity con- tracts. T.D. 8755, page 21. REG–119449–97, page 35. Temporary and proposed regulations under section 1397E of the Code relate to the federal income tax treatment of qualified zone academy bonds. A public hearing on the pro- posed regulations will be held on May 27, 1998. EXEMPT ORGANIZATIONS Announcement 98–19, page 44. A list is provided of organizations that no longer qualify as organizations to which contributions are deductible under section 170 of the Code. ADMINISTRATIVE Rev. Proc. 98–23, page 30. Conversion of a Qualified Subchapter S Trust (QSST) to an Electing Small Business Trust (ESBT) and of an ESBT to a QSST. This procedure provides automatic con- sent of the Commissioner for the conversion of a Qualified Subchapter S Trust (QSST) to an Electing Small Business Trust (ESBT) and of an ESBT to a QSST. Rev. Proc. 98–24, page 31. Automobile owners and lessees.This procedure provides owners and lessees of passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles) with tables detailing the limitations on depreciation deductions for own- ers of electric automobiles first placed in service after Au- gust 5, 1997, and before January 1, 1998, and the amounts to be included in income by lessees of electric automobiles first leased after August 5, 1997, and before January 1, 1998. Announcement 98–15, page 36. The Service is requesting comments from the public on pro- posed new Forms W–8, Certificate of Foreign Status of Ben- eficial Owner for United States Tax Withholding; W–8A, For- Internal Revenue bbuulllleettiinn Bulletin No. 1998–10 March 9, 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 49. Announcement of Disbarments and Suspensions begins on page 46. Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 44. (Continued on page 4) 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. eign Person’s Claim of Income Effectively Connected With the Conduct of a Trade or Business in the United States; W–8B, Certification for United States Tax Withholding for Foreign Governments and Other Foreign Organizations; and W–8C, Certificate of Intermediary for United States Tax With- holding. Announcement 98–18, page 44. Treasury and the Service are soliciting comments regarding the tax effects of changing to the EURO. March 9, 199841998–10 I.R.B. HIGHLIGHTS OF THIS ISSUE—Continued ADMINISTRATIVE—Continued 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 March 1998. See Rev. Rul. 98–11, page 13. Section 165.—Losses 26 CFR 1.165–11: Election in respect of losses attributable to a disaster. Election in respect of losses attribut- able to a disaster. This ruling lists the areas declared by the President to qualify as major disaster areas under the Disaster Relief and Emergency Assistance Act since the publication of Rev. Rul. 97–11. Rev. Rul. 98–12 Under § 165(i) of the Internal Revenue Code, if a taxpayer suffers a loss attribut- able to a disaster occurring in an area sub- sequently determined by the President of the United States to warrant assistance by the Federal Government under the Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121–5204c (1988 & Supp. V 1993) (Act), the taxpayer may elect to claim a deduction for that loss on the tax- payer’s federal income tax return for the taxable year immediately preceding the taxable year in which the disaster occurred. Section 1.165–11(e) of the Income Tax Regulations provides that the election to deduct a disaster loss for the preceding year must be made by filing a return, an amended return, or a claim for refund on or before the later of (1) the due date of the taxpayer’s income tax return (determined without regard to any extension of time to file the return) for the taxable year in which the disaster actually occurred, or (2) the due date of the taxpayer’s income tax return (determined with regard to any extension of time to file the return) for the taxable year immediately preceding the taxable year in which the disaster actually occurred. The provisions of § 165(i) apply only to losses that are otherwise deductible under § 165(a). An individual taxpayer may deduct losses if they are incurred in a trade or business, if they are incurred in a transaction entered into for profit, or if they are casualty losses under § 165(c)(3). The President has determined that dur- ing 1997 the areas listed below have been adversely affected by disasters of suffi- cient severity and magnitude to warrant assistance by the Federal Government under the Act. DRAFTING INFORMATION The principal author of this revenue ruling is Jonathan Strum of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information re- garding this revenue ruling, contact Mr. Strum on (202) 622-4960 (not a toll-free call). 1998–10 I.R.B.5March 9, 1998 Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Disaster Areas in 1997 Alabama Counties of Baldwin, Choctaw, and Mobile Arkansas Counties of Baxter, Clark, Clay, Con- way, Craighead, Cross, Greene, Hemp- stead, Hot Spring, Independence, Jack- son, Jefferson, Lawrence, Lee, Lincoln, Lonoke, Mississipi, Nevada, Newton, Poinsett, Pope, Pulaski, Saline, White, and Woodruff Counties of Bradley, Clay, Cleburne, Cleveland, Columbia, Craighead, Dal- las, Drew, Faulkner, Grant, Greene, Izard, Jackson, Jefferson, Lafayette, Lincoln, Lonoke, Monroe, Mont- gomery, Ouachita, Poinsett, Searcy, Sharp, St. Francis, Stone, Union, Van Buren, and White California Counties of Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Lassen, Madera, Marin, Mariposa, Mendocino, Severe storms, flooding, and high winds associated with Hurricane Danny Severe storms and tornadoes Severe storms and flooding Severe storms, flooding, and mud and land slides July 17-22, 1997 March 1-4, 1997 April 4-21, 1997 December 28, 1996-April 1, 1997 Type of DisasterDate of Disaster March 9, 199861998–10 I.R.B. Merced, Modoc, Mono, Monterey, Napa, Nevada, Placer, Plumas, Sacra- mento, San Benito, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Clara, Santa Cruz, Shasta, Sierra, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba; and the City of Morgan Hill Colorado Counties of Baca, Clear Creek, Crow- ley, Elbert, Kiowa, Larimer, Lincoln, Logan, Morgan, Otero, Phillips, Prow- ers, and Weld Florida Counties of Citrus, Hernando, Hillsbor- ough, Lake, Orange, Osceola, Pasco, Polk, and Sumter Guam Territory of Guam Idaho Counties of Adams, Benewah, Boise, Bonner, Boundary, Camas, Clearwater, Elmore, Gem, Idaho, Koontenai, Latah, Nez Perce, Owyhee, Payette, Shoshone, Valley and Washington Counties of Benewah, Bingham, Bon- ner, Bonneville, Boundary, Butte, Custer, Fremont, Jefferson, Kootenai, Madison, and Shoshone Illinois Counties of Alexander, Gallatin, Hardin, Massac, Pope, and Pulaski County of Cook Indiana Counties of Clark, Crawford, Dear- born, Floyd, Harrison, Jefferson, Ohio, Perry, Posey, Spencer, Switzerland, Vanderburgh, and Warrick Iowa Counties of Cass, Clarke, Iowa, Jasper, Madison, Mahaska, Marion, Mills, Polk, Pottawattamie, Poweshiek, Union, and Warren Kentucky Counties of Adair, Anderson, Ballard, Severe storms, heavy rains, flash floods, other flooding, mud and land slides, and severe ground saturation Severe storms, high winds, tornadoes, and flooding Typhoon Paka and associated torrential rains, high winds, high surf, and tidal surges Severe storms, flooding, and mud and land slides Severe storms, snowmelt, and mud and land slides Severe storms and flooding Severe thunder storms and flash flooding Severe storms and flooding Severe winter storm Severe storms, flooding, and tornadoes July 28-August 12, 1997 December 25, 1997-January 14, 1998 December 16-17, 1997 November 16, 1996-January 4, 1997 March 14-June 30, 1997 March 1-April 1, 1997 August 16-17, 1997 February 28-March 31, 1997 October 26-28, 1997 March 1-24, 1997 1998–10 I.R.B.7March 9, 1998 Barren, Bath, Boone, Bourbon, Boyd, Boyle, Bracken, Breathitt, Breckin- ridge, Bullitt, Butler, Caldwell, Cal- loway, Campbell, Carlisle, Carroll, Carter, Casey, Christian, Clark, Clay, Crittenden, Daviess, Edmonson, El- liott, Estill, Fayette, Fleming, Floyd, Franklin, Fulton, Gallatin, Grant, Graves, Grayson, Green, Greenup, Hancock, Hardin, Harrison, Hart, Hen- derson, Henry, Hickman, Hopkins, Jef- ferson, Jessamine, Johnson, Kenton, Knott, Larue, Lawrence, Lee, Leslie, Letcher, Lewis, Livingston, Logan, Lyon, Magoffin, Marion, Marshall, Mason, McCracken, McLean, Meade, Menifee, Mercer, Metcalfe, Monroe, Montgomery, Morgan, Muhlenberg, Nelson, Nicholas, Ohio, Oldham, Owen, Pendleton, Perry, Pike, Powell, Robertson, Rowan, Russell, Scott, Shelby, Simpson, Spencer, Taylor, Todd, Trigg, Trimble, Union, Warren, Washington, Webster, and Woodford Louisiana Counties of Calcasieu, Cameron, and Jefferson Davis Michigan Counties of Genesee, Macomb, Oak- land, Saginaw, and Wayne Micronesia Yap Proper, Ulithi Atoll, and Ngula Atoll of Yap State Minnesota Counties of Becker, Beltrami, Benton, Big Stone, Blue Earth, Brown, Chippewa, Clay, Clearwater, Cotton- wood, Douglas, Faribault, Grant, Hub- bard, Jackson, Kandiyohi, Kittson, Lac Qui Parle, Lake of the Woods, Le Sueur, Lincoln, Lyon, Mahnomen, Marshall, Martin, McLeod, Meeker, Murray, Nicollet, Nobles, Norman, Otter Tail, Pennington, Pipestone, Polk, Pope, Red Lake, Redwood, Renville, Rock, Roseau, Sherburne, Sibley, Stearns, Steele, Stevens, Swift, Todd, Traverse, Wadena, Waseca, Watonwan, Wilkin, Wright, and Yellow Medicine Counties of Aitkin, Anoka, Becker, Beltrami, Benton, Big Stone, Blue Earth, Brown, Carver, Cass, Chippewa, Clay, Clearwater, Dakota, Douglas, Severe ice storm Severe storms, tornadoes, and flooding Typhoon Fern Severe winter storms Severe flooding, severe winter storms, snowmelt, high winds, rains, and ice January 12-17, 1997 July 2, 1997 December 25-26, 1996 January 3-February 3, 1997 March 21-May 24, 1997 March 9, 199881998–10 I.R.B. Goodhue, Grant, Hennepin, Houston, Hubbard, Kandiyohi, Kittson, Lac Qui Parle, Lake of the Woods, Le Sueur, Lincoln, Lyon, Mahnomen, Marshall, McLeod, Morrison, Murray, Nicollet, Norman, Otter Tail, Pennington, Polk, Pope, Ramsey, Red Lake, Redwood, Renville, Roseau, Scott, Sherburne, Sibley, St. Louis, Stearns, Stevens, Swift, Todd, Traverse, Wabasha, Wadena, Washington, Wilkin, Winona, Wright, and Yellow Medicine Counties of Anoka, Hennepin, Isanti, Kandiyohi, Ramsey, Sherburne, and Wright Mississippi Counties of Bolivar, Tunica, Warren, and Washington Montana Counties of Broadwater, Carbon, Daw- son, Deer Lodge, Flathead, Judith Basin, Lincoln, Madison, Meagher, Missoula, Musselshell, Park, Prairie, Ravalli, Richland, Roosevelt, Sanders, Stillwater, Sweet Grass, Treasure, Val- ley, Wheatland, Yellowstone and the Flathead Indian Reservation of the Confederated Salish and Kootenai Tribes Nebraska Counties of Adams, Banner, Buffalo, Butler, Cass, Cheyenne, Clay, Custer, Dawson, Dodge, Douglas, Fillmore, Franklin, Frontier, Furnas, Gosper, Hall, Hamilton, Harlan, Hayes, Hitch- cock, Kearney, Kimball, Lancaster, Lincoln, Nuckolls, Otoe, Phelps, Polk, Red Willow, Saline, Sarpy, Saunders, Scotts Bluff, Seward, Thayer, Washing- ton, Webster, and York Nevada Counties of Churchill, Douglas, Lyon, Mineral, Storey, and Washoe; and the City of Carson City; and the Walker River Paiute tribal lands located in Churchill, Lyon, and Mineral Counties New Jersey County of Atlantic Severe storms, flooding, tornadoes, and high winds Flooding Severe storms, ice jams, snowmelt, flood- ing, and extreme soil saturation Severe snow storms, rains, and strong winds Severe storms, flooding, and mud and land slides Severe storms and flooding June 28-July 27, 1997 February 28-April 21, 1997 March 1-August 6, 1997 October 24-26, 1997 December 20, 1996-January 17, 1997 August 20-21, 1997 1998–10 I.R.B.9March 9, 1998 North Dakota All Counties Counties of Adams, Barnes, Benson, Billings, Bottineau, Bowman, Burke, Burleigh, Cass, Cavalier, Dickey, Di- vide, Dunn, Eddy, Emmons, Foster, Golden Valley, Grand Forks, Grant, Griggs, Hettinger, Kidder, Lamoure, Logan, McHenry, McIntosh, McKen- zie, McLean, Mercer, Morton, Moun- trail, Nelson, Oliver, Pembina, Pierce, Ramsey, Ransom, Renville, Richland, Rolette, Sargent, Sheridan, Sioux, Slope, Stark, Steele, Stutsman, Towner, Traill, Walsh, Ward, Wells and Williams Northern Marianas Islands of Rota, Saipan, and Tinian Island of Rota Ohio Counties of Adams, Athens, Brown, Clermont, Gallia, Hamilton, Highland, Hocking, Jackson, Lawrence, Meigs, Monroe, Morgan, Pike, Ross, Scioto, Vinton and Washington Oregon Counties of Baker, Coos, Douglas, Gilliam, Grant, Jackson, Josephine, Klamath, Lake, Lane, Morrow, Umatilla, Wallowa, and Wheeler South Dakota Counties of Butte, Harding, Hutchin- son, Lake, Meade, Minnehaha, Moody, Pennington, Perkins, and Turner All counties Counties of Aurora, Beadle, Bennett, Bon Homme, Brookings, Brown, Brule, Buffalo, Butte, Campbell, Charles Mix, Clark, Clay, Codington, Corson, Custer, Davison, Day, Deuel, Dewey, Douglas, Edmunds, Fall River, Faulk, Grant, Gregory, Haakon, Ham- lin, Hand, Hanson, Harding, Hughes, Hutchinson, Hyde, Jackson, Jerauld, Jones, Kingsbury, Lake, Lawrence, Lincoln, Lyman, Marshall, McCook, McPherson, Meade, Mellette, Miner, Minnehaha, Moody, Pennington, Perkins, Potter, Roberts, Sanborn, Major winter storm and blizzard Severe flooding, severe winter storm, heavy spring rains, rapid snowmelt, high winds, ice jams, and ground saturation Super Typhoon Keith Typhoon Paka Severe storms and flooding Severe winter storms, flooding, and mud and land slides Severe winter storm Severe winter storms and blizzard Severe flooding, severe winter storms, heavy spring rains, rapid snowmelt, high winds, and ice jams January 3-31, 1997 February 28-May 24, 1997 November 2-3, 1997 December 16-17, 1997 February 28-March 17, 1997 December 25, 1996-January 6, 1997 November 13-26 1996 January 3-31, 1997 February 3- May 24, 1997 March 9, 1998101998–10 I.R.B. Shannon, Spink, Stanley, Sully, Todd, Tripp, Turner, Union, Walworth, Yank- ton, and Ziebach Tennessee Counties of Benton, Carroll, Cheatham, Chester, Clay, Davidson, DeKalb, Decatur, Dickson, Dyer, Gib- son, Grundy, Hardeman, Hardin, Hen- derson, Henry, Houston, Humphreys, Jackson, Lake, Lauderdale, Madison, McNairy, Montgomery, Obion, Shelby, Stewart, Sumner, Tipton, and Weakley Counties of Bradley, Grundy, Hamil- ton, Polk, Sequatchie, and Smith Texas Counties of Bandera, Bexar, Blanco, Burnet, Comal, Eastland, Edwards, Gillespie, Goliad, Guadalupe, Hays, Kendall, Kerr, Kimble, Llano, Mason, Medina, Real, San Saba, Travis, and Uvalde Vermont Counties of Caledonia, Franklin, Lam- oille, Orleans, and Washington Washington Counties of Adams, Asotin, Benton, Chelan, Clallam, Clark, Columbia, Cowlitz, Douglas, Ferry, Franklin, Garfield, Grant, Grays Harbor, Island, Jefferson, King, Kitsap, Kittitas, Klick- itat, Lewis, Lincoln, Mason, Okanogan, Pacific, Pend Oreille, Pierce, San Juan, Skagit, Skamania, Snohomish, Spokane, Stevens, Thurston, Walla Walla, Whatcom, Whitman, and Yakima Counties of Clallam, Grays Harbor, Jefferson, King, Kitsap, Lincoln, Mason, Pacific, Pend Oreille, Sno- homish, Spokane, Stevens, and Thurston County of Pend Oreille West Virginia Counties of Braxton, Cabell, Calhoun, Clay, Gilmer, Jackson, Kanawha, Lin- coln, Mason, Putnam, Roane, Tyler, Wayne, Wetzel, Wirt, and Wood Heavy rains, tornadoes, flooding, hail, and high winds Severe storms and tornadoes Severe thunderstorms and flooding Excessive rainfall, high winds, and flood- ing Severe winter storms, flooding, and mud and land slides Heavy rains, snow melt, flooding, and mud and land slides Flooding and snowmelt Heavy rains, wind driven rains, high winds, flooding, and slides February 28- March 24, 1997 March 28-29, 1997 June 21-July 15, 1997 July 15-17, 1997 December 26, 1996-February 10, 1997 March 18-28, 1997 April 10-June 30, 1997 February 28-March 15, 1997 1998–10 I.R.B.11March 9, 1998 Wisconsin Counties of Milwaukee, Ozaukee, Washington, and Waukesha Severe storms and floodingJune 21-23, 1997 Section 280F.—Limitation on Depreciation for Luxury Automobiles; Limitation Where Certain Property Used for Personal Purposes 26 CFR 280F–7: Property leased after December 31, 1986. This procedure provides owners and lessees of passenger automobiles designed to be propelled pri- marily by electricity and built by an original equip- ment manufacturer (electric automobiles) with ta- bles detailing the limitations on depreciation deductions for owners of electric automobiles first placed in service after August 5, 1997, and before January 1, 1998, and the amounts to be included in income by lessees of electric automobiles first leased after August 5, 1997, and before January 1, 1998. See Rev. Proc. 98–24, page 31. Section 280G.—Golden Parachute Payments Federal short-term, mid-term, and long-term rates are set forth for the month of March 1998. See Rev. Rul. 98–11, page 13. Section 354.—Exchanges of Stock and Securities in Certain Reorganizations 26 CFR 1.354–1: Exchanges of stock and securities in certain reorganizations. The revenue ruling provides that an acquisition of stock for voting stock, accompanied under the re- organization plan by an exchange of securities for securities that are of equal fair market value and equal principal amout, qualifies as a corporate reor- ganization under § 368(a)(1)(B) of the Code. The revenue ruling also provides that the securities-for- securities exchange is governed by the nonrecogni- tion provisions of § 354(a)(1). Rev. Ruls. 68–637, 69–142, 70–41, 70–269, and 78–408 modified, su- perseded, amplified, as applicable. See Rev. Rul. 98–10 on this page. Section 368.—Definitions Relating to Corporate Reorganizations 26 CFR 1.368-2: Definition of terms. (Also § 354; § 1.354–1.) Reorganizations; exchange of securi- ties.An acquisition of sock for solely vot- ing stock, accompanied under the reorga- nization plan by an exchange of securities for securities that are of equal fair market value and equal principal amount, quali- fies as a corporate reorganization under section 368(a)(1)(B) of the Code. Section 354(a)(1) nonrecognition applies to the securities-for-securities exchange. Rev. Rul. 98–10 ISSUE Where a stock for stock acquisition otherwise qualifying under § 368(a)(1)(B) of the Internal Revenue Code is accompa- nied by an exchange of securities, how should the transaction be treated? FACTS The facts are substantially similar to the facts in Rev. Rul. 69–142, 1969–1 C.B. 107. Corporation Xacquires all of the out- standing capital stock of Corporation Y in exchange for voting stock of X. Corpora- tion Yis a solvent corporation. Prior to the exchange, Yhas an issue of six per- cent fifteen-year debentures outstanding. Pursuant to the plan of reorganization, X acquires all the outstanding debentures of Yin exchange for an equal principal amount of new six percent fifteen-year debentures of X. Some of the debentures of Yare held by its shareholders, but a substantial proportion of the Ydebentures are held by persons who own no stock. Xis in control of Yimmediately after the acquisition of the Ystock. The Xand Ydebentures constitute “securities” with- in the meaning of § 354(a)(1) and, thus, do not represent an equity interest. Disre- garding the exchange of debentures, the transaction meets the requirements of 368(a)(1)(B). LAW AND ANALYSIS Section 368(a)(1)(B) provides that a re- organization includes the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation. Section 1.368–2(c) of the Income Tax Regulations provides: In order to qualify as a “reorgani- zation” under section 368(a)(1)(B), the acquisition by the acquiring cor- poration of stock of another corpora- tion must be in exchange solely for all or a part of the voting stock of the acquiring corporation . . . , and the acquiring corporation must be in con- trol of the other corporation immedi- ately after the transaction. If, for ex- ample, Corporation Xin one transaction exchanges nonvoting pre- ferred stock or bonds in addition to all or a part of its voting stock in the acquisition of stock of Corporation Y, the transaction is not a reorganization under section 368(a)(1)(B). Section 354(a)(1) provides that no gain or loss will be recognized if stock or secu- rities in a corporation a party to a reorga- nization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in another corporation a party to a reorganization. In the circumstances set forth above, the Yshareholders receive exclusively voting stock of Xas consideration for the exchange of their Ystock. The fact that a substantial proportion of the Ydebentures is held by bondholders who own no stock in Yhas the effect of ensuring that the value of the debentures issued by Xin ex- change for the debentures of Yrealisti- cally reflects the value of the Ydebentures alone and does not constitute indirect nonqualifying consideration for the Y stock. Because the Yshareholders, in their capacity as shareholders, receive only Xvoting stock, the transaction con- stitutes a reorganization within the mean- ing of § 368(a)(1)(B). Although the acquisition by Xof the debentures of Yin exchange for deben- tures of Xoccurs as part of the overall transaction, it is not a part of the stock- for-stock exchange which qualifies as a reorganization. It is, however, an ex- change of securities in parties to a reorga- nization which occurs in pursuance of the plan of reorganization, and, therefore, meets all the conditions of § 354(a)(1). Accordingly, any gain or loss realized by the debenture holders of Yas a result of their exchange of their Ydebentures for an equal principal amount of debentures of Xwill not be recognized. Section 354(a)(1). If, under different facts, the principal amount of the debentures of X was greater than the principal amount of the debentures of Y, §§ 354(a)(2) and 356(d) would apply to require the deben- ture holders of Yto recognize some or all of any gain realized. HOLDING The exchange of Ystock for Xstock is a reorganization described in § 368(a)- (1)(B); and any gain or loss realized by the shareholders of Yas a result of the ex- change will not be recognized. Section 354(a)(1). The separate exchange of Ydebentures for Xdebentures is an exchange in pur- suance of the plan of reorganization de- scribed in § 368(a)(1)(B). Thus, any gain or loss realized by the debenture holders of Yas a result of their exchange of their Y debentures for an equal principal amount of debentures of Xwill not be recognized. Section 354(a)(1). In certain cases, rights to acquire stock of a party to a reorganization are “securi- ties” for purposes of § 354. See§ 1.354– 1(e) (as amended by T.D. 8752, 1998–9 I.R.B. 4, effective for exchanges occur- ring on or after March 9, 1998). An ex- change of such rights, although separate from a § 368 exchange, may also be in pursuance of the plan of reorganization. In such cases, any gain or loss realized by the holder of such rights as a result of the exchange will not be recognized. Section 354(a)(1). EFFECT ON OTHER REVENUE RULINGS Rev. Rul. 69–142, which dealt with substantially identical facts, is modified and superseded. Rev. Rul. 70–41, 1970–1 C.B. 77, deals with a stock-for-stock exchange accom- panied by an exchange of Acquired debentures for Acquiring stock. It is modified such that § 354 applies to the exchange of debentures for stock. Rev. Rul. 78–408, 1978–2 C.B. 203, deals with a stock-for-stock exchange ac- companied by a warrant-for-warrant ex- change. It is modified such that § 354 ap- plies to the exchange of warrants pro- vided that the warrants constitute securi- ties. See § 1.354–1(e). Rev. Ruls. 68–637, 1968–2 C.B. 158, and 70–269, 1970–1 C.B. 82, similarly deal with reorganization exchanges ac- companied by exchanges of warrants or options. Each is amplified such that § 354 applies to the exchange of warrants or options, provided that, as in Rev. Rul. 78–408 above, the warrants or options constitute securities. PROSPECTIVE APPLICATION Section 7805(b) provides that the Sec- retary may prescribe the extent, if any, to which any ruling relating to the internal revenue laws shall be applied without retroactive effect. Pursuant to the author- ity contained in § 7805(b), this revenue ruling will be applied only to corporate reorganizations in which the exchange of securities occurs on or after March 9, 1998, the date this revenue ruling is pub- lished in the Internal Revenue Bulletin. Transactions in which the exchange of se- curities occurs prior to this date will con- tinue to be governed by the rules as they existed prior to publication of this rev- enue ruling. DRAFTING INFORMATION The principal author of this revenue ruling is Michael J. Danbury of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Danbury on (202) 622-7750 (not a toll-free call). 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 March 1998. See Rev. Rul. 98–11, page 13. Section 412.—Minimum Funding Standards The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. Section 642.—Special Rules for Credits and Deductions Federal short-term, mid-term, and long-term rates are set forth for the month of March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. Section 985.—Functional Currency The Treasury Department and the IRS are solicit- ing comments on the tax issues raised by the conver- March 9, 1998121998–10 I.R.B. sion of certain European countries’ currencies to a single European currency (euro). See Announce- ment 98–18, page 44. 26 CFR 1.985–5: Adjustments Required Upon Change in Functional Currency The Treasury Department and the IRS are solicit- ing comments on the tax issues raised by the conver- sion of certain European countries’ currencies to a single European currency (euro). See Announce- ment 98–18, page 44. Section 989.—Other Definitions and Special Rules The Treasury Department and the IRS are solicit- ing comments on the tax issues raised by the conver- sion of certain European countries’ currencies to a single European currency (euro). See Announce- ment 98–18, page 44. 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 March 1998. Rev. Rul. 98–11 This revenue ruling provides various prescribed rates for federal income tax purposes for March 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 Inter- nal Revenue Code. Table 2 contains the short-term, mid-term, and long-term ad- justed applicable federal rates (adjusted 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 contains the ap- propriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for deter- mining 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 section 7520. 1998–10 I.R.B.13March 9, 1998 REV. RUL. 98–11 TABLE 1 Applicable Federal Rates (AFR) for March 1998 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-Term AFR5.39%5.32%5.29%5.26% 110% AFR5.94%5.85%5.81%5.78% 120% AFR6.48%6.38%6.33%6.30% 130% AFR7.04%6.92%6.86% 6.82% Mid-Term AFR5.59% 5.51%5.47%5.45% 110% AFR6.15%6.06%6.01%5.98% 120% AFR6.72%6.61%6.56%6.52% 130% AFR7.29%7.16%7.10%7.06% 150% AFR8.44%8.27%8.19%8.13% 175% AFR 9.87%9.64%9.53% 9.45% Long-Term AFR5.91%5.83%5.79%5.76% 110% AFR6.51%6.41%6.36%6.33% 120% AFR7.12%7.00%6.94%6.90% 130% AFR7.72%7.58%7.51%7.46% March 9, 1998141998–10 I.R.B. REV. RUL. 98–11 TABLE 2 Adjusted AFR for March 1998 Period for Compounding AnnualSemiannualQuarterlyMonthly Short-term adjusted AFR3.77%3.74%3.72%3.71% Mid-term adjusted AFR4.14%4.10%4.08%4.07% Long-term adjusted AFR4.88%4.82%4.79%4.77% REV. RUL. 98–11 TABLE 3 Rates Under Section 382 for March 1998 Adjusted federal long-term rate for the current month4.88% 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.)5.10% REV. RUL. 98–11 TABLE 4 Appropriate Percentages Under Section 42(b)(2) for March 1998 Appropriate percentage for the 70% present value low-income housing credit8.35% Appropriate percentage for the 30% present value low-income housing credit3.58% REV. RUL. 98–11 TABLE 5 Rate Under Section 7520 for March 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 1275.—Other Definitions and Special Rules 26 CFR 1.1275–1: Definitions. T.D. 8754 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Debt Instruments With Original Issue Discount; Annuity Contracts AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations relating to the federal in- come tax treatment of certain annuity contracts. The regulations determine which of these contracts are taxed as debt instruments for purposes of the original issue discount provisions of the Internal Revenue Code. The regulations provide needed guidance to owners and issuers of these contracts. DATES: Effective date:The regulations are effective February 9, 1998. Applicability dates: For dates of ap- plicability, see §1.1275–1(j)(8). FOR FURTHER INFORMATION CON- TACT: Jonathan R. Zelnik, (202) 622–3930 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Sections 163(e) and 1271 through 1275 of the Internal Revenue Code (Code) pro- vide rules for the treatment of debt instru- ments that have original issue discount (OID). On February 2, 1994, the IRS and Trea- sury published in the Federal Register (59 F.R. 4799) final regulations under the OID provisions. On April 7, 1995, the IRS published in the Federal Register (60 F.R. 17731) a notice of proposed rule- making relating to the federal income tax treatment of annuity contracts that are not issued by insurance companies subject to tax under subchapter L of the Code. The proposed regulations treat certain of these annuity contracts as debt instruments for purposes of the OID provisions. The IRS received a number of written comments on the proposed regulations. In addition, on August 8, 1995, the IRS held a public hearing on the proposed reg- ulations. The proposed regulations, with certain changes in response to comments, are adopted as final regulations. The comments and changes are discussed below. Explanation of Provisions Certain Annuity Contracts The OID provisions generally apply to issuers and holders of debt instruments. The term debt instrumentmeans any in- strument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law. See section 1275(a)(1) and §1.1275–1(d). Section 1275(a)(1)(B) excepts two types of annuity contracts from the defini- tion of debt instrument(and, therefore, from the OID provisions). First, section 1275(a)(1)(B)(i) excepts an annuity con- tract to which section 72 applies if the contract “depends (in whole or in substan- tial part) on the life expectancy of 1 or more individuals.” Second, section 1275(a)(1)(B)(ii) excepts an annuity con- tract to which section 72 applies if the contract is issued by “an insurance com- pany subject to tax under subchapter L” and the circumstances of the contract’s is- suance meet certain criteria. The proposed regulations address only the first exception, which is contained in section 1275(a)(1)(B)(i). Under the pro- posed regulations, an annuity contract qualifies for the exception in section 1275(a)(1)(B)(i) only if all payments under the contract are periodic payments that: (1) are made at least annually for the life (or lives) of one or more individuals; (2) do not increase at any time during the life of the contract; and (3) are part of a series of payments that begins within one year of the date of the initial investment in the contract. An annuity contract that is otherwise described in the preceding sen- tence, however, does not fail to qualify for the exception in section 1275(a)- (1)(B)(i) merely because it also provides for a payment (or payments) made by rea- son of the death of one or more individu- als. Thus, under the proposed regulations, the exception in section 1275(a)(1)(B)(i) applies only to an immediate annuity con- tract with level (or decreasing) payments for the life (or lives) of one or more indi- viduals. No deferred annuity contract qualifies for the exception. Several commentators questioned the approach of the proposed regulations. In particular, they contended that the excep- tion in section 1275(a)(1)(B)(i) should not be limited to those annuity contracts that require periodic payments to begin within one year of the date of the initial invest- ment in the contract. That is, deferred an- nuities, if dependent in whole or substan- tial part on an individual’s (or several individuals’) survival, should also qualify for the exception in section 1275(a)(1)- (B)(i). Other commentators took issue with this point of view and contended that the proposed regulations should be final- ized without substantial change. After a careful review of this issue, the IRS and the Treasury have modified the regulations to eliminate the requirement that annuity distributions begin within one year of the date of the initial invest- ment in the contract. Instead, as sug- gested by the legislative history, the final regulations interpret section 1275(a)- (1)(B)(i) as excepting from the definition of debt instrumentonly those annuity contracts that contain terms ensuring that the life contingency under the contract is both “real and significant.” H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 887 (1984), 1984–3 (Vol. 2) C.B. 141. The Treasury and the IRS have determined that the life contingency under an annuity contract is “real and significant” within the meaning of the legislative history only if, on the day the contract is purchased, there is a high probability that total distri- butions under the contract will increase commensurately with the longevity of the individual (or individuals) over whose life (or lives) the distributions are to be made. (These individuals are hereinafter referred to as annuitants.) The final regulations, therefore, provide a two-pronged general rule: An annuity contract qualifies for the exception in section 1275(a)(1)(B)(i) only if it both: (1) provides for periodic distrib- 1998–10 I.R.B.15March 9, 1998 utions made at least annually for the life (or joint lives) of an individual (or a rea- sonable number of individuals); and (2) contains no terms or provisions that can significantly reduce the probability that total distributions will increase commen- surately with longevity. The final regulations identify several types of terms and provisions that can sig- nificantly reduce the probability that total distributions under the contract will in- crease commensurately with longevity. These terms and provisions include the availability of a cash surrender option, the availability of a loan secured by the con- tract, minimum payout provisions, maxi- mum payout provisions, and provisions that allow decreasing payouts. Subject to limited exceptions, the presence of any of these terms or provisions causes an annu- ity contract to fail to qualify for the ex- ception in section 1275(a)(1)(B)(i). The list of identified terms and provisions in the final regulations is not exclusive. A contract fails to qualify for the exception in section 1275(a)(1)(B)(i) if the contract contains any other term or provision that can significantly reduce the probability that total distributions under the contract will increase commensurately with longevity. Cash Surrender Options and Loans Secured by the Contract If the holder of an annuity contract can exchange or surrender all or part of the contract for a distribution or for distribu- tions that are not contingent on life, the holder’s decision whether, and when, to exchange or surrender the contract can render the life contingency insignificant. Similarly, if the holder of an annuity con- tract can borrow against the contract, the holder’s decision whether, and when, to borrow can have a comparable effect. The final regulations, therefore, provide that, if either the issuer or a person acting in concert with the issuer explicitly or im- plicitly makes available either a cash sur- render option or a loan secured by the contract, then the contract contains a term that can significantly reduce the probabil- ity that total distributions on the contract will increase commensurately with longevity. That availability, therefore, causes the contract to fail to qualify for the exception in section 1275(a)(1)(B)(i). Minimum Payout Provisions If an annuity contract guarantees that a minimum amount will be distributed re- gardless of the death of the individual (or individuals) over whose life (or lives) payments are to be made, the minimum amount is not subject to the life contin- gency. In addition, the larger the mini- mum amount relative to aggregate ex- pected distributions over the remaining (joint) life expectancy of the annuitant (or annuitants), the less likely it is that total distributions under the contract will in- crease commensurately with the longevity of the annuitant (or annuitants). A suffi- ciently large minimum amount renders the life contingency virtually meaning- less. For example, consider a contract that provides for monthly distributions to begin on the annuity starting date and to extend for the longer of the life of the an- nuitant or 20 years, regardless of the an- nuitant’s age. If the annuitant has a life expectancy as of the annuity starting date of 5 years, it is likely that distributions will be made for exactly 20 years, regard- less of when the annuitant dies. In this case, although the form of the contract in- dicates that it depends on life, the exis- tence of the minimum payout provision significantly reduces the probability that total distributions under the contract will depend on longevity. Because the existence of a minimum payout provision can significantly reduce the probability that total distributions under the contract will increase commen- surately with longevity, the existence of any such provision generally causes the contract to fail to qualify for the exception in section 1275(a)(1)(B)(i). The final reg- ulations provide only two exceptions to this general rule. First, an annuity con- tract does not fail to be described in sec- tion 1275(a)(1)(B)(i) merely because it contains a minimum payout provision that guarantees a death benefit no greater than the unrecovered consideration paid for the contract. Second, an annuity contract does not fail to be described in section 1275(a)(1)(B)(i) merely because the con- tract provides that, after annuitization, distributions may be guaranteed to con- tinue for a term certain that is no longer than one-half of the period of time from the annuity starting date to the expected date of the “terminating death.” The terminating death is the annuitant death that, in general, causes annuity pay- ments to cease under the contract. The expected date of the terminating death is determined as of the annuity starting date with respect to all then-surviving annui- tants by reference to the applicable mor- tality table prescribed under section 417(e)(3)(A)(ii)(I). See Rev. Rul. 95–6, 1995–1 C.B. 80, for the applicable mor- tality table that is prescribed for this pur- pose as of January 8, 1998. Maximum Payout Provisions If an annuity contract provides that dis- tributions will cease if an annuitant lives beyond a specified date, total distribu- tions under the contract may fail to in- crease commensurately with longevity. If the specified date is relatively early (when compared to the annuitant’s life ex- pectancy as of the annuity starting date), its existence significantly reduces the probability that total distributions under the contract will increase commensurately with longevity. Conversely, if the speci- fied date is very late (when compared to the annuitant’s life expectancy as of the annuity starting date), its existence does not significantly reduce the probability that total distributions under the contract will increase commensurately with longevity. For example, consider an an- nuity contract that provides that distribu- tions will be made for the life of the annu- itant but in no event for more than 30 years. If the annuitant is a relatively young person, this maximum payout pro- vision significantly attenuates the life contingency. On the other hand, if the an- nuitant has a life expectancy of 10 years on the annuity starting date, this maxi- mum payout provision is unlikely to de- termine the total distributions. Because the existence of a maximum payout provision can significantly reduce the probability that total distributions under the contract will increase commen- surately with longevity, the final regula- tions provide that the existence of any maximum payout provision generally causes the contract to fail to qualify for the exception in section 1275(a)(1)(B)(i). There is a single exception to this general rule in cases where the period of time be- tween the annuity starting date and the date after which (under the maximum pay- March 9, 1998161998–10 I.R.B. out provision) no distributions will be made is at least twice as long as the period of time from the annuity starting date to the expected date of the terminating death. Decreasing Payout Provisions The connection between longevity and distributions under an annuity contract is apparent in the case of a contract that pro- vides for equal annual distributions for life. For each year the annuitant lives, an- other equal distribution is made. If distri- butions decrease over time, this connec- tion can become attenuated. Consider an annuity contract that provides for a distri- bution upon annuitization of $100,000 followed by annual distributions of $10 per year for life. Although this contract provides for periodic distributions for life, the pattern of the distributions causes the amount distributed to fail to adequately reflect longevity. If the amount of distributions under an annuity contract during any contract year may be less than the amount of distribu- tions during the preceding year, the final regulations provide that this possibility can significantly reduce the probability that total distributions under the contract will increase commensurately with longevity. Thus, the existence of this pos- sibility generally causes the contract to fail to qualify for the exception in section 1275(a)(1)(B)(i). There is a single excep- tion to this general rule for certain vari- able distributions that are closely tied to investment experience, inflation, or simi- lar fluctuating criteria. In these cases, because the provision can result in com- parable increases in the amount of distrib- utions, the possibility that the distribu- tions may decline from year to year does not significantly reduce the probability that total distributions under the contract will increase commensurately with longevity. Private and Charitable Gift Annuity Contracts Several commentators expressed con- cerns that the proposed regulations, if fi- nalized, would alter the tax treatment tra- ditionally afforded private and charitable gift annuity contracts. Private annuity contracts are typically issued as consider- ation in intra-family transfers of property. Charitable gift annuity contracts are typi- cally issued by charitable institutions in exchange for a transfer of cash or prop- erty greater in value than the annuity. Be- cause these contracts may call for peri- odic distributions to begin more than one year after they are issued, there was con- cern that, under the proposed regulations, they might fail to qualify for the excep- tion in section 1275(a)(1)(B)(i). In many cases, distributions under pri- vate and charitable gift annuity contracts are entirely contingent on the survival of one individual (or a small number of indi- viduals). These contracts are not indebted- ness under general principles of federal in- come tax law and, therefore, are not within the definition of debt instrumentin section 1275(a)(1)(A). For almost all other private and charitable gift annuities, the final regu- lations address the concern by removing the requirement that the distributions begin within one year of the date of the initial in- vestment in the contract. Annuity Contracts Issued by Foreign Insurance Companies One commentator asked the IRS to clar- ify the treatment of annuity contracts is- sued by a foreign insurance company that does not engage in a trade or business within the United States. In particular, the commentator asked for guidance on whether such an annuity contract qualifies under section 1275(a)(1)(B)(ii), which pro- vides a broad exception from the definition of debt instrument for certain annuity con- tracts issued by “an insurance company subject to tax under subchapter L.” These regulations do not address the exception in section 1275(a)(1)(B)(ii). The Treasury and the IRS, however, welcome comments on the proper scope of that provision. Certain Compensation Arrangements Several commentators questioned whether the proposed regulations apply to certain compensation arrangements whose distributions are taxed under sec- tion 72. The timing rules of the OID pro- visions do not apply to compensation arrangements that are subject to other spe- cific Code or regulations provisions. For example, if an arrangement is described in the first sentence of section 404(a) or in section 404(b) or if amounts under the arrangement are includible under sections 83, 403, or 457, or under §1.61–2, the arrangement is not subject to the OID tim- ing provisions. See also §§1.1273–2(d) and 1.1274–1(a), under which a nonpub- licly traded debt instrument issued for ser- vices has an issue price equal to its stated redemption price at maturity and, there- fore, has no OID. 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 has also been determined that section 553(b) of the Administrative Pro- cedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because the notice of proposed rulemaking preceding the regulations was issued prior to March 29, 1996, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pur- suant to section 7805(f) of the Code, the notice of proposed rulemaking was sub- mitted to the Small Business Administra- tion for comment on its impact on small business. Drafting Information Several persons from the Office of Chief Counsel and the Treasury depart- ment participated in developing these reg- ulations. * * * * * 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 removing the entries for “Sections 1.1271–1 through 1.1274– 5” and “Sections 1.1275–1 through 1.1275–5” and adding the following en- tries in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1271–1 also issued under 26 U.S.C. 1275(d). Section 1.1272–1 also issued under 26 U.S.C. 1275(d). Section 1.1272–2 also issued under 26 U.S.C. 1275(d). Section 1.1272–3 also issued under 26 U.S.C. 1275(d). Section 1.1273–1 also issued under 26 1998–10 I.R.B.17March 9, 1998 U.S.C. 1275(d). Section 1.1273–2 also issued under 26 U.S.C. 1275(d). Section 1.1274–1 also issued under 26 U.S.C. 1275(d). Section 1.1274–2 also issued under 26 U.S.C. 1275(d). Section 1.1274–3 also issued under 26 U.S.C. 1275(d). Section 1.1274–4 also issued under 26 U.S.C. 1275(d). Section 1.1274–5 also issued under 26 U.S.C. 1275(d). * * * Section 1.1275–1 also issued under 26 U.S.C. 1275(d). Section 1.1275–2 also issued under 26 U.S.C. 1275(d). Section 1.1275–3 also issued under 26 U.S.C. 1275(d). Section 1.1275–4 also issued under 26 U.S.C. 1275(d). Section 1.1275–5 also issued under 26 U.S.C. 1275(d). * * * Par. 2. Section 1.1271–0 is amended by adding entries for paragraphs (i) through (j)(8) to §1.1275–1 to read as fol- lows: §1.1271–0 Original issue discount; effective dates; table of contents. * * * * * §1.1275–1 Definitions. * * * * * (i) [Reserved] (j) Life annuity exception under section 1275(a)(1)(B)(i). (1) Purpose. (2) General rule. (3) Availability of a cash surrender op- tion. (4) Availability of a loan secured by the contract. (5) Minimum payout provision. (6) Maximum payout provision. (7) Decreasing payout provision. (8) Effective dates. * * * * * Par. 3. Section 1.1275–1 is amended by: 1. Revising the first sentence of para- graph (d). 2. Adding and reserving paragraph (i). 3. Adding paragraph (j). The revision and additions read as fol- lows: §1.1275–1 Definitions. * * * * * (d) Debt instrument.Except as pro- vided in section 1275(a)(1)(B) (relating to certain annuity contracts; see paragraph (j) of this section), debt instrument means any instrument or contractual arrange- ment that constitutes indebtedness under general principles of Federal income tax law (including, for example, a certificate of deposit or a loan). * * * * * * * * (i) [Reserved] (j) Life annuity exception under section 1275(a)(1)(B)(i)—(1) Purpose.Section 1275(a)(1)(B)(i) excepts an annuity con- tract from the definition of debt instru- ment if section 72 applies to the contract and the contract depends (in whole or in substantial part) on the life expectancy of one or more individuals. This paragraph (j) provides rules to ensure that an annuity contract qualifies for the exception in sec- tion 1275(a)(1)(B)(i) only in cases where the life contingency under the contract is real and significant. (2) General rule—(i) Rule.For pur- poses of section 1275(a)(1)(B)(i), an an- nuity contract depends (in whole or in substantial part) on the life expectancy of one or more individuals only if— (A) The contract provides for periodic distributions made not less frequently than annually for the life (or joint lives) of an individual (or a reasonable number of individuals); and (B) The contract does not contain any terms or provisions that can significantly reduce the probability that total distribu- tions under the contract will increase commensurately with the longevity of the annuitant (or annuitants). (ii) Terminology.For purposes of this paragraph (j): (A) Contract.The term contractin- cludes all written or unwritten under- standings among the parties as well as any person or persons acting in concert with one or more of the parties. (B) Annuitant.The term annuitant refers to the individual (or reasonable number of individuals) referred to in para- graph (j)(2)(i)(A) of this section. (C) Terminating death.The phrase ter- minating deathrefers to the annuitant death that can terminate periodic distribu- tions under the contract. (See paragraph (j)(2)(i)(A) of this section.) For example, if a contract provides for periodic distrib- utions until the later of the death of the last-surviving annuitant or the end of a term certain, the terminating death is the death of the last-surviving annuitant. (iii) Coordination with specific rules. Paragraphs (j)(3) through (7) of this sec- tion describe certain terms and conditions that can significantly reduce the probabil- ity that total distributions under the con- tract will increase commensurately with the longevity of the annuitant (or annui- tants). If a term or provision is not specif- ically described in paragraphs (j)(3) through (7) of this section, the annuity contract must be tested under the general rule of paragraph (j)(2)(i) of this section to determine whether it depends (in whole or in substantial part) on the life ex- pectancy of one or more individuals. (3) Availability of a cash surrender op- tion—(i) Impact on life contingency.The availability of a cash surrender option can significantly reduce the probability that total distributions under the contract will increase commensurately with the longevity of the annuitant (or annuitants). Thus, the availability of any cash surren- der option causes the contract to fail to be described in section 1275(a)(1)(B)(i). A cash surrender option is available if there is reason to believe that the issuer (or a person acting in concert with the issuer) will be willing to terminate or purchase all or a part of the annuity contract by making one or more payments of cash or property (other than an annuity contract described in this paragraph (j)). (ii) Examples.The following examples illustrate the rules of this paragraph (j)(3): Example 1. (i) Facts. On March 1, 1998, X is- sues a contract to A for cash. The contract provides that, effective on any date chosen by A (the annuity starting date), X will begin equal monthly distribu- tions for A’s life. The amount of each monthly dis- tribution will be no less than an amount based on the contract’s account value as of the annuity starting date, A’s age on that date, and permanent purchase rate guarantees contained in the contract. The con- tract also provides that, at any time before the annu- ity starting date, A may surrender the contract to X for the account value less a surrender charge equal to a declining percentage of the account value. For this purpose, the initial account value is equal to the cash invested. Thereafter, the account value increases an- nually by at least a minimum guaranteed rate. (ii) Analysis.The ability to obtain the account value less the surrender charge, if any, is a cash sur- render option. This ability can significantly reduce March 9, 1998181998–10 I.R.B. the probability that total distributions under the con- tract will increase commensurately with A’s longevity. Thus, the contract fails to be described in section 1275(a)(1)(B)(i). Example 2. (i) Facts. On March 1, 1998, X is- sues a contract to B for cash. The contract provides that beginning on March 1, 1999, X will distribute to B a fixed amount of cash each month for B’s life. Based on X’s advertisements, marketing literature, or illustrations or on oral representations by X’s sales personnel, there is reason to believe that an af- filiate of X stands ready to purchase B’s contract for its commuted value. (ii) Analysis.Because there is reason to believe that an affiliate of X stands ready to purchase B’s contract for its commuted value, a cash surrender option is available within the meaning of paragraph (j)(3)(i) of this section. This availability can signifi- cantly reduce the probability that total distributions under the contract will increase commensurately with B’s longevity. Thus, the contract fails to be de- scribed in section 1275(a)(1)(B)(i). (4)Availability of a loan secured by the contract—(i) Impact on life contin- gency.The availability of a loan secured by the contract can significantly reduce the probability that total distributions under the contract will increase commen- surately with the longevity of the annui- tant (or annuitants). Thus, the availability of any such loan causes the contract to fail to be described in section 1275(a)(1)- (B)(i). A loan secured by the contract is available if there is reason to believe that the issuer (or a person acting in concert with the issuer) will be willing to make a loan that is directly or indirectly secured by the annuity contract. (ii) Example.The following example illustrates the rules of this paragraph (j)(4): Example.(i) Facts.On March 1, 1998, X issues a contract to C for $100,000. The contract provides that, effective on any date chosen by C (the annuity starting date), X will begin equal monthly distribu- tions for C’s life. The amount of each monthly dis- tribution will be no less than an amount based on the contract’s account value as of the annuity starting date, C’s age on that date, and permanent purchase rate guarantees contained in the contract. From mar- keting literature circulated by Y, there is reason to believe that, at any time before the annuity starting date, C may pledge the contract to borrow up to $75,000 from Y. Y is acting in concert with X. (ii) Analysis.Because there is reason to believe that Y, a person acting in concert with X, is willing to lend money against C’s contract, a loan secured by the contract is available within the meaning of paragraph (j)(4)(i) of this section. This availability can significantly reduce the probability that total distributions under the contract will increase com- mensurately with C’s longevity. Thus, the contract fails to be described in section 1275(a)(1)(B)(i). (5) Minimum payout provision—(i) Im- pact on life contingency.The existence of a minimum payout provision can signifi- cantly reduce the probability that total distributions under the contract will in- crease commensurately with the longevity of the annuitant (or annuitants). Thus, the existence of any minimum payout provi- sion causes the contract to fail to be de- scribed in section 1275(a)(1)(B)(i). (ii) Definition of minimum payout pro- vision.A minimum payout provision is a contractual provision (for example, an agreement to make distributions over a term certain) that provides for one or more distributions made— (A) After the terminating death under the contract; or (B) By reason of the death of any indi- vidual (including distributions triggered by or increased by terminal or chronic ill- ness, as defined in section 101(g)(1)(A) and (B)). (iii) Exceptions for certain minimum payouts—(A) Recovery of consideration paid for the contract.Notwithstanding paragraphs (j)(2)(i)(A) and (j)(5)(i) of this section, a contract does not fail to be de- scribed in section 1275(a)(1)(B)(i) merely because it provides that, after the termi- nating death, there will be one or more distributions that, in the aggregate, do not exceed the consideration paid for the con- tract less total distributions previously made under the contract. (B) Payout for one-half of life ex- pectancy.Notwithstanding paragraphs (j)(2)(i)(A) and (j)(5)(i) of this section, a contract does not fail to be described in section 1275(a)(1)(B)(i) merely because it provides that, if the terminating death oc- curs after the annuity starting date, distri- butions under the contract will continue to be made after the terminating death until a date that is no later than the halfway date. This exception does not apply unless the amounts distributed in each contract year will not exceed the amounts that would have been distributed in that year if the terminating death had not occurred until the expected date of the terminating death, determined under paragraph (j)(5)(iii)(C) of this section. (C) Definition of halfway date.For purposes of this paragraph (j)(5)(iii), the halfway date is the date halfway between the annuity starting date and the expected date of the terminating death, determined as of the annuity starting date, with re- spect to all then-surviving annuitants. The expected date of the terminating death must be determined by reference to the applicable mortality table prescribed under section 417(e)(3)(A)(ii)(I). (iv) Examples.The following exam- ples illustrate the rules of this paragraph (j)(5): Example 1.(i) Facts. On March 1, 1998, X is- sues a contract to D for cash. The contract provides that, effective on any date D chooses (the annuity starting date), X will begin equal monthly distribu- tions for the greater of D’s life or 10 years, regard- less of D’s age as of the annuity starting date. The amount of each monthly distribution will be no less than an amount based on the contract’s account value as of the annuity starting date, D’s age on that date, and permanent purchase rate guarantees con- tained in the contract. (ii) Analysis.A minimum payout provision exists because, if D dies within 10 years of the annuity starting date, one or more distributions will be made after D’s death. The minimum payout provision does not qualify for the exception in paragraph (j)(5)(iii)(B) of this section because D may defer the annuity starting date until his remaining life ex- pectancy is less than 20 years. If, on the annuity starting date, D’s life expectancy is less than 20 years, the minimum payout period (10 years) will last beyond the halfway date. The minimum payout provision, therefore, can significantly reduce the probability that total distributions under the contract will increase commensurately with D’s longevity. Thus, the contract fails to be described in section 1275(a)(1)(B)(i). Example 2.(i) Facts.The facts are the same as in Example 1of this paragraph (j)(5)(iv) except that the monthly distributions will last for the greater of D’s life or a term certain. D may choose the length of the term certain subject to the restriction that, on the annuity starting date, the term certain must not exceed one-half of D’s life expectancy as of the an- nuity starting date. The contract also does not pro- vide for any adjustment in the amount of distribu- tions by reason of the death of D or any other individual, except for a refund of D’s aggregate pre- mium payments less the sum of all prior distribu- tions under the contract. (ii) Analysis.The minimum payout provision qualifies for the exception in paragraph (j)(5)(iii)(B) of this section because distributions under the mini- mum payout provision will not continue past the halfway date and the contract does not provide for any adjustments in the amount of distributions by reason of the death of D or any other individual, other than a guaranteed death benefit described in paragraph (j)(5)(iii)(A) of this section. Accordingly, the existence of this minimum payout provision does not prevent the contract from being described in section 1275(a)(1)(B)(i). (6) Maximum payout provision—(i) Impact on life contingency.The exis- tence of a maximum payout provision can significantly reduce the probability that total distributions under the contract will increase commensurately with the 1998–10 I.R.B.19March 9, 1998 longevity of the annuitant (or annuitants). Thus, the existence of any maximum payout provision causes the contract to fail to be described in section 1275(a)- (1)(B)(i). (ii) Definition of maximum payout pro- vision.A maximum payout provision is a contractual provision that provides that no distributions under the contract may be made after some date (the termination date), even if the terminating death has not yet occurred. (iii) Exception.Notwithstanding para- graphs (j)(2)(i)(A) and (j)(6)(i) of this sec- tion, an annuity contract does not fail to be described in section 1275(a)(1)(B)(i) merely because the contract contains a maximum payout provision, provided that the period of time from the annuity start- ing date to the termination date is at least twice as long as the period of time from the annuity starting date to the expected date of the terminating death, determined as of the annuity starting date, with respect to all then-surviving annuitants. The ex- pected date of the terminating death must be determined by reference to the applica- ble mortality table prescribed under sec- tion 417(e)(3)(A)(ii)(I). (iv) Example.The following example illustrates the rules of this paragraph (j)(6): Example. (i) Facts.On March 1, 1998, X issues a contract to E for cash. The contract provides that beginning on April 1, 1998, X will distribute to E a fixed amount of cash each month for E’s life but that no distributions will be made after April 1, 2018. On April 1, 1998, E’s life expectancy is 9 years. (ii) Analysis.A maximum payout provision ex- ists because if E survives beyond April 1, 2018, E will receive no further distributions under the con- tract. The period of time from the annuity starting date (April 1, 1998) to the termination date (April 1, 2018) is 20 years. Because this 20–year period is more than twice as long as E’s life expectancy on April 1, 1998, the maximum payout provision quali- fies for the exception in paragraph (j)(6)(iii) of this section. Accordingly, the existence of this maxi- mum payout provision does not prevent the contract from being described in section 1275(a)(1)(B)(i). (7) Decreasing payout provision—(i) General rule.If the amount of distribu- tions during any contract year (other than the last year during which distributions are made) may be less than the amount of distributions during the preceding year, this possibility can significantly reduce the probability that total distributions under the contract will increase commen- surately with the longevity of the annui- tant (or annuitants). Thus, the existence of this possibility causes the contract to fail to be described in section 1275(a)- (1)(B)(i). (ii) Exception for certain variable dis- tributions.Notwithstanding paragraph (j)(7)(i) of this section, if an annuity con- tract provides that the amount of each dis- tribution must increase and decrease in accordance with investment experience, cost of living indices, or similar fluctuat- ing criteria, then the possibility that the amount of a distribution may decrease for this reason does not significantly reduce the probability that the distributions under the contract will increase commensurately with the longevity of the annuitant (or an- nuitants). (iii) Examples.The following exam- ples illustrate the rules of this paragraph (j)(7): Example 1.(i) Facts.On March 1, 1998, X issues a contract to F for $100,000. The contract provides that beginning on March 1, 1999, X will make distrib- utions to F each year until F’s death. Prior to March 1, 2009, distributions are to be made at a rate of $12,000 per year. Beginning on March 1, 2009, dis- tributions are to be made at a rate of $3,000 per year. (ii) Analysis.If F is alive in 2009, the amount distributed in 2009 ($3,000) will be less than the amount distributed in 2008 ($12,000). The excep- tion in paragraph (j)(7)(ii) of this section does not apply. The decrease in the amount of any distribu- tions made on or after March 1, 2009, can signifi- cantly reduce the probability that total distributions under the contract will increase commensurately with F’s longevity. Thus, the contract fails to be de- scribed in section 1275(a)(1)(B)(i). Example 2.(i) Facts.On March 1, 1998, X is- sues a contract to G for cash. The contract provides that, effective on any date G chooses (the annuity starting date), X will begin monthly distributions to G for G’s life. Prior to the annuity starting date, the account value of the contract reflects the investment return, including changes in the market value, of an identifiable pool of assets. When G chooses the an- nuity starting date, G must also choose whether the distributions are to be fixed or variable. If fixed, the amount of each monthly distribution will remain constant at an amount that is no less than an amount based on the contract’s account value as of the annu- ity starting date, G’s age on that date, and permanent purchase rate guarantees contained in the contract. If variable, the monthly distributions will fluctuate to reflect the investment return, including changes in the market value, of the pool of assets. The monthly distributions under the contract will not otherwise decline from year to year. (ii) Analysis.Because the only possible year-to- year declines in annuity distributions are described in paragraph (j)(7)(ii) of this section, the possibility that the amount of distributions may decline from the previous year does not reduce the probability that total distributions under the contract will in- crease commensurately with G’s longevity. Thus, the potential fluctuation in the annuity distributions does not cause the contract to fail to be described in section 1275(a)(1)(B)(i). (8) Effective dates—(i) In general.Ex- cept as provided in paragraph (j)(8)(ii) and (iii) of this section, this paragraph (j) is applicable for interest accruals on or after February 9, 1998 on annuity con- tracts held on or after February 9, 1998. (ii) Grandfathered contracts.This paragraph (j) does not apply to an annuity contract that was purchased before April 7, 1995. For purposes of this paragraph (j)(8), if any additional investment in such a contract is made on or after April 7, 1995, and the additional investment is not required to be made under a binding con- tractual obligation that was entered into before April 7, 1995, then the additional investment is treated as the purchase of a contract after April 7, 1995. (iii) Contracts consistent with the pro- visions of FI–33–94, published at 1995–1 C.B. 920. See § 601.601(d)(2)(ii)(b) of this chapter.This paragraph (j) does not apply to a contract purchased on or after April 7, 1995, and before February 9, 1998, if all payments under the contract are periodic payments that are made at least annually for the life (or lives) of one or more individuals, do not increase at any time during the term of the contract, and are part of a series of distributions that begins within one year of the date of the initial investment in the contract. An annuity contract that is otherwise de- scribed in the preceding sentence does not fail to be described therein merely be- cause it also provides for a payment (or payments) made by reason of the death of one or more individuals. Michael P. Dolan, Deputy Commissioner of Internal Revenue. Approved December 19, 1997. Donald C. Lubick, Acting Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on January 7, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 8, 1998, 63 F.R. 1054) Section 1288.—Treatment of Original Issue Discount on Tax- Exempt Obligations March 9, 1998201998–10 I.R.B. The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of March 1998. See Rev. Rul. 98–11, page 13. Section 1397E.—Credit to Holders of Qualified Zone Academy Bonds 26 CFR 1.1397E–1T: Qualified Zone Academy Bonds (temporary). T.D. 8755 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Qualified Zone Academy Bonds AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. SUMMARY: This document contains temporary regulations relating to the fed- eral income tax treatment of qualified zone academy bonds. The regulations in this document provide needed guidance to holders and issuers of qualified zone acad- emy bonds. The text of the temporary reg- ulations also serves as the text of REG–119449–97, page 35 of this Bulletin. DATES: These regulations are effective January 1, 1998. FOR FURTHER INFORMATION CON- TACT: Timothy L. Jones, (202) 622- 3980 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 226(a) of the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, 111 Stat. 788 (1997), amended the Internal Revenue Code (Code) by redesignating section 1397E as section 1397F and adding a new section 1397E. Section 1397E authorizes a new type of debt in- strument known as a qualified zone acad- emy bond. Explanation of provisions In general A qualified zone academy bond is a taxable bond issued by a state or local government the proceeds of which are used to improve certain eligible public schools. In lieu of receiving periodic in- terest payments from the issuer, an eligi- ble holder of a qualified zone academy bond is generally allowed annual federal income tax credits while the bond is out- standing. These credits compensate the holder for lending money to the issuer and function as payments of interest on the bond. These temporary regulations provide rules for the federal income tax treatment of qualified zone academy bonds. These regulations generally treat the allowance of the credit as if it were a payment of in- terest on the bond. These regulations also provide rules to determine (1) the credit rate, (2) the discount rate used to present value private business contributions, and (3) the discount rate used to determine the maximum term of a qualified zone acad- emy bond. These regulations generally do not pro- vide guidance on the statutory require- ments that must be met for a bond to qual- ify as a qualified zone academy bond. Section 1397E(d) sets forth a number of detailed requirements that must be met for a bond to qualify as a qualified zone acad- emy bond. In particular, section 1397E(d)- (1)(C) requires the issuer to certify (1) that it has written assurances that private entities have agreed to contribute a certain level of goods or services to the qualified zone academy, and (2) that it has the writ- ten approval of the eligible local educa- tion agency for the bond issuance. The Treasury and the IRS intend that these certifications will be respected and may be relied on by taxpayers if the certifica- tions are reasonably made. In addition, section 1397E(d)(1)(A) re- quires that 95 percent or more of the pro- ceeds of an issue of qualified zone acad- emy bonds are to be used for a qualified purpose described in section 1397E(d)(5) with respect to a qualified zone academy as defined in section 1397E(d)(4). The Treasury and the IRS intend that the qual- ified purposes set forth in section 1397E(d)(5) are to be broadly interpreted. The Treasury and the IRS also intend that, if an issuer is unable to actually spend 95 percent or more of the proceeds of a qual- ified zone academy bond for a qualified purpose, the issuer may apply remedial actions similar to the remedial actions set forth in §1.142–2 to preserve the qualifi- cation of a bond. Further, the Treasury and the IRS intend that taxpayers may rely on an issuer’s determination that a public school (or academic program within a public school) is a qualified zone academy for purposes of section 1397E(d)(4) if the determination has a reasonable basis. The Treasury and IRS request comments on whether additional guidance is needed with respect to the section 1397E(d) requirements. Section 1397E(e) imposes a national limitation on the amount of qualified zone academy bonds that can be issued. For 1998 and 1999, the IRS will publish a revenue procedure allocating the national limitation among the States and the pos- sessions. The credit allowance A qualified zone academy bond pro- vides an annual federal income tax credit to certain holders. Under the regulations, the credit is deemed paid on the credit al- lowance date—the last day of each one- year accrual period on the bond. A tax- payer that receives a credit on a credit allowance date may use the credit to offset its income tax liability for the taxable year that includes the credit allowance date. There are two limitations on the use of the credit. First, only eligible taxpayers holding the bond on the credit allowance date may claim the credit. Section 1397E(d)(6) defines an eligible taxpayer as a bank, an insurance company, or a cor- poration actively engaged in the business of lending money. Second, an eligible taxpayer may claim the credit only to the extent the taxpayer has a tax liability for the taxable year that includes the credit al- lowance date. See section 1397E(c). The credit is nonrefundable. Treatment of the credit as interest The regulations treat the credit on a qualified academy zone bond as if it were a payment of qualified stated interest. This treatment effectively conforms the treat- ment of the credit with the treatment of in- terest income on debt instruments. Thus, for example, a holder that uses an accrual method of accounting accrues the credit amount over the one-year accrual period that ends on the credit allowance date. 1998–10 I.R.B.21March 9, 1998 Adjustment when credit is limited or disallowed In two situations the holder of a quali- fied zone academy bond on a credit al- lowance date will not be able to use some or all of the credit to offset its tax liability. First, if the holder on a credit allowance date is not an eligible taxpayer (a bank, insurance company, or corporation ac- tively engaged in the business of lending money), no credit is allowed. Second, the amount of the credit may exceed the in- come tax liability of a holder that is an el- igible taxpayer. In this second case, be- cause the credit is nonrefundable, some or all of the credit will not be used. In these situations, the regulations allow the holder to adjust its income by deducting the amount of the unused credit. This deduction is allowed for the taxable year that includes the credit al- lowance date. The Treasury and the IRS request comments on whether this adjust- ment works appropriately when an eligi- ble taxpayer holds a qualified zone acad- emy bond on the credit allowance date but has an income tax liability (determined without regard to the credit) that is less than the amount of the credit. Credit rate Section 1397E(b)(2) authorizes the Treasury to establish a single, uniform credit rate that will permit the issuance of qualified zone academy bonds without discount and without interest cost to the issuer. This section also requires the Treasury to adjust the credit allowance rate on a monthly basis to reflect changes in market interest rates. It is not possible to determine a uni- form credit rate that would permit all qualified zone academy bonds to be is- sued at par. Some borrowers are less creditworthy than others and, therefore, borrow at less favorable rates. In addi- tion, because section 1397E(b)(2) re- quires the Secretary to set the credit rate in the month before the bond is issued, changes in market interest rates between the time the rate is set and the time a qual- ified zone academy bond is issued can re- sult in a bond being issued at a price that is different than par. The regulations provide a single monthly rate that will minimize the discount or pre- mium on qualified zone academy bonds. Specifically, the regulations provide that the credit rate is 110 percent of the long- term applicable Federal rate (AFR), com- pounded annually, for the month of is- suance. Tying the credit rate to the AFR ensures that the rate will be adjusted on a monthly basis to reflect changes in market interest rates. In addition, the Treasury and the IRS believe the 10 percent spread over the long-term AFR is appropriate, in part, because qualified zone academy bonds bear more credit and liquidity risk than long- term Treasury bonds. Maximum term Section 1397E(d)(3) sets out a formula for determining the maximum term of a qualified zone academy bond. The for- mula requires the use of a discount rate equal to the average annual interest rate of tax-exempt obligations having a term of ten years or more. Because there is no readily available source for this discount rate, the regulations provide that the dis- count rate is 110 percent of the long-term adjusted AFR, compounded semi-annu- ally. The long-term adjusted AFR is pub- lished on a monthly basis and is designed to reflect the current yield of a risk-free tax-exempt obligation having a term of 9 years or more. Taxable obligation It is possible that some qualified zone academy bonds may either (1) provide for payments of stated interest, or (2) be is- sued at a discount. The Treasury and the IRS have determined that qualified zone academy bonds are not obligations the in- terest on which is excluded from gross in- come under section 103(a). There are a number of reasons for treating a qualified zone academy bond as a taxable obliga- tion. For example, the requirement in section 1397E(g) that a holder include the allowed amount of the credit in gross in- come evidences an intention to treat qual- ified zone academy bonds as taxable, not tax-exempt, obligations. Coordination with estimated tax rules The regulations do not address the esti- mated tax consequences of holding a qualified zone academy bond. The Trea- sury and the IRS request comments on whether there is a need to coordinate the regulations with the estimated tax rules and, if so, how they might be coordinated. Special Analyses It has been determined that this Trea- sury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because the regula- tions do not impose a collection of infor- mation 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, these tempo- rary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Drafting Information Several persons from the Office of Chief Counsel and the Treasury Depart- ment participated in developing these reg- ulations. * * * * * 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 * * * Section 1.1397E–1T also issued under 26 U.S.C. 1397E(b) and 1397E(d). * * * Par. 2. Section 1.1397E–1T is added to read as follows: §1.1397E–1T Qualified zone academy bonds (temporary). (a) Overview.In general, a qualified zone academy bond is a taxable bond is- sued by a state or local government the proceeds of which are used to improve certain eligible public schools. An eligi- ble taxpayer that holds a qualified zone academy bond generally is allowed an- nual federal income tax credits in lieu of periodic interest payments. These credits compensate the eligible taxpayer for lend- ing money to the issuer and function as March 9, 1998221998–10 I.R.B. payments of interest on the bond. Ac- cordingly, this section generally treats the allowance of a credit as if it were a pay- ment of interest on the bond. In addition, this section provides rules to determine the credit rate, the present value of quali- fied contributions from private entities, and the maximum term of a qualified zone academy bond. (b) Credit rate.The credit rate for a qualified zone academy bond is equal to 110 percent of the long-term applicable Federal rate (AFR), compounded annu- ally, for the month in which the bond is is- sued. The Internal Revenue Service pub- lishes this figure each month in a revenue ruling that is published in the Internal Revenue Bulletin. See §601.601(d)(2)- (ii)(b) of this Chapter. (c) Private business contribution re- quirement.To determine the present value (as of the issue date) of qualified contributions from private entities under section 1397E(d)(2), the issuer must use a reasonable discount rate. The credit rate determined under paragraph (b) of this section is a reasonable discount rate. (d) Maximum term.The maximum term for a qualified zone academy bond is determined under section 1397E(d)(3) by using a discount rate equal to 110 percent of the long-term adjusted AFR, com- pounded semi-annually, for the month in which the bond is issued. The Internal Revenue Service publishes this figure each month in a revenue ruling that is published in the Internal Revenue Bul- letin. See §601.601(d)(2)(ii)(b) of this Chapter. (e) Tax credit—(1) Eligible taxpayer. An eligible taxpayer (within the meaning of section 1397E(d)(6)) that holds a quali- fied zone academy bond on a credit al- lowance date is allowed a tax credit against the federal income tax imposed on the taxpayer for the taxable year that in- cludes the credit allowance date. The amount of the credit is equal to the product of the credit rate and the outstanding prin- cipal amount of the bond on the credit al- lowance date. The credit is subject to a limitation based on the eligible taxpayer’s income tax liability. See section 1397E(c). (2) Ineligible taxpayer.A taxpayer that is not an eligible taxpayer is not allowed a credit. (f) Treatment of the allowance of the credit as a payment of interest—(1) Gen- eral rule.The holder of a qualified zone academy bond must treat the bond as if it pays qualified stated interest (within the meaning of §1.1273–1(c)) on each credit allowance date. The amount of the deemed payment of interest on each credit allowance date is equal to the product of the credit rate and the outstanding princi- pal amount of the bond on that date. Thus, for example, if the holder uses an accrual method of accounting, the holder must accrue as interest income the amount of the credit over the one-year ac- crual period that ends on the credit al- lowance date. (2) Adjustment if the holder cannot use the credit to offset a tax liability.If a holder holds a qualified zone academy bond on the credit allowance date but can- not use all or a portion of the credit to re- duce its income tax liability (for example, because the holder is not an eligible tax- payer or because the limitation in section 1397E(c) applies), the holder is allowed a deduction for the taxable year that in- cludes the credit allowance date. The amount of the deduction is equal to the amount of the unused credit deemed paid on the credit allowance date. (g) Not a tax-exempt obligation.A qualified zone academy bond is not an obligation the interest on which is ex- cluded from gross income under section 103(a). (h) Cross-references.See section 171 and the regulations thereunder for rules relating to amortizable bond premium. See §1.61–7(c) for the seller’s treatment of a bond sold between interest payment dates (credit allowance dates) and §1.61– 7(d) for the buyer’s treatment of a bond purchased between interest payment dates (credit allowance dates). (i) [Reserved] (j) Effective date.This section applies to a qualified zone academy bond issued on or after January 1, 1998. Michael P. Dolan, Deputy Commissioner of Internal Revenue. Approved December 19, 1997. Donald C. Lubick, Acting Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on January 6, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 7, 1998, 63 F.R. 671) Section 1502.—Regulations 26 CFR 1.1502–3: Consolidated investment credit. T.D. 8751 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Consolidated Returns— Limitations on the Use of Certain Losses and Credits; Overall Foreign Loss Accounts AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regula- tions. SUMMARY: This document contains temporary amendments to the consoli- dated return regulations. The temporary amendments govern the use of tax credits of a consolidated group and its members. They also concern the recharacterization of certain foreign source income because of a prior overall foreign loss. The text of the temporary regulations also serves as the text of REG–104062–97, page 34 in this Bulletin. DATES: These amendments are effective January 12, 1998. For dates of applica- tion, see the Effective Datesportion of the preamble under SUPPLEMENTARY INFORMATION. FOR FURTHER IN- FORMATION CONTACT: Concerning the temporary regulations in general, Roy A. Hirschhorn, (202) 622-7770; concern- ing amendments related to foreign tax credits and foreign losses, Seth Goldstein (202) 622-3850. SUPPLEMENTARY INFORMATION: Background and Explanation of Provisions A. In General On June 27, 1996, the IRS and Trea- 1998–10 I.R.B.23March 9, 1998 sury published in the Federal Registera Treasury decision containing temporary regulations which, in part, provide rules governing the absorption of certain tax at- tribute carryovers and carrybacks from separate return limitation years (SRLYs), terminate the consolidated return change of ownership rules, and make minor changes to the computation of net section 1231 gains and losses for a group. The Treasury decision adopted without sub- stantive change rules that were proposed in 1991. The 1996 temporary regulations are effective for consolidated return years beginning on or after January 1, 1997. The 1996 temporary regulations signif- icantly modify SRLY loss rules which had been in place since 1966. The 1966 SRLY rules employed a member-by-member and year-by-year approach to determine the limitation on SRLY attributes. The 1996 temporary regulations adopted a subgroup and cumulative approach. See the preamble to NPRM for CO–078–90 (56 F.R. 4228), reprinted at 1991–1 C.B. 757. The 1996 temporary regulations, however, only apply the new approach to net operating loss and net capital loss car- ryovers and carrybacks. They do not change regulations containing limitations on the absorption of the following other tax attribute carryovers and carrybacks from SRLYs: general business credits (§1.1502–3), foreign tax credits (§1.1502–4), and overall foreign losses (OFLs) (§1.1502–9). On December 30, 1992, the IRS and Treasury published in the Federal Regis- tera notice of proposed rulemaking con- taining rules regarding a group’s compu- tation of its alternative minimum tax and minimum tax credits. See 57 F.R. 62251, as corrected by 58 F.R. 8027, reprinted at 1993–1 C.B. 799. The proposed regula- tions (Prop. Reg. §1.1502–55) do not ad- dress the application of SRLY limitations to the minimum tax credit. B. Extension of 1996 Principles The IRS and Treasury believe that it is appropriate to apply a single set of SRLY principles to all attributes that are subject to SRLY limitations. Unnecessary com- plexity would result from applying differ- ent principles to different attributes. In ad- dition, the IRS and Treasury believe that the subgroup and cumulative principles embodied in the 1996 temporary regula- tions more appropriately reflect the use of attributes brought into a consolidated group by SRLY members than do the member-by-member and year-by-year rules of the 1966 regulations. Accord- ingly, this document extends the princi- ples of the 1996 temporary regulations to the general business credit and the mini- mum tax credit. In doing so, the IRS and Treasury have not attempted to address the issues which some commentators have raised with respect to the application of the SRLY limitations in general. Rather, those issues will be addressed in connection with a review of comments re- ceived in response to the 1991 proposed regulations, the 1996 temporary regula- tions and to the temporary regulations contained in this document, prior to the expiration of the 1996 temporary regula- tions in 1999. In general, a group may include a member’s SRLY credits in the applicable consolidated section 38 credit or mini- mum tax credit for a consolidated return year based on the member’s contributions to the consolidated section 38(c) or con- solidated section 53(c) limitation for all consolidated return years. The contribu- tion is based on the aggregate of the mem- ber’s share of the group’s tax liability for relevant years. Such share is measured under the principles of section 1552 and the percentage method under §1.1502– 33(d)(3), assuming a 100% allocation of any decreased tax liability. The contribu- tion may be a negative number, for exam- ple, for a year in which the overall loss of the member offsets the income of other members. In the case of the minimum tax credit, the temporary regulations provide an adjustment to avoid double counting for years in which the SRLY member con- tributes to the group’s AMT liability. This document also adds an example to §1.1502–21T(c)(1) and §1.1502–23T(b). The examples assist taxpayers in comput- ing their cumulative registers by illustrat- ing the concept of cumulative contribu- tion to consolidated net capital gain and consolidated taxable income and the char- acter of section 1231 items for purposes of the relevant registers. C. Treatment of Foreiqn Tax Credits. OFLs and SLLs In considering the application of the new SRLY principles in the temporary regulations to credits in general, the IRS and Treasury considered extending these principles to foreign tax credits (FTCs), and to those losses associated with the FTC regime, namely, overall foreign losses (OFLs) and separate limitation losses (SLLs). The IRS and Treasury were concerned that continued application of the principles of the 1966 regulations (member-by-member and year-by-year) to these foreign attributes, and especially to OFL and SLL accounts, could lead to inappropriate results. Taxpayers might adopt structures in an attempt to achieve indefinite postponement of the recapture of SRLY OFLs and SLLs. Such postpone- ment would frustrate the neutrality princi- ple that the SRLY rules are intended to serve (i.e., that the decision to join a new affiliated group should generally be unaf- fected by considerations relating to the absorption of pre-affiliation attributes). While it was clear that application of the 1966 principles to OFLs and SLLs should not continue, it was less clear that application of the subgroup and cumula- tive principles of the temporary regula- tions would address all concerns. The subgroup and cumulative principles are meant to more closely parallel the absorp- tion that would have taken place had the member (or subgroup) continued filing separate returns. The interaction of the FTC regime (with its multiple baskets) and other provisions of the Internal Rev- enue Code affecting international transac- tions, such as, for example, section 864(e)(1) which allocates the interest ex- pense of a member to income in various baskets based on the group’s asset alloca- tion, can make it difficult to determine what the member has contributed to the group. Furthermore, even with the adop- tion of the subgroup and cumulative prin- ciples, taxpayers would likely have the ability to transfer controlled foreign cor- porations to new members or to cause op- erations to be assumed by new members, thereby delaying indefinitely the recap- ture of OFLs and SLLs subject to SRLY. The IRS and Treasury have decided, therefore, that the principles of SRLY are not served by applying SRLY limitations to OFL and SLL accounts of corporations joining a group. Thus, this document amends portions of §1.1502–9 to elimi- nate SRLY restrictions on OFL recapture. A new member’s SRLY OFL account will March 9, 1998241998–10 I.R.B. be added to the similar consolidated OFL account of the group. For similar reasons, and to avoid an imbalance in the applica- tion of the FTC regime, the IRS and Trea- sury have decided that SRLY limitations should not apply to FTCs of corporations joining a group. This document also amends §1.1502–4(f) such that, in the fu- ture, there will be no SRLY limitation on the use of a member’s separate year FTCs by the group. Other limitations on the use of separate year FTCs continue to apply. See, for example, section 383. These amendments apply to corpora- tions becoming members of a group. They do not address the apportionment of at- tributes to corporations that cease to members of a group. Therefore, they only partially address the issues presented in applying the OFL and SLL rules to groups. In particular, the IRS and Trea- sury recognize that the retention of the notional account system of §1.1502–9 for members that cease to be members is in- consistent with the rationale for removing the SRLY limitation for FTCs and OFL accounts. The notional account system may result in a member’s taking from the group an OFL or SLL account that is un- related to the member’s activities and fu- ture income. Accordingly, the IRS and Treasury expect in the near future to issue additional amendments to §1.1502–9. One approach under consideration would replace the notional account system with a new system that apportions accounts to a departing member based on the mem- ber’s share of group assets that would produce income subject to recapture. Effective Date The temporary amendments are applic- able to consolidated return years begin- ning on or after January 1, 1997. 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 is hereby certified that these regulations do not have a significant eco- nomic impact on a substantial number of small entities. This certification is based on the fact that these regulations princi- pally affect persons filing consolidated federal income tax returns that have car- ryover or carryback of credits from sepa- rate return limitation years. Available data indicates that many consolidated return filers are large companies (not small busi- nesses). In addition, the data indicates that an insubstantial number of consolidated return filers that are smaller companies have credit carryovers or carrybacks, and thus even fewer of these filers have credit carryovers or carrybacks that are subject to the separate return limitation year rules. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking accompanying these regula- tions is being sent to the Small Business Administration for comment on their im- pact on small businesses. Drafting Information The principal author of these regula- tions is Roy A. Hirschhorn of the Office of Assistant Chief Counsel (Corporate). Other personnel from the IRS and Trea- sury 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 entries in nu- merical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1502–3T also issued under 26 U.S.C. 1502. Section 1.1502–9T also issued under 26 U.S.C. 1502. * * * Section 1. 1502–55T also issued under 26 U.S.C. 1502. * * * Par. 2. Section 1.1502–3 is amended by adding paragraphs (c)(3) and (e)(3) and by designating the text following the heading of paragraph (d) as paragraph (d)(l) and adding paragraph (d)(2) to read as follows: §1.1502–3 Consolidated investment credit. * * * * * (c) * * * (3) Special effective date.This para- graph (c) applies to consolidated return years beginning before January 1, 1997. See §1.1502–3T(c) for the rule that limits the group’s use of a section 38 credit car- ryover or carryback from a SRLY for a consolidated return year beginning on or after January 1, 1997. For taxable years not subject to §1.1502–3T(c), prior law applies. See §1.1502–3 (c) in effect prior to January 12, 1998, (§1.1502–3(c) as contained in the 26 CFR part 1 edition re- vised April 1, 1997) for prior law. (d) Examples.(1) * * * (2) Examples (2) and (3) of this para- graph (d) do not apply to consolidated re- turn years beginning on or after January 1, 1997. For consolidated return years be- ginning on or after January 1, 1997, see §1.1502–3T(d) . (e) * * * (3) Special effective date.This para- graph (e) applies to a consolidated return change of ownership that occurred before January 1, 1997. * * * * * Par. 3. Section 1.1502–3T is added to read as follows: §1.1502–3T Consolidated investment credit (temporary). (a) and (b) [Reserved]. For further guidance, see §1.15023(a) and (b). (c) Limitation on tax credit carryovers and carrybacks from separate return limi- tation years—(1) General rule.The ag- gregate of a member’s unused section 38 credits arising in SRLYs that are included in the consolidated section 38 credits for all consolidated return years of the group may not exceed— (i) The aggregate for all consolidated return years of the member’s contribu- tions to the consolidated section 38(c) limitation for each consolidated return year; reduced by (ii) The aggregate of the member’s sec- tion 38 credits arising and absorbed in all consolidated return years (whether or not absorbed by the member). (2) Computational rules—(i) Mem- ber’s contribution to the consolidated section 38(c) limitation.If the consoli- dated section 38(c) limitation for a con- solidated return year is determined by reference to the consolidated tentative minimum tax (see section 38(c)(1)(A)), then a member’s contribution to the con- 1998–10 I.R.B.25March 9, 1998 solidated section 38(c) limitation for such year equals the member’s share of the consolidated net income tax minus the member’s share of the consolidated tenta- tive minimum tax. If the consolidated section 38(c) limitation for a consoli- dated return year is determined by refer- ence to the consolidated net regular tax liability (see section 38(c)(1)(B)), then a member’s contribution to the consoli- dated section 38(c) limitation for such year equals the member’s share of the consolidated net income tax minus 25 percent of the quantity which is equal to so much of the member’s share of the consolidated net regular tax liability less its portion of the $25,000 amount speci- fied in section 38(c)(1)(B). The group computes the member~s shares by apply- ing to the respective consolidated amounts the principles of section 1552 and the percentage method under §1.1502–33(d)(3), assuming a 100% al- location of any decreased tax liability. The group must make proper adjustments so that taxes and credits not taken into ac- count in computing the limitation under section 38(c) are not taken into account in computing the member’s share of the consolidated net income tax, etc. (See, for example, the taxes described in sec- tion 26(b) that are disregarded in comput- ing regular tax liability.) Also, the group may apportion all or a part of the $25,000 amount (or lesser amount if reduced by section 38(c)(3)) for any year to one or more members. (ii) Years included in computation.For purposes of computing the limitation under this paragraph (c), the consolidated return years of the group include only those years, including the year to which a credit is carried, that the member has been continuously included in the group’s con- solidated return, but exclude— (A) For carryovers, any years ending after the year to which the credit is car- ried; and (B) For carrybacks, any years ending after the year in which the credit arose. (iii) Subgroups and successors.The SRLY subgroup principles under §1.1502–21T(c)(2) apply for purposes of this paragraph (c). The predecessor and successor principles under §1.1502– 21T(f) also apply for purposes of this paragraph (c). (3) Effective date.This paragraph (c) applies to consolidated return years be- ginning on or after January 1, 1997. How- ever, a group does not take into account a consolidated taxable year beginning be- fore January 1, 1997, in determining a member’s (or subgroup’s) contributions to the consolidated section 38(c) limita- tion under this paragraph (c). See also §1.1502–3 (c) . (d) Example.(1) The following exam- ple illustrates the provisions of paragraph (c) of this section: Example.(i) P, the common parent of the P group, acquires all the stock of T at the beginning of Year 2. T carries over an unused section 38 general business credit from Year 1 of $100,000. The table below shows the group’s net consolidated income tax, consolidated tentative minimum tax, and con- solidated net regular tax liabilities, and T’s share of such taxes computed under the principles of sectyon March 9, 1998261998–10 I.R.B. P’s share ofT’s share of Year 2Groupcol. 1col. 1 1. consolidated taxable income$2,000$1,200$800 2. consolidated net regular tax$700$420$280 3. consolidated alternative minimum taxable income$4,000$3,200$800 4. consolidated tentative minimum tax$800$640$160 5. consolidated net income tax$800$520$280 6. greater of line 4 or 25% of (line 2 minus $25,000) for the group$800 7. consolidated §38(c) limitation (line 5 minus line 6)$0 1552 and the percentage method under §1.1502–33 (d) (3), assuming a 100% allocation of any de- creased tax liability, for Year 2. (The effects of the lower section 11 brackets are ignored, there are no other tax credits affecting a group amount or mem- ber’s share, and $1, 000s are omitted.) (ii) The amount of T’s unused section 38 credits from Year 1 that are included in the consolidted sec- tion 38 credits for Year 2 may not exceed T’s con- tributifn to the consolidated section 38(c) limitation. For Year 2, the group determines the consolidated section 38(c) km: tation by reference to consolidated tentative minimum tax for Year 2. Therefore, T’s contribution to the consolidated section 38(c) limita- tion for Year 2 equals its share of consolidated net income tax minus its share of consolidated tentativi minimum tax. T’s contribution is $280,000 minus $160,000, or $120,000. However, because the group P’s share ofT’s share of Year 3Groupcol. 1col. 1 1. consolidated taxable income$1,200$1,500$(300) 2. consolidated net regular tax$420$525$(105) 3. consolidated alternative minimum taxable income$1,500$1,700$(200) 4. consolidated tentative minimum tax$300$340$(40) 5. consolidated net income tax$420$525$(105) 6. greater of line 4 or 25% of (line 2 minus $25,000) for the group$300 7. consolidated §38(c) limitation (line 5 minus line 6)$120 has a consolidated section 38 limitation of zero, it may not include any of T’s unused section 38 credits in the consolidated section 38 credits for Year 2. (iii) The following table shows similar informa- tion for the group for Year 3: (iv) The amount of T’s unused section 38 credits from Year 1 that are included in the consolidated section 38 credits for Year 3 may not exceed T’s ag- gregate contribution to the consolidated section 38(c) limitation for Years 2 and 3. For Year 3, the group determines the consolidated section 38(c) lim- itation by reference to the consolidated tentative minimum tax for Year 3. Therefore, T’s contribution to the consolidated section 38(c) limitation for Year 3 equals its share of consolidated net income tax minus its share of consolidated tentative minimum tax. Applying the principles of section 1552 and §l.1502–33(d) (taking into account, for example, that T’s positive earnings and profits adjustment under §1.1502–33(d) reflects its losses actually ab- sorbed by the group), T’s contribution is $(105,000) minus $(40,000), or $(65,000). T’s /acgregate contri- butions to the consolidated section 38(c) l~hitation for Years 2 and 3 is $120,000 + $(65,000), or $55,000. The group may include $55,000 of T’s Year 1 unused sectio 38 credits in its consolidated section 38 tax credit in Year 3. (2) This paragraph (d) applies to con- solidated return years beginning on or after January 1, 1997. See also §1.1502– 3(d) for years prior to January 1, 1997. (e) and (f) [Reserved]. For further guid- ance, see §1.1502–3(e) and (f). Par. 4. Section 1.1502–4 is amended by adding new paragraphs (f) (3) and (g) (3) to read as follows: §1.1502–4 Consolidated foreign tax credit. * * * * * (f) * * * (3) Special effective date ending SRLY limitation.See §1.1502–4T(f) for the rule that ends the SRLY limitation with re- spect to foreign tax credits for consoli- dated return years beginning on or after January 1, 1997. (g) * * * (3) Special effective date for CRCO limitation.See §1.1502–4T(g)(3) for the rule that ends the CRCO limitation with respect to a consolidated return change of ownership that occurred on or after Janu- ary 1, 1997. * * * * * Par. 5. Section 1.1502–4T is added to read as follows: §1.1502–4T Consolidated foreiqn tax credit (temporary). (a) through (e) [Reserved]. For further guidance, see §1.1502–4 (a) through (e). (f) Limitation on unused foreian tax carryover or carryback from separate re- turn limitation years.Section 1.1502–4(f) does not apply to consolidated return years beginning on or after January 1, 1997. For consolidated return years be- ginning on or after January 1, 1997, a group shall include an unused foreign tax of a member arising in a SRLY without regard to the contribution of the member to consolidated tax liability for the con- solidated return year. (g)(1) and (2) [Reserved]. For further guidance, see §1.1502–4 (g) (1) and (2). (g)(3) Special effective date for CRCO limitation.Section 1.1502–4(g) applies to a consolidated return change of owner- ship that occurred before January 1, 1997. Par. 6. In §1.1502–9, paragraph (a) is amended by adding a sentence at the end of the paragraph to read as follows: §1.1502–9 Application of overall foreiqn loss recapture rules to corporations filing consolidated returns. (a) In general.*** See §1.1502– 9T(b)(1)(v) for the rule that ends the sepa- rate return limitation year limitation for consolidated return years beginning on or after January 1, 1997. * * * * * Par. 7. Section 1.1502–9T is added to read as follows: §1.1502–9T Application of overall foreign loss recapture rules to corporations filing consolidated returns (temporary). (a) and (b) introductory text through (b)(1)(iv) [Reserved]. For further guid- ance, see §1.1502–9 (a) and (b) introduc- tory text through (b) (1) (iv). (b)(1)(v) Special effective date for SRLY limitation.Sections 1.1502–9(b)(1)(iii) and (iv) apply only to consolidated return years beginning before January 1, 1997. For consolidated return years beginning on or after January 1, 1997, the rules of §1.1502–9(b)(1)(ii) shall apply to overall foreign losses from separate return years that are separate return limitation years. For purposes of applying §1.1502–9(b)- (1)(ii) in such years, the group treats a member with a balance in an overall for- eign loss account from a separate return limitation year on the first day of the first consolidated return year beginning on or after January 1, 1997, as a corporation joining the group on such first day. An overall foreign loss that is part of a net op- erating loss or net capital loss carryover from a separate return limitation year of a member that is absorbed in a consolidated return year beginning on or after January 1, 1997, shall be added to the appropriate consolidated overall foreign loss account in the year that it is absorbed. For consoli- dated return years beginning on or after January 1, 1997, similar principles apply to overall foreign losses when there has been a consolidated return change of own- ership (regardless of when the change of ownership occurred). (b)(2) through (f) [Reserved]. For fur- ther guidance, see §1.1502–9(b)(2) through (f). Par. 8. In §1.1502–21T, paragraph (c) (1) (iii) is amended by adding Example 5 to read as follows: §1.1502–21T Net operating losses (temporary). * * * * * (c) * * * (1) * * * (iii) * * * Example 5. Dual SRLY registers and accounting for SRLY losses actually absorbed. (i) In Year 1, T sustains a $100 net operating loss and a $50 net cap- ital loss. At the beginning of Year 2, T becomes a member of the P group. Both of T’s carryovers from Year 1 are subject to SRLY limits under this para- graph (c) and §1.1502–22T(c). The members of the P group contribute the following to the consolidated taxable income for Years 2 and 3 (computed without regard to T’s CNOL deduction under §1.1502–21T or net capital loss carryover under §1.1502–22T): (ii) For Year 2, the group computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. Under normal Internal Revenue Code rules, it determines its ability to use its capital loss carryover before it determines its ability to use its ordinary loss carryover. Under section 1211, because the group has no Year 2 capital gain, it cannot absorb any capital losses in Year 2. T’s Year 1 net capital loss and the 1998–10 I.R.B.27March 9, 1998 PT Year 1ordinary(100) (SRLY)capital(50) ordinary3060 Year 2capital0(20) ordinary1040 Year 3capital030 group’s Year 2 consolidated net capital loss fall of which is attributable to T) are carried over to Year 3. (iii) Under this section, the aggregate amount of T’s $100 NOL carryover from Year 1 that may be in- cluded in the CNOL deduction of the group for Year 2 may not exceed $60—the amount of the consolidated taxable income computed by reference only to T’s items, including losses and deductions to the extent actually absorbed (i.e., $60 of ordinary income for Year 2). Thus, the group may include $60 of T’s ordi- nary loss carryover from Year 1 in its Year 2 CNOL deduction. T carries over its remaining $40 of its Year 1 loss to Year 3. (iv) For Year 3, the group again computes separate SRLY limits for each of T’s SRLY carryovers from Year 1. The group has consolidated net capital gain (without taking into account a net capital loss carry- over deduction) of $30. Under 1.150222T(c), the ag- gregate amount of T’s $50 capital loss carryover from Year 1 that may be included in computing the group’s consolidated net capital gain for all years of the group (here Years 2 and 3) may not exceed $30 (the aggre- gate consolidated net capital gain computed by refer- ence only to T’s items, including losses and deduc- tions actually absorbed (i.e., $30 of capital gain in Year 3)). Thus, the group may include $30 of T’s Year 1 capital loss carryover in its computation of consoli- dated net capital gain for Year 3, which offsets the group’s capital gains for Year 3. T carries over its re- maining $20 of its Year 1 loss to Year 4. The group carries over the Year 2 consolidated net capital loss to Year 4. (v) Under this section, the aggregate amount of T’s NOL carryover from Year 1 that may be included in the CNOL deduction of the group for Years 2 and 3 may not exceed $100, which is the amount of the ag- gregate consolidated taxable income for Years 2 and 3 determined by reference only to T’s items, including losses and deductions actually absorbed (i.e., $60 of ordinary income in Year 2 plus $40 of ordinary in- come, $30 of capital gain, and $30 of SRLY capital losses actually absorbed in Year 3). The group in- cluded $60 of T’s ordinary loss carryover in its Year 2 CNOL deduction. It may include the remaining $40 of the carryover in its Year 3 CNOL deduction. * * * * * Par. 9. In §1.1502–23T, paragraphs (b) and (c) are redesignated as paragraphs (c) and (d), and a new paragraph (b) is added to read as follows: §1.1502–23T Consolidated net section 1231 qain or loss (temporary). * * * * * (b) Example.The following example il- lustrates the provisions of this section: Example. Use of SRLY registers with net gains and net losses under section 1231.(i) In Year 1, T sustains a $20 net capital loss. At the beginning of Year 2, T becomes a member of the P group. T’s capital loss carryover from Year 1 is subject to SRLY limits under §1.1502–22T(c). The members of the P group con- tribute the following to the consolidated taxable in- come for Year 2 (computed without regard to T’s net capital loss carryover under §1.1502– 22T): (ii) Under section 1231, if the section 1231 losses for any taxable year exceed the section 1231 gains for such taxable year, such gains and losses are treated as ordinary gains or losses. Because the P group’s section 1231 losses, $(60), exceed the sec- tion 1231 gains, $30, the P group’s net loss is treated as ordinary loss. T’s net section 1231 gain has the same character as the P group’s consolidated net sec- tion 1231 loss, so T’s $30 of section 1231 income is treated as ordinary income for purposes applying §1.1502–22T(c). under §1.1502–22T(c), the group’s consolidated net capital gain determined by reference only to T’s items is $0. None of T’s capital loss carry- over from Year 1 may be taken into account in Year 2. Par. 10. Section 1.1502–55T is added under the undesignated center heading “Special Taxes and Taxpayers” to read as follows: §1.1502–55T Computation of alternative minimum tax of consolidated groups (temporary). (a) through (h)(3) [Reserved]. (h)(4) Separate return year minimum tax credit. (i) and (ii) [Reserved]. (iii)(A) Limitation on portion of sepa- rate return year minimum tax credit aris- inq in separate return limitation years. The aggregate of a member’s minimum tax credits arising in SRLYs that are in- cluded in the consolidated minimum tax credits for all consolidated return years of the group may not exceed— (1) The aggregate for all consolidated return years of the member’s contribu- tions to the consolidated section 53(c) limitation for each consolidated return year; reduced by (2) The aggregate of the member’s minimum tax credits arising and absorbed in all consolidated return years (whether or not absorbed by the member). (B) Computational rules—(1) Mem- ber’s contribution to the consolidated sec- tion 53(c) limitation.Except as provided in the special rule of paragraph (h)(4)(iii)- (B)(2) of this section, a member’s contri- bution to the consolidated section 53(c) limitation for a consolidated return year equals the member’s share of the consoli- dated net regular tax liability minus its share of consolidated tentative minimum tax. The group computes the member’s shares by applying to the respective con- solidated amounts the principles of sec- tion 1552 and the percentage method under §1.1502–33(d)(3), assuming a 100% allocation of any decreased tax lia- bility. The group makes proper adjust- ments so that taxes and credits not taken into account in computing the limitation under section 53(c) are not taken into ac- count in computing the member’s share of the consolidated net regular tax, etc. (See, for example, the taxes described in sec- tion 26(b) that are disregarded in comput- ing regular tax liability.) (2) Adjustment for Year in which alter- native minimum tax is paid.For a consoli- dated return year for which consolidated tentative minimum tax is greater than con- solidated regular tax liability, the group re- duces the member’s share of the consoli- dated tentative minimum tax by the member’s share of the consolidated alter- native minimum tax for the year. The group determines the member’s share of consolidated alternative minimum tax for a year using the same method it uses to de- termine the member’s share of the consoli- dated minimum tax credits for the year. (3) Years included in computation.For purposes of computing the limitation under this paragraph (h)(4)(iii), the con- solidated return years of the group include only those years, including the year to which a credit is carried, that the member has been continuously included in the group’s consolidated return, but exclude any years after the year to which the credit is carried. (4) Subgroup principles.The SRLY subgroup principles under §1.1502– 21T(c)(2) apply for purposes of this para- graph (h)(4)(iii). The predecessor and successor principles under §1.1502– 21T(f) also apply for purposes of this paragraph (h) (4) (iii). (C) Effective date.This paragraph (h)(4)(iii) applies to consolidated return years beginning on or after January 1, 1997. However, a group does not take into account a consolidated taxable year beginning before January 1, 1997, in de- termining a member’s (or subgroup’s) contributions to the consolidated section March 9, 1998281998–10 I.R.B. PT Year 1ordinary (SRLY)capital(20) ordinary1020 Year 2capital700 §1231(60)30 53(c) limitation under paragraph (h)(4)(iii) of this section. Michael P. Dolan, Deputy Commissioner of Internal Revenue. Approved December 11, 1997. Donald C. Lubick, Acting Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on January 9, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 12, 1998, 63 F.R. 1740) Section 7520.—Valuation Tables The adjusted applicable federal short-term, mid- term, and long-term rates are set forth for the month of March 1998. See Rev. Rul. 98–11, page 13. 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 March 1998. See Rev. Rul. 98–11, page 13. 1998–10 I.R.B.29March 9, 1998 March 9, 1998301998–10 I.R.B. 26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of correct tax liability. (Also Part I, § 1361; 1.1361–1.) Rev. Proc. 98–23 SECTION 1. PURPOSE This revenue procedure provides guid- ance on (1) the conversion of a qualified subchapter S trust (QSST) to an electing small business trust (ESBT), and (2) the conversion of an ESBT to a QSST. SECTION 2. BACKGROUND Section 1361(a)(1) of the Internal Rev- enue Code defines an “S corporation,” with respect to any taxable year, as a small business corporation for which an S election is in effect for that year. Section 1361(b) defines “small busi- ness corporation” as a domestic corpora- tion that is not an ineligible corporation and that does not have (A) more than 75 shareholders, (B) as a shareholder a per- son (other than an estate, a trust described in § 1361(c)(2), or an organization de- scribed in § 1361(c)(6)) who is not an in- dividual, (C) a nonresident alien as a shareholder, and (D) more than one class of stock. Section 1361(d)(1)(A) provides that in the case of a QSST with respect to which a beneficiary makes an election under § 1361(d)(2), the trust will be treated as a trust described in § 1361(c)(2)(A)(i) (re- lating to trusts that may be shareholders of a small business corporation under § 1361(b)(1)). Section 1361(d)(2)(C) provides that a QSST election under § 1361(d), once made, may be revoked only with the con- sent of the Secretary. Section 1361(c)(2)(A)(v) provides that an ESBT (as defined in § 1361(e)) is a permitted S corporation shareholder. Section 1361(e)(1)(B) provides that the term ESBT does not include any QSST if an election under § 1361(d)(2) applies to any corporation the stock of which is held by the trust. Section 1361(e)(3) provides that an ESBT election under § 1361(e) applies to the taxable year of the trust for which made and all subsequent taxable years of the trust unless revoked with the consent of the Secretary. Section 1377(a) provides rules for de- termining a shareholder’s pro rata share of any item for any taxable year. SECTION 3. SCOPE Section 4 of this revenue procedure provides guidance on how to convert a QSST to an ESBT. Section 5 of this rev- enue procedure provides guidance on how to convert an ESBT to a QSST. A trust that wishes to convert within 36 months of a previous conversion must submit an application for consent to revoke the QSST or ESBT election to the Internal Revenue Service in the form of a letter ruling request under Rev. Proc. 98–1, 1998–1 I.R.B. 7 (or its successor). The application must be signed by the current income beneficiary and the trustee. This revenue procedure does not pro- vide guidance on whether a trust qualifies as a QSST or an ESBT. In particular, the Internal Revenue Service is currently studying whether a trust qualifies as an ESBT if any portion of the trust is treated as owned by the grantor or another person under the provisions of subpart E (section 671 and following), part I, subchapter J, chapter 1 of the Internal Revenue Code. SECTION 4. CONVERSION OF A QSST TO AN ESBT .01 Prerequisites for Conversion from QSST to ESBT. A trust is eligible to con- vert from a QSST to an ESBT if it meets the following requirements: (1) The trust meets all of the require- ments to be an ESBT under § 1361(e), ex- cept for the requirement under § 1361(e)- (1)(B) that the trust not have a QSST election in place under § 1361(d)(2). (2) The trustee and the current in- come beneficiary of the trust make the ESBT election pursuant to section 4.02 of this revenue procedure with respect to the stock of each S corporation held by the trust. (3) The trust has not converted from an ESBT to a QSST within the 36 month period preceding the effective date of the new ESBT election. (4) Except as provided in section 6 of this revenue procedure, the date on which the ESBT election is to be effective can not be more than 15 days and 2 months prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed. If an election specifies an effective date more than 15 days and 2 months prior to the date on which the election is filed, it will be effective 15 days and 2 months prior to the date on which it is filed. If an election specifies an effective date more than 12 months after the date on which the election is filed, it will be effective 12 months after the date it is filed. .02 Procedural Requirements for Con- version from QSST to ESBT. The current income beneficiary and the trustee of the trust must sign an ESBT election and file it with the service center where the S corporation files its income tax return. This ESBT election must state at the top of the document “ATTENTION ENTITY CONTROL—CONVERSION OF A QSST TO AN ESBT PURSUANT TO REV. PROC. 98–23” and include all information otherwise required for an ESBT election (see Notice 97–12, 1997–3 I.R.B. 11). A separate election must be made with respect to the stock of each S corporation held by the trust. .03 Conversion from QSST to ESBT. Pursuant to § 1361(d)(2)(C), the con- sent of the Commissioner to revoke a QSST election as of the effective date of the ESBT election is hereby granted to any QSST that satisfies the requirements of sections 4.01 and 4.02 of this revenue procedure. For purposes of § 1377(a), the QSST will be treated as terminating its in- terest in the S corporation and the new ESBT will be treated as a new share- holder of the S corporation. The last day the QSST will be a shareholder is the day before the effective date of the ESBT election, and the new ESBT will be a shareholder beginning on the effective date of the ESBT election. SECTION 5. CONVERSION OF AN ESBT TO A QSST .01 Prerequisites for Conversion from ESBT to QSST. A trust is eligible to con- vert from an ESBT to a QSST if it meets the following requirements: Part III. Administrative, Procedural, and Miscellaneous (1) The trust meets all of the require- ments to be a QSST under § 1361(d). (2) The trustee and current income beneficiary of the trust make the QSST election pursuant to section 5.02 of this revenue procedure with respect to the stock of each S corporation held by the trust. (3) The trust has not converted from a QSST to an ESBT within the 36 month period preceding the effective date of the new QSST election. (4) Except as provided in section 6 of this revenue procedure, the date on which the QSST election is to be effective can not be more than 15 days and 2 months prior to the date on which the election is filed and can not be more than 12 months after the date on which the election is filed. If an election specifies an effective date more than 15 days and 2 months prior to the date on which the election is filed, it will be effective 15 days and 2 months prior to the date on which it is filed. If an election specifies an effective date more than 12 months after the date on which the election is filed, it will be effective 12 months after the date it is filed. .02 Procedural Requirements for Con- version from ESBT to QSST. The current income beneficiary and the trustee of the trust must sign a QSST elec- tion and file it with the service center where the S corporation files its income tax return. This QSST election must state at the top of the document “ATTENTION ENTITY CONTROL—CONVERSION OF AN ESBT TO A QSST PURSUANT TO REV. PROC. 98–23” and include all information otherwise required for a QSST election (see § 1.1361–1(j)(6) of the In- come Tax Regulations). A separate elec- tion must be made with respect to the stock of each S corporation held by the trust. .03 Conversion from ESBT to QSST. Pursuant to § 1361(e)(3), the consent of the Commissioner to revoke an ESBT election as of the effective date of the QSST election is hereby granted to any ESBT that satisfies the requirements of sections 5.01 and 5.02 of this revenue procedure. For purposes of § 1377(a), the ESBT will be treated as terminating its in- terest in the S corporation and the new QSST will be treated as a new share- holder of the S corporation. The last day the ESBT will be a shareholder is the day before the effective date of the QSST election, and the new QSST will be a shareholder beginning on the effective date of the QSST election. SECTION 6. EFFECTIVE DATE This revenue procedure is effective for taxable years beginning after December 31, 1996. An election can be made effec- tive as of any date on or after January 1, 1997, and before March 9, 1998, if it is filed not more than 15 days and 2 months after March 9, 1998. PAPERWORK REDUCTION ACT The collection of information con- tained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1591. 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 control number. The collections of information in this revenue procedure are in sections 4.02 and 5.02. This information is required by the Internal Revenue Service to assure compliance with the new provisions of the Small Business Job Protection Act of 1996. The likely respondents are business or other for-profit institutions. The estimated total annual reporting burden is 2500 hours. The estimated average annual burden per respondent is one hour. The estimated number of respondents is 2500. The estimated frequency of responses is once. 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. DRAFTING INFORMATION The principal author of this revenue procedure is Steven R. Schneider of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure contact Steven R. Schneider at (202) 622-3060 (not a toll- free call). 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability. (Also Part I, § 280F; 1.280F–7) Rev. Proc. 98–24 SECTION 1. PURPOSE This revenue procedure provides limi- tations on depreciation deductions for owners of passenger automobiles de- signed to be propelled primarily by elec- tricity and built by an original equipment manufacturer (electric automobiles) first placed in service after August 5, 1997, and before January 1, 1998, and the amounts to be included in income by lessees of electric automobiles first leased after August 5, 1997, and before January 1, 1998. The tables detailing these depre- ciation limitations and lessee inclusion amounts reflect the tripling of the base de- preciation limits provided in § 280F(a)- (1)(A) required by § 280F(a)(1)(C) of the Internal Revenue Code, and the automo- bile price inflation adjustments required by § 280F(d)(7). SECTION 2. BACKGROUND For owners of automobiles, § 280F(a)- (1)(A) imposes dollar limitations on the depreciation deduction for both the year that the automobile is placed in service and each succeeding year. Section 280F(a)(1)(C)(ii) provides that in the case of a “purpose built passenger vehicle” (as defined in § 4001(a)(2)(C)(ii)), each of the annual limitations specified in § 280F(a)(1)(A) shall be tripled. Section 4001(a)(2)(C)(ii) provides that a purpose built passenger vehicle means a passenger vehicle produced by an original equip- ment manufacturer and designed so that the vehicle may be propelled primarily by electricity. Section 280F(d)(7) requires the amounts allowable as depreciation deduc- tions under § 280F(a)(1)(A) to be in- creased by a price inflation adjustment amount for passenger automobiles placed in service after calendar year 1988. For leased automobiles, § 280F(c) re- quires a reduction in the deduction al- 1998–10 I.R.B.31March 9, 1998 lowed to the lessee of the automobile. The reduction must be substantially equivalent to the limitations on the depre- ciation deductions imposed on owners of automobiles. Under § 1.280F–7(a), this reduction requires the lessees to include in gross income an inclusion amount de- termined by applying a formula to the amount obtained from a table. The table shows inclusion amounts for a range of fair market values for each tax year after the automobile is first leased. SECTION 3. SCOPE AND OBJECTIVE 01. The limitations on depreciation de- ductions in section 4.02 of this revenue procedure apply to electric automobiles (other than leased electric automobiles) that are placed in service after August 5, 1997, and before January 1, 1998, and continue to apply for each tax year that the automobile remains in service. 02. The table in section 4.03 of this revenue procedure applies to leased elec- tric automobiles for which the lease term begins after August 5, 1997, and before January 1, 1998. Lessees of such automo- biles must use this table to determine the inclusion amount for each tax year during which the automobile is leased. 03. SeeRev. Proc. 96–25, 1996–1 C.B. 681, for depreciation limitations and in- come inclusion amounts for electric auto- mobiles first purchased or leased before January 1, 1997, and Rev. Proc. 97–20, 1997–11 I.R.B. 10, for depreciation limi- tations and income inclusion amounts for electric automobiles first purchased or leased on or after January 1, 1997, and be- fore August 6, 1997. SECTION 4. APPLICATION 01. A taxpayer placing an electric auto- mobile in service for the first time after August 5, 1997, and before January 1, 1998, is limited to the depreciation deduc- tion shown in Table 1 of section 4.02(2) of this revenue procedure. A taxpayer first leasing an electric automobile after August 5, 1997, and before January 1, 1998, must use Table 2 in section 4.03 of this revenue procedure to determine the inclusion amount that is added to gross in- come. 02. Limitations on Depreciation De- ductions for Certain Automobiles. (1) Amount of the Inflation Adjust- ment.Under § 280F(d)(7)(B)(i), the auto- mobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. The term “CPI auto- mobile component” is defined in § 280F(d)(7)(B)(ii) as the “automobile component” of the Consumer Price Index for all Urban Consumers published by the Department of Labor (the CPI). The new car component of the CPI was 115.2 for October 1987 and 141.5 for October 1996. The October 1996 index exceeded the October 1987 index by 26.3. The In- ternal Revenue Service has, therefore, de- termined that the automobile price infla- tion adjustment for 1997 is 22.83 percent (26.3/115.2 3100%). This adjustment is applicable to all automobiles that are first placed in service in calendar year 1997. To determine the dollar limitations applic- able to an electric automobile first placed in service after August 5, 1997, and be- fore January 1, 1998, the dollar limita- tions in § 280F(a)(1)(A) are tripled in ac- cordance with § 280F(a)(1)(C) and are then multiplied by a factor of 0.2283; the resulting increases, after rounding to the nearest $100, are added to the tripled 1988 limitations to give the depreciation limitations for 1997. (2) Amount of the Limitation.For electric automobiles placed in service after August 5, 1997, and before January 1, 1998, Table 1 contains the dollar amount of the depreciation limitations for each tax year. 03. Inclusions in Income of Lessees of Electric Automobiles. The inclusion amounts for electric automobiles first leased after August 5, 1997, and before January 1, 1998, are cal- culated under the procedures described in § 1.280F–7(a) of the Income Tax regula- tions. Table 2 of this revenue procedure is the applicable table to be used in applying those procedures. March 9, 1998321998–10 I.R.B. REV. PROC. 98–24 TABLE 1 DEPRECIATION LIMITATIONS FOR ELECTRIC AUTOMOBILE FIRST PLACED IN SERVICE AFTER AUGUST 5, 1997, AND BEFORE JANUARY 1, 1998 Tax YearAmount 1st Tax Year$9,480 2nd Tax Year $15,100 3rd Tax Year $9,050 Each Succeeding Year$5,425 REV. PROC. 98–24 TABLE 2 DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES WITH A LEASE TERM BEGINNING AFTER AUGUST 5, 1997, AND BEFORE JANUARY 1, 1998 Fair Market Value of AutomobileTax Year During Lease OverNot Over1st2nd3rd4th5th and Later $ 47,00048,000147911 48,00049,000922334148 49,00050,0001740607384 50,00051,000255887104122 51,00052,00034 75114 136159 52,00053,00042 93140 169195 53,00054,00050111167 200 232 54,00055,000 58129 194232269 REV. PROC. 98–24 TABLE 2—Continued DOLLAR AMOUNTS FOR ELECTRIC AUTOMOBILES WITH A LEASE TERM BEGINNING AFTER AUGUST 5, 1997, AND BEFORE JANUARY 1, 1998 Fair Market Value of AutomobileTax Year During Lease OverNot Over1st2nd3rd4th5th and Later 55,00056,000 66147220264306 56,00057,00074165247296342 57,00058,00083183273328379 58,00059,00091201300359417 59,000 60,00099219326392453 60,00062,000111246366440508 62,00064,000 128 282 419 503 582 64,00066,000 144 318472 567656 66,000 68,000160354525631 730 68,00070,000177389579695803 70,000 72,000193425632759876 72,00074,000209 461 686 822950 74,000 76,000226497738 887 1,023 76,00078,000242533792 950 1,097 78,000 80,000 259 5688451,014 1,171 80,000 85,000 287 632 938 1,125 1,300 85,000 90,000 3287211,0711,285 1,484 90,00095,000 369 8111,2041,444 1,669 95,000 100,000 410 900 1,337 1,604 1,853 100,000110,000 4711,035 1,5371,843 2,128 110,000120,0005531,214 1,8032,1622,497 120,000130,0006351,3932,0692,4812,866 130,000140,0007171,5732,3342,8013,233 140,000150,0007981,7522,6013,1193,602 150,000160,000 8801,9322,8663,4393,970 160,000170,000 9622,1113,1333,757 4,338 170,000180,000 1,044 2,290 3,3994,076 4,707 180,000190,0001,1262,469 3,665 4,395 5,075 190,000200,0001,2082,6493,9304,715 5,443 200,000 210,000 1,289 2,828 4,1975,033 5,812 210,000 220,000 1,3713,008 4,4625,353 6,179 220,000230,000 1,4533,187 4,7295,6716,548 230,000 240,000 1,535 3,3664,9955,990 6,916 240,000250,0001,6173,5455,2616,3097,285 1998–10 I.R.B.33March 9, 1998 SECTION 5. EFFECTIVE DATE This revenue procedure is effective for electric automobiles (other than leased electric automobiles) that are first placed in service after August 5, 1997, and before January 1, 1998, and for leased electric au- tomobiles that are first leased after August 5, 1997, and before January 1, 1998. DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. Harvey of the Of- fice of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding the de- preciation limitations and lessee inclusion amounts in this revenue procedure, con- tact Mr. Harvey at (202) 622-3110 (not a toll-free call). March 9, 1998341998–10 I.R.B. Notice of Proposed Rulemaking and Notice of Public Hearing Consolidated Returns— Limitations on the Use of Certain Losses and Credits REG–104062–97 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. 8751, page 23 of this Bulletin, the IRS is issuing temporary reg- ulations that will govern the use of certain tax credits and losses of a consolidated group and its members. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations. DATES: Written comments and outlines of topics to be discussed at the public hearing scheduled for May 7, 1998, must be received by April 13, 1998. ADDRESSES: Send submissions to: CC:DOM:CORP:R [REG–104062–97], 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–104062–97], Courier’s Desk, In- ternal 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 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 has been scheduled for May 7, 1998, at 10 a.m., in room 2615, Internal Revenue Building, 1111 Consti- tution Avenue NW, Washington DC. FOR FURTHER INFORMATION CON- TACT: Concerning the proposed regula- tions, in general, Roy Hirschhorn (202) 622-7770; concerning amendments re- lated to foreign tax credits and foreign losses, Seth Goldstein (202) 622-3850; concerning submissions and the hearing, Mike Slaughter (202) 622-7190 (not toll- free numbers). SUPPLEMENTARY INFORMATION: Background Temporary regulations in T.D. 8751 amend the Income Tax Regulations (26 CFR part 1) relating to section 1502. The temporary regulations provide rules that will govern the use of certain tax credits and losses of a consolidated group and its members. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations. 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 economic impact on a substantial number of small entities. This certifica- tion is based on the fact that these regula- tions principally affect persons filing con- solidated federal income tax returns that have carryover or carryback of credits from separate return limitation years. Available data indicates that many con- solidated return filers are large companies (not small businesses). In addition, the data indicates that an insubstantial num- ber of consolidated return filers that are smaller companies have credit carryovers or carrybacks, and thus even fewer of these filers have credit carryovers or car- rybacks that are subject to the separate re- turn limitation year rules. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Admin- istration 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 written com- ments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be made avail- able for public inspection and copying. A public hearing has been scheduled for May 7, 1998, at 10 a.m., in room 2615. Because of access restrictions, visi- tors will not be admitted beyond the Inter- nal 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 who wish to present oral com- ments at the hearing must submit written comments and an outline of the topics (signed original and eight (8) copies) to be discussed 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 Roy A. Hirschhorn of the Office of Assistant Chief Counsel (Corporate). Other personnel from the IRS and Trea- sury participated in their development. * * * * * 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 26 CFR part 1 is amended by adding en- tries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1502–3 also issued under 26 U.S.C. 1502. Section 1.1502–4 also issued under 26 U.S.C. 1502. Section 1.1502–9 also issued under 26 U.S.C. 1502. * * * Part IV. Items of General Interest 1998–10 I.R.B.35March 9, 1998 Section 1.1502–23 also issued under 26 U.S.C. 1502. * * * Section 1.1502–55 also issued under 26 U.S.C. 1502. * * * Par. 2. In §1.1502–3, paragraph (c) is revised to read as follows: §1.1502–3 Consolidated investment credit. * * * * * (c) [The text of the proposed paragraph (c) of this section is the same as the text of §1.1502–3T(c) published in T.D. 8751.] * * * * * Par. 3. In §1.1502–4, paragraphs (f)(3) and (g)(3) are added to read as follows: §1.1502–4 Consolidated foreign tax credit. * * * * * (f) * * * (3) [The text of the proposed para- graph (f)(3) of this section is the same as the text of §1.1502–4T(f)(3) published in T.D. 8751.] (g) * * * (3) [The text of the proposed para- graph (g)(3) of this section is the same as the text of §1.1502-4T(g)(3) published in T.D. 8751.] * * * * * Par. 4. In §1.1502–9, paragraph (b)(1)(v) is added to read as follows: §1.1502–9 Application of overall foreign losses recapture rules to corporations filing consolidated returns. * * * * * (b) * * * (1) * * * (v) [The text of the proposed para- graph (b)(1)(v) of this section is the same as the text of §1.1502–9T(b)(1)(v) pub- lished in T.D. 8751.] * * * * * Par. 5. Section 1.1502–21, as proposed to be added at 61 F.R. 33394, June 27, 1996, is amended in paragraph (c)(1)(iii) by adding Example 5. to read as follows: §1.1502–21 Net operating losses. * * * * * (c) * * * (1) * * * (iii) [The text of the proposed para- graph (c)(1)(iii) Example 5of this section is the same as the text of §1.1502– 21T(c)(1)(iii) Example 5published in T.D. 8751.] * * * * * Par. 6. Section 1.1502–23, as proposed to be added at 61 F.R. 33395, June 27, 1996, is amended by redesignating para- graphs (b) and (c) as paragraphs (c) and (d) and adding a new paragraph (b) to read as follows: §1.1502–23 Consolidated net section 1231 gain or loss. * * * * * (b) [The text of the proposed para- graph (b) of this section is the same as the text of §1.1502–23T(b) published in T.D. 8751.] * * * * * Par. 7. Section 1.1502–55, as proposed to be added at 57 F.R. 62257, December 30, 1992, is amended by adding para- graph (h)(4)(iii) to read as follows: §1.1502–55 Computation of alternative minimum tax of consolidated groups. * * * * * (h) * * * (4) * * * (iii) [The text of the proposed para- graph (h)(4)(iii) of this section is the same as the text of §1.1502–55T(h)(4)(iii) pub- lished in T.D. 8751.] * * * * * Michael P. Dolan, Deputy Commissioner of Internal Revenue. (Filed by the Office of the Federal Register on January 9, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 12, 1998, 63 F.R. 1803) Notice of Proposed Rulemaking and Notice of Public Hearing Qualified Zone Academy Bonds REG–119449–97 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. 8755, page 21 of this Bulletin, the IRS is issuing temporary regulations that provide guidance to hold- ers and issuers of qualified zone academy bonds. These proposed regulations reflect changes made by the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, 111 Stat. 788 (1997), and affect holders and issuers of qualified zone academy bonds. The text of those temporary regulations also serves as the text of these proposed regu- lations. This document also provides a notice of public hearing on these pro- posed regulations. DATES: Written comments must be re- ceived by April 7, 1998. Outlines of top- ics to be discussed at the public hearing scheduled for May 27, 1998, must be re- ceived by May 6, 1998. ADDRESSES: Send submissions to CC:DOM:CORP:R (REG–119449–97), 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–119449–97), Courier’s Desk, In- ternal Revenue Building, 1111 Constitu- tion Avenue, NW, Washington, DC. Alter- natively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting directly to the IRS Internet site at http:www.irs.ustreas.gov/ prod/taxregs/comments.html. The public hearing will be held in Room 2615, Inter- nal Revenue Building, 1111 Constitution Ave., NW, Washington, DC. FOR FURTHER INFORMATION CON- TACT: Concerning the regulations, Tim- othy L. Jones, (202) 622-3980; concern- ing submissions and the hearing, LaNita Van Dyke (202) 622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Section 1.1397E–1T, published in T.D. 8755, is issued to provide guidance to holders and issuers of qualified zone academy bonds. March 9, 1998361998–10 I.R.B. The text of those temporary regulations also serves as the text of these proposed regulations. The preamble to the tempo- rary regulations explains the temporary regulations. 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 has also 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 regulations do 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 written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing has been scheduled for May 27, 1998, at 10:00 a.m. in Room 2615, Internal Revenue Building, 1111 C Constitution Avenue NW, Washington, DC. Because of access restrictions, visi- tors will not be admitted beyond the building lobby more than 15 minutes be- fore the hearing starts. The rules of 26 C.F.R. 601.601(a)(3) apply to the hearing. Persons that wish to present oral com- ments at the hearing must submit written comments by April 7, 1998, and submit an outline of the topics to be discussed and time to be devoted to each topic (signed original and eight (8) copies) by May 6, 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 Several persons from the Office of Chief Counsel and the Treasury Depart- ment participated in the development and drafting of these regulations. * * * * * Proposed Amendment 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 is amended by adding an entry in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1397E–1 also issued under 26 U.S.C. 1397E(b) and 1397E(d). * * * Par. 2. Sections 1.1397E–1 is added to read as follows: § 1.1397E–1 Qualified zone academy bonds. [The text of this proposed section is the same as the text of §1.1397E-1T pub- lished in T.D. 8755.] Michael P. Dolan, Deputy Commissioner of Internal Revenue. Approved December 19, 1997. Donald C. Lubick, Acting Assistant Secretary of the Treasury. (Filed by the Office of the Federal Register on January 6, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 7, 1998, 63 F.R. 671) Proposed Forms W–8, W–8A, W–8B, and W–8C Announcement 98–15 The Internal Revenue Service an- nounces that it is requesting comments from the public on proposed new Forms W–8, W–8A, W–8B, W–8C. These forms are being developed as a result of final regulations published on October 14, 1997, relating to the withholding of in- come tax under sections 1441, 1442, and 1443 on certain U.S. source income paid to foreign persons. T.D. 8734, 62 F.R. 53387; 1997–44 I.R.B. 5. These regula- tions, which provide for the use of several withholding certificates, will be effective January 1, 1999. Form W–8 (Certificate of Foreign Sta- tus of Beneficial Owner for United States Tax Withholding) would be provided to a withholding agent or payer by a beneficial owner of certain types of income to estab- lish foreign status, to claim that such per- son is the beneficial owner of the income for which the form is being furnished, and if applicable, to claim a reduced rate of, or exemption from, withholding as a resi- dent of a foreign country with which the United States has an income tax treaty. Form W–8A (Foreign Person’s Claim of Income Effectively Connected With the Conduct of a Trade or Business in the United States) would be provided to a withholding agent or payer by a foreign person claiming that certain income is ef- fectively connected with the conduct of a trade or business in the United States. Form W–8B (Certification for United States Tax Withholding for Foreign Gov- ernments and Other Foreign Organiza- tions) would be provided to a withholding agent or payer by a foreign government, international organization, foreign central bank of issue, or foreign tax-exempt orga- nization to claim that such organization is the beneficial owner of the income for which the form is being furnished, and if applicable, to claim a reduced rate of, or exemption from, withholding as a resi- dent of a foreign country with which the United States has an income tax treaty. Form W–8C (Certificate of Intermedi- ary for United States Tax Withholding) would be provided to a withholding agent or payer by an intermediary either to make representations regarding the status of beneficial owners of the amount paid or to transmit appropriate documentation to the withholding agent. This announcement provides draft copies of proposed Forms W–8, W–8A, W–8B, and W–8C. The forms are being issued without the instructions so that withholding agents can adapt their sys- tems to comply with the regulations. Based on comments, the forms may be re- vised, and together with instructions, will be re-issued for further comment as part of the OMB approval process. The IRS would like to receive com- ments on these proposed draft forms from all interested persons by April 8, 1998. Please send comments to Chairman, Tax 1998–10 I.R.B.37March 9, 1998 Forms Coordinating Committee, Internal Revenue Service, T:FP, Room 5577, 1111 Constitution Avenue, NW, Washington, DC 20224. March 9, 1998381998–10 I.R.B. Exhibit 1 1998–10 I.R.B.39March 9, 1998 Exhibit 2 March 9, 1998401998–10 I.R.B. Exhibit 3 1998–10 I.R.B.41March 9, 1998 Exhibit 3 (Continued) March 9, 1998421998–10 I.R.B. Exhibit 4 1998–10 I.R.B.43March 9, 1998 Exhibit 4 (Continued) Conversion to the Euro by Members of the European Union Announcement 98–18 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Solicitation for comments. SUMMARY: The Treasury Department and the IRS are soliciting comments on the tax issues raised by the conversion of certain European countries’ currencies to a single European currency (euro). SUPPLEMENTARY INFORMATION: Background The Treaty on European Union and Final Act of Feb. 7, 1992, 31 I.L.M. 247 (entered into force Nov. 1, 1993), sets forth a plan to replace the national curren- cies of participating members (legacy cur- rencies) that meet certain economic crite- ria with a single European currency (euro). Pursuant to directives of the Euro- pean Council, the process of converting the legacy currencies into the euro will take place in three phases. On January 1, 1999, the conversion rates from the legacy currencies to the euro are scheduled to become fixed. Thereafter, each of the legacy currencies will remain in circulation but will cease to have independent value apart from the euro. On January 1, 2002, euro bills and coins will be introduced into circulation. Finally, by July 1, 2002, the legacy cur- rencies will no longer be accepted as legal tender. The conversion of a legacy currency to the euro raises a number of tax issues for U.S. taxpayers operating, investing or otherwise conducting business in a legacy currency. For example, U.S. federal tax considerations include: 1. Whether a qualified business unit (QBU), as defined in section 989(a), with a legacy functional currency that is con- verted to the euro will have changed its functional currency under section 985 and regulations thereunder and the implica- tions of any such change (e.g., whether Treas. Reg. §1.985–5 adequately ad- dresses necessary adjustments, the treat- ment of unrealized currency gains and losses, and the appropriate timing of any such change). 2. Whether the conversion of a legacy currency to the euro creates a realization event with respect to a financial instru- ment denominated in a legacy currency and the appropriate time to recognize any resulting gain or loss. Comments The Treasury Department and the IRS are studying issues arising from conver- sion to the euro to determine the appropri- ate scope and content of published guid- ance and invite interested persons to submit comments regarding, but not lim- ited to, the issues described above. Comments are requested on or before April 30, 1998. Send written comments to: Internal Revenue Service, Attn: CC: DOM:CORP:R (Announcement 98-18), room 5226, POB 7604, Ben Franklin Sta- tion, Washington, DC 20044. Alterna- tively, taxpayers may submit comments in writing, by hand delivery to CC:DOM: CORP:R (Announcement 98–18), Courier’s Desk, Internal Revenue Ser- vice, 1111 Constitution Ave., NW, Wash- ington, DC, or, electronically, via the IRS Internet site at: http://www.irs.ustreas. gov/prod/taxregs/comments.html. If a re- spondent is submitting written comments, a signed original and eight (8) copies are requested. All comments will be avail- able for public inspection and copying in their entirety. DRAFTING INFORMATION For further information regarding this announcement, contact Howard Wiener of the Office of Associate Chief Counsel (International) at 202-622-3870 (not a toll-free number) Deletions From Cumulative List of Organizations Contributions to Which Are Deductible Under Section 170 of the Code Announcement 98–19 The names of organizations that no longer qualify as organizations described in section 170(c)(2) of the Internal Rev- enue Code of 1986 are listed below. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an orga- nization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judg- ment under section 7428 and if the con- tributor (1) had knowledge of the revoca- tion of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omis- sions of the organization that brought about this revocation. If on the other hand a suit for declara- tory judgment has been timely filed, con- tributions from individuals and organiza- tions described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on March 9, 1998, and would end on the date the court first determines that the organization is not de- scribed in section 170(c)(2) as more par- ticularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a hus- band and wife treated as one contributor. This benefit is not extended to any indi- vidual who was responsible, in whole or in part, for the acts or omissions of the orga- nization that were the basis for revocation. Adopt-A-Pet, Inc. Tulsa, OK Cavalier Manor Little League Portsmouth, VA Fountain of Life, Inc. Fayetteville, NC Health Plan Associates, PA Baltimore, MD Section 7428(c) Validation of Certain Contributions Made During Pendency of Declaratory Judgment Proceedings This announcement serves notice to po- tential donors that the organization listed below has recently filed a timely declara- tory judgment suit under section 7428 of the Code, challenging revocation of its status as an eligible donee under section 170(c)(2). Protection under section 7428(c) of the Code begins on the date that the notice of March 9, 1998441998–10 I.R.B. revocation is published in the Internal Revenue Bulletin and ends on the date on which a court first determines that an or- ganization is not described in section 170(c)(2), as more particularly set forth in section 7428(c)(1). In the case of individ- ual contributors, the maximum amount of contributions protected during this period is limited to $1,000.00, with a husband and wife being treated as one contributor. This protection is not extended to any in- dividual who was responsible, in whole or in part, for the acts or omissions of the or- ganization that were the basis for the re- vocation. This protection also applies (but without limitation as to amount) to organizations described in section 170(c)(2) which are exempt from tax under section 501(a). If the organization ultimately prevails in its declaratory judg- ment suit, deductibility of contributions would be subject to the normal limitations set forth under section 170. Muscular Dystrophy Aid Society, Inc. Houston, TX 1998–10 I.R.B.45March 9, 1998 March 9, 1998461998–10 I.R.B. NameAddressDesignationDate of Suspension Trempus Jr., JosephCabot, PACPAOctober 1, 1997 to February 28, 1998 Tyler, Delbert D.Monroeville, PACPAOctober 23, 1997 to April 22, 2000 Gillmore, George P.Hampton, NJCPAIndefinite from October 10, 1997 Kamin, James C.Chicago, ILCPADecember 1, 1997 to May 31, 1999 Hubbard, EdwardChicago, ILAttorneyIndefinite from December 1, 1997 Retzlaff, GeneHortonville, WIEnrolled AgentDecember 1, 1997 to May 31, 1998 Conklin, Dennis M.Arlington Hghts, ILCPADecember 3, 1997 to December 2, 1998 Bowen, Roger H.Lake Bluff, ILCPADecember 4, 1997 to December 3, 1999 Ciconte, WilliamWilmington, DEEnrolled AgentDecember 10, 1997 to December 9, 2000 Lopin, Paul I.Chicago, ILCPAIndefinite from December 11, 1997 Goldstein, BenjaminDes Plaines, ILCPADecember 12, 1997 to June 11, 1998 Olsen Jr., BurtonRancho Cordova, CACPADecember 15, 1997 to June 14, 1998 Hickman, MichaelLawrence, KSCPADecember 16, 1997 to April 15, 1998 Grant, Arthur J.Morris Plains, NJCPAJanuary 1, 1998 to December 31, 2000 Zielinski, HenryWoodstock, ILCPAJanuary 1, 1998 to June 30, 1999 Rosales, JohnBatavia, ILCPAJanuary 1, 1998 to April 30, 1998 Reinstein, MaxwellPotomac, MDCPAJanuary 1, 1998 to March 31, 1998 Payne, CharlotteBreckenridge, COCPAJanuary 1, 1998 to December 31, 1999 Ibrahim, MongyRaleigh, NCCPAJanuary 1, 1998 to December 31, 1998 Koutek, Paul J.Westchester, ILCPAJanuary 1, 1998 to August 31, 1998 Doherty, StevenChicago, ILCPAJanuary 1, 1998 to December 31, 1999 Deren, PatriciaLackawanna, NYAttorneyJanuary 1, 1998 to December 31, 1998 Calhoun, SandraLouisville, KYCPAJanuary 1, 1998 to March 31, 1998 Thurman, StephenArcadia, CACPAJanuary 1, 1998 to December 31, 1998 Davidson, MarkTulsa, OKCPAJanuary 15, 1998 to October 14, 1999 Hequembourg, DonaldGlencoe, MOCPAJanuary 20, 1998 to July 19, 1998 Announcement of the Consent Voluntary Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the Internal Revenue Service Under 31 Code of Federal Regulations, Part 10, an attorney, certified public ac- countant, enrolled agent, or enrolled ac- tuary, in order to avoid the institution or conclusion of a proceeding for his disbar- ment or suspension from practice before the Internal Revenue Service, may offer his consent to suspension from such prac- tice. The Director of Practice, in his dis- cretion, may suspend an attorney, certi- fied public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered. Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are prohibited in any Internal Revenue Ser- vice matter from directly or indirectly em- ploying, accepting assistance from, being employed by, or sharing fees with any practitioner disbarred or suspended from practice before the Internal Revenue Ser- vice. To enable attorneys, certified public ac- countants, enrolled agents, and enrolled actuaries to identify practitioners under consent suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Revenue Bulletin the names and ad- dresses of practitioners who have been suspended from such practice, their desig- nation as attorney, certified public ac- countant, enrolled agent, or enrolled actu- ary, and date or period of suspension. This announcement will appear in the weekly Bulletin at the earliest practicable date after such action and will continue to ap- pear in the weekly Bulletins for five suc- cessive weeks or for as many weeks as is practicable for each attorney, certified public accountant, enrolled agent, or en- rolled actuary so suspended and will be consolidated and published in the Cumu- lative Bulletin. The following individuals have been placed under consent suspension from practice before the Internal Revenue Ser- vice: 1998–10 I.R.B.47March 9, 1998 Under title 31 of the Code of Federal Regulations, section 10.76, the Director of Practice is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expe- dited proceeding is instituted, (1) has had a license to practice as an attorney, certi- fied public accountant, or actuary sus- pended or revoked for cause; or (2) has been convicted of any crime under title 26 of the United States Code or, of a felony under title 18 of the United States Code involving dishonesty or breach of trust. Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are prohibited in any Internal Revenue Service matter from directly or indirectly employ- ing, accepting assistance from, being em- ployed by, or sharing fees with, any practi- tioner disbarred or suspended from practice before the Internal Revenue Service. To enable attorneys, certified public ac- countants, enrolled agents, and enrolled ac- tuaries to identify practitioners under expe- dited suspension from practice before the Internal Revenue Service, the Director of Practice will announce in the Internal Rev- enue Bulletin the names and addresses of practitioners who have been suspended from such practice, their designation as at- torney, certified public accountant, en- rolled agent, or enrolled actuary, and date or period of suspension. This announce- ment will appear in the weekly Bulletin at the earliest practicable date after such ac- tion and will continue to appear in the weekly Bulletins for five successive weeks or for as many weeks as is practicable for each attorney, certified public accountant, enrolled agent, or enrolled actuary so sus- pended and will be consolidated and pub- lished in the Cumulative Bulletin. The following individual has been placed under suspension from practice be- fore the Internal Revenue Service by virtue of the expedited proceeding provisions of the applicable regulations: Announcement of the Expedited Suspension of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the Internal Revenue Service NameAddressDesignationDate of Suspension Christensen, Reed K.Roseville, CAEnrolled AgentIndefinite from December 16, 1997 March 9, 1998481998–10 I.R.B. 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. Proc..—Revenue Ruling. S—Subsidiary. S.P.R.—Statements of Procedral Rules. Stat.—Statutes at Large. T—Target Corporation. T.C.—Tax Court. T.D.—Treasury Decision. TFE—Transferee. TFR—Transferor. T.I.R.—Technical Information Release. TP—Taxpayer. TR—Trust. TT—Trustee. U.S.C.—United States Code. X—Corporation. Y—Corporation. Z—Corporation. Definition of Terms 1998–10 I.R.B.49March 9, 1998 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 1998–9 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 98–16, 1998–9 I.R.B. 17 98–17, 1998–9 I.R.B. 16 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 Proposed Regulations: REG–100841–97, 1998–8 I.R.B. 30 REG–102894–97, 1998–3 I.R.B. 59 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–115795–97, 1998–8 I.R.B.33 REG–121755–97, 1998–9 I.R.B. 13 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 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 Revenue Procedures—Continued 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 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 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 8752, 1998–9 I.R.B. 4 8753, 1998–9 I.R.B. 6 March 9, 1998501998–10 I.R.B. Finding List of Current Action on Previously Published Items 1 Bulletins 1998–1 through 1998–9 Revenue Procedures: 95–35 95–35A Superseded by 98–19, 1998–7 I.R.B. 30 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.
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