Internal Revenue Bulletin 1998-36 (PDF rendition): IRS Announcements

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

INCOME TAX
Ct.D. 2063, page 13.
Lien for taxes; validity and priority against third par-
ties; judgement creditor.The Supreme Court has affirmed
that under section 6323 of the Code a federal tax lien need
not be given preference over a judgement creditor’s per-
fected lien on real property in a decedent’s insolvent estate.
United States v. Estate of Francis J. Romani, et al.
Rev. Rul. 98–43, page 9.
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 September 1998.
T.D. 8778, page 4.
REG–115446–97, page 23.
Temporary and proposed regulations under section 936 of
the Code provide guidance regarding the addition of a sub-
stantial new line of business by a possessions corporation
that is an existing credit claimant. A public hearing on the
proposed regulations will be held on December 1, 1998.
ESTATE TAX
T.D. 8779, page 11.
Final regulations under section 2044 of the Code amend the
estate tax marital deduction regulations.
EXCISE TAX
Announcement 98–83, page 36.
This announcement provides excise tax changes for the
fourth quarter of 1998 based on recent legislation.
ADMINISTRATIVE
REG–209446–82, page 24.
Proposed regulations under section 1366 of the Code re-
late to the pass through of items of an S corporation to its
shareholders, the adjustments to the basis of stock of the
shareholders, and the treatment of distributions by an S
corporation. A public hearing will be held on December 15,
1998.
Rev. Proc. 98–46, page 21.
Last-in, first-out inventories; truck dealers.Rev. Proc.
97–44, 1997–41 I.R.B. 8, is modified to extend the relief
provided by that revenue procedure for certain LIFO con-
formity violations of section 472(c) or (e)(2) of the Code to
medium- and heavy-duty truck dealers.
Notice 98–46, page 21.
Information reporting; Hope Scholarship Credit; Life-
time Learning Credit.Taxpayers are informed that the
Service and Treasury are extending the application of Notice
97–73, 1997–51 I.R.B. 16, to information reporting re-
quired under section 6050S of the Code for 1999.
Announcement 98–81, page 35.
The disaster relief provided in section 5.02 of Rev. Proc.
95–28, 1995–1 C.B. 704 and 705, is extended to include
an area in Nevada County, California, bordering a declared
major disaster area.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–36
September 8, 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 38.
Index for January-August begins on page 40.
IRB 1998-36 9/2/98 3:07 PM Page 1

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.
IRB 1998-36 9/2/98 3:07 PM Page 2

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.
IRB 1998-36 9/2/98 3:07 PM Page 3

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 September 1998. See Rev. Rul. 98–43, page 9.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of September 1998.
See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul.
98–43, page 9.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 1998. See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
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 September 1998.
See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of September 1998.
See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
Section 936.—Puerto Rico and
Possession Tax Credit
26 CFR 1.936–11T: New lines of business
prohibited (temporary).
T.D. 8778
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Termination of Puerto Rico and
Possession Tax Credit; New
Lines of Business Prohibited
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations that provide guid-
ance regarding the addition of a substan-
tial new line of business by a possessions
corporation that is an existing credit
claimant. These temporary regulations
reflect changes made by the Small Busi-
ness Job Protection Act of 1996. The text
of these temporary regulations also serves
as the text of the proposed regulations set
forth in the notice of proposed rulemaking
on this subject in REG–115446–97, page
23.
DATES: These regulations are effective
September 18, 1998.
Applicability:These regulations apply
to taxable years of a possessions corpora-
tion beginning after August 19, 1998.
FOR FURTHER INFORMATION CON-
TACT: Patricia A. Bray or Elizabeth
Beck, (202) 622-3880, or Jacob Feldman,
(202) 622-3830 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 1601(a) of the Small Business
Job Protection Act of 1996, Public Law
104–188, 110 Stat. 1755 (1996), amended
the Internal Revenue Code by adding sec-
tion 936(j). Section 936(j) generally re-
peals the Puerto Rico and possession tax
credit for taxable years beginning after
December 31, 1995. However, the sec-
tion provides grandfather rules under
which a corporation that is an existing
credit claimant would be eligible to claim
credits for a transition period. The Puerto
Rico and possession tax credit will phase
out for these existing credit claimants
ending with the last taxable year begin-
ning before January 1, 2006.
For taxable years beginning after De-
cember 31, 1995 and before January 1,
2006, the Puerto Rico and possession tax
credit applies only to a corporation that
qualifies as an existing credit claimant (as
defined in section 936(j)(9)(A)). The de-
termination of whether a corporation is an
existing credit claimant is made sepa-
rately for each possession. A possessions
corporation that adds a substantial new
line of business (other than in a qualifying
acquisition of all the assets of a trade or
business of an existing credit claimant)
after October 13, 1995, ceases to be an
existing credit claimant as of the begin-
ning of the taxable year during which
such new line of business is added.
Therefore, a possessions corporation that
September 8, 199841998–36 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1998-36 9/2/98 3:07 PM Page 4

ceases to be an existing credit claimant ei-
ther because it has added a substantial
new line of business, or because a new
line of business becomes substantial, dur-
ing a taxable year may not claim the
Puerto Rico and possessions tax credit for
that taxable year or any subsequent tax-
able year.
Explanation of Provisions
This document provides temporary reg-
ulations that interpret section 936(j)-
(9)(B). In particular, temporary regula-
tion §1.936–11T adopts principles similar
to those in §1.7704–2(c) and (d) (transi-
tion rules for existing publicly traded
partnerships) for determining whether a
corporation has added a substantial new
line of business.
Paragraph (a) of §1.936–11T states the
general rule that, if a possessions corpora-
tion that is an existing credit claimant, as
defined in section 936(j)(9)(A), adds a
substantial new line of business during a
taxable year, it will cease to be an existing
credit claimant as of the close of the tax-
able year ending before the date of such
addition. The paragraph also generally
describes the subjects discussed in the
other paragraphs in §1.936–11T.
Paragraph (b) addresses the meaning of
the term new line of business.The tempo-
rary regulation generally follows the ap-
proach of §1.7704–2(d)(1), providing the
general rule derived from §1.7704–
2(d)(2) that explains when a business ac-
tivity is a pre-existing business,and from
§1.7704–2(d)(3) that defines when that
activity is closely relatedto a pre-existing
business. Paragraph (b)(1) provides that a
new line of business is any activity of the
possessions corporation that is not closely
related to a pre-existing business of the
possessions corporation.
Paragraph (b)(2) explains that, except
as provided in paragraph (b)(2)(ii), all the
facts and circumstances (including factors
A through H in paragraph (b)(2)(i)) must
be considered to determine whether a new
activity is closely related to a pre-existing
business of the possessions corporation.
Paragraph (b)(2)(i) applies the same eight
factors considered in §1.7704–2(d)(3),
except that the temporary regulation pro-
vides that in applying factor H, the pos-
sessions corporation may use either the
new North American Industry Classifica-
tion System Code (NAICS code) or the
Standard Industrial Classification Code
(SIC code).
Factor (H) is whether the United States
Bureau of the Census assigns the activity
the same six-digit NAICS code (or four-
digit SIC code) as the pre-existing busi-
ness. In the case of a pre-existing business
or activity that is listed under a NAICS
code of 99999, Unclassified establish-
ments, or under a miscellaneous category
(most NAICS codes ending in a “9” are
miscellaneous categories), the similarity
in NAICS codes is ignored as a factor in
determining whether the activity is closely
related to the pre-existing business. The
dissimilarity of the NAICS codes is con-
sidered in determining whether the activ-
ity is closely related to the pre-existing
business. For purposes of this section,
NAICS codes must be set forth in the
North American Industry Classification
System Manual, United States, that is in
effect for the taxable year during which a
new line of business is added.
Similarly, in the case of a pre-existing
business or activity that is listed under a
SIC code of 9999, Nonclassifiable Estab-
lishments, or under a miscellaneous cate-
gory (most SIC codes ending in a “9” are
miscellaneous categories), the similarity
in SIC codes is ignored as a factor in de-
termining whether the activity is closely
related to the pre-existing business. The
dissimilarity of the SIC codes is consid-
ered as a factor in determining whether
the activity is closely related to the pre-
existing business. The SIC codes are set
forth in the Executive Office of the Presi-
dent, Office of Management and Budget,
Standard Industrial Classification Man-
ual, that is in effect for the taxable year
during which a new line of business is
added.
Paragraph (b)(2)(ii) provides safe har-
bors for determining whether an activity
is closely related to a pre-existing busi-
ness in three cases. First, an activity will
be closely related to a pre-existing busi-
ness if the activity is within the same six-
digit NAICS code or four-digit SIC code
as the pre-existing business. Second, an
activity will be closely related to a pre-ex-
isting business if the activity is within the
same five-digit NAICS code or three-digit
SIC code as the pre-existing business and
the facts related to the new activity satisfy
at least three of the factors in paragraphs
(b)(2)(i)(A) through (G) of this section.
Third, an activity will be closely related
to a pre- existing business if the pre-exist-
ing business is making a component prod-
uct or end-product form, as defined in
§1.936–5(a)(1), Q & A1, and the new ac-
tivity is making an integrated product (or
end-product form with fewer excluded
components), that is not within the same
six-digit NAICS code (or four-digit SIC
code) as the pre-existing business solely
because the component product and the
integrated product (or the two end-prod-
uct forms) have different end-uses.
Paragraph (b)(3) provides that a busi-
ness activity of a possessions corporation
is considered to be a pre-existing business
if the possessions corporation was ac-
tively engaged in the activity within the
possession on or before October 13, 1995,
and the possessions corporation elected
the benefits of the Puerto Rico and pos-
session tax credit pursuant to an election
which was in effect for the taxable year
that included October 13, 1995.
Paragraph (b)(3)(ii) explains how the
acquisition of all of the assets or the stock
of an existing credit claimant can affect
the determination of whether an activity is
a pre-existing business. It is intended that
an activity that is a pre-existing business
of an existing credit claimant and that
continues to be carried on in the posses-
sion by any affiliated or non-affiliated ex-
isting credit claimant should continue to
be characterized as a pre-existing activity
since all the assets and activity remain in
the possession and no new activity is in-
troduced there. A non-affiliated acquiring
corporation will not be bound by any sec-
tion 936(h) election made by the prede-
cessor existing credit claimant with re-
spect to that business activity.
Where all of the assets related to a pre-
existing activity of an existing credit
claimant are acquired by a corporation
that is not an existing credit claimant, but
that continues the activity in the posses-
sion, the regulation provides that if the ac-
quiring corporation makes an election
under section 936(e) for the taxable year
of the acquisition, the acquired activity
will be treated as a pre-existing activity of
the acquiring corporation, and the acquir-
ing corporation will be treated as an exist-
ing credit claimant. The acquiring corpo-
ration will be deemed to satisfy the rules
of section 936(a)(2) for the year of acqui-
sition.
1998–36 I.R.B.5September 8, 1998
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In the case of an acquisition of all the
assets of a non-affiliated existing credit
claimant, the acquiring corporation will
not be bound by its predecessor’s elec-
tions under sections 936(a)(4) and (h) re-
garding that business activity.
A mere change in the ownership of a
possessions corporation will not affect its
status as an existing credit claimant for
purposes of determining whether an activ-
ity is closely related to a pre-existing
business.
Paragraph (b)(4) provides that the test
for a new line of business is only applied
at the time the new activity is added (as
opposed to the test of whether a new line
of business is substantial, which is ap-
plied annually under paragraph (c) of this
section).
Paragraph (c)(1) provides the general
rule for determining when a new line of
business becomes substantial. The para-
graph explains that, for purposes of sec-
tion 936 and section 30A, a new line of
business of a possessions corporation is
treated as substantial in the first taxable
year in which it satisfies either of the fol-
lowing two tests: (1) the possessions cor-
poration derives more than 15 percent of
its gross income for the taxable year from
that line of business (the gross income
test); or (2) the possessions corporation
directly uses in that line of business more
than 15 percent of its total assets (the as-
sets test). This position generally reflects
the rules of §1.7704–2(c)(1).
For purposes of the gross income test,
paragraph (c)(2) provides that the denom-
inator is the amount that is the gross in-
come of the possessions corporation for
the current taxable year, while the numer-
ator is the gross income of the new line of
business for the current taxable year. The
gross income test must be applied at the
end of each taxable year. The income is
not to be annualized when a new activity
begins late in the taxable year. Testing
should occur on a company-by-company
basis, if a consolidated group election was
made pursuant to section 936(i)(5). In the
case of a new line of business acquired
through the purchase of all of the assets of
an existing credit claimant, the gross in-
come test for the acquiring corporation
for the year of the acquisition includes
only the income from the date of acquisi-
tion through the end of the taxable year
that includes the date of acquisition.
Paragraph (c)(3) provides rules for ap-
plying the annual assets test. For pur-
poses of the assets test, paragraph (c)(3)
provides that the denominator is the ad-
justed tax bases of the total assets of the
possessions corporation for the current
taxable year, while the numerator is the
adjusted tax bases of the total assets uti-
lized in the new line of business for the
current taxable year. Total assets include
intangibles, cash and receivables. In
order to provide for administrative conve-
nience for both the taxpayer and the IRS
and for greater certainty in the result, the
test uses the adjusted tax bases of the ap-
plicable assets since these amounts are al-
ready reflected in the books and records
of the possessions corporation.
Paragraph (c)(3)(ii) permits an excep-
tion to the assets test. A new line of busi-
ness of a possessions corporation will not
be treated as substantial as a result of the
assets test if an event that is not reason-
ably anticipated causes the adjusted tax
bases of the assets used in the new line of
business to exceed 15 percent of the ad-
justed tax basis of the possessions corpo-
ration’s total assets. An event that is not
reasonably anticipated would include the
destruction of plant and equipment of the
pre-existing business due to a hurricane or
other natural disaster or other similar cir-
cumstances beyond the control of the pos-
sessions corporation. The expiration of a
patent is not such an event and thus will
not trigger this exception.
Paragraph (d) contains five examples
that illustrate the rules of this temporary
regulation.
Paragraph (e) provides that a posses-
sions corporation that adds a significant
new line of business during a taxable year
may not claim the Puerto Rico and pos-
session tax credit on its return for the tax-
able year in which the substantial new
line of business is added or a new line of
business becomes substantial.
Paragraph (f) provides that the tempo-
rary regulation will apply to taxable years
of the possessions corporation beginning
after August 19, 1998. However, taxpay-
ers may elect to apply all of the provisions
of the regulation for any open taxable
years beginning after December 31, 1995.
Once an election is made, the regulation
will apply for all subsequent taxable
years. The temporary regulations will not
apply to the activities of pre-existing busi-
nesses for taxable years beginning before
January 1, 1996.
Special Analyses
It has been determined that this tempo-
rary regulation is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Moreover, the rules contained in this
Treasury decision provide taxpayers with
immediate guidance necessary to comply
with section 936(j)(9)(B), which was ef-
fective for taxable years beginning after
December 31, 1995. In the absence of
temporary regulations, the only guidance
regarding what is a new line of businessis
a reference in the legislative history to the
principles of §1.7704–2(d) of the regula-
tions. The only guidance regarding what
is substantialis a reference to §1.7704–
2(c) in the Joint Committee Explanation
(Blue Book) of Public Law 104–188. Al-
though a possessions corporation might
be able to construct a tax return position
based on this information, the effect of
misinterpretation is severe—disqualifica-
tion as an existing credit claimant, with-
out benefits for either the substantial new
line of business or the pre-existing busi-
ness. Taxpayers must have unambiguous
guidance on which they can immediately
rely in structuring their possession corpo-
ration business activities. For these rea-
sons this temporary regulation is needed
to ensure the efficient administration of
the tax laws. Pursuant to section 7805(f)
of the Internal Revenue Code, this tempo-
rary regulation will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its effect on small business.
Drafting Information
The principal author of these regula-
tions is Patricia A. Bray of the Office of
the Associate Chief Counsel (Interna-
tional), within the office of Chief Coun-
sel, IRS. However, other personnel from
the IRS and the Department of the Trea-
September 8, 199861998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 6

sury participated in the development of
these regulations.
*****
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 1.936–11T also issued under 26
U.S.C. 936(j). ***
Par. 2. Section 1.936–11T is added to
read as follows:
§1.936–11T New lines of business
prohibited (temporary).
(a) In general.A possessions corpora-
tion that is an existing credit claimant, as
defined in section 936(j)(9)(A), and that
adds a substantial new line of business
during a taxable year, or that has a new
line of business that becomes substantial
during the taxable year, will cease to be
an existing credit claimant as of the close
of the taxable year ending before either
such taxable year. The term new line of
businessis defined in paragraph (b) of
this section. The term substantialis de-
fined in paragraph (c) of this section.
Paragraph (d) of this section provides ex-
amples illustrating paragraphs (a) through
(c) of this section. Paragraph (e) of this
section instructs a possessions corpora-
tion not to claim the Puerto Rico and pos-
session tax credit on its return if it has
added a substantial new line of business
during the taxable year. Paragraph (f) of
this section is the effective date provision.
(b) New line of business—(1) In gen-
eral.A new line of business is any busi-
ness activity of the possessions corpora-
tion that is not closely related to a
pre-existing business of the possessions
corporation. The term closely relatedis
defined in paragraph (b)(2) of this sec-
tion. The term pre-existing businessis de-
fined in paragraph (b)(3) of this section.
(2) Closely related.All the facts and
circumstances must be considered, in-
cluding paragraphs(b)(2)(i)(A) through
(H) of this section, to determine whether a
new activity is closely related to a pre-ex-
isting business of the possessions corpo-
ration, and thus is not a new line of busi-
ness.
(i) Factors.The following factors will
help to establish that a new activity is
closely related to a pre-existing business
activity of the possessions corporation—
(A) The activity provides products or
services very similar to the products or
services provided by the pre-existing
business;
(B) The activity markets products and
services to the same class of customers as
that of the pre-existing business;
(C) The activity is of a type that is nor-
mally conducted in the same business lo-
cation as the pre-existing business;
(D) The activity requires the use of
similar operating assets as those used in
the pre-existing business;
(E) The activity’s economic success de-
pends on the success of the pre-existing
business;
(F) The activity is of a type that would
normally be treated as a unit with the pre-
existing business in the business’ account-
ing records;
(G) If the activity and the pre-existing
business are regulated or licensed, they
are regulated or licensed by the same or
similar governmental authority; and
(H) The United States Bureau of the
Census assigns the activity the same six-
digit North American Industry Classifica-
tion System (NAICS) code or four-digit
Industry Number Standard Identification
code (SIC code) as the pre-existing busi-
ness. In the case of a pre-existing busi-
ness or activity that is listed under a
NAICS code of 99999, Unclassified Es-
tablishments, or under a miscellaneous
category (most NAICS codes that end in a
“9” are miscellaneous categories), the
similarity in NAICS codes is ignored as a
factor in determining whether the activity
is closely related to the pre-existing busi-
ness. The dissimilarity of the NAICS
code is considered in determining
whether the activity is closely related to
the pre-existing business. For purposes of
this section, NAICS codes must be set
forth in the North American Industry
Classification System (United States)
Manual that is in effect for the taxable
year during which a new line of business
is added. The official NAICS-United
States Manual is available in both printed
and electronic versions from the National
Technical Information Service (NTIS) at
1-800-553-6847 or at the NTIS NAICS
web site at <http://www.ntis.gov/naics>.
In the case of a pre-existing business or
activity that is listed under a SIC code of
9999, Nonclassifiable Establishments, or
under a miscellaneous category (most SIC
codes ending in “9” are miscellaneous
categories), the similarity in SIC codes is
ignored as a factor in determining
whether the activity is closely related to
the pre-existing business. The dissimilar-
ity of the SIC codes is considered in de-
termining whether the activity is closely
related to the pre-existing business. The
SIC codes are set forth in the Executive
Office of the President, Office of Man-
agement and Budget, Standard Industrial
Classification Manual, that is in effect for
the taxable year during which a new line
of business is added. A printed version of
the official SIC Manual is available from
the National Technical Information Ser-
vice (NTIS) at 1-800-553-6847.
(ii) Safe harbors.An activity is closely
related to a pre-existing business and thus
is not a new line of business in the follow-
ing three cases—
(A) If the activity is within the same
six-digit NAICS code (or four-digit SIC
code);
(B) If both the pre-existing business
activity and the new activity are within
the same five-digit NAICS code (or three-
digit SIC code) and the facts relating to
the new activity satisfy at least three of
the factors listed in paragraph (b)(2)(i)(A)
through (G) of this section; or
(C) If the pre-existing business is mak-
ing a component product or end-product
form, as defined in §1.936–5(a)(1),Q &
A1, and the new business activity is mak-
ing an integrated product, or an end-prod-
uct form with fewer excluded compo-
nents, that is not within the same six-digit
NAICS code (or four-digit SIC code) as
the pre-existing business solely because
the component product and the integrated
product (or two end-product forms) have
different end-uses.
(3) Pre-existing business—(i) In gen-
eral.Except as provided in paragraph
(b)(3)(ii) and (4) of this section, a busi-
ness activity is a pre-existing business of
the existing credit claimant if—
(A) The existing credit claimant was
actively engaged in the activity within the
1998–36 I.R.B.7September 8, 1998
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possession on or before October 13, 1995;
and
(B) The existing credit claimant has
elected the benefits of the Puerto Rico and
possession tax credit pursuant to an elec-
tion which is in effect for the taxable year
that includes October 13, 1995.
(ii) Acquisition of all of the assets or
stock of an existing credit claimant.(A) If
all the assets of a pre-existing business of
an existing credit claimant are acquired
by an affiliated or non-affiliated existing
credit claimant which carries on the busi-
ness activity of the predecessor existing
credit claimant, the acquired business ac-
tivity will be treated as a pre-existing
business of the acquiring corporation. A
non-affiliated acquiring corporation will
not be bound by any section 936(h) elec-
tion made by the predecessor existing
credit claimant with respect to that busi-
ness activity.
(B) Where all of the assets of a pre-ex-
isting business of an existing credit
claimant are acquired by a corporation
that is not an existing credit claimant, if
the acquiring corporation makes a section
936(e) election for the taxable year in
which the assets are acquired—
(1) The acquiring corporation will be
treated as an existing credit claimant for
the year of acquisition;
(2) The activity will be considered a
pre-existing business of the acquiring cor-
poration;
(3) The acquiring corporation will be
deemed to satisfy the rules of section
936(a)(2) for the year of acquisition; and
(4) After making an election under sec-
tion 936(e), a non-affiliated acquiring cor-
poration will not be bound by elections
under sections 936(a)(4) and (h) made by
the predecessor existing credit claimant.
(C) A mere change in the stock owner-
ship of a possessions corporation will not
affect its status as an existing credit
claimant for purposes of this section.
(4) Timing rule. The tests for a new
line of business in this paragraph
(whether the new activity is closely re-
lated to a pre-existing business) are ap-
plied only at the end of the taxable year
during which the new activity is added.
(c) Substantial—(1) In general.For
purposes of section 936 and section 30A,
a new line of business is considered to be
substantial as of the earlier of—
(i) The taxable year in which the pos-
sessions corporation derives more that 15
percent of its gross income from that new
line of business (gross income test); or
(ii) The taxable year in which the pos-
sessions corporation directly uses in that
new line of business more that 15 percent
of its assets (assets test).
(2) Gross income test. The denomina-
tor in the gross income test is the amount
that is the gross income of the possessions
corporation for the current taxable year,
while the numerator is the amount that is
the gross income of the new line of busi-
ness for the current taxable year. The
gross income test is applied at the end of
each taxable year. For purposes of this
test, if a new line of business is added late
in the taxable year, the income is not to be
annualized in that year. In the case of a
new line of business acquired through the
purchase of assets, the gross income of
such new line of business for the taxable
year of the acquiring corporation that in-
cludes the date of acquisition is deter-
mined from the date of acquisition
through the end of the taxable year. In the
case of a consolidated group election
made pursuant to section 936(i)(5), the
test applies on a company by company
basis and not on a consolidated basis.
(3) Assets test—(i) Computation.The
denominator is the adjusted tax basis of
the total assets of the possessions corpora-
tion for the current taxable year. The nu-
merator is the adjusted tax basis of the
total assets utilized in the new line of
business for the current taxable year. The
assets test is computed annually using all
assets including cash and receivables.
(ii) Exception.A new line of business
of a possessions corporation will not be
treated as substantial as a result of meet-
ing the assets test if an event that is not
reasonably anticipated causes assets used
in the new line of business of the posses-
sions corporation to exceed 15 percent of
the adjusted tax basis of the possession
corporation’s total assets. For example,
an event that is not reasonably anticipated
would include the destruction of plant and
equipment of the pre-existing business
due to a hurricane or other natural disas-
ter, or other similar circumstances beyond
the control of the possessions corporation.
The expiration of a patent is not such an
event and will not trigger this exception.
(d) Examples.The following examples
illustrate the rules described in paragraphs
(a), (b), and (c) of this section. In the fol-
lowing examples, X Corp. is an existing
credit claimant unless otherwise indicated:
Example 1.X Corp. is a pharmaceutical corpora-
tion which manufactured bulk chemicals (a compo-
nent product). In March 1997, X Corp. began to
also manufacture pills (e.g., finished dosages or an
integrated product). The new activity provides
products very similar to the products provided by
the pre-existing business. The new activity is of a
type that is normally conducted in the same business
location as the pre-existing business. The activity’s
economic success depends on the success of the pre-
existing business. The manufacture of bulk chemi-
cals is in NAICS code 325411, Medicinal and
Botanical Manufacturing, while the manufacture of
the pills is in NAICS code 325412, Pharmaceutical
Preparation Manufacturing. Although the products
have a different end-use, may be marketed to a dif-
ferent class of customers, and may not use similar
operating assets, they are within the same five-digit
NAICS code and the activity also satisfies para-
graphs (b)(2)(i)(A), (C), and (E) of this section.
The manufacture of the pills by X Corp. will be con-
sidered closely related to the manufacture of the
bulk chemicals. Therefore, X Corp. did not add a
new line of business because it falls within the safe
harbor rule of paragraph (b)(2)(ii)(B) of this section.
Example 2.X Corp. currently manufactures
printed circuit boards in a possession. As a result of
a technological breakthrough, X Corp. could pro-
duce the printed circuit boards more efficiently if it
modified its existing production methods. Because
demand was high, X Corp. expanded its facilities to
support the production of its current products when
it modified its production methods. After these
modifications to the facilities and production meth-
ods, the products produced through the new technol-
ogy were in the same six-digit NAICS code as prod-
ucts produced previously by X Corp. See paragraph
(b)(2)(ii)(A) of this section. Therefore, X Corp. will
not be considered to have added a new line of busi-
ness for purposes of paragraph (b) of this section.
Example 3.X Corp. has manufactured Device A
in Puerto Rico for a number of years and began to
manufacture Device B in Puerto Rico in 1997. De-
vice A and Device B are both used to conduct elec-
trical current to the heart and are both sold to cardi-
ologists. There is no significant change in the type
of activity conducted in Puerto Rico after the trans-
fer of the manufacturing of Device B to Puerto Rico.
Similar manufacturing equipment, manufacturing
processes and skills are used in the manufacture of
both devices. Both are regulated and licensed by the
Food and Drug Administration. The economic suc-
cess of Device B is dependent upon the success of
Device A only to the extent that the liability and
manufacturing prowess with respect to one reflects
favorably on the other. Depending upon the heart
abnormality, the cardiologist may choose to use De-
vice A, Device B or both on a patient. Both devices
are within the same business sector of the taxpayer’s
business. The manufacture of Device A is in the six-
digit NAICS code 339112, Surgical and Medical In-
strument Manufacturing. The manufacture of De-
vice B is in the six-digit NAICS code 334510,
Electromedical and electro- therapeutic Apparatus
Manufacturing. (The manufacture of Device A is in
the four-digit SIC code 3845, Electromedical and
Electrotheraputic Apparatus. The manufacture of
Device B is in the four-digit SIC code 3841, Surgi-
September 8, 199881998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 8

cal and Medical Instruments and Apparatus.) The
safe harbor of paragraph (b)(2)(ii)(B) of this section
applies because the two activities are within the
same three-digit SIC code and Corp. X satisfies
paragraphs (b)(2)(i)(A), (B), (C), (D), (F), and (G)
of this section.
Example 4. X Corp. has been manufacturing
house slippers in Puerto Rico since 1990. Y Corp. is
a U.S. corporation that is not affiliated with X Corp.
and is not an existing credit claimant. Y Corp. has
been manufacturing snack food in the United States.
In 1997, X Corp. purchased the assets of Y Corp. and
began to manufacture snack food in Puerto Rico.
House slipper manufacturing is in the six-digit
NAICS code 316212 (Four-digit SIC code 3142,
House Slippers). The manufacture of snack foods
falls under the six-digit NAICS code 311919, Other
Snack Food Manufacturing (four-digit SIC code
2052, Cookies and Crackers (pretzels)). Because
these activities are not within the same five or six
digit NAICS code (or the same three or four-digit
SIC code), and because snack food is not an inte-
grated product that contains house slippers, the safe
harbor of paragraph (b)(2)(ii) of this section cannot
apply. Considering all the facts and circumstances,
including the eight factors of paragraph (b)(2)(i) of
this section, the snack food manufacturing activity is
not closely related to the manufacture of house slip-
pers, and is a new line of business, within the mean-
ing of paragraph (b) of this section.
Example 5.X Corp. is an existing credit claimant
that has elected the profit-split method for comput-
ing taxable income. P Corp. was not an existing
credit claimant and manufactured a product in a dif-
ferent five-digit NAICS code than the product man-
ufactured by X Corp. In 1997, X Corp. acquired the
stock of P Corp. and liquidated P Corp. in a tax-free
liquidation under section 332, but continued the
business activity of P Corp. as a new business seg-
ment. Assume that this new business segment is a
new line of business within the meaning of para-
graph (c) of this section. In 1997, X Corp. has gross
income from the active conduct of a trade or busi-
ness in a possession computed under section
936(a)(2) of $500 million and the adjusted tax basis
of its assets is $200 million. The new business seg-
ment had gross income of $60 million, or 12 percent
of the X Corp. gross income, and the adjusted basis
of the new segment’s assets was $20 million, or 10
percent of the X Corp. total assets. In 1997, X Corp.
does not derive more than 15 percent of its gross in-
come, or directly use more that 15 percent of its total
assets, from the new business segment. Thus, the
new line of business acquired from P Corp. is not a
substantialnew line of business within the meaning
of paragraph (c) of this section, and the new activity
will not cause X Corp. to lose its status as an exist-
ing credit claimant during 1997. In 1998, however,
the gross income of X Corp. grew to $750 million
while the gross income of the new line of business
grew to $150 million, or 20% of the X Corp. 1998
gross income. Thus, in 1998, the new line of busi-
ness is substantial within the meaning of paragraph
(c) of this section, and X Corp. loses its status as an
existing credit claimant as of December 31, 1997.
(e) Loss of status as existing credit
claimant.An existing credit claimant that
adds a substantial new line of business in
a taxable year, or that has a new line of
business that becomes substantial in a tax-
able year, loses its status as an existing
credit claimant as of the close of the tax-
able year ending before either such tax-
able year. In such case, the possession
corporation must not claim the Puerto
Rico and possession tax credit on its re-
turn for the taxable year in which the sub-
stantial new line of business is added or a
new line of business becomes substantial.
(f) Effective date—(1) General rule.
This section applies to taxable years of a
possessions corporation beginning after
August 19, 1998.
(2) Election for retroactive application.
Taxpayers may elect to apply retroac-
tively all the provisions of this section for
any open taxable year beginning after De-
cember 31, 1995. Such election will be
effective for the year of the election and
all subsequent taxable years. This section
will not apply to activities of pre-existing
businesses for taxable years beginning be-
fore January 1, 1996.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
August 18, 1998, 8:45 a.m., and published in the
issue of the Federal Register for August 19, 1998, 63
F.R. 44387)
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 September 1998.
Rev. Rul. 98–43
This revenue ruling provides various
prescribed rates for federal income tax
purposes for September 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.
1998–36 I.R.B.9September 8, 1998
IRB 1998-36 9/2/98 3:07 PM Page 9

REV. RUL. 98–43 TABLE 1
Applicable Federal Rates (AFR) for September 1998
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR5.42%5.35%5.31%5.29%
110% AFR5.98%5.89%5.85%5.82%
120% AFR6.52%6.42%6.37%6.34%
130% AFR7.08%6.96%6.90%6.86%
Mid-Term
AFR5.54%5.47%5.43%5.41%
110% AFR6.11%6.02%5.98%5.95%
120% AFR6.67%6.56%6.51%6.47%
130% AFR7.24%7.11%7.05%7.01%
150% AFR8.38%8.21%8.13%8.07%
175% AFR9.80%9.57%9.46%9.38%
Long-Term
AFR5.74%5.66%5.62%5.59%
110% AFR6.33%6.23%6.18%6.15%
120% AFR6.91%6.79%6.73%6.70%
130% AFR7.50%7.36%7.29%7.25%
September 8, 1998101998–36 I.R.B.
REV. RUL. 98–43 TABLE 2
Adjusted AFR for September 1998
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR3.66%3.63%3.61%3.60%
Mid-term
adjusted AFR4.24%4.20%4.18%4.16%
Long-term
adjusted AFR5.02%4.96%4.93%4.91%
REV. RUL. 98–43 TABLE 3
Rates Under Section 382 for September 1998
Adjusted federal long-term rate for the current month 5.02%
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.)5.02%
REV. RUL. 98–43 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for September 1998
Appropriate percentage for the 70% present value low-income housing credit 8.32%
Appropriate percentage for the 30% present value low-income housing credit3.57%
IRB 1998-36 9/2/98 3:07 PM Page 10

Section 1288.—Treatment of
Original Issue Discount on Tax-
Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 1998. See Rev. Rul. 98–43, page 9.
Section 2044.—Certain
Property for Which Marital
Deduction Was Previously
Allowed
26 CFR 1.2044–1: Certain property for which
marital deduction was previously allowed.
T.D. 8779
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20 and 602
Estate and Gift Tax Marital
Deduction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations amending the estate tax
marital deduction regulations. The
amendments are made to conform the es-
tate tax regulations to recent court deci-
sions in Estate of Clayton v. Commis-
sioner,976 F.2d 1486 (5th Cir. 1992),
rev’g97 T.C. 327 (1991); Estate of
Robertson v. Commissioner, 15 F.3d 779
(8th Cir. 1994), rev’g98 T.C. 678 (1992);
Estate of Spencer v. Commissioner,43
F.3d 226 (6th Cir. 1995), rev’gT.C.
Memo. 1992–579; and Estate of Clack v.
Commissioner, 106 T.C. 131 (1996). The
amendments affect estates of decedents
electing the marital deduction for quali-
fied terminable interest property (QTIP)
and the estates of the surviving spouses of
such decedents.
DATES: These regulations are effective
August 19, 1998.
FOR FURTHER INFORMATION CON-
TACT: Susan B. Hurwitz, (202) 622-
3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these
final regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget (OMB) under
44 U.S.C. 3507 and assigned control
number 1545–1612.
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 assigned by OMB.
The collection of information in this
regulation is in §20.2056(b)–7(d)(3)(ii).
This information is required to provide a
method for estates of decedents whose es-
tate tax returns were due on or before
February 18, 1997, to obtain an extension
of time to make the qualified terminable
interest property election under section
2056(b)(7)(B)(v). This information will
be used to inform the IRS of the affected
estates that are electing to obtain the relief
granted in the regulation. The collection
of information is mandatory for those es-
tates that seek relief. The likely respon-
dents are individuals representing estates.
Comments concerning the collection of
information should be directed to OMB,
Attention: Desk Officer for the Depart-
ment of the Treasury, Office of Informa-
tion and Regulatory Affairs, Washington,
DC 20503, with copies to the Internal
Revenue Service, Attention: IRS Reports
Clearance Officer, OP:FS:FP, Washing-
ton, DC 20224. Any such comments
should be submitted not later than Octo-
ber 19, 1998. Comments are specifically
requested concerning:
Whether the collection of information
is necessary for the proper performance of
the functions of the IRS, including
whether the information will have practi-
cal utility.
The accuracy of the estimated burden
associated with the collection of informa-
tion (see below);
How to enhance the quality, utility, and
clarity of the information collected;
How to minimize the burden of com-
plying with the collection of information,
including the application of automated
collection techniques or other forms of in-
formation technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
Estimates of the reporting burden in
these final regulations will be reflected in
the burden of Form 843 (Claim for Re-
fund and Request for Abatement) and
Form 706 (Estate Tax Return) or 706NA
(Estate Tax Return for Nonresident
Noncitizens).
Books or records relating to this collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
On March 1, 1994, the IRS published
final estate and gift tax regulations (26
CFR part 20 and part 25) under sections
2044, 2056, 2207A, 2519, 2523, and 6019
of the Internal Revenue Code (Code) in
the Federal Register(59 F.R. 9642). At
1998–36 I.R.B.11September 8, 1998
REV. RUL. 98–43 TABLE 5
Rate Under Section 7520 for September 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 interest6.6%
IRB 1998-36 9/2/98 3:07 PM Page 11

that time, §20.2056(b)–7(d)(3) provided
that an income interest (or life estate) that
is contingent upon the executor’s election
under section 2056(b)(7)(B)(v) (the QTIP
election) is not a qualifying income inter-
est for life.
On February 18, 1997, temporary regu-
lations (T.D. 8714) amending the existing
final estate tax regulations relating to the
marital deduction for qualified terminable
interest property (QTIP) were published
in the Federal Register(62 F.R. 7156).
A notice of proposed rulemaking (REG–
209830–96) cross-referencing the tempo-
rary regulations was published in the Fed-
eral Register(62 F.R. 7188) for the same
day.
The temporary regulations provide that
an income interest for life (or life estate)
that is contingent upon the executor’s
QTIP election, will not, because of the
contingency, fail to be a qualifying in-
come interest for life.
Written comments responding to the
notice of proposed rulemaking were re-
ceived. A public hearing was held on
June 3, 1997. After consideration of all
the comments, the proposed regulations
under sections 2044 and 2056 are adopted
as revised by this Treasury decision, and
the corresponding temporary regulations
are removed.
Explanation of Revisions and Summary
of Comments
Under section 2056(b)(7)(B)(ii), the
surviving spouse has a qualifying income
interest for life in property which passes
from the decedent if (1) the surviving
spouse is entitled to all of the income from
the property, payable at least annually (or
has a usufruct interest for life in the prop-
erty), and (2) no person has a power to ap-
point any part of the property to any per-
son other than the surviving spouse.
Commentators suggested that the regu-
lation, based on the case law, should
specifically provide that as a result of the
executor’s election over a portion of the
property, in cases where the unelected por-
tion of the property passes to a beneficiary
other than the surviving spouse, the execu-
tor will not be considered to have a power
to appoint any part of the property to any
person other than the surviving spouse.
The final regulation is clarified to pro-
vide that an interest in property is eligible
for treatment as qualified terminable in-
terest property if the income interest is
contingent upon the executor’s election
and if that portion of the property for
which no election is made will pass to or
for the benefit of beneficiaries other than
the surviving spouse. Two examples pro-
vided in the temporary regulations have
been revised in the final regulations to
conform to this clarification.
Comments were also received regard-
ing the effective date of the temporary
regulations. It was suggested that relief
should be made available for estates of
decedents that did not make the QTIP
election on their estate tax returns because
the surviving spouse’s income interest in
the property was contingent upon the
election or because the nonelected portion
of the property was to pass to a benefi-
ciary other than the surviving spouse. Ac-
cordingly, the final regulations provide
that estates of decedents whose estate tax
returns were due on or before February
18, 1997, are granted an extension of time
to make the QTIP election if: (1) the pe-
riod of limitations on filing a claim for
credit or refund under section 6511(a) has
not expired; and (2) the estate submits a
statement providing that, pursuant to sec-
tion 2044, the surviving spouse’s gross
estate will include the value, at the date of
the surviving spouse’s death, of the prop-
erty for which the QTIP election is being
made. The statement must be signed,
under penalties of perjury, by the surviv-
ing spouse, the surviving spouse’s legal
representative (if the surviving spouse is
legally incompetent), or the surviving
spouse’s executor (if the surviving spouse
is deceased).
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 and, because
these regulations do not impose on small
entities a collection of information re-
quirement, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regulations
is Susan B. Hurwitz, Office of Assistant
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 20 and 602
are amended as follows:
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER
AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §20.2044-1, paragraph (e) Ex-
ample 8is added to read as follows:
§20.2044–1 Certain property for which
marital deduction was previously
allowed.
* * * * *
(e) * * *
Example 8. Inclusion of trust property when sur-
viving spouse dies before first decedent’s estate tax
return is filed.D dies on July 1, 1997. Under the
terms of D’s will, a trust is established for the benefit
of D’s spouse, S. The will provides that S is entitled
to receive the income from that portion of the trust
that the executor elects to treat as qualified ter-
minable interest property. The remaining portion of
the trust passes as of D’s date of death to a trust for
the benefit of C, D’s child. The trust terms other-
wise provide S with a qualifying income interest for
life under section 2056(b)(7)(B)(ii). S dies on Feb-
ruary 10, 1998. On April 1, 1998, D’s executor files
D’s estate tax return on which an election is made to
treat a portion of the trust as qualified terminable in-
terest property under section 2056(b)(7). S’s estate
tax return is filed on November 10, 1998. The value
on the date of S’s death of the portion of the trust for
which D’s executor made a QTIP election is includi-
ble in S’s gross estate under section 2044.
§20.2044–1T [Removed]
Par. 3. Section 20.2044–1T is re-
moved.
September 8, 1998121998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 12

Par. 4. In §20.2056(b)–(7), paragraphs
(d)(3) and (h) Example 6are revised to
read as follows:
§20.2056(b)–(7) Election with respect to
life estate for surviving spouse.
* * * * *
(d) * * *
(3) Contingent income interests.(i) An
income interest for a term of years, or a
life estate subject to termination upon the
occurrence of a specified event (e.g., re-
marriage), is not a qualifying income in-
terest for life. However, a qualifying in-
come interest for life that is contingent
upon the executor’s election under section
2056(b)(7)(B)(v) will not fail to be a qual-
ifying income interest for life because of
such contingency or because the portion
of the property for which the election is
not made passes to or for the benefit of
persons other than the surviving spouse.
This paragraph (d)(3)(i) applies with re-
spect to estates of decedents whose estate
tax returns are due after February 18,
1997. This paragraph (d)(3)(i) also ap-
plies to estates of decedents whose estate
tax returns were due on or before Febru-
ary 18, 1997, that meet the requirements
of paragraph (d)(3)(ii) of this section.
(ii) Estates of decedents whose estate
tax returns were due on or before Febru-
ary 18, 1997, that did not make the elec-
tion under section 2056(b)(7)(B)(v) be-
cause the surviving spouse’s income
interest in the property was contingent
upon the election or because the non-
elected portion of the property was to pass
to a beneficiary other than the surviving
spouse are granted an extension of time to
make the QTIP election if the following
requirements are satisfied:
(A) The period of limitations on filing a
claim for credit or refund under section
6511(a) has not expired.
(B) A claim for credit or refund is filed
on Form 843 with a revised Recapitula-
tion and Schedule M, Form 706 (or
706NA) that signifies the QTIP election.
Reference to this section should be made
on the Form 843.
(C) The following statement is in-
cluded with the Form 843: “The under-
signed certifies that the property with re-
spect to which the QTIP election is being
made will be included in the gross estate
of the surviving spouse as provided in
section 2044 of the Internal Revenue
Code, in determining the federal estate
tax liability on the spouse’s death.” The
statement must be signed, under penalties
of perjury, by the surviving spouse, the
surviving spouse’s legal representative (if
the surviving spouse is legally incompe-
tent), or the surviving spouse’s executor
(if the surviving spouse is deceased).
* * * * *
(h) * * *
Example 6. Spouse’s qualifying income interest
for life contingent on executor’s election.D’s will
established a trust providing that S is entitled to re-
ceive the income, payable at least annually, from
that portion of the trust that the executor elects to
treat as qualified terminable interest property. The
portion of the trust which the executor does not elect
to treat as qualified terminable interest property
passes as of D’s date of death to a trust for the bene-
fit of C, D’s child. Under these facts, the executor is
not considered to have a power to appoint any part
of the trust property to any person other than S dur-
ing S’s life.
* * * * *
§20.2056(b)–7T [Removed]
Par. 5. Section 20.2056(b)–7T is re-
moved.
Par. 6. Section 20.2056(b)–10 is re-
vised to read as follows:
§20.2056(b)–10 Effective dates.
Except as specifically provided in
§§20.2056(b)–5(c)(3)(ii) and (iii),
20.2056(b)–7(d)(3), 20.2056(b)–7(e)(5),
and 20.2056(b)–8(b), the provisions of
§§20.2056(b)–5(c), 20.2056(b)–7,
20.2056(b)–8, and 20.2056(b)–9 are ap-
plicable with respect to estates of dece-
dents dying after March 1, 1994. With
respect to decedents dying on or before
such date, the executor of the decedent’s
estate may rely on any reasonable inter-
pretation of the statutory provisions.
§20.2056(b)–10T [Removed]
Par. 7. Section 20.2056(b)–10T is re-
moved.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 8. In §602.101, paragraph (c), the
entry in the table for 20.2056(b)–7 is re-
vised to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identifiedcontrol No.
and described
* * * * *
20.2056(b)–7 . . . . . . . . . . . . 1545–0015
1545–1612
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved July 27, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
August 18, 1998, 8:45 a.m., and published in the
issue of the Federal Register for 63 F.R. 44391)
Section 6323.—Validity and
Priority Against Certain Persons
Ct.D. 2063
SUPREME COURT
OF THE UNITED STATES
No. 96–1613
UNITED STATES v. ESTATE OF
FRANCIS J. ROMANI ET AL.
523 U.S.
(1998)
CERTIORARI TO THE SUPREME
COURT OF PENNSYLVANIA,
WESTERN DISTRICT
APRIL 19,1998
Syllabus
After a third party perfected a $400,000
judgment lien under Pennsylvania law on
Francis Romani’s Cambria County real
property, the Internal Revenue Service
filed notices of tax liens on the property,
totaling some $490,000. When Mr. Ro-
mani died, his entire estate consisted of
real estate worth only $53,001. Because
1998–36 I.R.B.13September 8, 1998
IRB 1998-36 9/2/98 3:07 PM Page 13

the property was encumbered by both the
judgment lien and the federal tax liens,
the estate’s administrator sought the
county court’s permission to transfer the
property to the ‘judgment creditor in hen
of execution. The court authorized the
conveyance, overruling the Federal Gov-
ernment’s objection that the transfer vio-
lated the federal priority statute, 31 U. S.
C. §3713(a), which provides that a Gov-
ernment claim “shall be paid first” when a
decedent’s estate cannot pay all of its
debts. The Superior Court of Pennsyl-
vania affirmed, as did the Pennsylvania
Supreme Court. The latter court deter-
mined that there was a “plain in-
consistence” between §3713 and the Fed-
eral Tax Lien Act of 1966, which provides
that a federal tax hen “shall not be valid”
against judgment lien creditors until a
prescribed notice has been given, 26 U. S.
C. §6323(a). The court concluded that the
1966 Act effectively limited §3713’s op-
eration as to tax debts, relying on United
States v. Kimbell Foods, Inc., 440 U. S.
715, 738, which noted that the 1966 Act
modified the Government’s preferred po-
sition in the tax area and recognized the
priority of many state claims over federal
tax liens.
Held:Section 3713(a) does not require
that a federal tax claim be given prefer-
ence over a judgment creditor’s perfected
hen on real property. Pp. 4– 17.
(a) There is no dispute about the
meaning of either the Pennsylvania
hen statute or the Tax Lien Act. It is
undisputed that, under the state law,
the judgment creditor acquired a
valid lien on Romani’s real property
before his death and before the Gov-
ernment served notice of its tax hens.
That lien was therefore perfected in
the sense that there is nothing more
to be done to have a choate hen.
E.g., United States v. City of New
Britain, 347 U. S. 81, 84. And a re-
view of the Tax Lien Act’s history
reveals that each time Congress has
revisited the federal tax lien, it has
ameliorated pre-existing harsh con-
sequences for the delinquent tax-
payer’s other secured creditors.
Here, all agree that by §6323(a)’s
terms, the Government’s liens are
not valid as against the earlier
recorded judgment lien. Pp. 4–7.
(b) Because this Court has never
definitively resolved the basic ques-
tion whether the federal priority
statute gives the United States a pref-
erence only over other unsecured
creditors, or whether it also applies
to the antecedent perfected liens of
secured creditors, see,e.g., United
States v. Vermont, 377 U. S. 351,
358, n. 8, it does not seem appropri-
ate to view the issue here as whether
the Tax Lien Act has implicitly
amended or repealed §3713(a). In-
stead, the proper inquiry is how best
to harmonize the two statutes’ im-
pact on the Government’s power to
collect delinquent taxes. Pp. 7–12.
(c) Nothing in the federal priority
statute’s text or its long history justi-
fies the conclusion that it authorizes
the equivalent of a secret lien as a
substitute for the expressly autho-
rized tax lien that the Tax Lien Act
declares “shall not be valid” in a case
of this kind. On several occasions,
this Court has concluded that a spe-
cific policy embodied in a later fed-
eral statute should control interpreta-
tion of the older federal priority
statute, despite that law’s literal, un-
conditional text and the fact that it
had not been expressly amended by
the later Act. See, e.g., Cook County
Nat. Bank v. United States,107 U.
S. 445, 448451. United States v.
Emory,314 U. S. 423, 429–433, and
United States v. Key,397 U. S. 322,
324–333, distinguished. So too here,
there are sound reasons for treating
the Tax Lien Act as the governing
statute. That Act is the later statute,
the more specific statute, and its pro-
visions are comprehensive, reflect-
ing an obvious attempt to accommo-
date the strong policy objections to
the enforcement of secret liens. It
represents Congress’ detailed judg-
ment as to when the Government’s
claims for unpaid taxes should yield
to many different sorts of interests
(including, e.g.,judgment liens, me-
chanic’s liens, and attorneys’ liens)
in many different types of property
(including, e.g.,real property, securi-
ties, and motor vehicles). See
§6323. Indeed, given this Court’s
unambiguous determination that the
federal interest in the collection of
taxes is paramount to its interest in
enforcing other claims, see Kimbell
Foods Inc.,440 U. S., at 733735, it
would be anomalous to conclude that
Congress intended the priority
statute to impose greater burdens on
the citizen than those specifically
crafted for tax collection purposes.
Pp. 12–17.
Pa., 688 A. 2d 703, affirmed.
STEVENS, J., delivered the opinion of
the Court, in which REHNQUIST, C. J., and
O’CONNER, KENNEDY, SOUTHER, THOMAS,
GINSBURG, and BREYER, J.J., joined.
SCALIAJ., filed an opinion concurring in
part and concurring in the judgment.
SUPREME COURT OF THE
UNITED STATES
No. 96–1613
UNITED STATES, PETITIONER v.
ESTATE OF FRANCIS J. ROMANI
ET AL.
ON WRIT OF CERTIORARI TO THE
SUPREME COURT OF
PENNSYLVANIA, WESTERN
DISTRICT
[April, 29, 1998]
JUSTICE STEVENS delivered the
opinion of the Court.
The federal priority statute, 31 U. S. C.
§3713(a), provides that a claim of the
United States Government “shall be paid
first” when a decedent’s estate cannot pay
all of its debts.
1
The question presented is
whether that statute requires that a federal
September 8, 1998141998–36 I.R.B.
1
Ҥ3713. Priority of Government claims
“(a)(1) A claim of the United States Government
shall be paid first when—
“(A) a person indebted to the Government is in-
solvent and—
“(i) the debtor without enough property to pay all
debts makes a voluntary assignment of property;
“(ii) property of the debtor, if absent, is attached;
or
“(iii) an act of bankruptcy is committed; or
“(B) the estate of a deceased debtor, in the cus-
tody of the executor or administrator, is not enough
to pay all debts of the debtor.
“(2) This subsection does not apply to a case
under title ll.” 31 U.S. C. §3713.
The present statute is the direct descendent of
§3466 of the Revised Statutes, which had been codi-
fied in 31 U. S. C. § 191.
IRB 1998-36 9/2/98 3:07 PM Page 14

tax claim be given preference over a judg-
ment creditor’s perfected lien on real prop-
erty even though such a preference is
not authorized by the Federal Tax Lien
Act of 1966, 26 U. S. C. §6321 et seq.
I
On January 25, 1985, the Court of
Common Pleas of Cambria County, Penn-
sylvania, entered a judgment for $400,000
in favor of Romani Industries, Inc., and
against Francis J. Romani. The judgment
was recorded in the clerk’s office and
therefore, as a matter of Pennsylvania
law, it became a lien on all of the defen-
dant’s real property in Cambria County.
Thereafter, the Internal Revenue Service
filed a series of notices of tax liens on Mr.
Romani’s property. The claims for unpaid
taxes, interest and penalties described in
those notices amounted to approximately
$490,000.
When Mr. Romani died on January 13,
1992, his entire estate consisted of real es-
tate worth only $53,001. Because the
property was encumbered by both the
judgment lien and the federal tax liens,
the estate’s administrator sought permis-
sion from the Court of Common Pleas to
transfer the property to the judgment
creditor, Romani Industries, in lieu of ex-
ecution. The Federal Government ac-
knowledged that its tax liens were not
valid as against the earlier judgment hen;
but, giving new meaning to Franklin’s
aphorism that “in this world nothing can
be said to be certain, except death and
taxes,”
2
it opposed the transfer on the
ground that the priority statute (§3713)
gave it the right to “be paid first.”
The Court of Common Pleas overruled
the Government’s objection and autho-
rized the conveyance. The Superior Court
of Pennsylvania affirmed, and the
Supreme Court of the State also affirmed.
547 Pa. 41, 688 A. 2d 703 (1997). That
court first determined that there was a
“plain inconsistency” between §3713,
which appears to give the United States
“absolute priority” over all competing
claims, and the Tax Lien Act of 1966,
which provides that the federal tax lien
“shall not be valid” against judgment hen
creditors until a prescribed notice has
been given. Id.,at 45, 688 A. 2d, at 705.
3
Then, relying on the reasoning in United
States v. Kimbell Foods, Inc.,440 U. S.
715 (1979), which had noted that the Tax
Lien Act of 1966 modified the Federal
Government’s preferred position in the
tax area and recognized the priority of
many state claims over federal tax liens,
id.,at 738, the court concluded that the
1966 Act had the effect of limiting the op-
eration of §3713 as to tax debts.
The decision of the Pennsylvania
Supreme Court conflicts with two federal
court of appeals decisions, Kentucky ex
rel. Luckett v. United States,383 F. 2d 13
(CA6 1967), and Nesbitt v. United States,
622 F. 2d 433 (CA9 1980). Moreover, in
its petition for certiorari, the Government
submitted that the decision is inconsistent
with our holding in Thelusson v. Smith,2
Wheat. 396 (1817), and with the admoni-
tion that “‘[o]nly the plainest inconsis-
tency would warrant our finding an im-
plied exception to the operation of so
clear a command as that of [31 U. S. C.
§3713],”’United States v. Key, 397 U.S.
322, 324-325 (1970) (quoting United
States v. Emory,314 U.S. 423, 433
(1941)). We granted certiorari, 521 U. S.
(1997), to resolve the conflict and to con-
sider whether Thelusson, Key,or any of
our other cases construing the priority
statute requires a different result.
II
There is no dispute about the meaning
of two of the three statutes that control the
disposition of this case. It is therefore ap-
propriate to comment on the Pennsylvania
lien statute and the Federal Tax Lien Act
before considering the applicability of the
priority statute to property encumbered by
an antecedent judgment creditor’s lien.
The Pennsylvania statute expressly pro-
vides that a judgment shall create a lien
against real property when it is recorded in
the county where the property is located.
42 Pa. Cons. Stat. §4303(a) (1995). After
the judgment has been recorded, the judg-
ment creditor has the same right to notice
of a tax sale as a mortgagee.
4
The record-
ing in one county does not, of course, cre-
ate a lien on property located elsewhere.
In this case, however, it is undisputed that
the judgment creditor acquired a valid lien
on the real property in Cambria County
before the judgment debtor’s death and
before the Government served notice of its
tax liens. Romani Industries’ lien was
“perfected in the sense that there is noth-
ing more to be done to have a choate
lien—when the identity of the lienor, the
property subject to the lien, and the
amount of the hen are established.” United
States v. City of New Britain, 347 U. S.
81, 84 (1954); see also Illinois ex rel.
Gordon v. Campbell,329 U.S. 362, 375
(1946).
1998–36 I.R.B.15September 8, 1998
2
Letter of November 13, 1789 to Jean Baptiste
Le Roy, in 10 The Writings of Benjamin Franklin 69
(A. Smyth ed. 1907). As is often the case, the origi-
nal meaning of the aphorism is clarified somewhat
by its context: “Our new Constitution is now estab-
lished, and has an appearance that promises perma-
nency; but in this world nothing can be said to be
certain, except death and taxes.” Ibid.
3
The Federal Tax Lien Act of 1966, 26 U. S. C.
§6321 et seq.,provides in pertinent part:
Ҥ6321. Lien for taxes
“If any person liable to pay any tax neglects or re-
fuuses to pay the same after demand, the amount (in-
cluding any interest, additional amount, addition to
tax, or assessable penalty, together with any costs
that may accrue in addition thereto) shall be a lien in
favor of the United States upon all property and
rights to property, whether real or personal, belong-
ing to such person.”
Ҥ6323. Validity and priority against certain per-
sons
“(a) Purchasers, holders of security interests, me-
chanic’s henors, and judgment lien creditors
“The lien imposed by section 6321 shall not be
valid as against any purchaser, holder of a security
interest, mechanic’s henor, or judgment lien creditor
until notice thereof which meets the requirements of
subsection (f) has been filed by the Secretary.”
Section 6323(f)(1)(A)(i) provides that the re-
quired notice ‘shall be filed . . . [i]n the case of real
property, in one office within the State (or the
county, or other governmental subdivision), as des-
ignated by the laws of such State, in which the prop-
erty subject to the hen is situated.” If the State has
not designated such an office, notice is to be filed
with the clerk of the federal district court “for the ju-
dicial district in which situated.” §6323(f)(1)(B). the
property subject to the lien is situated.”
§6232(f)(1)(B).
4
The Pennsylvania Supreme Court has elabo-
rated:
“We must now decide whether judgment credi-
tors are also entitled to personal or general notice by
the [County Tax Claim] Bureau as a matter of due
process of law.
“Judgment liens are a product of centuries of
statutes which authorize a judgment creditor to seize
and sell the land of debtors at a judicial sale to sat-
isfy their debts out of the proceeds of the sale. The
judgment represents a binding judicial determination
of the rights and duties between the parties, and es-
tablishes their debtor-creditor relationship for all the
world to notice when the judgment is recorded in a
Prothonotary’s Office. When entered of record, the
judgment also operates as a lien upon all real prop-
erty of the debtor in that county.” In re Upset Sale,
Tax Claiin Bureau of Berks County, 505 Pa. 327,
334, 479 A. 2d 940,943(1984).
IRB 1998-36 9/2/98 3:07 PM Page 15

The Federal Government’s right to a
hen on a delinquent taxpayer’s property
has been a part of our law at least since
1865.
5
Originally the lien applied, with-
out exception, to all property of the tax-
payer immediately upon the neglect or
failure to pay the tax upon demand.
6
An
unrecorded tax lien against a delinquent
taxpayer’s property was valid even
against a bona fide purchaser who had no
notice of the lien. United States v. Snyder,
149 U. S. 210, 213– 215 (1893). In 1913,
Congress amended the statute to provide
that the federal tax hen “shall not be valid
as against any mortgagee, purchaser, or
judgment creditor” until notice has been
filed with the clerk of the federal district
court or with the appropriate local author-
ities in the district or county in which the
property subject to the hen is located. Act
of Mar. 4, 1913, 37 Stat. 1016. In 1939,
Congress broadened the protection
against unfiled tax hens to include
pledgees and the holders of certain securi-
ties. Act of June 29, 1939, §401, 53 Stat.
882–883. The Federal Tax Lien Act of
1966 again broadened that protection to
encompass a variety of additional secured
transactions, and also included detailed
provisions protecting certain secured in-
terests even when a notice of the federal
hen previously has been filed. 80 Stat.
1125-1132, as amended, 26 U. S. C.
§6323.
In sum, each time Congress revisited
the federal tax lien, it ameliorated its orig-
inal harsh impact on other secured credi-
tors of the delinquent taxpayer.
7
In this
case, it is agreed that by the terms of
§6323(a), the Federal Government’s liens
are not valid as against the hen created by
the earlier recording of Romani Indus-
tries' judgment.
III
The text of the priority statute on which
the Government places its entire reliance
is virtually unchanged since its enactment
in 1797.
8
As we pointed out in United
States v. Moore,423 U. S. 77 (1975), not
only were there earlier versions of the
statute,
9
but “its roots reach back even
further into the English common law,” id.,
at 80. The sovereign prerogative that was
exercised by the English Crown and by
many of the States as “an inherent inci-
dent of sovereignty,” ibid.,applied only to
unsecured claims. As Justice Brandeis
noted in Marshall v. New York,254 U. S.
380, 384 (1920), the common law priority
“[did] not obtain over a specific lien cre-
ated by the debtor before the sovereign
undertakes to enforce its right.” More-
over, the statute itself does not create a
lien in favor of the United States.
10
Given
this background, respondent argues that
the statute should be read as giving the
United States a preference over other un-
secured creditors but not over secured
creditors.
11
There are dicta in our earlier cases that
support this contention as well as dicta
that tend to refute it. Perhaps the
strongest support is found in Justice
Story’s statement:
“What then is the nature of the pri-
ority, thus limited and established in
favour of the United States? Is it a
right, which supersedes and overrules
the assignment of the debtor, as to
any property which the United States
may afterwards elect to take in exe-
cution, so as to prevent such property
from passing by virtue of such as-
signment to the assignees? Or, is it a
mere right of prior payment, out of
the general funds of the debtor, in the
hands of the assignees? We are of
opinion that it clearly falls, within the
latter description. The language em-
ployed is that which naturally would
be employed to express such an in-
tent; and it must be strained from its
ordinary import, to speak any other.”
Conard v. Atlantic Ins. Co. of N.Y,1
Pet. 386, 439 (1828).
Justice Story’s opinion that the language
employed in the statute “must be
September 8, 1998161998–36 I.R.B.
5
The post-Civil War Reconstruction Congress
imposed a tax of three cents per pound on “the pro-
ducer, owner, or holder” of cotton and a hen on the
cotton until the tax was paid. Act of July 13, 1866,
§1, 14 Stat. 98. The same statute also imposed a
general lien on all of a delinquent taxpayer’s prop-
erty, see §9, 14 Stat. 107, which was nearly identical
to a provision in the revenue act of Mar. 3, 1865, 13
Stat. 470–471, quoted in n. 6, infra.
6
The 1865 revenue act contained the following
sentence: ‘And if any person, bank, association,
company, or corporation, liable to pay any duty, shall
neglect or refuse to pay the same after demand, the
amount shall be a hen in favor of the United States
from the time it was due until paid, with the interests,
penalties, and costs that may accrue m addition
thereto, upon all property and rights to property; and
the collector, after demand, may levy or by warrant
may authorize a deputy collector to levy upon all
property and rights to property belonging to such
person, bank, association, company, or corporation,
or on which the said hen exists, for the payment of
the sum due as aforesaid, with interest and penalty
for non-payment, and also of such further sum as
shall be sufficient for the fees, costs, and expenses of
such levy.” 13 Stat. 470–471. This provision, as
amended, became §3186 of the Revised Statutes.
7
For a more thorough description of the early his-
tory and of Congress’ reactions to this Court’s tax
lien decisions, see Kennedy, The Relative Priority of
the Federal Government: The Pernicious Career of
the Inchoate and General Lien, 63 Yale L. J. 905,
919–922 (1954) (hereinafter Kennedy)
8
The Act of Mar. 3, 1797, §5, 1 Stat. 515, pro-
vided:
“And be it further enacted, That where any rev-
enue officer, or other person hereafter becoming in-
debted to the United States, by bond or otherwise,
shall become insolvent, or where the estate of any
deceased debtor, in the hands of executors or admin-
istrators, shall be insufficient to pay all the debts due
from the deceased, the debt due to the United States
shall be first satisfied; and the priority hereby estab-
lished shall be deemed to extend, as well to cases in
which a debtor, not having sufficient property to pay
all his debts, shall make a voluntary assignment
thereof, or in which the estate and effects of an ab-
sconding, concealed, or absent debtor, shall be at-
tached by process of law, as to cases in which an act
of legal bankruptcy shall be committed.” Compare
§3466 of the Revised Statutes, and the present
statutequoted in n. 1, supra.
It has long been settled that the federal priority
covers the Government’s claims for unpaid taxes.
Price v. United States,269 U. S. 492, 499–502
(1926); Massachusetts v. United States,333 U. S.
611, 625626, and n. 24 (1948).
9
“The earliest priority statute was enacted in the
Act of July 31, 1789, 1 Stat. 29, which dealt with
bonds posted by importers in lieu of payment of du-
ties for release of imported goods. It provided that
the ‘debt due to the United States’ for such duties
shall be discharged first ‘in all cases of insolvency,
or where any estate in the hands of executors or ad-
ministrators, shall be insufficient to pay all the debts
due from the deceased . . . .’ §21, 1 Stat. 42. A 1792
enactment broadened the Act’s coverage by provid-
ing that the language ‘cases of insolvency’ should be
taken to include cases in which a debtor makes a
voluntary assignment for the benefit of creditors,
and the other situations that §3466, 31 U.S.C. §191,
now covers. l Stat.263.” United States v.Moore,423
U.S., at 81.
10
“In construing the statutes on this subject, it has
been stated by the court, on great deliberation, that
the priority to which the United States are entitled,
does not partake of the character of a lienon the
property of public debtors. This distinction is al-
ways to be recollected.” United States v. Hooe,3
Cranch 73, 90 (1805).
11
Although this argument was not presented to
the state courts, respondent may defend the judg-
ment on a ground not previously raised. Heckler v.
Cainpbell,461 U. S. 458, 468–469, n. 12 (1983).
We will rarely consider such an argument, however.
Ibid.; see also Matsushita Elec. Industrial Co. v. Ep-
stien,516 U. S. 367, 379, n. 5 (1996).
IRB 1998-36 9/2/98 3:07 PM Page 16

strained” to give it any other meaning is
entitled to special respect because he was
more familiar with 18th-century usage
than judges who view the statute from a
20th-century perspective.
We cannot, however, ignore the Court’s
earlier judgment in Thelusson v. Smith,2
Wheat. 396, 426 (1817), or the more re-
cent dicta in United States v. Key,397 U.
S. 322, 324–325 (1970). In Thelusson,
the Court held that the priority statute
gave the United States a preference over
the claim of a judgment creditor who had
a general hen on the debtor’s real prop-
erty. The Court’s brief opinion
12
is sub-
ject to the interpretation that the statutory
priority always accords the Government a
preference over judgment creditors. For
two reasons, we do not accept that read-
ing of the opinion.
First, as a factual matter, in 1817 when
the case was decided, there was no proce-
dure for recording a judgment and thereby
creating a choate lien on a specific parcel
of real estate. See generally 2 L. Demb-
itz, A Treatise on Land Titles in the
United States §127, pp. 948–952 (1895).
Notwithstanding the judgment, a bona
fide purchaser could have acquired the
debtor’s property free from any claims of
the judgment creditor. See Semple v.
Burd,7 Serg. & Rawle 286, 291 (Pa.
1821) (“The prevailing object of the Leg-
islature, has uniformly been, to support
the security of a judgment creditor, by
confirming his lien, except when it inter-
feres with the circulation of property by
embarrassing a fair purchaser”). That is
not the case with respect to Romani In-
dustries’ choate hen on the property in
Cambria County.
Second, and of greater importance, in
his opinion for the Court in the Conard
case, which was joined by Justice Wash-
ington, the author of Thelusson,
13
Justice
Story explained why that holding was
fully consistent with his interpretation of
the text of the priority statute:
“The real ground of the decision,
was, that the judgment creditor had
never perfected his title, by any exe-
cution and levy on the Sedgely es-
tate; that he had acquired no title to
the proceeds as his property, and that
if the proceeds were to be deemed
general funds of the debtor, the pri-
ority of the United States to payment
had attached against all other credi-
tors; and that a mere potential lien on
land, did not carry a legal title to the
proceeds of a sale, made under an
adverse execution. This is the man-
ner in which this case has been un-
derstood, by the Judges who con-
curred in the decision; and it is
obvious, that it established no such
proposition, as that a specific and
perfected hen, can be displaced by
the mere priority of the United
States; since that priority is not of it-
self equivalent to a lien.” Conard,I
Pet., at 444.
14
The Government also relies upon dicta
from our opinion in United States v. Key,
397 U. S., at 324–325, which quoted from
our earlier opinion in United States v.
Emory,314 U.S., at 433: “Only the
plainest inconsistency would warrant our
finding an implied exception to the opera-
tion of so clear a command as that of
[§3713].” Because both Keyand Emory
were cases in which the competing claims
were unsecured, the statutory command
was perfectly clear even under Justice
Story’s construction of the statute. The
statements made in that context, of
course, shed no light on the clarity of the
command when the United States relies
on the statute as a basis for claiming a
preference over a secured creditor. In-
deed, the Keyopinion itself made this
specific point: “This case does not raise
the question, never decided by this Court,
whether §3466 grants the Government
priority over the prior specific liens of se-
cured creditors. See United States v.
Gilbert Associates, Inc.,345 U. S. 361,
365-366 (1953).” 397 U. S., at 332, n. 11.
The Keyopinion is only one of many in
which the Court has noted that despite the
age of the statute, and despite the fact that
it has been the subject of a great deal of
litigation, the question whether it has any
application to antecedent perfected liens
has never been answered definitively.
See United States v. Vermont,377 U.S.
351, 358, n. 8 (1964) (citing cases). In his
dissent in the Gilbert Associatescase,
Justice Frankfurter referred to the Court’s
reluctance to decide the issue “not only
today but for almost a century and a half.”
345 U. S., at 367.
The Government’s priority as against
specific, perfected security interests is, if
possible, even less settled with regard to
real property. The Court has sometimes
concluded that a competing creditor who
has not “divested” the debtor of “either
title or possession” has only a “general,
unperfected lien” that is defeated by the
Government’s priority. Eg., id.,at 366.
Assuming the validity of this “title or pos-
session” test for deciding whether a lien
on personal property is sufficiently choate
for purposes of the priority statute (a
question of federal law, see Illinois ex rel.
Gordon v. Campbell,329 U. S., at 371),
we are not aware of any decisions since
Thelussonapplying that theory to claims
for real property, or of any reason to re-
quire a lienor or mortgagee to acquire
possession in order to perfect an interest
in real estate.
Given the fact that this basic question
of interpretation remains unresolved, it
does not seem appropriate to view the
issue in this case as whether the Tax Lien
1998–36 I.R.B.17September 8, 1998
12
The relevant portion of the opinion reads, in
full, as follows:
“These [statutory] expressions are as general as any
which could have been used, and exclude all debts
due to individuals, whatever may be their dignity....
The law makes no exception in favour of prior judg-
ment creditors; and no reason has been, or we think
can be, shown to warrant this court in making one....
“The United States are to be first satisfied; but
then it must be out of the debtor’s estate. If, there-
fore, before the right of preference has accrued to the
United States, the debtor has made a bona fidecon-
veyance of his estate to a third person, or has mort-
gaged the same to secure a debt; or if his property
has been seized under a fi. fa.,the property is de-
vested out of the debtor, and cannot be made liable
to the United States. A judgment gives to the judg-
ment creditor a lien on the debtor’s lands, and a pref-
erence over all subsequent judgment creditors. But
the act of congress defeats this preference in favour
of the United States, in the cases specified in the
65th section of the act of 1799.” Thelusson v. Smith,
2 Wheat. 396, 425–426 (1817).
In the later Conardcase, Justice Story apologized
for Thelusson:“The reasons for that opinion are not,
owing to accidental circumstances, as fully given as
they are usually given in this Court.” Conard v. At-
lantic Ins. Co. of N. Y.,1 Pet. 386, 442 (1828).
13
Justice Washington’s opinion for this Court in
Thelussonaffirmed, and was essentially the same as,
his own opinion delivered in the Circuit Court as a
Circuit Justice. 2 Wheat., at 426, n. h.
14
Relying on this and several other cases, in 1857
the Attorney General of the United States issued an
opinion concluding that Thelusson“has been dis-
tinctly overruled” and that the priority of the United
States under this statute “will not reach back over
any hen, whether it be general or specific.” 9 Op.
Att. Gen. 28, 29. See also Kennedy 908–911 (ad-
vancing this same interpretation of the early priority
act decisions).
IRB 1998-36 9/2/98 3:07 PM Page 17

Act of 1966 has implicitly amended or re-
pealed the priority statute. Instead, we
think the proper inquiry is how best to
harmonize the impact of the two statutes
on the Government’s power to collect
delinquent taxes.
IV
In his dissent from a particularly harsh
application of the priority statute, Justice
Jackson emphasized the importance of
considering other relevant federal poli-
cies. Joined by three other Justices, he
wrote:
“This decision announces an un-
necessarily ruthless interpretation of
a statute that at its best is an arbitrary
one. The statute by which the Fed-
eral Government gives its own
claims against an insolvent priority
over claims in favor of a state gov-
ernment must be applied by courts,
not because federal claims are more
meritorious or equitable, but only
because that Government has more
power. But the priority statute is an
assertion of federal supremacy as
against any contrary state policy. It
is not a limitation on the Federal
Government itself, not an assertion
that the priority policy shall prevail
over all other federal policies. Its
generalities should not lightly be
construed to frustrate a specific pol-
icy embodied in a later federal
statute.” Massachusetts v. United
States,333 U. S. 611, 635 (1948)
(Jackson, J., dissenting).
On several prior occasions the Court
had followed this approach and concluded
that a specific policy embodied in a later
federal statute should control our con-
struction of the priority statute, even
though it had not been expressly amended.
Thus, in Cook County Nat. Bank v. United
States,107 U. S. 445, 448–451 (1883), the
Court concluded that the priority statute
did not apply to federal claims against na-
tional banks because the National Bank
Act comprehensively regulated banks’
obligations and the distribution of insol-
vent banks’ assets. And in United States v.
Guaranty Trust Co. of N.Y,280 U. S. 478,
485 (1930), we determined that the Trans-
portation Act of 1920 had effectively su-
perseded the priority statute with respect
to federal claims against the railroads aris-
ing under that Act.
The bankruptcy law provides an addi-
tional context in which another federal
statute was given effect despite the prior-
ity statute’s literal, unconditional text.
The early federal bankruptcy statutes had
accorded to “‘all debts due to the United
States, and all taxes and assessments
under the laws thereof “ a preference that
was “coextensive” with that established
by the priority statute. Guarantee Title &
Trust Co. v. Title Guaranty & Surety Co.,
224 U.S. 152, 158 (1972) (quoting the
Bankruptcy Act of 1867, Rev. Stat.
§5101). As such, the priority act and the
bankruptcy laws “were to be regarded as
in pari materia,and both were unquali-
fied; . . . as neither contained any qualifi-
cation, none could be interpolated.” Ibid.
The Bankruptcy Act of 1898, however,
subordinated the priority of the Federal
Government’s claims (except for taxes
due) to certain other kinds of debts. This
Court resolved the tension between the
new bankruptcy provisions and the prior-
ity statute by applying the former and thus
treating the Government like any other
general creditor. Id.,at 158–160; Davis v.
Pringle,268 U. S. 315, 317–319 (1925).
15
There are sound reasons for treating the
Tax Lien Act of 1966 as the governing
statute when the Government is claiming
a preference in the insolvent estate of a
delinquent taxpayer. As was the case with
the National Bank Act, the Transportation
Act of 1920, and the Bankruptcy Act of
1898, the Tax Lien Act is the later statute,
the more specific statute, and its provi-
sions are comprehensive, reflecting an
obvious attempt to accommodate the
strong policy objections to the enforce-
ment of secret hens. It represents Con-
gress’ detailed judgment as to when the
Government’s claims for unpaid taxes
should yield to many different sorts of in-
terests (including, for instance, judgment
liens, mechanic’s liens, and attorneys’
hens) in many different types of property
(including, for example, real property, se-
curities, and motor vehicles). See 26
U.S.C. §6323. Indeed, given our unam-
biguous determination that the federal in-
terest in the collection of taxes is para-
mount to its interest in enforcing other
claims, see United States v. Kimbell
Foods, Inc.,440 U. S., at 733–735, it
would be anomalous to conclude that
Congress intended the priority statute to
impose greater burdens on the citizen than
those specifically crafted for tax collec-
tion purposes.
Even before the 1966 amendments to
the Tax Lien Act, this Court assumed that
the more recent and specific provisions of
that Act would apply were they to conflict
with the older priority statute. In the
Gilbert Associatescase, which concerned
the relative priority of the Federal Gov-
ernment and a New Hampshire town to
funds of an insolvent taxpayer, the Court
first considered whether the town could
qualify as a “judgment creditor” entitled
to preference under the Tax Lien Act. 345
U.S., at 363–364. Only after deciding
that question in the negative did the Court
conclude that the United States obtained
preference by operation of the priority
statute. Id.,at 365–366. The Government
would now portray Gilbert Associatesas
a deviation from two other relatively re-
cent opinions in which the Court held that
the priority statute was not trumped by
provisions of other statutes: United States
v. Emory,314 U. S., at 429–433 (the Na-
tional Housing Act), and United States v.
Key,397 U. S., at 324–333 (Chapter X of
the Bankruptcy Act). In each of those
cases, however, there was no “plain in-
consistency” between the commands of
the priority statute and the other federal
act, nor was there reason to believe that
application of the priority statute would
frustrate Congress’ intent. Id.,at 329.
The same cannot be said in the present
suit.
The Government emphasizes that when
Congress amended the Tax Lien Act in
1966, it declined to enact the American
Bar Association’s proposal to modify the
federal priority statute, and Congress
again failed to enact a similar proposal in
1970. Both proposals would have ex-
pressly provided that the Government’s
September 8, 1998181998–36 I.R.B.
15
Congress amended the priority statute in 1978
to make it expressly inapplicable to Title 11 bank-
ruptcy cases. Pub. L. 95–598, §322(b), 92 Stat.
2679, codified in 31 U. S. C. §3713(a)(2). The dif-
ferences between the bankruptcy laws and the prior-
ity statute have been the subject of criticism: “as a
result of the continuing discrepancies between the
bankruptcy and insolvency rules, some creditors
have had a distinct incentive to throw into bank-
ruptcy a debtor whose case might have been han-
dled, with less expense and less burden on the fed-
eral courts, in another form of proceeding.” Plumb,
The Federal Priority in Insolvency: Proposals for
Reform, 70 Mich. L. Rev. 3, 8–9 (1971) (here-
inafter Plumb).
IRB 1998-36 9/2/98 3:07 PM Page 18

priority in insolvency does not displace
valid liens and security interests, and
therefore would have harmonized the pri-
ority statute with the Tax Lien Act. See
Hearings on H. R. 11256 and 11290 be-
fore the House Committee on Ways and
Means, 89th Cong., 2d Sess., 197 (1966)
(hereinafter Hearings); S. 2197, 92d
Cong., lst Sess. (1971). But both propos-
als also would have significantly changed
the priority statute in many other respects
to follow the priority scheme created by
the bankruptcy laws. See Hearings, at 85,
198; Plumb 10, n. 53, 33–37. The earlier
proposal may have failed because its
wide-ranging subject matter was beyond
the House Ways and Means Committee’s
jurisdiction. Plumb 8. The failure of the
1970 proposal in the Senate Judiciary
Committee—explained by no reports or
hearings—might merely reflect disagree-
ment with the broad changes to the prior-
ity statute, or an assumption that the pro-
posal was not needed because, as Justice
Story had believed, the priority statute
does not apply to prior perfected security
interests, or any number of other views.
Thus, the Committees’ failures to report
the proposals to the entire Congress do
not necessarily indicate that any legislator
thought that the priority statute should su-
persede the Tax Lien Act in the adjudica-
tion of federal tax claims. They provide
no support for the hypothesis that both
Houses of Congress silently endorsed that
position.
The actual measures taken by Congress
provide a superior insight regarding its in-
tent. As we have noted, the 1966 amend-
ments to the Tax Lien Act bespeak a
strong condemnation of secret liens,
which unfairly defeat the expectations of
innocent creditors and frustrate “the needs
of our citizens for certainty and conve-
nience in the legal rules governing their
commercial dealings.” 112 Cong. Rec.
22227 (1966) (remarks of Rep. Byrnes);
cf. United States v. Speers, 382 U.S. 266,
275 (1965) (referring to the “general pol-
icy against secret liens”). These policy
concerns shed light on how Congress
would want the conflicting statutory pro-
visions to be harmonized:
“Liens may be a dry-as-dust part of
the law, but they are not without sig-
nificance in an industrial and com-
mercial community where construc-
tion and credit are thought to have
importance. One does not readily
impute to Congress the intention that
many common commercial liens
should be congenitally unstable.” E.
Brown, The Supreme Court, 1957
Term—Foreword: Process of Law,
72 Harv. L. Rev. 77, 87 (1958)
(footnote omitted).
In sum, nothing in the text or the long
history of interpreting the federal priority
statute justifies the conclusion that it au-
thorizes the equivalent of a secret hen as a
substitute for the expressly authorized tax
lien that Congress has said “shall not be
valid” in a case of this kind.
The judgment of the Pennsylvania
Supreme Court is affirmed.
It is so ordered.
JUSTICESCALIAconcurring in part and
concurring in the judgment.
I join the opinion of the Court except
that portion which takes seriously, and
thus encourages in the future, an argu-
ment that should be laughed out of court.
The Government contended that 31 U. S.
C. §3713(a) must have priority over the
Federal Tax Lien Act of 1966, because in
1966 and again in 1970 Congress “failed
to enact” a proposal put forward by the
American Bar Association that would
have subordinated §3713(a) to the Tax
lien Act, citing hearings before the House
Committee on Ways and Means, and a bill
proposed in, but not passed by, the Sen-
ate. See Brief for United States 25–27,
and n. 10 (citing American Bar Associa-
tion, Final Report of the Committee on
Federal Liens 7, 122–124 (1959), con-
tained in Hearings on H. R. 11256 and
11290 before the House Committee on
Ways and Means, 89th Cong., 2d Sess.,
85, 199 (1966); S. 2197, 92d Cong., lst
Sess. (1971)). The Court responds that
these rejected proposals “provide no sup-
port for the hypothesis that both Houses
of Congress silently endorsed” the su-
premacy of §3713, ante,at 16, because
those proposals contained other provi-
sions as well, and might have been re-
jected because of those other provisions,
or because Congress thought the existing
law already made §3713 supreme. This
implies that, if the proposals had not con-
tained those additional features, or if
Members of Congress (or some part of
them) had somehow made clear in the
course of rejecting them that they wanted
the existing supremacy of the Tax Lien
Act to subsist, the rejection would“pro-
vide support” for the Government’s case.
That is not so, for several reasons. First
and most obviously, Congress can not-
express its will by a failure to legislate.
The act of refusing to enact a law (if that
can be called an act) has utterly no legal
effect, and thus has utterly no place in a
serious discussion of the law. The Consti-
tution sets forth the only manner in which
the Members of Congress have the power
to impose their will upon the country: by
a bill that passes both Houses and is either
signed by the President or repassed by a
supermajority after his veto. Art. 1, §7.
Everything else the Members of Congress
do is either prelude or internal organiza-
tion. Congress can no more express its
will by not legislating than an individual
Member can express his will by not vot-
ing.
Second, even if Congress couldexpress
its will by not legislating, the will of a
later Congress that a law enacted by an
earlier Congress should bear a particular
meaning is of no effect whatever. The
Constitution puts Congress in the busi-
ness of writing new laws, not interpreting
old ones. “[L]ater-enacted lows . . . do
not declare the meaning of earlier law.”
Almendarez-Torres v. United States,523
U. S.
(1998) (slip op., at 12);id.,
at (SCALIA, J., dissenting) (“This later
amendment can of course not cause [the
statute] to have meant, at the time of peti-
tioner’s conviction, something different
from what it then said”) (slip op., at 23).
If the enactedintent of a later Congress
cannot change the meaning of an earlier
statute, then it should go without saying
that the later unenacted intentcannot pos-
sibly do so. It should go without saying,
and it should go without arguing as well.
I have in the past been critical of the
Court’s using the so-called legislative his-
tory of an enactment (hearings, commit-
tee reports, and floor debates) to deter-
mine its meaning. See, e.g., Conroy v.
Aniskoff,507 U. S. 511, 518–529 (1993)
(SCAUA, J., concurring in judgment);
United States v. Thompson/Center Arms
Co.,504 U. S. 505, 521 (1992) (S
CALIA,
J., concurring in judgment); Blanchard v.
Bergeron,489 U. S. 87, 98–100 (1989)
(SCALIA, J., concurring in part and con-
curring in judgment). Today, however,
1998–36 I.R.B.19September 8, 1998
IRB 1998-36 9/2/98 3:07 PM Page 19

the Court’s fascination with the files of
Congress (we must consult them, because
they are there) is carried to a new silly ex-
treme. Today’s opinion ever-so-carefully
analyzes, not legislative history, but the
history of legislation-that never-was. If
we take this sort of material seriously, we
require conscientious counsel to investi-
gate (at clients’ expense) not only the
hearings, committee reports, and floor de-
bates pertaining to the history of the law
at issue (which is bad enough), but to
find, and then investigate the hearings,
committee reports, and floor debates per-
taining to, later bills on the same subject
that were never enacted. This is beyond
all reason, and we should say so.
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 1998. See Rev. Rul. 98–43, page 9.
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 September 1998. See Rev. Rul. 98–43, page 9.
September 8, 1998201998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 20

Returns Relating to Higher
Education Tuition and Related
Expenses
Notice 98–46
PURPOSE
This notice provides that the Internal
Revenue Service and the Treasury Depart-
ment are extending the application of No-
tice 97–73, 1997–51 I.R.B. 16, to informa-
tion reporting required under § 6050S of
the Internal Revenue Code for 1999.
BACKGROUND
Section 6050S, enacted by the Tax-
payer Relief Act of 1997, Pub. L. No.
105–34, § 201(c), 111 Stat. 804, requires
the filing of information returns to assist
taxpayers and the Service in determining
the Hope Scholarship credit and the Life-
time Learning credit that taxpayers may
claim pursuant to § 25A of the Code.
Section 6050S requires that institutions
file the specified information returns with
the Service and provide a corresponding
statement to the individuals named on the
information return showing the informa-
tion that has been reported.
The requirements of § 6050S are gener-
ally described in Notice 97–73, along
with specific information reporting re-
quirements for 1998. However, as a re-
sult of amendments to § 6050S made by
the Internal Revenue Service Restructur-
ing and Reform Act of 1998, Pub. L. No.
105–206, 112 Stat. 685, certain informa-
tion reporting requirements under
§ 6050S have been clarified or changed.
First, the amendments clarify that
§ 6050S requires institutions to report the
aggregate amount of payments made with
respect to each student for qualified tu-
ition and related expenses without any
amounts being subtracted for qualified
scholarships or other tax-free educational
assistance received with respect to the
student. Further, § 6050S(b)(2)(C), as
amended, specifically requires that the
amount of any grant received by the stu-
dent for payment of costs of attendance
and processed by the institution making
the information return be reported as a
separate item. Section 6050S(b)(2)(C)
was also amended to clarify that an insti-
tution must report only the aggregate
amount of reimbursements and refunds of
qualified tuition and related expenses paid
to a student by the institution (and not by
any other party). Finally, § 6050S(a) was
amended to clarify that only eligible edu-
cational institutions and persons engaged
in a trade or business of making payments
to individuals under insurance arrange-
ments are required to report information
under § 6050S. In all other respects, the
requirements of § 6050S remain the same
as described in Notice 97–73.
The Treasury Department intends to
issue regulations soon on the information
reporting requirements of § 6050S. In
light of the recent statutory changes and
legislative history prepared in connection
with those changes indicating Congress’s
intent that Notice 97–73 remain in effect
until the regulations are issued, the Ser-
vice is extending the application of Notice
97-73 for an additional year, i.e.,to infor-
mation reporting required under § 6050S
for 1999.
DISCUSSION
For 1999, eligible educational institu-
tions must follow the rules provided in
Notice 97–73 for reporting information
required under § 6050S. For example, an
eligible educational institution that re-
ceives payments of qualified tuition and
related expenses in 1999 must file a Form
1098-T, Tuition Payments, that includes
the same information that was required by
Notice 97–73 for 1998. The Forms 1098–
T must be filed with the Service by Febru-
ary 28, 2000, if filed on paper or by mag-
netic media, or by March 31, 2000, if
filed electronically. A statement contain-
ing the same information as the Form
1098-T filed with the Service must be fur-
nished to the student by January 31, 2000.
Similarly, Notice 97–73 applies for 1999
with respect to how penalties will be ad-
ministered under §§ 6721 and 6722 for in-
formation returns required under § 6050S.
EFFECT ON OTHER DOCUMENTS
Notice 97–73 is modified.
DRAFTING INFORMATION
The principal author of this notice is
John J. McGreevy of the Office of the As-
sistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this notice contact him on (202)
622-4910 (not a toll-free call).
26 CFR 1.472–2: Requirements incident to
adoption and use of LIFO inventory method.
(Also Part I, § 472; § 1.472–1.)
Rev. Proc. 98–46
SECTION 1. PURPOSE
.01 This revenue procedure modifies
Rev. Proc. 97–44, 1997–41 I.R.B. 8,
which provides relief for automobile and
light-duty truck dealers that elected the
last-in, first-out (LIFO) inventory method
and violated the LIFO conformity re-
quirement of § 472(c) or (e)(2) of the In-
ternal Revenue Code by providing, for
credit purposes, an income statement pre-
pared in a format required by the fran-
chisor or on a pre-printed form supplied
by the franchisor (an automobile manu-
facturer), covering any taxable year ended
on or before October 14, 1997, that fails
to reflect the LIFO inventory method.
.02 Rev. Proc. 97–44 is modified to ex-
tend the relief provided in that revenue
procedure to medium- and heavy-duty
truck dealers that comply with Rev. Proc.
97–44 as modified herein. In addition,
Rev. Proc. 97–44 is modified to extend the
due dates for medium- and heavy-duty
truck dealers to make installment pay-
ments of the settlement amount computed
in accordance with that revenue procedure.
SECTION 2. MODIFICATIONS
.01 Section 1 of Rev. Proc. 97–44 is
modified by adding the words “and truck”
after the word “automobile” in the first
and third sentences, and by adding the
words “or truck” after the word “automo-
bile” in the parenthetical phrase in the
first sentence.
.02 Section 3 of Rev. Proc. 97–44 is
modified by replacing the words “light-
duty” with the words “light-, medium-, or
heavy-duty” in the first sentence and by
adding the words “or truck” after the
word “automobile” in the parenthetical
phrase in the first sentence.
.03 Section 5.02(2) of Rev. Proc. 97–44
is modified by replacing the words “light-
1998–36 I.R.B.21September 8, 1998
Part III. Administrative, Procedural, and Miscellaneous
IRB 1998-36 9/2/98 3:07 PM Page 21

duty” with the words “light-, medium-,
and heavy-duty” in the second sentence.
.04 Section 5.03(1) of Rev. Proc. 97–44
is modified by replacing the second sen-
tence with the following two sentences:
Except as provided in section
5.03(2) or (3) of this revenue proce-
dure, the first installment and the
memorandum described in section
5.04 of this revenue procedure are
due on or before May 31, 1998, in
the case of inventory related to the
purchase, sale, and service of auto-
mobiles or light-duty trucks. Except
as provided in section 5.03(2) or (3)
of this revenue procedure, the first
installment and the memorandum
described in section 5.04 of this rev-
enue procedure are due on or before
January 31, 1999, in the of case in-
ventory related to the purchase, sale,
and service of medium- or heavy-
duty trucks.
.05 Section 5.03(2) of Rev. Proc. 97–44
is modified by replacing section 5.03(2)
with the following paragraph:
(2) Taxpayers under examination,
before appeals, or before a federal
court. If any federal income tax re-
turn of a taxpayer is under examina-
tion, before an appeals office, or be-
fore a federal court on October 14,
1997, the first installment of the set-
tlement amount and the memoran-
dum described in section 5.04 of this
revenue procedure with respect to in-
ventory related to the purchase, sale,
and service of automobiles and light-
duty trucks are due on or before De-
cember 1, 1997. Such a taxpayer
must notify the examining agent(s),
appeals officer, or the counsel for the
government, whichever is applica-
ble, in writing on or before Decem-
ber 15, 1997, that it has applied for
relief under this revenue procedure.
If any federal income tax return of a
taxpayer is under examination, be-
fore an appeals office, or before a
federal court on September 8, 1998,
the first installment of the settlement
amount and the memorandum de-
scribed in section 5.04 of this rev-
enue procedure with respect to in-
ventory related to the purchase, sale,
and service of medium- and heavy-
duty trucks are due on or before De-
cember 1, 1998. Such a taxpayer
must notify the examining agent(s),
appeals officer, or the counsel for the
government, whichever is applica-
ble, in writing on or before Decem-
ber 15, 1998, that it has applied for
relief under this revenue procedure.
For these purposes, the terms “under
examination,” “before an appeals of-
fice,” and “before a federal court”
have the same meaning as provided
in Rev. Proc. 97–27, 1997–21
I.R.B. 10. Evidence that the first in-
stallment has been paid and a copy
of the memorandum described in
section 5.04 of this revenue proce-
dure must be provided as part of this
written notification.
.06 Section 5.03(3) of Rev. Proc. 97–44
is modified by replacing section 5.03(3)
with the following paragraph:
(3) Option to pay settlement
amount in one installment.A tax-
payer may elect to pay the entire set-
tlement amount in one installment.
If a taxpayer makes this election, the
entire settlement amount and the
original memorandum described in
section 5.04 of this revenue proce-
dure with respect to inventory re-
lated to the purchase, sale, and ser-
vice of automobiles and light-duty
trucks are due on or before May 31,
1998, or, if any federal income tax
return of such taxpayer is under ex-
amination, before an appeals office,
or before a federal court, on or be-
fore December 1, 1997. The entire
settlement amount and the original
memorandum described in section
5.04 of this revenue procedure with
respect to inventory related to the
purchase, sale, and service of
medium- and heavy-duty trucks are
due on or before January 31, 1999,
or, if any federal income tax return
of such taxpayer is under examina-
tion, before an appeals office, or be-
fore a federal court, on or before De-
cember 1, 1998.
.07 Section 7.02 of Rev. Proc. 97–44 is
modified by deleting the words “light-
duty” in the first sentence.
.08 Section 9 of Rev. Proc. 97–44 is
modified by adding the words “or trucks”
after the word “automobiles” in the third
sentence of the third paragraph.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jeffery G. Mitchell of the Of-
fice of Assistant Chief Counsel (Income
Tax & Accounting). For further informa-
tion regarding this revenue procedure,
contact Mr. Mitchell on (202) 622-4970
(not a toll-free call).
September 8, 1998221998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 22

Notice of Proposed Rulemaking
and Notice of Public Hearing
Termination of Puerto Rico and
Possession Tax Credit; New
Lines of Business Prohibited
REG–115446–97
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. 8778 on page 4, the
IRS is issuing temporary regulations that
provide guidance regarding the addition
of a substantial new line of business by a
possessions corporation that is an existing
credit claimant. These regulations reflect
changes made by the Small Business Job
Protection Act of 1996. 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 must be re-
ceived by November 17, 1998. Requests
to speak and outlines of topics to be dis-
cussed at the public hearing scheduled for
Tuesday, December 1, 1998, at 10 a.m.
must be received by Tuesday, November
10, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–115446–97),
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–
115446–97), Courier’s Desk, Internal Rev-
enue Service, 1111 Constitution Avenue,
NW, Washington, DC. Alternatively, tax-
payers may submit comments electroni-
cally via the Internet by selecting the “Tax
Regs” option on the IRS Home Page, or by
submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.
gov/prod/tax_regs/comments.html. The
public hearing will be held in room 2615,
Internal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Patri-
cia A. Bray or Elizabeth Beck, (202) 622-
3880 or Jacob Feldman, (202) 622-3830;
concerning submissions and the hearing,
Michael Slaughter, (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary Regulations in T.D. 8778
amend Income Tax Regulations (26 CFR
Part 1) relating to section 936. Section
1.936–11T, published in T.D. 8778, pro-
vides guidance to possessions corpora-
tions that could lose their status as an ex-
isting credit claimant, and, as a result,
their right to claim the possession tax
credit, due to the addition of a substantial
new line of business.
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 Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory 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 regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business 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 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 December 1, 1998, at 10 a.m., in room
2615, Internal Revenue Building, 1111
Constitution Ave., NW, Washington, DC.
Because of access restrictions, visitors
will not be admitted beyond the Internal
Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to this hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments and an outline of the topic
(preferably a signed original and eight (8)
copies) to be discussed by November 10,
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 regulations
is Patricia A. Bray of the Office of the As-
sociate Chief Counsel (International).
Other personnel from the IRS and the De-
partment of the Treasury participated in the
development of these regulations.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.936–11 also issued under 26
U.S.C. 936. * * *
Par. 2. Section 1.936–11 is added to
read as follows:
§1.936–11 New lines of business
prohibited.
[The text of this proposed section is the
same as the text of §1.936–11T published
in T.D. 8778.]
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
1998–36 I.R.B.23September 8, 1998
Part IV. Items of General Interest
IRB 1998-36 9/2/98 3:07 PM Page 23

(Filed by the Office of the Federal Register on
August 18, 1998, 8:45 a.m., and published in the
issue of the Federal Register for August 19, 1998, 63
F.R. 44416)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Pass Through of Items of an S
Corporation to its Shareholders
REG–209446–82
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to the pass
through of items of an S corporation to its
shareholders, the adjustments to the basis
of stock of the shareholders, and the treat-
ment of distributions by an S corporation.
Changes to the applicable law were made
by the Subchapter S Revision Act of 1982,
the Tax Reform Act of 1984, the Tax Re-
form Act of 1986, the Technical and Mis-
cellaneous Revenue Act of 1988, and the
Small Business Job Protection Act of 1996.
These proposed regulations provide the
public with guidance needed to comply
with the applicable law and will affect S
corporations and their shareholders. This
document also contains a notice of public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by November 16, 1998. Outlines
of topics to be discussed at the public
hearing scheduled for Tuesday, December
15, 1998, at 10 a.m. must be received by
Tuesday, November 24, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209446–82),
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–209446–82), 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 IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations under
section 1366, Deane M. Burke or Terri A.
Belanger, (202) 622-3070; concerning the
regulations under sections 1367 and 1368,
Brenda Stewart, (202) 622-3120; con-
cerning submissions and the hearing,
Michael Slaughter, (202) 622-7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accor-
dance with the Paperwork Reduction Act
of 1995 (44 U.S.C. 3507(d)). Comments
on the collection of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the De-
partment of the Treasury, Office of Infor-
mation and Regulatory Affairs, Washing-
ton, DC 20503, with copies to the
Internal Revenue Service,Attn: IRS Re-
ports Clearance Officer, OP:FS:FP, Wash-
ington, DC 20224. Comments on the col-
lection of information should be received
by October 19, 1998. Comments are
specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up cost and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this
proposed regulation is in §1.1366–1. This
information is required in order for a
shareholder in an S corporation to prop-
erly compute its tax liability. This infor-
mation will be used to determine whether
the amount of tax has been computed cor-
rectly. Responses to this collection of in-
formation are mandatory for shareholders
in S corporations. The likely respondents
are individuals and businesses or other
for-profit institutions.
The reporting burden contained in
§1.1366–1 is reflected in the burden of
Form 1040, U.S. Individual Income Tax
Return, and Form 1120S, U.S. Income
Tax Return for an S Corporation.
Newly designated §1.1367–1(g) does
not impose a new collection of informa-
tion. The election in newly designated
§1.1367–1(g), previously contained in
§1.1367–1(f), was approved by OMB
under OMB Control Number 1545–1139.
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.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under sections
1366, 1367, and 1368 of the Internal Rev-
enue Code of 1986 (Code). Sections
1366, 1367, and 1368 were added by the
Subchapter S Revision Act of 1982 (1982
Act) (Public Law 97–354, 96 Stat. 1669,
1697). Section 1366 was amended by the
Tax Reform Act of 1984 (Public Law 98–
369, 98 Stat. 844, 985), the Tax Reform
Act of 1986 (Public Law 99-514, 100
Stat. 2085, 2277, 2343), the Technical and
Miscellaneous Revenue Act of 1988
(Public Law 100–647, 102 Stat. 3406),
and the Small Business Job Protection Act
of 1996 (1996 Act) (Public Law 104–188,
110 Stat. 1755).
Sections 1367 and 1368 were amended
by the Technical Corrections Act of 1982
(Public Law 97–448, 96 Stat. 2365,
2399–2400), the Tax Reform Act of 1984
(Public Law 98–369), and the Tax Reform
September 8, 1998241998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 24

Act of 1986 (Public Law 99–514). Final
regulations conforming the regulations to
these amendments were published in the
Federal Registeron January 3, 1994. The
proposed amendments would conform the
regulations to amendments made to sec-
tions 1367 and 1368 by the 1996 Act.
Explanation of Provisions
Determination of Shareholder’s Tax
Liability
Under section 1363, an S corporation
generally computes its taxable income in
the same manner as an individual, subject
to certain modifications. Thus, for exam-
ple, an S corporation is not entitled to a
dividends received deduction under sec-
tion 243.
Section 1366(a)(1) and the proposed
regulations provide rules under which a
shareholder of an S corporation takes into
account the shareholder’s pro rata share,
as defined under section 1377, of the cor-
poration’s items of income, loss, deduc-
tion, or credit. A shareholder’s share of
these items is determined for the share-
holder’s taxable year in which the taxable
year of the S corporation ends. If a share-
holder dies before the end of the corpora-
tion’s taxable year, the shareholder’s pro
rata share of these items is taken into ac-
count in the shareholder’s final tax return.
If a shareholder is an estate or trust, and
the estate or trust terminates before the
end of the corporation’s taxable year, the
shareholder’s pro rata share of these items
is taken into account in the shareholder’s
final tax return.
In the case of most items that must be
separately stated by an S corporation, the
provisions by which an S corporation ac-
counts to its shareholders for tax purposes
under section 1366 closely parallel the
provisions for a partnership accounting to
its partners under section 702. The pro-
posed regulations provide rules outlining
this general pass-through scheme for S
corporations to their shareholders.
Under section 1366(a)(1)(A), an S cor-
poration’s items of income, loss, deduc-
tion, and credit must be separately stated
if their separate treatment on any share-
holder’s income tax return could affect
the shareholder’s tax liability. These sep-
arately stated items include, but are not
limited to, short-term and long-term capi-
tal gain or loss, other items that may be
relevant to the shareholder in the compu-
tation of the shareholder’s tax liability re-
sulting from the sale or exchange of capi-
tal assets or assets described in section
1231(b), tax-exempt income, section
170(c) charitable contributions, certain
foreign taxes, items used in determining
certain credits, certain itemized deduc-
tions, items of portfolio income or loss
and related expenses under section 469,
and the corporation’s adjustments in com-
puting alternative minimum tax under
sections 56 and 58 and any items of tax
preference under section 57. All items of
income, loss, and deduction that are not
separately stated must be combined to
compute the nonseparately computed in-
come or loss of the S corporation under
section 1366(a)(1)(B).
Identification of Tax-exempt Income
The proposed regulations define tax-
exempt income as income that is perma-
nently excludible from the gross income
of an S corporation and its shareholders in
all circumstances in which the relevant
Code section applies. For example, tax-
exempt income includes proceeds of life
insurance contracts that are payable by
reason of an individual’s death and that
are excludible from gross income under
section 101, and interest on state and local
bonds that is excludible from gross in-
come under section 103.
However, income that is excludible
from gross income pursuant to a provi-
sion of the Code that might have the ef-
fect of deferring income to the S corpora-
tion or its shareholders is not tax-exempt
income. For example, income from im-
provements by a lessee on a lessor’s
property that is excludible from gross in-
come under section 109 is not tax-exempt
income because, for example, the lessor
would recognize the value of the im-
provements as income when the property
is sold by the lessor. Similarly, income
from the discharge of indebtedness that is
excludible from gross income under sec-
tion 108 does not constitute tax-exempt
income because the attribute reduction
provisions of section 108(b) have the ef-
fect of deferring the recognition of such
income in some circumstances while per-
manently excluding it, in whole or in part,
in other circumstances.
Treasury and the IRS believe that Con-
gress intended that section 108 would
allow taxpayers to avoid the immediate
adverse tax consequences that could oth-
erwise result from the inclusion of income
from discharge of indebtedness. The de-
ferral of income excluded under section
108(a)(1) by reducing the basis of prop-
erty or other tax attributes is one method
of achieving this purpose. For example,
the legislative history of section
108(a)(1)(D) provides that the exclusion
from gross income for discharge of quali-
fied real property business indebtedness
income simply defers income to the
shareholders of an S corporation and does
not result in an adjustment to the basis of
the stock of the corporation. See H.R.
Rep. No. 111, 103d Cong., 1st Sess. 625
(1993); H.R. Conf. Rep. No. 213, 103d
Cong., 1st Sess. 555 (1993).
Other specific rules apply to the dis-
charge of indebtedness of an S corpora-
tion. See section 108(d)(7). The legisla-
tive history of section 108(d)(7)(A)
provides that in order to treat all share-
holders in the same manner, the exclusion
of income arising from discharge of in-
debtedness and the corresponding reduc-
tions in tax attributes (including losses
that are not allowed by reason of any
shareholder’s basis limitation) are made
at the corporate level. See H.R. Rep. No.
432, 98th Cong., 2d Sess., pt. 2, 1640–41
(1984). Furthermore, the legislative his-
tory of section 108 indicates that any can-
cellation of indebtedness income re-
maining after the reduction of the S
corporation’s tax attributes does not result
in income or have other tax conse-
quences. See S. Rep. No. 1035, 96th
Cong., 2d Sess. 2 (1980). Thus, the ab-
sence of a stock basis increase for income
of an S corporation excluded under sec-
tion 108(a) is consistent with the legisla-
tive history of section 108 (and its pur-
pose to avoid the immediate adverse tax
consequences that could otherwise result
from the inclusion of income from dis-
charge of indebtedness) and the specific
rules that apply to the discharge of indebt-
edness income of S corporations.
Finally, even though a partner is enti-
tled to an increase in the basis of the part-
ner’s interest for income from discharge
of indebtedness of a partnership that is ex-
cluded under section 108(a), a share-
holder of an S corporation is not entitled
to an increase in stock basis under similar
circumstances. This difference is appro-
1998–36 I.R.B.25September 8, 1998
IRB 1998-36 9/2/98 3:07 PM Page 25

priate because the principal provisions of
section 108 are applied at the corporate
level in the case of an S corporation but at
the partner level in the case of a partner-
ship. See section 108(d)(6). A basis in-
crease in the partner’s interest in the part-
nership is necessary in order to apply
these provisions at the partner level be-
cause, for example, the income may prop-
erly be excluded by some partners and in-
cluded by others, and in order to offset the
basis reduction that will occur under sec-
tion 752(b) as the result of the deemed
distribution arising out of the decrease in
the partner’s share of partnership liabili-
ties. These considerations are not present
in the case of an S corporation.
Accordingly, Treasury and the IRS be-
lieve that income excluded by an S corpo-
ration pursuant to section 108 is not tax-
exempt income for purposes of section
1366 whether or not the application of
section 108 in a particular circumstance
results in the permanent exclusion, in
whole or in part, of income. See also Nel-
son v. Commissioner,110 T.C. 114
(1998).
Pass Through of Character and Gross
Income
Consistent with the adoption of parallel
operational rules between sections 702
and 1366, the items of an S corporation
are generally characterized in the same
manner that partnership items are charac-
terized. The partnership rules provide
that the character of a partnership item re-
ported by a partner is generally deter-
mined at the entity level under a conduit
rule. The proposed regulations provide a
similar conduit rule under which the char-
acter of a corporate item that is passed
through to and reported by a shareholder
is generally determined at the corporate
level. However, exceptions to the general
rule apply for contributions of either non-
capital gain property or capital loss prop-
erty if an S corporation is formed or
availed of by any shareholder or share-
holders for a principal purpose of selling
or exchanging the property to alter the
character of the gain or loss. The charac-
ter of the gain or loss will be the same as
it would have been if the property were in
the hands of the shareholder or sharehold-
ers at the time of the sale or exchange.
Section 1366(c), like section 702(c),
provides for the pass through of gross in-
come to a shareholder for federal income
tax purposes. Thus, where it is necessary
to determine the amount or character of
the gross income of a shareholder, the
shareholder’s gross income includes the
shareholder’s pro rata share of the gross
income of the S corporation. This amount
is the amount of gross income of the cor-
poration used to derive the shareholder’s
pro rata share of S corporation taxable in-
come or loss. See Rev. Rul. 87–121
(1987–2 C.B. 217).
Limitation on Losses and Deductions
In general, section 1366(d)(1) and the
proposed regulations provide that the
amount of losses and deductions taken
into account by a shareholder for any tax-
able year may not exceed the sum of the
shareholder’s adjusted bases in the stock
of the S corporation and in any indebted-
ness of the S corporation to the share-
holder. Moreover, any loss or deduction
for the taxable year not taken into account
by a shareholder by reason of the basis
limitation rule is treated under section
1366(d)(2) and the proposed regulations
as incurred by the corporation with re-
spect to that shareholder in the corpora-
tion’s first succeeding taxable year, and
subsequent taxable years. For purposes
of the basis limitation rule in section
1366(d), the basis of stock acquired by
gift is the basis of the stock for determin-
ing loss under section 1015. The basis
rules under section 1015 operate to mini-
mize the loss recognized by a donee upon
the sale or exchange of the loss stock ac-
quired by gift. Therefore, the basis limi-
tation rule limits a donee shareholder’s
pass-through items of loss or deduction to
the basis used for determining loss upon
the sale or exchange of the stock acquired
by gift.
The proposed regulations provide that
if a shareholder’s aggregate pro rata share
of the items of loss and deduction exceeds
the sum of the shareholder’s adjusted
bases in stock and debt, the limitation on
losses and deductions must be allocated
among the shareholder’s pro rata share of
each loss or deduction. This allocation is
determined by taking the proportion that
each loss or deduction bears to the total of
all losses and deductions, including those
previously disallowed.
Also under the proposed regulations, a
shareholder’s disallowed losses and de-
ductions are personal to that shareholder
and cannot be transferred. Moreover, if a
shareholder transfers all of the share-
holder’s stock in an S corporation, any
disallowed loss or deduction is perma-
nently disallowed.
The proposed regulations provide spe-
cial rules for a shareholder to carry over
disallowed losses and deductions to any
post-termination transition period. Those
special rules generally follow the limita-
tion rules provided in the proposed regu-
lations for years in which the S corpora-
tion election is in effect, except that the
amount of losses and deductions that may
be taken into account is limited to the ad-
justed basis of the shareholder’s stock
(rather than stock and debt) in the corpo-
ration determined at the close of the post-
termination transition period. See section
1366(d)(3)(B).
Finally, the proposed regulations pro-
vide rules regarding the carryover of dis-
allowed losses and deductions in the
event of certain corporate reorganizations.
If a corporation acquires, in a transaction
to which section 381(a) applies, the assets
of another S corporation for which disal-
lowed losses and deductions would carry
over with respect to a shareholder under
section 1366(d)(2), except for the reorga-
nization, the losses and deductions will be
available to that shareholder. Where the
acquiring corporation is an S corporation,
the losses and deductions will be treated
as incurred by the acquiring S corporation
with respect to that shareholder. Where
the acquiring corporation is a C corpora-
tion, the proposed regulations provide
special rules for a shareholder to carry
over disallowed losses and deductions to
any post-termination transition period
under section 1377 if the shareholder is a
shareholder of the C corporation after the
transaction.
In the case of an S corporation that
transfers a part of its assets constituting an
active trade or business to another corpo-
ration in a transaction to which section
368(a)(1)(D) applies, and immediately
thereafter the stock and securities of the
controlled corporation are distributed in a
distribution or exchange to which section
355 (or so much of section 356 as relates
to section 355) applies, any disallowed
loss or deduction with respect to a share-
holder of the distributing corporation im-
mediately before the transaction is allo-
September 8, 1998261998–36 I.R.B.
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cated between the distributing corporation
and the controlled corporation with re-
spect to the shareholder. This allocation
is made in proportion to the fair market
value of the shareholder’s stock of the
distributing corporation and the share-
holder’s stock of the controlled corpora-
tion, determined immediately after the
transaction.
Treatment of Family Group
In general, the proposed regulations
provide for the reallocation of items of the
corporation among family members under
certain conditions. Section 1366(e) re-
quires a determination of whether an indi-
vidual family member who renders ser-
vices for or provides capital to the S
corporation has received reasonable com-
pensation. The proposed regulations pro-
vide that in determining a reasonable al-
lowance for services rendered for, or
capital furnished to, the S corporation, all
the facts and circumstances are consid-
ered, including the amount that ordinarily
would be paid in order to obtain compara-
ble services or capital from a person who
is neither a member of that family nor a
shareholder in the corporation.
For purposes of section 1366(e), simi-
lar rules apply to services rendered, or
capital furnished, to an S corporation by a
pass-through entity in which a member of
a shareholder’s family holds an interest.
The proposed regulations provide that if
the pass-through entity does not receive
reasonable compensation for the services
rendered or capital furnished, the Com-
missioner may prescribe adjustments to
the pass-through entity and the corpora-
tion as necessary to reflect the value of
the services rendered or capital furnished.
Special Rules
Section 1366(f) and the proposed regu-
lations provide special rules limiting the
pass through of certain items of an S cor-
poration to its shareholders. Section
1366(f)(1) and the proposed regulations
provide that the pass-through rules under
section 1366(a) are inapplicable with re-
spect to any credit allowable under sec-
tion 34 (relating to certain uses of gaso-
line and special fuels). In addition,
section 1366(f)(2) and (3) and the pro-
posed regulations provide for a reduction
in the pass through of items for tax im-
posed on an S corporation under section
1374 or section 1375.
Adjustments to Basis of Stock
Section 1367(a) and §1.1367–1 pre-
scribe adjustments required by subchapter
S to the basis of a shareholder’s stock in
an S corporation and the manner in which
those adjustments are made. Section
1.1367–1 requires a shareholder in an S
corporation to adjust the basis of the
shareholder’s stock for items of income
and loss for any taxable year before ad-
justing the basis for distributions.
Section 1309 of the 1996 Act amended
section 1368 to require that in the case of
any distribution made during any taxable
year, the adjusted basis of the stock is deter-
mined with regard to the adjustments pro-
vided in section 1367(a)(1) for the taxable
year. Thus, the adjustments for distribu-
tions made by the S corporation during the
taxable year are taken into account before
applying the loss limitation for the year.
The proposed regulations amend
§1.1367–1 to provide that for taxable
years of the corporation beginning on or
after August 18, 1998, adjustments to the
basis of a share of stock are made in the
following order: (1) increases for income
items and the excess of deductions for de-
pletion over the basis of the property sub-
ject to depletion; (2) decreases for distrib-
utions; (3) decreases for noncapital,
nondeductible expenses, and certain oil
and gas depletion deductions; and (4) de-
creases for items of loss or deduction.
Adjustments Required Before
Determining Tax Effect of Distribution
Section 1368 provides rules for deter-
mining the source of a distribution made
by an S corporation with respect to its
stock and the tax effect of the distribution
on the shareholders. Under §1.1368–1,
the determination whether a distribution
is made out of the accumulated adjust-
ments account (AAA) or earnings and
profits is made only after the AAA has
been adjusted to reflect: (1) increases for
income items (other than income that is
exempt from tax) and the excess of the
deductions for depletion over the basis of
the property subject to depletion; (2) de-
creases for noncapital, nondeductible ex-
penses (other than federal taxes attribut-
able to any taxable year in which the
corporation was a C corporation and ex-
penses related to income that is exempt
from tax); (3) decreases for certain oil and
gas depletion deductions; (4) decreases
for items of loss or deduction; and (5) the
effect of certain redemptions.
Consistent with the proposed amend-
ments to §1.1367–1, the proposed regula-
tions amend §1.1368–2 to provide that for
taxable years of the corporation beginning
on or after August 18, 1998, the adjust-
ments to the AAA are made in the same
order as the adjustments to the basis of a
share of stock under §1.1367–1 of the
proposed regulations. For purposes of de-
termining the amount of any distribution
made from the AAA, decreases to the
AAA to reflect distributions are made
without taking into account any net nega-
tive adjustments as defined in section
1368(e)(1)(C)(ii).
Section 1311(a) of the 1996 Act gener-
ally eliminated the S corporation earnings
and profits of a corporation accumulated
in those taxable years beginning before
January 1, 1983, for which the corpora-
tion was an electing small business corpo-
ration under the provisions of subchapter
S of the Code as then in effect, if the cor-
poration was also an S corporation for its
first taxable year beginning after Decem-
ber 31, 1996. Several provisions of the
existing final regulations under subchap-
ter S, which were adopted before the 1996
Act amendments, refer separately to S
corporation earnings and profits and C
corporation earnings and profits. See,
e.g., §1.1368–1(f)(2)(iii). Treasury and
the IRS specifically request comments on
the extent, if any, to which these regula-
tions should be amended in view of the
general elimination of S corporation earn-
ings and profits. Treasury and the IRS
also request comments on whether section
1311(a) of the 1996 Act applies to quali-
fied casualty insurance electing small
business corporations and qualified oil
corporations, within the meaning of sec-
tion 6(c) of the 1982 Act.
Proposed Effective Date
The regulations under section 1366 and
the amendments to the regulations under
sections 1367 and 1368 are proposed to
be effective for taxable years of the cor-
poration beginning on or after August 18,
1998.
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Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory 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. It is hereby cer-
tified that the collection of information in
these regulations will not have a signifi-
cant economic impact on a substantial
number of small entities. This certifica-
tion is based upon the fact that these regu-
lations do not impose a collection of infor-
mation that is not already required by the
underlying statute or the current regula-
tions and reflected in the appropriate
forms. 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 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 com-
ments that are submitted timely (a signed
original and eight (8) copies) to the IRS.
All comments will be made available for
public inspection and copying.
A public hearing has been scheduled for
Tuesday, December 15, 1998, at 10 a.m. in
room 2615, Internal Revenue Building,
1111 Constitution Avenue NW, Washing-
ton, DC. Because of access restrictions,
visitors will not be admitted beyond the
Internal Revenue Building lobby more
than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit written
comments (a signed original and eight (8)
copies) by November 16, 1998. The out-
line of topics to be discussed at the hear-
ing must be received by Tuesday, Novem-
ber 24, 1998.
A period of 10 minutes will be allotted
for 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 authors of these proposed
regulations are Deane M. Burke, Terri A.
Belanger, and Brenda Stewart of the Of-
fice of Chief Counsel (Passthroughs and
Special Industries), Internal Revenue Ser-
vice. However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 continues to read in part:
Authority: 26 U.S.C. 7805 * * *
§§1.1366–1 and 1.1366–2 [Removed]
Par. 2. Sections 1.1366–1 and
1.1366–2 are removed.
Par. 3. Sections 1.1366–0 through
1.1366–5 are added to read as follows:
§1.1366–0 Table of contents.
The following table of contents is pro-
vided to facilitate the use of §§1.1366–1
through 1.1366–5:
§1.1366–1 Shareholder’s share of items
of an S corporation.
(a) Determination of shareholder’s tax
liability.
(1) In general.
(2) Separately stated items of income,
loss, deduction, or credit.
(3) Nonseparately computed income or
loss.
(4) Separate activities requirement.
(5) Aggregation of deductions or exclu-
sions for purposes of limitations.
(b) Character of items constituting pro
rata share.
(1) In general.
(2) Exception for contribution of non-
capital gain property.
(3) Exception for contribution of capital
loss property.
(c) Gross income of a shareholder.
(1) In general.
(2) Gross income for substantial omis-
sion of items.
(d) Shareholders holding stock subject
to community property laws.
(e) Net operating loss deduction of
shareholder of S corporation.
(f) Cross-reference.
§1.1366–2 Limitations on deduction of
pass-through items of an S corporation to
its shareholders.
(a) In general.
(1) Limitation on losses and deductions.
(2) Carryover of disallowance.
(3) Basis limitation amount.
(i) Stock portion.
(ii) Indebtedness portion.
(4) Limitation on losses and deductions
allocated to each item.
(5) Nontransferability of losses and de-
ductions.
(6) Basis of stock acquired by gift.
(b) Special rules for carryover of disal-
lowed losses and deductions to post-
termination transition period de-
scribed in section 1377(b).
(1) In general.
(2) Limitation on losses and deductions.
(3) Limitation on losses and deductions
allocated to each item.
(4) Adjustment to the basis of stock.
(c) Carryover of disallowed losses and
deductions in the case of liquida-
tions, reorganizations, and divisions.
(1) Liquidations and reorganizations.
(2) Corporate separations to which sec-
tion 368(a)(1)(D) applies.
§1.1366–3 Treatment of family groups.
(a) In general.
(b) Examples.
§1.1366–4 Special rules limiting the
pass through of certain items of an S
corporation to its shareholders.
(a) Pass through inapplicable to section
34 credit.
(b) Reduction in pass through for tax
imposed on built-in gains.
(c) Reduction in pass through for tax im-
posed on excess net passive income.
§1.1366-5 Effective date.
§1.1366-1 Shareholder’s share of items
of an S corporation.
(a) Determination of shareholder’s tax
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liability—(1) In general.An S corpora-
tion must report, and a shareholder is re-
quired to take into account in the share-
holder’s return, the shareholder’s pro rata
share, whether or not distributed, of the S
corporation’s items of income, loss, de-
duction, or credit described in paragraphs
(a)(2), (3), and (4) of this section. A
shareholder’s pro rata share is determined
in accordance with the provisions of sec-
tion 1377(a) and the regulations thereun-
der. The shareholder takes these items
into account in determining the share-
holder’s taxable income and tax liability
for the shareholder’s taxable year with or
within which the taxable year of the cor-
poration ends. If the shareholder dies (or
if the shareholder is an estate or trust and
the estate or trust terminates) before the
end of the taxable year of the corporation,
the shareholder’s pro rata share of these
items is taken into account on the share-
holder’s final return. For the limitation
on allowance of a shareholder’s pro rata
share of S corporation losses or deduc-
tions, see section 1366(d) and §1.1366–2.
(2) Separately stated items of income,
loss, deduction, or credit.Each share-
holder must take into account separately
the shareholder’s pro rata share of any
item of income (including tax-exempt in-
come), loss, deduction, or credit of the S
corporation that if separately taken into
account by any shareholder could affect
the shareholder’s tax liability for that tax-
able year differently than if the share-
holder did not take the item into account
separately. The separately stated items of
the S corporation include, but are not lim-
ited to, the following items—
(i) The corporation’s combined net
amount of gains and losses from sales or
exchanges of capital assets grouped by ap-
plicable holding periods, by applicable
rate of tax under section 1(h), and by any
other classification that may be relevant in
determining the shareholder’s tax liability;
(ii) The corporation’s combined net
amount of gains and losses from sales or
exchanges of property described in sec-
tion 1231 (relating to property used in the
trade or business and involuntary conver-
sions), grouped by applicable holding pe-
riods, by applicable rate of tax under sec-
tion 1(h), and by any other classification
that may be relevant in determining the
shareholder’s tax liability;
(iii) Charitable contributions, grouped
by the percentage limitations of section
170(b), paid by the corporation within the
taxable year of the corporation;
(iv) The taxes described in section 901
that have been paid (or accrued) by the
corporation to foreign countries or to pos-
sessions of the United States;
(v) Each of the corporation’s separate
items involved in the determination of
credits against tax allowable under part
IV of subchapter A (section 21 and fol-
lowing) of the Internal Revenue Code, ex-
cept for any credit allowed under section
34 (relating to certain uses of gasoline and
special fuels);
(vi) Each of the corporation’s separate
items of gains and losses from wagering
transactions (section 165(d)); soil and
water conservation expenditures (section
175); deduction under an election to ex-
pense certain depreciable business ex-
penses (section 179); medical, dental,
etc., expenses (section 213); the addi-
tional itemized deductions for individuals
provided in part VII of subchapter B (sec-
tion 212 and following) of the Internal
Revenue Code; and any other itemized
deductions for which the limitations on
itemized deductions under sections 67 or
68 applies;
(vii) Any of the corporation’s items of
portfolio income or loss, and expenses re-
lated thereto, as defined under section 469;
(viii) The corporation’s tax-exempt in-
come. For purposes of subchapter S, tax-
exempt income is income that is perma-
nently excludible from gross income in all
circumstances in which the applicable
provision of the Internal Revenue Code
applies. For example, income that is ex-
cludible from gross income under section
101 (certain death benefits) or section 103
(interest on state and local bonds) is tax-
exempt income, while income that is ex-
cludible from gross income under section
108 (income from discharge of indebted-
ness) or section 109 (improvements by
lessee on lessor’s property) is not tax-ex-
empt income;
(ix) The corporation’s adjustments de-
scribed in sections 56 and 58, and items
of tax preference described in section 57;
and
(x) Any item identified in guidance (in-
cluding forms and instructions) issued by
the Commissioner as an item required to
be separately stated under this paragraph
(a)(2).
(3) Nonseparately computed income or
loss. Each shareholder must take into ac-
count separately the shareholder’s pro
rata share of the nonseparately computed
income or loss of the S corporation. For
this purpose, nonseparately computed in-
come or lossmeans the corporation’s
gross income less the deductions allowed
to the corporation under chapter 1 of the
Internal Revenue Code, determined by
excluding any item requiring separate
computation under paragraph (a)(2) of
this section.
(4) Separate activities requirement.An
S corporation must report, and each
shareholder must take into account in the
shareholder’s return, the shareholder’s
pro rata share of an S corporation’s items
of income, loss, deduction, or credit de-
scribed in paragraphs (a)(2) and (3) of this
section for each of the corporation’s activ-
ities as defined in section 469 and the reg-
ulations thereunder.
(5) Aggregation of deductions or exclu-
sions for purposes of limitations—(i) In
general.A shareholder aggregates the
shareholder’s separate deductions or ex-
clusions with the shareholder’s pro rata
share of the S corporation’s separately
stated deductions or exclusions in deter-
mining the amount of any deduction or
exclusion allowable to the shareholder
under subtitle A of the Internal Revenue
Code as to which a limitation is imposed.
(ii) Example.The provisions of para-
graph (a)(5)(i) of this section are illus-
trated by the following example:
Example. In 1999, Corporation M, an S corpora-
tion, purchases and places in service section 179
property costing $10,000. Corporation M elects to
expense the entire cost of the property. Shareholder
A owns 50 percent of the stock of Corporation M.
Shareholder A’s pro rata share of this item after Cor-
poration M applies the section 179(b) limitations is
$5,000. Because the aggregate amount of Share-
holder A’s pro rata share and separately acquired
section 179 expense may not exceed $19,000 (the
aggregate maximum cost that may be taken into ac-
count under section 179(a) for the applicable taxable
year), Shareholder A may elect to expense up to
$14,000 of separately acquired section 179 property
that is purchased and placed in service in 1999, sub-
ject to the limitations of section 179(b).
(b) Character of items constituting pro
rata share—(1) In general.Except as
provided in paragraph (b)(2) or (3) of this
section, the character of any item of in-
come, loss, deduction, or credit described
in section 1366(a)(1)(A) or (B) and para-
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graph (a) of this section is determined for
the S corporation and retains that charac-
ter in the hands of the shareholder. For
example, if an S corporation has capital
gain on the sale or exchange of a capital
asset, a shareholder’s pro rata share of
that gain will also be characterized as a
capital gain regardless of whether the
shareholder is otherwise a dealer in that
type of property. Similarly, if an S corpo-
ration engages in an activity that is not for
profit (section 183), a shareholder’s pro
rata share of the S corporation’s deduc-
tions will be characterized as not for
profit. Also, if an S corporation makes a
charitable contribution to an organization
qualifying under section 170(b)(1)(A), a
shareholder’s pro rata share of the S cor-
poration’s charitable contribution will be
characterized as made to an organization
qualifying under section 170(b)(1)(A).
(2) Exception for contribution of non-
capital gain property.If an S corporation
is formed or availed of by any shareholder
or group of shareholders for a principal
purpose of selling or exchanging con-
tributed property that in the hands of the
shareholder or shareholders would not
have produced capital gain if sold or ex-
changed by the shareholder or sharehold-
ers, then the gain on the sale or exchange
of the property recognized by the corpora-
tion is not treated as a capital gain.
(3) Exception for contribution of capital
loss property.If an S corporation is
formed or availed of by any shareholder or
group of shareholders for a principal pur-
pose of selling or exchanging contributed
property that in the hands of the share-
holder or shareholders would have pro-
duced capital loss if sold or exchanged by
the shareholder or shareholders, then the
loss on the sale or exchange of the property
recognized by the corporation is treated as
a capital loss to the extent that, immedi-
ately before the contribution, the adjusted
basis of the property in the hands of the
shareholder or shareholders exceeded the
fair market value of the property.
(c) Gross income of a shareholder—(1)
In general.Where it is necessary to de-
termine the amount or character of the
gross income of a shareholder, the share-
holder’s gross income includes the share-
holder’s pro rata share of the gross in-
come of the S corporation. The
shareholder’s pro rata share of the gross
income of the S corporation is the amount
of gross income of the corporation used in
deriving the shareholder’s pro rata share
of S corporation taxable income or loss
(including items described in section
1366(a)(1)(A) or (B) and paragraph (a) of
this section). For example, a shareholder
is required to include the shareholder’s
pro rata share of S corporation gross in-
come in computing the shareholder’s
gross income for the purposes of deter-
mining the necessity of filing a return
(section 6012(a)) and the shareholder’s
gross income derived from farming (sec-
tions 175 and 6654(i)).
(2) Gross income for substantial omis-
sion of items—(i) In general.For pur-
poses of determining the applicability of
the 6-year period of limitation on assess-
ment and collection provided in section
6501(e) (relating to omission of more
than 25 percent of gross income), a share-
holder’s gross income includes the share-
holder’s pro rata share of S corporation
gross income (as described in section
6501(e)(1)(A)(i)). In this respect, the
amount of S corporation gross income
used in deriving the shareholder’s pro rata
share of any item of S corporation in-
come, loss, deduction, or credit (as in-
cluded or disclosed in the shareholder’s
return) is considered as an amount of
gross income stated in the shareholder’s
return for purposes of section 6501(e).
(ii) Example. The following example
illustrates the provisions of paragraph
(c)(2)(i) of this section:
Example.Shareholder A, an individual, owns 25
percent of the stock of Corporation N, an S corpora-
tion that has $10,000 gross income and $2,000 tax-
able income. A reports only $300 as A’s pro rata
share of N’s taxable income. A should have reported
$500 as A’s pro rata share of taxable income, derived
from $2,500 of N’s gross income. Because A’s re-
turn included only $300 without a disclosure meet-
ing the requirements of section 6501(e)(1)(A)(ii) de-
scribing the difference of $200, A is regarded as
having reported on the return only $1,500
($300/$500 of $2,500) as gross income from N.
(d) Shareholders holding stock subject
to community property laws.If a share-
holder holds S corporation stock that is
community property, then the share-
holder’s pro rata share of any item or items
listed in paragraphs (a)(2), (3), and (4) of
this section with respect to that stock is re-
ported by the husband and wife in accor-
dance with community property rules.
(e) Net operating loss deduction of
shareholder of S corporation. For pur-
poses of determining a net operating loss
deduction under section 172, a share-
holder of an S corporation must take into
account the shareholder’s pro rata share
of items of income, loss, deduction, or
credit of the corporation. See section
1366(b) and paragraph (b) of this section
for rules on determining the character of
the items. In determining under section
172(d)(4) the nonbusiness deductions al-
lowable to a shareholder of an S corpora-
tion (arising from both corporation
sources and any other sources), the share-
holder separately takes into account the
shareholder’s pro rata share of the deduc-
tions of the corporation that are not attrib-
utable to a trade or business and combines
this amount with the shareholder’s non-
business deductions from any other
sources. The shareholder also separately
takes into account the shareholder’s pro
rata share of the gross income of the cor-
poration not derived from a trade or busi-
ness and combines this amount with the
shareholder’s nonbusiness income from
all other sources. See section 172 and the
regulations thereunder.
(f) Cross-reference.For rules relating
to the consistent tax treatment of subchap-
ter S items, see section 6037(c).
§1.1366–2 Limitations on deduction of
pass-through items of an S corporation to
its shareholders.
(a) In general—(1) Limitation on
losses and deductions. The aggregate
amount of losses and deductions taken
into account by a shareholder under
§1.1366–1(a)(2), (3), and (4) for any tax-
able year of an S corporation cannot ex-
ceed the sum of—
(i) The adjusted basis of the share-
holder’s stock in the corporation (as de-
termined under paragraph (a)(3)(i) of this
section); and
(ii) The adjusted basis of any indebted-
ness of the corporation to the shareholder
(as determined under paragraph (a)(3)(ii)
of this section).
(2) Carryover of disallowance.A
shareholder’s aggregate amount of losses
and deductions for a taxable year in ex-
cess of the sum of the adjusted basis of
the shareholder’s stock in an S corpora-
tion and of any indebtedness of the S cor-
poration to the shareholder is not allowed
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for the taxable year. However, any disal-
lowed loss or deduction is treated as in-
curred by the corporation in the corpora-
tion’s first succeeding taxable year, and
subsequent taxable years, with respect to
the shareholder to the extent that the
shareholder’s adjusted basis of stock or
indebtedness exceeds zero. For rules on
determining the adjusted bases of stock of
an S corporation and indebtedness of the
corporation to the shareholder, see para-
graphs (a)(3)(i) and (ii) of this section.
(3) Basis limitation amount—(i) Stock
portion. A shareholder generally deter-
mines the adjusted basis of stock for
purposes of paragraphs (a)(1)(i) and (2) of
this section (limiting losses and deduc-
tions) by taking into account only in-
creases in basis under section 1367(a)(1)
for the taxable year and decreases in basis
under section 1367(a)(2)(A), (D) and (E)
(relating to distributions, noncapital,
nondeductible expenses, and certain oil
and gas depletion deductions) for the tax-
able year. In so determining this loss limi-
tation amount, the shareholder disregards
decreases in basis under section
1367(a)(2)(B) and (C) (for losses and de-
ductions, including losses and deductions
previously disallowed) for the taxable
year. However, if the shareholder has in
effect for the taxable year an election
under §1.1367–1(f) (proposed to be redes-
ignated as §1.1367–1(g)) to decrease basis
by items of loss and deduction prior to de-
creasing basis by noncapital, nonde-
ductible expenses and certain oil and gas
depletion deductions, the shareholder also
disregards decreases in basis under section
1367(a)(2)(D) and (E). This basis limita-
tion amount for stock is determined at the
time prescribed under §1.1367–1(d)(1) for
adjustments to the basis of stock.
(ii) Indebtedness portion.A share-
holder determines the shareholder’s ad-
justed basis in indebtedness of the corpo-
ration for purposes of paragraphs
(a)(1)(ii) and (2) of this section (limiting
losses and deductions) without regard to
any adjustment under section 1367(b)-
(2)(A) for the taxable year. This basis
limitation amount for indebtedness is de-
termined at the time prescribed under
§1.1367–2(d)(1) for adjustments to the
basis of indebtedness.
(4) Limitation on losses and deductions
allocated to each item.If a shareholder’s
pro rata share of the aggregate amount of
losses and deductions specified in
§1.1366–1(a)(2), (3), and (4) exceeds the
sum of the adjusted basis of the share-
holder’s stock in the corporation (deter-
mined in accordance with paragraph
(a)(3)(i) of this section) and the adjusted
basis of any indebtedness of the corpora-
tion to the shareholder (determined in ac-
cordance with paragraph (a)(3)(ii) of this
section), then the limitation on losses and
deductions under section 1366(d)(1) must
be allocated among the shareholder’s pro
rata share of each loss or deduction. The
amount of the limitation allocated to any
loss or deduction is an amount that bears
the same ratio to the amount of the limita-
tion as the loss or deduction bears to the
total of the losses and deductions. For
this purpose, the total of losses and de-
ductions for the taxable year is the sum of
the shareholder’s pro rata share of losses
and deductions for the taxable year, and
the losses and deductions disallowed and
carried forward from prior years pursuant
to section 1366(d)(2).
(5) Nontransferability of losses and de-
ductions. Any loss or deduction disal-
lowed under paragraph (a)(1) of this sec-
tion is personal to the shareholder and
cannot in any manner be transferred to an-
other person. If a shareholder transfers
some but not all of the shareholder’s stock
in the corporation, the amount of any dis-
allowed loss or deduction under this sec-
tion is not reduced and the transferee does
not acquire any portion of the disallowed
loss or deduction. If a shareholder trans-
fers all of the shareholder’s stock in the
corporation, any disallowed loss or de-
duction is permanently disallowed.
(6) Basis of stock acquired by gift. For
purposes of section 1366(d)(1)(A) and
paragraphs (a)(1)(i) and (2) of this sec-
tion, the basis of stock in a corporation
acquired by gift is the basis of the stock
that is used for purposes of determining
loss.
(b) Special rules for carryover of disal-
lowed losses and deductions to post-
termination transition period described in
section 1377(b)—(1) In general.If, for
the last taxable year of a corporation for
which it was an S corporation, a loss or
deduction was disallowed to a share-
holder by reason of the limitation in para-
graph (a) of this section, the loss or
deduction is treated under section
1366(d)(3) as incurred by that shareholder
on the last day of any post-termination
transition period (within the meaning of
section 1377(b)).
(2) Limitation on losses and deduc-
tions. The aggregate amount of losses
and deductions taken into account by a
shareholder under paragraph (b)(1) of this
section cannot exceed the adjusted basis
of the shareholder’s stock in the corpora-
tion determined at the close of the last day
of the post-termination transition period.
For this purpose, the adjusted basis of a
shareholder’s stock in the corporation is
determined at the close of the last day of
the post-termination transition period
without regard to any reduction required
under paragraph (b)(4) of this section. If
a shareholder disposes of a share of stock
prior to the close of the last day of the
post-termination transition period, the ad-
justed basis of that share is its basis as of
the close of the day of disposition. Any
losses and deductions in excess of a
shareholder’s adjusted stock basis are per-
manently disallowed. For purposes of
section 1366(d)(3)(B) and this paragraph
(b)(2), the basis of stock in a corporation
acquired by gift is the basis of the stock
that is used for purposes of determining
loss.
(3) Limitation on losses and deductions
allocated to each item.If the aggregate
amount of losses and deductions treated
as incurred by the shareholder under para-
graph (b)(1) of this section exceeds the
adjusted basis of the shareholder’s stock
determined under paragraph (b)(2) of this
section, the limitation on losses and de-
ductions under section 1366(d)(3)(B)
must be allocated among each loss or de-
duction. The amount of the limitation al-
located to each loss or deduction is an
amount that bears the same ratio to the
amount of the limitation as the amount of
each loss or deduction bears to the total of
all the losses and deductions.
(4) Adjustment to the basis of stock.
The shareholder’s basis in the stock of the
corporation is reduced by the amount al-
lowed as a deduction by reason of this
paragraph (b). For rules regarding adjust-
ments to the basis of a shareholder’s stock
in an S corporation, see §1.1367–1.
(c) Carryover of disallowed losses and
deductions in the case of liquidations, re-
organizations, and divisions—(1) Liqui-
dations and reorganizations.If a corpora-
tion acquires the assets of an S
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corporation in a transaction to which sec-
tion 381(a) applies, any loss or deduction
disallowed under paragraph (a) of this
section with respect to a shareholder of
the distributor or transferor S corporation
is available to that shareholder as a share-
holder of the acquiring corporation.
Thus, where the acquiring corporation is
an S corporation, a loss or deduction of a
shareholder of the distributor or transferor
S corporation disallowed prior to or dur-
ing the taxable year of the transaction is
treated as incurred by the acquiring S cor-
poration with respect to that shareholder
if the shareholder is a shareholder of the
acquiring S corporation after the transac-
tion. Where the acquiring corporation is a
C corporation, a post-termination transi-
tion period arises the day after the last day
that an S corporation was in existence and
the rules provided in paragraph (b) of this
section apply with respect to any share-
holder of the acquired S corporation that
is also a shareholder of the acquiring C
corporation after the transaction. See the
special rules under section 1377 for the
availability of the post-termination transi-
tion period if the acquiring corporation is
a C corporation.
(2) Corporate separations to which
section 368(a)(1)(D) applies. If an S cor-
poration transfers a portion of its assets
constituting an active trade or business to
another corporation in a transaction to
which section 368(a)(1)(D) applies, and
immediately thereafter the stock and se-
curities of the controlled corporation are
distributed in a distribution or exchange
to which section 355 (or so much of sec-
tion 356 as relates to section 355) applies,
any loss or deduction disallowed under
paragraph (a) of this section with respect
to a shareholder of the distributing S cor-
poration immediately before the transac-
tion is allocated between the distributing
corporation and the controlled corpora-
tion with respect to the shareholder. The
amount of disallowed loss or deduction
allocated to the distributing (or con-
trolled) corporation with respect to the
shareholder is an amount that bears the
same ratio to each item of disallowed loss
or deduction as the value of the share-
holder’s stock in the distributing (or con-
trolled) corporation bears to the total
value of the shareholder’s stock in the dis-
tributing and controlled corporations, in
each case as determined immediately
after the distribution.
§1.1366–3 Treatment of family groups.
(a) In general.Under section 1366(e),
if an individual, who is a member of the
family of one or more shareholders of an
S corporation, renders services for, or fur-
nishes capital to, the corporation without
receiving reasonable compensation, the
Commissioner shall prescribe adjust-
ments to those items taken into account
by the individual and the shareholders as
may be necessary to reflect the value of
the services rendered or capital furnished.
For these purposes, in determining the
reasonable value for services rendered, or
capital furnished, to the corporation, con-
sideration will be given to all the facts and
circumstances, including the amount that
ordinarily would be paid in order to ob-
tain comparable services or capital from a
person (other than a member of the fam-
ily) who is not a shareholder in the corpo-
ration. In addition, for purposes of sec-
tion 1366(e), if a member of the family of
one or more shareholders of the S corpo-
ration holds an interest in a pass-through
entity (e.g., a partnership, S corporation,
trust, or estate), that performs services for,
or furnishes capital to, the S corporation
without receiving reasonable compensa-
tion, the Commissioner shall prescribe
adjustments to the pass-through entity and
the corporation as may be necessary to re-
flect the value of the services rendered or
capital furnished. For purposes of section
1366(e), the term familyof any share-
holder includes only the shareholder’s
spouse, ancestors, lineal descendants, and
any trust for the primary benefit of any of
these persons.
(b) Examples. The provisions of this
section may be illustrated by the follow-
ing examples:
Example 1.The stock of an S corporation is
owned 50 percent by F and 50 percent by T, the
minor son of F. For the taxable year, the corporation
has items of taxable income equal to $70,000. Com-
pensation of $10,000 is paid by the corporation to F
for services rendered during the taxable year, and no
compensation is paid to T, who rendered no services.
Based on all the relevant facts and circumstances,
reasonable compensation for the services rendered
by F would be $30,000. In the discretion of the In-
ternal Revenue Service, up to an additional $20,000
of the $70,000 of the corporation’s taxable income,
for tax purposes, may be allocated to F as compensa-
tion for services rendered. If the Service allocates
$20,000 of the corporation’s taxable income to F as
compensation for services, taxable income of the
corporation would be reduced by $20,000 to
$50,000, of which F and T each would be allocated
$25,000. F would have $30,000 of total compensa-
tion paid by the corporation for services rendered.
Example 2.The stock of an S corporation is
owned by A and B. For the taxable year, the corpo-
ration has paid compensation to a partnership that
rendered services to the corporation during the tax-
able year. The spouse of A is a partner in that part-
nership. Consequently, if based on all the relevant
facts and circumstances the partnership did not re-
ceive reasonable compensation for the services ren-
dered to the corporation, the Internal Revenue Ser-
vice, in its discretion, may make adjustments to
those items taken into account by the partnership
and the corporation as may be necessary to reflect
the value of the services rendered.
§1.1366–4 Special rules limiting the
pass through of certain items of an S
corporation to its shareholders.
(a) Pass through inapplicable to sec-
tion 34 credit.Section 1.1366–1(a) does
not apply to any credit allowable under
section 34 (relating to certain uses of
gasoline and special fuels).
(b) Reduction in pass through for tax
imposed on built-in gains.For purposes
of §1.1366–1(a), if for any taxable year of
the S corporation a tax is imposed on the
corporation under section 1374, the
amount of the tax imposed is treated as a
loss sustained by the S corporation during
the taxable year. The character of the
deemed loss is determined by allocating
the loss proportionately among the recog-
nized built-in gain items giving rise to the
tax and attributing the character of each
recognized built-in gain item to the allo-
cable portion of the loss.
(c) Reduction in pass through for tax
imposed on excess net passive income.
For purposes of §1.1366–1(a), if for any
taxable year of the S corporation a tax is
imposed on the corporation under section
1375, each item of passive investment in-
come shall be reduced by an amount that
bears the same ratio to the amount of the
tax as the amount of the item bears to the
total passive investment income for that
taxable year.
§1.1366–5 Effective date.
Sections 1.1366–1 through 1.1366–4
apply to taxable years of an S corporation
beginning on or after August 18, 1998.
Par. 4. Section 1.1367–0 is amended in
the table as follows:
1. The entries for §1.1367–1(e)
through (g) are revised.
2. The entries for §1.1367–1(h)
through (j) are added.
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The additions and revisions read as fol-
lows:
§1.1367–0 Table of contents.
* * * * *
§1.1367–1 Adjustments to basis of
shareholder’s stock in an S corporation.
* * * * *
(e) Ordering rules for taxable years be-
ginning before January 1, 1997.
(f) Ordering rules for taxable years be-
ginning on or after
August 18, 1998.
(g) Elective ordering rule.
(h) Examples.
(i) [Reserved]
(j) Adjustments for items of income in
respect of a decedent.
* * * * *
Par. 5. Section 1.1367–1 is amended as
follows:
1. The heading and introductory text of
paragraph (e) are revised.
2. Paragraphs (f) and (g) are redesig-
nated as paragraphs (g) and (h), respec-
tively.
3. New paragraph (f) is added.
4. The first and second sentences of
newly designated paragraph (g) are re-
vised.
5. Newly designated paragraph (h) is
amended as follows:
a. The heading for Example 1is re-
vised.
b. Example 2and Example 3are redes-
ignated as Example 3and Example 4, re-
spectively.
c. New Example 2is added.
d. The heading of newly designated
Example 4is revised.
e. Example 5is added.
6. Paragraph (i) is added and reserved
and paragraph (j) is added.
The additions and revisions read as fol-
lows:
§1.1367–1 Adjustments to basis of
shareholder’s stock in an S corporation.
* * * * *
(e) Ordering rules for taxable years be-
ginning before January 1, 1997. For any
taxable year of a corporation beginning
before January 1, 1997, except as pro-
vided in paragraph (g) of this section, the
adjustments required by section 1367(a)
are made in the following order—
* * * * *
(f) Ordering rules for taxable years be-
ginning on or after August 18, 1998. For
any taxable year of a corporation begin-
ning on or after August 18, 1998, except
as provided in paragraph (g) of this sec-
tion, the adjustments required by section
1367(a) are made in the following order—
(1) Any increase in basis attributable to
the income items described in section
1367(a)(1)(A) and (B), and the excess of
the deductions for depletion described in
section 1367(a)(1)(C);
(2) Any decrease in basis attributable to
a distribution by the corporation de-
scribed in section 1367(a)(2)(A);
(3) Any decrease in basis attributable
to noncapital, nondeductible expenses de-
scribed in section 1367(a)(2)(D), and the
oil and gas depletion deduction described
in section 1367(a)(2)(E); and
(4) Any decrease in basis attributable to
items of loss or deduction described in
section 1367(a)(2)(B) and (C).
(g) Elective ordering rule.A share-
holder may elect to decrease basis under
paragraph (e)(3) or (f)(4) of this section,
whichever applies, prior to decreasing
basis under paragraph (e)(2) or (f)(3) of
this section, whichever applies. If a
shareholder makes this election, any
amount described in paragraph (e)(2) or
(f)(3) of this section, whichever applies,
that is in excess of the shareholder’s basis
in stock and indebtedness is treated,
solely for purposes of this section, as an
amount described in paragraph (e)(2) or
(f)(3) of this section, whichever applies,
in the succeeding taxable year. * * *
(h) * * *
Example 1.Adjustments to basis of stock for tax-
able years beginning before January 1, 1997. * * *
Example 2. Adjustments to basis of stock for tax-
able years beginning on or after August 18, 1998.(i)
On December 31, 2001, A owns a block of 50 shares
of stock with an adjusted basis per share of $6 in
Corporation S. On December 31, 2001, A purchases
for $400 an additional block of 50 shares of stock
with an adjusted basis of $8 per share. Thus, A
holds 100 shares of stock for each day of the 2002
taxable year. For S’s 2002 taxable year, A’s pro rata
share of the amount of items described in section
1367(a)(1)(A) (relating to increases in basis of
stock) is $300, A’s pro rata share of the amount of
the items described in section 1367(a)(2)(B) (relat-
ing to decreases in basis of stock attributable to
items of loss and deduction) is $300, and A’s pro rata
share of the amount of the items described in section
1367(a)(2)(D) (relating to decreases in basis of stock
attributable to noncapital, nondeductible expenses)
is $200. S makes a distribution to A in the amount
of $100 during 2002.
(ii) Pursuant to the ordering rules of paragraph (f)
of this section, A first increases the basis of each
share of stock by $3 ($300/100 shares) and then de-
creases the basis of each share by $1 ($100/100
shares) for the distribution. A next decreases the
basis of each share by $2 ($200/100 shares) for the
noncapital, nondeductible expenses and then de-
creases the basis of each share by $3 ($300/100
shares) for the items of loss. Thus, on January 1,
2003, A has a basis of $3 per share in the original
block of 50 shares ($6 + $3 – $1 – $2 – $3) and a
basis of $5 per share in the second block of 100
shares ($8 + $3 – $1 – $2 – $3).
* * * * *
Example 4. Effects of section 1377(a)(2) election
and distribution on basis of stock for taxable years
beginning before January 1, 1997.* * *
Example 5. Effects of section 1377(a)(2) election
and distribution on basis of stock for taxable years
beginning on or after August 18, 1998. (i) The facts
are the same as in Example 4,except that all of the
events occur in 2001 rather than in 1994 and except
as follows: On June 30, 2001, B sells 25 shares of
her stock for $5,000 to D and 25 shares back to Cor-
poration S for $5,000. Under section 1377(a)(2)(B)
and §1.1377–1(b)(2), B and C are affected share-
holders because B has transferred shares to Corpora-
tion S. Pursuant to section 1377(a)(2)(A) and
§1.1377–1(b)(1), B and C, the affected shareholders,
and Corporation S agree to treat the taxable year
2001 as if it consisted of two separate taxable years
for all affected shareholders for the purposes set
forth in §1.1377–1(b)(3)(i).
(ii) On June 30, 2001, B and C, pursuant to the
ordering rules of paragraph (f)(1) of this section, in-
crease the basis of each share by $60 ($6,000/100
shares) for the nonseparately computed income.
Then B and C reduce the basis of each share by $120
($12,000/100 shares) for the distribution. Finally, B
and C decrease the basis of each share by $40
($4,000/100 shares) for the separately stated deduc-
tion item.
(iii) The basis of the stock of B is reduced from
$120 to $20 per share ($120 + $60 – $120 – $40).
Prior to accounting for the separately stated deduction
item, the basis of the stock of C is reduced from $80
to $20 ($80 + $60 – $120). Finally, because the pe-
riod from January 1 through June 30, 2001 is treated
under §1.1377–1(b)(3)(i) as a separate taxable year
for purposes of making adjustments to the basis of
stock, under section 1366(d) and §1.1366– 2(a)(2), C
may deduct only $20 per share of the remaining $40
of the separately stated deduction item, and the basis
of the stock of C is reduced from $20 per share to $0
per share. Under section 1366 and §1.1366–2(a)(2),
C’s remaining separately stated deduction item of $20
per share is treated as having been incurred in the first
succeeding taxable year of Corporation S, which, for
this purpose, begins on July 1, 2001.
(i) [Reserved]
(j) Adjustments for items of income in
respect of a decedent.The basis deter-
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mined under section 1014 of any stock in
an S corporation is reduced by the portion
of the value of the stock that is attribut-
able to items constituting income in re-
spect of a decedent. For the determina-
tion of items realized by an S corporation
constituting income in respect of a dece-
dent, see sections 1367(b)(4)(A) and 691
and applicable regulations thereunder.
For the determination of the allowance of
a deduction for the amount of estate tax
attributable to income in respect of a
decedent, see section 691(c) and applica-
ble regulations thereunder.
Par. 6. The first sentence of §1.1367–3
is removed and two sentences are added
in its place to read as follows:
§1.1367–3 Effective date and transition
rule.
Except for §1.1367–1(f), Example 2
and Example 5of §1.1367–1(h), and
§1.1367–1(j), §§1.1367–1 and 1.1367–2
apply to taxable years of the corporation
beginning on or after January 1, 1994.
Section 1.1367–1(f), Example 2and Ex-
ample 5of §1.1367–1(h), and §1.1367–
1(j) apply only to taxable years of the cor-
poration beginning on or after August 18,
1998. * * *
Par. 7. Section 1.1368–0 is amended in
the table as follows:
1. The entry for §1.1368–1(e) is re-
vised and entries for §1.1368–1(e)(1) and
(2) are added.
2. The entries for §1.1368–2(a)(4) and
(d) are revised.
3. An entry for §1.1368–2(a)(5) is
added.
The additions and revisions read as fol-
lows:
§1.1368–0 Table of contents.
* * * * *
§1.1368–1 Distributions by S
corporations.
* * * * *
(e) Certain adjustments taken into ac-
count.
(1) Taxable years beginning before
January 1, 1997.
(2) Taxable years beginning on or after
August 18, 1998.
* * * * *
§1.1368–2 Accumulated adjustments
account (AAA).
(a) Accumulated adjustments account.
* * * * *
(4) Ordering rules for the AAA for tax-
able years beginning before January 1,
1997.
(5) Ordering rules for the AAA for tax-
able years beginning on or after August
18, 1998.
* * * * *
(d) Adjustment in the case of redemp-
tions, liquidations, reorganizations, and
divisions.
* * * * *
Par. 8. Section 1.1368–1 is amended
by revising paragraphs (d)(1) and (e) to
read as follows:
§1.1368–1 Distributions by S
corporations.
* * * * *
(d) S corporation with earnings and
profits—(1) General treatment of distrib-
ution. Except as provided in paragraph
(d)(2) of this section, a distribution made
with respect to its stock by an S corpora-
tion that has accumulated earnings and
profits as of the end of the taxable year of
the S corporation in which the distribution
is made is treated in the manner provided
in section 1368(c). See section 316 and
§1.316–2 for provisions relating to the al-
location of earnings and profits among
distributions.
* * * * *
(e) Certain adjustments taken into ac-
count—(1) Taxable years beginning be-
fore January 1, 1997.For any taxable
year of the corporation beginning before
January 1, 1997, paragraphs (c) and (d) of
this section are applied only after taking
into account—
(i) The adjustments to the basis of the
shares of a shareholder’s stock described
in section 1367 (without regard to section
1367(a)(2)(A) (relating to decreases at-
tributable to distributions not includible in
income)) for the S corporation’s taxable
year; and
(ii) The adjustments to the AAA re-
quired by section 1368(e)(1)(A) (but
without regard to the adjustments for dis-
tributions under §1.1368–2(a)(3)(iii)) for
the S corporation’s taxable year.
(2) Taxable years beginning on or after
August 18, 1998.For any taxable year of
the corporation beginning on or after Au-
gust 18, 1998, paragraphs (c) and (d) of
this section are applied only after taking
into account—
(i) The adjustments to the basis of the
shares of a shareholder’s stock described
in section 1367(a)(1) (relating to in-
creases in basis of stock) for the S corpo-
ration’s taxable year; and
(ii) The adjustments to the AAA re-
quired by section 1368(e)(1)(A) (but
without regard to the adjustments for dis-
tributions under §1.1368–2(a)(3)(iii)) for
the S corporation’s taxable year. Any net
negative adjustment (as defined in section
1368(e)(1)(C)(ii)) for the taxable year
shall not be taken into account.
* * * * *
Par. 9. Section 1.1368–2 is amended as
follows:
1. Paragraphs (a)(1) and (a)(3)(ii), and
the heading and introductory text of para-
graph (a)(4) are revised.
2. Paragraph (a)(5) is added.
3. The heading for paragraph (d) is re-
vised.
The additions and revisions read as fol-
lows:
§1.1368–2 Accumulated adjustments
account (AAA).
(a) Accumulated adjustments ac-
count—(1) In general.The accumulated
adjustments account is an account of the S
corporation and is not apportioned among
shareholders. The AAA is relevant for all
taxable years beginning on or after Janu-
ary 1, 1983, for which the corporation is
an S corporation. On the first day of the
first year for which the corporation is an S
corporation, the balance of the AAA is
zero. The AAA is increased in the man-
ner provided in paragraph (a)(2) of this
section and is decreased in the manner
provided in paragraph (a)(3) of this sec-
tion. For the adjustments to the AAA in
the case of redemptions, liquidations, re-
organizations, and corporate separations,
see paragraph (d) of this section.
* * * * *
(3) Decreases to the AAA* * *
(ii) Extent of allowable reduction.The
AAA may be decreased under paragraph
(a)(3)(i) of this section below zero. The
AAA is decreased by noncapital, nonde-
September 8, 1998341998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 34

ductible expenses under paragraph
(a)(3)(i)(C) of this section even though a
portion of the noncapital, nondeductible
expenses is not taken into account by a
shareholder under §1.1367–1(g) (relating
to the elective ordering rule). The AAA is
also decreased by the entire amount of
any loss or deduction even though a por-
tion of the loss or deduction is not taken
into account by a shareholder under sec-
tion 1366(d)(1) or is otherwise not cur-
rently deductible under the Internal Rev-
enue Code. However, in any subsequent
taxable year in which the loss, deduction,
or noncapital, nondeductible expense is
treated as incurred by the corporation
with respect to the shareholder under sec-
tion 1366(d)(2) or §1.1367–1(g) (or in
which the loss or deduction is otherwise
allowed to the shareholder), no further ad-
justment is made to the AAA.
* * * * *
(4) Ordering rules for the AAA for tax-
able years beginning before January 1,
1997.For any taxable year beginning be-
fore January 1, 1997, the adjustments to
the AAA are made in the following
order—
* * * * *
(5) Ordering rules for the AAA for tax-
able years beginning on or after August
18, 1998.For any taxable year of the cor-
poration beginning on or after August 18,
1998, the adjustments to the AAA are
made in the following order—
(i) The AAA is increased under para-
graph (a)(2) of this section before it is de-
creased under paragraph (a)(3) of this sec-
tion for the taxable year;
(ii) The AAA is decreased (but not
below zero) by any portion of an ordinary
distribution to which section 1368(b) or
(c)(1) applies (without taking into account
any net negative adjustment (as defined in
section 1368(e)(1)(C)(ii)) before it is de-
creased under paragraph (a)(3)(i) of this
section;
(iii) The AAA is decreased under para-
graph (a)(3)(i)(C) and (D) of this section
before it is decreased under paragraph
(a)(3)(i)(A) and (B) of this section;
(iv) The AAA is decreased under para-
graph (a)(3)(i)(A) and (B) of this section;
and
(v) The AAA is adjusted (whether neg-
ative or positive) for redemption distribu-
tions under paragraph (d)(1) of this sec-
tion.
* * * * *
(d) Adjustment in the case of redemp-
tions, liquidations, reorganizations, and
divisions* * *
* * * * *
Par. 10. Section 1.1368–3 is amended
as follows:
1. The heading for Example 1is re-
vised.
2. Example 2through Example 6are
redesignated as Example 3through Exam-
ple 7,respectively.
3. New Example 2is added.
The revision and addition read as fol-
lows:
§1.1368–3 Examples.
* * * * *
Example 1. Distributions by S corporations
without C corporation earnings and profits for tax-
able years beginning before January 1, 1997. * * *
Example 2. Distributions by S corporations
without earnings and profits for taxable years begin-
ning on or after August 18, 1998.(i) Corporation S,
an S corporation, has no earnings and profits as of
January 1, 2001, the first day of its 2001 taxable
year. S’s sole shareholder, A, holds 10 shares of S
stock with a basis of $1 per share as of that date. On
March 1, 2001, S makes a distribution of $38 to A.
For S’s 2001 taxable year, A’s pro rata share of the
amount of the items described in section 1367(a)(1)
(relating to increases in basis of stock) is $50. A’s
pro rata share of the amount of the items described
in sections 1367(a)(2)(B) through (D) (relating to
decreases in basis of stock for items other than dis-
tributions) is $26, $20 of which is attributable to
items described in section 1367(a)(2)(B) and (C)
and $6 of which is attributable to items described in
section 1367(a)(2)(D) (relating to decreases in basis
attributable to noncapital, nondeductible expenses).
(ii) Under section 1368(d)(1) and §1.1368–
1(e)(1) and (2), the adjustments to the basis of A’s
stock in S described in sections 1367(a)(1) are made
before the distribution rules of section 1368 are ap-
plied. Thus, A’s basis per share in the stock is $6.00
($1 + [$50/10]) before taking into account the distri-
bution. Under section 1367(a)(2)(A), the basis of
A’s stock is decreased by distributions to A that are
not includible in A’s income. Under §1.1367–
1(c)(3), the amount of the distribution that is attrib-
utable to each share of A’s stock is $3.80 ($38 distri-
bution/10 shares). Thus, A’s basis per share in the
stock is $2.20 ($6.00 – $3.80), after taking into ac-
count the distribution. Under section 1367(a)(2)(D),
the basis of each share of A’s stock in S after taking
into account the distribution, $2.20, is decreased by
$.60 ($6 noncapital, nondeductible expenses/10).
Thus, A’s basis per share after taking into account
the nondeductible, noncapital expenses is $1.60.
Under section 1367(a)(2)(B) and (C), A’s basis per
share is further decreased by $2 ($20 items de-
scribed in section 1367(a)(2)(B) and (C)/10 shares).
However, basis may not be reduced below zero.
Therefore, the basis of each share of A’s stock is re-
duced to zero. As of January 1, 2002, A has a basis
of $0 in his shares of S stock. Pursuant to section
1366(d)(2), the $.40 of loss in excess of A’s basis in
each of his shares of S stock is treated as incurred by
the corporation in the succeeding taxable year with
respect to A.
* * * * *
Par. 11. The first sentence of §1.1368-
4 is removed and two sentences are added
in its place to read as follows:
§1.1368–4 Effective date and transition
rule.
Except for §§1.1368–1(e)(2), 1.1368–
2(a)(5), and Example 2of §1.1368–3,
§§1.1368–1, 1.1368–2, and 1.1368–3
apply to taxable years of the corporation
beginning on or after January 1, 1994.
Sections 1.1368–1(e)(2), 1.1368–2(a)(5)
and Example 2of §1.1368–3 apply only
to taxable years of the corporation begin-
ning on or after August 18, 1998. * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
August 17, 1998, 8:45 a.m., and published in the
issue of the Federal Register for August 18, 1998, 63
F.R. 44181)
Announcement 98–81
Pursuant to the authority described in
section 9 of Rev. Proc. 95–28, 1995–1
C.B. 704, 705–6, this announcement ex-
tends the relief provided in section 5.02 of
that revenue procedure to the owner of
any project in Nevada County, California
that (1) received a 1996 allocation of low-
income housing credit under § 42(h)(1)(E)
or (F) of the Internal Revenue Code, (2) is
located within 20 miles of Yuba County,
California, one of the counties included in
a major disaster declaration by the Presi-
dent on February 9, 1998, as a result of
flooding from the “El Nino” weather pat-
tern, and (3) as required by section 6 of
Rev. Proc. 95–28, is determined by the
California Tax Credit Allocation Commit-
tee to qualify for the relief provided in sec-
tion 5.02 of that revenue procedure as a re-
sult of the flooding herein described. In
addition, the compliance monitoring relief
provided in section 8 of Rev. Proc. 95–28
1998–36 I.R.B.35September 8, 1998
IRB 1998-36 9/2/98 3:07 PM Page 35

will apply to the California Tax Credit Al-
location Committee.
The principal author of this announce-
ment is Christopher J. Wilson of the Of-
fice of Assistant Chief Counsel (Pass-
throughs and Special Industries). For fur-
ther information regarding this notice,
contact Mr. Wilson on (202) 622-3040
(not a toll-free call).
September 8, 1998361998–36 I.R.B.
Changes to Excise Taxes
Announcement 98-83
PurposeTo announce excise tax changes made by recent legislation. The changes include:
• A reduction in the tax rate for diesel fuel used in trains beginning November 1, 1998,
and
• New rules for making a claim for refund under sections 6421 and 6427 of the Internal
Revenue Code.
Diesel fuel used in trains, IRS No. 71Beginning November 1, 1998, the tax rate for diesel fuel used in trains is $.044 per gallon.
Claims for fuel tax refunds Beginning October 1, 1998, persons may file a claim if, at the close of any quarter of the
claimant’s income tax year, a refund of $750 or more is due. Such a claim now includes
amounts for excise taxes on gasoline, aviation gasoline, diesel fuel, aviation fuel (other
than gasoline), and kerosene in the quarter or any prior quarter of the taxable year.
Claimants should file Form 8849,Claim for Refund of Excise Taxes, or Schedule C of
Form 720,Quarterly Federal Excise Tax Return, for the listed taxes. However, they
should continue to use Form 4136,Credit for Federal Tax Paid on Fuels, for:
• Tax on gasoline used on a farm for farming purposes (section 6420); and
• Amounts not included in claims previously filed for the taxable year.
IRB 1998-36 9/2/98 3:07 PM Page 36

1998–36 I.R.B.37September 8, 1998
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms
IRB 1998-36 9/2/98 3:07 PM Page 37

September 8, 1998381998–36 I.R.B.
Numerical Finding List
1
Bulletins 1998–29 through 35
Announcements:
98–62, 1998–29 I.R.B. 13
98–68, 1998–29 I.R.B. 14
98–69, 1998–30 I.R.B. 16
98–70, 1998–30 I.R.B. 17
98–71, 1998–30 I.R.B. 17
98–72, 1998–31 I.R.B.14
98–73, 1998–31 I.R.B.14
98–74, 1998–31 I.R.B.15
98–75, 1998–31 I.R.B.15
98–76, 1998–32 I.R.B.64
98–77, 1998–34 I.R.B.30
98–78, 1998–34 I.R.B.30
98–79, 1998–34 I.R.B.31
98–80, 1998–34 I.R.B.32
98–82, 1998–35 I.R.B. 17
Notices:
98–36, 1998–29 I.R.B. 8
98–37, 1998–30 I.R.B.13
98–38, 1998–34 I.R.B.7
98–39, 1998–33 I.R.B.11
98–40, 1998–35 I.R.B. 7
98–41, 1998–33 I.R.B.12
98–42, 1998–33 I.R.B.12
98–43, 1998–33 I.R.B.13
98–44, 1998–34 I.R.B.7
98–45, 1998–35 I.R.B.7
Railroad Retirement Quarterly Rate:
1998–31 I.R.B. 7
Proposed Regulations:
REG–246256–96, 1998–34 I.R.B.9
REG–209813–96, 1998–35 I.R.B. 9
REG–104641–97, 1998–29 I.R.B. 9
REG–116608–97, 1998–29 I.R.B. 12
REG–119227–97, 1998–30 I.R.B. 13
REG–110332–98, 1998–33 I.R.B.18
REG–110403–98, 1998–29 I.R.B.11
Revenue Procedures:
98–40, 1998–32 I.R.B. 6
98–41, 1998–32 I.R.B. 7
98–42, 1998–28 I.R.B. 9
98–43, 1998–29 I.R.B. 8
98–44, 1998–32 I.R.B. 11
98–45, 1998–34 I.R.B.8
Revenue Rulings:
98–34, 1998–31 I.R.B. 12
98–35, 1998–30 I.R.B. 4
98–36, 1998–31 I.R.B.6
98–37, 1998–32 I.R.B.5
98–38, 1998–32 I.R.B.4
98–39, 1998–33 I.R.B.4
98–40, 1998–33 I.R.B.4
98–41, 1998–35 I.R.B.6
98–42, 1998–35 I.R.B. 5
Treasury Decisions:
8771, 1998–29 I.R.B. 6
8772, 1998–31 I.R.B. 8
8773, 1998–29 I.R.B. 4
Treasury Decisions—Continued
8774, 1998–30 I.R.B. 5
8775, 1998–31 I.R.B.4
8776, 1998–33 I.R.B.6
8777, 1998–34 I.R.B.4
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–28
will be found in Internal Revenue Bulletin 1998–29,
dated July 20, 1998.
IRB 1998-36 9/2/98 3:07 PM Page 38

1998–36 I.R.B.39September 8, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–29 through 35
*Denotes entry since last publication
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5
67–301
Modified by
98–41, 1998–35 I.R.B. 6
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–91
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5
97–37
Obsoleted by
98–39, 1998–33 I.R.B. 4
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–28 will be found in Internal
Revenue Bulletin 1998–29, dated July 20, 1998.
IRB 1998-36 9/2/98 3:07 PM Page 39

September 8, 1998401998–36 I.R.B.
Index
Internal Revenue Bulletins
1998–1 Through 1998–35
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page
number on which it appears.
Key to Abbreviations:
RRRevenue Ruling
RPRevenue Procedure
TDTreasury Decision
CDCourt Decision
PLPublic Law
EOExecutive Order
DODelegation Order
TDOTreasury Department Order
TCTax Convention
SPRStatement of Procedural
Rules
PTEProhibited Transaction
Exemption
EMPLOYMENT TAX
Magnetic media; electronic filing; 1998
Form W–4 specifications (RP 26) 13,
26
Proposed regulations:
26 CFR 31.3121(v)(2)–1, revised;
FICA and FUTA taxation of amounts
under employee benefit plans (REG–
209484–87; REG–209807–95) 8, 40
26 CFR 31.6053–1, –4; electronic tip
reports (REG–104691–97) 11, 13
Student FICA exception (RP 16) 5,19
26 CFR 31.6302–1(f)(4), revised; fed-
eral employment tax deposits de
minimisrule (REG–110403–98) 29,
11
Railroad retirement; rate determination;
quarterly beginning April 1, 1998 and
July 1, 1998 31, 7
Regulations:
26 CFR 1.6045–1T, –2T, removed;
1.6045–1, –2, amended; 301.6011–2,
amended; 301.6011–2T, removed;
magnetic filing requirements for in-
formation returns (TD 8772) 31, 8
26 CFR 31.6302–1(f)(4), 31.6302–1T,
added; federal employment tax de-
posits de minimisrule (TD 8771) 29,
6
EMPLOYMENT TAX—
Continued
Worker classification; section 530; Tax
Court review (Notice 43) 33, 13
ESTATE TAX
Regulations:
26 CFR 20.2041–3, 20.2056(d)–2,
amended; 20.2046–1, revised; prop-
erty interests and disclaimer (TD
8744) 7, 20
26 CFR 25.2702–5, –7, amended; qual-
ified prsonal residence trust, sale of
residence (TD 8743) 7, 26
26 CFR 25.2511–1, 25.2514–3,
25.2518–1, –2, amended; property
interests and disclaimers (TD 8744)
7, 20
Revocable trust; election (RP 13) 4, 21
Special use value; farms; interest rates
(RR 22) 19, 5
Underpayment interest, interest expense
deduction, estates (RP 15) 4, 25
Valuation of compensatory stock options
(RP 34) 18, 15
EXCISE TAX
Bows and arrows; taxable and nontaxable
articles (RR 5) 2, 20
Deposit of excise taxes, amendment (No-
tice 36) 29, 8
Federal excise taxes for consular officers
and employees, exemption (RR 24) 19, 6
Proposed regulations:
26 CFR 40.0–1T, added; 40.6011(a)–
1T, added; 40.6302(c)–2T, added;
deposits of excise taxes (REG–
102894–97) 3, 59
26 CFR 48.4052–1, added; 48.4081–1,
amended; 48.4082–6 through –10
and intermediary sections, 48.4091–
3, added; 48.4101–2, amended;
48.4101–3, 48.6427–10, –11, added;
kerosene tax, aviation fuel tax, tax
on heavy trucks and trailers (REG–
119227–97) 30, 13
26 CFR 53.4958; 301.6213–1,
301.6501(e)–1, 301.6501(n)–1,
301.7422–1, amended; 53.4958–0
through –7 and intermediary sections,
added; failure by certain charitable or-
ganizations to meet certain qualifica-
tion requirements, taxes on excess
benefit transactions (REG–246256–
96) 34, 9
EXCISE TAX—Continued
26 CFR 54.4980B–1, added; group
health plans continuation coverage
requirements (REG–209485–86) 11,
21
Regulations:
26 CFR 40.0–1(a), amended;
40.6011(a)–1(a)(2)(iii), 40.5302(c)–
1, amended, 40.6302(c)–2(b)(2)(iii),
added; deposits of excise taxes (TD
8740) 3, 4
26 CFR 40.6011(a)–1(b)(2)(vi),
amended; 48.4082–5T, removed;
48.4082–5, added; 48.4081–1,
amended; 48.4082–5T, redesignated;
48.6416(b)(4)–1, removed; 48.6421–
3(d)(2), amended; 48.6427–3(d)(2),
amended; 48.6715–1(a)(3), revised;
48.6715–2T, removed; gasoline and
diesel fuel excise tax; special rules for
Alaska, definitions (TD 8748) 8, 24
Regulations:
26 CFR 48.4081–1T, 48.4082–6T
through –10T and intermediary sec-
tions, 48.4091–3T, 48.4101–2T, –3T,
48.6427–10T, –11T, added;
145.4052–1, amended; kerosene,
aviation fuel, heavy trucks and trail-
ers tax (TD 8774) 30, 5
GIFT TAX
Nonstatutory stock option, transfer (RR
21) 18, 7
Qualifying income interest, disposition
(RR 8) 7, 24
Valuation of compensatory stock options
(RP 34) 18, 15
INCOME TAX
Advance pricing agreements, small busi-
ness taxpayers (Notice 10) 6, 9
Article XIII (8) Rev. Proc. (RP 21) 8, 27
Automobile owners and lessees (RP 24)
10, 31; (RP 30) 17,6
Below-market loans; exempted loans;
second mortgage loans under the
MAHRA Act (RR 34) 31, 12
Books and records; automatic data pro-
cessing system (RP 25) 11, 7
Business expenses:
Underground waste storage tank (RR
25) 19, 4
Capital gains and charitable remainder
trusts (Notice 20) 13, 25
IRB 1998-36 9/2/98 3:07 PM Page 40

1998–36 I.R.B.41September 8, 1998
INCOME TAX—Continued
Classification settlement program:
Extended until further notice (Notice
21) 15, 14
Common Trust Funds, unrelated business
taxable income (RR 41) 35, 6
Deductions:
When taken:
All events test; accrued cooperative
advertising expenses (RR 39) 33,
4
Definition of former Indian reservations
in Oklahoma (Notice 45) 35, 7
Disclosure authorization list (RP 43) 29, 8
Domestic assets/liability and investment
yield percentages (RP 31) 23, 9
Education loans (Notice 7) 3, 54
Effective date of consolidated overall for-
eign loss provisions (Notice 40) 35, 7
Elections under section 7704(g) (Notice
3) 3, 48
Electronic Federal Tax Payment System:
Batch filers and bulk filers (RP 32) 17,
11
Electronic funds transfer; failure to de-
posit penalty (Notice 30) 22, 9
Employee plans:
Administrative programs; closing
agreements (RP 22) 12, 11
Determination letters (RP 6) 1, 183;
(RP 14) 4,22
Discrimination; CODAs (Notice 1) 3,
42
Eligible deferred compensation plans
(Notice 8) 4, 6
Group health plans; COBRA continua-
tion coverage; HIPAA portability
(Notice 12) 5, 12
Net unrealized appreciation; capital
gains (Notice 24) 17, 5
Funding:
Full funding limitations, weighted
average interest rate for Janu-
ary 1998 (Notice 9) 4, 8; Feb-
ruary 1998 (Notice 15) 9,8;
March 1998 (Notice 18) 12,11;
April 1998 (Notice 26) 18, 14;
May 1998 (Notice 32) 22,23;
June 1998 (Notice 33) 25,10;
July 1998 (Notice 37) 30, 13;
August 1998 (Notice 44) 34,7
Letter rulings, etc. (RP 4) 1, 113
Limitations on benefits and contribu-
tions (RR 1) 2, 5
Minimum Funding Standards (RP 10)
2, 35
Minimum:
Remedial amendments (RP 42) 28, 9
INCOME TAX—Continued
Qualification (Notice 29) 22, 8;
CODAs (RR 30) 25, 8
Qualification:
Church plans (Notice 39) 33, 11
Recovery of basis; retirees (Notice 2)
2, 22
Section 457 model amendments (RP
41) 32, 7
Section 457 ruling program (RP 40)
32, 6
SIMPLE-IRAs (Notice 4) 2,25
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225
Enhanced oil recovery credit (Notice 41)
33, 12
Environmental cleanup costs; letter
rulings (RP 17) 5, 21
Exempt Organizations:
Letter rulings, etc. (RP 4) 1, 113
Organizations excepted from reporting
lobbying expenditures (RP 19) 7,
30
Tax consequences of physicians re-
cruitment incentives provided by
hospitals (RR 15) 12, 6
Technical advice (RP 5) 1, 155
User fees (RP 8) 1, 225
Failure to deposit federal tax; penalty
abatement (Notice 14) 8, 27
Foreign partnerships, reporting transfer of
property by U.S. persons (Notice 17)
11, 6
Foreign tax credit abuse (Notice 5) 3, 49
Fringe benefits aircraft valuation formula,
first half of 1998 (RR 14) 11, 4;
second half of 1998 (RR 40) 33,4
Fuel from a nonconventional source,
credit; section 29 inflation adjustment;
reference price for 1997 (Notice 28)
19, 7
Hybrid arrangements, treatment under
subpart F (Notice 35) 27, 35
Insurance companies:
Differential earnings rate and recom-
puted differential earnings rate for
mutual life insurance companies (RR
38) 32, 4
Discounting estimated salvage recover-
able (RP 12) 4, 18
Interest rate tables (RR 2) 2,15
Loss reserves; discounting unpaid
losses (RP 11) 4, 9
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for January 1998
(RR4) 2, 18; February 1998 (RR
7) 6, 6; March 1998 (RR 11) 10,
13; April 1998 (RR 18) 14,22;
May (RR 23) 18,5; June 1998
(RR 28) 22,5; July 1998 (RR 33)
27, 26; August 1998 (RR 36) 31, 6
Rates, underpayments and overpay-
ments (RR 17) 13, 21; calendar
quarter beginning July 1, 1998
(RR 32) 25,4
Inventory:
LIFO:
Price indexes; department stores for
November 1997 (RR 6) 4, 4; De-
cember 1997 (RR 9) 6,5; January
1998 (RR 16) 13,18; February
1998 (RR 20) 15,8; March 1998
(RR 26) 21,4; April 1998 (RR
29) 24,4; May 1998 (RR 35) 30,
4; June 1998 (RR 42) 35, 5
Shrinkage estimates:
Changing method of accounting for
estimating inventory shrinkage
(RP 29) 15, 22
Letter rulings, determination letters, and
information letters issued by Associate
Chief Counsel (Domestic), Associate
Chief Counsel (EBEO), Associate
Chief Counsel (Enforcement Litiga-
tion), and Associate Chief Counsel
(International) (RP 1) 1, 7
Losses attributable to a disaster during
1997 (RR 12) 10, 5
Low-income housing tax credit (Notice
13) 6, 19; (RP 45) 34,8
Satisfactory bond; “bond factor”
amounts for the period October
through December 1997 (RR 3) 2, 4;
January–March 1998 (RR 13) 11,4;
April-June 1998 (RR 31) 25,4
Magnetic media/electronic filing:
Specifications for 1998 Forms 1098,
1099, 5498, and W–2G (RP 35) 19,
6
Form 1040NR (RP 36) 23,10
Marginal production rates (Notice 42) 33,
12
Methods of accounting; involuntary
changes (Notice 31) 22, 10
Package design; amortization; capitaliza-
tion; amortizable section 197 intangible
(RP 39) 26, 36
Passive foreign investment companies:
Shareholders may use rules of sec.
1.1295–1T(b)(4), (f), and (g) to tax-
able years beginning before January
1, 1998 (Notice 22) 17, 5
INCOME TAX—Continued
Investment—Continued
IRB 1998-36 9/2/98 3:07 PM Page 41

September 8, 1998421998–36 I.R.B.
INCOME TAX—Continued
Private letter rulings under sections 877,
2107, and 2501(a)(3)(Notice 34) 27, 30
Proposed regulations:
26 CFR 1.32–3, added; EIC eligibility
requirements (REG–116608–97) 29,
12
26 CFR 1.72(p)–1, amended; loans to
plan participants (REG–209476–82)
8, 36
26 CFR 1.141–7, 1.142(f)(4)–1, 1.150–
5, added; 1.141–8, –15, amended;
obligations of states and political
subdivisions (REG–110965–97) 13,
42
26 CFR 1.195–1, added; election to
amortize start-up expenditures
(REG–209373–81) 14,26
26 CFR 1.356–6, added; reorganiza-
tions, nonqualified preferred stock
(REG–121755–97) 9, 13
26 CFR 1.368–1, amended; corporate
reorganizations, continuity of inter-
est (REG–120882–97) 14, 25
26 CFR 1.401(a)(9)–1, amended; quali-
fied plans and individual retirement
plans, required distributions (REG–
209463–82) 4, 27
26 CFR 1.417(e)–1 and paragraph (d),
revised; 1.417(e)–1T and paragraph
(d), revised; valuation of plan dis-
tributrions (TD 8768) 20, 4
26 CFR 1.460–6, amended; election
not to apply look-back method in de
minimiscases (REG–120200–97)
12, 32
26 CFR 1.469–10, revised; 1.7704–1,
added; investment income, passive
activity income and loss rules for
publicly traded partnerships
(REG–105163–97) 8, 31
26 CFR 1.475(g)–2, new; 1.482–8,
added; 1.482–0, –1, –2, 1.863,
1.863–7(a)(1), 1.864–4, –6, 1.894–1,
amended; 1.482–9, redesignated;
global dealing operation allocation
and sourcing of income and deduc-
tions among taxpayers (REG–
208299–90) 16, 26
26 CFR 1.513–7, added; travel and tour
activities of tax exempt organiza-
tions (REG–121268–97) 20, 12
26 CFR 1.671–4, 1.6049–7,
301.6109–1, amended; reporting re-
quirements for widely held fixed in-
vestment trusts (REG–209813–96)
35, 9
INCOME TAX—Continued
26 CFR 1.702–1, 1.954–1, 301.7701–3,
amended; 1.952–1(b), (c), redesig-
nated 1.954–2(a)(5), (6), 1.954–
4(b)(2)(iii), 1.954–9, 1.956–2(a)(3),
added (REG–104537–97) 16, 21
26 CFR 1.732–1, amended; 1.732–2,
amended; 1.734–1(e), added; 1.743–
1, revised; 1.751–1, amended;
1.755–1, revised; 1.1017–1, revised;
adjustments to basis of partnership
property and partnership interest
(REG–209682–94) 17, 20
26 CFR 1.864(b)–1; trading safe har-
bors (REG–106031–98) 26, 38
26 CFR 1.925(a)–1, (b)–1, added;
1.927(e)–1, amended; foreign sales
corporation transfer pricing source
and grouping rules (REG–102144–
98) 15, 25
26 CFR 1.985–8, 1.1001–5, added;
conversion to the euro (REG–
110332–98) 33, 18
26 CFR 1.1092(c)–1, added; equity op-
tions without standard terms, special
rules and definitions (REG–104641–
97) 29, xx
26 CFR 1.1291–1, 1.1293–1, 1.1295–1,
–3, 1.1297–3(c), added; 1.1296–4,
amended; passive foreign investment
company preferred shares, special
income exclusion (REG–115795–
97) 8, 33
26 CFR 1.1361–0, amended; 1.1361–1,
amended; 1.1361–1(d)(3), removed;
1.1361–2 through –6 and intermedi-
ary sections, added; 1.1362–0,
amended; 1.1362–2, amended;
1.1362–8, added; 1.1368–0,
amended; 1.1368–2(d)(2), amended;
1.1374–8(b), amended; S corpora-
tion subsidiaries (REG–251698–96)
20, 14
26 CFR 1.1397E–1, added; qualified
zone academy bonds (REG–
119449–97) 10, 35
26 CFR 1.1502–3(c), revised; 1.1502–
4(f)(3), (g)(3), added; 1.1502–9(b)-
(1)(v), added; 1.1502–21(c)(1)(iii),
amended; consolidated returns, limi-
tations on the use of certain losses
and credits (REG–104062–97) 10, 34
26 CFR 1.6031–1, removed;
1.6031(a)–1, added; 1.6063–1,
amended; partnership returns
(REG–209322–82) 15, 26
26 CFR 1.7702B–1, –2, added; quali-
fied long-term care insurance con-
tracts (REG–109333–97) 9, 9
INCOME TAX—Continued
26 CFR 301.6159–1, amended; agree-
ments for tax liability installment
payments (REG–100841–97) 8, 30
26 CFR 301.6404–2, added; abatement
of interest (REG–209276–87) 11, 18
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection ac-
tions (REG–251502–96) 9, 14
26 CFR 54.9812–1, added; mental
health parity; HIPAA (REG–
109704–97) 3, 60
Qualified Funeral Trust; guidance (Notice
6) 3, 52
Qualified intermediary agreements:
Guidance provided to foreign financial
institutions (RP 27) 15, 15
Qualified mortgage bonds, mortgage
credit certificates:
Guidance provided regarding use of na-
tional and area median gross income
figures by issuers (RP 28) 15, 14
Qualified Subchapter S Trust (QSST)
conversion to Electing Small Business
Trust (ESBT) 10, 30
Qualified Zone Academy Zone Bonds
(RP) 3, 100
Real estate transactions (RP 20) 7, 32
Regulations:
26 CFR 1.32–3T, added; EIC eligibility
requirements (TD 8773) 29, 4
26 CFR 1.61–12, 1.249–1, 1.1016–5,
1.1275–1, amended; 1.163–13,
1.171–5, added; 1.171–1, –2, –3, –4,
revised; 1.1016–9, removed; amorti-
zable bond premium (TD 8746) 7, 4
26 CFR 1.141–0, –2, amended;
1.141–7, –8, removed; 1.141–7T,
–8T, –15T, 1.142(f)(4)–1T, 1.150–
5T, added; 1.141–15, revised; oblig-
ations of states and political subdivi-
sions (TD 8757) 13, 4
26 CFR 1.166–3(a)(3), 1.1001–4,
added; 1.166–3T, 1.1001–4T, re-
moved; modifications of bad debts
and dealer assignments of notional
principal contracts (TD 8763) 15, 5
26 CFR 1.280B–1, added; building de-
molition, definition of structure (TD
8745) 7, 15
26 CFR 1.338–2, 1.368–1, –2,
amended; 1.368–1T, added; corpo-
rate reorganizations, continuity of in-
terest, and continuity of business en-
terprise (TD 8760) 14, 4; (TD 8761)
14, 13
IRB 1998-36 9/2/98 3:07 PM Page 42

1998–36 I.R.B.43September 8, 1998
INCOME TAX—Continued
26 CFR 1.354–1, 1.355–1, 1.356–3,
amended; reorganizations, treatment
of warrants as securities (TD 8752)
9, 4
26 CFR 1.356–6T, added; reorganiza-
tions, nonqualified preferred stock
(TD 8753) 9, 6
26 CFR 1.367(a)–1T, –3, amended;
1.367(a)–3T, removed; 1.367(a)–8,
1.367(b)–1, –4, added; 1.367(d)–1T,
amended; 1.6038B–1, added;
1.6038B–1T; 7.367(b)–1, –4, –7,
amended; certain transfers of stock
or securities by U.S. persons to for-
eign corporations (TD 8770) 27, 4
26 CFR 1.411(d)–4, amended; permit-
ted elimination of preretirement op-
tional forms of benefit (TD 8769)
28, 4
26 CFR 1.446–1, amended; 1.446–1T,
removed; 301.9100–0, added;
301.9100–1, revised; 301.9100–2,
–3, added; 301.9100–1T, –2T, –3T;
removed extensions of time to make
elections (TD 8742) 5, 4
26 CFR 1.453.11; installment obliga-
tions received from liquidating cor-
porations (TD 8762) 14, 15
26 CFR 1.460–0, amended; 1.460–6T,
added; election not to apply look-
back method in de minimiscases
(TD 8756) 12, 4
26 CFR 1.460–6T, removed;
1.460–6(i), (j), added; election not to
apply look-back method in de min-
imiscases (TD 8775) 31, 4
26 CFR 1.465–27, added; qualified
nonrecourse financing under section
465(b)(6) (TD 8777) 34, 4
26 CFR 1.468A–2, –3, –8, amended;
nuclear decommissioning funds; re-
vised schedules of ruling amounts
(TD 8758) 13, 15
26 CFR 1.904–5(o), 1.904–5T, 1.954–
0(b), 1.954–1, amended; 1.954–1T,
–2T, –9T, added; 301.7701–3(f)(1),
amended; controlled foreign corpo-
ration relating to partnerships and
branches (TD 8767) 16, 4
INCOME TAX—Continued
26 CFR 1.905–2, amended; foreign tax
credit filing requirements (TD 8759)
13, 19
26 CFR 1.925(a)–1T, 1.925(b)–
1T(b)(3)(i), amended; 1.927(e)–1T,
revised; foreign sales corporation
transfer pricing source and grouping
rules (TD 8764) 15, 9
26 CFR 1.985–1, –5(a), amended;
1.985–7, added; dollar approximate
separate transactions method of ac-
counting (DASTM) to profit and loss
method of accounting, change from
P&L method to DASTM (TD 8765)
16, 11
26 CFR 1.1271–1, 1.1275–1, amended;
debt instruments with original issue
discount, annuity contracts (TD
8754) 10, 15
26 CFR 1.1202–0, –2, added; qualified
small business stock (TD 8749) 7, 16
26 CFR 1.1290–0, amended; 1.1294–0,
added; a. 1291–0T, amended;
1.1291–1T, added; 1.1291–9,
amended; 1.1293–0, –1T, added;
1.1295–0, –1T, –3T, 1.1297–3T(c),
added; passive foreign investment
company preferred shares, special
income exclusion (TD 8750) 8, 4
26 CFR 1.1396–1; empowerment zone
employment credit, qualified zone
employees (TD 8747) 7, 18
26 CFR 1.1397E–1T, added; qualified
zone academy bonds (TD 8755) 10,
21
26 CFR 1.1502–3, –4, –9(a),
–21T(c)(1)(iii), amended; 1.1502–
3T, –4T, –9T, –55T, added; 1.1502–
23T(b), (c), redesignated; consoli-
dated returns, limitations on the use
of certain losses and credits, overall
foreign loss accounts (TD 8751) 10,
23
26 CFR 54.9801–2T, amended;
54.9801–4T, –5T, revised; 54.9804–
1T, redesignated; 54.9806–1T, redes-
ignated; 54.9812–1T, added; mental
health parity, interim rules (TD
8741) 3, 6
INCOME TAX—Continued
Relocation payments:
Authorized by sec. 105(a)(11) of Hous-
ing and Community Development
Act, not includible in gross income
(RR 19) 15, 5
Renewable electricity production credit;
calendar year 1998 inflation adjustment
factor and reference prices. (Notice 27)
18, 14
Reorganizations; exchange of securities
(RR 10) 10, 11
Reproduction of Forms 1096, 1098, 1099,
5498, and W–2G (RP 37) 26, 6
Rulings:
Areas in which advance rulings will not
be issued:
Associate Chief Counsel (Domes-
tic), Associate Chief Counsel
(EBEO) (RP 3) 1, 100
Associate Chief Counsel (Interna-
tional) (RP 7) 1, 222
Obsolete (RR 37) 32, 5
Rural airports (RP 18) 6, 20
Social security benefits under U.S.-
Canada treaty, recent changes (Notice
23) 18, 9
Specifications for filing Form 1042–S
(RP 44) 32, 11
Spin-off of subsidiary (RR 27) 22, 4
SRLY notice (Notice 38) 34, 7
Technical advice to district directors and
chiefs, appeals offices, Associate Chief
Counsel (Domestic), Associate Chief
Counsel (EBEO), Associate Chief
Counsel (Enforcement Litigation), and
Associate Chief Counsel (International)
(RP 2) 1, 74
Tentative differential earnings rate for
1997 (Notice 19) 13, 24
Treatment of hybrid arrangements under
subpart F (Notice 11) 6, 18
Trust, election to treat U.S. person;
domestic trust (Notice 25) 18, 11
Waiver of period of stay in foreign coun-
try (RP 38) 27, 29
Withholding regulations:
Effective date of sec. 1441 withholding
regulations amended (Notice 16) 15,
12
IRB 1998-36 9/2/98 3:07 PM Page 43

September 8, 1998441998–36 I.R.B.
Notes
IRB 1998-36 9/2/98 3:07 PM Page 44

1998–36 I.R.B.45September 8, 1998
Notes
IRB 1998-36 9/2/98 3:07 PM Page 45

Notes
September 8, 1998461998–36 I.R.B.
IRB 1998-36 9/2/98 3:07 PM Page 46

IRB 1998-36 9/2/98 3:07 PM Page 47

INTERNAL REVENUE BULLETIN
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IRB 1998-36 9/2/98 3:07 PM Page 48