Internal Revenue Bulletin 1998-11 (PDF rendition): IRS Notices

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

INCOME TAX
Rev. Rul. 98–13, page 4.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period January through March
1998.This ruling announces the monthly bond factor
amounts to be used by taxpayers who dispose of qualified
low-income buildings or interests therein during the period
January through March 1998.
Rev. Rul. 98–14, page 4.
Fringe benefits aircraft valuation formula.For purposes
of section 1.61–21(g) of the Income Tax Regulations, relat-
ing to the rule for valuing noncommercial flights on em-
ployer-provided aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal charge in effect for
the first half of 1998 are set forth.
EMPLOYEE PLANS
REG–209485–86, page 21.
Proposed regulations under section 4980B of the Code pro-
vide guidance on certain changes made by the Health Insur-
ance Portability and Accountability Act of 1996, the Omnibus
Budget Reconciliation Act of 1989, and the Technical and Mis-
cellaneous Revenue Act of 1988 relating to the continuation
coverage requirements applicable to group health plans.
EXEMPT ORGANIZATIONS
Announcement 98–21, page 26.
A list is given of organizations now classified as private foun-
dations.
EMPLOYMENT TAX
REG–104691–97, page 13.
Proposed regulations under section 6053 of the Code per-
mit employers to establish electronic systems for their
tipped employees to use to report tips to the employer.
EXCISE TAX
PS–158–86, page 13.
The proposed regulation under section 4611 of the Code re-
lating to the petroleum tax imposed on natural gasoline is
withdrawn.
ADMINISTRATIVE
Rev. Proc. 98–25, page 7.
Books and records; automatic data processing system.
This procedure specifies the basic requirements that the Ser-
vice considers to be essential in cases where a taxpayer’s
records are maintained within an Automatic Data Processing
(ADP) system. Rev. Proc. 91–59 updated and superseded.
Notice 98–17, page 6.
This notice provides simplified rules under section 6038B of
the Code, as amended by the Taxpayer Relief Act of 1997,
on how U.S. persons should report transfers of property to
foreign partnerships made between August 5, 1997, and
January 1, 1998. Taxpayers may also apply the simplified
rules of this notice to transfers to foreign partnerships made
after August 20, 1996, and subject to the reporting require-
ments of section 1494(c) of the Code, so that the penalties
under that section will not apply.
REG–209276–87, page 18.
Proposed regulations under section 6404 of the Code relate
to the abatement of interest attributable to unreasonable er-
rors or delays by an officer or employee of the IRS in per-
forming a ministerial or managerial act.
Announcement 98–20, page 25.
This announcement informs all payers/transmitters, who file
information returns magnetically or electronically with the
IRS Martinsburg Computing Center, of a change in the
record format for tax year 1998 returns filed in calendar
year 1999.
Internal Revenue
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Bulletin No. 1998–11
March 16, 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 29.

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

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Section 42.—Low-Income
Housing Credit
Low-income housing credit; satisfac-
tory bond; “bond factor” amounts for
the period January through March
1998.This ruling announces the monthly
bond factor amounts to be used by tax-
payers who dispose of qualified low-in-
come buildings or interests therein during
the period January through March 1998.
Rev. Rul. 98–13
In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guid-
ance to taxpayers concerning the general
methodology used by the Treasury De-
partment in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Sec-
retary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Inter-
nal Revenue Bulletin a table of “bond fac-
tor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfac-
tory under § 42(j)(6) for dispositions of
qualified low-income buildings or inter-
ests therein during the period January
through March 1998.
March 16, 199841998–11 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Table 1
Rev. Rul. 98–13
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition 198719881989199019911992199319941995199619971998
Jan ‘9863.9679.5781.8484.7588.1491.9795.9299.75103.57107.70111.85112.52
Feb ‘9863.9679.5781.5984.4987.8691.6795.5999.39103.18107.25111.28112.52
Mar ‘9863.9679.5781.3584.2487.5991.3795.2799.04102.80106.83110.79112.52
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see the following
revenue rulings: Rev. Rul. 95–83,
1995–2 C.B. 8, for dispositions occurring
during calendar year 1995; and Rev. Rul.
98–3, 1998–2 I.R.B. 4, for dispositions
occurring during the calendar years 1996
and 1997.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Jack Malgeri of the Office of As-
sistant Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this revenue ruling, contact
Mr. Malgeri at (202) 622-3040 (not a toll-
free call).
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Fringe benefits aircraft valuation for-
mula.For purposes of section 1.61–21(g)
of the Income Tax Regulations, relating to
the rule for valuing noncommercial flights
on employer-provided aircraft, the Stan-
dard Industry Fare Level (SIFL) cents-per-
mile rates and terminal charge in effect for
the first half of 1998 are set forth.
Rev. Rul. 98–14
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of the
Income Tax Regulations provides a rule
for valuing noncommercial flights on em-
ployer-provided aircraft. Section 1.61–
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying
the SIFL cents-per-mile rates applicable
for the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61–21(g)(7) and
then adding the applicable terminal
charge. The SIFL cents-per-mile rates in
the formula and the terminal charge are
calculated by the Department of Trans-
portation and are reviewed semi-annually.
The following chart sets forth the ter-
minal charges and SIFL mileage rates:
Period During Which Terminal SIFL Mileage
the Flight Was TakenCharge Rates
1/1/98-6/30/98 $31.60Up to 500 miles = $.1729 per mile
501-1500 miles = $.1318 per mile
Over 1500 miles = $.1267 per mile

DRAFTING INFORMATION
The principal author of this revenue
ruling is Felicia A. Daniels of the Office
of the Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions). For further information regarding
this revenue ruling contact, Ms. Daniels
on (202) 622-6050 (not a toll-free call).
Section 6001.—Notice or
Regulations Requiring Records,
Statements, and Special Returns
26 CFR 1.6001–1: Records.
What are the basic requirements that the Internal
Revenue Service considers to be essential in cases
where a taxpayer’s records are maintained within an
Automatic Data Processing (ADP) system. See Rev.
Proc. 98–25, page 7.
1998–11 I.R.B.5March 16, 1998

March 16, 199861998–11 I.R.B.
Contributions to Foreign
Partnerships Under Section
6038B
Notice 98–17
This Notice provides simplified rules
(pending the issuance of regulations) for
reporting the transfer of property by U.S.
persons to foreign partnerships under sec-
tion 6038B of the Internal Revenue Code
(the Code), as amended by the Taxpayer
Relief Act of 1997 (the 1997 Act). The
Notice applies to transfers made after Au-
gust 5, 1997 and before January 1, 1998.
Taxpayers may also apply the simplified
rules of this Notice to transfers to foreign
partnerships made after August 20, 1996
and subject to the reporting requirements
of section 1494(c), so that the penalties
under that section shall not apply.
SECTION 1. BACKGROUND
A. Sections 1491–1494
Before its repeal, section 1491 imposed
a 35 percent excise tax on a transfer of
property (“section 1491 transfer”) by a
U.S. person to a foreign partnership (un-
less section 1492 applied). The excise tax
was 35 percent of the excess of the fair
market value of the property transferred
over its adjusted basis plus any gain recog-
nized to the transferor upon the transfer.
In 1996, section 1494(c) was enacted,
adding a penalty (even if no excise tax
was due) for failure to file a return report-
ing a section 1491 transfer made after Au-
gust 20, 1996. Sections 1491–1494 were
repealed by the 1997 Act, effective Au-
gust 5, 1997.
B. Notices 97–18 and 97–42
Notice 97–18, 1997–10 I.R.B. 35, is-
sued after enactment of section 1494(c)
and before its repeal, excluded certain
section 1491 transfers from the reporting
requirement and provided that no penalty
would be imposed under section 1494(c)
with respect to a section 1491 transfer if a
Form 926 reporting such transfer was
filed by the date specified in that notice.
Notice 97–42, 1997–29 I.R.B. 12, also
issued after enactment of section 1494(c)
and before its repeal, extended the due
date for filing Form 926 to report section
1491 transfers made during the taxable
year that included August 20, 1996, to the
due date (including extensions) of the
transferor’s timely-filed income tax return
or information return for the first taxable
year beginning on or after January 1,
1997.
C. Section 6038B as amended by the
1997 Act
The 1997 Act amended section 6038B
to require that certain transfers by U.S.
persons to foreign partnerships be subject
to reporting under section 6038B. These
transfers are contributions described in
section 721 (“section 721 contributions”)
and any other contributions described in
regulations. Under section 6038B(b)(1),
this reporting is required only if: 1) the
transferor holds (immediately after the
transfer) directly or indirectly at least a 10
percent interest in the partnership, or 2)
the fair market value of the property
transferred (alone, or aggregated with cer-
tain other section 721 contributions) ex-
ceeds $100,000.
SECTION 2. SECTION 6038B
REPORTING FOR TRANSFERS
MADE AFTER AUGUST 5, 1997 AND
BEFORE JANUARY 1, 1998
Section 721 contributions to foreign
partnerships made after August 5, 1997
and before January 1, 1998 and required
to be reported under section 6038B shall
be reported by the filing of Form 926 with
Part I of the form completed and the in-
formation required in this Section 2 at-
tached. Form 926 and its attachments
must be filed with the transferor’s tax re-
turn or information return for the taxable
year that includes the date of transfer.
The notation “Filed under Notice 98–17”
should be marked at the top of the form.
A U.S. person that contributes to a for-
eign partnership appreciated property
subject to the allocation rules of section
704(c) (property with built-in gain), or
any intangible property, in a transfer sub-
ject to section 6038B, must separately
identify the property (except to the extent
that the property is permitted to be aggre-
gated in making allocations under section
704(c)). A U.S. person that contributes
built-in gain property must also indicate
the foreign partnership’s method of allo-
cating the built-in gain under section
704(c).
The value of other contributed property
must be aggregated by category on a
statement attached to Form 926 (with, in
each case, a brief description of the prop-
erty). The categories are:
(1) Stock in trade of the transferor (in-
ventory);
(2) Tangible property (other than stock
in trade) used in a trade or business of the
transferor;
(3) Cash, stock, notes receivable and
payable, and other securities; and,
(4) Other property.
Until further notice, taxpayers transfer-
ring property to partnerships will be re-
quired to report under section 6038B only
section 721 contributions. Any guidance
exercising the authority to require the re-
porting of other contributions will be
prospective only. Additionally, Section
761(a) allows certain organizations that
would otherwise be treated as partner-
ships to elect not to be treated as partner-
ships for purposes of subchapter K of the
Code. Until further notice, any transfer to
a foreign partnership with a valid section
761(a) election in effect will not be re-
quired to be reported under section
6038B.
SECTION 3. RELIEF FROM SECTION
1494 REPORTING
Section 1144(d)(2) of the 1997 Act pro-
vides that the section 1494(c) penalty will
not apply to any transfers which would
otherwise be subject to the penalty, if tax-
payers comply with the reporting require-
ments of amended section 6038B or such
simplified reporting requirements as the
Secretary may prescribe. In order to
avoid any section 1494(c) penalty which
otherwise would apply in respect of trans-
fers to foreign partnerships, taxpayers
need only comply with the simplified re-
porting requirements provided in Section
2, above. Furthermore, section 721 con-
tributions need only be reported by tax-
payers described in section 6038B(b)(1).
A transfer to a foreign partnership may
consist solely of property which would
not be required to be reported under sec-
tion 6038B and this Notice, but which is
required to be reported under section
Part III. Administrative, Procedural, and Miscellaneous

1494 and Notice 97–18. Taxpayers need
not report such transfers to avoid penal-
ties under section 1494(c). However, in
such cases, at their option, taxpayers may
file a Form 926 with the notation “Filed
under Notice 98–17—no reportable trans-
fers” at the top of the form.
This Notice does not affect any obliga-
tion under section 1494 to report transfers
to foreign entities other than foreign part-
nerships. Also, if a transfer to a foreign
partnership was subject to the excise tax
under section 1491, the tax must still be
paid and the transfer reported on Form
926. If the excise tax does not otherwise
apply by reason of section 1492, the tax-
payer must still comply with all applica-
ble requirements of that section. Finally,
a U.S. person that is required to report
under section 1494 and does not comply
with the reporting requirements of this
Notice remains subject to penalties under
section 1494(c).
SECTION 4. EFFECTIVE DATES
This Notice is effective for transfers
made after August 5, 1997 and before
January 1, 1998. The Form 926 reporting
such transfers must be filed with the
transferor’s timely-filed (including exten-
sions) income tax return or information
return for the period in which the transfers
occur. Transferors choosing to report
under these rules in respect of transfers
subject to section 1494(c), must file a
Form 926 including the information re-
quired by this Notice with their return for
the first taxable year beginning on or after
January 1, 1997 (the reporting deadline
under Notice 97–42).
SECTION 5. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this Notice have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1586.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The collections of information con-
tained in this Notice are in Sections 2 and
3. The information is required to deter-
mine if gain and income from property
transferred to foreign partnerships is cor-
rectly taxed to U.S. transferors. The in-
formation will be used for the purpose de-
scribed in the preceding sentence. The
collections of information are required to
obtain a benefit. The likely respondents
are businesses or other for-profit institu-
tions, individuals, and not-for-profit insti-
tutions.
The estimated total annual reporting
and/or recordkeeping burden is 250
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from 0.25
hours to 1.0 hours, with an average bur-
den of 0.5 hours. The estimated number
or respondents and/or recordkeepers is
500.
The estimated frequency of responses
(used for reporting requirements only) is
once per year.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
Robert Lorence of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Lorence at (202) 622-3860 (not a toll-
free call).
26 CFR 601.105: Examination of returns and
claims for refund, credits or abatement;
determination of correct tax liability.
(Also Part I, Section 6001; 1.6001–1.)
Rev. Proc. 98–25
Table of Contents
SECTION 1.PURPOSE
SECTION 2.BACKGROUND
SECTION 3.SCOPE
SECTION 4.DEFINITIONS
SECTION 5.RETAINING MACHINE-
SENSIBLE RECORDS
SECTION 6.DOCUMENTATION
SECTION 7.RESOURCES
SECTION 8.NOTIFICATION
SECTION 9.MAINTENANCE
SECTION 10.DISTRICT DIRECTOR
AUTHORITY
SECTION 11. HARDCOPY RECORDS
SECTION 12. PENALTIES
SECTION 13.EFFECT ON OTHER
DOCUMENTS
SECTION 14. EFFECTIVE DATE
SECTION 15.INTERNAL REVENUE
SERVICE OFFICE CON-
TACT
SECTION 16. PAPERWORK REDUC-
TION ACT
SECTION 1. PURPOSE
The purpose of this revenue procedure
is to specify the basic requirements that
the Internal Revenue Service considers to
be essential in cases where a taxpayer’s
records are maintained within an Auto-
matic Data Processing system (ADP).
This revenue procedure updates and su-
persedes Rev. Proc. 91–59, 1991–2 C.B.
841.
SECTION 2. BACKGROUND
.01 Section 6001 provides that every
person liable for any tax imposed by the
Code, or for the collection thereof, must
keep such records, render such state-
ments, make such returns, and comply
with such rules and regulations as the
Secretary may from time to time pre-
scribe. Whenever necessary, the Secre-
tary may require any person, by notice
served upon that person or by regulations,
to make such returns, render such state-
ments, or keep such records, as the Secre-
tary deems sufficient to show whether or
not that person is liable for tax.
.02 Section 1.6001–1(a) of the Income
Tax Regulations generally provides that
persons subject to income tax, or required
to file a return of information with respect
to income, must keep such books or
records, including inventories, as are suf-
ficient to establish the amount of gross in-
come, deductions, credits, or other mat-
ters required to be shown by that person
in any return of such tax or information.
.03 Section 1.6001–1(e) provides that
the books or records required by § 6001
must be kept available at all times for in-
spection by authorized internal revenue
officers or employees, and must be re-
tained so long as the contents thereof may
become material in the administration of
any internal revenue law.
.04 Rev. Rul. 71–20, 1971–1 C.B. 392,
establishes that all machine-sensible data
media used for recording, consolidating,
and summarizing accounting transactions
1998–11 I.R.B.7March 16, 1998

and records within a taxpayer’s ADP sys-
tem are records within the meaning of
§ 6001 and § 1.6001–1, and are required
to be retained so long as the contents may
become material in the administration of
any internal revenue law.
SECTION 3. SCOPE
.01Records.
(1) The requirements of this revenue
procedure pertain to all matters under the
jurisdiction of the Commissioner of Inter-
nal Revenue including, but not limited to,
income, excise, employment, and estate
and gift taxes, as well as employee plans
and exempt organizations.
(2) The requirements of this revenue
procedure are applicable to any sections
of the Code that have unique or specific
recordkeeping requirements. For exam-
ple, machine-sensible records maintained
by the taxpayer to meet the requirements
of § 274(d) relating to the amount, time,
place, and business purpose of a business
expense must meet the requirements of
this revenue procedure.
(3) Except as otherwise provided in
this revenue procedure, all requirements
of § 6001 that apply to hardcopy books
and records apply as well to machine-sen-
sible books and records that are main-
tained within an ADP system.
.02 Taxpayers.
(1) A taxpayer with assets of $10
million or more at the end of its taxable
year must comply with the record reten-
tion requirements of Rev. Rul. 71–20 and
the provisions of this revenue procedure.
For purposes of this revenue procedure, a
controlled group of corporations, as de-
fined in § 1563, is considered to be one
corporation and all assets of all members
of the group are aggregated.
(2) A taxpayer with assets of less
than $10 million at the end of its taxable
year must comply with the record reten-
tion requirements of Rev. Rul. 71–20 and
the provisions of this revenue procedure if
any of the following conditions exists:
(a) all or part of the information
required by § 6001 is not in the taxpayer’s
hardcopy books and records, but is avail-
able in machine-sensible records;
(b) machine-sensible records were
used for computations that cannot be rea-
sonably verified or recomputed without
using a computer (e.g.,Last-In, First-Out
(LIFO) inventories); or
(c) the taxpayer is notified by the
District Director that machine-sensible
records must be retained to meet the re-
quirements of § 6001.
(3) A Controlled Foreign Corpora-
tion (CFC), a domestic corporation that is
25 percent foreign-owned, and a foreign
corporation engaged in a trade or business
within the United States at any time dur-
ing a taxable year that maintains machine-
sensible records within an ADP system
must comply with the requirements of this
revenue procedure to satisfy the record-
keeping requirements of §§ 964(c),
982(d), 6038A(c)(4), and 6038C (and the
regulations thereunder).
(4) An insurance company that main-
tains machine-sensible records within an
ADP system to determine losses incurred
under § 832(b)(5) must comply with the
requirements of this revenue procedure
and Rev. Proc. 75–56, 1975–2 C.B. 596.
For this purpose, the machine-sensible
records for a particular taxable year in-
clude the records for that year and the
seven preceding years, all of which must
be retained so long as they may become
material to the examination of an insur-
ance company’s federal tax return.
(5) A taxpayer’s use of a third party
(such as a service bureau, time-sharing
service, value-added network, or other
third party service) to provide services
(e.g., custodial or management services)
in respect of machine-sensible records
does not relieve the taxpayer of its record-
keeping obligations and responsibilities
under § 6001 and this revenue procedure.
SECTION 4. DEFINITIONS
.01 An “ADP system” consists of an ac-
counting and/or financial system (and
subsystems) that processes all or part of a
taxpayer’s transactions, records, or data
by other than manual methods. An ADP
system includes, but is not limited to, a
mainframe computer system, stand-alone
or networked microcomputer system,
Data Base Management System (DBMS),
and a system that uses or incorporates
Electronic Data Interchange (EDI) tech-
nology or an electronic storage system.
.02 “Capable of being processed”
means the ability to retrieve, manipulate,
print on paper (hardcopy), and produce
output on electronic media. This term
does not encompass any requirement that
the program or system that created the
computer data be available to process the
data unless that program or system is nec-
essary to:
(1) a tax-related computation (e.g.,
LIFO inventories, insurance company
loss reserve computations, and foreign tax
credit computations); or
(2) the retrieval of data (e.g.,some
data base systems processes where the
taxpayer chooses not to create a sequen-
tial extract (see section 5.02 of this rev-
enue procedure)).
.03 A “DBMS” is a software system
that creates, controls, relates, retrieves,
and provides accessibility to data stored
in a data base.
.04 “EDI technology” is the computer-
to-computer exchange of business infor-
mation.
.05 An “electronic storage system” is a
system used to prepare, record, transfer,
index, store, preserve, retrieve, and repro-
duce books and records by either: (1)
electronically imaging hardcopy docu-
ments to an electronic storage media; or
(2) transferring computerized books and
records to an electronic storage media
using a technique such as “COLD” (com-
puter output to laser disk), which allows
books and records to be viewed or repro-
duced without the use of the original pro-
gram. See Rev. Proc. 97–22, 1997–13
I.R.B. 9, for electronic storage system re-
quirements.
.06 A “machine-sensible record” is data
in an electronic format that is intended for
use by a computer. Machine-sensible
records do not include paper records or
paper records that have been converted to
an electronic storage medium such as mi-
crofilm, microfiche, optical disk, or laser
disk.
SECTION 5. RETAINING MACHINE-
SENSIBLE RECORDS
.01 General.
(1) The taxpayer must retain ma-
chine-sensible records so long as their
contents may become material to the ad-
ministration of the internal revenue laws
under § 1.6001–1(e). At a minimum, this
materiality continues until the expiration
of the period of limitation for assessment,
including extensions, for each tax year. In
certain situations, records should be kept
for a longer period of time. For example,
records that pertain to fixed assets, losses
incurred under § 832(b)(5), and LIFO in-
March 16, 199881998–11 I.R.B.

ventories should be kept for longer peri-
ods of time.
(2) The taxpayer’s machine-sensible
records must provide sufficient informa-
tion to support and verify entries made on
the taxpayer’s return and to determine the
correct tax liability. The taxpayer’s ma-
chine-sensible records will meet this re-
quirement only if they reconcile with the
taxpayer’s books and the taxpayer’s re-
turn. A taxpayer establishes this reconcil-
iation by demonstrating the relationship
(i.e., audit trail):
(a) between the total of the
amounts in the taxpayer’s machine-sensi-
ble records by account and the account to-
tals in the taxpayer’s books; and
(b) between the total of the
amounts in the taxpayer’s machine-sensi-
ble records by account and the taxpayer’s
return.
(3) The taxpayer must ensure that its
machine-sensible records contain suffi-
cient transaction-level detail so that the
information and the source documents un-
derlying the machine-sensible records can
be identified.
(4) All machine-sensible records re-
quired to be retained by this revenue pro-
cedure must be made available to the Ser-
vice upon request and must be capable of
being processed.
(5) Except as otherwise required by
sections 5.01(2) or (3) of this revenue
procedure, a taxpayer is not required to
create any machine-sensible record other
than that created either in the ordinary
course of its business or to establish re-
turn entries. For example, a taxpayer who
does not create, in the ordinary course of
its business, the electronic equivalent of a
traditional paper document (such as an in-
voice) is not required by this revenue pro-
cedure to construct such a record, pro-
vided that the requirements of sections
5.01(2) and (3) are met. For requirements
relating to hardcopy records, see section
11 of this revenue procedure.
(6) A taxpayer’s disposition of a sub-
sidiary company does not relieve the
taxpayer of its responsibilities under this
revenue procedure. The files and docu-
mentation retained for the Service by, or
for, a disposed subsidiary must be re-
tained as otherwise required by this rev-
enue procedure.
.02 DBMS.
(1) A taxpayer has the discretion to
create files solely for the use of the Ser-
vice. For example, a taxpayer that uses a
DBMS may satisfy the provisions of this
revenue procedure by creating and retain-
ing a sequential file that contains the
transaction-level detail from the DBMS
and otherwise meets the requirements of
this revenue procedure.
(2) A taxpayer that creates a file de-
scribed in section 5.02(1) of this revenue
procedure must document the process that
created the sequential file in order to es-
tablish the relationship between the file
created and the original DBMS records.
.03 EDI.
(1) A taxpayer that uses EDI technol-
ogy must retain machine-sensible records
that alone, or in combination with any
other records (e.g.,underlying contracts,
price lists, and price changes), contain all
the information that § 6001 requires of
hardcopy books and records. For exam-
ple, a taxpayer that uses EDI technology
receives electronic invoices from its sup-
pliers. The taxpayer decides to retain the
invoice data from completed and verified
EDI transactions in its accounts payable
system rather than retain the incoming
EDI transactions. Neither the EDI trans-
actions, nor the accounts payable system,
contain product descriptions or vendor
names. To satisfy the requirements of
§ 6001, the taxpayer must supplement its
EDI records with product code descrip-
tion lists and a vendor master file.
(2) A taxpayer may capture the re-
quired detail for an EDI transaction at any
level within its accounting system. How-
ever, the taxpayer must establish audit
trails between the retained records and the
taxpayer’s books, and between the re-
tained records and the tax return.
(3) Section 11.02 of this revenue
procedure provides additional guidance
concerning hardcopy requirements related
to EDI transactions.
SECTION 6. DOCUMENTATION
.01 The taxpayer must maintain and
make available to the Service upon re-
quest documentation of the business
processes that:
(1) create the retained records;
(2) modify and maintain its records;
(3) satisfy the requirement of section
5.01(2) of this revenue procedure to sup-
port and verify entries made on the tax-
payer’s return and determine the correct
tax liability; and
(4) evidence the authenticity and in-
tegrity of the taxpayer’s records.
.02 The documentation described in
section 6.01 of this revenue procedure
must be sufficiently detailed to identify:
(1) the functions being performed as
they relate to the flow of data through the
system;
(2) the internal controls used to en-
sure accurate and reliable processing;
(3) the internal controls used to pre-
vent the unauthorized addition, alteration,
or deletion of retained records; and
(4) the charts of accounts and de-
tailed account descriptions.
.03 With respect to each file that is re-
tained, the taxpayer must maintain, and
make available to the Service upon re-
quest, documentation of:
(1) record formats or layouts;
(2) field definitions (including the
meaning of all “codes” used to represent
information);
(3) file descriptions (e.g.,data set
name);
(4) evidence that periodic checks
(described in section 9.01(3) of this rev-
enue procedure) of the retained records
were performed to meet section 9.02(1) of
this revenue procedure, if the taxpayer
wants to take advantage of section 9.02 of
this revenue procedure;
(5) evidence that the retained records
reconcile to the taxpayer’s books; and
(6) evidence that the retained records
reconcile to the taxpayer’s tax return.
.04 The system documentation must in-
clude any changes to the items specified
in sections 6.01, 6.02, and 6.03 of this
revenue procedure and the dates these
changes are implemented.
SECTION 7. RESOURCES
.01 The taxpayer must provide the Ser-
vice at the time of an examination with
the resources (e.g.,appropriate hardware
and software, terminal access, computer
time, personnel, etc.) that the District Di-
rector determines is necessary to process
the taxpayer’s machine-sensible books
and records. At the request of the tax-
payer, the District Director may, at the
District Director’s discretion:
(1) identify the taxpayer’s resources
that are not necessary to process books
and records;
1998–11 I.R.B.9March 16, 1998

(2) allow a taxpayer to convert ma-
chine-sensible records to a different
medium (e.g., from mainframe files to
microcomputer diskette(s));
(3) allow the taxpayer to satisfy the
processing needs of the Service during
off-peak hours; and
(4) allow the taxpayer to provide the
Service with third-party equipment.
.02 An ADP system must not be sub-
ject, in whole or in part, to any agreement
(such as a contract or license) that would
limit or restrict the Service’s access to and
use of the ADP system on the taxpayer’s
premises (or any other place where the
ADP system is maintained), including
personnel, hardware, software, files, in-
dexes, and software documentation.
SECTION 8. NOTIFICATION
.01 Except as provided in section 9.02
of this revenue procedure, the taxpayer
must promptly notify its District Director
if any machine-sensible records are lost,
stolen, destroyed, damaged, or otherwise
no longer capable of being processed (as
defined in section 4.02 of this revenue
procedure), or are found to be incomplete
or materially inaccurate (affected
records).
.02 The taxpayer’s notice must identify
the affected records and include a plan
that describes how, and in what time-
frame, the taxpayer proposes to replace or
restore the affected records in a way that
assures that they will be capable of being
processed. The plan must demonstrate
that all of the requirements of this revenue
procedure will continue to be met with re-
spect to the affected records.
.03 The District Director will notify the
taxpayer of any objection(s) to the tax-
payer’s plan.
.04 A District Director may consider,
whenever warranted by the facts and cir-
cumstances, the possibility of requiring
less than a total restoration of missing
data.
.05 Examples.
(1) Taxpayer Areplaces its general
ledger software system with a new gen-
eral ledger software system with which
the original system’s records are incom-
patible. However, A’s original records are
retrievable and capable of being proces-
sed on A’s hardware system. Ais not re-
quired to notify its District Director of the
change in its software system because A’s
records remain capable of being
processed.
(2) Taxpayer Breplaces its original
ADP hardware system with a new system
that cannot process the machine-sensible
records created and maintained by B’s
original system. Bmust notify its District
Director of this hardware system change
and propose a plan for assuring that the
machine-sensible records created and
maintained by the original ADP hardware
system are capable of being processed.
To that end, Bconsiders the following op-
tions: (1) having all records in the tax-
payer’s original system immediately re-
formatted so that the new system can
retrieve and process those records; (2)
having all records in its original system
reformatted by a designated future date;
or (3) having an arrangement with a third
party to process all records in its original
system on a compatible system. Any of
these options may be acceptable provided
the option selected enables the taxpayer to
meet the requirements of this revenue
procedure with respect to those records.
The taxpayer must be able to demonstrate
that any third party reformatting or pro-
cessing is done with the quality controls
in place that will ensure the continued in-
tegrity, accuracy, and reliability of the
taxpayer’s records.
SECTION 9. MAINTENANCE
.01 Recommended Practices.
(1) The implementation of records
management practices is a business deci-
sion that is solely within the discretion of
the taxpayer. Recommended records
management practices include the label-
ing of records, providing a secure storage
environment, creating back-up copies, se-
lecting an offsite storage location, and
testing to confirm records integrity.
(2) The National Archives and
Record Administration’s (NARA) Stan-
dards for the Creation, Use, Preservation,
and Disposition of Electronic Records, 36
C.F.R., Ch XII, Part 1234, Subpart C
(1996), is one example of a records man-
agement resource that a taxpayer may
choose to consult when formulating its
records management practices.
(3) The NARA standard in 36 C.F.R.
§ 1234.30(g)(4) (1996) requires an annual
reading of a statistical sampling of mag-
netic computer tape reels to identify any
loss of data and to discover and correct
the causes of data loss. In libraries with
1,800 or fewer storage units (e.g.,mag-
netic tape reels), a 20 percent random
sampling or a sample size of 50 units,
whichever is larger, should be read. In li-
braries with more than 1,800 units, a sam-
ple of 384 units should be read. Although
this NARA sampling standard is specifi-
cally for magnetic computer tape, the Ser-
vice recommends that all retained ma-
chine-sensible records be sampled and
tested as described in the NARA standard.
.02 Partial Loss of Data.A taxpayer
that loses only a portion of the data from a
particular storage unit will not be subject
to the penalties described in section 12 of
this revenue procedure if the taxpayer can
demonstrate to the satisfaction of the Dis-
trict Director that the taxpayer’s data
maintenance practices conform with 36
C.F.R. § 1234.30(g)(4) (1996) (the
NARA sampling standard). However, the
taxpayer remains responsible for substan-
tiating the information on its return as re-
quired by § 6001.
SECTION 10. DISTRICT DIRECTOR
AUTHORITY
.01 Record Retention Limitation Agree-
ment.
(1) A taxpayer who maintains ma-
chine-sensible records may request to
enter into a Record Retention Limitation
Agreement (RRLA) with its District Di-
rector. This agreement provides for the
establishment and maintenance of records
as agreed upon by the District Director
and the taxpayer.
(2) The taxpayer’s request must
identify and describe those records the
taxpayer proposes not to retain and ex-
plain why those records will not become
material to the administration of any in-
ternal revenue law. The District Director
will notify the taxpayer whether or not the
District Director will enter into an RRLA.
(3) In an RRLA, the District Director
may waive all or any of the specific re-
quirements in this revenue procedure. A
taxpayer remains subject to all the re-
quirements in this revenue procedure that
are not specifically modified or waived by
an RRLA.
(4) Unless an RRLA otherwise spec-
ifies, an RRLA shall not apply to account-
ing and tax systems added subsequent to
the completion of the record evaluation
March 16, 1998101998–11 I.R.B.

upon which the agreement is based. All
machine-sensible records produced by a
subsequently added accounting and tax
system, the contents of which may be or
may become material in the administra-
tion of the Code must be retained by the
taxpayer signing the RRLA until a new
evaluation is conducted by the District
Director.
(5) Unless an RRLA specifies other-
wise, it does not apply to a subsidiary ac-
quired subsequent to the completion of
the record evaluation upon which the
RRLA is based. All machine-sensible
records produced by the acquired sub-
sidiary, the contents of which may be or
may become material in the administra-
tion of the Code must be retained pur-
suant to this revenue procedure and any
pre-acquisition RRLA (“former RRLA”)
that applies to the acquired subsidiary.
The former RRLA applies to the acquired
subsidiary until the District Director ei-
ther revokes the former RRLA (in whole
or in part) or enters into a new RRLA that
applies to the acquired subsidiary.
(6) Upon the disposition of a sub-
sidiary, the files being retained for the
Service pursuant to an RRLA by, or for,
the disposed subsidiary must be retained
by the taxpayer until a new evaluation is
conducted by the District Director.
(7) A District Director’s decision to
revoke an RRLA, or not to enter into an
RRLA, does not relieve the taxpayer of its
recordkeeping obligations under § 6001
or its responsibilities described in this
revenue procedure.
.02 Records Evaluation.
(1) The District Director may conduct
a records evaluation at any time the Dis-
trict Director deems it appropriate to re-
view the taxpayer’s record retention prac-
tices, including the taxpayer’s relevant data
processing and accounting systems.
(2) The records evaluation described
in section 10.02(1) of this revenue proce-
dure is not an “examination”, “investiga-
tion,” or “inspection” of the books and
records within the meaning of § 7605(b)
of the Code, or a prior audit for purposes
of § 530 of the Revenue Act of 1978,
1978–3 (Vol. 1) C.B. 119, as amended by
§ 1122 of the Small Business Job Protec-
tion Act of 1996, because this evaluation
is not directly related to the determination
of the tax liability of a taxpayer for a par-
ticular taxable period.
(3) The District Director will inform
the taxpayer of the results of a records
evaluation.
.03 Testing.
(1) The District Director may period-
ically initiate tests to establish the authen-
ticity, readability, completeness, and in-
tegrity of a taxpayer’s machine-sensible
records retained in conformity with this
revenue procedure.
(2) These tests may include a review
of integrated systems such as EDI or an
electronic storage system, and a review of
the internal controls and security proce-
dures associated with the creation and
maintenance of the taxpayer’s records.
(3) The tests described in section
10.03(1) of this revenue procedure are not
an “examination”, “investigation,” or “in-
spection” of the books and records within
the meaning of § 7605(b) of the Code, or a
prior audit for purposes of § 530 of the
Revenue Act of 1978, 1978–3 (Vol. 1) C.B.
119, as amended by § 1122 of the Small
Business Job Protection Act of 1996, be-
cause these tests are not directly related to
the determination of the tax liability of a
taxpayer for a particular taxable period.
(4) The District Director will inform
the taxpayer of the results of these tests.
SECTION 11. HARDCOPY RECORDS
.01 The provisions of this revenue pro-
cedure do not relieve taxpayers of their
responsibility to retain hardcopy records
that are created or received in the ordinary
course of business as required by existing
law and regulations. Hardcopy records
may be retained in microfiche or micro-
film format in conformity with Rev. Proc.
81–46, 1981–2 C.B. 621. Hardcopy
records may also be retained in an elec-
tronic storage system in conformity with
Rev. Proc. 97–22. These records are not a
substitute for the machine-sensible
records required to be retained by this
revenue procedure.
.02 A taxpayer need not create or retain
hardcopy records if:
(1) the hardcopy records are merely
computer printouts created only for vali-
dation, control, or other temporary pur-
poses;
(2) the hardcopy records are not pro-
duced in the ordinary course of transact-
ing business (as may be the case when uti-
lizing EDI technology); or
(3) all the details relating to the trans-
action are subsequently received by the
taxpayer in an EDI transaction and are re-
tained as machine-sensible records by the
taxpayer in conformity with this revenue
procedure. For example, a taxpayer need
not retain credit card receipts generated at
the time of a transaction if all pertinent in-
formation on the receipts is subsequently
received in an EDI transaction and re-
tained as a machine-sensible record. See
section 5.03 of this revenue procedure for
requirements relating to EDI.
.03 A taxpayer need not create hard-
copy printouts of its machine-sensible
records unless requested to do so by the
Service. The Service may request such
hardcopy printouts either at the time of an
examination or in conjunction with the
tests described in section 10.03(1) of this
revenue procedure.
SECTION 12. PENALTIES
The District Director may issue a No-
tice of Inadequate Records pursuant to
§ 1.6001–1(d) if a taxpayer fails to comply
with this revenue procedure (including a
failure to satisfy the resource requirements
of section 7 of this revenue procedure).
Failure to comply with this revenue proce-
dure may also result in the imposition of
the applicable penalties under subtitle F of
the Code, including the § 6662(a) accu-
racy-related civil penalty and the § 7203
willful failure criminal penalty.
SECTION 13. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 91–59 is modified and su-
perseded for machine-sensible records re-
lating to taxable years beginning after De-
cember 31, 1997. However, a taxpayer
that complies with this revenue procedure
for taxable years beginning prior to that
date is treated as having complied with
Rev. Proc. 91–59 for those years.
SECTION 14. EFFECTIVE DATE
This revenue procedure is effective for
machine-sensible records relating to tax-
able years beginning after December 31,
1997.
SECTION 15. INTERNAL REVENUE
SERVICE OFFICE CONTACT
.01 Questions regarding this revenue
procedure should be directed to the Office
1998–11 I.R.B.11March 16, 1998

of the Assistant Commissioner (Examina-
tion). The telephone number for this of-
fice is (202)622-5480 (not a toll-free
number). Written questions should be ad-
dressed to: Assistant Commissioner (Ex-
amination)
Attention: CP:EX
Internal Revenue Service
1111 Constitution Ave., NW
Washington, DC 20224
.02 Questions regarding the application
of this revenue procedure to a specific
factual situation should be directed to the
appropriate District Director’s office.
SECTION 16. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1595.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The collections of information in this
revenue procedure are in sections 8 and
10 of this revenue procedure. This infor-
mation is required to ensure that machine-
sensible records will constitute records
within the meaning of § 6001. The col-
lections of information are mandatory for
a taxpayer whose machine-sensible
records are kept within an ADP system.
The likely respondents are individuals,
state or local governments, farms, busi-
ness or other for-profit institutions, fed-
eral agencies or employees, nonprofit in-
stitutions, and small businesses or
organizations.
The estimated total annual recordkeep-
ing burden is 120,000 hours.
The estimated annual burden per
recordkeeper will vary from 20 hours to
60 hours, depending on individual cir-
cumstances, with an estimated average of
40 hours. The estimated number of
recordkeepers is 3,000.
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.
March 16, 1998121998–11 I.R.B.

1998–11 I.R.B.13March 16, 1998
Withdrawal of Notice of
Proposed Rulemaking
Petroleum Tax Imposed on
Natural Gasoline
PS–158–86
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking.
SUMMARY: This document withdraws a
proposed regulation relating to the petro-
leum tax imposed on natural gasoline.
The withdrawal affects persons that pro-
duce natural gasoline at fractionation fa-
cilities or receive natural gasoline pro-
duced at those facilities.
FOR FURTHER INFORMATION CON-
TACT: Ruth Hoffman, (202) 622-3130
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 4611 imposed a tax on crude oil
(including natural gasoline) received at a
United States refinery. On April 26, 1993,
a notice of proposed rulemaking (PS–
158–86 [1993–1 C.B. 866]) relating to this
tax was published in the Federal Register
(58 F.R. 21963). The proposed regulation
treats any facility that produces natural
gasoline by fractionation or similar opera-
tion as a United States refinery. Under this
rule, tax would be imposed on natural
gasoline when it is produced from natural
gas liquids at a fractionation facility.
Since the publication of the proposed
regulation, the tax imposed by section
4611 has expired. Because tax is not cur-
rently imposed under section 4611, the
proposed regulation is being withdrawn.
For purposes of section 4611 prior to its
expiration, the IRS will follow the result
in Enron Gas Processing Co. v. United
States,96–1 USTC ¶ 70,058 (S.D. Tex.
1996), in all cases involving substantially
similar facts. In Enron,the U.S. District
Court for the Southern District of Texas
held that fractionation facilities are not
United States refineries.
* * * * *
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed rule-
making that was published in the Federal
Registeron April 26, 1993 (58 F.R.
21963) is withdrawn.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 22, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 23, 1997,
62 F.R. 67013)
Notice of Proposed Rulemaking
Electronic Tip Reports
REG–104691–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document proposes to
amend the regulations dealing with the re-
quirement that tipped employees report
their tips to their employer. The proposed
regulations permit employers to establish
electronic systems for use by their tipped
employees in reporting tips to the em-
ployer. The proposed regulations also ad-
dress substantiation requirements for em-
ployees using the electronic system.
DATES: Written comments and requests
for a public hearing must be received by
April 27, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–104691–97),
room 5228, 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–104691–97), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Karin
Loverud, 202-622-6060; concerning sub-
missions, Evangelista Lee, 202-622-8452
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of informa-
tion should be sent to the Office of Man-
agement and Budget,Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service,Attn: IRS
Reports Clearance Officer, T:FP, Wash-
ington, DC 20224. Comments on the col-
lection of information should be received
by March 27, 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 costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collections of information in this
proposed regulation are in §31.6053–1
and §31.6053–4. This information is re-
quired to conform with the statute and to
Part IV. Items of General Interest

assist employers and employees in fulfill-
ing their responsibilities. This informa-
tion will be used by employers to estab-
lish the amount of income and FICA (or
RRTA) taxes to withhold from the em-
ployee reporting the tips. This informa-
tion will be used by employees in meeting
the substantiation requirements. The col-
lections of information are mandatory.
The likely respondents are individuals.
Estimated total annual reporting bur-
den: 600,000 hours.
Estimated average annual burden hours
per respondent: 2 hours.
Estimated number of respondents:
300,000.
Estimated annual frequency of re-
sponses: varies.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
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 Employment Tax Reg-
ulations (26 CFR part 31) under section
6053(a) of the Internal Revenue Code
(Code). The proposed regulations pro-
vide rules permitting employers to estab-
lish electronic systems for use by their
tipped employees in reporting tips to the
employer.
In general, under section 6053(a) of the
Code, every employee who receives tips
must report the tips to the employer. The
tips that must be reported are those that
are wages for purposes of federal income
tax withholding and the Federal Insurance
Contributions Act (FICA) and compensa-
tion for purposes of the Railroad Retire-
ment Tax Act (RRTA). The tips must be
reported in a written statement or state-
ments furnished to the employer on or be-
fore the 10th day following the month in
which the tips are received. The Secre-
tary is authorized to prescribe rules neces-
sary to implement this provision, includ-
ing the form and manner of furnishing the
statements.
Generally, all cash tips (which include
tips that are charged) are wages (or com-
pensation), with one exception. If the
amount of cash tips received in a calendar
month by an employee in the course of
any one employment is less than $20, the
cash tips received in that employment
during that month are not wages subject
to income tax withholding, FICA taxes, or
RRTA taxes.
For example, A is a full-time tipped
employee of X and a part-time tipped em-
ployee of Y. During the month, A re-
ceived $1,000 in tips in A’s employment
with X and $10 in tips in A’s employment
with Y. The $1,000 in tips received in the
course of employment with X are wages
for income tax withholding and FICA (or
RRTA) tax purposes. A must report the
$1,000 in tips to X no later than the 10th
day of the following month. The $10 in
tips received in the course of employment
with Y are not wages for those purposes.
The $10 are, however, subject to federal
income tax and must be reported as wages
by the employee on Form 4137, Social
Security and Medicare Tax on Unreported
Tip Income,which the employee must file
with Form 1040, U.S. Individual Income
Tax Return.
Section 31.6053–1(b)(1) prescribes
rules for tip statements. The statement
furnished by the employee to the em-
ployer must be in writing and must be
signed by the employee. The statement
must disclose (1) the employee’s name,
address, and social security number; (2)
the employer’s name and address; (3) the
period for which and the date on which
the statement is furnished; and (4) the
total amount of tips received by the em-
ployee during the period that are required
to be reported to the employer.
Under §31.6053–1(b)(2), no particular
form is prescribed for use in furnishing
the tip statement. If the employer does
not provide a form for use by the em-
ployee in reporting tips received by the
employee, the employee may use Form
4070, Employee’s Report of Tips to Em-
ployer.Twelve blank Forms 4070 and 12
blank Forms 4070A, Employee’s Daily
Record of Tipsare reproduced in Publica-
tion 1244, Employee’s Daily Record of
Tips and Report to Employer.(Daily
completion of Form 4070A constitutes
sufficient evidence of tip income under
the substantiation requirements of
§31.6053–4.) Pub. 1244 is a convenient
pocket-sized document that also includes
the basic rules for reporting tips. Copies
of Pub. 1244 are available from the IRS
by calling 1-800-829-3676.
The regulations specifically permit em-
ployers to design their own forms for use
by employees in reporting tips. A form
used solely to report tips must include (1)
the employee’s name, address, and social
security number; (2) the employer’s name
and address; (3) the period for which and
the date on which the statement is fur-
nished; and (4) the total amount of tips re-
ceived by the employee during the period
that are required to be reported to the em-
ployer.
In lieu of a special tip reporting form
that is used solely for the purpose of re-
porting tips, employers may provide for
reporting of tips on regularly used forms,
such as time cards. The regularly used
forms need not include the employer in-
formation, but they must accurately iden-
tify the employee, identify the reporting
period, and specify the amount of tips re-
ceived. If a regularly used form is used to
report tips, the employer must furnish the
employee a statement showing the
amount of tips reported by the employee
for the period. This statement must be
furnished no later than shortly after the
first wage payment following the em-
ployee’s tip report. A payroll check stub
or other similar payroll document may be
used for this purpose.
The period covered by a tip statement
may not exceed one calendar month. An
employer may require tip statements more
frequently, such daily, weekly or every
pay period, if not less frequently than
monthly. In no event, however, may an
employer permit tips received in one
month to be reported after the 10th of the
following month. See section 6053(a).
For example, X has a weekly payroll pe-
riod, beginning on Sunday and ending on
Saturday. X requires that all tip state-
ments be submitted to X no later than the
Monday following each payroll period.
For the payroll period beginning on Sun-
day, March 30, and ending on Saturday,
April 5, the statements must be furnished
on or before Monday, April 7. If this oc-
curs, the 10th-of-the-month requirement
for March is met. If X’s payroll period
were biweekly and began on March 30
and ended on April 16 and if X required
March 16, 1998141998–11 I.R.B.

that all tip statements be submitted to X
no later than the Monday following each
payroll period, the 10th-of-the-month re-
quirement for March would not be met.
A tip statement furnished after this
deadline does not meet the requirements
of section 6053(a). The employer is not
required to withhold income, FICA, or
RRTA taxes on tips reported after the 10th
of the following month and is not respon-
sible for reporting those tips to the IRS.
The responsibility for reporting and pay-
ing the employee portion of the FICA tax
shifts to the employee. The employee
must complete and attach Form 4137, So-
cial Security and Medicare Tax on Unre-
ported Tip Income,to the employee’s fed-
eral income tax return. Moreover, an
employee who fails to report tips as re-
quired by section 6053(a) is subject to an
addition to the FICA tax or the RRTA tax,
whichever is applicable, equal to 50 per-
cent of the employee portion of the FICA
or RRTA tax on those tips.
Section 31.6053–4(a)(1) provides that
an employee must maintain sufficient evi-
dence to establish the amount of tip in-
come received during a taxable year. Suf-
ficient evidence consists of either a daily
record or, if the employee does not main-
tain a daily record, other evidence (such
as documentary evidence) that is as credi-
ble and as reliable as a daily record. Nev-
ertheless, if the facts or circumstances in-
dicate that the employee received a larger
amount of tip income, a daily record or
other evidence may not be sufficient evi-
dence.
Section 31.6053–4(a)(2) describes the
requirements for a daily record. In gen-
eral, the daily record must show the
amount of cash and charge tips received
directly from customers or other employ-
ees and the amount of tips, if any, that the
employee paid out to other employees
through tip sharing, tip pooling, or other
arrangements and the names of the em-
ployees. The daily record must show the
date on which each entry is made. Each
entry must be made on or near the date the
tip income is received. An entry made
when the employee has full present
knowledge of those receipts and pay-
ments satisfies this requirement.
Section 31.6053–4(a)(3) describes doc-
umentary evidence. Documentary evi-
dence consists of copies of any docu-
ments that contain amounts added as a tip
to a check by a customer or amounts paid
by a customer for food or beverages with
respect to which tips generally would be
received. Examples of documentary evi-
dence are copies of restaurant bills, credit
card charges, or charges under any other
arrangement containing amounts added
by the customer as a tip.
Explanation of Provisions
Electronic tip statements.No provision
currently exists for employees to furnish
tip statements to employers in a form
other than on paper. The proposed regu-
lations would permit an employer to
adopt a system under which some or all of
the tipped employees of the employer
would furnish their tip statements elec-
tronically. Therefore, the employer could
include in its electronic system any tipped
employee or employees working in any
location or locations.
The proposed regulations set forth re-
quirements for employers who wish to es-
tablish electronic systems for employees
to use to furnish tip statements to their
employers. The proposed regulations
apply only to tip statements required by
section 6053(a) and not with respect to
any other Code sections.
An employer that chooses to establish
an electronic tip reporting system may se-
lect the type or types of electronic sys-
tems (such as telephone or computer) to
be used by its employees. The system
must, however, ensure that the informa-
tion received is the information transmit-
ted by the employee and must document
all occasions of access that result in the
transmission of a tip statement. The de-
sign and operation of the electronic sys-
tem, including access procedures, must
make it reasonably certain that the person
accessing the system and transmitting the
tip statement is the employee identified in
the transmission. In the event of an ex-
amination, the employer must supply a
hard copy of the electronic statement to
the IRS upon request.
The electronic tip statement must con-
tain exactly the same information that is
required to be reported on a paper tip
statement and must contain the em-
ployee’s electronic signature. The elec-
tronic signature must identify the em-
ployee furnishing the electronic tip
statement and authenticate and verify the
transmission. An electronic signature can
be in any form that satisfies the foregoing
requirements. An electronic signature has
the same effect as a signature written on a
paper tip statement. See sections 6061,
6064, and 6065 of the Code.
Pursuant to Rev. Rul. 71–20 (1971–1
C.B. 392), all machine-sensible data
media used for recording, consolidating,
and summarizing accounting transactions
and records within a taxpayer’s ADP sys-
tem are records within the meaning of
section 6001 and §1.6001–1. The record
retention requirements contained in Rev.
Proc. 91–59 (1991–2 C.B. 841) (or any
revenue procedure updating Rev. Proc.
91–59), dealing with automatic data pro-
cessing systems, apply to electronic tip
reporting systems.
The proposed regulations provide that
an employee maintains sufficient evidence
to establish the amount of tip income re-
ceived by the employee during a calendar
month through a daily record (as de-
scribed in §31.6053–4(a)(2)) if the em-
ployee both reports tips on a daily basis
through an electronic system that other-
wise meets the substantiation require-
ments of the regulations and receives from
the employer a hard copy of a daily record
based on those entries for the period.
Employee substantiation requirements.
Because the proposed regulations expand
the permissible array of employer-de-
signed reporting systems to include elec-
tronic methods, employers will be provid-
ing a statement to employees of the tips
reported consistent with the existing re-
quirements of §31.6053–1(b). The Trea-
sury and the IRS recognize that many of
these systems may capture tip reporting
on a very current basis (e.g., point-of-sale
or end-of-shift). Thus, the information in
these systems offers a reasonable substi-
tute for a daily record maintained by the
employee if the employer’s system pro-
vides the employee with a printout that
would satisfy the current substantiation
requirements of §31.6053–4.
Thus, these proposed regulations pro-
vide that, if the employer, at its option,
provides employees with a copy of the
daily record based on entries made by the
employee in the system and otherwise sat-
isfying the substantiation requirement of
§31.6053–4, the entry in the electronic
system on a daily (or more frequent) basis
by the employee, together with the daily
1998–11 I.R.B.15March 16, 1998

record based on these entries provided by
the employer, will satisfy the substantia-
tion requirements of §31.6053–4. For ex-
ample, assume an employee enters tips in
the employer’s electronic system at the
end of each shift, but does not provide the
employer with a signed paper record of
these tips. After the end of each weekly
payroll period, the employer provides the
employee with a paper record that in-
cludes all the information specified in
§31.6053–4(a)(2) and that shows the total
amount of tips reported for each day dur-
ing the period based on the employee’s
entries. If the employee maintains this
employer generated paper record, the sub-
stantiation requirements of §31.6053–4
are satisfied.
The Treasury and the IRS particularly
invite comment on whether the proposed
regulations should be modified to reflect
ways in which these systems may permit
further reduction in paper reporting for ei-
ther the employer or employee while re-
taining provisions for appropriate and
timely substantiation of income.
Railroad Retirement Tax Act provi-
sions.The tip reporting provisions of sec-
tion 6053(a) apply to tips that are either
wages for income tax withholding and
Federal Insurance Contributions Act
(FICA) purposes or compensation for
Railroad Retirement Tax Act (RRTA) pur-
poses. The proposed regulations would
clarify that the regulations under section
6053(a) apply to tips that are compensa-
tion as well as to tips that are wages.
Proposed Effective Date
The revisions and additions in the pro-
posed regulations apply to tips required to
be reported to the employer after these reg-
ulations are published as final regulations
in the Federal Register. However, tax-
payers may rely on the guidance in these
proposed regulations for prior periods.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions.
It is hereby certified that the collections
of information in these regulations will
not have a significant economic impact on
a substantial number of small entities.
The collection of information in
§31.6053–1 is imposed solely on individ-
uals, not on any small entities, and the
regulations provide flexibility to employ-
ees who must provide the information re-
quired by statute, thereby reducing bur-
den. With respect to the collection of
information in §31.6053–4, the certifica-
tion is based on the expectation of the
IRS that most businesses that choose to
implement the electronic tip reporting
provisions will be larger businesses with
many employees and sophisticated com-
puter systems. Moreover, because the
provision is wholly elective, any small
business that would be adversely im-
pacted may choose not to use electronic
tip reporting. Finally, the Service expects
that for those small entities that choose to
implement the provision, the use of elec-
tronic tip reporting will reduce overall
burden by reducing paper collections.
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
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Comments and Requests for a 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 copies)
that are submitted timely (in the manner
described in the ADDRESSES portion of
this preamble) to the IRS. All comments
will be available for public inspection and
copying.
A public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. The
IRS will also consider requests for re-
mote teleconference sites as part of the
public hearing. If a public hearing is
scheduled, notice of the date, time, and
place (including teleconference, if any)
for the hearing will be published in the
Federal Register.
Drafting Information
The principal author of these proposed
regulations is Karin Loverud, Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations), IRS.
However, other personnel from the IRS
and the Treasury Department participated
in their development.
* * * * *
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.6053–1 is amended
as follows:
1. Paragraph (a) is revised.
2. The introductory text of paragraph
(b)(1) is revised.
3. The last sentence of paragraph
(b)(1)(iii) is revised.
4. Paragraph (b)(2) is revised.
5. Paragraph (c) is revised.
6. Paragraph (d) is added.
The revisions and additions read as fol-
lows:
§31.6053–1 Report of tips by employee
to employer.
(a) Requirement that tips be re-
ported—(1) In general.An employee
who receives, in the course of employ-
ment by an employer, tips that constitute
wages as defined in section 3121(a) or
section 3401, or compensation as defined
in section 3231(e), must furnish to the
employer a statement, or statements, dis-
closing the total amount of the tips re-
ceived by the employee in the course of
employment by the employer. Tips re-
ceived by an employee in a calendar
month in the course of employment by an
employer that are required to be reported
to the employer must be reported on or
before the 10th day of the following
month. Thus, for example, tips received
by an employee in January 1998 are re-
quired to be reported by the employee to
March 16, 1998161998–11 I.R.B.

the employer on or before February 10,
1998.
(2) Cross references.For provisions
relating to the treatment of tips as wages
for purposes of the Federal Insurance
Contributions Act (FICA) tax under sec-
tions 3101 and 3111, see sections 3102(c),
3121(a)(12), and 3121(q) and §§31.3102–
3 and 31.3121(a)(12)–1. For provisions
relating to the treatment of tips as wages
for purposes of the tax under section 3402
(income tax withholding), see sections
3401(a)(16), 3401(f), and 3402(k) and
§§31.3401(a)(16)–1, 31.3401(f)–1, and
31.3402(k)–1. For provisions relating to
the treatment of tips as compensation for
purposes of the Railroad Retirement Tax
Act (RRTA) tax under sections 3201
and 3221, see section 3231(e) and
§31.3231(e)–1(a).
(b) * * * (1) In general.The state-
ment described in paragraph (a) of this
section can be provided on paper or trans-
mitted electronically. The statement must
be signed by the employee and must dis-
close:
* * * * *
(iii) * * * If the statement is for a pe-
riod of less than 1 calendar month, the be-
ginning and ending dates of the period
must be included (for example, January 1
through January 8, 1998).
* * * * *
(2) Form of statement—(i) In general.
No particular form is prescribed for use in
furnishing the statement required by this
section. The statement may be furnished
on paper or transmitted electronically. An
electronic system and all tip statements
generated by that system must meet the
requirements of paragraph (d) of this sec-
tion. If the employer does not provide
any other means for the employee to re-
port tips, the employee may use Form
4070, Employee’s Report of Tips to Em-
ployer.
(ii) Single-purpose forms.A statement
may be furnished on an employer-pro-
vided form. The form may be on paper or
in electronic form. An employer that pro-
vides a paper form must make blank
copies of the form readily available to all
tipped employees. Any form, whether
paper or electronic, provided by an em-
ployer for use by its tipped employees
solely to report tips must meet all the re-
quirements of paragraph (b)(1) of this
section.
(iii) Regularly used forms.Instead of
requiring that tips be reported as de-
scribed in paragraph (b)(2)(ii) of this sec-
tion on a special form used solely for tip
reporting, an employer may prescribe reg-
ularly used forms for use by employees in
reporting tips. A regularly used form may
be on paper (such as a time card or report)
or in electronic form, must meet the re-
quirements of paragraph (b)(1)(iii) and
(iv) of this section, must contain identify-
ing information that will ensure accurate
identification of the employee by the em-
ployer, and is permitted to be used only if
the employer furnishes the employee a
statement suitable for retention showing
the amount of tips reported by the em-
ployee for the period. The employer
statement may be furnished when the em-
ployee reports the tips, when wages are
first paid following the reporting of tips
by the employee, or within a short time
after the wages are paid. The employer
may meet this requirement, for example,
through the use of a payroll check stub or
other payroll document regularly fur-
nished by the employer to the employee
showing gross pay and deductions. In the
case of electronic tip reports, the em-
ployer statement may be furnished on a
daily, weekly, monthly or on a regular
payroll basis (if not less frequent than
monthly).
(c) Period covered by, and due date of,
tip statement—(1) In general.A tip
statement furnished by an employee to an
employer may not cover a period greater
than 1 calendar month. An employer
may, however, require the submission of a
statement in respect of a specified period
of time, for example, on a weekly or bi-
weekly basis, regular payroll period, etc.
An employer may specify, subject to the
limitation in paragraph (a) of this section,
the time within which, or the date on
which, the statement for a specified pe-
riod of time should be submitted by the
employee. For example, a statement cov-
ering a payroll period may be required to
be submitted on the first (or second) day
following the close of the payroll period.
A statement submitted by an employee
after the date specified by the employer
for its submission nevertheless will be
considered as a statement furnished pur-
suant to section 6053(a) and this section if
it is submitted to the employer on or be-
fore the 10th day following the month in
which the tips were received.
(2) Termination of employment.If an
employee’s employment is terminating,
the employee must furnish a tip statement
to the employer when the employee ceases
to perform services for the employer. A
statement submitted by an employee after
the date on which the employee ceases to
perform services for the employer will be
considered as a statement furnished pur-
suant to section 6053(a) and this section if
the statement is submitted to the employer
on or before the earlier of the day on
which the final wage payment is made by
the employer to the employee or the 10th
day following the month in which the tips
were received.
(d) Requirements for electronic sys-
tems—(1) In general.The electronic sys-
tem must ensure that the information re-
ceived is the information transmitted by
the employee and must document all oc-
casions of access that result in the trans-
mission of a tip statement. In addition,
the design and operation of the electronic
system, including access procedures,
must make it reasonably certain that the
person accessing the system and transmit-
ting the statement is the employee identi-
fied in the statement transmitted.
(2) Same information as on paper
statement.The electronic tip statement
must provide the employer with all the in-
formation required by paragraph (b)(1) of
this section.
(3) Signature.The electronic tip state-
ment must be signed by the employee.
The electronic signature must identify the
employee transmitting the electronic tip
statement and must authenticate and ver-
ify the transmission. For this purpose, the
terms “authenticate” and “verify” have
the same meanings as they do when ap-
plied to a written signature on a paper tip
statement. An electronic signature can be
in any form that satisfies the foregoing re-
quirements.
(4) Copies of electronic tip statements.
Upon request by the Internal Revenue
Service (IRS), the employer must supply
the IRS with a hard copy of the electronic
tip statement and a statement that, to the
best of the employer’s knowledge, the
electronic tip statement was filed by the
named employee. The hard copy of the
electronic tip statement must provide the
1998–11 I.R.B.17March 16, 1998

information required by paragraph (b)(1)
of this section, but need not be a facsimile
of Form 4070 or any employer-designed
form.
(5) Record retention. The record re-
tention requirements dealing with auto-
matic data processing systems apply to
electronic tip reporting systems.
Par. 3. Section 31.6053–4 is amended
as follows:
1. A sentence is added to paragraph
(a)(1) after the third sentence.
2. A sentence is added to paragraph
(a)(2) after the fourth sentence.
The additions read as follows:
§31.6053–4 Substantiation requirements
for tipped employees.
(a) * * *
(1) * * * The Commissioner may by
revenue ruling, procedure or other guid-
ance of general applicability provide for
other methods of demonstrating evidence
of tip income. * * *
(2) * * * In addition, an electronic sys-
tem maintained by the employer that col-
lects substantially similar information as
Form 4070A may be used to maintain
such daily record, provided the employee
receives and maintains a paper copy of
the daily record. * * *
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 23, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 26, 1998,
63 F.R. 3680)
Notice of Proposed Rulemaking
Abatement of Interest
REG–209276–87
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the abate-
ment of interest attributable to unreason-
able errors or delays by an officer or em-
ployee of the IRS in performing a
ministerial or managerial act. The pro-
posed regulations reflect changes to the
law made by the Tax Reform Act of 1986
and the Taxpayer Bill of Rights 2. The
proposed regulations affect both taxpay-
ers requesting abatement of certain inter-
est and IRS personnel responsible for ad-
ministering the abatement provisions.
DATES: Written comments and requests
for a hearing must be received by April 8,
1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209276–87),
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–209276–87), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the INTERNET by se-
lecting 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.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
David Auclair, (202) 622-4910 (not a toll-
free number). Concerning submissions,
Michael Slaughter, (202) 622-7190 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Procedure and Admin-
istration Regulations (26 CFR Part 301)
relating to the abatement of interest attrib-
utable to unreasonable errors or delays by
an officer or employee of the IRS under
section 6404(e)(1) of the Internal Rev-
enue Code. Section 6404(e)(1) was en-
acted by section 1563(a) of the Tax Re-
form Act of 1986 (Public Law 99–514,
100 Stat. 2762 (1986)) (1986 Act) and
amended by section 301 of the Taxpayer
Bill of Rights 2 (Public Law 104–168,
110 Stat. 1452 (1996)) (TBOR2).
As enacted by the 1986 Act, section
6404(e)(l) provided that the IRS may
abate interest attributable to any error or
delay by an officer or employee of the
IRS (acting in an official capacity) in per-
forming a ministerial act. The legislative
history accompanying the Act provided,
The committee intends that the term ‘ministe-
rial act’ be limited to nondiscretionary acts
where all of the preliminary prerequisites,
such as conferencing and review by supervi-
sors, have taken place. Thus, a ministerial act
is a procedural action, not a decision in a sub-
stantive area of tax law.
H.R. Rep. No. 426, 99th Cong., 1st Sess.
845 (1985); S. Rep. No. 313, 99th Cong.,
2d Sess. 209 (1986).
Further, Congress did not intend that
the abatement of interest provision “be
used routinely to avoid payment of inter-
est.” H.R. Rep. No. 426, 99th Cong., 1st
Sess. 844 (1985); S. Rep. No. 313, 99th
Cong., 2d Sess. 208 (1986). Rather, Con-
gress intended abatement of interest to be
used in instances “where failure to abate
interest would be widely perceived as
grossly unfair.” Id.
On August 13, 1987, the IRS published
temporary regulations (T.D. 8150) in the
Federal Register(52 F.R. 30162) relating
to the definition of ministerial act for pur-
poses of abatement of interest. A notice of
proposed rulemaking (LR–34–87) cross-
referencing the temporary regulations was
also published in the Federal Register for
the same day (52 F.R. 30177). No public
hearing regarding these regulations was
requested or held. In this document, the
IRS is reproposing a modified version of
the earlier notice of proposed rulemaking
to incorporate changes made by TBOR2.
Therefore, the earlier notice of proposed
rulemaking is withdrawn.
The temporary regulations define min-
isterial act to mean a procedural or me-
chanical act that does not involve the ex-
ercise of judgment or discretion, and that
occurs during the processing of a tax-
payer’s case after all prerequisites to the
act, such as conferences and review by
supervisors, have taken place. A decision
concerning the proper application of fed-
eral tax law (or other federal or state law)
is not a ministerial act. The temporary
regulations also provide five examples to
illustrate the definition of ministerial act.
In TBOR2, Congress amended section
6404(e)(1) to permit the IRS to abate in-
terest attributable to any unreasonable
error or delay by an officer or employee
of the IRS (acting in an official capacity)
in performing a managerial act as well as
March 16, 1998181998–11 I.R.B.

a ministerial act. Thus, as a result of
TBOR2, the IRS has the authority to
abate interest in more situations than
under prior law.
Pursuant to the legislative history ac-
companying TBOR2, a managerial act is
a loss of records or a personnel manage-
ment decision such as the decision to ap-
prove a personnel transfer, extended
leave, or extended training. See H.R.
Rep. No. 506, 104th Cong., 2d Sess. 27
(1996). TBOR2 distinguished a manager-
ial act from a general administrative deci-
sion, such as a decision on how to orga-
nize the processing of tax returns or a
decision regarding the implementation of
an improved computer system. Id. A
general administrative decision is a deci-
sion that impacts tax administration. The
amendments to section 6404(e)(1) are ef-
fective for interest accruing with respect
to deficiencies or payments for taxable
years beginning after July 30, 1996.
TBOR2 also added section 6404(g).
Section 6404(g) grants the Tax Court ju-
risdiction to determine whether the IRS’s
failure to abate interest for an eligible tax-
payer is an abuse of discretion. Tax Court
review is available for requests for abate-
ment of interest that are made after July
30, 1996, or that have not been denied
prior to July 31, 1996. See Banat v. Com-
missioner,109 T.C. 92 (1997); White v.
Commissioner,109 T.C. 96 (1997).
Explanation of Provisions
TBOR2 expanded the scope of abate-
ment relief under section 6404(e)(1).
Consistent with congressional intent, the
proposed regulations permit abatement of
interest in more situations than under
prior law. Nothing in the proposed regu-
lations is intended to limit the extent to
which the IRS could abate interest before
the effective date of TBOR2.
The proposed regulations define man-
agerial act and incorporate other changes
made by TBOR2. TBOR2 did not alter
the definition of ministerial act under
prior law. Accordingly, the proposed reg-
ulations retain the definition of ministerial
act in the temporary regulations.
Managerial act is defined as an admin-
istrative act that occurs during the pro-
cessing of a taxpayer’s case involving the
temporary or permanent loss of records or
the exercise of judgment or discretion re-
lating to management of personnel. A de-
cision concerning the proper application
of federal tax law (or other federal or state
law) is not a managerial act. Further, in-
terest attributable to a general administra-
tive decision, such as the IRS’s decision
on how to organize the processing of tax
returns or its delay in implementing an
improved computer system, cannot be
abated under section 6404(e)(1).
In addition, the proposed regulations
provide examples to illustrate the defini-
tions of ministerial act and managerial
act. Examples 1, 2, 3, 7, and 8 of the pro-
posed regulations are substantially similar
to Examples 1 through 5 of the temporary
regulations. However, in Example 3 of
the proposed regulations (Example 4 of
the temporary regulations), a decision to
approve extended training is a managerial
act, and in Example 8 of the proposed
regulations (Example 5 of the temporary
regulations) the type of work priority is
specified.
The provisions of the regulations relat-
ing to a ministerial act apply to interest
accruing with respect to deficiencies or
payments of any tax described in section
6212(a) for taxable years beginning after
December 31, 1978, for which the applic-
able statute of limitations has not expired.
The provisions of the regulations relating
to a managerial act are proposed to apply
to interest accruing with respect to defi-
ciencies or payments of any tax described
in section 6212(a) for taxable years begin-
ning after July 30, 1996.
Special Analyses
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 Requests for a 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) or electronic comments that are
submitted timely to the IRS. All com-
ments will be available for public inspec-
tion and copying. A public hearing may
be scheduled if requested in writing by
any person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place of
the hearing will be published in the Fed-
eral Register.
Drafting Information
The principal author of these regulations
is David B. Auclair. However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6404–2 is added to
read as follows:
§301.6404–2 Abatement of interest.
(a) In general. (1) Section 6404(e)(1)
provides that the Commissioner may (in
the Commissioner’s discretion) abate the
assessment of all or any part of interest on
any—
(i) Deficiency (as defined in section
6211(a), relating to income, estate, gift,
generation-skipping, and certain excise
taxes) attributable in whole or in part to
any unreasonable error or delay by an of-
ficer or employee of the Internal Revenue
Service (IRS) (acting in an official capac-
ity) in performing a ministerial or man-
agerial act; or
(ii) Payment of any tax described in
section 6212(a) (relating to income, es-
tate, gift, generation-skipping, and certain
1998–11 I.R.B.19March 16, 1998

excise taxes) to the extent that any error
or delay in payment is attributable to an
officer or employee of the IRS (acting in
an official capacity) being unreasonably
erroneous or dilatory in performing a
ministerial or managerial act.
(2) An error or delay in performing a
ministerial or managerial act will be taken
into account only if no significant aspect
of the error or delay is attributable to the
taxpayer involved or to a person related to
the taxpayer within the meaning of sec-
tion 267(b) or section 707(b)(1). More-
over, an error or delay in performing a
ministerial or managerial act will be taken
into account only if it occurs after the IRS
has contacted the taxpayer in writing with
respect to the deficiency or payment. For
purposes of this paragraph (a)(2), no sig-
nificant aspect of the error or delay is at-
tributable to the taxpayer merely because
the taxpayer consents to extend the period
of limitations.
(b) Definitions.(1) Managerial act
means an administrative act that occurs
during the processing of a taxpayer’s case
involving the temporary or permanent
loss of records or the exercise of judg-
ment or discretion relating to manage-
ment of personnel. A decision concerning
the proper application of federal tax law
(or other federal or state law) is not a
managerial act. Further, interest attribut-
able to a general administrative decision,
such as the IRS’s decision on how to or-
ganize the processing of tax returns or the
IRS’s decision on the implementation
schedule for an improved computer sys-
tem, cannot be abated under paragraph (a)
of this section.
(2) Ministerial actmeans a procedural
or mechanical act that does not involve
the exercise of judgment or discretion,
and that occurs during the processing of a
taxpayer’s case after all prerequisites to
the act, such as conferences and review
by supervisors, have taken place. A deci-
sion concerning the proper application of
federal tax law (or other federal or state
law) is not a ministerial act.
(c) Examples.The following examples
illustrate the provisions of paragraphs
(b)(1) and (b)(2) of this section. For the
purposes of the examples, no significant
aspect of any error or delay is attributable
to the taxpayer, and the IRS has contacted
the taxpayer in writing with respect to the
deficiency.
Example 1.A taxpayer moves from one state to
another before the IRS selects the taxpayer’s income
tax return for examination. A letter explaining that
the return has been selected for examination is sent
to the taxpayer’s old address and then forwarded to
the new address. The taxpayer timely responds, ask-
ing that the audit be transferred to the IRS’s district
office that is nearest the new address. The group
manager approves the request. After the request for
transfer has been approved, the transfer of the case is
a ministerial act. The Commissioner may (in the
Commissioner’s discretion) abate interest attribut-
able to any unreasonable delay in transferring the
case.
Example 2.An examination of a taxpayer’s in-
come tax return reveals a deficiency with respect to
which a notice of deficiency will be issued. The tax-
payer and the IRS identify all agreed and unagreed
issues, the notice is prepared and reviewed (includ-
ing review by District Counsel, if necessary) and
any other relevant prerequisites are completed. The
issuance of the notice of deficiency is a ministerial
act. The Commissioner may (in the Commissioner’s
discretion) abate interest attributable to any unrea-
sonable delay in issuing the notice.
Example 3.A revenue agent is sent to a training
course for an extended period of time, and the
agent’s supervisor decides not to reassign the agent’s
cases. During the training course, no work is done
on the cases assigned to the agent. The decision to
send the revenue agent to the training course and the
decision not to reassign the agent’s cases are not
ministerial acts; however, both decisions are man-
agerial acts. The Commissioner may (in the Com-
missioner’s discretion) abate interest attributable to
any unreasonable delay resulting from these deci-
sions.
Example 4.A taxpayer appears for an office
audit and submits all necessary documentation and
information. The auditor tells the taxpayer that the
taxpayer will receive a copy of the audit report.
However, before the report is prepared, the auditor is
permanently reassigned to another group. An ex-
tended period of time passes before the auditor’s
cases are reassigned. The decision to reassign the
auditor and the decision not to reassign the auditor’s
cases are not ministerial acts; however, they are
managerial acts. The Commissioner may (in the
Commissioner’s discretion) abate interest attribut-
able to any unreasonable delay resulting from these
decisions.
Example 5.A taxpayer is notified that the IRS in-
tends to audit the taxpayer’s income tax return. The
agent assigned to the case is granted sick leave for
an extended period of time and the taxpayer’s case is
not reassigned. The decision to grant sick leave and
the decision not to reassign the taxpayer’s case to
another agent are not ministerial acts; however, they
are managerial acts. The Commissioner may (in the
Commissioner’s discretion) abate interest attribut-
able to any unreasonable delay caused by these deci-
sions.
Example 6.A revenue agent has completed an
examination of the income tax return of a taxpayer.
There are issues that are not agreed upon between
the taxpayer and the IRS. Before the notice of defi-
ciency is prepared and reviewed, a clerical employee
misplaces the taxpayer’s case file. The act of mis-
placing the case file is a managerial act. The Com-
missioner may (in the Commissioner’s discretion)
abate interest attributable to any unreasonable delay
resulting from the file being misplaced.
Example 7.A taxpayer invests in a tax shelter
and reports a loss from the tax shelter on the tax-
payer’s income tax return. IRS personnel conduct
an extensive examination of the tax shelter, and the
processing of the taxpayer’s case is delayed because
of that examination. The decision to delay the pro-
cessing of the taxpayer’s case until the completion
of the examination of the tax shelter is a decision on
how to organize the processing of tax returns. This
is a general administrative decision. Consequently,
interest attributable to this decision cannot be abated
under paragraph (a) of this section.
Example 8.A taxpayer claims a loss on the tax-
payer’s income tax return and is notified that the IRS
intends to examine the return. However, a decision
is made not to commence the examination of the
taxpayer’s return until the processing of another re-
turn, for which the statute of limitations is about to
expire, is completed. The decision on how to priori-
tize the processing of returns based on the expiration
of the statute of limitations is a general administra-
tive decision. Consequently, interest attributable to
this decision cannot be abated under paragraph (a)
of this section.
Example 9.During the examination of an in-
come tax return, there is disagreement between the
taxpayer and the revenue agent regarding certain
itemized deductions claimed by the taxpayer on the
return. To resolve the issue, Examination requests
advice from the Office of Chief Counsel on a sub-
stantive issue of federal tax law. The decision to re-
quest advice is a decision concerning the proper ap-
plication of federal tax law; it is neither a ministerial
nor a managerial act. Consequently, interest attrib-
utable to a delay resulting from the decision to re-
quest advice cannot be abated under paragraph (a) of
this section.
Example 10.The facts are the same as in Exam-
ple 9 except the attorney who is assigned to respond
to the request for advice is granted leave for an ex-
tended period of time. The case is not reassigned
during the attorney’s absence. The decision to grant
leave and the decision not to reassign the taxpayer’s
case to another attorney are not ministerial acts;
however, they are managerial acts. The Commis-
sioner may (in the Commissioner’s discretion) abate
interest attributable to any unreasonable delay
caused by these decisions.
Example 11.A taxpayer contacts an IRS em-
ployee and requests the amount due to satisfy the
taxpayer’s income tax liability for a particular tax-
able year. Because the employee fails to access the
most recent data, the employee gives the taxpayer an
incorrect amount due. As a result, the taxpayer pays
less than the amount required to satisfy the tax lia-
bility. Accessing the most recent data is a minister-
ial act. The Commissioner may (in the Commis-
sioner’s discretion) abate interest attributable to any
unreasonable error or delay arising from giving the
taxpayer an incorrect amount due to satisfy the tax-
payer’s income tax liability.
Example 12.A taxpayer contacts an IRS em-
ployee and requests the amount due to satisfy the tax-
payer’s income tax liability for a particular taxable
year. To determine the current amount due, the em-
ployee must interpret complex provisions of federal
tax law involving net operating loss carrybacks and
foreign tax credits. Because the employee incor-
March 16, 1998201998–11 I.R.B.

rectly interprets these provisions, the employee gives
the taxpayer an incorrect amount due. As a result,
the taxpayer pays less than the amount required to
satisfy the tax liability. Interpreting federal tax law is
neither a ministerial nor a managerial act. Conse-
quently, interest attributable to an error or delay aris-
ing from giving the taxpayer an incorrect amount due
to satisfy the taxpayer’s income tax liability cannot
be abated under paragraph (a) of this section.
(d) Effective date.The provisions of
this section apply to interest accruing with
respect to deficiencies or payments of any
tax described in section 6212(a) for tax-
able years beginning after July 30, 1996.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 7, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 8, 1998, 63
F.R. 1086)
Notice of Proposed Rulemaking
Continuation Coverage
Requirements of Group Health
Plans
REG–209485–86
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations that provide guid-
ance under section 4980B of the Internal
Revenue Code on certain changes made
by the Health Insurance Portability and
Accountability Act of 1996, the Omnibus
Budget Reconciliation Act of 1989, and
the Technical and Miscellaneous Revenue
Act of 1988 relating to the continuation
coverage requirements applicable to
group health plans. The regulations will
generally affect sponsors of and partici-
pants in group health plans, and they pro-
vide plan sponsors and plan administra-
tors with guidance necessary to comply
with the law.
DATES: Written comments and requests
for a public hearing must be received by
April 7, 1998.
ADDRESSES: Send Submissions to:
CC:DOM:CORP:R (REG–209485–86),
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–209485–86), 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.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Russ
Weinheimer, 202-622-4695; concerning
submissions or requests for a hearing,
LaNita VanDyke, 202-622-7190 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget (OMB) for re-
view in accordance 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 Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Ser-
vice,Attn: IRS Reports Clearance Offi-
cer, T:FP, Washington, DC 20224. Com-
ments on the collection of information
should be received by March 9, 1998.
Comments are specifically requested con-
cerning the following:
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;
How to enhance the quality, utility, and
clarity of the information to be collected;
How to minimize the burden of com-
plying with the proposed collection of in-
formation, including the application of
automated collection techniques or other
forms of information technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information is in pro-
posed §54.4980B–1(a)(1)(iii). This col-
lection of information is required by
statute. The likely respondents are indi-
viduals. Responses to this collection of
information are required in order to obtain
the benefit of an extended period during
which a group health plan must make
COBRA continuation coverage available.
Estimated total annual reporting bur-
den: 440 hours.
The estimated annual burden per re-
spondent: 1 minute.
Estimated number of respondents:
26,400.
Estimated annual frequency of re-
sponses: on occasion.
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
The Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA)
amended the Code to add health care con-
tinuation coverage requirements. These
provisions, now set forth in section
4980B of the Code,
1
generally apply to a
group health plan maintained by an em-
ployer with at least 20 employees, and re-
quire such a plan to offer each qualified
beneficiary who would otherwise lose
coverage as a result of a qualifying event
an opportunity to elect, within the applic-
able election period, COBRA continua-
1998–11 I.R.B.21March 16, 1998
1
The COBRA continuation coverage requirements
were initially set forth under section 162(k) of the
Code, but were moved to section 4980B of the Code
by the Technical and Miscellaneous Revenue Act of
1988 (TAMRA). TAMRA changed the sanction for
failure to comply with the continuation coverage
requirements of the Code from a disallowance of
certain employer deductions under section 162 (and
denial of the income exclusion under section 106(a)
to certain highly compensated employees of the
employer) to an excise tax under section 4980B.

tion coverage. The COBRA continuation
coverage requirements were amended on
various occasions,
2
most recently under
the Health Insurance Portability and Ac-
countability Act of 1996 (HIPAA).
Proposed regulations providing guid-
ance under the continuation coverage re-
quirements as originally enacted by
COBRA and as amended by the Tax Re-
form Act of 1986, were published as pro-
posed Treasury Regulation §1.162–26 in
the Federal Register of June 15, 1987 (52
F.R. 22716).
The new set of proposed regulations
being published in this notice of proposed
rulemaking reflects principally the most
recent set of statutory changes — those
made by HIPAA — but also reflects cer-
tain changes made by the Technical and
Miscellaneous Revenue Act of 1988
(TAMRA) and by the Omnibus Budget
Reconciliation Act of 1989 (OBRA ’89).
Explanation of Provisions
Disability Extension; Permitted
Premiums.
As originally enacted, the COBRA
continuation coverage provisions required
plans to make continuation coverage
available for up to 18 months in the case
of a qualifying event that is a termination
of employment or reduction in hours of
employment and for up to 36 months for
all other qualifying events, such as death
of the covered employee, divorce from
the covered employee, or a dependent
child ceasing to be a dependent under the
generally applicable requirements of the
plan. If someone became entitled to the
18-month maximum period of coverage
and experienced a second qualifying
event during that period of COBRA con-
tinuation coverage, then the law provided
an extended period of coverage so that
there would be a total of 36 months of
COBRA continuation coverage measured
from the date of the first qualifying event.
Under OBRA ’89, provisions were
added allowing the 18-month period to be
extended to 29 months if a qualified bene-
ficiary was disabled at the time of the
qualifying event. Section 421 of HIPAA
changed these provisions by requiring
plans to allow the disability extension if a
qualified beneficiary is disabled within
the first 60 days of COBRA continuation
coverage and by clarifying that nondis-
abled qualified beneficiaries with respect
to the same qualifying event are also enti-
tled to the disability extension.
Thus, under the current provisions in
the Code, all qualified beneficiaries with
respect to the same qualifying event are
entitled to an extension of the maximum
period of COBRA continuation coverage
from 18 to 29 months, if three conditions
are satisfied. First, each qualified benefi-
ciary must be a qualified beneficiary in
connection with a qualifying event that is
a termination of employment or reduction
in hours of employment. Second, a quali-
fied beneficiary must be determined to
have been disabled (within the meaning
of title II or title XVI of the Social Secu-
rity Act) within the first 60 days of
COBRA continuation coverage. Third,
the plan administrator must be provided
with a copy of the determination of dis-
ability on a date that is both within 60
days after the determination is issued and
before the end of the initial 18-month pe-
riod of COBRA continuation coverage.
In the case of a disability extension, for
any period after the end of the 18th month
of COBRA continuation coverage, the
plan may generally require payment for
COBRA continuation coverage in an
amount that does not exceed 150 percent
of the applicable premium.
These proposed regulations clarify the
statutory disability extension require-
ments in several respects. For example,
the first 60 days of COBRA continuation
coverage are generally measured from the
date of the termination of employment or
reduction in hours of employment. An
exception applies if coverage would be
lost (in the absence of an election for
COBRA continuation coverage) after the
date of the qualifying event and if the plan
has elected to measure both the maximum
coverage period and the period for pro-
viding notice upon the occurrence of a
qualifying event from the date that cover-
age would be lost rather than from the
date of the qualifying event. In such a
case, the first 60 days of COBRA continu-
ation coverage are also measured from the
date that coverage would be lost.
In addition, these proposed regulations
make clear that the disability extension
applies to each qualified beneficiary,
whether or not disabled, that each quali-
fied beneficiary has an independent right
to the disability extension, and that any of
the qualified beneficiaries may provide
the plan administrator with a copy of the
determination of disability.
Another clarification relates to the pe-
riod during which the plan may charge
150 percent of the applicable premium.
These proposed regulations make clear
that the plan may require payment equal
to 150 percent of the applicable premium
if a disabled qualified beneficiary experi-
ences a second qualifying event during
the disability extension. In such a case
(that is, where the disabled qualified ben-
eficiary is entitled to a 36-month maxi-
mum coverage period only because a sec-
ond qualifying event occurs during the
disability extension), the plan may require
payment of 150 percent of the applicable
premium until the end of the 36-month
maximum coverage period.
HIPAA also added provisions to the
Code, in section 9802(b), that generally
prohibit discrimination in premiums on
the basis of health status, including on the
basis of disability. These proposed regu-
lations clarify that a plan that requires a
disabled qualified beneficiary entitled to
the disability extension to pay 150 percent
of the applicable premium (as permitted
by the proposed regulations) does not for
that reason fail to comply with the nondis-
crimination requirements of section
9802(b).
These proposed regulations do not ad-
dress the extent to which a plan can
charge 150 percent of the applicable pre-
mium to a qualified beneficiary who is
not disabled. Comments are requested on
this issue.
Newborn and Adopted Children Treated
as Qualified Beneficiaries.
Section 421 of HIPAA also provides
that a child born to or placed for adoption
March 16, 1998221998–11 I.R.B.
2
Changes affecting the COBRA continuation cover-
age provisions were made under the Omnibus
Budget Reconciliation Act of 1986, the Tax Reform
Act of 1986, the Technical and Miscellaneous
Revenue Act of 1988, the Omnibus Budget
Reconciliation Act of 1989, the Omnibus Budget
Reconciliation Act of 1990, the Small Business Job
Protection Act of 1996, and the Health Insurance
Portability and Accountability Act of 1996. The
statutory continuation coverage requirements have
also been affected by an amendment made to the def-
inition of group health plan in section 5000(b)(1) by
the Omnibus Budget Reconciliation Act of 1993;
that definition is incorporated by reference in section
4980B(g)(2).

with the covered employee during a pe-
riod of COBRA continuation coverage is
a qualified beneficiary. Such a child gen-
erally is eligible to be enrolled immedi-
ately for COBRA continuation coverage
under the plan. These proposed regula-
tions clarify that the maximum coverage
period for such a child is measured from
the date of the qualifying event that gives
rise to the period of COBRA continuation
coverage during which the child is born or
adopted and not from the date of birth or
placement for adoption. Thus, the child’s
maximum period of COBRA continuation
coverage would end at the same time as
the maximum period for other family
members. In addition, the statutory term
placement for adoptionis clarified to in-
clude an adoption that is not preceded by
a placement for adoption.
Long-term Care; MSAs.
Section 321(d) of HIPAA amended sec-
tion 4980B of the Code to provide that a
plan does not constitute a group health
plan subject to the COBRA continuation
coverage requirements if substantially all
of the coverage provided under the plan is
for qualified long-term care services, as
defined in section 7702B(c). These pro-
posed regulations permit a plan to use any
reasonable method in determining
whether substantially all of the coverage is
for qualified long-term care services. Fur-
ther, the proposed regulations reflect sec-
tion 106(b)(5), added by HIPAA, which
provides that COBRA continuation cover-
age is not required to be made available
with respect to medical savings accounts
(MSAs), as defined under section 220.
Good Faith/Reasonable Interpretations.
The effective date of these regulations,
when made final, will not be earlier than
the date of publication of final regulations
in the Federal Register.For the period
before the effective date of final regula-
tions, plans and employers are required to
operate in good faith compliance with a
reasonable interpretation of the statutory
requirements. Compliance with the terms
of the proposed regulations concerning
the matters addressed is deemed to be
good faith compliance with a reasonable
interpretation of the statutory require-
ments. Actions inconsistent with the
terms of the proposed regulations will not
necessarily constitute a lack of good faith
compliance with a reasonable interpreta-
tion of the statutory requirements;
whether there has been good faith compli-
ance with a reasonable interpretation of
the statutory requirements will depend on
all the facts and circumstances of each
case. Plans and employers may also con-
tinue to rely on proposed Treasury Regu-
lation §1.162–26 (published on June 15,
1987 in 52 F.R. 22716), except to the ex-
tent that that proposed regulation is incon-
sistent with statutory amendments made
after its date of publication.
Future Guidance Concerning COBRA
Obligations in Certain Stock and Asset
Sales.
Treasury and the IRS are currently con-
sidering the issuance of guidance con-
cerning COBRA obligations in cases in-
volving a sale of stock in an employer that
causes the employer to become a member
of another controlled group of corpora-
tions (a “stock sale”), or a sale of substan-
tial assets by an employer (such as a plant
or division) to another employer outside
the controlled group (an “asset sale”).
The approach under consideration gen-
erally would provide, in the case of a
stock sale to a buyer maintaining a group
health plan, that the buyer’s group health
plan (and not a plan maintained by the
seller) would be responsible, after the
date of the sale, for complying with the
COBRA continuation coverage require-
ments with respect to any covered em-
ployee (and associated qualified benefi-
ciary) whose last employment was with
the sold corporation. Thus, for example,
the buyer’s group health plan would have
the obligation, after the date of the sale, to
comply with the COBRA continuation
coverage requirements with respect to
those individuals regardless of whether
their qualifying events were connected to
the sale of stock or were in advance of
and not connected to the sale. If the buyer
did not maintain a group health plan, then
a group health plan of the seller would
continue to be responsible for complying
with the COBRA continuation coverage
requirements with respect to qualified
beneficiaries associated with the sold cor-
poration.
In the case of an asset sale, the ap-
proach under consideration generally
would provide that a group health plan
maintained by the seller (and not a plan
maintained by the buyer) would be re-
sponsible for complying with the COBRA
continuation coverage requirements with
respect to any covered employee (and as-
sociated qualified beneficiary) whose last
employment was associated with the pur-
chased assets. However, an exception
would be provided if the buyer were a
“successor employer,” in which case a
group health plan of the buyer would be
responsible for complying with the
COBRA continuation coverage require-
ments with respect to qualified beneficia-
ries associated with the purchased assets.
Consideration is being given to treating a
buyer as a successor employer in connec-
tion with an asset sale only if the buyer
acquires substantial assets (such as a plant
or division, or substantially all of the as-
sets of a trade or business) and continues
the business operations associated with
those assets without interruption or sub-
stantial change, and only if, in connection
with the sale, the selling employer ceases
to maintain any group health plan. The
approach might also include a presump-
tion that the cessation is in connection
with the sale if it occurs within 6 months
of the sale.
Comments are requested on this possi-
ble approach to assigning responsibility
for compliance with the COBRA continu-
ation coverage requirements in the con-
text of stock sales and asset sales and on
any related issues that should be ad-
dressed.
Special Analyses
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 is
hereby certified that the collection-of-in-
formation requirement in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that the collection-of-information re-
quirement is imposed on individual quali-
fied beneficiaries and not on small busi-
nesses or other small entities. 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
1998–11 I.R.B.23March 16, 1998

Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Comments and Requests for a 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 available for public
inspection and copying. A public hearing
may be scheduled if requested in writing
by a person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place
for the hearing will be published in the
Federal Register.
Drafting Information
The principal author of these proposed
regulations is Russ Weinheimer, Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 54 is pro-
posed to be amended as follows:
Paragraph 1. The authority citation for
Part 54 is amended in part by adding an
entry in numerical order to read as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 54.4980B–1 also issued under
26 U.S.C. 4980B. * * *
Par. 2. A new section 54.4980B–1 is
added to read as follows:
§ 54.4980B–1 Certain changes to the
continuation coverage requirements of
group health plans.
(a) Disability extension—(1) In gen-
eral.Paragraphs (a)(2), (3), and (4) of
this section (describing qualified benefi-
ciaries entitled to a disability extension,
the length of the extension, and the
amount that a plan can require qualified
beneficiaries to pay during the extension)
apply to a group health plan only if all
three of the conditions of this paragraph
(a)(1) are satisfied.
(i) A termination-of-employment qual-
ifying event occurs.
(ii) An individual (whether or not the
covered employee) who is a qualified
beneficiary in connection with the termi-
nation-of-employment qualifying event is
determined under title II or XVI of the
Social Security Act to have been disabled
at any time during the first 60 days of
COBRA continuation coverage. For this
purpose, the first 60 days of COBRA con-
tinuation coverage are measured from the
date of the termination-of-employment
qualifying event, except that if a loss of
coverage would occur at a later date in the
absence of an election for COBRA
continuation coverage and if the plan
provides for the extension of required
periods (as permitted under section
4980B(f)(8)), then the first 60 days of
COBRA continuation coverage are mea-
sured from the date on which the cover-
age would be lost.
(iii) Any of the qualified beneficiaries
affected by the termination-of-employ-
ment qualifying event provides notice to
the plan administrator of the disability de-
termination on a date that is both within
60 days after the date the determination is
issued and before the end of the original
18-month maximum coverage period that
applies to the termination-of-employment
qualifying event.
(2) Maximum coverage period—(i)
The maximum coverage period ends—
(A) 29 months after the date of the ter-
mination-of-employment qualifying
event; or
(B) 36 months after the date of the ter-
mination-of-employment qualifying event
if a qualifying event (other than a bank-
ruptcy qualifying event) occurs during the
29-month period that begins on the date
of the termination-of-employment quali-
fying event.
(ii) If, in the absence of an election for
COBRA continuation coverage, coverage
under the group health plan would be lost
after the date of the termination-of-em-
ployment qualifying event and the plan
provides for the extension of the required
periods, as permitted under section
4980B(f)(8), then the dates or periods in
paragraph (a)(2)(i) of this section are
measured from the date on which cover-
age would be lost and not from the date of
the termination-of-employment qualify-
ing event.
(iii) Nothing in section 4980B or this
section prohibits a group health plan from
providing coverage that continues beyond
the end of the maximum coverage period.
(3) Application to all qualified benefi-
ciaries.Paragraph (a)(2) of this section
applies to all qualified beneficiaries enti-
tled to COBRA continuation coverage
because of the same termination-of-em-
ployment qualifying event. Thus, for ex-
ample, the 29-month period applies to
each qualified beneficiary who is not dis-
abled as well as to the qualified benefi-
ciary who is disabled, and it applies inde-
pendently with respect to each of the
qualified beneficiaries.
(4) Payment during disability exten-
sion—(i) Disabled qualified beneficia-
ries—(A) A group health plan is permit-
ted to require a disabled qualified
beneficiary described in paragraph (a)(1)
of this section, for any period of COBRA
continuation coverage after the end of the
18th month, to pay an amount that does
not exceed 150 percent of the applicable
premium. However, the plan is not per-
mitted to require a disabled qualified ben-
eficiary described in paragraph (a)(1) of
this section to pay an amount that exceeds
102 percent of the applicable premium for
any period of COBRA continuation cov-
erage to which the qualified beneficiary is
entitled without regard to the application
of this paragraph (a). Thus, if a disabled
qualified beneficiary described in para-
graph (a)(1) of this section experiences a
second qualifying event within the origi-
nal 18-month period of COBRA continua-
tion coverage, then the plan is not permit-
ted to require the qualified beneficiary to
pay an amount that exceeds 102 percent
of the applicable premium for any period
of COBRA continuation coverage. By
contrast, if a disabled qualified benefi-
ciary described in paragraph (a)(1) of this
section experiences a second qualifying
event after the end of the 18th month of
original COBRA continuation coverage,
the plan may require the qualified benefi-
ciary to pay an amount that is up to 150
percent of the applicable premium for the
remainder of the period of COBRA con-
tinuation coverage (that is, from the be-
ginning of the 19th month through the end
of the 36th month).
(B) A group health plan does not fail to
comply with section 9802(b) and
§54.9802–1T(b) (which generally pro-
March 16, 1998241998–11 I.R.B.

hibit an individual from being charged, on
the basis of health status, a higher pre-
mium than that charged for similarly situ-
ated individuals enrolled in the plan) with
respect to a disabled qualified beneficiary
described in paragraph (a)(1) of this sec-
tion merely because the plan requires pay-
ment of a premium in an amount permit-
ted under paragraph (a)(4)(i)(A) of this
section.
(ii) Nondisabled qualified beneficia-
ries.[Reserved].
(b) Newborns and adopted children. A
child who is born to or placed for adop-
tion with a covered employee during a pe-
riod of COBRA continuation coverage is
a qualified beneficiary and generally is el-
igible to be enrolled immediately for
COBRA continuation coverage under the
plan. See section 4980B(g)(1)(A), sec-
tion 9801(f)(2) and §54.9801–6T(b) (re-
lating to special enrollment rights of de-
pendents of employees), and Q&A–31 of
§1.162–26 of this chapter (relating to the
right of qualified beneficiaries to have
new family members covered to the same
extent that similarly situated active em-
ployees can have new family members
covered under the plan). Such a child has
the same open-enrollment-period rights as
other qualified beneficiaries with respect
to the same qualifying event (see Q&A-
30(c) of §1.162–26 of this chapter) and
would be entitled to a 36-month maxi-
mum coverage period if a second qualify-
ing event occurred while the child was in
a period of COBRA continuation cover-
age resulting from a termination-of-em-
ployment qualifying event. The maxi-
mum coverage period for such a child is
measured from the same date as for other
qualified beneficiaries with respect to the
same qualifying event (and not from the
date of the birth or placement for adop-
tion). In contrast, neither the covered em-
ployee, the spouse of the covered em-
ployee, nor any other dependent child of
the covered employee is a qualified bene-
ficiary unless that person is covered under
a group health plan on the day before a
qualifying event. See also Q&A–31 of
§1.162–26 of this chapter.
(c) Plan providing long-term care.A
plan is not subject to the COBRA continu-
ation coverage requirements if substan-
tially all of the coverage provided under
the plan is for qualified long-term care
services (as defined in section 7702B(c)).
For this purpose, a plan is permitted to
use any reasonable method in determining
whether substantially all of the coverage
under the plan is for qualified long-term
care services.
(d) Medical savings accounts.Under
section 106(b)(5), amounts contributed by
an employer to a medical savings account
are not considered part of a group health
plan that is subject to section 4980B.
Thus, a plan is not required to make
COBRA continuation coverage available
with respect to a medical savings account.
However, a high deductible health plan
that covers a medical savings account
holder may be a group health plan and
thus may be subject to the COBRA con-
tinuation coverage requirements.
(e) Definitions.For purposes of this
section —
Applicable premiumis defined in sec-
tion 4980B(f)(4).
Bankruptcy qualifying eventis a quali-
fying event described in section
4980B(f)(3)(F) (relating to certain bank-
ruptcy proceedings).
Covered employeeis defined in section
4980B(f)(7).
Group health planis defined in section
4980B(g)(2).
High deductible health planis defined
in section 220(c)(2).
Medical savings account is defined in
section 220(d).
Placement, or being placed, for adop-
tionmeans the assumption and retention
by the covered employee of a legal oblig-
ation for total or partial support of a child
in anticipation of the adoption of the
child. The child’s placement for adoption
with the covered employee terminates
upon the termination of the legal obliga-
tion for total or partial support. For pur-
poses of this section and section 4980B, a
child who is immediately adopted by the
covered employee without a preceding
placement for adoption is considered to
be placed for adoption on the date of the
adoption.
Qualified beneficiaryis defined in sec-
tion 4980B(g)(1).
Qualified long-term care servicesis de-
fined in section 7702B(c).
Termination-of-employment qualifying
eventis a qualifying event described in
section 4980B(f)(3)(B) (relating to quali-
fying events that occur as a result of a ter-
mination of employment, other than for
gross misconduct, or reduction of hours
of employment).
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 6, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 7, 1998, 63
F.R. 708)
Change in Record Format
For TY 1998 Returns To Be
Filed in CY 1999
Announcement 98–20
The purpose of this announcement is to
inform all payers/transmitters, who file
information returns magnetically or elec-
tronically with Internal Revenue Service
(IRS) Martinsburg Computing Center, of
a change in the record format for tax year
1998returns to be filed in calendar year
1999. Due to the century date change,
legislative changes, and proposed future
expansion, the record size will be in-
creased from the current 420 positions to
750 positions. This will enable IRS to
capture all data required to be filed. Sev-
eral examples of changes are: the number
of money fields have been expanded from
9 to 12, and blank fields have been added
to enable IRS to capture more complete
name and address information in the fu-
ture. Although the record has changed,
much of the information is data already
requested in the present format.
Publication 1220, Specifications for
Filing Forms 1098, 1099 series, 5498,
5498–MSA and W–2G Magnetically or
Electronically, is being revised and is
scheduled to be available on the Informa-
tion Reporting Program Bulletin Board
System (IRP–BBS) by May 1998 in an ef-
fort to give payers/transmitters as much
time as possible to incorporate the
changes into their programs. The tele-
phone number for the IRP–BBS is 304-
264-7070. IRS is planning additional In-
formation Reporting Seminars to assist
filers with the new format.
Due to the fact we are unable to discuss
any other changes in detail until the publi-
cation has gone through all necessary
clearances, no further information will be
provided at this time.
1998–11 I.R.B.25March 16, 1998

Foundations Status of Certain
Organizations
Announcement 98–21
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
Child Care Resources Inc., Maidens, VA
Childern Medical Foundation,
Clearwater, FL
Childhood Hope Inc., Sevierville, TN
Childlife International, Hopkins, MN
Childreach Pursuing Parenthood Inc.,
Norton, OH
Clearwater Aquatic Team Booster Club,
Inc., Clearwater, FL
Clergy Housing Support Group Inc.,
Philadelphia, PA
Cleveland Community Access
Corporation, Cleveland, OH
Cleveland Student Housing Association,
Independence, OH
Cleveland Theatre Company, Cleveland,
OH
Community Actors of St. Bernard
Theatre—C.A.S.T., Chalmette, LA
Community Advocacy of South Texas
Inc., Pharr, TX
Community Alliance of Pinellas for Aids,
Inc., St. Petersburg, FL
Community and Educational Services for
Family Youth and Senior Development
Corporation, Detroit, MI
Community Care and Share Pantry, West
Salem, WI
Community Care Co., Sapulpa, OK
Community Consulting & Research
Group Incorporated, Easton, MD
Community Corrections Advisory Board,
Jamestown, ND
Community Economic and Ecological
Development Institute, Santa Fe, NM
Community Gathering Place Association,
Columbus, OH
Crown of the Continent Conservancy,
Kalispell, MT
Crusaders Community Development,
Philadelphia, PA
Crystal Beach Volunteer Fire Dept.,
Crystal Beach, TX
CSC Charities Inc., Chicago, IL
Cuban National Congress Inc., Hialeah,
FL
Cullman Alzheimers and Related
Disorders Support Group, Cullman,
AL
Culpeper Senior Center Inc., Culpeper,
VA
Cultural Center for Social Change,
Washington, DC
Cultural Treasures of New Orleans, New
Orleans, LA
Cushing Regional Hospital, Cushing, OK
Custer County Family Preservation,
Broken Bow, NE
Cuyahoga County Local Council on
Physical Fitness and Sports, Cleveland,
OH
Derry Township Bridge Housing
Association, Hershey, PA
Desarrolladora Nuestro Barrio Inc., Rio
Piedras, PR
Desert Storm Coalition Veterans
Memorial Fund, Washington, DC
Design Your Life Inc., Palm Beach
Gardens, FL
Dodge City Academic Booster Club,
Dodge City, KS
Doingsomething of Baltimore Inc.,
Baltimore, MD
Dolf Seeds Ministries Inc., Odenville, AL
Dolphin Assisted Therapy Association
Inc., Miami, FL
Domestic Violence Intervention Services
Guild Inc., Tulsa, OK
Donald O. Oldmixon Memorial Public
Service Scholarship Trust Fund,
Goliad, TX
Dooly County Arts Council Inc., Vienna,
GA
Door to Recovery Inc., Houston, TX
Educational Fund for the Blind,
Shoshoni, WY
Educational Grants and Loans
Association, Colorado Springs, CO
Educational Imperatives, Boulder, CO
Educational Opportunities International,
Houghton, MI
Educational Resource Development
Corporation, Shawnee Mission, KS
Erie Area Local Education Fund, Erie, PA
Erie Maritime Programs Inc., Erie, PA
Ethics Institute, Washington, DC
Ethiopian Community Media Service,
Washington, DC
Evangel Christian Ministries Inc.,
Wilmore, KY
Evangeline Human Development Inc.,
Villa Platte, LA
Evanston Lighthouse Rotary Club,
Evanson, IL
Evergreen Behavioral Health Center,
New Martinsville, WV
Everlastings Inc., Warrenton, VA
Exodo Foundation, Houston, TX
Extended Arms Outreach Center Inc.,
Pensacola, FL
Extra Mile JPHSA Inc., Metairie, LA
Eyes on the Sparrow Ministry Inc.,
Baltimore, MD
FACEof Fond Du Lac County Inc.,
Fond Du Lac, WI
FOURInternational, Detroit, MI
Face of the City Inc., Goshen, IN
Felons and Community Together,
Waterloo, IA
Fencing Advisory Associates Inc.,
Mishawaka, IN
Ferrier Harris Residential Care Inc., St.
Louis, MO
Foster and Maralee Overcash Scholarship
Trust, Canton, IL
Foundation for Parents, Austin, TX
Foundation for the Advancement of
Professional Psychology Education,
Wheeling, IL
Friends of Pre-Release, Athens, AL
Friends of Rutgers University Equine
Research Inc., Montclair, NJ
Friends of Tagore Inc., Atlantis, FL
Friends of the Newport News Juvenile
Court, Newport News, VA
Friends of the Pere Marquette Trail,
Midland MI
Friends of the Quilt-National Capital
Area, Washington, DC
Grand Canyon Pioneers Society, Grand
Canyon, AZ
Grand Junction Baseball Committee Inc.,
Grand Junction, CO
Grand Rapids Area Choral Ensemble,
Grand Rapids, MI
Grand River and Nature Discovery
Project, Clarklake, MI
Grand Valley Public Radio Company,
Grand Junction, CO
Grandma Dottie Senior Charities,
Littleton, CO
Grandmas House Christian Childcare and
March 16, 1998261998–11 I.R.B.

Preschool Inc., Isle of Wight County,
VA
Grant-a-Wish Incorporated, Albuquerque,
NM
Gratiot County Widowed Persons
Service, Alma, MI
Grayling Ausable Football League,
Grayling, MI
Hawkeye Community Historical Center,
West Union, IA
Hays Lewis Sporting Clays Foundation
Inc., Pavo, GA
Hayward Elementary & Middle School
Playground Committee Fund,
Hayward, WI
He Shall Supply Ministries Inc., Vero
Beach, FL
Headspeth Inc., Atlanta, GA
Hearts to Hearts Inc., Miami, FL
Healthsearch Inc., Anderson, IN
Hebron Arabians Inc., Clovis, NM
Hegewisch Sports Facility Coalition Inc.,
Chicago, IL
Heidi Van Arnem Foundation to Cure
Paralysis, Birmingham, MI
Help & Information Service, Long Pond,
PA
Help Enable Alcoholics Receive
Treatment Inc., Metairie, LA
Help of Tampa Bay Inc., Pinellas Park,
FL
Help With Hearing Foundation, San
Antonio, TX
Helping Enhance Lifes Potentials, Dallas,
TX
Historically Black Colleges and
University Association, Kansas City,
MO
Hmong American Association of Portage
County Inc., Stevens Point, WI
Hope Housing, Crystal Lake, IL
Hope Unity & Growth Inc., Detroit, MI
Hopkins Street Community Association
LTD, Milwaukee, WI
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.
1998–11 I.R.B.27March 16, 1998

March 16, 1998281998–11 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Proc..—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

1998–11 I.R.B.29March 16, 1998
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.
Numerical Finding List
1
Bulletins 1998–1 through 1998–10
Announcements:
98–1, 1998–2 I.R.B. 38
98–2, 1998–2 I.R.B.38
98–3, 1998–2 I.R.B.38
98–4, 1998–4 I.R.B.31
98–5, 1998–5 I.R.B. 25
98–6, 1998–5 I.R.B. 25
98–7, 1998–5 I.R.B. 26
98–8, 1998–6 I.R.B. 96
98–9, 1998–7 I.R.B. 35
98–10, 1998–7 I.R.B. 35
98–11, 1998–8 I.R.B. 42
98–12, 1998–8 I.R.B. 43
98–13, 1998–8 I.R.B. 43
98–14, 1998–8 I.R.B. 44
98–15, 1998–10 I.R.B.36
98–16, 1998–9 I.R.B. 17
98–17, 1998–9 I.R.B. 16
98–18, 1998–10 I.R.B.44
98–19, 1998–10 I.R.B.44
Notices:
98–1, 1998–3 I.R.B. 42
98–2, 1998–2 I.R.B. 22
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25
98–5, 1998–3 I.B.R.49
98–6, 1998–3 I.R.B. 52
98–7, 1998–3 I.R.B. 54
98–8, 1998–4 I.R.B. 6
98–9, 1998–4 I.R.B. 8
98–10, 1998–6 I.R.B.9
98–11, 1998–6 I.R.B. 18
98–12, 1998–5 I.R.B.12
98–13, 1998–6 I.R.B.19
98–14, 1998–8 I.R.B. 27
98–15, 1998–9 I.R.B. 8
Proposed Regulations:
REG–100841–97, 1998–8 I.R.B. 30
REG–102894–97, 1998–3 I.R.B. 59
REG–104062–97, 1998–10 I.R.B. 34
REG–105163–97, 1998–8 I.R.B. 31
REG–109333–97, 1998–9 I.R.B. 9
REG–109704–97, 1998–3 I.R.B. 60
REG–115795–97, 1998–8 I.R.B.33
REG–119449–97, 1998–10 I.R.B. 35
REG–121755–97, 1998–9 I.R.B. 13
REG–209463–82, 1998–4 I.R.B. 27
REG–209476–82, 1998–8 I.R.B. 36
REG–209484–87, 1998–8 I.R.B.40
REG–209807–95, 1998–8 I.R.B. 40
REG–251502–96, 1998–9 I.R.B. 14
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
Revenue Procedures—Continued
98–11, 1998–4 I.R.B.9
98–12, 1998–4 I.R.B. 18
98–13, 1998–4 I.R.B. 21
98–14, 1998–4 I.R.B. 22
98–15, 1998–4 I.R.B. 25
98–16, 1998–5 I.R.B. 19
98–17, 1998–5 I.R.B. 21
98–18, 1998–6 I.R.B. 20
98–19, 1998–7 I.R.B. 30
98–20, 1998–7 I.R.B. 32
98–21, 1998–8 I.R.B. 27
98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
Revenue Rulings:
98–1, 1998–2 I.R.B. 5
98–2, 1998–2 I.R.B. 15
98–3, 1998–2 I.R.B. 4
98–4, 1998–2 I.R.B. 18
98–5, 1998–2 I.R.B. 20
98–6, 1998–4 I.R.B. 4
98–7, 1998–6 I.R.B.6
98–8, 1998–7 I.R.B. 24
98–9, 1998–6 I.R.B. 5
98–10, 1998–10 I.R.B. 11
98–11, 1998–10 I.R.B. 13
98–12, 1998–10 I.R.B. 5
Treasury Decisions:
8740, 1998–3 I.R.B. 4
8741, 1998–3 I.R.B. 6
8742, 1998–5 I.R.B.4
8743, 1998–7 I.R.B. 26
8744, 1998–7 I.R.B. 20
8745, 1998–7 I.R.B. 15
8746, 1998–7 I.R.B. 4
8747, 1998–7 I.R.B. 18
8748, 1998–8 I.R.B. 24
8749, 1998–7 I.R.B. 16
8750, 1998–8 I.R.B. 4
8751, 1998–10 I.R.B. 23
8752, 1998–9 I.R.B. 4
8753, 1998–9 I.R.B. 6
8754, 1998–10 I.R.B. 15
8755, 1998–10 I.R.B. 21

March 16, 1998301998–11 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–1 through 1998–10
Revenue Procedures:
95–35
95–35A
Superseded by
98–19, 1998–7 I.R.B. 30
97–1
Superseded by
98–1, 1998–1 I.R.B. 7
97–2
Superseded by
98–2, 1998–1 I.R.B. 74
97–3
Superseded by
98–3, 1998–1 I.R.B. 100
97–4
Superseded by
98–4, 1998–1 I.R.B. 113
97–5
Superseded by
98–5, 1998–1 I.R.B. 155
97–6
Superseded by
98–6, 1998–1 I.R.B. 183
97–7
Superseded by
98–7, 1998–1 I.R.B. 222
97–8
Superseded by
98–8, 1998–1 I.R.B. 225
97–21
Superseded by
98–2, 1998–1 I.R.B. 74
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:
75–17
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
92–19
Supplemented in part by
98–2, 1998–2 I.R.B. 15
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–27 through 1997–52 will be found in Internal
Revenue Bulletin 1998–1, dated January 5, 1998.

INTERNAL REVENUE BULLETIN
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