Internal Revenue Bulletin 1998-41 (PDF rendition): IRS Announcements

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

INCOME TAX
T.D. 8782, page 5.
Final regulations under section 927 of the Code provide guid-
ance to taxpayers who have made an election to be treated
as a foreign sales corporation (FSC).
T.D. 8783, page 4.
Final regulations under section 368 of the Code that provide
guidance regarding satisfaction of the continuity of interest
requirement for corporate reorganizations are amended.
EMPLOYMENT TAX
REG–209769–95, page 8.
Proposed regulations under section 3221 of the Code provide
guidance to employers covered by the Railroad Retirement
Tax Act. A public hearing will be held on January 20, 1999.
ADMINISTRATIVE
REG–106221–98, page 10.
Proposed regulations under section 1032 of the Code relate
to the treatment of a disposition by a corporation of the
stock of another corporation in a taxable transaction. A pub-
lic hearing will be held on January 7, 1999.
Announcement 98–88, page 14.
The Service announces that 1998 is not a cut-off year for
the Medical Savings Account pilot project.
Announcement 98–92, page 15.
The July 1998 revision of the Instructions for Form 706 is
corrected.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–41
October 13, 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 20.
Announcement of Disbarments and Suspensions begins on page 16.
IRB 1998-41 10/7/98 1:53 PM Page 1

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
IRB 1998-41 10/7/98 1:53 PM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
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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. Acitation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1998-41 10/7/98 1:53 PM Page 3

Section 368.—Definitions
Relating to Corporate
Reorganizations
26 CFR 1.368–1: Purpose and scope of exception of
reorganization exchanges.
T.D. 8783
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Continuity of Interest
Requirement for Corporate
Reorganizations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Amendment to final regula-
tions.
SUMMARY: This document amends
final regulations providing guidance re-
garding satisfaction of the continuity of
interest requirement for corporate reorga-
nizations. The amendment to the final
regulations affects corporations and their
shareholders. This amendment to the
final regulations is necessary to provide
clarification regarding an example illus-
trating a relationship created in connec-
tion with a potential reorganization.
DATES: Effective date:This amendment
is effective September 23, 1998.
Applicability date: This amendment ap-
plies to transactions occurring after Janu-
ary 28, 1998, except that it does not apply
to any transaction occurring pursuant to a
written agreement which is (subject to cus-
tomary conditions) binding on January 28,
1998, and at all times thereafter.
FOR FURTHER INFORMATION CON-
TACT: Phoebe Bennett, (202) 622-7750
(not a toll-free number).
SUPPLEMENTARYINFORMATION:
Background
On January 28, 1998, the IRS pub-
lished final regulations (REG–252231–
96) in the
Federal Register(63 F.R.
4174) relating to the continuity of interest
(COI) requirement.
Explanation of Provisions
The final COI regulation provides that
acquisitions of target (T) stock for cash by
a corporation related to the issuing corpo-
ration (P) generally do not preserve conti-
nuity of interest. See §1.368–1(e)(2).
Two corporations are related if they are
members of the same affiliated group as
defined in section 1504, or if a purchase
of Pstock by another corporation would
be treated as a distribution in redemption
of Pstock under section 304(a)(2). See
§1.368–1(e)(3). Acorporation will be
treated as related to another corporation if
such relationship exists immediately be-
fore or immediately after the acquisition
of Tstock, or if the relationship is created
in connection with the potential reorgani-
zation. See §1.368–1(e)(3)(ii). Thus, a
purchase by a corporation that was not
initially related to P, but purchased T
stock and became related to Pin the po-
tential reorganization, would not preserve
continuity to the extent of the purchase.
Section 1.368–1(e)(6), Example 2was
intended to illustrate this principle. In the
example, Aowns all of the stock of T. X,
a corporation which owns 60 percent of
the Pstock and none of the Tstock, buys
A’s Tstock for cash prior to the merger of
Tinto P. X exchanges the Tstock for P
stock in the merger which, when com-
bined with X’s prior ownership of Pstock,
constitutes 80 percent of the stock of P.
The example shows that X is related to P
because X becomes affiliated with Pin
the merger.
Section 1.338–2(c)(3) provides that, by
virtue of section 338, COI is satisfied for
certain persons if, following a qualified
stock purchase (QSP) of Tby the pur-
chasing corporation, the purchasing cor-
poration or a member of the purchasing
corporation’s affiliated group acquired the
Tassets. Commentators have questioned
whether §1.338–2(c)(3) applies to the
transaction described in Example 2.It is
not intended that these final regulations
provide guidance under section 338. To
avoid any such implication, Example 2is
amended so that X’s acquisition of A’s T
stock is not a QSP.
In addition, the amendment to the final
regulation illustrates the proper applica-
tion of the related party rule that treats
two corporations as related if a purchase
of Pstock by another corporation would
be treated as a distribution in redemption
of Pstock under section 304(a)(2). See
§1.368–1(e)(3)(i). Commentators have
questioned why, in Example 2, X is not al-
ready related to Punder the section
304(a)(2) rule even before the merger, be-
cause X owned more than 50 percent of
the Pstock. Section 304(a)(2) requires
that the issuing corporation control the ac-
quiring corporation (within the meaning
of section 304(c)). In Example 2, Pis the
issuing corporation and X is the acquiring
corporation. X is not related to Punder
section 304(a)(2) because Pdoes not con-
trol X; instead, X controls P. Asentence
is added to Example 2to illustrate this
point.
Applicability Date
The amendment to these final regula-
tions applies to transactions occurring
after January 28, 1998, except that it does
not apply to any transaction occurring
pursuant to a written agreement which is
(subject to customary conditions) binding
on January 28, 1998, and at all times
thereafter.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notices of proposed rulemaking preceding
these regulations were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of this amendment
to the final regulations is Phoebe Bennett
of the Office of the Assistant Chief Coun-
sel (Corporate), IRS. However, other per-
October 13, 199841998–41 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1998-41 10/7/98 1:53 PM Page 4

sonnel from the IRS and Treasury Depart-
ment participated in its development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. In §1.368–1, paragraph (e)(6)
Example 2 is revised to read as follows:
§1.368–1 Purpose and scope of
exception of reorganization exchanges.
* * * * *
(e) * * *
(6) * * *
Example 2. Relationship created in connection
with potential reorganization.Corporation X owns
60 percent of the stock of Pand 30 percent of the
stock of T. Aowns the remaining 70 percent of the
stock of T. X buys A’s Tstock for cash in a transac-
tion which is not a qualified stock purchase within
the meaning of section 338. Tthen merges into P.
In the merger, X exchanges all of its Tstock for ad-
ditional stock of P. As a result of the issuance of the
additional stock to X in the merger, X’s ownership
interest in Pincreases from 60 to 80 percent of the
stock of P. X is not a person related to Punder para-
graph (e)(3)(i)(B) of this section, because a purchase
of stock of Pby X would not be treated as a distribu-
tion in redemption of the stock of Punder section
304(a)(2). However, X is a person related to Punder
paragraphs (e)(3)(i)(A) and (ii)(B) of this section,
because X becomes affiliated with Pin the merger.
The continuity of interest requirement is not satis-
fied, because X acquired a proprietary interest in T
for consideration other than Pstock, and a substan-
tial part of the value of the proprietary interest in Tis
not preserved. See paragraph (e)(2) of this section.
*****
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved September 14, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
September 22, 1998, 8:45 a.m., and published in the
issue of the Federal Register for September 23,
1998, 63 F.R. 50757)
Section 927.—Other Definitions
and Special Rules
26 CFR 1.927(e)–1: Special sourcing rule.
T.D. 8782
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Source Rules for Foreign Sales
Corporation Transfer Pricing
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations that provide guidance to
taxpayers who have made an election to
be treated as a foreign sales corporation
(FSC). The regulations clarify that the
special source rule under section
927(e)(1) applies only to income of re-
lated suppliers from sales of export prop-
erty giving rise to foreign trading gross
receipts of a FSC.
DATES: Effective date.These regula-
tions are effective March 3, 1998.
Applicability date.These regulations
apply to taxable years beginning after De-
cember 31, 1997.
FOR FURTHER INFORMATION CON-
TACT: Elizabeth Beck (202) 874-1490
(not a toll-free number).
SUPPLEMENTARYINFORMATION:
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under section 927 which was added by
the Deficit Reduction Act of 1984, applic-
able for taxable years of foreign sales cor-
porations beginning after December 31,
1984. Temporary regulations (T.D. 8126)
were published in the Federal Register
(52 F.R. 6468 [1987–1 C.B. 184]) on
March 3, 1987. These temporary regula-
tions were amended by temporary regula-
tions published in the Federal Register
(63 F.R. 10305) as a Treasury decision
(T.D. 8764 [1998–15 I.R.B. 9]) on March
3, 1998. On the same date, a notice of
proposed rulemaking cross-referencing
TD 8764 was published in the Federal
Register(63 F.R. 10351 [REG–102144–
98, 1998–15 I.R.B. 25]). The proposed
rule proposed changes to the grouping
and source rules for foreign sales corpora-
tion transfer pricing. Comments respond-
ing to this notice were received. On June
24, 1998, a public hearing was held lim-
ited to the proposed changes to the group-
ing rules, since no hearing was requested
with respect to the source rule. After con-
sideration of all comments received, the
proposed regulations regarding the source
rule are adopted as revised by this Trea-
sury decision.
Explanation of Provisions
A.Current Temporary Regulations.
Section 927(e)(1) provides that “under
regulations, the income of a person de-
scribed in section 482 from a transaction
giving rise to foreign trading gross re-
ceipts of a FSC which is treated as from
sources outside the United States shall not
exceed the amount which would be
treated as foreign source income earned
by such person if the pricing rule under
section 994 which corresponds to the rule
used under section 925 with respect to
such transaction applied to such transac-
tion.” Transactions giving rise to foreign
trading gross receipts include qualifying
sales, leases, licenses and services. Be-
cause T.D. 8126 could be interpreted to
apply the special foreign source limit only
to sales of export property, §1.927(e)–1T
was amended by T.D. 8764 to clarify that
the regulation applies to any transaction
giving rise to foreign trading gross re-
ceipts of a FSC, including but not limited
to sales, leases, licenses and services.
T.D. 8764 also made conforming changes,
added special rules and gave examples re-
garding the special source rule.
B. Discussion of Comments
No comments were received on the
special rules added in proposed
§1.927(e)–1(a)(3)(ii). These rules clarify
how the corresponding DISC transfer
pricing rules are to be applied for pur-
poses of the foreign source limit and are
generally taxpayer favorable. No com-
ments were received on Examples (1) and
(3) set forth in proposed §1.927(e)–1(b).
1998–41 I.R.B.5October 13, 1998
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These examples illustrate how the limit is
applied under different transfer pricing
methods for sales transactions.
Comments received did suggest that
the rule distinguish between the foreign
source income limitation applicable to
sales and the limitation applicable to other
transactions giving rise to foreign trading
gross receipts. In light of these com-
ments, Treasury and the IRS believe that
additional consideration shouldbe given
to the appropriate scope of the special
source rule of section 927(e)(1) and that
the expanded special source rule should
be withdrawn. Accordingly, the final reg-
ulation applies the special source rule
only to sales of export property. Example
(2) of the proposed regulation, which ad-
dressed a licensing transaction, has been
removed.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in E.O. 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
regulation does not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regula-
tions is Elizabeth Beck of the Office of
the Associate Chief Counsel (Interna-
tional). Other personnel from the IRS and
Treasury Department also participated in
the development of these regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part l is amended
as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.927(e)–1Tand adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.927(e)–1 also issued under
26 U.S.C. 927(e)(1). * * *
§1.927(e)–1T[Removed]
Par. 2. Section 1.927(e)–1Tis re-
moved.
Par. 3. Section 1.927(e)–1 is added to
read as follows:
§1.927(e)–1 Special sourcing rule.
(a) Source rules for related persons—
(1) In general.The income of a person
described in section 482 from a sale of ex-
port property giving rise to foreign trad-
ing gross receipts of a FSC that is treated
as from sources outside the United States
shall not exceed the amount that would be
treated as foreign source income earned
by such person if the pricing rule under
section 994 that corresponds to the rule
used under section 925 with respect to
such transaction applied to such transac-
tion. This special sourcing rule also ap-
plies if the FSC is acting as a commission
agent for the related supplier with respect
to the transaction described in the first
sentence of this paragraph (a)(1) that
gives rise to foreign trading gross receipts
and the transfer pricing rules of section
925 are used to determine the commission
payable to the FSC. No limitation results
under this section with respect to a trans-
action to which the section 482 pricing
rule under section 925(a)(3) applies.
(2) Grouping of transactions.If, for
purposes of determining the FSC’s profits
under the administrative pricing rules of
sections 925(a)(1) and (2), grouping of
transactions under §1.925(a)–1T(c)(8)
was elected, the same grouping shall be
used for making the determinations under
the special sourcing rule in this section.
(3) Corresponding DISC pricing
rules—(i) In general.For purposes of
this section—
(A) The DISC gross receipts pricing
rule of section 994(a)(1) corresponds to
the gross receipts pricing rule of section
925(a)(1);
(B) The DISC combined taxable in-
come pricing rule of section 994(a)(2) cor-
responds to the combined taxable income
pricing rule of section 925(a)(2); and
(C) The DISC section 482 pricing rule
of section 994(a)(3) corresponds to the
section 482 pricing rule of section
925(a)(3).
(ii) Special rules.For purposes of this
section—
(A) The DISC pricing rules of section
994(a)(1) and (2) shall be determined
without regard to export promotion ex-
penses;
(B) Qualified export receipts under
section 994(a)(1) and (2) shall be deemed
to be an amount equal to the foreign trad-
ing gross receipts arising from the trans-
action; and
(C) Combined taxable income for pur-
poses of section 994(a)(2) shall be
deemed to be an amount equal to the com-
bined taxable income for purposes of sec-
tion 925(a)(2) arising from the transac-
tion.
(b) Examples. The provisions of this
section may be illustrated by the follow-
ing examples:
Example 1.(i) R and F are calendar year taxpay-
ers. R, a domestic manufacturing company, owns all
the stock of F, which is a FSC acting as a commis-
sion agent for R. For the taxable year, R and F used
the combined taxable income pricing rule of section
925(a)(2). For the taxable year, the combined tax-
able income of R and F is $100 from the sale of ex-
port property, as defined in section 927(a), manufac-
tured by R using production assets located in the
United States. Title to the export property passed
outside of the United States.
(ii) Under section 925(a)(2), 23 percent of the
$100 combined taxable income of R and F ($23) is
allocated to F and the remaining $77 is allocated to
R. Absent the special sourcing rule, under section
863(b) the $77 income allocated to R would be
sourced $38.50 U.S. source and $38.50 foreign
source. Under the special sourcing rule, the amount
of foreign source income earned by a related sup-
plier of a FSC shall not exceed the amount that
would result if the corresponding DISC pricing rule
applied. The DISC combined taxable income pric-
ing rule of section 994(a)(2) corresponds to the com-
bined taxable income pricing rule of section
925(a)(2). Under section 994(a)(2), $50 of the com-
bined taxable income ($100
3.50) would be allo-
cated to the DISC and the remaining $50 would be
allocated to the related supplier. Under section
863(b), the $50 income allocated to the DISC’s re-
lated supplier would be sourced $25 U.S. source and
$25 foreign source. Accordingly, under the special
sourcing rule, the foreign source income of R shall
not exceed $25.
October 13, 199861998–41 I.R.B.
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Example 2.(i) Assume the same facts as in Ex-
ample 1 except that R and F used the gross receipts
pricing rule of section 925(a)(1). In addition, for the
taxable year foreign trading gross receipts derived
from the sale of the export property are $2,000.
(ii) Under section 925(a)(1), 1.83 percent of the
$2,000 foreign trading gross receipts ($36.60) is al-
located to F and the $63.40 remaining combined tax-
able income ($100 – $36.60) is allocated to R. Ab-
sent the special sourcing rule, under section 863(b)
the $63.40 income allocated to R would be sourced
$31.70 U.S. source and $31.70 foreign source.
Under the special sourcing rule, the amount of for-
eign source income earned by a related supplier of a
FSC shall not exceed the amount that would result if
the corresponding DISC pricing rule applied. The
DISC gross receipts pricing rule of section 994(a)(1)
corresponds to the gross receipts pricing rule of sec-
tion 925(a)(1). Under section 994(a)(1), $80
($2,000 3.04) would be allocated to the DISC and
the $20 remaining combined taxable income would
be allocated to the related supplier. Under section
863(b), the $20 income allocated to the DISC’s re-
lated supplier would be sourced $10 U.S. source and
$10 foreign source. Accordingly, under the special
sourcing rule, the foreign source income of R shall
not exceed $10.
(c) Effective date.The rules of this
section are applicable to taxable years be-
ginning after December 31, 1997.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved August 18, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
September 17, 1998, 8:45 a.m., and published in the
issue of the Federal Register for September 21,
1998, 63 F.R. 50143)
1998–41 I.R.B.7October 13, 1998
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October 13, 199881998–41 I.R.B.
Notice of Rulemaking and
Notice of Public Hearing
Exception From Supplemental
Annuity Tax on Railroad
Employers
REG–209769–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations that provide guid-
ance to employers covered by the Rail-
road Retirement Tax Act. The Railroad
Retirement Tax Act imposes a supple-
mental tax on those employers, at a rate
determined by the Railroad Retirement
Board, to fund the Railroad Retirement
Board’s supplemental annuity benefit.
These proposed regulations provide rules
for applying the exception from the sup-
plemental tax with respect to employees
covered by a supplemental pension plan
established pursuant to a collective bar-
gaining agreement and for applying a re-
lated excise tax with respect to employees
for whom the exception applies. This
document also provides notice of a public
hearing on these proposed regulations.
DATES: Comments must be received by
December 22, 1998. Requests to speak
and outlines of topics to be discussed at
the public hearing scheduled for January
20, 1999, must be received by December
30, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209769–95),
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–209769–95), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Linda
S. F. Marshall, (202) 622-6030; concern-
ing submissions and the hearing, Michael
Slaughter, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARYINFORMATION:
Background
This document contains proposed
amendments to the Employment Tax Reg-
ulations (26 CFR Part 31) under section
3221(d). These proposed regulations pro-
vide guidance regarding the section
3221(d) exception from the tax imposed
under section 3221(c) with respect to em-
ployees covered by a supplemental pen-
sion plan of the employer established pur-
suant to an agreement reached through
collective bargaining.
Under the Railroad Retirement Act of
1974, as amended (RRA), an employee of
a railroad employer generally is entitled
to receive a supplemental annuity paid by
the Railroad Retirement Board (RRB) at
retirement. An employee is entitled to re-
ceive a supplemental annuity only if the
employee has performed at least 25 years
of service with the railroad industry, in-
cluding service with the railroad industry
before October 1, 1981. The monthly
amount of the supplemental annuity
ranges from $23 to $43, based on the em-
ployee’s number of years of service. See
45 U.S.C. 231b(e). Under section 2(h)(2)
of the RRA, an employee’s supplemental
annuity is reduced by the amount of pay-
ments received by the employee from any
plan determined by the RRB to be a sup-
plemental pension plan of the employer,
to the extent those payments are derived
from employer contributions.
Section 3221(c) imposes a tax on each
railroad employer to fund the supplemen-
tal annuity benefits payable by the Rail-
road Retirement Board. The tax imposed
under section 3221(c) is based on work-
hours for which compensation is paid.
The rate of tax under section 3221(c) is
established by the RRB quarterly, and is
calculated to generate sufficient tax rev-
enue to fund the RRB’s current supple-
mental annuity obligations.
Under section 3221(d), the tax imposed
by section 3221(c) does not apply to an
employer with respect to employees who
are covered by a supplemental pension
plan established pursuant to an agreement
reached through collective bargaining be-
tween the employer and employees.
However, if an employee for whom the
employer is relieved of any tax under the
section 3221(d) exception becomes enti-
tled to a supplemental annuity from the
RRB, the employer is subject to an excise
tax equal to the amount of the supplemen-
tal annuity paid to the employee (plus a
percentage determined by the RRB to be
sufficient to cover administrative costs at-
tributable to those supplemental annuity
payments).
Section 3221(d) was enacted by Public
Law 91–215, 84 Stat. 70, which amended
the Railroad Retirement Act of 1937 and
the Railroad Retirement Tax Act. The
legislative history to Public Law 91–215
indicates that the exception under section
3221(d) from the tax imposed under sec-
tion 3221(c) was “directed primarily at
the situation existing on certain short-line
railroads which are owned by the steel
companies. The employees of these lines
are, for the most part, covered by other
supplemental pension plans established
pursuant to collective bargaining agree-
ments between the steel companies and
the unions representing the majority of
their employees. . . . [T]hese railroads will
no longer be required to pay a tax to fi-
nance the supplemental annuity fund, but
will be required to reimburse the Railroad
Retirement Board for any supplemental
annuities that their employees may be
paid upon retirement.” S. Rep. 91–650,
91st Cong., 2d Sess. 6 (February 3, 1970).
Summary of Regulations
These proposed regulations provide
rules for determining whether a plan is a
supplemental pension plan established
pursuant to an agreement reached through
collective bargaining. Under these pro-
posed regulations, a plan is a supplemen-
tal pension plan only if the plan is a pen-
Part IV. Items of General Interest
IRB 1998-41 10/7/98 1:53 PM Page 8

1998–41 I.R.B.9October 13, 1998
sion plan within the meaning of §1.401–
1(b)(1)(i). Under this definition, a plan is
a pension plan only if the plan is estab-
lished and maintained primarily to provide
systematically for the payment of defi-
nitely determinable benefits to employees
over a period of years, usually for life,
after retirement. Thus, for example, a plan
generally is not a supplemental pension
plan if distributions from the plan that are
attributable to employer contributions
may be made prior to a participant’s death,
disability, or termination of employment.
See Rev. Rul. 74–254 (1974–1 C.B. 90);
Rev. Rul. 56–693 (1956–2 C.B. 282).
These proposed regulations also re-
quire that the RRB determine that a plan
is a private pension under its regulations
in order for the plan to be a supplemental
pension plan under section 3221(d) and
these proposed regulations. This require-
ment is included because the section
3221(d) exception to the section 3221(c)
tax is based on the assumption that any
participant for whom the exception ap-
plies will receive a reduced supplemental
annuity because of the supplemental pen-
sion plan on account of which the section
3221(c) tax is eliminated.
The IRS requests comments regarding
other appropriate requirements for a sup-
plemental pension plan within the mean-
ing of section 3221(d).
These proposed regulations also pro-
vide rules for determining whether a plan
is established by collective bargaining
agreement with respect to an employer.
These rules generally follow the rules ap-
plicable to qualified plans for this purpose.
Section 3221(d) imposes an excise tax
equal to the amount of the supplemental
annuity paid to any employee with respect
to whom the employer has been excepted
from the section 3221(c) tax under the
section 3221(d) exception. These pro-
posed regulations include rules applying
this excise tax under section 3221(d).
Proposed Effective Date
These proposed regulations are pro-
posed to be effective October 1, 1998.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments that
are submitted timely (in the manner de-
scribed under the ADDRESSES caption)
to the IRS. All comments will be avail-
able for public inspection and copying.
Apublic hearing has been scheduled
for January 20, 1999, at 10 a.m. in Room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC. Because of access restrictions, visi-
tors will not be admitted beyond the Inter-
nal Revenue Building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit com-
ments and an outline of topics to be dis-
cussed and the time to be devoted to each
topic (in the manner described under the
ADDRESSES caption of this preamble)
by December 30, 1998.
Aperiod of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Linda S. F. Marshall, Office of the
Associate Chief Counsel (Employee Ben-
efits and Exempt Organizations). How-
ever, other personnel from the IRS and
the Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART31—EMPLOYMENTTAXES
AND COLLECTION OF INCOME 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 31.3221–4 is added
under the undesignated center heading
“Tax on Employers” to read as follows:
§31.3221–4 Exception from
supplemental tax.
(a) General rule.Section 3221(d) pro-
vides an exception from the excise tax im-
posed by section 3221(c). Under this ex-
ception, the excise tax imposed by section
3221(c) does not apply to an employer
with respect to employees who are cov-
ered by a supplemental pension plan, as
defined in paragraph (b) of this section,
that is established pursuant to an agree-
ment reached through collective bargain-
ing between the employer and employees,
within the meaning of paragraph (c) of
this section.
(b) Definition of supplemental pension
plan—(1) In general.Aplan is a supple-
mental pension plan covered by the sec-
tion 3221(d) exception described in para-
graph (a) of this section only if it meets
the requirements of paragraphs (b)(2)
through (4) of this section.
(2) Pension benefit requirement. A
plan is a supplemental pension plan
within the meaning of this paragraph (b)
only if the plan is a pension plan within
the meaning of §1.401–1(b)(1)(i) of this
chapter. Thus, a plan is a supplemental
pension plan only if the plan provides for
the payment of definitely determinable
benefits to employees over a period of
years, usually for life, after retirement. A
plan need not be funded through a quali-
fied trust that meets the requirements of
section 401(a) or an annuity contract that
meets the requirements of section 403(a)
in order to meet the requirements of this
paragraph (b)(2). Aplan that is a profit-
sharing plan within the meaning of
§1.401–1(b)(1)(ii) of this chapter or a
stock bonus plan within the meaning of
IRB 1998-41 10/7/98 1:53 PM Page 9

October 13, 1998101998–41 I.R.B.
§1.401–1(b)(1)(iii) of this chapter is not a
supplemental pension plan within the
meaning of this paragraph (b).
(3) Railroad Retirement Board determi-
nation with respect to the plan.Aplan is
a supplemental pension plan within the
meaning of this paragraph (b) with re-
spect to an employee only during any pe-
riod for which the Railroad Retirement
Board has made a determination under 20
CFR 216.42(d) that the plan is a private
pension, the payments from which will
result in a reduction in the employee’s
supplemental annuity payable under 45
U.S.C. 231a(b). Aplan is not a supple-
mental pension plan for any time period
before the Railroad Retirement Board has
made such a determination, or after that
determination is no longer in force.
(4) Other requirements. [Reserved]
(c) Collective bargaining agreement.A
plan is established pursuant to a collective
bargaining agreement with respect to an
employee only if, in accordance with the
rules of §1.410(b)–6(d)(2) of this chapter,
the employee is included in a unit of em-
ployees covered by an agreement that the
Secretary of Labor finds to be a collective
bargaining agreement between employee
representatives and one or more employ-
ers, provided that there is evidence that
retirement benefits were the subject of
good faith bargaining between employee
representatives and the employer or em-
ployers.
(d) Substitute section 3221(d) excise
tax. Section 3221(d) imposes an excise
tax on any employer who has been ex-
cepted from the excise tax imposed under
section 3221(c) by the application of sec-
tion 3221(d) and paragraph (a) of this sec-
tion with respect to an employee. The ex-
cise tax is equal to the amount of the
supplemental annuity paid to that em-
ployee under section 2(b) of the Railroad
Retirement Act of 1974 (88 Stat. 1305),
plus a percentage thereof determined by
the Railroad Retirement Board to be suffi-
cient to cover the administrative costs at-
tributable to such payments under section
2(b) of that Act.
(e) Effective date.This section is effec-
tive October 1, 1998.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
September 22, 1998, 8:45 a.m., and published in the
issue of the Federal Register for September 23,
1998, 63 F.R. 50819)
Notice of Rulemaking and
Notice of Public Hearing
Guidance Under Section 1032
Relating to the Treatment of a
Disposition by One Corporation
of the Stock of Another
Corporation in a Taxable
Transaction
REG–106221–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the treat-
ment of a disposition by a corporation
(the acquiring corporation) of the stock of
another corporation (the issuing corpora-
tion) in a taxable transaction. The pro-
posed regulations interpret section 1032
of the Internal Revenue Code. The pro-
posed regulations affect corporations and
their subsidiaries.
DATES: Written comments must be re-
ceived by December 22, 1998. Requests
to speak and outlines of topics to be dis-
cussed at the public hearing scheduled for
Thursday, January 7, 1999 must be re-
ceived by Thursday, December 17, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–106221–98),
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–106221–98), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Lee
A. Dean, (202) 622-7550; concerning
submissions and the hearing, LaNita
VanDyke, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARYINFORMATION:
Background
Section 1032(a) provides that no gain
or loss shall be recognized to a corpora-
tion on the receipt of money or other
property in exchange for stock (including
treasury stock) of such corporation. No
gain or loss shall be recognized by a cor-
poration with respect to any lapse or ac-
quisition of an option to buy or sell its
stock (including treasury stock).
Before the enactment of section 1032
in 1954, Treasury regulations provided
that “where a corporation deals in its own
shares as it might in the shares of another
corporation, the resulting gain or loss is to
be computed in the same manner as
though the corporation were dealing in
the shares of another.” (Treas. Reg. 111,
§29.22(a)–15 (1934)).
As applied, this regulation resulted in
the recognition of gain or loss on the dis-
position by a corporation of its treasury
stock, even though the corporation would
not have recognized gain or loss on the
disposition of newly issued shares. See,
e.g., Firestone Tire & Rubber Co. v. Com-
missioner,2 T.C. 827 (1943). This dispar-
ity of treatment gave rise to tax avoidance
possibilities. Acorporation expecting a
gain upon disposition of treasury shares
might avoid such gain by canceling its
treasury shares and issuing new stock,
whereas a corporation might produce a
fictitious loss by purchasing its own
shares and reselling them at a lower price.
Congress enacted section 1032(a) in
1954 to eliminate this potential disparity
between the tax treatment of a disposition
by a corporation of its treasury stock and
a disposition of newly issued stock. H.R.
No. 1337, 83d Cong., 2d Sess. 268
(1954).
Rev. Rul. 74–503 (1974–2 C.B. 117)
considers the tax consequences of a par-
ent corporation’s transfer to its subsidiary
of its own treasury stock in a transaction
IRB 1998-41 10/7/98 1:53 PM Page 10

to which section 351 applies. The ruling
states that “[t]he transfer of [parent] stock
was not for the purpose of enabling [the
subsidiary corporation] to acquire prop-
erty by the use of such stock.” Rev. Rul.
74–503 holds that, since the basis of pre-
viously unissued parent stock in the hands
of the parent corporation is zero, the basis
of the parent corporation’s treasury stock
in the hands of the parent corporation is
also zero. Accordingly, under the trans-
ferred basis rule of section 362(a), the
subsidiary corporation’s basis of the trea-
sury stock of the parent corporation is
also zero (the zero basis result).
Section 1.1032–2(b), applicable to cer-
tain triangular reorganizations occurring
on or after December 23, 1994, eliminates
gain recognition in certain cases when an
acquiring corporation (S) acquires prop-
erty or stock of another corporation (T) in
exchange for stock of the corporation (P)
in control of S. Section 1.1032–2(b) pro-
vides that, “For purposes of §1.1032–
1(a), in the case of a forward triangular
merger, a triangular C reorganization, or a
triangular B reorganization (as described
in §1.358–6(b)), Pstock provided by Pto
S, or directly to Tor T’s shareholders on
behalf of S, pursuant to the plan of reor-
ganization is treated as a disposition by P
of its own stock for T’s assets or stock, as
applicable.” Section 1.1032–2(c) pro-
vides that S must recognize gain or loss
on its exchange of Pstock if S did not re-
ceive the Pstock pursuant to the plan of
reorganization.
Section 1.1502–13(f)(6)(ii), initially
published as temporary regulations ap-
plicable to transactions occurring on or
after July 12, 1995 (T.D. 8598, 1995–2
C.B. 188), eliminates gain recognition
under certain conditions on a member’s
disposition of the stock of its common
parent. If the requirements of that section
are satisfied, §1.1502–13(f)(6)(ii) pro-
vides that “If a member, M, would other-
wise recognize gain on a qualified dispo-
sition of Pstock, then immediately before
the qualified disposition, M is treated as
purchasing the Pstock from Pfor fair
market value with cash contributed to M
by P(or, if necessary, through any inter-
mediate members).” Among other re-
quirements, the member must, pursuant to
a plan, transfer the stock “immediately to
a nonmember that is not related.” See
§1.1502–13(f)(6)(ii)(B). The preamble to
the temporary regulations explains that
the gain relief provisions “prevent taxpay-
ers from being subject to inappropriate
taxation on gains in certain transactions.”
(T.D. 8598, 1995–2 C.B. 188, 189.)
Section 83 provides rules for property,
including parent’s stock, transferred in
connection with the performance of ser-
vices. Section 83(h) provides, in part,
that “there shall be allowed as a deduction
under section 162, to the person for whom
were performed the services in connec-
tion with which such property was trans-
ferred, an amount equal to the amount in-
cluded . . . in the gross income of the
person who performed such services.”
Section 1.83–6(b) provides that “[e]xcept
as provided in section 1032, at the time of
the transfer of property in connection with
the performance of services the transferor
recognizes gain to the extent that the
transferor receives an amount that ex-
ceeds the transferor’s basis in the prop-
erty.” Section 1.83–6(d) provides that,
“[i]f a shareholder of a corporation trans-
fers property to an employee of such cor-
poration . . . in consideration of services
performed for the corporation, the trans-
action shall be considered to be a contri-
bution of such property to the capital of
such corporation by the shareholder, and
immediately thereafter a transfer of such
property by the corporation to the em-
ployee . . . .”
Rev. Rul. 80–76 (1980–1 C.B. 15) ad-
dresses the use of a parent corporation’s
stock as compensation to an employee of
a subsidiary corporation. Under the facts,
A, a shareholder of P, transfers Pstock di-
rectly to B, an employee of S. The ruling
holds in part that, “because section 83 ap-
plies to the transfer of Pstock to B, S does
not recognize gain or loss on the transfer
of the Pstock.”
Explanation of Provisions
Some of the concerns that ultimately led
to the enactment of section 1032 are pre-
sent where a subsidiary corporation holds
the stock of a parent corporation. For ex-
ample, a parent corporation could place
treasury stock in a subsidiary corporation
in order to attempt to recognize losses if
the price of the parent corporation stock
goes down, or could sell shares directly if
the price rises. See Rev. Rul. 74–503
(1974–2 C.B. 117). The zero basis result
limits such planning opportunities.
These tax avoidance possibilities are
not present, however, in transactions
where one corporation transfers its own
stock to another corporation pursuant to a
plan by which the second corporation im-
mediately transfers the stock of the first
corporation to acquire money or other
property. The risk of selective loss recog-
nition does not arise where the stock of
the parent corporation is used immedi-
ately by the subsidiary corporation to ac-
quire money or other property and there-
fore does not have sufficient time to
depreciate in value. This concept is re-
flected in Rev. Rul. 74–503, which pro-
vides a factual carve-out for transfers of
parent corporation stock made for the pur-
pose of enabling a subsidiary corporation
to acquire property. Also, the IRS and the
Treasury have not applied the zero basis
result in such integrated transactions, re-
gardless of whether such a disposition of
stock is part of a tax-free reorganization
or is part of a taxable acquisition. See
§§1.1502–13(f)(6)(ii) and 1.1032–2(b).
These proposed regulations provide that
no gain or loss is recognized in certain
taxable transactions where one corpora-
tion immediately disposes of the stock of
another corporation pursuant to a plan to
acquire money or other property. The IRS
and Treasury believe that, in such transac-
tions, the nonapplicability of the zero
basis result avoids inappropriate gain
recognition and is consistent with the pur-
poses of section 1032. No inference is in-
tended regarding the applicability of the
zero basis result to transactions outside of
the scope of these proposed regulations.
If the conditions of these proposed reg-
ulations are satisfied, no gain or loss is
recognized on the disposition of the stock
of one corporation (the issuing corpora-
tion) by another corporation (the acquir-
ing corporation). The proposed regula-
tions apply if, pursuant to a plan to
acquire money or other property, (1) the
acquiring corporation acquires stock of
the issuing corporation directly or indi-
rectly from the issuing corporation in a
transaction in which, but for this section,
the basis of the stock of the issuing corpo-
ration in the hands of the acquiring corpo-
ration would be determined with respect
to the issuing corporation’s basis in the is-
suing corporation’s stock under section
362(a); (2) the acquiring corporation im-
mediately transfers the stock of the issu-
1998–41 I.R.B.11October 13, 1998
IRB 1998-41 10/7/98 1:53 PM Page 11

ing corporation to acquire money or other
property; and (3) no party receiving stock
of the issuing corporation from the ac-
quiring corporation receives a substituted
basis in the stock of the issuing corpora-
tion within the meaning of section
7701(a)(42). For purposes of this section,
“property” includes services. See
§1.1032–1.
Mechanics of Proposed Regulations
These proposed regulations adopt the
cash purchase model used in §1.1502–
13(f)(6)(ii) to provide relief from gain.
In transactions to which the proposed
regulations apply, immediately before the
disposition of the issuing corporation’s
stock, the acquiring corporation is treated
as purchasing the issuing corporation’s
stock from the issuing corporation for fair
market value with cash contributed to the
acquiring corporation by the issuing cor-
poration (or, if necessary, through inter-
mediate corporations).
As a result of this deemed cash purchase
of stock, the acquiring corporation will
have a fair market value basis in the issu-
ing corporation’s stock pursuant to section
1012, and the issuing corporation will in-
crease its basis in the stock of the acquiring
corporation (and, if necessary, the stock
basis of intermediate corporations) by that
amount. See, e.g., section 358.
No inference is intended regarding
whether circular cash flows would be re-
spected apart from this regulation. Simi-
larly, no inference is intended with re-
spect to other methods of avoiding gain
on the acquiring corporation’s use of the
issuing corporation’s stock.
Across-reference in §1.83–6(d) to the
proposed regulations clarifies that the me-
chanics of the proposed regulations—
rather than the mechanics of §1.83–
6(d)—apply to a corporate shareholder’s
transfer of its own stock to any person in
consideration of services performed for
another corporation where the conditions
of these proposed regulations are satisfied.
The cash purchase model of these pro-
posed regulations preserves the acquiring
corporation’s deduction under section 162
for the use of the issuing corporation’s
stock to compensate the acquiring corpo-
ration’s employees. In addition, as in
Rev. Rul. 80–76, the cash purchase model
of these proposed regulations provides
that the acquiring corporation will not
recognize gain or loss on the transfer of
the stock of the issuing corporation. The
proposed regulations provide that the cash
purchase model is applicable only when
the acquiring corporation immediately
transfers the stock of the issuing corpora-
tion to acquire money or other property.
The IRS and the Treasury believe that
these proposed regulations address the
same issues as in Rev. Rul. 80–76 and,
when issued in final form, will render
Rev. Rul. 80–76 obsolete.
Stock Options
Section 1032(a), in conjunction with
the rules governing the taxation of op-
tions, also operates to prevent selective
loss recognition in the case where a cor-
poration issues options to buy or sell its
own stock. See Deficit Reduction Act of
1984, H.R. Rep. No. 432, 98th Cong., 2d.
Sess. pt. 2 1196 (1984) (expanding sec-
tion 1032(a) to provide that a corporation
does not recognize gain or loss with re-
spect to any lapse or acquisition of an op-
tion to buy or sell its stock, including trea-
sury stock). As in the case of a subsidiary
corporation’s dealings in parent corpora-
tion stock, however, section 1032 may not
always prevent selective loss recognition
where a subsidiary corporation deals in
options on parent corporation stock.
Again, the zero basis result serves to limit
such planning opportunities.
The Treasury and the IRS have deter-
mined that the concerns underlying sec-
tion 1032 are not present where the issu-
ing corporation transfers options on its
own stock to the acquiring corporation
pursuant to a plan by which the acquiring
corporation immediately transfers those
options to acquire money or other prop-
erty. Accordingly, these proposed regula-
tions apply to an option issued by an issu-
ing corporation to buy or sell its own
stock in the same manner as they apply to
stock of an issuing corporation.
Amendment to §1.1032–2
The preamble to the final regulations
under §1.1032–2 states that the tax treat-
ment of a disposition by the acquiring
corporation (S) of stock options of the
corporation (P) in control of S was be-
yond the scope of the project. (Preamble
to Final Regulations under sections 358,
1032 and 1502 [T.D. 8648, 1996–1 C.B.
37, 39].) The IRS and the Treasury be-
lieve that the tax treatment of stock op-
tions of the issuing corporation in these
triangular reorganizations also should be
addressed under section 1032. Accord-
ingly, these proposed regulations amend
§1.1032–2 to provide that §1.1032–2
shall apply to an option to buy or sell P
stock issued by Pin the same manner as
that section applies to the stock of P.
Proposed Effective Date
The regulations are proposed to be ef-
fective on the date that final regulations
are published in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight copies) that are timely submitted to
the IRS. All comments will be available
for public inspection and copying.
Apublic hearing has been scheduled
for Thursday, January 7, 1999 beginning
at 10 a.m., in room 2615, Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington, DC. Because of access
restrictions, visitors will not be admitted
beyond the Internal Revenue Building
lobby more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must request to
speak, and submit an outline of topics to
October 13, 1998121998–41 I.R.B.
IRB 1998-41 10/7/98 1:53 PM Page 12

be discussed and the time to be devoted to
each topic by Thursday, December 17,
1998.
Aperiod of ten minutes will be allocated
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Lee A. Dean of the Office
of the Assistant Chief Counsel (Corpo-
rate), IRS. However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.83–6 is amended by
adding two sentences to the end of para-
graph (d)(1) to read as follows:
§1.83–6 Deduction by employer.
* * * * *
(d)(1) * * * For special rules that may
apply to a corporate shareholder’s transfer
of its own stock to any person in consider-
ation of services performed for another
corporation, see §1.1032–3. The preced-
ing sentence applies to transfers of stock
occurring on or after the date these regu-
lations are published as final regulations
in the Federal Register.
* * * * *
Par. 3. Section 1.1032–2 is amended
by:
1. Revising paragraph (e);
2. Adding paragraph (f).
The addition and revision read as fol-
lows:
§1.1032–2 Disposition by a corporation
of stock of a controlling corporation in
certain triangular reorganizations.
* * * * *
(e) Stock options. The rules of this sec-
tion shall apply to an option to buy or sell
Pstock issued by Pin the same manner as
the rules of this section apply to Pstock.
(f) Effective dates. This section ap-
plies to triangular reorganizations occur-
ring on or after December 23, 1994. Para-
graph (e) applies to transfers of stock
options occurring on or after the date
these regulations are published as final
regulations in the Federal Register.
Par. 4. Section 1.1032–3 is added to
read as follows:
§1.1032–3 Disposition of stock or stock
options in certain transactions not
qualifying under any other
nonrecognition provision.
(a) Scope.This section provides rules
for certain transactions in which one cor-
poration (the acquiring corporation) ac-
quires money or other property (as de-
fined in §1.1032–1) in exchange, in whole
or in part, for stock of another corporation
(the issuing corporation).
(b) General rule.In a transaction to
which this section applies, no gain or loss
is recognized on the disposition of the is-
suing corporation’s stock by the acquiring
corporation. The transaction is treated as
if, immediately before the acquiring cor-
poration disposes of the stock of the issu-
ing corporation, the acquiring corporation
purchased the issuing corporation’s stock
from the issuing corporation for fair mar-
ket value with cash contributed to the
acquiring corporation by the issuing cor-
poration (or, if necessary, through inter-
mediate corporations).
(c) Applicability.The rules of this sec-
tion apply only if, pursuant to a plan to
acquire money or other property—
(1) The acquiring corporation acquires
stock of the issuing corporation directly
or indirectly from the issuing corporation
in a transaction in which, but for this sec-
tion, the basis of the stock of the issuing
corporation in the hands of the acquiring
corporation would be determined with re-
spect to the issuing corporation’s basis in
the issuing corporation’s stock under sec-
tion 362(a);
(2) The acquiring corporation immedi-
ately transfers the stock of the issuing cor-
poration to acquire money or other prop-
erty; and
(3) No party receiving stock of the is-
suing corporation from the acquiring cor-
poration receives a substituted basis in the
stock of the issuing corporation within the
meaning of section 7701(a)(42).
(d) Stock options.The rules of this sec-
tion shall apply to an option issued by a
corporation to buy or sell its own stock in
the same manner as the rules of this sec-
tion apply to the stock of an issuing cor-
poration.
(e) Examples.The following examples
illustrate the application of this section:
Example 1.(i) X, a corporation, owns all of the
stock of Ycorporation. Yreaches an agreement with
A, an individual, to acquire a truck from Ain ex-
change for 10 shares of Xstock with a fair market
value of $100. To effectuate Y’s agreement with A,
Xtransfers to Ythe Xstock in a transaction in which,
but for this section, the basis of the Xstock in the
hands of Ywould be determined with respect to X’s
basis in the Xstock under section 362(a). Yimmedi-
ately transfers the Xstock to Ato acquire the truck.
(ii) In this Example 1, no gain or loss is recog-
nized on the disposition of the Xstock by Y. Imme-
diately before Y’s disposition of the Xstock, Yis
treated as purchasing the Xstock from Xfor $100 of
cash contributed to Yby X.
Example 2.(i) Assume the same facts as Exam-
ple 1, except that, rather than Xstock, Xtransfers an
option with a fair market value of $100 to buy X
stock.
(ii) In this Example 2, no gain or loss is recog-
nized on the disposition of the Xstock option by Y.
Immediately before Y’s disposition of the Xstock
option, Yis treated as purchasing the Xstock option
from Xfor $100 of cash contributed to Yby X.
Example 3.(i) X, a corporation, owns all of the
outstanding stock of Ycorporation. A, an individual,
is an employee of Y. Pursuant to an agreement be-
tween Xand Yto compensate Afor services pro-
vided to Y, Xtransfers to A10 shares of Xstock with
a fair market value of $100. Under §1.83–6(d), but
for this section, the transfer of Xstock by Xto A
would be treated as a contribution of the Xstock by
Xto the capital of Y, and immediately thereafter, a
transfer of the Xstock by Yto A. But for this sec-
tion, the basis of the Xstock in the hands of Ywould
be determined with respect to X’s basis in the X
stock under section 362(a).
(ii) In this Example 3,no gain or loss is recog-
nized on the deemed disposition of the Xstock by Y.
Immediately before Y’s deemed disposition of the X
stock, Yis treated as purchasing the Xstock from X
for $100 of cash contributed to Yby X.
Example 4.(i) X, a corporation, issues 10 shares
of Xstock subject to a substantial risk of forfeiture
to compensate Y’s employee, A, for services. Adoes
not have an election under section 83(b) in effect
with respect to the Xstock. Xretains a reversionary
interest in the Xstock in the event that Aforfeits the
right to the stock. At the time the stock vests, the 10
shares of Xstock have a fair market value of $100.
Under §1.83–6(d), but for this section, the transfer
of the Xstock by Xto Awould be treated, at the time
the stock vests, as a contribution of the Xstock by X
to the capital of Y, and immediately thereafter, a dis-
position of the Xstock by Yto A. The basis of the X
stock in the hands of Y, but for this section, would be
1998–41 I.R.B.13October 13, 1998
IRB 1998-41 10/7/98 1:53 PM Page 13

determined with respect to X’s basis in the Xstock
under section 362(a).
(ii) In this Example 4, no gain or loss is recog-
nized on the deemed disposition of Xstock by Y
when the stock vests. Immediately before Y’s
deemed disposition of the Xstock, Yis treated as
purchasing X’s stock from Xfor $100 of cash con-
tributed to Yby X.
Example 5.(i) Assume the same facts as in Ex-
ample 4, except that Y(rather than X) retains a rever-
sionary interest in the Xstock in the event that Afor-
feits the right to the stock. Several years after X’s
transfer of the Xshares, the stock vests.
(ii) This section does not apply to Y’s deemed
disposition of the Xshares. For the tax conse-
quences to Yon the deemed disposition of the X
stock, see §1.83–6(b).
(f) Effective date.This section applies
to transfers of stock or stock options of
the issuing corporation occurring on or
after the date these regulations are pub-
lished as final regulations in the Federal
Register.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
September 22, 1998, 8:45 a.m., and published in the
issue of the Federal Register for September 23,
1998, 63 F.R. 50816)
Medical Savings Accounts
Announcement 98–88
PURPOSE
Sections 220(i) and (j) of the Internal
Revenue Code provide that if the number
of medical savings account (MSA) re-
turns filed for 1997 exceeds 600,000,
then October 1, 1998, is a “cut-off” date
for the MSApilot project. If a statutorily
specified projection of the number of
MSAreturns that will be filed for 1998
exceeds 750,000, then October 1, 1998,
will also be a “cut-off” date for the MSA
pilot project. The Internal Revenue Ser-
vice (I.R.S.) has determined that the ap-
plicable number of MSAreturns filed for
1997 is 26,160, and that the applicable
number of MSAreturns projected to be
filed for 1998 is 50,172 (after reduction in
each case for statutorily specified exclu-
sions, such as the exclusion for previously
uninsured taxpayers). Consequently, Oc-
tober 1, 1998 is not a “cut-off” date and
1998 is not a “cut-off” year for the MSA
pilot project.
BACKGROUND
The Health Insurance Portability and
Accountability Act of 1996 added section
220 to the Code to permit eligible individ-
uals to establish MSAs under a pilot pro-
ject effective January 1, 1997. The pilot
project has a scheduled “cut-off” year of
2000, but may have an earlier “cut-off”
year if the number of individuals who
have established MSAs exceeds certain
numerical limitations. See sections 220(i)
and (j).
If a year is a “cut-off” year, section
220(i)(1) generally provides that no indi-
vidual will be eligible for a deduction or
exclusion for MSAcontributions for any
taxable year beginning after the “cut-off”
year unless the individual (A) was an ac-
tive MSAparticipant for any taxable year
ending on or before the close of the “cut-
off” year, or (B) first became an active
MSAparticipant for a taxable year ending
after the “cut-off” year by reason of cov-
erage under a high deductible health plan
of an MSA-participating employer.
Section 220(j)(2)(A) provides that the
numerical limitation for 1998 is exceeded
if the number of MSAreturns filed on or
before April 15, 1998 for taxable years
ending with or within the 1997 calendar
year, plus the Secretary’s estimate of the
number of MSAreturns for those taxable
years which will be filed after April 15,
1998, exceeds 600,000. Section 220(j)-
(2)(B) provides, as an alternative test, that
the numerical limitation for 1998 is also
exceeded if the sum of 90 percent of the
sum determined under section 220(j)-
(2)(A) for 1998 plus the product of 2.5 and
the number of MSAs for taxable years be-
ginning in 1998 that are established during
the portion of 1998 preceding July 1
(based on reports by MSAtrustees and
custodians), exceeds 750,000.
Under section 220(j)(3), in determining
whether any calendar year is a “cut-off”
year, the MSAof any previously unin-
sured individual is not taken into account.
In addition, section 220(j)(4)(D) specifies
that, to the extent practical, all MSAs es-
tablished by an individual are aggregated
and two married individuals opening sep-
arate MSAs are to be treated as having a
single MSAfor purposes of determining
the number of MSAs.
Atotal of 35,887 tax returns reporting
MSAs for the 1997 taxable year were
filed by April 15, 1998. Of this total,
13,311 taxpayers were reported as being
previously uninsured. It has been esti-
mated that an additional 5,781 tax returns
reporting MSAcontributions for the 1997
taxable year have been or will be filed
after April 15, 1998, including 2,197 tax-
payers who were previously uninsured.
Accordingly, it has been determined that
there were 41,668 (35,887 plus 5,781)
MSAreturns for 1997. Of this total,
15,508 (13,311 plus 2,197) were for tax-
payers reported as being previously unin-
sured. As a result, 26,160 (41,668 minus
15,508) MSAreturns count toward the
applicable statutory limitation for 1997
MSAreturns of 600,000.
Based on the Forms 8851 filed on or
before August 1, 1998 by MSAtrustees
and custodians, it has been determined
that 13,034 taxpayers who did not have
MSAcontributions for 1997 established
MSAs for 1998 during the portion of
1998 preceding July 1. Of this total,
2,180 taxpayers were reported by trustees
and custodians as previously uninsured,
and therefore are not taken into account in
determining whether 1998 is a “cut-off”
year. In addition, 166 taxpayers were re-
ported by trustees and custodians as ex-
cludable from the count because their
spouse also established an MSA, and 37
taxpayers had more than one account.
Accordingly, the applicable number of
MSAs established from January 1, 1998
through June 30, 1998, is 10,651 (13,034
minus (2,180 plus 166 plus 37)). The al-
ternative limitation for 1998 (90 percent
of the applicable number of MSAreturns
for 1997 plus the product of 2.5 and the
number of applicable MSAs established
from January 1, 1998 through June 30,
1998) is 50,172 (90 percent of 26,160
plus 2.5 times 10,651), which is less than
the statutory limit of 750,000. Thus, 1998
is not a cut-off year for the MSApilot
project by reason of either the 1997 MSA
returns test of section 220(j)(2)(A) or the
alternative test of section 220(j)(2)(B) of
the Code.
Questions regarding this announcement
may be directed to Felix Zech in the Of-
fice of Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions) at (202) 622-4606 (not a toll free
number).
October 13, 1998141998–41 I.R.B.
IRB 1998-41 10/7/98 1:53 PM Page 14

Correction of July 1998
Instructions for Form 706
Announcement 98–92
The July 1998 revision of the Instruc-
tions for Form 706 contain an error. On
page 6, in column 1, in the first paragraph
under Interest computation,the figure
$320,618 is incorrect. The correct figure
is $410,000.
1998–41 I.R.B.15October 13, 1998
IRB 1998-41 10/7/98 1:53 PM Page 15

October 13, 1998161998–41 I.R.B.
NameAddressDesignationEffective Date
Galt, Edward G.Monterey, CACPAOctober 25, 1997
Lopez, Andrew L.Albuquerque, NMCPADecember 11, 1997
Branch, Jimmie L.Jacksonville, FLCPAJanuary 15, 1998
Harrison, Rebecca A.Carmichael, CAEnrolled AgentMarch 4, 1998
Mayer, Robert J.Wexford, PACPAJune 4, 1998
Announcement of the Disbarment and Suspension of Attorneys, Certified
Public Accountants, Enrolled Agents, and Enrolled Actuaries From
Practice Before the Internal Revenue Service
Under 330, Title 31 of the United
States Code, the Secretary of the Trea-
sury, after due notice and opportunity for
hearing, is authorized to suspend or dis-
bar from practice before the Internal Rev-
enue Service any person who has vio-
lated the rules and regulations governing
the recognition of attorneys, certified
public accountants, enrolled agents, or
enrolled actuaries to practice before the
Internal Revenue Service.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from prac-
tice before the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled
actuaries to identify such disbarred or sus-
pended practitioners, the Director
of Practice will announce in the Internal
Revenue Bulletin the names and ad-
dresses of practitioners who have been
suspended from such practice, their desig-
nation as attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary, and date or period of suspension. This
announcement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to ap-
pear in the weekly Bulletins for five suc-
cessive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or en-
rolled actuary so suspended or disbarred
and will be consolidated and published in
the Cumulative Bulletin.
After due notice and opportunity for
hearing before an administrative law
judge, the following individuals have
been disbarred from further practice be-
fore the Internal Revenue Service:
IRB 1998-41 10/7/98 1:53 PM Page 16

1998–41 I.R.B.17October 13, 1998
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Internal
Revenue Service any practitioner who,
within five years from the date the expe-
dited proceeding is instituted, (1) has had
a license to practice as an attorney, certi-
fied public accountant, or actuary sus-
pended or revoked for cause; or (2) has
been convicted of any crime under title 26
of the United States Code or, of a felony
under title 18 of the United States Code
involving dishonesty or breach of trust.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify practitioners under expe-
dited suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, en-
rolled agent, or enrolled actuary, and date
or period of suspension. This announce-
ment will appear in the weekly Bulletin at
the earliest practicable date after such ac-
tion and will continue to appear in the
weekly Bulletins for five successive weeks
or for as many weeks as is practicable for
each attorney, certified public accountant,
enrolled agent, or enrolled actuary so sus-
pended and will be consolidated and pub-
lished in the Cumulative Bulletin.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions of
the applicable regulations:
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice
Beforethe Internal Revenue Service
NameAddressDesignationDate of Suspension
Clark, SheilaHouston, TXCPAIndefinite from April 21, 1998
Kimes, Larry W.Austin, TXAttorneyIndefinite from May 5, 1998
Braiteman, SheldonBaltimore, MDAttorneyIndefinite from June 5, 1998
Pollack, MichaelGuttenberg, NJAttorneyIndefinite from June 11, 1998
Eichenbaum, IrvingHuntingdon Valley, PACPAIndefinite from August 4, 1998
Corley, Francis R.Irmo, SCCPAIndefinite from August 4, 1998
Scott, RichardLincoln, NEAttorneyIndefinite from August 4, 1998
Wilson, Douglas D.Roanoke, VAAttorneyIndefinite from August 4, 1998
Watkins, Brian R.Lincoln, NEAttorneyIndefinite
Congdon Jr., Byron E.San Bernadino, CAAttorneyIndefinite from August 4, 1998
Abrams, RobertElmsford, NYCPAIndefinite from August 4, 1998
Robinson, DoaneRapid City, SDCPAIndefinite from August 4, 1998
Szarwark, ErnestNashville, TNAttorneyIndefinite from August 4, 1998
Roberts, MarkNorman, OKCPAIndefinite from August 4, 1998
Wood, Randall K.Springfield, MOAttorneyIndefinite from August 5, 1998
Chappell, Ronald L.Antelope, CACPAIndefinite from August 12, 1998
IRB 1998-41 10/7/98 1:53 PM Page 17

October 13, 1998181998–41 I.R.B.
NameAddressDesignationDate of Suspension
Makula, John G.Park Ridge, ILCPAApril 1, 1998 to March 31, 2003
Slomski, MichaelGross Pointe Woods, MICPAApril 1, 1998 to March 31, 2001
Bozeman Jr., T. AlvinSylvester, GACPAMay 22, 1998 to November 21, 1999
Parness, Richard A.Westfield, NJCPAJune 1, 1998 to December 31, 1998
Register, BillyHavana, FLCPAIndefinite from July 10, 1998
Cooper, Michael E.Edina, MNCPAAugust 19, 1998 to February 18, 1999
Minello, Michael J.Clarks Summit, PACPAAugust 28, 1998 to April 27, 2001
Holden, William W.Fairfield, CTCPASeptember 1, 1998 to March 31, 1999
Freeman, SamuelBedford, NHCPASeptember 1, 1998 to August 31, 1999
Anders, KevinWilliamport, MDCPASeptember 1, 1998 to August 31, 2001
Breed, Robert M.Concord, MACPASeptember 1, 1998 to February 28, 2001
Sandirk, Paula BrooksChehalis, WACPANovember 1, 1998 to April 30, 2000
Neuhaus Jr., GeorgeBrewster, NYCPANovember 1, 1998 to April 30, 2000
Announcement of the Consent Voluntary Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Beforethe Internal Revenue Service
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent, or enrolled ac-
tuary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certi-
fied public accountant, enrolled agent, or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by, or sharing fees with any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled
actuaries to identify practitioners under
consent suspension from practice before the
Internal Revenue Service, the Director
of Practice will announce in the Internal
Revenue Bulletin the names and ad-
dresses of practitioners who have been
suspended from such practice, their desig-
nation as attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary, and date or period of suspension. This
announcement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to ap-
pear in the weekly Bulletins for five suc-
cessive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or en-
rolled actuary so suspended and will be
consolidated and published in the Cumu-
lative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
IRB 1998-41 10/7/98 1:53 PM Page 18

1998–41 I.R.B.19October 13, 1998
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to Abut not
to B, and the new ruling holds that it ap-
plies to both Aand 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. Aruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms
IRB 1998-41 10/7/98 1:53 PM Page 19

October 13, 1998201998–41 I.R.B.
Numerical Finding List
1
Bulletins 1998–29 through 40
Announcements:
98–62, 1998–29 I.R.B. 13
98–68, 1998–29 I.R.B. 14
98–69, 1998–30 I.R.B. 16
98–70, 1998–30 I.R.B. 17
98–71, 1998–30 I.R.B. 17
98–72, 1998–31 I.R.B.14
98–73, 1998–31 I.R.B.14
98–74, 1998–31 I.R.B.15
98–75, 1998–31 I.R.B.15
98–76, 1998–32 I.R.B.64
98–77, 1998–34 I.R.B.30
98–78, 1998–34 I.R.B.30
98–79, 1998–34 I.R.B.31
98–80, 1998–34 I.R.B.32
98–81, 1998–36 I.R.B.35
98–82, 1998–35 I.R.B. 17
98–83, 1998–36 I.R.B. 36
98–84, 1998–38 I.R.B.30
98–85, 1998–38 I.R.B.30
98–86, 1998–38 I.R.B.31
98–87, 1998–40 I.R.B.11
98–89, 1998–40 I.R.B.11
98–91, 1998–40 I.R.B.12
Court Decisions:
2063, 1998–36 I.R.B. 13
2064, 1998–37 I.R.B. 4
2065, 1998–39 I.R.B.7
Notices:
98–36, 1998–29 I.R.B. 8
98–37, 1998–30 I.R.B.13
98–38, 1998–34 I.R.B.7
98–39, 1998–33 I.R.B.11
98–40, 1998–35 I.R.B. 7
98–41, 1998–33 I.R.B.12
98–42, 1998–33 I.R.B.12
98–43, 1998–33 I.R.B.13
98–44, 1998–34 I.R.B.7
98–45, 1998–35 I.R.B.7
98–46, 1998–36 I.R.B. 21
98–47, 1998–37 I.R.B. 8
98–48, 1998–39 I.R.B.17
98–49, 1998–38 I.R.B.5
Railroad Retirement Quarterly Rate:
1998–31 I.R.B. 7
Proposed Regulations:
REG–209446–82, 1998–36 I.R.B. 24
REG–209060–86, 1998–39 I.R.B. 18
REG–209813–96, 1998–35 I.R.B. 9
REG–246256–96, 1998–34 I.R.B.9
REG–104641–97, 1998–29 I.R.B. 9
REG–104565–97, 1998–39 I.R.B.21
REG–106177–97, 1998–37 I.R.B.33
REG–115446–97, 1998–36 I.R.B. 23
REG–116608–97, 1998–29 I.R.B. 12
REG–118926–97, 1998–39 I.R.B.23
REG–118966–97, 1998–39 I.R.B.29
REG–119227–97, 1998–30 I.R.B. 13
REG–101363–98, 1998–40 I.R.B.10
REG–110332–98, 1998–33 I.R.B.18
REG–110403–98, 1998–29 I.R.B.11
Proposed Regulations—Continued
REG–115393–98, 1998–39 I.R.B.34
Revenue Procedures:
98–40, 1998–32 I.R.B. 6
98–41, 1998–32 I.R.B. 7
98–42, 1998–28 I.R.B. 9
98–43, 1998–29 I.R.B. 8
98–44, 1998–32 I.R.B. 11
98–45, 1998–34 I.R.B.8
98–46, 1998–36 I.R.B. 21
98–47, 1998–37 I.R.B. 8
98–48, 1998–38 I.R.B.7
98–49, 1998–37 I.R.B. 9
98–50, 1998–38 I.R.B.8
98–51, 1998–38 I.R.B.20
98–52, 1998–37 I.R.B. 12
98–53, 1998–40 I.R.B.9
Revenue Rulings:
98–34, 1998–31 I.R.B. 12
98–35, 1998–30 I.R.B. 4
98–36, 1998–31 I.R.B.6
98–37, 1998–32 I.R.B.5
98–38, 1998–32 I.R.B.4
98–39, 1998–33 I.R.B.4
98–40, 1998–33 I.R.B.4
98–41, 1998–35 I.R.B.6
98–42, 1998–35 I.R.B. 5
98–43, 1998–36 I.R.B. 9
98–44, 1998–37 I.R.B.4
98–45, 1998–38 I.R.B.4
98–46, 1998–39 I.R.B. 10
98–47, 1998–39 I.R.B. 4
98–48, 1998–39 I.R.B. 6
98–49, 1998–40 I.R.B.4
98–50, 1998–40 I.R.B.7
Treasury Decisions:
8771, 1998–29 I.R.B. 6
8772, 1998–31 I.R.B. 8
8773, 1998–29 I.R.B. 4
8774, 1998–30 I.R.B. 5
8775, 1998–31 I.R.B.4
8776, 1998–33 I.R.B.6
8777, 1998–34 I.R.B.4
8778, 1998–36 I.R.B. 4
8779, 1998–36 I.R.B. 11
8780, 1998–39 I.R.B.14
8781, 1998–40 I.R.B. 4
1
Acumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–28
will be found in Internal Revenue Bulletin 1998–29,
dated July 20, 1998.
IRB 1998-41 10/7/98 1:53 PM Page 20

1998–41 I.R.B.21October 13, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–29 through 40
*Denotes entry since last publication
Notices:
87–13
Modified by
98–49, 1998–38 I.R.B. 5
87–16
Modified by
98–49, 1998–38 I.R.B. 5
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5
97–60
Superseded by
98–50, 1998–38 I.R.B. 8
97–61
Superseded by
98–51, 1998–38 I.R.B. 20
98–14
Modified by
98–53, 1998–40 I.R.B. 9
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5
67–301
Modified by
98–41, 1998–35 I.R.B. 6
70–225
Obsoleted by
98–44, 1998–37 I.R.B. 4
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–91
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5
97–37
Obsoleted by
98–39, 1998–33 I.R.B. 4
1
Acumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–28 will be found in Internal
Revenue Bulletin 1998–29, dated July 20, 1998.
IRB 1998-41 10/7/98 1:53 PM Page 21

October 13, 1998221998–41 I.R.B.
Notes
IRB 1998-41 10/7/98 1:53 PM Page 22

IRB 1998-41 10/7/98 1:54 PM Page 23

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
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IRB 1998-41 10/7/98 1:54 PM Page 24