Internal Revenue Bulletin 1999-10 (PDF rendition): IRS Announcements

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

INCOME TAX
Rev. Rul. 99–10, page 10.
Insurance companies; interest rate tables.Prevailing
state assumed interest rates are provided for the determina-
tion of reserves under section 807 of the Code for contracts
issued in 1998 and 1999. Rev. Rul. 92–19 supplemented in
part.
Rev. Rul. 99–11, page 18.
Determination of issue price in the case of certain
debt instruments issued for property.This ruling pro-
vides various prescribed rates for federal income tax pur-
poses for March 1999.
Rev. Rul. 99–13, page 4.
Election in respect of losses attributable to a disaster.
This ruling lists the areas declared by the President to qualify
as major disaster areas during 1998 under the Disaster Re-
lief and Emergency Assistance Act.
T.D. 8808, page 21.
REG–106564–98, page 53.
Temporary, proposed, and final regulations under sections
6221 through 6233 of the Code relate to the unified part-
nership audit procedure added to the Code by the Tax Equity
and Fiscal Responsibility Act of 1982 (TEFRA). A public hear-
ing is scheduled for April 14, 1999.
T.D. 8811, page 19.
REG–121806–97, page 46.
Temporary, proposed, and final regulations under section
6103 of the Code relate to additions to, and deletions from,
the list of items of information disclosed to the Bureau of the
Census for use in certain statistical programs.
EXEMPT ORGANIZATIONS
Announcement 99–19, page 63.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Notice 99–13, page 26.
The “differential earnings rate” under section 809 of the
Code is tentatively determined for 1998 together with the
“recomputed differential rate” for 1997.
REG–209619–93, page 28.
Proposed regulations under section 468 of the Code relate
to the designation of the person required to report the in-
come earned on qualified settlement funds and certain other
funds, trusts, and escrow accounts, and other related rules.
A public hearing is scheduled for May 12, 1999.
REG–116826–97, page 40.
Proposed regulations under section 221 of the Code relate
to the deduction for interest paid on qualified education
loans. The service will publish the time and date of the public
hearing in an announcement in the Federal Register.
REG–104924–98, page 47.
Proposed regulations under section 475 of the Code are set
forth for dealers in commodities and traders in securities or
commodities regarding the election to use the mark-to-mar-
ket method of accounting for their businesses. A public
hearing is scheduled for June 3, 1999.
REG–110524–98, page 55.
Proposed amendments to the regulations under section 453
of the Code relate to the taxation of capital gains on install-
ment sales of depreciable real property.
REG–113744–98, page 59.
Proposed regulations under section 1296 of the Code relate
to the new mark-to-market election for stock of a passive
foreign investment company (PFIC).
Internal Revenue
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Bulletin No. 1999–10
March 8, 1999
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 66.

Mission of the Service
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
2

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

Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 165.—Losses
26 CFR 1.165–11: Election in respect of losses
attributable to a disaster.
Insurance companies; interest rate
tables.Prevailing state assumed interest
rates are provided for the determination of
the reserves under section 807 of the Code
for contracts issued in 1998 and 1999.
Rev. Rul. 92–19 supplemented in part.
Rev. Rul. 99–13
Under § 165(i) of the Internal Revenue
Code, if a taxpayer suffers a loss attribut-
able to a disaster occurring in an area sub-
sequently determined by the President of
the United States to warrant assistance by
the Federal Government under the Disas-
ter Relief and Emergency Assistance Act,
42 U.S.C. §§ 5121–5204c (1988 & Supp.
V 1993) (the Act), the taxpayer may elect
to claim a deduction for that loss on the
taxpayer’s federal income tax return for
the taxable year immediately preceding
the taxable year in which the disaster
occurred.
Section 1.165–11(e) of the Income Tax
Regulations provides that the election to
deduct a disaster loss for the preceding
year must be made by filing a return, an
amended return, or a claim for refund on
or before the later of (1) the due date of
the taxpayer’s income tax return (deter-
mined without regard to any extension of
time to file the return) for the taxable year
in which the disaster actually occurred, or
(2) the due date of the taxpayer’s income
tax return (determined with regard to any
extension of time to file the return) for the
taxable year immediately preceding the
taxable year in which the disaster actually
occurred.
The provisions of § 165(i) apply only
to losses that are otherwise deductible
under § 165(a). An individual taxpayer
may deduct losses if they are incurred in a
trade or business, if they are incurred in a
transaction entered into for profit, or if
they are casualty losses under § 165(c)(3).
The President has determined that dur-
ing 1998 the areas listed below have been
adversely affected by disasters of suffi-
cient severity and magnitude to warrant
assistance by the Federal Government
under the Act.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Timothy Sheppard of the Office
of Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue ruling, contact Mr.
Sheppard on (202) 622-4960 (not a toll-
free call).
March 8, 199941999–10 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Disaster Areas Type ofDate of
in 1998DisasterDisaster
Alabama
Counties of Barbour, Butler, Coffee, Conecuh, Covington, Severe stormsMarch 7-21, 1998
Crenshaw, Dale, Escambia, Geneva, Henry, Houston, and and flooding
Randolph
Counties of Covington, Cullman, Jefferson, St. Clair, Tuscaloosa, Severe stormsApril 8-20, 1998
and Walkeand tornadoes
Counties of Baldwin, Butler, Choctaw, Clarke, Coffee, Conecuh, HurricaneSeptember 25-
Covington, Crenshaw, Escambia, Geneva, Lowndes, Mobile, GeorgesOctober 6, 1998
Monroe, and Washington
California
Counties of Alameda, Amador, Butte, Calaveras, Colusa, Severe winterFebruary 2-
Contra Costa, Del Norte, Fresno, Glenn, Humboldt, Kern, Lake, storms andApril 30, 1998
Los Angeles, Marin, Mendocino, Merced, Monterey, Napa, Orange, flooding
Riverside, Sacramento, San Benito, San Bernadino, San Diego,
San Francisco, San Joaquin, San Luis Obispo, San Mateo,
Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus,
Sutter, Tehama, Trinity, Tulare, Ventura, Yolo, and Yuba
Delaware
County of SussexSevere winterJanuary 28-
storms, high winds,February 6, 1998
and flooding

Florida
Counties of Alachua, Baker, Bay, Bradford, Brevard, Severe storms,December 25, 1997-
Broward, Calhoun, Citrus, Clay, Collier, Columbia, DeSoto, high winds, tornadoes,April 24, 1998
Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist, and flooding
Glades, Gulf, Hamilton, Hardee, Hernando, Highlands,
Hillsborough, Holmes, Jackson, Lafayette, Lake, Levy, Liberty,
Madison, Manatee, Marion, Nassau, Okaloosa, Okeechobee,
Orange, Osceola, Pasco, Pinellas, Polk, Putnam, Santa Rosa,
Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor,
Union, Volusia, Walton, and Washington
Counties of Broward, Dade, and MonroeSevere storms, highFebruary 2-4, 1998
winds, tornadoes, and
flooding
Counties of Alachua, Baker, Bay, Bradford, Brevard, Broward, Extreme fire hazardsMay 25-July 22, 1998
Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, Dade, DeSoto,
Dixie, Duval, Escambia, Flagler, Franklin, Gadsden, Gilchrist,
Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands,
Hillsborough, Holmes, Indian River, Jackson, Jefferson, Lafayette,
Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Martin,
Monroe, Nassau, Okaloosa, Okeechobee, Orange, Osceola,
Palm Beach, Pasco, Pinellas, Polk, Putnam, Santa Rosa, Sarasota,
St. Johns, St. Lucie, Seminole, Sumter, Suwannee, Taylor, Union,
Volusia, Wakulla, Walton, and Washington
Counties of Bay, Dixie, Franklin, Gulf, Taylor, and WakullaHurricane EarlSeptember 3, 1998
Counties of Bay, Calhoun, Columbia, Escambia, Franklin, Gadsden, Hurricane GeorgesSeptember 25-
Gulf, Holmes, Jackson, Jefferson, Liberty, Monroe, Okaloosa, October 7, 1998
Santa Rosa, Suwannee, Walton, and Washington
Counties of Monroe and Palm BeachTropical Storm MitchNovember 4-5, 1998
Georgia
Counties of Appling, Atkinson, Bacon, Baldwin, Baker, Barrow, Severe storms andFebruary 14-
Bartow, Ben Hill, Berrien, Bibb, Bleckley, Brantley, Brooks, Bryan, floodingMay 11, 1998
Bulloch, Burke, Butts, Calhoun, Candler, Carroll, Charlton, Chatham,
Cherokee, Clay, Clayton, Clinch, Cobb, Coffee, Colquitt, Columbia,
Cook, Crawford, Crisp, Dade, Dawson, DeCatur, Dekalb, Dodge,
Dooly, Dougherty, Douglas, Early, Echols, Effingham, Emanuel,
Evans, Floyd, Forsyth, Fulton, Glynn, Gordon, Grady, Gwinnett,
Habersham, Hall, Haralson, Heard, Henry, Houston, Irwin,
Jeff Davis, Jefferson, Jenkins, Johnson, Jones, Lamar, Lanier,
Laurens, Lee, Liberty, Lincoln, Long, Lowndes, Lumpkin, Macon,
McIntosh, Miller, Mitchell, Monroe, Montgomery, Murray,
Muscogee, Newton, Paulding, Peach, Pickens, Pike, Pulaski,
Quitman, Rabun, Randolph, Richmond, Rockdale, Screven,
Seminole, Spalding, Stewart, Sumter, Talbot, Tattnall, Telfair,
Terrell, Thomas, Tift, Toombs, Towns, Treutlen, Turner, Twiggs,
Union, Walker, Ware, Wayne, Webster, Wheeler, White,
Wilcox, Wilkinson, and Worth
Indiana
Counties of Benton, Jasper, Lake, LaPorte, Newton, Porter, Severe storms, tornadoesJune 11-Jully7, 1998
Pulaski, Saint Joseph, and Starkeand flooding
1999–10 I.R.B.5March 8, 1999

Counties of Benton, Clay, Crawford, Fayette, Franklin, Gibson, Severe storms, tornadoes,June 11-July 7, 1998
Greene, Howard, Knox, Lawrence, Madison, Miami, Monroe, and flooding
Montgomery, Orange, Owen, Parke, Pike, Putnam, Rush,
Sullivan, Union, Vigo, Wayne, and Warren
Iowa
Counties of Adair, Allamakee, Appanoose, Audubon, Benton, Severe storms, tornadoes,June 14, 1998-
Black Hawk, Boone, Buchanan, Buena Vista, Butler, Calhoun, and floodingJuly 15, 1998
Carroll, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clay,
Clayton, Clinton, Crawford, Dallas, Davis, Decatur, Delaware,
Des Moines, Dickinson, Emmet, Fayette, Floyd, Franklin, Fremont,
Greene, Grundy, Guthrie, Hamilton, Hancock, Hardin, Harrison,
Henry, Howard, Humboldt, Iowa, Jasper, Jefferson, Johnson,
Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska,
Marion, Marshall, Mills, Monona, Montgomery, Muscatine,
Osceola, Page, Palo Alto, Pocahontas, Polk, Pottawattamie,
Poweshiek, Ringgold, Sac, Shelby, Story, Tama, Taylor, Union,
Wapello, Warren, Washington, Webster, Winnebago,
Winneshiek, and Wright
Kansas
Counties of Bourbon, Cherokee, Douglas, Franklin, Jackson, Severe storms, flooding,October 1-8, 1998
Jefferson, Johnson, Leavenworth, Linn, Seward, Wabaunsee, and tornadoes
and Wyandotte
Counties of Butler, Chase, Coffey, Cowley, Douglas, Franklin, Severe storms andOctober 30-
Greenwood, Harper, Harvey, Johnson, Leavenworth, Lyon, floodingNovember 15, 1998
Marion, Neosho, Saline, Sedgwick, Sumner, Wilson, Woodson,
and Wyandotte
Kentucky
Counties of Adair, Bath, Boyle, Breathitt, Carter, Casey, Clark, Severe winter stormFebruary 4-6, 1998
Clay, Clinton, Elliott, Estill, Fleming, Garrard, Greenup, Jackson,
Johnson, Knox, Laurel, Lawrence, Lee, Lewis, Lincoln, Madison,
Magoffin, McCreary, Menifee, Mercer, Montgomery, Morgan,
Nicholas, Owsley, Powell, Pulaski, Robertson, Rockcastle, Rowan,
Russell, Wayne, Whitley, and Wolfe
Counties of Adair, Barren, Bell, Breathitt, Casey, Clay, Floyd, Severe storms, tornadoes,April 16-
Johnson, Knott, Knox, Lawrence, Lee, Leslie, Letcher, Magoffin, and floodingMay 10, 1998
Metcalfe, Owsley, Perry, Pike, Warren, and Whitley
Louisiana
Parishes of Acadia, Ascension, Assumption, Baptist, Cameron, Tropical Storm FrancesSeptember 9-
Evangeline, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, and Hurricane GeorgesOctober 4, 1998
St. Bernard, St. Charles, St. James, St. John, St. Martin, St. Mary,
St. Tammany, Tangipahoa, Terrebone, Vermilion, and Washington
Maine
Counties of Androscoggin, Aroostook, Cumberland, Franklin, Severe ice storms, rain,January 5-25, 1998
Hancock, Kennebec, Knox, Lincoln, Penobscot, Piscataquis, Oxford, and heavy winds
Sagadahoc, Somerset, Waldo, Washington, and York
Counties of Androscoggin, Franklin, Kennebec, Oxford, Severe storms and June 13-July 1, 1998
Somerset, and Yorkflooding
March 8, 199961999–10 I.R.B.

1999–10 I.R.B.7March 8, 1999
Marshall Islands
Ailinglaplap, Ailuk, Arno, Aur, Bikini, Ebeye, Ebon, Enewetak, Severe droughtJanuary 17-June 30, 1998
Jabat, Jaluit, Kili, Kwajalein, Lae, Lib, Likiep, Majuro, Maloelap,
Mejit, Mili, Namorik, Namu, Ujae, Utrik, Wotho, and Wotje
Massachusetts
Counties of Bristol, Essex, Middlesex, Norfolk, Plymouth, Heavy rains andJune 13-July 6, 1998
Suffolk, and Worcesterflooding
Michigan
Counties of Bay, Clinton, Gratiot, Ionia, Kent, Mason, Montcalm, Severe storms andMay 31, 1998
Newaygo, Oceana, Ottawa, Saginaw, and Shiawasseestraight-line winds
County of MuskegonSevere storms andMay 29-31, 1998
straight-line winds
Counties of Macomb and WayneSevere storms andJuly 21-22, 1998
high winds
Micronesia
State of Chuuk: Eot, Ettal, Etten, Fanapanges, Fefen, Fonanu, Severe droughtJanuary 25-
Fono, Houk, Kuttu, Lekinioch, Losap, Makur, Moch, Murillo, June 30, 1998
Nama, Namoluk, Nomwin, Oneop, Onou, Onoun, Paata, Parem,
Piherach, Piis-Emwar, Piis-Paneu, Pollap, Polle, Polowat,
Romanum, Ruo, Satowan, Siis, Ta, Tetiw, Tol, Tomatam, Tonoas,
Udot, Uman, Unanu, Weno, and Wonei.
State of Phonpei: the areas of Kipingamarangi, Mwoakilloa,
Nukuoro, Oroluk, Pakin, Pingelap, and Sapwuahfik.
State of Yap: Eauripik, Elato, Fais, Faraulap, Ifalik,
Lamotrek, Ngulu, Satawal, Sorol, Ulithi, Wolei, and Yap Proper.
Minnesota
Counties of Blue Earth, Brown, Cottonwood, LaSueur, Nicollet, Severe storms andMarch 29, 1998
Nobles, and Ricetornadoes
Counties of Anoka, Blue Earth, Carver, Dakota, Faribault, Severe storms, May 15-
Fillmore, Freeborn, Goodhue, Hennepin, Houston, Jackson, straight-line winds, andJune 28, 1998
Mower, Olmsted, Ramsey, Rice, Scott, Wabasha, Washington, tornadoes
and Winona
Mississippi
Counties of Covington, Forrest, George, Greene, Hancock, Hurricane GeorgesSeptember 25-
Harrison, Jackson, Jasper, Jefferson Davis, Jones, Lamar, October 5, 1998
Marion, Pearl River, Perry, Pike, Stone, and Wayne
Missouri
Counties of Jackson and St. Louis; and City of St. LouisSevere storms andJuly 10-31, 1998
flooding
Counties of Andrew, Barton, Caldwell, Carroll, Cedar, Chariton, Severe storms andOctober 4-11, 1998
Clay, Dade, DeKalb, Jackson, Linn, Livingston, Macon, Miller, flooding
Moniteau, Morgan, Platte, Polk, and Ray
New Hampshire
Counties of Belknap, Carroll, Cheshire, Coos, Grafton, Severe ice storms, rain,January 7-25, 1998
Hillsborough, Merrimack, Stafford, and Sullivanand high winds

Counties of Belknap, Carroll, Grafton, Hillsborough, Severe storms andJuly 12-July 2, 1998
Merrimack, Rockingham, and Sullivanflooding
New Jersey
Counties of Atlantic, Cape May, and OceanSevere winter coastalFebruary 4-9, 1998
storm, high winds, and
flooding
New York
Counties of Clinton, Essex, Franklin, Genessee, Jefferson, Severe winter and iceJanuary 5-17, 1998
Lewis, Monroe, Niagara, Saratoga, and St. Lawrencestorms, high winds, and
flooding
Counties of Broome, Chenango, Otsego, Rensselaer, Saratoga, Severe thunderstormsMay 31-June 2, 1998
and Wyomingand tornadoes
Counties of Allegany, Cattaraugus, Clinton, Delaware, Erie, Severe storms andJune 25-July 10, 1998
Essex, Franklin, Genesee, Livingston, Monroe, Steuben, flooding
Sullivan, Tioga, Tompkins, and Wyoming
Counties of Cayuga, Fulton, Herkimer, Madison, Monroe, Severe storms andSeptember 7, 1998
Nassau, Oneida, Onondaga, Ontario, Orleans, and Waynehigh winds
North Carolina
Counties of Ashe, Avery, Dare, Haywood, Madison, Mitchell, Severe storms andJanuary 7-
Robeson, Transylvania, Watauga, and YanceyfloodingFebruary 12, 1998
Counties of Durham, Edgecombe, Lenoir, Nash, Rockingham, Severe storms, tornadoes,March 20-
Wake, and Wayneand floodingApril 1, 1998
Counties of Beaufort, Bertie, Bladen, Brunswick, Camden, Hurricane BonnieAugust 25-
Carteret, Chowan, Columbus, Craven, Cumberland, Currituck, September 1, 1998
Dare, Duplin, Greene, Hyde, Jones, Lenoir, Martin,
New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans,
Pitt, Robeson, Sampson, Tyrrell, Washington, and Wayne
North Dakota
Counties of Barnes, Benson, Cass, Dickey, LaMoure, Nelson, Flooding groundMarch 2-July
Pembina, Pierce, Ramsey, Ransom, Richland, Rolette, Sargent, saturation, and severe18, 1998
Stutsman, Towner, Walsh; and Indian Reservations of the Spirit storms
Lake Sioux Tribe and the Turtle Mountain Band of Chippewa
Northern Mariana Islands
Island of RotaTyphoon Paka andDecember 16-17, 1998
associated torrential rains
Ohio
Counties of Athens, Belmont, Coshocton, Franklin, Guernsey, Severe storms, flooding,June 24-July 5, 1998
Harrison, Holmes, Jackson, Jefferson, Knox, Meigs, Monroe, and tornadoes
Morgan, Morrow, Muskingum, Noble, Ottawa, Perry, Pickaway,
Richland, Sandusky, Tuscarawas, and Washington
Oregon
County of Crook FloodingMay 28-June 3, 1998
Pennsylvania
Counties of Allegheny, Beaver, Berks, Pike, Susquehanna, Severe storms, tornadoesMay 31-June 2, 1998
Somerset, and Wyomingand flooding
March 8, 199981999–10 I.R.B.

Puerto Rico
All municipiosHurricane GeorgesSeptember 20-
October 27, 1998
South Carolina
County of HorryHurricane BonnieAugust 25-
September 1, 1998
South Dakota
Counties of Brown, Clark, Codington, Day, Hanson, Marshall, Flooding, severe storms,April 25-June 22, 1998
McCook, Roberts, and Spinkand tornadoes
Tennessee
Counties of Bledsoe, Bradley, Campbell, Cannon, Carter, Chester, Severe storms andJanuary 6-
Clay, Cocke, Crockett, Cumberland, DeKalb, Fentress, Gibson, floodingFebruary 12, 1998
Greene, Grundy, Hawkins, Haywood, Jackson, Jefferson, Johnson,
Madison, Meigs, Morgan, Overton, Pickett, Polk, Putnam, Rhea,
Roane, Scott, Sequatchie, Sevier, Sullivan, Tipton, Unicoi,
Van Buren, Warren, Washington, and White
Counties of Anderson, Blount, Bradley, Campbell, Carroll, Severe storms, tornadoes,April 16-May 18, 1998
Cheatham, Claiborne, Crockett, Davidson, Dickson, Dyer, Gibson, and flooding
Giles, Grainger, Hamblen, Hancock, Hardin, Hawkins, Humphreys,
Jackson, Jefferson, Knox, Lauderdale, Lawrence, Loudon, Macon,
Madison, Maury, Monroe, Morgan, Pickett, Polk, Rhea, Roane,
Robertson, Scott, Sevier, Shelby, Sumner, Union, Wayne,
Williamson, and Wilson
Counties of Lawrence and LewisFlooding and severeJuly 13-July 28, 1998
storms
Texas
Counties of Edwards, Kimble, Kinney, Maverick, Real, Tropical Storm CharleyAugust 22-31, 1998
Uvalde, Val Verde, and Webb
Counties of Brazoria, Galveston, Harris, Jefferson, and Severe storms andSeptember 9-
Matagordaflooding associated withOctober 5, 1998
Tropical Storm Frances
Counties of Austin, Atascosa, Bastrop, Bexar, Blanco, Brazoria, Severe storms, flooding,October 17-
Burleson, Caldwell, Calhoun, Colorado, Comal, DeWitt, Fayette, and tornadoesNovember 15, 1998
Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe,
Harris, Hays, Jackson, Jefferson, Jim Wells, Karnes, Kendall,
Lavaca, Liberty, Matagorda, Medina, Montgomery, Nueces, Polk,
Refugio, San Jacinto, San Patricio, Travis, Trinity, Victoria,
Walker, Waller, Wharton, and Wilson
U.S. Virgin Islands
Islands of St. Croix, St. John, St. Thomas, and Water IslandHurricane GeorgesSeptember 19-22, 1998
Vermont
Counties of Addison, Chittenden, Franklin, Grand Isle, Orange, Severe ice storms, rain,January 6-16, 1998
and Windsorhigh winds, and flooding
Counties of Addison, Caledonia, Chittenden, Essex, Franklin, Severe storms andJune 17-August
Lamoille, Orange, Orleans, Rutland, Washington, and Windsorflooding17, 1998
1999–10 I.R.B.9March 8, 1999

Virginia
Cities of Chesapeake, Norfolk, Portsmouth, Suffolk, and Hurricane BonnieAugust 25-
Virginia BeachSeptember 1, 1998
Washington
Counties of Ferry and StevensSevere storms and May 26-29, 1998
flooding
City of Kelso (Cowlitz County), specifically the Aldercrest-Banyon LandslideMarch 6-November
subdivision19, 1998
West Virginia
Counties of Braxton, Cabell, Calhoun, Clay, Doddridge, Gilmer, Severe storms,June 26-July 27, 1998
Harrison, Jackson, Kanawha, Lewis, Marion, Marshall, Ohio, flooding, and
Pleasants, Ritchie, Roane, Tyler, Webster, Wetzel, Wirt, and Woodtornadoes
Wisconsin
Counties of Buffalo, Clark, Crawford, Dunn, Grant, Jackson, Severe storms,June 18-30, 1998
La Crosse, Monroe, Pepin, Pierce, Richland, St. Croix, Trempealeau, straight-line winds,
and Vernontornadoes, heavy rain,
and flooding
Counties of Milwaukee, Racine, Rock, Sheboygan, and WaukeshaSevere storms andAugust 5-15, 1998
flooding
March 8, 1999101999–10 I.R.B.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of March 1999. See
Rev. Rul. 99–11, page 18.
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted federal long-term rate is set forth
for the month of March 1999. See Rev. Rul. 99–11,
page 18.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of March 1999. See
Rev. Rul. 99–11, page 18.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of March 1999. See
Rev. Rul. 99–11, page 18.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Insurance companies; interest rate
tables.Prevailing state assumed interest
rates are provided for the determination of
reserves under section 807 of the Code for
contracts issued in 1998 and 1999. Rev.
Rul. 92–19 supplemented in part.
Rev. Rul. 99–10
For purposes of § 807(d)(4) of the In-
ternal Revenue Code, for taxable years
beginning after December 31, 1997, this
ruling supplements the schedules of pre-
vailing state assumed interest rates set
forth in Rev. Rul. 92–19, 1992–1 C.B.
227. This information is to be used by in-
surance companies in computing their re-
serves for (1) life insurance and supple-
mentary total and permanent disability
benefits, (2) individual annuities and pure
endowments, and (3) group annuities and
pure endowments. As § 807(d)(2)(B) re-
quires that the interest rate used to com-
pute these reserves be the greater of (1)
the applicable federal interest rate, or (2)
the prevailing state assumed interest rate,

the table of applicable federal interest
rates in Rev. Rul. 92–19 is also supple-
mented.
Following are supplements to sched-
ules A, B, C, and D to Part III of Rev. Rul.
92–19, providing prevailing state as-
sumed interest rates for insurance prod-
ucts with different features issued in 1998
and 1999, and a supplement to the table in
Part IV of Rev. Rul. 92–19, providing the
applicable federal interest rate under
§ 807(d) for 1998 and 1999. This ruling
does not supplement Parts I and II of Rev.
Rul. 92–19.
This is the seventh supplement to the
interest rates provided in Rev. Rul. 92–19.
Earlier supplements were published in
Rev. Rul. 93–58, 1993–2 C.B. 241 (inter-
est rates for insurance products issued in
1992 and 1993), Rev. Rul. 94–11, 1994–1
C.B. 196 (1993 and 1994), Rev. Rul.
95–4, 1995–1 C.B. 141 (1994 and 1995),
Rev. Rul. 96–2, 1996–1 C.B. 141 (1995
and 1996), Rev. Rul. 97–2, 1997–1 C.B. 8
(1996 and 1997), and Rev. Rul. 98–2,
1998–2 I.R.B. 15 (1997 and 1998).
1999–10 I.R.B.11March 8, 1999
Part III. Prevailing State Assumed Interest Rates — Products Issued in Years After 1982.*
Schedule A
STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO
THE NAIC STANDARD VALUATION LAW
A. Life insurance valuation:
Guarantee DurationCalendar Year
(years)of Issue
1999
10 or fewer5.00**
More than 104.75**
but not more than 20
More than 204.50**
Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate
Bond Yield Average — Monthly Average Corporates.
** As the applicable federal interest rate for 1999 of 6.30 percent exceeds this prevailing state as-
sumed interest rate, the interest rate to be used for this product under § 807 is 6.30 percent.
* The terms used in the schedules in this ruling and in Part III of Rev. Rul. 92–19 are those used in the Standard Valuation
Law; the terms are defined in Rev. Rul. 92–19.
Part III, Schedule B
STATUTORY VALUATION INTEREST RATES BASED ON THE 1980 AMENDMENTS TO
THE NAIC STANDARD VALUATION LAW
B. Single premium immediate annuities and annuity benefits involving life contingencies arising
from other annuities with cash settlement options and from guaranteed interest contracts with cash
settlement options:
Calendar Year of IssueValuation Interest Rate
19986.25*
Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate
Bond Yield Average — Monthly Average Corporates. The terms used in this schedule are those
used in the Standard Valuation Law as defined in Rev. Rul. 92–19.
*As this prevailing state assumed interest does not exceed the applicable federal interest rate for 1998 of 6.31 percent, the
applicable federal interest rate of 6.31 percent is to be used for this product under § 807.

Part III, Schedule C16 – 1998
STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR
1998CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS
C. Valuation interest rates for other annuities and guaranteed interest contracts that are valued on an issue year basis:
CashFutureValuation Interest Rate
SettlementInterestGuarantee DurationFor Plan Type
Options? Guarantee?(years)ABC
YesYes5 or fewer6.25*5.50* 5.00*
More than 5, but not more than 10 6.00* 5.50* 5.00*
More than 10, but not more than 20 5.75*5.00* 4.75*
More than 20 4.75*4.50*4.50*
YesNo5 or fewer6.505.75*5.25*
More than 5, but not more than 106.25*5.75*5.25*
More than 10, but not more than 206.00*5.25*5.00*
More than 20 5.00* 4.75* 4.75*
No Yes or No5 or fewer6.25*
More than 5, but not more than 10 6.00*NOT APPLICABLE
More than 10, but not more than 20 5.75*
More than 20 4.75*
Source: Rates calculated from the monthly averages, ending June 30, 1998 of Moody’s Corporate Bond Yield Average — Monthly
Average Corporates.
*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under
§ 807 is 6.31 percent.
Part III, Schedule D16 – 1998
STATUTORY VALUATION INTEREST RATES BASED ON NAIC STANDARD VALUATION LAW FOR
1998 CALENDAR YEAR BUSINESS GOVERNED BY THE 1980 AMENDMENTS
D. Valuation interest rates for other annuities and guaranteed interest contracts that are contracts with cash settlement options and
that are valued on a change in fund basis:
CashFutureValuation Interest Rate
SettlementInterestGuarantee DurationFor Plan Type
Options? Guarantee?(years)ABC
YesYes5 or fewer7.006.505.25*
More than 5, but not more than 10 6.75 6.50 5.25*
More than 10, but not more than 20 6.25* 6.00* 5.00*
More than 20 5.50* 5.50* 4.75*
YesNo5 or fewer 7.00 6.75 5.50*
More than 5, but not more than 10 7.00 6.75 5.50*
More than 10, but not more than 20 6.50 6.25* 5.25*
More than 20 5.75*5.75* 4.75*
Source: Rates calculated from the monthly averages, ending June 30, 1998, of Moody’s Corporate Bond Yield Average — Monthly
Average Corporates.
*As the applicable federal interest rate for 1998 of 6.31 percent exceeds this prevailing state assumed interest rate, the interest rate to be used for this product under
§ 807 is 6.31 percent.
March 8, 1999121999–10 I.R.B.

Part IV. Applicable Federal Interest
Rates.
TABLE OF APPLICABLE FEDERAL
INTEREST RATES FOR PURPOSES
OF § 807
YearInterest Rate
19986.31
19996.30
Sources: Rev. Rul. 97–50, 1997–49 C.B.
5 for the 1998 rate and Rev. Rul. 98–57,
1998–49 I.R.B. 4 for the 1999 rate.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 92–19 is supplemented by the
addition to Part III of that ruling of pre-
vailing state assumed interest rates under
§ 807 for certain insurance products is-
sued in 1998 and 1999 and is further sup-
plemented by an addition to the table in
Part IV of Rev. Rul. 92–19 listing applica-
ble federal interest rates. Parts I and II of
Rev. Rul. 92–19 are not affected by this
ruling.
DRAFTING INFORMATIONThe
principal author of this revenue ruling is
Ann H. Logan of the Office of Assistant
Chief Counsel (Financial Institutions and
Products). For further information
regarding this revenue ruling contact her
on (202) 622-3970 (not a toll-free call).
1999–10 I.R.B.13March 8, 1999

March 8, 1999141999–10 I.R.B.

1999–10 I.R.B.15March 8, 1999

March 8, 1999161999–10 I.R.B.

1999–10 I.R.B.17March 8, 1999

Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, and
long-term rates are set forth for the month of March
1999. See Rev. Rul. 99–11, page 18.
Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Determination of issue price in the
case of certain debt instruments issued
for property.This ruling provides vari-
ous prescribed rates for federal income
tax purposes for March 1999.
Rev. Rul. 99–11
This revenue ruling provides various
prescribed rates for federal income tax
purposes for March 1999 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.
March 8, 1999181999–10 I.R.B.
REV. RUL. 99–11 TABLE 1
Applicable Federal Rates (AFR) for March 1999
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR4.67%4.62%4.59%4.58%
110% AFR5.14%5.08%5.05%5.03%
120% AFR5.62%5.54%5.50%5.48%
130% AFR6.10%6.01%5.97%5.94%
Mid-Term
AFR4.83%4.77%4.74%4.72%
110% AFR5.32%5.25%5.22%5.19%
120% AFR5.80%5.72%5.68%5.65%
130% AFR6.30%6.20%6.15%6.12%
150% AFR7.29%7.16%7.10%7.06%
175% AFR8.52%8.35%8.26%8.21%
Long-Term
AFR5.30%5.23%5.20%5.17%
110% AFR5.83%5.75%5.71%5.68%
120% AFR6.38%6.28%6.23%6.20%
130% AFR6.92%6.80%6.74%6.71%
REV. RUL. 99–11 TABLE 2
Adjusted AFR for March 1999
Period for Compounding
AnnualSemiannual QuarterlyMonthly
Short-term
adjusted AFR 3.09%3.07%3.06%3.05%
Mid-term
adjusted AFR 3.77%3.74%3.72%3.71%
Long-term
adjusted AFR4.68%4.63%4.60%4.59%

REV. RUL. 99–11 TABLE 3
Rates Under Section 382 for March 1999
Adjusted federal long-term rate for the current month4.68%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)4.71%
1999–10 I.R.B.19March 8, 1999
REV. RUL. 99–11 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for March 1999
Appropriate percentage for the 70% present value low-income housing credit 8.18%
Appropriate percentage for the 30% present value low-income housing credit 3.51%
REV. RUL. 99–11 TABLE 5
Rate Under Section 7520 for March 1999
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of
years, or a remainder or reversionary interest5.8%
Section 1288.—Treatment of
Original Issue Discount on
Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 6103.—Confidentiality
and Disclosure of Returns and
Return Information
26 CFR 6103.301.6103(j)(1)–1: Department of
Commerce
T.D. 8811
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return Information
to the Bureau of the Census
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations relating to
additions to, and deletions from, the list of
items of information disclosed to the
Bureau of the Census for use in certain
statistical programs. These regulations
provide guidance to IRS personnel re-
sponsible for disclosing the information.
The text of the temporary regulations also
serves as the text of the proposed regula-
tions set forth in the notice of proposed
rulemaking on this subject in REG–
121806–97, on page 46.
DATES: Effective Date:These regula-
tions are effective January 25, 1999.
Applicability Date:For dates of applic-
ability, see §301.6103(j)(1)–1T(e) of
these regulations.
FOR FURTHER INFORMATION CON-
TACT: Jamie Bernstein, (202) 622-4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1) of the Inter-
nal Revenue Code, upon written request
from the Secretary of Commerce, the
Secretary is to furnish to the Bureau of
the Census (“Bureau”) tax return infor-
mation that is prescribed by Treasury reg-
ulations for the purpose of structuring
censuses and national economic accounts
and conducting related statistical activi-
ties. Section 301.6103(j)(1)–1 of the reg-
ulations provides an itemized description
of the return information authorized to be
disclosed for this purpose. Periodically,
the disclosure regulations are amended to
reflect the changing needs of the Bureau
for data for its statutorily authorized sta-
tistical activities.
This document adopts temporary regu-
lations that authorize IRS personnel to
disclose the additional items of return in-
formation that have been requested by the
Secretary of Commerce. The temporary

regulations also delete certain items of re-
turn information that are enumerated in
the existing regulations but that the Secre-
tary of Commerce has indicated are no
longer needed.
Except for §301.6103(j)(1)–1T(b)(3),
(b)(6)(i)(A) and (b)(6)(iii), the text of the
temporary regulations is the same as 26
CFR 301.6103(j)(1)–1. The changes
made by §301.6103(j)(1)–1T(b)(3),
(b)(6)(i)(A) and (b)(6)(iii) are discussed
below.
Explanation of Provisions
The request by the Secretary of Com-
merce for additional items of return infor-
mation has indicated several areas in
which changes to existing Bureau access
to tax return information either would im-
prove present statistical programs or are
necessary to implement new programs.
To reduce small businesses’ direct re-
porting burden in quinquennial economic
censuses and current economic surveys,
and to improve the quality of the data re-
ceived, the Bureau needs certain items of
information set forth in tax returns. These
items include total expenses or deduc-
tions, beginning- and end-of-year inven-
tories, net gain from sales of business
property, other income, and total income.
The Secretary of Commerce also has
requested identity information of parent
corporations as shown on corporate tax
returns. This information will enable the
Bureau to collect data for various eco-
nomic surveys at the subsidiary or divi-
sion level rather than at the establishment
level. Restructuring data collection in ac-
cordance with such new organizational
linkages will reduce the burden on indi-
vidual business establishments to estimate
data relating to their affiliates, enhance
the quality of the data collected, and pro-
vide the Bureau with an efficient sam-
pling frame for surveys collecting certain
data, such as capital expenditures, that are
typically not available at the establish-
ment level.
To eliminate the follow-up contact of
corporate taxpayers presently required
under the Quarterly Financial Report
(QFR) program in order to establish S
corporation status, the Bureau needs the
document code and district office code
from corporate returns. Another improve-
ment to the QFR program would be ef-
fected by the requested disclosure of par-
ent corporation identity information, be-
cause subsidiaries could then be linked
before a sample was selected and would
be relieved of the separate Census report-
ing requirements. Finally, the Bureau
seeks to enhance the quality and reduce
the size of sample frames under the QFR
program by identifying inactive corpora-
tions so that they can be excluded from
the universe subject to sampling. This re-
quires that certain items of corporate em-
ployment tax information (employer iden-
tification number, tax period, total
compensation, and taxable wages and
tips), available to the Bureau under the
existing regulations for economic census
purposes, be available to the Bureau as
well for QFR purposes.
The Secretary of Commerce has ad-
vised that the Bureau no longer uses cer-
tain items of information listed in the ex-
isting regulations: sales of livestock and
produce raised, Schedule E information
filed with the Form 1120 series, and, with
respect to the QFR program, net income
or loss. Accordingly, the temporary regu-
lations have deleted these items from the
enumeration of return information to be
disclosed to the Bureau.
The transfer of the Census of Agricul-
ture to the Department of Agriculture
under the Census of Agriculture Act of
1997 (Public Law 105–113) has also ob-
viated the need for the Secretary of Com-
merce to receive certain items of informa-
tion. These items are: Schedule F filed
with the Form 1040 series, net farm prof-
its, agricultural activity code, and answers
to material participation questions. These
items have been deleted in the temporary
regulations.
For simplification and consistency, the
term “loss” is not expressly stated in these
regulations as an alternative to “income”
or “gain,” but it is the intent of the Secre-
tary to interpret “income” or “gain” as in-
cluding negative or loss figures and to
provide any such figures to the Bureau.
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. For the applic-
ability of the Regulatory Flexibility Act (5
U.S.C. chapter 6) see the Special Analy-
ses section of the preamble to the cross
reference notice of proposed rulemaking
published in the Proposed Rules section
in this issue of the Federal Register.Pur-
suant to section 7805(f) of the Internal
Revenue Code, these temporary regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Douglas Giblen, Office of the As-
sociate Chief Counsel (International) (for-
merly of the Office of Assistant Chief
Counsel (Disclosure Litigation)). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1T also issued
under 26 U.S.C. 6103(j)(1);* * *
Par. 2. Section 301.6103(j)(1)–1 is
amended by revising paragraphs (b)(3)
and (b)(6)(i)(A) to read as follows:
§301.6103(j)(1)–1 Disclosures of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities.
* * * * *
(b)(3)[Reserved]. For further guid-
ance, see §301.6103(j)(1)–1T(b)(3).
* * * * *
(b)(6)(i)(A)[Reserved]. For further
guidance, see §301.6103(j)(1)–1T(b)-
(6)(i)(A).
* * * * *
March 8, 1999201999–10 I.R.B.

Par. 3. Section 301.6103(j)(1)–1T is
added to read as follows:
§301.6103(j)(1)–1T Disclosure of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities
(temporary).
(a) through (b)(2)[Reserved]. For fur-
ther guidance, see §301.6103(j)(1)–1(a)
through (b)(2).
(b)(3) Officers or employees of the In-
ternal Revenue Service will disclose the
following business related return informa-
tion reflected on the return of a taxpayer
to officers and employees of the Bureau
of the Census for purposes of, but only to
the extent necessary in, conducting and
preparing, as authorized by chapter 5 of
title 13, United States Code, demo-
graphic, economic, and agricultural statis-
tics programs, censuses, and surveys. The
“return of a taxpayer” includes, but is not
limited to, Form 941; Form 990 series;
Form 1040 series and Schedules C and
SE; Form 1065 and all attending sched-
ules and Form 8825; Form 1120 series
and all attending schedules and Form
8825; Form 851; Form 1096; and other
business returns, schedules and forms that
the Internal Revenue Service may issue—
(i) Taxpayer identity information (as
defined in section 6103(b)(6)) including
parent corporation, shareholder, partner,
and employer identity information;
(ii) Gross income, profits, or receipts;
(iii) Returns and allowances;
(iv) Cost of labor, salaries, and wages;
(v) Total expenses or deductions;
(vi) Total assets;
(vii) Beginning- and end-of-year in-
ventory;
(viii) Royalty income;
(ix) Interest income, including portfo-
lio interest;
(x) Rental income, including gross
rents;
(xi) Tax-exempt interest income;
(xii) Net gain from sales of business
property;
(xiii) Other income;
(xiv) Total income;
(xv) Percentage of stock owned by
each shareholder;
(xvi) Percentage of capital ownership
of each partner;
(xvii) End-of-year code;
(xviii) Months actively operated;
(xix) Principal industrial activity code,
including the business description;
(xx) Total number of documents and
the total amount reported on the Form
1096 transmitting Forms 1099-MISC;
(xxi) Form 941 indicator and business
address on Schedule C; and
(xxii) Consolidated return indicator.
(b)(4) and (5)[Reserved]. For further
guidance, see §301.6103(j)(1)–1(b)(4)
and (5).
(b)(6)(i) Officers or employees of the
Internal Revenue Service will disclose the
following return information (but not in-
cluding return information described in
section 6103(o)(2)) reflected on the return
of a corporation with respect to the tax
imposed by Chapter 1 to officers and em-
ployees of the Bureau of the Census for
purposes of, but only to the extent neces-
sary in, developing and preparing, as au-
thorized by law, the Quarterly Financial
Report—
(A) From the business master files of
the Internal Revenue Service—
(1) Taxpayer identity information (as
defined in section 6103(b)(6)), including
parent corporation identity information;
(2) Document code;
(3) District office code;
(4) Consolidated return and final re-
turn indicators;
(5) Principal industrial activity code;
(6) Partial year indicator;
(7) Annual accounting period;
(8) Gross receipts less returns and al-
lowances; and
(9) Total assets.
(b)(6)(i)(B) and (ii)[Reserved]. For
further guidance, see §301.6103(j)(1)–
1(b)(6)(i)(B) and (ii).
(iii) Information from an employment
tax return disclosed pursuant to
§301.6103(j)(1)–1(b)(2)(iii)(A), (B), (D),
(I) and (J) may be used by officers and
employees of the Bureau of the Census
for the purpose described in and subject to
the limitations of this paragraph (b)(6).
(c) and (d) [Reserved]. For further guid-
ance, see §301.6103(j)(1)–1(c) and (d).
(e) Effective date.This section is ap-
plicable to the Bureau of the Census on
January 25, 1999, through January 22,
2002.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 29, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 22, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 25, 1999, 64 F.R.
3669)
Section 6221.—Tax Treatment
Determined at Partnership Level
26 CFR 6221–1T: Tax treatment determined at
partnership level (Temporary)
T.D. 8808
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
Modifications and Additions to
the Unified Partnership Audit
Procedures
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations relating to
the unified partnership audit procedures
added to the Internal Revenue Code by
the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA). The unified part-
nership audit procedures generally pro-
vide administrative rules for the auditing
of partnership items at the partnership
level. These regulations modify the exist-
ing unified partnership audit procedures
to comply with the Taxpayer Relief Act of
1997 (1997 Act) and the Internal Revenue
Service Restructuring and Reform Act of
1998 (1998 Act), and add new regulations
to administer the new unified partnership
audit provisions added by the 1997 Act.
In general, the text of these temporary
regulations also serves as the text of the
proposed regulations set forth in the no-
tice of proposed rulemaking on this sub-
ject in REG–106564–98, on page 53.
DATES: Effective Date: These regula-
tions are effective January 26, 1999.
1999–10 I.R.B.21March 8, 1999

FOR FURTHER INFORMATION CON-
TACT: Robert G. Honigman, (202) 622-
3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains temporary
amendments to the Procedure and Admin-
istration Regulations (26 CFR Part 301)
relating to the unified partnership audit
procedures found in sections 6221 through
6233 of the Internal Revenue Code (Code)
and final regulations pertaining to the ap-
plicable dates of §301.6231(a)(7)–
1T(p)(2) and §301.6231(a)(7)–1T(r)(1).
Sections 1231 through 1243 of the Tax-
payer Relief Act of 1997, Public Law
105–34, 111 Stat. 788, modified some of
the existing procedures and added certain
new rules. Section 3507 of the Internal
Revenue Service Restructuring and Re-
form Act of 1998, Public Law 105–206,
112 Stat. 685, modified section 6231.
This document modifies existing regula-
tions that, because of the 1997 Act or the
1998 Act, no longer reflect current law.
Explanation of Provisions
Penalties Determined At The Partnership
Level
Before the 1997 Act, the Internal Rev-
enue Service (Service) could impose
penalties on a partner only through the ap-
plication of the deficiency procedures
after the completion of a partnership level
proceeding. Forcing the Service to open
deficiency proceedings against the indi-
vidual partners was inconsistent with the
efficiency goal of the unified partnership
audit rules. The 1997 Act cured this prob-
lem by providing that, for partnerships
under audit for taxable years ending after
August 5, 1997, partnership level pro-
ceedings include the determination of ap-
plicable penalties at the partnership level.
Partners now may raise any partner level
defenses to the imposition of penalties
only in a subsequent refund action.
Consistent with these statutory
changes, the temporary regulations man-
date that the partnership’s penalty de-
fenses are to be resolved during the part-
nership proceeding. Nevertheless, any
individual defenses that a partner may
have to the imposition of a penalty may
be brought by the partner in a refund ac-
tion subsequent to the partnership level
determination. In order to minimize the
burden on individual partners to defend
themselves by bringing their own refund
suits, the temporary regulations incorpo-
rate a large number of defenses at the
partnership level. The majority of a part-
ner’s defenses to the imposition of penal-
ties are not specific to a particular partner,
but can be determined by reference to the
activities of the partnership. The applica-
bility of these defenses may be resolved at
the partnership level during the partner-
ship proceeding. In addition, the tempo-
rary regulations modify the computational
adjustment rules to allow the Service to
assess penalties under those procedures.
Partial Settlements
The period for assessing tax with re-
spect to partnership items generally is the
longer of the periods provided by section
6229 or section 6501. For partnership
items that convert to nonpartnership
items, section 6229(f) provides that the
period for assessing tax shall not expire
before the date which is one year after the
date that the items became nonpartnership
items. Section 6231(b)(1)(C) provides
that the partnership items of a partner for
a partnership taxable year become non-
partnership items as of the date the part-
ner enters into a settlement agreement
with the Service with respect to such
items. In some audits, however, the tax-
payer and the Service will enter into a set-
tlement agreement regarding some, but
not all, of the taxpayer’s partnership
items. The 1997 Act added a special rule
for these partial settlement agreements in
section 6229(f)(2), providing that the pe-
riod for assessing any tax attributable to
the settled items is determined as if the
partial settlement had not been executed.
Thus, the limitations period applicable to
the last partnership item to be resolved for
the partnership’s taxable year under audit
is controlling with respect to all disputed
partnership items (including settled items)
for such partnership taxable year.
The temporary regulations state that the
one year period for assessing partnership
items that convert to nonpartnership items
applicable to settlement agreements under
section 6231(b)(1)(C) does not apply to
partial settlement agreements under sec-
tion 6229(f)(2). Moreover, the temporary
regulations clarify that the partner re-
mains subject to the unified audit proce-
dures regarding the nonsettled items.
Tax Matters Partner As A Debtor In
Bankruptcy
Section 6229(b)(1)(B) provides that the
statute of limitations under section 6229
is extended with respect to all partners in
the partnership by an agreement entered
into between the tax matters partner
(TMP) and the Service. Treas. Reg.
§301.6231(a)(7)–1(l)(1)(iv) (1996) and
Temp. Treas. Reg. §301.6231(c)–7T(a)
(1987), however, provide that upon the
filing of a petition naming a partner as a
debtor in a bankruptcy proceeding, the
partner/debtor’s partnership items convert
to nonpartnership items, and if the part-
ner/debtor was the TMP, that status termi-
nates. These rules were promulgated to
avoid the complications that the auto-
matic stay provision contained in 11
U.S.C. 362(a)(8) would have on a unified
partnership audit. As a result, if a TMP
executed a consent to extend the statute of
limitations during a period when the TMP
was a debtor in a bankruptcy proceeding,
the consent would not be binding on the
other partners. Under the regulations, the
person signing the agreement was ineligi-
ble to act as the TMP and extend the
statute as to all partners.
To resolve the uncertainty under prior
law in the situation where a TMP executes
an agreement extending the statute of lim-
itations as to all partners while, unknown
to the Service, the TMP is a debtor in a
bankruptcy proceeding, the 1997 Act pro-
vides that the Service may rely on the ex-
ecuted statute extension agreement unless
it is notified of the TMP’s bankruptcy
proceeding. If the Service is not notified
of the TMP’s bankruptcy proceeding,
statute extensions granted by the TMP are
binding on all partners in the partnership.
The temporary regulations provide a
mechanism for the TMP, or other partners,
to provide notice to the Service that the
TMP is a debtor in a bankruptcy proceed-
ing and therefore is ineligible to serve as
TMP and extend the statute under section
6229. This mechanism is derived from
existing regulations that provide guidance
on how to notify the Service of informa-
tion concerning a partnership’s partners.
March 8, 1999221999–10 I.R.B.

Small Partnership Exception
The 1997 Act amended the small part-
nership exception to the unified partner-
ship audit procedures found in section
6231. Formerly, in order to qualify for
the small partnership exception, the part-
nership had to have 10 or fewer partners
at all times during the tax year, each of
whom was a natural person (other than a
nonresident alien) or an estate, and for
which each partner’s share of each part-
nership item was the same as that part-
ner’s share of every other partnership
item. The 1997 Act amended the small
partnership exception by allowing part-
nerships to qualify for the exception even
if they have a C corporation for a partner
or specially allocate some partnership
items. The temporary regulations modify
the existing regulations interpreting the
small partnership exception to take ac-
count of this change in the law.
Effective Date
These final and temporary regulations
are applicable January 26, 1999. In ac-
cordance with section 7805(e)(2), the
temporary regulations contained herein
shall expire January 25, 2002.
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 533(b) of the Administrative Pro-
cedures Act (5 U.S.C. chapter 5) does not
apply to these regulations. For the applic-
ability of the Regulatory Flexibility Act (5
U.S.C. chapter 6) refer to the Special
Analyses section of the preamble to the
cross reference notice of proposed rule-
making published in the Proposed Rules
section in this issue of the Federal Regis-
ter.Pursuant to section 7805(f) of the In-
ternal Revenue Code, these final and tem-
porary regulations will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal authors of these tempo-
rary regulations are Robert G. Honigman,
Office of the Assistant Chief Counsel
(Passthroughs & Special Industries), and
William A. Heard, Office of the Assistant
Chief Counsel (Field Service). However,
other personnel from the Service and
Treasury Department participated in their
development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Amend §301.6221–1T by:
1. Redesignating paragraph (c) as para-
graph (e).
2. Adding new paragraphs (c) and (d).
The additions read as follows:
§301.6221–1T Tax treatment determined
at partnership level (temporary).
* * * * *
(c) Penalties determined at partner-
ship level (partnership taxable years end-
ing after August 5, 1997).Any penalty,
addition to tax, or additional amount that
relates to an adjustment to a partnership
item, shall be determined at the partner-
ship level. Partner level defenses to such
items can only be asserted through refund
actions following assessment and pay-
ment. Assessment of any penalty, addi-
tion to tax, or additional amount that re-
lates to an adjustment to a partnership
item shall be made based on partnership
level determinations. Partnership level
determinations include all the legal and
factual determinations that underlie the
determination of any penalty, addition to
tax, or additional amount, other than part-
ner level defenses specified in paragraph
(d) of this section.
(d) Partner level defenses.Partner
level defenses to any penalty, addition to
tax, or additional amount that relates to an
adjustment to a partnership item, may not
be asserted in the partnership level pro-
ceeding, but may be asserted through sep-
arate refund actions following assessment
and payment. See section 6230(c)(4).
Partner level defenses are limited to those
that are personal to the partner or are de-
pendant upon the partner’s separate re-
turn, and cannot be determined at the
partnership level. Examples of these de-
terminations are: whether any applicable
threshold underpayment of tax has been
met with respect to the partner or whether
the partner has met the criteria of section
6664(b)(penalties applicable only where
return is filed), or section 6664(c)(1)(rea-
sonable cause exception) subject to part-
nership level determinations as to the ap-
plicability of section 6664(c)(2).
* * * * *
Par. 3. Amend §301.6223(c)–1T by
adding a sentence to the end of paragraph
(c) to read as follows:
§301.6223(c)–1T Additional information
regarding partners furnished to the
Service (temporary).
* * * * *
(c) * * * Furthermore, reference to a
prior general notification to the Service
that a partner who would otherwise be the
tax matters partner is a debtor in a bank-
ruptcy proceeding or has had a receiver
appointed for him in a receivership pro-
ceeding is not sufficient unless a copy of
the notification document referred to is at-
tached to the statement.
* * * * *
Par. 4. Amend §301.6224(c)–3T by:
1. Revising the section heading.
2. Revising paragraphs (b), (c)(3)(ii),
and (d), Example (1).
The revisions read as follows:
§301.6224(c)–3T Consistent settlement
terms (temporary).
* * * * *
(b) Requirements for consistent settle-
ment terms—(1) In general.Consistent
settlement terms are those based on the
same determinations with respect to part-
nership items. However, consistent set-
tlement terms also may include partner-
ship level determinations of any penalty,
addition to tax, or additional amount that
relates to partnership items. Settlements
with respect to partnership items shall be
self-contained; thus, a concession by one
party with respect to a partnership item
1999–10 I.R.B.23March 8, 1999

may not be based upon a concession by
another party with respect to any item that
is not a partnership item other than any
penalty, addition to tax, or additional
amount that relates to an adjustment to a
partnership item. Consistent agreements,
whether comprehensive or partial, must
be identical to the original settlement (that
is, the settlement upon which the offered
settlement terms are based). A consistent
agreement must mirror the original settle-
ment and may not be limited to selected
items from the original settlement. Once
a partner has settled a partnership item, or
penalty, addition to tax, or additional
amount that relates to an adjustment to a
partnership item, that partner may not
subsequently request settlement terms
consistent with a settlement that contains
the previously settled item. The require-
ment for consistent settlement terms ap-
plies only if—
(i) The items were partnership items
(and any related penalty, addition to tax,
or additional amount) for the partner en-
tering into the original settlement imme-
diately before the original settlement; and
(ii) The items are partnership items
(and any related penalty, addition to tax,
or additional amount) for the partner re-
questing the consistent settlement at the
time the partner files the request.
(2) Effect of consistent agreement.
Consistent settlement terms are reflected
in a consistent agreement. A consistent
agreement is not a settlement agreement
which gives rise to further consistent set-
tlement rights because it is required to be
given without volitional agreement of the
Secretary. Therefore, a consistent agree-
ment required to be offered to a request-
ing taxpayer is not a settlement agreement
under section 6224(c)(2) of the Internal
Revenue Code, or paragraph (c)(3) of this
section which starts a new period for re-
questing consistent settlement terms. For
all other purposes of the Internal Revenue
Code, however, (e.g., binding effect under
section 6224(c)(1), and conversion to
nonpartnership items under section
6231(b)(1)(C)) a consistent agreement is
treated as a settlement agreement.
(c) * * *
(3) * * *
(ii) The 60th day after the day on
which the settlement agreement was en-
tered into.
(d) * * *
Example (1).The Service seeks to disallow a
$100,000 loss reported by Partnership P. The Ser-
vice agrees to a settlement with X, a partner in P, in
which the Service allows 60 percent of the loss, ac-
cepts the treatment of all other partnership items on
the partnership return, and imposes a penalty for
negligence related to the loss disallowance. Partner
Y, which owns a 10 percent interest in the partner-
ship, requests settlement terms which are consistent
with the settlement made between X and the Ser-
vice. The items are partnership items (and a related
penalty) for X immediately before X enters into the
settlement agreement and are partnership items (and
a related penalty) for Y at the time of the request.
The Service must offer Y settlement terms allowing
a $6,000 loss, a negligence penalty on the $4,000
disallowance, and otherwise reflecting the treatment
of partnership items on the partnership return.
* * * * *
Par. 5. Add §301.6229(b)–2T to read
as follows:
§301.6229(b)–2T Special rule with
respect to debtors in Title 11 cases
(temporary).
(a) In general.Notwithstanding any
other law or rule of law, if an agreement is
entered into under section 6229(b)(1)(B),
and the agreement is signed by a person
who would be the tax matters partner but
for the fact that, at the time that the agree-
ment is executed, the person is a debtor in
a bankruptcy proceeding under Title 11 of
the United States Code, such agreement
shall be binding on all partners in the
partnership unless the Service has been
notified of the bankruptcy proceeding in
accordance with paragraph (b) of this
section.
(b) Procedures for notifying the Ser-
vice of a partner’s bankruptcy proceed-
ing. (1) The Service shall be notified of
the bankruptcy proceeding of the tax mat-
ters partner in accordance with the proce-
dures set forth in §301.6223(c)–1T.
(2) In addition to the information spec-
ified in §301.6223(c)–1T, notification that
a person is (or was) a debtor in a bank-
ruptcy proceeding shall include the date
the bankruptcy proceeding was filed, the
name and address of the court in which
the bankruptcy proceeding exists (or took
place), the caption of the bankruptcy pro-
ceeding (including the docket number or
other identification number used by the
court), and the status of the proceeding as
of the date of notification.
Par. 6. Add §301.6229(f)–1T to read as
follows:
§301.6229(f)–1T Special rule for partial
settlement agreements (temporary).
(a) In general.If a partner enters into a
settlement agreement with the Service
with respect to the treatment of some of
the partnership items in dispute for a part-
nership taxable year, but other partnership
items for such year remain in dispute, the
period of limitations for assessing any tax
attributable to the settled items shall be
determined as if such agreement had not
been entered into.
(b) Other items remaining in dispute.
Pursuant to section 6226(c), a partner is a
party to a partnership level judicial pro-
ceeding with respect to partnership items.
When a partner settles partnership items,
the settled partnership items convert to
nonpartnership items under section
6231(b)(1)(C) and will not be subject to
any future or pending partnership level
proceeding pursuant to section 6226(d)-
(1). The remaining unsettled partnership
items, however, will remain subject to de-
termination under partnership level ad-
ministrative and judicial procedures.
Consequently, any remaining unsettled
items will be deemed to remain in dis-
pute. Thus, the period for assessing set-
tled items will be governed by the period
for assessing the remaining unsettled
items.
Par. 7. Amend §301.6231(a)(1)–1T by:
1. Revising the first two sentences of
paragraph (a)(1).
2. Removing paragraph (a)(3).
3. Redesignating paragraph (a)(4) as
paragraph (a)(3).
The revision reads as follows:
§301.6231(a)(1)–1T Exception for small
partnerships (temporary).
(a) * * *
(1) “10 or fewer.” The “10 or fewer”
limitation described in section 6231(a)-
(1)(B)(i) is applied to the number of nat-
ural persons (other than nonresident
aliens), C corporations, and estates of de-
ceased partners that were partners at any
one time during the partnership taxable
year. Thus, for example, a partnership
that at no time during the taxable year had
more than 10 partners may be treated as a
small partnership even if, because of
transfers of interests in the partnership, 11
or more natural persons, C corporations,
or estates of deceased partners owned in-
March 8, 1999241999–10 I.R.B.

terests in the partnership for some portion
of the taxable year. * * *
* * * * *
Par. 8. Amend §301.6231(a)(6)–1T by:
1. Revising paragraph (a).
2. Removing paragraph (c).
The revision reads as follows:
§301.6231(a)(6)–1T Computational
adjustments (temporary).
(a) In general.A change in the tax lia-
bility of a partner to properly reflect the
treatment of a partnership item under sub-
chapter C of chapter 63 of the Internal
Revenue Code is made through a compu-
tational adjustment. A computational ad-
justment includes a change in tax liability
that reflects a change in an affected item
where that change is necessary to prop-
erly reflect the treatment of a partnership
item, or any penalty, addition to tax, or
additional amount that relates to an ad-
justment to a partnership item. However,
if a change in a partner’s tax liability can-
not be made without making one or more
partner level determinations, that portion
of the change in tax liability attributable
to the partner level determinations shall
be made under the provisions of subchap-
ter B of chapter 63 of the Internal Rev-
enue Code (relating to deficiency proce-
dures), except for any penalty, addition to
tax, or additional amount which relates to
an adjustment to a partnership item.
(1) Changes in a partner’s tax liability
with respect to affected items that do not
require partner level determinations (such
as the threshold amount of medical de-
ductions under section 213 that changes
as the result of determinations made at the
partnership level) are computational ad-
justments that are directly assessed.
When making computational adjust-
ments, the Service may assume that
amounts the partner reported on the part-
ner’s individual return include all
amounts reported to the partner by the
partnership, absent contrary notice to the
Service (for example, a “Notice of Incon-
sistent Treatment”). Such an assumption
by the Service does not constitute a part-
ner level determination. Moreover, sub-
stituting redetermined partnership items
for the partner’s previously reported part-
nership items (including partnership items
included in carryover amounts) does not
constitute a partner level determination
where the Service otherwise accepts all
nonpartnership items (including, for ex-
ample, nonpartnership item components
of carryover amounts) as reported.
(2) Changes in a partner’s tax liability
with respect to affected items that require
partner level determinations (such as a
partner’s at-risk amount to the extent it
depends upon the source from which the
partner obtained the funds that the partner
contributed to the partnership) are compu-
tational adjustments subject to deficiency
procedures. Nevertheless, any penalty,
addition to tax, or additional amount that
relates to an adjustment to a partnership
item may be directly assessed following a
partnership proceeding, based on determi-
nations in that proceeding, regardless of
whether partner level determinations are
required.
* * * * *
Par. 9. Amend §301.6231(a)(7)–1 by
adding a sentence at the end of paragraphs
(p)(2) and (r)(1) to read as follows:
§301.6231(a)(7)–1 Designation or
selection of tax matters partner.
* * * * *
(p) * * *
(2) * * * For regulations applicable on
or after January 26, 1999 (reflecting statu-
tory changes made effective July 22,
1998) and before January 25, 2002, see
§301.6231(a)(7)–1T(p)(2).
* * * * *
(r) * * * (1) * * * For regulations ap-
plicable on or after January 26, 1999 (re-
flecting statutory changes made effective
July 22, 1998) and before January 25,
2002, see §301.6231(a)(7)–1T(r)(1).
* * * * *
Par. 10. Add §301.6231(a)(7)–1T to
read as follows:
§301.6231(a)(7)–1T Designation or
selection of tax matters partner
(temporary).
(a) through (p)(1) [Reserved]. For fur-
ther guidance, see §301.6231(a)(7)–1(a)
through (p)(1).
(p)(2) When each general partner is
deemed to have no profits interest in the
partnership.If it is impracticable under
§301.6231(a)(7)–1(o)(2) to apply the
largest-profits-interest rule of §301.6231(a)-
(7)–1(m)(2), the Commissioner will se-
lect a partner (including a general or lim-
ited partner) as the tax matters partner in
accordance with the criteria set forth in
§301.6231(a)(7)–1(q). The Commis-
sioner will notify, within 30 days of the
selection, the partner selected, the part-
nership, and all partners required to re-
ceive notice under section 6223(a), effec-
tive as of the date specified in the notice.
For regulations applicable before July 22,
1998, see §301.6231(a)(7)–1(p)(2).
(p)(3) through (q) [Reserved]. For fur-
ther guidance, see §301.6231(a)(7)–
1(p)(3) through (q).
(r) Notification of partnership—(1) In
general.If the Commissioner selects a
tax matters partner under the provisions
of §301.6231(a)(7)–1(p)(1) or (3)(i), the
Commissioner will notify, within 30 days
of the selection, the partner selected, the
partnership, and all partners required to
receive notice under section 6223(a), ef-
fective as of the date specified in the no-
tice. For regulations applicable before
July 22, 1998, see §301.6231(a)(7)–
1(r)(1).
(r)(2) [Reserved]. For further guid-
ance, see §301.6231(a)(7)–1(r)(2).
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue Service.
Approved December 30, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on Janu-
ary 25, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 26, 1999, 64 F.R.
3837)
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of March 1999. See Rev. Rul. 99–11, page 18.
1999–10 I.R.B.25March 8, 1999

March 8, 1999261999–10 I.R.B.
Differential Earnings Rate for
Mutual Life Insurance
Companies
Notice 99–13
This notice publishes a tentative deter-
mination under § 809 of the Internal Rev-
enue Code of the “differential earnings
rate” for 1998 and the rate that is used to
calculate the “recomputed differential
earnings amount” for 1997. (The latter
rate is referred to in this notice as the “re-
computed differential earnings rate” for
1997.) These rates are used by mutual
life insurance companies to calculate their
federal income tax liability for taxable
years beginning in 1998.
BACKGROUND
Section 809(a) provides that, in the
case of any mutual life insurance com-
pany, the amount of the deduction allow-
able under § 808 for policyholder divi-
dends is reduced (but not below zero) by
the “differential earnings amount.” Any
excess of the differential earnings amount
over the amount of the deduction allow-
able under § 808 is taken into account as a
reduction in the closing balance of re-
serves under subsections (a) and (b) of
§ 807. The “differential earnings
amount” for any taxable year is the
amount equal to the product of (a) the life
insurance company’s average equity base
for the taxable year multiplied by (b) the
“differential earnings rate” for that tax-
able year. The “differential earnings rate”
for the taxable year is the excess of (a) the
“imputed earnings rate” for the taxable
year over (b) the “average mutual earn-
ings rate” for the second calendar year
preceding the calendar year in which the
taxable year begins. The “imputed earn-
ings rate” for any taxable year is the
amount that bears the same ratio to 16.5
percent as the “current stock earnings
rate” for the taxable year bears to the
“base period stock earnings rate.”
Section 809(f) provides that, in the case
of any mutual life insurance company, if
the “recomputed differential earnings
amount” for any taxable year exceeds the
differential earnings amount for that tax-
able year, the excess is included in life in-
surance gross income for the succeeding
taxable year. If the differential earnings
amount for any taxable year exceeds the
recomputed differential earnings amount
for that taxable year, the excess is allowed
as a life insurance deduction for the suc-
ceeding taxable year. The “recomputed
differential earnings amount” for any tax-
able year is an amount calculated in the
same manner as the differential earnings
amount for that taxable year, except that
the average mutual earnings rate for the
calendar year in which the taxable year
begins is substituted for the average mu-
tual earnings rate for the second calendar
year preceding the calendar year in which
the taxable year begins.
The stock earnings rates and mutual
earnings rates taken into account under
§ 809 generally are determined by divid-
ing statement gain from operations by the
average equity base. For this purpose, the
term “statement gain from operations”
means “the net gain or loss from opera-
tions required to be set forth in the annual
statement, determined without regard to
Federal income taxes, and . . . properly
adjusted for realized capital gains and
losses. . . .” See § 809(g)(1). The term
“equity base” is defined as an amount de-
termined in the manner prescribed by reg-
ulations equal to surplus and capital in-
creased by the amount of nonadmitted
financial assets, the excess of statutory re-
serves over the amount of tax reserves,
the sum of certain other reserves, and 50
percent of any policyholder dividends (or
other similar liability) payable in the fol-
lowing taxable year. See§ 809(b)(2), (3),
(4), (5) and (6). Section 1.809–10 of the
Income Tax Regulations provides that the
equity base includes both the asset valua-
tion reserve and the interest maintenance
reserve for taxable years ending after De-
cember 31, 1991.
Section 1.809–9(a) of the regulations
provides that neither the differential earn-
ings rate under § 809(c) nor the recom-
puted differential earnings rate that is
used in computing the recomputed differ-
ential earnings amount under § 809(f)(3)
may be less than zero.
Rev. Rul. 99–3, 1999–3 I.R.B. 4, pro-
vides that a life insurance subsidiary of a
mutual holding company is not a mutual
life insurance company for which the de-
duction for policyholder dividends is re-
duced pursuant to §§ 808(c)(2) and 809.
As described above, the differential
earnings rate for 1998 and the recomputed
differential earnings rate for 1997 affect
the income and deductions reported by
mutual life insurance companies on their
federal income tax returns for the 1998
taxable year.
Data necessary to determine the tenta-
tive differential earnings rate for 1998 and
the tentative recomputed differential earn-
ings rate for 1997 have been compiled
from returns filed by mutual life insurance
companies and certain stock life insurance
companies. The Internal Revenue Service
is currently examining these returns. This
examination will not be completed before
the March 15, 1999, due date for filing
1998 calendar year returns.
NOTICE OF TENTATIVE RATES
This notice publishes a tentative deter-
mination of the differential earnings rate
for 1998 and of the recomputed differen-
tial earnings rate for 1997. This notice
also publishes a tentative determination of
the rates on which the calculation of the
differential earnings rate for 1998 and the
recomputed differential earnings rate for
1997 are based. The final determination
of these rates is expected to be published
before September 1, 1999.
The tentative determination of the dif-
ferential earnings rate for 1998 and the
tentative determination of the recomputed
differential earnings rate for 1997 that are
published in this notice should be used by
mutual life insurance companies to calcu-
late the amount of tax liability for taxable
years beginning in 1998 (in the case of
companies that file returns before publi-
cation of the final determination of these
rates) or to calculate the amount of esti-
mated unpaid tax liability for taxable
years beginning in 1998 (in the case of
companies that are allowed an extension
of time to file returns). Companies that
file returns before publication of the final
determination of these rates should file
amended returns after the final determina-
tion of these rates is published. If there is
a failure to pay tax for a taxable year be-
ginning in 1998 and the failure is attribut-
Part III. Administrative, Procedural, and Miscellaneous

able to a difference between (a) the tenta-
tive determination of the differential earn-
ings rate for 1998 and recomputed differ-
ential earnings rate for 1997 and (b) the
final determination of these rates, then
any such failure through September 15,
1999, will be treated as due to reasonable
cause and will not give rise to any addi-
tion to tax under § 6651.
The tentative determination of the rates
is set forth in Table 1.
DRAFTING INFORMATION
The principal author of this notice is
Katherine A. Hossofsky of the Office of
the Assistant Chief Counsel (Financial In-
stitutions and Products). For further in-
formation regarding this notice, contact
Ms. Hossofsky on (202) 622-3477 (not a
toll-free call).
1999–10 I.R.B.27March 8, 1999
Notice 99–13 Table 1
Tentative Determination of Rates To Be Used
For Taxable Years Beginning in 1998
Differential earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.081
Recomputed differential earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . 0
Imputed earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.813
Imputed earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.193
Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.221
Current stock earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.882
Stock earnings rate for 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.087
Stock earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.238
Stock earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.321
Average mutual earnings rate for 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 16.112
Average mutual earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 15.566

March 8, 1999281999–10 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Escrow Funds and Other Similar
Funds
REG–209619–93
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 desig-
nation of the person required to report the
income earned on qualified settlement
funds and certain other funds, trusts, and
escrow accounts, and other related rules.
The proposed regulations would affect
qualified settlement funds, qualified
escrow accounts and qualified trusts es-
tablished in connection with deferred
like-kind exchanges, escrow accounts es-
tablished in connection with sales of
property, disputed ownership funds, and
parties to these escrow accounts, trusts,
and funds. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written comments must be re-
ceived by May 3, 1999. Requests to
speak and outlines of topics to be dis-
cussed at the public hearing scheduled for
May 12, 1999, at 10 a.m., must be re-
ceived by April 21, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209619–93),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–209619–93),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, 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.us-
treas.gov/prod/tax_regs/comments.html.
The public hearing will be held in Room
2615, Internal Revenue Building, 1111
Constitution Avenue, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Michael L. Gompertz of the Office of As-
sistant Chief Counsel (Income Tax & Ac-
counting), (202) 622-4910; concerning
submissions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing, Michael Slaugh-
ter, (202) 622-7190 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rulemak-
ing have been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collections of information
should be sent to the Office of Manage-
ment and Budget,Attn: Desk Officer for
the Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service,Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224. Comments on
the collections of information should be
received by April 1, 1999. Comments are
specifically requested concerning:
Whether the proposed collections of in-
formation are necessary for the proper
performance of the functions of the Inter-
nal Revenue Service, including whether
the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collections of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collections of information in this
proposed regulation are in §§1.468B–
1(k)(2), 1.468B–1(k)(3)(iv), 1.468B–
6(e)(1), 1.468B–6(f), 1.468B–7(d),
1.468B–8(f), 1.468B–8(g)(1), 1.468B–
9(c)(1), and 1.468B–9(f)(3).
The collections of information in
§§1.468B–1(k)(3)(iv), 1.468B–6(e)(1),
1.468B–7(d), 1.468B–8(g)(1), and
1.468B–9(c)(1) are satisfied by including
the required information on Forms 1099,
1041, 1120, or 1120-SF. The burden for
these requirements is reflected in the bur-
den estimates for these forms.
The other collections of information in
this proposed regulation (in §§1.468B–
1(k)(2), 1.468B–6(f), 1.468B–8(f), and
1.468B–9(f)(3)) are discussed below.
The collection of information in
§1.468B–1(k)(2) is an election statement
attached to a tax return filed for a quali-
fied settlement fund (QSF). The state-
ment notifies the IRS that the transferor to
the QSF has elected grantor trust treat-
ment for the QSF. This collection is re-
quired to obtain a benefit.
The collections of information in
§§1.468B–6(f) and 1.468B–8(f) are state-
ments that third parties must provide to an
escrow holder, trustee, or administrator to
enable the escrow holder, trustee, or ad-
ministrator to properly report the income
of an escrow account or trust on Form
1099. These collections are mandatory.
The collection of information in
§1.468B–9(f)(3) is a statement that a
transferor must provide with respect to
the transfer of cash or property to a dis-
puted ownership fund. This collection is
mandatory.
The likely respondents are individuals,
business or other for-profit institutions,
small businesses or organizations, non-
profit institutions, and government entities.
Estimated total annual reporting bur-
den: 4,650 hours.
Estimated average annual burden per
respondent: .5 hours.
Estimated number of respondents:
9,300.
Estimated annual frequency of re-
sponses: on occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
Part IV. Items of General Interest

1999–10 I.R.B.29March 8, 1999
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This notice contains proposed amend-
ments to the Income Tax Regulations (26
CFR Part 1) under section 468B of the In-
ternal Revenue Code. Section 468B was
added to the Code by section 1807(a)-
(7)(A) of the Tax Reform Act of 1986
(Public Law 99-514, 100 Stat. 2814) and
was amended by section 1018(f) of the
Technical and Miscellaneous Revenue
Act of 1988 (Public Law 100–647, 102
Stat. 3582). Section 468B(g) provides
that nothing in any provision of law shall
be construed as providing that an escrow
account, settlement fund, or similar fund
is not subject to current income tax. Sec-
tion 468B(g) further provides that the
Secretary shall prescribe regulations pro-
viding for the taxation of any such ac-
count or fund whether as a grantor trust or
otherwise.
On December 23, 1992, final regula-
tions (TD 8459, 1993–1 C.B. 68) under
section 468B(g) were published in the
Federal Register(57 F.R. 60983). The
regulations provide guidance concerning
qualified settlement funds, but do not ad-
dress other types of funds, escrow ac-
counts, or trusts subject to current taxa-
tion under section 468B(g).
Section 1.468B–1(c) defines a quali-
fied settlement fund (QSF) as a fund, ac-
count, or trust meeting three require-
ments. A QSF is a separate taxpayer
subject to tax on its modified gross in-
come. QSF classification is not elective.
The preamble to the QSF regulations (see
1993–1 C.B. 69) states that the IRS and
the Treasury Department rejected an elec-
tive approach because it would result in
inconsistent tax treatment for similar
funds, claimants, or transferors, and ac-
companying complexity.
The preamble to the QSF regulations
also states (see 1993–1 C.B. 73) that fu-
ture regulations will address the tax treat-
ment of funds, accounts, or trusts other
than QSFs, specifically, escrow accounts
used in the sale of property and section
1031 qualified escrow accounts.
Section 1031(a)(3) was added to the In-
ternal Revenue Code by section 77 of the
Tax Reform Act of 1984 (Public Law 98-
369, 98 Stat. 595). On May 1, 1991, final
regulations (TD 8346, 1991–1 C.B. 150)
under section 1031(a)(3) were published
in the Federal Register(56 F.R. 19933).
These regulations were amended by final
regulations (TD 8535, 1994–1 C.B. 202)
published in the Federal Registerfor
April 20, 1994 (59 F.R. 18747). The reg-
ulations provide four safe harbors, the use
of any of which will result in a determina-
tion that the taxpayer (i.e., the party trans-
ferring the property in the exchange) is
not in actual or constructive receipt of
money or other property for purposes of
section 1031. In particular, the regula-
tions provide that the taxpayer is not in
actual or constructive receipt of money or
other property held in a qualified escrow
account or qualified trust. Section
1.1031(k)–1(g)(3) defines qualified es-
crow accountand qualified trust.
The regulations under section 1031(a)-
(3) do not address the taxation of income
earned on a qualified escrow or qualified
trust. The preamble to these regulations
(see 1991–1 C.B. 154) states that this issue
will be addressed in future regulations.
Explanation of Provisions
1. Election to Treat a QSF as a Grantor
Trust Under §1.468B–1(k) of the
Proposed Regulations.
The proposed regulations provide that
if there is only one transferor to a QSF,
the transferor is allowed to make an elec-
tion that results in the QSF being treated
as a grantor trust all of which is treated as
owned by the transferor. In general, the
election is made on a statement attached
to the first Form 1041 filed on behalf of
the QSF. The transferor may make a
grantor trust election whether or not the
requirements are otherwise satisfied for
classification of the QSF as a grantor
trust.
In general, grantor trust treatment for a
QSF is available under the proposed regu-
lations only if the QSF is established after
the date final regulations are published in
the Federal Register.However, the pro-
posed regulations provide a narrow ex-
ception applicable to any QSF established
by the U.S. government on or before the
date final regulations are published if the
QSF would otherwise have been classi-
fied as a grantor trust in the absence of the
QSF regulations (see Rev. Rul. 77–230
(1977–2 C.B. 214)). Under the exception,
such a QSF will be automatically treated
as a grantor trust for all taxable years and
a grantor trust election is thus unneces-
sary. If a QSF is established after the date
final regulations are published, a grantor
trust election will be required in order for
the QSF to be treated as a grantor trust.
This rule applies whether or not the U.S.
government is the grantor.
2. Section 1031 Qualified Escrow
Accounts and Qualified Trusts Under
§1.468B–6 of the Proposed
Regulations.
In general, the proposed regulations
treat the assets of a qualified escrow ac-
count or qualified trust established in con-
nection with a deferred exchange under
section 1031(a)(3) as owned by the tax-
payer, i.e., the party that transfers the re-
linquished property. Thus, the taxpayer is
taxable on the income earned on these as-
sets. However, if the transferee or the
qualified intermediary has all the benefi-
cial use and enjoyment of the assets of a
qualified escrow account or qualified
trust, then the assets of the escrow ac-
count or trust are treated as owned by the
transferee or qualified intermediary, and
the income earned on the assets is taxable
to the transferee or qualified intermediary.
Further, the proposed regulations re-
quire the escrow holder of a qualified es-
crow account or trustee of a qualified trust
to report the income of the escrow ac-
count or trust on Forms 1099 to the extent
the information reporting provisions of
the Code otherwise require the filing of
Forms 1099. In general, the taxpayer is
treated as the payee of the income of the
escrow account or trust unless the parties
to the transaction provide a statement to
the escrow holder or trustee indicating
that the transferee or qualified intermedi-
ary is the payee. Such a statement must
be provided if the transferee or qualified
intermediary has all the beneficial use and
enjoyment of the assets of the escrow ac-
count or trust.

March 8, 1999301999–10 I.R.B.
The proposed regulations provide that
the escrow holder or trustee is not liable
for penalties under sections 6721 and
6722 if the escrow holder or trustee relies
on an incorrect statement provided to the
escrow holder or trustee (see above) or re-
lies on the parties’ failure to provide such
a statement.
The proposed regulations also provide
that if the transferee or the qualified
intermediary has all the beneficial use
and enjoyment of the assets of a qualified
escrow account or trust, the deferred
exchange may involve a below-market
loan of these assets from the taxpayer to
the transferee or qualified intermediary
subject to the provisions of section 7872.
3. Pre-closing Escrows Under
§1.468B–7 of the Proposed
Regulations.
A pre-closing escrow is an escrow ac-
count, trust, or fund that satisfies five re-
quirements. First, it must be established
in connection with a sale or exchange of
real or personal property. Second, it must
be funded with a down payment, earnest
money, or similar payment prior to the
sale or exchange of the property (as deter-
mined for federal income tax purposes).
Third, its assets must be used to secure
the purchaser’s obligation to pay the pur-
chase price (in the case of an exchange of
property, the term purchaser means the
transferee of the property and the term
purchase price means the required consid-
eration for the property). Fourth, its as-
sets (including income earned thereon)
must be paid to the purchaser or otherwise
used for the purchaser’s benefit, for ex-
ample, as a credit against the purchase
price. Fifth, it must not be a qualified es-
crow or qualified trust established in con-
nection with a deferred section 1031 ex-
change.
The proposed regulations treat the as-
sets of a pre-closing escrow as owned by
the purchaser for federal income tax pur-
poses. Thus, the income earned on the as-
sets is taxable to the purchaser. The es-
crow holder, trustee, or other person
responsible for administering a pre-clos-
ing escrow must report the income of the
escrow on Forms 1099 to the extent the
information reporting provisions of the
Code otherwise require the filing of
Forms 1099.
4. Contingent At-closing Escrows Under
§1.468B–8 of the Proposed
Regulations.
The proposed regulations provide rules
for taxing the income of a contingent at-
closing escrow, which is an escrow ac-
count, trust, or fund satisfying three re-
quirements. First, a contingent at-closing
escrow must be established in connection
with the sale or exchange of real or per-
sonal property used in a trade or business
or held for investment (other than an ex-
change to which section 354, 355, or 356
applies). Second, the assets of the escrow
must be distributable to the purchaser or
seller based on bona fide contingencies
that will be resolved after the sale or ex-
change (as determined for federal income
tax purposes). (If a contingent at-closing
escrow is established in connection with
an exchange of property, rather than a
sale, the term purchaserrefers to the
transferee of the property and the term
sellerrefers to the transferor of the prop-
erty.) Thus, for example, the agreement
between the parties may provide that all
or a portion of the assets of the escrow are
distributable to the purchaser if specified
liabilities associated with the property
arise within a specified period of time
after closing or if certain earnings targets
are not met by a specified date. Third, the
escrow must not be a qualified escrow ac-
count or qualified trust established in con-
nection with a deferred section 1031 ex-
change.
Prior to the date (called the determina-
tion date) on which the specified events
occur or fail to occur, thereby fixing the
amounts payable from the escrow to the
purchaser and seller, the proposed regula-
tions provide that the assets of the escrow
are treated as owned by the purchaser, and
the income earned on the assets is thus
taxable to the purchaser.
Beginning on the determination date,
the proposed regulations provide that the
purchaser and the seller are taxable on the
income of the escrow corresponding to
their respective ownership interests in
each asset of the escrow. Further, the pro-
posed regulations require the purchaser
and seller to provide the escrow holder,
trustee, or other administrator of the es-
crow with a statement within 30 days of
the determination date indicating what
these ownership interests are. Also, the
escrow holder, trustee, or other adminis-
trator is required to prepare Forms 1099
to report the income of a contingent at-
closing escrow to the extent the informa-
tion reporting provisions of the Code oth-
erwise require the filing of Forms 1099.
In preparing the Forms 1099, the es-
crow holder, trustee, or other administra-
tor may rely on the statement (discussed
above) provided to the administrator
within 30 days of the determination date.
Also, if the statement is not provided, the
escrow holder, trustee, or other adminis-
trator may rely on the parties’ failure to
provide a statement and continue to treat
the purchaser as the owner. The adminis-
trator’s ability to rely on a statement, or
its absence, protects the administrator
from liability for penalties under sections
6721 and 6722.
5. Disputed Ownership Funds Under
§1.468B–9 of the Proposed
Regulations.
A disputed ownership fund (DOF) is an
escrow account, trust, or fund other than a
QSF that satisfies three requirements.
First, a DOF must be established to hold
money or property subject to conflicting
claims of ownership. Second, a DOF
must be subject to the continuing jurisdic-
tion of a court of law or equity. Third,
money or property cannot be paid or dis-
tributed from a DOF to a claimant without
court approval. An interpleader fund may
qualify as a DOF.
In general, a DOF is taxed under the
proposed regulations as if it were a quali-
fied settlement fund if all the DOF’s as-
sets are passive investment assets, for ex-
ample, cash or cash equivalents, stock,
and debt obligations. However, if the
DOF holds assets other than passive in-
vestment assets (for example, real estate
or business property the ownership of
which is in dispute), the DOF is taxed as
if it were a C corporation. The claimants
to the fund may, however, submit a letter
ruling request proposing an alternative
method of taxation if they believe that
there is a more appropriate method of tax-
ing a DOF than under the rules stated
above.
In addition to providing rules for the
taxation of the income of a DOF, the pro-
posed regulations also provide rules con-
cerning the transfer of property to and
from a DOF. In particular, a transfer of
property to a DOF is not a sale or other

1999–10 I.R.B.31March 8, 1999
disposition by the transferor under section
1001(a) if the transferor claims ownership
of the transferred property. Also, a DOF
is not allowed a deduction for a distribu-
tion of disputed property to a claimant
and the distribution is not a taxable event
to the DOF.
6. Request for Comments
Comments are requested on the appro-
priate tax treatment of a fund, account, or
trust that meets the requirements for more
than one type of entity subject to the pro-
posed regulations. Comments are also re-
quested on the appropriate tax treatment
of a fund, account, or trust that changes
over time so that a different portion of the
proposed regulations would apply to it.
For example, an escrow initially may
meet the requirements for a contingent at-
closing escrow, but may subsequently sat-
isfy the requirements for a DOF. This
could occur if a dispute were to arise be-
tween the purchaser and the seller con-
cerning their respective interests in the es-
crow after the determination date and the
administrator of the DOF files an inter-
pleader action to resolve the dispute.
Comments are also requested concern-
ing the appropriate tax treatment of a con-
tingent-at-closing escrow if multiple con-
tingencies are specified in the agreement
between the purchaser and the seller. The
proposed regulations provide that (1) the
income of a contingent at-closing escrow
is taxable entirely to the purchaser prior to
the determination date, and (2) the deter-
mination date is the date on which (or by
which) the last of the contingent events
has either occurred or failed to occur.
Therefore, if multiple contingencies are
provided for in the agreement between the
parties and some, but not all, of the con-
tingencies have been resolved, the pro-
posed regulations provide that the income
of the escrow is taxable entirely to the
purchaser (because the determination date
has not yet occurred) regardless of the ef-
fect of the contingencies that have been
resolved. The purchaser is thus taxed on
all the income earned on the escrow even
though it may be known (based on the
resolution of one or more contingencies)
that a fixed portion of the escrowed assets
will be distributed to the seller. The pro-
posed rule is simple and easy to adminis-
ter because it treats the escrow in a uni-
tary manner and avoids the need for
multiple determination dates. Arguably,
however, a more complex approach
should be adopted involving a separate
determination date for each contingency.
Under the more complex approach, as
each contingency is resolved, a new de-
termination would be made concerning
the taxation of the fund’s income. The in-
come earned on the fund’s assets would
be taxable to the purchaser and seller in
accordance with their ownership interests
as determined on each determination date
as each separate contingency is resolved.
Comments are also requested on the re-
quirement that the assets of a contingent
at-closing escrow must be distributable to
the purchaser or seller based on bona fide
contingencies that are resolved after the
sale or exchange. Issues may arise as to
whether a particular contingency is bona
fide in at least two ways: whether the out-
come is sufficiently in doubt and whether
the effect of the outcome on the fund is
significant. A contingency may not be
bona fide if the parties can reasonably be
expected to know the outcome, e.g., a con-
tingency based on whether, in ten years,
the consumer price index will be at least
equal to the consumer price index today.
In addition, a contingency may not be
bona fide if the effect on the fund is mini-
mal even though the outcome is uncertain.
Finally, comments are requested re-
garding whether there are other types of
funds for which rules under section 468B
are required.
7. Proposed Effective Date.
In general, the regulations are pro-
posed to be applicable for QSFs, quali-
fied escrow accounts and qualified trusts,
pre-closing escrows, contingent at-clos-
ing escrows, and DOFs established after
the date final regulations are published in
the Federal Register.However, the pro-
posed regulations contain transition rules.
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. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business. An initial
regulatory flexibility analysis has been
prepared for the collections of informa-
tion contained in this notice of proposed
rulemaking under 5 U.S.C. 603. The
analysis is set forth below.
Initial Regulatory Flexibility Act Analysis
The objective of the proposed regula-
tions is to ensure that the income of cer-
tain escrow accounts, trusts, and funds is
subject to current taxation by identifying
the proper party or parties subject to tax
and by requiring appropriate information
reporting for the income of the escrow ac-
count, trust, or fund. Section 468B(g)
provides the legal basis for the require-
ments of the proposed regulations. The
IRS and Treasury Department are not
aware of any federal rules that may dupli-
cate, overlap, or conflict with the pro-
posed regulations.
An explanation is provided below of
the burdens on small entities resulting
from the requirements of the proposed
regulations. Also, a description is pro-
vided of alternative rules that were con-
sidered by the IRS and the Treasury De-
partment but rejected as too burdensome.
1. Grantor Trust Election Under
§1.468B–1(k).
Under §1.468B–1(k), the transferor to a
QSF may elect to have the QSF treated as
a grantor trust all of which is treated as
owned by the transferor (grantor trust
election). If the transferor makes the
grantor trust election, the administrator of
the QSF must file Form 1041 rather than
the QSF income tax return, Form 1120-SF.
Approximately 900 QSF returns are
filed each year. Only a small number of
these returns are filed for newly created
QSFs. Because a grantor trust election
may be made only for the year in which a
QSF is established, and may only be
made for a QSF that has one transferor,
the IRS and Treasury Department believe
that a very small number of grantor trust
elections will be made each year.
Because of the availability of the
grantor trust election, the proposed regu-
lations provide a choice of filing Form
1041 or Form 1120-SF in certain situa-

March 8, 1999321999–10 I.R.B.
tions. Small entities may choose the fil-
ing requirement that is less burdensome.
The alternative to the proposed regula-
tions is to retain the current rules for
QSFs and not provide qualifying taxpay-
ers with the opportunity to make a grantor
trust election.
2. Qualified Escrow Accounts and
Qualified Trusts Established in
Connection with Deferred Exchanges;
Pre-closing Escrows; and Contingent
At-closing Escrows.
Sections 1.468B–6(e)(1), 1.468B–7(d),
and 1.468B–8(g)(1) require specified es-
crow holders, trustees, and administrators
to file Forms 1099 with the IRS and fur-
nish payee statements in accordance with
the information reporting requirements of
subpart B, Part III, subchapter A, chapter
61, Subtitle F of the Internal Revenue
Code.
Also, §1.468B–6(f) requires the parties
to a qualified escrow account or qualified
trust to provide a statement to the escrow
holder or trustee if the qualified interme-
diary or transferee has all the beneficial
use and enjoyment of the assets of the es-
crow account or trust. This statement fa-
cilitates the filing of Forms 1099 by the
escrow holder or trustee.
Similarly, §1.468B–8(f) requires the
parties to a contingent at-closing escrow
to provide statements to the escrow holder
or other administrator. These statements
facilitate the filing of Forms 1099 by the
escrow holder or other administrator.
The IRS and Treasury Department esti-
mate that annually there are approxi-
mately 16,000 deferred exchange transac-
tions involving the creation of a qualified
escrow account or qualified trust; approx-
imately 200,000 transactions involving
the creation of a pre-closing escrow; and
approximately 10,000 transactions in-
volving the creation of a contingent at-
closing escrow.
As an alternative to the proposed regu-
lations, the IRS and the Treasury Depart-
ment considered, but rejected as too bur-
densome, a rule that would have required
the filing of grantor trust returns (Form
1041) for qualified escrow accounts and
qualified trusts, pre-closing escrows, and
contingent at-closing escrows. Instead of
requiring grantor trust returns, the pro-
posed regulations require the filing of
Forms 1099. This is less burdensome on
small entities because, unlike Form 1041,
Form 1099 is simple, does not require a
signature, and requires only the reporting
of gross income.
Further, the IRS and the Treasury De-
partment considered an alternative rule for
contingent at-closing escrows under which
the income of the escrow for the period be-
fore the determination date would have
been taxable to the purchaser or the seller
depending on the required tax treatment by
the purchaser and seller of the principal
amount deposited into the escrow. This al-
ternative rule would not have provided cer-
tainty, would have required a difficult legal
analysis (namely, the determination of the
required tax treatment of the principal
amount deposited into the escrow), and
would have required the purchaser and
seller to provide a signed statement to the
administrator of the escrow identifying the
party to whom the administrator should re-
port the income for the period before the
determination date. Under the proposed
regulations, the income of the escrow is al-
ways taxable to the purchaser for the pe-
riod before the determination date, thereby
eliminating the need for a signed statement
to be provided to the administrator and the
need to determine the required tax treat-
ment of the principal amount deposited
into the escrow. This rule is simpler than
the alternative.
3. Disputed Ownership Funds (DOFs).
Section 1.468B–9(c)(1) of the pro-
posed regulations generally provides that
a DOF is taxable as a QSF if all its assets
are passive investment assets or taxable as
a C corporation in all other cases. How-
ever, the regulations also provide that if
there is a more appropriate method of tax-
ing a DOF, the claimants to the fund may
request a private letter ruling to permit the
use of that method.
Section 1.468B–9(f)(3) of the proposed
regulations requires that a transferor pro-
vide a statement to the administrator of a
DOF that itemizes the cash or property
transferred to the DOF during the calen-
dar year. The statement must also indi-
cate the DOF’s basis and holding period
in the property.
The IRS and the Treasury Department
estimate that annually there are approxi-
mately 5,000 transactions involving the
creation of a disputed ownership fund.
As an alternative to the proposed regu-
lations, the IRS and the Treasury Depart-
ment considered, but rejected as too bur-
densome, a rule that would have required
all DOFs to file corporate income tax re-
turns (Form 1120) regardless of the nature
of the assets held by the DOF. This alter-
native was rejected because it was con-
cluded that a QSF return (Form 1120-SF)
is more appropriate than a corporate in-
come tax return if all the assets of the
DOF are passive investment assets. The
proposed regulations thus impose less of
an administrative burden on small entities
than would have resulted from the alter-
native rule as Form 1120-SF is generally
easier to prepare than Form 1120. Only
DOFs that hold assets other than passive
investment assets will be required to file
Form 1120 under the proposed regula-
tions. In addition, the proposed regula-
tions provide taxpayers with the addi-
tional flexibility of being able to request
an alternative method of taxation if that
method is more appropriate than QSF or
C corporation treatment as provided
under the general rule.
There are no known alternative rules
that are less burdensome to small entities
but that accomplish the purpose of the
statute. The IRS and Treasury Depart-
ment request comments from small enti-
ties concerning possible alternatives to
these rules.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) or electronic comments that are
submitted timely (in the manner described
in the ADDRESSES portion of the pream-
ble) to the IRS. The IRS and Treasury
Department request comments on the
clarity of the proposed rules and how they
can be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing is scheduled for May
12, 1999, at 10 a.m. in Room 2615, Inter-
nal Revenue Building, 1111 Constitution
Avenue NW, Washington, DC. Due to
building security procedures, visitors
must enter at the 10th Street entrance, lo-
cated between Constitution and Pennsyl-
vania Avenues, NW. In addition, all visi-
tors must present photo identification to
enter the building. Because of access re-

1999–10 I.R.B.33March 8, 1999
strictions, visitors will not be admitted be-
yond the immediate entrance area more
than 15 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments by May 3,
1999, and submit an outline of the topics
to be discussed and the time devoted to
each topic (signed original and eight (8)
copies) by April 21, 1999.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Michael L. Gompertz of the
Office of Assistant Chief Counsel (In-
come Tax and Accounting). However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.468B–6 also issued under 26
U.S.C. 468B.
Section 1.468B–7 also issued under 26
U.S.C. 468B.
Section 1.468B–8 also issued under 26
U.S.C. 468B.
Section 1.468B–9 also issued under 26
U.S.C. 468B. * * *
Par. 2. Section 1.468B-0 is amended as
follows:
1. The introductory text is revised.
2. The entry for §1.468B–1, paragraph
(k), is redesignated as paragraph (l).
3. A new entry for §1.468B–1, para-
graph (k), is added.
4. The section heading in the entry for
§1.468B–5 is revised.
5. New entries are added for
§§1.468B–5, paragraph (c), 1.468B–6,
1.468B–7, 1.468B–8, and 1.468B–9.
6. The revised and added provisions
read as follows:
§1.468B–0 Table of contents.
This section lists the table of contents
for §§1.468B–1 through 1.468B–9.
§1.468B–1 Qualified settlement funds.
* * * * *
(k) Election to treat a qualified settle-
ment fund as a subpart E trust.
(1) In general.
(2) Manner of making grantor trust elec-
tion.
(i) In general.
(ii) Requirements for election statement.
(3) Effect of making the election.
* * * * *
§1.468B–5 Effective dates and transition
rules applicable to qualified settlement
funds.
* * * * *
(c) Grantor trust elections under
§1.468B–1(k).
(1) In general.
(2) Qualified settlement funds estab-
lished by the U.S. government on or
before the date of publication of final
regulations in the Federal Register.
§1.468B–6 Qualified escrow accounts
and qualified trusts used in deferred
exchanges of like-kind property under
section 1031(a)(3).
(a) Scope.
(b) Definitions.
(c) Income of qualified escrow account
or qualified trust.
(1) In general.
(2) Transferee or qualified intermediary
has all the beneficial use and enjoy-
ment of assets of a qualified escrow
account or qualified trust.
(d) Application of section 7872.
(e) Reporting obligations of the escrow
holder or trustee.
(1) In general.
(2) Person treated as payee.
(3) Relief from penalties for filing incor-
rect information return or payee
statement.
(f) Statement provided to escrow holder
or trustee.
(g) Effective date.
(1) In general.
(2) Transition rule.
(h) Examples.
§1.468B–7 Pre-closing escrows.
(a) Scope.
(b) Definition.
(c) Taxation of pre-closing escrows.
(d) Reporting obligations of the adminis-
trator.
(e) Effective date.
(1) In general.
(2) Transition rule.
(f) Example.
§1.468B–8 Contingent at-closing
escrows.
(a) Scope.
(b) Definitions.
(c) Tax liability of purchaser and seller
for the period prior to the determina-
tion date.
(d) Transfer of interest in the assets of
the escrow on the determination date.
(e) Tax liability of purchaser and seller
for the period beginning on the deter-
mination date.
(f) Statement required to be provided to
administrator within 30 days after the
determination date.
(g) Reporting obligations of the adminis-
trator.
(1) In general.
(2) Person treated as payee.
(3) Relief from penalties for filing incor-
rect information return or payee
statement.
(h) Effective date.
(1) In general.
(2) Transition rule.
(i) [Reserved]
(j) Example.
§1.468B–9 Disputed ownership funds.
(a) In general.
(b) Definitions.
(c) Taxation of a disputed ownership
fund.
(1) In general.
(2) Exception.

March 8, 1999341999–10 I.R.B.
(3) Special rules.
(d) Basis of property held by a disputed
ownership fund.
(e) Request for prompt assessment.
(f) Rules applicable to the transferor.
(1) Transfer of property.
(i) In general.
(ii) Exceptions.
(2) Economic performance.
(i) In general.
(ii) Obligations of the transferor.
(3) Statement to the disputed ownership
fund and the Internal Revenue Ser-
vice.
(i) In general.
(ii) Information required on statement.
(A) In general.
(B) Combined statements.
(4) Distributions to transferors.
(i) In general.
(ii) Exception.
(iii) Deemed distributions.
(g) Distribution to a claimant other than
a transferor.
(h) Effective date.
(1) In general.
(2) Transition rule.
(i) [Reserved]
(j) Examples.
Par. 3. Section 1.468B–1 is amended
by redesignating paragraph (k) as para-
graph (l) and adding a new paragraph (k)
to read as follows:
§1.468B–1 Qualified settlement funds.
* * * * *
(k) Election to treat a qualified settle-
ment fund as a subpart E trust—(1) In gen-
eral.If a qualified settlement fund has
only one transferor (see paragraph (d)(1) of
this section for the definition of transferor),
the transferor may make an irrevocable
election (grantor trust election) to treat the
qualified settlement fund as a trust all of
which is treated as owned by the transferor
under section 671 and the regulations
thereunder. A grantor trust election may be
made whether or not the qualified settle-
ment fund would be classified, in the ab-
sence of paragraph (b) of this section, as a
trust all of which is treated as owned by the
transferor under section 671 and the regu-
lations thereunder.
(2) Manner of making grantor trust
election—(i) In general. To make a
grantor trust election, a transferor must at-
tach an election statement satisfying the
requirements of paragraph (k)(2)(ii) of this
section to a timely filed (including exten-
sions) Form 1041 that the administrator
files on behalf of the qualified settlement
fund for the taxable year in which the
qualified settlement fund is established.
However, if a Form 1041 would not other-
wise be required to be filed (for example,
because the provisions of §1.671–4(b) are
applicable), then the transferor makes a
grantor trust election by attaching an elec-
tion statement satisfying the requirements
of paragraph (k)(2)(ii) of this section to a
timely filed (including extensions) income
tax return of the transferor for the taxable
year in which the qualified settlement
fund is established.
(ii) Requirements for election state-
ment. The election statement must in-
clude a statement by the transferor that
the transferor will treat the qualified set-
tlement fund as a grantor trust. The elec-
tion statement must also include the trans-
feror’s name, signature, address, taxpayer
identification number, and the legend,
“§1.468B–1(k) Election”. The election
statement and the statement described in
§1.671–4(a) may be combined into a sin-
gle statement.
(3) Effect of making the election.If a
grantor trust election is made—
(i) Paragraph (b) of this section, and
§§1.468B–2, 1.468B–3, and 1.468B–5 do
not apply to the qualified settlement fund.
However, this section (except for para-
graph (b) of this section) and §1.468B–4
apply to the qualified settlement fund;
(ii) The qualified settlement fund is
treated for federal income tax purposes as
a trust all of which is treated as owned by
the transferor under section 671 and the
regulations thereunder;
(iii) The transferor must take into ac-
count in computing the transferor’s in-
come tax liability all items of income, de-
duction, and credit (including capital
gains and losses) of the qualified settle-
ment fund in accordance with §1.671–
3(a)(1); and
(iv) The reporting obligations imposed
by §1.671–4 on the trustee of a trust apply
to the administrator.
* * * * *
Par. 4. Section 1.468B–5 is amended
by revising the section heading and
adding paragraph (c) to read as follows:
§1.468B-5 Effective dates and transition
rules applicable to qualified settlement
funds.
* * * * *
(c) Grantor trust elections under
§1.468B–1(k)—(1) In general.A trans-
feror may make a grantor trust election
under §1.468B–1(k) only if the qualified
settlement fund is established after the
date of publication of final regulations in
the Federal Register.
(2) Qualified settlement funds estab-
lished by the U.S. government on or be-
fore the date of publication of final regu-
lations in theFederal Register. If the
U.S. government, or any agency or instru-
mentality thereof, establishes a qualified
settlement fund on or before the date of
publication of final regulations in the
Federal Register,and the fund would
have been classified as a trust all of which
is treated as owned by the U.S. govern-
ment under section 671 and the regula-
tions thereunder without regard to the reg-
ulations under section 468B, then the U.S.
government is deemed to have made a
grantor trust election under §1.468B–
1(k), and the election is effective for all
taxable years of the fund.
Par. 5. Sections 1.468B–6 through
1.468B–9 are added to read as follows:
§1.468B–6 Qualified escrow accounts
and qualified trusts used in deferred
exchanges of like-kind property under
section 1031(a)(3).
(a) Scope.This section provides rules
under section 468B(g) relating to the cur-
rent taxation of income of a qualified es-
crow account or qualified trust estab-
lished in connection with a deferred
exchange under section 1031(a)(3).
(b) Definitions.As used in this section,
deferred exchange, relinquished property,
replacement property, qualified escrow
account, qualified trust, qualified inter-
mediary, exchange period,and escrow
holderhave the same meanings as in
§1.1031(k)–. Also, as used in this section,
taxpayermeans the transferor of the relin-
quished property, and transfereemeans
the person who is treated as owning the
relinquished property for federal income
tax purposes after its transfer by the tax-
payer. Further, ownermeans the person
treated as owning the assets of the quali-

1999–10 I.R.B.35March 8, 1999
fied escrow account or qualified trust
under paragraph (c) of this section.
(c) Income of qualified escrow account
or qualified trust—(1) In general.Except
as otherwise provided in paragraph (c)(2)
of this section, and except for purposes of
determining whether a transaction quali-
fies as a deferred exchange, the taxpayer
is the owner. Thus, the taxpayer must
take into account in computing the tax-
payer’s income tax liability all items of
income, deduction, and credit (including
capital gains and losses) of the qualified
escrow account or qualified trust.
(2) Transferee or qualified intermedi-
ary has all the beneficial use and enjoy-
ment of assets of a qualified escrow ac-
count or qualified trust.If the transferee
or the qualified intermediary has all the
beneficial use and enjoyment of assets of
a qualified escrow account or qualified
trust, the transferee or qualified interme-
diary is the owner. Thus, the transferee or
qualified intermediary must take into ac-
count in computing its income tax liabil-
ity all items of income, deduction, and
credit (including capital gains and losses)
of the account or trust. The following
factors, and other relevant facts and cir-
cumstances in a particular case, will be
considered in determining whether the
transferee or the qualified intermediary,
rather than the taxpayer, has the beneficial
use and enjoyment of assets of an account
or trust and thus is the owner—
(i) Which person enjoys the use of the
earnings of the account or trust;
(ii) Which person receives the benefit
from appreciation, if any, in the value of
the assets of the account or trust; and
(iii) Which person is subject to a risk of
loss from a decline, if any, in the value of
the assets of the account or trust.
(d) Application of section 7872.If the
transferee or the qualified intermediary is
the owner under paragraph (c)(2) of this
section, section 7872 may apply if the de-
ferred exchange involves a below-market
loan from the taxpayer to the owner. See
section 7872(c)(1) for the loans to which
section 7872 applies.
(e) Reporting obligations of the escrow
holder or trustee—(1) In general.The
escrow holder of a qualified escrow ac-
count and the trustee of a qualified trust
must, for each calendar year (or portion
thereof) that the account or trust is in exis-
tence, report the income of the account or
trust on Forms 1099 in accordance with
the information reporting requirements of
subpart B, Part III, subchapter A, chapter
61, Subtitle F of the Internal Revenue
Code. The Forms 1099 must show the es-
crow holder or trustee as the payor and
must show the proper payee. See para-
graph (e)(2) of this section for the deter-
mination of the proper payee.
(2) Person treated as payee.In satisfy-
ing the reporting obligations of paragraph
(e)(1) of this section, the following rules
apply to the escrow holder of a qualified
escrow account and the trustee of a quali-
fied trust—
(i) If no written statement described in
paragraph (f) of this section is provided to
the escrow holder or trustee, the escrow
holder or trustee must treat the taxpayer
as the owner and the payee of the income
of the account or trust; and
(ii) If a written statement described in
paragraph (f) of this section is provided to
the escrow holder or trustee, the escrow
holder or trustee must treat the person
specified on the statement (see paragraph
(f)(3) of this section) as the owner and the
payee of the income of the account or
trust.
(3) Relief from penalties for filing in-
correct information return or payee state-
ment.For purposes of sections 6721 and
6722, the escrow holder of a qualified es-
crow account or trustee of a qualified trust
will not be treated as failing to file or fur-
nish a correct information return or payee
statement solely because, in preparing a
Form 1099, the escrow holder or trustee
relies on a statement described in para-
graph (f) of this section and therefore
treats the person specified on the state-
ment (see paragraph (f)(3) of this section)
as the owner and the payee of the income
of the account or trust. If a statement de-
scribed in paragraph (f) of this section is
not provided to the escrow holder or
trustee, the escrow holder or trustee will
not be treated as failing to file or furnish a
correct information return or payee state-
ment solely because, in preparing a Form
1099, the escrow holder or trustee relies
on the absence of the statement and there-
fore treats the taxpayer as the owner and
the payee of the income of the account or
trust.
(f) Statement provided to escrow holder
or trustee.If under paragraph (c)(2) of
this section, the qualified intermediary or
transferee is the owner, the taxpayer and
the owner must furnish to the escrow
holder or trustee a statement that—
(1) Is signed by the taxpayer and the
owner;
(2) Is furnished to the escrow holder or
trustee within 30 days after the taxpayer
transfers the relinquished property; and
(3) Specifies the person treated as the
owner and thus as the payee of the income
of the account or trust.
(g) Effective date—(1) In general.This
section applies to qualified escrow ac-
counts and qualified trusts established
after the date of publication of final regu-
lations in the Federal Register.
(2) Transition rule.With respect to a
qualified escrow account or qualified trust
established after August 16, 1986, but on
or before the date of publication of final
regulations in the Federal Register,the
Internal Revenue Service will not chal-
lenge a reasonable, consistently applied
method of taxation for income earned by
the account or trust. The Internal Rev-
enue Service will also not challenge a rea-
sonable, consistently applied method for
reporting such income.
(h) Examples.The provisions of this
section may be illustrated by the follow-
ing examples in which T is the taxpayer,
B is the transferee, and QI is the qualified
intermediary:
Example 1. (i) T uses the calendar year as the
taxable year and the cash receipts and disbursements
method of accounting. T enters into a deferred ex-
change agreement with B. Under the agreement, T
will transfer property (the relinquished property) to
B, and B must transfer to T within the exchange pe-
riod consideration (cash or replacement property or
both) having the same market value as that of the re-
linquished property. B’s obligations under the
agreement are secured by the assets of a qualified
escrow account. The deferred exchange does not in-
volve the use of a qualified intermediary.
(ii) Under the agreement, B must deposit cash
into the qualified escrow account equal to the agreed
upon fair market value of the relinquished property
on the date the property is transferred to B. The
agreement provides that the cash deposited into the
escrow account must be invested in a money market
fund.
(iii) The agreement provides that B is entitled to
receive the interest earned on the escrow account in
consideration for B’s performance of services in
connection with the exchange.
(iv) On September 1, 1999, T transfers the relin-
quished property to B. The property is unencum-
bered and has a fair market value of $100,000 on
September 1, 1999. B deposits $100,000 into a
qualified escrow account. The $100,000 is invested
in accordance with the exchange agreement in a

March 8, 1999361999–10 I.R.B.
money market fund. During 1999, $2,000 of interest
is earned on the escrow account. During January
2000, an additional $400 of interest is earned on the
escrow account. On February 1, 2000, B uses
$100,000 of the funds in the escrow account to pur-
chase replacement property identified by T, and on
this same date B transfers the replacement property
to T. The interest earned on the escrow account,
$2,400, is paid to B from the escrow account in con-
sideration for B’s performance of services.
(v) Paragraph (c)(1) of this section applies and T
must take into account in computing T’s income tax
liability for 1999 and 2000 the $2400 of interest
earned on the escrow account in those years even
though the interest is paid to B as compensation for
B’s services. Paragraph (c)(1) of this section applies
for the following reasons. T, rather than B, enjoys
the use of the earnings of the escrow account since
the earnings are used to discharge T’s obligation to
pay B for B’s services. B is not considered to have
all the beneficial use and enjoyment of the assets of
the escrow account merely because the compensa-
tion that B is entitled to receive is based on the earn-
ings of the escrow account.
(vi) The escrow holder must file Forms 1099 for
1999 and 2000 and furnish T with payee statements
with respect to the interest earned on the escrow in
1999 and 2000. See paragraph (e)(1) of this section.
Example 2. (i) The facts are the same as in Ex-
ample 1except that the agreement between B and T
requires B to pay $100,000 to QI; under the agree-
ment between T and QI, QI is obligated to transfer to
T within the exchange period consideration (cash or
replacement property or both) equal to $100,000
plus interest thereon at 4 percent compounded semi-
annually; QI’s obligation to transfer this considera-
tion is secured by the $100,000 received from B,
which QI must deposit into a qualified escrow ac-
count; the assets of the escrow account must be in-
vested in a money market fund; and, as compensa-
tion for QI’s performance of services to facilitate the
deferred exchange, QI is entitled to receive the ex-
cess of the interest earned on the escrow account
over the amount of interest (computed at 4 percent
compounded semiannually) payable to T in cash or
property.
(ii) QI deposits the $100,000 received from B
into a qualified escrow account, and the $100,000 is
invested in a money market fund earning interest at
4.8 percent compounded semiannually. During
1999, $1,600 of interest is earned on the escrow ac-
count. During January 2000, an additional $400 of
interest is earned on the escrow account. On Febru-
ary 1, 2000, QI uses $101,667 of the funds in the es-
crow account to purchase replacement property,
which is transferred to T. This transfer satisfies QI’s
obligations under the agreement because $1,667 is
the amount of interest that is earned on $100,000 at
4 percent compounded semiannually for 5 months.
Of the $2,000 in interest earned on the escrow ac-
count in 1999 and 2000, $1,667 is used to purchase
replacement property, and the remaining $333 is
paid in cash to QI as compensation for QI’s services.
(iii) Paragraph (c)(1) of this section applies and T
must take into account in computing T’s income tax
liability for 1999 and 2000 the $2000 of interest
earned on the escrow account in those years even
though $333 of the interest is paid to QI as compen-
sation for QI’s services.
(iv) The escrow holder must file Forms 1099 and
furnish T with payee statements with respect to the
$2000 of interest earned on the escrow in 1999 and
2000. See paragraph (e)(1) of this section.
§1.468B–7 Pre-closing escrows.
(a) Scope.This section provides rules
under section 468B(g) for the taxation of
income earned on pre-closing escrows.
(b) Definition.Apre-closing escrowis
an escrow account, trust, or fund—
(1) Established in connection with the
sale or exchange of real or personal
property;
(2) Funded with a down payment,
earnest money, or similar payment that is
deposited into the escrow prior to the sale
or exchange of the property;
(3) Used to secure the obligation of the
purchaser to pay the purchase price for the
property (in the case of an exchange, pur-
chasermeans the transferee of the prop-
erty, and purchase pricemeans the re-
quired consideration for the property);
(4) The assets of which, including the
income earned thereon, will be paid to the
purchaser or otherwise distributed for the
purchaser’s benefit when the property is
sold or exchanged (for example, by being
distributed to the seller as a credit against
the purchase price); and
(5) Which is not a qualified escrow ac-
count or qualified trust established in con-
nection with a deferred exchange under
section 1031(a)(3).
(c) Taxation of pre-closing escrows.
The purchaser is treated for federal income
tax purposes as owning the assets of a pre-
closing escrow. Thus, the purchaser must
take into account in computing the pur-
chaser’s income tax liability all items of in-
come, deduction, and credit (including
capital gains and losses) of the escrow.
(d) Reporting obligations of the admin-
istrator.For each calendar year (or portion
thereof) that a pre-closing escrow is in ex-
istence, the escrow agent, escrow holder,
trustee, or other person responsible for ad-
ministering the escrow (the administrator)
must report the income of the escrow on
Forms 1099 in accordance with the infor-
mation reporting requirements of subpart
B, Part III, subchapter A, chapter 61, Subti-
tle F of the Internal Revenue Code. The
Form 1099 must show the administrator as
the payor and the purchaser as the payee.
(e) Effective date—(1) In general.The
provisions of this section apply to pre-
closing escrows established after the date
of publication of final regulations in the
Federal Register.
(2) Transition rule. With respect to a
pre-closing escrow established after Au-
gust 16, 1986, but on or before the date of
publication of final regulations in the
Federal Register,the Internal Revenue
Service will not challenge a reasonable,
consistently applied method of taxation
for income earned by the escrow. The In-
ternal Revenue Service will also not chal-
lenge a reasonable, consistently applied
method for reporting such income.
(f) Example.The provisions of this
section may be illustrated by the follow-
ing example:
Example.P enters into a contract with S for the
purchase of residential property owned by S for the
price of $200,000. P is required to deposit $10,000
of earnest money into an escrow. At closing, the
$10,000 and the interest earned thereon will be cred-
ited against the purchase price of the property. The
escrow is a pre-closing escrow. P is treated as own-
ing the assets of the escrow, and P is taxable on the
interest earned on the escrow prior to closing. The
escrow holder must report the income earned on the
escrow on Forms 1099 and furnish payee statements
to P. The Forms 1099 must show the escrow holder
as the payor and P as the payee.
§1.468B–8 Contingent at-closing
escrows.
(a) Scope.This section provides rules
under section 468B(g) for the taxation of
income earned on a contingent at-closing
escrow, which is defined in paragraph (b)
of this section. No inference should be
drawn from this section concerning the
tax treatment of a contingent at-closing
escrow, or of parties to the escrow, under
sections of the Internal Revenue Code
other than section 468B. See also para-
graph (d) of this section.
(b) Definitions. For purposes of this
section, the following definitions apply—
Administratormeans an escrow agent,
escrow holder, trustee, or other person re-
sponsible for administering an escrow ac-
count, trust, or fund (the purchaser or the
seller may be the administrator);
Contingent at-closing escrow means an
escrow account, trust, or fund that satis-
fies the following requirements—
(1) The escrow is established in con-
nection with the sale or exchange (other
than an exchange to which section 354,
355, or 356 applies) of real or personal
property used in a trade or business or

1999–10 I.R.B.37March 8, 1999
held for investment (including stock in a
corporation or an interest in a partner-
ship);
(2) Depending on whether events spec-
ified in the agreement between the pur-
chaser and the seller that are subject to
bona fide contingencies (not including
events that are certain, or reasonably cer-
tain, to occur, such as the passage of time,
or that are certain, or reasonably certain,
not to occur) either occur or fail to occur,
the escrow’s assets (except for assets set
aside for taxes or expenses) will be dis-
tributable—
(i) Entirely to the purchaser;
(ii) Entirely to the seller; or
(iii) In part, to the purchaser with the
remainder to the seller; and
(3) The escrow is not a qualified es-
crow account or qualified trust estab-
lished in connection with a deferred ex-
change under section 1031(a)(3);
Determination datemeans the date on
which (or by which) the last of the events
subject to a bona fide contingency speci-
fied in the agreement between the pur-
chaser and the seller (referred to in the de-
finition of contingent at-closing escrow)
has either occurred or failed to occur;
Purchaser means, in the case of an ex-
change of property, the transferee of the
property; and
Sellermeans, in the case of an ex-
change of property, the transferor of the
property.
(c) Tax liability of purchaser and seller
for the period prior to the determination
date. For the period prior to the determi-
nation date, the purchaser is treated as
owning the assets of the contingent at-
closing escrow for federal income tax
purposes. Thus, in computing the pur-
chaser’s income tax liability, the pur-
chaser must take into account all items of
income, deduction, and credit (including
capital gains and losses) of the escrow
until the determination date.
(d) Transfer of interest in the assets of
the escrow on the determination date.No
inference should be drawn from this sec-
tion whether, for purposes of Internal
Revenue Code sections other than 468B,
there is a transfer of ownership of the as-
sets of a contingent at-closing escrow on
the determination date from the purchaser
to the seller or from the seller to the pur-
chaser, or the tax consequences of such a
transfer. Thus, for example, if there is a
transfer of ownership of the assets of the
escrow from the purchaser to the seller on
the determination date for purposes of
other Code sections, no inference should
be drawn from this section whether any
portion of the amount transferred is un-
stated interest. See §1.483-4.
(e) Tax liability of purchaser and seller
for the period beginning on the determi-
nation date. For the period beginning on
the determination date, the purchaser and
the seller must each take into account in
determining their income tax liabilities
the income, deductions, and credits (in-
cluding capital gains and losses) corre-
sponding to their ownership interests in
the assets of the escrow.
(f) Statement required to be provided to
administrator within 30 days after the de-
termination date.Within 30 days after
the determination date, the purchaser and
the seller must provide the administrator
with a written statement that—
(1) Is signed by the purchaser and the
seller;
(2) Specifies the determination date;
and
(3) Specifies the purchaser’s and
seller’s ownership interests in each asset
of the escrow.
(g) Reporting obligations of the admin-
istrator—(1) In general.The administra-
tor of a contingent at-closing escrow must,
for each calendar year (or portion thereof)
that the escrow is in existence, report the
income of the escrow on Forms 1099 in
accordance with the information reporting
requirements of subpart B, Part III, sub-
chapter A, chapter 61, Subtitle F of the In-
ternal Revenue Code. The Forms 1099
must show as payor the administrator of
the escrow and as payee the person (or
persons) treated as the payee (or payees)
under paragraph (g)(2) of this section.
(2) Person treated as payee.In satisfy-
ing the reporting obligations of paragraph
(g)(1) of this section, the following rules
apply to the administrator—
(i) For the period prior to the determi-
nation date, the administrator must treat
the purchaser as the payee of the income
of the escrow;
(ii) For the period beginning on the de-
termination date, if the written statement
described in paragraph (f) of this section
is timely provided to the administrator,
the administrator must treat as the payee
(or payees) of the income of the escrow
the purchaser or seller (or both) in accor-
dance with their respective ownership in-
terests as shown on the statement; and
(iii) If the written statement described
in paragraph (f) of this section is not pro-
vided to the administrator, the administra-
tor must continue to treat the purchaser as
the payee of the income of the escrow.
(3) Relief from penalties for filing in-
correct information return or payee state-
ment.For purposes of sections 6721 and
6722, the administrator will not be treated
as failing to file or furnish a correct infor-
mation return or payee statement solely
because, in preparing a Form 1099, the
administrator relies on a statement de-
scribed in paragraph (f) of this section and
therefore treats the purchaser or seller (or
both) as the payee (or payees) of the in-
come of the escrow in accordance with
their respective ownership interests in the
assets of the escrow as shown on the
statement. If a statement described in
paragraph (f) of this section is not pro-
vided to the administrator, the administra-
tor will not be treated as failing to file or
furnish a correct information return or
payee statement solely because, in prepar-
ing a Form 1099, the administrator relies
on the absence of the statement and there-
fore treats the purchaser as the payee.
(h) Effective date—(1) In general.The
provisions of this section apply to contin-
gent at-closing escrows that are estab-
lished after the date of publication of final
regulations in the Federal Register.
(2) Transition rule.With respect to a
contingent at- closing escrow established
after August 16, 1986, but on or before the
date of publication of final regulations in
the Federal Register,the Internal Rev-
enue Service will not challenge a reason-
able, consistently applied method of taxa-
tion for income earned by the escrow. The
Internal Revenue Service will also not
challenge a reasonable, consistently ap-
plied method for reporting such income.
(i) [Reserved]
(j) Example.The provisions of this
section may be illustrated by the follow-
ing example:
Example.(i) P and S are corporations. In 1999, P
enters into a contract with S for the purchase of
rental real estate. On October 1, 1999, the date of
sale, S transfers the real estate to P, and P pays S a
portion of the purchase price, $9,000,000. P de-
posits the remaining portion of the purchase price,
$850,000, into an escrow account as required by the
contract. H is the escrow holder.

March 8, 1999381999–10 I.R.B.
(ii) The contract provides that the escrow bal-
ance as of November 1, 2000, is payable entirely to
P, entirely to S, or partially to P and partially to S de-
pending on the amount, if any, by which the average
rental income from the real estate during a specified
testing period ending on September 30, 2000, ex-
ceeds one or more specified earnings targets.
(iii) According to the terms of the contract, the
income earned on the escrow must be accumulated
and is not currently distributable to P or S during the
period prior to November 1, 2000.
(iv) During the testing period specified in the
contract between P and S, the average rental income
earned on the property exceeds one (but not all) of
the specified earnings targets. As a result, on Sep-
tember 30, 2000, the end of the testing period, P be-
came entitled to 40% of the escrow assets and S be-
came entitled to 60% of the escrow assets.
(v) On October 30, 2000, P and S provide H with
the written statement described in paragraph (f) of
this section. The written statement is thus provided
within 30 days of September 30, 2000. The state-
ment indicates that P’s ownership interest in each
asset of the escrow is 40 percent and S’s ownership
interest in each asset is 60 percent.
(vi) The escrow is a contingent at-closing escrow.
September 30, 2000, is the determination date be-
cause this is the date on which the testing period
ends. As of this date, all contingencies specified in
the contract are resolved.
(vii) P must take into account all of the income,
deductions, and credits (including capital gains and
losses) of the escrow in computing P’s income tax li-
ability for the period prior to September 30, 2000.
See paragraph (c) of this section.
(viii) For the period beginning on September 30,
2000, P must take into account in computing P’s in-
come tax liability 40 percent of each item of income,
deduction, and credit of the escrow (including capi-
tal gains and losses), and S must take into account in
computing S’s income tax liability 60 percent of
these items. See paragraph (e) of this section.
(ix) H is subject to the information reporting re-
quirements of paragraph (g)(1) of this section. H
must file Forms 1099 and furnish payee statements
to reflect the fact that prior to September 30, 2000, P
is the payee of all the income of the escrow, and for
the period beginning on September 30, 2000, P is the
payee of 40 percent of the income, and S is the
payee of 60 percent of the income.
§1.468B–9 Disputed ownership funds.
(a) In general.An escrow account,
trust, or fund that is not a qualified settle-
ment fund is a disputed ownership fund
if—
(1) It is established to hold money or
property subject to conflicting claims of
ownership;
(2) The escrow account, trust, or fund
is subject to the continuing jurisdiction of
a court; and
(3) Money or property cannot be paid
or distributed from the escrow account,
trust, or fund to, or on behalf of, a
claimant or a transferor without the ap-
proval of the court.
(b) Definitions.For purposes of this
section—
(1) Administratormeans the person
designated as such by the court having ju-
risdiction over a disputed ownership fund.
If no person is designated, the administra-
tor is the escrow agent, escrow holder,
trustee, receiver, or other person responsi-
ble for administering the fund;
(2) Claimant means a person, including
a transferor, who claims ownership of, or
a legal or equitable interest in, money or
property held by a disputed ownership
fund;
(3) Courtmeans a court of law or eq-
uity of the United States, any state (in-
cluding the District of Columbia), terri-
tory, possession, or political subdivision
thereof;
(4) Related personmeans any person
who is related to the transferor within the
meaning of section 267(b) or 707(b)(1);
(5) Transferormeans, in general, a per-
son that transfers to a disputed ownership
fund money or property that is subject to
conflicting claims of claimants. How-
ever, a payor of interest or other income
earned by a disputed ownership fund is
not a transferor (unless the payor is also a
claimant). A transferor may also be a
claimant.
(c) Taxation of a disputed ownership
fund—(1) In general. For federal income
tax purposes, a disputed ownership fund
is treated as the owner of all assets that it
holds. A disputed ownership fund is
treated as a C corporation for purposes of
subtitle F of the Internal Revenue Code,
and the administrator of the fund must ob-
tain an employer identification number
for the fund, make all required income tax
and information returns, and deposit all
payments of tax. Also, except as other-
wise provided in this section, a disputed
ownership fund is taxable as if it were ei-
ther—
(i) A qualified settlement fund under
§1.468B–2 if all the assets transferred to
the fund by or on behalf of transferors are
passive investment assets, for example,
cash or cash equivalents, stock, and debt
obligations; or
(ii) A C corporation in all other cases.
(2) Exception.If there is a more appro-
priate method of taxing a disputed owner-
ship fund than as provided in paragraph
(c)(1) of this section, the claimants to the
fund may submit a private letter ruling re-
quest proposing an alternative method of
taxation.
(3) Special rules.(i) In general, money
or property subject to conflicting claims of
claimants (disputed property) that is trans-
ferred to a disputed ownership fund by, or
on behalf of, a transferor is excluded from
the gross income of the fund. However,
this exclusion does not apply to income
earned on assets of the fund such as—
(A) Payments to a disputed ownership
fund made in compensation for late or de-
layed transfers of money or property;
(B) Dividends on stock of a transferor
(or a related person) held by the fund; and
(C) Interest on debt of a transferor (or a
related person) held by the fund.
(ii) A distribution to a claimant of dis-
puted property by a disputed ownership
fund is not a taxable event to the fund.
(iii) A disputed ownership fund is not
allowed a deduction for a distribution of
disputed property to, or on behalf of, a
transferor or a claimant.
(iv) Upon the termination of a disputed
ownership fund, if the fund has an unused
net operating loss carryover under section
172, an unused capital loss carryover
under section 1212, or an unused tax
credit carryover, or if the fund has, for its
last taxable year, deductions in excess of
gross income, the claimant to whom the
fund’s net assets are distributable will
succeed to and take into account the
fund’s unused net operating loss carry-
over, unused capital loss carryover, un-
used tax credit carryover, or excess of de-
ductions over gross income for the last
taxable year of the fund. If the fund’s net
assets are distributable to more than one
claimant, the unused net operating loss
carryover, unused capital loss carryover,
unused tax credit carryover, or excess of
deductions over gross income for the last
taxable year must be allocated among the
claimants in proportion to the value of the
assets distributable to each claimant from
the fund.
(v) In the case of a disputed ownership
fund taxable as if it were a C corporation
under paragraph (c)(1)(ii) of this section,
this section does not, in general, restrict
the fund’s use of an otherwise allowable
method of accounting or taxable year.

1999–10 I.R.B.39March 8, 1999
(vi) Appropriate adjustments must be
made by a disputed ownership fund or
transferors to the fund to prevent the fund
and the transferors from taking into ac-
count the same item of income, deduc-
tion, gain, loss, or credit more than once
or from omitting such items.
(d) Basis of property held by a disputed
ownership fund.In general, the initial
basis of property transferred by, or on be-
half of, a transferor to a disputed owner-
ship fund is the fair market value of the
property on the date of transfer to the fund
as determined by the transferor for pur-
poses of the rules in paragraph (f)(1)(i) of
this section. However, if paragraph
(f)(1)(ii) of this section applies, the fund’s
initial basis in the property is the same as
the basis of the transferor immediately be-
fore the transfer to the fund.
(e) Request for prompt assessment.A
disputed ownership fund is eligible to re-
quest the prompt assessment of tax under
section 6501(d). For purposes of section
6501(d), a disputed ownership fund is
treated as dissolving on the date the fund
no longer has any assets (other than a rea-
sonable reserve for potential tax liabilities
and related professional fees) and will not
receive any more transfers.
(f) Rules applicable to the transferor—
(1) Transfer of property—(i) In general.
A transferor must treat a transfer of prop-
erty to a disputed ownership fund as a sale
or other disposition of that property for
purposes of section 1001(a). In comput-
ing the gain or loss, the amount realized
by the transferor is the fair market value
of the property on the date the transfer is
made to the disputed ownership fund.
(ii) Exceptions.A transfer of property
to a disputed ownership fund is not a sale
or other disposition of the property for
purposes of section 1001(a) if—
(A) The transferor claims ownership of
the transferred property immediately be-
fore and immediately after the transfer to
the fund; or
(B) The transferor is an agent, fidu-
ciary, or other person acting in a similar
capacity acting on behalf of a person
claiming ownership of the transferred
property immediately before and immedi-
ately after the transfer to the fund.
(2) Economic performance—(i) In gen-
eral.For purposes of section 461(h), if a
transferor has a liability to one or more
claimants for which economic perfor-
mance would otherwise occur under
§1.461–4(g) when the transferor makes a
payment to the claimant or claimants,
economic performance occurs with re-
spect to the liability to the extent the
transferor makes a transfer to a disputed
ownership fund to resolve or satisfy that
liability, but only if the transferor and re-
lated persons are not claimants and have
no right to receive payments or distribu-
tions from the fund.
(ii) Obligations of the transferor.With
respect to a transferor described in para-
graph (f)(2)(i) of this section, economic
performance does not occur when the
transferor transfers to a disputed owner-
ship fund its debt (or the debt of a related
person). Instead, economic performance
occurs as the transferor (or related person)
makes principal payments on the debt.
Similarly, economic performance does
not occur when the transferor transfers to
a disputed ownership fund its obligation
(or the obligation of a related person) to
provide property in the future or to make
a payment described in §1.461–4(g). In-
stead, economic performance occurs with
respect to such an obligation as property
or payments are provided or made to the
disputed ownership fund or a claimant.
(3) Statement to the disputed ownership
fund and the Internal Revenue Service—
(i) In general.By February 15 of the year
following each calendar year in which a
transferor (or other person acting on be-
half of a transferor) makes a transfer to a
disputed ownership fund, the transferor
(or other person) must provide a state-
ment to the administrator of the fund set-
ting forth the information described in
paragraph (f)(3)(ii) of this section. The
transferor must attach a copy of the state-
ment to (and as part of) its timely filed in-
come tax return (including extensions) for
the taxable year of the transferor in which
the transfer is made.
(ii) Information required on state-
ment—(A) In general.The statement re-
quired by paragraph (f)(3)(i) of this sec-
tion must include the following
information—
(1) A legend, “§1.468B–9(f) State-
ment”, at the top of the first page;
(2) The transferor’s name, address, and
taxpayer identification number;
(3) The disputed ownership fund’s
name, address, and employer identifica-
tion number;
(4) The date of each transfer;
(5) The amount of cash transferred;
(6) A description of property trans-
ferred, the disputed ownership fund’s
basis in the property as provided in para-
graph (d) of this section, and, if the rules
of paragraph (f)(1)(ii) of this section
apply, the fund’s holding period on the
date of transfer; and
(7) Whether or not the transferor is also
a claimant.
(B) Combined statements.If a disputed
ownership fund has more than one trans-
feror, any two or more of the transferors
may provide a combined statement to the
administrator that does not identify the
amount of cash or the property transferred
by a particular transferor. If a combined
statement is used, however, each trans-
feror must include with its copy of the
statement that is attached to its income tax
return a schedule describing each asset
that the transferor transferred to the dis-
puted ownership fund.
(4) Distributions to transferors—(i) In
general.A transferor must include in
gross income any distribution to a trans-
feror (including a deemed distribution
described in paragraph (f)(4)(iii) of this
section) from a disputed ownership fund.
If property is distributed, the amount in-
cludible in gross income and the basis in
that property is generally the fair market
value of the property on the date of distri-
bution.
(ii) Exception.The gross income of a
transferor does not include a distribution
to the transferor of property from a dis-
puted ownership fund if the transferor
previously transferred the property to the
fund and paragraph (f)(1)(ii) of this sec-
tion applied to that transfer. Also, the
transferor’s gross income does not in-
clude a distribution of money from the
disputed ownership fund equal to the net
income earned on that property while it
was held by the fund. Further, the trans-
feror’s basis in the property is the same as
the disputed ownership fund’s basis in the
property immediately before the distribu-
tion to the transferor.
(iii) Deemed distributions. If a disputed
ownership fund makes a distribution on
behalf of a transferor to a person that is not
a claimant, the distribution is deemed
made by the fund to the transferor. The
transferor, in turn, is deemed to have made
a payment to the actual recipient.

March 8, 1999401999–10 I.R.B.
(g) Distribution to a claimant other
than a transferor.Whether a claimant
other than a transferor must include in
gross income a distribution of money or
property from a disputed ownership fund
is generally determined by reference to
the claim in respect of which the distribu-
tion is made. If a disputed ownership
fund distributes property to a claimant
other than a transferor in satisfaction of
the claimant’s claim of ownership to that
property, the claimant’s basis in the prop-
erty must be adjusted to reflect the adjust-
ments to the basis of the property required
under section 1016 for the period the
property was held by the fund.
(h) Effective date—(1) In general.
This section applies to disputed owner-
ship funds established after the date of
publication of final regulations in the
Federal Register.
(2) Transition rule.With respect to a
disputed ownership fund established after
August 16, 1986, but on or before the date
of publication of final regulations in the
Federal Register,the Internal Revenue
Service will not challenge a reasonable,
consistently applied method of taxation
for income earned by the fund, transfers
to the fund, and distributions made by the
fund.
(i) [Reserved].
(j) Examples.The following examples
illustrate the rules of this section:
Example 1.(i) Prior to A’s death, A was the in-
sured under a life insurance contract (policy) issued
by X, an insurance company. A’s current spouse and
A’s former spouse each claim to be the beneficiary
under the policy and thus entitled to the policy pro-
ceeds ($1 million). In 1999, X files an interpleader
action and deposits the policy proceeds into the reg-
istry of the court. On June 1, 2000, a final determi-
nation is made that A’s current spouse is the benefi-
ciary under the policy and thus entitled to the funds
held in the registry of the court. These funds are dis-
tributed to A’s current spouse.
(ii) The funds held in the registry of the court
consisting of the policy proceeds and the earnings
thereon are a disputed ownership fund taxable as if it
were a qualified settlement fund. See paragraph
(c)(1)(i) of this section. The fund’s gross income
does not include the $1 million transferred to the
fund by X.
Example 2.(i) Two unrelated individuals, A and
B, claim ownership of certain rental property. A
claims to have purchased the property from B’s fa-
ther. However, B asserts that the purported sale to A
was ineffective and that B acquired ownership of the
property through intestate succession upon the death
of B’s father. For several years, A has maintained
the property and received the rent from the property.
(ii) Pending the resolution of the title dispute be-
tween A and B, the title to the property is transferred
into a court-supervised escrow on February 1, 2000.
Also, on that date the court appoints R as receiver
for the property. R collects the rent earned on the
property and hires employees necessary for the
maintenance of the property. The rents paid to R
cannot be distributed to A or B without the court’s
approval.
(iii) On June 1, 2001, the court makes a final de-
termination that the rental property is owned by B.
The court orders B to refund to A the purchase price
paid by A to B’s father plus interest on that amount
from February 1, 2000. Also, the court orders that a
distribution be made to B of all funds held in the
court registry consisting of the rent collected by R
and the income earned thereon. In addition, title to
the property is returned to B.
(iv) The rental property and the funds held by the
court registry are held in a disputed ownership fund.
(v) A is the transferor to the fund. A does not re-
alize gain or loss under section 1001(a) on A’s trans-
fer of the property to the disputed ownership fund.
(vi) The fund is taxable as if it were a C corpora-
tion because the rental property is not a passive in-
vestment asset. See paragraph (c)(1)(ii) of this sec-
tion. The fund is not taxable upon receipt of the
property. The fund’s initial basis in the property is
the same as A’s adjusted basis immediately before
the transfer to the fund. The fund’s gross income in-
cludes the rents paid to R and the income earned
thereon. For the period between February 1, 2000,
and June 1, 2001, the fund may be allowed deduc-
tions for depreciation and for the costs of mainte-
nance of the property because the fund is treated as
owning the property during this period. See sections
162, 167, and 168.
(vii) The fund is not allowed a deduction for the
distribution to B of the rent earned on the property
while held by the fund (or the income earned
thereon). No tax consequences to the fund result
from this distribution or from the fund’s transfer of
the rental property to B pursuant to the court’s deter-
mination that B owns the property.
Par. 6. Section 1.1031(k)–1 is
amended by adding a sentence at the end
of paragraphs (g)(3)(i) and (h)(2) to read
as follows:
§1.1031(k)–1 Treatment of deferred
exchanges.
* * * * *
(g) * * *
(3) * * * (i) * * * For rules under sec-
tion 468B(g) relating to the current taxa-
tion of income of a qualified escrow ac-
count or qualified trust, see §1.468B–6.
* * * * *
(h) * * *
(2) * * * For rules under section
468B(g) relating to the current taxation of
income of a qualified escrow account or
qualified trust, see §1.468B–6.
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 29, 1999, 8:45 a.m., and published in the issue of
the Federal Register for February 1, 1999, 64 F.R.
4801)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Deduction for Interest on
Qualified Education Loans
REG–116826–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and requests to videoconference the pub-
lic hearing.
SUMMARY: This document contains
proposed regulations relating to the de-
duction for interest paid on qualified edu-
cation loans. The proposed regulations
reflect changes to the law made by the
Taxpayer Relief Act of 1997, the Internal
Revenue Service Restructuring and Re-
form Act of 1998, and the Omnibus Con-
solidated and Emergency Supplemental
Appropriations Act, 1999. The proposed
regulations affect taxpayers who pay in-
terest on qualified education loans. This
document also provides notice that a pub-
lic hearing will be held on the proposed
regulations and that persons outside the
Washington, DC, area who wish to testify
at the hearing may request that the IRS
videoconference the hearing to their sites.
DATES: Written or electronically gener-
ated comments must be received by April
21, 1999. Requests to videoconference
the hearing to other sites must be received
by March 22, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–116826–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be

1999–10 I.R.B.41March 8, 1999
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–116826–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments. html. The IRS
will publish the time and date of the pub-
lic hearing and the locations of any video-
conferencing sites in an announcement in
the Federal Register.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, con-
tact John P. Moriarty, (202) 622-4950 (not
a toll-free number); concerning submis-
sions of comments, the hearing, and/or to
be placed on the building access list to at-
tend the hearing, contact Michael L.
Slaughter (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1). Section 202 of the
Taxpayer Relief Act of 1997 (Public Law
105–34 (111 Stat. 778) (TRA 97)) added
section 221 of the Internal Revenue Code
to allow a deduction from gross income
for certain interest paid on qualified edu-
cation loans. On November 17, 1997, the
IRS published Notice 97–60 (1997–46
I.R.B. 8) to provide guidance on the
higher education tax incentives enacted
by TRA 97, including the deduction for
interest paid on qualified education loans.
Section 6004(b) of the Internal Revenue
Service Restructuring and Reform Act of
1998 (Public Law 105–206 (112 Stat.
685)) (RRA 98) and section 4003(a) of
the Omnibus Consolidated and Emer-
gency Supplemental Appropriations Act,
1999 (Public Law 105–277 (112 Stat.
2681)) (Omnibus Act 99) made technical
amendments to section 221. TRA 97 also
added section 6050S to the Internal Rev-
enue Code, which requires the filing of
information returns by certain persons
who receive payments of interest that may
be deductible as interest on a qualified ed-
ucation loan. In 1998, the IRS published
two notices describing the information re-
turns that are required under section
6050S for 1998 and 1999. On January 20,
1998, the IRS published Notice 98-7
(1998–3 I.R.B. 54), which describes the
information reporting required under sec-
tion 6050S for 1998. On November 16,
1998, the IRS published Notice 98–54
(1998–46 I.R.B. 25), which modified No-
tice 98–7 to reflect a technical amend-
ment made by RRA 98 and extended the
application of Notice 98–7, as so modi-
fied, to information reporting required
under section 6050S for 1999.
Explanation of Provisions
Section 221 allows taxpayers who are
legally obligated to pay interest on quali-
fied education loans a federal income tax
deduction for their interest payments.
The deduction is an adjustment to gross
income and, therefore, is available to eli-
gible taxpayers regardless of whether they
itemize deductions. The deduction is lim-
ited to $2,500 for taxable years beginning
after 2000. For taxable years 1998, 1999
and 2000, the limits are $1,000, $1,500
and $2,000, respectively. Consistent with
the income limitations in section
221(b)(2), the proposed regulations pro-
vide that the deduction is phased-out for
taxpayers with modified adjusted gross
income between $40,000 and $55,000
($60,000 and $75,000 for taxpayers filing
a joint return) for the taxable year. For
taxable years beginning after 2002, these
amounts will be adjusted for inflation.
No deduction under section 221 is al-
lowed in a taxable year to an individual
who is properly claimed as a dependent
on another taxpayer’s federal income tax
return for the taxable year. In addition, a
taxpayer who is married as of the end of a
taxable year is allowed a deduction under
section 221 only if the taxpayer and the
taxpayer’s spouse file a joint return for
the taxable year.
Consistent with section 221(e)(1), the
proposed regulations define a qualified
education loanto mean any indebtedness
incurred by the taxpayer solely to pay
qualified higher education expenses on
behalf of a student enrolled at least half-
time in a program leading to a degree,
certificate, or other recognized educa-
tional credential. The student must be the
taxpayer, the taxpayer’s spouse, or the
taxpayer’s dependent at the time the in-
debtedness is incurred. In addition, the
qualified higher education expenses must
be incurred within a reasonable period of
time before or after the indebtedness is in-
curred. The requirement that the indebt-
edness be incurred solely to pay qualified
higher education expenses was added by
RRA ’98. Accordingly, mixed useloans
are not qualified education loans. Simi-
larly, revolving lines of credit (e.g., credit
card debt) generally are not qualified edu-
cation loans, unless the borrower uses the
line of credit solely to pay qualified
higher education expenses.
Consistent with section 221(e)(1), the
proposed regulations provide that a loan
made by an individual who is related to
the borrower, within the meaning of sec-
tion 267(b) or 707(b)(1), is not a qualified
education loan. For example, a loan from
a parent or grandparent of the borrower is
not a qualified education loan. In addi-
tion, consistent with a technical amend-
ment to section 221(e) contained in the
Omnibus Act ‘99, the proposed regula-
tions provide that loans made under any
qualified employer plan (within the mean-
ing of section 72(p)(4)) or made pursuant
to any contract referred to in section
72(p)(5) are not qualified education loans.
The proposed regulations also provide
that loans that are not issued or guaran-
teed as part of a federal postsecondary ed-
ucation loan program nonetheless may be
qualified education loans.
The proposed regulations provide that
whether or not qualified higher education
expenses are paid within a reasonable pe-
riod of time before or after the indebted-
ness is incurred depends on all the facts
and circumstances. However, the pro-
posed regulations provide two safe har-
bors. The first safe harbor treats any edu-
cation loan that is issued as part of a
federal postsecondary education loan pro-
gram as meeting the reasonable period re-
quirement. The second safe harbor treats
qualified higher education expenses as
paid or incurred within a reasonable pe-
riod of time before or after the indebted-
ness is incurred if the expenses relate to a
particular academic period and the pro-
ceeds of the loan are disbursed within a
period that begins 60 days prior to the
start of that academic period and ends 60
days after the end of that academic pe-

March 8, 1999421999–10 I.R.B.
riod. The proposed regulations do not re-
quire actual tracing of loan proceeds to
the payment of qualified higher education
expenses.
The proposed regulations define an eli-
gible educational institutionby reference
to section 25A to mean any college, uni-
versity, vocational school, or other post-
secondary educational institution that is
described in section 481 of the Higher Ed-
ucation Act of 1965 (20 U.S.C. 1088) as
in effect on August 5, 1997, and certified
by the U.S. Department of Education to
be eligible to participate in a student aid
program administered by that department.
This category includes generally all ac-
credited public, nonprofit, and proprietary
postsecondary institutions. Consistent
with section 221(e)(2), the proposed regu-
lations provide that, for purposes of the
qualified education loan interest deduc-
tion, eligible educational institutions also
include institutions that conduct an intern-
ship or residency program leading to a de-
gree or certificate awarded by an institu-
tion of higher education, a hospital, or a
health care facility that offers postgradu-
ate training.
Qualified higher education expenses
are generally the same as the cost of atten-
dance as determined by the eligible edu-
cational institution for purposes of calcu-
lating a student’s financial need, in
accordance with section 472 of the Higher
Education Act of 1965, 20 U.S.C. 1087ll,
as in effect on August 4, 1997. Such ex-
penses generally include tuition, fees,
room, board, books, equipment, and other
necessary expenses, such as transporta-
tion. However, for purposes of calculat-
ing qualified higher education expenses,
the amount of such expenses must be re-
duced by educational assistance that the
student receives and excludes from gross
income under section 117 (qualified
scholarships), section 127 (employer-pro-
vided educational assistance), section 135
(redemption of U.S. savings bonds), and
section 530 (distributions from education
IRAs). In addition, such expenses must
be reduced by a veterans’ or member of
the armed forces’ educational assistance
allowance under chapter 30, 31, 32, 34 or
35 of title 38 United States Code, or under
chapter 1606 of title 10, United States
Code, and any other educational assis-
tance that is excludable from the student’s
gross income (other than as a gift, be-
quest, devise or inheritance within the
meaning of section 102(a)).
The qualified education loan interest
deduction generally is available only for
interest payments made during the first 60
months in which interest payments are re-
quired on the qualified education loan.
The proposed regulations provide that the
60-month period commences with the
month in which a loan first enters manda-
tory repayment status and continues to
elapse regardless of whether payments are
actually made, unless the repayment pe-
riod is suspended for a period of defer-
ment or forbearance. The 60-month pe-
riod may expire at different times for
different loans of the same borrower.
The date on which a qualified educa-
tion loan enters repayment status is deter-
mined by reference to the loan agreement
or the federal regulations governing the
applicable federal postsecondary educa-
tion loan program.
The proposed regulations provide that a
deduction is allowed for a payment of in-
terest that was required to be made in one
month but that actually is made in a subse-
quent month prior to the expiration of the
60-month period. A deduction is not al-
lowed for a payment of interest that was
required to be made in one month but that
actually is made in a subsequent month
after the expiration of the 60-month period.
The proposed regulations provide that a
qualified education loan and all refinanc-
ings of that loan are treated as a single
loan for purposes of calculating the 60-
month period.
Consistent with section 221(d), as
amended by RRA ‘98, the proposed regu-
lations provide special rules for calculat-
ing the 60-month period for consolidated
loans or collapsed loans. These rules gen-
erally mirror the guidance contained in
Notice 98-7 and provide that the 60-month
period begins on the most recent date on
which any of the underlying loans entered
repayment status. See Conf. Rep. No.
599, 105th Cong., 2d Sess., at 339 (1998).
If a qualified education loan entered re-
payment status prior to January 1, 1998
(the effective date of section 221), the tax-
payer is not entitled to deduct any interest
paid during that portion of the 60-month
period occurring prior to January 1, 1998.
A deduction is allowed only for interest
due and paid during that portion, if any, of
the 60-month period remaining after De-
cember 31, 1997.
General tax principles apply in deter-
mining what is deductible interest for pur-
poses of section 221. However, to assist
taxpayers, the proposed regulations
specifically provide that loan origination
fees and capitalized interest are interest
and are deductible under section 221 as
the stated principal amount of the quali-
fied education loan is repaid.
Proposed Effective Date
These regulations are proposed to be
effective for interest paid after the date
they are published in the Federal Regis-
teras final regulations. Taxpayers may
rely on these proposed regulations for
guidance pending the issuance of final
regulations. If, and to the extent, future
guidance is more restrictive than the guid-
ance in these proposed regulations, the fu-
ture guidance will be applied without
retroactive effect.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because the 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 Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any comments that
are submitted timely to the IRS. The IRS
and Treasury Department request com-
ments on the clarity of the proposed rules
and on how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.

1999–10 I.R.B.43March 8, 1999
A public hearing will be scheduled in
the Internal Revenue Building, 1111 Con-
stitution Avenue, NW, Washington, DC.
The IRS recognizes that persons outside
the Washington, DC, area may also wish
to testify at the public hearing through
videoconferencing. Requests to include
videoconferencing sites must be received
by March 22, 1999. If the IRS receives
sufficient indications of interest to war-
rant videoconferencing to a particular
city, and if the IRS has videoconferencing
facilities available in that city on the date
the public hearing is to be scheduled, the
IRS will try to accommodate the requests.
The IRS will publish the time and date
of the public hearing and the locations of
any videoconferencing sites in an an-
nouncement in the Federal Register.
Drafting Information
The principal author of these regula-
tions is John P. Moriarty of the Office of
the Assistant Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.221–1 also issued under 26
U.S.C. 221(d). * * *
Par. 2. Section 1.221–1 is added under
the undesignated centerheading “Addi-
tional Itemized Deductions For Individu-
als” to read as follows:
§1.221–1 Deduction for interest on
qualified education loans.
(a) In general. An individual taxpayer
is allowed a deduction under section 221
from gross income for certain interest
paid during the taxable year on a qualified
education loan. The deduction is allowed
only with respect to interest paid on a
qualified education loan during the first
60 months that interest payments are re-
quired under the terms of the loan. See
paragraph (e) of this section for rules re-
lating to the 60-month rule.
(b) Eligibility—(1) Taxpayer must be
legally obligated to make interest pay-
ments.A taxpayer is allowed a deduction
under section 221 only if the taxpayer is
legally obligated to make interest pay-
ments under the terms of the qualified ed-
ucation loan.
(2) Claimed dependents not eligible—
(i) In general.An individual is not al-
lowed a deduction under section 221 for a
taxable year if the individual is a depen-
dent (as defined in section 152) for whom
a deduction under section 151 is claimed
on another taxpayer’s federal income tax
return for the same taxable year (or, in the
case of a fiscal year taxpayer, the taxable
year beginning in the same calendar year
as the individual’s taxable year).
(ii) Examples.The following exam-
ples illustrate the rules of this paragraph
(b):
Example 1. Student not claimed as dependent.
Student A pays $750 of interest on qualified educa-
tion loans during 1998. Student A’s parents do not
claim her as a dependent for 1998. Assuming all
other relevant requirements are met, Student A may
deduct the $750 of interest paid in 1998 under sec-
tion 221.
Example 2. Student claimed as dependent.Stu-
dent B pays $750 of interest on qualified education
loans during 1998. Only Student B is legally oblig-
ated to make the payments. Student B’s parent
claims him as a dependent and a deduction under
section 151 is allowed with respect to Student B in
computing the parent’s 1998 federal income tax.
Neither Student B nor Student B’s parent may
deduct the $750 of interest paid in 1998 under sec-
tion 221.
(3) Married taxpayers.If a taxpayer is
married as of the close of the taxable year,
a deduction under this section is allowed
only if the taxpayer and the taxpayer’s
spouse file a joint return for that taxable
year.
(c) Maximum deduction.In any tax-
able year, the amount allowed as a deduc-
tion under section 221 may not exceed the
amount determined in accordance with
the following table:
Taxable year Maximum
beginning in: Deduction
1998$1,000
1999$1,500
2000$2,000
2001 and thereafter$2,500
(d) Limitation based on modified ad-
justed gross income—(1) In general.The
deduction allowed under section 221 is
phased out ratably for taxpayers with
modified adjusted gross income between
$40,000 and $55,000 ($60,000 and
$75,000 for married individuals who file
a joint return). Taxpayers with modified
adjusted gross income of $55,000 or
above (or $75,000 or above for joint fil-
ers) are not allowed a deduction under
section 221.
(2) Modified adjusted gross income de-
fined.The term modified adjusted gross
incomemeans the adjusted gross income
(as defined in section 62) of the taxpayer
for the taxable year increased by any
amount excluded from gross income
under section 911, 931, or 933 (relating to
income earned abroad or from certain
U.S. possessions or Puerto Rico). Ad-
justed gross income must be determined
under this section after taking into ac-
count the exclusions, deductions and limi-
tations provided for by sections 86 (social
security and tier 1 railroad retirement ben-
efits), 135 (redemption of qualified U.S.
savings bonds), 137 (adoption assistance
programs), 219 (deductible IRA contribu-
tions) and 469 (limitation on passive ac-
tivity losses and credits).
(3) Inflation adjustment.For taxable
years beginning after 2002, the amounts
in paragraph (d)(1) of this section will be
increased for inflation occurring after
2001 in accordance with section 1(f)(3).
If any amount adjusted under this para-
graph (d)(3) is not a multiple of $5,000,
the amount will be rounded to the next
lowest multiple of $5,000.
(e) 60-month rule—(1) General rule.
A deduction for interest paid on a quali-
fied education loan is allowed only for
payments made during the first 60 months
that interest payments are required on the
loan. The 60-month period begins on the
date the qualified education loan first en-
ters repayment status and ends 60 months
later, unless the period is suspended for
periods of deferment or forbearance
within the meaning of paragraph (e)(3) of
this section. The 60-month period contin-
ues to elapse regardless of whether the re-
quired interest payments are actually
made. The date on which the qualified
education loan first enters repayment sta-
tus is determined under the terms of the
loan agreement or, in the case of a loan is-
sued or guaranteed under a federal post-

March 8, 1999441999–10 I.R.B.
secondary education loan program, under
applicable federal regulations. For spe-
cial rules relating to loan refinancings,
consolidated loans, and collapsed loans,
see paragraph (h)(1) of this section.
(2) Loans that entered repayment status
prior to January 1, 1998.In the case of
any qualified education loan that entered
repayment status prior to January 1, 1998,
no deduction is allowed under section 221
for interest paid during the portion of the
60-month period described in paragraph
(e)(1) of this section that occurred prior to
January 1, 1998. A deduction is allowed
only for interest due and paid during that
portion, if any, of the 60-month period re-
maining after December 31, 1997.
(3) Periods of deferment or forbear-
ance. The 60-month period described in
paragraph (e)(1) of this section is sus-
pended for any period when interest pay-
ments are not required on a qualified edu-
cation loan because the borrower has been
granted deferment or forbearance (includ-
ing postponement in anticipation of can-
cellation). However, in the case of a qual-
ified education loan that is not issued or
guaranteed under a federal postsecondary
education loan program, the 60-month pe-
riod will be suspended under this para-
graph (e)(3) only if the borrower satisfies
one of the conditions for deferment or for-
bearance established by the U.S. Depart-
ment of Education for federal student loan
programs under Title IV of the Higher Ed-
ucation Act of 1965, such as half-time
study at a postsecondary educational in-
stitution, study in an approved graduate
fellowship program or in an approved re-
habilitation program for the disabled, in-
ability to find full-time employment, eco-
nomic hardship, or the performance of
services in certain occupations or federal
programs. The 60-month period is not
suspended if, under the terms of the
loan—
(i) Interest continues to accrue while
the loan is in deferment or forbearance;
and
(ii) The taxpayer has the option of pay-
ing the interest currently or requesting
that the interest be capitalized, and the
taxpayer elects to make current interest
payments.
(4) Late payments.A deduction is al-
lowed for a payment of interest that was
required to be made in one month but that
actually is made in a subsequent month
prior to the expiration of the 60-month pe-
riod. A deduction is not allowed for a
payment of interest that was required to
be made in one month but that actually is
made in a subsequent month after the ex-
piration of the 60-month period.
(5) Examples.The following examples
illustrate the rules of this paragraph (e). In
the examples, assume that the institution is
an eligible educational institution, the loan
is a qualified education loan, and the stu-
dent is legally obligated to make interest
payments under the terms of the loan:
Example 1. Payment prior to 60-month period.
Student C obtains a loan to attend College V. The
terms of the loan provide that interest accrues on the
loan while C earns his undergraduate degree but that
C is not required to begin making payments of inter-
est until six full calendar months after he graduates.
Nevertheless, C voluntarily pays interest on the loan
while attending College V. C is not allowed a de-
duction for interest paid while attending College V
because the payments were made during a month
prior to the start of the 60-month period.
Example 2. Deferment option not exercised. The
facts are the same as Example 1,except that Student
C makes no payments on the loan while C is en-
rolled at College V. C graduates in June, 1999 and is
required to begin making monthly payments of prin-
cipal and interest on the loan in January, 2000. The
60-month period described in paragraph (e)(1) of
this section begins in January, 2000. In August,
2000, C enrolls in graduate school on a full-time
basis. Under the terms of the loan, C may apply for
deferment of the loan payments while C is enrolled
in graduate school. However, C elects not to apply
for deferment and continues to make monthly pay-
ments on the loan during graduate school. Assum-
ing all other relevant requirements are met, C may
deduct interest paid on the loan during the 60-month
period beginning in January, 2000, including interest
paid while C was enrolled in graduate school, but
elected not to defer payment.
Example 3. Late payment, within 60-month pe-
riod.The facts are the same as Example 2,except
that, after the loan enters repayment status in Janu-
ary, 2000, Student C makes no interest payments
until March, 2000. In March, 2000, C pays interest
required to be paid for the months of January, Febru-
ary, and March, 2000. Assuming all other relevant
requirements are met, C is allowed a deduction for
the interest paid in March for the months of January,
February, and March because the interest payments
were required under the terms of the loan and were
paid within the 60-month period, even though the
January and February interest payments may be late.
Example 4. Late payment during deferment but
within 60- month period.The terms of Student D’s
qualified education loan require her to begin making
monthly payments of interest on the loan in January,
2000. The 60-month period described in paragraph
(e)(1) of this section begins in January, 2000. D
fails to make the required interest payments for the
months of November and December, 2000. In Janu-
ary, 2001, D enrolls in graduate school on a half-
time basis. Under the terms of the loan, D is eligible
for deferment of the loan payments due while D is
enrolled in graduate school. The deferment is
granted effective January 1, 2001. In March, 2001,
while the loan is in deferment, D pays the interest
due for the months of November and December,
2000. Assuming all other relevant requirements are
met, D is allowed a deduction for interest paid in
March, 2001 for the months of November and De-
cember, 2000 because the interest payments were
made paid prior to the expiration of the 60-month
period, even though the November and December
interest payments were late and were made while the
loan was in deferment.
Example 5. 60-month period.The facts are the
same as Example 4except that Student D graduates
from graduate school in December, 2004 and is re-
quired to begin making monthly payments of inter-
est on the loan in June, 2005. As of January, 2001,
when the loan entered deferment status, 12 months
of the 60-month period had elapsed (January-De-
cember, 2000). As of June, 2005, when the loan re-
enters repayment status, there are 48 months remain-
ing in the 60-month period for that loan.
Example 6. 60-month period.The terms of Stu-
dent E’s qualified education loan require him to
begin making monthly payments of interest on the
loan in November, 1999. The 60-month period de-
scribed in paragraph (e)(1) of this section begins in
November, 1999. In January, 2000, E enrolls in
graduate school on a half-time basis. As permitted
under the terms of the loan, E applies for deferment
of the loan payments due while E is enrolled in grad-
uate school. While awaiting formal notification
from the lender that his request for deferment has
been granted, E pays interest due for the month of
January, 2000. In February, 2000, E receives notifi-
cation from the lender that deferment has been
granted, effective as January 1, 2000. Assuming all
other requirements are met, E is allowed a deduction
for interest paid in January, 2000, prior to his receipt
of the notification, even though the deferment was
granted retroactive to January 1, 2000. As of Febru-
ary, 2000, there are 57 months remaining in the 60-
month period for that loan.
Example 7. Reduction of 60-month period for
months prior to January 1, 1998.The first payment
on a qualified education loan is due on January 1,
1997. Thereafter, interest is required to be paid on a
monthly basis. The 60-month period for this loan
begins on January 1, 1997. However, no deduction
is allowed for interest paid by the borrower prior to
January 1, 1998, the effective date of section 221.
Assuming all other relevant requirements are met,
the borrower may deduct interest due and paid on
the loan during the 48 months beginning on January
1, 1998 (unless such period is extended for periods
of deferment or forbearance under paragraph (e)(3)
of this section).
(f) Definitions—(1) Eligible educa-
tional institution.In general, an eligible
educational institution means any college,
university, vocational school or other
post-secondary educational institution
that is described in section 481 of the
Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on August 5, 1997, and
is certified by the U.S. Department of Ed-

1999–10 I.R.B.45March 8, 1999
ucation to be eligible to participate in stu-
dent aid programs administered by the
Department, as described in section
25A(f)(2). In addition, for purposes of
this section, an eligible educational insti-
tution also includes an institution that
conducts an internship or residency pro-
gram leading to a degree or certificate
awarded by an institution, a hospital, or a
health care facility that offers postgradu-
ate training.
(2) Qualified higher education ex-
penses—(i) In general. Qualified higher
education expensesmeans the cost of at-
tendance (as defined in section 472 of the
Higher Education Act of 1965, 20 U.S.C.
1087ll, as in effect on August 4, 1997), at
an eligible educational institution, reduced
by the amounts described in paragraph
(f)(2)(ii) of this section. Consistent with
section 472 of the Higher Education Act of
1965, 20 U.S.C. 1087ll, the cost of atten-
dance is determined by the eligible educa-
tional institution and includes tuition and
fees normally assessed a student carrying
the same academic workload, an al-
lowance for room and board, and an al-
lowance for books, supplies, transportation
and miscellaneous expenses of the student.
(ii) Reductions.Qualified higher edu-
cation expenses must be reduced by any
amount paid to or on behalf of a student
with respect to such expenses that is—
(A) A qualified scholarship that is ex-
cludable from income under section 117;
(B) A veterans’ or member of the armed
forces’ educational assistance allowance
under chapter 30, 31, 32, 34 or 35 of title
38 United States Code, or under chapter
1606 of title 10, United States Code;
(C) Employer-provided educational as-
sistance that is excludable from income
under section 127;
(D) Any other educational assistance
that is excludable from gross income
(other than as a gift, bequest, devise, or
inheritance within the meaning of section
102(a));
(E) Any amount excluded from gross
income under section 135 (relating to the
redemption of United States savings
bonds); or
(F) Any amount distributed from an ed-
ucation individual retirement account de-
scribed in section 530 and excluded from
gross income.
(3) Qualified education loan—(i) In
general.Qualified education loan means
indebtedness incurred by a taxpayer
solely to pay qualified higher education
expenses that are—
(A) Incurred on behalf of a student who
is the taxpayer, the taxpayer’s spouse, or a
dependent (as defined in section 151) of
the taxpayer at the time the indebtedness
is incurred;
(B) Paid or incurred within a reason-
able period of time before or after the in-
debtedness is incurred. Qualified higher
education expenses that are paid with the
proceeds of education loans that are part
of a federal postsecondary education loan
program are deemed to meet this require-
ment. For other loans, except as provided
in paragraph (f)(3)(ii) of this section,
what constitutes a reasonable period of
time is determined based on all the rele-
vant facts and circumstances; and
(C) Attributable to education provided
during an academic period, as described
in section 25A and the regulations there-
under, when the student is an eligible stu-
dent as defined in section 25A(b)(3) (re-
quiring that the student be a degree
candidate carrying at least one-half the
normal full-time workload).
(ii) Reasonable period safe harbor.For
purposes of paragraph (f)(3)(i)(B) of this
section, qualified higher education ex-
penses are treated as paid or incurred
within a reasonable period of time before
or after the indebtedness is incurred if the
expenses relate to a particular academic
period and the loan proceeds are dis-
bursed within a period that begins 60 days
prior to the start of that academic period
and ends 60 days after the end of that aca-
demic period.
(iii) Related party.A loan made by a
person who is related to the borrower,
within the meaning of section 267(b) or
707(b)(1), is not a qualified education
loan. For example, a parent or grandpar-
ent of the borrower is a related person. In
addition, a loan made under any qualified
employer plan as defined in section
72(p)(4) or under any contract referred to
in section 72(p)(5) is not a qualified edu-
cation loan.
(iv) Not federally issued or guaranteed.
A loan does not have to be issued or guar-
anteed under a federal postsecondary edu-
cation loan program to be a qualified edu-
cation loan.
(4) Examples.The following exam-
ples illustrate the rules in this paragraph
(f):
Example 1. Eligible educational institution.
University Z is a postsecondary educational institu-
tion described in section 481 of the Higher Educa-
tion Act of 1965. University Z has completed the
necessary paperwork and has been certified by the
U.S. Department of Education as eligible to partici-
pate in federal financial aid programs administered
by the Department, although University Z chooses
not to participate. University Z is an eligible educa-
tional institution.
Example 2. Qualified education loan.Student F
borrows money from a commercial bank to pay
qualified higher education expenses related to his
enrollment on a half-time basis in a graduate pro-
gram at an eligible educational institution. All the
loan proceeds are used to pay qualified higher edu-
cation expenses incurred within a reasonable period
of time after the indebtedness is incurred. The loan
is not federally guaranteed. The commercial bank is
not related to Student F within the meaning of sec-
tion 267(b) or 707(b)(1). The fact that Student F’s
loan is not federally issued or guaranteed does not
prevent the loan from being a qualified education
loan within the meaning of section 221.
Example 3. Qualified higher education expenses.
Student G receives a $3,000 qualified scholarship for
the 1999 Fall semester, that is excludable from F’s
gross income under section 117. Student G receives
no other forms of financial assistance with respect to
the 1999 Fall semester. Student G’s cost of atten-
dance for the Fall semester, as determined by Student
G’s eligible educational institution for purposes of
calculating a student’s financial need in accordance
with section 472 of the Higher Education Act, is
$16,000. For the 1999 Fall semester, Student G has
qualified higher education expenses of $13,000 (the
cost of attendance as determined by the institution
($16,000) reduced by the qualified scholarship pro-
ceeds excludable from gross income ($3,000)).
Example 4. Qualified education loan.Student H
signs a promissory note for a loan on August 15,
1999, to pay for qualified higher education expenses
for the 1999 Fall and 2000 Spring semesters. On
August 20, 1999, loan proceeds are disbursed by the
lender to Student H’s college and credited to H’s ac-
count to pay qualified higher education expenses for
the 1999 Fall semester, that begins on August 23,
1999. On January 25, 2000, additional loan pro-
ceeds are disbursed by the lender to Student H’s col-
lege and credited to H’s account to pay qualified
higher education expenses for the 2000 Spring se-
mester, that began on January 10, 2000. Student H’s
qualified higher education expenses for the two se-
mesters are paid within a reasonable period of time,
as the first loan disbursement was made within 60
days prior to the start of the Fall 1999 semester and
the second loan disbursement was made during the
Spring 2000 semester.
Example 5. Mixed-use loans. Student I signs a
promissory note for a loan which is secured by I’s
personal residence. Part of the loan proceeds will be
used to pay for certain improvements to I’s resi-
dence and part of the loan proceeds will be used to
pay qualified higher education expenses of I’s
spouse. Because the loan is not incurred by I solely

March 8, 1999461999–10 I.R.B.
to pay qualified higher education expenses, the loan
is not a qualified education loan.
(g) Denial of double benefit. No de-
duction is allowed under this section for
any amount for which a deduction is al-
lowed under another provision of Chapter
1 of the Internal Revenue Code.
(h) Special rules—(1) 60-month limita-
tion—(i) Refinancing.A qualified educa-
tion loan and all refinancings of that loan
are treated as a single loan for purposes of
calculating the 60-month period described
in paragraph (e)(1) of this section.
(ii) Consolidated loans.A consoli-
dated loan is a single loan that refinances
more than one qualified education loan of
a borrower. For consolidated loans, the
60-month period described in paragraph
(e)(1) of this section begins on the most
recent date on which any of the underly-
ing loans entered repayment status and in-
cludes any subsequent month in which the
consolidated loan is in repayment status.
(iii) Collapsed loans. A collapsed loan
is two or more qualified education loans
of a single borrower that are treated as a
single qualified education loan for loan
servicing purposes and are not separately
accounted for by the lender or servicer.
For a collapsed loan, the 60-month period
described in paragraph (e)(1) of this sec-
tion begins on the most recent date on
which any of the underlying loans entered
repayment status and includes any subse-
quent month in which any of the underly-
ing loans is in repayment status.
(2) Loan origination fees and capital-
ized interest—(i) In general.Loan origi-
nation fees (other than any fees for ser-
vices) and capitalized interest are interest
and are deductible under this section.
(ii) Capitalized interest defined. Capi-
talized interestmeans any accrued and
unpaid interest on a qualified education
loan that is capitalized by the lender (in
accordance with the terms of the loan)
and added to the outstanding principal
balance of the qualified education loan.
(iii) Allocation of payments.Loan
origination fees and capitalized interest
are deemed to be paid by the taxpayer
when principal is repaid on the qualified
education loan. Accordingly, the taxpayer
may deduct the portion of a stated princi-
pal payment that is treated as the payment
of any loan origination fees or capitalized
interest on the loan. See §§1.446–2(e)
and 1.1275–2(a) for rules on how to allo-
cate payments between interest and prin-
cipal. In general, under these rules, a pay-
ment (regardless of its label) is treated
first as a payment of interest to the extent
of the interest that has accrued and re-
mains unpaid as of the date the payment is
due, second as a payment of any loan
origination fees or capitalized interest,
until such amounts have been reduced to
zero, and third as a payment of principal.
(3) Examples.The following examples
illustrate the rules of this paragraph (h):
Example 1. Refinancing.Student J obtains a
qualified education loan to pay for an undergraduate
degree at an eligible educational institution. After
graduation, Student J is required to make monthly
interest payments on the loan beginning in January
2000. Student J makes the required interest pay-
ments for 15 months. In April 2001, Student J bor-
rows money from another lender to be used exclu-
sively to repay the first qualified education loan.
The new loan requires interest payments to start im-
mediately. At the time Student J is required to make
interest payments on the new loan there are forty
five months remaining of the original 60-month pe-
riod referred to in paragraph (e)(1) of this section.
Example 2. Collapsed loans.To finance his edu-
cation, Student K obtains four separate qualified ed-
ucation loans from Lender B. The loans enter repay-
ment status on different dates. After all of Student
K’s loans have entered repayment status, Lender B
informs Student K that all four loans will be trans-
ferred to Lender C. Following the transfer, Lender
C treats the loans as a single loan for loan servicing
purposes; Lender C sends Student K a single state-
ment that shows the total principal and interest, and
does not keep separate records with respect to each
loan. The 60-month period described in paragraph
(e)(1) of this section begins on the most recent date
on which any of Student K’s four loans entered re-
payment status.
Example 3. Capitalized interest.Interest on Stu-
dent L’s qualified education loan accrues while Stu-
dent L is in school, but Student L is not required to
make any payments on the loan until six months
after he graduates. At that time, all accrued but un-
paid interest is capitalized by the lender and is added
to the outstanding principal amount of the loan.
Thereafter, Student L is required to make monthly
payments of interest and principal on the loan. For
purposes of section 221, interest includes both stated
interest and capitalized interest. Therefore, in deter-
mining the total amount of interest paid on the quali-
fied education loan during the 60-month period de-
scribed in paragraph (e)(1) of this section, Student L
may deduct any principal payments that are treated
as payments of capitalized interest under paragraph
(h)(4) of this section.
(i) Effective date. This section applies
to interest due and paid after December
31, 1997, on a qualified education loan.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 20, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 21, 1999, 64 F.R.
3257)
Notice of Proposed Rulemaking
Disclosure of Return Information
to the Bureau of the Census
REG–121806–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In T.D. 8811, on page 19,
the IRS is issuing temporary regulations
relating to additions to, and deletions
from, the list of items of information dis-
closed to the Bureau of the Census for use
in certain statistical programs. The text of
those temporary regulations also serves as
the text of these proposed regulations.
DATES: Written and electronic com-
ments and requests for a public hearing
must be received by February 24, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–121806–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–121806–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at: http://www.irs.ustreas.gov/
prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Jamie Bernstein, (202) 622-4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1) of the Inter-
nal Revenue Code, upon written request

1999–10 I.R.B.47March 8, 1999
from the Secretary of Commerce, the
Secretary is to furnish to the Bureau of
the Census (“Bureau”) tax return infor-
mation that is prescribed by Treasury reg-
ulations for the purpose of structuring
censuses and national economic accounts
and conducting related statistical activi-
ties. Section 301.6103(j)(1)–1 of the reg-
ulations provides an itemized description
of the return information authorized to be
disclosed for this purpose. Periodically,
the disclosure regulations are amended to
reflect the changing needs of the Bureau
for data for its statutorily authorized sta-
tistical activities.
This document contains proposed
amendments to the regulations authoriz-
ing Internal Revenue Service personnel to
disclose additional items of return infor-
mation that have been requested by the
Secretary of Commerce, and to delete cer-
tain items of return information that are
enumerated in the regulations but that the
Secretary of Commerce has indicated are
no longer needed.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the 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 Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic and
written comments (a signed original and
eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury Depart-
ment specifically request comments on
the clarity of the proposed regulation and
how they can be made easier to under-
stand. All comments will be available for
public inspection and copying. A public
hearing may be scheduled if requested in
writing by a person that timely submits
comments. If a public hearing is sched-
uled, notice of the date, time, and place
for the hearing will be published in the
Federal Register.
Drafting Information
The principal author of these regula-
tions is Douglas Giblen, Office of the As-
sociate Chief Counsel (International)(for-
merly of the Office of Assistant Chief
Counsel (Disclosure Litigation)). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1 also issued
under 26 U.S.C. 6103(j)(1);* * *
Par. 2. Section 301.6103(j)(1)–1 is
amended by:
1. Revising paragraphs (b)(3) and
(b)(6)(i)(A).
2. Adding paragraph (b)(6)(iii).
The revisions and addition read as fol-
lows:
§301.6103(j)(1)–1 Disclosure of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities.
* * * * *
(b) * * *
(3) [The text of this proposed para-
graph (b)(3) is the same as the text of
§301.6103(j)(1)–1T (b)(3) published in
T.D. 8811.]
* * * * *
(6)(i) * * *
(A) [The text of this proposed para-
graph (b)(6)(i)(A) is the same as the text
of §301.6103(j)(1)–T(b)(6)(i)(A) pub-
lished in T.D. 8811.]
* * * * *
(iii) [The text of this proposed para-
graph (b)(6)(iii) is the same as the text of
§301.6103(j)(1)–1T(b)(6)(iii) published
in T.D. 8811.]
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of the Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 22, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 25, 1999, 64 F.R.
3669)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Mark-to-Market Accounting for
Dealers in Commodities and
Traders in Securities or
Commodities
REG–104924–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations for dealers in com-
modities and traders in securities or com-
modities regarding the election to use the
mark-to-market method of accounting for
their businesses. Section 1001(b) of the
Taxpayer Relief Act of 1997 amended the
applicable tax law for these taxpayers.
This document also contains proposed
regulations providing guidance on statu-
tory changes to section 475 contained in
the Internal Revenue Service Restructur-
ing and Reform Act of 1998 (IRS Re-
structuring Act). This guidance is neces-
sary because section 7003 of the IRS
Restructuring Act generally prohibited the
application of mark-to-market accounting
to nonfinancial customer paper. Among
other things, the proposed regulations
provide guidance to taxpayers who are

March 8, 1999481999–10 I.R.B.
using mark-to-market accounting for non-
financial customer paper. This document
also provides notice of a public hearing
on these proposed regulations.
DATES: Written comments and outlines
of topics to be discussed at the public
hearing scheduled for June 3, 1999, at 10
a.m. must be received by May 13, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–104924–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–104924–98),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpayers
may submit comments electronically via
the Internet by selecting the “Tax Regs”
option on the IRS Home Page, or by sub-
mitting comments directly to the IRS In-
ternet site at http://www.irs.ustreas.gov/
prod/tax_regs/comments.html. The pub-
lic hearing will be held in room 2615, In-
ternal Revenue Building, 1111 Constitu-
tion Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations about
elections by commodities dealers and se-
curities and commodities traders, Jo Lynn
Ricks, 202-622-3920; concerning the reg-
ulations about nonfinancial customer
paper, Pamela Lew, 202-622-3950; con-
cerning submissions and the hearing,
Michael L. Slaughter, Jr., 202-622-7190
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)). Comments on
the collection of information should be
sent to the Office of Management and
Budget,Attn: Desk Officer for the De-
partment of Treasury, Office of Informa-
tion and Regulatory Affairs, Washington,
DC, 20503, with copies to the Internal
Revenue Service,Attn: IRS Reports
Clearance Officer, OP:FS:FP, Washington,
DC 20224. Comments concerning the
collection of information must be received
by March 29, 1999.
The first collection of information in
this proposed regulation is described in
the Explanation of Provisions section of
this document (rather than being included
in the text of the proposed regulations).
That description indicates that the elec-
tions under section 475(e)(1) and (f)(1)
and (2) may be required to be made on a
form to be developed by the IRS. This
burden will be reflected on that new form.
The second collection of information in
this proposed regulation is in §§1.475(e)–
1 and 1.475(f)–2. The information re-
quired to be recorded under §§1.475(e)–1
and 1.475(f)–2 is required by the IRS to
determine whether an exemption from
mark- to-market accounting is properly
claimed. This information will be used to
make that determination upon audit of
taxpayers’ books and records. The likely
recordkeepers are businesses or other for-
profit institutions.
Estimated total annual recordkeeping
burden: 1,000 hours.
The estimated annual burden per
recordkeeper varies from 15 minutes to 3
hours, depending on individual circum-
stances, with an estimated average of 1
hour.
Estimated number of recordkeepers:
1,000.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Section 475 provides that dealers in
securities generally must use mark-to-
market accounting for all securities. Ex-
ceptions from the mark-to-market re-
quirement are generally provided for
securities not held for sale to customers
and certain securities held as a hedge,
provided that the securities are identified
as exempt in a proper and timely manner.
For purposes of section 475, a security
includes any note, bond, debenture, or
other evidence of indebtedness. Revenue
Ruling 97–37 (1997–39 I.R.B. 4), clari-
fied that “other evidence of indebtedness”
includes customer paper, commonly re-
ferred to as trade accounts receivable.
The IRS provided procedures for a tax-
payer to change its method of accounting
for customer paper in Revenue Procedure
97–43 (1997–39 I.R.B. 12).
The IRS Restructuring Act modified
the definition of security for purposes of
section 475 to exclude nonfinancial cus-
tomer paper. For this purpose, nonfinan-
cial customer paper is any receivable aris-
ing out of the sale of nonfinancial goods
or services by a person the principal activ-
ity of which is the selling or providing of
nonfinancial goods or services if the re-
ceivable is held by that person (or a related
person) at all times since its issuance.
Section 475(c)(4), added by the IRS Re-
structuring Act, precludes a taxpayer from
using mark-to-market accounting under
section 475 for nonfinancial customer
paper. In addition, the legislative history
of the IRS Restructuring Act indicates that
taxpayers may not account for nonfinan-
cial customer paper using a mark-to-mar-
ket or lower-of-cost-or-market method of
accounting under other sections of the
Code. See H.R. Conf. Rep. No. 599,
105th Cong., 2d Sess. 353–54 (1998).
Congress, however, authorized the Secre-
tary to issue regulations describing situa-
tions where taxpayers must use mark-to-
market accounting for nonfinancial
customer paper in order to prevent taxpay-
ers from using the exclusion in section
475(c)(4) to avoid marking to market re-
ceivables that are inventory in the hands of
the taxpayer or a related person.
Section 475(e) and (f), added by section
1001(b) of the Taxpayer Relief Act of
1997, allows securities traders and com-
modities traders and dealers to elect mark-
to-market accounting similar to that cur-
rently required for securities dealers.
These provisions are effective for all tax-
able years ending after August 5, 1997, the
date of enactment of the Taxpayer Relief
Act. The proposed regulations clarify sev-
eral issues relating to these elections, in-
cluding the identification of securities and
commodities as exempt from mark-to-mar-
ket accounting, the character of marked se-

1999–10 I.R.B.49March 8, 1999
curities and commodities, and the time and
manner for making the elections.
Explanation of Provisions
Nonfinancial Customer Paper
Sections 1.446–1(c)(2)(iii), 1.471–12,
and 1.475(c)–2(d) of the proposed regula-
tions provide that taxpayers may not use
mark-to-market or lower-of-cost-or-mar-
ket accounting for any nonfinancial cus-
tomer paper unless a regulation affirma-
tively provides that the nonfinancial
customer paper is to be marked to market
as inventory.
The remaining proposed regulations
pertaining to section 475(c)(4) are cross
references or minor technical changes re-
quired by the addition of §1.475(c)–2(d).
Dealers in Commodities
The proposed regulations generally
provide that, except as provided in guid-
ance prescribed by the Commissioner, the
rules for mark-to-market accounting for
securities dealers apply to commodities
dealers that make an election under sec-
tion 475(e)(1) (electing commodities
dealers). Comments are requested
whether there are circumstances where
the specific rules applicable to securities
dealers should not be applied to electing
commodities dealers.
Under the proposed regulations, unless
the Commissioner otherwise provides in a
revenue ruling, revenue procedure, or let-
ter ruling, the exemption from mark-to-
market accounting for assets held for in-
vestment does not apply to a commodity
derivative held by an electing dealer in
commodities. If the rule described in the
preceding sentence applies (and conse-
quently requires a commodity derivative
to be marked to market), the gain or loss
is ordinary. The IRS and the Treasury De-
partment believe that it would be ex-
tremely rare for a commodity derivative
held by a commodities derivative dealer
to be acquired other than in a dealer ca-
pacity. See §1.475(c)–1(a)(2). Moreover,
the IRS and the Treasury Department be-
lieve that a dealer in physical commodi-
ties generally engages in derivatives ac-
tivities that are virtually indistinguishable
from its dealings in physical commodi-
ties. This situation invokes many of the
practical concerns that led Congress to
enact section 475(b)(4). The IRS and the
Treasury Department welcome comments
on whether, and under what circum-
stances, it may be appropriate for a dealer
in physical commodities to identify com-
modity derivatives as held for investment.
The proposed regulations also provide
that, in all cases, if a dealer in commodi-
ties identifies a commodity as exempt
from mark-to-market accounting under
section 475(b)(2), the identification is in-
effective unless it is made before the close
of the day on which the commodity was
acquired, originated, or entered into.
Thus, a rule similar to the 30-day identifi-
cation rule for certain securities in Hold-
ing 8 of Rev. Rul. 97–39 (1997–39 I.R.B.
4), does not apply to commodities dealers.
Traders in Securities or Commodities
The proposed regulations provide that
the principles underlying the rules and ad-
ministrative interpretations applicable to
securities dealers also apply to electing
traders, unless the proposed regulations or
the Commissioner provides otherwise.
The IRS and the Treasury Department re-
quest comments on whether there are cir-
cumstances under which a specific rule
applicable to securities dealers should not
apply to electing securities traders.
The proposed regulations provide rules
for the identification of investment securi-
ties as exempt from mark-to-market ac-
counting. The proposed regulations clar-
ify that a trader in securities who elects
mark-to-market accounting under section
475(f)(1) for its trading business (an
electing trader) must identify, in accor-
dance with section 475(f)(1)(B)(ii), any
security held other than in connection
with the trading business. If the electing
trader is also a dealer in securities, the
trader need only identify under section
475(f)(1)(B)(ii) securities that are not
held in connection with the trading busi-
ness and that are also described in section
475(b)(1) (without regard to section
475(b)(2)). That is, the trader need not
identify securities that could not properly
be identified as being exempt from sec-
tion 475(a).
The IRS and the Treasury Department
believe that in making the section 475
election available to securities traders,
Congress did not want taxpayers selec-
tively to mark to market some securities
but selectively to identify other securities
as exempt from this treatment. Congress
addressed this concern by establishing a
higher burden of proof for electing securi-
ties traders to identify securities as not
subject to section 475 than is applicable to
securities dealers. The IRS and the Trea-
sury Department share this concern, par-
ticularly because it traditionally has been
easier to distinguish investment securities
from dealer securities than to distinguish
investment securities from trading securi-
ties. Accordingly, the proposed regula-
tions provide that in no event is the re-
quirement of section 475(f)(1)(B)(i)
satisfied unless the electing trader demon-
strates by clear and convincing evidence
that a security has no connection to its
trading activities. The IRS and Treasury
Department request comments on whether
any trader of securities could meet this
burden and under what circumstances.
In addition, the IRS and the Treasury
Department seek comments on the man-
ner in which securities are identified as
not held in connection with trading activi-
ties and, in particular, comments that
focus on the administrability of rules in
this area.
Because of the fungible nature of cer-
tain securities, the proposed regulations
provide a special rule for identifying se-
curities held other than in connection with
the electing trader’s trading business
when the electing trader also trades other
of the same or substantially similar secu-
rities. In this circumstance, the electing
trader does not satisfy section 475(f)-
(1)(B)(i) unless the security is held in a
separate, nontrading account maintained
with a third party. The IRS and the Trea-
sury Department are considering extend-
ing this special identification rule to all
securities, rather than solely to those that
are fungible, and request comments on
the advisability of doing so.
Under the proposed regulations, all
identifications under section 475(f)(1)-
(B)(ii) must be made on the same day the
electing trader acquires, originates, or en-
ters into the security. Thus, a rule similar
to the 30-day identification rule for cer-
tain securities in Holding 8 of Rev. Rul.
97–39 does not apply to electing traders.
Because the principles of the rules and
administrative interpretations applicable
to securities dealers apply to electing
traders, if an electing trader improperly

March 8, 1999501999–10 I.R.B.
identifies as exempt a security that is ac-
tually held in connection with that busi-
ness, the gain or loss with respect to the
security is ordinary, and the consequences
described in section 475(d)(2) apply to
the security (i.e., the security is marked to
market and any losses realized with re-
spect to the security prior to its disposi-
tion are recognized only to the extent of
gain previously recognized with respect
to the security). Similarly, under the pro-
posed regulations, if an electing trader
fails to identify a security that is not held
in connection with its trading business,
the consequences of section 475(d)(2)
apply to the security, and the gain or loss
with respect to the security is ordinary.
Moreover, in the event of this failure, the
Commissioner may nevertheless treat the
security as if the requirements for exemp-
tion from mark-to-market accounting
were satisfied.
The proposed regulations further pro-
vide that the gain or loss with respect to a
security that is marked to market under
section 475(f)(1)(A) is ordinary. Under
this rule, if an electing trader disposes of a
security before the close of the taxable
year, proposed §1.475(a)–2 applies, and
the gain or loss is ordinary income or loss.
See sections 475(f)(1)(D) and 475(d)(3)
and the legislative history to section
475(f). H.R. Rep. No. 148, 105th Cong.,
1st Sess. 445 (1997).
Under the proposed regulations, the
above rules for electing securities traders
also apply to electing commodities
traders. In addition, the proposed regula-
tions provide a special character rule for
traders in section 1256 commodity con-
tracts who elect mark-to-market account-
ing for their businesses. For these traders,
the proposed regulations clarify that the
capital character rule of section 1256 does
not apply to these contracts and, thus, the
gain or loss with respect to such contracts
is ordinary.
Making the Elections
The proposed regulations clarify that if
a dealer in securities also has a securities
or commodities trading business or a
commodities dealing business, the dealer
may make an election for that business.
The proposed regulations also provide
that the mark-to-market elections for
dealers in commodities and for traders in
securities or commodities must be made
in the time and manner prescribed by the
Commissioner. The IRS and the Treasury
Department anticipate requiring taxpayers
to make the election by filing a form, to
be developed by the IRS, not later than 2_
months after the beginning of the taxable
year for which the election is made. (See
the Paperwork Reduction Act section of
this preamble, which requests comments
on the burden that may be imposed by this
requirement.) Interim procedures are
being provided in a revenue procedure.
Proposed Effective Dates
The proposed regulations in §1.475(c)–
2(d)(1) apply to every taxpayer who is re-
quired by section 475(c)(4) to cease using
mark-to-market accounting for nonfinan-
cial customer paper. These regulations
are applicable for all taxable years ending
after July 22, 1998. Proposed §§1.446–
1(c)(2)(iii), 1.471–12, and 1.475(c)–
2(d)(2) are applicable for all taxable years
ending on or after January 28, 1999. The
proposed regulations in §§1.475(e)–1 and
1.475(f)–2 generally apply to securities or
commodities acquired on or after March
1, 1999. The rules concerning the time
and manner for making the mark-to-mar-
ket elections for commodities dealers and
securities and commodities traders are
generally applicable for taxable years
ending on or after January 28, 1999.
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 impact
analysis is not required. It is hereby certi-
fied that the collection of information in
these regulations will not have a signifi-
cant economic impact on a substantial
number of small entities. As previously
noted, in those instances where a small
entity elects to apply the rules in these
regulations, the burden of the collection
of information is not significant. Accord-
ingly, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f),
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment specifically request comments on
the clarity of the proposed regulations and
how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for
June 3, 1999, beginning at 10 a.m. in room
2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must enter at the 10th Street
entrance, located between Constitution
and Pennsylvania Avenues, NW. In addi-
tion, all visitors must present photo identi-
fication to enter the building. Because of
access restrictions, visitors will not be ad-
mitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building ac-
cess list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written comments and an outline
of the topics to be discussed and the time
to be devoted to each topic (signed origi-
nal and eight (8) copies) by May 13,
1999. A period of 10 minutes will be al-
lotted to each person for making com-
ments. An agenda showing the schedul-
ing of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these regula-
tions are Jo Lynn Ricks and Pamela Lew
of the Office of Assistant Chief Counsel
(Financial Institutions & Products).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****

1999–10 I.R.B.51March 8, 1999
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entries
for §§1.475(a)–3 through 1.475(e)–1 and
adding the following entries in numerical
order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.475(a)–3 also issued under
26 U.S.C. 475(g).
Section 1.475(b)–1 also issued under 26
U.S.C. 475(b)(4) and 26 U.S.C. 475(g).
Section 1.475(b)–2 also issued under
26 U.S.C. 475(b)(2) and 26 U.S.C.
475(g).
Section 1.475(b)–4 also issued under
26 U.S.C. 475(b)(2), 26 U.S.C. 475(g),
and 26 U.S.C. 6001.
Section 1.475(c)–1 also issued under
26 U.S.C. 475(g).
Section 1.475(c)–2 also issued under
26 U.S.C. 475(g) and 26 U.S.C. 860G(e).
Section 1.475(d)–1 also issued under
26 U.S.C. 475(g).
Section 1.475(e)–1 also issued under
26 U.S.C. 475(g).
Section 1.475(f)–1 also issued under 26
U.S.C. 475(g).
Section 1.475(f)–2 also issued under 26
U.S.C. 475(g).***
Par. 2. In §1.446–1, paragraph
(c)(2)(iii) is added to read as follows:
§1.446–1 General rule for methods of
accounting.
* * * * *
(c) * * *
(2) * * *
(iii) Section 475 is the exclusive au-
thority on which a taxpayer may rely to
use the mark-to-market method of ac-
counting for nonfinancial customer paper,
as defined in section 475(c)(4)(B). Thus,
except to the extent provided in
§1.475(c)–2(d), the mark-to-market
method of accounting is not a permissible
method of accounting for nonfinancial
customer paper. In addition, the lower-of-
cost-or-market method of accounting is
not a permissible method of accounting
for these assets. See §1.471–12. This
paragraph (c)(2)(iii) applies to all tax
years ending on or after January 28, 1999.
* * * * *
Par. 3. Section 1.471–12 is added as
follows:
§1.471–12 Nonfinancial customer paper.
Nonfinancial customer paper, as de-
fined in section 475(c)(4)(B), may not be
treated as inventory except as provided in
§1.475(c)–2(d). This section applies to
taxable years ending on or after January
28, 1999.
Par. 4. In §1.475(c)–1, paragraphs
(b)(3)(i) and (b)(4)(ii) are revised to read
as follows:
§1.475(c)–1 Definitions—dealer in
securities.
* * * * *
(b) * * *
(3) * * *
(i) For purposes of section 471, the
taxpayer accounts for any security (as de-
fined in section 475(c)) as inventory;
* * * * *
(4) * * *
(ii) Continued applicability of an elec-
tion—(A) In general.Except as provided
in paragraph (b)(4)(ii)(B) of this section,
an election under this paragraph (b)(4)
continues in effect for subsequent taxable
years until revoked. The election may be
revoked only with the consent of the
Commissioner.
(B) Taxable years ending after July 22,
1998. An election under this paragraph
(b)(4) is ineffective for taxable years end-
ing after July 22, 1998.
* * * * *
Par. 5. In §1.475(c)–2, paragraph (d) is
added to read as follows:
§1.475(c)–2 Definitions—security.
* * * * *
(d) Inventory—(1) Nonfinancial cus-
tomer paper is generally not marked to
market under section 475.Except as pro-
vided in paragraph (d)(3) of this section,
nonfinancial customer paper (as defined
in section 475(c)(4)(B)) is not a security
even if it is inventory.
(2) Treatment of nonfinancial customer
paper under other sections of the Internal
Revenue Code.For nonfinancial cus-
tomer paper that is not a security, the
mark-to-market method of accounting
and the lower-of-cost-or-market method
of accounting are not permissible meth-
ods of accounting. See §§1.446–
1(c)(2)(iii) and 1.471-12.
(3) Nonfinancial customer paper
treated as inventory.[Reserved].
§1.475(e)–1 [Redesignated as
§1.475(g)–1]
Par. 6. Section 1.475(e)–1 is redesig-
nated as §1.475(g)–1.
Par. 7. New §1.475(e)–1 and
§§1.475(f)–1 and 1.475(f)–2 are added to
read as follows:
§1.475(e)–1 Election of mark-to-market
accounting for dealers in commodities.
(a) Time and manner of making elec-
tion.An election under section 475(e)(1)
must be made in the time and manner pre-
scribed by the Commissioner.
(b) Application of securities dealer
rules to electing commodities dealers.
Except as otherwise provided in this sec-
tion or in other guidance prescribed by the
Commissioner, the rules and administra-
tive interpretations under section 475 for
dealers in securities apply to dealers in
commodities that make an election under
section 475(e)(1).
(c) Commodity derivatives deemed not
held for investment—(1) In general.Ex-
cept as otherwise determined by the Com-
missioner in a revenue ruling, revenue
procedure, or letter ruling, if a dealer in
commodities that made an election under
section 475(e)(1) holds a commodity de-
scribed in section 475(e)(2)(B) or (C) (de-
scribing certain notional principal con-
tracts and commodity derivatives),
section 475(b)(1)(A) (exempting from
mark-to-market accounting certain posi-
tions that are held for investment) does
not apply to that commodity.
(2) Character of commodity derivatives
required to be marked to market.If a
commodity is required to be marked to
market because of the application of para-
graph (c)(1) of this section, the gain or
loss with respect to that commodity is
ordinary.
(d) Same day identification. An identi-
fication of a commodity as exempt from
mark-to-market accounting under section
475(b)(2) is not effective unless it is made
before the close of the day on which the

March 8, 1999521999–10 I.R.B.
commodity was acquired, originated, or
entered into.
§1.475(f)–1 Procedures for electing
mark-to-market accounting for traders.
(a) Time and manner of making elec-
tion. An election under section 475(f)(1)
or (2) must be made in the time and man-
ner prescribed by the Commissioner.
(b) Coordination with section 475(a). If
a dealer in securities also has a securities or
commodities trading business or a com-
modities dealing business, the dealer may
make an election under section 475(e)(1),
(f)(1), or (f)(2) for that business.
§1.475(f)–2 Election of mark-to-market
accounting for traders in securities or
commodities.
(a) Securities not held in connection
with trading activities—(1) Taxpayer
identification of investment securities.If a
trader in securities makes an election
under section 475(f)(1)(A) (electing
trader) and holds a security other than in
connection with that trading business, the
electing trader must identify that security
in accordance with section 475(f)(1)(B)-
(ii). If the electing trader is also a dealer
in securities, however, the preceding sen-
tence applies only to securities described
in section 475(b)(1) (without regard to
section 475(b)(2)).
(2) Satisfaction of Commissioner.In no
event is the requirement of section
475(f)(1)(B)(i) satisfied unless the elect-
ing trader demonstrates by clear and con-
vincing evidence that a security has no
connection to its trading activities.
(3) Substantially similar securities held
for trading and investment.An electing
trader that holds a security other than in
connection with its trading business and
also trades the same or substantially simi-
lar securities in no event satisfies the re-
quirement of section 475(f)(1)(B)(i) un-
less the security is held in a separate,
nontrading account maintained with a
third party.
(4) Consequences of failure to identify
investment securities.If an electing
trader holds a security that is not held in
connection with its trading business and
fails to identify the security in a manner
that satisfies the requirements of section
475(f)(1)(B)(ii)—
(i) The consequences described in sec-
tion 475(d)(2) apply to the security; and
(ii) The character of the gain or loss
with respect to the security is ordinary.
(5) Commissioner identification of in-
vestment securities.Notwithstanding
paragraph (a)(4) of this section, the Com-
missioner may treat a security described
in that paragraph as meeting the require-
ments of section 475(f)(1)(B)(i) and (ii).
(b) Character of securities marked to
market.The gain or loss with respect to a
security that is marked to market under
section 475(f)(1)(A) is ordinary.
(c) Application of securities dealer
rules to electing traders.Except as other-
wise provided in this section or in other
guidance prescribed by the Commis-
sioner, the principles of the rules and ad-
ministrative interpretations under section
475 for dealers in securities apply to
traders in securities that make an election
under section 475(f)(1).
(d) Same day identification.An identi-
fication of a security as exempt from
mark-to-market accounting under section
475(f)(1)(B) is not effective unless it is
made before the close of the day on which
the security was acquired, originated, or
entered into.
(e) Application to traders in commodi-
ties—(1) General rule.If a trader in com-
modities makes an election under section
475(f)(2), paragraphs (a), (b), (c), and (d)
of this section apply to the trader in the
same manner that they apply to a trader in
securities who makes an election under
section 475(f)(1).
(2) Coordination with section 1256.If
a trader in commodities makes an election
under section 475(f)(2) and trades section
1256 contracts that are commodities as
defined in section 475(e)(2), then the
rules of section 475(f) and paragraph
(e)(1) of this section apply to those con-
tracts, and not the capital character rules
of section 1256.
Par. 8. Newly designated §1.475(g)–1
is amended by revising paragraphs (h)(2)
and (i) and adding paragraphs (k), (l), and
(m) to read as follows:
§1.475(g)–1 Effective dates.
* * * * *
(h) * * *
(2) Section 1.475(c)–1(b) (concerning
sellers of nonfinancial goods and ser-
vices) applies as follows:
(i) Except as otherwise provided in this
paragraph (h)(2), §1.475(c)–1(b) applies
to taxable years ending on or after De-
cember 31, 1993.
(ii) Section 1.475(c)–1(b)(4)(ii)(B) ap-
plies to taxable years ending after July 22,
1998.
* * * * *
(i) Section 1.475(c)–2 (concerning the
definition of security) applies as follows:
(1) Section 1.475(c)–2(a), (b), and (c)
(concerning the definition of security) ap-
plies to taxable years ending on or after
December 31, 1993. By its terms, how-
ever, §1.475(c)–2(a)(3) applies only to
residual interests or to interests or
arrangements acquired on or after January
4, 1995; and the integrated transactions
that are referred to in §1.475(c)–2(a)(2)
and (b) exist only after August 13, 1996
(the effective date of §1.1275–6).
(2) Section 1.475(c)–2(d) applies as
follows:
(i) Section 1.475(c)–2(d)(1) applies to
taxable years ending after July 22, 1998.
(ii) Section 1.475(c)–2(d)(2) applies to
taxable years ending on or after January
28, 1999.
* * * * *
(k) Section 1.475(e)–1(a) (concerning
the time and manner for making the mark-
to-market election for dealers in commodi-
ties) applies to taxable years ending on or
after January 28, 1999. Section 1.475(e)–
1(b), (c) and (d) applies to commodities ac-
quired on or after March 1, 1999.
(l) Section 1.475(f)–1 (procedures for
electing mark-to-market accounting for
traders in securities or commodities) ap-
plies to taxable years ending on or after
January 28, 1999.
(m) Section 1.475(f)–2 (concerning the
mark-to-market rules for traders in securi-
ties or commodities) applies to securities
or commodities acquired on or after
March 1, 1999.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 27, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 28, 1999, 64 F.R.
4374)

1999–10 I.R.B.53March 8, 1999
Notice of Proposed Rulemaking
and Notice of Public Hearing
Modifications and Additions to
the Unified Partnership Audit
Procedures
REG–106564–98
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Notice of proposed rulemak-
ing, notice of proposed rulemaking by
cross-reference to temporary regulations,
and notice of public hearing.
SUMMARY: In T.D. 8808 on page 21,
the Internal Revenue Service (Service) is
issuing temporary regulations relating to
the unified partnership audit procedures
added to the Internal Revenue Code by
the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA). The text of those
temporary regulations also generally
serves as the text of these proposed regu-
lations. This document also provides a
notice of public hearing on these pro-
posed regulations.
DATES: Written and electronic com-
ments must be received by April 26, 1999.
Outlines of topics to be discussed at the
public hearing scheduled for April 14,
1999, at 10 a.m. must be received by
March 24, 1999.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–106564–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–106564–98),
Courier’s desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC. Alternatively, taxpayers may
submit comments electronically via the
Internet by selecting the “Tax Regs” op-
tion on the IRS Home Page, or by submit-
ting 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, Inter-
nal Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed and
temporary regulations, Robert G. Honig-
man, (202) 622-3050; concerning sub-
missions of comments, the hearing,
and/or to be placed on the building access
list to attend the hearing Michael L.
Slaughter, Jr., (202) 622-7180 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary and final regulations in T.D.
8808 amend the Procedure and Adminis-
tration Regulations (26 CFR part 301) re-
lating to the unified partnership audit pro-
cedures found in sections 6221 through
6233 of the Internal Revenue Code
(Code).
The text of those temporary regulations
also generally serves as the text of these
proposed regulations. The preamble to
the temporary regulations explains the
temporary and proposed regulations.
Temporary regulations previously were
published on December 13, 1984 (49 F.R.
48536), and March 5, 1987 (52 F.R.
6779) (the existing regulations). The Ser-
vice intends to finalize such regulations
simultaneously with finalizing these reg-
ulations. Comments previously received
in connection with the existing regula-
tions will be considered as well as new or
additional comments with respect to such
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. It also has been determined that
section 533(b) of the Administrative Pro-
cedures 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.
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 Business Admin-
istration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any elecronic and
written comments (a signed original and
eight (8) copies) that are submitted timely
to the Service. All comments will be
available for public inspection and copy-
ing. The Service and Treasury Depart-
ment specifically request comments on
the clarity of the proposed regulations and
how they may be made easier to under-
stand.
A public hearing has been scheduled
for April 14, 1999, at 10 a.m. in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the 10th Street en-
trance, located between Constitution and
Pennsylvania Avenues, NW. In addition,
all visitors must present photo identifica-
tion to enter the building. Because of ac-
cess restrictions, visitors will not be ad-
mitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit elec-
tronic or written comments by April 26,
1999, and an outline of the topics to be
discussed and the time devoted to each
topic (a signed original and eight (8)
copies) by March 24, 1999.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these proposed
regulations are Robert G. Honigman, Of-
fice of the Assistant Chief Counsel
(Passthroughs & Special Industries), and
William A. Heard, Office of the Assistant
Chief Counsel (Field Service). However,
other personnel from the Service and
Treasury Department participated in their
development.
*****

March 8, 1999541999–10 I.R.B.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6221–1 as proposed
to be added at 51 F.R. 13235, April 18,
1986, is amended by:
1. Redesignating paragraph (c) as
paragraph (e);
2. Adding paragraphs (c) and (d).
The additions read as follows:
§301.6221–1 Tax treatment determined at
partnership level.
* * * * *
(c) and (d) [The text of proposed para-
graphs (c) and (d) are the same as the text
of §301.6221–1T(c) and (d) published in
T.D. 8808.]
* * * * *
Par. 3. Section 301.6223(c)–1 as pro-
posed to be added at 51 F.R. 13238, April
18, 1986, is amended by adding a sen-
tence at the end of paragraph (c) to read as
follows:
§301.6223(c)–1 Additional information
regarding partners furnished to the
Service.
* * * * *
(c) * * * [The text of the proposed last
sentence in paragraph (c) is the same as
the text of the last sentence in
§301.6223(c)–1T(c) published in T.D.
8808.]
* * * * *
Par. 4. Section 301.6224(c)–3 as pro-
posed to be added at 51 F.R. 13241, April
18, 1986, is amended by revising the sec-
tion heading and paragraphs (b), (c)(3)(ii)
and (d), Example (1)to read as follows:
§301.6224(c)–3 Consistent settlement
terms.
* * * * *
(b) [The text of proposed paragraph (b)
is the same as the text of §301.6224(c)–
3T(b) published in T.D. 8808.]
(c) * * *
(3) * * *
(ii) [The text of proposed paragraph
(c)(3)(ii) is the same as the text of
§301.6224(c)–3T(c)(3)(ii) published in
T.D. 8808.]
(d) * * *
Example (1).[The text of proposed
paragraph (d) Example (1). is the same as
the text of §301.6224(c)–3T(d) Example
(1).published in T.D. 8808.]
* * * * *
Par. 5. Section 301-6229(b)–2 is added
to read as follow:
§301.6229(b)–2 Special rule with respect
to debtors in Title 11 cases.
[The text of this proposed section is the
same as the text of §301.6229(b)–2T pub-
lished in T.D. 8808.]
Par. 6. Section 301.6229(f)–1 is added
to read as follows:
[The text of this proposed section is the
same as the text of §301.6229(f)–1T pub-
lished in T.D. 8808.]
Par. 7. Section 301.6231(a)(1)–1 as
proposed to be added at 51 F.R. 13243,
April 18, 1986, is amended by:
1. Revising the first two sentences of
paragraph (a)(1);
2. Removing paragraph (a)(3);
3. Redesignating paragraph (a)(4) as
paragraph (a)(3).
The revision reads as follows:
§301.6231(a)(1)–1 Exception for small
partnerships.
(a) * * *
(1) [The text of the proposed first two
sentences of paragraph (a)(1) is the same
as the text of the first two sentences of
§301.6231(a)(1)–1T(a)(1) published in
T.D. 8808]. * * *
* * * * *
Par. 8. Section 301.6231(a)(6)–1 as
proposed to be added at 51 F.R. 13245,
April 18, 1986, is amended by:
1. Revising paragraph (a);
2. Removing paragraph (c).
The revision reads as follows:
§301.6231(a)(6)–1 Computational
adjustments.
(a) [The text of proposed paragraph (a)
is the same as the text of §301.6231(a)(6)–
1T(a) published in T.D. 8808.]
* * * * *
Par. 9. Section 301.6231(a)(7)–1 is
amended by revising paragraphs (p)(2),
(r)(1) and (s) to read as follows:
§301.6231(a)(7)–1 Designation or
selection of tax matters partner.
* * * * *
(p) * * *
(2) When each general partner is
deemed to have no profits interest in the
partnership.If it is impracticable under
paragraph (o)(2) of this section to apply
the largest-profits-interest rule of para-
graph (m)(2) of this section, the Commis-
sioner will select a partner (including a
general or limited partner) as the tax mat-
ters partner in accordance with the crite-
ria set forth in paragraph (q) of this sec-
tion. The Commissioner will notify,
within 30 days of the selection, the part-
ner selected, the partnership, and all part-
ners required to receive notice under sec-
tion 6223(a), effective as of the date
specified in the notice.
* * * * *
(r) * * * (1) In general.If the Com-
missioner selects a tax matters partner
under the provisions of paragraph (p)(1)
or (3)(i) of this section, the Commissioner
will notify, within 30 days of the selec-
tion, the partner selected, the partnership,
and all partners required to receive notice
under section 6223(a), effective as of the
date specified in the notice.
* * * * *
(s) Effective date. This section applies
to all designations, selections, and termi-
nations of a tax matters partner occurring
on or after December 23, 1996, except for
paragraphs (p)(2) and (r)(1), that are ap-
plicable on the date they are published as
final regulations in the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue Service.

1999–10 I.R.B.55March 8, 1999
(Filed by the Office of the Federal Register on Janu-
ary 25, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 26, 1999, 64 F.R.
3886)
Notice of Proposed Rulemaking
Capital Gains, Installment Sales,
Unrecaptured Section 1250
Gain
REG–110524–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed amendments to the regulations
relating to the taxation of capital gains on
installment sales of depreciable real prop-
erty. The proposed regulations interpret
changes made by the Taxpayer Relief Act
of 1997, as amended by the Internal Rev-
enue Service Restructuring and Reform
Act of 1998 and the Omnibus Consoli-
dated and Emergency Supplemental Ap-
propriations Act of 1999. The proposed
regulations affect persons required to re-
port capital gain from an installment sale
where a portion of the capital gain is unre-
captured section 1250 gain and a portion
is adjusted net capital gain.
DATES: Written comments or requests
for a public hearing must be received by
April 22, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–110524–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–110524–98), 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.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Susan Kassell, (202) 622-4930; concern-
ing submissions, LaNita VanDyke, (202)
622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amend-
ments to the Income Tax Regulations (26
CFR Part 1) relating to the taxation of
capital gains on installment sales of de-
preciable real property.
Prior to 1997, the maximum rate on net
capital gain for individuals was 28 per-
cent. In the Taxpayer Relief Act of 1997,
Public Law 105–34 (111 Stat. 788, 831)
(1997 Act), Congress amended section
1(h) generally to reduce the maximum
capital gain tax rates for individuals. Cer-
tain substantive changes and technical
corrections to section 1(h) were enacted
as part of the Internal Revenue Service
Restructuring and Reform Act of 1998,
Public Law 105–206 (112 Stat. 685), in-
cluding the repeal of an 18-month holding
period requirement for amounts properly
taken into account after December 31,
1997, and by the Omnibus Consolidated
and Emergency Supplemental Appropria-
tions Act, 1999, Public Law 105–277
(112 Stat. 2681).
As amended, section 1(h) generally di-
vides net capital gain into three rate
groups based on the nature of the prop-
erty, the nature of the gain, and the hold-
ing period of the property.
A maximum marginal rate of 28 per-
cent applies to 28-percent rate gain (28-
percent gain), the combination of (1) cap-
ital gains and losses from the sale or
exchange of collectibles held for more
than one year; (2) an amount equal to gain
excluded from income on the sale or ex-
change of certain small business stock
under section 1202; (3) capital gains and
losses determined under special transition
rules in section 1(h)(13) for certain
amounts taken into account in 1997; (4)
net short-term capital loss for the tax year;
and (5) any long-term capital loss carry-
over to the tax year under section 1212.
A maximum marginal rate of 25 per-
cent applies to unrecaptured section 1250
gain (25-percent gain), which is defined
in section 1(h)(7)(A) as the amount of
long-term capital gain (not otherwise
treated as ordinary income) that would be
treated as ordinary income if section
1250(b)(1) included all depreciation and
the applicable percentage under section
1250(a) were 100 percent, reduced by any
net loss in the 28-percent rate category.
Effectively, the amount of gain taxed at
25 percent is the amount of straight-line
depreciation allowed for the property.
Thus, the 25-percent rate category par-
tially recaptures such depreciation, but
the recapture is limited, inter alia, in that
the recapture rate may be less than the
marginal rates that applied to the depreci-
ation deductions. Section 1(h)(7)(B) lim-
its the unrecaptured section 1250 gain
from section 1231 assets for any tax year
to the net section 1231 gain for that year.
A maximum marginal rate of 20 per-
cent generally applies to adjusted net cap-
ital gain (20/10-percent gain), defined in
section 1(h)(4) as the portion of net capi-
tal gain that is not taxed at the 28-percent
or 25-percent rates. Under section
1(h)(1)(B), a 10-percent rate applies to
any portion of adjusted net capital gain
that would otherwise be taxed at a 15-per-
cent rate if capital gains were taxed as or-
dinary income.
For amounts properly taken into ac-
count after July 28, 1997, and before Jan-
uary 1, 1998, an 18-month holding period
is required to obtain the maximum 25-
percent, 20-percent, or 10-percent rates.
Section 453 provides that, unless tax-
payers elect out, gain from an installment
sale is recognized as payments on the in-
stallment obligation are received. Before
the 1997 Act, reporting capital gain under
the installment method was relatively
straightforward: the capital gain portion
of each payment was taxed at the maxi-
mum capital gain rate of 28 percent. Sec-
tion 1(h) provides for multiple rates, but
does not address how to treat an install-
ment sale of depreciable real property
when the gain to be reported consists of
both 25-percent gain and 20/10-percent
gain.
Explanation of Provisions
Front-Loaded Allocation of Unrecaptured
Section 1250 Gain
Under the proposed regulations, if a
portion of the capital gain from an install-
ment sale is 25-percent gain and a portion

March 8, 1999561999–10 I.R.B.
is 20/10-percent gain, the taxpayer is re-
quired to take the 25-percent gain into ac-
count before the 20/10-percent gain, as
payments are received. (Because sales
that result in 28-percent gain cannot also
yield 25-percent gain or 20/10-percent
gain, an allocation rule for 28-percent
gain is unnecessary.)
A front-loaded allocation method for
25-percent gain is generally consistent
with the statute, under which 20/10-per-
cent gain (that is, adjusted net capital gain)
is defined as the residual category of capi-
tal gain not taxed at maximum rates of 28
percent or 25 percent. The front-loaded
method precludes taxpayers from recog-
nizing some 20/10-percent gain from an
installment sale even when the amount ul-
timately recognized proves to be less than
the amount subject to recapture at the 25-
percent rate. Absent a front-loaded alloca-
tion method this inappropriate result could
arise, for example, when a taxpayer later
disposes of an installment obligation at a
discounted price or when the amount to be
received is contingent.
The IRS and Treasury Department have
previously adopted analogous front-
loaded allocation methods with respect to
installment sales. For example, before
1984—when Congress enacted section
453(i), which requires immediate recog-
nition of recapture gain at ordinary rates
under sections 1245 and 1250—taxpayers
were permitted to defer recognition of this
ordinary-rate recapture gain under the in-
stallment method. Thus, an installment
payment could contain both capital gain
and gain taxed at ordinary rates. By regu-
lation, a front-loaded allocation of the or-
dinary-rate recapture gain was required.
§§1.1245–6(d); 1.1250–1(c)(6). See
Dunn Construction v. United States,323
F. Supp. 440 (N.D. Ala. 1971) (upholding
§1.1245–6(d) as “reasonable and consis-
tent with the underlying statute” and a
valid exercise of the regulatory authority
under section 453). See also §§1.1251–
1(e)(6), 1.1252–1(d)(3), 1.1254–1(d), and
16A.1255–1(c)(3).
Interaction with Section 1231
Section 1(h) also does not address the
interaction of the capital gain rates, the in-
stallment method, and the rules in section
1231. Section 1231(a) generally provides
that, when gains from the sale or ex-
change of property used in a trade or busi-
ness exceed losses from such property,
the gains and losses are treated as long-
term capital gains and losses. Conversely,
when section 1231 losses exceed section
1231 gains, the gains and losses are
treated as ordinary. The capital nature of
net section 1231 gain is subject to an ex-
ception: under section 1231(c), net sec-
tion 1231 gain is treated as ordinary in-
come to the extent of the taxpayer’s
non-recaptured net section 1231 losses for
the preceding five years.
With respect to the interaction of sec-
tion 1231(c) and the capital gain rates, the
IRS and Treasury Department have al-
ready provided that section 1231 gain that
is recharacterized as ordinary gain under
section 1231(c) is deemed to consist first
of 28-percent gain, then 25-percent gain,
and finally 20/10-percent gain. See No-
tice 97–59 (1997–45 IRB 7, 8). An exam-
ple in the proposed regulations illustrates
the application of this principle in the in-
stallment sale context. Consistent with
this treatment and with the general rule
that 25-percent gain is front-loaded, an-
other example in the proposed regulations
illustrates that—in a year in which install-
ment gain is characterized as ordinary
gain under section 1231(a) because there
is a net section 1231 loss for the year—
the gain is treated as consisting of 25-per-
cent gain first, before 20/10-percent gain,
for purposes of determining how much
25-percent gain remains to be taken into
account in later payments.
The examples in the proposed regula-
tions—regarding the interaction of sec-
tions 1(h), 453, and 1231—are specific
applications of the general rule that, for
any given installment payment, gain from
all previous payments is treated as con-
sisting first of 25-percent gain, rather than
20/10-percent gain, in determining how
much of each category of gain remains to
be reported with respect to current and
subsequent payments. Under the regula-
tions, in making this determination it is
generally irrelevant how such prior gain
was actually reported and taxed. For ex-
ample, an installment payment that is
taxed at 15 percent because the taxpayer
is in a low tax bracket may be treated as
consisting of 25-percent gain (that is, un-
recaptured section 1250 gain) for alloca-
tion purposes, even though the gain is not
actually taxed at 25 percent. The pro-
posed regulations focus on examples in-
volving section 1231 since they are the
most common.
Treatment of Installment Payments from
Sales Prior to the Effective Date of the
1997 Act
The capital gains provisions of the
1997 Act were effective for taxable years
ending after May 6, 1997. However, the
maximum rate of 28 percent was not re-
duced for gains properly taken into ac-
count before May 7, 1997. Under settled
authority, originating in Snell v. Commis-
sioner,97 F.2d 891 (5th Cir. 1938), the
law in effect when an installment pay-
ment is received controls the tax treat-
ment of the payment. Unless otherwise
provided, installment payments received
after a change in the law are taxed under
the new law, whether favorable or unfa-
vorable, looking back to the original
transaction for the facts necessary to
apply the changed law. In Snell,for ex-
ample, installment payments from what
was a capital asset in the sale year were
taxed as ordinary income after Congress
changed the definition of a capital asset.
See also Estate of Kearns v. Commis-
sioner,73 T.C. 1223 (1980); Klein v.
Commissioner,42 T.C. 1000 (1964); Rev.
Rul. 79–22 (1979–1 CB 275). Congress
also implicitly has recognized the Snell
principle by enacting grandfather excep-
tions when the application of Snellwould
be unfavorable. For example, when Con-
gress extended the holding period require-
ment for capital gain in 1976, the legisla-
tion specifically excepted from the new,
harsher requirements post-1976 install-
ment gain from pre-1976 sales.
The legislative history of the 1997 Act
reflects the Snellprinciple, providing that
section 1(h) “generally applies to sales
and exchanges (and installment payments
received) after May 6, 1997.” Conf. Rep.
105–220, 105th Cong., 1st Sess. 382, 383
(1997). Thus, under these settled princi-
ples, gain on installment payments re-
ceived after May 6, 1997, from sales on or
before that date, is taxed at the new, lower
maximum rates of 25 percent, 20 percent,
or 10 percent if it qualifies as unrecap-
tured section 1250 gain or adjusted net
capital gain. However, as in the case of
gain from post-effective-date sales, sec-
tion 1(h) does not specify how to allocate
the two categories of gain.

1999–10 I.R.B.57March 8, 1999
The proposed regulations provide that
the capital gain rates applicable to install-
ment payments that are received on or
after the effective date of the 1997 Act
from sales prior to the effective date are
determined as if, for all payments re-
ceived after the date of sale but before the
effective date, 25-percent gain had been
taken into account before 20/10-percent
gain. This approach is consistent with the
Snell principle in that it provides for the
same method of allocation, whether the
sale occurred before or after the effective
date of the 1997 Act. For taxpayers who
sold property and received installment
payments before the effective date of the
1997 Act, this provision is favorable,
since it generally reduces or eliminates
the amount of 25-percent gain to be re-
ported on installment payments received
after the effective date. The approach is
also simple — because it is generally ir-
relevant how the prior gain was actually
reported and taxed, in most cases taxpay-
ers will simply calculate the total amount
of 25-percent gain on the sale and subtract
from that all gain previously reported, in
order to arrive at the amount of 25-per-
cent gain remaining to be reported.
Treatment of Installment Payments
Received Between the Effective Date of
the Statute and the Effective Date of the
Final Regulations.
The proposed regulations also address
the treatment of gain in installment pay-
ments that are received during the period
between the effective date of section 1(h)
and the effective date of the final regula-
tions. The proposed regulations provide
that, in the event the cumulative amount
of 25-percent gain actually reported in in-
stallment payments received during this
period was less than the amount that
would have been reported using the front-
loaded allocation method of the regula-
tions, the amount of 25-percent gain actu-
ally reported, rather than an amount
determined under a front-loaded alloca-
tion method, must be used in determining
the amount of 25-percent gain that re-
mains to be reported. This provision en-
sures that taxpayers cannot underreport
the total amount of 25-percent gain by
taking inconsistent positions with respect
to payments received before and after the
effective date of the regulations. By pro-
viding for this rule, no inference is in-
tended that any allocation method other
than the method provided for by the regu-
lations was a reasonable interpretation of
section 1(h) in this context. However, the
IRS will not challenge the use of a pro
rata allocation method—that is, a method
under which the amounts of 25-percent
gain and 20/10-percent gain in each in-
stallment payment bear the same relation-
ship as the total amounts of 25-percent
and 20/10-percent gain to be reported on
the sale—for installment payments re-
ceived before the effective date of the
final regulations, if the taxpayer used the
same pro rata method for all installment
payments during such period.
Proposed Effective Date
The regulations are proposed to be ef-
fective for payments properly taken into
account after the date the regulations are
published as final regulations in the Fed-
eral 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 also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because the regulations do not
impose a requirement for the 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,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be made
easier to understand. All comments will
be available for public inspection and
copying. A public hearing may be sched-
uled if requested in writing by a person
that timely submits written comments. If
a public hearing is scheduled, notice of
the date, time, and place for the hearing
will be published in the Federal Register.
Drafting Information
The principal authors of these regula-
tions are Susan Kassell and Rob Laude-
man, Office of the Assistant Chief Coun-
sel (Income Tax & Accounting).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendment to the Regulations
Accordingly, the IRS proposes to
amend 26 CFR part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.453–12 is added to
read as follows:
§1.453–12 Allocation of unrecaptured
section 1250 gain reported on the
installment method.
(a) General rule.Unrecaptured section
1250 gain, as defined in section 1(h)(7), is
reported on the installment method if that
method otherwise applies under section
453 or 453A and the corresponding regu-
lations. If gain from an installment sale
includes unrecaptured section 1250 gain
and adjusted net capital gain (as defined
in section 1(h)(4)), the unrecaptured sec-
tion 1250 gain is taken into account be-
fore the adjusted net capital gain.
(b) Installment payments from sales be-
fore May 7, 1997.The amount of unre-
captured section 1250 gain in an install-
ment payment that is properly taken into
account after May 6, 1997, from a sale be-
fore May 7, 1997, is determined as if, for
all payments properly taken into account
after the date of sale but before May 7,
1997, unrecaptured section 1250 gain had
been taken into account before adjusted
net capital gain.
(c) Installment payments received after
May 6, 1997, and before the effective date
of the final regulations.If the amount of

March 8, 1999581999–10 I.R.B.
unrecaptured section 1250 gain in an in-
stallment payment that is properly taken
into account after May 6, 1997, and before
the effective date of the final regulations,
is less than the amount that would have
been taken into account under this section,
the lesser amount is used to determine the
amount of unrecaptured section 1250 gain
that remains to be taken into account.
(d) Examples. In each example, the
taxpayer, an individual whose taxable
year is the calendar year, does not elect
out of the installment method. The in-
stallment obligation bears adequate stated
interest, and the property sold is real
property held in a trade or business that
qualifies as both section 1231 property
and section 1250 property. In all taxable
years, the taxpayer’s marginal tax rate on
ordinary income is 28 percent. The fol-
lowing examples illustrate the rules of
this section:
Example 1. General rule.This example illus-
trates the rule of paragraph (a) of this section.
(i) In 1998, A sells property for $10,000, to be
paid in ten equal annual installments beginning on
December 1, 1998. A originally purchased the prop-
erty for $5,000, held the property for several years,
and took straight-line depreciation deductions in the
amount of $3,000. In each of the years 1998-2007, A
has no other capital or section 1231 gains or losses.
(ii) A’s adjusted basis at the time of the sale is
$2,000. Of A’s $8,000 of section 1231 gain on the
sale of the property, $3,000 is attributable to prior
straight-line depreciation deductions and is unrecap-
tured section 1250 gain. The gain on each install-
ment payment is $800.
(iii) As illustrated in the following table, A takes
into account the unrecaptured section 1250 gain
first. Therefore, the gain on A’s first three payments,
received in 1998, 1999, and 2000, is taxed at 25 per-
cent. Of the $800 of gain on the fourth payment, re-
ceived in 2001, $600 is taxed at 25 percent and the
remaining $200 is taxed at 20 percent. The gain on
A’s remaining six installment payments is taxed at
20 percent. The table is as follows:
199819992000200120022003-2007Total gain
Installment gain80080080080080040008000
Taxed at 25%8008008006003000
Taxed at 20%20080040005000
Remaining to be taxed at 25%22001400600
199419951996199719981999-2003Total gain
Installment gain80080080080080040008000
Taxed at 28%8008008002400
Taxed at 25%600600
Taxed at 20%20080040005000
Remaining to be taxed at 25%22001400600
Example 2. Installment payments from sales
prior to May 7, 1997.This example illustrates the
rule of paragraph (b) of this section.
(i) The facts are the same as in Example 1except
that A sold the property in 1994, received the first of
the ten annual installment payments on December 1,
1994, and had no other capital or section 1231 gains
or losses in the years 1994-2003.
(ii) As in Example 1,of A’s $8000 of gain on the
sale of the property, $3000 was attributable to prior
straight-line depreciation deductions and is unrecap-
tured section 1250 gain.
(iii) As illustrated in the following table, A’s first
three payments, in 1994, 1995, and 1996, were re-
ceived before May 7, 1997, and taxed at 28 percent.
Under the rule described in paragraph (b) of this sec-
tion, A determines the allocation of unrecaptured
section 1250 gain for each installment payment after
May 6, 1997, by taking unrecaptured section 1250
gain into account first, treating the general rule of
paragraph (a) of this section as having applied since
the time the property was sold, in 1994. Conse-
quently, of the $800 of gain on the fourth payment,
received in 1997, $600 is taxed at 25 percent and the
remaining $200 is taxed at 20 percent. The gain on
A’s remaining six installment payments is taxed at
20 percent. The table is as follows:
Example 3. Effect of section 1231(c) recapture.
This example illustrates the rule of paragraph (a) of
this section when there are non-recaptured net sec-
tion 1231 losses, as defined in section 1231(c)(2),
from prior years.
(i) The facts are the same as in Example 1,except
that in 1998 A has non-recaptured net section 1231
losses from the previous four years of $1000.
(ii) As illustrated in the following table, in 1998,
all of A’s $800 installment gain is recaptured as or-
dinary income under section 1231(c). Under the
rule described in paragraph (a) of this section, for
purposes of determining the amount of unrecap-
tured section 1250 gain remaining to be taken into
account, the $800 recaptured as ordinary income
under section 1231(c) is treated as reducing unre-
captured section 1250 gain, rather than adjusted net
capital gain. Therefore, A has $2200 of unrecap-
tured section 1250 gain remaining to be taken into
account.
(iii) In 1999, A’s installment gain is taxed at two
rates. First, $200 is recaptured as ordinary income
under section 1231(c). Second, the remaining $600
of gain on A’s 1999 installment payment is taxed at
25 percent. Because the full $800 of gain reduces
unrecaptured section 1250 gain, A has $1400 of un-
recaptured section 1250 gain remaining to be taken
into account.
(iv) The gain on A’s installment payment re-
ceived in 2000 is taxed at 25 percent. Of the $800 of
gain on the fourth payment, received in 2001, $600
is taxed at 25 percent and the remaining $200 is
taxed at 20 percent. The gain on A’s remaining six
installment payments is taxed at 20 percent. The
table is as follows:

199819992000200120022003-2007Total gain
Installment gain80080080080080040008000
Taxed at ordinary rates under section 1231(c)8002001000
Taxed at 25%6008006002000
Taxed at 20%20080040005000
Remaining non-recaptured net section 1231 losses200
Remaining to be taxed at 25%22001400600
1999–10 I.R.B.59March 8, 1999
Example 4. Effect of a net section 1231 loss.
This example illustrates the application of paragraph
(a) of this section when there is a net section 1231
loss.
(i) The facts are the same as in Example 1except
that A has section 1231 losses of $1000 in 1998.
(ii) In 1998, A’s section 1231 installment gain of
$800 does not exceed A’s section 1231 losses of
$1000. Therefore, A has a net section 1231 loss of
$200. As a result, under section 1231(a) all of A’s
section 1231 gains and losses are treated as ordinary
gains and losses. As illustrated in the following
table, A’s entire $800 of installment gain is ordinary
gain. Under the rule described in paragraph (a) of
this section, for purposes of determining the amount
of unrecaptured section 1250 gain remaining to be
taken into account, A’s $800 of ordinary section
1231 installment gain in 1998 is treated as reducing
unrecaptured section 1250 gain. Therefore, A has
$2200 of unrecaptured section 1250 gain remaining
to be taken into account.
(iii) In 1999, A has $800 of section 1231 install-
ment gain, resulting in a net section 1231 gain of
$800. A also has $200 of non-recaptured net section
1231 losses. The $800 gain is taxed at two rates.
First, $200 is taxed at ordinary rates under section
1231(c), recapturing the $200 net section 1231 loss
sustained in 1998. Second, the remaining $600 of
gain on A’s 1999 installment payment is taxed at 25
percent. As in Example 3,the $200 of section
1231(c) gain is treated as reducing unrecaptured sec-
tion 1250 gain, rather than adjusted net capital gain.
Therefore, A has $1400 of unrecaptured section
1250 gain remaining to be taken into account.
(iv) The gain on A’s installment payment re-
ceived in 2000 is taxed at 25 percent, reducing the
remaining unrecaptured section 1250 gain to $600.
Of the $800 of gain on the fourth payment, received
in 2001, $600 is taxed at 25 percent and the remain-
ing $200 is taxed at 20 percent. The gain on A’s re-
maining six installment payments is taxed at 20 per-
cent. The table is as follows:
199819992000200120022003-2007Total gain
Installment gain80080080080080040008000
Ordinary gain under section 1231(a)800800
Taxed at ordinary rates under section 1231(c)200200
Taxed at 25%6008006002000
Taxed at 20%20080040005000
Net section 1231 loss200
Remaining to be taxed at 25%22001400600
(e) Effective date.This section applies
to installment payments properly taken
into account after the date these regula-
tions are published as final regulations in
the Federal Register.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Janu-
ary 21, 1999, 8:45 a.m., and published in the issue of
the Federal Register for January 22, 1999, 64 F.R.
3457)
Notice of Proposed Rulemaking
Passive Foreign Investment
Companies; Definition of
Marketable Stock
REG–113744–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to the new
mark to market election for stock of a pas-
sive foreign investment company (PFIC).
The proposed regulations interpret
changes made by the Taxpayer Relief Act
of 1997. The proposed regulations affect
persons holding PFIC stock that is regu-
larly traded on certain U.S. or foreign ex-
changes or markets or holding stock in
certain PFICs comparable to U.S. regu-
lated investment companies (RICs). The
proposed regulations also reserve treat-
ment of and request comments on making
the mark to market election for options on
marketable stock.

DATES: Written comments or requests
for a public hearing must be received by
May 3, 1999.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–113744–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–110524–98), 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.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Robert Laudeman, (202) 622-3840;
concerning submissions, LaNita
VanDyke, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This notice contains proposed amend-
ments to the Income Tax Regulations (26
CFR Part 1) regarding the taxation of U.S.
holders of PFIC stock.
Since the enactment of the Tax Reform
Act of 1986, U.S. holders of PFIC stock
have been subject to two alternative sets
of inclusion rules: the interest charge
rules under section 1291 of the Internal
Revenue Code and the qualified electing
fund (QEF) rules under section 1293.
The interest charge rules apply to
shareholders of PFICs that are not QEFs
or for which a QEF election is unavail-
able. Under the interest charge rules, the
PFIC shareholders pay tax and an interest
charge that is attributable to the value of
deferral on receipt of certain distributions
and on disposition of the PFIC stock. By
contrast, PFIC shareholders who make a
QEF election include currently in gross
income their respective shares of the
PFIC’s total earnings, with a separate
election to defer payment of tax, subject
to an interest charge, on income not cur-
rently received.
Congress recognized that the interest
charge rules are a substantial source of
complexity for PFIC shareholders and
that some shareholders would prefer the
current inclusion method afforded by the
QEF election, but are unable to make the
election because they cannot obtain the
necessary information from the PFIC.
Congress accordingly enacted new sec-
tion 1296 in the Tax Reform Act of 1997
to provide PFIC shareholders with an al-
ternative method to include income cur-
rently with respect to their interests in a
PFIC by allowing PFIC shareholders to
elect to mark to market PFIC stock that
qualifies as marketable stock.
In general, a PFIC shareholder who
elects under section 1296 to mark to mar-
ket the marketable stock of a PFIC in-
cludes in income each year an amount
equal to the excess, if any, of the fair mar-
ket value of the PFIC stock as of the close
of the taxable year over the shareholder’s
adjusted basis in such stock. A share-
holder is also generally allowed a deduc-
tion for the excess, if any, of the adjusted
basis of the PFIC stock over the fair mar-
ket value as of the close of the taxable
year. Deductions under this rule, however,
are allowable only to the extent of any net
mark to market gains with respect to the
stock included by the shareholder for
prior taxable years.
Section 1296(e)(1) defines marketable
stockas including several categories of
stock. First, section 1296(e)(1)(A) states
that marketable stock includes any stock
which is regularly traded on (i) a national
securities exchange which is registered
with the Securities and Exchange Com-
mission (SEC) or the national market sys-
tem established pursuant to section 11A
of the Securities Exchange Act of 1934,
or (ii) any exchange or other market
which the Secretary determines has rules
adequate to carry out the purposes of the
PFIC provisions. With respect to (ii)
above, the conference report specifies that
“PFIC stock is considered marketable if it
is regularly traded on any exchange or
market that the Secretary of the Treasury
determines has rules sufficient to ensure
that the market price represents a legiti-
mate and sound fair market value.” H.R.
Conf. Rep. No. 2014, 105th Cong., 1st
Sess. 625 (1997). Second, section
1296(e)(1)(B) states that, to the extent
provided in regulations, stock in any for-
eign corporation which is comparable to a
RIC and which offers for sale or has out-
standing any stock of which it is the issuer
and which is redeemable at its net asset
value will be marketable stock. Third,
section 1296(e)(1)(C) states that, to the
extent provided in regulations, any option
on stock described in section 1296(e)-
(1)(A) or (B) will constitute marketable
stock.
Section 1296(e)(2) provides that in the
case of any RIC which is offering for sale
or has outstanding any stock of which it is
the issuer and which is redeemable at net
asset value, all stock in a PFIC which it
owns directly or indirectly shall be treated
as marketable stock for purposes of sec-
tion 1296. Section 1296(e)(2) further pro-
vides that except as provided in regula-
tions, similar treatment as marketable
stock shall apply in the case of any other
RIC which publishes net asset valuations
at least annually.
The proposed regulations define mar-
ketable stock for purposes of section
1296. Specifically, the proposed regula-
tions define regularly traded and list at-
tributes that a foreign exchange or market
must have in order for PFIC stock traded
on such an exchange or market to be eligi-
ble for the mark to market election. The
definition of regularly traded and the at-
tributes required of foreign exchanges or
markets are intended to ensure that the
prices of PFIC shares listed on the ex-
change or market represent legitimate and
sound fair market values. The proposed
regulations also list the attributes that a
foreign corporation must satisfy to be
comparable to a RIC, and thus for its
stock to be marketable stock. The attrib-
utes are intended to ensure that the for-
eign corporation is an investment vehicle
similar in relevant respects to a U.S. mu-
tual fund and that its representations of
net asset value represent a legitimate fair
market value.
Explanation of Provisions
Regularly Traded
Under the proposed regulations, the
class of PFIC stock held by the share-
holder must be traded, other than in de
minimis quantities, on at least 15 days
during each calendar quarter. The pro-
posed regulations also include an anti-
abuse rule to prevent persons from manip-
March 8, 1999601999–10 I.R.B.

ulating the number of trades in order to
meet this test.
Exchange or Other Market
The proposed regulations require that a
foreign exchange or market be regulated
or supervised by a governmental authority
of the country in which the market is lo-
cated. This requirement will help to en-
sure that the prices of the stock listed by
the exchange are legitimate and sound fair
market values. Because the degree of
governmental regulation or supervision
for each foreign exchange or market may
vary by exchange or market or country,
the proposed regulations also list addi-
tional characteristics that the foreign ex-
change or market must have for stock that
is regularly traded on the exchange or
market to be considered marketable stock
for purposes of section 1296.
First, the exchange must have trading
volume, listing, financial disclosure and
other requirements, designed to prevent
fraud, perfect the mechanism of a free and
open market, and protect investors. See
section 6 of the Securities Exchange Act
of 1934, 15 U.S.C. 78f. There must be
actual enforcement of these requirements
by the exchange and government of the
country in which the exchange is located.
Second, the rules of the exchange must
ensure active trading of listed stocks.
Finally, the IRS and Treasury Depart-
ment invite comments on whether PFIC
stock that is regularly traded on any other
type of exchange or market, such as an
over-the-counter market, should be con-
sidered marketable stock. Additional
comments are requested about what fea-
tures those exchanges or markets should
have to ensure that the stock prices quoted
on such markets are legitimate and sound
fair market values.
Stock in Certain PFICs
The proposed regulations provide that
stock in certain PFICs will be marketable
stockif the PFIC is a corporation de-
scribed in section 1296(e)(1)(B) (foreign
corporations comparable to RICs) and if
the PFIC offers for sale or has outstanding
stock of which it is the issuer and which is
redeemable at its net asset value. A PFIC
will be a corporation described in section
1296(e)(1)(B) if the PFIC satisfies the
conditions listed in the proposed regula-
tions and described below, with respect to
the class of shares held by the electing
taxpayer. These conditions are intended
to describe PFICs that are comparable to
U.S. RICs in relevant respects and to im-
plement the intent of the statute by ensur-
ing that the net asset valuations of such
companies represent legitimate and sound
fair market values for the companies’
stock.
First, the class of stock held by an
electing shareholder must be held by one
hundred or more unrelated shareholders.
The relationships set forth in section
267(b) are used to define related share-
holders that are excluded from satisfying
this test. This condition is consistent with
the requirements for RICs under section
851(a) and §1.851–1 of the income tax
regulations.
Second, the applicable class of shares
of the foreign corporation must be regu-
larly available for purchase by the general
public at its net asset value in initial
amounts not greater than $10,000 (U.S.).
The IRS and Treasury Department invite
comments on whether $10,000 is the ap-
propriate ceiling to ensure that the shares
of the company will be widely available
to the general public. The IRS and Trea-
sury Department also invite comments on
whether and under what conditions the
regulations should allow shares of a for-
eign corporation to be purchased at
amounts different from their net asset
value, such as for a price that includes a
sales load. Additional comments are re-
quested about whether the regulations
should cover foreign corporations that
otherwise qualify but are closed to new
investors.
Third, the proposed regulations require
that quotations for the class of shares of the
foreign corporation be determined and
published on a daily basis in a widely-
available medium, such as a newspaper of
general circulation. This requirement ap-
proximates the practice of U.S. RICs and is
intended to ensure that shareholders and
prospective purchasers have regular access
to publicly available price information.
Fourth, financial statements of the for-
eign corporation prepared by independent
auditors that include balance sheets (state-
ments of assets, liabilities, and net assets)
and statements of income and expenses,
must be prepared and made available to
the public no less frequently than annu-
ally. This requirement approximates the
requirements imposed on U.S. mutual
funds by the SEC and is intended to en-
sure that shareholders and prospective
purchasers have regular access to financial
information for the foreign corporation.
Fifth, the foreign corporation must be
supervised or regulated as an investment
company by a foreign government or an
agency or instrumentality thereof. This
condition is intended to approximate the
SEC’s regulation of U.S. RICs while tak-
ing into account the variety of regulatory
regimes used by different governments.
Sixth, the foreign corporation may not
have any senior securities authorized or
outstanding, including any debt other than
de minimisamounts. This requirement is
similar to the requirement imposed on
U.S. RICs by the SEC.
Finally, the foreign corporation must
meet the PFIC income and asset tests in
sections 1297(a)(1) and (2) with the requi-
site percentages increased from 75 percent
to 90 percent and from 50 percent to 90
percent respectively. This condition is in-
tended to approximate the characteristic of
U.S. RICs as passive investment vehicles.
The proposed regulations also include
an anti-abuse rule to prevent a foreign
corporation from improperly manipulat-
ing its net asset valuations to reduce the
U.S. tax under section 1296 of one or
more shareholders of the corporation.
Options on Marketable Stock
The proposed regulations reserve the
paragraph for defining how and when op-
tions on marketable stock, as defined by
these regulations, will be eligible for
mark to market treatment. The IRS and
Treasury Department invite comments re-
garding the conditions under which the
regulations should define options on mar-
ketable stock to be marketable stock.
Special Rules for RICs
The proposed regulations clarify that
shares in a PFIC that are owned directly or
indirectly by a U.S. RIC, which is offering
for sale or has outstanding any stock of
which it is the issuer and which is re-
deemable at net asset value, shall be
treated as marketable stock for purposes of
section 1296. The IRS and Treasury De-
partment invite comments regarding situa-
tions where PFIC stock held by other U.S.
1999–10 I.R.B.61March 8, 1999

RICs that publish asset valuations at least
annually should not be treated as mar-
ketable stock for purposes of section 1296.
Proposed Effective Date
The regulations are proposed to be ap-
plicable for shareholders whose taxable
years end on or after the date these regula-
tions are published as final regulations in
the Federal Register.In addition, it is
proposed that shareholders may elect to
apply these regulations to taxable years
beginning after December 31, 1997.
Special Analyses
It has been determined that this notice of
proposed rulemaking is not a significant
regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and, because the
regulations do not impose a requirement
for the 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 Business Adminis-
tration for comment on its impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be made
easier to understand. All comments will
be available for public inspection and
copying. A public hearing may be sched-
uled if requested by any person that
timely submits comments. If a public
hearing is scheduled, notice of the date,
time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal author of these regula-
tions is Robert Laudeman, Office of the
Associate Chief Counsel (International).
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:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1296(e)–1 also issued under
26 U.S.C. 1296(e). * * *
Par. 2. Section 1.1296(e)–1 is added to
read as follows:
§1.1296(e)–1 Definition of marketable
stock.
(a) General rule.For purposes of sec-
tion 1296, the term marketable stock
means—
(1) Passive foreign investment com-
pany (PFIC) stock that is regularly traded,
as defined in paragraph (b) of this section,
on a qualified exchange or other market,
as defined in paragraph (c) of this section;
(2) Stock in certain PFICs, as described
in paragraph (d) of this section; and
(3) Options on stock that is described in
paragraph (a)(1) or (2) of this section, to
the extent provided in paragraph (e) of
this section.
(b) Regularly traded—(1) General
rule.For purposes of paragraph (a)(1) of
this section, a class of stock that is traded
on one or more qualified exchanges or
other markets, as defined in paragraph (c)
of this section, is considered to be regu-
larly traded on such exchanges or markets
for any calendar year during which such
class of stock is traded, other than in de
minimis quantities, on at least 15 days
during each calendar quarter.
(2) Anti-abuse rule. Trades that have
as one of their principal purposes the
meeting of the trading requirement of
paragraph (b)(1) of this section shall be
disregarded. Further, a class of stock
shall not be treated as meeting the trading
requirement of paragraph (b)(1) of this
section if there is a pattern of trades con-
ducted to meet the requirement of para-
graph (b)(1) of this section.
(c) Qualified exchange or other
market—(1) General rule.For purposes
of paragraph (a)(1) of this section, the
term qualified exchange or other market
means, for any taxable year—
(i) A national securities exchange
which is registered with the Securities and
Exchange Commission or the national
market system established pursuant to
section 11A of the Securities Exchange
Act of 1934 (15 U.S.C. 78f); or
(ii) A foreign securities exchange that is
regulated or supervised by a governmen-
tal authority of the country in which the
market is located and which has the fol-
lowing characteristics—
(A) The exchange has trading volume,
listing, financial disclosure, and other re-
quirements designed to prevent fraudulent
and manipulative acts and practices, to re-
move impediments to and perfect the
mechanism of a free and open market,
and to protect investors; and the laws of
the country in which the exchange is lo-
cated and the rules of the exchange ensure
that such requirements are actually en-
forced; and
(B) The rules of the exchange ensure
active trading of listed stocks.
(2) Exchange with multiple tiers. If an
exchange in a foreign country has more
than one tier or market level on which
stock may be separately listed or traded,
each such tier shall be treated as a sepa-
rate exchange.
(d) Stock in certain PFICs—(1) Gen-
eral rule.Except as provided in para-
graph (d)(2) of this section, a foreign cor-
poration will be a corporation described
in section 1296(e)(1)(B), and paragraph
(a)(2) of this section, if the foreign corpo-
ration offers for sale or has outstanding
stock of which it is the issuer and which is
redeemable at its net asset value and if the
foreign corporation satisfies the following
conditions with respect to the class of
shares held by the electing taxpayer—
(i) The foreign corporation has one
hundred or more shareholders with re-
spect to the class, other than shareholders
who are related under section 267(b);
(ii) The class of shares of the foreign
corporation is readily available for pur-
chase by the general public at its net asset
March 8, 1999621999–10 I.R.B.

value by new investors in initial amounts
not greater than $10,000 (U.S.);
(iii) Quotations for the class of shares
of the foreign corporation are determined
and published on a daily basis in a
widely-available medium, such as a
newspaper of general circulation;
(iv) No less frequently than annually,
independent auditors must prepare finan-
cial statements of the foreign corporation
that include balance sheets (statements of
assets, liabilities, and net assets) and
statements of income and expenses, and
those statements must be made available
to the public;
(v) The foreign corporation is super-
vised or regulated as an investment com-
pany by a foreign government or an
agency or instrumentality thereof;
(vi) The foreign corporation has no se-
nior securities authorized or outstanding,
including any debt other than in de min-
imis amounts;
(vii) Ninety percent or more of the
gross income of the foreign corporation
for its taxable year is passive income, as
defined in section 1297(a)(1) and the reg-
ulations thereunder; and
(viii) The average percentage of assets
held by the foreign corporation during its
taxable year which produce passive in-
come or which are held for the production
of passive income, as defined in section
1297(a)(2) and the regulations thereunder,
is at least 90 percent.
(2) Anti-abuse rule.If a foreign corpo-
ration undertakes any action with a princi-
pal purpose of manipulating the net asset
value of a class of its shares in order to re-
duce the United States tax under section
1296 of one or more of its shareholders,
the class of shares will not qualify as mar-
ketable stock for purposes of paragraph
(d)(1) of this section.
(e) [Reserved]
(f) Special rules for regulated invest-
ment companies (RICs)—(1) General
rule.In the case of any RIC which is of-
fering for sale or has outstanding any
stock of which it is the issuer and which is
redeemable at net asset value, its stock in
any passive foreign investment company
which it owns directly or indirectly, as de-
fined in sections 958(a)(1) and (2), shall
be treated as marketable stock owned by
that RIC for purposes of section 1296.
(2) [Reserved]
(g) Effective date.This section applies
to shareholders whose taxable year ends
on or after the date these regulations are
published as final regulations in the Fed-
eral Registerfor stock in a foreign corpo-
ration whose taxable year ends with or
within the shareholder’s taxable year. In
addition, shareholders may elect to apply
these regulations to any taxable year be-
ginning after December 31, 1997, for
stock in a foreign corporation whose tax-
able year ends with or within the share-
holder’s taxable year.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on Feb-
ruary 1, 1999, 8:45 a.m., and published in the issue
of the Federal Register for February 2, 1999, 64 F.R.
5012)
Foundations Status of Certain
Organizations
Announcement 99–19
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
Financial Assistance counseling and
Training Services, St. Paul, MN
Finger Lakes youth Sports Inc., Geneva,
NY
Fire Safety Education Inc., Plymouth,
MI
Fire Safety Education Task Force,
Cleveland, OH
Firm Foundation Ministries, Lincoln
Park, MI
First Coast Business Investment
Corporation, Jacksonville, FL
First Coast Crisis Pregnancy Center,
Jacksonville, FL
First Freedom Coalition Educational
Fund, Washington, DC
First International Fellowship,
Philadelphia, PA
First Light Dance Theatre, Knoxville,
TN
First Step Crisis Pregnancy Center Inc.,
Smithfield, NC
First Step I Inc., Knoxville, TN
First Step II Inc., Knoxville, TN
First Step Inc. of the Fifth Judicial
Circuit, Tavares, FL
Fish Forever, Seattle, WA
Fitspatrick Tennis Association Inc., New
York, NY
Flagler County Historical Society Inc.,
Bunnell, FL
Flatbush Youth Inc., Brooklyn, NY
Flemister Housing Development Fund
Corporation, New York, NY
Flickinger Center Foundation Inc.,
Alamogordo, NM
Flood Care Inc., Ursa, IL
Florala EMS, Florala, AL
Florence Griffith Joyner Youth
Foundation, Mission Viejo, CA
Florida Bio Diversity Project Inc.,
Fort Lauderdale, FL
Florida Classic Association Inc., Tampa,
FL
Florida Community Learning and
Information Network Inc., Fort
Lauderdale, FL
Florida Foundation for the Preservation
of Sight Inc., Zephryhills, FL
Florida Youth Foundation Inc., Plant City,
FL
Floyd Wickman Courses Family to
Family Inc., Troy, MI
Food for the Mind Inc., Miller Place,
NY
Footprints, Tacoma, WA
For His Glory Ministries, Inc., Virginia
Beach, VA
For Petes Sake Productions, Upper
Marlboro, MD
For the Lord, Federal Way, WA
For the People Inc., Brooklyn, NY
Foreign Student Education Foundation
Inc., Charlotte, NC
Forensic Artists International, Towson,
MD
Forest Hills Parent Network Inc., Grand
Rapids, MI
Fort Collins Community Computer
Network, Fort Collins, CO
1999–10 I.R.B.63March 8, 1999

Fort Phil Kearny-Bozeman Trail
Endowment Foundation Inc., Buffalo,
WY
Fort Smith Volunteer Connection Inc.,
Fort Smith, AR
Fort Worth Area Convention Committee,
Fort Worth, TX
Fort Worth Citizen Police Academy
Association, Fort Worth, TX
Forty Five North Kingston Avenue Inc.,
Cranford, NJ
Foundation De Manana Inc., Riverdale,
GA
Foundation for Agency Management
Excellence Inc., Washington, DC
Foundation for Aid to Needy Children in
Berkshire County, Stockbridge, MA
Foundation for Educational Innovation
Inc., Washington, DC
Foundation for Equine Facilitated
Psychotherapy, Englewood, CO
Foundation for Excellence in Arts
Education, Tucson, AZ
Foundation for Headache and Neuro-
Rehabilitation, Denver, CO
Foundation for Hospice of Rowan
County Inc., Salsbury, NC
Foundation for International
Development Alternative Inc., Long
Island City, NY
Foundation for International Cancer
Control Studies Inc., Madison, WI
Foundation for Mens Health, Dallas,
TX
Foundation for Religion and the Arts,
New Haven, CT
Foundation for Reproductive Health,
Birmingham, AL
Foundation for Sustainable Development,
Washington, DC
Foundation for Tax Education Inc.,
Boston, MA
Foundation for the Advancement of Arts
and Sciences from India Inc., Flushing,
NY
Foundation for the Benefit of Disabled
Persons, New York, NY
Foundation for the Children of Panama
Inc., New York, NY
Foundation for the Collegiate, New
Rochelle, NY
Foundation of the Interreligious Council
of Central New York Inc., Syracuse,
NY
Foundation to Eliminate E Coli
Outbreaks, Gig Harbor, WA
Foundation to Eliminate the National
Debt Inc., Madison, WI
Fountain Hills Schools Partnership
Foundation, Fountain Hills, AZ
Four Square Hospice Inc., Madill, OK
Foxs Den Goodwill Club Incorporated,
Baltimore, MD
Frameworks Education Project,
Minneapolis, MN
Fran Crosby Memorial Fund Inc.,
Leonardo, NJ
Frankford Senior Housing Associates,
Philadelphia, PA
Franklin County Citizens for Historic
Preservation, Cedar Grove, IN
Franklin Lakes Youth & Recreation
Foundation Inc., Franklin Lakes, NJ
Fred N Stones Jr Memorial Scholarship
Fund, Waxahachie, TX
Free Africa Foundation Inc., Washington,
DC
Free Clinic for Substance Abuse Inc.,
Richmond, VA
Free Spirit Ranch Inc., Plains, GA
Freedom Adventures Inc., Jacksonville,
FL
Freedom in Motion Inc., Princeton, WV
Freedom League Inc., Miami, FL
Freedom Today Not Tomorrow Inc.,
Olathe, KS
French Heritage Relief Committee-
Operation Mississippi, Chicago, IL
Friends and Former Students of Bolling
School Inc., Lewisburg, WV
Friends and Neighbors Ltd., Denver, CO
Friends for Conservation of the San
Antonio River Basin, Goliad, TX
Friends of Africa Inc., Los Angeles, CA
Friends of Ams Green Tree Health Center
Inc., Glendale, WI
Friends of Anzar Hills, Aromas, CA
Friends of British Virgin Island National
Parks USA Inc., British Virgin Islands
Friends of CASA Association, Newark,
DE
Friends of CMH Sumner Community
Memorial Hospital Foundation,
Sumner, IA
Friends of Companion Animals Inc.,
Lathrop, MO
Friends of Confide Inc., Rockville Centre,
NY
Friends of Crossroads Center, Bellevue,
WA
Friends of E M U Ltd., Ypsilanti, MI
Friends of Feral Felines Inc., Atascadero,
CA
Friends of Greenfield Recreation Inc.,
Greenfield, MA
Friends of ICA Moscow Inc., New York,
NY
Friends of Italian Culture Amici Dei Beni
Culturali Inc., New York, NY
Friends of Kidtown Playground,
Brookings, OR
Friends of Leverett Pond Inc., Amherst,
MA
Friends of Lynn & Nahant Beach, Lynn,
MA
Friends of Maitland Middle School Inc.,
Maitland, FL
Friends of Monona Inc., Monona, WI
Friends of Refugees of Eastern Europe
Inc., W. Bloomfield, MI
Friends of Rodeo Inc., Chowchilla, CA
Friends of Rosevilles Harriet Alexander
Nature Center Inc., Minneapolis, MN
Friends of Roxaboxen, Yuma, AZ
Friends of Russell Latimer Inc.,
San Diego, CA
Friends of Santa Inc., Chicago, IL
Friends of Shaarei Mevaseret Inc.,
Monsey, NY
Friends of Staraya Russia, Canandaigua,
NY
Friends of the Bowerston Public Library
Inc., Bowerston, OH
Friends of the Business Resource Center,
Glen Allen, VA
Friends of the Dr Eugene Clark Library
Lockhart TX, Lockhart, TX
Friends of the Golan Settlements
Committee Inc., Brooklyn, NY
Friends of the International School of Art
Inc., Brooklyn, NY
Friends of the Limestone Country Trail
Inc., Bloomington, IN
Friends of the Mary M Campbell Library
Inc., Marcus Hook, PA
Friends of the Mississippi River, St. Paul,
MN
Friends of the Norton-Dare House Inc.,
Selden, NY
Friends of the Old Synagogue in The
Hague Holland, Stamford, CT
Friends of the Raanana Symphonette
Orchestra Inc., New York, NY
Friends of the Seige & Battle of Corinth
Inc., Corinth, MS
Friends of the University of the Holly
Spirit of Kaslik Inc., Miami, FL
Friends of the Wicomico County Free
Library Inc., Salisbury, MD
Friends of the Youth Study Center Inc.,
Philadelphia, PA
Friends of Tikvatenu Youth Centers,
Dallas, TX
Friends of Tiverton Library Services Inc.,
Tiverton, RI
March 8, 1999641999–10 I.R.B.

Friends of Van Voorhees Park Inc.,
Brooklyn, NY
Friends of Washington Adventist Hospital
Inc., Potomac, MD
Friends of Women and Children, Chicago,
IL
Friendship Foundation of American-
Vietnamese Inc., Lorain, OH
Friendship Home of Wells Inc., Wells, MN
Friendship Hospice Memorial Foundation
Inc., Nashville, TN
Friendship House of India, Warren, MI
Friendship Project Corporation, Larkspur,
CA
Frost Parent Teacher Organization, Mesa,
AZ
Fund for Labor Education Inc., New York,
NY
Fundacion Pro-Desarrollo De Barahona
Inc., Bronx, NY
Future Generations Inc., Little Rock, AR
Future Problem Solving Program of
Alabama Inc., Homewood, AL
Fuente De Agua Viva, Arlington, VA
Full Moon Theatre Inc., Providence, RI
Fulton Church & Community Workers
Inc., Fulton, NY
Genesis II Hamilton Heights Development
Corporation, New York, NY
Grace Mining Company, Fountain Valley,
CA
Graceland Ministries, Inc., Benton, KY
Ground Zero, Colorado Springs, CO
Group for Research and Aid to Abductees,
Cary, NC
Growth Adventures Inc., Houston, TX
Guadalupe Foundation Inc., Evanston, IL
Guardian Care of Madison Inc., Portage,
WI
Guardian Society, Villa Park, CA
Guatemala Information Documentation
and Education Center Inc., Arlington,
VA
Guatemaltecos Unidos en Accion of
Rhode Island Inc., Cranston, RI
Gulfcoast CADRE Inc., Bradenton, FL
Gunnison Basin Community Forum,
Crested Butte, CO
Gymnastics Oregon, Ashland, OR
Hancock Family Foundation, Inc.,
Annapolis, MD
Hickory Nut Gorge Wilderness, Lake
Lure, NC
Interdisciplinary Council on
Developmental & Learning Disorders,
Inc., Bethesda, MD
Interpower Group, Inc., Detroit, MI
Nutritional Research and Educational
Foundation Inc., New York, NY
Project Turnabout, Claremont, CA
Scranton Lockawanna Resource
Development Corp., Scranton, PA
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classi-
fication as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
1999–10 I.R.B.65March 8, 1999

March 8, 1999661999–10 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

1999–10 I.R.B.67March 8, 1999
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–52
will be found in Internal Revenue Bulletin 1999–1,
dated January 4, 1999.
Numerical Finding List
1
Bulletins 1999–1 through 1999–9
Announcements:
99–1, 1999–2 I.R.B. 41
99–2, 1999–2 I.R.B. 44
99–3, 1999–3 I.R.B. 15
99–4, 1999–3 I.R.B. 15
99–5, 1999–3 I.R.B. 16
99–6, 1999–4 I.R.B.24
99–7, 1999–2 I.R.B. 45
99–8, 1999–4 I.R.B.24
99–9, 1999–4 I.R.B. 24
99–10, 1999–5 I.R.B. 63
99–11, 1999–5 I.R.B. 64
99–12, 1999–5 I.R.B. 65
99–13, 1999–6 I.R.B. 18
99–14, 1999–7 I.R.B.60
99–15, 1999–8 I.R.B.78
99–16, 1999–8 I.R.B. 80
99–17, 1999–9 I.R.B.59
Notices:
99–1, 1999–2 I.R.B. 8
99–2, 1999–2 I.R.B. 8
99–3, 1999–2 I.R.B. 10
99–4, 1999–3 I.R.B. 9
99–5, 1999–3 I.R.B. 10
99–6, 1999–3 I.R.B. 12
99–7, 1999–4 I.R.B.23
99–8, 1999–5 I.R.B. 26
99–9, 1999–4 I.R.B. 23
99–10, 1999–6 I.R.B. 14
99–11, 1999–8 I.R.B.56
99–12, 1999–9 I.R.B.44
Proposed Regulations:
REG–245562–96, 1999–9 I.R.B. 45
REG–114663–97, 1999–6 I.R.B. 15
REG–118620–97, 1999–9 I.R.B. 46
REG–106219–98, 1999–9 I.R.B. 51
REG–115433–98, 1999–9 I.R.B. 54
REG–106902–98, 1999–8 I.R.B. 57
REG–111435–98, 1999–7 I.R.B. 55
REG–113694–98, 1999–7 I.R.B. 56
REG–116824–98, 1999–7 I.R.B.57
REG–117620–98, 1999–7 I.R.B. 59
REG–121865–98, 1999–8 I.R.B.63
Revenue Procedures:
99–1, 1999–1 I.R.B. 6
99–2, 1999–1 I.R.B. 73
99–3, 1999–1 I.R.B. 103
99–4, 1999–1 I.R.B. 115
99–5, 1999–1 I.R.B. 158
99–6, 1999–1 I.R.B. 187
99–7, 1999–1 I.R.B. 226
99–8, 1999–1 I.R.B. 229
99–9, 1999–2 I.R.B. 17
99–10, 1999–2 I.R.B. 11
99–11, 1999–2 I.R.B. 14
99–12, 1999–3 I.R.B. 13
99–13, 1999–5 I.R.B. 52
99–14, 1999–5 I.R.B. 56
99–15, 1999–7 I.R.B. 42
99–16, 1999–7 I.R.B. 50
99–17, 1999–7 I.R.B. 52
Revenue Rulings:
99–1, 1999–2 I.R.B. 4
99–2, 1999–2 I.R.B. 5
99–3, 1999–3 I.R.B. 4
99–4, 1999–4 I.R.B.19
99–5, 1999–6 I.R.B.8
99–6, 1999–6 I.R.B. 6
99–7, 1999–5 I.R.B. 4
99–8, 1999–6 I.R.B.8
99–9, 1999–7 I.R.B.14
Treasury Decisions:
8789, 1999–3 I.R.B. 5
8791, 1999–5 I.R.B. 7
8792, 1999–7 I.R.B.36
8793, 1999–7 I.R.B.15
8794, 1999–7 I.R.B.4
8795, 1999–7 I.R.B.8
8796, 1999–4 I.R.B. 16
8797, 1999–5 I.R.B. 5
8799, 1999–6 I.R.B. 10
8800, 1999–4 I.R.B. 20
8801, 1999–4 I.R.B. 5
8802, 1999–4 I.R.B. 10
8805, 1999–5 I.R.B. 14
8806, 1999–6 I.R.B.4
8807, 1999–9 I.R.B. 33
8809, 1999–7 I.R.B.27
8810, 1999–7 I.R.B.19
8812, 1999–8 I.R.B. 19
8813, 1999–9 I.R.B. 34
8814, 1999–9 I.R.B. 4
8815, 1999–9 I.R.B. 31
8816, 1999–8 I.R.B. 4
8817, 1999–8 I.R.B. 51

March 8, 1999681999–10 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–1 through 1999–9
Revenue Procedures:
78–10
Obsoleted by
99–12, 1999–3 I.R.B. 13
94–56
Superseded by
99–9, 1999–2 I.R.B. 17
97–23
Superseded by
99–3, 1999–1 I.R.B. 103
98–1
Superseded by
99–1, 1999–1 I.R.B. 6
98–2
Superseded by
99–2, 1999–1 I.R.B. 73
98–3
Superseded by
99–3, 1999–1 I.R.B. 103
98–4
Superseded by
99–4, 1999–1 I.R.B. 115
98–5
Superseded by
99–5, 1999–1 I.R.B. 158
98–6
Superseded by
99–6, 1999–1 I.R.B. 187
98–7
Superseded by
99–7, 1999–1 I.R.B. 226
98–8
Superseded by
99–8, 1999–1 I.R.B. 229
98–22
Modified and amplified by
99–13, 1999–5 I.R.B. 52
98–56
Superseded by
99–3, 1999–1 I.R.B. 103
98–63
Modified by announcement
99–7, 1999–2 I.R.B. 45
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–52 will be found in Internal
Revenue Bulletin 1999–1, dated January 4, 1999.

1999–10 I.R.B.69March 8, 1999
Notes

March 8, 1999701999–10 I.R.B.
Notes

INTERNAL REVENUE BULLETIN
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on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
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