Internal Revenue Bulletin 1998-12 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
T.D. 8756, page 4.
REG–120200–97, page 32.
Final, temporary, and proposed regulations under section
460 of the Code explain how a taxpayer elects not to apply
the look-back method to long-term contracts in
de minimis
cases.
EMPLOYEE PLANS
Rev. Proc. 98–22, page 11.
Administrative programs; closing agreements.This
procedure consolidates and expands upon the following cur-
rent Employee Plans programs: the Administrative Policy Re-
garding Self-Correction, the Walk-in Closing Agreement Pro-
gram, the Audit Closing Agreement Program, the Voluntary
Compliance Resolution (VCR) Program, and the Standard-
ized VCR Procedure. Rev. Procs. 94–16, 94–62, and 96–29
modified and superseded.
Notice 98–18, page 11.
Weighted average interest rate update.Guidelines are
set forth for determining for March 1998, the weighted aver-
age interest rate and the resulting permissible range of in-
terest rates used to calculate current liability for purposes of
the full funding limitation of section 412(c)(7) of the Code as
amended by the Omnibus Budget Reconciliation Act of 1987
and by the Uruguay Round Agreements Act (GATT).
Announcement 98–22, page 33.
The Service provides guidance on continued reliance on pro-
posed regulations regarding the issues raised by Geissal v.
Moore Medical Corp.,which is currently before the Supreme
Court.
EXEMPT ORGANIZATIONS
Rev. Rul. 98–15, page 6.
Tax consequences of participation by hospitals de-
scribed in section 501(c)(3) of the Code in joint ven-
tures with for-profit entities.This ruling provides exam-
ples illustrating whether nonprofit hospitals that participate
in joint ventures with for-profit entities continue to qualify for
exemption as organizations described in section 501(c)(3)
of the Code.
Announcement 98–23, page 34.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Announcement 98–24, page 35.
New Publication 970, Tax Benefits for Higher Education, will
be available in March 1998.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–12
March 23, 1998
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 38.

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

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

Section 170.—Charitable, Etc.,
Contributions and Gifts
Whether an organization that operates an acute
care hospital constitutes an organization whose prin-
cipal purpose is providing hospital care within the
meaning of § 170(b)(1)(A)(iii) of the Internal Rev-
enue Code for purposes of § 509(a)(1) when it forms
a limited liability company (LLC) with a for-profit
corporation and then contributes its hospital and all
of its related operating assets to the LLC, which then
operates the hospital. See Rev. Rul. 98–15, page 6.
Section 460.—Special Rules for
Long-Term Contracts
26 CFR 1.460–6T: Look-back method (temporary).
T.D. 8756
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Election Not to Apply Look-Back
Method in
De MinimisCases
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations explaining
how a taxpayer elects under section
460(b)(6) not to apply the look-back
method to long-term contracts in de min-
imis cases. The regulations reflect changes
to the law made by the Taxpayer Relief Act
of 1997 and affect manufacturers and con-
struction contractors whose long-term con-
tracts otherwise are subject to the look-
back method. The text of the temporary
regulations also serves as the text of the
proposed regulations set forth in the notice
of REG–120200–97, page 32.
DATES: These regulations are effective
January 13, 1998.
These regulations apply to long-term
contracts completed in taxable years end-
ing after August 5, 1997.
FOR FURTHER INFORMATION CON-
TACT: Leo F. Nolan II or John M.
Aramburu at (202) 622-4960 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public procedure
pursuant to the Administrative Procedure
Act (5 U.S.C. 553). For this reason, the
collection of information contained in
these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget (OMB) under
control number 1545–1572. Responses to
this collection of information are required
for a taxpayer to elect not to apply the
look-back method to long-term contracts
in de minimis cases.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
For further information concerning
this collection of information, and where
to submit comments on the collection of
information and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing the burden, please refer to the pream-
ble in the cross-referencing notice of
REG–120200–97.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains amendments to
the Income TaxRegulations (26 CFR Part
1). Section 460(b)(6) of the Internal Rev-
enue Code was added by section 1211 of
the Taxpayer Relief Act of 1997, Public
Law 105–34, 111 Stat. 788, 998, to pro-
vide an election not to apply the look-
back method of section 460(b)(2) to long-
term contracts in de minimiscases. These
regulations provide guidance concerning
this new election.
Explanation of Provisions
Section 460(b) provides that, upon the
completion of any long-term contract, the
look-back method is applied to amounts
reported under the contract using the per-
centage-of-completion method (PCM).
The PCM requires the use of estimates of
total contract price and total contract costs
for reporting income in taxable years pre-
ceding the year of contract completion.
The look-back method is intended to off-
set the time-value-of-money effects of
using estimates during the life of a con-
tract that differ from the actual amounts
determined in the year of contract com-
pletion.
Under the look-back method, taxpayers
are required to pay interest if a tax liabil-
ity is deferred as a result of underestimat-
ing the total contract price or overestimat-
ing total contract costs. Conversely,
taxpayers are entitled to receive interest if
a tax liability is accelerated as a result of
overestimating the total contract price or
underestimating total contract costs.
Section 1.460–6(e) contains an elective
relief provision concerning the look-back
method, which is called the delayed reap-
plication method. Under the delayed
reapplication method, a taxpayer does not
apply the look-back method to any post-
completion taxable year until the first of
the following conditions is met: (1) the
net undiscounted value of increases or de-
creases in the contract price occurring
since the last application of the look-back
method exceeds the lesser of $1,000,000
or 10 percent of the total contract price as
of that time; (2) the net undiscounted
value of increases or decreases in the con-
tract costs occurring since the last appli-
cation of the look-back method exceeds
the lesser of $1,000,000 or 10 percent of
the total actual contract costs as of that
time; (3) the taxpayer goes out of exis-
tence; (4) the taxpayer reasonably be-
lieves the contract is finally settled and
closed; or (5) five taxable years have
passed since the last application of the
look-back method.
In the Taxpayer Relief Act of 1997,
section 460(b)(6) was added to provide
taxpayers with an election not to apply the
look-back method to long-term contracts
in either of the following cases (de min-
imiscases). First, a taxpayer does not
apply the look-back method in the com-
pletion year if, for each prior contract
year, the cumulative taxable income (or
loss) actually reported under the contract
March 23, 199841998–12 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

is within 10 percent of the cumulative
look-back income (or loss). Cumulative
look-back income (or loss) is the amount
of taxable income (or loss) that the tax-
payer would have reported if the taxpayer
had used actual contract price and costs
instead of estimated contract price and
costs. Second, a taxpayer does not apply
the look-back method in a post-comple-
tion taxable year if, as of the close of the
post-completion taxable year, the cumula-
tive taxable income (or loss) under the
contract is within 10 percent of the cumu-
lative look-back income (or loss) under
the contract as of the close of the most re-
cent year in which the look-back method
was applied to the contract (or would
have been applied but for this election).
These temporary regulations provide
that a taxpayer may elect not to apply the
look-back method to long-term contracts
in de minimiscases by attaching a state-
ment to the taxpayer’s timely filed federal
income tax return (including extensions)
for the taxable year the election is effec-
tive or to an amended return for that year,
provided the amended return is filed on or
before March 31, 1998.
This election applies to all long-term
contracts completed during and after the
year of election, unless the Commissioner
consents to the revocation of the election.
These temporary regulations apply to
long-term contracts completed in taxable
years ending after August 5, 1997.
Special Analyses
It has been determined that this final
and temporary regulation is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that the collection of information in these
regulations will not have a significant
economic impact on a substantial number
of small entities. This certification is
based on the fact that the time required to
prepare and file an election statement is
minimal and will not have a significant
impact on those small entities that choose
to make the election. In addition, the
election need only be made once by a tax-
payer. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this final and temporary
regulation will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Drafting Information
The principal author of these final and
temporary regulations is Leo F. Nolan II,
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.
* * * * *
26 CFR Part 602
Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry for
Section 1.460-6T in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.460–6T also issued under 26 U.S.C.
460(h). * * *
Par. 2. Section 1.460–0 is amended by
adding an entry for §1.460–6T to read as
follows:
§1.460– Outline of regulations under
section 460.
* * * * *
§1.460–6T Look-back method
(temporary).
(a) through (i) [Reserved]
(j) Election not to apply look-back
method in de minimiscases.
* * * * *
Par. 3. Section 1.460–6T is added to
read as follows:
§1.460–6T Look-back method
(temporary).
(a) through (h) [Reserved] For further
guidance, see §1.460–6(a) through (h).
(i) [Reserved]
(j) Election not to apply look-back
method in de minimiscases. Section
460(b)(6) provides taxpayers with an
election not to apply the look-back method
to long-term contracts in de minimiscases,
effective for contracts completed in taxable
years ending after August 5, 1997. To
make an election, a taxpayer must attach a
statement to its timely filed original federal
income tax return (including extensions)
for the taxable year the election is to be-
come effective or to an amended return for
that year, provided the amended return is
filed on or before March 31, 1998. This
statement must have the legend “NOTIFI-
CATION OF ELECTION UNDER SEC-
TION 460(b)(6)”; provide the taxpayer’s
name and identifying number and the ef-
fective date of the election; and identify the
trades or businesses that involve long-term
contracts. An election applies to all long-
term contracts completed during and after
the taxable year for which the election is
effective. An election may not be revoked
without the Commissioner’s consent. A
consolidated group of corporations, as de-
fined in §1.1502–1(h), is subject to consis-
tency rules analogous to those in §1.460–
6(e)(2) (concerning election to use delayed
reapplication method) and in §1.460–
6(d)(4)(ii)(C) (concerning election to use
simplified marginal impact method).
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (c) is
amended by adding an entry to the table
in numerical order to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or sectionCurrent OMB
where identified control No.
and described
* * * * *
1.460–6T(j) . . . . . . . . . . . . . .1545–1572
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
1998–12 I.R.B.5March 23, 1998

Approved December 18, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
January 12, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1998,
63 F.R. 1917)
Section 501.—Exemption From
Tax on Corporations, Certain
Trusts, Etc.
26 CFR 1.501(c)(3)–1: Organizations organized
and operated for religious, charitable, scientific,
testing for public safety, literary, or educational
purposes, or for the prevention of cruelty to
children or animals.
(Also §§ 170 and 509.)
Tax consequences of participation by
hospitals described in section 501(c)(3)
of the Code in joint ventures with for-
profit entities.This ruling provides ex-
amples illustrating whether nonprofit hos-
pitals that participate in joint ventures
with for-profit entities continue to qualify
for exemption as organizations described
in section 501(c)(3) of the Code.
Rev. Rul. 98–15
ISSUE
Whether, under the facts described
below, an organization that operates an
acute care hospital continues to qualify
for exemption from federal income tax as
an organization described in § 501(c)(3)
of the Internal Revenue Code when it
forms a limited liability company (LLC)
with a for-profit corporation and then
contributes its hospital and all of its other
operating assets to the LLC, which then
operates the hospital.
FACTS
Situation 1
Ais a nonprofit corporation that owns
and operates an acute care hospital. Ahas
been recognized as exempt from federal
income tax under § 501(a) as an organiza-
tion described in § 501(c)(3) and as other
than a private foundation as defined in
§ 509(a) because it is described in
§ 170(b)(1)(A)(iii). B is a for-profit cor-
poration that owns and operates a number
of hospitals.
Aconcludes that it could better serve its
community if it obtained additional fund-
ing. Bis interested in providing financing
for A’s hospital, provided it earns a rea-
sonable rate of return. Aand Bform a lim-
ited liability company, C. Acontributes all
of its operating assets, including its hospi-
tal to C. Balso contributes assets to C. In
return, Aand Breceive ownership inter-
ests in Cproportional and equal in value
to their respective contributions.
C’s Articles of Organization and Oper-
ating Agreement (“governing docu-
ments”) provide that Cis to be managed
by a governing board consisting of three
individuals chosen by Aand two individu-
als chosen by B. Aintends to appoint
community leaders who have experience
with hospital matters, but who are not on
the hospital staff and do not otherwise en-
gage in business transactions with the
hospital.
The governing documents further pro-
vide that they may only be amended with
the approval of both owners and that a
majority of three board members must ap-
prove certain major decisions relating to
C’s operation, including decisions relat-
ing to any of the following topics:
A. C’s annual capital and operating
budgets;
B. Distributions of C’s earnings;
C. Selection of key executives;
D. Acquisition or disposition of health
care facilities;
E. Contracts in excess of $x per year;
F. Changes to the types of services of-
fered by the hospital; and
G. Renewal or termination of manage-
ment agreements.
The governing documents require that
Coperate any hospital it owns in a man-
ner that furthers charitable purposes by
promoting health for a broad cross section
of its community. The governing docu-
ments explicitly provide that the duty of
the members of the governing board to
operate Cin a manner that furthers chari-
table purposes by promoting health for a
broad cross section of the community
overrides any duty they may have to oper-
ate Cfor the financial benefit of its own-
ers. Accordingly, in the event of a con-
flict between operation in accordance
with the community benefit standard and
any duty to maximize profits, the mem-
bers of the governing board are to satisfy
the community benefit standard without
regard to the consequences for maximiz-
ing profitability.
The governing documents further pro-
vide that all returns of capital and distrib-
utions of earnings made to owners of C
shall be proportional to their ownership
interests in C. The terms of the governing
documents are legal, binding, and en-
forceable under applicable state law.
Centers into a management agreement
with a management company that is unre-
lated to Aor Bto provide day-to-day man-
agement services to C. The management
agreement is for a five-year period, and
the agreement is renewable for additional
five-year periods by mutual consent. The
management company will be paid a
management fee for its services based on
C’s gross revenues. The terms and condi-
tions of the management agreement, in-
cluding the fee structure and the contract
term, are reasonable and comparable to
what other management firms receive for
similar services at similarly situated hos-
pitals. Cmay terminate the agreement for
cause.
None of the officers, directors, or key
employees of Awho were involved in
making the decision to form Cwere
promised employment or any other in-
ducement by Cor Band their related enti-
ties if the transaction were approved.
None of A’s officers, directors, or key em-
ployees have any interest, including any
interest through attribution determined in
accordance with the principles of § 318,
in Bor any of its related entities.
Pursuant to § 301.7701–3(b) of the
Procedure and Administrative Regula-
tions, Cwill be treated as a partnership
for federal income tax purposes.
Aintends to use any distributions it re-
ceives from Cto fund grants to support
activities that promote the health of A’s
community and to help the indigent ob-
tain health care. Substantially all of A’s
grantmaking will be funded by distribu-
tions from C. A’s projected grantmaking
program and its participation as an owner
of Cwill constitute A’s only activities.
Situation 2
Dis a nonprofit corporation that owns
and operates an acute care hospital. Dhas
been recognized as exempt from federal
income tax under § 501(a) as an organiza-
tion described in § 501(c)(3) and as other
than a private foundation as defined in
March 23, 199861998–12 I.R.B.

§ 509(a) because it is described in
§ 170(b)(1)(A)(iii). Eis a for-profit hos-
pital corporation that owns and operates a
number of hospitals and provides man-
agement services to several hospitals that
it does not own.
Dconcludes that it could better serve its
community if it obtained additional fund-
ing. Eis interested in providing financing
for D’s hospital, provided it earns a rea-
sonable rate of return. Dand Eform a
limited liability company, F. Dcon-
tributes all of its operating assets, includ-
ing its hospital to F. Ealso contributes as-
sets to F. In return, Dand Ereceive
ownership interests proportional and equal
in value to their respective contributions.
F’s Articles of Organization and Oper-
ating Agreement (“governing docu-
ments”) provide that Fis to be managed
by a governing board consisting of three
individuals chosen by Dand three indi-
viduals chosen by E. Dintends to appoint
community leaders who have experience
with hospital matters, but who are not on
the hospital staff and do not otherwise en-
gage in business transactions with the
hospital.
The governing documents further pro-
vide that they may only be amended with
the approval of both owners and that a
majority of board members must approve
certain major decisions relating to F’s op-
eration, including decisions relating to
any of the following topics:
A. F’s annual capital and operating
budgets;
B. Distributions of F’s earnings over a
required minimum level of distribu-
tions set forth in the Operating
Agreement;
C. Unusually large contracts; and
D. Selection of key executives.
F’s governing documents provide that
F’s purpose is to construct, develop, own,
manage, operate, and take other action in
connection with operating the health care
facilities it owns and engage in other health
care-related activities. The governing doc-
uments further provide that all returns of
capital and distributions of earnings made
to owners of Fshall be proportional to
their ownership interests in F.
Fenters into a management agreement
with a wholly-owned subsidiary of Eto
provide day-to-day management services
to F. The management agreement is for a
five-year period, and the agreement is re-
newable for additional five-year periods
at the discretion of E’s subsidiary. Fmay
terminate the agreement only for cause.
E’s subsidiary will be paid a management
fee for its services based on gross rev-
enues. The terms and conditions of the
management agreement, including the fee
structure and the contract term other than
the renewal terms, are reasonable and
comparable to what other management
firms receive for similar services at simi-
larly situated hospitals.
As part of the agreement to form F, D
agrees to approve the selection of two indi-
viduals to serve as F’s chief executive offi-
cer and chief financial officer. These indi-
viduals have previously worked for Ein
hospital management and have business
expertise. They will work with the man-
agement company to oversee F’s day-to-
day management. Their compensation is
comparable to what comparable executives
are paid at similarly situated hospitals.
Pursuant to § 301.7701–3(b), Fwill be
treated as a partnership for federal tax in-
come purposes.
Dintends to use any distributions it re-
ceives from Fto fund grants to support
activities that promote the health of D’s
community and to help the indigent ob-
tain health care. Substantially all of D’s
grantmaking will be funded by distribu-
tions from F. D’s projected grantmaking
program and its participation as an owner
of Fwill constitute D’s only activities.
LAW
Section 501(c)(3) provides, in part, for
the exemption from federal income tax of
corporations organized and operated ex-
clusively for charitable, scientific, or edu-
cational purposes, provided no part of the
organization’s net earnings inures to the
benefit of any private shareholder or indi-
vidual.
Section 1.501(c)(3)–1(c)(1) of the In-
come Tax Regulations provides that an
organization will be regarded as operated
exclusively for one or more exempt pur-
poses only if it engages primarily in activ-
ities which accomplish one or more of
such exempt purposes specified in
§ 501(c)(3). An organization will not be
so regarded if more than an insubstantial
part of its activities is not in furtherance
of an exempt purpose. In Better Business
Bureau of Washington, D.C. v. United
States,326 U.S. 279, 283 (1945), the
Court stated that “the presence of a single
. . . [non-exempt] purpose, if substantial
in nature, will destroy the exemption re-
gardless of the number or importance of
truly . . . [exempt] purposes.”
Section 1.501(c)(3)–1(d)(1)(ii) pro-
vides that an organization is not organized
or operated exclusively for exempt pur-
poses unless it serves a public rather than a
private interest. It further states that “to
meet the requirement of this subdivision,
it is necessary for an organization to estab-
lish that it is not organized and operated
for the benefit of private interests . . . .”
Section 1.501(c)(3)–1(d)(2) provides
that the term “charitable” is used in
§ 501(c)(3) in its generally accepted legal
sense. The promotion of health has long
been recognized as a charitable purpose.
See Restatement (Second) of Trusts,
§§ 368, 372 (1959); 4A Austin W. Scott
and William F. Fratcher, The Law of
Trusts§§ 368, 372 (4th ed. 1989). How-
ever, not every activity that promotes
health supports tax exemption under
§ 501(c)(3). For example, selling pre-
scription pharmaceuticals certainly pro-
motes health, but pharmacies cannot qual-
ify for recognition of exemption under
§ 501(c)(3) on that basis alone. Federa-
tion Pharmacy Services, Inc. v. Commis-
sioner,72 T.C. 687 (1979), aff’d, 625 F.2d
804 (8th Cir. 1980) (“Federation Phar-
macy”). Furthermore, “an institution for
the promotion of health is not a charitable
institution if it is privately owned and is
run for the profit of the owners.” 4A
Austin W. Scott and William F. Fratcher,
The Law of Trusts§ 372.1 (4th ed. 1989).
See also Restatement (Second) of Trusts,
§ 376 (1959). This principle applies to
hospitals and other health care organiza-
tions. As the Tax Court stated, “[w]hile
the diagnosis and cure of disease are in-
deed purposes that may furnish the foun-
dation for characterizing the activity as
‘charitable,’ something more is required.”
Sonora Community Hospital v. Commis-
sioner,46 T.C. 519, 525-526 (1966), aff’d
397 F.2d 814 (9th Cir. 1968) (“Sonora”).
See also Sound Health Association v.
Commissioner,71 T.C. 158 (1978), acq.
1981-2 C.B. 2 (“Sound Health”);
Geisinger Health Plan v. Commissioner,
985 F.2d 1210 (3rd Cir., 1993), rev’g62
T.C.M. 1656 (1991) (“Geisinger”).
In evaluating whether a nonprofit hos-
pital qualifies as an organization de-
1998–12 I.R.B.7March 23, 1998

scribed in § 501(c)(3), Rev. Rul. 69–545,
1969–2 C.B. 117, compares two hospi-
tals. The first hospital discussed is con-
trolled by a board of trustees composed of
independent civic leaders. In addition,
the hospital maintains an open medical
staff, with privileges available to all qual-
ified physicians; it operates a full-time
emergency room open to all regardless of
ability to pay; and it otherwise admits all
patients able to pay (either themselves, or
through third party payers such as private
health insurance or government programs
such as Medicare). In contrast, the sec-
ond hospital is controlled by physicians
who have a substantial economic interest
in the hospital. This hospital restricts the
number of physicians admitted to the
medical staff, enters into favorable rental
agreements with the individuals who con-
trol the hospital, and limits emergency
room and hospital admission substantially
to the patients of the physicians who con-
trol the hospital. Rev. Rul. 69–545 notes
that in considering whether a nonprofit
hospital is operated to serve a private ben-
efit, the Service will weigh all the rele-
vant facts and circumstances in each case,
including the use and control of the hospi-
tal. The revenue ruling concludes that the
first hospital continues to qualify as an or-
ganization described in § 501(c)(3) and
the second hospital does not because it is
operated for the private benefit of the
physicians who control the hospital.
Section 509(a) provides that the term
“private foundation” means a domestic or
foreign organization described in
§ 501(c)(3) other than an organization de-
scribed in § 509(a)(1), (2), (3), or (4). The
organizations described in § 509(a)(1) in-
clude those described in § 170(b)(1)-
(A)(iii). An organization is described in
§ 170(b)(1)(A)(iii) if its principal purpose
is to provide medical or hospital care.
Section 512(c) provides that an exempt
organization that is a member of a part-
nership conducting an unrelated trade or
business with respect to the exempt orga-
nization must include its share of the part-
nership income and deductions attribut-
able to that business (subject to the
exceptions, additions, and limitations in
§ 512(b)) in computing its unrelated busi-
ness income. See alsoH.R. No. 2319,
81st Cong., 2d Sess. 36, 111–112 (1950);
S. Rep. No. 2375, 81st Cong., 2d Sess. 26,
109–110 (1950); § 1.512(c)–1.
In Butler v. Commissioner,36 T.C.
1097 (1961), acq.1962–2 C.B. 4
(“Butler”), the court examined the rela-
tionship between a partner and a partner-
ship for purposes of determining whether
the partner was entitled to a business bad
debt deduction for a loan he had made to
the partnership that it could not repay. In
holding that the partner was entitled to the
bad debt deduction, the court noted that
“[b]y reason of being a partner in a busi-
ness, petitioner was individually engaged
in business.” Butler,36 T.C. at 1106 cit-
ing Dwight A. Ward v. Commissioner,20
T.C. 332 (1953), aff ’d224 F.2d 547 (9th
Cir. 1955).
In Plumstead Theatre Society, Inc. v.
Commissioner,74 T.C. 1324 (1980),
aff ’d, 675 F.2d 244 (9th Cir. 1982)
(“Plumstead”), the Tax Court held that a
charitable organization’s participation as
a general partner in a limited partnership
did not jeopardize its exempt status. The
organization co-produced a play as one of
its charitable activities. Prior to the open-
ing of the play, the organization encoun-
tered financial difficulties in raising its
share of costs. In order to meet its fund-
ing obligations, the organization formed a
limited partnership in which it served as
general partner, and two individuals and a
for-profit corporation were the limited
partners. One of the significant factors
supporting the Tax Court’s holding was
its finding that the limited partners had no
control over the organization’s operations.
In Broadway Theatre League of Lynch-
burg, Virginia, Inc. v. U.S.,293 F.Supp.
346 (W.D.Va. 1968) (“Broadway Theatre
League”), the court held that an organiza-
tion that promoted an interest in theatrical
arts did not jeopardize its exempt status
when it hired a booking organization to
arrange for a series of theatrical perfor-
mances, promote the series and sell sea-
son tickets to the series because the con-
tract was for a reasonable term and
provided for reasonable compensation
and the organization retained ultimate au-
thority over the activities being managed.
In Housing Pioneers v. Commissioner,
65 T.C.M. (CCH) 2191 (1993), aff’d, 49
F.3d 1395 (9th Cir. 1995), amended58
F.3d 401 (9th Cir. 1995) (“Housing Pio-
neers”), the Tax Court concluded that an
organization did not qualify as a
§ 501(c)(3) organization because its activ-
ities performed as co-general partner in
for-profit limited partnerships substan-
tially furthered a non-exempt purpose,
and serving that purpose caused the orga-
nization to serve private interests. The or-
ganization entered into partnerships as a
one percent co-general partner of existing
limited partnerships for the purpose of
splitting the tax benefits with the for-
profit partners. Under the management
agreement, the organization’s authority as
co-general partner was narrowly circum-
scribed. It had no management responsi-
bilities and could describe only a vague
charitable function of surveying tenant
needs.
In est of Hawaii v. Commissioner,71
T.C. 1067 (1979), aff ’d in unpublished
opinion647 F.2d 170 (9th Cir. 1981) (“est
of Hawaii”), several for-profit est organi-
zations exerted significant indirect control
over est of Hawaii, a non-profit entity,
through contractual arrangements. The
Tax Court concluded that the for-profits
were able to use the non-profit as an “in-
strument” to further their for-profit pur-
poses. Neither the fact that the for-profits
lacked structural control over the organi-
zation nor the fact that amounts paid to
the for-profit organizations under the con-
tracts were reasonable affected the court’s
conclusion. Consequently, est of Hawaii
did not qualify as an organization de-
scribed in § 501(c)(3).
In Harding Hospital, Inc. v. United
States,505 F.2d 1068 (6th Cir. 1974)
(“Harding”), a non-profit hospital with an
independent board of directors executed a
contract with a medical partnership com-
posed of seven physicians. The contract
gave the physicians control over care of
the hospital’s patients and the stream of
income generated by the patients while
also guaranteeing the physicians thou-
sands of dollars in payment for various
supervisory activities. The court held that
the benefits derived from the contract
constituted sufficient private benefit to
preclude exemption.
ANALYSIS
For federal income tax purposes, the
activities of a partnership are often con-
sidered to be the activities of the partners.
See, e.g., Butler.Aggregate treatment is
also consistent with the treatment of part-
nerships for purpose of the unrelated busi-
ness income tax under § 512(c). See H.R.
No. 2319, 81st Cong., 2d Sess. 36, 110–
March 23, 199881998–12 I.R.B.

112 (1950); S. Rep. No. 2375, 81st Cong.,
2d Sess. 26, 109–110 (1950); § 1.512(c)–
1. In light of the aggregate principle dis-
cussed in Butlerand reflected in § 512(c),
the aggregate approach also applies for
purposes of the operational test set forth
in § 1.501(c)(3)–1(c). Thus, the activities
of an LLC treated as a partnership for fed-
eral income tax purposes are considered
to be the activities of a nonprofit organi-
zation that is an owner of the LLC when
evaluating whether the nonprofit organi-
zation is operated exclusively for exempt
purposes within the meaning of
§ 501(c)(3).
A § 501(c)(3) organization may form
and participate in a partnership, including
an LLC treated as a partnership for fed-
eral income tax purposes, and meet the
operational test if participation in the part-
nership furthers a charitable purpose, and
the partnership arrangement permits the
exempt organization to act exclusively in
furtherance of its exempt purpose and
only incidentally for the benefit of the for-
profit partners. See Plumsteadand Hous-
ing Pioneers.Similarly, a § 501(c)(3) or-
ganization may enter into a management
contract with a private party giving that
party authority to conduct activities on
behalf of the organization and direct the
use of the organization’s assets provided
that the organization retains ultimate au-
thority over the assets and activities being
managed and the terms and conditions of
the contract are reasonable, including rea-
sonable compensation and a reasonable
term. See Broadway Theatre League.
However, if a private party is allowed to
control or use the non-profit organiza-
tion’s activities or assets for the benefit of
the private party, and the benefit is not in-
cidental to the accomplishment of exempt
purposes, the organization will fail to be
organized and operated exclusively for
exempt purposes. See est of Hawaii;
Harding; § 1.501(c)(3)–1(c)(1); and
§ 1.501(c)(3)–1(d)(1)(ii).
Situation 1
After Aand Bform C, and Acon-
tributes all of its operating assets to C, A’s
activities will consist of the health care
services it provides through Cand any
grantmaking activities it can conduct
using income distributed by C. Awill re-
ceive an interest in Cequal in value to the
assets it contributes to C, and A’s and B’s
returns from Cwill be proportional to
their respective investments in C. The
governing documents of Ccommit Cto
providing health care services for the ben-
efit of the community as a whole and to
give charitable purposes priority over
maximizing profits for C’s owners. Fur-
thermore, through A’s appointment of
members of the community familiar with
the hospital to C’s board, the board’s
structure, which gives A’s appointees vot-
ing control, and the specifically enumer-
ated powers of the board over changes in
activities, disposition of assets, and re-
newal of the management agreement, A
can ensure that the assets it owns through
Cand the activities it conducts through C
are used primarily to further exempt pur-
poses. Thus, Acan ensure that the benefit
to Band other private parties, like the
management company, will be incidental
to the accomplishment of charitable pur-
poses. Additionally, the terms and condi-
tions of the management contract, includ-
ing the terms for renewal and termination,
are reasonable. Finally, A’s grants are in-
tended to support education and research
and give resources to help provide health
care to the indigent. All of these facts and
circumstances establish that, when Apar-
ticipates in forming Cand contributes all
of its operating assets to C, and Coper-
ates in accordance with its governing doc-
uments, Awill be furthering charitable
purposes and continue to be operated ex-
clusively for exempt purposes.
Because A’s grantmaking activity will
be contingent upon receiving distributions
from C, A’s principal activity will con-
tinue to be the provision of hospital care.
As long as A’s principal activity remains
the provision of hospital care, Awill not
be classified as a private foundation in ac-
cordance with § 509(a)(1) as an organiza-
tion described in § 170(b)(1)(A)(iii).
Situation 2
When Dand Eform F, and Dcon-
tributes its assets to F, Dwill be engaged
in activities that consist of the health care
services it provides through Fand any
grantmaking activities it can conduct
using income distributed by F. However,
unlike A, Dwill not be engaging primar-
ily in activities that further an exempt pur-
pose. “While the diagnosis and cure of
disease are indeed purposes that may fur-
nish the foundation for characterizing the
activity as ‘charitable,’ something more is
required.” Sonora,46 T.C. at 525–526.
See also Federation Pharmacy; Sound
Health;and Geisinger. In the absence of
a binding obligation in F’s governing doc-
uments for Fto serve charitable purposes
or otherwise provide its services to the
community as a whole, Fwill be able to
deny care to segments of the community,
such as the indigent. Because Dwill
share control of Fwith E, Dwill not be
able to initiate programs within Fto serve
new health needs within the community
without the agreement of at least one gov-
erning board member appointed by E. As
a business enterprise, Ewill not necessar-
ily give priority to the health needs of the
community over the consequences for F’s
profits. The primary source of informa-
tion for board members appointed by D
will be the chief executives, who have a
prior relationship with Eand the manage-
ment company, which is a subsidiary of E.
The management company itself will
have broad discretion over F’s activities
and assets that may not always be under
the board’s supervision. For example, the
management company is permitted to
enter into all but “unusually large” con-
tracts without board approval. The man-
agement company may also unilaterally
renew the management agreement. Based
on all these facts and circumstances, D
cannot establish that the activities it con-
ducts through Ffurther exempt purposes.
“[I]n order for an organization to qualify
for exemption under § 501(c)(3) the orga-
nization must ‘establish’ that it is neither
organized nor operated for the ‘benefit of
private interests.’” Federation Pharmacy,
625 F.2d at 809. Consequently, the bene-
fit to Eresulting from the activities D
conducts through Fwill not be incidental
to the furtherance of an exempt purpose.
Thus, Dwill fail the operational test when
it forms F, contributes its operating assets
to F, and then serves as an owner of F.
HOLDING
Awill continue to qualify as an organi-
zation described in § 501(c)(3) when it
forms Cand contributes all of its operat-
ing assets to Cbecause Ahas established
that Awill be operating exclusively for a
charitable purpose and only incidentally
for the purpose of benefiting the private
interests of B. Furthermore, A’s principal
activity will continue to be the provision
1998–12 I.R.B.9March 23, 1998

of hospital care when Cbegins opera-
tions. Thus, Awill be an organization de-
scribed in § 170(b)(1)(A)(iii) and thus,
will not be classified as a private founda-
tion in accordance with § 509(a)(1), as
long as hospital care remains its principal
activity.
Dwill violate the requirements to be an
organization described in § 501(c)(3)
when it forms Fand contributes all of its
operating assets to Fbecause Dhas failed
to establish that it will be operated exclu-
sively for exempt purposes.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Judith E. Kindell of the Exempt
Organizations Division. For further infor-
mation regarding this revenue ruling con-
tact Judith E. Kindell on (202) 622-6494
(not a toll-free call).
Section 509.—Private
Foundation Defined
Whether an organization that operates an acute
care hospital constitutes an organization whose prin-
cipal purpose is providing hospital care within the
meaning of § 170(b)(1)(A)(iii) of the Internal Rev-
enue Code for purposes of § 509(a)(1) when it forms
a limited liability company (LLC) with a for-profit
corporation and then contributes its hospital and all
of its related operating assets to the LLC, which then
operates the hospital. See Rev. Rul. 98–15, page 6.
March 23, 1998101998–12 I.R.B.

1998–12 I.R.B.11March 23, 1998
Weighted Average Interest Rate
Update
Notice 98–18
Notice 88–73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Om-
nibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103–465
(GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for February
1998 is 5.89 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
Part III. Administrative, Procedural, and Miscellaneous
90% to 106%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
March19986.716.04 to 7.116.04 to 7.38
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans Di-
vision. For further information regarding
this notice, call (202) 622-6076 between
2:30 and 3:30 p.m. Eastern time (not a
toll-free number). Ms. Prestia’s number
is (202) 622-7377 (also not a toll-free
number).
26 CFR 601.202: Closing agreements.
Rev. Proc. 98–22
TABLE OF CONTENTS
PART I. INTRODUCTION TO EMPLOYEE PLANS COMPLIANCE RESOLUTION SYSTEM
SECTION 1. PURPOSE AND OVERVIEW
.01 Purpose.
.02 General principles underlying EPCRS.
.03 Overview.
.04 TVC program.
.05 Further changes and request for comments.
SECTION 2. CHANGES TO PROGRAMS
.01 Changes affecting all programs.
.02 Changes affecting specific programs.
PART II. PROGRAM EFFECT AND ELIGIBILITY
SECTION 3. EFFECT OF EPCRS; RELIANCE
.01 Effect of EPCRS.
.02 Reliance.
SECTION 4. PROGRAM ELIGIBILITY
.01 General program eligibility.
.02 Effect of examination.
.03 Favorable Letter requirement.
.04 Established practices and procedures.
.05 Plan amendments.
.06 Egregious failures.
.07 Diversion or misuse of plan assets.
.08 Operational Failures in § 403(b) Plans.

March 23, 1998121998–12 I.R.B.
PART III. DEFINITIONS, CORRECTION PRINCIPLES, AND RULES OF GENERAL APPLICABILITY
SECTION 5. DEFINITIONS
.01 Qualification Failure.
.02 Favorable Letter.
.03 Maximum Payment Amount.
.04 Qualified Plan.
.05 § 403(b) Plan.
.06 Under Examination.
SECTION 6. CORRECTION PRINCIPLES AND RULES OF GENERAL APPLICABILITY
.01 Correction principles; rules of general applicability.
.02 Correction.
.03 Correction under statute or regulations.
.04 Matters subject to excise taxes.
.05 Confidentiality and disclosure.
.06 No effect on other law.
PART IV. SELF-CORRECTION (APRSC)
SECTION 7. IN GENERAL
SECTION 8. SELF-CORRECTION OF INSIGNIFICANT OPERATIONAL FAILURES
.01 Requirements.
.02 Factors.
.03 Multiple failures.
.04 Examples.
SECTION 9. SELF-CORRECTION OF SIGNIFICANT OPERATIONAL FAILURES
.01 Requirements.
.02 Correction period.
.03 Substantial completion of correction.
.04 Example.
PART V. VOLUNTARY CORRECTION WITH SERVICE APPROVAL (VCR AND WALK-IN CAP)
SECTION 10. VCR PROGRAM
.01 VCR requirements.
.02 Identification of failures.
.03 No concurrent examination activity.
.04 Insufficient information.
.05 Closing agreements with respect to the excise tax under § 4974.
.06 Initial processing.
.07 Processing of acceptable submission.
.08 Failures discovered after initial submission.
.09 Conference right.
.10 Failure to reach resolution.
.11 Concurrent processing of determination letter applications.
.12 Special rules relating to SVP.
.13 General description of compliance statement.
.14 Compliance statement conditioned upon timely correction.
.15 Compliance statement for new plans conditioned upon timely amendment.
.16 Acknowledgement letter.
.17 Verification.
SECTION 11. WALK-IN CAP
.01 Walk-in CAP requirements.
.02 Failures discovered after initial submission.
.03 Failure to reach resolution.
.04 Effect of closing agreement.

1998–12 I.R.B.13March 23, 1998
SECTION 12. APPLICATION PROCEDURES FOR VCR AND WALK-IN CAP
.01 General rules.
.02 Multiemployer and multiple employer plans.
.03 Submission requirements.
.04 Required documents.
.05 Fee.
.06 Signed submission.
.07 Power of attorney requirements.
.08 Penalty of perjury statement.
.09 Checklist.
.10 Designation.
.11 VCR/SVP mailing address.
.12 Walk-in CAP mailing address.
.13 Maintenance of copies of submissions.
SECTION 13. FEES
.01 Rev. Proc. 98–8 modified.
.02 VCR fee.
.03 Establishing number of plan participants.
.04 SVP fee.
.05 Walk-in CAP compliance correction fee .
PART VI. CORRECTION ON AUDIT (AUDIT CAP)
SECTION 14. DESCRIPTION OF AUDIT CAP
.01 Audit CAP requirements.
.02 Payment of sanction.
.03 Additional requirements.
.04 Failure to reach resolution.
.05 Effect of closing agreement.
.06 Other procedural rules.
SECTION 15. AUDIT CAP SANCTION
.01 Determination of sanction.
.02 Factors considered.
PART VII. CHRONOLOGY, EFFECT ON OTHER DOCUMENTS, AND EFFECTIVE DATE
SECTION 16. CHRONOLOGY
.01 APRSC.
.02 VCR program.
.03 Walk-in CAP.
.04 Audit CAP.
SECTION 17. EFFECT ON OTHER DOCUMENTS
.01 Revenue procedures modified and superseded.
.02 Revenue procedure 98–8 modified.
.03 APRSC modified.
.04 Audit CAP modified.
SECTION 18. EFFECTIVE DATE
SECTION 19. PAPERWORK REDUCTION ACT
DRAFTING INFORMATION
APPENDIX A
APPENDIX B

March 23, 1998141998–12 I.R.B.
PART I. INTRODUCTION TO
EMPLOYEE PLANS COMPLIANCE
RESOLUTION SYSTEM
SECTION 1. PURPOSE AND
OVERVIEW
.01 Purpose.This revenue procedure
provides a comprehensive system of cor-
rection programs for sponsors of retire-
ment plans that are intended to satisfy the
requirements of § 401(a) or § 403(a) of
the Internal Revenue Code (the “Code”),
but that have not met these requirements
for a period of time. This system permits
plan sponsors to correct these qualifica-
tion failures and thereby continue to pro-
vide their employees with retirement ben-
efits on a tax-favored basis. The Internal
Revenue Service (the “Service”) previ-
ously established several programs allow-
ing correction of qualification failures, in-
cluding the Administrative Policy
Regarding Self-Correction (“APRSC”),
the Voluntary Compliance Resolution
(“VCR”) program, the Walk-in Closing
Agreement Program (“Walk-in CAP”),
and the Audit Closing Agreement Pro-
gram (“Audit CAP”).
This revenue procedure modifies these
programs and consolidates them into a co-
ordinated Employee Plans Compliance
Resolution System (“EPCRS”). In re-
sponse to requests by practitioners, this
revenue procedure sets forth and assem-
bles in one place the specific rules and
procedures applicable to the programs, in-
cluding illustrative examples.
.02 General principles underlying
EPCRS. EPCRS is based on the follow-
ing general principles:
• Sponsors of tax-qualified retirement
plans should be encouraged to establish
administrative practices and procedures
that ensure that plans are operated prop-
erly in accordance with the tax qualifica-
tion requirements.
• Sponsors of tax-qualified retirement
plans should maintain plan documents
satisfying the tax qualification require-
ments.
• Plan sponsors should make voluntary
and timely correction of any plan qualifi-
cation failures, whether involving dis-
crimination in favor of highly compen-
sated employees, plan operations, or the
terms of the plan document. Timely and
efficient correction protects participating
employees by providing them with their
expected retirement benefits, including
favorable tax treatment.
• Voluntary compliance is promoted by
providing for limited fees for voluntary
corrections approved by the Service,
thereby reducing employers’ uncertainty
regarding their potential liability.
• Sanctions for qualification failures
identified on audit should be reasonable
in light of the nature, extent, and severity
of the violation.
• Administration of EPCRS should be
consistent and uniform.
• Taxpayers should be able to rely on
the availability of EPCRS in taking cor-
rective actions to maintain the qualified
status of their plans.
.03 Overview. EPCRS includes the
following basic elements:
• Self-correction.A plan sponsor that
has established compliance practices and
procedures may, at any time, correct in-
significant operational failures without
paying any fee or sanction. In addition,
where a plan is the subject of a favorable
determination letter from the Service, the
plan sponsor generally may correct even
significant operational failures within a
two-year period without payment of any
fee or sanction. (APRSC)
• Voluntary correction with Service
approval. In the case of any other qualifi-
cation failure, a plan sponsor, at any time
before audit, may pay a limited fee and
receive the Service’s approval for the cor-
rection. (VCR and Walk-in CAP)
• Correction on audit.If a qualifica-
tion failure (other than a failure corrected
as described above) is identified on audit
and corrected, the sanction imposed will
bear a reasonable relationship to the na-
ture, extent and severity of the failure,
taking into account the extent to which
correction occurred before audit. (Audit
CAP)
.04 TVC program.This revenue pro-
cedure does not incorporate or modify the
Tax Sheltered Annuity Voluntary Correc-
tion program (“TVC”). TVC enables a
sponsor of a § 403(b) Plan to voluntarily
disclose to the Service certain operational
defects it has discovered in its § 403(b)
plans and pay both a fixed fee and a mon-
etary sanction negotiated with the Ser-
vice. The TVC program procedures
under Rev. Proc. 95–24, 1995–1 C.B.
694, continue to apply, pending future
modifications to the TVC program (which
may include consolidation with EPCRS).
.05 Further changes and request for
comments.The Service believes it is im-
portant to update EPCRS periodically to
reflect changing circumstances and make
other improvements. Accordingly, it is
anticipated that EPCRS will continue to
be monitored and improved in light of ex-
perience and comments from those who
use it, and that this consolidated revenue
procedure will be revised periodically for
that purpose. The Service specifically so-
licits comments or suggestions relating to
this revenue procedure and the adminis-
tration of EPCRS. In particular, the Ser-
vice requests (1) comments regarding the
extent to which a fixed (as opposed to an
indefinite) self-correction period encour-
ages prompt, voluntary correction, (2)
suggestions for items that should be in-
cluded in forthcoming guidance on per-
missible correction methods, and (3)
comments on possible improvements to
the TVC program.
It is requested that comments or sugges-
tions be submitted by June 21, 1998, ad-
dressed to CC:DOM:CORP:R (Rev. Proc.
98–22), Room 5228, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative,
comments may be hand-delivered between
the hours of 8 a.m. and 5 p.m. to
CC:DOM:CORP:R (Rev. Proc. 98–22),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC. Alternatively, taxpayers may
transmit comments electronically via the
Service’s Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html
SECTION 2. CHANGES TO
PROGRAMS
.01 Changes affecting all programs.
This revenue procedure makes the follow-
ing changes affecting all of the programs
comprising EPCRS:
• provides a uniform set of correction
principles;
• clarifies that there may be more than
one appropriate method of correcting
Qualification Failures;
• permits, in appropriate circum-
stances, the use of reasonable adjustments
in making corrections; and
• permits taxpayers to rely on the
availability of EPCRS in correcting Qual-
ification Failures.

1998–12 I.R.B.15March 23, 1998
.02 Changes affecting specific pro-
grams.This revenue procedure makes the
following specific changes to the APRSC,
VCR, Walk-in CAP, and Audit CAP cor-
rection programs:
(1) APRSC.APRSC enables a spon-
sor of a Qualified Plan or a § 403(b) Plan
to self-correct Operational Failures it dis-
covers in its plans. The provisions of
APRSC are modified and restated to:
• incorporate the recent extension of
the period for correcting significant Oper-
ational Failures from the end of the first
plan year following the plan year in which
the Operational Failure occurred to the
end of the second plan year following the
plan year in which the Operational Failure
occurred, as set forth in Announcement
97–121, 1997–50 I.R.B. 62;
• clarify that, for purposes of correcting
a failure to satisfy the actual deferral per-
centage (“ADP”) or actual contribution
percentage (“ACP”) test, the two-year cor-
rection period begins after the expiration
of the statutory correction period; and
• permit correction of an Operational
Failure to be completed after the end of
the correction period if correction was
substantially completed by the end of the
correction period.
(2) VCR.The VCR program en-
ables a sponsor of a Qualified Plan to vol-
untarily disclose to the Service Opera-
tional Failures it has discovered in its
plans and to pay a fixed fee to the Service.
The provisions of VCR are modified to:
• reduce the specificity required in the
calculations supporting plan sponsors’
proposed correction methods;
• revise the circumstances under which
closing agreements will be entered into
with respect to the excise tax under
§ 4974 (applicable to the failure to satisfy
the minimum distribution requirements
under § 401(a)(9));
• extend the time period within which
corrections are to be effected to 150 days;
• clarify and simplify permissible cor-
rection methods under the Standardized
VCR Procedure (SVP) (see Appendix A
of this revenue procedure); and
• provide a checklist for use by plan
sponsors in preparing VCR and SVP re-
quests (see Appendix B to this revenue
procedure).
(3) Walk-in CAP.Walk-in CAP en-
ables a sponsor of a Qualified Plan to vol-
untarily disclose to the Service Qualifica-
tion Failures it has discovered in its plans
and to pay a compliance correction fee.
The provisions of Walk-in CAP are modi-
fied to:
• discontinue the use of 40% (or any
other percentage) of the Maximum Pay-
ment Amount as the basis for calculating
sanctions (except for egregious failures);
• provide for greater predictability and
consistency by replacing the prior sanc-
tion structure with a limited range of com-
pliance correction fees, with the lowest
fees provided for small plans; and
• provide a checklist for use by plan
sponsors in preparing Walk-in CAP re-
quests (see Appendix B to this revenue
procedure).
(4) Audit CAP.Audit CAP, a pro-
gram established in the key district offices
that is available on examination of a
Qualified Plan, enables the plan sponsor
to negotiate a monetary sanction. The
provisions of Audit CAP are modified and
restated to:
• clarify that the sanction imposed
under Audit CAP will not be excessive
and will bear a reasonable relationship to
the nature, extent, and severity of the fail-
ure; and
• provide assurance that correction
made before audit, even for failures cor-
rected outside of the APRSC, VCR, and
Walk-in CAP programs, will be an impor-
tant factor in reducing the potential sanc-
tion under Audit CAP.
PART II. PROGRAM EFFECT AND
ELIGIBILITY
SECTION 3. EFFECT OF EPCRS;
RELIANCE
.01 Effect of EPCRS.If the eligibility
requirements of section 4 are satisfied and
the plan sponsor corrects a Qualification
Failure in accordance with the require-
ments of APRSC in section 7, the VCR
program in section 10, Walk-in CAP in sec-
tion 11, or Audit CAP in section 14, the
Service will not treat the plan as disquali-
fied on account of the Qualification Failure.
.02 Reliance.Taxpayers may rely on
this revenue procedure, including the re-
lief described in section 3.01.
SECTION 4. PROGRAM
ELIGIBILITY
.01 General program eligibility.
EPCRS includes three specific voluntary
correction programs and an audit correc-
tion program for Qualified Plans. The
voluntary correction programs are
APRSC and VCR, both of which are
available for Operational Failures, and
Walk-in CAP, which applies to Plan Doc-
ument and Demographic Failures and to
Operational Failures that are not eligible
for APRSC and VCR. APRSC is a volun-
tary employer-initiated procedure that
generally does not involve Service ap-
proval, whereas VCR and Walk-in CAP
are voluntary employer-initiated proce-
dures that involve Service approval. The
audit correction program is Audit CAP,
which is available for all types of Qualifi-
cation Failures found on examination that
cannot be corrected under APRSC. Addi-
tional, specific rules are set forth below.
.02 Effect of examination.If the plan
or plan sponsor is Under Examination, the
VCR and Walk-in CAP programs are not
available; insignificant Operational Fail-
ures can be corrected under APRSC; and
significant Operational Failures can be
corrected under APRSC in limited cir-
cumstances. See section 9.
.03 Favorable Letter requirement.The
VCR program and the provisions of
APRSC relating to significant Opera-
tional Failures (see section 9) are avail-
able only for a plan that is the subject of a
Favorable Letter.
.04 Established practices and proce-
dures.In order to be eligible for APRSC,
the plan sponsor or administrator of a plan
must have established practices and pro-
cedures (formal or informal) reasonably
designed to promote and facilitate overall
compliance with the requirements of
§ 401(a) or § 403(b). For example, the
plan administrator might use a check
sheet for tracking allocations and indicate
on that check sheet whether a particular
employee was a key employee for top-
heavy purposes. A plan document alone
will not constitute evidence of established
procedures. These established procedures
must have been in place and routinely fol-
lowed, but through an oversight or mis-
take in applying them, or because of an
inadequacy in the procedures, an Opera-
tional Failure occurred.
.05 Plan amendments.(1) Correction
by plan amendment not permitted in
APRSC or VCR. Neither APRSC nor the
VCR program is available for a plan
sponsor to correct an Operational Failure

March 23, 1998161998–12 I.R.B.
by a plan amendment that conforms the
terms of the plan to the plan’s prior opera-
tions. Thus, if loans were made to partici-
pants, but the plan document did not per-
mit loans to be made to participants, the
failure cannot be corrected under VCR by
retroactively amending the plan to pro-
vide for the loans. Nevertheless, if a plan
sponsor corrects under APRSC or VCR, it
may amend the plan to the extent neces-
sary to reflect operational correction. For
example, if the plan failed to satisfy the
ADP test required under § 401(k)(3) and
the employer must make qualified non-
elective contributions not already pro-
vided for under the plan, the plan may be
amended to provide for qualified nonelec-
tive contributions. The issuance of a
compliance statement does not constitute
a determination as to the effect of any
plan amendment on the qualification of
the plan.
(2) Limited availability of correc-
tion by plan amendment in Walk-in CAP.
In appropriate circumstances, a plan
sponsor may use Walk-in CAP to correct
an Operational Failure by a plan amend-
ment to conform the terms of the plan to
the plan’s prior operations, provided that
the amendment complies with the require-
ments of § 401(a), including the require-
ments of §§ 401(a)(4), 410(b), and
411(d)(6). Future guidance will be issued
regarding circumstances under which cor-
rection of an Operational Failure through
plan amendment may be appropriate
under Walk-in CAP.
.06 Egregious failures.Neither
APRSC nor the VCR program is available
to correct Operational Failures that are
egregious. For example, if an employer
has consistently and improperly covered
only highly compensated employees or if
a contribution to a defined contribution
plan for a highly compensated individual
is several times greater than the dollar
limit set forth in § 415, the failure would
be considered egregious.
.07 Diversion or misuse of plan assets.
The APRSC, VCR, Walk-in CAP and
Audit CAP programs are not available for
Qualification Failures relating to the di-
version or misuse of plan assets.
.08 Operational Failures in § 403(b)
Plans.APRSC is also available to correct
an Operational Failure in a § 403(b) Plan
(other than a failure that would result
solely in income inclusion for affected
employees). Thus, Operational Failures
involving contributions to a § 403(b) Plan
in excess of the § 415 limit and the maxi-
mum exclusion allowance (failures that
result solely in the inclusion in income for
affected participants) are not eligible for
APRSC.
PART III. DEFINITIONS,
CORRECTION PRINCIPLES, AND
RULES OF GENERAL
APPLICABILITY
SECTION 5. DEFINITIONS
The following definitions apply for
purposes of this revenue procedure:
.01 Qualification Failure.A Qualifi-
cation Failure is any failure that adversely
affects the qualification of a plan. There
are three types of Qualification Failures:
(1) Plan Document Failures, (2) Opera-
tional Failures, and (3) Demographic
Failures.
(1) Plan Document Failure.The
term “Plan Document Failure” means a
plan provision (or the absence of a plan
provision) that, on its face, violates the re-
quirements of § 401(a) or § 403(a). Thus,
for example, the failure of a plan to be
amended to reflect a new qualification re-
quirement within the plan’s applicable re-
medial amendment period under § 401(b)
is a Plan Document Failure. For purposes
of this revenue procedure, a Plan Docu-
ment Failure includes any Qualification
Failure that is a violation of the require-
ments of § 401(a) or § 403(a) and that is
neither an Operational Failure nor a De-
mographic Failure.
(2) Operational Failure.The term
“Operational Failure” means, with respect
to a Qualified Plan, a Qualification Fail-
ure that arises solely from the failure to
follow plan provisions.
A failure to follow the terms of the plan
providing for the satisfaction of the re-
quirements of § 401(k) and § 401(m) is
considered to be an Operational Failure.
A plan does not have an Operational Fail-
ure to the extent the plan is permitted to
be amended retroactively pursuant to
§ 401(b) or another statutory provision to
reflect the plan’s operations. However, if
within an applicable remedial amendment
period under § 401(b), a plan has been
properly amended for statutory or regula-
tory changes, and, on or after the later of
the date the amendment is effective or is
adopted, the amended provisions are not
followed, then the plan is considered to
have an Operational Failure.
An Operational Failure with respect to
a § 403(b) Plan is a failure that would re-
sult in the loss of the exclusion allowance
under § 403(b).
(3) Demographic Failure.The term
“Demographic Failure” means a failure to
satisfy the requirements of § 401(a)(4),
§ 401(a)(26), or § 410(b) that is not an
Operational Failure.
The correction of a Demographic Fail-
ure generally requires a substantive cor-
rective amendment to the plan adding
more benefits or increasing existing bene-
fits (see, for example, § 1.401(a)(4)–11(g)
of the Income Tax Regulations).
.02 Favorable Letter.The term “Fa-
vorable Letter” means a current favorable
determination letter for an individually
designed plan (including a volume sub-
mitter plan), a current favorable opinion
letter for a plan sponsor that has adopted a
master or prototype plan, or a current fa-
vorable notification letter for a plan spon-
sor that has adopted a regional prototype
plan. A plan has a current favorable de-
termination letter, opinion letter, or notifi-
cation letter if either (1), (2), or (3) below
is satisfied:
(1) The plan has a favorable determi-
nation, opinion, or notification letter that
considers the Tax Reform Act of 1986
(“TRA ’86”).
(2) The plan has a favorable deter-
mination, opinion, or notification letter
that considers the Tax Equity and Fiscal
Responsibility Act of 1982 (“TEFRA”),
the Deficit Reduction Act of 1984
(“DEFRA”), and the Retirement Equity
Act of 1984 (“REA”), and the § 401(b)
remedial amendment period for TRA ’86
has not yet expired. (The remedial
amendment period for TRA ’86 may not
have expired either because the plan has a
timely submitted, pending request for a
determination, opinion, or notification let-
ter that considers TRA ’86, or because the
plan is an adoption of a master or proto-
type plan, regional prototype plan, or vol-
ume submitter plan, described in section 3
of Rev. Proc. 95–12, 1995–1 C.B. 508; a
governmental plan described in Notice
96–64, 1996–2 C.B. 229; or a plan main-
tained by a tax-exempt organization, in-
cluding a non-electing church plan, de-
scribed in Notice 96–64.)

1998–12 I.R.B.17March 23, 1998
(3) The plan is initially adopted or
effective after December 7, 1994, and the
plan sponsor timely submits an applica-
tion for a determination, opinion, or noti-
fication letter within the plan’s remedial
amendment period under § 401(b).
.03 Maximum Payment Amount.The
term “Maximum Payment Amount”
means a monetary amount that is approxi-
mately equal to the tax the Service could
collect upon plan disqualification and is
the sum for the open taxable years of the:
(1) tax on the trust (Form 1041),
(2) additional income tax resulting
from the loss of employer deductions for
plan contributions (and any interest or
penalties applicable to the plan sponsor’s
return), and
(3) additional income tax resulting
from income inclusion for participants in
the plan (Form 1040).
For purposes of determining the maxi-
mum compliance correction fee applica-
ble under section 13.05(3), relating to
egregious failures under Walk-in CAP,
paragraph (2) above is modified to ex-
clude interest or penalties applicable to
the plan sponsor’s return, and paragraph
(3) above is modified to include only the
additional income tax resulting from in-
come inclusion for highly compensated
employees, as defined in § 414(q).
.04 Qualified Plan.The term “Quali-
fied Plan” means a plan intended to sat-
isfy the requirements of § 401(a) or
§ 403(a).
.05 § 403(b) Plan.The term “§ 403(b)
Plan” means a plan intended to satisfy the
requirements of § 403(b).
.06 Under Examination. The term
“Under Examination” means: (1) a plan
that is under an Employee Plans examina-
tion (that is, an examination of a Form
5500 series or other Employee Plans ex-
amination), or (2) a plan sponsor that is
under an Exempt Organizations examina-
tion (that is, an examination of a Form
990 series or other Exempt Organizations
examination).
A plan that is under an Employee Plans
examination includes any plan for which
the plan sponsor, or a representative, has
received verbal or written notification
from the Employee Plans Division of an
impending Employee Plans examination,
or of an impending referral for an Em-
ployee Plans examination, and also in-
cludes any plan that has been under an
Employee Plans examination and is now
in Appeals or in litigation for issues
raised in an Employee Plans examina-
tion. A plan is considered to be Under
Examination if it is aggregated for pur-
poses of satisfying the nondiscrimination
requirements of § 401(a)(4), the mini-
mum participation requirements of
§ 401(a)(26), or the minimum coverage
requirements of § 410(b), or the require-
ments of § 403(b)(12), with a plan(s) that
is Under Examination. In addition, a
plan is considered to be Under Examina-
tion with respect to a failure of a qualifi-
cation requirement (other than those de-
scribed in the preceding sentence) if the
plan is aggregated with another plan for
purposes of satisfying that qualification
requirement (for example, § 402(g),
§ 415, or § 416) and that other plan is
Under Examination. For example, as-
sume Plan A has a § 415 failure, Plan A is
aggregated with Plan B only for purposes
of § 415, and Plan B is Under Examina-
tion. In this case, Plan A is considered to
be Under Examination with respect to the
§ 415 failure. However, if Plan A has a
failure relating to the spousal consent
rules under § 417 or the vesting rules of
§ 411, Plan A is not considered to be
Under Examination with respect to the
§ 417 or § 411 failure. For purposes of
this revenue procedure, the term aggrega-
tion does not include consideration of
benefits provided by various plans for
purposes of the average benefits test set
forth in § 410(b)(2).
An Employee Plans examination also
includes a case in which a plan sponsor
has submitted a Form 5310, Application
for Determination of Qualification Upon
Termination, and the Employee Plans
agent notifies the plan sponsor, or a repre-
sentative, of possible Qualification Fail-
ures, whether or not the plan sponsor is
officially notified of an “examination.”
This would include the case where, for
example, a plan sponsor has applied for a
determination letter on plan termination,
and an Employee Plans agent notifies the
plan sponsor that there are partial termi-
nation concerns.
A plan sponsor that is under an Exempt
Organizations examination includes any
plan sponsor that has received (or its rep-
resentative has received) verbal or written
notification from the Exempt Organiza-
tions Division of an impending Exempt
Organizations examination or of an im-
pending referral for an Exempt Organiza-
tions examination and also includes any
plan sponsor that has been under an Ex-
empt Organizations examination and is
now in Appeals or in litigation for issues
raised in an Exempt Organizations exami-
nation.
SECTION 6. CORRECTION
PRINCIPLES AND RULES OF
GENERAL APPLICABILITY
.01 Correction principles; rules of
general applicability. The following gen-
eral correction principles and rules of
general applicability apply for purposes
of this revenue procedure.
.02 Correction. Generally, a Qualifi-
cation Failure is not corrected unless full
correction is made with respect to all par-
ticipants and beneficiaries, and for all tax-
able years (whether or not the taxable
year is closed). In the case of an Opera-
tional Failure, correction is determined
taking into account the terms of the plan
at the time of the failure. Correction
should be accomplished taking into ac-
count the following principles:
(1) Restoration of benefits. The cor-
rection method should restore the plan to
the position it would have been in had the
Qualification Failure not occurred, in-
cluding restoration of current and former
participants and beneficiaries to the bene-
fits and rights they would have had if the
Qualification Failure had not occurred.
(2) Reasonable and appropriate cor-
rection. The correction should be reason-
able and appropriate for the Qualification
Failure. Depending on the nature of the
Qualification Failure, there may be more
than one reasonable and appropriate cor-
rection for the failure. Any standardized
correction method permitted under SVP
(see Appendix A) is deemed to be a rea-
sonable and appropriate method of cor-
recting the related Qualification Failure.
Whether any other particular correction
method is reasonable and appropriate is
determined taking into account the applic-
able facts and circumstances and the fol-
lowing principles:
(a) The correction method should, to
the extent possible, resemble one already
provided for in the Code, Income Tax
Regulations, or other guidance of general
applicability. For example, the defined
contribution plan correction methods set

forth in § 1.415–6(b)(6) would be the typ-
ical means of correcting a failure under
§ 415. Likewise, the correction method
set forth in § 1.402(g)–1(e)(2) would be
the typical means of correcting a failure
under § 402(g).
(b) The correction method for Qual-
ification Failures relating to nondiscrimi-
nation should provide benefits for non-
highly compensated employees. For
example, the correction method set forth
in § 1.401(a)(4)–11(g) (rather than meth-
ods making use of the special testing pro-
visions set forth in § 1.401(a)(4)–8 or
1.401(a)(4)–9) would be the typical
means of correcting a failure to satisfy
nondiscrimination requirements. Simi-
larly, the correction of a failure to satisfy
the requirements of § 401(k)(3),
401(m)(2), or 401(m)(9) (relating to
nondiscrimination) solely by distributing
excess amounts to highly compensated
employees would not be the typical
means of correcting such a failure.
(c) The correction method should
keep plan assets in the plan, except to the
extent the Code, regulations, or other guid-
ance of general applicability provide for
correction by distribution to participants or
beneficiaries or return of assets to the em-
ployer or plan sponsor. For example, if an
excess allocation (not in excess of the
§ 415 limits) was made for a participant
under a plan (other than a cash or deferred
arrangement), the excess should be reallo-
cated to other participants or, depending on
the facts and circumstances, used to reduce
future employer contributions.
(d) The correction method should
not violate another applicable specific re-
quirement of § 401(a) (for example,
§ 401(a)(4) or 411(d)(6)).
(3) Principles regarding corrective
allocations and corrective distributions.
The following principles apply where an
appropriate correction method includes
the use of corrective allocations or correc-
tive distributions.
(a) Corrective allocations under a
defined contribution plan should be based
upon the terms of the plan and other ap-
plicable information at the time of the
Qualification Failure (including the com-
pensation that would have been used
under the plan for the period with respect
to which a corrective allocation is being
made) and should be adjusted for earnings
and forfeitures that would have been allo-
cated to the participant’s account if the
failure had not occurred. The corrective
allocation need not be adjusted for losses.
For administrative convenience, in the
case of corrective allocations, if the plan
permitted directed investments for the
years at issue, and thus had a number of
funds, the plan would be permitted to use
the highest rate earned in the plan for a
particular year as the rate used for all cor-
rections, provided that most of the em-
ployees receiving the corrective alloca-
tions are nonhighly compensated
employees. Similar rules apply with re-
spect to corrective distributions.
(b) A corrective allocation to a par-
ticipant’s account because of a failure to
make a required allocation in a prior limi-
tation year will not be considered an an-
nual addition with respect to the partici-
pant for the limitation year in which the
correction is made, but will be considered
an annual addition for the limitation year
to which the corrective allocation relates.
However, the normal rules of § 404, re-
garding deductions, apply.
(c) Corrective allocations should
come only from employer contributions
(including forfeitures if the plan permits
their use to reduce employer contribu-
tions).
(d) In the case of a defined benefit
plan, a corrective distribution for an indi-
vidual should be increased to take into ac-
count the delayed payment, consistent
with the plan’s actuarial adjustments.
(4) Special exceptions to full correc-
tion. In general, a Qualification Failure
must be fully corrected. Although the
mere fact that correction is inconvenient
or burdensome is not enough to relieve a
plan sponsor of the need to make full cor-
rection, full correction may not be re-
quired in certain situations because it is
unreasonable or not feasible. Even in
these situations, the correction method
adopted must be one that does not have
significant adverse effects on participants
and beneficiaries or the plan, and that
does not discriminate significantly in
favor of highly compensated employees.
The exceptions described below specify
those situations in which full correction is
not required.
(a) Reasonable estimates. If it is not
possible to make a precise calculation, or
the probable difference between the ap-
proximate and the precise restoration of a
participant’s benefits is insignificant and
the administrative cost of determining
precise restoration would significantly ex-
ceed the probable difference, reasonable
estimates may be used in calculating ap-
propriate correction.
(b) Delivery of very small benefits.
If the total corrective distribution due a
participant or beneficiary is $20 or less,
the plan sponsor is not required to make
the corrective distribution if the reason-
able direct costs of processing and deliv-
ering the distribution to the participant or
beneficiary would exceed the amount of
the distribution.
(c) Locating lost participants.Rea-
sonable actions must be taken to find all
current and former participants and bene-
ficiaries to whom additional benefits are
due, but who have not been located after a
mailing to the last known address. In
general, such actions include use of the
Internal Revenue Service Letter Forward-
ing Program (see Rev. Proc. 94–22,
1994–1 C.B. 608) or the Social Security
Administration Reporting Service. A plan
will not be considered to have failed to
correct a failure due to the inability to lo-
cate an individual if either of these pro-
grams is used; provided that, if the indi-
vidual is later located, the additional
benefits must be provided to the individ-
ual at that time.
(5) Reporting.Any distributions from
the plan should be properly reported.
(6) Additional guidance. The Service
may publish additional rules regarding
appropriate correction methods.
.03 Correction under statute or regula-
tions. Generally, none of the correction
programs are needed to correct failures
that can be corrected under the Code and
related regulations. For example, as a
general rule, a Plan Document Failure
that is a disqualifying provision for which
the remedial amendment period under
§ 401(b) has not expired can be corrected
by operation of the Code through retroac-
tive remedial amendment.
.04 Matters subject to excise taxes.
Excise taxes and additional taxes, to the
extent applicable, are not waived merely
because the underlying failure has been
corrected or because the taxes result from
the correction. Thus, for example, the ex-
cise tax on certain excess contributions
under § 4979 is not waived under these
correction programs.
March 23, 1998181998–12 I.R.B.

The correction programs are not avail-
able for events for which the Code pro-
vides tax consequences other than plan
disqualification (such as the imposition of
an excise tax or additional income tax).
For example, funding deficiencies (fail-
ures to make the required contributions to
a plan subject to § 412), prohibited trans-
actions, and failures to file the Form 5500
cannot be corrected under the correction
programs. However, if the event is also
an Operational Failure (for example, if
the terms of the plan document relating to
plan loans to participants were not fol-
lowed and loans made under the plan did
not satisfy § 72(p)(2)), the correction pro-
grams will be available to correct the Op-
erational Failure, even though the excise
or income taxes generally still will apply.
(In limited circumstances, as described in
section 10.05, if the failure involves the
failure to satisfy the minimum distribu-
tion requirements of § 401(a)(9), the Ser-
vice may enter into a closing agreement,
as part of the VCR program, with respect
to the excise tax under § 4974 applicable
to plan participants.)
.05 Confidentiality and disclosure.
Because each correction program relates
directly to the enforcement of the qualifi-
cation requirements, the information re-
ceived or generated by the Service under
the program is subject to the confidential-
ity requirements of § 6103, and is not a
written determination within the meaning
of § 6110.
.06 No effect on other law. Compli-
ance under these programs has no effect
on the rights of any party under any other
law, including Title I of the Employee Re-
tirement Income Security Act of 1974.
PART IV. SELF-CORRECTION
(APRSC)
SECTION 7. IN GENERAL
The requirements of this section are sat-
isfied with respect to an Operational Fail-
ure if the plan sponsor satisfies the require-
ments of section 8 (relating to insignificant
Operational Failures), or section 9 (relating
to significant Operational Failures).
SECTION 8. SELF-CORRECTION OF
INSIGNIFICANT OPERATIONAL
FAILURES
.01 Requirements. The requirements
of this section are satisfied with respect to
an Operational Failure if the Operational
Failure is corrected and, given all the
facts and circumstances, the Operational
Failure is insignificant. This section is
available for correcting an insignificant
Operational Failure even if the plan or
plan sponsor is Under Examination.
.02 Factors. The factors to be consid-
ered in determining whether or not an Op-
erational Failure under a plan is insignifi-
cant include, but are not limited to: (1)
whether other failures occurred during the
period being examined (for this purpose, a
failure is not considered to have occurred
more than once merely because more than
one participant is affected by the failure);
(2) the percentage of plan assets and con-
tributions involved in the failure; (3) the
number of years the failure occurred; (4)
the number of participants affected rela-
tive to the total number of participants in
the plan; (5) the number of participants af-
fected as a result of the failure relative to
the number of participants who could have
been affected by the failure; (6) whether
correction was made within a reasonable
time after discovery of the failure; and (7)
the reason for the failure (for example,
data errors such as errors in the transcrip-
tion of data, the transposition of numbers,
or minor arithmetic errors). No single fac-
tor is determinative.
.03 Multiple failures. In the case of a
plan with more than one Operational Fail-
ure in a single year, or Operational Fail-
ures that occur in more than one year, the
Operational Failures are eligible for cor-
rection under this section only if all of the
Operational Failures (other than Opera-
tional Failures that are not treated as re-
sulting in disqualification of the plan
under section 9, the VCR program in sec-
tion 10, or Walk-in CAP in section 11) are
insignificant in the aggregate.
.04 Examples.The following exam-
ples illustrate the application of this sec-
tion. It is assumed, in each example, that
the eligibility requirements of section 4
relating to APRSC have been satisfied
and that no Operational Failures occurred
other than the Operational Failures identi-
fied below.
Example 1: In 1984, Employer X es-
tablished Plan A, a profit-sharing plan
that satisfies the requirements of § 401(a)
in form. In 1999, the benefits of 50 of the
250 participants in Plan A were limited by
§ 415(c). However, when the Service ex-
amined Plan A in 2002, it discovered that,
during the 1999 limitation year, the an-
nual additions allocated to the accounts of
3 of these employees exceeded the maxi-
mum limitations under § 415(c). Em-
ployer X contributed $3,500,000 to the
plan for the plan year. The amount of the
excesses totalled $4,550. Based on data
provided by Employer X, the Service did
not find any evidence of other failures in
the plan. Under these facts, because the
number of participants affected by the
failure relative to the total number of par-
ticipants who could have been affected by
the failure, and the monetary amount of
the failure relative to the total employer
contribution to the plan for the 1999 plan
year, are insignificant, the § 415(c) failure
in Plan A that occurred in 1999 would be
eligible for correction under this section.
Example 2:The facts are the same as in
Example 1, except that the failure to sat-
isfy § 415 occurred during each of the
1998, 1999, and 2000 limitation years. In
addition, the three participants affected by
the § 415 failure were not identical each
year. The fact that the § 415 failures oc-
curred during more than one limitation
year did not cause the failures to be sig-
nificant; accordingly, the failures are still
eligible for correction under this section.
Example 3: The facts are the same as
in Example 1, except that the annual addi-
tions of 18 of the 50 employees whose
benefits were limited by § 415(c) never-
theless exceeded the maximum limita-
tions under § 415(c) during the 1999 limi-
tation year, and the amount of the
excesses ranged from $1,000 to $9,000,
and totalled $150,000. Under these facts,
taking into account the number of partici-
pants affected by the failure relative to the
total number of participants who could
have been affected by the failure for the
1999 limitation year (and the monetary
amount of the failure relative to the total
employer contribution), the failure is sig-
nificant. Accordingly, the § 415(c) failure
in Plan A that occurred in 1999 is ineligi-
ble for correction under this section as an
insignificant failure.
Example 4: Employer J maintains Plan
C, a money purchase pension plan estab-
lished in 1992. The plan document satis-
fies the requirements of § 401(a) of the
Code. The formula under the plan pro-
vides for an employer contribution equal
to 10% of compensation, as defined in the
1998–12 I.R.B.19March 23, 1998

plan. During its examination of the plan
for the 1999 plan year, the Service discov-
ered that the employee responsible for en-
tering data into the employer’s computer
made minor arithmetic errors in transcrib-
ing the compensation data with respect to
6 of the plan’s 40 participants, resulting in
excess allocations to those 6 participants’
accounts. Under these facts, the number
of participants affected by the failure rela-
tive to the number of participants that
could have been affected is insignificant,
and the failure is due to minor data errors.
Thus, the failure occurring in 1999 would
be insignificant and therefore eligible for
correction under this section.
Example 5:Public School maintains
for its 200 employees a salary reduction
403(b) plan (the “Plan”) which satisfies
the requirements of § 403(b). The busi-
ness manager has primary responsibility
for administering the Plan, in addition to
other administrative functions within
Public School. During the 1998 plan
year, a former employee should have re-
ceived an additional minimum distribu-
tion of $278 under § 403(b)(10). Another
participant received an impermissible
hardship withdrawal of $2,500. Another
participant made elective deferrals of
$11,000, $1,000 of which was in excess
of the § 402(g) limit. Under these facts,
even though multiple failures occurred in
a single plan year, the failures will be eli-
gible for correction under this section be-
cause in the aggregate the failures are in-
significant.
SECTION 9. SELF-CORRECTION OF
SIGNIFICANT OPERATIONAL
FAILURES
.01 Requirements.The requirements
of this section are satisfied with respect to
an Operational Failure (even if signifi-
cant) if the Operational Failure is cor-
rected and the correction is either com-
pleted or substantially completed (in
accordance with section 9.03) by the last
day of the correction period described in
section 9.02.
.02 Correction period.The last day of
the correction period for an Operational
Failure is the last day of the second plan
year following the plan year for which the
failure occurred. However, in the case of
a failure to satisfy the requirements of §
401(k)(3), 401(m)(2), or 401(m)(9), the
plan year that includes the last day of the
additional period for correction permitted
under § 401(k)(8) or 401(m)(6) is treated,
for this purpose, as the plan year for
which the Operational Failure occurs.
The correction period for an Operational
Failure that occurs for any plan year ends,
in any event, on the first date the plan or
plan sponsor is Under Examination for
that plan year (determined without regard
to the exception in the preceding sen-
tence). (But see section 9.03 for special
rules permitting completion of correction
after the end of the correction period.)
.03 Substantial completion of correc-
tion. Correction of an Operational Failure
is substantially completed by the last day
of the correction period only if the re-
quirements of either paragraph (1) or (2)
are satisfied.
(1) The requirements of this para-
graph (1) are satisfied if:
(a) during the correction period, the
plan sponsor is reasonably prompt in
identifying the Operational Failure, for-
mulating a correction method, and initiat-
ing correction in a manner that demon-
strates a commitment to completing
correction of the Operational Failure as
expeditiously as practicable, and
(b) within 90 days after the last day
of the correction period, the plan sponsor
completes correction of the Operational
Failure.
(2) The requirements of this para-
graph (2) are satisfied if:
(a) during the correction period, cor-
rection is completed with respect to 85%
of all participants affected by the Opera-
tional Failure, and
(b) thereafter, the plan sponsor com-
pletes correction of the Operational Fail-
ure with respect to the remaining affected
participants in a diligent manner.
.04 Example.The following example
illustrates the application of this section.
Assume that the eligibility requirements
of section 4 relating to APRSC have been
met.
Employer Z established a qualified de-
fined contribution plan in 1986 and re-
ceived a favorable determination letter for
TRA ’86. During 1999, while doing a
self-audit of the operation of the plan for
the 1998 plan year, the plan administrator
discovered that, despite the practices and
procedures established by Employer Z
with respect to the plan, several employ-
ees eligible to participate in the plan were
excluded from participation. The admin-
istrator also found that for 1998 the elec-
tive deferrals of additional employees ex-
ceeded the § 402(g) limit and discovered
Operational Failures in 1998 with respect
to the top-heavy provisions of the plan.
During the 1999 plan year, the plan spon-
sor made corrective contributions on be-
half of the excluded employees, distrib-
uted the excess deferrals to the affected
participants, and made a top-heavy mini-
mum contribution to all participants enti-
tled to that contribution for the 1999 plan
year. Each corrective contribution and
distribution was credited with earnings at
a rate appropriate for the plan from the
date the corrective contribution or distrib-
ution should have been made to the date
of correction. The Service subsequently
found, upon an examination of the plan,
that the Operational Failures for the 1998
plan year were corrected by the plan ad-
ministrator within the correction period
and thus satisfied the requirements of this
section.
PART V. VOLUNTARY
CORRECTION WITH SERVICE
APPROVAL (VCR AND WALK-IN
CAP)
SECTION 10. VCR PROGRAM
.01 VCR requirements. The require-
ments of this section are satisfied with re-
spect to an Operational Failure if the sub-
mission requirements of section 12 below
are satisfied and the plan sponsor corrects
the failures identified in accordance with
the compliance statement described in
section 10.13.
.02 Identification of failures.VCR is
not based upon an examination of the plan
by the Service. The Service will not
make any investigation or finding under
the VCR program concerning whether
there are Operational Failures. Only the
Operational Failures raised by the plan
sponsor or Operational Failures identified
by the Service in processing the applica-
tion will be addressed under the program,
and only those failures will be covered by
the program. However, because the VCR
program does not arise out of an examina-
tion, consideration under the VCR pro-
gram does not preclude or impede (under
§ 7605(b) or any administrative provi-
sions adopted by the Service) a subse-
quent examination of the plan sponsor or
March 23, 1998201998–12 I.R.B.

the plan by the Service with respect to the
taxable year (or years) involved with re-
spect to matters that are outside the com-
pliance statement. A plan sponsor’s state-
ments describing Operational Failures are
made only for purposes of the VCR pro-
gram and will not be regarded by the Ser-
vice as an admission of a failure for pur-
poses of any subsequent examination.
.03 No concurrent examination activity.
Except in unusual circumstances, a plan
that has been properly submitted under the
VCR program will not be examined while
the submission is pending. This practice
regarding concurrent examinations does
not extend to other plans of the plan spon-
sor. Thus, any plan of the plan sponsor
that is not pending under the VCR pro-
gram could be subject to examination by
the appropriate Key District Office.
.04 Insufficient information.Where it
is not possible to obtain sufficient infor-
mation to properly determine the nature
or extent of a failure or there is insuffi-
cient information to effect proper correc-
tion, or in other special circumstances
where the application of the VCR pro-
gram would be inappropriate or impracti-
cal, the failure cannot be corrected under
the VCR program.
.05 Closing agreements with respect to
the excise tax under § 4974.As a general
rule, a plan sponsor is not required to
enter into a closing agreement with the
Service with respect to the excise tax due
under § 4974 because of the failure to sat-
isfy the minimum distribution require-
ments under § 401(a)(9). However, the
Service retains the discretion to require a
plan sponsor to enter into a closing agree-
ment in rare or unusual cases. The Ser-
vice will enter into a closing agreement at
the request of the plan sponsor only in
cases where 10 or more plan participants
are subject to the excise tax under § 4974.
In such cases, the closing agreement en-
tered into will require the plan sponsor to
pay 100 percent of the excise tax due
under § 4974.
.06 Initial processing.(1) The Service
will review whether the eligibility require-
ments of section 4 and the submissions re-
quirements of section 12 are satisfied.
(2) If the plan is not the subject of a
Favorable Letter or the failure is not an
Operational Failure, the compliance fee
will be returned to the plan sponsor, and
the plan sponsor will be informed of the
option to voluntarily request considera-
tion under Walk-in CAP in the appropri-
ate Key District Office.
(3) If a plan sponsor requests a com-
pliance statement under the VCR program
for a plan with egregious failures de-
scribed in section 4.06, the compliance
fee will be returned and the plan sponsor
will be given 60 days to voluntarily re-
quest consideration under Walk-in CAP in
the appropriate Key District Office. If by
the end of the 60-day period, a request for
consideration under Walk-in CAP has not
been received in the appropriate Key Dis-
trict Office, the VCR request will be for-
warded to that office for examination con-
sideration.
(4) If the Service determines that a
submission is seriously deficient, the Ser-
vice reserves the right to return the sub-
mission and the compliance fee without
contacting the plan sponsor.
(5) If a request for consideration
under the VCR program is not described
in paragraph (2), (3), or (4) above, but
nevertheless fails to comply with the pro-
visions of this revenue procedure or if ad-
ditional information is required, a Service
representative will generally contact the
plan sponsor or the plan sponsor’s repre-
sentative and explain what is needed to
complete the submission. The plan spon-
sor will have 21 calendar days from the
date of this contact to provide the re-
quested information. If the information is
not received within 21 days, the matter
will be closed, the compliance fee will not
be returned, and the case may be referred
to the appropriate Key District Office in
accordance with section 10.06(5). Any
request for an extension of the 21-day
time period must be made in writing
within the 21-day time period and must be
approved by the Service.
.07 Processing of acceptable submis-
sion. Once the Service determines that a
request for consideration under the VCR
program is acceptable, the Service will
consult with the plan sponsor or the plan
sponsor’s representative to discuss the
proposed corrections and the plan’s ad-
ministrative procedures. If agreement is
reached, the Service will issue a compli-
ance statement with an enclosed acknowl-
edgment letter for signature by the plan
sponsor. The case will not be closed fa-
vorably until the Service has received the
signed acknowledgement letter from the
plan sponsor. The Service will discuss
the appropriateness of the plan’s existing
administrative procedures with the plan
sponsor. Where current procedures are
inadequate for operating the plan in con-
formance with the qualification require-
ments of the Code, the compliance state-
ment will be conditioned upon the
implementation of stated procedures
within the stated time period. The Ser-
vice may prescribe appropriate adminis-
trative procedures in the compliance
statement.
.08 Failures discovered after initial
submission.
(1) A plan sponsor that discovers ad-
ditional, unrelated Operational Failures
after its initial submission may request
that such failures be added to its submis-
sion. The Service retains the discretion to
reject the inclusion of such failures if the
request is not timely, for example, if the
plan sponsor makes its request when pro-
cessing of the VCR submission is sub-
stantially complete.
(2) If the Service discovers an unre-
lated Operational Failure while the request
is pending under the VCR program, the
failure generally will be added to the fail-
ures under consideration in the submis-
sion. The Service retains the discretion to
determine that a failure is outside the
scope of the voluntary request for consid-
eration because it was not voluntarily
brought forward by the plan sponsor. In
this case, the plan may be forwarded to the
appropriate Key District Office for consid-
eration on examination, but forwarding to
the Key District Office will occur only in
rare or unusual circumstances.
.09 Conference right.If the Service
initially determines that it cannot issue a
compliance statement because the parties
cannot agree upon correction or a change
in administrative procedures, the plan
sponsor or the plan sponsor’s representa-
tive will be contacted by the Service rep-
resentative and offered a conference with
the Service. The conference can be held
either in person or by telephone, and must
be held within 21 calendar days of the
date of contact. The plan sponsor will
have 21 calendar days after the date of the
conference to submit additional informa-
tion in support of the submission. Any re-
quest for an extension of the 21-day time
period must be made in writing within the
21-day time period and must be approved
1998–12 I.R.B.21March 23, 1998

by the Service. Additional conferences
may be held at the discretion of the Ser-
vice.
.10 Failure to reach resolution.If reso-
lution cannot be reached (for example,
where information is not timely provided
to the Service or because agreement cannot
be reached on correction or a change in ad-
ministrative procedures), the compliance
fee will not be returned, and the case may
be referred to the appropriate Key District
Office for examination consideration.
.11 Concurrent processing of determi-
nation letter applications.The Service
may process a determination letter appli-
cation (including an application requested
on Form 5310, Application for Determi-
nation of Qualification Upon Termina-
tion) concurrently with a VCR sub-
mission for the same plan. However,
issuance of the determination letter in re-
sponse to an application made on a Form
5310 will be suspended pending the clo-
sure of the VCR submission.
.12 Special rules relating to SVP.(1)
Under the VCR program, certain Opera-
tional Failures may be corrected under the
Standardized VCR Procedure (“SVP”)
rules in this section. SVP is available if
the plan’s only identified Operational
Failure or Failures are ones that are listed
in Appendix A of this revenue procedure
and the failures are corrected in accor-
dance with the applicable correction
method set forth in Appendix A. The plan
sponsor must request an SVP compliance
statement and pay the reduced compli-
ance fee set forth in section 13.04.
(2) The correction methods set forth
in Appendix A are strictly construed and
are the only acceptable correction methods
for SVP failures. If the plan sponsor
wishes to modify a correction method pro-
vided in Appendix A or to propose another
method, the plan sponsor may not use
SVP, but may request a compliance state-
ment under the regular VCR procedures.
(3) SVP is not available if the plan
sponsor has identified more than two SVP
failures in a single SVP request. If there
are one or two failures that can be cor-
rected under SVP and other failures that
cannot be corrected under SVP, SVP is
not available. The Service reserves the
right to shift a request for consideration
under SVP into the regular VCR program
if the plan sponsor submits a second SVP
request with respect to the same plan
while the first SVP request is being con-
sidered or during the 12 months after the
first SVP compliance statement is issued.
(4) The Service will review an SVP
request within 120 days of the date the
submission is received and determined to
be complete. If the Service determines
that the request is acceptable, the Service
will issue a compliance statement on the
plan sponsor’s proposed correction.
.13 General description of compliance
statement.Under the VCR program, a
plan sponsor receives a compliance state-
ment from the Service. The compliance
statement addresses the failures identi-
fied, the terms of correction, and any revi-
sion of administrative procedures, and
provides that the Service will not treat the
plan as disqualified on account of the Op-
erational Failures described in the compli-
ance statement. In addition, the time pe-
riod within which proposed corrections
and changes in administrative procedures
must be implemented are set forth in the
compliance statement. The compliance
statement is conditioned on the accuracy
or acceptability of any calculations or
other material submitted in connection
with the request.
.14 Compliance statement conditioned
upon timely correction.The compliance
statement is conditioned upon the imple-
mentation of the specific corrections and
administrative changes set forth in the
compliance statement within 150 days of
the date of the compliance statement. Any
request for an extension of this time period
must be made in advance and in writing
and must be approved by the Service.
.15 Compliance statement for new
plans conditioned upon timely amend-
ment.Reliance on any compliance state-
ment issued for a plan initially adopted or
effective after December 7, 1994, other
than an adoption of a master or prototype
or regional prototype plan, is conditioned
upon the plan being timely submitted for
a determination letter within the plan’s re-
medial amendment period under § 401(b).
.16 Acknowledgement letter.Within
30 calendar days after the compliance
statement is issued, a plan sponsor that
wishes to agree to the terms of the com-
pliance statement must send a signed ac-
knowledgement letter to the Service,
agreeing to the terms of the compliance
statement. If the plan sponsor does not
send the Service a signed acknowledge-
ment letter within 30 calendar days, the
plan may be referred to the appropriate
Key District Office for examination con-
sideration. Once the compliance state-
ment has been issued (based on the infor-
mation provided), the plan sponsor cannot
request a modification of the compliance
terms except by a new request for a com-
pliance statement. However, if the re-
quested modification is minor and is post-
marked no later than 30 days after the
compliance statement is issued, the VCR
compliance fee for the modification will
be the lesser of the original compliance
fee or $1,250.
.17 Verification.Once the compliance
statement has been issued, the Service
may require verification that the correc-
tions have been made and that any plan
administrative procedures required by the
statement have been implemented. This
verification does not constitute an exami-
nation of the books and records of the em-
ployer or the plan (within the meaning of
§ 7605(b)). If the Service determines that
the plan sponsor did not implement the
corrections and procedures within the
stated time period, the Service may con-
sider the issues in an examination.
SECTION 11. WALK-IN CAP
.01 Walk-in CAP requirements.(1) The
requirements of this section are satisfied
with respect to a Plan Document, an eligi-
ble Operational (see section 4), or a Demo-
graphic Failure if the submission require-
ments of section 12 are satisfied, the plan
sponsor pays the compliance correction
fee, and the plan sponsor corrects the fail-
ures identified in accordance with a clos-
ing agreement entered into by the Service
and the plan sponsor. Payment of the com-
pliance correction fee is generally required
at the time the closing agreement is signed.
(2) A determination letter applica-
tion is not a submission under Walk-in
CAP.
(3) Depending on the nature of the
failure, the Service will discuss the appro-
priateness of the plan’s existing adminis-
trative procedures with the plan sponsor.
Where current administrative procedures
are inadequate for operating the plan in
conformance with the qualification re-
quirements of the Code, the closing
agreement may be conditioned upon the
implementation of stated administrative
procedures.
March 23, 1998221998–12 I.R.B.

(4) In addition, the plan sponsor is
required to obtain a Favorable Letter be-
fore the closing agreement is signed un-
less the Service determines that it is un-
necessary based on the facts and
circumstances (for example, because the
plan already has a Favorable Letter and
no significant amendments are adopted).
If a Favorable Letter is required, the plan
sponsor would be required to pay the ap-
plicable user fee for obtaining the letter.
.02 Failures discovered after initial
submission. (1) A plan sponsor that dis-
covers additional, unrelated failures after
its initial submission may request that
such failures be added to its submission.
However, the Service retains the discre-
tion to reject the inclusion of such failures
if the request is not timely, for example, if
the plan sponsor makes its request when
processing of the submission is substan-
tially complete.
(2) If the Service discovers an unre-
lated plan failure while the request is
pending, the failure generally will be
added to the failures under consideration.
However, the Service retains the discre-
tion to determine that a failure is outside
the scope of the voluntary request for con-
sideration because it was not voluntarily
brought forward by the plan sponsor. In
this case, if the additional failure is signif-
icant, all aspects of the plan will be exam-
ined, and the rules pertaining to Audit
CAP will apply.
.03 Failure to reach resolution.If the
Service and the plan sponsor cannot reach
agreement with respect to the submission,
all aspects of the plan may be examined,
and the rules pertaining to Audit CAP will
apply.
.04 Effect of closing agreement.The
closing agreement is binding upon both
the Service and the plan sponsor with re-
spect to the specific tax matters identified
therein for the periods specified, but does
not preclude or impede an examination of
the plan by the Service relating to matters
outside the closing agreement, even with
respect to the same taxable year or years
to which the closing agreement relates.
SECTION 12. APPLICATION
PROCEDURES FOR VCR AND WALK-
IN CAP
.01 General rules.This section sets
forth the procedures for requesting a com-
pliance statement from the Service under
the VCR program (including SVP) and
for requesting a closing agreement under
Walk-in CAP. In general, a request under
the VCR program or Walk-in CAP con-
sists of a letter from the plan sponsor or
the plan sponsor’s representative to the
Service that contains a description of the
failures, a description of the proposed
methods of correction, and other proce-
dural items, and includes supporting in-
formation and documentation as de-
scribed below.
.02 Multiemployer and multiple em-
ployer plans. In the case of a multiem-
ployer or multiple employer plan, the plan
administrator (rather than any contribut-
ing or adopting employer) must request
consideration of the plan under the pro-
grams. The request must be with respect
to the plan, rather than a portion of the
plan affecting any particular employer.
.03 Submission requirements.The let-
ter from the plan sponsor or the plan
sponsor’s representative must contain the
following:
(1) A complete description of the
failures and the years in which the failures
occurred, including closed years (that is,
years for which the statutory period has
expired).
(2) A description of the administra-
tive procedures in effect at the time the
failures occurred.
(3) An explanation of how and why
the failures arose.
(4) A detailed description of the
method for correcting the failures that the
plan sponsor has implemented or pro-
poses to implement. Each step of the cor-
rection method must be described in nar-
rative form. The description must include
the specific information needed to support
the suggested correction method. This in-
formation includes, for example, the num-
ber of employees affected and the ex-
pected cost of correction (both of which
may be approximated if the exact number
cannot be determined at the time of the re-
quest), the years involved, and calcula-
tions or assumptions the plan sponsor
used to determine the amounts needed for
correction. See section 10.12 for special
procedures regarding SVP.
(5) A description of the methodol-
ogy that will be used to calculate earnings
or actuarial adjustments on any corrective
contributions or distributions (indicating
the computation periods and the basis for
determining earnings or actuarial adjust-
ments, in accordance with section
6.02(3)).
(6) Specific calculations for each af-
fected employee or a representative sam-
ple of affected employees. The sample
calculations must be sufficient to demon-
strate each aspect of the correction
method proposed. For example, if a plan
sponsor requests a compliance statement
with respect to a failure to satisfy the con-
tribution limits of § 415(c) and proposes a
correction method that involves elective
contributions (both matched and un-
matched) and matching contributions, the
plan sponsor must submit calculations il-
lustrating the correction method proposed
with respect to each type of contribution.
As another example, with respect to a
failure to satisfy the actual deferral per-
centage (“ADP”) test in § 401(k)(3), the
plan sponsor must submit the ADP test re-
sults both before the correction and after
the correction.
(7) The method that will be used to
locate and notify former employees and
beneficiaries, or an affirmative statement
that no former employees or beneficiaries
were affected by the failures.
(8) A description of the measures
that have been or will be implemented to
ensure that the same failures will not
recur.
(9) A statement that, to the best of
the plan sponsor’s knowledge, neither the
plan nor the plan sponsor is Under Exam-
ination.
(10) In the case of a VCR submis-
sion, a statement (if applicable) that the
plan is currently being considered in a de-
termination letter application. If the re-
quest for a determination letter is made
while a request for consideration under
VCR is pending, the plan sponsor must
update the VCR request to add this infor-
mation.
(11) In the case of an SVP submis-
sion, a statement that it is an SVP request,
a description of the applicable correction
in accordance with Appendix A, and a
statement that the plan sponsor proposes
to implement (or has implemented) the
correction(s).
.04 Required documents. The submis-
sion must be accompanied by the follow-
ing documents:
(1) In the case of a VCR submission,
a copy of the first page and a copy of the
1998–12 I.R.B.23March 23, 1998

page containing employee census informa-
tion (currently, line 7f of the 1997 Form
5500) and a copy of the page containing
the total amount of plan assets (currently,
line 31f of the 1997 Form 5500) of the
most recently filed Form 5500 series re-
turn, or in the case of a Walk-in CAP sub-
mission, a copy of the most recently filed
Form 5500 series return.
(2) A copy of the relevant portions
of the plan document. For example, in a
case involving improper exclusion of eli-
gible employees from a profit-sharing
plan with a cash or deferred arrangement,
relevant portions of the plan document in-
clude the eligibility, allocation, and cash
or deferred arrangement provisions of the
basic plan document (and the adoption
agreement, if applicable), along with ap-
plicable definitions in the plan.
(3) In the case of a VCR submis-
sion, a copy of the determination letter,
opinion letter, or notification letter that
considered TRA ’86, except:
(a) individually designed plans (in-
cluding volume submitter plans) for
which the TRA ’86 remedial amendment
period under § 401(b) would have expired
but for the fact that an application for a
determination or notification letter that
considers TRA ’86 was timely submitted
to the Service and is pending at the time
of the application to the VCR program
should submit a copy of the determination
letter that considered TEFRA, DEFRA,
and REA and a copy of the letter from the
Service acknowledging receipt of the
TRA ’86 determination letter application
(Form 2693),
(b) plans for which the TRA ’86 re-
medial amendment period has not yet ex-
pired should submit a copy of the determi-
nation, opinion, or notification letter that
considered TEFRA, DEFRA, and REA
and a statement that explains the reason
why the period has not yet expired (for ex-
ample, because the plan is a governmental
plan, or because it is an adopter of a mas-
ter or prototype plan that is still entitled to
continued or interim reliance under Rev.
Proc. 89–9, 1989–1 C.B. 780), and
(c) plans initially adopted or effec-
tive after December 7, 1994, should sub-
mit a statement indicating that the plan
will be submitted timely for a determina-
tion, opinion, or notification letter within
the plan’s remedial amendment period
under § 401(b).
.05 Fee.The VCR submission must in-
clude the appropriate fee described in sec-
tion 13.02 or 13.04 below. (The Walk-in
CAP compliance correction fee is due at
the time the closing agreement is signed.)
.06 Signed submission. The submis-
sion must be signed by the plan sponsor
or the sponsor’s representative.
.07 Power of attorney requirements.
To sign the submission or to appear be-
fore the Service in connection with the
submission, the plan sponsor’s represen-
tative must comply with the requirements
of section 9.02(11) and (12) of Rev. Proc.
98–4, 1998–1 I.R.B. 113.
.08 Penalty of perjury statement.The
following declaration must accompany a
request and any factual information or
change in the submission at a later time:
“Under penalties of perjury, I declare that
I have examined this submission, includ-
ing accompanying documents, and, to the
best of my knowledge and belief, the facts
presented in support of this submission
are true, correct, and complete.” The dec-
laration must be signed by the plan spon-
sor, not the sponsor’s representative.
.09 Checklist.The Service will be able
to respond more quickly to a VCR or
Walk-in CAP request if the request is
carefully prepared and complete. The
checklist in Appendix B is designed to as-
sist plan sponsors and their representa-
tives in preparing a submission that con-
tains the information and documents
required under this revenue procedure.
The checklist in Appendix B must be
completed, signed, and dated by the plan
sponsor or the plan sponsor’s representa-
tive, and should be placed on top of the
submission. A photocopy of this checklist
may be used.
.10 Designation.The letter to the Ser-
vice should be designated “VCR PRO-
GRAM,” “SVP/VCR PROGRAM,” or
“WALK-IN CAP PROGRAM,” as appro-
priate, in the upper right hand corner of
the letter.
.11 VCR/SVP mailing address. VCR/
SVP submissions should be mailed to:
Internal Revenue Service
Attention: CP:E:EP:VCR
P.O. Box 14073
Ben Franklin Station
Washington, DC 20044
.12 Walk-in CAP mailing address. Walk-
in CAP submissions should be mailed to
the Closing Agreement Coordinator in the
appropriate Key District Office:
March 23, 1998241998–12 I.R.B.
NORTHEAST REGIONEP/EO Division Review Staff
Internal Revenue Service
10 Metro Tech Center
625 Fulton Street
Brooklyn, NY 11201
Office (718) 488-2372
FAX (718) 488-2405
SOUTHEAST REGIONEP/EO Division Technical Branch
Internal Revenue Service
Room 1520
P.O. Box 13163
Baltimore, MD 21203
Office (410) 962-3499
FAX (410) 962-0882
MIDSTATES REGIONEP/EO Division Branch Office
Internal Revenue Service
230 S. Dearborn
Chicago, IL 60604
Office (312) 886-4700

FAX (312) 886-3275
WESTERNEP/EO Division
Internal Revenue Service
Attention: EP Walk-in CAP Coordinator
McCaslin Industrial Park
2 Cupania Circle
Monterey Park, CA 91755-7431
Office (213) 725-1852
FAX (213) 725-7065
1998–12 I.R.B.25March 23, 1998
.13 Maintenance of copies of submis-
sions. Plan sponsors and their representa-
tives should maintain copies of all corre-
spondence submitted to the Service with
respect to their VCR and Walk-in CAP re-
quests.
SECTION 13. FEES
.01 Rev. Proc. 98–8 modified. The
VCR compliance fee is processed under
the user fee program described in Rev.
Proc. 98–8, 1998–1 I.R.B. 225, as modi-
fied by this revenue procedure.
.02 VCR fee.Unless SVP is applica-
ble, the VCR compliance fee depends on
the assets of the plan and the number of
plan participants.
(1) The fee for a plan with assets of
less than $500,000, and no more than
1,000 plan participants, is $500.
(2) The fee for a plan with assets of
at least $500,000, and no more than 1,000
plan participants, is $1,250.
(3) The fee for a plan with more
than 1,000 plan participants but less than
10,000 plan participants is $5,000.
(4) The fee for a plan with 10,000 or
more plan participants is $10,000.
.03 Establishing number of plan par-
ticipants.The compliance fee is calcu-
lated by the plan sponsor using the num-
bers from the most recently filed Form
5500 series to establish the fee. Thus,
with respect to the 1997 Form 5500, the
plan sponsor would use the number
shown on line 7(f) (or the equivalent line
on the Form 5500 C/R or EZ) to establish
the number of plan participants and would
use line 31(f) (or the equivalent line on
the Form 5500 C/R or EZ) to establish the
amount of plan assets.
.04 SVP fee.The SVP compliance fee
is $350.
.05 Walk-in CAP compliance correc-
tion fee. (1)Compliance correction fee
chart. The compliance correction fee for a
Walk-in CAP application is determined in
accordance with the chart below. The
chart contains a graduated range of fees
based on the size of the plan (with the
number of participants determined as pro-
vided in section 13.03). Each range in-
cludes a minimum amount, a maximum
amount, and a presumptive amount. In
each case, the minimum amount is the ap-
plicable VCR fee in section 13.02. It is
expected that in most instances the com-
pliance correction fee imposed will be at
or near the presumptive amount in each
range; however, the fee may be a higher or
lower amount within the range, depending
on the factors in paragraph (2) below.
WALK-IN CAP COMPLIANCE CORRECTION FEES
# of participantsFee rangePresumptive Amount
10 or fewerVCR fee* to $4,000$2,000
11 to 50VCR fee* to $8,000$4,000
51 to 100VCR fee* to $12,000$6,000
101 to 300VCR fee* to $16,000$8,000
301 to 1000VCR fee* to $30,000 $15,000
over 1,000VCR fee* to $70,000$35,000
* Items marked by asterisk refer to the VCR compliance fee that would apply under section 13.02 if the
plan had been submitted under the VCR program.
(2) Factors considered. Considera-
tion of whether the compliance correction
fee should be equal to, greater than, or
less than the presumptive amount will de-
pend on factors relating to the nature, ex-
tent, and severity of the failure. These
factors include: (a) whether the failure is a
failure to satisfy the requirements of
§ 401(a)(4), § 401(a)(26), or § 410(b), (b)
whether the plan has both Operational and
Plan Document Failures, (c) the period
over which the violation occurred (for ex-
ample, the time that has elapsed since the
end of the applicable remedial amend-
ment period under § 401(b) for a Plan
Document Failure), and (d) whether the
plan has a Favorable Letter.
(3) Egregious failures.In cases in-
volving failures that are egregious (as de-
scribed in section 4.06), (a) the maximum
compliance correction fee applicable to
the plan under the chart in 13.05(1) is in-
creased to 40 percent of the Maximum
Payment Amount, and (b) no presumptive
amount applies.
PART VI. CORRECTION ON AUDIT
(AUDIT CAP)
SECTION 14. DESCRIPTION OF
AUDIT CAP
.01 Audit CAP requirements. In the
event the Service identifies a Qualifica-

tion Failure (other than a failure that is not
treated as resulting in disqualification of
the plan under APRSC, VCR, or Walk-in
CAP) upon an Employee Plans or Exempt
Organizations examination of a Qualified
Plan, the requirements of this section are
satisfied with respect to the failure if the
plan sponsor corrects the failure, pays a
sanction in accordance with section
14.02, satisfies any additional require-
ments of section 14.03, and enters into a
closing agreement with the Service.
.02 Payment of sanction.Under Audit
CAP, the plan sponsor is subject to a sanc-
tion determined in accordance with sec-
tion 15. Payment of the sanction gener-
ally will be required at the time the
closing agreement is signed.
.03 Additional requirements.Depend-
ing on the nature of the failure, the Service
will discuss the appropriateness of the
plan’s existing administrative procedures
with the plan sponsor. Where existing ad-
ministrative procedures are inadequate for
operating the plan in conformance with the
qualification requirements of the Code, the
closing agreement may be conditioned
upon the implementation of stated proce-
dures. In addition, the plan sponsor may
be required to obtain a Favorable Letter
before the closing agreement is signed un-
less the Service determines that it is unnec-
essary based on the facts and circum-
stances (for example, because the plan
already has a Favorable Letter and no sig-
nificant amendments are adopted). If a Fa-
vorable Letter is required, the plan sponsor
would be required to pay the applicable
user fee for obtaining the letter.
.04 Failure to reach resolution.If the
Service and the plan sponsor cannot reach
an agreement with respect to the correc-
tion of the failure(s) or the amount of the
sanction, the plan will be disqualified.
.05 Effect of closing agreement.A
closing agreement constitutes an agree-
ment between the Service and the plan
sponsor that is binding with respect to the
tax matters identified therein for the peri-
ods specified.
.06 Other procedural rules.The pro-
cedural rules for Audit CAP are set forth
in chapter 11 of Internal Revenue Manual
(“IRM”) 7(10)54. This revenue proce-
dure modifies and replaces the portions of
IRM 7(10)54 that relate to eligibility (sec-
tion 4.2 and section 4.3.1) and sanctions
(section 4.3.3) under Audit CAP. The
other provisions of IRM 7(10)54, relating
mostly to matters of internal procedure,
remain unchanged.
SECTION 15. AUDIT CAP SANCTION
.01 Determination of sanction.The
sanction under Audit CAP is a negotiated
percentage of the Maximum Payment
Amount. Sanctions will not be excessive
and will bear a reasonable relationship to
the nature, extent, and severity of the fail-
ures.
.02 Factors considered. The amount of
the sanction will depend on factors relating
to the nature, extent, and severity of the
failures, including the extent to which cor-
rection had progressed before the examina-
tion was initiated. Other factors relating to
the nature, extent, and severity of the fail-
ures include: (1) the number and type of
employees affected by the failure, (2) the
number of nonhighly compensated em-
ployees who would be adversely affected
if the plan was not treated as qualified,
(3) whether the failure is a failure to satisfy
the requirements of § 401(a)(4), § 401(a)-
(26), or § 410(b), (4) whether the plan has
both Operational and Plan Document Fail-
ures, (5) the period over which the failure
occurred (for example, the time that has
elapsed since the end of the applicable re-
medial amendment period under § 401(b)
for a Plan Document Failure), (6) the rea-
son for the failure (for example, data errors
such as errors in transcription of data, the
transposition of numbers, or minor arith-
metic errors), and (7) whether the plan is
the subject of a Favorable Letter.
PART VII. CHRONOLOGY, EFFECT
ON OTHER DOCUMENTS, AND
EFFECTIVE DATE
SECTION 16. CHRONOLOGY
.01 APRSC.(1) On March 26, 1991,
the Service established the Administrative
Policy Regarding Sanctions (APRS),
under which, at the discretion of the ap-
plicable Key District Office, certain
minor Operational Failures of the qualifi-
cation requirements for pension, profit-
sharing and stock bonus plans could be
treated as not resulting in either plan dis-
qualification or the related adverse tax
consequences. To be eligible for relief
under APRS, Operational Failures had to
satisfy six narrowly drawn criteria.
(2) On December 23, 1996, the Ser-
vice replaced APRS with APRSC, an ad-
ministrative policy that broadened the
scope of APRS in three significant ways:
(a) it expanded the original criteria for eli-
gibility, (b) it established a self-correction
procedure whereby plan sponsors may
correct their plans for Operational Fail-
ures within a specified time period, and
(c) it extended relief to § 403(b) plans.
(3) Announcement 97–121 extended
the period for correcting Operational Fail-
ures under Part IV of APRSC from the
end of the first plan year following the
plan year in which the Operational Failure
occurred, to the end of the second plan
year following the plan year in which the
Operational Failure occurred.
.02 VCR program.(1) On November
16, 1992, the Service established the VCR
program as a temporary, experimental
program ending on December 31, 1993.
On September 20, 1993, Rev. Proc.
93–36, 1993–2 C.B. 474, extended the ex-
piration date of the VCR program to De-
cember 31, 1994, and added SVP, a sim-
plified correction procedure for certain
listed failures.
(2) On September 26, 1994, Rev.
Proc. 94–62, 1994–2 C.B. 778, extended
the VCR program indefinitely and pro-
vided that the VCR program would con-
tinue to be administered in the Headquar-
ters Office. In addition, Rev. Proc. 94–62
expanded the types of failures that could
be corrected under SVP, modified the
VCR eligibility standards, and made other
administrative and technical changes.
(3) On April 15, 1996, Rev. Proc.
96–29, 1996–1 C.B. 693, modified Rev.
Proc. 94–62 to change the eligibility stan-
dards of the VCR program relating to
whether or not a plan is Under Examina-
tion and whether a plan is considered to
have a favorable letter.
.03 Walk-in CAP. (1) The Service es-
tablished the Walk-in CAP program under
Rev. Proc. 94-16, 1994-1 C.B. 455, in re-
sponse to requests by sponsors of plans
that were not eligible for the VCR pro-
gram, but were not under Employee Plans
examination, to be given an opportunity,
similar to the VCR program, to voluntar-
ily correct their plan failures. Rev. Proc.
94-16 enabled sponsors of plans with Plan
Document or certain Operational Failures
to correct failures in their plans and pay a
limited monetary sanction.
March 23, 1998261998–12 I.R.B.

(2) On April 15, 1996, Rev. Proc.
96–29 modified Rev. Proc. 94–16 to
change the definition of when a plan is in-
eligible for Walk-in CAP because the plan
is under an Employee Plans or Exempt
Organizations examination.
.04 Audit CAP.Audit CAP, established
as a pilot program in 1990, permitted a
sponsor of a Qualified Plan to avoid dis-
qualification of its plan by entering into a
closing agreement with the Service condi-
tioned upon correction of plan failure(s)
discovered upon an Employee Plans or
Exempt Organizations examination and
the payment of a monetary sanction.
Audit CAP was expanded and made per-
manent in 1991.
SECTION 17. EFFECT ON OTHER
DOCUMENTS
.01 Revenue procedures modified and
superseded.Rev. Procs. 94–16, 94–62,
and 96–29 are modified and superseded
by this revenue procedure.
.02 Revenue procedure 98–8 modified.
Rev. Proc. 98–8 is modified as provided
in section 13.
.03 APRSC modified.APRSC is modi-
fied and restated in this revenue procedure.
.04 Audit CAP modified.Audit CAP is
modified and restated, in part, in this rev-
enue procedure.
SECTION 18. EFFECTIVE DATE
To provide a full opportunity for public
comment and for the Service to consider
comments, this revenue procedure is gen-
erally effective September 1, 1998; how-
ever, plan sponsors are permitted, at their
option, to apply the provisions of this rev-
enue procedure on or after March 9, 1998.
Specifically, unless a plan sponsor ap-
plies the provisions of this revenue proce-
dure earlier, this revenue procedure is ef-
fective:
(1) with respect to VCR and Walk-in
CAP, for applications submitted on or
after September 1, 1998;
(2) with respect to Audit CAP, for
examinations begun on or after Septem-
ber 1, 1998; and
(3) with respect to APRSC, for fail-
ures for which correction is not complete
before January 1, 1999.
SECTION 19. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1598.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The collection of information in this
revenue procedure is in sections 4.05,
6.02(4)(c), 10.01, 10.02, 10.05–10.09,
10.12, 10.16, 11.01–11.03, 12.01–12.04,
and 12.06–12.13, and Appendix B. This
information is required to enable the Of-
fice of Assistant Commissioner (Em-
ployee Plans and Exempt Organizations)
of the Internal Revenue Service to make
determinations regarding the issuance of
various types of closing agreements and
compliance statements. This informa-
tion will be used to issue closing agree-
ments and compliance statements to
allow individual plans to continue to
maintain their tax qualified status. As a
result, favorable tax treatment of the
benefits of the eligible employees is re-
tained. The likely respondents are indi-
viduals, state or local governments, busi-
ness or other for-profit institutions,
nonprofit institutions, and small busi-
nesses or organizations.
The estimated total annual reporting
and/or recordkeeping burden is 43,000
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from .5 to
42.5 hours, depending on individual cir-
cumstances, with an estimated average of
21.5 hours. The estimated number of re-
spondents and/or recordkeepers is 2,000.
The estimated frequency of responses
is occasionally.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Joyce Kahn of the Employee
Plans Division. For further information
concerning this revenue procedure, please
contact the Employee Plans Division’s
taxpayer assistance telephone service be-
tween 1:30 and 3:30 p.m., Eastern Time,
Monday through Thursday at (202) 622-
6074/6075. (These telephone numbers
are not toll-free numbers). Ms. Kahn may
be reached at (202) 622-6214 (also not a
toll-free number). For specific informa-
tion regarding Walk-in CAP and APRSC,
you may call Carlton Watkins, also at
(202) 622-6214.
APPENDIX A
OPERATIONAL FAILURES AND
CORRECTIONS UNDER SVP
.01 General rule.This appendix sets
forth Operational Failures and corrections
under SVP in accordance with section
10.12. In each case, the method described
corrects the Operational Failure identified
in the headings below. Corrective alloca-
tions and distributions should reflect earn-
ings and actuarial adjustments in accor-
dance with section 6.02(3)(a).
.02 Failure to properly provide the min-
imum top-heavy benefit under § 416 of the
Code to non-key employees. In a defined
contribution plan, the permitted correction
method is to properly contribute and allo-
cate the required top-heavy minimums to
the plan in the manner provided for in the
plan on behalf of the non-key employees
(and any other employees required to re-
ceive top-heavy allocations under the
plan). In a defined benefit plan, the mini-
mum required benefit must be accrued in
the manner provided in the plan.
.03 Failure to satisfy the ADP test set
forth in § 401(k)(3), the ACP test set forth
in § 401(m)(2), or the multiple use test of
§ 401(m)(9). The permitted correction
method is to make qualified nonelective
contributions (QNCs) (as defined in
§ 1.401(k)–1(g)(13)) on behalf of the
nonhighly compensated employees to the
extent necessary to raise the actual defer-
ral percentage or actual contribution per-
centage of the nonhighly compensated
employees to the percentage needed to
pass the test or tests. The contributions
must be made on behalf of all eligible
nonhighly compensated employees (to the
extent permitted under § 415) and must
either be the same flat dollar amount or
the same percentage of compensation.
QNCs contributed to satisfy the ADP test
need not be matched. Employees who
would have been eligible for a matching
1998–12 I.R.B.27March 23, 1998

contribution had they made elective con-
tributions must be counted as eligible em-
ployees for the ACP test, and the plan
must satisfy the ACP test. Under this
SVP correction method, a plan may not be
treated as two separate plans, one cover-
ing otherwise excludable employees and
the other covering all other employees (as
permitted in § 1.410(b)–6(b)(3)) in order
to reduce the number of employees eligi-
ble to receive QNCs. Likewise, under
this SVP correction method, the plan may
not be restructured into component plans
(as permitted in § 1.401(k)–1(h)(3)(iii)
for plan years before January 1, 1992) in
order to reduce the number of employees
eligible to receive QNCs.
.04 Failure to distribute elective defer-
rals in excess of the § 402(g) limit (in con-
travention of § 401(a)(30)). The permit-
ted correction method is to distribute the
excess deferral to the employee and to re-
port the amount as taxable in the year of
deferral and the year distributed. In ac-
cordance with § 1.402(g)–1(e)(1)(ii), a
distribution to a highly compensated em-
ployee is included in the ADP test; a dis-
tribution to a nonhighly compensated em-
ployee is not included in the ADP test.
.05 Exclusion of an eligible employee
from all contributions or accruals under
the plan for one or more plan years. The
permitted correction method is to make a
contribution to the plan on behalf of the
employees excluded from a defined contri-
bution plan or to provide benefit accruals
for the employees excluded from a defined
benefit plan. If the employee should have
been eligible to make an elective contribu-
tion under a cash or deferred arrangement,
the employer must make a QNC to the plan
on behalf of the employee that is equal to
the actual deferral percentage for the em-
ployee’s group (either highly compensated
or nonhighly compensated). If the em-
ployee should have been eligible to make
employee contributions or for matching
contributions (on either elective contribu-
tions or employee contributions), the em-
ployer must make a QNC to the plan on
behalf of the employee that is equal to the
actual contribution percentage for the em-
ployee’s group (either highly compensated
or nonhighly compensated). Contributing
the actual deferral or contribution percent-
age for such employees eliminates the
need to rerun the ADP or ACP test to ac-
count for the previously excluded employ-
ees. Under this SVP correction method, a
plan may not be treated as two separate
plans, one covering otherwise excludable
employees and the other covering all other
employees (as permitted in § 1.410(b)–
6(b)(3)) in order to reduce the number of
employees eligible to receive QNCs. Like-
wise, restructuring the plan into compo-
nent plans under § 1.401(k)–1(h)(3)(iii) is
not permitted in order to reduce the num-
ber of employees eligible to receive QNCs.
.06 Failure to timely pay the minimum
distribution required under § 401(a)(9). In
a defined contribution plan, the permitted
correction method is to distribute the re-
quired minimum distributions. The
amount to be distributed for each year in
which the failure occurred should be deter-
mined by dividing the adjusted account
balance on the applicable valuation date by
the applicable divisor. For this purpose,
adjusted account balance means the actual
account balance, determined in accordance
with § 1.401(a)(9)–1 Q&A F-5 of the pro-
posed regulations, reduced by the amount
of the total missed minimum distributions
for prior years. In a defined benefit plan,
the permitted correction method is to dis-
tribute the required minimum distributions,
plus an interest payment representing the
loss of use of such amounts.
.07 Failure to obtain participant
and/or spousal consent for a distribution
subject to the participant and spousal
consent rules under §§ 401(a)(11),
411(a)(11) and 417. The permitted cor-
rection method is to give each affected
participant a choice between providing in-
formed consent for the distribution actu-
ally made or receiving a qualified joint
and survivor annuity. In order to use this
SVP correction method, the plan sponsor
must have contacted each affected partici-
pant and spouse (to whom the participant
was married at the annuity starting date)
and received responses from each such in-
dividual before requesting consideration
under SVP. In the event that participant
and/or spousal consent is required but
cannot be obtained, the participant must
receive a qualified joint and survivor an-
nuity based on the monthly amount that
would have been provided under the plan
at his or her retirement date. This annuity
may be actuarially reduced to take into
account distributions already received by
the participant. However, the portion of
the qualified joint and survivor annuity
payable to the spouse upon the death of
the participant may not be actuarially re-
duced to take into account prior distribu-
tions to the participant. Thus, for exam-
ple, if in accordance with the automatic
qualified joint and survivor annuity op-
tion under a plan, a married participant
who retired would have received a quali-
fied joint and survivor annuity of $600
per month payable for life with $300 per
month payable to the spouse upon the par-
ticipant’s death but instead received a sin-
gle-sum distribution equal to the actuarial
present value of the participant’s accrued
benefit under the plan, then the $600
monthly annuity payable during the par-
ticipant’s lifetime may be actuarially re-
duced to take the single-sum distribution
into account. However, the spouse must
be entitled to receive an annuity of $300
per month payable for life beginning at
the participant’s death.
.08 Failure to satisfy the § 415(c) lim-
its in a defined contribution plan.The
permitted correction for failure to limit
annual additions (other than elective de-
ferrals and employee contributions) allo-
cated to participants in a defined contribu-
tion plan as required in § 415(c) (even if
the excess did not result from the alloca-
tion of forfeitures or from a reasonable
error in estimating compensation) is to
place the excess annual additions into an
unallocated account, similar to the sus-
pense account described in § 1.415–6(b)-
(6)(iii), to be used as an employer contri-
bution in the succeeding year(s). While
such amounts remain in the unallocated
account, the employer is not permitted to
make additional contributions to the plan.
The permitted SVP correction for failure
to limit annual additions that are elective
deferrals or employee contributions (even
if the excess did not result from a reason-
able error in determining the amount of
elective deferrals or employee contribu-
tions that could be made with respect to
an individual under the § 415 limits) is to
distribute the elective deferrals or em-
ployee contributions using a method simi-
lar to that described under § 1.415–6(b)-
(6)(iv). Elective deferrals and employee
contributions that are matched may be re-
turned, provided that the matching contri-
butions relating to such contributions are
forfeited (which will also reduce excess
annual additions for the affected individu-
als). The forfeited matching contributions
are to be placed into an unallocated ac-
count to be used as an employer contribu-
tion in succeeding periods.
March 23, 1998281998–12 I.R.B.

APPENDIX B
VCR/SVP/WALK-IN CAP CHECKLIST
IS YOUR SUBMISSION COMPLETE?
INSTRUCTIONS
The Service will be able to respond more quickly to your VCR, SVP, or Walk-in CAP request if it is carefully prepared and
complete. To ensure that your request is in order, use this checklist. Answer each question in the checklist by inserting yes, no, or
N/A, if appropriate, in the blank next to the item. Sign and date the checklist (as taxpayer or authorized representative) and
place it on top of your request.
You must submit a completed copy of this checklist with your request. If a completed checklist is not submitted with your request,
substantive consideration of your submission will be deferred until a completed checklist is received.
TAXPAYER’S NAME
TAXPAYER’S I.D. NO.
PLAN NAME & NO.
ATTORNEY/P.O.A.
The following items relate to all submissions:
______1. Have you included a complete description of the failure(s) and the years in which the failure(s) occurred (including
the years for which the statutory period has expired)? (See section 12.03(1) of Rev. Proc. 98–22.) (Hereafter, all section
references are to Rev. Proc. 98–22.)
______2. Have you included an explanation of how and why the failure(s) arose, including a description of the administrative
procedures for the plan in effect at the time the failure(s) occurred? (See section 12.03(2) and (3).)
______3. Have you included a detailed description of the method for correcting the failure(s) identified in your submission?
This description must include, for example, the number of employees affected and the expected cost of correction (both
of which may be approximated if the exact number cannot be determined at the time of the request), the years involved,
and calculations or assumptions the plan sponsor used to determine the amounts needed for correction. In lieu of pro-
viding correction calculations with respect to each employee affected by a failure, you may submit calculations with re-
spect to a representative sample of affected employees. However, the representative sample calculations must be suffi-
cient to demonstrate each aspect of the correction method proposed. Note that each step of the correction method must
be described in narrative form.(See section 12.03(4).)
______ 4. Have you described the earnings or interest methodology (indicating computation period and basis for determining
earnings or interest rates) that will be used to calculate earnings or interest on any corrective contributions or distribu-
tions? (As a general rule, the interest rate (or rates) earned by the plan during the applicable period(s) should be used in
determining the earnings for corrective contributions or distributions.) (See section 12.03(5).)
If you inserted “N/A” for item 4, enter explanation:
______5. Have you submitted specific calculations for each affected employee or a representative sample of affected employ-
ees? (See section 12.03(6).)
______6. Have you described the method that will be used to locate and notify former employees or, if there are no former em-
ployees affected by the failure(s), provided an affirmative statement to that effect? (See section 12.03(7).)
1998–12 I.R.B.29March 23, 1998

______7. Have you provided a description of the administrative measures that have been or will be implemented to ensure that
the same failure(s) do not recur? (See section 12.03(8).)
______ 8. Have you included a statement that, to the best of the plan sponsor’s knowledge, the plan is not currently under an
Employee Plans examination? (See section 12.03(8).)
______9. Have you included a statement that, to the best of the plan sponsor’s knowledge, the plan sponsor is not under an Ex-
empt Organizations examination? (See section 12.03(8).)
______10. If the plan is currently being considered in a determination letter application on a Form 5310, have you included a
statement to that effect? (See section 12.03(10).)
______11. Have you included a copy of the portions of the plan document (and adoption agreement, if applicable) relevant to
the failure(s) and method(s) of correction? (See section 12.04(2).)
______ 12. Have you included a copy of the plan’s most recent Favorable Letter and/or the required applicable document(s)?
(See section 12.04(3).)
______13. Have you included the appropriate voluntary compliance fee? (See section 12.05.)
______14. Have you included the original signature of the sponsor or the sponsor’s representative? (See section 12.06.)
_____ 15. Have you included a Power of Attorney (Form 2848)? Note: (representation under the VCR/SVP and Walk-in CAP
is limited to attorneys, certified public accountants, enrolled agents, and enrolled actuaries; unenrolled return preparers
are not eligible to act as representatives under the VCR program). (See section 12.07.)
______16. Have you included a Penalty of Perjury Statement signed (original signature only) and dated by the plan sponsor?
(See section 12.08.)
______17. Have you designated your submission as a VCR, SVP, or Walk-in CAP submission, as appropriate? (See section
12.10.)
The following items relate only to submissions under VCR (including SVP):
______ 18. Have you included a copy of the first page, the page containing employee census information (currently line 7f of
the 1997 Form 5500), and the information relating to plan assets (currently line 31f of the 1997 Form 5500) of the most
recently filed Form 5500 series return? Note: If a Form 5500 is not applicable, insert N/A and furnish the name of the
plan, and the census information required of Form 5500 series filers. (See section 12.04(1).)
______19. Have you proposed a time period of correction that is limited to 150 days from the date the compliance statement is
issued? (See section 12.14.)
The following items relate only to submissions under SVP:
______20. Have you included a statement identifying your request as an SVP request? (See section 12.03(11).)
______21. Are each of the failures you have identified eligible for correction under SVP? (See Appendix A.)
______22. Have you identified no more than two SVP failures? (If more than two failures were identified, SVP is not avail-
able, but you may make a submission under VCR.) (See section 10.12(3).)
______23. Have you proposed to correct the failure(s) identified in your request using the permitted correction method(s) set
forth in Appendix A? (See Appendix A.)
The following item relates only to submissions under Walk-in CAP:
______24. Have you included a copy of the most recently filed Form 5500? (See section 12.04(1).)
March 23, 1998301998–12 I.R.B.

______25. Have you submitted an application for a determination letter? (See section 11.01(4).)
Signature Date
Title or Authority
Typed or printed name of person signing checklist
1998–12 I.R.B.31March 23, 1998

March 23, 1998321998–12 I.R.B.
Notice of Proposed Rulemaking
Election Not to Apply Look-Back
Method in
De MinimisCases
REG–120200–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In T.D. 8756, page 4, the
IRS is issuing temporary regulations
under section 460 relating to the look-
back method. The temporary regulations
provide rules for electing not to apply the
look-back method to long-term contracts
in de minimiscases. The temporary regu-
lations reflect changes to the law made by
the Taxpayer Relief Act of 1997 and af-
fect electing manufacturers and construc-
tion contractors whose long-term con-
tracts otherwise are subject to the
look-back method. The text of those tem-
porary regulations also serves as the text
of these proposed regulations.
DATES: Written comments and requests
for a public hearing must be received by
April 13, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–120200–97),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative, sub-
missions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–120200–97),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC, or sent 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: John M.Aramburu or Leo F.
Nolan II at (202) 622-4960 (not a toll-free
number).
SUPPLEMENTARY INFORMATION
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507(d)). Com-
ments on the collection 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, T:FP, Wash-
ington, DC 20224. Comments on the col-
lection of information should be received
by March 16, 1998. Comments are specif-
ically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service,including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in §1.460–6(j).
This information is required to notify the
Commissioner of taxpayers’ elections
under section 460(b)(6). This information
will be used to determine whether taxpay-
ers have properly elected under section
460(b)(6). This collection of information
is required for a taxpayer to elect not to
apply the look-back method to long-term
contracts in de minimiscases. The likely
respondents are for-profit entities.
Estimated total annual reporting bur-
den: 4,000 hours.
Estimated average annual burden hours
per respondent: 0.2 hours.
Estimated number of respondents:
20,000.
Estimated frequency of responses: Once.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Temporary regulations in T.D. 8756
amend the Regulations on Income Taxes
(26 CFR part 1) relating to section 460.
The text of those 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 is hereby certified
that the collection of information in these
regulations will not have a significant
economic impact on a substantial number
of small entities. This certification is
based on the fact that the time required to
prepare and file an election statement is
minimal and will not have a significant
impact on those small entities that choose
to make the election. In addition, the elec-
tion need only be made once by a tax-
payer. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Part IV. Items of General Interest

1998–12 I.R.B.33March 23, 1998
Comments and Requests for a Public
hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any electronic or
written comments (a signed original and
eight (8) copies) that are submitted timely
to the IRS. All comments will be avail-
able for public inspection and copying. A
public hearing may be scheduled if re-
quested in writing by a person that timely
submits written comments. If a public
hearing is scheduled, notice of the date,
time, and place of the hearing will be pub-
lished in the Federal Register.
Draft Information
The principal author of these proposed
regulations is Leo F. Nolan II, Office of
Assistant Chief Counsel (Income Tax and
Accounting). 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 continues to read in part as follows:
Authority: 26 U.S.C. 7805 ***
Par. 2. Section 1.460–6 is amended by
adding paragraph (j) to read as follows:
§1.460–6 Look-back Method.
*****
(j) [The text of proposed paragraph (j)
is the same as the text of §1.460–6T(j)
published in T.D. 8756.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
January 12, 1998, 8:45 a.m., and published in the
issue of the Federal Register for January 13, 1998,
63 F.R. 1932)
Amicus Brief in Geissal v. Moore
Medical Corp.
Announcement 98–22
The Solicitor General of the United
States is filing, on March 4, 1998, a brief
as amicus curiae in Geissal v. Moore
Medical Corp.,114 F.3d 1458 (8th Cir.
1997), cert. granted,66 U.S.L.W. 3490
(U.S. Jan. 23, 1998) (No. 97-689). In ac-
cordance with the recommendation of
Treasury and the Internal Revenue Ser-
vice, the Solicitor General takes a posi-
tion in the brief that is contrary to a provi-
sion in proposed Treasury Regulations
relating to the group health continuation
coverage requirements under the Consoli-
dated Omnibus Budget Reconciliation
Act of 1985, as amended (“COBRA”).
1
This announcement provides for contin-
ued reliance, for purposes of the excise
tax under section 4980B of the Internal
Revenue Code, on the position taken in
the proposed regulations pending the
Supreme Court’s decision in Geissal.
BACKGROUND
Upon the occurrence of certain events
(such as a termination of employment
other than for gross misconduct) that
would otherwise cause certain individuals
to lose coverage under a group health plan
subject to the COBRA continuation cov-
erage requirements, the plan must offer to
those individuals (defined in the statute as
“qualified beneficiaries”) the right to elect
continuation coverage. Among the dates
on which a group health plan may stop
making COBRA continuation coverage
available is the “date on which the quali-
fied beneficiary first becomes, after the
date of the election, covered under any
other group health plan . . . which does
not contain any exclusion or limitation
with respect to any preexisting condition
of such beneficiary . . . .” Section
4980B(f)(2)(B)(iv) of the Code.
2
Clause (d) of Q&A–38 of proposed
Treasury Regulation 1.162–26 provides
that COBRA continuation coverage can
cease to be made available on “the first
date after the date of the election upon
which the qualified beneficiary is covered
. . . under any other group health plan . . . .”
3
Thus, under the proposed regulations,
group health plans would not be pre-
cluded from terminating a qualified bene-
ficiary’s COBRA continuation coverage
due to the beneficiary’s other coverage
merely because the beneficiary obtained
the other coverage before the date of
electing COBRA continuation coverage.
4
A number of cases brought by qualified
beneficiaries under title I of ERISA have
focused on this issue. The Tenth and Sev-
enth Circuits have held that group health
plans cannot cease making COBRA cov-
erage available due to other coverage that
began before the date of the election for
COBRA coverage.
5
The brief being filed
as amicus curiae in Geissal supports this
view. The Fifth and Eleventh Circuits,
and the Eighth Circuit in Geissal, have
adopted a contrary view.
6
As noted above, proposed Treasury
Regulation 1.162–26 took the position
that a group health plan may cease mak-
ing COBRA continuation coverage avail-
able to a qualified beneficiary due to the
beneficiary’s other group health coverage
even if the other coverage began before
the date of the election for COBRA cover-
age. After further consideration of the
issue, however, Treasury and the Internal
Revenue Service now believe that the bet-
1
COBRA added group health continuation cover-
age requirements to the Internal Revenue Code, the
Employee Retirement Income Security Act of 1974
(ERISA), and the Public Health Service Act.
2
A group health plan may generally also stop
making COBRA continuation coverage available on
the date on which a qualified beneficiary first be-
comes, after the date of the election, entitled to
Medicare benefits. Seesection 4980B(f)(2)(B)(iv)
of the Code.
3
The proposed regulations were published in the
Federal Registeron June 15, 1987 (52 F.R. 22716),
interpreting the COBRA continuation coverage re-
quirements under section 162(k) of the Code. In
1988, the COBRA continuation coverage provisions
in the Code were moved from section 162(k) to sec-
tion 4980B.
4
Under the proposed regulations, group health
plans would also not be precluded from terminating
a qualified beneficiary’s COBRA continuation cov-
erage due to the beneficiary’s being entitled to
Medicare benefits merely because the beneficiary
became so entitled before the date of electing
COBRA continuation coverage. See Q&A–38(e) of
prop. Treas. Reg. 1.162–26. Moreover, under the
proposed regulations, group health plans would not
be required to make COBRA continuation coverage
available at all to someone who, on the day before
the qualifying event, was already entitled to
Medicare benefits. See Q&A–15(b)(2) of prop.
Treas. Reg. 1.162–26.
5
Oakley v. City of Longmont,890 F.2d 1128 (10th
Cir. 1989); Lutheran Hospital of Indiana, Inc. v.
Business Men’s Assurance Company of America,51
F.3d 1308 (7th Cir. 1995).
6
Brock v. Primedica, Inc.,904 F.2d 295 (5th Cir.
1990); National Companies Health Benefit Plan v.
St. Joseph’s Hospital of Atlanta, Inc.,929 F.2d 1558
(11th Cir. 1991); Geissal v. Moore Medical Corp.,
114 F.3d 1458 (8th Cir. 1997).

March 23, 1998341998–12 I.R.B.
ter interpretation of the statute is that a
plan is not permitted to cease making
COBRA coverage available merely be-
cause of other coverage (or entitlement to
Medicare benefits) that began before the
date of the election for COBRA coverage.
RELIANCE ON PROPOSED
REGULATIONS
Q&A–6 of proposed Treasury Regula-
tion 1.162–26 provides that, for the period
before the effective date of final regula-
tions, a group health plan must comply in
good faith with a reasonable interpreta-
tion of the statutory requirements. Q&A-
6 further provides that the Service will
consider compliance with the terms of the
proposed regulations to constitute good
faith compliance with a reasonable inter-
pretation of the statutory requirements as
they existed when the proposed regula-
tions were published (with an exception
for provisions of the statute not addressed
in the proposed regulations).
This announcement provides for con-
tinued reliance on Q&A–38(d) of pro-
posed Treasury Regulation 1.162–26,
pending a decision by the Supreme Court
in Geissal, with respect to the treatment of
certain qualified beneficiaries. (This an-
nouncement does not affect private rights
of action of qualified beneficiaries under
title I of ERISA.) Specifically, the contin-
ued reliance applies with respect to a
qualified beneficiary who, after the date
of the election for COBRA continuation
coverage, has other group health coverage
that does not contain any exclusion or
limitation with respect to a preexisting
condition of the qualified beneficiary.
Accordingly, no excise tax under section
4980B of the Code will be assessed with
respect to any period before the date of
the Supreme Court’s decision in Geissal
merely because the plan ceases to provide
COBRA continuation coverage to a quali-
fied beneficiary described in the preced-
ing sentence, even if the other group
health coverage took effect on or before
the date of the election for COBRA con-
tinuation coverage.
7
DRAFTING INFORMATION
The principal author of this announce-
ment is Russ Weinheimer of the Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations). For
further information regarding this an-
nouncement contact Mr. Weinheimer at
(202) 622-4695 (not a toll-free call).
Foundations Status of Certain
Organizations
Announcement 98–23
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:
Christian Care Network, Jackson, MI
Christian Cares Association Inc.,
Missouri City, TX
Christian Computer Concepts,
Lakewood, CO
Christian Counseling Center, Jackson,
TN
Christian Counseling Center of Northeast
Arkansas, Jonesboro, AR
Christian Discipleship International, Inc.,
Georgetown, OH
Christian Extension Ministries Inc.,
Hialeh, FL
Christian Family Resource Center,
Champaign, IL
Cliff and Clara Herlache Foundation,
Inc., Sturgeon Bay, WI
Clinton County Leadership Institute,
Wilmington, OH
Clothe A Child Inc., Indianapolis, IN
Cloverport Main Street Revitalization
Committee, Inc., Cloverport, KY
Co-Operative Services Inc., Gainesville,
FL
Committee To Save Susquehannas Lady
Liberty Inc., Harrisburg, PA
Common Sense Solutions Inc., Elgin, TX
Common Threads, Columbia, SC
Communicative Device Benevolent
Fund, Mentor, OH
Communities in Schools Kingsville Texas
Inc., Corpus Christi, TX
Communities Resolved To Encourage Art
That Edifies Inc., Port Lavaca, TX
Designated Driver Program Inc., Troy,
AL
Designs for Transforming Education,
Minneapolis, MN
Deska Firesafety Program, Oak Park, MI
Desoto Housing & Human Development
Corp., Hernando, MS
Detroit Freeze Hockey Club, St. Clair
Shores, MI
Detroit Mass Community Services Inc.,
Detroit, MI
Deutscher Hilfs Club Florida Westkuste
Inc., Palmetto, FL
Developmental Resource Corporation,
Shreveport, LA
Dfyit Inc., Houston, TX
Diabetes Foundation of Collier County
Inc., Naples, FL
Diamon Valley Youth Ranch Inc.,
Hutchinson, KS
Disability Community Development
Corporation, Ypsilanti, MI
Disabled Housing Concepts Inc.,
Columbus, OH
Discovery Days Daycare Inc.,
Hartington, NE
Egyptian Heritage Society, Houston, TX
Festa Italiana Inc., Atlanta, GA
Festival at Dunmaglas Inc., Charlevoix,
MI
Fibromyalgia Association of Houston
Inc., Bellaire, TX
Great American Air Affair Inc., Bowling
Green, KY
Great Falls Teachers Federal Credit
Union, Great Falls, MT
Gwinnett Panther Association Inc.,
Lilburn, GA
Gym Parents Inc., Lancaster, PA
7
This announcement also provides for continued
reliance on Q&A–15(b)(2) and Q&A–38(e) of pro-
posed Treasury Regulation 1.162–26. Accordingly,
no excise tax under section 4980B of the Code will
be assessed with respect to any period before the
date of the Supreme Court’s decision in Geissal
merely because a plan does not make COBRA con-
tinuation coverage available to an individual who is
entitled to Medicare benefits on the day before a
qualifying event affecting the individual, or merely
because a plan ceases to provide COBRA continua-
tion coverage to a qualified beneficiary on the basis
that the qualified beneficiary is entitled to Medicare
benefits, even if the beneficiary became entitled to
Medicare benefits on or before the date of the elec-
tion for COBRA continuation coverage.

1998–12 I.R.B.35March 23, 1998
Headway Homes of Texas Inc., Garland,
TX
Healing Forest Conservancy,
Washington, DC
Healing Hearts Foundation Inc., Roswell,
GA
Health and Wholeness Foundation Inc.,
Charleston, WV
Homeless Benefit Ball Inc., Louisville,
KY
Homeless Foundation of America Inc.,
Arlington, VA
Hondo Youth Basketball Association Inc.,
Hondo, TX
Hoosier Youth Invitational Games Inc.,
Indianapolis, IN
Hope and Development Center
Incorporated, Beaumont, TX
James Sterett Smith Memorial Education
Foundation Inc., Towanda, PA
Janie Butler Alcohol & Drug Prevention
Center Alcohol and Drug Center,
Meridian, MS
Japan-American Art and Cultural
Fellowship LTD., Baltimore, MD
Jefferson Ark Community Development,
Gary, IN
Kevin Shelley Memorial Childrens
Community Christmas Fund, Clinton,
MD
Key Ministries Inc., Tulsa, OK
Keys Childrens Shelter Foundation Inc.,
Key Largo, FL
Keystone Soccer Club, Philadelphia, PA
La Siembra the Sowing, Espanola, NM
La Tropa Michoacana Inc., E. Chicago,
IN
Labor Council Community Services Inc.,
Mobile, AL
Ladies in Motion Corporation, Chicago,
IL
Lake Cities Community Band, Southlake,
TX
Lake Community Homes Inc., Mentor,
OH
Lake Como Child Care Inc., Lake
Geneva, WI
Lake Leon Flood Control Fund Inc.,
Eastland, TX
Lake Park Area Historical Society Inc.,
Lake Park, GA
Lakeland Baptist Education Center,
Lewisville, TX
Martin Luther King Jr Association,
Pickens, MS
Martins Adult Foster Care Incorporated,
Bay City, MI
Maryland Alternative Resource Center
for Youth MARMARCY, Oxon Hill,
MD
Maryland Freshwater Foundation Inc.,
Baltimore, MD
Maryland Native Plant Society Inc.,
Silver Spring, MD
Maryland Womens Basketball Coaches,
Columbia, MD
McClain Ministries Inc., Gainesville, FL
McCollier Group Home Inc., Canton, OH
McGrane Self-Esteem Foundation Inc.,
Ft. Mitchell, KY
McPherson Babe Ruth Inc., McPherson,
KS
Meadowoods Education Foundation Inc.,
Orlando, FL
Mishpachat Alizim, Houston, TX
Missing Children of Utah Inc., Ogden,
UT
Missing Children Society of USA Inc.,
St. Rose, LA
Mission of Help Inc., Ft. Pierce, FL
Mississippi Association of the Deaf
Incorporated, Batesville, MS
Monarch House Group Inc., Colorado
Springs, CO
Monarch Youth Program Inc., Chicago, IL
Monmouth County Medical Society,
Tinton Falls, NJ
Monroe County Environmental
Education Advisory Council, Inc., Big
Pine Key, FL
Montana Freedom Home, Anaconda, MT
Montana Poets Society, Three Forks, MT
Mulvane Care & Share, Mulvane, KS
Muncie Alliance for the Prevention of
Substance Abuse, Inc., Muncie, IN
Murray Rotary Club Foundation, Murray,
UT
Museum on the Common, Mt. Pleasant,
SC
National Financial Literacy Institute, Inc.,
Wheaton, MD
National Foundation for Future Minority
Astronauts, Inc., Houston, TX
National Health Foundation of Russia,
Washington, DC
National Hispanic Council on Aging of
Wichita, Wichita, KS
National Institute for the Study of
Cognitive and Sensorimotor Therapies,
Boulder, CO
National IOTA Foundation, Baltimore,
MD
National Leadership Ministries Inc.,
Washington, DC
National Link Incorporated, Durham, NC
Native Gospel Outreach, Cortez, CO
Natrona County 4-H Foundation, Casper,
WY
Natural Bridges Inc., Indianapolis, IN
Nature Studies Center International Inc.,
Ranchos De Toas, NM
Navajo County Genealogical Society,
Winslow, AZ
Navajo Museum and Library Foundation,
Window Rock, AZ
New Jersey Chapter American College of
Health Care Administrators, Inc.,
Paterson, NJ
New Jerusalem Day Care Center, Killeen,
TX
New Life Network, Bozeman, MT
New Orleans Volunteers in Court, New
Orleans, LA
New Shreveport Community Housing
Development Organization, Inc.,
Shreveport, LA
New Sober Movement Inc., Ignacio, CO
New Trinity Coalition Inc., Dallas, TX
New Visions Inc., New York, NY
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.
Availability of Publication 970,
Tax Benefits for Higher
Education
Announcement 98–24
New Publication 970 will be available
in March, 1998. The publication explains
the tax benefits for persons who are sav-
ing for or paying higher education costs
for themselves and members of their fam-
ilies or who are repaying student loans.
The topics include:
• Two new education tax credits (the
Hope credit and the lifetime learning
credit),
• Using funds from education individ-

March 23, 1998361998–12 I.R.B.
ual retirement accounts (IRAs) or tradi-
tional IRAs to pay education costs,
• Student loans used to pay education
costs,
• Using proceeds from qualified state
tuition programs to pay education costs,
• Excluding from income interest
earned on certain savings bonds, and
• Excluding from income employer-
provided educational assistance benefits.
Most of the benefits become available
in 1998, and this publication will help you
determine which benefits apply to you so
that you can plan for your 1998 federal in-
come tax return.
You can get a copy of this publication
by calling 1-800-829-3676.Or you can
write to the IRS Forms Distribution Cen-
ter nearest you. Check your income tax
package for the address. The publication
is also available on the IRS Internet Web
Site at www.irs.ustreas.gov.

1998–12 I.R.B.37March 23, 1998
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Proc..—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

March 23, 1998381998–12 I.R.B.
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.
Numerical Finding List
1
Bulletins 1998–1 through 1998–11
Announcements:
98–1, 1998–2 I.R.B. 38
98–2, 1998–2 I.R.B.38
98–3, 1998–2 I.R.B.38
98–4, 1998–4 I.R.B.31
98–5, 1998–5 I.R.B. 25
98–6, 1998–5 I.R.B. 25
98–7, 1998–5 I.R.B. 26
98–8, 1998–6 I.R.B. 96
98–9, 1998–7 I.R.B. 35
98–10, 1998–7 I.R.B. 35
98–11, 1998–8 I.R.B. 42
98–12, 1998–8 I.R.B. 43
98–13, 1998–8 I.R.B. 43
98–14, 1998–8 I.R.B. 44
98–15, 1998–10 I.R.B.36
98–16, 1998–9 I.R.B. 17
98–17, 1998–9 I.R.B. 16
98–18, 1998–10 I.R.B.44
98–19, 1998–10 I.R.B.44
98–20, 1998–11 I.R.B. 25
98–21, 1998–11 I.R.B. 26
Notices:
98–1, 1998–3 I.R.B. 42
98–2, 1998–2 I.R.B. 22
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25
98–5, 1998–3 I.B.R.49
98–6, 1998–3 I.R.B. 52
98–7, 1998–3 I.R.B. 54
98–8, 1998–4 I.R.B. 6
98–9, 1998–4 I.R.B. 8
98–10, 1998–6 I.R.B.9
98–11, 1998–6 I.R.B. 18
98–12, 1998–5 I.R.B.12
98–13, 1998–6 I.R.B.19
98–14, 1998–8 I.R.B. 27
98–15, 1998–9 I.R.B. 8
98–17, 1998–11 I.R.B. 6
Proposed Regulations:
PS–158–86, 1998–11 I.R.B. 13
REG–100841–97, 1998–8 I.R.B. 30
REG–102894–97, 1998–3 I.R.B. 59
REG–104062–97, 1998–10 I.R.B. 34
REG–104691–97, 1998–11 I.R.B. 13
REG–105163–97, 1998–8 I.R.B. 31
REG–109333–97, 1998–9 I.R.B. 9
REG–109704–97, 1998–3 I.R.B. 60
REG–115795–97, 1998–8 I.R.B.33
REG–119449–97, 1998–10 I.R.B. 35
REG–121755–97, 1998–9 I.R.B. 13
REG–209276–87, 1998–11 I.R.B. 18
REG–209463–82, 1998–4 I.R.B. 27
REG–209476–82, 1998–8 I.R.B. 36
REG–209484–87, 1998–8 I.R.B.40
REG–209485–86, 1998–11 I.R.B. 21
REG–209807–95, 1998–8 I.R.B. 40
REG–251502–96, 1998–9 I.R.B. 14
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
Revenue Procedures—Continued
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
98–11, 1998–4 I.R.B.9
98–12, 1998–4 I.R.B. 18
98–13, 1998–4 I.R.B. 21
98–14, 1998–4 I.R.B. 22
98–15, 1998–4 I.R.B. 25
98–16, 1998–5 I.R.B. 19
98–17, 1998–5 I.R.B. 21
98–18, 1998–6 I.R.B. 20
98–19, 1998–7 I.R.B. 30
98–20, 1998–7 I.R.B. 32
98–21, 1998–8 I.R.B. 27
98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
98–25, 1998–11 I.R.B. 7
Revenue Rulings:
98–1, 1998–2 I.R.B. 5
98–2, 1998–2 I.R.B. 15
98–3, 1998–2 I.R.B. 4
98–4, 1998–2 I.R.B. 18
98–5, 1998–2 I.R.B. 20
98–6, 1998–4 I.R.B. 4
98–7, 1998–6 I.R.B.6
98–8, 1998–7 I.R.B. 24
98–9, 1998–6 I.R.B. 5
98–10, 1998–10 I.R.B. 11
98–11, 1998–10 I.R.B. 13
98–12, 1998–10 I.R.B. 5
98–13, 1998–11 I.R.B. 4
98–14, 1998–11 I.R.B. 4
Treasury Decisions:
8740, 1998–3 I.R.B. 4
8741, 1998–3 I.R.B. 6
8742, 1998–5 I.R.B.4
8743, 1998–7 I.R.B. 26
8744, 1998–7 I.R.B. 20
8745, 1998–7 I.R.B. 15
8746, 1998–7 I.R.B. 4
8747, 1998–7 I.R.B. 18
8748, 1998–8 I.R.B. 24
8749, 1998–7 I.R.B. 16
8750, 1998–8 I.R.B. 4
8751, 1998–10 I.R.B. 23
8752, 1998–9 I.R.B. 4
8753, 1998–9 I.R.B. 6
8754, 1998–10 I.R.B. 15
8755, 1998–10 I.R.B. 21

1998–12 I.R.B.39March 23, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–1 through 1998–11
Revenue Procedures:
91–59
Updated and superseded by
98–25, 1998–11 I.R.B. 7
95–35
95–35A
Superseded by
98–19, 1998–7 I.R.B. 30
97–1
Superseded by
98–1, 1998–1 I.R.B. 7
97–2
Superseded by
98–2, 1998–1 I.R.B. 74
97–3
Superseded by
98–3, 1998–1 I.R.B. 100
97–4
Superseded by
98–4, 1998–1 I.R.B. 113
97–5
Superseded by
98–5, 1998–1 I.R.B. 155
97–6
Superseded by
98–6, 1998–1 I.R.B. 183
97–7
Superseded by
98–7, 1998–1 I.R.B. 222
97–8
Superseded by
98–8, 1998–1 I.R.B. 225
97–21
Superseded by
98–2, 1998–1 I.R.B. 74
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:
75–17
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
92–19
Supplemented in part by
98–2, 1998–2 I.R.B. 15
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–27 through 1997–52 will be found in Internal
Revenue Bulletin 1998–1, dated January 5, 1998.

Notes
March 23, 1998401998–12 I.R.B.

1998–12 I.R.B.41March 23, 1998
Notes

March 23, 1998421998–12 I.R.B.
Notes

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
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The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
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ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
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would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
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