Internal Revenue Bulletin 1998-20 (PDF rendition): IRS Announcements

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

INCOME TAX
REG–251698–96, page 14.
Proposed regulations under sections 1361 and 1362 of the
Code interpret the rules permitting an S corporation to own
80 percent or more of the stock of a C corporation, and to
elect to treat a wholly owned subsidiary as a qualified sub-
chapter S subsidiary (QSSS).
Announcement 98–39, page 24.
This announcement contains corrections to final regulations
T.D. 8765 (1998–16 I.R.B. 11) relating to adjustments re-
quired when a qualified business unit (QBU) that used the
profit and loss method of accounting (P&L) in a post-1986
year begins to use the dollar approximate separate transac-
tion method of accounting (DASTM) and adjustments re-
quired when a QBU that used DASTM begins using P&L.
EMPLOYEE PLANS
T.D. 8768, page 4.
Final and temporary regulations under section 417(e) of the
Code provide guidance to employers in determining the pre-
sent value of an employee’s benefit under a qualified de-
fined benefit pension plan, for purposes of the applicable
consent rules and for determining the amount of a distribu-
tion made in any form other than certain nondecreasing an-
nuity forms.
EXEMPT ORGANIZATIONS
REG–121268–97, page 12.
Proposed regulations under section 513 of the Code clarify
when the travel and tour activities of tax exempt organiza-
tions are substantially related to the purposes for which ex-
emption was granted.
Announcement 98–41, page 25.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Announcement 98–40, page 24.
This announcement contains corrections to the notice of
proposed rulemaking REG–208299–90 (1998–16 I.R.B.
26). The proposed rulemaking under sections 482 and 864
of the Code relates to the allocation among controlled tax-
payers and sourcing of income, deductions, and gains and
losses from a global dealing operation; rules applying these
allocation and sourcing rules to foreign currency transac-
tions and to foreign corporations engaged in a U.S. trade or
business; and rules concerning the mark-to-market treat-
ment resulting from hedging activities of a global dealing op-
eration. The public hearing originally scheduled for July 9,
1998, has been rescheduled for July 14, 1998.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–20
May 18, 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 31.
Announcement of the Consent Voluntary Suspension of Attorneys, Certified Public Accounts,
Enrolled Agents, etc., begins on page 28.

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.

May 18, 199841998–20 I.R.B.
Section 417.—Definitions and
Special Rules for Purposes of
Minimum Survivor Annuity
Requirements
26 CFR 1.417(e)–1: Restrictions and valuations of
distributions from plans subject to sections
401(a)(11) and 417.
T.D. 8768
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Valuation of Plan Distributions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
final and temporary regulations that pro-
vide guidance to employers in determin-
ing the present value of an employee’s
benefit under a qualified defined benefit
pension plan, for purposes of the applica-
ble consent rules and for purposes of de-
termining the amount of a distribution
made in any form other than certain non-
decreasing annuity forms. These regula-
tions are issued to reflect changes to the
applicable law made by the Retirement
Protection Act of 1994 (RPA ’94), which
is part of the Uruguay Round Agreements
Act of 1994. RPA ’94 amended the law to
change the interest rate, and to specify the
mortality table, for the purposes described
above. These regulations affect employ-
ers that maintain qualified defined benefit
pension plans, and participants and bene-
ficiaries in those plans.
DATES: Effective date:These regula-
tions are effective April 3, 1998.
Applicability date:These regulations
apply to plan years beginning after De-
cember 31, 1994, except as provided in
§1.417(e)–1(d)(8) and (9).
FOR FURTHER INFORMATION CON-
TACT: Linda S. F. Marshall, (202) 622-
6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under section 417(e). Section 417(e)
was amended by the Retirement Protec-
tion Act of 1994 (RPA ’94). On April 5,
1995, temporary regulations (TD 8591)
under section 417(e) were published in
the Federal Register(60 F.R. 17216). A
notice of proposed rulemaking (EE–
12–95), cross-referencing the temporary
regulations, was published in the Federal
Register(60 F.R. 17286) on the same
day. The temporary regulations provide
guidance related to the determination of
the present value of an employee’s benefit
under a qualified defined benefit pension
plan in accordance with the rules of sec-
tion 417(e)(3). After consideration of the
public comments received regarding the
temporary and proposed regulations, the
temporary regulations are replaced and
the proposed regulations are adopted as
revised by this Treasury decision.
Section 417(e)(3) sets forth rules to be
used in determining the present value of
an employee’s benefit under a qualified
defined benefit pension plan, for purposes
of the applicable consent rules and for
purposes of determining the amount of a
distribution. The rules of section
417(e)(3) are also relevant to the applica-
tion of section 411(a)(11) and section
415(b). Section 411(a)(11) provides that
a participant’s benefit with a present value
that exceeds a statutory threshold can be
immediately distributed to a participant
only with the participant’s consent. The
level of this statutory threshold was
changed from $3,500 to $5,000 by the
Taxpayer Relief Act of 1997, effective for
plan years beginning after August 5,
1997. Under section 411(a)(11)(B), as
amended by RPA ’94, the present value of
a participant’s benefit is calculated using
the rules of section 417(e)(3).
Section 415(b) limits the maximum
benefit that can be provided under a qual-
ified defined benefit plan. Under section
415(b)(2)(E)(ii), as amended by RPA ’94,
the minimum interest rate permitted to be
used for certain purposes to determine
compliance with the limit under section
415(b) is the applicable interest rate as de-
fined in section 417(e)(3). Because the
rules of section 417(e)(3) affect the appli-
cation of sections 411(a)(11)(B) and
415(b)(2)(E)(ii), the guidance provided
by these regulations is relevant to the ap-
plication of those provisions.
Explanation of provisions
Section 417(e) restricts the ability of
certain qualified retirement plans to dis-
tribute a participant’s benefit under the
plan without the consent of the participant
and, in many cases, the participant’s
spouse. The application of these restric-
tions is determined based on the present
value of the participant’s benefit. Prior to
amendments made by RPA ’94, section
417(e)(3) restricted the interest rate to be
used under a plan to calculate the present
value of a participant’s benefit, but did
not impose any restrictions on the mortal-
ity table to be used for that purpose. Sec-
tion 767 of RPA ’94 modified section
417(e)(3) to provide that the present value
of a participant’s benefit is not less than
the present value calculated by using the
applicable mortality table and the applica-
ble interest rate.
In general, comments received on the
proposed and temporary regulations were
favorable. Thus, the final regulations re-
tain the general structure and substance of
the proposed and temporary regulations.
Applicable mortality table
The applicable mortality table under
section 417(e)(3) is defined as the table
prescribed by the Secretary based on the
prevailing commissioners’ standard table
(described in section 807(d)(5)(A)) used
to determine reserves for group annuity
contracts issued on the date as of which
present value is being determined (with-
out regard to any other subparagraph of
section 807(d)(5)). Currently, the prevail-
ing commissioners’ standard table is the
1983 Group Annuity Mortality Table. See
Rev. Rul. 92–19 (1992–1 C.B. 227).
These regulations retain the provision in
the temporary regulation that the applica-
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

ble mortality table as described above is
to be prescribed by the Commissioner in
revenue rulings, notices or other guidance
published in the Internal Revenue Bul-
letin. The mortality table currently pre-
scribed by the Commissioner is set forth
in Rev. Rul. 95–6 (1995–1 C.B. 80), and
is based on a fixed blend of 50 percent of
the male mortality rates and 50 percent of
the female mortality rates from the 1983
Group Annuity Mortality Table.
Applicable interest rate
Under section 417(e)(3), the applicable
interest rate is defined as the annual rate
of interest on 30-year Treasury securities
for the month before the date of distribu-
tion or such other time as the Secretary
may by regulations prescribe. These reg-
ulations retain the rule in the temporary
regulations that the applicable interest
rate for a month is the annual interest rate
on 30-year Treasury securities as speci-
fied by the Commissioner for that month.
The Commissioner publishes this interest
rate for each month by notice, after the
end of the month. Currently, this interest
rate is the interest rate published in Fed-
eral Reserve releases G.13 and H.15 as
the average yield on 30-year Treasury
Constant Maturities for the month.
The interest rate on 30-year Treasury
Constant Maturities published monthly in
Federal Reserve releases G.13 and H.15
can also be obtained by telephone from
the Public Information Department of the
Federal Reserve Bank of New York at
(212) 720-6130 (not a toll-free number),
or from the Federal Reserve Board of
Governors’ Internet site at http://www.
bog.frb.fed.us/releases. Information re-
garding subscriptions to Federal Reserve
releases G.13 and H.15 can be obtained
from the Publications Department of the
Federal Reserve Board of Governors at
(202) 452-3244 (not a toll-free number).
Time for determining applicable
interest rate
Section 417(e)(3)(A)(ii)(II) provides
that the applicable interest rate for distribu-
tions made during a month is the annual
rate of interest on 30-year Treasury securi-
ties for the month before the date of distri-
bution or such other time as the Secretary
may by regulations prescribe. As an alter-
native to this monthly change in the applic-
able interest rate, the temporary regula-
tions permitted selection of a plan quarter
or a plan year as a stability period during
which the applicable interest rate remains
constant, thereby permitting plans to offer
greater benefit stability than is provided by
the statutory rule. One commentator sug-
gested adding a calendar year and a calen-
dar quarter as additional alternative stabil-
ity periods for the applicable interest rate,
and another suggested adding a plan half-
year. The IRS and Treasury have weighed
the usefulness of the additional proposed
stability periods for taxpayers against the
additional complexity that would be added
to the regulation, and have added a calen-
dar year and a calendar quarter as addi-
tional alternative stability periods.
These regulations retain the rule in the
temporary regulations that the applicable
interest rate for the stability period may be
determined as the 30-year Treasury rate for
any one of the five calendar months pre-
ceding the first day of the stability period.
Permitting this “lookback” of up to five
months provides added flexibility and
gives plan administrators and participants
more time to comply with applicable no-
tice and election requirements using the
actual interest rate (instead of an estimate).
Several commentators suggested that
regulations permit an average of lookback
month interest rates to be used, in lieu of
the interest rate for a single lookback
month, to minimize interest rate fluctua-
tions. These regulations adopt this sug-
gestion, and permit an average interest
rate based on consecutive permitted look-
back months to be used for this purpose.
Several commentators suggested that a
plan be allowed to provide for different
applicable interest rates for each portion
of the plan that independently meets the
requirements of sections 410(b) and
401(a)(26). The IRS and Treasury have
determined, however, that there is insuffi-
cient basis for adopting a definition of a
“plan” that is different from the general
definition set forth in §1.414(l)–1(b)(1).
Exceptions from the requirements of
section 417(e)(3)
The temporary regulations provided an
exception from the requirements of sec-
tion 417(e)(3) and §1.417(e)–1T(d) for
the amount of a distribution under a non-
decreasing annuity payable for a period
not less than the life of the participant or,
in the case of a QPSA, the life of the sur-
viving spouse. For purposes of this ex-
ception, a nondecreasing annuity included
a QJSA, a QPSA, and an annuity that de-
creased merely because of the cessation
or reduction of Social Security supple-
ments or qualified disability payments (as
defined in section 411(a)(9)). This excep-
tion was identical to the exception pro-
vided under former final regulations.
Several commentators pointed out that
this exception did not cover several other
types of annuity forms of distribution that
were nondecreasing during the life of the
participant, and suggested that the regula-
tions be changed to provide additional ex-
ceptions for these additional annuity
forms of distribution.
The IRS and Treasury have determined
that it is appropriate to provide additional
exceptions for these benefit forms. Ac-
cordingly, under the final regulations, sec-
tion 417(e)(3) and §1.417(e)–1(d) do not
apply to the amount of a distribution paid
in the form of an annual benefit that does
not decrease during the life of the partici-
pant, or, in the case of a QPSA, the life of
the participant’s spouse; or that decreases
during the life of the participant merely
because of the death of the survivor annu-
itant (but only if the reduction is to a level
not below 50% of the annual benefit
payable before the death of the survivor
annuitant) or merely because of the cessa-
tion or reduction of Social Security sup-
plements or qualified disability benefits.
Also, under Q&A–2 of Rev. Rul. 98–1
(1998–2 I.R.B. 1), the interest rate pre-
scribed by section 415(b)(2)(E)(ii) does
not apply to these forms of benefit.
Effective dates
These regulations generally apply to
plan years beginning after December 31,
1994.
Under section 417(e)(3)(B) and these
regulations, the general effective date for
the RPA ’94 rules is delayed for certain
plans until the first plan year that begins
after December 31, 1999, unless an em-
ployer takes earlier action. The delayed
effective date applies to a plan adopted
1998–20 I.R.B.5May 18, 1998

and in effect before December 8, 1994, if
the provisions of the plan in effect on De-
cember 7, 1994, met the requirements of
section 417(e)(3) as in effect on Decem-
ber 7, 1994. For such a plan, the determi-
nation of whether a distribution made be-
fore the first day of the first plan year that
begins after December 31, 1999, satisfies
section 417(e) is made under the provi-
sions of the plan in effect on December 7,
1994, if the annuity starting date for the
distribution occurs before the date a plan
amendment applying both the applicable
mortality table and the applicable interest
rate rules added by RPA ’94 is adopted or,
if later, is made effective. Thus, under
section 417(e)(3)(B) and these regula-
tions, a plan that was adopted and in ef-
fect before December 8, 1994, and the
provisions of which, as in effect on De-
cember 7, 1994, met the requirements of
section 417(e)(3) as in effect on that date,
cannot be amended to provide a different
method of calculating the present value of
a distribution under section 417(e)(3) ef-
fective before the date a plan amendment
applying both the applicable mortality
table and the applicable interest rate rules
added by RPA ’94 is adopted or, if later, is
made effective.
One commentator inquired whether,
where a plan is spun off from another plan
during the optional delayed effective date
period, both plans are required to be
amended to apply the applicable mortality
table and the applicable interest rate rules
added by RPA ’94 effective on the same
date. Because these rules apply on a plan
by plan basis, the plans are not required to
be amended effective on the same date.
One other commentator suggested that the
regulations be changed to permit a plan to
provide for different optional delayed ef-
fective dates for each separate benefit
structure that independently meets the re-
quirements of section 401(a)(4). Section
417(e)(3)(B) requires a single effective
date for a plan amendment applying the
applicable mortality table and the applica-
ble interest rate rules added by RPA ’94.
Therefore, this suggestion is inconsistent
with the statute. Of course, a plan amend-
ment that applies the applicable mortality
table and the applicable interest rate rules
added by RPA ’94 may provide for tem-
porary or permanent use of interest and
mortality assumptions for specified par-
ticipant groups that result in larger distrib-
utions than the minimum required under
these RPA ’94 rules, provided that other
qualification requirements (such as sec-
tion 401(a)(4)) are satisfied.
These regulations restate the rules ap-
plicable to plan years beginning before
January 1, 1995, without substantive
change. Those pre-1995 rules also apply
to later plan years, to the extent that the
application of the RPA ’94 rules is de-
layed as described above.
In addition, section 767(d)(1) of RPA
’94 permits an employer to elect to accel-
erate the effective date of the RPA ’94
rules, and hence these regulations, in order
to apply the RPA ’94 rules to distributions
with annuity starting dates occurring after
December 7, 1994, in plan years begin-
ning before January 1, 1995. An employer
that makes a plan amendment applying the
applicable mortality table and the applica-
ble interest rate rules of these regulations
is treated as making this election as of the
date the plan amendment is adopted or, if
later, is made effective.
Relationship with section 411(d)(6)
Section 411(d)(6) provides that a plan
does not satisfy the requirements of sec-
tion 411 if the accrued benefit of a partici-
pant is decreased by a plan amendment.
In general, a plan amendment that
changes the interest rate or the mortality
assumptions used for purposes of deter-
mining the amount of any accrued benefit
in any preexisting optional form is subject
to section 411(d)(6). Consistent with both
the temporary regulations and the prior
final regulations, these regulations pro-
vide limited section 411(d)(6) relief for
certain plan amendments that change the
time for determining the applicable inter-
est rate. A plan amendment that changes
the time for determining the applicable in-
terest rate will not be treated as violating
section 411(d)(6) if each distribution
made until one year after the later of the
effective date or the adoption date of the
amendment is calculated using the time
for determining the applicable interest
rate as provided before or after the
amendment, whichever produces the
larger benefit. For this purpose, all other
plan provisions must be applied as in ef-
fect after the amendment.
Section 767(d)(2) of RPA ’94 provides
that a participant’s accrued benefit is not
considered to be reduced in violation of
section 411(d)(6) merely because the ben-
efit is determined in accordance with the
applicable interest rate rules and the ap-
plicable mortality table rules of section
417(e)(3)(A), as amended by RPA ’94.
These regulations provide that an amend-
ment replacing an interest rate used for
purposes of section 417(e)(3) qualifies for
this section 411(d)(6) relief if the interest
rate replaced is the Pension Benefit Guar-
anty Corporation (PBGC) interest rate or
a rate based on the PBGC interest rate.
Pursuant to suggestions made by several
commentators, these regulations clarify
that the interest rates that may be replaced
pursuant to this section 411(d)(6) relief
include an interest rate based on the aver-
age of the PBGC interest rates over a
specified period. In addition, pursuant to
suggestions made by two commentators,
the final regulations clarify the relation-
ship between the various types of section
411(d)(6) relief under the regulations, and
provide some additional flexibility to em-
ployers in determining how to transition
between the PBGC interest rate and the
applicable interest rate and applicable
mortality table, where the transition is
combined with a change in the time for
determining the interest rate.
One commentator asked whether the
section 411(d)(6) relief for plan amend-
ments adopting the applicable mortality
table and the applicable interest rate rules
applies with respect to terminated vested
participants. Because the section
411(d)(6) relief provided under section
767(d)(2) of RPA ’94 applies in the same
manner with respect to active and termi-
nated participants, the regulations like-
wise do not distinguish terminated vested
participants from other participants in this
regard.
Several commentators requested that
the regulations be amended to provide un-
conditional section 411(d)(6) relief for
plan amendments adopting the applicable
interest rate and applicable mortality table
rules of RPA ’94 regardless of changes in
the time for determining the applicable in-
terest rate. The IRS and Treasury have
determined that providing some addi-
tional flexibility to employers in deter-
mining how to transition between the
PBGC interest rate and the applicable in-
terest rate and applicable mortality table,
as discussed above, where the transition is
combined with a change in the time for
May 18, 199861998–20 I.R.B.

1998–20 I.R.B.7May 18, 1998
determining the interest rate, strikes an
appropriate balance between the practical
concerns of employers and the rights of
participants.
These regulations further provide that,
where a plan provided for the use of an in-
terest rate not based on the PBGC interest
rate prescribed by section 417(e)(3) as in
effect before amendments made by RPA
’94, a plan amendment that eliminates the
use of that interest rate and the associated
mortality table may result in a reduction
of a participant’s accrued benefit, which
would violate the requirements of section
411(d)(6). Two commentators suggested
that final regulations provide section
411(d)(6) relief for plan amendments that
eliminate the use of an interest rate not
based on the PBGC interest rate, for plan
amendments that adopt the applicable in-
terest rate and applicable mortality table
rules of RPA ’94. Another commentator
requested that final regulations provide
for similar section 411(d)(6) relief, but
only for mandatory distributions that are
permitted pursuant to the rules of section
411(a)(11). The IRS and Treasury have
determined that section 767(d)(2) of RPA
’94 does not support a grant of section
411(d)(6) relief with respect to plan
amendments eliminating interest rates
that are not based on the PBGC interest
rate.
These regulations provide examples of
the application of section 411(d)(6) and
the special rule of section 767(d)(2) of
RPA ’94, including an example illustrating
the use of a phase-in that provides for a
smoother transition from the plan’s former
terms to the new rules. In addition, these
regulations provide section 411(d)(6) re-
lief for certain plan amendments that elim-
inate use of the applicable interest rate and
the applicable mortality table with respect
to distribution forms that are newly ex-
cepted from the application of section
417(e)(3) by these regulations.
The PBGC has advised the IRS and
Treasury that it has not made any decision
at this time on whether it will continue to
calculate and publish the relevant interest
rates after the year 2000. Therefore, in
amending plans to comply with these reg-
ulations, employers should not rely on the
continued determination and publication
of these rates by the PBGC beyond the
year 2000.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the notice of proposed rulemaking pre-
ceding the regulations was issued prior to
March 29, 1996, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Linda S. F. Marshall, Office of the
Associate Chief Counsel (Employee Ben-
efits and Exempt Organizations). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority 26 U.S.C. 7805 * * *
Section 1.417(e)–1 also issued under
26 U.S.C. 417(e)(3)(A)(ii)(II). * * *
Par. 2. In §1.417(e)–1, paragraph (d) is
revised to read as follows:
§1.417(e)–1 Restrictions and valuations
of distributions from plans subject to
sections 401(a)(11) and 417.
*****
(d) Present value requirement—(1)
General rule.A defined benefit plan must
provide that the present value of any ac-
crued benefit and the amount (subject to
sections 411(c)(3) and 415) of any distrib-
ution, including a single sum, must not be
less than the amount calculated using the
applicable interest rate described in para-
graph (d)(3) of this section (determined
for the month described in paragraph
(d)(4) of this section) and the applicable
mortality table described in paragraph
(d)(2) of this section. The present value
of any optional form of benefit cannot be
less than the present value of the normal
retirement benefit determined in accor-
dance with the preceding sentence. The
same rules used for the plan under this
paragraph (d) must also be used to com-
pute the present value of the benefit for
purposes of determining whether consent
for a distribution is required under para-
graph (b) of this section.
(2) Applicable mortality table.The ap-
plicable mortality table is the mortality
table based on the prevailing commission-
ers’ standard table (described in section
807(d)(5)(A)) used to determine reserves
for group annuity contracts issued on the
date as of which present value is being de-
termined (without regard to any other
subparagraph of section 807(d)(5)), that is
prescribed by the Commissioner in rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bul-
letin (see §601.601(d)(2)(ii)(b) of this
chapter). The Commissioner may pre-
scribe rules that apply in the case of a
change to the prevailing commissioners’
standard table (described in section
807(d)(5)(A)) used to determine reserves
for group annuity contracts, in revenue
rulings, notices, or other guidance pub-
lished in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b) of this chapter).
(3) Applicable interest rate—(i) Gen-
eral rule.The applicable interest rate for
a month is the annual interest rate on 30-
year Treasury securities as specified by
the Commissioner for that month in rev-
enue rulings, notices or other guidance
published in the Internal Revenue Bul-
letin (see §601.601(d)(2)(ii)(b) of this
chapter).
(ii) Example.This example illustrates
the rules of this paragraph (d)(3):
Example.Plan A is a calendar year plan. For its
1995 plan year, Plan A provides that the applicable
mortality table is the table described in Rev. Rul.
95–6 (1995–1 C.B. 80), and that the applicable inter-
est rate is the annual interest rate on 30-year Trea-
sury securities as specified by the Commissioner for
the first full calendar month preceding the calendar
month that contains the annuity starting date. Partic-
ipant P is age 65 in January 1995, which is the

month that contains P’s annuity starting date. P has
an accrued benefit payable monthly of $1,000 and
has elected to receive a distribution in the form of a
single sum in January 1995. The annual interest rate
on 30-year Treasury securities as published by the
Commissioner for December 1994 is 7.87 percent.
To satisfy the requirements of section 417(e)(3) and
this paragraph (d), the single sum received by P may
not be less than $111,351.
(4) Time for determining interest
rate—(i) General rule. Except as pro-
vided in paragraph (d)(4)(iv) or (v) of this
section, the applicable interest rate to be
used for a distribution is the rate deter-
mined under paragraph (d)(3) of this sec-
tion for the applicable lookback month.
The applicable lookback month for a dis-
tribution is the lookback month (as de-
scribed in paragraph (d)(4)(iii) of this sec-
tion) for the month (or other longer
stability period described in paragraph
(d)(4)(ii) of this section) that contains the
annuity starting date for the distribution.
The time and method for determining the
applicable interest rate for each partici-
pant’s distribution must be determined in
a consistent manner that is applied uni-
formly to all participants in the plan.
(ii) Stability period. A plan must spec-
ify the period for which the applicable in-
terest rate remains constant. This stability
period may be one calendar month, one
plan quarter, one calendar quarter, one
plan year, or one calendar year.
(iii) Lookback month.A plan must
specify the lookback month that is used to
determine the applicable interest rate.
The lookback month may be the first, sec-
ond, third, fourth, or fifth full calendar
month preceding the first day of the sta-
bility period.
(iv) Permitted average interest rate. A
plan may apply the rules of paragraph
(d)(4)(i) of this section by substituting a
permitted average interest rate with re-
spect to the plan’s stability period for the
rate determined under paragraph (d)(3) of
this section for the applicable lookback
month for the stability period. For this
purpose, a permitted average interest rate
with respect to a stability period is an in-
terest rate that is computed by averaging
the applicable interest rates determined
under paragraph (d)(3) of this section for
two or more consecutive months from
among the first, second, third, fourth, and
fifth calendar months preceding the first
day of the stability period. For this para-
graph (d)(4)(iv) to apply, a plan must
specify the manner in which the permitted
average interest rate is computed.
(v) Additional determination dates.
The Commissioner may prescribe, in rev-
enue rulings, notices or other guidance
published in the Internal Revenue Bul-
letin (see §601.601(d)(2)(ii)(b)), other
times that a plan may provide for deter-
mining the applicable interest rate.
(vi) Example.This example illustrates
the rules of this paragraph (d)(4):
Example.Employer X maintains Plan A, a calen-
dar year plan. Employer X wishes to amend Plan A
so that the applicable interest rate will remain fixed
for each plan quarter, and so that the applicable inter-
est rate for distributions made during each plan quar-
ter can be determined approximately 80 days before
the beginning of the plan quarter. To comply with
the provisions of this paragraph (d)(4), Plan A is
amended to provide that the applicable interest rate is
the annual interest rate on 30-year Treasury securities
as specified by the Commissioner for the fourth cal-
endar month preceding the first day of the plan quar-
ter during which the annuity starting date occurs.
(5) Use of alternative interest rate and
mortality table.If a plan provides for use
of an interest rate or mortality table other
than the applicable interest rate or the ap-
plicable mortality table, the plan must
provide that a participant’s benefit must
be at least as great as the benefit produced
by using the applicable interest rate and
the applicable mortality table. For exam-
ple, if a plan provides for use of an inter-
est rate of 7% and the UP–1984 Mortality
Table (see §1.401(a)(4)–12, Standard
mortality table) in calculating single-sum
distributions, the plan must provide that
any single-sum distribution is calculated
as the greater of the single-sum benefit
calculated using 7% and the UP–1984
Mortality Table and the single-sum bene-
fit calculated using the applicable interest
rate and the applicable mortality table.
(6) Exceptions.This paragraph (d)
(other than the provisions relating to sec-
tion 411(d)(6) requirements in paragraph
(d)(10) of this section) does not apply to
the amount of a distribution paid in the
form of an annual benefit that—
(i) Does not decrease during the life of
the participant, or, in the case of a QPSA,
the life of the participant’s spouse; or
(ii) Decreases during the life of the par-
ticipant merely because of—
(A) The death of the survivor annuitant
(but only if the reduction is to a level not
below 50% of the annual benefit payable
before the death of the survivor annui-
tant); or
(B) The cessation or reduction of So-
cial Security supplements or qualified dis-
ability benefits (as defined in section
411(a)(9)).
(7) Defined contribution plans.Be-
cause the accrued benefit under a defined
contribution plan equals the account bal-
ance, a defined contribution plan is not
subject to the requirements of this para-
graph (d), even though it is subject to sec-
tion 401(a)(11).
(8) Effective date—(i) In general.This
paragraph (d) is effective for distributions
with annuity starting dates in plan years
beginning after December 31, 1994.
(ii) Optional delayed effective date of
Retirement Protection Act of 1994 (RPA
’94)(108 Stat. 5012) rules for plans
adopted and in effect before December 8,
1994.For a plan adopted and in effect be-
fore December 8, 1994, the application of
the rules relating to the applicable mortal-
ity table and applicable interest rate under
paragraphs (d)(2) through (4) of this sec-
tion is delayed to the extent provided in
this paragraph (d)(8)(ii), if the plan provi-
sions in effect on December 7, 1994, met
the requirements of section 417(e)(3) and
§1.417(e)–1(d) as in effect on December
7, 1994 (as contained in 26 CFR part 1 re-
vised April 1, 1995). In the case of a dis-
tribution from such a plan with an annuity
starting date that precedes the optional de-
layed effective date described in para-
graph (d)(8)(iv) of this section, and that
precedes the first day of the first plan year
beginning after December 31, 1999, the
rules of paragraph (d)(9) of this section
(which generally apply to distributions
with annuity starting dates in plan years
beginning before January 1, 1995) apply
in lieu of the rules of paragraphs (d)(2)
through (4) of this section. The interest
rate under the rules of paragraph (d)(9) of
this section is determined under the provi-
sions of the plan as in effect on December
7, 1994, reflecting the interest rate or rates
published by the Pension Benefit Guar-
anty Corporation (PBGC) and the provi-
sions of the plan for determining the date
on which the interest rate is fixed. The
above described interest rate or rates pub-
lished by the PBGC are those determined
by the PBGC (for the date determined
under those plan provisions) pursuant to
the methodology under the regulations of
the PBGC for determining the present
May 18, 199881998–20 I.R.B.

value of a lump sum distribution on plan
termination under 29 CFR part 2619 that
were in effect on September 1, 1993 (as
contained in 29 CFR part 2619 revised
July 1, 1994).
(iii) Optional accelerated effective date
of RPA ’94 rules. This paragraph (d) is
also effective for a distribution with an an-
nuity starting date after December 7, 1994,
during a plan year beginning before Janu-
ary 1, 1995, if the employer elects, on or
before the annuity starting date, to make
the rules of this paragraph (d) effective
with respect to the plan as of the optional
accelerated effective date described in
paragraph (d)(8)(iv) of this section. An
employer is treated as making this election
by making the plan amendments described
in paragraph (d)(8)(iv) of this section.
(iv) Determination of delayed or accel-
erated effective date by plan amendment
adopting RPA ’94 rules.The optional de-
layed effective date of paragraph
(d)(8)(ii) of this section, or the optional
accelerated effective date of paragraph
(d)(8)(iii) of this section, whichever is ap-
plicable, is the date plan amendments ap-
plying both the applicable mortality table
of paragraph (d)(2) of this section and the
applicable interest rate of paragraph
(d)(3) of this section are adopted or, if
later, are made effective.
(9) Plan years beginning before Janu-
ary 1, 1995—(i) Interest rate. (A) For
distributions made in plan years begin-
ning after December 31, 1986, and before
January 1, 1995, the following interest
rate described in paragraph (d)(9)(i)-
(A)(1) or (2) of this section, whichever
applies, is substituted for the applicable
interest rate for purposes of this section—
(1) The rate or rates that would be used
by the PBGC for a trusteed single-em-
ployer plan to value the participant’s (or
beneficiary’s) vested benefit (PBGC in-
terest rate) if the present value of such
benefit does not exceed $25,000; or
(2) 120 percent of the PBGC interest
rate, as determined in accordance with
paragraph (d)(9)(i)(A)(1) of this section,
if such present value exceeds $25,000. In
no event shall the present value deter-
mined by use of 120 percent of the PBGC
interest rate result in a present value less
than $25,000.
(B) The PBGC interest rate may be a
series of interest rates for any given date.
For example, the PBGC interest rate for
immediate annuities for November 1994
is 6%, and the PBGC interest rates for the
deferral period for that month are as fol-
lows: 5.25% for the first 7 years of the
deferral period, 4% for the following 8
years of the deferral period, and 4% for
the remainder of the deferral period. For
November 1994, 120 percent of the
PBGC interest rate is 7.2% (1.2 times 6%)
for an immediate annuity, 6.3% (1.2 times
5.25%) for the first 7 years of the deferral
period, 4.8% (1.2 times 4%) for the fol-
lowing 8 years of the deferral period, and
4.8% (1.2 times 4%) for the remainder of
the deferral period. The PBGC interest
rates are the interest rates that would be
used (as of the date of the distribution) by
the PBGC for purposes of determining the
present value of that benefit upon termi-
nation of an insufficient trusteed single
employer plan. Except as otherwise pro-
vided by the Commissioner, the PBGC in-
terest rates are determined by PBGC reg-
ulations. See subpart B of 29 CFR part
4044 for the applicable PBGC rates.
(ii) Time for determining interest rate.
(A) Except as provided in paragraph
(d)(9)(ii)(B) of this section, the PBGC in-
terest rate or rates are determined on ei-
ther the annuity starting date or the first
day of the plan year that contains the an-
nuity starting date. The plan must pro-
vide which date is applicable.
(B) The plan may provide for the use of
any other time for determining the PBGC
interest rate or rates provided that such
time is not more than 120 days before the
annuity starting date if such time is deter-
mined in a consistent manner and is ap-
plied uniformly to all participants.
(C) The Commissioner may, in revenue
rulings, notices or other guidance pub-
lished in the Internal Revenue Bulletin
(see §601.601(d)(2)(ii)(b)), prescribe
other times for determining the PBGC in-
terest rate or rates.
(iii) No applicable mortality table. In
the case of a distribution to which this
paragraph (d)(9) applies, the rules of this
paragraph (d) are applied without regard
to the applicable mortality table described
in paragraph (d)(2) of this section.
(10) Relationship with section
411(d)(6)—(i) In general.A plan amend-
ment that changes the interest rate, the
time for determining the interest rate, or
the mortality assumptions used for the
purposes described in paragraph (d)(1) of
this section is subject to section 411(d)(6).
But see §1.411(d)–4, Q&A–2(b)(2)(v)
(regarding plan amendments relating to
involuntary distributions). In addition, a
plan amendment that changes the interest
rate or the mortality assumptions used for
the purposes described in paragraph
(d)(1) of this section merely to eliminate
use of the interest rate described in para-
graph (d)(3) or paragraph (d)(9) of this
section, or the applicable mortality table,
with respect to a distribution form de-
scribed in paragraph (d)(6) of this section,
for distributions with annuity starting
dates occurring after a specified date that
is after the amendment is adopted, does
not violate the requirements of section
411(d)(6) if the amendment is adopted on
or before the last day of the last plan year
ending before January 1, 2000.
(ii) Section 411(d)(6) relief for change
in time for determining interest rate.
Notwithstanding the general rule of para-
graph (d)(10)(i) of this section, if a plan
amendment changes the time for deter-
mining the applicable interest rate (in-
cluding an indirect change as a result of a
change in plan year), the amendment will
not be treated as reducing accrued bene-
fits in violation of section 411(d)(6)
merely on account of this change if the
conditions of this paragraph (d)(10)(ii)
are satisfied. If the plan amendment is ef-
fective on or after the adoption date, any
distribution for which the annuity starting
date occurs in the one-year period com-
mencing at the time the amendment is
effective must be determined using the in-
terest rate provided under the plan deter-
mined at either the date for determining
the interest rate before the amendment or
the date for determining the interest rate
after the amendment, whichever results in
the larger distribution. If the plan amend-
ment is adopted retroactively (that is, the
amendment is effective prior to the adop-
tion date), the plan must use the interest
rate determination date resulting in the
larger distribution for the period begin-
ning with the effective date and ending
one year after the adoption date.
(iii) Section 411(d)(6) relief for plan
amendments pursuant to changes to sec-
tion 417 made by RPA ’94 providing for
statutory interest rate determination date.
1998–20 I.R.B.9May 18, 1998

Notwithstanding the general rule of para-
graph (d)(10)(i) of this section, except as
provided in paragraph (d)(10)(vi)(B) of
this section, a participant’s accrued bene-
fit is not considered to be reduced in vio-
lation of section 411(d)(6) merely be-
cause of a plan amendment that changes
any interest rate or mortality assumption
used to calculate the present value of a
participant’s benefit under the plan, if the
following conditions are satisfied—
(A) The amendment replaces the
PBGC interest rate (or an interest rate or
rates based on the PBGC interest rate) as
the interest rate used under the plan in de-
termining the present value of a partici-
pant’s benefit under this paragraph (d);
and
(B) After the amendment is effective,
the present value of a participant’s benefit
under the plan cannot be less than the
amount calculated using the applicable
mortality table and the applicable interest
rate for the first full calendar month pre-
ceding the calendar month that contains
the annuity starting date.
(iv) Section 411(d)(6) relief for plan
amendments pursuant to changes to sec-
tion 417 made by RPA ’94 providing for
prior determination date or up to two
months earlier. Notwithstanding the gen-
eral rule of paragraph (d)(10)(i) of this
section, except as provided in paragraph
(d)(10)(vi)(B) of this section, a partici-
pant’s accrued benefit is not considered to
be reduced in violation of section
411(d)(6) merely because of a plan
amendment that changes any interest rate
or mortality assumption used to calculate
the present value of a participant’s benefit
under the plan, if the following conditions
are satisfied—
(A) The amendment replaces the
PBGC interest rate (or an interest rate or
rates based on the PBGC interest rate) as
the interest rate used under the plan in de-
termining the present value of a partici-
pant’s benefit under this paragraph (d);
and
(B) After the amendment is effective,
the present value of a participant’s benefit
under the plan cannot be less than the
amount calculated using the applicable
mortality table and the applicable interest
rate, but only if the applicable interest rate
is the annual interest rate on 30-year Trea-
sury securities for the calendar month that
contains the date as of which the PBGC
interest rate (or an interest rate or rates
based on the PBGC interest rate) was de-
termined immediately before the amend-
ment, or for one of the two calendar
months immediately preceding such
month.
(v) Section 411(d)(6) relief for plan
amendments pursuant to changes to sec-
tion 417 made by RPA ‘94 providing for
other interest rate determination date.
Notwithstanding the general rule of para-
graph (d)(10)(i) of this section, except as
provided in paragraph (d)(10)(vi)(B) of
this section, a participant’s accrued bene-
fit is not considered to be reduced in vio-
lation of section 411(d)(6) merely be-
cause of a plan amendment that changes
any interest rate or mortality assumption
used to calculate the present value of a
participant’s benefit under the plan, if the
following conditions are satisfied—
(A) The amendment replaces the
PBGC interest rate (or an interest rate or
rates based on the PBGC interest rate) as
the interest rate used under the plan in de-
termining the present value of a partici-
pant’s benefit under this paragraph (d);
(B) After the amendment is effective,
the present value of a participant’s benefit
under the plan cannot be less than the
amount calculated using the applicable
mortality table and the applicable interest
rate; and
(C) The plan amendment satisfies ei-
ther the condition of paragraph (d)(10)(ii)
of this section (determined using the in-
terest rate provided under the terms of the
plan after the effective date of the amend-
ment) or the special early transition inter-
est rate rule of paragraph (d)(10)(vi)(C) of
this section.
(vi) Special rules—(A) Provision of
temporary additional benefits.A plan
amendment described in paragraph
(d)(10)(iii), (iv), or (v) of this section is
not considered to reduce a participant’s
accrued benefit in violation of section
411(d)(6) even if the plan amendment
provides for temporary additional benefits
to accommodate a more gradual transition
from the plan’s old interest rate to the new
rules.
(B) Replacement of non-PBGC inter-
est rate.The section 411(d)(6) relief pro-
vided in paragraphs (d)(10)(iii) through
(v) of this section does not apply to a plan
amendment that replaces an interest rate
other than the PBGC interest rate (or an
interest rate or rates based on the PBGC
interest rate) as an interest rate used under
the plan in determining the present value
of a participant’s benefit under this para-
graph (d). Thus, the accrued benefit de-
termined using that interest rate and the
associated mortality table is protected
under section 411(d)(6). For purposes of
this paragraph (d), an interest rate is based
on the PBGC interest rate if the interest
rate is defined as a specified percentage of
the PBGC interest rate, the PBGC interest
rate minus a specified number of basis
points, or an average of such interest rates
over a specified period.
(C) Special early transition interest
rate rule for paragraph (d)(10)(v).A plan
amendment satisfies the special rule of
this paragraph (d)(10)(vi)(C) if any distri-
bution for which the annuity starting date
occurs in the one-year period commenc-
ing at the time the plan amendment is ef-
fective is determined using whichever of
the following two interest rates results in
the larger distribution—
(1) The interest rate as provided under
the terms of the plan after the effective
date of the amendment, but determined at
a date that is either one month or two
months (as specified in the plan) before
the date for determining the interest rate
used under the terms of the plan before
the amendment; or
(2) The interest rate as provided under
the terms of the plan after the effective
date of the amendment, determined at the
date for determining the interest rate after
the amendment.
(vii) Examples.The provisions of this
paragraph (d)(10) are illustrated by the
following examples:
Example 1.On December 31, 1994, Plan A pro-
vided that all single-sum distributions were to be
calculated using the UP–1984 Mortality Table and
100% of the PBGC interest rate for the date of distri-
bution. On January 4, 1995, and effective on Febru-
ary 1, 1995, Plan A was amended to provide that all
single-sum distributions are calculated using the ap-
plicable mortality table and the annual interest rate
on 30-year Treasury securities for the first full calen-
dar month preceding the calendar month that con-
tains the annuity starting date. Pursuant to para-
graph (d)(10)(iii) of this section, this amendment
of Plan A is not considered to reduce the accrued
benefit of any participant in violation of section
411(d)(6).
Example 2.On December 31, 1994, Plan B pro-
vided that all single-sum distributions were to be cal-
culated using the UP–1984 Mortality Table and an
interest rate equal to the lesser of 100% of the PBGC
May 18, 1998101998–20 I.R.B.

interest rate for the date of distribution, or 6%. On
January 4, 1995, and effective on February 1, 1995,
Plan B was amended to provide that all single-sum
distributions are calculated using the applicable mor-
tality table and the annual interest rate on 30-year
Treasury securities for the second full calendar
month preceding the calendar month that contains
the annuity starting date. Pursuant to paragraph
(d)(10)(iv) of this section, this amendment of Plan B
is not considered to reduce the accrued benefit of any
participant in violation of section 411(d)(6) merely
because of the replacement of the PBGC interest
rate. However, under paragraph (d)(10)(vi)(B) of
this section, the section 411(d)(6) relief provided in
paragraphs (d)(10)(iii) through (v) of this section
does not apply to a plan amendment that replaces an
interest rate other than the PBGC interest rate (or a
rate based on the PBGC interest rate). Therefore,
pursuant to paragraph (d)(10)(vi)(B) of this section,
to satisfy the requirements of section 411(d)(6), the
plan must provide that the single-sum distribution
payable to any participant must be no less than the
single-sum distribution calculated using the
UP–1984 Mortality Table and an interest rate of 6%,
based on the participant’s benefits under the plan ac-
crued through January 31, 1995, and based on the
participant’s age at the annuity starting date.
Example 3.On December 31, 1994, Plan C, a
calendar year plan, provided that all single sum dis-
tributions were to be calculated using the UP–1984
Mortality Table and an interest rate equal to the
PBGC interest rate for January 1 of the plan year.
On March 1, 1995, and effective on July 1, 1995,
Plan C was amended to provide that all single-sum
distributions are calculated using the applicable
mortality table and the annual interest rate on 30-
year Treasury securities for August of the year be-
fore the plan year that contains the annuity starting
date. The plan amendment provides that each distri-
bution with an annuity starting date after June 30,
1995, and before July 1, 1996, is calculated using
the 30-year Treasury rate for August of the year be-
fore the plan year that contains the annuity starting
date, or the 30-year Treasury rate for January of the
plan year that contains the annuity starting date,
whichever produces the larger benefit. Pursuant to
paragraph (d)(10)(v) of this section, the amendment
of Plan C is not considered to have reduced the ac-
crued benefit of any participant in violation of sec-
tion 411(d)(6).
Example 4.(a) Employer X maintains Plan D, a
calendar year plan. As of December 7, 1994, Plan D
provided for single-sum distributions to be calculated
using the PBGC interest rate as of the annuity start-
ing date for distributions not greater than $25,000,
and 120% of that interest rate (but not an interest rate
producing a present value less than $25,000) for dis-
tributions over $25,000. Employer X wishes to delay
the effective date of the RPA ’94 rules for a year, and
to provide for an extended transition from the use of
the PBGC interest rate to the new applicable interest
rate under section 417(e)(3). On December 1, 1995,
and effective on January 1, 1996, Employer X
amends Plan D to provide that single-sum distribu-
tions are determined as the sum of—
(i) The single-sum distribution calculated based
on the applicable mortality table and the annual in-
terest rate on 30-year Treasury securities for the first
full calendar month preceding the calendar month
that contains the annuity starting date; and
(ii) A transition amount.
(b) The amendment provides that the transition
amount for distributions in the years 1996–99 is a
transition percentage of the excess, if any, of the
amount that the single-sum distribution would have
been under the plan provisions in effect prior to this
amendment over the amount of the single sum de-
scribed in paragraph (a)(i) of this Example 4.The
transition percentages are 80% for 1996, decreasing
to 60% for 1997, 40% for 1998 and 20% for 1999.
The amendment also provides that the transition
amount is zero for plan years beginning on or after
the year 2000. Pursuant to paragraphs (d)(10)(iii)
and (vi)(A) of this section, the amendment of Plan D
is not considered to have reduced the accrued bene-
fit of any participant in violation of section
411(d)(6).
Example 5.On December 31, 1994, Plan E, a
calendar year plan, provided that all single sum dis-
tributions were to be calculated using the UP-1984
Mortality Table and an interest rate equal to the
PBGC interest rate for January 1 of the plan year.
On March 1, 1995, and effective on July 1, 1995,
Plan E was amended to provide that all single-sum
distributions are calculated using the applicable
mortality table and the annual interest rate on 30-
year Treasury securities for August of the year be-
fore the plan year that contains the annuity starting
date. The plan amendment provides that each distri-
bution with an annuity starting date after June 30,
1995, and before July 1, 1996, is calculated using
the 30-year Treasury rate for August of the year be-
fore the plan year that contains the annuity starting
date, or the 30-year Treasury rate for November of
the plan year preceding the plan year that contains
the annuity starting date, whichever produces the
larger benefit. Pursuant to paragraphs (d)(10)(v)
and (vi)(C) of this section, the amendment of Plan E
is not considered to have reduced the accrued bene-
fit of any participant in violation of section
411(d)(6).
Par. 3. In §1.417(e)–1T, paragraph (d)
is revised to read as follows:
§1.417(e)–1T Restrictions and
valuations of distributions from plans
subject to sections 401(a)(11) and 417.
(Temporary)
*****
(d) For rules regarding the present
value of a participant’s accrued benefit
and related matters, see §1.417(e)–1(d).
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved March 30, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on April
3, 1998, 8:45 a.m., and published in the issue of the
Federal Register for April 7, 1998, 63 F.R. 16895)
1998–20 I.R.B.11May 18, 1998

May 18, 1998121998–20 I.R.B.
Notice of Proposed Rulemaking
Travel and Tour Activities of Tax
Exempt Organizations
REG–121268–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations clarifying when the
travel and tour activities of tax exempt or-
ganizations are substantially related to the
purposes for which exemption was
granted. These proposed regulations are
intended to augment the guidance that
currently exists with respect to travel
tours and the unrelated business income
tax.
DATES: Written comments and requests
for a public hearing must be received by
July 22, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–121268–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–121268–97), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Robin Ehrenberg, (202) 622-6080
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
An organization generally exempt from
tax under section 501(a) of the Internal
Revenue Code (“Code”) must pay tax on
its unrelated business taxable income, as
defined in section 512. Section 512(a)(1)
defines unrelated business taxable income
(“UBTI”) as the gross income derived by
any organization from any unrelated trade
or business (as defined in section 513)
regularly carried on by the organization,
less the deductions which are directly
connected with the conduct of the trade or
business. Gross income from an unre-
lated trade or business and any deductions
directly connected to that trade or busi-
ness are both computed in accordance
with the general income tax rules of chap-
ter 1 of the Internal Revenue Code, sub-
ject to the modifications provided in sec-
tion 512(b).
Section 513(a) generally defines an un-
related trade or business as any trade or
business the conduct of which is not sub-
stantially related (aside from the need of
an organization for income or funds or the
use it makes of the profits derived) to the
exercise or performance by the organiza-
tion of its charitable, educational, or other
purpose or function constituting the basis
for its exemption under section 501.
A “trade or business” is defined in Sec-
tion 1.513–1(b) of the Income Tax Regu-
lations as having the same meaning it has
for purposes of section 162, and “gener-
ally includes any activity carried on for
the production of income from the sale of
goods or performance of services.” The
key test of whether an activity constitutes
a trade or business is whether the activity
was conducted with a profit motive. See
U.S. v. American Bar Endowment,477
U.S. 105 (1986); Professional Insurance
Agents of Michigan v. Commissioner726
F.2d 1097 (6th Cir. 1983); National Water
Well Association v. Commissioner,92 T.C.
75 (1989). The regulations further pro-
vide that an activity conducted for the
production of income does not lose its
character as a business “merely because
[it is] carried on within a larger aggregate
of similar activities or within a larger
complex of other endeavors which may,
or may not, be related to the exempt pur-
poses of the organization.” This “frag-
mentation rule,” as it is commonly
known, may result in different treatment
of related activities under the unrelated
business income tax.
Section 1.513–1(d)(2) of the Income
Tax Regulations provides that a trade or
business is “substantially related” to ex-
empt purposes only where the conduct of
the business activities has a substantial
causal relationship to the achievement of
the exempt purposes (other than through
the production of income) of the organi-
zation conducting the trade or business.
Thus, a trade or business is substantially
related for purposes of section 513 only if
the conduct of the trade or business con-
tributes importantly to the accomplish-
ment of the organization’s exempt pur-
poses.
In recent years, taxpayers and Congress
have asked the IRS to publish guidance
addressing questions relating to the unre-
lated business income tax treatment of in-
come generated from travel tours con-
ducted by tax exempt organizations.
Although the IRS has issued a number of
revenue rulings addressing situations in
which tax exempt organizations sponsor
travel tours, most of these rulings have
analyzed whether an organization that of-
fers travel tours as its primary activity can
qualify as a charitable or educational or-
ganization described in section 501(c)(3)
of the Code.
Rev. Rul. 67–327, 1967–2 C.B. 187,
holds that an organization whose purpose
is to arrange group tours for students and
faculty of a university in order to allow
them to travel abroad does not qualify for
exemption because the organization oper-
ates essentially as a commercial travel
agency. The ruling concludes that the or-
ganization’s activities are not “educa-
tional” as that term is defined in Treas.
Reg. § 1.501(c)(3)–1(d)(3)(i)(a), because
they do not provide instruction or training
of individuals for the purpose of improv-
ing or developing their capabilities.
In contrast, in Rev. Rul. 69–400, 1969–
2 C.B. 114, an organization that selects
students and faculty members interested
in a certain foreign history and culture
and enrolls them at foreign universities
and arranges for on-site tours conducted
by local scholars that complement class-
room studies, is held to be exempt. Rev.
Rul. 69–400 distinguishes Rev. Rul. 67–
327 on the basis that the organization in
the later ruling is arranging for instruction
not just travel.
Rev. Rul. 70–534, 1970–2 C.B. 113,
describes an organization that conducts
travel study tours as its primary activity.
Part IV. Items of General Interest

1998–20 I.R.B.13May 18, 1998
Tours are geared toward students, but oth-
ers can take the tours as long as they par-
ticipate in the mandatory study programs.
Organized study, taught by certified
teachers, is conducted five to six hours a
day, and a library of materials related to
the courses being taught is available.
Exams are given, each student is graded
and a state board of education allows
credit for a student’s participation in the
study tour program. The revenue ruling
concludes that the organization furthers
educational purposes because it performs
training and instruction for the purpose of
allowing individuals to improve and de-
velop their capabilities, and is, therefore,
described in section 501(c)(3).
Rev. Rul. 77–366, 1977–2 C.B. 192,
concerns an organization that arranges
and conducts ocean cruises for ministers,
church members and their families for the
purpose of providing continuing educa-
tion in an atmosphere supporting spiritual
renewal. The organization’s activities in-
clude lectures, discussions, workshops
and some shore activities that further
charitable purposes. However, because of
the extensive resources the organization
devotes to social and recreational pro-
grams, the scheduling of those programs
relative to the schedule for the exempt
purpose programs, and other facts and cir-
cumstances, the organization was held to
be also serving a substantial nonexempt
purpose and, therefore, not to qualify for
exemption as an organization described in
section 501(c)(3).
The Tax Court applied a similar analy-
sis to an organization operating a moun-
tain lodge when it held that the organiza-
tion failed to qualify as a religious
organization described in section
501(c)(3). Although religious activities
were offered to guests in addition to a
wide range of recreational activities,
guests were not required to participate in
the religious activities, and the record
failed to show that the recreational activi-
ties were insubstantial. See The Schoger
Foundation v. Commissioner, 76 T.C. 380
(1981).
In contrast, Rev. Rul. 77–430, 1977–2
C.B. 194, holds that an organization con-
ducting weekend retreats is furthering its
stated purpose of advancing religion. In-
dividuals come to participate in a program
of seminars, lectures, prayer sessions and
meditation led by ministers and priests
that are scheduled on an hourly basis
throughout the day. Recreational activi-
ties are not scheduled, but are available to
participants during their limited free time.
Under these facts and circumstances, the
ruling holds that the facilities are being
used to advance religion and that recre-
ational activities are incidental to the ac-
complishment of this purpose.
The revenue rulings all focus on the de-
gree of educational or religious content
participants are expected to receive in
each travel program in determining
whether the activity serves an exempt
purpose. The same approach was taken in
the one ruling that has specifically ad-
dressed the application of the unrelated
business income tax to income generated
by travel tours. Rev. Rul. 78–43, 1978–1
C.B. 164, describes the travel tour activity
of a university alumni association. The
association’s program of approximately
ten tours per year is open to all current
members and their immediate families
and is planned with various travel agen-
cies. Each travel agency pays a per per-
son fee to the association. The tours do
not include any formal educational pro-
gram and do not differ substantially from
commercially operated tours. Rev. Rul.
78–43 concludes that there is no causal
relationship between arranging the travel
tours described in the ruling and the
achievement of an exempt purpose. Ac-
cordingly, the ruling holds that the sale of
tours to members is an unrelated trade or
business within the meaning of section
513.
These proposed regulations are in-
tended to augment the guidance that cur-
rently exists with respect to travel tours
and the unrelated business income tax.
The proposed regulations also provide ad-
ditional guidance regarding the fragmen-
tation rule and the distinctions that may
be necessary among different tours or ac-
tivities that are part of a single organiza-
tion’s travel program.
The IRS and Treasury are soliciting
comments on these proposed regulations.
In particular, because the IRS relies heav-
ily on review of records to determine
whether an organization’s trade or busi-
ness activities further an exempt purpose,
comments are requested on whether the
IRS should specify the types of records
organizations should keep to establish the
activity’s purpose.
Explanation of Provisions
The proposed regulations add a new
§1.513–7 providing that the determina-
tion of whether travel tour activities of tax
exempt organizations are substantially re-
lated to an organization’s exempt pur-
poses is a question of facts and circum-
stances. The proposed regulations set
forth a series of examples to illustrate
how various facts and circumstances
would be analyzed.
Proposed Effective Date
These regulations are proposed to be
effective for taxable years beginning after
the date final regulations are published in
the Federal Register.For prior taxable
years, the IRS will continue to apply prin-
ciples of existing law.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulation does not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Requests for a
Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying. A public
hearing may be scheduled if requested in
writing by a person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.

May 18, 1998141998–20 I.R.B.
Drafting Information
The principal author of these regula-
tions is Robin Ehrenberg, Office of Asso-
ciate Chief Counsel (Employee Benefits
and Exempt Organizations). However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.513–7 is added to
read as follows:
§ 1.513-7 Travel and tour activities of tax
exempt organizations.
(a) Travel tour activities that constitute
a trade or business, as defined in § 1.513-
1(b), and that are not substantially related
to the purposes for which exemption has
been granted to the organization consti-
tute an unrelated trade or business with
respect to that organization. Whether
travel tour activities conducted by an or-
ganization are substantially related to the
organization’s exempt purpose is deter-
mined by looking at all relevant facts and
circumstances. Section 513(c) and
§ 1.513–1(b) also apply to travel tour ac-
tivity. Application of the rules of section
513(c) and § 1.513–1(b) may result in dif-
ferent treatment for individual tours within
an organization’s travel tour program.
(b) Examples. The provisions of this
section are illustrated by the following ex-
amples:
Example 1. O, a university alumni association, is
exempt from federal income tax under section
501(a) as an educational organization described in
section 501(c)(3). As part of its activities, O oper-
ates a travel tour program. The program is open to
all current members of O and their guests. O works
with travel agencies to schedule approximately 10
tours annually to various destinations around the
world. Members of O pay $X to the organizing
travel agency to participate in a tour. The travel
agency pays O a per person fee for each participant.
Although the literature advertising the tours encour-
ages O’s members to continue their lifelong learning
by joining the tours, and a faculty member of O’s re-
lated university is invited to join the tour as a guest
of the alumni association, none of the tours includes
any scheduled instruction or curriculum related to
the destinations being visited. By arranging to make
travel tours available to its members, O is not con-
tributing importantly to the accomplishment of its
educational purpose. Rather, O’s program is de-
signed to generate revenues for O by regularly offer-
ing its members travel services. Accordingly, O’s
tour program is an unrelated trade or business within
the meaning of section 513(a) of the Code.
Example 2.N is an organization formed for the
purpose of educating individuals about the geogra-
phy and culture of the United States. It is exempt
from federal income tax under section 501(a) as an
educational and cultural organization described in
section 501(c)(3). N engages in a number of activi-
ties to accomplish its purposes, including offering
courses and publishing periodicals and books. As
one of its activities, N conducts study tours to na-
tional parks and other locations within the United
States. The study tours are conducted by teachers
and other education professionals. The tours are
open to all who agree to participate in the required
study program. The study program consists of com-
munity college level courses related to the location
being visited by the tour. While the students are on
the tour, five or six hours per day are devoted to or-
ganized study, preparation of reports, lectures, in-
struction and recitation by the students. Each tour
group brings along a library of material related to
the subject being studied on the tour. Examinations
are given at the end of each tour and N’s state board
of education awards academic credit for tour partici-
pation. Because the tours offered by N include a
substantial amount of required study, lectures, report
preparation, examinations and qualify for academic
credit, the tours clearly further N’s educational pur-
pose. Accordingly, N’s tour program is not an unre-
lated trade or business within the meaning of section
513(a) of the Code.
Example 3.R is a section 501(c)(4) social wel-
fare organization devoted to advocacy on a particu-
lar issue. On a regular basis throughout the year, R
organizes a travel tour for its members to Washing-
ton, D.C.. The tours are priced to produce a profit
for R. While in Washington, the members follow a
schedule according to which they spend substan-
tially all of their time over several days attending
meetings with legislators and government officials
and receiving briefings on policy developments re-
lated to the issue that is R’s focus. Bringing mem-
bers to Washington to participate in advocacy on
behalf of the organization and learn about develop-
ments relating to the organization’s principal focus
is substantially related to R’s social welfare purpose.
Therefore, R’s operation of the travel tours does not
constitute an unrelated trade or business.
Example 4.S is a membership organization
formed to foster cultural unity and to educate X
Americans about X, their country of origin. It is ex-
empt from federal income tax under section 501(a)
and is described in section 501(c)(3) as an educa-
tional and cultural organization. Membership in S is
open to all Americans interested in the X heritage.
As part of its activities, S sponsors a program of
travel tours to X. All of S’s tours are priced to pro-
duce a profit for S. The tours are divided into two
categories. Category A tours are trips to X that are
designed to immerse participants in the X history,
culture and language. The itinerary is designed to
have participants spend substantially all of their time
while in X receiving instruction on the X language,
history and cultural heritage. Destinations are se-
lected because of their historical or cultural signifi-
cance or because of instructional resources they
offer. Category B tours are also trips to X, but rather
than offering scheduled instruction, participants are
given the option of taking guided tours of various X
locations included in their itinerary. Other than the
optional guided tours, Category B tours offer no in-
struction or curriculum. Even if participants take all
of the tours offered, they have a substantial amount
of time free to pursue their own interests once in X.
Destinations of principally recreational interest,
rather than historical or cultural interest, are regu-
larly included on Category B tour itineraries. Based
on the facts and circumstances, sponsoring Category
A tours is an activity substantially related to S’s ex-
empt purposes, and does not constitute an unrelated
trade or business with respect to S. However, spon-
soring Category B tours does not contribute impor-
tantly to S’s accomplishment of its exempt purposes
and is designed to generate a profit for S. Therefore,
sponsoring the Category B tours constitutes an unre-
lated trade or business with respect to S.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on April
20, 1998, 2:48 p.m., and published in the issue of the
Federal Register for April 23, 1998, 63 F.R. 20156)
Notice of Proposed Rulemaking
S Corporation Subsidiaries
REG–251698–96
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the treat-
ment of corporate subsidiaries of S corpo-
rations. The proposed regulations inter-
pret the rules added to the Internal
Revenue Code by section 1308 of the
Small Business Job Protection Act of
1996. The proposed regulations affect S
corporations and their subsidiaries.
DATES: Written comments must be re-
ceived by July 21, 1998.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–251698–96),
room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–251698–96), Courier’s Desk, In-

ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Deanna L. Walton, (202) 622-3050 (Sub-
chapter S) or Lee A. Dean, (202) 622-
7540 (Subchapter C); concerning submis-
sions, Michael Slaughter, (202) 622-7190
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained
in this notice of proposed rulemaking
have been submitted to the Office of
Management and Budgetfor review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
T:FP, Washington, DC 20224. Comments
on the collections of information should
be received by June 22, 1998. Comments
are specifically requested concerning:
Whether the proposed collections of in-
formation are necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the
collections will have a practical utility;
The accuracy of the estimated burden
associated with the proposed collections
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collections of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
The collections of information in these
proposed regulations are in §§1.1361–
3(a)(1), 1.1361–3(b)(1), 1.1361–5(a)(2),
and 1.1362–8. The collections of infor-
mation are required to determine the man-
ner in which a corporate subsidiary of an
S corporation will be treated under the In-
ternal Revenue Code.
These collections of information are re-
quired to obtain a benefit. The likely re-
spondents and/or recordkeepers are small
businesses or organizations, businesses or
other for-profit institutions, and farms.
Estimated total annual reporting/record-
keeping burden: 10,110 hours
Estimated average annual burden per re-
spondent/recordkeeper: 57 minutes
Estimated number of respondents/record-
keepers: 10,660
Estimated annual frequency of responses:
On occasion
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) relating to S corpo-
rations and their subsidiaries under sec-
tions 1361 and 1362 of the Internal
Revenue Code (Code). Section 1308 of
the Small Business Job Protection Act of
1996, Public Law 104–188, 110 Stat.
1755 (the Act), modified section 1361 of
the Code to permit an S corporation (1) to
own 80 percent or more of the stock of a
C corporation, and (2) to elect to treat a
wholly owned subsidiary as a qualified
subchapter S subsidiary (QSSS). In No-
tice 97–4 (1997–2 I.R.B. 24), the IRS an-
nounced its intention to issue regulations
under section 1308 of the Act and re-
quested comments on certain issues. Sec-
tion 1601 of the Taxpayer Relief Act of
1997, Public Law 105–34, 111 Stat. 788
(the 1997 Act), made a technical correc-
tion to section 1361 to provide regulatory
authority regarding the consequences of
an election to be a QSSS.
Explanation of Provisions
Overview
Prior law prohibited an S corporation
from owning 80 percent or more of the
stock of another corporation. The Act re-
pealed section 1362(b)(2)(A) of the Inter-
nal Revenue Code (Code), thereby allow-
ing an S corporation to own 80 percent or
more of the stock of a C corporation. The
Act also added section 1504(b)(8) to the
Code to prevent an S corporation from
joining in the filing of a consolidated re-
turn with its affiliated C corporations. A
C corporation subsidiary of an S corpora-
tion, however, may file a consolidated re-
turn with its affiliated C corporations.
See H.R. Conf. Rep. No. 737, 104th
Cong., 2d Sess. 224 (1996).
New section 1361(b)(3)(B) defines the
term qualified subchapter S subsidiary as
any domestic corporation that is not an in-
eligible corporation if, (1) an S corpora-
tion holds 100 percent of the stock of the
corporation, and (2) that S corporation
elects to treat the subsidiary as a QSSS.
Except as otherwise provided in regula-
tions, a corporation for which a QSSS
election is made is not treated as a sepa-
rate corporation, and all assets, liabilities,
and items of income, deduction, and
credit of the QSSS are treated as assets, li-
abilities, and items of income, deduction,
and credit of the parent S corporation.
The legislative history accompanying sec-
tion 1361(b)(3) indicates that, when the
parent corporation makes the election, the
subsidiary is deemed to have liquidated
under sections 332 and 337 immediately
before the election is effective. See S.
Rep. No. 281, 104th Cong., 2d Sess. 53
(1996); H.R. Rep. No. 586, 104th Cong.,
2d Sess. 89 (1996). However, the legisla-
tive history accompanying the technical
correction made by the 1997 Act indicates
that regulations may provide exceptions
to that general rule. See S. Rep. No. 33,
105th Cong., 1st Sess. 320 (1997).
Section 1361(b)(3)(C) provides that
any QSSS that ceases to meet the require-
ments of section 1361(b)(3)(B) will be
treated as a new corporation acquiring all
of its assets (and assuming all of its liabil-
ities) immediately before the cessation
from its S corporation parent in exchange
1998–20 I.R.B.15May 18, 1998

for the subsidiary’s stock. Section
1361(b)(3)(D) provides that a QSSS
whose election has terminated (or a suc-
cessor corporation) may not make an S
election or have a QSSS election made
with respect to it before its fifth taxable
year that begins after the first taxable year
for which the termination is effective, un-
less the Secretary consents to the election.
Under current and prior law, the S elec-
tion of a corporation with subchapter C
corporation earnings and profits termi-
nated if that S corporation received pas-
sive investment income, including divi-
dends, in excess of 25 percent of gross
receipts for three consecutive years. Sec-
tion 1362(d)(3)(E) modifies that general
rule by excluding dividends from passive
investment income to the extent that the
dividends are attributable to the active
conduct of a trade or business of a C cor-
poration in which the S corporation has an
80 percent or greater ownership interest.
Neither the Act nor the legislative history
provides rules for determining the attribu-
tion of dividends to an active trade or
business.
QSSS Formation
Under the proposed regulations, an S
corporation makes a QSSS election with
respect to an eligible subsidiary by filing
a form to be developed by the IRS prior to
the time these regulations become final.
This proposes to change the temporary
election procedure provided in Notice 97–
4, which provides that a parent S corpora-
tion files a completed Form 966, Corpo-
rate Dissolution and Liquidation (with
some modifications), to make a QSSS
election. Until these proposed regulations
are finalized, taxpayers should continue
to use the temporary election procedure in
Notice 97–4 to make QSSS elections.
The proposed regulations also provide
that the effective date of a QSSS election
may be up to 2 months and 15 days prior
to the day the QSSS election is made.
This is a slight change from the 75 day
retroactive period provided in Notice 97–
4, but is consistent with the general time
period for making S elections. Unlike the
S election, however, a QSSS election
does not need to be made within 2 months
and 15 days of the beginning of a taxable
year. A similar retroactive period is pro-
vided for revocations of QSSS status. In
addition, a taxpayer may choose a
prospective effective date for a QSSS
election or revocation, so long as the date
selected is not more than 12 months after
the date the election or revocation is
made.
The proposed regulations provide that,
when an S corporation makes a valid
QSSS election with respect to a sub-
sidiary, the subsidiary is deemed to have
liquidated into the parent. The tax treat-
ment of this liquidation, alone or in the
context of any larger transaction (for ex-
ample, a transaction that also includes the
acquisition of the subsidiary’s stock), is
generally determined under all relevant
provisions of the Code and general princi-
ples of tax law, including the step transac-
tion doctrine. However, a special transi-
tion rule applies to certain elections
effective prior to the date that is 60 days
after publication of final regulations in the
Federal Register.The transition rule in-
dicates the recognition of special concerns
that may have arisen as a result of transac-
tions entered into by taxpayers relying on
the legislative history to the Act and with-
out applying the step transaction doctrine
to the acquisition of the subsidiary’s stock
followed by a QSSS election. The IRS re-
quests comments concerning other trans-
actions occurring during the transitional
period for which relief from the effect of
application of the step transaction doctrine
may be warranted.
Special rules may apply when a QSSS
election is made following the transfer of
one S corporation’s stock to another S
corporation. For example, if an S corpo-
ration acquires the stock of another S cor-
poration in a transaction in which the ac-
quiring S corporation’s basis in the stock
received is determined by reference to the
transferor’s basis and makes a QSSS elec-
tion with respect to the other corporation
effective on the day of acquisition, any
losses disallowed under section 1366(d)
with respect to a former shareholder of
the QSSS will be available to that share-
holder as a shareholder of the acquiring S
corporation. Furthermore, when stock in
an S corporation is transferred to another
S corporation and a QSSS election is
made with respect to the subsidiary effec-
tive on the day of acquisition, the S elec-
tion of the former corporation terminates
at the same moment as the QSSS election
becomes effective. This rule ensures that
the former S corporation is not treated as
a C corporation for any period solely be-
cause of the transfer.
Generally, the proposed regulations
treat the liquidation as occurring at the
close of the day before the QSSS election
is effective. Under this rule, if a parent
corporation makes an S election effective
on the same date as a QSSS election with
respect to a subsidiary, the deemed liqui-
dation occurs at a time when the parent
corporation is still a C corporation. A
QSSS election satisfies the requirement of
adopting a plan of liquidation under sec-
tion 332.
Following the deemed liquidation, the
QSSS is not treated as a separate corpora-
tion (except as otherwise provided in the
regulations), and all assets, liabilities, and
items of income, deduction, and credit are
treated as those of the S corporation. Ac-
cordingly, all such items must be reported
on the S corporation’s return required to
be filed under section 6037. A special
rule applies for the calculation of these
items where either an S corporation or its
QSSS is a bank (as defined in section
581). This special rule was first an-
nounced in Notice 97–5 (1997–2 I.R.B.
25). Until these proposed regulations are
finalized, taxpayers should continue to
follow Notice 97–5.
QSSS Termination
The QSSS status of a corporation con-
tinues until it terminates. The regulations
specify the date of termination for spe-
cific terminating events. Section 1361(b)-
(3)(D) provides that, if a QSSS election
terminates, the corporation is treated as a
new corporation acquiring all of its assets
(and assuming all of its liabilities) from
the S corporation in exchange for stock of
the new corporation immediately before
the termination. The tax treatment of this
transaction or of a larger transaction that
includes this transaction will be deter-
mined under the Code and general princi-
ples of tax law, including the step transac-
tion doctrine. Examples are provided to
illustrate situations in which the forma-
tion of the new corporation will qualify as
a nonrecognition transaction under sec-
tion 351. The proposed regulations also
provide that, under certain circumstances,
relief may be available under the stan-
dards established under section 1362(f)
for the inadvertent termination of an S
election.
May 18, 1998161998–20 I.R.B.

Section 1361(b)(3)(D) provides that a
corporation whose QSSS election has ter-
minated (or a successor corporation) may
not make an S election or have a QSSS
election made with respect to it for five
taxable years following the termination
without the consent of the Secretary. The
proposed regulations provide that, with-
out requesting the Secretary’s consent, a
corporation may make an election to be
treated as an S corporation or may have a
QSSS election made with respect to it be-
fore the expiration of the five-year period
under certain circumstances. Consent is
not required if an otherwise valid S elec-
tion or QSSS election is made for the for-
mer QSSS (or its successor corporation)
effective immediately following the dis-
position of its stock. Thus, the proposed
regulations allow corporations to move
freely between QSSS and S corporation
status, provided there is no intervening
period for which the corporation is treated
as a C corporation.
C Corporation Subsidiaries
The proposed regulations also provide
rules relating to certain C corporation
subsidiaries held by S corporations.
Under section 1362(d)(3)(E), dividends
received by an S corporation from a C
corporation in which the S corporation
has an 80 percent or greater ownership
interest are not treated as passive invest-
ment income for purposes of sections
1362 and 1375 to the extent the dividends
are attributable to the earnings and profits
of the C corporation derived from the ac-
tive conduct of a trade or business. The
proposed regulations provide guidance
for attributing dividends to the active
conduct of a trade or business. Special
rules apply to dividends distributed by
the common parent of a consolidated
group.
Under the proposed regulations, earn-
ings and profits of a C corporation de-
rived from the active conduct of a trade or
business are the earnings and profits of
the corporation derived from activities
that would not produce passive invest-
ment income under section 1362(d)(3) if
the C corporation were an S corporation.
The proposed regulations provide a safe
harbor under which the corporation may
determine the amount of the active earn-
ings and profits by comparing the corpo-
ration’s gross receipts derived from non-
passive investment income-producing ac-
tivities with the corporation’s total gross
receipts in the year the earnings and prof-
its are produced. If less than 10 percent
of the C corporation’s earnings and profits
for a taxable year are derived from activi-
ties that would produce passive invest-
ment income, all earnings and profits pro-
duced by the corporation during the
taxable year are considered active earn-
ings and profits.
The proposed regulations also provide
that a C corporation may treat all earnings
and profits accumulated by the corpora-
tion prior to the time an S corporation
held stock meeting the requirements of
section 1504(a)(2) as active earnings and
profits in the same proportion as the C
corporation’s active earnings and profits
for the three taxable years ending prior to
the time when the S corporation acquired
80 percent of the C corporation bear to the
C corporation’s total earnings and profits
for those three taxable years. Provisions
also address the allocation of distributions
from current or accumulated earnings and
profits.
Proposed Effective Date
The regulations are proposed to be ef-
fective on the date that final regulations
are published in the Federal Register.
However, the IRS is considering whether
certain provisions should be made
retroactive. The IRS requests comments
concerning whether certain provisions
should be made effective for taxable years
beginning on or after January 1, 1997.
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. Pursuant to section
7805(f) of the Internal Revenue Code,
this notice of proposed rulemaking will
be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business. It is hereby certified that
the collections of information contained
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small businesses. This certifi-
cation is based on the fact that the eco-
nomic burden imposed on taxpayers by
the collections of information and record-
keeping requirements of these regula-
tions is insignificant. For example, the
estimated average annual burden per re-
spondent is less than one hour. Further-
more, most taxpayers will only have to
respond to the requests for information
contained in §§1.1361–3(b)(1) and
1.1361–5(a)(2) one time in the life of the
corporation. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are timely submit-
ted to the IRS. All comments will be
available for public inspection and
copying.
A public hearing will be scheduled in
the Internal Revenue Building, 1111 Con-
stitution Avenue, NW, Washington, DC.
The IRS recognizes that persons outside
the Washington, DC, area also may wish
to testify at the public hearing through
teleconferencing. Requests to include
teleconferencing sites must be received
by June 22, 1998. If the IRS receives
sufficient indications of interest to war-
rant teleconferencing to a particular city,
and if the IRS has teleconferencing facili-
ties available in that city on the date the
public hearing is to be scheduled, the IRS
will try to accommodate the requests.
The IRS will publish the time and date
of the public hearing and the locations of
any teleconferencing sites in an an-
nouncement in the Federal Register.
Drafting Information
The principal authors of these proposed
regulations are Deanna L. Walton, Office
of the Assistant Chief Counsel (Pass-
throughs and Special Industries); and Lee
A. Dean, Office of the Assistant Chief
Counsel (Corporate). However, other
personnel from the IRS and Treasury De-
partment participated in their develop-
ment.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
1998–20 I.R.B.17May 18, 1998

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. Amend §1.1361–0 as follows:
1. Revise the introductory text.
2. Remove the entry for §1.1361–
1(d)(3).
3. Add entries for §§1.1361–2,
1.1361–3, 1.1361–4, 1.1361–5, and
1.1361–6.
The revisions and additions read as fol-
lows:
§1.1361–0 Table of contents.
This section lists captions contained in
§§1.1361–1, 1.1361–2, 1.1361–3,
1.1361–4, 1.1361–5, and 1.1361–6.
*****
§1.1361–2 Definitions relating to S
corporation subsidiaries.
(a) In general.
(b) Stock treated as held by S corpora-
tion.
(c) Examples.
§1.1361–3 QSSS election.
(a) Time and manner of making election.
(1) In general.
(2) Time of making election.
(3) Effective date of election.
(4) Example.
(5) Extension of time for making a QSSS
election.
(b) Revocation of QSSS election.
(1) Manner of revoking QSSS election.
(2) Effective date of revocation.
(3) Revocation after termination.
§1.1361–4 Effect of QSSS election.
(a) Separate existence ignored.
(1) In general.
(2) Liquidation of subsidiary.
(3) Treatment of banks.
(i) In general.
(ii) Examples.
(4) Treatment of stock of QSSS.
(5) Transitional relief.
(i) General rule.
(ii) Examples.
(b) Timing of the liquidation.
(1) In general.
(2) Acquisitions.
(3) Coordination with section 338 elec-
tion.
(c) Carryover of disallowed losses and
deductions.
(d) Examples.
§1.1361–5 Termination of QSSS election.
(a) In general.
(1) Effective date.
(2) Information to be provided upon ter-
mination of QSSS election by failure
to qualify as a QSSS.
(3) Examples.
(b) Effect of termination of QSSS elec-
tion.
(1) Formation of new corporation.
(2) Carryover of disallowed losses and
deductions.
(3) Examples.
(c) Inadvertent terminations.
(d) Election after QSSS termination.
(1) In general.
(2) Exception.
(3) Examples.
§1.1361–6 Effective date.
Par. 3. Amend §1.1361–1 as follows:
1. Revise paragraph (b)(1)(i).
2. Remove paragraph (d)(1)(i).
3. Redesignate paragraphs (d)(1)(ii),
(d)(1)(iii), (d)(1)(iv), and (d)(1)(v) as
paragraphs (d)(1)(i), (d)(1)(ii), (d)(1)(iii),
and (d)(1)(iv), respectively.
4. Revise newly designated paragraph
(d)(1)(i).
5. Remove paragraph (d)(3).
6. Revise the first sentence of para-
graph (e)(1).
The revisions read as follows:
§1.1361–1 S corporation defined.
*****
(b) * * *
(1) * * *
(i) More than 75 shareholders (35 for
taxable years beginning before January 1,
1997);
*****
(d) * * *
(1) * * *
(i) For taxable years beginning on or
after January 1, 1997, a financial institu-
tion that uses the reserve method of ac-
counting for bad debts described in sec-
tion 585 (for taxable years beginning
prior to January 1, 1997, a financial insti-
tution to which section 585 applies (or
would apply but for section 585(c)) or to
which section 593 applies);
*****
(e) * * *
(1) General rule. A corporation does
not qualify as a small business corpora-
tion if it has more than 75 shareholders
(35 for taxable years beginning prior to
January 1, 1997). * * *
*****
Par. 4. Add §§ 1.1361–2, 1.1361–3,
1.1361–4, 1.1361–5, and 1.1361–6 to
read as follows:
§1.1361–2 Definitions relating to S
corporation subsidiaries.
(a) In general.The term qualified sub-
chapter S subsidiary(QSSS) means any
domestic corporation that is not an ineli-
gible corporation (as defined in section
1361(b)(2) and the regulations thereun-
der), if—
(1) 100 percent of the stock of such
corporation is held by an S corporation;
and
(2) The S corporation properly elects
to treat the subsidiary as a QSSS under
§1.1361–3.
(b) Stock treated as held by S corpora-
tion. For purposes of satisfying the 100
percent stock ownership requirement in
section 1361(b)(3)(B)(i) and paragraph
(a)(1) of this section, stock of a corpora-
tion is treated as held by an S corporation
if the S corporation is the owner of that
stock for federal income tax purposes.
(c) Examples.The following examples
illustrate the application of this section:
Example 1. X, an S corporation, owns 100 per-
cent of Y, a corporation for which a valid QSSS elec-
tion is in effect for the taxable year. Yowns 100 per-
cent of Z, a corporation otherwise eligible for QSSS
status. Xmay elect to treat Zas a QSSS under sec-
tion 1361(b)(3)(B)(ii).
Example 2.Assume the same facts as in Example
1, except that Yis a business entity that is disre-
garded as an entity separate from its owner under
§301.7701–2(c)(2) of this chapter. Xmay elect to
treat Zas a QSSS.
Example 3.Assume the same facts as in Example
1,except that Yowns 50 percent of Z, and Xowns
the other 50 percent. Xmay elect to treat Zas a
QSSS.
Example 4.Assume the same facts as in Example
1,except that Yis a C corporation. Although Yis a
domestic corporation that is otherwise eligible to be
a QSSS, no QSSS election has been made for Y.
Thus, Xis not treated as holding the stock of Z.
Consequently, Xmay not elect to treat Zas a QSSS.
§1.1361–3 QSSS election.
(a) Time and manner of making elec-
tion—(1) In general. Except as provided
May 18, 1998181998–20 I.R.B.

in section 1361(b)(3)(D) and §1.1361–
5(d) (five-year prohibition on re-elec-
tion), an S corporation may elect to treat
an eligible subsidiary as a QSSS by filing
a completed form to be prescribed by the
Internal Revenue Service. The election
form must be signed by a person autho-
rized to sign the S corporation’s return re-
quired to be filed under section 6037 and
must be submitted to the service center
where the subsidiary filed its most recent
tax return (if applicable). If an S corpora-
tion forms a subsidiary and makes a valid
QSSS election (effective upon the date of
the subsidiary’s formation) for the sub-
sidiary, the election should be submitted
to the service center where the S corpora-
tion filed its most recent return.
(2) Time of making election.A QSSS
election may be made by the S corpora-
tion parent at any time during the taxable
year.
(3) Effective date of election. A QSSS
election will be effective on the date spec-
ified on the election form or on the date
the election form is filed if no date is
specified. The effective date specified on
the form can not be more than 2 months
and 15 days prior to the date of filing and
can not be more than 12 months after the
date of filing. For this purpose, the defin-
ition of the term “month” found in
§1.1362–6(a)(2)(ii)(C) applies. If an
election form specifies an effective date
more than 2 months and 15 days prior to
the date on which the election form is
filed, it will be effective 2 months and 15
days prior to the date it is filed. If an elec-
tion form specifies an effective date more
than 12 months after the date on which
the election is filed, it will be effective 12
months after the date it is filed. The cor-
poration for which the QSSS election is
made must meet all the requirements of
section 1361(b)(3)(B) at the time the elec-
tion is made and for all periods for which
the election is to be effective.
(4) Example.The following example
illustrates the application of paragraph
(a)(3) of this section:
Example. Xhas been a calendar year S corpora-
tion engaged in a trade or business for several years.
Xacquires the stock of Y, a calendar year C corpora-
tion, on April 1, 1998. On August 10, 1998, X
makes an election to treat Yas a QSSS. Unless oth-
erwise specified on the election form, the election
will be effective as of August 10, 1998. If specified
on the election form, the election may be effective
on some other date that is not more than 2 months
and 15 days prior to August 10, 1998, and not more
than 12 months after August 10, 1998.
(5) Extension of time for making a
QSSS election.An extension of time to
make a QSSS election may be available
under the procedures applicable under
§§301.9100–1 and 301.9100–3 of this
chapter.
(b) Revocation of QSSS election—(1)
Manner of revoking QSSS election. An S
corporation may revoke a QSSS election
under section 1361 by filing a statement
with the service center where the S corpo-
ration’s most recent tax return was prop-
erly filed. The revocation statement must
include the names, addresses, and tax-
payer identification numbers of both the
parent S corporation and the QSSS. The
statement must be signed by a person au-
thorized to sign the S corporation’s return
required to be filed under section 6037.
(2) Effective date of revocation.The
revocation of a QSSS election is effective
on the date specified on the revocation
statement or on the date the revocation
statement is filed if no date is specified.
The effective date specified on the revo-
cation statement can not be more than 2
months and 15 days prior to the date on
which the revocation statement is filed
and can not be more than 12 months after
the date on which the revocation state-
ment is filed. If a revocation statement
specifies an effective date more than 2
months and 15 days prior to the date on
which the statement is filed, it will be ef-
fective 2 months and 15 days prior to the
date it is filed. If a revocation statement
specifies an effective date more than 12
months after the date on which the state-
ment is filed, it will be effective 12
months after the date it is filed.
(3) Revocation after termination.Are-
vocation may not be made after the occur-
rence of an event that renders the sub-
sidiary ineligible for QSSS status under
section 1361(b)(3)(B).
§1.1361–4 Effect of QSSS election.
(a) Separate existence ignored—(1) In
general. Except as otherwise provided in
paragraph (a)(3) of this section, for fed-
eral tax purposes—
(i) A corporation which is a QSSS shall
not be treated as a separate corporation;
and
(ii) All assets, liabilities, and items of
income, deduction, and credit of a QSSS
shall be treated as assets, liabilities, and
items of income, deduction, and credit of
the S corporation.
(2) Liquidation of subsidiary. If an S
corporation makes a valid QSSS election
with respect to a subsidiary, the sub-
sidiary is deemed to have liquidated into
the S corporation. Except as provided in
paragraph (a)(5) of this section, the tax
treatment of the liquidation or of a larger
transaction that includes the liquidation
will be determined under the Internal
Revenue Code and general principles of
tax law, including the step transaction
doctrine. Thus, for example, if an S cor-
poration forms a subsidiary and makes a
valid QSSS election (effective upon the
date of the subsidiary’s formation) for the
subsidiary, there will be no deemed liqui-
dation of the new subsidiary. Instead, the
corporation will be deemed to be a QSSS
from its inception. For purposes of sec-
tion 332, the making of a QSSS election
satisfies the requirement of adopting a
plan of liquidation.
(3) Treatment of banks—(i) In general.
If an S corporation is a bank, or if an S
corporation makes a valid QSSS election
for a subsidiary that is a bank, any special
rules applicable to banks under the Inter-
nal Revenue Code continue to apply sepa-
rately to the bank parent or bank sub-
sidiary as if the deemed liquidation of any
QSSS under paragraph (a)(2) of this sec-
tion had not occurred. For any QSSS that
is a bank, however, all assets, liabilities,
and items of income, deduction, and credit
of the QSSS, as determined in accordance
with the special bank rules, are treated as
assets, liabilities, and items of income, de-
duction, and credit of the S corporation.
For purposes of this paragraph (a)(3)(i),
the term “bank” has the same meaning as
in section 581.
(ii) Examples.The following exam-
ples illustrate the application of this para-
graph (a)(3):
Example 1. X, an S corporation, is a bank as de-
fined in section 581. Xowns 100 percent of Yand Z,
corporations for which valid QSSS elections are in
effect. Yis a bank as defined in section 581, and Zis
not a financial institution. Pursuant to paragraph
(a)(3)(i) of this section, any special rules applicable
to banks under the Internal Revenue Code continue
to apply separately to Xand Yand do not apply to Z.
Thus, for example, section 265(b), which provides
special rules for interest expense deductions of
banks, applies separately to Xand Y. That is, Xand
Yeach must make a separate determination under
section 265(b) of interest expense allocable to tax-
1998–20 I.R.B.19May 18, 1998

exempt interest, and no deduction is allowed for that
interest expense.
Example 2. X, an S corporation, is a bank hold-
ing company and thus is not a bank as defined in
section 581. Xowns 100 percent of Y, a corporation
for which a valid QSSS election is in effect. Yis a
bank as defined in section 581. Pursuant to para-
graph (a)(3)(i) of this section, any special rules ap-
plicable to banks under the Internal Revenue Code
continue to apply to Y and do not apply to X. How-
ever, all of Y’s assets, liabilities, and items of in-
come, deduction, and credit, as determined in accor-
dance with the special bank rules, are treated as
those of X. Thus, for example, section 582(c), which
provides special rules for sales and exchanges of
debt by banks, applies only to sales and exchanges
by Y. However, any gain or loss on such a transac-
tion by Y that is considered ordinary income or ordi-
nary loss pursuant to section 582(c) is treated as or-
dinary income or ordinary loss of X.
(4) Treatment of stock of QSSS.Ex-
cept for purposes of section 1361(b)-
(3)(B)(i) and §1.1361–2(a)(1), the stock
of a QSSS shall be disregarded for all fed-
eral tax purposes.
(5) Transitional relief—(i) General
rule.If an S corporation and another cor-
poration (the related corporation) are per-
sons specified in section 267(b) prior to
an acquisition by the S corporation of
some or all of the stock of the related cor-
poration followed by a QSSS election for
the related corporation, the step transac-
tion doctrine will not apply to determine
the tax consequences of the acquisition.
This paragraph (a)(5) shall apply to QSSS
elections effective prior to the date that is
60 days after publication of final regula-
tions in the Federal Register.
(ii) Examples.The following exam-
ples illustrate the application of this para-
graph (a)(5):
Example 1. Individual Aowns 100 percent of the
stock of X, an S corporation. Xowns 79 percent of
the stock of Y, a solvent corporation, and Aowns the
remaining 21 percent. On May 4, 1998, Acon-
tributes its Ystock to Xin exchange for Xstock. X
makes a QSSS election with respect to Yeffective
immediately following the transfer. The liquidation
described in paragraph (a)(2) of this section is re-
spected as an independent step separate from the
stock acquisition, and the tax consequences of the
liquidation are determined under sections 332 and
337. The contribution by Aof the Ystock qualifies
under section 351, and no gain or loss is recognized
by A, X, or Y.
Example 2.Individual Aowns 100 percent of the
stock of two solvent S corporations, Xand Y. On
May 4, 1998, Acontributes the stock of Yto X. X
makes a QSSS election with respect to Yimmedi-
ately following the transfer. The liquidation de-
scribed in paragraph (a)(2) of this section is re-
spected as an independent step separate from the
stock acquisition, and the tax consequences of the
liquidation are determined under sections 332 and
337. The contribution by Aof the Ystock to Xqual-
ifies under section 351, and no gain or loss is recog-
nized by A, X, or Y. Yis not treated as a C corpora-
tion for any period solely because of the transfer of
its stock to X, an ineligible shareholder. See
§1.1362–2(b)(4).
(b) Timing of the liquidation—(1) In
general.Except as otherwise provided in
paragraphs (b)(2) or (b)(3) of this section,
the liquidation described in paragraph
(a)(2) of this section occurs at the close of
the day before the QSSS election is effec-
tive. Thus, for example, if a C corpora-
tion elects to be treated as an S corpora-
tion and makes a QSSS election (effective
the same date as the S election) with re-
spect to a subsidiary, the liquidation oc-
curs immediately before the S election be-
comes effective, while the S electing
parent is still a C corporation.
(2) Acquisitions.If an S corporation
does not own 100 percent of the stock of
the subsidiary on the day before the QSSS
election is effective, the liquidation de-
scribed in paragraph (a)(2) of this section
occurs immediately after the time at
which the S corporation first owns 100
percent of the stock.
(3) Coordination with section 338
election.An S corporation that makes a
qualified stock purchase of a target may
make an election under section 338 with
respect to the acquisition if it meets the
requirements for the election, and may
make a QSSS election with respect to the
target. If an S corporation makes an elec-
tion under section 338 with respect to a
subsidiary acquired in a qualified stock
purchase, a QSSS election made with re-
spect to that subsidiary is not effective be-
fore the day after the acquisition date
(within the meaning of section 338(h)(2)).
If the QSSS election is effective on the
day after the acquisition date, the liquida-
tion under paragraph (a)(2) of this section
occurs immediately after the deemed
asset purchase by the new target corpora-
tion under section 338. If an S corpora-
tion makes an election under section 338
(without a section 338(h)(10) election)
with respect to a target, the target must
file a final or deemed sale return as a C
corporation reflecting the deemed sale.
See §1.338–1(e).
(c) Carryover of disallowed losses and
deductions.If an S corporation (S1) ac-
quires the stock of another S corporation
(S2) in a transaction in which the basis of
the S2 stock is determined in whole or in
part by reference to the transferor’s basis,
and S1 makes a QSSS election with re-
spect to S2 effective on the day of the ac-
quisition, any loss or deduction disal-
lowed under section 1366(d) with respect
to a former shareholder of S2 is available
to that shareholder as a shareholder of S1.
Thus, a loss or deduction of a shareholder
of S2 disallowed prior to or during the
taxable year of the transaction is treated
as incurred by S1 with respect to that
shareholder if the shareholder is a share-
holder of S1 after the transaction.
(d) Examples.The following exam-
ples illustrate the application of this sec-
tion:
Example 1. X, an S corporation, owns 100 per-
cent of the stock of Y, a C corporation. On June 2,
1998, Xmakes a valid QSSS election for Y, effective
June 2, 1998. Assume that, under general principles
of tax law, including the step transaction doctrine,
X’s acquisition of the Ystock and the subsequent
QSSS election would not be treated as related. The
liquidation described in paragraph (a)(2) of this sec-
tion occurs at the close of the day on June 1, 1998,
the day before the QSSS election is effective, and
the plan of liquidation is considered adopted on that
date. Y’s taxable year and separate existence for fed-
eral tax purposes end at the close of June 1, 1998.
Example 2. X, a C corporation, owns 100 percent
of the stock of Y, another C corporation. On Decem-
ber 31, 1998, Xmakes an election under section
1362 to be treated as an S corporation and a valid
QSSS election for Y, both effective January 1, 1999.
Assume that, under general principles of tax law, in-
cluding the step transaction doctrine, X’s acquisition
of the Ystock and the subsequent QSSS election
would not be treated as related. The liquidation de-
scribed in paragraph (a)(2) of this section occurs at
the close of December 31, 1998, the day before the
QSSS election is effective. The QSSS election for Y
is effective on the same day that X’s S election is ef-
fective, and the deemed liquidation is treated as oc-
curring before the S election is effective, when Xis
still a C corporation. Y’s taxable year ends at the
close of December 31, 1998. See §1.381(b)–1.
Example 3.On June 1, 1998, X, an S corpora-
tion, acquires 100 percent of the stock of Y, an exist-
ing S corporation, for cash in a transaction meeting
the requirements of a qualified stock purchase
(QSP) under section 338. Ximmediately makes a
QSSS election for Yeffective June 2, 1998, and also
makes a joint election under section 338(h)(10) with
the shareholder of Y. Under section 338(a) and
§1.338(h)(10)–1, Yis treated as having sold all of its
assets at the close of the acquisition date, June 1,
1998. Yis treated as a new corporation which pur-
chased all of those assets as of the beginning of June
2, 1998, the day after the acquisition date. Section
338(a)(2). The QSSS election is effective on June 2,
1998, and the liquidation under paragraph (a)(2) of
this section occurs immediately after the deemed
asset purchase by the new corporation.
May 18, 1998201998–20 I.R.B.

Example 4. X, an S corporation, owns 100 per-
cent of Y, a corporation for which a QSSS election is
in effect. On May 12, 1998, a date on which the
QSSS election is in effect, Xissues Ya $10,000 note
under state law that matures in ten years with a mar-
ket rate of interest. Yis not treated as a separate cor-
poration, and X’s issuance of the note to Yon May
12, 1998, is disregarded for federal tax purposes.
Example 5. X, an S corporation, owns 100 per-
cent of the stock of Y, a C corporation. At a time
when Yis indebted to Xin an amount which exceeds
the fair market value of Y’s assets, Xmakes a QSSS
election effective on the date it is filed with respect
to Y. The liquidation described in paragraph (a)(2)
of this section does not qualify under sections 332
and 337 and, thus, Yrecognizes gain or loss on the
assets distributed, subject to the limitations of sec-
tion 267.
§1.1361-5 Termination of QSSS election.
(a) In general—(1) Effective date.
The termination of a QSSS election is ef-
fective —
(i) On the effective date contained in
the revocation statement if a QSSS elec-
tion is revoked under §1.1361–3(b);
(ii) At the close of the last day of the
parent’s last taxable year as an S corpora-
tion if the parent’s S election terminates
under §1.1362–2; or
(iii) At the close of the day on which
an event (other than an event described in
paragraph (a)(1)(ii) of this section) occurs
that renders the subsidiary ineligible for
QSSS status under section 1361(b)(3)(B).
(2) Information to be provided upon
termination of QSSS election by failure to
qualify as a QSSS.If a QSSS election ter-
minates because an event renders the sub-
sidiary ineligible for QSSS status, the S
corporation must attach to its return for
the taxable year in which the termination
occurs a notification that a QSSS election
has terminated, the date of the termina-
tion, and the names, addresses, and em-
ployer identification numbers of both the
parent corporation and the QSSS.
(3) Examples. The following exam-
ples illustrate the application of this para-
graph (a):
Example 1. Termination because parent’s S elec-
tion terminates. X, an S corporation, owns 100 per-
cent of Y. A QSSS election is in effect with respect
to Yfor 1998. Effective on January 1, 1999, Xre-
vokes its S election. Because Xis no longer an S
corporation, Yno longer qualifies as a QSSS at the
close of December 31, 1998.
Example 2. Termination due to transfer of QSSS
stock. X,an S corporation, owns 100 percent of Y.
A QSSS election is in effect with respect to Yfor
1998. On December 10, 1998, Xsells one share of Y
stock to A, an individual. Because Xno longer owns
100 percent of the stock of Y, Yno longer qualifies
as a QSSS. Accordingly, the QSSS election made
with respect to Yterminates at the close of Decem-
ber 10, 1998.
Example 3. No termination on stock transfer be-
tween QSSS and parent. X, an S corporation, owns
100 percent of the stock of Yand Yowns 100 per-
cent of the stock of Z. QSSS elections are in effect
with respect to both Yand Z. Ytransfers all of its Z
stock to X. Because Xis treated as owning the stock
of Zboth before and after the transfer of stock solely
for purposes of determining whether the require-
ments of section 1361(b)(3)(B)(i) and §1.1361–
2(a)(1) have been satisfied, the transfer of Zstock
does not terminate Z’s QSSS election. Because the
stock of Zis disregarded for all other federal tax pur-
poses, no gain is recognized under section 311.
(b) Effect of termination of QSSS elec-
tion—(1) Formation of new corporation.
If a QSSS election terminates under para-
graph (a) of this section, the former QSSS
is treated as a new corporation acquiring
all of its assets (and assuming all of its li-
abilities) immediately before the termina-
tion from the S corporation parent in ex-
change for stock of the new corporation.
The tax treatment of this transaction or of
a larger transaction that includes this
transaction will be determined under the
Internal Revenue Code and general prin-
ciples of tax law, including the step trans-
action doctrine.
(2) Carryover of disallowed losses and
deductions.If a QSSS terminates because
the S corporation distributes the QSSS
stock to some or all of the S corporation’s
shareholders in a transaction to which
section 368(a)(1)(D) applies by reason of
section 355 (or so much of section 356 as
relates to section 355), any loss or deduc-
tion disallowed under section 1366(d)
with respect to a shareholder of the S cor-
poration immediately before the distribu-
tion is allocated between the S corpora-
tion and the former QSSS with respect to
the shareholder. The amount of the disal-
lowed loss or deduction allocated to the S
corporation is an amount that bears the
same ratio to each item of disallowed loss
or deduction as the value of the share-
holder’s stock in the S corporation bears
to the total value of the shareholder’s
stock in both the S corporation and the
former QSSS, in each case as determined
immediately after the distribution.
(3) Examples.The following exam-
ples illustrate the application of this para-
graph (b):
Example 1. X, an S corporation, owns 100 per-
cent of the stock of Y, a corporation for which a
QSSS election is in effect. Xsells 21 percent of the
Ystock to Z, an unrelated corporation, for cash,
thereby terminating the QSSS election. Yis treated
as a new corporation acquiring all of its assets (and
assuming all of its liabilities) in exchange for Y
stock immediately before the termination from the S
corporation. The deemed exchange by Xof assets
for Ystock does not qualify under section 351 be-
cause Xis not in control of Ywithin the meaning of
section 368(c) immediately after the transfer as a re-
sult of the sale of stock to Z. Therefore, Xmust rec-
ognize gain, if any, on the assets transferred to Yin
exchange for its stock. X’s losses, if any, on the as-
sets transferred are subject to the limitations of sec-
tion 267.
Example 2.Assume the same facts as in Example
1,except that, instead of purchasing Ystock, Zcon-
tributes to Yan operating asset in exchange for 21
percent of the Ystock. Yis treated as a new corpora-
tion acquiring all of its assets (and assuming all of
its liabilities) in exchange for Ystock immediately
before the termination. Because Xand Zare co-
transferors that control the transferee immediately
after the transfer, the transaction qualifies under sec-
tion 351.
Example 3. X, an S corporation, owns 100 per-
cent of the stock of Y, a corporation for which a
QSSS election is in effect. Xdistributes all of the Y
stock pro rata to its shareholders, and the distribu-
tion terminates the QSSS election. The transaction
can qualify as a distribution to which sections
368(a)(1)(D) and 355 apply if the transaction other-
wise satisfies the requirements of those sections.
Example 4. X, an S corporation, owns 100 per-
cent of the stock of Y, a corporation for which a
QSSS election is in effect. Xsubsequently revokes
the QSSS election. Yis treated as a new corporation
acquiring all of its assets (and assuming all of its lia-
bilities) immediately before the revocation from its
S corporation parent in a deemed exchange for Y
stock. On a subsequent date, Xsells 21 percent of
the stock of Yto Z, an unrelated corporation, for
cash. Assume that under general principles of tax
law including the step transaction doctrine, the sale
is not taken into account in determining whether Xis
in control of Yimmediately after the deemed ex-
change of assets for stock. The deemed exchange by
Xof assets for Ystock and the deemed assumption
by Yof its liabilities qualify under section 351 be-
cause, for purposes of that section, Xis in control of
Ywithin the meaning of section 368(c) immediately
after the transfer.
(c) Inadvertent terminations.Relief
from the consequences of an inadvertent
termination of a QSSS election may be
available under the standards established
by the Commissioner for the inadvertent
termination of an S election under
§1.1362–4.
(d) Election after QSSS termination—
(1) In general.Absent the Commis-
sioner’s consent, and except as provided
in paragraph (d)(2) of this section, a cor-
poration whose QSSS election has termi-
nated under paragraph (a) of this section
(or a successor corporation as defined in
1998–20 I.R.B.21May 18, 1998

§1.1362–5(b)) may not make an S elec-
tion under section 1362 or have a QSSS
election under section 1361(b)(3)(B)(ii)
made with respect to it for five taxable
years (as described in section 1361(b)-
(3)(D)). The Commissioner may permit
an S election by the corporation or a new
QSSS election with respect to the corpo-
ration before the 5-year period expires.
The corporation requesting consent to
make the election has the burden of estab-
lishing that, under the relevant facts and
circumstances, the Commissioner should
consent to a new election.
(2) Exception.If a corporation’s QSSS
election terminates by reason of a disposi-
tion of the corporation’s stock, the corpo-
ration may, without requesting the Com-
missioner’s consent, make an S election
or have a QSSS election made with re-
spect to it before the expiration of the
five-year period described in section
1361(b)(3)(D) and paragraph (d)(1) of
this section, provided that —
(i) Immediately following the disposi-
tion of its stock, the corporation (or its
successor corporation) is otherwise eligi-
ble to make an S election or have a QSSS
election made for it; and
(ii) The relevant election is made ef-
fective immediately following the dispo-
sition of the stock of the corporation.
(3) Examples.The following exam-
ples illustrate the application of this para-
graph (d):
Example 1. Termination upon distribution of
QSSS stock to shareholders of parent. X, an S cor-
poration, owns Y, a QSSS. Xdistributes all of its Y
stock to X’s shareholders. The distribution termi-
nates the QSSS election because Yno longer satis-
fies the requirements of a QSSS. Assuming Yis oth-
erwise eligible to be treated as an S corporation, Y’s
shareholders may elect to treat Yas an S corporation
effective on the date of the stock distribution without
requesting the Commissioner’s consent.
Example 2. Sale of 100 percent of QSSS stock.
X, an S corporation, owns Y, a QSSS. Xsells 100
percent of the stock of Yto Z, an unrelated S corpo-
ration. Zmay elect to treat Yas a QSSS effective on
the date of purchase without requesting the Com-
missioner’s consent.
§1.1361–6 Effective date.
Except as provided in §1.1361–4(a)-
(5)(i), the provisions of §§1.1361–2
through 1.1361–5 apply to taxable years
beginning on or after the date that final
regulations are published in the Federal
Register.
Par. 5. Amend §1.1362–0 as follows:
1. Add an entry for §1.1362–2(b)(4).
2. Add entries for §1.1362–8.
The additions read as follows:
§1.1362–0 Table of contents.
*****
§1.13622 Termination of election.
*****
(b) * * *
(4) Termination when stock transferred
to another S corporation.
*****
§1.1362–8 Dividends received from
affiliated subsidiaries.
(a) In general.
(b) Determination of active or passive
earnings and profits.
(1) In general.
(2) Lower tier subsidiaries.
(3)De minimisexception.
(4) Special rules for earnings and profits
accumulated by a C corporation prior
to 80 percent acquisition.
(5) Gross receipts safe harbor.
(c) Allocating distributions to active or
passive earnings and profits.
(1) Distributions from current earnings
and profits.
(2) Distributions from accumulated earn-
ings and profits.
(3) Adjustments to active earnings and
profits.
(4) Special rules for consolidated groups.
(d) Examples.
(e) Effective date.
Par. 6. Amend §1.1362–2 as follows:
1. Amend paragraph (b)(1) by adding a
sentence to the end of the paragraph.
2. Add paragraph (b)(4).
3. Amend paragraph (c)(5)(ii)(C) by
adding a sentence to the end of the para-
graph.
The additions read as follows:
§1.1362–2 Termination of election.
*****
(b) * * *
(1) * * * See paragraph (b)(4) of this
section for a special rule applying to the
termination of an S election caused by the
transfer of the corporation’s stock to an-
other S corporation.
*****
(4) Termination when stock transferred
to another S corporation.If all of the
stock of an S corporation (S1) is trans-
ferred to another S corporation (S2) and a
QSSS election for S1 is made effective as
of the day of the transfer, S1’s S election
terminates at the same time as the deemed
liquidation under §1.1361–4(a)(2). Ac-
cordingly, S1 is not treated as a C corpora-
tion for any period solely because of the
transfer of S1 stock to S2, an ineligible S
corporation shareholder. See, however,
§1.338–1(e)(3) if an election under section
338 (without an election under section
338(h)(10)) is made. This paragraph (b)(4)
is effective on the date final regulations are
published in the Federal Register.
(c) * * *
(5) * * *
(ii) * * *
(C) * * * See §1.1362–8 for special
rules regarding the treatment of dividends
received by an S corporation from a C
corporation in which the S corporation
holds stock meeting the requirements of
section 1504(a)(2).
*****
Par. 7. Add §1.1362–8 to read as fol-
lows:
§1.1362–8 Dividends received from
affiliated subsidiaries.
(a) In general. For purposes of section
1362(d)(3), if an S corporation holds
stock in a C corporation meeting the re-
quirements of section 1504(a)(2), the
term “passive investment income” does
not include dividends from the C corpora-
tion to the extent those dividends are at-
tributable to the earnings and profits of
the C corporation derived from the active
conduct of a trade or business (“active
earnings and profits”). For purposes of
applying section 1362(d)(3), earnings and
profits of a C corporation are active earn-
ings and profits to the extent that the earn-
ings and profits are derived from activi-
ties that would not produce passive
investment income (as defined in section
1362(d)(3)) if the C corporation were an S
corporation.
(b) Determination of active or passive
earnings and profits—(1) In general. An
S corporation may use any reasonable
method to determine the amount of divi-
dends that are not treated as passive in-
May 18, 1998221998–20 I.R.B.

vestment income under section 1362(d)-
(3)(E). Paragraph (b)(5) of this section
describes a method of determining the
amount of dividends that are not treated
as passive investment income under sec-
tion 1362(d)(3)(E) that is deemed to be
reasonable under all circumstances.
(2) Lower tier subsidiaries.If a C cor-
poration subsidiary (upper tier corpora-
tion) holds stock in another C corporation
(lower tier subsidiary) meeting the re-
quirements of section 1504(a)(2), the
upper tier corporation’s gross receipts at-
tributable to a dividend from the lower
tier subsidiary are considered to be de-
rived from the active conduct of a trade or
business to the extent the lower tier sub-
sidiary’s earnings and profits are attribut-
able to the active conduct of a trade or
business by the subsidiary under para-
graph (b)(1), (b)(3), (b)(4), or (b)(5) of
this section. For purposes of this section,
distributions by the lower tier subsidiary
will be considered attributable to active
earnings and profits according to the rule
in paragraph (c) of this section. This
paragraph (b)(2) does not apply to any
member of a consolidated group (as de-
fined in §1.1502–1(h)).
(3) De minimis exception. If less than
10 percent of a C corporation’s earnings
and profits for a taxable year are derived
from activities that would produce pas-
sive investment income if the C corpora-
tion were an S corporation, all earnings
and profits produced by the corporation
during that taxable year are considered
active earnings and profits.
(4) Special rules for earnings and
profits accumulated by a C corporation
prior to 80 percent acquisition. A C cor-
poration may treat all earnings and profits
accumulated by the corporation in all tax-
able years ending before the S corporation
held stock meeting the requirements of
section 1504(a)(2) as active earnings and
profits in the same proportion as the C
corporation’s active earnings and profits
for the three taxable years ending prior to
the time when the S corporation acquired
80 percent of the C corporation bears to
the C corporation’s total earnings and
profits for those three taxable years.
(5) Gross receipts safe harbor. A cor-
poration may treat its earnings and profits
for a year as active earnings and profits in
the same proportion as the corporation’s
gross receipts (as defined in §1.1362–
2(c)(4)) derived from activities that would
not produce passive investment income
(if the C corporation were an S corpora-
tion), including those that do not produce
passive investment income under para-
graphs (b)(2) through (b)(4) of this sec-
tion, bear to the corporation’s total gross
receipts for the year in which the earnings
and profits are produced.
(c) Allocating distributions to active or
passive earnings and profits—(1) Distri-
butions from current earnings and profits.
Dividends distributed by a C corporation
from current earnings and profits are at-
tributable to active earnings and profits in
the same proportion as current active
earnings and profits bear to total current
earnings and profits of the C corporation.
(2) Distributions from accumulated
earnings and profits.Dividends distrib-
uted by a C corporation out of accumu-
lated earnings and profits for a taxable
year are attributable to active earnings
and profits in the same proportion as ac-
cumulated active earnings and profits for
that taxable year bear to total accumulated
earnings and profits for that taxable year
immediately prior to the distribution.
(3) Adjustments to active earnings and
profits.For purposes of applying para-
graph (c)(1) or (c)(2) of this section to a
distribution, the active earnings and prof-
its of a corporation shall be reduced by the
amount of any prior distribution properly
treated as attributable to active earnings
and profits from the same taxable year.
(4) Special rules for consolidated
groups.For purposes of applying section
1362(d)(3) and this section to dividends
received by an S corporation from the
common parent of a consolidated group
(as defined in §1.1502–1(h)), the follow-
ing rules apply—
(i) The current earnings and profits, ac-
cumulated earnings and profits, and ac-
tive earnings and profits of the common
parent shall be determined under the prin-
ciples of §1.1502–33 (relating to earnings
and profits of any member of a consoli-
dated group owning stock of another
member); and
(ii) The gross receipts of the common
parent shall be the sum of the gross re-
ceipts of each member of the consolidated
group (including the common parent), ad-
justed to eliminate gross receipts from in-
tercompany transactions (as defined in
§1.1502-13(b)(1)(i)).
(d) Examples. The following exam-
ples illustrate the principles of this sec-
tion:
Example 1. (i) X, an S corporation, owns 85 per-
cent of the one class of stock of Y. On December 31,
1998, Ydeclares a dividend of $100 ($85 to X),
which is equal to Y’s current earnings and profits. In
1998, Yhas total gross receipts of $1,000, $200 of
which would be passive investment income if Y
were an S corporation.
(ii) One-fifth ($200/$1,000) of Y’s gross receipts
for 1998 is attributable to activities that would pro-
duce passive investment income. Accordingly, one-
fifth of the $100 of earnings and profits is passive,
and $17 (1/5 of $85) of the dividend from Yto Xis
passive investment income.
Example 2. (i) The facts are the same as in Ex-
ample 1,except that Yowns 90 percent of the stock
of Z. Yand Zdo not join in the filing of a consoli-
dated return. In 1998, Zhas gross receipts of
$15,000, $12,000 of which are derived from activi-
ties that would produce passive investment income.
On December 31, 1998, Zdeclares a dividend of
$1,000 ($900 to Y) from current earnings and profits.
(ii) Four-fifths ($12,000/15,000) of the dividend
from Zto Yare attributable to passive earnings and
profits. Accordingly, $720 (4/5 of $900) of the divi-
dend from Zto Yis considered gross receipts from
an activity that would produce passive investment
income. The $900 dividend to Ygives Ya total of
$1,900 ($1,000 + $900) in gross receipts, $920
($200 + $720) of which is attributable to passive in-
vestment income-producing activities. Under these
facts, $41 ($920/1,900 of $85) of Y’s distribution to
Xis passive investment income to X.
(e) Effective date.This section applies
to dividends received in taxable years be-
ginning on or after the date that final reg-
ulations are published in the Federal
Register.
§1.1368–0 [Amended]
Par. 8. Amend §1.1368–0 in the entry
for §1.1368–2(d)(2) by revising “Reorga-
nizations” to read “Liquidations and reor-
ganizations”.
§1.1368–2 [Amended]
Par. 9. Amend §1.1368–2 in paragraph
(d)(2) by revising “Reorganizations” to
read “Liquidations and reorganizations”
in the heading and by revising “section
381(a)(2)” to read “section 381(a)” in the
first sentence.
Par. 10. Amend §1.1374–8 by adding
two sentences to the end of paragraph (b)
to read as follows:
§1.1374–8 Section 1374(d)(8)
transactions.
*****
1998–20 I.R.B.23May 18, 1998

(b) Separate determination of tax. * *
* If a C corporation elects to be treated
as an S corporation, and also makes a
QSSS election under section 1361(b)(3)
(effective on the same date as the S elec-
tion) with respect to a subsidiary, the as-
sets held by the QSSS at the time of the
QSSS election will be treated as assets
held by the parent when it became an S
corporation. The preceding sentence ap-
plies to QSSS elections made after the
date final regulations are published in
the Federal Register.
*****
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
April 21, 1998, 8:45 a.m., and published in the
issue of the Federal Register for April 22, 1998, 63
F.R. 19864)
Change From Dollar
Approximate Separate
Transaction Method of
Accounting (DASTM) to the
Profit and Loss Method of
Accounting/Change From the
Profit and Loss Method to
DASTM; Correction to T.D.
8765
Announcement 98–39
SUMMARY: This announcement con-
tains corrections to final regulations
(T.D. 8765 [1998–16 I.R.B. 11] 63 F.R.
10772), relating to adjustments required
when a qualified business unit (QBU)
that used the profit and loss method of
accounting (P&L) in a post-1986 year
begins to use the dollar approximate sep-
arate transaction method of accounting
(DASTM) and adjustments required
when a QBU that used DASTM begins
using P&L.
DATES: This correction is effective
April 6, 1998.
FOR FURTHER INFORMATION CON-
TACT: Howard Wiener of the Office of
Chief Counsel (International), (202)
622-3870 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final regulations that are the sub-
ject of these corrections are under sec-
tion 985 of the Internal Revenue Code.
Need for Correction
As published, the final regulations
(T.D. 8765) contain errors which may
prove to be misleading and are in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8765), which was
the subject of FR Doc. 98-5470, is cor-
rected as follows:
§1.985–1 [Corrected]
1. On page 10774, column 2,
§1.985–1 (b)(2)(ii)(C) is corrected as
follows:
1. The paragraph heading for para-
graph (b)(2)(ii)(C)(1) is added.
2. A new paragraph (b)(2)(ii)(C)(2) is
added.
The corrections read as follows:
§1.985–1 Functional currency.
*****
(b) * * *
(2) * * *
(ii) * * *
(C) * * * (1) In general.* * *
(2) Effective date. This paragraph
(b)(2)(ii)(C) applies to taxable years be-
ginning after April 6, 1998. However, a
taxpayer may choose to apply this para-
graph to all open years after December
31, 1986, provided each person, and
each QBU branch of a person, that is re-
lated (within the meaning of
§1.985–2(d)(3)) also applies to this para-
graph (b)(2)(ii)(C).
§1.985–7 [Corrected]
2. On page 10775, column 2,
§1.985–7 (b)(3), in the last three lines,
the language “had translated its assets
and liabilities under §1.985–3 during the
look-back period.” is corrected to read
“had translated its assets and liabilities
acquired and incurred during the look-
back period under §1.985–3.”.
4. On page 10776, column 2,
§1.985–7 (c)(5), line 17, the language
“of change.) For purposes of section
960,” is corrected to read “of change).
For purposes of section 960,”.
5. On page 10776, column 2,
§1.985–7 (c)(5), the last line, the lan-
guage “section.)” is corrected to read
“section).”.
6. On page 10776, column 3,
§1.985–7 (d)(5), the last two lines, the
language “assets and liabilities under
§1.985–3 during the look- back period.”
is corrected to read “assets and liabilities
acquired and incurred during the look-
back period under §1.985–3.”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
Allocation and Sourcing of
Income and Deductions Among
Taxpayers Engaged in a Global
Dealing Operation; Correction
Announcement 98–40
SUMMARY: This announcement con-
tains corrections, including a change to
the date of the public hearing, to the no-
tice of proposed rulemaking (REG–
208299–90 [1998–16 I.R.B. 26] 63 F.R.
11177). The notice of proposed rule-
making relates to the allocation among
controlled taxpayers and sourcing of in-
come, deductions, gains and losses from
a global dealing operation; rules apply-
ing these allocation and sourcing rules to
foreign currency transactions and to for-
eign corporations engaged in a U.S. trade
or business; and rules concerning the
mark-to-market treatment resulting from
hedging activities of a global dealing op-
eration.
DATES: The public hearing originally
scheduled for July 9, 1998 has been
rescheduled for July 14, 1998.
ADDRESS: The public hearing will be
held in room 2615, Internal Revenue
Building, 1111 Constitution Avenue,
NW, Washington, DC 20224.
FOR FURTHER INFORMATION CON-
TACT: Ginny Chung, (202) 622-3870
(not a toll-free number).
May 18, 1998241998–20 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemaking that
is subject to these corrections is under
sections 482 and 864 of the Internal Rev-
enue Code.
Need for Correction
As published, the notice of proposed
rulemaking (REG–208299–90) contain
errors that may prove to be misleading
and are in need of clarification.
Correction of Publication
Accordingly, the publication of the no-
tice of proposed rulemaking (REG–
208299–90) which is the subject of F.R.
Doc. 98–5674 is corrected as follows:
1. On page 11182, column 2, in the
preamble under the heading “K. Source of
Global Dealing Income”, in the second
paragraph, line 5, the language “§1.863–3
which sources income from a” is cor-
rected to read “§1.863–3(h) which
sources income from a”.
2. On page 11185, column 2, in the
preamble under the heading “Comments
and Public Hearing”, in the second para-
graph, line 2, the language “for July 9,
1998, at 10 a.m. in room 2615,” is cor-
rected to read “for July 14, 1998, at 10
a.m. in room 2615,”.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
Foundations Status of Certain
Organizations
Announcement 98–41
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:
Paddock Bath and Tennis Club Inc.,
Florissant, MO
Painted Desert Demonstration Projects
Inc., Flagstaff, AZ
Palo Pinto Humane Society Inc., Mineral
Wells, TX
Panhandle Crimestoppers Inc., Guymon,
OK
Panther Baseball Club Inc., Arlington,
TX
Panther Soccer Booster Club Inc., Miami,
FL
Paola Free Library Foundation, Paola, KS
Paramedic Relief Network, Maryland
Hts, MO
Pard Athletic Club Inc., Marrero, LA
Parent Relative Organization for
Oakwood Facilities Fund Inc.,
Covington, KY
Parent Support Network, Lansing, MI
Parenting Place, Southfield, MI
Parents Against Community Crime
Organization Pacco Inc., Houston, TX
Parents and Kids Together Inc., Potomac,
MD
Parents Empowered To Save Teens Inc.,
Mt. Pleasant, SC
Parents Re-Establishing Independent
Development and Encouragement
Pride, Phoenix, AZ
Parents Reaching Out, St. Charles, MO
Parents Who Care Inc., Tipp City, OH
Park Hill Literacy Inc., Denver, CO
Park Place Group Inc., Pinellas Park, FL
Parke-Vermillion Community Education
& Employment Corporation, Clinton,
IN
Parkway Pride Inc., Keslers Cross Lanes,
WV
Partners in Education Inc., Poneto, IN
Partners in Education Inc., Roanoke, AL
Partners With Youth Foundation,
Springfield, MO
Partnership Against Racism, Chicago, IL
Partnership for Families Inc., Greenville,
SC
Pat Rush Ministries Inc., Titusville, FL
Pathfinders of Indiana Inc., Goshen, IN
Pathway Ministries Inc., Louisville, KY
Pathway of Light, Columbus, OH
Patidar Cultural Association of USA Inc.,
Stanhope, NJ
Patrick M. Gagliardi Foundation, Sault
Ste Marie, MI
Paul Gage Ministries, Bedford, TX
Paul S. Morton Scholarship Foundation
Inc., New Orleans, LA
Paulding County Genealogical Society,
Paulding, OH
Payson Choral Society, Payson, AZ
Peace and Joy Ministries Inc., Haysville,
KS
Peaceful Dove Enterprises Incorporated,
Palm Bay, FL
Peaceful Valley Ranch, Westminster,
CO
Pediatric Assistance International Inc.,
Ann Arbor, MI
Pee Dee Electric Trust, Darlington, SC
Pegasus Incorporated of South Carolina,
Blacksburg, SC
Pennsylvania Elk Foundation, Reading,
PA
Pennsylvania Quality Leadership
Foundation Inc., Harrisburg, PA
Pennsylvania Religious Coalition for
Abortion Rights, Philadelphia, PA
Penumbra U S A Inc., Shaker Hts, OH
People Against Cigarette Smoke PACS
Inc., Destreham, LA
People First of Illinois, Wayne, IL
People Help People Face to Face Inc.,
Evanston, IL
People Helping People-Disaster Relief
Inc., Teaneck, NJ
People Organized for Excellence in
Education, Beaumont, TX
Peoples Community Hope for Homes
Inc., Westland, MI
Performing Artists Network Inc.,
Linwood, NJ
Performing Arts League Inc., Cleveland,
OH
Petoskey Youth Soccer Association,
Petoskey, MI
Petra Ministries Inc., Glendale, AZ
Pets for the Elderly Foundation,
Cleveland, OH
PFLAG Suburban Chicago—Parents
Families and Friends of Lesbians and
Gays Inc., Downers Grove, IL
Phase I Colorguard, St. Louis, MO
Phenix City Education Foundation Inc.,
Phenix City, AL
PHFD Womens Association, Prospect
Heights, IL
Philadelphia Korean War Veterans
Memorial Inc., Philadelphia, PA
Philadelphia Student Athletes Inc.,
Parkesburg, PA
1998–20 I.R.B.25May 18, 1998

Philip Simmons Foundation Inc.,
Charleston, SC
Philippine Development Forum,
Washington, DC
Phineas Newborn Jr. Fam Foundation,
Memphis, TN
PHS Community Development
Corporation, Detroit, MI
Pictorial Research LTD Inc., West Des
Moines, IA
PIN—People in Need, Gowen, MI
Pinellas Pioneer Settlement Inc., St.
Petersburg, FL
Pioneer Artists Inc., Dodge City, KS
Pioneer Historical Museum &
Interpretive Center, Ft. Laramie, WY
Pipestone Performing Arts Center Inc.,
Pipestone, MN
Pitre Vision Home, Dallas, TX
Pitt County Helping Hands Inc.,
Greenville, NC
Pitt-Greenville Opportunities
Industrialization Center Inc.,
Greenville, NC
Pittsburgh Ensemble Theatre Company,
Pittsburgh, PA
Pittsburgh Young Professionals Inc.,
Pittsburgh, PA
Plaisance Mortagage Corporation,
Opelousas, LA
Plano Housing Corporation, Plano, TX
Plants for Clean Air Council Inc.,
Mitchellville, MD
Plateau Youth Center, Olathe, CO
Pleasant Hill Child Enrichment Center,
Pleasant Hill, TN
Pleasant Prairie Professional Police
Association, Pleasant, WI
Poinciana Youth Baseball, Poinciana, FL
Poindexter Ministries Inc., Washington,
DC
Point Pleasant Community Association
Inc., Point Pleasant, PA
Police Athletic League of Port Orange
Inc., Port Orange, FL
Police Benevolent Fund Inc., Atlanta, GA
Porter County Champs Inc., Valparaiso,
IN
Portsmouth Inner City Development
Corporation Housing Association II,
Portsmouth, OH
Positive Approach Inc., Victoria, TX
Positive Changes Incorporated,
Lewisburg, PA
Positive Direction for Youth Inc.,
Greensboro, NC
Positive People Inc., Chicago, IL
Positive Support Institute, Trenton, MI
Possibilities Productions Unlimited,
Denver, CO
Postal Employees-John Miller
Scholarship Fund, Roseville, MN
Pottawatomie Indian Museum Polyak
Foundation Inc., Beverly Shores, IN
Power Connection Ministries Inc.,
Kingwood, TX
Power of Praise Ministries Inc.,
Cleveland, SC
Power Partenting Association Inc.,
Ellicott City, MD
Practical Christian Services Inc.,
Concord, NC
Prairie Dance Theatre, Clinton, IL
Praying Tobacco Charitable
Organization, Wakpala, SD
Preble County Dare Inc., New Paris, OH
Precinct 2 Mounted Patrol of Harris
County, Houston, TX
Pregnancy Care Center of Fairfield
County Inc., Lancaster, OH
Premiere Musical Theater Warehouse,
Denver, CO
Prep Alumni II, Waukegan, IL
Prespress Publishing of Michigan,
Kalamazoo, MI
Presby Tips Foundation, Cairo, IL
Presbyterian Coalition for Loving Justice,
Washington, DC
Preserve the Schuyler Colfax House,
Wayne, NJ
Press Club of Houston, Houston, TX
Press Club of Houston Educational
Foundation Inc., Houston, TX
Preventive Aging Center Inc., South
Amboy, NJ
Pride of Tennessee Education
Foundation, Nashville, TN
Primary Resource Developers Group
Inc., Norcross, GA
Prince Frederick Foundation, Raleigh,
NC
Prince Hall Foundation Inc., North
Brunswick, NJ
Prisoners Against Crime, Lakewood,
CO
Proclaim Ministries Inc., Rockford, IL
Professional Training Institute Inc., Silver
Spring, MD
Professionals for Houstons Homeless,
Spring, TX
Professions of Edgewood, San Antonio,
TX
Program of Emmanuels Hands,
Allentown, PA
Progress for Youth Inc., Mountain Home,
AR
Progressive Foundation for Social
Responsibility, Eden Prairie, MN
Project DARE Drug Abuse Resistance
Education for Maury Co., Columbia,
TN
Project Help Inc., Sweetwater, TN
Project Independence Incorporated of
Sedgwick County, Wichita, KS
Project Intercept, Denver, CO
Project Jericho, New Orleans, LA
Project Kids Inc., Allen, TX
Project Match Incorporated, Smyrna, GA
Project Me Inc., Tucson, AZ
Project New Smile, Baltimore, MD
Project Playground—Central Park,
Beaumont, TX
Project Reach Out Incorporated Pro Inc.,
Indianapolis, IN
Project-Rescue Band, Sheffield Lake, OH
Project Safe House Inc., Atlanta, GA
Project Second Chance Inc., Cleveland,
OH
Project Self-Help, Beaumont, TX
Project Victory Inc., Pompano Beach,
FL
Promise Land Community Shelter,
Detroit, MI
Promises People Reaching Out
Ministering in Spiritual Emotional
Support Inc., Longmont, CO
Promoting African American Success in
Schools, Fort Worth, TX
Promoting Animal Welfare Society Inc.,
Muskogee, OK
Prophetic Insights Inc., Fletcher, NC
Prospect Plains Housing Corporation,
Monmouth Junction, NJ
Providers of Encouragement and
Assistance To Restructure Your Life,
Houston, TX
Providing for the Needy Inc., Louisville,
KY
Psychiatrists for Better Psychiatry Inc.,
Louisville, KY
Public Service Telecommunications
Corporation International, Arlington,
VA
Puebloans Against Violent Environment,
Pueblo, CO
Puerto Rico Society of Cleveland,
Lakewood, OH
Pulliam Ministries Inc., Tulsa, OK
Purr-Fect Haven Inc., San Antonio, TX
Pushkin Goncharov Historical
Foundation, Greenwood Village, CO
Quad Cities Womens Encouragement
Board Inc., Bettendorf, IA
Quality Nutrition for Kids, Houston, TX
May 18, 1998261998–20 I.R.B.

Queen Annes County Watermans
Festivals, Inc., Queenstown, MD
Quilt Guild of Greater Victoria Inc.,
Victoria, TX
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.
1998–20 I.R.B.27May 18, 1998

May 18, 1998281998–20 I.R.B.
NameAddressDesignationDate of Suspension
Soulides, James C. Berwyn, ILCPAJanuary 1, 1998 to June 30, 2000
Bujan, FrankOrland Park, ILCPAJanuary 1, 1998 to June 30, 2000
Field, Edward L.Topeka, KSCPAJanuary 27, 1998 to April 26, 1999
Cito, Paul J.West Orange, NJCPAFebruary 21, 1998 to May 20, 1999
Sproul, JerryIdaho Falls, IDCPAFebruary 25, 1998 to October 24, 1998
Hunt, RussellPauls Valley, OKCPAMarch 1, 1998 to June 30, 1998
Oertli, WilliamRochester, MNCPAMach 4, 1998 to March 3, 2000
Maynard, RichardReno, NVCPAMarch 10, 1998 to March 9, 2002
McDonald, BillReno, NVAttorneyMarch 10, 1998 to March 9, 2002
Komendant, HowardPassaic, NJCPAMarch 10, 1998 to September 9, 1998
Kwiatek, Fabian A.Silver Spring, MDCPAMarch 16, 1998 to March 15, 2001
Brown, PatriciaDeKalb, ILCPAMarch 16, 1998 to September 15, 1999
Marshall, RobertWoodland Hills, CAAttorneyMarch 18, 1998 to November 17, 2000
Baloun, Donald J.Palatine, ILCPAMarch 25, 1998 to November 24, 1998
Goldman, Harold J.Summit, NJCPAMarch 27 , 1998 to September 26, 1998
Garner, Darrow C.Austin, TXCPAApril 1, 1998 to March 30, 2000
Klein, Charles U.Dunedin, FLCPAApril 1, 1998 to September 30, 1999
Morgan, Robert I.Brownsville, VTAttorneyApril 2, 1998 to April 1, 2000
Teel, Jeffrey J.Hollis, NHCPAApril 2, 1998 to April 1, 2001
Hancock, Randall M.Gardendale, ALCPAIndefinite from April 13, 1998
Allison Jr., Dale A.Blairsville, GAAttorneyApril 15, 1998 to July 14, 2001
Gogel, William A.North Hills, NYAttorneyApril 21, 1998 to April 20, 2002
Bose, GautemOak Brook, ILCPAMay 1, 1998 to April 30, 2001
Woods, W. RexBelleville, KSCPAMay 1, 1998 to January 31, 1999
Monahan, JohnSeattle, WAAttorneyMay 1, 1998 to April 30, 2001
Swartz, Lewis A.Syosset, NYCPAMay 1, 1998 to April 30, 2002
Announcement of the Consent Voluntary Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent, or enrolled ac-
tuary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certi-
fied public accountant, enrolled agent, or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by, or sharing fees with any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled
actuaries to identify practitioners under
consent suspension from practice before the
Internal Revenue Service, the Director
of Practice will announce in the Internal
Revenue Bulletin the names and ad-
dresses of practitioners who have been
suspended from such practice, their desig-
nation as attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary, and date or period of suspension. This
announcement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to ap-
pear in the weekly Bulletins for five suc-
cessive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or en-
rolled actuary so suspended and will be
consolidated and published in the Cumu-
lative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:

1998–20 I.R.B.29May 18, 1998
NameAddressDesignationDate of Suspension
Eckert, Bruce G.Cleveland, OHCPAMay 2, 1998 to May 1, 1999
Rozanski, Lawrence J.Pittsburgh, PACPAJune 1, 1998 to May 30, 2000
Mangum, Carl E.Morris Plains, NJCPAJuly 1, 1998 to December 31, 1999
Reeser, Richard M. Thornton, COCPAJuly 1, 1998 to September 30, 1999
Bailey, Thomas O.Dallas, TXCPAJuly 1, 1998 to June 30, 2001
Johnson, Kenneth E.Forest Lake, MNCPAJuly 1, 1998 to November 30, 1999
Deren, JosephLackawanna, NYAttorneyJuly 1, 1998 to June 30, 2001

May 18, 1998301998–20 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

1998–20 I.R.B.31May 18, 1998
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.
Numerical Finding List
1
Bulletins 1998–1 through 1998–19
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
98–22, 1998–12 I.R.B. 33
98–23, 1998–12 I.R.B. 34
98–24, 1998–12 I.R.B. 35
98–25, 1998–13 I.R.B.43
98–26, 1998–14 I.R.B. 28
98–27, 1998–15 I.R.B. 30
98–28, 1998–15 I.R.B. 30
98–29, 1998–16 I.R.B. 48
98–30, 1998–17 I.R.B. 38
98–32, 1998–17 I.R.B. 39
98–33, 1998–17 I.R.B. 39
98–34, 1998–17 I.R.B. 39
98–35, 1998–17 I.R.B. 40
98–36, 1998–18 I.R.B. 18
98–37, 1998–19 I.R.B. 24
98–38, 1998–19 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
98–16, 1998–15 I.R.B. 12
98–17, 1998–11 I.R.B. 6
98–18, 1998–12 I.R.B. 11
98–19, 1998–13 I.R.B.24
98–20, 1998–13 I.R.B.25
98–21, 1998–15 I.R.B. 14
98–22, 1998–17 I.R.B. 5
98–23, 1998–18 I.R.B. 9
98–24, 1998–17 I.R.B. 5
98–25, 1998–18 I.R.B. 11
98–26, 1998–18 I.R.B. 14
Notices—Continued
98–27, 1998–18 I.R.B. 14
98–28, 1998–19 I.R.B.7
Proposed Regulations:
PS–158–86, 1998–11 I.R.B. 13
REG–100841–97, 1998–8 I.R.B. 30
REG–102144–98, 1998–15 I.R.B.25
REG–102894–97, 1998–3 I.R.B. 59
REG–104062–97, 1998–10 I.R.B. 34
REG–104537–97, 1998–16 I.R.B. 21
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–110965–97, 1998–13 I.R.B. 42
REG–115795–97, 1998–8 I.R.B.33
REG–119449–97, 1998–10 I.R.B. 35
REG–120200–97, 1998–12 I.R.B. 32
REG–120882–97, 1998–14 I.R.B. 25
REG–121755–97, 1998–9 I.R.B. 13
REG–208299–90, 1998–16 I.R.B. 26
REG–209276–87, 1998–11 I.R.B. 18
REG–209322–82, 1998–15 I.R.B. 26
REG–209373–81, 1998–14 I.R.B. 26
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–209682–94, 1998–17 I.R.B. 20
REG–209807–95, 1998–8 I.R.B. 40
REG–243025–96, 1998–18 I.R.B. 18
REG–251502–96, 1998–9 I.R.B. 14
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
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
98–22, 1998–12 I.R.B. 11
98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
98–25, 1998–11 I.R.B. 7
98–26, 1998–13 I.R.B.26
98–27, 1998–15 I.R.B.15
98–28, 1998–15 I.R.B.14
98–29, 1998–15 I.R.B. 22
98–30, 1998–17 I.R.B. 6
98–32, 1998–17 I.R.B. 11
98–33, 1998–19 I.R.B. 7
98–34, 1998–18 I.R.B. 15
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
98–15, 1998–12 I.R.B. 6
98–16, 1998–13 I.R.B. 18
98–17, 1998–13 I.R.B. 21
98–18, 1998–14 I.R.B. 22
98–19, 1998–15 I.R.B. 5
98–20, 1998–15 I.R.B. 8
98–21, 1998–18 I.R.B. 7
98–22, 1998–19 I.R.B.5
98–23, 1998–18 I.R.B. 5
98–24, 1998–19 I.R.B. 6
98–25, 1998–19 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
8756, 1998–12 I.R.B.4
8757, 1998–13 I.R.B.4
8758, 1998–13 I.R.B. 15
8759, 1998–13 I.R.B. 19
8760, 1998–14 I.R.B. 4
8761, 1998–14 I.R.B. 13
8762, 1998–14 I.R.B. 15
8763, 1998–15 I.R.B. 5
8764, 1998–15 I.R.B. 9
8765, 1998–16 I.R.B. 11
8766, 1998–16 I.R.B. 17
8767, 1998–16 I.R.B. 4

May 18, 1998321998–20 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–1 through 1998–19
Revenue Procedures:
91–59
Updated and superseded by
98–25, 1998–11 I.R.B. 7
94–16
Modified and superseded by
98–22, 1998–12 I.R.B. 11
93–62
Modified and superseded by
98–22, 1998–12 I.R.B. 11
95–35
95–35A
Superseded by
98–19, 1998–7 I.R.B. 30
96–29
Modified and superseded by
98–22, 1998–12 I.R.B. 11
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
97–24
97–24A
Superseded by
98–33, 1998–19 I.R.B. 7
97–26
Obsoleted by
98–28, 1998–15 I.R.B. 14
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:
68–352
Obsoleted by
98–24, 1998–19 I.R.B. 6
73–198
Modified by
98–24, 1998–19 I.R.B. 6
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.

1998–20 I.R.B.33May 18, 1998
Notes

Notes
May 18, 1998341998–20 I.R.B.

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