Internal Revenue Bulletin No. 1998–15
April 13, 1998
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.
INCOME TAX EXEMPT ORGANIZATIONS
Rev. Rul. 98–19, page 5. Announcement 98–28, page 30.
Relocation payments; Housing and Community Devel- A list is given of organizations now classified as private foun-
opment Act. A relocation payment, authorized by section dations.
105(a)(11) of the Housing and Community Development Act
and funded under the 1997 Emergency Supplemental Appro-
priations Act for Recovery From Natural Disasters, made by ADMINISTRATIVE
a local jurisdiction to an individual moving from a flood-dam-
aged residence to another residence, is not includible in the REG–209322–82, page 26.
Proposed regulations under sections 6031 and 6063 of the
individual’s gross income.
Code revise the partnership filing requirement to reflect
Rev. Rul. 98–20, page 8. changes to the law made by the Taxpayer Relief Act of 1997
LIFO; price indexes; department stores. The February (TRA). LR–198–82, 1986–1 C.B. 778 is withdrawn. A public
1998 Bureau of Labor Statistics price indexes are accepted hearing will be held on May 19, 1998.
for use by department stores employing the retail inventory Rev. Proc. 98–27, page 15.
and last-in, first-out inventory methods for valuing inventories This procedure provides guidance to foreign financial insti-
for tax years ended on, or with reference to, February 28, tutions that desire to enter into a withholding agreement
1998. with the Service in order to be treated as qualified interme-
diaries under new section 1.1441–1(e)(5) of the Income Tax
T.D. 8763, page 5.
Regulations. It describes the application procedures for be-
Final regulations under section 166 of the Code deem a
coming a qualified intermediary and the terms that the Ser-
charge-off and allow a deduction for a partially worthless
vice will ordinarily require in a withholding agreement.
debt when the terms of a debt instrument have been modi-
fied. Rev. Proc. 98–28, page 14.
Qualified mortgage bonds; mortgage credit certifi-
T.D. 8764, page 9. cates; national median gross income. Guidance is pro-
REG–102144–98, page 25. vided concerning the use of the national and area median
Temporary and proposed regulations under sections 925 gross income figures by issuers of qualified mortgage
and 927 of the Code provide guidance to taxpayers who bonds and mortgage credit certificates in determining the
have made an election to be treated as a foreign sales cor- housing cost/income ratio described in section 143(f)(5) of
poration (FSC). A public hearing on the proposed regula- the Code. Rev. Proc. 97–26 is obsolete except as provided
tions will be held on June 24, 1998. in section 5.02 of this revenue procedure.
Continued on page 4
Finding Lists begin on page 35.
Department of the Treasury
Internal Revenue Service
Mission of the Service
The purpose of the Internal Revenue Service is to collect ucts and services; and perform in a manner warranting
the proper amount of tax revenue at the least cost; serve the highest degree of public confidence in our integrity, effi-
the public by continually improving the quality of our prod- ciency, and fairness.
Statement of Principles
of Internal Revenue
The function of the Internal Revenue Service is to adminis- The Service also has the responsibility of applying and
ter the Internal Revenue Code. Tax policy for raising revenue administering the law in a reasonable, practical manner.
is determined by Congress. Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
With this in mind, it is the duty of the Service to carry out that At the same time, the examining officer should never hesi-
policy by correctly applying the laws enacted by Congress; tate to raise a meritorious issue. It is also important that
to determine the reasonable meaning of various Code provi- care be exercised not to raise an issue or to ask a court to
sions in light of the Congressional purpose in enacting them; adopt a position inconsistent with an established Service
and to perform this work in a fair and impartial manner, with position.
neither a government nor a taxpayer point of view.
Administration should be both reasonable and vigorous. It
At the heart of administration is interpretation of the Code. It should be conducted with as little delay as possible and
is the responsibility of each person in the Service, charged with great courtesy and considerateness. It should never
with the duty of interpreting the law, to try to find the true try to overreach, and should be reasonable within the
meaning of the statutory provision and not to adopt a bounds of law and sound administration. It should, howev-
strained construction in the belief that he or she is “protect- er, be vigorous in requiring compliance with law and it
ing the revenue.” The revenue is properly protected only should be relentless in its attack on unreal tax devices and
when we ascertain and apply the true meaning of the statute. fraud.
The Internal Revenue Bulletin is the authoritative instrument dures must be considered, and Service personnel and oth-
of the Commissioner of Internal Revenue for announcing offi- ers concerned are cautioned against reaching the same con-
cial rulings and procedures of the Internal Revenue Service clusions in other cases unless the facts and circumstances
and for publishing Treasury Decisions, Executive Orders, Tax are substantially the same.
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained The Bulletin is divided into four parts as follows:
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 Part I.—1986 Code.
on a single-copy basis. This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
It is the policy of the Service to publish in the Bulletin all sub-
Part II.—Treaties and Tax Legislation.
stantive rulings necessary to promote a uniform application
This part is divided into two subparts as follows: Subpart A,
of the tax laws, including all rulings that supersede, revoke,
Tax Conventions, and Subpart B, Legislation and Related
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 Part III.—Administrative, Procedural, and Miscellaneous.
of internal practices and procedures that affect the rights To the extent practicable, pertinent cross references to
and duties of taxpayers are published. 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
Revenue rulings represent the conclusions of the Service on
are issued by the Department of the Treasury’s Office of the
the application of the law to the pivotal facts stated in the
Assistant Secretary (Enforcement).
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 Part IV.—Items of General Interest.
are deleted to prevent unwarranted invasions of privacy and With the exception of the Notice of Proposed Rulemaking
to comply with statutory requirements. and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
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 The first Bulletin for each month includes a cumulative index
will not be relied on, used, or cited as precedents by Service for the matters published during the preceding months.
personnel in the disposition of other cases. In applying pub- These monthly indexes are cumulated on a semiannual basis
lished rulings and procedures, the effect of subsequent leg- and are published in the first Bulletin of the succeeding semi-
islation, regulations, court decisions, rulings, and proce- annual period, respectively.
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.
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued Notice 98–21, page 14.
Extension of the effective date of the Classification
Rev. Proc. 98–29, page 22. Settlement Program. The Service is extending the Classi-
Inventory shrinkage estimates. Guidance, including a “re-
fication Settlement Program or “CSP” until further notice.
tail safe harbor method,” is provided for a taxpayer that
wants to change to a method of accounting for estimating Announcement 98–27, page 30.
inventory “shrinkage” in computing ending inventory. The Service announces that Forms W–9 and W–9S can be
Notice 98–16, page 12. filed electronically.
This notice announces that the Service will amend the effec-
tive date of the section 1441 withholding regulations to
apply to payments made after December 31, 1999.
April 13, 1998 4 1998–15 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 25.—Interest on Certain ing from the resident’s flood-damaged of Assistant Chief Counsel (Income Tax
Home Mortgages residence to another residence. and Accounting). For further information
According to section 101(c) of the Act, regarding this revenue ruling, contact Mr.
26 CFR 1.25–4T: Qualified mortgage credit the primary objective of Title I “is the de- Iskow on (202) 622-4920 (not a toll-free
certificate program (temporary). velopment of viable urban communities, call).
Guidance is provided for the use of the national by providing decent housing and a suitable
and area median gross income figures by issuers of living environment and expanding eco-
qualified mortgage bonds and mortgage credit cer- nomic opportunities, principally for per- Section 103.—State and Local
tificates in determining the housing cost/income sons of low and moderate income.” 42
ratio described in section 143(f)(5) of the Code. See
U.S.C. § 5301(c). Section 105(a)(11) of
Rev. Proc. 98–28, page 14.
the Act provides, in part, that a community 26 CFR 1.103–1: Interest upon obligations of a
development program may provide reloca- State, Territory, etc.
tion payments and assistance for displaced
Section 61.—Gross Income Guidance is provided for the use of the national
individuals and families as authorized and area median gross income figures by issuers of
Defined under the Act. 42 U.S.C. § 5305(a)(11). qualified mortgage bonds and mortgage credit cer-
The Supplemental Act provides fund- tificates in determining the housing cost/income
26 CFR 1.61–1: Gross income.
ratio described in section 143(f)(5) of the Code. See
ing, for displaced individuals and families
Rev. Proc. 98–28, page 14.
Relocation payments; Housing and as authorized under the Act, to certain
Community Development Act. A reloca- communities affected by the flooding in
tion payment, authorized by section the upper Midwest and other Presiden-
105(a)(11) of the Housing and Commu- tially-declared disasters occurring during Section 143.—Mortgage
nity Development Act and funded under the federal government’s fiscal year end- Revenue Bonds: Qualified
the 1997 Emergency Supplemental Ap- ing September 30, 1997. Mortgage Bond and Qualified
propriations Act for Recovery From Nat- Veterans’ Mortgage Bond
ural Disasters, made by a local jurisdic- LAW AND ANALYSIS
26 CFR 6a.103A–2: Qualified mortgage bond.
tion to an individual moving from a Section 61 and the Income Tax Regula-
flood-damaged residence to another resi- tions thereunder provide that, except as Guidance is provided for the use of the national
dence, is not includible in the individual’s otherwise provided by law, gross income and area median gross income figures by issuers of
gross income. qualified mortgage bonds and mortgage credit cer-
means all income from whatever source tificates in determining the housing cost/income
derived. ratio described in section 143(f)(5) of the Code. See
Rev. Rul. 98–19 The Service has held that payments Rev. Proc. 98–28, page 14.
made under legislatively provided social
ISSUE benefit programs for the promotion of gen-
Is a relocation payment authorized pur- eral welfare are not includible in a recipi- Section 166.—Bad Debts
suant to section 105(a)(11) of Title I of ent’s gross income. See Rev. Rul. 76–373,
the Housing and Community Develop- 1976–2 C.B. 16, which holds that reloca- 26 CFR 1.166–3: Partial or total worthlessness.
ment Act of 1974 (Act), 42 U.S.C. tion payments received by individuals pur-
suant to section 105(a)(11) of the Act are in T.D. 8763
§ 5305(a)(11), funded under the 1997
Emergency Supplemental Appropriations the nature of general welfare and are not in- DEPARTMENT OF THE TREASURY
Act for Recovery From Natural Disasters cludible in the gross incomes of recipients.
Internal Revenue Service
(Supplemental Act), Pub. L. No. 105–18, HOLDING 26 CFR Part 1
111 Stat. 158, 198–199, and made by a
local jurisdiction to an individual moving A relocation payment authorized pur- Modifications of Bad Debts and
from a flood-damaged residence to an- suant to section 105(a)(11) of the Act, Dealer Assignments of Notional
other residence, includible in the individ- funded under the Supplemental Act, and Principal Contracts
ual’s gross income under § 61 of the Inter- made by a local jurisdiction to an individ-
nal Revenue Code? ual moving from a flood-damaged resi- AGENCY: Internal Revenue Service
dence to another residence, is in the na- (IRS), Treasury.
FACTS ture of general welfare and is not
includible in the individual’s gross in- ACTION: Final and temporary regula-
Pursuant to the Act and the Supplemen- tions.
tal Act, a resident of a local jurisdiction, come under § 61.
within a Presidentially-declared disaster DRAFTING INFORMATION SUMMARY: This document contains
area in the upper Midwest, received a re- regulations that deem a charge-off and
location payment from the local jurisdic- The principal author of this revenue allow a deduction for a partially worthless
tion to help defray the expenses of mov- ruling is Sheldon A. Iskow of the Office debt when the terms of a debt instrument
1998–15 I.R.B. 5 April 13, 1998
have been modified. The regulations pro- to deduct an amount on account of a par- ted by the terms of the contract, the as-
vide guidance to certain taxpayers that tially worthless debt even though an signment is not treated as a deemed ex-
have claimed a deduction for a partially amount has not been charged off within change by the nonassigning party of the
worthless debt and then modified the the taxable year. original contract for a new contract that
terms of the debt instrument. This docu- Section 166(a)(2) and §1.166–3(a) pro- differs materially either in kind or in ex-
ment also contains regulations relating to vide that a deduction for a partially worth- tent. Thus, an assignment to which the
certain assignments of notional principal less debt is allowed only to the extent the rule applies does not trigger gain or loss
contracts by dealers in those contracts. debt is charged off in the taxable year. to the dealer’s counterparty.
The regulations provide guidance to tax- The charge-off requirement is satisfied Three comments were received on the
payers relating to the consequences of when a portion of the debt is removed §1.166–3T regulations. The first com-
these assignments. from the taxpayer’s books and records. ment requests a deemed charge-off for a
This generally is accomplished by reduc- taxpayer that purchased at a discount debt
DATES: Effective date: These regula- ing the debt’s book basis. Thus, when an for which a previous deduction for partial
tions are effective January 29, 1998. amount has been deducted for partial worthlessness was claimed, and then sig-
Applicability date: These regulations worthlessness, there is generally a reduc- nificantly modified the debt under
apply to significant modifications of debt tion of both the book basis and the tax §1.1001–3 and recognized gain on the
instruments and assignments of interest basis of a debt. modification. Whenever debt is pur-
rate swaps, commodity swaps, and other When a taxpayer is required to recog- chased for less than the stated redemption
notional principal contracts occurring on nize gain under §1.1001–1 because of a price, recognized gain from a significant
or after September 23, 1996. modification of a debt instrument, the tax- modification is attributable to market dis-
payer’s tax basis in the debt is increased count as defined in section 1278(a)(2)(A)
FOR FURTHER INFORMATION CON-
by the amount of gain recognized. How- and not to a previously claimed deduction
TACT: Concerning the modifications of
ever, regulatory and general accounting for partial worthlessness. In addition, the
bad debts, Craig Wojay, (202) 622-3920,
principles generally would not permit a temporary regulations refer to §1.166–
and concerning dealer assignments of no-
corresponding increase in the book basis 3(a)(1) and (2) for guidance relating to
tional principal contracts, Thomas M.
of the debt. Because the prior charge-off prior charge-offs and deductions for par-
Preston, (202) 622-3940 (not toll-free
is not restored (that is, the book basis of tial worthlessness. Extending the tempo-
the debt is not increased), there is no op- rary regulations to cover a discount pur-
SUPPLEMENTARY INFORMATION: portunity for the taxpayer to take a new chase would significantly expand the
charge-off for pre-existing worthlessness. regulations beyond their intended scope
Background The purpose of the temporary regula- and create a situation that would be ex-
tions is to preserve a portion of a tax- tremely difficult to administer. The regu-
On June 25, 1996, temporary regula-
payer’s bad debt deduction with respect to lations do not adopt the request to extend
tions (T.D. 8676 [1996–2 C.B. 9]) relating
a partially worthless debt. The portion the regulations to cover such a purchase.
to modifications of bad debts and dealer
preserved corresponds to the amount the The second comment requests a
assignments of notional principal con-
taxpayer would have been entitled to deemed charge-off for a member of a con-
tracts under sections 166 and 1001 of the
deduct for partial worthlessness with re- solidated group that purchased debt, for
Internal Revenue Code (Code) were pub-
spect to the modified debt if the book which a previous deduction for partial
lished in the Federal Register (61 F.R.
basis of the modified debt were increased worthlessness was claimed, from another
32653). A notice of proposed rulemaking
to the same extent as the tax basis of that member of the group, then significantly
(REG–209743–94, formerly FI–59–94
debt. Thus, if all the conditions of the modified the debt under §1.1001–3 and
[1996–2 C.B. 442]) cross-referencing the
temporary regulations are satisfied, then a recognized gain on the modification.
temporary regulations was published in
modified debt is deemed to have been Whenever debt is purchased for less than
the Federal Register for the same day
charged off in the year in which gain is the stated redemption price, subsequently
(61 F.R. 32728). No public hearing was recognized. The amount of the deemed recognized gain from a significant modi-
requested or held. charge-off, however, is limited to the dif- fication is attributable to market discount
Written comments responding to the ference between the tax basis of the debt as defined in section 1278(a)(2)(A) and
notice were received. After consideration and the greater of the book basis or the not to a previously claimed deduction for
of the comments, the regulations pro- fair market value of the debt. The tempo- partial worthlessness. Extending the tem-
posed by REG–209743–94 are adopted rary regulations also address debt that porary regulations to cover a purchase
by this Treasury decision, and the corre- constitutes transferred basis property from another member of the consolidated
sponding temporary regulations are re- under section 7701(a)(43). group would significantly expand the reg-
moved. In addition, the temporary regulations ulations beyond their intended scope. The
Explanation of Provisions provide a limited rule dealing with a regulations do not adopt the request to ex-
dealer’s assignment of its position in an tend the regulations to cover an intercom-
The preamble to the temporary regula- interest rate swap, commodity swap, or pany transaction.
tions sets forth limited circumstances other notional principal contract to an- The third comment requests expanding
under which a taxpayer will be permitted other dealer. If the assignment is permit- the temporary regulations to include other
April 13, 1998 6 1998–15 I.R.B.
situations in which a taxpayer has tax basis Par. 2. In §1.166–3, paragraph (a)(3) is party on an interest rate or commodity
in a debt but no corresponding book basis. added to read as follows: swap, or other notional principal contract
The first situation involves the accrual of (as defined in §1.446–3(c)(1)), is not
interest income on loans that have been §1.166–3 Partial or total worthlessness. treated as a deemed exchange by the
placed on non-accrual status for book pur- (a) * * * nonassigning party of the original con-
poses. The second situation involves the (3) Significantly modified debt—(i) tract for a modified contract that differs
requirement to accrue interest on original Deemed charge-off. If a significant modi- materially either in kind or in extent if—
issue discount obligations even if the loan fication of a debt instrument (within the (1) The party assigning its rights and
has become uncollectible. This comment meaning of §1.1001–3) during a taxable obligations under the contract and the
deals with situations other than the modifi- year results in the recognition of gain by a party to which the rights and obligations
cation of a debt instrument and is beyond taxpayer under §1.1001–1(a), and if the are assigned are both dealers in notional
the scope of this regulation project. requirements of paragraph (a)(3)(ii) of principal contracts, as defined in
this section are met, there is a deemed §1.446–3(c)(4)(iii); and
Special Analyses (2) The terms of the contract permit the
charge-off of the debt during that taxable
year in the amount specified in paragraph substitution.
It has been determined that this Trea-
(a)(3)(iii) of this section. (b) Effective date. This section applies
sury decision is not a significant regula-
(ii) Requirements for deemed charge- to assignments of interest rate swaps,
tory action as defined in EO 12866.
off. A debt is deemed to have been commodity swaps, and other notional
Therefore, a regulatory assessment is not
charged off only if— principal contracts occurring on or after
required. It also has been determined that
(A) The taxpayer (or, in the case of a September 23, 1996.
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not debt that constitutes transferred basis
apply to these regulations, and because the property within the meaning of section
regulation does not impose a collection of 7701(a)(43), a transferor taxpayer) has Par. 5. Section 1.1001–4T is removed.
information on small entities, the Regula- claimed a deduction for partial worthless-
tory Flexibility Act (5 U.S.C. chapter 6) ness of the debt in any prior taxable year; Michael P. Dolan,
does not apply. Pursuant to section and Deputy Commissioner of
7805(f) of the Internal Revenue Code, the (B) Each prior charge-off and deduc- Internal Revenue.
tion for partial worthlessness satisfied the
notice of proposed rulemaking preceding
requirements of paragraphs (a)(1) and (2) Approved January 14, 1998.
these regulations was submitted to the
of this section.
Small Business Administration for com- Donald C. Lubick,
(iii) Amount of deemed charge-off. The
ment on its impact on small business. Assistant Secretary of
amount of the deemed charge-off, if any,
is the amount by which the tax basis of the Treasury.
the debt exceeds the greater of the fair (Filed by the Office of the Federal Register on
The principal author of the regulations market value of the debt or the amount of January 28, 1998, 8:45 a.m., and published in the
concerning the modifications of bad debts the debt recorded on the taxpayer’s books issue of the Federal Register for January 29, 1998,
is Craig Wojay, Office of the Assistant 63 F.R. 4396)
and records reduced as appropriate for a
Chief Counsel (Financial Institutions and specific allowance for loan losses. The
Products), IRS. The principal author of amount of the deemed charge-off, how-
the regulations concerning the dealer as- ever, may not exceed the amount of rec- Section 471.—General Rule for
signments of notional principal contracts ognized gain described in paragraph Inventories
is Thomas M. Preston, Office of the Assis- (a)(3)(i) of this section.
26 CFR 1.471–2: Valuation of inventories.
tant Chief Counsel (Financial Institutions (iv) Effective date. This paragraph
and Products), IRS. However, other per- (a)(3) applies to significant modifications Guidance, including a “retail safe harbor
sonnel from the IRS and Treasury Depart- of debt instruments occurring on or after method,” is provided for a taxpayer that wants to
September 23, 1996. change to a method of accounting for estimating in-
ment participated in their development.
ventory “shrinkage” in computing ending inventory.
* * * * * See Rev. Proc. 98–29, page 22.
* * * * *
Adoption of Amendments to the §1.166–3T [Removed]
Regulations Section 472.—Last-in, First-out
Par. 3. Section 1.166–3T is removed.
Accordingly, 26 CFR part 1 is amended Par. 4. Section 1.1001–4 is added to Inventories
as follows: read as follows:
26 CFR 1.472–1: Last-in, first-out inventories.
PART 1—INCOME TAXES §1.1001–4 Modifications of certain
notional principal contracts. LIFO; price indexes; department
Paragraph 1. The authority citation for stores. The February 1998 Bureau of
part 1 continues to read in part as follows: (a) Dealer assignments. For purposes Labor Statistics price indexes are ac-
Authority: 26 U.S.C. 7805 * * * of §1.1001–1(a), the substitution of a new cepted for use by department stores em-
1998–15 I.R.B. 7 April 13, 1998
ploying the retail inventory and last-in, tistics. The indexes are accepted by the Indexes are prepared on a national basis
first-out inventory methods for valuing Internal Revenue Service, under § 1.472– and include (a) 23 major groups of de-
inventories for tax years ended on, or with 1(k) of the Income Tax Regulations and partments, (b) three special combinations
reference to, February 28, 1998. Rev. Proc. 86–46, 1986–2 C.B. 739, for of the major groups - soft goods, durable
appropriate application to inventories of goods, and miscellaneous goods, and (c)
Rev. Rul. 98–20 department stores employing the retail in- a store total, which covers all depart-
ventory and last-in, first-out inventory ments, including some not listed sepa-
The following Department Store Inven- methods for tax years ended on, or with rately, except for the following: candy,
tory Price Indexes for February 1998 reference to, February 28, 1998. food, liquor, tobacco, and contract de-
were issued by the Bureau of Labor Sta- The Department Store Inventory Price partments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Groups Feb. Feb. from Feb. 1997
1997 1998 to Feb. 19981
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526.4 535.8 1.8
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650.4 639.3 –1.7
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 640.2 656.9 2.6
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897.7 886.5 –1.2
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617.7 612.6 –0.8
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534.2 565.2 5.8
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296.5 308.1 3.9
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546.9 548.2 0.2
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.6 408.9 –2.1
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615.4 624.0 1.4
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585.1 590.4 0.9
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469.9 499.3 6.3
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1004.9 1001.0 –0.4
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 772.0 802.0 3.9
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912.3 926.5 1.6
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662.0 668.3 1.0
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581.2 583.7 0.4
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817.0 810.3 –0.8
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246.1 242.0 –1.7
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.6 73.6 –6.4
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.1 107.7 –3.1
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133.3 134.0 0.5
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.9 107.7 –0.2
Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598.9 601.1 0.4
Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470.0 462.4 –1.6
Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113.3 111.0 –2.0
Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554.2 552.3 –0.3
1Absence of a minus sign before percentage change in this column signifies price increase.
2Indexes on a January 1986=100 base.
3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-
bacco, and contract departments.
April 13, 1998 8 1998–15 I.R.B.
DRAFTING INFORMATION added by the Deficit Reduction Act of of the FSC’s timely filed U.S. income tax
1984, applicable for taxable years of for- return (including extensions thereof) for
The principal author of this revenue eign sales corporations beginning after the taxable year. No untimely or
ruling is Stan Michaels of the Office of December 31, 1984. Temporary regula- amended returns will be allowed to elect
Assistant Chief Counsel (Income Tax and tions were published in the Federal Reg- to group, to change a grouping basis, or to
Accounting). For further information re- ister (52 F.R. 6468) as a Treasury Deci- change from a grouping basis to a transac-
garding this revenue ruling, contact Mr. sion (T.D. 8126 [1987–1 C.B. 184]) on tion-by-transaction basis for such year.
Michaels on (202) 622-4970 (not a toll- March 3, 1987. Treasury and IRS believe Conforming changes and cross-refer-
free call). that immediate guidance in the form of ences are reflected in §1.925(a)–1T(e)(4)
these temporary regulations is necessary and §1.925(b)–1T(b)(3).
for the reasons stated below. The regulations apply to taxable years
Section 925.—Transfer Pricing beginning after December 31, 1997.
Rules Explanation of Provisions There is also a transition rule providing
These regulations set a deadline for an that the regulations also apply to taxable
26 CFR 1.925(a)–1T: Temporary regulations;
transfer pricing rules for FSCs. election to group transactions for pur- years beginning before January 1, 1998.
poses of the foreign sales corporation For these taxable years, the transition rule
T.D. 8764 (FSC) administrative pricing methods and allows taxpayers to redetermine their
clarify that the foreign source limit for a grouping of transactions with respect to
DEPARTMENT OF THE TREASURY such years provided such redetermination
FSC’s related supplier extends to all
Internal Revenue Service transactions giving rise to foreign trading is made no later than the due date of the
26 CFR Part 1 gross receipts. FSC’s timely filed U.S. income tax return
(including extensions thereof) for its first
Source and Grouping Rules for I. Grouping Election Deadline. taxable year beginning after December
Foreign Sales Corporation 31, 1997.
Transfer Pricing A. Current temporary regulations.
Current §1.925(a)–1T(c)(8) and II. Scope of Related Supplier Foreign
AGENCY: Internal Revenue Service §1.925(b)–1T(b)(3) permit taxpayers an- Source Limit.
(IRS), Treasury. nually to group transactions in applying
the administrative pricing (including the A. Current temporary regulations and
ACTION: Temporary regulations. marginal costing) rules to determine FSC TRA 97.
benefits. Current §1.925(a)–1T(c)(8)(i) Section 927(e)(1) provides that
SUMMARY: This document contains “[u]nder regulations, the income of a per-
temporary regulations that provide guid- requires an election to group to be evi-
denced on the FSC income tax return for son described in section 482 from a trans-
ance to taxpayers who have made an elec- action giving rise to foreign trading gross
tion to be treated as a foreign sales corpo- the taxable year. Current §1.925(a)–
1T(e)(4) authorizes taxpayers to file receipts of a FSC which is treated as from
ration (FSC). The regulations provide sources outside the United States shall not
rules that clarify the special sourcing rules amended returns subsequently (within the
statute of limitations period) to redeter- exceed the amount which would be
under section 927(e)(1) and provide a treated as foreign source income earned
deadline for the election to group transac- mine FSC benefits based on a different
grouping of transactions than that origi- by such person if the pricing rule under
tions. The text of the temporary regula- section 994 which corresponds to the rule
tions also serves as the text of the proposed nally elected. Pursuant to this provision,
taxpayers may change their grouping used under section 925 with respect to
regulations on this subject in REG– such transaction applied to such transac-
102144–98, page 25 of this Bulletin. basis, or change from a grouping to a
transaction-by-transaction basis. The IRS tion.” Transactions giving rise to foreign
DATES: Effective date: These regula- and the Treasury have become increas- trading gross receipts include qualifying
tions are effective March 3, 1998. ingly aware of taxpayers who, through the sales, leases, licenses and services. Cur-
Applicability: For dates of applicabil- use of sophisticated computer programs, rent §1.927(e)–1T restates the section
ity, see §§1.925(a)–1T(c)(8)(i) and substantially revise their transaction 927(e)(1) rule as applicable on “the sale
1.927(e)–1T(c). groupings just prior to the expiration of of export property.” While the statute is
the statute of limitations and many years not limited to export sale transactions in
FOR FURTHER INFORMATION CON- after the original returns were filed. that it applies to any transaction giving
TACT: Elizabeth Beck (202) 622-3880 These revised groupings typically employ rise to foreign trading gross receipts of a
(not a toll-free number). complex estimating techniques. The re- FSC, the current regulation might be in-
cent rise in this practice is placing a sig- terpreted to apply the special foreign
SUPPLEMENTARY INFORMATION: sourcing limit only to sales of export
nificant burden on the auditing process
Background and is creating a potential for abuse. property.
Section 1171 of the Taxpayer Relief
This document contains amendments to B. Revised temporary regulations. Act of 1997 (TRA 97) amended section
the Income Tax Regulations (26 CFR part Under §1.925(a)–1T(c)(8)(i), the elec- 927(a)(2)(B) (without any inference in-
1) under sections 925 and 927 which were tion to group must be made on Schedule P tended regarding prior law) to provide
1998–15 I.R.B. 9 April 13, 1998
that computer software licensed for repro- Drafting Information 1997. For any taxable year beginning be-
duction abroad is included within the def- fore January 1, 1998, for which a redeter-
inition of export property for purposes of The principal author of these regula- mination is otherwise permissible under
the FSC provisions. The amendment ap- tions is Elizabeth Beck of the Office of paragraph (e)(4) of this section as in ef-
plies to gross receipts from computer soft- the Associate Chief Counsel (Interna- fect for taxable years beginning before
ware licenses attributable to periods after tional). Other personnel from the IRS and January 1, 1998, a redetermination of
December 31, 1997, in tax years ending Treasury Department also participated in
grouping of transactions cannot be made
after such date. the development of these regulations.
later than the due date of the FSC’s timely
In light of TRA 97, it is important to filed U.S. income tax return (including
* * * * *
clarify the scope of the related supplier’s extensions thereof) for the FSC’s first tax-
foreign source limit under the regulations. Adoption of Amendments to the able year beginning after December 31,
This clarification needs to be imple- Regulations 1997. The language “or grouping of
mented immediately in order to provide transactions” is removed from the fourth
Accordingly, 26 CFR part 1 is amended
clear guidance to taxpayers, including sentence of paragraph (e)(4) of this sec-
those utilizing the TRA 97 amendment to tion, applicable to taxable years begin-
section 927(a)(2)(B). PART 1—INCOME TAXES ning after December 31, 1997.
B. Revised temporary regulations. Paragraph 1. The authority citation for * * * * *
Under §1.927(e)–1T(a)(1), the related part 1 is amended by revising the entries
supplier’s foreign source limit applies to (e) * * *
for sections 1.925(a)–1T and 1.925(b)–1T
any transaction, including but not limited (4) * * * For the election to group
to read as follows:
to any sale, lease, license or service, giv- transactions for purposes of applying the
Authority: 26 U.S.C. 7805 * * *
ing rise to foreign trading gross receipts administrative pricing methods, see para-
Section 1.925(a)–1T is also issued
of a FSC. No inference is intended re- graph (c)(8)(i) of this section.
under 26 U.S.C. 925(b)(1) and (2) and
garding the scope of application of the 927(d)(2)(B). * * * * *
prior regulation. Section 1.925(b)–1T is also issued
Conforming changes are reflected in Par. 3. In §1.925(b)–1T, paragraph
under 26 U.S.C. 925(b)(1) and (2) and
§1.927(e)–1T(a)(2) and (3). Special rules (b)(3)(i) is amended by adding at the end
927(d)(2)(B) * * *
are added in §1.927(e)–1T(a)(3)(ii) to of the paragraph the following sentence:
Par. 2. Section 1.925(a)–1T is
clarify how the corresponding DISC amended by: §1.925(b)–1T Temporary regulations;
transfer pricing rules are to be applied for 1. Removing the last sentence of para- marginal costing rules.
purposes of the foreign source limit. graph (c)(8)(i) and adding five sentences
Three examples set forth in §1.927(e)– in its place. * * * * *
1T(b) illustrate how the limit is applied 2. Paragraph (e)(4) is amended by:
under different transfer pricing methods (b) * * *
a. Removing the language “or group-
and for different types of transactions. (3) * * * (i) * * * For the election to
ing of transactions” from the fourth sen-
The regulations apply to taxable years group transactions for purposes of apply-
beginning after December 31, 1997. ing the administrative pricing methods,
b. Adding a sentence to the end of the
The additions read as follows: * * * * *
It has been determined that this Trea-
§1.925(a)–1T Temporary Regulations; Par. 4. Section 1.927(e)–1T is revised
sury Decision is not a significant regula-
Transfer pricing rules for FSCs. to read as follows:
tory action as defined in Executive Order
12866. Therefore, a regulatory assess- * * * * * §1.927(e)–1T Temporary regulations;
ment is not required. It has also been de- special sourcing rule.
termined that section 553(b) of the Ad- (c) * * *
ministrative Procedure Act (5 U.S.C. (8) * * * (i) * * * The election to (a) Source rules for related persons—
chapter 5) does not apply to these regula- group transactions shall be evidenced on (1) In general. The income of a person
tions, and because the regulation does not Schedule P of the FSC’s timely filed U.S. described in section 482 from a transac-
impose a collection of information on income tax return (including extensions tion giving rise to foreign trading gross
small entities, the Regulatory Flexibility thereof) for the taxable year. No untimely receipts of a FSC which is treated as from
Act (5 U.S.C. chapter 6) does not apply. or amended returns will be allowed to sources outside the United States shall not
Pursuant to section 7805(f) of the Internal elect to group, to change a grouping basis, exceed the amount which would be
Revenue Code, these temporary regula- or to change from a grouping basis to a treated as foreign source income earned
tions will be submitted to the Chief Coun- transaction-by-transaction basis. The by such person if the pricing rule under
sel for Advocacy of the Small Business rules of the previous two sentences of this section 994 which corresponds to the rule
Administration for comment on their im- paragraph (c)(8)(i) are applicable to tax- used under section 925 with respect to
pact on small business. able years beginning after December 31, such transaction applied to such transac-
April 13, 1998 10 1998–15 I.R.B.
tion. This section applies to any transac- (b) Examples. The provisions of this pricing rule of section 925(a)(1). In addition, for the
tion, including but not limited to any sale, section may be illustrated by the follow- taxable year foreign trading gross receipts derived
from the sale of the export property are $2,000.
lease, license or service, giving rise to for- ing examples:
(ii) Under section 925(a)(1), 1.83 percent of the
eign trading gross receipts of a FSC. This $2,000 foreign trading gross receipts, that is $36.60,
Example 1. (i) R and F are calendar year taxpay-
special sourcing rule also applies if the ers. R, a domestic manufacturing company, owns all is allocated to F and the $63.40 remaining combined
FSC is acting as a commission agent for the stock of F, which is a FSC acting as a commis- taxable income ($100 - $36.60) is allocated to R.
the related supplier with respect to the sion agent for R. For the taxable year, R and F used Absent the special sourcing rule, under section
the combined taxable income pricing rule of section 863(b) the $63.40 income allocated to R would be
transaction described above which gives
925(a)(2). For the taxable year, the combined tax- sourced $31.70 U.S. source and $31.70 foreign
rise to foreign trading gross receipts and source. Under the special sourcing rule, the amount
able income of R and F is $100 from the sale of ex-
the transfer pricing rules of section 925 port property, as defined in section 927(a), manufac- of foreign source income earned by a related sup-
are used to determine the commission tured by R using production assets located in the plier of a FSC shall not exceed the amount that
payable to the FSC. No limitation results United States. Title to the export property passed would result if the corresponding DISC pricing rule
under this section with respect to a trans- outside of the United States. applied. The DISC gross receipts pricing rule of
(ii) Under section 925(a)(2), 23 percent of the section 994(a)(1) corresponds to the gross receipts
action to which the section 482 pricing
$100 combined taxable income of R and F, that is pricing rule of section 925(a)(1). Under section
rule under section 925(a)(3) applies. $23, is allocated to F and the remaining $77 is allo- 994(a)(1), $80 ($2,000 x .04) would be allocated to
(2) Grouping of transactions. If, for cated to R. Absent the special sourcing rule, under the DISC and the $20 remaining combined taxable
purposes of determining the FSC’s profits section 863(b) the $77 income allocated to R would income would be allocated to the related supplier.
under the administrative pricing rules of be sourced $38.50 U.S. source and $38.50 foreign Under section 863(b), the $20 income allocated to
source. Under the special sourcing rule, the amount the DISC’s related supplier would be sourced $10
sections 925(a)(1) and (2), grouping of of foreign source income earned by a related sup- U.S. source and $10 foreign source. Accordingly,
transactions under §1.925(a)–1T(c)(8) plier of a FSC shall not exceed the amount that under the special sourcing rule, the foreign source
was elected, the same grouping shall be would result if the corresponding DISC pricing rule income of R shall not exceed $10.
used for making the determinations under applied. The DISC combined taxable income pric-
(c) Effective Date. The rules of this
this special sourcing rule. ing rule of section 994(a)(2) corresponds to the com-
bined taxable income pricing rule of section section are applicable to taxable years be-
(3) Corresponding DISC pricing 925(a)(2). Under section 994(a)(2), $50 of the com- ginning after December 31, 1997.
rules—(i) In general. For purposes of bined taxable income ($100 x .50) would be allo-
this section— cated to the DISC and the remaining $50 would be Michael P. Dolan,
(A) The DISC gross receipts pricing allocated to the related supplier. Under section Deputy Commissioner of
rule of section 994(a)(1) corresponds to 863(b), the $50 income allocated to the DISC’s re-
lated supplier would be sourced $25 U.S. source and
the gross receipts pricing rule of section $25 foreign source. Accordingly, under the special
925(a)(1); sourcing rule, the foreign source income of R shall
Approved February 20, 1998.
(B) The DISC combined taxable in- not exceed $25.
Example 2. (i) Assume the same facts as in Ex- Donald C. Lubick,
come pricing rule of section 994(a)(2)
ample 1 except that the combined taxable income Acting Assistant Secretary of
corresponds to the combined taxable in-
come pricing rule of section 925(a)(2);
arises from the licensing of the copyright rights in the Treasury.
computer software for use outside of the United
and States and that R developed the computer software (Filed by the Office of the Federal Register on
(C) The DISC section 482 pricing rule in the United States. March 2, 1998, 8:45 a.m., and published in the issue
of section 994(a)(3) corresponds to the (ii) Under section 925(a)(2), 23 percent of the of the Federal Register for March 3, 1998, 63 F.R.
$100 combined taxable income of R and F, that is 10305)
section 482 pricing rule of section
$23, is allocated to F and the remaining $77 is allo-
925(a)(3). cated to R. Absent the special sourcing rule, under
(ii) Special rules. For purposes of this section 862(a)(4) the $77 income allocated to R
section— would be sourced $77 foreign source in its entirety.
Section 1441.—Withholding of
(A) The DISC pricing rules of section Under the special sourcing rule, the amount of for- Tax
eign source income earned by a related supplier of a
994(a)(1) and (2) shall be determined This notice announces that the Department of the
FSC shall not exceed the amount that would result if
without regard to export promotion ex- the corresponding DISC pricing rule applied. The Treasury and the Internal Revenue Service will
penses; DISC combined taxable income pricing rule of sec- amend the effective date of the section 1441 with-
(B) Qualified export receipts under tion 994(a)(2) corresponds to the combined taxable holding regulations to apply to payments made after
income pricing rule of section 925(a)(2). Under sec- December 31, 1999. The transition rules provided
section 994(a)(1) and (2) shall be deemed under those regulations will also be amended to be
tion 994(a)(2), $50 of the combined taxable income
to be an amount equal to the foreign trad- ($100 x .50) would be allocated to the DISC and the consistent with the later effective date of those regu-
ing gross receipts arising from the trans- remaining $50 would be allocated to the related sup- lations. This Notice also amends the related transi-
action; and plier. Under section 862(a)(4), the $50 income allo- tion rule of Notice 97–66, 1997–48 I.R.B. 8, to be
(C) Combined taxable income for pur- cated to the DISC’s related supplier would be consistent with the later effective date of the 1441
sourced $50 foreign source in its entirety. Accord- regulations. Finally, this Notice announces that the
poses of section 994(a)(2) shall be deemed
ingly, under the special sourcing rule, the foreign Internal Revenue Service intends to develop model
to be an amount equal to the combined source income of R shall not exceed $50. withholding agreements for qualified intermediaries
taxable income for purposes of section Example 3. (i) Assume the same facts as in Ex- on a country by country basis. See Notice 98–16,
925(a)(2) arising from the transaction. ample 1 except that R and F used the gross receipts page 12.
1998–15 I.R.B. 11 April 13, 1998
Part III. Administrative, Procedural, and Miscellaneous
Effective Date of Regulations ing agents. These changes come at a time will also take into account whether or not
Under Section 1441 and when many of these entities are also at- a withholding agent (whether U.S. or for-
Qualified Intermediary tempting to make significant changes to eign) effectively implements the final
Procedures business practices and information sys- withholding regulations beginning on
tems to conform to the Year 2000 date January 1, 2000.
Notice 98–16 change and the European Monetary
Union currency conversion. Section 4. Modified Transition Rules
Section 1. Scope Treasury and the IRS also must ensure The final withholding regulations pro-
that qualified intermediary withholding vide transition rules for obtaining new
This notice announces that the Depart-
agreements are available to as many fi- withholding certificates and statements
ment of the Treasury (“Treasury”) and the
nancial intermediaries as possible for the containing the necessary information and
Internal Revenue Service (the “IRS”) will
final withholding regulations to be effec- representations required by those regula-
extend the effective date of the section
tively implemented. As described more tions. The IRS released and requested
1441 withholding regulations. As ex-
fully below, Treasury and the IRS expect public comments on draft new withhold-
tended, those regulations will apply to
that the process for making qualified in- ing certificates in Announcement 98–15,
certain payments made to foreign persons
termediary withholding agreements published in 1998–10 I.R.B. 36. The new
after December 31, 1999. This notice
widely available will take several months withholding certificates would replace
also provides new transition rules for sat-
from the date the process begins. current Forms W–8, 1001, 4224, 8709,
isfying the withholding certificate or
Accordingly, Treasury and the IRS be- and 1078, and statements described in
statement requirements under the with-
lieve it is in the best interest of tax admin- §1.1441–5 of the regulations in effect be-
holding regulations. Finally, this notice
istration to extend the date of applicability fore January 1, 1999 (the “existing certifi-
describes the general procedure the IRS
of the final withholding regulations to en- cates or statements”).
will follow in entering into qualified in-
sure that both taxpayers and the govern- Generally, under the transition rules
termediary withholding agreements in
order to expedite the process of making ment can complete the changes necessary contained in the final withholding regula-
such agreements as widely available as to implement the new withholding tions, a withholding agent holding a valid
possible. regime. As extended by this notice, the existing certificate or statement on De-
final withholding regulations will apply to cember 31, 1998, may treat that certificate
Section 2. Background payments made after December 31, 1999. or statement as valid until the earlier of its
In addition, the IRS will regard the expiration or December 31, 1999. In ad-
On October 14, 1997, final Income Tax 1999 calendar year as a transition period dition, the transition rules provide that
Regulations (the “final withholding regu- for the administration of the withholding any existing withholding certificate or
lations”) substantially revising and re- tax system. Accordingly, in enforcing statement that is valid on January 1, 1998,
placing existing regulations regarding the compliance with current withholding and that expires during 1998, remains
withholding of tax under chapter 3 (sec- rules for calendar year 1999, the IRS will valid until December 31, 1998. (These
tions 1441–1464) of the Internal Revenue take into account the extent to which a rules cannot operate together, however, to
Code (the “Code”) were published in the withholding agent makes a good faith ef- extend beyond December 31, 1998, the
Federal Register as T.D. 8734. Those reg- fort during that period to transform its validity of a certificate that, without the
ulations also significantly revise existing business practices and information sys- transition rule, would expire in 1998.)
information reporting and backup with- tems to comply with the final withholding The IRS intends to modify the with-
holding regulations under chapter 61 and regulations. For example, the IRS will holding certificate and statement transi-
section 3406 of the Code. As promul- take into account whether a U.S. with- tion rules of the final withholding regula-
gated, the final withholding regulations holding agent makes reasonable efforts tions to provide that a withholding agent
will apply to all payments made after De- during 1999 to modify its account open- holding a valid existing certificate or
cember 31, 1998. ing practices to conform to the new docu- statement on December 31, 1999, may
Section 3. Extended Effective Date mentation requirements, obtain new doc- treat that certificate or statement as valid
umentation on existing accounts when until the earlier of its expiration or De-
Treasury and the IRS will amend the new withholding certificates become cember 31, 2000. No existing certificates
final withholding regulations to extend available, and make appropriate systems or statements will be effective after De-
the date of applicability of those regula- changes to comply with the final with- cember 31, 2000. As under the final regu-
tions to payments made after December holding regulations and, if appropriate, lations, existing certificates and state-
31, 1999. Treasury and the IRS recognize Rev. Proc. 98–27 (relating to qualified in- ments that expire in 1999 will not be
that the final withholding regulations con- termediary withholding agreements). For effective after expiration. The existing
tain substantial changes to existing rules foreign withholding agents, the IRS will transition rule providing that any existing
and will likely require significant changes also take into account whether or not the withholding certificate or statement that is
to business practices and information sys- withholding agent makes an effort to seek valid on January 1, 1998, and that expires
tems for many U.S. and foreign withhold- qualified intermediary status. The IRS during 1998 remains valid until Decem-
April 13, 1998 12 1998–15 I.R.B.
ber 31, 1998, will be retained. This rule quirement of section 871(h)(5) will be ticipated that the qualified intermediary
should ensure that withholding agents satisfied with respect to substitute interest regime will reduce the collection of infor-
will be able to replace existing withhold- payments made after November 13, 1997, mation and reporting required of with-
ing certificates or statements that expire and before January 1, 1999, if any writ- holding agents under the current rules.
in 1998 with new certificates that will be ten, electronic, or oral statement that rea- Simultaneously with this notice, Trea-
valid under the final withholding regula- sonably establishes that the payee is a for- sury and the IRS are releasing Revenue
tions when those regulations take effect. eign person is given or made to the payor Procedure 98–27, which provides guid-
The IRS anticipates that new withholding before, or within a reasonable period ance on entering into a qualified interme-
certificates will be available before De- after, the payment. diary withholding agreement with the
cember 31, 1998. Because the IRS intends to make IRS. Although the revenue procedure is
New withholding certificates that are §1.871–14(c) of the final withholding designed to provide specific guidance on
valid under the final withholding regula- regulations effective for payments made the application process for persons de-
tions will be deemed to satisfy the require- after December 31, 1999, as announced scribed in §1.1441–1(e)(5)(ii)(A) and (B)
ments under the regulations in effect be- herein, the transition rule in Notice 97–66 (i.e., foreign financial institutions, foreign
fore January 1, 2000, to obtain Forms is extended to apply to substitute interest clearing organizations, and foreign
W–8, 1001, 4224, 8709, or a statement payments made after November 13, 1997 branches of U.S. financial institutions and
under section 1.1441–5. Therefore, in sit- (or after December 31, 1998, if elected) U.S. clearing organizations), any person
uations where existing certificates and and before January 1, 2000. The remain- desiring a qualified intermediary with-
statements are not outstanding, or new der of Notice 97–66 remains unchanged. holding agreement may submit a draft
certificates or statements must be obtained On January 26, 1998, a notice of pro- agreement in the general manner de-
because of a change in circumstances, a posed rulemaking (REG–209322–82) was scribed in the revenue procedure.
withholding agent may obtain new with- published in the Federal Register that This notice announces that, although
holding certificates. New withholding would amend regulations under sections any person is permitted to apply for and
certificates will be valid for the period 6031 and 6063 regarding the filing of re- negotiate an individual qualified interme-
specified in section 1.1441–1(e)(4)(ii) of turns of partnership income (a “partner- diary withholding agreement with the
the final withholding regulations, regard- ship return”). Under §1.6031(a)–1(b)(2) IRS, the IRS intends to issue a series of
less of when they are obtained. of the proposed regulations, a partnership model agreements of broad applicability
Notice 97–66 (1997–48 I.R.B. 1) pro- return is not required of a foreign partner- to make qualified withholding agreements
vides a related transition rule that is af- ship if it meets certain conditions and as widely available as possible. It is con-
fected by the extended effective date of Forms 1042 and 1042–S are filed under templated that, upon release of one of
the final withholding regulations. Notice §1.1461–1(b) and (c), as amended by the these model agreements, any person
97–66 relates to final Income Tax Regu- final withholding regulations, either by falling within the class of persons covered
lations on the source and character of the partnership or by another withholding by the model agreement would be able to
substitute interest and dividend payments agent (or agents). The proposed date of accept, sign, and submit the agreement to
published in the Federal Register on Oc- applicability for the exception is taxable the IRS, without the need for individual
tober 14, 1997 as T.D. 8735 (the “final years of a partnership that begin on or negotiations. The IRS currently contem-
substitute payment regulations”). The after January 1, 1999. If §1.6031(a)– plates that each model agreement will be
notice provides guidance on complying 1(b)(2) is finalized, Treasury and IRS in- specific to a particular country, or group
with the statement requirement of section tend to amend the date of applicability for of countries with similar laws and prac-
871(h)(5) for substitute interest payments that section to reflect the extended date of tices, and will be specific to a class of per-
made after November 13, 1997, or, if an applicability of §1.1461–1(b) and (c) of sons conducting similar intermediary
election is made under section 6 of the the final withholding regulations. businesses in a similar manner. Such an
notice, for substitute interest payments approach enables each model agreement
Section 5. Qualified Intermediary
made after December 31, 1998. Substi- to cover as broad a class of persons as
tute interest payments made by a foreign possible, while allowing uniform applica-
person that are U.S. source interest must As indicated above, for the final with- tion of all material provisions among all
satisfy the statement requirement of sec- holding regulations to be most effectively persons in the identified class.
tion 871(h)(5) to qualify as portfolio implemented, it is desirable for qualified Because of its intent to issue a series of
interest. intermediary withholding agreements to model agreements of broad applicability,
The final substitute payment regula- be available to as many foreign financial the IRS invites submissions of proposed
tions referred taxpayers to §1.871–14(c) intermediaries as possible. A qualified in- model agreements by groups or associa-
of the final withholding regulations for termediary is a foreign person, or a for- tions of potential qualified intermediaries.
guidance on the statement requirement of eign branch of a U.S. person, that agrees As part of the submission, the IRS re-
section 871(h)(5). Because §1.871–14(c) with the IRS in a qualified intermediary quests a description of the class of per-
of the final withholding regulations was withholding agreement to collect infor- sons the proposed model agreement is in-
not to be effective before January 1, 1999, mation regarding its account holders and tended to cover and why that class of
however, Notice 97–66 provides a transi- to make that information available as may persons could operate under a single
tion rule providing that the statement re- be required under the agreement. It is an- model agreement.
1998–15 I.R.B. 13 April 13, 1998
In the interest of ensuring that as many gram or “CSP” until further notice. The local bond. Section 103(b)(1) provides
financial intermediaries as possible can CSP is an optional settlement program that that § 103(a) shall not apply to any private
become qualified intermediaries well in allows businesses and tax examiners to re- activity bond that is not a “qualified
advance of the effective date of the final solve worker classification cases as early bond” within the meaning of § 141. Sec-
withholding regulations, the IRS intends in the administrative process as possible, tion 141(e) provides that the term “quali-
to give submissions of proposed model thereby reducing taxpayer burden. In the fied bond” includes any private activity
agreements of broad applicability first CSP, examiners can offer a business under bond that (1) is a qualified mortgage
consideration. Consequently, except in audit a worker classification settlement bond, (2) meets the volume cap require-
unusual circumstances, proposed agree- using a standard closing agreement devel- ments under § 146, and (3) meets the ap-
ments by individual intermediaries, while oped for this purpose. The CSP proce- plicable requirements under § 147.
also invited, will not likely lead to negoti- dures also ensure that the taxpayer relief .02 Section 143(a)(1) provides that the
ations with the IRS until sufficient provisions under section 530 of the Rev- term “qualified mortgage bond” means a
progress has been made in the process of enue Act of 1978 are properly applied. bond that is issued as part of a “qualified
issuing model agreements. Moreover, The Service implemented the CSP in mortgage issue”. Section 143(a)(2)(A)
persons who are clearly within a class of March 1996 on a two-year trial basis. Re- provides that the term “qualified mort-
persons covered by an existing model view of the program and feedback from gage issue” means an issue of one or more
agreement will not be permitted to negoti- the public have indicated that the program bonds by a state or political subdivision
ate an individual agreement absent un- is successful in facilitating early resolu- thereof, but only if (i) all proceeds of the
usual circumstances. tion of cases. issue (exclusive of issuance costs and a
The IRS currently contemplates releas- Taxpayer participation in the CSP is en- reasonably required reserve) are to be
ing a group of model agreements simulta- tirely voluntary. A taxpayer declining to used to finance owner-occupied resi-
neously, rather than issuing them one-by- accept a settlement offer retains all rights dences; (ii) the issue meets the require-
one, and expects that this release will to administrative appeal that exist under ments of subsections (c),(d),(e),(f),(g),
occur before December 31, 1998. Addi- the Service’s current IRS procedures and (h),(i), and (m)(7) of § 143; (iii) the issue
tional model agreements and individual all existing rights to judicial review. does not meet the private business tests of
agreements may be issued after that first paragraphs (1) and (2) of § 141(b); and
release of model agreements. Due to time DRAFTING INFORMATION (iv) with respect to amounts received
constraints, however, groups or associa- more than 10 years after the date of is-
tions of intermediaries desiring to submit The principal author of this notice is
Greg Christensen of the Office of Em- suance, repayments of $250,000 or more
a proposed model agreement on behalf of of principal on financing provided by the
a class of persons should make such a ployment Tax Administration and Com-
pliance. For further information regard- issue are used not later than the close of
submission on or before July 3, 1998, to the first semi-annual period beginning
ensure that such model agreement can be ing this notice, please contact Mr.
Christensen at 202-622-3650 (not a toll- after the date the prepayment (or com-
released and individual agreements can be plete repayment) is received to redeem
concluded prior to December 31, 1998. free number).
bonds that are part of the issue.
Persons submitting proposed model .03 Section 143(f) imposes eligibility
agreements are advised that these submis-
26 CFR 601.201: Rulings and determination
requirements concerning the maximum
sions will be made available to the public.
letters. income of mortgagors for whom financ-
(Also Part I, Sections 25, 103, 143; 1.25–4T, ing may be provided by qualified mort-
Section 6. Contact Information 1.103–1, 6a.103A–2.)
gage bonds. Section 25(c)(2)(A)(iii)(IV)
The principal author of this Notice is provides that recipients of mortgage
Carl Cooper of the Office of the Associate Rev. Proc. 98–28
credit certificates must meet the income
Chief Counsel (International) within the SECTION 1. PURPOSE requirements of § 143(f). Generally,
Office of the Chief Counsel, Internal Rev- under §§ 143(f)(1) and 25(c)(2)(A)(iii)-
enue Service, 1111 Constitution Avenue, This revenue procedure provides guid- (IV), these income requirements are met
N.W., Washington, D.C. 20224. For fur- ance concerning the United States and only if all owner-financing under a quali-
ther information regarding this Notice area median gross income figures that are fied mortgage bond and all certified in-
contact Mr. Cooper at 202-622-3840 (not to be used by issuers of qualified mort- debtedness amounts under a mortgage
a toll-free call). gage bonds, as defined in § 143(a) of the credit certificate program are provided to
Internal Revenue Code, and issuers of mortgagors whose family income is 115
mortgage credit certificates, as defined in percent or less of the applicable median
Extension of the Effective Date § 25(c), in computing the housing cost/in- family income. Under § 143(f)(6), the in-
of the Classification Settlement come ratio described in § 143(f)(5). come limitation is reduced to 100 percent
Program of the applicable median family income if
SECTION 2. BACKGROUND
there are fewer than three individuals in
.01 Section 103(a) provides that, except the family of the mortgagor.
The Internal Revenue Service is ex- as provided in § 103(b), gross income .04 Section 143(f)(4) provides that the
tending the Classification Settlement Pro- does not include interest on any state or term “applicable median family income”
April 13, 1998 14 1998–15 I.R.B.
means the greater of (A) the area median .02 When computing the housing Rev. Proc. 98–27
gross income for the area in which the cost/income ratio under § 143(f)(5), is-
residence is located or (B) the statewide suers of qualified mortgage bonds and CONTENTS
median gross income for the state in mortgage credit certificates must use the
SECTION 1. PURPOSE AND SCOPE
which the residence is located. area median gross income figures re-
SECTION 2. BACKGROUND
.05 Section 143(f)(5) provides for an leased by HUD on January 7, 1998. See
SECTION 3. DEFINITIONS
upward adjustment of the income limita- section 2.06 of this revenue procedure.
SECTION 4. APPLICATION PROCE-
tions in certain high housing cost areas.
SECTION 4. EFFECT ON OTHER DURES FOR QI STA-
Under § 143(f)(5)(C), a high housing cost
REVENUE PROCEDURES TUS AND WITHHOLD-
area is a statistical area for which the
housing cost/income ratio is greater than .01 Rev. Proc. 97–26, 1997–17 I.R.B. SECTION 5. QI WITHHOLDING
1.2. The housing cost/income ratio is de- 17, is obsolete except as provided in sec- AGREEMENT
termined under § 143(f)(5)(D) by divid- tion 5.02 of this revenue procedure. SECTION 6. EFFECTIVE DATE
ing (a) the applicable housing price ratio .02 This revenue procedure does not af-
by (b) the ratio that the area median gross SECTION 7. PAPERWORK REDUC-
fect the effective date provisions of Rev. TION ACT
income bears to the median gross income
Rul. 86–124, 1986–2 C.B. 27. Those ef- SECTION 8. FURTHER INFORMA-
for the United States. The applicable
fective date provisions will remain opera- TION
housing price ratio is the new housing
tive at least until the Service publishes a
price ratio (new housing average purchase SECTION 1. PURPOSE AND SCOPE
new revenue ruling that conforms the ap-
price for the area divided by the new
proach to effective dates set forth in Rev.
housing average purchase price for the .01 Purpose. This revenue procedure
Rul. 86–124 to the general approach
United States) or the existing housing gives guidance for entering into a with-
taken in this revenue procedure.
price ratio (existing housing average area holding agreement with the Internal Rev-
purchase price divided by the existing SECTION 5. EFFECTIVE DATES enue Service (IRS) to be treated as a
housing average purchase price for the Qualified Intermediary (QI) under
United States), whichever results in the .01 Issuers must use the United States §1.1441–1(e)(5) of the Income Tax Regu-
housing cost/income ratio being closer to and area median gross income figures lations. It describes the application pro-
1. This income adjustment applies only specified in section 3 of this revenue pro- cedures for becoming a QI and the terms
to bonds issued and nonissued bond cedure for commitments to provide fi- that the IRS will ordinarily require in a QI
amounts elected after December 31, 1988. nancing that are made, or (if the purchase withholding agreement. The objective of
.06 The Department of Housing and precedes the financing commitment) for a QI withholding agreement is to simplify
Urban Development (HUD) has com- residences that are purchased, in the pe- withholding and reporting obligations
puted the median gross income for the riod that begins on January 7, 1998, the with respect to payments of income (in-
United States, the states, and statistical date HUD released the income figures, cluding interest, dividends, royalties, and
areas within the states. The income infor- and ends on the date when these United gross proceeds) made to an account
mation was released to the HUD regional States and area median gross income fig- holder through one or more foreign inter-
offices on January 7, 1998, and may be ures are rendered obsolete by a new rev- mediaries.
obtained by calling the HUD reference enue procedure. .02 Scope. This revenue procedure ap-
service at 1-800-245-2691, or, in the .02 Notwithstanding section 5.01 of plies to persons described in §1.1441–
Washington, D.C., area, at 301-251-5154. this revenue procedure, issuers may con- 1(e)(5)(ii)(A) and (B)—foreign financial
The Internal Revenue Service annually tinue to rely on the United States and area institutions, foreign clearing organiza-
publishes only the median gross income median gross income figures specified in tions, and foreign branches of U.S. finan-
for the United States. Rev. Proc. 97–26 with respect to bonds cial institutions and U.S. clearing organi-
.07 The most recent nationwide aver- originally sold and nonissued bond zations. It does not apply to foreign
age purchase prices and average area pur- amounts elected not later than May 13, corporations seeking to become a QI to
chase price safe harbor limitations were 1998, if the commitments or purchases present claims of benefits under an in-
published on September 6, 1994, in Rev. described in section 5.01 are made not come tax treaty on behalf of shareholders.
Proc. 94–55, 1994–2 C.B. 716. later than July 13, 1998. See §§1.1441–1(e)(5)(ii)(C) and 1.1441–
DRAFTING INFORMATION 6(b)(4)(ii)(B). It does not apply to a for-
SECTION 3. APPLICATION
eign partnership seeking to qualify as a
.01 When computing the housing The principal author of this revenue withholding foreign partnership. See
cost/income ratio under § 143(f)(5), is- procedure is Patricia M. Monahan of the §1.1441–5(c)(2)(ii). It also does not
suers of qualified mortgage bonds and Office of Assistant Chief Counsel (Finan- apply to other persons that the IRS may
mortgage credit certificates must use cial Institutions and Products). For fur- accept to be qualified intermediaries as
$45,300 as the median gross income for ther information regarding this revenue authorized under §1.1441–1(e)(5)(ii)(D).
the United States. See section 2.06 of this procedure contact Ms. Monahan at (202) A person that is not within the scope of
revenue procedure. 622-4122 (not a toll-free call). this revenue procedure but may seek QI
1998–15 I.R.B. 15 April 13, 1998
status under §1.1441–1(e)(5)(ii)(C) or evidence for payments made outside the the Code, unless specifically indicated
(D), or §1.1441–5(c)(2)(ii) should contact United States to an offshore account or, in otherwise.
the Office of the Assistant Commissioner the case of broker proceeds, a sale ef- .07 Any reference to “chapter 61 of the
(International) at the address or telephone fected outside the United States. Code” means sections 6041, 6041A,
number in section 4.01 of this revenue In addition, a payor or withholding 6042, 6044, 6045, 6049, and 6050N of the
procedure. agent may rely on a QI’s certifications (as Code.
described in §1.1441–1(e)(3)(ii) and sec- .08 A “reportable amount” means an
SECTION 2. BACKGROUND tion 5.02 of this revenue procedure) to de- amount subject to withholding under
.01 Withholding and reporting on pay- termine whether a beneficial owner or chapter 3 of the Code (within the meaning
ments to foreign persons. Under sections payee is foreign, and to determine the ap- of §1.1441–2(a)), U.S. source deposit in-
1441 and 1442 of the Internal Revenue plicable rate of withholding and the ap- terest (including original issue discount)
Code (Code), a person that makes a pay- propriate type of reporting. The QI pro- described in section 871(i)(2)(A) of the
ment of U.S. source interest, dividends, vides its certifications on a Form W–8. Code, and U.S. source interest or original
royalties, and certain other types of in- By furnishing its own Form W–8 to a issue discount on short-term obligations
come to a foreign person must generally payor or withholding agent, a QI may, for described in section 871(g)(1)(B) of the
deduct and withhold 30 percent from the example, act on behalf of its foreign ac- Code. The term does not include pay-
payment. A lower rate of withholding count holders to claim a reduction of the ments on deposits with banks and other fi-
may apply under the Code (e.g., section 30-percent withholding rate without hav- nancial institutions that remain on deposit
1443), the regulations, or an income tax ing to document or identify to the with- for two weeks or less. It also does not in-
treaty. Generally, a payor of these types holding agent each foreign account holder clude amounts of original issue discount
of income must also report the payments individually. arising from a sale and repurchase trans-
on Form 1042–S. See §1.1461–1(c). action completed within a period of two
SECTION 3. DEFINITIONS
Under sections 6042, 6045, 6049, and weeks or less, or amounts described in
6050N of the Code (the Form 1099 re- For purposes of this revenue procedure, §1.6049–5(b)(7), (10), or (11) (relating to
porting provisions), payors of dividends, the terms listed below are defined as fol- certain obligations issued in bearer form).
gross proceeds, interest, and royalties lows. See §1.1441–1(e)(3)(vi).
must report the payments on Form 1099 .01 A “QI” is an eligible person as de- .09 A “withholding agent” has the same
unless an exception applies. If a payor scribed in §1.1441–1(e)(5)(ii)(A) or (B) meaning as set forth in §1.1441–7(a) and
must report a payment on Form 1099, it (and paragraph .10 of this section) that includes a payor, as defined in
must obtain a Form W–9 from the payee. enters into a withholding agreement (de- §1.6049–4(a)(2). As used in this revenue
If the payor does not receive the Form scribed in section 5 of this revenue proce- procedure, the term generally refers to the
W–9, it must backup withhold at a 31- dure) with the IRS. A person acting in its person making a payment to a QI.
percent rate under section 3406 of the capacity as a QI does not act as an agent .10 An “eligible person” means, as de-
Code. One exception to the Form 1099 of the IRS, nor does it have the authority scribed in §1.1441–1(e)(5)(ii)(A) or (B),
reporting provisions applies if the payee to hold itself out as an agent of the IRS. any foreign financial institution, foreign
is a foreign person. A payor can treat a .02 A “QI-Form W–8” means a with- clearing organization, or foreign branch
person as foreign if the payor can reliably holding certificate described in §1.1441– of a U.S. financial institution or U.S.
associate the payment with documenta- 1(e)(3)(ii). clearing organization.
tion that establishes that the person is a .03 An “account holder” means any .11 A “branch” includes an office.
foreign beneficial owner of the income or person that has an account with a QI. It .12 A “financial institution” means a
a foreign payee. See §§1.6042–3(b)(1)- includes a person that is the beneficial person described in §1.165–12(c)(1)(iv)
(iii), 1.6045–1(g)(1)(i), 1.6049–5(b)(12), owner of the account or a person that (not including a person providing pension
and 1.6050N–1(c)(1)(i). Moreover, a holds the account as an intermediary (e.g., or other similar benefits or a regulated in-
payor does not have to backup withhold custodian, nominee or agent). vestment company or other mutual fund,
on payments to foreign beneficial owners .04 An “exempt recipient” means, for unless otherwise indicated).
or foreign payees because backup with- interest, dividends, and royalties, a person .13 A “clearing organization” means a
holding applies only to amounts that the described in §1.6049–4(c)(1)(ii). For bro- person described in §1.163–5(c)(2)(i)-
payor must report on Form 1099. ker proceeds, it is a person described in (D)(8).
.02 Proof of foreign status. The regula- §5f.6045–1(c)(3)(i)(B) or in §1.6045– .14 “Class of assets” and “withholding
tions under section 1441 and the Form 2(b)(2)(i). pool,” have the meanings given to the
1099 reporting provisions of the Code .05 A “non-exempt recipient” or “non- terms in section 5.02(4)(c) of this revenue
prescribe the manner in which a benefi- exempt payee” means a person that is not procedure.
cial owner or payee certifies to a payor an exempt recipient under the definition .15 Any reference to “payments to a QI
that it is a foreign or U.S. person and, if in paragraph .04 of this section. or an account holder” includes crediting
foreign, whether a reduced rate of with- .06 Any reference to “chapter 3 of the an amount to the account of the QI or ac-
holding applies. For proof of foreign sta- Code” means sections 1441, 1442, and count holder.
tus, a payor or a withholding agent may 1443 of the Code, and shall not include .16 An “acceptance agent” is a person,
rely on a Form W–8 or on documentary references to sections 1445 and 1446 of as described in §301.6109–1(d)(3)(iv)(B),
April 13, 1998 16 1998–15 I.R.B.
that is authorized to assist persons in ob- (8) An explanation of the applicant’s or Form W–9 from each of its account
taining individual taxpayer identification “know-your-customer” practices and pro- holders to such withholding agents.
numbers or employer identification num- cedures (under its local money-laundering (2) Designation of primary withholding
bers from the IRS. See Rev. Proc. 96–52, laws) for opening accounts, and identify- responsibility. A QI is a withholding agent
1996–2 C.B. 372. ing and communicating with customers at under chapter 3 of the Code and a payor
each location covered by the agreement. under chapter 61 and section 3406 of the
SECTION 4. APPLICATION FOR QI The explanation should include whether Code for reportable amounts that it pays to
STATUS AND WITHHOLDING local law mandates the “know-your-cus- its account holders. Generally, a with-
AGREEMENT tomer” procedures and the manner in holding agent that makes a payment to the
.01 Where to Apply and Pre-submission which local authorities verify compliance. QI, however, will be responsible for actu-
Conferences. To apply for QI status and a The applicant should also describe the ally withholding under chapter 3 and sec-
withholding agreement, an eligible person governmental or other supervisory author- tion 3406 of the Code. Thus, if the with-
must submit a written request to: ities that regulate the “know-your-cus- holding agent has withheld and reported
Assistant Commissioner (Interna- tomer” procedures, and the sanctions that on the reportable amounts paid to the QI,
tional), CP:IN:OO:WT 950 L’Enfant apply under local law for failing to com- the QI is not required to withhold except
Plaza South, SW ply with the procedures. The applicant to the extent required to correct any under-
Washington DC 20024 must include supporting documentation. withholding. See §1.1441–1(b)(6). The
FAX: (202) 874-1797 (9) A list of assets in the United States QI may, however, agree in its withholding
An eligible person may request one or from which amounts owed to the IRS can agreement to assume primary withholding
more pre-submission conferences by con- be collected, if necessary. responsibility for payments to foreign ac-
tacting the Office of the Assistant Com- (10) A completed Form SS–4 (Appli- count holders. See §1.1441–1(e)(5)(iv).
missioner (International) at (202) 874- cation for Employer Identification Num- Generally, the IRS will not allow a QI to
1800 (not a toll-free number). ber) to apply for a QI Employer Identifi- assume primary withholding or reporting
.02 Content of Application. The appli- cation Number (QI-EIN) to be used solely responsibility for payments to U.S. per-
cation must establish to the satisfaction of for QI reporting and filing purposes. An sons unless the QI is a foreign branch of a
the IRS that the applicant has adequate re- applicant must apply for a QI-EIN even if U.S. financial institution, or the QI has a
sources and procedures to comply with it already has another EIN. branch in the United States and establishes
the terms of a withholding agreement. An (11) A proposed QI withholding agree- that its U.S. branch can adequately com-
application must include the information ment drafted in accordance with section 5 ply with the provisions under chapter 61
specified in this section 4.02, and any ad- of this revenue procedure. and section 3406 of the Code.
ditional information and documentation (3) Disclosure of identity of beneficial
SECTION 5. QI WITHHOLDING
requested by the IRS. owner or payee by QI. Except as other-
(1) A statement that the applicant is an wise provided in this subparagraph (3), a
eligible person and that it requests a QI .01 Scope of the agreement. An agree- QI is not required to disclose the identity
withholding agreement with the IRS. ment may not cover U.S. branches of an of its account holders covered by a QI-
(2) The applicant’s name, address, and eligible person. An eligible person is not Form W–8 to a withholding agent. Fur-
employer identification number (EIN), if required to include all of its foreign ther, the documentation given by an ac-
any. branches in the agreement. The IRS may count holder to a QI supporting the
(3) The country in which the applicant require, however, that an eligible person account holder’s claim of foreign status
was created or organized and a descrip- agree to include certain of its branches to and, if applicable, entitlement to a re-
tion of the applicant’s business. insure the disclosure of certain U.S. ac- duced rate of withholding does not need
(4) A list of the applicant’s officers and count holders. See §1.1441–1(e)(5)(iii) to be attached to the QI-Form W–8. The
directors and a list of the employees who and section 5.02(3), below. In appropri- QI must, however, furnish a Form W–9
are responsible parties for performance ate cases, an eligible person may request (or an acceptable substitute form) for each
under the agreement. that the agreement cover its related non- of its account holders (or those of another
(5) A list of the branches that the U.S. affiliates or unrelated account hold- intermediary or of a foreign partnership)
agreement will cover and their location. ers that act as nominees, custodians, or that is a U.S. payee that is not an exempt
(6) An explanation and sample of the agents of beneficial owners. If the IRS recipient. The identity of U.S. payees
account opening agreements and other grants the request, each related non-U.S. who are exempt recipients is not required
documents used to open and maintain the affiliate or unrelated account holder must to be disclosed to the withholding agent.
accounts at each location covered by the agree to be a signatory to the agreement. If the QI does not hold a Form W–9 for a
agreement. .02 Terms and procedures regarding in- non-exempt U.S. payee, it must furnish to
(7) The type of account holders (e.g., termediary withholding certificate. (1) the withholding agent any information the
U.S., foreign, treaty benefit claimant, or Submission of QI-Form W–8. The agree- QI has regarding the payee’s name, ad-
intermediary), the approximate number of ment must specify that a QI will furnish dress, and taxpayer identifying number.
account holders within each type, and the its QI-Form W–8, with its QI-EIN, to The requirement to disclose the identity
estimated value of U.S. investments that withholding agents for reportable of non-exempt U.S. payees will apply de-
the QI-Form W–8 will cover. amounts in lieu of furnishing a Form W-8 spite local bank secrecy laws.
1998–15 I.R.B. 17 April 13, 1998
(4) Information to withholding agent. stitute a separate class. A QI paying re- ing in a non-treaty country (a withholding
(a) In general. A QI must agree to iden- portable amounts (other than U.S. source pool of dividends - 30% rate);
tify the classes of assets covered by the bank deposit interest or short-term OID) (4) assets producing interest income
QI-Form W–8 by following §1.1441– must presume that undocumented payees earned by each U.S. account holder (a
1(e)(5)(v) and subparagraph (4)(c) of this of those amounts are foreign unless the QI withholding pool per account holder of
section. In addition, the QI must state the has actual knowledge that the payee is a interest reportable on a Form 1099 - zero
rate of withholding for each class. U.S. non-exempt recipient. For re- rate);
(b) Application of presumptions. To portable amounts that are bank deposit in- (5) assets producing dividends earned
identify the relevant classes of assets, a terest from a U.S. branch of a U.S. bank by each U.S. account holder (a withhold-
QI may determine the status of its, or an- or similar financial institution or short- ing pool per account holder for dividends
other intermediary’s, account holders by term original issue discount, the QI must reportable on a Form 1099 - zero rate);
following the presumptions in §§1.1441– presume that the undocumented payee is a (6) assets producing dividends and in-
1(b)(3), 1.1441–5(d) and (e), and 1.6049– U.S. non-exempt recipient. terest income earned by account holders
5(d)(2) through (d)(5). (D) QI assuming primary withholding for whom the QI1 does not hold all of the
(c) Class of assets and withholding responsibility. Assets for which a QI as- required documentation as specified
pool. (i) Definition. Generally, a class of sumes primary withholding responsibility under the agreement (a withholding pool
assets is a group of assets that produces are a separate class. The QI does not have for undocumented payees - 30% rate (pre-
the same type of income (e.g., interest or to identify separate classes of assets with- sumed foreign)—Note: QI1 could divide
dividends), is subject to the same rate of in that class if the assumption of with- this class of assets into one for dividends
withholding, and is associated with the holding responsibility makes such a dis- and another for interest income); and
same type of payee or beneficial owner closure unnecessary. The QI withholding (7) assets producing dividends and in-
(e.g., foreign, U.S., or undocumented agreement may, however, require a QI to terest payable to QI2 for its foreign ac-
(i.e., a payee for whom the QI holds no or identify the assets with respect to which it count holders (a withholding pool for
unreliable documentation)). Notwith- assumes primary withholding responsibil- which QI2 assumes withholding).
standing the general rule that a class of ity on a country-by-country basis. .03 Documentation requirements. (1)
asset should produce the same type of in- (iii) Example. (A) Facts. A QI In general. The agreement must contain
come, a QI-Form W–8 may state that all (“QI1”) has foreign account holders. The provisions covering the type of documen-
assets held in a particular account are QI1 also has account holders that are U.S. tation a QI will obtain from its account
within a single class of assets if all the in- non-exempt recipients. Another account holders. Generally, the QI must agree to
come from the assets in such account is holder is a QI (“QI2”) that has assumed the same documentation requirements
subject to the same rate of withholding primary withholding responsibility. Fi- that apply to withholding agents under
and the same type of information report- nally, QI1 has some account holders for chapters 3 and 61 of the Code. The QI
ing. See, for example, subparagraph whom it does not have the required docu- may use any substitute form for a Form
(4)(c)(ii)(C) of this section. The QI with- mentation. QI1 has not assumed primary W–8 or Form W–9 that is acceptable to
holding agreement must require the QI to withholding responsibility for any assets. the IRS. The QI may include a substitute
identify classes of assets on a country-by- All account holders earn U.S. source form in an account opening form. If a QI
country basis. The income from each interest that would qualify as portfolio in- relies on documentary evidence in place
class of assets is a separate “withholding terest if they gave the documentation re- of a Form W–8, the agreement must spec-
pool.” See section 5.07(3) for more infor- quired by §1.871–14(c)(2). They also ify the type of documentary evidence
mation on withholding pools. earn U.S. source dividends. Some of the upon which the QI may rely.
(ii) Application. (A) Foreign payees. foreign account holders can benefit from (2) Documentary evidence from bene-
Assets that are associated with foreign a 15-percent reduced withholding rate ficial owners. Beneficial owner docu-
payees, that produce a specific type of in- under a tax treaty on dividend income mentary evidence is acceptable if the QI
come, and are subject to a particular with- while others cannot. complies with the provisions of §1.6049–
holding rate are a class of assets. Thus, (B) Analysis. QI1 has the following 5(c)(1). Generally, a QI will be permitted
there may be numerous classes of assets classes of U.S. source assets and with- to rely on the “know-your-customer” pro-
for the same type of income paid to for- holding pools: cedures (as submitted for review pur-
eign payees because of different with- (1) assets producing interest earned by suant to section 4.02(8) of this revenue
holding rates under the Code or an applic- foreign account holders claiming the port- procedure) if such procedures are accept-
able treaty. folio interest exemption at source (a with- able to the IRS.
(B) U.S. payees. Assets associated holding pool of interest - zero rate); (3) Documentation supporting claim of
with each U.S. payee that is a non-ex- (2) assets producing dividend income reduced rate. A QI may not reduce the
empt recipient are a separate class. As- earned by foreign account holders claim- rate of withholding, or instruct a with-
sets associated with all U.S. payees that ing the 15-percent reduced rate at source holding agent to reduce the rate, unless it
are exempt recipients are a single sepa- under an income tax treaty (a withholding can associate the payment with valid doc-
rate class. pool of dividends - 15% rate); umentation described in the section 1441
(C) Undocumented payees. Assets as- (3) assets producing dividend income regulations or in the QI withholding
sociated with undocumented payees con- earned by foreign account holders resid- agreement. If an account holder is not an
April 13, 1998 18 1998–15 I.R.B.
individual, the QI must obtain a certifica- Form W–8 to certify to the withholding with the requirements for a certified TIN
tion that the account holder meets the agent the withholding status of the second under §1.1441–6(b). Only account hold-
Limitations on Benefits article contained tier QI’s account holders, then the first ers claiming a reduced rate under an in-
in any treaty the account holder invokes. tier QI must agree to allocate the assets come tax treaty for certain payments (e.g.,
See §1.1441–6(c)(5). If an account associated with the second tier QI’s QI- income from non-publicly traded securi-
holder, other than an individual, is acting Form W–8 to the classes that the first tier ties) are required to obtain a certified TIN.
for its own account, the QI must also ob- QI has established for its own account See §1.1441–6(b)(1) and (2)(i).
tain a representation that the account holders as if the account holders of the .05 Recordkeeping obligations. The
holder is not a partnership for U.S. tax second tier QI were the first tier QI’s own agreement must provide that the QI will
purposes. If the account holder is a part- account holders. maintain a record of the documentation
nership for U.S. tax purposes, then the QI (c) Assumption of primary withholding obtained and reviewed under the agree-
must obtain a Form W–9 as described in responsibility. If a QI has assumed pri- ment. The QI must maintain the docu-
§1.1441–1(d)(2) (if the partnership is a mary withholding responsibility, it must mentation for any account holder for a pe-
domestic partnership) or a Form W–8 as generally assume that responsibility for riod of three years after its validity
described in §1.1441–5(c) (if the partner- all other intermediaries, whether or not expires. The documentation must also be
ship is a foreign partnership). In addition, they are QIs, that are before it in the chain available for inspection by the IRS or, if
if an account holder, other than an individ- of payment. If a second tier QI has applicable, an approved external auditor.
ual, claims the benefit of a reduced rate of agreed to assume primary withholding re- .06 Withholding obligations. (1) QI
withholding under a tax treaty, the QI sponsibility, then a first tier QI that has assumes primary withholding responsibil-
must obtain the representations set forth in also assumed primary withholding re- ity. A QI that assumes primary withhold-
§§1.1441–6(b)(4)(i) and 1.894–1T(d). sponsibility does not have to withhold on ing responsibility must agree to withhold
(4) Documentation from intermedi- income paid to the second tier QI. If the any amount due under section 1441,
aries. When the QI receives a payment of second tier QI has assumed primary with- 1442, or 1443 of the Code in accordance
a reportable amount for an account holder holding responsibility but the first tier QI with §1.1441–1(b)(1) and §1.1443–1(b).
that is an intermediary (e.g., nominee, has not, the first tier QI must agree to If applicable, the QI must also agree to
custodian, or agent), the QI must obtain identify for the withholding agent those withhold any amount due under section
beneficial owner documentation in the assets associated with the second tier QI’s 3406 of the Code. In addition, the QI
following manner: QI-Form W–8 and on which there should must agree to deposit the withheld
(a) Intermediary that is not a QI. If the be no withholding (other than under sec- amounts following §1.1461–1(a) and all
intermediary is not a QI, then the interme- tion 3406 of the Code, if applicable). See other relevant deposit obligations. Under
diary must give the QI a Form W–8 ac- example under paragraph .02(4)(c)(iii), the agreement, the IRS may agree to spe-
cording to §1.1441–1(e)(3)(iii), including above. cial deposit procedures to facilitate remit-
a statement described in §1.1441– (5) Standards of reliability and due tances from a foreign country.
1(e)(3)(iv) regarding the allocation of diligence. A QI must agree to follow the (2) QI that does not assume primary
payments. A QI that receives a non-QI in- due diligence obligations of §1.1441– withholding responsibility. A QI that does
termediary Form W–8 may either give the 7(b)(2)(ii). The reliability of any docu- not assume primary withholding responsi-
non-QI intermediary Form W–8, with all mentation will be evaluated by the type of bility nevertheless must agree to withhold
the accompanying documentation, to the information contained in the documents, if it knows that an amount should have
withholding agent or may use the non-QI the procedures under which the docu- been withheld from the payment and the
intermediary Form W–8 as the basis for ments are issued, and the ease with which full amount was not withheld. The QI
the certifications that the QI includes in the documents could be falsified. must also agree to comply with withhold-
its own QI-Form W–8 regarding the sta- (6) Renewal of documentation. Unless ing and deposit procedures in the same
tus of, and entitlement to benefits by, the specified otherwise in the agreement, a QI manner as described in paragraph .06(1)
non-QI intermediary’s account holders. must agree to follow the provisions of of this section for amounts that it with-
(b) Intermediary that is a QI. If the §1.1441–1(e)(4)(ii) regarding the renewal holds.
intermediary is a QI (i.e., a second tier of the Forms W–8 and documentary evi- .07 Reporting obligations. (1) In gen-
QI), the second tier QI must give the first dence provided by its account holders. eral. The regulations under section 1461
tier QI a QI-Form W–8. The first tier QI .04 Assistance regarding taxpayer of the Code require a QI to make returns
may give the second tier QI’s QI-Form identification numbers. (1) Acceptance on a Form 1042 and to provide informa-
W–8, and accompanying documentation, agents. A QI may agree to act as an ac- tion to the IRS and beneficial owners or
to the withholding agent. Alternatively, ceptance agent, including a certifying ac- payees on a Form 1042–S on a calendar
the first tier QI may use the second tier’s ceptance agent, for purposes of section year basis under the provisions of
QI-Form W–8 as the basis for the certifi- 6109 of the Code and the regulations §1.1461–1(b), subject to the following
cations that the first tier QI includes in its thereunder. See Rev. Proc. 96–52, 1996– modifications to which the IRS may agree.
own QI-Form W–8 regarding the status 2 C.B. 372, for the duties and obligations (2) Form 1042 reporting. Generally,
of, and entitlement to benefits by, the sec- of an acceptance agent. every QI shall file an annual Form 1042
ond tier QI’s account holders. If the first (2) TIN certifications. A QI may agree and the form must include the following
tier QI relies on the second tier QI’s QI- to assist its account holders in complying additional information:
1998–15 I.R.B. 19 April 13, 1998
(a) A schedule providing information (a) Type of income; scribe) if an adjustment under §1.1461–
on reportable amounts of income subject (b) Withholding rate; 2(a) cannot be made.
to withholding under chapter 3 of the (c) Country of residence of account (3) Underwithholding determined after
Code that the QI received during the cal- holder; and filing a QI’s Form 1042. A QI, including a
endar year. The schedule should list the (d) Type of recipients (e.g., undocu- QI that does not assume primary withhold-
name, address, and EIN of each withhold- mented payees, U.S. payees). ing responsibility, must agree to file an
ing agent from whom the reportable (4) Furnishing a Form 1042–S to the amended Form 1042 to report any under-
amounts were received and the income beneficial owner or payee. The agreement withheld tax which is determined after the
type and rate of withholding; may modify or waive the obligation under filing of the QI’s Form 1042 for the calen-
(b) Information regarding overpay- §1.1461–1(c)(1)(i) that the QI furnish a dar year in which the tax was underwith-
ments or balances due, adjustments under statement to a beneficial owner or payee held. In addition, the QI must agree to pay
§1.1461–2 and an explanation for the on a Form 1042–S and provide for alter- the tax due (including interest and penal-
over- or underwithholding; native reporting procedures. ties). This includes, but is not limited to,
(c) A statement regarding the audit (5) Reports related to claims of a re- instances where the underwithholding is
conducted by the QI’s internal auditors duced rate under a tax treaty. The QI determined as a result of an audit by the
under the audit guidelines specified in the must agree to give the IRS, on request or QI’s internal or external auditors.
agreement (i.e., that the QI is complying on an annual basis, the names and ad- .09 Verification procedures. (1) In
with the agreement in all material respects dresses of its account holders that re- general. Unless the QI agreement allows
or a description of the irregularities un- ceived a reduced rate of withholding for verification by an external auditor, a
covered by the internal auditors and the under a tax treaty and that have certified QI must agree to make records and ac-
actions undertaken to correct such irregu- that they meet the Limitation on Benefits count information specified in the QI
larities); and provision and that they derive, within the withholding agreement available to the
(d) A statement that an approved exter- meaning of §1.894–1T(d), the income re- IRS for audit, and must agree to proce-
nal auditor conducted an audit, when re- ceiving the benefit. The QI must also dures for carrying out an audit of those
quired, with a copy of the report of audit agree to disclose the names and addresses records and information. The IRS must
findings (see paragraph .09 of this section of account holders of any non-QI interme- be able to verify that the QI has adequate
regarding verification procedures). diary that has given the QI a Form W–8 or systems and control procedures in effect
(3) Form 1042–S reporting. The other documentation if the account hold- to comply with the agreement. In addi-
agreement may waive the obligation for a ers have certified that they meet the Limi- tion, the IRS may require specific proce-
QI to report beneficial owner information tation on Benefits provision of a treaty dures to allow it to verify compliance
to the IRS on Forms 1042–S in appropri- and derive the income receiving the bene- with the QI withholding agreement for
ate cases. In place of beneficial owner in- fit. Generally, the IRS will agree to limit specific accounts.
formation, the IRS may require the QI to disclosure to account holders that receive (2) Verification of specific account in-
report by country and withholding pools. more than an agreed upon amount (not formation. If a QI is not subject to audit
An appropriate case may exist if benefi- less than $100,000) of treaty-benefited in- under the approved external auditor pro-
cial owner information is otherwise avail- come in their QI account. cedure, described in paragraph .10(3) of
able to the IRS, for example, pursuant to .08 Adjustments for under- and over- this section, then the QI withholding
treaty exchange of information provi- withholding, refund procedures, and un- agreement will contain procedures for
sions, or the IRS decides that access to derwithholding determined after the filing IRS audits of account information. Gen-
beneficial owner information is not neces- of Form 1042. (1) Adjustments. If a QI erally, a QI that complies with the filing
sary for compliance. Similarly, reporting has not assumed primary withholding re- requirements on Forms 1042 and 1042–S
by withholding pools may be sufficient sponsibility, it must agree that it will pro- (or otherwise makes account holder in-
for compliance purposes if the QI has vide sufficient information to a withhold- formation available to the IRS) may be
agreed to adequate verification proce- ing agent so that the withholding agent exempted from IRS audits or be subject
dures as described in paragraph .09 of this can make the adjustments for over- and to abbreviated IRS audits. If a QI has
section. The QI may provide the informa- under-withholding described in §1.1461– agreed to certify tax residence to the IRS
tion on a Form 1042–S, as modified by 2(a) and (b). If a QI has assumed primary under §1.1441–6(c)(2)(iii) based upon
the IRS to adapt to the withholding pool withholding responsibility, it may make documentation the QI has obtained and
reporting requirements, on magnetic the adjustments itself in the manner de- reviewed, it must also agree to give the
media, by electronic means, or on any scribed under §1.1461–2(a) and (b). documentation to the IRS upon written
form to which the IRS and the QI agree. (2) Refunds. A QI withholding agree- request in the manner agreed. To conduct
The information must include the number ment may allow any net amount of over- periodic compliance checks, the IRS may
of account holders in each pool. The type withholding for a calendar year on a QI’s rely on sampling techniques to assure re-
of withholding pool subdivisions the IRS account holders which remains outstand- liability of the examination without
may require for the payment of reportable ing after the due date for filing the QI’s undue disruption to the QI. The agree-
amounts under chapter 3 of the Code Form 1042 (not including extensions) to ment will specify the manner in which
(within the meaning of §1.1441–2(a)) in- be refunded to the QI for its account hold- IRS compliance checks will take place.
cludes the following: ers (under procedures as the IRS may pre- In appropriate cases, assistance may be
April 13, 1998 20 1998–15 I.R.B.
obtained from the tax authorities of the to report non-compliance findings under approval by the Associate Chief Counsel
countries where the QI activities are the agreement. (International). To the extent an agree-
located. (d) Upon completion of the audit, the ment covers a QI’s related non-U.S. affili-
(3) Approved external auditors. If, external auditors must issue a report of ate or unrelated account holder, that affili-
given local enforcement of know-your- audit findings (or incorporate their audit ate or account holder must be a signatory
customer procedures and local oversight findings as a separate part of a larger audit to the agreement.
and controls over the QI and its external report) and provide the report to the IRS .12 Expiration, Termination and De-
auditors, the IRS determines it is appro- in English (and using U.S. dollars). The fault. (1) Term and events of termination.
priate, the following procedures will gen- report must explain the scope and objec- The period of the agreement will be be-
erally apply under the agreement. tives of the audit, state the methodology tween three and six years. The agreement
(a) The QI must establish that it has im- used, and certify that the audit was con- may be renewed for further periods as
plemented adequate internal procedures ducted in accordance with applicable laws specified in paragraph .13 of this section.
and accounting systems to comply with and regulatory requirements. The report Either the IRS or the QI may terminate
the QI withholding agreement and to ver- must express the auditor’s opinion on the the agreement prior to its term by deliver-
ify its compliance with those procedures. QI’s compliance with the terms of the ing a 30-day notice of termination to the
Internal auditors must review those proce- agreement. The QI and the approved ex- other party. The IRS will not give notice
dures and accounting systems on an an- ternal auditor must agree to allow the IRS of termination until thirty days after it has
nual basis as a regular part of their audit to communicate with the external auditors delivered a notice of default to the QI.
program. Their conclusions must be in- and review their workpapers, if necessary. The IRS may deliver a notice of default at
cluded in their annual audit report. A If the external auditor’s report identifies any time after an event of default under
statement certifying that the annual re- compliance issues or if, based on a review the agreement has occurred or after a sig-
view has taken place and the results of of the external auditor’s report, the IRS nificant change in the circumstances of
that review (including a notation of all ir- determines that further checks are neces- the QI has occurred such as a merger,
regularities observed and actions taken to sary, then the IRS may request that the ex- changes in the business or operations of
address those irregularities) must be at- ternal auditor perform additional audit the QI, or bankruptcy.
tached to the QI’s annual Form 1042 filed procedures. (2) Events of default. Events of default
with the IRS. (4) Special rules for foreign branches include the determination upon audit or
(b) Verification must also be per- of U.S. financial institutions. Generally, a otherwise that the QI has failed to comply
formed by external auditors. The QI must QI that is a foreign branch of a U.S. finan- with the procedures required by the agree-
agree to an external auditor’s review after cial institution will be subject to the same ment in a way that (1) causes, or may
the first year of operation as a QI. There- IRS audit procedures that apply to any cause, significant underwithholding, ex-
after, the frequency and scope of compli- U.S. taxpayer. cessive refunds, or an excessive number of
ance checks by external auditors will .10 Guarantee of payment. To insure undocumented payees, or (2) impedes, or
occur only at the request of the IRS, gen- collection of payments for underwithheld may impede, the disclosure of the identity
erally based upon a review of the QI’s amounts, the agreement may require a of persons who are required to be dis-
Form 1042 or indicators that the QI may guarantee to be furnished by the QI to the closed under the agreement. An event of
have compliance problems (e.g., large re- IRS. The guarantee may include a letter default also includes the lack of coopera-
fund requests, large pool of undocu- of credit, bond, or other surety in an tion by the QI or an approved external au-
mented payees). The scope of review by amount to which the QI and the IRS ditor in connection with an audit of the QI
external auditors may be limited based on agree. The amount of the bond or letter of or with inquiries by the IRS related to ver-
the scope of annual internal audits. In credit must be commensurate with the ap- ifying compliance by the QI. The agree-
order for the external auditors to perform proximate risk of underwithholding. Fac- ment will define when underwithholding
their audit effectively, the QI must agree tors to be considered in this regard in- or inadequate reporting is deemed to be
to allow external auditors to have access clude the amount of U.S. investments significant. A QI will also be in default if
to all of its relevant records for purposes made through the QI, the number of bene- it makes material misrepresentations on its
of performing the audits. ficial owners making U.S. investments, Form W–8; it has actual knowledge at the
(c) The external auditor must be ap- the type of investment and the character- time a payment is made that documenta-
proved by the IRS and designated in the istics of the beneficial owners, and the de- tion regarding a significant number of ac-
QI withholding agreement. Subsequent gree of reporting by the QI to the IRS. count holders is lacking, incorrect, or un-
changes of external auditors must also be Generally, a QI that has substantial assets reliable; or it fails to perform any other
approved by the IRS. To be approved, an in the United States will be considered to material duty or obligation required of it
auditor must be subject to regulatory su- have adequately guaranteed its withhold- under the agreement. The QI may respond
pervision under the laws of the country or ing obligations. to the notice of default by making an offer
countries in which the QI’s activities .11 Approval and Execution. An agree- to cure within thirty days. The IRS will
under the agreement are expected to ment must be signed by the authorized accept or reject the offer to cure, or make a
occur. The external auditor’s procedures representative of the QI and by the IRS. counter-proposal, within ten days.
must require it to verify that the QI com- The Assistant Commissioner (Interna- .13 Renewal. A QI may renew a QI
plies with the terms of the agreement and tional) will sign on behalf of the IRS upon withholding agreement by submitting an
1998–15 I.R.B. 21 April 13, 1998
application for renewal to the IRS no ear- The collections of information are con- breakage, and bookkeeping errors. In ad-
lier than one year and no later than six tained in sections 4 and 5 of this revenue dition, section 4 of this revenue procedure
months prior to the expiration of the procedure regarding (1) the application provides interim guidance that describes
agreement. In the application for re- procedures for QI status and withholding the “retail safe harbor method” for a tax-
newal, the QI will update the information agreements, and (2) the provisions of the payer that wants to change to the retail
it provided in the original application. QI withholding agreement requiring safe harbor method for estimating inven-
Before approval of any renewal of the record retention or maintenance, and any tory shrinkage. The procedures for a tax-
agreement, the IRS will require an audit communication or contact with the IRS or payer within the scope of this revenue
of the QI. the account holders. This information procedure to automatically change to a
.14 Effective date of agreements. The will be used to enable the IRS to deter- method of accounting for estimating in-
agreements entered into under §1.1441– mine whether to enter into a withholding ventory shrinkage are provided in Rev.
1(e)(5) will be effective for all accounts agreement with the QI applicant and, if Proc. 97–37, 1997–33 I.R.B. 18, as modi-
opened on or after the date specified in accepted, to verify the QI’s compliance fied by section 5.02 of this revenue proce-
the agreement. For accounts existing on with the agreement. The collection of in- dure. This revenue procedure also re-
the effective date of the agreement, the formation is required to obtain a QI with- quests comments on issues that should be
requirements to obtain documentation holding agreement. The likely respon- addressed in forthcoming regulations
generally will not apply until the expira- dents are business or other for-profit under § 471 regarding proper methods of
tion of the one-year period beginning on institutions. estimating inventory shrinkage for tax-
the agreement’s effective date. Until the The estimated total annual reporting able years ending after August 5, 1997.
documentation is obtained for these ac- and/or recordkeeping burden is 301,393
counts, the QI generally will be permitted hours. SECTION 2. BACKGROUND
to rely on any documentation or informa- The estimated average annual burden is
.01 Section 471(a) of the Internal Rev-
tion in an existing account file. In the ab- 30 minutes for a QI account holder, and
enue Code provides that whenever, in the
sence of any documentation or indica- 2,093 hours for a QI, depending on indi-
opinion of the Secretary, the use of inven-
tion, or actual knowledge, the QI will be vidual circumstances. The estimated
tories is necessary in order to clearly de-
allowed to presume that an account number of respondents and/or record-
termine the income of any taxpayer, in-
holder is a foreign person based on the keepers is 88,504.
ventories must be taken by such taxpayer
indicia of foreign status described in The estimated annual frequency of re-
on such basis as the Secretary may pre-
§1.1441–1(b)(3)(iii)(A). The presump- sponses is on occasion.
scribe as conforming as nearly as may be
tion shall not be effective for purposes of Books or records relating to a collec-
to the best accounting practice in the trade
obtaining the benefit of the portfolio in- tion of information must be retained as
or business and as most clearly reflecting
terest exemption under section 871(h) or long as their contents may become mater-
881(c) of the Code or the benefit of a tax ial in the administration of any internal
.02 Section 1.471–2(d) of the Income
treaty. revenue law. Generally tax returns and
Tax Regulations provides that when a tax-
tax return information are confidential, as
SECTION 6. EFFECTIVE DATE payer maintains book inventories in ac-
required by 26 U.S.C. 6103.
cordance with a sound accounting system,
This revenue procedure is effective on SECTION 8. FURTHER the net value of the inventory will be
the date of its publication in the Internal INFORMATION deemed to be the cost basis of the inven-
Revenue Bulletin. The IRS may conclude tory, provided that such book inventories
agreements under this revenue procedure For further information regarding this are verified by physical inventories at rea-
at any time after that date, but such agree- revenue procedure, telephone the Office sonable intervals and adjusted to conform
ments will not have effect before the date of Assistant Commissioner (International) therewith. Physical inventories are used
specified in the agreement. at (202) 874-1800 (not a toll-free number). to determine and adjust book inventories
SECTION 7. PAPERWORK
REDUCTION ACT .03 Section 961 of the Taxpayer Relief
26 CFR 601.204: Changes in accounting periods Act of 1997 (Act) amended § 471(b) to
and in methods of accounting.
The collections of information con- (Also Part I, Sections 471; 1.471–2.) permit, under certain circumstances, ad-
tained in this revenue procedure have justments to ending inventory for esti-
been reviewed and approved by the Of- Rev. Proc. 98–29 mates of inventory shrinkage. Section
fice of Management and Budget in accor- 961(b) of the Act provides that, in the
dance with the Paperwork Reduction Act SECTION 1. PURPOSE case of any taxpayer permitted by
(44 U.S.C. 3507) under control number § 471(b) to change its method of account-
1545–1597. This revenue procedure provides guid- ing to a permissible method for any tax-
An agency may not conduct or sponsor, ance for a taxpayer that wants to change able year, the change is treated as made
and a person is not required to respond to, to a method of accounting for estimating with the consent of the Secretary and the
a collection of information unless the col- inventory “shrinkage” in computing end- period for taking into account the adjust-
lection of information displays a valid ing inventory. “Shrinkage” refers collec- ments under § 481 by reason of such
OMB control number. tively to such items as undetected theft, change is four years.
April 13, 1998 22 1998–15 I.R.B.
.04 The legislative history (Conference 3115, Application for Change in Account- cal ratio for each store or each department
Report and House Report) accompanying ing Method, with the Commissioner in in a store by its sales for the period be-
the Act provides that a taxpayer is permit- accordance with the requirements of tween the date of the last physical inven-
ted by § 471(b) to change its method of §1.446–1(e)(3)(i) and Rev. Proc. 97–27, tory and the end of the taxable year.
accounting if the taxpayer is currently 1997–21 I.R.B. 10. .05 Taxpayers using the last-in first-out
using a method that does not utilize esti- (LIFO) inventory method must allocate
mates of inventory shrinkage and wants to SECTION 4. RETAIL SAFE HARBOR shrinkage among their various LIFO in-
change to a method that includes inven- METHOD ventory pools in a reasonable and consis-
tory shrinkage estimates based on physical .01 The retail safe harbor method of tent manner.
inventories taken at other than year-end. estimating inventory shrinkage, as de- .06 Estimated shrinkage determined in
H.R. Rep. No. 220 (Conference Report), scribed in sections 4.02 through 4.07 of accordance with consistent application of
105th Cong., 1st Sess. 466, at 467–68 this revenue procedure, may be used in the retail safe harbor method may not be
(1997); H.R. Rep No. 2014 (House Re- computing ending store inventory by tax- recalculated, through a look-back adjust-
port), 105th Cong., 1st Sess. 408, at 410 payers that are primarily engaged in retail ment or otherwise, to reflect the results of
(1997). In addition, the Conference Re- trade (the resale of personal property to physical inventories taken after year-end.
port provides a safe harbor method applic- the general public), where physical inven- .07 A taxpayer that changes to the re-
able to taxpayers primarily engaged in re- tories are normally taken at each location tail safe harbor method must use the retail
tail trade (the “retail safe harbor method”). at least annually. safe harbor method consistently to deter-
The Conference Report further provides .02 The retail safe harbor method uses mine the ending inventory for all stores
that the conferees expect that the Secretary a historical ratio of shrinkage to sales to that comprise a separate trade or business
will provide procedures allowing a tax- estimate the inventory shrinkage that oc- of the taxpayer. Use of the retail safe har-
payer to automatically change to the retail curred between the date of the last physi- bor method for estimating inventory
safe harbor method. Pursuant to the Con- cal inventory and the end of the taxable shrinkage results in the clear reflection of
ference Report, use of the retail safe har- year. This historical ratio is based on the income, provided this method is used
bor method will be deemed to result in a actual shrinkage established by all physi- consistently and the taxpayer’s inventory
clear reflection of income, provided such cal inventories taken during the most re- methods otherwise satisfy the clear reflec-
safe harbor method is consistently applied cent three taxable years and the sales for tion of income standard.
and the taxpayer’s inventory methods oth- related periods. The most recent three
erwise satisfy the clear reflection of in- SECTION 5. CHANGING TO THE
taxable years include the taxable year for RETAIL SAFE HARBOR METHOD OR
come standard. which the shrinkage estimate is to be OTHER METHOD OF ESTIMATING
SECTION 3. SCOPE made and the two prior taxable years. INVENTORY SHRINKAGE
The historical ratio, or estimated shrink-
.01 Applicability. This revenue proce- age determined using the historical ratio, .01 In general. Any change in a tax-
dure applies to a taxpayer requesting the cannot be adjusted by judgmental or other payer’s computation of ending inventory
Commissioner’s consent to change to a factors (for example, floors or caps). to estimate inventory shrinkage, or any
method of accounting for estimating in- .03 For stores with departments, a tax- change in the computation of such esti-
ventory shrinkage in computing ending payer must determine the historical ratio mate, is a change in method of accounting
inventory, using: separately for each store or each depart- to which the provisions of §§ 446 and 481
(1) the retail safe harbor method, re- ment in a store. This determination must and the regulations thereunder apply.
gardless of whether the taxpayer’s present be done in the same manner for all stores .02 Automatic change. A taxpayer
method of accounting estimates inventory with departments that are in the same within the scope of this revenue proce-
shrinkage; or trade or business of the taxpayer. For dure that wants to change to a method of
(2) a method other than the retail stores without departments, a taxpayer accounting for estimating inventory
safe harbor method, provided (a) the tax- must determine the historical ratio sepa- shrinkage in computing ending inventory
payer’s present method of accounting does rately for each store. If a taxpayer has a must follow the automatic change in ac-
not estimate inventory shrinkage, and (b) new store (or a new department in a store) counting method provisions of Rev. Proc.
the taxpayer’s new method of accounting for which the taxpayer has not verified 97–37, with the following modifications:
(that estimates inventory shrinkage) shrinkage by a physical inventory in each (1) The scope limitations in section
clearly reflects income under § 446(b). of the most recent three taxable years, the 4.02 of Rev. Proc. 97–37, as well as the
.02 Inapplicability. This revenue pro- historical ratio is the average of the histor- application procedures in sections 6.03,
cedure does not apply to a taxpayer re- ical ratios of the taxpayer’s other stores 6.04, and 6.05 of Rev. Proc. 97–37, do not
questing to change to a method other than (or other departments in the store where apply. However, if the taxpayer is under
the retail safe harbor method of account- the taxpayer computes the historical ratio examination, before an appeals office, or
ing for estimating inventory shrinkage in on a department basis) during the most re- before a federal court with respect to any
computing ending inventory, if the tax- cent three taxable years. income tax issue, the taxpayer must pro-
payer’s present method of accounting es- .04 The estimated inventory shrinkage vide a copy of the Form 3115 to the ex-
timates inventory shrinkage. A taxpayer permitted by the retail safe harbor method amining agent(s), appeals officer, or
requesting such a change must file a Form is determined by multiplying the histori- counsel for the government, as appropri-
1998–15 I.R.B. 23 April 13, 1998
ate, at the same time that it files the copy taxpayers, the method of determining in- puting ending inventory for taxable years
of the Form 3115 with the national office. ventory shrinkage for, or allocating inven- ending after August 5, 1997. Comments
The Form 3115 must contain the name(s) tory shrinkage to, each LIFO pool) in the are requested regarding safe harbor meth-
and telephone number(s) of the examin- Form 3115 filed by the taxpayer for such a ods for estimating inventory shrinkage
ing agent(s), appeals officer, or counsel change. The District Director or national (including the retail safe harbor method),
for the government, as appropriate. office subsequently may review whether and any other issues that these regulations
(2) A taxpayer that, on or before the new method clearly reflects the tax- should address. Written comments
June 12, 1998, files its original federal in- payer’s income under § 446(b). If the Dis- should be submitted by August 11, 1998,
come tax return for its first taxable year trict Director or the national office deter- to: Internal Revenue Service, P.O. Box
ending on or after August 5, 1997, is not mines that the new method of accounting 7604, Ben Franklin Station, Washington,
subject to the filing requirement in section does not clearly reflect the taxpayer’s in- DC 20044, Attn: CC:DOM:CORP:R
6.02(2)(a) of Rev. Proc. 97–37, provided come, the taxpayer will be treated as hav- (IT&A BRANCH 7, Room 5226). Sub-
the taxpayer complies with the following ing made a change in method of account- missions may be hand-delivered between
filing requirement. The taxpayer must ing without obtaining the consent of the the hours of 8 a.m. and 5 p.m. to:
complete and file a Form 3115 in dupli- Commissioner as required by § 446(e). Courier’s Desk, Internal Revenue Ser-
cate. The original must be attached to the See section 6.06 of Rev. Proc. 97–37. vice, 1111 Constitution Avenue, NW,
taxpayer’s amended federal income tax (5) For a change in method of ac- Washington DC, Attn: CC:DOM:CORP:
return for the taxpayer’s first taxable year counting within the scope of this revenue R (IT&A Branch 7, Room 5226). Alter-
ending on or after August 5, 1997. This procedure, the provisions of Rev. Proc. natively, taxpayers may submit comments
amended return must be filed no later than 97–37 are effective for taxable years end- electronically at
August 11, 1998. A copy of the Form ing after August 5, 1997. http://www.irs.ustreas.gov/prod/tax_re
3115 must be filed with the national office (6) The transition rules in section gs/comments.html
(see section 6.02(6) of Rev. Proc. 97–37 13.02 of Rev. Proc. 97–37 do not apply to
(the Service’s internet site). All com-
for the address) no later than when the any change in method of accounting
ments submitted will be available for pub-
taxpayer’s amended return is filed. within the scope of this revenue proce-
lic inspection and copying.
(3) A taxpayer, whose present dure. The Service will return any Form
method of accounting estimates inven- 3115 if it is filed with the national office SECTION 7. EFFECTIVE DATE
tory shrinkage, does not receive audit pro- pursuant to the Code, regulations, or ad-
tection under section 7 of Rev. Proc. 97– ministrative guidance other than Rev. This revenue procedure is effective for
37 in connection with a change to the re- Proc. 97–37 and the change in method of taxable years ending after August 5, 1997.
tail safe harbor method if, on the date the accounting is within the scope of this rev-
taxpayer files a copy of the Form 3115 enue procedure. SECTION 8. EFFECT ON OTHER
with the national office, the taxpayer’s .03 Future change. A taxpayer that DOCUMENTS
present method of estimating inventory changes to the retail safe harbor method
shrinkage is an issue under consideration described in this revenue procedure will Rev. Proc. 97–37 is modified and am-
within the meaning of section 3.09 of not be precluded, solely by reason of such plified to include this automatic account-
Rev. Proc. 97–37. change, from changing to another safe ing method change in the Appendix.
(4) In addition to all the require- harbor method for estimating inventory
ments and procedures in Rev. Proc. 97-37, shrinkage in computing ending inventory DRAFTING INFORMATION
as modified by this revenue procedure, the in the first year that such other safe harbor
The principal author of this revenue
following rules apply to a taxpayer within method is available.
procedure is Jan L. Skelton of the Office
the scope of this revenue procedure that
of Assistant Chief Counsel (Income Tax
changes to a method other than the retail SECTION 6. REGULATIONS AND
and Accounting). For further information
safe harbor method of accounting for esti- REQUEST FOR PUBLIC COMMENT
regarding this revenue procedure, contact
mating inventory shrinkage. The taxpayer
The Service intends to issue regulations Ms. Skelton at (202) 622-4970 (not a toll-
must provide a detailed description of all
under § 471 regarding proper methods for free call).
aspects of the new method of estimating
inventory shrinkage (including, for LIFO estimating inventory shrinkage in com-
April 13, 1998 24 1998–15 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Rulemaking Constitution Avenue, NW., Washington, Constitution Avenue, NW, Washington,
and Notice of Public Hearing DC. DC. Because of access restrictions, visi-
tors will not be admitted beyond the Inter-
Source and Grouping Rules for FOR FURTHER INFORMATION CON- nal Revenue lobby more than 15 minutes
Foreign Sales Corporation TACT: Concerning the regulations, before the hearing starts.
Elizabeth Beck (202) 622-3880; concern-
Transfer Pricing The rules of 26 CFR 601.601(a)(3)
ing submissions and the hearing, Michael apply to the hearing.
REG–102144–98 Slaughter, (202) 622-7190 (not toll-free Persons that wish to present oral com-
numbers). ments at the hearing must submit written
AGENCY: Internal Revenue Service comments by June 1, 1998, and submit an
(IRS), Treasury. SUPPLEMENTARY INFORMATION:
outline of the topics to be discussed and
ACTION: Notice of proposed rulemak- Background the time to be devoted to each topic
ing by cross-reference to (preferably a signed original and eight (8)
Temporary regulations in T.D. 8764 copies) by June 3, 1998.
temporary regulations and notice of pub-
amend the Income Tax Regulations (26 A period of 10 minutes will be allotted
CFR part 1) relating to sections 925 and to each person for making comments.
SUMMARY: In T.D. 8764, page 9 of this 927. The temporary regulations contain An agenda showing the schedule of
Bulletin, the IRS is issuing temporary rules relating to the grouping of transac- speakers will be prepared after the dead-
regulations that provide guidance to tax- tions under the FSC transfer pricing rules line for receiving outlines has passed.
payers who have made an election to be and the special source rules under section Copies of the agenda will be available
treated as a foreign sales corporation 927(e)(1). The preamble to the temporary free of charge at the hearing.
(FSC). The regulations provide rules regulations explains the temporary regu-
clarifying the special sourcing rules under lations. Drafting Information
section 927(e)(1) and provide a deadline Special Analyses The principal author of the proposed
for the election to group transactions. regulations is Elizabeth Beck, of the Of-
This document also provides notice of a It has been determined that this notice fice of the Associate Chief Counsel (Inter-
public hearing on these proposed regula- of proposed rulemaking is not a signifi- national). Other personnel from the IRS
tions. The text of the temporary regula- cant regulatory action as defined in Exec- and Treasury Department also partici-
tions also serves as the text of the pro- utive Order 12866. Therefore, a regula- pated in the development of these regula-
posed regulations. tory assessment is not required. It has tions.
also been determined that section 553(b)
DATES: Written comments must be re- of the Administrative Procedure Act (5 * * * * *
ceived by June 1, 1998. Requests to U.S.C. chapter 5) does not apply to these
speak (with outlines of oral comments) to Proposed Amendments to the Regulations
regulations, and because the regulation
be discussed at the public hearing sched- does not impose a collection of informa- Accordingly, 26 CFR part 1 is pro-
uled for June 24, 1998, at 10 a.m., must tion on small entities, the Regulatory posed to be amended as follows:
be received by June 3, 1998. Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of PART 1—INCOME TAXES
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–102144–98), the Internal Revenue Code, this notice of Paragraph 1. The authority citation for
room 5226, Internal Revenue Service, proposed rulemaking will be submitted to part 1 is amended by adding the following
POB 7604, Ben Franklin Station, Wash- the Chief Counsel for Advocacy of the entries to the table in numerical order to
ington, DC 20044. Submissions may be Small Business Administration for com- read as follows:
hand delivered between the hours of 8 ment on its impact on small business. Authority: 26 U.S.C. 7805 * * *
a.m. and 5 p.m. to: CC:DOM:CORP:R Comments and Public Hearing Section 1.925(a)–1 is also issued under
(REG-102144-98), Courier’s Desk, Inter- 26 U.S.C. 925(b)(1) and (2) and
nal Revenue Service, 1111 Constitution Before these proposed regulations are 927(d)(2)(B).
Avenue, NW, Washington, DC. Alterna- adopted as final regulations, considera- Section 1.925(b)–1 is also issued under
tively, taxpayers may submit comments tion will be given to any written com- 26 U.S.C. 925(b)(1) and (2) and
electronically via the Internet by selecting ments (preferably a signed original and 927(d)(2)(B). * * *
the “Tax Regs” option on the IRS Home eight (8) copies) that are submitted timely Par. 2. Section 1.925(a)–1 is added as
Page, or by submitting comments directly to the IRS. All comments will be avail- follows:
to the IRS Internet site at http://www.irs. able for public inspection and copying. [The text of proposed §1.925(a)–1 con-
ustreas.gov/prod/tax_regs/comments.html. A public hearing has been scheduled sisting of paragraphs (c)(8)(i) and (e)(4) is
The public hearing will be held in Room for June 24, 1998, at 10 a.m., in room the same as the text of §1.925(a)– 1T(c)-
2615, Internal Revenue Service, 1111 2615, Internal Revenue Building, 1111 (8)(i) and (e)(4) as amended in T.D. 8764.]
1998–15 I.R.B. 25 April 13, 1998
Par. 3. Section 1.925(b)–1 is added as room 5226, Internal Revenue Service, the information to be collected may be en-
follows: POB 7604, Ben Franklin Station, Wash- hanced;
[The text of proposed §1.925(b)–1 con- ington, DC 20044. Submissions may be How the burden of complying with the
sisting of paragraph (b)(3)(i) is the same hand delivered between the hours of 8 proposed collection of information may
as the text of §1.925(b)–1T(b)(3)(i) as a.m. and 5 p.m. to: CC:DOM:CORP:R be minimized, including through the ap-
amended in T.D. 8764.] (REG–209322–82), Courier’s Desk, In- plication of automated collection tech-
Par. 4. Section 1.927(e)–1 is amended ternal Revenue Service, 1111 Constitution niques or other forms of information tech-
as follows: Avenue NW, Washington, DC. Alterna- nology; and
[The text of proposed §1.927(e)-1 is tively, taxpayers may submit comments Estimates of the capital or start-up
the same as the text of §1.927(e)-1T pub- electronically via the Internet by selecting costs and costs of operation, maintenance,
lished in T.D. 8764.] the “Tax Regs” option of the IRS Home and purchase of services to provide infor-
Page, or by submitting comments directly mation.
Michael P. Dolan, to the IRS Internet site at: http://www.irs. The collection of information in this
Deputy Commissioner of ustreas.gov/prod/tax_regs/comments.html. proposed regulation is in §1.6031(a)-1.
Internal Revenue. The public hearing will be held in the IRS This information is required to enable the
Auditorium, 7400 Corridor, Internal Rev- IRS to verify that a taxpayer is reporting
(Filed by the Office of the Federal Register on
March 2, 1998, 8:45 a.m., and published in the issue enue Building, 1111 Constitution Avenue the correct amount of income or gain or
of the Federal Register for March 3, 1998, 63 F.R. NW, Washington, DC. claiming the correct amount of losses, de-
ductions, or credits from that taxpayer’s
FOR FURTHER INFORMATION CON-
interest in the partnership. The collection
TACT: Concerning the regulations, Martin
of information is mandatory. The likely
Notice of Proposed Rulemaking Schäffer or Christopher Kelley, 202-622-
respondents are businesses and other for-
and Notice of Public Hearing 3080; concerning foreign partnerships,
Ronald Gootzeit, 202-622-3860; concern-
The burden is reflected in the burden of
Return of Partnership Income ing submissions and the hearing, Michael
Slaughter, 202-622-7190 (not toll-free
An agency may not conduct or sponsor,
and a person is not required to respond to,
AGENCY: Internal Revenue Service SUPPLEMENTARY INFORMATION: a collection of information unless it dis-
(IRS), Treasury. plays a valid control number assigned by
Paperwork Reduction Act the Office of Management and Budget.
ACTION: Withdrawal of notice of pro-
Books or records relating to a collec-
posed rulemaking; notice of proposed The collection of information con-
tion of information must be retained as
rulemaking and notice of public hearing. tained in this notice of proposed rulemak-
long as their contents may become mater-
ing has been submitted to the Office of
SUMMARY: This document withdraws ial in the administration of any internal
Management and Budget for review in ac-
the notice of proposed rulemaking relat- revenue law. Generally, tax returns and
cordance with the Paperwork Reduction
ing to partnership returns. The proposed tax return information are confidential, as
Act of 1995 (44 U.S.C. 3507(d)). Com-
regulations were published in the Federal required by 26 U.S.C. 6103.
ments on the collection of information
Register on January 23, 1986 [LR– should be sent to the Office of Manage- Background
198–82, 1986–1 C.B. 778]. These regula- ment and Budget, Attn: Desk Officer for
tions revise the partnership filing require- the Department of the Treasury, Office of This document contains proposed
ment to reflect changes to the law made Information and Regulatory Affairs, amendments to the Income Tax Regula-
by the Taxpayer Relief Act of 1997 Washington, DC 20503, with copies to tions (26 CFR Part 1) under sections 6031
(TRA). All partnerships required to file the Internal Revenue Service, Attn: IRS and 6063 of the Internal Revenue Code of
partnership returns, including certain for- Reports Clearance Officer, T:FP, Wash- 1986 (Code). These amendments are de-
eign partnerships, are affected by these ington, DC 20224. Comments on the col- signed, in part, to reflect changes made to
regulations. This document also contains lection of information must be received section 6031 by section 1141 of TRA,
a notice of a public hearing on the pro- by March 27, 1998. Comments are Public Law 105–34, 111 Stat. 788 (1997).
posed regulations. specifically requested on: Section 6031 contains rules regarding the
DATES: Written comments must be re- Whether the proposed collection of in- filing of returns of partnership income
ceived by April 27, 1998. Requests to formation is necessary for the proper per- (partnership returns).
speak and outlines of oral comments to be formance of the functions of the Internal On January 23, 1986, the IRS pub-
discussed at the public hearing scheduled Revenue Service, including whether the lished in the Federal Register (51 F.R.
for May 19, 1998, at 10 a.m., must be re- information will have practical utility; 3075) proposed regulations under section
ceived by April 28, 1998. The accuracy of the estimated burden 6031 of the Internal Revenue Code (exist-
associated with the proposed collection of ing proposed regulations). Section
ADDRESSES: Send submissions to: information (see below); 1.6031–1 of the existing proposed regula-
CC:DOM:CORP:R (REG–209322–82), How the quality, utility, and clarity of tions provides rules that, if finalized,
April 13, 1998 26 1998–15 I.R.B.
would implement the partnership filing ally must file a partnership return only if quired to file a partnership return under
requirements of section 404 of the Tax it has either United States source income section 6031 but fails to do so, the period
Equity and Fiscal Responsibility Act of or income effectively connected (or of limitations on assessment of tax attrib-
1982 (TEFRA), Public Law 97–248, 96 treated as effectively connected) with the utable to items of that partnership remains
Stat. 669 (1982). Because section 1141 of conduct of a trade or business within the open indefinitely under section 6229(a).
TRA supersedes the partnership filing re- United States. However, under the pro- The failure of a partnership to file a return
quirements of section 404 of TEFRA, the posed regulations, a foreign partnership required by section 6031 might also result
IRS and Treasury consider it appropriate that has no gross income that is effec- in disallowance under section 6231(f) of
to reissue proposed regulations reflecting tively connected with the conduct of a the deductions, losses, and credits flowing
recent changes to the law, while giving trade or business within the United States, through to the partners and could subject
taxpayers another opportunity to com- and that would be required to file a part- the partnership to penalties under section
ment. Accordingly, this document with- nership return only because it has gross 6698 and/or section 7203.
draws §1.6031–1 of the existing proposed income derived from sources within the
regulations published in the Federal Reg- United States, will be exempt from the re- Information To Be Furnished to Partners
ister on January 23, 1986 (51 F.R. 3075). quirement to file a partnership return if (i) Under section 6031(b), every partner-
A partnership that has followed the rules no United States person has a direct or in- ship that is required by section 6031(a) to
contained in §1.6031–1 of the existing direct interest in the partnership; (ii) the file a partnership return must furnish in-
final regulations for all taxable years prior gross income derived from sources within formation to its partners as required by
to the taxable year for which these new the United States is either fixed or deter- regulations. The rules governing partner-
regulations will become effective will be minable annual or periodical income de- ship statements to partners and nominees
treated as fully complying with the part- scribed in §1.1441–2(b) or other amounts are in §1.6031(b)–1T.
nership filing requirements with respect subject to withholding described in
to such taxable years. §1.1441–2(c); (iii) Forms 1042 and 1042– Partnership Elections
Section 6063 provides that a partner- S are filed with respect to all such gross
income in accordance with §1.1461–1(b) A foreign partnership otherwise exempt
ship return shall be signed by any one of
and (c); and (iv) the tax liability of the from the filing requirement that wants to
the partners. The proposed regulations
partners with respect to such gross income make a partnership-level election under
clarify who must sign a partnership return
has been fully satisfied by the withholding section 703(b) must file a partnership re-
filed solely for the purpose of making cer-
of tax at the source, if applicable, under turn for the year of the election. The pro-
tain partnership-level elections.
chapter 3. The foreign partnership’s posed regulations provide rules similar to
Explanation of Provisions obligation to file Forms 1042 and 1042–S those contained in §1.7701–3(c)(2) of the
is generally eliminated by the regulations entity classification regulations with re-
Filing Requirement spect to who has the authority to file such
under section 1461 published in the Fed-
eral Register on October 14, 1997 (62 returns. Generally, the return must be
Section 6031(a) requires every partner-
F.R. 53387) if those returns are filed by signed by all partners or by an authorized
ship to file a partnership return. New sec-
the withholding agent (or agents) making partner.
tion 6031(e), as added by section 1141 of
TRA, exempts certain foreign partner- the payments of United States source in- Proposed Effective Dates
ships from the filing requirement of sec- come to the partnership and the partners’
tion 6031(a). Section 6031(e) provides tax liability with respect to United States These regulations are proposed to be
that a foreign partnership is not required source income has been fully satisfied by applicable to partnership tax years ending
to file a return for a tax year unless during withholding. See §1.1461–1(b)(2) and on or after the 90th day after final regula-
that year it derives gross income from (c)(4). The IRS and Treasury invite com- tions on this subject are published in the
sources within the United States or has ments addressing other ways to reduce du- Federal Register. However, the excep-
gross income that is effectively connected plicative information filing. tions for certain foreign partnerships con-
with the conduct of a trade or business Any domestic or foreign partnership that tained in §1.6031(a)–1(b)(2) will not be
within the United States. Further excep- elects to be excluded from subchapter K of applicable to any partnership taxable
tions to the filing requirement for foreign Chapter 1 of the Code under section 761(a) years beginning before January 1, 1999.
partnerships may be provided by regula- will not be required to file a partnership re-
turn, except that where a partnership Special Analyses
The proposed regulations separately makes an election under §1.761–2(b)(2)(i), It has been determined that this notice
describe the filing requirements for do- the partnership must timely file a partner- of proposed rulemaking is not a signifi-
mestic and foreign partnerships. In accor- ship return that contains the information cant regulatory action as defined in EO
dance with section 6031(a), the proposed required by §1.761–2(b)(2)(i) for the tax- 12866. Therefore, a regulatory assess-
regulations provide that, except in certain able year for which the election is made. ment is not required. It also has been de-
limited circumstances, every domestic Failure to Meet Filing Requirement termined that section 553(b) of the Ad-
partnership must file a partnership return. ministrative Procedure Act (5 U.S.C.
Under section 6031 and the proposed If a partnership that is not a small part- chapter 5) does not apply to these pro-
regulations, a foreign partnership gener- nership under section 6231(a)(1)(B) is re- posed regulations. It is hereby certified
1998–15 I.R.B. 27 April 13, 1998
that the collection of information con- an outline of the topics to be discussed ship must file a return of partnership in-
tained in these proposed regulations will and the time to be devoted to each topic come under section 6031 (partnership re-
not have a significant economic impact on (signed original and eight (8) copies) by turn) for each taxable year on the form
a substantial number of small entities. April 28, 1998. prescribed for the partnership return. The
This certification is based on the fact that A period of 10 minutes will be allotted partnership return must be filed for the
the regulations would reduce (rather than to each person for making comments. taxable year of the partnership regardless
increase) the number of small entities that An agenda showing the scheduling of of the taxable years of the partners. For
are required to file a partnership return. the speakers will be prepared after the taxable years of a partnership and of a
Specifically, the proposed regulations deadline for receiving outlines has partner, see section 706 and §1.706–1.
would eliminate the filing requirements passed. Copies of the agenda will be For the rules governing partnership state-
for certain foreign partnerships that are available free of charge at the hearing. ments to partners and nominees, see
fully subject to withholding in order to §1.6031(b)–1T.
prevent duplicative filing requirements. Drafting Information (2) Content of return. The partnership
In addition to eliminating the filing re- return must contain the information re-
The principal authors of these regula-
quirements in these circumstances, for quired by the prescribed form and the ac-
tions are Martin Schäffer and Christopher
ease of reference the proposed regulations companying instructions.
Kelley, Office of Assistant Chief Counsel
update and restate the general require- (3) Special rule. A partnership that has
(Passthroughs and Special Industries),
ments to file a partnership return as set no income, deductions, or credits for fed-
and Ronald Gootzeit, Office of the Asso-
forth in existing regulations. Because the eral income tax purposes for a taxable
ciate Chief Counsel (International).
proposed regulations would not impose year is not required to file a partnership
However, other personnel from the IRS
any new reporting requirements that are return for that year.
and Treasury Department participated in
not imposed by the existing regulations, (4) Failure to file. For the conse-
and the only significant modification of quences of a failure to comply with the re-
the existing regulations is to eliminate the * * * * * quirements of section 6031(a) and this
filing requirement for certain foreign part- paragraph (a), see sections 6229(a),
nerships, the regulations will not have a Withdrawal of Proposed Amendments to 6231(f), 6698, and 7203.
significant economic impact on a substan- the Regulations (b) Foreign partnerships—(1) Return
tial number of small entities. Accord- required. A foreign partnership must file
ingly, a Regulatory Flexibility Analysis Accordingly, under the authority of 26 a partnership return for a partnership tax-
under the Regulatory Flexibility Act (5 U.S.C. 7805, the notice of proposed rule- able year only if it has gross income de-
U.S.C. chapter 6) is not required. Pur- making that was published in the Federal rived from sources within the United
suant to section 7805(f) of the Code, these Register on January 23, 1986 (51 F.R. States or it has gross income that is (or is
proposed regulations will be submitted to 3075) is withdrawn. treated as) effectively connected with the
the Chief Counsel for Advocacy of the conduct of a trade or business within the
Proposed Amendments to the Regulations
Small Business Administration for com- United States for the taxable year. Cer-
ment on their impact on small business. Accordingly, 26 CFR part 1 is pro- tain exceptions to this requirement are
posed to be amended as follows: provided in paragraphs (b)(2) and (c) of
Comments and Public Hearing
this section. A foreign partnership that is
PART 1—INCOME TAXES required to file a partnership return must
Before these proposed regulations are
adopted as final regulations, considera- Paragraph 1. The authority citation for file the partnership return in accordance
tion will be given to any written com- part 1 is amended by adding an entry in with the rules provided for domestic part-
ments (preferably a signed original and numerical order to read as follows: nerships in paragraph (a) of this section.
eight (8) copies) that are submitted timely Authority: 26 U.S.C. 7805. * * * (2) Exception to partnership return re-
to the IRS. All comments will be avail- Section 1.6031(a)–1 also issued under quirement for certain foreign partner-
able for public inspection and copying. 26 U.S.C. 6031. * * * ships investing in the United States. A
A public hearing has been scheduled foreign partnership that has no gross in-
for Tuesday, May 19, 1998, at 10 a.m., in §1.6031–1 [Removed] come that is effectively connected with
the IRS Auditorium, 7400 Corridor, Inter- the conduct of a trade or business within
Par. 1a. Section 1.6031–1 is removed. the United States, and that would be re-
nal Revenue Building, 1111 Constitution
Avenue NW, Washington, DC. Because Par. 2. Section 1.6031(a)–1 is added to quired to file a partnership return only be-
of access restrictions, visitors will not be read as follows: cause it has gross income derived from
admitted beyond the building lobby more §1.6031(a)–1 Return of partnership sources within the United States, is not re-
than 15 minutes before the hearing starts. income. quired to file a partnership return under
The rules of 26 CFR 601.601(a)(3) section 6031 if—
apply to the hearing. (a) Domestic partnerships—(1) Return (i) No United States person has a direct
Persons that wish to present oral com- required. Except as provided in para- or indirect interest in the partnership;
ments at the hearing must submit written graphs (a)(3) and (c) of this section, every (ii) The gross income derived from
comments by April 27, 1998, and submit domestic organization that is a partner- sources within the United States is either
April 13, 1998 28 1998–15 I.R.B.
fixed or determinable annual or periodical respect to the partnership under section ships. The return of a domestic partner-
income described in §1.1441–2(b) or 6038. ship that is required to file under para-
other amounts subject to withholding de- (4) Exclusion for certain organizations. graph (a) of this section must be filed with
scribed in §1.1441–2(c); The return requirement of section 6031 the service center for the internal revenue
(iii) Forms 1042 and 1042–S are filed and this section does not apply to the In- district in which the partnership has its
with respect to all such gross income in ternational Telecommunications Satellite principal office or principal place of busi-
accordance with §1.1461–1(b) and (c). In Organization, the International Maritime ness in the United States.
order to satisfy this requirement, Forms Satellite Organization, or any organiza- (ii) Foreign partnerships with United
1042 and 1042–S must be filed by the tion that is a successor of either. States business or income. The return of
partnership unless the partnership is not (c) Partnerships excluded from the ap- a foreign partnership that is required to
required to file such returns under plication of subchapter K—(1) Wholly ex- file under paragraph (b)(1) of this section
§1.1461–1(b)(2) and (c)(4), in which cluded—(i) Year of election. An eligible must be filed—
case, Forms 1042 and 1042–S must be partnership as described in §1.761–2(a) (A) With the service center for the inter-
filed by another withholding agent (or that elects to be excluded from all the pro- nal revenue district in which the partner-
agents); and visions of subchapter K of chapter 1 of the ship has its principal office or principal
(iv) The tax liability of the partners Internal Revenue Code in the manner place of business in the United States; or
with respect to such gross income has specified by §1.761–2(b)(2)(i) must (B) With the Internal Revenue Service
been fully satisfied by the withholding of timely file the form prescribed for the Center, Philadelphia, PA 19255-0011 if
tax at the source, if applicable, under partnership return for the taxable year for the partnership has no office or place of
chapter 3 of the Internal Revenue Code. which the election is made. In lieu of the business in the United States.
(3) Partnership information or returns information otherwise required, the return (iii) Foreign partnerships without
required of partners who are United must contain or be accompanied by the in- United States business or income. The re-
States persons—(i) In general. If a formation required by §1.761–2(b)(2)(i). turn of a foreign partnership filed under
United States person is a partner in a part- (ii) Subsequent years. Except as other- paragraph (b)(3)(ii) of this section (re-
nership that is not required to file a part- wise provided in paragraph (c)(1)(i) of garding partnerships for which an election
nership return, the district director or di- this section, an eligible partnership that under section 703 is made) must be filed
rector of the service center may require elects to be wholly excluded from the ap- with the Internal Revenue Service Center,
that person to render the statements or plication of subchapter K is not required Philadelphia, PA 19255-0011. A state-
provide the information necessary to ver- to file a partnership return. ment must be attached to the partnership
ify the accuracy of the reporting by that (2) Deemed excluded. An eligible part- return indicating that the return is being
person of any items of partnership in- nership that is deemed to have elected ex- filed pursuant to paragraph (b)(3)(ii) of
come, gain, loss, deduction, or credit. clusion from the application of subchapter this section solely to make one or more
(ii) Certain partnership elections. For K beginning with its first taxable year, as elections under section 703.
a partnership that is not otherwise re- specified in §1.761–2(b)(2)(ii), is not re- (2) Time for filing. The return of a part-
quired to file a partnership return, if an quired to file a partnership return. nership must be filed on or before the fif-
election that can only be made by the (d) Definitions—(1) Partnership. For teenth day of the fourth month following
partnership under section 703 (affecting the meaning of the term partnership, see the close of the taxable year of the part-
the computation of taxable income de- §1.761–1(a). nership.
rived from a partnership) is to be made by (2) United States person. In applying (3) Magnetic media filing. For mag-
or for the partnership, a return on the form this section, United States person means a netic media filing requirements with re-
prescribed for the partnership return must person described in section 7701(a)(30); spect to partnerships, see section
be filed for the partnership. The return the government of the United States, a 6011(e)(2) and the regulations thereunder.
must be signed by— State, or the District of Columbia (includ- (f) Effective date. This section applies
(A) Each partner that is a partner in the ing an agency or instrumentality thereof); to taxable years of a partnership ending
partnership at the time the election is or a corporation created or organized in on or after the 90th day after the date final
made; or Guam, the Commonwealth of Northern regulations on this subject are published
(B) Any partner of the partnership who Mariana Islands, the U.S. Virgin Islands, in the Federal Register. However, in no
is authorized (under local law or the part- and American Samoa, if the requirements event will paragraph (b)(2) of this section
nership’s organizational documents) to of sections 881(b)(1)(A), (B), and (C) are apply to taxable years of a partnership
make the election and who represents to met for such corporation. The term does that begin before January 1, 1999.
having such authorization under penalties not include an alien individual who is a Par. 3. Section 1.6063–1 is amended
of perjury. resident of Puerto Rico, Guam, the by adding paragraph (c) to read as fol-
(iii) Controlled foreign partnerships. Commonwealth of Northern Mariana lows:
Certain United States persons who are Islands, the U.S. Virgin Islands, or §1.6063–1 Signing of returns,
partners in a foreign partnership con- American Samoa, as determined under statements, and other documents made by
trolled (within the meaning of section §301.7701(b)–1(d) of this chapter. partnerships.
6038(e)(1)) by United States persons may (e) Procedural requirements—(1)
be required to provide information with Place for filing—(i) Domestic partner- * * * * *
1998–15 I.R.B. 29 April 13, 1998
(c) Certain partnership elections—(1) provisions of this announcement. In gen- Form W–9. The instructions and the lan-
In general. For rules regarding the au- eral, the electronic system must meet the guage of the perjury statement must im-
thority of a partner to sign a partnership requirements described in paragraphs (1), mediately follow the payee’s certifying
return filed solely for the purpose of mak- (2), (4), and (5) below. Further, if an elec- statements and immediately precede the
ing certain partnership-level elections, see tronic Form W–9S is used to certify that electronic signature.
§1.6031(a)–1(b)(3)(ii). the borrower will use the loan proceeds to (4) Copies of electronic Forms W–9 or
(2) Effective date. The provisions of pay for qualified higher education ex- W–9S. Upon request by the Internal Rev-
paragraph (c) of this section apply for tax- penses, the lending institution’s electronic enue Service, the payer or educational or
able years of a partnership ending on or system must also meet the requirements lending institution must supply a hard
after the 90th day after the date final regu- described in paragraph (3)(A) below. copy of the electronic Form W–9 or
lations on this subject are published in the W–9S and a statement that, to the best of
Federal Register. Requirements the payer’s or educational or lending in-
(1) In general. The electronic system stitution’s knowledge, the electronic
Michael P. Dolan, Form W–9 or W–9S was submitted by
must ensure that the information received
Deputy Commissioner of the named payee, student, or borrower.
by the payer or educational or lending in-
Internal Revenue. The hard copy of the electronic Form
stitution is the information sent by the
(Filed by the Office of the Federal Register on payee, student, or borrower. The system W–9 or W–9S must provide exactly the
January 23, 1998, 8:45 a.m., and published in the must document all occasions of user ac- same information as, but need not be a
issue of the Federal Register for January 26, 1998,
cess that result in the submission. In ad- facsimile of, the paper Form W–9 or
63 F.R. 3677)
dition, the design and operation of the W–9S.
electronic system, including access proce- (5) Effective date. This announcement
dures, must make it reasonably certain applies to Forms W–9 and W–9S submit-
The lRS Will Permit Electronic ted electronically by payees, students, or
that the person accessing the system and
Submission of Forms W–9 borrowers on or after April 13, 1998.
submitting the Form W–9 or W–9S is the
and W–9S person identified in the form. For further information regarding this
(2) Same information as paper Form announcement, contact Donna Welch of
Announcement 98–27 the Office of the Assistant Chief Counsel
W–9 or W–9S. The electronic submission
Form W–9 must provide the payer or educational or (Income Tax and Accounting) at (202)
lending institution with exactly the same 622-4910 (not a toll-free call).
The Internal Revenue Service will information as the paper Form W–9 or
allow payers to establish a system to elec- W–9S.
tronically receive Forms W–9, Request (3) Signature requirements and perjury Foundations Status of Certain
for Taxpayer Identification Number and statement. The electronic submission Organizations
Certification. In general, the electronic must be signed with an electronic signa-
system must meet the requirements de- ture by the payee whose name is on the Announcement 98–28
scribed in paragraphs (1) through (5) Form W–9 or by the borrower whose The following organizations have
below. However, for Forms W–9 that are name is on the Form W–9S. failed to establish or have been unable to
not required to be signed, the electronic (A) Electronic signature. The elec- maintain their status as public charities or
system need not meet the requirements tronic signature must identify the payee or as operating foundations. Accordingly,
described in paragraph (3). The IRS will borrower submitting the electronic form grantors and contributors may not, after
revise the “Instructions for the Requester and must authenticate and verify the sub- this date, rely on previous rulings or des-
of Form W–9” to reflect the provisions of mission. For this purpose, the terms “au- ignations in the Cumulative List of Orga-
this announcement. thenticate” and “verify” have the same nizations (Publication 78), or on the pre-
For purposes of this announcement, meanings as they do when applied to a sumption arising from the filing of notices
“payer” refers to a person required to file written signature on a paper Form W–9 or under section 508(b) of the Code. This
an information return. “Payee” refers to W–9S. An electronic signature can be in listing does not indicate that the organiza-
the person required to submit Form W–9 any form that satisfies the foregoing re- tions have lost their status as organiza-
to the payer. quirements. The electronic signature tions described in section 501(c)(3), eligi-
Form W–9S must be the final entry in the submission. ble to receive deductible contributions.
(B) Perjury statement. The elec- Former Public Charities. The following
The Internal Revenue Service will also tronic signature on Form W–9 must be organizations (which have been treated as
allow educational and lending institutions under penalties of perjury. The perjury organizations that are not private founda-
to establish a system for students and bor- statement must contain the language that tions described in section 509(a) of the
rowers to electronically submit Form appears on the paper Form W–9. The Code) are now classified as private foun-
W–9S, Request for Student’s or Bor- electronic system must inform the payee dations:
rower’s Social Security Number and Cer- that he or she makes the declaration con- Adams House, San Rafael, CA
tification. The IRS will revise the instruc- tained in the perjury statement and that Adelaide Hollander Scholarship
tions for Form W–9S to reflect the the declaration is made by signing the Foundation, Inc., Pomona, NJ
April 13, 1998 30 1998–15 I.R.B.
Alliance for a SAFER Greater Detroit, Educate America First Foundation, Foundation for Nager and Miller
Detroit, MI Littleton, CO Syndromes, Glenview, IL
American Homeowners Resource Center, Education and Auditory Resource Foundation for Northern Thailand
San Juan Capistrano, CA Services, Jackson, MS Scholarship, Humble, TX
Bradley Creek Extension Homemakers Education First Foundation Inc., Palm Fund 2000, Gastonia, NC
Club, Wilmington, NC Beach Gardens, FL Gordon Junior Sandhills Wrestling
Central Pittsburgh Amateur Hockey Edwards County Heathcare Foundation, Association, Gordon, NE
Association, Pittsburgh, PA Kinsley, KS Goshen Community Theatre Inc.,
Chautauqua Group, Boulder, CO Egg Harbor Township Community Goshen, IN
Chemical People of Charles County Inc., Playground, Pleasantville, NJ Gospel Light Ministries Inc., Madison,
LaPlata, MD El Paso Metro Police Activities League TN
Cheniere Hurricane Centennial, Cut Off, Inc., El Paso, TX Gospel Music Workshop of America New
LA El Paso Music Teachers Association, El Orleans Chapter, New Orleans, LA
Cherokee Chief Indian Ministry Inc., Hot Paso, TX Gospel Singers Inc., Dallas, TX
Springs, AR Emporia Basketball Club Inc., Emporia, Governors Commission on Educational
Cherokee Strip Centennial Corporation, KS Choice, Akron, OH
Perry, OK Engine House No. 5 Foundation, Grace Emory Foundation Inc., Doraville,
Chevra Kadisha of Houston Inc., Allendale, MI GA
Houston, TX Environmental Concerns Inc., Lafayette, Grace House Deborah M. Barker,
Chicago Black Horse Troop Association LA Marion, IN
Inc., Rockford, IL Envision Inc., New Orleans, LA Grace Ministries International, Rochester,
Chicago Breakthrough Foundation, Extended Health Care Services Inc., MN
Chicago, IL Montclair, NJ Grace Pavilion Foundation, Northbrook,
Chicago Printing Ink Production Club, Fayette County Crisis Pregnancy Chapter IL
Inc., Hickory Hills, IL Inc., Fayetteville, GA Grove Outreach Inc., Coconut Grove, FL
Chief Frank Fools Crow Memorial Federation for Civic Action Incorporated, Guardian Ad Litem Advisory Board of
Foundation and Humanitarian Fund, Milwaukee, WI Charlotte County Inc., Punta Gorda, FL
Pine Ridge, SD Feener Family Ministries, Olive Branch, Gwinnett County Childrens Association,
Community Chiropractic Health Clinics MS Inc., Lawrenceville, GA
of California, Inc., Oroville, CA Fellowship Christian Center, Omaha, NE Habersham County Council on Child
Delray Beach Community Development Fellowship Foundation, New Orleans, Abuse Inc., Clarkesville, GA
Corporation, Delray Beach, FL LA Habilitation Concepts Inc., Fort Worth,
Delta Axis Inc., Memphis, TN Financial Responsibility Advocacy TX
Delta Blues Educational Fund, Project, Washington, DC Haitian Relief V A D I G Inc., Boynton
Clarksdale, MS Fire Instructors Association of North Beach, FL
Deming Youth Center Incorporated, Texas Inc., Bedford, TX Hamblen Adults Working for Kids Inc.,
Deming, NM Fire Museum of Texas Association Inc., Morristown, TN
Dendron Volunteer Fire Dept Inc., Beaumont, TX Hamblen County Recreational Flag
Dendron, VA First Christian Church Early Childhood Football Association, Russellville, TN
Denim & Lace Inc., Lamar, CO Development Center, Beckley, WV Hamblen Museum of Glass and Antiques,
Denton Youth Football Association Inc., First Coast Chapter of Tuskegee Airmen Lebanon, TN
Denton, TX Inc., Jacksonville, FL Hamilton Housing Development
District of Columbia Comprehensive First Impressions, Cleveland, TN Corporation, Cincinnati, OH
Aids Resources & Education, First Trees for the World Foundation Inc., Hampton Apple Tree Club House Inc.,
Washington, DC Washington, DC Hampton, VA
Divorce Center Inc., New Orleans, LA Fisher Community Foundation for Hancock County Food Pantry Inc., Bay
Dixie Manor Resident Management, Educational, Champaign, IL St. Louis, MS
Pinson, AL Foster Children of Johnson County Inc., Handicapped Transportation Inc.,
DMC-Midwives Inc., Detroit, MI Leawood, KS Oklahoma City, OK
DMC-OBGYN Inc., Detroit, MI Foundation for Abused and Neglected Handicapped Veterans Society Inc.,
Economic Services Inc., Madison, FL Children, Dallas, TX North Miami Beach, FL
Ecorse Resident Council, Ecorse, MI Foundation for Advanced Studies Inc., Hands for Humanity Inc., Frenchburg,
Ed U Care Child Development Center Coralville, IA KY
Inc., Kansas City, MO Foundation for Allied Conservative Hands Healing Hearts, Miami, FL
Edu-Quest Education Foundation Inc., Therapies Research, Lawrence, KS Hands on Battle Creek Museum, Battle
Virginia Beach, VA Foundation for Homecare Inc., Creek, MI
Educaring Inc., Tucson, AZ Wilmington, NC Hannahs House Inc., Louisville, KY
1998–15 I.R.B. 31 April 13, 1998
Hanner Summer Camp Inc., Lawndale Apartments Inc. Non Profit Mandalay Community Center Inc.,
Chattanooga, TN Housing Corporation, Mt. Pleasant, MI Westminster, CO
Happy Birthday Jesus Foundation, Lawrence County Minority Economic Mandt Community Center Inc.,
Bellbrook, OH Trade and Development Association, Stoughton, WI
Happy Christian Homes Inc., Tempe, Ironton, OH Manhattan Marlins Inc., Manhattan, KS
AZ Lawrence-Douglas County Coalition for Marathon County Crime Stoppers,
Harborside Performers Inc., Punta Gorda, the Homeless Inc., Lawrence, KS Weston, WI
FL Lawton Education Foundation Inc., Marbled Ball Kids Inc., Houston, TX
Harc IV Housing Inc., Birmingham, AL Mattawan, MI Margil House of Studies, Houston, TX
Hardcore Evangelistic Ministries Inc., Laynor Foundation, Scottsdale, AZ Marin City Childrens Church, San
Dallas, TX Leann J Hauptman Foundation Inc., Francisco, CA
Harrah Senior Housing Corporation II, Bethesda, MD Marion County Alliance of
Harrah, OK Learning Disabilities Association of Neighborhood Associations, Inc.,
Harris County Friends of the Library, McLennan County, Waco, TX Indianapolis, IN
Katy, TX Learning for Everyone Inc., Americus, Marion County Community
Harrison County Conservation Society GA Development Corporation, Ocala, FL
Inc., Marshall,TX Lebanon Girls Softball League, Lebanon, Marion County Historical Society, Buena
Harvard Club of San Antonio, San MO Vista, GA
Antonio, TX Ledbetter Community Development Mark Wanker Ministries Inc., Jackson,
Harvest Hands, Grand Blanc, MI Corporation, Dallas, TX MS
Harvest Homes Inc., Kokomo, IN L W G Family Ministries Inc., Many, LA Marquette Fine Arts Council Inc.,
Harvey Oilers Booster Club Inc., Harvey, L Y Dean III Foundation Inc., Eufaula, AL Marquette, KS
LA L Y O A Cancer Support Group, Marriage Impact Ministries Inc., Phoenix,
Help Inc., Baltimore, MD Houston, TX AZ
H I M Incorporated, Raleigh, NC M A D Dads of Martin County Inc., Mars Mission International, Houston,
H O M E, Washington, DC Stuart, FL TX
H O P E Center Inc., Abilene, KS Martha Mary House for Women &
Mac House Inc., Houston, TX
House of Prayer Ministries, Efland, NC Children, Berryville, AR
MacGregor Area Community
House of Prayer Ministry Inc., Gonzalez, Meadows Healthcare Resources, Inc.,
Development Corporation, Houston,
LA Vidalia, GA
House of Ruth Inc., Louisville, KY Mid-South Transportation Management,
Macon County Role Model Association,
Institute for Biodynamic Shelter, Inc., Memphis, TN
Waldoboro, ME Middle East Medievalists, Northbrooke,
Madison Brown Scholarship Fund Inc.,
Institute for International Initiatives Inc., IL
Austin, TX Middletown Athletic Association,
Madison Community Housing
J & M Therapeutic Foster Group Home, Levittown, PA
Incorporated, London, OH
Houston, TX Midland Area Aids Support Inc.,
J and M Moore Foundation, Duluth, MN Madison Curling Foundation Inc.,
J C Bubb Rudd Foundation Inc., Madison, WI
Midwest Center for Arts, Minneapolis,
Beaumont, TX Madisonville Hopkins County Labor-
Jacksonville Area Caring for Kids Inc., Management Committee, Inc., Midwest Civic Council, Detroit, MI
Jacksonville, FL Madisonville, KY Midwest Regional Space Center, Cedar
Jesus Christ Evangelistic Ministries, Magalit, Bedford, TX Rapids, IA
Delaware, OH Magdalena Youth Athletics Association, Midwest YMCA of America, Chicago, IL
Kairos Center for Spiritual Renewal Inc., Magdalena, NM Militant Church of the Fields, Big Horn,
Mason, TX Maggie Valley Police Association, WY
Kakapo Rescue, Salt Lake City, UT Maggie Valley, NC National Association of Black
Kalamazoo Alternative Housing Inc., Main Street Clarksville Inc., Clarksville, Communications Professionals,
Kalamazoo, MI TN Columbia, MD
Korean American Heritage Foundation, Main Street Ozark Inc., Ozark, AR National Association of Planning
Inc., San Francisco, CA Make It Live Productions, Chicago, IL Councils, Oklahoma City, OK
LA Federation of Families, Covington, Malinis Dances of India, Ann Arbor, MI National Association of Resident
LA Mallard Bryant Smith Inc., Alliance, OH Management Corps, Washington, DC
La Maison De Beaux Arts Co., New Man-Environment Relations Research, National Association of Sportsman
Orleans, LA Chesapeake Beach, MD Legislators, Knoxville, TN
Laurinburg Homework Center Inc., Mancelona Area Resource Conservation National Black Music Caucus,
Laurinburg, NC Coalition, Mancelona, MI Philadelphia, PA
April 13, 1998 32 1998–15 I.R.B.
National Center for Mood Disorders, North Woods Fishing Club, Mishawaka, Society for Cinephiles-Cinecon, Inc., Los
Houston, TX IN Angeles, CA
National Childrens Assistance Northeast Denver Learning and Resource Southern Burn Foundation, Inc., Augusta,
Association, Searcy, AR Center, Inc., Denver, CO GA
National Church Residences of Northeast Neighborhood House Inc., Visual Pen Pals Inc., Atlanta, GA
Charleston, WV, Columbus, OH Washington, DC Voices Past Inc., Tulsa, OK
National Coalition of 100 Black Northern Business Aids Project, If an organization listed above submits
Children, Inc., Jackson, MS Woodstock, IL information that warrants the renewal of its
National Computer Society of the Deaf, Northern New Jersey Christian Life classification as a public charity or as a pri-
Woodridge, IL vate operating foundation, the Internal
Coalition, Inc., Wyckoff, NJ
The National Dorymens Association, Revenue Service will issue a ruling or de-
Office of Croatian Affairs, South San
Mission Viejo, CA termination letter with the revised classifi-
Nazareth Communications, Inc., cation as to foundation status. Grantors and
Greenville, SC Resident Association Members, Johnson contributors may thereafter rely upon such
Nellys Puppet Theatre Company, City, TN ruling or determination letter as provided
Lexington, KY San Diego Family Day Care Association, in section 1.509(a)–7 of the Income Tax
North Penn Improvement Association, Inc., Escondido, CA Regulations. It is not the practice of the
Hatfield, PA Sash Inc., Glendale, MD Service to announce such revised classifi-
North Royalton Playground Fund, North Seagoville Area Soccer Association, cation of foundation status in the Internal
Royalton, OH Seagoville, TX Revenue Bulletin.
1998–15 I.R.B. 33 April 13, 1998
Definition of Terms
Revenue rulings and revenue procedures plies to both A and B, the prior ruling is new ruling does more than restate the
(hereinafter referred to as “rulings”) that modified because it corrects a published substance of a prior ruling, a combination
have an effect on previous rulings use the position. (Compare with amplified and of terms is used. For example, modified
following defined terms to describe the clarified, above). and superseded describes a situation
effect: Obsoleted describes a previously pub- where the substance of a previously pub-
Amplified describes a situation where lished ruling that is not considered deter- lished ruling is being changed in part and
no change is being made in a prior pub- minative with respect to future transac- is continued without change in part and it
lished position, but the prior position is tions. This term is most commonly used is desired to restate the valid portion of
being extended to apply to a variation of in a ruling that lists previously published the previously published ruling in a new
the fact situation set forth therein. Thus, rulings that are obsoleted because of ruling that is self contained. In this case
if an earlier ruling held that a principle changes in law or regulations. A ruling the previously published ruling is first
applied to A, and the new ruling holds may also be obsoleted because the sub- modified and then, as modified, is super-
that the same principle also applies to B, stance has been included in regulations seded.
the earlier ruling is amplified. (Compare subsequently adopted. Supplemented is used in situations in
with modified, below). Revoked describes situations where the which a list, such as a list of the names of
Clarified is used in those instances position in the previously published rul- countries, is published in a ruling and
where the language in a prior ruling is ing is not correct and the correct position that list is expanded by adding further
being made clear because the language is being stated in the new ruling. names in subsequent rulings. After the
has caused, or may cause, some confu- Superseded describes a situation where original ruling has been supplemented
sion. It is not used where a position in a the new ruling does nothing more than several times, a new ruling may be pub-
prior ruling is being changed. restate the substance and situation of a lished that includes the list in the original
Distinguished describes a situation previously published ruling (or rulings). ruling and the additions, and supersedes
where a ruling mentions a previously Thus, the term is used to republish under all prior rulings in the series.
published ruling and points out an essen- the 1986 Code and regulations the same Suspended is used in rare situations to
tial difference between them. position published under the 1939 Code show that the previous published rulings
Modified is used where the substance and regulations. The term is also used will not be applied pending some future
of a previously published position is when it is desired to republish in a single action such as the issuance of new or
being changed. Thus, if a prior ruling ruling a series of situations, names, etc., amended regulations, the outcome of
held that a principle applied to A but not that were previously published over a pe- cases in litigation, or the outcome of a
to B, and the new ruling holds that it ap- riod of time in separate rulings. If the Service study.
Abbreviations E.O.—Executive Order.
PHC—Personal Holding Company.
PO—Possession of the U.S.
The following abbreviations in current use and for- ERISA—Employee Retirement Income Security Act. PR—Partner.
merly used will appear in material published in the
Bulletin. EX—Executor. PRS—Partnership.
F—Fiduciary. PTE—Prohibited Transaction Exemption.
FC—Foreign Country. Pub. L.—Public Law.
FICA—Federal Insurance Contribution Act. REIT—Real Estate Investment Trust.
FISC—Foreign International Sales Company. Rev. Proc.—Revenue Procedure.
FPH—Foreign Personal Holding Company. Rev. Rul.—Revenue Ruling.
F.R.—Federal Register. S—Subsidiary.
B.T.A.—Board of Tax Appeals.
FUTA—Federal Unemployment Tax Act. S.P.R.—Statements of Procedral Rules.
FX—Foreign Corporation. Stat.—Statutes at Large.
G.C.M.—Chief Counsel’s Memorandum. T—Target Corporation.
CFR—Code of Federal Regulations.
GE—Grantee. T.C.—Tax Court.
GP—General Partner. T.D.—Treasury Decision.
IC—Insurance Company. TFR—Transferor.
D—Decedent. I.R.B.—Internal Revenue Bulletin. T.I.R.—Technical Information Release.
DC—Dummy Corporation. LE—Lessee. TP—Taxpayer.
DE—Donee. LP—Limited Partner. TR—Trust.
Del. Order—Delegation Order. LR—Lessor. TT—Trustee.
DISC—Domestic International Sales Corporation. M—Minor. U.S.C.—United States Code.
DR—Donor. Nonacq.—Nonacquiescence. X—Corporation.
E—Estate. O—Organization. Y—Corporation.
EE—Employee. P—Parent Corporation. Z—Corporation.
April 13, 1998 34 1998–15 I.R.B.
Numerical Finding List1 Proposed Regulations—Continued Treasury Decisions—Continued
Bulletins 1998–1 through 1998–14 REG–209463–82, 1998–4 I.R.B. 27 8752, 1998–9 I.R.B. 4
REG–209476–82, 1998–8 I.R.B. 36 8753, 1998–9 I.R.B. 6
Announcements: REG–209484–87, 1998–8 I.R.B. 40 8754, 1998–10 I.R.B. 15
REG–209485–86, 1998–11 I.R.B. 21 8755, 1998–10 I.R.B. 21
98–1, 1998–2 I.R.B. 38 REG–209807–95, 1998–8 I.R.B. 40 8756, 1998–12 I.R.B. 4
98–2, 1998–2 I.R.B. 38 REG–251502–96, 1998–9 I.R.B. 14 8757, 1998–13 I.R.B. 4
98–3, 1998–2 I.R.B. 38 8758, 1998–13 I.R.B. 15
98–4, 1998–4 I.R.B. 31 Revenue Procedures: 8759, 1998–13 I.R.B. 19
98–5, 1998–5 I.R.B. 25 8760, 1998–14 I.R.B. 4
98–6, 1998–5 I.R.B. 25 98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74 8761, 1998–14 I.R.B. 13
98–7, 1998–5 I.R.B. 26 8762, 1998–14 I.R.B. 15
98–8, 1998–6 I.R.B. 96 98–3, 1998–1 I.R.B. 100
98–9, 1998–7 I.R.B. 35 98–4, 1998–1 I.R.B. 113
98–10, 1998–7 I.R.B. 35 98–5, 1998–1 I.R.B. 155
98–11, 1998–8 I.R.B. 42 98–6, 1998–1 I.R.B. 183
98–12, 1998–8 I.R.B. 43 98–7, 1998–1 I.R.B. 222
98–13, 1998–8 I.R.B. 43 98–8, 1998–1 I.R.B. 225
98–14, 1998–8 I.R.B. 44 98–9, 1998–3 I.R.B. 56
98–15, 1998–10 I.R.B. 36 98–10, 1998–2 I.R.B. 35
98–16, 1998–9 I.R.B. 17 98–11, 1998–4 I.R.B. 9
98–17, 1998–9 I.R.B. 16 98–12, 1998–4 I.R.B. 18
98–18, 1998–10 I.R.B. 44 98–13, 1998–4 I.R.B. 21
98–19, 1998–10 I.R.B. 44 98–14, 1998–4 I.R.B. 22
98–20, 1998–11 I.R.B. 25 98–15, 1998–4 I.R.B. 25
98–21, 1998–11 I.R.B. 26 98–16, 1998–5 I.R.B. 19
98–22, 1998–12 I.R.B. 33 98–17, 1998–5 I.R.B. 21
98–23, 1998–12 I.R.B. 34 98–18, 1998–6 I.R.B. 20
98–24, 1998–12 I.R.B. 35 98–19, 1998–7 I.R.B. 30
98–25, 1998–13 I.R.B. 43 98–20, 1998–7 I.R.B. 32
98–26, 1998–14 I.R.B. 28 98–21, 1998–8 I.R.B. 27
98–22, 1998–12 I.R.B. 11
Notices: 98–23, 1998–10 I.R.B. 30
98–24, 1998–10 I.R.B. 31
98–1, 1998–3 I.R.B. 42 98–25, 1998–11 I.R.B. 7
98–2, 1998–2 I.R.B. 22 98–26, 1998–13 I.R.B. 26
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25 Revenue Rulings:
98–5, 1998–3 I.B.R. 49
98–6, 1998–3 I.R.B. 52 98–1, 1998–2 I.R.B. 5
98–7, 1998–3 I.R.B. 54 98–2, 1998–2 I.R.B. 15
98–8, 1998–4 I.R.B. 6 98–3, 1998–2 I.R.B. 4
98–9, 1998–4 I.R.B. 8 98–4, 1998–2 I.R.B. 18
98–10, 1998–6 I.R.B. 9 98–5, 1998–2 I.R.B. 20
98–11, 1998–6 I.R.B. 18 98–6, 1998–4 I.R.B. 4
98–12, 1998–5 I.R.B. 12 98–7, 1998–6 I.R.B. 6
98–13, 1998–6 I.R.B. 19 98–8, 1998–7 I.R.B. 24
98–14, 1998–8 I.R.B. 27 98–9, 1998–6 I.R.B. 5
98–15, 1998–9 I.R.B. 8 98–10, 1998–10 I.R.B. 11
98–17, 1998–11 I.R.B. 6 98–11, 1998–10 I.R.B. 13
98–18, 1998–12 I.R.B. 11 98–12, 1998–10 I.R.B. 5
98–19, 1998–13 I.R.B. 24 98–13, 1998–11 I.R.B. 4
98–20, 1998–13 I.R.B. 25 98–14, 1998–11 I.R.B. 4
98–15, 1998–12 I.R.B. 6
Proposed Regulations: 98–16, 1998–13 I.R.B. 18
98–17, 1998–13 I.R.B. 21
PS–158–86, 1998–11 I.R.B. 13 98–18, 1998–14 I.R.B. 22
REG–100841–97, 1998–8 I.R.B. 30
REG–102894–97, 1998–3 I.R.B. 59 Treasury Decisions:
REG–104062–97, 1998–10 I.R.B. 34
REG–104691–97, 1998–11 I.R.B. 13 8740, 1998–3 I.R.B. 4
REG–105163–97, 1998–8 I.R.B. 31 8741, 1998–3 I.R.B. 6
REG–109333–97, 1998–9 I.R.B. 9 8742, 1998–5 I.R.B. 4
REG–109704–97, 1998–3 I.R.B. 60 8743, 1998–7 I.R.B. 26
REG–110965–97, 1998–13 I.R.B. 42 8744, 1998–7 I.R.B. 20
REG–115795–97, 1998–8 I.R.B. 33 8745, 1998–7 I.R.B. 15
REG–119449–97, 1998–10 I.R.B. 35 8746, 1998–7 I.R.B. 4
REG–120200–97, 1998–12 I.R.B. 32 8747, 1998–7 I.R.B. 18
REG–120882–97, 1998–14 I.R.B. 25 8748, 1998–8 I.R.B. 24
REG–121755–97, 1998–9 I.R.B. 13 8749, 1998–7 I.R.B. 16
REG–209276–87, 1998–11 I.R.B. 18 8750, 1998–8 I.R.B. 4
REG–209373–81, 1998–14 I.R.B. 26 8751, 1998–10 I.R.B. 23
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.
1998–15 I.R.B. 35 April 13, 1998
Finding List of Current Action on
Previously Published Items1
Bulletins 1998–1 through 1998–14
Updated and superseded by
98–25, 1998–11 I.R.B. 7
Modified and superseded by
98–22, 1998–12 I.R.B. 11
Modified and superseded by
98–22, 1998–12 I.R.B. 11
98–19, 1998–7 I.R.B. 30
Modified and superseded by
98–22, 1998–12 I.R.B. 11
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
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
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.
April 13, 1998 36 1998–15 I.R.B.
1998–15 I.R.B. 37 April 13, 1998
April 13, 1998 38 1998–15 I.R.B.
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