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Internal Revenue Bulletin No. 1998–33 bulletin August 17, 1998 HIGHLIGHTS OF THIS ISSUE These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX EMPLOYMENT TAX Rev. Rul. 98–39, page 4 Notice 98–43, page 13. All events test; cooperative advertising. Under the all Tax Court review of worker classification and section events test of section 461 of the Code, an accrual method 530 determinations. This notice describes new proce- manufacturer’s liability for cooperative advertising services dures that the Service has implemented to comply with new of a retailer is incurred in Year 1, the year the services are section 7436 of the Code. performed, provided the manufacturer is able to reasonably estimate the liability, even though the retailer does not sub- ADMINISTRATIVE mit the required claim form until Year 2. Rev. Proc. 97–37 modified and amplified. Notice 98–39, page 11. Church plans; nondiscrimination; safe harbors. This no- Rev. Rul. 98–40, page 4. tice extends the effective date of the applicable nondiscrimi- Fringe benefits aircraft valuation formula. For pur- nation regulations for certain church plans. poses of section 1.61–21(g) of the Income Tax Regulations, relating to the rule for valuing noncommercial flights on em- Notice 98–41, page 12. ployer-provided aircraft, the Standard Industry Fare Level 1998 enhanced oil recovery credit. The enhanced oil (SIFL) cents-per-mile rates and terminal charges in effect for recovery credit for taxable years beginning in the 1998 cal- the second half of 1998 are set forth. endar year is determined without regard to the phase-out for crude oil price increases provided in section 43(b) of the T.D.8776, page 6. Code. REG–110332–98, page 18. Final, proposed, and temporary regulations under section Notice 98–42, page 12. 985 of the Code provide guidance regarding certain federal 1998 marginal production rates. This notice announces tax consequences arising from the introduction of the euro. the applicable percentage to be used in determining per- A public hearing on the proposed regulations will be held on centage depletion for marginal properties for the 1998 cal- October 20, 1998. endar year.

Finding Lists begin on page 21.

Department of the Treasury IRB 1998-33 8/12/98 11:04 AM Page 2

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 Tax Administration

The function of the Internal Revenue Service is to adminis- The Service also has the responsibility of applying and ter the . 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.

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Introduction

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 Committee Reports. 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- lative Bulletins. 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.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986 Section 61.–Gross Income fice of the Associate Chief Counsel (Em- vices incurred in Year 1 when those ser- Defined ployee Benefits and Exempt Organiza- vices are provided by the retailer, or in tions). For further information regarding Year 2 when the retailer submits the re- 26 CFR 1.61–21: Taxation of fringe benefits. this revenue ruling contact, Ms. Smith on quired claim form for those services? Fringe benefits aircraft valuation (202) 622-6050 (not a toll-free call). FACTS formula. For purposes of section 1.61–21(g) of the Income Tax Regula- X, an accrual method taxpayer using a tions, relating to the rule for valuing non- Section 451.—General Rule for calendar year as its taxable year, manufac- commercial flights on employer-provided Taxable Year of Inclusion tures various consumer products, including aircraft, the Standard Industry Fare Level 26 CFR 1.451–1: General rule for taxable year of product M. Retailers engaged in the busi- (SIFL) cents-per-mile rates and terminal inclusion. ness of selling merchandise to consumers purchase product M from X for resale. In charges in effect for the second half of Under the all events test of § 461 of the Code, is 1998 are set forth. an accrual method manufacturer’s liability to pay a August of Year 1, X made a written offer to retailer for cooperative advertising services incurred pay each of these retailers $1 for each case Rev. Rul. 98–40 in Year 1 when those services are provided by the re- of product M that the retailer purchased tailer, or in Year 2 when the retailer submits the re- For purposes of the taxation of fringe from X during September, October, and quired claim form for those services. See Rev. Rul. November of Year 1, provided that the re- benefits under section 61 of the Internal 98–39, page 4. Revenue Code, section 1.61–21(g) of the tailer advertised X’s product M during Oc- Income Tax Regulations provides a rule tober or November of Year 1. To qualify for valuing noncommercial flights on Section 461.—General Rule for for X’s payment, the advertising provided by the retailer had to satisfy the require- employer-provided aircraft. Section Taxable Year of Deduction 1.61–21(g)(5) provides an aircraft valua- ments set forth in X’s offer regarding the 26 CFR 1.461–1: General rule for taxable year of tion formula to determine the value of format and content of the advertising (in- deduction. cluding the offering of a discount on prod- such flights. The value of a flight is de- (Also section 451; 1.451–1.) termined under the base aircraft valua- uct M), and the time for performance of the tion formula (also known as the Standard All events test; cooperative advertis- advertising. X’s offer further required that, Industry Fare Level formula or SIFL) by ing. Under the all events test of section to obtain payment, the retailer had to sub- multiplying the SIFL cents-per-mile 461 of the Code, an accrual method man- mit a claim form and proofs of perfor- rates applicable for the period during ufacturer’s liability for cooperative adver- mance within 90 days after the date that which the flight was taken by the appro- tising services of a retailer is incurred in the advertising was performed, verifying priate aircraft multiple provided in sec- Year 1, the year the services are per- that the advertising was performed in ac- tion 1.61–21(g)(7) and then adding the formed, provided the manufacturer is able cordance with the terms of X’s offer. applicable terminal charge. The SIFL to reasonably estimate the liability, even Y, a retailer that accepted X’s offer, or- cents-per-mile rates in the formula and though the retailer does not submit the re- dered 1,000 cases of product M from X the terminal charge are calculated by the quired claim form until Year 2. during September, October, and Novem- Department of Transportation and are re- ber of Year 1, and advertised product M in viewed semi-annually. Rev. Rul. 98–39 November of Year 1 in a manner that sat- The following chart sets forth the ter- ISSUE isfied the requirements of its agreement minal charges and SIFL mileage rates: with X. To obtain payment for that adver- Under the all events test of § 461 of the tising, Y submitted its claim form and proofs of performance to X in January of Period During Which Terminal SIFL Mileage Year 2. the Flight Is Taken Charge Rates X is able to make a reasonable estimate of the amount that it is liable to pay Y for 7/1/98–12/31/98 $31.81 Up to 500 miles the cooperative advertising services per- = $.1740 per mile formed by Y in Year 1.

501–1500 miles LAW AND ANALYSIS = $.1327 per mile Section 451 provides rules for deter- mining the taxable year of inclusion for Over 1500 miles items of gross income. = $.1276 per mile Section 1.451–1(a) of the Income Tax Regulations provides that under an ac- DRAFTING INFORMATION Internal Revenue Code, is an accrual crual method of accounting, income is in- The principal author of this revenue method manufacturer’s liability to pay a cludible in gross income when all the ruling is Felicia Daniels Smith of the Of- retailer for cooperative advertising ser- events have occurred that fix the right to August 17, 1998 4 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 5

receive such income and the amount Wrapping Machine Co. v. Commissioner, vertising services already performed. thereof can be determined with reason- 30 T.C. 550 (1958) (performance of ser- Thus, similar to Dally and Frank’s Cas- able accuracy. vices pursuant to a contract was necessary ing, Y’s submission of the claim form and Section 461(a) provides that the to establish the taxpayer’s liability); proofs of performance is a ministerial act, amount of any deduction or credit is taken Charles Schwab v. Commissioner, 107 much like the submission of an invoice. for the taxable year that is the proper tax- T.C. 282 (1996) (execution of a trade pur- These facts distinguish the cooperative able year under the method of accounting suant to a customer order fixes the bro- advertising agreement between X and Y used in computing taxable income. ker’s right to receive the commission in- from General Dynamics and demonstrate Section 461(h) and § 1.461–1(a)(2)(i) come). that Y’s submission to X of the claim form provide that, under the accrual method of Moreover, once the services are per- and proofs of performance is a mere tech- accounting, a liability is incurred, and is formed, the establishment of the fact of li- nicality, not a condition precedent that is generally taken into account for federal ability under the all events test is not de- necessary to establish X’s liability for income tax purposes, in the taxable year layed by an additional requirement in the § 461 purposes. in which (1) all the events have occurred agreement that a claim or documentation The last event necessary to establish that establish the fact of the liability, (2) be submitted to obtain payment, if such the fact of X’s liability under the all events the amount of the liability can be deter- act is ministerial. See Dally v. Commis- test occurred when Y performed the coop- mined with reasonable accuracy, and (3) sioner, 227 F.2d 724 (9th Cir. 1955), cert. erative advertising services in Year 1 in economic performance has occurred with denied, 351 U.S. 908 (1956) (contractor’s accordance with the terms of the contract. respect to the liability. right to income was fixed in year it deliv- X can reasonably estimate the amount of Section 461(h)(2)(A)(i) provides that, ered houses, not in later year when a its Year 1 liability for the cooperative ad- if the liability of the taxpayer arises out of properly certified invoice was submitted, vertising services performed by Y. Eco- the providing of services to the taxpayer even though the contract specifically pro- nomic performance with respect to X’s li- by another person, economic performance vided for payment upon the submission of ability occurred in Year 1 when Y occurs as that person provides the ser- a properly certified invoice); Frank’s Cas- performed the cooperative advertising vices. ing Crew & Rental Tools, Inc. v. Commis- services. Accordingly, X may deduct on Generally, in a transaction where one sioner, T.C. Memo. 1996–413 (contrac- its Year 1 federal income tax return its lia- taxpayer is accruing a liability to pay tor’s preparation and sending of the bility for Y’s cooperative advertising ser- another taxpayer, the last event neces- invoices were ministerial acts that did not vices. sary to establish the fact of liability postpone accrual of income otherwise under the all events test of § earned). See also Continental Tie & Lum- HOLDING 1.461–1(a)(2)(i) is the same event that ber Co. v. United States, 286 U.S. 290 Under the all events test of § 461, an fixes the right to receive income under (1932). accrual method manufacturer’s liability to the all events test of § 1.451–1(a). See However, in some cases, the require- pay a retailer for cooperative advertising Capital Investments of Hawaii, Inc. v. ment that a claim for payment be filed is a services is incurred in Year 1, the year in Commissioner, T.C. Memo. 1982–80, n. condition precedent that delays satisfac- which the services are performed, pro- 9 (the reasoning of cases analyzing § tion of the all events test for § 461 pur- vided the manufacturer is able to reason- 451 is applicable to an analysis under § poses. In United States v. General Dy- ably estimate this liability, and even 461); Schneer v. Commissioner, 97 T.C. namics Corp., 481 U.S. 239 (1987), the though the retailer does not submit the re- 643 at 650 (1991) (“the prerequisite of Court held that employees must file quired claim form until Year 2. performance of the services prior to any claims with the employer to establish the liability on the part of the obligor is an fact of the liability to reimburse employ- APPLICATION essential to satisfying the all-events test. ees for medical expenses under the all Any change in a taxpayer’s method of The right to receive income cannot be- events test. The Court noted that some accounting to conform with this revenue come fixed before the obligor has an covered employees fail to file claims with ruling is a change in method of accounting obligation to pay”); see also Rev. Rul. their employer for various reasons, such to which the provisions of §§ 446 and 481 79–266, 1979–2 C.B. 203, and Rev. Rul. that an employee’s receipt of covered and the regulations thereunder apply. A 79–410, 1979–2 C.B. 213. medical services was not sufficient to fix taxpayer wanting to change its method of Where a taxpayer’s obligations are set the employer’s liability. Thus, the filing accounting for its payments for coopera- forth in a written agreement, the terms of of the claim was not a mere technicality. tive advertising services provided by a re- the agreement are relevant in determining In the cooperative advertising agree- tailer to conform with this revenue ruling the events that fix the taxpayer’s obliga- ment between X and Y, the performance must follow the automatic change in ac- tion to pay. See, e.g., Decision, Inc. v. required under the agreement is the provi- counting method provisions of Rev. Proc. Commissioner, 47 T.C. 58 (1966), acq., sion of advertising services. Y’s submis- 97–37, 1997–33 I.R.B. 18, except that the 1967–2 C.B. 2. sion of a claim form and proofs of perfor- scope limitations in section 4.02, as well In general, the event fixing the fact of mance substantiating that it has as the application procedures in sections liability pursuant to an agreement for the performed the advertising according to 6.03, 6.04, and 6.05, of Rev. Proc. 97–37 provision of services is performance of X’s specifications is merely the mecha- do not apply. However, if the taxpayer is the services. See, e.g., National Bread nism by which Y requests payment for ad- under examination, before an appeals of- 1998–33 I.R.B. 5 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 6

fice, or before a federal court with respect these temporary regulations also serves as (transition period), the legacy currencies to any income tax issue, the taxpayer must the text of proposed regulations published will remain in circulation as subunits of provide a copy of the Form 3115, Applica- in REG–110332–98, page 18. the euro. The transition period is referred tion for Change in Accounting Method, to to as the “no prohibition, no compulsion” DATES: These regulations are effective the examining agent(s), appeals officer, or period because during this time amounts July 29, 1998. counsel for the government, as appropri- may generally be denominated in the ate, at the same time that it files the copy FOR FURTHER INFORMATION CON- legacy currencies and/or the euro at the of the Form 3115 with the national office. TACT: Howard Wiener of the Office of option of individuals and businesses. Fi- The Form 3115 must contain the name(s) Associate Chief Counsel (International), nally, by July 1, 2002, the legacy curren- and telephone number(s) of the examining (202) 622-3870, regarding the change in cies will no longer be accepted as legal agent(s), appeals officer, or counsel for the functional currency rules and Thomas tender. government, as appropriate. Preston of the Office of Assistant Chief On May 3, 1998, the European Union Counsel (Financial Institutions and Prod- announced the eleven countries that EFFECT ON OTHER DOCUMENTS ucts), (202) 622-3930, regarding section would initially participate in the conver- Rev. Proc. 97–37 is modified and am- 1001 (not toll free calls). sion and the expected rates at which the plified to include this accounting method respective currencies would convert to the change in the APPENDIX. SUPPLEMENTARY INFORMATION: euro. The eleven countries are Austria, Belgium, Finland, France, Germany, Ire- DRAFTING INFORMATION Background land, Italy, Luxembourg, Netherlands, The principal author of this revenue On March 9, 1998, the IRS issued An- Portugal, and Spain. Four current mem- ruling is John P. Moriarty of the Office of nouncement 98–18 (1998–9 IRB 44) re- bers of the European Union (Denmark, Assistant Chief Counsel (Income Tax and questing comments relating to the tax is- Greece, Sweden, and the United King- Accounting). For further information re- sues for U.S. taxpayers operating, dom) will not participate in the initial garding this revenue ruling, contact Mr. investing or otherwise conducting busi- conversion to the euro. These countries, Moriarty on (202) 622-4950 (not a toll- ness in a currency that is converting to the along with other countries that later join free call). euro. Numerous comments were re- the European Union, however, may con- ceived. After consideration of these com- vert their currencies to the euro at some future time. Section 985–Functional ments, these regulations are adopted as a temporary Treasury decision to provide Currency II. Temporary Regulations immediate guidance to taxpayers. 26 CFR 1.985–1: Functional currency. Explanation of Provisions 1. In General T.D. 8776 These temporary regulations provide I. Background guidance regarding certain of the federal DEPARTMENT OF THE TREASURY The Treaty on European Union signed income tax consequences arising from the Internal Revenue Service February 7, 1992, (31 I.L.M. 247) (en- introduction of the euro. Consistent with 26 CFR Part 1 tered into force November 1, 1993), sets comments received from taxpayers, the forth a plan to replace the national curren- regulations generally minimize the tax Conversion to the Euro cies of participating members (legacy cur- consequences that arise by reason of the rencies) that meet certain economic crite- euro conversion. In a limited number of AGENCY: Internal Revenue Service circumstances, however, the Treasury and (IRS), Treasury. ria with a single European currency (euro). Pursuant to directives of the Euro- IRS determined that considerations, such as administrative feasibility, made a dif- ACTION: Final and Temporary regula- pean Council, the process of converting ferent result more appropriate. tions. the legacy currencies into the euro will The regulations provide guidance with take place in three phases. SUMMARY: This document contains respect to two issues: (i) the circum- On January 1, 1999, the currency of temporary Income Tax Regulations relat- stances under which the euro conversion participating member states of the Euro- ing to U.S. taxpayers operating, investing creates a realization event with respect to pean Union shall be the euro. At that time, or otherwise conducting business in the instruments and contracts denominated in currencies of certain European countries the euro will be substituted for the cur- a legacy currency, and (ii) the circum- that are replacing their national currencies rency of each state at a conversion rate es- stances under which the euro conversion with a single, multinational currency tablished pursuant to the Treaty on Euro- constitutes a change in functional cur- called the euro. These regulations pro- pean Union. Thereafter, the bills and rency for a qualified business unit (QBU) vide rules relating to adjustments required coins of each of the legacy currencies will whose functional currency is a legacy cur- for qualified business units operating in remain in circulation but will cease to rency, and certain consequences thereof. such currencies and rules relating to the have independent value apart from the tax effect of holding such currencies or fi- euro. On January 1, 2002, euro bills and 2. Realization nancial instruments or contracts denomi- coins will be introduced into circulation. The temporary regulations provide that nated in such currencies. The text of From January 1, 1999, until June 30, 2002 the conversion of legacy currencies to the August 17, 1998 6 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 7

euro does not result in a realization event imposed on QBUs when they are required an election is provided for QBUs to real- under section 1001. This rule is broadly to change their internal systems to accom- ize exchange gain or loss on accounts re- applicable to all situations where the modate the introduction of the euro, the ceivable and payable immediately prior to rights and obligations of a taxpayer are al- regulations provide that a QBU that cur- the year of change. A QBU making this tered solely by reason of the euro conver- rently uses a legacy functional currency is election must realize exchange gains and sion. Thus, conversion to the euro of deemed to automatically change its func- losses on all of its accounts receivable and legacy currency held by a taxpayer and tional currency to the euro in the year the payable that are legacy currency denomi- conversion of legacy currency denomi- QBU changes its books and records to the nated section 988 transactions. The elec- nated contractual relationships, financial euro. That change, however, must be tion responds to the administrative bur- instruments, and other claims or obliga- made no later than the last taxable year dens associated with tracking exchange tions are not realization events solely as a beginning on or before the first day such gains and losses on large quantities of ac- result of the conversion. In addition, as a legacy currency is no longer valid legal counts receivable and payable. Taxpayers result of this rule, exchange gains and tender. not making the election will continue to losses on section 988 transactions denom- The euro conversion implicates the pol- treat these positions as section 988 trans- inated in a legacy currency will not be icy concerns underlying §1.985–5, actions under the general rule described taken into account until a subsequent real- namely, the preservation of built-in ex- above. ization event with respect to the underly- change gains and losses arising from the Exchange gains and losses on transac- ing instrument. For example, when the fact that positions that had once been de- tions in, or holdings of, nonfunctional Dutch guilder is converted into the euro, a nominated in a nonfunctional currency currency cash are recognized immediately U.S. dollar functional currency taxpayer will now be made or received in a QBU’s because cash accounts are generally will not recognize either market gain or functional currency. turned over rapidly and the administrative loss or exchange gain or loss on a fixed In the context of the euro conversion, burdens in tracking exchange gains and interest rate Dutch guilder debt instru- two items are of particular concern in losses outweigh the benefits of deferral. ment. properly accounting for exchange gains The regulations also provide special Other aspects of the euro conversion and losses: (1) section 988 transactions rules for taking into account exchange may result in taxable events. For exam- denominated in a legacy currency other gain or loss when the taxpayer and a ple, if an unscheduled fractional principal than the QBU’s legacy functional cur- branch of the taxpayer change their func- payment is made on a debt instrument in rency, and (2) unremitted earnings of a tional currencies to the euro. The rules order to facilitate a rounding convention, branch with a legacy functional currency provide that exchange gains and losses on this payment is accounted for under the different from the home office’s legacy unremitted earnings of affected branches rules governing payments on debt instru- functional currency. In both these in- be recognized ratably over a four-year pe- ments (such as §§1.446–2 and 1.1275–2) stances, positions that had previously riod beginning in the year of change. and under section 988 (in the case of a been accounted for in a nonfunctional Some commentators recommended that section 988 transaction). Other changes currency (against which exchange gains the principles of section 987 continue to may or may not constitute realization and loses would be computed) will, after be applied after the conversion. As in the the conversion, be accounted for in euros events depending on the terms of the case with cash, however, the Treasury and (against which exchange gains and losses changes. For example, accrual periods, IRS believe that the administrative bur- would not be computed when a QBU’s holiday conventions or indices on a float- dens for taxpayers and the government as functional currency is also the euro). ing rate instrument may be altered. well as the potential for abuse, outweigh Rather than requiring immediate recog- Whether these changes are realization the benefit of extended deferral. nition, as would be required under events must be determined under existing These temporary regulations also pro- §1.985–5, the temporary regulations pro- law. See, e.g., §1.1001–3. vide rules for the proper translation of a vide special rules for the euro conversion. Limitations that under otherwise applic- QBU’s balance sheet accounts in a man- These rules provide that for affected sec- able principles prevent or defer the recog- ner that preserves any accrued but unrec- tion 988 transactions (other than transac- nition of realized gains and losses continue ognized currency gain or loss. These tions in or holdings of nonfunctional cur- to apply. Thus, for example, recognition of rules are consistent with the existing rency cash), exchange gains and losses losses between related parties under sec- §1.985–5, change in functional currency that would have been recognized immedi- tion 267 and §1.988–1(a)(10) remain sub- rules. ately if the §1.985–5 change in functional ject to the limitations set forth in those sec- currency rules applied will be deferred tions. III. Other Issues until otherwise realized. This is accom- 3. Change in Functional Currency plished by providing that section 988 Finally, these regulations do not ad- The regulations provide that QBUs transactions continue to be treated as non- dress certain issues that taxpayers have with a legacy functional currency will be functional currency transactions under the commented upon that are not unique to deemed to have automatically changed principles of section 988 even though the the euro conversion. In particular, these their functional currency to the euro at the remaining payments on the asset or liabil- regulations do not address the deductibil- beginning of the year they are required to ity will be made in the QBU’s new func- ity of costs associated with the euro con- make such change. Because of the signif- tional currency (i.e., the euro). version and mismatches icant administrative burdens that will be In response to comments by taxpayers, that can occur as a result of tax account- 1998–33 I.R.B. 7 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 8

ing differences between the United States reference “§1.985–2” and adding tional currency to the euro under paragraph and other countries. “§1.985–2 or 1.985–8T” in its place. (b)(2) of this section, an affected taxpayer Par. 4. Section 1.985–8T is added to shall attach to its return for the taxable year Special Analysis read as follows: of change a statement that includes the fol- lowing: “TAXPAYER CERTIFIES THAT It has been determined that this Treasury §1.985–8T Special rules applicable to A QBU OF THE TAXPAYER HAS decision is not a significant regulatory ac- the European Monetary Union (conver- CHANGED ITS FUNCTIONAL CUR- tion as defined in Executive Order 12866. sion to the euro)(temporary). Therefore, a regulatory assessment is not RENCY TO THE EURO PURSUANT TO required. It has also been determined that (a) Definitions—(1) Legacy currency. TREAS. REG. §1.985–8T.” For purposes section 553(b) of the Administrative Proce- A legacy currency is the national currency of this paragraph (b)(3), an affected tax- dures Act (5 U.S.C. chapter 5) and the Reg- of a participating member state of the Eu- payer shall be in the case where the QBU ulatory Flexibility Act (5 U.S.C. chapter 6) ropean Union used prior to the substitu- is: a QBU of an individual U.S. resident do not apply to these regulations, and there- tion of the euro for the national currency (as a result of the activities of such individ- fore, a Regulatory Flexibility Analysis is of that state in accordance with the Treaty ual), the individual; a QBU branch of a not required. Pursuant to section 7805(f) of on European Union signed February 7, U.S. corporation, the corporation; a con- the Internal Revenue Code, these tempo- 1992. The term legacy currency shall also trolled foreign corporation (as described in rary regulations will be submitted to the include the European Currency Unit. section 957)(or QBU branch thereof), each Chief Counsel for Advocacy of the Small (2) Conversion rate. The conversion United States shareholder (as described in Business Administration for comment on rate is the rate at which the euro is substi- section 951(b)); a partnership, each partner their impact on small business. tuted for a legacy currency. separately; a noncontrolled section 902 (b) Operative rules—(1) Initial adop- corporation (as described in section Drafting Information tion. A QBU (as defined in §1.989(a)–1(b)) 904(d)(2)(E)) (or branch thereof), each do- whose first taxable year begins after the mestic shareholder as described in The principal authors of these regula- euro has been substituted for a legacy cur- §1.902–1(a)(1); or a trust or estate, the tions are Howard A. Wiener of the Office rency may not adopt that legacy currency fiduciary of such trust or estate. of the Associate Chief Counsel (Interna- as its functional currency. (c) Adjustments required—(1) In gen- tional) and Thomas Preston of the Office (2) QBU with a legacy functional cur- eral. A QBU that changes its functional of Associate Chief Counsel (Domestic). rency—(i) Required change. A QBU with currency to the euro pursuant to para- Other personnel from the IRS and Trea- a legacy currency as its functional cur- graph (b) of this section must make the sury Department also participated in their rency is required to change its functional adjustments described in paragraphs development. currency to the euro beginning the first (c)(2) through (5) of this section. Section 1.985–5 shall not apply. * * * * * day of the first taxable year: (A) That begins on or after the day that (2) Determining the euro basis of prop- Adoption of Amendments to the the euro is substituted for that legacy cur- erty and the euro amount of liabilities and Regulations rency (in accordance with the Treaty on other relevant items. The euro basis in European Union); and property and the euro amount of liabilities Accordingly, 26 CFR part 1 is amended (B) In which the QBU begins to main- and other relevant items shall equal the as follows: tain its books and records (as described in product of the legacy functional currency adjusted basis or amount of liabilities PART 1—INCOME TAXES §1.989(a)–1(d)) in the euro. (ii) Notwithstanding paragraph multiplied by the applicable conversion Paragraph 1. The authority citation for (b)(2)(i) of this section, a QBU with a rate. part 1 continues to read in part as follows: legacy currency as its functional currency (3) Taking into account exchange gain Authority: 26 U.S.C. 7805 * * * is required to change its functional cur- or loss on legacy currency section 988 Par. 2. In §1.985–1, paragraph (c)(6) is rency to the euro no later than the last tax- transactions—(i) In general. Except as amended by adding a sentence at the end able year beginning on or before the first provided in paragraphs (c)(3)(iii) and (iv) to read as follows: day such legacy currency is no longer of this section, a legacy currency denomi- nated section 988 transaction (determined §1.985–1 Functional currency. valid legal tender. (iii) Consent of Commissioner. A after applying section 988(d)) outstanding on the last day of the taxable year imme- * * * * * change made pursuant to paragraph (b)(2)(i) of this section shall be deemed to diately prior to the year of change shall (c) * * * continue to be treated as a section 988 (6) * * * For special rules relating to be made with the consent of the Commis- sioner for purposes of §1.985–4. A QBU transaction after the change and the prin- the conversion to the euro, see §1.985–8T. ciples of section 988 shall apply. changing its functional currency to the (ii) Example. The application of this * * * * * euro pursuant to this paragraph (b)(2) paragraph (c)(3) may be illustrated by the must make adjustments as provided in §1.985–4 [Amended] following examples: paragraph (c) of this section. Par. 3. In §1.985–4, the last sentence of (3) Statement to file upon change. With Example 1. X, a calendar year QBU on the cash paragraph (a) is amended by removing the respect to a QBU that changes its func- method of accounting, uses the deutschmark as its August 17, 1998 8 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 9

functional currency. X is not described in section accrued in 1999, X will realize no exchange gain or rency is other than the euro. If a branch 1281(b). On July 1, 1998, X converts 10,000 loss since the exchange rate when the interest ac- changes its functional currency from a deutschmarks (DM) into Dutch guilders(fl) at the crued and the spot rate on the payment date are the legacy currency to the euro for a taxable spot rate of fl1 = DM1 and loans the 10,000 guilders same. to Y (an unrelated party) for one year at a rate of (iii) X will realize exchange loss of =C666.67 on year during which the taxpayer’s func- 10% with principal and interest to be paid on June repayment of the loan principal computed in the tional currency is other than the euro, the 30, 1999. On January 1, 1999, X changes its func- same manner as in Example 1 [C= 5333.33 branch’s euro equity pool shall equal the tional currency to the euro pursuant to §1.985–8T. (fl12,000/2.25) – =C6000 (fl12,000/1)/2)]. The losses product of the legacy currency amount of The euro/deutschmark conversion rate is set by the with respect to accrued interest and principal are the equity pool multiplied by the applica- European Council at =C1 = DM2. The euro/guilder characterized and sourced under the rules of section conversion rate is set at =C1 = fl2.25. Accordingly, 988. ble conversion rate. No adjustment to the under the terms of the note, on June 30, 1999, X will basis pool is required. receive =C4444.44 (fl10,000/2.25) of principal and (iii) Special rule for legacy nonfunc- (ii) Branch changing from a legacy =C444.44 (fl1,000/2.25) of interest. Pursuant to this tional currency. The QBU shall realize or currency to the euro in a taxable year paragraph (c)(3), X will realize an exchange loss on the principal computed under the principles of otherwise take into account for all pur- during which taxpayer’s functional cur- §1.988–2(b)(5). For this purpose, the exchange rate poses of the Internal Revenue Code the rency is the euro. If a branch changes its used under §1.988–2(b)(5)(i) shall be the amount of any unrealized exchange gain or functional currency from a legacy cur- guilder/euro conversion rate. The amount under loss attributable to nonfunctional currency rency to the euro for a taxable year during §1.988–2(b)(5)(ii) is determined by translating the (as described in section 988(c)(1)(C)(ii)) which the taxpayer’s functional currency fl10,000 at the guilder/deutschmark spot rate on July 1, 1998, and translating that deutschmark amount that is denominated in a legacy currency as is the euro, the taxpayer shall realize gain into euros at the deutschmark/euro conversion rate. if the currency were disposed of on the last or loss attributable to the branch’s equity Thus, X will compute an exchange loss for 1999 of day of the taxable year immediately prior pool under the principles of section 987, =C555.56 determined as follows: [C= 4444.44 to the year of change. The character and computed as if the branch terminated on = (fl10,000/2.25) – C5000 ((fl10,000/1)/2) = source of the gain or loss are determined the last day prior to the year of change. –C= 555.56]. Pursuant to this paragraph (c)(3), the character and source of the loss are determined pur- under section 988. Adjustments under this paragraph suant to section 988 and regulations thereunder. Be- (iv) Legacy currency denominated ac- (c)(4)(ii) shall be taken into account by cause X uses the cash method of accounting for the counts receivable and payable—(A) In the taxpayer ratably over four taxable interest on this debt instrument, X does not realize general. A QBU may elect to realize or years beginning with the taxable year of exchange gain or loss on the receipt of that interest. change. Example 2. (i) X, a calendar year QBU on the ac- otherwise take into account for all pur- crual method of accounting, uses the deutschmark as poses of the Internal Revenue Code the (5) Adjustments to a branch’s accounts its functional currency. On February 1, 1998, X amount of any unrealized exchange gain when a taxpayer changes to the euro—(i) converts 12,000 deutschmarks into Dutch guilders at or loss attributable to a legacy currency Taxpayer changing from a legacy cur- the spot rate of fl1 = DM1 and loans the 12,000 denominated item described in section rency to the euro in a taxable year during guilders to Y (an unrelated party) for one year at a rate of 10% with principal and interest to be paid on 988(c)(1)(B)(ii) as if the item were termi- which a branch’s functional currency is January 31, 1999. In addition, assume the average nated on the last day of the taxable year other than the euro. If a taxpayer rate (deutschmark/guilder) for the period from Feb- ending prior to the year of change. changes its functional currency to the ruary 1, 1998, through December 31, 1998 is fl1.07 (B) Time and manner of election. With euro for a taxable year during which the = DMl. Pursuant to §1.988– 2(b)(2)(ii)(C), X will respect to a QBU that makes an election functional currency of a branch of the accrue eleven months of interest on the note and rec- ognize interest income of DM1028.04 (fl1100/1.07) described in paragraph (c)(3)(iv)(A) of taxpayer is other than the euro, the basis in the 1998 taxable year. this section, an affected taxpayer (as de- pool shall equal the product of the legacy (ii) On January 1, 1999, the euro will replace the scribed in paragraph (b)(3) of this section) currency amount of the basis pool multi- deutschmark as the national currency of Germany shall attach a statement to its tax return plied by the applicable conversion rate. pursuant to the Treaty on European Union signed for the taxable year of change which in- No adjustment to the equity pool is re- February 7, 1992. Assume that on January 1, 1999, X changes its functional currency to the euro pur- cludes the following: “TAXPAYER CER- quired. suant to §1.985–8T. The euro/deutschmark conver- TIFIES THAT A QBU OF THE TAX- (ii) Taxpayer changing from a legacy sion rate is set by the European Council at =C1 = PAYER HAS ELECTED TO REALIZE currency to the euro in a taxable year DM2. The euro/guilder conversion rate is set at =C1 CURRENCY GAIN OR LOSS ON during which a branch’s functional cur- = fl2.25. In 1999, X will accrue one month of inter- LEGACY CURRENCY DENOMI- rency is the euro. If a taxpayer changes est equal to =C44.44 (fl100/2.25). On January 31, 1999, pursuant to the note, X will receive interest NATED ACCOUNTS RECEIVABLE its functional currency from a legacy cur- denominated in euros of =C533.33 (fl1200/2.25). AND PAYABLE UPON CHANGE OF rency to the euro for a taxable year during Pursuant to this paragraph (c)(3), X will realize an FUNCTIONAL CURRENCY TO THE which the functional currency of a branch exchange loss in the 1999 taxable year with respect EURO.” A QBU making the election of the taxpayer is the euro, the taxpayer to accrued interest computed under the principles of must do so for all legacy currency denom- shall take into account gain or loss as de- §1.988–2(b)(3). For this purpose, the exchange rate used under §1.988–2(b)(3)(i) is the guilder/euro inated items described in section termined under paragraph (c)(4)(ii) of this conversion rate and the exchange rate used under 988(c)(1)(B)(ii). section. §1.988–2(b)(3)(ii) is the deutschmark/euro conver- (4) Adjustments when a branch (6) Additional adjustments that are sion rate. Thus, with respect to the interest accrued changes its functional currency to the necessary when a corporation changes its = in 1998, X will realize exchange loss of C25.13 euro—(i) Branch changing from a legacy functional currency to the euro. The under §1.988–2(b)(3) as follows: [C= 488.89 (fl1100/2.25) – =C514.02 (DM1028.04/2) = currency to the euro in a taxable year amount of a corporation’s euro currency –C= 25.13]. With respect to the one month of interest during which taxpayer’s functional cur- earnings and profits and the amount of its 1998–33 I.R.B. 9 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 10

euro paid-in capital shall equal the prod- (a) Conversion of currencies. For pur- ing payments of euros, that alteration is uct of the legacy currency amounts of poses of §1.1001–1(a), the conversion to not a modification within the meaning of these items multiplied by the applicable the euro of legacy currencies (as defined §1.1001–3(c). conversion rate. The foreign income in §1.985–8T(a)(1)) is not the exchange (c) Effective date. This section applies taxes and accumulated profits or deficits of property for other property differing to tax years ending after July 29, 1998. in accumulated profits of a foreign corpo- materially in kind or extent. ration that were maintained in foreign (b) Effect of currency conversion on Michael P. Dolan, currency for purposes of section 902 and other rights and obligations. For pur- Deputy Commissioner of that are attributable to taxable years of the poses of §1.1001–1(a), if, solely as the re- Internal Revenue. foreign corporation beginning before Jan- sult of the conversion of legacy currencies uary 1, 1987, also shall be translated into to the euro, rights or obligations denomi- Approved July 17, 1998. the euro at the conversion rate. nated in a legacy currency become rights Donald C. Lubick, (d) Effective date. This section applies or obligations denominated in the euro, Assistant Secretary of to tax years ending after July 29, 1998. that event is not the exchange of property the Treasury. Par. 5. Section 1.1001–5T is added to for other property differing materially in kind or extent. Thus, for example, when a read as follows: (Filed by the Office of the Federal Register on July debt instrument that requires payments of 28, 1998, 8:45 a.m., and published in the issue of the §1.1001–5T European Monetary Union amounts denominated in a legacy cur- Federal Register for July 29, 1998, 63 F.R. 40366) (conversion to the euro)(temporary). rency becomes a debt instrument requir-

August 17, 1998 10 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 11

Part III. Administrative, Procedural, and Miscellaneous Effective Date of 1996–2 C.B. 229, provided that the regu- effective before the first day of that plan Nondiscrimination Regulations lations under §§ 401(a)(4), 401(a)(5), year. (A later remedial amendment period for Church Plans 401(l) and 414(s) apply for nonelecting applies for governmental plans.) church plans in plan years beginning on III. EXTENSION OF EFFECTIVE Notice 98–39 or after January 1, 1999. For plan years DATE OF NONDISCRIMINATION beginning before that effective date, non- I. PURPOSE REGULATIONS FOR NONELECTING electing church plans must be operated in This notice extends, until the first day CHURCH PLANS accordance with a reasonable, good faith of the first plan year beginning on or after interpretation of these statutory provi- Under the extension provided by this January 1, 2001, the effective date of cer- sions. notice, the regulations under §§ 401(a)(4), tain nondiscrimination regulations for The remedial amendment period de- 401(a)(5), 401(l), and 414(s) apply to nonelecting church plans. Specifically, scribed in § 401(b) is generally the period nonelecting church plans only for plan this notice extends the effective date of during which a plan may be amended years beginning on or after January 1, the regulations under §§ 401(a)(4), retroactively to comply with certain plan 2001. For plan years beginning before 401(a)(5), 401(l), and 414(s) of the Inter- qualification requirements. Announce- this extended effective date, nonelecting nal Revenue Code. This notice also ex- ment 95–48 and Notice 96–64 extended church plans must be operated in accor- tends the TRA ’86 remedial amendment the remedial amendment period under § dance with a reasonable, good faith inter- period for such provisions, and other re- 401(b) for nonelecting church plans for pretation of these sections. lated administrative relief for nonelecting certain amendments (“TRA ’86 remedial church plans, until the last day of the first IV. EXTENSION OF REMEDIAL amendment period”) to the last day of the plan year beginning on or after January 1, AMENDMENT PERIOD AND first plan year beginning on or after Janu- 2001. ADMINISTRATIVE RELIEF FOR ary 1, 1999. The amendments to which NONELECTING CHURCH PLANS the TRA ’86 remedial amendment period II. BACKGROUND FOR AMENDMENTS RELATING TO applies are those required to comply with NONDISCRIMINATION A. Church Plans TRA ’86 and subsequent legislation REQUIREMENTS Section 414(e)(1) of the Code provides through the Omnibus Budget Reconcilia- in general that the term “church plan” tion Act of 1993. Announcement 95–48 Under this notice, the TRA ’86 reme- means a plan established and maintained and Notice 96–64 also provided that, for a dial amendment period for nonelecting for its employees (and their beneficiaries) nonelecting church plan during the TRA church plans is extended to the last day of by a church or by a convention or associa- ’86 remedial amendment period, the addi- the first plan year beginning on or after tion of churches which is exempt from tax tional administrative relief provided January 1, 2001, but only for amendments under § 501. Pursuant to § 410(d), a under Notice 92–36, 1992–2 C.B. 364, required to comply with the nondiscrimi- church or convention or association of would continue to be available. nation requirements of §§ 401(a)(4), churches which maintains any church 401(a)(5), 401(l), and 414(s). The addi- C. Revenue Procedure 97–41 and plan may make an election under § 410(d) tional administrative relief provided to have certain Code provisions relating Revenue Procedure 98–14 under Notice 92–36 also applies to these to participation, vesting, and funding, The Uruguay Round Agreements Act plans through this extended remedial etc., apply to such church plan (an “elect- of 1994 (“GATT”), SBJPA (including amendment period with respect to these ing church plan”) as if such provisions did § 414(u) of the Code and the Uniformed nondiscrimination requirements. This no- not contain an exclusion for church plans. Services Employment and Reemployment tice does not extend the remedial amend- A church plan for which such an election Rights Act of 1994 (“USERRA”)), and ment periods for any provisions applica- has not been made (a “nonelecting church the Taxpayer Relief Act of 1997 (“TRA ble to nonelecting church plans other than plan”) is not subject to these provisions. ’97”) changed certain provisions of the these nondiscrimination requirements. Section 1462(b) of the Small Business Code affecting qualified plans. Rev. Proc. V. SCOPE AND COMMENTS Job Protection Act of 1996 (“SBJPA”) 97–41, 1997–33 I.R.B. 51, and Rev. Proc. provides that the Secretary of the Trea- 98–14, 1998–4 I.R.B. 22, set forth the re- The extensions described in this notice sury may design nondiscrimination and medial amendment period for plans for are provided in anticipation of the devel- coverage safe harbors for church plans. amendments relating to these statutes. opment of nondiscrimination and cover- The remedial amendment period for these age safe harbors for nonelecting church B. Announcement 95–48 and Notice statutes generally permits plan amend- plans to comply with §§ 401(a)(4), 96–64 ments to be made retroactively effective if 401(a)(5), 401(l), and 414(s), as described The nondiscrimination requirements they are adopted on or before the last day in § 1462(b) of SBJPA. The Treasury and under the Code were substantially of the first plan year beginning on or after the Service recognize that certain issues changed by the Act of 1986 January 1, 1999, and they relate to GATT, may arise for nonelecting church plans (“TRA ’86”). Announcement 95–48, SBJPA (including § 414(u) and that are attributable to unique features of 1995–23 I.R.B. 13, and Notice 96–64, USERRA), and TRA ’97 changes that are churches as sponsoring employers. Such 1998–33 I.R.B. 11 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 12

issues may arise, for instance, in the inter- The enhanced oil recovery credit under § endar year as well as the previously pub- action of §§ 401(a)(4) and 410(c). The 43 for any taxable year is reduced if the lished inflation adjustment factors and Treasury and the Service invite specific “reference price,” determined under § phase-out amounts for the 1991 through comments and suggestions regarding the 29(d)(2)(C), for the calendar year preced- 1997 calendar years. design of safe harbors for nonelecting ing the calendar year in which the taxable church plans. year begins is greater than $28 multiplied The extensions provided by this notice by the inflation adjustment factor for that Notice 98–41 TABLE 2 do not apply to electing church plans. year. INFLATION ADJUSTMENT The Treasury and the Service do not The term “inflation adjustment factor” FACTORS AND PHASE-OUT presently anticipate the development of means, with respect to any calendar year, AMOUNTS safe harbors for electing church plans a fraction the numerator of which is the Inflation under § 1462(b) of SBJPA, but comments GNP implicit price deflator for the pre- Calendar Adjustment Phase-out are welcome regarding whether these ceding calendar year and the denominator Year Factor Amount plans need safe harbors. Furthermore, of which is the GNP implicit price defla- this notice does not apply to annuity con- tor for 1990. 1991 1.0000 0 tracts or other arrangements maintained Because the reference price for the 1992 1.0363 0 by churches pursuant to § 403(b), which 1997 calendar year ($17.24) does not ex- 1993 1.0708 0 continue to be eligible for the relief de- ceed $28 multiplied by the inflation ad- 1994 1.0992 0 scribed in § VI of Notice 96–64. justment factor for the 1998 calendar 1995 1.1160 0 Comments or suggestions in response year, the enhanced oil recovery credit for 1996 1.1485 0 to this notice should be addressed to qualified costs paid or incurred in 1998 is 1997 1.1720 0 CC:DOM:CORP:R (Notice 98–39), determined without regard to the phase- 1998 1.1999 0 Room 5226, Internal Revenue Service, out for crude oil price increases. POB 7604, Ben Franklin Station, Wash- Table 1 contains the GNP implicit price ington, DC 20044. Alternatively, taxpay- deflator used for the 1998 calendar year, DRAFTING INFORMATION ers may hand-deliver comments between as well the previously published GNP im- The principal author of this notice is the hours of 8 a.m. and 5 p.m. to: plicit price deflators used for the 1991 Brenda M. Stewart of the Office of Assis- CC:DOM:CORP:R (Notice 98–39), through 1997 calendar years. tant Chief Counsel (Passthroughs and Courier’s desk, Internal Revenue Service, Special Industries). For further informa- 1111 Constitution Ave., NW, Washington, Notice 98–41 TABLE 1 tion regarding this notice contact Ms. DC, or may submit comments electroni- Stewart on (202) 622-3120 (not a toll-free cally via the IRS internet site at GNP IMPLICIT PRICE DEFLATORS call). http://www.irs.ustreas.gov./prod/tax_regs/ GNP Implicit comments.html Calendar Year Price Deflator 1998 Marginal Production Rates VI. EFFECT ON OTHER DOCUMENTS 1990 112.9 (used for 1991) 1991 117.0 (used for 1992) Notices 96–64 and 92–36 are modified. Notice 98–42 1992 120.9 (used for 1993) DRAFTING INFORMATION 1993 124.1 (used for 1994) Section 613A(c)(6)(C) of the Internal The principal author of this notice is 1994 126.0 (used for 1995) Revenue Code defines the term “ap- Diane S. Bloom of the Employee Plans 1995 107.5 (used for 1996)* plicable percentage” for purposes of Division. For further information regard- 1996 109.7 (used for 1997) determining percentage depletion for ing this notice, please contact the Em- 1997 112.35 (used for 1998)** oil and gas produced from marginal ployee Plans Division’s taxpayer assis- * Beginning in 1995, the GNP implict properties. The applicable percentage tance telephone service at (202) 622-6074 price deflator was rebased relative to is the percentage (not greater than 25 or (202) 622-6075, between the hours of 1992. The 1990 GNP implicit price percent) equal to the sum of 15 percent, 1:30 p.m. and 3:30 p.m. Eastern Time, deflator used to compute the 1996 § 43 plus one percentage point for each Monday through Thursday. Ms. Bloom inflation adjustment factor is 93.6. whole dollar by which $20 exceeds the may be reached at (202) 622-6214. These reference price (determined under § telephone numbers are not toll-free. ** Beginning in 1997, two digits fol- 29(d)(2)(C)) for crude oil for the calen- low the decimal point in the GNP im- dar year preceding the calendar year in plicit price deflator. The 1990 GNP which the taxable year begins. The ref- 1998 Section 43 Inflation price deflator used to compute the erence price determined under § Adjustment 1998 § 43 inflation adjustment factor 29(d)(2)(C) for the 1997 calendar year is 93.63. is $17.24. Notice 98–41 Table 1 contains the applicable percent- Section 43(b)(3)(B) of the Internal Table 2 contains the inflation adjust- ages for marginal production for taxable Revenue Code requires the Secretary to ment factor and the phase-out amount for years beginning in calendar years 1991 publish an inflation adjustment factor. taxable years beginning in the 1998 cal- through 1998. August 17, 1998 12 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 13

BACKGROUND view by the Tax Court under § 7436(a). Notice 98–42 TABLE 1 Section 7436(a) of the Code provides The Service will issue a Notice of De- APPLICABLE PERCENTAGE FOR the Tax Court with jurisdiction to review termination only after the Service has de- MARGINAL PRODUCTION determinations by the Service that work- termined both that one or more individu- ers are employees for purposes of subtitle als performing services for the taxpayer Applicable are employees for purposes of subtitle C Calendar Year Percentage C of the Code, or that the organization for which services are performed is not enti- and that the taxpayer is not entitled to re- 1991 15 percent tled to relief from employment taxes lief under § 530. This will provide tax- 1992 18 percent under § 530 of the Revenue Act of 1978. payers with the opportunity to resolve 1993 19 percent Section 7436(a) requires that the determi- both issues in one judicial determination. 1994 20 percent nation involve an actual controversy and TAXPAYERS ELIGIBLE TO SEEK 1995 21 percent that it be made as part of an examination. JUDICIAL REVIEW 1996 20 percent Section 7436 became effective on August 1997 16 percent 5, 1997. Section 7436(b) provides that a plead- 1998 17 percent Proceedings under § 7436 may be con- ing seeking Tax Court review of the Ser- ducted pursuant to the Tax Court’s simpli- vice’s determination may be filed only by “the person for whom the services are DRAFTING INFORMATION fied procedures for small tax cases set forth in § 7463 of the Code and Rule 295 performed.” Thus, workers may not seek The principal author of this notice is of the Tax Court’s Rules of Practice and review of the Service’s determinations Brenda M. Stewart of the Office of Assis- Procedure. Currently, taxpayers may under § 7436. In addition, because there tant Chief Counsel (Passthroughs and elect, with the concurrence of the Tax must be an actual controversy, review Special Industries). For further informa- Court, to use these simplified procedures may not be sought by a third party that tion regarding this notice contact Ms. if the amount of employment taxes placed has not been determined by the Service to Stewart on (202) 622-3120 (not a toll-free in dispute is $50,000 or less for each cal- be the employer. call). endar quarter involved. NOTICE OF DETERMINATION ISSUES TO WHICH § 7436 APPLIES CONCERNING WORKER New Procedures for Processing Section 7436(a) provides the Tax Court CLASSIFICATION UNDER § 7436 Employment Tax Cases with jurisdiction to review the Service’s The Service will inform taxpayers of a Involving Worker Classification determinations that one or more individu- determination described in § 7436(a) by and Section 530 of the Revenue als performing services for the taxpayer sending the taxpayer a Notice of Determi- Act of 1978 Under Section are employees of the taxpayer for pur- nation by certified or registered mail. A 7436 of the Code poses of subtitle C of the Code, or that the copy of the current Notice of Determina- taxpayer is not entitled to relief under § tion, which may be revised from time to Notice 98–43 530 with respect to such individuals. time, is attached hereto as Exhibit 1. Thus, § 7436(a) does not provide the Tax The Notice of Determination will ad- PURPOSE Court with jurisdiction to determine any vise taxpayers of the opportunity to seek The Taxpayer Relief Act of 1997 amount of employment tax or penalties. Tax Court review and provides informa- (TRA ’97), Pub. L. No. 105–34, 111 Stat. Nor does § 7436(a) provide the Tax Court tion on how to do so. Attached to the No- 788, created new § 7436 of the Internal with jurisdiction to review other employ- tice of Determination will be a schedule Revenue Code (the “Code”), which pro- ment tax issues. Moreover, the proce- showing each kind of tax with its pro- vides Tax Court review rights concern- dures set forth in § 7436 do not apply to posed employment tax adjustment by cal- ing certain employment tax determina- employment-related issues not arising endar quarter. The schedule will be pro- tions. This notice provides information under subtitle C, such as the classification vided to enable the taxpayer to determine about how taxpayers may petition for of individuals with respect to pension eligibility to elect use of the small tax Tax Court review of employment tax de- plan coverage or the proper treatment of case procedures under § 7436(c). Cur- terminations under § 7436. Attached to individual income tax deductions. Addi- rently, the small tax case procedures may this notice as Exhibit 1 is a “Notice of tionally, insofar as § 7436(a) only confers be available under § 7436(c) if the Determination Concerning Worker Clas- jurisdiction upon the Tax Court to review amount of employment taxes placed in sification Under Section 7436” (a “No- determinations that are made by the Ser- dispute is $50,000 or less for each calen- tice of Determination”). With respect to vice as part of an examination, other Ser- dar quarter involved. taxpayers whose workers are the subject vice determinations that are not made as In most cases, a taxpayer who receives of an employment tax determination, the part of an examination, including those a Notice of Determination will have pre- attached Notice of Determination ad- that are made in the context of private let- viously received a “thirty-day letter,” dressed to a taxpayer will constitute the ter rulings or Forms SS–8, Determination which the Service sends to taxpayers in “determination” that is a prerequisite to of Employee Work Status for Purposes of unagreed examination cases. The thirty- invoking the Tax Court’s jurisdiction Federal Employment Taxes and Income day letter lists the proposed employment under § 7436. Tax Withholding, are not subject to re- tax adjustments to be made and describes 1998–33 I.R.B. 13 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 14

the taxpayer’s right to either agree to the after the Service mails its Notice of Deter- for assessment of taxes attributable to the proposed employment tax adjustments or, mination to the taxpayer by certified or worker classification and § 530 issues alternatively, to protest the proposed ad- registered mail. If the taxpayer discusses will be suspended under section 6503(a) justments to the Appeals Division of the the case with the Service during the pe- during the Tax Court proceedings, and Service within thirty days of the date of riod before the 91st day following the for 60 days after the Tax Court decision the letter. If the taxpayer does not re- mailing of the Notice of Determination, becomes final. spond to the thirty-day letter by agreeing the discussion will not extend the period to the proposed adjustments or, alterna- in which the taxpayer may file a petition RESTRICTIONS ON ASSESSMENT tively, by filing a protest with the Appeals with the Tax Court. Section 7436(d)(1) provides that the re- Division, the taxpayer will receive, by A taxpayer who does not file a Tax strictions on assessment in § 6213 of the certified or registered mail, a Notice of Court petition within the allotted time re- Code apply in the same manner as if a no- Determination. Under normal proce- tains the right to seek judicial review of tice of deficiency had been issued. Thus, dures, if the taxpayer does not respond to the Service’s employment tax determina- pursuant to § 6213(a), the Service is pre- the thirty-day letter, the taxpayer should tions by paying the tax and filing a claim cluded from assessing the taxes attribut- generally expect to receive a Notice of for refund, as required by § 7422(a) of the able to the worker classification and § 530 Determination within sixty days after ex- Code. If the claim for refund is denied, issues prior to expiration of the 90-day piration of the thirty-day period beginning the taxpayer may file a refund suit in dis- period during which the taxpayer may file with the date on the thirty-day letter. If no trict court or the Court of Federal Claims. a timely Tax Court petition. If the tax- Notice of Determination is received dur- payer does file a timely Tax Court peti- ing this period, the taxpayer may wish to APPEALS JURISDICTION tion, § 6213(a) generally precludes the contact the local Internal Revenue Service Cases docketed in the United States Service from assessing taxes attributable office to check on the status of the case. Tax Court will be referred by District to the worker classification and § 530 is- If the taxpayer responds to the thirty- Counsel to the Appeals Division for con- sues until the decision of the Tax Court day letter by filing a protest with the Ap- sideration of settlement unless the Notice has become final. If the taxpayer does not peals Division (or if the case proceeds to of Determination was issued by Appeals. file a timely Tax Court petition before the Appeals by way of the employment tax Cases in which Appeals issued such a No- 91st day after the Notice of Determination early referral procedures, see Announce- tice of Determination may be referred to was mailed, the employment taxes attrib- ment 97–52, 1997–21 I.R.B. 22; An- Appeals unless District Counsel deter- utable to the workers described in the No- nouncement 96–13, 1996–12 I.R.B. 33; mines that there is little likelihood that a tice of Determination may thereafter be and Rev. Proc. 96–9, 1996–1 C.B. 575), settlement of all or a part of the case can assessed. and the worker classification and § 530 is- be achieved in a reasonable period of sues are not settled on an agreed basis in time. Appeals will have sole settlement AGREED SETTLEMENTS the Appeals Division, the taxpayer will authority over docketed cases referred to If the taxpayer wishes to settle the thereafter receive a Notice of Determina- Appeals until the case is returned to Dis- worker classification and § 530 issues on tion. Taxpayers are encouraged to resolve trict Counsel. See Rev. Proc. 87–24, an agreed basis before issuance of a No- cases in nondocketed status by requesting 1987–1 C.B. 720. tice of Determination, the taxpayer must use of the early referral procedures in ap- formally waive the restrictions on assess- SUSPENSION OF STATUTE OF propriate cases. ment contained in §§ 7436(d)(1) and LIMITATIONS 6213. This will generally be accom- PREREQUISITE FOR SEEKING TAX Section 7436(d)(1) provides that the plished by execution of an agreed settle- COURT REVIEW suspension of the limitations period for ment that contains the following lan- Because a Notice of Determination assessment in § 6503(a) of the Code ap- guage: constitutes the Service’s determination plies in the same manner as if a notice of I understand that, by signing this described in § 7436(a), the Notice of De- deficiency had been issued. Thus, pur- agreement, I am waiving the restric- termination is a jurisdictional prerequisite suant to § 6503(a), the mailing of the No- tions on assessment provided in for seeking Tax Court review of the Ser- tice of Determination by certified or reg- sections 7436(d) and 6213(a) of the vice’s determinations regarding worker istered mail will suspend the statute of Internal Revenue Code of 1986. classification and § 530 issues. Tax Court limitations for assessment of taxes attrib- The Service will not assess employ- proceedings seeking review of these de- utable to the worker classification and § ment taxes attributable to worker classifi- terminations may not be commenced 530 issues. Generally, the statute of limi- cation or § 530 issues unless either the prior to the time the Service issues a No- tations for assessment of taxes attribut- Service has issued a Notice of Determina- tice of Determination to the taxpayer. able to the worker classification and § tion to the taxpayer and the 90-day period 530 issues is suspended for the 90-day for filing a Tax Court petition has expired TIME BY WHICH PETITION MUST BE period during which the taxpayer can or, alternatively, the taxpayer has waived FILED begin a suit in Tax Court, plus an addi- the restrictions on assessment. If the Ser- Section 7436(b)(2) provides that a tax- tional 60 days thereafter. Moreover, if vice erroneously makes an assessment of payer’s petition for review must be filed the taxpayer does file a timely petition in taxes attributable to worker classification with the Tax Court before the 91st day the Tax Court, the statute of limitations and § 530 issues without first either issu- August 17, 1998 14 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 15

ing a Notice of Determination or obtain- 1997, effective date of the Act are not issues addressed in this notice, the form ing a waiver of restrictions on assessment subject to the new legislation or the pro- of the attached Notice of Determination, from the taxpayer, the taxpayer is entitled cedures discussed above. All employ- as well as with respect to any procedural to an automatic abatement of the assess- ment tax examinations involving worker issues which should be addressed in forth- ment. However, once any such proce- classification and/or § 530 issues that coming guidance. Written comments dural defects are corrected, the Service were pending as of August 5, 1997, are should be submitted to Lynne A. Camillo may reassess the employment taxes to the subject to the new legislation. of the Employee Benefits and Exempt Or- same extent as if the abated assessment ganizations Division, Office of Chief had not occurred. DRAFTING INFORMATION Counsel, Internal Revenue Service, 1111 The principal author of this notice is Constitution Avenue, NW, Room 5329, EFFECTIVE DATE Lynne A. Camillo of the Office of the As- Washington, DC 20224. For further in- Section 1454 of TRA ’97 is effective as sociate Chief Counsel (Employee Bene- formation regarding this notice contact of August 5, 1997. Thus, assessments fits and Exempt Organizations). The Ser- Lynne A. Camillo at (202) 622-6040 (not that were made prior to the August 5, vice invites comments with respect to the a toll-free call).

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Internal Revenue Service Department of the Treasury Date: Taxpayer Identification Number: Person to Contact: Telephone Number:

NOTICE OF DETERMINATION CONCERNING WORKER CLASSIFICATION UNDER SECTION 7436 As a result of an employment tax audit, we are sending you this NOTICE OF DETERMINATION CONCERNING WORKER CLASSIFICATION UNDER SECTION 7436. We have determined that the individual(s) listed or described on the attached schedule are to be classified as employees for purposes of federal employment taxes under subtitle C of the Internal Revenue Code and that you are not entitled to relief from this classification pursuant to section 530 of the Revenue Act of 1978 with respect to such individual(s). This determination could result in employment taxes being assessed against you. If you want to contest this determination in court, you may file a petition with the for a redeter- mination of the above-referenced issues. If you wish to contest this determination in the United States Tax Court, your petition must be filed before the 91st day after the date this letter was mailed by certified or registered mail. You can get a copy of the rules for filing a petition by writing to the address below. United States Tax Court 400 Second Street, NW Washington, DC 20217 Send the completed petition, a copy of this letter, and copies of all statements and/or schedules you received with this let- ter to the Tax Court at the same address above. The Tax Court cannot consider your case if the petition is filed late. The peti- tion is considered timely filed if the postmark date (either by the U.S. Postal Service or a designated private delivery service) falls within the period for filing a petition described above and the envelope containing the petition is properly addressed with the correct postage. The time you have to file a petition with the Tax Court is set by law and cannot be extended. Thus, contacting the Internal Revenue Service (IRS) for more information, or receiving other correspondence from the IRS, will not change the period for filing a petition with the Tax Court. EXHIBIT 1 If you are in bankruptcy, under Bankruptcy Code section 362(a)(8), the filing of a petition with the Tax Court is automatical- ly stayed because of your bankruptcy case. When the automatic stay is in effect, you must ask the Bankruptcy Court (under Bankruptcy Code section 362(d)(1)) to lift the stay so you can file a petition with the Tax Court. Your petition must be filed before the 91st day after the date of this letter, plus any additional period provided by section 6213(f)(1) of the Internal Revenue Code (gen- erally, the period that the automatic stay is in effect, plus 60 days) to file a petition with the Tax Court. If this letter is addressed to both husband and wife, and both want to petition the Tax Court, both must sign and file the peti- tion or each must file a separate, signed petition. If more than one tax period is shown on the attached schedule, you only need to file one petition showing all of the periods you are contesting. The Tax Court has a simplified procedure for small tax cases that will apply when the amount of employment taxes in dispute is $50,000 or less for each calendar quarter involved. Attached is a preliminary calculation of the amounts that we think you might owe as a result of this determination. We have included this calculation for your use in determining whether you are entitled to request that your case be conducted under the Tax Court’s simplified procedures for small tax cases. You can get more information about this procedure by writing to the Tax Court at the address listed above. You should write promptly if you intend to file a peti- tion with the Court. If you decide not to file a petition with the Tax Court, we may assess the amount of employment taxes owed. If you do file a timely petition, we will not assess those taxes until the decision of the Tax Court is final. If you do not file a Tax Court petition within the allotted time, you still may seek judicial review of the IRS’s employment tax determinations by paying the tax and filing a claim for refund with the IRS. If the claim for refund is denied, you may file a refund suit in district court or the Court of Federal Claims. If you have any questions about this letter, you may write to the person whose name and IRS address are shown on the front of this letter. If you write, please include your telephone number, the best time for us to call you if we need more information, and August 17, 1998 16 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 17

a copy of this letter to help us identify your account. Keep the original letter for your records. If you prefer, you may call the IRS contact person at the telephone number on the front page of this letter. If this number is outside your local calling area, there will be a long distance charge to you. You may call the IRS telephone number listed in your local directory. An IRS employee there may be able to help you, but the contact person at our address shown on this letter is most familiar with your case.

Thank you for your cooperation.

Sincerely yours,

Commissioner by

Enclosure: Explanation of tax changes

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Part IV. Items of General Interest Notice of Proposed Rulemaking SUPPLEMENTARY INFORMATION: prior to the conversion will be a euro de- and Notice of Public Hearing nominated position after the conversion, Background and the section 988 rules should then be Conversion to the Euro Temporary regulations in T.D. 8776 applied to the euro denominated position. REG–110332–98 amend the Income Tax Regulations (26 Special Analyses CFR part 1) relating to sections 985 and AGENCY: Internal Revenue Service 1001. The temporary regulations contain It has been determined that this notice (IRS), Treasury. rules relating to conversion to the euro. of proposed rulemaking is not a signifi- The text of those temporary regulations cant regulatory action as defined in EO ACTION: Notice of proposed rulemak- also serves as the text of these proposed 12866. Therefore, a regulatory assess- ing by cross-reference to temporary regu- regulations. The preamble to the tempo- ment is not required. It has also been de- lations and notice of public hearing. rary regulations explains the temporary termined that section 553(b) of the Ad- SUMMARY: In T.D. 8776, page 6, the regulations. ministrative Procedure Act (5 U.S.C. IRS is issuing temporary regulations re- chapter 5) and the Regulatory Flexibility Request for Additional Comments lating to the change to the euro. The text Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regu- of those temporary regulations also serves The Treasury and IRS request addition- latory Flexibility Analyses is not required. as the text of these proposed regulations. al comments on the following issues. This document also provides a notice of Pursuant to section 7805(f) of the Internal (1) Whether the final regulations public hearing on these proposed regula- Revenue Code, this notice of proposed should contain guidance (and the sub- rulemaking will be submitted to the Chief tions. stance of any such guidance) concerning Counsel for Advocacy of the Small Busi- DATES: Written comments must be re- the application of sections 1092 and 1259. ness Administration for comment on its ceived by October 1, 1998. Requests to Comments should separately address the impact on small business. speak and outlines of oral comments to be rules for periods before May 3, 1998, be- discussed at the public hearing scheduled tween May 3, 1998 and December 31, Comments and Public Hearing for October 20, at 10 a.m., must be re- 1998, and after December 31, 1998. Before these proposed regulations are ceived by September 29, 1998. (2) Whether guidance is necessary with adopted as final regulations, considera- respect to section 905, relating to the re- ADDRESSES: Send submissions to: tion will be given to any written com- determination of taxes in post-conversion CC:DOM:CORP:R (REG–110332–98), ments (preferably a signed original and years. room 5226, Internal Revenue Service, eight (8) copies) that are submitted timely (3) Whether a QBU whose functional POB 7604, Ben Franklin Station, Wash- to the IRS. All comments will be avail- currency was a currency other than a ington, DC 20044. Submissions may be able for public inspection and copying. legacy currency, but whose functional hand delivered between the hours of 8 A public hearing has been scheduled currency should properly be the euro after a.m. and 5 p.m. to: CC:DOM:CORP:R for Tuesday, October 20, 1998, at 10 a.m., the conversion, should be deemed to have (REG–110332–98) Courier’s Desk, Inter- in Room 2615, Internal Revenue Build- automatically changed its functional cur- nal Revenue Service, 1111 Constitution ing, 1111 Constitution Avenue NW, rency to the euro. Avenue NW, Washington, DC. Alterna- Washington, DC. Because of access re- (4) Whether the regulations adequately tively, taxpayers may submit com- strictions, visitors will not be admitted be- address QBUs with functional currencies of ments electronically via the Internet by yond the building lobby more than 15 countries that adopt the euro in the future. selecting the “Tax Regs” option of the minutes before the hearing starts. The Treasury and IRS also request com- IRS Home Page, or by submitting com- The rules of 26 CFR 601.601(a)(3) ments regarding guidance clarifying the ments directly to the IRS Internet site at: apply to the hearing. treatment of section 988 transactions that http://www.irs.ustreas.gov/prod/tax_regs/ Persons that wish to present oral com- are held by euro functional currency QBUs comments.html. The public hearing will ments at the hearing must submit written and that are denominated in a currency that be held in the IRS Auditorium, 7400 Cor- comments by October 1, 1998, and sub- is replaced by the euro in the future. ridor, Internal Revenue Building, 1111 mit an outline of the topics to be dis- (5) Whether guidance is necessary to Constitution Avenue NW, Washington, cussed and the time to be devoted to each addresses integrated section 988 hedging topic (signed original and eight (8) DC. transactions. It is intended that these reg- copies) by September 29, 1998. FOR FURTHER INFORMATION CON- ulations be applied to section 988 inte- A period of 10 minutes will be allotted TACT: Concerning the regulations, grated hedging transactions under section to each person for making comments. Howard Wiener, (202)622-3870 or 988(d) on an integrated basis. If a QBU An agenda showing the scheduling of Thomas Preston, (202) 622-3930; con- subsequently legs out of a position of a the speakers will be prepared after the cerning submissions and the hearing, section 988 integrated hedging transac- deadline for receiving outlines has LaNita VanDyke, 202-622-7190 (not toll- tion after the euro conversion, a leg that passed. Copies of the agenda will be free numbers). formerly was a legacy currency position available free of charge at the hearing. August 17, 1998 18 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 19

Drafting Information posed to be amended as follows: Par. 3. Section 1.1001–5 is added to read as follows: The principal authors of these regula- PART 1—INCOME TAXES tions are Howard A. Wiener, of the Office Paragraph 1. The authority citation for §1.1001–5 European Monetary Union of Associate Chief Counsel (Interna- part 1 continues to read in part as follows: (conversion to the euro). tional) and Thomas Preston of the Office Authority: 26 U.S.C. 7805 * * * of Associate Chief Counsel (Domestic). [The text of this proposed section is the Par. 2. Section 1.985–8 is added to read However, other personnel from the IRS same as the text of T.D. 8776.] as follows: and Treasury Department participated in Michael P. Dolan, their development. §1.985–8 Special rules applicable to the Deputy Commissioner of European Monetary Union (conversion to * * * * * Internal Revenue. the euro). Proposed Amendment to the Regulations (Filed by the Office of the Federal Register on July [The text of this proposed section is the 28, 1998, 8:45 a.m., and published in the issue of the Accordingly, 26 CFR part 1 is pro- same as the text of T.D. 8776.] Federal Register for July 29, 1998, 63 F.R. 40383)

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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.

E.O.—Executive Order. PHC—Personal Holding Company. Abbreviations ER—Employer. 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. A—Individual. FC—Foreign Country. Pub. L.—Public Law. Acq.—Acquiescence. FICA—Federal Insurance Contribution Act. REIT—Real Estate Investment Trust. B—Individual. FISC—Foreign International Sales Company. Rev. Proc.—Revenue Procedure. BE—Beneficiary. FPH—Foreign Personal Holding Company. Rev. Rul.—Revenue Ruling. BK—Bank. 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. C.—Individual. FX—Foreign Corporation. Stat.—Statutes at Large. C.B.—Cumulative Bulletin. G.C.M.—Chief Counsel’s Memorandum. T—Target Corporation. CFR—Code of Federal Regulations. GE—Grantee. T.C.—Tax Court. CI—City. GP—General Partner. T.D.—Treasury Decision. COOP—Cooperative. GR—Grantor. TFE—Transferee. Ct.D.—Court Decision. IC—Insurance Company. TFR—Transferor. CY—County. 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. August 17, 1998 20 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 21

Numerical Finding List1 Bulletins 1998–29 through 32 Announcements: 98–62, 1998–29 I.R.B. 13 98–68, 1998–29 I.R.B. 14 98–69, 1998–30 I.R.B. 16 98–70, 1998–30 I.R.B. 17 98–71, 1998–30 I.R.B. 17 98–72, 1998–31 I.R.B. 14 98–73, 1998–31 I.R.B. 14 98–74, 1998–31 I.R.B. 15 98–75, 1998–31 I.R.B. 15 98–76, 1998–32 I.R.B. 64 Notices: 98–36, 1998–29 I.R.B. 8 98–37, 1998–30 I.R.B. 13 Railroad Retirement Quarterly Rate: 1998–31 I.R.B. 7

Proposed Regulations: REG–104641–97, 1998–29 I.R.B. 9 REG–110403–98, 1998–29 I.R.B. 11 REG–116608–97, 1998–29 I.R.B. 12 REG–119227–97, 1998–30 I.R.B. 13

Revenue Procedures: 98–40, 1998–32 I.R.B. 6 98–41, 1998–32 I.R.B. 7 98–42, 1998–28 I.R.B. 9 98–43, 1998–29 I.R.B. 8 98–44, 1998–32 I.R.B. 11

Revenue Rulings: 98–34, 1998–31 I.R.B. 12 98–35, 1998–30 I.R.B. 4 98–36, 1998–31 I.R.B. 6 98–37, 1998–32 I.R.B. 5 98–38, 1998–32 I.R.B. 4 Treasury Decisions: 8771, 1998–29 I.R.B. 6 8772, 1998–31 I.R.B. 8 8773, 1998–29 I.R.B. 4 8774, 1998–30 I.R.B. 5 8775. 1998–31 I.R.B. 4

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 1998–1 through 1998–28 will be found in Internal Revenue Bulletin 1998–29, dated July 20, 1998.

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Finding List of Current Action on Previously Published Items1 Bulletins 1998–29 through 32 *Denotes entry since last publication

1 A cumulative finding list for previously published items mentioned in Internal Revenue Bulletins 1998–1 through 1998–28 will be found in Internal Revenue Bulletin 1998–29, dated July 20, 1998.

August 17, 1998 22 1998–33 I.R.B. IRB 1998-33 8/12/98 11:04 AM Page 23

1998–33 I.R.B. 23 August 17, 1998 IRB 1998-33 8/12/98 11:04 AM Page 24

INTERNAL REVENUE BULLETIN The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of Documents when their subscriptions must be renewed.

CUMULATIVE BULLETINS The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week- ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the Superintendent of Documents.

HOW TO ORDER Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance, detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please allow two to six weeks, plus mailing time, for delivery.

WE WELCOME COMMENTS ABOUT THE INTERNAL REVENUE BULLETIN If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page (www.irs.ustreas.gov) or write to the IRS Bulletin Unit, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC 20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.

August 17, 1998 24 1998–33 I.R.B.