Internal Revenue Bulletin 1998-33 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
Rev. Rul. 98–39, page 4
All events test; cooperative advertising. Under the all
events test of section 461 of the Code, an accrual method
manufacturer’s liability for cooperative advertising services
of a retailer is incurred in Year 1, the year the services are
performed, provided the manufacturer is able to reasonably
estimate the liability, even though the retailer does not sub-
mit the required claim form until Year 2. Rev. Proc. 97–37
modified and amplified.
Rev. Rul. 98–40, page 4.
Fringe benefits aircraft valuation formula. For pur-
poses of section 1.61–21(g) of the Income Tax Regulations,
relating to the rule for valuing noncommercial flights on em-
ployer-provided aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal charges in effect for
the second half of 1998 are set forth.
T.D.8776, page 6.
REG–110332–98, page 18.
Final, proposed, and temporary regulations under section
985 of the Code provide guidance regarding certain federal
tax consequences arising from the introduction of the euro.
A public hearing on the proposed regulations will be held on
October 20, 1998.
EMPLOYMENT TAX
Notice 98–43, page 13.
Tax Court review of worker classification and section
530 determinations. This notice describes new proce-
dures that the Service has implemented to comply with new
section 7436 of the Code.
ADMINISTRATIVE
Notice 98–39, page 11.
Church plans; nondiscrimination; safe harbors. This no-
tice extends the effective date of the applicable nondiscrimi-
nation regulations for certain church plans.
Notice 98–41, page 12.
1998 enhanced oil recovery credit. The enhanced oil
recovery credit for taxable years beginning in the 1998 cal-
endar year is determined without regard to the phase-out for
crude oil price increases provided in section 43(b) of the
Code.
Notice 98–42, page 12.
1998 marginal production rates. This notice announces
the applicable percentage to be used in determining per-
centage depletion for marginal properties for the 1998 cal-
endar year.
Internal Revenue
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Bulletin No. 1998–33
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.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 21.
IRB 1998-33 8/12/98 11:04 AM Page 1

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
IRB 1998-33 8/12/98 11:04 AM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first Bulletin for each month includes a cumulative index
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These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1998-33 8/12/98 11:04 AM Page 3

August 17, 199841998–33 I.R.B.
Section 61.–Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Fringe benefits aircraft valuation
formula.For purposes of section
1.61–21(g) of the Income Tax Regula-
tions, relating to the rule for valuing non-
commercial flights on employer-provided
aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal
charges in effect for the second half of
1998 are set forth.
Rev. Rul. 98–40
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of the
Income Tax Regulations provides a rule
for valuing noncommercial flights on
employer-provided aircraft. Section
1.61–21(g)(5) provides an aircraft valua-
tion formula to determine the value of
such flights. The value of a flight is de-
termined under the base aircraft valua-
tion formula (also known as the Standard
Industry Fare Level formula or SIFL) by
multiplying the SIFL cents-per-mile
rates applicable for the period during
which the flight was taken by the appro-
priate aircraft multiple provided in sec-
tion 1.61–21(g)(7) and then adding the
applicable terminal charge. The SIFL
cents-per-mile rates in the formula and
the terminal charge are calculated by the
Department of Transportation and are re-
viewed semi-annually.
The following chart sets forth the ter-
minal charges and SIFL mileage rates:
DRAFTING INFORMATION
The principal author of this revenue
ruling is Felicia Daniels Smith of the Of-
fice of the Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions). For further information regarding
this revenue ruling contact, Ms. Smith on
(202) 622-6050 (not a toll-free call).
Section 451.—General Rule for
Taxable Year of Inclusion
26 CFR 1.451–1: General rule for taxable year of
inclusion.
Under the all events test of § 461 of the Code, is
an accrual method manufacturer’s liability to pay a
retailer for cooperative advertising services incurred
in Year 1 when those services are provided by the re-
tailer, or in Year 2 when the retailer submits the re-
quired claim form for those services. See Rev. Rul.
98–39, page 4.
Section 461.—General Rule for
Taxable Year of Deduction
26 CFR 1.461–1: General rule for taxable year of
deduction.
(Also section 451; 1.451–1.)
All events test; cooperative advertis-
ing. Under the all events test of section
461 of the Code, an accrual method man-
ufacturer’s liability for cooperative adver-
tising services of a retailer is incurred in
Year 1, the year the services are per-
formed, provided the manufacturer is able
to reasonably estimate the liability, even
though the retailer does not submit the re-
quired claim form until Year 2.
Rev. Rul. 98–39
ISSUE
Under the all events test of § 461 of the
Internal Revenue Code, is an accrual
method manufacturer’s liability to pay a
retailer for cooperative advertising ser-
vices incurred in Year 1 when those ser-
vices are provided by the retailer, or in
Year 2 when the retailer submits the re-
quired claim form for those services?
FACTS
X, an accrual method taxpayer using a
calendar year as its taxable year, manufac-
tures various consumer products, including
product M. Retailers engaged in the busi-
ness of selling merchandise to consumers
purchase product M from X for resale. In
August of Year 1, Xmade a written offer to
pay each of these retailers $1 for each case
of product M that the retailer purchased
from Xduring September, October, and
November of Year 1, provided that the re-
tailer advertised X’s product M during Oc-
tober or November of Year 1. To qualify
for X’s payment, the advertising provided
by the retailer had to satisfy the require-
ments set forth in X’s offer regarding the
format and content of the advertising (in-
cluding the offering of a discount on prod-
uct M), and the time for performance of the
advertising. X’s offer further required that,
to obtain payment, the retailer had to sub-
mit a claim form and proofs of perfor-
mance within 90 days after the date that
the advertising was performed, verifying
that the advertising was performed in ac-
cordance with the terms of X’s offer.
Y, a retailer that accepted X’s offer, or-
dered 1,000 cases of product M from X
during September, October, and Novem-
ber of Year 1, and advertised product M in
November of Year 1 in a manner that sat-
isfied the requirements of its agreement
with X. To obtain payment for that adver-
tising, Y submitted its claim form and
proofs of performance to Xin January of
Year 2.
Xis able to make a reasonable estimate
of the amount that it is liable to pay Yfor
the cooperative advertising services per-
formed by Y in Year 1.
LAW AND ANALYSIS
Section 451 provides rules for deter-
mining the taxable year of inclusion for
items of gross income.
Section 1.451–1(a) of the Income Tax
Regulations provides that under an ac-
crual method of accounting, income is in-
cludible in gross income when all the
events have occurred that fix the right to
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Period During Which Terminal SIFL Mileage
the Flight Is TakenCharge Rates
7/1/98–12/31/98$31.81Up to 500 miles
= $.1740 per mile
501–1500 miles
= $.1327 per mile
Over 1500 miles
= $.1276 per mile
IRB 1998-33 8/12/98 11:04 AM Page 4

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

fice, or before a federal court with respect
to any income tax issue, the taxpayer must
provide a copy of the Form 3115, Applica-
tion for Change in Accounting Method, to
the examining agent(s), appeals officer, or
counsel for the government, as appropri-
ate, at the same time that it files the copy
of the Form 3115 with the national office.
The Form 3115 must contain the name(s)
and telephone number(s) of the examining
agent(s), appeals officer, or counsel for the
government, as appropriate.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 97–37 is modified and am-
plified to include this accounting method
change in the APPENDIX.
DRAFTING INFORMATION
The principal author of this revenue
ruling is John P. Moriarty of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Moriarty on (202) 622-4950 (not a toll-
free call).
Section 985–Functional
Currency
26 CFR 1.985–1: Functional currency.
T.D. 8776
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Conversion to the Euro
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and Temporary regula-
tions.
SUMMARY: This document contains
temporary Income Tax Regulations relat-
ing to U.S. taxpayers operating, investing
or otherwise conducting business in the
currencies of certain European countries
that are replacing their national currencies
with a single, multinational currency
called the euro. These regulations pro-
vide rules relating to adjustments required
for qualified business units operating in
such currencies and rules relating to the
tax effect of holding such currencies or fi-
nancial instruments or contracts denomi-
nated in such currencies. The text of
these temporary regulations also serves as
the text of proposed regulations published
in REG–110332–98, page 18.
DATES: These regulations are effective
July 29, 1998.
FOR FURTHER INFORMATION CON-
TACT: Howard Wiener of the Office of
Associate Chief Counsel (International),
(202) 622-3870, regarding the change in
functional currency rules and Thomas
Preston of the Office of Assistant Chief
Counsel (Financial Institutions and Prod-
ucts), (202) 622-3930, regarding section
1001 (not toll free calls).
SUPPLEMENTARY INFORMATION:
Background
On March 9, 1998, the IRS issued An-
nouncement 98–18 (1998–9 IRB 44) re-
questing comments relating to the tax is-
sues for U.S. taxpayers operating,
investing or otherwise conducting busi-
ness in a currency that is converting to the
euro. Numerous comments were re-
ceived. After consideration of these com-
ments, these regulations are adopted as a
temporary Treasury decision to provide
immediate guidance to taxpayers.
Explanation of Provisions
I. Background
The Treaty on European Union signed
February 7, 1992, (31 I.L.M. 247) (en-
tered into force November 1, 1993), sets
forth a plan to replace the national curren-
cies of participating members (legacy cur-
rencies) that meet certain economic crite-
ria with a single European currency
(euro). Pursuant to directives of the Euro-
pean Council, the process of converting
the legacy currencies into the euro will
take place in three phases.
On January 1, 1999, the currency of
participating member states of the Euro-
pean Union shall be the euro. At that time,
the euro will be substituted for the cur-
rency of each state at a conversion rate es-
tablished pursuant to the Treaty on Euro-
pean Union. Thereafter, the bills and
coins of each of the legacy currencies will
remain in circulation but will cease to
have independent value apart from the
euro. On January 1, 2002, euro bills and
coins will be introduced into circulation.
From January 1, 1999, until June 30, 2002
(transition period), the legacy currencies
will remain in circulation as subunits of
the euro. The transition period is referred
to as the “no prohibition, no compulsion”
period because during this time amounts
may generally be denominated in the
legacy currencies and/or the euro at the
option of individuals and businesses. Fi-
nally, by July 1, 2002, the legacy curren-
cies will no longer be accepted as legal
tender.
On May 3, 1998, the European Union
announced the eleven countries that
would initially participate in the conver-
sion and the expected rates at which the
respective currencies would convert to the
euro. The eleven countries are Austria,
Belgium, Finland, France, Germany, Ire-
land, Italy, Luxembourg, Netherlands,
Portugal, and Spain. Four current mem-
bers of the European Union (Denmark,
Greece, Sweden, and the United King-
dom) will not participate in the initial
conversion to the euro. These countries,
along with other countries that later join
the European Union, however, may con-
vert their currencies to the euro at some
future time.
II. Temporary Regulations
1. In General
These temporary regulations provide
guidance regarding certain of the federal
income tax consequences arising from the
introduction of the euro. Consistent with
comments received from taxpayers, the
regulations generally minimize the tax
consequences that arise by reason of the
euro conversion. In a limited number of
circumstances, however, the Treasury and
IRS determined that considerations, such
as administrative feasibility, made a dif-
ferent result more appropriate.
The regulations provide guidance with
respect to two issues: (i) the circum-
stances under which the euro conversion
creates a realization event with respect to
instruments and contracts denominated in
a legacy currency, and (ii) the circum-
stances under which the euro conversion
constitutes a change in functional cur-
rency for a qualified business unit (QBU)
whose functional currency is a legacy cur-
rency, and certain consequences thereof.
2. Realization
The temporary regulations provide that
the conversion of legacy currencies to the
August 17, 199861998–33 I.R.B.
IRB 1998-33 8/12/98 11:04 AM Page 6

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

ing differences between the United States
and other countries.
Special Analysis
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Proce-
dures Act (5 U.S.C. chapter 5) and the Reg-
ulatory Flexibility Act (5 U.S.C. chapter 6)
do not apply to these regulations, and there-
fore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of
the Internal Revenue Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these regula-
tions are Howard A. Wiener of the Office
of the Associate Chief Counsel (Interna-
tional) and Thomas Preston of the Office
of Associate Chief Counsel (Domestic).
Other personnel from the IRS and Trea-
sury Department also participated in their
development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.985–1, paragraph (c)(6) is
amended by adding a sentence at the end
to read as follows:
§1.985–1 Functional currency.
* * * * *
(c) * * *
(6) * * * For special rules relating to
the conversion to the euro, see §1.985–8T.
* * * * *
§1.985–4 [Amended]
Par. 3. In §1.985–4, the last sentence of
paragraph (a) is amended by removing the
reference “§1.985–2” and adding
“§1.985–2 or 1.985–8T” in its place.
Par. 4. Section 1.985–8T is added to
read as follows:
§1.985–8T Special rules applicable to
the European Monetary Union (conver-
sion to the euro)(temporary).
(a) Definitions—(1) Legacy currency.
A legacy currency is the national currency
of a participating member state of the Eu-
ropean Union used prior to the substitu-
tion of the euro for the national currency
of that state in accordance with the Treaty
on European Union signed February 7,
1992. The term legacy currency shall also
include the European Currency Unit.
(2) Conversion rate. The conversion
rate is the rate at which the euro is substi-
tuted for a legacy currency.
(b) Operative rules—(1) Initial adop-
tion.A QBU (as defined in §1.989(a)–1(b))
whose first taxable year begins after the
euro has been substituted for a legacy cur-
rency may not adopt that legacy currency
as its functional currency.
(2) QBU with a legacy functional cur-
rency—(i) Required change. A QBU with
a legacy currency as its functional cur-
rency is required to change its functional
currency to the euro beginning the first
day of the first taxable year:
(A) That begins on or after the day that
the euro is substituted for that legacy cur-
rency (in accordance with the Treaty on
European Union); and
(B) In which the QBU begins to main-
tain its books and records (as described in
§1.989(a)–1(d)) in the euro.
(ii) Notwithstanding paragraph
(b)(2)(i) of this section, a QBU with a
legacy currency as its functional currency
is required to change its functional cur-
rency to the euro no later than the last tax-
able year beginning on or before the first
day such legacy currency is no longer
valid legal tender.
(iii) Consent of Commissioner. A
change made pursuant to paragraph
(b)(2)(i) of this section shall be deemed to
be made with the consent of the Commis-
sioner for purposes of §1.985–4. A QBU
changing its functional currency to the
euro pursuant to this paragraph (b)(2)
must make adjustments as provided in
paragraph (c) of this section.
(3) Statement to file upon change. With
respect to a QBU that changes its func-
tional currency to the euro under paragraph
(b)(2) of this section, an affected taxpayer
shall attach to its return for the taxable year
of change a statement that includes the fol-
lowing: “TAXPAYER CERTIFIES THAT
A QBU OF THE TAXPAYER HAS
CHANGED ITS FUNCTIONAL CUR-
RENCY TO THE EURO PURSUANT TO
TREAS. REG. §1.985–8T.” For purposes
of this paragraph (b)(3), an affected tax-
payer shall be in the case where the QBU
is: a QBU of an individual U.S. resident
(as a result of the activities of such individ-
ual), the individual; a QBU branch of a
U.S. corporation, the corporation; a con-
trolled foreign corporation (as described in
section 957)(or QBU branch thereof), each
United States shareholder (as described in
section 951(b)); a partnership, each partner
separately; a noncontrolled section 902
corporation (as described in section
904(d)(2)(E)) (or branch thereof), each do-
mestic shareholder as described in
§1.902–1(a)(1); or a trust or estate, the
fiduciary of such trust or estate.
(c) Adjustments required—(1) In gen-
eral. A QBU that changes its functional
currency to the euro pursuant to para-
graph (b) of this section must make the
adjustments described in paragraphs
(c)(2) through (5) of this section. Section
1.985–5 shall not apply.
(2) Determining the euro basis of prop-
erty and the euro amount of liabilities and
other relevant items.The euro basis in
property and the euro amount of liabilities
and other relevant items shall equal the
product of the legacy functional currency
adjusted basis or amount of liabilities
multiplied by the applicable conversion
rate.
(3) Taking into account exchange gain
or loss on legacy currency section 988
transactions—(i) In general. Except as
provided in paragraphs (c)(3)(iii) and (iv)
of this section, a legacy currency denomi-
nated section 988 transaction (determined
after applying section 988(d)) outstanding
on the last day of the taxable year imme-
diately prior to the year of change shall
continue to be treated as a section 988
transaction after the change and the prin-
ciples of section 988 shall apply.
(ii) Example. The application of this
paragraph (c)(3) may be illustrated by the
following examples:
Example 1. X, a calendar year QBU on the cash
method of accounting, uses the deutschmark as its
August 17, 199881998–33 I.R.B.
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1998–33 I.R.B.9August 17, 1998
functional currency. X is not described in section
1281(b). On July 1, 1998, X converts 10,000
deutschmarks (DM) into Dutch guilders(fl) at the
spot rate of fl1 = DM1 and loans the 10,000 guilders
to Y (an unrelated party) for one year at a rate of
10% with principal and interest to be paid on June
30, 1999. On January 1, 1999, X changes its func-
tional currency to the euro pursuant to §1.985–8T.
The euro/deutschmark conversion rate is set by the
European Council at C
=
1 = DM2. The euro/guilder
conversion rate is set at C
=
1 = fl2.25. Accordingly,
under the terms of the note, on June 30, 1999, X will
receive C
=
4444.44 (fl10,000/2.25) of principal and
C
=
444.44 (fl1,000/2.25) of interest. Pursuant to this
paragraph (c)(3), X will realize an exchange loss on
the principal computed under the principles of
§1.988–2(b)(5). For this purpose, the exchange rate
used under §1.988–2(b)(5)(i) shall be the
guilder/euro conversion rate. The amount under
§1.988–2(b)(5)(ii) is determined by translating the
fl10,000 at the guilder/deutschmark spot rate on July
1, 1998, and translating that deutschmark amount
into euros at the deutschmark/euro conversion rate.
Thus, X will compute an exchange loss for 1999 of
C
=
555.56 determined as follows: [C
=
4444.44
(fl10,000/2.25) – C
=
5000 ((fl10,000/1)/2) =
–C
=
555.56]. Pursuant to this paragraph (c)(3), the
character and source of the loss are determined pur-
suant to section 988 and regulations thereunder. Be-
cause X uses the cash method of accounting for the
interest on this debt instrument, X does not realize
exchange gain or loss on the receipt of that interest.
Example 2. (i) X, a calendar year QBU on the ac-
crual method of accounting, uses the deutschmark as
its functional currency. On February 1, 1998, X
converts 12,000 deutschmarks into Dutch guilders at
the spot rate of fl1 = DM1 and loans the 12,000
guilders to Y (an unrelated party) for one year at a
rate of 10% with principal and interest to be paid on
January 31, 1999. In addition, assume the average
rate (deutschmark/guilder) for the period from Feb-
ruary 1, 1998, through December 31, 1998 is fl1.07
= DMl. Pursuant to §1.988– 2(b)(2)(ii)(C), X will
accrue eleven months of interest on the note and rec-
ognize interest income of DM1028.04 (fl1100/1.07)
in the 1998 taxable year.
(ii) On January 1, 1999, the euro will replace the
deutschmark as the national currency of Germany
pursuant to the Treaty on European Union signed
February 7, 1992. Assume that on January 1, 1999,
X changes its functional currency to the euro pur-
suant to §1.985–8T. The euro/deutschmark conver-
sion rate is set by the European Council at C
=
1 =
DM2. The euro/guilder conversion rate is set at C
=
1
= fl2.25. In 1999, X will accrue one month of inter-
est equal to C
=
44.44 (fl100/2.25). On January 31,
1999, pursuant to the note, X will receive interest
denominated in euros of C
=
533.33 (fl1200/2.25).
Pursuant to this paragraph (c)(3), X will realize an
exchange loss in the 1999 taxable year with respect
to accrued interest computed under the principles of
§1.988–2(b)(3). For this purpose, the exchange rate
used under §1.988–2(b)(3)(i) is the guilder/euro
conversion rate and the exchange rate used under
§1.988–2(b)(3)(ii) is the deutschmark/euro conver-
sion rate. Thus, with respect to the interest accrued
in 1998, X will realize exchange loss of C
=
25.13
under §1.988–2(b)(3) as follows: [C
=
488.89
(fl1100/2.25) – C
=
514.02 (DM1028.04/2) =
–C
=
25.13]. With respect to the one month of interest
accrued in 1999, X will realize no exchange gain or
loss since the exchange rate when the interest ac-
crued and the spot rate on the payment date are the
same.
(iii) X will realize exchange loss of C
=
666.67 on
repayment of the loan principal computed in the
same manner as in Example 1 [C
=
5333.33
(fl12,000/2.25) – C
=
6000 (fl12,000/1)/2)]. The losses
with respect to accrued interest and principal are
characterized and sourced under the rules of section
988.
(iii) Special rule for legacy nonfunc-
tional currency.The QBU shall realize or
otherwise take into account for all pur-
poses of the Internal Revenue Code the
amount of any unrealized exchange gain or
loss attributable to nonfunctional currency
(as described in section 988(c)(1)(C)(ii))
that is denominated in a legacy currency as
if the currency were disposed of on the last
day of the taxable year immediately prior
to the year of change. The character and
source of the gain or loss are determined
under section 988.
(iv) Legacy currency denominated ac-
counts receivable and payable—(A) In
general. A QBU may elect to realize or
otherwise take into account for all pur-
poses of the Internal Revenue Code the
amount of any unrealized exchange gain
or loss attributable to a legacy currency
denominated item described in section
988(c)(1)(B)(ii) as if the item were termi-
nated on the last day of the taxable year
ending prior to the year of change.
(B) Time and manner of election. With
respect to a QBU that makes an election
described in paragraph (c)(3)(iv)(A) of
this section, an affected taxpayer (as de-
scribed in paragraph (b)(3) of this section)
shall attach a statement to its tax return
for the taxable year of change which in-
cludes the following: “TAXPAYER CER-
TIFIES THAT A QBU OF THE TAX-
PAYER HAS ELECTED TO REALIZE
CURRENCY GAIN OR LOSS ON
LEGACY CURRENCY DENOMI-
NATED ACCOUNTS RECEIVABLE
AND PAYABLE UPON CHANGE OF
FUNCTIONAL CURRENCY TO THE
EURO.” A QBU making the election
must do so for all legacy currency denom-
inated items described in section
988(c)(1)(B)(ii).
(4) Adjustments when a branch
changes its functional currency to the
euro—(i) Branch changing from a legacy
currency to the euro in a taxable year
during which taxpayer’s functional cur-
rency is other than the euro.If a branch
changes its functional currency from a
legacy currency to the euro for a taxable
year during which the taxpayer’s func-
tional currency is other than the euro, the
branch’s euro equity pool shall equal the
product of the legacy currency amount of
the equity pool multiplied by the applica-
ble conversion rate. No adjustment to the
basis pool is required.
(ii) Branch changing from a legacy
currency to the euro in a taxable year
during which taxpayer’s functional cur-
rency is the euro.If a branch changes its
functional currency from a legacy cur-
rency to the euro for a taxable year during
which the taxpayer’s functional currency
is the euro, the taxpayer shall realize gain
or loss attributable to the branch’s equity
pool under the principles of section 987,
computed as if the branch terminated on
the last day prior to the year of change.
Adjustments under this paragraph
(c)(4)(ii) shall be taken into account by
the taxpayer ratably over four taxable
years beginning with the taxable year of
change.
(5) Adjustments to a branch’s accounts
when a taxpayer changes to the euro—(i)
Taxpayer changing from a legacy cur-
rency to the euro in a taxable year during
which a branch’s functional currency is
other than the euro.If a taxpayer
changes its functional currency to the
euro for a taxable year during which the
functional currency of a branch of the
taxpayer is other than the euro, the basis
pool shall equal the product of the legacy
currency amount of the basis pool multi-
plied by the applicable conversion rate.
No adjustment to the equity pool is re-
quired.
(ii) Taxpayer changing from a legacy
currency to the euro in a taxable year
during which a branch’s functional cur-
rency is the euro.If a taxpayer changes
its functional currency from a legacy cur-
rency to the euro for a taxable year during
which the functional currency of a branch
of the taxpayer is the euro, the taxpayer
shall take into account gain or loss as de-
termined under paragraph (c)(4)(ii) of this
section.
(6) Additional adjustments that are
necessary when a corporation changes its
functional currency to the euro.The
amount of a corporation’s euro currency
earnings and profits and the amount of its
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August 17, 1998101998–33 I.R.B.
euro paid-in capital shall equal the prod-
uct of the legacy currency amounts of
these items multiplied by the applicable
conversion rate. The foreign income
taxes and accumulated profits or deficits
in accumulated profits of a foreign corpo-
ration that were maintained in foreign
currency for purposes of section 902 and
that are attributable to taxable years of the
foreign corporation beginning before Jan-
uary 1, 1987, also shall be translated into
the euro at the conversion rate.
(d) Effective date.This section applies
to tax years ending after July 29, 1998.
Par. 5. Section 1.1001–5T is added to
read as follows:
§1.1001–5T European Monetary Union
(conversion to the euro)(temporary).
(a) Conversion of currencies. For pur-
poses of §1.1001–1(a), the conversion to
the euro of legacy currencies (as defined
in §1.985–8T(a)(1)) is not the exchange
of property for other property differing
materially in kind or extent.
(b) Effect of currency conversion on
other rights and obligations.For pur-
poses of §1.1001–1(a), if, solely as the re-
sult of the conversion of legacy currencies
to the euro, rights or obligations denomi-
nated in a legacy currency become rights
or obligations denominated in the euro,
that event is not the exchange of property
for other property differing materially in
kind or extent. Thus, for example, when a
debt instrument that requires payments of
amounts denominated in a legacy cur-
rency becomes a debt instrument requir-
ing payments of euros, that alteration is
not a modification within the meaning of
§1.1001–3(c).
(c) Effective date.This section applies
to tax years ending after July 29, 1998.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved July 17, 1998.
Donald C. Lubick,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on July
28, 1998, 8:45 a.m., and published in the issue of the
Federal Register for July 29, 1998, 63 F.R. 40366)
IRB 1998-33 8/12/98 11:04 AM Page 10

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

issues may arise, for instance, in the inter-
action of §§ 401(a)(4) and 410(c). The
Treasury and the Service invite specific
comments and suggestions regarding the
design of safe harbors for nonelecting
church plans.
The extensions provided by this notice
do not apply to electing church plans.
The Treasury and the Service do not
presently anticipate the development of
safe harbors for electing church plans
under § 1462(b) of SBJPA, but comments
are welcome regarding whether these
plans need safe harbors. Furthermore,
this notice does not apply to annuity con-
tracts or other arrangements maintained
by churches pursuant to § 403(b), which
continue to be eligible for the relief de-
scribed in § VI of Notice 96–64.
Comments or suggestions in response
to this notice should be addressed to
CC:DOM:CORP:R (Notice 98–39),
Room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Alternatively, taxpay-
ers may hand-deliver comments between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (Notice 98–39),
Courier’s desk, Internal Revenue Service,
1111 Constitution Ave., NW, Washington,
DC, or may submit comments electroni-
cally via the IRS internet site at
http://www.irs.ustreas.gov./prod/tax_regs/
comments.html
VI. EFFECT ON OTHER DOCUMENTS
Notices 96–64 and 92–36 are modified.
DRAFTING INFORMATION
The principal author of this notice is
Diane S. Bloom of the Employee Plans
Division. For further information regard-
ing this notice, please contact the Em-
ployee Plans Division’s taxpayer assis-
tance telephone service at (202) 622-6074
or (202) 622-6075, between the hours of
1:30 p.m. and 3:30 p.m. Eastern Time,
Monday through Thursday. Ms. Bloom
may be reached at (202) 622-6214. These
telephone numbers are not toll-free.
1998 Section 43 Inflation
Adjustment
Notice 98–41
Section 43(b)(3)(B) of the Internal
Revenue Code requires the Secretary to
publish an inflation adjustment factor.
The enhanced oil recovery credit under §
43 for any taxable year is reduced if the
“reference price,” determined under §
29(d)(2)(C), for the calendar year preced-
ing the calendar year in which the taxable
year begins is greater than $28 multiplied
by the inflation adjustment factor for that
year.
The term “inflation adjustment factor”
means, with respect to any calendar year,
a fraction the numerator of which is the
GNP implicit price deflator for the pre-
ceding calendar year and the denominator
of which is the GNP implicit price defla-
tor for 1990.
Because the reference price for the
1997 calendar year ($17.24) does not ex-
ceed $28 multiplied by the inflation ad-
justment factor for the 1998 calendar
year, the enhanced oil recovery credit for
qualified costs paid or incurred in 1998 is
determined without regard to the phase-
out for crude oil price increases.
Table 1 contains the GNP implicit price
deflator used for the 1998 calendar year,
as well the previously published GNP im-
plicit price deflators used for the 1991
through 1997 calendar years.
Table 2 contains the inflation adjust-
ment factor and the phase-out amount for
taxable years beginning in the 1998 cal-
endar year as well as the previously pub-
lished inflation adjustment factors and
phase-out amounts for the 1991 through
1997 calendar years.
DRAFTING INFORMATION
The principal author of this notice is
Brenda M. Stewart of the Office of Assis-
tant Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice contact Ms.
Stewart on (202) 622-3120 (not a toll-free
call).
1998 Marginal Production Rates
Notice 98–42
Section 613A(c)(6)(C) of the Internal
Revenue Code defines the term “ap-
plicable percentage” for purposes of
determining percentage depletion for
oil and gas produced from marginal
properties. The applicable percentage
is the percentage (not greater than 25
percent) equal to the sum of 15 percent,
plus one percentage point for each
whole dollar by which $20 exceeds the
reference price (determined under §
29(d)(2)(C)) for crude oil for the calen-
dar year preceding the calendar year in
which the taxable year begins. The ref-
erence price determined under §
29(d)(2)(C) for the 1997 calendar year
is $17.24.
Table 1 contains the applicable percent-
ages for marginal production for taxable
years beginning in calendar years 1991
through 1998.
August 17, 1998121998–33 I.R.B.
Notice 98–41 TABLE 1
GNP IMPLICIT PRICE DEFLATORS
GNP Implicit
Calendar YearPrice Deflator
1990112.9 (used for 1991)
1991117.0 (used for 1992)
1992120.9 (used for 1993)
1993124.1 (used for 1994)
1994126.0 (used for 1995)
1995107.5 (used for 1996)*
1996109.7 (used for 1997)
1997112.35 (used for 1998)**
* Beginning in 1995, the GNP implict
price deflator was rebased relative to
1992. The 1990 GNP implicit price
deflator used to compute the 1996 § 43
inflation adjustment factor is 93.6.
** Beginning in 1997, two digits fol-
low the decimal point in the GNP im-
plicit price deflator. The 1990 GNP
price deflator used to compute the
1998 § 43 inflation adjustment factor
is 93.63.
Notice 98–41 TABLE 2
INFLATION ADJUSTMENT
FACTORS AND PHASE-OUT
AMOUNTS
Inflation
CalendarAdjustmentPhase-out
YearFactorAmount
19911.00000
19921.03630
19931.07080
19941.09920
19951.11600
19961.14850
19971.17200
19981.19990
IRB 1998-33 8/12/98 11:04 AM Page 12

DRAFTING INFORMATION
The principal author of this notice is
Brenda M. Stewart of the Office of Assis-
tant Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice contact Ms.
Stewart on (202) 622-3120 (not a toll-free
call).
New Procedures for Processing
Employment Tax Cases
Involving Worker Classification
and Section 530 of the Revenue
Act of 1978 Under Section
7436 of the Code
Notice 98–43
PURPOSE
The Taxpayer Relief Act of 1997
(TRA ’97), Pub. L. No. 105–34, 111 Stat.
788, created new § 7436 of the Internal
Revenue Code (the “Code”), which pro-
vides Tax Court review rights concern-
ing certain employment tax determina-
tions. This notice provides information
about how taxpayers may petition for
Tax Court review of employment tax de-
terminations under § 7436. Attached to
this notice as Exhibit 1 is a “Notice of
Determination Concerning Worker Clas-
sification Under Section 7436” (a “No-
tice of Determination”). With respect to
taxpayers whose workers are the subject
of an employment tax determination, the
attached Notice of Determination ad-
dressed to a taxpayer will constitute the
“determination” that is a prerequisite to
invoking the Tax Court’s jurisdiction
under § 7436.
BACKGROUND
Section 7436(a) of the Code provides
the Tax Court with jurisdiction to review
determinations by the Service that work-
ers are employees for purposes of subtitle
C of the Code, or that the organization for
which services are performed is not enti-
tled to relief from employment taxes
under § 530 of the Revenue Act of 1978.
Section 7436(a) requires that the determi-
nation involve an actual controversy and
that it be made as part of an examination.
Section 7436 became effective on August
5, 1997.
Proceedings under § 7436 may be con-
ducted pursuant to the Tax Court’s simpli-
fied procedures for small tax cases set
forth in § 7463 of the Code and Rule 295
of the Tax Court’s Rules of Practice and
Procedure. Currently, taxpayers may
elect, with the concurrence of the Tax
Court, to use these simplified procedures
if the amount of employment taxes placed
in dispute is $50,000 or less for each cal-
endar quarter involved.
ISSUES TO WHICH § 7436 APPLIES
Section 7436(a) provides the Tax Court
with jurisdiction to review the Service’s
determinations that one or more individu-
als performing services for the taxpayer
are employees of the taxpayer for pur-
poses of subtitle C of the Code, or that the
taxpayer is not entitled to relief under §
530 with respect to such individuals.
Thus, § 7436(a) does not provide the Tax
Court with jurisdiction to determine any
amount of employment tax or penalties.
Nor does § 7436(a) provide the Tax Court
with jurisdiction to review other employ-
ment tax issues. Moreover, the proce-
dures set forth in § 7436 do not apply to
employment-related issues not arising
under subtitle C, such as the classification
of individuals with respect to pension
plan coverage or the proper treatment of
individual income tax deductions. Addi-
tionally, insofar as § 7436(a) only confers
jurisdiction upon the Tax Court to review
determinations that are made by the Ser-
vice as part of an examination, other Ser-
vice determinations that are not made as
part of an examination, including those
that are made in the context of private let-
ter rulings or Forms SS–8, Determination
of Employee Work Status for Purposes of
Federal Employment Taxes and Income
Tax Withholding, are not subject to re-
view by the Tax Court under § 7436(a).
The Service will issue a Notice of De-
termination only after the Service has de-
termined both that one or more individu-
als performing services for the taxpayer
are employees for purposes of subtitle C
and that the taxpayer is not entitled to re-
lief under § 530. This will provide tax-
payers with the opportunity to resolve
both issues in one judicial determination.
TAXPAYERS ELIGIBLE TO SEEK
JUDICIAL REVIEW
Section 7436(b) provides that a plead-
ing seeking Tax Court review of the Ser-
vice’s determination may be filed only by
“the person for whom the services are
performed.” Thus, workers may not seek
review of the Service’s determinations
under § 7436. In addition, because there
must be an actual controversy, review
may not be sought by a third party that
has not been determined by the Service to
be the employer.
NOTICE OF DETERMINATION
CONCERNING WORKER
CLASSIFICATION UNDER
§ 7436
The Service will inform taxpayers of a
determination described in § 7436(a) by
sending the taxpayer a Notice of Determi-
nation by certified or registered mail. A
copy of the current Notice of Determina-
tion, which may be revised from time to
time, is attached hereto as Exhibit 1.
The Notice of Determination will ad-
vise taxpayers of the opportunity to seek
Tax Court review and provides informa-
tion on how to do so. Attached to the No-
tice of Determination will be a schedule
showing each kind of tax with its pro-
posed employment tax adjustment by cal-
endar quarter. The schedule will be pro-
vided to enable the taxpayer to determine
eligibility to elect use of the small tax
case procedures under § 7436(c). Cur-
rently, the small tax case procedures may
be available under § 7436(c) if the
amount of employment taxes placed in
dispute is $50,000 or less for each calen-
dar quarter involved.
In most cases, a taxpayer who receives
a Notice of Determination will have pre-
viously received a “thirty-day letter,”
which the Service sends to taxpayers in
unagreed examination cases. The thirty-
day letter lists the proposed employment
tax adjustments to be made and describes
1998–33 I.R.B.13August 17, 1998
Notice 98–42 TABLE 1
APPLICABLE PERCENTAGE FOR
MARGINAL PRODUCTION
Applicable
Calendar YearPercentage
199115 percent
199218 percent
199319 percent
199420 percent
199521 percent
199620 percent
199716 percent
199817 percent
IRB 1998-33 8/12/98 11:04 AM Page 13

the taxpayer’s right to either agree to the
proposed employment tax adjustments or,
alternatively, to protest the proposed ad-
justments to the Appeals Division of the
Service within thirty days of the date of
the letter. If the taxpayer does not re-
spond to the thirty-day letter by agreeing
to the proposed adjustments or, alterna-
tively, by filing a protest with the Appeals
Division, the taxpayer will receive, by
certified or registered mail, a Notice of
Determination. Under normal proce-
dures, if the taxpayer does not respond to
the thirty-day letter, the taxpayer should
generally expect to receive a Notice of
Determination within sixty days after ex-
piration of the thirty-day period beginning
with the date on the thirty-day letter. If no
Notice of Determination is received dur-
ing this period, the taxpayer may wish to
contact the local Internal Revenue Service
office to check on the status of the case.
If the taxpayer responds to the thirty-
day letter by filing a protest with the Ap-
peals Division (or if the case proceeds to
Appeals by way of the employment tax
early referral procedures, see Announce-
ment 97–52, 1997–21 I.R.B. 22; An-
nouncement 96–13, 1996–12 I.R.B. 33;
and Rev. Proc. 96–9, 1996–1 C.B. 575),
and the worker classification and § 530 is-
sues are not settled on an agreed basis in
the Appeals Division, the taxpayer will
thereafter receive a Notice of Determina-
tion. Taxpayers are encouraged to resolve
cases in nondocketed status by requesting
use of the early referral procedures in ap-
propriate cases.
PREREQUISITE FOR SEEKING TAX
COURT REVIEW
Because a Notice of Determination
constitutes the Service’s determination
described in § 7436(a), the Notice of De-
termination is a jurisdictional prerequisite
for seeking Tax Court review of the Ser-
vice’s determinations regarding worker
classification and § 530 issues. Tax Court
proceedings seeking review of these de-
terminations may not be commenced
prior to the time the Service issues a No-
tice of Determination to the taxpayer.
TIME BY WHICH PETITION MUST BE
FILED
Section 7436(b)(2) provides that a tax-
payer’s petition for review must be filed
with the Tax Court before the 91st day
after the Service mails its Notice of Deter-
mination to the taxpayer by certified or
registered mail. If the taxpayer discusses
the case with the Service during the pe-
riod before the 91st day following the
mailing of the Notice of Determination,
the discussion will not extend the period
in which the taxpayer may file a petition
with the Tax Court.
A taxpayer who does not file a Tax
Court petition within the allotted time re-
tains the right to seek judicial review of
the Service’s employment tax determina-
tions by paying the tax and filing a claim
for refund, as required by § 7422(a) of the
Code. If the claim for refund is denied,
the taxpayer may file a refund suit in dis-
trict court or the Court of Federal Claims.
APPEALS JURISDICTION
Cases docketed in the United States
Tax Court will be referred by District
Counsel to the Appeals Division for con-
sideration of settlement unless the Notice
of Determination was issued by Appeals.
Cases in which Appeals issued such a No-
tice of Determination may be referred to
Appeals unless District Counsel deter-
mines that there is little likelihood that a
settlement of all or a part of the case can
be achieved in a reasonable period of
time. Appeals will have sole settlement
authority over docketed cases referred to
Appeals until the case is returned to Dis-
trict Counsel. See Rev. Proc. 87–24,
1987–1 C.B. 720.
SUSPENSION OF STATUTE OF
LIMITATIONS
Section 7436(d)(1) provides that the
suspension of the limitations period for
assessment in § 6503(a) of the Code ap-
plies in the same manner as if a notice of
deficiency had been issued. Thus, pur-
suant to § 6503(a), the mailing of the No-
tice of Determination by certified or reg-
istered mail will suspend the statute of
limitations for assessment of taxes attrib-
utable to the worker classification and §
530 issues. Generally, the statute of limi-
tations for assessment of taxes attribut-
able to the worker classification and §
530 issues is suspended for the 90-day
period during which the taxpayer can
begin a suit in Tax Court, plus an addi-
tional 60 days thereafter. Moreover, if
the taxpayer does file a timely petition in
the Tax Court, the statute of limitations
for assessment of taxes attributable to the
worker classification and § 530 issues
will be suspended under section 6503(a)
during the Tax Court proceedings, and
for 60 days after the Tax Court decision
becomes final.
RESTRICTIONS ON ASSESSMENT
Section 7436(d)(1) provides that the re-
strictions on assessment in § 6213 of the
Code apply in the same manner as if a no-
tice of deficiency had been issued. Thus,
pursuant to § 6213(a), the Service is pre-
cluded from assessing the taxes attribut-
able to the worker classification and § 530
issues prior to expiration of the 90-day
period during which the taxpayer may file
a timely Tax Court petition. If the tax-
payer does file a timely Tax Court peti-
tion, § 6213(a) generally precludes the
Service from assessing taxes attributable
to the worker classification and § 530 is-
sues until the decision of the Tax Court
has become final. If the taxpayer does not
file a timely Tax Court petition before the
91st day after the Notice of Determination
was mailed, the employment taxes attrib-
utable to the workers described in the No-
tice of Determination may thereafter be
assessed.
AGREED SETTLEMENTS
If the taxpayer wishes to settle the
worker classification and § 530 issues on
an agreed basis before issuance of a No-
tice of Determination, the taxpayer must
formally waive the restrictions on assess-
ment contained in §§ 7436(d)(1) and
6213. This will generally be accom-
plished by execution of an agreed settle-
ment that contains the following lan-
guage:
I understand that, by signing this
agreement, I am waiving the restric-
tions on assessment provided in
sections 7436(d) and 6213(a) of the
Internal Revenue Code of 1986.
The Service will not assess employ-
ment taxes attributable to worker classifi-
cation or § 530 issues unless either the
Service has issued a Notice of Determina-
tion to the taxpayer and the 90-day period
for filing a Tax Court petition has expired
or, alternatively, the taxpayer has waived
the restrictions on assessment. If the Ser-
vice erroneously makes an assessment of
taxes attributable to worker classification
and § 530 issues without first either issu-
August 17, 1998141998–33 I.R.B.
IRB 1998-33 8/12/98 11:04 AM Page 14

ing a Notice of Determination or obtain-
ing a waiver of restrictions on assessment
from the taxpayer, the taxpayer is entitled
to an automatic abatement of the assess-
ment. However, once any such proce-
dural defects are corrected, the Service
may reassess the employment taxes to the
same extent as if the abated assessment
had not occurred.
EFFECTIVE DATE
Section 1454 of TRA ’97 is effective as
of August 5, 1997. Thus, assessments
that were made prior to the August 5,
1997, effective date of the Act are not
subject to the new legislation or the pro-
cedures discussed above. All employ-
ment tax examinations involving worker
classification and/or § 530 issues that
were pending as of August 5, 1997, are
subject to the new legislation.
DRAFTING INFORMATION
The principal author of this notice is
Lynne A. Camillo of the Office of the As-
sociate Chief Counsel (Employee Bene-
fits and Exempt Organizations). The Ser-
vice invites comments with respect to the
issues addressed in this notice, the form
of the attached Notice of Determination,
as well as with respect to any procedural
issues which should be addressed in forth-
coming guidance. Written comments
should be submitted to Lynne A. Camillo
of the Employee Benefits and Exempt Or-
ganizations Division, Office of Chief
Counsel, Internal Revenue Service, 1111
Constitution Avenue, NW, Room 5329,
Washington, DC 20224. For further in-
formation regarding this notice contact
Lynne A. Camillo at (202) 622-6040 (not
a toll-free call).
1998–33 I.R.B.15August 17, 1998
IRB 1998-33 8/12/98 11:04 AM Page 15

August 17, 1998161998–33 I.R.B.
Internal Revenue ServiceDepartment 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 United States Tax Court 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
IRB 1998-33 8/12/98 11:04 AM Page 16

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

August 17, 1998181998–33 I.R.B.
Notice of Proposed Rulemaking
and Notice of Public Hearing
Conversion to the Euro
REG–110332–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations and notice of public hearing.
SUMMARY: In T.D. 8776, page 6, the
IRS is issuing temporary regulations re-
lating to the change to the euro. The text
of those temporary regulations also serves
as the text of these proposed regulations.
This document also provides a notice of
public hearing on these proposed regula-
tions.
DATES: Written comments must be re-
ceived by October 1, 1998. Requests to
speak and outlines of oral comments to be
discussed at the public hearing scheduled
for October 20, at 10 a.m., must be re-
ceived by September 29, 1998.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–110332–98),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–110332–98) Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC. Alterna-
tively, taxpayers may submit com-
ments electronically via the Internet by
selecting the “Tax Regs” option of the
IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at:
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. The public hearing will
be held in the IRS Auditorium, 7400 Cor-
ridor, Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Howard Wiener, (202)622-3870 or
Thomas Preston, (202) 622-3930; con-
cerning submissions and the hearing,
LaNita VanDyke, 202-622-7190 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in T.D. 8776
amend the Income Tax Regulations (26
CFR part 1) relating to sections 985 and
1001. The temporary regulations contain
rules relating to conversion to the euro.
The text of those temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the temporary
regulations.
Request for Additional Comments
The Treasury and IRS request addition-
al comments on the following issues.
(1) Whether the final regulations
should contain guidance (and the sub-
stance of any such guidance) concerning
the application of sections 1092 and 1259.
Comments should separately address the
rules for periods before May 3, 1998, be-
tween May 3, 1998 and December 31,
1998, and after December 31, 1998.
(2) Whether guidance is necessary with
respect to section 905, relating to the re-
determination of taxes in post-conversion
years.
(3) Whether a QBU whose functional
currency was a currency other than a
legacy currency, but whose functional
currency should properly be the euro after
the conversion, should be deemed to have
automatically changed its functional cur-
rency to the euro.
(4) Whether the regulations adequately
address QBUs with functional currencies of
countries that adopt the euro in the future.
The Treasury and IRS also request com-
ments regarding guidance clarifying the
treatment of section 988 transactions that
are held by euro functional currency QBUs
and that are denominated in a currency that
is replaced by the euro in the future.
(5) Whether guidance is necessary to
addresses integrated section 988 hedging
transactions. It is intended that these reg-
ulations be applied to section 988 inte-
grated hedging transactions under section
988(d) on an integrated basis. If a QBU
subsequently legs out of a position of a
section 988 integrated hedging transac-
tion after the euro conversion, a leg that
formerly was a legacy currency position
prior to the conversion will be a euro de-
nominated position after the conversion,
and the section 988 rules should then be
applied to the euro denominated position.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regu-
latory Flexibility Analyses is not required.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (preferably a signed original and
eight (8) copies) that are submitted timely
to the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for Tuesday, October 20, 1998, at 10 a.m.,
in Room 2615, Internal Revenue Build-
ing, 1111 Constitution Avenue NW,
Washington, DC. Because of access re-
strictions, visitors will not be admitted be-
yond the building lobby more than 15
minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral com-
ments at the hearing must submit written
comments by October 1, 1998, and sub-
mit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (signed original and eight (8)
copies) by September 29, 1998.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Part IV. Items of General Interest
IRB 1998-33 8/12/98 11:04 AM Page 18

1998–33 I.R.B.19August 17, 1998
Drafting Information
The principal authors of these regula-
tions are Howard A. Wiener, of the Office
of Associate Chief Counsel (Interna-
tional) and Thomas Preston of the Office
of Associate Chief Counsel (Domestic).
However, other personnel from the IRS
and Treasury Department participated in
their development.
* * * * *
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.985–8 is added to read
as follows:
§1.985–8 Special rules applicable to the
European Monetary Union (conversion to
the euro).
[The text of this proposed section is the
same as the text of T.D. 8776.]
Par. 3. Section 1.1001–5 is added to
read as follows:
§1.1001–5 European Monetary Union
(conversion to the euro).
[The text of this proposed section is the
same as the text of T.D. 8776.]
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on July
28, 1998, 8:45 a.m., and published in the issue of the
Federal Register for July 29, 1998, 63 F.R. 40383)
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August 17, 1998201998–33 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms
IRB 1998-33 8/12/98 11:04 AM Page 20

1998–33 I.R.B.21August 17, 1998
Numerical Finding List
1
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.
IRB 1998-33 8/12/98 11:04 AM Page 21

August 17, 1998221998–33 I.R.B.
Finding List of Current Action on
Previously Published Items
1
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.
IRB 1998-33 8/12/98 11:04 AM Page 22

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

August 17, 1998241998–33 I.R.B.
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.
IRB 1998-33 8/12/98 11:04 AM Page 24