Internal Revenue Bulletin 1998-37 (PDF rendition): IRS Revenue Rulings

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INCOME TAX
Rev. Rul. 98–44, page 4.
Section 355.This ruling declares Rev. Rul. 70–225 obso-
lete because it is no longer determinative following modifica-
tions made by the Taxpayer Relief Act of 1997, as amended
by the Tax Technical Corrections Act of 1998. Rev. Rul.
70–225 addresses a distribution of the stock of a newly
formed controlled corporation followed by an acquisition of
the stock of the controlled corporation. Rev. Rul. 70–225
obsoleted.
EXCISE TAX
Ct.D. 2064, page 4.
The Harbor Maintenance Tax of section 4461 of the Code vi-
olates the Export Clause by imposing an
ad valoremfee
based on the value of the cargo and not on the use of fed-
eral harbor services. United States v. United States Shoe
Corporation.
ADMINISTRATIVE
REG–106177–97, page 33.
Proposed regulations under section 529 of the Code relate
to Qualified State Tuition Programs (QSTPs). A public hear-
ing will be held on January 6, 1999.
Rev. Proc. 98–47, page 8.
Business expenses; environmental remediation costs;
election.Procedures are provided for taxpayers to make
the election under section 198 of the Code to deduct any
qualified environmental remediation expenditure.
Rev. Proc. 98–49, page 9.
LIFO; price indexes; inventory price computation
method.Guidance is provided to taxpayers using the dollar-
value last-in, first-out (LIFO) inventory method and the inven-
tory price index computation (IPIC) method regarding the
computation of a percent change for an index category that
is affected by revisions to the CPI Detailed Report or the PPI
Detailed Report.
Rev. Proc. 98–52, page 12.
Electronic filing; magnetic media.Specifications are set
forth for the magnetic or electronic filing of 1998 Forms
8027. The forms may be filed with the Service using
1
⁄
2
inch
magnetic tape; IBM 3480/3490 or AS400 compatible tape
cartridges; or 5
1
⁄
4
-, 3
1
⁄
2
-inch diskettes and electronic filing
through the Information Reporting Program Bulletin Board
System (IRB-BBS). Rev. Proc. 92–81 superseded.
Notice 98–47, page 8.
Timely filing or payment; private delivery services.An
updated list of designated private delivery services is pro-
vided for purposes of section 7502 of the Code. The list re-
mains unchanged from the lists published in Notice 97–50,
1997–37 I.R.B. 21 and Notice 97–26, 1997–1 I.R.B. 413.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–37
September 14, 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 49.
IRB 1998-37 9/10/98 4:04 PM 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 1998-37 9/10/98 4:04 PM 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
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
3
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1998-37 9/10/98 4:04 PM Page 3

Section 355.—Distribution of
Stock and Securities of a
Controlled Corporation
26 CFR 1.355–2: Limitations.
The revenue ruling declares Rev. Rul. 70–225
obsolete because it is no longer determinative fol-
lowing modifications made by the Taxpayer Relief
Act of 1997, as amended by the Tax Technical Cor-
rections Act of 1998. SeeRev Rul. 98–44, page 4.
26 CFR 1.355–2: Limitations.
(Also section 7805; 301.7805–1.)
Section 355.This ruling declares Rev.
Rul. 70–225 obsolete because it is no
longer determinative following modifica-
tions made by the Taxpayer Relief Act of
1997, as amended by the Tax Technical
Corrections Act of 1998. Rev. Rul.
70–225 addresses a distribution of the
stock of a newly formed controlled corpo-
ration followed by an acquisition of the
stock of the controlled corporation. Rev.
Rul. 70–225 obsoleted.
Rev. Rul. 98–44
Rev. Rul. 70–225, 1970–1 C.B. 80,
modified by Rev. Rul. 98–27, 1998–22
I.R.B. 4, addresses a distribution of the
stock of a newly formed controlled corpo-
ration followed by an acquisition of the
stock of the controlled corporation. Rev.
Rul. 70–225 is no longer determinative
following enactment of § 1012 of the Tax-
payer Relief Act of 1997, Pub. L. No.
105–34, 111 Stat. 788, 914–18 (the
“Act”), as amended in § 6010(c) of the
Tax Technical Corrections Act of 1998,
Pub. L. No. 105–206, 112 Stat. 790, 813–
14, which modified certain provisions in
§§ 351, 355, and 368 of the Internal Rev-
enue Code. Subject to certain transition
rules, § 1012(c) of the Act is effective for
transfers after August 5, 1997.
Accordingly, Rev. Rul. 70–225 is de-
clared obsolete as of the effective date of
§ 1012(c) of the Act.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Phoebe Bennett of the Office of
Assistant Chief Counsel (Corporate). For
further information regarding this revenue
ruling, contact Ms. Bennett at (202) 622-
7750 or Brendan P. O’Hara at (202) 622-
7530 (not toll-free calls).
Section 4461.—Harbor
Maintenance Tax: Imposition of
Ta x
Ct.D. 2064
SUPREME COURT
OF THE UNITED STATES
No. 97–372
UNITED STATES v. UNITED STATES
SHOE CORP.
523 U.S.
(1998)
CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR
THE FEDERAL CIRCUIT
March 31, 1998
Syllabus
The Harbor Maintenance Tax (HMT)
obligates exporters, importers, and do-
mestic shippers, 26 U.S.C. §4461(c)(1),
to pay 0.125 percent of the value of the
commercial cargo they ship through the
Nation’s ports, §4461(a). The HMT is im-
posed at the time of loading for exports
and unloading for other shipments.
§4461(c)(2). It is collected by the Cus-
toms Service and deposited in the Harbor
Maintenance Trust Fund (Fund), from
which Congress may appropriate amounts
to pay for harbor maintenance and devel-
opment projects and related expenses.
§9505. Respondent United States Shoe
Corporation (U.S. Shoe) paid the HMT
for articles the company exported during
the period April to June 1994 and then
filed a protest with the Customs Service
alleging that, to the extent the toll applies
to exports, it violates the Export Clause,
U.S. Const., Art. 1, §9, cl. 5, which states:
“No Tax or Duty shall be laid on Articles
exported from any State.” The Customs
Service responded to U.S. Shoe with a
form letter stating that the HMT is a statu-
torily mandated user fee, not an unconsti-
tutional tax on exports. U. S. Shoe then
sued for a refund, asserting that the HMT
violates the Export Clause as applied to
exports. In granting U.S. Shoe summary
judgment, the Court of International
Trade (CIT) held that it had jurisdiction
under 28 U.S.C. §1581(i) and that the
HMT qualifies as a tax. Rejecting the
Government’s characterization of the
HMT as a user fee, the CIT reasoned that
the tax is assessed ad valoremdirectly
upon the value of the cargo itself, not
upon any services rendered for the cargo.
The Federal Circuit affirmed.
Held:
1. The CIT properly entertained juris-
diction in this case. Section 1581(i)(4)
gives that court residual jurisdiction over
“any civil action . . . against the United
States . . . that arises out of any [federal]
law . . . providing for . . . administration
and enforcement with respect to the mat-
ters referred to in [§1581(i)(1)],” which in
turn applies to “revenue from imports.”
This dispute involves such a law. The
HMT statute, although applied to exports
here, applies equally to imports. That
§1581(i) does not use the word “exports”
is hardly surprising in view of the Export
Clause, which confines customs duties to
imports. Moreover, 26 U.S.C. §4462(f)(2)
directs that the HMT “be treated as . . . a
customs duty” for jurisdictional purposes.
Such duties, by their very nature, provide
for revenue from imports and are encom-
passed within §1581(i)(1). Accordingly,
CIT jurisdiction over controversies re-
garding HMT administration and enforce-
ment accords with §1581(i)(4). Pp. 3–5.
2. Although the Export Clause categor-
ically bars Congress from imposing any
tax on exports, United States v. Interna-
tional Business Machines Corp.,517 U.S.
843 (IBM),it does not rule out a “user
fee” that lacks the attributes of a generally
applicable tax or duty and is, instead, a
charge designed as compensation for gov-
ernment-supplied services, facilities, or
benefits, see Pace v. Burgess,92 U.S.
372, 375–376. The HMT, however, is a
tax, and thus violates the Export Clause as
applied to exports. Pp. 3–9.
(a) The HMT bears the indicia of a tax:
Congress expressly described it as such,
26 U. S. C. §4461(a), codified it as part of
the Internal Revenue Code, and provided
that, for administrative, enforcement, and
jurisdictional purposes, it should be
September 14, 199841998–37 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1998-37 9/10/98 4:04 PM Page 4

treated “as if [it] were a customs duty,”
§§4462(f)(1),(2). Prior cases in which this
Court upheld flat and ad valorem charges
as valid user fees do not govern here be-
cause they involved constitutional provi-
sions other than the Export Clause. IBM
plainly stated that the Export Clause’s
simple, direct, unqualified prohibition on
any taxes or duties distinguishes it from
other constitutional limitations on govern-
mental taxing authority. 517 U.S., at 851,
852, 857, 861. Pp. 5–7.
(b) The guiding precedent for deter-
mining what constitutes a bona fide user
fee in the Export Clause context remains
this Court’s time-tested Pacedecision.
The PaceCourt upheld a fee for stamps
placed on tobacco packaged for export.
The stamp was required to prevent fraud,
and the charge for it, the Court said,
served as “compensation given for ser-
vices [in fact] rendered.” 92 U.S., at 375.
In holding that the fee was not a duty, the
Court emphasized that the charge bore no
relationship to the quantity or value of the
goods stamped for export. Ibid. Pacees-
tablishes that, under the Export Clause,
the connection between a service the
Government renders and the compensa-
tion it receives for that service must be
closer than is present here. Unlike the fee
at issue in Pace,the HMTisdetermined
entirely on an ad valorembasis. The value
of export cargo, however, does not corre-
late reliably with the federal harbor ser-
vices, facilities, and benefits used or us-
able by the exporter. The Court’s holding
does not mean that exporters are exempt
from any and all user fees designed to de-
fray the cost of harbor development and
maintenance. It does mean, however, that
such a fee must fairly match the ex-
porters’ use of port services and facilities.
Pp. 7–9.
114 F. 3d 1564, affirmed.
G
INSBURG, J., delivered the opinion for
a unanimous Court.
SUPREME COURT
OF THE UNITED STATES
No. 97–372
UNITED STATES, PETITIONER v.
UNITED STATES SHOE
CORPORATION
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR THE
FEDERAL CIRCUIT
[March 31, 1998]
J
USTICEGINSBURGdelivered the opin-
ion of the Court.
The Export Clause of the Constitution
states: “No Tax or Duty shall be laid on
Articles exported from any State.” U.S.
Const., Art. 1, §9, cl. 5. We held in United
States v.International Business Machines
Corp.,517 U.S. 843 (1996) (IBM), that
the Export Clause categorically bars Con-
gress from imposing any tax on exports.
The Clause, however, does not rule out a
“user fee,” provided that the fee lacks the
attributes of a generally applicable tax or
duty and is, instead, a charge designed as
compensation for government-supplied
services, facilities, or benefits. See Pace
v. Burgess, 92 U.S. 372, 375–376 (1876).
This case presents the question whether
the Harbor Maintenance Tax (HMT), 26
U.S.C. §4461(a), as applied to goods
loaded at United States ports for export, is
an impermissible tax on exports or, in-
stead, a legitimate user fee. We hold, in
accord with the Federal Circuit, that the
tax, which is imposed on an ad valorem
basis, is not a fair approximation of ser-
vices, facilities, or benefits furnished to
the exporters, and therefore does not qual-
ify as a permissible user fee.
I
The HMT, enacted as part of the Water
Resources Development Act of 1986, 26
U.S.C. §§4461–4462, imposes a uniform
charge on shipments of commercial cargo
through the Nation’s ports. The charge is
currently set at 0.125 percent of the
cargo’s value. Exporters, importers, and
domestic shippers are liable for the HMT,
§4461(c)(1), which is imposed at the time
of loading for exports and unloading for
other shipments, §4461(c)(2). The HMT
is collected by the Customs Service and
deposited in the Harbor Maintenance
Trust Fund (Fund). Congress may appro-
priate amounts from the Fund to pay for
harbor maintenance and development
projects, including costs associated with
the St. Lawrence Seaway, or related ex-
penses. §9505.
Respondent United States Shoe Corpo-
ration (U.S. Shoe) paid the HMT for arti-
cles the company exported during the pe-
riod April to June 1994 and then filed a
protest with the Customs Service alleging
the unconstitutionality of the toll to the
extent it applies to exports. The Customs
Service responded with a form letter stat-
ing that the HMT is a statutorily man-
dated fee assessment on port users, not an
unconstitutional tax on exports. On No-
vember 3, 1994, U.S. Shoe brought this
action against the Government in the
Court of International Trade (CIT). The
company sought a refund on the ground
that the HMT is unconstitutional as ap-
plied to exports.
Sitting as a three-judge court, the CIT
held that its jurisdiction was properly in-
voked under 28 U.S.C. §1581(i); on the
merits, the CIT agreed with U.S. Shoe
that the HMT qualifies as a tax. 907 F.
Supp. 408 (1995). Rejecting the Govern-
ment’s characterization of the HMT as a
user fee rather than a tax, the CIT rea-
soned: “The Tax is assessed ad valorem
directly upon the value of the cargo itself,
not upon any services rendered for the
cargo. . . . Congress could not have im-
posed the Tax any closer to exportation,
or more immediate to the articles ex-
ported.” Id.,at 418. Relying on the Export
Clause, the CIT entered summary judg-
ment for U. S. Shoe.
The Court of Appeals for the Federal
Circuit, sitting as a five-judge panel, af-
firmed. 114F.3d 1564 (1997). On auxil-
iary questions, the Federal Circuit upheld
the CIT’s exercise of jurisdiction under
§1581(i) and agreed with the lower court
that the HMT applied to goods in export
transit.
1
Concluding that the HMT is not
based on a fair approximation of port use,
the Federal Circuit also agreed that the
HMT imposes a tax, not a user fee. In
making this determination, the Court of
Appeals emphasized that the HMT does
not depend on the amount or manner of
port use, but is determined solely by the
value of cargo. Judge Mayer dissented; in
his view, Congress properly designed the
HMT as a user fee, a toll on shippers that
supplies funds not for the general support
of government, but exclusively for the fa-
cilitation of commercial navigation.
1998–37 I.R.B.5September 14, 1998
1
The Government does not here challenge the
determination that the HMT applies to goods in ex-
port transit.
IRB 1998-37 9/10/98 4:04 PM Page 5

Numerous cases challenging the consti-
tutionality of the HMT as applied to ex-
ports are currently pending in the Court of
International Trade and the Court of Fed-
eral Claims.
2
We granted certiorari, 522
U.S.
(1997), to review the Federal Cir-
cuit’s determination that the HMT vio-
lates the Export Clause.
II
As an initial matter, we conclude that
the CIT properly entertained jurisdiction
in this case. The complaint alleged exclu-
sive original jurisdiction in that tribunal
under 28 U.S.C. §1581(a) or, alterna-
tively, §1581(i). App. 26. We agree with
the CIT and the Federal Circuit that
§1581(i) is the applicable jurisdictional
prescription. The key directive is stated in
26 U.S.C. §4462(f)(2), which instructs
that for jurisdictional purposes, the HMT
“shall be treated as if such tax were a cus-
toms duty.”
Section 1581(a) surely concerns cus-
toms duties. It confers exclusive original
jurisdiction on the Court of International
Trade in “any civil action commenced to
contest the [Customs Service’s] denial of
a protest.” A protest, as indicated in 19
U.S.C. §1514, is an essential prerequisite
when one challenges an actual Customs
decision. As to the HMT, however, the
Federal Circuit correctly noted that pro-
tests are not pivotal, for Customs “per-
forms no active role,” it undertakes “no
analysis [or adjudication],” “issues no
directives,” “imposes no liabilities”;
instead, Customs “merely passively
collects” HMT payments. 114 F.3d, at
1569.
Section 1581(i) describes the Court of
International Trade’s residual jurisdiction
over
“any civil action commenced against
the United States . . . that arises out
of any law of the United States pro-
viding for —
“(1) revenue from imports or ton-
nage;
. . . . .
“(4) administration and enforcement
with respect to the matters referred
to in paragraphs (l)–(3) of this sub-
section. . . .”
This dispute, as the Federal Circuit stated,
“involve[s] the ‘administration and en-
forcement’ of a law providing for revenue
from imports because the HMT statute, al-
though applied to exports here, does apply
equally to imports.” 114F.3d, at 1571.
True, §1581(i) does not use the word “ex-
ports.” But that is hardly surprising in
view of the Export Clause, which confines
customs duties to imports. Revenue from
imports and revenue from customs duties
are thus synonymous in this setting. In
short, as the CIT correctly concluded and
the Federal Circuit correctly affirmed,
“Congress [in §4462(f)(2)] directed [that]
the [HMT] be treated as a customs duty
for purposes of jurisdiction. Such duties,
by their very nature, provide for revenue
from imports, and are encompassed
within [§]1581(i)(1).” 907 F. Supp., at
421. Accordingly, CIT jurisdiction over
controversies regarding the administra-
tion and enforcement of the HMT accords
with §1581(i)(4).
3
III
Two Terms ago, in IBM,this Court
considered the question whether a tax on
insurance premiums paid to protect ex-
ports against loss violated the Export
Clause. Distinguishing case law devel-
oped under the Commerce Clause, 517
U.S., at 850–852, and the Import-Export
Clause, id.,at 857–861, the Court held
that the Export Clause allows no room for
any federal tax, however generally applic-
able or nondiscriminatory, on goods in
export transit. Before this Court’s deci-
sion in IBM,the Government argued that
the HMT, even if characterized as a “tax”
rather than a “user fee,” should survive
constitutional review “because it applies
without discrimination to exports, imports
and domestic commerce alike.” Reply
Brief for United States 9, n. 2. Recogniz-
ing that IBM“rejected an indistinguish-
able contention,” the Government now
asserts only that HMT is “ ‘a permissible
user fee,’ ” ibid.,a toll within the toler-
ance of Export Clause precedent. Adher-
ing to the Court’s reasoning in IBM, we
reject the Government’s current position.
The HMT bears the indicia of a tax.
Congress expressly described it as “a tax
on any port use,” 26 U.S.C. §4461(a)
(emphasis added), and codified the HMT
as part of the Internal Revenue Code. In
like vein, Congress provided that, for ad-
ministrative, enforcement, and jurisdic-
tional purposes, the HMT should be
treated “as if [it] were a customs duty.”
§§4462(f)(1), (2). However, “we must re-
gard things rather than names,” Pace v.
Burgess,92 U.S., at 376, in determining
whether an imposition on exports ranks as
a tax. The crucial question is whether the
HMT is a tax on exports in operation as
well as nomenclature or whether, despite
the label Congress has put on it, the exac-
tion is instead a bona fide user fee.
In arguing that the HMT constitutes a
user fee, the Government relies on our de-
cisions in United Statesv. Sperry Corp.,
493 U.S. 52 (1989), Massachusettsv.
United States,435 U.S. 444 (1978), and
Evansville-Vanderburgh Airport Author-
ity Dist.v. Delta Airlines, Inc.,405 U.S.
707 (1972). In those cases, this Court up-
held flat and ad valoremcharges as valid
user fees. See United Statesv. Sperry
Corp.,493 U.S., at 62 (1
1
⁄
2
percent ad val-
orem fee applied to awards certified by
the Iran-United States Claims Tribunal
qualifies as a user fee and is not so exces-
sive as to violate the Takings Clause);
Massachusettsv. United States,435 U.S.,
at 463–467 (flat federal registration fee
imposed annually on all civil aircraft
meets genuine user fee standards and, as
applied to state-owned aircraft, does not
dishonor State’s immunity from federal
taxation); Evansville-Vanderburgh Air-
port Authority,405 U.S., at 717–721 (flat
charge for each passenger enplaning,
levied for the maintenance of State’s air-
port facilities, does not run afoul of the
dormant Commerce Clause). Those deci-
sions involved constitutional provisions
other than the Export Clause, however,
and thus do not govern here.
IBMplainly stated that the Export
Clause’s simple, direct, unqualified prohi-
bition on any taxes or duties distinguishes
September 14, 199861998–37 I.R.B.
2
According to the Government, some 4,000 cases
raising this claim are currently stayed in the CIT,
with more than 100 additional cases stayed in
the Court of Federal Claims. See Brief for United
States 4.
3
Because we determine that the Court of Interna-
tional Trade has exclusive jurisdiction over chal-
lenges to the HMT under §1581(i)(4), it follows that
the Court of Federal Claims lacks jurisdiction over
the challenges to the HMT currently pending there.
See 28 U.S.C. §1491(b). The plaintiffs in these chal-
lenges may invoke §1631, which authorizes inter-
court transfers, when “in the interest of justice,” to
cure want of jurisdiction. See also §610 (as used in
Title 28, the term “court” includes the Court of Fed-
eral Claims and the CIT).
IRB 1998-37 9/10/98 4:04 PM Page 6

it from other constitutional limitations on
governmental taxing authority. The Court
there emphasized that the “text of the
Export Clause . . . expressly prohibits
Congress from laying any tax or duty on
exports.” 517 U.S., at 852; see also id.,
at 861 (“[T]he Framers sought to alleviate
. . . concerns [that Northern States would
tax exports to the disadvantage of South-
ern States] by completely denying to Con-
gress the power to tax exports at all.”).
Accordingly, the Court reasoned in IBM,
“[o]ur decades-long struggle over the
meaning of the nontextual negative com-
mand of the dormant Commerce Clause
does not lead to the conclusion that our
interpretation of the textual command of
the Export Clause is equally fluid.” Id.,at
851; see also id.,at 857 (“We have good
reason to hesitate before adopting the
analysis of our recent Import-Export
Clause cases into our Export Clause ju-
risprudence....[M]eaningful textual
differences exist [between the two
Clauses] and should not be overlooked.”).
In Sperry,moreover, we noted that the
Takings Clause imposes fewer constraints
on user fees than does the dormant Com-
merce Clause. See 493 U.S., at 61, n. 7
(analysis under Takings Clause is less
“exacting” than under the dormant Com-
merce Clause). A fortiori,therefore, the
Takings Clause is less restrictive than the
Export Clause.
The guiding precedent for determining
what constitutes a bona fide user fee in
the Export Clause context remains our
time-tested decision in Pace. Pacein-
volved a federal excise tax on tobacco.
Congress provided that the tax would not
apply to tobacco intended for export. To
prevent fraud, however, Congress re-
quired that tobacco the manufacturer
planned to export carry a stamp indicating
that intention. Each stamp cost 25 cents
(later 10 cents) per package of tobacco.
Congress did not limit the quantity or
value of the tobacco packaged for export
or the size of the stamped package;
“[t]hese were unlimited, except by the de-
scription of the exporter or the conve-
nience of handling.” 92 U.S., at 375.
The Court upheld the charge, conclud-
ing that it was “in no sense a duty on ex-
portation,” but rather “compensation
given for services [in fact] rendered.”
Ibid.In so ruling, the Court emphasized
two characteristics of the charge: It “bore
no proportion whatever to the quantity or
value of the package on which [the stamp]
was affixed”; and the fee was not exces-
sive, taking into account the cost of
arrangements needed both “to give to the
exporter the benefit of exemption from
taxation, and . . . to secure . . . against the
perpetration of fraud.” Ibid.
Paceestablishes that, under the Export
Clause, the connection between a service
the Government renders and the compen-
sation it receives for that service must be
closer than is present here. Unlike the
stamp charge in Pace,the HMT is deter-
mined entirely on an ad valorembasis.
The value of export cargo, however, does
not correlate reliably with the federal har-
bor services used or usable by the ex-
porter. As the Federal Circuit noted, the
extent and manner of port use depend on
factors such as the size and tonnage of a
vessel, the length of time it spends in port,
and the services it requires, for instance,
harbor dredging. See 114 F. 3d, at 1572.
In sum, if we are “to guard against . . .
the imposition of a [tax] under the pretext
of fixing a fee,” Pacev. Burgess, 92 U.S.,
at 376, and resist erosion of the Court’s
decision in IBM,we must hold that the
HMT violates the Export Clause as ap-
plied to exports. This does not mean that
exporters are exempt from any and all
user fees designed to defray the cost of
harbor development and maintenance. It
does mean, however, that such a fee must
fairly match the exporters’ use of port ser-
vices and facilities.
***
For the foregoing reasons, the judg-
ment of the Court of Appeals for the Fed-
eral Circuit is
Affirmed.
1998–37 I.R.B.7September 14, 1998
IRB 1998-37 9/10/98 4:04 PM Page 7

September 14, 199881998–37 I.R.B.
Designated Private Delivery
Services
Notice 98–47
This notice updates the list of private
delivery services (“PDSs”) designated
under Notice 97–26, 1997–1 C.B. 413,
and Notice 97–50, 1997–37 I.R.B. 21
(“designated PDSs”) for purposes of the
“timely mailing as timely filing/paying”
rule of § 7502 of the Internal Revenue
Code, effective September 1, 1998.
Section 7502(f) authorizes the Secre-
tary to designate certain PDSs for the
“timely mailing as timely filing/paying”
rule of § 7502. Rev. Proc. 97–19, 1997–1
C.B. 644, provides the criteria currently
applicable for designation of a PDS. No-
tice 97–50, modifying Notice 97–26 and
Rev. Proc. 97–19, provides that each year
there will be only one application period,
which will end on June 30th. Notice
97–50 also provides that the Service will
issue a notice providing a new list of des-
ignated PDSs on or before September 1st
of each year for which Rev. Proc. 97–19
is in effect.
Effective September 1, 1998, the list of
designated PDSs is as follows:
1. Airborne Express (Airborne): Over-
night Air Express Service, Next Af-
ternoon Service, and Second Day
Service;
2. DHL Worldwide Express (DHL):
DHL “Same Day” Service and DHL
USA Overnight;
3. Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, and FedEx 2 Day; and
4. United Parcel Service (UPS): UPS
Next Day Air, UPS Next Day Air
Saver, UPS 2nd Day Air, and UPS
2nd Day Air A.M.
This list remains unchanged from the
lists published in Notice 97–26 and No-
tice 97–50. Airborne, DHL, FedEx, and
UPS are not designated with respect to
any type of delivery service not identified
above. Notice 97–26 also provides special
rules used to determine the date that will
be treated as the postmark date for pur-
poses of § 7502.
EFFECT ON OTHER DOCUMENTS
Notice 97–50 is modified by updating
the list of designated PDSs.
EFFECTIVE DATE
This notice is effective on September 1,
1998.
FOR FURTHER INFORMATION
The principal author of this notice is
Renay France of the Office of the Assist-
ant Chief Counsel (Income Tax and Ac-
counting). For further information regard-
ing this notice, contact Ms. France at
(202) 622-6232 (not a toll-free call).
Section 198: Expensing of environmental
remediation costs.
Rev. Proc. 98–47
SECTION 1. PURPOSE
This revenue procedure provides pro-
cedures for taxpayers to make the election
under § 198 of the Code (“§ 198 elec-
tion”) to deduct any qualified environ-
mental remediation expenditure (“QER
expenditure”).
SECTION 2. BACKGROUND
.01 Section 198(a), as added by
§ 941(a) of the Taxpayer Relief Act of
1997, Pub. L. No. 105–34, 111 Stat. 788
(Aug. 5, 1997), provides that a taxpayer
may elect to treat any QER expenditure as
an expense that is not chargeable to the
capital account, but is deductible for the
taxable year in which it is paid or in-
curred.
.02 Section 198(b)(1) generally defines
a “qualified environmental remediation
expenditure” as any expenditure that is
otherwise chargeable to the capital ac-
count, and that is paid or incurred in con-
nection with the abatement or control of
hazardous substances as a qualified conta-
minated site. However, under § 198(b)(2)
a QER expenditure does not include any
expenditure for property subject to an al-
lowance for depreciation, except that the
portion of the allowance for depreciation
of such property that is otherwise allo-
cated to a qualified contaminated site is
treated as a QER expenditure.
.03 Section 198(c)(1)(A) defines a
“qualified contaminated site” as any area:
(i) that is held by the taxpayer for use
in a trade or business or for the production
of income, or that is property described in
§ 1221(1) in the hands of the taxpayer;
(ii) that is within a targeted area (as
defined in § 198(c)(2)); and
(iii) at or on which there has been a
release (or threat of release) or disposal of
any hazardous substance.
Section 198(c)(1)(B) provides that an area
is treated as a qualified contaminated site
with respect to expenditures paid or in-
curred during any taxable year only if the
taxpayer receives a statement from an ap-
propriate agency of the state (as defined
by § 198(c)(1)(C)) in which the area is lo-
cated, verifying that the area meets the re-
quirements of § 198(c)(1)(A)(ii) and (iii)
(described above).
.04 Section 198(d)(1) generally defines
“hazardous substance” as any substance
that is a hazardous substance as defined in
§ 101(14) of the Comprehensive Environ-
mental Response, Compensation, and Lia-
bility Act of 1980 (CERCLA), and any
substance that is designated as a hazardous
substance under § 102 of CERCLA.
.05 Section 198 is effective for expen-
ditures paid or incurred after August 5,
1997, and on or before December 31,
2000. See§ 198(h).
SECTION 3. PROCEDURE
.01 Time for Making the Election.
Except as provided in section
3.02(3) of this revenue procedure, a § 198
election must be made on or before the
due date (including extensions) for filing
the income tax return for the taxable year
in which the QER expenditures are paid
or incurred.
.02 Manner of Making the Election.
(1) Individuals.Individuals must in-
clude the total amount of § 198 expenses
on the line for “Other Expenses” on
Schedule C, E, or F (as appropriate) for
Form 1040, U.S. Individual Income Tax
Return. Wherever the schedule requires
that the taxpayer separately identify each
expense included in “Other Expenses,”
the taxpayer must write “Section 198
Election” on the line on which the § 198
expense amounts separately appear.
(2) All other entities.Persons other
than individuals (including S corpora-
tions, partnerships, and trusts) must in-
clude the total amount of § 198 expenses
Part III. Administrative, Procedural, and Miscellaneous
IRB 1998-37 9/10/98 4:04 PM Page 8

1998–37 I.R.B.9September 14, 1998
on the line for “Other Deductions” (or the
equivalent thereof) on their appropriate
federal income tax return. On a schedule
attached to the return that separately iden-
tifies each expense included in “Other
Deductions” (or the equivalent thereof),
the taxpayer must write “Section 198
Election” on the line on which the § 198
expense amounts separately appear.
(3) Transition rule.Taxpayers that
claim a deduction for QER expenditures,
paid or incurred after August 5, 1997, on a
return filed on or before October 14,
1998, will be deemed to have made a §
198 election with respect to those expen-
ditures, even if no reference to § 198 is
contained on the return. If a taxpayer did
not claim a deduction for such QER ex-
penditures on such return, the taxpayer
may make the § 198 election for those ex-
penditures for the taxable year covered by
the return only by filing an amended re-
turn (within the applicable period of limi-
tations) that complies with section 3.02(1)
and (2) of this revenue procedure.
.03 Scope of Election.
If, for any taxable year, the taxpayer
pays or incurs more than one QER expen-
diture, the taxpayer may make a § 198
election for any one or more of such ex-
penditures for that year. Thus, the tax-
payer may make a § 198 election with re-
spect to a QER expenditure even though
the taxpayer chooses to capitalize other
such expenditures (whether or not they
are of the same type or paid or incurred
with respect to the same qualified conta-
minated site). A § 198 election for one
year has no effect for other years. Thus, a
taxpayer must make a § 198 election for
each year in which the taxpayer intends to
deduct QER expenditures.
.04 Revocation.
A § 198 election is revocable only
with the prior written consent of the Com-
missioner. To obtain the Commissioner’s
consent, a taxpayer must submit a request
for a private letter ruling in accordance
with the provisions of Rev. Proc. 98–1,
1998–1 I.R.B. 7 (or its successor). The
taxpayer may submit a request for revoca-
tion for any taxable year for which the pe-
riod of limitations for filing a claim for
credit or refund of overpayment of tax has
not expired.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for
QER expenditures paid or incurred after
August 5, 1997.
DRAFTING INFORMATION
The principal author of this revenue
procedure is J. Peter Baumgarten of the
office of Assistant Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Baumgarten on (202) 622-
4950 (not a toll-free call).
26 CFR 601.602: Forms and instructions.
(Also Part I, sections 446, 471, 472, 1.446–1,
1.471–8, 1.472–1.)
Rev. Proc. 98–49
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance to taxpayers that use the dollar-value
last-in, first-out (LIFO) inventory method
and the inventory price index computa-
tion (IPIC) method regarding the compu-
tation of a percent change for the first tax-
able year in which such percent change is
computed with reference to a revised CPI
Detailed Report(CPI) or a PPI Detailed
Report(PPI) for any index category af-
fected by such revisions. A revised CPI
or PPI is one that contains new index cat-
egories, eliminates some previously re-
ported index categories, resets the base
year of some index categories, or does not
report the relative weights of some index
categories. Generally, under this revenue
procedure, any reasonable method of
computing a percent change for a selected
index category affected by revisions to
the CPI or PPI will be accepted by the In-
ternal Revenue Service. This revenue
procedure also provides a specific safe
harbor method that will be considered a
reasonable method for these purposes.
SECTION 2. BACKGROUND
.01 Section 472(a) of the Internal Rev-
enue Code authorizes a taxpayer to use
the LIFO inventory method in accordance
with regulations prescribed by the
Secretary.
.02 Section 1.472–8(a) of the Income
Tax Regulations provides that a taxpayer
may elect to determine the cost of its
LIFO inventories under the dollar-value
LIFO method, provided that method is
used consistently and clearly reflects the
taxpayer’s income.
.03 Section 1.472–8(e)(1) authorizes
three methods for computing the LIFO
value of a dollar-value inventory pool: (1)
the double-extension method, (2) an
index method, and (3) the link-chain
method.
.04 Section 1.472–8(e)(3)(i) authorizes
the use of the IPIC method to compute the
LIFO value of a dollar-value inventory
pool. An inventory price index computed
in the manner provided in § 1.472–8(e)(3)
will be accepted by the Commissioner as
an appropriate method of computing an
index, and the use of such index will
be accepted as accurate, reliable, and
suitable.
.05 Section 1.472–8(e)(3)(ii) provides
that an inventory price index computed
under the IPIC method must be a stated
percentage of the percent change in the
selected consumer or producer price
index or indexes. The stated percentage
for a taxpayer in a taxable year in which it
is an eligible small business is 100 per-
cent of the percent change in the selected
price indexes. The stated percentage for
all other taxpayers is 80 percent of the
percent change in the selected price in-
dexes. If it is necessary to select more
than one specific consumer or producer
price index for an inventory pool, the
stated percentage of the percent change is
the stated percentage of the weighted av-
erage percent change for such indexes.
Such weighed average is computed by
reference to the relative amounts of cur-
rent-year costs in the inventory pool for
each index category of goods.
.06 Section 1.472–8(e)(3)(iii) describes
the process for selecting consumer and
producer price indexes under the IPIC
method. Inventory items in each of the
taxpayer’s pools are classified according
to the detailed listings in the appropriate
tables of the CPI or PPI (formerly known
as Producer Prices and Price Indexes)
and assigned to various index categories.
§ 1.472–8(e)(3)(iii)(B). Indexes and
weights published by the United States
Bureau of Labor Statistics (BLS) are used
to compute the percent change for each
index category to which inventory items
have been assigned. Id.In many cases,
the selected index for an index category
must be converted into a cost price index
prior to the computation of the percent
change for the index category. § 1.472–
8(e)(3)(iii)(C). In the case of a taxpayer
IRB 1998-37 9/10/98 4:04 PM Page 9

using the retail inventory method, the
index selected must be the index as of the
last month of the taxpayer’s taxable year.
Id.Taxpayers that do not use the retail
method must select indexes as of the
month or months most appropriate to the
taxpayer’s method of determining the cur-
rent-year cost of the inventory pool under
§ 1.472–8(e)(2)(ii), or make a one-time
binding election of an appropriate repre-
sentative month during the taxable year.
Id.
.07 The BLS frequently makes changes
to the categories included in the CPI or
PPI. For example, the BLS revised the
categories of goods listed in the January
1998 CPI by introducing some new cate-
gories as of January 1998 and eliminating
or resetting some existing categories as of
December 1997. Consequently, January
1999 will be the first month for which it is
possible to compute a percent change for
a 12-month period with reference to the
BLS published indexes for any affected
index category (as described in section 3
of this revenue procedure). Moreover, the
BLS did not publish weights for some
index categories.
SECTION 3. SCOPE
This revenue procedure applies to a
taxpayer that uses the dollar-value LIFO
inventory and IPIC methods pursuant to
§ 1.472–8(e)(3) for any taxable year in
which a percent change for an index cate-
gory for the 12-month period ending with
the appropriate index month, as defined in
§ 1.472–8(e)(iii)(C) (“index month”), (or,
in the case of a short taxable year, the ap-
plicable period) cannot be computed by
the taxpayer in strict conformity with
§ 1.472–8(e)(3)(ii) or (iii) because of re-
visions to the CPI or PPI as described in
section 2.07 of this revenue procedure
(“affected index category”).
SECTION 4. APPLICATION
A taxpayer described in section 3 of
this revenue procedure may use any rea-
sonable method of computing a percent
change for each affected index category,
provided such method is used consistently
for all affected index categories within a
particular taxable year. The procedure for
computing a percent change for an af-
fected index category set forth in section 5
of this revenue procedure is deemed to be
a reasonable method for these purposes.
SECTION 5. PROCEDURE
.01 When a revised CPI or PPI includes
new index categories or eliminates or re-
sets old index categories, a taxpayer may
compute a total percent change for each
affected index category represented in
the taxpayer’s ending inventory in accor-
dance with the procedure provided in this
section 5.01. This total percent change
will be a combination of the percent
change for the second portion of the tax-
able year based on the revised index cate-
gory and the corresponding percent
change for the first portion of the taxable
year based on the old index category.
(1) A taxpayer must first compute the
percent change for each affected index
category set forth in the revised CPI or
PPI for the period between the first month
covered by the revised CPI or PPI and the
index month (“the second portion”) as
follows:
(a) Using the appropriate table of
the revised CPI or PPI for the index
month, all specific inventory items must
be placed in the most detailed index cate-
gory that includes that specific inventory
item (without regard to the index selec-
tion requirements in § 1.472–8(e)(3)-
(iii)(B)).
(b) The percent change of each re-
vised CPI or PPI index category for the
second portion is determined using the
following formula:
[(A-B) / B) * 100]
where:
A = Cumulative index for index month
(adjusted, as necessary, to reflect a
cost or retail price index)
B = Cumulative index for last month of
old CPI or PPI as published for the
first month of revised CPI or PPI
(adjusted, as necessary, to reflect a
cost or retail price index).
(2) A taxpayer must then compute a
percent change for each affected index
category set forth in the old CPI or PPI for
the period between the preceding year’s
index month and the last month covered
by the old CPI or PPI (“the first portion”)
as follows:
(a) Using the appropriate table of
the old CPI or PPI for the preceding
year’s index month, all specific inventory
items must be placed in the most detailed
index category that includes that specific
inventory item (without regard to the
index selection requirements of § 1.472–
8(e)(3)(iii)(B)).
(b) The percent change of each old
CPI or PPI index category for the first
portion is determined using the following
formula:
[(C–D) / D) * 100]
where:
C = Cumulative index for last month of
old CPI or PPI as published for the
last month of old CPI or PPI (ad-
justed, as necessary, to reflect a
cost or retail price index)
D = Cumulative index for preceding
year’s index month (adjusted, as
necessary, to reflect a cost or retail
price index).
(3) The taxpayer will then determine
the total percent change for each index
category set forth in the revised CPI or
PPI represented in the ending inventory
by combining the percent change for the
second portion with the corresponding
percent change for the first portion using
the following formula:
({[(X + 100) * (Y + 100)] / 100} – 100)
where:
X = Percent change for the second por-
tion
Y = Percent change for the first por-
tion.
For purposes of computing the total per-
cent change for each revised CPI or PPI
index category, the corresponding percent
change for the first portion is the percent
change for the old CPI or PPI index cate-
gory that includes the specific inventory
item(s) included in the revised CPI or PPI
index category. If specific inventory
items included in a single revised CPI or
PPI index category were separately in-
cluded in different old CPI or PPI index
categories, the corresponding percent
change for the first portion is the
weighted average percent change of such
old CPI or PPI percent changes. The
costs to be used in computing such
weighted average must be the relative
current-year costs in ending inventory.
.02 When § 1.472–8(e)(3)(iii)(B)(5) re-
quires a taxpayer to compute a percent
change for a selected index category
using the BLS weights and the CPI or PPI
does not report the relative weights for
one or more of the taxpayer’s detailed
September 14, 1998101998–37 I.R.B.
IRB 1998-37 9/10/98 4:04 PM Page 10

index categories within a selected index
category, the taxpayer may weight the de-
tailed index categories actually present in
its ending inventory within such selected
index category using the taxpayer’s actual
inventory weights.
SECTION 6. EXAMPLE
.01 The following example illustrates
the index selection and computation pro-
cedure described in section 5 of this rev-
enue procedure. X, a retailer, uses the re-
tail inventory method along with the
dollar-value LIFO and IPIC inventory
methods and files its returns on the basis
of a taxable year ending on January 31.
Under § 1.472–8(e)(3)(iii)(C), Xis re-
quired to select indexes from the CPI as
of January, the last month of X’s taxable
year. Xhas five items in its only dollar-
value LIFO pool on January 31, 1998—
tomatoes, bananas, lemons, oranges, and
peaches. The retail selling prices of the
goods were tomatoes, $1,000; bananas,
$80; lemons, $50; oranges, $50; and
peaches, $20.
.02 Pursuant to § 1.472–8(e)(3)(iii)(B),
Xassigns the items to the most detailed
listings in the January 1998 CPI as fol-
lows: tomatoes are assigned to “Toma-
toes;” bananas are assigned to “Bananas;”
lemons are assigned to “Citrus fruits;” or-
anges are assigned to “Oranges, including
tangerines;” and peaches are assigned to
“Other fresh fruits.”
.03 Xselects the index for “Tomatoes”
because tomatoes represent more than
10% of its total inventory value.
§§ 1.472–8(e)(3)(iii)(B)(1) and (4). Xcan
compute a total percent change for
“Tomatoes” in accordance with §§ 1.472–
8(e)(3)(ii) and (iii) using the information
contained in the CPI for January 1997 and
January 1998. Thus, the “Tomatoes”
index category is not an affected index
category, and Xmust compute the total
percent change for that index category in
accordance with §§ 1.472–8(e)(3)(ii) and
(iii). Because no remaining detailed
index category contains 10% or more of
X’s total inventory value, Xmust investi-
gate successively less detailed index cate-
gory levels. § 1.472–8(e)(3)(iii)(B)(2). X
discovers that the remainder of its inven-
tory fits within the “Fresh fruits” index
category. X, however, may not use the
published “Fresh fruits” index for the re-
mainder of its goods, because X’s inven-
tory does not include apples. § 1.472–
8(e)(3)(iii)(B)(5). Xmust compute a per-
cent change for the “Fresh fruits” index
category using the BLS indexes and
weights published for the detailed index
categories actually present in its inven-
tory. Id.However, the BLS did not pub-
lish a cumulative index for “Citrus fruits”
in the January 1997 CPI or weights for
“Oranges, including tangerines” in the
January 1998 CPI. Moreover, the BLS
reset the base year for “Other fresh fruits”
in the January 1998 CPI. Since Xcannot
compute a total percent change for “Fresh
fruits” in strict conformity with §§ 1.472-
8(e)(3)(ii) and (iii), Xchooses to compute
such total percent change using the
method described in section 5 of this rev-
enue procedure.
.04 Pursuant to section 5.01(1)(a) of
this revenue procedure, Xassigns the in-
ventory items within the affected “Fresh
fruits” category to the most detailed index
categories in the 1998 CPI as follows: ba-
nanas are assigned to “Bananas;” lemons
are assigned to “Citrus fruits;” oranges
are assigned to “Oranges, including tan-
gerines;” and peaches are assigned to
“Other fresh fruits.” Pursuant to section
5.01(1)(b) of this revenue procedure, X
computes the percent changes for the sec-
ond portion as follows:
1998–37 I.R.B.11September 14, 1998
1998
Items CategoryComputation% Change
bananasBananas = [(154.7 – 151.5) / 151.5)] *100 =2.1122
lemonsCitrus f= [(105.6 – 100.0) / 100.0)] *100 = 5.6000
orangesOranges =[(201.3 – 189.3) / 189.3)] *100=6.3391
peachesOther ff=[( 96.6 – 100.0) / 100.0)] *100 = –3.4000
.05 Pursuant to section 5.01(2)(a) of
this revenue procedure, Xassigns the
items to the most detailed index cate-
gories in the January 1997 CPI as fol-
lows: bananas are assigned to “Bananas;”
lemons are assigned to “Other fresh
fruits;” oranges are assigned to “Oranges,
including tangerines;” and peaches are as-
signed to “Other fresh fruits.” Pursuant to
section 5.01(2)(b) of this revenue proce-
dure, Xcomputes the percent changes for
the first portion as follows:
1997
Items CategoryComputation% Change
bananasBananas =[(151.5 – 161.9) / 161.9)] *100 =–6.4237
lemonsOther ff= [(294.9 – 290.2) / 290.2)] *100 = 1.6196
orangesOranges = [(189.3 – 187.4) / 187.4)] *100 =1.0139
peachesOther ff= [(294.9 – 290.2) / 290.2)] *100 =1.6196
.06 Pursuant to section 5.01(3) of this
revenue procedure, Xcomputes the total
percent change for each 1998 CPI de-
tailed index category by combining the
corresponding percent changes for the
first and second portions as follows:
IRB 1998-37 9/10/98 4:04 PM Page 11

Because the BLS published the total per-
cent change for “Bananas” and “Oranges,
including tangerines” in the January 1998
CPI, it was not necessary for Xto com-
pute a total percent change for those de-
tailed index categories pursuant to section
5.01 of this revenue procedure.
.07 Pursuant to section 5.02 of this rev-
enue procedure, Xcomputes the weights
for each 1998 CPI detailed index category
as follows:
September 14, 1998121998–37 I.R.B.
1998
CategoryComputation% Change
Bananas = {[(102.1122 * 93.5763) / 100] – 100} = –4.4472
Citrus f= {[(105.6000 * 101.6196) / 100] – 100} = 7.3103
Oranges = {[(106.3391 * 101.0139) / 100] – 100} = 7.4173
Other ff= {[( 96.6000 * 101.6196) / 100] – 100} = –1.8355
DetailedSelected
1998CategoryCategory
Detailed CategoryCostCost Weight
Bananas=$80/$200 = 0.40
Citrus fruits =$50 /$200 = 0.25
Oranges =$50/$200= 0.25
Other fresh fruits =$20 /$200 = 0.10
Then, Xweights the percent change for
each 1998 CPI detailed index category
and adds them together to determine the
total percent change for the “Fresh fruits”
index category as follows:
1998Weighted
Detailed CategoryWeight% Change% Change
Bananas=0.403–4.4472 =–1.7789
Citrus fruits=0.2537.3103=1.8276
Oranges=0.2537.4173=1.8543
Other fresh fruits=0.103–1.8355 =–0.1836
Total Percent Change+1.7194
SECTION 7. METHOD OF
ACCOUNTING
The selection of a new consumer or
producer price index for a specific inven-
tory item to compute an inventory price
index as a result of revisions to the CPI or
PPI as described in section 2.07 of this
revenue procedure will not be treated as a
change in method of accounting. Any
other change in the selection of a con-
sumer or producer price index for a spe-
cific inventory item is a change in method
of accounting for which the taxpayer must
secure the consent of the Commissioner
as provided in § 446(e). See§ 1.472–
8(e)(3)(iii)(B).
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jeffery G. Mitchell of the Of-
fice of Assistant Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Mitchell on (202) 622-4970
(not a toll free call).
IRB 1998-37 9/10/98 4:04 PM Page 12

Rev. Proc. 98–52
26 CFR 601.602: Tax forms and instructions.
TABLE OF CONTENTS
PART A. GENERAL
SECTION 1.PURPOSE
SECTION 2.NATURE OF CHANGES
SECTION 3.WHERE TO FILE AND HOW TO CONTACT THE IRS MARTINSBURG COMPUTING CENTER
SECTION 4.FILING REQUIREMENTS
SECTION 5.REQUEST FOR WAIVER FROM FILING INFORMATION RETURNS ON MAGNETIC MEDIA
SECTION 6.APPLICATION FOR MAGNETIC/ELECTRONIC REPORTING
SECTION 7.TEST FILES
SECTION 8.FILING OF FORM 8027 MAGNETICALLY/ELECTRONICALLY
SECTION 9.FILING DATES
SECTION 10. EXTENSIONS OF TIME TO FILE
SECTION 11. PROCESSING OF MAGNETIC/ELECTRONIC RETURNS
SECTION 12. PENALTIES
SECTION 13. CORRECTED RETURNS, SUBSTITUTE FORMS, AND COMPUTER-GENERATED FORMS
SECTION 14. EFFECT ON PAPER RETURNS
SECTION 15. DEFINITIONS
PART B. MAGNETIC/ELECTRONIC SPECIFICATIONS
SECTION 1.GENERAL
SECTION 2.TAPE SPECIFICATIONS
SECTION 3.DISKETTE SPECIFICATIONS
SECTION 4.TAPE CARTRIDGE SPECIFICATIONS
SECTION 5.8MM, 4MM, AND QUARTER INCH CARTRIDGE SPECIFICATIONS
SECTION 6.ASYNCHRONOUS (IRP-BBS) ELECTRONIC FILING SPECIFICATIONS
SECTION 7.RECORD FORMAT AND LAYOUT
SECTION 8.EFFECT ON OTHER DOCUMENTS
SECTION 9.EFFECTIVE DATE
PART A. GENERAL
SEC. 1. PURPOSE
.01 Form 8027 is used by large food or beverage establishments when the employer is required to make annual reports to the IRS
on receipts from food or beverage operations and tips reported by employees.
*Note: All employees receiving $20.00 or more a month in tips must report 100% of their tips to their employer
.02 The Internal Revenue Service Martinsburg Computing Center (IRS/MCC) has the responsibility of processing Forms 8027
submitted magnetically/electronically. The purpose of this revenue procedure is to provide the specifications for filing Form 8027,
Employer’s Annual Information Return of Tip Income and Allocated Tips, magnetically or electronically. This revenue procedure is
updated when legislative changes occur or reporting procedures are modified. Major changes have been emphasized by italics.
.03 This revenue procedure supersedes the following: Rev. Proc. 92–81 published as Publication 1239 (9–92), Specifications for
Filing Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, on Magnetic Tape and 5
1
⁄
4
or 3
1
⁄
2
inch
Magnetic Diskettes.
SEC. 2. NATURE OF CHANGES
.01 Numerous editorial changes have been made to the revenue procedure. Please read the publication carefully and in its entirety
before attempting to prepare your magnetic media for submission. The changes are as follows:
(a) The title of Publication 1239 has changed from “Specifications for Filing Form 8027, Employer’s Annual Information Re-
turn of Tip Income and Allocated Tips, on Magnetic Tape and 5
1
⁄
4
or 3
1
⁄
2
-Inch Magnetic Diskettes” to “Specifications for Filing
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips Magnetically/Electronically.”
(b) Updated information on IRS/MCC’s mailing addresses, telephone numbers and the Call Site are provided in Part A, Sec. 3.
1998–37 I.R.B.13September 14, 1998
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(c) A note regarding denial of waivers in Part A, Section 5.06 was deleted. While IRS/MCC encourages filers to request
waivers at least 45 days prior to the due date of the return, we will accept waivers postmarked by the due date of the return.
(d) Part A, Section 10, Extensions of Time To File, has been completely revised. Form 8809, Request for Extension of Time To
File Information Returns, should be submitted to request an extension of time to file Form 8027.
.02 Starting with tax year 1997 returns, IRS/MCC will accept Forms 8027 via the following additional options:
(a) Tape cartridge specifications are in Part B, Sec. 4.
(b) 8mm, 4mm, quarter inch cartridges specifications are in Part B, Sec. 5.
(c) Asynchronous electronic filing specifications through the Information Reporting Program-Bulletin Board (IRP-BBS) are in
Part B, Sec. 6.
.03 Form 5064 media label has been obsoleted. Filers can now prepare their own self-sticking label. Notice 210 details what in-
formation should be included on the label.
.04 A page of cut out labels has been included for filers to use in mailing their media to MCC. A label should be affixed to the
outside of the package to help expedite handling.
.05 Part B, Section 7 is now titled Record Format and Layout. A record layout now follows the record format specifications.
SEC. 3. WHERE TO FILE AND HOW TO CONTACT THE IRS MARTINSBURG COMPUTING CENTER
.01 All Forms 8027 filed magnetically or electronically are processed at IRS/MCC and are to be sent to the following addresses:
)(
If by Postal Service:or If by truck or air freight:
IRS-Martinsburg Computing CenterIRS-Martinsburg Computing Center
Information Reporting ProgramInformation Reporting Program
P. O. Box 1359Route 9 and Needy Road
Martinsburg, WV25402-1359Martinsburg, WV 25401
*Note: The ZIP Code has changed from 25401-1359 to 25402-1359 for the IRS P.O. Box address for Martinsburg, WV.
.02 Publication 1239 and other IRS publications concerning magnetic/electronic filing of information returns are available
through the IRP-BBS as “downloadable” files. Using IRP-BBS as a means of obtaining publications will provide faster access to
this information. Additionally, publications will be available from IRP-BBS much earlier than the printed version. The IRP-BBS is
operational 24 hours a day, 7 days a week. The telephone number is (304)264-7070.
.03 Requests for paper forms and publications should be requested by calling the “Forms Only Number” listed in your local tele-
phone directory or by calling the IRS toll-free number 1-800-TAX- FORM (1-800-829-3676).
.04 Questions pertaining to magnetic media filing of Forms W-2 mustbe directed to the Social Security Administration (SSA).
Filers can call 1-800-SSA-1213 to obtain the phone number of the SSA Magnetic Media Coordinator for their area.
.05 A taxpayer or authorized representative may request a copy of a tax return or a Form W-2 filed with a return by submitting
Form 4506, Request for Copy or Transcript of Tax Form, to IRS. This form may be obtained by calling 1-800-TAX-FORM (1-800-
829-3676).
.06 The IRS/MCC Call Site, located in Martinsburg, WV, provides service to the payer/employer community (financial institu-
tions, employers, and other transmitters of information returns). The IRS/MCC Call Site answers questions concerning tax law and
magnetic/electronic filing of Forms 8027 and other information returns (Forms 1096, 1098, 1099, 5498, W-2G, W-3, 1042-S), ques-
tionable Forms W-4, inquiries dealing with backup withholding due to missing and incorrect taxpayer identification numbers and
questions concerning paper filing of Forms W-2. Recipients of information returns (payees) should continue to contact 1-800-829-
1040 or other numbers specified in the tax return instructions with any questions on how to report tax returns.
The Call Site accepts calls from all areas of the country. The number to call is 304-263-8700or Telecommunications Device for
the Deaf (TDD) 304-267-3367.These are toll calls. Hours of operation for the Call Site are Monday through Friday, 8:30 a.m. to
4:30 p.m. Eastern Time. The Call Site is in operation throughout the year to handle the questions of payers, transmitters, and em-
ployers. Due to the high demand for assistance at the end of January and February, it is advisable to call as soon as possible to
avoid these peak filing seasons.
.07 The telephone numbers for magnetic media inquiries or electronic submissions are:
%
304-263-8700 – Call Site
304-264-7070– IRP-BBS (Information Reporting Program-
Bulletin Board System)
304-267-3367 – TDD (Telecommunication Device for the Deaf)
304-264-5602 – Fax Machine
(These are not toll-free telephone numbers.)
September 14, 1998141998–37 I.R.B.
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TO OBTAIN FORMS & PUBLICATIONS, CALL:
1-800-TAX-FORM(1-800-829-3676)
SEC. 4. FILING REQUIREMENTS
.01 Section 6011(e)(2)(A) of the Internal Revenue Code requires that any person, including corporations, partnerships, individu-
als, estates, and trusts, required to file 250 or more information returns must file such returns on magnetic media.
.02 The filing requirements apply separately to both original and corrected returns.
.03 Filing electronically through the Information Reporting Program-Bulletin Board System (IRP-BBS) fulfills the magnetic
media filing requirement.
.04 The above requirements do not apply if you establish undue hardship (see Part A, Sec. 5).
SEC. 5. REQUEST FOR WAIVER FROM FILING INFORMATION RETURNS ON MAGNETIC MEDIA
.01 If an employer is required to file on magnetic media but fails to do so (or fails to file electronically, in lieu of magnetic media
filing) and does not have an approved waiver on record, the employer will be subject to a penalty of $50 per return in excess of 250.
.02 If employers are required to file original or corrected returns on magnetic media, but such filing would create a hardship, they
may request a waiver from these filing requirements by submitting Form 8508, Request for Waiver From Filing Information Returns
on Magnetic Media, to IRS/MCC.
.03 Even though an employer may submit as many as 250 corrections on paper, IRS encourages magnetically or electronically
submitted corrections. Once the 250 threshold has been met, filers are required to submit any additional returns magnetically or
electronically. However, if a waiver for an original filing is approved, any corrections for the same type of returns will be covered
under this waiver.
.04 Generally, only the employer may sign the Form 8508. A transmitter may sign if given power of attorney; however, a letter
signed by the employer stating this fact must be attached to the Form 8508.
.05 A transmitter must submit a separate Form 8508 for each employer. Do not submit a list of employers.
.06 All information requested on the Form 8508 must be provided to IRS for the request to be processed.
.07 The waiver, if approved, will provide exemption from magnetic media filing for the current tax year only. Employers may not
apply for a waiver for more than one tax year at a time; application must be made each year a waiver is necessary.
.08 Form 8508 may be photocopied or computer-generated as long as it contains all the information requested on the original
form.
.09 Filers are encouraged to submit Form 8508 to IRS/MCC at least 45 days before the due date of the returns.
.10 File Form 8508 for Forms W–2 with IRS/MCC, not SSA.
.11 Waivers are evaluated on a case-by-case basis and are approved or denied based on criteria set forth under section 6011(e) of
the Internal Revenue Code. The transmitter must allow a minimum of 30 days for IRS/MCC to respond to a waiver request.
.12 If a waiver request is approved, the transmitter should keep the approval letter on file. The transmitter should not send a
copy of the approved waiver to the service center where the paper returns are filed.
.13 An approved waiver from filing information returns on magnetic media does not provide exemption from all filing. The em-
ployer must timely file information returns on acceptable paper forms with the appropriate service center.
SEC. 6. APPLICATION FOR MAGNETIC/ELECTRONIC REPORTING
.01 For the purposes of this revenue procedure, the EMPLOYER is the organization supplying the information and the TRANS-
MITTER is the organization preparing the magnetic/electronic file and/or sending the file to IRS/MCC. The employer and the trans-
mitter may be the same entity. Employers or their transmitters are required to complete Form 4419, Application for Filing Informa-
tion Returns Magnetically/Electronically.
.02 Form 4419 can be submitted at any time during the year; however, it should be submitted to IRS/MCC at least 30 days before
the due date of the return(s). IRS will act on an application and notify the applicant, in writing, of authorization to file. A five-char-
acter alpha/numeric Transmitter Control Code (TCC) will be assigned and included in an acknowledgment letter within 15 to 45
days of receipt of the application. Magnetic/electronic returns may not be filed with IRS until the application has been approved and
a TCC assigned. Include your TCC in any correspondence with IRS/MCC.
.03 If you file information returns other than Form 8027 on magnetic media, you must obtain a separate TCC for those types of re-
turns. The TCC assigned for Forms 8027 is to be used for the processing of those forms only.
.04 Upon approval, a magnetic media reporting package containing the current revenue procedure, forms, and instructions will be
sent to the attention of the contact person indicated on Form 4419. Thereafter, IRS/MCC will send the transmitter a package con-
taining the current revenue procedure and forms each year. This package will continue to be sent to the contact person indicated on
the Form 4419 unless IRS/MCC has been notified in writing of any changes or updates. After you have received approval to file on
magnetically/electronically, you do not need to reapply each year; however, notify IRS in writing if:
(a) You change your name or the name of your organization, so that your files may be updated to reflect the proper name;
(b) You discontinue filing on magnetic media for two years (your TCC may have been reassigned).
1998–37 I.R.B.15September 14, 1998
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.05 If you plan to file for multiple employers, IRS encourages transmitters to submit one application and to use one TCC for all
employers.
.06 Only employers or transmitters using equipment compatible with IRS equipment will have their application approved.
.07 If your magnetic media files have been prepared for you in the past by a transmitter, and you now have computer equipment
compatible with that of IRS and wish to prepare your own files, you must request your own five-character alpha/numeric TCC by fil-
ing an application, Form 4419, as described in Sec. 6.02.
SEC. 7. TEST FILES
.01 IRS/MCC encourages new filers to submit test files for review in advance of the filing season. Employers or transmitters must
be approved to file magnetically/electronically before a test file is submitted (See Part A, Sec. 6 for application procedures.)
.02 All test files must be submitted between October 1 and December 15 of the year before the returns are due. If you are unable
to submit your test files by December 15, you may send a sample hard copy printout to IRS/MCC between December 16 and Janu-
ary 15. Clearly mark the hardcopy printout as “TEST DATA” and include the name, address, and telephone number of someone fa-
miliar with the test printout who may be contacted to discuss its acceptability.
SEC. 8. FILING OF FORM 8027 MAGNETICALLY/ELECTRONICALLY
.01 Form 4804, Transmittal of Information Returns Reported Magnetically/Electronically, must accompany allmagnetic media
shipments. If you file for multiple employers and have the authority to sign the affidavit on Form 4804, you should also submit
Form 4802, Transmittal of Information Returns Reported Magnetically/Electronically (Continuation). For electronic transmissions,
the Form 4804 and Form 4802, if applicable, must be sent the same day as the electronic transmission.
.02 The employer MUSTsign Form 4804, however, an agent (transmitter, service bureau, paying agent, or disbursing agent) may
sign Form 4804 for the employer. To do this, the agent must have the authority to sign for the employer under an agency agreement
(either oral, written, or implied) that is valid under the state law and must add to his or her signature the caption “For: (name of em-
ployer)”.
NOTE: Failure to sign the Form 4804 may delay processing or will result in your file being returned to you unprocessed.
.03 Although a duly authorized agent may sign the Form 4804, the employer is responsible for the accuracy of the Form 4804 and
the returns filed. The employer will be liable for penalties for failure to comply with filing requirements.
.04 Be sure to include Form 4804, 4802 or computer-generated substitutes with your magnetic media shipment. DO NOT MAIL
YOUR MAGNETIC MEDIA AND THE TRANSMITTAL DOCUMENTS SEPARATELY.
.05 Indicate on Form 4804, in the block captioned “Combined Total Payee Records,” the total number of establishments being re-
ported in this shipment. This figure should match the total number of records in your magnetic media file.
.06 DO NOT SUBMIT THE SAME INFORMATION ON PAPER FORMS THAT YOU SUBMIT MAGNETICALLY/
ELECTRONICALLY. This does not mean that corrected documents are not to be filed. If a return has been prepared and submit-
ted improperly, you must file a corrected return as soon as possible. Refer to Part A, Sec. 13 for requirements and instructions for fil-
ing corrected returns.
.07 If an allocation of tips is based on a good faith agreement, a copy of this agreement must accompany the submission.
.08 If, under Rev. Proc. 86–21, 1986–1 C.B. 560, the District Director granted the establishment a percentage of gross receipts of
less than 8%, a copy of the determination letter must be sent with the submission. Employers with more than one establishment can
receive approval from one district in each Internal Revenue Service region where the establishments are located (See sec. 31.6053–
3(h)(4) of the Employment Tax Regulations).
.09 Before submitting your magnetic/electronic file, include the following:
(a) AsignedForm 4804, Transmittal of Information Returns Reported Magnetically/Electronically, along with a Form 4802,
Transmittal of Information Returns Reported Magnetically/Electronically(Continuation), if you submit data for multiple employers.
These forms must be mailed the same day electronic files are submitted.
(b) Your media (tape, diskette, or cartridge) with an external identifying label. Notice 210 describes the information which
should be included on this self-prepared label.
(c) On the outside of the shipping container, affix the label, IRB Special Projects. This label is included in the publication.
*Note: See Part B, Section 6 for electronic submission requirements.
.10 IRS/MCC will not pay or accept “Collect on Delivery” or “Charged to IRS” shipments of reportable tax information that an
individual or organization is legally required to submit.
SEC. 9. FILING DATES
.01 Magnetic media reporting to IRS for Form 8027 must be on a calendar year basis. The due date of either paper or magneti-
cally/electronically reported Forms 8027 is the last day of February.
.02 If the due date falls on a Saturday, Sunday, or legal holiday, filing Form 8027 on the next day that is not a Saturday, Sunday, or
legal holiday will be considered timely.
September 14, 1998161998–37 I.R.B.
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SEC. 10. EXTENSIONS OF TIME TO FILE
.01 An extension of time to file may be requested for Forms 8027, 1099, 1098, 5498, W–2G, W–2, and 1042–S.
.02 Form 8809, Request for Extension of Time To File Information Returns, should be submitted to IRS/MCC. This form may be
used to request an extension of time to file information returns submitted on paper, magnetically or electronically.
.03 Requesting an extension of time for multiple employers may be done by submitting Form 8809 and attaching a list of the em-
ployer names and their TINs (EIN or SSN). The listing must be attached to ensure the extension is recorded for all employers.
Form 8809 may be computer-generated or photocopied. Be sure that all the pertinent information is included.
.04 Requests for extensions of time for multiple employers will be responded to with one approval letter, accompanied by a list of
employers covered under that approval.
.05 As soon as it is apparent that an extension of time to file is needed, Form 8809 may be submitted. When granted, the exten-
sion will be for 30 days. It will take a minimum of 30 days for IRS/MCC to respond to an extension request. Under certain circum-
stances, a request for an extension of time could be denied. When a denial letter is received, any additional or necessary informa-
tion may be resubmitted within 20 days. When requesting an extension of time, do nothold your files waiting for a response.
.06 While very difficult to obtain, if an additional extension of time is needed, a second Form 8809 must be submitted before the
end of the initial extension period. Line 7 on the form should be checked to indicate that an additional extension is being requested.
A second 30-day extension will be approved onlyin cases of extreme hardship or catastrophic events.
.07 Form 8809 must be postmarked no later than the due date of the returnfor which an extension is requested. If request-
ing an extension of time to file several types of forms, use one Form 8809, but the Form 8809 must be postmarked no later than
the earliest due date. For example, if requesting an extension of time to file both Forms 8027 and 5498, submit Form 8809 post-
marked on or before the last day of February.
.08 If an extension request is approved, the approval letter should be kept on file. The approval letter or copy of the approval let-
ter for extension of time should not be sent to IRS/MCC with the magnetic/electronic file or to the service center where the paper re-
turns are filed.
.09 Request an extension for only one tax year.
.10 The extension request must be signed by the employer or a person who is duly authorized to sign a return, statement or other
document for the employer.
.11 Failure to properly complete and sign the Form 8809 may cause delays in processing the request or result in a denial. Care-
fully read and follow the instructions on the back of the Form 8809.
.12 Form 8809 may be obtained by calling 1-800-TAX-FORM (1-800-829-3676).
*Note: AN EXTENSION OF TIME TO FILE IS NOT AN EXTENSION TO ISSUE THE FORM W–2 COPY TO THE
EMPLOYEE.
.13 Request an extension of time to furnish the statements to
recipients of Forms W–2 by submitting a letter to IRS/MCC containing the following information:
(a) Employer name
(b) TIN
(c) Address
(d) Type of return (W-2)
(e) Specify that the extension request is to provide W-2 statements to recipients
(f) Reason for delay
(g) Signature of employer or person duly authorized
Requests for an extension of time to furnish the statements for Forms W-2 to recipients are not automatically approved; however,
if approved, generally an extension will allow a maximum of 30 additional days from the due date to furnish the statements to the re-
cipients. The request must be postmarked by the date on which the statements are due to the recipients.
SEC. 11. PROCESSING OF MAGNETIC/ELECTRONIC RETURNS
.01 All data received at IRS/MCC for processing will be given the same protection as individual returns (Form 1040). IRS/MCC
will process your magnetic/electronic files to ensure the records were formatted and coded according to this revenue procedure.
.02 If the data is formatted incorrectly, the file will be returned for replacement accompanied with a Media Tracking Slip (Form
9267). When media is returned, it is because IRS/MCC encountered errors (not limited to format) and was unable to process the
media; therefore, requiring a replacement. Open all packages immediately.
.03 Files must be corrected and returned with the Media Tracking Slip (Form 9267) to IRS/MCC within 45 days from the date of
the letter IRS/MCC included with the returned files. A penalty for failure to file correct information returns by the due date will be
assessed if the files are not corrected and returned within the 45 days or if the incorrect files are returned by IRS/MCC for re-
placement more than two times.A penalty for intentional disregard of filing requirements will be assessed if a replacement file is
not received.
.04 Files will not be returned to you after successful processing. Therefore, if you want proof that IRS/MCC received your ship-
ment, you may use a carrier that provides proof of delivery.
1998–37 I.R.B.17September 14, 1998
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.05 To distinguish between a correction and a replacement, the following definitions have been provided:
(a) A correction is a record submitted by the employer/transmitter to correct a record that was successfully processed by IRS,
but contained erroneous information.
(b) A replacement is media that IRS has returned because of format errors or data discrepancies encountered during processing.
After necessary changes have been made, the media must be returned to IRS/MCC for processing.
SEC. 12. PENALTIES
.01 The Revenue Reconciliation Act of 1989 changed the penalty provisions for any documents including corrections, which are
filed after the original filing date for the return. The penalty for failure to file correct information returns is “time sensitive,” in that
prompt correction of failures to file, or prompt correction of errors on returns that were filed, can lead to reduced penalties.
— The penalty generally is $50 for each information return that is not filed, or is not filed correctly, by the prescribed filing
date, with a maximum penalty of $250,000 per year ($100,000 for certain small businesses with average annual gross receipts, over
the most recent 3-year period, not in excess of $5,000,000). The penalty generally is reduced to:
— $30 for each failure to comply if the failure is corrected more than 30 days after the return was due, but on or before August
1 of the calendar year in which the return was due, with a maximum penalty of $150,000 per year ($50,000 for certain small busi-
nesses with average annual gross receipts, over the most recent 3-year period, not in excess of $5,000,000).
— $15 for each failure to comply if the failure is corrected within 30 days after the date the return was due, with a maximum
penalty of $75,000 per year ($25,000 for certain small businesses with average annual gross receipts, over the most recent 3-year pe-
riod, not in excess of $5,000,000).
.02 Penalties can be waived if failures were due to reasonable cause and not to willful neglect. In addition, section 6721(c)of the
Code provides a de minimis rule that if:
(a) information returns have been filed but were filed with incomplete or incorrect information, and
(b) the failures are corrected on or before August 1 of the calendar year in which the returns were due, then the penalty for fil-
ing incorrect returns (but not the penalty for filing late) will not apply to the greater of 10 returns or one-half of 1 percent of the total
number of information returns you are required to file for the calendar year.
.03 Intentional Disregard of Filing Requirements— If any failure to file a correct information return is due to intentional dis-
regard of the filing and correct information requirements, the penalty is at least $100 per information return with no maximum
penalty.
SEC. 13. CORRECTED RETURNS, SUBSTITUTE FORMS, AND COMPUTER-GENERATED FORMS
.01 If returns must be corrected, approved magnetic/electronic filers must provide such corrections magnetically/electronically if
you have 250 or more. If your information is filed magnetically/electronically, corrected returns are identified by using the “Cor-
rected 8027 Indicator” in field position 370 of the employer record. Form 4804 must accompany the shipment, and the box for cor-
rection should be marked in Block 1 of the form. (See Part A, Sec. 11.05 for the definition of corrections.)
.02 If corrections are not submitted on magnetic media, employers must submit them on official Forms 8027. Substitute forms
that have been previously approved by IRS, or computer-generated forms that are exact facsimiles of the official form (except for
minor page size or print style deviations), may be submitted without obtaining IRS approval before using the form.
.03 Employers/establishments may send corrected paper Forms 8027 to IRS at the address shown in Part A, Sec. 14.01. Corrected
paper returns are identified by marking the “AMENDED” check box on Form 8027.
SEC. 14. EFFECT ON PAPER RETURNS
.01 If you are filing more than one paper Form 8027, you must attach a completed Form 8027–T, Transmittal of Employer’s An-
nual Information Return of Tip Income and Allocated Tips, to the Forms 8027 and send to:
Internal Revenue Service Center
Andover, MA 05501
IRS/MCC processes Forms 8027 submitted magnetically/electronically only. Do not send paper Forms 8027 to IRS/MCC.
.02 If part of a submission is filed magnetically/electronically and the rest of the submission is filed on paper Forms 8027, send
the paper forms to the Andover Service Center. For example, you filed your Forms 8027 magnetically/electronically with
IRS/MCC, and later you found that some of the forms you filed need correcting. Because of the low volume of corrections, you sub-
mit the corrections on paper Forms 8027. You must send these corrected Forms 8027 along with Form 8027-T to the Andover Ser-
vice Center.
September 14, 1998181998–37 I.R.B.
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SEC. 15. DEFINITIONS
ELEMENTDESCRIPTION
EINA nine-digit Employer Identification Number which has been assigned by IRS to the reporting
entity.
EmployerThe organization supplying the information.
EstablishmentA large food or beverage establishment that provides food or beverage for consumption on the
premises; where tipping is a customary practice; and where there are normally more than 10 em-
ployees who work more than 80 hours on a typical business day during the preceding calendar
year.
More than 10An employer is considered to have more than 10 employees on a typical business day during the
employeescalendar year if half the sum of: the average number of employee hours worked per business day
in the calendar month in which the aggregate gross receipts from food and beverage operations
were greatest, plusthe average number of employee hours worked per business day in the calen-
dar month in which the total aggregate gross receipts from food and beverage operations were
the least, equalsmore than 80 hours.
Employees hoursThe average number of employee hours worked per business day during a month is figured by
workeddividing the total hours worked during the month by all your employees who are employed in a
food or beverage operation by the average number of days in the month that each food or bever-
age operation at which these employees worked was open for business.
FileFor the purpose of this revenue procedure, a file consists of all magnetic/electronic records sub-
mitted by an Employer or Transmitter.
TransmitterPerson or organization preparing magnetic/electronic file(s). May be Employer or agent of Em-
ployer.
Transmitter ControlA five-character alpha/numeric code assigned by IRS to the transmitter prior to actual filing
Code (TCC)magnetically/electronically. This number is inserted in the record and must be present. An ap-
plication (Form 4419) must be filed with IRS to receive this number.
ReplacementA replacement is an information return that IRS/MCC has returned to the transmitter due to er-
rors encountered during processing.
CorrectionA correction is an information return submitted by the transmitter to correct an information re-
turn that was previously submitted to and processed by IRS/MCC, but contained erroneous in-
formation.
PART B. MAGNETIC/ELECTRONIC SPECIFICATIONS
SEC. 1. GENERAL
.01 The magnetic/electronic specifications contained in this part of the revenue procedure define the required format and contents
of the records to be included in the file.
.02 Aself prepared media label must be affixed to each piece of media submitted for processing. Notice 210 provides instructions
on how to complete a self-prepared media label.
.03 The record format in Part B, Sec. 7 applies to both magnetic and electronic files.
SEC. 2. TAPE SPECIFICATIONS
.01 In most instances, IRS/MCC can process any compatible tape files. Compatible tape files must meet any one set of the fol-
lowing:
(a) 9-track EBCDIC (Extended Binary Coded Decimal Interchange Code) with
1998–37 I.R.B.19September 14, 1998
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(1) Odd Parity and
(2) A density of 1600 or 6250 BPI
(3) If you use Unisys Series 1100, you must submit an interchange tape.
(b) 9-track ASCII (American Standard Coded Information Interchange) with
(1) Odd Parity and
(2) A density of 1600 or 6250 BPI
Please be consistent in the use of recording codes and density on your files. If files are generated in more than one recording code
and/or density, multiple shipments would be appreciated.
.02 All compatible tape files must have the following characteristics:
(a) Type of Tape –
1
⁄
2
inch mylar base, oxide coated; computer grade magnetic tape on reels up to 2400 feet (731.52 m) within
the following specifications:
(1) Tape thickness: 1.0 or 1.5 mils
(2) Reel diameter: 10.5 inch (26.67 cm), 8.5 inch (21.59 cm), or 7 inch (17.78 cm).
.03 All records have a fixed record length of 372 positions.
.04 The tape record defined in this revenue procedure may be blocked or unblocked, subject to the following:
(a) All records except the header and trailer labels may be blocked.
(b) If records are blocked, the block can not exceed 32,736 tape positions. The block length must be evenly divisible by 372.
(c) If the use of blocked records would result in a short block, all remaining positions of the block MUST be filled with 9’s. DO
NOT PAD A BLOCK WITH BLANKS.Padding a block with blanks will result in a short record, which will cause math compu-
tation errors. Your tape will then be returned for correction.
.05 For the purposes of this revenue procedure the following conventions must be used:
Header label:
(a) Transmitters may use standard headers provided they begin with 1HDR, HDR1, VOL1, or VOL2.
(b) Consists of a maximum of 80 positions.
(c) Header and trailer labels are optional unless more than one reel is being submitted. If more than one reel is being submitted,
header and trailer labels are required. IRS/MCC PREFERS STANDARD OR ANSI LABELED TAPES. IF YOU SUBMIT
AN UNLABELED TAPE, THIS MUST BE INDICATED ON THE EXTERNAL LABEL AND ON THE FORM 4804 OR
COMPUTER-GENERATED SUBSTITUTE.
Trailer label:
(a) Standard trailer labels may be used provided that they begin with 1EOR, 1EOF, EOV1, or EOV2.
(b) Consists of a maximum of 80 positions.
(c) Header and trailer labels are optional unless more than one reel is being submitted. If more than one reel is being submit-
ted, header and trailer labels are required.
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) May follow the header label and precede and/or follow the trailer label.
SEC. 3. DISKETTE SPECIFICATIONS
IRS-MCC will discontinue processing 5
1
⁄
4
inch diskettes in the future. Filers who use 5
1
⁄
4
inch diskettes are encouraged to
explore other methods of submitting information returns magnetically/electronically.
.01 To be compatible, a diskette file must meet the following specifications:
(a) 5
1
⁄
4
or 3
1
⁄
2
inches in diameter.
(b) Data must be recorded in standard ASCII code.
(c) Records must be fixed length of 372 bytes.
(d) Delimiter character commas (,) must not be used.
(e) Positions 371 and 372 of each record have been reserved for carriage return/line feed (cr/lf) characters.
(f) Filename of ATMTAX must be used. Do not enter any other data in this field. If a file will consist of more than one diskette,
the filename will contain a 3-digit extension. This extension will indicate the sequence of the diskette within the file. For
example, the first diskette will be named ATMTAX.001, the second diskette will be ATMTAX.002, etc.
(g) A file may contain more than one diskette as long as the filename conventions are adhered to.
(h) Diskettes must meet one of the following specifications:
CapacityTracksSides/DensitySector Size
1.44 mb96tpihd512
1.44 mb135tpihd512
1.2 mb96tpihd512
720 kb48tpids/dd512
360 kb48tpids/dd512
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.02 IRS requires that 5
1
⁄
4
and 3
1
⁄
2
inch diskettes be created using MS/DOS. Diskettes created using other operating systems are
not acceptable. We strongly recommend that you submit a test file if this will be your first time filing on diskette.
.03 Deviations from the prescribed format will not be acceptable.
Sec. 4. TAPE CARTRIDGE SPECIFICATIONS
.01 In most instances, IRS/MCC can process tape cartridges that meet the following specifications:
(a) Must be IBM 3480, 3490, 3490E, or AS400 compatible.
(b) Must meet American National Standard Institute (ANSI) standards, and have the following characteristics:
(1) Tape cartridges will be
1
⁄
2
-inch tape contained in plastic cartridges which are approximately 4-inches by 5-inches by 1-
inch in dimension.
(2) Magnetic tape will be chromium dioxide particle based
1
⁄
2
-inch tape.
(3) Cartridges must be 18-track or 36-track parallel (See Note).
(4) Cartridges will contain 37,871 CPI or 75,742 CPI (characters per inch).
(5) Mode will be full function.
(6) The data may be compressed using EDRC (Memorex) or IDRC (IBM) compression.
(7) Either EBCDIC (Extended Binary Coded Decimal Interchange Code) or ASCII (American Standard Coded Informa-
tion Interchange) may be used.
.02 The tape cartridge records defined in this revenue procedure may be blocked subject to the following:
(a) A block must notexceed 32,736 tape positions.
(b) If the use of blocked records would result in a short block, all remaining positions of the block must be filled with 9s; how-
ever, the last block of the file may be filled with 9s or truncated. Do not pad a block with blanks.
(c) All records, except the header and trailer labels, may be blocked or unblocked. A record may not contain any control fields
or block descriptor fields which describe the length of the block or the logical records within the block. The number of logical
records within a block (the blocking factor) must be constant in every block with the exception of the last block which may be shorter
(see item b above). The block length must be evenly divisible by 372.
(d) Records may not span blocks.
.03 Tape cartridges may be labeled or unlabeled.
.04 For the purposes of this revenue procedure, the following must be used:
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) For even parity, use BCD configuration 001111 (8421).
(c) May follow the header label and precede and/or follow the trailer label.
*Note: Filers should indicate on the external media label and transmittal Form 4804 whether the cartridge is 36-track
or 18-track.
SEC. 5. 8MM, 4MM, AND QUARTER INCH CARTRIDGE SPECIFICATIONS
.01 In most instances, IRS/MCC can process 8mm tape cartridges that meet the following specifications:
(a) Must meet American National Standard Institute (ANSI) standards, and have the following characteristics:
(1) Created from an AS400 operating system only.
(2) 8mm (.315-inch) tape cartridges will be 2
1
⁄
2
-inch by 3
3
⁄
4
-inch.
(3) The 8mm tape cartridges must meet the following specifications:
TracksDensityCapacity
120 (43245 BPI)2.5 Gb
121 (45434 BPI)5 Gb
(4) Mode will be full function.
(5) Compressed data is not acceptable.
(6) Either EBCDIC (Extended Binary Coded Decimal Interchange Code) or ASCII (American Standard Coded Informa-
tion Interchange) may be used. However, IRS/MCC encourages the use of EBCDIC. This information must appear on the external
media label affixed to the cartridge.
(7) A file may consist of more than one cartridge, however, no more than 250,000 documents may be transmitted per file or
per cartridge. The filename, for example; ATMTAX, will contain a three digit extension. The extension will indicate the sequence of
the cartridge within the file 1 of 3, 2 of 3, and 3 of 3 and would appear in the header label ATMTAX.001, ATMTAX.002, and ATM-
TAX.003 on each cartridge of the file.
.02 The 8mm (.315-inch) tape cartridge records defined in this revenue procedure may be blocked subject to the following:
(a) A block must notexceed 32,736 tape positions.
1998–37 I.R.B.21September 14, 1998
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(b) If the use of blocked records would result in a short block, all remaining positions of the block must be filled with 9’s; how-
ever, the last block of the file may be filled with 9’s or truncated. Do not pad a block with blanks.
(c) All records, except the header and trailer labels, may be blocked or unblocked. A record may not contain any control fields
or block descriptor fields which describe the length of the block or the logical records within the block. The number of logical
records within a block (the blocking factor) must be constant in every block with the exception of the last block which may be shorter
(see item (b) above). The block length must be evenly divisible by 372.
(d) Records may not span blocks.
(e) No more than 250,000 documents per cartridge and per file.
.03 Various COPY commands have been successful, however, the SAVE OBJECT COMMAND is not acceptable.
.04 For faster processing, IRS/MCC encourages transmitters to use header labeled cartridges. ATMTAX may be used as a sug-
gested filename.
.05 For the purposes of this revenue procedure, the following must be used:
Tape Mark:
(a) Used to signify the physical end of the recording on tape.
(b) For even parity, use BCD configuration 001111 (8421).
(c) May follow the header label and precede and/or follow the trailer label.
.06 IRS/MCC can only read one data file on a tape. A data file is a group of records which may or may not begin with a tape-
mark, but must end with a trailer label. Any data beyond the trailer label cannot be read by IRS programs.
.07 4mm (.157-inch) cassettes are now acceptable with the following specifications:
(a) 4 mm cassettes will be 2
1
⁄
4
-inch by 3-inch.
(b) The tracks are 1 (one).
(c) The density is 19 (61000 BPI).
(d) The typical capacity is DDS (DAT data storage) at 1.3 Gb or 2 Gb, or DDS–2 at 4Gb.
(e) The general specifications for 8mm cartridges will also apply to the 4 mm cassettes.
.08 Various Quarter Inch Cartridges (QIC)(
1
⁄
4
-inch) are also acceptable.
(a) QIC cartridges will be 4” by 6”.
(b) QIC cartridges must meet the following specifications:
SizeTracksDensityCapacity
QIC–114/54 (8000 BPI)22Mb or 30Mb
QIC–248/95 (8000 BPI)45Mb or 60Mb
QIC–1201515 (10000 BPI)120Mb or 200Mb
QIC–1501816 (10000 BPI)150Mb or 250Mb
QIC–3202617 (16000 BPI)320Mb
QIC–5252617 (16000 BPI)525Mb
QIC–10003021 (36000 BPI)1Gb
QIC–13503018 (51667 BPI)1.3Gb
QIC–2Gb4234 (40640 BPI) 2Gb
(c) The general specifications that apply to 8mm cartridges will also apply to QIC cartridges.
SEC. 6. ASYNCHRONOUS (IRP-BBS) ELECTRONIC FILING SPECIFICATIONS
.01 Asynchronous electronic filing of Forms 8027, originals, corrections, and replacements is offered as an alternative to mag-
netic media (tape, tape cartridge, or diskette) or paper filing, but is not a requirement. Electronic filing using the Information Re-
porting Program-Bulletin Board System (IRP-BBS) will fulfill the magnetic media requirements for those employers who are re-
quired to file magnetically. It may also be used by employers who are under the filing threshold requirement, but would prefer to file
their information returns this way. If the original file was sent magnetically, but was returned for replacement, the replacement may
be transmitted electronically. Also, if the original file was submitted via magnetic media, any corrections may be transmitted elec-
tronically.
.02 The electronic filing of information returns is not affiliated with the Form 1040 electronic filing program. These two pro-
grams are totally independent, and filers must obtain separate approval to participate in each of them. All inquiries concerning the
electronic filing of information returns should be directed to IRS/MCC. IRS/MCC personnel cannot answer questions or assist tax-
payers in the filing of Form 1040 tax returns. Filers with questions of this nature will be directed to the Customer Service toll-free
number (1-800-829-1040)for assistance.
.03 Filers participating in the electronic filing program for information returns will submit their returns to IRS/MCC electroni-
cally and not through magnetic media or paper filing. Files submitted in this manner must be in standard ASCII code.
.04 If a request for extension is approved, transmitters who file electronically will be granted an extension of 30 days to file. Part
A, Sec. 10, explains procedures for requesting extensions of time. Filers are encouraged to file their data as soon as possible.
September 14, 1998221998–37 I.R.B.
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.05 The format of the record is the same for electronically filed records as it is for 5
1
⁄
4
and 3
1
⁄
2
inch diskettes, tapes, and tape car-
tridges; however, it must be in standard ASCII code.
.06 Filers must obtain a Transmitter Control Code (TCC) prior to submitting their files electronically. (Filers who currently have
a TCC for filing Forms 8027 do not have to request a second TCC for electronic filing.) Refer to Part A, Sec. 6, for information on
how to obtain a TCC.
.07 Filers using IRP-BBS assign their own passwords and do not need special approval.
.08 With all passwords, it is the user’s responsibility to remember the password and not allow the password to be compromised.
However, if filers do forget their password, call 304-263-8700for assistance.
*Note: Passwords on the IRP-BBS are case sensitive.
.09 Electronically filed information may be submitted to IRS/MCC 24 hours a day, 7 days a week. Technical assistance will be
available Monday through Friday between 8:30 a.m. and 4:30 p.m. Eastern Time by calling 304-263-8700.
.10 Filers may submit as many documents as they choose electronically. Filers are allowed 240 minutes a day; however, more
time may be requested if needed.
.11 Do not transmit data using IRP-BBS January 1 through January 7.This will allow time for the IRP-BBS to be updated to
reflect current year changes.
.12 Data compression is encouraged when submitting information returns by way of the IRP-BBS. MCC has the ability to de-
compress files created using several popular software compression programs such as ARC, LHARC, and PKZIP. Software data
compression can be done alone or in conjunction with V.42bis hardware compression.
The time required to transmit information returns electronically will vary depending on the modem speed and the type of data
compression used, if any. The time required to transmit a file can be reduced by as much as 85 percent by using software com-
pression and hardware compression.
The following are actual transmission rates for forms 1099 achieved in test uploads at MCC using compressed files (PKZIP) and
the XMODEM-1K protocol. The actual transmission rates will vary depending on the protocol that is used. (ZMODEM is normally
the fastest protocol and XMODEM and KERMIT are the slower protocols.)
.13 Files submitted to IRP-BBS must have a unique filename; therefore, the IRP-BBS will build the filename that must be used.
The name will consist of the filer’s TCC, submission type (T = Test, P = Production, C = Correction, and R = Replacement) and a
sequence number. Filers may call the file anything they choose on their end. The sequence number will be incremented every time
the filers send, or attempt to send, a file. Record the upload date, time, and filename. This information will be needed by MCC in
order to identify the file if assistance is required and to complete Form 4804.
.14 The results of the electronic transmission will be posted to the (F)ile Status area of the IRP-BBS; however, no further process-
ing will occur until the signed Form 4804 is received. The transmitter must send or fax the signed Form 4804 the same day the elec-
tronic transmission is made. No return is considered filed until a Form 4804 is received by IRS/MCC.
.15 Form 4804 can be ordered by calling the IRS toll-free forms and publication order number 1-800-TAX-FORM, (1-800-829-
3676), downloaded from the IRP-BBS, or it may be computer-generated. A copy of the form is also available in the back of this pub-
lication. If a filer chooses to computer-generate Form 4804, all of the information contained on the original form, including the af-
fidavit, must also be contained on the computer-generated form.
.16 Forms 4804 are to be mailed to the following addresses:
1998–37 I.R.B.23September 14, 1998
Transmission
Speed in bps500 Records2500 Records10000 Records
960040 sec2 min 50 sec12 min 21 sec
1920031 sec1 min 34 sec7 min 1 sec
3840017 sec36 sec4 min 7 sec
IRB 1998-37 9/10/98 4:04 PM Page 23

If by Postal Service: )
IRS-Martinsburg Computing Center
Information Reporting Program
Attn.: Electronic Filing Coordinator
P. O. Box 1359
Martinsburg, WV 25402-1359
*Note: The ZIP Code has changed from 25401-1359 to 25402-1359 for the IRS P.O. Box addresses for Martinsburg, WV.
If by air or truck freight:(
IRS-Martinsburg Computing Center
Information Reporting Program
Attn.: Electronic Filing Coordinator
Route 9 and Needy Road
Martinsburg, WV 25401
.17 A signed Form 4804 submitted for electronically filed information returns may be faxed to IRS/MCC at the following number:
304-264-5602. Faxed transmittals will allow IRS/MCC to begin processing the file immediately.
.18 The IRP-BBS is an electronic bulletin board system available to filers of information returns. In addition to filing information
returns electronically, the IRP-BBS provides other capabilities. Some of the advantages of IRP-BBS are as follows:
(1) Notification within two weeks as to the acceptability of the data transmitted.
(2) Immediate access to the latest changes and updates that affect the Information Reporting Program at IRS/MCC (program,
legislative, etc.).
(3) Access to publications such as the Publication 1239 as soon as they are available.
(4) Capability to communicate with IRS/MCC personnel.
(5) Ability to retrieve information and files applicable to the IRP-BBS.
.19 The IRP-BBS is available for public use and accessible using various personal computer communications equipment; how-
ever, electronic submission of information returns is limited to holders of valid TCCs. A TCC is not needed to access those portions
of the IRP-BBS that contain forms and publications or to leave questions or messages for IRS/MCC personnel.
.20 Filers using IRP-BBS can determine the acceptability of files submitted by checking the file status area of the bulletin board.
These reports are not immediately available but will be available within two weeks after the transmission is received by IRS/MCC.
.21 Contact the IRP-BBS by dialing 304-264-7070. The communication software settings for IRP-BBS are:
—No parity
— Eight data bits
— One stop bit
— Full duplex
The communication software should be set up to use the fastest speed allowed by the filer’s modem.
.22 Due to the large number of communication products available, it is impossible to provide specific information on a particular
software package or hardware configuration. Filers should contact their software or hardware supplier for assistance.
.23 IRP-BBS software provides a menu-driven environment allowing access to different parts of IRP-BBS. Whenever possible,
IRS/MCC personnel will provide assistance in resolving any communication problems with IRP-BBS.
.24 IRP-BBS can be accessed at speeds from 1200 to 28,800 bps. The speed is automatically negotiated for connection at the
speed of the calling modem. The communication standards supported include Industry Standard 212A, V.22bis, V.32, V.32bis, V.34,
and V.FC. Point-to-point error control is supported using the V.42 ITU–T standard or MNP 2–4. Data compression is supported
using V.42bis ITU–T standard or MNP5.
.25 The following information will be requested to set up the filer’s user profile when logging onto the IRP-BBS for the first time.
(1) Enter the letter that corresponds to the filer’s terminal from the following:
<A> IBM PC<B>IBM w/ANSI<C>Hyperterm
<D>Terminal<E>VT-100<F><CR>
Most PCs, clones, etc., will select the IBM PC emulation. Machines with color, CGA, EGA, or VGA should select IBM w/ANSI.
(2) Upper/lower case, line feed needed, O (zero) nulls after each <CR>, do you wish to modify this? (Most users answer no.)
September 14, 1998241998–37 I.R.B.
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Common Problems
ProblemProbable CauseSolution
File does notNot starting communication whenStart upload/download on filers end
upload/downloadprompted by ‘Awaiting Start Signal’
All files notCompressing several files intoCompress only one file for every filename
processed one filename
Replacement neededOriginal data does not meet processingReplacement must be submitted within 45
and/or format requirements days of original transmission
Cannot determineNot dialing back thru IRP-BBS toTwo weeks after sending a file, check under
file statuscheck the status of the file(F)ile Status for notification of acceptability
Transfer abortsTransfer protocol mismatchEnsure protocols match on both the sending
before it startsand receiving ends
Loss of carrierIncorrect modem settings on user’sReference your modem manual about in-
during session endcreasing the value of the S10 register
Unreadable screensANSI.SYS driver not loaded in theSelect non ANSI under (Y)our settings
after selecting IBM w/ANSIuser’s PC
IRS cannot complete finalUser did not send the Form 4804Send completed Form 4804 the same day
processing of dataas the electronic transmission
IRS cannot determineUser did not indicate which file isMust enter the filename being replaced
which file is being replacedbeing replacedunder the replacement option
IRS cannot determine the typeUser incorrectly indicated T, P, C,When prompted, enter the correct type of file
of file being sentor R for the type of filebeing sent
Replacement file notUser did not dial back thru IRP-BBSTwo weeks after sending file, check under
replaced within 45 daysto check status of file(F)ile Status for notification of acceptability
Duplicate dataTransmitter sends corrections forOnly submit corrections for incorrect records
entire file
SEC. 7. RECORD FORMAT AND LAYOUT
FORM 8027 RECORD FORMAT
Field
PositionField TitleLengthDescription and Remarks
1Establishment1REQUIRED. This digit identifies the kind of establishment. Enter the
Typenumber which describes the type of establishment, as shown below:
1 for an establishment that serves evening meals only (with or without al-
coholic beverages).
2 for an establishment that serves evening meals and other meals (with or
without alcoholic beverages).
3 for an establishment that serves only meals other than evening meals
(with or without alcoholic beverages).
4 for an establishment that serves food, if at all, only as an incidental part
of the business of serving alcoholic beverages.
1998–37 I.R.B.25September 14, 1998
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SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
PositionField TitleLengthDescription and Remarks
2–6Establishment5REQUIRED.These five digit Serial Numbers are for identifying individ-
Serial Numbersual establishments of an employer reporting under the same EIN. The em-
ployer shall assign each establishment a unique number. NUMERICS
O N LY.
7–46Establishment Name40REQUIRED.Enter the name of the establishment. Left justify and fill
unused positions with blanks. ALLOWABLE CHARACTERS ARE AL-
PHAS, NUMERICS, BLANKS, HYPHENS, AMPERSANDS, AND
SLASHES.
47–86Establishment Street40REQUIRED.Enter the mailing address of the establishment. Street ad-
Addressdress should include number, street, apartment or suite number (or P O Box
if mail is not delivered to street address). Left justify and blank fill.
*Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the address 210 N. Queen St.,
Suite #300 must be entered as 210 N Queen St Suite 300.
87–111Establishment City25REQUIRED.Enter the city, town, or post office. Left justify and blank
fill.
*Note 1: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the city St. Louis must be en-
tered as St Louis.
112–113Establishment2REQUIRED. Enter state code of the establishment; must be one of
Statethe following:
STATECODESTATECODE
AlabamaALMontanaMT
AlaskaAKNebraskaNE
ArizonaAZNevadaNV
ArkansasARNew HampshireNH
CaliforniaCANew JerseyNJ
ColoradoCONew MexicoNM
ConnecticutCTNew YorkNY
DelawareDENorth CarolinaNC
District of ColumbiaDCNorth DakotaND
FloridaFLOhioOH
GeorgiaGAOklahomaOK
HawaiiHIOregonOR
IdahoIDPennsylvaniaPA
IllinoisILRhode IslandRI
IndianaINSouth CarolinaSC
IowaIASouth DakotaSD
KansasKSTennesseeTN
KentuckyKYTexasTX
LouisianaLAUtahUT
Maine MEVermontVT
MarylandMDVirginiaVA
MassachusettsMAWashingtonWA
September 14, 1998261998–37 I.R.B.
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SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
PositionField TitleLengthDescription and Remarks
STATECODESTATECODE
MichiganMIWest VirginiaWV
MinnesotaMNWisconsinWI
MississippiMSWyomingWY
MissouriMO
114–122Establishment9REQUIRED.Enter the complete nine-digit ZIP Code of the establish-
ZIP Codement. If using a five-digit ZIPCode, left justify the five-digit ZIP Code
and fill the remaining four positions with blanks.
*Note: MUST BE NINE NUMERICS OR FIVE NUMERICS AND FOUR BLANKS. DO NOT ENTER THE DASH.
123–131Employer9REQUIRED.Enter the nine digit number assigned to the employer by
IdentificationIRS. DO NOT ENTER HYPHENS, ALPHAS, ALL 9’s, OR ALL
NumberZEROS.
132–171Employer Name40REQUIRED.Enter the name of the employer as it appears on your tax
forms (e.g., Form 941). Any extraneous information must be deleted. Left
justify and blank fill. ALLOWABLE CHARACTERS ARE ALPHAS,
BLANKS, NUMERICS, AMPERSANDS, HYPHENS, AND
SLASHES.
172–211Employer40REQUIRED.Enter mailing address of employer. Street address should
Street Addressinclude number, street, apartment or suite number (or P O Box if mail is not
delivered to street address). Left justify and blank fill.
*Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the address 210 N. Queen St.,
Suite #300 must be entered as 210 N Queen St Suite 300.
212–236Employer City25REQUIRED.Enter the city, town, or post office. Left justify and blank
fill.
*Note: The only allowable characters are alphas, blanks, numerics, ampersands, hyphens and slashes. Punctuation such
as periods and commas are not allowed and will cause your file to be returned. For example, the city St. Louis must be en-
tered as St Louis.
237–238Employer State2REQUIRED.Enter state code of employer. Must be one of the abbrevia-
tions shown in the state abbreviation table for Establishment State (field
positions 112–113).
239–247Employer ZIP9REQUIRED.Enter the complete nine-digit ZIP Code of the employer. If
Codeusing a five-digit ZIP Code, left justify the five-digit ZIP Code and fill the
remaining four positions with blanks.
*Note: MUST BE NINE NUMERICS OR FIVE NUMERICS AND FOUR BLANKS. DO NOT ENTER THE DASH.
248–259Charged Tips12REQUIRED.Enter the total amount of tips that are shown on charge re-
ceipts for the calendar year. Amount must be entered in U.S. dollars and
cents. The right-most two positions represent cents. Right justify and zero
fill. If no entry, zero fill. NUMERICS ONLY. DO NOT ENTER DECI-
MAL POINTS, DOLLAR SIGNS, OR COMMAS.
1998–37 I.R.B.27September 14, 1998
IRB 1998-37 9/10/98 4:04 PM Page 27

SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
PositionField TitleLengthDescription and Remarks
260–271Charged Receipts12REQUIRED.Enter the total sales for the calendar year other than carry-
out sales or sales with an added service charge of 10 percent or more, that
are on charge receipts with a charged tip shown. This includes credit card
charges, other credit arrangements, and charges to a hotel room unless the
employer’s normal accounting practice consistently excludes charges to a
hotel room. Do not include any state or local taxes in the amount reported.
Amount must be entered in U.S. dollars and cents. The right-most two po-
sitions represent cents. Right justify and zero fill. If no entry, zero fill.
NUMERICS ONLY. DO NOT INCLUDE DOLLAR SIGNS, DECI-
MAL POINTS, OR COMMAS.
272–283Service Charge12REQUIRED.Enter the total amount of service charges less than 10
Less Than 10percent added to customer’s bills and were distributed to your employees
Percentfor the calendar year. In general, service charges added to the bill are not
tips since the customer does not have a choice. These service charges are
treated as wages and are included on Form W–2. For a more detailed expla-
nation, see Rev. Rul. 19–28, 1969–1 C.B. 270. Amount must be entered in
U.S. dollars and cents. The right-most two positions represent cents. Right
justify and zero fill. If no entry, zero fill. NUMERICS ONLY. DO NOT
ENTER DOLLAR SIGNS, DECIMAL POINTS, OR COMMAS.
284–295Indirect Tips12REQUIRED.Enter the total amount of tips reported by indirectly tipped
Reportedemployees (e.g., busboys, service bartenders, cooks) for the calendar year.
Do not include tips received by employees in December of the prior tax
year but not reported until January. Include tips received by employees in
December of the tax year being reported, but not reported until January of
the subsequent year. Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS.
296–307Direct Tips 12REQUIRED.Enter the total amount of tips reported by directly tipped
Reportedemployees (e.g., waiters, waitresses, bartenders) for the calendar year. Do
not include tips received by employees in December of the prior tax year
but not reported until January. Include tips received by employees in De-
cember of the tax year being reported, but not reported until January of the
subsequent year. Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS
308–319Total Tips12REQUIRED.Enter the total amount of tips reported by all employees
Reported(both indirectly tipped and directly tipped) for the calendar year. Do not in-
clude tips received in December of the prior tax year but not reported until
January. Include tips received in December of the tax year being reported,
but not reported until January of the subsequent year. Amount must be en-
tered in U.S. dollars and cents. The right-most two positions represent
cents. Right justify and zero fill. If no entry, zero fill. NUMERICS
ONLY. DO NOT ENTER DOLLAR SIGNS, DECIMAL POINTS, OR
COMMAS.
September 14, 1998281998–37 I.R.B.
IRB 1998-37 9/10/98 4:04 PM Page 28

SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
PositionField TitleLengthDescription and Remarks
320–331Gross Receipts12REQUIRED.Enter the total gross receipts from the provision of food
and/or beverages for this establishment for the calendar year. Do not in-
clude receipts for carry-out sales or sales with an added service charge of
10 percent or more. Do not include in gross receipts charged tips (field po-
sitions 248–259) shown on charge receipts unless you have reduced the
cash sales amount because you have paid cash to tipped employees for tips
they earned that were charged. Do not include state or local taxes in gross
receipts. If you do not charge separately for food or beverages along with
other services (such as a package deal for food and lodging), make a good
faith estimate of the gross receipts attributable to the food or beverages.
This estimate must reflect the cost of providing the food or beverages plus
a reasonable profit factor. Include the retail value of complimentary food or
beverages served to customers if tipping for them is customary and they are
provided in connection with an activity engaged in for profit whose re-
ceipts would not be included as gross receipts from the provision of food
or beverages (e.g., complimentary drinks served to customers at a gam-
bling casino). Amount must be entered in U.S. dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. If no
entry, zero fill. NUMERICS ONLY. DO NOT ENTER DOLLAR
SIGNS, DECIMAL POINTS, OR COMMAS.
332–343Tip Percentage12REQUIRED.Enter the amount determined by multiplying Gross Receipts
Rate Timesfor the year (field positions 320–331) by the Tip Percentage Rate (field
Gross Reciptspositions 344–347). For example, if the value of Gross Receipts is
“000045678900” and Tip Percentage Rate is “0800”, multiply $456,789.00
by .0800 to get $36,543.12 and enter “000003654312”. If tips are allocated
using other than the calendar year, enter zeros; this may occur if you allo-
cated tips based on the time period for which wages were paid or allocated
on a quarterly basis. Amount must be entered in U.S.dollars and cents. The
right-most two positions represent cents. Right justify and zero fill. NU-
MERICS ONLY. DO NOT ENTER DOLLAR SIGNS, DECIMAL
POINTS, OR COMMAS.
344–347Tip Percentage4REQUIRED.Enter 8 percent (0800) unless a lower rate has been granted
Rateby the District Director. The determination letter must accompany the
magnetic/electronic submission. NUMERICS ONLY. DO NOT ENTER
DECIMAL POINT.
348–359Allocated Tips12REQUIRED.If Tip Percentage Rate Times Gross Receipts (field posi-
tions 332–343)is greater than Total Tips Reported (field positions
308–319), then the difference becomes Allocated Tips. Otherwise, enter all
zeros. If tips are allocated using other than the calendar year, enter the
amount of allocated tips from your records. Amount must be entered in
U.S. dollars and cents. The right-most two positions represents cents.
Right justify and zero fill. NUMERICS ONLY. DO NOT ENTER
DOLLAR SIGNS, DECIMAL POINTS, OR COMMAS.
360Allocation1REQUIRED. Enter the allocation method used if Allocated Tips (field
Methodpositions 348–359) are greater than zero as follows:
1) for allocation based on hours worked.
2) for allocation based on gross receipts.
1998–37 I.R.B.29September 14, 1998
IRB 1998-37 9/10/98 4:04 PM Page 29

SEC. 7. RECORD FORMAT AND LAYOUT (Continued)
FORM 8027 RECORD FORMAT (Continued)
Field
PositionField TitleLengthDescription and Remarks
3) for allocation based on a good faith agreement. The good faith agree-
ment must accompany the magnetic/electronic submission. If Allocated
Tips are equal to zero, enter 0 (zero).
*Note: Under Section 1571 of the Tax Reform Act of 1986, the method of allocation of tips based on the number of hours
worked as described in Section 31.6053–3(f)(1)(iv) may be utilized only by an employer that employs less than the equivalent
of 25 full-time employees at the establishment during the payroll period. Section 31.6053–3(j)(19) provides that an employer
is considered to employ less than the equivalent of 25 full-time employees at an establishment during a payroll period if the
average number of employee hours worked per business day during the payroll period is less than 200 hours.
361–364Number of4REQUIRED.Enter the total number (must be greater than zero) of
Directly Tippeddirectly tipped employees employed by the establishment for the calendar
Employeesyear. Right justify and zero fill. NUMERICS ONLY.
365–369Transmitter5REQUIRED.Enter the 5-digit Transmitter Control Code assigned by the
Control CodeIRS.
(TCC)
370Corrected 80271REQUIRED.Enter blank for original return. Enter “G” for corrected
Indicatorreturn. A corrected return must be a complete new return replacing the
original return.
371–372Blank or cr/lf 2Magnetic tape filers are required to enter blanks. Diskette filers may enter
blanks or the carriage return/line feed characters (cr/lf).
FORM 8027 RECORD LAYOUT
12–67–4647–86
87–111112–113114–122123–131
132–171172–211212–236237–238
September 14, 1998301998–37 I.R.B.
Establishment
Type
Establishment
Serial Number
Establishment
Name
Establishment
Street Address
Establishment
City
Establishment
State
Establishment
ZIP Code
Employer
Identification
Number
Employer Name
Employer Street
Address
Employer City
Employer State
IRB 1998-37 9/10/98 4:04 PM Page 30

FORM 8027 RECORD LAYOUT (Continued)
239–247248–259260–271272–283
284–295296–307308–319320–331
332–343344–347348–359360
361–364365–369370371–372
SEC. 8. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 92-81 is superseded.
SEC. 9. EFFECTIVE DATE
.01 This revenue procedure is effective for Forms 8027 due the last day of February 1999 and any returns filed thereafter.
1998–37 I.R.B.31September 14, 1998
Employer Zip
Code
Charged Tips
Charged
Receipts
Service Charge
Less Than 10
Percent
Indirect Tips
Reported
Direct Tips
Reported
Total Tips
Reported
Gross Receipts
Tip Percentage
Rate Times
Gross Receipts
Tip Percentage
Rate
Allocated Tips
Allocation
Method
Number of Directly
Tipped Employees
Transmitter Control
Code (TCC)
Corrected
8027
Indicator
Blank or
cr/lf
IRB 1998-37 9/10/98 4:04 PM Page 31

September 14, 1998321998–37 I.R.B.
I R B
Special Projects
Box of
I R B
Special Projects
Box of
I R B
Special Projects
Box of
Internal Revenue Service
Martinsburg Computing Center
Special Projects
P O Box 1359
Martinsburg WV 25402
I R B
Special Projects
Box of
I R B
Special Projects
Box of
I R B
Special Projects
Box of
Internal Revenue Service
Martinsburg Computing Center
Special Projects
Route 9 and Needy Road
Martinsburg WV 25401
(Reproduce as needed)
To expedite handling, please affix this label, or a substitute
label, to your OUTSIDE shipping container.
(use this label for U S Postal deliveries)(use this label for truck or air freight deliveries)
$
IRB 1998-37 9/10/98 4:04 PM Page 32

1998–37 I.R.B.33September 14, 1998
Notice of Proposed Rulemaking
and Notice of Public Hearing
Qualified State Tuition Programs
REG–106177–97
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to qualified
State tuition programs (QSTPs). These
proposed regulations reflect changes to
the law made by the Small Business Job
Protection Act of 1996 and the Taxpayer
Relief Act of 1997. The proposed regula-
tions affect QSTPs established and main-
tained by a State or agency or instrumen-
tality of a State, and individuals receiving
distributions from QSTPs. This docu-
ment also provides notice of a public
hearing on these proposed regulations.
DATES: Written comments must be re-
ceived by November 23, 1998. Outlines
of topics to be discussed at the public
hearing scheduled for Wednesday, Janu-
ary 6, 1999, at 10 a.m. must be received
by December 16, 1998.
ADDRESSES: Send submissions to
CC:DOM:CORP:R (REG–106177–97),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington DC 20044. Submissions may be
hand delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG–106177–97), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue NW, Washington DC. Alterna-
tively, taxpayers may submit comments
electronically via the Internet by selecting
the “Tax Regs” option on the IRS Home
Page, or by submitting comments directly
to the IRS Internet site at http://www.irs.
ustreas.gov/prod/tax_regs/comments.html.
The public hearing will be held in room
2615, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Monice Rosenbaum, (202) 622-
6070; concerning the proposed estate and
gift tax regulations, Susan Hurwitz (202)
622-3090; concerning submissions and
the hearing, Michael Slaughter, (202)
622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in this notice of proposed rule-
making has been submitted to the Office
of Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of informa-
tion should be sent to the Office of Man-
agement and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington DC 20503, with copies to the
Internal Revenue Service,Attn: IRS Re-
ports Clearance Officer, OP:FS:FP, Wash-
ington, DC 20224. Comments on the col-
lection of information should be received
by October 23, 1998. Comments are
specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service,including whether the
information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information;
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the ap-
plication of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase or services to provide information.
The collection of information in this
proposed regulation is in §§1.529–
2(e)(4), 1.529–2(f) and (i), 1.529–4, and
1.529–5(b)(2). This information is re-
quired by the IRS to verify compliance
with sections 529(b)(3), (4), (7) and (d).
This information will be used by the IRS
and individuals receiving distributions
from QSTPs to determine that the taxable
amount of the distribution has been com-
puted correctly. The collection of infor-
mation is required to obtain the benefit of
being a QSTP described in section 529.
The likely respondents and/or recordkeep-
ers are state governments and distributees
who receive distributions under the pro-
grams. The burden for reporting distribu-
tions is reflected in the burden for Form
1099–G, Certain Government Payments.
The burden for electing to take certain
contributions to a QSTP into account rat-
ably over a five year period in determining
the amount of gifts made during the calen-
dar year is reflected in the burden for
Form 709, Federal Gift Tax Return.
Estimated total annual reporting/record-
keeping burden: 705,000 hours
Estimated average annual burden per re-
spondent/recordkeeper: 35 hours, 10 min-
utes
Estimated number of respondents/record-
keepers: 20,051
Estimated annual frequency of responses:
On occasion
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) relating to qualified
State tuition programs described in sec-
tion 529. Section 529 was added to the
Internal Revenue Code by section 1806 of
the Small Business Job Protection Act of
1996, Public Law 104–188, 110 Stat.
1895. Section 529 was modified by sec-
tions 211 and 1601(h) of the Taxpayer Re-
lief Act of 1997, Public Law 105–34, 111
Stat. 810 and 1092.
Section 529 provides tax-exempt status
to qualified State tuition programs
(QSTPs) established and maintained by a
State (or agency or instrumentality
Part IV. Items of General Interest
IRB 1998-37 9/10/98 4:04 PM Page 33

September 14, 1998341998–37 I.R.B.
thereof) under which persons may (1)
purchase tuition credits or certificates on
behalf of a designated beneficiary enti-
tling the beneficiary to a waiver or pay-
ment of qualified higher education ex-
penses, or (2) contribute to an account
established exclusively for the purpose of
meeting qualified higher education ex-
penses of the designated beneficiary.
Qualified higher education expenses, for
purposes of section 529, are tuition, fees,
books, supplies, and equipment required
for enrollment or attendance at an eligible
educational institution, as well as certain
room and board expenses for students
who attend an eligible educational institu-
tion at least half-time. An eligible educa-
tional institution is an accredited post-sec-
ondary educational institution offering
credit toward a bachelor’s degree, an as-
sociate’s degree, a graduate-level or pro-
fessional degree, or another recognized
post-secondary credential. The institution
must be eligible to participate in Depart-
ment of Education student aid programs.
QSTPs established and maintained by
a State (or agency or instrumentality
thereof) must require all contributions to
the program be made only in cash. Nei-
ther contributors nor designated benefi-
ciaries may direct the investment of any
contributions or any earnings on contri-
butions. No interest in the program may
be pledged as security for a loan. A sepa-
rate accounting must be provided to each
designated beneficiary in the program. A
program must impose a more than de
minimis penalty on refunds that are not
used for qualified higher education ex-
penses, not made on account of death or
disability of the designated beneficiary,
or not made on account of a scholarship
or certain other educational allowances.
A program must provide adequate safe-
guards to prevent contributions in excess
of those necessary to provide for the
qualified higher education expenses of
the beneficiary. A specified individual
must be designated as the beneficiary at
the commencement of participation in a
QSTP, unless the interests in the program
are purchased by a State or local govern-
ment or a tax-exempt organization de-
scribed in section 501(c)(3) as part of a
scholarship program operated by such
government or organization under which
beneficiaries to be named in the future
will receive the interests as scholarships.
Distributions under a QSTP are in-
cludible in the gross income of the distrib-
utee in the manner as provided under sec-
tion 72 to the extent not excluded from
gross income under any other provision.
Distributions include in-kind benefits fur-
nished to a designated beneficiary under a
QSTP. Any distribution, or portion of a
distribution, that is transferred within 60
days under a QSTP to the credit of a new
designated beneficiary who is a member
of the family of the old designated benefi-
ciary shall not be treated as a distribution.
A change in the designated beneficiary of
an interest in a QSTP shall not be treated
as a distribution if the new beneficiary is a
member of the family of the old benefi-
ciary. A member of the family means the
spouse of the designated beneficiary or an
individual who is related to the designated
beneficiary as described in section
152(a)(1) through (8) or is the spouse of
any of these individuals.
Section 529, as added to the Code by
the Small Business Job Protection Act of
1996 (1996 Act), contained provisions ad-
dressing the estate, gift, and generation-
skipping transfer tax. The provisions
were significantly revised, effective
prospectively, by the Taxpayer Relief Act
of 1997 (1997 Act).
A contribution on behalf of a desig-
nated beneficiary to a QSTP which is
made after August 20, 1996, and before
August 6, 1997, is not treated as a taxable
gift. Rather, the subsequent waiver (or
payment) of qualified higher education
expenses of a designated beneficiary by
(or to) an educational institution under the
QSTP is treated as a qualified transfer
under section 2503(e) and is not treated as
a transfer of property by gift for purposes
of section 2501. As such, the contribution
is not subject to the generation-skipping
transfer tax imposed by section 2601.
In contrast, under section 529 as
amended by the 1997 Act, a contribution
on behalf of a designated beneficiary to a
QSTP after August 5, 1997, is a com-
pleted gift of a present interest in property
under section 2503(b) from the contribu-
tor to the designated beneficiary and is
not a qualified transfer within themeaning
of section 2503(e). The portion of a con-
tribution excludible from taxable gifts
under section 2503(b) also satisfies the re-
quirements of section 2642(c)(2) and,
therefore, is also excludible for purposes
of the generation-skipping transfer tax
imposed under section 2601. For pur-
poses of the annual exclusion, a contribu-
tor may elect to take certain contributions
to a QSTP into account ratably over a
five-year period in determining the
amount of gifts made during the calendar
year. Under section 529 as amended by
the 1997 Act, a transfer which occurs by
reason of a change in the designated bene-
ficiary of a QSTP, or a rollover from the
account of one beneficiary to the account
of another beneficiary in a QSTP, is not a
taxable gift if the new beneficiary is a
member of the family, as defined in sec-
tion 529(e)(2), of the old beneficiary, and
is assigned to the same generation, as de-
fined in section 2651, as the old benefi-
ciary. If the new beneficiary is assigned
to a lower generation than the old benefi-
ciary, the transfer is a taxable gift from
the old beneficiary to the new beneficiary
regardless of whether the new beneficiary
is a member of the family of the old bene-
ficiary. In addition, the transfer will be
subject to the generation-skipping transfer
tax if the new beneficiary is assigned to a
generation which is two or more levels
lower than the generation assignment of
the old beneficiary. The five-year averag-
ing election for purposes of the gift tax
annual exclusion may be applied to the
transfer.
Regarding the application of the estate
tax, the value of any interest in any QSTP
which is attributable to contributions
made by a decedent who died after Au-
gust 20, 1996, and before June 9, 1997, is
includible in the decedent’s gross estate.
In contrast, pursuant to the 1997 Act
amendments to section 529, the value of
such an interest is not includible in the
gross estate of a decedent who dies after
June 8, 1997, unless the decedent had
elected the five-year averaging rule for
purposes of the gift tax annual exclusion
and died before the close of the five-year
period. In that case, the portion of the
contribution allocable to calendar years
beginning after the decedent’s date of
death is includible in his gross estate.
Also, pursuant to the 1997 Act amend-
ments to section 529, the value of any in-
terest in a QSTP held for a designated
beneficiary who dies after June 8, 1997, is
includible in the designated beneficiary’s
gross estate.
The Federal estate and gift tax treat-
IRB 1998-37 9/10/98 4:04 PM Page 34

1998–37 I.R.B.35September 14, 1998
ment of QSTP interests has no effect on
the actual rights and obligations of the
parties pursuant to the terms of the con-
tracts under State law. In addition, the es-
tate and gift tax treatment of contributions
to a QSTP and interests in a QSTP is gen-
erally different from the treatment that
would otherwise apply under generally
applicable estate and gift tax principles.
For example, under most contracts, the
contributor may retain the right to change
the designated beneficiary of an account,
to designate any person other than the
designated beneficiary to whom funds
may be paid from the account, or to re-
ceive distributions from the account if no
such other person is designated. Such
rights would ordinarily cause the transfer
to the account to fail to be a completed
gift and mandate inclusion of the value of
the undistributed interest in the QSTP in
the gross estate of the contributor under
sections 2036 and/or 2038. However,
under section 529, the gross estate of a
contributor who dies after June 8, 1997,
does not include the value of any interest
in a QSTP attributable to contributions
from the contributor (except amounts at-
tributable to calendar years after death
where the five-year averaging rule has
been elected). Also, because a contribu-
tion after August 5, 1997, is a completed
gift from the contributor to the designated
beneficiary, any subsequent transfer
which occurs by reason of a change in the
designated beneficiary or a rollover from
the account of the original designated
beneficiary to the account of another ben-
eficiary is treated, to the extent it is sub-
ject to the gift and/or generation-skipping
transfer tax, as a transfer from the original
designated beneficiary to the new benefi-
ciary. This is the result even though the
change in beneficiary or the rollover is
made at the direction of the contributor
under the terms of the contract.
Comments from Notice 96–58
In Notice 96–58, 1996–2 C.B. 226, the
Internal Revenue Service invited com-
ments on section 529 including the re-
quirements for reporting distributions by
QSTPs, the requirements for qualification
and operation of programs, and the treat-
ment of distributions made by programs
for federal tax purposes. Eighteen com-
ments were received. The comments ad-
dressed a broad range of issues, including
but not limited to, those outlined by No-
tice 96–58, the concept of account owner-
ship and gift tax rules, enforcement of
penalties, accounting and recordkeeping,
and transition relief for programs in exis-
tence on August 20, 1996. The summary
below is not intended to be a complete
discussion of the comments. However,
all matters presented in the comments
were considered in the drafting of this no-
tice of proposed rulemaking.
One commenter discussed in detail the
requirements that a QSTP be “established
and maintained” by a State or agency or
instrumentality of a State. The com-
menter recommended a list of factors to
be considered in determining whether a
State maintains the program. This com-
menter and others urged that the use of
outside contractors or the holding of pro-
gram deposits at a private financial insti-
tution selected by the State not be deter-
minative of whether the program was
maintained by the State.
One commenter was endorsed by sev-
eral others for suggesting two specific
safe harbors to satisfy the requirement
that a program impose more than a de
minimis penalty on refunds. The first
safe harbor was a 5 percent of earnings
penalty on refunds of earnings prior to the
designated beneficiary matriculating, re-
duced to at least a 1 percent penalty on re-
funds of earnings only after the age of
matriculation. The second safe harbor
was a fixed-rate safe harbor equal to the
lesser of $50 or 1 percent of the assets dis-
tributed. Another commenter suggested
an additional safe harbor based on the re-
turn of Series EE savings bonds. That
commenter also suggested that safe har-
bors are not necessarily the minimum ac-
ceptable penalties and that all facts and
circumstances should be taken into ac-
count in determining the adequacy of
penalties that are less than the safe harbor
penalties.
Commenters urged that regulations
limit or avoid rules requiring programs to
enforce penalties or require substantiation
to ensure that disbursements are used to
pay for qualified higher education ex-
penses. Recognizing however that there
may be some misuse in this area, com-
menters recommended that checks from
QSTPs be marked with a special endorse-
ment or be payable to both the educational
institution and the designated beneficiary.
Commenters suggested that the prohi-
bition on investment direction not include
a choice between a prepaid tuition pro-
gram and a savings program (established
and maintained in one State), a choice
among options in a prepaid tuition pro-
gram, a choice among options for the ini-
tial contribution to the program, or an op-
portunity to change investment strategies.
One commenter suggested that the prohi-
bition on investment direction not apply
to prevent participation in the program by
program board and staff members.
Commenters suggested several ap-
proaches for satisfying the prohibition on
excess contributions. Two safe harbors
were proposed; one was based upon eight
times the average annual undergraduate
tuition and required fees at private four-
year universities; the other was based
upon five years of tuition, fees, books,
supplies, and equipment at the highest cost
institution allowed by the State’s program.
Other approaches proposed allowing the
provision of adequate safeguards to pre-
vent excess contributions to be left to the
discretion of the program or allowing the
contributor to certify that no attempt
would be made to overfund the account.
Commenters made suggestions and
raised concerns regarding: separate ac-
counting rules including, but not limited to,
the valuation and tracking of tuition units;
the operating rules treating all programs in
which an individual is a designated benefi-
ciary as one program, and treating all dis-
tributions during a taxable year as one dis-
tribution; the application of section 72 to
calculate distributions; and, income tax
consequences relating to account owner-
ship, penalties, and withholding.
The modifications made to section 529
by the Taxpayer Relief Act of 1997 have
addressed, in large part, the issues raised
by commenters concerning transition relief
for programs in existence on August 20,
1996, estate and gift tax consequences for
contributors and designated beneficiaries,
and definitions pertaining to family mem-
bers and eligible educational institutions.
Explanation of Provisions
Qualification as Qualified State Tuition
Program (QSTP): Unrelated Business
Income Tax and Filing Requirements
The proposed regulations provide guid-
ance on the requirements a program must
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September 14, 1998361998–37 I.R.B.
satisfy in order to be a QSTP described in
section 529. A program that meets these
requirements generally is exempt from in-
come taxation. However, a QSTP is sub-
ject to the taxes imposed by section 511
relating to imposition of tax on unrelated
business income. For purposes of section
529 and these regulations, an interest in a
QSTP shall not be treated as debt for pur-
poses of section 514; consequently, in-
vestment income earned on contributions
to the program by purchasers will not
constitute debt-financed income subject
to the unrelated business income tax.
However, investment income of the
QSTP shall be subject to the unrelated
business income tax to the extent the pro-
gram incurs indebtedness when acquiring
or improving income-producing property.
Earnings forfeited on educational con-
tracts or savings, amounts collected as
penalties on refunds or excess contribu-
tions, and certain administrative and other
fees are not unrelated business income to
the QSTP. A QSTP is not required to file
Form 990, Return of Organization Ex-
empt From Income Tax, however, this
does not affect the obligation of a QSTP
to file Form 990–T, Exempt Organization
Business Income Tax Return.
Established and Maintained
The proposed regulations provide that a
program is established by a State or
agency or instrumentality of the State if
the program is initiated by State statute or
regulation, or by an act of a State official
or agency with the authority to act on be-
half of the State. A program is maintained
by a State or agency or instrumentality of
a State if all the terms and conditions of
the program are set by the State or agency
or instrumentality and the State or agency
or instrumentality is actively involved on
an ongoing basis in the administration of
the program, including supervising all de-
cisions relating to the investment of assets
contributed to the program. The proposed
regulations set forth factors that are rele-
vant in determining whether a State,
agency or instrumentality is actively in-
volved in the administration of the pro-
gram. Included in the factors is the man-
ner and extent to which it is permissible
for the program to contract out for profes-
sional and financial services.
Penalties and Substantiation – Safe
Harbors
As required by section 529(b)(3), a
more than de minimis penalty must be im-
posed on the earnings portion of any dis-
tribution from the program that is not
used for the qualified higher education
expenses of the designated beneficiary,
not made on account of the death or dis-
ability of the designated beneficiary, or
not made on account of a scholarship or
certain other payments described in sec-
tions 135(d)(1)(B) and (C) that are re-
ceived by the designated beneficiary to
the extent the amount of the refund does
not exceed the amount of the scholarship,
allowance, or payment. The penalty shall
also not apply to rollover distributions de-
scribed in section 529(c)(3)(C) which are
discussed in the section titled Income Tax
Treatment of Distributees, below. The
proposed regulations provide that a
penalty is more than de minimis if it is
consistent with a program intended to as-
sist individuals in saving exclusively for
qualified higher education expenses.
Whether any penalty is more than de min-
imis will depend upon the facts and cir-
cumstance of the particular program, in-
cluding the extent to which the penalty
offsets the federal income tax benefit from
having deferred income tax liability on the
earnings portion of any distribution. The
proposed regulations provide a safe harbor
penalty that a program may adopt for sat-
isfying this requirement. For purposes of
the safe harbor, a penalty imposed on the
earnings portion of a distribution is more
than de minimis if it is equal to or greater
than 10 percent of the earnings.
To be treated as imposing a more than
de minimis penalty as required by section
529(b)(3) a program must implement
practices and procedures for identifying
whether a distribution is subject to a
penalty and collecting any penalty that is
due. The proposed regulations, in the
form of a safe harbor, set forth practices
and procedures that may be implemented
by a program. The safe harbor provides
that distributions are treated as payments
of qualified higher education expenses if
the distribution is made directly to an eli-
gible educational institution; the distribu-
tion is made in the form of a check
payable to both the designated beneficiary
and the eligible educational institution; the
distribution is made after the designated
beneficiary submits substantiation show-
ing that the qualified higher education ex-
penses were paid and the program reviews
the substantiation; or the designated bene-
ficiary certifies prior to distribution the
amount to be used for qualified higher ed-
ucation expenses and the program requires
substantiation of payment within 30 days
of making the distribution, the program re-
views the substantiation, and the program
retains an amount necessary to collect the
penalty owed on the distribution if valid
substantiation is not produced.
The safe harbor procedure provides that
a penalty be collected on all other distribu-
tions except where prior to distribution the
program receives written third party con-
firmation that the designated beneficiary
has died or become disabled or has re-
ceived a scholarship or allowance or pay-
ment described in section 135(d)(1)(B) or
(C). Alternatively, distributions may be
made upon the certification of the account
owner that the designated beneficiary has
died or become disabled or has received a
scholarship or allowance or payment de-
scribed above, if the program withholds a
portion of the distribution as a penalty.
The penalty may be refunded after receipt
of third party confirmation of the certifica-
tion made by the account owner.
The safe harbor procedure provides that
a program may document amounts re-
funded from eligible educational institu-
tions that were not used for qualified
higher education expenses by requiring a
signed written statement from the distribu-
tee identifying the amount of any refund
received from an eligible educational in-
stitution at the end of each year in which
distributions for qualified higher educa-
tion expenses were made and of the next
year. A program must also have proce-
dures to collect the penalty either by re-
taining a sufficient balance in the account
to pay the penalty, withholding an amount
equal to the penalty from a distribution, or
collecting the penalty on a State income
tax return.
Other Requirements for QSTP
Qualification
As described in section 529(b)(1)(A),
the proposed regulations provide that con-
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1998–37 I.R.B.37September 14, 1998
tributions to the program can be placed
into either a prepaid educational arrange-
ment or contract, or an educational sav-
ings account, or both, but cannot be
placed into any other type of account.
Contributions may be made only in cash
and not in property as provided in section
529(b)(2), however, the proposed regula-
tions provide that a program may accept
payment in cash, or by check, money
order, credit card, or similar methods.
Section 529(b)(4) requires that a pro-
gram provide separate accounting for each
designated beneficiary. Separate account-
ing requires that contributions for the ben-
efit of a designated beneficiary and earn-
ing attributable to those contributions are
allocated to the appropriate account. The
proposed regulations provide that if a pro-
gram does not ordinarily provide each ac-
count owner an annual account statement
showing the transactions related to the ac-
count, the program must give this infor-
mation to the account owner or designated
beneficiary upon request.
Section 529(b)(5) states that a program
shall not be treated as a QSTP unless it
provides that any contributor to, or desig-
nated beneficiary under, such program
may not directly or indirectly direct the
investment of any contributions to the
program or any earnings thereon. A pro-
gram will not violate the requirement of
this paragraph if it permits a person who
establishes an account to select between a
prepaid educational services account and
an educational savings account, or to se-
lect among different investment strategies
designed exclusively by the program, at
the time that an educational savings ac-
count is established. However, the pro-
posed regulations clarify that a program
will violate this requirement if, after an
account with the program initially is es-
tablished, the account owner, a contribu-
tor, or the designated beneficiary subse-
quently is permitted to select among
different investment options or strategies.
A program will not violate this require-
ment merely because it permits its board
members, its employees, or the board
members or employees of a contractor it
hires to perform administrative services to
purchase tuition credits or certificates or
make contributions.
Section 529(b)(6) provides that a pro-
gram may not allow any interest in the
program, or any portion of an interest in
the program, to be used as security for a
loan. The proposed regulations clarify
that this restriction includes, but is not
limited to, a prohibition on the use of any
interest in the program as security for a
loan used to purchase the interest in the
program.
Section 529(b)(7) requires a program to
establish adequate safeguards to prevent
contributions for the benefit of a desig-
nated beneficiary in excess of those nec-
essary to provide for the qualified higher
education expenses of the designated ben-
eficiary. The proposed regulations pro-
vide a safe harbor that permits a program
to satisfy this requirement if the program
will bar any additional contributions to an
account as soon as the account reaches a
specified limit applicable to all accounts
of designated beneficiaries with the same
expected year of enrollment. The total
contributions may not exceed the amount
determined by actuarial estimates that is
necessary to pay tuition, required fees,
and room and board expenses of the des-
ignated beneficiary for five years of un-
dergraduate enrollment at the highest cost
institution allowed by the program. The
safe harbor in the proposed regulations
applies only to the program. Despite the
fact that a program has met the safe har-
bor, a particular account established under
the program may have a balance that ex-
ceeds the amount actually needed to cover
the particular designated beneficiary’s
qualified higher education expenses. Dis-
tributions made that are not used for qual-
ified higher education expenses of the
designated beneficiary are subject to the
penalty provisions of section 529(b)(3).
Income Tax Treatment of Distributees
In accordance with section 529(c)(3),
the proposed regulations provide that dis-
tributions made by a QSTP, including any
benefit furnished in-kind, must be in-
cluded in the gross income of the distribu-
tee to the extent that the distribution
consists of earnings. The proposed regu-
lations clarify that term “distributee”
refers to the designated beneficiary or the
account owner who receives or is treated
as receiving a distribution from a QSTP.
As required by section 529(c)(3)(A), dis-
tributions under a QSTP must be included
in income in the manner as provided
under section 72. Therefore, deposits or
contributions made into an account under
a QSTP are recovered ratably over the pe-
riod of time distributions are made. The
amount of taxable earnings shall be deter-
mined by applying an earnings ratio, gen-
erally the earnings allocable to the ac-
count as of the close of the calendar year
divided by the total account balance as of
the close of the calendar year, to the dis-
tribution. In the case of a prepaid educa-
tional services account, this method of
calculating taxable earnings utilizes an
average value for each unit of education
(e.g., credit, hour, semester, or other unit
of education) that is distributed rather
than the recovery of the cost of any partic-
ular unit of education.
In accordance with section 529(c)(3)-
(C), the proposed regulations permit non-
taxable rollover distributions. A rollover
consists of a distribution or transfer from
an account of a designated beneficiary
that is transferred to or deposited within
60 days of the distribution into an account
of another individual who is a member of
the family of the designated beneficiary.
A distribution is not a rollover distribution
unless there is a change in beneficiary.
The new designated beneficiary’s account
may be in a QSTP established or main-
tained by the same State or by another
State. A transfer from the designated ben-
eficiary to himself or herself, regardless
of whether the transfer is to an account
within the same QSTP or another QSTP
in the same or another State, is not a
rollover distribution and is taxable under
the general rule. The Internal Revenue
Service is concerned about the use of
multiple rollovers to circumvent the re-
striction on investment direction. In par-
ticular, the Internal Revenue Service re-
quests comments on this issue, including
whether limits should be placed on the
number of rollovers permitted within a
certain time period or rollovers back to
the original designated beneficiary. No
taxable distribution will result from a
change in designated beneficiary of an in-
terest in a QSTP purchased by a State or
local government or an organization de-
scribed in section 501(c)(3) as part of a
scholarship program.
Reporting Requirements
The proposed regulations set forth
recordkeeping and reporting require-
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September 14, 1998381998–37 I.R.B.
ments. A QSTP must maintain records
that enable the program to produce an an-
nual account balance for each account.
See, requirements related to section
529(b)(4) above. A QSTP must report
taxable earnings on Form 1099–G, Cer-
tain Government Payments, to distribu-
tees. Any reporting requirements promul-
gated under section 529(d) apply in lieu
of any other reporting requirement for a
program that may apply with respect to
information returns or payee statements
or distributions. The proposed regula-
tions contain more detail on how the in-
formation must be reported.
Estate and Gift Tax
The proposed regulations provide guid-
ance on the gift and generation-skipping
transfer tax consequences of contributions
to a QSTP, a change in the designated ben-
eficiary of a QSTP, and a rollover from the
account of one beneficiary to the account
of another beneficiary under a QSTP. The
proposed regulations also provide guid-
ance on whether and to what extent the
value of an interest in a QSTP is includible
in the gross estate of a contributor to a
QSTP or the gross estate of a designated
beneficiary of a QSTP. Because of the
amendments to section 529 made by the
Taxpayer Relief Act of 1997, different gift
tax rules apply to contributions made after
August 20, 1996, and before August 6,
1997, than apply to contributions made
after August 5, 1997. Also, estates of
decedents dying after August 20, 1996,
and before June 9, 1997, are treated differ-
ently from estates of decedents dying after
June 8, 1997. Comments are requested
specifically on whether there is a need for
more detailed guidance with respect to the
estate, gift, and generation-skipping trans-
fer tax provisions.
Transition Rules
In accordance with section 1806(c) of
the Small Business Job Protection Act of
1996 and section 1601(h) of the Taxpayer
Relief Act of 1997, special transition rules
apply to programs in existence on August
20, 1996. The proposed regulations pro-
vide that no income tax liability will be as-
serted against a QSTP for any period be-
fore the program meets the requirements
of section 529 and these regulations if the
program qualifies for the transition relief.
A program shall be treated as meeting the
transition rule if it conforms to the require-
ments of section 529 and these regulations
by the date of final regulations.
The proposed regulations provide tran-
sition rules that grandfather certain provi-
sions in contracts issued and accounts
opened before August 20, 1996. These
contracts may be honored without regard
to the definitions of “member of the fam-
ily” and “eligible educational institution”
used in section 529(e)(2) and (3), and
without regard to section 529(b)(6) which
prohibits the pledging of a QSTP interest
as security for a loan. However, regard-
less of the terms of any agreement exe-
cuted before August 20, 1996, distribu-
tions made by the QSTP are subject to tax
according to the rules of §1.529–3 and
subject to the reporting requirements of
§1.529–4.
Proposed Effective Date
These regulations are proposed to be
effective on the date they are published in
the Federal Registeras final regulations.
Taxpayers may, however, rely on the pro-
posed regulations for taxable years ending
after August 20, 1996. Programs that
were in existence on August 20, 1996,
may also rely upon the transition rules
provided.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief counsel for Advocacy of the Small
Business 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 (a signed original and eight (8)
copies) that are submitted timely to the
IRS. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for Wednesday, January 6, 1999, begin-
ning at 10 a.m. in room 2615 of the Inter-
nal Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC. Because
of access restrictions, visitors will not be
admitted beyond the Internal Revenue
Building lobby more than 15 minutes be-
fore the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
comments and an outline of the topics to
be discussed and the time to be devoted to
each topic (signed original and eight (8)
copies) by December 16, 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.
Drafting Information
The principal authors of these proposed
regulations are Monice Rosenbaum, Office
of Associate Chief Counsel (Employee
Benefits and Exempt Organizations) and
Susan Hurwitz, Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. An undesignated center heading
and §§1.529–0 through 1.529–6 are added
to read as follows:
QUALIFIED STATE TUITION
PROGRAMS
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1998–37 I.R.B.39September 14, 1998
§1.529–0 Table of contents.
This section lists the following captions
contained in §§1.529–1 through 1.529-–6:
§1.529–1 Qualified State tuition
program, unrelated business income tax
and definitions.
(a) In general.
(b) Unrelated business income tax rules.
(1) Application of section 514.
(2) Penalties and forfeitures.
(3) Administrative and other fees.
(c) Definitions.
§1.529–2 Qualified State tuition program
described.
(a) In general.
(b) Established and maintained by a
State or agency or instrumentality of
a State.
(1) Established.
(2) Maintained.
(3) Actively involved.
(c) Permissible uses of contributions.
(d) Cash contributions.
(e) Penalties on refunds.
(1) General rule.
(2) More than de minimis penalty.
(i)In general.
(ii) Safe harbor.
(3) Separate distributions.
(4) Procedures for verifying use of dis-
tributions and imposing and collect-
ing penalties.
(i)In general.
(ii) Safe harbor.
(A) Distributions treated as payments of
qualified higher education expenses.
(B) Treatment of all other distributions.
(C) Refunds of penalties.
(D) Documentation of amounts refunded
and not used for qualified higher ed-
ucation expenses.
(E) Procedures to collect penalty.
(f)Separate accounting.
(g) No investment direction.
(h) No pledging of interest as security.
(i)Prohibition on excess contributions.
(1) In general.
(2) Safe harbor.
§1.529–3 Income tax treatment of
distributees.
(a) Taxation of distributions.
(1) In general.
(2) Rollover distributions.
(b) Computing taxable earnings.
(1) Amount of taxable earnings in a dis-
tribution.
(i)Educational savings account.
(ii)Prepaid educational services ac-
count.
(2) Adjustment for programs that
treated distributions and earnings in
a different manner for years begin-
ning before January 1, 1999.
(3) Examples.
(c) Change in designated beneficiaries.
(1) General rule.
(2) Scholarship program.
(d) Aggregation of accounts.
§1.529–4 Time, form, and manner of
reporting distributions from QSTPs and
backup withholding.
(a) Taxable distributions.
(b) Requirement to file return.
(1) Form of return.
(2) Payor.
(3) Information included on return.
(4) Time and place for filing return.
(5) Returns required on magnetic media.
(6) Extension of time to file return.
(c) Requirement to furnish statement to
the distributee.
(1) In general.
(2) Information included on statement.
(3) Time for furnishing statement.
(4) Extension of time to furnish state-
ment.
(d) Backup withholding.
(e) Effective date.
§1.529–5 Estate, gift, and generation-
skipping transfer tax rules relating to
qualified State tuition programs.
(a) Gift and generation-skipping trans-
fer tax treatment of contributions
after August 20, 1996, and before
August 6, 1997.
(b) Gift and generation-skipping trans-
fer tax treatment of contributions
after August 5, 1997.
(1) In general.
(2) Contributions that exceed the annual
exclusion amount.
(3) Change of designated beneficiary or
rollover.
(c) Estate tax treatment for estates of
decedents dying after August 20,
1996, and before June 9, 1997.
(d) Estate tax treatment for estates of
decedents dying after June 8, 1997.
(1) In general.
(2) Excess contributions.
(3) Designated beneficiary decedents.
§1.529–6 Transition rules.
(a) Effective date.
(b) Programs maintained on August 20,
1996.
(c) Retroactive effect.
(d) Contracts entered into and accounts
opened before August 20, 1996.
(1) In general.
(2) Interest in program pledged as secu-
rity for a loan.
(3) Member of the family.
(4) Eligible educational institution.
§1.529–1 Qualified State tuition
program, unrelated business income tax
and definitions.
(a) In general.A qualified State tuition
program (QSTP) described in section 529
is exempt from income tax, except for the
tax imposed under section 511 on the
QSTP’s unrelated business taxable in-
come. A QSTP is not required to file
Form 990, Return of Organization Ex-
empt From Income Tax, Form 1041, U.S.
Income Tax Return for Estates and Trusts,
or Form 1120, U.S. Corporation Income
Tax Return. A QSTP may be required to
file Form 990–T, Exempt Organization
Business Income Tax Return. See
§§1.6012–2(e) and 1.6012–3(a)(5) for re-
quirements for filing Form 990–T.
(b) Unrelated business income tax
rules. For purposes of section 529, this
section and §§1.529–2 through 1.529–6:
(1) Application of section 514.An in-
terest in a QSTP shall not be treated as
debt for purposes of section 514. Conse-
quently, a QSTP’s investment income will
not constitute debt-financed income sub-
ject to the unrelated business income tax
merely because the program accepts con-
tributions and is obligated to pay out or
refund such contributions and certain
earnings attributable thereto to designated
beneficiaries or to account owners. How-
ever, investment income of a QSTP shall
be subject to the unrelated business in-
come tax as debt-financed income to the
extent the program incurs indebtedness
when acquiring or improving income-pro-
ducing property.
(2) Penalties and forfeitures.Earnings
forfeited on prepaid educational arrange-
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September 14, 1998401998–37 I.R.B.
ments or contracts and educational sav-
ings accounts and retained by a QSTP, or
amounts collected by a QSTP as penalties
on refunds or excess contributions are not
unrelated business income to the QSTP.
(3) Administrative and other fees.
Amounts paid, in order to open or maintain
prepaid educational arrangements or con-
tracts and educational savings accounts, as
administrative or maintenance fees, and
other similar fees including late fees, ser-
vice charges, and finance charges, are not
unrelated business income to the QSTP.
(c) Definitions.For purposes of sec-
tion 529, this section and §§1.529–2
through 1.529–6:
Accountmeans the formal record of
transactions relating to a particular desig-
nated beneficiary when it is used alone
without further modification in these reg-
ulations. The term includes prepaid edu-
cational arrangements or contracts de-
scribed in section 529(b)(1)(A)(i) and
educational savings accounts described in
section 529(b)(1)(A)(ii).
Account ownermeans the person who,
under the terms of the QSTP or any con-
tract setting forth the terms under which
contributions may be made to an account
for the benefit of a designated beneficiary,
is entitled to select or change the desig-
nated beneficiary of an account, to desig-
nate any person other than the designated
beneficiary to whom funds may be paid
from the account, or to receive distribu-
tions from the account if no such other
person is designated.
Contributionmeans any payment di-
rectly allocated to an account for the ben-
efit of a designated beneficiary or used to
pay late fees or administrative fees associ-
ated with the account. In the case of a tax-
free rollover,within the meaning of this
paragraph (c), into a QSTP account, only
the portion of the rollover amount that
constituted investment in the account,
within the meaning of this paragraph (c),
is treated as a contribution to the account
as required by §1.529–3(a)(2).
Designated beneficiarymeans—
(1) The individual designated as the
beneficiary of the account at the time an
account is established with the QSTP;
(2) The individual who is designated as
the new beneficiary when beneficiaries
are changed; and
(3) The individual receiving the bene-
fits accumulated in the account as a schol-
arship in the case of a QSTP account es-
tablished by a State or local government
or an organization described in section
501(c)(3) and exempt from taxation under
section 501(a) as part of a scholarship
program operated by such government or
organization.
Distributeemeans the designated bene-
ficiary or the account owner who receives
or is treated as receiving a distribution
from a QSTP. For example, if a QSTP
makes a distribution directly to an eligible
educational institution to pay tuition and
fees for a designated beneficiary or a
QSTP makes a distribution in the form of
a check payable to both a designated ben-
eficiary and an eligible educational insti-
tution, the distribution shall be treated as
having been made in full to the designated
beneficiary.
Distributionmeans any disbursement,
whether in cash or in-kind, from a QSTP.
Distributions include, but are not limited
to, tuition credits or certificates, payment
vouchers, tuition waivers or other similar
items. Distributions also include, but are
not limited to, a refund to the account
owner, the designated beneficiary or the
designated beneficiary’s estate.
Earningsattributable to an account are
the total account balance on a particular
date minus the investment in the account
as of that date.
Earnings ratiomeans the amount of
earnings allocable to the account on the
last day of the calendar year divided by
the total account balance on the last day
of that calendar year. The earnings ratio
is applied to any distribution made during
the calendar year. For purposes of com-
puting the earnings ratio, the earnings al-
locable to the account on the last day of
the calendar year and the total account
balance on the last day of the calendar
year include all distributions made during
the calendar year and any amounts that
have been forfeited from the account dur-
ing the calendar year.
Eligible educational institutionmeans
an institution which is described in section
481 of the Higher Education Act of 1965
(20 U.S.C 1088) as in effect on August 5,
1997, and which is eligible to participate
in a program under title IV of such Act.
Such institutions generally are accredited
post-secondary educational institutions of-
fering credit toward a bachelor’s degree,
an associate’s degree, a graduate level or
professional degree, or another recognized
post-secondary credential. Certain propri-
etary institutions and post-secondary vo-
cational institutions also are eligible insti-
tutions. The institution must be eligible to
participate in Department of Education
student aid programs.
Final distributionmeans the distribu-
tion from a QSTP account that reduces
the total account balance to zero.
Forfeitmeans that earnings and contri-
butions allocable to a QSTP account are
withdrawn by the QSTP from the account
or deducted by the QSTP from a distribu-
tion to pay a penalty as required by
§1.529–2(e).
Investment in the accountmeans the
sum of all contributions made to the ac-
count on or before a particular date less
the aggregate amount of contributions in-
cluded in distributions, if any, made from
the account on or before that date.
Member of the familymeans an indi-
vidual who is related to the designated
beneficiary as described in paragraphs (1)
through (9) of this definition. For pur-
poses of determining who is a member of
the family, a legally adopted child of an
individual shall be treated as the child of
such individual by blood. The terms
brother and sister include a brother or sis-
ter by the halfblood. Member of the fam-
ily means—
(1) A son or daughter, or a descendant
of either;
(2) A stepson or stepdaughter;
(3) A brother, sister, stepbrother, or
stepsister;
(4) The father or mother, or an ancestor
of either;
(5) A stepfather or stepmother;
(6) A son or daughter of a brother or
sister;
(7) A brother or sister of the father or
mother;
(8) A son-in-law, daughter-in-law, fa-
ther-in-law, mother-in-law, brother-in-
law, or sister-in-law; or
(9) The spouse of the designated bene-
ficiary or the spouse of any individual de-
scribed in paragraphs (1) through (8) of
this definition.
Personhas the same meaning as under
section 7701(a)(1).
Qualified higher education expenses
means —
(1) Tuition, fees, and the costs of
books, supplies, and equipment required
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1998–37 I.R.B.41September 14, 1998
for the enrollment or attendance of a des-
ignated beneficiary at an eligible educa-
tional institution; and
(2) The costs of room and board (as
limited by paragraph (2)(i) of this defini-
tion) of a designated beneficiary (who
meets requirements of paragraph (2)(ii) of
this definition) incurred while attending
an eligible educational institution:
(i) The amount of room and board
treated as qualified higher education ex-
penses shall not exceed the minimum
room and board allowance determined in
calculating costs of attendance for Federal
financial aid programs under section 472
of the Higher Education Act of 1965 (20
U.S.C. 1087ll) as in effect on August 5,
1997. For purposes of these regulations,
room and board costs shall not exceed
$1,500 per academic year for a designated
beneficiary residing at home with parents
or guardians. For a designated benefi-
ciary residing in institutionally owned or
operated housing, room and board costs
shall not exceed the amount normally as-
sessed most residents for room and board
at the institution. For all other designated
beneficiaries the amount shall not exceed
$2,500 per academic year. For this pur-
pose the term academic year has the same
meaning as that term is given in 20 U.S.C.
1088(d) as in effect on August 5, 1997.
(ii) Room and board shall be treated as
qualified higher education expenses for a
designated beneficiary if they are incurred
during any academic period during which
the designated beneficiary is enrolled or
accepted for enrollment in a degree, cer-
tificate, or other program (including a
program of study abroad approved for
credit by the eligible educational institu-
tion) that leads to a recognized educa-
tional credential awarded by an eligible
educational institution. In addition, the
designated beneficiary must be enrolled at
least half-time. A student will be consid-
ered to be enrolled at least half-time if the
student is enrolled for at least half the
full-time academic workload for the
course of study the student is pursuing as
determined under the standards of the in-
stitution where the student is enrolled.
The institution’s standard for a full-time
workload must equal or exceed the stan-
dard established by the Department of Ed-
ucation under the Higher Education Act
and set forth in 34 CFR 674.2(b).
Rollover distributionmeans a distribu-
tion or transfer from an account of a des-
ignated beneficiary that is transferred to
or deposited within 60 days of the distrib-
ution into an account of another individ-
ual who is a member of the family of the
designated beneficiary. A distribution is
not a rollover distribution unless there is a
change in beneficiary. The new desig-
nated beneficiary’s account may be in a
QSTP in either the same State or a QSTP
in another State.
Total account balancemeans the total
amount or the total fair market value of
tuition credits or certificates or similar
benefits allocable to the account on a par-
ticular date. For purposes of computing
the earnings ratio,the total account bal-
ance is adjusted as described in this para-
graph (c).
§1.529–2 Qualified State tuition program
described.
(a) In general.To be a QSTP, a pro-
gram must satisfy the requirements de-
scribed in paragraphs (a) through (i) of
this section. A QSTP is a program estab-
lished and maintained by a State or an
agency or instrumentality of a State under
which a person—
(1) May purchase tuition credits or cer-
tificates on behalf of a designated benefi-
ciary that entitle the beneficiary to the
waiver or payment of qualified higher ed-
ucation expenses of the beneficiary; or
(2) May make contributions to an ac-
count that is established for the purpose of
meeting the qualified higher education
expenses of the designated beneficiary of
the account.
(b) Established and maintained by a
State or agency or instrumentality of a
State—(1) Established.A program is es-
tablished by a State or an agency or in-
strumentality of a State if the program is
initiated by State statute or regulation, or
by an act of a State official or agency with
the authority to act on behalf of the State.
(2) Maintained.A program is main-
tained by a State or an agency or instru-
mentality of a State if—
(i) The State or agency or instrumental-
ity sets all of the terms and conditions of
the program, including but not limited to
who may contribute to the program, who
may be a designated beneficiary of the
program, what benefits the program may
provide, when penalties will apply to re-
funds and what those penalties will be;
and
(ii) The State or agency or instrumen-
tality is actively involved on an ongoing
basis in the administration of the pro-
gram, including supervising all decisions
relating to the investment of assets con-
tributed to the program.
(3) Actively involved. Factors that are
relevant in determining whether a State,
agency or instrumentality is actively in-
volved include, but are not limited to:
whether the State provides services or
benefits (such as tax, student aid or other
financial benefits) to account owners or
designated beneficiaries that are not pro-
vided to persons who are not account
owners or designated beneficiaries;
whether the State or agency or instrumen-
tality establishes detailed operating rules
for administering the program; whether
officials of the State or agency or instru-
mentality play a substantial role in the op-
eration of the program, including select-
ing, supervising, monitoring, auditing,
and terminating any private contractors
that provide services under the program;
whether the State or agency or instrumen-
tality holds the private contractors that
provide services under the program to the
same standards and requirements that
apply when private contractors handle
funds that belong to the State or provide
services to the State; whether the State
provides funding for the program; and,
whether the State or agency or instrumen-
tality acts as trustee or holds program as-
sets directly or for the benefit of the ac-
count owners or designated beneficiaries.
If the State or an agency or instrumental-
ity thereof exercises the same authority
over the funds invested in the program as
it does over the investments in or pool of
funds of a State employees’ defined bene-
fit pension plan, then the State or agency
or instrumentality will be considered ac-
tively involved on an ongoing basis in the
administration of the program.
(c) Permissible uses of contributions.
Contributions to a QSTP can be placed
into either a prepaid educational arrange-
ment or contract described in section
529(b)(1)(A)(i) or an educational savings
account described in section 529(b)(1)-
(A)(ii), or both, but cannot be placed into
any other type of account.
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September 14, 1998421998–37 I.R.B.
(1) A prepaid educational services
arrangement or contract is an account
through which tuition credits or certifi-
cates or other rights are acquired that enti-
tle the designated beneficiary of the ac-
count to the waiver or payment of
qualified higher education expenses.
(2) An educational savings account is
an account that is established exclusively
for the purpose of meeting the qualified
higher education expenses of a designated
beneficiary.
(d) Cash contributions.A program
shall not be treated as a QSTP unless it
provides that contributions may be made
only in cash and not in property. A QSTP
may accept payment, however, in cash, or
by check, money order, credit card, or
similar methods.
(e) Penalties on refunds—(1) General
rule.A program shall not be treated as a
QSTP unless it imposes a more than de
minimis penalty on the earnings portion
of any distribution from the program that
is not—
(i) Used exclusively for qualified
higher education expenses of the desig-
nated beneficiary;
(ii) Made on account of the death or
disability of the designated beneficiary;
(iii) Made on account of the receipt of a
scholarship (or allowance or payment de-
scribed in section 135(d)(1)(B) or (C)) by
the designated beneficiary to the extent
the amount of the distribution does not
exceed the amount of the scholarship, al-
lowance, or payment; or
(iv) A rollover distribution.
(2) More than de minimis penalty—(i)
In general.A penalty is more than de
minimis if it is consistent with a program
intended to assist individuals in saving
exclusively for qualified higher education
expenses. Except as provided in para-
graph (e)(2)(ii) of this section, whether
any particular penalty is more than de
minimisdepends on the facts and circum-
stances of the particular program, includ-
ing the extent to which the penalty offsets
the federal income tax benefit from hav-
ing deferred income tax liability on the
earnings portion of any distribution.
(ii) Safe harbor.A penalty imposed on
the earnings portion of a distribution is
more than de minimisif it is equal to or
greater than 10 percent of the earnings.
(3) Separate distributions.For pur-
poses of applying the penalty, any single
distribution described in paragraph (e)(1)
of this section will be treated as a separate
distribution and not part of a single aggre-
gated annual distribution by the program,
notwithstanding the rules under §1.529–3
and §1.529–4.
(4) Procedures for verifying use of dis-
tributions and imposing and collecting
penalties—(i) In general.To be treated as
imposing a more than de minimis penalty
as required in paragraph (e)(1) of this sec-
tion, a program must implement practices
and procedures to identify whether a dis-
tribution is subject to a penalty and collect
any penalty that is due.
(ii) Safe harbor.A program that falls
within the safe harbor described in para-
graphs (e)(4)(ii)(A) through (E) of this
section will be treated as implementing
practices and procedures to identify
whether a more than de minimis penalty
must be imposed as required in paragraph
(e)(1) of this section.
(A) Distributions treated as payments
of qualified higher education expenses.
The program treats distributions as being
used to pay for qualified higher education
expenses only if—
(1) The distribution is made directly to
an eligible educational institution;
(2) The distribution is made in the form
of a check payable to both the designated
beneficiary and the eligible educational
institution;
(3) The distribution is made after the
designated beneficiary submits substanti-
ation to show that the distribution is a re-
imbursement for qualified higher educa-
tion expenses that the designated
beneficiary has already paid and the pro-
gram has a process for reviewing the va-
lidity of the substantiation prior to the dis-
tribution; or
(4) The designated beneficiary certifies
prior to the distribution that the distribu-
tion will be expended for his or her quali-
fied higher education expenses within a
reasonable time after the distribution; the
program requires the designated benefi-
ciary to provide substantiation of payment
of qualified higher education expenses
within 30 days after making the distribu-
tion and has a process for reviewing the
substantiation; and the program retains an
account balance that is large enough to
collect any penalty owed on the distribu-
tion if valid substantiation is not pro-
duced.
(B) Treatment of all other distributions.
The program collects a penalty on all dis-
tributions not treated as made to pay qual-
ified higher education expenses except
where—
(1) Prior to the distribution the program
receives written third party confirmation
that the designated beneficiary has died or
become disabled or has received a schol-
arship (or allowance or payment de-
scribed in section 135(d)(1)(B) or (C)) in
an amount equal to the distribution; or
(2) Prior to the distribution the program
receives a certification from the account
owner that the distribution is being made
because the designated beneficiary has
died or become disabled or has received a
scholarship (or allowance or payment de-
scribed in section 135(d)(1)(B) or (C)) re-
ceived by the designated beneficiary (and
the distribution is equal to the amount of
the scholarship, allowance, or payment)
and the program withholds and reserves a
portion of the distribution as a penalty.
Any penalty withheld by the program
may be refunded after the program re-
ceives third party confirmation that the
designated beneficiary has died or be-
come disabled or has received a scholar-
ship or allowance (or payment described
in section 135(d)(1)(B) or (C)).
(C) Refunds of penalties.The program
will refund a penalty collected on a distri-
bution only after the designated benefi-
ciary substantiates that he or she had qual-
ified higher education expenses greater
than or equal to the distribution, and the
program has reviewed the substantiation.
(D) Documentation of amounts re-
funded and not used for qualified higher
education expenses.The program re-
quires the distributee, defined in §1.529–
1(c), to provide a signed statement identi-
fying the amount of any refunds received
from eligible educational institutions at
the end of each year in which distribu-
tions for qualified higher education ex-
penses were made and of the next year.
(E) Procedures to collect penalty.The
program collects required penalties by re-
taining a sufficient balance in the account
to pay the amount of penalty, withholding
an amount equal to the penalty from a dis-
tribution, or collecting the penalty on a
State income tax return.
(f) Separate accounting.A program
shall not be treated as a QSTP unless it
provides separate accounting for each
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1998–37 I.R.B.43September 14, 1998
designated beneficiary. Separate account-
ing requires that contributions for the ben-
efit of a designated beneficiary and any
earnings attributable thereto must be allo-
cated to the appropriate account. If a pro-
gram does not ordinarily provide each ac-
count owner an annual account statement
showing the total account balance, the in-
vestment in the account, earnings, and
distributions from the account, the pro-
gram must give this information to the ac-
count owner or designated beneficiary
upon request. In the case of a prepaid ed-
ucational arrangement or contract de-
scribed in section 529(b)(1)(A)(i) the total
account balance may be shown as credits
or units of benefits instead of fair market
value.
(g) No investment direction.A program
shall not be treated as a QSTP unless it
provides that any account owner in, or
contributor to, or designated beneficiary
under, such program may not directly or
indirectly direct the investment of any
contribution to the program or directly or
indirectly direct the investment of any
earnings attributable to contributions. A
program does not violate this requirement
if a person who establishes an account
with the program is permitted to select
among different investment strategies de-
signed exclusively by the program, only
at the time the initial contribution is made
establishing the account. A program will
not violate the requirement of this para-
graph (g) if it permits a person who estab-
lishes an account to select between a pre-
paid educational services account and an
educational savings account. A program
also will not violate the requirement of
this paragraph (g) merely because it per-
mits its board members, its employees, or
the board members or employees of a
contractor it hires to perform administra-
tive services to purchase tuition credits or
certificates or make contributions as de-
scribed in paragraph (c) of this section.
(h) No pledging of interest as security.
A program shall not be treated as a QSTP
unless the terms of the program or a state
statute or regulation that governs the pro-
gram prohibit any interest in the program
or any portion thereof from being used as
security for a loan. This restriction in-
cludes, but is not limited to, a prohibition
on the use of any interest in the program
as security for a loan used to purchase
such interest in the program.
(i) Prohibition on excess contribu-
tions—(1) In general.A program shall not
be treated as a QSTP unless it provides ad-
equate safeguards to prevent contributions
for the benefit of a designated beneficiary
in excess of those necessary to provide for
the qualified higher education expenses of
the designated beneficiary.
(2) Safe harbor.A program satisfies
this requirement if it will bar any addi-
tional contributions to an account as soon
as the account reaches a specified account
balance limit applicable to all accounts of
designated beneficiaries with the same
expected year of enrollment. The total
contributions may not exceed the amount
determined by actuarial estimates that is
necessary to pay tuition, required fees,
and room and board expenses of the des-
ignated beneficiary for five years of un-
dergraduate enrollment at the highest cost
institution allowed by the program.
§1.529–3 Income tax treatment of
distributees.
(a) Taxation of distributions—(1) In
general.Any distribution, other than a
rollover distribution, from a QSTP ac-
count must be included in the gross in-
come of the distributee to the extent of the
earnings portion of the distribution and to
the extent not excluded from gross in-
come under any other provision of chap-
ter 1 of the Internal Revenue Code. If any
amount of a distribution is forfeited under
a QSTP as required by §1.529–2(e), this
amount is neither included in the gross in-
come of the distributee nor deductible by
the distributee.
(2) Rollover distributions.No part of a
rollover distribution is included in the in-
come of the distributee. Following the
rollover distribution, that portion of the
rollover amount that constituted invest-
ment in the account, defined in §1.529–
1(c), of the account from which the distri-
bution was made is added to the invest-
ment in the account of the account that re-
ceived the distribution. That portion of
the rollover amount that constituted earn-
ings of the account that made the distribu-
tion is added to the earnings of the ac-
count that received the distribution.
(b) Computing taxable earnings—(1)
Amount of taxable earnings in a distribu-
tion—(i) Educational savings account.In
the case of an educational savings account,
the earnings portion of a distribution is
equal to the product of the amount of the
distribution and the earnings ratio, defined
in §1.529–1(c). The return of investment
portion of the distribution is equal to the
amount of the distribution minus the earn-
ings portion of the distribution.
(ii) Prepaid educational services ac-
count.In the case of a prepaid educa-
tional services account, the earnings por-
tion of a distribution is equal to the value
of the credits, hours, or other units of edu-
cation distributed at the time of distribu-
tion minus the return of investment por-
tion of the distribution. The value of the
credits, hours, or other units of education
may be based on the tuition waived or the
cash distributed. The return of investment
portion of the distribution is determined
by dividing the investment in the account
at the end of the year in which the distrib-
ution is made by the number of credits,
hours, or other units of education in the
account at the end of the calendar year
(including all credits, hours, or other units
of education distributed during the calen-
dar year), and multiplying that amount by
the number of credits, hours, or other
units of education distributed during the
current calendar year.
(2) Adjustment for programs that
treated distributions and earnings in a
different manner for years beginning be-
fore January 1, 1999. For calendar years
beginning after December 31, 1998, a
QSTP must treat taxpayers as recovering
investment in the account and earnings
ratably with each distribution. Prior to
January 1, 1999, a program may have
treated distributions in a different manner
and reported them to taxpayers accord-
ingly. In order to adjust to the method de-
scribed in this section, if distributions
were treated as coming first from the in-
vestment in the account, the QSTP must
adjust the investment in the account by
subtracting the amount of the investment
in the account previously treated as dis-
tributed. If distributions were treated as
coming first from earnings, the QSTP
must adjust the earnings portion of the ac-
count by subtracting the amount of earn-
ings previously treated as distributed.
After the adjustment is made, the invest-
ment in the account is recovered ratably
in accordance with this section. If no pre-
vious distribution was made but earnings
were treated as taxable to the taxpayer in
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September 14, 1998441998–37 I.R.B.
the year they were allocated to the ac-
count, the earnings treated as already tax-
able are treated as additional contribu-
tions and added to the investment in the
account.
(3) Examples.The application of this
paragraph (b) is illustrated by the follow-
ing examples. The rounding convention
used (rounding to three decimal places) in
these examples is for purposes of illustra-
tion only. A QSTP may use another
rounding convention as long as it consis-
tently applies the convention. The exam-
ples are as follows:
Example 1. (i) In 1998, an individual, A, opens a
prepaid educational services account with a QSTP on
behalf of a designated beneficiary. Through the ac-
count A purchases units of education equivalent to
eight semesters of tuition for full-time attendance at a
public four-year university covered by the QSTP. A
contributes $16,000 that includes payment of pro-
cessing fees to the QSTP. In 2011 the designated
beneficiary enrolls at a public four-year university.
The QSTP makes distributions on behalf of the des-
ignated beneficiary to the university in August for the
fall semester and in December for the spring semes-
ter. Tuition for full-time attendance at the university
is $7,500 per academic year in 2011 and 2012,
$7,875 for the academic year in 2013, and $8,200 for
the academic year in 2014. The only expense cov-
ered by the QSTP distribution is tuition for four acad-
emic years. The calculations are as follows:
2011
Investment in the account
as of 12/31/2011 . . . . . . . . . . . . . .=$16,000
Units in account . . . . . . . . . . . . . . . .=8
Per unit investment . . . . . . . . . . . . .=$ 2,000
Units distributed in 2011 . . . . . . . . .=2
Investment portion of distribution
in 2011 ($2,000 per unit 3
2 units) . . . . . . . . . . . . . . . . . . . . . .=$ 4,000
Current value of two units
distributed in 2011 . . . . . . . . . . . . .=$ 7,500
Earnings portion of distribution
in 2011 ($7,500 - $4,000) . . . . . . .=$ 3,500
2012
Investment in the account as of
12/31/2012 ($16,000–$4,000) . . . .=$12,000
Units in account . . . . . . . . . . . . . . . .=6
Per unit investment . . . . . . . . . . . . .=$ 2,000
Units distributed in 2012 . . . . . . . . .=2
Investment portion of distribution
in 2012 ($2,000 per unit 3
2 units) . . . . . . . . . . . . . . . . . . . . ..=$ 4,000
Current value of two units
distributed in 2012 . . . . . . . . . . . .=$ 7,500
Earnings portion of distribution
in 2012 ($7,500–$4,000) . . . . . . . .=$ 3,500
2013
Investment in the account as of
12/31/2013 ($12,000–$4000) . . . .=$ 8,000
Units in account . . . . . . . . . . . . . . . .=4
Per unit investment . . . . . . . . . . . . .=$ 2,000
Units distributed in 2013 . . . . . . . . . .=2
Investment portion of distribution
in 2013 ($2,000 per unit 32 units)=$ 4,000
Current value of two units
distributed in 2013 . . . . . . . . . . . . .=$ 7,875
Earnings portion of distribution
in 2013 ($7,875–$4,000) . . . . . . . .=$ 3,875
2014
Investment in the account as of
12/31/2014 ($8,000–$4000) . . . . .=$ 4,000
Units in account . . . . . . . . . . . . . . . .=2
Per unit investment . . . . . . . . . . . . . .=$ 2,000
Units distributed in 2014 . . . . . . . . . .=2
Investment portion of distribution
in 2014 ($4,000 per unit 32 units)=$ 4,000
Current value of two units
distributed in 2014 . . . . . . . . . . . . .=$ 8,200
Earnings portion of distribution
in 2014 ($8,200–$4,000) . . . . . . . .=$ 4,200
12/31/2014(after distributions)
Investment in the account as of
12/31/2014 ($4,000–$4000) . . . . .=0
(ii) In each year the designated beneficiary in-
cludes in his or her gross income the earnings por-
tion of the distribution for tuition.
Example 2.(i) In 1998, an individual, B, opens a
college savings account with a QSTP on behalf of a
designated beneficiary. B contributes $18,000 to the
account that includes payment of processing fees to
the QSTP. On December 31, 2011, the total balance
in the account for the benefit of the designated bene-
ficiary is $30,000 (including distributions made dur-
ing the year 2011). In 2011 the designated benefi-
ciary enrolls at a four-year university. The QSTP
makes distributions on behalf of the designated bene-
ficiary to the university in August for the fall semes-
ter and in December for the spring semester. Tuition
for full-time attendance at the university is $7,500
per academic year in 2011 and 2012, $7,875 for the
academic year in 2013, and $8,200 for the academic
year in 2014. The only expense covered by the
QSTP distributions is tuition for four academic years.
On the last day of the calendar year the account is al-
located earnings of 5% on the total account balance
on that day. Under the terms of the QSTP, a penalty
of 15% is applied to the earnings not used to pay tu-
ition. The calculations are as follows:
2011
Investment in the account . . . . . . . .=$18,000
Total account balance
as of 12/31/2011 . . . . . . . . . . . . .=$30,000
Earnings as of 12/31/2011 . . . . . . .=$12,000
Distributions in 2011 . . . . . . . . . . .= $ 7,500
Earnings ratio for 2011
($12,000 4$30,000) . . . . . . . . . .=40%
Earnings portion of distributions
in 2011 ($7,500 3.4) . . . . . . . . .= $ 3,000
Return of investment portion
of distributions in 2011
($7,500–$3,000) . . . . . . . . . . . . .= $ 4,500
2012
Investment in the account as of
12/31/2012 ($18,000–$4,500) . . .=$13,500
Total account balance as of 12/31/12
[($30,000–$7,500) 3105%] . . . .=$23,625
Earnings as of 12/31/2012 . . . . . . .=$10,125
Distributions in 2012 . . . . . . . . . . .= $ 7,500
Earnings ratio for 2012
($10,125 4$23,625) . . . . . . . . . . =42.9%
Earnings portion of distributions
in 2012 ($7,500 3.429) . . . . . . . = $ 3,217.50
Return of investment portion
of distributions in 2012
($7,500–$3,217.50) . . . . . . . . . . . = $ 4,282.50
2013
Investment in the account as of
12/31/2013 ($13,500–$4,282.50) . = $ 9,217.50
Total account balance as of 12/31/13
[($23,625–$7,500) 3105%] . . . . = $16,931.25
Earnings as of 12/31/2013 . . . . . . . = $ 7,713.75
Distributions in 2013 . . . . . . . . . . . = $ 7,875
Earnings ratio for 2013
($7,713.75 4$16,931.25) . . . . . . =45.6%
Earnings portion of distributions
in 2013 ($7,875 3.456) . . . . . . . = $ 3,591
Return of investment portion
of distributions in 2013
($7,875–$3,591) . . . . . . . . . . . . . = $ 4,284
2014
Investment in the account as of
12/31/2014 ($9,217.50–$4,284) . . = $ 4,933.50
Total account balance as of 12/31/14
[($16,931.25–$7,875) 3105%] . = $ 9,509.06
Earnings as of 12/31/2014 . . . . . . . = $ 4,575.56
Distributions in 2014 for qualified
higher education expenses
(QHEE) . . . . . . . . . . . . . . . . . . . . = $ 8,200
Distributions in 2014 not for qualified
higher education expenses
(Non-QHEE) . . . . . . . . . . . . . . . . = $ 1,309.06
Total distributions . . . . . . . . . . . . . . = $ 9,509.06
Earnings portion of QHEE
distribution in 2014
[($8,200 4$9,509.06) 3
$4,575.56] . . . . . . . . . . . . . . . . . . = $ 3,945.68
Return of investment portion of
QHEE distribution in 2014 . . . . . = $ 4,254.32
Earnings portion of Non-QHEE
distribution subject to penalty
[($1,309.06 4$9,509.06) 3
$4,575.56)] . . . . . . . . . . . . . . . . . = $ 629.89
Return of investment portion of
non-QHEE distribution in 2014 . . = $ 679.17
(ii) In years 2011 through 2013 the designated
beneficiary includes in gross income the earnings
portion of the distributions for tuition. In year 2014
the designated beneficiary includes in gross income
the earnings portion of the distribution for tuition,
$3,945.68, plus the earnings portion of the distribu-
tion that was not used for tuition after reduction for
the penalty, i.e. $535.41 ($629.89 minus a 15%
penalty of $94.48).
(c) Change in designated bene-
ficiaries—(1) General rule.A change in
the designated beneficiary of a QSTP ac-
count is not treated as a distribution if the
new designated beneficiary is a member
of the family of the transferor designated
beneficiary. However, any change of des-
ignated beneficiary not described in the
preceding sentence is treated as a distribu-
tion to the account owner, provided the
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1998–37 I.R.B.45September 14, 1998
account owner has the authority to change
the designated beneficiary. For rules re-
lated to a change in the designated benefi-
ciary pursuant to a rollover distribution
see §§1.529–1(c) and 1.529–3(a)(2).
(2) Scholarship program.Notwith-
standing paragraph (c)(1) of this section,
the requirement that the new beneficiary
be a member of the family of the trans-
feror beneficiary shall not apply to a
change in designated beneficiary of an in-
terest in a QSTP account purchased by a
State or local government or an organiza-
tion described in section 501(c)(3) as part
of a scholarship program.
(d) Aggregation of accounts. If an indi-
vidual is a designated beneficiary of more
than one account under a QSTP, the
QSTP shall treat all contributions and
earnings as allocable to a single account
for purposes of calculating the earnings
portion of any distribution from that
QSTP. For purposes of determining the
effect of the distribution on each account,
the earnings portion and return of invest-
ment in the account portion of the distrib-
ution shall be allocated pro rata among
the accounts based on total account value
as of the close of the current calendar
year.
§1.529–4 Time, form, and manner of
reporting distributions from QSTPs and
backup withholding.
(a) Taxable distributions.The portion
of any distribution made during the calen-
dar year by a QSTP that represents earn-
ings shall be reported by the payor as de-
scribed in this section.
(b) Requirement to file return—(1)
Form of return.A payor must file a return
required by this section on Form 1099–G.
A payor may use forms containing provi-
sions similar to Form 1099–G if it com-
plies with applicable revenue procedures
relating to substitute Forms 1099. A payor
must file a separate return for each distrib-
utee who receives a taxable distribution.
(2) Payor.For purposes of this sec-
tion, the term “payor” means the officer
or employee having control of the pro-
gram, or their designee.
(3) Information included on return.A
payor must include on Form 1099–G—
(i) The name, address, and taxpayer
identifying number (TIN) (as defined in
section 7701(a)(41)) of the payor;
(ii) The name, address, and TIN of the
distributee;
(iii) The amount of earnings distributed
to the distributee in the calendar year; and
(iv) Any other information required by
Form 1099–G or its instructions.
(4) Time and place for filing return.A
payor must file any return required by this
paragraph (b) on or before February 28 of
the year following the calendar year in
which the distribution is made. A payor
must file the return with the IRS office
designated in the instructions for Form
1099–G.
(5) Returns required on magnetic
media. If a payor is required to file at
least 250 returns during the calendar year,
the returns must be filed on magnetic
media. If a payor is required to file fewer
than 250 returns, the prescribed paper
form may be used.
(6) Extension of time to file return. For
good cause, the Commissioner may grant
an extension of time in which to file Form
1099-G for reporting taxable earnings
under section 529. The application for
extension of time must be submitted in
the manner prescribed by the Commis-
sioner.
(c) Requirement to furnish statement to
the distributee—(1) In general.A payor
that must file a return under paragraph (b)
of this section must furnish a statement to
the distributee. The requirement to fur-
nish a statement to the distributee will be
satisfied if the payor provides the distrib-
utee with a copy of the Form 1099–G (or
a substitute statement that complies with
applicable revenue procedures) contain-
ing all the information filed with the In-
ternal Revenue Service and all the leg-
ends required by paragraph (c)(2) of this
section by the time required by paragraph
(c)(3) of this section.
(2) Information included on statement.
A payor must include on the statement
that it must furnish to the distributee—
(i) The information required under
paragraph (b)(3) of this section;
(ii) The telephone number of a person
to contact about questions pertaining to
the statement; and
(iii) A legend as required on the official
Internal Revenue Service Form 1099–G.
(3) Time for furnishing statement.A
payor must furnish the statement required
by paragraph (c)(1) of this section to the
distributee on or before January 31 of the
year following the calendar year in which
the distribution was made. The statement
will be considered furnished to the dis-
tributee if it is mailed to the distributee’s
last known address.
(4) Extension of time to furnish state-
ment.For good cause, the Commissioner
may grant an extension of time to furnish
statements to distributees of taxable earn-
ings under section 529. The application
for extension of time must be submitted in
the manner prescribed by the Commis-
sioner.
(d) Backup withholding.Distributions
from a QSTP are not subject to backup
withholding.
(e) Effective date.The reporting re-
quirements set forth in this section apply
to distributions made after December 31,
1998.
§1.529–5 Estate, gift, and generation-
skipping transfer tax rules relating to
qualified State tuition programs.
(a) Gift and generation-skipping trans-
fer tax treatment of contributions after
August 20, 1996, and before August 6,
1997. A contribution on behalf of a desig-
nated beneficiary to a QSTP (or to a pro-
gram that meets the transitional rule re-
quirements under §1.529–6(b)) after
August 20, 1996, and before August 6,
1997, is not treated as a taxable gift. The
subsequent waiver of qualified higher ed-
ucation expenses of a designated benefi-
ciary by an educational institution (or the
subsequent payment of higher education
expenses of a designated beneficiary to an
educational institution) under a QSTP is
treated as a qualified transfer under sec-
tion 2503(e) and is not treated as a trans-
fer of property by gift for purposes of sec-
tion 2501. As such, the contribution is not
subject to the generation-skipping transfer
tax imposed by section 2601.
(b) Gift and generation-skipping trans-
fer tax treatment of contributions after
August 5, 1997—(1) In general.A contri-
bution on behalf of a designated benefi-
ciary to a QSTP (or to a program that
meets the transitional rule requirements
under §1.529–6(b)) after August 5, 1997,
is a completed gift of a present interest in
property under section 2503(b) from the
person making the contribution to the des-
ignated beneficiary. As such, the contri-
bution is eligible for the annual gift tax
IRB 1998-37 9/10/98 4:04 PM Page 45

September 14, 1998461998–37 I.R.B.
exclusion provided under section
2503(b). The portion of a contribution
excludible from taxable gifts under sec-
tion 2503(b) also satisfies the require-
ments of section 2642(c)(2) and, there-
fore, is also excludible for purposes of the
generation-skipping transfer tax imposed
under section 2601. A contribution to a
QSTP after August 5, 1997, is not treated
as a qualified transfer within the meaning
of section 2503(e).
(2) Contributions that exceed the an-
nual exclusion amount.(i) Under section
529(c)(2)(B) a donor may elect to take
certain contributions to a QSTP into ac-
count ratably over a five year period in
determining the amount of gifts made
during the calendar year. The provision is
applicable only with respect to contribu-
tions not in excess of five times the sec-
tion 2503(b) exclusion amount available
in the calendar year of the contribution.
Any excess may not be taken into account
ratably and is treated as a taxable gift in
the calendar year of the contribution.
(ii) The election under section
529(c)(2)(B) may be made by a donor and
his or her spouse with respect to a gift
considered to be made one-half by each
spouse under section 2513.
(iii) The election is made on Form 709,
Federal Gift Tax Return, for the calendar
year in which the contribution is made.
(iv) If in any year after the first year of
the five year period described in section
529(c)(2)(B), the amount excludible under
section 2503(b) is increased as provided in
section 2503(b)(2), the donor may make
an additional contribution in any one or
more of the four remaining years up to the
difference between the exclusion amount
as increased and the original exclusion
amount for the year or years in which the
original contribution was made.
(v) Example.The application of this
paragraph (b)(2) is illustrated by the fol-
lowing example:
Example.In Year 1, when the annual exclusion
under section 2503(b) is $10,000, P makes a contri-
bution of $60,000 to a QSTP for the benefit of P’s
child, C. P elects under section 529(c)(2)(B) to ac-
count for the gift ratably over a five year period be-
ginning with the calendar year of contribution. P is
treated as making an excludible gift of $10,000 in
each of Years 1 through 5 and a taxable gift of
$10,000 in Year 1. In Year 3, when the annual exclu-
sion is increased to $12,000, P makes an additional
contribution for the benefit of C in the amount of
$8,000. P is treated as making an excludible gift of
$2,000 under section 2503(b); the remaining $6,000
is a taxable gift in Year 3.
(3) Change of designated beneficiary
or rollover.(i) A transfer which occurs by
reason of a change in the designated bene-
ficiary, or a rollover of credits or account
balances from the account of one benefi-
ciary to the account of another benefi-
ciary, is not a taxable gift and is not sub-
ject to the generation-skipping transfer
tax if the new beneficiary is a member of
the family of the old beneficiary, as de-
fined in §1.529–1(c), and is assigned to
the same generation as the old benefi-
ciary, as defined in section 2651.
(ii) A transfer which occurs by reason
of a change in the designated beneficiary,
or a rollover of credits or account bal-
ances from the account of one beneficiary
to the account of another beneficiary, will
be treated as a taxable gift by the old ben-
eficiary to the new beneficiary if the new
beneficiary is assigned to a lower genera-
tion than the old beneficiary, as defined in
section 2651, regardless of whether the
new beneficiary is a member of the family
of the old beneficiary. The transfer will
be subject to the generation-skipping
transfer tax if the new beneficiary is as-
signed to a generation which is two or
more levels lower than the generation as-
signment of the old beneficiary. The five
year averaging rule described in para-
graph (b)(2) of this section may be ap-
plied to the transfer.
(iii) Example. The application of this
paragraph (b)(3) is illustrated by the fol-
lowing example:
Example.In Year 1, P makes a contribution to a
QSTP on behalf of P’s child, C. In Year 4, P directs
that a distribution from the account for the benefit of
C be made to an account for the benefit of P’s grand-
child, G. The rollover distribution is treated as a
taxable gift by C to G, because, under section 2651,
G is assigned to a generation below the generation
assignment of C.
(c) Estate tax treatment for estates of
decedents dying after August 20, 1996,
and before June 9, 1997. The gross estate
of a decedent dying after August 20,
1996, and before June 9, 1997, includes
the value of any interest in any QSTP
which is attributable to contributions
made by the decedent to such program on
behalf of a designated beneficiary.
(d) Estate tax treatment for estates of
decedents dying after June 8, 1997—(1)
In general.Except as provided in para-
graph (d)(2) of this section, the gross es-
tate of a decedent dying after June 8,
1997, does not include the value of any
interest in a QSTP which is attributable to
contributions made by the decedent to
such program on behalf of any designated
beneficiary.
(2) Excess contributions.In the case
of a decedent who made the election
under section 529(c)(2)(B) and paragraph
(b)(3)(i) of this section who dies before
the close of the five year period, that por-
tion of the contribution allocable to cal-
endar years beginning after the date of
death of the decedent is includible in the
decedent’s gross estate.
(3) Designated beneficiary decedents.
The gross estate of a designated benefi-
ciary of a QSTP includes the value of any
interest in the QSTP.
§1.529–6 Transition rules.
(a) Effective date.Section 529 is effec-
tive for taxable years ending after August
20, 1996, and applies to all contracts en-
tered into or accounts opened on August
20, 1996, or later.
(b) Programs maintained on August
20, 1996. Transition relief is available to
a program maintained by a State under
which persons could purchase tuition
credits, certification or similar rights on
behalf of, or make contributions for edu-
cational expenses of, a designated benefi-
ciary if the program was in existence on
August 20, 1996. Such program must
meet the requirements of a QSTP before
the later of August 20, 1997, or the first
day of the first calendar quarter after the
close of the first regular session of the
State legislature that begins after August
20, 1996. If a State has a two-year leg-
islative session, each year of such session
shall be deemed to be a separate regular
session of the State legislature. The pro-
gram, as in effect on August 20, 1996,
shall be treated as a QSTP with respect to
contributions (and earnings allocable
thereto) pursuant to contracts entered into
under the program. This relief is avail-
able for contributions (and earnings allo-
cable thereto) made before, and the con-
tracts entered into before, the first date on
which the program becomes a QSTP. The
provisions of the program, as in effect on
August 20, 1996, shall apply in lieu of
IRB 1998-37 9/10/98 4:04 PM Page 46

section 529(b) with respect to such contri-
butions and earnings. A program shall be
treated as meeting the transition rule if it
conforms to the requirements of section
529, §§1.529–1 through 1.529–5 and this
section, by the date this document is pub-
lished as final regulations in the Federal
Register.
(c) Retroactive effect.No income tax
liability will be asserted against a QSTP
for any period before the program meets
the requirements of section 529, §§1.529–
1 through 1.529–5 and this section, if the
program qualifies for the transition relief
described in paragraph (b) of this section.
(d) Contracts entered into and ac-
counts opened before August 20, 1996—
(1) In general.A QSTP may continue to
maintain agreements in connection with
contracts entered into and accounts
opened before August 20, 1996, without
jeopardizing its tax exempt status even if
maintaining the agreements is contrary to
section 529(b) provided that the QSTP
operates in accordance with the restric-
tions contained in this paragraph (d).
However, distributions made by the
QSTP, regardless of the terms of any
agreement executed before August 20,
1996, are subject to tax according to the
rules of §1.529–3 and subject to the re-
porting requirements of §1.529–4.
(2) Interest in program pledged as se-
curity for a loan.An interest in the pro-
gram, or a portion of an interest in the
program, may be used as security for a
loan if the contract giving rise to the inter-
est was entered into or account was
opened prior to August 20, 1996 and the
agreement permitted such a pledge.
(3) Member of the family. In the case
of an account opened or a contract entered
into before August 20, 1996, the rules re-
garding a change in beneficiary, including
the rollover rule in §1.529–3(a) and the
gift tax rule in §1.529–5(b)(3), shall be
applied by treating any transferee benefi-
ciary permitted under the terms of the ac-
count or contract as a member of the fam-
ily of the transferor beneficiary.
(4) Eligible educational institution. In
the case of an account opened or contract
entered into before August 20, 1996, an
eligible educational institution is an edu-
cational institution in which the benefi-
ciary may enroll under the terms of the
account or contract.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
August 21, 1998, 8:45 a.m., and published in the
issue of the Federal Register for 63 F.R. 45019)
1998–37 I.R.B.47September 14, 1998
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September 14, 1998481998–37 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 1998-37 9/10/98 4:04 PM Page 48

1998–37 I.R.B.49September 14, 1998
Numerical Finding List
1
Bulletins 1998–29 through 36
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
98–77, 1998–34 I.R.B.30
98–78, 1998–34 I.R.B.30
98–79, 1998–34 I.R.B.31
98–80, 1998–34 I.R.B.32
98–81, 1998–36 I.R.B.35
98–82, 1998–35 I.R.B. 17
98–83, 1998–36 I.R.B. 36
Court Decisions:
2063, 1998–36 I.R.B. 13
Notices:
98–36, 1998–29 I.R.B. 8
98–37, 1998–30 I.R.B.13
98–38, 1998–34 I.R.B.7
98–39, 1998–33 I.R.B.11
98–40, 1998–35 I.R.B. 7
98–41, 1998–33 I.R.B.12
98–42, 1998–33 I.R.B.12
98–43, 1998–33 I.R.B.13
98–44, 1998–34 I.R.B.7
98–45, 1998–35 I.R.B.7
98–46, 1998–36 I.R.B. 21
Railroad Retirement Quarterly Rate:
1998–31 I.R.B. 7
Proposed Regulations:
REG–209446–82, 1998–36 I.R.B. 24
REG–209813–96, 1998–35 I.R.B. 9
REG–246256–96, 1998–34 I.R.B.9
REG–104641–97, 1998–29 I.R.B. 9
REG–115446–97, 1998–36 I.R.B. 23
REG–116608–97, 1998–29 I.R.B. 12
REG–119227–97, 1998–30 I.R.B. 13
REG–110332–98, 1998–33 I.R.B.18
REG–110403–98, 1998–29 I.R.B.11
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
98–45, 1998–34 I.R.B.8
98–46, 1998–36 I.R.B. 21
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
Revenue Rulings—Continued
98–39, 1998–33 I.R.B.4
98–40, 1998–33 I.R.B.4
98–41, 1998–35 I.R.B.6
98–42, 1998–35 I.R.B. 5
98–43, 1998–36 I.R.B. 9
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
8776, 1998–33 I.R.B.6
8777, 1998–34 I.R.B.4
8778, 1998–36 I.R.B. 4
8779, 1998–36 I.R.B. 11
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 1998-37 9/10/98 4:04 PM Page 49

September 14, 1998501998–37 I.R.B.
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–29 through 36
*Denotes entry since last publication
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5
67–301
Modified by
98–41, 1998–35 I.R.B. 6
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–91
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5
97–37
Obsoleted by
98–39, 1998–33 I.R.B. 4
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 1998-37 9/10/98 4:04 PM Page 50

IRB 1998-37 9/10/98 4:05 PM Page 51

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
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IRB 1998-37 9/10/98 4:05 PM Page 52