Internal Revenue Bulletin 1998-7 (PDF rendition): IRS Revenue Rulings

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

INCOME TAX
T.D. 8745, page 15.
Final regulations under section 280B of the Code relate to
deductions available upon demolition of a building.
T.D. 8746, page 4.
Final regulations under section 171 of the Code relate to the
federal income tax treatment of bond premium and bond is-
suance premium.
T.D. 8747, page 18.
Final regulations under section 1396 of the Code relate to
the period employers may use in computing the empower-
ment zone employment credit.
T.D. 8749, page 16.
Final regulations under section 1202 of the Code relate to
the 50-percent exclusion for gain from certain small busi-
ness stock.
EXEMPT ORGANIZATIONS
Rev. Proc. 98–19, page 30.
Organizations excepted from reporting lobbying ex-
penditures.This procedure provides guidance to organiza-
tions exempt from taxation under Code section 501(a) on
the application of amendments made to Code sections
162(e) and 6033(e) by section 13222 of the Omnibus Bud-
get Reconciliation Act of 1993. Rev. Procs. 95–35 and
95–35A superseded.
Announcement 98–10, page 35.
A list is given of organizations now classified as private foun-
dations.
GIFT TAX
Rev. Rul. 98–8, page 24.
Disposition of qualifying income interest.If a surviving
spouse acquires the remainder interest in a trust subject to
a QTIP election under section 2056(b)(7) of the Code in con-
nection with the transfer by the surviving spouse of property
or cash to the holder of the remainder interest, the surviving
spouse makes a gift under sections 2511, 2512, and 2519
of the Code.
T.D. 8743, page 26.
Final regulations under section 2702 of the Code permit the
reformation of a personal residence trust or a qualified per-
sonal residence trust in order to comply with the applicable
requirements for such trusts.
T.D. 8744, page 20.
Final regulations under section 2518 of the Code relate to
the treatment of disclaimers for estate and gift tax pur-
poses.
EMPLOYMENT TAX
Announcement 98–9, page 35.
This announcement provides corrections to the 1998 Circu-
lar E, Employer’s Tax Guide (Publication 15).
ADMINISTRATIVE
Rev. Proc. 98–20, page 32.
This procedure sets forth the acceptable form of written as-
surances that will except the sale or exchange of a principal
residence from information reporting.
Internal Revenue
bbuulllleettiinn
Bulletin No. 1998–7
February 17, 1998
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 40.
Announcement of Disbarments and Suspensions begins on page 37.

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

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

February 17, 199841998–7 I.R.B.
Section 121.—Exclusion of Gain
From Sale of Principal Residence
Guidance is provided on the acceptable form of
written assurances (certification) that a real estate
reporting person must obtain from the seller of a
principal residence to except such sale or exchange
from the information reporting requirements for real
estate transactions under section 6045(e)(5). See
Rev. Proc. 98–20, page 32.
Section 162.—Trade or Business
Expenses
26 CFR 1.162–20: Expenditures attributable to
lobbying, political campaigns, attempts to influence
legislation, etc., and certain advertising.
This revenue procedure provides guidance to or-
ganizations exempt from taxation under § 501(a) of
the Internal Revenue Code of 1986 on the applica-
tion of amendments made to §§ 162(e) and 6033(e)
by § 13222 of the Omnibus Budget Reconciliation
Act of 1993. The revenue procedure identifies cer-
tain tax-exempt organizations that will be treated as
satisfying the requirements of § 6033(e)(3). Those
organizations will not be subject to the reporting and
notice requirements of § 6033(e)(1) or the tax im-
posed by § 6033(e)(2). Procedures for other exempt
organizations to establish that they satisfy the re-
quirements of § 6033(e)(3) are also provided. Rev.
Proc. 95–35, 1995–2 C.B. 391, and Rev. Proc.
95–35A, 1995–2 C.B. 392, are superseded. See Rev.
Proc. 98–19, page 30.
Section 171.—Amortizable Bond
Premium
26 CFR 1.171: Bond premium.
T.D. 8746
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Amortizable Bond Premium
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the federal in-
come tax treatment of bond premium and
bond issuance premium. The regulations
reflect changes to the law made by the
Tax Reform Act of 1986 and the Techni-
cal and Miscellaneous Revenue Act of
1988. The regulations will provide
needed guidance to holders and issuers of
debt instruments.
DATES: Effective Date:March 2, 1998.
Applicability date:For dates of applic-
ability of the final regulations, s
ee Effec-
tive Datesunder SUPPLEMENTARY
INFORMATION.
FOR FURTHER INFORMATION CON-
TACT: William E. Blanchard, (202) 622-
3950 (not a toll-free number).
SUPPLEMENTARYINFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have been
reviewed and approved by the Office of
Management and Budget in accordance
with the requirements of the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-
1491. Responses to these collections of
information are required by the IRS to de-
termine whether a holder of a bond has
elected to amortize bond premium and
whether an issuer or a holder has changed
its method of accounting for premium.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
The estimated annual burden per re-
spondent varies from 0.25 hours to 0.75
hours, depending on individual circum-
stances, with an estimated average of 0.5
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS
Reports Clearance Officer, T:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget,Attn: Desk
Officer for the Department of Treasury,
Office of Information and Regulatory Af-
fairs, Washington, DC 20503.
Books or records relating to the collec-
tions 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
Sections 1.171-1 through 1.171-4 of
the Income Tax Regulations were promul-
gated in 1957 and last amended in 1968.
In the Tax Reform Act of 1986, section
171(b) was amended to require that bond
premium be amortized by reference to a
constant yield. In the Technical and Mis-
cellaneous Revenue Act of 1988, section
171(e) was amended to require that amor-
tizable bond premium be treated as an off-
set to interest income.
On June 27, 1996, the IRS published a
notice of proposed rulemaking in the Fed-
eral Register(61 F.R. 33396 [FI–48–95,
1996–2 C.B. 449]) relating to the federal
income tax treatment of bond premium
and bond issuance premium. Apublic
hearing was not held because no one re-
quested to speak at the hearing that had
been scheduled for October 23, 1996.
The IRS did receive a few comments on
the proposed regulations. The proposed
regulations, with certain changes to re-
spond to the comments, are adopted as
final regulations.
Explanation of Provisions
In general, bond premium arises when a
holder acquires a bond for more than the
principal amount of the bond. Similarly,
bond issuance premium arises when an is-
suer issues a bond for more than the princi-
pal amount of the bond. Aholder will pur-
chase, and an issuer will issue, a bond for
more than its principal amount when the
stated interest rate on the bond is higher
than the current market yield for the bond.
The holder’s treatment of bond premium
is addressed in §§1.171–1 through
1.171–5. The issuer’s treatment of bond
issuance premium is addressed in §1.163–
13. In each case, the amortization of pre-
mium is based on constant yield principles.
For this reason, the final regulations use
concepts and definitions from the original
issue discount (OID) regulations (in gen-
eral, see §§1.1271–1 through 1.1275–7T).
Determination of Bond Premium
Under the proposed regulations, bond
premium is defined as the excess of a
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

holder’s basis in a bond over the sum of
the remaining amounts payable on the
bond other than payments of qualified
stated interest. The holder generally de-
termines the amount of bond premium as
of the date the holder acquires the bond.
The proposed regulations provide spe-
cial rules that limit a holder’s basis solely
for purposes of determining bond pre-
mium. For example, if a bond is convert-
ible into stock of the issuer at the holder’s
option, for purposes of determining bond
premium, the holder must reduce its basis
in the bond by the value of the conversion
option. This reduction prevents the
holder from inappropriately amortizing
the cost of the embedded conversion
option.
The final regulations adopt the rules of
the proposed regulations for determining
the amount of bond premium, if any, on a
bond. However, in response to com-
ments, the final regulations clarify the de-
termination of basis in the case of a con-
vertible bond acquired in a transferred
basis transaction.
Amortization of Bond Premium
(a) In general
Under section 171, the holder of a tax-
able bond acquired at a premium may
elect to amortize bond premium. The
holder of a tax-exempt bond acquired at a
premium must amortize the premium. As
premium is amortized, the holder’s basis
in the bond is reduced by a corresponding
amount under section 1016(a)(5).
Under the proposed regulations, a
holder amortizes bond premium by offset-
ting qualified stated interest income with
bond premium. An offset is calculated for
each accrual period using constant yield
principles. However, the offset for an ac-
crual period is only taken into account
when the holder takes qualified stated in-
terest into account under the holder’s reg-
ular method of accounting. Thus, a holder
using the cash receipts and disbursements
method of accounting does not take bond
premium into account until a qualified
stated interest payment is received.
The final regulations adopt the rules in
the proposed regulations for amortizing
bond premium.
(b) Excess premium
For certain bonds (for example, bonds
that pay a variable rate of interest or that
provide for an interest holiday), the
amount of bond premium allocable to an
accrual period could exceed the amount
of qualified stated interest allocable to
that period. The proposed regulations ad-
dress this situation by providing that the
excess bond premium is not allowed as a
deduction but is carried forward to future
accrual periods.
Several commentators stated that this
excess premium should be allowable as a
current deduction for the accrual period in
which the excess occurs. In response to
these comments, the final regulations
adopt rules for excess premium that are
similar to the rules for negative adjust-
ments on contingent payment debt instru-
ments and deflation adjustments on infla-
tion-indexed debt instruments. Under the
final regulations, any excess bond pre-
mium allocable to an accrual period is de-
ductible by the holder under section
171(a)(1) for the accrual period. The
amount deductible, however, is limited by
the amount of the holder’s prior income
inclusions on the bond. If any of the ex-
cess bond premium is not deductible
under section 171(a)(1), this amount is
carried forward to the next accrual period
and is treated as bond premium allocable
to that period.
Bonds Subject to Certain Contingencies
If a bond provides for one or more al-
ternative payment schedules, the yield of
the bond cannot be determined without
making assumptions about the actual pay-
ment schedule. The OID regulations pro-
vide rules for making these assumptions.
For example, the rules assume that an is-
suer will exercise a call option if doing so
would minimize the yield of the debt in-
strument and that a holder will exercise a
put option if doing so would maximize
the yield of the debt instrument.
The proposed regulations under section
171 generally use similar assumptions to
determine the holder’s yield on a bond
that provides for alternative payment
schedules. However, in the case of an is-
suer’s option on a taxable bond, the pro-
posed regulations reverse the assumption
in the OID regulations by assuming that
the issuer will exercise the option only if
doing so would increase the yield on the
bond. See section 171(b)(1)(B)(ii). Thus,
under the proposed regulations, a holder
generally must amortize bond premium
on a taxable bond by reference to the
stated maturity date, even if it appears
likely the bond will be called. In this
case, if the bond is actually called, the
proposed regulations provide that the
holder may deduct the unamortized pre-
mium. If the bond is partially called and
the partial call is not a pro-rata prepay-
ment, the proposed regulations do not
allow the holder to deduct a portion of the
unamortized premium. Instead, the
holder must recompute the yield of the
bond on the date of the partial call and
amortize the remaining premium by refer-
ence to the recomputed yield.
In general, the final regulations adopt
the rules of the proposed regulations. In
response to a comment, the final regula-
tions limit the issuer rule for taxable
bonds to call options.
Bond Issuance Premium
Under existing §1.61–12(c), a corpo-
rate issuer treats premium received upon
issuance of a bond as a separate item of
income. Over the term of the bond, the
premium is taken into income, and the
full amount of the stated interest is de-
ducted. The proposed regulations revise
the treatment of bond issuance premium.
Under the proposed regulations, bond is-
suance premium is amortized as an offset
to the issuer’s otherwise allowable inter-
est deduction, not as a separate item of in-
come. The amount of bond issuance pre-
mium amortized in any period is based on
a constant yield. In addition, the pro-
posed regulations apply to all issuers, not
just corporate issuers.
In general, the final regulations adopt
the rules in the proposed regulations for
bond issuance premium. However, the
final regulations contain several impor-
tant changes from the proposed regula-
tions. First, in response to comments, the
final regulations clarify the treatment of a
debt instrument subject to an alternative
payment schedule by explicitly cross-ref-
erencing §1.1272–1(c). Second, the final
regulations provide that, in the case of a
debt instrument subject to a mandatory
sinking fund provision, the issuer must
determine the payment schedule by as-
suming that a pro rata portion of the debt
instrument will be called under the sink-
ing fund provision. This rule produces
more economic interest accruals than the
1998–7 I.R.B5February 17, 1998

accruals determined by ignoring the sink-
ing fund provision as under the proposed
regulations. Third, the final regulations
adopt rules for excess bond issuance pre-
mium allocable to an accrual period.
These rules are similar to the rules for ex-
cess bond premium described above.
Aggregation Rules
Although the proposed regulations do
not provide for an aggregate method of
accounting for premium, comments were
requested on the need for an aggregate
method. Because no comments were re-
ceived, the final regulations do not pro-
vide rules for an aggregate method of ac-
counting for premium.
Bonds Not Subject to the Final
Regulations
The final regulations generally apply to
bonds acquired or issued at a premium.
Certain bonds, however, are excluded
from the application of the final regula-
tions. For example, the final regulations
exclude debt instruments described in
section 1272(a)(6)(C) (regular interests in
a REMIC, qualified mortgages held by a
REMIC, and certain other debt instru-
ments, or pools of debt instruments, with
payments subject to acceleration). No in-
ference is intended regarding the treat-
ment of debt instruments described in sec-
tion 1272(a)(6)(C).
Effective Dates
The final regulations relating to bond
premium are effective for bonds acquired
on or after March 2, 1998. However, if a
holder makes the election to amortize
bond premium for the taxable year con-
taining March 2, 1998, or any subsequent
taxable year, the regulations apply to
bonds held on or after the first day of the
taxable year in which the election is
made.
The final regulations relating to bond
issuance premium apply to debt instru-
ments issued on or after March 2, 1998.
The final regulations also provide auto-
matic consent for a taxpayer to change its
method of accounting for premium in cer-
tain circumstances. Because the change
is made on a cut-off basis, no items of in-
come or deduction are omitted or dupli-
cated. Therefore, no adjustment under
section 481 is allowed.
Special Analyses
It is hereby certified that these regula-
tions do not have significant economic
impact on a substantial number of small
entities. This certification is based upon
the fact that the regulations merely re-
quire a taxpayer to attach to the tax-
payer’s return a statement that indicates
whether the taxpayer is making an elec-
tion under section 171 or is changing its
accounting method for bond premium or
bond issuance premium. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required.
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
Several persons from the Office of As-
sistant Chief Counsel (Financial Institu-
tions and Products) and the Treasury De-
partment participated in the development
of these regulations.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.171–2 also issued under 26
U.S.C. 171(e).
Section 1.171–3 also issued under 26
U.S.C. 171(e).
Section 1.171–4 also issued under 26
U.S.C. 171(c). * * *
Par. 2. Section 1.61–12 is amended by
revising paragraph (c) to read as follows:
§1.61–12 Income from discharge of
indebtedness.
* * * * *
(c) Issuance and repurchase of debt in-
struments—(1) Issuance.An issuer does
not realize gain or loss upon the issuance
of a debt instrument. For rules relating to
an issuer’s interest deduction for a debt
instrument issued with bond issuance pre-
mium, see §1.163–13.
(2) Repurchase—(i) In general.An is-
suer does not realize gain or loss upon the
repurchase of a debt instrument. How-
ever, if a debt instrument provides for
payments denominated in, or determined
by reference to, a nonfunctional currency,
an issuer may realize a currency gain or
loss upon the repurchase of the instru-
ment. See section 988 and the regulations
thereunder. For purposes of this para-
graph (c)(2), the term repurchaseincludes
the retirement of a debt instrument, the
conversion of a debt instrument into stock
of the issuer, and the exchange (including
an exchange under section 1001) of a
newly issued debt instrument for an exist-
ing debt instrument.
(ii) Repurchase at a discount.An is-
suer realizes income from the discharge
of indebtedness upon the repurchase of a
debt instrument for an amount less than
its adjusted issue price (within the mean-
ing of §1.1275–1(b)). The amount of dis-
charge of indebtedness income is equal to
the excess of the adjusted issue price over
the repurchase price. See section 108 and
the regulations thereunder for additional
rules relating to income from discharge of
indebtedness. For example, to determine
the repurchase price of a debt instrument
that is repurchased through the issuance
of a new debt instrument, see section
108(e)(10).
(iii) Repurchase at a premium.An is-
suer may be entitled to a repurchase pre-
mium deduction upon the repurchase of a
debt instrument for an amount greater than
its adjusted issue price (within the meaning
of §1.1275–1(b)). See §1.163– 7(c) for the
treatment of repurchase premium.
(iv) Effective date.This paragraph
(c)(2) applies to debt instruments repur-
chased on or after March 2, 1998.
* * * * *
Par. 3. Section 1.163-13 is added to
read as follows:
February 17, 199861998–7 I.R.B.

§1.163–13 Treatment of bond issuance
premium.
(a) General rule.If a debt instrument
is issued with bond issuance premium,
this section limits the amount of the is-
suer’s interest deduction otherwise allow-
able under section 163(a). In general, the
issuer determines its interest deduction by
offsetting the interest allocable to an ac-
crual period with the bond issuance pre-
mium allocable to that period. Bond is-
suance premium is allocable to an accrual
period based on a constant yield. The use
of a constant yield to amortize bond is-
suance premium is intended to generally
conform the treatment of debt instruments
having bond issuance premium with those
having original issue discount. Unless
otherwise provided, the terms used in this
section have the same meaning as those
terms in section 163(e), sections 1271
through 1275, and the corresponding reg-
ulations. Moreover, unless otherwise pro-
vided, the provisions of this section apply
in a manner consistent with those of sec-
tion 163(e), sections 1271 through 1275,
and the corresponding regulations. In ad-
dition, the anti-abuse rule in §1.1275–2(g)
applies for purposes of this section. For
rules dealing with the treatment of bond
premium by a holder, see §§1.171–1
through 1.171–5.
(b) Exceptions.This section does not
apply to—
(1) Adebt instrument described in sec-
tion 1272(a)(6)(C) (regular interests in a
REMIC, qualified mortgages held by a
REMIC, and certain other debt instru-
ments, or pools of debt instruments, with
payments subject to acceleration); or
(2) Adebt instrument to which
§1.1275–4 applies (relating to certain
debt instruments that provide for contin-
gent payments).
(c) Bond issuance premium.Bond is-
suance premium is the excess, if any, of
the issue price of a debt instrument over
its stated redemption price at maturity.
For purposes of this section, the issue
price of a convertible bond (as defined in
§1.171–1(e)(1)(iii)(C)) does not include
an amount equal to the value of the con-
version option (as determined under
§1.171–1(e)(1)(iii)(A)).
(d) Offsetting qualified stated interest
with bond issuance premium—(1) In gen-
eral.An issuer amortizes bond issuance
premium by offsetting the qualified stated
interest allocable to an accrual period
with the bond issuance premium allocable
to the accrual period. This offset occurs
when the issuer takes the qualified stated
interest into account under its regular
method of accounting.
(2) Qualified stated interest allocable
to an accrual period.See §1.446–2(b) to
determine the accrual period to which
qualified stated interest is allocable and to
determine the accrual of qualified stated
interest within an accrual period.
(3) Bond issuance premium allocable
to an accrual period.The bond issuance
premium allocable to an accrual period is
determined under this paragraph (d)(3).
Within an accrual period, the bond is-
suance premium allocable to the period
accrues ratably.
(i) Step one: Determine the debt in-
strument’s yield to maturity.The yield to
maturity of a debt instrument is deter-
mined under the rules of §1.1272–1(b)-
(1)(i).
(ii) Step two: Determine the accrual
periods.The accrual periods are deter-
mined under the rules of §1.1272–1(b)-
(1)(ii).
(iii) Step three: Determine the bond is-
suance premium allocable to the accrual
period.The bond issuance premium allo-
cable to an accrual period is the excess of
the qualified stated interest allocable to
the accrual period over the product of the
adjusted issue price at the beginning of
the accrual period and the yield. In per-
forming this calculation, the yield must be
stated appropriately taking into account
the length of the particular accrual period.
Principles similar to those in §1.1272–
1(b)(4) apply in determining the bond is-
suance premium allocable to an accrual
period.
(4) Bond issuance premium in excess of
qualified stated interest—(i) Ordinary in-
come.If the bond issuance premium allo-
cable to an accrual period exceeds the
qualified stated interest allocable to the
accrual period, the excess is treated as or-
dinary income by the issuer for the ac-
crual period. However, the amount
treated as ordinary income is limited to
the amount by which the issuer’s total in-
terest deductions on the debt instrument
in prior accrual periods exceed the total
amount treated by the issuer as ordinary
income on the debt instrument in prior ac-
crual periods.
(ii) Carryforward.If the bond issuance
premium allocable to an accrual period
exceeds the sum of the qualified stated in-
terest allocable to the accrual period and
the amount treated as ordinary income for
the accrual period under paragraph
(d)(4)(i) of this section, the excess is car-
ried forward to the next accrual period
and is treated as bond issuance premium
allocable to that period. If a carryforward
exists on the date the debt instrument is
retired, the carryforward is treated as or-
dinary income on that date.
(e) Special rules—(1) Variable rate
debt instruments.An issuer determines
bond issuance premium on a variable rate
debt instrument by reference to the stated
redemption price at maturity of the equiv-
alent fixed rate debt instrument con-
structed for the variable rate debt instru-
ment. The issuer also allocates any bond
issuance premium among the accrual pe-
riods by reference to the equivalent fixed
rate debt instrument. The issuer con-
structs the equivalent fixed rate debt in-
strument, as of the issue date, by using the
principles of §1.1275–5(e).
(2) Inflation-indexed debt instruments.
An issuer determines bond issuance pre-
mium on an inflation-indexed debt instru-
ment by assuming that there will be no in-
flation or deflation over the term of the
instrument. The issuer also allocates any
bond issuance premium among the accrual
periods by assuming that there will be no
inflation or deflation over the term of the
instrument. The bond issuance premium
allocable to an accrual period offsets qual-
ified stated interest allocable to the period.
Notwithstanding paragraph (d)(4) of this
section, if the bond issuance premium al-
locable to an accrual period exceeds the
qualified stated interest allocable to the
period, the excess is treated as a deflation
adjustment under §1.1275–7T(f)(1)(ii).
See §1.1275–7Tfor other rules relating to
inflation-indexed debt instruments.
(3) Certain debt instruments subject to
contingencies—(i) In general.Except as
provided in paragraph (e)(3)(ii) of this
section, the rules of §1.1272–1(c) apply to
determine a debt instrument’s payment
schedule for purposes of this section. For
example, an issuer uses the payment
schedule determined under §1.1272–1(c)
to determine the amount, if any, of bond
issuance premium on the debt instrument,
the yield and maturity of the debt instru-
1998–7 I.R.B7February 17, 1998

ment, and the allocation of bond issuance
premium to an accrual period.
(ii) Mandatory sinking fund provision.
Notwithstanding paragraph (e)(3)(i) of
this section, if a debt instrument is subject
to a mandatory sinking fund provision de-
scribed in §1.1272–1(c)(3), the issuer
must determine the payment schedule by
assuming that a pro rata portion of the
debt instrument will be called under the
sinking fund provision.
(4) Remote and incidental contingen-
cies.For purposes of determining the
amount of bond issuance premium and al-
locating bond issuance premium among
accrual periods, if a bond provides for a
contingency that is remote or incidental
(within the meaning of §1.1275–2(h)), the
issuer takes the contingency into account
under the rules for remote and incidental
contingencies in §1.1275–2(h).
(f) Example.The following example il-
lustrates the rules of this section:
Example—(i) Facts.On February 1, 1999, X is-
sues for $110,000 a debt instrument maturing on
February 1, 2006, with a stated principal amount of
$100,000, payable at maturity. The debt instrument
provides for unconditional payments of interest of
$10,000, payable on February 1 of each year. X uses
the calendar year as its taxable year, X uses the cash
receipts and disbursements method of accounting,
and X decides to use annual accrual periods ending
on February 1 of each year. X’s calculations assume
a 30-day month and 360-day year.
(ii) Amount of bond issuance premium.The issue
price of the debt instrument is $110,000. Because
the interest payments on the debt instrument are
qualified stated interest, the stated redemption price
at maturity of the debt instrument is $100,000.
Therefore, the amount of bond issuance premium is
$10,000 ($110,000–$100,000).
(iii) Bond issuance premium allocable to the first
accrual period.Based on the payment schedule and
the issue price of the debt instrument, the yield of the
debt instrument is 8.07 percent, compounded annu-
ally. (Although, for purposes of simplicity, the yield
as stated is rounded to two decimal places, the com-
putations do not reflect this rounding convention.)
The bond issuance premium allocable to the accrual
period ending on February 1, 2000, is the excess of
the qualified stated interest allocable to the period
($10,000) over the product of the adjusted issue price
at the beginning of the period ($110,000) and the
yield (8.07 percent, compounded annually). There-
fore, the bond issuance premium allocable to the ac-
crual period is $1,118.17 ($10,000– $8,881.83).
(iv) Premium used to offset interest.Although X
makes an interest payment of $10,000 on February
1, 2000, X only deducts interest of $8,881.83, the
qualified stated interest allocable to the period
($10,000) offset with the bond issuance premium al-
locable to the period ($1,118.17).
(g) Effective date.This section applies
to debt instruments issued on or after
March 2, 1998.
(h) Accounting method changes—(1)
Consent to change.An issuer required to
change its method of accounting for bond
issuance premium to comply with this
section must secure the consent of the
Commissioner in accordance with the re-
quirements of §1.446–1(e). Paragraph
(h)(2) of this section provides the Com-
missioner’s automatic consent for certain
changes.
(2) Automatic consent.The Commis-
sioner grants consent for an issuer to
change its method of accounting for bond
issuance premium on debt instruments is-
sued on or after March 2, 1998. Because
this change is made on a cut-off basis, no
items of income or deduction are omitted
or duplicated and, therefore, no adjust-
ment under section 481 is allowed. The
consent granted by this paragraph (h)(2)
applies provided—
(i) The change is made to comply with
this section;
(ii) The change is made for the first tax-
able year for which the issuer must ac-
count for a debt instrument under this sec-
tion; and
(iii) The issuer attaches to its federal in-
come tax return for the taxable year con-
taining the change a statement that it has
changed its method of accounting under
this section.
Par. 4. Sections 1.171-1 through 1.171-
4 are revised to read as follows:
§1.171–1 Bond premium.
(a) Overview—(1) In general.This
section and §§1.171–2 through 1.171–5
provide rules for the determination and
amortization of bond premium by a
holder. In general, a holder amortizes
bond premium by offsetting the interest
allocable to an accrual period with the
premium allocable to that period. Bond
premium is allocable to an accrual period
based on a constant yield. The use of a
constant yield to amortize bond premium
is intended to generally conform the treat-
ment of bond premium to the treatment of
original issue discount under sections
1271 through 1275. Unless otherwise
provided, the terms used in this section
and §§1.171–2 through 1.171–5 have the
same meaning as those terms in sections
1271 through 1275 and the corresponding
regulations. Moreover, unless otherwise
provided, the provisions of this section
and §§1.171–2 through 1.171–5 apply in
a manner consistent with those of sections
1271 through 1275 and the corresponding
regulations. In addition, the anti-abuse
rule in §1.1275–2(g) applies for purposes
of this section and §§1.171–2 through
1.171–5.
(2) Cross-references.For rules dealing
with the adjustments to a holder’s basis to
reflect the amortization of bond premium,
see §1.1016–5(b). For rules dealing with
the treatment of bond issuance premium
by an issuer, see §1.163–13.
(b) Scope—(1) In general.Except as
provided in paragraph (b)(2) of this sec-
tion and §1.171–5, this section and
§§1.171–2 through 1.171–4 apply to any
bond that, upon its acquisition by the
holder, is held with bond premium. For
purposes of this section and §§1.171–2
through 1.171–5, the term bond has the
same meaning as the term debt instrument
in §1.1275–1(d).
(2) Exceptions.This section and
§§1.171–2 through 1.171–5 do not apply
to—
(i) Abond described in section 1272(a)-
(6)(C) (regular interests in a REMIC,
qualified mortgages held by a REMIC,
and certain other debt instruments, or
pools of debt instruments, with payments
subject to acceleration);
(ii) Abond to which §1.1275–4 applies
(relating to certain debt instruments that
provide for contingent payments);
(iii) Abond held by a holder that has
made a §1.1272–3 election with respect to
the bond;
(iv) Abond that is stock in trade of the
holder, a bond of a kind that would prop-
erly be included in the inventory of the
holder if on hand at the close of the tax-
able year, or a bond held primarily for
sale to customers in the ordinary course of
the holder’s trade or business; or
(v) Abond issued before September 28,
1985, unless the bond bears interest and
was issued by a corporation or by a gov-
ernment or political subdivision thereof.
(c) General rule—(1) Tax-exempt
obligations.Aholder must amortize bond
premium on a bond that is a tax-exempt
obligation. See §1.171–2(c) Example 4.
(2) Taxable bonds.Aholder may elect
to amortize bond premium on a taxable
bond. Except as provided in paragraph
(c)(3) of this section, a taxable bond is
any bond other than a tax-exempt obliga-
tion. See §1.171–4 for rules relating to
February 17, 199881998–7 I.R.B.

the election to amortize bond premium on
a taxable bond.
(3) Bonds the interest on which is par-
tially excludable. For purposes of this
section and §§1.171–2 through 1.171–5, a
bond the interest on which is partially ex-
cludable from gross income is treated as
two instruments, a tax-exempt obligation
and a taxable bond. The holder’s basis in
the bond and each payment on the bond
are allocated between the two instruments
based on a reasonable method.
(d) Determination of bond premium—
(1) In general.Aholder acquires a bond
at a premium if the holder’s basis in the
bond immediately after its acquisition by
the holder exceeds the sum of all amounts
payable on the bond after the acquisition
date (other than payments of qualified
stated interest). This excess is bond pre-
mium, which is amortizable under
§1.171–2.
(2) Additional rules for amounts
payable on certain bonds.Additional
rules apply to determine the amounts
payable on a variable rate debt instru-
ment, an inflation-indexed debt instru-
ment, a bond that provides for certain al-
ternative payment schedules, and a bond
that provides for remote or incidental con-
tingencies. See §1.171–3.
(e) Basis.Aholder determines its basis
in a bond under this paragraph (e). This
determination of basis applies only for
purposes of this section and §§1.171–2
through 1.171–5. Because of the applica-
tion of this paragraph (e), the holder’s
basis in the bond for purposes of these
sections may differ from the holder’s
basis for determining gain or loss on the
sale or exchange of the bond.
(1) Determination of basis—(i) In gen-
eral.In general, the holder’s basis in the
bond is the holder’s basis for determining
loss on the sale or exchange of the bond.
(ii) Bonds acquired in certain ex-
changes.If the holder acquired the bond
in exchange for other property (other than
in a reorganization defined in section 368)
and the holder’s basis in the bond is deter-
mined in whole or in part by reference to
the holder’s basis in the other property,
the holder’s basis in the bond may not ex-
ceed its fair market value immediately
after the exchange. See paragraph (f) Ex-
ample 1of this section. If the bond is ac-
quired in a reorganization, see section
171(b)(4)(B).
(iii) Convertible bonds—(A) General
rule.If the bond is a convertible bond,
the holder’s basis in the bond is reduced
by an amount equal to the value of the
conversion option. The value of the con-
version option may be determined under
any reasonable method. For example, the
holder may determine the value of the
conversion option by comparing the mar-
ket price of the convertible bond to the
market prices of similar bonds that do not
have conversion options. See paragraph
(f) Example 2of this section.
(B) Convertible bonds acquired in cer-
tain exchanges.If the bond is a convert-
ible bond acquired in a transaction de-
scribed in paragraph (e)(1)(ii) of this
section, the holder’s basis in the bond
may not exceed its fair market value im-
mediately after the exchange reduced by
the value of the conversion option.
(C) Definition of convertible bond.A
convertible bond is a bond that provides
the holder with an option to convert the
bond into stock of the issuer, stock or debt
of a related party (within the meaning of
section 267(b) or 707(b)(1)), or into cash
or other property in an amount equal to the
approximate value of such stock or debt.
(2) Basis in bonds held by certain
transferees. Notwithstanding paragraph
(e)(1) of this section, if the bond is trans-
ferred basis property (as defined in sec-
tion 7701(a)(43)) and the transferor had
acquired the bond at a premium, the
holder’s basis in the bond is—
(i) The holder’s basis for determining
loss on the sale or exchange of the bond;
reduced by
(ii) Any amounts that the transferor
could not have amortized under this para-
graph (e) or under §1.171–4(c), except to
the extent that the holder’s basis already
reflects a reduction attributable to such
nonamortizable amounts.
(f) Examples. The following examples
illustrate the rules of this section:
Example 1.Bond received in liquidation of a
partnership interest—(i) Facts.PR is a partner in
partnership PRS. PRS does not have any unrealized
receivables or inventory items as defined in section
751. On January 1, 1998, PRS distributes to PR a
taxable bond, issued by an unrelated corporation, in
liquidation of PR’s partnership interest. At that
time, the fair market value of PR’s partnership inter-
est is $40,000 and the basis is $100,000. The fair
market value of the bond is $40,000.
(ii) Determination of basis.Under section
732(b), PR’s basis in the bond is equal to PR’s basis
in the partnership interest. Therefore, PR’s basis for
determining loss on the sale or exchange of the bond
is $100,000. However, because the distribution is
treated as an exchange for purposes of section
171(b)(4), PR’s basis in the bond is $40,000 for pur-
poses of this section and §§1.171–2 through 1.171–
5. See paragraph (e)(1)(ii) of this section.
Example 2.Convertible bond—(i) Facts.On
January 1, 1998, Apurchases for $1,100 B corpora-
tion’s bond maturing on January 1, 2001, with a
stated principal amount of $1,000, payable at matu-
rity. The bond provides for unconditional payments
of interest of $30 on January 1 and July 1 of each
year. In addition, the bond is convertible into 15
shares of B corporation stock at the option of the
holder. On January 1, 1998, B corporation’s non-
convertible, publicly-traded, three-year debt with a
similar credit rating trades at a price that reflects a
yield of 6.75 percent, compounded semiannually.
(ii) Determination of basis.A’s basis for deter-
mining loss on the sale or exchange of the bond is
$1,100. As of January 1, 1998, discounting the re-
maining payments on the bond at the yield at which
B’s similar nonconvertible bonds trade (6.75 per-
cent, compounded semiannually) results in a present
value of $980. Thus, the value of the conversion op-
tion is $120. Under paragraph (e)(1)(iii)(A) of this
section, A’s basis is $980 ($1,100–$120) for pur-
poses of this section and §§1.171–2 through 1.171–
5. The sum of all amounts payable on the bond
other than qualified stated interest is $1,000. Be-
cause A’s basis (as determined under paragraph
(e)(1)(iii)(A) of this section) does not exceed
$1,000, Adoes not acquire the bond at a premium.
§1.171–2 Amortization of bond premium.
(a) Offsetting qualified stated interest
with premium—(1) In general.Aholder
amortizes bond premium by offsetting the
qualified stated interest allocable to an ac-
crual period with the bond premium allo-
cable to the accrual period. This offset
occurs when the holder takes the qualified
stated interest into account under the
holder’s regular method of accounting.
(2) Qualified stated interest allocable
to an accrual period.See §1.446–2(b) to
determine the accrual period to which
qualified stated interest is allocable and to
determine the accrual of qualified stated
interest within an accrual period.
(3) Bond premium allocable to an ac-
crual period.The bond premium alloca-
ble to an accrual period is determined
under this paragraph (a)(3). Within an ac-
crual period, the bond premium allocable
to the period accrues ratably.
(i) Step one: Determine the holder’s
yield.The holder’s yield is the discount
rate that, when used in computing the pre-
sent value of all remaining payments to be
made on the bond (including payments of
qualified stated interest), produces an
amount equal to the holder’s basis in the
1998–7 I.R.B9February 17, 1998

bond as determined under §1.171–1(e).
For this purpose, the remaining payments
include only payments to be made after
the date the holder acquires the bond.
The yield is calculated as of the date the
holder acquires the bond, must be con-
stant over the term of the bond, and must
be calculated to at least two decimal
places when expressed as a percentage.
(ii) Step two: Determine the accrual
periods.Aholder determines the accrual
periods for the bond under the rules of
§1.1272–1(b)(1)(ii).
(iii) Step three: Determine the bond
premium allocable to the accrual period.
The bond premium allocable to an accrual
period is the excess of the qualified stated
interest allocable to the accrual period
over the product of the holder’s adjusted
acquisition price (as defined in paragraph
(b) of this section) at the beginning of the
accrual period and the holder’s yield. In
performing this calculation, the yield must
be stated appropriately taking into account
the length of the particular accrual period.
Principles similar to those in §1.1272–
1(b)(4) apply in determining the bond pre-
mium allocable to an accrual period.
(4) Bond premium in excess of quali-
fied stated interest—(i) Taxable bonds—
(A) Bond premium deduction.In the case
of a taxable bond, if the bond premium al-
locable to an accrual period exceeds the
qualified stated interest allocable to the
accrual period, the excess is treated by the
holder as a bond premium deduction
under section 171(a)(1) for the accrual pe-
riod. However, the amount treated as a
bond premium deduction is limited to the
amount by which the holder’s total inter-
est inclusions on the bond in prior accrual
periods exceed the total amount treated by
the holder as a bond premium deduction
on the bond in prior accrual periods. A
deduction determined under this para-
graph (a)(4)(i)(A) is not subject to section
67 (the 2-percent floor on miscellaneous
itemized deductions). See Example 1of
§1.171–3(e).
(B) Carryforward.If the bond premium
allocable to an accrual period exceeds the
sum of the qualified stated interest alloca-
ble to the accrual period and the amount
treated as a deduction for the accrual pe-
riod under paragraph (a)(4)(i)(A) of this
section, the excess is carried forward to the
next accrual period and is treated as bond
premium allocable to that period.
(ii) Tax-exempt obligations.In the case
of a tax-exempt obligation, if the bond
premium allocable to an accrual period
exceeds the qualified stated interest allo-
cable to the accrual period, the excess is a
nondeductible loss. If a regulated invest-
ment company (RIC) within the meaning
of section 851 has excess bond premium
for an accrual period that would be a
nondeductible loss under the prior sen-
tence, the RIC must use this excess bond
premium to reduce its tax-exempt interest
income on other tax-exempt obligations
held during the accrual period.
(5) Additional rules for certain bonds.
Additional rules apply to determine the
amortization of bond premium on a vari-
able rate debt instrument, an inflation-in-
dexed debt instrument, a bond that pro-
vides for certain alternative payment
schedules, and a bond that provides for
remote or incidental contingencies. See
§1.171–3.
(b) Adjusted acquisition price.The ad-
justed acquisition price of a bond at the
beginning of the first accrual period is the
holder’s basis as determined under
§1.171–1(e). Thereafter, the adjusted ac-
quisition price is the holder’s basis in the
bond decreased by—
(1) The amount of bond premium pre-
viously allocable under paragraph (a)(3)
of this section; and
(2) The amount of any payment previ-
ously made on the bond other than a pay-
ment of qualified stated interest.
(c) Examples.The following examples
illustrate the rules of this section. Each
example assumes the holder uses the cal-
endar year as its taxable year and has
elected to amortize bond premium, effec-
tive for all relevant taxable years. In ad-
dition, each example assumes a 30-day
month and 360-day year. Although, for
purposes of simplicity, the yield as stated
is rounded to two decimal places, the
computations do not reflect this rounding
convention. The examples are as follows:
Example 1.Taxable bond—(i) Facts.On Febru-
ary 1, 1999, Apurchases for $110,000 a taxable
bond maturing on February 1, 2006, with a stated
principal amount of $100,000, payable at maturity.
The bond provides for unconditional payments of
interest of $10,000, payable on February 1 of each
year. Auses the cash receipts and disbursements
method of accounting, and Adecides to use annual
accrual periods ending on February 1 of each year.
(ii) Amount of bond premium.The interest pay-
ments on the bond are qualified stated interest.
Therefore, the sum of all amounts payable on the
bond (other than the interest payments) is $100,000.
Under §1.171–1, the amount of bond premium is
$10,000 ($110,000–$100,000).
(iii) Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the bond and A’s basis in the bond, A’s yield is
8.07 percent, compounded annually. The bond pre-
mium allocable to the accrual period ending on Feb-
ruary 1, 2000, is the excess of the qualified stated in-
terest allocable to the period ($10,000) over the
product of the adjusted acquisition price at the be-
ginning of the period ($110,000) and A’s yield (8.07
percent, compounded annually). Therefore, the
bond premium allocable to the accrual period is
$1,118.17 ($10,000–$8,881.83).
(iv) Premium used to offset interest.Although A
receives an interest payment of $10,000 on February
1, 2000, Aonly includes in income $8,881.83, the
qualified stated interest allocable to the period
($10,000) offset with bond premium allocable to the
period ($1,118.17). Under §1.1016–5(b), A’s basis
in the bond is reduced by $1,118.17 on February 1,
2000.
Example 2. Alternative accrual periods—(i)
Facts.The facts are the same as in Example 1of this
paragraph (c) except that Adecides to use semian-
nual accrual periods ending on February 1 and Au-
gust 1 of each year.
(ii) Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the bond and A’s basis in the bond, A’s yield is
7.92 percent, compounded semiannually. The bond
premium allocable to the accrual period ending on
August 1, 1999, is the excess of the qualified stated
interest allocable to the period ($5,000) over the
product of the adjusted acquisition price at the be-
ginning of the period ($110,000) and A’s yield,
stated appropriately taking into account the length of
the accrual period (7.92 percent/2). Therefore, the
bond premium allocable to the accrual period is
$645.29 ($5,000–$4,354.71). Although the accrual
period ends on August 1, 1999, the qualified stated
interest of $5,000 is not taken into income until Feb-
ruary 1, 2000, the date it is received. Likewise, the
bond premium of $645.29 is not taken into account
until February 1, 2000. The adjusted acquisition
price of the bond on August 1, 1999, is $109,354.71
(the adjusted acquisition price at the beginning of
the period ($110,000) less the bond premium alloca-
ble to the period ($645.29)).
(iii) Bond premium allocable to the second ac-
crual period.Because the interval between pay-
ments of qualified stated interest contains more than
one accrual period, the adjusted acquisition price at
the beginning of the second accrual period must be
adjusted for the accrued but unpaid qualified stated
interest. See paragraph (a)(3)(iii) of this section and
§1.1272–1(b)(4)(i)(B). Therefore, the adjusted ac-
quisition price on August 1, 1999, is $114,354.71
($109,354.71 + $5,000). The bond premium alloca-
ble to the accrual period ending on February 1,
2000, is the excess of the qualified stated interest al-
locable to the period ($5,000) over the product of the
adjusted acquisition price at the beginning of the pe-
riod ($114,354.71) and A’s yield, stated appropri-
ately taking into account the length of the accrual
period (7.92 percent/2). Therefore, the bond pre-
mium allocable to the accrual period is $472.88
($5,000–$4,527.12).
February 17, 1998101998–7 I.R.B.

(iv)Premium used to offset interest.Although A
receives an interest payment of $10,000 on February
1, 2000, Aonly includes in income $8,881.83, the
qualified stated interest of $10,000 ($5,000 allocable
to the accrual period ending on August 1, 1999, and
$5,000 allocable to the accrual period ending on
February 1, 2000) offset with bond premium of
$1,118.17 ($645.29 allocable to the accrual period
ending on August 1, 1999, and $472.88 allocable to
the accrual period ending on February 1, 2000). As
indicated in Example 1of this paragraph (c), this
same amount would be taken into income at the
same time had Aused annual accrual periods.
Example 3. Holder uses accrual method of ac-
counting—(i) Facts. The facts are the same as in Ex-
ample 1of this paragraph (c) except that Auses an
accrual method of accounting. Thus, for the accrual
period ending on February 1, 2000, the qualified
stated interest allocable to the period is $10,000, and
the bond premium allocable to the period is
$1,118.17. Because the accrual period extends be-
yond the end of A’s taxable year, Amust allocate
these amounts between the two taxable years.
(ii) Amounts allocable to the first taxable year.
The qualified stated interest allocable to the first tax-
able year is $9,166.67 ($10,000
311/12). The bond
premium allocable to the first taxable year is
$1,024.99 ($1,118.17 311/12).
(iii) Premium used to offset interest.For 1999, A
includes in income $8,141.68, the qualified stated
interest allocable to the period ($9,166.67) offset
with bond premium allocable to the period
($1,024.99). Under §1.1016–5(b), A’s basis in the
bond is reduced by $1,024.99 in 1999.
(iv) Amounts allocable to the next taxable year.
The remaining amounts of qualified stated interest
and bond premium allocable to the accrual period
ending on February 1, 2000, are taken into account
for the taxable year ending on December 31, 2000.
Example 4.Tax-exempt obligation—(i) Facts.
On January 15, 1999, C purchases for $120,000 a
tax-exempt obligation maturing on January 15,
2006, with a stated principal amount of $100,000,
payable at maturity. The obligation provides for un-
conditional payments of interest of $9,000, payable
on January 15 of each year. C uses the cash receipts
and disbursements method of accounting, and C de-
cides to use annual accrual periods ending on Janu-
ary 15 of each year.
(ii) Amount of bond premium.The interest pay-
ments on the obligation are qualified stated interest.
Therefore, the sum of all amounts payable on the
obligation (other than the interest payments) is
$100,000. Under §1.171–1, the amount of bond pre-
mium is $20,000 ($120,000–$100,000).
(iii) Bond premium allocable to the first accrual
period.Based on the remaining payment schedule
of the obligation and C’s basis in the obligation, C’s
yield is 5.48 percent, compounded annually. The
bond premium allocable to the accrual period ending
on January 15, 2000, is the excess of the qualified
stated interest allocable to the period ($9,000) over
the product of the adjusted acquisition price at the
beginning of the period ($120,000) and C’s yield
(5.48 percent, compounded annually). Therefore,
the bond premium allocable to the accrual period is
$2,420.55 ($9,000–$6,579.45).
(iv) Premium used to offset interest.Although C
receives an interest payment of $9,000 on January
15, 2000, C only receives tax-exempt interest in-
come of $6,579.45, the qualified stated interest allo-
cable to the period ($9,000) offset with bond pre-
mium allocable to the period ($2,420.55). Under
§1.1016–5(b), C’s basis in the obligation is reduced
by $2,420.55 on January 15, 2000.
§1.171–3 Special rules for certain
bonds.
(a) Variable rate debt instruments.A
holder determines bond premium on a
variable rate debt instrument by reference
to the stated redemption price at maturity
of the equivalent fixed rate debt instru-
ment constructed for the variable rate debt
instrument. The holder also allocates any
bond premium among the accrual periods
by reference to the equivalent fixed rate
debt instrument. The holder constructs
the equivalent fixed rate debt instrument,
as of the date the holder acquires the vari-
able rate debt instrument, by using the
principles of §1.1275–5(e). See para-
graph (e) Example 1of this section.
(b) Inflation-indexed debt instruments.
Aholder determines bond premium on an
inflation-indexed debt instrument by as-
suming that there will be no inflation or
deflation over the remaining term of the
instrument. The holder also allocates any
bond premium among the accrual periods
by assuming that there will be no inflation
or deflation over the remaining term of
the instrument. The bond premium allo-
cable to an accrual period offsets quali-
fied stated interest allocable to the period.
Notwithstanding §1.171–2(a)(4), if the
bond premium allocable to an accrual pe-
riod exceeds the qualified stated interest
allocable to the period, the excess is
treated as a deflation adjustment under
§1.1275–7T(f)(1)(i). See §1.1275–7Tfor
other rules relating to inflation-indexed
debt instruments.
(c) Yield and remaining payment sched-
ule of certain bonds subject to contingen-
cies—(1) Applicability.This paragraph
(c) provides rules that apply in determin-
ing the yield and remaining payment
schedule of certain bonds that provide for
an alternative payment schedule (or
schedules) applicable upon the occur-
rence of a contingency (or contingencies).
This paragraph (c) applies, however, only
if the timing and amounts of the payments
that comprise each payment schedule are
known as of the date the holder acquires
the bond (the acquisition date) and the
bond is subject to paragraph (c)(2), (3), or
(4) of this section. Abond does not pro-
vide for an alternative payment schedule
merely because there is a possibility of
impairment of a payment (or payments)
by insolvency, default, or similar circum-
stances. See §1.1275–4 for the treatment
of a bond that provides for a contingency
that is not described in this paragraph (c).
(2) Remaining payment schedule that is
significantly more likely than not to occur.
If, based on all the facts and circum-
stances as of the acquisition date, a single
remaining payment schedule for a bond is
significantly more likely than not to
occur, this remaining payment schedule is
used to determine and amortize bond pre-
mium under §§1.171–1 and 1.171–2.
(3) Mandatory sinking fund provision.
Notwithstanding paragraph (c)(2) of this
section, if a bond is subject to a manda-
tory sinking fund provision described in
§1.1272–1(c)(3), the provision is ignored
for purposes of determining and amortiz-
ing bond premium under §§1.171–1 and
1.171–2.
(4) Treatment of certain options—(i)
Applicability.Notwithstanding para-
graphs (c)(2) and (3) of this section, the
rules of this paragraph (c)(4) determine
the remaining payment schedule of a
bond that provides the holder or issuer
with an unconditional option or options,
exercisable on one or more dates during
the remaining term of the bond, to alter
the bond’s remaining payment schedule.
(ii) Operating rules.Aholder deter-
mines the remaining payment schedule of
a bond by assuming that each option will
(or will not) be exercised under the fol-
lowing rules:
(A) Issuer options.In general, the is-
suer is deemed to exercise or not exercise
an option or combination of options in the
manner that minimizes the holder’s yield
on the obligation. However, the issuer of
a taxable bond is deemed to exercise or
not exercise a call option or combination
of call options in the manner that maxi-
mizes the holder’s yield on the bond.
(B) Holder options.Aholder is
deemed to exercise or not exercise an op-
tion or combination of options in the man-
ner that maximizes the holder’s yield on
the bond.
(C) Multiple options.If both the issuer
and the holder have options, the rules of
paragraphs (c)(4)(ii)(A) and (B) of this
section are applied to the options in the
order that they may be exercised. Thus,
1998–7 I.R.B11February 17, 1998

the deemed exercise of one option may
eliminate other options that are later in
time.
(5) Subsequent adjustments—(i) In
general.Except as provided in paragraph
(c)(5)(ii) of this section, if a contingency
described in this paragraph (c) (including
the exercise of an option described in
paragraph (c)(4) of this section) actually
occurs or does not occur, contrary to the
assumption made pursuant to paragraph
(c) of this section (a change in circum-
stances), then solely for purposes of sec-
tion 171, the bond is treated as retired and
reacquired by the holder on the date of the
change in circumstances for an amount
equal to the adjusted acquisition price of
the bond as of that date. If, however, the
change in circumstances results in a sub-
stantially contemporaneous pro-rata pre-
payment as defined in §1.1275–2(f)(2),
the pro-rata prepayment is treated as a
payment in retirement of a portion of the
bond. See paragraph (e) Example 2of
this section.
(ii) Bond premium deduction on the is-
suer’s call of a taxable bond.If a change
in circumstances results from an issuer’s
call of a taxable bond or a partial call that
is a pro-rata prepayment, the holder may
deduct as bond premium an amount equal
to the excess, if any, of the holder’s ad-
justed acquisition price of the bond over
the greater of—
(A) The amount received on redemp-
tion; and
(B) The amounts that would have been
payable under the bond (other than pay-
ments of qualified stated interest) if no
change in circumstances had occurred.
(d) Remote and incidental contingen-
cies.For purposes of determining and
amortizing bond premium, if a bond pro-
vides for a contingency that is remote or
incidental (within the meaning of
§1.1275–2(h)), the holder takes the con-
tingency into account under the rules for
remote and incidental contingencies in
§1.1275–2(h).
(e) Examples.The following examples
illustrate the rules of this section. Each
example assumes the holder uses the cal-
endar year as its taxable year and has
elected to amortize bond premium, effec-
tive for all relevant taxable years. In ad-
dition, each example assumes a 30-day
month and 360-day year. Although, for
purposes of simplicity, the yield as stated
is rounded to two decimal places, the
computations do not reflect this rounding
convention. The examples are as follows:
Example 1.Variable rate debt instrument—(i)
Facts.On March 1, 1999, E purchases for $110,000
a taxable bond maturing on March 1, 2007, with a
stated principal amount of $100,000, payable at ma-
turity. The bond provides for unconditional pay-
ments of interest on March 1 of each year based on
the percentage appreciation of a nationally-known
commodity index. On March 1, 1999, it is reason-
ably expected that the bond will yield 12 percent,
compounded annually. E uses the cash receipts and
disbursements method of accounting, and E decides
to use annual accrual periods ending on March 1 of
each year. Assume that the bond is a variable rate
debt instrument under §1.1275–5.
(ii) Amount of bond premium.Because the bond
is a variable rate debt instrument, E determines and
amortizes its bond premium by reference to the
equivalent fixed rate debt instrument constructed for
the bond as of March 1, 1999. Because the bond
provides for interest at a single objective rate that is
reasonably expected to yield 12 percent, com-
pounded annually, the equivalent fixed rate debt in-
strument for the bond is an eight-year bond with a
principal amount of $100,000, payable at maturity.
It provides for annual payments of interest of
$12,000. E’s basis in the equivalent fixed rate debt
instrument is $110,000. The sum of all amounts
payable on the equivalent fixed rate debt instrument
(other than payments of qualified stated interest) is
$100,000. Under §1.171–1, the amount of bond pre-
mium is $10,000 ($110,000–$100,000).
(iii) Bond premium allocable to each accrual pe-
riod.E allocates bond premium to the remaining ac-
crual periods by reference to the payment schedule
on the equivalent fixed rate debt instrument. Based
on the payment schedule of the equivalent fixed rate
debt instrument and E’s basis in the bond, E’s yield
is 10.12 percent, compounded annually. The bond
premium allocable to the accrual period ending on
March 1, 2000, is the excess of the qualified stated
interest allocable to the period for the equivalent
fixed rate debt instrument ($12,000) over the prod-
uct of the adjusted acquisition price at the beginning
of the period ($110,000) and E’s yield (10.12 per-
cent, compounded annually). Therefore, the bond
premium allocable to the accrual period is $870.71
($12,000–$11,129.29). The bond premium alloca-
ble to all the accrual periods is listed in the follow-
ing schedule:
February 17, 1998121998–7 I.R.B.
Accrual period
ending
3/1/00
3/1/01
3/1/02
3/1/03
3/1/04
3/1/05
3/1/06
3/1/07
Adjusted
acquisition
price at beginning
of accrual period
$110,000.00
109,129.29
108,170.48
107,114.66
105,952.02
104,671.75
103,261.95
101,709.51
Premium allocable
to accrual period
$870.71
958.81
1,055.82
1,162.64
1,280.27
1,409.80
1,552.44
1,709.51
$10,000.00
(iv) Qualified stated interest for each accrual pe-
riod. Assume the bond actually pays the following
amounts of qualified stated interest:
Accrual period endingQualified stated interest
3/1/00$2,000.00
3/1/010.00
3/1/020.00
3/1/0310,000.00
3/1/048,000.00
3/1/0512,000.00
3/1/0615,000.00
3/1/078,500.00
(v) Premium used to offset interest.E’s interest
income for each accrual period is determined by off-
setting the qualified stated interest allocable to the
period with the bond premium allocable to the pe-
riod. For the accrual period ending on March 1,
2000, E includes in income $1,129.29, the qualified
stated interest allocable to the period ($2,000) offset
with the bond premium allocable to the period
($870.71). For the accrual period ending on March
1, 2001, the bond premium allocable to the accrual
period ($958.81) exceeds the qualified stated inter-
est allocable to the period ($0) and, therefore, E does
not have interest income for this accrual period.
However, under §1.171–2(a)(4)(i)(A), E may deduct
as bond premium $958.81, the excess of the bond
premium allocable to the accrual period ($958.81)
over the qualified stated interest allocable to the ac-
crual period ($0). For the accrual period ending on
March 1, 2002, the bond premium allocable to the
accrual period ($1,055.82) exceeds the qualified
stated interest allocable to the accrual period ($0)
and, therefore, E does not have interest income for
the accrual period. Under §1.171–2(a)(4)(i)(A), E’s
deduction for bond premium for the accrual period

is limited to $170.48, the excess of E’s total interest
inclusions on the bond in prior accrual periods
($1,129.29) over the total amount treated by E as a
bond premium deduction in prior accrual periods
($958.81). Under §1.171–2(a)(4)(i)(B), E must
carry forward the remaining $885.34 of bond pre-
mium allocable to the period ending March 1, 2002,
and treat it as bond premium allocable to the period
ending March 1, 2003. The amount E includes in in-
come for each accrual period is shown in the follow-
ing schedule:
1998–7 I.R.B13February 17, 1998
Accrual
period
ending
3/1/00
3/1/01
3/1/02
3/1/03
3/1/04
3/1/05
3/1/06
3/1/07
Qualified
stated
interest
$2,000.00
0.00
0.00
10,000.00
8,000.00
12,000.00
15,000.00
8,500.00
Premium
allocable
to accrual
period
$870.71
958.81
1,055.82
1,162.64
1,280.27
1,409.80
1,552.44
1,709.51
$10,000.00
Interest
income
$1,129.29
0.00
0.00
7,951.93
6,719.73
10,590.20
13,447.56
6,790.49
Premium
deduction
$958.81
170.48
Premium
carryforward
$885.34
Example 2.Partial call that results in a pro-rata
prepayment—(i) Facts.On April 1, 1999, M pur-
chases for $110,000 N’s taxable bond maturing on
April 1, 2006, with a stated principal amount of
$100,000, payable at maturity. The bond provides
for unconditional payments of interest of $10,000,
payable on April 1 of each year. N has the option to
call all or part of the bond on April 1, 2001, at a 5
percent premium over the principal amount. M uses
the cash receipts and disbursements method of ac-
counting.
(ii) Determination of yield and the remaining
payment schedule.M’s yield determined without re-
gard to the call option is 8.07 percent, compounded
annually. M’s yield determined by assuming N ex-
ercises its call option is 6.89 percent, compounded
annually. Under paragraph (c)(4)(ii)(A) of this sec-
tion, it is assumed N will not exercise the call option
because exercising the option would minimize M’s
yield. Thus, for purposes of determining and amor-
tizing bond premium, the bond is assumed to be a
seven-year bond with a single principal payment at
maturity of $100,000.
(iii) Amount of bond premium.The interest pay-
ments on the bond are qualified stated interest.
Therefore, the sum of all amounts payable on the
bond (other than the interest payments) is $100,000.
Under §1.171–1, the amount of bond premium is
$10,000 ($110,000–$100,000).
(iv) Bond premium allocable to the first two ac-
crual periods.For the accrual period ending on
April 1, 2000, M includes in income $8,881.83, the
qualified stated interest allocable to the period
($10,000) offset with bond premium allocable to the
period ($1,118.17). The adjusted acquisition price
on April 1, 2000, is $108,881.83 ($110,000–
$1,118.17). For the accrual period ending on April
1, 2001, M includes in income $8,791.54, the quali-
fied stated interest allocable to the period ($10,000)
offset with bond premium allocable to the period
($1,208.46). The adjusted acquisition price on April
1, 2001, is $107,673.37 ($108,881.83–$1,208.46).
(v) Partial call.Assume N calls one-half of M’s
bond for $52,500 on April 1, 2001. Because it was
assumed the call would not be exercised, the call is a
change in circumstances. However, the partial call
is also a pro-rata prepayment within the meaning of
§1.1275–2(f)(2). As a result, the call is treated as a
retirement of one-half of the bond. Under paragraph
(c)(5)(ii) of this section, M may deduct $1,336.68,
the excess of its adjusted acquisition price in the re-
tired portion of the bond ($107,673.37/2, or
$53,836.68) over the amount received on redemp-
tion ($52,500). M’s adjusted basis in the portion of
the bond that remains outstanding is $53,836.68
($107,673.37– $53,836.68).
§1.171–4 Election to amortize bond
premium on taxable bonds.
(a) Time and manner of making the
election—(1) In general.Aholder makes
the election to amortize bond premium by
offsetting interest income with bond pre-
mium in the holder’s timely filed federal
income tax return for the first taxable year
to which the holder desires the election to
apply. The holder should attach to the re-
turn a statement that the holder is making
the election under this section.
(2) Coordination with OID election. If
a holder makes an election under
§1.1272–3 for a bond with bond pre-
mium, the holder is deemed to have made
the election under this section.
(b) Scope of election.The election
under this section applies to all taxable
bonds held during or after the taxable year
for which the election is made.
(c) Election to amortize made in a sub-
sequent taxable year—(1) In general.If a
holder elects to amortize bond premium
and holds a taxable bond acquired before
the taxable year for which the election is
made, the holder may not amortize
amounts that would have been amortized
in prior taxable years had an election been
in effect for those prior years.
(2) Example. The following example
illustrates the rule of this paragraph (c):
Example—(i) Facts.On May 1, 1999, C pur-
chases for $130,000 a taxable bond maturing on
May 1, 2006, with a stated principal amount of
$100,000, payable at maturity. The bond provides
for unconditional payments of interest of $15,000,
payable on May 1 of each year. C uses the cash re-
ceipts and disbursements method of accounting and
the calendar year as its taxable year. C has not pre-
viously elected to amortize bond premium, but does
so for 2002.
(ii) Amount to amortize. C’s basis for determining
loss on the sale or exchange of the bond is $130,000.
Thus, under §1.171–1, the amount of bond premium
is $30,000. Under §1.171–2, if a bond premium elec-
tion were in effect for the prior taxable years, C would
have amortized $3,257.44 of bond premium on May
1, 2000, and $3,551.68 of bond premium on May 1,
2001, based on annual accrual periods ending on May
1. Thus, for 2002 and future years to which the elec-
tion applies, C may amortize only $23,190.88
($30,000–$3,257.44–$3,551.68).
(d) Revocation of election. The elec-
tion under this section may not be re-
voked unless approved by the Commis-
sioner. Because a revocation of the
election is a change in accounting
method, a taxpayer must follow the rules
under §1.446–1(e)(3)(i) to request the
Commissioner’s consent to revoke the
election. Arevocation of the election ap-
plies to all taxable bonds held during or
after the taxable year for which the revo-
cation is effective. The holder may not
amortize any remaining bond premium on
bonds held at the beginning of the taxable
year for which the revocation is effective.
Therefore, no adjustment under section
481 is allowed upon the revocation of the
election because no items of income or
deduction are omitted or duplicated.
Par. 5. Section 1.171–5 is added to
read as follows:
§1.171–5 Effective date and transition
rules.
(a) Effective date—(1) In general.Sec-

tions 1.171-1 through 1.171–4 apply to
bonds acquired on or after March 2, 1998.
However, if a holder makes the election
under §1.171–4 for the taxable year con-
taining March 2, 1998, or any subsequent
taxable year, §§1.171–1 through 1.171–4
apply to bonds held on or after the first
day of the taxable year in which the elec-
tion is made.
(2) Transition rule for use of constant
yield.Notwithstanding paragraph (a)(1)
of this section, §1.171–2(a)(3) (providing
that the bond premium allocable to an ac-
crual period is determined with reference
to a constant yield) does not apply to a
bond issued before September 28, 1985.
(b) Coordination with existing election.
Aholder is deemed to have made the elec-
tion under §1.171-4 for the taxable year
containing March 2, 1998, if the holder
elected to amortize bond premium under
section 171 and that election is effective
on March 2, 1998. If the holder is
deemed to have made the election under
§1.171–4 for the taxable year containing
March 2, 1998, §§1.171–1 through
1.171–4 apply to bonds acquired on or
after the first day of that taxable year. See
§1.171–4(d) for rules relating to a revoca-
tion of an election under section 171.
(c) Accounting method changes—(1)
Consent to change.Aholder required to
change its method of accounting for bond
premium to comply with §§1.171–1
through 1.171–3 must secure the consent
of the Commissioner in accordance with
the requirements of §1.446–1(e). Para-
graph (c)(2) of this section provides the
Commissioner’s automatic consent for cer-
tain changes. Aholder making the election
under §1.171–4 does not need the Com-
missioner’s consent to make the election.
(2) Automatic consent.The Commis-
sioner grants consent for a holder to
change its method of accounting for bond
premium with respect to taxable bonds to
which §§1.171–1 through 1.171–3 apply.
Because this change is made on a cut-off
basis, no items of income or deduction are
omitted or duplicated and, therefore, no
adjustment under section 481 is allowed.
The consent granted by this paragraph
(c)(2) applies provided—
(i) The holder elected to amortize bond
premium under section 171 for a taxable
year prior to the taxable year containing
March 2, 1998, and that election has not
been revoked;
(ii) The change is made for the first tax-
able year for which the holder must ac-
count for a bond under §§1.171–1
through 1.171–3; and
(iii) The holder attaches to its return for
the taxable year containing the change a
statement that it has changed its method
of accounting under this section.
Par. 6. Section 1.249–1 is amended by
revising paragraph (c) and the first sen-
tence of paragraph (d)(2) to read as fol-
lows:
§1.249–1 Limitation on deduction of
bond premium on repurchase.
* * * * *
(c) Repurchase premium. For purposes
of this section, the term repurchase pre-
miummeans the excess of the repurchase
price paid or incurred to repurchase the
obligation over its adjusted issue price
(within the meaning of §1.1275–1(b)) as
of the repurchase date. For the general
rules applicable to the deductibility of re-
purchase premium, see §1.163–7(c). This
paragraph (c) applies to convertible oblig-
ations repurchased on or after March 2,
1998.
(d) * * *
(2) * * * For a convertible obligation
repurchased on or after March 2, 1998, a
call premium specified in dollars under
the terms of the obligation is considered
to be a normal call premium on a noncon-
vertible obligation if the call premium ap-
plicable when the obligation is repur-
chased does not exceed an amount equal
to the interest (including original issue
discount) that otherwise would be de-
ductible for the taxable year of repurchase
(determined as if the obligation were not
repurchased). * * *
* * * * *
Par. 7. Section 1.1016–5 is amended by
revising paragraph (b) to read as follows:
§1.1016–5 Miscellaneous adjustments to
basis.
* * * * *
(b)Amortizable bond premium—(1) In
general.Aholder’s basis in a bond is re-
duced by the amount of bond premium
used to offset qualified stated interest in-
come under §1.171–2. This reduction oc-
curs when the holder takes the qualified
stated interest into account under the
holder’s regular method of accounting.
(2) Special rules for taxable bonds. A
holder’s basis in a taxable bond is reduced
by the amount of bond premium allowed
as a deduction under §1.171–3(c)(5)(ii)
(relating to the issuer’s call of a taxable
bond) or under §1.171–2(a)(4)(i)(A) (re-
lating to excess bond premium).
(3) Special rule for tax-exempt obliga-
tions.Aholder’s basis in a tax-exempt
obligation is reduced by the amount of ex-
cess bond premium that is treated as a
nondeductible loss under §1.171– 2(a)-
(4)(ii).
* * * * *
§1.1016–9 [Removed]
Par. 8. Section 1.1016–9 is removed.
Par. 9. Section 1.1275–1 is amended
by:
1. Redesignating paragraph (b)(2) as
paragraph (b)(3).2. Adding a new para-
graph (b)(2).
The addition reads as follows:
§1.1275–1 Definitions.
* * * * *
(b) * * *
(2) Bond issuance premium.If a debt
instrument is issued with bond issuance
premium (as defined in §1.163–13(c)), for
purposes of determining the issuer’s ad-
justed issue price, the adjusted issue price
determined under paragraph (b)(1) of this
section is also decreased by the amount of
bond issuance premium previously allo-
cable under §1.163–13(d)(3).
* * * * *
PART602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 10. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 11. Section 602.101, paragraph (c)
is amended by:
1. Removing the following entry from
the table:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
February 17, 1998141998–7 I.R.B.

CFR part or section Current OMB
where identifiedcontrol No.
and described
* * * * *
1.171–3 . . . . . . . . . . . . . . . . .1545–0172
* * * * *
2. Adding entries in numerical order to
the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identifiedcontrol No.
and described
* * * * *
1.163–13 . . . . . . . . . . . . . . . .1545–1491
* * * * *
1.171–4 . . . . . . . . . . . . . . . . .1545–1491
1.171–5 . . . . . . . . . . . . . . . . .1545–1491
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved December 15, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 30, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 31, 1997,
62 F.R. 68173)
Section 280B.—Demolition of
Structures
26 CFR 1.280B–1: Demolition of structures.
T.D. 8745
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Structure
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to deductions
available upon demolition of a building.
These final regulations reflect changes to
the law made by the Tax Reform Act of
1984 and affect owners and lessees of real
property who demolish buildings.
DATES: The regulations are effective
December 30, 1997.
FOR FURTHER INFORMATION CON-
TACT: Bernard P. Harvey, (202) 622-
3110 (not a toll-free number). For dates
of applicability of these regulations, see §
1.280B–1(c).
SUPPLEMENTARYINFORMATION:
Background
This document contains final regula-
tions under section 280B of the Internal
Revenue Code. Section 280B was added
by the Tax Reform Act of 1976, Public
Law 94–455, 2124(b), 90 Stat. 1520,
1918 (Oct. 4, 1976), and significant
amendments were made to the provision
by the Economic Recovery Tax Act of
1981, Public Law 97–34, 212(d)(2)(C)
and (e)(2), 95 Stat. 172, 239 (Aug. 13,
1981) (1981 Act) and the Tax Reform Act
of 1984, Public Law 98–369, 1063, 98
Stat. 494, 1047 (July 18, 1984) (1984
Act). Transition rules were provided in
the Tax Reform Act of 1986, Public Law
99–514, 1878(h), 100 Stat. 2085, 2904
(Oct. 22, 1986) (1986 Act). As originally
enacted, section 280B required any costs
or losses incurred on account of the demo-
lition of any certified historic structure (a
building or structure meeting certain re-
quirements) to be capitalized into the land
upon which the demolished structure was
located. The 1981 Act modified the defin-
ition of certified historic structure for pur-
poses of section 280B from a building or
structure meeting certain requirements to a
building (or its structural components)
meeting certain requirements. The 1984
Act substituted “any structure” for “certi-
fied historic structure.”
Anotice of proposed rulemaking was
published in the Federal Register(61 F.R.
31473 [PS–39–93, 1996–2 C.B. 489]) on
June 20, 1996. The one written comment
received supports the position announced
in the notice of proposed rulemaking.
These final regulations define what
“structure” means for purposes of section
280B.
Explanation of Provisions
These final regulations define the term
“structure” for purposes of section 280B
as a building and its structural compo-
nents as those terms are defined in §1.48–
1(e) of the Income Tax Regulations.
Thus, under section 280B, a structure will
include only a building and its structural
components and not other inherently per-
manent structures such as oil and gas stor-
age tanks, blast furnaces, and coke ovens.
The final regulations rely on the leg-
islative history underlying the 1984 and
1986 Acts, which refer repeatedly to
buildings rather than to structures gener-
ally. In addition, the legislative history of
the 1984 Act discusses the difficulty of
applying the intent test of §1.165–3 of the
regulations, which applies to the demoli-
tion of buildings, and indicates that the
newly added language is meant to elimi-
nate this difficulty.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations and, because
these regulations do not impose on small
entities a collection of information re-
quirement, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Bernard P. Harvey, Office of As-
sistant Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
1998–7 I.R.B15February 17, 1998

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.280B–1 is added to
read as follows:
§1.280B–1 Demolition of structures.
(a) In general.Section 280B provides
that, in the case of the demolition of any
structure, no deduction otherwise allow-
able under chapter 1 of subtitle Ashall be
allowed to the owner or lessee of such
structure for any amount expended for the
demolition or any loss sustained on ac-
count of the demolition, and that the ex-
penditure or loss shall be treated as prop-
erly chargeable to the capital account with
respect to the land on which the demol-
ished structure was located.
(b) Definition of structure.For pur-
poses of section 280B, the term structure
means a building, as defined in §1.48–
1(e)(1), including the structural compo-
nents of that building, as defined in
§1.48–1(e)(2).
(c) Effective date.This section is effec-
tive for demolitions commencing on or
after December 30, 1997.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 29, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 30, 1997,
62 F.R. 67725)
Section 501.—Exemption From
Tax on Corporations, Certain
Trusts, Etc.
This revenue procedure provides guidance to or-
ganizations exempt from taxation under § 501(a) of
the Internal Revenue Code of 1986 on the applica-
tion of amendments made to §§ 162(e) and 6033(e)
by § 13222 of the Omnibus Budget Reconciliation
Act of 1993. The revenue procedure identifies cer-
tain tax-exempt organizations that will be treated as
satisfying the requirements of § 6033(e)(3). Those
organizations will not be subject to the reporting and
notice requirements of § 6033(e)(1) or the tax im-
posed by § 6033(e)(2). Procedures for other exempt
organizations to establish that they satisfy the re-
quirements of § 6033(e)(3) are also provided. Rev.
Proc. 95–35, 1995–2 C.B. 391, and Rev. Proc.
95–35A, 1995–2 C.B. 392, are superseded. See Rev.
Proc. 98–19, page 30.
Section 1202.—50 Percent
Exclusion for Gain From Certain
Small Business Stock
26 CFR 1.1202–2: Qualified small business stock;
effect of redemptions.
T.D. 8749
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Qualified Small Business Stock
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the 50-percent
exclusion for gain from certain small
business stock. The final regulations
reflect changes to the law made by the
Omnibus Budget Reconciliation Act of
1993 and provide guidance to the issuers
and owners of the stock of certain small
businesses.
DATES: This regulation is effective De-
cember 31, 1997. For dates of applicabil-
ity of these regulations, see §1.1202–2(e).
FOR FURTHER INFORMATION CON-
TACT: Catherine A. Prohofsky of the Of-
fice of the Assistant Chief Counsel
(Income Tax and Accounting) at 202-622-
4930 (not a toll-free call).
SUPPLEMENTARYINFORMATION:
Background
Section 1202 of the Internal Revenue
Code allows a taxpayer (other than a cor-
poration) to exclude 50 percent of certain
gain from the sale or exchange of quali-
fied small business stock held for more
than 5 years. This document contains
amendments to the Income Tax Regula-
tions (26 CFR part 1) that provide guid-
ance relating to the effect of redemptions
on the availability of this exclusion.
On June 6, 1996, the Federal Register
published a notice of proposed rulemak-
ing (IA–26–94), 61 F.R. 28821, relating
to the effect of certain redemptions on the
50-percent exclusion of gain from the sale
or exchange of qualified small business
stock under section 1202. The proposed
regulations provide that these redemp-
tions are disregarded in determining
whether the anti-churning rules of section
1202(c) are violated.
Four comments responding to this no-
tice were received. Apublic hearing was
held on October 3, 1996. After considera-
tion of the comments, the proposed regu-
lations under section 1202 are adopted as
modified by this Treasury decision.
Summary of Comments and
Modifications
The notice of proposed rulemaking re-
quested comments on how to determine
when an independent contractor has ter-
minated services. One commentator sug-
gested that the determination of whether
services of an independent contractor
were terminated should be based on all
the facts and circumstances, with termina-
tion conclusively presumed if no further
services were provided for six months.
The IRS and Treasury Department have
not adopted this suggestion, but are con-
tinuing to study this issue and request ad-
ditional comments.
Commentators suggested an additional
exception for all redemptions occurring in
the ordinary course of business or for le-
gitimate business reasons. The final regu-
lations do not incorporate this suggestion.
The exceptions in the final regulations re-
late to redemptions that are incident to
certain events affecting a shareholder.
Because of the extraordinary nature of
these events and the fact that they are gen-
erally not within the control of the issuing
corporation, the exceptions are unlikely to
lead to avoidance of the requirement that
qualified small business stock be pur-
chased at original issue. The IRS and
Treasury are concerned, however, that a
much broader exception for redemptions
that arise out of the ordinary business
needs and purposes of the issuing corpo-
February 17, 1998161998–7 I.R.B.

ration, and are not incident to extraordi-
nary events affecting its shareholders,
would be much more likely to undermine
the original issue requirement.
Two commentators requested that the
final regulations be effective for stock
purchases by an issuing corporation at
any time after August 10, 1993. The ef-
fective date has been modified in re-
sponse to this suggestion. The final regu-
lations will apply to stock issued after
August 10, 1993. Thus, regardless of the
date on which a redemption occurs (or on
which the redeemed stock was issued) the
redemption is treated as provided in the
final regulations for purposes of deter-
mining whether stock issued after August
10, 1993, is qualified small business
stock.
The Chief Counsel for Advocacy of the
Small Business Administration recom-
mended the inclusion of an exception for
redemptions occurring in connection with
the divorce of a shareholder. This sugges-
tion has been adopted. The final regula-
tions provide that redemptions of stock
occurring incident to the divorce of a
shareholder are disregarded in determin-
ing whether redemptions exceed de min-
imis amounts.
The Chief Counsel for Advocacy also
requested that the IRS and Treasury De-
partment analyze the current use of sec-
tion 1202. No exclusion under section
1202 can be claimed until 1998 because
stock must be issued after August 10,
1993, to be qualified small business stock,
and must be held for more than 5 years to
qualify for the exclusion. Thus, the avail-
able tax return data do not provide the in-
formation necessary to analyze the cur-
rent use of section 1202.
Minor clarifying changes in the regula-
tory language have also been made.
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C chapter 5) does not
apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these final regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Catherine A. Prohofsky, Office of
the Assistant Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1202–2 is also issued under
26 U.S.C. 1202(k). * * *
Par. 2. Sections 1.1202–0 and 1.1202–
2 are added to read as follows:
§1.1202–0 Table of contents.
This section lists the major captions
that appear in the regulations under
§1.1202–2.
§1.1202–2 Qualified small business
stock; effect of redemptions.
(a)Redemptions from taxpayer or re-
lated person.
(1)In general.
(2)De minimisamount.
(b)Significant redemptions.
(1)In general.
(2)De minimisamount.
(c)Transfers by shareholders in con-
nection with the performance of
services not treated as purchases.
(d)Exceptions for termination of ser-
vices, death, disability or mental
incompetency, or divorce.
(1)Termination of services.
(2)Death.
(3)Disability or mental incompe-
tency.
(4)Divorce.
(e)Effective date.
§1.1202–2 Qualified small business
stock; effect of redemptions.
(a) Redemptions from taxpayer or re-
lated person—(1) In general.Stock ac-
quired by a taxpayer is not qualified small
business stock if, in one or more pur-
chases during the 4-year period beginning
on the date 2 years before the issuance of
the stock, the issuing corporation pur-
chases (directly or indirectly) more than a
de minimisamount of its stock from the
taxpayer or from a person related (within
the meaning of section 267(b) or 707(b))
to the taxpayer.
(2) De minimis amount.For purposes
of this paragraph (a), stock acquired from
the taxpayer or a related person exceeds a
de minimisamount only if the aggregate
amount paid for the stock exceeds $10,000
and more than 2 percent of the stock held
by the taxpayer and related persons is ac-
quired. The following rules apply for pur-
poses of determining whether the 2-per-
cent limit is exceeded. The percentage of
stock acquired in any single purchase is
determined by dividing the stock’s value
(as of the time of purchase) by the value
(as of the time of purchase) of all stock
held (directly or indirectly) by the tax-
payer and related persons immediately be-
fore the purchase. The percentage of
stock acquired in multiple purchases is the
sum of the percentages determined for
each separate purchase.
(b) Significant redemptions—(1) In
general.Stock is not qualified small
business stock if, in one or more pur-
chases during the 2-year period beginning
on the date 1 year before the issuance of
the stock, the issuing corporation pur-
chases more than a de minimisamount of
its stock and the purchased stock has an
aggregate value (as of the time of the re-
spective purchases) exceeding 5 percent
of the aggregate value of all of the issuing
corporation’s stock as of the beginning of
such 2-year period.
(2) De minimis amount.For purposes
of this paragraph (b), stock exceeds a de
minimisamount only if the aggregate
amount paid for the stock exceeds
$10,000 and more than 2 percent of all
outstanding stock is purchased. The fol-
lowing rules apply for purposes of deter-
mining whether the 2-percent limit is ex-
ceeded. The percentage of the stock
acquired in any single purchase is deter-
mined by dividing the stock’s value (as of
1998–7 I.R.B17February 17, 1998

the time of purchase) by the value (as of
the time of purchase) of all stock outstand-
ing immediately before the purchase. The
percentage of stock acquired in multiple
purchases is the sum of the percentages
determined for each separate purchase.
(c) Transfers by shareholders in con-
nection with the performance of services
not treated as purchases.Atransfer of
stock by a shareholder to an employee or
independent contractor (or to a benefi-
ciary of an employee or independent con-
tractor) is not treated as a purchase of the
stock by the issuing corporation for pur-
poses of this section even if the stock is
treated as having first been transferred to
the corporation under §1.83–6(d)(1) (re-
lating to transfers by shareholders to em-
ployees or independent contractors).
(d) Exceptions for termination of ser-
vices, death, disability or mental incom-
petency, or divorce.Astock purchase is
disregarded if the stock is acquired in the
following circumstances:
(1) Termination of services—(i) Em-
ployees and directors.The stock was ac-
quired by the seller in connection with the
performance of services as an employee
or director and the stock is purchased
from the seller incident to the seller’s re-
tirement or other bona fide termination of
such services;
(ii) Independent contractors.[Re-
served];
(2) Death.Prior to a decedent’s death,
the stock (or an option to acquire the
stock) was held by the decedent or the
decedent’s spouse (or by both), by the
decedent and joint tenant, or by a trust re-
vocable by the decedent or the decedent’s
spouse (or by both), and—
(i) The stock is purchased from the
decedent’s estate, beneficiary (whether by
bequest or lifetime gift), heir, surviving
joint tenant, or surviving spouse, or from
a trust established by the decedent or
decedent’s spouse; and
(ii) The stock is purchased within 3
years and 9 months from the date of the
decedent’s death;
(3) Disability or mental incompetency.
The stock is purchased incident to the dis-
ability or mental incompetency of the
selling shareholder; or
(4) Divorce.The stock is purchased in-
cident to the divorce (within the meaning
of section 1041(c)) of the selling share-
holder.
(e) Effective date.This section applies
to stock issued after August 10, 1993.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved December 22, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 30, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 31, 1997,
62 F.R. 68165)
Section 1396.—Empowerment
Zone Employment Credit
26 CFR 1.1396–1: Qualified zone employees.
T.D. 8747
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Empowerment Zone
Employment Credit
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the period em-
ployers may use in computing the em-
powerment zone employment credit
under section 1396 of the Internal Rev-
enue Code. The regulations reflect and
implement certain changes made by the
Omnibus Budget Reconciliation Act of
1993 (OBRA
’93). They affect employers
of employees who live and work in an
empowerment zone designated under the
statute. The regulations provide employ-
ers with the guidance necessary to claim
the credit.
DATES: These regulations are effective
December 30, 1997. For dates of applica-
bility, see § 1.1396–1(c) of these regula-
tions.
FOR FURTHER INFORMATION CON-
TACT: Robert G. Wheeler, (202) 622-
6060 (not a toll-free number).
SUPPLEMENTARYINFORMATION:
Background
On December 16, 1996, a notice of pro-
posed rulemaking [REG–209834–96]
containing proposed regulations relating
to the period employers may use in com-
puting the empowerment zone employ-
ment credit under section 1396 of the In-
ternal Revenue Code was published in the
Federal Register(61 F.R. 66000).
No written comments responding to
this notice were received. No one re-
quested an opportunity to speak at a pub-
lic hearing. Therefore, no public hearing
was held. The regulations proposed by
REG–209834–96 are adopted with minor
clarifications by this Treasury decision.
Explanation of Provisions
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) relating to the empowerment zone em-
ployment credit under section 1396. Sec-
tion 1396 was added to the Internal Rev-
enue Code by the Omnibus Budget
Reconciliation Act of 1993 (OBRA’93).
Section 1397D of the Code authorizes the
Secretary of the Treasury to prescribe reg-
ulations that may be necessary or appro-
priate to carry out the purposes of section
1396.
Section 1396 provides employers with
a credit for certain wages (qualified zone
wages) paid or incurred by an employer
for services performed by a qualifed zone
employee. The amount of the empower-
ment zone employment credit under sec-
tion 1396 is equal to a specified percent-
age of the qualified zone wages paid or
incurred by the employer during the cal-
endar year that ends with or within the
taxable year of the employer. Questions
have arisen about the definition of a
“qualified zone employee” in section
1396(d). In particular, questions have
been raised about the appropriate period
under section 1396(d)(1)(A) during which
substantially all of the services performed
by an employee for his or her employer
must be performed within an empower-
ment zone in a trade or business of the
employer.
Under the regulations, an employer
may use either each pay period of the cal-
endar year or the entire calendar year as
the relevant period in determining
February 17, 1998181998–7 I.R.B.

whether a particular employee performed
substantially all of his or her services
within an empowerment zone (the “loca-
tion-of-services” requirement). For each
taxable year the employer must use the
same method for all its employees, but the
employer may change methods from one
taxable year to the next. The description of
the pay period method has been revised
slightly to clarify that the relevant pay peri-
ods are those for the calendar year with re-
spect to which the credit is being claimed
(i.e., the calendar year ending with or
within the employer’s taxable year).
Special Analyses
It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the regulation does not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Robert G. Wheeler, Office of As-
sociate Chief Counsel, Employee Bene-
fits and Exempt Organizations. However,
other personnel from the IRS and Trea-
sury Department participated in their de-
velopment.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1396–1 also issued under 26
U.S.C. 1397D.
Par. 2. Anew undesignated center
heading and §1.1396-1 are added to read
as follows:
Empowerment Zone Employment Credit
§1.1396–1 Qualified zone employees.
(a) In general.Aqualified zone em-
ployee of an employer is an employee
who satisfies the location-of-services re-
quirement and the abode requirement
with respect to the same empowerment
zone and is not otherwise excluded by
section 1396(d).
(1) Location-of-services requirement.
The location-of- services requirement is
satisfied if substantially all of the services
performed by the employee for the em-
ployer are performed in the empowerment
zone in a trade or business of the em-
ployer.
(2) Abode requirement.The abode re-
quirement is satisfied if the employee’s
principal place of abode while performing
those services is in the empowerment
zone.
(b) Period for applying location-of-ser-
vices requirement.In applying the loca-
tion-of-services requirement, an employer
may use either the pay period method de-
scribed in paragraph (b)(1) of this section
or the calendar year method described in
paragraph (b)(2) of this section. For each
taxable year of an employer, the employer
must either use the pay period method
with respect to all of its employees or use
the calendar year method with respect to
all of its employees. The employer may
change the method applied to all of its em-
ployees from one taxable year to the next.
(1) Pay period method—(i) Relevant
period.Under the pay period method, the
relevant period for applying the location-
of-services requirement is each pay pe-
riod in which an employee provides ser-
vices to the employer during the calendar
year with respect to which the credit is
being claimed (i.e., the calendar year that
ends with or within the relevant taxable
year). If an employer has one pay period
for certain employees and a different pay
period for other employees (e.g., a weekly
pay period for hourly wage employees
and a bi-weekly pay period for salaried
employees), the pay period actually ap-
plicable to a particular employee is the
relevant pay period for that employee
under this method.
(ii) Application of method.Under this
method, an employee does not satisfy the
location-of-services requirement during a
pay period unless substantially all of the
services performed by the employee for
the employer during that pay period are
performed within the empowerment zone
in a trade or business of the employer.
(2) Calendar year method—(i) Relevant
period.Under the calendar year method,
the relevant period for an employee is the
entire calendar year with respect to which
the credit is being claimed. However, for
any employee who is employed by the em-
ployer for less than the entire calendar
year, the relevant period is the portion of
that calendar year during which the em-
ployee is employed by the employer.
(ii) Application of method.Under this
method, an employee does not satisfy the
location-of-services requirement during
any part of a calendar year unless substan-
tially all of the services performed by the
employee for the employer during that
calendar year (or, if the employee is em-
ployed by the employer for less than the
entire calendar year, the portion of that
calendar year during which the employee
is employed by the employer) are per-
formed within the empowerment zone in
a trade or business of the employer.
(3) Examples.This paragraph (b) may
be illustrated by the following examples.
In each example, the following assump-
tions apply. The employees satisfy the
abode requirement at all relevant times
and all services performed by the employ-
ees for their employer are performed in a
trade or business of the employer. The
employees are not precluded from being
qualified zone employees by section
1396(d)(2) (certain employees ineligible).
No portion of the employees’wages is
precluded from being qualified zone
wages by section 1396(c)(2) (only first
$15,000 of wages taken into account) or
section 1396(c)(3) (coordination with tar-
geted jobs credit and work opportunity
credit). The examples are as follows:
Example 1. (i) Employer X has a weekly pay pe-
riod for all its employees. Employee Aworks for X
throughout 1997. During each of the first 20 weekly
pay periods in 1997, substantially all of A’s work for
X is performed within the empowerment zone in
which Aresides. Aalso works in the zone at various
times during the rest of the year, but there is no other
pay period in which substantially all of A’s work for
X is performed within the empowerment zone. Em-
ployer X uses the pay period method.
1998–7 I.R.B19February 17, 1998

(ii) For each of the first 20 pay periods of 1997, A
is a qualified zone employee, all of A’s wages from
X are qualified zone wages, and X may claim the
empowerment zone employment credit with respect
to those wages. X cannot claim the credit with re-
spect to any of A’s wages for the rest of 1997.
Example 2. (i) Employer Yhas a weekly pay pe-
riod for its factory workers and a bi-weekly pay pe-
riod for its office workers. Employee B works for Y
in various factories and Employee C works for Yin
various offices. Employer Yuses the pay period
method.
(ii) Ymust use B’s weekly pay periods to deter-
mine the periods (if any) in which B is a qualified
zone employee. Ymay claim the empowerment
zone employment credit with respect to B’s wages
only for the weekly pay periods for which B is a
qualified zone employee, because those are B’s only
wages that are qualified zone wages. Ymust use C’s
bi-weekly pay periods to determine the periods (if
any) in which C is a qualified zone employee. Y
may claim the credit with respect to C’s wages only
for the bi-weekly pay periods for which C is a quali-
fied zone employee, because those are C’s only
wages that are qualified zone wages.
Example 3. (i) Employees D and E work for Em-
ployer Z throughout 1997. Although some of D’s
work for Z in 1997 is performed outside the empow-
erment zone in which D resides, substantially all of
it is performed within that empowerment zone. E’s
work for Z is performed within the empowerment
zone in which E resides for several weeks of 1997
but outside the zone for the rest of the year so that,
viewed on an annual basis, E’s work is not substan-
tially all performed within the empowerment zone.
Employer Z uses the calendar year method.
(ii) D is a qualified zone employee for the entire
year, all of D’s 1997 wages from Z are qualified
zone wages, and Z may claim the empowerment
zone employment credit with respect to all of those
wages, including the portion attributable to work
outside the zone. Under the calendar year method, E
is not a qualified zone employee for any part of
1997, none of E’s 1997 wages are qualified zone
wages, and Z cannot claim any empowerment zone
employment credit with respect to E’s wages for
1997. Z cannot use the calendar year method for D
and the pay period method for E because Z must use
the same method for all employees. For 1998, how-
ever, Z can switch to the pay period method for E if
Z also switches to the pay period method for D and
all of Z’s other employees.
(c) Effective date.This section applies
with respect to wages paid or incurred on
or after December 21, 1994.
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 29, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 30, 1997,
62 F.R. 67726)
Section 2044.—Certain
Property for Which Marital
Deduction was Previously
Allowed
26 CFR 20.2044–1: Certain property for which
marital deduction was previously allowed.
What are the gift tax consequences to the surviv-
ing spouse of the acquisition by the surviving spouse
of the remainder interest in a trust subject to a quali-
fied terminable interest property (QTIP) election
under § 2056(b)(7) of the Internal Revenue Code?
See Rev. Rul. 98–8, page 24.
Section 2056.—Bequests, Etc.,
to Surviving Spouse
26 CFR 20.2056(b)(7): Election with respect to life
estate for surviving spouse.
What are the gift tax consequences to the surviv-
ing spouse of the acquisition by the surviving spouse
of the remainder interest in a trust subject to a quali-
fied terminable interest property (QTIP) election
under § 2056(b)(7) of the Internal Revenue Code?
See Rev. Rul. 98–8, page 24.
Section 2511.—Transfers in
General
26 CFR 25.251–1: Transfers in general.
If a surviving spouse acquires the remainder in-
terest in a trust subject to a QTIPelection under
§ 2056(b)(7) in connection with the transfer by the
surviving spouse of property or cash to the holder of
the remainder interest, does the surviving spouse
make a gift under § 2511 of the Internal Revenue
Code? See Rev. Rul. 98–8, page 24.
Section 2512.—Valuation of
Gifts
Section 25.2512–8: Transfers for insufficient
consideration.
If a surviving spouse acquires the remainder in-
terest in a trust subject to a QTIPelection under
§ 2056(b)(7) in connection with the transfer by the
surviving spouse of property or cash to the holder of
the remainder interest, what is the value of the gift
under § 2512 of the Internal Revenue Code? See
Rev. Rul. 98–8, page 24.
Section 2518.—Disclaimers
26 CFR 25.2518–2: Requirements for a qualified
disclaimer.
T.D. 8744
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20 and 25
Disclaimer of Interests and
Powers
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final Regulations.
SUMMARY: This document contains
final regulations relating to the treatment
of disclaimers for estate and gift tax pur-
poses. The regulations clarify certain pro-
visions governing the disclaimer of prop-
erty interests and powers and, in addition,
conform the regulations to court decisions
holding the current regulation invalid
with respect to the disclaimer of joint
property interests. The final regulations
will affect persons who disclaim property
interests, powers, or interests in jointly
owned property.
DATES: Effective date:The final regula-
tions are effective December 31, 1997.
Applicability dates:The amendments
to §§25.2518–l(a) and 25.2518–2(c)(3)
(substituting the statutory language in
section 2518(b)(2)(A) “transfer creating
the interest,” for “taxable transfer”) and
conforming changes to §§20.2041–3(d)-
(6)(i), 20.2046–1, 20.2056(d)–2 (a) and
(b), 25.2511–l(c)(1), 25.2514–3(c)(5), are
applicable for transfers creating the inter-
est or power to be disclaimed made on or
after December 31, 1997. The amend-
ments to §25.2518–2(c)(4) (relating to the
disclaimer of joint property and bank ac-
counts) are applicable for disclaimers
made on or after December 31, 1997.
FOR FURTHER INFORMATION CON-
TACT: James F. Hogan (202) 622-3090
(not a toll-free number).
SUPPLEMENTARYINFORMATION:
Background
On August 21, 1996, the IRS published
in the Federal Register(61 F.R. 43197) a
notice of proposed rulemaking (REG–
208216–91) amending the regulations
under section 2518. The IRS received
comments on the proposed regulations;
however, no request for a public hearing
was received so no public hearing was
February 17, 1998201998–7 I.R.B.

held. This document adopts final regula-
tions with respect to this notice of pro-
posed rulemaking.
The proposed regulations substituted the
statutory language of section 2518(b)-
(2)(A), “transfer creating the interest,” for
“taxable transfer” as the reference point for
determining when the 9-month time period
for making the disclaimer commences.
This change clarifies that the starting point
for the 9-month period is not dependent on
the actual imposition of a transfer tax at the
time that the interest to be disclaimed is
created. Comments with respect to the
clarification in the proposed regulation
supported the change.
Under the proposed regulations, the
one-half survivorship interest in jointly-
held property that was unilaterally sever-
able could be disclaimed within 9 months
of the date of death of the first joint tenant
to die. The proposed regulations did not
extend the same treatment to joint interests
that are not unilaterally severable (e.g.,
tenancies by the entirety), but the pream-
ble invited comments on this subject.
The comments received unanimously
suggested that a surviving joint tenant
should be allowed to disclaim, within 9
months of the date of death of the first
joint tenant to die, his or her survivorship
interest in a tenancy, whether or not that
tenancy is unilaterally severable. The
comments noted that parties purchasing a
residence often do not make an informed
decision regarding whether the residence
should be held as joint tenants or tenants
by the entirety, and generally are not
aware that the decision to take title to the
property as either joint tenants with right
of survivorship or tenants by the entirety
will affect the ability to disclaim their in-
terest in the property after the death of the
first joint tenant to die.
Accordingly, the final regulations
allow the disclaimer of jointly-held prop-
erty that is not unilaterally severable on
the same basis as joint property that is
unilaterally severable. Thus, a surviving
joint tenant may disclaim the one-half
survivorship interest in property that the
joint tenant held either in joint tenancy
with right of survivorship or in tenancy by
the entirety, within 9 months of the death
of the first joint tenant to die. The rule
also significantly simplifies the dis-
claimer of jointly-held property, eliminat-
ing certain special rules that were depen-
dent on the application of section 2515 to
the creation of the tenancy.
The proposed regulations provided rules
regarding the disclaimer of interests in
Joint bank accounts and brokerage ac-
counts, generally recognizing that the cre-
ation of such accounts are not completed
gifts under certain circumstances. Com-
ments noted that other kinds of investment
accounts, such as accounts held at mutual
funds, accord the parties rights that are
similar to the rights of parties with respect
to joint bank accounts and brokerage ac-
counts. Accordingly, the final regulations
have expanded the special rule with re-
spect to the disclaimer of jointly-held bank
and brokerage accounts to include jointly-
held investment accounts such as accounts
held at mutual funds.
Special Analyses
It has been determined that this Treasury
decision is not a significant regulatory ac-
tion as defined in EO 12866. Therefore, a
regulatory assessment is not required. It
also has 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 these regu-
lations do not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, the Notice of
Proposed Rulemaking preceding these reg-
ulations was submitted to the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Dale Carlton, Office of the Chief
Counsel, IRS. Other personnel from the
IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 20 and 25
are amended as follows:
PART20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER
AUGUST16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2041–3 is amended
as follows:
1. Paragraph (d)(6)(i) is amended by
revising the first sentence and by adding a
new sentence after the first sentence.
2. Paragraph (d) (6) (iii) is added.
The additions and revisions read as fol-
lows:
§20.2041–3 Powers of appointment
created after October 21. 1942.
* * * * *
(d) * * *
(6)(i) Adisclaimer or renunciation of a
general power of appointment created in a
transfer made after December 31, 1976, is
not considered to be the release of the
power if the disclaimer or renunciation i”
a qualified disclaimer as described in sec-
tion 2518 and the corresponding regula-
tions. For rules relating to when the trans-
fer creating the power occurs, see
25.2518–2(c) (3) of this chapter. * * *
* * * * *
(iii) The first and second sentences of
paragraph (d)(6)(i) of this section are ap-
plicable for transfers creating the power
to be disclaimed made on or after Decem-
ber 31, 1997.
* * * * *
Par. 3. Section 20.2046–1 is revised to
read as follows:
520.2046–1 Disclaimed property.
(a) This section shall apply to the dis-
claimer or renunciation of an interest in
the person disclaiming by a transfer made
after December 31, 1976. For rules relat-
ing to when the transfer creating the inter-
est occurs, see §25.2518–2(C) (3) and (c)
(4) of this chapter. If a qualified dis-
claimer is made with respect to such a
transfer, the Federal estate tax provisions
are to apply with respect to the property
interest disclaimed as if the interest had
never been transferred to the person mak-
ing the disclaimer. See section 2518 and
the corresponding regulations for rules re-
lating to a qualified disclaimer.
(b) The first and second sentences of
this section are applicable for transfers
creating the interest to be disclaimed
made on or after December 31, 1997.
Par. 4. Section 20.2056 (d)–2 is
amended as follows:
1998–7 I.R.B21February 17, 1998

1. Paragraph (a) is amended by revising
the first sentence and adding a new sen-
tence after the first sentence.
2. Paragraph (b) is revised.
3. Anew paragraph (c) is added.
The additions and revisions read as fol-
low:
120.2056(d)–2 Marital deduction: effect
of disclaimers of postDecember 31. 1976
transfers.
(a) * * * If a surviving spouse disclaims
an interest in property passing to such
spouse from the decedent, which interest
was created in a transfer made after De-
cember 31, 1976, the effectiveness of the
disclaimer will be determined by section
2518 and the corresponding regulations.
For rules relating to when the transfer
creating the interest occurs, see
§25.25182(c)(3) and (c)(4) of this chapter.
* * *
(b) Disclaimer by a person other than a
surviving spouse.If an interest in property
passes from a decedent to a person other
than the surviving spouse, and the interest
is created in a transfer made after Decem-
ber 31, 1976, and—
(1) The person other than the surviving
spouse makes a qualified disclaimer with
respect to such interest; and
(2) The surviving spouse is entitled to
such interest in property as a result of
such disclaimer, the disclaimed interest is
treated as passing directly from the dece-
dent to the surviving spouse. For rules re-
lating to when the transfer creating the in-
terest occurs, see §25.2518–2(c)(3) and
(c)(4) of this chapter.
(c) Effective date. The first and second
sentences of paragraphs (a) and (b) of this
section are applicable for transfers creat-
ing the interest to be disclaimed made on
or after December 31, 1997.
PART25—GIFTTAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority citation for part 25
is amended by adding an entry in numeri-
cal order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 25.2518–2 is also issued under
26 U. S. C. 2518 (b). * * *
Par. 6. Section 25.2511–1 is amended
as follows:
1. In paragraph (c)(l), the fourth sen-
tence is revised.
2. Anew paragraph (c)(3) is added.
The additions and revisions read as fol-
lows: 25. 2511–1 Transfers in asneral.
* * * * *
(c)(l) * * * However, in the case of a
transfer creating an interest in property
(within the meaning of 25.2518–2(c) (3)
and (c) (4) ) made after December 31,
1976, this paragraph (c)(l) shall not apply
to the donee if, as a result of a qualified
disclaimer by the donee, the interest
passes to a different donee. * * *
* * * * *
(3) The fourth sentence of paragraph
(c)(l) of this section is applicable for
transfers creating an interest to be dis-
claimed made on or after December 31,
1997.
* * * * *
Par. 7. Section 25.2514–3 is amended
as follows:
1. Paragraph (c) (5) is amended by re-
vising the first sentence and adding a new
sentence after the first sentence.
2. Anew paragraph (c)(7) is added.
The additions and revisions read as fol-
lows:
§425.2514–3 Powers of appointment
created after October 21. 1942.
* * * * *
(c) * * *
(5) * * * Adisclaimer or renunciation of
a general power of appointment created in
a transfer made after December 31, 1976,
is not considered a release of the power for
gift tax purposes if the disclaimer or re-
nunciation is a qualified disclaimer as de-
scribed in section 2518 and the corre-
sponding regulations. For rules relating to
when a transfer creating the power occurs,
see §25.2518–2(c) (3) . * * *
* * * * *
(7) The first and second sentences of
paragraph (c)(5) of this section are applic-
able for transfers creating the power to be
disclaimed made on or after December
31, 1997.
* * * * *
Par. 8. Section 25.2518–1 is amended
as follows:
1. Paragraph (a)(l) is revi ;ed.
2. In paragraph (a)(2), the last three
sentences of the example are removed and
four new sentences are added in their
place.
3. Anew paragraph (a)(3) is added.
The additions and revisions read as fol-
lows:
§425.2518–1 Oualified disclaimers of
property: In general.
(a) * * * (1) In aeneral. The rules de-
scribed in this section, §25. 2518–2, and
§25. 2518– 3 apply to the qualified dis-
claimer of an interest in property which is
created in the person disclaiming by a
transfer made after December 31, 1976.
In general, a qualified disclaimer is an
irrevocable and unqualified refusal to ac-
cept the ownership of an interest in prop-
erty. For rules relating to the determina-
tion of when a transfer creating an interest
occurs, see §25.2518–2(c)(3) and (4)
(2) * * *
Example.* * * The transfer creating the remain-
der interest in the trust occurred in 1968. See
§25.2511–l(c)(2). Therefore, section 2518 does not
apply to the disclaimer of the remainder interest be-
cause the transfer creating the interest was made
prior to January 1, 1977. If, however, Whad caused
the gift to be incomplete by also retaining the power
to designate the person or persons to receive the
trust principal at death, and, as a result, no transfer
(within the meaning of 2§5.2511–l(c)(2)) of the re-
mainder interest was made at the time of the creation
of the trust, section 2518 would apply to any dis-
claimer made after W’s death with respect to an in-
terest in the trust property.
(3) Paragraph (a)(l) of this section is
applicable for transfers creating the inter-
est to be disclaimed made on or after De-
cember 31, 1997.
* * * * *
Par. 9. Section 25.2518–2 is amended
as follows:
1. The text of paragraph (c)(3) follow-
ing the heading is redesignated as para-
graph (c)(3)(i) and amended as follows:
a. In the first, eighth, and eleventh sen-
tences, the word “taxable” is removed in
each place it appears.
b. In the second and ninth sentences,
the language “taxable transfer” is re-
moved and “transfer creating an interest”
is added in each place it appears.
c. In the third sentence the language
“taxable transfers” is removed and “trans-
fers creating an interest” is added.
d. The fourth, fifth, sixth, and seventh
sentences are removed and five new sen-
tences are added in their place.
February 17, 1998221998–7 I.R.B.

2–3. Anew paragraph (c) (3 (ii) is
added.
4. Paragraph (c)(4) is revised.
5. In paragraph (c)(5), Example (7)is
revised.
6. In paragraph (c)(5), Example (8)is
removed.
7. In paragraph (c)(5), Example (9)is
redesignated as Example (12)and is re-
vised.
8. In paragraph (c)(5), Example (10)is
redesignated as Example (11)and the first
sentence is revised.
9. In paragraph (c)(5), new Examples
(8), (9), (10), (13),and(14), are added.
The additions and revisions read as fol-
lows:
625.2518–2 Requirements for a qualified
disclaimer.
* * * * *
(c) * * * (3) Transfer.(i) * * * With re-
spect to transfers made by a decedent at
death or transfers that become irrevocable
at death, the transfer creating the interest
occurs on the date of the decedent’s death,
even if an estate tax is not imposed on the
transfer. For example, a bequest of for-
eign-situs property by a nonresident alien
decedent is regarded as transfer creating
an interest in property even if the transfer
would not be subject to estate tax. If there
is a transfer creating an interest in property
during the transferor’s lifetime and such
interest is later included in the transferor’s
gross estate for estate tax purposes (or
would have been included if such interest
were subject to estate tax), the 9-month
period for making the qualified disclaimer
is determined with reference to the earlier
transfer creating the interest. In the case of
a general power of appointment, the
holder of the power has a 9-month period
after the transfer creating the power in
which to disclaim. If a person to whom
any interest in property passes by reason
of the exercise, release, or lapse of a gen-
eral power desires to make a qualified dis-
claimer, the disclaimer must be made
within a 9-month period after the exercise,
release, or lapse regardless of whether the
exercise, release, or lapse is subject to es-
tate or gift tax. * * *
(ii) Sentences 1 through 10 and 12 of
paragraph (c)(3)(i) of this section are ap-
plicable for transfers creating the interest
to be disclaimed made on or after Decem-
ber 31, 1997.
(4) Joint property—(i) Interests in joint
tenancy with right of survivorship or ten-
ancies by the entirety.Except as provided
in paragraph (c)(4)(iii) of this section
(with respect to joint bank, brokerage, and
other investment accounts), in the case of
an interest in a joint tenancy with right of
survivorship or a tenancy by the entirety,
a qualified disclaimer of the interest to
which the disclaimant succeeds upon cre-
ation of the tenancy must be made no later
than 9 months after the creation of the
tenancy regardless of whether such inter-
est can be unilaterally severed under local
law. Aqualified disclaimer of the sur-
vivorship interest to which the survivor
succeeds by operation of law upon the
death of the first joint tenant to die must
be made no later than 9 months after the
death of the first joint tenant to die regard-
less of whether such interest can be uni-
laterally severed under local law and, ex-
cept as provided in paragraph (c)(4)(ii) of
this section (with respect to certain tenan-
cies created on or after July 14, 1988),
such interest is deemed to be a one-half
interest in the property. (See, however,
section 2518(b)(2)(B) for a special rule in
the case of disclaimers by persons under
age 21.) This is the case regardless of the
portion of the property attributable to con-
sideration furnished by the disclaimant
and regardless of the portion of the prop-
erty that is included in the decedent’s
gross estate under section 2040 and re-
gardless of whether the interest can be
unilaterally severed under local law. See
paragraph (c)(5), Examples (7) and (8), of
this section.
(ii) Certain tenancies in real property
between spouses created on or after July
14. 1988.In the case of a joint tenancy be-
tween spouses or a tenancy by the entirety
in real property created on or after July
14, 1988, to which section 2523(i)(3) ap-
plies (relating to the creation of a tenancy
where the spouse of the donor is not a
United States citizen), the surviving
spouse may disclaim any portion of the
joint interest that is includible in the dece-
dent’s gross estate under section 2040.
See paragraph (c)(5), Example (9), of this
section.
(iii) Special rule for joint bank, bro-
kerege, and other investment accounts
(e.g., accounts held at mutual funds) es-
tablished between spouses or between
persons other than husband and wife.In
the case of a transfer to a joint bank, bro-
kerage, or other investment account (e.g.,
an account held at a mutual fund), if a
transferor may unilaterally regain the
transferor’s own contributions to the ac-
count without the consent of the other co-
tenant, such that the transfer is not a com-
pleted gift under §25.2511–l(h)(4), the
transfer creating the survivor’s interest in
the decedent’s share of the account occurs
on the death of the deceased cotenant. Ac-
cordingly, if a surviving joint tenant de-
sires to make a qualified disclaimer with
respect to funds contributed by a deceased
cotenant, the disclaimer must be made
within 9 months of the cotenant’s death.
The surviving joint tenant may not dis-
claim any portion of the joint account at-
tributable to consideration furnished by
that surviving joint tenant. See paragraph
(c)(5), Examples (12), (13), and (14), of
this section, regarding the treatment of
disclaimed interests under sections 2518,
2033 and 2040.
(iv) Effective date. This paragraph
(c)(4) is applicable for disclaimers made
on or after December 31, 1997.
(5) Examples.* * *
* * * * *
Example (7). On February 1, 1990, Apurchased
real property with A’s funds. Title to the property
was conveyed to “Aand B, as joint tenants with
right b’survivorship.” Under applicable state law,
the joint interest is unilaterally severable by either
tenant. B dies on May 1, 1998, and is survived by A.
On January 1, 1999, Adisclaims the one-half sur-
vivorship interest in the property to which Asuc-
ceeds as a result of B’s death. Assuming that the
other requirements of section 2518(b) are satisfied,
Ahas made a qualified disclaimer of the one-half
survivorship interest (but not the interest retained by
Aupon the creation of the tenancy, which may not
be disclaimed by A). The result is the same whether
or not Aand B are married and regardless of the pro-
portion of consideration furnished by Aand B in
purchasing the property.
Example (8). Assume the iame facts as in Exam-
ple (7)except that Aand B are married and title to
the property was conveyed to “Aand B, as tenants
by the entirety.” Under applicable state law, the ten-
ancy cannot be unilaterally severed by either tenant.
Assuming that the other requirements of section
2518(b) are satisfied, Ahas made a qualified dis-
claimer of the one-half survivorship interest (but not
the interest retained by Aupon the creation of the
tenancy, which may not be disclaimed by A). The re-
sult is the same regardless of the proportion of con-
sideration furnished by Aand B in purchasing the
property.
Example (9). On March 1, 1989, H and Wpur-
chase a tract of vacant land which is conveyed to
them as tenants by the entirety. The entire considera-
tion is paid by H. Wis not a United States citizen. H
1998–7 I.R.B23February 17, 1998

d es on June 1, 1998. Wcan disclaim the entire joint
interest because this is the interest includible in H’s
gross estate under section 2040(a). Assuming that
W’s disclaimer is received by the executor of H’s es-
tate no later than 9 months after June 1, 1998, and
the other requirements of section 2518(b) are satis-
fied, W’s disclaimer of the property would be a qual-
ified disclaimer. The result would be the same if the
property was held in joint tenancy with right of sur-
vivorship that was unilaterally severable under local
law.
Example (10). In 1986, pouses Aand B pur-
chased a personal residence taking title as tenants
by the entirety. B dies on July 10, 1998. Awishes to
disclaim the one-half undivided interest to which A
would succeed by right of survivorship. If Amakes
the disclaimer, the propery interest would pass under
B’s will to their child C. C, an adult, and Aresided in
the residence at B’s death and will continue to reside
there in the future. Acontinues to own a one-half un-
divided interest in the property. Assuming that the
other requirements of section 2518(b) are satisfied,
Amay make a qualified disclaimer with respect to
the one-half undivided survivorship interest in the
residence if Adelivers the written disclaimer to the
personal representative of B’s estate by April 10,
1999, since Ais not deemed to have accepted the in-
terest or any of its benefits prior to that time and A’s
occupancy of the residence after B’s death is consis-
tent with A’s retained undivided ownership interest.
The result would be the same if property was held in
joint tenancy with right of survivorship that was uni-
laterally severable under local law.
Example (11). H and W, husband and wife, reside
in state X, a community property state. * * *
Example (12).On July 1, 1990, Aopens a bank
account that is held jointly with B, A’s spouse, and
transfers $50,000 of A’s money to the account. Aand
B are United States citizens. Acan regain the entire
account without B’s consent, such that the transfer is
not a completed gift under §25.2511–l(h)(4). Adies
on August 15, 1998, and B disclaims the entire
amount in the bank account on October 15, 1998.
Assuming that the remaining requirements of sec-
tion 2518(b) are satisfied, B made a qualified dis-
claimer under section 2518 (a) because the dis-
claimer was made within 9 months after A’s death at
which time B had succeeded to full dominion and
control over the account. Under state law, B is
treated as predeceasing Awith respect to the dis-
claimed interest. The disclaimed account balance
passes through A’s probate estate and is no longer
joint property includible in A’s gross estate under
section 2040.The entire account is, instead, includi-
ble in A’s gross estate und~er section 2033. The re-
sult would be the same if Aand B were not married.
Example (13).The facts ire the same as Example
(12),except that B, rather than A, dies on August 15,
1998. Amay not make a qualified disclaimer with
respect to any of the funds in the bank account, be-
cause Afurnished the funds for the entire account
and Adid not relinq ish dominion and control over
the funds. .
Example (14).The fact s are the same as Example
(12), except that B disclaims 40 F ercent of the funds
in the account. Since, under state law, B is treated as
predeceasing Awith respect to the disclaimed in in-
terest, the 40 percent portion of the account balance
that was disclaln~d passes as part of A’s probate es-
tate, and is no longer characterized as joint property.
This 40 percent portion of the account balance is,
therefore, includible in A’s gross estate under section
2033. The remaining 60 percent of the account bal-
ance that was not disclaimed retains its character as
joint property and, therefore, is includible in A’s
gross estate as provide in section 2040(b). There-
fore, 30 percent (1/2 360 percent) of the account
balance is includible in A’s gross estate under sec-
tion 2040(b), and a total of 70 percent of the aggre-
gate account balance is includible in A’s gross estate.
If Aand B were not married, then the 40 percent por-
tion of the account subject to the disclaimer would
be includible in A’s gross estate as provided in sec-
tion 2033 and the 60 percent portion of the account
not subject to the disclaimer would be includible in
A’s gross estate as provided in section 2040(a), be-
cause Afurnished all of the funds with respect to the
account.
* * * * *
Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved December 10, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 30, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 31, 1997,
62 F.R. 68183)
Section 2519.—Dispositions of
Certain Life Estates
26 CFR 25.2519–1: Dispositions of certain life
estates.
(Also sections 2044; 2056; 2511; 2512; 20.2044–1;
20.2056(b)–7; 25.2511–1; 25.2512–8)
Disposition of qualifying income in-
terest.If a surviving spouse acquires the
remainder interest in a trust subject to a
QTIPelection under section 2056(b)(7) of
the Code in connection with the transfer
by the surviving spouse of property or
cash to the holder of the remainder inter-
est, the surviving spouse makes a gift
under sections 2511, 2512, and 2519 of
the Code.
Rev. Rul. 98–8
ISSUE
What are the gift tax consequences to
the surviving spouse of the acquisition by
the surviving spouse of the remainder in-
terest in a trust subject to a qualified ter-
minable interest property (QTIP) election
under § 2056(b)(7) of the Internal Rev-
enue Code?
FACTS
The decedent, D, died in 1993 survived
by S, D’s spouse. Under the terms of D’s
will, a trust (the QTIPTrust) was estab-
lished under which S was to receive all of
the trust income, payable at least annu-
ally, for S’s life. On S’s death, the remain-
der was to be distributed outright to C,
D’s adult child. Swas not given a general
power of appointment over the trust
property.
On the federal estate tax return filed for
D’s estate, the executor made an election
under § 2056(b)(7) to treat the trust prop-
erty as QTIP, and a marital deduction was
allowed to D’s estate for the value of the
property passing from Dto the QTIPTrust.
Subsequently, S, C, and the trustee of
the QTIPTrust entered into the following
transaction: (1) Sacquired C’s remainder
interest in the QTIPTrust; (2) Sgave Ca
promissory note in the face amount of x
dollars (the value of the remainder inter-
est) for the remainder interest; (3) the
trustee distributed all of the QTIPTrust
assets (having a value of x+ ydollars) to
S; and (4) Sthereupon paid xdollars from
those assets to Cin satisfaction of the
promissory note.
At the conclusion of the transaction,
the QTIPTrust was terminated; Sheld
QTIPTrust assets having a value of y dol-
lars (which was equal to the value of S’s
life interest in the trust); and Cheld assets
having a value of xdollars (which was
equal to the value of the remainder inter-
est in the trust). Scontended that the
transaction was not subject to gift tax be-
cause Sreceived full and adequate consid-
eration (the xdollar remainder interest in
the QTIPTrust) in exchange for the xdol-
lar promissory note given by STO C.
LAWAND ANALYSIS
Section 2044(a) provides that the value
of the gross estate includes the value of
any property described in § 2044(b) in
which the decedent had a qualifying in-
come interest for life. Section 2044(b)
provides that § 2044 applies to any prop-
erty if a deduction was allowed with re-
spect to the transfer of the property to the
decedent under § 2056(b)(7).
Section 2056(a) provides that the value
of the taxable estate is, except as limited
February 17, 1998241998–7 I.R.B.

by § 2056(b), determined by deducting
from the value of the gross estate an
amount equal to the value of any interest
in property that passes or has passed from
the decedent to the surviving spouse.
Under § 2056(b)(1), if an interest pass-
ing to the surviving spouse will terminate,
no deduction is allowed with respect to
such interest if, after termination of the
spouse’s interest, an interest in the prop-
erty passes or has passed (for less than an
adequate and full consideration in money
or money’s worth) from the decedent to
any person other than the surviving
spouse (or the estate of such spouse).
Section 2056(b)(7)(A) provides that
qualified terminable interest property, for
purposes of § 2056(a), is treated as pass-
ing to the surviving spouse, and no part of
such property is treated as passing to any
person other than the surviving spouse.
In general, qualified terminable interest
property is property in which the spouse
receives a qualifying income interest for
life,and with respect to which the execu-
tor makes an election to treat the property
as QTIP.
Section 2511(a) provides that the gift
tax applies whether the transfer is in trust
or otherwise, whether the gift is direct or
indirect, and whether the property is real
or personal, tangible or intangible.
Section 2512(b) provides that where
property is transferred for less than an ad-
equate and full consideration in money or
money’s worth, the amount by which the
value of the property exceeds the value of
the consideration is deemed a gift.
Section 2519(a) provides that any dis-
position of all or part of a qualifying in-
come interest for life in any property to
which the section applies is treated as a
transfer of all interests in the property
other than the qualifying income interest.
Section 2519(b) provides that the section
applies to any property if a deduction was
allowed with respect to the transfer of
such property to the donor under
§ 2056(b)(7).
The estate tax marital deduction provi-
sions are intended to provide a special tax
benefit that allows property to pass to the
surviving spouse without the decedent’s
estate paying tax on its value. Tax is de-
ferred on the transfer until the surviving
spouse either dies or makes a lifetime dis-
position of the property. Under either cir-
cumstance, a transfer (estate or gift) tax is
paid. United States v. Stapf, 375 U.S.
118, 128 (1963), 1964-1 (Part 1) C.B.
535, 537; Estate of Clayton v. Commis-
sioner, 976 F.2d 1486, 1491 (5th Cir.
1992); Estate of Letts v.Commissioner,
109 T.C. 290 (1997), (“It is a basic policy
of the marital deduction that property that
passes untaxed from a predeceasing
spouse to a surviving spouse is included
in the estate of the surviving spouse.”)
The statutory scheme of the QTIPpro-
visions is consistent with this congres-
sional intent. Thus, a marital deduction is
allowed under § 2056(b)(7) for property
passing from a decedent to a QTIPtrust in
which the surviving spouse possesses a
lifetime income interest. Sections 2519
and 2044 act to defer the taxable event on
the marital deduction property only so
long as the surviving spouse continues to
hold the lifetime income interest.
Under § 2519, if a surviving spouse
disposes of any part of the qualifying in-
come interest, the spouse is treated as
making a gift of the remainder interest in
the underlying property (i.e., all interests
in the property other than the income in-
terest). Correspondingly, under § 2511,
the disposition of the income interest by
the spouse is treated as a gift, to the extent
the income interest is transferred to an-
other for less than adequate consideration.
The term “disposition,” as used in §
2519, applies broadly to circumstances in
which the surviving spouse’s right to re-
ceive the income is relinquished or other-
wise terminated, by whatever means. See
H. Rep. No. 201, 97th Cong., 1st Sess.
161 (1981) that states:
The bill provides that property sub-
ject to a [QTIPelection] will be subject
to transfer taxes at the earlier of (1) the
date on which the spouse disposes (ei-
ther by gift, sale, or otherwise) of all or
part of the qualifying income interest,
or (2) upon the spouse’s death.
Acommutation, which is a proportion-
ate division of trust property between the
life beneficiary and remainderman based
on the respective values of their interests
is, in the context of a QTIPtrust, a taxable
disposition by the spouse of the qualify-
ing income interest, resulting in a gift
under § 2519 of the value of the remain-
der interest. The commutation of the
spouse’s income interest in the QTIPtrust
is essentially a sale of the income interest
by the spouse to the trustee (or the re-
mainderman) in exchange for an amount
equal to the value of the income interest.
Sales and commutations are expressly
characterized as dispositions in the ap-
plicable legislative history and regula-
tions. Section 25.2519–1(g), Example 2
(illustrating that the sale by the spouse of
the spouse’s income interest to the trust
remaindermen is a disposition of the in-
come interest); § 25.2519–1(f) providing
that “[T]he sale of qualified terminable
interest property, followed by the pay-
ment to the donee-spouse of a portion of
the proceeds equal to the value of the
donee-spouse’s income interest, is consid-
ered a disposition of the qualifying in-
come interest”. See also, Estate of
Novotny v. Commissioner,93 T.C. 12
(1989), in which the surviving spouse and
remainderman divided the sale proceeds
of QTIPproperty proportionately on the
basis of the respective values of their in-
terests; the court indicated that the com-
mutation constituted a disposition by the
spouse of the income interest for purposes
of § 2519 and was thus subject to gift tax.
There is little distinction between the
sale and commutation transactions treated
as dispositions in the regulations and the
transaction presented here, where Sac-
quired the remainder interest. In both
cases, after the transaction the spouse’s
income interest in the trust is terminated
and the spouse receives outright owner-
ship of property having a net value equal
to the value of the spouse’s income inter-
est. Similarly, the remainderman receives
ownership of property equal in value to
the remainder interest. Thus, the transac-
tion in the instant case essentially effectu-
ates a commutation of S’s income interest
in the trust, a transaction that is a disposi-
tion of S’s income interest under § 2519.
Therefore, under § 2519, Sis regarded as
making a gift of xdollars, the value of the
remainder interest in the QTIPTrust.
Section 25.2519–1(f).
This conclusion that S has made a gift
is also supported by an additional analy-
sis. Sacquired an asset (the remainder in-
terest in the QTIPTrust) that is already
subject to inclusion in S’s transfer tax
base under § 2044. In analogous situa-
tions, the courts have recognized that the
receipt of an asset that does not effec-
tively increase the value of the recipient’s
gross estate does not constitute adequate
consideration for purposes of the gift and
1998–7 I.R.B25February 17, 1998

estate tax. See Commissioner v. Wemyss,
324 U.S. 303, 307 (1945), 1945 C.B. 416,
(“The section taxing as gifts transfers that
are not made for `adequate and full
[money] consideration’aims to reach
those transfers which are withdrawn from
the donor’s estate.”)
Acompanion case to Commissioner v.
Wemyss, Merrill v. Fahs,324 U.S. 308
(1945), 1945 C.B. 418, and the cases that
preceded it, involved situations where A,
an individual, transferred property to B,
A’s spouse (or future spouse), in exchange
for B’s relinquishment of marital rights in
A’s property. The Court held that B’s re-
linquishment of the marital rights did not
constitute adequate and full consideration
for A’s transfer because the assets subject
to the marital rights were already includi-
ble in A’s taxable estate. The property
subject to dower and marital rights is
clearly included in the gross estate of the
property owner. Thus, to conclude that
the relinquishment of dower and marital
rights by the spouse of the property
owner constituted adequate and full con-
sideration for a transfer by the property
owner for gift tax purposes would effec-
tively subvert the legislative intent and
statutory scheme of the gift tax provi-
sions. Merrill v. Fahs,at 311–312. See
also, Commissioner v. Bristol,121 F.2d
129, 136 (1st Cir. 1941).
Likewise, in the present situation, prop-
erty subject to the QTIPelection was in-
tended to be subject to either gift or estate
tax. S’s receipt of the remainder interest
does not increase the value of S’s taxable
estate because that property is already
subject to inclusion in S’s taxable estate
under § 2044. Rather, S’s issuance of the
note results in a depletion of S’s taxable
estate that is not offset by S’s receipt of
the remainder interest. Thus, for estate
and gift tax purposes, S’s receipt of the re-
mainder interest cannot constitute ade-
quate and full consideration under
§ 2512 for the promissory note transferred
by Sto C. As was the case in Merrill v.
Fahs,any other result would subvert the
legislative intent and statutory scheme un-
derlying § 2056(b)(7). Therefore, under
§ 2511, Shas made a gift to Cequal to the
value of the promissory note S gave to C.
In addition, a gift tax would be im-
posed under the above alternative ratio-
nales even if Sacquired only a portion of
C’s remainder interest; e.g.,Sacquired 60
percent of C’s remainder interest. If,
under applicable state law, such a transac-
tion results in a partial termination of the
trust, Swould be treated as disposing of
part of S’s income interest in the trust, and
the commutation analysis would apply.
See, e.g., Restatement (Second) of Trusts
§ 340(2) (1959). See also,§ 25.2519–
1(g), Example 4, (illustrating the estate
and gift tax consequences of the disposi-
tion of a portion of the spouse’s income
interest). If the trust does not terminate, S
would nonetheless be treated as making a
transfer under §§ 2511 and 2512 for less
than adequate and full consideration to
the extent of the value of the property or
cash Stransfers in exchange for the partial
remainder interest.
Further, the conclusion of this revenue
ruling would be the same if Stransferred
to Cproperty or cash rather than the
promissory note. The economic effect of
the transaction is identical, regardless
whether Suses S’s own funds to finance
the transaction or gives a promissory note
and discharges the note using some of the
QTIPTrust assets received in the transac-
tion. Thus, the result is the same for
transfer tax purposes.
HOLDING
If a surviving spouse acquires the re-
mainder interest in a trust subject to a
QTIPelection under § 2056(b)(7) in con-
nection with the transfer by the surviving
spouse of property or cash to the holder of
the remainder interest, the surviving
spouse makes a gift both under § 2519
and under §§ 2511 and 2512. The amount
of the gift is equal to the greater of (i) the
value of the remainder interest (pursuant
to § 2519), or (ii) the value of the property
or cash transferred to the holder of the re-
mainder interest (pursuant to §§ 2511 and
2512).
DRAFTING INFORMATION
The principal author of this revenue
ruling is Deborah Ryan of the office of
Assistant Chief Counsel (Passthroughs
and Special Industries. For further infor-
mation regarding this revenue ruling con-
tact Ms. Ryan on (202) 622-3090 (not a
toll-free call).
Section 2702.—Special
Valuation Rules in Case of
Transfers of Interest in Trusts
26 CFR 25.2702–5: Personal residence trusts.
T.D. 8743
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 25 and 602
Sale of Residence From
Qualified Personal Residence
Trust
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations
SUMMARY: This document contains
final regulations permitting the reforma-
tion of a personal residence trust or a
qualified personal residence trust in order
to comply with the applicable require-
ments for such trusts. The final regula-
tions also provide that the governing in-
struments of such trusts must prohibit the
sale of a residence held in the trust to the
grantor of the trust, the grantor’s spouse,
or an entity controlled by the grantor or
the grantor’s spouse.
DATES: The regulations are effective
December 23, 1997.
FOR FURTHER INFORMATION CON-
TACT: Lane Damazo (202) 622-3090
(not a toll-free number).
SUPPLEMENTARYINFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1485. Responses to this collection of in-
formation are required in order to ensure
the proper collection of the gift tax.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number.
February 17, 1998261998–7 I.R.B.

The estimated annual burden per re-
spondent/recordkeeper varies from 3
hours to 3.25 hours, depending on indi-
vidual circumstances, with an estimated
average of 3.1 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service,Attn: IRS Re-
ports Clearance Officer T:FP, Washing-
ton, DC 20224, and to the Office of Man-
agement and Budget,Attention: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to this 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
On April 16, 1996, the IRS published in
the Federal Registera notice of proposed
rulemaking (formerly PS–004–96) at 61
FR 16623. The IRS received written and
oral comments on the proposed regula-
tions and held a public hearing on July 24,
1996. This document adopts final regula-
tions with respect to this notice of pro-
posed rulemaking.
Comments with respect to §25.2702–
5(a)(2) indicated that the procedure per-
mitting reformation of trust instruments
will be helpful to taxpayers and practi-
tioners. It was suggested that an addi-
tional reformation period be made avail-
able for trusts for which the gift tax return
due date had passed before the regulations
became effective. Accordingly, under the
final regulations, the trustees of trusts cre-
ated before January 1, 1997, are granted a
90-day period after these regulations be-
come final in which to reform the trust.
Some of the comments concerning the
amendments to §25.2702–5(b) and (c)
agreed that the restrictions in the pro-
posed regulations on the sale of the per-
sonal residence after the termination of
the grantor’s retained interest in a per-
sonal residence trust or a qualified per-
sonal residence trust further the intent of
Congress in enacting section 2702(a)-
(3)(A)(ii). Other comments stated that
the restrictions were not supported by the
statute. Treasury and the IRS continue to
believe that these regulations are consis-
tent with the intent of Congress and carry
out the purpose of the personal residence
exception to section 2702.
Other comments suggested that the
final regulations should contain an excep-
tion permitting the sale of the residence to
the grantor if the need arises. Treasury
and the IRS believe, however, that a rule
of this nature is not necessary, since a
grantor may lease the residence after the
retained term from a trust or individual to
which the residence passes after the expi-
ration of the initial term. The right to
lease the residence may be expressly set
forth in the trust document creating the
personal residence trust. If the residence
is leased for its fair market value rental,
the grantor will not retain the economic
benefit of the property for purposes of
section 2036(a), since the grantor will be
paying adequate consideration for the use
of the property. However, if the residence
is leased from a trust that is a grantor trust
with respect to the grantor, the IRS under
some circumstances may contend that the
grantor has retained the economic benefit
of the property.
Commentators raised a concern that be-
cause the regulations prohibit the transfer
of the residence to the grantor, or the
grantor’s spouse, etc., the trust could not
provide for a reversionary interest or a tes-
tamentary power of disposition, taking ef-
fect at the grantor’s death prior to the expi-
ration of the trust term, nor could the trust
provide for a remainder interest in fee for
the grantor’s spouse (e.g., remainder out-
right to spouse, or remainder to child, but
if child predeceases termination of the
trust, then to spouse.) The final regula-
tions permit dispositions to the spouse.
Finally, commentators objected to the
statement in the preamble to the proposed
regulations to the effect that if the IRS
finds a pre-effective date trust to be in-
consistent with the purposes of section
2702, the IRS, by established legal doc-
trines, may treat the trust as non-qualify-
ing. Treasury and the IRS wish to clarify
that the IRS will apply these regulations
only to post-effective date trusts. Never-
theless, Treasury and the IRS have the au-
thority to apply established legal doc-
trines to disqualify a pre-effective date
trust in cases where the statutory purpose
has clearly been violated.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and, because
these regulations do not impose on small
entities, a collection of information re-
quirement, the Regulatory Flexibility Act
(5 U.S.C. chapter 6), does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to sec-
tion 7805(f) of the Internal Revenue
Code, the Notice of Proposed Rulemak-
ing preceding these regulations was sub-
mitted to the Small Business Administra-
tion for comment on their impact on small
business.
Drafting Information
The principal author of these regula-
tions is Dale Carlton, Office of the Chief
Counsel, IRS. Other personnel from the
IRS and Treasury Department partici-
pated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 25 is
amended as follows:
PART25—GIFTTAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Paragraph 1. The authority citation for
part 25 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 25.2702-5 is amended
as follows:
1. Paragraph (a) heading and text are
redesignated as paragraph (a)(1) heading
and text and paragraph (a)(2) is added.
2. In paragraph (b)(1), five sentences
are added after the third sentence.
3. Paragraph (c)(5)(ii)(C) is revised.
4. Paragraph (c)(9) is added.
The additions and revisions read as fol-
lows:
§25.2702–5 Personal residence trusts.
(a) * * *
(2) Modification of trust.Atrust that
does not comply with one or more of the
regulatory requirements under paragraph
1998–7 I.R.B27February 17, 1998

(b) or (c) of this section will, nonetheless,
be treated as satisfying these requirements
if the trust is modified, by judicial refor-
mation (or nonjudicial reformation if ef-
fective under state law), to comply with
the requirements. In the case of a trust
created after December 31, 1996, the re-
formation must be commenced within 90
days after the due date (including exten-
sions) for the filing of the gift tax return
reporting the transfer of the residence
under section 6075 and must be completed
within a reasonable time after commence-
ment. If the reformation is not completed
by the due date (including extensions) for
filing the gift tax return, the grantor or
grantor’s spouse must attach a statement
to the gift tax return stating that the refor-
mation has been commenced or will be
commenced within the 90-day period. In
the case of a trust created before January
1, 1997, the reformation must be com-
menced within 90 days after December
23, 1997, and must be completed within a
reasonable time after commencement.
(b) * * * (1) * * * In addition, the trust
does not meet the requirements of this
section unless the governing instrument
prohibits the trust from selling or transfer-
ring the residence, directly or indirectly,
to the grantor, the grantor’s spouse, or an
entity controlled by the grantor or the
grantor’s spouse, at any time after the
original duration of the term interest dur-
ing which the trust is a grantor trust. For
purposes of the preceding sentence, a sale
or transfer to another grantor trust of the
grantor or the grantor’s spouse is consid-
ered a sale or transfer to the grantor or the
grantor’s spouse; however, a distribution
(for no consideration) upon or after the
expiration of the original duration of the
term interest to another grantor trust of
the grantor or the grantor’s spouse pur-
suant to the express terms of the trust will
not be considered a sale or transfer to the
grantor or the grantor’s spouse if such
other grantor trust prohibits the sale or
transfer of the property to the grantor, the
grantor’s spouse, or an entity controlled
by the grantor or the grantor’s spouse. In
the event the grantor dies prior to the ex-
piration of the original duration of the
term interest, this paragraph (b)(1) does
not apply to the distribution (for no con-
sideration) of the residence to any person
(including the grantor’s estate) pursuant
to the express terms of the trust or pur-
suant to the exercise of a power retained
by the grantor under the terms of the trust.
Further, this paragraph (b)(1) does not
apply to any outright distribution (for no
consideration) of the residence to the
grantor’s spouse after the expiration of
the original duration of the term interest
pursuant to the express terms of the trust.
For purposes of this paragraph (b)(1), a
grantor trust is a trust treated as owned in
whole or in part by the grantor or the
grantor’s spouse pursuant to sections 671
through 678, and control is defined in
§25.2701–2(b)(5)(ii) and (iii). * * *
* * * * *
(c) * * *
(5) * * *
(ii) * * *
(C) Sale proceeds.The governing in-
strument may permit the sale of the resi-
dence (except as set forth in paragraph
(c)(9) of this section) and may permit the
trust to hold proceeds from the sale of the
residence, in a separate account.
* * * * *
(9) Sale of residence to grantor,
grantor’s spouse, or entity controlled by
grantor or grantor’s spouse. The govern-
ing instrument must prohibit the trust
from selling or transferring the residence,
directly or indirectly, to the grantor, the
grantor’s spouse, or an entity controlled
by the grantor or the grantor’s spouse dur-
ing the retained term interest of the trust,
or at any time after the retained term in-
terest that the trust is a grantor trust. For
purposes of the preceding sentence, a sale
or transfer to another grantor trust of the
grantor or the grantor’s spouse is consid-
ered a sale or transfer to the grantor or the
grantor’s spouse; however, a distribution
(for no consideration) upon or after the
expiration of the retained term interest to
another grantor trust of the grantor or the
grantor’s spouse pursuant to the express
terms of the trust will not be considered a
sale or transfer to the grantor or the
grantor’s spouse if such other grantor
trust prohibits the sale or transfer of the
property to the grantor, the grantor’s
spouse, or an entity controlled by the
grantor or the grantor’s spouse. In the
event the grantor dies prior to the expira-
tion of the retained term interest, this
paragraph (c)(9) does not apply to the dis-
tribution (for no consideration) of the res-
idence to any person (including the
grantor’s estate) pursuant to the express
terms of the trust or pursuant to the exer-
cise of a power retained by the grantor
under the terms of the trust. Further, this
paragraph (c)(9) does not apply to an out-
right distribution (for no consideration) of
the residence to the grantor’s spouse after
the expiration of the retained trust term
pursuant to the express terms of the trust.
For purposes of this paragraph (c)(9), a
grantor trust is a trust treated as owned in
whole or in part by the grantor or the
grantor’s spouse pursuant to sections 671
through 678, and control is defined in
§25.2701–2(b)(5)(ii) and (iii).
* * * * *
Par. 3. Section 25.2702–7 is amended
as follows:
1. The first sentence is revised.
2. Asentence is added at the end of the
section.
The revision and addition read as fol-
lows:
§25.2702–7 Effective dates.
Except as provided in this section,
§§25.2702–1 through 25.2702–6 apply as
of January 28, 1992. * * * The fourth
through eighth sentences of §25.2702-
5(b)(1) and §25.2702–5(c)(9) apply with
respect to trusts created after May 16,
1996.
PART602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (c) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
(c) * * *
CFR part or section Current OMB
where identifiedcontrol No.
and described
* * * * *
25.2702–5 . . . . . . . . . . . . . . .1545–1485
* * * * *
February 17, 1998281998–7 I.R.B.

Michael P. Dolan,
Acting Commissioner of
Internal Revenue.
Approved December 4, 1997.
Donald C. Lubick,
Acting Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 22, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 23, 1997,
62 F.R. 66987)
Section 6033.—Returns by
Exempt Organizations
This revenue procedure provides guidance to or-
ganizations exempt from taxation under § 501(a) of
the Internal Revenue Code of 1986 on the applica-
tion of amendments made to §§ 162(e) and 6033(e)
by § 13222 of the Omnibus Budget Reconciliation
Act of 1993. The revenue procedure identifies cer-
tain tax-exempt organizations that will be treated as
satisfying the requirements of § 6033(e)(3). Those
organizations will not be subject to the reporting and
notice requirements of § 6033(e)(1) or the tax im-
posed by § 6033(e)(2). Procedures for other exempt
organizations to establish that they satisfy the re-
quirements of § 6033(e)(3) are also provided. Rev.
Proc. 95–35, 1995–2 C.B. 391, and Rev. Proc.
95–35A, 1995–2 C.B. 392, are superseded. See Rev.
Proc. 98–19, page 30.
Section 6045.—Returns of
Brokers
26 CFR 1.6045–4: Information reporting on real
estate transactions with dates of closing on or after
January 1, 1991.
Guidance is provided on the acceptable form of
written assurances (certification) that a real estate
reporting person must obtain from the seller of a
principal residence to except such sale or exchange
from the information reporting requirements for real
estate transactions under section 6045(e)(5). See
Rev. Proc. 98–20, page 32.
1998–7 I.R.B29February 17, 1998

February 17, 1998301998–7 I.R.B.
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also §§ 162, 501, and 6033)
Rev. Proc. 98–19
SECTION 1. PURPOSE
This Revenue Procedure provides guid-
ance to organizations exempt from taxa-
tion under § 501(a) of the Internal Rev-
enue Code of 1986 on certain exceptions
from the reporting and notice require-
ments of § 6033(e)(1) and the tax im-
posed by § 6033(e)(2). The revenue pro-
cedure updates and supersedes Rev. Proc.
95-35, 1995–2 C.B. 391, as modified by
Rev. Proc. 95–35A, 1995–2 C.B. 392.
Rev. Proc. 95–35 and Rev. Proc. 95–
35Awere issued pursuant to the Secre-
tary’s authority to relieve tax-exempt orga-
nizations from the burden of meeting the
reporting and notice requirements of
§ 6033(e)(1) or the tax imposed by
§ 6033(e)(2) where the organization estab-
lishes to the satisfaction of the Secretary
that substantially all of the dues or other
similar amounts paid by persons to such
organization are not deductible without re-
gard to § 162(e). Rev. Proc. 95–35 and
Rev. Proc. 95–35Aidentify certain tax-ex-
empt organizations that are treated as satis-
fying the requirements of § 6033(e)(3) and
are thus not subject to the reporting and no-
tice requirements of § 6033(e)(1) or the tax
imposed by § 6033(e)(2). Procedures for
other exempt organizations to establish
that they satisfy the requirements of
§ 6033(e)(3) are also provided.
In light of comments submitted in re-
sponse to Rev. Proc. 95–35, the Service
has determined that the requirements
should be modified to further relieve the
burden of § 6033(e)(1). This revenue pro-
cedure retains the requirements set out in
Rev. Proc. 95–35, and Rev. Proc. 95–35A,
with the modification that the amount of
annual dues (or similar amounts) that may
be received by organizations described in
§ 4.02 without becoming subject to the re-
quirements of § 6033(e) is increased to
$75 or less.
SEC. 2. BACKGROUND
Section 6033(e) imposes reporting and
notice requirements on tax-exempt orga-
nizations (other than § 501(c)(3) organi-
zations) that incur lobbying and political
expenditures to which § 162(e) applies
(“nondeductible lobbying expenditures”).
Section 162(e) denies a deduction, other-
wise allowable under § 162(a) as an ordi-
nary and necessary trade or business ex-
pense, for certain lobbying and political
expenditures. Section 162(e)(3) denies a
deduction for the dues (or other similar
amounts) paid to certain tax-exempt orga-
nizations to the extent that the organiza-
tion, at the time the dues are assessed or
paid, notifies the dues payer that the dues
are allocable to nondeductible lobbying
expenditures.
Section 6033(e)(1) requires a tax-ex-
empt organization that pays or incurs
nondeductible lobbying expenditures to
notify its members, at the time the dues
(or other similar amounts) are assessed or
paid, of its reasonable estimate of the por-
tion of the dues that is allocable to those
expenditures. Section 6033(e)(1) does
not, however, apply to tax-exempt organi-
zations described in § 501(c)(3), or to or-
ganizations that establish to the satisfac-
tion of the Secretary that substantially all
the dues they receive are not deductible
without regard to § 162(e). In addition,
organizations whose lobbying and politi-
cal expenditures consist solely of certain
in-house expenditures for nondeductible
lobbying and whose total such expendi-
tures do not exceed $2,000 in a taxable
year are not subject to the reporting and
notice requirements of § 6033(e)(1).
Section 6033(e)(2)(A) provides that if a
tax-exempt organization fails to provide
the notices required by § 6033(e)(1), or if
the notices underestimate the actual
amount of dues allocable to nonde-
ductible lobbying expenditures, the orga-
nization is subject to tax (at the highest
rate imposed by § 11) on the aggregate
amount of dues allocable to nonde-
ductible lobbying expenditures paid dur-
ing the taxable year that was not reported
on the notices. However, § 6033(e)(2)(B)
provides that if a tax would be imposed
on the organization because its estimate
of the nondeductible portion of the dues
was less than the actual amount allocable
to nondeductible lobbying expenditures,
the Secretary may waive the tax if the or-
ganization agrees to increase the amount
reasonably estimated to be nondeductible
for the following taxable year by the
amount of the underestimate.
Section 6033(e)(3) provides that
§ 6033(e)(1)(A) shall not apply to an ex-
empt organization that establishes to the
satisfaction of the Secretary that substan-
tially all the dues or similar amounts paid
by persons to the organization are not de-
ductible without regard to § 162(e). The
tax imposed by § 6033(e)(2)(A) only ap-
plies to organizations subject to the notice
requirements of § 6033(e)(1)(A).
SEC. 3. SCOPE
This revenue procedure (i) sets forth
specific circumstances in which certain
tax-exempt organizations are treated as
meeting the requirements of § 6033(e)(3),
and (ii) provides guidance to other ex-
empt organizations regarding how they
may establish that they satisfy the require-
ments of § 6033(e)(3).
SEC. 4. APPLICATION
.01 Exempt Organizations Automati-
cally Excepted Under Section 6033(e)(3).
Organizations recognized by the Service
as exempt from taxation under § 501(a),
other than (i) social welfare organizations
described in § 501(c)(4) that are not veter-
ans organizations, (ii) agricultural and
horticultural organizations described in §
501(c)(5), and (iii) organizations de-
scribed in § 501(c)(6), are treated as satis-
fying the requirements of § 6033(e)(3).
.02 Section 501(c)(4) Social Welfare
Organizations and Section 501(c)(5)
Agricultural and Horticultural Organiza-
tions.Social welfare organizations recog-
nized by the Service as exempt from taxa-
tion under § 501(c)(4) and agricultural
and horticultural organizations recog-
nized by the Service as exempt from taxa-
tion under § 501(c)(5) are treated as satis-
fying the requirements of § 6033(e)(3) if
either (i) more than 90 percent of all an-
nual dues (or similar amounts) are re-
ceived from persons, families, or entities
who each pay annual dues (or similar
amounts) of $75 or less, or (ii) more than
90 percent of all annual dues (or similar
amounts) are received from organizations
described in § 501(c)(3), state govern-
ments, local governments, entities whose
Part III. Administrative, Procedural, and Miscellaneous

1998–7 I.R.B31February 17, 1998
income is exempt from tax under § 115,
or organizations excepted under section
4.01 of this revenue procedure.
.03 Section 501(c)(6) Organizations.
Organizations recognized by the Service
as exempt from taxation under § 501(c)-
(6) shall be treated as meeting the require-
ments of § 6033(e)(3) if more than 90 per-
cent of all annual dues (or similar
amounts) are received from organizations
described in § 501(c)(3), state govern-
ments, local governments, entities whose
income is exempt from tax under § 115,
or organizations excepted under section
4.01 of this revenue procedure.
SEC. 5. DEFINITIONS AND
PROCEDURES
.01 Annual Dues (or Similar Amounts).
For purposes of this revenue procedure,
the term “annual dues” means the amount
an organization requires a person, family,
or entity to pay to be recognized by the
organization as a member for an annual
period. For purposes of this revenue pro-
cedure, “similar amounts” includes, but is
not limited to, voluntary payments made
by persons, families, or entities, assess-
ments made by the organization to cover
basic operating costs, and special assess-
ments imposed by the organization to
conduct lobbying activities.
.02 Member.For purposes of this rev-
enue procedure, “member” is used in its
broadest sense and is not limited to per-
sons with voting rights in the organization.
.03 Treatment of Affiliated Organiza-
tions.For purposes of this revenue proce-
dure, if more than one organization de-
scribed in §§ 501(c)(4), 501(c)(5), or
501(c)(6) share a name, charter, historic
affiliation or similar characteristics and
coordinate their activities, all such organi-
zations shall be treated as parts of a single
organization. Only dues (or similar
amounts) paid by persons other than the
organizations treated as being parts of the
single organization shall be considered
for purposes of applying this revenue pro-
cedure. All annual dues payments made
by each person outside the organizational
structure to any organization within the
single organization are considered for
purposes of applying this revenue proce-
dure to be paid to the single organization
for a single membership. If, under this
revenue procedure, the single organiza-
tion is considered to meet the require-
ments of § 6033(e)(3), then all the organi-
zations that are treated as parts of the sin-
gle organization are considered to meet
the requirements of § 6033(e)(3). For
purposes of this revenue procedure, if or-
ganizations within the affiliated structure
are on different taxable years, the organi-
zations may base their calculations of an-
nual dues on any single reasonable tax-
able year.
.04 Example of An Affiliated Organiza-
tion.Agroup of social welfare organiza-
tions, each of which is recognized by the
Service as being described in § 501(c)(4),
share a common name and work jointly to
promote a single purpose. Each organiza-
tion operates at either the national, state,
or local level. Individuals and families
that are interested in the purpose pro-
moted by the organizations pay annual
dues of $75 to one of the local organiza-
tions. The total amount of dues collected
from individuals and families is $950x.
Also, a number of corporations are mem-
bers of the national organization and pay
annual dues of $500 directly to it. The
total amount of dues received from corpo-
rations is $50x. The organizations are
linked by a structure that makes the local
organizations members of the appropriate
state organizations and of the national or-
ganization. Accordingly, each local orga-
nization transfers a portion of the dues it
collects to the appropriate state organiza-
tion and another portion to the national
organization as dues. These transfer
amounts are significantly greater than
$75. Because the organizations share a
name and coordinate their activities, they
are treated as parts of a single organiza-
tion for purposes of determining whether
they satisfy the requirements of
§ 6033(e)(3). Therefore, only the dues (or
similar amounts) paid by persons other
than the organizations treated as being
parts of the single organization are con-
sidered for purposes of applying this rev-
enue procedure. The total amount of an-
nual dues paid by individuals and families
at the $75 level is more than 90 percent of
all annual dues paid to both the local affil-
iated organizations by individuals and
families, and to the national organization
by corporations. Therefore, the single or-
ganization satisfies the requirements of §
6033(e)(3), which means that all the affil-
iated local and state organizations, and the
national organization, are each considered
to have satisfied the requirements of §
6033(e)(3).
.05 Seventy-five Dollar Amount to be
Indexed for Inflation.The $75 amount
for annual dues in section 4.02 will be in-
creased for taxable years beginning after
December 31, 1998, by a cost-of-living
adjustment under § 1(f)(3) of the Code,
rounded to the next highest dollar.
.06 Establishing that an Organization
is Described in § 6033(e)(3).Any exempt
organization that is not treated as satisfy-
ing the requirements of § 6033(e)(3)
under section 4 of this revenue procedure
may still establish that it satisfies the re-
quirements of § 6033(e)(3) by: (i) main-
taining records establishing that 90 per-
cent or more of the annual dues (or
similar amounts) paid to the organization
are not deductible without regard to §
162(e), and (ii) notifying the Service that
it is described in § 6033(e)(3) on any
Form 990 (Return of Organization Ex-
empt From Income Tax) that it is required
to file. Unless an organization complies
with both of the above requirements, it
will not have established to the satisfac-
tion of the Service that it meets the re-
quirements of § 6033(e)(3). Additionally,
an organization may request a private let-
ter ruling that substantially all the annual
dues (or similar amounts) paid to the or-
ganization are not deductible, either di-
rectly or indirectly, without regard to
§ 162(e). To receive a favorable private
letter ruling, the organization must pro-
vide the Service with evidence establish-
ing that 90 percent or more of all annual
dues (or similar amounts) are not de-
ductible, either directly or indirectly,
without regard to § 162(e). If an organi-
zation receives a favorable private letter
ruling, the Service will not contest the or-
ganization’s entitlement to exemption
under § 6033(e)(3) for a subsequent year
so long as the character of the organiza-
tion’s membership is substantially similar
to its membership at the time of the rul-
ing. Ruling requests should be submitted
to the Assistant Commissioner (Employee
Plans and Exempt Organizations), Atten-
tion: CP:E:EO, Internal Revenue Service,
P.O. Box 120, Ben Franklin Station,
Washington, DC 20044, in accordance
with Rev. Proc. 98–4, 1998–1 I.R.B. 113
(January 5, 1998) (or as revised).

SEC. 6. EFFECTON OTHER
DOCUMENTS
Rev. Proc. 95–35, 1995–2 C.B. 391,
and Rev. Proc. 95–35A, 1995–2 C.B. 392,
are superseded.
PAPERWORK REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1589.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in section 5.06. This
revenue procedure provides guidance to
organizations exempt from taxation under
§ 501(a) of the Internal Revenue Code of
1986 on certain exceptions from the re-
porting and notice requirements of
§ 6033(e)(1) and the tax imposed by
§ 6033(e)(2). It identifies certain tax-ex-
empt organizations that are treated as sat-
isfying the requirements of § 6033(e)(3)
and are thus not subject to the reporting
and notice requirements of § 6033(e)(1)
or the tax imposed by § 6033(e)(2), and
provides procedures for other exempt or-
ganizations to establish that they satisfy
the requirements of § 6033(e)(3). The in-
formation maintained by exempt organi-
zations will be used in determining
whether they meet the exception provided
under § 6033(e)(3). The record retention
and annual reporting are required to as-
sure compliance with the requirements of
§ 6033(e). The likely respondents are so-
cial welfare organizations exempt under
§ 501(c)(4), agricultural and horticultural
organizations exempt under 501(c)(5),
and business leagues exempt under
§ 501(c)(6) that wish to establish that they
receive substantially dues from members
who do not claim a deduction for their
dues payments under § 162, without re-
gard to § 162(e).
The estimated total annual recordkeep-
ing burden is 150,000 hours.
The estimated annual burden per orga-
nization varies from 1 hour to 100 hours,
depending on individual circumstances,
with an estimated average of 10 hours.
The estimated number of organizations
required to maintain records is 15,000.
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.
DRAFTING INFORMATION
The principal author of this revenue pro-
cedure is Thomas J. Miller of the Exempt
Organizations Division. For further
information regarding this revenue pro-
cedure contact Mr. Miller on (202) 622-
7867 (not a toll-free call).
26 CFR 601.602: Tax forms and instructions.
(Also Part I, Section 6045; 1.6045-4; section 121)
Rev. Proc. 98–20
SECTION 1. PURPOSE
This revenue procedure sets forth the
acceptable form of the written assurances
(certification) that a real estate reporting
person must obtain from the seller of a
principal residence to except such sale or
exchange from the information reporting
requirements for real estate transactions
under § 6045(e)(5) of the Internal Rev-
enue Code.
SECTION 2. BACKGROUND
.01 Section 6045(e) and § 1.6045–4 of
the Income Tax Regulations generally re-
quire a real estate reporting person (as de-
fined in § 6045(e)(2) and § 1.6045–4) to
file an information return regarding a real
estate transaction and to furnish a payee
statement to the seller regarding that
transaction. The information return and
statement must include the name, address,
and taxpayer identification number (TIN)
of the seller, and the gross proceeds of the
real estate transaction. This information
is reported on Form 1099-S, Proceeds
From Real Estate Transactions.
.02 Section 312 of the Taxpayer Relief
Act of 1997 (the Act), Pub. L. No. 105–
34, 111 Stat. 788 (August 5, 1997), effec-
tive for sales or exchanges after May 6,
1997, amended § 6045(e) by adding a
new paragraph (5), which excepts a sale
or exchange of a residence from the
§ 6045(e) information reporting require-
ments if the seller provides the real estate
reporting person with a certification set-
ting forth certain written assurances, in-
cluding an assurance that the residence is
the seller’s principal residence (within the
meaning of § 121) and an assurance that
the full amount of the gain on the sale or
exchange of the principal residence is ex-
cludable from gross income under § 121.
.03 Section 312 of the Act also
amended § 121 to provide new rules for
the exclusion of gain on certain sales or
exchanges of a principal residence. Sec-
tion 121, as amended, provides that a tax-
payer may exclude from gross income up
to $250,000 of gain on the sale or ex-
change of a principal residence if certain
conditions are met. In certain circum-
stances, a married individual filing a joint
return for the taxable year of the sale or
exchange may exclude from gross income
up to $500,000 of gain. This exclusion
also applies to the sale or exchange of
stock held by a tenant-stockholder in a co-
operative housing corporation (as defined
in § 216) and may apply to the sale or ex-
change of a remainder interest in a princi-
pal residence if the taxpayer so elects.
SECTION 3. SCOPE
This revenue procedure applies to the
information reporting requirements under
§ 6045(e) for a sale or exchange of a prin-
cipal residence.
SECTION 4. SELLER CERTIFICATION
.01 To be excepted from the informa-
tion reporting requirements in § 6045(e)
on the sale or exchange of a residence (in-
cluding stock in a cooperative housing
corporation), the real estate reporting per-
son must obtain from the seller a written
certification, signed by the seller under
penalties of perjury, that assurances (1)
through (4) set forth in section 4.02 of this
revenue procedure are true. For purposes
of this certification, the term “seller” in-
cludes each owner of the residence that is
sold or exchanged. Thus, if a residence
has more than one owner, a real estate re-
porting person must either obtain a certifi-
cation from each owner (whether married
or not) or file an information return and
furnish a payee statement for any owner
that does not make the certification.
.02 The assurances are:
February 17, 1998321998–7 I.R.B.

(1) The seller owned and used the
residence as the seller’s principal resi-
dence for periods aggregating 2 years or
more during the 5-year period ending on
the date of the sale or exchange of the res-
idence.
(2) The seller has not sold or ex-
changed another principal residence dur-
ing the 2-year period ending on the date
of the sale or exchange of the residence
(not taking into account any sale or ex-
change before May 7, 1997).
(3) No portion of the residence has
been used for business or rental purposes
by the seller (or the seller’s spouse if the
seller is married) after May 6, 1997.
(4) At least one of the following
three statements applies:
The sale or exchange is of the en-
tire residence for $250,000 or less.
OR
The seller is married, the sale or
exchange is of the entire residence for
$500,000 or less, and the gain on the
sale or exchange of the entire residence
is $250,000 or less.
OR
The seller is married, the sale or
exchange is of the entire residence for
$500,000 or less, and (a) the seller in-
tends to file a joint return for the year of
the sale or exchange, (b) the seller’s
spouse also used the residence as his or
her principal residence for periods ag-
gregating 2 years or more during the 5-
year period ending on the date of the
sale or exchange of the residence, and
(c) the seller’s spouse also has not sold
or exchanged another principal resi-
dence during the 2-year period ending
on the date of the sale or exchange of the
residence (not taking into account any
sale or exchange before May 7, 1997).
SECTION 5. FORMATFOR MAKING
SELLER CERTIFICATION
Asample certification form that may be
used by a real estate reporting person to
obtain the applicable assurances from the
seller is provided in the Appendix of this
revenue procedure. However, use of this
sample certification form is not required.
The requirements of the certification
under § 6045(e)(5) will be met if the con-
tent and wording of a written certification
provide the same information as required
by section 4.02 of this revenue procedure.
SECTION 6. OBTAINING AND
RETAINING SELLER
CERTIFICATION
.01 General rule.Except as provided
in section 6.02 of this revenue procedure,
the real estate reporting person may ob-
tain a certification at any time on or be-
fore January 31 of the year following the
year of the sale or exchange of the resi-
dence. The certification must be retained
by the real estate reporting person for 4
years after the year of the sale or ex-
change of the residence to which the certi-
fication applies.
.02 Transition rule.For a sale or ex-
change of a residence occurring after May
6, 1997 and on or before December 31,
1997, the real estate reporting person may
obtain a certification at any time on or be-
fore February 28, 1998.
SECTION 7. PENALTIES
Areal estate reporting person who re-
lies on a certification made in compliance
with this revenue procedure will not be li-
able for the penalties under § 6721 for
failure to file an information return, or
under § 6722 for failure to furnish a payee
statement to the seller, unless the real es-
tate reporting person has actual knowl-
edge that any assurance is incorrect.
SECTION 8. COMMENTS INVITED
The Service requests comments on any
additional guidance that may be needed
under §§ 6045(e)(5) and 121. Comments
should be submitted by April 30, 1998, to:
Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044, Attn: CC:DOM:CORP:R (IT&A
Branch 2), Room 5226. Submissions may
be hand-delivered between the hours of 8
a.m. and 5 p.m. to: Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, Attn:
CC:DOM:CORP:R (IT&ABranch 2),
Room 5226. Alternatively, taxpayers may
submit comments electronically at
http://www.irs.ustreas.gov/prod/tax
regs/comments.html
(the Service’s internet site). All com-
ments submitted will be available for pub-
lic inspection and copying.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
sales or exchanges of a residence occur-
ring after May 6, 1997.
SECTION 10. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1592.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in sections 4 and 5
of this revenue procedure. This informa-
tion is required to exempt a real estate re-
porting person from the requirement to
file an information return and furnish a
payee statement reporting the sale or ex-
change of a principal residence. The
likely respondents are individual taxpay-
ers who sell or exchange a principal resi-
dence and real estate businesses.
The estimated total annual reporting
burden for respondents is 383,000 hours.
The estimated burden per respondent is
10 minutes. The estimated number of re-
spondents is 2,300,000. The frequency of
responses is on occasion.
The estimated total annual burden for
recordkeepers is 37,500 hours.
The estimated annual burden per
recordkeeper is 25 minutes. The esti-
mated number of recordkeepers is 90,000.
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
return information are confidential, as re-
quired by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Sharon Hester of the Office
of Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue procedure, contact
Ms. Hester at (202) 622-4920 (not a toll-
free call).
1998–7 I.R.B33February 17, 1998

APPENDIX
CERTIFICATION FOR NO INFORMATION REPORTING
ON THE SALE OR EXCHANGE OF APRINCIPALRESIDENCE
This form may be completed by the seller of a principal residence. This information is necessary to determine whether the sale or
exchange should be reported to the seller, and to the Internal Revenue Service on Form 1099-S, Proceeds From Real Estate Transac-
tions. If the seller properly completes Parts I and III, and makes a “yes” response to assurances (1) through (4) in Part II, no infor-
mation reporting to the seller or to the Service will be required for that seller. The term “seller” includes each owner of the residence
that is sold or exchanged. Thus, if a residence has more than one owner, a real estate reporting person must either obtain a certifica-
tion from each owner (whether married or not) or file an information return and furnish a payee statement for any owner that does
not make the certification.
Part I. SellerInformation
1.Name
2.Address or legal description (including city, state, and ZIPcode) of residence being sold or exchanged
3.Taxpayer Identification Number (TIN)
Part II. SellerAssurances
Check “yes” or “no” for assurances (1) through (4).
YesNo
uu(1)I owned and used the residence as my principal residence for periods aggregating 2 years or more during
the 5-year period ending on the date of the sale or exchange of the residence.
uu(2)I have not sold or exchanged another principal residence during the 2-year period ending on the date of
the sale or exchange of the residence (not taking into account any sale or exchange before May 7, 1997).
uu(3)No portion of the residence has been used for business or rental purposes by me (or my spouse if I am
married) after May 6, 1997.
uu(4)At least one of the following three statements applies:
The sale or exchange is of the entire residence for $250,000 or less.
OR
I am married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale
or exchange of the entire residence is $250,000 or less.
OR
I am married, the sale or exchange is of the entire residence for $500,000 or less, and (a) I intend to file a
joint return for the year of the sale or exchange, (b) my spouse also used the residence as his or her principal resi-
dence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange
of the residence, and (c) my spouse also has not sold or exchanged another principal residence during the 2-year
period ending on the date of the sale or exchange of the residence (not taking into account any sale or exchange be-
fore May 7, 1997).
Part III. SellerCertification
Under penalties of perjury, I certify that all the above information is true as of the end of the day of the sale or exchange.
Signature of SellerDate
February 17, 1998341998–7 I.R.B.

1998–7 I.R.B35February 17, 1998
Announcement 98–9
Corrections are needed for the 1998
Circular E, Employer’s Tax Guide (Publi-
cation 15). Paper copies of Circular E
and copies downloaded from the IRS web
site or bulletin board before January 9,
1998, contain errors.
The second paragraph under the head-
ing “Family Employees” on page 7
should read:
Payments for the services of a child
under the age of 21 who works for
his or her parent whether or not in a
trade or business are not subject to
Federal unemployment (FUTA) tax.
In addition, the Advance EIC Payment
Tables contain errors (page 59 only). If
these tables are used, some employees
may receive slightly lower advance EIC
payments than they are entitled to receive.
However, because the errors create only
small differences in advance EIC pay-
ments, employers are not required to cor-
rect payments already made or reprogram
for the remainder of 1998.
Acorrected Circular E has been posted
to the IRS web site at www.irs.ustreas.gov.
The tables in Circular A, Agricultural Em-
ployer’s Tax Guide (Pub. 51), and in No-
tice 1036, Early Release Copies of In-
come Tax Withholding and Advance
Earned Income Credit Payment Tables,
are correct as originally issued.
Foundations Status of Certain
Organizations
Announcement 98–10
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
Brighton Foundation, Inc., Muncie, IN
Camp Wanna-Be Inc., Vidalia, GA
Children and Families Inc., Baltimore,
MD
Children Inc., Raleigh, NC
Children of Mine, Washington, DC
Childrens Advocacy Center Inc.,
Phoenix, AZ
Childrens Alternative Services Inc.,
Annapolis, MD
Childrens Center of Preston County Inc.,
Bruceton Mills, WV
Childrens Christmas Dream Fund Inc.,
St. Petersburg, FL
Circle C Child Development Center, Inc.,
Austin, TX
Circle of Hope Inc., Mableton, GA
Citizens Advocating Responsible
Transportation, Houston, TX
Doris Humphrey Repertory Dance
Company, Princeton, NJ
Doubletree Foundation Inc., Austin, TX
Douglas County Preservation Alliance
Inc., Lawrence, KS
El Cid Historic Neighborhood, West
Palm Beach, FL
El Paso Adult Day Care Service, El Paso,
TX
El Paso Borderlands Cultural Center, El
Paso, TX
El S O LProject Save Our Landscape
Project, Kingsville, TX
El Shaddai Emmaus Community of
Illiana Inc., Harmony, IN
Elephant Management USAInc.,
Franksville, WI
Family Enrichment Center, Inc.,
Indianapolis, IN
Friends of Harris Park, Birmingham,
AL
Great Promise, Austin, TX
Great River Foundation Inc., Natchez,
MS
Greater Annapolis Public Safety
Foundation Inc., Annapolis, MD
Greater Columbus Billy Graham
Crusade, Columbus, OH
Greene County Child Abuse Prevention
Council Inc., Solsberry, IN
Greene County Courthouse Preservation
Society Inc., Paragould, AR
Greene County Education Foundation,
Eutaw, AL
Grosse Pointe High School-Grosse Point
South High School Alumni
Association, Grosse Pointe, MI
Group for Affordable Housing, Roseville,
MN
Grove City Football Supporters Inc.,
Grove City, OH
Guilford County Minority AIDS Task
Force, Greensboro, NC
Hannah’s House, Inc., Mishawaka, IN
Health Education Resources Network of
Abilene Herna, Abilene, TX
Healthier People Network Inc., Decatur,
GA
Heart of Chicago Association, Oak
Brook, IL
Heart of Florida Via De Cristo, Winter
Park, FL
Heart of Ohio Girls Softball Association,
Richwood, OH
Heart of the Rockies Christian
Conference, Salida, CO
Heart of the Rockies Singers,
Breckenridge, CO
Hockey Unlimited Inc., Wausau, WI
Hohokam Tribe of Indians, Tucson, AZ
Holland Harbor Lighthouse Historical
Commission, East Lansing, MI
Holland Home Health Services, Grand
Rapids, MI
Holley Navarre Senior Association Inc.,
Navarre, FL
Holly Pride Committee, Holly, CO
Holy Rock Ministries Inc., Midwest City,
OK
Holyland and Bible Faith Foundation,
Washington, DC
Home Inc., Colfax, NC
Home of a Second Chance Incorporated,
Indianapolis, IN
Jefferson Business Referrals Inc., New
Orleans, LA
Jefferson County Tuberculosis
Association Inc., Charles Town,
WV
Jefferson Junior Wrestling Association
Inc., JJWA, Kearneysville, WV
Jehovah Rapha Ministries, Starr, SC
Jehovah Rapha Missions, Athens, TN
Jemison-Van De Graaff Mansion
Foundation, Tuscaloosa, AL
Jersey Light Horse Brigade Inc.,
Ringwood, NJ
Part IV. Items of General Interest

February 17, 1998361998–7 I.R.B.
Kansas-Laubach Literacy Action Inc.,
Arkansas City, KS
Kansas Nurses for Life Inc., Valley
Center, KS
Karpenissi Inc., Charlotte, NC
Keep America Warm Inc., Tulsa, OK
Keep Michigan Beautiful Foundation,
Bloomfield Hills, MI
Lakeshore Soccer League, Stevensville,
MI
Lakeview Senior Citizens Center, Macon,
MO
Lamar County Firefighters Association,
Chicota, TX
Lamar Haven Inc., Fayette, AL
Lesbian Thesbians Inc., Durham, NC
Let God Arise Ministries Inc.,
Montgomery, AL
Levi Graham Henry III Scholarship
Foundation Inc., Miami, FL
Levi Jordan Plantation Historical Society,
Angleton, TX
Lorain County D.A.R.E. Officers
Association Inc., Elyria, OH
Louisville Senior Citizens Inc.,
Louisville, NE
Love & Light Support Co. Inc., Kansas
City, MO
Love-A-Lot Day Care Center Inc.,
Dahlonega, GA
Love Abounds House of Charity,
Edgewater, FL
Love All-Serve All Inc., Tallahassee, FL
Love and Faith Support Sytems Inc.,
Chicago, IL
Maryland Womens Lacrosse Club
Incorporated, Chattanooga, TN
Maryland Youth Corporation Inc.,
Owings Mills, MD
Masjidullah Economic Community
Corporation of America-M.E.C.C.A.,
Philadelphia, PA
Massacre Canyon Inc., Palisade, NE
Masterbuilders Inc., Knoxville, TN
Mastering Life Ministries Inc.,
Hermitage, TN
Matthews Housing Corporation, Dallas,
TX
Melbourne Beach Soccer Club Inc.,
Melbourne Beach, FL
Melchizedek Non-Profit Inc., Chicago, IL
Melody and Harmony Low Cost
Housing, Far Hills, NJ
Metro Life Choices, Dearborn, MI
Metropolitan Community Housing
Development Organization, Southfield,
MI
Miami County Council on Aging,
Bucyrus, KS
Miami Literature Depot Inc., Miami, FL
Miami Valley Council for Native
Americans, Dayton, OH
Micro Enterprise Assistance Program,
Pittsburgh, PA
Mid-Atlantic Marine Education
Association, Williamsburg, VA
Mid-City Development Corporation,
Detroit, MI
Morgan Resident Association Inc.,
Morgan, PA
Morris Hockey Association Inc., Morris,
MN
Morton-Tulpehocken Civic Association,
Philadelphia, PA
Mosswood Golf & Recreation
Association, Monroe City, MO
Mothers Against Gangs-Evanston Inc.,
Evanston, IL
Ronald McDonald House Charities in
Omaha Inc., Omaha, NE
Sophia Schnitman Educational
Foundation Inc., East Windsor, NJ
Virginia Chapter of National Bureau of
Missing Children Inc., Richmond, VA
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classifi-
cation as to foundation status. Grantors and
contributors may thereafter rely upon such
ruling or determination letter as provided
in section 1.509(a)–7 of the Income Tax
Regulations. It is not the practice of the
Service to announce such revised classifi-
cation of foundation status in the Internal
Revenue Bulletin.

1998–7 I.R.B37February 17, 1998
NameAddressDesignationDate of Suspension
Trempus Jr., JosephCabot, PACPAOctober 1, 1997 to February 28, 1998
Tyler, Delbert D.Monroeville, PACPAOctober 23, 1997 to April 22, 2000
Gillmore, George P.Hampton, NJCPAIndefinite from October 10, 1997
Kamin, James C.Chicago, ILCPADecember 1, 1997 to May 31, 1999
Hubbard, EdwardChicago, ILAttorneyIndefinite from December 1, 1997
Retzlaff, GeneHortonville, WIEnrolled AgentDecember 1, 1997 to May 31, 1998
Conklin, Dennis M.Arlington Hghts, ILCPADecember 3, 1997 to December 2, 1998
Bowen, Roger H.Lake Bluff, ILCPADecember 4, 1997 to December 3, 1999
Ciconte, WilliamWilmington, DEEnrolled AgentDecember 10, 1997 to December 9, 2000
Lopin, Paul I.Chicago, ILCPAIndefinite from December 11, 1997
Goldstein, BenjaminDes Plaines, ILCPADecember 12, 1997 to June 11, 1998
Olsen Jr., BurtonRancho Cordova, CACPADecember 15, 1997 to June 14, 1998
Hickman, MichaelLawrence, KSCPADecember 16, 1997 to April 15, 1998
Grant, Arthur J.Morris Plains, NJCPAJanuary 1, 1998 to December 31, 2000
Zielinski, HenryWoodstock, ILCPAJanuary 1, 1998 to June 30, 1999
Rosales, JohnBatavia, ILCPAJanuary 1, 1998 to April 30, 1998
Reinstein, MaxwellPotomac, MDCPAJanuary 1, 1998 to March 31, 1998
Payne, CharlotteBreckenridge, COCPAJanuary 1, 1998 to December 31, 1999
Ibrahim, MongyRaleigh, NCCPAJanuary 1, 1998 to December 31, 1998
Koutek, Paul J.Westchester, ILCPAJanuary 1, 1998 to August 31, 1998
Doherty, StevenChicago, ILCPAJanuary 1, 1998 to December 31, 1999
Deren, PatriciaLackawanna, NYAttorneyJanuary 1, 1998 to December 31, 1998
Calhoun, SandraLouisville, KYCPAJanuary 1, 1998 to March 31, 1998
Thurman, StephenArcadia, CACPAJanuary 1, 1998 to December 31, 1998
Davidson, MarkTulsa, OKCPAJanuary 15, 1998 to October 14, 1999
Hequembourg, DonaldGlencoe, MOCPAJanuary 20, 1998 to July 19, 1998
Announcement of the Consent Voluntary Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Beforethe Internal Revenue Service
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent, or enrolled ac-
tuary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certi-
fied public accountant, enrolled agent, or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by, or sharing fees with any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled
actuaries to identify practitioners under
consent suspension from practice before the
Internal Revenue Service, the Director
of Practice will announce in the Internal
Revenue Bulletin the names and ad-
dresses of practitioners who have been
suspended from such practice, their desig-
nation as attorney, certified public ac-
countant, enrolled agent, or enrolled actu-
ary, and date or period of suspension. This
announcement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to ap-
pear in the weekly Bulletins for five suc-
cessive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or en-
rolled actuary so suspended and will be
consolidated and published in the Cumu-
lative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:

February 17, 1998381998–7 I.R.B.
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Internal
Revenue Service any practitioner who,
within five years from the date the expe-
dited proceeding is instituted, (1) has had
a license to practice as an attorney, certi-
fied public accountant, or actuary sus-
pended or revoked for cause; or (2) has
been convicted of any crime under title 26
of the United States Code or, of a felony
under title 18 of the United States Code
involving dishonesty or breach of trust.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify practitioners under expe-
dited suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, en-
rolled agent, or enrolled actuary, and date
or period of suspension. This announce-
ment will appear in the weekly Bulletin at
the earliest practicable date after such ac-
tion and will continue to appear in the
weekly Bulletins for five successive weeks
or for as many weeks as is practicable for
each attorney, certified public accountant,
enrolled agent, or enrolled actuary so sus-
pended and will be consolidated and pub-
lished in the Cumulative Bulletin.
The following individual has been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions of
the applicable regulations:
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice
Beforethe Internal Revenue Service
NameAddressDesignationDate of Suspension
Christensen, Reed K.Roseville, CAEnrolled AgentIndefinite from December 16, 1997

1998–7 I.R.B39February 17, 1998
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 Abut not
to B, and the new ruling holds that it ap-
plies to both Aand 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. Aruling
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. Proc..—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

February 17, 1998401998–7 I.R.B.
1
Acumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–27 through
1997–52 will be found in Internal Revenue Bulletin
1998–1, dated January 5, 1998.
Numerical Finding List
1
Bulletins 1998–1 through 1998–6
Announcements:
98–1, 1998–2 I.R.B. 38
98–2, 1998–2 I.R.B.38
98–3, 1998–2 I.R.B.38
98–4, 1998–4 I.R.B.31
98–5, 1998–5 I.R.B. 25
98–6, 1998–5 I.R.B. 25
98–7, 1998–5 I.R.B. 26
98–8, 1998–6 I.R.B. 96
Notices:
98–1, 1998–3 I.R.B. 42
98–2, 1998–2 I.R.B. 22
98–3, 1998–3 I.R.B. 48
98–4, 1998–2 I.R.B. 25
98–5, 1998–3 I.B.R.49
98–6, 1998–3 I.R.B. 52
98–7, 1998–3 I.R.B. 54
98–8, 1998–4 I.R.B. 6
98–9, 1998–4 I.R.B. 8
98–10, 1998–6 I.R.B.9
98–11, 1998–6 I.R.B. 18
98–12, 1998–5 I.R.B.12
98–13, 1998–6 I.R.B.19
Proposed Regulations:
REG–102894–97, 1998–3 I.R.B. 59
REG–109704–97, 1998–3 I.R.B. 60
REG–209463–82, 1998–4 I.R.B. 27
Revenue Procedures:
98–1, 1998–1 I.R.B. 7
98–2, 1998–1 I.R.B. 74
98–3, 1998–1 I.R.B. 100
98–4, 1998–1 I.R.B. 113
98–5, 1998–1 I.R.B. 155
98–6, 1998–1 I.R.B. 183
98–7, 1998–1 I.R.B. 222
98–8, 1998–1 I.R.B. 225
98–9, 1998–3 I.R.B. 56
98–10, 1998–2 I.R.B. 35
98–11, 1998–4 I.R.B.9
98–12, 1998–4 I.R.B. 18
98–13, 1998–4 I.R.B. 21
98–14, 1998–4 I.R.B. 22
98–15, 1998–4 I.R.B. 25
98–16, 1998–5 I.R.B. 19
98–17, 1998–5 I.R.B. 21
98–18, 1998–6 I.R.B. 20
Revenue Rulings:
98–1, 1998–2 I.R.B. 5
98–2, 1998–2 I.R.B. 15
98–3, 1998–2 I.R.B. 4
98–4, 1998–2 I.R.B. 18
98–5, 1998–2 I.R.B. 20
98–6, 1998–4 I.R.B. 4
98–7, 1998–6 I.R.B.6
98–9, 1998–6 I.R.B. 5
Treasury Decisions:
8740, 1998–3 I.R.B. 4
8741, 1998–3 I.R.B. 6
8742, 1998–5 I.R.B.4

1998–7 I.R.B41February 17, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–1 through 1998–6
Revenue Procedures:
97–1
Superseded by
98–1, 1998–1 I.R.B. 7
97–2
Superseded by
98–2, 1998–1 I.R.B. 74
97–3
Superseded by
98–3, 1998–1 I.R.B. 100
97–4
Superseded by
98–4, 1998–1 I.R.B. 113
97–5
Superseded by
98–5, 1998–1 I.R.B. 155
97–6
Superseded by
98–6, 1998–1 I.R.B. 183
97–7
Superseded by
98–7, 1998–1 I.R.B. 222
97–8
Superseded by
98–8, 1998–1 I.R.B. 225
97–21
Superseded by
98–2, 1998–1 I.R.B. 74
97–53
Superseded by
98–3, 1998–1 I.R.B. 100
Revenue Rulings:
75–17
Supplemented and superseded by
98–5, 1998–2 I.R.B. 20
92–19
Supplemented in part by
98–2, 1998–2 I.R.B. 15
1
Acumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–27 through 1997–52 will be found in Internal
Revenue Bulletin 1998–1, dated January 5, 1998.