What’s New Supplement

1998 Workbook

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What’s New Supplement

December 30, 1998

This material was prepared by: C. Allen Bock, Professor of Agricultural Law,Department of Agricultural & Consumer Economics, 339 Mumford Hall,

1301 W. Gregory Drive, Urbana, IL 61801

© 1999 by the Board of Trustees of the University of Illinois

The Illinois Cooperative Extension Service provides equal opportunities in programs and employment.Urbana, Illinois January 1999

Issued in furtherance of Cooperative Extension Work, Acts of May 8 and June 30, 1914, in cooperation with theU.S. Department of Agriculture, Cooperative Extension Service, University of Illinois at Urbana-Champaign.

Copyrighted by the Board of Trustees of the University of Illinois.his information was correct when originally published. It has not been updated for any subsequent law changes.

1998 Workbook

Copyrighted by the Board of Trustees of the University of Illinois.This information was correct when originally published. It has not been updated for any subsequent law changes.

1998 Workbook1

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Corrections Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Recent Rulings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Rev. Rul. 98-56 . . . . . . . . . . . . . . . . . . . . . . . .6Gain treated as long-term capital gain under §1231(a) is not disqualified income for purposes of the earned income credit.

T.D. 8798 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Due diligence requirements are listed for taxpayers claiming the earned income credit.

Rev. Proc. 98-55. . . . . . . . . . . . . . . . . . . . . . . 10Guidance is provided for taxpayers requesting relief for late or untimely elections relating to S corporations.

Rev. Proc. 98-54. . . . . . . . . . . . . . . . . . . . . . . 10

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Rev. Rul. 98-50 . . . . . . . . . . . . . . . . . . . . . . . 11AFR Table for October 1998.

Rev. Rul. 98-52 . . . . . . . . . . . . . . . . . . . . . . . 11AFR Table for November 1998.

Rev. Rul. 98-57 . . . . . . . . . . . . . . . . . . . . . . . 12AFR Table for December 1998.

Notice 98-50 . . . . . . . . . . . . . . . . . . . . . . . . . 12Guidance is provided as to whether an amount converted from a traditional IRA to a Roth IRA may not only be transferred back to a traditional IRA, but also reconverted from the traditional IRA to a Roth IRA.

Changes to Codes for Roth IRAson Form 1099-R. . . . . . . . . . . . . . . . . . . . . . . 15

Announcement 98-106 . . . . . . . . . . . . . . . . . 15Taxpayers are advised as to changes in the distribution codes for Roth IRAs on Form 1099-R.

Notice 98-54 . . . . . . . . . . . . . . . . . . . . . . . . . 15This notice specifies that no information reporting is required for “mixed use” loans and extends the application of Notice 98-7 to information reporting required under §6050S.

Notice 98-59. . . . . . . . . . . . . . . . . . . . . . . . . . 16Eligible educational institutions are not required to file information returns for nonresident alien students or students enrolled exclusively in non-credit courses.

Notice 98-61. . . . . . . . . . . . . . . . . . . . . . . . . . 16This notice provides interim guidance for taxpayers seeking equitable relief from federal tax liability under §6015(f) or 66(c).

Rev. Rul. 98-47. . . . . . . . . . . . . . . . . . . . . . . . 21A facility’s offering of continuing or frequent medical, nursing, or psychiatric services to its residents will cause the facility to be other than residential rental property.

Announcement 98-89 . . . . . . . . . . . . . . . . . . 21New IRS procedures for handling matters in bankruptcy.

Alternative Identifying Numbers for Income Tax Return Prepares . . . . . . . . . . . . . . . . . . . 21

Notice 98-63 . . . . . . . . . . . . . . . . . . . . . . . . . 21Preparers are alerted to the IRS’s intention to develop a system of alternative identifying numbers, and are reminded to furnish their SSNs as identifying numbers in the meantime.

T.D. 8785 . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Regulations concern the taxation of transactions involving computer programs.

Effective Date for Cut in Tax Deduction for Business Driving Changed . . . . . . . . . . . . . .23

T.D. 8787 . . . . . . . . . . . . . . . . . . . . . . . . . . . .24The basis reduction due to discharge of indebtedness is limited to the excess of the aggregate of the bases of the property held immediately after the discharge over the aggregate of the liabilities.

Income Averaging. . . . . . . . . . . . . . . . . . . . .26

Social Security Wage Base . . . . . . . . . . . . . .26

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The Tax and Trade Relief Extension Act of 1998, which was passed after the book went to press,changes the answers to Examples 1 and 2. In each of these examples, the farm losses qualify for thenew five-year Caribbean.

Item 21A: The Act provides that the penalty to pay taxes is reduced by 50%, cross out is notimposed.

AMT does not reduce the credit for 1998.

Last sentence in Answer 4: See Chapter 15.

Put (30,000) on Line 1b. Put (20,000) on Line 2a.

Answer 21, 3rd paragraph, first sentence: change or after both to—to.

Question 27: The contribution is in 1998.

Column (d) should be 1,575 rather than 4,400; column (e) should be 1,486.50 rather than3,964; and column (f) should be 88.50 rather than 436.

Figure 15. Schedule D instructions released after the book went to press indicate that theamount entered in column (f) should be $300,000. On the next line, a negative $150,000 should beentered in column (f), preceded by the following: “exclusion under IRC §1202.”

Sold in 1998 not 1995.

Line 13(g) should be $300 not $100.

Answer 2—Second line $1880 not $620.

Example 19 should be 19A.

Income averaging cannot use taxable income below zero for the starting point in usingbrackets from the three prior years. Therefore, Example 1-D is incorrect and should be omitted.

Wuebker is being appealed by the IRS.

Top of page—Swain has been affirmed by the 7th Cir.

Top case name is McNeil.

Lemishow not Lemi

Change each partner to each shareholder in Line 2 and 4.

Enter 90,000 on Line 6, 10,000 on Line 7, 100,000 on Line 8, and.05 on Line 9.

Facts, third line: Change decline to increase.

The $1,000 Threshold was increased to $1,100 for 1998.

CORRECTIONS SHEET

p. 4.

p. 48.

p. 72.

p. 72.

p. 82.

p. 83.

p. 85.

Top of p. 221.

p. 239.

Top of p. 242.

p. 247.

p. 283.

p. 299.

pp. 310, 311.

p. 313.

p. 442.

p. 473.

p. 480.

p. 534.

p. 565.

p. 603.

pp. 620, 621.

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Example 11—November 15, 1996 not November 15, 1997.

Second note—$40,000 is subject to max rate of 25%; $20,000 to max rate of 20%.

#6 see Q6 on page 706.

Example One—$1,690,000 not $690,000.

12-31-98 should be 12-31-90.

Item 78. The instructions for Form 1099-Misc., which were released after the book went topress, indicate that the payments are reported on Form 1099-MISC rather than Form 1099-B as antici-pated in the text. The instructions read as follows:

Payments to attorneys. Attorneys’ fees of $600 or more paid in the course of your trade or business areand continue to be reportable in box 7 of Form 1099-MISC. However, for 1998 and later years, if youmake a payment in the course of your trade or business to an attorney in connection with legal servicesand the attorney’s fee cannot be determined, the total amount paid to the attorney (gross proceeds)must be reported in box 13 of new Code A. For example, an insurance company pays an attorney$100,000 to settle a claim. The attorney’s fee cannot be determined by the insurance company. There-fore, the insurance company must report $100,000 in box 13 of Form 1099-MISC with Code A. If theinsurance company knows that the attorney’s fee is, for example, $34,000, the insurance companymust report $34,000 in box 7 and nothing in box 13. These rules apply (a) whether or not the attorneyis the exclusive payee (e.g., the attorney’s and claimant’s names on one check). However, these rulesdo not apply to profits distributed by a partnership to its partners that are reportable on Schedule K-1(Form 1065), Partner’s Share of Income, Credits, Deductions, etc., or to wages paid to attorneys thatare reportable on Form W-2, Wage and Tax Statement. The term “attorney” includes a law firm orother provider of legal services. Payments to corporations for legal services. The exemption from reporting payments made to corpo-rations no longer applies to payments for legal services. Therefore, for 1998 and later years, you mustreport attorneys’ fees (in box 7) or gross proceeds (in box 13) as described above to corporations thatprovide legal services.

The preceding years seafarer for estimated payments made for year 2000 and2001 is 106%.

p. 659.

p. 662.

p. 699.

p. 719.

p. 748.

p. 749.

Yellow Supplement p. 2.

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RECENT RULINGS
Rev. Rul. 98-56EIC - Disqualified Income

Section 32 of the Internal Revenue Code allows an earned income credit to eligible individuals whoseincome does not exceed certain limits. Section 32(i) denies the earned income credit to an otherwiseeligible individual if the individual’s “disqualified income” exceeds a specified level for the taxableyear for which the credit is claimed. Disqualified income is income specified in §32(i)(2).

Note: This is a reversal of an IRS position. Consider amended returns where appropriate.

T.D. 8798EIC

The temporary regulations essentially adopt the four due diligence requirements in Notice 97-65.Thus, to avoid the penalty under section 6695(g), a preparer must: (1) complete the EligibilityChecklist (Form 8876, Paid Preparer’s Earned Income Credit Checklist, or such other form as maybe prescribed by the IRS), or otherwise record in the preparer’s files the information neces-sary to complete the Eligibility Checklist; (2) complete the Computation Worksheet (EarnedIncome Credit Worksheet contained in the Form 1040 instructions), or otherwise record in thepreparer’s files the computation and information necessary to complete the ComputationWorksheet; (3) have no knowledge, and have no reason to know, that any information used bythe preparer in determining the eligibility for, and amount of, the EIC is incorrect; and (4)retain for three years the Eligibility Checklist and the Computation Worksheet (or alternativerecords), and a record of how and when the information used to determine eligibility for, andthe amount of, the EIC was obtained by the preparer.

☞ Gain that is treated as long-term capital gainunder §1231(a)(1) of the Code is not disqualifiedincome for purposes of the earned incomecredit.

Gain that is treated as long-term capital gain under §1231(a)(1) is not disqualified income forpurposes of §32(i).

In figuring the EITC, the IRS instructions take as capital gain net income the total from Sched-ule D, “Capital Gains and Losses.” This includes certain gains reported on Form 4797, “Sales ofBusiness Property,” and carried over to the Schedule D. Under the ruling announced today, thegain reported on Form 4797 should be subtracted from the Schedule D total when figuring theEITC investment income limit.

The 1998 tax instructions, which have already gone to print, will not reflect this change. How-ever, specific instructions for preparing 1998 returns will appear in Publication 596, “EarnedIncome Credit.”

Taxpayers who were otherwise eligible to claim the EITC on their 1996 or 1997 returns—buthad too much investment income because of the Form 4797 calculation—should claim a refund byfiling an amended return on Form 1040X for each year that the new calculation lowers theirinvestment income below the limit for that year.

☞ EIC Due Diligence Explained

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The temporary regulations also provide that the income tax return preparer may avoid the section6695(g) penalty with respect to a particular income tax return or claim for refund if the preparer candemonstrate to the satisfaction of the IRS that, considering all the facts and circumstances, the pre-parer’s normal office procedures are reasonably designed and routinely followed to ensure compliancewith the due diligence requirements of the regulations, and that the particular failure was isolated andinadvertent.

The temporary regulations will be effective for taxable years beginning after December 31,1996. However, the Eligibility Checklist contained in Notice 97-65 has been expanded in Form8867.

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Rev. Proc. 98-55S Corporation Elections
Section 1. Scope.

.01 In general. This revenue procedure extends the special procedure for late S corporation electionsdescribed in Rev. Proc. 97-40 from 6 months to 12 months (but in no event later than the unextendeddue date of the tax return for the first year the corporation intended to be an S corporation), providessimilar relief for certain QSub elections, and extends the application of Rev. Proc. 94-23 to ESBT elec-tions.

Note. This is a very lengthy Rev. Proc. and should be studied by practitioners with this problem. Itdoes contain valuable information.

Rev. Proc. 98-54Deficiency Notices

☞ This revenue procedure amplifies and super-sedes the provisions of Rev. Proc. 94-23, 1994-1C.B. 609, and Rev. Proc. 97-40, 1997-33 I.R.B. 50.This revenue procedure is intended to provideguidance for taxpayers requesting relief for lateS corporation elections and certain untimelyelections required to be filed by or with respectto an S corporation. Accompanying this docu-ment is a flowchart designed to aid taxpayers inapplying this revenue procedure.

☞ This revenue procedure provides taxpayers withinstructions for entering into an agreement withthe Internal Revenue Service under §6212(d) ofthe Internal Revenue Code to rescind a notice ofdeficiency. This revenue procedure clarifies,modifies, and supersedes Rev. Proc. 88-17, 1988-1C.B. 692.

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INTERESTRev. Rul. 98-50

Rev. Rul. 98-57

APPLICABLE FEDERAL RATES (AFR) FOR OCTOBER 1998

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-TermAFR 5.06% 5.00% 4.97% 4.95%

110% AFR 5.58% 5.50% 5.46% 5.44%120% AFR 6.09% 6.00% 5.96% 5.93%130% AFR 6.61% 6.50% 6.45% 6.41%

Mid-TermAFR 5.12% 5.06% 5.03% 5.01%

110%AFR 5.65% 5.57% 5.53% 5.51%120% AFR 6.16% 6.07% 6.02% 5.99%130% AFR 6.69% 6.58% 6.53% 6.49%150% AFR 7.73% 7.59% 7.52% 7.47%175% AFR 9.06% 8.86% 8.76% 8.70%

Long-TermAFR 5.46% 5.39% 5.35% 5.33%

110% AFR 6.02% 5.93% 5.89% 5.86%120% AFR 6.57% 6.47% 6.42% 6.38%130% AFR 7.13% 7.01% 6.95% 6.94%

APPLICABLE FEDERAL RATES (AFR) FOR NOVEMBER 1998



Short-TermAFR 4.47% 4.42% 4.40% 4.38%

110% AFR 4.92% 4.86% 4.83% 4.81%120% AFR 5.37% 5.30% 5.27% 5.24%130% AFR 5.83% 5.75% 5.71% 5.68%

Mid-TermAFR 4.51% 4.46% 4.44% 4.42%

110% AFR 4.97% 4.91% 4.88% 4.86%120% AFR 5.42% 5.35% 5.31% 5.29%130% AFR 5.88% 5.80% 5.76% 5.73%150% AFR 6.80% 6.69% 6.63% 6.60%175% AFR 7.96% 7.81% 7.74% 7.69%

Long-TermAFR 5.10% 5.04% 5.01% 4.99%

110% AFR 5.62% 5.54% 5.50% 5.48%120% AFR 6.14% 6.05% 6.00% 5.98%130% AFR 6.66% 6.55% 6.50% 6.46%

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Rev. Rul. 98-57
Roth IRA Guidance Recharacterizations

Purpose. This notice responds to questions that have arisen regarding whether a taxpayer who hasconverted an amount from a traditional IRA to a Roth IRA may not only transfer the amount back toa traditional IRA in a recharacterization but also subsequently “reconvert” that amount from the tradi-tional IRA to a Roth IRA.

Background. Section 408A(d)(6) of the Code and §1.408A-5 of the proposed regulations prescriberules for “recharacterizations” of IRA contributions, including Roth IRA conversion contributions.Section 408A(d)(6) provides that, except as otherwise provided by the Secretary of the Treasury, anIRA contribution that is transferred to another IRA in a trustee-to-trustee transfer on or before the dateprescribed by law for filing the taxpayer’s Federal income tax return, including extensions, (the “duedate”) for the taxable year of the contribution is treated as made to the transferee IRA and not thetransferor IRA. The proposed regulations interpret §408A(d)(6) to make its application elective by thetaxpayer, permit the taxpayer to recharacterize most types of IRA contributions, and permit the tax-payer to recharacterize all or any portion of an IRA contribution.

Treatment of Reconversions. The question has arisen whether a taxpayer who has converted an amountfrom a traditional IRA to a Roth IRA may not only transfer the amount back to a traditional IRA in arecharacterization but also subsequently “reconvert” that amount from the traditional IRA to a RothIRA. The proposed regulations do not specifically address this question, and the Service and Treasuryare considering whether final regulations should permit reconversions under any circumstances. How-ever, effective as of November 1, 1998, the interim rules set forth below will apply for 1998 and 1999.Any future guidance that either prohibits reconversions or imposes conditions on reconversions morerestrictive than those imposed under this notice will not apply to reconversions completed before issu-ance of that guidance.

If a taxpayer converts (or reconverts) an amount, transfers that amount back to a traditional IRAby means of a recharacterization, and reconverts that amount in a transaction for which the taxpayer is

APPLICABLE FEDERAL RATES (AFR) FOR DECEMBER 1998



Short-TermAFR 4.33% 4.28% 4.26% 4.24%

110% AFR 4.77% 4.71% 4.68% 4.66%120% AFR 5.21% 5.14% 5.11% 5.09%130% AFR 5.64% 5.56% 5.52% 5.50%

Mid-TermAFR 4.52% 4.47% 4.45% 4.43%

110% AFR 4.98% 4.92% 4.89% 4.87%120% AFR 5.43% 5.36% 5.32% 5.30%130% AFR 5.89% 5.81% 5.77% 5.74%150% AFR 6.82% 6.71% 6.65% 6.62%175% AFR 7.97% 7.82% 7.75% 7.70%

Long-TermAFR 5.25% 5.18% 5.15% 5.12%

110% AFR 5.78% 5.70% 5.66% 5.63%120% AFR 6.32% 6.22% 6.17% 6.14%130% AFR 6.84% 6.73% 6.67% 6.64%

Notice 98-50

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not eligible under the interim rules set forth in this notice, the reconversion will be deemed an “excessreconversion.” However, any reconversions that a taxpayer has made before November 1, 1998, willnot be treated as excess reconversions and will not be taken into account in determining whether anylater reconversion is an excess reconversion.

A taxpayer who converts an amount from a traditional IRA to a Roth IRA during 1998 and thentransfers that amount back to a traditional IRA by means of a recharacterization is eligible to reconvertthat amount to a Roth IRA once (but no more than once) on or after November 1, 1998, and on orbefore December 31, 1998; the taxpayer also is eligible to reconvert that amount once (but no morethan once) during 1999. (Any conversion of that amount during 1999 would constitute a reconversionbecause the taxpayer previously converted that amount during 1998). This rule applies without regardto whether the taxpayer’s initial conversion or recharacterization of the amount occurs before, on, orafter November 1, 1998, and (as indicated above) even if the taxpayer has made one or more reconver-sions before November 1, 1998.

A taxpayer who converts an amount from a traditional IRA to a Roth IRA during 1999 that hasnot been converted previously and then transfers that amount back to a traditional IRA by means of arecharacterization is eligible to reconvert that amount to a Roth IRA once (but no more than once) onor before December 31, 1999. In determining whether a taxpayer has made a previous conversion forpurposes of these interim rules, a failed conversion, as described in proposed regulations §1.408A-4,Q&A-3 (that is, an attempted conversion for which the taxpayer is not eligible for reasons set forth inproposed regulations §1.408A-4), will not be treated as a conversion.

Any excess reconversion of an amount during 1998 or 1999 will not change the taxpayer’s taxableconversion amount (as defined in proposed regulations §1.408A-8, Q&A-1(b)(7)). Instead, the excessreconversion and the last preceding recharacterization will not be taken into account for purposes ofdetermining the taxpayer’s taxable conversion amount, and the taxpayer’s taxable conversion amountwill be based on the last reconversion that was not an excess reconversion (unless, after the excessreconversion, the amount is transferred back to a traditional IRA by means of a recharacterization). Anexcess reconversion will otherwise be treated as a valid reconversion.

Any conversion, recharacterization, or reconversion of an amount under this notice must satisfythe provisions of §408A and the proposed regulations. For example, a taxpayer making a conversionor reconversion must satisfy the $100,000 modified AGI limitation of §408A(c)(3)(B)(i) and proposedregulations §1.408A-4, Q&A-2, and a taxpayer transferring a contribution from one IRA to anotherIRA by means of a recharacterization must make the transfer on or before the due date for the taxableyear of the contribution, as required by §408A(d)(6) and proposed regulations §1.408A-5, Q&A-1. Indetermining the portion of any amount held in a Roth IRA or a traditional IRA that a taxpayer is noteligible to reconvert under the interim rules set forth in this notice, any amount previously converted(or reconverted) is adjusted for subsequent net gains or losses thereon.

Example 1. On May 1, 1998, T converted an amount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). T did not contribute any other amount to Roth IRA 1. On October 15, 1998,T transferred the amount in Roth IRA 1 to a traditional IRA (Traditional IRA 2) by means of a rechar-acterization. T is eligible to reconvert the amount in Traditional IRA 2 to a Roth IRA once (but nomore than once) at any time on or after November 1, 1998, and on or before December 31, 1998. Anyadditional reconversion during 1998 would be an excess reconversion. This result would not be differ-ent if the recharacterization had occurred on or after November 1, 1998, instead of before November 1,1998.

Example 2. The facts are the same as in Example 1, except that, on November 25, 1998, T reconvertsthe amount in Traditional IRA 2 to a Roth IRA (Roth IRA 2). After that reconversion, T may transferthe amount from Roth IRA 2 back to a traditional IRA by means of a recharacterization, but any sub-sequent reconversion of that amount to a Roth IRA before January 1, 1999, would be an excess recon-version. If T does transfer the amount from Roth IRA 2 back to a traditional IRA by means of arecharacterization, T is eligible to reconvert that amount once (but no more than once) during 1999.Any additional reconversion of that amount during 1999 would be an excess reconversion.

Example 3. The facts are the same as in Example 2, except that, on December 4, 1998, T transfers theamount from Roth IRA 2 back to a traditional IRA (Traditional IRA 3) by means of a recharacteriza-

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tion. If T does not reconvert that amount to a Roth IRA on or before December 31, 1998, T cannot usethe 4-year spread available for 1998 conversions.
Example 4. The facts are the same as in Example 3. The value of the amount converted on May 1,1998, was $X, and the value of the amount converted on November 25, 1998, was $Y. On December8, 1998, T reconverts the amount in Traditional IRA 3 (which then has a value of $Z) to a Roth IRA(Roth IRA 3). Under the interim rules set forth in this notice, T is not eligible to make the December 8,1998, reconversion, and that excess reconversion will not be taken into account for purposes of deter-mining T’s taxable conversion amount (although it is otherwise treated as a valid conversion). Instead,T’s taxable conversion amount will be based on T’s November 25, 1998, reconversion. Therefore, T’staxable conversion amount will be $Y. Because it is a 1998 conversion, the November 25, 1998, recon-version is eligible for the 4-year spread (unless T again transfers the amount from Roth IRA 3 to a tra-ditional IRA by means of a recharacterization.

Example 5. The facts are the same as in Example 2, except that T’s modified AGI for 1998 was$110,000. Therefore, T was not eligible to convert an amount from a traditional IRA to a Roth IRA in1998, and T’s attempted conversion (on May 1, 1998) and reconversion (on November 25, 1998) arefailed conversions, as described in proposed regulations §1.408A-4, Q&A-3. Therefore, if T transfersthe amount of the failed conversion in Roth IRA 2 back to a traditional IRA by means of a recharacter-ization and converts that amount from the traditional IRA to a Roth IRA during 1999, T will be eligi-ble to reconvert that amount once (but no more than once) on or before December 31, 1999. Anyadditional reconversion of that amount during 1999 would be an excess reconversion.

Example 6. On November 5, 1998, R converts an amount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). On November 25, 1998, R transfers the amount in Roth IRA 1 back to a tra-ditional IRA (Traditional IRA 2) by means of a recharacterization. R is then eligible to reconvert theamount in Traditional IRA 2 to a Roth IRA at any time on or before December 31, 1998. After thatreconversion, R may transfer the amount back to a traditional IRA by means of a recharacterization,but any subsequent reconversion of that amount to a Roth IRA before January 1, 1999, would be anexcess reconversion. If R does transfer the amount in Traditional IRA 2 to a Roth IRA at any time onor before December 31, 1998. After that reconversion, R may transfer the amount back to a traditionalIRA by means of a recharacterization (whether before or after the end of 1998), R will be eligible toreconvert that amount once (but no more than once) during 1999. Any additional reconversion of thatamount during 1999 would be an excess reconversion.

Example 7. On January 5, 1999, S converts an amount in a traditional IRA (Traditional IRA 1) to aRoth IRA (Roth IRA 1). S had not previously converted that amount. On February 17, 1999, S trans-fers the amount in Roth IRA 1 back to a traditional IRA (Traditional IRA 2) by means of a recharacter-ization. After the recharacterization, S is eligible to reconvert the amount in Traditional IRA 2 once(but no more than once) at any time on or before December 31, 1999. Any additional reconversion ofthat amount during 1999 would be an excess reconversion.

This notice is intended to clarify and supplement the guidance provided in the proposed regula-tions under §408A and may be relied upon as if it were incorporated in those regulations. In accor-dance with the procedures for submitting comments on the proposed regulations, interested parties areinvited to submit comments on whether final regulations should permit reconversions (and, if so, underwhat circumstances and conditions). Possible approaches to reconversions in final regulations mightinclude providing that a taxpayer is not eligible to reconvert an amount before the end of the taxableyear in which the amount was first converted (or the due date for that taxable year) or that a taxpayerwho transfers a converted amount back to a traditional IRA in a recharacterization must wait until thepassage of a fixed number of days (e.g., 30 or 60 days) before reconverting. Additionally, suchapproaches might include providing that an excess reconversion would be treated as a failed conver-sion that would be subject to the consequences described in proposed regulations §1.408A-4, Q&A-3,and that could be remedied as described therein.

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Changes to Codes for Roth IRAs on Form 1099-R

Announcement 98-106

Purpose The purpose of this announcement is to advise payers making distributionsfrom Roth IRAs of changes to the distributions codes on Form 1099-R, Distri-butions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc.

Background The Internal Revenue Service Restructuring and Reform Act of 1998 (PublicLaw 105–206) amended Internal Revenue Code section 408A, dealing withRoth IRAs. Because of these amendments, the Service has concluded that codeK (Distribution from a 1998 Roth conversion IRA in the first 5 years) on the1998 Form 1099-R may not be needed. In addition, a new code for recharacter-izations is needed.

1998 Form 1099-R Code K, to be used in box 7 on the 1998 Form 1099-R, is now optional. All dis-tributions from a Roth IRA or Roth conversion IRA can be reported usingcode J, Distribution from a Roth IRA in first 5 years, in box 7.

1999 Form 1099-R Code K will be eliminated on the 1999 Form 1099-R. Code J will be changed to“Distribution from a Roth IRA.” Use Code J when reporting any distributionfrom a Roth IRA or Roth conversion IRA. Code R, Recharacterized IRA con-tribution, will be added to identify a recharacterization of an IRA contribution.

Returns Relating to Interest on Education Loans

The requirements for reporting qualified education loan interest under §6050S are generallydescribed in Notice 98-7, along with specific information reporting requirements for 1998. Section D ofthe Discussion portion of Notice 98-7 provides a rule for reporting payments of interest made on orafter January 1, 1998, on mixed use loans or revolving accounts, such as credit card accounts. Pay-ments of interest on these loans are treated under Notice 98-7 as interest paid with respect to a qualifiededucation loan (and must be reported as such) only if the mixed use loan or revolving account is certi-fied by the payor to be, in part, a qualified education loan, and the payee has a reasonable method forallocating the interest payments to the part of the loan that is certified to be a qualified education loan.In addition, Section E of the Discussion provides that, with respect to loans made on or after January 1,1998, that are secured by real property, if a payor certifies all or part of such a loan as a qualified edu-cation loan, only the certified portion of the loan may be treated as a qualified education loan for pur-poses of information reporting. The remaining portion must be treated as a mortgage subject toinformation reporting under §6050H.

☞ This notice modifies Notice 98-7, 1998-3 I.R.B. 54,which describes the information reportingrequirements under §6050S of the Internal Reve-nue Code for 1998 that apply in the case of pay-ments of interest on qualified education loans.Specifically, this notice provides that no informa-tion reporting is required with respect to “mixeduse” loans. This notice also provides that theInternal Revenue Service and the TreasuryDepartment are extending the application ofNotice 98-7 to information reporting requiredunder §6050S for 1999.

Notice 98-54

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[Also see p. 731 of the Tax Book for Notice 97-73].

Notice 98-59, I.R.B. 1998-49, November 18, 1998.

This notice modifies Notice 97-73, 1997-2 C.B. 335, and Notice 98-46. 1998-36 I.R.B. 21, by provid-ing that the Internal Revenue Service will not require an eligible educational institution to file informa-tion returns under §6050S of the Internal Revenue Code for 1998 or 1999 with respect to students whoare enrolled during the year only in courses for which the student receives no academic credit from theinstitution. In addition, this notice modifies Notice 97-73 and Notice 98-46 by providing that eligibleeducational institutions are not required to file information returns for 1998 for 1999 with respect tononresident alien students, unless requested to do so by the student.

[Also see p. 725 of the Tax Book]

Interim Guidance for Equitable Relief From Joint and Several Liability

Discussion. Section 221(e)(1), as amended by RRA 1998, provides that the term “qualified educa-tion loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher educa-tion expenses. The amendment to §221(e)(1) is effective as if included in the Taxpayer Relief Act of1997 and applies to interest payments due and paid after December 31, 1997. Thus, the payeemust not report under §6050S information on mixed use loans (whether or not secured byreal property) because they are not qualified education loans under §221(e)(1) asamended. However, information reporting under §6050S continues to be required for any loan(including a loan secured by real property) or revolving account, such as credit card account, thatthe payor certifies is used solely for the purpose of paying qualified higher education expenses. Thepayee may rely on this certification when filing Form 1098-E, Student Loan Interest Statement, for1998 and need not verify the payor’s actual use of the funds. In all other respects, the require-ments of §6050S with respect to qualified education loan interest reporting for 1998remain the same as described in Notice 98-7.

The Service is currently revising Form W-9S, Request for Student’s or Borrower’s Social Secu-rity Number and Certification, to remove the certification for mixed use loans. In addition, payeesshould disregard the instructions regarding mixed use loans and revolving accounts, which arefound in the Form 1098-E section of the 1998 Instructions for Forms 1099, 1098, 5498, and W-2G.Those instructions will be revised for 1999.

☞ Educational Institution Reporting

☞ The Treasury Department and the InternalRevenue Service are in the process of developingguidance for taxpayers seeking equitable relieffrom federal tax liability under §6015(f) or 66(c) ofthe Internal Revenue Code. This notice providesinterim guidance.

Notice 98-61

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Rev. Rul. 98-47Residential Rental Property

The Internal Revenue Service has undertaken a new initiative to improve its procedures for handlingbankruptcy cases. The new procedures are intended to minimize the likelihood that IRS collectionactions will inadvertently violate the bankruptcy laws, to facilitate prompt correction of any violationsthat do occur, and to provide an administrative process for handling any claims for damages againstthe IRS that arise from such violations.

Alternative Identifying Numbers for Income Tax Return Preparers

Notice 98-63

PURPOSE

This notice informs income tax return preparers of the Service’s intention to develop a system ofproviding alternative identifying numbers for preparers. Individual preparers are reminded of theircontinuing responsibility to furnish their social security numbers (“SSNs”) on returns or claims forrefund prepared by them.

LAW PRIOR TO AMENDMENT BY THE ACT

Section 6109(a)(4) of the Internal Revenue Code provides that any return or claim for refund pre-pared by an income tax return preparer must bear the indentifying number of the preparer as requiredunder regulations prescribed by the Secretary. Prior to its amendment by §3710 of the Act, §6109(a) ofthe Code provided that the identifying number of an individual preparer was that individual’s SSN.

Section 1.6109-2 of the Income Tax Regulations provides that each return or claim for refund pre-pared by an income tax return preparer must bear the identifying number of the preparer, which, foran individual preparer, is that individual’s SSN.

EFFECT OF THE ACT

Under §6109(a), as amended by §3710 of the Act, the identifying number required for a return pre-parer need not be the preparer’s SSN. Instead, the Secretary may issue regulations providing alterna-tives to the SSN for purposes of identifying individual preparers. See §6109(d).

☞ Residential rental property. For purposes of§142(d) and 145(d) of the Code, the ruling pro-vides that the availability of continual or fre-quent medical, nursing, or psychiatric services ina facility for the residents of the facility willcause the facility to be other than residentialrental property. Other non-housing servicesavailable in a facility for the residents of thefacility generally will not cause the facility to beother than residential rental property.

☞ IRS announced new procedures for handlingmatters in bankruptcy

Announcement 98-89

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Until the alternative identifying numbers are available, §1.6109-2 requires that individual preparerscontinue to furnish their SSNs as their identifying numbers. However, as provided by Rev. Rul. 78-317, 1978-2 C.B. 335, preparers may omit their SSNs from copies of returns furnished to taxpayersunder §6107(a).

T.D. 8785

Classification of Certain Transactions Involving Computer Programs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains regulations relating to the tax treatment of certain transactionsinvolving the transfer of computer programs. The regulations provide rules for classifying such transac-tions as sales or licenses of copyright rights, sales or leases of copyrighted articles, or the provision ofservices, or of know-how, under certain provisions of the Internal Revenue Code and tax treaties.These regulations are necessary to give taxpayers guidance on the taxation of computer program trans-actions. These regulations affect taxpayers engaging in certain transactions involving computer pro-grams.

DATES: Effective date. These regulations are effective October 2, 1998.

To implement this change, the Service intends to develop a system for assigning alternativeidentifying numbers to individual preparers. These alternative identifying numbers are scheduledto be available for the filing season beginning January 1, 2000. The Secretary intends to amend§1.6109-2 to allow individual preparers the option of electing alternative identifying numbers inlieu of their SSNs.

The Service will continue to monitor returns and claims for refund for the presence of preparerSSNs. Income tax return preparers failing to furnish their SSNs on returns or claims for refund aresubject to a penalty of $50 for each such failure, as provided by §6695(c).

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T.D. 8787
Action. Final and temporary regulations

Dates. Effective Date: These regulations are effective, October 22, 1998.Applicability Date: These regulations apply to discharges of indebtedness occurring on or after,

October 22, 1998 and to elections under §108(b)(5) concerning discharges of indebtedness occurringon or after, October 22, 1998.

Explanation of Revisions and Summary of Comments.

1. Basis reduction. The statute, in §1017(b)(2), provides only one limitation on basis reduction for insol-vent and bankrupt taxpayers who do not make an election under §108(b)(5). Under that rule, thebasis reduction may not exceed the excess of the aggregate of the bases of the property heldby the taxpayer immediately after the discharge over the aggregate of the liabilities of thetaxpayer immediately after the discharge.

2. Section 108(c)(2)(A) limitation. Section 1.108–5(a) of the proposed regulations described the limitationunder §108(c)(2)(A) and provided that the amount excluded under §108(a)(1)(D) (concerning dis-charges of qualified real property business indebtedness) could not exceed the excess of the outstand-ing principal amount of that indebtedness immediately before the discharge over the net fair marketvalue of the qualifying real property (as defined under §1.1017–1(c)(1)) immediately before the dis-charge. The final regulations provide that, for purposes of §108(c)(2)(A) and §1.108–6 only, out-standing principal amount means the principal amount of an indebtedness and all additionalamounts owed that, immediately before the discharge, are equivalent to principal, in thatinterest on such amounts would accrue and compound in the future. Amounts that are subject to§108(e)(2) are excepted from the definition of principal amount. In addition, principal amount must beadjusted to account for unamortized premium and discount consistent with §108(e)(3).

3. Allocation of basis reduction of multiple properties within the same class. The proposed regulation in-corporate the limitation described in §1017(b)(2) which provides that the basis reduction for bankruptand insolvent taxpayers may not exceed the excess of the aggregate of the bases of the property held bythe taxpayer immediately after the discharge over the aggregate of the liabilities of the taxpayer imme-diately after the discharge.

The overall limitation on basis reduction is determined by reference to the adjusted basis of prop-erty and the amount of money held by the taxpayer over the liabilities of the taxpayer “immediatelyafter the discharge.” By contrast, under the basis reduction rules applicable for purposes of§108(b)(2)(E), the taxpayer must reduce the adjusted basis of property “held by the taxpayer at thebeginning of the taxable year following the year in which the discharge occurs.” Section 1017(a).

The proposed regulations also provided that a taxpayer must treat a distributive share of a partner-ship’s COD income as attributable to a discharged indebtedness secured by the taxpayer’s interest inthat partnership. The rule in the proposed regulations for allocating basis reduction among multipleproperties under §108(b)(2)(E) contained parenthetical language cross-referencing the partnership pro-vision for the property classes that included secured real and personal property used in a trade or busi-ness or held for investment. This parenthetical language was intended to remind taxpayers thatpartnership indebtedness is treated as indebtedness secured by the taxpayer’s interest in the partner-ship.

One commentator stated that the cross-reference with respect to secured real property was confus-ing since a partnership interest presumably should be treated as personal property in reducing basisunder §108(b)(2)(E). This is contrasted with the modified basis reduction rules under sections 108(b)(5)and 108(c) which, assuming the appropriate requests are made and consents are granted, apply a look-through rule to reduce the inside basis of depreciable property or depreciable real property held by apartnership.

☞ Basis Reduction Due to Discharge of Indebted-ness

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4. Meaning of “in connection with” in section 108(c)(3). Section 108(c)(3)(A) defines qualified real propertybusiness indebtedness as indebtedness which “was incurred or assumed by the taxpayer in-connectionwith real property used in a trade or business and is secured by such real property.” The IRS and Trea-sury Department do not believe that this sentence should be interpreted to mean only that the debtmust be secured by real property used in a trade or business as of January 1, 1993.

5. Basis reduction with respect to a residence. Section 1034 was repealed by the Taxpayer Relief Act of1997. New §121, enacted by the Taxpayer Relief Act of 1997, exempts certain gain on the sale of aresidence, but does not provide that the potential gain will be transferred to a replacement residence.Therefore, under the new law, there is no mechanism to preserve the potential recapture income withrespect to a new residence, and the potential recapture income must be recognized on the sale of theresidence under §1245.

6. Mandatory request and consent. The proposed regulations provided that a partner may treat a part-nership interest as depreciable property under §108(b)(5) (or as depreciable real property under§108(c)) only if the partnership consents to make corresponding adjustments to the basis of the partner-ship’s depreciable property (or depreciable real property). The IRS and Treasury Department gener-ally believe, in this context, that whether or not a partnership consents to make the correspondingadjustments to the basis of its property should be a matter of agreement between the partner and thepartnership. Therefore, the proposed regulations generally provided that a partner is free to choosewhether or not to request that a partnership reduce the basis of partnership property and that the part-nership is free to grant or withhold its consent.

As in the proposed regulations, the final regulations do not require a partnership to reducethe basis of its depreciable property (or depreciable real property) in all situations where the partner-ship is the source of the COD income. However, where a partnership is the source of the COD incomeand partners elect to exclude such income, such partners are required to request that the partnershipreduce its basis in such property. Accordingly, if partners meeting certain regulatory require-ments elect to exclude such income, the partnership must consent to reduce the basis of its deprecia-ble property (or depreciable real property).

7. Timing and reporting. The proposed regulations provided that a partner requesting a reduction ininside basis must make the request and receive consent before the due date (including extensions) forfiling the partner’s Federal income tax return for the taxable year in which the partner has CODincome. The proposed regulations also provided that a partnership that consents to a basis reductionmust include a consent statement with its Form 1065, U.S. Partnership Return of Income, and providea copy of that statement to the affected partner on or before the date the Form 1065 is filed. One com-mentator stated that the final regulations should provide that: (i) partners should not be required torequest consent, and (ii) neither the partner nor the partnership should be required to attach statementsto their returns, until the filing date of their respective returns for the taxable year following the yearthat the partner excludes COD income.

The IRS and Treasury Department continue to believe that a partner electing under sections108(b)(5) or 108(c) must receive the consent of the partnership before the partner excludes the CODincome. Therefore, the final regulations provide that the partner must request and receive theconsent of the partnership prior to the due date (including extensions) for filing the partner’sFederal income tax return for the taxable year in which the partner has COD income. Thefinal regulations do, however, adopt the suggestion that the partnership is not required to attach a state-ment to its return until the filing date of its Federal income tax return for the taxable year following theyear that ends with or within the taxable year that the partner excludes the COD income.

As under the proposed regulations, the final regulations continue to treat a distributive share ofa partnership’s COD income as attributable to a discharged indebtedness secured by the tax-payer’s partnership interest.

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Income averaging regulations for farmers have not been released by the IRS yet.
The Social Security Wagebase is $72,600 for 1999.

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Documents

What’s New Supplement