Part IV. Items — Internal Revenue Bulletin 1998-11

Page, or by submitting comments directly to the IRS Internet site at http://www.irs. ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Karin Loverud, 202-622-6060; concerning submissions, Evangelista Lee, 202-622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Man- agement and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collection of information should be received by March 27, 1998. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information (see below);

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information.

The collections of information in this proposed regulation are in §31.6053–1 and §31.6053–4. This information is required to conform with the statute and to

Withdrawal of Notice of Proposed Rulemaking

Petroleum Tax Imposed on Natural Gasoline

PS–158–86

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

SUMMARY: This document withdraws a proposed regulation relating to the petroleum tax imposed on natural gasoline. The withdrawal affects persons that produce natural gasoline at fractionation facilities or receive natural gasoline produced at those facilities.

FOR FURTHER INFORMATION CONTACT: Ruth Hoffman, (202) 622-3130 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 4611 imposed a tax on crude oil (including natural gasoline) received at a United States refinery. On April 26, 1993, a notice of proposed rulemaking (PS– 158–86 [1993–1 C.B. 866]) relating to this tax was published in the Federal Register (58 F.R. 21963). The proposed regulation treats any facility that produces natural gasoline by fractionation or similar operation as a United States refinery. Under this rule, tax would be imposed on natural gasoline when it is produced from natural gas liquids at a fractionation facility.

Since the publication of the proposed regulation, the tax imposed by section 4611 has expired. Because tax is not currently imposed under section 4611, the proposed regulation is being withdrawn. For purposes of section 4611 prior to its expiration, the IRS will follow the result in Enron Gas Processing Co. v. United States, 96–1 USTC ¶ 70,058 (S.D. Tex. 1996), in all cases involving substantially similar facts. In Enron, the U.S. District Court for the Southern District of Texas held that fractionation facilities are not United States refineries.

Withdrawal of Notice of Proposed Rulemaking

Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking that was published in the Federal Register on April 26, 1993 (58 F.R. 21963) is withdrawn.

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(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. 67013)

Notice of Proposed Rulemaking

Electronic Tip Reports

REG–104691–97

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document proposes to amend the regulations dealing with the requirement that tipped employees report their tips to their employer. The proposed regulations permit employers to establish electronic systems for use by their tipped employees in reporting tips to the employer. The proposed regulations also address substantiation requirements for employees using the electronic system.

DATES: Written comments and requests for a public hearing must be received by April 27, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–104691–97), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–104691–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home

1998–11 I.R.B. 13 March 16, 1998

assist employers and employees in fulfilling their responsibilities. This information will be used by employers to establish the amount of income and FICA (or RRTA) taxes to withhold from the employee reporting the tips. This information will be used by employees in meeting the substantiation requirements. The collections of information are mandatory. The likely respondents are individuals.

Estimated total annual reporting burden: 600,000 hours.

Estimated average annual burden hours per respondent: 2 hours.

Estimated number of respondents: 300,000. Estimated annual frequency of responses: varies.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains proposed amendments to the Employment Tax Regulations (26 CFR part 31) under section 6053(a) of the Internal Revenue Code (Code). The proposed regulations provide rules permitting employers to establish electronic systems for use by their tipped employees in reporting tips to the employer.

In general, under section 6053(a) of the Code, every employee who receives tips must report the tips to the employer. The tips that must be reported are those that are wages for purposes of federal income tax withholding and the Federal Insurance Contributions Act (FICA) and compensation for purposes of the Railroad Retirement Tax Act (RRTA). The tips must be reported in a written statement or statements furnished to the employer on or before the 10th day following the month in which the tips are received. The Secretary is authorized to prescribe rules necessary to implement this provision, including the form and manner of furnishing the statements.

Generally, all cash tips (which include tips that are charged) are wages (or compensation), with one exception. If the amount of cash tips received in a calendar month by an employee in the course of any one employment is less than $20, the cash tips received in that employment during that month are not wages subject to income tax withholding, FICA taxes, or RRTA taxes.

For example, A is a full-time tipped employee of X and a part-time tipped employee of Y. During the month, A received $1,000 in tips in A’s employment with X and $10 in tips in A’s employment with Y. The $1,000 in tips received in the course of employment with X are wages for income tax withholding and FICA (or RRTA) tax purposes. A must report the $1,000 in tips to X no later than the 10th day of the following month. The $10 in tips received in the course of employment with Y are not wages for those purposes. The $10 are, however, subject to federal income tax and must be reported as wages by the employee on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, which the employee must file with Form 1040, U.S. Individual Income Tax Return.

Section 31.6053–1(b)(1) prescribes rules for tip statements. The statement furnished by the employee to the employer must be in writing and must be signed by the employee. The statement must disclose (1) the employee’s name, address, and social security number; (2) the employer’s name and address; (3) the period for which and the date on which the statement is furnished; and (4) the total amount of tips received by the employee during the period that are required to be reported to the employer.

Under §31.6053–1(b)(2), no particular form is prescribed for use in furnishing the tip statement. If the employer does not provide a form for use by the employee in reporting tips received by the employee, the employee may use Form 4070, Employee’s Report of Tips to Em- ployer. Twelve blank Forms 4070 and 12 blank Forms 4070A, Employee’s Daily Record of Tips are reproduced in Publication 1244, Employee’s Daily Record of Tips and Report to Employer. (Daily completion of Form 4070A constitutes sufficient evidence of tip income under the substantiation requirements of

§31.6053–4.) Pub. 1244 is a convenient pocket-sized document that also includes the basic rules for reporting tips. Copies of Pub. 1244 are available from the IRS by calling 1-800-829-3676.

The regulations specifically permit employers to design their own forms for use by employees in reporting tips. A form used solely to report tips must include (1) the employee’s name, address, and social security number; (2) the employer’s name and address; (3) the period for which and the date on which the statement is furnished; and (4) the total amount of tips received by the employee during the period that are required to be reported to the employer.

In lieu of a special tip reporting form that is used solely for the purpose of reporting tips, employers may provide for reporting of tips on regularly used forms, such as time cards. The regularly used forms need not include the employer information, but they must accurately identify the employee, identify the reporting period, and specify the amount of tips received. If a regularly used form is used to report tips, the employer must furnish the employee a statement showing the amount of tips reported by the employee for the period. This statement must be furnished no later than shortly after the first wage payment following the employee’s tip report. A payroll check stub or other similar payroll document may be used for this purpose.

The period covered by a tip statement may not exceed one calendar month. An employer may require tip statements more frequently, such daily, weekly or every pay period, if not less frequently than monthly. In no event, however, may an employer permit tips received in one month to be reported after the 10th of the following month. See section 6053(a). For example, X has a weekly payroll period, beginning on Sunday and ending on Saturday. X requires that all tip statements be submitted to X no later than the Monday following each payroll period. For the payroll period beginning on Sunday, March 30, and ending on Saturday, April 5, the statements must be furnished on or before Monday, April 7. If this occurs, the 10th-of-the-month requirement for March is met. If X’s payroll period were biweekly and began on March 30 and ended on April 16 and if X required

March 16, 1998 14 1998–11 I.R.B.

that all tip statements be submitted to X no later than the Monday following each payroll period, the 10th-of-the-month requirement for March would not be met.

A tip statement furnished after this deadline does not meet the requirements of section 6053(a). The employer is not required to withhold income, FICA, or RRTA taxes on tips reported after the 10th of the following month and is not responsible for reporting those tips to the IRS. The responsibility for reporting and paying the employee portion of the FICA tax shifts to the employee. The employee must complete and attach Form 4137, So- cial Security and Medicare Tax on Unre- ported Tip Income, to the employee’s federal income tax return. Moreover, an employee who fails to report tips as required by section 6053(a) is subject to an addition to the FICA tax or the RRTA tax, whichever is applicable, equal to 50 percent of the employee portion of the FICA or RRTA tax on those tips.

Section 31.6053–4(a)(1) provides that an employee must maintain sufficient evidence to establish the amount of tip income received during a taxable year. Sufficient evidence consists of either a daily record or, if the employee does not maintain a daily record, other evidence (such as documentary evidence) that is as credible and as reliable as a daily record. Nevertheless, if the facts or circumstances indicate that the employee received a larger amount of tip income, a daily record or other evidence may not be sufficient evidence.

Section 31.6053–4(a)(2) describes the requirements for a daily record. In general, the daily record must show the amount of cash and charge tips received directly from customers or other employees and the amount of tips, if any, that the employee paid out to other employees through tip sharing, tip pooling, or other arrangements and the names of the employees. The daily record must show the date on which each entry is made. Each entry must be made on or near the date the tip income is received. An entry made when the employee has full present knowledge of those receipts and payments satisfies this requirement.

Section 31.6053–4(a)(3) describes documentary evidence. Documentary evidence consists of copies of any documents that contain amounts added as a tip

to a check by a customer or amounts paid by a customer for food or beverages with respect to which tips generally would be received. Examples of documentary evidence are copies of restaurant bills, credit card charges, or charges under any other arrangement containing amounts added by the customer as a tip.

Explanation of Provisions

Electronic tip statements. No provision currently exists for employees to furnish tip statements to employers in a form other than on paper. The proposed regulations would permit an employer to adopt a system under which some or all of the tipped employees of the employer would furnish their tip statements electronically. Therefore, the employer could include in its electronic system any tipped employee or employees working in any location or locations.

The proposed regulations set forth requirements for employers who wish to establish electronic systems for employees to use to furnish tip statements to their employers. The proposed regulations apply only to tip statements required by section 6053(a) and not with respect to any other Code sections.

An employer that chooses to establish an electronic tip reporting system may select the type or types of electronic systems (such as telephone or computer) to be used by its employees. The system must, however, ensure that the information received is the information transmitted by the employee and must document all occasions of access that result in the transmission of a tip statement. The design and operation of the electronic system, including access procedures, must make it reasonably certain that the person accessing the system and transmitting the tip statement is the employee identified in the transmission. In the event of an examination, the employer must supply a hard copy of the electronic statement to the IRS upon request.

The electronic tip statement must contain exactly the same information that is required to be reported on a paper tip statement and must contain the employee’s electronic signature. The electronic signature must identify the employee furnishing the electronic tip statement and authenticate and verify the

transmission. An electronic signature can be in any form that satisfies the foregoing requirements. An electronic signature has the same effect as a signature written on a paper tip statement. See sections 6061, 6064, and 6065 of the Code. Pursuant to Rev. Rul. 71–20 (1971–1 C.B. 392), all machine-sensible data media used for recording, consolidating, and summarizing accounting transactions and records within a taxpayer’s ADP system are records within the meaning of section 6001 and §1.6001–1. The record retention requirements contained in Rev. Proc. 91–59 (1991–2 C.B. 841) (or any revenue procedure updating Rev. Proc. 91–59), dealing with automatic data processing systems, apply to electronic tip reporting systems.

The proposed regulations provide that an employee maintains sufficient evidence to establish the amount of tip income received by the employee during a calendar month through a daily record (as described in §31.6053–4(a)(2)) if the employee both reports tips on a daily basis through an electronic system that otherwise meets the substantiation requirements of the regulations and receives from the employer a hard copy of a daily record based on those entries for the period.

Employee substantiation requirements. Because the proposed regulations expand the permissible array of employer-designed reporting systems to include electronic methods, employers will be providing a statement to employees of the tips reported consistent with the existing requirements of §31.6053–1(b). The Treasury and the IRS recognize that many of these systems may capture tip reporting on a very current basis (e.g., point-of-sale or end-of-shift). Thus, the information in these systems offers a reasonable substitute for a daily record maintained by the employee if the employer’s system provides the employee with a printout that would satisfy the current substantiation requirements of §31.6053–4.

Thus, these proposed regulations provide that, if the employer, at its option, provides employees with a copy of the daily record based on entries made by the employee in the system and otherwise satisfying the substantiation requirement of §31.6053–4, the entry in the electronic system on a daily (or more frequent) basis by the employee, together with the daily

1998–11 I.R.B. 15 March 16, 1998

record based on these entries provided by the employer, will satisfy the substantiation requirements of §31.6053–4. For example, assume an employee enters tips in the employer’s electronic system at the end of each shift, but does not provide the employer with a signed paper record of these tips. After the end of each weekly payroll period, the employer provides the employee with a paper record that includes all the information specified in §31.6053–4(a)(2) and that shows the total amount of tips reported for each day during the period based on the employee’s entries. If the employee maintains this employer generated paper record, the substantiation requirements of §31.6053–4 are satisfied.

The Treasury and the IRS particularly invite comment on whether the proposed regulations should be modified to reflect ways in which these systems may permit further reduction in paper reporting for either the employer or employee while retaining provisions for appropriate and timely substantiation of income.

Railroad Retirement Tax Act provi- sions. The tip reporting provisions of section 6053(a) apply to tips that are either wages for income tax withholding and Federal Insurance Contributions Act (FICA) purposes or compensation for Railroad Retirement Tax Act (RRTA) purposes. The proposed regulations would clarify that the regulations under section 6053(a) apply to tips that are compensation as well as to tips that are wages.

Proposed Effective Date

The revisions and additions in the proposed regulations apply to tips required to be reported to the employer after these regulations are published as final regulations in the Federal Register. However, taxpayers may rely on the guidance in these proposed regulations for prior periods.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory 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 Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

It is hereby certified that the collections of information in these regulations will not have a significant economic impact on a substantial number of small entities. The collection of information in §31.6053–1 is imposed solely on individuals, not on any small entities, and the regulations provide flexibility to employees who must provide the information required by statute, thereby reducing burden. With respect to the collection of information in §31.6053–4, the certification is based on the expectation of the IRS that most businesses that choose to implement the electronic tip reporting provisions will be larger businesses with many employees and sophisticated computer systems. Moreover, because the provision is wholly elective, any small business that would be adversely impacted may choose not to use electronic tip reporting. Finally, the Service expects that for those small entities that choose to implement the provision, the use of electronic tip reporting will reduce overall burden by reducing paper collections. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight copies) that are submitted timely (in the manner described in the ADDRESSES portion of this preamble) to the IRS. All comments will be available for public inspection and copying.

A public hearing may be scheduled if requested in writing by any person that timely submits written comments. The IRS will also consider requests for remote teleconference sites as part of the public hearing. If a public hearing is scheduled, notice of the date, time, and place (including teleconference, if any) for the hearing will be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Karin Loverud, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), IRS. However, other personnel from the IRS and the Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 31.6053–1 is amended as follows:

Paragraph (a) is revised.
The introductory text of paragraph (b)(1) is revised.
The last sentence of paragraph (b)(1)(iii) is revised.
Paragraph (b)(2) is revised.
Paragraph (c) is revised.
Paragraph (d) is added. The revisions and additions read as follows:

§31.6053–1 Report of tips by employee to employer.

(a) Requirement that tips be re- ported —(1) In general. An employee who receives, in the course of employment by an employer, tips that constitute wages as defined in section 3121(a) or section 3401, or compensation as defined in section 3231(e), must furnish to the employer a statement, or statements, disclosing the total amount of the tips received by the employee in the course of employment by the employer. Tips received by an employee in a calendar month in the course of employment by an employer that are required to be reported to the employer must be reported on or before the 10th day of the following month. Thus, for example, tips received by an employee in January 1998 are required to be reported by the employee to

March 16, 1998 16 1998–11 I.R.B.

the employer on or before February 10, 1998. (2) Cross references. For provisions relating to the treatment of tips as wages for purposes of the Federal Insurance Contributions Act (FICA) tax under sections 3101 and 3111, see sections 3102(c), 3121(a)(12), and 3121(q) and §§31.3102– 3 and 31.3121(a)(12)–1. For provisions relating to the treatment of tips as wages for purposes of the tax under section 3402 (income tax withholding), see sections 3401(a)(16), 3401(f), and 3402(k) and §§31.3401(a)(16)–1, 31.3401(f)–1, and 31.3402(k)–1. For provisions relating to the treatment of tips as compensation for purposes of the Railroad Retirement Tax Act (RRTA) tax under sections 3201 and 3221, see section 3231(e) and §31.3231(e)–1(a).

(b) * * * (1) In general. The statement described in paragraph (a) of this section can be provided on paper or transmitted electronically. The statement must be signed by the employee and must disclose:

(iii) * * * If the statement is for a period of less than 1 calendar month, the beginning and ending dates of the period must be included (for example, January 1 through January 8, 1998).

(2) Form of statement —(i) In general. No particular form is prescribed for use in furnishing the statement required by this section. The statement may be furnished on paper or transmitted electronically. An electronic system and all tip statements generated by that system must meet the requirements of paragraph (d) of this section. If the employer does not provide any other means for the employee to report tips, the employee may use Form 4070, Employee’s Report of Tips to Em- ployer.

(ii) Single-purpose forms. A statement may be furnished on an employer-provided form. The form may be on paper or in electronic form. An employer that provides a paper form must make blank copies of the form readily available to all tipped employees. Any form, whether paper or electronic, provided by an employer for use by its tipped employees solely to report tips must meet all the re

quirements of paragraph (b)(1) of this section.

(iii) Regularly used forms. Instead of requiring that tips be reported as described in paragraph (b)(2)(ii) of this section on a special form used solely for tip reporting, an employer may prescribe regularly used forms for use by employees in reporting tips. A regularly used form may be on paper (such as a time card or report) or in electronic form, must meet the requirements of paragraph (b)(1)(iii) and (iv) of this section, must contain identifying information that will ensure accurate identification of the employee by the employer, and is permitted to be used only if the employer furnishes the employee a statement suitable for retention showing the amount of tips reported by the employee for the period. The employer statement may be furnished when the employee reports the tips, when wages are first paid following the reporting of tips by the employee, or within a short time after the wages are paid. The employer may meet this requirement, for example, through the use of a payroll check stub or other payroll document regularly furnished by the employer to the employee showing gross pay and deductions. In the case of electronic tip reports, the employer statement may be furnished on a daily, weekly, monthly or on a regular payroll basis (if not less frequent than monthly).

(c) Period covered by, and due date of, tip statement —(1) In general. A tip statement furnished by an employee to an employer may not cover a period greater than 1 calendar month. An employer may, however, require the submission of a statement in respect of a specified period of time, for example, on a weekly or biweekly basis, regular payroll period, etc. An employer may specify, subject to the limitation in paragraph (a) of this section, the time within which, or the date on which, the statement for a specified period of time should be submitted by the employee. For example, a statement covering a payroll period may be required to be submitted on the first (or second) day following the close of the payroll period. A statement submitted by an employee after the date specified by the employer for its submission nevertheless will be considered as a statement furnished pursuant to section 6053(a) and this section if

it is submitted to the employer on or before the 10th day following the month in which the tips were received.

(2) Termination of employment. If an employee’s employment is terminating, the employee must furnish a tip statement to the employer when the employee ceases to perform services for the employer. A statement submitted by an employee after the date on which the employee ceases to perform services for the employer will be considered as a statement furnished pursuant to section 6053(a) and this section if the statement is submitted to the employer on or before the earlier of the day on which the final wage payment is made by the employer to the employee or the 10th day following the month in which the tips were received.

(d) Requirements for electronic sys- tems —(1) In general. The electronic system must ensure that the information received is the information transmitted by the employee and must document all occasions of access that result in the transmission of a tip statement. In addition, the design and operation of the electronic system, including access procedures, must make it reasonably certain that the person accessing the system and transmitting the statement is the employee identified in the statement transmitted.

(2) Same information as on paper statement. The electronic tip statement must provide the employer with all the information required by paragraph (b)(1) of this section.

(3) Signature. The electronic tip statement must be signed by the employee. The electronic signature must identify the employee transmitting the electronic tip statement and must authenticate and verify the transmission. For this purpose, the terms “authenticate” and “verify” have the same meanings as they do when applied to a written signature on a paper tip statement. An electronic signature can be in any form that satisfies the foregoing requirements.

(4) Copies of electronic tip statements. Upon request by the Internal Revenue Service (IRS), the employer must supply the IRS with a hard copy of the electronic tip statement and a statement that, to the best of the employer’s knowledge, the electronic tip statement was filed by the named employee. The hard copy of the electronic tip statement must provide the

1998–11 I.R.B. 17 March 16, 1998

IRS (acting in an official capacity) in performing a ministerial act. The legislative history accompanying the Act provided,

The committee intends that the term ‘ministerial act’ be limited to nondiscretionary acts where all of the preliminary prerequisites, such as conferencing and review by supervisors, have taken place. Thus, a ministerial act is a procedural action, not a decision in a substantive area of tax law.

H.R. Rep. No. 426, 99th Cong., 1st Sess. 845 (1985); S. Rep. No. 313, 99th Cong., 2d Sess. 209 (1986). Further, Congress did not intend that the abatement of interest provision “be used routinely to avoid payment of interest.” H.R. Rep. No. 426, 99th Cong., 1st Sess. 844 (1985); S. Rep. No. 313, 99th Cong., 2d Sess. 208 (1986). Rather, Congress intended abatement of interest to be used in instances “where failure to abate interest would be widely perceived as grossly unfair.” Id.

On August 13, 1987, the IRS published temporary regulations (T.D. 8150) in the Federal Register (52 F.R. 30162) relating to the definition of ministerial act for purposes of abatement of interest. A notice of proposed rulemaking (LR–34–87) crossreferencing the temporary regulations was also published in the Federal Register for the same day (52 F.R. 30177). No public hearing regarding these regulations was requested or held. In this document, the IRS is reproposing a modified version of the earlier notice of proposed rulemaking to incorporate changes made by TBOR2. Therefore, the earlier notice of proposed rulemaking is withdrawn.

The temporary regulations define ministerial act to mean a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A decision concerning the proper application of federal tax law (or other federal or state law) is not a ministerial act. The temporary regulations also provide five examples to illustrate the definition of ministerial act.

In TBOR2, Congress amended section 6404(e)(1) to permit the IRS to abate interest attributable to any unreasonable error or delay by an officer or employee of the IRS (acting in an official capacity) in performing a managerial act as well as

information required by paragraph (b)(1) of this section, but need not be a facsimile of Form 4070 or any employer-designed form.

(5) Record retention. The record retention requirements dealing with automatic data processing systems apply to electronic tip reporting systems.

Par. 3. Section 31.6053–4 is amended as follows:

A sentence is added to paragraph (a)(1) after the third sentence.
A sentence is added to paragraph (a)(2) after the fourth sentence.

The additions read as follows:

§31.6053–4 Substantiation requirements for tipped employees.

(a) * * * (1) * * * The Commissioner may by revenue ruling, procedure or other guidance of general applicability provide for other methods of demonstrating evidence of tip income. * * *

(2) * * * In addition, an electronic system maintained by the employer that collects substantially similar information as Form 4070A may be used to maintain such daily record, provided the employee receives and maintains a paper copy of the daily record. * * *

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on January 23, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 26, 1998, 63 F.R. 3680)

Notice of Proposed Rulemaking

Abatement of Interest

REG–209276–87

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the abatement of interest attributable to unreasonable errors or delays by an officer or employee of the IRS in performing a

ministerial or managerial act. The proposed regulations reflect changes to the law made by the Tax Reform Act of 1986 and the Taxpayer Bill of Rights 2. The proposed regulations affect both taxpayers requesting abatement of certain interest and IRS personnel responsible for administering the abatement provisions.

DATES: Written comments and requests for a hearing must be received by April 8, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–209276–87), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209276–87), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the INTERNET by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/prod/tax–regs/ comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David Auclair, (202) 622-4910 (not a tollfree number). Concerning submissions, Michael Slaughter, (202) 622-7190 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Procedure and Administration Regulations (26 CFR Part 301) relating to the abatement of interest attributable to unreasonable errors or delays by an officer or employee of the IRS under section 6404(e)(1) of the Internal Revenue Code. Section 6404(e)(1) was enacted by section 1563(a) of the Tax Reform Act of 1986 (Public Law 99–514, 100 Stat. 2762 (1986)) (1986 Act) and amended by section 301 of the Taxpayer Bill of Rights 2 (Public Law 104–168, 110 Stat. 1452 (1996)) (TBOR2). As enacted by the 1986 Act, section 6404(e)(l) provided that the IRS may abate interest attributable to any error or delay by an officer or employee of the

March 16, 1998 18 1998–11 I.R.B.

a ministerial act. Thus, as a result of TBOR2, the IRS has the authority to abate interest in more situations than under prior law.

Pursuant to the legislative history accompanying TBOR2, a managerial act is a loss of records or a personnel management decision such as the decision to approve a personnel transfer, extended leave, or extended training. See H.R. Rep. No. 506, 104th Cong., 2d Sess. 27 (1996). TBOR2 distinguished a managerial act from a general administrative decision, such as a decision on how to organize the processing of tax returns or a decision regarding the implementation of an improved computer system. Id. A general administrative decision is a decision that impacts tax administration. The amendments to section 6404(e)(1) are effective for interest accruing with respect to deficiencies or payments for taxable years beginning after July 30, 1996.

TBOR2 also added section 6404(g). Section 6404(g) grants the Tax Court jurisdiction to determine whether the IRS’s failure to abate interest for an eligible taxpayer is an abuse of discretion. Tax Court review is available for requests for abatement of interest that are made after July 30, 1996, or that have not been denied prior to July 31, 1996. See Banat v. Com- missioner, 109 T.C. 92 (1997); White v. Commissioner, 109 T.C. 96 (1997).

Explanation of Provisions

TBOR2 expanded the scope of abatement relief under section 6404(e)(1). Consistent with congressional intent, the proposed regulations permit abatement of interest in more situations than under prior law. Nothing in the proposed regulations is intended to limit the extent to which the IRS could abate interest before the effective date of TBOR2.

The proposed regulations define managerial act and incorporate other changes made by TBOR2. TBOR2 did not alter the definition of ministerial act under prior law. Accordingly, the proposed regulations retain the definition of ministerial act in the temporary regulations.

Managerial act is defined as an administrative act that occurs during the processing of a taxpayer’s case involving the temporary or permanent loss of records or the exercise of judgment or discretion re

lating to management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act. Further, interest attributable to a general administrative decision, such as the IRS’s decision on how to organize the processing of tax returns or its delay in implementing an improved computer system, cannot be abated under section 6404(e)(1).

In addition, the proposed regulations provide examples to illustrate the definitions of ministerial act and managerial act. Examples 1, 2, 3, 7, and 8 of the proposed regulations are substantially similar to Examples 1 through 5 of the temporary regulations. However, in Example 3 of the proposed regulations (Example 4 of the temporary regulations), a decision to approve extended training is a managerial act, and in Example 8 of the proposed regulations (Example 5 of the temporary regulations) the type of work priority is specified.

The provisions of the regulations relating to a ministerial act apply to interest accruing with respect to deficiencies or payments of any tax described in section 6212(a) for taxable years beginning after December 31, 1978, for which the applicable statute of limitations has not expired. The provisions of the regulations relating to a managerial act are proposed to apply to interest accruing with respect to deficiencies or payments of any tax described in section 6212(a) for taxable years beginning after July 30, 1996.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 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 the regulations do not impose a collection 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, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the hearing will be published in the Fed- eral Register.

Drafting Information

The principal author of these regulations is David B. Auclair. However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.6404–2 is added to read as follows:

§301.6404–2 Abatement of interest.

(a) In general. (1) Section 6404(e)(1) provides that the Commissioner may (in the Commissioner’s discretion) abate the assessment of all or any part of interest on any—

(i) Deficiency (as defined in section 6211(a), relating to income, estate, gift, generation-skipping, and certain excise taxes) attributable in whole or in part to any unreasonable error or delay by an officer or employee of the Internal Revenue Service (IRS) (acting in an official capacity) in performing a ministerial or managerial act; or

(ii) Payment of any tax described in section 6212(a) (relating to income, estate, gift, generation-skipping, and certain

1998–11 I.R.B. 19 March 16, 1998

excise taxes) to the extent that any error or delay in payment is attributable to an officer or employee of the IRS (acting in an official capacity) being unreasonably erroneous or dilatory in performing a ministerial or managerial act.

(2) An error or delay in performing a ministerial or managerial act will be taken into account only if no significant aspect of the error or delay is attributable to the taxpayer involved or to a person related to the taxpayer within the meaning of section 267(b) or section 707(b)(1). Moreover, an error or delay in performing a ministerial or managerial act will be taken into account only if it occurs after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. For purposes of this paragraph (a)(2), no significant aspect of the error or delay is attributable to the taxpayer merely because the taxpayer consents to extend the period of limitations.

(b) Definitions. (1) Managerial act means an administrative act that occurs during the processing of a taxpayer’s case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. A decision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act. Further, interest attributable to a general administrative decision, such as the IRS’s decision on how to organize the processing of tax returns or the IRS’s decision on the implementation schedule for an improved computer system, cannot be abated under paragraph (a) of this section.

(2) Ministerial act means a procedural or mechanical act that does not involve the exercise of judgment or discretion, and that occurs during the processing of a taxpayer’s case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. A decision concerning the proper application of federal tax law (or other federal or state law) is not a ministerial act.

(c) Examples. The following examples illustrate the provisions of paragraphs (b)(1) and (b)(2) of this section. For the purposes of the examples, no significant aspect of any error or delay is attributable to the taxpayer, and the IRS has contacted the taxpayer in writing with respect to the deficiency.

Example 1. A taxpayer moves from one state to another before the IRS selects the taxpayer’s income tax return for examination. A letter explaining that the return has been selected for examination is sent to the taxpayer’s old address and then forwarded to the new address. The taxpayer timely responds, asking that the audit be transferred to the IRS’s district office that is nearest the new address. The group manager approves the request. After the request for transfer has been approved, the transfer of the case is a ministerial act. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay in transferring the case.

Example 2. An examination of a taxpayer’s income tax return reveals a deficiency with respect to which a notice of deficiency will be issued. The taxpayer and the IRS identify all agreed and unagreed issues, the notice is prepared and reviewed (including review by District Counsel, if necessary) and any other relevant prerequisites are completed. The issuance of the notice of deficiency is a ministerial act. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay in issuing the notice.

Example 3. A revenue agent is sent to a training course for an extended period of time, and the agent’s supervisor decides not to reassign the agent’s cases. During the training course, no work is done on the cases assigned to the agent. The decision to send the revenue agent to the training course and the decision not to reassign the agent’s cases are not ministerial acts; however, both decisions are managerial acts. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay resulting from these decisions.

Example 4. A taxpayer appears for an office audit and submits all necessary documentation and information. The auditor tells the taxpayer that the taxpayer will receive a copy of the audit report. However, before the report is prepared, the auditor is permanently reassigned to another group. An extended period of time passes before the auditor’s cases are reassigned. The decision to reassign the auditor and the decision not to reassign the auditor’s cases are not ministerial acts; however, they are managerial acts. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay resulting from these decisions.

Example 5. A taxpayer is notified that the IRS intends to audit the taxpayer’s income tax return. The agent assigned to the case is granted sick leave for an extended period of time and the taxpayer’s case is not reassigned. The decision to grant sick leave and the decision not to reassign the taxpayer’s case to another agent are not ministerial acts; however, they are managerial acts. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay caused by these decisions.

Example 6. A revenue agent has completed an examination of the income tax return of a taxpayer. There are issues that are not agreed upon between the taxpayer and the IRS. Before the notice of deficiency is prepared and reviewed, a clerical employee misplaces the taxpayer’s case file. The act of misplacing the case file is a managerial act. The Commissioner may (in the Commissioner’s discretion)

abate interest attributable to any unreasonable delay resulting from the file being misplaced.

Example 7. A taxpayer invests in a tax shelter and reports a loss from the tax shelter on the taxpayer’s income tax return. IRS personnel conduct an extensive examination of the tax shelter, and the processing of the taxpayer’s case is delayed because of that examination. The decision to delay the processing of the taxpayer’s case until the completion of the examination of the tax shelter is a decision on how to organize the processing of tax returns. This is a general administrative decision. Consequently, interest attributable to this decision cannot be abated under paragraph (a) of this section.

Example 8. A taxpayer claims a loss on the taxpayer’s income tax return and is notified that the IRS intends to examine the return. However, a decision is made not to commence the examination of the taxpayer’s return until the processing of another return, for which the statute of limitations is about to expire, is completed. The decision on how to prioritize the processing of returns based on the expiration of the statute of limitations is a general administrative decision. Consequently, interest attributable to this decision cannot be abated under paragraph (a) of this section.

Example 9. During the examination of an income tax return, there is disagreement between the taxpayer and the revenue agent regarding certain itemized deductions claimed by the taxpayer on the return. To resolve the issue, Examination requests advice from the Office of Chief Counsel on a substantive issue of federal tax law. The decision to request advice is a decision concerning the proper application of federal tax law; it is neither a ministerial nor a managerial act. Consequently, interest attributable to a delay resulting from the decision to request advice cannot be abated under paragraph (a) of this section.

Example 10. The facts are the same as in Example 9 except the attorney who is assigned to respond to the request for advice is granted leave for an extended period of time. The case is not reassigned during the attorney’s absence. The decision to grant leave and the decision not to reassign the taxpayer’s case to another attorney are not ministerial acts; however, they are managerial acts. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable delay caused by these decisions.

Example 11. A taxpayer contacts an IRS employee and requests the amount due to satisfy the taxpayer’s income tax liability for a particular taxable year. Because the employee fails to access the most recent data, the employee gives the taxpayer an incorrect amount due. As a result, the taxpayer pays less than the amount required to satisfy the tax liability. Accessing the most recent data is a ministerial act. The Commissioner may (in the Commissioner’s discretion) abate interest attributable to any unreasonable error or delay arising from giving the taxpayer an incorrect amount due to satisfy the taxpayer’s income tax liability.

Example 12. A taxpayer contacts an IRS employee and requests the amount due to satisfy the taxpayer’s income tax liability for a particular taxable year. To determine the current amount due, the employee must interpret complex provisions of federal tax law involving net operating loss carrybacks and foreign tax credits. Because the employee incor

March 16, 1998 20 1998–11 I.R.B.

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information is in proposed §54.4980B–1(a)(1)(iii). This collection of information is required by statute. The likely respondents are individuals. Responses to this collection of information are required in order to obtain the benefit of an extended period during which a group health plan must make COBRA continuation coverage available.

Estimated total annual reporting burden: 440 hours.

The estimated annual burden per respondent: 1 minute.

Estimated number of respondents: 26,400. Estimated annual frequency of responses: on occasion.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

Books or records relating to a collection of information must be retained as long as their contents may become material 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

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) amended the Code to add health care continuation coverage requirements. These provisions, now set forth in section 4980B of the Code, ¹ generally apply to a group health plan maintained by an employer with at least 20 employees, and require such a plan to offer each qualified beneficiary who would otherwise lose coverage as a result of a qualifying event an opportunity to elect, within the applicable election period, COBRA continua

1The COBRA continuation coverage requirements were initially set forth under section 162(k) of the Code, but were moved to section 4980B of the Code by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). TAMRA changed the sanction for failure to comply with the continuation coverage requirements of the Code from a disallowance of certain employer deductions under section 162 (and denial of the income exclusion under section 106(a) to certain highly compensated employees of the employer) to an excise tax under section 4980B.

rectly interprets these provisions, the employee gives the taxpayer an incorrect amount due. As a result, the taxpayer pays less than the amount required to satisfy the tax liability. Interpreting federal tax law is neither a ministerial nor a managerial act. Consequently, interest attributable to an error or delay arising from giving the taxpayer an incorrect amount due to satisfy the taxpayer’s income tax liability cannot be abated under paragraph (a) of this section.

(d) Effective date. The provisions of this section apply to interest accruing with respect to deficiencies or payments of any tax described in section 6212(a) for taxable years beginning after July 30, 1996.

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on January 7, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 8, 1998, 63 F.R. 1086)

Notice of Proposed Rulemaking

Continuation Coverage Requirements of Group Health Plans

REG–209485–86

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations that provide guidance under section 4980B of the Internal Revenue Code on certain changes made by the Health Insurance Portability and Accountability Act of 1996, the Omnibus Budget Reconciliation Act of 1989, and the Technical and Miscellaneous Revenue Act of 1988 relating to the continuation coverage requirements applicable to group health plans. The regulations will generally affect sponsors of and participants in group health plans, and they provide plan sponsors and plan administrators with guidance necessary to comply with the law.

DATES: Written comments and requests for a public hearing must be received by April 7, 1998.

ADDRESSES: Send Submissions to: CC:DOM:CORP:R (REG–209485–86),

room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209485–86), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs. ustreas.gov/prod/tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Russ Weinheimer, 202-622-4695; concerning submissions or requests for a hearing, LaNita VanDyke, 202-622-7190 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Ser- vice, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collection of information should be received by March 9, 1998. Comments are specifically requested concerning the following:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How to enhance the quality, utility, and clarity of the information to be collected;

How to minimize the burden of complying with the proposed collection of information, including the application of automated collection techniques or other forms of information technology; and

1998–11 I.R.B. 21 March 16, 1998

viding notice upon the occurrence of a qualifying event from the date that coverage would be lost rather than from the date of the qualifying event. In such a case, the first 60 days of COBRA continuation coverage are also measured from the date that coverage would be lost.

In addition, these proposed regulations make clear that the disability extension applies to each qualified beneficiary, whether or not disabled, that each qualified beneficiary has an independent right to the disability extension, and that any of the qualified beneficiaries may provide the plan administrator with a copy of the determination of disability.

Another clarification relates to the period during which the plan may charge 150 percent of the applicable premium. These proposed regulations make clear that the plan may require payment equal to 150 percent of the applicable premium if a disabled qualified beneficiary experiences a second qualifying event during the disability extension. In such a case (that is, where the disabled qualified beneficiary is entitled to a 36-month maximum coverage period only because a second qualifying event occurs during the disability extension), the plan may require payment of 150 percent of the applicable premium until the end of the 36-month maximum coverage period.

HIPAA also added provisions to the Code, in section 9802(b), that generally prohibit discrimination in premiums on the basis of health status, including on the basis of disability. These proposed regulations clarify that a plan that requires a disabled qualified beneficiary entitled to the disability extension to pay 150 percent of the applicable premium (as permitted by the proposed regulations) does not for that reason fail to comply with the nondiscrimination requirements of section 9802(b). These proposed regulations do not address the extent to which a plan can charge 150 percent of the applicable premium to a qualified beneficiary who is not disabled. Comments are requested on this issue.

Newborn and Adopted Children Treated as Qualified Beneficiaries.

Section 421 of HIPAA also provides that a child born to or placed for adoption

tion coverage. The COBRA continuation coverage requirements were amended on various occasions, ² most recently under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

Proposed regulations providing guidance under the continuation coverage requirements as originally enacted by COBRA and as amended by the Tax Reform Act of 1986, were published as proposed Treasury Regulation §1.162–26 in the Federal Register of June 15, 1987 (52 F.R. 22716).

The new set of proposed regulations being published in this notice of proposed rulemaking reflects principally the most recent set of statutory changes — those made by HIPAA — but also reflects certain changes made by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) and by the Omnibus Budget Reconciliation Act of 1989 (OBRA ’89).

Explanation of Provisions

Disability Extension; Permitted Premiums.

As originally enacted, the COBRA continuation coverage provisions required plans to make continuation coverage available for up to 18 months in the case of a qualifying event that is a termination of employment or reduction in hours of employment and for up to 36 months for all other qualifying events, such as death of the covered employee, divorce from the covered employee, or a dependent child ceasing to be a dependent under the generally applicable requirements of the plan. If someone became entitled to the 18-month maximum period of coverage and experienced a second qualifying event during that period of COBRA continuation coverage, then the law provided an extended period of coverage so that

2Changes affecting the COBRA continuation coverage provisions were made under the Omnibus Budget Reconciliation Act of 1986, the Tax Reform Act of 1986, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1990, the Small Business Job Protection Act of 1996, and the Health Insurance Portability and Accountability Act of 1996. The statutory continuation coverage requirements have also been affected by an amendment made to the definition of group health plan in section 5000(b)(1) by the Omnibus Budget Reconciliation Act of 1993; that definition is incorporated by reference in section 4980B(g)(2).

there would be a total of 36 months of COBRA continuation coverage measured from the date of the first qualifying event.

Under OBRA ’89, provisions were added allowing the 18-month period to be extended to 29 months if a qualified beneficiary was disabled at the time of the qualifying event. Section 421 of HIPAA changed these provisions by requiring plans to allow the disability extension if a qualified beneficiary is disabled within the first 60 days of COBRA continuation coverage and by clarifying that nondisabled qualified beneficiaries with respect to the same qualifying event are also entitled to the disability extension.

Thus, under the current provisions in the Code, all qualified beneficiaries with respect to the same qualifying event are entitled to an extension of the maximum period of COBRA continuation coverage from 18 to 29 months, if three conditions are satisfied. First, each qualified beneficiary must be a qualified beneficiary in connection with a qualifying event that is a termination of employment or reduction in hours of employment. Second, a qualified beneficiary must be determined to have been disabled (within the meaning of title II or title XVI of the Social Security Act) within the first 60 days of COBRA continuation coverage. Third, the plan administrator must be provided with a copy of the determination of disability on a date that is both within 60 days after the determination is issued and before the end of the initial 18-month period of COBRA continuation coverage. In the case of a disability extension, for any period after the end of the 18th month of COBRA continuation coverage, the plan may generally require payment for COBRA continuation coverage in an amount that does not exceed 150 percent of the applicable premium.

These proposed regulations clarify the statutory disability extension requirements in several respects. For example, the first 60 days of COBRA continuation coverage are generally measured from the date of the termination of employment or reduction in hours of employment. An exception applies if coverage would be lost (in the absence of an election for COBRA continuation coverage) after the date of the qualifying event and if the plan has elected to measure both the maximum coverage period and the period for pro

March 16, 1998 22 1998–11 I.R.B.

with the covered employee during a period of COBRA continuation coverage is a qualified beneficiary. Such a child generally is eligible to be enrolled immediately for COBRA continuation coverage under the plan. These proposed regulations clarify that the maximum coverage period for such a child is measured from the date of the qualifying event that gives rise to the period of COBRA continuation coverage during which the child is born or adopted and not from the date of birth or placement for adoption. Thus, the child’s maximum period of COBRA continuation coverage would end at the same time as the maximum period for other family members. In addition, the statutory term placement for adoption is clarified to include an adoption that is not preceded by a placement for adoption.

Long-term Care; MSAs.

Section 321(d) of HIPAA amended section 4980B of the Code to provide that a plan does not constitute a group health plan subject to the COBRA continuation coverage requirements if substantially all of the coverage provided under the plan is for qualified long-term care services, as defined in section 7702B(c). These proposed regulations permit a plan to use any reasonable method in determining whether substantially all of the coverage is for qualified long-term care services. Further, the proposed regulations reflect section 106(b)(5), added by HIPAA, which provides that COBRA continuation coverage is not required to be made available with respect to medical savings accounts (MSAs), as defined under section 220.

Good Faith/Reasonable Interpretations.

The effective date of these regulations, when made final, will not be earlier than the date of publication of final regulations in the Federal Register. For the period before the effective date of final regulations, plans and employers are required to operate in good faith compliance with a reasonable interpretation of the statutory requirements. Compliance with the terms of the proposed regulations concerning the matters addressed is deemed to be good faith compliance with a reasonable interpretation of the statutory requirements. Actions inconsistent with the terms of the proposed regulations will not necessarily constitute a lack of good faith

compliance with a reasonable interpretation of the statutory requirements; whether there has been good faith compliance with a reasonable interpretation of the statutory requirements will depend on all the facts and circumstances of each case. Plans and employers may also continue to rely on proposed Treasury Regulation §1.162–26 (published on June 15, 1987 in 52 F.R. 22716), except to the extent that that proposed regulation is inconsistent with statutory amendments made after its date of publication.

Future Guidance Concerning COBRA Obligations in Certain Stock and Asset Sales.

Treasury and the IRS are currently considering the issuance of guidance concerning COBRA obligations in cases involving a sale of stock in an employer that causes the employer to become a member of another controlled group of corporations (a “stock sale”), or a sale of substantial assets by an employer (such as a plant or division) to another employer outside the controlled group (an “asset sale”).

The approach under consideration generally would provide, in the case of a stock sale to a buyer maintaining a group health plan, that the buyer’s group health plan (and not a plan maintained by the seller) would be responsible, after the date of the sale, for complying with the COBRA continuation coverage requirements with respect to any covered employee (and associated qualified beneficiary) whose last employment was with the sold corporation. Thus, for example, the buyer’s group health plan would have the obligation, after the date of the sale, to comply with the COBRA continuation coverage requirements with respect to those individuals regardless of whether their qualifying events were connected to the sale of stock or were in advance of and not connected to the sale. If the buyer did not maintain a group health plan, then a group health plan of the seller would continue to be responsible for complying with the COBRA continuation coverage requirements with respect to qualified beneficiaries associated with the sold corporation.

In the case of an asset sale, the approach under consideration generally would provide that a group health plan maintained by the seller (and not a plan

maintained by the buyer) would be responsible for complying with the COBRA continuation coverage requirements with respect to any covered employee (and associated qualified beneficiary) whose last employment was associated with the purchased assets. However, an exception would be provided if the buyer were a “successor employer,” in which case a group health plan of the buyer would be responsible for complying with the COBRA continuation coverage requirements with respect to qualified beneficiaries associated with the purchased assets. Consideration is being given to treating a buyer as a successor employer in connection with an asset sale only if the buyer acquires substantial assets (such as a plant or division, or substantially all of the assets of a trade or business) and continues the business operations associated with those assets without interruption or substantial change, and only if, in connection with the sale, the selling employer ceases to maintain any group health plan. The approach might also include a presumption that the cessation is in connection with the sale if it occurs within 6 months of the sale.

Comments are requested on this possible approach to assigning responsibility for compliance with the COBRA continuation coverage requirements in the context of stock sales and asset sales and on any related issues that should be addressed.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that the collection-of-information requirement in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the collection-of-information requirement is imposed on individual qualified beneficiaries and not on small businesses or other small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for

1998–11 I.R.B. 23 March 16, 1998

Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely (a signed original and eight (8) copies) to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

Drafting Information

The principal author of these proposed regulations is Russ Weinheimer, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR Part 54 is proposed to be amended as follows:

Paragraph 1. The authority citation for Part 54 is amended in part by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 54.4980B–1 also issued under 26 U.S.C. 4980B. * * * Par. 2. A new section 54.4980B–1 is added to read as follows:

§ 54.4980B–1 Certain changes to the continuation coverage requirements of group health plans.

(a) Disability extension —(1) In gen- eral. Paragraphs (a)(2), (3), and (4) of this section (describing qualified beneficiaries entitled to a disability extension, the length of the extension, and the amount that a plan can require qualified beneficiaries to pay during the extension) apply to a group health plan only if all three of the conditions of this paragraph (a)(1) are satisfied.

(iii) Any of the qualified beneficiaries affected by the termination-of-employment qualifying event provides notice to the plan administrator of the disability determination on a date that is both within 60 days after the date the determination is issued and before the end of the original 18-month maximum coverage period that applies to the termination-of-employment qualifying event.

(2) Maximum coverage period —(i) The maximum coverage period ends—

(A) 29 months after the date of the termination-of-employment qualifying event; or

(B) 36 months after the date of the termination-of-employment qualifying event if a qualifying event (other than a bankruptcy qualifying event) occurs during the 29-month period that begins on the date of the termination-of-employment qualifying event.

(ii) If, in the absence of an election for COBRA continuation coverage, coverage under the group health plan would be lost after the date of the termination-of-employment qualifying event and the plan provides for the extension of the required periods, as permitted under section 4980B(f)(8), then the dates or periods in paragraph (a)(2)(i) of this section are measured from the date on which coverage would be lost and not from the date of the termination-of-employment qualifying event.

(i) A termination-of-employment qualifying event occurs.

(ii) An individual (whether or not the covered employee) who is a qualified beneficiary in connection with the termination-of-employment qualifying event is determined under title II or XVI of the Social Security Act to have been disabled at any time during the first 60 days of COBRA continuation coverage. For this purpose, the first 60 days of COBRA continuation coverage are measured from the date of the termination-of-employment qualifying event, except that if a loss of coverage would occur at a later date in the absence of an election for COBRA continuation coverage and if the plan provides for the extension of required periods (as permitted under section 4980B(f)(8)), then the first 60 days of COBRA continuation coverage are measured from the date on which the coverage would be lost.

(iii) Nothing in section 4980B or this section prohibits a group health plan from providing coverage that continues beyond the end of the maximum coverage period.

(3) Application to all qualified benefi- ciaries. Paragraph (a)(2) of this section applies to all qualified beneficiaries entitled to COBRA continuation coverage because of the same termination-of-employment qualifying event. Thus, for example, the 29-month period applies to each qualified beneficiary who is not disabled as well as to the qualified beneficiary who is disabled, and it applies independently with respect to each of the qualified beneficiaries.

(4) Payment during disability exten- sion —(i) Disabled qualified beneficia- ries —(A) A group health plan is permitted to require a disabled qualified beneficiary described in paragraph (a)(1) of this section, for any period of COBRA continuation coverage after the end of the 18th month, to pay an amount that does not exceed 150 percent of the applicable premium. However, the plan is not permitted to require a disabled qualified beneficiary described in paragraph (a)(1) of this section to pay an amount that exceeds 102 percent of the applicable premium for any period of COBRA continuation coverage to which the qualified beneficiary is entitled without regard to the application of this paragraph (a). Thus, if a disabled qualified beneficiary described in paragraph (a)(1) of this section experiences a second qualifying event within the original 18-month period of COBRA continuation coverage, then the plan is not permitted to require the qualified beneficiary to pay an amount that exceeds 102 percent of the applicable premium for any period of COBRA continuation coverage. By contrast, if a disabled qualified beneficiary described in paragraph (a)(1) of this section experiences a second qualifying event after the end of the 18th month of original COBRA continuation coverage, the plan may require the qualified beneficiary to pay an amount that is up to 150 percent of the applicable premium for the remainder of the period of COBRA continuation coverage (that is, from the beginning of the 19th month through the end of the 36th month).

(B) A group health plan does not fail to comply with section 9802(b) and §54.9802–1T(b) (which generally pro

March 16, 1998 24 1998–11 I.R.B.

hibit an individual from being charged, on the basis of health status, a higher premium than that charged for similarly situated individuals enrolled in the plan) with respect to a disabled qualified beneficiary described in paragraph (a)(1) of this section merely because the plan requires payment of a premium in an amount permitted under paragraph (a)(4)(i)(A) of this section.

(ii) Nondisabled qualified beneficia- ries. [Reserved].

(b) Newborns and adopted children. A child who is born to or placed for adoption with a covered employee during a period of COBRA continuation coverage is a qualified beneficiary and generally is eligible to be enrolled immediately for COBRA continuation coverage under the plan. See section 4980B(g)(1)(A), section 9801(f)(2) and §54.9801–6T(b) (relating to special enrollment rights of dependents of employees), and Q&A–31 of §1.162–26 of this chapter (relating to the right of qualified beneficiaries to have new family members covered to the same extent that similarly situated active employees can have new family members covered under the plan). Such a child has the same open-enrollment-period rights as other qualified beneficiaries with respect to the same qualifying event (see Q&A30(c) of §1.162–26 of this chapter) and would be entitled to a 36-month maximum coverage period if a second qualifying event occurred while the child was in a period of COBRA continuation coverage resulting from a termination-of-employment qualifying event. The maximum coverage period for such a child is measured from the same date as for other qualified beneficiaries with respect to the same qualifying event (and not from the date of the birth or placement for adoption). In contrast, neither the covered employee, the spouse of the covered employee, nor any other dependent child of the covered employee is a qualified beneficiary unless that person is covered under a group health plan on the day before a qualifying event. See also Q&A–31 of §1.162–26 of this chapter.

(c) Plan providing long-term care. A plan is not subject to the COBRA continuation coverage requirements if substantially all of the coverage provided under the plan is for qualified long-term care services (as defined in section 7702B(c)).

For this purpose, a plan is permitted to use any reasonable method in determining whether substantially all of the coverage under the plan is for qualified long-term care services.

(d) Medical savings accounts. Under section 106(b)(5), amounts contributed by an employer to a medical savings account are not considered part of a group health plan that is subject to section 4980B. Thus, a plan is not required to make COBRA continuation coverage available with respect to a medical savings account. However, a high deductible health plan that covers a medical savings account holder may be a group health plan and thus may be subject to the COBRA continuation coverage requirements.

(e) Definitions. For purposes of this section —

Applicable premium is defined in section 4980B(f)(4).

Bankruptcy qualifying event is a qualifying event described in section 4980B(f)(3)(F) (relating to certain bankruptcy proceedings).

Covered employee is defined in section 4980B(f)(7). Group health plan is defined in section 4980B(g)(2). High deductible health plan is defined in section 220(c)(2).

Medical savings account is defined in section 220(d).

Placement, or being placed, for adop- tion means the assumption and retention by the covered employee of a legal obligation for total or partial support of a child in anticipation of the adoption of the child. The child’s placement for adoption with the covered employee terminates upon the termination of the legal obligation for total or partial support. For purposes of this section and section 4980B, a child who is immediately adopted by the covered employee without a preceding placement for adoption is considered to be placed for adoption on the date of the adoption.

Qualified beneficiary is defined in section 4980B(g)(1).

Qualified long-term care services is defined in section 7702B(c).

Termination-of-employment qualifying event is a qualifying event described in section 4980B(f)(3)(B) (relating to qualifying events that occur as a result of a termination of employment, other than for

gross misconduct, or reduction of hours of employment).

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on January 6, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 7, 1998, 63 F.R. 708)

Change in Record Format For TY 1998 Returns To Be Filed in CY 1999

Announcement 98–20

The purpose of this announcement is to inform all payers/transmitters, who file information returns magnetically or electronically with Internal Revenue Service (IRS) Martinsburg Computing Center, of a change in the record format for tax year 1998 returns to be filed in calendar year 1999. Due to the century date change, legislative changes, and proposed future expansion, the record size will be increased from the current 420 positions to 750 positions. This will enable IRS to capture all data required to be filed. Several examples of changes are: the number of money fields have been expanded from 9 to 12, and blank fields have been added to enable IRS to capture more complete name and address information in the future. Although the record has changed, much of the information is data already requested in the present format.

Publication 1220, Specifications for Filing Forms 1098, 1099 series, 5498, 5498–MSA and W–2G Magnetically or Electronically, is being revised and is scheduled to be available on the Information Reporting Program Bulletin Board System (IRP–BBS) by May 1998 in an effort to give payers/transmitters as much time as possible to incorporate the changes into their programs. The telephone number for the IRP–BBS is 304264-7070. IRS is planning additional Information Reporting Seminars to assist filers with the new format.

Due to the fact we are unable to discuss any other changes in detail until the publication has gone through all necessary clearances, no further information will be provided at this time.

1998–11 I.R.B. 25 March 16, 1998

Erie Maritime Programs Inc., Erie, PA Ethics Institute, Washington, DC Ethiopian Community Media Service,

Foundations Status of Certain Organizations

Announcement 98–21

Community Gathering Place Association,

Washington, DC Evangel Christian Ministries Inc.,

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 designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations: Child Care Resources Inc., Maidens, VA Childern Medical Foundation,

Columbus, OH Crown of the Continent Conservancy,

Kalispell, MT Crusaders Community Development,

Physical Fitness and Sports, Cleveland, OH Derry Township Bridge Housing

Waterloo, IA Fencing Advisory Associates Inc.,

Philadelphia, PA Crystal Beach Volunteer Fire Dept.,

Crystal Beach, TX CSC Charities Inc., Chicago, IL Cuban National Congress Inc., Hialeah,

Wilmore, KY Evangeline Human Development Inc.,

Villa Platte, LA Evanston Lighthouse Rotary Club,

FL Cullman Alzheimers and Related

Disorders Support Group, Cullman, AL Culpeper Senior Center Inc., Culpeper,

VA Cultural Center for Social Change,

Washington, DC Cultural Treasures of New Orleans, New

Orleans, LA Cushing Regional Hospital, Cushing, OK Custer County Family Preservation,

Evanson, IL Evergreen Behavioral Health Center,

New Martinsville, WV Everlastings Inc., Warrenton, VA Exodo Foundation, Houston, TX Extended Arms Outreach Center Inc.,

Pensacola, FL Extra Mile JPHSA Inc., Metairie, LA Eyes on the Sparrow Ministry Inc.,

Baltimore, MD F A C E of Fond Du Lac County Inc.,

Broken Bow, NE Cuyahoga County Local Council on

Fond Du Lac, WI F O U R International, Detroit, MI Face of the City Inc., Goshen, IN Felons and Community Together,

Mishawaka, IN Ferrier Harris Residential Care Inc., St.

Clearwater, FL Childhood Hope Inc., Sevierville, TN Childlife International, Hopkins, MN Childreach Pursuing Parenthood Inc.,

Association, Hershey, PA Desarrolladora Nuestro Barrio Inc., Rio

Louis, MO Foster and Maralee Overcash Scholarship

Norton, OH Clearwater Aquatic Team Booster Club,

Piedras, PR Desert Storm Coalition Veterans

Memorial Fund, Washington, DC Design Your Life Inc., Palm Beach

Gardens, FL Dodge City Academic Booster Club,

Trust, Canton, IL Foundation for Parents, Austin, TX Foundation for the Advancement of

Inc., Clearwater, FL Clergy Housing Support Group Inc.,

Philadelphia, PA Cleveland Community Access

Corporation, Cleveland, OH Cleveland Student Housing Association,

Independence, OH Cleveland Theatre Company, Cleveland,

Dodge City, KS Doingsomething of Baltimore Inc.,

Baltimore, MD Dolf Seeds Ministries Inc., Odenville, AL Dolphin Assisted Therapy Association

Inc., Miami, FL Domestic Violence Intervention Services

Professional Psychology Education, Wheeling, IL Friends of Pre-Release, Athens, AL Friends of Rutgers University Equine

Research Inc., Montclair, NJ Friends of Tagore Inc., Atlantis, FL Friends of the Newport News Juvenile

Court, Newport News, VA Friends of the Pere Marquette Trail,

OH Community Actors of St. Bernard

Theatre—C.A.S.T., Chalmette, LA Community Advocacy of South Texas

Midland MI Friends of the Quilt-National Capital

Canyon, AZ Grand Junction Baseball Committee Inc.,

Inc., Pharr, TX Community Alliance of Pinellas for Aids,

Inc., St. Petersburg, FL Community and Educational Services for

Family Youth and Senior Development Corporation, Detroit, MI Community Care and Share Pantry, West

Guild Inc., Tulsa, OK Donald O. Oldmixon Memorial Public

Service Scholarship Trust Fund, Goliad, TX Dooly County Arts Council Inc., Vienna,

Shoshoni, WY Educational Grants and Loans

Area, Washington, DC Grand Canyon Pioneers Society, Grand

GA Door to Recovery Inc., Houston, TX Educational Fund for the Blind,

Grand Junction, CO Grand Rapids Area Choral Ensemble,

Salem, WI Community Care Co., Sapulpa, OK Community Consulting & Research

Grand Rapids, MI Grand River and Nature Discovery

Group Incorporated, Easton, MD Community Corrections Advisory Board,

Association, Colorado Springs, CO Educational Imperatives, Boulder, CO Educational Opportunities International,

Houghton, MI Educational Resource Development

Project, Clarklake, MI Grand Valley Public Radio Company,

Jamestown, ND Community Economic and Ecological

Grand Junction, CO Grandma Dottie Senior Charities,

Littleton, CO Grandmas House Christian Childcare and

Development Institute, Santa Fe, NM

Corporation, Shawnee Mission, KS Erie Area Local Education Fund, Erie, PA

March 16, 1998 26 1998–11 I.R.B.

Preschool Inc., Isle of Wight County, VA Grant-a-Wish Incorporated, Albuquerque,

Hebron Arabians Inc., Clovis, NM Hegewisch Sports Facility Coalition Inc.,

Chicago, IL Heidi Van Arnem Foundation to Cure

NM Gratiot County Widowed Persons

Service, Alma, MI Grayling Ausable Football League,

Paralysis, Birmingham, MI Help & Information Service, Long Pond,

Grayling, MI Hawkeye Community Historical Center,

PA Help Enable Alcoholics Receive

Treatment Inc., Metairie, LA Help of Tampa Bay Inc., Pinellas Park,

West Union, IA Hays Lewis Sporting Clays Foundation

Inc., Pavo, GA Hayward Elementary & Middle School

Antonio, TX Helping Enhance Lifes Potentials, Dallas,

FL Help With Hearing Foundation, San

Playground Committee Fund, Hayward, WI He Shall Supply Ministries Inc., Vero

University Association, Kansas City, MO Hmong American Association of Portage

Hope Housing, Crystal Lake, IL Hope Unity & Growth Inc., Detroit, MI Hopkins Street Community Association

LTD, Milwaukee, WI If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification 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 classification of foundation status in the Internal Revenue Bulletin.

Beach, FL Headspeth Inc., Atlanta, GA Hearts to Hearts Inc., Miami, FL Healthsearch Inc., Anderson, IN

TX Historically Black Colleges and

County Inc., Stevens Point, WI

1998–11 I.R.B. 27 March 16, 1998