Part IV. Items of General Interest

empt purposes only where the conduct of the business activities has a substantial causal relationship to the achievement of the exempt purposes (other than through the production of income) of the organization conducting the trade or business. Thus, a trade or business is substantially related for purposes of section 513 only if the conduct of the trade or business contributes importantly to the accomplishment of the organization’s exempt purposes.

In recent years, taxpayers and Congress have asked the IRS to publish guidance addressing questions relating to the unrelated business income tax treatment of income generated from travel tours conducted by tax exempt organizations. Although the IRS has issued a number of revenue rulings addressing situations in which tax exempt organizations sponsor travel tours, most of these rulings have analyzed whether an organization that offers travel tours as its primary activity can qualify as a charitable or educational organization described in section 501(c)(3) of the Code.

Rev. Rul. 67–327, 1967–2 C.B. 187, holds that an organization whose purpose is to arrange group tours for students and faculty of a university in order to allow them to travel abroad does not qualify for exemption because the organization operates essentially as a commercial travel agency. The ruling concludes that the organization’s activities are not “educational” as that term is defined in Treas. Reg. § 1.501(c)(3)–1(d)(3)(i)(a), because they do not provide instruction or training of individuals for the purpose of improving or developing their capabilities.

In contrast, in Rev. Rul. 69–400, 1969– 2 C.B. 114, an organization that selects students and faculty members interested in a certain foreign history and culture and enrolls them at foreign universities and arranges for on-site tours conducted by local scholars that complement classroom studies, is held to be exempt. Rev. Rul. 69–400 distinguishes Rev. Rul. 67– 327 on the basis that the organization in the later ruling is arranging for instruction not just travel.

Rev. Rul. 70–534, 1970–2 C.B. 113, describes an organization that conducts travel study tours as its primary activity.

Notice of Proposed Rulemaking

Travel and Tour Activities of Tax Exempt Organizations

REG–121268–97

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations clarifying when the travel and tour activities of tax exempt organizations are substantially related to the purposes for which exemption was granted. These proposed regulations are intended to augment the guidance that currently exists with respect to travel tours and the unrelated business income tax.

DATES: Written comments and requests for a public hearing must be received by July 22, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–121268–97), 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–121268–97), 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 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: Robin Ehrenberg, (202) 622-6080 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

An organization generally exempt from tax under section 501(a) of the Internal Revenue Code (“Code”) must pay tax on its unrelated business taxable income, as defined in section 512. Section 512(a)(1)

defines unrelated business taxable income (“UBTI”) as the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by the organization, less the deductions which are directly connected with the conduct of the trade or business. Gross income from an unrelated trade or business and any deductions directly connected to that trade or business are both computed in accordance with the general income tax rules of chapter 1 of the Internal Revenue Code, subject to the modifications provided in section 512(b).

Section 513(a) generally defines an unrelated trade or business as any trade or business the conduct of which is not substantially related (aside from the need of an organization for income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501.

A “trade or business” is defined in Section 1.513–1(b) of the Income Tax Regulations as having the same meaning it has for purposes of section 162, and “generally includes any activity carried on for the production of income from the sale of goods or performance of services.” The key test of whether an activity constitutes a trade or business is whether the activity was conducted with a profit motive. See U.S. v. American Bar Endowment, 477 U.S. 105 (1986); Professional Insurance Agents of Michigan v. Commissioner 726 F.2d 1097 (6th Cir. 1983); National Water Well Association v. Commissioner, 92 T.C. 75 (1989). The regulations further provide that an activity conducted for the production of income does not lose its character as a business “merely because

[it is] carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization.” This “fragmentation rule,” as it is commonly known, may result in different treatment of related activities under the unrelated business income tax.

Section 1.513–1(d)(2) of the Income Tax Regulations provides that a trade or business is “substantially related” to ex

May 18, 1998 12 1998–20 I.R.B.

Explanation of Provisions

The proposed regulations add a new §1.513–7 providing that the determination of whether travel tour activities of tax exempt organizations are substantially related to an organization’s exempt purposes is a question of facts and circumstances. The proposed regulations set forth a series of examples to illustrate how various facts and circumstances would be analyzed.

Proposed Effective Date

These regulations are proposed to be effective for taxable years beginning after the date final regulations are published in the Federal Register. For prior taxable years, the IRS will continue to apply principles of existing law.

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, and because the regulation does 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) 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 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.

Tours are geared toward students, but others can take the tours as long as they participate in the mandatory study programs. Organized study, taught by certified teachers, is conducted five to six hours a day, and a library of materials related to the courses being taught is available. Exams are given, each student is graded and a state board of education allows credit for a student’s participation in the study tour program. The revenue ruling concludes that the organization furthers educational purposes because it performs training and instruction for the purpose of allowing individuals to improve and develop their capabilities, and is, therefore, described in section 501(c)(3).

Rev. Rul. 77–366, 1977–2 C.B. 192, concerns an organization that arranges and conducts ocean cruises for ministers, church members and their families for the purpose of providing continuing education in an atmosphere supporting spiritual renewal. The organization’s activities include lectures, discussions, workshops and some shore activities that further charitable purposes. However, because of the extensive resources the organization devotes to social and recreational programs, the scheduling of those programs relative to the schedule for the exempt purpose programs, and other facts and circumstances, the organization was held to be also serving a substantial nonexempt purpose and, therefore, not to qualify for exemption as an organization described in section 501(c)(3).

The Tax Court applied a similar analysis to an organization operating a mountain lodge when it held that the organization failed to qualify as a religious organization described in section 501(c)(3). Although religious activities were offered to guests in addition to a wide range of recreational activities, guests were not required to participate in the religious activities, and the record failed to show that the recreational activities were insubstantial. See The Schoger Foundation v. Commissioner, 76 T.C. 380 (1981).

In contrast, Rev. Rul. 77–430, 1977–2 C.B. 194, holds that an organization conducting weekend retreats is furthering its stated purpose of advancing religion. Individuals come to participate in a program of seminars, lectures, prayer sessions and meditation led by ministers and priests

that are scheduled on an hourly basis throughout the day. Recreational activities are not scheduled, but are available to participants during their limited free time. Under these facts and circumstances, the ruling holds that the facilities are being used to advance religion and that recreational activities are incidental to the accomplishment of this purpose.

The revenue rulings all focus on the degree of educational or religious content participants are expected to receive in each travel program in determining whether the activity serves an exempt purpose. The same approach was taken in the one ruling that has specifically addressed the application of the unrelated business income tax to income generated by travel tours. Rev. Rul. 78–43, 1978–1 C.B. 164, describes the travel tour activity of a university alumni association. The association’s program of approximately ten tours per year is open to all current members and their immediate families and is planned with various travel agencies. Each travel agency pays a per person fee to the association. The tours do not include any formal educational program and do not differ substantially from commercially operated tours. Rev. Rul. 78–43 concludes that there is no causal relationship between arranging the travel tours described in the ruling and the achievement of an exempt purpose. Accordingly, the ruling holds that the sale of tours to members is an unrelated trade or business within the meaning of section 513. These proposed regulations are intended to augment the guidance that currently exists with respect to travel tours and the unrelated business income tax. The proposed regulations also provide additional guidance regarding the fragmentation rule and the distinctions that may be necessary among different tours or activities that are part of a single organization’s travel program.

The IRS and Treasury are soliciting comments on these proposed regulations. In particular, because the IRS relies heavily on review of records to determine whether an organization’s trade or business activities further an exempt purpose, comments are requested on whether the IRS should specify the types of records organizations should keep to establish the activity’s purpose.

1998–20 I.R.B. 13 May 18, 1998

lected because of their historical or cultural significance or because of instructional resources they offer. Category B tours are also trips to X, but rather than offering scheduled instruction, participants are given the option of taking guided tours of various X locations included in their itinerary. Other than the optional guided tours, Category B tours offer no instruction or curriculum. Even if participants take all of the tours offered, they have a substantial amount of time free to pursue their own interests once in X. Destinations of principally recreational interest, rather than historical or cultural interest, are regularly included on Category B tour itineraries. Based on the facts and circumstances, sponsoring Category A tours is an activity substantially related to S’s exempt purposes, and does not constitute an unrelated trade or business with respect to S. However, sponsoring Category B tours does not contribute importantly to S’s accomplishment of its exempt purposes and is designed to generate a profit for S. Therefore, sponsoring the Category B tours constitutes an unrelated trade or business with respect to S.

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on April 20, 1998, 2:48 p.m., and published in the issue of the Federal Register for April 23, 1998, 63 F.R. 20156)

Notice of Proposed Rulemaking

S Corporation Subsidiaries

REG–251698–96

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to the treatment of corporate subsidiaries of S corporations. The proposed regulations interpret the rules added to the Internal Revenue Code by section 1308 of the Small Business Job Protection Act of 1996. The proposed regulations affect S corporations and their subsidiaries.

DATES: Written comments must be received by July 21, 1998.

ADDRESSES: Send submissions to CC:DOM:CORP:R (REG–251698–96), 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–251698–96), Courier’s Desk, In

Drafting Information

The principal author of these regulations is Robin Ehrenberg, Office of 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 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.513–7 is added to read as follows:

§ 1.513-7 Travel and tour activities of tax exempt organizations.

(a) Travel tour activities that constitute a trade or business, as defined in § 1.5131(b), and that are not substantially related to the purposes for which exemption has been granted to the organization constitute an unrelated trade or business with respect to that organization. Whether travel tour activities conducted by an organization are substantially related to the organization’s exempt purpose is determined by looking at all relevant facts and circumstances. Section 513(c) and § 1.513–1(b) also apply to travel tour activity. Application of the rules of section 513(c) and § 1.513–1(b) may result in different treatment for individual tours within an organization’s travel tour program.

(b) Examples. The provisions of this section are illustrated by the following examples:

Example 1. O, a university alumni association, is exempt from federal income tax under section 501(a) as an educational organization described in section 501(c)(3). As part of its activities, O operates a travel tour program. The program is open to all current members of O and their guests. O works with travel agencies to schedule approximately 10 tours annually to various destinations around the world. Members of O pay $X to the organizing travel agency to participate in a tour. The travel agency pays O a per person fee for each participant. Although the literature advertising the tours encourages O’s members to continue their lifelong learning by joining the tours, and a faculty member of O’s related university is invited to join the tour as a guest of the alumni association, none of the tours includes any scheduled instruction or curriculum related to the destinations being visited. By arranging to make

travel tours available to its members, O is not contributing importantly to the accomplishment of its educational purpose. Rather, O’s program is designed to generate revenues for O by regularly offering its members travel services. Accordingly, O’s tour program is an unrelated trade or business within the meaning of section 513(a) of the Code.

Example 2. N is an organization formed for the purpose of educating individuals about the geography and culture of the United States. It is exempt from federal income tax under section 501(a) as an educational and cultural organization described in section 501(c)(3). N engages in a number of activities to accomplish its purposes, including offering courses and publishing periodicals and books. As one of its activities, N conducts study tours to national parks and other locations within the United States. The study tours are conducted by teachers and other education professionals. The tours are open to all who agree to participate in the required study program. The study program consists of community college level courses related to the location being visited by the tour. While the students are on the tour, five or six hours per day are devoted to organized study, preparation of reports, lectures, instruction and recitation by the students. Each tour group brings along a library of material related to the subject being studied on the tour. Examinations are given at the end of each tour and N’s state board of education awards academic credit for tour participation. Because the tours offered by N include a substantial amount of required study, lectures, report preparation, examinations and qualify for academic credit, the tours clearly further N’s educational purpose. Accordingly, N’s tour program is not an unrelated trade or business within the meaning of section 513(a) of the Code. Example 3. R is a section 501(c)(4) social welfare organization devoted to advocacy on a particular issue. On a regular basis throughout the year, R organizes a travel tour for its members to Washington, D.C.. The tours are priced to produce a profit for R. While in Washington, the members follow a schedule according to which they spend substantially all of their time over several days attending meetings with legislators and government officials and receiving briefings on policy developments related to the issue that is R’s focus. Bringing members to Washington to participate in advocacy on behalf of the organization and learn about developments relating to the organization’s principal focus is substantially related to R’s social welfare purpose. Therefore, R’s operation of the travel tours does not constitute an unrelated trade or business.

Example 4. S is a membership organization formed to foster cultural unity and to educate X Americans about X, their country of origin. It is exempt from federal income tax under section 501(a) and is described in section 501(c)(3) as an educational and cultural organization. Membership in S is open to all Americans interested in the X heritage. As part of its activities, S sponsors a program of travel tours to X. All of S’s tours are priced to produce a profit for S. The tours are divided into two categories. Category A tours are trips to X that are designed to immerse participants in the X history, culture and language. The itinerary is designed to have participants spend substantially all of their time while in X receiving instruction on the X language, history and cultural heritage. Destinations are se

May 18, 1998 14 1998–20 I.R.B.

authority regarding the consequences of an election to be a QSSS.

Explanation of Provisions

ternal 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, Deanna L. Walton, (202) 622-3050 (Subchapter S) or Lee A. Dean, (202) 6227540 (Subchapter C); concerning submissions, Michael Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed rulemaking have 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 collections 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 Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collections of information should be received by June 22, 1998. Comments are specifically requested concerning:

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

The accuracy of the estimated burden associated with the proposed collections 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 collections 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 services to provide information.

The collections of information in these proposed regulations are in §§1.1361– 3(a)(1), 1.1361–3(b)(1), 1.1361–5(a)(2), and 1.1362–8. The collections of information are required to determine the manner in which a corporate subsidiary of an S corporation will be treated under the Internal Revenue Code.

These collections of information are required to obtain a benefit. The likely respondents and/or recordkeepers are small businesses or organizations, businesses or other for-profit institutions, and farms. Estimated total annual reporting/recordkeeping burden: 10,110 hours Estimated average annual burden per respondent/recordkeeper: 57 minutes Estimated number of respondents/recordkeepers: 10,660 Estimated annual frequency of responses: On occasion

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it 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 Income Tax Regulations (26 CFR Part 1) relating to S corporations and their subsidiaries under sections 1361 and 1362 of the Internal Revenue Code (Code). Section 1308 of the Small Business Job Protection Act of 1996, Public Law 104–188, 110 Stat. 1755 (the Act), modified section 1361 of the Code to permit an S corporation (1) to own 80 percent or more of the stock of a C corporation, and (2) to elect to treat a wholly owned subsidiary as a qualified subchapter S subsidiary (QSSS). In Notice 97–4 (1997–2 I.R.B. 24), the IRS announced its intention to issue regulations under section 1308 of the Act and requested comments on certain issues. Section 1601 of the Taxpayer Relief Act of 1997, Public Law 105–34, 111 Stat. 788 (the 1997 Act), made a technical correction to section 1361 to provide regulatory

Overview

Prior law prohibited an S corporation from owning 80 percent or more of the stock of another corporation. The Act repealed section 1362(b)(2)(A) of the Internal Revenue Code (Code), thereby allowing an S corporation to own 80 percent or more of the stock of a C corporation. The Act also added section 1504(b)(8) to the Code to prevent an S corporation from joining in the filing of a consolidated return with its affiliated C corporations. A C corporation subsidiary of an S corporation, however, may file a consolidated return with its affiliated C corporations. See H.R. Conf. Rep. No. 737, 104th Cong., 2d Sess. 224 (1996).

New section 1361(b)(3)(B) defines the term qualified subchapter S subsidiary as any domestic corporation that is not an ineligible corporation if, (1) an S corporation holds 100 percent of the stock of the corporation, and (2) that S corporation elects to treat the subsidiary as a QSSS. Except as otherwise provided in regulations, a corporation for which a QSSS election is made is not treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of the QSSS are treated as assets, liabilities, and items of income, deduction, and credit of the parent S corporation. The legislative history accompanying section 1361(b)(3) indicates that, when the parent corporation makes the election, the subsidiary is deemed to have liquidated under sections 332 and 337 immediately before the election is effective. See S. Rep. No. 281, 104th Cong., 2d Sess. 53 (1996); H.R. Rep. No. 586, 104th Cong., 2d Sess. 89 (1996). However, the legislative history accompanying the technical correction made by the 1997 Act indicates that regulations may provide exceptions to that general rule. See S. Rep. No. 33, 105th Cong., 1st Sess. 320 (1997). Section 1361(b)(3)(C) provides that any QSSS that ceases to meet the requirements of section 1361(b)(3)(B) will be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the cessation from its S corporation parent in exchange

1998–20 I.R.B. 15 May 18, 1998

a C corporation for any period solely because of the transfer.

Generally, the proposed regulations treat the liquidation as occurring at the close of the day before the QSSS election is effective. Under this rule, if a parent corporation makes an S election effective on the same date as a QSSS election with respect to a subsidiary, the deemed liquidation occurs at a time when the parent corporation is still a C corporation. A QSSS election satisfies the requirement of adopting a plan of liquidation under section 332.

Following the deemed liquidation, the QSSS is not treated as a separate corporation (except as otherwise provided in the regulations), and all assets, liabilities, and items of income, deduction, and credit are treated as those of the S corporation. Accordingly, all such items must be reported on the S corporation’s return required to be filed under section 6037. A special rule applies for the calculation of these items where either an S corporation or its QSSS is a bank (as defined in section 581). This special rule was first announced in Notice 97–5 (1997–2 I.R.B. 25). Until these proposed regulations are finalized, taxpayers should continue to follow Notice 97–5.

QSSS Termination

The QSSS status of a corporation continues until it terminates. The regulations specify the date of termination for specific terminating events. Section 1361(b)(3)(D) provides that, if a QSSS election terminates, the corporation is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) from the S corporation in exchange for stock of the new corporation immediately before the termination. The tax treatment of this transaction or of a larger transaction that includes this transaction will be determined under the Code and general principles of tax law, including the step transaction doctrine. Examples are provided to illustrate situations in which the formation of the new corporation will qualify as a nonrecognition transaction under section 351. The proposed regulations also provide that, under certain circumstances, relief may be available under the standards established under section 1362(f) for the inadvertent termination of an S election.

for the subsidiary’s stock. Section 1361(b)(3)(D) provides that a QSSS whose election has terminated (or a successor corporation) may not make an S election or have a QSSS election made with respect to it before its fifth taxable year that begins after the first taxable year for which the termination is effective, unless the Secretary consents to the election.

Under current and prior law, the S election of a corporation with subchapter C corporation earnings and profits terminated if that S corporation received passive investment income, including dividends, in excess of 25 percent of gross receipts for three consecutive years. Section 1362(d)(3)(E) modifies that general rule by excluding dividends from passive investment income to the extent that the dividends are attributable to the active conduct of a trade or business of a C corporation in which the S corporation has an 80 percent or greater ownership interest. Neither the Act nor the legislative history provides rules for determining the attribution of dividends to an active trade or business.

QSSS Formation

Under the proposed regulations, an S corporation makes a QSSS election with respect to an eligible subsidiary by filing a form to be developed by the IRS prior to the time these regulations become final. This proposes to change the temporary election procedure provided in Notice 97– 4, which provides that a parent S corporation files a completed Form 966, Corporate Dissolution and Liquidation (with some modifications), to make a QSSS election. Until these proposed regulations are finalized, taxpayers should continue to use the temporary election procedure in Notice 97–4 to make QSSS elections.

The proposed regulations also provide that the effective date of a QSSS election may be up to 2 months and 15 days prior to the day the QSSS election is made. This is a slight change from the 75 day retroactive period provided in Notice 97– 4, but is consistent with the general time period for making S elections. Unlike the S election, however, a QSSS election does not need to be made within 2 months and 15 days of the beginning of a taxable year. A similar retroactive period is provided for revocations of QSSS status. In addition, a taxpayer may choose a

prospective effective date for a QSSS election or revocation, so long as the date selected is not more than 12 months after the date the election or revocation is made.

The proposed regulations provide that, when an S corporation makes a valid QSSS election with respect to a subsidiary, the subsidiary is deemed to have liquidated into the parent. The tax treatment of this liquidation, alone or in the context of any larger transaction (for example, a transaction that also includes the acquisition of the subsidiary’s stock), is generally determined under all relevant provisions of the Code and general principles of tax law, including the step transaction doctrine. However, a special transition rule applies to certain elections effective prior to the date that is 60 days after publication of final regulations in the Federal Register. The transition rule indicates the recognition of special concerns that may have arisen as a result of transactions entered into by taxpayers relying on the legislative history to the Act and without applying the step transaction doctrine to the acquisition of the subsidiary’s stock followed by a QSSS election. The IRS requests comments concerning other transactions occurring during the transitional period for which relief from the effect of application of the step transaction doctrine may be warranted.

Special rules may apply when a QSSS election is made following the transfer of one S corporation’s stock to another S corporation. For example, if an S corporation acquires the stock of another S corporation in a transaction in which the acquiring S corporation’s basis in the stock received is determined by reference to the transferor’s basis and makes a QSSS election with respect to the other corporation effective on the day of acquisition, any losses disallowed under section 1366(d) with respect to a former shareholder of the QSSS will be available to that shareholder as a shareholder of the acquiring S corporation. Furthermore, when stock in an S corporation is transferred to another S corporation and a QSSS election is made with respect to the subsidiary effective on the day of acquisition, the S election of the former corporation terminates at the same moment as the QSSS election becomes effective. This rule ensures that the former S corporation is not treated as

May 18, 1998 16 1998–20 I.R.B.

the collections of information and recordkeeping requirements of these regulations is insignificant. For example, the estimated average annual burden per respondent is less than one hour. Furthermore, most taxpayers will only have to respond to the requests for information contained in §§1.1361–3(b)(1) and 1.1361–5(a)(2) one time in the life of the corporation. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (preferably a signed original and eight (8) copies) that are timely submitted to the IRS. All comments will be available for public inspection and copying.

A public hearing will be scheduled in the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. The IRS recognizes that persons outside the Washington, DC, area also may wish to testify at the public hearing through teleconferencing. Requests to include teleconferencing sites must be received by June 22, 1998. If the IRS receives sufficient indications of interest to warrant teleconferencing to a particular city, and if the IRS has teleconferencing facilities available in that city on the date the public hearing is to be scheduled, the IRS will try to accommodate the requests.

The IRS will publish the time and date of the public hearing and the locations of any teleconferencing sites in an announcement in the Federal Register.

Drafting Information

The principal authors of these proposed regulations are Deanna L. Walton, Office of the Assistant Chief Counsel (Passthroughs and Special Industries); and Lee A. Dean, Office of the Assistant Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

Section 1361(b)(3)(D) provides that a corporation whose QSSS election has terminated (or a successor corporation) may not make an S election or have a QSSS election made with respect to it for five taxable years following the termination without the consent of the Secretary. The proposed regulations provide that, without requesting the Secretary’s consent, a corporation may make an election to be treated as an S corporation or may have a QSSS election made with respect to it before the expiration of the five-year period under certain circumstances. Consent is not required if an otherwise valid S election or QSSS election is made for the former QSSS (or its successor corporation) effective immediately following the disposition of its stock. Thus, the proposed regulations allow corporations to move freely between QSSS and S corporation status, provided there is no intervening period for which the corporation is treated as a C corporation.

C Corporation Subsidiaries

The proposed regulations also provide rules relating to certain C corporation subsidiaries held by S corporations. Under section 1362(d)(3)(E), dividends received by an S corporation from a C corporation in which the S corporation has an 80 percent or greater ownership interest are not treated as passive investment income for purposes of sections 1362 and 1375 to the extent the dividends are attributable to the earnings and profits of the C corporation derived from the active conduct of a trade or business. The proposed regulations provide guidance for attributing dividends to the active conduct of a trade or business. Special rules apply to dividends distributed by the common parent of a consolidated group.

Under the proposed regulations, earnings and profits of a C corporation derived from the active conduct of a trade or business are the earnings and profits of the corporation derived from activities that would not produce passive investment income under section 1362(d)(3) if the C corporation were an S corporation. The proposed regulations provide a safe harbor under which the corporation may determine the amount of the active earnings and profits by comparing the corporation’s gross receipts derived from non

passive investment income-producing activities with the corporation’s total gross receipts in the year the earnings and profits are produced. If less than 10 percent of the C corporation’s earnings and profits for a taxable year are derived from activities that would produce passive investment income, all earnings and profits produced by the corporation during the taxable year are considered active earnings and profits.

The proposed regulations also provide that a C corporation may treat all earnings and profits accumulated by the corporation prior to the time an S corporation held stock meeting the requirements of section 1504(a)(2) as active earnings and profits in the same proportion as the C corporation’s active earnings and profits for the three taxable years ending prior to the time when the S corporation acquired 80 percent of the C corporation bear to the C corporation’s total earnings and profits for those three taxable years. Provisions also address the allocation of distributions from current or accumulated earnings and profits.

Proposed Effective Date

The regulations are proposed to be effective on the date that final regulations are published in the Federal Register. However, the IRS is considering whether certain provisions should be made retroactive. The IRS requests comments concerning whether certain provisions should be made effective for taxable years beginning on or after January 1, 1997.

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. 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. It is hereby certified that the collections of information contained in these regulations will not have a significant economic impact on a substantial number of small businesses. This certification is based on the fact that the economic burden imposed on taxpayers by

1998–20 I.R.B. 17 May 18, 1998

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Amend §1.1361–0 as follows:

1. Revise the introductory text.
2. Remove the entry for §1.1361– 1(d)(3).
3. Add entries for §§1.1361–2, 1.1361–3, 1.1361–4, 1.1361–5, and 1.1361–6. The revisions and additions read as follows:

§1.1361–0 Table of contents.

This section lists captions contained in §§1.1361–1, 1.1361–2, 1.1361–3, 1.1361–4, 1.1361–5, and 1.1361–6.

- - - -

§1.1361–2 Definitions relating to S corporation subsidiaries.

(a) In general. (b) Stock treated as held by S corpora tion. (c) Examples.

§1.1361–3 QSSS election.

(a) Time and manner of making election. (1) In general. (2) Time of making election. (3) Effective date of election. (4) Example. (5) Extension of time for making a QSSS

election. (b) Revocation of QSSS election. (1) Manner of revoking QSSS election. (2) Effective date of revocation. (3) Revocation after termination.

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored. (1) In general. (2) Liquidation of subsidiary. (3) Treatment of banks. (i) In general. (ii) Examples. (4) Treatment of stock of QSSS. (5) Transitional relief. (i) General rule. (ii) Examples. (b) Timing of the liquidation. (1) In general. (2) Acquisitions. (3) Coordination with section 338 elec tion.

(c) Carryover of disallowed losses and

deductions. (d) Examples.

§1.1361–5 Termination of QSSS election.

(a) In general. (1) Effective date. (2) Information to be provided upon ter mination of QSSS election by failure to qualify as a QSSS. (3) Examples. (b) Effect of termination of QSSS elec tion. (1) Formation of new corporation. (2) Carryover of disallowed losses and

deductions. (3) Examples. (c) Inadvertent terminations. (d) Election after QSSS termination. (1) In general. (2) Exception. (3) Examples.

§1.1361–6 Effective date.

Par. 3. Amend §1.1361–1 as follows:

1. Revise paragraph (b)(1)(i).

2. Remove paragraph (d)(1)(i).

3. Redesignate paragraphs (d)(1)(ii), (d)(1)(iii), (d)(1)(iv), and (d)(1)(v) as paragraphs (d)(1)(i), (d)(1)(ii), (d)(1)(iii), and (d)(1)(iv), respectively.

4. Revise newly designated paragraph (d)(1)(i).

5. Remove paragraph (d)(3).

6. Revise the first sentence of paragraph (e)(1).

The revisions read as follows:

§1.1361–1 S corporation defined.

- - - - (b) * * *

(1) * * * (i) More than 75 shareholders (35 for taxable years beginning before January 1, 1997);

- - - - (d) * * *

(1) * * * (i) For taxable years beginning on or after January 1, 1997, a financial institution that uses the reserve method of accounting for bad debts described in section 585 (for taxable years beginning prior to January 1, 1997, a financial institution to which section 585 applies (or would apply but for section 585(c)) or to which section 593 applies);

- - - -

(e) * * * (1) General rule. A corporation does not qualify as a small business corporation if it has more than 75 shareholders (35 for taxable years beginning prior to January 1, 1997). * * *

- - - -

Par. 4. Add §§ 1.1361–2, 1.1361–3, 1.1361–4, 1.1361–5, and 1.1361–6 to read as follows:

§1.1361–2 Definitions relating to S corporation subsidiaries.

(a) In general. The term qualified sub- chapter S subsidiary (QSSS) means any domestic corporation that is not an ineligible corporation (as defined in section 1361(b)(2) and the regulations thereunder), if—

(1) 100 percent of the stock of such corporation is held by an S corporation; and

(2) The S corporation properly elects to treat the subsidiary as a QSSS under §1.1361–3.

(b) Stock treated as held by S corpora- tion. For purposes of satisfying the 100 percent stock ownership requirement in section 1361(b)(3)(B)(i) and paragraph (a)(1) of this section, stock of a corporation is treated as held by an S corporation if the S corporation is the owner of that stock for federal income tax purposes.

(c) Examples. The following examples illustrate the application of this section:

Example 1. X, an S corporation, owns 100 percent of Y, a corporation for which a valid QSSS election is in effect for the taxable year. Y owns 100 percent of Z, a corporation otherwise eligible for QSSS status. X may elect to treat Z as a QSSS under section 1361(b)(3)(B)(ii).

Example 2. Assume the same facts as in Example 1, except that Y is a business entity that is disregarded as an entity separate from its owner under §301.7701–2(c)(2) of this chapter. X may elect to treat Z as a QSSS.

Example 3. Assume the same facts as in Example 1, except that Y owns 50 percent of Z, and X owns the other 50 percent. X may elect to treat Z as a QSSS.

Example 4. Assume the same facts as in Example 1, except that Y is a C corporation. Although Y is a domestic corporation that is otherwise eligible to be a QSSS, no QSSS election has been made for Y . Thus, X is not treated as holding the stock of Z . Consequently, X may not elect to treat Z as a QSSS.

§1.1361–3 QSSS election.

(a) Time and manner of making elec- tion —(1) In general. Except as provided

May 18, 1998 18 1998–20 I.R.B.

in section 1361(b)(3)(D) and §1.1361– 5(d) (five-year prohibition on re-election), an S corporation may elect to treat an eligible subsidiary as a QSSS by filing a completed form to be prescribed by the Internal Revenue Service. The election form must be signed by a person authorized to sign the S corporation’s return required to be filed under section 6037 and must be submitted to the service center where the subsidiary filed its most recent tax return (if applicable). If an S corporation forms a subsidiary and makes a valid QSSS election (effective upon the date of the subsidiary’s formation) for the subsidiary, the election should be submitted to the service center where the S corporation filed its most recent return.

(2) Time of making election. A QSSS election may be made by the S corporation parent at any time during the taxable year.

(3) Effective date of election. A QSSS election will be effective on the date specified on the election form or on the date the election form is filed if no date is specified. The effective date specified on the form can not be more than 2 months and 15 days prior to the date of filing and can not be more than 12 months after the date of filing. For this purpose, the definition of the term “month” found in §1.1362–6(a)(2)(ii)(C) applies. If an election form specifies an effective date more than 2 months and 15 days prior to the date on which the election form is filed, it will be effective 2 months and 15 days prior to the date it is filed. If an election form specifies an effective date more than 12 months after the date on which the election is filed, it will be effective 12 months after the date it is filed. The corporation for which the QSSS election is made must meet all the requirements of section 1361(b)(3)(B) at the time the election is made and for all periods for which the election is to be effective.

(4) Example. The following example illustrates the application of paragraph (a)(3) of this section:

Example. X has been a calendar year S corporation engaged in a trade or business for several years. X acquires the stock of Y, a calendar year C corporation, on April 1, 1998. On August 10, 1998, X makes an election to treat Y as a QSSS. Unless otherwise specified on the election form, the election will be effective as of August 10, 1998. If specified on the election form, the election may be effective on some other date that is not more than 2 months

and 15 days prior to August 10, 1998, and not more than 12 months after August 10, 1998.

(5) Extension of time for making a QSSS election. An extension of time to make a QSSS election may be available under the procedures applicable under §§301.9100–1 and 301.9100–3 of this chapter.

(b) Revocation of QSSS election —(1) Manner of revoking QSSS election. An S corporation may revoke a QSSS election under section 1361 by filing a statement with the service center where the S corporation’s most recent tax return was properly filed. The revocation statement must include the names, addresses, and taxpayer identification numbers of both the parent S corporation and the QSSS. The statement must be signed by a person authorized to sign the S corporation’s return required to be filed under section 6037.

(2) Effective date of revocation. The revocation of a QSSS election is effective on the date specified on the revocation statement or on the date the revocation statement is filed if no date is specified. The effective date specified on the revocation statement can not be more than 2 months and 15 days prior to the date on which the revocation statement is filed and can not be more than 12 months after the date on which the revocation statement is filed. If a revocation statement specifies an effective date more than 2 months and 15 days prior to the date on which the statement is filed, it will be effective 2 months and 15 days prior to the date it is filed. If a revocation statement specifies an effective date more than 12 months after the date on which the statement is filed, it will be effective 12 months after the date it is filed.

(3) Revocation after termination. A revocation may not be made after the occurrence of an event that renders the subsidiary ineligible for QSSS status under section 1361(b)(3)(B).

§1.1361–4 Effect of QSSS election.

(a) Separate existence ignored —(1) In general. Except as otherwise provided in paragraph (a)(3) of this section, for federal tax purposes—

(i) A corporation which is a QSSS shall not be treated as a separate corporation; and

(ii) All assets, liabilities, and items of income, deduction, and credit of a QSSS

shall be treated as assets, liabilities, and items of income, deduction, and credit of the S corporation.

(2) Liquidation of subsidiary. If an S corporation makes a valid QSSS election with respect to a subsidiary, the subsidiary is deemed to have liquidated into the S corporation. Except as provided in paragraph (a)(5) of this section, the tax treatment of the liquidation or of a larger transaction that includes the liquidation will be determined under the Internal Revenue Code and general principles of tax law, including the step transaction doctrine. Thus, for example, if an S corporation forms a subsidiary and makes a valid QSSS election (effective upon the date of the subsidiary’s formation) for the subsidiary, there will be no deemed liquidation of the new subsidiary. Instead, the corporation will be deemed to be a QSSS from its inception. For purposes of section 332, the making of a QSSS election satisfies the requirement of adopting a plan of liquidation.

(3) Treatment of banks —(i) In general. If an S corporation is a bank, or if an S corporation makes a valid QSSS election for a subsidiary that is a bank, any special rules applicable to banks under the Internal Revenue Code continue to apply separately to the bank parent or bank subsidiary as if the deemed liquidation of any QSSS under paragraph (a)(2) of this section had not occurred. For any QSSS that is a bank, however, all assets, liabilities, and items of income, deduction, and credit of the QSSS, as determined in accordance with the special bank rules, are treated as assets, liabilities, and items of income, deduction, and credit of the S corporation. For purposes of this paragraph (a)(3)(i), the term “bank” has the same meaning as in section 581.

(ii) Examples. The following examples illustrate the application of this paragraph (a)(3):

Example 1. X, an S corporation, is a bank as defined in section 581. X owns 100 percent of Y and Z, corporations for which valid QSSS elections are in effect. Y is a bank as defined in section 581, and Z is not a financial institution. Pursuant to paragraph (a)(3)(i) of this section, any special rules applicable to banks under the Internal Revenue Code continue to apply separately to X and Y and do not apply to Z . Thus, for example, section 265(b), which provides special rules for interest expense deductions of banks, applies separately to X and Y . That is, X and Y each must make a separate determination under section 265(b) of interest expense allocable to tax

1998–20 I.R.B. 19 May 18, 1998

exempt interest, and no deduction is allowed for that interest expense.

Example 2. X, an S corporation, is a bank holding company and thus is not a bank as defined in section 581. X owns 100 percent of Y, a corporation for which a valid QSSS election is in effect. Y is a bank as defined in section 581. Pursuant to paragraph (a)(3)(i) of this section, any special rules applicable to banks under the Internal Revenue Code continue to apply to Y and do not apply to X . However, all of Y ’s assets, liabilities, and items of income, deduction, and credit, as determined in accordance with the special bank rules, are treated as those of X . Thus, for example, section 582(c), which provides special rules for sales and exchanges of debt by banks, applies only to sales and exchanges by Y. However, any gain or loss on such a transaction by Y that is considered ordinary income or ordinary loss pursuant to section 582(c) is treated as ordinary income or ordinary loss of X .

(S2) in a transaction in which the basis of the S2 stock is determined in whole or in part by reference to the transferor’s basis, and S1 makes a QSSS election with respect to S2 effective on the day of the acquisition, any loss or deduction disallowed under section 1366(d) with respect to a former shareholder of S2 is available to that shareholder as a shareholder of S1. Thus, a loss or deduction of a shareholder of S2 disallowed prior to or during the taxable year of the transaction is treated as incurred by S1 with respect to that shareholder if the shareholder is a shareholder of S1 after the transaction.

(d) Examples. The following examples illustrate the application of this section:

Example 1. X, an S corporation, owns 100 percent of the stock of Y, a C corporation. On June 2, 1998, X makes a valid QSSS election for Y, effective June 2, 1998. Assume that, under general principles of tax law, including the step transaction doctrine, X ’s acquisition of the Y stock and the subsequent QSSS election would not be treated as related. The liquidation described in paragraph (a)(2) of this section occurs at the close of the day on June 1, 1998, the day before the QSSS election is effective, and the plan of liquidation is considered adopted on that date. Y ’s taxable year and separate existence for federal tax purposes end at the close of June 1, 1998.

Example 2. X, a C corporation, owns 100 percent of the stock of Y, another C corporation. On December 31, 1998, X makes an election under section 1362 to be treated as an S corporation and a valid QSSS election for Y, both effective January 1, 1999. Assume that, under general principles of tax law, including the step transaction doctrine, X ’s acquisition of the Y stock and the subsequent QSSS election would not be treated as related. The liquidation described in paragraph (a)(2) of this section occurs at the close of December 31, 1998, the day before the QSSS election is effective. The QSSS election for Y is effective on the same day that X ’s S election is effective, and the deemed liquidation is treated as occurring before the S election is effective, when X is still a C corporation. Y ’s taxable year ends at the close of December 31, 1998. See §1.381(b)–1.

Example 3. On June 1, 1998, X, an S corporation, acquires 100 percent of the stock of Y, an existing S corporation, for cash in a transaction meeting the requirements of a qualified stock purchase (QSP) under section 338. X immediately makes a QSSS election for Y effective June 2, 1998, and also makes a joint election under section 338(h)(10) with the shareholder of Y . Under section 338(a) and §1.338(h)(10)–1, Y is treated as having sold all of its assets at the close of the acquisition date, June 1, 1998. Y is treated as a new corporation which purchased all of those assets as of the beginning of June 2, 1998, the day after the acquisition date. Section 338(a)(2). The QSSS election is effective on June 2, 1998, and the liquidation under paragraph (a)(2) of this section occurs immediately after the deemed asset purchase by the new corporation.

(4) Treatment of stock of QSSS. Except for purposes of section 1361(b)(3)(B)(i) and §1.1361–2(a)(1), the stock of a QSSS shall be disregarded for all federal tax purposes.

(5) Transitional relief —(i) General rule. If an S corporation and another corporation (the related corporation) are persons specified in section 267(b) prior to an acquisition by the S corporation of some or all of the stock of the related corporation followed by a QSSS election for the related corporation, the step transaction doctrine will not apply to determine the tax consequences of the acquisition. This paragraph (a)(5) shall apply to QSSS elections effective prior to the date that is 60 days after publication of final regulations in the Federal Register.

(ii) Examples. The following examples illustrate the application of this paragraph (a)(5):

Example 1. Individual A owns 100 percent of the stock of X, an S corporation. X owns 79 percent of the stock of Y, a solvent corporation, and A owns the remaining 21 percent. On May 4, 1998, A contributes its Y stock to X in exchange for X stock. X makes a QSSS election with respect to Y effective immediately following the transfer. The liquidation described in paragraph (a)(2) of this section is respected as an independent step separate from the stock acquisition, and the tax consequences of the liquidation are determined under sections 332 and 337. The contribution by A of the Y stock qualifies under section 351, and no gain or loss is recognized by A, X, or Y .

Example 2. Individual A owns 100 percent of the stock of two solvent S corporations, X and Y . On May 4, 1998, A contributes the stock of Y to X . X makes a QSSS election with respect to Y immediately following the transfer. The liquidation described in paragraph (a)(2) of this section is respected as an independent step separate from the stock acquisition, and the tax consequences of the

liquidation are determined under sections 332 and 337. The contribution by A of the Y stock to X qualifies under section 351, and no gain or loss is recognized by A, X, or Y . Y is not treated as a C corporation for any period solely because of the transfer of its stock to X, an ineligible shareholder. See §1.1362–2(b)(4).

(b) Timing of the liquidation —(1) In general. Except as otherwise provided in paragraphs (b)(2) or (b)(3) of this section, the liquidation described in paragraph (a)(2) of this section occurs at the close of the day before the QSSS election is effective. Thus, for example, if a C corporation elects to be treated as an S corporation and makes a QSSS election (effective the same date as the S election) with respect to a subsidiary, the liquidation occurs immediately before the S election becomes effective, while the S electing parent is still a C corporation.

(2) Acquisitions. If an S corporation does not own 100 percent of the stock of the subsidiary on the day before the QSSS election is effective, the liquidation described in paragraph (a)(2) of this section occurs immediately after the time at which the S corporation first owns 100 percent of the stock.

(3) Coordination with section 338 election. An S corporation that makes a qualified stock purchase of a target may make an election under section 338 with respect to the acquisition if it meets the requirements for the election, and may make a QSSS election with respect to the target. If an S corporation makes an election under section 338 with respect to a subsidiary acquired in a qualified stock purchase, a QSSS election made with respect to that subsidiary is not effective before the day after the acquisition date (within the meaning of section 338(h)(2)). If the QSSS election is effective on the day after the acquisition date, the liquidation under paragraph (a)(2) of this section occurs immediately after the deemed asset purchase by the new target corporation under section 338. If an S corporation makes an election under section 338 (without a section 338(h)(10) election) with respect to a target, the target must file a final or deemed sale return as a C corporation reflecting the deemed sale. See §1.338–1(e).

(c) Carryover of disallowed losses and deductions. If an S corporation (S1) acquires the stock of another S corporation

May 18, 1998 20 1998–20 I.R.B.

QSSS election is in effect. X sells 21 percent of the Y stock to Z, an unrelated corporation, for cash, thereby terminating the QSSS election. Y is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) in exchange for Y stock immediately before the termination from the S corporation. The deemed exchange by X of assets for Y stock does not qualify under section 351 because X is not in control of Y within the meaning of section 368(c) immediately after the transfer as a result of the sale of stock to Z . Therefore, X must recognize gain, if any, on the assets transferred to Y in exchange for its stock. X ’s losses, if any, on the assets transferred are subject to the limitations of section 267.

Example 2. Assume the same facts as in Example 1, except that, instead of purchasing Y stock, Z contributes to Y an operating asset in exchange for 21 percent of the Y stock. Y is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) in exchange for Y stock immediately before the termination. Because X and Z are cotransferors that control the transferee immediately after the transfer, the transaction qualifies under section 351.

Example 3. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a QSSS election is in effect. X distributes all of the Y stock pro rata to its shareholders, and the distribution terminates the QSSS election. The transaction can qualify as a distribution to which sections 368(a)(1)(D) and 355 apply if the transaction otherwise satisfies the requirements of those sections.

Example 4. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a QSSS election is in effect. X subsequently revokes the QSSS election. Y is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the revocation from its S corporation parent in a deemed exchange for Y stock. On a subsequent date, X sells 21 percent of the stock of Y to Z, an unrelated corporation, for cash. Assume that under general principles of tax law including the step transaction doctrine, the sale is not taken into account in determining whether X is in control of Y immediately after the deemed exchange of assets for stock. The deemed exchange by X of assets for Y stock and the deemed assumption by Y of its liabilities qualify under section 351 because, for purposes of that section, X is in control of Y within the meaning of section 368(c) immediately after the transfer.

(c) Inadvertent terminations. Relief from the consequences of an inadvertent termination of a QSSS election may be available under the standards established by the Commissioner for the inadvertent termination of an S election under §1.1362–4.

(d) Election after QSSS termination (1) In general. Absent the Commissioner’s consent, and except as provided in paragraph (d)(2) of this section, a corporation whose QSSS election has terminated under paragraph (a) of this section (or a successor corporation as defined in

Example 4. X, an S corporation, owns 100 percent of Y, a corporation for which a QSSS election is in effect. On May 12, 1998, a date on which the QSSS election is in effect, X issues Y a $10,000 note under state law that matures in ten years with a market rate of interest. Y is not treated as a separate corporation, and X ’s issuance of the note to Y on May 12, 1998, is disregarded for federal tax purposes. Example 5. X, an S corporation, owns 100 percent of the stock of Y, a C corporation. At a time when Y is indebted to X in an amount which exceeds the fair market value of Y ’s assets, X makes a QSSS election effective on the date it is filed with respect to Y . The liquidation described in paragraph (a)(2) of this section does not qualify under sections 332 and 337 and, thus, Y recognizes gain or loss on the assets distributed, subject to the limitations of section 267.

§1.1361-5 Termination of QSSS election.

(a) In general —(1) Effective date. The termination of a QSSS election is effective —

(i) On the effective date contained in the revocation statement if a QSSS election is revoked under §1.1361–3(b);

(ii) At the close of the last day of the parent’s last taxable year as an S corporation if the parent’s S election terminates under §1.1362–2; or

(iii) At the close of the day on which an event (other than an event described in paragraph (a)(1)(ii) of this section) occurs that renders the subsidiary ineligible for QSSS status under section 1361(b)(3)(B).

(2) Information to be provided upon termination of QSSS election by failure to qualify as a QSSS. If a QSSS election terminates because an event renders the subsidiary ineligible for QSSS status, the S corporation must attach to its return for the taxable year in which the termination occurs a notification that a QSSS election has terminated, the date of the termination, and the names, addresses, and employer identification numbers of both the parent corporation and the QSSS.

(3) Examples. The following examples illustrate the application of this paragraph (a):

Example 1. Termination because parent’s S elec- tion terminates. X, an S corporation, owns 100 percent of Y . A QSSS election is in effect with respect to Y for 1998. Effective on January 1, 1999, X revokes its S election. Because X is no longer an S corporation, Y no longer qualifies as a QSSS at the close of December 31, 1998.

Example 2. Termination due to transfer of QSSS stock. X, an S corporation, owns 100 percent of Y . A QSSS election is in effect with respect to Y for 1998. On December 10, 1998, X sells one share of Y stock to A, an individual. Because X no longer owns

100 percent of the stock of Y, Y no longer qualifies as a QSSS. Accordingly, the QSSS election made with respect to Y terminates at the close of December 10, 1998.

Example 3. No termination on stock transfer be- tween QSSS and parent. X, an S corporation, owns 100 percent of the stock of Y and Y owns 100 percent of the stock of Z . QSSS elections are in effect with respect to both Y and Z. Y transfers all of its Z stock to X . Because X is treated as owning the stock of Z both before and after the transfer of stock solely for purposes of determining whether the requirements of section 1361(b)(3)(B)(i) and §1.1361– 2(a)(1) have been satisfied, the transfer of Z stock does not terminate Z ’s QSSS election. Because the stock of Z is disregarded for all other federal tax purposes, no gain is recognized under section 311.

(b) Effect of termination of QSSS elec- tion —(1) Formation of new corporation. If a QSSS election terminates under paragraph (a) of this section, the former QSSS is treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the termination from the S corporation parent in exchange for stock of the new corporation. The tax treatment of this transaction or of a larger transaction that includes this transaction will be determined under the Internal Revenue Code and general principles of tax law, including the step transaction doctrine.

(2) Carryover of disallowed losses and deductions. If a QSSS terminates because the S corporation distributes the QSSS stock to some or all of the S corporation’s shareholders in a transaction to which section 368(a)(1)(D) applies by reason of section 355 (or so much of section 356 as relates to section 355), any loss or deduction disallowed under section 1366(d) with respect to a shareholder of the S corporation immediately before the distribution is allocated between the S corporation and the former QSSS with respect to the shareholder. The amount of the disallowed loss or deduction allocated to the S corporation is an amount that bears the same ratio to each item of disallowed loss or deduction as the value of the shareholder’s stock in the S corporation bears to the total value of the shareholder’s stock in both the S corporation and the former QSSS, in each case as determined immediately after the distribution.

(3) Examples. The following examples illustrate the application of this paragraph (b):

Example 1. X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a

1998–20 I.R.B. 21 May 18, 1998

§1.1362–5(b)) may not make an S election under section 1362 or have a QSSS election under section 1361(b)(3)(B)(ii) made with respect to it for five taxable years (as described in section 1361(b)(3)(D)). The Commissioner may permit an S election by the corporation or a new QSSS election with respect to the corporation before the 5-year period expires. The corporation requesting consent to make the election has the burden of establishing that, under the relevant facts and circumstances, the Commissioner should consent to a new election.

(2) Exception. If a corporation’s QSSS election terminates by reason of a disposition of the corporation’s stock, the corporation may, without requesting the Commissioner’s consent, make an S election or have a QSSS election made with respect to it before the expiration of the five-year period described in section 1361(b)(3)(D) and paragraph (d)(1) of this section, provided that —

(i) Immediately following the disposition of its stock, the corporation (or its successor corporation) is otherwise eligible to make an S election or have a QSSS election made for it; and

(ii) The relevant election is made effective immediately following the disposition of the stock of the corporation.

(3) Examples. The following examples illustrate the application of this paragraph (d):

Example 1. Termination upon distribution of QSSS stock to shareholders of parent. X, an S corporation, owns Y, a QSSS. X distributes all of its Y stock to X ’s shareholders. The distribution terminates the QSSS election because Y no longer satisfies the requirements of a QSSS. Assuming Y is otherwise eligible to be treated as an S corporation, Y ’s shareholders may elect to treat Y as an S corporation effective on the date of the stock distribution without requesting the Commissioner’s consent.

Example 2. Sale of 100 percent of QSSS stock. X, an S corporation, owns Y, a QSSS. X sells 100 percent of the stock of Y to Z, an unrelated S corporation. Z may elect to treat Y as a QSSS effective on the date of purchase without requesting the Commissioner’s consent.

§1.1361–6 Effective date.

Except as provided in §1.1361–4(a)(5)(i), the provisions of §§1.1361–2 through 1.1361–5 apply to taxable years beginning on or after the date that final regulations are published in the Federal Register.

Par. 5. Amend §1.1362–0 as follows:

1. Add an entry for §1.1362–2(b)(4).
2. Add entries for §1.1362–8. The additions read as follows:

§1.1362–0 Table of contents.

- - - -

§1.13622 Termination of election.

- - - -

(b) * * * (4) Termination when stock transferred to another S corporation.

- - - -

§1.1362–8 Dividends received from affiliated subsidiaries.

(a) In general. (b) Determination of active or passive

earnings and profits. (1) In general. (2) Lower tier subsidiaries. (3) De minimis exception. (4) Special rules for earnings and profits

accumulated by a C corporation prior to 80 percent acquisition. (5) Gross receipts safe harbor. (c) Allocating distributions to active or

passive earnings and profits. (1) Distributions from current earnings

and profits. (2) Distributions from accumulated earn ings and profits. (3) Adjustments to active earnings and

profits. (4) Special rules for consolidated groups. (d) Examples. (e) Effective date.

Par. 6. Amend §1.1362–2 as follows:

1. Amend paragraph (b)(1) by adding a sentence to the end of the paragraph.

2. Add paragraph (b)(4).

3. Amend paragraph (c)(5)(ii)(C) by adding a sentence to the end of the paragraph.

The additions read as follows:

§1.1362–2 Termination of election.

- - - -

(b) * * * (1) * * * See paragraph (b)(4) of this section for a special rule applying to the termination of an S election caused by the transfer of the corporation’s stock to another S corporation.

- - - -

(4) Termination when stock transferred to another S corporation. If all of the stock of an S corporation (S1) is transferred to another S corporation (S2) and a QSSS election for S1 is made effective as of the day of the transfer, S1’s S election terminates at the same time as the deemed liquidation under §1.1361–4(a)(2). Accordingly, S1 is not treated as a C corporation for any period solely because of the transfer of S1 stock to S2, an ineligible S corporation shareholder. See, however, §1.338–1(e)(3) if an election under section 338 (without an election under section 338(h)(10)) is made. This paragraph (b)(4) is effective on the date final regulations are published in the Federal Register.

(c) * * * (5) * * * (ii) * * * (C) * * * See §1.1362–8 for special rules regarding the treatment of dividends received by an S corporation from a C corporation in which the S corporation holds stock meeting the requirements of section 1504(a)(2).

- - - -

Par. 7. Add §1.1362–8 to read as follows:

§1.1362–8 Dividends received from affiliated subsidiaries.

(a) In general. For purposes of section 1362(d)(3), if an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term “passive investment income” does not include dividends from the C corporation to the extent those dividends are attributable to the earnings and profits of the C corporation derived from the active conduct of a trade or business (“active earnings and profits”). For purposes of applying section 1362(d)(3), earnings and profits of a C corporation are active earnings and profits to the extent that the earnings and profits are derived from activities that would not produce passive investment income (as defined in section 1362(d)(3)) if the C corporation were an S corporation.

(b) Determination of active or passive earnings and profits —(1) In general. An S corporation may use any reasonable method to determine the amount of dividends that are not treated as passive in

May 18, 1998 22 1998–20 I.R.B.

vestment income under section 1362(d)(3)(E). Paragraph (b)(5) of this section describes a method of determining the amount of dividends that are not treated as passive investment income under section 1362(d)(3)(E) that is deemed to be reasonable under all circumstances.

(2) Lower tier subsidiaries. If a C corporation subsidiary (upper tier corporation) holds stock in another C corporation (lower tier subsidiary) meeting the requirements of section 1504(a)(2), the upper tier corporation’s gross receipts attributable to a dividend from the lower tier subsidiary are considered to be derived from the active conduct of a trade or business to the extent the lower tier subsidiary’s earnings and profits are attributable to the active conduct of a trade or business by the subsidiary under paragraph (b)(1), (b)(3), (b)(4), or (b)(5) of this section. For purposes of this section, distributions by the lower tier subsidiary will be considered attributable to active earnings and profits according to the rule in paragraph (c) of this section. This paragraph (b)(2) does not apply to any member of a consolidated group (as defined in §1.1502–1(h)).

(3) De minimis exception. If less than 10 percent of a C corporation’s earnings and profits for a taxable year are derived from activities that would produce passive investment income if the C corporation were an S corporation, all earnings and profits produced by the corporation during that taxable year are considered active earnings and profits.

(4) Special rules for earnings and profits accumulated by a C corporation prior to 80 percent acquisition. A C corporation may treat all earnings and profits accumulated by the corporation in all taxable years ending before the S corporation held stock meeting the requirements of section 1504(a)(2) as active earnings and profits in the same proportion as the C corporation’s active earnings and profits for the three taxable years ending prior to the time when the S corporation acquired 80 percent of the C corporation bears to the C corporation’s total earnings and profits for those three taxable years.

(5) Gross receipts safe harbor. A corporation may treat its earnings and profits for a year as active earnings and profits in the same proportion as the corporation’s gross receipts (as defined in §1.1362–

2(c)(4)) derived from activities that would not produce passive investment income (if the C corporation were an S corporation), including those that do not produce passive investment income under paragraphs (b)(2) through (b)(4) of this section, bear to the corporation’s total gross receipts for the year in which the earnings and profits are produced.

(c) Allocating distributions to active or passive earnings and profits —(1) Distri- butions from current earnings and profits. Dividends distributed by a C corporation from current earnings and profits are attributable to active earnings and profits in the same proportion as current active earnings and profits bear to total current earnings and profits of the C corporation.

(2) Distributions from accumulated earnings and profits. Dividends distributed by a C corporation out of accumulated earnings and profits for a taxable year are attributable to active earnings and profits in the same proportion as accumulated active earnings and profits for that taxable year bear to total accumulated earnings and profits for that taxable year immediately prior to the distribution.

(3) Adjustments to active earnings and profits. For purposes of applying paragraph (c)(1) or (c)(2) of this section to a distribution, the active earnings and profits of a corporation shall be reduced by the amount of any prior distribution properly treated as attributable to active earnings and profits from the same taxable year.

(4) Special rules for consolidated groups. For purposes of applying section 1362(d)(3) and this section to dividends received by an S corporation from the common parent of a consolidated group (as defined in §1.1502–1(h)), the following rules apply—

(i) The current earnings and profits, accumulated earnings and profits, and active earnings and profits of the common parent shall be determined under the principles of §1.1502–33 (relating to earnings and profits of any member of a consolidated group owning stock of another member); and

(ii) The gross receipts of the common parent shall be the sum of the gross receipts of each member of the consolidated group (including the common parent), adjusted to eliminate gross receipts from intercompany transactions (as defined in §1.1502-13(b)(1)(i)).

(d) Examples. The following examples illustrate the principles of this section:

Example 1 . (i) X, an S corporation, owns 85 percent of the one class of stock of Y . On December 31, 1998, Y declares a dividend of $100 ($85 to X ), which is equal to Y ’s current earnings and profits. In 1998, Y has total gross receipts of $1,000, $200 of which would be passive investment income if Y were an S corporation.

(ii) One-fifth ($200/$1,000) of Y ’s gross receipts for 1998 is attributable to activities that would produce passive investment income. Accordingly, onefifth of the $100 of earnings and profits is passive, and $17 (1/5 of $85) of the dividend from Y to X is passive investment income.

Example 2. (i) The facts are the same as in Ex- ample 1, except that Y owns 90 percent of the stock of Z . Y and Z do not join in the filing of a consolidated return. In 1998, Z has gross receipts of $15,000, $12,000 of which are derived from activities that would produce passive investment income. On December 31, 1998, Z declares a dividend of $1,000 ($900 to Y) from current earnings and profits.

(ii) Four-fifths ($12,000/15,000) of the dividend from Z to Y are attributable to passive earnings and profits. Accordingly, $720 (4/5 of $900) of the dividend from Z to Y is considered gross receipts from an activity that would produce passive investment income. The $900 dividend to Y gives Y a total of $1,900 ($1,000 + $900) in gross receipts, $920 ($200 + $720) of which is attributable to passive investment income-producing activities. Under these facts, $41 ($920/1,900 of $85) of Y ’s distribution to X is passive investment income to X .

(e) Effective date. This section applies to dividends received in taxable years beginning on or after the date that final regulations are published in the Federal Register.

§1.1368–0 [Amended]

Par. 8. Amend §1.1368–0 in the entry for §1.1368–2(d)(2) by revising “Reorganizations” to read “Liquidations and reorganizations”.

§1.1368–2 [Amended]

Par. 9. Amend §1.1368–2 in paragraph (d)(2) by revising “Reorganizations” to read “Liquidations and reorganizations” in the heading and by revising “section 381(a)(2)” to read “section 381(a)” in the first sentence.

Par. 10. Amend §1.1374–8 by adding two sentences to the end of paragraph (b) to read as follows:

§1.1374–8 Section 1374(d)(8) transactions.

- - - -

1998–20 I.R.B. 23 May 18, 1998

§1.985–7 (c)(5), line 17, the language “of change.) For purposes of section 960,” is corrected to read “of change). For purposes of section 960,”.

5. On page 10776, column 2, §1.985–7 (c)(5), the last line, the language “section.)” is corrected to read “section).”.

6. On page 10776, column 3, §1.985–7 (d)(5), the last two lines, the language “assets and liabilities under §1.985–3 during the look- back period.” is corrected to read “assets and liabilities acquired and incurred during the lookback period under §1.985–3.”.

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

Allocation and Sourcing of Income and Deductions Among Taxpayers Engaged in a Global Dealing Operation; Correction

Announcement 98–40

SUMMARY: This announcement contains corrections, including a change to the date of the public hearing, to the notice of proposed rulemaking (REG– 208299–90 [1998–16 I.R.B. 26] 63 F.R. 11177). The notice of proposed rulemaking relates to the allocation among controlled taxpayers and sourcing of income, deductions, gains and losses from a global dealing operation; rules applying these allocation and sourcing rules to foreign currency transactions and to foreign corporations engaged in a U.S. trade or business; and rules concerning the mark-to-market treatment resulting from hedging activities of a global dealing operation.

DATES: The public hearing originally scheduled for July 9, 1998 has been rescheduled for July 14, 1998.

ADDRESS: The public hearing will be held in room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Ginny Chung, (202) 622-3870 (not a toll-free number).

(b) Separate determination of tax. - *

• If a C corporation elects to be treated as an S corporation, and also makes a QSSS election under section 1361(b)(3) (effective on the same date as the S election) with respect to a subsidiary, the assets held by the QSSS at the time of the QSSS election will be treated as assets held by the parent when it became an S corporation. The preceding sentence applies to QSSS elections made after the date final regulations are published in the Federal Register.

  ---

  Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on April 21, 1998, 8:45 a.m., and published in the issue of the Federal Register for April 22, 1998, 63 F.R. 19864)

Change From Dollar Approximate Separate Transaction Method of Accounting (DASTM) to the Profit and Loss Method of Accounting/Change From the Profit and Loss Method to DASTM; Correction to T.D. 8765

Announcement 98–39

SUMMARY: This announcement contains corrections to final regulations (T.D. 8765 [1998–16 I.R.B. 11] 63 F.R. 10772), relating to adjustments required when a qualified business unit (QBU) that used the profit and loss method of accounting (P&L) in a post-1986 year begins to use the dollar approximate separate transaction method of accounting (DASTM) and adjustments required when a QBU that used DASTM begins using P&L.

DATES: This correction is effective April 6, 1998.

FOR FURTHER INFORMATION CONTACT: Howard Wiener of the Office of Chief Counsel (International), (202) 622-3870 (not a toll-free number).

SUPPLEMENTARY INFORMATION: Background

The final regulations that are the subject of these corrections are under section 985 of the Internal Revenue Code.

Need for Correction

As published, the final regulations (T.D. 8765) contain errors which may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the final regulations (TD 8765), which was the subject of FR Doc. 98-5470, is corrected as follows:

§1.985–1 [Corrected]

1. On page 10774, column 2, §1.985–1 (b)(2)(ii)(C) is corrected as follows:

2. The paragraph heading for paragraph (b)(2)(ii)(C)(1) is added.

3. A new paragraph (b)(2)(ii)(C)(2) is added.

The corrections read as follows:

§1.985–1 Functional currency.

---

(b) * * * (2) * * * (ii) * * * (C) * * * ( 1 ) In general. - * * (2) Effective date. This paragraph (b)(2)(ii)(C) applies to taxable years beginning after April 6, 1998. However, a taxpayer may choose to apply this paragraph to all open years after December 31, 1986, provided each person, and each QBU branch of a person, that is related (within the meaning of §1.985–2(d)(3)) also applies to this paragraph (b)(2)(ii)(C).

§1.985–7 [Corrected]

2. On page 10775, column 2, §1.985–7 (b)(3), in the last three lines, the language “had translated its assets and liabilities under §1.985–3 during the look-back period.” is corrected to read “had translated its assets and liabilities acquired and incurred during the lookback period under §1.985–3.”.

3. On page 10776, column 2,

May 18, 1998 24 1998–20 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking that is subject to these corrections is under sections 482 and 864 of the Internal Revenue Code.

Need for Correction

As published, the notice of proposed rulemaking (REG–208299–90) contain errors that may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of proposed rulemaking (REG– 208299–90) which is the subject of F.R. Doc. 98–5674 is corrected as follows:

1. On page 11182, column 2, in the preamble under the heading “K. Source of Global Dealing Income”, in the second paragraph, line 5, the language “§1.863–3 which sources income from a” is corrected to read “§1.863–3(h) which sources income from a”.

2. On page 11185, column 2, in the preamble under the heading “Comments and Public Hearing”, in the second paragraph, line 2, the language “for July 9, 1998, at 10 a.m. in room 2615,” is corrected to read “for July 14, 1998, at 10 a.m. in room 2615,”.

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

Foundations Status of Certain Organizations

Announcement 98–41

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: Paddock Bath and Tennis Club Inc.,

Stanhope, NJ

Paulding, OH Payson Choral Society, Payson, AZ Peace and Joy Ministries Inc., Haysville,

KS Peaceful Dove Enterprises Incorporated,

Patrick M. Gagliardi Foundation, Sault

Ste Marie, MI Paul Gage Ministries, Bedford, TX Paul S. Morton Scholarship Foundation

Inc., New Orleans, LA Paulding County Genealogical Society,

Florissant, MO Painted Desert Demonstration Projects

Inc., Flagstaff, AZ Palo Pinto Humane Society Inc., Mineral

Wells, TX Panhandle Crimestoppers Inc., Guymon,

Palm Bay, FL Peaceful Valley Ranch, Westminster,

OK Panther Baseball Club Inc., Arlington,

Ann Arbor, MI Pee Dee Electric Trust, Darlington, SC Pegasus Incorporated of South Carolina,

TX Panther Soccer Booster Club Inc., Miami,

FL Paola Free Library Foundation, Paola, KS Paramedic Relief Network, Maryland

CO Pediatric Assistance International Inc.,

Blacksburg, SC Pennsylvania Elk Foundation, Reading,

PA Pennsylvania Quality Leadership

Hts, MO Pard Athletic Club Inc., Marrero, LA Parent Relative Organization for

Oakwood Facilities Fund Inc., Covington, KY Parent Support Network, Lansing, MI Parenting Place, Southfield, MI Parents Against Community Crime

Foundation Inc., Harrisburg, PA Pennsylvania Religious Coalition for

Abortion Rights, Philadelphia, PA Penumbra U S A Inc., Shaker Hts, OH People Against Cigarette Smoke PACS

Organization Pacco Inc., Houston, TX Parents and Kids Together Inc., Potomac,

Inc., Destreham, LA People First of Illinois, Wayne, IL People Help People Face to Face Inc.,

Evanston, IL People Helping People-Disaster Relief

MD Parents Empowered To Save Teens Inc.,

Mt. Pleasant, SC Parents Re-Establishing Independent

Education, Beaumont, TX Peoples Community Hope for Homes

Development and Encouragement Pride, Phoenix, AZ Parents Reaching Out, St. Charles, MO Parents Who Care Inc., Tipp City, OH Park Hill Literacy Inc., Denver, CO Park Place Group Inc., Pinellas Park, FL Parke-Vermillion Community Education

Inc., Teaneck, NJ People Organized for Excellence in

Inc., Westland, MI Performing Artists Network Inc.,

Linwood, NJ Performing Arts League Inc., Cleveland,

& Employment Corporation, Clinton, IN Parkway Pride Inc., Keslers Cross Lanes,

OH Petoskey Youth Soccer Association,

WV Partners in Education Inc., Poneto, IN Partners in Education Inc., Roanoke, AL Partners With Youth Foundation,

Springfield, MO Partnership Against Racism, Chicago, IL Partnership for Families Inc., Greenville,

SC Pat Rush Ministries Inc., Titusville, FL Pathfinders of Indiana Inc., Goshen, IN Pathway Ministries Inc., Louisville, KY Pathway of Light, Columbus, OH Patidar Cultural Association of USA Inc.,

Petoskey, MI Petra Ministries Inc., Glendale, AZ Pets for the Elderly Foundation,

Heights, IL Philadelphia Korean War Veterans

Memorial Inc., Philadelphia, PA Philadelphia Student Athletes Inc.,

Parkesburg, PA

Cleveland, OH PFLAG Suburban Chicago—Parents

Families and Friends of Lesbians and Gays Inc., Downers Grove, IL Phase I Colorguard, St. Louis, MO Phenix City Education Foundation Inc.,

Phenix City, AL PHFD Womens Association, Prospect

1998–20 I.R.B. 25 May 18, 1998

Philip Simmons Foundation Inc.,

Possibilities Productions Unlimited,

Progressive Foundation for Social

Charleston, SC Philippine Development Forum,

Washington, DC Phineas Newborn Jr. Fam Foundation,

Denver, CO Postal Employees-John Miller

Responsibility, Eden Prairie, MN Project D A R E Drug Abuse Resistance

Education for Maury Co., Columbia, TN Project Help Inc., Sweetwater, TN Project Independence Incorporated of

Sedgwick County, Wichita, KS Project Intercept, Denver, CO Project Jericho, New Orleans, LA Project Kids Inc., Allen, TX Project Match Incorporated, Smyrna, GA Project Me Inc., Tucson, AZ Project New Smile, Baltimore, MD Project Playground—Central Park,

Memphis, TN PHS Community Development

Corporation, Detroit, MI Pictorial Research LTD Inc., West Des

Scholarship Fund, Roseville, MN Pottawatomie Indian Museum Polyak

Foundation Inc., Beverly Shores, IN Power Connection Ministries Inc.,

Kingwood, TX Power of Praise Ministries Inc.,

Cleveland, SC Power Partenting Association Inc.,

Moines, IA PIN—People in Need, Gowen, MI Pinellas Pioneer Settlement Inc., St.

Petersburg, FL Pioneer Artists Inc., Dodge City, KS Pioneer Historical Museum &

Ellicott City, MD Practical Christian Services Inc.,

Interpretive Center, Ft. Laramie, WY Pipestone Performing Arts Center Inc.,

Concord, NC Prairie Dance Theatre, Clinton, IL Praying Tobacco Charitable

Organization, Wakpala, SD Preble County Dare Inc., New Paris, OH Precinct 2 Mounted Patrol of Harris

Beaumont, TX Project Reach Out Incorporated Pro Inc.,

Indianapolis, IN Project-Rescue Band, Sheffield Lake, OH Project Safe House Inc., Atlanta, GA Project Second Chance Inc., Cleveland,

Pipestone, MN Pitre Vision Home, Dallas, TX Pitt County Helping Hands Inc.,

County, Houston, TX Pregnancy Care Center of Fairfield

Greenville, NC Pitt-Greenville Opportunities

OH Project Self-Help, Beaumont, TX Project Victory Inc., Pompano Beach,

Industrialization Center Inc., Greenville, NC Pittsburgh Ensemble Theatre Company,

County Inc., Lancaster, OH Premiere Musical Theater Warehouse,

Denver, CO Prep Alumni II, Waukegan, IL Prespress Publishing of Michigan,

Pittsburgh, PA Pittsburgh Young Professionals Inc.,

FL Promise Land Community Shelter,

Detroit, MI Promises People Reaching Out

Ministering in Spiritual Emotional Support Inc., Longmont, CO Promoting African American Success in

Schools, Fort Worth, TX Promoting Animal Welfare Society Inc.,

Pittsburgh, PA Plaisance Mortagage Corporation,

Opelousas, LA Plano Housing Corporation, Plano, TX Plants for Clean Air Council Inc.,

Mitchellville, MD Plateau Youth Center, Olathe, CO Pleasant Hill Child Enrichment Center,

Kalamazoo, MI Presby Tips Foundation, Cairo, IL Presbyterian Coalition for Loving Justice,

Washington, DC Preserve the Schuyler Colfax House,

Wayne, NJ Press Club of Houston, Houston, TX Press Club of Houston Educational

Foundation Inc., Houston, TX Preventive Aging Center Inc., South

Muskogee, OK Prophetic Insights Inc., Fletcher, NC Prospect Plains Housing Corporation,

Pleasant Hill, TN Pleasant Prairie Professional Police

Association, Pleasant, WI Poinciana Youth Baseball, Poinciana, FL Poindexter Ministries Inc., Washington,

Amboy, NJ Pride of Tennessee Education

Foundation, Nashville, TN Primary Resource Developers Group

Inc., Norcross, GA Prince Frederick Foundation, Raleigh,

Monmouth Junction, NJ Providers of Encouragement and

DC Point Pleasant Community Association

Assistance To Restructure Your Life, Houston, TX Providing for the Needy Inc., Louisville,

KY Psychiatrists for Better Psychiatry Inc.,

Inc., Point Pleasant, PA Police Athletic League of Port Orange

Inc., Port Orange, FL Police Benevolent Fund Inc., Atlanta, GA Porter County Champs Inc., Valparaiso,

NC Prince Hall Foundation Inc., North

Brunswick, NJ Prisoners Against Crime, Lakewood,

CO Proclaim Ministries Inc., Rockford, IL Professional Training Institute Inc., Silver

Louisville, KY Public Service Telecommunications

Corporation International, Arlington, VA Puebloans Against Violent Environment,

Pueblo, CO Puerto Rico Society of Cleveland,

IN Portsmouth Inner City Development

Corporation Housing Association II, Portsmouth, OH Positive Approach Inc., Victoria, TX Positive Changes Incorporated,

Spring, MD Professionals for Houstons Homeless,

Spring, TX Professions of Edgewood, San Antonio,

Lewisburg, PA Positive Direction for Youth Inc.,

Greensboro, NC Positive People Inc., Chicago, IL Positive Support Institute, Trenton, MI

TX Program of Emmanuels Hands,

Allentown, PA Progress for Youth Inc., Mountain Home,

AR

Lakewood, OH Pulliam Ministries Inc., Tulsa, OK Purr-Fect Haven Inc., San Antonio, TX Pushkin Goncharov Historical

Foundation, Greenwood Village, CO Quad Cities Womens Encouragement

Board Inc., Bettendorf, IA Quality Nutrition for Kids, Houston, TX

May 18, 1998 26 1998–20 I.R.B.

Queen Annes County Watermans

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.

Festivals, Inc., Queenstown, MD Quilt Guild of Greater Victoria Inc.,

Victoria, TX 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

1998–20 I.R.B. 27 May 18, 1998