Part I. Rulings — Internal Revenue Bulletin 1998-39

nity to monitor the overall well-being, nutrition, and health of the residents.

Only the basic services are made available to residents of Building X. No other services are included in the monthly payment. Continual or frequent nursing, medical, or psychiatric services are not made available in Building X.

The basic services and the Building Y support services are made available to residents of Building Y. The Building Y support services are as follows: assistance by medication management technicians in medication management and intake; maintenance of detailed medication records; consultation with a nurse as needed about health concerns and medication plans; assistance by non-medically certified aides each day during waking hours in activities of daily living that include getting in and out of bed and chairs, walking, using the toilet, dressing, eating, and bathing; and routine checks by staff members of Building Y to insure the residents’ general well-being. Some residents of Building Y have incapacitating infirmities that require continual assistance, but do not require continual or frequent nursing, medical, or psychiatric services. Continual or frequent nursing, medical, or psychiatric services are not made available in Building Y.

The basic services and the Building Y support services are made available to residents of Building Z. In addition, Building Z is staffed in the following manner: registered nurses are on duty for 12 hours each day; licensed practical nurses are on duty for 24 hours each day; and licensed nurses’ aides are available 24 hours each day. The nurses and nurses’ aides are available to provide nursing care for residents’ medical or psychiatric needs. Thus, continual or frequent nursing, medical, or psychiatric services are made available in Building Z.

Residents in Building X are required to move into Buildings Y or Z or another facility outside of Complex M if, because of physical or mental disability, they require additional care beyond that offered by Building X. Residents in Buildings X and Y are required to move into Building Z or another facility outside of Complex M if they require continual or frequent nursing, medical, or psychiatric services.

Section 103.—Interest on State and Local Bonds

26 CFR 1.103–8(b): Residential rental property.

For purposes of sections 142(d) and 145(d) of the Code, the ruling provides that the availability of continual or frequent medical, nursing, or psychiatric services in a facility for the residents of the facility will cause the facility to be other than residential rental property. Other non-housing services available in a facility for the residents of the facility generally will not cause the facility to be other than residential rental property. See Rev. Rul. 98–47, page 4.

Section 142.—Exempt Facility Bond

26 CFR 1.103–8(b): Residential rental property.

26 CFR 1.103–8: Interest on bonds to finance certain exempt facilities. (Also sections 145 and 103)

Residential rental property. For purposes of section 142(d) and 145(d) of the Code, the ruling provides that the availability of continual or frequent medical, nursing, or psychiatric services in a facility for the residents of the facility will cause the facility to be other than residential rental property. Other non-housing services available in a facility for the residents of the facility generally will not cause the facility to be other than residential rental property.

Rev. Rul. 98–47

ISSUE

Are the buildings described below residential rental property for purposes of § 142(d) and § 145(d) of the Internal Revenue Code?

FACTS

Complex M provides housing units on a non-transient basis for individuals who are

of retirement age or older. All of the units in Complex M are available to members of the general public. Complex M is comprised of Building X, Building Y, and Building Z, each of which is composed of similarly constructed housing units that have separate and complete facilities for living, sleeping, eating, cooking, bathing, and sanitation. The cooking and eating area contains a small refrigerator, a sink, a pull-down table, and a two-burner stove with an oven. Each unit is designed so that the stove can be replaced with a full-sized microwave oven if the physical or mental frailties of the resident make it imprudent to provide a functioning cooking stove.

Each resident enters into a lease arrangement with Complex M. The amount of the monthly payment under the lease varies according to the level of care provided in the building in which the resident resides, with Building Z commanding the largest payment and Building X the smallest payment. The monthly payment is made in exchange for use of an individual unit, basic services and, with respect to Buildings Y and Z, other services. Under a lifetime lease payment option, residents of Complex M may pay a fixed monthly amount for the time they reside in Complex M. The lifetime lease option guarantees a resident the right to move to a unit in Buildings Y or Z if the resident requires additional care.

The basic services available to the residents in all three buildings include: laundry; housekeeping; regular daily meals in the common dining areas; 24 hour monitored emergency call service using call buttons and two-way communication devices located in each room of a unit; planned social activities; and scheduled transportation to various sites in the vicinity including commercial areas, shopping centers, hospitals, and doctor’s offices.

Building X, Building Y, and Building Z each contains a separate common dining area. The dining area in each building will be used exclusively by residents of Complex M and visitors of those residents. The size of the dining area in any building does not exceed that necessary to serve the residents of the building and their guests. The dining area serves the special needs of the residents and provides the staff of Complex M an opportu

September 28, 1998 4 1998–39 I.R.B.

LAW AND ANALYSIS

in the regulations under § 42 regarding the nature of the facility based on the frequency of nursing, medical, or psychiatric services available in the facility is also the appropriate standard for determining whether facilities are residential rental property for purposes of § 142(d) and § 145(d).

For purposes of § 142(d) and § 145(d), if a facility makes available continual or frequent nursing, medical, or psychiatric services, the facility will not be residential rental property under § 142(d) or § 145(d). In the case of a mixed use facility, the allocable portion of the facility in which continual or frequent nursing, medical, or psychiatric services are made available will not be residential rental property under § 142(d) or § 145(d).

As set forth in the facts above, Building X, Building Y, and Building Z each contains complete living units within the meaning of § 1.103–8(b)(8), all of the living units within the respective buildings are available to the general public, and all of the living units are used on a non-transient basis. Since Complex M also provides significant non-housing services to residents of the three buildings (including continual or frequent nursing, medical, or psychiatric services to the residents of Building Z), the analysis must consider the nature and extent of the non-housing services. In the case of Complex M, the analysis must examine whether the buildings of Complex M are hospitals, nursing homes, sanitariums, or rest homes rather than residential rental property. For purposes of § 142(d) and § 145(d), labels are not determinative. The focus of these sections, their legislative histories, and the applicable regulations thereunder, is whether the facilities are, in substance, residences or health care facilities. Therefore, the nature and degree of the services provided by the facility controls.

Significant non-housing services are made available to residents of Building X and Building Y, including meals and various support services. The services available to residents of Building X and Building Y do not include continual or frequent nursing, medical, or psychiatric services although, under the lifetime lease option, certain residents are assured that they will receive continual or frequent nursing, medical, or psychiatric services in Building Z if required. Thus, under the princi

Under the general rule of § 103(a), gross income does not include interest on any state or local bond. Section 103(b)(1), however, provides that the exclusion does not apply to any private activity bond unless it is one of the qualified bonds under § 141(e). Among these qualified bonds are exempt facility bonds and qualified § 501(c)(3) bonds.

Section 142(a) describes an exempt facility bond as any bond issued as part of an issue of bonds if 95 percent or more of the net proceeds of the issue are to be used to provide listed types of projects or facilities. Within the list, in § 142(a)(7), are qualified residential rental projects.

Section 142(d) defines a qualified residential rental project as a project for residential rental property that houses occupants who meet one of the alternative income tests at all times throughout a qualified project period. In the Tax Reform Act of 1986, 1986–3 (Vol. 1) C.B. 519–575 (the “1986 Act”), Congress reorganized § 103 and § 103A of the Internal Revenue Code of 1954 (the “1954 Code”) regarding tax-exempt bonds into § 103 and §§ 141 through 150 of the Internal Revenue Code of 1986. Congress intended that to the extent not amended by the 1986 Act, all principles of pre-1986 Act law would continue to apply to the reorganized provisions. 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II–686 (1986), 1986–3 (Vol. 4) C.B. 686. (Conference Report). Because no Income Tax Regulations have been promulgated under § 142(d), the regulations promulgated pursuant to § 103(b)(4) of the 1954 Code continue to apply to residential rental property except as otherwise modified by the 1986 Act and subsequent law.

Section 145(a) describes a qualified § 501(c)(3) bond as any bond issued as part of an issue of bonds if all of the property to be provided by the net proceeds of the issue is to be owned by a § 501(c)(3) organization or a governmental unit and 95 percent or more of the net proceeds of the issue are used in a manner related to the exempt purpose of the § 501(c)(3) organization. Under § 145(d)(1), however, a bond generally is not a qualified § 501(c)(3) bond if net proceeds of the issue are used directly or indirectly to provide residential rental property for family

units. Section 145(d)(2) provides certain exceptions to § 145(d)(1). The legislative history of § 145(d) indicates that the phrase residential rental property for family units in § 145(d) has the same meaning as residential rental property under § 1.103–8(b) of the Income Tax Regulations.

Under § 1.103–8(b)(4), a residential rental project is residential rental property that meets certain requirements including occupancy requirements by low-income tenants during the period when the units must be continually rented or available for rental. Residential rental property is a building or structure, together with any functionally related and subordinate facilities, containing one or more similarly constructed units that are available to members of the general public and used on other than a transient basis. The regulations also provide that hotels, motels, dormitories, fraternity and sorority houses, rooming houses, hospitals, nursing homes, sanitariums, rest homes, and trailer parks and courts for use on a transient basis are not residential rental projects.

Section 1.103–8(b)(8) defines a “unit” as any accommodation containing separate and complete facilities for living, sleeping, eating, cooking, and sanitation. The regulations note that an example of a unit would be a separate and distinct apartment containing a living area, a sleeping area, bathing and sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator, and sink.

Additional insight into the meaning of residential rental property can be found under § 42, which provides the low-income housing credit. 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II–89 (1986), 1983–3 (Vol. 4) C.B. 89, states that the phrase “residential rental property” generally has the same meaning under both § 42 and § 142(d).

Section 1.42–11(b) provides a distinction between residential rental properties and health care facilities by focusing on whether frequent nursing, medical, or psychiatric services are provided to residents. Under that section, if continual or frequent nursing, medical, or psychiatric services are provided to residents, it is presumed that the building is ineligible for the credit as is the case with a hospital or nursing home. The distinction drawn

1998–39 I.R.B. 5 September 28, 1998

ples set forth above, Buildings X and Y would be residential rental property.

Continual or frequent nursing, medical, or psychiatric services are made available to residents of Building Z in addition to the same non-housing services that are made available to residents of Building X and Building Y. Thus, under the principles set forth above, Building Z would not be a residential rental property.

HOLDING

Building X and Building Y are residential rental property for purposes of § 142(d) and § 145(d). Because continual or frequent nursing, medical, or psychiatric services are made available in Building Z, Building Z is not residential rental property for purposes of § 142(d) and § 145(d).

Neither Building X nor Building Y would fail to be residential rental property under § 142(d) or § 145(d) merely because it was called a hospital, a sanitarium, a rest home, or a nursing home. Similarly, Building Z would not be residential rental property under § 142(d) or § 145(d) merely because it was called an assisted living facility or an elderly care facility.

DRAFTING INFORMATION

The principal authors of this revenue

ruling are Harold N. Diamond and Timothy L. Jones of the Office of Associate Chief Counsel (Domestic) and Edwin G. Oswald of the Department of the Treasury. For further information regarding this revenue ruling contact Harold N. Diamond at 202-622-3980 (not a toll-free call).

Section 145.—Qualified 501(c)(3) Bond

26 CFR 1.103–8(b): Residential rental property.

For purpose of sections 142(d) and 145(d) of the Code, the ruling provides that the availability of continual or frequent medical, nursing, or psychiatric services in a facility for the residents of the facility will cause the facility to be other than residential rental property. Other non-housing services available in a facility for the residents of the facility generally will not cause the facility to be other than residential rental property. See Rev. Rul. 98–47, page 4.

Section 472.—Last-in, First-out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department stores. The July 1998 Bureau of Labor Statistics price indexes are accepted for

use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, July 31, 1998.

Rev. Rul. 98–48

The following Department Store Inventory Price Indexes for July 1998 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, July 31, 1998.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups - soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Percent Change Groups July July from July 1997 1997 1998 to July 1998 ¹

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539.8 547.7 1.5
Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656.1 626.7 –4.5
Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . 641.6 642.3 0.1
Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 902.6 906.5 0.4
Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637.9 606.8 –4.9
Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543.5 573.1 5.4
Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297.8 307.6 3.3
Women’s and Girls’Accessories . . . . . . . . . . . . . . . . . . . . . . . 544.5 539.3 –1.0
Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . 395.0 389.3 –1.4
Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621.6 613.4 –1.3
Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585.9 589.3 0.6
Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . 495.9 489.4 –1.3
Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1003.9 981.5 –2.2
Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797.5 767.3 –3.8
Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905.7 947.6 4.6
Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662.8 683.7 3.2

September 28, 1998 6 1998–39 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS (Continued)

(January 1941 = 100, unless otherwise noted)

Percent Change Groups July July from July 1997 1997 1998 to July 1998 ¹

Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598.2 602.1 0.7
Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807.2 825.5 2.3
Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243.1 238.3 –2.0
Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.9 71.6 –5.7
Recreation and Education ² . . . . . . . . . . . . . . . . . . . . . . . . . . . 109.8 104.3 –5.0
Home Improvements ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.7 131.2 –1.1
Auto Accessories ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108.6 107.5 –1.0

Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 594.9 592.1 –0.5

Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . 464.2 464.9 0.2

Groups 21 - 23: Misc. Goods ² . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.5 108.4 –3.6

Store Total ³ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549.8 545.9 –0.7

1Absence of a minus sign before percentage change in this column signifies price increase. 2Indexes on a January 1986=100 base. 3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue ruling is Stan Michaels of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Michaels on (202) 622-4970 (not a tollfree call).

Section 846— Discounted Unpaid Losses Defined

Ct.D. 2065

SUPREME COURT OF THE UNITED STATES

No. 97–147

ity that they would inflate reserves to manipulate the “fresh start” by excepting “reserve strengthening” from the exclusion. Sec. 1023(e)(3)(B). Treasury Regulation Sec. 1.846–3(c)(3)(ii) defmes “reserve strengthening” to include any net additions to reserves. Respondent Commissioner determined that petitioner, Atlantic Mutual Insurance Co., and its subsidiary, a PC insurer, made net additions to loss reserves in 1986, reducing the “fresh start” entitlement and resulting in a tax deficiency. The Tax Court disagreed, holding that “reserve strengthening” refers to only those increases that result from changes in computation methods or assumptions. In reversing, the Third Circuit concluded that the Treasury regulation’s definition of “reserve strengthening” is based on a permissible statutory construction.

Held: The Treasury regulation represents a reasonable interpretation of the term “reserve strengthening.” Neither prior legislation nor industry use establishes the plain meaning Atlantic ascribes to that term: reserve increases attributable to changes in methods or assumptions. Since the term is ambiguous, the question is not whether the Treasury regulation represents the best interpretation of the statute, but whether it represents a reason

ATLANTIC MUTUAL INSURANCE

CO. v. COMMISSIONER OF

INTERNAL REVENUE

523 U.S. (1998)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

April 21,1998

Syllabus

Before enactment of the Tax Reform

Act of 1986, the Internal Revenue Code gave property and casualty (PC) insurers a full deduction for “loss reserves: “ estimated amounts of losses reported but not yet paid, losses incurred but not yet reported, and administrative costs of resolving claims. In each taxable year, not only losses paid, but the full amount of the loss reserves, reduced by the amount of the loss reserves claimed for the prior taxable year, were treated as a business expense. Section 1023 of the 1986 Act required PC insurers, beginning with the 1987 taxable year, to discount unpaid losses to present value when claiming them as a deduction. Requiring insurers to subtract undiscounted year-end 1986 reserves from discounted year-end 1987 reserves in computing 1987 losses would produce artificially low deductions, so the Act included a transitional rule requiring insurers to discount 1986 reserves as well. This rule changed the “method of accounting” for computing taxable income. To avoid requiring PC insurers to recognize as income the difference between undiscounted and discounted year-end 1986 loss reserves, the Act afforded them a “fresh start,” to-wit, an exclusion from taxable income of the difference between undiscounted and discounted year-end 1023(e)(3)(A). It foreclosed the possibil

1998–39 I.R.B. 7 September 28, 1998

(3)(A) ofthe 1986 Act afforded PC insurers a “fresh start,” to-wit, an exclusion from taxable income of the difference between undiscounted and discounted yearend 1986 loss reserves. 100 Stat. 2404, note following 26 U.S.C. Sec. 846. Of course, the greater the 1986 reserves, the greater the exclusion. Section 1023(e)(3)(B) of the 1986 Act foreclosed the possibility that insurers would inflate reserves to manipulate the “fresh start” by excepting “reserve strengthening” from the exclusion:

“(B) RESERVE STRENGTHENING IN YEARS AFTER 1985. — Subparagraph (A) [the fresh-start provision] shall not apply to any reserve strengthening in a taxable year beginning in 1986, and such strengthening shall be treated as occurring in the taxpayer’s 1st taxable year beginning after December 31, 1986.” 100 Stat. 2404, note following 26 U.S.C. Sec. 846. Regulations promulgated by the Treasury Department set forth rules for determining the amount of “reserve strengthening”:

“(1) In general. The amount of reserve strengthening (weakening) is the amount that is determined under paragraph (c)(2) or (3) to have been added to (subtracted from) an unpaid loss reserve in a taxable year beginning in 1986. For purposes of section 1023 (e)(3)(B) of the 1986 Act, the amount of reserve strengthening (weakening) must be determined separately for each unpaid loss reserve by applying the rules of this paragraph (c). This determination is made without regard to the reasonableness of the amount of the unpaid loss reserve and without regard to the taxpayer’s discretion, or lack thereof, in establishing the amount of the unpaid loss reserve. . . . .

“(3) Accident years before 1986 — (i) In general. For each taxable year beginning in 1986, the amount of reserve strengthening (weakening) for an unpaid loss reserve for an accident year before 1986 is the amount by which the reserve at the end of that taxable year exceeds (is less than) —

(A) The reserve at the end of the immediately preceding taxable year; reduced by

able one. See Cottage Savings Assn. v. Conunissioner, 499 U.S. 554, 560–561. As a purely linguistic matter, the phrase is broad enough to embrace all increases in the reserve’s amount, for whatever reason and from whatever source. The provision at issue is a limitation upon an extraordinary deduction accorded to PC insurers. There was no need for the deduction to be microscopically fair, and the interpretation adopted in the Treasury regulation seems to be a reasonable accommodation of the competing interests of fairness, administrability, and avoidance of abuse. Given the hundreds (or, more likely, thousands) of claims involved, claims resolved for less than estimated reserves will tend to offset claims that settle for more than estimated reserves. Any discrepancy would not approach the unrealistic proportions claimed by Atlantic. Pp. 111 F.3d 1056, affirmed. SCALIA, J., delivered the opinion for a unanimous Court.

SUPREME COURT OF THE UNITED STATES

No. 97–147

corporations, including Centennial Insurance Co., a property and casualty (PC) insurer. From 1985 to 1993, the two corporations (Atlantic) maintained what insurers call “loss reserves.” Loss reserves are estimates of amounts insurers will have to pay for losses that have been reported but not yet paid, for losses that have been incurred but not yet reported, and for administrative costs of resolving claims.

Before enactment of the Tax Reform Act of 1986, Pub.L. 99–514, 100 Stat. 2085, the Internal Revenue Code gave PC insurers a fall deduction for loss reserves as “losses incurred.” In each taxable year, not only losses paid, but the full amount of the loss reserves, reduced by the amount of the loss reserves claimed for the prior taxable year, would be treated as a business expense. 26 U.S.C. Secs. 832(b)(5) and (c)(4) (1982 ed.). This designation enabled the PC insurer to take, in effect, a current deduction for future loss payments without adjusting for the “time value of money” — the fact that “‘ [a] dollar today is worth more than a dollar tomorrow,”’ D. Herwitz & M. Barrett, Accounting for Lawyers 221 (2d ed. 1997). Section 1023 of the 1986 Act amended the Code to require PC insurers, for taxable years beginning after December 31, 1986, to discount unpaid losses to present value when claiming them as a deduction. 100 Stat. 2399, 2404, 26 U.S.C. Secs. 832(b)(5)(A), 846 (1982 ed., Supp. V). Absent a transitional rule, PC insurers would have been left to subtract undiscounted year-end 1986 reserves from discounted year-end 1987 reserves for purposes of computing losses incurred for taxable year 1987 — producing artificially low deductions. The 1986 Act softened this consequence by requiring PC insurers, for purposes of that 1987 tax computation, to discount 1986 reserves as well. 100 Stat. 2404, note following 26 U.S.C. Sec. 846.

Because the requirement that PC insurers discount 1986 reserves changed the “method of accounting” for computing taxable income, PC insurers, absent another transitional rule, would have been required to recognize as income the difference between undiscounted and discounted year-end 1986 loss reserves. See 26 U.S.C. Sec. 481(a) (1988 ed.). To avoid this consequence, Sec. 1023(e)

ATLANTIC MUTUAL INSURANCE

CO. v. COMMISSIONER OF

INTERNAL REVENUE

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

April 21, 1998

JUSTICE SCALIA delivered the opinion of the Court.

Property and casualty insurance companies maintain accounting reserves for “unpaid losses.” Under the Tax Reform Act of 1986, increases in loss reserves that constitute “reserve strengthening” do not qualify for a certain one-time tax benefit. We must decide whether the term “reserve strengthening” reasonably encompasses any increase in reserves, or only increases that result from changes in the methods or assumptions used to compute them.

Atlantic Mutual Insurance Co. is the common parent of an affiliated group of

September 28, 1998 8 1998–39 I.R.B.

Atlantic further contends that the term “reserve strengthening” draws a plain meaning from a provision of the Tax Reform Act of 1984 that accorded a “fresh start” adjustment to life insurance reserves. Div. A., 98 Stat. 758, note following 26 U.S.C. Sec. 801 (1984 Act). That provision, like the “fresh start” adjustment for PC insurers in the 1986 Act, said that the “fresh start” would not apply to reserve strengthening, specifically, “to any reserve strengthening reported for Federal income tax purposes after September 27, 1983, for a taxable year ending before January 1, 1984.” 98 Stat. 759. Unlike the 1986 Act, however, the 1984 Act expressly provided that “reserve strengthening” would not be excluded from the “fresh start” if the insurer “employs the reserve practice used for purposes of the most recent annual statement filed before September 27, 1983. . . . Ibid. If, as Atlantic contends, reserve strengthening encompasses only reserve increases that result from a change in reserve practices (viz., change in methods or assumptions), the saving clause is superfluous. Thus, to the extent the definition of “reserve strengthening” in the life insurance context is relevant to its meaning here (which is questionable, see 111 F.3d at 1061– 1062), the 1984 Act, like the regulations under the 1959 Act, tends to contradict, rather than support, petitioner’s interpretation. We conclude that neither prior legislation nor industry use establishes the plain meaning Atlantic ascribes to “reserve strengthening.”

III

Since the term “reserve strengthening” is ambiguous, the task that confronts us is to decide not whether the Treasury regulation represents the best interpretation of the statute, but whether it represents a reasonable one. See Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560–561 (1991). We conclude that it does.

As a purely linguistic matter, the phrase is certainly broad enough to embrace all increases in (all “strengthening of”) the amount of the reserve, for whatever reason and from whatever source. Atlantic contends that this interpretation is unreasonable because, in theory, it produces absurd results, as the following example supposedly illustrates: assume that, in 1985, a PC insurer had four case reserves

(B) Claims paid and loss adjustment expenses paid (“loss payments”) in the taxable year beginning in 1986 with respect to losses that are attributable to the reserve. . . . Treas. Reg. 1.846–3(c), 26 CFR Sec. 1.846–3(c) (1997).

In short, any net additions to reserves (with two exceptions not here at issue, Sec. 1.846–3(c)(3)(ii)) constitute “reserve strengthening” under the regulation.

The Commissioner of Internal Revenue determined that Atlantic made net additions to reserves — “reserve strengthening” — during 1986, reducing the “fresh start” entitlement by an amount that resulted in a tax deficiency of $519,987. The Tax Court disagreed, holding that Atlantic had not strengthened its reserves. “Reserve strengthening,” the Tax Court held, refers only to increases in reserves that result from changes in the methods or assumptions used to compute them. (Atlantic’s reserve increases, there is no dispute, did not result from any such change.) The United States Court of Appeals for the Third Circuit reversed the Tax Court, concluding that the Treasury regulation’s definition of “reserve strengthening” to include any net additions to reserves is based on a permissible construction of the statute. 111 F.3d 1056 (1997). (It expressly disagreed with the Eighth Circuit’s conclusion in Western National Mutual Insurance Co. v. Com- missioner, 65 F.3d 90 (1995), that the Treasury regulation is invalid.) We granted certiorari. 522 U.S. (1997).

The 1986 Act does not define “reserve strengthening.” Atlantic contends that the term has a plain meaning under the statute: reserve increases attributable to changes in methods or assumptions. If that is what the term plainly means, Atlantic must prevail, “for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron U.S.A. Inc. v. Natural Re- sources Defense Council, Inc., 467 U.S. 837, 842-843 (1984). Atlantic contends that the plain meaning of “reserve strengthening” can be discerned, first, from its use in the PC insurance industry. It presented at trial two expert reports which, by “constructing a working definition of the term” that requires “a material change in methodology

and/or assumptions,” App. 68, 74, purport to demonstrate that Atlantic “did not strengthen reserves,” id. at 99. Our task, of course, is to determine not what the term ought to mean, but what it does mean. Atlantic’s first expert, before “constructing” a definition, expressly acknowledged that “reserve strengthening” is “not a well defined PC insurance or actuarial term of art to be found in PC actuarial, accounting, or insurance regulatory literature.” Id. at 60. On this point, she was in agreement with the Commissioner’s experts: “In the property-casualty industry, the term ‘reserve strengthening’ has various meanings, rather than a single universal meaning,” id. at 124. If the expert reports establish anything, it is that “reserve strengthening” does not have an established meaning in the PC insurance industry.

Atlantic next contends that a plain meaning can be discerned from prior use of the term in life insurance tax legislation. According to Atlantic, the term has its roots in the Life Insurance Company Income Tax Act of 1959, which provided tax consequences for changes in the “basis” for determining life insurance reserves. 73 Stat. 125, 26 U.S.C. Sec. 810(d) (1958 ed., Supp. 1). But that provision does not define, or for that matter even use, the term “reserve strengthening.” Though the regulation that implemented the provision uses the term “reserve strengthening” in a caption, Treas. Reg. Sec. 1.810–3(a), 26 CFR Sec. 1.8103(a) (1997), its text does not mention the term, and one of its Examples speaks only of “reserve strengthening attributable to the change in basis which occurred in 1959,” Sec. 1.810–3(b), Ex. 2. If, as Atlantic argues, “basis” and “assumptions or methodologies” are interchangeable terms, Brief for Petitioner 17, n. 8, and a change in basis is necessary for “reserve strengthening,” it is redundant to say “reserve strengthening attributable to the change in basis which occurred in 1959,” much as it would be to say “a sunburn attributable to the sun in 1959.” On Atlantic’s assumptions, the more natural formulation would have been simply “reserve strengthening in 1959.” Thus, the 1959 Act and implementing regulation suggest, if anything, that a change in basis is a sufficient, but not a necessary, condition for “reserve strengthening.”

1998–39 I.R.B. 9 September 28, 1998

of $500 each (total reserves of $2,000). If two cases settled in 1986 for $750 each ($1,500 total), the remaining loss reserve would be $1,000. Under the regulation, according to Atlantic, the Commissioner would find “reserve strengthening” of $500 (1986 loss reserves ($1,000) less (first year reserves ($2,000) less second year payments ($1,500))), even though reserves did not increase. The Commissioner denies this consequence, contending that, under the stipulation in this case, the increase in the reserve would be “reduced to zero” by an offsetting adjustment when the payment is made, and that adjustments in the IBNR reserve (reserve for claims “incurred but not reported”) may result from payments in excess of prior reserve amounts, offsetting changes in other reserves. Brief for Respondent 36–39.

We need not resolve that dispute, because we agree with the Commissioner that Atlantic’s horrific example is, in any event, unrealistic. The property and casualty insurer that had only four cases would not be in business very long, with or without the benefit of the tax adjustment — or, if he would, his talents could be put to better use in Las Vegas. The whole point of the insurance business is to spread the insured risk over a large number of cases, where experience and the law of probabilities can be relied upon. And where hundreds (or more likely thousands) of claims are involved, claims resolved for less than estimated reserves will tend to offset claims that settle for more than estimated reserves. See Notice of Proposed Rulemaking Discounted Unpaid Losses, FI–139–86, 1991–2 Cum. Bull. 946, 947 (“For most unpaid loss reserves . . ., any potential inaccuracies are likely to offset each other in the aggregate”). There may, to be sure, be some discrepancy in one direction or the other, but it would not approach the relative proportions claimed by Atlantic. It should be borne in mind that the provision at issue here is a limitation upon an extraordinary deduction accorded to PC insurers. There was certainly no need for that deduction to be microscopically fair, and the interpretation adopted by the Treasury Regulation seems to us a reasonable accommodation — and one that the statute very likely intended — of the competing interests of fairness, administrability, and avoidance of abuse.

- -

Because the Treasury regulation represents a reasonable interpretation of the term “reserve strengthening,” we affirm the judgment of the Court of Appeals.

It is so ordered.

Section 6621.— Determination of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning October 1, 1998, will be 7 percent for overpayments, 8 percent for underpayments, and 10 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 is 5.5 percent.

Rev. Rul. 98–46

Section 6621 of the Internal Revenue Code establishes different rates for interest on tax overpayments and interest on tax underpayments. Under § 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 2 percentage points, except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under § 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under § 6601 on any large corporate underpayment, the underpayment rate under § 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See § 6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and § 301.6621–3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal shortterm rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under § 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹ ⁄2 of 1 percent, the rate is increased to the next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under § 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with § 6621 which, pursuant to § 6622, is subject to daily compounding.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of July 1998 is 5 percent. Accordingly, an overpayment rate of 7 percent and an underpayment rate of 8 percent are established for the calendar quarter beginning October 1, 1998. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 1998, is 5.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning October 1, 1998, is 10 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 5.5 percent, 7 percent, 8 percent, and 10 percent are published in Tables 16, 19, 21, and 25 of Rev. Proc. 95–17, 1995–1 C.B. 556, 570, 573, 575, and 579. Annual interest rates to be compounded daily pursuant to § 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue ruling is Raymond Bailey of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Bailey on (202) 622-6226 (not a toll-free call).

September 28, 1998 10 1998–39 I.R.B.

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

DAILY RATE TABLE PERIOD RATE IN 1995–1 C.B. Before Jul. 1, 1975 6% Table 2, pg. 557 Jul. 1, 1975—Jan. 31, 1976 9% Table 4, pg. 559 Feb. 1, 1976—Jan. 31, 1978 7% Table 3, pg. 558 Feb. 1, 1978—Jan. 31, 1980 6% Table 2, pg. 557 Feb. 1, 1980—Jan. 31, 1982 12% Table 5, pg. 560 Feb. 1, 1982—Dec. 31, 1982 20% Table 6, pg. 560 Jan. 1, 1983—Jun. 30, 1983 16% Table 37, pg. 591 Jul. 1, 1983—Dec. 31, 1983 11% Table 27, pg. 581 Jan. 1, 1984—Jun. 30, 1984 11% Table 75, pg. 629 Jul. 1, 1984—Dec. 31, 1984 11% Table 75, pg. 629 Jan. 1, 1985—Jun. 30, 1985 13% Table 31, pg. 585 Jul. 1, 1985—Dec. 31, 1985 11% Table 27, pg. 581 Jan. 1, 1986—Jun. 30, 1986 10% Table 25, pg. 579 Jul. 1, 1986—Dec. 31, 1986 9% Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 - PRESENT

OVERPAYMENTS UNDERPAYMENTS

RATE TABLE PG RATE TABLE PG 1995–1 C.B. 1995–1 C.B.

Jan. 1, 1987—Mar. 31, 1987 8% 21 575 9% 23 577 Apr. 1, 1987—Jun. 30, 1987 8% 21 575 9% 23 577 Jul. 1, 1987—Sep. 30, 1987 8% 21 575 9% 23 577 Oct. 1, 1987—Dec. 31, 1987 9% 23 577 10% 25 579 Jan. 1, 1988—Mar. 31, 1988 10% 73 627 11% 75 629 Apr. 1, 1988—Jun. 30, 1988 9% 71 625 10% 73 627 Jul. 1, 1988—Sep. 30, 1988 9% 71 625 10% 73 627 Oct. 1, 1988—Dec. 31, 1988 10% 73 627 11% 75 629 Jan. 1, 1989—Mar. 31, 1989 10% 25 579 11% 27 581 Apr. 1, 1989—Jun. 30, 1989 11% 27 581 12% 29 583 Jul. 1, 1989—Sep. 30, 1989 11% 27 581 12% 29 583 Oct. 1, 1989—Dec. 31, 1989 10% 25 579 11% 27 581 Jan. 1, 1990—Mar. 31, 1990 10% 25 579 11% 27 581 Apr. 1, 1990—Jun. 30, 1990 10% 25 579 11% 27 581 Jul. 1, 1990—Sep. 30, 1990 10% 25 579 11% 27 581 Oct. 1, 1990—Dec. 31, 1990 10% 25 579 11% 27 581 Jan. 1, 1991—Mar. 31, 1991 10% 25 579 11% 27 581 Apr. 1, 1991—Jun. 30, 1991 9% 23 577 10% 25 579 Jul. 1, 1991—Sep. 30, 1991 9% 23 577 10% 25 579 Oct. 1, 1991—Dec. 31, 1991 9% 23 577 10% 25 579 Jan. 1, 1992—Mar. 31, 1992 8% 69 623 9% 71 625 Apr. 1, 1992—Jun. 30, 1992 7% 67 621 8% 69 623 Jul. 1, 1992—Sep. 30, 1992 7% 67 621 8% 69 623

1998–39 I.R.B. 11 September 28, 1998

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 - PRESENT

RATE TABLEPG

1995–1 C.B. Jan. 1, 1991—Mar. 31, 1991 13% 31 585 Apr. 1, 1991—Jun. 30, 1991 12% 29 583 Jul. 1, 1991—Sep. 30, 1991 12% 29 583 Oct. 1, 1991—Dec. 31, 1991 12% 29 583 Jan. 1, 1992—Mar. 31, 1992 11% 75 629 Apr. 1, 1992—Jun. 30, 1992 10% 73 627 Jul. 1, 1992—Sep. 30, 1992 10% 73 627 Oct. 1, 1992—Dec. 31, 1992 9% 71 625 Jan. 1, 1993—Mar. 31, 1993 9% 23 577 Apr. 1, 1993—Jun. 30, 1993 9% 23 577 Jul. 1, 1993—Sep. 30, 1993 9% 23 577 Oct. 1, 1993—Dec. 31, 1993 9% 23 577 Jan. 1, 1994—Mar. 31, 1994 9% 23 577 Apr. 1, 1994—Jun. 30, 1994 9% 23 577

September 28, 1998 12 1998–39 I.R.B.

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS (Continued)

FROM JANUARY 1, 1991 - PRESENT

RATE TABLEPG

1995–1 C.B.

Jul. 1, 1994—Sep. 30, 1994 10% 25 579 Oct. 1, 1994—Dec. 31, 1994 11% 27 581 Jan. 1, 1995—Mar. 31, 1995 11% 27 581 Apr. 1, 1995—Jun. 30, 1995 12% 29 583 Jul. 1, 1995—Sep. 30, 1995 11% 27 581 Oct. 1, 1995—Dec. 31, 1995 11% 27 581 Jan. 1, 1996—Mar. 31, 1996 11% 75 629 Apr. 1, 1996—Jun. 30, 1996 10% 73 627 Jul. 1, 1996—Sep. 30, 1996 11% 75 629 Oct. 1, 1996—Dec. 31, 1996 11% 75 629 Jan. 1, 1997—Mar. 31, 1997 11% 27 581 Apr. 1, 1997—Jun. 30, 1997 11% 27 581 Jul. 1, 1997—Sep. 30, 1997 11% 27 581 Oct. 1, 1997—Dec. 31, 1997 11% 27 581 Jan. 1, 1998—Mar. 31, 1998 11% 27 581 Apr. 1, 1998—Jun. 30, 1998 10% 25 579 Jul. 1, 1998—Sep. 30, 1998 10% 25 579 Oct. 1, 1998—Dec. 31, 1998 10% 25 579

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 - PRESENT

RATE TABLE PG

1995–1 C.B.

Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572 Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574 Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572 Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572 Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620 Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618 Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620 Oct. 1, 1996—Dec. 31, 1996 6.5% 66 620 Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572 Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572 Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572 Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572 Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572 Apr. 1, 1998—Jun. 30, 1998 5.5% 16 570 Jul. 1. 1998—Sep. 30, 1998 5.5% 16 570 Oct. 1, 1998—Dec. 31, 1998 5.5% 16 570

1998–39 I.R.B. 13 September 28, 1998

and punishment persons guilty of violating the internal revenue laws or conniving at the same, and for information that leads to the detection of underpayments of tax. In addition, the amendments to section 7623 provide that rewards will be paid from the proceeds of amounts (other than interest) collected by reason of the information provided.

Following the publication of the proposed regulations, it was determined that the regulations should clarify that rewards may also be paid in situations where information leads to the denial of a claim for refund. Therefore, the final regulations provide that proceeds of amounts (other than interest) collected by reason of the information provided include both additional amounts collected because of the information provided and amounts collected prior to receipt of the information if the information leads to the denial of a claim for refund that otherwise would have been paid.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

It is hereby certified that the regulations in this document will not have a significant economic impact on a substantial number of small entities. This certification is based on a determination that in the past approximately 10,000 persons have filed claims for reward on an annual basis. Of these persons, almost all have been individuals. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small businesses.

Drafting Information

The principal author of these regulations is Judith A. Lintz, Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel

Section 7623—Expenses of Detection of Underpayments and Fraud, Etc.

26 CFR 301.7623–1: Rewards for information relating to violations of internal revenue laws.

T.D. 8780

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 301 and 602

Rewards for Information Relating to Violations of Internal Revenue Laws

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final regulations relating to rewards for information that relates to violations of the internal revenue laws. The regulations reflect changes to the law made by the Taxpayer Bill of Rights 2 and affect persons that are eligible to receive an informant reward.

DATES: Effective date: These regulations are effective August 21, 1998.

Applicability date: For dates of applicability, see §301.7623-1(g).

FOR FURTHER INFORMATION CONTACT: Judith A. Lintz (202) 622-4940 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545–1534. Responses to these collections of information are voluntary with respect to the provision of information relating to violations of the internal revenue laws, but are required to obtain a benefit with respect to filing a claim for reward.

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.

The estimated annual burden per respondent varies from 2 to 4 hours, depending on individual circumstances, with an estimated average of 3 hours.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224, and 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.

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 amendments to the Regulations on Procedure and Administration (26 CFR Part 301) under section 7623 relating to rewards for information that relates to violations of the internal revenue laws. This section was amended by section 1209 of the Taxpayer Bill of Rights 2 (TBOR 2) (Public Law 104–168, 110 Stat. 1452 (1996)). On October 14, 1997, final and temporary regulations (TD 8737) relating to informant rewards under section 7623 were published in the Federal Register (62 F.R. 53230). A notice of proposed rulemaking (REG–252936–96) cross-referencing the temporary regulations was published in the Federal Register for the same day (62 F.R. 53274).

No written comments responding to the notice were received. No public hearing was requested or held. The proposed regulations under section 7623 are adopted as revised by this Treasury decision, and the corresponding temporary regulations are removed. The revisions are discussed below.

Explanation of Provisions

The amendments made by TBOR 2 to section 7623 provide that the Secretary may pay rewards for information that leads to the detection and bringing to trial

September 28, 1998 14 1998–39 I.R.B.

from the IRS and Treasury Department participated in their development.

- - - -

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

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

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7623–1 is revised to read as follows:

§301.7623–1 Rewards for information relating to violations of internal revenue laws.

(a) In general. In cases where rewards are not otherwise provided for by law, a district or service center director may approve a reward, in a suitable amount, for information that leads to the detection of underpayments of tax, or the detection and bringing to trial and punishment of persons guilty of violating the internal revenue laws or conniving at the same. The rewards provided for by section 7623 and this section will be paid from the proceeds of amounts (other than interest) collected by reason of the information provided. For purposes of section 7623 and this section, proceeds of amounts (other than interest) collected by reason of the information provided include both additional amounts collected because of the information provided and amounts collected prior to receipt of the information if the information leads to the denial of a claim for refund that otherwise would have been paid.

(b) Eligibility to file claim for reward (1) In general. Any person, other than certain present or former federal employees described in paragraph (b)(2) of this section, that submits, in the manner described in paragraph (d) of this section, information relating to the violation of an internal revenue law is eligible to file a claim for reward under section 7623 and this section.

(2) Federal employees. No person who was an officer or employee of the Department of the Treasury at the time the indi

vidual came into possession of information relating to violations of the internal revenue laws, or at the time the individual divulged such information, is eligible for a reward under section 7623 and this section. Any other current or former federal employee is eligible to file a claim for reward if the information provided came to the individual’s knowledge other than in the course of the individual’s official duties.

(3) Deceased informants. A claim for reward may be filed by an executor, administrator, or other legal representative on behalf of a deceased informant if, prior to the informant’s death, the informant was eligible to file a claim for such reward under section 7623 and this section. Certified copies of the letters testamentary, letters of administration, or other similar evidence must be attached to the claim for reward on behalf of a deceased informant in order to show the authority of the legal representative to file the claim.

(c) Amount and payment of reward. All relevant factors, including the value of the information furnished in relation to the facts developed by the investigation of the violation, will be taken into account by a district or service center director in determining whether a reward will be paid, and, if so, the amount of the reward. The amount of a reward will represent what the district or service center director deems to be adequate compensation in the particular case, generally not to exceed fifteen percent of the amounts (other than interest) collected by reason of the information. Payment of a reward will be made as promptly as the circumstances of the case permit, but not until the taxes, penalties, or fines involved have been collected. However, if the informant waives any claim for reward with respect to an uncollected portion of the taxes, penalties, or fines involved, the claim may be immediately processed. Partial reward payments, without waiver of the uncollected portion of the taxes, penalties, or fines involved, may be made when a criminal fine has been collected prior to completion of the civil aspects of a case, and also when there are multiple tax years involved and the deficiency for one or more of the years has been paid in full. No person is authorized under this section to make any offer, or promise, or otherwise

to bind a district or service center director with respect to the payment of any reward or the amount of the reward.

(d) Submission of information. A person that desires to claim a reward under section 7623 and this section may submit information relating to violations of the internal revenue laws, in person, to the office of a district director, preferably to a representative of the Criminal Investigation Division. Such information may also be submitted in writing to the Commissioner of Internal Revenue, Attention: Assistant Commissioner (Criminal Investigation), 1111 Constitution Avenue, NW., Washington, DC 20224, to any district director, Attention: Chief, Criminal Investigation Division, or to any service center director. If the information is submitted in person, either orally or in writing, the name and official title of the person to whom it is submitted and the date on which it is submitted must be included in the formal claim for reward.

(e) Identification of informant. No unauthorized person will be advised of the identity of an informant.

(f) Filing claim for reward. An informant that intends to claim a reward under section 7623 and this section should notify the person to whom the information is submitted of such intention, and must file a formal claim on Form 211, Application for Reward for Original Information, signed by the informant in the informant’s true name, as soon as practicable after the submission of the information. If other than the informant’s true name was used in furnishing the information, satisfactory proof of identity as that of the informant must be included with the claim for reward.

(g) Effective date. This section is applicable with respect to rewards paid after January 29, 1997.

§301.7623–1T [Removed]

Par. 3. Section 301.7623–1T is removed.

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as follows: Authority: 26 U.S.C. 7805. Par. 5. In §602.101, paragraph (c) is amended by removing the entry for

1998–39 I.R.B. 15 September 28, 1998

301.7623–1T from the table and by revising the entry for 301.7623–1 to read as follows:

§602.101 OMB Control numbers.

CFR part or section Current OMB where identified and control No. described

301.7623–1 . . . . . . . . . . . . . .1545–0409 1545–1534

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

Approved July 20, 1998.

Donald C. Lubick, Assistant Secretary of

the Treasury.

(Filed by the Office of the Federal Register on August 20, 1998, 8:45 a.m., and published in the issue of the Federal Register for August 21, 1998, 63 F.R. 44777)

September 28, 1998 16 1998–39 I.R.B.