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LONG-AWAITED INS GUIDANCE ON 245i SUNSET RELEASED
On January 14, 1998, Congress permitted Section 245i of the Immigration and Nationality Act to expire. That provision permitted would be immigrants to process their green card applications in the US (also known as adjusting status) regardless of status violations as long as the applicant paid a penalty fee of $ 1000. After the law sunsetted, the law reverted back to the prior rule that applicants must have always maintained legal status in order to process an adjustment of status application. If this is not the case, an applicant must process a green card application at a US Consulate outside the country. The problem for many is that there are new bars on reentering the US for people who have been out of legal status for more than six months. So if the applicant left the country to process, they would be barred for up to ten years from reentering.
When Congress let the law expire, however, it did permit cases filed before January 15, 1998 to continue processing under the rules allowing for payment of the penalty. The big question that until now has remained unaddressed by the INS is what they consider to be a pre-January 15th filing for purposes of applying 245i. 
Section 245i now reads as follows:
(i)(1) Notwithstanding the provisions of subsections (a) and (c) of this section, an alien physically present in the United States –
who 
entered the United States without inspection; or 
is within one of the classes enumerated in subsection (c) of this section; and 
who is the beneficiary (including a spouse or child of the principal alien, if eligbile to receive a visa under section 203(d) of – 
a petition for classification under section 204 that was filed with the Attorney General on or before January 14, 1998; or 
an application for a labor certification under section 212(a)(5)(A) that was filed pursuant to the regulations of the Secretary of Labor on or before such date; 
may apply to the Attorney General for the adjustment of his or her status to that of an alien lawfully admitted for permanent residence. The Attorney General may accept such applications only if the alien remits with such application a sum equaling $ 1000 as of the date of receipt of the applciation.
The INS is taking a fairly liberal "alien-based" reading of the statute and will consider a person "grandfathered" and eligible for 245i if they have any immigrant petition or labor certification filed before January 15, 1998 even if the basis for adjustment of status is an application filed after that date. For example, if someone’s US citizen sister filed an application for her in 1997 and they win the green card lottery this year, they would be eligible to adjust status based on the 1997 filing even though they had been out of status for some time. Were it not for that filing, the applicant would not have been eligible for processing.
There are some restrictions, however, that would prevent a pre-January 15, 1998 from conferring 245i benefits. A case must have approvable at the time of filing. Pre-January 15 filings that were submitted without a fee, were fraudulent, or had no basis in law or fact will not grandfather in an applicant.
The INS has said, however, that DV-99 lottery applicants will not be able to use the fact that their applications were submitted in 1997 to adjust status. According to the INS, this is because DV applications are filed with the Department of State and 245i specifically says that it only applies to a petition filed with the Attorney General or a labor certification filed with the Department of Labor. 
In cases where the underlying visa application has still not been adjudicated – e.g. the I-130 has not been approved or a labor certification application is still pending – INS officers are instructed to review the pre-January 15 filing to see if it has been properly filed and is non-fraudulent or non-frivolous. 
In cases where the earlier petition is denied, revoked or withdrawn, the INS officer is instructed to look to the filing and determine whether it was "approvable when filed." If it was, then the beneficiary is grandfathered even if the filing was later denied, revoked, or withdrawn. The key in these cases is the reason for the denial, withdrawal, or revocation. If, for example, a labor certification was denied because the employer went out of business or the petitioning spouse died or a derivative child turned 21, then the case is likely to be considered approvable when filed. If circumstances did not change, however, then the applicant will have more difficulty showing this. 
One point the INS emphasizes at several points is the need for the applicant to prove that he or she is eligible for the grandfathering. That means that the applicant should provide evidence of the earlier approved petition or that the earlier petition was "approvable when filed."
And finally, a statement in the INS memo that applications filed before October 1, 1994 (after Section 245i became law) would not count for grandfathering was later recanted by the agency. ALL filings that are pre-January 15, 1998 are eligible for grandfathering assuming the requirements noted above are met.