Rules and Regulations. Temporary rule; modification of a closure

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BILLING CODE 3510-22-S DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 679 [Docket No. 060216045-6045-01; I.D. 073106B] Fisheries of the Economic Exclusive Zone Off Alaska; Pacific Cod by Catcher Vessels Less Than 60 Feet (18.3 Meters) Length Overall Using Hook-and-Line or Pot Gear in the Bering Sea and Aleutian Islands Management Area AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Temporary rule; modification of a closure. SUMMARY: NMFS is opening directed fishing for Pacific cod by catcher vessels less than 60 feet (18.3 meters (m)) length overall

(LOA)using hook-and-line or pot gear in the Bering Sea and Aleutian Islands management area (BSAI). This action is necessary to allow the catcher vessels less than 60 feet (18.3 m) LOA using hook-and-line or pot gear in the BSAI to harvest their Pacific cod allocation. DATES: Effective 1200 hrs, Alaska local time (A.l.t.), August 15, 2006, through 2400 hrs, A.l.t., December 31, 2006. FOR FURTHER INFORMATION CONTACT: Jennifer Hogan, 907-586-7228. SUPPLEMENTARY INFORMATION: NMFS manages the groundfish fishery in the BSAI exclusive economic zone according to the Fishery Management Plan for Groundfish of the Bering Sea and Aleutian Islands Management Area

(FMP)prepared by the North Pacific Fishery Management Council under authority of the Magnuson-Stevens Fishery Conservation and Management Act. Regulations governing fishing by U.S. vessels in accordance with the FMP appear at subpart H of 50 CFR part 600 and 50 CFR part 679. NMFS closed directed fishing for Pacific cod by catcher vessels less than 60 feet (18.3 m) LOA using hook-and-line or pot gear in the BSAI under § 679.21(d)(1)(iii) on May 23, 2006 (71 FR 30300, May 26, 2006). NMFS has determined that as of July 25, 2006, approximately 60 metric tons of Pacific cod remain in the 2006 Pacific cod TAC specified for catcher vessels less than 60 feet (18.3 m) LOA using hook-and-line or pot gear in the BSAI. Therefore, in accordance with §§ 679.25(a)(2)(i)(C) and (a)(2)(iii)(D), and to allow the catcher vessels less than 60 feet (18.3 m) LOA using hook-and-line or pot gear in the BSAI to harvest their Pacific cod allocation, NMFS is terminating the previous closure and is reopening directed fishing for Pacific cod by catcher vessels less than 60 feet (18.3 m) LOA using hook-and-line or pot gear in the BSAI. The reopening is effective 1200 hrs, Alaska local time (A.l.t.), August 15, 2006, through 2400 hrs, A.l.t., December 31, 2006. Classification This action responds to the best available information recently obtained from the fishery. The Assistant Administrator for Fisheries, NOAA (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay the reallocation of Pacific cod specified for jig vessels to catcher vessels less than 60 feet (18.3 m) LOA using pot or hook-and-line gear. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of July 25, 2006. The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment. This action is required by § 679.25 and is exempt from review under Executive Order 12866. Authority: 16 U.S.C. 1801 *et seq.* Dated: July 31, 2006. Alan D. Risenhoover, Acting Director, Office of Sustainable Fisheries, National Marine Fisheries Service. [FR Doc. E6-12648 Filed 8-3-06; 8:45 am] BILLING CODE 3510-22-S DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 679 [Docket No. 060216045-6045-01; I.D.073106A] Fisheries of the Exclusive Economic Zone Off Alaska; Reallocation of Pacific Cod in the Bering Sea and Aleutian Islands Management Area AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Temporary rule; reallocation. SUMMARY: NMFS is reallocating the projected unused amount of Pacific cod from vessels using jig gear to catcher vessels less than 60 feet (18.3 meters (m)) length overall

(LOA)using pot or hook-and-line gear in the Bering Sea and Aleutian Islands management area (BSAI). These actions are necessary to allow the 2006 A and B season total allowable catch

(TAC)of Pacific cod to be harvested. DATES: Effective August 3, 2006, through 2400 hrs, Alaska local time (A.l.t.), December 31, 2006. FOR FURTHER INFORMATION CONTACT: Jennifer Hogan, 907-586-7228. SUPPLEMENTARY INFORMATION: NMFS manages the groundfish fishery in the BSAI according to the Fishery Management Plan for Groundfish of the Bering Sea and Aleutian Islands Management Area

(mt)for the period 1200 hrs, A.l.t., April 30, 2006, through 1200 hrs, A.l.t., August 31, 2006. This amount is established by the 2006 and 2007 final harvest specifications for groundfish in the BSAI (71 FR 10894, March 3, 2006); the adjustment of the Pacific cod TACs in the BSAI on March 14, 2006 (71 FR 13777, March 17, 2006), and reallocations on March 24, 2006 (71 FR 14825, March 24, 2006) and May 1, 2006 (71 FR 25508, May 1, 2006). See § 679.20(c)(3)(iii), § 679.20(c)(5), and § 679.20(a)(7)(i)(A). The Acting Administrator, Alaska Region, NMFS, has determined that jig vessels will not be able to harvest 296 mt of the A and B season apportionment of Pacific cod allocated to those vessels under § 679.20(a)(7)(i)(A) and § 679.20(a)(7)(iii)(A)(3). Therefore, in accordance with § 679.20(a)(7)(ii)(C)(1), NMFS apportions 296 mt of Pacific cod from the A and B season jig gear apportionment to catcher vessels less than 60 feet (18.3 m) LOA using pot or hook-and-line gear. The harvest specifications for Pacific cod included in the harvest specifications for groundfish in the BSAI (71 FR 10894, March 3, 2006) are revised as follows: 93 mt to the B season apportionment for vessels using jig gear and 3,232 mt to catcher vessels less than 60 feet (18.3 m) LOA using pot or hook-and-line gear. Classification This action responds to the best available information recently obtained from the fishery. The Assistant Administrator for Fisheries, NOAA (AA), finds good cause to waive the requirement to provide prior notice and opportunity for public comment pursuant to the authority set forth at 5 U.S.C. 553(b)(B) as such requirement is impracticable and contrary to the public interest. This requirement is impracticable and contrary to the public interest as it would prevent NMFS from responding to the most recent fisheries data in a timely fashion and would delay the reallocation of Pacific cod specified for jig vessels to catcher vessels less than 60 feet (18.3 m) LOA using pot or hook-and-line gear. Immediate notification is necessary to allow for the orderly conduct and efficient operation of this fishery; allow the industry to plan for the fishing season and avoid potential disruption to the fishing fleet as well as processors. NMFS was unable to publish a notice providing time for public comment because the most recent, relevant data only became available as of July 25, 2006. The AA also finds good cause to waive the 30-day delay in the effective date of this action under 5 U.S.C. 553(d)(3). This finding is based upon the reasons provided above for waiver of prior notice and opportunity for public comment. This action is required by § 679.20 and is exempt from review under Executive Order 12866. Authority: 16 U.S.C. 1801 *et seq.* Dated: July 31, 2006. Alan D. Risenhoover, Acting Director, Office of Sustainable Fisheries, National Marine Fisheries Service. [FR Doc. E6-12651 Filed 8-3-06; 8:45 am] BILLING CODE 3510-22-S DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Parts 679 and 680 [Docket No. 060424108-6204-02; I.D. 040706A] RIN 0648-AT43 Fisheries of the Exclusive Economic Zone Off Alaska; Cost Recovery Program for North Pacific Halibut, Sablefish, and Bering Sea and Aleutian Islands Crab Individual Fishing Quota Programs AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce . ACTION: Final rule. SUMMARY: NMFS issues a final rule to amend the Individual Fishing Quota

(IFQ)Cost Recovery Program for the Halibut and Sablefish IFQ and the Bering Sea and Aleutian Islands

(BSAI)Crab Rationalization Programs. This action modifies the procedure NMFS uses to publish notification of adjustment of the IFQ fee percentage for the IFQ Cost Recovery Program in the Halibut and Sablefish IFQ and the Crab Rationalization Programs. This action is necessary to provide timely and efficient notice of fee obligations while ensuring consistency with all applicable statutes. This action is intended to improve the fee collection methods required for all Alaska IFQ programs under the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) and is necessary to promote the objectives of the Magnuson-Stevens Act with respect to the IFQ fisheries managed by NMFS in the Alaska Region. DATES: Effective on September 5, 2006. ADDRESSES: Copies of the Categorical Exclusion (CE), regulatory impact review (RIR), and regulatory flexibility certification prepared for this action are available from NMFS, Alaska Region, P.O. Box 21668, Juneau, AK 99802-1668, Attn: Ellen Walsh, or from NMFS, Alaska Region, 709 West 9th Street, Room 453, Juneau, AK 99801, or by calling the Sustainable Fisheries Division, Alaska Region, NMFS, at 907-586-7228. FOR FURTHER INFORMATION CONTACT: Bubba Cook, 907-586-7425 or *bubba.cook@noaa.gov* . SUPPLEMENTARY INFORMATION: Halibut and Sablefish IFQ Cost Recovery On March 20, 2000, NMFS published regulations (65 FR 14919) implementing the IFQ Cost Recovery Program for IFQ landings of halibut and sablefish (set forth at 50 CFR 679.45). Under the regulations, an IFQ permit holder incurs a cost recovery fee liability for every pound of IFQ halibut and IFQ sablefish that is landed under his or her IFQ permit(s). The IFQ permit holder is responsible for self-collecting the fee liability for all IFQ halibut and IFQ sablefish landings on his or her permit(s). The IFQ permit holder also is responsible for submitting a fee liability payment to NMFS on or before the due date of January 31, following the year in which the IFQ landings were made. For each permit, the dollar amount of the fee due is determined by multiplying the annual IFQ fee percentage (3 percent or less) by the ex-vessel value of each IFQ landing. If the permit holder has more than one permit, the total amounts of each permit are added. Section 304(d)(2)(B) of the Magnuson-Stevens Act sets a maximum fee of 3 percent of the ex-vessel value of fish harvested under an IFQ program. Current regulations allow NMFS to reduce the fee percentage if actual management and enforcement costs are recoverable through a lesser percentage. NMFS will not know the actual annual costs of IFQ-related management and enforcement until after the end of each Federal fiscal year (September 30). If the management and enforcement costs total less than the 3 percent fee, NMFS will reduce the fee percentage for the new Federal fiscal year. Fishermen will not know at the time they sell their IFQ fish exactly what fee percentage will be applied to their IFQ landings made from February (season opening) through September (Federal fiscal year-end). Therefore, NMFS encourages IFQ permit holders to set aside the full 3 percent throughout the fishing year so a lump sum payment may be made by January 31 of the following calendar year. Early payments are allowed but do not relieve a permit holder of associated reporting requirements. Crab Rationalization Cost Recovery In 2005, section 313(j) of the Magnuson-Stevens Act provided supplementary authority to section 304(d)(2)(A) and additional detail for cost recovery provisions specific to the Crab Rationalization Program. As a quota program, the Crab Rationalization Program must follow the statutory provisions set forth by section 304(d) and section 313(j) of the Magnuson-Stevens Act. Section 313(j) requires the Secretary to approve a cost recovery program for the Crab Rationalization Program, conducted in accordance with the existing Halibut and Sablefish IFQ cost recovery program. Similar to the Halibut and Sablefish IFQ cost recovery program, the Crab Rationalization cost recovery program allows for the collection of actual management and enforcement costs up to 3 percent of ex-vessel gross revenues and a loan program using 25 percent of the fees collected. Section 313(j) includes specific cost recovery requirements to accommodate the crab processing industry and to address problems experienced under the Halibut and Sablefish IFQ cost recovery program. This section provides NMFS the authority to collect 133 percent of the actual costs of management and enforcement. By collecting 133 percent, 25 percent of that amount can be set aside for the IFQ loan program, authorized by section 303(d)(4), and the remaining 75 percent more fully reimburses the management and enforcement costs of the program. Additionally, section 313(j) requires cost recovery fees to be paid in equal shares by the harvesting and processing sectors. Catcher/Processors, a combination of both sectors, pay the full fee percentage. NMFS developed the Crab Rationalization cost recovery program to conform with statutory requirements and to partially compensate the agency for the unique added costs of management and enforcement of the Crab Rationalization Program. Key provisions of the Crab Rationalization cost recovery program include

(1)a new definition and application of “fee liability";

(2)the establishment of a Registered Crab Receiver

(RCR)permit system to streamline management and reporting;

(3)the establishment of a “crab fishing year” for biological and administrative purposes; and

(4)a new administrative process that requires the collection and submission of fees by RCRs rather than requiring separate billings to each person that receives a crab allocation (crab allocation holder). The crab allocations include IFQ, Crew IFQ, Individual Processing Quota (IPQ), Community Development Quota (CDQ), and the Adak community allocation. In the crab rationalization fishery, a crab allocation holder generally incurs a cost recovery fee liability for every pound of crab landed. The RCR permit holder must collect the fee liability of the crab allocation holder landing crab. Additionally, the RCR permit holder must self-collect his or her own fee liability for all crab delivered to the RCR. The RCR permit holder is responsible for submitting this payment to NMFS on or before the due date of July 31, following the crab fishing year in which payment for the crab is made. The dollar amount of the fee due is determined by multiplying the fee percentage (not to exceed 3 percent) by the ex-vessel value of crab debited from the allocation. Specific details on the Crab Rationalization cost recovery program may be found in the implementing regulations for the Crab Rationalization Program set forth at § 680.44, and published March 2, 2005, at 70 FR 10174. The Effect of this Action This final rule amends the existing regulations at §§ 679.45 and 680.44 addressing the methods by which NMFS calculates fee percentages and provides notice under the cost recovery provisions of the Halibut and Sablefish IFQ Program and Crab Rationalization Program. Calculation of the fee percentage under this action becomes a ministerial duty conducted by NMFS. This action does not affect the ex-vessel value determination under either program nor does it affect the current structure or administration of the standard prices calculated for the Halibut and Sablefish IFQ Program or the Catcher/Processor ex-vessel values calculated for the Crab Rationalization Program. NMFS makes minor changes to the current fee regulations to ensure full compliance with the APA (5 U.S.C. 501 *et seq.* , 701 *et seq.* ) while improving administrative efficiency. The principal elements of this amendment are described and explained in detail in the preamble to the proposed rule and are not repeated here. This final rule is substantively the same as the proposed rule published May 8, 2006 (71 FR 26728). However, this final rule corrects an incorrect cross-reference at § 680.44(g) by changing the reference citation for § 680.5(f) to § 680.5(g). The proposed rule to amend the IFQ Cost Recovery Program for the Halibut and Sablefish IFQ and the BSAI Crab Rationalization Programs was published in the **Federal Register** on May 8, 2006 (71 FR 26728). Comments on the proposed rule were invited through June 7, 2006. NMFS received no comments on the proposed rule. Classification The Administrator, Alaska Region, NMFS, determined that the regulatory amendment is necessary for the conservation and management of the groundfish fisheries off Alaska and that it is consistent with the Magnuson-Stevens Act and other applicable laws. This rule has been determined to be not significant for purposes of Executive Order 12866. The Chief Counsel for Regulation of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration during the proposed rule stage that this action would not have a significant economic impact on a substantial number of small entities. The factual basis for the certification was published in the proposed rule and is not repeated here. No comments were received regarding this certification or the economic impact of the rule. As a result, a regulatory flexibility analysis was not required and none was prepared. List of Subjects in 50 CFR Parts 679 and 680 Alaska, Determinations and appeals, Fisheries, Recordkeeping and reporting requirements. Dated: July 31, 2006. Samuel D. Rauch III Deputy Assistant Administrator for Regulatory Programs, National Marine Fisheries Service. For the reasons set out in the preamble, 50 CFR parts 679 and 680 are amended as follows: PART 679—FISHERIES OF THE EXCLUSIVE ECONOMIC ZONE OFF ALASKA 1. The authority citation for part 679 continues to read as follows: Authority: 16 U.S.C. 773 *et seq.* ; 1540(f); 1801 *et seq.* ; 1851 note; 3631 *et seq.* 2. In § 679.45 paragraph

(d)is revised to read as follows: § 679.45 IFQ cost recovery program.

(d)*IFQ fee percentage* —(1) *Established percentage.* The annual IFQ fee percentage is the amount as determined by the factors and methodology described in paragraph (d)(2) of this section. This amount will be announced by publication in the **Federal Register** in accordance with paragraph (d)(3) of this section. This amount must not exceed 3 percent pursuant to 16 U.S.C. 1854(d)(2)(B).

(2)*Calculating fee percentage value.* Each year NMFS shall calculate and publish the fee percentage according to the following factors and methodology:

(i)*Factors.* NMFS must use the following factors to determine the fee percentage:

(A)The catch to which the IFQ fee will apply;

(B)The ex-vessel value of that catch; and

(C)The costs directly related to the management and enforcement of the IFQ program.

(ii)*Methodology.* NMFS must use the following equation to determine the fee percentage: 100 x (DPC / V) where: “DPC” is the direct program costs for the IFQ fishery for the previous fiscal year, and “V” is the ex-vessel value of the catch subject to the IFQ fee for the current year.

(3)*Publication* —(i) *General.* During or before the last quarter of each year, NMFS shall publish the IFQ fee percentage in the **Federal Register** . NMFS shall base any calculations on the factors and methodology in paragraph (d)(2) of this section.

(ii)*Effective period.* The calculated IFQ fee percentage shall remain in effect through the end of the calendar year in which it was determined.

(4)*Applicable percentage.* The IFQ permit holder must use the IFQ fee percentage in effect at the time an IFQ landing is made to calculate his or her fee liability for such landed IFQ pounds. The IFQ permit holder must use the IFQ percentage in effect at the time an IFQ retro-payment is received by the IFQ permit holder to calculate his or her IFQ fee liability for the IFQ retro-payment. PART 680—SHELLFISH FISHERIES OF THE EXCLUSIVE ECONOMIC ZONE OFF ALASKA 3. The authority citation for part 680 continues to read as follows: Authority: 16 U.S.C. 1862. 4. In § 680.44 paragraphs (a)(2)(iii), (c)(1) through (3), and

(g)are revised; paragraph (c)(4) is removed; and paragraph (c)(5) is redesignated as paragraph (c)(4) to read as follows: § 680.44 Cost recovery.

(a)* * *

(2)* * *

(iii)NMFS will provide a summary to all RCR permit holders during the last quarter of the crab fishing year. The summary will explain the fee liability determination including the current fee percentage, details of raw crab pounds debited from CR allocations by permit, port or port-group, species, date, and prices.

(c)* * *

(1)*Established percentage.* The crab fee percentage is the amount as determined by the factors and methodology described in paragraph (c)(2) of this section. This amount will be announced by publication in the **Federal Register** in accordance with paragraph (c)(3) of this section. This amount must not exceed 3 percent pursuant to 16 U.S.C. 1854(d)(2)(B).

(i)The calculated crab fee percentage will be divided equally between the harvesting and processing sectors.

(ii)Catcher/Processors must pay the full crab fee percentage determined by the fee percentage calculation for all CR crab debited from a CR allocation.

(2)*Calculating fee percentage value.* Each year NMFS shall calculate and publish the fee percentage according to the following factors and methodology:

(i)*Factors.* NMFS must use the following factors to determine the fee percentage:

(A)The catch to which the crab cost recovery fee will apply;

(B)The ex-vessel value of that catch; and

(C)The costs directly related to the management and enforcement of the Crab Rationalization Program.

(ii)*Methodology.* NMFS must use the following equations to determine the fee percentage: Harvesting and Processing Sectors: [100 (DPC/ V)] 0.5 Catcher/Processors: 100 (DPC /V) where: “DPC” is the direct program costs for the Crab Rationalization Program for the previous fiscal year, and “V” is the ex-vessel value of the catch subject to the crab cost recovery fee liability for the current year.

(3)*Publication* —(i) *General.* During the first quarter of each crab fishing year, NMFS shall calculate the crab fee percentage based on the calculations described in paragraph (c)(2) of this section.

(ii)*Effective period.* The calculated IFQ fee percentage remains in effect through the end of the crab fishing year in which it was determined.

(g)*Fee submission form.* An RCR must submit an RCR permit holder fee submission form according to § 680.5(g). [FR Doc. E6-12647 Filed 8-3-06; 8:45 am] BILLING CODE 3510-22-S 71 150 Friday, August 4, 2006 Proposed Rules DEPARTMENT OF AGRICULTURE Animal and Plant Health Inspection Service 9 CFR Part 95 [Docket No. APHIS-2006-0113] Importation of Swine Hides and Skins, Bird Trophies, and Ruminant Hides and Skins AGENCY: Animal and Plant Health Inspection Service, USDA. ACTION: Proposed rule. SUMMARY: We are proposing to amend the regulations governing the importation of animal byproducts to require that untanned swine hides and skins from regions with African swine fever and bird trophies from regions with exotic Newcastle disease go directly to an approved establishment upon importation into the United States. We would also set out certain requirements for the importation of untanned bovine, deer, and other ruminant hides and skins into the United States from Mexico to prevent the spread of bovine babesiosis. These proposed requirements would provide for the importation of these articles under conditions intended to prevent the introduction of African swine fever, bovine babesiosis, and exotic Newcastle disease. DATES: We will consider all comments that we receive on or before October 3, 2006. ADDRESSES: You may submit comments by either of the following methods: • Federal eRulemaking Portal: Go to *http://www.regulations.gov* and, in the lower “Search Regulations and Federal Actions” box, select “Animal and Plant Health Inspection Service” from the agency drop-down menu, then click on “Submit.” In the Docket ID column, select APHIS-2006-0113 to submit or view public comments and to view supporting and related materials available electronically. Information on using Regulations.gov, including instructions for accessing documents, submitting comments, and viewing the docket after the close of the comment period, is available through the site's “User Tips” link. • Postal Mail/Commercial Delivery: Please send four copies of your comment (an original and three copies) to Docket No. APHIS-2006-0113, Regulatory Analysis and Development, PPD, APHIS, Station 3A-03.8, 4700 River Road Unit 118, Riverdale, MD 20737-1238. Please state that your comment refers to Docket No. APHIS-2006-0113. *Reading Room:* You may read any comments that we receive on this docket in our reading room. The reading room is located in room 1141 of the USDA South Building, 14th Street and Independence Avenue. SW., Washington, DC. Normal reading room hours are 8 a.m. to 4:30 p.m., Monday through Friday, except holidays. To be sure someone is there to help you, please call

(202)690-2817 before coming. *Other Information:* Additional information about APHIS and its programs is available on the Internet at *http://www.aphis.usda.gov.* FOR FURTHER INFORMATION CONTACT: Dr. Tracye Butler, Senior Staff Veterinarian, Technical Trade Services, National Center for Import and Export, VS, APHIS, 4700 River Road Unit 39, Riverdale, MD 20737-1231;

(301)734-3277. SUPPLEMENTARY INFORMATION: Background The regulations in 9 CFR parts 93, 94, 95, and 96 (referred to below as the regulations) govern the importation of certain animals, birds, poultry, meat, other animal products and byproducts, hay, and straw into the United States in order to prevent the introduction of various animal diseases, including rinderpest, foot-and-mouth disease (FMD), African swine fever (ASF), and exotic Newcastle disease (END). The regulations in § 95.5 cover the requirements for the unrestricted entry of untanned hides and skins. Section 95.6 sets out restrictions for those hides or skins that do not meet the requirements for unrestricted entry in § 95.5. The regulations in § 95.5, in their present form, do not address the importation into the United States of swine hides and skins from regions with ASF or bird trophies from regions with END. We have allowed the entry of these articles, however, if, among other requirements, the articles are sent directly to an establishment approved by the Animal and Plant Health Inspection Service (APHIS) for the receipt and handling of restricted imported animal byproducts. These precautions are needed to protect the U.S. swine and bird populations from incursions of these diseases. Both ASF and END are contagious and fatal viral diseases. Outbreaks of the latter in California, Arizona, Nevada, and Texas in 2002 and 2003 resulted in serious economic consequences for the poultry industry in those States. An outbreak of ASF could have similar effects on the U.S. swine industry. We have also allowed entry into the United States of deer and other ruminant hides and skins from Mexico under certain conditions, even though those conditions are not set out explicitly in the current regulations. Such hides and skins have been deemed eligible for importation into the United States from Mexico if they have been subjected to a hard drying, pickling, or lime treatment; have been frozen solid for 24 hours and accompanied by a written statement from the owner attesting to that fact; or are free from ticks and accompanied by a certificate issued by a full-time salaried veterinary officer of the Government of Mexico stating that the hides or skins have been treated with an acaricide. Bovine hides and skins from Mexico have been deemed eligible for importation under the same conditions as other Mexican ruminant hides and skins if the cattle from which the hides or skins were derived were subjected to a tickicidal dip at the Mexican slaughter facility where they were prepared. We have viewed these precautions as necessary because ruminant hides and skins from Mexico could be infested with ticks, which, if brought into the United States without the above listed treatments, could transmit bovine babesiosis (also known as splenetic or tick fever) to cattle in the United States. In order to make these conditions of entry more transparent and ensure uniform enforcement and maximum protection for the U.S. swine, bird, and ruminant populations, we are proposing to amend the regulations in § 95.5 to provide specific conditions under which untanned swine hides and skins from regions with ASF, bird trophies from regions with END, and deer and other ruminant hides and skins from Mexico could be imported into the United States. For greater clarity, we are also proposing to reorder the provisions of § 95.5. We would retain the provisions for imported hides and skins contained in current paragraphs

(a)through (e), albeit with some modifications (which are discussed below), but would redesignate these provisions as paragraphs (a)(1) through (a)(5). New provisions pertaining to deer and other ruminant hides and skins from Mexico would be contained in new proposed paragraph (b). Proposed paragraph

(c)would provide for the importation of bird trophies from END-free regions. We would also add references to bird trophies in the section heading and the introductory text, since bird trophies would be covered under these regulations for the first time. Currently, the introductory text of § 95.5 indicates that untanned hides and skins of cattle, buffalo, sheep, goats, other ruminants, and swine that do not meet the requirements for unrestricted entry specified in paragraphs

(a)through

(e)of that section can only be imported if subjected to the handling prescribed in § 95.6 after arrival at the port of entry. Unfortunately, while the hard drying, pickling, and lime treatment processes specified in current paragraphs (b), (d), and (e), respectively, of § 95.5 will provide adequate protection against the transmission of FMD and rinderpest if carried out according to the regulations, these treatments may not kill the virus that causes ASF. We are proposing to amend the introductory text of § 95.5, along with the current provisions pertaining to hides and skins, to address the importation of swine hides and skins that could introduce ASF into the U.S. swine population and bird trophies that could introduce END into the avian population. Our proposed introductory text would state that untanned hides and skins and bird trophies may be imported into the United States without restriction if they meet the requirements of § 95.5 and that any untanned hides or skins or bird trophies that do not meet these requirements, including, but not limited to, swine hides and skins imported from regions with ASF and bird trophies from regions with END, must be handled at an approved establishment as set forth in § 95.6. Current paragraph

(a)of § 95.5, which would become paragraph (a)(1) under this proposed rule, states that hides or skins originating in and shipped directly from a region not declared by the Secretary of Agriculture to be infected with FMD or rinderpest may be imported without further restriction. We would amend that paragraph to provide that for untanned swine hides and skins to be imported into the United States without further restriction, they would have to come from regions that are not only free of rinderpest and FMD, but of ASF as well. With respect to ruminant hides and skins, an exception would be noted for deer or other ruminant hides or skins imported from Mexico. Such articles would be subject to the additional requirements of proposed paragraph

(b)because they may contain ticks that could transmit bovine babesiosis to the U.S. cattle population. Current paragraph

(b)of § 95.5, which would become paragraph (a)(2) under this proposed rule, states that hides or skins may be imported without other restriction if found upon inspection by an inspector, or by certificate of the shipper or importer satisfactory to said inspector, to be hard dried hides or skins. We would amend this paragraph so that it would apply only to untanned ruminant hides or skins because, as noted earlier, hard drying may not kill the ASF virus. Current paragraph

(c)of § 95.5, which would become paragraph (a)(3) under this proposed rule, allows the importation, under certain conditions, of abattoir hides or skins taken from animals that are slaughtered under national government inspection in a region and in an abattoir which maintains an inspection service approved by APHIS. We are proposing that only those abattoirs that are certified as meeting U.S. Department of Agriculture

(USDA)equivalency requirement under 9 CFR part 327 would satisfy the requirements of this rule. 1 The animals from which the hides or skins are taken must have been found free at the time of slaughter from anthrax, FMD, and rinderpest. We are proposing two substantive changes to this paragraph. Due to our concerns about ASF, our proposed paragraph would apply only to ruminant hides or skins. Also, because the provisions in current paragraph

(c)do not address the risks posed by the importation of deer or other ruminant hides or skins from Mexico, which could be infested with ticks carrying bovine babesiosis, we would add an exception for those articles. Finally, we are proposing some minor editorial changes to the paragraph to eliminate any possible ambiguity. 1 The USDA's Food Safety Inspection Service

(FSIS)maintains an Internet site that lists certified foreign establishments under the equivalency requirements. These establishments are listed by establishment number and country. Web site: *http://www.fsis.usda.gov/regulations/index-of-certified-countries/index.asp.* Current paragraph

(d)of § 95.5, which would become paragraph (a)(4) under this proposed rule, states that hides or skins may be imported without other restriction if shown upon inspection by an inspector, or by certificate of the shipper or importer satisfactory to said inspector, to have been pickled in a solution of salt containing mineral acid and packed in barrels, casks, or tight cases while still wet with such solution. We are proposing to amend this paragraph so that it would apply only to ruminant hides or skins because, as noted earlier, pickling may not kill the ASF virus. In order to ensure the elimination of the rinderpest and FMD viruses, the amended paragraph would also state that the pickling solution must be determined by an inspector to have a pH of less than or equal to 5. A pH of 5 or less has been determined to inactivate viruses of concern, such as those that cause FMD and rinderpest, on ruminant hides. It is currently the requirement that APHIS inspectors use as provided in the Plant Protection and Quarantine Animal Product Manual (APM). 2 2 The APM provides guidance to the port inspectors regarding importation-related issues. The section on hides can be found in Table 3-7-9, ``Regulatory Action on Untanned Hides, Skins or Capes of Ruminant and of Swine from Regions of Origin Known to be Affected with FMD, and Are Pickled in a Salt solution Containing Mineral Acid.'' the APM is available on the Internet at *http://www.aphis.usda.gov/ppq/manuals/port/APM Chapters.htm.* Current paragraph

(e)of § 95.5, which would become paragraph (a)(5) under this proposed rule, allows the importation of hides or skins if they have been treated with lime, become dehaired, and have reached the stage of preparation for immediate manufacture into products ordinarily made from rawhide. Because lime treatment, like hard drying and pickling, may not kill the ASF virus, we would amend the paragraph so that it would apply only to untanned ruminant hides or skins. Under proposed paragraph

(b)of § 95.5, we would allow the importation of deer or other ruminant hides and skins from Mexico into the United States if they were subjected to any one of several possible treatment options, all of which we view as effective in eliminating ticks that could spread bovine babesiosis. Specifically, untanned deer or other ruminant hides and skins could be imported from Mexico without further restriction if they are:

(1)Subjected to the same hard drying, pickling, or lime treatment prescribed for ruminant hides or skins in proposed paragraphs (a)(2) through (a)(4);

(2)frozen solid for 24 hours and accompanied by a written statement from the owner attesting to that fact;

(3)free from ticks and accompanied by a certificate issued by a full-time salaried veterinary officer of the Government of Mexico stating that they have been treated with an acaricide; or

(4)abattoir bovine hides taken from cattle that were subjected to a tickicidal dip at a Mexican export facility 7 to 12 days prior to slaughter. The 7-to-12-day range parallels the tickicide dip requirement in § 93.427(b)(2)(ii) for live Mexican cattle offered for importation into the United States. Dipping ruminants within 7 to 12 days of slaughter reflects the residual effect of the tickicide and the life cycle of the female tick. The residual effect of the tickicide lasts about 2 weeks, meaning that any tick to come into contact with the hide within 2 weeks of application would die. Whereas the life cycle of a female tick takes about 2 weeks, since it must come into contact with the hide, be impregnated, engorge on the hide, and lay eggs, if a female tick were to come into contact with the hide within 2 weeks of slaughter and for some reason not die from the tickicide, the life cycle would be interrupted once the ruminant is slaughtered. Therefore, we believe that requiring the dip within 7 to 12 days of slaughter would ensure that the tickicide would still be effective at the time of slaughter and that hides taken from such bovines would be free of ticks. Under proposed paragraph

(c)of § 95.5, bird trophies from END-free regions could be imported without further restriction if they were accompanied by a certificate of origin issued by the national government of the region of export. This certification requirement would help to ensure that any bird trophy imported into the United States will have originated in and been exported from an END-free region. Taken together, these actions would help to make conditions of entry for ruminant and swine hides and skins and bird trophies more transparent and would protect the U.S. livestock and bird populations from incursions of ASF, bovine babesiosis, and END. Executive Order 12866 and Regulatory Flexibility Act This proposed rule has been reviewed under Executive Order 12866. The rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget. This proposed rule would amend the regulations in § 95.5 governing the requirements for importation of untanned hides and skins. We are proposing to require that untanned swine hides and skins from regions with ASF and bird trophies from regions with END go directly to an approved establishment upon importation into the United States and be subject to the requirements under § 95.6 of the regulations. We are also proposing to require that deer and other ruminant hides and skins imported into the United States from Mexico be subjected to one of several possible treatments that we view as effective in killing ticks that could transmit bovine babesiosis. We anticipate that the proposed rule will produce economic benefits by preventing incursions of ASF, END, and bovine babesiosis, which could negatively affect the ability of the U.S. swine, poultry, and ruminant industries to export their products to international markets. The economic effects of END have been demonstrated by the recent 2002 and 2003 outbreak of the disease in the western United States. END was diagnosed in both backyard poultry flocks and in commercial poultry in California, Nevada, Arizona, and Texas. Over the course of the outbreak, more than 18,000 premises were quarantined, and more than 3 million birds were depopulated. The eradication efforts cost taxpayers in excess of $180 million. In addition, over 30 international governments placed varying levels of import restrictions on poultry and poultry products from the United States as a result of this outbreak. These restrictions consisted primarily of bans on poultry and poultry products from the affected areas of the United States, resulting in approximately $121 million of direct total value of exports affected by these restrictions. Incursions of ASF and bovine babesiosis could cause similar serious economic damage to the U.S. swine and cattle industries. These three livestock industries were valued at more than $72 billion in 2000. Specifically, the U.S. cattle industry was valued at $67.1 billion, the swine industry at $4.3 billion, and the poultry industry at $1.2 billion (Agricultural Statistics, 2001). U.S. imports of untanned swine hides and skins from ASF-affected regions are relatively meager (see table 1 below). The average value of such imports in 2000 and 2001, all of which came from sub-Saharan Africa, was $4,500, while the average value of all U.S. imports of untanned swine hides and skins during the same period was $980,500. There were no U.S. imports of untanned swine hides and skins from ASF-affected regions in 2002 and 2003. We can conclude, then, that the amount of untanned swine hides and skins coming from ASF-affected countries into the United States is insignificant and that the proposed requirement that these hides and skins be consigned to an approved establishment is not likely to have a significant economic effect on U.S. importers of such hides and skins. Table 1.—Value of U.S. Imports of Untanned Swine Hides and Skins 1 Region 2000 2001 2002 2003 Sub-Saharan Africa $3,000 $6,000 0 0 World 1,292,000 669,000 $1,401,000 $868,000 1 Fresh or salted untanned swine-hides—(HS 4103900060). Import HS-10 Digit-lUSITC Commodities in Detail. Source: FAS, U.S. Trade Internet System, Imports, FATUS. Web site: *http://www.fas.usda.gov/ustrade.* U.S. imports of untanned deer hides and skins from Mexico have also been limited. As shown in table 2, the value of U.S. imports of untanned deer hides and skins from Mexico in 2001 was $2,000, accounting for approximately 0.33 percent of the U.S. total for that year. There were no untanned deer hides and skins imported from Mexico in 2000, 2002, and 2003. The average value of total U.S. imports of untanned deer hides and skins in 2000 and 2001 was $700,000, and none were imported in 2002 or 2003. Since Mexico's share of this market has been so small, we can conclude that this proposed rule is not likely to have a significant economic effect on U.S. importers of untanned deer hides and skins. Table 2.—Value of U.S. Imports of Untanned Deer-Hides and Skins 1 Region 2000 2001 2002 2003 Mexico 0 $2,000 0 0 World $805,000 604,000 0 0 1 Fresh or dried or salted, but not tanned deer-skins—(HS 4103900030). Import HS-10 Digit-USITC Commodities in Detail. Source: FAS, U.S. Trade Internet System, Imports, FATUS. Web site: *http://www.fas.usda.gov/ustrade.* Other ruminant hides and skins that are currently being imported into the United States from Mexico and that would be subject to provisions of this proposed rule include those of bovines, sheep or lambs, and chamoises. The latest available data on the value of U.S. imports from Mexico of such hides and skins and the percentages of Mexico's market share for the years 1997 through 2001 are presented in tables 3 through 6. Table 3.—Value of U.S. Imports of Untanned Bovine Hides, Whole, Raw Region 1997 1998 1999 2000 2001 5-year average Mexico $10,000 (0.5%) 0 $1,000 (0.1%) 0 $177,000 (15%) 3.12% World 1,964,000 $667,000 962,000 $1,135,000 1,217,000 Source: United Nations ( *http://untrade.fas.usda.gov/untrade* ). Table 4.—Value of U.S. Imports of NES1 Untanned Bovine Skins Region 1997 1998 1999 2000 2001 5-year average Mexico $142,000 (0.8%) $704,000 (5%) $372,000 (4%) $63,000 (0.8%) $59,000 (0.9%) 2.3% World 17,733,000 14,974,000 10,123,000 8,319,000 6,768,000 1 Not elsewhere specified. Source: United Nations ( *http://untrade.fas.usda.gov/untrade* ). Table 5.—Value of U.S. Imports of Sheep or Lamb Skins, Raw, With Wool On Region 1997 1998 1999 2000 2001 5-year average Mexico $486,000 (23%) $59,000 (3.2%) 0 $13,000 (5.8%) 0 6.4% World 2,116,000 1,828,000 $256,000 226,000 $764,000 Source: United Nations ( *http://untrade.fas.usda.gov/untrade* ). Table 6.—Value of U.S. Imports of Untanned Chamois Hides Region 1997 1998 1999 2000 2001 5-year average Mexico $3,753,000 (27%) $4,358,000 (29%) $4,907,000 (34%) $5,588,000 (38%) $6,156,000 (48%) 35.2% World 13,711,000 15,150,000 14,483,000 14,849,000 12,969,000 Source: United Nations ( *http://untrade.fas.usda.gov/untrade* ). As the tables illustrate, with the exception of chamois hides (table 6), imports from Mexico account for a relatively small proportion of the total U.S. imports of these commodities. Over the 5-year period, an average of 3.12 percent of the untanned whole bovine hides, 2.3 percent of the NES untanned bovine skins, and 6.4 percent of the untanned sheep and lamb skins that were imported into the United States came from Mexico. Mexican chamois hides, however, did account for a significantly larger proportion of total imports, averaging 35.2 percent. Still, given the relatively small amounts of most of these commodities that Mexico provides and the fact that the procedures specified in this proposed rule are already being required for entry of ruminant hides and skins into the United States in most cases, it appears unlikely that the proposed rule would have a significant effect on any U.S. importers of untanned ruminant hides or skins from Mexico. The United States Fish and Wildlife Service grants permits to individuals for the importation of bird trophies but does not require a separate permit for each trophy, whether imported as a finished product or as skin, bones, and feathers, and does not collect data on the number of mounts prepared by each permit holder. Therefore, reliable data on imported bird trophies from END-free regions are not available. Economic Impact on Small Entities Agencies are required to analyze the impacts of their regulations on small businesses and to use flexibility to provide regulatory relief when regulations create economic disparities between different-sized entities. Among the small entities that could be affected by this proposed rule are importers of hides and skins. According to the 2002 Economic Census, in that year there were 260 establishments in the United States which primarily engaged in the wholesale distribution of untanned hides and skins. No data were available on how many of these entities were importers. According to the criteria used by the Small Business Administration (SBA), an entity in this category (North American Industrial Classification System [NAICS] 4225159) is considered small if it employs fewer than 100 persons. In 2002, these 260 entities employed a total of 1,983 paid employees, an average of approximately 7 per entity. It is likely, therefore, that the overwhelming majority of these establishments were small. As we have already noted, imports of the commodities potentially affected by this proposed rule are relatively low, and we do not expect this rulemaking to have a significant economic impact on any U.S. entities, large or small. Moreover, any possible negative effects of this proposed rule on U.S. importers of untanned ruminant or swine hides and skins, deer or other ruminant hides and skins from Mexico, and bird trophies would be far outweighed by the benefits to other small entities by preventing outbreaks of ASF, END, and bovine babesiosis. Over 99 percent of U.S. cattle producers and more than 88 percent of U.S. swine producers have annual receipts of $750,000 or less, which is the criterion by which such firms are designated as small entities by the SBA. The majority of meat packing plants (NAICS 311612 and NAICS 311613), which could be affected by an ASF or bovine babesiosis outbreak, and poultry processors (NAICS 311615), which could be affected by an END outbreak, are also small entities, the SBA threshold for these entities being 100 or fewer employees. The latest available data show that in 1997, more than 96 percent of meat packing firms were small. These small firms accounted for approximately 40 percent of the total value of the industry's shipments. All of these small entities would benefit from the proposed rule by being protected from potential outbreaks of ASF, END, and bovine babesiosis. Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action would not have a significant economic impact on a substantial number of small entities. Executive Order 12988 This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. If this proposed rule is adopted:

(1)All State and local laws and regulations that are inconsistent with this rule will be preempted;

(2)no retroactive effect will be given to this rule; and

(3)administrative proceedings will not be required before parties may file suit in court challenging this rule. Paperwork Reduction Act In accordance with section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 *et seq.* ), the information collection or recordkeeping requirements included in this proposed rule have been submitted for approval to the Office of Management and Budget (OMB). Please send written comments to the Office of Information and Regulatory Affairs, OMB, Attention: Desk Officer for APHIS, Washington, DC 20503. Please state that your comments refer to Docket No. APHIS-2006-0113. Please send a copy of your comments to:

(1)Docket No. APHIS-2006-0113, Regulatory Analysis and Development, PPD, APHIS, Station 3A-03.8, 4700 River Road Unit 118, Riverdale, MD 20737-1238, and

(2)Clearance Officer, OCIO, USDA, room 404-W, 14th Street and Independence Avenue SW., Washington, DC 20250. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication of this proposed rule. Some of the import requirements contained in this proposed rule would necessitate the use of additional certification statements in connection with the importation, from certain regions, of commodities such as untanned hides and bird trophies. In addition to meeting all other applicable APHIS provisions, certain untanned deer or other ruminant hides from Mexico would be allowed to enter the United States only if accompanied by a certificate, issued by a full-time salaried veterinary officer of the Government of Mexico, stating that the hides were treated with an acaricide to kill ticks that could carry and spread bovine babesiosis; or if accompanied by a written statement from the owner attesting to the fact that the hides were frozen solid for 24 hours. In addition to meeting all other applicable APHIS provisions, bird trophies from regions that are free of END would be eligible to enter the United States only if accompanied by a certificate of origin issued by the national government of the region of export. We are soliciting comments from the public (as well as affected agencies) concerning our proposed information collection and recordkeeping requirements. These comments will help us:

(1)Evaluate whether the proposed information collection is necessary for the proper performance of our agency's functions, including whether the information will have practical utility;

(2)Evaluate the accuracy of our estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used;

(3)Enhance the quality, utility, and clarity of the information to be collected; and

(4)Minimize the burden of the information collection on those who are to respond (such as through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses). *Estimate of burden:* Public reporting burden for this collection of information is estimated to average 0.2 hours per response. *Respondents:* Federal animal health authorities in certain regions and foreign exporters of certain animal byproducts. *Estimated annual number of respondents:* 50. *Estimated annual number of responses per respondent:* 4. *Estimated annual number of responses:* 200. *Estimated total annual burden on respondents:* 40 hours. (Due to averaging, the total annual burden hours may not equal the product of the annual number of responses multiplied by the reporting burden per response.) Copies of this information collection can be obtained from Mrs. Celeste Sickles, APHIS' Information Collection Coordinator, at

(301)734-7477. E-Government Act Compliance The Animal and Plant Health Inspection Service is committed to compliance with the E-Government Act to promote the use of the Internet and other information technologies, to provide increased opportunities for citizen access to Government information and services, and for other purposes. For information pertinent to E-Government Act compliance related to this proposed rule, please contact Mrs. Celeste Sickles, APHIS' Information Collection Coordinator, at

(301)734-7477. List of Subjects in 9 CFR Part 95 Animal feeds, Hay, Imports, Livestock, Reporting and recordkeeping requirements, Straw, Transportation. Accordingly, we propose to amend 9 CFR part 95 as follows: PART 95—SANITARY CONTROL OF ANIMAL BYPRODUCTS (EXCEPT CASINGS), AND HAY AND STRAW, OFFERED FOR ENTRY INTO THE UNITED STATES 1. The authority citation for part 95 would continue to read as follows: Authority: 7 U.S.C. 8301-8317; 21 U.S.C. 136 and 136a; 31 U.S.C. 9701; 7 CFR 2.22, 2.80, and 371.4. 2. Section 95.5 would be revised to read as follows: § 95.5 Untanned hides and skins and bird trophies; requirements for unrestricted entry. Untanned hides and skins and bird trophies may be imported into the United States without restriction if they meet the requirements of this section. Any untanned hides or skins or bird trophies that do not meet the requirements of this section, including, but not limited to, swine hides imported from regions where African swine fever exists and bird trophies imported from regions where exotic Newcastle disease exists, must be handled at an approved establishment as set forth in § 95.6.

(a)*Untanned hides and skins.*

(1)Except for ruminant hides or skins from Mexico, any untanned hides or skins of ruminants from regions free of foot-and-mouth disease and rinderpest and any untanned hides or skins of swine from regions free of foot-and-mouth disease, rinderpest, and African swine fever may be imported without further restriction.

(2)Untanned ruminant hides or skins may be imported from any region without other restriction if an inspector determines, based on inspection and upon examination of a shipper or importer certificate, that they are hard dried hides or skins.

(3)Except for ruminant hides or skins from Mexico, untanned abattoir hides or skins of ruminants may be imported from any region without other restriction if the following requirements are met:

(i)The ruminants from which the hides or skins were taken have been slaughtered under national government inspection in a region 1 and in an abattoir in which is maintained an inspection service that meets the requirements and has been approved pursuant to part 327 of this title; and 1 Names of these regions will be furnished upon request to the Animal and Plant Health Inspection Service, Veterinary Services, National Center for Import and Export, 4700 River Road Unit 38, Riverdale, Maryland 20737-1231.

(ii)The hides or skins are accompanied by a certificate bearing the seal of the proper department of that national government and signed by an official veterinary inspector of the region in which the ruminants were slaughtered. The certificate must state that the hides or skins were taken from ruminants slaughtered in an abattoir that meets the requirements of paragraph (a)(3)(i) of this section and that the hides or skins are free from anthrax, foot-and-mouth disease, and rinderpest.

(4)Untanned ruminant hides or skins from any region may be imported without other restriction if an inspector determines, based on inspection and upon examination of a shipper or importer certificate, that they have been pickled in a solution of salt containing mineral acid and packed in barrels, casks, or tight cases while still wet with such solution. The solution must be determined by the inspector to have a pH of less than or equal to 5.

(5)Untanned ruminant hides or skins from any region may be imported without other restriction if an inspector determines, based on inspection and upon examination of a shipper or importer certificate, that they have been treated with lime in such manner and for such period as to have obviously been processed, to have become dehaired, and to have reached the stage of preparation for immediate manufacture into products ordinarily made from rawhide.

(b)*Ruminant hides and skins from Mexico* . Ruminant hides and skins from Mexico may enter the United States without other restriction if:

(1)They have been subjected to any one of the treatments specified in paragraphs (a)(2), (a)(3), or (a)(4) of this section; or

(2)They have been frozen solid for 24 hours and are accompanied by a written statement from the owner attesting to that fact; or

(3)They are free from ticks and are accompanied by a certificate issued by a full-time salaried veterinary officer of the Government of Mexico stating that they have been treated with an acaricide; or

(4)They are bovine hides taken from cattle that were subjected to a tickicidal dip at a Mexican export facility 7 to 12 days prior to slaughter.

(c)*Bird trophies* . Bird trophies from regions designated in § 94.6 of this subchapter as free of exotic Newcastle disease may be imported without further restriction if accompanied by a certificate of origin issued by the national government of the region of export. (Approved by the Office of Management and Budget under control number 0579-0015) Done in Washington, DC, this 31st day of July 2006. W. Ron DeHaven, Administrator, Animal and Plant Health Inspection Service. [FR Doc. E6-12639 Filed 8-3-06; 8:45 am] BILLING CODE 3410-34-P DEPARTMENT OF THE INTERIOR National Indian Gaming Commission 25 CFR Parts 502 and 546 Class II Definitions and Game Classification Standards AGENCY: National Indian Gaming Commission. ACTION: Notice of public hearing; notice of extension of comment period; errata notice. SUMMARY: This document sets a date, time, place, and procedures for a public hearing in connection with the proposed Class II definitions and game classification standards published in the **Federal Register** on May 25, 2006 (71 FR 30232, 71 FR 30238). Additionally, this document extends the period for comments on the proposed regulations. Finally, this document provides an errata for the preamble to the Notice of Proposed Rulemaking published in the **Federal Register** on May 25, 2006 (71 FR 30238). DATES: The hearing will begin at 10 a.m. e.d.t. on September 19, 2006. Comment Period: The comment period for the proposed classification regulations is extended from August 23, 2006, to September 30, 2006. ADDRESSES: United States Department of the Interior, Main Auditorium, 1849 C Street, NW., Washington, DC. FOR FURTHER INFORMATION CONTACT: Natalie Hemlock at 202/632-7003; fax 202/632-7066 (these are not toll-free numbers). SUPPLEMENTARY INFORMATION: Congress established the National Indian Gaming Commission (NIGC or Commission) under the Indian Gaming Regulatory Act of 1988 (25 U.S.C. 2701 et seq.)

(IGRA)to regulate gaming on Indian lands. On May 25, 2006, proposed Class II definitions and game classification standards were published in the **Federal Register** (71 FR 30238). The purpose of this meeting is to provide the NIGC with information from those impacted by changes to gaming regulations. The hearing will be non-adversarial and fact-finding in nature and questioning will be limited to the panel topics. This public hearing will be transcribed and the transcription will be made available to the public. 1. Composition of the Hearing Panels The Hearing Panels will be composed of individuals selected by the NIGC. The Hearing Panel will be headed by the Chairman of the NIGC. The Chairman shall have the authority to administer oaths, regulate the conduct of the public hearing, and rule on any procedural questions or objections. 2. Topic Panels

(1)State Perspective.

(2)Tribal Perspective.

(3)Federal Perspective.

(4)Manufacturers Perspective.

(5)Economic Impacts.

(6)Game Simulation. 3. Public Attendance The public hearing is open to the public; however, NIGC and the Department of the Interior

(DOI)have the authority to put reasonable limitations on use of transcription devices, videotape cameras, still cameras, camera lights and camera flash lights. NIGC and DOI have the right to restrict persons from entering into the hearing room if they believe their conduct will be disruptive and have the right to restrict the number of spectators to the capacity of the meeting room. *Errata:* This Errata makes the following corrections to the preamble to the Notice of Proposed Rulemaking published on May 25, 2006 (71 FR 30238).

(1)71 FR 30243, third paragraph, strike *U.S.* v. 103 *Electronic Gambling Devices,* 223 F.3d 1091, 1093 (10th Cir. 2000), insert *U.S.* v. *103 Electronic Gambling Devices,* 223 F.3d 1091, 1093 (9th Cir. 2000).

(2)71 FR 30246, fourth paragraph, last sentence, strike “If all players have covered sooner, the game may proceed.”

(3)71 FR 30248, second paragraph, strike “The minimum two-second opportunity for covering (daubing) the selected numbers or other designations in each release that appears on players' cards may be shortened, and the game may proceed, if all players in the game Cover

(daub)their cards in less time.”

(4)71 FR 30248, tenth paragraph, third sentence, strike “or a lesser time if all players have covered.” Dated: July 31, 2006. Philip N. Hogen, Chairman, National Indian Gaming Commission. [FR Doc. E6-12580 Filed 8-3-06; 8:45 am] BILLING CODE 7565-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-124152-06] RIN 1545-BF73 Definition of Taxpayer for Purposes of Section 901 and Related Matters AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: These proposed regulations provide guidance relating to the determination of who is considered to pay a foreign tax for purposes of sections 901 and 903. The proposed regulations affect taxpayers that claim direct and indirect foreign tax credits. DATES: Written or electronic comments must be received by October 3, 2006. Outlines of topics to be discussed at the public hearing scheduled for October 13, 2006, must be received by October 3, 2006. ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-124152-06), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be sent electronically via the IRS Internet site at *http://www.irs.gov/regs* or via the Federal eRulemaking Portal at *http://www.regulations.gov* (IRS and REG-124152-06). The public hearing will be held in the Auditorium, Internal Revenue Service, New Carrollton Building, 5000 Ellin Road, Lanham, MD 20706. FOR FURTHER INFORMATION CONTACT: Concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly Banks ( *Kelly.D.Banks@irscounsel.treas.gov* ); concerning the regulations, Bethany A. Ingwalson,

(202)622-3850 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 901 of the Internal Revenue Code

(Code)permits taxpayers to claim a credit for income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States. Section 903 of the Code permits taxpayers to claim a credit for a tax paid in lieu of an income tax. Section 1.901-2(f)(1) of the current final regulations provides that the person by whom tax is considered paid for purposes of sections 901 and 903 is the person on whom foreign law imposes legal liability for such tax. This legal liability rule applies even if another person, such as a withholding agent, remits the tax. Section 1.901-2(f)(3) provides that if foreign income tax is imposed on the combined income of two or more related persons (for example, a husband and wife or a corporation and one or more of its subsidiaries) and they are jointly and severally liable for the tax under foreign law, foreign law is considered to impose legal liability on each such person for the amount of the foreign income tax that is attributable to its portion of the base of the tax, regardless of which person actually pays the tax. The existing final regulations were published in 1983. Since that time, numerous questions have arisen regarding the application of the legal liability rule to fact patterns not specifically addressed in the regulations or the case law. These include situations in which the members of a foreign consolidated group may not have in the U.S. sense the full equivalent of joint and several liability for the group's consolidated tax liability, and cases in which the person whose income is included in the foreign tax base is not the person who is obligated to remit the tax. Courts have reached inconsistent conclusions on these matters. Compare *Nissho Iwai American Corp.* v. *Commissioner,* 89 T.C. 765, 773-74 (1987), *Continental Illinois Corp.* v. *Commissioner,* 998 F.2d 513 (7th Cir. 1993), *cert. denied,* 510 U.S 1041 (1994), *Norwest Corp* v. *Commissioner,* 69 F.3d 1404 (8th Cir. 1995), *cert. denied,* 517 U.S. 1203 (1996), *Riggs National Corp. & Subs.* v. *Commissioner,* 107 T.C. 301, *rev'd and rem'd on another issue,* 163 F.3d 1363 (D.C. Cir. 1999) (all holding that U.S. lenders had legal liability for tax imposed on their interest income from Brazilian borrowers, notwithstanding that under Brazilian law the tax could only be collected from the borrowers) with *Guardian Industries Corp. & Subs.* v. *United States,* 65 Fed. Cl. 50 (2005), appeal docketed, No. 2006-5058 (Fed. Cir. December 19, 2005) (concluding that the subsidiary corporations in a Luxembourg consolidated group had no legal liability for tax imposed on their income, because under Luxembourg law the parent corporation was solely liable to pay the tax). Questions have also arisen regarding the application of the legal liability rule to entities that have different classifications for U.S. and foreign tax law purposes ( *e.g.* , hybrid entities and reverse hybrids). This is particularly the case following the promulgation of §§ 301.7701-1 through -3 (the check the box regulations) in 1997. A hybrid entity is an entity that is treated as a taxable entity ( *e.g.* , a corporation) under foreign law and as a partnership or disregarded entity for U.S. tax purposes. For purposes of these regulations, a reverse hybrid is an entity that is a corporation for U.S. tax purposes but is treated as a pass-through entity for foreign tax purposes ( *i.e.* , income of the entity is taxed under foreign law at the owner level). Current § 1.901-2(f) does not explicitly address how to determine the person that is considered to pay foreign tax imposed on the income of hybrid entities or reverse hybrids. The IRS and the Treasury Department have determined that the regulations should be updated to clarify the application of the legal liability rule in these situations, and request comments on additional matters that should be addressed in published guidance. Explanation of Provisions A. Overview The IRS and Treasury Department have received substantial comments as to matters that may be addressed under the legal liability rule of § 1.901-2(f). These matters include rules relating to the treatment of foreign consolidated groups, reverse hybrids, hybrid entities, hybrid instruments and payments, and other issues. The proposed regulations would provide guidance on foreign consolidated groups, reverse hybrids, and hybrid entities. However, the proposed regulations reserve on issues relating to hybrid instruments and payments, specifically on the question of who is considered to pay tax imposed on income attributable to amounts paid or accrued between related parties under a hybrid instrument or payments that are disregarded for U.S. tax purposes. These and other issues will be addressed in a subsequent guidance project. The proposed regulations would retain the general principle that tax is considered paid by the person who has legal liability under foreign law for the tax. However, the proposed regulations would further clarify application of the legal liability rule in situations where foreign law imposes tax on the income of one person but requires another person to remit the tax. The proposed regulations make clear that foreign law is considered to impose legal liability for income tax on the person who is required to take such income into account for foreign tax purposes even if another person has the sole obligation to remit the tax (subject to the above-referenced reservation for hybrid instruments and payments). The proposed regulations would provide detailed guidance regarding how to treat taxes paid on the combined income of two or more persons. First, the proposed regulations would clarify the application of § 1.901-2(f) to foreign consolidated-type regimes where the members are not jointly and severally liable in the U.S. sense for the group's tax. The proposed regulations would make clear that the foreign tax must be apportioned among all the members pro rata based on the relative amounts of net income of each member as computed under foreign law. The proposed regulations would provide guidance in determining the relative amounts of net income. Second, the proposed regulations would revise § 1.901-2(f) to provide that a reverse hybrid is considered to have legal liability under foreign law for foreign taxes imposed on an owner of the reverse hybrid in respect of the owner's share of income of the reverse hybrid. The reverse hybrid's foreign tax liability would be determined based on the portion of the owner's taxable income (as computed under foreign law) that is attributable to the owner's share of the income of the reverse hybrid. Third, the proposed regulations would clarify that a hybrid entity that is treated as a partnership for U.S. income tax purposes is legally liable under foreign law for foreign income tax imposed on the income of the entity, and that the owner of an entity that is disregarded for U.S. income tax purposes is considered to have legal liability for such tax. These provisions are discussed in more detail below. B. Legal Liability Under Foreign Law Section 1.901-2(f)(1)(i) of the proposed regulations clarifies that, except for income attributable to related party hybrid payments described in § 1.901-2(f)(4), foreign law is considered to impose legal liability for income tax on the person who is required to take such income into account for foreign tax purposes. This paragraph of the proposed regulations further clarifies that such person has legal liability for the tax even if another person is obligated to remit the tax, another person actually remits the tax, or the foreign country (defined in § 1.901-2(g) to include political subdivisions and U.S. possessions) can proceed against another person to collect the tax in the event the tax is not paid. Similarly, § 1.902-1(f)(1)(ii) of the proposed regulations clarifies that, in the case of a tax imposed with respect to a base other than income, foreign law is considered to impose legal liability for the tax on the person who is the owner of the tax base for foreign tax purposes. Thus, in the case of a gross basis withholding tax that qualifies as a tax in lieu of an income tax under § 1.903-1(a), the proposed regulations provide that the person that is considered under foreign law to earn the income on which the foreign tax is imposed has legal liability for the tax, even if the foreign tax cannot be collected from such person. The IRS and Treasury Department request comments on whether the regulations should provide a special rule on where legal liability resides in the case of withholding taxes imposed on an amount received by one person on behalf of the beneficial owner of such amount. In certain cases, a foreign country may consider the recipient to earn income (or be the owner of the tax base) while the United States considers the recipient to be a nominee receiving the payment on behalf of the beneficial owner. Comments should focus on how a special rule for such nominee arrangements could be narrowly drawn to prevent opportunities for abuse while maintaining the administrative advantages of the legal liability rule, which generally operates to classify as the *taxpayer* the person who is in the best position to prove the tax was required to be, and actually was, paid. C. Taxes Imposed on Combined Income 1. Foreign Consolidated Groups The IRS and Treasury Department believe that § 1.901-2(f)(1) of the current final regulations requires allocation of foreign consolidated tax liability among the members of a foreign consolidated group pro rata based on each member's share of the consolidated taxable income included in the foreign tax base. In addition, the IRS and Treasury Department believe that § 1.901-2(f)(3) confirms this rule in situations in which foreign consolidated regimes impose joint and several liability for the group's tax on each member. With respect to a foreign consolidated-type regime where the members do not have the full equivalent of joint and several liability in the U.S. sense, or where the income of the consolidated group members is attributed to the parent corporation in computing the consolidated taxable income, the current regulations do not include a specific illustration of how the consolidated tax should be allocated among the members of the group for foreign tax credit purposes. Thus, the IRS and Treasury Department believe that § 1.901-2(f)(1) of the current final regulations requires as a general rule pro rata allocation of foreign tax among the members of a foreign consolidated group, and that § 1.901-2(f)(3) illustrates the application of the general rule in cases where the group members are jointly and severally liable for that consolidated tax. Failure to allocate appropriately the consolidated tax among the members of the group may result in a separation of foreign tax from the income on which the tax is imposed. This type of splitting of foreign tax and income is contrary to the general purpose of the foreign tax credit to relieve double taxation of foreign-source income. Accordingly, § 1.901-2(f)(2) of the proposed regulations would explicitly cover all foreign consolidated-type regimes, including those in which the regime imposes joint and several liability in the U.S. sense, those in which the regime treats subsidiaries as branches of the parent corporation (or otherwise attributes income of subsidiaries to the parent corporation), and those in which some of the group members have limited obligations, or even no obligation, to pay the consolidated tax. Several significant commentators recommended that the regulations be clarified in this manner. The proposed regulations would define *combined income* to include cases where the foreign country initially recognizes the subsidiaries as separate taxable entities, but pursuant to the applicable consolidated tax regime treats subsidiaries as branches of the parent, requires or treats all income as distributed to the parent, or otherwise attributes all income to the parent. This approach will minimize the need for extensive analysis of the intricacies of the relevant foreign consolidated tax regime, by treating a foreign subsidiary as legally liable for its share of the consolidated tax without regard to the precise mechanics of the foreign consolidated regime. This approach will not only reduce inappropriate foreign tax credit splitting but will also reduce administrative burdens on taxpayers and the IRS. Section 1.902-1(f)(2) of the proposed regulations retains the general principle that the foreign tax must be apportioned among the persons whose income is included in the combined base pro rata based on the relative amounts of net income of each person as computed under foreign law. As under current law, this rule would apply regardless of which person is obligated to remit the tax, which person actually remits the tax, and which person the foreign country could proceed against to collect the tax in the event all or a portion of the tax is not paid. Under § 1.902-1(f)(2)(i), *person* for this purpose includes a disregarded entity. 2. Reverse Hybrid Entities The proposed regulations would revise § 1.901-2(f) to provide that a reverse hybrid is considered to have legal liability under foreign law for foreign taxes imposed on the owners of the reverse hybrid in respect of each owner's share of the reverse hybrid's income. Proposed regulation § 1.902-1(f)(2)(iii). This rule is necessary to prevent the inappropriate separation of foreign tax from the related income and to prevent dissimilar treatment of foreign consolidated groups and foreign groups containing reverse hybrids, which are treated identically for U.S. tax purposes. Under the proposed rule, the reverse hybrid's foreign tax liability would be determined based on the portion of the owner's taxable income (as computed under foreign law) that is attributable to the owner's share of the reverse hybrid's income. Thus, for example, if an owner of a reverse hybrid has no other income on which tax is imposed by the foreign country, then the entire amount of foreign tax that is imposed on the owner is treated as attributable to the reverse hybrid for U.S. income tax purposes and, accordingly, is tax for which the reverse hybrid has legal liability. This rule would apply irrespective of whether the owner and the reverse hybrid are located in the same foreign country. If the owner pays tax to more than one foreign country with respect to income of the reverse hybrid, tax paid to each foreign country would be separately apportioned on the basis of the income included in that country's tax base. The treatment of reverse hybrids in the proposed regulations is consistent with the treatment recommended by a significant commentator. 3. Apportionment of Tax on Combined Income Section 1.901-2(f)(2)(iv) of the proposed regulations includes rules for determining each person's share of the combined income tax base, generally relying on foreign tax reporting of separate taxable income or books maintained for that purpose. The regulations provide that payments between group members that result in a deduction under both U.S. and foreign tax law will be given effect in determining each person's share of the combined income, but, as noted above, explicitly reserve with respect to the effect of hybrid instruments and disregarded payments between related parties (to be dealt with in a separate guidance project). Special rules address the effect of dividends (and deemed dividends) and net losses of group members on the determination of separate taxable income. Once an amount of foreign tax is determined to be paid by a consolidated group member or reverse hybrid under the combined income rule, applicable provisions of the Code would determine the specific U.S. tax consequences of that treatment. For example, a parent corporation's payment of tax on its subsidiary's share of consolidated taxable income, or the payment of tax by the owner of a reverse hybrid with respect to its share of the income of the reverse hybrid, ordinarily would result in a capital contribution to the subsidiary or reverse hybrid. Further, under sections 902 and 960, domestic corporate owners that own 10 percent or more of a foreign corporation's voting stock are eligible to claim indirect credits. Thus, domestic corporations that are considered to own 10 percent or more of a reverse hybrid's voting stock would be able to claim indirect credits for the taxes attributable to the earnings of the reverse hybrid that are distributed as dividends or otherwise included in the owner's income for U.S. tax purposes. D. Hybrid Entities Section 1.901-2(f)(3) of the proposed regulations would also clarify the treatment of hybrid entities. In the case of an entity that is a partnership for U.S. income tax purposes but taxable under foreign law as an entity, foreign law is considered to impose legal liability for the tax on the entity. This is the case even if the owners of the entity also have a secondary obligation to pay the tax. Sections 702, 704, and 901(b)(5) and the Treasury regulations thereunder apply for purposes of allocating the foreign tax among the owners of a hybrid entity that is a partnership for U.S. tax purposes. In the case of tax imposed on an entity that is disregarded as separate from its owner for U.S. income tax purposes, foreign law is considered to impose legal liability for the tax on the owner. E. Effective Date The regulations are proposed to be effective for foreign taxes paid or accrued during taxable years beginning on or after January 1, 2007. Comments are requested as to how to determine which person paid a foreign tax in cases where a foreign taxable year ends, and foreign tax accrues, within a post-effective date U.S. taxable year of a reverse hybrid and a pre-effective date U.S. taxable year of its owner. F. Request for Additional Comments As indicated above, in developing these proposed regulations, the IRS and Treasury Department considered comments on the proper scope and content of the regulations. Commentators generally agreed that amendments to clarify that foreign tax is properly apportioned among the members of a foreign consolidated group were appropriate. Commentators also agreed that the regulations should clarify that tax imposed on a disregarded entity is considered paid by its owner, and that tax imposed on a hybrid partnership should be allocated under the rules of sections 702, 704, and 901(b)(5). Some comments strongly stated that the IRS and Treasury Department have authority to extend the scope of the regulations to require the attribution of foreign tax to reverse hybrids. One comment, however, suggested that the IRS and Treasury Department may lack such authority. The IRS and Treasury Department considered these comments and concluded that the proposed regulations are well within applicable regulatory authority and fully consistent with the case law, including *Biddle* v. *Commissioner,* 302 U.S. 573 (1938). Comments also suggested that the IRS and Treasury Department should extend the scope of the regulations to ensure that hybrid instruments and hybrid entities could not be used effectively to separate foreign tax from the related foreign income. As indicated above, however, the IRS and Treasury Department have decided not to exercise this authority in these regulations. The proposed regulations reserve on the effect given to hybrid payments and disregarded payments in determining the person whose income is subject to foreign tax. The IRS and Treasury Department are continuing to study certain transactions employing hybrid instruments and other transactions designed to generate inappropriate foreign tax credit results. These include the use of hybrid instruments that accrue income for foreign tax purposes, but not U.S. tax purposes, to accelerate the payment of creditable foreign taxes before the related income is subject to U.S. tax. These also include the use of disregarded payments to shift foreign tax liabilities away from the person that is considered to earn the associated taxable income for U.S. tax purposes. It is contemplated that some or all of these issues will be addressed in a separate guidance project, and that any such regulations may also be effective for taxable years beginning on or after January 1, 2007. The IRS and Treasury Department request additional comments regarding the appropriate application of the legal liability rule to hybrid instruments and payments that are disregarded for U.S. tax purposes. They also request comments on other issues that might be incorporated into final regulations. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6), does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight

(8)copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing has been scheduled for October 13, 2006, beginning at 10 a.m., in the Auditorium, Internal Revenue Service, New Carrollton Building, 5000 Ellin Road, Lanham, MD 20706. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments must submit electronic or written comments and an outline of the topics to be discussed and time to be devoted to each topic (a signed original and eight

(8)copies) by October 3, 2006. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these regulations is Bethany A. Ingwalson, Office of Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 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.** In § 1.706-1, paragraph (c)(6) is added to read as follows: § 1.706-1 Taxable years of partner and partnership.

(c)* * *

(6)*Foreign taxes* . For rules relating to the treatment of foreign taxes paid or accrued by a partnership, see § 1.901-2(f)(3)(i) and (ii). **Par. 3.** In § 1.901-2, paragraphs

(f)and

(h)are revised to read as follows: § 1.901-2 Income, war profits, or excess profits tax paid or accrued.

(f)*Taxpayer* —(1) *In general* —(i) *Income taxes.* Income tax (within the meaning of paragraphs

(a)through

(c)of this section) is considered paid for U.S. income tax purposes by the person on whom foreign law imposes legal liability for such tax. In general, foreign law is considered to impose legal liability for tax on income on the person who is required to take the income into account for foreign income tax purposes (paragraph (f)(4) of this section reserves with respect to certain related party hybrid payments). This rule applies even if under foreign law another person is obligated to remit the tax, another person (e.g., a withholding agent) actually remits the tax, or foreign law permits the foreign country to proceed against another person to collect the tax in the event the tax is not paid. However, see section 905(b) and the regulations thereunder for rules relating to proof of payment. Except as provided in paragraph (f)(2)(i) of this section, for purposes of this section the term *person* has the meaning set forth in section 7701(a)(1), and so includes an entity treated as a corporation, trust, estate or partnership for U.S. tax purposes, but not a disregarded entity described in § 301.7701-2(c)(2)(i) of this chapter. The person on whom foreign law imposes legal liability is referred to as the “taxpayer” for purposes of this section, § 1.901-2A, and § 1.903-1.

(ii)*Taxes in lieu of income taxes.* The principles of paragraph (f)(1)(i) and paragraphs (f)(2) through (f)(5) of this section shall apply to determine the person who is considered to have legal liability for, and thus to have paid, a tax in lieu of an income tax (within the meaning of § 1.903-1(a)). Accordingly, foreign law is considered to impose legal liability for any such tax on the person who is the owner of the base on which the tax is imposed for foreign tax purposes.

(2)*Taxes on combined income of two or more persons* —(i) *In general.* If foreign tax is imposed on the combined income of two or more persons (for example, a husband and wife or a corporation and one or more of its subsidiaries), foreign law is considered to impose legal liability on each such person for the amount of the tax that is attributable to such person's portion of the base of the tax. Therefore, if foreign tax is imposed on the combined income of two or more persons, such tax shall be allocated among, and considered paid by, such persons on a pro rata basis. For this purpose, the term pro rata means in proportion to each person's portion of the combined income, as determined under paragraph (f)(2)(iv) of this section and, generally, under foreign law. The rules of this paragraph (f)(2) apply regardless of which person is obligated to remit the tax, which person actually remits the tax, or which person the foreign country could proceed against to collect the tax in the event all or a portion of the tax is not paid. For purposes of this paragraph (f)(2), the term *person* shall include a disregarded entity described in § 301.7701-2(c)(2)(i) of this chapter. In determining the amount of tax paid by an owner of a hybrid partnership or disregarded entity (as defined in paragraph (f)(3) of this section), this paragraph (f)(2) shall first apply to determine the amount of tax paid by the hybrid partnership or disregarded entity, and then paragraph (f)(3) of this section shall apply to allocate the amount of such tax to the owner.

(ii)*Combined income.* For purposes of this paragraph (f)(2), foreign tax is imposed on the combined income of two or more persons if such persons compute their taxable income on a combined basis under foreign law. Foreign tax is considered to be imposed on the combined income of two or more persons even if the combined income is computed under foreign law by attributing to one such person (e.g., the foreign parent of a foreign consolidated group) the income of other such persons. However, foreign tax is not considered to be imposed on the combined income of two or more persons solely because foreign law:

(A)Permits one person to surrender a net loss to another person pursuant to a group relief or similar regime;

(B)Requires a shareholder of a corporation to include in income amounts attributable to taxes imposed on the corporation with respect to distributed earnings, pursuant to an integrated tax system that allows the shareholder a credit for such taxes; or

(C)Requires a shareholder to include, pursuant to an anti-deferral regime (similar to subpart F of the Internal Revenue Code (sections 951 through 965)), income attributable to the shareholder's interest in the corporation.

(iii)*Reverse hybrid entities.* For purposes of this paragraph (f)(2), if an entity is a corporation for U.S. income tax purposes and a person is required to take all or a part of the income of one or more such entities into account under foreign law because the entity is treated as a branch or a pass-through entity under foreign law (a *reverse hybrid* ), tax imposed on the person's share of income from each reverse hybrid and tax imposed by the foreign country on other income of the person, if any, is considered to be imposed on the combined income of the person and each reverse hybrid. Therefore, under paragraph (f)(2)(i) of this section, foreign tax imposed on the combined income of the person and each reverse hybrid shall be allocated between the person and the reverse hybrid on a pro rata basis. For this purpose, the term pro rata means in proportion to the portion of the combined income included in the foreign tax base that is attributable to the person's share of income from each reverse hybrid and the portion of the combined income that is attributable to the other income of the person (including income received from a reverse hybrid other than in the owner's capacity as an owner). If the person has a share of income from the reverse hybrid but no other income on which tax is imposed by the foreign country, the entire amount of foreign tax is allocated to and considered paid by the reverse hybrid.

(iv)*Portion of combined income* —(A) *In general.* Except with respect to income attributable to related party hybrid payments or accrued amounts described in paragraph (f)(4) of this section, each person's portion of the combined income shall be determined by reference to any return, schedule or other document that must be filed or maintained with respect to a person showing such person's income for foreign tax purposes, as properly amended or adjusted for foreign tax purposes. If no such return, schedule or document must be filed or maintained with respect to a person for foreign tax purposes, then, for purposes of this paragraph (f)(2), such person's income shall be determined from the books of account regularly maintained by or on behalf of the person for purposes of computing its taxable income under foreign law.

(B)*Effect of certain payments.* Each person's portion of the combined income shall be determined by giving effect to payments and accrued amounts of interest, rents, royalties, and other amounts to the extent such payments or accrued amounts are taken into account in computing the separate taxable income of such person both under foreign law and under U.S. tax principles. With respect to certain related party hybrid payments, see the reservation in paragraph (f)(4) of this section. Thus, for example, interest paid by a reverse hybrid to one of its owners with respect to an instrument that is treated as debt for both U.S. and foreign tax purposes would be considered income of the owner and would reduce the taxable income of the reverse hybrid. However, each person's portion of the combined income shall be determined without taking into account any payments from other persons whose income is included in the combined base that are treated as dividends under foreign law, and without taking into account deemed dividends or any similar attribution of income made for purposes of computing the combined income under foreign law. This rule applies regardless of whether any such dividend, deemed dividend or attribution of income results in a deduction or inclusion under foreign law.

(C)*Net losses.* If tax is considered to be imposed on the combined income of three or more persons and one or more of such persons has a net loss for the taxable year for foreign tax purposes, the following rules apply. If foreign law provides mandatory rules for allocating the net loss among the other persons, then the rules that apply for foreign tax purposes shall apply for purposes of paragraph (f)(2)(iv) of this section. If foreign law does not provide mandatory rules for allocating the net loss, the net loss shall be allocated among all other such persons pro rata based on the amount of each person's income, as determined under paragraphs (f)(2)(iv)(A) and

(B)of this section. For purposes of this paragraph (f)(2)(iv)(C), foreign law shall not be considered to provide mandatory rules for allocating a loss solely because such loss is attributed from one person to a second person for purposes of computing combined income, as described in paragraph (f)(2)(ii) of this section.

(v)*Collateral consequences.* U.S. tax principles shall apply to determine the tax consequences if one person remits a tax that is the legal liability of, and thus is considered paid by, another person. For example, a payment of tax for which a corporation has legal liability by a shareholder of that corporation (including an owner of a reverse hybrid) will ordinarily result in a deemed capital contribution and deemed payment of tax by the corporation. If the corporation reimburses the shareholder for the tax payment, such reimbursement would ordinarily be treated as a distribution for U.S. tax purposes.

(3)*Taxes on income of hybrid partnerships and disregarded entities* —(i) *Hybrid partnerships.* If foreign law imposes tax at the entity level on the income of an entity that is treated as a partnership for U.S. income tax purposes (a *hybrid partnership* ), the hybrid partnership is considered to be legally liable for such tax under foreign law. Therefore, the hybrid partnership is considered to pay the tax for U.S. income tax purposes. See § 1.704-1(b)(4)(viii) for rules relating to the allocation of such tax among the partners of the partnership. If the hybrid partnership's U.S. taxable year closes for all partners due to a termination of the partnership under section 708 and the regulations thereunder (other than in the case of a termination under section 708(b)(1)(A)) and the foreign taxable year of the partnership does not close, then foreign tax paid or accrued by the partnership with respect to the foreign taxable year that ends with or within the new partnership's first U.S. taxable year shall be allocated between the terminating partnership and the new partnership. The allocation shall be made under the principles of § 1.1502-76(b) based on the respective portions of the taxable income of the partnership (as determined under foreign law) for the foreign taxable year that are attributable to the period ending on and the period ending after the last day of the terminating partnership's U.S. taxable year. The principles of the preceding sentence shall also apply if the hybrid partnership's U.S. taxable year closes with respect to one or more, but less than all, partners or, except as otherwise provided in section 706(d)(2) or (d)(3) (relating to certain cash basis items of the partnership), there is a change in any partner's interest in the partnership during the partnership's U.S. taxable year. If, as a result of a change in ownership during a hybrid partnership's foreign taxable year, the hybrid partnership becomes a disregarded entity and the entity's foreign taxable year does not close, foreign tax paid or accrued by the disregarded entity with respect to the foreign taxable year shall be allocated between the hybrid partnership and the owner of the disregarded entity under the principles of this paragraph (f)(3)(i).

(ii)*Disregarded entities.* If foreign tax is imposed at the entity level on the income of an entity described in § 301.7701-2(c)(2)(i) of this chapter (a *disregarded entity* ), foreign law is considered to impose legal liability for the tax on the person who is treated as owning the assets of the disregarded entity for U.S. income tax purposes. Such person shall be considered to pay the tax for U.S. income tax purposes. If there is a change in the ownership of such disregarded entity during the entity's foreign taxable year and such change does not result in a closing of the disregarded entity's foreign taxable year, foreign tax paid or accrued with respect to such foreign taxable year shall be allocated between the old owner and the new owner. The allocation shall be made under the principles of § 1.1502-76(b) based on the respective portions of the taxable income of the disregarded entity (as determined under foreign law) for the foreign taxable year that are attributable to the period ending on the date of the ownership change and the period ending after such date. If, as a result of a change in ownership, the disregarded entity becomes a hybrid partnership and the entity's foreign taxable year does not close, foreign tax paid or accrued by the hybrid partnership with respect to the foreign taxable year shall be allocated between the old owner and the hybrid partnership under the principles of this paragraph (f)(3)(ii). If the person who owns a disregarded entity is a partnership for U.S. income tax purposes, see § 1.704-1(b)(4)(viii) for rules relating to the allocation of such tax among the partners of the partnership.

(4)*Tax on income attributable to related party payments or accrued amounts that are deductible for foreign (or U.S.) tax law purposes and that are nondeductible for U.S. (or foreign) tax law purposes or that are disregarded for U.S. tax law purposes.* [Reserved].

(5)*Party undertaking tax obligation as part of transaction.* Tax is considered paid by the taxpayer even if another party to a direct or indirect transaction with the taxpayer agrees, as a part of the transaction, to assume the taxpayer's foreign tax liability. The rules of the foregoing sentence apply notwithstanding anything to the contrary in paragraph (e)(3) of this section. See § 1.901-2A for additional rules regarding dual capacity taxpayers.

(6)*Examples.* The following examples illustrate the rules of paragraphs (f)(1) through (f)(5) of this section. *Example 1.*

(i)*Facts.* Under a loan agreement between A, a resident of country X, and B, a United States person, A agrees to pay B a certain amount of interest net of any tax that country X may impose on B with respect to its interest income. Country X imposes a 10 percent tax on the gross amount of interest income received by nonresidents of country X from sources in country X, and it is established that this tax is a tax in lieu of an income tax within the meaning of § 1.903-1(a). Under the law of country X this tax is imposed on the interest income of the nonresident recipient, and any resident of country X that pays such interest to a nonresident is required to withhold and pay over to country X 10 percent of the amount of such interest. Under the law of country X, the country X taxing authority may proceed against A, but not B, if A fails to withhold and pay over the tax to country X.

(ii)*Result.* Under paragraph (f)(1)(ii) of this section, B is considered legally liable for the country X tax because such tax is imposed on B's interest income. Therefore, for U.S. income tax purposes, B is considered to pay the country X tax, and B's interest income includes the amount of country X tax that is imposed with respect to such interest income and paid on B's behalf by A. No portion of such tax is considered paid by A. *Example 2.*

(i)*Facts.* The facts are the same as in *Example 1* , except that in collecting and receiving the interest B is acting as a nominee for, or agent of, C, who is a United States person. Accordingly, C, not B, is the beneficial owner of the interest for U.S. income tax purposes. Country X law also recognizes the nominee or agency arrangement and, thus, considers C to be the beneficial owner of the interest income.

(ii)*Result.* Under paragraph (f)(1)(ii) of this section, legal liability for the tax is considered to be imposed on C, not B (C's nominee or agent). Thus, C is the taxpayer with respect to the country X tax imposed on C's interest income from C's loan to A. Accordingly, C's interest income for U.S. income tax purposes includes the amount of country X tax that is imposed on C with respect to such interest income and that is paid on C's behalf by A pursuant to the loan agreement. Under paragraph (f)(1)(ii) of this section, such tax is considered for U.S. income tax purposes to be paid by C. No such tax is considered paid by B. *Example 3.*

(i)*Facts.* A, a U.S. person, owns a bond issued by C, a resident of country X. On January 1, 2008, A and B enter into a transaction in which A, in form, sells the bond to B, also a U.S. person. As part of the transaction, A and B agree that A will repurchase the bond from B on December 31, 2013 for the same amount. In addition, B agrees to make payments to A equal to the amount of interest B receives from C. As a result of the arrangement, legal title to the bond is transferred to B. The transfer of legal title has the effect of transferring ownership of the bond to B for country X tax purposes. A remains the owner of the bond for U.S. income tax purposes. Country X imposes a 10 percent tax on the gross amount of interest income received by nonresidents of country X from sources in country X, and it is established that this tax is a tax in lieu of an income tax within the meaning of § 1.903-1(a). Under the law of country X this tax is imposed on the interest income of the nonresident recipient, and any resident of country X that pays such interest to a nonresident is required to withhold and pay over to country X 10 percent of the amount of such interest. On December 31, 2008, C pays B interest on the bond and withholds 10 percent of country X tax.

(ii)*Result.* Under paragraph (f)(1)(ii) of this section, B is considered legally liable for the country X tax because B is the owner of the interest income for country X tax purposes, even though A and not B recognizes the interest income for U.S. tax purposes. The result would be the same if the transaction had the effect of transferring ownership of the bond to B for U.S. income tax purposes. *Example 4.*

(i)*Facts.* On January 1, 2007, A, a United States person, purchases a bond issued by X, a foreign person resident in county Y. A accrues interest income on the bond for U.S. tax purposes from January 1, 2007, until A sells the bond to B, another United States person, on July 1, 2007. On December 31, 2007, X pays interest on the bond that accrued for the entire year to B. Country Y imposes a 10 percent tax on the gross amount of interest income received by nonresidents of country Y from sources in country Y, and it is established that this tax is a tax in lieu of an income tax within the meaning of § 1.903-1(a). Under the law of country Y this tax is imposed on the interest income of the nonresident recipient, and any resident of country Y that pays such interest to a nonresident is required to withhold and pay over to country X 10 percent of the amount of such interest. Pursuant to the law of country Y, X withholds tax from the interest paid to B.

(ii)*Result.* Under paragraph (f)(1)(ii) of this section, legal liability for the tax is considered to be imposed on B. Thus, B is the taxpayer with respect to the entire amount of the country Y tax even though, for U.S. income tax purposes, B only recognizes interest that accrues on the bond on and after July 1, 2007. No portion of the country Y tax is considered to be paid by A even though, for U.S. income tax purposes, A recognizes interest on the bond that accrues prior to July 1, 2007. *Example 5.*

(i)*Facts.* A, a United States person and resident of country X, is an employee of B, a corporation organized in country X. Under the laws of country X, B is required to withhold from A's wages and pay over to country X foreign social security tax of a type described in paragraph (a)(2)(ii)(C) of this section, and it is established that this tax is an income tax described in paragraph (a)(1) of this section.

(ii)*Result.* Under paragraph (f)(1)(i) of this section, A is considered legally liable for the country X tax because such tax is imposed on A's wages. Therefore, for U.S. income tax purposes, A is considered to pay the country X tax. *Example 6.*

(i)*Facts.* A, a United States person, owns 100 percent of B, an entity organized in country X. B is a corporation for country X tax purposes, and a disregarded entity for U.S. income tax purposes. B owns 100 percent of corporation C and corporation D, both of which are also organized in country X. B, C and D use the “u” as their functional currency and file on a combined basis for country X income tax purposes. Country X imposes an income tax described in paragraph (a)(1) of this section at the rate of 30 percent on the taxable income of corporations organized in country X. Under the country X combined reporting regime, income (or loss) of C and D is attributed to, and treated as income (or loss) of, B. B has the sole obligation to pay country X income tax imposed with respect to income of B and income of C and D that is attributed to, and treated as income of, B. Under the law of country X, country X may proceed against B, but not C or D, if B fails to pay over to country X all or any portion of the country X income tax imposed with respect to such income. In year 1, B has taxable income of 100u, C has taxable income of 200u, and D has a net loss of (60u). Under the law of country X, B is considered to have 240u of taxable income with respect to which 72u of country X income tax is imposed. Country X does not provide mandatory rules for allocating D's loss.

(ii)*Result.* Under paragraph (f)(2)(ii) of this section, the 72u of country X tax is considered to be imposed on the combined income of B, C, and D. Because country X law does not provide mandatory rules for allocating D's loss between B and C, under paragraph (f)(2)(iv)(C) of this section D's

(60u)loss is allocated pro rata: 20u to B ((100u/300u) × 60u) and 40u to C ((200u/300u) × 60u). Under paragraph (f)(2)(i) of this section, the 72u of country X tax must be allocated pro rata among B, C, and D. Because D has no income for country X tax purposes, no country X tax is allocated to D. Accordingly, 24u (72u × (80u/240u)) of the country X tax is allocated to B, and 48u (72u × (160u/240u)) of such tax is allocated to C. Under paragraph (f)(3)(ii) of this section, A is considered to have legal liability for the 24u of country X tax allocated to B under paragraph (f)(2) of this section. Example 7.

(i)*Facts.* A, a domestic corporation, owns 95 percent of the voting power and value of C, an entity organized in country Z that uses the “u” as its functional currency. B, a domestic corporation, owns the remaining 5 percent of the voting power and value of C. Pursuant to an election made under § 301.7701-3(a), C is treated as a corporation for U.S. income tax purposes, but as a partnership for country Z income tax purposes. Accordingly, under country Z law, A and B are required to take into account their respective shares of the taxable income of C. Country Z imposes an income tax described in paragraph (a)(1) of this section at the rate of 30 percent on such taxable income. For 2007, C has 500u of taxable income for country Z tax purposes. A's and B's shares of such income are 475u and 25u, respectively. In addition, A has 125u of taxable income attributable to a permanent establishment in country Z. Income of nonresidents that is attributable to a permanent establishment in country Z is also subject to the country Z income tax at a rate of 30 percent. Accordingly, country Z imposes 180u of tax on A's total taxable income of 600u (475u of income from C and 125u of income from the permanent establishment). Country Z imposes 7.5u of tax on B's 25u of taxable income from C.

(ii)*Result.* Under paragraph (f)(2)(iii) of this section, the 180u of tax imposed on the taxable income of A is considered to be imposed on the combined income of A and C. Under paragraph (f)(2)(i) of this section, such tax must be allocated between A and C on a pro rata basis. Accordingly, C is considered to be legally liable for the 142.5u (180u × (475u/600u)) of country Z tax imposed on A's 475u share of C's income, and A is considered to be legally liable for the 37.5u (180u × (125u/600u)) of the country Z tax imposed on A's 125u of income from its permanent establishment. Under paragraph (f)(2)(iii) of this section, the 7.5u of tax imposed on the taxable income of B is considered to be imposed on the combined income of B and C. Since B has no other income on which income tax is imposed by country Z, under paragraph (f)(2)(iii) of this section the entire amount of such tax is allocated to and considered paid by C. C's post-1986 foreign income taxes include the U.S. dollar equivalent of 150u of country Z income tax C is considered to pay for U.S. income tax purposes. A, but not B, is eligible to compute deemed-paid taxes under section 902(a) in connection with dividends received from C. Under paragraph (f)(2)(v) of this section, the payment by A or B of tax for which C is considered legally liable is treated as a capital contribution by A or B to C. Example 8.

(i)*Facts.* A, B, and C are U.S. persons that each use the calendar year as their taxable year. A and B each own 50 percent of the capital and profits of D, an entity organized in country M. D is a partnership for U.S. income tax purposes, but is a corporation for country M tax purposes. D uses the “u” as its functional currency and the calendar year as its taxable year for both U.S. tax purposes and country M tax purposes. Country M imposes an income tax described in paragraph (a)(1) of this section at a rate of 30 percent at the entity level on the taxable income of D. On September 30, 2008, A sells its 50 percent interest in D to C. A's sale of its partnership interest results in a termination of the partnership under section 708(b) for U.S. tax purposes. As a result of the termination, “old” D's taxable year closes on September 30, 2008 for U.S. tax purposes. New D also has a short U.S. taxable year, beginning on October 1, 2008, and ending on December 31, 2008. The sale of A's interest does not close D's taxable year for country M tax purposes. D has 400u of taxable income for its 2008 foreign taxable year with respect to which country M imposes 120u equal to $120 of income tax.

(ii)*Result.* Under paragraph (f)(3)(i) of this section, hybrid partnership D is legally liable for the $120 of country M income tax imposed on its net income. Because D's taxable year closes on September 30, 2008, for U.S. tax purposes, but does not close for country M tax purposes, under paragraph (f)(3)(i) of this section the $120 of country M tax must be allocated under the principles of § 1.1502-76(b) between the short U.S. taxable years of terminating D and new D. See § 1.704-1(b)(4)(viii) for rules relating to the allocation of terminating D's country M taxes between A and B and the allocation of new D's country M taxes between B and C. Example 9.

(i)*Facts.* A, a United States person engaged in construction activities in country X, is subject to the country X income tax. Country X has contracted with A for A to construct a naval base. A is a dual capacity taxpayer (as defined in paragraph (a)(2)(ii)(A) of this section) and, in accordance with paragraphs (a)(1) and (c)(1) of § 1.901-2A, A has established that the country X income tax as applied to dual capacity persons and the country X income tax as applied to persons other than dual capacity persons together constitute a single levy. A has also established that that levy is an income tax within the meaning of paragraph (a)(1) of this section. Pursuant to the terms of the contract, country X has agreed to assume any country X income tax liability that A may incur with respect to A's income from the contract.

(ii)*Result.* For U.S. income tax purposes, A's income from the contract includes the amount of tax that is imposed by country X on A with respect to its income from the contract and that is assumed by country X; and the amount of the tax liability assumed by country X is considered to be paid by A. By reason of paragraph (f)(5) of this section, country X is not considered to provide a subsidy, within the meaning of section 901(i) and paragraph (e)(3) of this section, to A.

(h)*Effective Date* . Paragraphs

(a)through

(e)and paragraph

(g)of this section, § 1.901-2A and § 1.903-1 apply to taxable years beginning after November 14, 1983. Paragraph

(f)of this section is effective for foreign taxes paid or accrued during taxable years of the taxpayer beginning on or after January 1, 2007. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. [FR Doc. E6-12358 Filed 8-3-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 31 [REG-146893-02; REG-115037-00; REG-138603-03] RIN 1545-BB31, 1545-AY38, 1545-BC52 Treatment of Services Under Section 482 Allocation of Income and Deductions From Intangibles Stewardship Expense AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing. SUMMARY: In a separate part to this issue of the **Federal Register** , the IRS is issuing temporary regulations relating to the treatment of controlled services transactions under section 482. These temporary regulations also provide guidance regarding the allocation of income from intangibles, in particular with respect to contribution by a controlled party to the value of an intangible owned by another controlled party as it relates to controlled services transactions and modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482. The text of those regulations also serves as the text of these proposed regulations. These proposed regulations also contain a coordination rule with global dealing operations. The Treasury Department and the IRS are presently working on new global dealing regulations and intend that when final regulations are issued, those regulations, not § 1.482-9T, will govern the evaluation of the activities performed by a global dealing operation within the scope of those regulations. Pending finalization of the global dealing regulations, taxpayers may rely on the proposed global dealing regulations, not the temporary services regulations, to govern financial transactions entered into in connection with a global dealing operation as defined in proposed § 1.482-8. Therefore, proposed regulations under § 1.482-9(m)(5) clarify that a controlled services transaction does not include a financial transaction entered into in connection with a global dealing operation. These proposed regulations potentially affect controlled taxpayers within the meaning of section 482. This document also provides notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by November 2, 2006. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-146893-02, REG-115037-00, and REG-138603-03), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be sent electronically, via the IRS Internet site at *http://www.irs.gov/regs* or via Federal eRulemaking Portal at *http://www.regulations.gov* (IRS REG-146893-02, REG-115037-00, and REG-138603-03). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Thomas A. Vidano,

(202)435-5265, or Carol B. Tan,

(202)435-5265 for matters relating to section 482, or David Bergkuist

(202)622-3850 for matters relating to stewardship expenses; concerning submission of comments, the hearing, and/or, to be placed on the building access list to attend the hearing, [Insert Name],

(202)622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background and Explanation of Provisions Temporary regulations in the Rules and Regulations section of this issue of the **Federal Register** amend the Income Tax Regulations (26 CFR parts 1 and 31) relating to section 482. The temporary regulations set forth guidance on the treatment of controlled services transactions, the allocation from intangibles under section 482, and stewardship expenses under section 861. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations. These proposed regulations potentially affect controlled taxpayers within the meaning of section 482. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the 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 (Code), this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Comments and Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight

(8)copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the **Federal Register** . Drafting Information The principal authors of these regulations are Thomas A. Vidano and Carol B. Tan, Office of Associate Chief Counsel (International). List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social Security and Unemployment compensation. Proposed Amendments to the Regulations Accordingly, 26 CFR parts 1 and 31 are proposed to be amended as follows: PART 1—INCOME TAXES **Paragraph. 1.** The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.482-9 also issued under 26 U.S.C. 482. * * * **Par. 2.** Section 1.482-0 is amended as follows: 1. The section heading is revised. 2. The entries for § 1.482-2(b) are revised. 3. The entries for § 1.482-4(f)(3), (f)(4) and (f)(5) are revised and new entries for § 1.482-4(f)(6) are added. 4. New entries for §§ 1.482-6T(c)(3)(i)(B)( *1* ) and ( *2* ) and 1.482-9T are added. The revisions and additions read as follows: § 1.482-0 Outline of regulations under section 482. [The text of the proposed amendment to § 1.482-0 is the same as the text of § 1.482-0T published elsewhere in this issue of the **Federal Register** ]. **Par. 3.** Section 1.482-1 is amended as follows: 1. Paragraphs (a)(1), (b)(2)(i), (d)(3)(ii)(C) *Example 3* , (d)(3)(v), (f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), (g)(4)(iii) and paragraph

(i)are revised. 2. Paragraphs (d)(3)(ii)(C), *Example 4* and *Example 5* and

(j)are added. *The additions and revisions read as follows:* § 1.482-1 Allocation of income and deductions among taxpayers. (a)(1) [The text of the proposed amendment to § 1.482-1(a)(1) is the same as the text of § 1.482-1T(a)(1) published elsewhere in this issue of the **Federal Register** ].

(b)* * *

(1)* * * (b)(2)(i) [The text of the proposed amendment to § 1.482-1(b)(2)(i) is the same as the text of § 1.482-1T(b)(2)(i) published elsewhere in this issue of the **Federal Register** ].

(d)* * *

(3)* * *

(ii)* * *

(C)* * * Example 3. [The text of the proposed amendment to § 1.482-1(d)(3)(ii)(C), *Example 3* is the same as the text of § 1.482-1T(d)(3)(ii)(C) *Example 3* published elsewhere in this issue of the **Federal Register** ]. Example 4. [The text of the proposed amendment to § 1.482-1(d)(3)(ii)(C) *Example 4* is the same as the text of § 1.482-1T(d)(3)(ii)(C) *Example 4* published elsewhere in this issue of the **Federal Register** ]. Example 5. [The text of the proposed amendment to § 1.482-1(d)(3)(ii)(C) *Example 5* is the same as the text of § 1.482-1T(d)(3)(ii)(C) *Example 5* published elsewhere in this issue of the **Federal Register** ]. Example 6. [The text of the proposed amendment to § 1.482-1(d)(3)(ii)(C) *Example 6* is the same as the text of § 1.482-1T(d)(3)(ii)(C) *Example 6* published elsewhere in this issue of the **Federal Register** ].

(v)*Property or services.* [The text of the proposed amendment to § 1.482-1(d)(3)(v) is the same as the text of § 1.482-1T(d)(3)(v) published elsewhere in this issue of the **Federal Register** ].

(f)* * *

(2)* * * (ii)(A) [The text of the proposed amendment to § 1.482-1(f)(2)(ii)(A) is the same as the text of § 1.482-1T(f)(2)(ii)(A) published elsewhere in this issue of the **Federal Register** ].

(iii)* * *

(B)[The text of the proposed amendment to § 1.482-1(f)(3)(iii)(B) is the same as the text of § 1.482-1T(f)(3)(iii)(B) published elsewhere in this issue of the **Federal Register** ].

(g)* * *

(4)* * *

(i)* * * [The text of the proposed amendment to § 1.482-1(g)(4)(i) is the same as the text of § 1.482-1T(g)(4)(i) published elsewhere in this issue of the **Federal Register** ].

(iii)* * * Example 1. [The text of the proposed amendment to § 1.482-1(g)(4)(iii) *Example 1* is the same as the text of § 1.482-1T(g)(4)(iii) *Example 1* published elsewhere in this issue of the **Federal Register** ].

(i)[The text of the proposed amendment to § 1.482-1(i) is the same as the text of § 1.482-1T(i) published elsewhere in this issue of the **Federal Register** ].

(j)[The text of the proposed amendment to § 1.482-1(j) is the same as the text of § 1.482-1T(j)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. **Par. 4.** Section 1.482-2 is amended as follows: 1. Paragraph

(b)is revised. 2. Paragraph

(e)is added. The revision and addition reads as follows: § 1.482-2 Determination of taxable income in specific situations.

(b)[The text of the proposed amendment to § 1.482-2(b) is the same as the text of § 1.482-2T(b) published elsewhere in this issue of the **Federal Register** ].

(e)[The text of the proposed amendment to § 1.482-2(e) is the same as the text of § 1.482-2T(e)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. **Par. 5.** Section 1.482-4 is amended as follows: 1. Paragraph (f)(3) is revised. 2. Paragraphs (f)(4) and (f)(5) are redesignated as paragraphs (f)(5) and (f)(6), respectively. 3. New paragraphs (f)(4) and (f)(7) are added. The revision and addition read as follows: § 1.482-4 Methods to determine taxable income in connection with a transfer of intangible property.

(f)* * *

(3)[The text of the proposed amendment to § 1.482-4(f)(3) is the same as the text of § 1.482-4T(f)(3) published elsewhere in this issue of the **Federal Register** ].

(4)[The text of the proposed amendment to § 1.482-4(f)(4) is the same as the text of § 1.482-4T(f)(4) published elsewhere in this issue of the **Federal Register** ].

(7)[The text of the proposed amendment to § 1.482-4(f)(7) is the same as the text of § 1.482-4T(f)(7)(i) and

(ii)published elsewhere in this issue of the **Federal Register** ]. **Par. 6.** Section 1.482-6 is amended by revising paragraphs (c)(2)(ii)(B)( *1* ), (c)(2)(ii)(D), (c)(3)(i)(A), (c)(3)(i)(B), and (c)(3)(ii)(D), and adding paragraph

(d)to read as follows: § 1.482-6 Profit split method.

(c)* * *

(2)* * *

(ii)* * *

(B)* * *

(1)* * * [The text of the proposed amendment to § 1.482-6(c)(2)(ii)(B)( *1* ) is the same as the text of § 1.482-6T(c)(2)(ii)(B)( *1* ) published elsewhere in this issue of the **Federal Register** ].

(D)[The text of the proposed amendment to § 1.482-6(c)(2)(ii)(D) is the same as the text of § 1.482-6T(c)(2)(ii)(D) published elsewhere in this issue of the **Federal Register** ].

(3)* * *

(i)* * *

(A)[The text of the proposed amendment to § 1.482-6(c)(3)(i)(A) is the same as the text of § 1.482-6T(c)(3)(i)(A) published elsewhere in this issue of the **Federal Register** ].

(B)[The text of the proposed amendment to § 1.482-6(c)(3)(i)(B) is the same as the text of § 1.482-6T(c)(3)(i)(B) published elsewhere in this issue of the **Federal Register** ].

(ii)* * *

(D)[The text of the proposed amendment to § 1.482-6(c)(3)(ii)(D) is the same as the text of § 1.482-6T(c)(3)(ii)(D) published elsewhere in this issue of the **Federal Register** ].

(d)[The text of the proposed amendment to § 1.482-6(d) is the same as the text of § 1.482-6T(d)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. **Par. 7.** Section 1.482-8 is amended by adding *Examples 10* through *12* to read as follows: § 1.482-8 Examples of the best method rule.

(a)Example 10. Cost of services plus method preferred to other methods. [The text of the proposed amendment to § 1.482-8(a) *Example 10* is the same as the text of § 1.482-8T(a) *Example 10* published elsewhere in this issue of the **Federal Register** ]. Example 11. CPM for services preferred to other methods. [The text of the proposed amendment to § 1.482-8(a) *Example 11* is the same as the text of § 1.482-8T(a) *Example 11* published elsewhere in this issue of the **Federal Register** ]. Example 12. Residual profit split preferred to other methods. [The text of the proposed amendment to § 1.482-8(a) *Example 12* is the same as the text of § 1.482-8T(a) *Example 12* published elsewhere in this issue of the **Federal Register** ].

(b)[The text of the proposed amendment to § 1.482-8(b) is the same as the text of § 1.482-8T(b)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. **Par. 8.** A new § 1.482-9 is added to read as follows: § 1.482-9 Methods to determine taxable income in connection with a controlled services transaction.

(a)through (m)(5) [The text of the proposed § 1.482-9(a) through (m)(5) is the same as the text of § 1.482-9T(a) through (m)(5) published elsewhere in this issue of the **Federal Register** ]. (m)(6) *Global dealing operations.* A controlled services transaction does not include a financial transaction entered into in connection with a global dealing operation as defined in § 1.482-8.

(n)[The text of the proposed § 1.482-9(n) is the same as the text of § 1.482-9T(n)(1) and (n)(2) published elsewhere in this issue of the **Federal Register** ]. **Par. 9.** Section 1.861-8 is amended by revising paragraphs (a)(5), the fifth and sixth sentences in paragraph (b)(3), (e)(4), (f)(4)(i),

(g)*Examples 17* , *18* , and *30* , and the first sentence in paragraph

(h)introductory text to read as follows: § 1.861-8 Computation of taxable income from sources within the United States and from other sources and activities.

(a)* * *

(5)[The text of the proposed amendment to § 1.861-8(a)(5) is the same as the text of § 1.861-8T (a)(5) published elsewhere in this issue of the **Federal Register** ]

(b)* * *

(3)* * * [The text of the proposed amendment to § 1.861-8(b)(3) is the same as the text in § 1.861-8T(b)(3) published elsewhere in this issue of the **Federal Register** ]. * * *

(e)* * *

(4)[The text of the proposed amendment to § 1.861-8(e)(4) is the same as the text of § 1.861-8T(e)(4) published elsewhere in this issue of the **Federal Register** ].

(f)* * *

(4)* * *

(i)[The text of the proposed amendment to § 1.861-8(f)(4)(i) is the same as the text of § 1.861-8T(e)(4)(i) published elsewhere in this issue of the **Federal Register** ].

(g)* * * Example 17. [The text of the proposed amendment to § 1.861-8(g) *Example 17* is the same as the text of § 1.861-8T(g) *Example 17* , published elsewhere in this issue of the **Federal Register** ]. Example 18. [The text of the proposed amendment to § 1.861-8(g) *Example 18* is the same as the text of § 1.861-8T(g) *Example 18* , published elsewhere in this issue of the **Federal Register** ]. Example 30. [The text of the proposed amendment to § 1.861-8(g) *Example 30* is the same as the text of § 1.861-8T(g) *Example 30* , published elsewhere in this issue of the **Federal Register** ].

(h)[The text of the proposed amendment to § 1.861-8(h) is the same as the text of § 1.861-8T(h)(1) published elsewhere in this issue of the **Federal Register** ]. * * * **Par. 10.** Section 1.6038A-3(a)(3) is amended by revising paragraph (a)(3) *Example 4* and

(i)to read: § 1.6038A-3 Record maintenance.

(a)* * *

(3)* * * Example 4. [The text of the proposed amendment to § 1.6038A-3, *Example 4* is the same as the text of § 1.6038A-3T, *Example 4* published elsewhere in this issue of the **Federal Register** ].

(i)[The text of the proposed amendment to § 1.6038A-3(i) is the same as the text of § 1.6038A-3T(i)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. **Par. 11.** Section 1.6662-6 is amended by revising paragraphs (d)(2)(ii)(B), (d)(2)(iii)(B)( *4* ), (d)(2)(iii)(B)( *6* ) and

(g)to read as follows: § 1.6662-6 Transactions between persons described in section 482 and net section 482 transfer price adjustments.

(d)* * *

(2)* * *

(ii)* * *

(B)[The text of the proposed amendment to § 1.6662-6(d)(2)(ii)(B) is the same as the text of § 1.6662-6T(d)(2)(ii)(B) published elsewhere in this issue of the **Federal Register** ].

(iii)* * *

(B)* * * ( *4* ) [The text of the proposed amendment to § 1.6662-6(d)(2)(iii)(B)( *4* ) is the same as the text of § 1.6662-6T(d)(2)(iii)(B)( *4* ) published elsewhere in this issue of the **Federal Register** ].

(6)[The text of the proposed amendment to § 1.6662-6(d)(2)(iii)(B)(6) is the same as the text of § 1.6662-6T(d)(2)(iii)(B)(6) published elsewhere in this issue of the **Federal Register** ].

(g)[The text of the proposed amendment to § 1.6662-6(g) is the same as the text of § 1.6662-6T(g)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE SOURCE **Par. 12.** The authority citation for part 31 continues to read as follows: Authority: 26 U.S.C. 7805 * * * **Par. 13.** Section 31.3121(s)-1 is amended by revising paragraphs (c)(2)(iii) and

(d)to read as follows: § 31.3121(s)-1 Concurrent employment by related corporations with common paymaster.

(c)* * *

(2)* * *

(iii)[The text of the proposed amendment to § 31.3121(s)-1(c)(2)(iii) is the same as the text of § 31.3121(s)-1T(c)(2)(iii) published elsewhere in this issue of the **Federal Register** ].

(d)[The text of the proposed amendment to § 31.3121(s)-1(d) is the same as the text of § 31.3121(s)-1T(d)(1) and

(2)published elsewhere in this issue of the **Federal Register** ]. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. [FR Doc. 06-6674 Filed 7-31-06; 4:40 pm]

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U.S. Code