Unknown. Final rule

74,644 words·~339 min read·/register/2006/10/19/06-8814

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

--- schema: federal-register doc_type: fedreg source_file: FR-2006-10-19.xml --- 71 202 Thursday, October 19, 2006 Contents Agriculture Agriculture Department See Forest Service Coast Guard Coast Guard PROPOSED RULES Drawbridge operations: Connecticut, 61698-61701 06-8814 Commerce Commerce Department See Industry and Security Bureau See International Trade Administration See National Oceanic and Atmospheric Administration Customs Customs and Border Protection Bureau NOTICES Agency information collection activities; proposals, submissions, and approvals, 61790-61792 E6-17442 E6-17443 E6-17444 Defense Defense Department See Navy Department NOTICES Civilian health and medical program of uniformed services (CHAMPUS):

TRICARE program— Diagnosis related group updates; 2007 FY rates and weights; correction, 61729-61730 06-8767 Meetings: Senior Executive Service Performance Review Board; membership, 61730 06-8768 Drug Drug Enforcement Administration NOTICES Schedules of controlled substances: Ephedrine, pseudoephedrine, and phenylpropanolamine; Schedule I proposed 2007 assessment, 61801-61803 E6-17526 Schedules of controlled substances; production quotas: Schedules I and II— Final revised 2006 aggregate, 61803-61806 E6-17524 *Applications, hearings, determinations, etc.:* Tocris Cookson, Inc., 61800-61801 E6-17525 Education Education Department NOTICES Agency information collection activities; proposals, submissions, and approvals, 61730 06-8785 Energy Energy Department See Federal Energy Regulatory Commission NOTICES Environmental statements; notice of intent:

Complex 2030; stockpile stewardship and management, 61731-61736 E6-17508 EPA Environmental Protection Agency RULES Air quality implementation plans; approval and promulgation; various States; air quality planning purposes; designation of areas: Indiana; withdrawn, 61686-61687 E6-17432 PROPOSED RULES Air pollutants, hazardous; national emission standards: Semiconductor manufacturing, 61701-61705 E6-17224 NOTICES Agency information collection activities; proposals, submissions, and approvals, 61765-61771 E6-17423 E6-17446 E6-17447 E6-17448 E6-17449 Air pollution control:

Citizens suits; proposed settlements— Natural Resources Defense Council, et al., 61771-61772 E6-17430 Executive Executive Office of the President See Trade Representative, Office of United States FAA Federal Aviation Administration RULES Airworthiness directives: Aerospace Technologies of Australia Pty Ltd., 61636-61639 E6-17425 Airbus, 61639-61648 E6-17420 E6-17426 Boeing, 61644-61646 E6-17428 Turbomeca, 61634-61635, 61642-61643 E6-17326 E6-17328 PROPOSED RULES Airworthiness directives:

McDonnell Douglas, 61690-61691 E6-17421 NOTICES Exemption petitions; summary and disposition, 61821-61822 06-8756 FCC Federal Communications Commission NOTICES Agency information collection activities; proposals, submissions, and approvals, 61772-61774 E6-17509 E6-17511 Declaratory ruling petitions: Arizona Dialtone Inc. and IDT Telecom, Inc., 61774 E6-17513 Meetings: Technological Advisory Council, 61774 E6-17510 FDIC Federal Deposit Insurance Corporation NOTICES No Fear Act:

Employee, applicants; rights and remedies, 61774-61776 E6-17388 Federal Energy Federal Energy Regulatory Commission NOTICES Agency information collection activities; proposals, submissions, and approvals, 61736-61737 E6-17501 Electric rate and corporate regulation combined filings, 61756-61759 E6-17467 Environmental statements; availability, etc.: Millennium Pipeline L.L.C. et al., 61759-61761 E6-17473 Environmental statements; notice of intent: Kinder Morgan Illinois Pipeline LLC, 61761-61762 E6-17486 Hydroelectric applications, 61762-61765 E6-17502 E6-17503 E6-17504 Meetings:

Midwest Independent Transmission System Operator, Inc., et al., 61765 E6-17474 *Applications, hearings, determinations, etc.:* 330 Fund I, L.P., et al., 61737-61738 E6-17480 AB Energy, Inc., 61738 E6-17491 Allegheny Ridge Wind Farm, LLC, 61738-61739 E6-17496 Aquila, Inc., 61739 E6-17472 BG Dighton Power, LLC, 61739-61740 E6-17494 Black River Macro Discretionary Fund, Ltd., et al., 61740 E6-17500 Carolina Gas Transmission Corp. et al., 61740 E6-17460 Celeren Corp., 61740-61741 E6-17479 Cinergy Marketing & Trading, L.P, 61741 E6-17498 CMP Androscoggin LLC, 61741-61742 E6-17484 Colorado Interstate Gas Co., 61742 E6-17458 Columbia Gas Transmission Corp., 61742-61743 E6-17470 Dominion Cove Point LNG, LP, 61743 E6-17471 Dominion Transmission, Inc., 61743-61744 E6-17466 Eastern Shore Natural Gas Co., 61744 E6-17487 ECP Energy, LLC, 61744 E6-17476 Evergreen Windpower, LLC, 61744-61745 E6-17492 Fairchild Energy, LLC, 61745 E6-17483 FPL Energy Mower County, LLC, 61745-61746 E6-17505 FPL Energy Oliver Wind, LLC, 61746 E6-17495 Gas Transmission Northwest Corp., 61746 E6-17464 Hawks Nest Hydro LLC, 61747 E6-17499 International Paper Co., 61747 E6-17493 Liberty Power Holdings, LLC, 61747-61748 E6-17468 Liberty Power Maine, LLC, et al., 61748-61749 E6-17478 MATEP LLC, 61749 E6-17477 Moguai Energy, LLC, 61749-61750 E6-17485 Mt.

Tom Generating Co., LLC, 61750 E6-17490 New Hope Power Partnership, 61750-61751 E6-17506 Newmont Nevada Energy Investment LLC, 61751 E6-17475 Noble Bliss Windpark, LLC, et al., 61751 E6-17497 Northern Indiana Public Service Co., 61752 E6-17462 Parkview AMC Energy, LLC, 61752-61753 E6-17481 PEAK Capital Management, LLC, 61753 E6-17482 Puget Sound Energy, Inc., 61753-61754 E6-17469 Reliant Energy Power Supply, LLC, 61754 E6-17488 Tennessee Gas Pipeline Co., 61754-61755 E6-17459 E6-17463 Williston Basin Interstate Pipeline Co., 61755 E6-17465 Wolverine Trading, Inc., 61755-61756 E6-17489 Federal Motor Federal Motor Carrier Safety Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 61822-61825 E6-17450 E6-17451 E6-17455 Federal Railroad Federal Railroad Administration RULES Railroad safety:

Passenger equipment safety standards— Miscellaneous amendments and safety appliances attachment, 61836-61864 06-8611 Federal Reserve Federal Reserve System NOTICES Banks and bank holding companies: Formations, acquisitions, and mergers, 61776 E6-17372 Permissible nonbanking activities, 61776 E6-17371 FTC Federal Trade Commission NOTICES Agency information collection activities; proposals, submissions, and approvals, 61776-61780 E6-17507 Fish Fish and Wildlife Service NOTICES Endangered and threatened species permit applications, determinations, etc., 61792 06-8766 Meetings:

Sport Fishing and Boating Partnership Council, 61792-61793 E6-17418 Reports and guidance documents; availability, etc.: National Management Control Plan; New Zealand mudsnail, 61793-61794 E6-17403 Food Food and Drug Administration NOTICES Reports and guidance documents; availability, etc.: Blood and plasma establishments; biological product deviation reporting, 61780-61781 E6-17378 Licensed manufacturers of biological products other than blood and blood components; biological product deviation reporting, 61781-61782 E6-17374 Forest Forest Service NOTICES Agency information collection activities; proposals, submissions, and approvals, 61706 E6-17406 Health Health and Human Services Department See Food and Drug Administration See National Institutes of Health NOTICES Agency information collection activities; proposals, submissions, and approvals, 61780 E6-17424 Homeland Homeland Security Department See Coast Guard See Customs and Border Protection Bureau Housing Housing and Urban Development Department RULES Public and Indian housing:

Indian Housing Block Grant Program; minimum funding extension, 61866-61868 E6-17518 Industry Industry and Security Bureau PROPOSED RULES Export administration regulations: China; export and reexport controls revisions and clarification; new authorization validated end-user, 61692 E6-17429 NOTICES Export transactions: List of unverified persons in foreign countries, guidance to exporters as to red flags (Supplement No. 3 to 15 CFR part 732); update, 61706-61708 06-8771 Interior Interior Department See Fish and Wildlife Service See Land Management Bureau See Minerals Management Service See Reclamation Bureau See Surface Mining Reclamation and Enforcement Office IRS Internal Revenue Service RULES Income taxes:

Foreign tax expenditures; partner's distributive share, 61648-61662 E6-17307 Income attributable to domestic production activities; deduction, 61662-61680 E6-17402 Procedure and administration: Return information disclosure by officers and employees for investigative purposes Correction, 61833 C6-6110 PROPOSED RULES Income taxes: Income attributable to domestic production activities; deduction; hearing, 61692-61693 E6-17409 Payments in lieu of taxes; treatment, 61693-61695 E6-17408 NOTICES Agency information collection activities; proposals, submissions, and approvals, E6-17393 61828-61832 E6-17395 E6-17398 E6-17400 E6-17401 E6-17417 E6-17419 06-8758 International International Trade Administration NOTICES Antidumping:

Fresh garlic from— China, 61708-61709 E6-17358 Heavy forged hand tools, finished or unfinished, with or without handles, from— China, 61709-61710 E6-17380 Lemon juice from— Argentina and Mexico, 61710-61714 E6-17381 Softwood lumber products from— Canada, 61714 E6-17377 Countervailing duties: Softwood lumber products from— Canada, 61714-61715 E6-17382 North American Free Trade Agreement (NAFTA); binational panel reviews: Softwood lumber products from— Canada, 61715-61716 E6-17375 E6-17405 Reports and guidance documents; availability, etc.:

Antidumping methodologies: market economy inputs, expected non-market economy wages, and duty drawback, 61716-61724 E6-17376 International International Trade Commission NOTICES Import investigations: Engines, components and products containing the same, 61799-61800 E6-17512 Justice Justice Department See Drug Enforcement Administration Land Land Management Bureau NOTICES Meetings: Resource Advisory Councils— New Mexico, 61794 E6-17439 Realty actions; sales, leases, etc.: Nevada, 61794-61796 E6-17399 Survey plat filings:

Montana, 61796 E6-17422 Minerals Minerals Management Service NOTICES Agency information collection activities; proposals, submissions, and approvals, 61796-61797 E6-17514 NASA National Aeronautics and Space Administration RULES Acquisition regulations: Small business innovation research and small business technology transfer contractor re-certification of program compliance, 61687-61689 E6-17043 National Highway National Highway Traffic Safety Administration NOTICES Motor vehicle safety standards:

Nonconforming vehicles importation eligibility determinations, 61825-61826 E6-17454 Motor vehicle safety standards; exemption petitions, etc.: BMW, 61826-61827 E6-17456 NIH National Institutes of Health NOTICES Meetings: National Human Genome Research Institute, 61782 06-8777 National Institute of Biomedical Imaging and Bioengineering, 61785 06-8780 National Institute of Child Health and Human Development, 61783-61784 06-8774 06-8775 06-8776 National Institute of Diabetes and Digestive and Kidney Diseases, 61782-61785 06-8772 06-8778 National Institute of Neurological Disorders and Stroke, 61783 06-8773 Scientific Review Center, 06-8779 61785-61790 06-8781 06-8782 NOAA National Oceanic and Atmospheric Administration NOTICES Grants and cooperative agreements; availability, etc.:

Environmental literacy projects, 61724-61729 E6-17535 E6-17536 Navy Navy Department RULES Navigation, COLREGS compliance exemptions: USS HAWAII, 61685-61686 E6-17431 Nuclear Nuclear Regulatory Commission NOTICES Environmental statements; availability, etc.: Nuclear Management Company, LLC, 61806 E6-17435 Meetings: Reactor Safeguards Advisory Committee, 61806-61808 E6-17433 E6-17436 E6-17437 E6-17438 Office of U.S. Trade Office of United States Trade Representative See Trade Representative, Office of United States Personnel Personnel Management Office RULES Absence and leave:

Senior Executive Service; accrual and accumulation, 61633-61634 E6-17389 Reclamation Reclamation Bureau NOTICES Environmental statements; notice of intent: Upper Truckee River and Marsh Restoration Project, CA, 61797-61799 E6-17427 SEC Securities and Exchange Commission NOTICES Agency information collection activities; proposals, submissions, and approvals, 61809 E6-17397 Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC, 61809-61815 E6-17392 E6-17396 NASDAQ Stock Market LLC, 61815-61819 E6-17440 E6-17441 New York Stock Exchange LLC, 61819-61820 E6-17394 SBA Small Business Administration NOTICES Interest rates; quarterly determinations, 61820 E6-17445 Social Social Security Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 61820-61821 06-8770 Surface Surface Mining Reclamation and Enforcement Office RULES Permanent program and abandoned mine land reclamation plan submissions:

New Mexico, 61680-61685 E6-17521 PROPOSED RULES Permanent program and abandoned mine land reclamation plan submissions: Ohio, 61695-61698 E6-17369 Trade Trade Representative, Office of United States NOTICES World Trade Organization: Dispute settlement panel proceedings— United States; measures affecting the cross-border supply of gambling and betting services, 61808-61809 E6-17527 Transportation Transportation Department See Federal Aviation Administration See Federal Motor Carrier Safety Administration See Federal Railroad Administration See National Highway Traffic Safety Administration Treasury Treasury Department See Internal Revenue Service RULES Merchandise, special classes:

Canada; softwood lumber products; special entry requirements, 61399-61403 [ **Editorial Note:** This document was inadvertently dropped from the **Federal Register** Table of Contents of Wednesday, October 18, 2006.] NOTICES Agency information collection activities; proposals, submissions, and approvals, 61827 E6-17457 Separate Parts In This Issue Part II Transportation Department, Federal Railroad Administration, 61836-61864 06-8611 Part III Housing and Urban Development Department, 61866-61868 E6-17518 Reader Aids Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, reminders, and notice of recently enacted public laws.

To subscribe to the Federal Register Table of Contents LISTSERV electronic mailing list, go to http://listserv.access.gpo.gov and select Online mailing list archives, FEDREGTOC-L, Join or leave the list (or change settings); then follow the instructions. 71 202 Thursday, October 19, 2006 Rules and Regulations OFFICE OF PERSONNEL MANAGEMENT 5 CFR Part 630 RIN 3206-AK72 Absence and Leave; SES Annual Leave AGENCY: Office of Personnel Management. ACTION: Final rule. SUMMARY: The Office of Personnel Management is issuing final regulations to provide a higher annual leave accrual rate of 1 day (8 hours) per biweekly pay period for members of the Senior Executive Service, employees in senior-level and scientific or professional positions, and other employees covered by equivalent pay systems.

DATES: The regulations are effective November 20, 2006. FOR FURTHER INFORMATION CONTACT: Kevin Kitchelt by telephone at

(202)606-2858, by fax at

(202)606-0824, or by e-mail at *pay-performance-policy@opm.gov.* SUPPLEMENTARY INFORMATION: On March 21, 2005, the Office of Personnel Management

(OPM)published interim regulations (70 FR 13343) to implement Section 202(b) of the Federal Workforce Flexibility Act of 2004 (Pub. L. 108-411, October 30, 2004) hereafter referred to as “the Act.” Section 202(b) added paragraph

(f)to 5 U.S.C. 6303 to provide that members of the Senior Executive Service (SES), employees in senior-level

(SL)and scientific or professional

(ST)positions, and employees covered by a pay system equivalent to the SES pay system or SL/ST pay system, as determined by OPM, will accrue annual leave at the rate of 1 day (8 hours) for each full biweekly pay period, without regard to their length of service in the Federal Government. The 60-day comment period for the interim regulations ended on May 20, 2005. During the comment period, OPM received comments from 2 agencies, 3 professional organizations, 1 union, and 14 individuals. In this final rule document, we address the comments received on the interim regulations. The majority of individuals commented that the interim regulations were unfair and created disparate treatment of Federal employees. The commenters believe the annual leave accrual rate should be based solely on an employee's length of creditable service and not on the employee's grade or pay level. OPM's regulations are consistent with the statutory language in 5 U.S.C. 6303(f), which provides entitlement to a higher annual leave accrual rate to SES members, employees in SL and ST positions, and employees in positions covered by a pay system, determined by OPM, to be equivalent to the SES or SL/ST pay systems. This annual leave benefit is one of two leave enhancements provided in the Act. Section 202(a) of the Act added paragraph

(e)to 5 U.S.C. 6303 to provide OPM with the authority to prescribe regulations to permit an agency to provide to a newly appointed or reappointed employee service credit for prior work experience that otherwise would not be creditable for the purpose of determining the employee's annual leave accrual rate. An agency may provide service credit to an employee if his or her work experience was obtained in a position having duties that directly relate to the duties of the position to which the employee is being appointed and if it is determined that the use of this authority is necessary to recruit an individual with the skills and experience necessary to achieve an important agency mission or performance goal. (See OPM's interim regulations issued on April 29, 2005, at 70 FR 22245.) Agencies have discretionary authority to use this enhanced authority, regardless of an employee's grade Several commenters disagreed with the criteria in § 630.301(b)(3) of the interim regulations that require an SES or SL/ST “equivalent position” to be subject to a performance appraisal system. The commenters believe there is no basis in law to require an SES or SL/ST “equivalent position” to be covered by a performance appraisal system, and this requirement is not consistent with Congress' intent in providing this leave benefit. Further, the commenters believe the requirement that an equivalent position must be subject to a performance appraisal system will have an adverse impact on an agency's ability to recruit exceptionally qualified and experienced individuals. The law gives OPM sole authority to determine whether a pay system is equivalent to the SES pay system or SL/ST pay system for the purpose of authorizing the 8-hour annual leave accrual rate for categories of employees in positions covered by the pay system. OPM's regulations in § 630.301(b) allow the head of an agency to request that OPM authorize the 8-hour annual leave accrual rate for additional categories of employees in positions in pay systems, determined by OPM, to be equivalent to the SES pay system or SL/ST pay system because the covered pay systems meet three conditions— 1. Pay rates are established under an administratively determined

(AD)pay system that has a single rate of pay (excluding locality pay) that is higher than the rate for GS-15, step 10 (excluding locality pay) or has a range of rates where the minimum rate (excluding locality pay) of the rate range is at least equal to the minimum rate for the SES and SL/ST pay systems (120 percent of the rate for GS-15, step 1, excluding locality pay) and the maximum rate (excluding locality pay) of the rate range is at least equal to the rate for level IV of the Executive Schedule; 2. Covered positions are equivalent to a “Senior Executive Service position” as defined in 5 U.S.C. 3132(a)(2), a senior-level position ( *i.e.* , a non-executive position that is classified above GS-15, such as a high-level special assistant or a senior attorney in a highly-specialized field who is not a manager, supervisor, or policy advisor), or a scientific or professional position as described in 5 U.S.C. 3104; and 3. Covered positions are subject to a performance appraisal system established under 5 U.S.C. chapter 43 and 5 CFR part 430, subparts B and C, or other applicable legal authority, for planning, monitoring, developing, evaluating, and rewarding employee performance. The SES pay system assures a clear and direct linkage between performance and pay. Paysetting for a member of the SES is based on the individual's performance, contribution to the agency's performance, or both, as determined under a rigorous performance management system. Since the SES and SL/ST pay systems are both subject to a performance appraisal system established under 5 U.S.C. chapter 43 and 5 CFR part 430, subparts B and C, it is essential that, for any position to be deemed equivalent, it must be subject to an equivalent performance appose of allowing a higher annual leave accrual rate is to provide agencies with an additional tool to recruit well-qualified, experienced individuals for senior positions. We believe this additional leave benefit will assist agencies in recruiting mid-career individuals who may be hesitant to enter Federal service if they have to surrender a considerable amount of personal or vacation time without an opportunity to accrue additional paid time off in a timely manner. Finally, we have amended § 630.301(b) to remove the word “Executive” to allow the head of any agency to request that OPM authorize the 8-hour annual leave accrual rate for additional categories of employees. We are revising this section to be consistent with the legislation. E.O. 12866, Regulatory Review This rule has been reviewed by the Office of Management and Budget in accordance with E.O. 12866. Regulatory Flexibility Act I certify that these regulations will not have a significant economic impact on a substantial number of small entities because they will apply only to Federal agencies and employees. List of Subjects in 5 CFR 630 Government employees. Office of Personnel Management. Linda M. Springer, Director. Accordingly, the interim rule amending 5 CFR part 630, which was published at 70 FR 13343 on March 21, 2005, is adopted as final with the following changes: PART 630—ABSENCE AND LEAVE 1. The authority citation for part 630 continues to read as follows: Authority: 5 U.S.C. 6311; 630.205 also issued under Pub. L. 108-411, 118 Stat 2312; 630.301 also issued under Pub. L. 103-356, 108 Stat. 3410 and Pub. L. 108-411, 118 Stat 2312; 630.303 also issued under 5 U.S.C. 6133(a); 630.306 and 630.308 also issued under 5 U.S.C. 6304(d)(3), Pub. L. 102-484, 106 Stat. 2722, and Pub. L. 103-337, 108 Stat. 2663; subpart D also issued under Pub. L. 103-329, 108 Stat. 2423; 630.501 and subpart F also issued under E.O. 11228, 30 FR 7739, 3 CFR, 1974 Comp., p. 163; subpart G also issued under 5 U.S.C. 6305; subpart H also issued under 5 U.S.C. 6326; subpart I also issued under 5 U.S.C. 6332, Pub. L. 100-566, 102 Stat. 2834, and Pub. L. 103-103, 107 Stat. 1022; subpart J also issued under 5 U.S.C. 6362, Pub. L. 100-566, and Pub. L. 103-103; subpart K also issued under Pub. L. 105-18, 111 Stat. 158; subpart L also issued under 5 U.S.C. 6387 and Pub. L. 103-3, 107 Stat. 23; and subpart M also issued under 5 U.S.C. 6391 and Pub. L. 102-25, 105 Stat. 92. Subpart C—Annual Leave 2. In § 630.301, paragraph

(b)introductory text, is revised to read as follows: § 630.301 Annual leave accrual and accumulation—Senior Executive Service.

(b)The head of an agency may request that OPM authorize an annual leave accrual rate of 1 full day (8 hours) for each biweekly pay period for additional categories of employees who are covered by 5 U.S.C. 6301 and who hold positions that are determined by OPM to be equivalent to positions subject to the pay systems under 5 U.S.C. 5383 or 5376. Such a request must include documentation that the affected pay system is equivalent to the SES or SL/ST pay system because it meets all three of the following conditions: [FR Doc. E6-17389 Filed 10-18-06; 8:45 am] BILLING CODE 6325-39-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2005-23809; Directorate Identifier 2005-NE-52-AD; Amendment 39-14795; AD 2006-21-10] RIN 2120-AA64 Airworthiness Directives; Turbomeca Arriel 2B Series Turboshaft Engines AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule. SUMMARY: The FAA is adopting a new airworthiness directive

(AD)for Turbomeca Arriel 2B, 2B1, and 2B1A turboshaft engines. This AD requires visually inspecting the splines of the high-pressure

(HP)pump drive gear shaft and coupling shaft assembly for wear. This AD results from reports of uncommanded in-flight shutdowns of engines. We are issuing this AD to detect wear on the splines of the HP pump drive gear shaft and coupling shaft assembly, which could interrupt the fuel flow and cause an uncommanded in-flight shutdown of the engine on a single-engine helicopter. The in-flight shutdown of the engine could result in a forced autorotation landing or accident. DATES: This AD becomes effective November 24, 2006. The Director of the Federal Register approved the incorporation by reference of certain publications listed in the regulations as of November 24, 2006. ADDRESSES: You can get the service information identified in this AD from Turbomeca, 40220 Tarnos—France; Tel

(33)05 59 74 40 00; Telex 570 042; Fax

(33)05 59 74 45 15. You may examine the AD docket on the Internet at *http://dms.dot.gov* or in Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC. FOR FURTHER INFORMATION CONTACT: Christopher Spinney, Aerospace Engineer, Engine Certification Office, FAA, Engine and Propeller Directorate, 12 New England Executive Park, Burlington, MA 01803; telephone

(781)238-7175; fax

(781)238-7199. SUPPLEMENTARY INFORMATION: The FAA proposed to amend 14 CFR part 39 with a proposed AD. The proposed AD applies to Turbomeca Arriel 2B, 2B1, and 2B1A turboshaft engines. We published the proposed AD in the **Federal Register** on March 9, 2006 (71 FR 12150). That action proposed to require visually inspecting the splines of the HP pump drive gear shaft and coupling shaft assembly for wear. Examining the AD Docket You may examine the docket that contains the AD, any comments received, and any final disposition in person at the Docket Management Facility Docket Office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Office (telephone

(800)647-5227) is located on the plaza level of the Department of Transportation Nassif Building at the street address stated in ADDRESSES . Comments will be available in the AD docket shortly after the DMS receives them. Comments We provided the public the opportunity to participate in the development of this AD. We received no comments on the proposal or on the determination of the cost to the public. Conclusion We have carefully reviewed the available data and determined that air safety and the public interest require adopting the AD as proposed. Costs of Compliance We estimate that this AD will affect 107 engines installed on helicopters of U.S. registry. We also estimate that it will take about 1.0 work-hours per engine to perform the actions, and that the average labor rate is $65 per work-hour. There are no required parts. Based on these figures, we estimate the total cost of the AD to U.S. operators to be $6,955. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We have determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that this AD:

(1)Is not a “significant regulatory action” under Executive Order 12866;

(2)Is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

(3)Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a summary of the costs to comply with this AD and placed it in the AD Docket. You may get a copy of this summary at the address listed under ADDRESSES . List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. Adoption of the Amendment Accordingly, under the authority delegated to me by the Administrator, the Federal Aviation Administration amends 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The FAA amends § 39.13 by adding the following new airworthiness directive: **2006-21-10 Turbomeca:** Amendment 39-14795. Docket No. FAA-2005-23809; Directorate Identifier 2005-NE-52-AD. Effective Date

(a)This airworthiness directive

(AD)becomes effective November 24, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to Turbomeca Arriel 2B, 2B1, and 2B1A turboshaft engines. These engines are installed on, but not limited to, Eurocopter AS350B3 and EC130B4 helicopters. Unsafe Condition

(d)This AD results from reports of uncommanded in-flight shutdowns of engines. We are issuing this AD to detect wear on the splines of the high-pressure

(HP)pump drive gear shaft and the coupling shaft assembly, which could interrupt the fuel flow and cause an uncommanded in-flight shutdown of the engine on a single-engine helicopter. The in-flight shutdown of the engine could result in a forced autorotation landing or accident. Compliance

(e)You are responsible for having the actions required by this AD performed within the compliance times specified unless the actions have already been done. Initial Visual Inspection

(f)Perform an initial visual inspection of the splines of the coupling assembly and the HP pump drive gear shaft for wear. Use 2.A. through 2.C.(2) of the Instructions to be Incorporated of Turbomeca Mandatory Service Bulletin

(MSB)No. 292 73 2812, Update No. 2, dated June 28, 2005, as follows:

(1)For hydraulic mechanical units

(HMUs)that have accumulated 450 or more hours time-since-new

(TSN)or time-since-overhaul

(TSO)on the effective date of this AD, inspect within 50 hours after the effective date of this AD. Replace the HMU if worn beyond limits.

(2)For HMUs that have fewer than 450 hours TSN or TSO on the effective date of this AD, inspect after accumulating 450 hours TSN or TSO, but before accumulating 500 hours TSN or TSO. Replace the HMU if worn beyond limits. Repetitive Visual Inspections

(g)Thereafter, perform a visual inspection of the splines of the coupling shaft assembly and the HP pump drive gear shaft for wear every time you remove or install the HMU. Use 2.A. through 2.C.(2) of the Instructions to be Incorporated of Turbomeca MSB No. 292 73 2812, Update No. 2, dated June 28, 2005. Replace the HMU and coupling shaft assembly if worn beyond limits. Alternative Methods of Compliance

(h)The Manager, Engine Certification Office, has the authority to approve alternative methods of compliance for this AD if requested using the procedures found in 14 CFR 39.19. Related Information

(i)DGAC airworthiness directive F-2005-188, dated November 23, 2005, also addresses the subject of this AD. Material Incorporated by Reference

(j)You must use Turbomeca Mandatory Service Bulletin No. 292 73 2812, Update No. 2, dated June 28, 2005, to perform the visual inspections required by this AD. The Director of the Federal Register approved the incorporation by reference of this service bulletin in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Contact Turbomeca, 40220 Tarnos—France; Tel

(33)05 59 74 40 00; Telex 570 042; Fax

(33)05 59 74 45 15, for a copy of this service information. You may review copies at the FAA, New England Region, Office of the Regional Counsel, 12 New England Executive Park, Burlington, MA; or at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: *http://www.archives.gov/federal-register/cfr/ibr-locations.html.* Issued in Burlington, Massachusetts, on October 12, 2006. Thomas A. Boudreau, Acting Manager, Engine and Propeller Directorate, Aircraft Certification Service. [FR Doc. E6-17326 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-25928; Directorate Identifier 2006-CE-53-AD; Amendment 39-14797; AD 2006-21-12] RIN 2120-AA64 Airworthiness Directives; AeroSpace Technologies of Australia Pty Ltd. Models N22B, N22S, and N24A Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Final rule; request for comments SUMMARY: The FAA is adopting a new airworthiness directive

(AD)to supersede AD 2003-22-13, which applies to all AeroSpace Technologies of Australia Pty Ltd.

(ASTA)Models N22B and N24A airplanes. AD 2003-22-13 currently requires you to visually inspect the ailerons for damage and replace if necessary; adjust the engine power levers aural warning microswitches; set flap extension and flap down operation limitations; and fabricate and install cockpit flap extension and flap down operation restriction placards. This AD results from mandatory continuing airworthiness information

(MCAI)issued by the airworthiness authority for Australia. The FAA inadvertently omitted Model N22S airplanes from the applicability of AD 2003-22-13. Therefore, this AD retains the actions exactly as required in AD 2003-22-13 and adds Model N22S airplanes to the Applicability section. We are issuing this AD to prevent failure of the aileron due to undetected pre-existing aileron damage and airplane operation outside of the approved limits. Aileron failure could lead to reduced or loss of control of the airplane. DATES: This AD becomes effective on November 8, 2006. As of November 8, 2006, the Director of the Federal Register approved the incorporation by reference of certain publications listed in the regulation. We must receive any comments on this AD by November 20, 2006. ADDRESSES: Use one of the following to comment on this AD: • *DOT Docket Web site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Government-wide rulemaking Web site:* Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • *Mail:* Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, Washington, DC 20590-0001. • *Fax:*

(202)493-2251. • *Hand Delivery:* Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. To get the service information identified in this AD, contact Nomad Operations, Aerospace Support Division, Boeing Australia, PO Box 767, Brisbane, QLD 4000 Australia; telephone 61 7 3306 3366; fax 61 7 3306 3111. To view the comments to this AD, go to *http://dms.dot.gov.* The docket number is FAA-2006-25928; Directorate Identifier 2006-CE-53-AD. FOR FURTHER INFORMATION CONTACT: Doug Rudolph, Aerospace Engineer, FAA, Small Airplane Directorate, 901 Locust, Room 301, Kansas City, Missouri 64106; telephone:

(816)329-4059; fax:

(816)329-4090. SUPPLEMENTARY INFORMATION: Discussion The Civil Aviation Safety Authority (CASA), which is the airworthiness authority for Australia, reported several incidents of ailerons incurring damage during flight. Extensive tests and analysis revealed the cause of the damage to the ailerons resulted from operation outside approved limits and undetected pre-existing damage. The CASA lowered the operational limits of the affected airplanes in order to prevent damage from occurring. Additional reports of aileron flutter were received even when operating within these lower approved limits. As a precautionary measure, the CASA further restricted flight operations by issuing Australian AD Number AD/GAF-N22/69, Amendment 4, dated February 27, 2003. This situation prompted us to issue AD 2003-22-13, Amendment 39-13361 (68 FR 64270, November 13, 2003). AD 2003-22-13 currently requires the following on all ASTA Models N22B and N24A airplanes: —Visually inspecting the ailerons for damage and replacing if necessary; —Adjusting the engine power levers aural warning microswitches; —Setting flap extension and flap down operation limitations; and —Fabricating and installing cockpit flap extension and flap down operation restriction placards. Since we issued AD 2003-22-13, the CASA issued Australian AD Number AD/GAF-N22/69, Amendment 5, issued September 14, 2006, effective on October 26, 2006. That AD clarifies that N22 series and Model N24S airplanes with float/amphibian configuration are included in the Applicability section of their AD. Upon reviewing Amendment 5 of the CASA AD to ensure N22 series and Model N24S airplanes with float/amphibian configuration were included in the Applicability section of AD 2003-22-13, we realized that we inadvertently omitted Model N22S airplanes from the Applicability section. Models N22B and N24A airplanes with float/amphibian configuration were affected by AD 2003-22-13 because we included all serial numbers in the Applicability section. This condition, if not corrected, could result in aileron failure. Such failure could lead to reduced or loss of control of the airplane. Relevant Service Information We reviewed Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006. The service information describes procedures for: —Adjusting the engine power levers aural warning microswitches; —Setting flap extension and flap down operation limitations; and —Fabricating and installing cockpit flap extension and flap down operation restriction placards. FAA's Determination and Requirements of This AD These ASTA Models N22B, N22S, and N24A airplanes are manufactured in Australia and are type-certificated for operation in the United States under the provisions of § 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Under this bilateral airworthiness agreement, the CASA has kept us informed of the situation described above. We are issuing this AD because we evaluated all the information and determined the unsafe condition described previously is likely to exist or develop on other products of the same type design. This AD supersedes AD 2003-22-13 with a new AD that retains the actions exactly as required in AD 2003-22-13, adds Model N22S airplanes to the Applicability section, and clarifies applicability to airplanes with float/amphibian configuration. In preparing this rule, we contacted type clubs and aircraft operators to get technical information and information on operational and economic impacts. We did not receive any information through these contacts. If received, we would have included a discussion of any information that may have influenced this action in the rulemaking docket. FAA's Determination of the Effective Date Since an unsafe condition exists that requires the immediate adoption of this AD, we determined that notice and opportunity for public comment before issuing this AD are impracticable, and that good cause exists for making this amendment effective in fewer than 30 days. Comments Invited This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and an opportunity for public comment. We invite you to send any written relevant data, views, or arguments regarding this AD. Send your comments to an address listed under the ADDRESSES section. Include the docket number “FAA-2006-25928; Directorate Identifier 2006-CE-53-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the AD. We will consider all comments received by the closing date and may amend the AD in light of those comments. We will post all comments we receive, without change, to *http://dms.dot.gov,* including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive concerning this AD. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this AD. Regulatory Findings We have determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that this AD: 1. Is not a “significant regulatory action” under Executive Order 12866; 2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and 3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a regulatory evaluation of the estimated costs to comply with this AD and placed it in the AD docket. Examining the AD Docket You may examine the AD docket that contains the AD, the regulatory evaluation, any comments received, and other information on the Internet at *http://dms.dot.gov;* or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Office (telephone

(800)647-5227) is located at the street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. Adoption of the Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The FAA amends § 39.13 by removing Airworthiness Directive

(AD)2003-22-13, Amendment 39-13361 (68 FR 64270, November 13, 2003) and adding the following new AD: **2006-21-12 AeroSpace Technologies of Australia Pty Ltd.:** Amendment 39-14797; Docket No. FAA-2006-25928; Directorate Identifier 2006-CE-53-AD. Effective Date

(a)This AD becomes effective on November 8, 2006. Affected ADs

(b)Supersedes AD 2003-22-13, Amendment 39-13361. Applicability

(c)This AD affects Models N22B, N22S, and N24A airplanes, all serial numbers including airplanes with float/amphibian configuration, that are certificated in any category. Unsafe Condition

(d)This AD is the result of mandatory continuing airworthiness information

(MCAI)issued by the airworthiness authority for Australia. We are issuing this AD to prevent failure of the aileron due to undetected pre-existing aileron damage and airplane operation outside of the approved limits. Aileron failure could lead to reduced or loss of control of the airplane. Compliance

(e)To address this problem, you must do the following: Actions Compliance Procedures

(1)Visually inspect the left-hand and right-hand ailerons for damage (i.e., distortion, bending, impact marks). Repair or replace any damaged aileron found

(i)For Models N22B and N24A airplanes (airplanes previously affected by AD 2003-22-13): Inspect within the next 50 hours time-in-service

(TIS)after December 23, 2003 (the effective date of AD 2003-22-13), unless already done Following the applicable maintenance manual.

(ii)For Model N22S airplanes (airplanes not previously affected by AD 2003-22-13): Inspect within the next 10 hours TIS or 30 days, whichever occurs first, after the effective date of this AD, unless already done

(iii)For all affected airplanes: Repair or replace before further flight after the inspection

(2)Adjust the engine power lever actuated landing gear “up” aural warning microswitches and then perform a ground test. If deficiencies are detected during the ground test, make the necessary adjustments

(i)For Models N22B and N24A airplanes (airplanes previously affected by AD 2003-22-13): Within the next 50 hours TIS after December 23, 2003 (the effective date of AD 2003-22-13), unless already done following Nomad Alert Service Bulletin ANMD-57-18, dated December 19, 2002 Following Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006, and the applicable maintenance manual.

(ii)For Model N22S airplanes (airplanes not previously affected by AD 2003-22-13): Within the next 10 hours TIS or 30 days, whichever occurs first, after the effective date of this AD, unless already done

(3)For Model N22B airplanes:

(i)Fabricate placards that incorporate the following words (using at least 1/8 -inch letters) and install these placards on the instrument panel within the pilot's clear view:

(A)“RECOMMENDED APPROACH FLAPS 10 OR 20 DEG AT 90 KIAS”;

(B)“USE 10° OR 20° FLAP FOR TAKE-OFF AND LANDING—WARNING—DO NOT EXCEED 20° FLAP EXTENSION DURING FLIGHT, LANDING GEAR UP WARNING WILL INITIATE FOR A TORQUE PRESSURE OF LESS THAN 30 PSI”; and

(ii)Incorporate the following information into the Limitations section of the Airplane Flight Manual (AFM):

(A)Limit the maximum flap extension to 20 degrees; and

(B)Limit flaps down operations for landing to 10° or 20° flap. Within the next 50 hours TIS after December 23, 2003 (the effective date of AD 2003-22-13), unless already done following Nomad Alert Service Bulletin ANMD-57-18, dated December 19, 2002 Following Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006. To show compliance with paragraphs (e)(3)(ii)(A) and (e)(3)(ii)(B) of this AD, a copy of this AD may be inserted into the Limitations section of the AFM. The owner/operator holding at least a private pilot certificate as authorized by section 43.7 of the Federal Aviation Regulations (14 CFR 43.7) may do the AFM insertion and the placard requirements of paragraphs (e)(3)(i)(A) and (e)(3)(i)(B) of this AD. Make an entry into the aircraft records showing compliance with these portions of the AD following section 43.9 of the Federal Aviation Regulations (14 CFR 43.9).

(4)For Model N22S airplanes:

(i)Fabricate a placard that incorporates the following words (using at least 1/8 -inch letters) and install this placard on the instrument panel within the pilot's clear view: “USE 10° FLAP FOR TAKE-OFF AND LANDING—WARNING—DO NOT EXCEED 10° FLAP EXTENSION DURING FLIGHT, LANDING GEAR UP WARNING WILL INITIATE FOR A TORQUE PRESSURE OF LESS THAN 30 PSI”; and

(ii)Incorporate the following information into the Limitations section of the AFM:

(A)Limit the maximum flap extension to 10 degrees; and

(B)Limit flaps down operations for landing to 10° flap. Within the next 10 hours TIS or 30 days, whichever occurs first, after the effective date of this AD, unless already done Following Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006. To show compliance with paragraphs (e)(4)(ii)(A) and (e)(4)(ii)(B) of this AD, a copy of this AD may be inserted into the Limitations section of the AFM. The owner/operator holding at least a private pilot certificate as authorized by section 43.7 of the Federal Aviation Regulations (14 CFR 43.7) may do the AFM insertion and the placard requirement of paragraph (e)(4)(i) of this AD. Make an entry into the aircraft records showing compliance with these portions of the AD following section 43.9 of the Federal Aviation Regulations (14 CFR 43.9).

(5)For Model N24A airplanes:

(ii)Incorporate the following information into the Limitations section of the AFM:

(A)Limit the maximum flap extension to 10 degrees; and

(B)Limit flaps down operations for landing to 10° flap. Within the next 50 hours TIS after December 23, 2003 (the effective date of AD 2003-22-13), unless already done following Nomad Alert Service Bulletin ANMD-57-18, dated December 19, 2002 Following Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006. To show compliance with paragraphs (e)(5)(ii)(A) and (e)(5)(ii)(B) of this AD, a copy of this AD may be inserted into the Limitations section of the AFM. The owner/operator holding at least a private pilot certificate as authorized by section 43.7 of the Federal Aviation Regulations (14 CFR 43.7) may do the AFM insertion and the placard requirement of paragraph (e)(5)(i) of this AD. Make an entry into the aircraft records showing compliance with these portions of the AD following section 43.9 of the Federal Aviation Regulations (14 CFR 43.9). Alternative Methods of Compliance (AMOCs)

(f)The Manager, Standards Staff, FAA, ATTN: Doug Rudolph, Aerospace Engineer, Small Airplane Directorate, 901 Locust, Room 301, Kansas City, Missouri 64106; telephone:

(816)329-4059; fax:

(816)329-4090, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19.

(g)AMOCs approved for AD 2003-22-13 are not approved for this AD. Related Information

(h)This AD relates to Australian AD/GAF-N22/69, Amendment 5, dated September 14, 2006, which references Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006. Material Incorporated by Reference

(i)You must use Nomad Alert Service Bulletin ANMD-57-18, Rev 1, dated August 14, 2006, to do the actions required by this AD, unless the AD specifies otherwise.

(1)The Director of the Federal Register approved the incorporation by reference of this service information under 5 U.S.C. 552(a) and 1 CFR part 51.

(2)For service information identified in this AD, contact Nomad Operations, Aerospace Support Division, Boeing Australia, PO Box 767, Brisbane, QLD 4000 Australia; telephone 61 7 3306 3366; fax 61 7 3306 3111.

(3)You may review copies at the FAA, Central Region, Office of the Regional Counsel, 901 Locust, Kansas City, Missouri 64106; or at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: *http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.* Issued in Kansas City, Missouri, on October 13, 2006. James E. Jackson, Acting Manager, Small Airplane Directorate, Aircraft Certification Service. [FR Doc. E6-17425 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-26083; Directorate Identifier 2006-NM-185-AD; Amendment 39-14793; AD 2006-21-08] RIN 2120-AA64 Airworthiness Directives; Airbus Model A330-200, A340-200, and A340-300 Airplanes AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule; request for comments. SUMMARY: The FAA is adopting a new airworthiness directive

(AD)for certain Airbus Model A330-200, A340-200, and A340-300 airplanes. This AD requires the installation of heatshields in the belly fairing of the center fuselage. This AD results from fuel system reviews conducted by the manufacturer. We are issuing this AD to prevent exposing any fuel leaked from the center fuel tank to the hot temperature areas of the air conditioning packs, which could result in a fire and consequent fuel tank explosion. DATES: This AD becomes effective November 3, 2006. The Director of the Federal Register approved the incorporation by reference of certain publications listed in the AD as of November 3, 2006. We must receive comments on this AD by December 18, 2006. ADDRESSES: Use one of the following addresses to submit comments on this AD. • DOT Docket Web site: Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • Government-wide rulemaking Web site: Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • Mail: Docket Management Facility; U.S. Department of Transportation, 400 Seventh Street SW., Nassif Building, Room PL-401, Washington, DC 20590. • Fax:

(202)493-2251. • Hand Delivery: Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Contact Airbus, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France, for service information identified in this AD. FOR FURTHER INFORMATION CONTACT: Tim Backman, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone

(425)227-2797; fax

(425)227-1149. SUPPLEMENTARY INFORMATION: Discussion The FAA has examined the underlying safety issues involved in fuel tank explosions on several large transport airplanes, including the adequacy of existing regulations, the service history of airplanes subject to those regulations, and existing maintenance practices for fuel tank systems. As a result of those findings, we issued a regulation titled “Transport Airplane Fuel Tank System Design Review, Flammability Reduction and Maintenance and Inspection Requirements” (66 FR 23086, May 7, 2001). In addition to new airworthiness standards for transport airplanes and new maintenance requirements, this rule included Special Federal Aviation Regulation No. 88 (“SFAR 88,” Amendment 21-78, and subsequent Amendments 21-82 and 21-83). Among other actions, SFAR 88 requires certain type design ( *i.e.* , type certificate

(TC)and supplemental type certificate (STC)) holders to substantiate that their fuel tank systems can prevent ignition sources in the fuel tanks. This requirement applies to type design holders for large turbine-powered transport airplanes and for subsequent modifications to those airplanes. It requires them to perform design reviews and to develop design changes and maintenance procedures if their designs do not meet the new fuel tank safety standards. As explained in the preamble to the rule, we intended to adopt airworthiness directives to mandate any changes found necessary to address unsafe conditions identified as a result of these reviews. In evaluating these design reviews, we have established four criteria intended to define the unsafe conditions associated with fuel tank systems that require corrective actions. The percentage of operating time during which fuel tanks are exposed to flammable conditions is one of these criteria. The other three criteria address the failure types under evaluation: Single failures, single failures in combination with a latent condition(s), and in-service failure experience. For all four criteria, the evaluations included consideration of previous actions taken that may mitigate the need for further action. The Joint Aviation Authorities

(JAA)has issued a regulation that is similar to SFAR 88. (The JAA is an associated body of the European Civil Aviation Conference

(ECAC)representing the civil aviation regulatory authorities of a number of European States who have agreed to co-operate in developing and implementing common safety regulatory standards and procedures.) Under this regulation, the JAA stated that all members of the ECAC that hold type certificates for transport category airplanes are required to conduct a design review against explosion risks. We have determined that the actions identified in this AD are necessary to reduce the potential of ignition sources inside fuel tanks, which, in combination with flammable fuel vapors, could result in fuel tank explosions and consequent loss of the airplane. The European Aviation Safety Agency (EASA), which is the airworthiness authority for the European Union, notified us that an unsafe condition may exist on certain Airbus Model A330-200, A340-200, and A340-300 airplanes. The EASA advises that there could be temperatures in excess of 200 degrees Celsius on surfaces in the belly fairing of the center fuselage. Therefore, any fuel leaked from the center fuel tank would be exposed to the hot temperature areas of the air conditioning packs. This condition, if not corrected, could result in a fire and consequent fuel tank explosion. Relevant Service Information Airbus has issued Service Bulletins A330-21-3096 and A340-21-4107, both Revision 01, both dated October 10, 2005. The service bulletins describe procedures for the installation of heatshields in the belly fairing of the center fuselage. The installation includes the following actions: • Replacing existing heatshields with new heatshields fitted with edges and draining tapping. • Adding draining systems. • Adding two heatshields. • Adding two tight insulation sleeves on the ozone reducer and on the trim pipe. • Replacing and adding brackets. • Modifying a heatshield panel. The EASA mandated the service information and issued airworthiness directive 2006-0191, dated July 10, 2006, to ensure the continued airworthiness of these airplanes in the European Union. FAA's Determination and Requirements of this AD These airplane models are manufactured in France and are type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. As described in FAA Order 8100.14A, “Interim Procedures for Working with the European Community on Airworthiness Certification and Continued Airworthiness,” dated August 12, 2005, the EASA has kept the FAA informed of the situation described above. We have examined the EASA's findings, evaluated all pertinent information, and determined that we need to issue an AD for products of this type design that are certificated for operation in the United States. Therefore, we are issuing this AD to prevent exposing any fuel leaked from the center fuel tank to the hot temperature areas of the air conditioning packs, which could result in a fire and consequent fuel tank explosion. This AD requires accomplishing the actions specified in the service information described previously, except as discussed in “Difference Between EASA Airworthiness Directive and This AD.” Difference Between EASA Airworthiness Directive and This AD The applicability of EASA airworthiness directive 2006-0191 excludes airplanes on which Airbus Service Bulletin A330-21-3096, Revision 01; or Airbus Service Bulletin A340-21-4107, Revision 01; have been accomplished in service. However, we have not excluded those airplanes in the applicability of this AD; rather, this AD includes a requirement to accomplish the actions specified in Revision 01 of those service bulletins, as applicable. This requirement would ensure that the actions specified in the service bulletins and required by this AD are accomplished on all affected airplanes. Operators must continue to operate the airplane in the configuration required by this AD unless an alternative method of compliance is approved. Costs of Compliance None of the airplanes affected by this action are on the U.S. Register. All airplanes affected by this AD are currently operated by non-U.S. operators under foreign registry; therefore, they are not directly affected by this AD action. However, we consider this AD necessary to ensure that the unsafe condition is addressed if any affected airplane is imported and placed on the U.S. Register in the future. The following table provides the estimated costs to comply with this AD for any affected airplane that might be imported and placed on the U.S. Register in the future. Estimated Costs Action Work hours Average labor rate per hour Parts cost Cost per airplane Installation 65 $80 $17,290 $22,490 FAA's Determination of the Effective Date No airplane affected by this AD is currently on the U.S. Register. Therefore, providing notice and opportunity for public comment is unnecessary before this AD is issued, and this AD may be made effective in less than 30 days after it is published in the **Federal Register** . Comments Invited This AD is a final rule that involves requirements that affect flight safety and was not preceded by notice and an opportunity for public comment; however, we invite you to submit any relevant written data, views, or arguments regarding this AD. Send your comments to an address listed in the ADDRESSES section. Include “Docket No. FAA-2006-26083; Directorate Identifier 2006-NM-185-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the AD that might suggest a need to modify it. We will post all comments we receive, without change, to *http://dms.dot.gov,* including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this AD. Using the search function of that Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78), or you may visit *http://dms.dot.gov.* Examining the Docket You may examine the AD docket on the Internet at *http://dms.dot.gov,* or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone

(800)647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the Docket Management System receives them. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in subtitle VII, part A, subpart III, section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We have determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that the regulation: 1. Is not a “significant regulatory action” under Executive Order 12866; 2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and 3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a regulatory evaluation of the estimated costs to comply with this AD and placed it in the AD docket. See the ADDRESSES section for a location to examine the regulatory evaluation. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. Adoption of the Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The Federal Aviation Administration

(FAA)amends § 39.13 by adding the following new airworthiness directive (AD): **2006-21-08 Airbus:** Amendment 39-14793. Docket No. FAA-2006-26083; Directorate Identifier 2006-NM-185-AD. Effective Date

(a)This AD becomes effective November 3, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to Airbus Model A330-200, A340-200, and A340-300 airplanes, certificated in any category; except airplanes on which Airbus Modification 49520 has been done in production. Unsafe Condition

(d)This AD results from fuel system reviews conducted by the manufacturer. We are issuing this AD to prevent exposing any fuel leaked from the center fuel tank to the hot temperature areas of the air conditioning packs, which could result in a fire and consequent fuel tank explosion. Compliance

(e)You are responsible for having the actions required by this AD performed within the compliance times specified, unless the actions have already been done. Installation of Heatshields

(f)Within 27 months after the effective date of this AD, install heatshields in the belly fairing of the center fuselage in accordance with the Accomplishment Instructions of Airbus Service Bulletin A330-21-3096, Revision 01, dated October 10, 2005 (for Model A330-200 airplanes); or Airbus Service Bulletin A340-21-4107, Revision 01, dated October 10, 2005 (for Model A340-200 and A340-300 airplanes); as applicable. Alternative Methods of Compliance (AMOCs) (g)(1) The Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA, has the authority to approve AMOCs for this AD, if requested in accordance with the procedures found in 14 CFR 39.19.

(h)European Aviation Safety Agency

(EASA)airworthiness directive 2006-0191, dated July 10, 2006, also addresses the subject of this AD. Material Incorporated by Reference

(i)You must use Airbus Service Bulletin A330-21-3096, Revision 01, dated October 10, 2005; or Airbus Service Bulletin A340-21-4107, Revision 01, dated October 10, 2005; as applicable, to perform the actions that are required by this AD, unless the AD specifies otherwise. The Director of the Federal Register approved the incorporation by reference of these documents in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Contact Airbus, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France, for a copy of this service information. You may review copies at the Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street, SW., Room PL-401, Nassif Building, Washington, DC; on the Internet at *http://dms.dot.gov;* or at the National Archives and Records Administration (NARA). For information on the availability of this material at the NARA, call

(202)741-6030, or go to *http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.* Issued in Renton, Washington, on October 10, 2006. Kalene C. Yanamura, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E6-17426 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-25730; Directorate Identifier 2006-NE-31-AD; Amendment 39-14796; AD 2006-21-11] RIN 2120-AA64 Airworthiness Directives; Turbomeca Turmo IV A and IV C Series Turboshaft Engines AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule; request for comments. SUMMARY: The FAA is adopting a new airworthiness directive

(AD)for Turbomeca Turmo IV A and IV C series turboshaft engines. This AD requires identifying, inspecting and replacing flexible lubrication pipes manufactured after April 1, 2003. If both engines on the same helicopter each have an affected pipe, then this AD requires replacing one of the affected pipes before further flight. This AD also requires initial and repetitive borescope inspections of affected pipes, visual inspections for oil leakage, and visual inspections of the oil filter, on engines that are not required to have an affected pipe replaced before further flight by this AD. This AD results from 7 reports of oil leakage due to the deterioration of flexible lubrication pipes manufactured after April 1, 2003. We are issuing this AD to prevent dual-engine failure on a twin-engine helicopter. DATES: Effective November 3, 2006. We must receive any comments on this AD by December 18, 2006. ADDRESSES: Use one of the following addresses to comment on this AD: • *DOT Docket Web site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Government-wide rulemaking Web site:* Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • *Mail:* Docket Management Facility; U.S. Department of Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, Washington, DC 20590-0001. • *Fax:*

(202)493-2251. • *Hand Delivery:* Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Contact Turbomeca, 40220 Tarnos, France; telephone 33 05 59 74 40 00, fax 33 05 59 74 45 15 for the service information identified in this AD. FOR FURTHER INFORMATION CONTACT: Christopher Spinney, Aerospace Engineer, Engine Certification Office, FAA, Engine and Propeller Directorate, 12 New England Executive Park, Burlington, MA 01803; telephone

(781)238-7175; fax

(781)238-7199. SUPPLEMENTARY INFORMATION: The European Aviation Safety Agency (EASA), which is the airworthiness authority for the European Community, recently notified us that an unsafe condition may exist on certain Turbomeca Turmo IV A and IV C series turboshaft engines. EASA advises that 7 reports were received of oil leakage due to the deterioration of flexible lubrication pipes, part number (P/N) 0 249 92 813 0, installed on Turbomeca Turmo III C4 (military version) turboshaft engines. Turbomeca is still investigating the cause of the deterioration, but links a manufacturing process change, applied by the pipe manufacturer, in 2003. The same process was used to manufacture flexible lubrication pipes, P/N 0 249 92 916 0. Either P/N pipe could be installed on Turmo IV A and IV C series turboshaft engines. Relevant Service Information We have reviewed and approved the technical contents of Turbomeca Alert Mandatory Service Bulletin

(MSB)No. A249 72 0802, Update No. 1, dated August 3, 2006. That Alert MSB describes procedures for identifying affected flexible lubrication pipes by their curing batch number, and replacing one of the affected pipes on a twin-engine helicopter to prevent dual-engine failure. That Alert MSB also describes procedures for performing repetitive borescope inspections of all other affected pipes and visual inspections of the oil filter. EASA classified this service bulletin as mandatory and issued AD 2006-0240-E in order to ensure the airworthiness of these Turbomeca Turmo IV A and IV C series turboshaft engines in Europe. Bilateral Airworthiness Agreement These Turbomeca Turmo IV A and IV C series turboshaft engines are manufactured in France and are type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Under this bilateral airworthiness agreement, EASA kept the FAA informed of the situation described above. We have examined the findings of EASA, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States. FAA's Determination and Requirements of This AD The unsafe condition described previously is likely to exist or develop on other Turbomeca Turmo IV A and IV C series turboshaft engines of the same type design. We are issuing this AD to prevent dual-engine failure on a twin-engine helicopter. This AD requires identifying affected flexible lubrication pipes by their curing batch number, and replacing the affected pipe before further flight, on one engine if both engines on the same helicopter each have an affected pipe. This AD also requires initial and repetitive borescope inspections of flexible lubrication pipes and visual inspections of the oil filter, on engines that do not have the affected pipe replaced before further flight. FAA's Determination of the Effective Date Since an unsafe condition exists that requires the immediate adoption of this AD, we have found that notice and opportunity for public comment before issuing this AD are impracticable, and that good cause exists for making this amendment effective in less than 30 days. Interim Action These actions are interim actions and we may take further rulemaking actions in the future. Comments Invited This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment; however, we invite you to send us any written relevant data, views, or arguments regarding this AD. Send your comments to an address listed under ADDRESSES . Include “AD Docket No. FAA-2006-25730; Directorate Identifier 2006-NE-31-AD” in the subject line of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the rule that might suggest a need to modify it. We will post all comments we receive, without change, to *http://dms.dot.gov* , including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this AD. Using the search function of the DMS Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78) or you may visit *http://dms.dot.gov.* Examining the AD Docket You may examine the docket that contains the AD, any comments received, and any final disposition in person at the Docket Management Facility Docket Office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Office (telephone

(800)647-5227) is located on the plaza level of the Department of Transportation Nassif Building at the street address stated in ADDRESSES . Comments will be available in the AD docket shortly after the DMS receives them. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We have determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that the regulation: 1. Is not a “significant regulatory action” under Executive Order 12866; 2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and 3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a summary of the costs to comply with this AD and placed it in the AD Docket. You may get a copy of this summary by sending a request to us at the address listed under ADDRESSES . List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Safety. Adoption of the Amendment Under the authority delegated to me by the Administrator, the Federal Aviation Administration amends part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The FAA amends § 39.13 by adding the following new airworthiness directive: **2006-21-11 Turbomeca:** Amendment 39-14796. Docket No. FAA-2006-25730; Directorate Identifier 2006-NE-31-AD. Effective Date

(a)This airworthiness directive

(AD)becomes effective November 3, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to Turbomeca Turmo IV A and IV C series turboshaft engines with flexible lubrication pipes, part number (P/N) 0 249 92 813 0 or P/N 0 249 92 916 0, installed. These engines are installed on but not limited to, Aerospatiale SA 330—PUMA helicopters. Unsafe Condition

(d)This AD results from 7 reports of oil leakage due to the deterioration of certain flexible lubrication pipes, part number (P/N) 0 249 92 813 0. We are issuing this AD to prevent dual-engine failure on a twin-engine helicopter. Compliance

(e)You are responsible for having the actions required by this AD performed within the compliance times specified unless the actions have already been done. *Initial Actions*

(f)Before further flight:

(1)Identify the curing batch of the flexible lubrication pipes.

(2)If the two engines installed on the same helicopter have pipes with a curing batch of “2T03” (meaning 2nd quarter of 2003) or subsequent batch, replace one of the pipes with a pipe having a curing batch before batch “2T03”.

(3)On the other engine, or on a helicopter that has only one engine affected by this AD, borescope-inspect the pipe for deterioration, visually inspect for oil leakage, and visually inspect the oil filter for black particle deterioration from the pipe. Replace the pipe if deterioration or leakage is found, with a pipe having a curing batch before batch “2T03”. Repetitive Actions

(g)Within every additional 25 operating hours, on engines still having an affected flexible lubrication pipe, borescope-inspect the pipe for deterioration, visually inspect pipe for oil leakage, and visually inspect the oil filter for black particle deterioration from the pipe. Replace the pipe if deterioration or leakage is found, with a pipe having a curing batch before batch “2T03”.

(h)Information on performing the initial and repetitive actions in this AD can be found in Turbomeca Alert Mandatory Service Bulletin No. A249 72 0802, Update No. 1, dated August 3, 2006. Alternative Methods of Compliance

(i)The Manager, Engine Certification Office, has the authority to approve alternative methods of compliance for this AD if requested using the procedures found in 14 CFR 39.19. Related Information

(j)European Aviation Safety Agency airworthiness directive No. 2006-0240-E, dated August 11, 2006, also addresses the subject of this AD. Issued in Burlington, Massachusetts, on October 12, 2006. Thomas A. Boudreau, Acting Manager, Engine and Propeller Directorate, Aircraft Certification Service. [FR Doc. E6-17328 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-26085; Directorate Identifier 2006-NM-142-AD; Amendment 39-14794; AD 2006-21-09] RIN 2120-AA64 Airworthiness Directives; Boeing Model 777-200 Series Airplanes Equipped with General Electric GE90-94B Engines AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule; request for comments. SUMMARY: The FAA is adopting a new airworthiness directive

(AD)for certain Boeing Model 777-200 series airplanes equipped with General Electric GE90-94B engines. This AD requires inspecting to determine the part number of the identification plate of the torque box on the thrust reversers (TRs), and investigative and corrective actions if necessary. This AD results from engine certification testing which revealed that TRs on GE90-94B engines have inner walls that could develop disbonding in the upper bifurcation radii. Disbonding was found in an equivalent inner wall used during the testing. We are issuing this AD to prevent failure of a TR and adjacent components and their consequent separation from the airplane during flight or during a refused takeoff (RTO). These separated components could cause structural damage to the airplane or damage to other airplanes and possible injury to people on the ground. TR failure during a RTO could also cause the engine to produce forward thrust, resulting in asymmetric thrust and possible runway excursion. DATES: This AD becomes effective November 3, 2006. The Director of the Federal Register approved the incorporation by reference of a certain publication listed in the AD as of November 3, 2006. We must receive comments on this AD by December 18, 2006. ADDRESSES: Use one of the following addresses to submit comments on this AD. • *DOT Docket Web site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Government-wide rulemaking Web site:* Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • *Mail:* Docket Management Facility; U.S. Department of Transportation, 400 Seventh Street SW., Nassif Building, Room PL-401, Washington, DC 20590. • *Fax:*

(202)493-2251. • *Hand Delivery:* Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Contact Boeing Commercial Airplanes, P.O. Box 3707, Seattle, Washington 98124-2207, for the service information identified in this AD. FOR FURTHER INFORMATION CONTACT: Gary Oltman, Aerospace Engineer, Airframe Branch, ANM-120S, Seattle Aircraft Certification Office, FAA, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone

(425)917-6443; fax

(425)917-6590. SUPPLEMENTARY INFORMATION: Discussion We have received a report indicating that engine certification testing on certain Boeing Model 777-200 series airplanes with General Electric GE90 engines revealed that certain thrust reversers

(TRs)have inner walls that could develop disbonding in the upper bifurcation radii. Disbonding and structural degradation was found in an equivalent inner wall used during the testing. Investigation revealed that the disbonding was caused by a flight maneuver that applied too much stress in the upper bifurcation radii composite materials. This condition, if not corrected, could result in failure of a TR and adjacent components and their consequent separation from the airplane during flight or during a refused takeoff (RTO). These separated components could cause structural damage to the airplane or damage to other airplanes and possible injury to people on the ground. TR failure during a RTO could also cause the engine to produce forward thrust, resulting in asymmetric thrust and possible runway excursion. Relevant Service Information We have reviewed Boeing Alert Service Bulletin 777-78A0056, dated April 20, 2006. The service bulletin describes procedures for a general visual inspection to determine the part number on the identification plate of the torque box on the TRs, and investigative and corrective actions if necessary. If the identification plate shows any part number specified in paragraph 3.B.1.a. of the service bulletin, without the service bulletin number as a modification number, the investigative and corrective actions include, among other things, replacing the existing TRs with new or serviceable TRs, and marking the service bulletin number on the identification plate of the torque box. Accomplishing the actions specified in the service information is intended to adequately address the unsafe condition. The Boeing service bulletin refers to Spirit AeroSystems Document MAA7-70023-1, dated November 22, 2005, as an additional source of service information for accomplishing the corrective actions. FAA's Determination and Requirements of This AD The unsafe condition described previously is likely to exist or develop on other airplanes of the same type design that may be registered in the U.S. at some time in the future. Therefore, we are issuing this AD to prevent failure of a TR and adjacent components and their consequent separation from the airplane during flight or during a RTO. These separated components could cause structural damage to the airplane or damage to other airplanes and possible injury to people on the ground. TR failure during a RTO could also cause the engine to produce forward thrust, resulting in asymmetric thrust and possible runway excursion. This AD requires accomplishing the actions specified in the Boeing service information described previously, except as discussed under “Difference Between the AD and the Service Information.” Difference Between the AD and the Service Information You should note that, although Boeing Alert Service Bulletin 777-78A0056 specifies that you may contact the manufacturer for repair instructions, this AD requires you to repair in one of the following ways: • Using a method that we approve; or • Using data that meet the certification basis of the airplane that have been approved by an Authorized Representative for the Boeing Delegation Option Authorization Organization who has been authorized by the FAA to make those findings. Costs of Compliance None of the airplanes affected by this action are on the U.S. Register. All airplanes affected by this AD are currently operated by non-U.S. operators under foreign registry; therefore, they are not directly affected by this AD action. However, we consider this AD necessary to ensure that the unsafe condition is addressed if any affected airplane is imported and placed on the U.S. Register in the future. If an affected airplane is imported and placed on the U.S. Register in the future, the required inspection would take about 1 work hour per airplane, at an average labor rate of $80 per work hour. Based on these figures, the estimated cost of the AD would be $80 per airplane. FAA's Determination of the Effective Date No airplane affected by this AD is currently on the U.S. Register. Therefore, providing notice and opportunity for public comment is unnecessary before this AD is issued, and this AD may be made effective in less than 30 days after it is published in the **Federal Register** . Comments Invited This AD is a final rule that involves requirements that affect flight safety and was not preceded by notice and an opportunity for public comment; however, we invite you to submit any relevant written data, views, or arguments regarding this AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2006-26085; Directorate Identifier 2006-NM-142-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the AD that might suggest a need to modify it. We will post all comments we receive, without change, to *http://dms.dot.gov,* including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this AD. Using the search function of that Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review the DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78), or you may visit *http://dms.dot.gov.* Examining the Docket You may examine the AD docket on the Internet at *http://dms.dot.gov,* or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone

(FAA)amends § 39.13 by adding the following new airworthiness directive (AD): **2006-21-09 Boeing:** Amendment 39-14794. Docket No. FAA-2006-26085; Directorate Identifier 2006-NM-142-AD. Effective Date

(a)This AD becomes effective November 3, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to Boeing Model 777-200 series airplanes equipped with General Electric GE90-94B engines; certificated in any category; as identified in Boeing Alert Service Bulletin 777-78A0056, dated April 20, 2006. Unsafe Condition

(d)This AD results from engine certification testing which revealed that thrust reversers

(TRs)on GE90-94B engines have inner walls that could develop disbonding in the upper bifurcation radii. Disbonding was found in an equivalent inner wall used during the testing. We are issuing this AD to prevent failure of a TR and adjacent components and their consequent separation from the airplane during flight or during a refused takeoff (RTO). These separated components could cause structural damage to the airplane or damage to other airplanes and possible injury to people on the ground. TR failure during a RTO could also cause the engine to produce forward thrust, resulting in asymmetric thrust and possible runway excursion. Compliance

(e)You are responsible for having the actions required by this AD performed within the compliance times specified, unless the actions have already been done. General Visual Inspection/Investigative and Corrective Actions

(f)Within 24 months after the effective date of this AD: Do a general visual inspection to determine the part number of the identification plate of the torque box on the TRs, and do all applicable investigative and corrective actions before further flight, in accordance with the Accomplishment Instructions of Boeing Alert Service Bulletin 777-78A0056, dated April 20, 2006. If any discrepancy is found and the service bulletin specifies to contact Boeing for appropriate action: Before further flight, repair the TR using a method approved in accordance with the procedures specified in paragraph

(g)of this AD. Note 1: The Boeing service bulletin refers to Spirit AeroSystems Document MAA7-70023-1, dated November 22, 2005, as an additional source of service information for accomplishing the corrective actions. Alternative Methods of Compliance (AMOCs) (g)(1) The Manager, Seattle Aircraft Certification Office (ACO), FAA, has the authority to approve AMOCs for this AD, if requested in accordance with the procedures found in 14 CFR 39.19.

(3)An AMOC that provides an acceptable level of safety may be used for any repair required by this AD, if it is approved by an Authorized Representative for the Boeing Commercial Airplanes Delegation Option Authorization Organization who has been authorized by the Manager, Seattle ACO, to make those findings. For a repair method to be approved, the repair must meet the certification basis of the airplane. Material Incorporated by Reference

(h)You must use Boeing Alert Service Bulletin 777-78A0056, dated April 20, 2006, to perform the actions that are required by this AD, unless the AD specifies otherwise. The Director of the Federal Register approved the incorporation by reference of this document in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Contact Boeing Commercial Airplanes, P.O. Box 3707, Seattle, Washington 98124-2207, for a copy of this service information. You may review copies at the Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street, SW., Room PL-401, Nassif Building, Washington, DC; on the Internet at *http://dms.dot.gov;* or at the National Archives and Records Administration (NARA). For information on the availability of this material at the NARA, call

(202)741-6030, or go to *http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.* Issued in Renton, Washington, on October 10, 2006. Kalene C. Yanamura, Acting Manager, Transport Airplane Directorate; Aircraft Certification Service. [FR Doc. E6-17428 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-25060; Directorate Identifier 2006-NM-119-AD; Amendment 39-14792; AD 2006-21-07] RIN 2120-AA64 Airworthiness Directives; Airbus Model A321 Airplanes AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Final rule. SUMMARY: We are adopting a new airworthiness directive

(AD)for the products listed above. This AD results from mandatory continuing airworthiness information

(MCAI)issued by an airworthiness authority of another country to identify and correct an unsafe condition on an aviation product. We are issuing this AD to require actions to correct the unsafe condition on these products. DATES: This AD becomes effective November 24, 2006. The Director of the Federal Register approved the incorporation by reference of certain publications listed in this AD as of November 24, 2006. ADDRESSES: You may examine the AD docket on the Internet at *http://dms.dot.gov* or in person at the Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street SW., Nassif Building, Room PL-401, Washington, DC. FOR FURTHER INFORMATION CONTACT: Dan Rodina, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone

(425)227-2125; fax

(425)227-1149. SUPPLEMENTARY INFORMATION: Discussion We issued a notice of proposed rulemaking

(NPRM)to amend 14 CFR part 39 to include an AD that would apply to the specified products. That NPRM was published in the **Federal Register** on June 19, 2006 (71 FR 35220). That NPRM proposed to require the removal of one of the two inflating vacuums in order to reduce the speed of the slide inflation. Comments We gave the public the opportunity to participate in developing this AD. We considered the comments received. Requests To Change Compliance Time Airbus concurs with the contents of the NPRM. Airbus notes that French airworthiness directive F-2005-155, dated August 31, 2005, mandated corrective actions be done before September 10, 2008; however, the NPRM proposes accomplishing the modification within 3 years after the effective date of the AD. Airbus notes that the current compliance time would give operators until the last quarter of 2009 to accomplish the required modification. The Air Transport Association (ATA), on behalf of its members and U.S. Airways, asks that the compliance time for the modification specified in the NPRM be extended to 42 months. The ATA states that its members generally support the intent of the AD, and have been in lead airline discussions with Airbus and Messier on the referenced service bulletins. The commenters state that to comply with the work instructions specified in the referenced Air Cruisers service bulletins, the affected slides must be sent to the original equipment manufacturer

(OEM)for modification. Due to this fact, more time is necessary for accomplishing the modification. We do not agree with the requests to either reduce or extend the compliance time. The 36-month compliance time required by this AD reflects an equivalent amount of time specified by the French airworthiness directive. In developing an appropriate compliance time for this action, we considered the safety implications, parts availability, and normal maintenance schedules for the timely accomplishment of the modification. In consideration of these items, as well as the reports of slide damage and deflation during deployment tests, we have determined that the 36-month compliance time required by this AD will ensure an acceptable level of safety and allow the modifications to be done during scheduled maintenance intervals for most affected operators. In addition, if the slides are sent to the OEM for modification, the compliance time is more than adequate to cover such circumstances. We have made no change to the AD in this regard. Request To Change/Clarify Certain Procedures The Modification and Replacement Parts Association (MARPA) provided the following comments to the NPRM. • MARPA states that paragraph

(e)of the NPRM requires work to be accomplished as specified in a particular Airbus service bulletin. MARPA adds that manufacturer's service documents are privately authored instruments, generally having copyright protection against duplication and distribution. When a service document is incorporated by reference into a public document, such as an airworthiness directive, pursuant to 5 U.S.C. 552(a) and 1 CFR part 51, it loses its private, protected status and becomes a public document. MARPA notes that the NPRM is one of these public documents, but does not incorporate by reference that service document. Therefore, the NPRM, as proposed, attempts to require compliance with a public law by reference to a private writing. MARPA believes that public laws, by definition, should be public, and asks that the referenced Airbus service bulletin be incorporated by reference into the AD. We do not agree that documents should be incorporated by reference during the NPRM phase of rulemaking. The Office of the Federal Register

(OFR)requires that documents that are necessary to accomplish the requirements of the AD be incorporated by reference during the final rule phase of rulemaking. This final rule incorporates by reference the document necessary for the accomplishment of the requirements mandated by this AD. Further, we point out that while documents that are incorporated by reference do become public information, they do not lose their copyright protection. For that reason, we advise the public to contact the manufacturer to obtain copies of the referenced service information. • MARPA also states that service documents incorporated by reference should be made available to the public by publication in either the **Federal Register** or the Docket Management System (DMS), keyed to the action that incorporates those documents. The stated purpose of the incorporation by reference method is brevity, to keep from expanding the **Federal Register** needlessly by publishing documents already in the hands of the affected individuals. MARPA adds that, traditionally, “affected individuals” means aircraft owners and operators, who are generally provided service information by the manufacturer. MARPA adds that a new class of affected individuals has emerged, since the majority of aircraft maintenance is now performed by specialty shops instead of aircraft owners and operators. MARPA notes that this new class includes maintenance and repair organizations, component servicing, and/or servicing alternatively certified parts under section 21.303 (“Parts Manufacturer Approval”), of the Federal Aviation Regulations (14 CFR 21.303). MARPA states that the concept of brevity is now nearly archaic as documents exist more frequently in electronic format than on paper. Therefore, MARPA asks that the referenced Airbus service bulletin be published either in the **Federal Register** or on DMS. In regard to the commenter's request that service documents be made available to the public by publication in the **Federal Register** , we agree that incorporation by reference was authorized to reduce the volume of material published in the **Federal Register** and the Code of Federal Regulations. However, as specified in the **Federal Register** Document Drafting Handbook, the Director of the Office of the OFR decides when an agency may incorporate material by reference. As the commenter is aware, the OFR files documents for public inspection on the workday before the date of publication of the rule at its office in Washington, DC. As stated in the *Federal Register Document Drafting Handbook* , when documents are filed for public inspection, anyone may inspect or copy file documents during the OFR's hours of business. Further questions regarding publication of documents in the **Federal Register** or incorporation by reference should be directed to the OFR. In regard to the commenter's request to post service bulletins on DMS, we are currently in the process of reviewing issues surrounding the posting of service bulletins on DMS as part of an AD docket. Once we have thoroughly examined all aspects of this issue and have made a final determination, we will consider whether our current practice needs to be revised. No change to the final rule is necessary in response to this comment. • In addition, MARPA states that paragraph (g)(3) of the NPRM is vague. MARPA adds that courts have universally held that requirements are unenforceable if they are too vague to convey to a reasonable person the specific acts that are required or proscribed by the rule. We partially agree with MARPA. We are considering clarifying the text of paragraph (g)(3) in future ADs to more clearly remind operators they are required to assure a product is airworthy before it is returned to service. However, we consider the existing text to be legally enforceable since it requires performing FAA-approved corrective actions before returning the product to an airworthy condition. No change is required to this final rule in that regard. Conclusion We reviewed the available data, including the comments received, and determined that air safety and the public interest require adopting the AD as proposed. Differences Between This AD and the MCAI or Service Information We have reviewed the MCAI and related service information and, in general, agree with their substance. But we might have found it necessary to use different words from those in the MCAI to ensure the AD is clear for U.S. operators and is enforceable in a U.S. court of law. In making these changes, we do not intend to differ substantively from the information provided in the MCAI and related service information. We might also have required different actions in this AD from those in the MCAI in order to follow our FAA policies. Any such differences are described in a separate paragraph of the AD. These requirements, if any, take precedence over the actions copied from the MCAI. Costs of Compliance Based on the service information, we estimate that this AD affects about 37 products of U.S. registry. We also estimate that it takes about 5 work hours per product to do the actions and that the average labor rate is $80 per work hour. Required parts cost about $370 per product. Where the service information lists required parts costs that are covered under warranty, we have assumed that there will be no change for these costs. As we do not control warranty coverage for affected parties, some parties may incur costs higher than estimated here. Based on these figures, we estimate the cost of the AD on U.S. operators to be $28,490, or $770 per product. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that this AD:

(1)Is not a “significant regulatory action” under Executive Order 12866;

(2)Is not a “significant rule” under DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and

(3)Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a regulatory evaluation of the estimated costs to comply with this AD and placed it in the AD Docket. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains the NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Office (telephone

(800)647-5227) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Incorporation by reference, Safety. Adoption of the Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The FAA amends § 39.13 by adding the following new AD: **2006-21-07 Airbus:** Amendment 39-14792. Docket No. FAA-2006-25060; Directorate Identifier 2006-NM-119-AD. Effective Date

(a)This airworthiness directive

(AD)becomes effective November 24, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to Airbus A321 aircraft, all certified models and serial numbers that are equipped with escape slides, part number (P/N) 62292-105, 62292-106, 62293-105, or 62293-106. Aircraft on which no modification/replacement of escape slides at doors 2 and 3 has been performed since embodiment of Airbus Modification 34989 in production are not affected by the requirements of this AD. Reason

(d)Some cases of slide damage and deflation have been reported during deployment tests at doors 2 and 3 of the A321. Analysis has shown that the slide may inflate too fast compared to the associated door release. If there is a delay during the opening of the door, the inflatable slide may exercise pressure on this not yet opened door, which could result in damage to the inflatable slide. A slide not inflated correctly may disrupt passenger emergency evacuation. For such reason, this AD renders mandatory the removal of one of the two inflating vacuums in order to reduce the speed of the slide inflation. Actions and Compliance

(e)Unless already done, do the following actions except as stated in paragraph

(f)below: Within 36 months after the effective date of this AD, modify the slides, P/N 62292-105, 62292-106, 62293-105, or 62293-106, in accordance with the instructions given in Airbus Service Bulletin A320-25-1416, dated May 20, 2005. FAA AD Differences

(f)None. Other FAA AD Provisions

(g)The following provisions also apply to this AD:

(1)Alternative Methods of Compliance (AMOCs): The Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA, ATTN: Dan Rodina, Aerospace Safety Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone

(425)227-2125; fax

(425)227-1149; has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19.

(2)Notification of Principal Inspector: Before using any AMOC approved in accordance with 14 CFR 39.19 on any airplane to which the AMOC applies, notify the appropriate principal inspector in the FAA Flight Standards Certificate Holding District Office.

(3)Return to Airworthiness: When complying with this AD, perform FAA-approved corrective actions before returning the product to an airworthy condition.

(4)Reporting Requirements: For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 *et seq.* ), the Office of Management and Budget

(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information (h)(1) This AD is related to MCAI French airworthiness directive F-2005-155, dated August 31, 2005, which references Airbus Service Bulletin A320-25-1416, dated May 20, 2005, for information on required actions.

(2)Airbus Service Bulletin A320-25-1416, dated May 20, 2005, refers to Air Cruisers Service Bulletin S.B. A321 005-25-15, dated May 30, 2005, as an additional source of service information for modifying the escape slides. Material Incorporated by Reference

(i)You must use Airbus Service Bulletin A320-25-1416, dated May 20, 2005, to do the actions required by this AD, unless the AD specifies otherwise.

(1)The Director of the Federal Register approved the incorporation by reference of this service information under 5 U.S.C. 552(a) and 1 CFR part 51.

(2)For service information identified in this AD, contact Airbus, 1 Rond Point Maurice Bellonte, 31707 Blagnac Cedex, France.

(3)You may review copies at the FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; or at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202-741-6030, or go to: *http://www.archives.gov/federal-register/cfr/ibr-locations.html.* Issued in Renton, Washington, on October 10, 2006. Kalene C. Yanamura, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E6-17420 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9292] RIN 1545-BB11 Partner's Distributive Share: Foreign Tax Expenditures AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. SUMMARY: This document contains final regulations regarding the allocation of creditable foreign tax expenditures by partnerships. The regulations are necessary to clarify the application of section 704(b) to allocations of creditable foreign tax expenditures. The final regulations affect partnerships and their partners. DATES: *Effective Date:* These regulations are effective October 19, 2006. *Applicability Date:* These regulations apply to partnership taxable years beginning on or after October 19, 2006. FOR FURTHER INFORMATION CONTACT: Timothy J. Leska at 202-622-3050 or Michael I. Gilman at 202-622-3850 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains amendments to 26 CFR part 1 under section 704 of the Internal Revenue Code (Code). On April 21, 2004, temporary regulations (TD 9121) relating to the proper allocation of partnership expenditures for foreign taxes were published in the **Federal Register** (69 FR 21405). A notice of proposed rulemaking (REG-139792-02) cross-referencing the temporary regulations was also published in the **Federal Register** (69 FR 21454) on April 21, 2004. A public hearing was requested and held on September 14, 2004. The IRS received a number of written comments responding to the temporary and proposed regulations. After consideration of the comments, the proposed regulations are adopted as revised by this Treasury decision and the corresponding temporary regulations are removed. Section 704(a) provides that a partner's distributive share of income, gain, loss, deduction, or credit shall, except as otherwise provided, be determined by the partnership agreement. Section 704(b) provides that a partner's distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances) if the allocation to a partner under the partnership agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect. Thus, in order to be respected, partnership allocations either must have substantial economic effect or must be in accordance with the partners' interests in the partnership. In general, for an allocation to have economic effect, it must be consistent with the underlying economic arrangement of the partners. This means that, in the event there is an economic burden or benefit that corresponds to the allocation, the partner to whom the allocation is made must receive the economic benefit or bear such economic burden. See § 1.704-1(b)(2)(ii). As a general rule, the economic effect of an allocation (or allocations) is substantial if there is a reasonable possibility that the allocation (or allocations) will affect substantially the dollar amounts to be received, independent of tax consequences. See § 1.704-1(b)(2)(iii). Even if the allocation affects substantially the dollar amounts, the economic effect of the allocation (or allocations) is not substantial if, at the time the allocation (or allocations) becomes part of the partnership agreement,

(1)The after-tax economic consequences of at least one partner may, in present value terms, be enhanced compared to such consequences if the allocation (or allocations) were not contained in the partnership agreement, and

(2)there is a strong likelihood that the after-tax economic consequences of no partner will, in present value terms, be substantially diminished compared to such consequences if the allocation (or allocations) were not contained in the partnership agreement. See § 1.704-1(b)(2)(iii). The temporary and proposed regulations clarified the application of the regulations under section 704 to foreign taxes paid or accrued by a partnership and eligible for credit under section 901(a) (creditable foreign tax expenditures or CFTEs). While allocations of CFTEs that are disproportionate to the related income may have economic effect in that they reduce the recipient partner's capital account and affect the amount the recipient partner is entitled to receive on liquidation, this effect will almost certainly not be substantial after taking U.S. tax consequences into account. For example, the after-tax economic consequences to a foreign or other tax-indifferent partner whose share of the tax expense is borne by a U.S. taxable partner will be enhanced by reason of the allocation, and there is a strong likelihood that the after-tax economic consequences to a U.S. partner will not be substantially diminished since the allocation of the CFTE increases the allowable foreign tax credit and results in a dollar-for-dollar reduction in the U.S. tax the partner would otherwise owe. The temporary and proposed regulations were based on the assumption that partnerships specially allocate foreign taxes where the recipient partner would elect to claim the CFTE as a credit, rather than as a deduction. As a matter of administrative convenience, the regulations applied to all allocations of CFTEs even though, in rare instances, a partner may instead elect to deduct the CFTEs. Thus, the temporary and proposed regulations provided that partnership allocations of CFTEs cannot have substantial economic effect and, therefore, must be allocated in accordance with the partners' interests in the partnership. The temporary and proposed regulations provided a safe harbor under which partnership allocations of CFTEs will be deemed to be in accordance with the partners' interests in the partnership. Under this safe harbor, if the partnership agreement satisfies the requirements of § 1.704-1(b)(2)(ii)( *b* ) or ( *d* ) (capital account maintenance, liquidation according to capital accounts, and either deficit restoration obligations or qualified income offsets), then an allocation of CFTEs that is proportionate to a partner's distributive share of the partnership income to which such taxes relate (including income allocated pursuant to section 704(c)) will be deemed to be in accordance with the partners' interests in the partnership. If the allocation of CFTEs does not satisfy this safe harbor, then the allocation of CFTEs will be tested under the partners' interests in the partnership standard set forth in § 1.704-1(b)(3). Summary of Comments and Explanation of Provisions These final regulations retain the provisions of the proposed and temporary regulations excluding allocations of CFTEs from the substantial economic effect safe harbor of § 1.704-1(b)(2), and provide a safe harbor under which allocations of CFTEs will be deemed to be in accordance with the partners' interests in the partnership. As provided in the temporary and proposed regulations, the final regulations provide that allocations of CFTEs must be in proportion to the distributive shares of income to which the CFTEs relate in order to satisfy the safe harbor. The final regulations provide that the income to which a CFTE relates is the net income in the CFTE category to which the CFTE is allocated and apportioned. A CFTE category is a category of net income attributable to one or more activities of the partnership. The net income in a CFTE category is the net income determined for U.S. Federal income tax purposes (U.S. net income) attributable to each separate activity of the partnership that is included in the CFTE category. Income from separate activities is included in the same CFTE category only if the U.S. net income from the activities is allocated among the partners in the same proportions. For this purpose, income from a divisible part of a single activity that is shared in a different ratio than other income from that activity is treated as income from a separate activity. CFTEs are allocated and apportioned to CFTE categories in accordance with § 1.904-6 principles, as modified by the final regulations. Therefore, CFTEs generally are allocated to a CFTE category if the income on which the CFTE is imposed (the net income recognized for foreign tax purposes) is in the CFTE category. Accordingly, the safe harbor of the final regulations requires a three-step process to determine the distributive share of income to which a CFTE relates. First, the partnership must determine its CFTE categories. Second, the partnership must determine the U.S. net income in each CFTE category. Third, the partnership must allocate and apportion CFTEs to the CFTE categories based on the net income in the CFTE categories that is recognized for foreign tax purposes. To satisfy the safe harbor, the partnership must allocate CFTEs among the partners in the same proportion as the allocations of U.S. net income in the applicable CFTE category. Summary of Comments A number of comments were received on the temporary and proposed regulations. The comments included requests for clarification and recommendations relating to the following:

(i)The definition of CFTEs,

(ii)the CFTE categories,

(iii)the distributive share of income to which a CFTE relates,

(iv)the application of the principles of § 1.904-6,

(v)the partners' interests in the partnership,

(vi)the effective date and transition rule and

(vii)certain other matters. The comments and final regulations are discussed in detail below. A. Creditable Foreign Tax Expenditures (CFTEs) The temporary and proposed regulations provide that a CFTE is a foreign tax paid or accrued by a partnership that is eligible for a credit under section 901(a). A qualifying domestic corporate shareholder may claim a credit under section 901(a) for taxes paid or accrued by a foreign corporation and deemed paid by the shareholder under section 902 or 960 upon distribution or inclusion of the associated earnings. Several commentators requested guidance concerning whether taxes deemed paid under section 902 or 960 are subject to these regulations. Although a domestic corporation may be eligible to claim a credit for deemed-paid taxes with respect to stock of a foreign corporation it owns indirectly through a partnership, any such deemed-paid taxes are determined directly by the corporate partner based on the partner's distributive share of dividend income or inclusion. Such deemed-paid taxes, therefore, are not partnership items and are not taxes paid or accrued (or deemed paid or accrued) by a partnership. Accordingly, foreign taxes deemed paid under section 902 or 960 are not subject to these regulations. The final regulations retain the definition of CFTE contained in the temporary and proposed regulations. In response to the comment, the final regulations clarify that a CFTE does not include foreign taxes deemed paid by a corporate partner under section 902 or 960. The final regulations also clarify that the regulations do not apply to foreign taxes paid or accrued by a partner (foreign taxes for which the partner has legal liability within the meaning of § 1.901-2(f)). Finally, the final regulations clarify that a CFTE does include a foreign tax paid or accrued by a partnership that is eligible for a credit under an applicable U.S. income tax treaty. B. CFTE Categories Examples in the temporary and proposed regulations illustrated that the determination of the income to which a CFTE relates must be made separately for certain categories of income when the partnership agreement provides for different allocations of such income. Commentators requested additional guidance regarding the relevant categories for purposes of the safe harbor, including clarification that the safe harbor does not require the partnership to determine its CFTE categories by reference to section 904(d) categories. Subject to the requirements of section 704(b) and other applicable provisions of U.S. law, partners are free to allocate income in any manner they choose. Although partners must assign their distributive shares of partnership items (along with their other items of income and expense) to section 904(d) categories to compute the applicable limitations on the foreign tax credit, the CFTE categories need not be determined by reference to section 904(d) categories. These principles were illustrated by the examples in the temporary and proposed regulations. However, the IRS and the Treasury Department agree with commentators that it is appropriate to provide additional guidance in determining a partnership's relevant categories of income. Accordingly, the final regulations provide additional guidance for purposes of making this determination. The additional guidance is also intended to assist in the determination of the distributive share of income to which a foreign tax relates. See the discussion at section C in this preamble. Consistent with the comments, the rules provided for in the final regulations rely to the extent possible on U.S. tax principles. The final regulations clarify that the relevant category of income is the CFTE category, defined in the final regulations as U.S. net income attributable to one or more activities of the partnership. In general, the final regulations provide that U.S. net income from all of the partnership's activities is treated as income in a single CFTE category. This general rule does not apply, however, if the partnership agreement provides for an allocation of U.S. net income from one or more activities that differs from the allocation of U.S. net income from other activities. In that case, U.S. net income from each activity or group of activities that is subject to a different allocation is treated as net income in a separate CFTE category. For this purpose, income from a divisible part of a single activity is treated as income from a separate activity if such income is shared in a different ratio than other income from the activity. Thus, if a partnership agreement allocates all partnership items in the same manner, the partnership will have a single CFTE category, regardless of the number of activities in which the partnership is engaged. Conversely, a partnership agreement that provides for different allocations of net income with respect to one or more activities will have multiple CFTE categories. For example, assume a partnership

(AB)with two partners is engaged in two activities and that the partnership agreement provides that all partnership items are shared 50-50. In such a case, the partnership has a single CFTE category. However, the partnership would have two CFTE categories if the items from one activity were shared 50-50 and the items from the second activity were shared 80-20. Different allocations of the partnership's U.S. net income from separate activities and, thus, multiple CFTE categories may result if the partnership agreement contains special allocations. For example, assume that AB partnership agreement allocates all items other than depreciation 50-50, and that deductions for depreciation are allocated 100 percent to one of the partners. In such a case, the allocations of U.S. net income from the two activities will differ if AB's deductions for depreciation relate solely to one activity or if the deductions relate disproportionately to the activities. See paragraph (b)(5) *Example 22.* A preferential allocation of income will not result in multiple CFTE categories if the allocation relates to all of the partnership's net income. For example, assume partnership AB allocates $100 of gross income each year to one of the partners and all remaining items 50-50. In such a case, the special allocation of $100 of gross income affects the overall sharing ratio of partnership net income, but does not result in different sharing ratios with respect to income from the partnership's two activities. Accordingly, the U.S. net income attributable to the two activities is included in a single CFTE category. See paragraph (b)(5) *Example 25.* Whether the partnership has different sharing ratios with respect to income from one or more activities, and therefore has more than one CFTE category, depends on the facts and circumstances. Therefore, the final regulations provide that whether a partnership has one or more activities, and the scope of those activities, must be determined in a reasonable manner taking into account all the facts and circumstances. In evaluating whether aggregating or disaggregating income from particular business or investment operations constitutes a reasonable method of determining the scope of an activity, the principal consideration is whether or not the proposed determination has the effect of separating CFTEs from the related foreign income. Accordingly, relevant facts and circumstances include whether the partnership conducts business or investment operations in more than one geographic location or through more than one entity or branch, and whether certain types of income are exempt from foreign tax or subject to preferential foreign tax treatment. In addition, income from a divisible part of a single activity is treated as income from a separate activity if necessary to prevent the separation of CFTEs from the related foreign income. Finally, the final regulations provide that the partnership's activities must be determined consistently from year to year absent a material change in facts and circumstances. C. Distributive Share of Income to Which a CFTE Relates The temporary and proposed regulations required the allocation of a CFTE to be in proportion to the partner's distributive share of income to which it relates. Several commentators requested that the final regulations provide additional guidance in determining a partner's distributive share of income for purposes of the safe harbor. Some commentators believed that it was unclear whether allocations of CFTEs must be proportionate to allocations of income as determined for U.S. tax purposes or as determined under foreign law. One comment recommended that, at least in cases where there is a preferential allocation of income, income as determined for U.S. tax purposes should control. Other commentators requested that the final regulations clarify whether allocations of CFTEs must follow allocations of gross or net income, and that the final regulations clarify the effect of special allocations and allocations of separately stated items on allocations of CFTEs under the safe harbor. Commentators also requested clarifications regarding section 704(c) allocations, income allocations that are deductible under foreign law, guaranteed payments, and situations in which certain partners' allocable shares of partnership income are excluded from the foreign tax base. In response to the comments, the final regulations provide several clarifications regarding the determination of a partner's distributive share of income to which a CFTE relates. 1. Net Income in a CFTE Category The final regulations clarify that the net income in a CFTE category is the net income for U.S. Federal income tax purposes, determined by taking into account all items attributable to the relevant activity or group of activities (or portion thereof). The final regulations provide that the items of gross income included in a CFTE category must be determined in a consistent manner under any reasonable method taking into account all the facts and circumstances. Expenses, losses or other deductions generally must be allocated and apportioned to gross income included in a CFTE category in accordance with the rules of §§ 1.861-8 and 1.861-8T. Sections 1.861-8 and 1.861-8T require taxpayers to use special rules contained in §§ 1.861-9 through 1.861-13T and § 1.861-17 to allocate and apportion deductions for interest expense and research and development (R&D) costs. See §§ 1.861-8(e)(3) and 1.861-8T(e)(2). Those provisions generally require taxpayers to allocate and apportion such deductions at the partner level and do not provide rules for allocating and apportioning the deductions at the partnership level. See §§ 1.861-9T(e) and 1.861-17(f). Therefore, the final regulations permit a partnership to allocate and apportion deductions for interest and R&D costs for purposes of determining net income in a CFTE category under any reasonable method, including but not limited to the rules contained in §§ 1.861-9 through 1.861-13T and § 1.861-17. The final regulations clarify that in applying U.S. Federal income tax principles to determine the net income attributable to an activity of a branch, the only items of gross income taken into account are items of gross income that are recognized by the branch for U.S. Federal income tax purposes. Therefore, a payment from one branch to another does not increase the gross income attributable to the activity of the recipient. See paragraph (b)(5) *Example 24.* Similarly, because U.S. tax principles apply to determine net income attributable to an activity of a branch, the inter-branch payment does not reduce the gross income of the payor. See paragraph (b)(4)(viii)( *c* )( *3* )( *B* ) and paragraph (b)(5) *Example 24.* The discussion in this preamble addresses the effect of the following factors on the determination of net income in a CFTE category:

(a)Section 704(c) allocations,

(b)preferential income allocations and guaranteed payments, and

(c)the exclusion of income of certain partners from the foreign tax base.

(a)Section 704(c) Allocations Several commentators requested clarification of when section 704(c) allocations should be taken into account. Some commentators believed that section 704(c) allocations should only be taken into account where the built-in gain or loss is also recognized in the foreign jurisdiction. A number of commentators suggested further that section 704(c) allocations should be taken into account only upon the disposition of the section 704(c) property, while other commentators believed that section 704(c) allocations should also be taken into account as the section 704(c) property is depreciated or amortized over time. After consideration of these comments, the final regulations retain the general principle that all section 704(c) allocations must be taken into account when determining net income in the relevant category. The IRS and the Treasury Department concluded that any attempt to trace the impact of built-in gain (or loss) under foreign tax principles to corresponding items under U.S. tax principles would be difficult to do and impractical to administer. Because allocations of net income from a CFTE category are allocations of the net income recognized for U.S. tax purposes, the IRS and the Treasury Department believe that all section 704(c) allocations (including “reverse” section 704(c) allocations and section 704(c) allocations that are made prior to an asset's disposition) must be taken into account in determining a partner's distributive share of income. Thus, the final regulations provide that the net income in a CFTE category is the net income for U.S. income tax purposes, determined by taking into account all items attributable to the relevant activity, including, among other items, items allocated pursuant to section 704(c). See paragraph (b)(5) *Example 26.*

(b)Preferential Income Allocations and Guaranteed Payments Several commentators requested that the final regulations provide guidance regarding the treatment of preferential income allocations and guaranteed payments when applying the safe harbor. In particular, clarification was requested as to the relevance of the deductibility of such items under foreign law in determining whether CFTEs are related to such items. The final regulations generally provide that the income to which a CFTE relates is the net income in the CFTE category to which the CFTE is allocated and apportioned. However, if an allocation of partnership income is treated as a deductible payment under foreign law, then no CFTEs are related to that income because it is not included in the foreign tax base. To reflect this principle, the final regulations provide that income attributable to an activity shall not include an item of partnership income to the extent the allocation of such item of income (or payment thereof) to a partner results in a deduction under foreign law. By removing the income associated with a preferential income allocation that is deductible under foreign law from the net income in a CFTE category, this provision of the final regulations ensures that no CFTE will be related to such income, which is not included in the base upon which the creditable foreign tax is imposed. The principle that no CFTEs are related to income if the allocation of such income results in a deduction under foreign law applies with equal force to cases in which a guaranteed payment made by a partnership to a partner is deductible by the partnership under foreign law. Conversely, where a partner receives a guaranteed payment and the guaranteed payment is not deductible by the partnership under foreign law (and thus does not reduce the foreign tax base), CFTEs should relate to the guaranteed payment. Accordingly, the final regulations contain two provisions to reflect these principles. First, under the final regulations, a guaranteed payment is treated as income in a CFTE category to the extent that the payment is not deductible by the partnership under foreign law. Second, the final regulations provide that such a guaranteed payment is treated as a distributive share of income for purposes of the safe harbor. Consequently, the final regulations provide that CFTEs relate to income taken into account as a guaranteed payment to the extent the payment is not deductible under foreign law, and therefore CFTEs must be allocated to the partner receiving the guaranteed payment. One commentator requested guidance concerning the source and character of guaranteed payments for other U.S. tax purposes. These issues are clearly important, but they are beyond the scope of this project and are not addressed in these final regulations.

(c)Taxes Imposed on Certain Partners' Income A foreign jurisdiction may impose tax with respect to partnership income that is allocable to certain partners and not with respect to partnership income allocable to other partners. For example, as was the case in *Vulcan Materials Co.* v. *Comm'r,* 96 T.C. 410 (1991), *aff'd in unpublished opinion,* 959 F.2d 973 (11th Cir. 1992), *nonacq.* 1995-2 CB 2, a foreign jurisdiction may impose tax solely with respect to the nonresident partners' shares of partnership income. One commentator suggested that the final regulations provide that in these situations, allocations of CFTEs satisfy the safe harbor if they are allocated to the partner or partners whose income is included in the foreign tax base. The final regulations adopt this comment, and provide that income in a CFTE category does not include net income that foreign law would exclude from the foreign tax base as a result of the status of the partner. By removing such income from a CFTE category, this provision of the final regulations ensures that CFTEs will be related only to income of those partners whose income is included in the base upon which the creditable foreign tax is imposed. 2. Distributive Share of Income The final regulations provide that a partner's distributive share of income generally is the portion of the net income in a CFTE category that is allocated to the partner. Therefore, a partner's distributive share of income is determined under U.S. tax principles, taking into account the modifications described in section C1 under “Net income in a CFTE category.” The final regulations provide a special rule for cases in which more than one partner receives positive income allocations (income in excess of expenses) from a CFTE category and the aggregate of such positive income allocations exceeds the net income in the CFTE category because one or more other partners is allocated a net loss (expenses in excess of income). Because in this situation the sum of the positive income allocations from the CFTE category exceeds 100 percent of the net income in the category, an adjustment to the safe harbor formula is required to ensure that aggregate allocations of CFTEs do not exceed 100 percent of the CFTEs in the category. Accordingly, solely for purposes of allocating CFTEs under the safe harbor, the final regulations limit the distributive share of income of each partner that receives a positive income allocation to the partner's positive income allocation attributable to the CFTE category, divided by the aggregate positive income allocations attributable to the CFTE category, multiplied by the net income in the CFTE category. For example, assume that the partnership has $100 of net income ($130 of gross income and $30 of expenses) in a CFTE category and that partner A is allocated $65 of gross income, partner B is allocated $45 of gross income and partner C is allocated $20 of gross income and $30 of expenses. In this case, solely for purposes of the safe harbor, partner A's distributive share of income is $59 ($65/$110 × 100) and partner B's distributive share of income is $41 ($45/$110 × $100). 3. No Net Income The final regulations contain a special rule for cases in which CFTEs are allocated and apportioned to a CFTE category that does not have any net income for U.S. tax purposes in the year the foreign taxes are paid or accrued. In such cases, there is no net income in the CFTE category to which the CFTEs relate. In the absence of a special rule, allocations of such CFTEs among the partners would not fall within the general safe harbor of the final regulations and would be required to be allocated in accordance with the partners' interests in the partnership. To eliminate uncertainty in this situation, the final regulations include a rule that relates such CFTEs to net income recognized for U.S. tax purposes in other years or in other CFTE categories. (For rules relating to the allocation and apportionment of CFTEs to a CFTE category, see section D below.) Under the final regulations, CFTEs allocated and apportioned to a CFTE category that has no net income for U.S. tax purposes will be deemed to relate to the aggregate net income (if any) recognized by the partnership in that CFTE category during the preceding three-year period (not taking into account years in which there is a net loss in the CFTE category for U.S. tax purposes). Accordingly, the CFTEs in these situations generally must be allocated among the partners in the same proportion as the allocations of such net income for the prior three-year period to satisfy the safe harbor. If the partnership does not have net income in the applicable CFTE category in either the current year or any of the previous three taxable years, the CFTEs must be allocated among the partners in the same proportion that the partnership reasonably expects to allocate net income in the applicable CFTE category over the succeeding three years. If the partnership does not reasonably expect to have net income in the applicable CFTE category in the succeeding three years, the CFTEs must be allocated among the partners in the same proportion as the total partnership net income for the year is allocated. If the CFTE cannot be allocated under any of the foregoing rules, it must be allocated in proportion to the partners' outstanding capital contributions. D. Allocation and Apportionment of CFTEs to CFTE Categories The temporary and proposed regulations provided that the income to which a CFTE relates is determined in accordance with the principles of § 1.904-6. Section 1.904-6, which contains rules for allocating and apportioning foreign taxes to the categories of income described in section 904(d), provides generally that a foreign tax is related to income if the income is included in the base upon which the foreign tax is imposed. Section 1.904-6(a)(1)(ii) contains special rules for apportioning taxes among categories of income when the income on which the foreign tax is imposed includes income in more than one category. It also provides special rules for allocating a foreign tax that is imposed on an item that would be income under U.S. tax principles in another year (timing difference) or an item that does not constitute income under U.S. tax principles (base differences). A number of comments were received requesting clarification of the § 1.904-6 principles that apply for purposes of these regulations. In particular, commentators requested guidance concerning the applicability of the related party interest expense rule in § 1.904-6(a)(1)(ii), timing and base differences, and inter-branch payments. The final regulations retain the rule that the determination of the income to which a CFTE relates is made in accordance with the principles of § 1.904-6. In response to the comments, however, the final regulations contain several clarifications and modifications regarding how the principles of § 1.904-6 apply in allocating foreign taxes to CFTE categories. The final regulations clarify that in applying § 1.904-6 for purposes of the safe harbor, the relevant categories are the CFTE categories determined under the rules described in section B in this preamble. Therefore, the final regulations clarify that application of the principles of § 1.904-6 requires a CFTE to be allocated to a CFTE category if the net income on which the tax is imposed (the net income recognized for foreign tax purposes) is in the CFTE category. The final regulations also provide guidance on

(a)the apportionment rule in § 1.904-6(a)(1)(ii),

(b)the rules for timing differences,

(c)the rules for base differences and

(d)the treatment of inter-branch payments. 1. Apportionment of CFTEs Section 1.904-6(a)(1)(ii) provides that where foreign taxes are imposed on income that relates to more than one separate category, the foreign taxes must be apportioned among the separate categories pro rata based on the amount of net income in each category. Subject to a special rule for related party interest expense, the net income in each category generally is determined under foreign law. If foreign law does not provide rules for the allocation and apportionment of expenses, losses or other deductions to a particular category of income, then such items must be allocated and apportioned in accordance with the rules of §§ 1.861-8 through 1.861-14T. Commentators requested clarification that the apportionment rule in § 1.904-6(a)(1)(ii), which apportions foreign taxes among categories based on relative amounts of net income as determined under foreign law, applies for purposes of apportioning taxes among the categories of income created by the partnership agreement. Commentators recommended that the related party interest expense rule be disregarded for purposes of the apportionment rule. In response to these comments, the final regulations clarify that the principles of § 1.904-6(a)(1)(ii) require a taxpayer to apportion foreign taxes among the CFTE categories based on the relative amounts of net income as determined under foreign law in each CFTE category. In addition, the final regulations modify the apportionment rule in two respects. See § 1.704-(b)(4)(viii)( *d* )( *1* ). The final regulations adopt the recommendation to disregard the related party interest expense rule contained in § 1.904-6(a)(1)(ii) for purposes of apportioning taxes among the CFTE categories on the basis of foreign net income. The IRS and the Treasury Department agree that this rule, which coordinates the characterization of taxes and income for section 904(d) purposes, is not relevant for purposes of apportioning CFTEs to CFTE categories. Rather, the apportionment of CFTEs is based on the partnership income, as determined under foreign law, in the CFTE categories, which may include partnership items in one or more section 904(d) categories. The final regulations also provide that if foreign law does not provide rules for the allocation and apportionment of expenses, losses or other deductions allowed under foreign law to a CFTE category of income, then such expenses, losses or other deductions must be allocated and apportioned to gross income as determined under foreign law in a manner that is consistent with the allocation and apportionment of such items for purposes of determining the net income in the CFTE category for U.S. tax purposes. 2. Timing Differences A timing difference arises when an item subject to foreign tax is recognized as income under U.S. tax principles in a different year. The temporary and proposed regulations did not contain a specific textual rule regarding the application of the timing difference rule of § 1.904-6(a)(1)(iv) in the context of section 704(b). However, the temporary and proposed regulations included an example that involved a timing difference (Example 27), which indicated that a current year CFTE attributable to an item of income recognized in the prior year for U.S. tax purposes related to, and thus must be allocated in accordance with, the income allocated under the partnership agreement in the prior year. Upon further consideration, the IRS and the Treasury Department have concluded that relating foreign taxes paid or accrued in one year to income recognized for U.S. tax purposes in another year would be difficult for taxpayers to comply with and for the IRS to administer. In many instances, it would be difficult to identify accurately the extent of timing differences and the years in which such differences would be reversed. Moreover, where income allocations change from year to year, it often would be impossible for partnerships to determine how the partners would share related U.S. income in subsequent years. Accordingly, the final regulations provide for a more administrable rule that requires the partnership to allocate a CFTE attributable to a timing difference among the partners in the same proportions as the allocations of income recognized for U.S. tax purposes in the relevant CFTE category in the year such taxes are paid or accrued. See paragraph (b)(5) *Example 23* (reflecting modifications to *Example 27* in the temporary and proposed regulations). This approach should result in allocations of CFTEs that are generally in proportion to the partners' distributive shares of U.S. taxable income over time, and therefore is consistent with the underlying purposes of the foreign tax credit rules to mitigate double taxation. See the discussion at section E in this preamble under “Partners' Interests in the Partnership” for cases in which the partnership agreement allocates CFTEs attributable to a timing difference among the partners in proportion to allocations of U.S. income in an earlier or later year when the income with respect to which the foreign tax is imposed is recognized for U.S. tax purposes. In addition, the final regulations expressly incorporate the timing difference rule of § 1.904-6(a)(1)(iv). Therefore, a CFTE attributable to a timing difference is allocated to the CFTE category to which the income would be assigned if the income were recognized for U.S. tax purposes in the year in which the foreign tax is imposed. 3. Base Differences A base difference arises when an item subject to foreign tax is not income under U.S. tax principles. Several commentators observed that the base difference rule under § 1.904-6(a)(1)(iv) provides little indication of how a CFTE attributable to a base difference should be allocated for purposes of the safe harbor. The IRS and the Treasury Department agree that this issue should be clarified. In the absence of any income to which such a CFTE relates, the final regulations provide that a CFTE attributable to a base difference is related to the income recognized for U.S. tax purposes in the relevant CFTE category in the year such taxes are paid or accrued. For this purpose, a CFTE attributable to a base difference is allocated and apportioned to the CFTE category that includes the partnership items attributable to the activity with respect to which the creditable foreign tax is imposed. Thus, the final regulations adopt similar rules for dealing with timing and base differences. These changes are intended to provide greater certainty for taxpayers and simplify the administration of the safe harbor. 4. Inter-Branch Transactions Several commentators requested additional guidance regarding the application of the final regulations to transactions between branches (including disregarded entities owned by the partnership) that are disregarded for U.S. tax purposes. In response to this comment, the final regulations provide that if a branch of the partnership (including a disregarded entity owned by the partnership) is required to include in income under foreign law a payment (inter-branch payment) it receives from the partnership or another branch of the partnership, any CFTE imposed with respect to the payment relates to the income in the CFTE category that includes the items attributable to the recipient. In cases where the partnership agreement results in more than one CFTE category with respect to the recipient, such tax is allocated to the CFTE category that includes the items attributable to the activity to which the inter-branch payment relates. A similar rule applies to payments received by the partnership from a branch of the partnership. This rule is consistent with the timing and base difference rules in the final regulations because it associates foreign tax imposed on the recipient with net income of the recipient as determined under U.S. tax principles, notwithstanding differences in U.S. and foreign tax rules. Like the timing and base difference rules, this rule avoids the need for complex tracing rules. It is possible that this approach might result in distortions of the effective foreign tax rates on the partners' distributive shares of income in certain cases. Nevertheless, the IRS and the Treasury Department have concluded that imposing a requirement to trace taxes imposed on the recipient with respect to such inter-branch payments to income recognized under U.S. tax principles by the payor would be difficult for taxpayers to comply with and for the IRS to administer. Some commentators recommended that at least in cases where the income allocations take such inter-branch payments into account in determining the partners' distributive shares of income, the allocation of CFTEs should be respected if made in proportion to income allocations that reflect such payments. The final regulations do not adopt this comment, as the approach suggested by these commentators would require taxpayers and the IRS to identify the inter-branch payments and relate such amounts to items of income of the payor and to CFTEs imposed on the recipient to substantiate that CFTEs of the payor and recipient were properly allocated. The IRS and the Treasury Department concluded that this approach would be difficult to administer and was therefore ill-suited to inclusion in a safe harbor. See the discussion at section E under “Partners' Interests in the Partnership” for cases in which the partnership agreement allocates partnership items of income to reflect inter-branch payments. E. Partners' Interests in the Partnership Some commentators suggested that allocations of CFTEs that are not proportionate to allocations of the related income (and therefore fail to satisfy the safe harbor) will nevertheless be valid as in accordance with the partners' interests in the partnership standard of § 1.704-1(b)(3). According to these commentators, the partners' interests in the partnership with respect to a CFTE are conclusively determined by the manner in which the CFTE is allocated under the partnership agreement. The IRS and the Treasury Department believe that this view of the partners' interests in the partnership is incorrect, particularly in the context of a CFTE that is allocated to a partner who can use the associated foreign tax credit. In such a situation, the partner is relieved of a corresponding amount of U.S. tax, and thus does not bear the economic burden of the CFTE. Because of this lack of economic burden, the allocation of the CFTE is meaningless in the determination of the partners' interests in the partnership with respect to the CFTE and with respect to any other partnership item that has a material effect on the amount of CFTE that would be allocated to a partner under the safe harbor of the final regulations. Consequently, the final regulations clarify that in determining the partners' interests in the partnership with respect to an allocation of a partnership item, the allocation of the CFTE itself must be disregarded. This rule does not apply where the partners to whom the taxes are allocated reasonably expect to claim a deduction for such taxes in determining their U.S. tax liabilities. As indicated in the preamble to the temporary regulations, the IRS and the Treasury Department believe that only in unusual circumstances (such as where the CFTEs are deducted and not credited) will allocations that fail to satisfy the safe harbor be in accordance with the partners' interests in the partnership. As discussed in this preamble, for administrative reasons, the final regulations do not adopt a tracing approach for timing differences or inter-branch payments. Allocations of foreign taxes in such situations that are based on a tracing approach may constitute an unusual situation where the safe harbor is not satisfied, but the allocations are in accordance with the partners' interests in the partnership. When a CFTE is attributable to a timing difference, the CFTE category to which the CFTE is allocated may or may not have income for U.S. tax purposes in the year the foreign tax is paid or accrued. In either case, allocations of such CFTEs that are proportionate to allocations of the income at the time such income is recognized for U.S. tax purposes may not qualify for safe harbor treatment, but nonetheless be in accordance with the partners' interests in the partnership. Allocations of CFTEs imposed on the payor of an inter-branch payment may fail the safe harbor, but nonetheless be in accordance with the partners' interests in the partnership if the allocations of the CFTEs are in the same proportions as the allocations of the income of the payor, other than income that is eliminated from the foreign tax base because the inter-branch payment is deductible under foreign law. See paragraph (b)(5) *Example 24* (iv). Similarly, allocations of CFTEs imposed on the recipient with respect to an inter-branch payment may fail the safe harbor, but nonetheless be in accordance with the partners' interests in the partnership, if such allocations are proportionate to the allocations of income recognized for U.S. tax purposes out of which the payment is made. See paragraph (b)(5) *Example 24* (iii). Several commentators also requested guidance regarding whether a reallocation of CFTEs will cause the IRS to reallocate other partnership items so that the partners' ending capital account balances will remain unchanged. If the reallocation of the CFTEs causes the partners' capital accounts not to reflect their contemplated economic arrangement, the partners may need to reallocate other partnership items to ensure the tax consequences of the partnership allocations are consistent with their contemplated economic arrangement. Consistent with the principles of the proposed and temporary regulations, the final regulations clarify that the IRS generally will not reallocate other partnership items in the year in which a CFTE is reallocated. See paragraph (b)(5) *Example 25* (ii). This treatment is also consistent with the results arising from and approach taken with respect to reallocations of other items of income, gain, loss or deduction that are not sustained under section 704(b). The IRS and the Treasury Department believe the parties and not the government should determine what allocations should be changed to reflect their economic arrangement. F. Effective Date and Transition Rule The provisions of these final regulations generally apply for partnership taxable years beginning on or after October 19, 2006. A transition rule is provided for existing partnerships. Under the transition rule, if a partnership agreement was entered into before April 21, 2004, then the partnership may apply the provisions of § 1.704-1(b) as if the amendments made by these final regulations had not occurred. If the partnership agreement is materially modified on or after April 21, 2004, however, transition relief is no longer afforded, and the rules of § 1.704-1T(b)(4)(xi) or these final regulations apply, depending upon the date on which the material modification occurs and the tax year at issue. For this purpose, a material modification includes any change in ownership of the partnership. This transition rule does not apply if, as of April 20, 2004, persons that are related to each other (within the meaning of sections 267(b) and 707(b)) collectively have the power to amend the partnership agreement without the consent of any unrelated party. However, taxpayers may rely on the provisions of paragraph (b)(4)(viii) of this section for partnership taxable years beginning on or after April 21, 2004. As stated in this preamble, the temporary and proposed regulations included a limited transition relief provision which ceases to apply upon a material modification of the partnership agreement, including any change in ownership. In addition, transition relief was not provided to partnerships owned by related parties who collectively have the power to amend the partnership agreement. One commentator requested that the IRS and the Treasury Department consider modifying the transition relief provision to indicate that a change in ownership is not a material modification unless there is more than a 50 percent change in ultimate beneficial ownership over a three-year period. The commentator also requested that the final regulations include a rule providing transition relief to partnerships owned by related parties who collectively have the power to amend the partnership agreement only in a way that does not adversely impact unrelated partners. After careful consideration of these comments, the IRS and the Treasury Department have decided not to expand the transition relief described in the proposed and temporary regulations. Accordingly, the final regulations do not adopt these comments. G. Other Comments One commentator suggested that where the partners are unrelated, the safe harbor should permit the partnership to allocate CFTEs in the same proportion as all other partnership expenses (rather than in proportion to related income). Section 1.704-1(b)(4)(ii) requires partnership credits to be allocated in the same proportions as items giving rise to the credits. Allocating CFTEs in proportion to other partnership expenses would be inconsistent with § 1.704-1(b)(4)(ii). Moreover, such an approach would result in the inappropriate separation of CFTEs from the income to which such CFTEs relate. Thus, the final regulations do not incorporate this comment. The temporary and proposed regulations provided that the safe harbor is available if the partnership agreement satisfied the requirements of § 1.704-1(b)(2)(ii)( *b* ) or ( *d* ) (capital account maintenance, liquidation according to capital accounts, and either deficit restoration obligation or qualified income offsets) and the partnership agreement provided for the allocation of the CFTE in proportion to the partner's distributive share of partnership income. Commentators suggested that the safe harbor also should be available if the partnership allocations satisfy the economic effect equivalence standard of § 1.704-1(b)(2)(ii)( *i* ). The purpose of the safe harbor is to provide assurance that allocations of CFTEs will be respected if the CFTEs are allocated in proportion to the income to which such CFTEs relate. This purpose is satisfied as long as CFTEs are allocated in proportion to valid allocations of net income, regardless of whether the partnership maintains capital accounts or liquidates in accordance with them. Accordingly, the final regulations adopt these comments by eliminating the requirement that the partnership allocations satisfy the requirements of § 1.704-1(b)(2)(ii)( *b* ) or ( *d* ), and instead condition eligibility for the safe harbor on the validity of income allocations, as described in this preamble. One commentator suggested that the final regulations clarify that the underlying allocation of income to which the foreign tax relates itself must be valid in order to qualify for the safe harbor. The commentator pointed out that an income allocation may be valid because it has substantial economic effect, or because it is in accordance with (or is deemed to be in accordance with) the partners' interests in the partnership. If income allocations are not valid, allocations of CFTEs based on such allocations will not be in proportion to the income to which the CFTEs relate. Accordingly, it is appropriate to clarify that the allocations of other items must be valid. However, the IRS and the Treasury Department believe that invalid allocations of other items should not disqualify allocations of CFTEs for safe harbor treatment unless the invalid allocations, in the aggregate, materially affect the allocation of CFTEs. Therefore, the final regulations provide that allocations of CFTEs may qualify for safe harbor treatment so long as allocations of all other partnership items that, in the aggregate, have a material effect on the amount of CFTEs allocated to the partners are valid. Commentators suggested that the safe harbor should be available if the partnership agreement is silent with regard to the allocation of CFTEs, but actual allocations of CFTEs are made in proportion to related income. The IRS and the Treasury Department agree. Accordingly, the final regulations allow safe harbor treatment if the CFTE is allocated (whether or not pursuant to an express provision in the partnership agreement) and reported on the partnership return in proportion to the distributive shares of income to which the CFTE relates. Special Analyses It has been determined that this Treasury Decision 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 these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal authors of this regulation are Timothy J. Leska, Office of the Associate Chief Counsel (Passthroughs & Special Industries) and Michael I. Gilman, Office of the Associate Chief Counsel (International). However, other personnel from the IRS and the Treasury Department participated in its development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES **Paragraph 1.** The authority citation for part 1 continues to read, in part, as follows: Authority: 26 U.S.C. 7805 * * * **Par. 2.** Section 1.704-1 is amended as follows: 1. Paragraph (b)(0) is amended by redesignating the entry in the table of contents for § 1.704-1(b)(4)(xi) as the entry for § 1.704-1(b)(4)(viii) and by adding entries following the entry for § 1.704-1(b)(4)(viii). The entries for §§ 1.704-1(b)(4)(ix) and 1.704-1(b)(4)(x) are removed. 2. The heading and text of paragraphs (b)(1)(ii)( *b* ), and (b)(5) *Examples 25* through *28* are revised. 3. Paragraphs (b)(3)(iv) and (b)(4)(viii), and paragraph (b)(5) *Examples 20* through *24* are added. 4. Paragraph (b)(4)(xi) is removed. The additions and revisions read as follows: § 1.704-1 Partner's distributive share.

(b)* * *

(0)* * * Heading Section * * * * * * * Allocation of creditable foreign taxes 1.704-1(b)(4)(viii) In general 1.704-1(b)(4)(viii)( *a* ) Creditable foreign tax expenditures (CFTEs) 1.704-1(b)(4)(viii)( *b* ) Income to which CFTEs relate 1.704-1(b)(4)(viii)( *c* ) In general 1.704-1(b)(4)(viii)( *c* )( *1* ) CFTE category 1.704-1(b)(4)(viii)( *c* )( *2* ) Net income in a CFTE category 1.704-1(b)(4)(viii)( *c* )( *3* ) Distributive shares of income 1.704-1(b)(4)(viii)( *c* )( *4* ) No net income in a CFTE category 1.704-1(b)(4)(viii)( *c* )( *5* ) Allocation and apportionment of CFTEs to CFTE categories 1.704-1(b)(4)(viii)( *d* ) In general 1.704-1(b)(4)(viii)( *d* )( *1* ) Timing and base differences 1.704-1(b)(4)(viii)( *d* )( *2* ) Special rules for inter-branch payments 1.704-1(b)(4)(viii)( *d* )( *3* )

(1)* * *

(ii)* * * ( *b* ) *Rules relating to foreign tax expenditures* —( *1* ) *In general.* The provisions of paragraphs (b)(3)(iv) and (b)(4)(viii) of this section (regarding the allocation of creditable foreign taxes) apply for partnership taxable years beginning on or after October 19, 2006. The rules that apply to allocations of creditable foreign taxes made in partnership taxable years beginning before October 19, 2006 are contained in §§ 1.704-1T(b)(1)(ii)( *b* )( *1* ) and 1.704-1T(b)(4)(xi) as in effect prior to October 19, 2006 (see 26 CFR part 1 revised as of April 1, 2005). However, taxpayers may rely on the provisions of paragraphs (b)(3)(iv) and (b)(4)(viii) of this section for partnership taxable years beginning on or after April 21, 2004. ( *2* ) *Transition rule.* Transition relief is provided herein to partnerships whose agreements were entered into prior to April 21, 2004. In such case, if there has been no material modification to the partnership agreement on or after April 21, 2004, then the partnership may apply the provisions of paragraph

(b)of this section as if the amendments made by paragraphs (b)(3)(iv) and (b)(4)(viii) of this section had not occurred. If the partnership agreement was materially modified on or after April 21, 2004, then the rules provided in paragraphs (b)(3)(iv) and (b)(4)(viii) of this section shall apply to the later of the taxable year beginning on or after October 19, 2006 or the taxable year within which the material modification occurred, and to all subsequent taxable years. If the partnership agreement was materially modified on or after April 21, 2004, and before a tax year beginning on or after October 19, 2006, see §§ 1.704-1T(b)(1)(ii)( *b* )( *1* ) and 1.704-1T(b)(4)(xi) as in effect prior to October 19, 2006 (26 CFR part 1 revised as of April 1, 2005). For purposes of this paragraph (b)(1)(ii)( *b* )( *2* ), any change in ownership constitutes a material modification to the partnership agreement. This transition rule does not apply to any taxable year (and all subsequent taxable years) in which persons that are related to each other (within the meaning of section 267(b) and 707(b)) collectively have the power to amend the partnership agreement without the consent of any unrelated party.

(3)* * *

(iv)*Special rule for creditable foreign tax expenditures.* In determining whether an allocation of a partnership item is in accordance with the partners' interests in the partnership, the allocation of the creditable foreign tax expenditure

(CFTE)(as defined in paragraph (b)(4)(viii)( *b* ) of this section) must be disregarded. This paragraph (b)(3)(iv) shall not apply to the extent the partners to whom such taxes are allocated reasonably expect to claim a deduction for such taxes in determining their U.S. tax liabilities.

(4)* * *

(viii)*Allocation of creditable foreign taxes* —( *a* ) *In general.* Allocations of creditable foreign taxes do not have substantial economic effect within the meaning of paragraph (b)(2) of this section and, accordingly, such expenditures must be allocated in accordance with the partners' interests in the partnership. See paragraph (b)(3)(iv) of this section. An allocation of a creditable foreign tax expenditure

(CFTE)will be deemed to be in accordance with the partners' interests in the partnership if— ( *1* ) The CFTE is allocated (whether or not pursuant to an express provision in the partnership agreement) and reported on the partnership return in proportion to the distributive shares of income to which the CFTE relates; and ( *2* ) Allocations of all other partnership items that, in the aggregate, have a material effect on the amount of CFTEs allocated to a partner pursuant to paragraph (b)(4)(viii)( *a* )( *1* ) of this section are valid. ( *b* ) *Creditable foreign tax expenditures* ( *CFTEs* ). For purposes of this section, a CFTE is a foreign tax paid or accrued by a partnership that is eligible for a credit under section 901(a) or an applicable U.S. income tax treaty. A foreign tax is a CFTE for these purposes without regard to whether a partner receiving an allocation of such foreign tax elects to claim a credit for such tax. Foreign taxes paid or accrued by a partner with respect to a distributive share of partnership income, and foreign taxes deemed paid under section 902 or 960 by a corporate partner with respect to stock owned, directly or indirectly, by or for a partnership, are not taxes paid or accrued by a partnership and, therefore, are not CFTEs subject to the rules of this section. See paragraphs

(e)and

(f)of § 1.901-2 for rules for determining when and by whom a foreign tax is paid or accrued. ( *c* ) Income to which CFTEs relate—( *1* ) *In general.* For purposes of paragraph (b)(4)(viii)( *a* ) of this section, CFTEs are related to net income in the partnership's CFTE category or categories to which the CFTE is allocated and apportioned in accordance with the rules of paragraph (b)(4)(viii)( *d* ) of this section. Paragraph (b)(4)(viii)( *c* )( *2* ) of this section provides rules for determining a partnership's CFTE categories. Paragraph (b)(4)(viii)( *c* )( *3* ) of this section provides rules for determining the net income in each CFTE category. Paragraph (b)(4)(viii)( *c* )( *4* ) of this section provides guidance in determining a partner's distributive share of income in a CFTE category. Paragraph (b)(4)(viii)( *c* )( *5* ) of this section provides a special rule for allocating CFTEs when a partnership has no net income in a CFTE category. ( *2* ) *CFTE category* —( *i* ) *Income from activities.* A CFTE category is a category of net income (or loss) attributable to one or more activities of the partnership. Net income (or loss) from all the partnership's activities shall be included in a single CFTE category unless the allocation of net income (or loss) from one or more activities differs from the allocation of net income (or loss) from other activities, in which case income from each activity or group of activities that is subject to a different allocation shall be treated as net income (or loss) in a separate CFTE category. ( *ii* ) *Different allocations.* Different allocations of net income (or loss) generally will result from provisions of the partnership agreement providing for different sharing ratios for net income (or loss) from separate activities. Different allocations of net income (or loss) from separate activities generally will also result if any partnership item is shared in a different ratio than any other partnership item. A guaranteed payment described in paragraph (b)(4)(viii)( *c* )( *3* )( *ii* ) of this section, gross income allocation, or other preferential allocation will result in different allocations of net income (or loss) from separate activities only if the amount of the payment or the allocation is determined by reference to income from less than all of the partnership's activities. For purposes of this paragraph (b)(4)(viii)( *c* )( *2* ), a partnership item shall not include any item that is excluded from income attributable to an activity pursuant to the second sentence of paragraph (b)(4)(viii)( *c* )( *3* )( *ii* ) of this section (relating to allocations or payments that result in a deduction under foreign law). ( *iii* ) *Activity.* Whether a partnership has one or more activities, and the scope of each activity, shall be determined in a reasonable manner taking into account all the facts and circumstances. In evaluating whether aggregating or disaggregating income from particular business or investment operations constitutes a reasonable method of determining the scope of an activity, the principal consideration is whether the proposed determination has the effect of separating CFTEs from the related foreign income. Accordingly, relevant considerations include whether the partnership conducts business in more than one geographic location or through more than one entity or branch, and whether certain types of income are exempt from foreign tax or subject to preferential foreign tax treatment. In addition, income from a divisible part of a single activity shall be treated as income from a separate activity if necessary to prevent separating CFTEs from the related foreign income. The partnership's activities must be determined consistently from year to year absent a material change in facts and circumstances. ( *3* ) *Net income in a CFTE category* —( *i* ) *In general.* The net income in a CFTE category means the net income for U.S. Federal income tax purposes, determined by taking into account all partnership items attributable to the relevant activity or group of activities, including items of gross income, gain, loss, deduction, and expense and items allocated pursuant to section 704(c). The items of gross income attributable to an activity shall be determined in a consistent manner under any reasonable method taking into account all the facts and circumstances. Except as otherwise provided below, expenses, losses or other deductions shall be allocated and apportioned to gross income attributable to an activity in accordance with the rules of §§ 1.861-8 and 1.861-8T. Under these rules, if an expense, loss or other deduction is allocated to gross income from more than one activity, such expense, loss or deduction must be apportioned among each such activity using a reasonable method that reflects to a reasonably close extent the factual relationship between the deduction and the gross income from such activities. See § 1.861-8T(c). For purposes of determining net income in a CFTE category, the partnership's interest expense and research and experimental expenditures described in section 174 may be allocated and apportioned under any reasonable method, including but not limited to the methods prescribed in § 1.861-9 through § 1.861-13T (interest expense) and § 1.861-17 (research and experimental expenditures). For purposes of determining the net income attributable to any activity of a branch, the only items of gross income taken into account in applying this paragraph (b)(4)(viii)( *c* )( *3* ) are those items of gross income recognized by the branch for U.S. income tax purposes. See paragraph (b)(5) *Example 24* of this section (relating to inter-branch payments). ( *ii* ) Special rules. Income attributable to an activity shall include the amount included in a partner's income as a guaranteed payment (within the meaning of section 707(c)) from the partnership to the extent that the guaranteed payment is not deductible by the partnership under foreign law. See paragraph (b)(5) *Example 25*

(iv)of this section. Except for an inter-branch payment described in paragraph (b)(4)(viii)( *d* )( *3* ) of this section, income attributable to an activity shall not include an item of partnership income to the extent the allocation of such item of income (or payment thereof) results in a deduction under foreign law. See paragraph (b)(5) *Example 25*

(iii)and

(iv)of this section. Similarly, income attributable to an activity shall not include net income that foreign law would exclude from the foreign tax base as a result of the status of a partner. See paragraph (b)(5) *Example 27* of this section. ( *4* ) *Distributive shares of income.* For purposes of paragraph (b)(4)(viii)( *a* )( *1* ) of this section, distributive share of income means the net income from each CFTE category, determined in accordance with paragraph (b)(4)(viii)( *c* )( *3* ) of this section, that is allocated to a partner. A guaranteed payment shall be treated as a distributive share of income for purposes of paragraph (b)(4)(viii)( *a* )( *1* ) of this section to the extent that the guaranteed payment is treated as income attributable to an activity pursuant to paragraph (b)(4)(viii)( *c* )( *3* )( *ii* ) of this section. See paragraph (b)(5) *Example 25*

(iv)of this section. If more than one partner receives positive income allocations (income in excess of expenses) from a CFTE category, which in the aggregate exceed the total net income in the CFTE category, then for purposes of paragraph (b)(4)(viii)( *a* )( *1* ) of this section such partner's distributive share of income from the CFTE category shall equal the partner's positive income allocation from the CFTE category, divided by the aggregate positive income allocations from the CFTE category, multiplied by the net income in the CFTE category. ( *5* ) *No net income in a CFTE category.* If a CFTE is allocated or apportioned to a CFTE category that does not have net income for the year in which the foreign tax is paid or accrued, the CFTE shall be deemed to relate to the aggregate of the net income (disregarding net losses) recognized by the partnership in that CFTE category in each of the three preceding taxable years. Accordingly, except as provided below, such CFTE must be allocated in the current taxable year in the same proportion as the allocation of the aggregate net income for the prior three-year period in order to satisfy the requirements of paragraph (b)(4)(viii)( *a* )( *1* ) of this section. If the partnership does not have net income in the applicable CFTE category in either the current year or any of the previous three taxable years, the CFTE must be allocated in the same proportion that the partnership reasonably expects to allocate the aggregate net income (disregarding net losses) in the CFTE category for the succeeding three taxable years. If the partnership does not reasonably expect to have net income in the CFTE category for the succeeding three years and the partnership has net income in one or more other CFTE categories for the year in which the foreign tax is paid or accrued, the CFTE shall be deemed to relate to such other net income and must be allocated in proportion to the allocations of such other net income. If any CFTE is not allocated pursuant to the above provisions of this paragraph then the CFTE must be allocated in proportion to the partners' outstanding capital contributions. ( *d* ) *Allocation and apportionment of CFTEs to CFTE categories* —( *1* ) *In general.* CFTEs are allocated and apportioned to CFTE categories in accordance with the principles of § 1.904-6. Under these principles, a CFTE is related to income in a CFTE category if the income is included in the base upon which the foreign tax is imposed. In accordance with § 1.904-6(a)(1)(ii) as modified by this paragraph (b)(4)(viii)( *d* ), if the foreign tax base includes income in more than one CFTE category, the CFTEs are apportioned among the CFTE categories based on the relative amounts of taxable income computed under foreign law in each CFTE category. For purposes of this paragraph (b)(4)(viii)( *d* ), references in § 1.904-6 to a separate category or separate categories shall mean “CFTE category” or “CFTE categories” and the rules in § 1.904-6(a)(1)(ii) are modified as follows: ( *i* ) The related party interest expense rule in § 1.904-6(a)(1)(ii) shall not apply in determining the amount of taxable income computed under foreign law in a CFTE category. ( *ii* ) If foreign law does not provide for the direct allocation or apportionment of expenses, losses or other deductions allowed under foreign law to a CFTE category of income, then such expenses, losses or other deductions must be allocated and apportioned to gross income as determined under foreign law in a manner that is consistent with the allocation and apportionment of such items for purposes of determining the net income in the CFTE categories for U.S. tax purposes pursuant to paragraph (b)(4)(viii)( *c* )( *3* ) of this section. ( *2* ) *Timing and base differences.* A foreign tax imposed on an item that would be income under U.S. tax principles in another year (a timing difference) is allocated to the CFTE category that would include the income if the income were recognized for U.S. tax purposes in the year in which the foreign tax is imposed. A foreign tax imposed on an item that would not constitute income under U.S. tax principles in any year (a base difference) is allocated to the CFTE category that includes the partnership items attributable to the activity with respect to which the foreign tax is imposed. See paragraph (b)(5) *Example 23* of this section. ( *3* ) *Special rules for inter-branch payments.* Notwithstanding any other provision of this paragraph ( *d* ), the rules of this paragraph (b)(4)(viii)( *d* )( *3* ) shall apply if a branch (including an entity described in § 301.7701-2(c)(2)(i) of this chapter) of the partnership is required to include in income under foreign law a payment it receives from another branch of the partnership. The foreign tax imposed on such payments (“inter-branch payments”) is allocated to the CFTE category that includes the items attributable to the relevant activities of the recipient branch. In cases where the partnership agreement results in more than one CFTE category with respect to activities of the recipient branch, such tax is allocated to the CFTE category that includes the items attributable to the activity to which the inter-branch payment relates. The rules of this paragraph (b)(4)(viii)( *d* )( *3* ) shall also apply to payments between a partnership and a branch of the partnership. See paragraph (b)(5) *Example 24* of this section.

(xi)[Reserved].

(5)* * * Example 20.

(i)A and B form AB, an eligible entity (as defined in § 301.7701-3(a) of this chapter), treated as a partnership for U.S. tax purposes. AB operates business M in country X and earns income from passive investments in country X. Country X imposes a 40 percent tax on business M income, which tax is a CFTE, but exempts from tax income from passive investments. In 2007, AB earns $100,000 of income from business M and $30,000 from passive investments and pays or accrues $40,000 of country X taxes. For purposes of section 904(d), the income from business M is general limitation income and the income from the passive investments is passive income. Pursuant to the partnership agreement, all partnership items, including CFTEs, from business M are allocated 60 percent to A and 40 percent to B, and all partnership items, including CFTEs, from passive investments are allocated 80 percent to A and 20 percent to B. Accordingly, A is allocated 60 percent of the business M income ($60,000) and 60 percent of the country X taxes ($24,000), and B is allocated 40 percent of the business M income ($40,000) and 40 percent of the country X taxes ($16,000). The income from the passive investments is allocated $24,000 to A and $6,000 to B. Assume that allocations of all items other than CFTEs are valid.

(ii)Because the partnership agreement provides for different allocations of the net income attributable to business M and the passive investments, the net income attributable to each is income in a separate CFTE category. See paragraph (b)(4)(viii)( *c* )( *2* ) of this section. AB must determine the net income in each CFTE category and the CFTEs allocable to each CFTE category. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the business M CFTE category is the $100,000 attributable to business M and the net income in the passive investments CFTE category is the $30,000 attributable to the passive investments. Under paragraph (b)(4)(viii)( *d* ) of this section, the $40,000 of country X taxes is allocated to the business M CFTE category and no portion of the country X taxes is allocated to the passive investments CFTE category. Therefore, the $40,000 of country X taxes are related to the $100,000 of net income in the business M CFTE category. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the net income from the business M CFTE category 60 percent to A and 40 percent to B, and the country X taxes 60 percent to A and 40 percent to B, the allocations of the CFTEs are in proportion to the distributive shares of income to which the CFTEs relate. Because AB satisfies the requirement of paragraph (b)(4)(viii) of this section, the allocations of the country X taxes are deemed to be in accordance with the partners' interests in the partnership. Because the business M income is general limitation income, all $40,000 of taxes are attributable to the general limitation category. See § 1.904-6. Example 21.

(i)A and B form AB, an eligible entity (as defined in § 301.7701-3(a) of this chapter), treated as a partnership for U.S. tax purposes. AB operates business M in country X and business N in country Y. Country X imposes a 40 percent tax on business M income, country Y imposes a 20 percent tax on business N income, and the country X and country Y taxes are CFTEs. In 2007, AB has $100,000 of income from business M and $50,000 of income from business N. Country X imposes $40,000 of tax on the income from business M and country Y imposes $10,000 of tax on the income of business N. Pursuant to the partnership agreement, all partnership items, including CFTEs, from business M are allocated 75 percent to A and 25 percent to B, and all partnership items, including CFTEs, from business N are split evenly between A and B (50 percent each). Accordingly, A is allocated 75 percent of the income from business M ($75,000), 75 percent of the country X taxes ($30,000), 50 percent of the income from business N ($25,000), and 50 percent of the country Y taxes ($5,000). B is allocated 25 percent of the income from business M ($25,000), 25 percent of the country X taxes ($10,000), 50 percent of the income from business N ($25,000), and 50 percent of the country Y taxes ($5,000). Assume that allocations of all items other than CFTEs are valid. The income from business M and business N is general limitation income for purposes of section 904(d).

(ii)Because the partnership agreement provides for different allocations of the net income attributable to businesses M and N, the net income attributable to each business is income in a separate CFTE category even though all of the income is in the general limitation category for section 904(d) purposes. See paragraph (b)(4)(viii)( *c* )( *2* ) of this section. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the business M CFTE category is the $100,000 attributable to business M and the net income in the business N CFTE category is $50,000 attributable to business N. Under paragraph (b)(4)(viii)( *d* ) of this section, the $40,000 of country X taxes is allocated to the business M CFTE category and the $10,000 of country Y taxes is allocated to the business N CFTE category. Therefore, the $40,000 of country X taxes are related to the $100,000 of net income in the business M CFTE category and the $10,000 of country Y taxes are related to the $50,000 of net income in the business N CFTE category. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the $40,000 of country X taxes in the same proportion as the net income in the business M CFTE category, and the $10,000 of country Y taxes in the same proportion as the net income in the business N CFTE category, the allocations of the country X taxes and the country Y taxes are in proportion to the distributive shares of income to which the foreign taxes relate. Because AB satisfies the requirements of paragraph (b)(4)(viii) of this section, the allocations of the country X and country Y taxes are deemed to be in accordance with the partners' interests in the partnership. Example 22.

(i)The facts are the same as in *Example 21,* except that the partnership agreement provides for the following allocations. Depreciation attributable to machine X, which is used in business M, is allocated 100 percent to A. B is allocated the first $20,000 of gross income attributable to business N, which allocation does not result in a deduction under foreign law. All remaining items, except CFTEs, are allocated 50 percent to A and 50 percent to B. For 2007, assume that business M generates $120,000 of income, before taking into account depreciation attributable to machine X. The total amount of depreciation attributable to machine X is $20,000, which results in $100,000 of net income attributable to business M for U.S. and country X tax purposes. Business N generates $70,000 of gross income and has $20,000 of expenses, resulting in $50,000 of net income for U.S. and country Y tax purposes. Pursuant to the partnership agreement, A is allocated $40,000 of the net income attributable to business M ($60,000 of business M income less $20,000 of depreciation attributable to machine X), and $15,000 of the net income attributable to business N. B is allocated $60,000 of the net income attributable to business M and $35,000 of the net income attributable to business N ($20,000 of gross income, plus $15,000 of net income).

(ii)As a result of the special allocations, the net income attributable to business M ($100,000) is allocated 40 percent to A and 60 percent to B. The net income attributable to business N ($50,000) is allocated 30 percent to A and 70 percent to B. Because the partnership agreement provides for different allocations of the net income attributable to businesses M and N, the net income from each of businesses M and N is income in a separate CFTE category. See paragraph (b)(4)(viii)( *c* )( *2* ) of this section. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the business M CFTE category is the $100,000 of net income attributable to business M and the net income in the business N CFTE category is the $50,000 of net income attributable to business N. Under paragraph (b)(4)(viii)( *d* )( *1* ) of this section, the $40,000 of country X taxes is allocated to the business M CFTE category and the $10,000 of country Y taxes is allocated to the business N CFTE category. Therefore, the $40,000 of country X taxes relates to the $100,000 of net income in the business M CFTE and the $10,000 of country Y taxes relates to the $50,000 of net income in the business N CFTE category. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. The allocations of the country X taxes will be in proportion to the distributive shares of income to which they relate and will be deemed to be in accordance with the partners' interests in the partnership if such taxes are allocated 40 percent to A and 60 percent to B. The allocations of the country Y taxes will be in proportion to the distributive shares of income to which they relate and will be deemed to be in accordance with the partners' interests in the partnership if such taxes are allocated 30 percent to A and 70 percent to B.

(iii)Assume that for 2008, all the facts are the same as in paragraph

(i)of this *Example 22,* except that business M generates $60,000 of income before taking into account depreciation attributable to machine X and country X imposes $16,000 of tax on the $40,000 of net income attributable to business M. Pursuant to the partnership agreement, A is allocated 25 percent of the income from business M ($10,000), and B is allocated 75 percent of the income from business M ($30,000). Allocations of the country X taxes will be in proportion to the distributive shares of income to which they relate and will be deemed to be in accordance with the partners' interests in the partnership if such taxes are allocated 25 percent to A and 75 percent to B. Example 23.

(i)The facts are the same as in *Example 21,* except that AB does not actually receive the $50,000 of income accrued in 2007 with respect to business N until 2008 and AB accrues and receives an additional $100,000 with respect to business N in 2008. Also assume that A, B, and AB each report taxable income on an accrual basis for U.S. tax purposes and AB reports taxable income using the cash receipts and disbursements method of accounting for country X and country Y purposes. In 2007, AB pays or accrues country X taxes of $40,000. In 2008, AB pays or accrues country Y taxes of $30,000. Pursuant to the partnership agreement, in 2007, A is allocated 75 percent of business M income ($75,000) and country X taxes ($30,000) and 50 percent of business N income ($25,000). B is allocated 25 percent of business M income ($25,000) and country X taxes ($10,000) and 50 percent of business N income ($25,000). In 2008, A and B are each allocated 50 percent of the business N income ($50,000) and country Y taxes ($15,000).

(ii)For 2007, the $40,000 of country X taxes paid or accrued by AB relates to the $100,000 of net income in the business M CFTE category. No portion of the country X taxes paid or accrued in 2007 relates to the $50,000 of net income in the business N CFTE category. For 2008, the net income in the business N CFTE category is the $100,000 attributable to business N. See paragraph (b)(4)(viii)( *c* )( *3* ) of this section. Under paragraph (b)(4)(viii)( *d* )( *1* ) of this section, $20,000 of the country Y tax paid or accrued in 2008 is allocated to the business N CFTE category. The remaining $10,000 of country Y tax is allocated to the business N CFTE category under paragraph (b)(4)(viii)( *d* )( *2* ) of this section (relating to timing differences). Therefore, the $30,000 of country Y taxes paid or accrued by AB in 2008 is related to the $100,000 of net income in the business N CFTE category for 2008. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the $40,000 of country X taxes and the $30,000 of country Y taxes in proportion to the distributive shares of income to which the taxes relate, the allocations of the country X and country Y taxes satisfy the requirements of paragraphs (b)(4)(viii)( *a* )( *1* ) and ( *2* ) of this section and the allocations of the country X and Y taxes are deemed to be in accordance with the partners' interests in the partnership under paragraph (b)(4)(viii) of this section. Example 24.

(i)The facts are the same as in *Example 21* , except that businesses M and N are conducted by entities (DE1 and DE2, respectively) that are corporations for country X and Y tax purposes and disregarded entities for U.S. tax purposes. Also, assume that DE1 makes payments of $75,000 during 2007 to DE2 that are deductible by DE1 for country X tax purposes and includible in income of DE2 for country Y tax purposes. As a result of such payments, DE1 has taxable income of $25,000 for country X purposes on which $10,000 of taxes are imposed and DE2 has taxable income of $125,000 for country Y purposes on which $25,000 of taxes are imposed. For U.S. tax purposes, $100,000 of AB's income is attributable to the activities of DE1 and $50,000 of AB's income is attributable to the activities of DE2. Pursuant to the partnership agreement, all partnership items, including CFTEs, from business M are allocated 75 percent to A and 25 percent to B, and all partnership items, including CFTEs, from business N are split evenly between A and B (50 percent each). Accordingly, A is allocated 75 percent of the income from business M ($75,000), 75 percent of the country X taxes ($7,500), 50 percent of the income from business N ($25,000), and 50 percent of the country Y taxes ($12,500). B is allocated 25 percent of the income from business M ($25,000), 25 percent of the country X taxes ($2,500), 50 percent of the income from business N ($25,000), and 50 percent of the country Y taxes ($12,500).

(ii)Because the partnership agreement provides for different allocations of the net income attributable to businesses M and N, the net income attributable to each of business M and business N is income in separate CFTE categories. See paragraph (b)(4)(viii)( *c* )( *2* ) of this section. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the $100,000 of net income attributable to business M is in the business M CFTE category and the $50,000 of net income attributable to business N is in the business N CFTE category. Under paragraph (b)(4)(viii)( *d* )( *1* ) of this section, the $10,000 of country X taxes is allocated to the business M CFTE category and $10,000 of the country Y taxes is allocated to the business N CFTE category. Under paragraph (b)(4)(viii)( *d* )( *3* ) of this section, the additional $15,000 of country Y tax imposed with respect to the inter-branch payment is assigned to the business N CFTE category. Therefore, the $10,000 of country X taxes is related to the $100,000 of net income in the business M CFTE category and the $25,000 of country Y taxes is related to the $50,000 of net income in the business N CFTE category. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the $10,000 of country X taxes in the same proportion as the distributive shares of income to which the taxes relate and the $25,000 of country Y taxes in the same proportion as the distributive shares of income to which the taxes relate, AB satisfies the requirements of paragraph (b)(4)(viii) of this section and the allocations of the country X and country Y taxes are deemed to be in accordance with the partners' interests in the partnership. No inference is intended with respect to the application of other provisions to arrangements that involve disregarded payments. See paragraph (b)(1)(iii) of this section (relating to the effect of sections of the Internal Revenue Code other than section 704(b)).

(iii)Assume that the facts are the same as paragraph

(i)of this *Example 24* , except that the partnership agreement provides that the $15,000 of country Y tax imposed with respect to the inter-branch payment is allocated 75 percent to A ($11,250) and 25 percent to B ($3,750) and that the remaining $10,000 of country Y tax is allocated 50 percent to A ($5,000) and 50 percent to B ($5,000). Thus, the country Y taxes are allocated 65 percent to A and 35 percent to B while the income in the business N CFTE category is allocated 50 percent to A and 50 percent to B. The allocations of the country Y tax are not deemed to be in accordance with the partners' interests because they are not in proportion to the allocations of the distributive shares of income from the business N CFTE category. However, upon sufficient substantiation that $15,000 of country Y tax paid by DE2 with respect to the $75,000 inter-branch payment relates to income that is recognized by DE1 for U.S. tax purposes, the allocations of the country Y taxes may be established to be actually in accordance with the partners' interests in the partnership. The allocations of the $10,000 of country X taxes are deemed to be in accordance with the partners' interests in the partnership because the country X taxes are allocated in the same proportion as the distributive shares of income to which they relate.

(iv)Assume that the facts are the same as in paragraph

(i)of this *Example 24* , except that in order to reflect the $75,000 payment from DE1 to DE2, the partnership agreement allocates $75,000 of the income attributable to business M equally between A and B (50 percent each). Therefore, the total income attributable to business M is allocated 56.25 percent to A (75 percent of $25,000 plus 50 percent of $75,000) and 43.75 percent to B (25 percent of $25,000 and 50 percent of $75,000). The allocation of the country X taxes (75 percent to A and 25 percent to B) is not deemed to be in accordance with the partners' interests because it is not in proportion to the allocations of the distributive shares of income from the business M CFTE category. However, upon sufficient substantiation that all $10,000 of country X tax paid by DE1 relates to the $25,000 of DE1's income that is shared in the same 75-25 ratio, the allocations of the country X taxes may be established to be actually in accordance with the partners' interests in the partnership. The allocations of the $25,000 of country Y taxes are deemed to be in accordance with the partners' interests in the partnership because the country Y taxes are allocated in the same proportion as the distributive shares of income to which they relate. Example 25.

(i)A contributes $750,000 and B contributes $250,000 to form AB, an eligible entity (as defined in § 301.7701-3(a) of this chapter), treated as a partnership for U.S. tax purposes. AB operates business M in country X. Country X imposes a 20 percent tax on the net income from business M, which tax is a CFTE. In 2007, AB earns $300,000 of gross income, has deductible expenses of $100,000, and pays or accrues $40,000 of country X tax. Pursuant to the partnership agreement, the first $100,000 of gross income each year is allocated to A as a return on excess capital contributed by A. All remaining partnership items, including CFTEs, are split evenly between A and B (50 percent each). The gross income allocation is not deductible in determining AB's taxable income under country X law. Assume that allocations of all items other than CFTEs are valid.

(ii)AB has a single CFTE category because all of AB's net income is allocated in the same ratio. See paragraph (b)(4)(viii)( *c* )( *2* ). Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the single CFTE category is $200,000. The $40,000 of taxes is allocated to the single CFTE category and, thus, related to the $200,000 of net income in the single CFTE category. In 2007, AB's partnership agreement allocates $150,000 or 75 percent of the net income to A ($100,000 attributable to the gross income allocation plus $50,000 of the remaining $100,000 of net income) and $50,000 or 25 percent of the net income to B. AB's partnership agreement allocates the country X taxes in accordance with the partners' shares of partnership items remaining after the $100,000 gross income allocation. Therefore, AB allocates the country X taxes 50 percent to A ($20,000) and 50 percent to B ($20,000). AB's allocations of country X taxes are not deemed to be in accordance with the partners' interests in the partnership under paragraph (b)(4)(viii) of this section, because they are not in proportion to the allocations of the distributive shares of income to which the country X taxes relate. Accordingly, the country X taxes will be reallocated according to the partners' interest in the partnership. Assuming that the partners do not reasonably expect to claim a deduction for the CFTE in determining their U.S. tax liabilities, a reallocation of the CFTEs under paragraph (b)(3) of this section would be 75 percent to A ($30,000) and 25 percent to B ($10,000). If the reallocation of the CFTEs causes the partners' capital accounts not to reflect their contemplated economic arrangement, the partners may need to reallocate other partnership items to ensure that the tax consequences of the partnership's allocations are consistent with their contemplated economic arrangement over the term of the partnership. The Commissioner will not reallocate other partnership items after the reallocation of the CFTEs.

(iii)The facts are the same as in paragraph

(i)of this *Example 25* , except that the $100,000 allocation of gross income is deductible under country X law and that AB pays or accrues $20,000 of foreign tax. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the single CFTE category is the $100,000 of net income, determined by disregarding the $100,000 of gross income that is allocated to A and deductible in determining AB's taxable income under the law of country X. See paragraph (b)(4)(viii)( *c* )( *3* )( *ii* ) of this section. The $20,000 of country X tax is allocated to the single CFTE category, and, thus, related to the $100,000 of net income in the single CFTE category. See paragraphs (b)(4)(viii)( *c* )( *1* ) and ( *d* ) of this section. No portion of the tax is related to the $100,000 of gross income allocated to A. Pursuant to the partnership agreement, AB allocates the country X taxes 50 percent to A ($10,000) and 50 percent to B ($10,000). AB's allocations of country X taxes are deemed to be in accordance with the partners' interests in the partnership under paragraph (b)(4)(viii) of this section.

(iv)The results in

(ii)and

(iii)of this *Example 25* would be the same assuming all of the facts except that, rather than being a preferential gross income allocation, the $100,000 was a guaranteed payment to A within the meaning of section 707(c). See paragraph (b)(4)(viii)( *c* )( *3* ) of this section. Example 26.

(i)A and B form AB, an eligible entity (as defined in § 301.7701-3(a) of this chapter), treated as a partnership for U.S. tax purposes. AB operates business M in country X and business N in country Y. A, a U.S. corporation, contributes a building with a fair market value of $200,000 and an adjusted basis of $50,000 for both U.S. and country X purposes. The building contributed by A is used in business M. B, a country X corporation, contributes $800,000 cash. The AB partnership agreement provides that AB will make allocations under section 704(c) using the traditional method under § 1.704-3(b) and that all other items, excluding creditable foreign taxes, will be allocated 20 percent to A and 80 percent to B. The partnership agreement provides that creditable foreign taxes will be allocated in proportion to the partners' distributive shares of net income in each CFTE category, which shall be determined by taking into accounts items allocated pursuant to section 704(c). Country X and Country Y impose tax at a rate of 20 percent and 40 percent, respectively, and such taxes are CFTEs. In 2007, AB sells the building contributed by A for $200,000, thereby recognizing taxable income of $150,000 for U.S. and country X purposes, and recognizes $250,000 of other income from the operation of business M. AB pays or accrues $80,000 of country X tax on such income. Also in 2007, business N recognizes $100,000 of taxable income for U.S. and country Y purposes and pays or accrues $40,000 of country Y tax. Pursuant to the partnership agreement, A is allocated $200,000 of business M income ($150,000 of taxable income in accordance with section 704(c) and $50,000 of other business M income) and $40,000 of country X tax, and 20 percent of both business N income ($20,000) and country Y tax ($8,000). B is allocated $200,000 of business M income and $40,000 of country X tax and 80 percent of both the business N income ($80,000) and country Y tax ($32,000). Assume that allocations of all items other than CFTEs are valid.

(ii)The net income attributable to business M ($400,000) is allocated 50 percent to A and 50 percent to B while the net income attributable to business N ($100,000) is allocated 20 percent to A and 80 percent to B. Because the partnership agreement provides for different allocations of the net income attributable to businesses M and N, the net income attributable to each activity is income in a separate CFTE category. See paragraph (b)(4)(viii)( *c* )( *2* ) of this section. Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the net income in the business M CFTE category is the $400,000 of net income attributable to business M and the net income in the business N CFTE category is the $100,000 of net income attributable to business N. Under paragraph (b)(4)(viii)( *d* )( *1* ) of this section, the $80,000 of country X tax is allocated to the business M CFTE category and the $40,000 of country Y tax is allocated to the business N CFTE category. Therefore, the $80,000 of country X tax relates to the $400,000 of net income in the business M CFTE category and the $40,000 of country Y tax relates to the $100,000 of net income in the business N CFTE category. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the $80,000 of country X taxes and $40,000 of country Y taxes in proportion to the distributive shares of income to which such taxes relate, the allocations are deemed to be in accordance with the partners' interest in the partnership under paragraph (b)(4)(viii) of this section. Example 27.

(i)A, a U.S. citizen, and B, a country X citizen, form AB, a country X eligible entity (as defined in § 301.7701-3(a) of this chapter), treated as a partnership for U.S. tax purposes. AB's only activity is business M, which it operates in country X. Country X imposes a 40 percent tax on the portion of AB's business M income that is the allocable share of AB's owners that are not citizens of country X, which tax is a CFTE. The partnership agreement provides that all partnership items, excluding CFTEs, from business M are allocated 40 percent to A and 60 percent to B. CFTEs are allocated 100 percent to A. In 2007, AB earns $100,000 of net income from business M and pays or accrues $16,000 of country X taxes on A's allocable share of AB's income ($40,000). Pursuant to the partnership agreement, A is allocated 40 percent of the business M income ($40,000) and 100 percent of the country X taxes ($16,000), and B is allocated 60 percent of the business M income ($60,000) and no country X taxes. Assume that allocations of all items other than CFTEs are valid.

(ii)AB has a single CFTE category because all of AB's net income is allocated in the same ratio. See paragraph (b)(4)(viii)( *c* )( *2* ). Under paragraph (b)(4)(viii)( *c* )( *3* ) of this section, the $40,000 of business M income that is allocated to A is included in the single CFTE category. Under paragraph (b)(4)(viii)( *c* )( *3* )( *ii* ) of this section, no portion of the $60,000 allocated to B is included in the single CFTE category. Under paragraph (b)(4)(viii)( *d* ) of this section, the $16,000 of taxes is allocated to the single CFTE category. Therefore, the $16,000 of country X taxes is related to the $40,000 of net income in the single CFTE category that is allocated to A. See paragraph (b)(4)(viii)( *c* )( *1* ) of this section. Because AB's partnership agreement allocates the country X taxes in proportion to the distributive share of income to which the taxes relate, AB satisfies the requirement of paragraph (b)(4)(viii) of this section, and the allocation of the country X taxes is deemed to be in accordance with the partners' interests in the partnership. § 1.704-1T [Removed] **Par. 3.** Section 1.704-1T is removed. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved: September 12, 2006. Eric Solomon, Acting Deputy Assistant Secretary of the Treasury. [FR Doc. E6-17307 Filed 10-18-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9293] RIN 1545-BF88 TIPRA Amendments to Section 199 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary regulations concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 to section 199 of the Internal Revenue Code. The temporary regulations also contain a rule concerning the use of losses incurred by members of an expanded affiliated group. Section 199 provides a deduction for income attributable to domestic production activities. The regulations will affect taxpayers engaged in certain domestic production activities. The text of the temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the **Federal Register** . DATES: *Effective Date:* These regulations are effective October 19, 2006. *Applicability Date:* For dates of applicability, see § 1.199-8T(i)(5) and (6). FOR FURTHER INFORMATION CONTACT: Concerning §§ 1.199-2T(e)(2) and 1.199-8T(i)(5), Paul Handleman or Lauren Ross Taylor,

(202)622-3040; concerning §§ 1.199-3T(i)(7) and (8), and 1.199-5T, Martin Schaffer,

(202)622-3080; and concerning §§ 1.199-7T(b)(4) and 1.199-8T(i)(6), Ken Cohen,

(202)622-7790 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document provides rules relating to the deduction for income attributable to domestic production activities under section 199 of the Internal Revenue Code (Code). Section 199 was added to the Code by section 102 of the American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 1418), and amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 109-135, 119 Stat. 25) and section 514 of the Tax Increase Prevention and Reconciliation Act of 2005 (Pub. L. 109-222, 120 Stat. 345) (TIPRA). On June 1, 2006, the IRS and Treasury Department published final regulations under section 199 (71 FR 31268). The preamble to the final regulations states that the IRS and Treasury Department plan on issuing regulations on the amendments made to section 199 by section 514 of TIPRA. General Overview Section 199(a)(1) allows a deduction equal to 9 percent (3 percent in the case of taxable years beginning in 2005 or 2006, and 6 percent in the case of taxable years beginning in 2007, 2008, or 2009) of the lesser of

(A)the qualified production activities income

(QPAI)of the taxpayer for the taxable year, or

(B)taxable income (determined without regard to section 199) for the taxable year (or, in the case of an individual, adjusted gross income (AGI)). Section 199(b)(1) limits the deduction for a taxable year to 50 percent of the W-2 wages paid by the taxpayer during the calendar year that ends in such taxable year. For this purpose, section 199(b)(2)(A) defines the term *W-2 wages* to mean, with respect to any person for any taxable year of such person, the sum of the amounts described in section 6051(a)(3) and

(8)paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year. Section 514(a) of TIPRA added new section 199(b)(2)(B), which provides that the term *W-2 wages* does not include any amount which is not properly allocable to domestic production gross receipts

(DPGR)for purposes of section 199(c)(1). Section 199(b)(2)(C) provides that the term *W-2 wages* does not include any amount that is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for the return. Section 199(b)(3) provides that the Secretary shall prescribe rules for the application of section 199(b) in the case of an acquisition or disposition of a major portion of either a trade or business or a separate unit of a trade or business during the taxable year. Pass-Thru Entities Section 199(d)(1)(A) provides that, in the case of a partnership or S corporation,

(i)section 199 shall be applied at the partner or shareholder level,

(ii)each partner or shareholder shall take into account such person's allocable share of each item described in section 199(c)(1)(A) or

(B)(determined without regard to whether the items described in section 199(c)(1)(A) exceed the items described in section 199(c)(1)(B)), and (iii), as amended by section 514(b) of TIPRA, each partner or shareholder shall be treated for purposes of section 199(b) as having W-2 wages for the taxable year in an amount equal to such person's allocable share of the W-2 wages of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary). Section 199(d)(1)(B) provides that, in the case of a trust or estate,

(i)the items referred to in section 199(d)(1)(A)(ii) (as determined therein) and the W-2 wages of the trust or estate for the taxable year shall be apportioned between the beneficiaries and the fiduciary (and among the beneficiaries) under regulations prescribed by the Secretary, and

(ii)for purposes of section 199(d)(2), AGI of the trust or estate shall be determined as provided in section 67(e) with the adjustments described in such section. Section 199(d)(1)(C) provides that the Secretary may prescribe rules requiring or restricting the allocation of items and wages under section 199(d)(1) and may prescribe such reporting requirements as the Secretary determines appropriate. Expanded Affiliated Groups Section 199(d)(4)(A) provides that all members of an expanded affiliated group

(EAG)are treated as a single corporation for purposes of section 199. Section 199(d)(4)(B) provides that an EAG is an affiliated group as defined in section 1504(a), determined by substituting “more than 50 percent” for “at least 80 percent” each place it appears and without regard to section 1504(b)(2) and (4). Authority To Prescribe Regulations Section 199(d)(8) authorizes the Secretary to prescribe such regulations as are necessary to carry out the purposes of section 199, including regulations that prevent more than one taxpayer from being allowed a deduction under section 199 with respect to any activity described in section 199(c)(4)(A)(i). Explanation of Provisions W-2 Wages Properly Allocable to Domestic Production Gross Receipts Section 514(a) of TIPRA amended section 199(b)(2) to provide that the term *W-2 wages* does not include any amount that is not properly allocable to DPGR for purposes of section 199(c)(1). The Secretary is authorized to provide rules for the proper allocation of items (including wages) in determining QPAI. See section 199(d)(8). The temporary regulations provide that for taxable years beginning after May 17, 2006, the term *W-2 wages* includes only amounts described in § 1.199-2(e)(1) (paragraph (e)(1) wages) that are properly allocable to DPGR. The temporary regulations provide that a taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances. The temporary regulations provide safe harbors for determining the amount of paragraph (e)(1) wages that is properly allocable to DPGR. Under the wage expense safe harbor for taxpayers using either the section 861 method of cost allocation under § 1.199-4(d) or the simplified deduction method under § 1.199-4(e), a taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR by multiplying the amount of paragraph (e)(1) wages by the ratio of the taxpayer's wage expense included in calculating QPAI for the taxable year to the taxpayer's total wage expense used in calculating the taxpayer's taxable income (or AGI, if applicable) for the taxable year. For purposes of determining the amount of wage expense in cost of goods sold

(CGS)under this safe harbor, a taxpayer may determine its wage expense included in CGS using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances. For example, a reasonable method would include a taxpayer using direct labor included in CGS as wage expense included in CGS. Additionally, a reasonable method would include a taxpayer using the section 263A labor costs used by the taxpayer in its simplified service cost method with labor-based allocation ratio under § 1.263-1(h)(4)(ii) as wage expense included in CGS. Because CGS frequently includes goods manufactured in prior years, and thus would frequently include paragraph (e)(1) wages from prior years attributable to DPGR, the amount of paragraph (e)(1) wages in CGS that is properly allocable to DPGR may be difficult to determine. The IRS and Treasury Department request comments on appropriate safe harbors for determining the amount of paragraph (e)(1) wages in CGS that are properly allocable to DPGR. A taxpayer that uses the small business simplified overall method of cost allocation under § 1.199-4(f) may use the small business simplified overall method safe harbor for determining the amount of paragraph (e)(1) wages that is properly allocable to DPGR. Under that safe harbor, the amount of paragraph (e)(1) wages that is properly allocable to DPGR is equal to the same proportion of paragraph (e)(1) wages that the amount of DPGR bears to the taxpayer's total gross receipts. As a consequence of the amendment to section 199(b)(2) made by TIPRA and its interplay with the rules in § 1.199-7(a) and

(b)for the computation of an EAG's section 199 deduction, the section 199 deduction for the members of an EAG may be reduced if one member of an EAG uses employees of another member of the EAG to perform activities attributable to DPGR and does not have paragraph (e)(1) wages. In general, § 1.199-7(a) and

(b)provides that each member of an EAG calculates its own taxable income or loss, QPAI, and W-2 wages, which are then aggregated in determining the EAG's section 199 deduction. Therefore, prior to the amendment to section 199(b)(2), in determining the wage limitation under section 199(b)(1) (the W-2 wage limitation), it was irrelevant which member of an EAG had the paragraph (e)(1) wages, because there was no requirement that paragraph (e)(1) wages be properly allocable to DPGR to qualify as W-2 wages, and the W-2 wages of all the members of an EAG are aggregated. For example, assume that X and Y are members of an EAG and do not join in the filing of a consolidated Federal income tax return. X has paragraph (e)(1) wages incurred in connection with Y's DPGR activities, but X has no DPGR itself. Further assume that Y has no paragraph (e)(1) wages. Prior to the amendment to section 199(b)(2), notwithstanding that X has no DPGR, X would have W-2 wages, because there was no requirement that paragraph (e)(1) wages be properly allocable to DPGR. Thus, the EAG would have W-2 wages, the same as if Y, rather than X, had the paragraph (e)(1) wages. Assuming the EAG had QPAI and taxable income, the EAG would receive a section 199 deduction. After the amendment to section 199(b)(2), to qualify as W-2 wages within the meaning of § 1.199-2T(e)(2), paragraph (e)(1) wages must be properly allocable to DPGR to qualify as W-2 wages. Because each member of an EAG separately calculates its own items before they are aggregated by the EAG, the member having the paragraph (e)(1) wages must itself have DPGR to which the wages are properly allocable in order to qualify those wages as W-2 wages. Paragraph (e)(1) wages that are not properly allocable to DPGR of the member having the paragraph (e)(1) wages do not qualify as W-2 wages, even if the paragraph (e)(1) wages were paid in connection with another member's DPGR activities. Thus, after the amendment to section 199(b)(2), X's paragraph (e)(1) wages do not qualify as W-2 wages, because X has no DPGR to which the paragraph (e)(1) wages would be properly allocable. Accordingly, as neither X nor Y has W-2 wages, the EAG has no W-2 wages and no section 199 deduction. If Y had the paragraph (e)(1) wages rather than X, the EAG would have W-2 wages and a section 199 deduction. However, if X and Y join in the filing of a consolidated Federal income tax return, the results may differ. Section 1.1502-13(c)(1)(i) and (c)(4) requires that the separate entity attributes of X's and Y's intercompany items or corresponding items be redetermined to the extent necessary to produce the effect as if X and Y were divisions of a single corporation. Thus, § 1.1502-13(c)(1)(i) and (c)(4) may apply to treat the paragraph (e)(1) wages incurred by X as W-2 wages. The temporary regulations provide examples to demonstrate the described scenarios. Pass-Thru Entities Section 514(b) of TIPRA amended section 199(d)(1)(A)(iii) regarding a partner's or shareholder's share of W-2 wages from a partnership or S corporation for taxable years beginning after May 17, 2006. After TIPRA, the section 199(d)(1)(A)(iii) wage limitation for pass-thru entities no longer includes the second prong of a two-prong standard, by which a partner's or shareholder's share of W-2 wages from the partnership or S corporation was limited to the lesser of that person's allocable share of W-2 wages from the entity or a specified percentage of the person's QPAI, computed by taking into account only the items of the entity allocated to that person for the taxable year of the entity. Section 1.199-5T(b)(3) and (c)(3) provides guidance regarding a partner's or shareholder's share of W-2 wages of a partnership or an S corporation after the effective date of TIPRA. Except as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* )), the partnership or S corporation must allocate its paragraph (e)(1) wages (including any such wages from a lower-tier partnership of which the partnership or S corporation is a partner) among its partners or shareholders in the same manner that wage expense is allocated among those partners or shareholders. The partner or shareholder must add its share of the paragraph (e)(1) wages from the partnership or S corporation to the partner's or shareholder's paragraph (e)(1) wages from other sources, if any. The partner (other than a partner that itself is a partnership or S corporation) or shareholder then must calculate its W-2 wages (as defined in § 1.199-2T(e)(2)) by determining the amount of its paragraph (e)(1) wages properly allocable to DPGR. See § 1.199-2T(e)(2) for the computation of W-2 wages. Section 1.199-5T(e) requires a non-grantor trust or estate to calculate each beneficiary's share (as well as the trust's or estate's share, if any) of QPAI and W-2 wages from the trust or estate at the trust or estate level. The QPAI of a trust or estate and W-2 wages of the trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust's or estate's distributable net income (DNI), as defined by section 643(a), for the taxable year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. Because the second prong of the wage limitation of section 199(d)(1)(A)(iii) was prospectively repealed by TIPRA, there is no longer any need for a special rule for tiered structures (where a pass-thru entity owns an interest in another pass-thru entity). Accordingly, the rule in § 1.199-9(g) of the final regulations regarding the section 199(d)(1)(A)(iii) wage limitation and tiered structures has not been included in these temporary regulations. The temporary regulations provide a transition rule for the situation in which a partner (or shareholder) and a partnership (or S corporation) have different taxable years, only one of which begins on or before the effective date of TIPRA. Under § 1.199-5T(b)(4) and (c)(4), the beginning date of the taxable year of the partnership (or S corporation) determines which definition of W-2 wages and which W-2 wage limitation for pass-thru entities apply. Expanded Affiliated Groups After issuance of the final regulations, it was brought to the attention of the IRS and Treasury Department that the combination of the aggregation rules for determining the taxable income of an EAG in § 1.199-7(b)(1) and the rules of section 172 for net operating loss

(NOL)deductions can result in the same loss being used twice in determining the taxable income limitation under section 199(a)(1)(B). That is, in determining the taxable income limitation under section 199(a)(1)(B), a loss sustained by a member of an EAG could be used in the year the loss is sustained to offset the taxable income of another member of the EAG in determining the EAG's taxable income limitation. However, because the EAG is not a separate taxpaying entity that files its own tax return, the member that sustained the loss would still have an NOL carryover or carryback. Thus, the loss could be used again as an NOL deduction of the member that sustained the loss in a previous or subsequent year to offset its own income, either as a member of the same EAG, a different EAG, or on a stand-alone basis. Because the section 199 deduction is a percentage of the lesser of QPAI or taxable income (subject to the W-2 wage limitation), the use of the same loss twice could potentially reduce the section 199 deduction that should be allowable. For example, assume that corporations X and Y are the only two members of an EAG and that X and Y do not file a consolidated Federal income tax return. In 2010, X and Y each have $100 of QPAI which, under § 1.199-7(b), are aggregated in determining the EAG's QPAI. X has $100 of taxable income and Y has a $100 NOL, which are also aggregated in determining the EAG's taxable income for purposes of the taxable income limitation of section 199(a)(1)(B). Further assume that the EAG has sufficient W-2 wages so that the section 199 deduction is not limited under section 199(b)(1). Thus, although in 2010 the EAG has $200 of QPAI and sufficient W-2 wages so that the section 199 deduction is not limited under section 199(b)(1), as a result of the use of Y's NOL, the EAG has $0 of taxable income and no section 199 deduction. However, because the EAG is not a separate taxpaying entity, Y has an NOL of $100 which is available for carryover or carryback. In 2011, X has $100 of taxable income and Y, before the deduction allowed under section 172, has $300 of taxable income. Under section 172, Y reduces its 2011 taxable income of $300 by its 2010 NOL of $100, thus reducing Y's taxable income to $200. Y's loss was effectively used twice, first in 2010 to reduce the EAG's taxable income for purposes of the taxable income limitation of section 199(a)(1)(B) and then in 2011 to reduce Y's own taxable income, which reduces the EAG's aggregate taxable income for purposes of the taxable income limitation. This result was not intended. Accordingly, § 1.199-7T(b)(4) has been added to provide that, to the extent that an NOL was used in the year it was sustained in determining any EAG's taxable income for purposes of the taxable income limitation of section 199(a)(1)(B), such NOL is not treated as an NOL carryover or NOL carryback to any taxable year in determining the taxable income limitation under section 199(a)(1)(B). Thus, in the previous example, solely for purposes of determining the EAG's 2011 taxable income limitation under section 199(a)(1)(B), Y would not have an NOL carryover from 2010, because the entire $100 NOL was used in 2010 to reduce the EAG's taxable income. Therefore, for purposes of determining the EAG's taxable income limitation in 2011, Y would have taxable income of $300 and the EAG would have aggregate taxable income of $400. The temporary regulations provide examples to illustrate this provision. Effective Date Section 199 applies to taxable years beginning after December 31, 2004. These temporary regulations are applicable for taxable years beginning on or after October 19, 2006. A taxpayer may apply §§ 1.199-2T(e)(2), 1.199-3T(i)(7) and (8), and 1.199-5T to taxable years beginning after May 17, 2006, and before October 19, 2006 regardless of whether the taxpayer otherwise relied upon Notice 2005-14 (2005-1 CB 498) (see § 601.601(d)(2)), the provisions of REG-105847-05 (2005-47 IRB 987) (see § 601.601(d)(2)), or §§ 1.199-1 through 1.199-8. A taxpayer may apply § 1.199-7T(b)(4) to taxable years beginning after December 31, 2004, and before October 19, 2006 regardless of whether the taxpayer otherwise relied upon Notice 2005-14, the provisions of REG-105847-05, or §§ 1.199-1 through 1.199-9. The applicability of these temporary regulations expires on October 19, 2009. Special Analyses It has been determined that this Treasury decision 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. For applicability of the Regulatory Flexibility Act (5 U.S.C. 601 *et seq.* ), refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the **Federal Register** . Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Drafting Information The principal authors of these regulations are Paul Handleman and Lauren Ross Taylor, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES **Paragraph 1.** The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * **Par. 2.** Section 1.199-0 is amended by adding the following entries for §§ 1.199-7(b)(4) and 1.199-8(i)(5) and (6): § 1.199-0 Table of contents. § 1.199-7 Expanded affiliated groups.

(b)* * *

(4)Losses used to reduce taxable income of expanded affiliated group. [Reserved]. § 1.199-8 Other rules.

(i)* * *

(5)Tax Increase Prevention and Reconciliation Act of 2005. [Reserved].

(6)Losses used to reduce taxable income of expanded affiliated group. [Reserved]. **Par. 3.** Section 1.199-2 is amended by adding a sentence at the end of paragraph (e)(2) to read as follows: 1.199-2 Wage limitation.

(e)* * *

(2)*Limitation on W-2 wages for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.* * * * For further guidance, see § 1.199-2T(e)(2). **Par. 4.** Section 1.199-2T is added to read as follows: 1.199-2T Wage limitation (temporary).

(a)through

(d)[Reserved]. For further guidance, see § 1.199-2(a) through (d).

(e)*Definition of W-2 wages—(1)* *In general.* [Reserved]. For further guidance, see § 1.199-2(e)(1).

(2)*Limitation on W-2 wages for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005* —(i) *In general.* The term *W-2 wages* includes only amounts described in § 1.199-2(e)(1) (paragraph (e)(1) wages) that are properly allocable to domestic production gross receipts

(DPGR)(as defined in § 1.199-3) for purposes of section 199(c)(1). A taxpayer may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances.

(ii)*Wage expense safe harbor* —(A) *In general.* A taxpayer using either the section 861 method of cost allocation under § 1.199-4(d) or the simplified deduction method under § 1.199-4(e) may determine the amount of paragraph (e)(1) wages that is properly allocable to DPGR for a taxable year by multiplying the amount of paragraph (e)(1) wages for the taxable year by the ratio of the taxpayer's wage expense included in calculating qualified production activities income

(QPAI)(as defined in § 1.199-1(c)) for the taxable year to the taxpayer's total wage expense used in calculating the taxpayer's taxable income (or adjusted gross income, if applicable) for the taxable year, without regard to any wage expense disallowed by section 465, 469, 704(d), or 1366(d). A taxpayer that uses the section 861 method of cost allocation under § 1.199-4(d) or the simplified deduction method under § 1.199-4(e) to determine QPAI must use the same expense allocation and apportionment methods that it uses to determine QPAI to allocate and apportion wage expense for purposes of this safe harbor. For purposes of this paragraph (e)(2)(ii), the term *wage expense* means wages (that is, compensation paid by the employer in the active conduct of a trade or business to its employees) that are properly taken into account under the taxpayer's method of accounting.

(B)*Wage expense included in cost of goods sold.* For purposes of paragraph (e)(2)(ii)(A) of this section, a taxpayer may determine its wage expense included in cost of goods sold

(CGS)using any reasonable method that is satisfactory to the Secretary based on all of the facts and circumstances, such as using the amount of direct labor included in CGS or using section 263A labor costs (as defined in § 1.263A-1(h)(4)(ii)) included in CGS.

(iii)*Small business simplified overall method safe harbor.* A taxpayer that uses the small business simplified overall method under § 1.199-4(f) may use the small business simplified overall method safe harbor for determining the amount of paragraph (e)(1) wages that is properly allocable to DPGR. Under this safe harbor, the amount of paragraph (e)(1) wages that is properly allocable to DPGR is equal to the same proportion of paragraph (e)(1) wages that the amount of DPGR bears to the taxpayer's total gross receipts.

(iv)*Examples.* The following examples illustrate the application of this paragraph (e)(2). See § 1.199-5T for an example of the application of paragraph (e)(2)(ii) of this section to a trust or estate. Example 1. *Section 861 method and no EAG.*

(i)*Facts.* X, a United States corporation that is not a member of an expanded affiliated group

(EAG)(as defined in § 1.199-7) or an affiliated group as defined in the regulations under section 861, engages in activities that generate both DPGR and non-DPGR. X's taxable year ends on April 30, 2011. For X's taxable year ending April 30, 2011, X has $3,000 of paragraph (e)(1) wages reported on 2010 Forms W-2. All of X's production activities that generate DPGR are within Standard Industrial Classification

(SIC)Industry Group AAA (SIC AAA). All of X's production activities that generate non-DPGR are within SIC Industry Group BBB (SIC BBB). X is able to specifically identify CGS allocable to DPGR and to non-DPGR. X incurs $900 of research and experimentation expenses (R&E) that are deductible under section 174, $300 of which are performed with respect to SIC AAA and $600 of which are performed with respect to SIC BBB. None of the R&E is legally mandated R&E as described in § 1.861-17(a)(4) and none of the R&E is included in CGS. X incurs section 162 selling expenses that are not includible in CGS and are definitely related to all of X's gross income. For X's taxable year ending April 30, 2011, the adjusted basis of X's assets is $50,000, $40,000 of which generate gross income attributable to DPGR and $10,000 of which generate gross income attributable to non-DPGR. For X's taxable year ending April 30, 2011, the total square footage of X's headquarters is 8,000 square feet, of which 2,000 square feet is set aside for domestic production activities. For its taxable year ending April 30, 2011, X's taxable income is $1,380 based on the following Federal income tax items: DPGR (all from sales of products within SIC AAA) $3,000 Non-DPGR (all from sales of products within SIC BBB) 3,000 CGS allocable to DPGR (includes $200 of wage expense)

(600)CGS allocable to non-DPGR (includes $600 of wage expense) (1,800) Section 162 selling expenses (includes $600 of wage expense)

(840)Section 174 R&E-SIC AAA (includes $100 of wage expense)

(300)Section 174 R&E-SIC BBB (includes $200 of wage expense)

(600)Interest expense (not included in CGS)

(300)Headquarters overhead expense (includes $100 of wage expense)

(180)X's taxable income 1,380

(ii)*X's QPAI.* X allocates and apportions its deductions to gross income attributable to DPGR under the section 861 method in § 1.199-4(d). In this case, the section 162 selling expenses and overhead expense are definitely related to all of X's gross income. Based on the facts and circumstances of this specific case, apportionment of the section 162 selling expenses between DPGR and non-DPGR on the basis of X's gross receipts is appropriate. In addition, based on the facts and circumstances of this specific case, apportionment of the headquarters overhead expense between DPGR and non-DPGR on the basis of the square footage of X's headquarters is appropriate. For purposes of apportioning R&E, X elects to use the sales method as described in § 1.861-17(c). X elects to apportion interest expense under the tax book value method of § 1.861-9T(g). X has $2,400 of gross income attributable to DPGR (DPGR of $3,000—CGS of $600 allocated based on X's books and records). X's QPAI for its taxable year ending April 30, 2011, is $1,395, as shown in the following table: DPGR (all from sales of products within SIC AAA) $3,000 CGS allocable to DPGR

(600)Section 162 selling expenses ($840 × ($3,000 DPGR/$6,000 total gross receipts))

(420)Section 174 R&E-SIC AAA

(300)Interest expense (not included in CGS) ($300 × ($40,000 (X's DPGR assets)/$50,000 (X's total assets)))

(240)Headquarters overhead expense ($180 × (2,000 square feet attributable to DPGR activity/total 8,000 square feet))

(45)X's QPAI 1,395

(iii)*W-2 wages.* X chooses to use the wage expense safe harbor under paragraph (e)(2)(ii) of this section to determine its W-2 wages, as shown in the following steps:

(A)*Step one.* X determines that $625 of wage expense were taken into account in determining its QPAI in paragraph

(ii)of this *Example 1,* as shown in the following table: CGS wage expense $200 Section 162 selling expenses wage expense ($600 × ($3,000 DPGR/$6,000 total gross receipts)) 300 Section 174 R&E-SIC AAA wage expense 100 Headquarters overhead wage expense ($100 × (2,000 square feet attributable to DPGR activity/8,000 total square feet)) 25 Total wage expense taken into account 625

(B)*Step two.* X determines that $1,042 of the $3,000 in paragraph (e)(1) wages are properly allocable to DPGR, and are therefore W-2 wages, as shown in the following calculation: ER19OC06.000a

(iv)*Section 199 deduction determination.* X's tentative deduction under § 1.199-1(a) (section 199 deduction) is $124 (.09 × (lesser of QPAI of $1,395 or taxable income of $1,380)) subject to the wage limitation under section 199(b)(1) (W-2 wage limitation) of $521 (50% × $1,042). Accordingly, X's section 199 deduction for its taxable year ending April 30, 2011, is $124. Example 2. *Section 861 method and EAG.*

(i)*Facts.* The facts are the same as in *Example 1* except that X owns stock in Y, a United States corporation, equal to 75% of the total voting power of stock of Y and 80% of the total value of stock of Y. X and Y are not members of an affiliated group as defined in section 1504(a). Accordingly, the rules of § 1.861-14T do not apply to X's and Y's selling expenses, R&E, and charitable contributions. X and Y are, however, members of an affiliated group for purposes of allocating and apportioning interest expense (see § 1.861-11T(d)(6)) and are also members of an EAG. Y's taxable year ends April 30, 2011. For Y's taxable year ending April 30, 2011, Y has $2,000 of paragraph (e)(1) wages reported on 2010 Forms W-2. For Y's taxable year ending April 30, 2011, the adjusted basis of Y's assets is $50,000, $20,000 of which generate gross income attributable to DPGR and $30,000 of which generate gross income attributable to non-DPGR. All of Y's activities that generate DPGR are within SIC Industry Group AAA (SIC AAA). All of Y's activities that generate non-DPGR are within SIC Industry Group BBB (SIC BBB). None of X's and Y's sales are to each other. Y is not able to specifically identify CGS allocable to DPGR and non-DPGR. In this case, because CGS is definitely related under the facts and circumstances to all of Y's gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is appropriate. For Y's taxable year ending April 30, 2011, the total square footage of Y's headquarters is 8,000 square feet, of which, 2,000 square feet is set aside for domestic production activities. Y incurs section 162 selling expenses that are not includible in CGS and are definitely related to all of Y's gross income. For Y's taxable year ending April 30, 2011, Y's taxable income is $1,710 based on the following Federal income tax items: DPGR (all from sales of products within SIC AAA) $3,000 Non-DPGR (all from sales of products within SIC BBB) 3,000 CGS allocated to DPGR (includes $300 of wage expense) (1,200) CGS allocated to non-DPGR (includes $300 of wage expense) (1,200) Section 162 selling expenses (includes $300 of wage expense)

(840)Section 174 R&E-SIC AAA (includes $20 of wage expense)

(100)Section 174 R&E-SIC BBB (includes $60 of wage expense)

(200)Interest expense (not included in CGS and not subject to § 1.861-10T)

(500)Charitable contributions

(50)Headquarters overhead expense (includes $40 of wage expense)

(200)Y's taxable income 1,710

(ii)*QPAI.*

(A)*X's QPAI.* Determination of X's QPAI is the same as in *Example 1* except that interest is apportioned to gross income attributable to DPGR based on the combined adjusted bases of X's and Y's assets. See § 1.861-11T(c). Accordingly, X's QPAI for its taxable year ending April 30, 2011, is $1,455, as shown in the following table: DPGR (all from sales of products within SIC AAA) $3,000 CGS allocated to DPGR

(600)Section 162 selling expenses ($840 × ($3,000 DPGR/$6,000 total gross receipts))

(420)Section 174 R&E-SIC AAA

(300)Interest expense (not included in CGS and not subject to § 1.861-10T) ($300 × ($60,000 (tax book value of X's and Y's DPGR assets)/$100,000 (tax book value of X's and Y's total assets)))

(180)Headquarters overhead expense ($180 × (2,000 square feet attributable to DPGR activity/total 8,000 square feet))

(45)X's QPAI 1,455

(B)*Y's QPAI.* Y makes the same elections under the section 861 method as does X. Y has $1,800 of gross income attributable to DPGR (DPGR of $3,000—CGS of $1,200 allocated based on Y's gross receipts). Y's QPAI for its taxable year ending April 30, 2011, is $905, as shown in the following table: DPGR (all from sales of products within SIC AAA) $3,000 CGS allocated to DPGR (1,200) Section 162 selling expenses ($840 × ($3,000 DPGR/$6,000 total gross receipts))

(420)Section 174 R&E-SIC AAA

(100)Interest expense (not included in CGS and not subject to § 1.861-10T) ($500 × ($60,000 (tax book value of X's and Y's DPGR assets)/$100,000 (tax book value of X's and Y's total assets)))

(300)Charitable contributions (not included in CGS) ($50 × ($1,800 gross income attributable to DPGR/$3,600 total gross income))

(25)Headquarters overhead expense ($200 × (2,000 square feet attributable to DPGR activity/total 8,000 square feet))

(50)Y's QPAI 905

(iii)*W-2 wages.*

(A)*X's W-2 wages.* X's W-2 wages are $1,042, the same as in Example 1.

(B)*Y's W-2 wages.* Y chooses to use the wage expense safe harbor under paragraph (e)(2)(ii) of this section to determine its W-2 wages, as shown in the following steps: ( *1* ) *Step one.* Y determines that $480 of wage expense were taken into account in determining its QPAI in paragraph (ii)(B) of this *Example 2,* as shown in the following table: CGS wage expense $300 Section 162 selling expenses wage expense ($300 × ($3,000 DPGR/$6,000 total gross receipts)) 150 Section 174 R&E-SIC AAA wage expense 20 Headquarters overhead wage expense ($40 × (2,000 square feet attributable to DPGR activity/8,000 total square feet)) 10 Total wage expense taken into account 480 ( *2* ) *Step two.* Y determines that $941 of the $2,000 paragraph (e)(1) wages are properly allocable to DPGR, and are therefore W-2 wages, as shown in the following calculation: ER19OC06.001a

(iv)*Section 199 deduction determination.* The section 199 deduction of the X and Y EAG is determined by aggregating the separately determined taxable income, QPAI, and W-2 wages of X and Y. See § 1.199-7(b). Accordingly, the X and Y EAG's tentative section 199 deduction is $212 (.09 × (lesser of combined QPAI of X and Y of $2,360 (X's QPAI of $1,455 plus Y's QPAI of $905) or combined taxable incomes of X and Y of $3,090 (X's taxable income of $1,380 plus Y's taxable income of $1,710)) subject to the combined W-2 wage limitation of X and Y of $992 (50% × ($1,042 (X's W-2 wages) + $941 (Y's W-2 wages)))). Accordingly, the X and Y EAG's section 199 deduction is $212. The $212 is allocated to X and Y in proportion to their QPAI. See § 1.199-7(c). Example 3. *Simplified deduction method.*

(i)*Facts.* Z, a corporation that is not a member of an EAG, engages in activities that generate both DPGR and non-DPGR. Z is able to specifically identify CGS allocable to DPGR and to non-DPGR. Z's taxable year ends on April 30, 2011. For Z's taxable year ending April 30, 2011, Z has $3,000 of paragraph (e)(1) wages reported on 2010 Forms W-2, and Z's taxable income is $1,380 based on the following Federal income tax items: DPGR $3,000 Non-DPGR 3,000 CGS allocable to DPGR (includes $200 of wage expense)

(600)CGS allocable to non-DPGR (includes $600 of wage expense) (1,800) Expenses, losses, or deductions (deductions) (includes $1,000 of wage expense) (2,220) Z's taxable income 1,380

(ii)*Z's QPAI.* Z uses the simplified deduction method under § 1.199-4(e) to apportion deductions between DPGR and non-DPGR. Z's QPAI for its taxable year ending April 30, 2011, is $1,290, as shown in the following table: DPGR $3,000 CGS allocable to DPGR

(600)Deductions apportioned to DPGR ($2,220 × ($3,000 DPGR/$6,000 total gross receipts)) (1,110) Z's QPAI 1,290

(iii)*W-2 wages.* Z chooses to use the wage expense safe harbor under paragraph (e)(2)(ii) of this section to determine its W-2 wages, as shown in the following steps:

(A)*Step one.* Z determines that $700 of wage expense were taken into account in determining its QPAI in paragraph

(ii)of this *Example 3,* as shown in the following table: Wage expense included in CGS allocable to DPGR $200 Wage expense included in deductions ($1,000 in wage expense × ($3,000 DPGR/$6,000 total gross receipts)) 500 Wage expense allocable to DPGR 700

(B)*Step two.* Z determines that $1,167 of the $3,000 paragraph (e)(1) wages are properly allocable to DPGR, and are therefore W-2 wages, as shown in the following calculation: ER19OC06.002a

(iv)*Section 199 deduction determination.* Z's tentative section 199 deduction is $116 (.09 × (lesser of QPAI of $1,290 or taxable income of $1,380)) subject to the W-2 wage limitation of $584 (50% × $1,167). Accordingly, Z's section 199 deduction for its taxable year ending April 30, 2011, is $116. Example 4. *Small business simplified overall method.*

(i)*Facts.* Z, a corporation that is not a member of an EAG, engages in activities that generate both DPGR and non-DPGR. Z's taxable year ends on April 30, 2011. For Z's taxable year ending April 30, 2011, Z has $3,000 of paragraph (e)(1) wages reported on 2010 Forms W-2, and Z's taxable income is $1,380 based on the following Federal income tax items: DPGR $3,000 Non-DPGR 3,000 CGS and deductions (4,620) Z's taxable income 1,380

(ii)*Z's QPAI.* Z uses the small business simplified overall method under § 1.199-4(f) to apportion CGS and deductions between DPGR and non-DPGR. Z's QPAI for its taxable year ending April 30, 2011, is $690, as shown in the following table: DPGR $3,000 CGS and deductions apportioned to DPGR ($4,620 × ($3,000 DPGR/$6,000 total gross receipts)) (2,310) Z's QPAI 690

(iii)*W-2 wages.* Z's W-2 wages under paragraph (e)(2)(iii) of this section are $1,500, as shown in the following calculation: $3,000 in paragraph (e)(1) wages × ($3,000 DPGR/$6,000 total gross receipts)—$1,500

(iv)*Section 199 deduction determination.* Z's tentative section 199 deduction is $62 (.09 × (lesser of QPAI of $690 or taxable income of $1,380)) subject to the W-2 wage limitation of $750 (50% × $1,500). Accordingly, Z's section 199 deduction for its taxable year ending April 30, 2011, is $62. Example 5. *Corporation uses employees of non-consolidated EAG member.*

(i)*Facts.* Corporations S and B are members of the same EAG but are not members of a consolidated group. S and B are both calendar year taxpayers. All the activities described in this example take place during the same taxable year and they are the only activities of S and B. S and B each use the section 861 method described in § 1.199-4(d) for allocating and apportioning their deductions. B is a manufacturer but has only three employees of its own. S employs the remainder of the personnel who perform the manufacturing activities for B. S's only receipts are from supplying employees to B. In 2010, B manufactures qualifying production property

(QPP)(as defined in § 1.199-3(j)(1)), using its three employees and S's employees, and sells the QPP for $10,000,000. B's total CGS and other deductions are $6,000,000, including $1,000,000 paid to S for the use of S's employees and $100,000 paid to its own employees. B reports the $100,000 paid to its employees on the 2010 Forms W-2 issued to its employees. S pays its employees $800,000 that is reported on the 2010 Forms W-2 issued to the employees.

(ii)*B's W-2 wages.* In determining its W-2 wages, B utilizes the wage expense safe harbor described in paragraph (e)(2)(ii) of this section. The entire $100,000 paid by B to its employees is included in B's wage expense included in calculating its QPAI and is the only wage expense used in calculating B's taxable income. Thus, under the wage expense safe harbor described in paragraph (e)(2)(ii) of this section, B's W-2 wages are $100,000 ($100,000 (paragraph (e)(1) wages) x ($100,000 (wage expense used in calculating B's QPAI)/$100,000 (wage expense used in calculating B's taxable income))).

(iii)*S's W-2 wages.* In determining its W-2 wages, S utilizes the wage expense safe harbor described in paragraph (e)(2)(ii) of this section. Because S's $1,000,000 in receipts from B do not qualify as DPGR and are S's only gross receipts, none of the $800,000 paid by S to its employees is included in S's wage expense included in calculating its QPAI. However, the entire $800,000 is included in calculating S's taxable income. Thus, under the wage expense safe harbor described in paragraph (e)(2)(ii)(A) of this section, S's W-2 wages are $0 ($800,000 (paragraph (e)(1) wages) × ($0 (wage expense used in calculating S's QPAI)/$800,000 (wage expense used in calculating S's taxable income))).

(iv)*Determination of EAG's section 199 deduction.* The section 199 deduction of the S and B EAG is determined by aggregating the separately determined taxable income or loss, QPAI, and W-2 wages of S and B. See § 1.199-7(b). B's taxable income and QPAI are each $4,000,000 ($10,000,000 DPGR−$6,000,000 CGS and other deductions). S's taxable income is $200,000 ($1,000,000 gross receipts−$800,000 total deductions). S's QPAI is $0 ($0 DPGR−$0 CGS and other deductions). B's W-2 wages (as calculated in paragraph

(ii)of this *Example 5* ) are $100,000 and S's W-2 wages (as calculated in paragraph

(iii)of this *Example 5* ) are $0. The EAG's tentative section 199 deduction is $360,000 (.09 × (lesser of combined QPAI of $4,000,000 (B's QPAI of $4,000,000 + S's QPAI of $0) or combined taxable income of $4,200,000 (B's taxable income of $4,000,000 + S's taxable income of $200,000)) subject to the W-2 wage limitation of $50,000 (50% × ($100,000 (B's W-2 wages) + $0 (S's W-2 wages))). Accordingly, the S and B EAG's section 199 deduction for 2010 is $50,000. The $50,000 is allocated to S and B in proportion to their QPAI. See § 1.199-7(c). Because S has no QPAI, the entire $50,000 is allocated to B. Example 6. *Corporation using employees of consolidated EAG member* . The facts are the same as in *Example 5* except that B and S are members of the same consolidated group. Ordinarily, as demonstrated in *Example 5* , S's $1,000,000 of receipts would not be DPGR and its $800,000 paid to its employees would not be W-2 wages (because the $800,000 would not be properly allocable to DPGR). However, because S and B are members of the same consolidated group, § 1.1502-13(c)(1)(i) provides that the separate entity attributes of S's intercompany items or B's corresponding items, or both, may be redetermined in order to produce the same effect as if S and B were divisions of a single corporation. If S and B were divisions of a single corporation, S and B would have QPAI and taxable income of $4,200,000 ($10,000,000 DPGR received from the sale of the QPP—$5,800,000 CGS and other deductions) and, under the wage expense safe harbor described in paragraph (e)(2)(ii) of this section, would have $900,000 of W-2 wages ($900,000 combined paragraph (e)(1) wages of S and B) × ($900,000 (wage expense used in calculating QPAI)/$900,000 (wage expense used in calculating taxable income)). The single corporation would have a tentative section 199 deduction equal to 9% of $4,200,000, or $378,000, subject to the W-2 wage limitation of 50% of $900,000, or $450,000. Thus, the single corporation would have a section 199 deduction of $378,000. To obtain this same result for the consolidated group, S's $1,000,000 of receipts from the intercompany transaction are redetermined as DPGR. Thus, S's $800,000 paid to its employees are costs properly allocable to DPGR and S's W-2 wages are $800,000. Accordingly, the consolidated group has QPAI and taxable income of $4,200,000 ($11,000,000 DPGR (from the sale of the QPP and the redetermined intercompany transaction)—$6,800,000 CGS and other deductions) and W-2 wages of $900,000. The consolidated group's section 199 deduction is $378,000, the same as the single corporation. However, for purposes of allocating the section 199 deduction between S and B, the redetermination of S's income as DPGR under § 1.1502-13(c)(1)(i) is not taken into account. See § 1.199-7(d)(5). Accordingly, the consolidated group's entire section 199 deduction of $378,000 is allocated to B. **Par. 5.** Section 1.199-3 is amended by adding a sentence at the end of each of paragraphs (i)(7) and

(8)to read as follows: § 1.199-3 Domestic production gross receipts.

(i)* * *

(7)*Qualifying in-kind partnership for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.* * * * For further guidance, see § 1.199-3T(i)(7).

(8)*Partnerships owned by members of a single expanded affiliated group for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005.* * * * For further guidance, see § 1.199-3T(i)(8). **Par. 6.** Section 1.199-3T is amended by adding paragraphs (i)(7) and

(8)to read as follows: § 1.199-3T Domestic production gross receipts (temporary).

(i)* * *

(7)* Qualifying in-kind partnership for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005 * —(i) *In general.* If a partnership is a qualifying in-kind partnership described in paragraph (i)(7)(ii) of this section, then each partner is treated as having manufactured, produced, grown, or extracted

(MPGE)(as defined in § 1.199-3(e)) or produced the property MPGE or produced by the partnership that is distributed to that partner. If a partner of a qualifying in-kind partnership derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of the property that was MPGE or produced by the qualifying in-kind partnership and distributed to that partner, then, provided such partner is a partner of the qualifying in-kind partnership at the time the partner disposes of the property, the partner is treated as conducting the MPGE or production activities previously conducted by the qualifying in-kind partnership with respect to that property. With respect to a lease, rental, or license, the partner is treated as having disposed of the property on the date or dates on which it takes into account its gross receipts derived from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the partner is treated as having disposed of the property on the date it ceases to own the property for Federal income tax purposes, even if no gain or loss is taken into account.

(ii)*Definition of qualifying in-kind partnership.* For purposes of this paragraph (i)(7), a qualifying in-kind partnership is a partnership engaged solely in—

(A)The extraction, refining, or processing of oil, natural gas (as described in § 1.199-3(l)(2)), petrochemicals, or products derived from oil, natural gas, or petrochemicals in whole or in significant part within the United States;

(B)The production or generation of electricity in the United States; or

(C)An activity or industry designated by the Secretary by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter).

(iii)*Other rules.* Except as provided in this paragraph (i)(7), a qualifying in-kind partnership is treated the same as other partnerships for purposes of section 199. Accordingly, a qualifying in-kind partnership is subject to the rules of this section regarding the application of section 199 to pass-thru entities, including application of the section 199(d)(1)(A)(iii) wage limitation under § 1.199-5T(b)(3). In determining whether a qualifying in-kind partnership or its partners MPGE qualifying production property

(QPP)(as defined in § 1.199-3(j)) in whole or in significant part within the United States (as defined in § 1.199-3(h)), see § 1.199-3(g)(2) and (3).

(iv)*Example.* The following example illustrates the application of this paragraph (i)(7). Assume that PRS and X are calendar year taxpayers. Example. X, Y and Z are partners in PRS, a qualifying in-kind partnership described in paragraph (i)(7)(ii) of this section. X, Y, and Z are corporations. In 2007, PRS distributes oil to X that PRS derived from its oil extraction. PRS incurred $600 of CGS extracting the oil distributed to X, and X's adjusted basis in the distributed oil is $600. X incurs $200 of CGS in refining the oil within the United States. In 2007, X, while it is a partner in PRS, sells the oil to a customer for $1,500. X is treated as having disposed of the property on the date it ceases to own the property for Federal income tax purposes. Under paragraph (i)(7)(i) of this section, X is treated as having extracted the oil. The extraction and refining of the oil qualify as an MPGE activity under § 1.199-3(e)(1). Therefore, X's $1,500 of gross receipts qualify as DPGR. X subtracts from the $1,500 of DPGR the $600 of CGS incurred by PRS and the $200 of refining costs it incurred. Thus, X's QPAI is $700 for 2007.

(8)*Partnerships owned by members of a single expanded affiliated group for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005* —(i) *In general.* For purposes of this section, if all of the interests in the capital and profits of a partnership are owned by members of a single expanded affiliated group

(EAG)at all times during the taxable year of the partnership (EAG partnership), then the EAG partnership and all members of that EAG are treated as a single taxpayer for purposes of section 199(c)(4) during that taxable year.

(ii)*Attribution of activities* —(A) *In general.* If a member of an EAG (disposing member) derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by an EAG partnership, all the partners of which are members of the same EAG to which the disposing member belongs at the time that the disposing member disposes of such property, then the disposing member is treated as conducting the MPGE or production activities previously conducted by the EAG partnership with respect to that property. The previous sentence applies only for those taxable years in which the disposing member is a member of the EAG of which all the partners of the EAG partnership are members for the entire taxable year of the EAG partnership. With respect to a lease, rental, or license, the disposing member is treated as having disposed of the property on the date or dates on which it takes into account its gross receipts from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the disposing member is treated as having disposed of the property on the date it ceases to own the property for Federal income tax purposes, even if no gain or loss is taken into account. Likewise, if an EAG partnership derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by a member (or members) of the same EAG (the producing member) to which all the partners of the EAG partnership belong at the time that the EAG partnership disposes of such property, then the EAG partnership is treated as conducting the MPGE or production activities previously conducted by the producing member with respect to that property. The previous sentence applies only for those taxable years in which the producing member is a member of the EAG of which all the partners of the EAG partnership are members for the entire taxable year of the EAG partnership. With respect to a lease, rental, or license, the EAG partnership is treated as having disposed of the property on the date or dates on which it takes into account its gross receipts derived from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the EAG partnership is treated as having disposed of the property on the date it ceases to own the property for Federal income tax purposes, even if no gain or loss is taken into account. See paragraph (i)(8)(iv) *Example 3* of this section.

(B)*Attribution between EAG partnerships.* If an EAG partnership (disposing partnership) derives gross receipts from the lease, rental, license, sale, exchange, or other disposition of property that was MPGE or produced by another EAG partnership (producing partnership), then the disposing partnership is treated as conducting the MPGE or production activities previously conducted by the producing partnership with respect to that property, provided that each of these partnerships (the producing partnership and the disposing partnership) is owned for its entire taxable year in which the disposing partnership disposes of such property by members of the same EAG. With respect to a lease, rental, or license, the disposing partnership is treated as having disposed of the property on the date or dates on which it takes into account its gross receipts from the lease, rental, or license under its method of accounting. With respect to a sale, exchange, or other disposition, the disposing partnership is treated as having disposed of the property on the date it ceases to own the property for Federal income tax purposes, even if no gain or loss is taken into account.

(C)*Exceptions to attribution.* Attribution of activities does not apply for purposes of the construction of real property under § 1.199-3(m)(1) and the performance of engineering and architectural services under § 1.199-3(n)(2) and (3), respectively.

(iii)*Other rules.* Except as provided in this paragraph (i)(8), an EAG partnership is treated the same as other partnerships for purposes of section 199. Accordingly, an EAG partnership is subject to the rules of this section regarding the application of section 199 to pass-thru entities, including the section 199(d)(1)(A)(iii) wage limitation under § 1.199-5T(b)(3). In determining whether a member of an EAG or an EAG partnership MPGE QPP in whole or in significant part within the United States or produced a qualified film or produced utilities within the United States, see § 1.199-3(g)(2) and

(3)and *Example 5* of paragraph (i)(8)(iv) of this section.

(iv)*Examples.* The following examples illustrate the rules of this paragraph (i)(8). Assume that PRS, X, Y, and Z all are calendar year taxpayers. Example 1. *Contribution.* X and Y are the only partners in PRS, a partnership, for PRS's entire 2007 taxable year. X and Y are both members of a single EAG for the entire 2007 year. In 2007, X MPGE QPP within the United States and contributes the QPP to PRS. In 2007, PRS sells the QPP for $1,000. Under this paragraph (i)(8), PRS is treated as having MPGE the QPP within the United States, and PRS's $1,000 gross receipts constitute DPGR. PRS, X, and Y must apply the rules of this section regarding the application of section 199 to pass-thru entities with respect to the activity of PRS, including the section 199(d)(1)(A)(iii) wage limitation under § 1.199-5T(b)(3). Example 2. *Sale.* X, Y, and Z are the only members of a single EAG for the entire 2007 year. X and Y each own 50% of the capital and profits interests in PRS, a partnership, for PRS's entire 2007 taxable year. In 2007, PRS MPGE QPP within the United States and then sells the QPP to X for $6,000, its fair market value at the time of the sale. PRS's gross receipts of $6,000 qualify as DPGR. In 2007, X sells the QPP to customers for $10,000, incurring selling expenses of $2,000. Under paragraph (i)(8)(ii)(A) of this section, X is treated as having MPGE the QPP within the United States, and X's $10,000 of gross receipts qualify as DPGR. PRS, X and Y must apply the rules of this section regarding the application of section 199 to pass-thru entities with respect to the activity of PRS, including application of the section 199(d)(1)(A)(iii) wage limitation under § 1.199-5T(b)(3). The results would be the same if PRS sold the QPP to Z rather than to X. However, if PRS did sell the QPP to Z, and Z was not a member of the EAG for PRS's entire taxable year, the activities previously conducted by PRS with respect to the QPP would not be attributed to Z, and none of Z's $10,000 of gross receipts would qualify as DPGR. Example 3. *Lease.* X, Y, and Z are the only members of a single EAG for the entire 2007 year. X and Y each own 50% of the capital and profits interests in PRS, a partnership, for PRS's entire 2007 taxable year. In 2007, PRS MPGE QPP within the United States and then sells the QPP to X for $6,000, its fair market value at the time of the sale. PRS's gross receipts of $6,000 qualify as DPGR. In 2007, X rents the QPP it acquired from PRS to customers unrelated to X. X takes the gross receipts attributable to the rental of the QPP into account under its method of accounting in 2007 and 2008. On July 1, 2008, X ceases to be a member of the same EAG to which Y, the other partner in PRS, belongs. For 2007, X is treated as having MPGE the QPP within the United States under paragraph (i)(8)(ii)(A) of this section, and its gross receipts derived from the rental of the QPP qualify as DPGR. For 2008, however, because X and Y, partners in PRS, are no longer members of the same EAG for the entire year, the gross rental receipts X takes into account in 2008 do not qualify as DPGR. Example 4. *Distribution.* X and Y are the only partners in PRS, a partnership, for PRS's entire 2007 taxable year. X and Y are both members of a single EAG for the entire 2007 year. In 2007, PRS MPGE QPP within the United States, incurring $600 of CGS, and then distributes the QPP to X. X's adjusted basis in the QPP is $600. X incurs $200 of directly allocable costs to further MPGE the QPP within the United States. In 2007, X sells the QPP for $1,500 to an unrelated customer. X is treated as having disposed of the QPP on the date it ceases to own the QPP for Federal income tax purposes. Under paragraph (i)(8)(ii)(A) of this section, X is treated as having MPGE the QPP within the United States, and X's $1,500 of gross receipts qualify as DPGR. Example 5. *Multiple sales.*

(i)*Facts.* X and Y are the only partners in PRS, a partnership, for PRS's entire 2007 taxable year. X and Y are both non-consolidated members of a single EAG for the entire 2007 year. PRS produces in bulk form in the United States the active ingredient for a drug. Assume that PRS's own MPGE activity with respect to the active ingredient is not substantial in nature, taking into account all of the facts and circumstances, and PRS's direct labor and overhead to MPGE the active ingredient within the United States are $15 and account for 15% of PRS's $100 CGS of the active ingredient. In 2007, PRS sells the active ingredient in bulk form to X. X uses the active ingredient to produce the finished dosage form drug. Assume that X's own MPGE activity with respect to the drug is not substantial in nature, taking into account all of the facts and circumstances, and X's direct labor and overhead to MPGE the drug within the United States are $12 and account for 10% of X's $120 CGS of the drug. In 2007, X sells the drug in finished dosage to Y and Y sells the drug to customers. Assume that Y's own MPGE activity with respect to the drug is not substantial in nature, taking into account all of the facts and circumstances, and Y incurs $2 of direct labor and overhead and Y's CGS in selling the drug to customers is $130.

(ii)*Analysis.* PRS's gross receipts from the sale of the active ingredient to X are non-DPGR because PRS's MPGE activity is not substantial in nature and PRS does not satisfy the safe harbor described in § 1.199-3(g)(3) because PRS's direct labor and overhead account for less than 20% of PRS's CGS of the active ingredient. X's gross receipts from the sale of the drug to Y are DPGR because X is considered to have MPGE the drug in significant part in the United States pursuant to the safe harbor described in § 1.199-3(g)(3) because the $27 ($15 + $12) of direct labor and overhead incurred by PRS and X equals or exceeds 20% of X's total CGS ($120) of the drug at the time X disposes of the drug to Y. Similarly, Y's gross receipts from the sale of the drug to customers are DPGR because Y is considered to have MPGE the drug in significant part in the United States pursuant to the safe harbor described in § 1.199-3(g)(3) because the $29 ($15 + $12 + $2) of direct labor and overhead incurred by PRS, X, and Y equals or exceeds 20% of Y's total CGS ($130) of the drug at the time Y disposes of the drug to Y's customers. **Par. 7.** Section 1.199-5 is amended by adding a sentence at the end to read as follows: § 1.199-5 Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005. * * * For further guidance, see § 1.199-5T. **Par. 8.** Section 1.199-5T is added to read as follows: § 1.199-5T Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005 (temporary).

(a)*In general.* The provisions of this section apply solely for purposes of section 199 of the Internal Revenue Code (Code).

(b)*Partnerships* —(1) *In general* —(i) *Determination at partner level.* The deduction with respect to the qualified production activities of the partnership allowable under § 1.199-1(a) (section 199 deduction) is determined at the partner level. As a result, each partner must compute its deduction separately. The section 199 deduction has no effect on the adjusted basis of the partner's interest in the partnership. Except as provided by publication pursuant to paragraph (b)(1)(ii) of this section, for purposes of this section, each partner is allocated, in accordance with sections 702 and 704, its share of partnership items (including items of income, gain, loss, and deduction), cost of goods sold

(CGS)allocated to such items of income, and gross receipts that are included in such items of income, even if the partner's share of CGS and other deductions and losses exceeds domestic production gross receipts

(DPGR)(as defined in § 1.199-3(a)). A partnership may specially allocate items of income, gain, loss, or deduction to its partners, subject to the rules of section 704(b) and the supporting regulations. Guaranteed payments under section 707(c) are not considered allocations of partnership income for purposes of this section. Guaranteed payments under section 707(c) are deductions by the partnership that must be taken into account under the rules of § 1.199-4. See § 1.199-3(p) and paragraph (b)(6) *Example 5* of this section. Except as provided in paragraph (b)(1)(ii) of this section, to determine its section 199 deduction for the taxable year, a partner aggregates its distributive share of such items, to the extent they are not otherwise disallowed by the Code, with those items it incurs outside the partnership (whether directly or indirectly) for purposes of allocating and apportioning deductions to DPGR and computing its qualified production activities income

(QPAI)(as defined in § 1.199-1(c)).

(ii)*Determination at entity level.* The Secretary may, by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), permit a partnership to calculate a partner's share of QPAI and W-2 wages as defined in § 1.199-2T(e)(2) (W-2 wages) at the entity level, instead of allocating to the partner, in accordance with sections 702 and 704, the partner's share of partnership items (including items of income, gain, loss, and deduction) and amounts described in § 1.199-2(e)(1) (paragraph (e)(1) wages). If a partnership does calculate QPAI at the entity level—

(A)Each partner is allocated its share of QPAI (subject to the limitations of paragraph (b)(2) of this section) and W-2 wages from the partnership, which are combined with the partner's QPAI and W-2 wages from other sources, if any;

(B)For purposes of computing QPAI under §§ 1.199-1 through 1.199-8, a partner does not take into account the items from the partnership (for example, a partner does not take into account items from the partnership in determining whether a threshold or de minimis rule applies or in allocating and apportioning deductions in calculating its QPAI from other sources);

(C)A partner generally does not recompute its share of QPAI from the partnership using another method; however, the partner might have to adjust its share of QPAI from the partnership to take into account certain disallowed losses or deductions, or the allowance of suspended losses or deductions; and

(D)A partner's distributive share of QPAI from a partnership may be less than zero.

(2)*Disallowed losses or deductions.* Except as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), losses or deductions of a partnership are taken into account in computing the partner's section 199 deduction for a taxable year only if, and to the extent that, the partner's distributive share of those losses or deductions from all of the partnership's activities is not disallowed by section 465, 469, or 704(d), or any other provision of the Code. If only a portion of the partner's distributive share of the losses or deductions from a partnership is allowed for a taxable year, a proportionate share of those allowable losses or deductions that are allocated to the partnership's qualified production activities, determined in a manner consistent with sections 465, 469, and 704(d), and any other applicable provision of the Code, is taken into account in computing QPAI for that taxable year. To the extent that any of the disallowed losses or deductions are allowed in a later taxable year under section 465, 469, or 704(d), or any other provision of the Code, the partner takes into account a proportionate share of those allowed losses or deductions that are allocated to the partnership's qualified production activities in computing the partner's QPAI for that later taxable year. Losses or deductions of the partnership that are disallowed for taxable years beginning on or before December 31, 2004, are not taken into account in a later taxable year for purposes of computing the partner's QPAI for that later taxable year, whether or not the losses or deductions are allowed for other purposes.

(3)*Partner's share of paragraph (e)(1) wages.* Under section 199(d)(1)(A)(iii), a partner's share of paragraph (e)(1) wages of a partnership for purposes of determining the partner's wage limitation under section 199(b)(1) (W-2 wage limitation) equals the partner's allocable share of those wages. Except as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), the partnership must allocate the amount of paragraph (e)(1) wages among the partners in the same manner it allocates wage expense among those partners. The partner must add its share of the paragraph (e)(1) wages from the partnership to the partner's paragraph (e)(1) wages from other sources, if any. The partner (other than a partner that itself is a partnership or S corporation) then must calculate its W-2 wages by determining the amount of the partner's total paragraph (e)(1) wages properly allocable to DPGR. If the partner is a partnership or S corporation, the partner must allocate its paragraph (e)(1) wages (including the paragraph (e)(1) wages from a lower-tier partnership) among its partners or shareholders in the same manner it allocates wage expense among those partners or shareholders. See § 1.199-2T(e)(2) for the computation of W-2 wages and for the proper allocation of any such wages to DPGR.

(4)*Transition rule for definition of W-2 wages and for W-2 wage limitation.* If a partnership and any partner in that partnership have different taxable years, only one of which begins on or before May 17, 2006, the definition of W-2 wages of the partnership and the section 199(d)(1)(A)(iii) limitation on W-2 wages from that partnership is determined under the law applicable to partnerships based on the beginning date of the partnership's taxable year. Thus, for example, for the taxable year of a partnership beginning on or before May 17, 2006, a partner's share of W-2 wages from the partnership is determined under section 199(d)(1)(A)(iii) as in effect for taxable years beginning on or before May 17, 2006, even if the taxable year of that partner in which those wages are taken into account begins after May 17, 2006.

(5)*Partnerships electing out of subchapter K.* For purposes of §§ 1.199-1 through 1.199-8, the rules of paragraph

(b)of this section apply to all partnerships, including those partnerships electing under section 761(a) to be excluded, in whole or in part, from the application of subchapter K of chapter 1 of the Code.

(6)*Examples.* The following examples illustrate the application of this paragraph (b). Assume that each partner has sufficient adjusted gross income or taxable income so that the section 199 deduction is not limited under section 199(a)(1)(B). Assume also that the partnership and each of its partners (whether individual or corporate) are calendar year taxpayers. Example 1. *Section 861 method with interest expense.*

(i)*Partnership Federal income tax items.* X and Y, unrelated United States corporations, are each 50% partners in PRS, a partnership that engages in production activities that generate both DPGR and non-DPGR. X and Y share all items of income, gain, loss, deduction, and credit equally. Both X and Y are engaged in a trade or business. PRS is not able to identify from its books and records CGS allocable to DPGR and non-DPGR. In this case, because CGS is definitely related under the facts and circumstances to all of PRS's gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is appropriate. For 2010, the adjusted basis of PRS's business assets is $5,000, $4,000 of which generate gross income attributable to DPGR and $1,000 of which generate gross income attributable to non-DPGR. For 2010, PRS has the following Federal income tax items: DPGR $3,000 Non-DPGR 3,000 CGS 3,240 Section 162 selling expenses 1,200 Interest expense (not included in CGS) 300

(ii)*Allocation of PRS's Federal income tax items.* X and Y each receive the following distributive share of PRS's Federal income tax items, as determined under the principles of § 1.704-1(b)(1)(vii): Gross income attributable to DPGR ($1,500 (DPGR)—$810 (allocable CGS)) $690 Gross income attributable to non-DPGR ($1,500 (non-DPGR)—$810 (allocable CGS)) 690 Section 162 selling expenses 600 Interest expense (not included in CGS) 150

(iii)*Determination of QPAI.*

(A)*X's QPAI.* Because the section 199 deduction is determined at the partner level, X determines its QPAI by aggregating its distributive share of PRS's Federal income tax items with all other such items from all other, non-PRS-related activities. For 2010, X does not have any other such items. For 2010, the adjusted basis of X's non-PRS assets, all of which are investment assets, is $10,000. X's only gross receipts for 2010 are those attributable to the allocation of gross income from PRS. X allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of § 1.199-4(d). In this case, the section 162 selling expenses are not included in CGS and are definitely related to all of PRS's gross income. Based on the facts and circumstances of this specific case, apportionment of those expenses between DPGR and non-DPGR on the basis of PRS's gross receipts is appropriate. X elects to apportion its distributive share of interest expense under the tax book value method of § 1.861-9T(g). X's QPAI for 2010 is $366, as shown in the following table: DPGR $1,500 CGS allocable to DPGR

(810)Section 162 selling expenses ($600 × ($1,500 DPGR/$3,000 total gross receipts))

(300)Interest expense (not included in CGS) ($150 × ($2,000 (X's share of PRS's DPGR assets)/$12,500 (X's non-PRS assets ($10,000) + X's share of PRS assets ($2,500))))

(24)X's QPAI 366

(B)*Y's QPAI.* ( *1* ) For 2010, in addition to the activities of PRS, Y engages in production activities that generate both DPGR and non-DPGR. Y is able to identify from its books and records CGS allocable to DPGR and to non-DPGR. For 2010, the adjusted basis of Y's non-PRS assets attributable to its production activities that generate DPGR is $8,000 and to other production activities that generate non-DPGR is $2,000. Y has no other assets. Y has the following Federal income tax items relating to its non-PRS activities: Gross income attributable to DPGR ($1,500 (DPGR)—$900 (allocableCGS)) $600 Gross income attributable to non-DPGR ($3,000 (other gross receipts)—$1,620 (allocable CGS)) 1,380 Section 162 selling expenses 540 Interest expense (not included in CGS) 90 ( *2* ) Y determines its QPAI in the same general manner as X. However, because Y has other trade or business activities outside of PRS, Y must aggregate its distributive share of PRS's Federal income tax items with its own such items. Y allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of § 1.199-4(d). In this case, Y's distributive share of PRS's section 162 selling expenses, as well as those selling expenses from Y's non-PRS activities, are definitely related to all of its gross income. Based on the facts and circumstances of this specific case, apportionment of those expenses between DPGR and non-DPGR on the basis of Y's gross receipts (including Y's share of PRS's gross receipts) is appropriate. Y elects to apportion its distributive share of interest expense under the tax book value method of § 1.861-9T(g). Y has $1,290 of gross income attributable to DPGR ($3,000 DPGR ($1,500 from PRS and $1,500 from non-PRS activities)—$1,710 CGS ($810 from PRS and $900 from non-PRS activities)). Y's QPAI for 2010 is $642, as shown in the following table: DPGR ($1,500 from PRS and $1,500 from non-PRS activities) $3,000 CGS allocable to DPGR ($810 from PRS and $900 from non-PRS activities) (1,710) Section 162 selling expenses ($1,140 ($600 from PRS and $540 from non-PRS activities) × $3,000 ($1,500 PRS DPGR + $1,500 non-PRS DPGR)/ $7,500 ($3,000 PRS total gross receipts + $4,500 non-PRS total gross receipts))

(456)Interest expense (not included in CGS) ($240 ($150 from PRS and $90 from non-PRS activities) × $10,000 (Y's non-PRS DPGR assets ($8,000) + Y's share of PRS DPGR assets ($2,000))/$12,500 (Y's non-PRS assets ($10,000) + Y's share of PRS assets ($2,500)))

(192)Y's QPAI 642

(iv)*Determination of section 199 deduction.* X's tentative section 199 deduction is $33 (.09 x $366, that is, QPAI determined at the partner level) subject to the W-2 wage limitation (50% of W-2 wages). Y's tentative section 199 deduction is $58 (.09 x $642) subject to the W-2 wage limitation. *Example 2. Section 861 method with R&E expense.*

(i)*Partnership Federal income tax items.* X and Y, unrelated United States corporations each of which is engaged in a trade or business, are partners in PRS, a partnership that engages in production activities that generate both DPGR and non-DPGR. Neither X nor Y is a member of an affiliated group. X and Y share all items of income, gain, loss, deduction, and credit equally. All of PRS's domestic production activities that generate DPGR are within Standard Industrial Classification

(SIC)Industry Group AAA (SIC AAA). All of PRS's production activities that generate non-DPGR are within SIC Industry Group BBB (SIC BBB). PRS is not able to identify from its books and records CGS allocable to DPGR and to non-DPGR. In this case, because CGS is definitely related under the facts and circumstances to all of PRS's gross receipts, apportionment of CGS between DPGR and non-DPGR based on gross receipts is appropriate. PRS incurs $900 of research and experimentation expenses (R&E) that are deductible under section 174, $300 of which are performed with respect to SIC AAA and $600 of which are performed with respect to SIC BBB. None of the R&E is legally mandated R&E as described in § 1.861-17(a)(4) and none is included in CGS. For 2010, PRS has the following Federal income tax items: DPGR (all from sales of products within SIC AAA) $3,000 Non-DPGR (all from sales of products within SIC BBB) 3,000 CGS 2,400 Section 162 selling expenses 840 Section 174 R&E-SIC AAA 300 Section 174 R&E-SIC BBB 600

(ii)*Allocation of PRS's Federal income tax items.* X and Y each receive the following distributive share of PRS's Federal income tax items, as determined under the principles of § 1.704-1(b)(1)(vii): Gross income attributable to DPGR ($1,500 (DPGR)—$600 (CGS)) $900 Gross income attributable to non-DPGR ($1,500 (other gross receipts)—$600 (CGS)) 900 Section 162 selling expenses 420 Section 174 R&E-SIC AAA 150 Section 174 R&E-SIC BBB 300

(iii)*Determination of QPAI.*

(A)*X's QPAI.* Because the section 199 deduction is determined at the partner level, X determines its QPAI by aggregating its distributive share of PRS's Federal income tax items with all other such items from all other, non-PRS-related activities. For 2010, X does not have any other such tax items. X's only gross receipts for 2010 are those attributable to the allocation of gross income from PRS. As stated, all of PRS's domestic production activities that generate DPGR are within SIC AAA. X allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of § 1.199-4(d). In this case, the section 162 selling expenses are definitely related to all of PRS's gross income. Based on the facts and circumstances of this specific case, apportionment of those expenses between DPGR and non-DPGR on the basis of PRS's gross receipts is appropriate. For purposes of apportioning R&E, X elects to use the sales method as described in § 1.861-17(c). Because X has no direct sales of products, and because all of PRS's SIC AAA sales attributable to X's share of PRS's gross income generate DPGR, all of X's share of PRS's section 174 R&E attributable to SIC AAA is taken into account for purposes of determining X's QPAI. Thus, X's total QPAI for 2010 is $540, as shown in the following table: DPGR (all from sales of products within SIC AAA) $1,500 CGS

(600)Section 162 selling expenses ($420 × ($1,500 DPGR/$3,000 total gross receipts))

(210)Section 174 R&E-SIC AAA

(150)X's QPAI 540

(B)*Y's QPAI.* ( *1* ) For 2010, in addition to the activities of PRS, Y engages in domestic production activities that generate both DPGR and non-DPGR. With respect to those non-PRS activities, Y is not able to identify from its books and records CGS allocable to DPGR and to non-DPGR. In this case, because non-PRS CGS is definitely related under the facts and circumstances to all of Y's non-PRS gross receipts, apportionment of non-PRS CGS between DPGR and non-DPGR based on Y's non-PRS gross receipts is appropriate. For 2010, Y has the following non-PRS Federal income tax items: DPGR (from sales of products within SIC AAA) $1,500 DPGR (from sales of products within SIC BBB) 1,500 Non-DPGR (from sales of products within SIC BBB) 3,000 CGS (allocated to DPGR within SIC AAA) 750 CGS (allocated to DPGR within SIC BBB) 750 CGS (allocated to non-DPGR within SIC BBB) 1,500 Section 162 selling expenses 540 Section 174 R&E-SIC AAA 300 Section 174 R&E-SIC BBB 450 ( *2* ) Because Y has DPGR as a result of activities outside PRS, Y must aggregate its distributive share of PRS's Federal income tax items with such items from all its other, non-PRS-related activities. Y allocates and apportions its deductible items to gross income attributable to DPGR under the section 861 method of § 1.199-4(d). In this case, the section 162 selling expenses are definitely related to all of Y's gross income. Based on the facts and circumstances of the specific case, apportionment of such expenses between DPGR and non-DPGR on the basis of Y's gross receipts (including Y's share of PRS's gross receipts) is appropriate. For purposes of apportioning R&E, Y elects to use the sales method as described in § 1.861-17(c). ( *3* ) With respect to sales that generate DPGR, Y has gross income of $2,400 ($4,500 DPGR ($1,500 from PRS and $3,000 from non-PRS activities) − $2,100 CGS ($600 from sales of products by PRS and $1,500 from non-PRS activities)). Because all of the sales in SIC AAA generate DPGR, all of Y's share of PRS's section 174 R&E attributable to SIC AAA and the section 174 R&E attributable to SIC AAA that Y incurs in its non-PRS activities are taken into account for purposes of determining Y's QPAI. Because only a portion of the sales within SIC BBB generate DPGR, only a portion of the section 174 R&E attributable to SIC BBB is taken into account in determining Y's QPAI. Thus, Y's QPAI for 2010 is $1,282, as shown in the following table: DPGR ($4,500 DPGR ($1,500 from PRS and $3,000 from non-PRS activities)) $4,500 CGS ($600 from sales of products by PRS and $1,500 from non-PRS activities) (2,100) Section 162 selling expenses ($960 ($420 from PRS + $540 from non-PRS activities) × ($4,500 DPGR/$9,000 total gross receipts))

(480)Section 174 R&E SIC AAA ($150 from PRS and $300 from non-PRS activities)

(450)Section 174 R&E-SIC BBB ($750 ($300 from PRS + $450 from non-PRS activities) × ($1,500 DPGR/$6,000 total gross receipts allocated to SIC BBB ($1,500 from PRS + $4,500 from non-PRS activities)))

(188)Y's QPAI 1,282

(iv)*Determination of section 199 deduction.* X's tentative section 199 deduction is $49 (.09 × $540, that is, QPAI determined at the partner level) subject to the W-2 wage limitation (50% of W-2 wages). Y's tentative section 199 deduction is $115 (.09 × $1,282) subject to the W-2 wage limitation. Example 3. *Partnership with special allocations* .

(i)*In general.* X and Y are unrelated corporate partners in PRS and each is engaged in a trade or business. PRS is a partnership that engages in a domestic production activity and other activities. In general, X and Y share all partnership items of income, gain, loss, deduction, and credit equally, except that 80% of the wage expense of PRS and 20% of PRS's other expenses are specially allocated to X. Under all the facts and circumstances, these special allocations have substantial economic effect under section 704(b). In the 2010 taxable year, PRS's only wage expense is $2,000 for marketing, which is not included in CGS. PRS has $8,000 of gross receipts ($6,000 of which is DPGR), $4,000 of CGS ($3,500 of which is allocable to DPGR), and $3,000 of deductions (comprised of $2,000 of wage expense for marketing and $1,000 of other expenses). X qualifies for and uses the simplified deduction method under § 1.199-4(e). Y does not qualify to use that method and, therefore, must use the section 861 method under § 1.199-4(d). In the 2010 taxable year, X has gross receipts attributable to non-partnership trade or business activities of $1,000 and wage expense of $200. None of X's non-PRS gross receipts is DPGR. For purposes of this example, with regard to both X and PRS, paragraph (e)(1) wages equal wage expense for the 2010 taxable year.

(ii)*Allocation and apportionment of costs.* Under the partnership agreement, X's distributive share of the Federal income tax items of PRS is $1,250 of gross income attributable to DPGR ($3,000 DPGR − $1,750 allocable CGS), $750 of gross income attributable to non-DPGR ($1,000 non-DPGR − $250 allocable CGS), and $1,800 of deductions (comprised of X's special allocations of $1,600 of wage expense ($2,000 × 80%) for marketing and $200 of other expenses ($1,000 × 20%)). Under the simplified deduction method, X apportions $1,200 of other deductions to DPGR ($2,000 ($1,800 from the partnership and $200 from non-partnership activities) × ($3,000 DPGR/$5,000 total gross receipts)). Accordingly, X's QPAI is $50 ($3,000 DPGR − $1,750 CGS − $1,200 of deductions). X has $1,800 of paragraph (e)(1) wages ($1,600 (X's 80% share) from PRS + $200 (X's own non-PRS paragraph (e)(1) wages)). To calculate its W-2 wages, X must determine how much of this $1,800 is properly allocable under § 1.199-2T(e)(2) to X's total DPGR (including X's share of DPGR from PRS). Thus, X's tentative section 199 deduction for the 2010 taxable year is $5 (.09 × $50), subject to the W-2 wage limitation (50% of X's W-2 wages). Example 4. *Partnership with no paragraph (e)(1) wages.*

(i)*Facts.* A and B, both individuals, are partners in PRS. PRS is a partnership that engages in manufacturing activities that generate both DPGR and non-DPGR. A and B share all items of income, gain, loss, deduction, and credit equally. For the 2010 taxable year, PRS has total gross receipts of $2,000 ($1,000 of which is DPGR), CGS of $400 and deductions of $800. PRS has no paragraph (e)(1) wages. Each partner's distributive share of PRS's Federal income tax items is $500 DPGR, $500 non-DPGR, $200 CGS, and $400 of deductions. A has trade or business activities outside of PRS (non-PRS activities). With respect to those activities, A has total gross receipts of $1,000 ($500 of which is DPGR), CGS of $400 (including $50 of paragraph (e)(1) wages), and deductions of $200 for the 2010 taxable year. B has no trade or business activities outside of PRS. A and B each use the small business simplified overall method under § 1.199-4(f).

(ii)*A's QPAI.* A's total CGS and deductions apportioned to DPGR equal $600 (($1,200 ($200 PRS CGS + $400 non-PRS CGS + $400 PRS deductions + $200 non-PRS trade or business deductions)) × ($1,000 total DPGR ($500 from PRS + $500 from non-PRS activities)/$2,000 total gross receipts ($1,000 from PRS + $1,000 from non-PRS activities))). Accordingly, A's QPAI is $400 ($1,000 DPGR ($500 from PRS + $500 from non-PRS activities) − $600 CGS and deductions).

(iii)*A's W-2 wages and section 199 deduction.* A has $50 of paragraph (e)(1) wages ($0 from PRS + $50 from A's non-PRS activities). To calculate A's W-2 wages, A determines, under a reasonable method satisfactory to the Secretary, that $40 of this $50 is properly allocable under § 1.199-2T(e)(2) to A's DPGR from PRS and non-PRS activities. A's tentative section 199 deduction is $36 (.09 × $400), subject to the W-2 wage limitation of $20 (50% of W-2 wages of $40). Thus, A's section 199 deduction is $20.

(iv)*B's QPAI and section 199 deduction.* B's CGS and deductions apportioned to DPGR equal $300 (($200 PRS CGS + $400 PRS deductions) × ($500 DPGR from PRS /$1,000 total gross receipts from PRS)). Accordingly, B's QPAI is $200 ($500 DPGR − $300 CGS and deductions). B's tentative section 199 deduction is $18 (.09 × $200), subject to the W-2 wage limitation. In this case, however, the limitation is $0, because B has no paragraph (e)(1) wages. Thus, B's section 199 deduction is $0. Example 5. *Guaranteed payment.*

(i)*Facts.* The facts are the same as in *Example 4* , except that in 2010 PRS also makes a guaranteed payment of $200 to A for services rendered by A (see section 707(c)), and PRS incurs $200 of wage expense for employees' salary, which is included within the $400 of CGS (in this case the wage expense of $200 equals PRS's paragraph (e)(1) wages). The guaranteed payment is taxable to A as ordinary income and is properly deducted by PRS under section 162. Pursuant to § 1.199-3(p), A may not treat any part of this payment as DPGR. Accordingly, PRS has total gross receipts of $2,000 ($1,000 of which is DPGR), CGS of $400 (including $200 of wage expense) and deductions of $1,000 (including the $200 guaranteed payment) for the 2010 taxable year. Each partner's distributive share of the items of the partnership is $500 DPGR, $500 non-DPGR, $200 CGS (including $100 of wage expense), and $500 of deductions.

(ii)*A's QPAI and W-2 wages.* A's total CGS and deductions apportioned to DPGR equal $591 ($1,300 ($200 PRS CGS + $400 non-PRS CGS + $500 PRS deductions + $200 non-PRS trade or business deductions) × ($1,000 total DPGR ($500 from PRS + $500 from non-PRS activities)/$2,200 total gross receipts ($1,000 from PRS + $200 guaranteed payment + $1,000 from non-PRS activities))). Accordingly, A's QPAI is $409 ($1,000 DPGR − $591 CGS and other deductions). A's total paragraph (e)(1) wages are $150 ($100 from PRS + $50 from non-PRS activities). To calculate its W-2 wages, A must determine how much of this $150 is properly allocable under § 1.199-2T(e)(2) to A's total DPGR from PRS and non-PRS activities. A's tentative section 199 deduction is $37 (.09 x $409), subject to the W-2 wage limitation (50% of W-2 wages).

(iii)*B's QPAI and W-2 wages.* B's QPAI is $150 ($500 DPGR − $350 CGS and other deductions). B has $100 of paragraph (e)(1) wages (all from PRS). To calculate its W-2 wages, B must determine how much of this $100 is properly allocable under § 1.199-2T(e)(2) to B's total DPGR. B's tentative section 199 deduction is $14 (.09 × $150), subject to the W-2 wage limitation (50% of B's W-2 wages).

(c)*S corporations* —(1) *In general* —(i) *Determination at shareholder level.* The section 199 deduction with respect to the qualified production activities of an S corporation is determined at the shareholder level. As a result, each shareholder must compute its deduction separately. The section 199 deduction has no effect on the adjusted basis of a shareholder's stock in an S corporation. Except as provided by publication pursuant to paragraph (c)(1)(ii) of this section, for purposes of this section, each shareholder is allocated, in accordance with section 1366, its pro rata share of S corporation items (including items of income, gain, loss, and deduction), CGS allocated to such items of income, and gross receipts included in such items of income, even if the shareholder's share of CGS and other deductions and losses exceeds DPGR. Except as provided by publication under paragraph (c)(1)(ii) of this section, to determine its section 199 deduction for the taxable year, the shareholder aggregates its pro rata share of such items, to the extent they are not otherwise disallowed by the Code, with those items it incurs outside the S corporation (whether directly or indirectly) for purposes of allocating and apportioning deductions to DPGR and computing its QPAI.

(ii)*Determination at entity level.* The Secretary may, by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), permit an S corporation to calculate a shareholder's share of QPAI and W-2 wages at the entity level, instead of allocating to the shareholder, in accordance with section 1366, the shareholder's pro rata share of S corporation items (including items of income, gain, loss, and deduction) and paragraph (e)(1) wages. If an S corporation does calculate QPAI at the entity level—

(A)Each shareholder is allocated its share of QPAI (subject to the limitations of paragraph (c)(2) of this section) and W-2 wages from the S corporation, which are combined with the shareholder's QPAI and W-2 wages from other sources, if any;

(B)For purposes of computing QPAI under §§ 1.199-1 through 1.199-8, a shareholder does not take into account the items from the S corporation (for example, a shareholder does not take into account items from the S corporation in determining whether a threshold or *de minimis* rule applies or in allocating and apportioning deductions in calculating its QPAI from other sources);

(C)A shareholder generally does not recompute its share of QPAI from the S corporation using another method; however, the shareholder might have to adjust its share of QPAI from the S corporation to take into account certain disallowed losses or deductions, or the allowance of suspended losses or deductions; and

(D)A shareholder's share of QPAI from an S corporation may be less than zero.

(2)*Disallowed losses or deductions.* Except as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), losses or deductions of the S corporation are taken into account in computing the shareholder's section 199 deduction for a taxable year only if, and to the extent that, the shareholder's pro rata share of the losses or deductions from all of the S corporation's activities is not disallowed by section 465, 469, or 1366(d), or any other provision of the Code. If only a portion of the shareholder's share of the losses or deductions from an S corporation is allowed for a taxable year, a proportionate share of those allowable losses or deductions that are allocated to the S corporation's qualified production activities, determined in a manner consistent with sections 465, 469, and 1366(d), and any other applicable provision of the Code, is taken into account in computing QPAI for that taxable year. To the extent that any of the disallowed losses or deductions are allowed in a later taxable year under section 465, 469, or 704(d), or any other provision of the Code, the shareholder takes into account a proportionate share of those allowed losses or deductions that are allocated to the S corporation's qualified production activities in computing the shareholder's QPAI for that later taxable year. Losses or deductions of the S corporation that are disallowed for taxable years beginning on or before December 31, 2004, are not taken into account in a later taxable year for purposes of computing the shareholder's QPAI for that later taxable year, whether or not the losses or deductions are allowed for other purposes.

(3)*Shareholder's share of paragraph (e)(1) wages.* Under section 199(d)(1)(A)(iii), an S corporation shareholder's share of the paragraph (e)(1) wages of the S corporation for purposes of determining the shareholder's W-2 wage limitation equals the shareholder's allocable share of those wages. Except as provided by publication in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)( *b* ) of this chapter), the S corporation must allocate the paragraph (e)(1) wages among the shareholders in the same manner it allocates wage expense among those shareholders. The shareholder then must add its share of the paragraph (e)(1) wages from the S corporation to the shareholder's paragraph (e)(1) wages from other sources, if any, and then must determine the portion of those total paragraph (e)(1) wages allocable to DPGR to compute the shareholder's W-2 wages. See § 1.199-2T(e)(2) for the computation of W-2 wages and for the proper allocation of such wages to DPGR.

(4)*Transition rule for definition of W-2 wages and for W-2 wage limitation.* If an S corporation and any of its shareholders have different taxable years, only one of which begins on or before May 17, 2006, the definition of W-2 wages of the S corporation and the section 199(d)(1)(A)(iii) limitation on W-2 wages from that S corporation is determined under the law applicable to S corporations based on the beginning date of the S corporation's taxable year. Thus, for example, for the short taxable year of an S corporation beginning after May 17, 2006, and ending in 2006, a shareholder's share of W-2 wages from the S corporation is determined under section 199(d)(1)(A)(iii) for taxable years beginning after May 17, 2006, even if that shareholder's taxable year began on or before May 17, 2006.

(d)*Grantor trusts.* To the extent that the grantor or another person is treated as owning all or part (the owned portion) of a trust under sections 671 through 679, such person (owner) computes its QPAI with respect to the owned portion of the trust as if that QPAI had been generated by activities performed directly by the owner. Similarly, for purposes of the W-2 wage limitation, the owner of the trust takes into account the owner's share of the paragraph (e)(1) wages of the trust that are attributable to the owned portion of the trust. The provisions of paragraph

(e)of this section do not apply to the owned portion of a trust.

(e)*Non-grantor trusts and estates* —(1) *Allocation of costs.* The trust or estate calculates each beneficiary's share (as well as the trust's or estate's own share, if any) of QPAI and W-2 wages from the trust or estate at the trust or estate level. The beneficiary of a trust or estate may not recompute its share of QPAI or W-2 wages from the trust or estate by using another method to reallocate the trust's or estate's qualified production costs or paragraph (e)(1) wages, or otherwise. Except as provided in paragraph

(d)of this section, the QPAI of a trust or estate must be computed by allocating expenses described in section 199(d)(5) in one of two ways, depending on the classification of those expenses under § 1.652(b)-3. Specifically, directly attributable expenses within the meaning of § 1.652(b)-3 are allocated pursuant to § 1.652(b)-3, and expenses not directly attributable within the meaning of § 1.652(b)-3 (other expenses) are allocated under the simplified deduction method of § 1.199-4(e) (unless the trust or estate does not qualify to use the simplified deduction method, in which case it must use the section 861 method of § 1.199-4(d) with respect to such other expenses). For this purpose, depletion and depreciation deductions described in section 642(e) and amortization deductions described in section 642(f) are treated as other expenses described in section 199(d)(5). Also for this purpose, the trust's or estate's share of other expenses from a lower-tier pass-thru entity is not directly attributable to any class of income (whether or not those other expenses are directly attributable to the aggregate pass-thru gross income as a class for purposes other than section 199). A trust or estate may not use the small business simplified overall method for computing its QPAI. See § 1.199-4(f)(5).

(2)*Allocation among trust or estate and beneficiaries* —(i) *In general.* The QPAI of a trust or estate (which will be less than zero if the CGS and deductions allocated and apportioned to DPGR exceed the trust's or estate's DPGR) and W-2 wages of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust's or estate's distributable net income (DNI), as defined by section 643(a), for the taxable year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. To the extent that the trust or estate has no DNI for the taxable year, any QPAI and W-2 wages are allocated entirely to the trust or estate. A trust or estate is allowed the section 199 deduction in computing its taxable income to the extent that QPAI and W-2 wages are allocated to the trust or estate. A beneficiary of a trust or estate is allowed the section 199 deduction in computing its taxable income based on its share of QPAI and W-2 wages from the trust or estate, which are aggregated with the beneficiary's QPAI and W-2 wages from other sources, if any.

(ii)*Treatment of items from a trust or estate reporting qualified production activities income.* When, pursuant to this paragraph (e), a taxpayer must combine QPAI and W-2 wages from a trust or estate with the taxpayer's total QPAI and W-2 wages from other sources, the taxpayer, when applying §§ 1.199-1 through 1.199-8 to determine the taxpayer's total QPAI and W-2 wages from such other sources, does not take into account the items from such trust or estate. Thus, for example, a beneficiary of an estate that receives QPAI from the estate does not take into account the beneficiary's distributive share of the estate's gross receipts, gross income, or deductions when the beneficiary determines whether a threshold or *de minimis* rule applies or when the beneficiary allocates and apportions deductions in calculating its QPAI from other sources. Similarly, in determining the portion of the beneficiary's paragraph (e)(1) wages from other sources that is attributable to DPGR (thus, the W-2 wages from other sources), the beneficiary does not take into account DPGR and non-DPGR from the trust or estate.

(3)*Transition rule for definition of W-2 wages and for W-2 wage limitation.* The definition of W-2 wages of a trust or estate and the section 199(d)(1)(A)(iii) limitation on W-2 wages from that trust or estate, and thus the beneficiary's share of W-2 wages from that trust or estate, is determined under the law applicable to pass-thru entities based on the beginning date of the taxable year of the trust or estate, regardless of the beginning date of the taxable year of the beneficiary.

(4)*Example.* The following example illustrates the application of this paragraph (e). Assume that the partnership, trust, and trust beneficiary all are calendar year taxpayers. Example.

(i)*Computation of DNI and inclusion and deduction amounts.*

(A)*Trust's distributive share of partnership items.* Trust, a complex trust, is a partner in PRS, a partnership that engages in activities that generate DPGR and non-DPGR. In 2010, PRS distributes $10,000 cash to Trust. PRS properly allocates (in the same manner as wage expense) paragraph (e)(1) wages of $3,000 to Trust. Trust's distributive share of PRS items, which are properly included in Trust's DNI, is as follows: Gross income attributable to DPGR ($15,000 DPGR—$5,000 CGS (including wage expense of $1,000)) $10,000 Gross income attributable to non-DPGR ($5,000 other gross receipts—$0 CGS) 5,000 Selling expenses attributable to DPGR (includes wage expense of $2,000) 3,000 Other expenses (includes wage expense of $1,000) 2,000

(B)*Trust's direct activities.* Trust has direct paragraph (e)(1) wages of $2,000 for the 2010 taxable year. In addition to its cash distribution in 2010 from PRS, Trust also directly has the following items which are properly included in Trust's DNI: Dividends $10,000 Tax-exempt interest 10,000 Rents from commercial real property operated by Trust as a business 10,000 Real estate taxes 1,000 Trustee commissions 3,000 State income and personal property taxes 5,000 Wage expense for rental business 2,000 Other business expenses 1,000

(C)*Allocation of deductions under § 1.652(b)-3.* ( *1* ) *Directly attributable expenses.* In computing Trust's DNI for the taxable year, the distributive share of expenses of PRS are directly attributable under § 1.652(b)-3(a) to the distributive share of income of PRS. Accordingly, the $5,000 of CGS, $3,000 of selling expenses, and $2,000 of other expenses are subtracted from the gross receipts from PRS ($20,000), resulting in net income from PRS of $10,000. With respect to the Trust's direct expenses, $1,000 of the trustee commissions, the $1,000 of real estate taxes, and the $2,000 of wage expense are directly attributable under § 1.652(b)-3(a) to the rental income. ( *2* ) *Non-directly attributable expenses.* Under § 1.652(b)-3(b), the trustee must allocate a portion of the sum of the balance of the trustee commissions ($2,000), state income and personal property taxes ($5,000), and the other business expenses ($1,000) to the $10,000 of tax-exempt interest. The portion to be attributed to tax-exempt interest is $2,222 ($8,000 × ($10,000 tax exempt interest/$36,000 gross receipts net of direct expenses)), resulting in $7,778 ($10,000—$2,222) of net tax-exempt interest. Pursuant to its authority recognized under § 1.652(b)-3(b), the trustee allocates the entire amount of the remaining $5,778 of trustee commissions, state income and personal property taxes, and other business expenses to the $6,000 of net rental income, resulting in $222 ($6,000—$5,778) of net rental income.

(D)*Amounts included in taxable income.* For 2010, Trust has DNI of $28,000 (net dividend income of $10,000 + net PRS income of $10,000 + net rental income of $222 + net tax-exempt income of $7,778). Pursuant to Trust's governing instrument, Trustee distributes 50%, or $14,000, of that DNI to B, an individual who is a discretionary beneficiary of Trust. Assume that there are no separate shares under Trust, and no distributions are made to any other beneficiary that year. Consequently, with respect to the $14,000 distribution B receives from Trust, B properly includes in B's gross income $5,000 of income from PRS, $111 of rents, and $5,000 of dividends, and properly excludes from B's gross income $3,889 of tax-exempt interest. Trust includes $20,222 in its adjusted total income and deducts $10,111 under section 661(a) in computing its taxable income.

(ii)*Section 199 deduction.*

(A)*Simplified deduction method.* For purposes of computing the section 199 deduction for the taxable year, assume Trust qualifies for the simplified deduction method under § 1.199-4(e). The determination of Trust's QPAI under the simplified deduction method requires multiple steps to allocate costs. First, the Trust's expenses directly attributable to DPGR under § 1.652(b)-3(a) are subtracted from the Trust's DPGR. In this step, the directly attributable $5,000 of CGS and selling expenses of $3,000 are subtracted from the $15,000 of DPGR from PRS. Second, the Trust's expenses directly attributable under § 1.652(b)-3(a) to non-DPGR from a trade or business are subtracted from the Trust's trade or business non-DPGR. In this step, $4,000 of Trust expenses directly allocable to the real property rental activity ($1,000 of real estate taxes, $1,000 of Trustee commissions, and $2,000 of wages) are subtracted from the $10,000 of rental income. Third, Trust must identify the portion of its other expenses that is attributable to Trust's trade or business activities, if any, because expenses not attributable to trade or business activities are not taken into account in computing QPAI. In this step, in this example, the portion of the trustee commissions not directly attributable to the rental operation ($2,000) are directly attributable to non-trade or business activities. In addition, the state income and personal property taxes are not directly attributable under § 1.652(b)-3(a) to either trade or business or non-trade or business activities, so the portion of those taxes not attributable to either the PRS interests or the rental operation are not trade or business expenses and, thus, are not taken into account in computing QPAI. The portion of the state income and personal property taxes that is treated as other trade or business expenses is $3,000 ($5,000 × $30,000 total trade or business gross receipts/$50,000 total gross receipts). Fourth, Trust then allocates its other trade or business expenses (not directly attributable under § 1.652(b)-3(a)) between DPGR and non-DPGR on the basis of its total gross receipts from the conduct of a trade or business ($20,000 from PRS + $10,000 rental income). Thus, Trust combines its non-directly attributable (other) business expenses ($2,000 from PRS + $4,000 ($1,000 of other business expenses + $3,000 of income and property taxes allocated to a trade or business) from its own activities) and then apportions this total ($6,000) between DPGR and other receipts on the basis of Trust's total trade or business gross receipts ($6,000 of such expenses × $15,000 DPGR/$30,000 total trade or business gross receipts = $3,000). Thus, for purposes of computing Trust's and B's section 199 deduction, Trust's QPAI is $4,000 ($7,000—$3,000). Because the distribution of Trust's DNI to B equals one-half of Trust's DNI, Trust and B each has QPAI from PRS for purposes of the section 199 deduction of $2,000. B has $1,000 of QPAI from non-Trust activities that is added to the $2,000 QPAI from Trust for a total of $3,000 of QPAI.

(B)*W-2 wages.* For the 2010 taxable year, Trust chooses to use the wage expense safe harbor under § 1.199-2T(e)(2)(ii) to determine its W-2 wages. For its taxable year ending December 31, 2010, Trust has $5,000 of paragraph (e)(1) wages reported on 2010 Forms W-2. Trust's W-2 wages are $2,917, as shown in the following table: Wage expense included in CGS directly attributable to DPGR $1,000 Wage expense included in selling expense directly attributable to DPGR 2,000 Wage expense included in non-directly attributable deductions ($1,000 in wage expense x ($15,000 DPGR/$30,000 total trade or business gross receipts)) 500 Wage expense allocable to DPGR 3,500 W-2 wages (($3,500 of wage expense allocable to DPGR/$6,000 of total wage expense) x $5,000 in paragraph (e)(1) wages) $2,917

(C)*Section 199 deduction computation.* ( *1* ) *B's computation* . B is eligible to use the small business simplified overall method. Assume that B has sufficient adjusted gross income so that the section 199 deduction is not limited under section 199(a)(1)(B). Because the $14,000 Trust distribution to B equals one-half of Trust's DNI, B has W-2 wages from Trust of $1,459 (50% × $2,917). B has W-2 wages of $100 from non-Trust trade or business activities (computed without regard to B's interest in Trust pursuant to § 1.199-2(e)) for a total of $1,559 of W-2 wages. B has $1,000 of QPAI from non-Trust activities that is added to the $2,000 QPAI from Trust for a total of $3,000 of QPAI. B's tentative deduction is $270 (.09 × $3,000), limited under the W-2 wage limitation to $780 (50% × $1,559 W-2 wages). Accordingly, B's section 199 deduction for 2010 is $270. ( *2* ) *Trust's computation.* Trust has sufficient adjusted gross income so that the section 199 deduction is not limited under section 199(a)(1)(B). Because the $14,000 Trust distribution to B equals one-half of Trust's DNI, Trust has W-2 wages of $1,459 (50% × $2,917). Trust's tentative deduction is $180 (.09 × $2,000 QPAI), limited under the W-2 wage limitation to $730 (50% × $1,459 W-2 wages). Accordingly, Trust's section 199 deduction for 2010 is $180.

(f)*Gain or loss from the disposition of an interest in a pass-thru entity.* DPGR generally does not include gain or loss recognized on the sale, exchange, or other disposition of an interest in a pass-thru entity. However, with respect to a partnership, if section 751(a) or

(b)applies, then gain or loss attributable to assets of the partnership giving rise to ordinary income under section 751(a) or (b), the sale, exchange, or other disposition of which would give rise to DPGR, is taken into account in computing the partner's section 199 deduction. Accordingly, to the extent that cash or property received by a partner in a sale or exchange of all or part of its partnership interest is attributable to unrealized receivables or inventory items within the meaning of section 751(c) or (d), respectively, and the sale or exchange of the unrealized receivable or inventory items would give rise to DPGR if sold, exchanged, or otherwise disposed of by the partnership, the cash or property received by the partner is taken into account by the partner in determining its DPGR for the taxable year. Likewise, to the extent that a distribution of property to a partner is treated under section 751(b) as a sale or exchange of property between the partnership and the distributee partner, and any property deemed sold or exchanged would give rise to DPGR if sold, exchanged, or otherwise disposed of by the partnership, the deemed sale or exchange of the property must be taken into account in determining the partnership's and distributee partner's DPGR to the extent not taken into account under the qualifying in-kind partnership rules. See §§ 1.751-1(b) and 1.199-3T(i)(7).

(g)*No attribution of qualified activities.* Except as provided in § 1.199-3T(i)(7) regarding qualifying in-kind partnerships and § 1.199-3T(i)(8) regarding EAG partnerships, an owner of a pass-thru entity is not treated as conducting the qualified production activities of the pass-thru entity, and vice versa. For example, if a partnership manufactures QPP within the United States, or produces a qualified film or produces utilities in the United States, and distributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partner who then, without performing its own qualifying activity, leases, rents, licenses, sells, exchanges, or otherwise disposes of such property, then the partner's gross receipts from this latter lease, rental, license, sale, exchange, or other disposition are treated as non-DPGR. In addition, if a partner manufactures QPP within the United States, or produces a qualified film or produces utilities in the United States, and contributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partnership which then, without performing its own qualifying activity, leases, rents, licenses, sells, exchanges, or otherwise disposes of such property, then the partnership's gross receipts from this latter disposition are treated as non-DPGR. **Par. 9.** Section 1.199-7 is amended by adding new paragraph (b)(4) to read as follows: § 1.199-7 Expanded affiliated groups.

(b)* * *

(4)*Losses used to reduce taxable income of expanded affiliated group.* [Reserved]. For further guidance, see § 1.199-7T(b)(4). **Par. 10.** Section 1.199-7T is added to read as follows: § 1.199-7T Expanded affiliated groups (temporary).

(a)[Reserved]. For further guidance, see § 1.199-7(a).

(b)*Computation of expanded affiliated group's section 199 deduction.*

(1)through

(3)[Reserved]. For further guidance, see § 1.199-7(b)(1) through (3).

(4)*Losses used to reduce taxable income of expanded affiliated group* —(i) *In general.* The amount of a net operating loss

(NOL)sustained by any member of an expanded affiliated group

(EAG)(as defined in § 1.199-7) that is used in the year sustained in determining an EAG's taxable income limitation under section 199(a)(1)(B) is not treated as an NOL carryover or NOL carryback to any taxable year in determining the taxable income limitation under section 199(a)(1)(B). For purposes of this paragraph (b)(4), an NOL is considered to be used if it reduces an EAG's aggregate taxable income, regardless of whether the use of the NOL actually reduces the amount of the deduction under § 1.199-1(a) (section 199 deduction) that the EAG would otherwise derive. An NOL is not considered to be used to the extent that it reduces an EAG's aggregate taxable income to an amount less than zero. If more than one member of an EAG has an NOL used in the same taxable year to reduce the EAG's taxable income, the members' respective NOLs are deemed used in proportion to the amount of their NOLs.

(ii)*Examples.* The following examples illustrate the application of this paragraph (b)(4). For purposes of these examples, assume that all relevant parties have sufficient W-2 wages so that the section 199 deduction is not limited under section 199(b)(1). Example 1.

(i)*Facts.* Corporations A and B are the only two members of an EAG. A and B are both calendar year taxpayers and they do not join in the filing of a consolidated Federal income tax return. Neither A nor B had taxable income or loss prior to 2010. In 2010, A has qualified production activities income

(QPAI)(as defined in § 1.199-1(c)) and taxable income of $1,000 and B has QPAI of $1,000 and an NOL of $1,500. In 2011, A has QPAI of $2,000 and taxable income of $1,000 and B has QPAI of $2,000 and taxable income prior to the NOL deduction allowed under section 172 of $2,000.

(ii)*Section 199 deduction for 2010.* In determining the EAG's section 199 deduction for 2010, A's $1,000 of QPAI and B's $1,000 of QPAI are aggregated, as are A's $1,000 of taxable income and B's $1,500 NOL. Thus, for 2010, the EAG has QPAI of $2,000 and taxable income of ($500). The EAG's section 199 deduction for 2010 is 9% of the lesser of its QPAI or its taxable income. Because the EAG has a taxable loss in 2010, the EAG's section 199 deduction is $0.

(iii)*Section 199 deduction for 2011.* In determining the EAG's section 199 deduction for 2011, A's $2,000 of QPAI and B's $2,000 of QPAI are aggregated, giving the EAG QPAI of $4,000. Also, $1,000 of B's NOL from 2010 was used in 2010 to reduce the EAG's taxable income to $0. The remaining $500 of B's 2010 NOL is not considered to have been used in 2010 because it reduced the EAG's taxable income below $0. Accordingly, for purposes of determining the EAG's taxable income limitation under section 199(a)(1)(B) in 2011, B is deemed to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income. Thus, B's taxable income in 2011 is $1,500 which is aggregated with A's $1,000 of taxable income. The EAG's taxable income limitation in 2011 is $2,500. The EAG's section 199 deduction is 9% of the lesser of its QPAI of $4,000 or its taxable income of $2,500. Thus, the EAG's section 199 deduction in 2011 is 9% of $2,500, or $225. The results would be the same if neither A nor B had QPAI in 2010. Example 2. The facts are the same as in *Example 1* except that in 2010 B was not a member of the same EAG as A, but instead was a member of an EAG with Corporation X, which had QPAI and taxable income of $1,000 in 2010, and had neither taxable income nor loss in any other year. There were no other members of the EAG in 2010 besides B and X, and B and X did not file a consolidated Federal income tax return. As $1,000 of B's NOL was used in 2010 to reduce the B and X EAG's taxable income to $0, B is considered to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income for purposes of the taxable income limitation under section 199(a)(1)(B), just as in *Example 1.* Accordingly, the results for the A and B EAG in 2011 are the same as in *Example 1.* Example 3. The facts are the same as in *Example 1* except that B is not a member of any EAG in 2011. Because $1,000 of B's NOL was used in 2010 to reduce the EAG's taxable income to $0, B is considered to have only a $500 NOL carryover from 2010 to offset a portion of its 2011 taxable income for purposes of the taxable income limitation under section 199(a)(1)(B), just as in *Example 1.* Thus, for purposes of determining B's taxable income limitation in 2011, B is considered to have taxable income of $1,500, and B has a section 199 deduction of 9% of $1,500, or $135. Example 4. Corporations A, B, and C are the only members of an EAG. A, B, and C are all calendar year taxpayers and they do not join in the filing of a consolidated Federal income tax return. None of the EAG members (A, B, or C) had taxable income or loss prior to 2010. In 2010, A has QPAI of $2,000 and taxable income of $1,000, B has QPAI of $1,000 and an NOL of $1,000, and C has QPAI of $1,000 and an NOL of $3,000. In 2011, prior to the NOL deduction allowed under section 172, A and B each has taxable income of $200 and C has taxable income of $5,000. In determining the EAG's section 199 deduction for 2010, A's QPAI of $2,000, B's QPAI of $1,000, and C's QPAI of $1,000 are aggregated, as are A's taxable income of $1,000, B's NOL of $1,000, and C's NOL of $3,000. Thus, for 2010, the EAG has QPAI of $4,000 and taxable income of ($3,000). In determining the EAG's taxable income limitation under section 199(a)(1)(B) in 2011, $1,000 of B's and C's aggregate NOLs in 2010 of $4,000 are considered to have been used in 2010 to reduce the EAG's taxable income to $0, in proportion to their NOLs. Thus, $250 of B's NOL from 2010 ($1,000 x $1,000/$4,000) and $750 of C's NOL from 2010 ($1,000 x $3,000/$4,000) are deemed to have been used in 2010. The remaining $750 of B's NOL and the remaining $2,250 of C's NOL are not deemed to have been used because so doing would have reduced the EAG's taxable income in 2010 below $0. Accordingly, for purposes of determining the EAG's taxable income limitation in 2011, B is deemed to have a $750 NOL carryover from 2010 and C is deemed to have a $2,250 NOL carryover from 2010. Thus, for purposes of determining the EAG's taxable income limitation, B's taxable income in 2011 is $0 and C's taxable income in 2011 is $2,750, which are aggregated with A's $200 taxable income. B's unused NOL carryover from 2010 cannot be used to reduce either A's or C's 2011 taxable income. Thus, the EAG's taxable income limitation in 2011 is $2,950, A's taxable income of $200 plus B's taxable income of $0 plus C's taxable income of $2,750. **Par. 11.** Section 1.199-8 is amended by adding new paragraphs (i)(5) and

(6)to read as follows: § 1.199-8 Other rules.

(i)* * *

(5)*Tax Increase Prevention and Reconciliation Act of 2005.* [Reserved]. For further guidance, see § 1.199-8T(i)(5).

(6)*Losses used to reduce taxable income of expanded affiliated group.* [Reserved]. For further guidance, see § 1.199-8T(i)(6). **Par. 12.** Section 1.199-8T is amended by adding new paragraphs (i)(5) and

(6)to read as follows: § 1.199-8T Other rules (temporary).

(i)* * *

(5)*Tax Increase Prevention and Reconciliation Act of 2005.* Sections 1.199-2T(e)(2), 1.199-3T(i)(7) and (8), and 1.199-5T are applicable for taxable years beginning on or after October 19, 2006. A taxpayer may apply §§ 1.199-2T(e)(2), 1.199-3T(i)(7) and (8), and 1.199-5T to taxable years beginning after May 17, 2006, and before October 19, 2006 regardless of whether the taxpayer otherwise relied upon Notice 2005-14 (2005-1 CB 498) (see § 601.601(d)(2) of this chapter), the provisions of REG-105847-05 (2005-47 IRB 987) (see § 601.601(d)(2) of this chapter), or §§ 1.199-1 through 1.199-8. The applicability of §§ 1.199-2T(e)(2), 1.199-3T(i)(7) and (8), and 1.199-5T expires on October 19, 2009.

(6)*Losses used to reduce taxable income of expanded affiliated group.* Section 1.199-7T(b)(4) is applicable for taxable years beginning on or after October 19, 2006. A taxpayer may apply § 1.199-7T(b)(4) to taxable years beginning after December 31, 2004, and before October 19, 2006 regardless of whether the taxpayer otherwise relied upon Notice 2005-14 (2005-1 CB 498) (see § 601.601(d)(2) of this chapter), the provisions of REG-105847-05 (2005-47 IRB 987) (see § 601.601(d)(2) of this chapter), or §§ 1.199-1 through 1.199-9. The applicability of § 1.199-7T(b)(4) expires on October 19, 2009. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. Approved: October 12, 2006. Eric Solomon, Acting Deputy Assistant Secretary of the Treasury. [FR Doc. E6-17402 Filed 10-18-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE INTERIOR Office of Surface Mining Reclamation and Enforcement 30 CFR Part 931 [NM-045-FOR] New Mexico Regulatory Program AGENCY: Office of Surface Mining Reclamation and Enforcement, Interior. ACTION: Final rule; approval of amendment. SUMMARY: We are approving an amendment to the New Mexico regulatory program (the “New Mexico program”) under the Surface Mining Control and Reclamation Act of 1977 (SMCRA or the Act). New Mexico proposed revisions to and additions of rules and revisions to statutes concerning the administrative appeals process and revisions to statutes concerning an extension of time for the authority of the Coal Surface Mining Commission (Commission). New Mexico revised its program to be consistent with SMCRA and the corresponding Federal regulations, streamline and clarify the administrative and judicial appeals process and ensure continuing authority for the New Mexico program. EFFECTIVE DATE: October 19, 2006. FOR FURTHER INFORMATION CONTACT: Willis Gainer, Telephone:

(505)248-5096, E-mail address: *wgainer@osmre.gov.* SUPPLEMENTARY INFORMATION: I. Background on the New Mexico Program II. Submission of the Proposed Amendment III. Office of Surface Mining Reclamation and Enforcement's

(OSM)Findings IV. Summary and Disposition of Comments V. OSM's Decision VI. Procedural Determinations I. Background on the New Mexico Program Section 503(a) of the Act permits a State to assume primacy for the regulation of surface coal mining and reclamation operations on non-Federal and non-Indian lands within its borders by demonstrating that its State program includes, among other things, “a State law which provides for the regulation of surface coal mining and reclamation operations in accordance with the requirements of this Act * * *; and rules and regulations consistent with regulations issued by the Secretary pursuant to this Act.” See 30 U.S.C. 1253(a)(1) and (7). On the basis of these criteria, the Secretary conditionally approved the New Mexico program on December 31, 1980. You can find background information on the New Mexico program, including the Secretary's findings, the disposition of comments, and conditions of approval in the December 31, 1980, **Federal Register** (45 FR 86459). You can also find later actions concerning New Mexico's program and program amendments at 30 CFR 931.10, 931.11, 931.13, 931.15, 931.16, and 931.30. II. Submission of the Proposed Amendment By letter dated November 18, 2005, New Mexico sent us an amendment to its program (Administrative Record No. 874) under SMCRA (30 U.S.C. 1201 *et seq.* ). New Mexico sent the amendment to include the changes made at its own initiative to

(1)Streamline and clarify the administrative and judicial appeals process and

(2)extend the time for the authority of the Commission to operate. We announced receipt of the proposed amendment in the February 13, 2006, **Federal Register** (71 FR 7477; Administrative Record No. NM-882). In the same document, we opened the public comment period and provided an opportunity for a public hearing or meeting on the amendment's adequacy. We did not hold a public hearing or meeting because no one requested one. The public comment period ended on March 15, 2006. We received one agency comment from the State Historic Preservation Officer and one public comment from the Zuni Tribe. During our review of the amendment, we identified one non-substantive editorial concern with an incorrect statutory citation referenced in a proposed rule. We notified New Mexico of this concern by letter dated March 24, 2006 (Administrative Record No. NM-887). New Mexico responded in a letter dated March 27, 2006, by sending us a revised amendment (Administrative Record No. NM-888). New Mexico responded with a revision to correct the statutory cite, from the New Mexico Surface Mining Act of 1978 (NMSA), section 69-25A-30.G to NMSA, section 69-25A-29.A, referenced at proposed rule New Mexico Annotated Code (NMAC), section 19.8.12.1203.K. Because the correction was editorial in nature and did not substantively revise New Mexico's proposed amendment, we did not reopen the opportunity for public comment and we are proceeding with the final rule **Federal Register** document. III. OSM's Findings Following are the findings we made concerning the amendment under SMCRA and the Federal regulations at 30 CFR 732.15 and 732.17. We are approving the amendment as described below. A. Minor Revisions to New Mexico's Rules and Statute New Mexico proposed minor wording, editorial, punctuation, grammatical, and recodification changes to the following previously-approved statutes in NMSA, and rules in the NMAC. NMSA, sections 69-25A-18.A, B, C, D and F concerning the decisions of the Director of the New Mexico program and appeals; NMSA, sections 69-25A-29.A, B, C, D and F concerning the administrative review of a notice or order by the Director of the New Mexico program; NMAC, sections 19.8.11.1100.A(3), D, and D(2), concerning public notices of filing of permit applications; NMAC, section 19.8.11.1101.C, concerning opportunity for submission of written comments on permit applications; NMAC, sections 19.8.11.1102.A and B(2), concerning the right to file written objections; NMAC, sections 19.8.11.1103.A(3), B, B(1), D, E(1), and F, concerning hearings and conferences; NMAC, section 19.8.11.1104.B, concerning public availability of information in permit applications on file with the Director; NMAC, sections 19.8.11.1105.C(2), D, E, and F, concerning review of permit applications; NMAC, sections 19.8.11.1106.C, D(3), F, G(1) and (2), and N, concerning criteria for permit approval or denial; NMAC, sections 19.8.11.1107.A, B, B(1), B(1)(b), B(3), C, D, E, and F, concerning general procedures for improvidently issued permits; NMAC, section 19.8.11.1108.B, concerning existing structures and criteria for permit approval or denial; NMAC, sections 19.8.11.1109.A(4), B, B(1) and (2), B(2)(b), B(3), and D, concerning permit approval or denial actions; NMAC, section 19.8.11.1110.A(1), concerning the rescission process for improvidently issued permits; NMAC, section 19.8.11.1111.B, concerning permit terms; NMAC, section 19.8.11.1113.C(2), concerning conditions of permit for environment, public health and safety; NMAC, section 19.8.11.1114, concerning conformance of permit; NMAC, sections 19.8.11.1115.A, B, and C, concerning verification of ownership or control application information; NMAC, sections 19.8.11.1116.B and B(2)(b), concerning review of ownership or control and violation information; NMAC, sections 19.8.11.1117.A, A(1),

(2)and (3), B, C, D, D(1) and (2), and D(2)(a) and (b), concerning procedures for challenging ownership or control links shown in the applicant violator system; NMAC, sections 19.8.11.1118.B, B(1),

(2)and (3), B(3)(1), C, C(1)(a) through (c), and C(2), concerning standards for challenging ownership or control links and the status of violations; and NMAC, sections 19.8.12.1203.A through J and L, concerning formal review of notices of violations, cessation orders and show cause orders. Because these changes are minor, we find that they will not make New Mexico's rules and statutes less effective than the corresponding Federal regulations or less stringent than SMCRA. B. Revisions to New Mexico's Statutes and Rules That Require an Explanation and Basis for Approval The Federal regulations at 30 CFR 732.15(b) require, among other things, that a State program include provisions that provide for

(1)Administrative review of State program actions, in accordance with section 525 of SMCRA and 30 CFR Subchapter L, and

(2)judicial review of State program actions in accordance with State law, as provided in section 526(e) of SMCRA, except that judicial review of State enforcement actions shall be in accordance with section 526 of SMCRA. The Federal definitions at 30 CFR 730.5 set forth the standards for review of State program provisions which must be consistent with and in accordance with the Act and the counterpart Federal regulations. OSM defines consistent with and in accordance with to mean

(a)with regard to SMCRA, the State laws and regulations are no less stringent than, meet the minimum requirements of and include all applicable provisions of the Act and

(b)with regard to the Federal regulations, the State laws and regulations are no less effective than the Federal regulations in meeting the requirements of SMCRA. As discussed below, New Mexico's proposed revisions of NMSA and the State's implementing regulations are in accordance with the corresponding sections of SMCRA and consistent with the Federal regulations. 1. NMSA, Section 69-25A-29.G, and NMAC, Section 19.8.12.1201, Elimination of Appeals for Review by the Commission of Decisions of the Director of the New Mexico Program At its own initiative, New Mexico proposes to eliminate the provisions in NMSA at 69-25A-29.G and in NMAC, section 19.8.12.1201 that require administrative review by the Commission of decisions by the Director of the New Mexico program. States must provide for administrative review of State program actions, in accordance with section 525 of SMCRA and 30 CFR subchapter L. States must also have a permit system which provides for review of decisions consistent with 30 CFR subchapter G. Section 525 of SMCRA and subchapter G require one level of administrative review. New Mexico is retaining its statutory provisions for administrative review of enforcement actions by the Director of the New Mexico program in NMSA section 69-25A-29 and permitting decisions in NMSA section 69-25A-18. New Mexico also is retaining regulations at NMAC, section 19.8.12.1203, for administrative review of enforcement actions by the Director of the New Mexico program. The elimination of administrative review by the Commission leaves in place existing provisions for administrative review conducted by the Director of the New Mexico program for decisions concerning permitting and enforcement actions. OSM finds that New Mexico's proposed revisions concerning administrative review at NMSA, section 69-25A-29.G, and NMAC, section 19.8.12.1201, are consistent with the Act and the Federal regulations, and the revisions will not make New Mexico's statutes and rules less stringent than section 525 of SMCRA or less effective than 30 CFR subchapters L and G. 2. NMSA, Section 69-25A-30.A, and NMAC, Sections 19.8.12.1202.A and 19.8.12.1203.K, Appeals of Decisions by the Director of the New Mexico Program to the State District Court New Mexico proposes revisions of NMSA, section 69-25A-30.A, concerning judicial review, to clarify that appeals to a State District Court may be made by a party who is aggrieved by a decision of the Director, rather than the Commission, of the New Mexico program. Likewise, New Mexico proposes to revise NMAC, sections 10.8.12.1202.A and 19.8.12.1203.K, concerning judicial review, to state respectively that

(1)A party to a proceeding before the Director who is aggrieved by a Director's decision issued after a hearing may obtain a review of that decision pursuant to NMSA section 39-3-1.1, and

(2)the State District Court may review decisions concerning formal review of notices of violation, cessation orders, and show cause orders issued by the Director of the New Mexico program, pursuant to Subsection G of section 69-25A-30, NMSA, and NMAC 19.8.12.1202. Existing NMAC 19.8.12.1202.A through D established procedures for judicial review of administrative decisions under the New Mexico program. New Mexico proposes to eliminate the procedures in NMAC 19.8.12.1202.A through D and revise NMAC 19.8.12.1202.A to require that appeals to State District Court will be subject to section 39-3-1.1 of the NMSA. Section 39-3-1.1 is applicable to all New Mexico State agencies for appeal of final agency decisions to the State District Court and covers procedures for application and scope of review. The Federal regulation at 30 CFR 732.15(b)(15) requires State programs to provide for judicial review of State program actions in accordance with State laws, as provided in section 526(e) of SMCRA, except that judicial review of State enforcement actions shall be in accordance with section 526 of SMCRA. Section 526(e) of SMCRA requires that actions of the State regulatory authority pursuant to an approved State program shall be subject to judicial review by a court of competent jurisdiction in accordance with State law. Sections 526(a) through

(d)of SMCRA establish procedures for such judicial review of enforcement actions. Section 526(a) specifies that actions constituting rulemaking and orders or decisions in a civil penalty proceeding, issued by the Secretary of the Interior, may be subject to judicial review; it also provides the location and timeframe for filing of a petition for judicial review. Section 526(b) specifies the actions of the court hearing such a petition. Section 526(c) specifies the circumstances necessary for a court to grant temporary relief in the case of a proceeding to review any order or decision for cessation of coal mining and reclamation operations. Section 526(d) specifies that the commencement of a proceeding for judicial review shall not, unless specifically ordered by the court, operate as a stay of the action, order, or decision of the Secretary. There are no Federal regulations that set forth procedures for judicial review. The procedures set forth in NMSA 39-3-1.1 apply to judicial review of any final decision by a New Mexico agency, and among other things, specify how final agency decisions must be documented and published, provide for appeal of a decision by any person aggrieved by the decision, specify the actions that may be taken by the district court, and provide for review of the State District Court decision by a party to the appeal. The procedures set forth by New Mexico in NMSA 39-3-1.1 provide for similar procedures concerning judicial review set forth in SMCRA at sections 526(a) through

(d)and demonstrate the ability for a person to obtain judicial review of all agency decisions as required by SMCRA at section 526(e). These proposed revisions are also consistent with New Mexico's revisions discussed in finding B.1 above that eliminate administrative review by the Commission of decisions, other than those concerning promulgation of rules, by the Director. (See finding No. 3 below for New Mexico's provisions concerning judicial review of agency rulemaking decisions.) Therefore, OSM finds that the proposed revisions concerning judicial review at NMSA, section 69-25A-30.A, and at NMAC, sections 10.8.12.1202.A and 19.8.12.1203.K are consistent with the Act and the Federal regulations and the revisions will not make New Mexico's statutes and rules less stringent than section 526 of SMCRA or less effective than 30 CFR subchapters L and G. 3. NMAC, Section 19.8.12.1202.B, Judicial Review of Decisions by the Commission Concerning Adoption of a Rule, Amendment of a Rule or Repeal of a Rule Existing NMAC 19.8.12.1202.E provides that persons aggrieved by a rule or amendment or repeal of a rule the Commission adopts may appeal to the State Court of Appeals. The existing regulation also includes procedures and timeframes for such an appeal as well as the standards for review by the court. As described in finding B.2 above, New Mexico proposes to eliminate existing NMAC 19.8.12.1202.B, C and D so that New Mexico's existing NMAC 19.8.12.1202.E becomes NMAC 19.8.12.1202.B. New Mexico proposes to eliminate the existing procedures, timeframe and standards in proposed NMAC 19.8.12.1202.B and instead proposes to cross-reference the statutory provision at NMSA, Subsection B of 69-25A-30, which sets forth the same procedures, timeframes and standards for judicial review. 30 CFR 732.15(b)(15) requires that State programs provide for judicial review of State program actions in accordance with State law, as provided in section 526(e) of the Act. Section 526(e) states that actions of the State regulatory authority shall be subject to judicial review by a court of competent jurisdiction in accordance with State law. There are no Federal regulations for section 526(e) of the Act. OSM finds that New Mexico's proposed NMAC 19.8.12.1202.B, concerning judicial review of rulemaking by the Commission, and the reference to NMSA, subsection B of 69-25A-30, are in accordance with the requirements of section 526(e) of SMCRA for judicial review. 4. NMSA, Section 69-25A-29.F, Administrative Review of a Notice or Order by the Director of the New Mexico Program New Mexico proposes to revise NMSA, section 69-25A-29.F, concerning administrative review, by deleting references to the Commission. With these revisions, New Mexico removed authority from the Commission and left authority with the Director of the New Mexico program to determine whether expenses (that have been reasonably incurred for or in connection with participation in administrative proceedings, including any judicial review of agency actions) may be assessed against any party. Section 525(e) of SMCRA allows for an award of a sum equal to the aggregate amount of all costs, expenses, and attorney fees determined by the Secretary of the Interior to have been reasonably incurred by a person for or in connection with his participation in administrative proceedings, including any judicial review of agency actions. As discussed in finding No. B.1. above, New Mexico's proposed revisions to delete the additional administrative review by the Commission of the Director's decisions, is consistent with section 525 of SMCRA. OSM finds that New Mexico's proposed revisions to NMSA, section 69-25A-29.F, deleting references to the Commission, are consistent with and no less stringent than section 525(e) of SMCRA. 5. NMSA, Section 69-25A-36, Termination of Agency Life New Mexico proposes revisions of NMSA at section 69-25A-36, concerning termination of agency life, to extend the authority of the Commission to operate according to the provisions of NMSA from July 1, 2005, until July 1, 2012. The Commission, created in NMSA at section 69-25A-1, meets at least once a year to adopt, amend and repeal rules. SMCRA, at section 503(a), and the Federal regulation at 30 CFR 732.15(a) requires that the State program provide for the State to carry out the provisions and meet the purposes of SMCRA within the State and that the State's laws and regulations are in accordance with the provisions of SMCRA. Because New Mexico's proposed revision extends the authority of the Commission to operate until July 1, 2012, and therefore enables rulemaking for the New Mexico program, OSM approves the proposed revision. IV. Summary and Disposition of Comments Public Comments We asked for public comments on the amendment (Administrative Record No. NM-876). We received one comment letter. By letter dated February 2, 2006 (Administrative Record No. NM-879), we received comments from the Governor of the Zuni Tribe in Zuni, New Mexico. Our response to the Governor's comments regarding New Mexico's proposed rule revisions at NMAC, section 19.8.12.1202.A, concerning judicial review of final agency decisions, is discussed below. The Governor raised a concern that the proposed revision to NMAC, section 19.8.12.1202.A, would limit a person's ability to challenge agency decisions. New Mexico's proposed revisions at NMAC, sections 19.8.12.1201 and 19.8.12.1202.A eliminate the need for a second administrative hearing before the Commission prior to allowing an appeal to the State District Court; this rule revision reflects the same statutory revision of the NMSA at section 69-25A-29.G. As discussed in finding No. B.2 above, New Mexico's proposed elimination of the opportunity for a second administrative hearing is consistent with the counterpart Federal regulations at 30 CFR 775.13. The Governor also expressed concern that because only certain agency decisions can be the subject of an administrative hearing, some decisions may not therefore be appealed to the State District Court. As discussed in finding B.1 above, New Mexico's proposed revision of NMSA, section 69-25A-30.A, and NMAC, sections 19.8.12.1202.A and 19.8.12.1203.K, provide for appeals of decisions by the Director to the State District Court. New Mexico's NMSA, section 69-25A-29, provides for administrative review of enforcement actions and NMSA, section 69-25A-18, provides for administrative review of permitting decisions. New Mexico is also retaining regulations at NMAC, section 19.8.12.1203, for administrative review of enforcement actions by the Director. The elimination of administrative review by the Commission leaves in place existing provisions for administrative review conducted by the Director for decisions concerning both permitting and enforcement actions and appeal of these decisions to the State District Court. Therefore, New Mexico's proposed revision is consistent with and in accordance with section 526 of SMCRA and 30 CFR subchapters L and G. The Governor also correctly noted that the existing New Mexico rule at NMAC, section 19.8.12.1200.A, allows an administrative appeal of, among other final decisions made by the Director of the New Mexico program, a decision concerning a permit modification; this opportunity for review has not been revised. OSM notes that New Mexico's allowance for an administrative appeal of a decision concerning a permit modification at NMAC section 19.8.12.1200.A is not specifically required under the counterpart Federal regulation at 30 CFR 775.11(a) (see OSM's approval of NMAC, section 19.8.12.1200.A, on April 13, 2004, 69 FR 19321, at 19322, finding No. C.2.). For the reasons discussed above, we are not requiring any revision of New Mexico's proposed rules in response to these comments. Federal Agency Comments Under 30 CFR 732.17(h)(11)(i) and section 503(b) of SMCRA, we requested comments on the amendment from various Federal agencies with an actual or potential interest in the New Mexico program (Administrative Record No. NM-876). We received no comments. Environmental Protection Agency

(EPA)Concurrence and Comments Under 30 CFR 732.17(h)(11)(i) and (ii), we are required to get concurrence from EPA for those provisions of the program amendment that relate to air or water quality standards issued under the authority of the Clean Water Act (33 U.S.C. 1251 *et seq.* ) or the Clean Air Act (42 U.S.C. 7401 *et seq.* ). None of the revisions that New Mexico proposed to make in this amendment pertains to air or water quality standards. Under 30 CFR 732.17(h)(11)(i), OSM requested comments on the amendment from EPA (Administrative Record No. NM-876). EPA did not respond to our request. State Historic Preservation Officer

(SHPO)and the Advisory Council on Historic Preservation

(ACHP)Under 30 CFR 732.17(h)(4), we are required to request comments from the SHPO and ACHP on amendments that may have an effect on historic properties. On December 20, 2006, we requested comments on New Mexico's amendment (Administrative Record No. NM-876). The SHPO responded on February 9, 2006, that it had no comments because the proposed amendments do not affect cultural resources (Administrative Record No. NM-881). We did not receive a response from the ACHP. V. OSM's Decision Based on the above findings, we approve New Mexico's November 18, 2005, proposed amendment, as revised on March 27, 2006. We approve New Mexico's proposed statutory revisions as they were enacted by New Mexico (effective on June 17, 2005) and rule revisions as promulgated by New Mexico (effective on April 28, 2006). To implement this decision, we are amending the Federal regulations at 30 CFR part 931, which codify decisions concerning the New Mexico program. We find that good cause exists under 5 U.S.C. 553(d)(3) to make this final rule effective immediately. Section 503(a) of SMCRA requires that the State's program demonstrate that the State has the capability of carrying out the provisions of the Act and meeting its purposes. Making this regulation effective immediately will expedite that process. SMCRA requires consistency of State and Federal standards. VI. Procedural Determinations Executive Order 12630—Takings This rule does not have takings implications. This determination is based on the analysis performed for the counterpart Federal regulation. Executive Order 12866—Regulatory Planning and Review This rule is exempted from review by the Office of Management and Budget

(OMB)under Executive Order 12866 (Regulatory Planning and Review). Executive Order 12988—Civil Justice Reform The Department of the Interior has conducted the reviews required by section 3 of Executive Order 12988 and has determined that this rule meets the applicable standards of subsections

(a)and

(b)of that section. However, these standards are not applicable to the actual language of State regulatory programs and program amendments because each program is drafted and promulgated by a specific State, not by OSM. Under sections 503 and 505 of SMCRA (30 U.S.C. 1253 and 1255) and the Federal regulations at 30 CFR 730.11, 732.15, and 732.17(h)(10), decisions on proposed State regulatory programs and program amendments submitted by the States must be based solely on a determination of whether the submittal is consistent with SMCRA and its implementing Federal regulations and whether the other requirements of 30 CFR Parts 730, 731, and 732 have been met. Executive Order 13132—Federalism This rule does not have Federalism implications. SMCRA delineates the roles of the Federal and State governments with regard to the regulation of surface coal mining and reclamation operations. One of the purposes of SMCRA is to “establish a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations.” Section 503(a)(1) of SMCRA requires that State laws regulating surface coal mining and reclamation operations be “in accordance with” the requirements of SMCRA, and section 503(a)(7) requires that State programs contain rules and regulations “consistent with” regulations issued by the Secretary pursuant to SMCRA. Executive Order 13175—Consultation and Coordination With Indian Tribal Governments In accordance with Executive Order 13175, we have evaluated the potential effects of this rule on Federally recognized Indian Tribes and have determined that the rule does not have substantial direct effects on one or more Indian Tribes, on the relationship between the Federal government and Indian Tribes, or on the distribution of power and responsibilities between the Federal government and Indian Tribes. The rule does not involve or affect Indian Tribes in any way. Executive Order 13211—Regulations That Significantly Affect the Supply, Distribution, or Use of Energy On May 18, 2001, the President issued Executive Order 13211 which requires agencies to prepare a Statement of Energy Effects for a rule that is

(1)considered significant under Executive Order 12866, and

(2)likely to have a significant adverse effect on the supply, distribution, or use of energy. Because this rule is exempt from review under Executive Order 12866 and is not expected to have a significant adverse effect on the supply, distribution, or use of energy, a Statement of Energy Effects is not required. National Environmental Policy Act This rule does not require an environmental impact statement because section 702(d) of SMCRA (30 U.S.C. 1292(d)) provides that agency decisions on proposed State regulatory program provisions do not constitute major Federal actions within the meaning of section 102(2)(C) of the National Environmental Policy Act (42 U.S.C. 4321. Paperwork Reduction Act This rule does not contain information collection requirements that require approval by OMB under the Paperwork Reduction Act (44 U.S.C. 3501 *et seq.* ). Regulatory Flexibility Act The Department of the Interior certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 *et seq.* ). The State submittal, which is the subject of this rule, is based upon counterpart Federal regulations for which an economic analysis was prepared and certification made that such regulations would not have a significant economic effect upon a substantial number of small entities. In making the determination as to whether this rule would have a significant economic impact, the Department relied upon the data and assumptions for the counterpart Federal regulations. Small Business Regulatory Enforcement Fairness Act This rule is not a major rule under 5 U.S.C. 804(2), of the Small Business Regulatory Enforcement Fairness Act. This rule: a. Does not have an annual effect on the economy of $100 million. b. Will not cause a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions. c. Does not have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-based enterprises. This determination is based upon the fact that the State submittal which is the subject of this rule is based upon counterpart Federal regulations for which an analysis was prepared and a determination made that the Federal regulation was not considered a major rule. Unfunded Mandates This rule will not impose an unfunded Mandate on State, local, or tribal governments or the private sector of $100 million or more in any given year. This determination is based upon the fact that the State submittal, which is the subject of this rule, is based upon counterpart Federal regulations for which an analysis was prepared and a determination made that the Federal regulation did not impose an unfunded mandate. List of Subjects in 30 CFR Part 931 Intergovernmental relations, Surface mining, Underground mining. Dated: September 11, 2006. Allen D. Klein, Regional Director, Western Region. For the reasons set out in the preamble, 30 CFR part 931 is amended as set forth below: PART 931—NEW MEXICO 1. The authority citation for part 931 continues to read as follows: Authority: 30 U.S.C. 1201 *et seq.* 2. Section 931.15 is amended in the table by adding a new entry in chronological order by “Date of final publication” to read as follows: § 931.15 Approval of New Mexico regulatory program amendments. Original amendment submission date Date of final publication Citation/description * * * * * * * November 18, 2005, as revised on March 27, 2006 October 19, 2006 NMSA, sections 69-25A-18.A, B, C, D and F, concerning the decisions of the Director and appeals; NMSA, sections 69-25A-29.A, B, C, D, and F, concerning the administrative review of a notice or order by the Director; NMSA, sections 69-25A-29.G, concerning deletion of statutes allowing for review by the Commission of decisions of the Director; NMSA, section 69-25A-30.A, concerning judicial review of final decisions by the Director; NMSA, sections 69-25A-36, concerning termination of agency life; NMAC, sections 19.8.11.1100.A(3), D, and D(2), concerning public notices of filing of permit applications; NMAC, section 19.8.11.1101.C, concerning opportunity for submission of written comments on permit applications; NMAC, sections 19.8.11.1102.A and B(2), concerning the right to file written objections; NMAC, sections 19.8.11.1103.A(3), B, B(1), D, E(1), and F, concerning hearings and conferences; NMAC, section 19.8.11.1104.B, concerning public availability of information in permit applications on file with the Director; NMAC, sections 19.8.11.1105.C(2), D, E, and F, concerning review of permit applications; NMAC, sections 19.8.11.1106.C, D(3), F, G(1) and (2), and N, concerning criteria for permit approval or denial; NMAC, sections 19.8.11.1107.A, B, B(1), B(1)(b), B(3), C, D, E, and F, concerning general procedures for improvidently issued permits; NMAC, section 19.8.11.1108.B, concerning existing structures and criteria for permit approval or denial; NMAC, sections 19.8.11.1109.A(4), B, B(1) and (2), B(2)(b), B(3), and D, concerning permit approval or denial actions; NMAC, section 19.8.11.1110.A(1), concerning the rescission process for improvidently issued permits; NMAC, section 19.8.11.1111.B, concerning permit terms; NMAC, section 19.8.11.1113.C(2), concerning conditions of permit for environment, public health and safety; NMAC, section 19.8.11.1114, concerning conformance of permit; NMAC, sections 19.8.11.1115.A, B, and C, concerning verification of ownership or control application information; NMAC, sections 19.8.11.1116.B and B(2)(b), concerning review of ownership or control and violation information; NMAC, sections 19.8.11.1117.A, A(1),

(2)and (3), B, C, D, D(1) and (2), and D(2)(a) and (b), concerning procedures for challenging ownership or control links shown in the applicant violator system; NMAC, sections 19.8.11.1118.B, B(1),

(2)and (3), B(3)(1), C, C(1)(a) through (c), and C(2), concerning standards for challenging ownership or control links and the status of violations; NMAC, section 19.8.12.1201, deletion of rules allowing for review by the Commission of decisions of the Director; NMAC, sections 19.8.12.1202.A, concerning judicial review of final decisions by the Director; NMAC, sections 19.8.12.1202.B, concerning judicial review of decisions by the Commission; and NMAC, sections 19.8.12.1203.A through L, concerning formal review of notices of violations, cessation orders, and show cause orders. [FR Doc. E6-17521 Filed 10-18-06; 8:45 am] BILLING CODE 4310-05-P DEPARTMENT OF DEFENSE Department of the Navy 32 CFR Part 706 Certifications and Exemptions Under the International Regulations for Preventing Collisions at Sea, 1972 AGENCY: Department of the Navy, DoD. ACTION: Final rule. SUMMARY: The Department of the Navy is amending its certifications and exemptions under the International Regulations for Preventing Collisions at Sea, 1972 (72 COLREGS), to reflect that the Deputy Assistant Judge Advocate General (Admiralty and Maritime Law) has determined that USS HAWAII (SSN 776) is a vessel of the Navy which, due to its special construction and purpose, cannot fully comply with certain provisions of the 72 COLREGS without interfering with its special function as a naval ship. The intended effect of this rule is to warn mariners in waters where 72 COLREGS apply. DATES: Effective Date: October 5, 2006. FOR FURTHER INFORMATION CONTACT: Commander C. J. Spain, JAGC, U.S. Navy, Deputy Assistant Judge Advocate General (Admiralty and Maritime Law), Office of the Judge Advocate General, Department of the Navy, 1322 Patterson Ave., SE., Suite 3000, Washington Navy Yard, DC 20374-5066, telephone 202-685-5040. SUPPLEMENTARY INFORMATION: Pursuant to the authority granted in 33 U.S.C. 1605, the Department of the Navy amends 32 CFR Part 706. This amendment provides notice that the Deputy Assistant Judge Advocate General (Admiralty and Maritime Law), under authority delegated by the Secretary of the Navy, has certified that USS HAWAII(SSN 776) is a vessel of the Navy which, due to its special construction and purpose, cannot fully comply with the following specific provisions of 72 COLREGS without interfering with its special function as a naval ship: Rule 21(c) pertaining to the arc of visibility of the stern light; Annex I, section 2(a)(i), pertaining to the height of the masthead light; Annex I, section 2(k) pertaining to the height and relative positions of the anchor lights; and Annex I, section 3(b), pertaining to the location of the sidelights. The Deputy Assistant Judge Advocate General (Admiralty and Maritime Law) has also certified that the lights involved are located in closest possible compliance with the applicable 72 COLREGS requirements. All other previously certified deviations from the 72 COLREGS not affected by this amendment remain in effect. Moreover, it has been determined, in accordance with 32 CFR Parts 296 and 701, that publication of this amendment for public comment prior to adoption is impracticable, unnecessary, and contrary to public interest since it is based on technical findings that the placement of lights on this vessel in a manner differently from that prescribed herein will adversely affect the vessel's ability to perform its military functions. List of Subjects in 32 CFR Part 706 Marine safety, Navigation (water), and Vessels. For the reasons set forth in the preamble, amend part 706 of title 32 of the Code of Federal Regulations as follows: PART 706—CERTIFICATIONS AND EXEMPTIONS UNDER THE INTERNATIONAL REGULATIONS FOR PREVENTING COLLISIONS AT SEA, 1972 1. The authority citation for part 706 continues to read: Authority: 33 U.S.C. 1605. 2. Table One of § 706.2 is amended by adding, in numerical order, the following entry for the USS HAWAII (SSN 776): § 706.2 Certifications of the Secretary of the Navy under Executive Order 11964 and 33 U.S.C. 1605. Vessel Number Distance in meters of forward masthead light below minimum required height. § 2(a)(i), Annex I * * * * * * * USS HAWAII SSN 776 2.90 * * * * * * * 3. Table Three of § 706.2 is amended by adding, in numerical order, the following entry for USS HAWAII: § 706.2 Certifications of the Secretary of the Navy under Executive Order 11964 and 33 U.S.C. 1605. Table 3 Vessel No. Masthead lights arc of visibility; rule 21(a) Side lights arc of visibility; rule 21(b) Stern light arc of visibility; rule 21(c) Side lights distance inboard of ship's sides in meters § 3(b) annex 1 Stern light, distance forward of stern in meters; rule 21(c) Forward anchor light height above hull in meters; 2(K) annex 1 Anchor lights relation ship of aft light to forward light in meters 2(K) annex 1 USS HAWAII SSN 776 205° 4.37 11.05 2.8 0.30 below. Approved: October 5, 2006. Gregg A. Cervi, Commander, JAGC, U.S. Navy,Deputy Assistant Judge Advocate General (Admiralty and Maritime Law). [FR Doc. E6-17431 Filed 10-18-06; 8:45 am] BILLING CODE 3810-FF-P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Parts 52 and 81 [EPA-R05-OAR-2006-0399; FRL-8232-1] Determination of Attainment, Approval and Promulgation of Implementation Plans and Designation of Areas for Air Quality Planning Purposes; Indiana; Redesignation of Allen County 8-hour Ozone Nonattainment Area to Attainment for Ozone; Withdrawal of Direct Final Rule AGENCY: Environmental Protection Agency (EPA). ACTION: Withdrawal of direct final rule. SUMMARY: Due to the receipt of an adverse comment, the EPA is withdrawing the August 30, 2006 (71 FR 51489), direct final rule approving the State of Indiana's May 30, 2006, request to redesignate the 8-hour ozone National Ambient Air Quality Standard (NAAQS) nonattainment area of Allen County, Indiana, to attainment for the 8-hour ozone NAAQS; and for EPA approval of an Indiana State Implementation Plan

(SIP)revision containing a 14-year maintenance plan for Allen County. In the direct final rule, EPA stated that if adverse comments were submitted by September 29, 2006, the rule would be withdrawn and not take effect. On September 4, 2006, EPA received a comment. EPA believes this comment is adverse and, therefore, EPA is withdrawing the direct final rule. EPA will address the comment in a subsequent final action based upon the proposed action also published on August 30, 2006 (71 FR 51546). EPA will not institute a second comment period on this action. DATES: The direct final rule published at 71 FR 51489 on August 30, 2006 is withdrawn as of October 19, 2006. FOR FURTHER INFORMATION CONTACT: Steven Rosenthal, Environmental Engineer, Criteria Pollutant Section, Air Programs Branch (AR-18J), Environmental Protection Agency, Region 5, 77 West Jackson Boulevard, Chicago, Illinois 60604, (312)886-6052, *Rosenthal.steven@epa.gov. * List of Subjects 40 CFR Part 52 Environmental protection, Air pollution control, Incorporation by reference, Intergovernmental relations, Nitrogen dioxide, Ozone, and Volatile organic compounds. 40 CFR Part 81 Air pollution control, Environmental protection, National parks, Wilderness areas. Dated: October 6, 2006. Gary Gulezian, Acting Regional Administrator, Region 5. PART 40—[AMENDED] Accordingly, the amendments to 40 CFR 52.777 and 81.315 published in the **Federal Register** on August 30, 2006 (71 FR 51489) on pages 51489-51500 is withdrawn as of October 19, 2006. [FR Doc. E6-17432 Filed 10-18-06; 8:45 am] BILLING CODE 6560-50-P NATIONAL AERONAUTICS AND SPACE ADMINISTRATION 48 CFR Parts 1819 and 1852 RIN 2700-AD17 Small Business Innovation Research

(SBIR)and Small Business Technology Transfer

(STTR)Contractor Recertification of Program Compliance AGENCY: National Aeronautics and Space Administration. ACTION: Final rule. SUMMARY: This rule adopts the proposed rule published in the **Federal Register** on September 30, 2005 as final with minor, non-substantive editorial changes. The final rule amends the NASA FAR Supplement

(NFS)to include a requirement for NASA's Small Business Innovation Research

(SBIR)and the Small Business Technology Transfer

(STTR)program contractors to complete a recertification of program compliance prior to final payment. This requirement is being established to facilitate the Government's ability to hold contractors accountable for compliance with Federal statute, regulation, and requirements associated with the SBIR and STTR programs. In addition, the final rule corrects the following in the proposed rule: Revises the section numbering of the prescription identified in NFS 1832.12 of the proposed rule from NFS 1832.1200 to NFS 1819.7302(f); revises the numbering of the clause from NFS 1852.232-83 in the proposed rule to NFS 1852.219-85 in the final rule; makes minor revisions to conform clause titles with those in the clause prescriptions; revises the Supplementary Information, Paragraph B. Regulatory Flexibility Act to expand the justification that the rule does not have a significant economic impact on small entities; and makes other minor editorial corrections. DATES: *Effective Date:* October 19, 2006. FOR FURTHER INFORMATION CONTACT: Marilyn J. Seppi, NASA, Office of Procurement, Contract Management Division,

(202)358-0447, e-mail: *Marilyn.Seppi-1@nasa.gov.* SUPPLEMENTARY INFORMATION: A. Background NASA published a proposed rule in the **Federal Register** on September 30, 2005 (70 FR 57240-57242). The public comment period ended on November 29, 2005. One public comment was received. The comment stated that the proposed rule constituted an undue burden and would have a significant (adverse) impact on small businesses. The respondent also objected to long-standing SBIR/STTR program requirements relating to limitations on subcontracting. NASA's Response: Regarding the issue of additional burden, NASA believes that it is in the Government's best interest to implement the proposed rule requiring SBIR/STTR contractors to recertify their compliance with Program requirements prior to final payment to hold contractors accountable for Program compliance and to enable the pursuit of criminal and civil cases when noncompliance constitutes a fraud against the Government. NASA believes that the additional burden resulting from the recertification statement requirement is minimal. The respondent's comment objecting to current SBIR/STTR program requirements relating to limitations on subcontracting is noted; however, these are existing program requirements that apply regardless of this rule. Therefore, this final rule amends NASA FAR Supplement Parts 1819 and 1852 to require that all research and development contracts awarded under the SBIR and STTR Programs include the clause at 1852.219-85, Conditions for Final Payment—SBIR and STTR Contracts. This clause provides direction to the contractor regarding completion and submission of a recertification requirement prior to and as a condition of final payment. In addition, the rule requires use of the clauses at 1852.219-80, Limitation on Subcontracting—SBIR Phase I Program, 1852.219-81, Limitation on Subcontracting—SBIR Phase II Program, and 1852.219-82, Limitation on Subcontracting—STTR Program, in the respective SBIR and STTR contracts to delineate the subcontracting limitations necessary for contract performance. The rule also requires the use of clauses at 1852.219-83, Limitation of the Principal Investigator—SBIR Program, and 1852.219-84, Limitation of the Principal Investigator—STTR Program, respectively, to describe the employment requirements of the principal investigator. This is not a significant regulatory action and, therefore, was not subject to review under Section 6(b) of Executive Order 12866, Regulatory Planning and Review, dated September 30, 1993. This rule is not a major rule under 5 U.S.C. 804. B. Regulatory Flexibility Act NASA certifies that this rule will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, *et seq.* , because the recertification prior to final payment to awardees is merely an updated statement by the contractor provided in the representations and certifications submitted with the proposal in accordance with the Small Business Administration's SBIR Program Directive. The information included in the contractor's statement addresses subcontracting limitations and contracting officer consent requirements which are part of a contractor's normal contract administration responsibilities in monitoring compliance with contract and program requirements. Accordingly, the recertification is not considered to have a significant impact. C. Paperwork Reduction Act The Paperwork Reduction Act applies because the changes to the NFS impose recordkeeping or information collections, or collection of information from offerors or contractors. The Office of Management and Budget under 44 U.S.C. 3501, *et seq.* , has approved this as a new collection under OMB Control Number 2700-0124. List of Subjects in 48 CFR 1819 and 1852 Government procurement. Tom Luedtke, Assistant Administrator for Procurement. Accordingly, 48 CFR parts 1819 and 1852 are amended as follows: 1. The authority citation for 48 CFR parts 1819 and 1852 continues to read as follows: Authority: 42 U.S.C. 2473(c)(1). PART 1819—SMALL BUSINESS PROGRAMS 2. Add Subpart 1819.73 to read as follows: Subpart 1819.73—Small Business Innovation Research

(SBIR)and Small Business Technology Transfer

(STTR)Programs 1819.7301 Scope of subpart. Sec. 1819.7301 Scope of subpart. 1819.7302 NASA contract clauses. Subpart 1819.73—Small Business Innovation Research

(SBIR)and Small Business Technology Transfer

(STTR)Programs 1819.7301 Scope of subpart. The Small Business Innovation Research

(SBIR)and Small Business Technology Transfer

(STTR)Programs were established and issued under the authority of the Small Business Act codified at 15 U.S.C. 631, as amended, and the Small Business Innovation Development Act of 1982 (Pub. L. 97-219), codified with amendments at 15 U.S.C. 638. The Small Business Act requires that the Small Business Administration

(SBA)issue SBIR and STTR Program Policy Directives for the general conduct of the SBIR/STTR Programs within the Federal Government. The statutory purpose of the SBIR Program is to strengthen the role of innovative small business concerns

(SBCs)in federally-funded research or research and development (R/R&D). Specific program purposes are to: Stimulate technological innovation; use small business to meet Federal R/R&D needs; foster and encourage participation by socially and economically disadvantaged SBCs, and by SBCs that are 51-percent owned and controlled by women, in technological innovation; and increase private sector commercialization of innovations derived from Federal R/R&D, thereby increasing competition, productivity and economic growth. Federal agencies participating in the SBIR/STTR Programs (SBIR/STTR agencies) are obligated to follow the guidance provided by the SBA Policy Directive. NASA is required to ensure its policies, regulations, and guidance on the SBIR/STTR Programs are consistent with SBA's Policy Directive. Contracting officers are required to insert the applicable clauses identified in 1819.7302 in all SBIR and STTR contracts. 1819.7302 NASA contract clauses.

(a)Contracting officers shall insert the clause at 1852.219-80, Limitation on Subcontracting—SBIR Phase I Program, in all Phase I contracts awarded under the Small Business Innovation Research

(SBIR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982).

(b)Contracting officers shall insert the clause at 1852.219-81, Limitation on Subcontracting—SBIR Phase II Program, in all Phase II contracts awarded under the Small Business Innovation Research

(SBIR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982).

(c)Contracting officers shall insert the clause at 1852.219-82, Limitation on Subcontracting—STTR Program, in all contracts awarded under the Small Business Technology Transfer

(STTR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982).

(d)Contracting officers shall insert the clause at 1852.219-83, Limitation of the Principal Investigator—SBIR Program, in all contracts awarded under the Small Business Innovation Research

(SBIR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982).

(e)Contracting officers shall insert the clause at 1852.219-84, Limitation of the Principal Investigator—STTR Program, in all contracts awarded under the Small Business Technology Transfer

(STTR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982).

(f)Contracting officers shall insert the clause at 1852.219-85, Conditions for Final Payment—SBIR and STTR Contracts, in all contracts awarded under the Small Business Technology Transfer

(STTR)Program and in all Phase I and Phase II contracts awarded under the Small Business Technology Transfer

(STTR)Small Business Innovation Research

(SBIR)Program established pursuant to Public Law 97-219 (the Small Business Innovation Development Act of 1982). PART 1852—SOLICITATION PROVISIONS AND CONTRACT CLAUSES 3. Add sections 1852.219-80, 1852.219-81, 1852.219-82, 1852.219-83, 1852.219-84, and 1852.219-85 to read as follows: 1852.219-80 Limitation on Subcontracting—SBIR Phase I Program. As prescribed in 1819.7302(a), insert the following clause: Limitation on Subcontracting—SBIR Phase I Program(Oct 2006) The Contractor shall perform a minimum of two-thirds of the research and/or analytical effort (total contract price less profit) conducted under this contract. Any deviation from this requirement must be approved in advance and in writing by the Contracting Officer. (End of clause) 1852.219-81 Limitation on Subcontracting—SBIR Phase II Program. As prescribed in 1819.7302(b), insert the following clause: Limitation on Subcontracting—SBIR Phase II Program (Oct 2006) The Contractor shall perform a minimum of one-half of the research and/or analytical effort (total contract price less profit) conducted under this contract. Any deviation from this requirement must be approved in advance and in writing by the Contracting Officer. Since the selection of R&D contractors is substantially based on the best scientific and technological sources, it is important that the Contractor not subcontract technical or scientific work without the Contracting Officer's advance approval. (End of clause) 1852.219-82 Limitation on Subcontracting—STTR Program. As prescribed in 1819.7302(c), insert the following clause: Limitation on Subcontracting—STTR Program(Oct 2006) The Contractor shall perform a minimum of 40 percent of the work under this contract (total contract price including cost sharing if any, less profit if any). A minimum of 30 percent of the work under this contract shall be performed by the research institution. Since the selection of R&D contractors is substantially based on the best scientific and technological sources, it is important that the Contractor not subcontract technical or scientific work without the Contracting Officer's advance approval. (End of clause) 1852.219-83 Limitation of the Principal Investigator—SBIR Program. As prescribed in 1819.7302(d), insert the following clause: Limitation of the Principal Investigator—SBIR Program(Oct 2006) The primary employment of the principal investigator

(PI)shall be with the small business concern (SBC)/Contractor during the conduct of this contract. Primary employment means that more than one-half of the principal investigator's time is spent in the employ of the SBC/Contractor. This precludes full-time employment with another organization. Deviations from these requirements must be approved in advance and in writing by the Contracting Officer and are not subject to a change in the firm-fixed price of the contract. The PI for this contract is ( *insert name* ). (End of Clause) 1852.219-84 Limitation of the Principal Investigator—STTR Program. As prescribed in 1819.7302(e), insert the following clause: Limitation of the Principal Investigator—STTR Program (Oct 2006)

(a)The primary employment of the principal investigator

(PI)identified in paragraph

(b)of this clause is with the small business concern (SBC)/Contractor or the research institution (RI). Primary employment means that more than one-half of the principal investigator's time is spent in the employ of the SBC/Contractor or RI.

(b)The PI is considered to be key personnel in the performance of this contract. The SBC/Contractor, whether or not the employer of the PI, shall exercise primary management direction and control over the PI and be overall responsible for the PI's performance under this contract. Deviations from these requirements must be approved in advance and in writing by the Contracting Officer and are not subject to a change in the firm-fixed price of the contract. The PI for this contract is ( *insert name* ). (End of Clause) 1852.219-85 Conditions for Final Payment—SBIR and STTR Contracts. As prescribed in 1819.7302(f), insert the following clause: Conditions for Final Payment—SBIR AND STTR Contracts(Oct 2006) As a condition for final payment under this contract, the Contractor shall provide the following certifications as part of its final payment invoice request: During performance of this contract— 1. Essentially equivalent work performed under this contract has not been proposed for funding to another Federal agency; 2. No other Federal funding award has been received for essentially equivalent work performed under this contract; 3. Deliverable items submitted under this contract have not been submitted as deliverable items under another Federal funding award; 4. *For SBIR contracts:* The subcontracting limitation set forth in this contract was not exceeded except as approved in writing by the Contracting Officer on ( *insert date of approval or modification number.* ); 5. *For STTR contracts:* The subcontracting limitation set forth in this contract was not exceeded; 6. *For SBIR contracts:* The primary employment of the principal investigator

(PI)identified in this SBIR contract was with the Contractor, except as approved in writing by the Contracting Officer on ( *insert date of approval or modification number* ); and 7. *For STTR contracts:* The primary employment of the principal investigator

(PI)identified in this STTR contract was the SBC/Contractor or the research institution (RI). The PI identified in the STTR contract was considered key in the performance of this contract. The SBC/Contractor, whether or not the employer of the PI, did exercise primary management direction and control over the PI and was overall responsible for the PI's performance under this contract. Any substitutions of this individual were approved in writing by the Contracting Officer on ( *insert date of approval or modification number* ). I understand that the willful provision of false information or concealing a material fact in this representation is a criminal offense under Title 18 USC, Section 1001, False Statements, as well as Title 18 U.S.C., Section 287, False Claims. (End of Clause) [FR Doc. E6-17043 Filed 10-18-06; 8:45 am] BILLING CODE 7510-01-P 71 202 Thursday, October 19, 2006 Proposed Rules DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2006-26084; Directorate Identifier 2006-NM-063-AD] RIN 2120-AA64 Airworthiness Directives; McDonnell Douglas Model DC-8-62, DC-8-63, DC-8-62F, and DC-8-63F Airplanes AGENCY: Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: The FAA proposes to adopt a new airworthiness directive

(AD)for certain McDonnell Douglas Model DC-8-62, DC-8-63, DC-8-62F, and DC-8-63F airplanes. This proposed AD would require revising the wiring for the engine thrust brake circuit and indicating circuit and other specified actions, or rerouting the wiring at plug P1-1762A on the electrical power center generator control panel, as necessary. This proposed AD results from the determination that the thrust reverser systems on these airplanes do not adequately preclude inadvertent deployment of the thrust reversers. We are proposing this AD to prevent inadvertent deployment of the thrust reversers during takeoff or landing, which could result in loss of control of the airplane. DATES: We must receive comments on this proposed AD by December 4, 2006. ADDRESSES: Use one of the following addresses to submit comments on this proposed AD. • *DOT Docket Web site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Government-wide rulemaking Web site:* Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • *Mail:* Docket Management Facility, U.S. Department of Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, Washington, DC 20590. • *Fax:*

(202)493-2251. • *Hand Delivery:* Room PL-401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. Contact Boeing Commercial Airplanes, Long Beach Division, 3855 Lakewood Boulevard, Long Beach, California 90846, Attention: Data and Service Management, Dept. C1-L5A (D800-0024), for the service information identified in this proposed AD. FOR FURTHER INFORMATION CONTACT: William Bond, Aerospace Engineer, Propulsion Branch, ANM-140L, FAA, Los Angeles Aircraft Certification Office, 3960 Paramount Boulevard, Lakewood, California 90712-4137; telephone

(562)627-5253; fax

(562)627-5210. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to submit any relevant written data, views, or arguments regarding this proposed AD. Send your comments to an address listed in the ADDRESSES section. Include the docket number “FAA-2006-26084; Directorate Identifier 2006-NM-063-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of the proposed AD. We will consider all comments received by the closing date and may amend the proposed AD in light of those comments. We will post all comments we receive, without change, to *http://dms.dot.gov* , including any personal information you provide. We will also post a report summarizing each substantive verbal contact with FAA personnel concerning this proposed AD. Using the search function of that Web site, anyone can find and read the comments in any of our dockets, including the name of the individual who sent the comment (or signed the comment on behalf of an association, business, labor union, etc.). You may review DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78), or you may visit *http://dms.dot.gov.* Examining the Docket You may examine the AD docket on the Internet at *http://dms.dot.gov* , or in person at the Docket Management Facility office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Management Facility office (telephone

(800)647-5227) is located on the plaza level of the Nassif Building at the DOT street address stated in the ADDRESSES section. Comments will be available in the AD docket shortly after the Docket Management System receives them. Discussion In April 1992, the FAA issued a document titled “Criteria for Assessing Transport Turbojet Fleet Thrust Reverser Safety.” This document is based upon the premise that no failure of thrust reverser components anticipated to occur in service should prevent continued safe flight and landing of an airplane. In order to comply with the criteria in the document, Boeing recommends incorporating a wiring modification of the thrust reverser system on McDonnell Douglas Model DC-8-62, DC-8-63, DC-8-62F, and DC-8-63F airplanes. Based upon the Boeing safety evaluations, we have determined that the existing thrust reverser systems on these airplanes do not adequately preclude inadvertent deployment of the thrust reversers. Inadvertent deployment of the thrust reversers during takeoff or landing could result in loss of control of the airplane. Relevant Service Information We have reviewed McDonnell Douglas DC-8 Service Bulletin 78-95, Revision 2, dated March 10, 1971; and Revision 1, dated December 29, 1970. The service bulletins describe procedures for either revising the wiring for the engine thrust brake circuit and indicating circuit and doing other specified actions, or rerouting the wiring at plug P1-1762A on the electrical power center

(EPC)generator control panel, depending on the configuration of the airplane. The other specified actions include modifying and reidentifying a nameplate and accomplishing the adjustment/test of the thrust reverser system. For certain airplanes, the other specified actions also include installing a new bracket, terminal boards, and clamps. Accomplishing the actions specified in the service information is intended to adequately address the unsafe condition. FAA's Determination and Requirements of the Proposed AD We have evaluated all pertinent information and identified an unsafe condition that is likely to exist or develop on other airplanes of this same type design. For this reason, we are proposing this AD, which would require accomplishing the actions specified in the service information described previously, except as discussed under “Difference Between the Proposed AD and Service Bulletin.” Difference Between the Proposed AD and Service Bulletin Although the service bulletins do not recommend a compliance time for accomplishing the modification, we have coordinated a compliance time of 27 months with Boeing. In developing an appropriate compliance time for this proposed AD, we considered not only the manufacturer's recommendation, but the degree of urgency associated with addressing the subject unsafe condition, the average utilization of the affected fleet, and the time necessary to perform the modification. In light of all of these factors, we find a compliance time of 27 months for completing the required actions to be warranted, in that it represents an appropriate interval of time for affected airplanes to continue to operate without compromising safety. Costs of Compliance There are about 70 airplanes of the affected design in the worldwide fleet. This proposed AD would affect about 45 airplanes of U.S. registry. The proposed actions would take between 1 and 5 work hours per airplane, depending on airplane configuration, at an average labor rate of $80 per work hour. For a certain airplane configuration, required parts would cost about $9 per airplane. For a certain other airplane configuration, required parts would cost about $2,825 per airplane. Based on these figures, the estimated cost of the proposed AD for U.S. operators is between $4,005 and $145,125, or between $89 and $3,225 per airplane. Authority for This Rulemaking Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, Section 106, describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the Agency's authority. We are issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701, “General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action. Regulatory Findings We have determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. For the reasons discussed above, I certify that the proposed regulation: 1. Is not a “significant regulatory action” under Executive Order 12866; 2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and 3. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. We prepared a regulatory evaluation of the estimated costs to comply with this proposed AD and placed it in the AD docket. See the ADDRESSES section for a location to examine the regulatory evaluation. List of Subjects in 14 CFR Part 39 Air transportation, Aircraft, Aviation safety, Safety. The Proposed Amendment Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows: PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The Federal Aviation Administration

(FAA)amends § 39.13 by adding the following new airworthiness directive (AD): **McDonnell Douglas:** Docket No. FAA-2006-26084; Directorate Identifier 2006-NM-063-AD. Comments Due Date

(a)The FAA must receive comments on this AD action by December 4, 2006. Affected ADs

(b)None. Applicability

(c)This AD applies to McDonnell Douglas Model DC-8-62 and DC-8-63 airplanes and Model DC-8-62F and DC-8-63F airplanes, certificated in any category; as identified in McDonnell Douglas DC-8 Service Bulletin 78-95, Revision 2, dated March 10, 1971. Unsafe Condition

(d)This AD results from the determination that the thrust reverser systems on McDonnell Douglas Model DC-8-62, DC-8-63, Model DC-8-62F, and DC-8-63F airplanes do not adequately preclude inadvertent deployment of the thrust reversers. We are issuing this AD to prevent inadvertent deployment of the thrust reversers during takeoff or landing, which could result in loss of control of the airplane. Compliance

(e)You are responsible for having the actions required by this AD performed within the compliance times specified, unless the actions have already been done. Modification of Engine Thrust Brake Circuitry

(f)Within 27 months after the effective date of this AD, do the applicable action specified in paragraph (f)(1) or (f)(2) of this AD, by accomplishing all of the applicable actions specified in the Accomplishment Instructions of McDonnell Douglas DC-8 Service Bulletin 78-95, Revision 2, dated March 10, 1971; or Revision 1, dated December 29, 1970.

(1)Revise the wiring for the engine thrust brake circuit and indicating circuit, and do all other specified actions before further flight after revising the wiring.

(2)Reroute the wiring at plug P1-1762A on the electrical power center generator control panel. Alternative Methods of Compliance (AMOCs) (g)(1) The Manager, Los Angeles Aircraft Certification Office, FAA, has the authority to approve AMOCs for this AD, if requested in accordance with the procedures found in 14 CFR 39.19.

(2)Before using any AMOC approved in accordance with § 39.19 on any airplane to which the AMOC applies, notify the appropriate principal inspector in the FAA Flight Standards Certificate Holding District Office. Issued in Renton, Washington, on October 10, 2006. Kalene C. Yanamura, Acting Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E6-17421 Filed 10-18-06; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF COMMERCE Bureau of Industry and Security 15 CFR Parts 740, 742, 744 and 748 [Docket No. 06022180-6266-02] RIN 0694-AD75 Revisions and Clarification of Export and Reexport Controls for the People's Republic of China (PRC); New Authorization Validated End-User AGENCY: Bureau of Industry and Security, Commerce. ACTION: Proposed rulemaking; extension of comment period. SUMMARY: This notice extends the comment period on a July 6, 2006 proposed rule in which the Bureau of Industry and Security

(BIS)proposed amending the Export Administration Regulations

(EAR)to revise and clarify the United States' policy for exports and reexports of dual-use items to the People's Republic of China (PRC). DATES: All comments on the proposed rule must be received by no later than December 4, 2006. ADDRESSES: Written comments on this rule may be sent to the Federal eRulemaking Portal: *http://www.regulations.gov* , or by e-mail to *publiccomments@bis.doc.gov.* Include RIN 0694-AD75 in the subject line of the message. Comments may be submitted by mail or hand delivery to Sheila Quarterman, Office of Exporter Services, Regulatory Policy Division, Bureau of Industry and Security, Department of Commerce, 14th St. & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230, ATTN: RIN 0694-AD75; or by fax to

(202)482-3355. FOR FURTHER INFORMATION CONTACT: For further information regarding this notice or the proposed rule, contact Sheila Quarterman, Office of Exporter Services, Regulatory Policy Division, by telephone at

(202)482-2440 or by fax at

(202)482-3355. SUPPLEMENTARY INFORMATION: On July 6, 2006, the Bureau of Industry and Security

(BIS)published a proposed rule in the **Federal Register** (71 FR 38313) that proposed amending the Export Administration Regulations

(EAR)to revise and clarify the United States' policy for exports and reexports of dual-use items to the People's Republic of China (PRC). Specifically, the proposed rule states that it is the policy of the United States Government to prevent exports that would make a material contribution to the military capability of the PRC, while facilitating U.S. exports to legitimate civil end-users in the PRC. Consistent with this policy, BIS proposed to amend the EAR by revising and clarifying United States licensing requirements and licensing policy on exports and reexports of goods and technology to the PRC. The main amendments in the proposed rule include restrictions on certain exports and reexports for military end-uses in the PRC; a change in scope of end-user certificate requirement for the PRC; and a new Authorization Validated End-User (VEU). The proposed rule indicated that the deadline for public comments closes on November 3, 2006. BIS is now extending the comment period until December 4, 2006, to allow the public more time to submit comments in light of discussions heard during the public meetings. Dated: October 13, 2006. Eileen Albanese, Director, Office of Exporter Services. [FR Doc. E6-17429 Filed 10-18-06; 8:45 am] BILLING CODE 3510-33-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-127819-06] RIN 1545-BF79 TIPRA Amendments to Section 199 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing. SUMMARY: In the Rules and Regulations section of this issue of the **Federal Register** , the IRS is issuing temporary regulations concerning the application of section 199 of the Internal Revenue Code, which provides a deduction for income attributable to domestic production activities. The text of those regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by January 17, 2007. Outlines of topics to be discussed at the public hearing scheduled for February 5, 2007, must be received by January 16, 2007. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-127819-06), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-127819-06), Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell St., Arlington, VA, or 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-REG-127819-06). The public hearing will be held in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Maryland 20706. FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Paul Handleman or Lauren Ross Taylor,

(202)622-3040; concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly D. Banks,

(202)622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Temporary regulations in the Rules and Regulations section of this issue of the **Federal Register** amend the Income Tax Regulations (26 CFR part 1) relating to section 199. The temporary regulations provide guidance concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 to section 199 of the Internal Revenue Code. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on 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. Comments are requested on all aspects of the proposed regulations. In addition, the IRS and Treasury Department specifically request comments on the clarity of the proposed rules 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 February 5, 2007 at 10 a.m., in the auditorium of the New Carrollton Federal Building, 5000 Ellin Rd., Lanham, Maryland 20706. Due to building security procedures, visitors must enter at the main entrance. 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 at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (a signed original and eight

(8)copies) by January 16, 2007. 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 authors of these regulations are Paul Handleman and Lauren Ross Taylor, Office of Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and 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.** Section 1.199-2 is amended to read as follows: § 1.199-2 Wage limitation. [The text of proposed § 1.199-2 is the same as the text of § 1.199-2T published elsewhere in this issue of the **Federal Register** .] **Par. 3.** Section 1.199-3 is amended to read as follows: § 1.199-3 Domestic production gross receipts. [The text of proposed § 1.199-3 is the same as the text of § 1.199-3T published elsewhere in this issue of the **Federal Register** .] **Par. 4.** Section 1.199-5 is amended to read as follows: § 1.199-5 Application of section 199 to pass-thru entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention and Reconciliation Act of 2005. [The text of proposed § 1.199-5 is the same as the text of § 1.199-5T published elsewhere in this issue of the **Federal Register** .] **Par. 5.** Section 1.199-7 is amended to read as follows: § 1.199-7 Expanded affiliated groups. [The text of proposed § 1.199-7 is the same as the text of § 1.199-7T published elsewhere in this issue of the **Federal Register** .] **Par. 6.** Section 1.199-8 is amended to read as follows: § 1.199-8 Other rules. [The text of proposed § 1.199-8 is the same as the text of § 1.199-8T published elsewhere in this issue of the **Federal Register** .] Mark E. Matthews, Deputy Commissioner for Services and Enforcement. [FR Doc. E6-17409 Filed 10-18-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-136806-06] RIN 1545-BF87 Treatment of Payments in Lieu of Taxes Under Section 141 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations modifying the standards for treating payments in lieu of taxes (PILOTs) as generally applicable taxes for purposes of the private security or payment test under section 141 of the Internal Revenue Code (Code). The proposed regulations provide State and local governmental issuers of tax-exempt bonds with guidance for applying the private security or payment test. The proposed regulations affect State and local governmental issuers of tax-exempt bonds. This document also provides notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by January 16, 2007. Outlines of topics to be discussed at the public hearing scheduled for February 13, 2007, at 10 a.m., must be received by January 16, 2007. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136806-06), Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered to CC:PA:LPD:PR (REG-136806-06), Courier's Desk, Internal Revenue Service, Crystal Mall 4 Building, 1901 S. Bell Street, Arlington, Virginia or sent electronically, via the IRS Internet site at *http://www.irs.gov/regs* or via the Federal eRulemaking Portal at *www.regulations.gov* (IRS REG-136806-06). The public hearing will be held in the auditorium, Internal Revenue Service, New Carrollton Federal Building, 5000 Ellin Road, Lanham, Maryland 20706. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Vicky Tsilas or Carla Young, at

(202)622-3980; concerning submissions of comments, the hearing and/or to be placed on the building access list to attend the hearing, Kelly Banks, at

(202)622-0392 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1). Final regulations (TD 8712) under section 141 of the Code were published in the **Federal Register** on January 16, 1997 (62 FR 2275) to provide comprehensive guidance on most aspects of the private activity bond restrictions. This document amends the Income Tax Regulations under section 141 of the Code by proposing modifications to the standards for treating payments in lieu of taxes as generally applicable taxes for purposes of the private security or payment test under section 141. These regulations are published as proposed regulations to provide an opportunity for public review and comment. Explanation of Provisions I. Introduction In general, interest on State and local governmental bonds is excludable from gross income under section 103 of the Code. Interest on a private activity bond, other than a qualified bond under section 141(e), is not excludable from gross income. Section 141(a) classifies a bond as a private activity bond if it is part of an issue that meets both the private business use test under section 141(b)(1) (the private business use test) and the private security or payment test under section 141(b)(2) (the private payment test). In addition, section 141(a) independently treats a bond as a private activity bond if it is part of an issue that meets the private loan test under section 141(c). Section 141(b)(2) provides generally that an issue meets the private payment test if the payment of the debt service on more than 10 percent of the proceeds of such issue is (under the terms of such issue or any underlying arrangement) directly or indirectly

(1)secured by any interest in property used or to be used for a private business use, or payments in respect of such property, or

(2)to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use. II. Private Payment Test in General Sections 1.141-4(c) and 1.141-4(d) of the Income Tax Regulations provide broad general rules for purposes of application of the private payment test. Private payments generally include any payments made, directly or indirectly, by any nongovernmental person that is a private business user of proceeds during a period of private business use and any payments made with respect to property financed with proceeds of an issue during a period of private business use, whether or not made by a private business user. In addition, private payments include property and payments in respect of property that are used or to be used for private business use to the extent that any interest in that property or payments serves as security for the payment of debt service on an issue. III. Generally Applicable Taxes Exception Section 1.141-4(e) provides an exception to the otherwise-broad scope of payments taken into account under the private payment test in the case of “generally applicable taxes.” In general, the purpose of the generally applicable taxes exception is to allow eligible tax payments made with respect to property or services to be used to pay debt service on an issue without causing private payments. For this purpose, § 1.141-4(e)(2) defines a generally applicable tax to mean an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental purposes. To qualify as a generally applicable tax, a tax must have a uniform rate that is applied to all persons of the same classification in the appropriate jurisdiction and the tax must have a generally applicable manner of determination and collection. By contrast, under § 1.141-4(e)(3), a payment does not qualify as a generally applicable tax if it is a special charge for a special privilege granted or service rendered (for example, a payment limited to property or persons benefited by an improvement). Sections 1.141-4(e)(4)(ii) and

(iii)set forth certain permissible and impermissible agreements that bear upon whether or not a tax has a generally applicable manner of determination and collection. For example, an agreement to reduce or limit the amount of taxes collected to further a bona fide governmental purpose is a permissible agreement. IV. Certain Payments in Lieu of Taxes Treated as Generally Applicable Taxes In addition, existing § 1.141-4(e)(5) treats certain tax equivalency payments or PILOTs as generally applicable taxes if

(1)the payments are commensurate with and not greater than the amounts imposed by the statute for a tax of general application, and

(2)the payments are designated for a public purpose and are not special charges (as described in § 1.141-4(e)(3)). Existing § 1.141-4(e)(5) further provides an example which states that a PILOT made in consideration for the use of property financed with tax-exempt bonds is treated as a special charge. The Treasury Department and the IRS are concerned that additional guidance may be needed regarding the existing standards for treating PILOTs as generally applicable taxes and that those existing standards potentially could be interpreted in an unduly broad manner to provide favorable treatment for certain PILOTs which may have an insufficient link to generally applicable taxes. Conversely, the Treasury Department and the IRS are concerned that the last sentence of existing § 1.141-4(e)(5)(ii), which provides as an example of a special charge a PILOT paid in consideration for the use of property financed with tax-exempt bonds, could be interpreted in an unduly restrictive manner to prevent any PILOTs with respect to property financed with tax-exempt bonds from being treated as generally applicable taxes. To address these concerns, the Treasury Department and the IRS propose to modify the standards to better assure a reasonably close relationship between eligible PILOT payments and generally applicable taxes. The proposed clarification provides that an eligible PILOT payment must represent a fixed percentage of, or reflect a fixed adjustment to, the amount of generally applicable taxes in each year, based on comparable current valuation assessments. In addition, the Treasury Department and the IRS propose to eliminate the example in the last sentence of § 1.141-4(e)(5)(ii). Regarding this latter proposal, the Treasury Department and the IRS believe that the existing definition of special charge under § 1.141-4(e)(3) adequately addresses this principle. The proposed standards for treating PILOTs as generally applicable taxes generally contemplate PILOTs based on property taxes. The Treasury Department and the IRS also seek public comment regarding whether any special rules are needed to address PILOTs based on other taxes, including sales taxes. Proposed Effective Date The proposed regulations are proposed to apply to bonds that are sold on or after February 16, 2007. 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 Procedures 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 Code, this proposed regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. 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 Treasury Department and the IRS specifically request comments on the clarity of the proposed rules and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing has been scheduled for February 13, 2007, at 10 a.m. in the auditorium of the Internal Revenue Service, New Carrollton Federal Building, 5000 Ellin Road, Lanham, Maryland 20706. Due to building security procedures, visitors must enter at the New Carrollton Federal Building main entrance. 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 at the hearing must submit written or electronic comments and an outline of the topics to be discussed and the amount of time to be devoted to each topic (signed original and eight

(e)* * *

(5)*Payments in lieu of taxes* —(i) *In general.* A tax equivalency payment or other payment in lieu of a tax (PILOT) is treated as a generally applicable tax if—

(A)The payment is commensurate with and not greater than the amounts imposed by a statute for a generally applicable tax in each year; and

(B)The payment is designated for a public purpose and is not a special charge (as described in paragraph (e)(3) of this section).

(ii)*Commensurate standard.* For purposes of this paragraph (e)(5), a payment is “commensurate” with generally applicable taxes only if the amount of such payment represents a fixed percentage of, or reflects a fixed adjustment to, the amount of generally applicable taxes that otherwise would apply to the property in each year if the property were subject to tax. For example, a payment is commensurate with generally applicable taxes if it is equal to the amount of generally applicable taxes in each year, less a fixed dollar amount or a fixed adjustment determined by reference to characteristics of the property, such as size or employment. A payment does not fail to be a fixed percentage or adjustment as a result of a single change in the level of the percentage or adjustment following completion of development of the subject property. The payment must be based on the current assessed value of the property for property tax purposes for each year in which the PILOTs are paid and that assessed value must be determined in the same manner and with the same frequency as property subject to generally applicable taxes. A payment is not commensurate if it is based in any way on debt service on an issue or is otherwise set at a fixed dollar amount that cannot vary with the assessed value of the property determined in the manner described in this paragraph (e)(5)(ii). **Par. 3.** Section 1.141-15 is amended by adding paragraph

(m)to read as follows: § 1.141-15 Effective dates.

(m)*Effective date for certain regulations relating to payments in lieu of tax.* The rules of § 1.141-4(e)(5) apply to bonds sold on or after [DATE THAT IS 120 DAYS AFTER PUBLICATION OF THIS DOCUMENT IN THE **Federal Register** ] that are subject to section 141. Mark E. Matthews, Deputy Commissioner for Services and Enforcement. [FR Doc. E6-17408 Filed 10-18-06; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE INTERIOR Office of Surface Mining Reclamation and Enforcement 30 CFR Part 935 [OH-251-FOR] Ohio Regulatory Program AGENCY: Office of Surface Mining Reclamation and Enforcement (OSM), Interior. ACTION: Proposed rule; public comment period and opportunity for public hearing on proposed amendment. SUMMARY: We

(OSM)are announcing receipt of a proposed amendment to the Ohio regulatory program (the “Ohio program”) under the Surface Mining Control and Reclamation Act of 1977 (SMCRA or the Act). The proposed amendment consists of a request from Ohio to withdraw portions of a prior amendment to the Ohio program that OSM approved. The prior amendment pertained to clarification of certain Conflict of Interest provisions. Although OSM approved the amendment in 1995, Ohio has not promulgated the approved regulations through their rule-making process and has now decided the approved changes are not necessary. This document gives the times and locations that the Ohio program and proposed amendment to that program are available for your inspection, the comment period during which you may submit written comments on the amendment, and the procedures that we will follow for the public hearing, if one is requested. DATES: We will accept written comments on this amendment until 4 p.m., (local time), November 20, 2006. If requested, we will hold a public hearing on the amendment on November 13, 2006. We will accept requests to speak at a hearing until 4 p.m., local time, on November 3, 2006. ADDRESSES: You may submit comments, identified by OH-251-FOR, by any of the following methods: • E-mail: *grieger@osmre.gov.* Include OH-251-FOR in the subject line of the message; • Mail/Hand Delivery: Mr. George Rieger, Chief, Pittsburgh Field Division, Office of Surface Mining Reclamation and Enforcement, 3 Parkway Center, Pittsburgh, Pennsylvania 15220; or • Federal eRulemaking Portal: *http://www.regulations.gov.* Follow the instructions for submitting comments. *Instructions:* All submissions received must include the agency docket number for this rulemaking. For detailed instructions on submitting comments and additional information on the rulemaking process, see the “Public Comment Procedures” heading in the SUPPLEMENTARY INFORMATION section of this document. You may also request to speak at a public hearing by any of the methods listed above or by contacting the individual listed under FOR FURTHER INFORMATION CONTACT . *Docket:* You may review copies of the Ohio program, this amendment, a listing of any scheduled public hearings, and all written comments received in response to this document at the addresses listed below during normal business hours, Monday through Friday, excluding holidays. You may also receive one free copy of this amendment by contacting OSM's Pittsburgh Field Division listed below. Mr. George Rieger, Chief, Pittsburgh Field Division, Office of Surface Mining Reclamation and Enforcement, 3 Parkway Center, Pittsburgh, Pennsylvania 15220. Telephone:

(412)937-2153. E-mail: *grieger@osmre.gov.* Mr. Michael Sponsler, Chief, Division of Mineral Resources Management, Ohio Department of Natural Resources, 1855 Fountain Square Court-Bldg. H-2, Columbus, Ohio 43224. Telephone:

(614)265-6633. FOR FURTHER INFORMATION CONTACT: Mr. George Rieger, Chief, Pittsburgh Field Division, Telephone:

(412)937-2153. E-mail: *grieger@osmre.gov* . SUPPLEMENTARY INFORMATION: I. Background on the Ohio Program II. Description of the Proposed Amendment III. Public Comment Procedures IV. Procedural Determinations I. Background on the Ohio Program Section 503(a) of the Act permits a State to assume primacy for the regulation of surface coal mining and reclamation operations on non-Federal and non-Indian lands within its borders by demonstrating that its program includes, among other things, “a State law which provides for the regulation of surface coal mining and reclamation operations in accordance with the requirements of the Act * * * and rules and regulations consistent with regulations issued by the Secretary pursuant to the Act.” See 30 U.S.C. 1253(a)(1) and (7). On the basis of these criteria, the Secretary of the Interior conditionally approved the Ohio program on August 16, 1982. You can find background information on the Ohio program, including the Secretary's findings, the disposition of comments, and conditions of approval of the Ohio program in the August 16, 1982, **Federal Register** (47 FR 34687). You can also find later actions concerning Ohio's program and program amendments at 30 CFR 935.11, 935.15, and 935.16. II. Description of the Proposed Amendment By letter dated August 30, 2006, Ohio sent us a proposed amendment to its program (Administrative Record Number OH-2187-00) under SMCRA (30 U.S.C. 1201 *et seq.* ). In its letter, Ohio stated that it has reviewed revisions previously proposed by Ohio in Program Amendment #69. Ohio stated that those components of program amendment #69 related to Conflict of Interest are no longer necessary, and it would like to withdraw those program provisions from consideration at this time. OSM approved the provisions proposed in program amendment #69 (including the subsequent revisions) in the **Federal Register** on July 17, 1995 (60 FR 36352). However, Ohio did not promulgate the approved draft regulations in final form. Because we have already published our approval of the Conflict of Interest provisions that Ohio has requested be withdrawn from consideration, we are unable to merely withdraw those provisions. Rather, we are seeking public comment on whether the removal of the provisions identified below will render the approved Ohio program less effective than SMCRA and the Federal regulations. Ohio program amendment #69 was originally submitted by Ohio by letter dated September 22, 1994 (Administrative Record Number OH-2059). Revisions to amendment #69 were subsequently submitted by letters dated March 8, 1995, and May 3, 1995 (Administrative Record Numbers OH-2099 and OH-2115, respectively). We announced receipt of the proposed amendments, and the two revisions, in the October 21, 1994; March 17, 1995; and May 12, 1995; **Federal Register** (59 FR 53122, 60 FR 14401, and 60 FR 25660, respectively). The Conflict of Interest provisions that we approved on July 17, 1995, and that Ohio proposes be removed from the approved Ohio program, are identified below. Financial Interest Statements (OAC [Ohio Administrative Code] Section 1501:13-1-03) 1. Definition of “Employee” Ohio proposed to revise paragraph (D)(2) to provide that members of the Ohio Board on Unreclaimed Strip Mined Lands are included under the definition of “employee.” Ohio also proposed to revise this paragraph to provide that, for the purposes of OAC Section 1501:13-1-03, hearing officers for the Ohio Reclamation Board of Review shall also be included within the definition of “employee.” Ohio also proposed to revise paragraphs (L)(1) and

(2)to delete separate references to the Reclamation Board of Review's hearing officers because those hearing officers are to be included under the definition of “employee” in this rule. In our July 17, 1995, approval of these revisions, OSM stated that “the inclusion of these persons under the State definition of “employee” is appropriate and no less effective than the corresponding Federal definition.” 2. Use of Financial Interest Statement Form by Members of the Ohio Reclamation Board of Review Ohio proposed to revise paragraph (I)(1) to require that employees and members of the Ohio Reclamation Board of Review report all required information concerning employment and financial interests on Form OSM-23. In our July 17, 1995, approval of these revisions, OSM stated that “* * * Ohio's requirement that its employees and members of the Ohio Reclamation Board of Review file employment and financial interest statements using OSM Form 23 is no less effective than the corresponding Federal regulations at 30 CFR 705.10 and 705.11.” 3. Acceptance of Gifts and Gratuities by Members of the Ohio Reclamation Board of Review Ohio proposed to revise paragraph (J)(1) to prohibit, with certain exceptions, the solicitation or acceptance of gifts and gratuities by members of the Ohio Reclamation Board of Review from coal companies which are conducting or seeking to conduct regulated activities or which have an interest that may be substantially affected by the performance of the Board members' official duty. In our July 17, 1995, approval of these revisions, OSM stated that “* * * the State requirement regarding members of the Ohio Reclamation Board of Review is not inconsistent with the Federal regulations at 30 CFR 705.18 or with the revisions which Ohio is making elsewhere in this rule.” 4. Appeal of Remedial Actions Ohio proposed to revise paragraph (L)(1) to specify that nothing in OAC Section 1501:13-1-03 modifies any right of appeal that any employee may have under State law of a decision by the Chief of the Division of Natural Resources, on an employee's appeal of remedial action for prohibited financial interests. In our July 17, 1995, approval of this revision, OSM stated that “* * * this provision is not inconsistent with the Federal rule at 30 CFR 705.21(a) which allows employees to file an appeal through established procedures within their State.” Ohio also proposed to revise paragraph (L)(2) to provide that only the Chief of the Division of Reclamation may appeal a remedial action to the Director of OSM. In our July 17, 1995, approval of this revision, OSM stated that “Ohio's proposed paragraph (L)(2) is not less effective than 30 CFR 705.21(b).” Ohio also added paragraph (L)(3) to provide that members of the Ohio Reclamation Board of Review may request advisory opinions from the Director of OSM on issues pertaining to an apparent prohibited financial interest. However, resolution of conflicts is governed by section 1513.05 and 1513.29 of the Ohio Revised Code. In our July 17, 1995, approval of this new language, OSM stated that “* * * the appeal provision proposed in paragraph (L)(3) is not inconsistent with the Federal regulations at 30 CFR 705.21 or with the revisions which Ohio is making elsewhere in this rule.” III. Public Comment Procedures Under the provisions of 30 CFR 732.17(h), we are seeking your comments on whether the amendment satisfies the applicable program approval criteria of 30 CFR 732.15. If we approve the removal of these amendments, they will no longer be part of the approved Ohio program. Written Comments Send your written comments to OSM at the address given above. Your written comments should be specific, pertain only to the issues proposed in this rulemaking, and include explanations in support of your recommendations. We will not consider or respond to your comments when developing the final rule if they are received after the close of the comment period (see DATES ). We will make every attempt to log all comments into the administrative record, but comments delivered to an address other than the Appalachian Region office identified above may not be logged in. Electronic Comments Please submit Internet comments as an ASCII file avoiding the use of special characters and any form of encryption. Please also include “Attn: SATS No. OH-251-FOR,” your name and return address in your Internet message. If you do not receive a confirmation that we have received your Internet message, contact the Appalachian Region office at

(412)937-2153. Availability of Comments We will make comments, including names and addresses of respondents, available for public review during normal business hours. We will not consider anonymous comments. If individual respondents request confidentiality, we will honor their request to the extent allowable by law. Individual respondents who wish to withhold their name or address from public review, except for the city or town, must state this prominently at the beginning of their comments. We will make all submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials of organizations or businesses, available for public review in their entirety. Public Hearing If you wish to speak at the public hearing, contact the person listed under FOR FURTHER INFORMATION CONTACT by 4 p.m., local time, on November 3, 2006. We will arrange the location and time of the hearing with those persons requesting the hearing. If no one requests an opportunity to speak, we will not hold the hearing. To assist the transcriber and ensure an accurate record, we request, if possible, that each person who speaks at a public hearing provide us with a written copy of his or her comments. The public hearing will continue on the specified date until everyone scheduled to speak has been given an opportunity to be heard. If you are in the audience and have not been scheduled to speak and wish to do so, you will be allowed to speak after those who have been scheduled. We will end the hearing after everyone scheduled to speak and others present in the audience who wish to speak, have been heard. If you are disabled and need a special accommodation to attend a public hearing, contact the person listed under FOR FURTHER INFORMATION CONTACT . Public Meeting If only one person requests an opportunity to speak, we may hold a public meeting rather than a public hearing. If you wish to meet with us to discuss the amendment, please request a meeting by contacting the person listed under FOR FURTHER INFORMATION CONTACT . All such meetings are open to the public and, if possible, we will post notices of meetings at the locations listed under ADDRESSES . We will make a written summary of each meeting a part of the administrative record. IV. Procedural Determinations Executive Order 12630—Takings This rule does not have takings implications. This determination is based on the analysis performed for the counterpart Federal regulations. Executive Order 12866—Regulatory Planning and Review This rule is exempted from review by the Office of Management and Budget

(OMB)under Executive Order 12866. Executive Order 12988—Civil Justice Reform The Department of the Interior has conducted the reviews required by section 3 of Executive Order 12988 and has determined that, to the extent allowable by law, this rule meets the applicable standards of subsections

(a)and

(b)of that section. However, these standards are not applicable to the actual language of State regulatory programs and program amendments since each such program is drafted and promulgated by a specific State, not by OSM. Under sections 503 and 505 of SMCRA (30 U.S.C. 1253 and 1255) and the Federal regulations at 30 CFR 730.11, 732.15, and 732.17(h)(10), decisions on proposed State regulatory programs and program amendments submitted by the States must be based solely on a determination of whether the submittal is consistent with SMCRA and its implementing Federal regulations and whether the other requirements of 30 CFR parts 730, 731, and 732 have been met. Executive Order 13132—Federalism This rule does not have Federalism implications. SMCRA delineates the roles of the Federal and State governments with regard to the regulation of surface coal mining and reclamation operations. One of the purposes of SMCRA is to “establish a nationwide program to protect society and the environment from the adverse effects of surface coal mining operations.” Section 503(a)(1) of SMCRA requires that State laws regulating surface coal mining and reclamation operations be “in accordance with” the requirements of SMCRA. Section 503(a)(7) requires that State programs contain rules and regulations “consistent with” regulations issued by the Secretary pursuant to SMCRA. Executive Order 13175—Consultation and Coordination With Indian Tribal Governments In accordance with Executive Order 13175, we have evaluated the potential effects of this rule on Federally-recognized Indian tribes and have determined that the rule does not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian Tribes. The basis for this determination is that our decision is on a State regulatory program and does not involve a Federal program involving Indian lands. Executive Order 13211—Regulations That Significantly Affect the Supply, Distribution, or Use of Energy On May 18, 2001, the President issued Executive Order 13211 which requires agencies to prepare a Statement of Energy Effects for a rule that is

(1)considered significant under Executive Order 12866, and

(a)Does not have an annual effect on the economy of $100 million;

(b)Will not cause a major increase in costs or prices for consumers, individual industries, geographic regions, or Federal, State or local governmental agencies; and

(c)Does not have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S.-based enterprises to compete with foreign-based enterprises. This determination is based upon the fact that the State submittal, which is the subject of this rule, is based upon counterpart Federal regulations for which an analysis was prepared and a determination made that the Federal regulation was not considered a major rule. Unfunded Mandates This rule will not impose a cost of $100 million or more in any given year on any governmental entity or the private sector. List of Subjects in 30 CFR Part 935 Intergovernmental relations, Surface mining, Underground mining. Dated: September 29, 2006. Michael K. Robinson, Acting Regional Director, Appalachian Region. [FR Doc. E6-17369 Filed 10-18-06; 8:45 am] BILLING CODE 4310-05-P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 117 [CGD01-06-122] RIN 1625-AA09 Drawbridge Operation Regulations; Thames River, New London, CT AGENCY: Coast Guard, DHS. ACTION: Notice of proposed rulemaking. SUMMARY: The Coast Guard proposes to temporarily change the drawbridge operating regulations governing the operation of the Amtrak Bridge across the Thames River, mile 0.8, at New London, Connecticut. This notice of proposed rulemaking

(NPRM)would allow the bridge owner to open the bridge on a temporary opening schedule from November 15, 2006 through May 15, 2007. This proposed rule is necessary to facilitate bridge pier repairs. DATES: Comments must reach the Coast Guard on or before November 1, 2006. ADDRESSES: You may mail comments to Commander (dpb), First Coast Guard District Bridge Branch, One South Street, Battery Park Building, New York, New York 10004, or deliver them to the same address between 7 a.m. and 3 p.m., Monday through Friday, except Federal holidays. The telephone number is

(212)668-7165. The First Coast Guard District, Bridge Branch, maintains the public docket for this rulemaking. Comments and material received from the public, as well as documents indicated in this preamble as being available in the docket, will become part of this docket and will be available for inspection or copying at the First Coast Guard District, Bridge Branch, 7 a.m. to 3 p.m., Monday through Friday, except Federal holidays. FOR FURTHER INFORMATION CONTACT: Ms. Judy Leung-Yee, Project Officer, First Coast Guard District,

(212)668-7195. SUPPLEMENTARY INFORMATION: Regulatory Information Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for publishing an NPRM with a shortened comment period of 15 days, and under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the **Federal Register** . Due to the urgency of the repairs, it is essential that this rule becomes effective on November 15, 2006. The owner of the bridge, National Railroad Passenger Corporation (Amtrak), requested a temporary final rule to facilitate un-scheduled structural bridge repairs. On June 29, 2006, the bridge owner discovered that one of the main bridge piers had shifted as a result of pile driving for the new adjacent Amtrak Bridge. In order to perform corrective repairs, minimize structural impingement, and continue to provide for rail traffic, the bridge must remain in the closed position, except during specific time periods during which the bridge will remain in the full open position for the passage of vessel traffic. The Coast Guard published a temporary deviation in the **Federal Register** on July 24, 2006 [71 FR 41730], to allow immediate repairs to the bridge to commence. On September 6, 2006, Amtrak contacted the Coast Guard and requested a temporary regulation effective from November 15, 2006 through May 15, 2007, to facilitate the completion of the bridge repairs. The Coast Guard believes this shortened comment period and effective date is reasonable because the bridge repairs facilitated by this temporary rule are vital and necessary, thus, they must be performed with all due speed in order to assure the continued safe and reliable operation of the bridge. Request for Comments We encourage you to participate in this rulemaking by submitting comments or related material. If you do so, please include your name and address, identify the docket number for this rulemaking (CGD01-06-122), indicate the specific section of this document to which each comment applies, and give the reason for each comment. Please submit all comments and related material in an unbound format, no larger than 8 1/2 by 11 inches, suitable for copying. If you would like to know if they reached us, please enclose a stamped, self-addressed postcard or envelope. We will consider all comments and material received during the comment period. We may change this proposed rule in view of them. Public Meeting We do not now plan to hold a public meeting. But you may submit a request for a meeting by writing to the First Coast Guard District, Bridge Branch, at the address under ADDRESSES explaining why one would be beneficial. If we determine that one would aid this rulemaking, we will hold one at a time and place announced by a later notice in the **Federal Register** . Background and Purpose The Amtrak Bridge across the Thames River, mile 3.0, at New London, Connecticut, has a vertical clearance of 30 feet at mean high water and 33 feet at mean low water in the closed position. The existing operating regulations are listed at 33 CFR 117.224. The owner of the bridge, Amtrak, requested a temporary change to the drawbridge operation regulations to facilitate repairs to one of the main bridge piers. On June 29, 2006, the bridge owner discovered that one of the main bridge piers had shifted as a result of pile driving for the new adjacent Amtrak Bridge. In order to perform corrective repairs, minimize structural impingement, and continue to provide for rail traffic, the bridge must remain in the closed position except during specific time periods during which the bridge will remain in the full open position for the passage of vessel traffic. Discussion of Proposed Rule This proposed change would allow the Amtrak Bridge to operate on temporary schedule from November 15, 2006 through May 15, 2007, to facilitate the completion of repairs to one of the main bridge piers damaged by nearby pile driving. Under this notice of proposed rulemaking, from November 15, 2006 through May 15, 2007, the Amtrak Bridge across the Thames River, mile 3.0, at New London, Connecticut, shall remain in the full open position for the passage of vessel traffic as follows: *Monday through Friday:* 5 a.m. to 5:40 a.m.; 11:20 a.m. to 11:55 a.m.; 3:35 p.m. to 4:15 p.m.; and 8:30 p.m. to 8:55 p.m. *Saturday:* 8:30 a.m. to 9:10 a.m.; 12:35 p.m. to 1:05 p.m.; 3:40 p.m. to 4:10 p.m.; 5:35 p.m. to 6:05 p.m.; and 7:35 p.m. to 8:40 p.m. *Sunday:* 8:30 a.m. to 9:20 a.m.; 11:35 a.m. to 12:15 p.m.; 1:30 p.m. to 1:55 p.m.; 6:30 p.m. to 7:10 p.m.; and 8:30 p.m. to 9:15 p.m. The bridge shall open on signal at any time for the passage of U.S. Navy submarines and escort vessels. At all other times the draw shall remain in the closed position. Vessels that can pass under the draw without a bridge opening may do so at all times. The Coast Guard believes this proposed rule is reasonable because the required repair work is vital and necessary in order to ensure the safe and continued reliable operation of the bridge. Regulatory Evaluation This proposed rule is not a “significant regulatory action” under section 3(f) of Executive Order 12866, Regulatory Planning and Review, and does not require an assessment of potential costs and benefits under 6(a)(3) of that Order. The Office of Management and Budget has not reviewed it under that Order. We expect the economic impact of this proposed rule to be so minimal that a full Regulatory Evaluation is unnecessary. This conclusion is based on the fact that the vessel traffic that normally transits this bridge should only be minimally affected as they will still be able to transit the bridge under the temporary opening schedule. Small Entities Under the Regulatory Flexibility Act (5 U.S.C. 601-612), we considered whether this proposed rule would have a significant economic impact on a substantial number of small entities. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under section 5 U.S.C. 605(b), that this proposed rule would not have a significant economic impact on a substantial number of small entities. This notice of proposed rulemaking would not have a significant economic impact on a substantial number of small entities for the following reason: The Thames River is navigated predominantly by recreational vessels and U.S. Navy vessels. The temporary opening schedule should not preclude recreational vessel traffic from transiting the bridge because the recreational vessels that normally use this waterway will be in winter storage for most of the time period this rule is in effect and the U.S. Navy submarines and associated vessels will be provided bridge openings on demand at any time. If you think that your business, organization, or governmental jurisdiction qualifies as a small entity and that this rule would have a significant economic impact on it, please submit a comment (see ADDRESSES ) explaining why you think it qualifies and how and to what degree this rule would economically affect it. Assistance for Small Entities Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this proposed rule so that they can better evaluate its effects on them and participate in the rulemaking. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact us in writing at, Commander (dpb), First Coast Guard District, Bridge Branch, One South Street, New York, NY 10004. The telephone number is

(212)668-7165. The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard. Collection of Information This proposed rule would call for no new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520.). Federalism A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on State or local governments and would either preempt State law or impose a substantial direct cost of compliance on them. We have analyzed this proposed rule under that Order and have determined that it does not have implications for federalism. Unfunded Mandates Reform Act The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 or more in any one year. Though this proposed rule would not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble. Taking of Private Property This proposed rule would not affect a taking of private property or otherwise have taking implications under E.O. 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights. Civil Justice Reform This proposed rule meets applicable standards in sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity, and reduce burden. Protection of Children We have analyzed this proposed rule under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This rule is not an economically significant rule and would not create an environmental risk to health or risk to safety that may disproportionately affect children. Indian Tribal Governments This rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it would not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. Energy Effects We have analyzed this rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. We have determined that it is not a “significant energy action” under that order because it is not a “significant regulatory action” under Executive Order 12866 and is not likely to have a significant adverse effect on the supply, distribution, or use of energy. The Administrator of the Office of Information and Regulatory Affairs has not designated it as a significant energy action. Therefore, it does not require a Statement of Energy Effects under Executive Order 13211. Technical Standards The National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note) directs agencies to use voluntary consensus standards in their regulatory activities unless the agency provides Congress, through the Office of Management and Budget, with an explanation of why using these standards would be inconsistent with applicable law or otherwise impractical. Voluntary consensus standards are technical standards (e.g., specifications of materials, performance, design, or operation; test methods; sampling procedures; and related management systems practices) that are developed or adopted by voluntary consensus standards bodies. This proposed rule does not use technical standards. Therefore, we did not consider the use of voluntary consensus standards. Environment We have analyzed this proposed rule under Commandant Instruction M16475.1D and Department of Homeland Security Management Directive 5100.1, which guide the Coast Guard in complying with the National Environmental Policy Act of 1969

(NEPA)(42 U.S.C. 4321-4370f), and have made a preliminary determination that there are no factors in this case that would limit the use of a categorical exclusion under section 2.B.2 of the Instruction. Therefore, we believe that this rule should be categorically excluded, under figure 2-1, paragraph (32)(e), of the Instruction, from further environment documentation because this action relates to the promulgation of operating regulations or procedures for drawbridges. Under figure 2-1, paragraph (32)(e) of the Instruction, an “Environmental Analysis Checklist” is not required for this rule. Comments on this section will be considered before we make the final decision on whether to categorically exclude this rule from further environmental review. List of Subjects in 33 CFR Part 117 Bridges. For the reasons set out in the preamble, the Coast Guard proposes to amend 33 CFR part 117 as follows: PART 117—DRAWBRIDGE OPERATION REGULATIONS 1. The authority citation for part 117 continues to read as follows: Authority: 33 U.S.C. 499; 33 CFR 1.05-1(g); Department of Homeland Security Delegation No. 0170.1; section 117.255 also issued under the authority of Pub. L. 102-587, 106 Stat. 5039. 2. From November 15, 2006 through May 15, 2006, § 117.224 is amended by suspending paragraphs

(a)and

(b)and adding a temporary paragraph

(c)to read as follows: § 117.224 Thames River. (c)(1) The draw shall remain in the full open position for the passage of vessel traffic as follows: Monday through Friday from 5 a.m. to 5:40 a.m.; 11:20 a.m. to 11:55 a.m.; 3:35 p.m. to 4:15 p.m.; and 8:30 p.m. to 8:55 p.m. Saturday from 8:30 a.m. to 9:10 a.m.; 12:35 p.m. to 1:05 p.m.; 3:40 p.m. to 4:10 p.m.; 5:35 p.m. to 6:05 p.m.; and 7:35 p.m. to 8:40 p.m. Sunday from 8:30 a.m. to 9:20 a.m.; 11:35 a.m. to 12:15 p.m.; 1:30 p.m. to 1:55 p.m.; 6:30 p.m. to 7:10 p.m.; and 8:30 p.m. to 9:15 p.m.

(2)The draw shall open on signal at all times for the passage of U.S. Navy submarines, Navy escort vessels and commercial vessels. At all other times the draw need not open for the passage of vessel traffic. Dated: October 13, 2006. Timothy S. Sullivan, Rear Admiral, U.S. Coast Guard Commander, First Coast Guard District. [FR Doc. 06-8814 Filed 10-17-06; 2:34 pm]

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