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Code · REGISTER · 2007-09-28 · Federal Aviation Administration (FAA), DOT · Proposed Rules

Proposed Rules. Notice of proposed rulemaking (NPRM)

73,172 words·~333 min read·/register/2007/09/28/07-4777

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

BILLING CODE 3410-05-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29334; Directorate Identifier 2006-NM-268-AD] RIN 2120-AA64 Airworthiness Directives; Airbus Model A330 Airplanes and A340-200 and -300 Series Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: We propose to adopt a new airworthiness directive
(AD)for the products listed above. This proposed AD results from mandatory continuing airworthiness information
(MCAI)originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: All permanent fuselage skin * * * and lap joint doubler * * * repair principles published in the SRM (Structural Repair Manual) * * * have been replaced with Oct/05 Revision by updated, simplified and harmonized repair principles. These updates led to the de-validation of some repairs and to reassess the repair inspection requirements. This situation if not corrected, can affect the aircraft structural integrity with a possible risk of decompression. The proposed AD would require actions that are intended to address the unsafe condition described in the MCAI. DATES: We must receive comments on this proposed AD by October 29, 2007. ADDRESSES: You may send comments by any of the following methods: • *DOT Docket Web Site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Fax:*
(202)493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M- 30, West Building, Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Federal Rulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone
(800)647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. 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: Streamlined Issuance of AD The FAA is implementing a new process for streamlining the issuance of ADs related to MCAI. This streamlined process will allow us to adopt MCAI safety requirements in a more efficient manner and will reduce safety risks to the public. This process continues to follow all FAA AD issuance processes to meet legal, economic, Administrative Procedure Act, and **Federal Register** requirements. We also continue to meet our technical decision-making responsibilities to identify and correct unsafe conditions on U.S.-certificated products. This proposed AD references the MCAI and related service information that we considered in forming the engineering basis to correct the unsafe condition. The proposed AD contains text copied from the MCAI and for this reason might not follow our plain language principles. Comments Invited We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2007-29334; Directorate Identifier 2006-NM-268-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on 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 about this proposed AD. Discussion The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directives 2006-0332 and 2006-0333, both dated October 27, 2006 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states: A review of the repair substantiations of the SRM (Structural Repair Manual) has been done to take into account the latest aircraft operational data (Aircraft Weight Variant and Fatigue Flight Mission Profiles). As a result, all permanent fuselage skin (Figure 202-210/213-214) and lap joint doubler (Figure 215-216) repair principles published in the SRM chapter 53-00-11, Page Block 201 have been replaced with Oct/05 Revision by updated, simplified and harmonized repair principles. These updates led to the de-validation of some repairs and to reassess the repair inspection requirements. This situation if not corrected, can affect the aircraft structural integrity with a possible risk of decompression. In order to maintain the structural integrity, this Airworthiness Directive
(AD)renders mandatory the inspection of the fuselage to identify possible permanent skin repairs and permanent longitudinal lap joint repairs and to apply the associated corrective actions. The corrective actions include contacting Airbus for repair/inspection instructions, and repair, as applicable, for skin repairs or longitudinal lap joint repairs that were done in accordance with the repair principles in SRM chapter 53-00-11, Page Block 201, before October 2005, or repairs that were done without using an individual repair design approval sheet provided by Airbus. You may obtain further information by examining the MCAI in the AD docket. Relevant Service Information Airbus has issued Service Bulletins A330-53-3161, dated April 14, 2006; A330-53-3162, dated April 6, 2006; and Service Bulletins A340-53-4166 and A340-53-4167, both dated April 6, 2006. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI. FAA's Determination and Requirements of This Proposed AD This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design. 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 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 proposed different actions in this AD from those in the MCAI in order to follow FAA policies. Any such differences are highlighted in a NOTE within the proposed AD. Costs of Compliance Based on the service information, we estimate that this proposed AD would affect about 9 products of U.S. registry. We also estimate that it would take about 9 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $80 per work-hour. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $6,480, or $720 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 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 this 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. 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 FAA amends § 39.13 by adding the following new AD: **Airbus:** Docket No. FAA-2007-29334; Directorate Identifier 2006-NM-268-AD. Comments Due Date
(a)We must receive comments by October 29, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to Airbus Model A330-201, -202, -203, -223, -243, -301, -321, -322, -323, -341, -342, and -343 airplanes; and Model A340-200 and -300 series airplanes; all certified models, all serial numbers; certificated in any category; except those on which Airbus Modification 49144 (install rudder fly by wire) has been embodied in production. Subject
(d)Fuselage. Reason
(e)The mandatory continuing airworthiness information
(MCAI)states: A review of the repair substantiations of the SRM (Structural Repair Manual) has been done to take into account the latest aircraft operational data (Aircraft Weight Variant and Fatigue Flight Mission Profiles). As a result, all permanent fuselage skin (Figure 202-210/213-214) and lap joint doubler (Figure 215-216) repair principles published in the SRM chapter 53-00-11, Page Block 201 have been replaced with Oct/05 Revision by updated, simplified and harmonized repair principles. These updates led to the de-validation of some repairs and to reassess the repair inspection requirements. This situation if not corrected, can affect the aircraft structural integrity with a possible risk of decompression. In order to maintain the structural integrity, this Airworthiness Directive
(AD)renders mandatory the inspection of the fuselage to identify possible permanent skin repairs and permanent longitudinal lap joint repairs and to apply the associated corrective actions. The corrective actions include contacting Airbus for repair/inspection instructions, and repair, as applicable, for skin repairs or longitudinal lap joint repairs that were done in accordance with the repair principles in SRM chapter 53-00-11, Page Block 201, before October 2005, or repairs that were done without using an individual repair design approval sheet provided by Airbus. Actions and Compliance
(f)Within 18 months after the effective date of this AD, unless already done, do the following actions.
(1)For airplanes with Weight Variant
(WV)greater than WV 004 and lower than or equal to WV 027 (for Model A330 airplanes) or WV 029 (for Model A340-200 and -300 series airplanes): Do the actions specified in paragraphs (f)(1)(i) and (f)(1)(ii) of this AD.
(i)Perform a detailed visual inspection of the fuselage outer skin for permanent skin repairs in the area between frame
(FR)54 and FR 58; and for permanent longitudinal lap joint repairs in the area between FR 53.3 and FR 58 (for Section 15, between FR 53.3 and FR 54, only in the area between stringer
(STGR)22LH (left-hand) and STGR 22RH (right-hand) upper shell); and as applicable, apply the corrective actions before further flight. Perform the actions in accordance with the instructions given in Airbus Service Bulletin A330-53-3161, dated April 14, 2006; or A340-53-4166, dated April 6, 2006; as applicable.
(ii)Perform a detailed visual inspection of the fuselage outer skin for permanent skin repairs in the area between FR 18 and FR 38, and between FR 58 and FR 91; and for permanent longitudinal lap joint repairs in the area between FR 18 and FR 53.3, and between FR 58 and FR 91 (for Section 15, between FR 39 and FR 53.3, only in the area between STGR 22LH (left-hand) and STGR 22RH (right-hand) upper shell); and as applicable, apply the corrective actions before further flight. Perform the actions in accordance with the instructions given in Airbus Service Bulletin A330-53-3162 or A340-53-4167, both dated April 6, 2006, as applicable.
(2)For airplanes with WV lower than or equal to WV 004: Perform a detailed visual inspection of the fuselage outer skin for permanent skin repairs in the area between FR 18 and FR 38, and between FR 54 and FR 91; and for permanent longitudinal lap joint repairs in the area between FR 18 and FR 91 (for Section 15, between FR 39 and FR 54, only in the area between STGR 22LH and STGR 22RH upper shell); and as applicable, apply the corrective actions before further flight. Perform the actions in accordance with the instructions given in Airbus Service Bulletin A330-53-3162 or A340-53-4167, both dated April 6, 2006, as applicable. FAA AD Differences Note: This AD differs from the MCAI and/ or service information as follows: No differences. 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, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Tim Backman, Aerospace Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-2797; fax
(425)227-1149. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(2)*Airworthy Product:* For any requirement in this AD to obtain corrective actions from a manufacturer or other source, use these actions if they are FAA-approved. Corrective actions are considered FAA-approved if they are approved by the State of Design Authority (or their delegated agent). You are required to assure the product is airworthy before it is returned to service.
(3)*Reporting Requirements:* For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act, the Office of Management and Budget
(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information
(h)Refer to MCAI EASA Airworthiness Directives 2006-0332 and 2006-0333, both dated October 27, 2006; and Airbus Service Bulletins A330-53-3161, dated April 14, 2006; A330-53-3162, dated April 6, 2006; and A340-53-4166 and A340-53-4167, both dated April 6, 2006; for related information. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19258 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29335; Directorate Identifier 2007-NM-045-AD] RIN 2120-AA64 Airworthiness Directives; McDonnell Douglas Model DC-9-81 (MD-81), DC-9-82 (MD-82), DC-9-83 (MD-83), DC-9-87 (MD-87), and MD-88 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 all McDonnell Douglas Model DC-9-81 (MD-81), DC-9-82 (MD-82), DC-9-83 (MD-83), DC-9-87 (MD-87), and MD-88 airplanes. This proposed AD would require repetitive inspections for cracking of the overwing frames from stations 845 to 905 (MD-87 stations 731 to 791), left and right sides, and corrective actions if necessary. This proposed AD results from reports of cracked overwing frames. We are proposing this AD to detect and correct such cracking, which could sever the frame, increase the loading of adjacent frames, and result in damage to adjacent structure and loss of overall structural integrity of the airplane. DATES: We must receive comments on this proposed AD by November 13, 2007. 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:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Fax:*
(202)493-2251. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., 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: Roger Durbin, Aerospace Engineer, Airframe Branch, ANM-120L, FAA, Los Angeles Aircraft Certification Office, 3960 Paramount Boulevard, Lakewood, California 90712-4137; telephone
(562)627-5233; 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-2007-29335; Directorate Identifier 2007-NM-045-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 Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Operations office (telephone
(800)647-5527) is located on the ground floor of the West 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 We have received a report indicating that four MD-80 operators reported six instances of cracked overwing frames. The reports indicate two failures at frame station 886 on the left side, three failures at frame station 886 on the right side, and one failure at frame station 905 on the right side. The cracking occurred on airplanes that had accumulated between 25,965 and 40,612 total flight cycles. The cracks, which originate in the upper radius of the frame inboard tab just below the floor, were caused by fatigue. Frames at stations 845 and 864, although not reported to be cracked, are also susceptible to this type of failure. All of the noted frames are a part of MD-80 principal structural element
(PSE)53.80.005 (although the inspections that would be required by this proposed AD are not included in supplemental inspections already required for PSE 53.80.005). If not corrected, an undetected crack might sever the frame, which could increase the loading of adjacent frames, result in damage to adjacent structure, necessitate extensive repair, and ultimately lead to the loss of overall structural integrity of the airplane. Relevant Service Information We have reviewed Boeing Alert Service Bulletin MD80-53A301, Revision 1, dated May 25, 2007. The service bulletin describes procedures for inspections, using general visual and high frequency eddy current methods, to detect cracking of the overwing frames from stations 845 to 905 (MD-87 stations 731 to 791), left and right sides. The service bulletin specifies repeating the inspections within 9,300 flight cycles after any repair, within 20,000 flight cycles after any replacement, and at intervals not to exceed 9,300 flight cycles if no cracks are found. Corrective actions are done before further flight and include a blend out repair of cracks less than 0.125 inch deep, and replacement of any overwing frame with a crack 0.125 inch or deeper. 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. Interim Action We consider this proposed AD interim action. The manufacturer is currently developing a modification that will address the unsafe condition identified in this proposed AD. Once this modification is developed, approved, and available, we may consider additional rulemaking. Costs of Compliance There are about 1,189 airplanes of the affected design in the worldwide fleet. The following table provides the estimated costs for U.S. operators to comply with this proposed AD. Estimated Costs Work hours Average labor rate per hour Parts Cost per airplane Number of U.S.-registered airplanes Fleet cost 4 $80 None $320, per inspection cycle 670 $214,400, per inspection cycle. 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-2007-29335; Directorate Identifier 2007-NM-045-AD. Comments Due Date
(a)The FAA must receive comments on this AD action by November 13, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to all McDonnell Douglas Model DC-9-81 (MD-81), DC-9-82 (MD-82), DC-9-83 (MD-83), DC-9-87 (MD-87), and MD-88 airplanes, certificated in any category. Unsafe Condition
(d)This AD results from reports of cracked overwing frames. We are issuing this AD to detect and correct such cracking, which could sever the frame, increase the loading of adjacent frames, and result in damage to adjacent structure and loss of overall structural integrity 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. Inspections
(f)Before the accumulation of 20,000 total flight cycles, or within 24 months after the effective date of this AD, whichever occurs later: Do general visual and high frequency eddy current inspections, and all applicable corrective actions, in accordance with the Accomplishment Instructions of Boeing Alert Service Bulletin MD80-53A301, Revision 1, dated May 25, 2007. Do the applicable corrective actions before further flight after accomplishing the inspections. Repeat the inspections thereafter at applicable intervals not to exceed those specified in paragraph 1.E., “Compliance,” of the service bulletin. Actions According to Previous Issue of Service Bulletin
(g)Inspections and related investigative and corrective actions are also acceptable for compliance with the requirements of paragraph
(f)of this AD if done before the effective date of this AD in accordance with Boeing Alert Service Bulletin MD80-53A301, dated January 9, 2007. Alternative Methods of Compliance (AMOCs) (h)(1) The Manager, Los Angeles 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.
(2)To request a different method of compliance or a different compliance time for this AD, follow the procedures in 14 CFR 39.19. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(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, Los Angeles ACO, to make those findings. For a repair method to be approved, the repair must meet the certification basis of the airplane and 14 CFR 25.571, Amendment 45, and the approval must specifically refer to this AD. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19204 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29332; Directorate Identifier 2007-NM-172-AD] RIN 2120-AA64 Airworthiness Directives; ATR Model ATR42 and ATR72 Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: We propose to adopt a new airworthiness directive
(AD)for the products listed above. This proposed AD results from mandatory continuing airworthiness information
(MCAI)originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: Subsequent to accidents involving Fuel Tank System explosions in flight * * * and on ground, * * * Special Federal Aviation Regulation 88 (SFAR88) * * * required a safety review of the aircraft Fuel Tank System * * *. Fuel Airworthiness Limitations are items arising from a systems safety analysis that have been shown to have failure mode(s) associated with an “unsafe condition” * * *. These are identified in Failure Conditions for which an unacceptable probability of ignition risk could exist if specific tasks and/or practices are not performed in accordance with the manufacturers' requirements. The proposed AD would require actions that are intended to address the unsafe condition described in the MCAI. DATES: We must receive comments on this proposed AD by October 29, 2007. ADDRESSES: You may send comments by any of the following methods: • *DOT Docket Web Site: Go to http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Fax:*
(202)493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone
(800)647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. FOR FURTHER INFORMATION CONTACT: Tom Rodriguez, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-1137; fax
(425)227-1149. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2007-29332; Directorate Identifier 2007-NM-172-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on 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 about this proposed AD. Discussion The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2006-0219R1, dated June 29, 2007 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states: Subsequent to accidents involving Fuel Tank System explosions in flight * * * and on ground, the FAA published Special Federal Aviation Regulation 88 (SFAR 88) in June 2001. SFAR 88 required a safety review of the aircraft Fuel Tank System to determine that the design meets the requirements of FAR (Federal Aviation Regulations) § 25.901 and § 25.981(a) and (b). A similar regulation has been recommended by the JAA (Joint Aviation Authorities) to the European National Aviation Authorities in JAA letter 04/00/02/07/03-L024 of 3 February 2003. The review was requested to be mandated by NAA's (National Aviation Authorities) using JAR (Joint Aviation Regulation) § 25.901(c), § 25.1309. In August 2005 EASA published a policy statement on the process for developing instructions for maintenance and inspection of Fuel Tank System ignition source prevention (EASA D 2005/CPRO, *www.easa.eu.int/home/cert_policy_statements_en.html* ) that also included the EASA expectations with regard to compliance times of the corrective actions on the unsafe and the not unsafe part of the harmonised design review results. On a global scale the TC (type certificate) holders committed themselves to the EASA published compliance dates (see EASA policy statement). The EASA policy statement has been revised in March 2006: the date of 31-12-2005 for the unsafe related actions has now been set at 01-07-2006. Fuel Airworthiness Limitations are items arising from a systems safety analysis that have been shown to have failure mode(s) associated with an ‘unsafe condition’ as defined in FAA's memo 2003-112-15 ‘SFAR 88—Mandatory Action Decision Criteria’. These are identified in Failure Conditions for which an unacceptable probability of ignition risk could exist if specific tasks and/or practices are not performed in accordance with the manufacturers' requirements. This EASA Airworthiness Directive mandates the Fuel System Airworthiness Limitations (comprising maintenance/inspection tasks and Critical Design Configuration Control Limitations (CDCCL)) for the type of aircraft, that resulted from the design reviews and the JAA recommendation and EASA policy statement mentioned above. The corrective action is revising the Airworthiness Limitations Section of the Instructions for Continued Airworthiness to incorporate new limitations for fuel tank systems. You may obtain further information by examining the MCAI in the AD docket. 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. Relevant Service Information ATR has issued the Time Limits Section of Part 1 of the ATR42-200/-300/-320 Maintenance Review Board Report (MRBR), Revision 7, dated March 31, 2006; the ATR 42-400/-500 MRBR, Revision 6, dated March 26, 2007; and the ATR 72 MRBR, Revision 8, dated March 26, 2007. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI. FAA's Determination and Requirements of This Proposed AD This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design. 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 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 proposed different actions in this AD from those in the MCAI in order to follow FAA policies. Any such differences are highlighted in a NOTE within the proposed AD. Costs of Compliance Based on the service information, we estimate that this proposed AD would affect about 84 products of U.S. registry. We also estimate that it would take about 1 work-hour per product to comply with the basic requirements of this proposed AD. The average labor rate is $80 per work-hour. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $6,720, or $80 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 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 this 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. 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 FAA amends § 39.13 by adding the following new AD: **ATR-GIE Avions De Transport Regional (Formerly Aerospatiale):** Docket No. FAA-2007-29332; Directorate Identifier 2007-NM-172-AD. Comments Due Date
(a)We must receive comments by October 29, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to all ATR Model ATR42-200, -300, -320, and -500 airplanes; and all ATR Model ATR72-101, -201, -102, -202, -211, -212, and -212A airplanes; certificated in any category. Note 1: This AD requires revisions to certain operator maintenance documents to include new inspections. Compliance with these inspections is required by 14 CFR 91.403(c). For airplanes that have been previously modified, altered, or repaired in the areas addressed by these inspections, the operator may not be able to accomplish the inspections described in the revisions. In this situation, to comply with 14 CFR 91.403(c), the operator must request approval for an alternative method of compliance according to paragraph
(g)of this AD. The request should include a description of changes to the required inspections that will ensure the continued operational safety of the airplane. Subject
(d)Air Transport Association
(ATA)of America Code 28: Fuel. Reason
(e)The mandatory continuing airworthiness information
(MCAI)states: Subsequent to accidents involving Fuel Tank System explosions in flight * * * and on ground, the FAA published Special Federal Aviation Regulation 88 (SFAR 88) in June 2001. SFAR 88 required a safety review of the aircraft Fuel Tank System to determine that the design meets the requirements of FAR (Federal Aviation Regulation) § 25.901 and § 25.981(a) and (b). A similar regulation has been recommended by the JAA (Joint Aviation Authorities) to the European National Aviation Authorities in JAA letter 04/00/02/07/03-L024 of 3 February 2003. The review was requested to be mandated by NAA's (National Aviation Authorities) using JAR (Joint Aviation Regulation) § 25.901(c), § 25.1309. In August 2005 EASA published a policy statement on the process for developing instructions for maintenance and inspection of Fuel Tank System ignition source prevention (EASA D 2005/CPRO, *http://www.easa.eu.int/home/cert_policy_statements_en.html* ) that also included the EASA expectations with regard to compliance times of the corrective actions on the unsafe and the not unsafe part of the harmonised design review results. On a global scale the TC (type certificate) holders committed themselves to the EASA published compliance dates (see EASA policy statement). The EASA policy statement has been revised in March 2006: the date of 31-12-2005 for the unsafe related actions has now been set at 01-07-2006. Fuel Airworthiness Limitations are items arising from a systems safety analysis that have been shown to have failure mode(s) associated with an 'unsafe condition' as defined in FAA's memo 2003-112-15 ‘SFAR 88—Mandatory Action Decision Criteria'. These are identified in Failure Conditions for which an unacceptable probability of ignition risk could exist if specific tasks and/or practices are not performed in accordance with the manufacturers' requirements. This EASA Airworthiness Directive mandates the Fuel System Airworthiness Limitations (comprising maintenance/inspection tasks and Critical Design Configuration Control Limitations (CDCCL)) for the type of aircraft, that resulted from the design reviews and the JAA recommendation and EASA policy statement mentioned above. The corrective action is revising the Airworthiness Limitations Section of the Instructions for Continued Airworthiness to incorporate new limitations for fuel tank systems. Actions and Compliance
(f)Unless already done, do the following actions.
(1)Within 3 months after the effective date of this AD or before December 16, 2008, whichever occurs first, revise the Airworthiness Limitations Section
(ALS)of the Instructions for Continued Airworthiness to incorporate Task 28.10.00 “Fuel Tank—General,” and Task 28.20.00 “Distribution,” of the Certification Maintenance Requirements
(CMR)Time Limits Section of Part 1 of the ATR-42-200/-300/-320 Maintenance Review Board Report (MRBR), Revision 7, dated March 31, 2006; the ATR 42-400/-500 MRBR, Revision 6, dated March 26, 2007; or the ATR 72 MRBR, Revision 8, dated March 26, 2007; as applicable. For all tasks identified in the applicable MRBR, the initial compliance times start from the later of the times specified in paragraphs (f)(1)(i) and (f)(1)(ii) of this AD, except as provided by paragraph (f)(3) of this AD. The repetitive inspections must be accomplished thereafter at the interval specified in the applicable MRBR.
(i)The effective date of this AD.
(ii)The date of issuance of the original French standard airworthiness certificate or the date of issuance of the original French export certificate of airworthiness.
(2)Within 3 months after the effective date of this AD or before December 16, 2008, whichever occurs first, revise the ALS of the Instructions for Continued Airworthiness to incorporate the CDCCLs as defined in Section 4. “Critical Design Configuration Control List,” of the Airworthiness Limitations section of the Time Limits Section of Part 1 of the ATR42-200/-300/-320 Maintenance Review Board Report (MRBR), Revision 7, dated March 31, 2006; the ATR 42-400/-500 MRBR, Revision 6, dated March 26, 2007; or the ATR 72 MRBR, Revision 8, dated March 26, 2007; as applicable.
(3)For the task titled “Detailed visual inspection of the fuel tanks and associated equipment, wiring, piping and braids” (CMR (Certification Maintenance Requirements) task reference 28.10.00-1): The initial compliance time is the later of the times specified in paragraphs (f)(3)(i) and (f)(3)(ii) of this AD. Thereafter, the task titled “Detailed visual inspection of the fuel tanks and associated equipment, wiring, piping and braids” must be accomplished at the repetitive interval specified in Section 4. “Critical Design Configuration Control List,” of the Airworthiness Limitations Section of the Time Limits Section of Part 1 of the ATR42-200/-300/-320 MRBR, Revision 7, dated March 31, 2006; the ATR 42-400/-500 MRBR, Revision 6, dated March 26, 2007; or the ATR 72 MRBR, Revision 8, dated March 26, 2007; as applicable.
(i)Within 144 months since the date of issuance of the original French standard airworthiness certificate or the date of issuance of the original French export certificate of airworthiness.
(ii)Within 72 months or 20,000 flight hours after the effective date of this AD, whichever occurs first.
(4)Except as provided by paragraph
(g)of this AD: After accomplishing the actions specified in paragraphs (f)(1) and (f)(2) of this AD, no alternative inspection, inspection intervals, or CDCCLs may be used. FAA AD Differences Note 2: This AD differs from the MCAI and/or service information as follows: No differences. Other FAA AD Provisions
(g)The following provisions also apply to this AD:
(1)*Alternative Methods of Compliance (AMOCs):* The International Branch, ANM-116, Transport Airplane Directorate, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Tom Rodriguez, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue SW., Renton, Washington 98057-3356; telephone
(425)227-1137; fax
(425)227-1149. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(2)*Airworthy Product:* For any requirement in this AD to obtain corrective actions from a manufacturer or other source, use these actions if they are FAA-approved. Corrective actions are considered FAA-approved if they are approved by the State of Design Authority (or their delegated agent). You are required to assure the product is airworthy before it is returned to service.
(3)*Reporting Requirements:* For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act, the Office of Management and Budget
(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information
(h)Refer to MCAI European Aviation Safety Agency
(EASA)Airworthiness Directive 2006-0219R1, dated June 29, 2007, and the service information identified in Table 1 of this AD, for related information. Table 1.—Service Information Document Revision level Date Time Limits Section of Part 1 of the ATR42-200/-300/-320 Maintenance Review Board Report 7 March 31, 2006. Time Limits Section of Part 1 of the ATR42-400/-500 Maintenance Review Board Report 6 March 26, 2007. Time Limits Section of Part 1 of the ATR72 Maintenance Review Board Report 8 March 26, 2007. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19201 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29331; Directorate Identifier 2007-NM-136-AD] RIN 2120-AA64 Airworthiness Directives; Saab Model SAAB-Fairchild SF340A (SAAB/SF340A) and SAAB 340B Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: We propose to adopt a new airworthiness directive
(AD)for the products listed above. This proposed AD results from mandatory continuing airworthiness information
(MCAI)originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: A crack has been found in an axle adaptor during fatigue testing. It was found that the internal edges of the dowel holes did not have the correct radius and the crack had developed from the edge of one of the dowel holes. A crack in the axle adaptor can cause the axle adaptor to fail and ultimately lead to loss of the wheels and total loss of brake capability. The proposed AD would require actions that are intended to address the unsafe condition described in the MCAI. DATES: We must receive comments on this proposed AD by October 29, 2007. ADDRESSES: You may send comments by any of the following methods: • *DOT Docket Web Site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Fax:*
(202)493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone
(800)647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. FOR FURTHER INFORMATION CONTACT: Mike Borfitz, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-2677; fax
(425)227-1149. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2007-29331; Directorate Identifier 2007-NM-136-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on 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 about this proposed AD. Discussion The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2006-0263, dated August 29, 2006 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states: A crack has been found in an axle adaptor during fatigue testing. It was found that the internal edges of the dowel holes did not have the correct radius and the crack had developed from the edge of one of the dowel holes. A crack in the axle adaptor can cause the axle adaptor to fail and ultimately lead to loss of the wheels and total loss of brake capability. The corrective action includes doing repetitive ultrasonic inspections to detect cracking in the axle adaptor; replacing the axle adaptor if necessary; and ultimately doing the terminating action of inspecting and modifying the main landing gear
(MLG)shock strut and axle adaptors. The inspection is a crack test. The modification includes measuring the dowel hole, and corrective actions if necessary (replacing the axle adaptor, repairing the dowel hole) and, when accomplished, terminates the repetitive inspection requirements. You may obtain further information by examining the MCAI in the AD docket. Relevant Service Information Saab has issued Service Bulletin 340-32-133, Revision 01, dated May 3, 2006. APPH Limited has issued APPH Service Bulletin AIR83064-32-12, Revision 3, dated April 26, 2006; and AIR83022-32-32, Revision 3, dated April 26, 2006. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI. FAA's Determination and Requirements of This Proposed AD This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design. 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 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 proposed different actions in this AD from those in the MCAI in order to follow FAA policies. Any such differences are highlighted in a NOTE within the proposed AD. Costs of Compliance Based on the service information, we estimate that this proposed AD would affect about 220 products of U.S. registry. We also estimate that it would take about 9 work-hours per product to comply with the basic requirements of this proposed AD. Required parts cost would be negligible. The average labor rate is $80 per work-hour. Where the service information lists required parts costs that are covered under warranty, we have assumed that there will be no charge 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 proposed AD on U.S. operators to be $158,400, or $720 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 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 this 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. 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 FAA amends § 39.13 by adding the following new AD: **Saab Aircraft AB:** Docket No. FAA-2007-29331; Directorate Identifier 2007-NM-136-AD. Comments Due Date
(a)We must receive comments by October 29, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to the airplanes listed in paragraphs (c)(1) and (c)(2) of this AD, certificated in any category, unless equipped with Main Landing Gear
(MLG)shock struts modified in accordance with APPH Service Bulletin AIR83064-32-12 or AIR83022-32-32.
(1)Saab Model SAAB-Fairchild SF340A (SAAB/SF340A) airplanes, serial numbers (S/Ns) SF340A-004 through -159.
(2)Saab Model SAAB 340B airplanes, S/Ns 340B-160 through -459. Subject
(d)Air Transport Association
(ATA)of America Code 32: Landing Gear. Reason
(e)The mandatory continuing airworthiness information
(MCAI)states: A crack has been found in an axle adaptor during fatigue testing. It was found that the internal edges of the dowel holes did not have the correct radius and the crack had developed from the edge of one of the dowel holes. A crack in the axle adaptor can cause the axle adaptor to fail and ultimately lead to loss of the wheels and total loss of brake capability. The corrective action includes doing repetitive ultrasonic inspections to detect cracking in the axle adaptor; replacing the axle adaptor if necessary; and ultimately doing the terminating action of inspecting and modifying the main landing gear
(MLG)shock strut and axle adaptors. The inspection is a crack test. The modification includes measuring the dowel hole and corrective actions if necessary (replacing the axle adaptor, repairing the dowel hole), and, when accomplished, terminates the repetitive inspection requirements. Actions and Compliance
(f)Unless already done, do the following actions.
(1)Within 8,000 flight cycles since the last MLG overhaul, or within 1,500 flight cycles, or 6 months after the effective date of this AD, whichever occurs latest: Inspect the MLG in accordance with the Accomplishment Instructions of Saab Service Bulletin 340-32-133, Revision 01, dated May 3, 2006. If any crack is found, before further flight: Replace the axle adaptor in accordance with the Accomplishment Instructions of Saab Service Bulletin 340-32-133, Revision 01, dated May 3, 2006.
(2)Repeat the inspection required by paragraph (f)(1) of this AD thereafter at intervals not to exceed 2,000 flight cycles until the terminating action required by paragraph (f)(3) of this AD is accomplished.
(3)Within 12,000 flight cycles after the effective date of this AD, or at the next MLG overhaul, whichever occurs earlier: Inspect and modify the MLG shock strut and axle adaptors in accordance with the Accomplishment instructions of APPH Service Bulletin AIR83064-32-12, Revision 3, dated April 26, 2006; or AIR83022-32-32, Revision 3, dated April 26, 2006; as applicable.
(4)Actions done before the effective date of this AD in accordance with the service bulletins listed in paragraphs (f)(4)(i), (f)(4)(ii), and (f)(4)(iii) of this AD, as applicable, are acceptable for compliance with the corresponding actions in this AD.
(i)Saab Service Bulletin 340-32-133, dated April 19, 2006.
(ii)APPH Service Bulletin AIR 83064-32-12, dated January 18, 2006; Revision 1, dated January 23, 2006; and Revision 2, dated March 30, 2006.
(iii)APPH Service Bulletin AIR83022-32-32, dated January 18, 2006; Revision 1, dated January 23, 2006; and Revision 2, dated March 30, 2006.
(5)As of the effective date of this AD, no person may install an MLG shock strut having part number (P/N) AIR83022 or 83064, or axle adaptor having P/N AIR127308, 390226, or AIR130238, unless it has been inspected and modified in accordance with APPH Service Bulletin AIR83022-32-32 or AIR83064-32-12. FAA AD Differences Note: This AD differs from the MCAI and/or service information as follows: No differences. Other FAA AD Provisions
(g)The following provisions also apply to this AD:
(1)*Alternative Methods of Compliance (AMOCs):* The Manager, ANM-116, International Branch, Transport Airplane Directorate, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Mike Borfitz, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-2677; fax
(425)227-1149. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(2)*Airworthy Product:* For any requirement in this AD to obtain corrective actions from a manufacturer or other source, use these actions if they are FAA-approved. Corrective actions are considered FAA-approved if they are approved by the State of Design Authority (or their delegated agent). You are required to assure the product is airworthy before it is returned to service.
(3)*Reporting Requirements:* For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act, the Office of Management and Budget
(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information
(h)Refer to MCAI EASA Airworthiness Directive 2006-0263, dated August 29, 2006; Saab Service Bulletin 340-32-133, Revision 01, dated May 3, 2006; APPH Service Bulletin AIR83064-32-12, Revision 3, dated April 26, 2006; and APPH Service Bulletin AIR83022-32-32, Revision 3, dated April 26, 2006; for related information. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19202 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29333; Directorate Identifier 2007-NM-141-AD] RIN 2120-AA64 Airworthiness Directives; Boeing Model 737-600, -700, -700C, -800, and -900 Series 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 Boeing Model 737-600, -700, -700C, -800, and -900 series airplanes. This proposed AD would require various repetitive inspections to detect cracks along the chemically milled steps of the fuselage skin or missing or loose fasteners in the area of the preventative modification or repairs, replacement of the time-limited repair with the permanent repair if applicable, and applicable corrective actions if necessary, which would end certain repetitive inspections. This proposed AD results from a fatigue test that revealed numerous cracks in the upper skin panel at the chemically milled step above the lap joint. We are proposing this AD to detect and correct such fatigue-related cracks, which could result in the crack tips continuing to turn and grow to the point where the skin bay flaps open, causing decompression of the airplane. DATES: We must receive comments on this proposed AD by November 13, 2007. 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. • *Governmentwide rulemaking Web site:* Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Fax:*
(202)493-2251. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., 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 proposed AD. FOR FURTHER INFORMATION CONTACT: Wayne Lockett, Aerospace Engineer, Airframe Branch, ANM-120S, FAA, Seattle Aircraft Certification Office, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)917-6447; fax
(425)917-6590. 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-2007-29333; Directorate Identifier 2007-NM-141-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 Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Docket Operations office (telephone
(800)647-5527) is located on the ground level of the West 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 We have received a report that, during a fatigue test of the fuselage of a Boeing Model 737-800 series airplane, numerous cracks were found in the upper skin panel at the chemically milled step above the lap joint at stringers 4 and 10 on both the left and right sides of the airplane. The cracks were caused by fatigue stresses generated by secondary bending in the lap splice. Such fatigue-related cracks, if not detected and corrected in a timely manner, could result in the crack tips continuing to turn and grow to the point where the skin bay flaps open, causing decompression of the airplane. Relevant Service Information We have reviewed Boeing Special Attention Service Bulletin 737-53-1232, dated April 2, 2007. The service information describes the following actions: Inspections and Replacement, as Applicable For airplanes on which— The service bulletin describes procedures for doing— The preventative modification specified in the service bulletin has not been installed An external eddy current inspection to detect cracks of the chemically milled steps at the upper skin panels and repetitive external detailed inspections to detect cracks of the skin. The preventative modification specified in the service bulletin has been installed Repetitive external detailed inspections and repetitive external high frequency eddy current
(HFEC)inspections to detect cracks or loose or missing fasteners in the area of the preventative modification. The permanent repair specified in the service bulletin has been installed Repetitive external low frequency eddy current
(LFEC)inspections to detect cracks in the skin. Repetitive external LFEC inspections to detect cracks of the doubler. Repetitive external detailed inspections to detect cracks or loose or missing fasteners of the permanent repair. Repetitive internal medium frequency eddy current inspections to detect cracks of the skin if doing “Skin Inspection Option 2” specified in Table 2 of the service bulletin The time-limited repair specified in the service bulletin has been installed Repetitive internal and external detailed inspections to detect cracks or loose or missing fasteners of the repaired area and replacement of the time-limited repair with the permanent repair. The service information also describes procedures for doing applicable corrective actions. The corrective actions include contacting Boeing for certain conditions, replacing any loose or missing fastener with a new fastener, and installing a permanent repair, time-limited repair, and preventative modification. For airplanes on which the preventative modification has not been installed, accomplishing the preventative modification, time-limited repair, or permanent repair ends the repetitive external detailed inspections only. The service information also specifies the following compliance times: • *For the initial inspections and replacement:* Compliance times ranging between 1,500 flight cycles and 56,000 total flight cycles, depending on the airplane configuration and the inspection method. • *For the applicable corrective actions:* A compliance time of before further flight. • *For repetitive inspections:* Repeat intervals ranging between 1,100 and 8,000 flight cycles, depending on the airplane configuration. 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 Information.” Difference Between the Proposed AD and Service Information The service information specifies to contact the manufacturer for instructions on how to repair certain conditions, but this proposed AD would require repairing those conditions in one of the following ways: • Using a method that we approve; or • Using data that meet the certification basis of the airplane, and that have been approved by an Authorized Representative for the Boeing Commercial Airplanes Delegation Option Authorization Organization whom we have authorized to make those findings. Costs of Compliance There are about 871 airplanes of the affected design in the worldwide fleet. This proposed AD would affect about 378 airplanes of U.S. registry. The proposed inspections would take between 11 and 25 work hours per airplane depending on the airplane configuration, at an average labor rate of $80 per work hour. Based on these figures, the estimated cost of the proposed AD for U.S. operators is between $332,640 and $756,000, or between $880 and $2,000 per airplane, per inspection cycle. 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): **Boeing:** Docket No. FAA-2007-29333; Directorate Identifier 2007-NM-141-AD. Comments Due Date
(a)The FAA must receive comments on this AD action by November 13, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to Boeing Model 737-600, -700, -700C, -800, and -900 series airplanes, certificated in any category; as identified in Boeing Special Attention Service Bulletin 737-53-1232, dated April 2, 2007. Unsafe Condition
(d)This AD results from a fatigue test that revealed numerous cracks in the upper skin panel at the chemically milled step above the lap joint. We are issuing this AD to detect and correct such fatigue-related cracks, which could result in the crack tips continuing to turn and grow to the point where the skin bay flaps open, causing decompression 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. Service Bulletin
(f)The term “service bulletin,” as used in this AD, means Boeing Special Attention Service Bulletin 737-53-1232, dated April 2, 2007. Inspections and Replacement, as Applicable
(g)At the applicable compliance times listed in Tables 1, 2, and 3 of paragraph 1.E., “Compliance,” of the service bulletin, or within the time specified in paragraph (g)(1) or (g)(2) of this AD, as applicable, whichever occurs later, and thereafter at the applicable repeat intervals listed in Tables 1, 2, and 3: Do the applicable inspections and replacement by accomplishing all the actions specified in the Accomplishment Instructions of the service bulletin.
(1)For airplanes specified in Tables 1 and 2 of paragraph 1.E., “Compliance,” of the service bulletin: Do the applicable initial inspection required by paragraph
(g)of this AD within 36 months after the effective date of this AD.
(2)For airplanes specified in Table 3 of paragraph 1.E., “Compliance,” of the service bulletin: Do the applicable initial inspection and replacement required by paragraph
(g)of this AD within 24 months after the effective date of this AD. Corrective Actions
(h)If any crack or loose or missing fastener is found during any applicable inspection required by paragraph
(g)of this AD, before further flight, do the applicable corrective action in accordance with the service bulletin; except, where the service bulletin specifies to contact Boeing for appropriate action, before further flight, repair the crack using a method approved in accordance with the procedures specified in paragraph
(j)of this AD. Terminating Action for Certain Repetitive Inspections
(i)For airplanes on which the preventative modification specified in the service bulletin has not been installed: Accomplishing the preventative modification, time-limited repair, or permanent repair in accordance with the service bulletin ends the applicable repetitive external detailed inspections required by paragraph
(g)of this AD. Alternative Methods of Compliance (AMOCs) (j)(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.
(2)To request a different method of compliance or a different compliance time for this AD, follow the procedures in 14 CFR 39.19. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(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, and the approval must specifically refer to this AD. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19205 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29176; Directorate Identifier 2007-NE-38-AD] RIN 2120-AA64 Airworthiness Directives; McCauley Propeller Systems Model 4HFR34C653/L106FA Propellers 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 McCauley Propeller Systems model 4HFR34C653/L106FA propellers. This proposed AD would require a onetime fluorescent penetrant inspection
(FPI)and eddy current inspection
(ECI)of the propeller hub for cracks. This proposed AD results from reports of 3 hubs found cracked during propeller overhaul. We are proposing this AD to prevent failure of the propeller hub, which could cause blade separation, damage to the airplane, and loss of control of the airplane. DATES: We must receive any comments on this proposed AD by November 27, 2007. ADDRESSES: Use one of the following addresses to comment on this proposed AD. • *Federal eRulemaking Portal:* Go to *http://www.regulations.gov.* Follow the online instructions for sending your comments electronically. • *Mail:* Docket Management Facility: U.S. Department of Transportation, 1200 New Jersey Avenue, SE., West Building Ground Floor, Room W12-140, Washington, DC 20590-0001. • *Hand Delivery:* Deliver to Mail address above between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Fax:*
(202)493-2251. You can get the service information identified in this proposed AD from McCauley Propeller Systems, P.O. Box 7704, Wichita, KS 67277-7704; telephone
(800)621-7767. FOR FURTHER INFORMATION CONTACT: Jeff Janusz, Aerospace Engineer, Wichita Aircraft Certification Office, FAA, Small Airplane Directorate, 1801 Airport Road, Wichita, KS 67209; e-mail: *jeff.janusz@faa.gov;* telephone:
(316)946-4148; fax:
(316)946-4107. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send us any written relevant data, views, or arguments regarding this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2007-29176; Directorate Identifier 2007-NE-38-AD” in the subject line 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://www.dms.dot.gov* or *http://www.regulations.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. Anyone is able to search the electronic form of all comments received into any of our dockets by the name of the individual submitting the comment (or signing the comment, if submitted 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). Examining the AD Docket For access to the docket to read background documents or comments received, go to *http://dms.dot.gov* until September 27, 2007, or the street address listed under ADDRESSES . The DOT docket may be offline at times between September 28 through September 30 to migrate to the Federal Docket Management System (FDMS). On October 1, 2007, the internet access to the docket will be at *http://www.regulations.gov.* Follow the online instructions for accessing the dockets. Comments will be available in the AD docket shortly after receipt. Discussion The FAA received reports of 3 hubs found cracked during propeller overhaul. All 3 hubs had very small cracks located in the hub socket region, in the area of the outer bearing race press-fit surfaces. To date, the cause of these cracks appears to be fretting damage between the outer bearing race and the hub surface. This condition, if not corrected, could result in failure of the propeller hub, which could cause blade separation, damage to the airplane, and loss of control of the airplane. Relevant Service Information We have reviewed and approved the technical contents of McCauley Propeller Systems Alert Service Bulletin
(ASB)No. ASB254, dated August 20, 2007. That ASB describes procedures for a onetime FPI and ECI of propeller hubs for cracks. 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 products of this same type design. We are proposing this AD, which would require a onetime FPI and ECI of propeller hubs for cracks. The proposed AD would require you to use the service information described previously to perform these actions. Interim Action These actions are interim actions and we may take further rulemaking actions in the future. Costs of Compliance We estimate that this proposed AD would affect 128 propellers installed on airplanes of U.S. registry. We also estimate that it would take about 41.5 work-hours per propeller to perform the proposed actions, and that the average labor rate is $80 per work-hour. Required parts would cost about $80 per propeller, if the hub passes inspection. Required parts would cost about $4,113 per propeller, if the hub fails inspection. We estimate that 5% of the hubs will require replacement. Based on these figures, we estimate the total cost of the proposed AD to U.S. operators to be $463,991. 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 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. Would 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. 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, Safety. The Proposed Amendment Under the authority delegated to me by the Administrator, the Federal Aviation Administration 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 adding the following new airworthiness directive: **McCauley Propeller Systems:** Docket No. FAA-2007-29176; Directorate Identifier 2007-NE-38-AD. Comments Due Date
(a)The Federal Aviation Administration
(FAA)must receive comments on this airworthiness directive
(AD)action by November 27, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to McCauley Propeller Systems model 4HFR34C653/L106FA propellers. These propellers are installed on, but not limited to, British Aerospace Jetstream 3201 airplanes. Unsafe Condition
(d)This AD results from reports of 3 hubs found cracked during propeller overhaul. We are issuing this AD to prevent failure of the propeller hub, which could cause blade separation, damage to the airplane, and 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.
(f)For propeller hubs with 6,000 or more operating hours time-since-new
(TSN)on the effective date of this AD, perform the procedures in paragraphs
(h)through
(k)of this AD within 100 operating hours time-in-service
(TIS)after the effective date of this AD.
(g)For propeller hubs with fewer than 6,000 operating hours TSN on the effective date of this AD, perform the procedures in paragraphs
(h)through
(k)of this AD before the propeller hub reaches 6,100 operating hours TSN. Onetime Propeller Hub Inspection
(h)Remove and disassemble the propeller, and etch the propeller hub, using paragraphs 1.A. through 2.D. of the Accomplishment Instructions of McCauley Propeller Systems Alert Service Bulletin No. ASB254, dated August 20, 2007.
(i)Perform a onetime fluorescent penetrant inspection
(FPI)of the propeller hub, using paragraphs 3.A through 3.G. of the Accomplishment Instructions of McCauley Propeller Systems Alert Service Bulletin No. ASB254, dated August 20, 2007.
(j)For hubs that pass the FPI, perform a onetime eddy current inspection of the propeller hub, using paragraphs 4.A. through 4.F. of the Accomplishment Instructions of McCauley Propeller Systems Alert Service Bulletin No. ASB254, dated August 20, 2007.
(k)Remove cracked hubs from service and any other propeller parts found cracked, and return them within 10 days after inspection to McCauley Propeller Systems, P.O. Box 7704, Wichita, KS 67277-7704, for further evaluation. Previous Credit
(l)If you performed the onetime inspection of the propeller hub using McCauley Propeller Systems Service Bulletin No. SB238A, or Alert Service Bulletin ASB254, both dated August 20, 2007, before the effective date of this AD, you have satisfied the inspection requirements of this AD. Reporting Requirements
(m)Record the hub inspection results on reporting form, page 8, of McCauley Alert Service Bulletin No. ASB254, dated August 20, 2007. Within 10 days after the inspection, send the completed reporting form to McCauley Propeller Systems, P.O. Box 7704, Wichita, KS 67277-7704, telephone
(316)831-4021; fax
(316)831-3858.
(n)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 contained in this AD and has assigned OMB Control Number 2120-0056. Interim Action
(o)These actions are interim actions and we may take further rulemaking actions in the future. Alternative Methods of Compliance
(p)The Manager, Wichita Aircraft 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. Special Flight Permits
(q)Under 14 CFR part 39.23, we are limiting the special flight permits for this AD by the following conditions:
(1)The propeller must have no signs of external oil leakage from the hub; and
(2)The propeller has no current reports of abnormal operation or vibration. Related Information
(r)None.
(s)Contact Jeff Janusz, Aerospace Engineer, Wichita Aircraft Certification Office, FAA, Small Airplane Directorate, 1801 Airport Road, Wichita, KS 67209; e-mail: *jeff.janusz@faa.gov;* telephone:
(316)946-4148; fax:
(316)946-4107, for more information about this AD. Issued in Burlington, Massachusetts, on September 24, 2007. Thomas A. Boudreau, Acting Manager, Engine and Propeller Directorate, Aircraft Certification Service. [FR Doc. E7-19194 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29337; Directorate Identifier 2007-NM-150-AD] RIN 2120-AA64 Airworthiness Directives; BAE Systems (Operations) Limited Model BAe 146 and Model Avro 146-RJ Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: We propose to adopt a new airworthiness directive
(AD)for the products listed above. This proposed AD results from mandatory continuing airworthiness information
(MCAI)originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: Corrosion has been reported beneath the heat shield which is located around the APU (auxiliary power unit) exhaust outlet. Such corrosion could result in the fuselage being unable to sustain horizontal and vertical stabiliser loads. This is considered as potentially hazardous/catastrophic. * * * The unsafe condition is that the horizontal or vertical stabilizer might collapse under excessive load, resulting in loss of control of the airplane. The proposed AD would require actions that are intended to address the unsafe condition described in the MCAI. DATES: We must receive comments on this proposed AD by October 29, 2007. ADDRESSES: You may send comments by any of the following methods: • *DOT Docket Web Site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Fax:*
(202)493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone
(800)647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. FOR FURTHER INFORMATION CONTACT: Todd Thompson, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-1175; fax
(425)227-1149. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2007-29337; Directorate Identifier 2007-NM-150-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on 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 about this proposed AD. Discussion The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2007-0075, dated March 20, 2007 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states: Corrosion has been reported beneath the heat shield which is located around the APU (auxiliary power unit) exhaust outlet. Such corrosion could result in the fuselage being unable to sustain horizontal and vertical stabiliser loads. This is considered as potentially hazardous/catastrophic. This AD mandates inspections necessary to address the identified unsafe condition. The unsafe condition is that the horizontal or vertical stabilizer might collapse under excessive load, resulting in loss of control of the airplane. Corrective actions include repetitive detailed visual inspections for corrosion, pitted fasteners, or pillowing of the APU heat shield and surrounding skin and, if applicable, removal of the heat shield and repair. You may obtain further information by examining the MCAI in the AD docket. Relevant Service Information BAE Systems (Operations) Limited has issued Inspection Service Bulletin ISB.53-191, dated October 25, 2006. The actions described in this service information are intended to correct the unsafe condition identified in the MCAI. FAA's Determination and Requirements of This Proposed AD This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design. 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 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 proposed different actions in this AD from those in the MCAI in order to follow FAA policies. Any such differences are highlighted in a NOTE within the proposed AD. Costs of Compliance Based on the service information, we estimate that this proposed AD would affect about 1 product of U.S. registry. We also estimate that it would take about 2 work-hours per product to comply with the basic requirements of this proposed AD. The average labor rate is $80 per work-hour. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $160, or $160 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 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 this 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. 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 FAA amends § 39.13 by adding the following new AD: **BAE Systems (Operations) Limited (Formerly British Aerospace Regional Aircraft):** Docket No. FAA-2007-29337; Directorate Identifier 2007-NM-150-AD. Comments Due Date
(a)We must receive comments by October 29, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to BAE Systems (Operations) Limited Model BAe 146 and Model Avro 146-RJ airplanes; certificated in any category; all models, all serial numbers. Subject
(d)*Air Transport Association
(ATA)of America Code 53:* Fuselage. Reason
(e)The mandatory continuing airworthiness information
(MCAI)states: Corrosion has been reported beneath the heat shield which is located around the APU (auxiliary power unit) exhaust outlet. Such corrosion could result in the fuselage being unable to sustain horizontal and vertical stabiliser loads. This is considered as potentially hazardous/catastrophic. This AD mandates inspections necessary to address the identified unsafe condition. The unsafe condition is that the horizontal or vertical stabilizer might collapse under excessive load, resulting in loss of control of the airplane. Corrective actions include repetitive detailed visual inspections for corrosion, pitted fasteners, or pillowing of the APU heat shield and surrounding skin and, if applicable, removal of the heat shield and repair. Actions and Compliance
(f)Unless already done, do the following actions.
(1)Within 12 months after the effective date of this AD and thereafter at intervals not to exceed 24 months, perform a detailed visual inspection of the APU heat shield and surrounding skin, in accordance with paragraph 2.C. of BAE Systems (Operations) Limited Inspection Service Bulletin ISB.53-191, dated October 25, 2006.
(2)If any corrosion, pitted fastener, or pillowing is found during any detailed visual inspection required by paragraph (f)(1) of this AD, before the next flight, remove the APU heat shield and repair the affected area in accordance with paragraph 2.D. of BAE Systems (Operations) Limited Inspection Service Bulletin ISB.53-191, dated October 25, 2006.
(3)For any airplane modified in accordance with BAE Systems (Operations) Limited Modification Service Bulletin SB.53-193-60732A, dated November 1, 2006, the repetitive interval specified in paragraph (f)(1) of this AD may be extended to 48 months. FAA AD Differences Note: This AD differs from the MCAI and/or service information as follows: No differences. 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, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Todd Thompson, Aerospace Engineer, International Branch, ANM-116, FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-1175; fax
(425)227-1149. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(2)*Airworthy Product:* For any requirement in this AD to obtain corrective actions from a manufacturer or other source, use these actions if they are FAA-approved. Corrective actions are considered FAA-approved if they are approved by the State of Design Authority (or their delegated agent). You are required to assure the product is airworthy before it is returned to service.
(3)*Reporting Requirements:* For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act, the Office of Management and Budget
(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information
(h)Refer to MCAI European Aviation Safety Agency Airworthiness Directive 2007-0075, dated March 20, 2007; BAE Systems (Operations) Limited Inspection Service Bulletin ISB.53-191, dated October 25, 2006; and BAE Systems (Operations) Limited Modification Service Bulletin SB.53-193-60732A, dated November 1, 2006; for related information. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19197 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA-2007-29336; Directorate Identifier 2007-NM-143-AD] RIN 2120-AA64 Airworthiness Directives; Airbus Model A300, A310, and A300-600 Series Airplanes AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). SUMMARY: We propose to adopt a new airworthiness directive
(AD)for the products listed above. This proposed AD results from mandatory continuing airworthiness information
(MCAI)originated by an aviation authority of another country to identify and correct an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: * * * accidents which occurred to in-service aircraft caused by the violent opening of the passenger door related to excessive residual pressure in the cabin. The proposed AD would require actions that are intended to address the unsafe condition described in the MCAI. DATES: We must receive comments on this proposed AD by October 29, 2007. ADDRESSES: You may send comments by any of the following methods: • *DOT Docket Web Site:* Go to *http://dms.dot.gov* and follow the instructions for sending your comments electronically. • *Fax:*
(202)493-2251. • *Mail:* U.S. Department of Transportation, Docket Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • *Hand Delivery:* Room W12-140 on the ground floor of the West Building, 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. Examining the AD Docket You may examine the AD docket on the Internet at *http://dms.dot.gov;* or in person at the Docket Operations office between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains this proposed AD, the regulatory evaluation, any comments received, and other information. The street address for the Docket Operations office (telephone
(800)647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt. FOR FURTHER INFORMATION CONTACT: Tom Stafford, Aerospace Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-1622; fax
(425)227-1149. SUPPLEMENTARY INFORMATION: Comments Invited We invite you to send any written relevant data, views, or arguments about this proposed AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2007-29336; Directorate Identifier 2007-NM-143-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this proposed AD. We will consider all comments received by the closing date and may amend this proposed AD based on 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 about this proposed AD. Discussion The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA Airworthiness Directive 2007-0093 R1, dated April 17, 2007 (referred to after this as “the MCAI”), to correct an unsafe condition for the specified products. The MCAI states: The present AD requires the flight crew to follow the instructions of the “emergency procedure check of delta P = 0” of the Aircraft Flight Manual
(AFM)at the latest revision date. This AD falls within the scope of a set of corrective measures developed by AIRBUS subsequent to accidents which occurred to in-service aircraft caused by the violent opening of the passenger door related to excessive residual pressure in the cabin. * * * The corrective action is revising the Emergency Procedures sections of the AFMs to advise the flightcrew of new procedures for emergency evacuation. You may obtain further information by examining the MCAI in the AD docket. FAA's Determination and Requirements of This Proposed AD This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI and service information referenced above. We are proposing this AD because we evaluated all pertinent information and determined an unsafe condition exists and is likely to exist or develop on other products of the same type design. 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 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 proposed different actions in this AD from those in the MCAI in order to follow FAA policies. Any such differences are highlighted in a NOTE within the proposed AD. Costs of Compliance Based on the service information, we estimate that this proposed AD would affect about 238 products of U.S. registry. We also estimate that it would take about 1 work-hour per product to comply with the basic requirements of this proposed AD. The average labor rate is $80 per work-hour. Based on these figures, we estimate the cost of the proposed AD on U.S. operators to be $19,040, or $80 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 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 this 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. 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 FAA amends § 39.13 by adding the following new AD: **Airbus:** Docket No. FAA-2007-29336; Directorate Identifier 2007-NM-143-AD. Comments Due Date
(a)We must receive comments by October 29, 2007. Affected ADs
(b)None. Applicability
(c)This AD applies to Airbus Model A300, A310, and A300-600 series airplanes, certificated in any category, all certified models and all serial numbers. Subject
(d)Air Transport Association
(ATA)of America Code 21: Air conditioning. Reason
(e)The mandatory continuing airworthiness information
(MCAI)states: The present AD requires the flight crew to follow the instructions of the “emergency procedure check of delta P = 0” of the Aircraft Flight Manual
(AFM)at the latest revision date. This AD falls within the scope of a set of corrective measures developed by AIRBUS subsequent to accidents which occurred to in-service aircraft caused by the violent opening of the passenger door related to excessive residual pressure in the cabin. * * * The corrective action is revising the Emergency Procedures sections of the AFMs to advise the flightcrew of new procedures for emergency evacuation. Actions and Compliance
(f)Within 30 days after the effective date of this AD, unless already done, do the following actions.
(1)For Model A300 series airplanes without modification 10002 installed, revise the Emergency Procedures sections of the AFM to include the following statement. This may be done by inserting a copy of this AD into the AFM. “EMERGENCY EVACUATION AIRCRAFT/PARKING BRAKE Stop/Set ATC (VHF 1) Notify Cabin crew Notify EMER EXIT LT ON BOTH FUEL LEVERS OFF FIRE handles (ENG and APU) Pull AGENTS (ENG and APU) as rqrd RAM AIR INLET Open Before opening doors: ΔP (DIFF PRESS) Check zero • If evacuation required: Evacuation Initiate • If evacuation not required: CABIN CREW and PASSENGERS Notify”
(2)For Model A300 series airplanes on which modification 10002 is installed, revise the Emergency Procedures sections of the AFM to include the following statement. This may be done by inserting a copy of this AD into the AFM. “EMERGENCY EVACUATION (Mod 10002) AIRCRAFT/PARKING BRAKE Stop/Set ATC (VHF 1) Notify Cabin crew Notify EMER EXIT LT ON CL LT ON BOTH FUEL LEVERS OFF FIRE handles (ENG and APU) Pull AGENTS (ENG and APU) as rqrd RAM AIR INLET Open Before opening doors: ΔP (DIFF PRESS) Check zero • If evacuation required: Evacuation Initiate • If evacuation not required: CABIN CREW and PASSENGERS Notify”
(3)For Model A310 and A300-600 series airplanes, revise the Emergency Procedures sections of the AFM to include the following information. This may be done by inserting a copy of this AD into the AFM. “Before opening doors: • IF DEPRESS VALVE selected in MAN mode: —DEPRESS VALVE MAN CLT Full Open —ΔP (Diff press) Check zero • If evacuation required: —Evacuation Initiate —BAT (before leaving A/C) OFF/R • If evacuation not required: —CABIN CREW and PASSENGERS Notify” Note 1: When the information described in paragraphs (f)(1), (f)(2), or (f)(3) has been included in the general revisions of the AFM, the general revisions may be inserted in the applicable AFM, and the copy of the AD may be removed from that AFM. FAA AD Differences Note 2: This AD differs from the MCAI and/or service information as follows: No differences. 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, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. Send information to ATTN: Tom Stafford, Aerospace Engineer, International Branch, ANM-116, Transport Airplane Directorate, FAA, 1601 Lind Avenue, SW., Renton, Washington 98057-3356; telephone
(425)227-1622; fax
(425)227-1149. Before using any approved AMOC on any airplane to which the AMOC applies, notify your appropriate principal inspector
(PI)in the FAA Flight Standards District Office (FSDO), or lacking a PI, your local FSDO.
(2)*Airworthy Product:* For any requirement in this AD to obtain corrective actions from a manufacturer or other source, use these actions if they are FAA-approved. Corrective actions are considered FAA-approved if they are approved by the State of Design Authority (or their delegated agent). You are required to assure the product is airworthy before it is returned to service.
(3)*Reporting Requirements:* For any reporting requirement in this AD, under the provisions of the Paperwork Reduction Act, the Office of Management and Budget
(OMB)has approved the information collection requirements and has assigned OMB Control Number 2120-0056. Related Information
(h)Refer to MCAI EASA Airworthiness Directive 2007-0093 R1, dated April 17, 2007, for related information. Issued in Renton, Washington, on September 21, 2007. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. E7-19203 Filed 9-27-07; 8:45 am] BILLING CODE 4910-13-P SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 [Release No. IA-2652; File No. S7-22-07] RIN 3235-AJ97 Interpretive Rule Under the Advisers Act Affecting Broker-Dealers AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission is publishing for comment an interpretive rule that would address the application of the Investment Advisers Act of 1940 to certain activities of broker-dealers. The proposal would reinstate three interpretive provisions of a rule that was vacated by a recent court opinion. The first provision would clarify that a broker-dealer that exercises investment discretion with respect to an account or charges a separate fee, or separately contracts, for advisory services provides investment advice that is not “solely incidental to” its business as a broker-dealer. The second provision would clarify that a broker-dealer does not receive special compensation within the meaning of section 202(a)(11)(C) of the Advisers Act solely because it charges a commission for discount brokerage services that is less than it charges for full-service brokerage. The third provision would clarify that a registered broker-dealer is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subjects it to the Advisers Act. DATES: Comments should be received on or before November 2, 2007. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/proposed.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number S7-22-07 on the subject line; or • Use the Federal eRulemaking Portal ( *http://www.regulations.gov* ). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-22-07. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/proposed.shtml* ). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days from 10 a.m. to 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: David W. Blass, Assistant Director, or Vincent M. Meehan, Senior Counsel, at
(202)551-6787 or *IArules@sec.gov,* Office of Investment Adviser Regulation, Division of Investment Management, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-5041. SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (“Commission” or “SEC”) is proposing to amend rule 202(a)(11)-1 [17 CFR 275.202(a)(11)-1] under the Investment Advisers Act of 1940. I. Introduction The Investment Advisers Act of 1940 (“Advisers Act” or “Act”) 1 regulates the activities of certain “investment advisers,” who are defined in section 202(a)(11) of the Act as persons who receive compensation for providing advice about securities as part of a regular business. Section 202(a)(11)(C) excepts from the definition of “investment adviser” a broker or dealer “whose performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” 1 15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, where the Advisers Act is codified. In 2005, we adopted the original rule 202(a)(11)-1 under the Advisers Act, the principal purpose of which was to deem broker-dealers offering “fee-based brokerage accounts” as not subject to the Advisers Act. 2 The rule also included several interpretations of section 202(a)(11)(C). On March 30, 2007, the Court of Appeals for the District of Columbia Circuit (the “Court”), in *Financial Planning Association* v. *SEC* (the “ *FPA* decision”), vacated the original rule 202(a)(11)-1 on the grounds that the Commission did not have the authority to except broker-dealers offering fee-based brokerage accounts from the definition of “investment adviser.” 3 Though the Court did not question the validity of our interpretive positions, it vacated the entire rule, leaving our interpretations potentially in doubt. 2 *See Certain Broker-Dealers Deemed Not to be Investment Advisers,* Investment Advisers Act Release No. 2376 (Apr. 12, 2005) [70 FR 20424 (Apr. 19, 2005)] (“2005 Adopting Release”). Fee-based brokerage accounts are similar to traditional full-service brokerage accounts, which provide a package of services, including execution, incidental investment advice, and custody. The primary difference between the two types of accounts is that a customer in a fee-based brokerage account pays a fee based upon the amount of assets on account (an asset-based fee) and a customer in a traditional full-service brokerage account pays a commission (or a mark-up or mark-down) for each transaction. 3 482 F.3d 481 (D.C. Cir. 2007). We have received requests from broker-dealers that we clarify the status of our interpretive positions. 4 Because of the significance of the interpretations, and in order to provide the public with an opportunity for meaningful comment on them in light of the *FPA* decision, we are re-proposing the interpretive positions. 5 Proposed rule 202(a)(11)-1 would clarify that
(i)a broker-dealer provides investment advice that is not “solely incidental to” the conduct of its business as a broker-dealer if it exercises investment discretion (other than on a temporary or limited basis) with respect to an account or charges a separate fee, or separately contracts, for advisory services,
(ii)a broker-dealer does not receive “special compensation” solely because it charges different rates for its full-service brokerage services and discount brokerage services, and
(iii)a registered broker-dealer is an investment adviser solely with respect to accounts for which it provides services that subject it to the Advisers Act. We discuss these proposed interpretive positions below. 4 *See, e.g.,* Letter from Ira D. Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets Association, to Robert E. Plaze, Associate Director, Division of Investment Management and Catherine McGuire, Chief Counsel, Division of Market Regulation (June 27, 2007). This letter and the comment letters cited in this Release are available for viewing and downloading at *http://www.sec.gov/rules/proposed/s72599.shtml.* 5 As a separate part of our response to the *FPA* decision, we have adopted a temporary rule on an interim final basis that establishes an alternative means for investment advisers who are registered with us as broker-dealers to meet the requirements of section 206(3) of the Advisers Act when they act, directly or indirectly, in a principal capacity with respect to transactions with certain of their advisory clients. *See Temporary Rule Regarding Principal Trades with Certain Advisory Clients,* Investment Advisers Act Release No. 2653 (Sept. 24, 2007). II. Discussion A. “Solely Incidental” Section 202(a)(11)(C) of the Advisers Act, as discussed above, provides an exception from the Act for a broker-dealer “whose performance of [advisory services] is solely incidental to his business as a broker-dealer and who receives no special compensation therefor.” This exception amounts to a recognition that broker-dealers commonly give a certain amount of advice to their customers in the course of their regular business as broker-dealers and that “it would be inappropriate to bring them within the scope of the [Advisers Act] merely because of this aspect of their business.” 6 6 *Opinion of General Counsel Relating to Section 202(a)(11)(C) of the Investment Advisers Act of 1940* , Investment Advisers Act Release No. 2 (Oct. 28, 1940) [11 FR 10996 (Sept. 27, 1946)] (“Advisers Act Release No. 2”). In the 2005 Proposing Release, we explained our understanding that investment advice is “solely incidental to” the conduct of a broker-dealer's business within the meaning of section 202(a)(11)(C) when the advisory services rendered to an account are in connection with and reasonably related to the brokerage services provided to that account. 7 We further explained that our understanding is consistent with the legislative history of the Advisers Act, which indicates Congress' intent to exclude broker-dealers providing advice as part of traditional brokerage services. We also explained that it is consistent with the Commission's contemporaneous construction of the Advisers Act as excepting broker-dealers whose investment advice is given “solely as an incident of their regular business.” 8 7 *Certain Broker-Dealers Deemed Not to be Investment Advisers* , Investment Advisers Act Release No. 2340 (Jan. 6, 2005) [70 FR 2716 (Jan. 14, 2005)] (“2005 Proposing Release”). 8 *Id.* Many commenters responding to the 2005 Proposing Release urged us to clarify that certain practices are not solely incidental to brokerage services. Proposed rule 202(a)(11)-1(a) would re-codify two of the interpretations we announced in 2005 regarding activity that is not “solely incidental” to brokerage services for purposes of section 202(a)(11)(C). The situations addressed by these interpretations are not the only ones in which a broker-dealer provides advice that is not solely incidental to its business as a broker-dealer. 9 Commenters are invited to suggest other situations that should be addressed by the rule. 9 We have removed the text “(among other things, and without limitation)” from the introductory paragraph to proposed rule 202(a)(11)-1(a), though we included that text in 2005. We believe it is clear that the rule as we propose it today does not address all the situations in which a broker-dealer can provide advice that is not “solely incidental” to its business as a broker-dealer for purposes of section 202(a)(11)(C). 1. *Separate Contract or Fee for Advisory Services.* Proposed rule 202(a)(11)-1(a)(1) would provide that a broker-dealer that separately contracts with a customer for, or separately charges a fee for, investment advisory services cannot be considered to be providing advice that is solely incidental to its brokerage. We view a separate contract specifically providing for the provision of investment advisory services to reflect a recognition that the advisory services are provided independent of brokerage services and, therefore, cannot be considered solely incidental to the brokerage services. 10 Similarly, we have long held the view that when a broker-dealer charges its customers a separate fee for investment advice, it clearly is providing advisory services and is subject to the Advisers Act. 11 In light of the *FPA* decision, brokerage firms and other interested parties may be unsure about whether we continue to hold these views. In order to provide certainty to those parties, the proposed rule would codify our interpretations. 10 2005 Adopting Release, *supra* note 2 at n.145, and accompanying text. 11 *Final Extension of Temporary Rules* , Investment Advisers Act Release No. 626 (Apr. 27, 1978) [43 FR 19224 (May 4, 1978)] (“Advisers Act Release No. 626”). *See also* Advisers Act Release No. 2, *supra* note 6 (“a broker or dealer who is specially compensated for the rendition of advice should be considered an investment adviser and not be excluded from the purview of the [Advisers] Act merely because he is also engaged in effecting market transactions in securities”). We request comment on our interpretation. In the 2005 Adopting Release, we explained our understanding that many broker-dealers already use the payment of a separate fee as a bright line test to distinguish their brokerage activities from their advisory activities and we have received no information since 2005 that would change our understanding. Are we correct? Do broker-dealers also already consider advisory services that are the subject of a separate contract not to be solely incidental to the brokerage services they provide? Commenters are invited to explain to us any situation in which a broker-dealer could charge a separate fee for, or separately contract for, advisory services in a manner that, consistent with the intent of the Advisers Act, is “solely incidental” to the brokerage services provided. For example, could a broker-dealer separately contract for advisory services, but receive no “special compensation” therefore, for purposes of section 202(a)(11)(C) of the Act? 2. *Discretionary Investment Advice* . We have long acknowledged that a broker-dealer's exercise of investment discretion over customer accounts raises serious questions about whether those accounts must be treated as subject to the Advisers Act—even where no special compensation is received. 12 In 2005, we adopted, and today we are re-proposing, a rule that would clarify that any account over which a broker-dealer exercises investment discretion is subject to the Advisers Act. Specifically, rule 202(a)(11)-1(a) would clarify that discretionary investment advice is not “solely incidental to” the business of a broker-dealer within the meaning of section 202(a)(11)(C) and, accordingly, brokers and dealers are not excepted from the Act for any accounts over which they exercise investment discretion as that term is defined in section 3(a)(35) of the Exchange Act (except that investment discretion granted by a customer on a temporary or limited basis is excluded). 13 12 Advisers Act Release No. 626, *supra* note 11 (brokerage relationships “which include discretionary authority to act on a client's behalf have many of the characteristics of the relationships to which the protections of the Advisers Act are important.”). 13 We would view a broker-dealer's discretion to be temporary or limited within the meaning of rule 202(a)(11)-1(d) when the broker-dealer is given discretion:
(i)As to the price at which or the time to execute an order given by a customer for the purchase or sale of a definite amount or quantity of a specified security;
(ii)on an isolated or infrequent basis, to purchase or sell a security or type of security when a customer is unavailable for a limited period of time not to exceed a few months;
(iii)as to cash management, such as to exchange a position in a money market fund for another money market fund or cash equivalent;
(iv)to purchase or sell securities to satisfy margin requirements;
(v)to sell specific bonds and purchase similar bonds in order to permit a customer to take a tax loss on the original position;
(vi)to purchase a bond with a specified credit rating and maturity; and
(vii)to purchase or sell a security or type of security limited by specific parameters established by the customer. We believe that a broker-dealer's authority to effect a trade without first consulting a customer is qualitatively distinct from simply providing advice as part of a package of brokerage services. When a broker-dealer exercises investment discretion, it is not only the source of investment *advice* , it also has the authority to make the investment *decision* relating to the purchase or sale of securities on behalf of its client. This, in our view, warrants the protection of the Advisers Act because of the “special trust and confidence inherent” in such a relationship. 14 Most commenters who addressed this aspect of our 2005 proposal, including those representing investors, advisers, and broker-dealers, generally agreed with us. 14 *See Amendment and Extension of Temporary Exemption From the Investment Advisers Act for Certain Brokers and Dealers* , Investment Advisers Act Release No. 471 (Aug. 20, 1975) [40 FR 38156 (Aug. 27, 1975)]. Under the proposed rule, the exception provided by section 202(a)(11)(C) of the Act is unavailable for any account over which a broker-dealer exercises investment discretion, regardless of the form of compensation and without regard to how the broker-dealer handles other accounts. We believe our interpretation is appropriate for several reasons. 15 First, we believe it would apply the Advisers Act to the sort of relationship with a broker-dealer that the Act was intended to reach. Second, we believe the proposed rule is consistent with the interpretation that a broker-dealer is an investment adviser only with respect to those accounts for which the broker-dealer provides services or receives compensation that subject the broker-dealer to the Advisers Act. Finally, we believe the proposed rule would provide a workable, bright-line test for the availability of the section 202(a)(11)(C) exception. 15 2005 Adopting Release, *supra* note 2, at n.165 and accompanying text. In that release, we described our position as a change to the staff's prior approach under which a discretionary account is subject to the Act only if the broker-dealer has enough other discretionary accounts to trigger the Act. For the reasons discussed in this Release and in the 2005 Adopting Release, we believe that the interpretation we are proposing today and adopted in 2005 better effectuates the purposes of the Act. We request comment on our proposed interpretive provision. Do commenters agree with us that it addresses the sort of relationship that the Advisers Act should reach? One commenter to our 2005 proposal asserted it does not. 16 This commenter argued that Congress, when it adopted the Advisers Act, must have been aware that broker-dealers exercised discretionary authority and, by not expressly stating that brokers offering such accounts were subject to the Act, Congress indicated its intent to except such broker-dealers from the Act. We disagree. As we explained in 2005, the Advisers Act does not address directly whether a broker-dealer exercising investment discretion over a commission-based account must comply with the Act. The Act applies unless the advisory services are “solely incidental to” the broker-dealer's business and no “special compensation” is received. We remain unable to conclude that in 1940 Congress would have understood investment discretion to be part of the traditional package of services broker-dealers offered for commissions. We are aware of nothing in the legislative history of section 202(a)(11)(C) (or of the Act as a whole) or in the brokerage practices in 1940 that would preclude our interpretation of that section as being unavailable for all accounts over which broker-dealers exercise investment discretion. Do commenters agree? 16 Comment Letter of Morgan, Lewis & Bockius LLP (Feb. 7, 2005). We also are interested in understanding the impact on investors of these distinctions. We also request comment on our reference in the proposed rule to the definition of “investment discretion” in section 3(a)(35) of the Exchange Act. Is a different definition more appropriate? If so, what definition should we use? Are we correct in excluding investment discretion given on a temporary or limited basis? Have we correctly identified the circumstances in which a broker-dealer exercises temporary or limited discretion? 3. *Financial Planning* . The rule we adopted in 2005 also contained a provision stating that when a broker-dealer provides advice as part of a financial plan or in connection with providing financial planning services, a broker-dealer provides advice that is not solely incidental if it
(i)holds itself out to the public as a financial planner or as providing financial planning services,
(ii)delivers to its customer a financial plan, or
(iii)represents to the customer that the advice is provided as part of a financial plan or financial planning services. 17 17 2005 Adopting Release, *supra* note 2, at Section III(E). We have decided not to propose this provision as part of this rule, which many financial services firms found difficult to apply. 18 Instead, we plan to consider issues relating to financial planning in light of the results of a study we commissioned by the RAND Corporation (“RAND Study”) comparing the levels of protection afforded customers of broker-dealers and investment advisers under the federal securities laws. The RAND Study is expected to be delivered to us no later than December 2007, several months ahead of schedule. 19 18 Our staff attempted to address some of the interpretive issues that were raised by this provision in a staff interpretive letter. Securities Industry Association, SEC Staff Letter (Dec. 16, 2005), available at h *ttp://www.sec.gov/divisions/investment/guidance.shtml* . That letter is terminated. 19 *See Commission Seeks Time for Investors and Brokers to Respond to Court Decision on Fee-Based Accounts* , SEC Press Release No. 2007-95 (May 14, 2007). The results of the RAND Study are expected to provide an important empirical foundation for the Commission to consider what action to take to improve the way investment advisers and broker-dealers provide financial services to customers. One option that will be available to the Commission will be making the RAND Study results available to the public and seeking comments on them. B. Full-Service and Discount Brokerage Programs As part of our 2005 rulemaking, we adopted an interpretive provision which clarified that a broker-dealer will not be considered to have received “special compensation” for purposes of section 202(a)(11)(C) of the Advisers Act (and therefore will not be subject to the Act) *solely* because the broker-dealer charges a commission, mark-up, mark-down or similar fee for brokerage services that is greater or less than one it charges another customer. 20 We are re-proposing that interpretive position today as proposed rule 202(a)(11)-1(b). 21 20 Discount brokerage programs, including electronic trading programs, give customers who do not want or need all the services that traditionally are provided in a full-service brokerage account the ability to trade securities at a reduced commission rate. Electronic trading programs provide customers the ability to trade on-line, typically without the assistance of a broker-dealer's registered representative. Customers trading electronically may devise their own investment or trading strategies, or may seek advice separately from investment advisers. 21 We have, however, modified the text of the rule to clarify that it is an interpretation of the phrase “special compensation.” In addition, in the 2005 rulemaking, we stated that the interpretive position was necessary to supersede past staff interpretations that would lead to a full-service broker-dealer being subject to the Advisers Act “with respect to accounts for which it provides advice incidental to its brokerage business merely because it offers electronic trading or other forms of discount brokerage.” 2005 Proposing Release at n.88 and accompanying text. Having revisited those past staff interpretations, we conclude that they do not necessarily lead to the conclusion that a broker-dealer's full-service accounts are advisory accounts subject to the Advisers Act merely because the broker-dealer also offers some form of discount brokerage. This interpretive position reflects the longstanding view that, with respect to brokerage commissions or other transaction-based compensation, broker-dealers receive “special compensation” where there is a clearly definable charge for investment advice. 22 But, if a firm negotiates different fees with its customers for similar transactions, the Commission would not conclude that the customer being charged the higher fee is paying “special compensation” for investment advice based solely on differences in charges, because whether the pricing difference is based on the presence or absence of investment advice is “too hypothetical.” 23 Similarly, if, for example, a broker-dealer had a general fee schedule for full service brokerage that included access to brokerage personnel, and had a separate fee schedule for automated transactions using an Internet Web site, we would not, absent other factors, view the difference as “special compensation.” As one commenter to our 2005 proposal noted, electronic brokerage programs offer “lower expenses and less overhead, [and it is] entirely appropriate, and necessarily competitive, for firms to have reduced their fees for such services, and this reduction is obviously in clients' best interests.” 24 22 *See* Advisers Act Release No. 626 *supra* note 11. As the Commission's general counsel opined in a 1940 letter responding to questions about “special compensation,” where the only difference in the services provided to two brokerage customers is that one receives advice and the other does not, and the firm always charges a higher amount to the customer that receives the advice, the customer paying the higher transaction amount is paying “special compensation.” Advisers Act Release No. 2, *supra* note 6. 23 This view is consistent with the staff position announced in Advisers Act Release No. 626, *supra* note 11. 24 *See* Comment Letter of Merrill, Lynch, Pierce, Fenner & Smith (Feb. 7, 2005), at p. 7. The Commission would not look outside the fee structure of a given firm to determine whether special compensation exists. That is, just because a “discount” firm offered lower rates than a “full-service” firm, we would not consider the “full-service” firm's charges “special compensation.” 25 We request comment on this interpretation. Do commenters support it? Should we consider any modifications and, if so, which ones? 25 *Id.* C. Dual Registrants Finally, we adopted in 2005, and are re-proposing today, a rule providing that a broker-dealer that is registered under both the Exchange Act and the Advisers Act is an investment adviser solely with respect to those accounts for which it provides advice or receives compensation that subject the broker-dealer to the Advisers Act. 26 We received few comments regarding this provision of the original rule, and we are proposing it as adopted. The provision would codify a long-standing interpretation of the Act that permits a broker-dealer also registered under the Act to distinguish its brokerage customers from its advisory clients. 27 26 Proposed rule 202(a)(11)-1(c). 27 2005 Adopting Release, *supra* note 2. See also Advisers Act Release No. 626, *supra* note 11. III. General Request for Comment The Commission is proposing the interpretive provisions described above and we welcome your comments. We solicit comment, both specific and general, on each component of the proposals. We request and encourage any interested person to submit comments regarding: • The proposals that are the subject of this release; • Additional or different revisions; and • Other matters that may have an effect on the proposals contained in this release. Comment is also solicited from the point of view of broker-dealers and investment advisers, their customers and clients, other regulatory bodies (such as state securities regulators), and other interested persons. Any person wishing to submit written comments on any aspect of the proposal is requested to do so. IV. Cost-Benefit Analysis The Commission is sensitive to the costs and benefits imposed by its rules, and is considering the costs and benefits of proposed rule 202(a)(11)-1. Proposed rule 202(a)(11)-1 would clarify that if a broker-dealer exercises investment discretion over customer accounts or contracts with a customer for, or charges a separate fee for, advisory services it is not providing advice that is “solely incidental” to its business as a broker-dealer. The proposed rule also would clarify that a broker-dealer does not receive “special compensation” solely because it charges a commission rate to one customer that is greater or less than one it charges another customer. Finally, proposed rule 202(a)(11)-1 would clarify that broker-dealers that also are registered as investment advisers are subject to the Advisers Act solely with respect to accounts for which they provide services or receive compensation that subject them to the Act. As discussed above, in 2005 we adopted the original rule 202(a)(11)-1 under the Advisers Act. The original rule included, among other things, the interpretive rules we are proposing today. On March 30, 2007, the Court vacated original rule 202(a)(11)-1, though the Court did not question the validity of our interpretive positions. The rules we are proposing today are substantially identical to those interpretive positions. As requested by the Commission, the Court has stayed the issuance of its mandate until October 1, 2007, and thus the interpretive positions contained in original rule 202(a)(11)-1 remain in effect. Accordingly, we would expect that advisers' conduct would have conformed to the interpretive positions contained in original rule 202(a)(11)-1 and therefore the proposed rules, if adopted, would have no effect on advisers' conduct. The principal benefit of the proposed rule would be to clarify the validity of these interpretations in light of the *FPA* decision. 28 We believe that broker-dealers that currently rely on the interpretation that a broker-dealer would not be deemed to be an investment adviser solely because the broker-dealer charges a commission, mark-up, mark-down, or similar fee for brokerage services that is greater or less than one it charges another customer would benefit because it will be clear that they can continue to offer the same services under the same regulatory regime. Similarly, we believe that broker-dealers relying on the interpretation that permits dually-registered broker-dealers to distinguish their brokerage accounts from their advisory accounts would benefit because it will be clear that they can continue to make these distinctions among their accounts. 28 The Commission previously solicited comment on the benefits of these interpretations. 2005 Proposing Release, *supra* note 7. *See also* 2005 Adopting Release, *supra* note 2, for a discussion of the benefits of each of these proposed interpretations. We do not believe that the proposed rule would require broker-dealers or investment advisers to incur new or additional costs. 29 As noted, proposed rule 202(a)(11)-1 would re-codify substantially identical interpretations of section 202(a)(11)(C) that were contained in the rule vacated by the FPA decision. Prior to that decision, broker-dealers operated with the understanding that contracting with a customer for, or charging a separate fee for, advisory services or exercising investment discretion (other than on a temporary or limited basis) would not be considered “solely incidental” to the brokerage services they provide for purposes of section 202(a)(11)(C) of the Advisers Act. Similarly, broker-dealers operated full-service and discount brokerage programs relying on the interpretation that they were not subject to the Act solely because they offered different rate structures for those services. Furthermore, dually-registered broker-dealers already distinguish their brokerage customers from their advisory clients in reliance on our previous interpretation contained in the vacated rule. We, therefore, believe the proposed rule would not change existing obligations or relationships. Accordingly, we do not believe that broker-dealers or investment advisers would need to take steps or alter their business practices in such a way that would require them to incur new or additional costs as a result of the adoption of the proposed rule. 29 The Commission previously solicited comment on the costs of these interpretations. 2005 Proposing Release, *supra* note 7. *See also* 2005 Adopting Release, *supra* note 2, for a discussion of the costs associated with each of these proposed interpretations. We request comment on the assumptions on which we base our preliminary conclusion that broker-dealers and investment advisers would not incur new or additional costs if we determined to adopt the rule as proposed. We encourage commenters to discuss any costs and benefits that we did not consider in our discussion above. We request commenters to provide analysis and empirical data to support their statements regarding any costs or benefits associated with proposed rule 202(a)(11)-1. V. Paperwork Reduction Act Proposed rule 202(a)(11)-1 would not impose any new “collections of information” within the meaning of the Paperwork Reduction Act of 1995. 30 The proposed rule would not create any new filing, reporting, recordkeeping, or disclosure reporting requirements for broker-dealers or investment advisers. The proposed rule would re-codify three interpretive provisions. First, the rule would clarify that a broker-dealer that exercises investment discretion with respect to an account or contracts with a customer for, or charges a separate fee for, advisory services provides investment advice that is not “solely incidental to” its business as a broker-dealer. Second, the rule would clarify that a broker-dealer does not receive “special compensation” solely because it charges a commission rate to one customer that is greater or less than one it charges another customer. Third, the rule would clarify that a registered broker-dealer is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subject it to the Advisers Act. We believe the proposed rule contains no new “collections of information” under the Paperwork Reduction Act that requires the approval of the Office of Management and Budget under 44 U.S.C. 3501. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. 30 44 U.S.C. 3501 to 3520. In our 2005 releases, we estimated that the interpretive provisions we adopted then in the original rule 202(a)(11)-1, and which we are re-proposing today as revised rule 202(a)(11)-1, would have the effect of requiring certain broker-dealers that contract with customers for, or charge a separate fee for, advisory services or provide discretionary brokerage to register under the Advisers Act. 31 We estimated that the rule, which we are proposing today as rule 202(a)(11)-1(a), therefore increased the number of respondents under several existing collections of information, and, correspondingly, increased the annual aggregate burden under those existing collections of information. 32 Accordingly, we submitted to the Office of Management and Budget (“OMB”), in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, and the OMB approved, amending these collections of information for which we estimated the annual aggregate burden likely increased as a result of the 2005 adoption of rule 202(a)(11)-1. The titles of the affected collections of information are: “Form ADV,” “Form ADV-W and Rule 203-2,” “Rule 203-3 and Form ADV-H,” “Form ADV-NR,” “Rule 204-2,” “Rule 204-3,” “Rule 204A-1,” “Rule 206(4)-3,” “Rule 206(4)-4,” “Rule 206(4)-6,” and “Rule 206(4)-7,” all under the Advisers Act. The approved collections of information numbers appear under OMB control numbers 3235-0049, 3235-0313, 3235-0538, 3235-0240, 3235-0278, 3235-0047, 3235-0596, 3235-0242, 3235-0345, 3235-0571, and 3235-0585, respectively. 31 *See* 2005 Proposing Release, *supra* note 7, at Section VII; 2005 Adopting Release, *supra* note 2, at Section VIII. 32 In 2005, as today, we estimated that the provisions now contained in proposed rule 202(a)(11)-1(b) and 202(a)(11)-1(c) did not contain any collections of information within the meaning of the Paperwork Reduction Act. We have determined not to modify these burden estimates because we continue to believe they were appropriate and, with respect to the proposals in this release, that there is no additional paperwork burden. We request comment on whether our assumption that there is no additional paperwork burden is correct. VI. Initial Regulatory Flexibility Analysis Section 3(a) of the Regulatory Flexibility Act requires the Commission to undertake an Initial Regulatory Flexibility Analysis of the proposed rule on small entities unless the Commission certifies that the proposed rule, if adopted, would not have a significant economic impact on a substantial number of small entities. 33 Pursuant to section 605(b) of the Regulatory Flexibility Act, the Commission hereby certifies that proposed rule 202(a)(11)-1 would not, if adopted, have a significant impact on a substantial number of small entities. 34 33 5 U.S.C. 603(a). 34 5 U.S.C. 605(b). Proposed rule 202(a)(11)-1 would re-codify three interpretive provisions. First, the rule would clarify that a broker-dealer that exercises investment discretion with respect to an account or contracts with customers for, or charges a separate fee for, advisory services provides investment advice that is not “solely incidental to” its business as a broker-dealer. Second, the rule would clarify that a broker-dealer does not receive “special compensation” solely because it charges a commission rate to one customer that is greater or less than one it charges another customer. Third, the rule would clarify that a registered broker-dealer is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subject it to the Advisers Act. Proposed rule 202(a)(11)-1 would re-codify substantially identical interpretations of section 202(a)(11)(C) of the Advisers Act that we adopted in 2005. Therefore, we do not believe that the proposed rule would have an economic impact on broker-dealers or investment advisers, regardless of whether these broker-dealers or investment advisers are small entities, because these entities would likely have conformed to the interpretive positions previously adopted. Accordingly, the Commission certifies that proposed rule 202(a)(11)-1 would not have a significant economic impact on a substantial number of small entities. The Commission encourages written comments regarding this certification. We request that commenters describe the nature of any impact on small businesses and provide empirical data to support the extent of the impact. VII. Statutory Authority The Commission is proposing to amend Rule 202(a)(11)-1 pursuant to section 211(a) of the Advisers Act. Text of Rule List of Subjects in 17 CFR Part 275 Investment advisers, Reporting and recordkeeping requirements. For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 275—RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940 1. The general authority citation for part 275 is revised to read as follows: Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless otherwise noted. 2. Section 275.202(a)(11)-1 is revised to read as follows: § 275.202(a)(11)-1 Certain broker-dealers.
(a)*Solely incidental.* A broker or dealer provides advice that is not solely incidental to the conduct of its business as a broker or dealer within the meaning of section 202(a)(11)(C) of the Advisers Act (15 U.S.C. 80b-2(a)(11)(C)) if the broker or dealer:
(1)Charges a separate fee, or separately contracts, for advisory services; or
(2)Exercises investment discretion (as that term is defined in section 3(a)(35) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. 78c(a)(35))), except investment discretion granted by a customer on a temporary or limited basis, over such account.
(b)*Special compensation.* A broker or dealer registered pursuant to section 15 of the Exchange Act (15 U.S.C. 78o) does not receive special compensation within the meaning of section 202(a)(11)(C) of the Advisers Act solely because the broker or dealer charges a commission, mark-up, mark-down, or similar fee for brokerage services that is greater than or less than one it charges another customer.
(c)*Special rule.* A broker or dealer registered with the Commission under Section 15 of the Exchange Act is an investment adviser solely with respect to those accounts for which it provides services or receives compensation that subject the broker-dealer to the Advisers Act. By the Commission. Dated: September 24, 2007. Nancy M. Morris, Secretary. [FR Doc. E7-19269 Filed 9-27-07; 8:45 am] BILLING CODE 8010-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-143326-05] RIN 1545-BE95 S Corporation Guidance Under AJCA of 2004 and GOZA of 2005 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations that provide guidance regarding certain changes made to the rules governing S corporations under the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone Act of 2005. The proposed regulations are necessary to replace obsolete references in the current regulations and to allow taxpayers to make proper use of the provisions that made changes to prior law. In particular, the proposed regulations provide guidance on the S corporation family shareholder rules, the definitions of “powers of appointment” and “potential current beneficiaries”
(PCBs)with regard to electing small business trusts (ESBTs), the allowance of suspended losses to the spouse or former spouse of an S corporation shareholder, and relief for inadvertently terminated or invalid qualified subchapter S subsidiary
(QSub)elections. The proposed regulations will affect S corporations and their shareholders. This document also provides a notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by December 27, 2007. Outlines of topics to be discussed at the public hearing scheduled for January 16, 2008, at 10 a.m., must be received by December 27, 2007. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-143326-05), room 5203, Internal Revenue Service, P.O. 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-143326-05), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at *http://www.regulations.gov/* (indicate IRS REG-143326-05). The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Bradford R. Poston,
(202)622-3060; concerning submissions of comments, the hearing, or to be placed on the building access list to attend the hearing, Kelly Banks,
(202)622-7180 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collections of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by November 27, 2007. Comments are specifically requested concerning: Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collection of information; How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information. The reporting requirement in these proposed regulations is in § 1.1361-1(m)(2)(ii)(A). This information must be reported by the trustees of trusts electing to be ESBTs. This information will be used by the IRS to determine the number of shareholders of the corporation in which the trust holds stock and thus whether the corporation is an eligible S corporation. The respondents will be trusts making an ESBT election. The following estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on the information that is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on their particular circumstances. *Estimated total annual reporting burden:* 26,000 hours. *Estimated average annual burden:* 1 hour. *Estimated number of respondents:* 26,000. *Estimated annual frequency of response:* On occasion. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) concerning S corporations under sections 1361, 1362, and 1366 of the Internal Revenue Code (Code). These Code sections were amended by sections 231, 232, 233, 234, 235, 236, 237, 238, and 239 of the American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 1418) (the 2004 Act) and sections 403 and 413 of the Gulf Opportunity Zone Act of 2005 (Pub. L. 109-135) (the 2005 Act). This document does not address other amendments made by the 2004 Act or the 2005 Act. In addition, this document contains additional proposed amendments to the regulations under Code section 1362 necessary to conform the regulations to the changes made by section 1305(a) of the Small Business Job Protection Act of 1996 (Pub. L. 104-188, 110 Stat. 1755) (the 1996 Act). Explanation of Provisions Increase in Maximum Number of Shareholders Section 232 of the 2004 Act amends Code section 1361(b)(1)(A) by increasing the permitted number of shareholders from 75 to 100 for a small business corporation eligible to make an S election. This provision is effective for taxable years beginning after December 31, 2004. The proposed regulations remove or amend several references in the regulations under Code section 1361 that cite a specific number of permissible S corporation shareholders, except insofar as such references are necessary in an example. This change will accommodate any future statutory changes in the maximum number of permitted shareholders. Family Shareholders Section 1361(c)(1), as amended by section 231(a) of the 2004 Act and section 403(b) of the 2005 Act, treats a husband and wife (and their estates), and all members of a family (and their estates) as one shareholder for purposes of the 100 shareholder limitation. Section 403(b) of the 2005 Act eliminated the requirement of an election in order for a family to be treated as one shareholder, providing instead that members of a family would automatically be treated as one shareholder for purposes of Code section 1361(b)(1)(A). This amendment is effective as if included in section 231 of the 2004 Act for tax years beginning after December 31, 2004. Notice 2005-91 (2005-2 CB 1164), see § 601.601(d)(2)(ii)( *b* ), issued prior to the enactment of section 403(b) of the 2005 Act, informed taxpayers that the Treasury Department and the IRS intended to issue guidance regarding the family shareholder election under section 1361(c) and provided that taxpayers could rely on the provisions of Notice 2005-91 until the issuance of that guidance. Although the portions of Notice 2005-91 addressing the manner of making the family shareholder election are no longer relevant, the proposed regulations retain the provisions of Notice 2005-91 describing certain entities other than individuals that will be treated as members of the family. The family members are determined by reference to a common ancestor. Section 1361(c)(1)(B) defines “members of a family” as a common ancestor, any lineal descendant of the common ancestor, and any spouse or former spouse of the common ancestor or any such lineal descendant. Adopted and foster children are included among the lineal descendants as described in section 1361(c)(1)(C). An individual is not eligible to be the common ancestor for purposes of this provision if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders who would otherwise be members of the family (without regard to the “six generation” test of Code section 1361(c)(1)(B)(ii)). Section 403(b) of the 2005 Act also changed the applicable date in section 1361(c)(1)(B)(iii) on which a person will be tested for qualification as a “common ancestor” to the latest of
(1)The date the S election is made,
(2)the earliest date an individual who is a “member of the family” holds stock in the S corporation, or
(3)October 22, 2004. The regulation clarifies that the “six generation” test is applied only at the date specified in Code section 1361(c)(1)(B)(iii) for determining whether an individual meets the definition of “common ancestor,” and has no continuing significance in limiting the number of generations of a family that may hold stock and be treated as a single shareholder. The regulation provides that there is no adverse consequence to a person being a member of two families. Disregard of Unexercised Powers of Appointment in ESBTs Potential current beneficiaries
(PCBs)are treated as shareholders of the corporation for purposes of Code section 1361(b)(1) (which addresses both shareholder eligibility and the permitted number of shareholders). Section 234 of the 2004 Act amended Code section 1361(e)(2) by providing that in determining an ESBT's PCBs for any period, powers of appointment will be disregarded to the extent not exercised by the end of that period. The amended section also increases the period from 60 days to one year during which an ESBT may safely dispose of S corporation stock after an ineligible shareholder becomes a PCB. These amendments apply to taxable years beginning after December 31, 2004. The amendment overrides current § 1.1361-1(m)(4)(vi) and the illustrative example which provides that any person who may receive a distribution under a currently exercisable power of appointment is a PCB. Under § 1.1361-1(m)(4)(vi), the broad powers of appointment commonly included in many trusts used for estate planning purposes would preclude those trusts from qualifying as ESBTs, because that power would cause the S corporation to have an excessive number of deemed shareholders or to have as deemed shareholders persons ineligible to hold S corporation stock. The proposed regulations remove and replace the sections of the regulation inconsistent with current law. The Treasury Department and the IRS have received inquiries concerning whether certain powers held by a trustee or any other person who is not a beneficiary will be considered to be powers of appointment for purposes of Code section 1361(e)(2), and thus be disregarded (to the extent not exercised) in determining the PCBs of the ESBT. In particular, there is concern about the powers to add persons to the class of current beneficiaries or to select from an unlimited class of charitable beneficiaries. Under the current regulations, such powers, regardless of the identity of the holder, could result in the termination of the S corporation election if the class of charities that could currently receive distributions or the class of persons who could be added as beneficiaries is sufficiently large to cause the corporation to have more than the number of shareholders allowed by Code section 1361(b)(1)(A). “Power of appointment” is not defined or described in either Code section 1361(e)(2) as amended or in current § 1.1361-1(m). However, “power of appointment” is described for estate tax purposes in § 20.2041-1(b) of the Estate Tax Regulations and for gift tax purposes in § 25.2514-1(b) of the Gift Tax Regulations. For transfer tax purposes, a power of appointment generally includes the power to appropriate or consume the principal of the trust or the power to affect the beneficial enjoyment of trust property or its income by altering, amending, or revoking the trust instrument or terminating the trust. If the transfer tax descriptions are narrowly interpreted, powers held by fiduciaries (who are not also beneficiaries of the trust) to spray or sprinkle trust distributions would generally not be “powers of appointment.” Therefore, the relief provided by the amended provision of Code section 1361(e)(2) would not apply to prevent the possible creation of an excessive number of PCBs. These powers would continue to be treated under the general rule of current § 1.1361-1(m)(4)(i), which provides that a PCB “is, with respect to any period, any person who at any time during such period is entitled to, or in the discretion of any person may receive, a distribution from the principal or income of the trust.” Any sufficiently broad power to spray or sprinkle trust distributions would result in an excessive number of PCBs and thus cause the termination of the S corporation election. Alternatively, if all fiduciary powers to spray or sprinkle trust distributions to a class of current beneficiaries or possible current beneficiaries were deemed to be “powers of appointment” for purposes of Code section 1361(e)(2), this would effectively result in the replacement of “potential current beneficiaries” as a measuring tool under Code section 1361(b)(1) with “current beneficiaries,” as only those actually receiving distributions would ever meet the PCB definition. The 2004 Act, however, did not replace “potential current beneficiary” with “current beneficiary”. The Treasury Department and the IRS believe that the proper interpretation of the change made by the 2004 Act is that the provision avoids counting as PCBs an unlimited number of potential appointees who may never become permissible beneficiaries. In this manner, the legislative change prevents the mere presence of common estate planning powers in a trust instrument from resulting in a termination of the S corporation election because of an excessive number of PCBs. The power to select from among an unlimited class of charities within the class of beneficiaries who may receive current distributions from a trust in the discretion of a fiduciary is a common estate planning power. The proposed regulations amend the definition of “potential current beneficiary” to provide that all members of a class of unnamed charities permitted to receive distributions under a discretionary distribution power held by a fiduciary that is not a power of appointment, will be considered, collectively, to be a single PCB for purposes of determining the number of permissible shareholders under section 1361(b)(1)(A) unless the power is actually exercised, in which case each charity that actually receives distributions will also be a PCB. The ESBT election requirements under § 1.1361-1(m)(2)(ii)(A) are amended to require a trust containing such a power to indicate the presence of the power in the election statement. This amended PCB definition applies only to powers to distribute to one or more members of a class of unnamed charities which is unlimited in number. The amended PCB definition does not apply to a power to make distributions to or among particular named charities. The proposed regulations further provide that a power to add beneficiaries, whether or not charitable, to a class of current permissible beneficiaries is generally a power of appointment and thus will be disregarded to the extent it is not exercised. However, if the power is exercised and an unlimited class of charitable beneficiaries is added to the class of current permissible beneficiaries, that class will count as a single PCB under the amended definition of PCB, and, to the extent distributions are actually made to one or more charities, those charities will each count as PCBs. Transfer of Stock Between Spouses or Incident to Divorce Section 235 of the 2004 Act amended Code section 1366(d)(2) to provide that if the stock of an S corporation is transferred between spouses or incident to divorce under Code section 1041(a), any loss or deduction with respect to the transferred stock which cannot be taken into account by the transferring shareholder in the year of the transfer because of the basis limitation in section 1366(d)(1) shall be treated as incurred by the corporation in the succeeding taxable year with regard to the transferee. Prior to this amendment, any losses or deductions disallowed under section 1366(d) were personal to the shareholder and did not transfer upon the transfer of the S corporation stock to another person. Section 1366(d)(2) is effective for transfers after December 31, 2004. The proposed regulations amend the provisions of § 1.1366-2(a)(5) to include this exception to the general rule of nontransferability of losses and deductions. Losses and deductions allocable to the transferor spouse for the taxable year immediately preceding the year of transfer that are subject to the basis limitation rule of section 1366(d) will be treated as incurred by the corporation with respect to the transferor spouse in the taxable year of the transfer. The transferor spouse may use all losses and deductions carried over to the year of transfer if the transferor spouse has sufficient basis in the transferor's adjusted basis in stock or adjusted basis in the indebtedness of the corporation to the transferor. Under § 1.1366-2(a)(4), if the transferor's pro rata share of the losses and deductions in the year of transfer exceeds the transferor's basis in stock or the indebtedness of the corporation to the transferor, then the limitation must be allocated among the transferor spouse's pro rata share of each loss or deduction, including disallowed losses and deductions carried over from the prior year. Under the proposed regulations, losses and deductions carried over to the year of transfer that are not used by the transferor spouse in such year will be prorated between the transferor spouse and the transferee spouse based on their stock ownership at the beginning of the succeeding taxable year. The proposed regulations include examples illustrating these rules. The Treasury Department and IRS request comments on the best methods to ensure that losses are properly allocated between the transferor and transferee spouses, including whether a notification requirement should be imposed on the transferor spouse. Passive Activity Losses and At-risk Amounts of Qualified Subchapter S Trusts Section 236 of the 2004 Act amends Code section 1361(d)(1) to provide that, for purposes of applying Code sections 465 and 469 to the beneficiary of a qualified subchapter S trust
(QSST)with respect to which the beneficiary has made an election under Code section 1361(d)(2), the disposition of S corporation stock by the QSST shall be treated as a disposition by the beneficiary. This creates an exception to the general rule of § 1.1361-1(j)(8), which provides that the trust, rather than the beneficiary, is treated as the owner of the S corporation stock in determining the income tax consequences of a disposition of the stock. The proposed regulations add conforming language to § 1.1361-1(j)(8). Qualified Subchapter S Subsidiary Relief and Inadvertent Invalid Elections or Terminations Section 238 of the 2004 Act amends Code section 1362(f) to provide that QSubs are eligible for relief for an inadvertent invalid QSub election or termination under the same standards applied to an inadvertent invalid S corporation election or termination. This provision is effective for elections made and terminations occurring after December 31, 2004. The proposed regulations make conforming changes to § 1.1362-4. The proposed regulations make additional changes to § 1.1362-4 addressing the change to Code section 1362(f) made by section 1305(a) of the 1996 Act, which provided relief for corporations with inadvertently invalid S corporation elections, in addition to the relief already available for inadvertent terminations of valid S corporation elections. Effect on Other Documents The following publication is proposed to be obsoleted as of the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** : Notice 2005-91 (2005-2 CB 1164). Proposed Effective Date These regulations are proposed to be effective on the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** . 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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Further, it has been determined that these regulations are not subject to the Regulatory Flexibility Act (5 U.S.C. chapter 6) because the collection of information required by these regulations is imposed on electing small business trusts and such entities are not “small entities” for purposes of the Regulatory Flexibility Act (5 U.S.C. chapter 6). Additionally, the information collection burden imposed on the electing small business trusts is minimal. Pursuant to section 7805(f) of the Internal Revenue Code, this 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 IRS and Treasury Department 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 January 16, 2008, beginning at 10 a.m. in the auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue 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 time to be devoted to each topic (signed original and eight
(8)copies) by December 27, 2007. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the schedule of speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Drafting Information The principal author of these proposed regulations is Bradford R. Poston of the Office of Associate Chief Counsel (Passthroughs and Special Industries). List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendment 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 1.1361-0 is amended by adding a new entry in the table of contents for § 1.1361-1(e)(3) to read as follows: § 1.1361-0 Table of contents. *§ 1.1361-1 S Corporation defined.*
(e)* * *
(3)Special rules relating to stock owned by members of a family. **Par. 3** . Section 1.1361-1 is amended by: 1. Revising paragraphs (b)(1)(i) and (e)(1). 2. Adding paragraphs (e)(3), (h)(1)(vii), and (h)(3)(i)(G). 3. Adding a new sentence to the end of paragraph (j)(8). 4. Adding a new sentence to the end of paragraph (k)(2)(i). 5. Revising paragraphs (m)(2)(ii)(A), (m)(4)(iii), and (m)(4)(vi). 6. Revising paragraph (m)(8), *Example 2.* 7. Revising the seventh sentence of paragraph (m)(8), *Example 5* . 8. Revising paragraph (m)(8), *Example 7.* 9. Adding paragraph (m)(8), *Example 8* . 10. Adding paragraph (m)(8), *Example 9.* 11. Adding a sentence to the end of paragraph (m)(9). The revisions and additions read as follows: § 1.1361-1 S Corporation defined.
(b)* * *
(1)* * *
(i)More than the number of shareholders provided in section 1361(b)(1)(A);
(e)*Number of shareholders* —(1) *General rule.* A corporation does not qualify as a small business corporation if it has more than the number of shareholders provided in section 1361(b)(1)(A). Ordinarily, the person who would have to include in gross income dividends distributed with respect to the stock of the corporation (if the corporation were a C corporation) is considered to be the shareholder of the corporation. For example, if stock (owned other than by a husband and wife or members of a family described in section 1361(c)(1)) is owned by tenants in common or joint tenants, each tenant in common or joint tenant is generally considered to be a shareholder of the corporation. (For special rules relating to stock owned by husband and wife or members of a family, see paragraphs (e)(2) and
(3)of this section, respectively; for special rules relating to restricted stock, see paragraphs (b)(3) and
(6)of this section.) The person for whom stock of a corporation is held by a nominee, guardian, custodian, or an agent is considered to be the shareholder of the corporation for purposes of this paragraph
(e)and paragraphs
(f)and
(g)of this section. For example, a partnership may be a nominee of S corporation stock for a person who qualifies as a shareholder of an S corporation. However, if the partnership is the beneficial owner of the stock, then the partnership is the shareholder, and the corporation does not qualify as a small business corporation. In addition, in the case of stock held for a minor under a uniform transfers to minors or similar statute, the minor and not the custodian is the shareholder. Except as otherwise provided in paragraphs
(h)and
(j)of this section, and for purposes of this paragraph
(e)and paragraphs
(f)and
(g)of this section, if stock is held by a decedent's estate or a trust described in section 1361(c)(2)(A)(ii) or (iii), the estate or trust (and not the beneficiaries of the estate or trust) is considered to be the shareholder; however, if stock is held by a subpart E trust (which includes a voting trust) or an electing QSST described in section 1361(d)(1), the deemed owner of the trust is considered to be the shareholder. If stock is held by an ESBT described in section 1361(c)(2)(A)(v), each potential current beneficiary of the trust shall be treated as a shareholder, except that the trust shall be treated as the shareholder during any period in which there is no potential current beneficiary of the trust. If stock is held by a trust described in section 1361(c)(2)(A)(vi), the individual for whose benefit the trust was created shall be treated as the shareholder. See paragraph
(h)of this section for special rules relating to trusts.
(3)*Special rules relating to stock owned by members of a family* —(i) In general. For purposes of paragraph (e)(1) of this section, stock owned by members of a family is treated as owned by one shareholder. Members of a family include a common ancestor, any lineal descendant of the common ancestor, and any spouse (or former spouse) of the common ancestor or of any lineal descendants of the common ancestor. An individual shall not be considered to be a common ancestor if, on the applicable date, the individual is more than six generations removed from the youngest generation of shareholders who would (but for this six-generation test) be members of the family. For purposes of this test, a spouse (or former spouse) is treated as being of the same generation as the individual to whom the spouse is or was married. This test is applied on the latest of the date the election under section 1362(a) is made for the corporation, the earliest date that a member of the family holds stock in the corporation, or October 22, 2004. For this purpose, the date the election under section 1362(a) is made for the corporation is the effective date of the election, not the date it is signed or received by any person. The test is only applied as of the applicable date, and lineal descendants (and spouses) more than six generations removed from the common ancestor will be treated as members of the family even if they acquire stock in the corporation after that date. The members of a family are treated as one shareholder under this paragraph (e)(3) solely for purposes of section 1361(b)(1)(A), and not for any other purpose, whether under section 1361 or any other provision. Specifically, each member of the family who owns or is deemed to own stock must meet the requirements of sections 1361(b)(1)(B) and
(C)(regarding permissible shareholders) and section 1362(a)(2) (regarding shareholder consents to an S corporation election). Although a person may be a member of more than one family under this paragraph (e)(3), each family (not all of whose members are also members of the other family) will be treated as one shareholder. For purposes of this paragraph (e)(3), any legally adopted child of an individual, any child who is lawfully placed with an individual for legal adoption by that individual, and any eligible foster child of an individual (within the meaning of section 152(f)(1)(C)), shall be treated as a child of such individual by blood.
(ii)*Certain entities treated as members of a family.* For purposes of this paragraph (e)(3), the estate or trust (described in section 1361(c)(2)(A)(ii) or (iii)) of a deceased member of the family will be considered to be a member of the family during the period in which the estate or such trust (if the trust is described in section 1361(c)(2)(A)(ii) or (iii)), holds stock in the S corporation. The members of the family also will include—
(A)In the case of an ESBT, each potential current beneficiary who is a member of the family;
(B)In the case of a QSST, the income beneficiary who makes the QSST election, if that income beneficiary is a member of the family;
(C)In the case of a trust created primarily to exercise the voting power of stock transferred to it, each beneficiary who is a member of the family;
(D)The individual for whose benefit a trust described in section 1361(c)(2)(A)(vi) was created, if that individual is a member of the family;
(E)The deemed owner of a trust described in section 1361(c)(2)(A)(i) if that deemed owner is a member of the family; and
(F)The owner of an entity disregarded as an entity separate from its owner under § 301.7701-3 of the Procedure and Administration Regulations, if that owner is a member of the family.
(h)* * *
(1)* * *
(vii)*Individual retirement accounts.* In the case of a corporation which is a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A, but only to the extent of the stock held by such trust in such bank or company as of October 22, 2004. Individual retirement accounts (including Roth IRAs) are not otherwise eligible S corporation shareholders.
(3)* * *
(i)* * *
(G)If stock in an S corporation bank or depository institution holding company is held by an individual retirement account (including a Roth IRA) described in paragraph (h)(1)(vii) of this section, the individual for whose benefit the trust was created shall be treated as the shareholder.
(j)* * *
(8)* * * However, solely for purposes of applying sections 465 and 469 to the income beneficiary, a disposition of S corporation stock by a QSST shall be treated as a disposition by the income beneficiary.
(k)* * *
(2)* * *
(i)* * * Paragraphs (b)(1)(i), (e)(1), (e)(3), (h)(1)(vii), (h)(3)(i)(G), and the fifth sentence of paragraph (j)(8) are effective on and after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** .
(m)* * *
(2)* * *
(ii)* * *
(A)The name, address, and taxpayer identification number of the trust, the potential current beneficiaries, and the S corporations in which the trust currently holds stock. If the trust includes a power described in paragraph (m)(4)(vi)(B) of this section, then the election statement must include a statement that such a power is included in the instrument, but does not need to include the name, address, or taxpayer identification number of any particular charity or any other information regarding the power.
(4)* * *
(iii)*Special rule for dispositions of stock.* Notwithstanding the provisions of paragraph (m)(4)(i) of this section, if a trust disposes of all of the stock which it holds in an S corporation, then, with respect to that corporation, any person who first met the definition of a potential current beneficiary during the 1-year period ending on the date of such disposition is not a potential current beneficiary and thus is not a shareholder of that corporation.
(vi)*Currently exercisable powers of appointment and other powers* —(A) *Powers of appointment* . A person to whom a distribution may be made during any period pursuant to a power of appointment (as described for transfer tax purposes in section 2041 and § 20.2041-1(b) of this chapter and section 2514 and § 25.2514-1(b) of this chapter) is not a potential current beneficiary unless the power is exercised in favor of that person during the period. It is immaterial for purposes of this paragraph (m)(4)(vi)(A) whether such power of appointment is a “general power of appointment” for transfer tax purposes as described in § 20.2041-1(c) and § 25.2514-1(c) of this chapter. The mere existence of one or more powers of appointment during the lifetime of a power holder that would permit current distributions from the trust to be made to more than the number of persons described in section 1361(b)(1)(A) or to a person described in section 1361(b)(1)(B) or (C), will not cause the S corporation election to terminate unless one or more of such powers are exercised, collectively, in favor of an excessive number of persons or in favor of a person who is ineligible to be an S corporation shareholder. For purposes of this paragraph (m)(4)(vi)(A), a “power of appointment” includes a power, regardless of by whom held, to add a beneficiary or class of beneficiaries to the class of potential current beneficiaries, but generally does not include a power held by a fiduciary who is not also a beneficiary of the trust to spray or sprinkle trust distributions among beneficiaries. Nothing in this paragraph (m)(4)(vi)(A) alters the definition of “power of appointment” for purposes of any provision of the Internal Revenue Code or the regulations.
(B)*Powers to distribute to certain organizations not pursuant to powers of appointment* . If a trustee or other fiduciary has a power (that does not constitute a power of appointment for transfer tax purposes as described in §§ 20.2041-1(b) and 25.2514-1(b) of this chapter) to make distributions from the trust to one or more members of a class of organizations described in section 1361(c)(6), such organizations will be counted collectively as only one potential current beneficiary for purposes of this paragraph (m), except that each organization receiving a distribution also will be counted as a potential current beneficiary. This paragraph (m)(4)(vi)(B) shall not apply to a power to currently distribute to one or more particular charitable organizations named in the instrument. Each of such organizations is a potential current beneficiary of the trust.
(8)* * * Example 2.
(i)*Invalid potential current beneficiary.* Effective January 1, 2005, Trust makes a valid ESBT election. On January 1, 2006, *A* , a nonresident alien, becomes a potential current beneficiary of Trust. Trust does not dispose of all of its S corporation stock within one year after January 1, 2006. As of January 1, 2006, *A* is the potential current beneficiary of Trust and therefore is treated as a shareholder of the S corporation. Because *A* is not an eligible shareholder of an S corporation under section 1361(b)(1), the S corporation election of any corporation in which Trust holds stock terminates effective January 1, 2006. Relief may be available under section 1362(f).
(ii)*Invalid potential current beneficiary and disposition of S stock.* Assume the same facts as in *Example 2*
(i)except that within one year after January 1, 2006, trustee of Trust disposes of all Trust's S corporation stock. *A* is not considered a potential current beneficiary of Trust and therefore is not treated as a shareholder of any S corporation in which Trust previously held stock. Example 5. * * * Trust-2 itself will not be counted toward the shareholder limit of section 1361(b)(1)(A). * * * Example 7. *Potential current beneficiaries and powers of appointment.* *M* creates Trust from which *A* has a right to all net income and funds it with S corporation stock. *A* also has a currently exercisable power to appoint income or principal to anyone except *A* , *A* 's creditors, *A* 's estate, and the creditors of *A* 's estate. The potential current beneficiaries of Trust for any period will be *A* and each person who receives a distribution from Trust pursuant to *A* 's exercise of *A* 's power of appointment during that period. Example 8. *Power to distribute to an unlimited class of charitable organizations not pursuant to a power of appointment.* *M* creates Trust from which *A* has a right to all net income and funds it with S corporation stock. In addition, the trustee of Trust, who is not *A* or a descendant of *M* , has the power to make discretionary distributions of principal to the living descendants of *M* and to any organizations described in section 1361(c)(6). The potential current beneficiaries of Trust for any period will be *A,* each then-living descendant of *M* , and each exempt organization described in section 1361(c)(6) that receives a distribution during that period. In addition, the class of exempt organizations will be counted as one potential current beneficiary. Example 9. *Power to distribute to a class of named charitable organizations not pursuant to a power of appointment.* *M* creates Trust from which *A* has a right to all net income and funds it with S corporation stock. In addition, the trustee of Trust, who is not *A* or a descendant of *M* , has the power to make discretionary distributions of principal to the living descendants of *M* and to *X* , *Y* , and *Z* , each of which is an organization described in section 1361(c)(6). The potential current beneficiaries of Trust for any period will be *A* , *X* , *Y* , *Z* , and each living descendant of *M* .
(9)*Effective/applicability date.* * * * Paragraphs (m)(2)(ii)(A), (m)(4)(iii) and (vi), and (m)(8), *Example 2,* *Example 5,* *Example 7,* *Example 8,* and *Example 9* are effective on and after the date of publication of the Treasury decision adopting these rules as final regulations is published in the **Federal Register** . **Par. 4** . Section 1.1361-4 is amended by revising paragraph (a)(1) and adding new paragraph (a)(9) to read as follows: § 1.1361-4 Effect of QSub Election.
(a)*Separate existence ignored* —(1) *In general.* Except as otherwise provided in paragraphs (a)(3), (a)(6), (a)(7), (a)(8), and (a)(9) of this section, for Federal tax purposes—
(i)A corporation which is a QSub shall not be treated as a separate corporation; and
(ii)All assets, liabilities, and items of income, deduction, and credit of a QSub shall be treated as assets, liabilities, and items of income, deduction, and credit of the S corporation.
(9)*Information returns* —(i) *In general.* Except to the extent provided by the Secretary, paragraph (a)(1) of this section shall not apply to part III of subchapter A of chapter 61, relating to information returns.
(ii)*Effective/applicability date.* This paragraph (a)(9) is effective on and after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** . **Par. 5** . Section 1.1361-6 is amended by revising the first sentence as follows: § 1.1361-6 Effective date. Except as provided in §§ 1.1361-4(a)(3)(iii), 1.1361-4(a)(5)(i), 1.1361-4(a)(6)(iii), 1.1361-4(a)(7)(ii), 1.1361-4(a)(8)(ii), 1.1361-4(a)(9), and 1.1361-5(c)(2), the provisions of §§ 1.1361-2 through 1.1361-5 apply to taxable years beginning on or after January 20, 2000; however, taxpayers may elect to apply the regulations in whole, but not in part (aside from those sections with special dates of applicability), for taxable years beginning on or after January 1, 2000, provided all affected taxpayers apply the regulations in a consistent manner. * * * **Par. 6** . Section 1.1362-0 is amended by revising the heading of the table of contents for § 1.1362-4 to read as follows: § 1.1362-0 Table of contents. *§ 1.1362-4 Inadvertent terminations and inadvertently invalid elections.* **Par. 7** . Section 1.1362-4 is amended by: 1. Revising the section heading and paragraphs (a), (b), (c), (d), and (f). 2. Adding paragraph (g). The addition and revisions read as follows: § 1.1362-4 Inadvertent terminations and inadvertently invalid elections.
(a)*In general.* A corporation is treated as continuing to be an S corporation or a QSub (or, an invalid election to be either an S corporation or a QSub is treated as valid) during the period specified by the Commissioner if—
(1)The corporation made a valid election under section 1362(a) or section 1361(b)(3) and the election terminated or the corporation made an election under section 1362(a) or section 1361(b)(3) that was invalid;
(2)The Commissioner determines that the termination or invalidity was inadvertent;
(3)Steps were taken by the corporation to return to or qualify for small business corporation or QSub status within a reasonable period after discovery of the terminating event or invalid election, or the required shareholder consents are acquired; and
(4)The corporation and shareholders agree to adjustments that the Commissioner may require for the period.
(b)*Inadvertent termination or inadvertently invalid election* . For purposes of paragraph
(a)of this section, the determination of whether a termination or invalid election was inadvertent is made by the Commissioner. The corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination or invalid election was inadvertent. The fact that the terminating event or invalidity of the election was not reasonably within the control of the corporation and, in the case of a termination, was not part of a plan to terminate the election, or the fact that the terminating event or circumstance took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard itself against such an event or circumstance, tends to establish that the termination or invalidity of the election was inadvertent.
(c)*Corporation's request for determination of an inadvertent termination or invalid election* . A corporation that believes that the termination or invalidity of its election was inadvertent may request a determination from the Commissioner that the termination or invalidity of its election was inadvertent. The request is made in the form of a ruling request and should set forth all relevant facts pertaining to the event or circumstance including, but not limited to, the facts described in paragraph
(b)of this section, the date of the corporation's election (or intended election) under section 1362(a) or 1361(b)(3), a detailed explanation of the event or circumstance causing the termination or invalidity, when and how the event or circumstance was discovered, and the steps taken under paragraph (a)(3) of this section.
(d)*Adjustments* . The Commissioner may require any adjustments that are appropriate. In general, the adjustments required should be consistent with the treatment of the corporation as an S corporation or QSub during the period specified by the Commissioner. In the case of stock held by an ineligible shareholder that causes an inadvertent termination or invalid election for an S corporation under section 1362(f), the Commissioner may require the ineligible shareholder to be treated as a shareholder of the S corporation during the period the ineligible shareholder actually held stock in the corporation. Moreover, the Commissioner may require protective adjustments that prevent the loss of any revenue due to the holding of stock by an ineligible shareholder (for example, a nonresident alien).
(f)*Status of corporation* . The status of the corporation after the terminating event or invalid election and before the determination of inadvertence is determined by the Commissioner. Inadvertent termination or inadvertent invalid election relief may be granted retroactively for all years for which the terminating event or circumstance giving rise to invalidity is effective, in which case the corporation is treated as if its election was valid or had not terminated. Alternatively, relief may be granted only for the period in which the corporation became eligible for subchapter S or QSub treatment, in which case the corporation is treated as a C corporation or, in the case of a QSub with an inadvertently terminated or invalid election, as a separate C corporation, during the period for which the corporation was not eligible for its intended status.
(g)*Effective/applicability date* . Paragraphs (a), (b), (c), (d), and
(f)of this section are effective on and after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** . **Par. 8** . Section 1.1366-0 is amended by adding new entries in the table of contents for § 1.1366-2(a)(5)(i) through
(iii)to read as follows: § 1.1366-0 Table of contents. *§ 1.1366-2 Limitations on deduction of passthrough items of an S corporation to its shareholders.*
(a)* * *
(5)* * *
(i)*In general* .
(ii)*Exceptions for transfers of stock under section 1041(a)* .
(iii)*Examples* . **Par. 9** . Section 1.1366-2(a)(5) is amended by: 1. Adding the heading and revising the first sentence of paragraph (a)(5)(i). 2. Adding paragraphs (a)(5)(ii) and (a)(5)(iii). The revisions and additions read as follows: § 1.1366-2 Limitations on deduction of passthrough items of an S corporation to its shareholders.
(a)*In general* . * * *
(5)*Nontransferability of losses and deductions* —(i) *In general.* Except as provided in paragraph (a)(5)(ii) of this section, any loss or deduction disallowed under paragraph (a)(1) of this section is personal to the shareholder and cannot in any manner be transferred to another person. * * *
(ii)*Exceptions for transfers of stock under section 1041(a).* If a shareholder transfers stock of an S corporation after December 31, 2004, in a transfer described in section 1041(a), any loss or deduction with respect to the transferred stock that is disallowed to the transferring shareholder under paragraph (a)(1) of this section shall be treated as incurred by the corporation in the following taxable year with respect to the transferee spouse or former spouse. The amount of any loss or deduction with respect to the stock transferred shall be determined by prorating any losses or deductions disallowed under paragraph (a)(1) for the year of the transfer between the transferor and the spouse or former spouse based on the stock ownership at the beginning of the following taxable year. If a transferor claims a deduction for losses in the taxable year of transfer, then under paragraph (a)(4) of this section, if the transferor's pro rata share of the losses and deductions in the year of transfer exceeds the transferor's basis in stock or the indebtedness of the corporation to the transferor, then the limitation must be allocated among the transferor spouse's pro rata share of each loss or deduction, including disallowed losses and deductions carried over from the prior year.
(iii)*Examples.* The following examples illustrates the provisions of paragraph (a)(5)(ii) of this section: Example 1. *A* owns all 100 shares in *X* , a calendar year S corporation. For *X* 's taxable year ending December 31, 2006, *A* has zero basis in the shares and *X* does not have any indebtedness to *A.* For the 2006 taxable year, *X* had $100 in losses which *A* cannot use because of the basis limitation in section 1366(d)(1) and which are treated as incurred by the corporation with respect to *A* in the following taxable year. Halfway through the 2007 taxable year, *A* transfers 50 shares to *B* , *A'* s former spouse in a transfer to which section 1041(a) applies. In the 2007 taxable year, *X* has $80 in losses. On *A'* s 2007 individual income tax return, *A* may use the entire $100 carryover loss from 2006, as well as *A'* s share of the $80 2007 loss determined under section 1377(a) ($60), assuming *A* acquires sufficient basis in the *X* stock. On *B* 's 2007 individual income tax return, *B* may use *B* 's share of the $80 2007 loss determined under section 1377(a) ($20), assuming *B* has sufficient basis in the *X* stock. If any disallowed 2006 loss is disallowed to *A* under section 1366(d)(1) in 2007, that loss is prorated between *A* and *B* based on their stock ownership at the beginning of 2008. On *B* 's 2008 individual income tax return, *B* may use that loss, assuming *B* acquires sufficient basis in the *X* stock. If neither *A* nor *B* acquires any basis during the 2007 taxable year, then as of the beginning of 2008, the corporation will be treated as incurring $50 of loss with respect to *A* and $50 of loss with respect to *B* for the $100 of disallowed 2006 loss, and the corporation will be treated as incurring $60 of loss with respect to *A* and $20 with respect to *B* for the $80 of disallowed 2007 loss. Example 2. Assume the same facts as *Example 1,* except that during the 2007 taxable year, *A* acquires $10 of basis in *A* 's shares in *X* . For the 2007 taxable year, *A* may claim a $10 loss deduction, which represents $6.25 of the disallowed 2006 loss of $100 and $3.75 of *A* 's 2007 loss of $60. The disallowed 2006 loss is reduced to $93.75. As of the beginning of 2008, the corporation will be treated as incurring half of the remaining $93.75 of loss with respect to *A* and half of that loss with respect to *B* for the remaining $93.75 of disallowed 2006 loss, and if *B* does not acquire any basis during 2007, the corporation will be treated as incurring $56.25 of loss with respect to *A* and $20 with respect to *B* for the remaining disallowed 2007 loss. **Par. 10** . Section 1.1366-5 is amended by adding a new sentence at the end. The addition reads as follows: § 1.1366-5 Effective/applicability date. * * * Paragraphs 1.1366-2(a)(5)(i),
(ii)and
(iii)are effective on and after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** . Kevin M. Brown, Deputy Commissioner for Services and Enforcement. [FR Doc. E7-18987 Filed 9-27-07; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-107592-00; REG-105964-98] RIN 1545-BA11; RIN 1545-AW30 Consolidated Returns; Intercompany Obligations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and withdrawal of proposed regulations. SUMMARY: This document contains proposed regulations that provide guidance regarding the treatment of transactions involving obligations between members of a consolidated group and the treatment of transactions involving the provision of insurance between members of a consolidated group. The regulations will affect corporations filing consolidated returns. DATES: Written or electronic comments and requests for a public hearing must be received by December 27, 2007. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-107592-00), room 5203, Internal Revenue Service, P.O. 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-107592-00), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically via the Federal eRulemaking Portal at *http://www.regulations.gov* (IRS REG-107592-00). FOR FURTHER INFORMATION CONTACT: Concerning submissions of comments and/or requests for a public hearing, Kelly Banks
(202)622-7180; concerning the proposed regulations, Frances L. Kelly
(202)622-7770 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background On July 18, 1995, final regulations (TD 8597) under § 1.1502-13 were published in the **Federal Register** [60 FR 36671], amending the intercompany transaction system of the consolidated return regulations. These final regulations included rules under § 1.1502-13(e) governing the treatment of insurance transactions between members of a consolidated group and rules under § 1.1502-13(g) governing the treatment of obligations between members of a consolidated group (the Current Regulations). On December 21, 1998, a notice of proposed rulemaking (REG-105964-98) was published in the **Federal Register** [63 FR 70354], which proposed amendments to the intercompany obligation rules of § 1.1502-13(g) (the 1998 Proposed Regulations). After consideration of comments received regarding the Current Regulations and the 1998 Proposed Regulations, the IRS and the Treasury Department believe that the rules governing the treatment of intercompany obligations need to be revised. Accordingly, the IRS and the Treasury Department are withdrawing the 1998 Proposed Regulations and issuing these new proposed regulations in their place. However, for purposes of determining the tax treatment of transactions undertaken prior to the finalization of these proposed regulations, taxpayers may continue to rely upon the form and timing of the recast transaction, as clarified by the 1998 Proposed Regulations. In addition, the IRS and the Treasury Department propose to revise certain of the rules under § 1.1502-13(e) that apply to intercompany transactions involving the provision of insurance between group members. Explanation of Provisions I. Intercompany Obligation Regulations A. General Application Section 1.1502-13(g) prescribes rules relating to the treatment of transactions involving intercompany obligations. An intercompany obligation is generally defined as an obligation between members of a consolidated group, but only for the period during which both the creditor and debtor are members of the group. Section 1.1502-13(g) can apply to three types of transactions:
(1)Transactions in which an obligation between a group member and a nonmember becomes an intercompany obligation, such as the purchase by a consolidated group member of another member's debt from a nonmember creditor or the acquisition by a consolidated group member of stock of a nonmember creditor or debtor (inbound transactions);
(2)transactions in which an intercompany obligation ceases to be an intercompany obligation, such as the sale by a creditor member of another member's debt to a nonmember or the deconsolidation of either the debtor or creditor member (outbound transactions); and
(3)transactions in which an intercompany obligation is assigned or extinguished within the consolidated group (intragroup transactions). B. The Deemed Satisfaction-Reissuance Model—Current Regulations and 1998 Proposed Regulations For all three types of transactions—inbound, outbound, and intragroup—the Current Regulations and the 1998 Proposed Regulations generally provide that an obligation is treated as satisfied and, if the obligation remains outstanding, reissued as a new obligation (the deemed satisfaction-reissuance model). These regulations are intended to minimize the effects of intercompany obligations on a consolidated group's taxable income. For inbound transactions, the deemed satisfaction-reissuance model mirrors the mechanics and single-entity policies underlying the section 108(e)(4) regulations. However, in contrast to those regulations, the deemed satisfaction-reissuance model also applies to obligations acquired for a premium and governs the treatment of the creditor as well as the debtor. For outbound transactions, the deemed satisfaction-reissuance model furthers single-entity treatment by treating a consolidated group as a single issuer, and an intercompany obligation acquired or assumed by a nonmember as newly-issued debt. Thus, if a nonmember purchases an intercompany obligation at a discount, the nonmember will be treated as having acquired a new instrument with original issue discount to which section 1272 applies rather than market discount to which sections 1276 through 1278 apply. For all three types of transactions, the deemed satisfaction-reissuance model preserves the location of a creditor and debtor member's items from an intercompany obligation, matches the timing of such items, and ensures that future items of original issue discount or premium between the creditor and debtor will similarly correspond in amount and timing. Since the issuance of the 1998 Proposed Regulations, the IRS and the Treasury Department have considered whether, with respect to intragroup transactions, the objectives of § 1.1502-13(g) could be better accomplished without a deemed satisfaction-reissuance model, and could instead be achieved solely through the matching and acceleration principles of § 1.1502-13. After considering this approach, it was determined that special rules (in addition to the matching rule of § 1.1502-13(c) and the acceleration rule of § 1.1502-13(d)) would be necessary to ensure that transactions involving intercompany obligations clearly reflect consolidated taxable income. For example, if an intercompany obligation is sold to another member, the special rules and elections of the various debt regimes (that is, the rules for original issue discount, market discount, and acquisition premium) would have to be reconciled with the intercompany transaction rules through coordinating adjustments among the selling creditor, debtor, buying creditor, and any subsequent member creditors. The IRS and the Treasury Department have concluded that the deemed satisfaction-reissuance model is preferable to the complexity inherent in any such special rules. Nonetheless, the IRS and the Treasury Department also have concluded that the deemed satisfaction-reissuance model can be improved in several respects. First, with respect to intragroup and outbound transactions, the mechanics of the model can be simplified and the amount for which an intercompany obligation is satisfied and reissued can be clarified. Second, the application of the model can be limited to those transactions for which its purposes are essential. Accordingly, these proposed regulations provide several exceptions to the application of the deemed satisfaction-reissuance model. With respect to inbound transactions, the IRS and the Treasury Department have concluded that the mechanics of the deemed satisfaction-reissuance model and its application produce appropriate results and, therefore, no change has been proposed (except for the addition of a subgroup exception described in part I.H. of this preamble). C. Revised Deemed Satisfaction-Reissuance Model for Intragroup and Outbound Transactions 1. Simplified Mechanics Under the Current Regulations, and as revised under the 1998 Proposed Regulations, the mechanics of the deemed satisfaction and reissuance model are the same for both intragroup and outbound transactions. These mechanics generally treat an intercompany obligation as satisfied before an intragroup or outbound transaction and, if the obligation remains outstanding, reissued immediately after the transaction. Because these mechanics may affect the treatment of the actual transaction, they create uncertainties that have raised concerns among taxpayers. To address these concerns, these proposed regulations adopt new and more precise mechanics for the application of the deemed satisfaction-reissuance model to certain intragroup and outbound transactions (or “triggering transactions” as described in part I.D. of this preamble). In general, the new model deems the following sequence of events to occur immediately before, and independently of, the actual transaction:
(1)The debtor is deemed to satisfy the obligation for a cash amount equal to the obligation's fair market value; and
(2)the debtor is deemed to immediately reissue the obligation to the original creditor for that same cash amount. The parties are then treated as engaging in the actual transaction but with the new obligation. For example, assume that S holds a B note with an adjusted issue price and basis of $100 and a fair market value of $70, and that S sells the B note to nonmember X for $70. Under the new deemed satisfaction-reissuance model, B is deemed, immediately before the sale to X, to satisfy the note for its fair market value of $70, resulting in $30 of cancellation of indebtedness income for B and $30 of loss for S (which is treated as ordinary loss under the attribute redetermination rule of § 1.1502-13(c)(4)(i)). B is then treated as reissuing to S a new note with identical terms for $70 and S is treated as selling this new note to X. By separating the deemed satisfaction and reissuance from the actual transaction in which the obligation is transferred, the new model avoids confusion regarding whether or how the deemed satisfaction proceeds are integrated with the actual transaction. The new model operates to trigger all built-in items arising from the obligation, and then reissue the obligation with an issue price equal to its basis (and generally, its fair market value) before the actual transaction. Thus, no further gain, loss, income, or deduction with respect to the obligation will result from the actual transaction. In the example above, because S has a basis in the new B note of $70, S recognizes no gain or loss in the actual sale of the note to X, and X acquires the new B note with original issue discount of $30. See section 1278(a)(2)(B) (coordination where bond has original issue discount). After the obligation is deemed satisfied and reissued, the occurrence of the actual transaction does not result in an additional deemed satisfaction and reissuance. 2. The Deemed Satisfaction-Reissuance Amount The Current Regulations and the 1998 Proposed Regulations provide that the deemed satisfaction and reissuance amount generally should be determined using the original issue discount principles of sections 1273 and 1274. The IRS and the Treasury Department have concluded, however, that for transactions where it is appropriate to require a deemed satisfaction and reissuance, the deemed satisfaction and reissuance amount generally should be equal to the obligation's fair market value. The IRS and the Treasury Department acknowledge the inherent difficulty in valuing intercompany obligations. Nonetheless, the use of fair market value pricing more accurately preserves the location of a creditor and debtor member's items from an intercompany obligation and results in less distortion of the members' income, particularly where the issue price and value of the obligation differ significantly. Furthermore, in many transactions to which the deemed satisfaction-reissuance model applies under these proposed regulations, the group will often be required to determine the fair market value of the intercompany obligation because there is a taxable exchange of property for which the appropriate amount of gain or loss must be determined under general Internal Revenue Code
(Code)principles. Accordingly, the IRS and the Treasury Department generally believe that requiring a deemed satisfaction and reissuance at fair market value will not be overly burdensome. However, these proposed regulations also provide that where the creditor's amount realized with respect to the intercompany obligation in the transaction differs from the fair market value of the obligation, and the transaction is not an intragroup exchange of an intercompany obligation for a newly issued intercompany obligation, the deemed satisfaction and reissuance amount is the amount realized. For example, the amount realized with respect to an intercompany obligation may differ from fair market value if the creditor sells the obligation in a transaction to which section 1060 applies. In such cases, the use of amount realized rather than fair market value as the satisfaction amount for the deemed satisfaction and reissuance ensures that no additional items with respect to the obligation will result from the actual transaction. If the transaction is an intragroup exchange of an intercompany obligation for a newly issued intercompany obligation, these proposed regulations provide that the obligation is deemed satisfied and reissued for its fair market value. In addition, for all such intragroup debt exchanges (other than routine intragroup debt modifications as discussed in part I.D.4 of this preamble), the newly issued obligation will be treated as having an issue price equal to its fair market value. In addition, if a member's amount realized with respect to an intercompany obligation results from a mark to fair market value under section 475, then the obligation will be treated as satisfied and reissued under these regulations but will not otherwise be marked to fair market value under section 475 immediately thereafter. Because the deemed satisfaction and reissuance causes all built-in items from the obligation to be recognized, there is no need for an additional mark to fair market value under section 475. However, the rules of section 475 will continue to apply to the newly-reissued obligation with respect to future events. These proposed regulations do not provide specific rules for intercompany obligations that are not debt instruments. The regulations generally provide that the principles applied to debt instruments will similarly apply (with appropriate adjustments) to such non-debt instruments. The IRS and the Treasury Department request comments on whether additional rules are needed for such instruments. D. Limitations on the Application of the Deemed Satisfaction-Reissuance Model to Intragroup Transactions The Current Regulations and the 1998 Proposed Regulations apply the deemed satisfaction-reissuance model to intragroup transactions in which a member realizes an amount (under the Current Regulations, an amount of income, gain, deduction, or loss, other than zero) with respect to an intercompany obligation from the assignment or extinguishment of all or part of its remaining rights or obligations under the intercompany obligation (or from a comparable transaction). These proposed regulations generally retain the deemed satisfaction-reissuance model for such intragroup transactions. Specifically, these proposed regulations apply the model upon a “triggering transaction,” which is defined as any intercompany transaction in which a member realizes an amount, directly or indirectly, from the assignment or extinguishment of all or part of its remaining rights or obligations under an intercompany obligation (or from a comparable transaction). However, in recognition of the administrative burden involved in valuing intercompany obligations in certain transactions and in order to limit the effects of § 1.1502-13(g) on certain routine intragroup transactions involving intercompany obligations (such as an intragroup merger of one member into another), these proposed regulations provide a number of exceptions from the application of the deemed satisfaction and reissuance model (subject to the material tax benefit rule described in part I.E. of this preamble). In general, and as further described in this preamble, the IRS and the Treasury Department have sought to apply the deemed satisfaction-reissuance model only to those intragroup transactions that have the greatest potential to create distortions of consolidated taxable income and to exclude those transactions where the administrative burdens of either requiring precise valuation of intercompany obligations or requiring the additional mechanics of the deemed satisfaction-reissuance model outweigh the benefits of increased precision. The IRS and the Treasury Department request comments as to whether some or all of these exceptions are appropriate, as well as suggestions for other exceptions. 1. Intragroup Sections 332, 351, and 361 Exchanges Under these proposed regulations, and subject to the material tax benefit rule as described in part I.E. of this preamble, assignments of intercompany obligations in certain intragroup nonrecognition transactions are excepted from the application of the deemed satisfaction-reissuance model. These transactions include transfers and assumptions of intercompany obligations in intragroup exchanges to which section 332 or section 361 apply if neither the creditor nor the debtor recognizes an amount of income, gain, deduction, or loss in the transaction, or in intragroup exchanges to which section 351 applies if no such amount is recognized by the creditor. 2. Intragroup Taxable Assumption Transactions These proposed regulations also provide an exception to the application of the deemed satisfaction-reissuance model for taxable intragroup sales of assets where intercompany obligations are assumed as part of the transaction. Where indebtedness is assumed incident to a sale of assets, in most cases, the location of gain or loss from an intercompany obligation is appropriately reflected in increased or reduced sales proceeds for the assets. Such transactions generally present less potential for distortion of consolidated taxable income. Accordingly, subject to the material tax benefit rule as described in part I.E. of this preamble, the regulations do not require a deemed satisfaction and reissuance where an intercompany obligation is assumed in a taxable intragroup sale of assets. 3. Intragroup Extinguishments—In General These proposed regulations except from the application of the deemed-satisfaction reissuance model many intragroup transactions in which an intercompany obligation is extinguished. In general, where an intercompany obligation is extinguished, the Code and regulations will cause the creditor and debtor to recognize their respective items from the obligation, and thus preserve the location of such items. In such cases, a deemed satisfaction-reissuance model is not necessary. Thus, under these proposed regulations and subject to the material tax benefit rule as described in part I.E. of this preamble, the deemed satisfaction-reissuance model does not apply where the adjusted issue price of the obligation is equal to the creditor's basis in the obligation and the creditor's and debtor's items from the extinguishment transaction offset in amount. These proposed regulations provide that certain Code provisions, such as section 108(a) and section 354 are inapplicable to gains and losses from intercompany obligations (and clarify that section 355(a)(1) is also inapplicable to such gains and losses). Turning off these provisions ensures single entity treatment by correcting mismatches that occur under the Code (where, for instance, a debtor has discharge of indebtedness income from the retirement of a security but the creditor's corresponding loss is not recognized) and requiring immediate recognition of both the debtor's and the creditor's items. The Current Regulations and the 1998 Proposed Regulations also provide that these Code provisions are inapplicable in many circumstances. In the context of extinguishment transactions, the “turn-off” rule in these proposed regulations is applied first to determine whether the transaction is a triggering transaction. Because the rule imposes symmetrical treatment of the debtor and the creditor and requires that each member recognize their respective items, in many cases the debtor's and creditor's items will offset in amount and the exception described above will apply. For example, assume a note with an adjusted issue price and basis of $100 is extinguished in a fully taxable transaction for $20 and that the debtor's cancellation of indebtedness income would otherwise be excluded under section 108(a). Because the turn-off rule makes section 108(a) inapplicable, the creditor's $80 loss and the debtor's $80 of cancellation of indebtedness income will offset in amount and the extinguishment transaction will not be subject to the deemed satisfaction and reissuance model. However, the deemed satisfaction-reissuance model will continue to apply in those cases where, after taking into account the above-described “turn-off” rule, the creditor's and debtor's items from the transaction do not offset in amount. In these cases, depending upon the circumstances, the net amount of income, gain, loss, or deduction from the intercompany obligation may or may not be redetermined, under the principles of § 1.1502-13(c)(1), to be excluded from gross income or treated as a noncapital, nondeductible amount. 4. Routine Intragroup Modifications of Intercompany Obligations In general, the exchange of intercompany debt for newly issued intercompany debt presents a high potential for distortion of consolidated taxable income. Accordingly, these proposed regulations apply the deemed satisfaction-reissuance model at fair market value to such intragroup exchanges and generally provide that the newly issued obligation will be treated as issued for its fair market value. However, in order to avoid requiring valuation of intercompany obligations in routine debt modifications, the proposed regulations provide an exception for certain debt-for-debt exchanges involving a single issuer, subject to the material tax benefit rule as described in part I.E. of this preamble. Thus, if a member's intercompany debt is extinguished in exchange (or deemed exchange) for the member's newly issued intercompany debt, and the issue price of the new debt is equal to both the adjusted issue price and basis of the extinguished debt, the deemed satisfaction-reissuance model does not apply (and the newly issued debt is not treated as issued for its fair market value). 5. Other Exceptions for Intragroup Transactions These proposed regulations retain the exceptions in the Current Regulations for transactions involving an obligation that became an intercompany obligation by reason of an event described in § 1.108-2(e), and for amounts realized from reserve accounting under section 585. However, consistent with the 1998 Proposed Regulations, these proposed regulations do not include the exception in the Current Regulations for transactions in which the deemed satisfaction and reissuance will not have a significant effect on any person's Federal income tax liability for any year. E. Material Tax Benefit Rule Although these proposed regulations provide exceptions to the deemed satisfaction-reissuance model, the IRS and the Treasury Department remain concerned that the shifting of built-in items from intercompany obligations can give rise to significant potential for distortion. Intercompany obligations present special concerns because debt between members never increases or diminishes the wealth of the group (one member's economic gain is matched by the other's economic loss) and because, in comparison to other types of property, they can be easily created, transferred, modified, and extinguished within the group at little or no economic cost. Therefore, in order to prevent distortions that may result from the shifting of built-in items from intercompany obligations, these proposed regulations include a special rule (the material tax benefit rule) that applies to intragroup transactions otherwise excepted from the deemed satisfaction-reissuance model under the exceptions for certain intragroup nonrecognition exchanges, taxable assumption transactions, extinguishment transactions, and routine debt modifications as described in parts I.D.1, 2, 3 and 4 of this preamble. The rule is directed at intragroup transactions that would have a distortive effect on members' attributes or the basis of member stock using built-in items from intercompany obligations. The material tax benefit rule generally applies to an intragroup assignment or extinguishment that would otherwise be excepted from the deemed satisfaction-reissuance model if, at the time of the transaction, it is reasonably foreseeable (regardless of intent) that the shifting of items of built-in gain, loss, income, or deduction from an intercompany obligation between members will secure a material tax benefit that would not otherwise be enjoyed. In such cases, the intercompany transaction will be treated as a “triggering transaction” and will be subject to the deemed satisfaction-reissuance model as described in part I.C. of this preamble. F. Off-Market Issuance Rule The IRS and the Treasury Department also believe that inappropriate distortions of consolidated taxable income could result from intercompany obligations that are issued at a materially off-market rate of interest. Such lending transactions may create built-in gain or loss in a newly issued obligation that could facilitate the manipulation of a member's attributes or the basis of member stock. Although off-market lending transactions are subject to various limitations under the Code and regulations (for example, sections 482, 1274, and 7872), the IRS and the Treasury Department believe that an additional rule is necessary to properly reflect consolidated taxable income. Accordingly, these proposed regulations include a special rule (the off-market issuance rule) that generally applies if an intercompany obligation is issued at a rate of interest that is materially off-market, and at the time of issuance, it is reasonably foreseeable that the shifting of built-in items from the obligation from one member to another member will secure a material tax benefit. In such cases, the intercompany obligation will be treated as originally issued for its fair market value, and any difference between the amount loaned and the fair market value of the obligation will be treated as transferred between the creditor member and the debtor member at the time of issuance (for example, as a distribution or a contribution to capital). This rule is not intended to apply to intragroup lending at interest rates that approximate those that would have been charged in an arm's length transaction. The IRS and the Treasury Department are continuing to explore the relationship between the intragroup off-market issuance rule and the other limitations imposed by the Code and regulations on such lending transactions, and request comments in this regard. G. Outbound Transactions These proposed regulations have retained the deemed satisfaction-reissuance model (with the aforementioned new mechanics) for outbound transactions, as well as the exception in the Current Regulations for outbound transactions involving an obligation that became intercompany obligation in an event described in § 1.108-2(e). These proposed regulations also include two additional exceptions applicable to outbound transactions. The first, the subgroup exception, provides that the deemed satisfaction and reissuance model will not apply if the creditor and debtor to an intercompany obligation cease to be members of a consolidated group in a transaction in which neither member otherwise recognize an item with respect to the intercompany obligation, and immediately after the transaction, such creditor and debtor are members of another consolidated group. In such cases, a deemed satisfaction and reissuance is unnecessary because any built-in items with respect to the obligation will be appropriately preserved and offset in the new consolidated group. However, to minimize distortions in the new group that may result from these built-in items (for example, if S and B are acquired in different chains), the exception requires that the creditor and the debtor bear a relationship described in section 1504(a)(1) to each other through an intercompany obligation subgroup parent (which may be the debtor or the creditor). These proposed regulations provide a second exception for an intercompany obligation that is newly issued in an intragroup reorganization and pursuant to the plan of reorganization, is distributed to a nonmember shareholder or creditor in a transaction to which section 361(c) applies. Because the obligation is newly issued in the reorganization and is distributed outside of the group as part of the same plan, the IRS and the Treasury Department believe that a deemed satisfaction and reissuance of the obligation is not necessary to carry out the purposes of § 1.1502-13. These proposed regulations also provide a rule that prevents indirect acceleration of a loss from an intercompany obligation through the sale of the obligation to a nonmember in exchange for a newly-issued obligation (the issue price of which is determined under section 1273(b)(4) or section 1274(a)) followed by a sale of the nonmember obligation at a loss. The regulations under section 108(e)(4) contain a similar rule. H. Inbound Transactions Both the Current Regulations and the 1998 Proposed Regulations apply a deemed satisfaction-reissuance model for transactions in which a nonintercompany obligation becomes an intercompany obligation. For such transactions, the obligation is treated as satisfied and reissued immediately after it becomes an intercompany obligation. These proposed regulations retain the deemed satisfaction-reissuance model for inbound transactions, but also include a “subgroup” exception for certain of these transactions. The subgroup exception for inbound transactions is similar to the subgroup exception for outbound transactions as described in part I.G. of this preamble. In addition, these proposed regulations provide a special rule to prevent inappropriate acceleration of a deduction for repurchase premium in certain inbound transactions. A single corporation that repurchases its own debt in exchange for a newly-issued debt, the issue price of which is determined under either section 1273(b)(4) or section 1274, must amortize any repurchase premium over the term of the newly-issued debt instrument. See § 1.163-7(c). Because the IRS and the Treasury Department believe that it would be inconsistent with single-entity principles to permit consolidated groups an immediate deduction in similar circumstances, these proposed regulations provide that if indebtedness of a member is acquired in exchange for the issuance of indebtedness to a nonmember and the issue price of the newly-issued indebtedness is not determined by reference to its fair market value (for example, the issue price is determined under section 1273(b)(4) or section 1274(a)), then the repurchase premium from the deemed satisfaction will be amortized over the term of the obligation issued to the nonmember. I. Other Request for Comments In general, these proposed regulations retain the definition of intercompany obligation found in the Current Regulations and the 1998 Proposed Regulations. This definition excludes executory obligations to purchase or provide goods or services. The IRS and the Treasury Department are considering whether this exclusion is appropriate in all instances, and request comments in this regard. As described in part I.G. of this preamble, these proposed regulations except from the deemed satisfaction-reissuance model outbound transfers of intercompany obligations where the obligation is newly issued in an intragroup reorganization and is then distributed to a nonmember shareholder or creditor in a transaction to which section 361(c) applies. These proposed regulations do not provide an exception for such transactions where the newly issued obligation is distributed within the group to a member shareholder or creditor. The IRS and the Treasury Department are studying the effects of the deemed satisfaction-reissuance model on such intragroup distributions and are considering various approaches to ensure the appropriate single-entity treatment of such transactions. Comments are requested in this regard. These proposed regulations do not provide special rules for the treatment of intercompany obligations transferred or assumed in transactions under section 338. The IRS and the Treasury Department request comments in this regard. The application of the deemed satisfaction-reissuance model and the matching principles of § 1.1502-13(c) generally align the basis and issue price (or adjusted issue price) of an intercompany obligation and, thus, reduce potential distortions. For newly issued obligations, however, in certain circumstances the Code and regulations produce disparities between issue price and basis (such as the issuance of note by a subsidiary to its parent in a distribution to which section 301 applies). The IRS and the Treasury Department are considering whether it would be beneficial to eliminate any such disparity created upon the issuance of an obligation (for example, by treating such obligations as issued for fair market value) and request comments in this regard. II. Intercompany Insurance Regulations A. Current Regulations Under the Current Regulations, a member's special status as an insurance company is respected and, in some circumstances, results in an exception to the general single entity treatment for intercompany transactions. Under § 1.1502-13(e)(2)(ii)(A), if a member provides insurance to another member in an intercompany transaction, the transaction is taken into account on a separate entity basis. Thus, premiums, reserve increases and decreases, and other similar items are determined and taken into account under the members' separate entity method of accounting rather than under the matching rule of § 1.1502-13(c) and the acceleration rule of § 1.1502-13(d). It was believed that such transactions would not have a substantial effect on consolidated taxable income, and therefore, it was appropriate to except these transactions from single entity treatment. This exception was intended to avoid the complexity that would result from adjustments needed to produce single entity results, and, thus, simplify intercompany accounting. See CO-11-91, 1994-1 CB 724 [59 FR 18011]. However, except with respect to the amount of any reserve item listed in section 807(c) or section 832(b)(5) resulting from an intercompany reinsurance transaction, this departure from single entity treatment does not extend to intercompany reinsurance transactions. See § 1.1502-13(e)(2)(ii)(B). Subsequent to the issuance of the Current Regulations, the IRS determined that it would no longer invoke the “economic family theory” in addressing whether captive insurance transactions constituted insurance for federal income tax purposes. Rev. Rul. 2001-31 (2001-1 C.B. 1348), (See § 601.601(d)(2)(ii)( *b* ).) In addition, the IRS and the Treasury Department have become aware of the increasing prevalence of captive insurance arrangements within consolidated groups. Thus, the separate entity treatment of insurance payments from one member of a group to a captive insurance member may now have a greater effect on consolidated taxable income than was anticipated when the Current Regulations were issued. B. Single Entity Treatment for Significant Insurance Members The IRS and the Treasury Department believe that separate entity treatment for direct insurance transactions is inappropriate where a significant amount of the insuring member's business arises from transactions with other group members. Accordingly, these proposed regulations provide that, where a significant portion (5 percent or more) of the business of the insuring member (in such case, a “significant insurance member”) arises from insuring the risks of other members (either by issuing insurance contracts directly to members or by reinsuring risks on contracts issued to members), it is appropriate to take into account the items from the intercompany transactions on a single entity basis. In such cases, the treatment of the members' items from the insurance transactions are subject to the matching and acceleration rules of § 1.1502-13. Under these rules, the insured member's deduction and the significant insurance member's income from the transaction will generally be taken into account currently. However, the effects of the intercompany transaction will otherwise be treated in a manner comparable to “self-insurance” by a single corporation. For example, the significant insurance member's discounted unpaid losses under section 832(b)(5) will be determined without regard to the intercompany insurance transaction, and such member will instead take deductions with respect to losses incurred on intercompany insurance under the principles of sections 162 and 461. On the other hand, if a significant insurance member assumes all or a portion of the risk on an insurance contract written by another member with respect to risks of a nonmember, then under single entity principles, these proposed regulations generally permit the significant insurance member to increase its reserve item under section 807(c) or 832(b)(5) with respect to the premium payment. These proposed regulations continue to except intercompany insurance transactions from single entity treatment where intercompany insurance represents less than 5 percent of the insuring member's business. Reinsurance transactions engaged in by group members that attempt to circumvent the single entity rules of § 1.1502-13(e) may be subject to the anti-avoidance rules of § 1.1502-13(h). Thus, for example, if a member enters into an insurance contract with a third-party insurer and the contract is then reinsured with a member of the group in order to avoid treatment as an intercompany transaction, appropriate adjustments will be made to carry out the purposes of the intercompany transaction regulations. See also section 845, which allows the Secretary to allocate, recharacterize, or make other adjustments with respect to two or more related persons who are parties to a reinsurance agreement in order to reflect the proper amount, source, or character of taxable income related to such an agreement, or to make proper adjustments with respect to a party to a reinsurance contract if the contract has a significant tax avoidance effect. C. Request for Comments The determination of whether an insuring member is a “significant insurance member” and, therefore, is subject to the special rules described above, is made on an annual basis by comparing the amount of the insuring member's business that arises from insuring the risks of other members with its total insurance business. In making this determination, these proposed regulations use an amount determined under section 832(b)(4)(A) (gross premiums written during the taxable year less return premiums and premiums paid for reinsurance) to measure the insuring member's annual insurance business. The IRS and the Treasury Department request comments as to whether this is an appropriate measure of an insuring member's business, as well as suggestions for alternatives. The IRS and the Treasury Department are also considering whether the status of an insuring member as a “significant insurance member” should be an annual determination and whether additional rules are needed when an insuring member's status changes. The IRS and the Treasury Department request comments in this regard, in addition to whether any additional special rules are needed to accomplish single entity treatment for intercompany insurance transactions. Proposed Effective/Applicability Date and Reliance These proposed regulations under § 1.1502-13(g) apply to transactions involving intercompany obligations occurring in consolidated return years beginning on or after the date these regulations are published as final regulations in the **Federal Register** . However, for purposes of determining the tax treatment of transactions undertaken prior to the finalization of these proposed regulations, taxpayers may continue to rely upon the form and timing of the recast transaction, as clarified by the 1998 Proposed Regulations (REG-105964-98) [63 FR 70354]. These proposed regulations under § 1.1502-13(e) apply to intercompany transactions involving the provision of insurance occurring in consolidated return years beginning on or after the date these regulations are published as final regulations in the **Federal Register** . 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 is hereby certified that these regulations do not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses, and, moreover, that any burden on taxpayers is minimal. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight
(8)copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the **Federal Register** . Drafting Information The principal author of these regulations is Frances L. Kelly, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Withdrawal of Proposed Regulations Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking (REG-105964-98) that was published in the **Federal Register** on Monday, December 21, 1998, [63 FR 70354] is withdrawn. 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 is amended by adding the following entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.1502-13 also issued under 26 U.S.C. 1502. * * * **Par. 2** . Section 1.1502-13 is amended by: 1. Revising the fifth paragraph heading, each entry for Examples 1 through 5, and adding new Examples 6 through 11 in the table of examples in paragraph (a)(6)(ii). 2. Revising the first sentence of paragraph (e)(2)(i). 3. Adding new paragraph (e)(2)(ii)(C). 4. Revising paragraph (g). 5. Removing paragraph (j)(9) *Example 5(c)* . The addition and revisions read as follows: § 1.1502-13 Intercompany transactions.
(a)* * *
(6)* * *
(ii)* * * *Obligations of members. (§ 1.1502-13(g)(7)(ii))* Example 1. Interest on intercompany obligation. Example 2. Intercompany obligation becomes nonintercompany obligation. Example 3. Loss or bad debt deduction with respect to intercompany obligation. Example 4. Intercompany nonrecognition transactions. Example 5. Assumption of intercompany obligation. Example 6. Extinguishment of intercompany obligation. Example 7. Exchange of intercompany obligations. Example 8. Material tax benefit rule. Example 9. Issuance at off-market rate of interest. Example 10. Nonintercompany obligation becomes intercompany obligation. Example 11. Notional principal contracts.
(e)* * *
(2)* * *
(i)* * * Except as provided in paragraph (g)(4)(v) of this section (deferral of items from an intercompany obligation), a member's addition to, or reduction of, a reserve for bad debts that is maintained under section 585 is taken into account on a separate entity basis. * * *
(ii)* * *
(C)*Significant insurance member* —( *1* ) *Single entity treatment for direct insurance and reinsurance* . If a significant insurance member (as defined in paragraph (e)(2)(ii) ( *C* )( *2* )( *i)* of this section) insures the risk of another member (the insured member) in an intercompany transaction, paragraphs (e)(2)(ii)(A) and
(B)of this section do not apply and the intercompany transaction is taken into account by both members on a single entity basis. For example, the timing and attributes of items from a premium payment from an insured member to a significant insurance member will be taken into account under the matching and acceleration rules, and the premiums earned with respect to the intercompany payment will not be accounted for by the significant insurance member under the rules of section 832(b)(4). The significant insurance member's deduction for losses incurred with respect to the intercompany insurance will be taken into account under the rules of sections 162 and 461 (including § 1.461-2), rather than section 832(b)(5). However, under single-entity principles, if a significant insurance member assumes all or a portion of the risk on an insurance contract written by another member with respect to risks of a nonmember, then the matching and acceleration rules will generally permit the significant insurance member to increase its reserve item under section 807(c) or 832(b)(5) with respect to the premium payment. ( *2* ) *Definitions* . For purposes of this paragraph (e)(2)(ii)(C), the following definitions apply: ( *i* ) *Significant insurance member* . A member is a significant insurance member if it is an insurance company subject to tax under subchapter L and five percent or more of the member's insurance premiums written during the taxable year arise from insuring risks of other members of the group. ( *ii* ) *Insurance premiums written during the taxable year* means gross premiums written (as defined in § 1.832-4(a)(4) and as reported by the insuring member under the method prescribed by § 1.832-4(a)(5)) on insurance contracts during the taxable year, less return premiums (as defined in § 1.832-4(a)(6)) and premiums paid for reinsurance. ( *3* ) *Effective/applicability date.* The rules of this paragraph (e)(2)(ii)(C) apply to intercompany transactions involving the provision of insurance occurring in consolidated return years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** .
(g)*Obligations of members* —(1) *In general* . In addition to the general rules of this section, the rules of this paragraph
(g)apply to intercompany obligations.
(2)*Definitions* . For purposes of this section, the following definitions apply:
(i)*Obligation of a member* is a debt or security of a member.
(A)*Debt of a member* is any obligation of the member constituting indebtedness under general principles of Federal income tax law (for example, under nonstatutory authorities, or under section 108, section 163, or § 1.1275-1(d)), but not an executory obligation to purchase or provide goods or services.
(B)*Security of a member* is any security of the member described in section 475(c)(2)(D) or (E), and any commodity of the member described in section 475(e)(2)(A), (B), or (C), but not if the security or commodity is a position with respect to the member's stock. See paragraphs (f)(4) and (f)(6) of this section for special rules applicable to positions with respect to a member's stock.
(ii)*Intercompany obligation* is an obligation between members, but only for the period during which both parties are members.
(iii)*Intercompany obligation subgroup* is comprised of two or more members that include the creditor and debtor on an intercompany obligation if the creditor and debtor bear the relationship described in section 1504(a)(1) to each other through an intercompany obligation subgroup parent.
(iv)*Intercompany obligation subgroup parent* is the corporation (including either the creditor or debtor) that bears the same relationship to the other members of the intercompany obligation subgroup as a common parent bears to the members of a consolidated group. Any reference to an intercompany obligation subgroup parent includes, as the context may require, a reference to a predecessor or successor. For this purpose, a predecessor is a transferor of assets to a transferee (the successor) in a transaction to which section 381(a) applies.
(v)*Material tax benefit* is the benefit of a material net reduction in income or gain, or a material net increase in loss, deduction, credit, or allowance. A material tax benefit includes, but is not limited to, the use of a built-in item or items from an intercompany obligation to materially reduce gain or increase loss on the sale of member stock, or to create or absorb a material tax attribute of a member or subgroup.
(3)*Deemed satisfaction and reissuance of intercompany obligations in triggering transactions* —(i) *Scope* —(A) *Triggering transactions* . For purposes of this paragraph (g)(3), a triggering transaction includes the following: ( *1* ) *Assignment and extinguishment transactions* . Any intercompany transaction in which a member realizes an amount, directly or indirectly, from the assignment or extinguishment of all or part of its remaining rights or obligations under an intercompany obligation or any comparable transaction in which a member realizes any such amount, directly or indirectly, from an intercompany obligation (for example, a mark to fair market value of an obligation or a bad debt deduction). However, a reduction of the basis of an intercompany obligation pursuant to sections 108 and 1017 and § 1.1502-28 (basis reductions upon the exclusion from gross income of discharge of indebtedness) or any other provision that adjusts the basis of an intercompany obligation as a substitute for income, gain, deduction, or loss, is not a comparable transaction. ( *2* ) *Outbound transactions* . Any transaction in which an intercompany obligation becomes an obligation that is not an intercompany obligation.
(B)*Exceptions* . Except as provided in paragraph (g)(3)(i)(C) of this section, a transaction is not a triggering transaction as described in paragraph (g)(3)(i)(A) of this section if any of the exceptions in this paragraph (g)(3)(i)(B) apply. In making this determination, if a creditor or debtor realizes an amount in a transaction in which a creditor assigns all or part of its rights under an intercompany obligation to the debtor, or a debtor assigns all of or part of its obligations under an intercompany obligation to the creditor, the transaction will be treated as an extinguishment and will be excepted from the definition of “triggering transaction” only if either of the exceptions in paragraphs (g)(3)(i)(B)( *5* ) or ( *6* ) of this section apply. ( *1* ) *Intragroup section 332, 351, or 361 exchange* . The transaction is an intercompany exchange to which section 332 or section 361 applies in which no amount of income, gain, deduction or loss is recognized by the creditor or debtor, or an intercompany exchange to which section 351 applies in which no such amount is recognized by the creditor (unless section 362(e)(2) applies to the exchange). ( *2* ) *Intragroup assumption transaction* . All of the debtor's obligations under an intercompany obligation are assumed in connection with the debtor's sale or other disposition of property (other than money) in an intercompany transaction to which section 1001 applies. ( *3* ) *Exceptions to the application of section 108(e)(4)* . The obligation became an intercompany obligation by reason of an event described in § 1.108-2(e) (exceptions to the application of section 108(e)(4)). ( *4* ) *Reserve accounting* . The amount realized is from reserve accounting under section 585 (see paragraph (g)(4)(v) of this section for special rules). ( *5* ) *Intragroup extinguishment transaction* . All or part of the rights and obligations under the intercompany obligation are extinguished in an intercompany transaction (other than an exchange or deemed exchange of an intercompany obligation for a newly issued intercompany obligation), the adjusted issue price of the obligation is equal to the creditor's basis in the obligation, and the debtor's corresponding item and the creditor's intercompany item (after taking into account the special rules of paragraph (g)(4)(i)(C) of this section) with respect to the obligation offset in amount. ( *6* ) *Routine modification of intercompany obligation* . All of the rights and obligations under the intercompany obligation are extinguished in an intercompany transaction that is an exchange (or deemed exchange) for a newly issued intercompany obligation, and the issue price of the newly issued obligation equals both the adjusted issue price of the extinguished obligation and the creditor's basis in the extinguished obligation. ( *7* ) *Outbound distribution of newly issued intercompany obligation* . The intercompany obligation becomes an obligation that is not an intercompany obligation in a transaction in which a member that is a party to the reorganization exchanges property in pursuance of the plan of reorganization for a newly issued intercompany obligation of another member that is a party to the reorganization and distributes such intercompany obligation to a nonmember shareholder or nonmember creditor in a transaction to which section 361(c) applies. ( *8* ) *Outbound subgroup exception* . The intercompany obligation becomes an obligation that is not an intercompany obligation in a transaction in which the members of an intercompany obligation subgroup cease to be members of a consolidated group, neither the creditor nor the debtor recognize any income, gain, deduction, or loss with respect to the intercompany obligation, and such members constitute an intercompany obligation subgroup of another consolidated group immediately after the transaction.
(C)*Material tax benefit rule* . If an assignment or extinguishment of an intercompany obligation in an intercompany transaction would otherwise be excepted from the definition of triggering transaction under paragraph (g)(3)(i)(B)( *1* ), ( *2* ), ( *5* ), or ( *6* ) of this section, but at the time of the assignment or extinguishment, it is reasonably foreseeable that the shifting of items of built-in gain, loss, income, or deduction from the obligation from one member to another member will secure a material tax benefit (as defined in paragraph (g)(2)(v) of this section) that the group or its members would not otherwise enjoy in a consolidated or separate return year, then the assignment or extinguishment will be a triggering transaction to which paragraph (g)(3)(ii) of this section applies.
(ii)*Application of deemed satisfaction and reissuance* . This paragraph (g)(3)(ii) applies if a triggering transaction occurs.
(A)*General rule* . If the intercompany obligation is debt of a member, then (except as provided in the following sentence) the debt is treated for all Federal income tax purposes as having been satisfied by the debtor for cash in an amount equal to its fair market value, and then as having been reissued as a new obligation (with a new holding period but otherwise identical terms) for the same amount of cash, immediately before the triggering transaction. However, if the creditor realizes an amount with respect to the debt in the triggering transaction that differs from the debt's fair market value, and the triggering transaction is not an exchange (or deemed exchange) of debt of a member for newly issued debt of a member, then the debt is treated for all Federal income tax purposes as having been satisfied by the debtor for cash in an amount equal to such amount realized, and reissued as a new obligation (with a new holding period but otherwise identical terms) for the same amount of cash, immediately before the triggering transaction. If the triggering transaction is a mark to fair market value under section 475, then the intercompany obligation will be deemed satisfied and reissued for its fair market value (as determined under section 475 and applicable regulations) and section 475 will not otherwise apply with respect to that triggering transaction. If the intercompany obligation is a security of a member, similar principles apply (with appropriate adjustments) to treat the security as having been satisfied and reissued immediately before the triggering transaction.
(B)*Treatment as separate transaction* . The deemed satisfaction and reissuance is treated as a separate transaction from the triggering transaction. The deemed satisfaction and reissuance of a member's debt will not cause the debt to be recharacterized as other than debt for Federal income tax purposes immediately before the triggering transaction.
(4)*Special rules* —(i) *Timing and attributes* . For purposes of applying the matching rule and the acceleration rule to a transaction involving an intercompany obligation (other than a transaction to which paragraph (g)(5) of this section applies)—
(A)Paragraph (c)(6)(i) of this section (treatment of intercompany items if corresponding items are excluded or nondeductible) will not apply to exclude any amount of income or gain attributable to a reduction of the basis of the intercompany obligation pursuant to sections 108 and 1017 and § 1.1502-28, or any other provision that adjusts the basis of an intercompany obligation as a substitute for income or gain;
(B)Paragraph (c)(6)(ii) of this section (limitation on treatment of intercompany income or gain as excluded from gross income) does not apply to prevent any intercompany income or gain from the intercompany obligation from being excluded from gross income;
(C)Any income, gain, deduction, or loss from the intercompany obligation is not subject to section 108(a), section 354, section 355(a)(1), section 1091, or, in the case of an extinguishment of an intercompany obligation in a transaction in which the creditor transfers the obligation to the debtor in exchange for stock in such debtor, section 351(a); and
(D)Section 108(e)(7) does not apply upon the extinguishment of an intercompany obligation.
(ii)*Newly issued obligation in intragroup exchanges* . If an intercompany obligation is exchanged (or is deemed exchanged) for a newly issued intercompany obligation and the exchange (or deemed exchange) is not a routine modification of an intercompany obligation (as described in paragraph (g)(3)(i)(B)( *6* ) of this section), then the newly issued obligation will be treated for all Federal income tax purposes as having an issue price equal to its fair market value.
(iii)*Off-market issuance* . If an intercompany obligation is issued at a rate of interest that is materially off-market (off-market obligation) and at the time of issuance, it is reasonably foreseeable that the shifting of items of built-in gain, loss, income, or deduction from the obligation from one member to another member will secure a material tax benefit (as defined in paragraph (g)(2)(v) of this section), then the intercompany obligation will be treated, for all Federal income tax purposes, as originally issued for its fair market value, and any difference between the amount loaned and the fair market value of the obligation will be treated as transferred between the creditor and the debtor at the time the obligation is issued. For example, if S lends $100 to B in return for an off-market B note with a value of $130, and at that time, it is reasonably foreseeable that a material tax benefit will be secured by the shifting of items from the note, then the B note will be treated as issued for $130. The $30 difference will be treated as a distribution or capital contribution between S and B (as appropriate) at the time of issuance, and this amount will be reflected in future payments on the note as bond issuance premium. An adjustment to an off-market obligation under this paragraph (g)(4)(iii) will be made without regard to the application of, and in lieu of any adjustment under, section 467 (certain payments for the use of property or services), 482 (allocations among commonly controlled taxpayers), 483 (interest on certain deferred payments), 1274 (determination of issue price for certain debt instruments issued for property), or 7872 (treatment of loans with below-market interest rates.
(iv)*Deferral of loss or deduction with respect to nonmember indebtedness acquired in certain debt exchanges* . If a creditor transfers an intercompany obligation to a nonmember (former intercompany obligation) in exchange for newly issued debt of a nonmember (nonmember debt), and the issue price of the nonmember debt is not determined by reference to its fair market value (for example, the issue price is determined under section 1273(b)(4) or 1274(a) or any other provision of applicable law), then any loss of the creditor otherwise allowable on the subsequent disposition of the nonmember debt, or any comparable tax benefit that would otherwise be available in any other transaction that directly or indirectly results from the disposition of the nonmember debt, is deferred until the date the debtor retires the former intercompany obligation.
(v)*Bad debt reserve* . A member's deduction under section 585 for an addition to its reserve for bad debts with respect to an intercompany obligation is not taken into account, and is not treated as realized for purposes of paragraph (g)(3)(i)(A)( *1* ) of this section, until the intercompany obligation is extinguished or becomes an obligation that is not an intercompany obligation.
(5)*Deemed satisfaction and reissuance of obligations becoming intercompany obligations* —(i) *Application of deemed satisfaction and reissuance* —(A) *In general* . This paragraph (g)(5) applies if an obligation that is not an intercompany obligation becomes an intercompany obligation.
(B)*Exceptions* . This paragraph (g)(5) does not apply to an intercompany obligation if either of the following exceptions apply. ( *1* ) *Exceptions to the application of section 108(e)(4)* . The obligation becomes an intercompany obligation by reason of an event described in § 1.108-2(e) (exceptions to the application of section 108(e)(4)); or ( *2* ) *Inbound subgroup exception* . The obligation becomes an intercompany obligation in a transaction in which the members of an intercompany obligation subgroup cease to be members of a consolidated group, neither the creditor nor the debtor recognize any income, gain, deduction, or loss with respect to the intercompany obligation, and such members constitute an intercompany obligation subgroup of another consolidated group immediately after the transaction.
(ii)*Deemed satisfaction and reissuance* —(A) *General rule* . If the intercompany obligation is debt of a member, then the debt is treated for all Federal income tax purposes, immediately after it becomes an intercompany obligation, as having been satisfied by the debtor for cash in an amount determined under the principles of § 1.108-2(f), and then as having been reissued as a new obligation (with a new holding period but otherwise identical terms) for the same amount of cash. If the intercompany obligation is a security of a member, similar principles apply (with appropriate adjustments) to treat the security, immediately after it becomes an intercompany obligation, as satisfied and reissued by the debtor for cash in an amount equal to its fair market value.
(B)*Treatment as separate transaction* . The deemed satisfaction and reissuance is treated as a separate transaction from the transaction in which the debt becomes an intercompany obligation, and the tax consequences of the transaction in which the debt becomes an intercompany obligation must be determined before the deemed satisfaction and reissuance occurs. (For example, if the debt becomes an intercompany obligation in a transaction to which section 351 applies, any limitation imposed by section 362(e) on the basis of the intercompany obligation in the hands of the transferee member is determined before the deemed satisfaction and reissuance.) The deemed satisfaction and reissuance of a member's debt will not cause the debt to be recharacterized as other than debt for Federal income tax purposes.
(6)*Special rules* —(i) *Timing and attributes* . If paragraph (g)(5) of this section applies to an intercompany obligation—
(A)Section 108(e)(4) does not apply;
(B)The attributes of all items taken into account from the satisfaction of the intercompany obligation are determined on a separate entity basis, rather than by treating S and B as divisions of a single corporation; and
(C)Any intercompany gain or loss realized by the creditor is not subject to section 354 or section 1091.
(ii)*Waiver of loss carryovers from separate return limitation years* . Solely for purposes of § 1.1502-32(b)(4) and the effect of any election under that provision, any loss taken into account under paragraph (g)(5) of this section by a corporation that becomes a member as a result of the transaction in which the obligation becomes an intercompany obligation is treated as a loss carryover from a separate return limitation year.
(iii)*Deduction of repurchase premium in certain debt exchanges* . If an obligation to which paragraph (g)(5) of this section applies is acquired in exchange for the issuance of an obligation to a nonmember and the issue price of this newly issued obligation is not determined by reference to its fair market value (for example, the issue price is determined under section 1273(b)(4) or 1274(a) or any other provision of applicable law), then, under the principles of § 1.163-7(c), any repurchase premium from the deemed satisfaction of the intercompany obligation under paragraph (g)(5)(ii) of this section will be amortized by the debtor over the term of the obligation issued to the nonmember in the same manner as if it were original issue discount and the obligation to the nonmember had been issued directly by the debtor.
(7)*Examples* —(i) *In general* . For purposes of the examples in this paragraph (g), unless otherwise stated, interest is qualified stated interest under § 1.1273-1(c), and the intercompany obligations are capital assets and are not subject to section 475.
(ii)The application of this section to obligations of members is illustrated by the following examples: Example 1. *Interest on intercompany obligation* .
(i)*Facts* . On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. B fully performs its obligations. Under their separate entity methods of accounting, B accrues a $10 interest deduction annually under section 163, and S accrues $10 of interest income annually under section 61(a)(4) and § 1.446-2.
(ii)*Matching rule* . Under paragraph (b)(1) of this section, the accrual of interest on B's note is an intercompany transaction. Under the matching rule, S takes its $10 of income into account in each of years 1 through 5 to reflect the $10 difference between B's $10 of interest expense taken into account and the $0 recomputed expense. S's income and B's deduction are ordinary items. (Because S's intercompany item and B's corresponding item would both be ordinary on a separate entity basis, the attributes are not redetermined under paragraph (c)(1)(i) of this section.)
(iii)*Original issue discount* . The facts are the same as in paragraph
(i)of this *Example 1* , except that B borrows $90 (rather than $100) from S in return for B's note providing for $10 of interest annually and repayment of $100 at the end of year 5. The principles described in paragraph
(ii)of this *Example 1* for stated interest also apply to the $10 of original issue discount. Thus, as B takes into account its corresponding expense under section 163(e), S takes into account its intercompany income under section 1272. S's income and B's deduction are ordinary items.
(iv)*Tax-exempt income* . The facts are the same as in paragraph
(i)of this *Example 1* , except that B's borrowing from S is allocable under section 265 to B's purchase of state and local bonds to which section 103 applies. The timing of S's income is the same as in paragraph
(ii)of this *Example 1* . Under paragraph (c)(4)(i) of this section, the attributes of B's corresponding item of disallowed interest expense control the attributes of S's offsetting intercompany interest income. Paragraph (c)(6) of this section does not prevent the redetermination of S's intercompany item as excluded from gross income because section 265(a)(2) permanently and explicitly disallows B's corresponding deduction and because, under paragraph (g)(4)(i)(B) of this section, paragraph (c)(6)(ii) of this section does not apply to prevent any intercompany income from the B note from being excluded from gross income. Accordingly, S's intercompany income is treated as excluded from gross income. Example 2. *Intercompany obligation becomes nonintercompany obligation* .
(i)*Facts* . On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. As of January 1 of year 3, B has paid the interest accruing under the note and S sells B's note to X for $70, reflecting an increase in prevailing market interest rates. B is never insolvent within the meaning of section 108(d)(3).
(ii)*Deemed satisfaction and reissuance* . Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *2* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value of $70 immediately before S's sale to X. As a result of the deemed satisfaction of the note for less than its adjusted issue price, B takes into account $30 of discharge of indebtedness income under § 1.61-12. On a separate entity basis, S's $30 loss would be a capital loss under section 1271(a)(1). Under the matching rule, however, the attributes of S's intercompany item and B's corresponding item must be redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of B's $30 of discharge of indebtedness income control the attributes of S's loss. Thus, S's loss is treated as ordinary loss. B is also treated as reissuing, immediately after the satisfaction, a new note to S with a $70 issue price, a $100 stated redemption price at maturity, and a $70 basis in the hands of S. S is then treated as selling the new note to X for the $70 received by S in the actual transaction. Because S has a basis of $70 in the new note, S recognizes no gain or loss from the sale to X. After the sale, the new note held by X is not an intercompany obligation, it has a $70 issue price, a $100 stated redemption price at maturity, and a $70 basis. The $30 of original issue discount will be taken into account by B and X under sections 163(e) and 1272.
(iii)*Creditor deconsolidation* . The facts are the same as in paragraph
(i)of this *Example 2* , except that P sells S's stock to X (rather than S selling B's note to X). Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *2* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its $70 fair market value immediately before S becomes a nonmember. The treatment of S's $30 of loss and B's $30 of discharge of indebtedness income is the same as in paragraph
(ii)of this *Example 2* . The new note held by S upon deconsolidation is not an intercompany obligation, it has a $70 issue price, a $100 stated redemption price at maturity, and a $70 basis. The $30 of original issue discount will be taken into account by B and S under sections 163(e) and 1272.
(iv)*Debtor deconsolidation* . The facts are the same as in paragraph
(i)of this *Example 2* , except that P sells B's stock to X (rather than S selling B's note to X). The results to S and B are the same as in paragraph
(iii)of this *Example 2* .
(v)*Subgroup exception* . The facts are the same as in paragraph
(i)of this *Example 2* , except that P owns all of the stock of S, S owns all of the stock of B, and P sells all of the S stock to X, the parent of another consolidated group. Because B and S, members of an intercompany obligation subgroup, cease to be members of the P group in a transaction that does not cause either member to recognize an item with respect to the B note, and such members constitute an intercompany obligation subgroup in the X group, P's sale of S stock is not a triggering transaction under paragraph (g)(3)(i)(B)( *8* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section. After the sale, the note held by S has a $100 issue price, a $100 stated redemption price at maturity, and a $100 basis. The results are the same if the S stock is sold to an individual and the S-B affiliated group elects to file a consolidated return for the period beginning on the day after S and B cease to be members of the P group.
(vi)*Section 338 election* . The facts are the same as paragraph
(i)of this *Example 2* , except that P sells S's stock to X and a section 338 election is made with respect to the stock sale. Under section 338, S is treated as selling all of its assets to X, including the B note, at the close of the acquisition date. The aggregate deemed sales price (within the meaning of § 1.338-4) allocated to the B note is $70. Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *2* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued immediately before S's deemed sale to X for $70, the amount realized with respect to the note (the aggregate deemed sales price allocated to the note under § 1.338-6). The results to S and B are the same as in paragraph
(ii)of this *Example 2* .
(vii)*Appreciated note* . The facts are the same as in paragraph
(i)of this *Example 2* , except that S sells B's note to X for $130 (rather than $70), reflecting a decline in prevailing market interest rates. Because the B note becomes an obligation that is not an intercompany obligation, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *2* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value of $130 immediately before S's sale to X. As a result of the deemed satisfaction of the note for more than its adjusted issue price, B takes into account $30 of repurchase premium under § 1.163-7(c). On a separate entity basis, S's $30 gain would be a capital gain under section 1271(a)(1). Under the matching rule, however, the attributes of S's intercompany item and B's corresponding item must be redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of B's premium deduction control the attributes of S's gain. Accordingly, S's gain is treated as ordinary income. B is also treated as reissuing, immediately after the satisfaction, a new note to S with a $130 issue price, $100 stated redemption price at maturity, and $130 basis in the hands of S. S is then treated as selling the new note to X for the $130 received by S in the actual transaction. Because S has a basis of $130 in the new note, S recognizes no gain or loss from the sale to X. After the sale, the new note held by X is not an intercompany obligation, it has a $130 issue price, a $100 stated redemption price at maturity, and a $130 basis. The treatment of B's $30 of bond issuance premium under the new note is determined under § 1.163-13. Example 3. *Loss or bad debt deduction with respect to intercompany obligation* .
(i)*Facts* . On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. On January 1 of year 3, the fair market value of the B note has declined to $60 and S sells the B note to P for property with a fair market value of $60. B is never insolvent within the meaning of section 108(d)(3). The B note is not a security within the meaning of section 165(g)(2).
(ii)*Deemed satisfaction and reissuance.* Because S realizes an amount of loss from the assignment of the B note, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *1* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value of $60 immediately before S's sale to P. As a result of the deemed satisfaction of the note for less than its adjusted issue price ($100), B takes into account $40 of discharge of indebtedness income under § 1.61-12. On a separate entity basis, S's $40 loss would be a capital loss under section 1271(a)(1). Under the matching rule, however, the attributes of S's intercompany item and B's corresponding item must be redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of B's $40 of discharge of indebtedness income control the attributes of S's loss. Thus, S's loss is treated as ordinary loss. B is also treated as reissuing, immediately after the satisfaction, a new note to S with a $60 issue price, $100 stated redemption price at maturity, and $60 basis in the hands of S. S is then treated as selling the new note to P for the $60 of property received by S in the actual transaction. Because S has a basis of $60 in the new note, S recognizes no gain or loss from the sale to P. After the sale, the note is an intercompany obligation, it has a $60 issue price and a $100 stated redemption price at maturity, and the $40 of original issue discount will be taken into account by B and P under sections 163(e) and 1272.
(iii)*Partial bad debt deduction.* The facts are the same as in paragraph
(i)of this *Example 3,* except that S claims a $40 partial bad debt deduction under section 166(a)(2) (rather than selling the note to P). Because S realizes a deduction from a transaction comparable to an assignment of the B note, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)( *1* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value of $60 immediately before section 166(a)(2) applies. The treatment of S's $40 loss and B's $40 of discharge of indebtedness income are the same as in paragraph
(ii)of this *Example 3.* After the reissuance, S has a basis of $60 in the new note. Accordingly, the application of section 166(a)(2) does not result in any additional deduction for S. The $40 of original issue discount on the new note will be taken into account by B and S under sections 163(e) and 1272.
(iv)*Insolvent debtor.* The facts are the same as in paragraph
(i)of this *Example 3,* except that B is insolvent within the meaning of section 108(d)(3) at the time that S sells the note to P. As explained in paragraph
(ii)of this *Example 3,* the transaction is a triggering transaction and the B note is treated as satisfied and reissued for its fair market value of $60 immediately before S's sale to P. On a separate entity basis, S's $40 loss would be capital, B's $40 income would be excluded from gross income under section 108(a), and B would reduce attributes under section 108(b) or section 1017 (see also § 1.1502-28). However, under paragraph (g)(4)(i)(C) of this section, section 108(a) does not apply to characterize B's income as excluded from gross income. Accordingly, the attributes of S's loss and B's income are redetermined in the same manner as in paragraph
(ii)of this *Example 3.* Example 4. *Intercompany nonrecognition transactions.*
(i)*Facts.* On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. As of January 1 of year 3, B has fully performed its obligations, but the note's fair market value is $130, reflecting a decline in prevailing market interest rates. On January 1 of year 3, S transfers the note and other assets to a newly formed corporation, Newco, for all of Newco's stock in an exchange to which section 351 applies. The aggregate adjusted bases of property transferred does not exceed the fair market value of such property immediately after the transfer.
(ii)*No deemed satisfaction and reissuance.* Because the assignment of the B note is an exchange to which section 351 applies and S recognizes no gain or loss, the transaction is not a triggering transaction under paragraph (g)(3)(i)(B)( *1* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section.
(iii)*Receipt of other property.* The facts are the same as in paragraph
(i)of this *Example 4* , except that the other assets transferred to Newco have a basis of $100 and a fair market value of $260, and S receives, in addition to Newco stock, $15 of cash. Because S would recognize $15 of gain under section 351(b), the assignment of the B note is a triggering transaction under paragraph (g)(3)(i)(A)( *1* ) of this section. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value of $130 immediately before the transfer to Newco. As a result of the deemed satisfaction of the note for more than its adjusted issue price, B takes into account $30 of repurchase premium under § 1.163-7(c). On a separate entity basis, S's $30 gain would be a capital gain under section 1271(a)(1). Under the matching rule, however, the attributes of S's intercompany item and B's corresponding item must be redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of B's premium deduction control the attributes of S's gain. Accordingly, S's gain is treated as ordinary income. B is also treated as reissuing, immediately after the satisfaction, a new note to S with a $130 issue price, $100 stated redemption price at maturity, and $130 basis in the hands of S. S is then treated as transferring the new note to Newco for the Newco stock and cash received by S in the actual transaction. Because S has a basis of $130 in the new B note, S recognizes no gain or loss with respect to the transfer of the note in the section 351 exchange, and S recognizes $10 of gain with respect to the transfer of the other assets under section 351(b). After the transfer, the note has a $130 issue price and a $100 stated redemption price at maturity. The treatment of B's $30 of bond issuance premium under the new note is determined under § 1.163-13.
(iv)*Intercompany obligation transferred in section 332 transaction.* The facts are the same as in paragraph
(i)of this *Example 4,* except that S transfers the B note to P in complete liquidation under section 332. Because the transaction is an exchange to which section 332 applies, and neither S nor B recognize gain or loss, the transaction is not a triggering transaction under paragraph (g)(3)(i)(B)( *1* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section. Example 5. *Assumption of intercompany obligation.*
(i)*Facts.* On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. The note is fully recourse and is incurred for use in Business Z. As of January 1 of year 3, B has fully performed its obligations, but the note's fair market value is $110 reflecting a decline in prevailing market interest rates. Business Z has a fair market value of $95. On January 1 of year 3, B transfers all of the assets of Business Z and $15 of cash to M in exchange for the assumption by M of all of B's obligations under the note. The terms and conditions of the note are not modified in connection with the sales transaction, and no amount of income, gain, loss, or deduction is recognized by S, B, or M with respect to the note.
(ii)*No deemed satisfaction and reissuance.* Because all of B's obligations under the B note are assumed by M in connection with the sale of the Business Z assets, the assignment of B's obligations under the note is not a triggering transaction under paragraph (g)(3)(i)(B)( *2* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section. Example 6. *Extinguishment of intercompany obligation.*
(i)*Facts.* On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. The note is a security within the meaning of section 351(d)(2). As of January 1 of year 3, B has fully performed its obligations, but the fair market value of the B note is $130, reflecting a decline in prevailing market interest rates, and S transfers the note to B in exchange for $130 of B stock in a transaction to which section 351 applies.
(ii)*No deemed satisfaction and reissuance.* As a result of the satisfaction of the note for more than its adjusted issue price, B takes into account $30 of repurchase premium under § 1.163-7(c). Although the transfer of the B note is a transaction to which section 351 applies, under paragraph (g)(4)(i)(C) of this section, any gain or loss from the intercompany obligation is not subject to section 351(a), and therefore, S has a $30 gain under section 1001. Because the note is extinguished in a transaction in which the adjusted issue price of the note is equal to the creditor's basis in the note, and the debtor's and creditor's items offset in amount, the transaction is not a triggering transaction under paragraph (g)(3)(i)(B)( *5* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section. On a separate entity basis, S's $30 gain would be a capital gain under section 1271(a)(1). Under the matching rule, however, the attributes of S's intercompany item and B's corresponding item must be redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of B's premium deduction control the attributes of S's gain. Accordingly, S's gain is treated as ordinary income. Under paragraph (g)(4)(i)(D) of this section, section 108(e)(7) does not apply upon the extinguishment of the B note, and therefore, the B stock received by S in the exchange will not be treated as section 1245 property. Example 7. *Exchange of intercompany obligations. *
(i)*Facts.* On January 1 of year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 20. As of January 1 of year 3, B has fully performed its obligations and, pursuant to a recapitalization to which section 368(a)(1)(E) applies, B issues a new note to S in exchange for the original B note. The new B note has an issue price, stated redemption price at maturity, and stated principal amount of $100, but contains terms that differ sufficiently from the terms of the original B note to cause a realization event under § 1.1001-3. The original B note and the new B note are both securities (within the meaning of section 354(a)(1)).
(ii)*No deemed satisfaction and reissuance.* Because the original B note is extinguished in exchange for a newly issued B note and the issue price of the new B note is equal to both the adjusted issue price of the original B note and S's basis in the original B note, the transaction is not a triggering transaction under paragraph (g)(3)(i)(B)( *6* ) of this section, and the note is not treated as satisfied and reissued under paragraph (g)(3)(ii) of this section. B has neither income from discharge of indebtedness under section 108(e)(10) nor a deduction for repurchase premium under § 1.163-7(c). Although the exchange of the original B note for the new B note is a transaction to which section 354 applies, under paragraph (g)(4)(i)(C) of this section, any gain or loss from the intercompany obligation is not subject to section 354. Under section 1001, S has no gain or loss from the exchange of notes. Example 8. *Material tax benefit rule.*
(i)*Facts.* T is a member with a material loss from a separate return limitation year (SRLY). S holds a materially appreciated B note which it transfers to T as part of an exchange which otherwise qualifies for nonrecognition treatment under section 351.
(ii)*Deemed satisfaction and reissuance.* Under paragraph (g)(3)(i)(B)( *1* ) of this section, absent the application of the material tax benefit rule of paragraph (g)(3)(i)(C) of this section, the assignment of the B note would not be a triggering transaction. However, because at the time of the assignment, it is reasonably foreseeable that the shifting of the built-in income or gain from the obligation will secure a material tax benefit that the group or its members would not otherwise enjoy, under paragraph (g)(3)(i)(C) of this section, the assignment of the B note is a triggering transaction to which paragraph (g)(3)(ii) of this section applies. Under paragraph (g)(3)(ii) of this section, B's note is treated as satisfied and reissued for its fair market value, immediately before S's transfer to T. As a result of the deemed satisfaction of the note for more than its adjusted issue price, S takes into account gain and B has a corresponding repurchase premium deduction. B is also treated as reissuing, immediately after the deemed satisfaction, a new note to S with an issue price and basis equal to its fair market value. S is then treated as transferring the new note to T as part of the section 351 exchange. Because T will have a fair market value basis in the reissued B note immediately after the exchange, T's intercompany item from the subsequent retirement of the B note will not reflect any of S's built-in gain (and the amount of SRLY loss that may be absorbed by such item will be limited to any appreciation in the B note accruing after the exchange).
(iii)*No material tax benefit.* The facts are the same as in paragraph
(i)of this *Example 8* , except that S has a SRLY loss that exceeds, and will expire prior to, that of T. Further, it is anticipated that S and T will each generate similar amounts of income for the foreseeable future, and there is no plan or intention to sell the stock of either member. Because the built-in income or gain from the B note could have been used to facilitate the absorption of S's SRLY loss (rather than an equal amount of T's SRLY loss), the group and its members have not secured a material tax benefit from the assignment that it would not have otherwise enjoyed. Accordingly, the assignment is not subject to the material tax benefit rule of paragraph (g)(3)(i)(C) of this section, and the B note is not deemed satisfied and reissued under paragraph (g)(3)(ii) of this section. Example 9. *Issuance at off-market rate of interest.*
(i)*Facts.* T is a member with a material loss from a separate return limitation year (SRLY). T's sole shareholder, P, borrows an amount from T in return for a P note that provides for a materially above market rate of interest. As a result, the P note will generate additional interest income to T over the term of the note which will facilitate the absorption of T's SRLY loss each year and will result in a material tax benefit.
(ii)*Reasonably foreseeable.* Because at the time of the issuance, it is reasonably foreseeable that the shifting of interest income from the off-market obligation will secure a material tax benefit that the group or its members would not otherwise enjoy, under paragraph (g)(4)(iii) of this section, the intercompany obligation is treated, for all Federal income tax purposes, as originally issued for its fair market value so T is treated as purchasing the note at a premium. The difference between the amount loaned and the fair market value of the obligation is treated as transferred from P to T as a capital contribution at the time the note is issued. Throughout the term of the note, T takes into account interest income and bond premium and P takes into account interest deduction and bond issuance premium under generally applicable Internal Revenue Code sections. Because paragraph (g)(4)(iii) of this section applies, no adjustment is made under section 482. Example 10. *Nonintercompany obligation becomes intercompany obligation.*
(i)*Facts.* On January 1 of year 1, B borrows $100 from X in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of year 5. As of January 1 of year 3, B has fully performed its obligations, but the note's fair market value is $70, reflecting an increase in prevailing market interest rates. On January 1 of year 3, P buys all of X's stock. B is solvent within the meaning of section 108(d)(3).
(ii)*Deemed satisfaction and reissuance.* Under paragraph (g)(5)(ii) of this section, B's note is treated as satisfied for $70 (determined under the principles of § 1.108-2(f)(2)) immediately after it becomes an intercompany obligation. Both X's $30 capital loss (under section 1271(a)(1)) and B's $30 of discharge of indebtedness income (under § 1.61-12) are taken into account in determining consolidated taxable income for year 3. Under paragraph (g)(6)(i)(B) of this section, the attributes of items resulting from the satisfaction are determined on a separate entity basis. But see section 382 and § 1.1502-15 (as appropriate). B is also treated as reissuing a new note to X. The new note is an intercompany obligation, it has a $70 issue price and $100 stated redemption price at maturity, and the $30 of original issue discount will be taken into account by B and X in the same manner as provided in paragraph
(iii)of *Example 1* of this paragraph (g)(7).
(iii)*Amortization of repurchase premium.* The facts are the same as in paragraph
(i)of this *Example 10,* except that on January 1 of year 3, the B note has a fair market value of $130 and rather than purchasing the X stock, S purchases the B note from X by issuing its own note. The S note has an issue price, stated redemption price at maturity, stated principal amount, and a fair market value of $130. Under paragraph (g)(5)(ii) of this section, B's note is treated as satisfied for $130 (determined under the principles of § 1.108-2(f)(1)) immediately after it becomes an intercompany obligation. As a result of the deemed satisfaction of the note, S has no gain or loss and B has $30 of repurchase premium. Under paragraph (g)(6)(iii) of this section, B's $30 of repurchase premium from the deemed satisfaction is amortized by B over the term of the newly issued S note in the same manner as if it were original issue discount and the newly issued S note had been issued directly by B. B is also treated as reissuing a new note to S. The new note is an intercompany obligation, it has a $130 issue price and $100 stated redemption price at maturity, and the treatment of B's $30 of bond issuance premium under the new B note is determined under § 1.163-13.
(iv)*Election to file consolidated returns.* Assume instead that B borrows $100 from S during year 1, but the P group does not file consolidated returns until year 3. Under paragraph (g)(5)(ii) of this section, B's note is treated as satisfied and reissued as a new note immediately after the note becomes an intercompany obligation. The satisfaction and reissuance are deemed to occur on January 1 of year 3, for the fair market value of the obligation (determined under the principles of § 1.108-2(f)(2)) at that time. Example 11. *Notional principal contracts.*
(i)*Facts.* On April 1 of year 1, M1 enters into a contract with counterparty M2 under which, for a term of five years, M1 is obligated to make a payment to M2 each April 1, beginning in year 2, in an amount equal to the London Interbank Offered Rate (LIBOR), as determined by reference to LIBOR on the day each payment is due, multiplied by a $1,000 notional principal amount. M2 is obligated to make a payment to M1 each April 1, beginning in year 2, in an amount equal to 8 percent multiplied by the same notional principal amount. LIBOR is 7.80 percent on April 1 of year 2, and therefore, M2 owes $2 to M1.
(ii)*Matching rule.* Under § 1.446-3(d), the net income (or net deduction) from a notional principal contract for a taxable year is included in (or deducted from) gross income. Under § 1.446-3(e), the ratable daily portion of M2's obligation to M1 as of December 31 of year 1 is $1.50 ($2 multiplied by 275/365). Under the matching rule, M1's net income for year 1 of $1.50 is taken into account to reflect the difference between M2's net deduction of $1.50 taken into account and the $0 recomputed net deduction. Similarly, the $.50 balance of the $2 of net periodic payments made on April 1 of year 2 is taken into account for year 2 in M1's and M2's net income and net deduction from the contract. In addition, the attributes of M1's intercompany income and M2's corresponding deduction are redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of M2's corresponding deduction control the attributes of M1's intercompany income. (Although M1 is the selling member with respect to the payment on April 1 of year 2, it might be the buying member in a subsequent period if it owes the net payment.)
(iii)*Dealer.* The facts are the same as in paragraph
(i)of this *Example 11,* except that M2 is a dealer in securities, and the contract with M1 is not inventory in the hands of M2. Under section 475, M2 must mark its securities to fair market value at year-end. Assume that under section 475, M2's loss from marking to fair market value the contract with M1 is $10. Because M2 realizes an amount of loss from the mark to fair market value of the contract, the transaction is a triggering transaction under paragraph (g)(3)(i)(A)(1) of this section. Under paragraph (g)(3)(ii) of this section, M2 is treated as making a $10 payment to M1 to terminate the contract immediately before a new contract is treated as reissued with an up-front payment by M1 to M2 of $10. M1's $10 of income from the termination payment is taken into account under the matching rule to reflect M2's deduction under § 1.446-3(h). The attributes of M1's intercompany income and M2's corresponding deduction are redetermined to produce the same effect as if the transaction had occurred between divisions of a single corporation. Under paragraph (c)(4)(i) of this section, the attributes of M2's corresponding deduction control the attributes of M1's intercompany income. Accordingly, M1's income is treated as ordinary income. Under § 1.446-3(f), the deemed $10 up-front payment by M1 to M2 in connection with the issuance of a new contract is taken into account over the term of the new contract in a manner reflecting the economic substance of the contract (for example, allocating the payment in accordance with the forward rates of a series of cash-settled forward contracts that reflect the specified index and the $1,000 notional principal amount). (The timing of taking items into account is the same if M1, rather than M2, is the dealer subject to the mark-to-market requirement of section 475 at year-end. However in this case, because the attributes of the corresponding deduction control the attributes of the intercompany income, M1's income from the deemed termination payment from M2 might be ordinary or capital). Under paragraph (g)(3)(ii)(A) of this section, section 475 does not apply to mark the notional principal contract to fair market value after its deemed satisfaction and reissuance.
(8)*Effective/applicability date.* The rules of this paragraph
(g)apply to transactions involving intercompany obligations occurring in consolidated return years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the **Federal Register** . Kevin M. Brown, Deputy Commissioner for Services and Enforcement. [FR Doc. E7-19134 Filed 9-27-07; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 406, 407, and 408 [CMS-4129-P] RIN 0938-A077 Medicare Program; Special Enrollment Period and Medicare Premium Changes AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Proposed rule. SUMMARY: This proposed rule would provide a special enrollment period
(SEP)for Medicare Part B and premium Part A for certain individuals who are sponsored by prescribed organizations as volunteers outside of the United States and who have health insurance that covers them while outside the United States. Under the SEP provision, qualifying volunteers can delay enrollment in Part B and premium Part A, or terminate such coverage, for the period of service outside of the United States and reenroll without incurring a premium surcharge for late enrollment or reenrollment. This proposed rule would also codify provisions that require certain beneficiaries to pay an income-related monthly adjustment amount (IRMAA) in addition to the standard Medicare Part B premium, plus any applicable increase for late enrollment or reenrollment. The income-related monthly adjustment amount is to be paid by beneficiaries who have a modified adjusted gross income that exceeds certain threshold amounts. It also represents the amount of decreases in Medicare Part B premium subsidy, that is, the amount of the Federal government's contribution to the Federal Supplementary Medicare Insurance
(SMI)Trust Fund. DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on November 27, 2007. ADDRESSES: In commenting, please refer to file code CMS-4129-P. Because of staff and resource limitations, we cannot accept comments by facsimile
(FAX)transmission. You may submit comments in one of four ways (no duplicates, please): 1. *Electronically.* You may submit electronic comments on specific issues in this regulation to *http://www.cms.hhs.gov/eRulemaking* . Click on the link “Submit electronic comments on CMS regulations with an open comment period.” (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.) 2. *By regular mail.* You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-4129-P, P.O. Box 8017, Baltimore, MD 21244-8017. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. *By express or overnight mail* . You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-4129-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. *By hand or courier* . If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number
(410)786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 21244-1850. (Because access to the interior of the HHH Building is not readily available to persons without Federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. *Submission of comments on paperwork requirements* . You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Sam DellaVecchia,
(410)786-4481. Denise Cox,
(410)786-3195. SUPPLEMENTARY INFORMATION: *Submitting Comments:* We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-4129-P and the specific “issue identifier” that precedes the section on which you choose to comment. *Inspection of Public Comments:* All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: *http://www.cms.hhs.gov/eRulemaking.* Click on the link “Electronic Comments on CMS Regulations” on that Web site to view public comments. Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. I. Background A. General Medicare is a Federal health insurance program that helps millions of Americans pay for health care. Beneficiaries include eligible individuals age 65 or older and certain people younger than age 65 who also qualify to receive Medicare. These individuals include those who have disabilities and those who have permanent kidney failure (end stage renal disease). Medicare Parts A and B are the subject of this proposed rule. Hospital insurance (Part A) helps to pay for inpatient care in hospitals, skilled nursing facilities, as well as home health care and hospice care. Part B or supplementary medical insurance
(SMI)helps to pay for physicians' services, outpatient hospital services, durable medical equipment, and a number of other medical services and supplies that are not covered under Part A. Part A is financed primarily through compulsory payroll taxes under the Federal Insurance Contributions Act (“FICA”). Individuals age 65 or over who are entitled to receive Social Security or railroad retirement benefits, or who are eligible for Social Security benefits and have filed an application for hospital insurance, are entitled to receive Part A benefits without paying a monthly premium. However, individuals who do not qualify for premium-free Part A, may voluntarily enroll in Part A but are required to pay a monthly premium. These individuals generally include those who have not worked 10 years in Medicare-covered employment or are not the spouse, divorced spouse or widow(er) of an individual who has worked 10 years in Medicare-covered employment. In addition, they must meet the following requirements:
(1)Be at least age 65;
(2)a resident of the United States;
(3)a United States citizen or an alien who has been lawfully admitted for permanent residence and who has resided continuously in the United States for the 5 year period immediately preceding the month of enrollment;
(4)not otherwise eligible to receive Part A benefits without having to pay a premium; and
(5)entitled to Part B or are eligible and have enrolled. Enrollment in Part B is open to all persons who are entitled to Part A benefits, as well as to persons who are not entitled to Part A benefits provided certain requirements are satisfied. Part B is financed primarily through premiums paid by or on behalf of beneficiaries, along with transfers made from the General Fund of the Treasury. Section 1839(a) of the Social Security Act (the Act) requires the Secretary of Health and Human Services to determine the Medicare Part B standard monthly premium amount annually. Currently, the standard monthly premium represents approximately 25 percent of the estimated total Part B program cost for each aged enrollee. The remaining 75 percent of the total estimated cost is subsidized by the Federal government through transfers to the Federal SMI Trust Fund from the General Fund of the Treasury. Individuals who do not enroll in Part B or premium Part A when first eligible or who enroll and later terminate their coverage may only enroll during the general enrollment period, which is January through March of each year, unless an exception applies. The coverage will be effective the following July 1. Under section 1839(b) of the Act, individuals who delay enrolling in premium Part A or Part B for 12 or more months must pay a premium surcharge. B. General Enrollment Period Exceptions 1. Special Enrollment Period
(SEP)Currently, section 1837(i) provides a special enrollment period
(SEP)for individuals age 65 or over who are working or who are the spouses of working individuals who are covered under a group health plan (GHP). For disabled individuals, who are under age 65, the SEP applies if the individual is covered by a GHP by reason of the current employment status of the individual or the individual's spouse, or if the individual is covered by a large group health plan
(LGHP)by reason of the current employment status of the individual or a member of the individual's family. In this type of situation, enrollment in Part B can take place anytime the individual is covered under the GHP or LGHP based on current employment status or during the 8-month period that begins the first full month after the GHP or LGHP coverage ends. Because section 1818(c) of the Act provides that the enrollment provisions in section 1837 (except subsection f thereof) apply to persons authorized to enroll in premium Part A, we have extended this SEP to premium Part A enrollments. 2. Transfer Enrollment Period
(TEP)Another exception is the transfer enrollment period
(TEP)for enrollment in premium Part A. The TEP is for individuals age 65 or older who are otherwise eligible to enroll in premium Part A; are enrolled in a plan with an organization listed in section 1876 of the Act; and whose coverage under the plan is terminated for any reason. Here, an individual may enroll in premium Part A beginning any month that the individual is enrolled in the plan, and ending with the last day of the 8-month period following the last month in which the individual is no longer enrolled in the plan. 3. Statutory Changes Section 5115(a)(2) of the Deficit Reduction Act of 2005 (Pub. L. 109-171)
(DRA)amended section 1837 of the Act to add a new subsection (k), which provides a SEP for certain international volunteers. Beginning January 1, 2007, a SEP for Part B is provided to qualifying international volunteers who are eligible to enroll in Part B because they meet the requirements in section 1836(1) or
(2)of the Act, but who do not enroll in Part B during the initial enrollment period or who terminate enrollment during a month in which they qualify as an international volunteer. Enrollment can take place during the 6-month period beginning on the first day of the month which includes the date the individual no longer qualifies under this provision. Coverage for an individual who enrolls during a SEP in accordance with this provision begins on the first day of the month following the month in which the individual enrolls. Under new section 1837(k)(3) of the Act, an individual qualifies as an international volunteer if he or she is serving in a program outside of the United States that covers at least a 12-month period, and that is sponsored by an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 (the Code) and exempt from taxation under section 501(a) of the same Code. The individual must also have health insurance coverage to cover medical services while serving overseas in the program. Specifically, qualifying organizations under section 501(c)(3) of the Code that are exempt from taxation under section 501(a) of the Code are “corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals * * *”. Furthermore, to qualify for this exemption, no part of the net earnings of the organization can inure to the benefit of any private shareholder or individual and no substantial part of the activities can be used for propaganda, or otherwise attempt to influence legislation (except as otherwise provided in section 510(h) of the Code) or participate or intervene (including the publishing or distributing of statements) in political campaigns on behalf of (or in opposition to) any candidate for public office. C. Income-Related Monthly Adjustment Amount under Medicare Part B Section 811 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA)(Pub. L. 108-173) amends section 1839 of the Act and establishes a Medicare Part B premium subsidy reduction referred to as the “Income-Related Monthly Adjustment Amount” (IRMAA). Section 1839(i) of the Act requires that an income-related monthly adjustment amount be added to beneficiary's Part B premium if his or her modified adjusted gross income exceeds the established threshold amounts. The IRMAA reduces the amount that the beneficiary's premium is subsidized by the Federal government. All beneficiaries will continue to receive some subsidy of their premium. Section 1839(i) of the Act establishes a sliding scale that we would use to establish four income-related monthly adjustment amounts that would increase a beneficiary's Medicare Part B premium by specific percentages. If a beneficiary's modified adjusted gross income is greater than the statutory threshold amounts, the beneficiary will pay a larger portion of the estimated total cost of Part B coverage. The income ranges, as set forth in section 1839(i)(3)(C)(i) of the Act, start at $80,000 for a beneficiary filing an individual tax return, and $160,000 for a beneficiary filing a joint income tax return, and are listed in the following table: Individual tax filers with income: Joint tax filers with income: Premium percentage Greater than $80,000 and less than or equal to $100,000 Greater than $160,000 and less than or equal to $200,000 35 Greater than $100,000 and less than or equal to $150,000 Greater than $200,000 and less than or equal to $300,000 50 Greater than $150,000 and less than or equal to $200,000 Greater than $300,000 and less than or equal to $400,000 65 Greater than $200,000 Greater than $400,000 80 In calendar year
(CY)2007, individual tax filers with income less than or equal to $80,000 and joint tax filers with income less than or equal to $160,000 will continue to pay the standard premium which represents roughly 25 percent of the estimated total Part B program costs. As specified in section 1839(i)(5) of the Act, each dollar amount in this table would be adjusted annually based on the Consumer Price Index. Section 811 of the MMA also provided for a 5-year phase-in of the Medicare Part B premium subsidy reduction. However, section 1839(i) was subsequently amended by section 5111 of the DRA to provide for a 3-year phase-in period. Therefore, the percentages presented in this table reflect the Part B premium percentages that certain beneficiaries would pay once IRMAA is fully phased-in. The “hold-harmless” provision in section 1839(f) of the Act provides for a reduction to the Part B premium for beneficiaries whose Social Security [or Railroad Board
(RRB)annuity] cost of living adjustments (COLAs) are not sufficient to cover the Part B premium increase. If in a given year, the increase in the Part B premium would cause an individual's Social Security or RRB check to be less than it was the year before, the premium is reduced to ensure that the amount of the individual's Social Security benefit (or RRB annuity) stays the same. To be held harmless, a beneficiary must have had the Part B premium deducted from both the December check of the prior year and the January check of the next year. Under section 1839(f) of the Act, the “hold-harmless” provision does not apply to beneficiaries who are required to pay an IRMAA based on their modified adjusted gross income. These beneficiaries must pay the full Medicare Part B standard monthly premium, plus any applicable penalty for late enrollment or reenrollment, plus the income-related monthly adjustment amount. Section 702(a)(5) of the Act allows SSA to make the rules and regulations necessary or appropriate to carry out the functions of SSA. Other provisions in section 811 of the MMA provide SSA with additional specific authorization to make rules and regulations to determine which beneficiaries are required to pay the different income-related monthly adjustment amounts. On October 27, 2006, SSA issued a final rule implementing regulations governing SSA's determination of income-related monthly adjustment amounts (71 FR 62923). This final rule explains:
(1)The statutory requirement to implement an income-related adjustment to the Part B premium subsidy;
(2)the information that would be used to determine whether a beneficiary must pay an income-related monthly adjusted amount and the amount of any adjustment;
(3)when SSA will consider a major life-changing event that results in a significant reduction in a beneficiary's modified adjusted gross income; and
(4)how a beneficiary can appeal SSA's determination about the beneficiary's income-related monthly adjustment amount. For a more detailed discussion see the October 27, 2006 SSA final rule (71 FR 62923). II. Provisions of the Proposed Rule We are proposing to add a new § 406.25, which would allow certain individuals who are sponsored by prescribed organizations as volunteers outside of the United States and have health care insurance to qualify for a SEP for premium hospital insurance (Part A) special enrollment period. We recognize that section 5115 of the DRA, in amending section 1839(b) of the Act, explicitly provides only for a SEP for Part B. However, since section 1818(c) of the Act applies all of the provisions of section 1837 of the Act (except subsection
(f)thereof) to persons authorized to enroll under section 1818 of the Act, we believe that the SEP provided in section 5115 of the DRA also applies to enrollment in premium Part A. In § 406.33(a)(3), we propose to make a technical correction by removing an incorrect phrase “the 7-month special enrollment period under § 406.21(e)” and replacing it with the phrase “the special enrollment period under § 406.24.” In § 406.33(a)(5) and (6), we propose to exclude from the calculation of the premium surcharge those months the individual qualifies for the SEP described in § 406.25(a). We are proposing to add a new § 407.21, which implements section 5115 of the DRA by allowing certain individuals who are sponsored by prescribed organizations as volunteers outside of the United States and have health care insurance that covers medical services while serving overseas to qualify for a Medicare Part B SEP. In proposed § 408.20(e)(3)(iii), we would implement section 811(b)(1)(c) of the MMA by excluding from the “hold harmless” provision (known as the “nonstandard premium”) individuals who are required to pay the income-related monthly adjustment amount (IRMAA). Such beneficiaries must pay the full Medicare Part B standard monthly premium plus any applicable premium surcharge for late enrollment or re-enrollment, plus the income-related monthly adjustment amount. In proposed § 408.24(a)(10), we would implement section 5115(a) of the DRA by excluding from the calculation of the premium surcharge those months the individual meets the requirements of proposed § 407.21. We are also making a conforming change in § 408.24(b)(2)(i) of this section by revising the cross reference to include the new paragraph § 408.24(a)(10). Finally, we propose to add a new § 408.28, to specify that, beginning January 1, 2007, we would inform Medicare beneficiaries that they may be required to pay an income-related monthly adjustment amount in addition to the standard Part B premium, plus any applicable increase for late enrollment or reenrollment, if their modified adjusted gross income exceeds the threshold limits specified in 20 CFR 418.1115. III. Collection of Information Requirements Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the **Federal Register** and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget
(OMB)for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues: • The need for the information collection and its usefulness in carrying out the proper functions of our agency. • The accuracy of our estimate of the information collection burden. • The quality, utility, and clarity of the information to be collected. • Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. We are soliciting public comment on each of these issues for the following sections of this document that contain information collection requirements. Special Enrollment Period for Volunteers Outside of the United States (§ 406.25) Section 406.25 outlines the requirements that an individual volunteer must meet to qualify for a SEP. A qualifying individual can enroll or reenroll without incurring a surcharge for a late enrollment or reenrollment. Specifically, § 406.25(a)(3)(i) states that an individual volunteer must demonstrate that his or her period of service is sponsored by an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of the Internal Revenue Code. The burden associated with this requirement is the time and effort associated with demonstrating the tax-exempt status of the organization sponsoring the individual. The estimated burden associated with this requirement is 15 minutes per individual. We estimate that 1500 individuals will be subject to this requirement on a yearly basis for a total annual burden of 375 burden hours. In addition, § 406.25(a)(3)(ii) requires that an individual demonstrate that he or she has health insurance that covers medical services received outside of the United States during his or her period of service. The burden associated with this requirement is the time and effort associated with demonstrating possession of health insurance coverage that covers the medical services received outside of the United States. We estimate the burden for verifying coverage to be 15 minutes per individual; we also estimate that 1500 individuals will be subject to this requirement on a yearly basis. The total estimated burden is 375 annual burden hours. Special Enrollment Period for Volunteers Outside the United States (§ 407.21) Section 407.21 addresses the provision of a SEP for an individual who elects not to enroll or to be deemed enrolled in SMI when first eligible and an individual who terminates SMI enrollment. To be eligible for the SEP, the individual must meet the criteria outlined in the regulations text. As stated in § 407.21(a), the individual must:
(1)Volunteer in a program for a 12-month or longer period of service outside of the United States;
(2)volunteer in a program sponsored by an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under 501(a) of such Code; and
(3)demonstrate that he or she had health insurance coverage that covers medical services received outside of the United States during his or her period of service, respectively. The burden associated with the introductory text to § 407.21(a), as well as § 407.21(a)(1) and (a)(2), is the time and effort associated with verifying the individual's volunteer period of service, verifying the tax-exempt status of the organization sponsoring the individual, and submitting the information to CMS. The estimated burden associated with these requirements is 15 minutes per individual. We estimate that 1500 individuals will be required to verify their volunteer service. The total annual burden associated with this requirement is 375 burden hours. The burden associated with the § 407.21(a)(3) is the time and effort associated with an individual demonstrating that he or she has health insurance that covers medical services received outside of the United States during his or her period of service. We estimate the burden for verifying coverage to be 15 minutes per individual; we also estimate that 1500 individuals will be subject to this requirement on a yearly basis. The total estimated burden is 375 annual burden hours. We have submitted a copy of this proposed rule to OMB for its review of the information collection requirements contained in this section. These requirements are not final until they are approved by OMB. If you comment on these information collection and recordkeeping requirements, please mail copies directly to the following: Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Regulations Development Group, Attn: William N. Parham III, CMS-4129-P, Room C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850; and Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Carolyn Lovett, CMS Desk Officer, CMS-4129-P, *carolyn_lovett@omb.eop.gov.* Fax
(202)395-6974. IV. Response to Comments Because of the large number of public comments we normally receive on **Federal Register** documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document. V. Regulatory Impact Statement We have examined the impact of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act
(RFA)(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132. Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis
(RIA)must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). We do not anticipate that there will be more than 1500 beneficiaries (international volunteers) at any one time who will qualify for a SEP. To qualify under this SEP, the Medicare beneficiary must have elected not to enroll in Part B or premium Part A during the initial enrollment period, or terminated enrollment, because the individual was serving as a volunteer outside the United States. In addition, the individual must have served as a volunteer outside of the United States through a program that covers at least a 12-month period, and that is sponsored by an organization described in section 501(C)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of that Code, and must have health care insurance coverage that covers medical services while serving overseas in the program. It is for this reason, that we anticipate that the overall expenditure for this provision of the Medicare program projected over a 5-year period would be negligible. In addition, this rule only codifies the income-related monthly adjustment amount provision of MMA. It is for these reasons that this rule does not reach the economic threshold and thus is not considered a major rule. The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. Individuals and States are not included in the definition of a small entity. We are not preparing an analysis for the RFA because we have determined that this rule will not have a significant economic impact on a substantial number of small entities. In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. We are not preparing an analysis for section 1102(b) of the Act, because we have determined that this proposed rule will not have a significant impact on the operations of a substantial number of small rural hospitals. Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $120 million. This rule will have no consequential effect on State, local, or tribal governments or on the private sector. Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. We have determined that this proposed rule does not impose any costs on State or local governments, therefore the requirements of E.O. 13132 are not applicable. In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget. List of Subjects 42 CFR Part 406 Health facilities, Kidney diseases, Medicare. 42 CFR Part 407 Medicare. 42 CFR Part 408 Medicare. For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services would amend 42 CFR Chapter IV as follows: PART 406—HOSPITAL INSURANCE ELIGIBILITY AND ENTITLEMENT 1. The authority citation for part 406 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). Subpart C—Premium Hospital Insurance 2. Section 406.25 is added to read as follows: § 406.25 Special enrollment period for volunteers outside the United States.
(a)*General rule.* An individual described in paragraph (a)(2) may use a SEP as defined in § 406.24(a)(4) of this section if—
(1)At the time the individual first met the requirements of § 406.10 through 406.15 or § 406.20(b), the individual elected not to enroll in premium Part A during the individual's initial enrollment period; or
(2)The individual terminated enrollment in premium hospital insurance during a month in which the individual was described in paragraph (a)(2) of this section.
(3)For purposes of paragraphs (a)(1) and (a)(2) of this section, an individual—
(i)Is serving as a volunteer outside of the United States through a program that covers at least a 12-month period and that is sponsored by an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code; and
(ii)Can demonstrate that he or she has health insurance that covers medical services that the individual receives outside the United States while serving in the program.
(b)*Duration of SEP.* The SEP is the 6-month period beginning on the first day of the month which includes the date that the individual no longer meets the description in paragraph (a)(2) of this section.
(c)*Effective date of coverage.* If the individual enrolls in premium hospital insurance in accordance with a SEP authorized by this section, coverage begins on the first day of the month following the month in which the individual enrolls. 3. Section 406.33 is amended by— A. Revising paragraph (a)(3). B. Adding paragraphs (a)(5) and (a)(6). The revision and additions read as follows: § 406.33 Determination of months to be counted for premium increase: Enrollment.
(a)* * *
(3)Any months during the SEP under § 406.24 of this part, during which premium hospital insurance coverage is in effect.
(5)For premiums due for months after December 2006, any months during which the individual met the provisions of § 406.25(a) of this subpart.
(6)Any months during the 6-month SEP described in § 406.25(b) of this part during which premium hospital insurance coverage is in effect. PART 407—SUPPLEMENTARY MEDICAL INSURANCE
(SMI)ENROLLMENT AND ENTITLEMENT 4. The authority citation for part 407 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). Subpart B—Individual Enrollment and Entitlement for SMI 5. Section 407.21 is added to read as follows: § 407.21 Special enrollment period for volunteers outside the United States.
(a)*General rule.* A SEP, as defined in § 406.24(a)(4) of this subchapter, is provided for an individual who does not elect to enroll or to be deemed enrolled in Part B
(SMI)when first eligible, or who terminates SMI enrollment, if while serving as a volunteer outside of the United States—
(1)The individual is in a program that covers at least a 12-month period of service outside of the United States;
(2)The program is sponsored by an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code; and
(3)The individual demonstrates that he or she has health insurance that covers medical services that the individual receives outside of the United States during his or her period of service.
(b)*Duration of SEP.* The SEP is the 6-month period beginning on the first day of the month which includes the date that the individual no longer satisfies the provisions of paragraph
(b)of this section.
(c)*Effective date of coverage.* For individuals enrolling in an SEP under this section, coverage begins on the first day of the month following the month in which the individual enrolls. PART 408—PREMIUMS FOR SUPPLEMENTARY MEDICAL INSURANCE 6. The authority citation for part 408 continues to read as follows: Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh). Subpart B—Amount of Monthly Premiums 7. Section 408.20 is amended by adding paragraph (e)(3)(iii) to read as follows: § 408.20 Monthly premiums.
(e)* * *
(3)* * *
(iii)Beginning with CY 2007, a nonstandard premium may not be applied to individuals who are required to pay an income-related monthly adjustment amount described in § 408.28 of this part. 8. Section 408.24 is amended by— A. Adding paragraph (a)(10). B. Revising paragraph (b)(2)(i). The addition and revision read as follows: § 408.24 Individuals who enrolled or reenrolled before April 1, 1981 or after September 30, 1981.
(a)* * *
(10)For premiums due for months beginning with January 1, 2007, the following:
(i)Any months after December 2006 during which the individual met the conditions under § 407.21(a) of this chapter.
(ii)Any months of SMI coverage for which the individual enrolled during a special enrollment period as provided in § 407.21(b) of this chapter.
(b)* * *
(2)* * *
(i)Any of the periods specified in paragraph (a); and 9. Section 408.28 is added to read as follows: § 408.28 Increased premiums due to the income-related monthly adjustment amount (IRMAA). Beginning January 1, 2007, Medicare beneficiaries must pay an income-related monthly adjustment amount in addition to the Part B standard monthly premium plus any applicable increase for late enrollment or reenrollment if the beneficiary's modified adjusted gross income exceeds the threshold amounts specified in 20 CFR 418.1115. (Authority: Catalog of Federal Domestic Assistance Program No. 93.773, Medicare—Hospital Insurance; and Program No. 93.774, Medicare—Supplementary Medical Insurance Program.) Dated: March 1 2007. Leslie V. Norwalk, Acting Administrator, Centers for Medicare & Medicaid Services. Approved: June 4, 2007. Michael O. Leavitt, Secretary. Editorial Note: This document was received at the Office of the Federal Register on September 14, 2007. [FR Doc. E7-18467 Filed 9-27-07; 8:45 am] BILLING CODE 4120-01-P DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 440 and 447 [CMS-2213-P] RIN 0938-AO17 Medicaid Program; Clarification of Outpatient Clinic and Hospital Facility Services Definition and Upper Payment Limit AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Proposed rule. SUMMARY: This proposed rule would amend the regulatory definition of outpatient hospital services for the Medicaid program. Outpatient hospital services are a mandatory part of the standard Medicaid benefit package. The current regulatory definition at 42 CFR 440.20 is broader than the definition in Medicare, and can overlap with other covered benefit categories. The purpose of this amendment is to align the Medicaid definition more closely to the Medicare definition in order to improve the functionality of the applicable upper payment limits under 42 CFR 447.321 (which are based on a comparison to Medicare payments for the same services), provide more transparency in determining available coverage in any State, and generally clarify the scope of services for which Federal financial participation
(FFP)is available under the outpatient hospital services benefit category. DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on October 29, 2007. ADDRESSES: In commenting, please refer to file code CMS-2213-P. Because of staff and resource limitations, we cannot accept comments by facsimile
(FAX)transmission. You may submit comments in one of four ways (no duplicates, please): 1. *Electronically.* You may submit electronic comments on specific issues in this regulation to *http://www.cms.hhs.gov/eRulemaking.* Click on the link “Submit electronic comments on CMS regulations with an open comment period.” (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.) 2. *By regular mail.* You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, *Attention* : CMS-2213-P, P.O. Box 8016, Baltimore, MD 21244-8016. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. *By express or overnight mail.* You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, *Attention* : CMS-2213-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. *By hand or courier.* If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number
(410)786-7195 in advance to schedule your arrival with one of our staff members: Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 21244-1850. (Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Jeremy Silanskis,
(410)786-1592. SUPPLEMENTARY INFORMATION: *Submitting Comments:* We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-2213-P and the specific “issue identifier” that precedes the section on which you choose to comment. *Inspection of Public Comments:* All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: *http://www.cms.hhs.gov/eRulemaking.* Click on the link “Electronic Comments on CMS Regulations” on that Web site to view public comments. Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. I. Introduction Title XIX of the Social Security Act (the Act) authorizes the Secretary of the Department of Health and Human Services (the Secretary) to provide grants to States to partially finance programs furnishing medical assistance (State Medicaid programs) to specified groups of needy individuals in accordance with an approved State Plan. “Medical Assistance” is defined at section 1905(a) as payment for part or all of the cost of a list of specified care and services, including at section 1905(a)(2)(A), “outpatient hospital services.” Details concerning the scope of covered services, the groups of eligible individuals, the payment methodologies for covered services, and all other information necessary to assure that the plan can be a basis for Federal Medicaid funding must be set forth in the approved Medicaid State Plan. For approval, the Medicaid State plan must comply with requirements set forth in section 1902(a) of the Social Security Act (the Act), as implemented and interpreted in applicable regulations and guidance issued by the Centers for Medicare & Medicaid Services (CMS). The Secretary has delegated overall authority for the Federal Medicaid program, including State Plan approval, to CMS. Medicaid services are jointly funded by the Federal and State governments in accordance with section 1903(a) of the Act. Section 1903(a)(1) of the Act provides for payments to States of a percentage of expenditures under the approved State Plan for covered medical assistance. The percentage of Federal financial participation
(FFP)is the “Federal Medicaid assistance percentage” (FMAP). For ordinary medical assistance, the FMAP varies among the States based on a complex formula set forth in section 1905(b) of the Act. Section 1902(a)(30)(A) of the Act requires a State Medicaid plan to meet certain requirements in setting payment amounts for covered care and services. One of these requirements is that State Plan methodologies must assure that payments are consistent with efficiency, economy, and quality of care. This provision provides authority for specific upper payment limits
(UPLs)set forth in Federal regulations in 42 CFR part 447 relating to certain Medicaid covered services. The UPL applicable to outpatient hospital services is at § 447.321. The purpose of this proposed rule is to clarify the definition of the benefit for “outpatient hospital services” under section 1905(a)(2)(A) of the Act, and the application of that definition under the applicable UPL. This rule proposes to describe the scope of services States may include in the outpatient hospital UPL and define appropriate Medicare references that States must use when calculating the UPL for Medicaid outpatient hospital services. The rule proposes to align the Medicaid definition of outpatient services with the Medicare definition of outpatient services and clarify Medicaid's corresponding UPLs for outpatient hospital and clinic services. II. Background A. Medicaid Outpatient Hospital Services as Currently Defined Section 1905(a)(2)(A) of the Act lists outpatient hospital services as a benefit that can be covered under a State Medicaid program, and it is among those benefits that is mandatory for the most eligible Medicaid populations under sections 1902(a)(10)(A) and 1902(a)(10)(C)(iv) of the Act. The statute does not provide a definition for these services. The current implementing regulation at § 440.20 describes “outpatient hospital services” as preventive, diagnostic, therapeutic, rehabilitative, or palliative services that—
(1)Are furnished to outpatients;
(2)Are furnished by or under the direction of a physician or dentist; and
(3)Are furnished by an institution that—(i) Is licensed or formally approved as a hospital by an officially designated authority for State standard-setting; and
(ii)Meets the requirements for participation in Medicare as a hospital;
(4)May be limited by a Medicaid agency in the following manner: A Medicaid agency may exclude from the definition of “outpatient hospital services” those types of items and services that are not generally furnished by most hospitals in the State. An “outpatient” is defined in § 440.2(a) as “a patient of an organized medical facility, or distinct part of that facility who is expected by the facility to receive and who does receive professional services for less than a 24-hour period regardless of the hour of admission, whether or not a bed is used, or whether or not the patient remains in the facility past midnight.” Because the regulatory definition of outpatient hospital services is so broad, there is a high possibility of overlap between outpatient hospital services and other covered benefits. This overlap results in circumstances in which payment for services is made at the high levels customary for outpatient hospital services instead of the levels associated with the other covered benefits. For example, there have been instances of claims for payment of physician services as outpatient hospital services, which result in payment far in excess of the rates available in the State for physician services. In addition, the Fifth Circuit Court of Appeals, in Louisiana Department of Health and Hospitals v. CMS, 346 F. 3d 571 (2003), found that hospital-based rural health clinic services were within the current definition of outpatient hospital services and, although paid under a separate methodology, could be included in calculating supplemental payments for uncompensated care costs of outpatient hospital services. The result of these overlapping definitions is payment for identical services of a higher amount under the outpatient hospital benefit than otherwise available under the State Plan. In addition, the current broad definition of outpatient hospital services is not clear on whether outpatient hospital services can include types of services that are outside the normal responsibility of outpatient hospitals, such as practitioner, school-based, and rehabilitative services. In other words, the current broad definition does not clearly limit the scope of the outpatient hospital service benefit to those services over which the outpatient hospital has oversight and control. Also important, as we discuss further in the following section below, the broad definition of Medicaid outpatient hospital services is inconsistent with the applicable UPL, which is based on the premise of some level of comparability between the Medicare and Medicaid definitions of outpatient hospital and clinic services. The UPL regulation at § 447.321 limits outpatient service payments to what Medicare would pay for equivalent services. This proposed regulation would clarify the scope of services that may be included in the State Plan definition of outpatient hospital services to clarify coverage and payment requirements for outpatient services. B. Medicaid Outpatient Hospital Services Upper Payment Limit as Currently Defined Limitations on aggregate State payments for outpatient hospital and clinic services are established in regulation at § 447.321, “Outpatient hospital services and clinic services: Application of upper limits of payments.” This regulation requires that aggregate State Medicaid payments for outpatient hospital and/or clinic services not exceed a reasonable estimate of the amount the provider would be paid under Medicare payment principles, forming a UPL for these services. The aggregate Medicaid payments and corresponding UPL for outpatient hospital and/or clinic services are calculated for private facilities. FFP is not available for State expenditures that exceed the upper payment limit. Before 1981, States were required to pay rates for hospital and long-term care services that were directly related to Medicare reasonable cost reimbursement. To comply with this requirement, many States set Medicaid hospital rates using reasonable costs as determined by Medicare. The Congress removed the Medicare cost-based reimbursement requirements by enacting legislation in 1980 and 1981, collectively referred to as the Boren Amendment. Under section 962 of the Omnibus Reconciliation Act of 1980 (ORA 1980), Pub. L. 96-499, and Section 2173 of the Omnibus Budget Reconciliation Act of 1981 (OBRA 1981), Pub. L. 97-85, the Congress provided States flexibility to deviate from Medicare cost determinations for hospital reimbursement. In lieu of using Medicare cost reimbursement rates, States were allowed to set rates based on the costs of efficiently and economically operated facilities. Though the Boren Amendment removed the specific requirement that States adhere to Medicare cost principles, the legislative history indicates the intent that the Secretary continue to require that payments made to hospitals and other inpatient facilities under the State Plan not exceed Medicare payment principles. The Senate Finance Committee stated that “the Secretary would be expected to continue to apply current regulations that require that payments made under State plans do not exceed amounts that would be determined under Medicare principles of reimbursement (S. Rep. No. 471, 96th Cong. 1st Sess. (1979)).” These limitations provide us with the authority to establish UPLs for outpatient and inpatient hospital services. The Congress allowed for even more flexibility for State payments to hospital and other providers under the Balanced Budget Act of 1997 (BBA), Pub. L. 105-33. The BBA effectively replaced the requirements of the Boren Amendment with a public process to determine the rates of payment under the State Plan. The public process requires that States publish proposed and final rates, the methodologies underlying the established rates, and the justification for the rates. Providers, beneficiaries, and other concerned State residents have an opportunity to review and comment on the rates before they become final. Section 705 of the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA)required that we publish final regulations authorizing transition periods for States to comply with the UPL regulations. In response to this statutory directive, we modified the UPL regulations for inpatient and outpatient hospital services through a final regulation on January 12, 2001 (66 FR 3147). In addition, on May 29, 2007 (72 FR 29748), CMS published a final rule (CMS-2258-FC) which will impact the outpatient and inpatient hospital upper payment limits for services provided by units of government. Congress has enacted a one year moratorium that delays CMS from implementing the policies established under that final rule. The provisions proposed in this regulation address completely different policy matters than those set forth in CMS-2258-FC. The current outpatient hospital UPL regulation prohibits States from paying more, in the aggregate, for Medicaid outpatient hospital services than the “reasonable estimate” that Medicare would pay for equivalent services in privately operated facilities. As with the scope of outpatient hospital services that may be included under the State Plan, the “reasonable estimate” of what Medicare would pay for equivalent Medicaid services has had varied interpretations. Some States have proposed to use their own hospital cost reports to assess the “reasonable estimate” of Medicare payment. These cost reports may not represent finalized data or accurately reflect Medicare payment and/or charge rates. To establish standardization across all States, the proposed rule would require States to base the “reasonable estimate” upon service charge ratios reported in the most recently filed Medicare hospital cost report, or a State cost report for which the State can clearly demonstrate gathers data elements directly from the proposed standard worksheets and lines on the most recently filed Medicare cost report. We believe that these standards will provide an accurate resource for the “reasonable estimate” of what Medicare would pay for equivalent Medicaid services. C. General Intention of Proposed Rule In our review of Medicaid State Plans, we have noted instances where the State allows non-facility services and/or non-traditional outpatient hospital services to be paid under the outpatient hospital benefit. The definition of outpatient hospital services in current regulation may allow States to include such non-facility services (that is, physician and professional services) and/or non-traditional outpatient hospital services (that is, school-based and rehabilitative services) within the State Plan definition of outpatient hospital services. We do not believe that such a broad definition of outpatient hospital services is consistent with congressional intent when enacting section 1905(a)(2)(A) of the Act. Therefore, as discussed in more detail below, we are proposing to change the definition and scope of outpatient hospital services, and the corresponding UPL for outpatient hospital and clinic services, in an effort to clarify the current regulatory language and make it consistent with the intent of the Congress in enacting section 1905(a)(2)(A) of the Act. This revised definition of outpatient hospital services would align the outpatient services covered by Medicaid with those covered by Medicare. As a result, the calculation of the Medicaid UPLs would reflect a comparison of like services. The revised definition would also narrow the scope of Medicaid outpatient services to those traditionally and typically recognized as outpatient facility services. While we recognize that Medicaid covers certain services that are not covered by Medicare, this regulation would not prohibit States from covering any Medicaid service allowable under section 1905(a) of the Act. Rather, the regulation would only define services that may be covered, and reimbursed, under the outpatient hospital services benefit in the Medicaid State Plan. In addition, a number of States have requested that we clarify in regulation the requirements for calculating Medicare comparable UPLs on outpatient and clinic services. The current regulation at § 447.321 limits outpatient hospital and rural health clinic payments in privately operated facilities to “a reasonable estimate of the amount that would be paid for services furnished by the group of facilities under Medicare payment principles.” The current regulation does not address how this estimate should be made, nor does it address the treatment of services that are not comparable to a service furnished under Medicare. As States provide an array of services in a variety of settings authorized under § 440.90, we are proposing to set forth effective UPLs to limit Medicaid payments in all clinic settings. To address these concerns, as discussed below in more detail, in addition to revising the definition of “outpatient hospital services” for consistency between Medicare and Medicaid, we are proposing changes to address the method for calculating the UPL. The proposed UPL definition of outpatient hospital services and clinics would establish payments as reported on the most recently filed Medicare cost report, or a State cost report for which the State can clearly demonstrate gathers data elements directly from the proposed standard worksheets and lines on the most recently filed Medicare cost report, as the standard for the reasonable estimate of what Medicare would pay for equivalent Medicaid services. The Medicare cost report reflects cost-to-charge ratios for all outpatient services reimbursed prospectively or reimbursed under a fee schedule by Medicare. Additionally, payment-to-charge ratios may be derived from the Medicare cost report for all facility payments reported to the Medicare fiscal intermediary. Medicare regularly updates these payment systems to recover costs for providers. We believe that the Medicare costs or payments reported in the most recently filed Medicare cost reports, or an equivalent State cost report as described above, provide the most accurate measure of what Medicare would pay for Medicaid-equivalent outpatient hospital services. D. Medicaid Outpatient Hospital Service Definition Scope of Outpatient Hospital Services—Proposed Rule The BBA required CMS (formerly the Health Care Financing Administration) to implement an outpatient prospective payment system
(OPPS)for hospital services reimbursed under the Medicare program. Before the implementation of OPPS, services were reimbursed on a formula-driven basis. As part of the development process for the OPPS, we published a proposed rule on September 8, 1998 (63 FR 47552) that, among other provisions, described the services that would be paid for by Medicare on a prospective basis. The final rule was published in the **Federal Register** on April 7, 2000 (65 FR 18434). Regulations at 42 CFR part 419—Prospective Payment System for hospital Outpatient Department Services—describes the categories of hospitals and the services that are included and excluded from the Medicare hospital OPPS. The proposed rule references the services that Medicare pays for under the OPPS, defined at § 419.2. In addition, the proposed rule references other outpatient hospital facility services that Medicare pays through an alternate methodology, such as a fee schedule, as coverable Medicaid outpatient hospital services. While Medicare pays for both professional and facility services through alternate payment methodologies, the proposed rule would limit Medicaid coverage and payment for outpatient hospital services to facility services only. For example, States may cover and reimburse prosthetic devices, prosthetics, supplies, and orthotic devices, durable medical equipment, and clinical diagnostic laboratory services as outpatient hospital services. In addition, the proposed rule would allow States to cover outpatient services provided outside of the hospital only in a department of a provider that meets the standards defined under Medicare regulations in 42 CFR part 413, subpart E—Payments to Providers. This section of the regulations describes the relationship that facilities with provider-based status must have with a hospital in order to receive Medicare payments equivalent to those received by hospitals. Specifically, our intention is to ensure that a department of a hospital that meets the Medicare requirements for provider-based status and is reimbursed for Medicaid outpatient hospital services is treated the same as the main provider. In contrast, a provider-based entity that is not a department of the main provider would be treated as a separate, non-hospital, entity for this purpose (by definition, under 42 CFR 413.65(a)(2), provider-based entities provide health care services of a different type from those of the main provider). We have considered other options and believe that the services recognized under Medicare regulations as outpatient hospital services represent an industry-accepted class of services. By including services reimbursed to outpatient hospitals under Medicare OPPS and outpatient services reimbursed through Medicare fee schedules within the Medicaid definition, we would provide greater consistency between the two federally funded programs. In addition, we are proposing to adopt Medicare's definition of a department of a provider meeting the requirements of provider-based status, into Medicaid regulation to assure that all providers that are reimbursed for outpatient hospital services have a legal relationship with a main provider that is defined under regulation. This is consistent with efficiency and economy as set forth in section 1902(a)(30)(A) of the Act. The proposed rule also would exclude States from covering under the Medicaid outpatient hospital benefit services that are covered under another medical assistance service category under the State Plan. Our review of State Plan methodologies recently submitted to CMS finds that States may include non-facility and/or non-traditional hospital services (that is, school-based services and rehabilitation services) within the definition of covered outpatient hospital services. For example, States have proposed including school-based, adult day health and rehabilitative services in the outpatient hospital coverage section of the State Plan. In many cases, these services are already covered and paid for under another methodology under the plan. In at least one instance, a State reimburses non-traditional hospital services at the rate that community providers receive, as defined under the distinct payment methodology for those services under the State Plan, rather than the higher outpatient rate that should be paid for a covered outpatient service. Such inconsistencies have the potential to enhance the UPL for outpatient services by increasing the scope of outpatient hospital services that might be included in the UPL calculation. We are proposing to exclude non-facility and/or non-traditional hospital services from the outpatient definition in this proposed rule to assure efficiency and economy within the scope of outpatient hospital services as outpatient service rates are generally higher than rates for other Medicaid non-facility services. An outpatient hospital service may not be covered and/or reimbursed under another Medical Assistance services category under the State Plan. However, States may continue to cover any service that is authorized under section 1905(a) of the Act within the State Plan under a coverage benefit that is distinct from outpatient hospital services. Finally, the proposed rule would make a clear distinction between outpatient services billed by a recognized hospital facility in which services are furnished and those billed by physicians and other professionals. Under Medicaid, States generally pay a fee schedule rate for physician and other professional services and a separate rate to hospitals providing outpatient services. We are restricting the Medicaid outpatient hospital definition to facility services only to prevent duplicative payments for professional services that are reimbursed under a separate payment methodology, under a different benefit category under section 1905(a) of the Act. E. Upper Payment Limits—Proposed Rule We are proposing to revise § 447.321 to clarify the appropriate Medicare references that States may use to derive the reasonable estimate of what would be paid for Medicaid outpatient and clinic services furnished by the group of facilities under Medicare payment principles. Outpatient Hospital Upper Payment Limit The revisions to the outpatient UPL, as defined in the proposed rule, would limit the services that may be included in the outpatient hospital UPL for privately operated facilities to those with a Medicare equivalent as reported through the most recently filed Medicare cost report, for each outpatient hospital Medicaid service provider, or a State cost report for which the State can clearly demonstrate gathers data directly from the proposed standardized Medicare cost report references. The proposed rule would allow States to include within the UPL calculation only services that
(1)may be covered under the Medicaid outpatient coverage definition; and
(2)that show up on outpatient-specific Medicare hospital cost report worksheets. Thus, the scope of outpatient hospital services as defined by Medicaid would be the same services as those included in the outpatient hospital UPL. Though we recognize that Medicaid covers more services than Medicare, we believe that an economic and efficient UPL should include only services to which there exists a Medicare equivalent. Restricting the permissible scope of Medicaid outpatient hospital services to Medicare's definition would allow us to define standard references that States may use to calculate the UPL. All Medicare-certified institutional providers, including hospitals, are required to submit annual cost reports to a fiscal intermediary. These cost reports include information such as facility characteristics, utilization data, cost and charges by cost center (in total and for Medicare), Medicare settlement data, and financial Statement data. The Medicare hospital cost report captures all of the services that are included in the proposed revised definition of Medicaid outpatient hospital services, and it is the most accurate reflection of what Medicare would pay for Medicaid equivalent services. As previously stated, the Medicare hospital cost report includes line items that calculate a cost-to-charge ratio (ratio of the provider's actual costs vs. the amount the provider charges). The cost-to-charge ratio on the Medicare cost report captures the highest possible amount that Medicare would pay for an outpatient service. The proposed rule would allow States to use either the cost-to-charge ratio, as reported on the most recently filed Medicare hospital cost report, or a payment-to-charge ratio (the ratio of the amount that Medicare actually pays for outpatient hospital services through the fiscal intermediary vs. the amount of the hospital's charges for such services) to develop the foundation of a reasonable estimate of what Medicare would pay for Medicaid's outpatient hospital services. For either UPL methodology, the dates of service as reported to the Medicare hospital cost report for Medicare cost or payment must match the dates of service for Medicare charges as reported to the cost report. We currently require that States demonstrate compliance with the UPL for outpatient hospital services using one of the methods described above when the State submits a Medicaid State plan amendment for outpatient services. The UPL demonstration must include a formula that clearly accounts for either the ratio of Medicare cost to Medicare charges multiplied by Medicaid outpatient charges, or the ratio of Medicare payments to Medicare charges multiplied by Medicaid outpatient charges. The State must cite all references from the most recently filed Medicare hospital cost report that are included in the Medicare cost-to-charge ratio or Medicare payment-to-charge ratio portion of the UPL formula. States utilizing a State-specific cost report must demonstrate a clear crosswalk between the proposed Medicare cost report references that may be included in a UPL demonstration and the State's reporting system. For a cost-to-charge UPL demonstration, the link to Medicare is made through reference to ancillary and outpatient hospital services cost center cost-to-charge ratios as found on Worksheet C, Column 9, lines 37—68 or Worksheet D, Part V, Column 1.01, lines 37-68 of the CMS 2552-96. These ratios, which must be determined for each provider, include all cost regardless of payer for all ancillary and outpatient cost centers and charges made to all payers including Medicaid. CMS will not accept a UPL that is inflated by adjusting Medicare's allowed cost as reported on these worksheets. The applicable outpatient hospital service payment references for a payment-to-charge UPL demonstration may be found on Worksheet E, Part B of the CMS 2552-96. While Worksheet E represents what Medicare pays for services within hospitals, States must make certain adjustments in order to reflect equivalent Medicaid outpatient hospital provider services that may be included in the UPL demonstration. For example, all lines that report payments associated with professional services must be removed from the numerator. Additionally, States must ensure that bad debts are not over-reported by including deductibles and coinsurance and reimbursable bad debt in Medicare payments. If deductible and coinsurance are added on to the Medicare payment, the State should remove reimbursable bad debts included in the Medicare payment. The resulting payments reported from Worksheet E should represent allowable Medicare payments for purposes of the UPL demonstration. The source of Medicare charge data, reflected in the ratio's denominator, must come from Worksheet D, Part V and Part VI of the Medicare cost report. We note that a payment-to-charge ratio UPL methodology may not be inclusive of the full scope of outpatient hospital services because payments and charges on the Medicare cost report do not include payments and charges reimbursed on a fee-for-service basis through the Medicare Part B Carrier. For example, durable medical equipment payments and charges are not included on Worksheets E and D. We believe States should have the flexibility to determine the UPL through a comparison of Medicare payment. We also note that the specific line references from the Medicare hospital cost report are subject to change as the Medicare cost report and reporting requirements are modified by CMS. However, only those costs, charges, and payments included in the above worksheets and lines on the CMS 2552-96 (the current standard Medicare hospital cost report form at the issuance of this proposed rule) may be included in the outpatient UPL demonstration for Medicaid services. Depending on which UPL demonstration methodology the State utilizes, the Medicare cost-to-charge ratio or the Medicare payment-to-charge ratio for each provider, this ratio is multiplied by the Medicaid outpatient hospital charges associated with paid claims for each provider as reported to the Medicaid Management Information System (MMIS). We have considered other methods and believe that the use of adjudicated claims excludes outpatient services paid for by Medicare for patients dually eligible for Medicare and Medicaid and helps to assure that charges represent covered Medicaid services. The Medicaid charge data must exclude clinical diagnostic laboratory services, which are limited to a separate UPL under section 1903(i)(7) of the Act, and all professional services. The resulting product is an estimate of the actual cost or payment associated with Medicaid outpatient hospital facility services. The total estimate of Medicaid cost or payment is compared to actual Medicaid paid claims to determine whether outpatient hospital payments exceed the UPL. States may choose to trend the UPL data to the current rate year. Under the proposed rule, we are proposing that all data must be trended uniformly in successive years and use the Medicare Market Basket Index as the trending factor. The State must demonstrate to CMS the effect of the trended data for each successive year from the base year to the current rate year. In addition, the State must demonstrate its methodology for any proposed volume trending. Clinic Upper Payment Limit For privately operated clinics that are not providing outpatient hospital services under § 440.20 (those that would not be paid by Medicare in that setting under OPPS or under an alternative outpatient hospital service payment methodology) but instead are covered under the authority of § 440.90, the UPL is the reasonable estimate of what would be paid for clinic services furnished by the group of facilities under Medicare payment principles. In calculating the reasonable estimate of what Medicare would pay for Medicaid clinic services, we must consider Medicare's reimbursement methods for these services. Medicare does not typically pay for clinic services on the basis of cost as reported by the facility. Rather, through the resource-based relative value (RBRVS) system, used to determine the fee-for-service rate, Medicare recognizes specific clinic costs eligible for reimbursement in a clinic setting. For clinic services, a reasonable estimate of what Medicare would pay for equivalent Medicaid services is the non-facility professional rate for those services. We propose two options for States to demonstrate compliance with the proposed UPL rule for clinic services provided in privately operated facilities, which requires payment that does not exceed a reasonable estimate of what Medicare would pay for equivalent Medicaid services. A State may choose to limit clinic reimbursement to a percentage, not to exceed 100 percent, of what Medicare pays under the non-facility professional rate for equivalent Medicaid services. This first option would require States to include language in the State Plan that specifies the percentage of the Medicare facility fee schedule that would be paid for services in clinic settings. If the State pays a percentage of what Medicare pays under a facility-specific fee schedule or the non-facility professional rate and wishes to make supplemental payments up to 100 percent of what Medicare pays, the State must demonstrate per CPT code what Medicare would pay for equivalent Medicaid services. The calculation may be conducted in the aggregate for clinic type or by specific facilities (end-stage renal disease (ESRD), ambulatory surgical center (ASC), etc.). If a State opts to pay 100 percent of what Medicare pays under a facility-specific fee schedule or the non-facility professional rate for equivalent Medicaid services, the State would not have the option of making supplemental payments. However, the State would not be required to submit documentation for a clinic UPL demonstration. As a second option, a State may develop a fee schedule for Medicaid clinic services, which is not based on the Medicare professional fee schedule. Clinical diagnostic laboratory services may not be included in this demonstration because section 1903(i)(7) of the Act requires that these services not exceed the Medicare fee schedule. For all other clinic services, the State may pay through an encounter rate or a Medicaid specific fee schedule that is not based on Medicare payment principles. Under this option, a UPL demonstration is required to demonstrate that Medicaid clinic reimbursement would not exceed what Medicare would pay for equivalent services. This demonstration must show a comparison by CPT code of the amount paid by Medicare for equivalent Medicaid services. The calculation may be conducted in the aggregate for clinic type or by specific facilities (ESRD, ASC, etc.). Under the second option, a State may pay more than Medicare for some services or facilities, and less than Medicare for others, as long as the aggregate Medicaid payment is equal to or less than the amount that Medicare would pay in the aggregate. We include a special provision for dental services provided in clinics for purposes of UPL calculations because we recognize that Medicare does not generally cover dental services. Since there is no Medicare payment for dental services in clinic settings, we allow the State to incorporate the Medicaid State Plan fee schedule rate as the reasonable estimate of what Medicare would pay for dental services. As a result, dental clinic providers are not excluded from the State's aggregate clinic UPL calculation. III. Provisions of the Proposed Rule A. Overview Under our proposal, the outpatient hospital services covered under the Medicaid program would continue to be set forth in regulation under § 440.20. In addition, the UPL requirements for outpatient hospital services would continue to be defined under § 447.321. However, both current definitions would undergo significant revision to clarify the scope of outpatient hospital services recognized by the Medicaid program and to standardize Medicare cost and payment principles as the basis to accurately determine the reasonable estimate of what Medicare would pay for equivalent Medicaid services in a privately operated outpatient facility. B. General Provisions The revised definitions would begin with existing § 440.20 that describes outpatient hospital services and rural health clinic services. The definition of rural health clinic services would be revised to apply to all clinic settings. In addition, the existing § 447.321 that describes UPLs for Medicaid services provided in outpatient hospitals and clinics would be revised. 1. Outpatient Hospital Services and Rural Health Clinic Services (Proposed § 440.20) Existing § 440.20 sets forth definitions for outpatient hospital services and rural health clinic services. We are proposing to change § 440.20(a) to specify the scope of facility services covered under the Medicaid program. We propose to substitute in § 440.20(a) the term “by an institution” for “in a facility.” We believe this term better describes outpatient hospital settings where Medicaid services may be covered. We proposed to modify the requirements for a participating facility to include those described in § 413.65. Though the current regulation requires that participating facilities meet the requirements for participation in Medicare as a hospital, we included the criteria for provider-based status as a department of an outpatient hospital facility, as described in § 413.65, to recognize all settings where Medicaid outpatient hospital services may be provided. In accordance with § 413.65, a department of a provider must furnish health care services of a same type as those of the main provider under the name, ownership, and administrative and financial control of the main provider. We proposed to add to the current definition a comprehensive list of the scope of services that may be included under the Medicaid outpatient hospital services benefit. The modified definition allows States to cover outpatient services paid for under the Medicare OPPS and all other outpatient hospital facility services that Medicare pays under a fee schedule. These services are limited only to hospital facility services and exclude all professional services. Professional services may continue to be billed under a separate fee schedule rate. The Medicare provision for OPPS covered services may be found at § 419.2(b). Finally, we excluded all services, other than outpatient hospital services, that are covered and paid under medical assistance under section 1905(a) of the Act. For example, services paid for under a fee schedule (for example, Federally Qualified Health Centers) or services that are typically covered under a different section of the State Plan (for example, rehabilitative services). 2. Outpatient Hospital and Clinic Services: Application of Upper Payment Limits (Proposed § 447.321) We propose to modify the existing definition of UPLs for outpatient hospital and clinic services to provide States with clear and accurate guidance on the “reasonable estimate of the amount that would be paid for the services furnished by the group of facilities under Medicare payment principles in subchapter B of this chapter.” The proposed rule would allow States to include within the UPL calculation only services that may be covered under the Medicaid outpatient coverage definition and that appear on the Medicare hospital cost report. All hospitals throughout the nation report cost and charge data through Medicare hospital cost reports. Since these reports reflect Medicare data for all outpatient hospital payments made by Medicare, we require States to reference the Medicare hospital cost reports, or a State cost report for which the State can clearly demonstrate gathers data directly from the proposed standardized Medicare cost report references, when calculating the Medicaid outpatient UPL for privately operated facilities. From the Medicare cost reports, States may use payment-to-charge ratios or cost-to-charge ratios and apply the ratios to Medicaid outpatient hospital charges from the MMIS to determine the outpatient UPL. We base the UPL calculation on Medicare hospital cost reports because we believe they provide the most accurate reflection of what Medicare would pay for equivalent Medicaid outpatient hospital services. Medicare pays on a different basis for clinic services. These rates incorporate some of the facility costs and are higher than traditional fee schedule payments for professional services. States may continue to calculate the reasonable estimate of what Medicare would pay for equivalent Medicaid clinic services using these rates. However, States must demonstrate a clinic UPL by either specifying a percentage, not to exceed 100 percent, of the Medicare rate that is paid by Medicaid. Or a State can demonstrate that, in the aggregate, Medicaid-specific payment rates that are not directly related to Medicare rates are less than what Medicare would pay based on a comparison of what Medicaid pays by CMS Common Procedure Coding System
(CPT)code to the amount paid by Medicare for equivalent Medicaid services. In addition, Medicare generally does not reimburse for dental services. With this in mind, we added a provision allowing States to use the Medicaid fee schedule rate for dental services to calculate the UPL for such services. This provision would allow dental services to be included in the aggregate clinic UPL calculation, and, thus, allow dental providers to be eligible for supplemental payments. Since Medicare generally does not pay for dental services, we believe this is the best alternative for inclusion of dental services in the clinic UPL calculation. IV. Collection of Information Requirements This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 35). V. Response to Comments Because of the large number of public comments we normally receive on **Federal Register** documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document. VI. Regulatory Impact Statement We have examined the impact of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act
(RFA)(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-04), and Executive Order 13132. Due to a lack of available data, we cannot determine the fiscal impact of this proposed rule. The proposed rule defines the scope of services that may be reimbursed under the outpatient hospital benefit category covered in the Medicaid State plan. In addition, the rule clarifies the appropriate methods States may use to calculate the Medicaid upper payment limit for those services paid to private service providers. CMS does not intend to eliminate or limit the scope of Medicaid services that are defined under Title XIX of the Act. We have reviewed the effects of the proposed rule and have determined that it would clarify current vague regulatory language but would not significantly alter current practices in most States. This proposed rule is a proactive attempt to clarify and clearly define regulatory language and prevent over calculation of the outpatient hospital upper payment limit. Therefore, we do not believe the proposed rule would have significant economic effects. Over the past 4 years, CMS has approved outpatient hospital reimbursement methodologies submitted by 32 States. As part of our review process, we have determined that only one of the 32 States currently defines non-hospital services as part of the outpatient hospital Medicaid State plan service benefit. Furthermore, with respect to the one State that CMS believes currently includes non-hospital services under the outpatient hospital benefit category, this rule would not impact the rates of payment for these services under the State plan. While the current regulation might permit payment at a higher outpatient hospital payment rate, that State currently pays for such services at the same rate that is paid for such services outside of the outpatient hospital benefit category. The rule would have an undetermined effect on the aggregate upper payment limit for private outpatient hospital services within the State. As part of the upper payment limit calculation the State includes the non-hospital services. This effectively raises the limit that Medicaid may pay to hospitals. The rule would prevent the State from defining these services as outpatient hospital services and including them in the UPL calculation. States calculate the UPL, the reasonable estimate of Medicare payment for equivalent Medicaid services, in the aggregate for all Medicaid services provided by all private providers. This total for all providers is reduced by actual Medicaid payments in a rate year to determine a pool of funding that may be distributed as supplemental payments to outpatient hospital providers. Supplemental payments for outpatient hospital services up to the UPL may be distributed to any hospital within the private category. States are not required to equitably distribute supplemental payments among providers or exhaust the available supplemental payment pool. Considering the UPL is calculated in the aggregate for all outpatient hospital service for all private providers, it is impossible to isolate the exact fiscal impact of removing non-hospital services from the UPL calculation. Even if the payments for these services could be isolated in a particular year, the difference between the reasonable estimate of Medicare payment for a particular service and Medicaid payments for these services could vary drastically from year-to-year as payment amounts for services change within each program. Additionally, the UPL calculation considers the volume of a particular service rendered to Medicaid beneficiaries, which also varies between rate years. Therefore, we cannot determine the exact fiscal impact of removing non-hospital services from the private UPL calculation within this one State. We believe the fiscal impact would be minimal because most States historically have not made supplemental payments to private providers up to the upper payment limit. In fact, the State that we suspect could be affected by this rule has recently reported paying approximately $68 million under the outpatient hospital UPL to private facilities. We do not believe the services that would be removed by this proposed rule would cause such a significant impact on the UPL calculation. We invite public comment on the potential impact of the rule. Executive Order 12866 directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize the net benefits (including potential economic, environmental, public health and safety effects, distributive impacts and equity). A regulatory impact analysis
(RIA)must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). The rule proposes to clarify the definition of outpatient hospital services and the UPL for these services to provide additional guidance to States that interpret these definitions. Under the revised regulations, States would not be prevented from covering Medicaid services under the State Plan. Rather, a few States may need to move services that are not outpatient in nature, as defined by Medicare, to the appropriate coverage and payment methodology in the State Plan. With this in mind, the rule would not reach the economic threshold and thus is not considered a major rule. The RFA requires agencies to analyze options for regulatory relief of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year. Individuals and States are not included in the definition of a small entity. We are not preparing an analysis for this RFA because we have determined that this rule would not have a significant economic impact on a substantial number of small entities. In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan Statistical Area and has fewer than 100 beds. We are not preparing an analysis for section 1102(b) of the Act because we have determined that this rule would not have a significant impact on the operations of a substantial number of small rural hospitals. Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in expenditures in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. The proposed rule would not prevent States from receiving FFP for Medicaid covered services. Therefore, the net change in appropriate FFP that can be received by States for Medicaid expenditures is economically insignificant. The proposed rule would not result in anticipated costs or benefits to the private sector. Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. Because the proposed rule seeks to curb inappropriate Federal revenue maximization, the proposed rule would not impose any additional costs to States. Again, States may receive FFP for all appropriate Medicaid expenditures for covered services. In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget. List of Subjects 42 CFR Part 440 Grant programs—health, Medicaid. 42 CFR Part 447 Accounting, Administrative practice and procedure, Drugs, Grant programs—health, Health facilities, Health professions, Medicaid, Reporting and recordkeeping requirements, Rural areas. For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services would amend 42 CFR chapter IV as set forth below: PART 440—SERVICES GENERAL PROVISIONS 1. The authority citation for part 440 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). 2. Section 440.20 is amended by revising the section heading and paragraph
(a)to read as follows: § 440.20 Outpatient clinic and hospital facility services and rural health clinic services.
(a)Outpatient hospital services means preventive, diagnostic, therapeutic, rehabilitative, or palliative services that—
(1)Are furnished to outpatients;
(2)Are furnished by or under the direction of a physician or dentist;
(3)Are furnished in a facility that—
(i)Is licensed or formally approved as a hospital by an officially designated authority for State standard-setting; and
(ii)Meets the requirements for participation in Medicare as a hospital;
(4)Are limited to the scope of facility services that—
(i)Would be included, in the setting delivered, in the Medicare outpatient prospective payment system
(OPPS)as defined under § 419.2(b) of this chapter or are paid by Medicare as an outpatient hospital service under an alternate payment methodology;
(ii)Are furnished by an outpatient hospital facility, including an entity that meets the standards for provider-based status as a department of an outpatient hospital set forth in § 413.65 of this chapter;
(iii)Are not covered under the scope of another Medical Assistance service category under the State Plan; and
(5)May be limited by a Medicaid agency in the following manner: A Medicaid agency may exclude from the definition of “outpatient hospital services” those types of items and services that are not generally furnished by most hospitals in the State. PART 447—PAYMENTS FOR SERVICES 3. The authority citation for part 447 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). 4. Section 447.321 is amended by revising paragraphs
(a)and
(b)to read as follows: § 447.321 Outpatient hospital and clinic services: Application of upper payment limits.
(a)*Scope.* This section applies to rates set by the agency to pay for outpatient services furnished by hospitals and clinics within one of the following categories:
(1)State government operated facilities (that is, all facilities that are operated by the State) as defined at § 433.50(a) of this chapter.
(2)Non-State government operated facilities (that is, all governmentally operated facilities that are not operated by the State) as defined at § 433.50(a) of this chapter.
(3)Privately operated facilities that is, all facilities that are not operated by a unit of government as defined at § 433.50(a) of this chapter.
(b)*General rules.*
(1)For privately operated facilities, upper Payment Limit
(UPL)refers to a reasonable estimate of the amount that would be paid for the services furnished by the group of facilities under Medicare payment principles in subchapter B of this chapter.
(i)*Private Outpatient Hospital Services.* Services included in the calculation of the private outpatient hospital UPL must meet all of the criteria for outpatient hospital services defined in § 440.20 of this chapter. A reasonable estimate of the amount that would be paid for outpatient hospital services under Medicare payment principles is determined through—
(A)Calculation of estimated Medicare payment for Medicaid equivalent outpatient services reimbursed under current Medicare payment systems, including— ( *1* ) Outpatient hospital services paid under the Medicare outpatient prospective payment system as defined under § 419.2 of this chapter; and ( *2* ) Outpatient hospital services or clinic services paid under a Medicare outpatient hospital or clinic fee schedule or alternate payment methodology.
(B)The estimated Medicare payment may be based on the Medicare cost report, or an accepted State cost report that reports the same data from the Medicare cost report references in paragraphs (b)(1)(i)(B)(1) through (b)(1)(i)(B)(2) of this section, as the source to determine either: ( *1* ) The ratio of costs-to-charges for all services included in the outpatient hospital UPL calculation. The Medicare cost-to-charges ratios for outpatient hospital services are found on Worksheet C and Worksheet D, Part V of the Medicare cost report; or ( *2* ) The ratio of payments-to-charges for all services included in the outpatient hospital UPL calculation. Medicare outpatient payments are found on Worksheet E, Part B and outpatient charges are found on Worksheet D, Part V of the Medicare cost report. ( *3* ) The charge ratios in paragraphs (b)(1)(i)(B)(1) through (b)(1)(i)(B)(2) of this section for Medicare equivalent services are multiplied by Medicaid charges as reported to the Medicaid Management Information System (MMIS).
(ii)*Private Clinic Services.* For privately operated clinics that are not providing outpatient hospital services under § 440.20 (those that would not be paid by Medicare in that setting under OPPS or under an alternative outpatient hospital service payment methodology), the reasonable estimate of what Medicare would pay for equivalent Medicaid services may be determined through:
(A)A State Plan reimbursement methodology for covered services that is a defined percentage, not to exceed 100 percent, of what Medicare pays under the non-facility fee schedule; or
(B)For reimbursement methodologies based upon a Medicaid-specific fee schedule or encounter rate, a comparison by CPT code of the amount paid by Medicare for equivalent Medicaid services. The calculation may be conducted in the aggregate for clinic type or by specific facilities (ESRD, ASC, etc). Clinical diagnostic laboratory services or any other services for which the Act defines a separate upper limit for Medicaid reimbursement must be excluded from the clinic UPL.
(C)For dentists providing services in clinics, the clinic UPL calculation may include payment amounts at the amount that Medicaid would pay outside of the facility. (Catalog of Federal Domestic Assistance Program No. 93.778, Medical Assistance Program) Dated: March 15, 2007. Leslie V. Norwalk, Acting Administrator, Centers for Medicare & Medicaid Services. Approved: June 20, 2007. Michael O. Leavitt, Secretary. Editorial Note: This document was received at the Office of the Federal Register on September 24, 2007. [FR Doc. E7-19154 Filed 9-27-07; 8:45 am] BILLING CODE 4120-01-P DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 648 [Docket No. 070827484-7485-01] RIN 0648-AV99 Fisheries of the Northeastern United States; Recreational Management Measures for the Summer Flounder Fishery; Fishing Year 2008 AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Proposed rule; request for comments. SUMMARY: NMFS proposes coastwide summer flounder recreational management measures to administratively complete the rulemaking process initiated in March 2007. This action is necessary to propose appropriate coastwide management measures to be in place on January 1, 2008, following the expiration of the current state-by-state conservation equivalency management measures on December 31, 2007. The intent of these measures is to prevent overfishing of the summer flounder resource during the interim between the aforementioned expiration of the 2007 recreational measures and the implementation of measures for 2008. DATES: Comments must be received by 5 p.m. local time, on October 15, 2007. ADDRESSES: You may submit comments by any of the following methods: • E-mail: *0648-AV99@noaa.gov* . Include in the subject line the following identifier: “Comments on 2008 Summer Flounder Interim Recreational Measures.” • Federal e-rulemaking portal: *http://www.regulations.gov* • Mail: Patricia A. Kurkul, Regional Administrator, NMFS, Northeast Regional Office, One Blackburn Drive, Gloucester, MA 01930. Mark the outside of the envelope: “Comments on 2008 Summer Flounder Interim Recreational Measures.” • Fax:
(978)281-9135. Copies of the Supplemental Environmental Assessment, as well as the original Environmental Assessment, Regulatory Impact Review, and Initial Regulatory Flexibility Analysis (EA/RIR/IRFA) completed for the 2007 recreational management measures are available from Daniel T. Furlong, Executive Director, Mid-Atlantic Fishery Management Council, Room 2115, Federal Building, 300 South New Street, Dover, DE 19901-6790. The Supplemental Environmental Assessment is also accessible via the Internet at *http://www.nero.noaa.gov* . FOR FURTHER INFORMATION CONTACT: Michael P. Ruccio, Fishery Policy Analyst,
(978)281-9104. SUPPLEMENTARY INFORMATION: This proposed action is necessary to complete the final detail of the 2007 summer flounder recreational management measures rulemaking and should not be confused with upcoming process to develop the 2008 recreational management measures. The Mid-Atlantic Fishery Management Council (Council) will begin development of the 2008 recreational management measures, based on updated assessment information and 2007 fishery information, through its Monitoring Committee meeting in November 2007. The Council will consider the Monitoring Committee's recommendations for 2008 management measures during its December 2007 meeting in Secaucus, NJ. The following summarizes the details of several events that transpired before and during the initial recreational management measures rulemaking that brought about the need for this action. 2007 Recreational Management Measures Options Under the Summer Flounder, Scup, and Black Sea Bass Fishery Management Plan (FMP), the Council may recommend and NMFS may approve one of two approaches for managing the summer flounder recreational fishery: State-by-state conservation equivalency with a precautionary default backstop approved by the Atlantic States Marine Fisheries Commission (Commission), which cooperatively manages summer flounder in state waters, and NMFS; or coastwide management measures. The FMP requires that the Council review updated assessment and fishery information on an annual basis and recommend to NMFS both a Total Allowable Landings
(TAL)and recreational management measures. Under conservation equivalency, any state that fails to provide measures for Commission and NMFS review, or whose measures are found not to be sufficient to achieve the required reduction in recreational landings, is bound to the precautionary default measures. The precautionary default is set at or below the level of reduction needed for the state with the highest reduction level. Coastwide measures are designed to achieve the necessary reduction in landings for the entire coast. Council's Proposed 2007 Measures The Council indicated, during its December 2006 meeting, that its preferred alternative for 2007 summer flounder recreational fishery management was conservation equivalency. Under this approach, states craft measures that produce the required state-by-state reduction in recreational landings to constrain landings within their respective targets. NMFS implemented conservation equivalency to manage the 2007 recreational summer flounder fishery, consistent with the Council's recommendation, on June 1, 2007 (72 FR 30492). The precautionary default measures were not required for any state, as both the Commission and NMFS approved and implemented the individual states' measures for equivalent reductions. Detailed information on the 2007 conservation equivalent and precautionary default measures are found in the June 1, 2007, final rule and is not repeated here. The Council proposed, as the non-preferred alternative for the 2007 summer flounder recreational fishery management, coastwide measures of a 19-inch (48.26-cm) minimum fish size, a 1-fish possession limit, and a year-round season. In a year when conservation equivalency is implemented, the coastwide measures are not in effect during the fishing year but become the regulatory default measures in place on January 1 in the year after conservation equivalency has expired. These measures remain effective until superseded by new measures, implemented by NMFS as part of the annual management measures review conducted by the Council, as required by the FMP. Events that Transpired Before and During Rulemaking Requiring Change to Proposed Coastwide Measures The 2007 summer flounder TAL was increased by NMFS from 12.983 million lb (5,889 mt), as published in the **Federal Register** on December 14, 2006 (71 FR 75134), to 17.112 million lb (7,762 mt) on January 19, 2007 (72 FR 2458). The increase in TAL was the result of the Secretary of Commerce's determination that the rebuilding time line for summer flounder could be extended for 3 years, consistent with authority granted in the Magnuson-Stevens Fishery Conservation and Management Reauthorization Act of 2006 (Reauthorized Magnuson-Stevens Act). The rationale for the respective TALs, including the justifications for increasing the summer flounder rebuilding time line and increasing the 2007 TAL, are included within the individual rules and are not repeated here. The development of the 2007 summer flounder recreational management measures occurred concurrently with the passage of the Reauthorized Magnuson-Stevens Act by Congress, analysis of recreational management measures alternatives by Council and NMFS staff, the December 2006 Council meeting, and the aforementioned increase in TAL following the Secretarial determination to extend the summer flounder rebuilding time line. Because of this succession of overlapping events from December 2006 through January 2007, during the development of recreational management measures, insufficient time was available for the development of coastwide management alternatives based on the higher TAL and subsequently higher recreational harvest limit before NMFS published the proposed 2007 recreational management measures (72 FR 12158, March 15, 2007). Individual states do not begin to develop conservation equivalency measures until after the Council and Commission's Summer Flounder Management Board (Board) have identified conservation equivalency as the preferred management system for the upcoming year. The Council and the Board identified conservation equivalency as their preferred alternative for 2007 management during the December 2006 Council meeting. NMFS's emergency action to increase the 2007 TAL occurred in mid-January 2007. As a result, states were able to craft their 2007 conservation equivalency proposals consistent with the level of reduction necessary to constrain recreational landings to the targets resulting from the increased 17.112-million-lb (7,762-mt) TAL. However, the analysis had already been conducted for the coastwide measures alternative based on the recreational harvest limit associated with the lower 12.983-million-lb (5,889-mt) TAL and was not revised prior to the publication of the recreational management measures proposed rule (72 FR 12158, March 15, 2007). In response to the proposed rule, members of the public commented that the proposed coastwide measures of a 19-inch (48.26-cm) minimum fish size, 1-fish possession limit, and year-round season would be unduly restrictive if implemented, as it would constrain landings to approximately 55 percent of the recreational harvest limit under the increased 17.112-million-lb (7,762-mt) TAL. This issue was rendered moot for 2007 as conservation equivalency was implemented by NMFS instead of the coastwide measures (72 FR 30492, June 1, 2007). However, on January 1, 2008, after conservation equivalency has expired for the 2007 fishing year, the coastwide measures will become the interim default measures and remain in place until new recreational management measures are developed and implemented as part of the annual recreational management measures review in late spring/early summer 2008. NMFS indicated in the 2007 recreational management measures final rule (72 FR 30492, June 1, 2007) that a separate notice and comment rulemaking, to propose and implement an coastwide measure that is based on the increased TAL to serve as the interim 2008 management measures after conservation equivalency has expired, would be undertaken. This proposed rule is the initiation of that action, which is largely administrative and designed to complete the normal recreational management measures rulemaking process that had been constrained by the options available for consideration during the initial rulemaking that resulted in conservation equivalency for 2007. Proposed Interim Coastwide Measure The Commission's Technical Committee
(TC)conducted analysis on coastwide measure alternatives after the implementation of the increased TAL. Several options considered by the TC were designed to constrain landings to or below the increased 2007 recreational harvest limit of 2,421,460 fish. The TC provided analysis that indicated an 18.5-inch (46.99-cm) minimum fish size with a 4-fish possession limit and a year-round season would constrain landings to 90 percent of the harvest limit (2,181,735 fish). NMFS proposes to now implement these measures as the 2007 coastwide measures. As a result, these measures, if adopted, would complete the normal regulatory process that occurs when conservation equivalency is utilized to manage the summer flounder recreational fishery, as was the case for 2007. These measures, if adopted, will replace the existing coastwide measures regulatory language of a 17-inch (43.18-cm) minimum fish size, a 4-fish possession limit, and no closed season, and serve as the default management measures in place on January 1, 2008, after conservation equivalent measures have expired. The 2008 TAL and the resulting recreational harvest limit will not be finalized and the Council will not recommend recreational harvest measures until December 2007. It is not certain, at this time, if the coastwide measure will require revision as part of the updated 2008 recreational management measures, as the annual development of those measures will not begin until later this year. These measures, if implemented, should be sufficiently risk averse as interim measures until new measures, based on the updated 2007 stock assessment, are developed and implemented. Summer flounder are typically found offshore during colder winter months and only limited recreational fisheries occur in the southern range of the stock during spring. Marine Recreational Fisheries Statistical Survey (MRFSS) data from 1994-1998 show that less than 0.9-percent of the annual harvest occurs in the first two MRFSS data collection periods (called waves) of the year (January-April). Approximately 28 percent of the coastwide summer flounder harvest occurs in Wave 3 (May-June). The difference in implementation time between conservation equivalency and coastwide measures is the time it takes states to develop, and get approved, individual measures under conservation equivalency, should that management method be utilized in 2008. Based on recent years' development and rulemaking schedule when conservation equivalency has been utilized for summer flounder recreational management measures, it is expected that updated measures, based on 2007 recreational landings and adjusted for any quota overages, would be in place before Wave 4 (July-August) and the bulk of summer flounder recreational fisheries begin in 2008. If different coastwide measures are recommended by the Council and Commission and implemented by NMFS for 2008 management, it is expected that those measures would be in place during Wave 2 (March-April 2008). Classification NMFS has determined that the proposed rule is consistent with the FMP and preliminarily determined that the rule is consistent with the Magnuson-Stevens Fishery Conservation and Management Act and other applicable laws. This proposed rule has been determined to be not significant for purposes of Executive Order 12866. This proposed rule does not duplicate, overlap, or conflict with other Federal rules. An IRFA was prepared for the 2007 recreational management measures rulemaking process, as required by section 603 of the RFA. The IRFA describes the economic impact this proposed rule, if adopted, would have on small entities. A description of the action, why it is being considered (i.e., what problem it addresses), and the legal basis for this action are contained in the initial recreational management measures proposed rule (72 FR 12158, March 15, 2007 ) and at the beginning of that rule's preamble and in the SUMMARY section of this proposed rule's preamble. A detailed summary of the analysis conducted is included in the initial recreational management measures proposed rule (72 FR 12158, March 15, 2007). An additional summary follows. A copy of the complete IRFA is available from the Council (see ADDRESSES ). The proposed action could affect any recreational angler who fishes for summer flounder, in the EEZ or on a party/charter vessel issued a Federal permit for summer flounder. However, the IRFA focuses upon the impacts on party/charter vessels issued a Federal permit for summer flounder because these vessels are considered small business entities for the purposes of the Regulatory Flexibility Act, i.e., businesses with gross revenues of up to $6.5 million. These small entities can be specifically identified in the Federal vessel permit database and would be impacted by the recreational measures, regardless of whether they fish in Federal or state waters. Although individual recreational anglers are likely to be impacted, they are not considered small entities under the RFA. Also, there is no permit requirement to participate in these fisheries; thus, it would be difficult to quantify any impacts on recreational anglers in general. The proposed measures could affect any of the 1,006 vessels possessing a Federal charter/party permit for summer flounder in 2005, the most recent year for which complete permit data are available. However, only 66 of these vessels reported active participation in the recreational summer flounder fishery in 2005. In the IRFA, the no-action alternative (i.e., Alternative 1, maintenance of the regulations as codified) is defined as continuation of the following measures for summer flounder: Coastwide measures of a 17-inch (43.18-cm) minimum fish size; a 4-fish possession limit; and no closed season (i.e., season of January 1 through December 31). In consideration of the recreational harvest limits established for the 2007 fishing year and necessary for the beginning of the 2008 fishing year, taking no action in the summer flounder fishery would be inconsistent with the goals and objectives of the FMP and its implementing regulations because the no-action alternative would not have been expected to prevent the 2007 summer flounder recreational harvest limits from being exceeded. In addition, it is unlikely that these measures would serve as adequate interim regulatory measures for 2008 until appropriate measures, either conservation equivalency or different coastwide measures, are implemented to constrain harvest within the yet to be established 2008 recreational harvest limit. The impacts of the Council's originally proposed summer flounder coastwide alternative (i.e., Alternative 2) for a 19-inch (48.26-cm) minimum fish size, a 1-fish possession limit, and no closed season, were evaluated using the quantitative methods of the IRFA as summarized in the initial proposed rule (72 FR 12158, March 15, 2007). Impacted trips were defined under Alternative 2 as individual angler trips taken aboard party/charter vessels in 2006 that landed at least one summer flounder smaller than 19 inches (48.26 cm), or that landed more than one summer flounder. The analysis concluded that the measures would affect 4.13 percent of the party/charter vessel trips in the NE, including those trips where no summer flounder were caught. However, the Alternative 2 measures were designed to constrain recreational landings to the original recreational harvest limit resulting from the pre-extended rebuilding time frame TAL of 12.983 million lb (5,889 mt). Under the increased TAL implemented on January, 19, 2007, following the Secretarial determination that the rebuilding time frame could be extended and the 2007 TAL increased, further analysis indicated that the Alternative 2 measures would constrain recreational landings to 55 percent of the larger recreational harvest limit resulting from increasing the TAL. While this would satisfy both the objectives of the FMP and the Magnuson-Stevens Act, the public submitted comments in response to the 2007 recreational management measures proposed rule (72 FR 12158, March 15, 2007) that the Alternative 2 measures were unduly restrictive. NMFS agreed and indicated at that time that other alternatives would be evaluated for their effectiveness in allowing a higher percentage of the recreational harvest limit under the increased TAL to be attained while constraining landings to the 2007 limit and still ensuring compliance with the FMP and Magnuson-Stevens Act. The measures detailed in this proposed rule (i.e., Alternative 3) for an 18.5-inch (46.99-cm) minimum fish size with a 4-fish possession limit and a year-round season, would constrain landings to 90 percent of the harvest limit (2,181,735 fish). Again, the IRFA contained analysis on the impact of the Alternative 3 size limit for 2007. Under Alternative 3, impacted trips are defined as trips taken in 2006 that landed at least one summer flounder smaller than 18.5 inches (46.99 cm) or landed more than one summer flounder. The analysis concluded that implementation of the Alternative 3 measures could affect 4.06 percent of the party/charter vessel trips in the NE, including those trips were no summer flounder were caught. While the percent of potentially affected trips is only slightly different, the Alternative 3 measures would afford additional fish to be kept by anglers (i.e., 4 fish as compared to 1 fish) and would allow a greater number of fish to be landed under the increased recreational harvest limit and thereby is the alternative with the least economic impact on small entities while still achieving the required objectives of the FMP and the Magnuson-Stevens Act. Compared to the measures implement through conservation equivalency for 2007, the Alternative 3 measures would provide less restrictive minimum fish sizes for Rhode Island and New York, while maintaining the same size limit for Virginia. All other states' measures for 2007 were smaller than the Alternative 3 minimum fish size of 18.5 inches (46.99 cm). A 4-fish possession limit would maintain the same limits in place for New York, Delaware, and Maryland; all other states' possession limits were higher than 4-fish under conservation equivalency. The year-round season would be equal to or longer than the 2007 state measures implemented under conservation equivalency. Under the Council's proposed coastwide measures (i.e., Alternative 2: A19-inch (48.26-cm) minimum fish size, a 1-fish possession limit, and no closed season), each state's conservation equivalency measures were smaller than 19 inches (48.26 cm) except New York. Each state had possession limits higher than one fish, and four states (Rhode Island, Connecticut, New Jersey, and Virginia) had seasons that were less shorter January 1-December 31; all other states had year-long seasons. There are no new reporting or recordkeeping requirements contained in any of the alternatives considered for this action. List of Subjects in 50 CFR Part 648 Fisheries and Fishing. Dated: September 21, 2007. Samuel D. Rauch III, Deputy Assistant Administrator For Regulatory Programs,National Marine Fisheries Service. For the reasons set out in the preamble, 50 CFR part 648 is proposed to be amended as follows: PART 648—FISHERIES OF THE NORTHEASTERN UNITED STATES 1. The authority citation for part 648 continues to read as follows: Authority: 16 U.S.C. 1801 *et seq.* 2. In § 648.103, paragraph
(b)is revised to read as follows: § 648.103 Minimum fish sizes.
(b)Unless otherwise specified pursuant to § 648.107, the minimum size for summer flounder is 18.5 inches (46.99 cm) TL for all vessels that do not qualify for a moratorium permit, and charter boats holding a moratorium permit if fishing with more than three crew members, or party boats holding a moratorium permit if fishing with passengers for hire or carrying more than five crew members. 3. In § 648.105, the first sentence of paragraph
(a)is revised to read as follows: § 648.105 Possession restrictions.
(a)Unless otherwise specified pursuant to § 648.107, no person shall possess more than four summer flounder in, or harvested from, the EEZ, unless that person is the owner or operator of a fishing vessel issued a summer flounder moratorium permit, or is issued a summer flounder dealer permit. * * * [FR Doc. E7-19133 Filed 9-27-07; 8:45 am] BILLING CODE 3510-22-S DEPARTMENT OF COMMERCE National Oceanic and Atmospheric Administration 50 CFR Part 660 [Docket No. 070907502-7503-01] RIN 0648-XB01 Fisheries Off West Coast States; Coastal Pelagic Species Fisheries; Annual Specifications AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce. ACTION: Proposed rule. SUMMARY: NMFS proposes a regulation to implement the annual harvest guideline
(HG)for Pacific mackerel in the U.S. exclusive economic zone
(EEZ)off the Pacific coast for the fishing season of July 1, 2007, through June 30, 2008. This HG has been calculated according to the regulations implementing the Coastal Pelagic Species
(CPS)Fishery Management Plan
(FMP)and establishes allowable harvest levels for Pacific mackerel off the Pacific coast. DATES: Comments must be received by October 29, 2007. ADDRESSES: You may submit comments on this proposed rule, identified by 0648-XB01 by any of the following methods: • E-mail: *0648-XB01.SWR@noaa.gov* . Include the identifier “0648-XB01” in the subject line of the message. • Federal e-Rulemaking portal: *http://www.regulations.gov* . Following the instructions for submitting comments. • Mail: Rodney R. McInnis, Regional Administrator, Southwest Region, NMFS, 501 West Ocean Blvd., Suite 4200, Long Beach, CA 90802-4213. • Fax:
(562)980-4047. Copies of the report *Pacific Mackerel (Scomber japonicus) Stock Assessment for U.S. Management in the 2007-2008 Fishing Year* may be obtained from the Southwest Regional Office (see ADDRESSES ). FOR FURTHER INFORMATION CONTACT: Joshua Lindsay, Southwest Region, NMFS,
(562)980-4034. SUPPLEMENTARY INFORMATION: The CPS FMP, which was implemented by publication of the final rule in the **Federal Register** on December 15, 1999 (64 FR 69888), divides management unit species into two categories: actively managed and monitored. Harvest guidelines for actively managed species (Pacific sardine and Pacific mackerel) are based on formulas applied to current biomass estimates. Biomass estimates are not calculated for species that are only monitored (jack mackerel, northern anchovy, and market squid). During public meetings each year, the biomass for each actively managed species within the CPS FMP is presented to the Pacific Fishery Management Council's (Council) Coastal Pelagic Species Management Team (Team), the Council's Coastal Pelagic Species Advisory Subpanel (Subpanel) and the CPS Subcommitee of the Scientific and Statistical Committee (SSC). At that time, the biomass, the acceptable biological catch
(ABC)and the status of the fisheries are reviewed and discussed. This information is then presented to the Council along with HG recommendations and comments from the Team and Subpanel. Following review by the Council and after hearing public comments, the Council makes its HG recommendation to NOAA's National Marine Fisheries Service (NMFS). The annual HG is published in the **Federal Register** as close as practicable to the start of the fishing season. The Pacific mackerel season begins on July 1 and ends on June 30 of each year. A full assessment for Pacific mackerel was conducted this year and reviewed by a Stock Assessment Review
(STAR)Panel in La Jolla, CA, May 1-4. Public meetings of the Team and Subpanel were then held May 8-10 in Long Beach, CA. During these meetings the STAR Panel report and current stock assessment for Pacific mackerel, which included a preliminary biomass estimate and ABC, were presented and reviewed in accordance with the procedures of the FMP. Based on a total stock biomass estimate of 359,290 metric tons (mt), the ABC for U.S. fisheries for the 2007/2008 management season is 71,629 mt. The estimated stock biomass for the 2006/2007 season was 112,700 mt, resulting in an ABC of 19,845 mt. The increase in ABC this management season is the result of changes to the modeling parameters recommended by the STAR Panel during their review of the current stock assessment for Pacific mackerel; adjusting stock recruitment variability to be more consistent with the biology of the species and an improvement in the catch-per-unit-effort in the commercial passenger fishing vessel time series. In June, the Council held a public meeting in Foster City, CA, during which time they reviewed the current stock assessment, biomass numbers and ABC and heard statements from the SSC, Team and Subpanel (72 FR 29130). The SSC endorsed the assessment as the best available science for use in management. Both the Team and Subpanel recommended setting the 2007/2008 HG below ABC and no higher than 40,000 mt. This HG recommendation is still roughly double the HG adopted by the Council for the 2006/2007 fishing year (19,845 mt) and much greater than the average U.S. harvest since the year 2000 (5,700 mt). Setting the harvest guideline substantially below the ABC was recommended as a precautionary measure in response to uncertainty associated with changes to assessment modeling parameters and the reference in the FMP that the domestic fishery appears to be market limited to roughly 40,000 mt. Following the SSC, Team and Subpanel reports the Council adopted an HG of 40,000 mt for the 2007-2008 fishing year. The Council also adopted the Subpanel recommendation that in the event that the 40,000 mt is attained by the fishery, that Pacific mackerel fishing be closed to directed harvest and only incidental harvest be allowed. The proposed incidental fishery would be constrained to a 45 percent by weight incidental catch rate when Pacific mackerel are landed with other CPS, except that up to one metric ton of Pacific mackerel could be landed without landing any other CPS. The Council may schedule an inseason review of the Pacific mackerel fishery for the March or April 2008 Council meeting, in order to consider either releasing a portion of the incidental allotment to the directed fishery or further constraining incidental landings to ensure total harvest remains below the ABC. The size of the Pacific mackerel population was estimated using the Age-Structured-Assessment-Program
(ASAP)stock assessment model. ASAP was recommended as the most appropriate framework for conducting the Pacific mackerel assessment for the 2007/2008 management year by the STAR panel which met in May of 2007 at the Southwest Fisheries Science Center in La Jolla, California. Information on the fishery and the stock assessment are found in the report *Pacific mackerel (Scomber japonicus) Stock Assessment for U.S. Management in the 2007-08 Fishing Season* (see ADDRESSES ). The harvest control rule formula in the FMP uses the following factors to determine the ABC: 1. *Biomass.* The estimated stock biomass of Pacific mackerel age one and above for the 2007/2008 management season is 359,290 metric tons (mt). 2. *Cutoff.* This is the biomass level below which no commercial fishery is allowed. The FMP established this level at 18,200 mt. 3. *Distribution.* The portion of the Pacific mackerel biomass estimated in the U.S. EEZ off the Pacific coast is 70 percent and is based on the average historical larval distribution obtained from scientific cruises and the distribution of the resource according to the logbooks of aerial fish-spotters. 4. *Fraction.* The harvest fraction is the percentage of the biomass above 18,200 mt that may be harvested. The FMP established this at 30 percent. Classification Pursuant to section 304 (b)(1)(A) of the Magnuson-Stevens Act, the NMFS Assistant Administrator has determined that this proposed rule is consistent with the CPS FMP, other provisions of the Magnuson-Stevens Act, and other applicable law, subject to further consideration after public comment. These proposed specifications are exempt from review under Executive Order 12866. The Chief Counsel for Regulation of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration that this proposed rule, if adopted, would not have a significant economic impact on a substantial number of small entities as follows: The purpose of this proposed rule is to implement the 2007/2008 harvest guideline for Pacific mackerel in the EEZ off the U.S. West Coast. The CPS FMP and its implementing regulations require NMFS to set an annual harvest guideline for the Pacific mackerel fishery based on the harvest formula in the FMP. The harvest formula is applied to the current stock biomass estimate to determine the ABC, from which the harvest guideline is then derived. Pacific mackerel harvest is a component of the CPS fisheries off the U.S. West Coast which includes the fisheries for Pacific sardine, Northern anchovy, Jack mackerel, and Market squid. Pacific mackerel are principally caught off southern California within the limited entry portion (south of 39 N. latitude; Point Arena, California) of the fishery. Sixty-one vessels are currently permitted in the Federal CPS limited entry fishery off California. These vessels are considered small business entities by the U.S. Small Business Administration since the vessels do not have annual receipts in excess of $4.0 million. This proposed rule has an equal effect on all of these small entities and therefore will impact a substantial number of these small entities in the same manner. There would be no economic impacts resulting from disproportionality between small and large business entities under the proposed action. The profitability of these vessels as a result of this proposed rule is based on the average Pacific mackerel ex-vessel price per mt. NMFS used average Pacific mackerel ex-vessel price per mt to conduct a profitability analysis because cost data for the harvesting operations of CPS finfish vessels was unavailable. For the 2006/2007 fishing year, the harvest guideline was set at 19,845 mt with an estimated ex-vessel value of approximately $2.7 million. Around 8,000 mt of this harvest guideline was actually harvested during the 2006/2007 fishing season valued at an estimated $1 million. The proposed harvest guideline for the 2007/2008 Pacific mackerel fishing season (July 1, 2007 through June 30, 2008) is 40,000 metric tons (mt). This HG recommendation is roughly double the HG adopted by the Council for the 2006/2007 fishing year (19,845 mt) and much greater than the average U.S. harvest since the year 2000 (5,700 mt). If the fleet were to take the entire 2007/2008 harvest guideline, and assuming no change in the coastwide average ex-vessel price per mt of $132, the potential revenue to the fleet would be approximately $5.3 million. However, the potential lack of availability of the resource to the fishing fleet could cause a reduction in the amount of Pacific mackerel harvested, in which case the total revenue to the fleet would be reduced. Additionally, if there is no change in market conditions (i.e., a lack in demand for Pacific mackerel product), it is not likely that the full harvest guideline will be taken during the 2007-2008 fishing year, in which case profits will be lower. NMFS does not anticipate a drop in profitability based on this rule due to the fact that it allows fishermen to harvest more than last year. Based on the disproportionality and profitability analysis above, this rule if adopted, will not have a significant economic impact on a substantial number of these small entities. As a result, an Initial Regulatory Flexibility Analysis is not required and none has been prepared. Authority: 16 U.S.C. 1801 *et seq.* Dated: September 24, 2007. John Oliver, Deputy Assistant Administrator for Operations, National Marine Fisheries Service. [FR Doc. E7-19252 Filed 9-27-07; 8:45 am] BILLING CODE 3510-22-S 72 188 Friday, September 28, 2007 Notices DEPARTMENT OF AGRICULTURE Food and Nutrition Service Agency Information Collection Activities: Proposed Collection; Comment Request—Annual Report of State Revenue Matching AGENCY: Food and Nutrition Service, USDA. ACTION: Notice and request for comments. SUMMARY: In accordance with the Paperwork Reduction Act of 1995, this notice invites the general public to comment on the proposed information collection in the Annual Report of State Revenue Matching. The State agencies use this form to report State revenues used specifically by State agencies for school nutrition program purposes. The proposed collection is an extension of a collection currently approved for the Form FNS-13, Annual Report of State Revenue Matching. DATES: Written comments on this notice must be received by November 27, 2007. ADDRESSES: Comments are invited on:
(a)Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;
(b)the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used;
(c)ways to enhance the quality, utility, and clarity of the information to be collected; and
(d)ways to minimize the burden of the collection of information on those who are to respond, including use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology. Comments may be sent to Melissa Rothstein, Chief, Program Analysis and Monitoring Branch, Child Nutrition Division, Food and Nutrition Service, USDA, 3101 Park Center Drive, Room 640, Alexandria, Virginia 22302. Comments may also be submitted via fax to the attention of Melissa Rothstein at
(703)305-2879 or via e-mail to *melissa.rothstein@fns.usda.gov.* All written comments will be open for public inspection at the office of the Food and Nutrition Service during regular business hours (8:30 a.m. to 5 p.m., Monday through Friday) at 3101 Park Center Drive, Room 640, Alexandria, Virginia 22302. All responses to this notice will be summarized and included in the request for OMB approval, and will become a matter of public record. FOR FURTHER INFORMATION CONTACT: Requests for additional information or copies of this information collection should be directed to Melissa Rothstein at
(703)305-2590. SUPPLEMENTARY INFORMATION: *Title:* Annual Report of State Revenue Matching. *OMB Numbers:* 0584-0075. *Expiration Date:* November 30, 2007. *Type of Request:* Extention of a currently approved information collection. *Abstract:* The National School Lunch Program is authorized by the Richard B. Russell National School Lunch Act, 42 U.S.C. 1751, *et seq.* , and the Child Nutrition Act of 1966, 42 U.S.C. 1771, *et seq.* Program implementing regulations are contained in 7 CFR Part 210. In accordance with § 210.17 (g), State agencies must submit an annual report of State expenditures on school nutrition programs in order to receive Federal reimbursement for meals served to eligible participants. *Affected Public:* State agencies that administer the National School Lunch Program. *Estimated Number of Respondents:* 57. *Estimated Number of Responses per Respondent:* The number of responses is estimated to be one submission per State agency per school year. *Estimate Time per Response:* Public reporting burden for this collection of information is estimated to average 80 hours per respondent per submission. *Estimated Total Annual Burden:* 4,560 hours. Dated: September 20, 2007. Roberto Salazar, Administrator, Food and Nutrition Service. [FR Doc. E7-19257 Filed 9-27-07; 8:45 am] BILLING CODE 3410-30-P DEPARTMENT OF AGRICULTURE National Agricultural Library Notice of Intent To Seek Approval To Collect Information AGENCY: Agricultural Research Service, National Agricultural Library, USDA. ACTION: Notice and request for comments. SUMMARY: In accordance with the Paperwork Reduction Act of 1995 and Office of Management and Budget
(OMB)regulations, this notice announces the National Agricultural Library's intent to request approval for a new information collection to obtain an evaluation of user satisfaction with NAL Internet sites. DATES: The agency must receive comments on or before November 6, 2007. ADDRESSES: Address all comments concerning this notice to John Gladstone, Project Manager, 10301 Baltimore Ave., Room 013; Beltsville, MD 20705. Submit electronic comments to *jgladsto@nal.usda.gov.* FOR FURTHER INFORMATION CONTACT: John Gladstone, Phone: 301-504-5462; Fax:
(301)504-7473. SUPPLEMENTARY INFORMATION: *Title:* Evaluation of User Satisfaction with NAL Internet Sites. *OMB Number:* 0518-0040. *Expiration Date:* N/A. *Type of Request:* Approval for new data collection. *Abstract:* This is a request, made by the National Agricultural Library
(NAL)Office of the Director (OD), Office of the Associate Director of Information Services, the Office of Management and Budget
(OMB)approve, under the Paperwork Reduction Act of 1995, a three year generic clearance for the NAL to conduct user satisfaction research around its Internet sites. This effort is made according to Executive Order 12862 which directs federal agencies that provide significant services directly to the public to survey customers to determine the kind and quality of services they want and their level of satisfaction with existing services. The National Agricultural Library Internet sites are a vast collection of Web pages created and maintained by component organizations of the NAL. On average, 3.4 million people visit the NAL internet sites per month. All seven of the NAL Information Centers and a dozen special interest collections have established a Web presence with a home page and links to sub-pages that provide information to their respective audiences. Description of Surveys The online surveys will be no more than 15 Semantic Differential Scale or multiple choice questions, and no more than 4 open-ended response questions. *Estimate of Burden:* Public reporting burden for this collection of information is estimated to average 5 minutes per survey. *Respondents:* The agricultural community, USDA personnel and their cooperators, and including public and private users or providers of agricultural information. *Estimated Number of Respondents:* 1200 per year. *Estimated Total Annual Burden on Respondents:* 100 hours. Comments are invited on
(a)whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;
(b)the accuracy of the agency's estimate of the burden of the proposed collection of information, including the validity of the methodology and the assumptions used;
(c)ways to enhance the quality, utility, and clarity of the information to be collected; and
(d)ways to minimize the burden of the collection of information on those who respond, including the use of appropriate automated, electronic, mechanical, or other technology. Comments should be sent to the address in the preamble. Dated: September 13, 2007. Edward B. Knipling, Administrator, ARS. [FR Doc. E7-19213 Filed 9-27-07; 8:45 am] BILLING CODE 3410-03-P COMMITTEE FOR PURCHASE FROM PEOPLE WHO ARE BLIND OR SEVERELY DISABLED Procurement List: Proposed Additions and Deletion AGENCY: Committee for Purchase From People Who Are Blind or Severely Disabled. ACTION: Proposed Additions to and Deletion from the Procurement List. SUMMARY: The Committee is proposing to add to the Procurement List a product and services to be furnished by nonprofit agencies employing persons who are blind or have other severe disabilities, and to delete a service previously furnished by such agencies. *Comments Must Be Received On or Before:* October 28, 2007. ADDRESSES: Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia 22202-3259. FOR FURTHER INFORMATION OR TO SUBMIT COMMENTS CONTACT: Kimberly M. Zeich, Telephone:
(703)603-7740, Fax:
(703)603-0655, or e-mail: *CMTEFedReg@jwod.gov.* SUPPLEMENTARY INFORMATION: This notice is published pursuant to 41 U.S.C 47(a)(2) and 41 CFR 51-2.3. Its purpose is to provide interested persons an opportunity to submit comments on the proposed actions. Additions If the Committee approves the proposed additions, the entities of the Federal Government identified in this notice for each product or service will be required to procure the products and services listed below from nonprofit agencies employing persons who are blind or have other severe disabilities. Regulatory Flexibility Act Certification I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were: 1. If approved, the action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will furnish the product and services to the Government. 2. If approved, the action will result in authorizing small entities to furnish the product and services to the Government. 3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the product and services proposed for addition to the Procurement List. Comments on this certification are invited. Commenters should identify the statement(s) underlying the certification on which they are providing additional information. End of Certification The following product and services are proposed for addition to Procurement List for production by the nonprofit agencies listed: Product Hydration System, MOLLE, Universal Camouflage *NSN:* 8465-01-525-5531. *NPA:* The Lighthouse for the Blind, Inc., Seattle, WA. *Coverage:* C-List—for the requirements of the Defense Supply Center Philadelphia, Philadelphia, PA. *Contracting Activity:* Defense Supply Center Philadelphia, Philadelphia, PA Services *Service Type/Location:* Base Supply Center, Fort Belvoir, Fort Belvoir, VA. *NPA:* Virginia Industries for the Blind, Charlottesville, VA. *Contracting Activity:* Department of Army, Capital District Contracting Center (CDCC), Fort Belvoir, VA. *Service Type/Location:* Document Destruction, Social Security Administration, 1301 Young Street, Dallas, TX. *NPA:* Expanco, Inc., Fort Worth, TX. *Contracting Activity:* Social Security Administration, Dallas, TX. *Service Type/Location:* Custodial Services, U.S. Army Reserve Center, Camp Bullis, Building 6143, San Antonio, TX. *NPA:* Professional Contract Services, Inc., Austin, TX. *Contracting Activity:* Army Contracting Agency, Southern Region, Fort Sam Houston, TX. Deletion Regulatory Flexibility Act Certification I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were: 1. If approved, the action may result in additional reporting, recordkeeping or other compliance requirements for small entities. 2. If approved, the action may result in authorizing small entities to furnish the service to the Government. 3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the service proposed for deletion from the Procurement List. Comments on this certification are invited. Commenters should identify the statement(s) underlying the certification on which they are providing additional information. End of Certification The following service is proposed for deletion from the Procurement List: Service *Service Type/Location:* Janitorial/Custodial, Social Security Building, 350 Donmoor, Baton Rouge, LA. *NPA:* Louisiana Industries for the Disabled, Inc., Baton Rouge, LA. *Contracting Activity:* General Services Administration, Facility Support Center, New Orleans, LA. Kimberly M. Zeich, Director, Program Operations. [FR Doc. E7-19223 Filed 9-27-07; 8:45 am] BILLING CODE 6353-01-P COMMITTEE FOR PURCHASE FROM PEOPLE WHO ARE BLIND OR SEVERELY DISABLED Procurement List Additions AGENCY: Committee for Purchase From People Who Are Blind or Severely Disabled. ACTION: Additions to the Procurement List. SUMMARY: This action adds to the Procurement List a product and services to be furnished by nonprofit agencies employing persons who are blind or have other severe disabilities. EFFECTIVE DATE: October 28, 2007. ADDRESSES: Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia 22202-3259. FOR FURTHER INFORMATION CONTACT: Kimberly M. Zeich, Telephone:
(703)603-7740, Fax:
(703)603-0655, or e-mail: *CMTEFedReg@jwod.gov.* SUPPLEMENTARY INFORMATION: On July 27 and August 3, 2007, the Committee for Purchase From People Who Are Blind or Severely Disabled published notice (72 FR 41289; 43230) of proposed additions to the Procurement List. After consideration of the material presented to it concerning capability of qualified nonprofit agencies to provide the products and services and impact of the additions on the current or most recent contractors, the Committee has determined that the product and services listed below are suitable for procurement by the Federal Government under 41 U.S.C. 46-48c and 41 CFR 51-2.4. A comment was received from a clock manufacturer who objected to this proposed addition to the Procurement List, stating that this proposed addition, and previous actions by the Committee, has seriously impacted its company's clock sales. The commenter claimed to have previously been advised that “only 50% of the Government clocks would be set-aside” and the proposed nonprofit agency “would not be involved in the commercial market.” Finally, the commenter said that the proposed nonprofit's financial condition was such that further “protection” by the Committee was unnecessary. The commenter did not provide revenue data as requested by original notice. In addition, the commenter's claims about ceilings being established for the nonprofit agency's market share could not be confirmed. The Committee's purpose in this proposed addition to the Procurement List is to create jobs for people who are blind, not to bolster the proposed nonprofit's financial condition. Consequently, the Committee determines that there is no significant impact from including this proposed addition on the Procurement List. Regulatory Flexibility Act Certification I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were: 1. The action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organizations that will furnish the product and services to the Government. 2. The action will result in authorizing small entities to furnish the product and services to the Government. 3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O'Day Act (41 U.S.C. 46-48c) in connection with the product and services proposed for addition to the Procurement List. End of Certification Accordingly, the following product and services are added to the Procurement List: Product Clocks, SelfSet & SelfSet
(LOGO)*NSN:* 6645-00-NIB-0108—12-in diameter, Black. *NSN:* 6645-00-NIB-0112—12-in diameter, Bronze. *NSN:* 6645-00-NIB-0114—8-in diameter, Black. *NSN:* 6645-00-NIB-0118—8-in diameter, Bronze. *NSN:* 6645-00-NIB-0123—16-in diameter, Mahogany. *NSN:* 6645-00-NIB-0127—Octagonal, 8.5-in diameter, Mahogany. *Coverage:* A-List for the total Government requirement as specified by the General Services Administration. *NSN:* 6645-00-NIB-0109—12-in diameter, Black, with Logo. *NSN:* 6645-00-NIB-0113—12-in diameter, Bronze, with Logo. *NSN:* 6645-00-NIB-0115—8-in diameter, Black, with Logo. *NSN:* 6645-00-NIB-0119—8-in diameter, Bronze, with Logo. *NSN:* 6645-00-NIB-0124—16-in diameter, Mahogany, with Logo. *NSN:* 6645-00-NIB-0128—Octagonal, 8.5-in diameter, Mahogany, with Logo. *Coverage:* B-List—for the broad Government requirement as specified by the General Services Administration. *NPA:* The Chicago Lighthouse for People who are Blind or Visually Impaired, Chicago, IL. *Contracting Activity:* General Services Administration, Office Supplies & Paper Products Acquisition Ctr, New York, NY. Services *Service Type/Location:* Custodial Services, U.S. Department of Agriculture, Animal and Plant Health Inspection Service (APHIS), Plant Protection Quarantine (PPQ), Professional Development Center (PDC), 67 Thomas Johnson Drive, Suite A2, Bldg 2, 69 Thomas Johnson Drive, Suite 100, Bldg 1, Frederick, MD. *NPA:* NW Works, Inc., Winchester, VA. *Contracting Activity:* U.S. Department of Agriculture, Animal & Plant Health Inspection Service, MRP, Minneapolis, MN. *Service Type/Location:* Grounds Maintenance, U.S. Department of Agriculture, Agricultural Research Service, 3127 Ligon Street, Raleigh, NC. *NPA:* OE Enterprises, Inc., Hillsborough, NC. *Contracting Activity:* U.S. Department of Agriculture, Agriculture Research Service-SAA, Raleigh, Raleigh, NC. This action does not affect current contracts awarded prior to the effective date of this addition or options that may be exercised under those contracts. Kimberly M. Zeich, Director, Program Operations. [FR Doc. E7-19224 Filed 9-27-07; 8:45 am] BILLING CODE 6353-01-P DEPARTMENT OF COMMERCE Economic Development Administration [Docket No: 070921532-7533-01] Membership of the Economic Development Administration Performance Review Board AGENCY: Economic Development Administration, Department of Commerce. ACTION: Notice of Membership on the Economic Development Administration's Performance Review Board. SUMMARY: In accordance with 5 U.S.C. 4314(c)(4), the Economic Development Administration (EDA), Department of Commerce (DOC), announces the appointment of those individuals who have been selected to serve as members of EDA's Performance Review Board. The Performance Review Board is responsible for
(1)reviewing performance appraisals and ratings of Senior Executive Service
(SES)members and
(2)making recommendations to the appointing authority on other performance management issues, such as pay adjustments, bonuses and Presidential Rank Awards for SES members. The appointment of these members to the Performance Review Board will be for a period of twenty-four
(24)months. DATES: The period of appointment for those individuals selected for EDA's Performance Review Board begins on September 28, 2007. FOR FURTHER INFORMATION CONTACT: Sandra R. Walters, Economic Development Administration, Office of Management Services, Department of Commerce, Room 7217, 1401 Constitution Avenue, NW., Washington, DC 20230; telephone: 202-482-5892. SUPPLEMENTARY INFORMATION: In accordance with 5 U.S.C. 4314(c)(4), EDA announces the appointment of those individuals who have been selected to serve as members of EDA's Performance Review Board. The Performance Review Board is responsible for
(1)reviewing performance appraisals and ratings of Senior Executive Service
(SES)members and
(2)making recommendations to the appointing authority on other performance management issues, such as pay adjustments, bonuses and Presidential Rank Awards for SES members. The appointment of these members to the Performance Review Board will be for a period of twenty-four
(24)months beginning on September 28, 2007. The name, position title, and type of appointment of each member of EDA's Performance Review Board are set forth below by organization: Department of Commerce, Office of the Secretary Lisa Casias, Deputy CFO and Director for Financial Management (Chairperson). Deborah Jefferson, Director, Office of Human Resources Management. Barbara Retzlaff, Director, Office of Budget. Department of Commerce, Economic Development Administration Otto Barry Bird, Chief Counsel. Matthew Crow, Deputy Assistant Secretary for External Affairs and Communication. Dated: September 24, 2007. Sandra R. Walters, Deputy Chief Financial Officer and Director, Administrative and Support Services Division. [FR Doc. E7-19218 Filed 9-27-07; 8:45 am] BILLING CODE 3510-24-P DEPARTMENT OF COMMERCE Bureau of Industry and Security Materials Processing Equipment Technical Advisory Committee; Notice of Partially Closed Meeting The Materials Processing Equipment Technical Advisory Committee will meet on October 11, 2007, 9 a.m., Room 6087B, in the Herbert C. Hoover Building, 14th Street between Pennsylvania and Constitution Avenues, NW., Washington, DC. The Committee advises the Office of the Assistant Secretary for Export Administration with respect to technical questions that affect the level of export controls applicable to materials processing equipment and related technology. Agenda Public Session 1. Opening Remarks and Introductions. 2. Presentation of Papers and Comments by the Public. 3. Report on 2007 September Wassenaar Meeting. 4. MPETAC Future Activities—Discussion of MPETAC 2008 Proposals. 5. Report on proposed changes to the Export Administration Regulations. 6. Other Business. Closed Session 7. Discussion of matters determined to be exempt from the provisions relating to public meetings found in 5 U.S.C. App. 2 §§ 10(a)(1) and 10(a)(3). The open session will be accessible via teleconference to 20 participants on a first come, first serve basis. To join the conference, submit inquiries to Ms. Yvette Springer at *Yspringer@bis.doc.gov* no later than October 3, 2007. A limited number of seats will be available for the public session. Reservations are not accepted. To the extent that time permits, members of the public may present oral statements to the Committee. The public may submit written statements at any time before or after the meeting. However, to facilitate the distribution of public presentation materials to the Committee members, the Committee suggests that presenters forward the public presentation materials prior to the meeting to Ms. Springer via e-mail. The Assistant Secretary for Administration, with the concurrence of the delegate of the General Counsel, formally determined on September 5, 2007, pursuant to Section 10(d) of the Federal Advisory Committee Act, as amended (5 U.S.C. App. 2 §§ (10)(d)), that the portion of the meeting dealing with matters the disclosure of which would be likely to frustrate significantly implementation of an agency action as described in 5 U.S.C. 552b(c)(9)(B) shall be exempt from the provisions relating to public meetings found in 5 U.S.C. App. 2 §§ 10(a)1 and 10(a)(3). The remaining portions of the meeting will be open to the public. For more information, call Yvette Springer at
(202)482-2813. Dated: September 25, 2007. Yvette Springer, Committee Liaison Officer. [FR Doc. 07-4777 Filed 9-20-07; 8:45 am]
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40 references not yet in our index
  • 14 CFR 39
  • 17 CFR 275
  • 17 CFR 275.202(a)(11)
  • 15 USC 80b
  • 482 F.3d 481
  • 5 CFR 1320.11
  • 26 CFR 1
  • Pub. L. 108-357
  • 118 Stat. 1418
  • Pub. L. 109-135
  • Pub. L. 104-188
  • 110 Stat. 1755
  • T.D. 8597
  • Rev. Rul. 2001-31
  • Pub. L. 109-171
  • Pub. L. 108-173
  • Pub. L. 96-354
  • Pub. L. 104-4
  • 42 CFR 406
  • 42 CFR 407
  • 42 CFR 408
  • 42 CFR 440.20
  • 42 CFR 447.321
  • 42 CFR 447
  • 346 F.3d 571
  • Pub. L. 96-499
  • Pub. L. 97-85
  • Pub. L. 105-33
  • 42 CFR 419
  • 42 CFR 413
  • 42 CFR 413.65(a)(2)
  • 44 USC 35
  • Pub. L. 104-04
  • 42 CFR 440
  • 50 CFR 648
  • 50 CFR 660
  • 7 CFR 210
  • 41 USC 47(a)(2)
  • 41 CFR 51
  • 41 USC 46-48c
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Fed. Reg.Proposed Rules
Fed. Reg.Notices
U.S.C.§ 106
C.F.R.§ 39.19
C.F.R.§ 25.571
C.F.R.§ 91.403
U.S.C.§ 3501
C.F.R.§ 39.23
U.S.C.§ 3507
F. App'x482 F.3d 481
F. App'x346 F.3d 571
Cite14 CFR 39
Cites 67 · showing 12Cited by 0 across 0 sources
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