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Code · REGISTER · 2007-12-21 · Agriculture Agriculture Department See Animal and Plant Health Inspection Service See Farm Service Agency See Forest Service Animal Animal and Plant Health Inspection Service RULES Viruses, serums, to · Unknown

Unknown. Final rule

48,559 words·~221 min read·/register/2007/12/21/07-6156

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

--- schema: federal-register doc_type: fedreg source_file: FR-2007-12-21.xml --- 72 245 Friday, December 21, 2007 Contents Agriculture Agriculture Department See Animal and Plant Health Inspection Service See Farm Service Agency See Forest Service Animal Animal and Plant Health Inspection Service RULES Viruses, serums, toxins, and analogous products: Live vaccines; standard requirements, 72563-72564 E7-24649 Army Army Department See Engineers Corps NOTICES Agency information collection activities; proposals, submissions, and approvals, 72681 E7-24830 Blind Blind or Severely Disabled, Committee for Purchase From People Who Are See Committee for Purchase From People Who Are Blind or Severely Disabled Centers Centers for Medicare & Medicaid Services NOTICES Privacy Act; systems of records, 72729-72737 E7-24786 E7-24788 Commerce Commerce Department See International Trade Administration See National Oceanic and Atmospheric Administration See National Technical Information Service Committee for Purchase Committee for Purchase From People Who Are Blind or Severely Disabled NOTICES Agency information collection activities; proposals, submissions, and approvals, 72665-72666 E7-24848 Procurement list; additions and deletions, 72666-72668 E7-24849 E7-24850 Comptroller Comptroller of the Currency RULES Community Reinvestment Act; implementation:
Small bank, small savings association, etc.; threshold amount adjustments; technical correction, 72571-72574 E7-24719 Defense Defense Department See Army Department See Engineers Corps NOTICES Agency information collection activities; proposals, submissions, and approvals, 72679-72681 E7-24823 E7-24827 E7-24828 E7-24833 Meetings; Sunshine Act, 72681 07-6178 Education Education Department NOTICES Agency information collection activities; proposals, submissions, and approvals, 72682-72683 E7-24796 E7-24798 Grants and cooperative agreements; availability, etc.:
Elementary and secondary education— Even Start Family Literacy Program, 72683-72689 E7-24865 Employee Employee Benefits Security Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 72761-72767 E7-24802 E7-24803 E7-24804 E7-24806 E7-24807 E7-24808 E7-24809 Energy Energy Department See Energy Efficiency and Renewable Energy Office See Federal Energy Regulatory Commission NOTICES Meetings: Environmental Management Site-Specific Advisory Board— Nevada Test Site, NV, 72689-72690 E7-24829 Oak Ridge Reservation, TN, 72689 E7-24826 Energy Energy Efficiency and Renewable Energy Office RULES Consumer products; energy conservation program:
Energy conservation standards— New Federal commercial and multi-family high-rise residential buildings and low-rise residential buildings, 72565-72571 E7-24615 Engineers Engineers Corps NOTICES Environmental statements; availability, etc.: Beaufort County, NC; Potash Corp. of Saskatchewan phosphate mine operation continuation, 72681-72682 E7-24892 EPA Environmental Protection Agency RULES Air quality implementation plans: Preparation, adoption, and submittal— Prevention of significant deterioration and nonattainment new source review; reasonable possibility in recordkeeping, 72607-72617 E7-24714 Air quality implementation plans; approval and promulgation; various States:
South Dakota, 72617-72622 E7-24717 Pesticides; tolerances in food, animal feeds, and raw agricultural commodities: Glufosinate-ammonium, 72622-72626 E7-24841 NOTICES Agency information collection activities; proposals, submissions, and approvals, 72704-72706 E7-24842 Environmental statements; availability, etc.: Agency comment availability, 72706-72707 E7-24843 Agency weekly receipts, 72707-72708 E7-24839 Meetings: Environmental Policy and Technology National Advisory Council, 72708 E7-24857 Total Coliform Rule Distribution System Advisory Commitee, 72708-72709 E7-24858 Pesticide programs:
Special reviews— Dichlorvos, 72709-72710 E7-24739 Pesticide registration, cancellation, etc.: Nicotine, etc., 72710-72713 E7-24903 Polypropylene glycol, 72713-72715 E7-24771 Reports and guidance documents; availability, etc.: Integrated Risk Information System; 2008 program announcement, 72715-72719 E7-24844 Oxides of nitrogen and sulfur; environmental criteria; integrated science assessment, 72719-72720 E7-24906 Toxic and hazardous substances control: Citizens petitions— Sierra Club, 72886-72896 07-6176 Executive Executive Office of the President See National Drug Control Policy Office Farm Farm Service Agency RULES Special programs:
Emergency agricultural assistance (2007); crop disaster and livestock indemnity programs, 72864-72878 07-6153 Livestock compensation and catfish grant programs (2005-2007), 72878-72884 07-6154 FAA Federal Aviation Administration PROPOSED RULES Air traffic operating and flight rules, etc.: Automatic dependent surveillance-broadcast out performance requirements to support air traffic control service, 72637-72641 E7-24713 Airworthiness directives: BAE Systems (Operations) Ltd.; withdrawn, 72636-72637 E7-24821 McDonnell Douglas; correction, 72823 Z7-22727 FCC Federal Communications Commission RULES Radio stations; table of assignments:
North Carolina and Tennessee, 72626 E7-24623 NOTICES Agency information collection activities; proposals, submissions, and approvals, 72720-72723 E7-24793 E7-24794 *Applications, hearings, determinations, etc.:* Keeney, Lonnie L., 72723-72724 07-6175 FDIC Federal Deposit Insurance Corporation RULES Community Reinvestment Act; implementation: Small bank, small savings association, etc.; threshold amount adjustments; technical correction, 72571-72574 E7-24719 Federal Election Federal Election Commission NOTICES Presidential candidates (2008):
Net outstanding campaign obligations statements; matching fund submission dates and post date of ineligibility dates to submit, 72724-72725 E7-24791 Federal Energy Federal Energy Regulatory Commission NOTICES Hydroelectric applications, 72693-72704 E7-24756 E7-24757 E7-24758 E7-24759 E7-24760 E7-24766 *Applications, hearings, determinations, etc.:* Atmos Pipeline & Storage, LLC, 72690 E7-24767 Azusa, CA, 72690-72691 E7-24750 East Kentucky Power Cooperative, Inc, 72691 E7-24752 E7-24754 El Paso Electric Co., 72691-72692 E7-24755 Public Service Electric & Gas Co., 72692 E7-24751 Southeastern Power Administration, 72692 E7-24749 Southwestern Power Administration, 72692-72693 E7-24753 Federal Highway Federal Highway Administration RULES Engineering and traffic operations:
Uniform Traffic Control Devices Manual— Traffic sign retroreflectivity; maintenance methods, 72574-72582 E7-24683 Federal Labor Federal Labor Relations Authority PROPOSED RULES Unfair labor practice proceedings: Office of General Counsel's role during investigatory stage, 72632-72636 E7-24846 Federal Reserve Federal Reserve System RULES Community Reinvestment Act; implementation: Small bank, small savings association, etc.; threshold amount adjustments; technical correction, 72571-72574 E7-24719 NOTICES Agency information collection activities; proposals, submissions, and approvals, 72725-72727 E7-24785 Banks and bank holding companies:
Formations, acquisitions, and mergers, 72727 E7-24832 Federal Transit Federal Transit Administration NOTICES Environmental statements; notice of intent: Utah County, UT; potential high-capacity fixed-guideway transit and roadway infrastructure improvements, 72813-72815 E7-24861 Fish Fish and Wildlife Service NOTICES Endangered and threatened species and marine mammal permit applications, determinations, etc., 72749 E7-24772 Food Food and Drug Administration NOTICES Meetings: Pulmonary-Allergy Drugs Advisory Committee, 72737-72738 E7-24812 Reports and guidance documents; availability, etc.:
Dietary lipids and cancer, soy protein and coronary heart disease, antioxidant vitamins and cancers, and selenium and cancers; health claims; reevaluation, 72738-72740 E7-24813 Forest Forest Service NOTICES Recreation fee areas: Grand Mesa, Uncompahgre, and Gunnison National Forests, CO; forest cabin rental program, 72665 E7-24840 Health Health and Human Services Department See Centers for Medicare & Medicaid Services See Food and Drug Administration See Health Resources and Services Administration See National Institutes of Health See Substance Abuse and Mental Health Services Administration NOTICES Naional Toxicology Program:
Interagency Center for Evaluation of Alternative Toxicological Methods; ten-year anniversary symposium and five-year plan, 72727-72729 E7-24799 Health Health Resources and Services Administration NOTICES Public Readiness and Emergency Preparedness Act: Potential eligibility for compensation announcment; declaration and filing deadlines, 72740-72741 07-6180 Homeland Homeland Security Department See U.S. Customs and Border Protection Housing Housing and Urban Development Department NOTICES Agency information collection activities; proposals, submissions, and approvals, 72746-72747 E7-24775 E7-24879 Grants and cooperative agreements; availability, etc.:
Homeless assistance; excess and surplus Federal properties, 72747-72749 E7-24496 Interior Interior Department See Fish and Wildlife Service See Land Management Bureau See Minerals Management Service See National Park Service See Reclamation Bureau IRS Internal Revenue Service RULES Income taxes: Foreign tax credit limitation categories; reduction, 72582-72592 E7-24782 Overall foreign and domestic losses; treatment, 72592-72606 E7-24877 Procedure and administration: Actuarial services, enrollment; user fees, 72606-72607 07-6156 PROPOSED RULES Income taxes:
Foreign and domestic losses; treatment; cross-reference, 72646-72648 E7-24896 Foreign tax credit limitation categories; reduction; cross-reference, 72645-72646 E7-24783 International International Trade Administration NOTICES Antidumping: Frozen fish fillets from— Vietnam, 72668 E7-24854 Frozen warmwater shrimp from— China, 72668-72670 E7-24851 Polyethylene retail carrier bags from— China, 72670 E7-24852 Stainless steel bar from— India, 72671-72674 E7-24856 Wooden bedroom furniture from— China, 72674 E7-24847 Labor Labor Department See Employee Benefits Security Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 72759-72761 E7-24777 E7-24810 Land Land Management Bureau NOTICES Alaska Native claims selection:
Chugach Alaska Corp., 72750 E7-24825 Environmental statements; notice of intent: Powder River Federal Coal Production Region, WY; Federal coal lease-by-application, 72750-72751 E7-24428 Resource management plans, etc.: Colorado, Utah, and Wyoming; oil shale and tar sands development, 72751-72753 E7-24811 Minerals Minerals Management Service PROPOSED RULES Outer Continental Shelf; oil, gas, and sulphur operations: Plans, applications, and permits; processing fees; electronic payment, 72648-72652 07-6173 Royalty management:
Deepwater Outer Continental Shelf oil and gas leases; royalty relief; regulations conformed to court decision, 72652-72657 07-6161 NASA National Aeronautics and Space Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 72768-72769 E7-24773 E7-24774 National Archives National Archives and Records Administration NOTICES Agency records schedules; availability, 72769-72770 E7-24805 National Drug National Drug Control Policy Office NOTICES Agency information collection activities; proposals, submissions, and approvals, 72770-72771 E7-24870 NIH National Institutes of Health NOTICES Agency information collection activities; proposals, submissions, and approvals, 72741-72742 E7-24872 Inventions, Government-owned; availability for licensing, 72742-72744 E7-24784 NOAA National Oceanic and Atmospheric Administration RULES Fishery conservation and management:
Northeastern United States fisheries— Atlantic sea scallop, 72626-72630 E7-24907 West Coast States and Western Pacific fisheries— Pacific Coast groundfish, 72630-72631 E7-24864 PROPOSED RULES Fishery conservation and management: Magnuson-Stevens Act provisions— Experimental permitting process, exempted fishing permits, and scientific research activity, 72657-72664 E7-24866 NOTICES Antarctic Marine Living Resources Conservation Convention Act of 1984; conservation and management measures, 72826-72861 E7-24312 Marine mammal permit applications, determinations, etc., 72674-72675 E7-24862 Meetings:
Council Coordination Committee, 72675 E7-24814 Gulf of Mexico Fishery Management Council, 72676 E7-24819 North Pacific Fishery Management Council, 72676 E7-24815 Pacific Fishery Management Council, 72676-72677 E7-24820 South Atlantic Fishery Management Council, 72677-72678 E7-24816 E7-24818 South Atlantic Fishery Management Council et al., 72677-72678 E7-24817 National Park National Park Service NOTICES Environmental statements; availability, etc.:78 Governors Island National Monument, NY, 72753-72754 E7-24831 Environmental statements; notice of intent:
Wrangell-St. Elias National Park and Preserve, AK; off-road vehicles recreational use along Nabesna Area trails, 72754-72755 E7-24853 Meetings: Chesapeake and Ohio Canal National Historical Park Advisory Commission, 72755-72756 E7-24834 Tallgrass Prairie National Preserve Advisory Committee, 72756 E7-24845 National Technical National Technical Information Service NOTICES Meetings: Advisory Board, 72678-72679 E7-24859 Nuclear Nuclear Regulatory Commission NOTICES Agency information collection activities; proposals, submissions, and approvals, 72771 E7-24873 Environmental statements; notice of intent:
South Texas Project Nuclear Operating Co., 72774-72775 E7-24875 Meetings: Independent External Review Panel to Identify Vulnerabilities in U.S. Nuclear Regulatory Commission's Materials Licensing Program, 72775-72776 E7-24869 *Applications, hearings, determinations, etc.:* Mallinckrodt Inc., 72771-72773 E7-24878 National Office of National Drug Control Policy See National Drug Control Policy Office Personnel Personnel Management Office NOTICES Personnel management demonstration projects:
National Nuclear Security Administration; pay banding and performance-based pay adjustments, 72776-72802 07-6144 Pipeline Pipeline and Hazardous Materials Safety Administration NOTICES Pipeline safety: Waiver petitions— TransCanada Pipelines Ltd., 72815-72819 E7-24776 Reclamation Reclamation Bureau NOTICES Environmental statements; availability, etc.: Northwest Area Water Supply Project, ND, 72756-72757 E7-24575 Environmental statements; notice of intent: Grassland Bypass Project extension, Merced and Fresno Counties, CA, 72757-72758 E7-24822 Red River Valley Water Supply Project, ND, 72758-72759 E7-24590 SEC Securities and Exchange Commission NOTICES Securities:
Suspension of trading— Score One, Inc., 72802 07-6174 Self-regulatory organizations; proposed rule changes: American Stock Exchange LLC, 72803-72804 E7-24801 Chicago Board Options Exchange, Inc., 72804-72808 E7-24790 International Securities Exchange, LLC, 72808-72809 E7-24800 NASDAQ Stock Market LLC, 72809-72813 E7-24789 Social Social Security Administration PROPOSED RULES Supplemental security income: Aged, blind, and disabled— Parent-to-child deeming from stepparents, 72641-72645 E7-24787 State State Department NOTICES Antarctic Marine Living Resources Conservation Convention Act of 1984; conservation and management measures, 72826-72861 E7-24312 Substance Substance Abuse and Mental Health Services Administration NOTICES Agency information collection activities; proposals, submissions, and approvals, 72744 E7-24824 Surface Surface Transportation Board NOTICES Environmental statements; notice of intent:
Canadian National Railway Corp. et al., 72819-72822 E7-24835 Thrift Thrift Supervision Office RULES Community Reinvestment Act; implementation: Small bank, small savings association, etc.; threshold amount adjustments; technical correction, 72571-72574 E7-24719 Transportation Transportation Department See Federal Aviation Administration See Federal Highway Administration See Federal Transit Administration See Pipeline and Hazardous Materials Safety Administration See Surface Transportation Board NOTICES Aviation proceedings:
Hearings, etc.— Taga Air Charter Service, Inc., 72813 E7-24868 Treasury Treasury Department See Comptroller of the Currency See Internal Revenue Service See Thrift Supervision Office Customs U.S. Customs and Border Protection NOTICES Citizenship and identity; oral declarations no longer satisfactory as evidence, 72744-72745 E7-24691 Commercial gauger and laboratory accreditations: Approval— Inspectorate America Corp., 72745-72746 E7-24694 Separate Parts In This Issue Part II Commerce Department, National Oceanic and Atmospheric Administration;
State Department, 72826-72861 E7-24312 Part III Agriculture Department, Farm Service Agency, 72864-72884 07-6153 07-6154 Part IV Environmental Protection Agency, 72886-72896 07-6176 Reader Aids Consult the Reader Aids section at the end of this issue for phone numbers, online resources, finding aids, reminders, and notice of recently enacted public laws. To subscribe to the Federal Register Table of Contents LISTSERV electronic mailing list, go to http://listserv.access.gpo.gov and select Online mailing list archives, FEDREGTOC-L, Join or leave the list (or change settings); then follow the instructions. 72 245 Friday, December 21, 2007 Rules and Regulations DEPARTMENT OF AGRICULTURE Animal and Plant Health Inspection Service 9 CFR Part 113 [Docket No.
APHIS-2006-0079] RIN 0579-AC30 Viruses, Serums, Toxins, and Analogous Products; Standard Requirements for Live Vaccines AGENCY: Animal and Plant Health Inspection Service, USDA. ACTION: Final rule. SUMMARY: We are amending the Virus-Serum-Toxin Act regulations for certain live bacterial and viral vaccines by removing the requirement to retest the Master Seeds for immunogenicity 3 years after the initial qualifying immunogenicity test. In addition, we are amending the requirement concerning mouse safety tests prescribed for a biological product recommended for animals other than poultry.
These changes update the standard requirements by eliminating unnecessary testing of Master Seed bacteria and viruses and other forms of bulk or completed biological product. DATES: Effective Date: *January 22, 2008.* FOR FURTHER INFORMATION CONTACT: Dr. Albert P. Morgan, Chief Staff Officer, Operational Support Section, Center for Veterinary Biologics, Policy, Evaluation, and Licensing, APHIS, USDA, 4700 River Road, Unit 148, Riverdale, MD 20737-1228;
(301)734-8245. SUPPLEMENTARY INFORMATION: Background The Virus-Serum-Toxin Act regulations in 9 CFR part 113 (referred to below as the regulations) contain standard procedures and requirements that are used to establish the purity, safety, potency, and efficacy of veterinary biological products. Current standard requirements for certain live bacterial and viral vaccines require that each Master Seed be retested for immunogenicity 3 years after the initial immunogenicity test. The requirement to confirm the immunogenicity of a Master Seed at 3 years has been in place since the master seed concept for vaccine production was established, and had been considered necessary until such time that an accumulation of data derived from such confirmatory testing established the antigenic stability of Master Seed bacteria and viruses over extended periods of storage. Data accumulated by veterinary biologics licensees over several years have shown that the immunogenicity of the Master Seed is not adversely affected over extended periods of storage. On January 31, 2007, we published in the **Federal Register** (72 FR 4470-4472, Docket No. APHIS-2006-0079) a proposal 1 to amend the Virus-Serum-Toxin Act regulations for certain live bacterial and viral vaccines by removing the requirement to retest the Master Seeds for immunogenicity 3 years after the initial qualifying immunogenicity test. We also proposed to amend the requirement concerning mouse safety tests prescribed for biological products recommended for animals other than poultry. 1 To view the proposed rule and the comments we received, go to *http://www.regulations.gov/fdmspublic/component/main?main=DocketDetail&d=APHIS-2006-0079.* We solicited comments concerning our proposal for 60 days ending April 2, 2007. We received two comments by that date, from a trade association representing veterinary biologics manufacturers and a representative of a State animal health commission. One commenter supported the elimination of unnecessary testing/retesting from the regulations and noted that such action would decrease duplicative testing in animals. With regard to using the subcutaneous route of inoculation when conducting the mouse safety test, that same commenter recommended that proposed § 113.33(a)(1) should provide the option to split the injection volume among more than one injection site. The commenter pointed out that this recommendation was consistent with the “good practice” guidelines for subcutaneous injections recommended by the Association for Assessment and Accreditation of Laboratory Animal Care. We agree with the commenter's recommendation and have amended § 113.33(a)(1) in this final rule to allow the option of dividing the 0.5 mL inoculation volume among more than one injection site. The second commenter expressed concern that adverse local reactions may be missed if intraperitoneal inoculation is the only route used for the mouse safety test, and suggested that such test be conducted by inoculating mice using both the subcutaneous and intraperitoneal routes instead of by only one route as had been proposed. In response to the commenter's concern that adverse local reactions may be missed if only one route is used, we wish to point out that § 113.300(b) of the regulations requires final container samples from each serial of product to be tested for safety in at least one species for which the vaccine is intended; the purpose of such test is to ensure freedom from undue adverse local reactions. Accordingly, we are not making any changes in this final rule in response to the comment. Therefore, for the reasons given in the proposed rule and in this document, we are adopting the proposed rule as a final rule, with the changes discussed in this document. Executive Order 12866 and Regulatory Flexibility Act This proposed rule has been reviewed under Executive Order 12866. The rule has been determined to be not significant for the purposes of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget. We are amending the regulations for certain live bacterial and viral vaccines to eliminate the requirement to retest the Master Seed for immunogenicity 3 years after the initial qualifying immunogenicity test. In addition, this amendment updates the regulations concerning mouse safety tests by requiring either intraperitoneal or subcutaneous inoculation of mice, but not both, in such tests. The primary effect of this rule will be to update the standard requirements by eliminating unnecessary testing of Master Seed bacteria and viruses and other forms of bulk or completed product in animals. There are approximately 125 veterinary biologics establishments, including licensees and permittees that may be affected by this rule. According to the standards of the Small Business Administration, most veterinary biologics establishments would be classified as small entities. It is anticipated that no increased recordkeeping burden will be added to licensees or permittees since the amended regulations actually will mean that fewer tests will be needed and fewer reports required to be submitted. We further anticipate that licensees and permittees may benefit economically from the cost savings associated with the reduction in the amount of required animal testing. The overall effect of this amendment will be to reduce the costs associated with producing and testing veterinary biological products. Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action will not have a significant economic impact on a substantial number of small entities. Executive Order 12372 This program/activity is listed in the Catalog of Federal Domestic Assistance under No. 10.025 and is subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. (See 7 CFR part 3015, subpart V.) Executive Order 12988 This final rule has been reviewed under Executive Order 12988, Civil Justice Reform. It is not intended to have retroactive effect. This rule will not preempt any State or local laws, regulations, or policies, unless they present an irreconcilable conflict with this rule. The Virus-Serum-Toxin Act does not provide administrative procedures which must be exhausted prior to a judicial challenge to the provisions of this rule. Paperwork Reduction Act This rule contains no new information or recordkeeping requirements under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 *et seq.* ). List of Subjects in 9 CFR Part 113 Animal biologics, Exports, Imports, Reporting and recordkeeping requirements. Accordingly, we are amending 9 CFR part 113 as follows: PART 113—STANDARD REQUIREMENTS 1. The authority citation for part 113 continues to read as follows: Authority: 21 U.S.C. 151-159; 7 CFR 2.22, 2.80, and 371.4. § 113.8 [Amended] 2. In § 113.8, paragraph
(d)is amended as follows: a. In the heading by removing the words “ *Repeat immunogenicity tests* ” and adding the words “ *Extending the dating of a reference* ” in their place. b. By removing paragraph (d)(1). c. By removing the paragraph designation “(2)”. 3. In § 113.33, paragraphs (a)(1) and (a)(2) are revised to read as follows: § 113.33 Mouse safety tests.
(a)* * *
(1)Vaccine prepared for use as recommended on the label shall be tested by inoculating eight mice intraperitoneally or subcutaneously with 0.5 mL (the inoculation volume may be divided among more than one injection site), and the animals observed for 7 days.
(2)If unfavorable reactions attributable to the product occur in any of the mice during the observation period, the serial or subserial is unsatisfactory. If unfavorable reactions which are not attributable to the product occur, the test shall be declared inconclusive and may be repeated: *Provided,* That, if the test is not repeated, the serial or subserial shall be declared unsatisfactory. §§ 113.66, 113.68, and 113.69 [Amended] 4. In §§ 113.66, 113.68, and 113.69, paragraph (b)(6) is removed and paragraph (b)(7) is redesignated as paragraph (b)(6). § 113.67 [Amended] 5. In § 113.67, paragraph (b)(7) is removed and paragraph (b)(8) is redesignated as paragraph (b)(7). § 113.70 [Amended] 6. In § 113.70, paragraph (b)(5) is removed. §§ 113.71, 113.306, and 113.318 [Amended] 7. In §§ 113.71, 113.306, and 113.318, paragraph (b)(4) is removed and paragraph (b)(5) is redesignated as paragraph (b)(4). § 113.303 [Amended] 8. In § 113.303, paragraph (c)(6) is removed. § 113.302, 113.304, 113.314, 113.315, 113.317, 113.327, 113.331, and 113.332 [Amended] 9. In §§ 113.302, 113.304, 113.314, 113.315, 113.317, 113.327, 113.331, and 113.332, paragraph (c)(4) is removed and paragraph (c)(5) is redesignated as paragraph (c)(4). § 113.305 [Amended] 10. In § 113.305, paragraphs (b)(1)(iii) and (b)(2)(iii) are removed and paragraph (b)(2)(iv) is redesignated as paragraph (b)(2)(iii). §§ 113.308 and 113.316 [Amended] 11. In §§ 113.308 and 113.316, paragraph (b)(5) is removed and paragraph (b)(6) is redesignated as paragraph (b)(5). § 113.309 [Amended] 12. In § 113.309, paragraph (c)(9) is removed and paragraph (c)(10) is redesignated as paragraph (c)(9). § 113.310 [Amended] 13. In § 113.310, paragraph (c)(8) is removed and paragraph (c)(9) is redesignated as paragraph (c)(8). § 113.311 [Amended] 14. In § 113.311, paragraph (c)(7) is removed and paragraph (c)(8) is redesignated as paragraph (c)(7). § 113.312 [Amended] 15. In § 113.312, paragraphs (b)(5) and(b)(6) are removed and paragraph (b)(7) is redesignated as paragraph (b)(5). §§ 113.313 and 113.328 [Amended] 16. In §§ 113.313 and 113.328, paragraph (c)(6) is removed and paragraph (c)(7) is redesignated as paragraph (c)(6). §§ 113.325 and 113.326 [Amended] 17. In §§ 113.325 and 113.326, paragraph (c)(5) is removed and paragraph (c)(6) is redesignated as paragraph (c)(5). § 113.329 [Amended] 18. In § 113.329, paragraph (c)(5) is removed and paragraphs (c)(6) and (c)(7) are redesignated as paragraphs (c)(5) and (c)(6), respectively. Done in Washington, DC, this 13th day of December 2007. Kevin Shea, Acting Administrator, Animal and Plant Health Inspection Service. [FR Doc. E7-24649 Filed 12-20-07; 8:45 am] BILLING CODE 3410-34-P DEPARTMENT OF ENERGY Office of Energy Efficiency and Renewable Energy 10 CFR Parts 433, 434, and 435 [Docket No. EE-RM/STD-02-112] RIN 1904-AB13 Energy Conservation Standards for New Federal Commercial and Multi-Family High-Rise Residential Buildings and New Federal Low-Rise Residential Buildings AGENCY: Office of Energy Efficiency and Renewable Energy, Department of Energy. ACTION: Final rule. SUMMARY: The U.S. Department of Energy
(DOE)is adopting with changes the interim final rule published on December 4, 2006 (71 FR 70275) that implemented provisions in the Energy Policy Act of 2005 that require DOE to establish revised energy efficiency performance standards for the construction of all new Federal buildings. The standards in today's final rule apply to commercial and multi-family high-rise residential buildings and low-rise residential buildings, as designed and constructed. DATES: This rule is effective January 22, 2008. FOR FURTHER INFORMATION CONTACT: For technical issues contact Cyrus Nasseri, U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Federal Energy Management Program, EE-2L, 1000 Independence Avenue, SW., Washington, DC 20585-0121,
(202)586-9138, e-mail: *cyrus.nasseri@ee.doe.gov* . For legal issues contact Chris Calamita, U.S. Department of Energy, Office of the General Counsel, Forrestal Building, GC-72, 1000 Independence Avenue, SW., Washington, DC 20585,
(202)586-1777, e-mail: *Christopher.Calamita@hq.doe.gov* . SUPPLEMENTARY INFORMATION: I. Introduction A. Background B. Interim Final Rule C. Summary of the Final Rule II. Discussion of Comments and Changes to the Interim Final Rule III. Regulatory Analyses IV. Congressional Notification V. Approval of the Office of the Secretary I. Introduction A. Background Section 305 of the Energy Conservation and Production Act (ECPA), as amended by the Energy Policy Act of 1992 (Pub. L. 102-486) requires DOE to establish building energy efficiency standards for all new Federal buildings. (42 U.S.C. 6834) Section 305(a)(1) requires standards that contain energy efficiency measures that are technologically feasible and economically justified but, at a minimum, require the subject buildings to meet the energy saving and renewable energy specifications in the applicable voluntary consensus energy code specified in section 305(a)(2). (42 U.S.C. 6834(a)(1) and (2)) Until amended by the Energy Policy Act of 2005 (EPAct 2005; Pub. L. 109-58), section 305(a)(2) set the minimum or baseline standards as the CABO (Council of American Building Officials) Model Energy Code, 1992 (for residential buildings) and ASHRAE (American Society of Heating, Refrigerating, and Air-Conditioning Engineers) Standard 90.1-1989 (for commercial and multi-family high rise residential buildings). Section 305(a)(2)(C) of ECPA requires that DOE consider, in consultation with the Environmental Protection Agency and other Federal agencies, and where appropriate, measures regarding radon and other indoor air pollutants. Section 306(a)(1) of ECPA provides that each Federal agency must adopt procedures to ensure that new Federal buildings will meet or exceed the Federal building energy efficiency standards established under section 305. (42 U.S.C. 6835(a)(1)) Additionally, section 306(a)(2) extends the requirements for new Federal buildings established under section 305 to buildings under the jurisdiction of the Architect of the Capitol. (42 U.S.C. 6835(a)(2)) Section 306(b) bars the head of a Federal agency from expending Federal funds for the construction of a new Federal building unless the building meets or exceeds the applicable Federal building energy standards established under section 305. (42 U.S.C. 6835(b)) DOE established Federal building standards under ECPA and initially placed both the commercial and residential standards in Part 435 of Title 10 of the Code of Federal Regulations (CFR). In a final rule published on October 6, 2000, DOE established new energy efficiency standards for new Federal commercial and multi-family high-rise residential buildings. 65 FR 59999. DOE placed the revised Federal commercial and multi-family high-rise residential building standards in a new 10 CFR part 434, entitled “Energy Code for New Federal Commercial and Multi-Family High Rise Residential Buildings.” The standards for Federal low-rise residential buildings remain in 10 CFR part 435. Section 109 of EPAct 2005 amended section 305 of ECPA. (42 U.S.C. 6835) Section 109 replaced the minimum standards referenced in section 305(a)(2)(A) with references to updated building codes that are widely used today. For residential buildings, CABO Model Energy Code, 1992, was replaced with the 2004 International Energy Conservation Code (IECC). For commercial and multi-family high rise buildings, ASHRAE Standard 90.1-1989 was replaced with ASHRAE Standard 90.1-2004. Section 109 of EPAct 2005 also added a new section 305(a)(3)(A) that requires DOE, by rule, to establish revised Federal building energy efficiency performance standards not later than August 8, 2006. (42 U.S.C. 6834(a)(3)(A)) Under the revised standards, new Federal buildings must be designed to achieve energy consumption levels that are at least 30 percent below the updated minimum standards referenced in section 305(a)(2), if life-cycle cost-effective. (42 U.S.C. 6834(a)(3)(A)(i)(I)) B. Interim Final Rule On December 4, 2006, the Department published an interim final rule establishing energy conservation standards for the design and construction of new Federal commercial and multi-family high rise residential buildings (10 CFR part 433) and the design and construction of new Federal low-rise residential buildings (10 CFR part 435, subpart A). 71 FR 70275. DOE determined that establishing these requirements through an interim final rule offered the best opportunity to achieve the energy efficiency goals of section 109 of the EPAct 2005 as soon as possible. Further, the standards are applicable only to the design and construction of Federal buildings, which are public property. Regulations applicable only to public property are exempted from the Administrative Procedure Act's prior notice and comment requirements. (5 U.S.C. 553(a)(2)) Additionally, the explicitness of the direction provided to DOE for this rule in section 109 of the EPAct 2005 supported the issuance of an interim final rule, as a matter of policy. The interim final rule established an energy efficiency baseline for new Federal commercial and multi-family high rise residential buildings and new Federal low-rise residential buildings based on referencing ASHRAE Standard 90.1-2004 and the 2004 IECC, respectively. These standards establish requirements for the structure and major systems of a building and are mandatory for new Federal buildings. The interim final rule established a requirement for new Federal buildings to achieve a level of energy efficiency 30 percent greater than that of the ANSI/ASHRAE/IESNA or the 2004 IECC levels, as appropriate, when life-cycle cost-effective, again as directed by the statute. The standards established in the interim final rule do not take a prescriptive approach as to how the 30 percent reduction is to be obtained. The baseline standards contain a limited set of mandatory requirements, such as sealing leaks in the building envelope and air duct systems. Beyond this, there are no restrictions on how a Federal agency is to achieve cost-effective energy savings. DOE believes that Federal agencies should be given the flexibility necessary to determine the most effective ways to achieve energy savings above that of the incorporated standards, rather than relying on prescriptive requirements that may not be appropriate in all cases. The interim final rule became effective January 3, 2007. All new Federal buildings for which design for construction began on or after that date must comply with the requirements established in this rule. Again, the interim final rule applied to the design and construction of Federal buildings, as opposed to the operation of Federal buildings following construction. All new Federal buildings for which design for construction began prior to that date must comply with the requirements in 10 CFR part 434 or subpart C of part 435, as applicable. DOE provided a list of resources to help Federal agencies achieve building energy efficiency levels of at least 30 percent below that of ASHRAE Standard 90.1-2004 or the 2004 IECC. 71 FR 70278-70279. The resources were provided in three categories—for all buildings, specifically for commercial and high-rise multi-family residential buildings, and specifically for low-rise residential buildings. C. Summary of the Final Rule In today's final rule, the Department makes a number of minor changes to the interim final rule. These changes are described in Section II below. II. Discussion of Comments and Changes to the Interim Final Rule DOE received a variety of comments from twenty different parties in response to the interim final rule. The comments covered a variety of topics. There were comments and questions on scope and timing of new Federal standards, such as what energy end-uses the rules cover, and whether they should apply to major retrofits and leased buildings. Some comments suggested changes or alternatives to the baseline minimum standards. In particular, several commenters requested an update to the 2006 IECC in place of 2004 IECC for low-rise residential buildings. A number of comments suggested that the rules require more than 30 percent energy savings if cost effective. Some commenters wanted DOE to actively enforce that Federal agencies comply with the standards and/or provide support and guidance for implementing the standards. DOE received two comments (United States Postal Service, No. 15; Edison Electric Institute No. 18 1 ) that simply expressed support for the content of the new Federal standards. Comments are discussed and addressed in greater detail below. Questions on Scope and Timing of New Federal Standards As stated above, the interim final rule applies to Federal buildings for which design for construction began on or after January 3, 2007. Los Alamos National Laboratory (Comment No. 6) and the Department of Veterans Affairs (Comment No. 20) requested clarification of when “design for construction” begins as this establishes the applicable stage when the new rule applies. The rule becomes effective at the design stage when the impact of the rule needs to be accounted for in the procurement process. Specifically, this is the stage when the energy efficiency and sustainability details (such as insulation levels, HVAC systems, water-using systems, etc.) are either explicitly determined or implicitly included in a project cost specification. If prior to January 3, 2007, energy efficiency and sustainability details were incorporated into a building design, and thus a costly redesign would be required to meet this rule, the new rule is not applicable. Today's final rule clarifies the applicability of the new Federal building standards. 1 The number accompanying an identified commenter indicates the location of the comment with in the docket for this rulemaking. There were 20 comments received in total. All comments can be reviewed at *http://www2.eere.energy.gov/femp/pdfs/ee_rm_std_02_112.pdf.* Four comments questioned if the standards apply to leased buildings (Naval Facilities Engineering Command, No. 3; The Alliance to Save Energy, No. 9; The American Institute of Architects; No. 10 and No. 14). The last three comments recommended that the scope of the interim rule be expanded to apply to leased buildings. ECPA specifically defines “Federal building” to mean any building to be “constructed by, or for the use of, any Federal agency which is not legally subject to State or local building codes or similar requirements.” (42 U.S.C. 6832(6)) DOE applied the statutory definition to define “new Federal buildings” for the purpose of 10 CFR 433.2 and 435.2. A building being constructed for lease by a Federal agency would be for the use of the Federal agency and therefore would be a “new Federal building” subject to the requirements established in the interim final rule if it is not legally subject to State or local building codes. Four comments suggested the rule should apply to additions and/or major renovations. (Comments No. 6; No. 9; No. 10; No. 14). Commenters noted that the previous building standards applied to major renovations. Section 305 of ECPA specifies that the rule shall apply to only new buildings. Today's final rule provides additional clarity on the distinction between a “new” building and a major renovation. Under today's final rule the definition of “new Federal building” specifies that a building is a new building if it is completely replaced from the foundation up. DOE notes that the recent Executive Order 13423, *Strengthening Federal Environmental, Energy, and Transportation Management* , includes mandatory energy efficiency requirements for major renovations to Federal buildings. 72 FR 3919 (January 24, 2007). Request for Use of the 2006 IECC Instead of the 2004 IECC for Low-Rise Residential Buildings Five commenters (Birch Point Consulting, No. 1; American Architectural Manufacturers Association, No. 4; Pilkington North America No. 5; APA-The Engineered Wood Association No. 12; and a combined comment from Icynene, Nu-Wool Co., Inc., and Building Quality, No. 13) requested that the residential standards be updated from the 2004 IECC Edition to the 2006 IECC. These commenters stated that the 2004 IECC is what is referred to as a “supplement edition” that is published at the midpoint between the three year cycles when stand-alone editions of the IECC are published. Some of the commenters further stated that the 2004 IECC is “not a code.” Comments stated that the 2006 IECC is the most current version of the IECC and the 2004 Supplement is now an older version. Additionally, several commenters objected to requirements in the 2004 IECC and stated a preference for the alterations to these requirements in the 2006 IECC. Conversely, one commenter believes the Department was correct to use the 2004 IECC (Responsible Energy Codes Alliance, No. 11) Several commenters observed that ECPA requires that the Department determine whether the Federal standards should be updated within one year after approval of revisions to the IECC (or ASHRAE Standard 90.1). These commenters requested that consistent with this provision of EPCA DOE incorporate the 2006 version of the IECC. The interim final rule reflected Congress's specific instruction as to which voluntary consensus standard DOE is to incorporate into the requirements as the baseline for Federal residential buildings, 2004 IECC. Further, the 2004 IECC is code language that is fully sanctioned by the International Code Council. As directed by ECPA, DOE will consider updating to the 2006 IECC based on the cost effectiveness of the revisions contained in the 2006 IECC. However, at this time DOE has not completed the analysis necessary to determine if the standard should be updated to cite the 2006 IECC. Suggestions for Use of Alternative Baseline Standards DOE received a number of comments suggesting the use of alternative baseline standards to the 2004 IECC (for low-rise residential buildings) and ASHRAE Standard 90.1-2004 (for commercial and high-rise residential buildings). Suggestions included the use of the IECC for commercial and high-rise residential buildings (Comment No. 1; Responsible Energy Codes Alliance, No. 11) and use of the IRC (Comment No. 1) or ASHRAE Standard 90.2-2004 (Comment No. 14; No. 18) for low-rise residential buildings. Today's final rule does not amend the use of ASHRAE Standard 90.1-2004 and the 2004 IECC as the baselines for the requirement. As stated above, section 109 of EPAct 2005 is explicit in the voluntary standards that are to be incorporated as the baseline. Comments Requesting Clarification of Requirements Under the requirements established in the interim final rule, Federal buildings must exceed the energy efficiency level of the appropriate consensus standard by 30 percent if life-cycle cost effective. 10 CFR 433.4(a)(2) and 435.4(a)(2). DOE received several comments on the 30 percent level specified in the standards and the reliance on “life-cycle cost effective.” Regarding the energy savings target, four commenters suggested that DOE require the maximum cost-effective energy efficiency, even if it is beyond 30% (Comments No. 9; No. 10; No. 14; and Natural Resources Defense Council, No. 17). These commenters interpreted the direction in EPAct 2005 to be to achieve the maximum level of energy efficiency that is cost-effective relative to the baseline standards, not just to achieve at least 30 percent savings. As stated in the preamble to the interim final rule, Congress expressly specified a minimum performance requirement of a 30 percent improvement, if life-cycle cost effective. 71 FR 70277. Although the statute requires DOE to establish performance standards that are “at least” 30 percent below the levels in the incorporated ASHRAE and IECC standards, the standards that DOE established in the interim final rule do not require Federal agencies to consider the life-cycle cost effectiveness of improvements beyond the 30 percent level. It is DOE's view that had Congress sought to require improvements at a maximum energy savings with the condition that it has an equal or lower life-cycle cost relative to the baseline standard, it would have mandated designs to achieve that level and would not have specified the 30 percent minimum. The rule uses the same language in EPAct—that at least 30 percent savings be achieved if cost-effective. Federal agencies are not precluded from designing buildings to achieve greater improvements, and DOE encourages agencies to design new Federal buildings to achieve lower energy consumption levels if life-cycle cost effective. Further, DOE has made a minor modification to Sections 433.4(c) and 435.4(c) of the final rule to permit energy efficient better than the maximum level that is cost effective. This allows Federal agencies the flexibility to pursue additional energy efficiency for demonstration projects, such as zero energy buildings. One commenter objected to the performance based nature of the 30 percent requirements. The commenter stated that DOE should establish more prescriptive standards (Comment No. 17). The standards established in the interim final rule allow Federal designers flexibility in choosing a compliant design and assign the responsibility of ensuring compliance to the Federal agencies. The commenter's statements suggest a preference for prescriptive standards to achieve the additional 30 percent savings compared to the reference national standards, with explicit minimum requirements for individual building components (such as walls, windows, and floors) and systems (such as lighting and mechanical systems). Previous standards for Federal buildings were generally prescriptive in nature. However, given the complexity of developing a set of prescriptive requirements that meet both the energy efficiency and cost-effectiveness goals of section 109 of the EPAct 2005 for all Federal buildings of all types, DOE established a performance-based approach, utilizing the prescriptive requirements of the private sector standards as the absolute minimum if higher levels are not cost-effective. This approach permits the applicable construction costs and fuel costs for any given project to be accounted for, allowing for most cost-effective solution, which may indeed result in a greater than 30 percent savings over the minimum reference standards. One commenter (Comment No. 3) stated that “life-cycle cost-effectiveness” had not been adequately defined. The definition in the interim final rule specifies that life cycle cost-effectiveness is determined in accordance with 10 CFR part 436. The definition of “life-cycle cost effective” in 10 CFR part 436 provides agencies a choice of 4 methods of showing life cycle cost effectiveness, including lowest life cycle costs (10 CFR 436.19), positive net savings (10 CFR 436.20), a saving-to-investment ratio greater than one (10 CFR 436.21), or an internal rate of return higher than the discount rate published by OMB (10 CFR 436.22). The methodologies specified in 10 CFR 436 have been widely established in Federal projects, with the National Institute of Standards and Technology
(NIST)responsible for providing support for implementing 10 CFR 436 ( *http://www.bfrl.nist.gov/oae/projects/04ps75.html* ). Comments Related to the Handling of Receptacle and Process Loads DOE received five comments about addressing plug and process loads in Federal buildings. Two of the comments (Environmental Protection Agency, No. 7; Department of Interior, No. 19) objected to the fact that receptacle and process loads were exempted from calculation of the savings for the 30 percent requirement for commercial and high-rise residential buildings in the interim final rule. Laclede Gas (Comment No. 16) urged the Department to keep food service ventilation classified as process load. Conversely, the Department of Veterans Affairs (Comment No. 20) asked that medical equipment loads be exempt from the energy consumption savings requirements. Another comment (Los Alamos National Laboratory, No. 6) suggested that it be recognized that there are situations that should be excluded from the evaluation of energy savings such as industrial, manufacturing, or commercial processes. The energy efficiency of many receptacle loads (anything that is plugged in, such as a personal computer) is addressed through a separate section of EPAct 2005. Section 104 of EPAct 2005 requires Federal agencies to purchase energy efficient appliances and equipment. (42 U.S.C 8259b). Additionally, today's final rule applies to buildings as designed and constructed and it is often not possible to identify all receptacle loads when a building is designed or constructed as the occupants will to some degree establish what is plugged in. As equipment is replaced over time the initial savings from receptacle loads may diminish. As such DOE is maintaining the exclusion of receptacle loads for the purpose of calculating energy savings under the Federal building standards. With respect to process loads (for example, medical or industrial equipment), the Department is excluding these energy end-uses from the energy savings metric. Process loads typically involve specialized equipment for which improvements in energy efficiency may affect the functionality of the equipment or where improvements are not available at all. Some Federal buildings use most of their energy serving process loads, and application of the energy savings requirement to these buildings would likely place an undo burden on the rest of the building if the 30 percent savings is to be achieved. In order to provide additional clarity, DOE is establishing definitions of “receptacle load” and “process load.” Suggestion to Use Source Energy Instead of Site Energy DOE received a comment from the American Gas Association (Comment No. 8) suggesting the use of source energy instead of site energy as the energy metric to be used for determining energy consumption in the new Federal standards. Site energy is the energy used at the building. Source energy is the site energy and all energy used to produce and deliver the energy to the site. ECPA as modified by EPAct 2005 specifies the use of ASHRAE Standard 90.1 and the IECC as the reference standards. The procedures for calculating energy efficiency performance in these reference standards are annual energy cost. These procedures are adopted in this rulemaking. Energy costs implicitly account for the complete process of producing energy. Comments on Implementation and Enforcement of the Rules DOE received a number of comments requesting that additional actions be taken to implement and enforce the rule. Two commenters (Comments No. 10 and No. 14) urged the Department to issue rulemakings with provisions for sustainable design principles and water conservation technologies as required by EPCA, as amended by section 109 of EPACT 2005. DOE is currently preparing a notice of proposed rulemaking to address these provisions. Three commenters (The Polyisocyanurate Insulating Manufacturers Association, No. 2; Comments No. 9; and No. 14) suggested the Department take actions to ensure that agencies are complying with the standards. DOE again notes that today's final rule applies to the design and construction of new Federal buildings. Section 109 of EPAct 2005 assigns the responsibility of reporting compliance to the individual agencies as part of their annual budget request. Agencies are required to submit a list of all new Federal buildings owned, operated, or controlled by the Federal agency, and a statement specifying whether the Federal buildings have been constructed (or designed to be constructed) to meet or exceed the standards adopted in this notice. (42 U.S.C. 6834(a)(3)(C)) DOE has determined that the existing reporting requirement is sufficient to identify agency compliance. The interim final rule provided a list of resources to provide guidance on compliance with the requirements. 71 FR 70278-70279. Additionally, DOE, through its Federal Energy Management Program, is preparing training for federal agencies on how to comply with today's final rule. The Alliance to Save Energy commented that DOE should add requirements for commissioning and energy metering (Comment No. 9). DOE notes that section 103 of EPAct 2005 amended EPCA to require that all Federal buildings be metered. (42 U.S.C. 8253) The rule does not contain requirements for commissioning as the applicable Federal agencies are responsible for ensuring that the energy efficiency measures be properly installed. The Alliance to Save Energy commented that the Department should consider innovative provisions to make buildings more adaptable to new and emerging technologies (Comment No. 9). DOE notes that it participates in the development of new energy-efficient technologies for buildings and does promote the use of new energy-efficient technologies in buildings. Private sector standards and codes (ASHRAE Standard 90.1-2004 and the 2004 IECC) are typically “technology-neutral.” Particular technologies may be used to set the level of performance for energy codes or standards, but it would be this level of performance and not the specific technology that would be embodied in the code or standard. As stated above, the 30-percent requirement is a performance based requirement. Federal agencies are free to rely on a variety of technologies that they determine to be appropriate for their specific applications. The Alliance to Save Energy suggested that the provisions of section 104 of EPAct 2005 for building equipment to meet Energy Star and FEMP-designated efficiency criteria be included in this rule (Comment No. 9). As discussed above, DOE does not believe that it is appropriate to address receptacle loads in the Federal building standards. DOE is addressing the procurement requirements of section 104 in a separate rulemaking. 72 FR 33696 (June 19, 2007). Comments Requesting Support in Implementing the Rule One commenter (No. 2; 2) requested that the Department develop a comprehensive database of energy-efficiency features. FEMP maintains a database on high performance Federal buildings. ( *http://www.eere.energy.gov/femp/highperformance/* ) Three commenters (Comments No. 2; No. 10; and No. 14) requested that DOE provide support for education and training. FEMP intends to provide training and education on the new Federal standards, beginning in late 2007. DOE received a comment (Comment No. 10) suggesting that DOE implement the requirements of the new Federal standards in design specifications and model contract language that could be used by all agencies. The Department believes this is a good suggestion and will take this under consideration for action. Suggestion To Remove a Single Reference From the Preamble DOE received a comment from the American Gas Association (Comment No. 8) requesting that the references to the ASHRAE Advanced Energy Design Guide
(AEDG)be removed from the preamble because it “encourages more buildings to use electric resistance.” DOE notes that the references provided in the preamble of the interim final rule are for informational purposes only and the AEDG is approved by ASHRAE, a leading national technical society. The references are not intended to promote any single method for achieving compliance with the requirements. III. Regulatory Analyses A. Review Under Executive Order 12866, “Regulatory Planning and Review” Today's final rule is a “significant regulatory action” under section 3(f)(1) of Executive Order 12866, “Regulatory Planning and Review.” 58 FR 51735 (October 4, 1993). Accordingly, today's action was subject to review by the Office of Information and Regulatory Affairs in the Office of Management and Budget (OMB). OMB has completed its review. B. Review Under the Regulatory Flexibility Act The Regulatory Flexibility Act (5 U.S.C. 601 *et seq.* ) requires the preparation of an initial regulatory flexibility analysis for any rule that by law must be proposed for public comment, unless the agency certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. As required by Executive Order 13272, *Proper Consideration of Small Entities in Agency Rulemaking,* 67 FR 53461 (August 16, 2002), DOE published procedures and policies on February 19, 2003, to ensure that the potential impacts of its rules on small entities are properly considered during the rulemaking process (68 FR 7990). The Department has made its procedures and policies available on the Office of General Counsel's Web site: *http://www.gc.doe.gov.* Today's rule amending standards on energy efficiency performance standards for the design and construction of new Federal buildings is a rule relating to public property, and therefore, is not subject to any legal requirement to publish a general notice of proposed rulemaking. The Regulatory Flexibility Act does not apply. C. Review Under the Paperwork Reduction Act of 1995 This rulemaking will impose no new information or record keeping requirements. Accordingly, Office of Management and Budget
(OMB)clearance is not required under the Paperwork Reduction Act. (44 U.S.C. 3501 *et seq.* ) D. Review Under the National Environmental Policy Act of 1969 DOE prepared an Environmental Assessment
(EA)(DOE/EA-1463) entitled, Draft Environmental Assessment for Interim Final Rule, 10 CFR Part 433, “Energy Efficiency Standards for New Federal Commercial and Multi-Family High-Rise Residential Buildings,” and 10 CFR Part 435, “Energy Efficiency Standards for New Federal Low-Rise Residential Buildings,” pursuant to the Council on Environmental Quality's
(CEQ)Regulations for Implementing the Procedural Provisions of the National Environmental Policy Act (40 CFR Parts 1500-1508), the National Environmental Policy Act of 1969 (NEPA), as amended (42 U.S.C. 4321 *et seq.* ), and DOE's NEPA Implementing Procedures (10 CFR Part 1021). The EA addresses the possible environmental effects attributable to the implementation of the interim final rule. The only projected impact is a decrease in outdoor air pollutants resulting from decreased fossil fuel burning for energy use in Federal buildings. Today's minor changes to the interim final rule do not affect the findings of the EA or the discussion of those findings in the preamble to the interim final rule. 71 FR 70280. E. Review Under Executive Order 13132, “Federalism” Executive Order 13132, “Federalism,” 64 FR 43255 (August 4, 1999), imposes certain requirements on agencies formulating and implementing policies or regulations that preempt State law or that have federalism implications. The Executive Order requires agencies to examine the constitutional and statutory authority supporting any action that would limit the policymaking discretion of the States and to carefully assess the necessity for such actions. The Executive Order also requires agencies to have an accountable process to ensure meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications. On March 14, 2000, DOE published a statement of policy describing the intergovernmental consultation process it will follow in the development of such regulations. (65 FR 13735). DOE examined this rule and determined that it does not preempt State law and does 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. No further action is required by Executive Order 13132. F. Review Under Executive Order 12988, “Civil Justice Reform” With respect to the review of existing regulations and the promulgation of new regulations, section 3(a) of Executive Order 12988, “Civil Justice Reform,” 61 FR 4729 (February 7, 1996), imposes on Federal agencies the general duty to adhere to the following requirements:
(1)Eliminate drafting errors and ambiguity;
(2)write regulations to minimize litigation; and
(3)provide a clear legal standard for affected conduct, rather than a general standard and promote simplification and burden reduction. Section 3(b) of Executive Order 12988 specifically requires that Executive agencies make every reasonable effort to ensure that the regulation:
(1)Clearly specifies the preemptive effect, if any;
(2)clearly specifies any effect on existing Federal law or regulation;
(3)provides a clear legal standard for affected conduct, while promoting simplification and burden reduction;
(4)specifies the retroactive effect, if any;
(5)adequately defines key terms; and
(6)addresses other important issues affecting clarity and general draftsmanship under any guidelines issued by the Attorney General. Section 3(c) of Executive Order 12988 requires Executive agencies to review regulations in light of applicable standards in section 3(a) and section 3(b) to determine whether they are met or it is unreasonable to meet one or more of them. DOE has completed the required review and determined that, to the extent permitted by law: this rule meets the relevant standards of Executive Order 12988. G. Review Under the Unfunded Mandates Reform Act of 1995 Title II of the Unfunded Mandates Reform Act of 1995
(UMRA)(Pub. L. 104-4) requires each Federal agency to assess the effects of Federal regulatory actions on State, local, and tribal governments and the private sector. For a proposed regulatory action likely to result in a rule that may cause the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year (adjusted annually for inflation), section 202 of UMRA requires a Federal agency to publish a written statement that estimates the resulting costs, benefits, and other effects on the national economy. (2 U.S.C. 1532(a) and (b)). The UMRA also requires a Federal agency to develop an effective process to permit timely input by elected officers of State, local, and tribal governments on a proposed “significant intergovernmental mandate,” and requires an agency plan for giving notice and opportunity for timely input to potentially affected small governments before establishing any requirements that might significantly or uniquely affect small governments. On March 18, 1997, DOE published a statement of policy on its process for intergovernmental consultation under UMRA (62 FR 12820) (also available at *http://www.gc.doe.gov* ). This final rule contains neither an intergovernmental mandate nor a mandate that may result in the expenditure of $100 million or more in any year, so these requirements under the Unfunded Mandates Reform Act do not apply. H. Review Under the Treasury and General Government Appropriations Act of 1999 Section 654 of the Treasury and General Government Appropriations Act of 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family Policymaking Assessment for any rule that may affect family well-being. This final rule would not have any impact on the autonomy or integrity of the family as an institution. Accordingly, DOE has concluded that it is not necessary to prepare a Family Policymaking Assessment. I. Review Under Executive Order 12630, “Governmental Actions and Interference With Constitutionally Protected Property Rights” The Department has determined, under Executive Order 12630, “ Governmental Actions and Interference with Constitutionally Protected Property Rights,” 53 FR 8859 (March 18, 1988), that this rule would not result in any takings which might require compensation under the Fifth Amendment to the United States Constitution. J. Review Under the Treasury and General Government Appropriations Act, 2001 Section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516, note) provides for agencies to review most disseminations of information to the public under guidelines established by each agency pursuant to general guidelines issued by OMB. OMB's guidelines were published at 67 FR 8452 (February 22, 2002), and DOE's guidelines were published at 67 FR 62446 (October 7, 2002). DOE has reviewed today's final rule under the OMB and DOE guidelines and has concluded that it is consistent with applicable policies in those guidelines. K. Review Under Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,” 66 FR 28355 (May 22, 2001), requires Federal agencies to prepare and submit to the Office of Information and Regulatory Affairs (OIRA), Office of Management and Budget, a Statement of Energy Effects for any proposed significant energy action. A “significant energy action” is defined as any action by an agency that promulgated or is expected to lead to promulgation of a final rule, and that:
(1)Is a significant regulatory action under Executive Order 12866, or any successor order; and
(2)is likely to have a significant adverse effect on the supply, distribution, or use of energy, or
(3)is designated by the Administrator of OIRA as a significant energy action. For any proposed significant energy action, the agency must give a detailed statement of any adverse effects on energy supply, distribution, or use should the proposal be implemented, and of reasonable alternatives to the action and their expected benefits on energy supply, distribution, and use. This final rule would not have a significant adverse effect on the supply, distribution, or use of energy and, therefore, is not a significant energy action. Accordingly, DOE has not prepared a Statement of Energy Effects. IV . Congressional Notification As required by 5 U.S.C. 801, DOE will report to Congress on the promulgation of this rule prior to its effective date. The report will state that it has been determined that the rule is not a “major rule” as defined by 5 U.S.C. 804(2). V. Approval of the Office of the Secretary The Secretary of Energy has approved publication of today's final rule. List of Subjects in 10 CFR Parts 433, 434, and 435 Buildings, Energy conservation, Engineers, Federal buildings and facilities, Housing, Incorporation by reference. Issued in Washington, DC, on December 4, 2007. Alexander A. Karsner, Assistant Secretary, Energy Efficiency and Renewable Energy. Accordingly, the interim final rule amending 10 CFR parts 433, 434 and 435, which was published at 71 FR 70275 on December 4, 2006, is adopted as a final rule with the following changes: PART 433—ENERGY EFFICIENCY STANDARDS FOR THE DESIGN AND CONSTRUCTION OF NEW FEDERAL COMMERCIAL AND MULTI-FAMILY HIGH-RISE RESIDENTIAL BUILDINGS 1. The authority citation for part 433 continues to read as follows: Authority: 42 U.S.C. 6831-6832, 6834-6835; 42 U.S.C. 7101 *et seq.* 2. Amend § 433.2 by adding in alphabetical order definitions of “Design for construction,” “Process load” and “Receptacle load” and revise the definition of “New Federal building” to read as follows: § 433.2 Definitions. *Design for construction* means the stage when the energy efficiency and sustainability details (such as insulation levels, HVAC systems, water-using systems, etc.) are either explicitly determined or implicitly included in a project cost specification. *New Federal building* means any building to be constructed on a site that previously did not have a building or a complete replacement of an existing building from the foundation up, by, or for the use of, any Federal agency which is not legally subject to State or local building codes or similar requirements. *Process load* means the load on a building resulting from energy consumed in support of a manufacturing, industrial, or commercial process. Process loads do not include energy consumed maintaining comfort and amenities for the occupants of the building (including space conditioning for human comfort). *Receptacle load* means the load on a building resulting from energy consumed by any equipment plugged into electrical outlets. 3. Revise paragraph
(c)of § 433.4 to read as follows: § 433.4 Energy efficiency performance standard.
(c)If a 30 percent reduction is not life-cycle cost-effective, the design of the proposed building shall be modified so as to achieve an energy consumption level at or better than the maximum level of energy efficiency that is life-cycle cost-effective, but at a minimum complies with paragraph
(a)of this section. PART 434—ENERGY CODE FOR NEW FEDERAL COMMERCIAL AND MULTI-FAMILY HIGH-RISE RESIDENTIAL BUILDINGS 4. The authority citation for part 434 continues to read as follows: Authority: 42 U.S.C. 6831-6832, 6834-6836; 42 U.S.C. 8253-54; 42 U.S.C. 7101 *et seq.* 5. In § 434.101, paragraph 101.1.1, paragraphs (a)(2) and
(3)are revised to read as follows: § 434.101 Scope. 101.1.1
(a)* * *
(2)An addition for which design for construction began before January 3, 2007, that adds new space with provision for a heating or cooling system, or both, or for a hot water system; or
(3)A substantial renovation of a building for which design for construction began before January 3, 2007, involving replacement of a heating or cooling system, or both, or hot water system, that is either in service or has been in service. PART 435—ENERGY EFFICIENCY STANDARDS FOR NEW FEDERAL LOW-RISE RESIDENTIAL BUILDINGS 6. The authority citation for part 435 continues to read as follows: Authority: 42 U.S.C. 6831-6832, 6834-6835; 42 U.S.C. 8253-54; 42 U.S.C. 7101 *et seq.* 6a. Amend part 435 by revising the part heading to read as set forth above. 7. Amend § 435.2 by adding in alphabetical order a definition of “Design for construction” and revise the definition of “New Federal building” to read as follows: § 435.2 Definitions. *Design for construction* means the stage when the energy efficiency and sustainability details (such as insulation levels, HVAC systems, water-using systems, etc.) are either explicitly determined or implicitly included in a project cost specification. *New Federal building* means any building to be constructed by, or for the use of, any Federal agency which is not legally subject to State or local building codes or similar requirements. A new building is a building constructed on a site that previously did not have a building or a complete replacement of an existing building from the foundation up. 8. Revise paragraph
(c)of § 435.4 to read as follows: § 435.4 Energy efficiency performance standard.
(c)If a 30 percent reduction is not life-cycle cost-effective, the design of the proposed building shall be modified so as to achieve an energy consumption level at or better than the maximum level of energy efficiency that is life-cycle cost-effective, but at a minimum complies with paragraph
(a)of this section. [FR Doc. E7-24615 Filed 12-20-07; 8:45 am] BILLING CODE 6450-01-P DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 25 [Docket ID OCC-2007-0021] RIN 1557-AD05 FEDERAL RESERVE SYSTEM 12 CFR Part 228 [Regulation BB; Docket No. R-1302] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 345 RIN 3064-AD24 DEPARTMENT OF TREASURY Office of Thrift Supervision 12 CFR Part 563e [Docket ID OTS-2007-0024] RIN 1550-AC18 Community Reinvestment Act Regulations AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision (OTS). ACTION: Joint final rule; technical correction. SUMMARY: The OCC, the Board, the FDIC, and the OTS (collectively, the “agencies”) are amending their Community Reinvestment Act
(CRA)regulations to adjust the asset-size thresholds used to define “small bank” or “small savings association” and “intermediate small bank” or “intermediate small savings association.” As required by the CRA regulations, the adjustment to the threshold amount is based on the annual percentage change in the Consumer Price Index. The agencies are also correcting a paragraph heading that is inaccurate as a result of annual revisions to the small institution threshold. DATE: Effective January 1, 2008. FOR FURTHER INFORMATION CONTACT: *OCC:* Margaret Hesse, Special Counsel, Community and Consumer Law Division,
(202)874-5750; or Karen Tucker, National Bank Examiner, Compliance Policy Division,
(202)874-4428, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. *Board:* Anjanette M. Kichline, Senior Supervisory Consumer Financial Services Analyst,
(202)785-6054; or Brett Lattin, Attorney,
(202)452-3667, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. *FDIC:* Deirdre Foley, Senior Policy Analyst, Compliance Policy Section,
(202)898-6612, and Faye Murphy, Review Examiner, Compliance Examination Support,
(202)898-6613, Division of Supervision and Consumer Protection; or Susan van den Toorn, Counsel, Legal Division,
(202)898-8707, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. *OTS:* Celeste Anderson, Senior Project Manager, Compliance and Consumer Protection,
(202)906-7990; or Richard Bennett, Senior Compliance Counsel, Regulations and Legislation Division,
(202)906-7409, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: Background and Description of the Joint Final Rule The agencies' CRA regulations establish CRA performance standards for small and intermediate small banks and savings associations. The regulations define small and intermediate small institutions by reference to asset-size criteria expressed in dollar amounts, and they further require the agencies to publish annual adjustments to these dollar figures based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW), not seasonally adjusted, for each twelve-month period ending in November, with rounding to the nearest million. 12 CFR 25.12(u)(2), 228.12(u)(2), 345.12(u)(2), and 563e.12(u)(2). The threshold for small banks was revised most recently for the OCC, the Board, and the FDIC effective January 1, 2007 (71 FR 78335 (Dec. 29, 2006)). These agencies' CRA regulations, as revised on December 29, 2006, provide that banks that, as of December 31 of either of the prior two calendar years, had assets of less than $1.033 billion are “small banks.” Small banks with assets of at least $258 million as of December 31 of both of the prior two calendar years and less than $1.033 billion as of December 31 of either of the prior two calendar years are “intermediate small banks.” 12 CFR 25.12(u)(1), 228.12(u)(1), 345.12(u)(1). The threshold for small savings associations was revised in the same way and the same threshold for intermediate small savings associations was established by OTS effective July 1, 2007 (72 FR 13435 (Mar. 22, 2007). 12 CFR 563e.12(u)(1). This joint final rule further revises these thresholds. During the period ending November 2007, the CPIW increased by 2.7 percent. As a result, the agencies are revising 12 CFR 25.12(u)(1), 228.12(u)(1), 345.12(u)(1), and 563e.12(u)(1) to make this annual adjustment. Beginning January 1, 2008, banks and savings associations that, as of December 31 of either of the prior two calendar years, had assets of less than $1.061 billion are “small banks” or “small savings associations.” Small banks or small savings associations with assets of at least $265 million as of December 31 of both of the prior two calendar years and less than $1.061 billion as of December 31 of either of the prior two calendar years are “intermediate small banks” or “intermediate small savings associations.” The agencies also publish current and historical asset-size thresholds on the website of the Federal Financial Institutions Examination Council at *http://www.ffiec.gov/cra/* . The agencies also are amending their CRA regulations to make a technical correction to revise a paragraph heading that is inaccurate as a result of annual small institution threshold adjustments. The technical correction revises the paragraph headings found at 12 CFR 25.26(a)(1), 228.26(a)(1), and 345.26(a)(1) (“Small banks with assets of less than $250 million”) and 12 CFR 563e.26(a)(1) (“Small savings associations with assets of less than $250 million”). As a result of the agencies' annual adjustments to the dollar amount threshold for small institutions, the threshold of $250 million described in the paragraph heading is inaccurate. The agencies are revising the headings so that they do not reference the dollar amount of the small bank or small savings association asset threshold. Administrative Procedure Act and Effective Date Under 5 U.S.C. 553(b)(B) of the Administrative Procedure Act (APA), an agency may, for good cause, find (and incorporate the finding and a brief statement of reasons therefore in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest. The amendments to the regulations to adjust the asset-size thresholds for small and intermediate small banks and savings associations result from the application of a formula established by a provision in the CRA regulations that the agencies previously published for comment. *See* 70 FR 12148 (Mar. 11, 2005), 70 FR 44256 (Aug. 2, 2005), 71 FR 67826 (Nov. 24, 2006), and 72 FR 13429 (Mar. 22, 2007). Sections 25.12(u)(1), 228.12(u)(1), 345.12(u)(1), and 563e.12(u)(1) are amended by adjusting the asset threshold as provided for in §§ 25.12(u)(2), 228.12(u)(2), 345.12(u)(2), and 563e.12(u)(2). Accordingly, since the agencies' rules provide no discretion as to the computation or timing of the revisions to the asset-size criteria, the agencies have determined that publishing a notice of proposed rulemaking and providing opportunity for public comment are unnecessary. With regard to the revision amending the paragraph heading, as a result of the annual adjustment required by the regulations, the heading describing “small banks” or “small savings associations” as those with assets of less than $250 million is inaccurate. The revision merely amends the heading to correct this inaccuracy and prevent further inaccuracies when annual adjustments are made in the future. For this reason, the agencies, for good cause, find that the notice and comment procedures prescribed by the APA are unnecessary because the joint final rule is making a technical correction without substantive change to the provisions of parts 25, 228, 345, and 563e. This joint final rule takes effect January 1, 2008. Under 5 U.S.C. 553(d)(3) of the APA, the required publication or service of a substantive rule shall be made not less than 30 days before its effective date, except, among other things, as provided by the agency for good cause found and published with the rule. The agencies find that there is good cause for shortened notice because their current rules already provide notice that the small and intermediate asset-size thresholds will be adjusted as of December 31 based on twelve-month data as of the end of November each year. Moreover, the revisions to the headings in the agencies' rules are minor, nonsubstantive, and technical. Regulatory Flexibility Act The Regulatory Flexibility Act
(RFA)does not apply to a rulemaking where a general notice of proposed rulemaking is not required. 5 U.S.C. 603 and 604. As noted previously, the agencies have determined that it is unnecessary to publish a notice of proposed rulemaking for this joint final rule. Accordingly, the RFA's requirements relating to an initial and final regulatory flexibility analysis do not apply. Paperwork Reduction Act of 1995 There are no collection of information requirements in this joint final rule. Executive Order 12866 The OCC and OTS have each determined that its portion of this joint final rule is not a significant regulatory action as defined in Executive Order 12866. Unfunded Mandates Reform Act of 1995 Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532 (Unfunded Mandates Act), requires that an agency must prepare a budgetary impact statement before promulgating any rule likely to result in a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC and OTS have each determined that its portion of this joint final rule will not result in expenditures by State, local, and tribal governments, or by the private sector, of $100 million or more in any one year. Accordingly, this joint final rule is not subject to section 202 of the Unfunded Mandates Act. Executive Order 13132 The OCC and OTS have each determined that its portion of this joint final rule does not have any Federalism implications as required by Executive Order 13132. List of Subjects 12 CFR Part 25 Community development, Credit, Investments, National banks, Reporting and recordkeeping requirements. 12 CFR Part 228 Banks, banking, Community development, Credit, Investments, Reporting and recordkeeping requirements. 12 CFR Part 345 Banks, banking, Community development, Credit, Investments, Reporting and recordkeeping requirements. 12 CFR Part 563e Community development, Credit, Investments, Reporting and recordkeeping requirements, Savings associations. Department of the Treasury Office of the Comptroller of the Currency 12 CFR Chapter I For the reasons discussed in the joint preamble, 12 CFR part 25 is amended as follows: PART 25—COMMUNITY REINVESTMENT ACT AND INTERSTATE DEPOSIT PRODUCTION REGULATIONS 1. The authority citation for part 25 continues to read as follows: Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36, 93a, 161, 215, 215a, 481, 1814, 1816, 1828(c), 1835a, 2901 through 2907, and 3101 through 3111. 2. Revise § 25.12(u)(1) to read as follows: § 25.12 Definitions.
(u)*Small bank* —(1) *Definition.* Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.061 billion. Intermediate small bank means a small bank with assets of at least $265 million as of December 31 of both of the prior two calendar years and less than $1.061 billion as of December 31 of either of the prior two calendar years. 3. Revise the paragraph heading to § 25.26(a)(1) to read as follows: § 25.26 Small bank performance standards.
(a)*Performance criteria* —(1) *Small banks that are not intermediate small banks.* * * * Federal Reserve System 12 CFR Chapter II For the reasons set forth in the joint preamble, the Board of Governors of the Federal Reserve System amends part 228 of chapter II of title 12 of the Code of Federal Regulations as follows: PART 228—COMMUNITY REINVESTMENT (REGULATION BB) 1. The authority citation for part 228 continues to read as follows: Authority: 12 U.S.C. 321, 325, 1828(c), 1842, 1843, 1844, and 2901 *et seq.* 2. Revise § 228.12(u)(1) to read as follows: § 228.12 Definitions.
(u)*Small bank* —(1) *Definition.* Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.061 billion. Intermediate small bank means a small bank with assets of at least $265 million as of December 31 of both of the prior two calendar years and less than $1.061 billion as of December 31 of either of the prior two calendar years. 3. Revise the paragraph heading to § 228.26(a)(1) to read as follows: § 228.26 Small bank performance standards.
(a)*Performance criteria* —(1) *Small banks that are not intermediate small banks.* * * * Federal Deposit Insurance Corporation 12 CFR Chapter III Authority and Issuance For the reasons set forth in the joint preamble, the Board of Directors of the Federal Deposit Insurance Corporation amends part 345 of chapter III of title 12 of the Code of Federal Regulations to read as follows: PART 345—COMMUNITY REINVESTMENT 1. The authority citation for part 345 continues to read as follows: Authority: 12 U.S.C. 1814-1817, 1819-1820, 1828, 1831u and 2901-2907, 3103-3104, and 3108(a). 2. Revise § 345.12(u)(1) to read as follows: § 345.12 Definitions.
(u)*Small bank* —(1) *Definition.* Small bank means a bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.061 billion. Intermediate small bank means a small bank with assets of at least $265 million as of December 31 of both of the prior two calendar years and less than $1.061 billion as of December 31 of either of the prior two calendar years. 3. Revise the paragraph heading to § 345.26(a)(1) to read as follows: § 345.26 Small bank performance standards.
(a)*Performance criteria* —(1) *Small banks that are not intermediate small banks.* * * * Department of the Treasury Office of Thrift Supervision 12 CFR Chapter V For the reasons discussed in the joint preamble, 12 CFR part 563e is amended as follows: PART 563e—COMMUNITY REINVESTMENT 1. The authority citation for part 563e continues to read as follows: Authority: 12 U.S.C. 1462a, 1463, 1464, 1467a, 1814, 1816, 1828(c), and 2901 through 2907. 2. Revise § 563e.12(u)(1) to read as follows: § 563e.12 Definitions.
(u)*Small savings association* —(1) *Definition. Small savings association* means a savings association that, as of December 31 of either of the prior two calendar years, had assets of less than $1.061 billion. *Intermediate small savings association* means a small savings association with assets of at least $265 million as of December 31 of both of the prior two calendar years and less than $1.061 billion as of December 31 of either of the prior two calendar years. 3. Revise the paragraph heading to § 563e.26(a)(1) to read as follows: § 563e.26 Small savings association performance standards.
(a)*Performance criteria* —(1) *Small savings associations that are not intermediate small savings associations.* * * * Dated: December 5, 2007. Julie L. Williams, First Senior Deputy Comptroller and Chief Counsel. By order of the Board of Governors of the Federal Reserve System. Dated: December 14, 2007. Jennifer J. Johnson, Secretary of the Board. By order of the Board of Directors. Dated at Washington, DC, this 10th day of December, 2007. Federal Deposit Insurance Corporation. Robert E. Feldman, Executive Secretary. Dated: December 14, 2007. By the Office of Thrift Supervision. John M. Reich, Director. [FR Doc. E7-24719 Filed 12-20-07; 8:45 am] BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P DEPARTMENT OF TRANSPORTATION Federal Highway Administration 23 CFR Part 655 [FHWA Docket No. FHWA-2003-15149] RIN 2125-AE98 National Standards for Traffic Control Devices; the Manual on Uniform Traffic Control Devices for Streets and Highways; Maintaining Traffic Sign Retroreflectivity AGENCY: Federal Highway Administration (FHWA), DOT. ACTION: Final rule. SUMMARY: The Manual on Uniform Traffic Control Devices (MUTCD) is incorporated by reference in 23 CFR part 655, subpart F, approved by the Federal Highway Administration, and recognized as the national standard for traffic control devices used on all public roads. The purpose of this final rule is to revise standards, guidance, options, and supporting information relating to maintaining minimum levels of retroreflectivity for traffic signs on all roads open to public travel. EFFECTIVE DATE: This final rule is effective January 22, 2008. The incorporation by reference of the publication listed in this regulation is approved by the Director of the Office of the Federal Register as of January 22, 2008. FOR FURTHER INFORMATION CONTACT: Ms. Mary McDonough, Office of Safety Design,
(202)366-2175, or Mr. Raymond W. Cuprill, Office of the Chief Counsel,
(202)366-0791, U.S. Department of Transportation, Federal Highway Administration, 1200 New Jersey Ave., SE., Washington, DC 20590. Office hours are from 7:45 a.m. to 4:15 p.m., E.T., Monday through Friday, except Federal holidays. SUPPLEMENTARY INFORMATION: Electronic Access This document, the notice of proposed amendments (NPA), the supplemental notice of proposed amendments (SNPA), and all comments received may be viewed online through the Federal eRulemaking portal at *http://www.regulations.gov.* Electronic submission and retrieval help and guidelines are available under the help section of the Web site. An electronic copy of this document may also be downloaded from the Office of the **Federal Register's** home page at: *http://www.archives.gov* and the Government Printing Office's Web page at: *http://www.access.gpo.gov/nara.* Background On July 30, 2004, at 69 FR 45623, the FHWA published in the **Federal Register** a NPA proposing to amend the MUTCD to include methods to maintain traffic sign retroreflectivity. The NPA was issued in response to section 406 of the Department of Transportation and Related Agencies Appropriations Act, 1993 (Pub. L. 102-388; October 6, 1992). Section 406 of this Act directed the Secretary of Transportation to revise the MUTCD to include a standard for minimum levels of retroreflectivity that must be maintained for traffic signs and pavement markings, which apply to all roads open to public travel. The FHWA is currently conducting research to develop a standard for minimum levels of pavement marking retroreflectivity. The FHWA expects to initiate the pavement marking retroreflectivity rulemaking process once the research is concluded and the results are analyzed and considered. The FHWA has led a significant effort toward establishing minimum-maintained levels of sign retroreflectivity since the statute was issued in 1993. Three national workshops were held in 1995 to educate State and local highway agency personnel and solicit their input regarding an initial set of minimum maintained sign retroreflectivity levels. In 1998, FHWA published revisions to initial research recommendations on minimum sign retroreflectivity levels 1 noting that additional work would be needed because the National Highway Traffic Safety Administration was also revising the Federal Motor Vehicle Safety Standard Number 108 Lamps, Reflective Devices, and Associated Equipment (FMVSS 108). The additional research was completed in 2003, at which time FHWA began preparing the NPA for traffic sign retroreflectivity for the MUTCD, which was published in 2004. 1 A copy of “An Implementation Guide For Minimum Retroreflectivity Requirements for Traffic Signs,” dated April 1, 1998, can be found on the Docket Management System (FHWA-2003-15149-229) for this ruling at the following Web address: *http://dms.dot.gov/search/document.cfm?documentid=467771&docketid=15149.* After considering and analyzing the comments on the NPA for minimum levels of retroreflectivity for traffic signs, FHWA decided to publish a supplemental notice of proposed amendments (SNPA). In particular, the SNPA was developed to address comments to the docket that:
(1)Expressed concern that the NPA proposal did not meet the intent of the 1993 statute,
(2)suggested that the table of minimum retroreflectivity levels should be placed in the MUTCD,
(3)requested clarification of the compliance period, and
(4)expressed concern about the resource requirements for complying with the rulemaking. The proposed MUTCD text in the SNPA included a STANDARD statement that required that a method be used to manage and maintain retroreflectivity and required that sign retroreflectivity be maintained at minimum levels. It also included the table of minimum retroreflectivity levels in the MUTCD. These changes were significant enough to warrant an SNPA to allow FHWA to obtain and assess additional public comments. The SNPA was published on May 8, 2006, at 71 FR 26711. The comment period for the SNPA ended on November 6, 2006. Based on the comments received and its own experience, FHWA is issuing this final rule establishing the minimum levels of retroreflectivity that must be maintained for traffic signs. The FHWA is designating the MUTCD, with these changes incorporated, as Revision 2 of the 2003 Edition of the MUTCD. The text of this Revision No. 2 and the text of the 2003 Edition of the MUTCD with Revision No. 2 final text incorporated are available for inspection and copying as prescribed in 49 CFR part 7 at the FHWA Office of Transportation Operations. Furthermore, final Revision No. 2 changes are available on the official MUTCD Web site at *http://mutcd.fhwa.dot.gov.* The entire MUTCD text with final Revision No. 2 text incorporated is also available on this Web site. Summary of Comments The FHWA received 121 letters submitted to the docket in response to the SNPA containing approximately 550 individual comments. The FHWA received comments from the National Committee on Uniform Traffic Control Devices (NCUTCD), the American Association of State Highway and Transportation Officials (AASHTO) and 20 State Departments of Transportation
(DOT)members of AASHTO, the National Association of County Engineers
(NACE)and seven county association members of NACE, city and county governmental agencies, consulting firms, private industry, associations, other organizations, and individual private citizens. The FHWA has considered all these comments. Docket comments and summaries of FHWA's analyses and determinations are discussed below. General comments are discussed first, followed by discussion of major issues and adopted changes, and finally, discussion of other comments. Discussion of General Comments Many respondents agreed with the intent and the concepts proposed in both the NPA and the SNPA. In analyzing the comments to the SNPA, FHWA decided that additional clarification should be provided in the MUTCD text and in the explanations provided in the final rule in order to address the following five major issues:
(1)Clarification of compliance period;
(2)Resource burdens on public agencies;
(3)Statutory requirements;
(4)Table of minimum retroreflectivity levels in the MUTCD; and
(5)Impacts of sign retroreflectivity on safety. Discussion of Major Issues This section provides a discussion of each of the five major issues raised by commenters in response to the SNPA, along with FHWA's analysis and resolution.
(1)Clarification of the compliance period. Several county associations and many county and local officials requested an extension from 2 to 4 years for the compliance period for the establishment and implementation of a method to maintain sign retroreflectivity, in order to accommodate their programs within their 2-year budget cycles. There were also a few requests to extend the 7 and 10 year compliance periods for the signs themselves. Considering the comments regarding budget cycles, particularly budget cycles for local agencies, FHWA has extended to 4 years the compliance period for establishing and implementing a sign assessment or management method to maintain minimum levels of sign retroreflectivity. This extended compliance period will allow transportation agencies to make allowances for budgets (including working with the States or regional organizations) to access funds and/or partnerships to achieve the minimum levels of sign retroreflectivity. The 7 and 10 year compliance dates for minimum levels for sign retroreflectivity will remain 7 years for regulatory, warning, and ground-mounted guide signs and 10 years for street name and overhead guide signs, because these compliance target dates correspond to the normal expected service life of sign sheeting and will allow highway agencies to make the proper accommodations in their efforts to maintain minimum retroreflectivity levels. The 7 and 10 year compliance dates are counted from the effective date of this rule and are not in addition to the 4-year period for establishing the methods.
(2)Resource burdens on public agencies. While the Minnesota DOT (MNDOT) recognized that the proposed language would impose additional time and resource burdens on public agencies, it did not perceive this rule as an “unmanageable burden.” Several sign manufacturers and some private citizens appreciated the FHWA's effort to point out that Federal funds are available for up to 100 percent funding of “replacement of signs in this program.” In addition, the American Traffic Safety Services Association (ATSSA), the American Automobile Association (AAA), the American Association of Retired People (AARP), the American Highway Users Alliance (AHUA), and several private citizens agree that the benefits from this rulemaking will outweigh the costs that agencies may experience. However, AASHTO, NACE, and several State and local DOTs believe that the requirements, as proposed in the SNPA, are an unfunded mandate with serious financial implications to their agencies. The FHWA conducted a study to determine if unfunded mandates, as defined by the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, 109 Stat. 48, March 22, 1995), would be imposed by including requirements in the MUTCD for minimum maintained traffic sign retroreflectivity levels. 2 Based on the analysis, this rulemaking effort does not impose an unfunded mandate. Additionally, because Federal-aid highway dollars are often provided to States to use for these types of sign replacements, this requirement does not rise to the level of an unfunded mandate. 2 “Maintaining Traffic Sign Retroreflectivity: Impacts on State and Local Agencies,” Publication No. FHWA-HRT-07-042, dated April 2007, is available at the following Web address: *http://www.tfhrc.gov/safety/pubs/07042/index.htm.* One commenter reviewed the FHWA's report “Maintaining Traffic Sign Retroreflectivity: Impacts on State and Local Agencies (DRAFT)” (1994—15149-06), and suggested that perhaps there was a mathematical error in that report that would mean that the costs incurred by agencies when replacing signs would be above those that can be required from agencies without funding. The FHWA has updated the 1994 draft report with a 2007 version (see footnote # 2). The updated report now includes the costs of overhead and street name signs, which the 1994 version excluded. The updated report concludes that the national impact of including the minimum maintained traffic sign retroreflectivity levels in the MUTCD is approximately $37.5 million over a 10-year implementation period, with a maximum annual impact of $4.5 million in years 1 through 7. This is below the annual $128.1 million unfunded mandate level. The FHWA has also provided ample phase-in time for agencies to comply. Agencies are already required to have a highway safety program that includes provisions for the upgrading of substandard traffic control devices and installations to achieve conformity with the MUTCD, so this rulemaking does not create additional burdens. While many counties believe that FHWA should consider a funding stream directly to local jurisdictions for rulemaking activities such as minimum retroreflectivity standards, such funding stream discussions are outside the scope of this rulemaking. Signing programs remain eligible for Federal-aid highway dollars.
(3)Statutory requirements: Several organizations representing highway users from a safety perspective agree that the language proposed in the SNPA satisfied the statutory requirements to establish a standard for the minimum levels of sign retroreflectivity; however, AASHTO, and several States, commented that Congress did not explicitly indicate that the minimum values for maintaining sign retroreflectivity had to be included in the MUTCD as a Standard. Alternatively, the Advocates for Highway and Auto Safety
(AHAS)believe that the language proposed in the SNPA still did not fully satisfy the statutory requirements, which AHAS interprets as requiring the establishment of specific and mandatory minimum levels of retroreflectivity for signs and pavement markings in the MUTCD and an obligation on State and local authorities to maintain those specific minimum values of retroreflectivity. AHAS stated that the intent can only be met by including such requirements in a “standard” statement in the MUTCD, which is defined as one of the “required, mandatory, or specifically prohibitive practice regarding a traffic control device.” The FHWA includes the reference to minimum levels for sign retroreflectivity in a Standard statement because the statute requires the Secretary to revise the MUTCD to include a standard for minimum levels of retroreflectivity that must be maintained for traffic signs. Under the MUTCD's current organization, the best way to do this is by including it in a STANDARD statement, because Standards represent requirements. 3 In addition, the congressional reference to a standard did not exclude the use of GUIDANCE, OPTION, and SUPPORT statements to help clarify the STANDARD statement of required minimum levels of retroreflectivity that must be maintained, similar to the other sections of the MUTCD. 3 In the context of this final rule, the definitions of STANDARD and GUIDANCE are identical to the definitions provided in the Introduction of the MUTCD ( *http://mutcd.fhwa.dot.gov* ). Specifically, a STANDARD is a statement of required, mandatory or specifically prohibitive practice regarding a traffic control device, while a GUIDANCE is a statement of recommended, but not mandatory, practice in typical situations, with deviations allowed if engineering judgment or engineering study indicates the deviation to be appropriate. The FHWA also received comments from the city of Plano, Texas, and the Illinois County Engineers expressing a concern and/or confusion that the language proposed in the SNPA “imbedded” a GUIDANCE statement within a STANDARD, because the STANDARD statement referenced the GUIDANCE statement for minimum retroreflectivity levels. Based on this concern, and to clarify FHWA's intent, FHWA revises the STANDARD statement to explicitly reference Table 2A-3 Minimum Maintained Retroreflectivity Levels, which contains minimum-maintained retroreflectivity levels for various sign color combinations and types of sign sheeting. The National Association of Counties
(NACo)and NACE suggested adding “recommended” before “minimum level” in describing the retroreflectivity levels shown in Table 2A-3. The FHWA retains the wording “minimum level” in describing the levels shown in Table 2A-3, because the word “recommended” is not appropriate when referencing a Standard.
(4)Table of minimum retroreflectivity levels in the MUTCD. The ATSSA, AAA, AARP, AHUA, Minnesota and Virginia DOTs, the city of Plano, Texas, sign manufacturers, and many private citizens were in favor of including the table of minimum retroreflectivity levels in the MUTCD. However, many organizations, such as AASHTO, NACo, NACE, and numerous State DOTs, as well as county and local agencies were opposed to the inclusion of the table. Those who opposed including the table in the MUTCD expressed concern over potential litigation that could be brought against public agencies if an individual sign within their jurisdiction was to fall below the minimum maintained levels in the table. The NCUTCD also commented that before any table is inserted into the MUTCD, FHWA should provide substantial clarification regarding the process and frequency for updating or changing the table of retroreflectivity values. The FHWA believes that including this table in the MUTCD is necessary to satisfy the statutory requirement that the MUTCD be amended to include minimum retroreflectivity levels. Therefore, the FHWA includes Table 2A-3, titled “Minimum Maintained Retroreflectivity Levels” in the MUTCD. The FHWA also believes inclusion of the table will provide clarity and convenience to the users of the MUTCD. In response to the request by the NCUTCD that FHWA clarify the process for updating or changing values in the table, we note that updates or changes to the table would be subject to a public rulemaking process before FHWA could adopt changes to the values of the table in the MUTCD. This process will include notice and opportunity for comment by the public. Table 2A-3 will be included in the MUTCD as follows (note that the values in this table have not changed during the rulemaking process): ER21DE07.010 BILLING CODE 4910-22-C The FHWA received comments from NACo, NACE and several local agencies that suggested adding a statement clarifying that all signs need not meet the minimum retroreflectivity values at every point in time. Considering these comments in conjunction with FHWA's understanding that there will be cases where vandalism, weather, or damage due to a crash influences the visibility of a sign, the FHWA clarified the SUPPORT statement in Section 2A.09. The revised statement clarifies that an agency or an official having jurisdiction would be in compliance with the Standard even if there are some individual signs that do not meet the minimum retroreflectivity levels at a particular point in time, provided that an assessment or management method implemented in accordance with Section 2A.09 of the MUTCD is being used. The FHWA also received comments from NACo, NACE and several local agencies stating specific concerns that the establishment of specific retroreflectivity values within Table 2A-3 will become “the de-facto standard” that will be used against highway agencies in tort claims and lawsuits. The FHWA believes that the selection of a reasonable method for maintaining sign retroreflectivity and strict adherence to the same might serve to defend highway agencies in tort liability claims and litigation. Public agencies and officials that implement and follow a reasonable method in conformance with the national MUTCD would appear to be in a better position to successfully defend tort litigation involving claims of improper sign retroreflectivity than jurisdictions that lack any method. In addition, as a result of adding clarifying language to the Support statement indicating that once an assessment or management method is used by an agency or official having jurisdiction, agencies would be in compliance with the STANDARD even if some individual signs do not meet the minimum retroreflectivity levels at a point in time. Including Table 2A-3 in the MUTCD does not imply that an agency needs to measure the retroreflectivity of every sign in its jurisdiction. Instead, agencies must implement methods designed to provide options on how to maintain the minimum retroreflectivity levels, using the criteria in Table 2A-3.
(5)Impacts of sign retroreflectivity on safety. The ATSSA and several sign manufacturers believe there is a proven link between maintained sign retroreflectivity and safety, especially as it relates to older drivers. In addition, several citizens believe that improved retroreflectivity will lead to safer roads. One citizen who worked for several years in the field of nighttime visibility stated that his research with actual drivers on the road showed conclusive results that greater levels of retroreflectivity increase a driver's ability to be warned well in advance of a traffic situation or pedestrian encounter. The North Carolina DOT (NCDOT) and the AHAS, however, recommend that further FHWA studies be done to demonstrate that retroreflective improvements translate into safety improvements. The FHWA believes that improving sign retroreflectivity will be a benefit to all drivers, including older drivers. All drivers need legible signs in order to make important decisions at key locations, such as intersections and exit ramps on high speed facilities. This is particularly true for regulatory and warning signs. This is fundamental to safe driving, and the lack of uniform retroreflectivity standards has led to wide variations in maintenance levels of these critical signs. As discussed in the SNPA, there have been some investigations that demonstrate potential safety benefits of upgrading sign materials. 4 More importantly, maintaining sign retroreflectivity is consistent with one of FHWA's primary goals, which is to improve safety on the Nation's streets and highways. Improvements in sign visibility will also support FHWA's efforts to be responsive to the needs of older drivers, which is important because the number of older drivers is expected to increase significantly in the next 30 years. 4 Supplemental Notice of Proposed Amendments, page 26717. The SNPA was published on May 8, 2006, at 71 FR 26711. This notice can be found at: *http://www.gpoaccess.gov/fr/retrieve.html* and on the Docket Management System (FHWA-2003-15149-229) for this ruling at the following Internet Web site: *http://dms.dot.gov.* Discussion of Other Comments In addition to the five major issues discussed in the previous section, FHWA also received comments that can be grouped into the following three topics:
(6)Assessment methods;
(7)Blue and brown signs; and
(8)Minimum retroreflectivity levels. This section contains a discussion of each of these topics.
(6)Assessment methods: The FHWA received comments from the AASHTO, NCUTCD, ATSSA, AHAS, AAA, AARP, AHUA, ARTBA, Maryland and Wisconsin DOTs, and several counties in Illinois regarding the assessment and management methods for maintaining sign retroreflectivity as proposed in the GUIDANCE statement of the SNPA. The AASHTO and several State DOTs did not support actual measurement of signs as one of the methods, but supported visual nighttime inspections, blanket replacement, control signs, and expected sign life methods. The city of Plano, Texas and a private citizen suggested that the numerical values in Table 2A-3 should only apply to Method B: Measured Sign Retroreflectivity. Those commenters suggested that for all other methods where subjective judgment is used, such as visual nighttime inspection, the table should serve as guidance for local offices to reject and accept signs. Finally, the NCUTCD, the Illinois Association of County Engineers, and the DeWitt County, Illinois Highway Department suggested adding additional language to the GUIDANCE statement to explicitly, rather than implicitly, state that other assessment methods based on engineering study can be used to assess sign retroreflectivity. The FHWA believes that the final rule provides several assessment or management methods that agencies can choose from, based on the method that best fits the agencies' resources and needs. An agency can choose to use either assessment methods or management methods, or a combination; however, agencies should develop a method in such a way that it corresponds to the values in Table 2A-3. The methods have been developed to provide flexibility for agencies for addressing their local conditions. To address the comments received regarding the types of assessment methods that should be used, FHWA clarifies the GUIDANCE statement by adding a sixth method to the list of assessment or management methods titled “Other Methods,” which explicitly states that other methods developed based on engineering studies can be used. 5 5 As defined in the MUTCD, an engineering study shall be performed by an engineer, or by an individual working under the supervision of an engineer, through the application of procedures and criteria established by the engineer. An engineering study shall be documented. In accordance with the text heading GUIDANCE in the MUTCD, deviations to a recommended practice are allowed if engineering study indicates the deviation to be appropriate.
(7)Blue and brown signs: In the SNPA, FHWA asked for comments on the need for retroreflectivity levels to be developed for signs with blue and brown backgrounds. 6 The Maryland State Highway Administration suggested that recommended minimum retroreflectivity levels be established for blue-background signs and that those levels apply to certain signs such as Hospital, EMS, Ambulance Station, and Emergency Medical Care signs, whose nighttime readability can be important. The combined letter from a representative of AAA, AARP, and AHUA, and one comment letter from a sign manufacturer stated that blue and brown signs are intended for use both day and night, and that motorist safety, particularly for older drivers, would be enhanced by including minimum retroreflectivity levels for blue and brown signs. The commenters acknowledged that if blue and brown signs are being excluded because there is a lack of data on which to base a requirement, a “placeholder” could be included in the MUTCD until more data is available and the table of minimum levels can be updated. 6 Blue signs are generally described as informational signs, and include evacuation route and road user signs. Examples include hospital, specific service signs (food, gas, lodging, camping, and attraction) and tourist-oriented directional signs. Brown signs, which are also informational signs, are primarily recreational and cultural interest area signs. The FHWA is currently studying blue and brown minimum sign retroreflectivity levels. Because the study has not been finalized and FHWA did not analyze the costs associated with the sign retroreflectivity of blue and brown signs in the economic impacts study, minimum retroreflectivity levels for blue and brown signs are not included in the MUTCD at this time. At the conclusion of FHWA's study on this topic, the results may indicate a need to pursue such a requirement. If so, updates or changes to Table 2A-3 would be subject to the public rulemaking process before FHWA could add blue and brown minimum retroreflectivity levels.
(8)Minimum retroreflectivity levels: Several of the commenters, including AASHTO, NACE, the Illinois and Indiana Associations of County Engineers, DeWitt County, Illinois Highway Department, the North Carolina DOT and the Maryland State Highway Administration suggested that the data within the table were not precise, and reflected data that were developed based on assumptions and varying characteristics. The FHWA acknowledges that the data are based on some assumptions and varying characteristics; however, they are based on the latest science and empirical-based research emphasizing older drivers. 7 The supporting research reflects the best information at this time. One of the key aspects to the research supporting the minimum retroreflectivity levels is that it was based on field studies under conditions on a closed course facility that represented real roadway scenarios to the maximum extent possible without jeopardizing safety. Research subjects were recruited and participated in the research, which ultimately developed cumulative distribution profiles for luminance levels needed to accommodate the legibility of older drivers. These luminance levels were then used in conjunction with computer modeling to determine the retroreflectivity needed under a variety of roadway conditions. The computer modeling allows analyses of an infinite set of roadway scenarios, but is based on the luminance levels derived through the human factors research supported by FHWA. 7 Carlson, P.J. and H.G. Hawkins. Minimum Retroreflectivity Levels for Overhead Guide Signs and Street-Name Signs. FHWA-RD-03-082. U.S. Department of Transportation, Federal Highway Administration, Washington, DC. This document is available at the following Web address: *http://www.tfhrc.gov/safety/pubs/03082/index.htm.* After the research was completed, FHWA held national workshops, which included nighttime inspections of signs at various retroreflectivity levels. The participants of the workshops evaluated the signs at night using a visual inspection technique. The results of this effort helped confirm that the minimum retroreflectivity levels in Table 2A-3 are appropriate. The NCDOT suggested that a tiered system be applied to the retroreflectivity levels, similar to the tiered system used for letter heights and sign sizes based on roadway classification. 8 The NCDOT commented that retroreflective sign applications for lower speed, lower volume roads should be coordinated with lower retroreflectivity values. 8 Part 2 of the MUTCD includes a table titled, “Table 2B-1 Regulatory Sign Sizes” that includes sign sizes for conventional roads, expressways, freeways, and oversized as well as minimum sign sizes. Generally, sign sizes for conventional roads are smaller than those for expressways or freeways. The FHWA believes that the values shown in the table are applicable to all classifications of roads, including lower volume and slower speed roadways. The retroreflectivity levels are based on the legibility design threshold level as specified in Section 2A.14 of the MUTCD (40 feet of legibility per inch of letter height). Therefore, the size of the sign, and the message on the sign, play a key role in the retroreflectivity levels. Smaller signs have smaller messages, which mean drivers need to be closer to the signs to read them. As the distance between the sign and the vehicle decreases, the efficiency of retroreflectivity materials generally decreases, meaning that more retroreflectivity is needed. This often outweighs the increased illumination available from the vehicle headlamps. The minimum retroreflectivity levels were designed to be easy to implement, without added complexities such as a tiered system based on letter heights and sign sizes. However, with the proper support (i.e., an engineering study), and using the values in Table 2A-3 as minimum maintained retroreflectivity levels, there is flexibility in this final rule and the associated MUTCD language that allows for an agency to develop a more complex set of minimum retroreflectivity levels, if it chooses to do so. Such levels cannot be below the minimums in Table 2A-3. As mentioned in item 3 under Major Issues, a few commenters such as NACE, the NCUTCD and others, believed that Table 2A-3 and its title should be referred to as “Recommended.” The FHWA believes that it is inappropriate to include “Recommended” in the title of a table that is referenced in a STANDARD statement of the MUTCD. In addition, the word “Recommended” implies guidance, rather than a standard, and would therefore be confusing. ATSSA, the AHAS and the MNDOT agreed with eliminating Type I material for ground-mounted signs, and they also agreed with eliminating Types I, II, and III for overhead guide sign legends. These commenters felt that prohibiting the use of these less efficient retroreflective materials would substantially improve the nighttime driving environments, especially for older drivers with a variety of visual impairments. ATSSA also supported including Type X materials so that all currently defined American Society of Testing Materials
(ASTM)Type designations that are used for traffic signs will be included in the MUTCD. The NCDOT disagrees with any retroreflective requirement for illuminated signs. Their reasoning is that the assessment and management methods used to maintain retroreflectivity do not address signs with illumination and that Section 2A.08 does not require retroreflectivity for illuminated signs. Illuminated signs do need to meet the minimum retroreflectivity requirements because there are times that the signs may not be illuminated due to power failure. Previous research has shown that overhead signs can be effective without lighting, as long as the appropriate retroreflective sheeting materials are used to fabricate the sign. 9 With this knowledge, many agencies have elected to use more efficient retroreflective sheeting on overhead guide signs without sign lighting, citing adequate visibility and concerns about energy use and light pollution (although sign lighting may continue to be used in areas of complex surroundings and/or roadway geometries). The minimum retroreflectivity levels in Table 2A-3 in the MUTCD prohibit the use of less efficient reflective materials for overhead signs so that agencies do not use them. As a result, agencies are more likely to select appropriate materials to meet nighttime driving requirements. 9 Carlson, P.J. and H.G. Hawkins. Minimum Retroreflectivity Levels for Overhead Guide Signs and Street-Name Signs. FHWA-RD-03-082. U.S. Department of Transportation, Federal Highway Administration, Washington, DC. This document is available at the following Web address: *http://www.tfhrc.gov/safety/pubs/03082/index.htm* . One supplier of overhead sign lighting systems and 22 citizens suggested that lighting of overhead signs should be mandatory. This final rule does not change the existing MUTCD language recommending lighting for overhead signs. Mandating lighting for overhead signs is outside the scope of this rulemaking. One sign manufacturer suggested that retroreflectivity levels measured at 0.5 degree observation angle be included. As discussed in item #12 of the SNPA, research has been completed that supports moving toward the 0.5-degree concept and the ASTM has started working toward a revision to its specifications to describe 0.5-degree measurements. 10 The FHWA believes that it is not practical to implement minimum retroreflectivity levels based on an observation angle of 0.5 degrees until measuring devices become more readily available, and the ASTM completes its work developing a standard measurement specification. At that time there may be a need for an alternative table and a transition period established while the 0.2-degree measurement geometries and devices are phased out. If so, these changes will be introduced through public rulemaking procedures described earlier for MUTCD changes or additions. 10 The ASTM E12 committee is working to develop a standard measurement specification for 0.5 degree instruments. The committee is using ASTM E1709 as a template (ASTM E1709 is the standard measurement specification for 0.2 degree instruments). More information is available at *http://www.astm.org* . Conclusion To address the comments to the docket, the FHWA adopts the following key changes to Section 2A.09 Maintaining Minimum Retroreflectivity in the MUTCD from what was proposed in the SNPA:
(A)In the STANDARD statement, a reference to Table 2A-3 was added to clarify that the levels contained in Table 2A-3 are the minimum levels that are to be used by public agencies or officials having jurisdiction when they develop an assessment or management method that is designed to maintain sign retroreflectivity.
(B)The 2nd SUPPORT statement was clarified to indicate that once an assessment or management method is used, an agency or official having jurisdiction would be in compliance with the STANDARD even if some individual signs do not meet the minimum retroreflectivity levels at a particular point in time.
(C)The GUIDANCE statement was modified by adding a sixth method to the list of assessment or management methods that should be used to maintain sign retroreflectivity titled “Other Methods,” which explicitly states that other methods developed based on engineering studies can be used. In addition, FHWA adopts a 4-year compliance date (instead of the proposed 2-year compliance date) for implementation and continued use of an assessment or management method that is designed to maintain traffic sign retroreflectivity at or above the established minimum levels. The final rule meets statutory requirements, provides clarity where needed, and provides flexibility for compliance. Rulemaking Analyses and Notices Executive Order 12866 (Regulatory Planning and Review) and U.S. DOT Regulatory Policies and Procedures The FHWA has determined that this action is not a significant regulatory action within the meaning of Executive Order 12866 or under the regulatory policies and procedures of the U.S. Department of Transportation. While the FHWA had preliminarily designated this rulemaking as significant during the NPRM and SNPRM stages, the FHWA has determined that this rulemaking does not meet the criteria for a “significant regulatory action” under Executive Order 12866. This rule will not adversely affect, in a material way, any sector of the economy. Additionally, this rulemaking will not interfere with any action taken or planned by another agency and will not materially alter the budgetary impact of any entitlements, grants, user fees or loan programs. It is anticipated that the economic impact of this rulemaking would cause minimal additional expenses to public agencies. In 2007, FHWA updated its analysis of the cost impacts to State and local agencies to reflect higher material costs due to inflation, an increase in the proportion of signs that would be replaced with higher-level sign sheeting material, and changes in the overall mileage of State and local roads. 11 The findings of the 2007 analysis show that the costs of the proposed action to State and local agencies would be less than $128.1 million per year. 12 The 7-year implementation period for ground-mounted signs will allow State and local agencies to delay replacement of recently installed Type I signs until they have reached their commonly accepted 7-year service life. The 10-year compliance period for overhead signs would allow an extended period of time because of the longer service life typically used for those signs. The final rule does not affect the impacts assessments described above. 11 “Maintaining Traffic Sign Retroreflectivity: Impacts on State and Local Agencies,” Publication No. FHWA-HRT-07-042, dated April 2007, is available at the following Web address: *http://www.tfhrc.gov/safety/pubs/07042/index.htm* . 12 Ibid. Currently, the MUTCD requires that traffic signs be illuminated or retroreflective to enhance nighttime visibility. In 1993, Congress mandated that the MUTCD contain standards for maintaining minimum traffic sign and pavement marking retroreflectivity. 13 The final rule provides additional guidance, clarification, and flexibility in maintaining traffic sign retroreflectivity that is already required by the MUTCD. The minimum retroreflectivity levels and maintenance methods consider changes in the composition of the vehicle population, vehicle headlamp design, and the demographics of drivers. The FHWA expects that the levels and maintenance methods will help to promote safety and mobility on the Nation's streets and highways. 13 United States Department of Transportation and Related Agencies Act of 1993, Public Law 102-388, 106 Stat. 1520, Section 406. This rulemaking addresses comments received in response to the Office of Management and Budget's (OMB's) request for regulatory reform nominations from the public. The OMB is required to submit an annual report to Congress on the costs and benefits of Federal regulations. The 2002 report included recommendations for regulatory reform that OMB requested from the public. 14 One recommendation was that the FHWA should establish standards for minimum levels of brightness of traffic signs. 15 The FHWA has identified this rulemaking as responsive to that recommendation. 14 A copy of the OMB report “Stimulating Smarter Regulation: 2002 Report to Congress on the Costs and Benefits of Regulation and Unfunded Mandates on State, Local, and Tribal Entities” is available at the following Web address: *http://www.whitehouse.gov/omb/inforeg/summaries_nominations_final.pdf* . 15 15 A complete compilation of comments received by OMB is available at the following Web address: *http://www.whitehouse.gov/omb/inforeg/key_comments.html* . Comment 93 includes the recommendation concerning the retroreflectivity of traffic signs. Regulatory Flexibility Act In compliance with the Regulatory Flexibility Act (Pub. L. 96-354, 5 U.S.C. 601-612), the FHWA has evaluated the effects of this final rule on small entities and has determined that this final rule will not have a significant economic impact on a substantial number of small entities. This rule would apply to State Departments of Transportation in the execution of their highway programs, specifically with respect to the retroreflectivity of traffic signs. Additionally, sign replacement is often eligible for up to 100 percent Federal-aid funding—this applies to local jurisdictions and tribal governments, pursuant to 23 U.S.C. 120(c). The implementation of this final rule would not affect the economic viability or sustenance of small entities, as States are not included in the definition of a small entity that is set forth in 5 U.S.C. 601. Unfunded Mandates Reform Act of 1995 This rule does not impose unfunded mandates as defined by the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, 109 Stat. 48, March 22, 1995). The impacts analysis shows that State and local agencies would be likely to incur impacts of roughly $37.5 million. Using a 7-year implementation period for regulatory, warning, and guide signs and a 10-year implementation period for street name and overhead guide signs, the annual impacts are estimated to be approximately $4.5 million for years 1 through 7, and $2.1 million for years 8 through 10. The estimates are based upon the added cost of more efficient performance sign materials. The labor, equipment, and mileage costs for sign replacement were excluded under the assumption that the proposed implementation period was long enough to allow replacement of non-compliant signs under currently planned maintenance cycles. Therefore, this final rule will not result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $128.1 million or more in any one year. In addition, sign replacement is often eligible for up to 100 percent Federal-aid funding—this applies to local jurisdictions and tribal governments, pursuant to 23 U.S.C. 120(c). Further, the definition of “Federal Mandate” in the Unfunded Mandates Reform Act excludes financial assistance of the type in which State, local or tribal governments have authority to adjust their participation in the program in accordance with changes made in the program by the Federal Government. The Federal-aid highway program permits this type of flexibility. Executive Order 13132 (Federalism) The FHWA analyzed this final rule in accordance with the principles and criteria contained in Executive Order 13132, dated August 4, 1999, and FHWA has determined that this final rule will not have a substantial direct effect or sufficient federalism implications on States and local governments that would limit the policy-making discretion of the States and local governments. Nothing in the MUTCD directly preempts any State law or regulation. The MUTCD is incorporated by reference in 23 CFR Part 655, subpart F. This final rule is in keeping with the Secretary of Transportation's authority under 23 U.S.C. 109(d), 315, and 402(a) to promulgate uniform guidelines to promote the safe and efficient use of the Nation's streets and highways. Executive Order 13175 (Tribal Consultation) The FHWA has analyzed this action under Executive Order 13175, dated November 6, 2000, and believes that it will not have substantial direct effects on one or more Indian tribes, will not impose substantial direct compliance costs on Indian tribal governments, and will not preempt tribal law. Therefore, a tribal summary impact statement is not required. Executive Order 13211 (Energy Effects) The FHWA has analyzed this final rule under Executive Order 13211, Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use. The FHWA has determined that this is not a significant energy action under that order because, although it is a significant regulatory action under Executive Order 12866, it is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Therefore, a Statement of Energy Effects under Executive Order 13211 is not required. Executive Order 12372 (Intergovernmental Review) Catalog of Federal Domestic Assistance Program Number 20.205, Highway Planning and Construction. The regulations implementing Executive Order 12372 regarding intergovernmental consultation on Federal programs and activities apply to this program. Paperwork Reduction Act Under the Paperwork Reduction Act of 1995
(PRA)(44 U.S.C. 3501, *et seq.* ), Federal agencies must obtain approval from OMB for each collection of information they conduct, sponsor, or require through regulations. The FHWA has determined that this action does not contain a collection of information requirement for the purposes of the PRA. Executive Order 12988 (Civil Justice Reform) This action meets applicable standards in Sections 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize litigation, to eliminate ambiguity, and to reduce burden. Executive Order 13045 (Protection of Children) The FHWA has analyzed this action under Executive Order 13045, Protection of Children from Environmental Health Risks and Safety Risks. This is not an economically significant action and does not concern an environmental risk to health or safety that might disproportionately affect children. Executive Order 12630 (Taking of Private Property) This action would not affect a taking of private property or otherwise have taking implications under Executive Order 12630, Governmental Actions and Interference with Constitutionally Protected Property Rights. National Environmental Policy Act The agency has analyzed this final rule for the purpose of the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.) and has determined that it will not have any effect on the quality of the environment. Regulation Identification Number A regulation identification number
(RIN)is assigned to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. The RIN contained in the heading of this document can be used to cross reference this action with the Unified Agenda. List of Subjects in 23 CFR Part 655 Design standards, Grant programs—Transportation, Highways and roads, Incorporation by reference, Signs, Traffic regulations. Issued on: December 13, 2007. J. Richard Capka, Federal Highway Administrator. In consideration of the foregoing, the FHWA is amending title 23, Code of Federal Regulations, part 655, subpart F as follows: PART 655—TRAFFIC OPERATIONS 1. The authority citation for part 655 continues to read as follows: Authority: 23 U.S.C. 101(a), 104, 109(d), 114(a), 217, 315 and 402(a); 23 CFR 1.32; and 49 CFR 1.48(b). Subpart F—Traffic Control Devices on Federal-Aid and Other Streets and Highways—[Amended] 2. Revise § 655.601(a), to read as follows: § 655.601 Purpose.
(a)Manual on Uniform Traffic Control Devices for Streets and Highways (MUTCD), 2003 Edition, including Revision No. 1, FHWA, dated November 2004, and revision No. 2, FHWA, dated January 2008. This publication is incorporated by reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51 and is on file at the National Archives and Record Administration (NARA). For information on the availability of this material at NARA call
(202)741-6030, or go to *http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html.* It is available for inspection at the Federal Highway Administration, 1200 New Jersey Ave., SE., Washington, DC 20590, as provided in 49 CFR part 7. The text is also available from the FHWA Office of Transportation Operations' Web site at *http://mutcd.fhwa.dot.gov* . [FR Doc. E7-24683 Filed 12-20-07; 8:45 am] BILLING CODE 4910-22-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9368] RIN 1545-BG55 Reduction of Foreign Tax Credit Limitation Categories Under Section 904(d) AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary Income Tax Regulations regarding the reduction of the number of separate foreign tax credit limitation categories under section 904(d) of the Internal Revenue Code (Code). Section 404 of the American Jobs Creation Act of 2004
(AJCA)reduced the number of section 904(d) separate categories from eight to two, effective for taxable years beginning after December 31, 2006. These temporary regulations affect taxpayers claiming foreign tax credits and provide guidance needed to comply with the statutory changes made by the AJCA. The text of these temporary regulations also serves as the text of the proposed regulations (REG-114126-07) set forth in the notice of proposed rulemaking on this subject published elsewhere in this issue of the **Federal Register** . DATES: *Effective Date:* These regulations are effective on December 21, 2007. *Applicability Dates:* For dates of applicability, see §§ 1.904-2T(i)(3), 1.904-4T(n), 1.904-5T(o)(3), 1.904-7T(g)(6), and 1.904(f)-12T(h)(6). These regulations apply to taxable years of United States taxpayers beginning after December 31, 2006, and ending on or after December 21, 2007, and to taxable years of foreign corporations which end with or within taxable years of their domestic corporate shareholders beginning after December 31, 2006, and ending on or after December 21, 2007. FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry
(202)622-3850 (not a toll-free call). SUPPLEMENTARY INFORMATION: Background This document contains amendments to the regulations under section 904 relating to the application of separate foreign tax credit limitations to certain categories of income under section 904(d), as amended by the AJCA. Prior to the effective date of the AJCA amendments (that is, for taxable years beginning before January 1, 2007 (“pre-2007 taxable years”)), the foreign tax credit limitation applied separately to the following categories of income: passive income, high withholding tax interest, financial services income, shipping income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income, certain distributions from a FSC or former FSC, and any other income not described in this sentence (“general limitation income”). Other provisions of the Code that subject other categories of income to separate foreign tax credit limitations were not amended by the AJCA. See, for example, sections 56(g)(4)(C)(iii)(IV), 245(a)(10), 865(h), 901(j), and 904(h)(10); see also H.R. Rep. No. 108-755, at 383 (October 7, 2004). Effective for taxable years beginning after December 31, 2006 (“post-2006 taxable years”), the AJCA reduced the number of section 904(d) separate categories to two categories for “passive category income” and “general category income.” New section 904(d)(2)(A) defines passive category income as passive income and specified passive category income, and general category income as income other than passive category income. In addition, new section 904(d)(2)(C) and
(D)provides rules concerning the treatment of financial services income and companies. These temporary regulations modify the regulations under section 904 to reflect the new separate categories for passive category income and general category income, and provide transition rules for the treatment of earnings and profits and foreign income taxes of controlled foreign corporations and noncontrolled section 902 corporations accumulated in pre-2007 taxable years, overall foreign losses and separate limitation losses under section 904(f), and the carryover and carryback of excess foreign taxes under section 904(c). Explanation of Provisions I. Carryovers and Carrybacks of Excess Foreign Taxes Under Section 904(c) Section 904(d)(2)(K)(i), as added by the AJCA, provides that excess taxes carried from a pre-2007 taxable year to a post-2006 taxable year shall be assigned to the post-2006 separate categories based on where the related income would have been assigned had such taxes been paid or accrued in a post-2006 taxable year. Consistent with this statutory amendment, § 1.904-2T(i)(1)(i) provides that if a taxpayer carries over to a post-2006 taxable year any excess taxes that were paid, accrued, or deemed paid with respect to income in any pre-2007 separate category, the excess taxes are assigned to the appropriate post-2006 separate category as if the taxes had been paid or accrued in a post-2006 taxable year. For example, to the extent that any taxes were related to income that would have been treated as high-taxed income under section 904(d)(2)(B)(iii)(II), such taxes will be assigned to the post-2006 separate category for general category income. Because the IRS and the Treasury Department recognize that taxpayers may face difficulties in reconstructing excess taxes accounts, § 1.904-2T(i)(1)(ii) of the temporary regulations provides a safe harbor. Under the safe harbor, a taxpayer may assign excess taxes in any pre-2007 separate category, except the passive category, to the post-2006 separate category for general category income. The safe harbor provides that excess taxes in the pre-2007 passive category will be assigned to the post-2006 separate category for passive category income. Section 904(d)(2)(K)(ii), as added by the AJCA, authorizes the Secretary to issue regulations for allocating carrybacks of excess taxes with respect to income from a post-2006 taxable year to a pre-2007 taxable year for purposes of allocating the excess taxes among the separate categories in effect for the taxable year to which carried. The IRS and the Treasury Department believe that it is appropriate to allow a taxpayer to reconstruct separate categories of income earned and excess taxes paid or accrued in its first post-2006 taxable year as if the pre-2007 rules applied. Accordingly, § 1.904-2T(i)(2)(i) provides that if a taxpayer carries back excess taxes paid, accrued, or deemed paid with respect to income in the post-2006 separate category for passive category income or general category income to a pre-2007 taxable year, the excess taxes are assigned to the appropriate pre-2007 separate category or categories as if the taxes had been paid or accrued in a pre-2007 taxable year. Section 1.904-2T(i)(2)(ii) provides that a taxpayer may, in lieu of reconstruction, assign excess taxes in the separate category for general category income to the pre-2007 general category, and excess taxes in the separate category for passive category income to the pre-2007 passive category. II. Definition of Passive Category Income New section 904(d)(2)(A)(i) defines passive category income as passive income and specified passive category income. New section 904(d)(2)(B)(i) generally defines passive income as “any income received or accrued by any person which is of a kind which would be foreign personal holding company income (as defined in section 954(c)).” Passive income includes amounts includible in gross income under section 1293, except as provided in section 904(d)(3)(H) (providing that look-through treatment applies to an amount included in gross income under section 1293 if the passive foreign investment company is a controlled foreign corporation
(CFC)and the taxpayer is a United States shareholder in such CFC) and section 904(d)(2)(E)(ii) (providing that an inclusion under section 1293 with respect to a foreign corporation that is a noncontrolled section 902 corporation with respect to the taxpayer shall be treated as a dividend from such corporation). See section 904(d)(2)(B)(ii). Passive income does not include export financing interest and high-taxed income. See section 904(d)(2)(B)(iii). New section 904(d)(2)(B)(iv) provides that in determining whether income is of a kind which would be foreign personal holding company income, the rules of section 864(d)(6) apply only in the case of income of a CFC. New section 904(d)(2)(B)(v) defines specified passive category income as dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States, taxable income attributable to foreign trade income
(FTI)within the meaning of section 923(b), and distributions from a FSC or former FSC out of earnings and profits attributable to FTI (within the meaning of section 923(b)) or interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in FTI (as defined in section 923(b)). The temporary regulations reflect the new definitions of passive category income, passive income, and specified passive category income. Section 1.904-4T(b)(3) incorporates the definition of specified passive category income in section 904(d)(2)(B)(v), which includes dividends from DISCs, distributions from FSCs, and FTI. Because these types of income constitute specified passive category income and not passive income, such income can never qualify as financial services income that could be treated as general category income. The final regulations at § 1.904-5(h)(3) currently provide that gain from the sale of a partnership interest is assigned to the separate category for passive income. Section 954(c)(4), which was enacted by the AJCA, provides a look-through rule for sales of 25-percent-owned partnerships. Because the definition of passive income in section 904(d)(2)(B) refers to section 954(c), these temporary regulations revise § 1.904-5(h)(3) to reflect that gain on the sale of a partnership interest by a 25-percent partner is assigned to the separate category for general category income, to the extent that, under the section 954(c)(4) look-through rule, the gain is not classified as foreign personal holding company income. III. Definition of Financial Services Income Section 904(d)(2)(C)(i), as amended by the AJCA, provides that financial services income shall be treated as general category income in the case of a member of a financial services group and any other person predominantly engaged in the active conduct of a banking, insurance, financing or similar business. New section 904(d)(2)(C)(ii) defines a financial services group as “any affiliated group (as defined in section 1504(a) without regard to paragraphs
(2)and
(3)of section 1504(b)) which is predominantly engaged in the active conduct of a banking, insurance, financing or similar business.” In determining whether a group is so engaged, only the income of members of the group that are U.S. corporations or CFCs in which U.S. corporations own, directly or indirectly, at least 80 percent of the vote or value of the stock are taken into account. Section 904(d)(2)(C)(iii) provides that the Secretary “shall by regulation specify for purposes of this subparagraph the treatment of financial services income received or accrued by partnerships and by other pass-thru entities which are not members of a financial services group.” Section 904(d)(2)(D), as amended by the AJCA, generally adopts the definition of financial services income of former section 904(d)(2)(C)(i) and (ii), except that it includes neither the rule providing that financial services income includes export financing interest that would be high withholding tax interest, nor the exception in former section 904(d)(2)(C)(iii) for high withholding tax interest and export financing interest that would not be high withholding tax interest. New section 904(d)(2)(D)(i) defines financial services income as “any income which is received or accrued by any person predominantly engaged in the active conduct of a banking, insurance, financing or similar business,” and which is either described in section 904(d)(2)(D)(ii) (which provides a general description of financial services income) or is passive income (determined without regard to whether it is high-taxed). An item of income satisfies the general description of financial services income if such income is
(1)derived in the active conduct of a banking, financing, or similar business;
(2)derived from the investment by an insurance company of its unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business; or
(3)of a kind which would be insurance income as defined in section 953(a) determined without regard to section 953(a)(1)(A), which limits insurance income to income from countries other than the country in which the corporation was created or organized. See section 904(d)(2)(D)(ii). The final regulations at § 1.904-4(e) provide rules concerning the separate category for financial services income. Section 1.904-4(e)(1) provides a general definition of financial services income. Section 1.904-4(e)(2) provides an exclusive list describing items of income that are treated as active financing income. Section 1.904-4(e)(3)(i) provides that a person is considered to be predominantly engaged in the active financing business for any taxable year if for that year at least 80 percent of its gross income is active financing income, as defined in § 1.904-4(e)(2). On June 26, 2007, the IRS and the Treasury Department issued Notice 2007-58, 2007-29 IRB 88 (see § 601.601(d)(2)(ii)( *b* )), in which the IRS and the Treasury Department announced that in light of the amendments to the foreign tax credit rules in the AJCA, they were reviewing the provisions relating to financial services income, active financing income, and financial services entities in § 1.904-4(e). The Notice also solicited comments relating to these definitions. The IRS and the Treasury Department received several written comments and are continuing to study this issue. Accordingly, the rules of § 1.904-4(e) of the current final regulations are not being revised at this time. IV. Pre-2007 Separate Categories To reflect the reduction of separate categories, §§ 1.904-4(d) (definition of high withholding tax interest), 1.904-4(f) (definition of shipping income), and 1.904-4(g) (treatment of dividends from a noncontrolled section 902 corporation) are reserved. It should be noted that the separate category for shipping income remained effective for taxable years beginning before January 1, 2007. Section 415 of the AJCA repealed the foreign base company shipping income rules of section 954(f), effective for taxable years of foreign corporations beginning after December 31, 2004, and taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end. Notice 2007-13, 2007-5 IRB 410, stated that in light of the repeal of section 954(f), § 1.954-1(e)(4)(i)(A) (providing a trump rule for income that qualifies as foreign base company shipping income) is obsolete, and § 1.954-6 (providing rules for determining foreign base company shipping income) is effective only for purposes of applying the rules for the withdrawal of previously excluded subpart F income from qualified investments. However, a technical correction in the Tax Increase Prevention and Reconciliation Act of 2005 confirmed that the separate category for shipping income is defined by reference to shipping income as defined in section 954(f) prior to its repeal. Accordingly, the subpart F shipping regulations continued to apply for section 904(d) purposes, and the separate category for shipping income continued to exist, through the end of taxable years beginning before 2007. See § 601.601(d)(2)(ii)( *b* ). The final regulations at §§ 1.904-4(h) (definition of and rules relating to treatment of export financing interest), 1.904-4(i) (concerning the interaction of section 907(c) and § 1.904-4), 1.904-4(j) (concerning DASTM gain or loss), 1.904-4(l) (priority rules for income meeting the definitions of more than one pre-2007 separate category), and 1.904-5 have been revised to reflect the new separate categories for passive category income and general category income. V. Post-1986 Undistributed Earnings and Post-1986 Foreign Income Taxes of a Foreign Corporation as of the End of the Corporation's Last Pre-2007 Taxable Year A. General Rule of Reconstruction If a dividend is paid, or an amount is included in the gross income of a U.S. shareholder under section 951, out of post-1986 undistributed earnings (or pre-1987 accumulated profits) of a foreign corporation attributable to more than one separate category, the amount of foreign income taxes deemed paid by the domestic shareholder or upper-tier corporation under section 902 or 960 is computed separately with respect to the post-1986 undistributed earnings (or pre-1987 accumulated profits) in each separate category out of which the dividend is paid or to which the subpart F inclusion is attributable. See §§ 1.902-1T(d)(1); 1.960-1(i)(1). The temporary regulations implement the reduction of separate categories under the AJCA by recharacterizing the foreign corporation's pools of post-1986 undistributed earnings and post-1986 foreign income taxes in the pre-2007 separate categories as pools of post-1986 undistributed earnings and post-1986 foreign income taxes in the separate categories for passive category income and general category income on the first day of the foreign corporation's first post-2006 taxable year. Section 1.904-7T(g)(2) of the temporary regulations provides that in the case of a CFC or noncontrolled section 902 corporation that has pools of post-1986 undistributed earnings and post-1986 foreign income taxes in any pre-2007 separate category, the earnings and foreign income taxes that exist as of the end of the foreign corporation's last pre-2007 taxable year are treated as if they were accumulated and paid during a period when the post-2006 rules applied, including the rules under section 904(d)(3)(E). Recharacterized amounts of earnings and taxes are taken into account in determining the opening balance of the post-1986 undistributed earnings and post-1986 foreign income taxes pools in each of the foreign corporation's post-2006 separate categories on the first day of the foreign corporation's first post-2006 taxable year. Section 1.904-7T(g)(3)(i) of the temporary regulations provides that in order to substantiate the recharacterization of the pools of post-1986 undistributed earnings and post-1986 foreign income taxes in any pre-2007 separate category, the pools must be reconstructed for each pre-2007 taxable year, beginning with the first year in which earnings were accumulated in the pool with respect to each such pre-2007 separate category. Earnings are treated as if they were accumulated in a period when the post-2006 rules applied, taking into account earnings distributed and taxes deemed paid pro rata from the amounts that were added to the pools in each separate category in subsequent pre-2007 taxable years. As reconstructed, the pools of earnings and taxes in a pre-2007 separate category are assigned to the post-2006 separate categories on the first day of the foreign corporation's first post-2006 taxable year. (A hovering deficit is subject to the same rules for purposes of identifying the post-2006 separate categories to which the deficit is assigned, but the hovering deficit is not included in determining the opening balance of the pool. See § 1.367(b)-7.) Similar rules apply to assign to the post-2006 separate categories amounts of previously-taxed earnings and profits described in section 959(c)(1)(A), accumulated deficits, and pre-1987 accumulated profits in pre-2007 separate categories. For example, if there is an accumulated deficit in any pre-2007 separate category as of the end of a CFC's or noncontrolled section 902 corporation's last pre-2007 taxable year, the deficit and associated taxes (if any) are treated in the same manner as if there had been positive accumulated earnings and taxes in the separate category, that is, the deficit and taxes are treated as if the post-2006 rules applied in the year the deficit was accumulated and the taxes were paid. The earnings and deficits in earnings making up the accumulated deficit are assigned to the post-2006 separate categories based on where those items of income and expenses or losses would have been assigned had they been incurred when the post-2006 rules were in effect. As reconstructed, the deficit is taken into account in determining the opening balance of the post-1986 undistributed earnings pool in the appropriate post-2006 separate category or categories on the first day of the foreign corporation's first post-2006 taxable year. The IRS and the Treasury Department recognize that shareholders may face difficulties in reconstructing historical accumulated earnings and taxes accounts of a foreign corporation. Therefore, a reasonable approximation of the amounts properly included in the post-2006 separate categories, based on available records obtained through reasonable, good-faith efforts by the taxpayer, will adequately substantiate reconstruction. B. Safe Harbors 1. In General For pools of undistributed earnings and foreign income taxes in the pre-2007 separate categories of CFCs and noncontrolled section 902 corporations, the temporary regulations provide that a taxpayer may elect to apply one of two safe harbors in lieu of reconstructing historical accumulated earnings and taxes accounts of the foreign corporation. See § 1.904-7T(g)(3)(ii). The safe harbors apply to allocate post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and pre-1987 accumulated profits and associated foreign income taxes in a foreign corporation's pre-2007 separate categories. Amounts allocated to the post-2006 separate categories under a safe harbor are taken into account in computing the opening balance of the post-1986 undistributed earnings and post-1986 foreign income taxes pools, as well as pre-1987 accumulated profits and pre-1987 foreign income taxes, in each of the foreign corporation's post-2006 separate categories on the first day of the foreign corporation's first post-2006 taxable year. 2. General Safe Harbor Under § 1.904-7T(g)(3)(ii)(B)( *1* ) of the temporary regulations, the safe harbor for post-1986 undistributed earnings and post-1986 foreign income taxes (as well as deficits and previously-taxed earnings, and pre-1987 accumulated profits, if any) in a CFC's or noncontrolled section 902 corporation's pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income, or certain distributions from a FSC or former FSC provides that such earnings and taxes are allocated to the post-2006 separate category for passive category income. Under § 1.904-7T(g)(3)(ii)(B)( *2* ), the safe harbor for post-1986 undistributed earnings and post-1986 foreign income taxes (as well as deficits, previously-taxed earnings, and pre-1987 accumulated profits, if any) in a CFC's or noncontrolled section 902 corporation's pre-2007 separate category for financial services income, shipping income, or general limitation income provides that such earnings and taxes are allocated to the post-2006 separate category for general category income. Under § 1.904-7T(g)(3)(ii)(B)( *3* ), the safe harbor for post-1986 undistributed earnings and post-1986 foreign income taxes (as well as deficits, previously-taxed earnings, and pre-1987 accumulated profits, if any) in a CFC's or noncontrolled section 902 corporation's pre-2007 separate category for high withholding tax interest generally provides that such earnings and taxes are allocated to the post-2006 separate category for passive category income. However, § 1.904-7T(g)(3)(ii) (B)( *4* ) provides that if a CFC has positive post-1986 undistributed earnings or pre-1987 accumulated profits and foreign income taxes attributable to high-withholding tax interest, such earnings and taxes are allocated to the post-2006 separate category for general category income if the earnings would qualify as income subject to high foreign taxes under section 954(b)(4) if the entire amount of earnings in the pre-2007 pool in the separate category for high withholding tax interest were treated as a net item of income subject to the rules of § 1.954-1(d). If the earnings would not qualify as income subject to high foreign taxes under section 954(b)(4), the earnings and taxes are allocated to the post-2006 separate category for passive category income. The IRS and the Treasury Department believe that, given that high withholding tax interest generally constitutes subpart F income unless it is high-taxed, this safe harbor is an appropriate alternative to reconstructing earnings and taxes in a CFC's separate category for high withholding tax interest. 3. Interest Apportionment Safe Harbor A second safe harbor is provided under § 1.904-7T(g)(3)(ii)(C) which allows taxpayers to allocate the post-1986 undistributed earnings and post-1986 foreign taxes (and deficits, previously-taxed earnings, and pre-1987 accumulated profits, if any) in a CFC's or noncontrolled section 902 corporation's pre-2007 pools following the principles of the safe harbor method described in the transition rules under § 1.904-7T(f)(4)(ii) for post-1986 undistributed earnings and post-1986 foreign income taxes in the non-look-through pool of a controlled foreign corporation or noncontrolled section 902 corporation. 4. Election of Safe Harbor To allocate pools of undistributed earnings (and deficits, previously-taxed earnings, and pre-1987 accumulated profits, if any) and foreign income taxes in the pre-2007 separate categories of a CFC or noncontrolled section 902 corporation to the foreign corporation's post-2006 separate categories, the temporary regulations at § 1.904-7T(g)(3)(iii) provide that a taxpayer may elect to apply a safe harbor in lieu of reconstruction on a separate-category-by-separate-category basis. If a taxpayer elects to apply a safe harbor to allocate pre-2007 pools of more than one pre-2007 separate category of a foreign corporation, the same safe harbor (that is, the general safe harbor described in § 1.904-7T(g)(3)(ii)(B) or the interest apportionment safe harbor described in § 1.904-7T(g)(3)(ii)(C)) shall then apply to allocate the pre-2007 pools of all of the foreign corporation's pre-2007 separate categories for which the taxpayer elects to apply a safe harbor method in lieu of reconstructing the pre-2007 pools. C. Post-1986 Undistributed Earnings and Taxes of Lower-Tier Foreign Corporations The transition rules described in Sections V.A. and B in this preamble apply to post-1986 undistributed earnings and post-1986 foreign income taxes (as well as deficits, previously- taxed earnings, and pre-1987 accumulated profits, if any) not only of a first-tier foreign corporation but also of lower-tier foreign corporations as well. See § 1.904-7T(g)(5). Accordingly, to the extent a lower-tier foreign corporation has pools of post-1986 undistributed earnings (attributable to amounts not yet included in gross income by the U.S. shareholder) and foreign income taxes in a pre-2007 separate category, the rules of § 1.904-7T(g) apply in treating the earnings and taxes as the opening balance of the foreign corporation's pools of post-1986 undistributed earnings and post-1986 foreign income taxes in the appropriate post-2006 separate category or categories on the first day of the foreign corporation's first post-2006 taxable year. Similarly, pre-1987 accumulated profits and pre-1987 foreign income taxes in a pre-2007 separate category of a lower-tier foreign corporation are allocated to the appropriate post-2006 separate categories in accordance with the rules of § 1.904-7T(g). VI. Separate Limitation Losses and Overall Foreign Losses Because the AJCA reduced the number of section 904(d) separate categories from eight to two for post-2006 taxable years, the temporary regulations provide transition rules for recapture in a post-2006 taxable year of an overall foreign loss
(OFL)or separate limitation loss
(SLL)in a pre-2007 separate category that offset U.S. source income or income in another pre-2007 separate category, respectively, in a pre-2007 taxable year. Section 1.904(f)-12T(h)(1) of the temporary regulations provides that to the extent a taxpayer has an OFL or SLL at the end of the taxpayer's last pre-2007 taxable year in the pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income, or certain distributions from a FSC or former FSC, such OFL or SLL is allocated on the first day of the taxpayer's next taxable year to the taxpayer's post-2006 separate category for passive category income. Accordingly, such OFL or SLL will be subject to recapture in subsequent taxable years out of the taxpayer's passive category income. Where a taxpayer has an SLL in some other pre-2007 separate category (for example, a general limitation SLL) that offset passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income, or certain distributions from a FSC or former FSC, the SLL will be recaptured in subsequent taxable years as passive category income. Section 1.904(f)-12T(h)(2) of the temporary regulations provides that to the extent a taxpayer has an OFL or SLL at the end of the taxpayer's last pre-2007 taxable year in the pre-2007 separate category for financial services income, shipping income, or general limitation income, such OFL or SLL is allocated on the first day of the taxpayer's next taxable year to the taxpayer's post-2006 separate category for general category income. Accordingly, such OFL or SLL will be subject to recapture in subsequent taxable years out of the taxpayer's general category income. Where a taxpayer has an SLL in some other pre-2007 separate category (for example, a passive SLL) that offset financial services income, shipping income, or general limitation income, the SLL will be recaptured in subsequent taxable years as general category income. Section 1.904(f)-12T(h)(3) provides that to the extent a taxpayer has an OFL or SLL at the end of the taxpayer's last pre-2007 taxable year in the pre-2007 separate category for high withholding tax interest, the allocation of such OFL or SLL to the taxpayer's post-2006 separate categories depends on the taxpayer's allocation of excess taxes in the high withholding tax interest loss category for carryover purposes. Accordingly, if the excess taxes are assigned to the appropriate post-2006 separate category or categories based on reconstruction (that is, treating the taxes as if they had been paid or accrued in a post-2006 taxable year under § 1.904-2T(i)(1)(i)), the OFL or SLL is allocated pro rata to the taxpayer's post-2006 separate categories based on the proportions in which the excess high withholding taxes are assigned to the post-2006 separate categories. If instead the taxpayer elects to assign the excess taxes to the post-2006 separate category for general category income under the safe harbor described in § 1.904-2T(i)(1)(ii), the OFL or SLL is also allocated to the same post-2006 general category. If there are no excess taxes in the loss category that are carried over to post-2006 taxable years, an OFL or SLL in the pre-2007 separate category for high withholding tax interest is allocated to the post-2006 separate category for passive category income. Similarly, where a taxpayer has an SLL in a pre-2007 separate category that offset high withholding tax interest, the SLL will be recaptured in subsequent taxable years pro rata as income in the post-2006 separate categories for general category income and passive category income based on how the taxpayer allocated excess taxes in the pre-2007 separate category for high withholding tax interest under § 1.904-2T(i)(1). If no excess taxes in the pre-2007 separate category for high withholding tax interest are carried over to post-2006 taxable years, the SLL will be recaptured in subsequent taxable years as income in the post-2006 separate category for passive category income. Section 1.904-12T(h)(4) provides that after application of paragraphs
(1)through (3), any separate limitation loss account allocated to the post-2006 separate category for passive category income for which income is to be recaptured as passive category income will be eliminated, since “recapture” to and from the same category would be meaningless. For the same reason, any separate limitation loss accounts allocated to the post-2006 separate category for general category income for which income is to be recaptured as general category income will be eliminated. Section 1.904-12T(h)(5) provides that taxpayers may in the alternative determine the treatment of OFLs and SLLs in pre-2007 separate categories following the principles of the transition rules of § 1.904-12T(g)(1) and
(2)concerning the treatment of OFLs and SLLs in the separate category for dividends from a noncontrolled section 902 corporation. Effective/Applicability Date The effective date for these regulations is December 21, 2007. The temporary regulations apply to taxable years of United States taxpayers beginning after December 31, 2006, and ending on or after December 21, 2007, and to taxable years of a foreign corporation which end with or within a taxable year of its domestic corporate shareholder beginning after December 31, 2006, and ending on or after December 21, 2007. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble of the cross-referenced notice of proposed rulemaking published in this issue of the **Federal Register** . 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 businesses. Drafting Information The principal author of these regulations is Jeffrey L. Parry of the Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES **Paragraph 1.** The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * **Par. 2.** Section 1.904-0 is amended as follows: 1. Add the entry for § 1.904-2(i). 2. Remove and reserve the entries for § 1.904-4(a), (b), (d), (f), (g), (h)(3), and (l). 3. Remove and reserve the entry for § 1.904-5(h)(3). 4. Add and reserve the entry for § 1.904-5(o)(3). 5. Add the entry for § 1.904-7(g). 6. Add the entry for § 1.904(f)-12(h). The revisions and additions read as follows: § 1.904-0 Outline of regulation provisions for section 904. § 1.904-2 Carryback and carryover of unused foreign tax.
(i)[Reserved]. § 1.904-4 Separate application of section 904 with respect to certain categories of income.
(a)[Reserved].
(b)[Reserved].
(d)[Reserved].
(f)[Reserved].
(g)[Reserved]. (h)(3) [Reserved].
(l)[Reserved]. § 1.904-5 Look-through rules as applied to controlled foreign corporations and other entities.
(h)* * *
(3)[Reserved].
(o)* * *
(3)[Reserved]. § 1.904-7 Transition rules.
(g)[Reserved]. § 1.904(f)-12 Transition rules.
(h)[Reserved]. **Par. 3.** Section 1.904-2 is amended by adding paragraph
(i)to read as follows: § 1.904-2 Carryback and carryover of unused foreign tax.
(i)[Reserved.] For further guidance, see § 1.904-2T(i). **Par. 4.** Section 1.904-2T is amended by adding paragraph
(i)to read as follows: § 1.904-2T Carryback and carryover of unused foreign tax (temporary).
(i)*Transition rules for carryovers and carrybacks of pre-2007 and post-2006 unused foreign tax* —(1) *Carryover of unused foreign tax* —(i) *General rule.* For purposes of this paragraph (i), the terms *post-2006 separate category* and *pre-2007 separate category* have the meanings set forth in § 1.904-7T(g)(1)(ii) and (iii). The rules of this paragraph (i)(1) apply to reallocate to the taxpayer's post-2006 separate categories for general category income and passive category income any unused foreign taxes (as defined in § 1.904-2(b)(2)) that were paid or accrued or deemed paid under section 902 with respect to income in a pre-2007 separate category (other than a category described in § 1.904-4(m)). To the extent any such unused foreign taxes are carried forward to a taxable year beginning after December 31, 2006, such taxes shall be allocated to the taxpayer's post-2006 separate categories to which those taxes would have been allocated if the taxes were paid or accrued in a taxable year beginning after December 31, 2006. For example, any foreign taxes paid or accrued or deemed paid with respect to financial services income in a taxable year beginning before January 1, 2007, that are carried forward to a taxable year beginning after December 31, 2006, will be allocated to the general category because the financial services income to which those taxes relate would have been allocated to the general category if it had been earned in a taxable year beginning after December 31, 2006.
(ii)*Safe harbor.* In lieu of applying the rules of paragraph (i)(1)(i) of this section, a taxpayer may allocate all unused foreign taxes in the pre-2007 separate category for passive income to the post-2006 separate category for passive category income, and allocate all other unused foreign taxes described in paragraph (i)(1)(i) of this section to the post-2006 separate category for general category income.
(2)*Carryback of unused foreign tax* —(i) *General rule.* The rules of this paragraph (i)(2) apply to any unused foreign taxes that were paid or accrued or deemed paid under section 902 with respect to income in a post-2006 separate category (other than a category described in § 1.904-4(m)). To the extent any such unused foreign taxes are carried back to a taxable year beginning before January 1, 2007, a credit for such taxes shall be allowed only to the extent of the excess limitation in the pre-2007 separate category, or categories, to which the taxes would have been allocated if the taxes were paid or accrued in a taxable year beginning before January 1, 2007. For example, any foreign taxes paid or accrued or deemed paid with respect to income in the general category in a taxable year beginning after December 31, 2006, that are carried back to a taxable year beginning before January 1, 2007, will be allocated to the same separate categories to which the income would have been allocated if it had been earned in a taxable year beginning before January 1, 2007.
(ii)*Safe harbor.* In lieu of applying the rules of paragraph (i)(2)(i) of this section, a taxpayer may allocate all unused foreign taxes in the post-2006 separate category for passive category income to the pre-2007 separate category for passive income, and may allocate all other unused foreign taxes described in paragraph (i)(2)(i) of this section to the pre-2007 separate category for general limitation income.
(3)*Effective/applicability date.* This paragraph
(i)applies to taxable years of United States taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007.
(4)*Expiration date.* The applicability of this paragraph
(i)expires on December 20, 2010. **Par. 5.** Section 1.904-4 is amended as follows: 1. In the table below, for each section listed in the left column, remove the language in the middle column and add the language in the right column. 2. Paragraphs (a),(b), (d), (f), (g), (h)(3) and
(l)are revised. 3. Paragraph (h)(4) *Example 2* is removed. 4. Paragraph (h)(4) *Example 3* is redesignated as *Example 2.* 5. Paragraph (h)(4) ( *Example 4* is redesignated as *Example 3* and in the last sentence the language “general limitation” is removed and the language “general category” is added in its place. 6. Paragraphs (h)(5)(iii) *Example 2* and (h)(5)(iii) Example 4 are removed. 7. Paragraph (h)(5)(iii) *Example 3* is redesignated as *Example 2* and in the last sentence the language “general limitation” is removed and the language “general category.” is added in its place. The revisions read as follows: Section Remove Add 1.904-4(c)(1), third sentence general limitation general category. 1.904-4(c)(1), third sentence general limitation general category. 1.904-4(c)(1), fourth sentence general limitation general category. 1.904-4(c)(6)(iii), second sentence general limitation general category. 1.904-4(c)(6)(iii), fifth sentence general limitation general category. 1.904-4(c)(6)(iv)(A), first sentence general limitation general category. 1.904-4(c)(7)(i), second sentence general limitation general category. 1.904-4(c)(7)(iii), third sentence general limitation general category. 1.904-4(c)(8) *Example 1,* last sentence general limitation general category. 1.904-4(c)(8) *Example 1,* last sentence general limitation general category. 1.904-4(c)(8) *Example 2,* last sentence general limitation general category. 1.904-4(c)(8) *Example 3,* last sentence general limitation general category. 1.904-4(c)(8) *Example 5,* last sentence general limitation general category. 1.904-4(c)(8) *Example 6,* seventh sentence general limitation general category. 1.904-4(c)(8) *Example 8,* last sentence general limitation general category. 1.904-4(c)(8) *Example 9* (i), last sentence general limitation general category. 1.904-4(c)(8) *Example 9* (ii), first sentence general limitation general category. 1.904-4(c)(8) *Example 9* (ii), last sentence general limitation general category. 1.904-4(c)(8) *Example 11,* first sentence general limitation general category. 1.904-4(c)(8) *Example 11,* last sentence general limitation general category. 1.904-4(c)(8) *Example 12,* third sentence general limitation general category. 1.904-4(h)(2) general limitation general category. 1.904-4(h)(5)(i), first sentence that is not a financial services entity 1.904-4(h)(5)(i), first sentence general limitation general category. 1.904-4(h)(5)(i), last sentence If a financial services entity receives or accrues that income, the income shall not be considered to be export financing interest and, therefore, shall be treated as financial services income 1.904-4(h)(5)(ii), first sentence 904(d)(2)(A)(iii)(II) 904(d)(2)(B)(iii)(I). 1.904-4(h)(5)(ii), first sentence general limitation general category. 1.904-4(h)(5)(ii), first sentence unless the interest is received or accrued by a financial services entity 1.904-4(h)(5)(ii), last sentence If that interest also would be high withholding tax interest but for section 904(d)(2)(B)(ii), then the interest shall be treated as financial services income 1.904-4(h)(5)(iii) *Example 1,* last sentence general limitation general category. 1.904-4(i), second sentence Thus, for example, if a taxpayer receives or accrues a dividend distribution from two separate noncontrolled section 902 corporations out or earnings and profits attributable to income received or accrued by the noncontrolled section 902 corporations that is income described in section 907(c), the rules provided in section 907 shall apply separately to the dividends received from each noncontrolled section 902 corporation. 1.904-4(j), last sentence 904(d)(2)(A)(iii)(III) 904(d)(2)(B)(iii)(II). 1.904-4(m) 904(g)(10) 904(h)(10) 1.904-4(m) and (d)(3)(F)(i) § 1.904-4 Separate application of section 904 with respect to certain categories of income.
(a)[Reserved]. For further guidance, see § 1.904-4T(a).
(b)[Reserved]. For further guidance, see § 1.904-4T(b).
(d)[Reserved].
(f)[Reserved]. For further guidance, see § 1.904-4T(f).
(g)[Reserved]. For further guidance, see § 1.904-4T(g).
(h)* * *
(3)[Reserved]. For further guidance, see § 1.904-4T(h)(3).
(l)[Reserved]. For further guidance, see § 1.904-4T(l). **Par. 6.** Section 1.904-4T is amended as follows: 1. Revise paragraphs (a), (b), (c)(4)(i), (c)(4)(ii), (c)(4)(iii), (c)(5), (c)(6), (7), (c)(8), (d), (e), (f), (g), (h), (i), (j), (k), (l), and (m). 2. Add paragraphs
(n)and (o). The revisions and additions read as follows: § 1.904-4T Separate application of section 904 with respect to certain categories of income (temporary).
(a)*In general.* A taxpayer is required to compute a separate foreign tax credit limitation for income received or accrued in a taxable year that is described in section 904(d)(1)(A) (passive category income), 904(d)(1)(B) (general category income), or § 1.904-4(m) (additional separate categories).
(b)*Passive category income* —(1) *In general.* The term *passive category income* means passive income and specified passive category income.
(2)*Passive income* —(i) *In general.* The term *passive income* means any—
(A)Income received or accrued by any person that is of a kind that would be foreign personal holding company income (as defined in section 954(c)) if the taxpayer were a controlled foreign corporation, including any amount of gain on the sale or exchange of stock in excess of the amount treated as a dividend under section 1248; or
(B)Amount includible in gross income under section 1293.
(ii)*Exceptions.* Passive income does not include any export financing interest (as defined in section 904(d)(2)(G) and paragraph
(h)of this section), any high-taxed income (as defined in section 904(d)(2)(F) and paragraph
(c)of this section), or any active rents and royalties (as defined in paragraph (b)(2)(iii) of this section). In addition, passive income does not include any income that would otherwise be passive but is characterized as income in another separate category under the look-through rules of section 904(d)(3), (d)(4), and (d)(6)(C) and the regulations under those provisions. In determining whether any income is of a kind that would be foreign personal holding company income, the rules of section 864(d)(5)(A)(i) and
(6)(treating related person factoring income of a controlled foreign corporation as foreign personal holding company income that is not eligible for the export financing income exception to the separate limitation for passive income) shall apply only in the case of income of a controlled foreign corporation (as defined in section 957). Thus, income earned directly by a United States person that is related person factoring income may be eligible for the exception for export financing interest.
(iii)*Active rents or royalties* —(A) *In general.* For rents and royalties paid or accrued after September 20, 2004, passive income does not include any rents or royalties that are derived in the active conduct of a trade or business, regardless of whether such rents or royalties are received from a related or an unrelated person. Except as provided in paragraph (b)(2)(iii)(B) of this section, the principles of section 954(c)(2)(A) and the regulations under that section shall apply in determining whether rents or royalties are derived in the active conduct of a trade or business. For this purpose, the term taxpayer shall be substituted for the term controlled foreign corporation if the recipient of the rents or royalties is not a controlled foreign corporation.
(B)*Active conduct of trade or business.* Rents and royalties are considered derived in the active conduct of a trade or business by a United States person or by a controlled foreign corporation (or other entity to which the look-through rules apply) for purposes of section 904 (but not for purposes of section 954) if the requirements of section 954(c)(2)(A) are satisfied by one or more corporations that are members of an affiliated group of corporations (within the meaning of section 1504(a), determined without regard to section 1504(b)(3)) of which the recipient is a member. For purposes of this paragraph (b)(2)(iii)(B), an affiliated group includes only domestic corporations and foreign corporations that are controlled foreign corporations in which domestic members of the affiliated group own, directly or indirectly, at least 80 percent of the total voting power and value of the stock. For purposes of this paragraph (b)(2)(iii)(B), indirect ownership shall be determined under section 318 and the regulations under that section.
(iv)*Examples.* The following examples illustrate the application of paragraph (b)(2) of this section. Example 1. P is a domestic corporation with a branch in foreign country X. P does not have any financial services income. For 2008, P has a net foreign currency gain that would not constitute foreign personal holding company income if P were a controlled foreign corporation because the gain is directly related to the business needs of P. The currency gain is, therefore, general category income to P because it is not income of a kind that would be foreign personal holding company income. Example 2. Controlled foreign corporation S is a wholly-owned subsidiary of P, a domestic corporation. S is regularly engaged in the restaurant franchise business. P licenses trademarks, tradenames, certain know-how, related services, and certain restaurant designs for which S pays P an arm's length royalty. P is regularly engaged in the development and licensing of such property. The royalties received by P for the use of its property are allocable under the look-through rules of § 1.904-5 to the royalties S receives from the franchisees. Some of the franchisees are unrelated to S and P. Other franchisees are related to S or P and use the licensed property outside of S's country of incorporation. S does not satisfy, but P does satisfy, the active trade or business requirements of section 954(c)(2)(A) and the regulations under that section. The royalty income earned by S with regard to both its related and unrelated franchisees is foreign personal holding company income because S does not satisfy the active trade or business requirements of section 954(c)(2)(A) and, in addition, the royalty income from the related franchisees does not qualify for the same country exception of section 954(c)(3). However, all of the royalty income earned by S is general category income to S under § 1.904-4(b)(2)(iii) because P, a member of S's affiliated group (as defined therein), satisfies the active trade or business test (which is applied without regard to whether the royalties are paid by a related person). S's royalty income that is taxable to P under subpart F and the royalties paid to P are general category income to P under the look-through rules of § 1.904-5(c)(1)(i) and (c)(3), respectively.
(3)*Specified passive category income* means—
(i)Dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States;
(ii)Taxable income attributable to foreign trade income (within the meaning of section 923(b)); or
(iii)Distributions from a FSC (or a former FSC) out of earnings and profits attributable to foreign trade income (within the meaning of section 923(b)) or interest or carrying charges (as defined in section 927(d)(1)) derived from a transaction which results in foreign trade income (as defined in section 923(b)). (c)(4)(i) through (h)(2) [Reserved]. For further guidance, see § 1.904-4(c)(i) through (h)(2).
(3)*Exception.* Unless it is received or accrued by a financial services entity, export financing interest shall be treated as passive category income if that income is also related person factoring income. For this purpose, related person factoring income is—
(i)Income received or accrued by a controlled foreign corporation that is income described in section 864(d)(6) (income of a controlled foreign corporation from a loan for the purpose of financing the purchase of inventory property of a related person); or
(ii)Income received or accrued by any person that is income described in section 864(d)(1) (income from a trade receivable acquired from a related person). (h)(4) through
(k)[Reserved]. For further guidance, see § 1.904-4(h)(3)(iii) through (k).
(l)*Priority rule.* Income that meets the definitions of a separate category described in paragraph
(m)of this section and another category of income described in section 904(d)(2)(A)(i) and
(ii)will be subject to the separate limitation described in paragraph
(m)of this section and will not be treated as general category income described in section 904(d)(2)(A)(ii).
(m)[Reserved]. For further guidance, see § 1.904-4(m).
(n)*Effective/applicability date.* Paragraphs (a), (b), (h)(3), and
(l)of this section shall apply to taxable years of United States taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007, and to taxable years of a foreign corporation which end with or within taxable years of its domestic corporate shareholder beginning after December 31, 2006 and ending on or after December 21, 2007.
(o)*Expiration date.* The applicability of paragraphs (a), (b), (h)(3)(ii) and
(l)of this section expires on December 20, 2010. **Par. 7.** Section 1.904-5 is amended by revising paragraph (h)(3) and adding paragraph (o)(3) to read as follows: § 1.904-5 Look-through rules as applied to controlled foreign corporations and other entities.
(h)* * *
(3)[Reserved]. For further guidance, see § 1.904-5T(h)(3).
(o)* * *
(3)[Reserved]. For further guidance, see § 1.904-5T(o)(3). **Par. 8.** Section 1.904-5T is amended by revising paragraphs (c)(4)(iv), (d), (e), (f), (g), and
(h)and adding paragraph (o)(3) to read as follows: § 1.904-5T Look-through rules as applied to controlled foreign corporations and other entities (temporary). (c)(4)(iv) through (h)(2) [Reserved]. For further guidance, see § 1.904-5(c)(4)(iv) through (h)(2).
(3)*Income from the sale of a partnership interest* —(i) *In general.* To the extent a partner recognizes gain on the sale of a partnership interest, that income shall be treated as passive category income to the partner, unless the income is considered to be high-taxed under section 904(d)(2)(B)(iii)(II) and § 1.904-4(c).
(ii)*Exception for 25-percent owned partnership.* In the case of a sale of an interest in a partnership by a partner that is a 25-percent owner of the partnership under the principles of section 954(c)(4)(B), income recognized on the sale of the partnership interest shall be treated as general category income to the extent that such gain would not be classified as foreign personal holding company income under the look-through rule of section 954(c)(4).
(o)* * *
(3)*Rules for income from the sale of a partnership interest* —(i) *Effective/applicability date.* Paragraph (h)(3) of this section shall apply to taxable years of United States taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007, and to taxable years of a foreign corporation which end with or within taxable years of its domestic corporate shareholder beginning after December 31, 2006 and ending on or after December 21, 2007.
(ii)*Expiration date.* The applicability of paragraph (h)(3) of this section expires on December 20, 2010. **Par. 9.** Section 1.904-7 is amended by adding paragraph
(g)to read as follows: § 1.904-7 Transition rules.
(g)[Reserved.] For further guidance, see § 1.904-7T(g). **Par. 10.** Section 1.904-7T is amended by adding paragraph
(g)to read as follows: § 1.904-7T Transition Rules (temporary).
(g)*Treatment of earnings and foreign taxes of a controlled foreign corporation or a noncontrolled section 902 corporation accumulated in taxable years beginning before January 1, 2007* —(1) *Definitions* —(i) *Pre-2007 pools* means the pools in each separate category of post-1986 undistributed earnings (as defined in § 1.902-1(a)(9)) that were accumulated, and post-1986 foreign income taxes (as defined in § 1.902-1(a)(8)) paid, accrued, or deemed paid, in taxable years beginning before January 1, 2007.
(ii)*Pre-2007 separate categories* means the separate categories of income described in section 904(d) as applicable to taxable years beginning before January 1, 2007, and any other separate category of income described in § 1.904-4(m).
(iii)*Post-2006 separate categories* means the separate categories of income described in section 904(d) as applicable to taxable years beginning after December 31, 2006, and any other separate category of income described in § 1.904-4(m).
(2)*Treatment of pre-2007 pools of a controlled foreign corporation or a noncontrolled section 902 corporation.* Any post-1986 undistributed earnings in a pre-2007 pool of a controlled foreign corporation or a noncontrolled section 902 corporation shall be treated in taxable years beginning after December 31, 2006, as if they were accumulated during a period in which the rules governing the determination of post-2006 separate categories applied. Post-1986 foreign income taxes paid, accrued, or deemed paid with respect to such earnings shall be treated as if they were paid, accrued, or deemed paid during a period in which the rules governing the determination of post-2006 separate categories (including the rules of section 904(d)(3)(E)) applied as well. Any such earnings and taxes in pre-2007 pools shall constitute the opening balance of the foreign corporation's post-1986 undistributed earnings and post-1986 foreign income taxes on the first day of the foreign corporation's first taxable year beginning after December 31, 2006, in accordance with the rules of paragraph (g)(3) of this section. Similar rules shall apply to characterize any deficits in the pre-2007 pools and previously-taxed earnings and profits described in section 959(c)(1)(A) that are attributable to earnings in the pre-2007 pools.
(3)*Substantiation of post-2006 character of earnings and taxes in a pre-2007 pool* —(i) *Reconstruction of earnings and taxes pools.* In order to substantiate the post-2006 characterization of post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes in pre-2007 pools of a controlled foreign corporation or a noncontrolled section 902 corporation, the taxpayer shall make a reasonable, good-faith effort to reconstruct the pre-2007 pools of post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes following the rules governing the determination of post-2006 separate categories for each taxable year beginning before January 1, 2007, beginning with the first year in which post-1986 undistributed earnings were accumulated in the pre-2007 pool. Reconstruction shall be based on reasonably available books and records and other relevant information. To the extent any pre-2007 separate category includes earnings that would be allocated to more than one post-2006 separate category, the taxpayer must account for earnings distributed and taxes deemed paid in these years for such category as if they were distributed and deemed paid pro rata from the amounts that were added to that category during each taxable year beginning before January 1, 2007.
(ii)*Safe harbor method* —(A) *In general.* Subject to the rules of paragraph (g)(3)(iii) of this section, a taxpayer may allocate the post-1986 undistributed earnings and post-1986 foreign income taxes in pre-2007 pools of a controlled foreign corporation or a noncontrolled section 902 corporation (as well as deficits and previously-taxed earnings, if any) under one of the safe harbor methods described in paragraphs (g)(3)(ii)(B) and (g)(3)(ii)(C) of this section.
(B)*General safe harbor method* —( *1* ) Any post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes of a noncontrolled section 902 corporation or a controlled foreign corporation in a pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income, or certain distributions from a FSC or former FSC shall be allocated to the post-2006 separate category for passive category income. ( *2* ) Any post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes of a noncontrolled section 902 corporation or a controlled foreign corporation in a pre-2007 separate category for financial services income, shipping income or general limitation income shall be allocated to the post-2006 separate category for general category income. ( *3* ) Except as provided in paragraph (g)(3)(ii)(B)( *4* ) of this section, any post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes of a noncontrolled section 902 corporation or a controlled foreign corporation in a pre-2007 separate category for high withholding tax interest shall be allocated to the post-2006 separate category for passive category income. ( *4* ) If a controlled foreign corporation has positive post-1986 undistributed earnings and post-1986 foreign income taxes in a pre-2007 separate category for high withholding tax interest, such earnings and taxes shall be allocated to the post-2006 separate category for general category income if the earnings would qualify as income subject to high foreign taxes under section 954(b)(4) if the entire amount of post-1986 undistributed earnings were treated as a net item of income subject to the rules of § 1.954-1(d). If the high withholding tax interest earnings would not qualify as income subject to high foreign taxes under section 954(b)(4), then the earnings and taxes shall be allocated to the post-2006 separate category for passive category income.
(C)*Interest apportionment safe harbor.* A taxpayer may allocate the post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes in pre-2007 pools of a controlled foreign corporation or a noncontrolled section 902 corporation following the principles of paragraph (f)(4)(ii) of this section.
(iii)*Consistency rule.* The election to apply a safe harbor method under paragraph (g)(3)(ii) of this section in lieu of the rules described in paragraph (g)(3)(i) of this section may be made on a separate category by separate category basis. However, if a taxpayer elects to apply a safe harbor to allocate pre-2007 pools of more than one pre-2007 separate category of a controlled foreign corporation or a noncontrolled section 902 corporation, such safe harbor (the general safe harbor described in paragraph (g)(3)(ii)(B) of this section or the interest apportionment safe harbor described in paragraph (g)(3)(ii)(C) of this section) shall apply to allocate post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes for the pre-2007 pools in each pre-2007 separate category of the foreign corporation for which the taxpayer elected to apply a safe harbor method in lieu of reconstructing the pre-2007 pools.
(4)*Treatment of pre-1987 accumulated profits.* Any pre-1987 accumulated profits (as defined in § 1.902-1(a)(10)) of a noncontrolled section 902 corporation or a controlled foreign corporation shall be treated in taxable years beginning after December 31, 2006, as if they had been accumulated during a period in which the rules governing the determination of post-2006 separate categories applied. Foreign income taxes paid, accrued, or deemed paid with respect to such earnings shall be treated as if they were paid, accrued, or deemed paid during a period in which the rules governing the determination of post-2006 separate categories applied as well. The taxpayer must substantiate the post-2006 characterization of the pre-1987 accumulated profits and pre-1987 foreign income taxes in accordance with the rules of paragraph (g)(3) of this section, including the safe harbor provisions. Similar rules shall apply to characterize any deficits or previously-taxed earnings and profits described in section 959(c)(1)(A) that are attributable to pre-1987 accumulated profits.
(5)*Treatment of earnings and foreign taxes in pre-2007 pools of a lower-tier controlled foreign corporation or noncontrolled section 902 corporation.* The rules of paragraphs (g)(1) through
(4)of this section apply to post-1986 undistributed earnings (as well as deficits and previously-taxed earnings, if any) and post-1986 foreign income taxes in pre-2007 pools, and pre-1987 accumulated profits and pre-1987 foreign income taxes, of a lower-tier controlled foreign corporation or noncontrolled section 902 corporation.
(6)*Effective/applicability date.* This paragraph
(g)shall apply to taxable years of United States taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007, and to taxable years of a foreign corporation which end with or within taxable years of its domestic corporate shareholder beginning after December 31, 2006 and ending on or after December 21, 2007.
(7)*Expiration date.* The applicability of this paragraph
(g)expires on December 20, 2010. **Par. 11.** Section 1.904(f)-12 is amended by adding paragraph
(h)to read as follows: § 1.904(f)-12 Transition rules.
(h)[Reserved.] For further guidance, see § 1.904(f)-12T(h). **Par. 12.** Section 1.904(f)-12T is amended by adding paragraph
(h)to read as follows: § 1.904(f)-12T Transition rules (temporary).
(h)*Recapture in years beginning after December 31, 2006, of separate limitation losses and overall foreign losses incurred in years beginning before January 1, 2007* —(1) *Losses related to pre-2007 separate categories for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income or certain distributions from a FSC or former FSC* —(i) *Recapture of separate limitation loss or overall foreign loss incurred in a pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income or certain distributions from a FSC or former FSC* . To the extent that a taxpayer has a balance in any separate limitation loss or overall foreign loss account in a pre-2007 separate category (as defined in § 1.904-7T(g)(1)(ii)) for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income or certain distributions from a FSC or former FSC, at the end of the taxpayer's last taxable year beginning before January 1, 2007, the amount of such balance, or balances, shall be allocated on the first day of the taxpayer's next taxable year to the taxpayer's post-2006 separate category (as defined in § 1.904-7T(g)(1)(iii)) for passive category income.
(ii)* Recapture of separate limitation loss with respect to a pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income or certain distributions from a FSC or former FSC. * To the extent that a taxpayer has a balance in any separate limitation loss account in any pre-2007 separate category with respect to a pre-2007 separate category for passive income, certain dividends from a DISC or former DISC, taxable income attributable to certain foreign trade income or certain distributions from a FSC or former FSC at the end of the taxpayer's last taxable year beginning before January 1, 2007, such loss shall be recaptured in subsequent taxable years as income in the post-2006 separate category for passive category income.
(2)*Losses related to pre-2007 separate categories for shipping, financial services income or general limitation income* —(i) *Recapture of separate limitation loss or overall foreign loss incurred in a pre-2007 separate category for shipping income, financial services income or general limitation income.* To the extent that a taxpayer has a balance in any separate limitation loss or overall foreign loss account in a pre-2007 separate category for shipping income, financial services income or general limitation income at the end of the taxpayer's last taxable year beginning before January 1, 2007, the amount of such balance, or balances, shall be allocated on the first day of the taxpayer's next taxable year to the taxpayer's post-2006 separate category for general category income.
(ii)*Recapture of separate limitation loss with respect to a pre-2007 separate category for shipping income, financial services income or general limitation income.* To the extent that a taxpayer has a balance in any separate limitation loss account in any pre-2007 separate category with respect to a pre-2007 separate category for shipping income, financial services income or general limitation income at the end of the taxpayer's last taxable year beginning before January 1, 2007, such loss shall be recaptured in subsequent taxable years as income in the post-2006 separate category for general category income.
(3)*Losses related to a pre-2007 separate category for high withholding tax interest* —(i) *Recapture of separate limitation loss or overall foreign loss incurred in a pre-2007 separate category for high withholding tax interest.* To the extent that a taxpayer has a balance in any separate limitation loss or overall foreign loss account in a pre-2007 separate category for high withholding tax interest at the end of the taxpayer's last taxable year beginning before January 1, 2007, the amount of such balance shall be allocated on the first day of the taxpayer's next taxable year on a pro rata basis to the taxpayer's post-2006 separate categories for general category and passive category income, based on the proportion in which any unused foreign taxes in the same pre-2007 separate category for high withholding tax interest are allocated under § 1.904-2T(i)(1). If the taxpayer has no unused foreign taxes in the pre-2007 separate category for high withholding tax interest, then any loss account balance in that category shall be allocated to the post-2006 separate category for passive category income.
(ii)*Recapture of separate limitation loss with respect to a pre-2007 separate category for high withholding tax interest.* To the extent that a taxpayer has a balance in a separate limitation loss account in any pre-2007 separate category with respect to a pre-2007 separate category for high withholding tax interest at the end of the taxpayer's last taxable year beginning before January 1, 2007, such loss shall be recaptured in subsequent taxable years on a pro rata basis as income in the post-2006 separate categories for general category and passive category income, based on the proportion in which any unused foreign taxes in the pre-2007 separate category for high withholding tax interest are allocated under § 1.904-2T(i)(1). If the taxpayer has no unused foreign taxes in the pre-2007 separate category for high withholding tax interest, then the loss account balance shall be recaptured in subsequent taxable years solely as income in the post-2006 separate category for passive category income.
(4)*Elimination of certain separate limitation loss accounts* . After application of paragraphs (h)(1) through (h)(3) of this section, any separate limitation loss account allocated to the post-2006 separate category for passive category income for which income is to be recaptured as passive category income, as determined under those same provisions, shall be eliminated. Similarly, after application of paragraphs (h)(1) through (h)(3) of this section, any separate limitation loss account allocated to the post-2006 separate category for general category income for which income is to be recaptured as general category income, as determined under those same provisions, shall be eliminated.
(5)*Alternative method* . In lieu of applying the rules of paragraphs (h)(1) through (h)(3) of this section, a taxpayer may apply the principles of paragraphs (g)(1) and (g)(2) of this section to determine recapture in taxable years beginning after December 31, 2006, of separate limitation losses and overall foreign losses incurred in taxable years beginning before January 1, 2007.
(6)*Effective/applicability date* . This paragraph
(h)shall apply to taxable years of United States taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007.
(7)*Expiration date* . The applicability of this paragraph
(h)expires on December 20, 2010. Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Approved: December 14, 2007. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. E7-24782 Filed 12-20-07; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9371] RIN 1545-BH14 Treatment of Overall Foreign and Domestic Losses AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary regulations under section 904(g) of the Internal Revenue Code
(Code)relating to the recapture of overall domestic losses. Section 402 of the American Jobs Creation Act of 2004
(AJCA)enacted new section 904(g) of the Code to provide for the recapture of overall domestic losses. These regulations provide guidance needed to comply with these changes, as well as updated guidance with respect to overall foreign losses and separate limitation losses, and affect individuals and corporations claiming foreign tax credits. The text of these temporary regulations also serves as the text of the proposed regulations (REG-141399-07) published in the Proposed Rules section in this issue of the **Federal Register** . DATES: *Effective Date:* These regulations are effective on *December 21, 2007* . *Applicability Dates:* For dates of applicability, see §§ 1.904(f)-1T(g), 1.904(f)-2T(e), 1.904(f)-7T(f), 1.904(f)-8T(c), 1.904(g)-1T(f), 1.904(g)-2T(d), 1.904(g)-3T(i), and 1.1502-9T(e). FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry,
(202)622-3850 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Section 402 of the AJCA enacted new section 904(g) of the Code to provide for the recharacterization of U.S. source income as foreign source income where a taxpayer's foreign tax credit limitation has been reduced as a result of an overall domestic loss. See Public Law 108-357, 118 Stat. 1418 (October 22, 2004), as corrected by the Gulf Opportunity Zone Act of 2005, Public Law 109-135, 119 Stat. 2577 (December 22, 2005). The primary reason for enacting these provisions was “to create parity in the treatment of overall domestic losses and overall foreign losses in order to prevent the double taxation of income.” H.R. Rep. No. 108-548, at 187 (June 16, 2004); see also S. Rep. No. 108-192, at 19-20 (November 7, 2003). When a U.S. source loss is allocated to reduce foreign source income, the foreign tax credit limitation is reduced for the taxable year, which may result in excess foreign tax credits. Any such excess foreign taxes may be credited, if at all, in a subsequent (or the preceding) taxable year. In addition, U.S. source taxable income in a subsequent taxable year is not offset by the U.S. source loss allocated to foreign source income in the prior taxable year, and U.S. tax on such U.S. source taxable income cannot be offset by the foreign tax credit carryforward. This may lead to the double taxation of foreign source income over time. The overall domestic loss recapture provisions amend this result. Section 904(g)(1) generally provides that a portion of a taxpayer's U.S. source income is recharacterized as foreign source income in an amount equal to the lesser of
(1)the amount of the overall domestic loss for years prior to such taxable year and
(2)fifty percent of the taxpayer's U.S. source income for such taxable year. Section 904(g)(2) generally defines an overall domestic loss for this purpose as any domestic loss to the extent it offsets foreign source taxable income for the current year or any preceding taxable year by reason of a carryback. Section 904(g)(4) provides that the Secretary of the Treasury shall prescribe such regulations as may be necessary to coordinate the overall domestic loss provisions with the overall foreign loss provisions. Similar rules were first enacted as a part of the Tax Reform Act of 1976, Public Law 94-455, 90 Stat. 1531 (1976), in section 904(f) to deal with overall foreign losses. Under the overall foreign loss provisions, a portion of foreign source taxable income earned after an overall foreign loss year is recharacterized as U.S. source taxable income for foreign tax credit purposes. Unless a taxpayer elects a higher percentage, generally no more than 50 percent of the foreign source taxable income earned in any particular taxable year is recharacterized as U.S. source taxable income. Recapturing the overall foreign loss reduces the foreign tax credit limitation in one or more years following an overall foreign loss. The separate limitation loss provisions of section 904(f)(5) were added by the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085
(1986)(the 1986 Act) and amended by the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (1988). Other amendments to the overall foreign loss provisions were made by the AJCA as well. Regulations addressing overall foreign losses under section 904(f) were published in the **Federal Register** (52 FR 31992) on August 25, 1987 (the 1987 regulations) and updated by regulations published in the **Federal Register** (71 FR 24516) on April 25, 2006 (the 2006 regulations). Additional guidance was provided in Notice 89-3, 1989-1 CB 623, regarding ordering rules for the allocation of net operating losses, overall foreign losses, and separate limitation losses; the recapture of overall foreign losses and separate limitation losses; and the allocation of U.S. source losses. The section 904(f) regulations have not been amended to reflect changes to the Code since the Tax Reform Act of 1976 or to incorporate the rules of Notice 89-3. See § 601.601(d)(2)(ii)( *b* ). These temporary regulations provide guidance needed to comply with enactment of the overall domestic loss regime, as well as provide updated guidance with respect to overall foreign losses and separate limitation losses. Explanation of Provisions I. Overall Domestic Losses The temporary regulations include rules in §§ 1.904(g)-1T and 1.904(g)-2T which address the establishment, maintenance, and recapture of overall domestic loss accounts. A. Overall Domestic Loss Accounts Section 1.904(g)-1T(b)(1) provides that taxpayers must establish overall domestic loss accounts for an overall domestic loss. It further provides that a separate overall domestic loss account must be maintained for each separate category of foreign source income that is offset by a domestic loss. Section 1.904(g)-1T(b)(2) explains when an overall domestic loss is sustained. Generally, an overall domestic loss is treated as sustained in the later of the taxable years in which the domestic loss is incurred or the foreign source income offset by the domestic loss is earned. Accordingly, in the case of a domestic loss that is carried back to offset foreign source income in a prior taxable year in which the taxpayer elects to credit foreign taxes, the resulting overall domestic loss is treated as sustained in the taxable year the domestic loss is incurred, not in the prior taxable year in which the domestic loss offsets foreign source income. In the case of a domestic loss that is carried forward to offset foreign source income in a later taxable year, however, the overall domestic loss is treated as sustained in the year in which the domestic loss offsets foreign source income, not the earlier year in which the domestic loss is incurred. Accordingly, if a taxpayer incurs a domestic loss in a pre-2007 taxable year, and the loss is carried forward as part of a net operating loss and applied to offset foreign source income in a post-2006 taxable year, the resulting overall domestic loss is treated as sustained in the post-2006 taxable year. Section 1.904(g)-1T(c) provides that an overall domestic loss is sustained when a domestic loss offsets foreign source taxable income in the same taxable year or a preceding taxable year by reason of a carryback, provided the taxpayer has elected to take a credit for its foreign taxes in the year of the offset. A domestic loss is the amount by which U.S. source gross income is exceeded by deductions properly allocated and apportioned thereto. See § 1.904(g)-1T(c). Section 1.904(g)-1T(d) describes additions to overall domestic loss accounts. This includes any overall domestic losses of the taxpayer, as determined above, as well as any allocation from another taxpayer of an overall domestic loss account under § 1.1502-9T, described in Part V of this preamble, and certain adjustments for capital gains and losses. Section 1.904(g)-1T(e) describes reductions to overall domestic loss accounts, including reductions for recaptured amounts and any allocation to another taxpayer of an overall domestic loss account under § 1.1502-9T. B. Recapture of Overall Domestic Losses Section 1.904(g)-2T provides that overall domestic losses are recaptured by treating a portion of a taxpayer's U.S. source taxable income as foreign source income. If the taxpayer has overall domestic loss accounts attributable to more than one separate category, the recharacterized income will be allocated among those categories on a pro rata basis. The amount of U.S. source income subject to recapture is the lesser of the aggregate balance in the overall domestic loss account, or fifty percent of the taxpayer's U.S. source taxable income. Unlike the overall foreign loss recapture provisions in section 904(f), section 904(g) does not permit a taxpayer to elect to recharacterize more than fifty percent of its U.S. source taxable income. Recapture continues until the balance in the overall domestic loss account has been reduced to zero. II. Separate Limitation Losses As discussed below, the 1987 regulations do not reflect the enactment of the separate limitation loss provisions of section 904(f)(5) as part of the 1986 Act. These temporary regulations include new provisions regarding the establishment and recapture of separate limitation loss accounts. Section 1.904(f)-7T provides that taxpayers must establish a separate limitation loss account with respect to a separate category to the extent a foreign source loss in that category offsets foreign source income in another separate category. This section also provides definitions and rules relating to the maintenance of these accounts. Section 1.904(f)-8T provides rules for the recapture of separate limitation loss accounts. Separate limitation loss accounts are recaptured by recharacterizing a portion of the foreign source income in the separate category with the loss account as income in the separate category in which foreign source income of a prior year was offset to create the loss account. The amount of foreign source income subject to recharacterization is the lesser of the balance in a separate limitation loss account or the amount of foreign source income for the taxable year in that same separate category. There is no fifty-percent limitation with respect to separate limitation loss account recapture. If there is more than one separate limitation loss account in a single separate category and the aggregate balance in all those loss accounts exceeds the income in the separate category, income is recharacterized in proportion to the balance in each account. Recapture with respect to a particular separate limitation loss account continues until the balance in the separate limitation loss account has been reduced to zero. III. Overall Foreign Loss The 1987 regulations set forth rules governing the determination and maintenance of overall foreign loss accounts, as well as the recapture of overall foreign losses and the allocation of net operating losses and net capital losses. The regulations do not reflect changes made to the overall foreign loss rules of section 904(f) as part of the 1986 Act and certain subsequent changes to section 904(f), such as the enactment in the AJCA of section 904(f)(3)(D), addressing dispositions of stock in controlled foreign corporations. These temporary regulations update the existing regulations to take into account certain changes made to the overall foreign loss rules since the 1987 regulations were promulgated. Section 1.904(f)-1(a) states that the 1987 regulations apply to taxpayers that sustain overall foreign losses (as defined in paragraph
(c)of that section) in taxable years beginning after December 31, 1975. However, paragraph
(c)of that section only defines overall foreign losses for taxable years beginning after December 31, 1982, and before January 1, 1987. While it is beyond the scope of this project to undertake a full revision of the 1987 regulations to reflect all intervening statutory changes made to section 904(f), the Treasury Department and the IRS believe that as part of this regulations project the principles of the 1987 regulations should be extended to apply to overall foreign losses sustained in taxable years beginning after December 31, 1986, modified so as to take into account statutory amendments. New § 1.904(f)-1T(a)(2) adopts such a rule. The Treasury Department and the IRS believe the application of the fifty-percent limitation on the amount of foreign source income subject to recapture in a taxable year under the overall foreign loss recapture provisions also needs to be clarified as part of this regulations project. Section 1.904(f)-2(c)(1) provides that the amount of foreign source taxable income subject to recapture in a taxable year is the lesser of the balance in the applicable overall foreign loss account in a given separate category or fifty percent of the taxpayer's foreign source taxable income in that same separate category. For example, recapture of a general category overall foreign loss would be limited to the lesser of the balance in the general category overall foreign loss account or fifty percent of the general category taxable income for the taxable year. The legislative history to the 1986 Act clarifies that the fifty-percent limitation is to be applied to the full amount of the taxpayer's foreign source income, not on a separate-category-by-separate-category basis. See H.R. Conf. Rep. No. 99-841 at II-590 (1986). This clarification was incorporated by reference into Notice 89-3, paragraph 3(b), and reflected in instructions to Form 1118 (Foreign Tax Credit—Corporations). The temporary regulations modify the fifty-percent limitation to reflect this clarification. Section 1.904(f)-2T(c)(1) provides that the foreign source taxable income subject to recharacterization is the lesser of the aggregate amount of maximum potential recapture in all overall foreign loss accounts or fifty percent of the taxpayer's total foreign source income. If the aggregate amount of maximum potential recapture in all overall foreign loss accounts exceeds fifty percent of the taxpayer's total foreign source taxable income, foreign source taxable income in each separate category with an overall foreign loss account is recharacterized in an amount equal to the separate category's allocable portion of the section 904(f)(1) recapture amount. The maximum potential recapture from any separate category is the lesser of the balance in the overall foreign loss account or the foreign source taxable income for the current year in the same separate category. Other revisions to the 1987 regulations include updating provisions to reflect statutory and regulatory changes affecting capital gains and losses, in particular those provisions that were superseded by the regulations promulgated under section 904(b) in TD 9141 (July 20, 2004). In addition, § 1.904(f)-3 is made obsolete by the ordering rules added in § 1.904(g)-3T and is removed accordingly. IV. Coordination of Overall Foreign Losses, Separate Limitation Losses, and Overall Domestic Losses Under the specific grant of regulatory authority in section 904(g)(4), these temporary regulations provide ordering rules for coordinating the section 904(f) overall foreign loss and separate limitation loss provisions and the section 904(g) overall domestic loss provisions. Section 1.904(g)-3T provides ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and the recapture of separate limitation losses, overall foreign losses, and overall domestic losses. While these rules generally follow the ordering rules set forth in Notice 89-3, some changes were appropriate to take into account the enactment of the overall domestic loss provisions. A. Step One: Allocation of Net Operating Loss and Net Capital Loss Carryovers These temporary regulations generally follow the rules of Notice 89-3 for the carryover and carryback of net operating losses. Under § 1.904(g)-3T(b)(1), net operating losses that are carried back to a prior year are allocated to income in the carryback year in accordance with the allocation rules for absorbing and allocating net operating loss carryovers. However, the income against which the net operating loss is allocated is the income after application of the overall foreign loss, separate limitation loss and overall domestic loss allocation and recapture rules for the carryback year. The rules for net operating loss carryforwards vary for full and partial carryovers of the net operating loss. In the case of a full net operating loss carryover, the U.S. source losses and foreign losses in separate categories that are part of the net operating loss are carried forward and combined with U.S. source income or loss and foreign source income or loss in the same categories as the respective portions of the net operating loss. In the case of a partial net operating loss carryover, several steps apply. In applying these steps it is important to distinguish the net operating loss, which is the total net operating loss, and the net operating loss carryover, which is the portion of the net operating loss that is absorbed in the carryover year. First, the U.S. source portion of the net operating loss (but not in excess of the net operating loss carryover) is carried over to the extent of U.S. source income in the carryover year. Second, the separate limitation losses that are part of the net operating loss are tentatively carried to the extent of taxable income in the same separate category. This amount is tentative because the total amount of matching net operating losses and separate limitation income may exceed the net operating loss carryover amount remaining after the first step. To the extent the total amount of these tentative loss carryovers is in fact limited by the amount of the remaining net operating loss carryover, then the tentative carryovers in each separate category are reduced on a pro rata basis so that their sum equals the amount of the remaining net operating loss carryover amount. Third, any net operating loss carryover remaining after the first and second steps is carried over proportionately from any remaining loss in each separate category and combined with foreign source loss, if any, in the same separate categories in the carryover year. Finally, any remaining U.S. source loss is carried over to the extent of the net operating loss carryover remaining after the third step, if any, and combined with U.S. source loss, if any, in the carryover year. The temporary regulations deviate from the net operating loss rules of Notice 89-3 in the final two steps. The temporary regulations require the U.S. source loss and foreign source losses in the separate categories that are carried over to be combined with U.S. source income or loss and foreign source income or loss in the same categories as the respective portions of the net operating loss. Then, the temporary regulations provide these losses are allocated against other income as part of the general loss allocation rules for current year losses. Notice 89-3, however, requires the allocation of the net operating loss against income in other separate categories before allocation of current year losses. The Treasury Department and the IRS believe there is no difference in result whether the net operating losses carried into a taxable year are allocated before or at the same time as current year losses, given the treatment of U.S. losses in § 1.904(g)-3T. However, the approach of the temporary regulations provides added simplicity in application of the ordering rules as well as greater consistency with the rules for full net operating loss carryovers. The rules for the allocation of net operating losses apply similarly to net capital loss carryovers. B. Step Two: Allocation of Separate Limitation Losses Separate limitation losses are first allocated to separate limitation income for the taxable year in other separate categories on a proportionate basis. Separate limitation loss accounts are increased as a result of any such allocations. To the extent the separate limitation losses exceed separate limitation income for the year, those losses are allocated against U.S. income, if any, for the taxable year and overall foreign loss accounts are increased. Unlike Notice 89-3, the temporary regulations also provide that offsetting separate limitation loss accounts are netted against one another. For example, if a taxpayer has a separate limitation loss account in the general category with respect to passive category income, and in the next year incurs a passive category separate limitation loss that offsets general category income, the two accounts will be netted against each other, rather than both being carried forward until each one is recaptured. C. Step Three: Allocation of U.S. Source Loss U.S. source losses are allocated against separate limitation income on a proportionate basis, and overall domestic loss accounts are increased appropriately. Under the ordering rules in Notice 89-3, U.S. losses sustained in the current taxable year are allocated after all other losses are allocated and after separate limitation losses and overall foreign losses are recaptured. With the addition of section 904(g), Congress expressed that domestic losses and foreign source losses should be treated with greater parity. To that end, the Treasury Department and the IRS believe the ordering rules of Notice 89-3 should be amended. Accordingly, the temporary regulations provide that U.S. losses are allocated in the same manner as foreign losses, before any income is recharacterized. D. Step Four: Recapture of Overall Foreign Loss Accounts To the extent a taxpayer has any separate limitation income for the taxable year after losses are allocated in steps one through three, a portion of such income will be subject to recharacterization in order to recapture prior year overall foreign losses, if any. E. Step Five: Recapture of Separate Limitation Loss Accounts To the extent a taxpayer has any separate limitation income for the taxable year after overall foreign losses are recaptured in step four, then such income will be subject to recharacterization in order to recapture prior year separate limitation losses, if any. F. Step Six: Recapture of Overall Domestic Loss Accounts To the extent a taxpayer has any U.S. source income after losses are allocated in steps one through three, but not taking into account any foreign source income that is recharacterized as U.S. source income under step four, then a portion of such income will be subject to recharacterization in order to recapture prior year overall domestic losses, if any. The temporary regulations coordinate the overall foreign loss and overall domestic loss regimes by providing that the recapture of overall foreign and domestic loss accounts is done independently. Accordingly, income recharacterized under one recapture provision is not taken into account in determining the amount of income subject to recharacterization under the other recapture provision. For example, foreign source income that is recharacterized as U.S. source income in order to recapture an overall foreign loss account will not then be included in the determination of U.S. source income subject to recharacterization as foreign source income in order to recapture an overall domestic loss account. V. Consolidated Overall Domestic Loss Accounts—§ 1.1502-9T Section 1.1502-9T revises § 1.1502-9 to include rules for the application of section 904(g) to consolidated groups and their members. Section 1.1502-9 provides rules only for the application of section 904(f) to consolidated groups and their members. Under those rules, consolidated overall foreign loss
(COFL)accounts and consolidated separate limitation loss
(CSLL)accounts are determined by the consolidated group on an aggregate basis under the principles of §§ 1.1502-11 and 1.1502-12. When a new member joins the group, its separate overall foreign loss and separate limitation loss accounts are combined with the appropriate COFL and CSLL accounts of the group. When a member leaves the group, it is allocated a pro rata portion of each of the group's COFL and CSLL accounts based on the member's share of the group's assets that generate income subject to recharacterization under the corresponding loss account. The temporary regulations do not alter these provisions addressing COFL and CSLL accounts. The revisions simply extend these principles to provide parallel treatment for consolidated overall domestic loss accounts. Effective/Applicability Dates The effective date for these regulations is December 21, 2007. The regulations generally apply to taxable years beginning after December 21, 2007. However, taxpayers may choose to apply the overall domestic loss provisions of the regulations in other taxable years beginning after December 31, 2006. In the alternative, taxpayers may use any reasonable method consistently applied for those years, including one based on the ordering rules of Notice 89-3. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. For applicability of the Regulatory Flexibility Act, see the cross-referenced notice of proposed rulemaking published elsewhere in this issue of the **Federal Register** . Pursuant to section 7805(f), these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal author of these regulations is Jeffrey L. Parry of the Office of Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES **Paragraph 1.** The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.904(g)-3T also issued under 26 U.S.C. 904(g)(4). * * * **Par. 2.** Section 1.904-0 is amended by revising the section heading and introductory text to read as follows: § 1.904-0 Outline of regulation provisions. This section lists the headings for §§ 1.904-1 through 1.904-7. **Par. 3.** Section 1.904(b)-0 is added. The entries for §§ 1.904(b)-1 and 1.904(b)-2 in § 1.904-0 are redesignated as entries in new § 1.904(b)-0. § 1.904(b)-0 Outline of regulation provisions. This section lists the headings for §§ 1.904(b)-1 and 1.904(b)-2. **Par. 4.** Section 1.904(f)-0 is added and amended as follows: 1. The entries for §§ 1.904(f)-1, 1.904(f)-2, 1.904(f)-3, 1.904(f)-4, 1.904(f)-5, 1.904(f)-6 and 1.904(f)-12 in § 1.904-0 are redesignated as entries in new § 1.904(f)-0. 2. The entry for § 1.904(f)-1(a) is redesignated as § 1.904(f)-1(a)(1) and a new entry for § 1.904(f)-1(a)(2) is added. 3. The entries for § 1.904(f)-1(d)(2), (d)(3), and (d)(4) are revised and the entry for § 1.904(f)-1(d)(5) is removed. 4. The entries for § 1.904(f)-2(c) and (c)(1) are revised. 5. The entries for § 1.904(f)-3 are removed. 6. New entries for §§ 1.904(f)-7 and 1.904(f)-8 are added. The additions and revisions read as follows: § 1.904(f)-0 Outline of regulation provisions. This section lists the headings for §§ 1.904(f)-1 through 1.904(f)-8 and 1.904(f)-12. *§ 1.904(f)-1 Overall foreign loss and the overall foreign loss account.* (a)(1) Overview of regulations.
(2)[Reserved]. For further guidance, see the entry for § 1.904(f)-1T(a)(2) in § 1.904(f)-0T.
(d)* * *
(2)Overall foreign losses of another taxpayer.
(3)Additions to overall foreign loss account created by loss carryovers.
(4)[Reserved]. For further guidance, see the entry for § 1.904(f)-1T(d)(4) in § 1.904(f)-0T. *§ 1.904(f)-2 Recapture of overall foreign losses.*
(c)and (c)(1) [Reserved]. For further guidance, see the entries for § 1.904(f)-2T(c) and (c)(1) in § 1.904(f)-0T. *§ 1.904(f)-7 Separate limitation loss and the separate limitation loss account* . [Reserved]. For further guidance, see the entries for § 1.904(f)-7T in § 1.904(f)-0T. *§ 1.904(f)-8 Recapture of separate limitation loss accounts.* [Reserved]. For further guidance, see the entries for § 1.904(f)-8T in § 1.904(f)-0T. **Par. 5.** Section 1.904(f)-0T is added to read as follows: § 1.904(f)-0T Outline of regulation provisions (temporary). This section lists the headings for §§ 1.904(f)-1T, 1.904(f)-2T, 1.904(f)-7T and 1.904(f)-8T. *§ 1.904(f)-1T Overall foreign loss and the overall foreign loss account (temporary).* (a)(1) [Reserved]. For further guidance, see the entry for § 1.904(f)-1(a)(1) in § 1.904(f)-0.
(2)Application to post-1986 taxable years.
(b)through (d)(3) [Reserved]. For further guidance, see the entries for § 1.904(f)-1(b) through (d)(3) in § 1.904(f)-0. (d)(4) Adjustments for capital gains and losses.
(e)through
(f)[Reserved]. For further guidance, see the entries for § 1.904(f)-1(e) through
(f)in § 1.904(f)-0.
(g)Effective/applicability date.
(h)Expiration date. *§ 1.904(f)-2T Recapture of overall foreign loss (temporary).*
(a)and
(b)[Reserved]. For further guidance, see the entries for § 1.904(f)-2(a) and
(b)in § 1.904(f)-0.
(c)Section 904(f)(1) recapture.
(1)In general. (c)(2) through
(d)[Reserved]. For further guidance, see the entries for § 1.904(f)-2(c)(2) through
(d)in § 1.904(f)-0.
(e)Effective/applicability date.
(f)Expiration date. *§ 1.904(f)-7T Separate limitation loss and the separate limitation loss account (temporary).*
(a)Overview of regulations.
(b)Definitions.
(1)Separate category.
(2)Separate limitation income.
(3)Separate limitation loss.
(c)Separate limitation loss account.
(d)Additions to separate limitation loss accounts.
(1)General rule.
(2)Separate limitation losses of another taxpayer.
(3)Additions to separate limitation loss account created by loss carryovers.
(e)Reductions of separate limitation loss accounts.
(1)Pre-recapture reduction for amounts allocated to other taxpayers.
(2)Reduction for offsetting loss accounts.
(3)Reduction for amounts recaptured.
(f)Effective/applicability date.
(g)Expiration date. *§ 1.904(f)-8T Recapture of separate limitation loss accounts (temporary).*
(a)In general.
(b)Effect of recharacterization of separate limitation income on associated taxes.
(c)Effective/applicability date.
(d)Expiration date. **Par. 6.** Section 1.904(f)-1 is amended as follows: 1. Redesignate paragraph
(a)as (a)(1). 2. Add a new paragraph (a)(2). 3. In paragraph (d)(1), remove the language “paragraph (d)(4) of this section” and add the language “paragraph (d)(3) of this section” in its place. 4. Remove paragraphs (d)(2), (d)(5), and *Example 4* and *Example 5* in paragraph (f). 5. Redesignate paragraph (d)(3) as paragraph (d)(2), and paragraph (d)(4) as paragraph (d)(3). 6. In newly-redesignated paragraph (d)(3), remove the language “1.904(f)-1(d)(5)” and add the language “1.904(f)-1(d)(4)” in its place. 7. Add new paragraphs (d)(4) and (g). The revisions and additions read as follows: § 1.904(f)-1 Overall foreign loss and the overall foreign loss account.
(a)* * *
(2)[Reserved]. For further guidance, see § 1.904(f)-1T(a)(2).
(d)* * *
(4)[Reserved]. For further guidance, see § 1.904(f)-1T(d)(4).
(g)[Reserved]. For further guidance, see § 1.904(f)-1T(g). **Par. 7.** Section 1.904(f)-1T is added to read as follows: § 1.904(f)-1T Overall foreign loss and the overall foreign loss account (temporary). (a)(1) [Reserved]. For further guidance, see § 1.904(f)-1(a)(1).
(2)*Application to post-1986 taxable years.* The principles of §§ 1.904(f)-1 through 1.904(f)-5 shall apply to overall foreign loss sustained in taxable years beginning after December 31, 1986, modified so as to take into account the effect of statutory amendments.
(b)through (d)(3) [Reserved]. For further guidance, see § 1.904(f)-1(b) through (d)(3). (d)(4) *Adjustments for capital gains and losses.* If a taxpayer has capital gains or losses, the taxpayer shall make adjustments to such capital gains and losses to the extent required under section 904(b)(2) and § 1.904(b)-1 before applying the provisions of § 1.904(f)-1T. See § 1.904(b)-1(h).
(e)and
(f)[Reserved]. For further guidance, see § 1.904(f)-1(e) and (f).
(g)*Effective/applicability date.* This section applies to taxable years beginning after *December 21, 2007.*
(h)*Expiration date.* The applicability of this section expires on December 20, 2010. Par. 8. Section 1.904(f)-2 is amended as follows: 1. Revise paragraph (c)(1). 2. Revise paragraph (c)(5) *Example 4.* 3. Add a new paragraph (e). The revisions and addition read as follows: § 1.904(f)-2 Recapture of overall foreign losses.
(c)* * *
(1)[Reserved]. For further guidance, see § 1.904(f)-2T(c)(1).
(5)* * * *Example 4.* [Reserved]. For further guidance see § 1.904(f)-2T(c)(5) *Example 4.*
(e)[Reserved]. For further guidance, see § 1.904(f)-2T(e). Par. 9. Section 1.904(f)-2T is added to read as follows: § 1.904(f)-2T Recapture of overall foreign losses (temporary).
(a)and
(b)[Reserved]. For further guidance, see § 1.904(f)-2(a) and (b).
(c)*Section 904(f)(1) recapture* —(1) *In general.* In a year in which a taxpayer elects the benefits of section 901 or 30A, the amount of foreign source taxable income subject to recharacterization in a taxable year in which paragraph
(a)of this section is applicable is the lesser of the aggregate amount of maximum potential recapture in all overall foreign loss accounts or fifty percent of the taxpayer's total foreign source taxable income. If the aggregate amount of maximum potential recapture in all overall foreign loss accounts exceeds fifty percent of the taxpayer's total foreign source taxable income, foreign source taxable income in each separate category with an overall foreign loss account is recharacterized in an amount equal to the section 904(f)(1) recapture amount, multiplied by the maximum potential recapture in the overall foreign loss account, divided by the aggregate amount of maximum potential recapture in all overall foreign loss accounts. The maximum potential recapture in any account is the lesser of the balance in that overall foreign loss account (after reduction of such accounts in accordance with § 1.904(f)-1(e)) or the foreign source taxable income for the year in the same separate category as the loss account. If, in any year, in accordance with section 164(a) and section 275(a)(4)(A), a taxpayer deducts rather than credits its foreign taxes, recapture is applied to the extent of the lesser of—
(i)The balance in the overall foreign loss account in each separate category; or
(ii)Foreign source taxable income minus foreign taxes in each separate category. (c)(2) through
(5)*Example 3* [Reserved]. For further guidance, see § 1.904(f)-2(c)(2) through
(5)*Example 3.* *Example 4.* Y Corporation is a domestic corporation that does business in the United States and abroad. On December 31, 2007, the balance in Y's general category overall foreign loss account is $500, all of which is attributable to a loss incurred in 2007. Y has no other loss accounts subject to recapture. For 2008, Y has U.S. source taxable income of $400 and foreign source taxable income of $300 in the general category and $900 in the passive category. Under paragraph (c)(1) of this section, the amount of Y's general category income subject to recharacterization is the lesser of the aggregate maximum potential recapture or 50 percent of the total foreign source taxable income. In this case Y's aggregate maximum potential recapture is $300 (the lesser of the $500 balance in the general category overall foreign loss account or $300 foreign source income in the general category for the year), which is less than $600, or 50 percent of total foreign source taxable income ($1200 × 50%). Therefore, pursuant to paragraph
(c)of this section, $300 of foreign source income in the general category is recharacterized as U.S. source income. The balance in Y's general category overall foreign loss account is reduced by $300 to $200 in accordance with § 1.904(f)-1(e)(2). (c)(5) *Example 5* through
(d)[Reserved]. For further guidance, see § 1.904(f)-2(c)(5) *Example 5* through § 1.904(f)-2(d).
(e)*Effective/applicability date.* This section applies to taxable years beginning after *December 21, 2007.*
(f)*Expiration date.* The applicability of this section expires on *December 20, 2010.* Par. 10. Section 1.904(f)-3 is revised to read as follows: § 1.904(f)-3 Allocation of net operating losses and net capital losses. For rules relating to the allocation of net operating losses and net capital losses, see § 1.904(g)-3T. **Par. 11.** Sections 1.904(f)-7, 1.904(f)-7T, 1.904(f)-8, and 1.904(f)-8T are added to read as follows: § 1.904(f)-7 Separate limitation loss and the separate limitation loss account. [Reserved]. For further guidance, see § 1.904(f)-7T. § 1.904(f)-7T Separate limitation loss and the separate limitation loss account (temporary).
(a)*Overview of regulations.* This section provides rules for determining a taxpayer's separate limitation losses, for establishing separate limitation loss accounts, and for making additions to and reductions from such accounts for purposes of section 904(f). Section 1.904(f)-8T provides rules for recharacterizing the balance in any separate limitation loss account under the general recharacterization rule of section 904(f)(5)(C).
(b)*Definitions.* The definitions in paragraphs (b)(1) through
(4)of this section apply for purposes of this section and §§ 1.904(f)-8T and 1.904(g)-3T.
(1)*Separate category* means each separate category of income described in section 904(d) and any other category of income described in § 1.904-4(m). For example, income subject to section 901(j) or 904(h)(10) is income in a separate category.
(2)*Separate limitation income* means, with respect to any separate category, the taxable income from sources outside the United States, separately computed for that category for the taxable year. Separate limitation income shall be determined by taking into account any adjustments for capital gains and losses under section 904(b)(2) and § 1.904(b)-1. See § 1.904(b)-1(h)(1)(i).
(3)*Separate limitation loss* means, with respect to any separate category, the amount by which the foreign source gross income in that category is exceeded by the sum of expenses, losses and other deductions (not including any net operating loss deduction under section 172(a) or any expropriation loss or casualty loss described in section 907(c)(4)(B)(iii)) properly allocated and apportioned thereto for the taxable year. Separate limitation losses are determined separately for each separate category. Accordingly, income and deductions attributable to a separate category are not netted with income and deductions attributable to another separate category for purposes of determining the amount of a separate limitation loss. Separate limitation losses shall be determined by taking into account any adjustments for capital gains and losses under section 904(b)(2) and § 1.904(b)-1. See § 1.904(b)-1(h)(1)(i).
(c)*Separate limitation loss account.* Any taxpayer that sustains a separate limitation loss that is allocated to reduce separate limitation income of the taxpayer under the rules of § 1.904(g)-3T must establish a separate limitation loss account for the loss. The taxpayer must establish separate loss accounts for each separate category in which a separate limitation loss is incurred that is allocated to reduce other separate limitation income. A separate account must then be established for each separate category to which a portion of the loss is allocated. The balance in any separate limitation loss account represents the amount of separate limitation income that is subject to recharacterization (as income in another separate category) in a subsequent year pursuant to § 1.904(f)-8T and section 904(f)(5)(F). From year to year, amounts may be added to or subtracted from the balance in such loss accounts, as provided in paragraphs
(d)and
(e)of this section.
(d)*Additions to separate limitation loss accounts* —(1) *General rule.* A taxpayer's separate limitation loss as defined in paragraph (b)(3) of this section shall be added to the applicable separate limitation loss accounts at the end of the taxable year to the extent that the separate limitation loss has reduced separate limitation income in one or more other separate categories of the taxpayer during the taxable year. For rules with respect to net operating loss carryovers, see paragraph (d)(3) of this section and § 1.904(g)-3T.
(2)*Separate limitation losses of another taxpayer.* If any portion of any separate limitation loss account of another taxpayer is allocated to the taxpayer in accordance with § 1.1502-9T (relating to consolidated separate limitation losses) the taxpayer shall add such amount to its applicable separate limitation loss account.
(3)*Additions to separate limitation loss account created by loss carryovers.* The taxpayer shall add to each separate limitation loss account all net operating loss carryovers to the current taxable year to the extent that separate limitation losses included in the net operating loss carryovers reduced foreign source income in other separate categories for the taxable year.
(e)*Reductions of separate limitation loss accounts.* The taxpayer shall subtract the following amounts from its separate limitation loss accounts at the end of its taxable year in the following order as applicable:
(1)*Pre-recapture reduction for amounts allocated to other taxpayers.* A separate limitation loss account is reduced by the amount of any separate limitation loss account which is allocated to another taxpayer in accordance with § 1.1502-9T (relating to consolidated separate limitation losses).
(2)*Reduction for offsetting loss accounts.* A separate limitation account is reduced to take into account any netting of separate limitation loss accounts under § 1.904(g)-3T(c).
(3)*Reduction for amounts recaptured.* A separate limitation loss account is reduced by the amount of any separate limitation income that is earned in the same separate category as the separate limitation loss that resulted in the account and that is recharacterized in accordance with § 1.904(f)-8T (relating to recapture of separate limitation losses) or section 904(f)(5)(F) (relating to recapture of separate limitation loss accounts out of gain realized from dispositions).
(f)*Effective/applicability date.* This section applies to taxpayers that sustain separate limitation losses in taxable years beginning after *December 21, 2007.* For taxable years beginning after December 31, 1986, and on or before *December 21, 2007* , see section 904(f)(5).
(g)*Expiration date.* The applicability of this section expires on *December 20, 2010.* § 1.904(f)-8 Recapture of separate limitation loss accounts. [Reserved]. For further guidance, see § 1.904(f)-8T. § 1.904(f)-8T Recapture of separate limitation loss accounts (temporary).
(a)*In general.* A taxpayer shall recapture a separate limitation loss account as provided in this section. If the taxpayer has a separate limitation loss account or accounts in any separate category (the “loss category”) and the loss category has income in a subsequent taxable year, the income shall be recharacterized as income in that other category or categories. The amount of income recharacterized shall not exceed the separate limitation loss accounts for the loss category as determined under § 1.904(f)-7T, including the aggregate separate limitation loss accounts from the loss category not previously recaptured under this paragraph (a). If the taxpayer has more than one separate limitation loss account in a loss category, and there is not enough income in the loss category to recapture the entire amount in all the loss accounts, then separate limitation income in the loss category shall be recharacterized as separate limitation income in the separate limitation loss categories on a proportionate basis. This is determined by multiplying the total separate limitation income subject to recapture by a fraction, the numerator of which is the amount in a particular loss account and the denominator of which is the total amount in all loss accounts for the separate category.
(b)*Effect of recapture of separate limitation income on associated taxes.* Recharacterization of income under paragraph
(a)of this section shall not result in the recharacterization of any tax. The rules of § 1.904-6, including the rules that the taxes are allocated on an annual basis and that foreign taxes paid on U.S. source income shall be allocated to the separate category that includes that U.S. source income (see § 1.904-6(a)), shall apply for purposes of allocating taxes to separate categories. Allocation of taxes pursuant to § 1.904-6 shall be made before the recapture of any separate limitation loss accounts of the taxpayer pursuant to the rules of this section.
(c)*Effective/applicability date.* This section applies to taxpayers that sustain separate limitation losses in taxable years beginning after *December 21, 2007.* For taxable years beginning after December 31, 1986, and on or before *December 21, 2007,* see section 904(f)(5).
(d)*Expiration date.* The applicability of this section expires on *December 20, 2010.* **Par. 11.** Section 1.904(g)-0 is added to read as follows: § 1.904(g)-0 Outline of regulation provisions. This section lists the headings for §§ 1.904(g)-1 through 1.904(g)-3. *§ 1.904(g)-1 Overall domestic loss and the overall domestic loss account.* [Reserved]. For further guidance, see the entries for § 1.904(g)-1T in § 1.904(g)-0T. *§ 1.904(g)-2 Recapture of overall domestic losses.* [Reserved]. For further guidance, see the entries for § 1.904(g)-2T in § 1.904(g)-0T. *§ 1.904(g)-3 Ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for recapture of separate limitation losses, overall foreign losses, and overall domestic losses.* [Reserved]. For further guidance, see the entries for § 1.904(g)-3T in § 1.904(g)-0T. **Par. 12.** Section 1.904(g)-0T is added to read as follows: § 1.904(g)-0T Outline of regulation provisions (temporary). This section lists the headings for §§ 1.904(g)-1T through 1.904(g)-3T. *§ 1.904(g)-1T Overall domestic loss and the overall domestic loss account (temporary).*
(a)Overview of regulations.
(b)Overall domestic loss accounts.
(1)In general.
(2)Taxable year in which overall domestic loss is sustained.
(c)Determination of a taxpayer's overall domestic loss.
(1)Overall domestic loss defined.
(2)Domestic loss defined.
(3)Qualified taxable year defined.
(4)Method of allocation and apportionment of deductions.
(d)Additions to overall domestic loss accounts.
(1)General rule.
(2)Overall domestic loss of another taxpayer.
(3)Adjustments for capital gains and losses.
(e)Reductions of overall domestic loss accounts.
(1)Pre-recapture reduction for amounts allocated to other taxpayers.
(2)Reduction for amounts recaptured.
(f)Effective/applicability date.
(g)Expiration date. *§ 1.904(g)-2T Recapture of overall domestic losses (temporary).*
(a)In general.
(b)Determination of U.S. source taxable income for purposes of recapture.
(c)Section 904(g)(1) recapture.
(d)Effective/applicability date.
(e)Expiration date. *§ 1.904(g)-3T Ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for recapture of separate limitation losses, overall foreign losses, and overall domestic losses (temporary).*
(a)In general.
(b)Step One: Allocation of net operating loss and net capital loss carryovers.
(1)In general.
(2)Full net operating loss carryover.
(3)Partial net operating loss carryover.
(4)Net capital loss carryovers.
(c)Step Two: Allocation of separate limitation losses.
(d)Step Three: Allocation of U.S. source losses.
(e)Step Four: Recapture of overall foreign loss accounts.
(f)Step Five: Recapture of separate limitation loss accounts.
(g)Step Six: Recapture of overall domestic loss accounts.
(h)Examples.
(i)Effective/applicability date.
(j)Expiration date. **Par. 13.** Sections 1.904(g)-1, 1.904(g)-1T, 1.904(g)-2, 1.904(g)-2T, 1.904(g)-3, and 1.904(g)-3T are added to read as follows: § 1.904(g)-1 Overall domestic loss and the overall domestic loss account. [Reserved]. For further guidance, see § 1.904(g)-1T. § 1.904(g)-1T Overall domestic loss and the overall domestic loss account (temporary).
(a)*Overview of regulations.* This section provides rules for determining a taxpayer's overall domestic losses, for establishing overall domestic loss accounts, and for making additions to and reductions from such accounts for purposes of section 904(g). Section 1.904(g)-2T provides rules for recapturing the balance in any overall domestic loss account under the general recharacterization rule of section 904(g)(1). Section 1.904(g)-3T provides ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and the recapture of separate limitation losses, overall foreign losses and overall domestic losses.
(b)*Overall domestic loss accounts* —(1) *In general.* Any taxpayer that sustains an overall domestic loss under paragraph
(c)of this section must establish an account for such loss. Separate overall domestic loss accounts must be maintained with respect to each separate category in which foreign source income is offset by the domestic loss. The balance in each overall domestic loss account represents the amount of such overall domestic loss subject to recapture in a given year. From year to year, amounts may be added to or subtracted from the balances in such accounts as provided in paragraphs
(d)and
(e)of this section.
(2)*Taxable year in which overall domestic loss is sustained.* When a taxpayer incurs a domestic loss that is carried back as part of a net operating loss to offset foreign source income in a qualified taxable year, as defined in paragraph (c)(3) of this section, the resulting overall domestic loss is treated as sustained in the later year in which the domestic loss was incurred and not in the earlier year in which the loss offset foreign source income. Similarly, when a taxpayer incurs a domestic loss that is carried forward as part of a net operating loss and applied to offset foreign source income in a later taxable year, the resulting overall domestic loss is treated as sustained in the later year in which the domestic loss offsets foreign source income and not in the earlier year in which the loss was incurred. For example, if a taxpayer incurs a domestic loss in the 2007 taxable year that is carried back to the 2006 qualified taxable year and offsets foreign source income in 2006, the resulting overall domestic loss is treated as sustained in the 2007 taxable year. If a taxpayer incurs a domestic loss in a pre-2007 taxable year that is carried forward to a post-2006 qualified taxable year and offsets foreign source income in the post-2006 year, the resulting overall domestic loss is treated as sustained in the post-2006 year. The overall domestic loss account is established at the end of the later of the taxable year in which the domestic loss arose or the qualified taxable year to which the loss is carried and applied to offset foreign source income, and will be recaptured from U.S. source income arising in subsequent taxable years.
(c)*Determination of a taxpayer's overall domestic loss* —(1) *Overall domestic loss defined.* For taxable years beginning after December 31, 2006, a taxpayer sustains an overall domestic loss—
(i)In any qualified taxable year in which its domestic loss for such taxable year offsets foreign source taxable income for the taxable year or for any preceding qualified taxable year by reason of a carryback; and
(ii)In any other taxable year in which the domestic loss for such taxable year offsets foreign source taxable income for any preceding qualified taxable year by reason of a carryback.
(2)*Domestic loss defined.* For purposes of this section and §§ 1.904(g)-2T and 1.904(g)-3T, the term *domestic loss* means the amount by which the U.S. source gross income for the taxable year is exceeded by the sum of the expenses, losses and other deductions properly apportioned or allocated to such income, taking into account any net operating loss carried forward from a prior taxable year, but not any loss carried back. If a taxpayer has any capital gains or losses, the amount of the taxpayer's domestic loss shall be determined by taking into account adjustments under section 904(b)(2) and § 1.904(b)-1. See § 1.904(b)-1(h)(1)(iii).
(3)*Qualified taxable year defined.* For purposes of this section and §§ 1.904(g)-2T and 1.904(g)-3T, the term *qualified taxable year* means any taxable year for which the taxpayer chooses the benefits of section 901.
(4)*Method of allocation and apportionment of deductions.* In determining its overall domestic loss, a taxpayer shall allocate and apportion expenses, losses, and other deductions to U.S. gross income in accordance with sections 861(b) and 865 and the regulations thereunder, including §§ 1.861-8T through 1.861-14T.
(d)*Additions to overall domestic loss accounts* —(1) *General rule.* A taxpayer's overall domestic loss as determined under paragraph
(c)of this section shall be added to the applicable overall domestic loss account at the end of its taxable year to the extent that the overall domestic loss either reduces foreign source income for the year (but only if such year is a qualified taxable year) or reduces foreign source income for a qualified taxable year to which the loss has been carried back.
(2)*Overall domestic loss of another taxpayer.* If any portion of any overall domestic loss of another taxpayer is allocated to the taxpayer in accordance with § 1.1502-9T (relating to consolidated overall domestic losses) the taxpayer shall add such amount to its applicable overall domestic loss account.
(3)*Adjustments for capital gains and losses.* If the taxpayer has capital gains or losses, the amount by which an overall domestic loss reduces foreign source income in a taxable year shall be determined in accordance with § 1.904(b)-1(h)(1)(i) and (iii).
(e)*Reductions of overall domestic loss accounts.* The taxpayer shall subtract the following amounts from its overall domestic loss accounts at the end of its taxable year in the following order, if applicable:
(1)*Pre-recapture reduction for amounts allocated to other taxpayers.* An overall domestic loss account is reduced by the amount of any overall domestic loss which is allocated to another taxpayer in accordance with § 1.1502-9T (relating to consolidated overall domestic losses).
(2)*Reduction for amounts recaptured.* An overall domestic loss account is reduced by the amount of any U.S. source income that is recharacterized in accordance with § 1.904(g)-2T(c) (relating to recapture under section 904(g)(1)).
(f)*Effective/applicability date.* This section applies to any taxpayer that sustains an overall domestic loss for a taxable year beginning after *December 21, 2007.* Taxpayers may choose to apply this section to overall domestic losses sustained in other taxable years beginning after December 31, 2006, as well.
(g)*Expiration date.* The applicability of this section expires on *December 20, 2010.* § 1.904(g)-2 Recapture of overall domestic losses. [Reserved]. For further guidance, see § 1.904(g)-2T. § 1.904(g)-2T Recapture of overall domestic losses (temporary).
(a)*In general* . A taxpayer shall recapture an overall domestic loss as provided in this section. Recapture is accomplished by treating a portion of the taxpayer's U.S. source taxable income as foreign source income. The recharacterized income is allocated among and increases foreign source income in separate categories in proportion to the balances of the overall domestic loss accounts with respect to those separate categories. As a result, if the taxpayer elects the benefits of section 901, the taxpayer's foreign tax credit limitation is increased. As provided in § 1.904(g)-1T(f)(2), the balance in a taxpayer's overall domestic loss account with respect to a separate category is reduced at the end of each taxable year by the amount of loss recaptured during that taxable year. Recapture continues until such time as the amount of U.S. source income recharacterized as foreign source income equals the amount in the overall domestic loss account.
(b)*Determination of U.S. source taxable income for purposes of recapture* . For purposes of determining the amount of an overall domestic loss subject to recapture, the taxpayer's taxable income from U.S. sources shall be computed in accordance with the rules set forth in § 1.904(g)-1T(c)(4).
(c)*Section 904(g)(1) recapture* . The amount of any U.S. source taxable income subject to recharacterization in a taxable year in which paragraph
(a)of this section is applicable is the lesser of the aggregate balance in taxpayer's overall domestic loss accounts in each separate category (after reduction of such account in accordance with § 1.904(g)-1T(e)) or fifty percent of the taxpayer's U.S. source taxable income (as determined under paragraph
(b)of this section).
(d)*Effective/applicability date* . This section applies to any taxpayer that sustains an overall domestic loss for a taxable year beginning after *December 21, 2007* . Taxpayers may choose to apply this section to overall domestic losses sustained in other taxable years beginning after December 31, 2006, as well.
(e)*Expiration date* . The applicability of this section expires on *December 20, 2010* . § 1.904(g)-3 Ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for recapture of separate limitation losses, overall foreign losses, and overall domestic losses. [Reserved]. For further guidance, see § 1.904(g)-3T. § 1.904(g)-3T Ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for recapture of separate limitation losses, overall foreign losses, and overall domestic losses (temporary).
(a)*In general* . This section provides ordering rules for the allocation of net operating losses, net capital losses, U.S. source losses, and separate limitation losses, and for recapture of separate limitation losses, overall foreign losses, and overall domestic losses. The rules must be applied in the order set forth in paragraphs
(b)through
(g)of this section.
(b)*Step One: Allocation of net operating loss and net capital loss carryovers* —(1) *In general* . Net operating losses from a current taxable year are carried forward or back to a taxable year in the following manner. Net operating losses that are carried forward pursuant to section 172 are combined with income or loss in the carryover year in the manner described in this paragraph (b). The combined amounts are then subject to the ordering rules provided in paragraphs
(c)through
(g)of this section. Net operating losses that are carried back to a prior taxable year pursuant to section 172 are allocated to income in the carryback year in the manner set forth in paragraphs (b)(2) and (3), (c), and
(d)of this section. The income in the carryback year to which the net operating loss is allocated is the foreign source income in each separate category and the U.S. source income after the application of sections 904(f) and 904(g) to income and loss in that previous year, including as a result of net operating loss carryovers or carrybacks from taxable years prior to the current taxable year.
(2)*Full net operating loss carryover* . If the full net operating loss (that remains after carryovers to other taxable years) is less than or equal to the taxable income in a particular taxable year (carryover year), and so can be carried forward in its entirety to such carryover year, U.S. source losses and foreign source losses in separate categories that are part of a net operating loss from a particular taxable year that is carried forward in its entirety shall be combined with the U.S. income or loss and the foreign source income or loss in the same separate categories in the carryover year.
(3)*Partial net operating loss carryover* . If the full net operating loss (that remains after carryovers to other taxable years) exceeds the taxable income in a carryover year, and so cannot be carried forward in its entirety to such carryover year, the following rules apply:
(i)First, any U.S. source loss (not to exceed the net operating loss carryover) shall be carried over to the extent of any U.S. source income in the carryover year.
(ii)If the net operating loss carryover exceeds the U.S. source loss carryover determined under paragraph (b)(3)(i) of this section, then separate limitation losses that are part of the net operating loss shall be tentatively carried over to the extent of separate limitation income in the same separate category in the carryover year. If the sum of the potential separate limitation loss carryovers determined under the preceding sentence exceeds the amount of the net operating loss carryover reduced by any U.S. source loss carried over under paragraph (b)(3)(i) of this section, then the potential separate limitation loss carryovers shall be reduced pro rata so that their sum equals such amount.
(iii)If the net operating loss carryover exceeds the sum of the U.S. and separate limitation loss carryovers determined under paragraphs (b)(3)(i) and
(ii)of this section, then a proportionate part of the remaining loss from each separate category shall be carried over to the extent of such excess and combined with the foreign source loss, if any, in the same separate categories in the carryover year.
(iv)If the net operating loss carryover exceeds the sum of all the loss carryovers determined under paragraphs (b)(3)(i), (ii), and
(iii)of this section, then any U.S. source loss not carried over under paragraph (b)(3)(i) of this section shall be carried over to the extent of such excess and combined with the U.S. source loss, if any, in the carryover year.
(4)*Net capital loss carryovers* . Rules similar to the rules of paragraphs (b)(1) through
(3)of this section apply for purposes of determining the components of a net capital loss carryover to a taxable year.
(c)*Step Two: Allocation of separate limitation losses* . The taxpayer shall allocate separate limitation losses sustained during the taxable year (increased, if appropriate, by any losses carried over under paragraph
(b)of this section), in the following manner:
(1)the taxpayer shall allocate its separate limitation losses for the year to reduce its separate limitation income in other separate categories on a proportionate basis, and increase its separate limitation loss accounts appropriately. To the extent a separate limitation loss in one separate category is allocated to reduce separate limitation income in a second separate category, and the second category has a separate limitation loss account from a prior taxable year with respect to the first category, the two separate limitation loss accounts shall be netted one against the other.
(2)If the taxpayer's separate limitation losses for the taxable year exceed the taxpayer's separate limitation income for the year, so that the taxpayer has separate limitation losses remaining after the application of paragraph (c)(1) of this section, the taxpayer shall allocate those losses to its U.S. source income for the taxable year, to the extent thereof, and shall increase its overall foreign loss accounts appropriately.
(d)*Step Three: Allocation of U.S. source losses* . The taxpayer shall allocate U.S. source losses sustained during the taxable year (increased, if appropriate, by any losses carried over under paragraph
(b)of this section) to separate limitation income on a proportionate basis, and shall increase its overall domestic loss accounts appropriately.
(e)*Step Four: Recapture of overall foreign loss accounts* . If the taxpayer's separate limitation income for the taxable year (reduced by any losses carried over under paragraph
(b)of this section) exceeds the sum of the taxpayer's U.S. source loss and separate limitation losses for the year, so that the taxpayer has separate limitation income remaining after the application of paragraphs (c)(1) and
(d)of this section, then the taxpayer shall recapture prior year overall foreign losses, if any, in accordance with §§ 1.904(f)-2 and 1.904(f)-2T.
(f)*Step Five: Recapture of separate limitation loss accounts* . To the extent the taxpayer has remaining separate limitation income for the year after the application of paragraph
(e)of this section, then the taxpayer shall recapture prior year separate limitation loss accounts, if any, in accordance with § 1.904(f)-8T.
(g)*Step Six: Recapture of overall domestic loss accounts* . If the taxpayer's U.S. source income for the year (reduced by any losses carried over under paragraph
(b)of this section or allocated under paragraph
(c)of this section, but not increased by any recapture of overall foreign loss accounts under paragraph
(e)of this section) exceeds the taxpayer's separate limitation losses for the year, so that the taxpayer has U.S. source income remaining after the application of paragraph (c)(2) of this section, then the taxpayer shall recapture its prior year overall domestic losses, if any, in accordance with § 1.904(g)-2T.
(h)*Examples* . The following examples illustrate the rules of this section. Unless otherwise noted, all corporations use the calendar year as the U.S. taxable year. Example 1.
(i)*Facts* .
(A)Z Corporation is a domestic corporation with foreign branch operations in Country B. For 2009, Z has a net operating loss of ($500), determined as follows: General Passive US ($300) $0 ($200)
(B)For 2008, Z had the following taxable income and losses after application of section 904(f) and
(g)to income and loss in 2008: General Passive US $400 $200 $110
(ii)*Net operating loss allocation* . Because Z's taxable income for 2008 exceeds its total net operating loss for 2009, the full net operating loss is carried back. Under Step 1, each component of the net operating loss is carried back and combined with its same category in 2008. See paragraph (b)(2) of this section. After allocation of the net operating loss, Z has the following taxable income and losses for 2008: General Passive US $100 $200 ($90)
(iii)*Loss allocation* . Under Step 3, the ($90) of U.S. loss is allocated proportionately to reduce the general category and passive category income. Accordingly, $30 ($90 × $100/$300) of the U.S. loss is allocated to general category income and $60 ($90 × $200/$300) of the U.S. loss is allocated to passive category income, with a corresponding creation or increase to Z's overall domestic loss accounts. Example 2.
(i)*Facts* .
(A)X Corporation is a domestic corporation with foreign branch operations in Country C. As of January 1, 2007, X has no loss accounts subject to recapture. For 2007, X has a net operating loss of ($1400), determined as follows: General Passive US ($400) ($200) ($800)
(B)X has no taxable income in 2005 or 2006 available for offset by a net operating loss carryback. For 2008, X has the following taxable income and losses: General Passive US $500 ($100) $1200
(ii)*Net operating loss allocation* . Under Step 1, because X's total taxable income for 2008 of $1600 ($1200 + $500 − $100) exceeds the total 2007 net operating loss, the full $1400 net operating loss is carried forward. Under paragraph (b)(2) of this section, each component of the net operating loss is carried forward and combined with its same category in 2008. After allocation of the net operating loss, X has the following taxable income and losses: General Passive US $100 ($300) $400
(iii)*Loss allocation* . Under Step 2, $100 of the passive category loss offsets the $100 of general category income, resulting in a passive category separate limitation loss account with respect to general category income, and the other $200 of passive category loss offsets $200 of the U.S. source taxable income, resulting in the creation of an overall foreign loss account in the passive category. Example 3.
(i)*Facts* . Assume the same facts as in *Example 2* , except that in 2008, X had the following taxable income and losses: General Passive US $200 ($100) $1200
(ii)*Net operating loss allocation* . Under Step 1, because the total net operating loss for 2007 of ($1400) exceeds total taxable income for 2008 of $1300 ($1200 + $200 − $100), X has a partial net operating loss carryover to 2008 of $1300. Under paragraph (b)(3)(i) of this section, first, the $800 U.S. source component of the net operating loss is allocated to U.S. income for 2008. The tentative general category carryover under paragraph (b)(3)(ii) of this section ($200) does not exceed the remaining net operating loss carryover amount ($500). Therefore, $200 of the general category component of the net operating loss is next allocated to the general category income for 2008. Under paragraph (b)(3)(iii) of this section, the remaining $300 of net operating loss carryover ($1300 − $800 − $200) is carried over proportionally from the remaining net operating loss components in the general category ($200, or $400 total general category loss—$200 general category loss already allocated) and passive category ($200). Therefore, $150 ($300×$200×$400) of the remaining net operating loss carryover is carried over from the general category for 2007 and combined with the general category for 2008, and $150 ($300×$200×$400) of the remaining net operating loss carryover is carried over from the passive category for 2007 and combined with the passive category for 2008. After allocation of the net operating loss carryover from 2007 to the appropriate categories for 2008, X has the following taxable income and losses: General Passive US ($150) ($250) $400
(iii)*Loss allocation* . Under Step 2, the losses in the general and passive categories fully offset the U.S. source income, resulting in the creation of general category and passive category overall foreign loss accounts. Example 4.
(i)*Facts* . Assume the same facts as in *Example 2* , except that in 2008, X has the following taxable income and losses: General Passive US $200 $200 ($200)
(ii)*Net operating loss allocation* . Under Step 1, because the total net operating loss of ($1400) exceeds total taxable income for 2008 of $200 ($200 + $200 − $200), X has a partial net operating loss carryover to 2008 of $200. Because X has no U.S. source income in 2008, under paragraph (b)(3)(i) of this section no portion of the U.S. source component of the net operating loss is initially carried into 2008. Because the total tentative carryover under paragraph (b)(3)(ii) of this section of $400 ($200 in each of the general and passive categories) exceeds the net operating loss carryover amount, the tentative carryover from each separate category is reduced proportionately by $100 ($200 × $200/$400). Accordingly, $100 ($200 − $100) of the general category component of the net operating loss is carried forward and $100 ($200 − $100) of the passive category component of the net operating loss is carried forward and combined with income in the same respective categories for 2008. After allocation of the net operating loss carryover from 2007, X has the following taxable income and losses: General Passive US $100 $100 ($200)
(iii)*Loss allocation* . Under Step 3, the $200 U.S. source loss offsets the remaining $100 of general category income and $100 of passive category income, resulting in the creation of overall domestic loss accounts with respect to the general and passive categories. Example 5.
(i)*Facts* . Assume the same facts as in *Example 2* , except that in 2008, X has the following taxable income and losses: General Passive US $800 ($100) $100
(ii)*Net operating loss allocation* . Under Step 1, because X's total net operating loss in 2007 of ($1400) exceeds its total taxable income for 2008 of $800 ($100 + $800 − $100), X has a partial net operating loss carryover to 2008 of $800. Under paragraph (b)(3)(i) of this section, $100 of the U.S. source component of the net operating loss is allocated to U.S. income for 2008. The tentative general category carryover under paragraph (b)(3)(ii) of this section does not exceed the remaining net operating loss carryover amount. Therefore, $400 of the general category component of the net operating loss is allocated to reduce general category income in 2008. Under paragraph (b)(3)(iii) of this section, of the remaining $300 of net operating loss carryover ($800 − $100 − $400), $200 is carried forward from the passive category component of the net operating loss and combined with the passive category for 2008. Under paragraph (b)(3)(iv) of this section, the remaining $100 ($300 − $200) of net operating loss carryover is carried forward from the U.S. source component of the net operating loss and combined with the U.S. source income
(loss)for 2008. After allocation of the net operating loss carryover from 2007, X has the following taxable income and losses: General Passive US $400 ($300) ($100)
(iii)*Loss allocation* .
(A)Under Step 2, the $300 passive category loss offsets the $300 of income in the general category, resulting in the creation of a passive category separate limitation loss account with respect to the general category.
(B)Under Step 3, the $100 U.S. source loss offsets the remaining $100 of the general category income, resulting in the creation of an overall domestic loss account with respect to the general category. Example 6.
(i)*Facts.*
(A)Y Corporation is a domestic corporation with foreign branch operations in Country D. Y has no net operating losses and does not make an election to recapture more than the required amount of overall foreign losses. As of January 1, 2007, Y has a ($200) general category overall foreign loss
(OFL)account and a ($200) general category separate limitation loss
(SLL)account with respect to the passive category. For 2007, Y has $400 of passive category income that is fully offset by a ($400) domestic loss in that taxable year, giving rise to the creation of an overall domestic loss
(ODL)account with respect to the passive category. As of January 1, 2008, Y has the following balances in its OFL, SLL, and ODL accounts: General OFL Passive SLL US Passive ODL $200 $200 $400
(B)In 2008, Y has the following taxable income and losses: General Passive US $400 ($100) $600
(ii)*Loss allocation.* Under Step 2, the $100 of passive category loss offsets $100 of the general category income, creating a passive category SLL account of $100 with respect to the general category. Because there is an offsetting general category SLL account of $200 with respect to the passive category from a prior taxable year, the two accounts are netted against each other so that all that remains is a $100 general category SLL account with respect to the passive category.
(iii)*OFL account recapture.* Under Step 4, 50 percent of the remaining $300, or $150, of income in the general category is subject to recharacterization as U.S. source income as a recapture of part of the OFL account in the general category.
(iv)*SLL account recapture.* Under Step 5, $100 of the remaining $150 of income in the general category is recharacterized as passive category income as a recapture of the general category SLL account with respect to the passive category.
(v)*ODL account recapture.* Under Step 6, 50 percent of the $600, or $300, of U.S. source income is subject to recharacterization as foreign source passive category income as a recapture of a part of the ODL account with respect to the passive category. None of the $150 of general category income that was recharacterized as U.S. source income under Step 5 is included here as income subject to recharacterization in connection with recapture of the overall domestic loss account.
(v)*Results.*
(A)After the allocation of loss and recapture of loss accounts, X has the following taxable income and losses for 2008: General Passive US $50 $400 $450
(B)As of January 1, 2009, Y has the following balances in its OFL, SLL and ODL accounts: General OFL Passive SLL Passive General SLL US Passive ODL $50 $0 $0 $100
(i)*Effective/applicability date.* This section applies to taxable years beginning after *December 21, 2007.* Taxpayers may choose to apply this section to other taxable years beginning after December 31, 2006, as well.
(j)*Expiration date.* The applicability of this section expires on *December 20, 2010.* **Par. 15.** Section 1.904(i)-0 is added. The entries for § 1.904(i)-1 in § 1.904-0 are redesignated as entries for new § 1.904(i)-0. § 1.904(i)-0 Outline of regulation provisions. This section lists the headings for § 1.904(i)-1. **Par. 16.** Section 1.904(j)-0 is added. The entries for § 1.904(j)-1 in § 1.904-0 are redesignated as entries for new § 1.904(j)-0. § 1.904(j)-0 Outline of regulation provisions. This section lists the headings for § 1.904(j)-1. **Par. 17.** Section 1.1502-9 is revised to read as follows: § 1.1502-9 Consolidated overall foreign losses, separate limitation losses, and overall domestic losses. [Reserved]. For further guidance, see § 1.1502-9T. **Par. 18.** Section 1.1502-9T is added to read as follows: § 1.1502-9T Consolidated overall foreign losses, separate limitation losses, and overall domestic losses (temporary).
(a)*In general.* This section provides rules for applying section 904(f) and
(g)(including its definitions and nomenclature) to a group and its members. Generally, section 904(f) concerns rules relating to overall foreign losses
(OFLs)and separate limitation losses
(SLLs)and the consequences of such losses. Under section 904(f)(5), losses are computed separately in each category of income described in section 904(d)(1) or § 1.904-4(m) (separate category). Section 904(g) concerns rules relating to overall domestic losses
(ODLs)and the consequences of such losses. Paragraph
(b)of this section defines terms and provides computational and accounting rules, including rules regarding recapture. Paragraph
(c)of this section provides rules that apply to OFLs, SLLs, and ODLs when a member becomes or ceases to be a member of a group. Paragraph
(d)of this section provides a predecessor and successor rule. Paragraph
(e)of this section provides effective dates.
(b)*Consolidated application of section 904(f) and (g).* A group applies section 904(f) and
(g)for a consolidated return year in accordance with that section, subject to the following rules:
(1)*Computation of CSLI or CSLL and consolidated U.S.-source taxable income or CDL.* The group computes its consolidated separate limitation income
(CSLI)or consolidated separate limitation loss
(CSLL)for each separate category under the principles of § 1.1502-11 by aggregating each member's foreign-source taxable income or loss in such separate category computed under the principles of § 1.1502-12, and taking into account the foreign portion of the consolidated items described in § 1.1502-11(a)(2) through
(8)for such separate category. The group computes its consolidated U.S.-source taxable income or consolidated domestic loss
(CDL)under similar principles.
(2)*Netting CSLLs, CSLIs, and consolidated U.S.-source taxable income.* The group applies section 904(f)(5) to determine the extent to which a CSLL for a separate category reduces CSLI for another separate category or consolidated U.S.-source taxable income.
(3)*Netting CDL and CSLI.* The group applies section 904(g)(2) to determine the extent to which a CDL reduces CSLI.
(4)*CSLL, COFL, and CODL accounts.* To the extent provided in section 904(f), the amount by which a CSLL for a separate category (the loss category) reduces CSLI for another separate category (the income category) shall result in the creation of (or addition to) a CSLL account for the loss category with respect to the income category. Likewise, the amount by which a CSLL for a loss category reduces consolidated U.S.-source taxable income will create (or add to) a consolidated overall foreign loss account (a COFL account). To the extent provided in section 904(g), the amount by which a CDL reduces CSLI shall result in the creation of (or addition to) a consolidated overall domestic loss
(CODL)account for the income category reduced by the CDL.
(5)*Recapture of COFL, CSLL, and CODL accounts.* In the case of a COFL account for a loss category, section 904(f)(1) and
(3)recharacterizes some or all of the foreign-source income in the loss category as U.S.-source income. In the case of a CSLL account for a loss category with respect to an income category, section 904(f)(5)(C) and
(F)recharacterizes some or all of the foreign-source income in the loss category as foreign-source income in the income category. In the case of a CODL account, section 904(g)(3) recharacterizes some of the U.S.-source income as foreign-source income in the separate category that was offset by the CDL. The COFL account, CSLL account, or CODL account is reduced to the extent income is recharacterized with respect to such account.
(6)*Intercompany transactions—*
(i)*Nonapplication of section 904(f) disposition rules.* Neither section 904(f)(3) (in the case of a COFL account) nor section 904(f)(5)(F) (in the case of a CSLL account) applies at the time of a disposition that is an intercompany transaction to which § 1.1502-13 applies. Instead, section 904(f)(3) and (5)(F) applies only at such time and only to the extent that the group is required under § 1.1502-13 (without regard to section 904(f)(3) and (5)(F)) to take into account any intercompany items resulting from the disposition, based on the COFL or CSLL account existing at the end of the consolidated return year during which the group takes the intercompany items into account.
(ii)*Examples.* Paragraph (b)(6)(i) of this section is illustrated by the following examples. The identity of the parties and the basic assumptions set forth in § 1.1502-13(c)(7)(i) apply to the examples. Except as otherwise stated, assume further that the consolidated group recognizes no foreign-source income other than as a result of the transactions described. The examples are as follows: Example 1.
(i)On June 10, year 1, S transfers nondepreciable property with a basis of $100 and a fair market value of $250 to B in a transaction to which section 351 applies. The property was predominantly used without the United States in a trade or business, within the meaning of section 904(f)(3). B continues to use the property without the United States. The group has a COFL account in the relevant loss category of $120 as of December 31, year 1.
(ii)Because the contribution from S to B is an intercompany transaction, section 904(f)(3) does not apply to result in any gain recognition in year 1. See paragraph (b)(5)(i) of this section.
(iii)On January 10, year 4, B ceases to be a member of the group. Because S did not recognize gain in year 1 under section 351, no gain is taken into account in year 4 under § 1.1502-13. Thus, no portion of the group's COFL account is recaptured in year 4. For rules requiring apportionment of a portion of the COFL account to B, see paragraph (c)(2) of this section. Example 2.
(i)The facts are the same as in paragraph
(i)of *Example 1.* On January 10, year 4, B sells the property to X for $300. As of December 31, year 4, the group's COFL account is $40. (The COFL account was reduced between year 1 and year 4 due to unrelated foreign-source income taken into account by the group.)
(ii)B takes into account gain of $200 in year 4. The $40 COFL account in year 4 recharacterizes $40 of the gain as U.S. source. See section 904(f)(3). Example 3.
(i)On June 10, year 1, S sells nondepreciable property with a basis of $100 and a fair market value of $250 to B for $250 cash. The property was predominantly used without the United States in a trade or business, within the meaning of section 904(f)(3). The group has a COFL account in the relevant loss category of $120 as of December 31, year 1. B predominantly uses the property in a trade or business without the United States.
(ii)Because the sale is an intercompany transaction, section 904(f)(3) does not require the group to take into account any gain in year 1. Thus, under paragraph (b)(5)(i) of this section, the COFL account is not reduced in year 1.
(iii)On January 10, year 4, B sells the property to X for $300. As of December 31, year 4, the group's COFL account is $60. (The COFL account was reduced between year 1 and year 4 due to unrelated foreign-source income taken into account by the group.)
(iv)In year 4, S's $150 intercompany gain and B's $50 corresponding gain are taken into account to produce the same effect on consolidated taxable income as if S and B were divisions of a single corporation. See § 1.1502-13(c). All of B's $50 corresponding gain is recharacterized under section 904(f)(3). If S and B were divisions of a single corporation and the intercompany sale were a transfer between the divisions, B would succeed to S's $100 basis in the property and would have $200 of gain ($60 of which would be recharacterized under section 904(f)(3)), instead of a $50 gain. Consequently, S's $150 intercompany gain and B's $50 corresponding gain are taken into account, and $10 of S's gain is recharacterized under section 904(f)(3) as U.S. source income to reflect the $10 difference between B's $50 recharacterized gain and the $60 recomputed gain that would have been recharacterized.
(c)*Becoming or ceasing to be a member of a group—*
(1)*Adding separate accounts on becoming a member.* At the time that a corporation becomes a member of a group (a new member), the group adds to the balance of its COFL, CSLL or CODL account the balance of the new member's corresponding OFL account, SLL account or ODL account. A new member's OFL account corresponds to a COFL account if the account is for the same loss category. A new member's SLL account corresponds to a CSLL account if the account is for the same loss category and with respect to the same income category. A new member's ODL account corresponds to a CODL account if the account is with respect to the same income category. If the group does not have a COFL, CSLL or CODL account corresponding to the new member's account, it creates a COFL, CSLL or CODL account with a balance equal to the balance of the member's account.
(2)*Apportionment of consolidated account to departing member* —(i) *In general.* A group apportions to a member that ceases to be a member (a departing member) a portion of each COFL, CSLL and CODL account as of the end of the year during which the member ceases to be a member and after the group makes the additions or reductions to such account required under paragraphs (b)(4), (b)(5) and (c)(1) of this section (other than an addition under paragraph (c)(1) of this section attributable to a member becoming a member after the departing member ceases to be a member). The group computes such portion under paragraph (c)(2)(ii) of this section, as limited by paragraph (c)(2)(iii) of this section. The departing member carries such portion to its first separate return year after it ceases to be a member. Also, the group reduces each account by such portion and carries such reduced amount to its first consolidated return year beginning after the year in which the member ceases to be a member. If two or more members cease to be members in the same year, the group computes the portion allocable to each such member (and reduces its accounts by such portion) in the order that the members cease to be members.
(ii)*Departing member's portion of group's account.* A departing member's portion of a group's COFL, CSLL or CODL account for a loss category is computed based upon the member's share of the group's assets that generate income subject to recapture at the time that the member ceases to be a member. Under the characterization principles of §§ 1.861-9T(g)(3) and 1.861-12T, the group identifies the assets of the departing member and the remaining members that generate U.S.-source income (domestic assets) and foreign-source income (foreign assets) in each separate category. The assets are characterized based upon the income that the assets are reasonably expected to generate after the member ceases to be a member. The member's portion of a group's COFL or CSLL account for a loss category is the group's COFL or CSLL account, respectively, multiplied by a fraction, the numerator of which is the value of the member's foreign assets for the loss category and the denominator of which is the value of the foreign assets of the group (including the departing member) for the loss category. The member's portion of a group's CODL account for each income category is the group's CODL account multiplied by a fraction, the numerator of which is the value of the member's domestic assets and the denominator of which is the value of the domestic assets of the group (including the departing member). The value of the domestic and foreign assets is determined under the asset valuation rules of § 1.861-9T(g)(1) and
(2)using either tax book value or fair market value under the method chosen by the group for purposes of interest apportionment as provided in § 1.861-9T(g)(1)(ii). For purposes of this paragraph (c)(2)(ii), § 1.861-9T(g)(2)(iv) (assets in intercompany transactions) shall apply, but § 1.861-9T(g)(2)(iii) (adjustments for directly allocated interest) shall not apply. If the group uses the tax book value method, the member's portions of COFL, CSLL, and CODL accounts are limited by paragraph (c)(2)(iii) of this section. In addition, for purposes of this paragraph (c)(2)(ii), the tax book value of assets transferred in intercompany transactions shall be determined without regard to previously deferred gain or loss that is taken into account by the group as a result of the transaction in which the member ceases to be a member. The assets should be valued at the time the member ceases to be a member, but values on other dates may be used unless this creates substantial distortions. For example, if a member ceases to be a member in the middle of the group's consolidated return year, an average of the values of assets at the beginning and end of the year (as provided in § 1.861-9T(g)(2)) may be used or, if a member ceases to be a member in the early part of the group's consolidated return year, values at the beginning of the year may be used, unless this creates substantial distortions.
(iii)*Limitation on member's portion for groups using tax book value method.* If a group uses the tax book value method of valuing assets for purposes of paragraph (c)(2)(ii) of this section and the aggregate of a member's portions of COFL and CSLL accounts for a loss category (with respect to one or more income categories) determined under paragraph (c)(2)(ii) of this section exceeds 150 percent of the actual fair market value of the member's foreign assets in the loss category, the member's portion of the COFL or CSLL accounts for the loss category shall be reduced (proportionately, in the case of multiple accounts) by such excess. In addition, if the aggregate of a member's portions of CODL accounts (with respect to one or more income categories) determined under paragraph (c)(2)(ii) of this section exceeds 150 percent of the actual fair market value of the member's domestic assets, the member's portion of the CODL accounts shall be reduced (proportionately, in the case of multiple accounts) by such excess. This rule does not apply in the case of COFL or CSLL accounts if the departing member and all other members that cease to be members as part of the same transaction own all (or substantially all) the foreign assets in the loss category. In the case of CODL accounts, this rule does not apply if the departing member and all other members that cease to be members as part of the same transaction own all (or substantially all) the domestic assets.
(iv)*Determination of values of domestic and foreign assets binding on departing member.* The group's determination of the value of the member's and the group's domestic and foreign assets for a loss category is binding on the member, unless the Commissioner concludes that the determination is not appropriate. The common parent of the group must attach a statement to the return for the taxable year that the departing member ceases to be a member of the group that sets forth the name and taxpayer identification number of the departing member, the amount of each COFL and CSLL for each loss category and each CODL that is apportioned to the departing member under this paragraph (c)(2), the method used to determine the value of the member's and the group's domestic and foreign assets in each such loss category, and the value of the member's and the group's domestic and foreign assets in each such loss category. The common parent must also furnish a copy of the statement to the departing member.
(v)*Anti-abuse rule.* If a corporation becomes a member and ceases to be a member, and a principal purpose of the corporation becoming and ceasing to be a member is to transfer the corporation's OFL account, SLL account or ODL account to the group or to transfer the group's COFL, CSLL or CODL account to the corporation, appropriate adjustments will be made to eliminate the benefit of such a transfer of accounts. Similarly, if any member acquires assets or disposes of assets (including a transfer of assets between members of the group and the departing member) with a principal purpose of affecting the apportionment of accounts under paragraph (c)(2)(i) of this section, appropriate adjustments will be made to eliminate the benefit of such acquisition or disposition.
(vi)*Examples.* The following examples illustrate the rules of this paragraph (c): Example 1.
(i)On November 6, year 1, S, a member of the P group, a consolidated group with a calendar consolidated return year, ceases to be a member of the group. On December 31, year 1, the P group has a $40 COFL account for the general category, a $20 CSLL account for the general category (that is, the loss category) with respect to the passive category (that is, the income category), and a $10 CODL account with respect to the passive category (that is, the income category). No member of the group has foreign-source income or loss in year 1. The group apportions its interest expense according to the tax book value method.
(ii)On November 6, year 1, the group identifies S's assets and the group's assets (including S's assets) expected to produce foreign-source general category income. Use of end-of-the-year values will not create substantial distortions in determining the relative values of S's and the group's relevant assets on November 6, year 1. The group determines that S's relevant assets have a tax book value of $2,000 and a fair market value of $2,200. Also, the group's relevant assets (including S's assets) have a tax book value of $8,000. On November 6, year 1, S has no assets expected to produce U.S. source income.
(iii)Under paragraph (c)(2)(ii) of this section, S takes a $10 COFL account for the general category ($40 × $2000/$8000) and a $5 CSLL account for the general category with respect to the passive category ($20 × $2000/$8000). S does not take any portion of the CODL account. The limitation described in paragraph (c)(2)(iii) of this section does not apply because the aggregate of the COFL and CSLL accounts for the general category that are apportioned to S ($15) is less than 150 percent of the actual fair market value of S's general category foreign assets ($2,200 x 150%). Example 2.
(i)Assume the same facts as in *Example 1,* except that the fair market value of S's general category foreign assets is $4 as of November 6, year 1.
(ii)Under paragraph (c)(2)(iii) of this section, S's COFL and CSLL accounts for the general category must be reduced by $9, which is the excess of $15 (the aggregate amount of the accounts apportioned under paragraph (c)(2)(ii) of this section) over $6 (150 percent of the $4 actual fair market value of S's general category foreign assets). S thus takes a $4 COFL account for the general category ($10−($9 × $10/$15)) and a $2 CSLL account for the general category with respect to the passive category ($5−($9 × $5/$15)). Example 3.
(i)Assume the same facts as in *Example 1,* except that S also has assets that are expected to produce U.S. source income.
(ii)On November 6, year 1, the group identifies S's assets and the group's assets (including S's assets) expected to produce U.S. source income. Use of end-of-the-year values will not create substantial distortions in determining the relative values of S's and the group's relevant assets on November 6, year 1. The group determines that S's relevant assets have a tax book value of $3,000 and a fair market value of $2,500. Also, the group's relevant assets (including S's assets) have a tax book value of $6,000.
(iii)Under paragraph (c)(2)(ii) of this section, S takes a $5 CODL account ($10 × $3,000/$6,000), in addition to the COFL and CSLL accounts determined in *Example 1.* The limitation described in paragraph (c)(2)(iii) of this section does not apply because the CODL account that is apportioned to S ($5) is less than 150 percent of the actual fair market value of S's U.S. assets ($2,500 × 150%).
(d)*Predecessor and successor.* A reference to a member includes, as the context may require, a reference to a predecessor or successor of the member. See § 1.1502-1(f).
(e)*Effective/applicability date.* This section applies to consolidated return years beginning after *December 21, 2007.* Taxpayers may choose to apply the provisions of this section relating to overall domestic losses to other consolidated return years beginning after December 31, 2006, as well. For rules relating to overall foreign losses and separate limitation losses in consolidated return years beginning on or before *December 21, 2007* see 26 CFR 1.1502-9 (revised as of April 1, 2007).
(f)*Expiration date.* The applicability of this section expires on *December 20, 2010.* Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Approved: December 14, 2007. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. E7-24877 Filed 12-20-07; 8:45 am] BILLING CODE 4830-01-P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 300 [TD 9370] RIN 1545-BG88 User Fees Relating to Enrollment To Perform Actuarial Services AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations relating to user fees for the initial and renewed enrollment to become an enrolled actuary. The charging of user fees is authorized by the Independent Offices Appropriations Act
(IOAA)of 1952. DATES: *Effective Date:* These regulations are effective on December 21, 2007. *Applicability Date:* For date of applicability, see § 300.0(c). FOR FURTHER INFORMATION CONTACT: Concerning cost methodology, Eva J. Williams at
(202)435-5514; concerning the final regulations, Kimberly Mattonen at
(202)622-4940 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background The Employee Retirement Income Security Act of 1974 (Pub. L. 93-406) ordered the Secretary of Labor and the Secretary of Treasury to establish a Joint Board for the Enrollment of Actuaries. 29 U.S.C. 1241. The Joint Board shall, by regulation, establish reasonable standards and qualifications for persons performing actuarial services and the Joint Board shall enroll such individuals who, upon application, satisfy such standards and qualifications. 29 U.S.C. 1242(a). The regulations at 20 CFR Part 901, Subpart B address eligibility for enrollment and renewal of enrollment. Pursuant to the Joint Board's bylaws, the Secretary of the Treasury is to appoint an Executive Director to the Board who has the delegated authority to administer the Board's enrollment program. The Secretary of the Treasury has delegated these functions to the Internal Revenue Service and the costs of these activities are borne by the Service. 20 CFR 901.11(d)(4) provides for a reasonable non-refundable fee for applications for renewal of enrollment. Form 5434-A, “Application for Renewal of Enrollment” presently states that the renewal fee is $25. Final 26 CFR 300.7 and 300.8 establish separate $250 user fees for the enrollment and renewal of enrollment process. These fees represent the IRS's costs in administering the program, and the $250 fee for renewal of enrollment will supplant the $25 fee. Authority The IOAA of 1952 (31 U.S.C. 9701) authorizes agencies to prescribe regulations that establish charges for services provided by the agency. The charges must be fair and be based on the costs to the Government, the value of the service to the recipient, the public policy or interest served, and other relevant facts. The IOAA of 1952 provides that regulations implementing user fees are subject to policies prescribed by the President, which are currently set forth in OMB Circular A-25, 58 FR 38142 (July 15, 1993) (the OMB Circular). The OMB Circular encourages user fees for government-provided services that confer benefits on identifiable recipients over and above those benefits received by the general public. Under the OMB Circular, an agency that seeks to impose a user fee for government-provided services must calculate its full cost of providing those services. In general, a user fee should be set at an amount in order for the agency to recover the cost of providing the special service, unless the Office of Management and Budget grants an exception. Pursuant to the guidelines in the OMB Circular, the IRS has calculated its cost of providing services under the enrolled actuaries program. The IRS has determined that the full cost of administering the enrollment and re-enrollment processes is $250 per enrolled actuary per process. The final user fees will be implemented under the authority of the IOAA of 1952 and the OMB Circular. On October 31, 2007, a notice of proposed rulemaking (REG-134923-07) was published in the **Federal Register** [72 FR 61583]. No comments were received from the public in response to the notice of proposed rulemaking. No public hearing was requested or held. The proposed regulations are adopted by this Treasury decision. Special Analyses It has been determined that this final rule 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 will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. This certification is based on the information that follows. These final rules affect enrolled actuaries, of which there are currently 4,600 active. The economic impact of these regulations on any small entity would result from a small entity, including a sole proprietor, being required to pay a fee prescribed by these regulations in order to obtain a particular service. The appropriate NAICS codes for enrolled actuaries relate to Insurance Other (524298) and Administrative and General Management Consulting, Including Financial Consulting (541611). Entities identified under these codes are considered small under the SBA size standards (13 CFR 121.201) if their annual revenue is less than $6.5 million. The IRS estimates that as many as 2,070 enrolled actuaries may be operating as or employed by small entities. Therefore, the IRS has determined that these final rules will affect a substantial number of small entities. The dollar amounts of the fees are not, however, substantial enough to have a significant economic impact on any entity subject to the fees. The amounts of the fees are commensurate with, if not less than, the amount charged by professional organizations. Persons who elect to apply for enrollment or renewal of enrollment also receive benefits from obtaining the enrolled actuary designation. Pursuant to section 7805(f) of the Internal Revenue Code, the NPRM preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact. Drafting Information The principal author of these regulations is Kimberly A. Mattonen of the Office of the Associate Chief Counsel (Procedure & Administration). List of Subjects in 26 CFR Part 300 Reporting and recordkeeping requirements, User fees. Adoption of Amendments to the Regulations Accordingly, 26 CFR Part 300 is amended as follows: PART 300—USER FEES **Paragraph 1.** The authority citation for part 300 continues to read as follows: Authority: 31 U.S.C. 9701. **Par. 2.** Section 300.0 is amended as follows: 1. Paragraphs (b)(7) and (b)(8) are added. 2. Paragraph
(c)is revised. The additions and revision read as follows: § 300.0 User fees, in general.
(b)* * *
(7)Enrolling an enrolled actuary.
(8)Renewing the enrollment of an enrolled actuary.
(c)*Effective/applicability date.* This part 300 is applicable March 16, 1995, except that the user fee for processing offers in compromise is applicable November 1, 2003; the user fee for the special enrollment examination, enrollment, and renewal of enrollment for enrolled agents is applicable November 6, 2006; the user fee for entering into installment agreements on or after January 1, 2007, is applicable January 1, 2007; the user fee for restructuring or reinstatement of an installment agreement on or after January 1, 2007, is applicable January 1, 2007; and the user fee for the enrollment and renewal of enrollment for enrolled actuaries is applicable January 22, 2008. **Par. 3.** Section 300.7 is added to read as follows: § 300.7 Enrollment of enrolled actuary fee.
(a)*Applicability.* This section applies to the initial enrollment of enrolled actuaries with the Joint Board for the Enrollment of Actuaries pursuant to 20 CFR Part 901.
(b)*Fee.* The fee for initially enrolling as an enrolled actuary with the Joint Board for the Enrollment of Actuaries is $250.00.
(c)*Person liable for the fee.* The person liable for the enrollment fee is the applicant filing for enrollment as an enrolled actuary with the Joint Board for the Enrollment of Actuaries. **Par. 5.** Section 300.8 is added to read as follows: § 300.8 Renewal of enrollment of enrolled actuary fee.
(a)*Applicability.* This section applies to the renewal of enrollment of enrolled actuaries with the Joint Board for the Enrollment of Actuaries pursuant to 20 CFR Part 901.
(b)*Fee.* The fee for renewal of enrollment as an enrolled actuary with the Joint Board for the Enrollment of Actuaries is $250.00.
(c)*Person liable for the fee.* The person liable for the renewal of enrollment fee is the person renewing their enrollment as an enrolled actuary with the Joint Board for the Enrollment of Actuaries. Linda E. Stiff, Deputy Commissioner for Services and Enforcement. Eric Solomon, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 07-6156 Filed 12-18-07; 2:32 pm]
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Traces to 49 documents
U.S. Code
46 references not yet in our index
  • 9 CFR 113
  • 7 CFR 3015
  • 21 USC 151-159
  • 7 CFR 2.22
  • Pub. L. 102-486
  • Pub. L. 109-58
  • 10 CFR 434
  • 10 CFR 435
  • 10 CFR 433
  • 10 CFR 433.4(a)(2)
  • 10 CFR 436
  • 10 CFR 1021
  • Pub. L. 104-4
  • Pub. L. 105-277
  • 42 USC 6831-6832
  • 42 USC 8253-54
  • 12 CFR 25
  • 12 CFR 228
  • 12 CFR 345
  • 12 CFR 563
  • 12 USC 1814-1817
  • 23 CFR 655
  • Pub. L. 102-388
  • 49 CFR 7
  • 109 Stat. 48
  • Pub. L. 96-354
  • 5 USC 601-612
  • 49 CFR 1.48(b)
  • 1 CFR 51
  • 26 CFR 1
  • T.D. 9368
  • T.D. 9371
  • Pub. L. 108-357
  • 118 Stat. 1418
  • Pub. L. 109-135
  • 119 Stat. 2577
  • Pub. L. 94-455
  • 90 Stat. 1531
  • Pub. L. 99-514
  • 100 Stat. 2085
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U.S.C.§ 6835
U.S.C.§ 553
U.S.C.§ 6832
C.F.R.§ 433.2
Cite9 CFR 113
Cite7 CFR 3015
Cite21 USC 151-159
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