This rule has been determined to be exempt for the purpose of Executive Order 12866 and, therefore, has not been reviewed by the Office of Management and Budget (OMB).

In accordance with section 3507(j) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501), the information collection and recordkeeping requirements included in the proposed rule have been submitted for approval to OMB. Please submit your written comments to the Office of Information and Regulatory Affairs, OMB, Attention: Desk Officer for RMA, Washington, D.C. 20503. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication of this proposed rule.

We are soliciting comments from the public concerning our proposed information collection and recordkeeping requirements. We need this outside input to help us:

(1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information has practical utility;

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

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

(4) Minimize the burden of the collection of information on those who are to respond (such as through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission responses.)

The collections of information for this rule revise the Multiple Peril Crop Insurance Collections of Information 0563-0053 which expires April 30, 2001.

Title: Multiple Peril Crop Insurance (Fig, Pear, Walnut, Almond, Prune, Table Grape, Peach, Plum, Apple and Stonefruit).

Abstract: This rule improves the existing Fig, Pear, Walnut, Almond, Prune, Table Grape, Peach, Plum, Apple and Stonefruit Crop Insurance Provisions. The Apple Crop Insurance Provisions are revised by allowing optional units and price elections by varietal group. The Fig, Pear, Walnut, Almond, Prune, Table Grape, Peach, Plum, Apple and Stonefruit Crop Insurance Provisions are revised by adding provisions to specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased and that each subsequent crop year coverage begins on the day immediately following the end of the insurance period for the prior crop year. The Almond and Walnut crop insurance provisions are revised by allowing insurance coverage for trees that have been grafted. The Almond crop insurance provisions are revised by deleting the word “rejects” from the definition of “meat pounds.”

Purpose: The purpose of this proposed rule is to clarify existing crop provisions, clarify the methodology for calculating losses, and provide additional coverage benefits to improve these risk management tools so they better meet the needs of producers in all regions of the country.

Burden statement: The information FCIC collects on the specified forms will be used in offering crop insurance coverage, determining program eligibility, establishing a production guarantee or amount of insurance, calculating losses qualifying for a payment, etc. The burden hours may increase the information collection because of the possibility the number of claims may increase as a result of these changes.

Estimate of Burden: We estimate it will take insured producers, a loss adjuster, and an insurance agent an average of .9 of an hour to provide the information required by the Fig, Pear, Walnut, Almond, Prune, Table Grape, Peach, Plum, Apple and Stonefruit Crop Insurance Provisions.

Respondents: Insureds, insurance agents, and loss adjusters.

Estimated annual number of respondents: 14,137.

Estimated annual number of responses per respondents: 2.8.

Estimated annual number of responses: 39,255.

Estimated total annual burden of respondents: The total public burden for this proposed rule is estimated at 13,314 hours.

Record keeping requirements: FCIC requires records to be kept for three years, but all records required by FCIC are retained as part of the normal business practice. However, these records are retained as part of the normal business practice and FCIC's requirement does not place additional burden on insured producers. Therefore, FCIC is not estimating additional burden related to record keeping requirement.

Copies of this information collection can be obtained from Information Collection Clearance Office, OCIO, USDA, Room 404-W, 1400 Independence Ave., S.W., Washington, D.C. 20250.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments and the private sector. This rule contains no Federal mandates (under the regulatory provisions of title II of the UMRA) for State, local, and tribal governments or the private sector. Therefore, this rule is not subject to the requirements of sections 202 and 205 of the UMRA.

It has been determined under section 1(a) of Executive Order 13132, Federalism, that this rule does not have sufficient implications to warrant consultation with the states. The provisions contained in this rule will not have a substantial direct effect on States, or on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

This regulation will not have a significant economic impact on a substantial number of small entities. New provisions included in this rule will not impact small entities to a greater extent than large entities. Under the current regulations, every producer is required to complete an application and acreage report. If the crop is damaged or destroyed, the insured is required to give notice of loss and provide the necessary information to complete a claim for indemnity. This regulation does not alter those requirements. The amount of work required of the insurance companies delivering and servicing these policies will not increase significantly from the amount of work currently required. Therefore, this action is determined to be exempt from the provisions of the Regulatory Flexibility Act (5 U.S.C. 605), and no Regulatory Flexibility Analysis was prepared.

This program is listed in the Catalog of Federal Domestic Assistance under No. 10.450.

This program is not subject to the provisions of Executive Order 12372, which require intergovernmental consultation with State and local officials. See the Notice related to 7 CFR part 3015, subpart V, published at 48 FR 29115, June 24, 1983.

This proposed rule has been reviewed in accordance with Executive Order 12988 on civil justice reform. The provisions of this rule will not have a retroactive effect. The provisions of this rule will preempt State and local laws to the extent such State and local laws are inconsistent herewith. The administrative appeal provisions published at 7 CFR part 11 must be exhausted before any action against FCIC for judicial review may be brought.

This action is not expected to have a significant economic impact on the quality of the human environment, health, and safety. Therefore, neither an Environmental Assessment nor an Environmental Impact Statement is needed.

FCIC proposes to amend the Common Crop Insurance Regulations (7 CFR part 457) by amending the following Crop Insurance Provisions:

1. 7 CFR 457.110 Fig Crop Insurance Provisions effective for the 2001 and succeeding crop years. The changes to the provisions for insuring fig are as follows:

a. Section 3—This section has been redesignated as section 3(a) and (b) to specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased after coverage begins if a cause of loss that could or would reduce the yield of the insured crop is evident prior to the time that change in coverage is requested. This change was made to preclude insureds with continuous coverage from increasing the liability on insured acreage following a cause of loss that could or would reduce the yield of the crop.

b. Section 8(b)—Specify that for each subsequent crop year that the policy remains continuously in force, coverage begins on the day immediately following the end of the insurance period for the prior crop year. This provision provides for fig year round coverage. Policy cancellation that results solely from transferring to a different insurance provider for a subsequent crop year will not be considered a break in continuous coverage. This rule proposes to eliminate any lapse in insurance coverage between crop years.

c. Section 8(c)—Clarify that if the insured's policy is canceled or terminated for any crop year after insurance attached for that crop year, insurance will not be considered to have attached for that crop year and no premium, administrative fee, or indemnity will be due for such crop year. This change is needed to avoid premium and administrative fees for canceled or terminated coverage because insurance will have attached before the last day a policy can be canceled or terminated.

2. FCIC proposes to amend the Common Crop Insurance Regulations (7 CFR part 457) by amending 457.111 Pear, 457.133 Prune, 457.149 Table Grape, 457.153 Peach, 457.157 Plum and 457.159 Stonefruit Crop Insurance Provisions, effective for the 2001 and succeeding crop years. The changes are as follows:

a. Section 1—Peach—Add definition for “marketable” for clarification.

b. Section 2—Peach and section 3—Table Grape, Pear, Plum, Prune and Stonefruit—Specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased after coverage begins if a cause of loss that could or would reduce the yield of the insured crop is evident prior to the time that change in coverage is requested. This change was made to preclude insureds with continuous coverage from increasing the liability on insured acreage following a cause of loss that could or will reduce the yield of the crop.

c. Section 7 for Peach, section 8 for Pear, Plum, Prune and Stonefruit, and section 9 for Table Grape—Specify that for each subsequent crop year that the policy remains continuously in force, coverage begins on the day immediately following the end of the insurance period for the prior crop year. These provisions provide for year round coverage. Policy cancellation that results solely from transferring to a different insurance provider for a subsequent crop year will not be considered a break in continuous coverage. The current provisions specify calendar dates for the beginning and end of the insurance period, thereby establishing a minimum time period during which no insurance coverage exists between crop years. This rule proposes to eliminate any lapse in insurance coverage between crop years. Also, specify that if the insured's policy is canceled or terminated for any crop year after insurance attached for that crop year, insurance will not be considered to have attached for that crop year and no premium, administrative fee, or indemnity will be due for such crop year. This change is needed to avoid premium and administrative fees for canceled or terminated coverage because insurance will have attached before the last day a policy can be canceled or terminated.

3. 7 CFR 457.122 Walnut Crop Insurance Provisions effective for the 2001 and succeeding crop years. The changes to the provisions for insuring walnuts as well as other minor editorial changes are as follow:

a. Section 3(c)—Specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased after coverage begins if a cause of loss that could or would reduce the yield of the insured crop is evident prior to the time that change in coverage is requested. This change was made to preclude insureds with continuous coverage from increasing the liability on insured acreage following a cause of loss that could or would reduce the yield of the crop.

b. Section 8(a)(3)—Specify that for each subsequent crop year that the policy remains continuously in force, coverage begins on the day immediately following the end of the insurance period for the prior crop year. This provision provides year round coverage for walnuts. Policy cancellation that results solely from transferring to a different insurance provider for a subsequent crop year will not be considered a break in continuous coverage. The current Walnut Crop Insurance Provisions specify calendar dates for the beginning and end of the insurance period, thereby, establishing a time period during which no insurance coverage exists between crop years. This rule proposes to eliminate any lapse in insurance coverage between crop years.

c. Section 8(a)(4)—Specify that if the insured's policy is canceled or terminated for any crop year after insurance attached for that crop year, insurance will not be considered to have attached for that crop year and no premium, administrative fee, or indemnity will be due for such crop year. This change is needed to avoid premium and administrative fees for canceled or terminated coverage because insurance will have attached before the last day a policy can be canceled or terminated.

d. Section 10—Modify the format of this section and require that notice be given 15 days prior to harvest if there is mold damage to the walnuts so that an inspection may be performed.

e. Section 11(b)—Add an example of claim for indemnity for clarity.

f. Section 11(d)—Add that whenever mold damage exceeds 30 percent and such production will not be sold, the production to count will be zero.

4. 7 CFR 457.123 Almond Crop Insurance Provisions effective for the 2001 and succeeding crop years. The changes to the provisions for insuring almonds are as follows:

a. Section 1—Delete the words “and rejects” in the definition of “meat pounds.” These changes were made to better fit the current almond industry practice and to be consistent with the changes to section 11(c)(2).

b. Section 3(c)—Specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased after coverage begins if a cause of loss that could or would reduce the yield of the insured crop is evident prior to the time that change in coverage is requested. This change will preclude insureds with continuous coverage from increasing the liability on insured acreage following a cause of loss that could or would reduce the yield of the crop.

c. Section 8(a)(3)—Specify that for each subsequent crop year that the policy remains continuously in force, coverage begins on the day immediately following the end of the insurance period for the prior crop year. This provision provides year round coverage for almonds. Policy cancellation that results solely from transferring to a different insurance provider for a subsequent crop year will not be considered a break in continuous coverage. The current Almond Crop Insurance Provisions specify calendar dates for the beginning and end of the insurance period, thereby, establishing a time period during which no insurance coverage exists between crop years. This rule proposes to eliminate any lapse in insurance coverage between crop years.

d. Section 8(a)(4)—Specify that if the insured's policy is canceled or terminated for any crop year after insurance attached for that crop year, insurance will not be considered to have attached for that crop year and no premium, administrative fee, or indemnity will be due for such crop year. This change is needed to avoid premium and administrative fees for canceled or terminated coverage because insurance will have attached before the last day a policy can be canceled or terminated.

e. Section 11(b)—Add an example of claim for indemnity for clarity.

f. Section 11(c)(2)—Revise language to count all harvested meat pounds towards the production to count that is accepted by a buyer. Also removed exception for harvested meat pounds rejected due to an insured cause of loss. Under the current exception it is difficult to accurately determine whether the rejects are due to an insurable cause of loss, so the term, “rejects” will be removed.

1. 7 CFR 457.158 Apple Crop Insurance Provisions effective for the 2001 and succeeding crop years. The changes to the provisions for insuring apples are as follows:

a. Section 1—For clarity, define “varietal group” as apple varieties with similar characteristics that are grouped for insurance purposes as specified in the Special Provisions.

b. Section 2—In addition to section 34(b) of the Basic Provisions, allow optional units by varietal group and if on non-contiguous land. This will allow apple producers to produce new apple varieties in response to public demand while having adequate risk management protection through crop insurance.

c. Section 3(a) and (b)—Add references to price election and reporting by type or “varietal group.” This change was made to clarify that insureds may select one price election for each apple type or varietal group and must report all varietal groups of apples for insurance.

d. Section 3(c)—Specify that the insured's elected or assigned coverage level or the ratio of the insured's price election to the maximum price election offered may not be increased after coverage begins if a cause of loss that could or would reduce the yield of the insured crop is evident prior to the time that change in coverage is requested. This change will preclude insureds with continuous coverage from increasing the liability on insured acreage following a cause of loss that could or would reduce the yield of the crop.

e. Section 8(c)—Specify that for each subsequent crop year that the policy remains continuously in force, coverage begins on the day immediately following the end of the insurance period for the prior crop year. This provision provides year round coverage for apples. Policy cancellation that results solely from transferring to a different insurance provider for a subsequent crop year will not be considered a break in continuous coverage. The current Apple Crop Insurance Provisions specify calendar dates for the beginning and end of the insurance period, thereby, establishing a time period during which no insurance coverage exists. This rule proposes to eliminate any lapse in insurance coverage between crop years.

f. Section 8(d)—Specify that if the insured's policy is canceled or terminated for any crop year after insurance attached for that crop year, insurance will not be considered to have attached for that crop year and no premium, administrative fee or indemnity will be due for such crop year. This change is needed to avoid premium and administrative fees for canceled or terminated coverage because insurance will have attached before the last day a policy can be canceled or terminated.

g. Section 14 Option C—Prices and Units by Varietal Group—Allow optional units and price elections by varietal group for an additional premium designated in the actuarial documents. Allow optional units and price elections based on varietal groups and non-contiguous land. This will allow apple producers to produce new apple varieties in response to public demand while having adequate risk management protection through crop insurance. The option is not available to producers insured under the Catastrophic Risk Protection (CAT) level of coverage. This limitation is consistent with options contained in other crop policies and the CAT Endorsement. Option C is targeted toward producers of apples intended for fresh market; therefore, Option C is unavailable to insureds who select Fresh Fruit Option A for all insurable acreage. Fresh Fruit Option A primarily covers apples intended for processing.

Accordingly, as set forth in the preamble, the Federal Crop Insurance Corporation proposes to amend 7 CFR part 457 as follows:

The regulations in 9 CFR part 94 (referred to below as the regulations) prohibit or restrict the importation of certain animals and animal products into the United States to prevent the introduction of certain animal diseases. The regulations in § 94.6 govern, among other things, the importation of poultry carcasses, parts, products, and eggs (other than hatching eggs) from regions where exotic Newcastle disease (END) or Salmonella enteritidis , phage-type 4, is considered to exist. Because END exists in certain parts of Mexico, Mexico is characterized, under § 94.6(a), as a region where END is considered to exist. Further, under the regulations in § 94.6(b), Mexico is also characterized as a region where S. enteritidis , phage-type 4, is considered to exist.

Under the regulations, poultry carcasses, and parts and products of poultry carcasses may be imported into the United States from Mexico only if they have been cooked or are consigned directly to an approved establishment in the United States. Poultry eggs (other than hatching eggs) from Mexico may be imported into the United States only if: (1) They are accompanied by a health certificate regarding the flock of origin and meet certain other conditions; (2) they are consigned directly to an approved establishment for breaking and pasteurization; (3) they are imported under permit for scientific, educational, or research purposes; or (4) they are imported under permit and have been cooked or processed or will be handled in a manner that prevents the introduction of END and S. enteritidis into the United States.

Further, poultry carcasses, parts, products, and eggs (other than hatching eggs) that do not qualify for entry into the United States under one of these conditions may transit the United States via air and sea ports under the conditions contained in § 94.15(d).

Mexico's Director of Animal Health has requested that we allow poultry carcasses, parts, and products from the Mexican States that Mexico considers free of END to transit the United States via land border ports for export to another country. Currently, Mexico recognizes the States of Baja California, Baja California Sur, Campeche, Chihuahua, Coahuila, Durango, Nuevo Leon, Quintana Roo, Sinaloa, Sonora, Tamaulipas, and Yucatan as free of END.

In response, officials of the Animal and Plant Health Inspection Service (APHIS) have met with representatives from Mexico knowledgeable in disease prevention, epidemiology, and diagnostic methods. The APHIS officials reviewed the information supplied by these representatives (discussed below) and found two factors contributing to the 12 States' apparent successes in remaining free of END: The States' locations and relative isolation from States or countries where END is considered to exist, and controls by Mexico's Division of Animal Health on the movement of poultry and eggs into and through the END-free States. Based on this review, the APHIS officials recommended granting Mexico's request. However, because the term “poultry carcasses, parts, and products” might be construed to include eggs and egg products, we wish to make it clear that because Mexico is characterized as a region where S. enteritidis , phage-type 4, is considered to exist, eggs (other than hatching eggs) and egg products are only allowed to transit the United States via air and sea ports under the conditions currently contained in § 94.15(d). We are not proposing to amend the regulations concerning the transit of eggs or egg products from Mexico in this document.

The table below shows the year of the last outbreak of END in each State and the year Mexico officially declared each State free of END. As shown in the table, none of the States listed has had an outbreak of END in the last 8 years.

Geographically, the 12 States compose two contiguous areas in Mexico. The States of Yucatan, Campeche, and Quintana Roo are located on the Yucatan Peninsula. They are bordered by only one Mexican State, Tabasco, and two countries, Guatemala and Belize, not considered free of END. Yucatan, Campeche, and Quintana Roo maintain active border surveillance, ensuring that no poultry from Tabasco, Guatemala, and Quintana Roo enters without proper documentation, as explained below.

The remaining nine States considered by Mexico to be free of END—Baja California, Baja California Sur, Chihuahua, Coahuila, Durango, Nuevo Leon, Sinaloa, Sonora, and Tamaulipas—are contiguously located in northern Mexico, along the U.S. border and south into north-central Mexico. These States are bordered to the south by States not considered free of END, but, like the Yucatan Peninsula States, they maintain active border surveillance to ensure the safety of their poultry from END.

Of the 12 States that would be eligible to transit poultry carcasses, parts, and products (except eggs and egg products) through the United States via land ports under this proposed rule, Nuevo Leon had the highest volume of poultry production in 1997 (120,000 metric tons, or less than one-tenth of one percent of Mexico's total poultry production for that year). Following Nuevo Leon were Durango and Coahuila, with a combined total of 150,000 metric tons, and Yucatan with 60,000 metric tons. The other 8 States produced less than 60,000 metric tons of poultry each.

Poultry carcasses, parts, and products from Mexico that would be eligible to transit the United States via land border ports under this proposed rule must be processed and packaged in Tipo Inspeccio n Federal (TIF) plants. TIF plants are facilities that are approved by the Government of Mexico and that are subject to strict Federal supervision to ensure that international health standards are maintained. A TIF plant may be a slaughter facility, a processing plant, or a combination of the two. The number of TIF plants in each of the 12 Mexican States is shown in the table below. Data is not available on the exact number of nonslaughter TIF plants that process poultry. The number of TIF plants listed in the “Industrial plant” column below includes pork, beef, and poultry processing plants.

As required by the Government of Mexico, the 12 States that are subject to this proposed rule may import live poultry only from other END-free States and countries. The Government of Mexico requires shipments of poultry from END-free countries to be accompanied by a certificate of origin issued by that country's veterinary authorities and by a certificate of import issued by Mexico's veterinary authorities. States recognized by Mexico as free of END also require and issue their own permits and health certificates, further ensuring that the products originate in an END-free region. In addition, live poultry and poultry carcasses, parts, or products imported into these END-free States must be shipped in sealed trucks, and all shipments are inspected at inspection stations located either on State lines or at international ports of entry.

The Government of Mexico also requires that any poultry carcasses, parts, or products that are shipped for processing to an END-free State from a region where END is believed to exist arrive at TIF processing plants in sealed, numbered containers. The seals must show no evidence of tampering, and the shipment must be accompanied by a certificate signed by an authorized official in the region of origin. Once they arrive at the TIF plant in an END-free State, such poultry carcasses, parts, or products are not allowed to come in contact with poultry that is eligible for importation into the United States in accordance with the regulations contained in 9 CFR part 94 to ensure that no comminglement occurs. The poultry carcasses, parts, or products must be immediately cooked to eliminate any risk of disseminating END.

Under this proposed rule, the following conditions would apply to the in-transit movement of poultry carcasses, parts, and products (except eggs and egg products) from Baja California, Baja California Sur, Campeche, Chihuahua, Coahuila, Durango, Nuevo Leon, Quintana Roo, Sinaloa, Sonora, Tamaulipas, and Yucatan:

1. Any person wishing to move poultry carcasses, parts, or products from Baja California, Baja California Sur, Campeche, Chihuahua, Coahuila, Durango, Nuevo Leon, Quintana Roo, Sinaloa, Sonora, Tamaulipas, and Yucatan through the United States via land ports for export must first obtain a permit from APHIS. The application for the permit would tell APHIS how much and what type of poultry carcasses, parts, or products would be transported; when they would be transported; the method and route of shipment; and who would be involved in the transportation.

2. The poultry carcasses, parts, or products must be packaged prior to movement from the TIF plant in leakproof containers sealed with serially numbered seals approved by APHIS. The containers must remain sealed at all times while transiting Mexico and the United States.

3. The person moving the poultry carcasses, parts, or products through the United States via land ports must inform the APHIS officer at the U.S. port of arrival, in writing, of the following information before the poultry carcasses, parts, or products arrive in the United States: The time and date that the poultry carcasses, parts, or products are expected at the port of arrival in the United States, the time schedule and route of the shipments through the United States, the permit number, and the serial numbers of the seals on the containers.

4. The poultry carcasses, parts, or products must transit the United States under Customs bond.

5. The poultry carcasses, parts, or products must be exported from the United States within the time period specified on the permit.

Any poultry carcasses, parts, or products exceeding the time limit specified on the permit or transiting in violation of any of the requirements of the permit or the regulations may be destroyed or otherwise disposed of at the discretion of the Administrator, APHIS, pursuant to section 2 of the Act of February 2, 1903, as amended (21 U.S.C. 111).

These safeguards are intended to prevent tampering with the shipments, ensure that the shipments actually leave the United States, and otherwise ensure that the shipments do not present a significant risk of introducing END into the United States.

Under these circumstances—the low risk associated with the poultry carcasses, parts, and products coupled with the safeguards for in-transit shipments—we believe that there would be little, if any, risk of introducing END into the United States as a result of this proposed rule. Therefore, we are proposing to amend § 94.15 to allow poultry carcasses, parts, and products (except eggs and egg products) that do not meet the requirements in § 94.6 for entry into the United States and that originate in one of the Mexican States listed above to transit the United States via land ports for export to another country.

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.

Currently, the regulations in 9 CFR part 94 prohibit or restrict the importation of certain animals or animal products into the United States to prevent the introduction of certain animal diseases. Under the regulations, poultry carcasses, parts, and products from Mexico must meet the requirements of § 94.6 to be imported into the United States because exotic Newcastle disease (END) is considered to exist in certain areas in Mexico. However, under § 94.15, certain products that are not eligible for entry into the United States in accordance with the regulations in 9 CFR part 94 may transit the United States for immediate export if certain conditions are met. Currently § 94.15(b) covers only pork and pork products from Chihuahua, Baja California, Sonora, or Yucatan, Mexico, and 94.15(d) allows the transit via air and sea ports of all meat and animal products not otherwise eligible for entry into the United States.

In this document, we are proposing to allow poultry carcasses, parts, and products (except eggs and egg products) that are not eligible for entry into the United States under § 94.6 to move via land ports through the United States from 12 Mexican States, under certain conditions, for export to another country. These 12 States have been officially declared by the Government of Mexico to be free of END.

An APHIS review of the END situation in those States has revealed that, if proper risk management techniques continue to be applied in Mexico, and if accident and exposure are minimized by proper handling during transport, there would be a negligible risk that END could be disseminated into the United States as a result of this proposal.

The proposed regulations would have no direct effect on U.S. producers and consumers of poultry because Mexican poultry would only transit the United States en route to other countries and would not enter U.S. marketing channels. Neither the quantity or price of poultry traded in U.S. domestic markets nor U.S. consumer or producer surplus would be affected by the proposed rule.

A benefit of allowing Mexican poultry to transit the United States for export is that U.S. companies would ship the poultry from U.S. receiving centers in the border States of California, Arizona, and Texas to export points. Current Department of Transportation regulations restrict trucks from Mexico from proceeding into the United States due to safety restrictions. However, any economic activity that would result from this proposal is dependent on the volume of poultry shipped from Mexico for export to other countries. Given Mexico's low volume of poultry and poultry product exports, few shipments of poultry are likely to transit the United States to other countries under this proposal, and benefits to U.S. carriers and shippers are likely to be very small.

Potential losses from disease outbreaks are not quantified because APHIS judges the likelihood of outbreaks (which could result from a combination of factors such as the presence of the disease in Mexico, failure of the preclearance program, accidental openings while in transit, or exposure after an accidental opening of a shipment) to be negligible.

Since 1990, poultry meat production in Mexico has grown 5 percent annually to reach 1.7 million metric tons in 1998. However, nearly all of the poultry meat produced in Mexico is consumed domestically. For example, in 1997, Mexico produced 1.5 million metric tons of poultry, but exported only 5,000 metric tons of that total. Therefore, we anticipate that the volume of poultry that would transit the United States under this proposal would be very small.

This proposed rule, if implemented, could directly affect U.S. trucking companies operating in the border States of California, Arizona, and Texas. Small Business Administration (SBA) data show that there are approximately 18,000 trucking companies operating in those States, and over 96 percent of those companies are small entities. However, it is unclear how many of those companies would be affected by this proposal.

At present, freight arriving in the Customs territory of the United States by truck from Mexico has to be delivered to customers within the commercial zone of the U.S. cities along the border or else transferred to a U.S. trucking or other shipping company within that zone. U.S. trucking companies would benefit from transporting Mexican poultry from U.S. land border ports to U.S. maritime ports. However, given the anticipated low volume of Mexican exports, this proposed rule would likely not have a significant economic effect on a substantial number of small trucking companies.

This proposed rule, if implemented, could also affect four U.S. railroad companies that currently transport goods across the U.S.-Mexico border. Two of these railroad companies meet SBA criteria for small entities (fewer than 1,500 employees). Any economic effects on railroad companies, whether small or large, would likely be positive, but such effects are anticipated to be insignificant, given the expected small volume of Mexican exports.

This proposal could also affect U.S. poultry exporters. Historical data on shipments of Mexican poultry suggest that the poultry would be shipped to either Japan or the Middle East; but, once again, given the anticipated low volume of Mexican exports, U.S. companies that export poultry and poultry products to these two regions are unlikely to be significantly affected.

This proposal would remove some restrictions on the movement of poultry carcasses, parts, or products (except eggs and egg products) from Mexico and would encourage a positive trading environment between the United States and Mexico by stimulating economic activity and providing export opportunities to Mexican poultry industries.

Under these circumstances, the Administrator of the Animal and Plant Health Inspection Service has determined that this action would not have a significant economic impact on a substantial number of small entities.

This proposed rule has been reviewed under Executive Order 12988, Civil Justice Reform. If this proposed rule is adopted: (1) All State and local laws and regulations that are inconsistent with this rule will be preempted; (2) no retroactive effect will be given to this rule; and (3) administrative proceedings will not be required before parties may file suit in court challenging this rule.

In accordance with section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ), the information collection or recordkeeping requirements included in this proposed rule have been submitted for approval to the Office of Management and Budget (OMB). Please send written comments to the Office of Information and Regulatory Affairs, OMB, Attention: Desk Officer for APHIS, Washington, DC 20503. Please state that your comments refer to Docket No. 98-094-1. Please send a copy of your comments to: (1) Docket No. 98-094-1, Regulatory Analysis and Development, PPD, APHIS, suite 3C03, 4700 River Road Unit 118, Riverdale, MD 20737-1238, and (2) Clearance Officer, OCIO, USDA, room 404-W, 14th Street and Independence Avenue, SW., Washington, DC 20250. A comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication of this proposed rule.

This proposed rule would amend the regulations to allow poultry carcasses, parts, and products (except eggs and egg products) that are not eligible for entry into the United States to move through the United States via land ports from Mexican States that Mexico considers to be free of exotic Newcastle disease (END), under certain conditions, for export to another country.

Implementing this proposed rule would necessitate the use of several paperwork collection activities, including the completion of an import permit application, the placement of serially numbered seals on product containers, and the forwarding of a written pre-arrival notification to APHIS port personnel.

We are soliciting comments from the public (as well as affected agencies) concerning our proposed information collection and recordkeeping requirements. These comments will help us:

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

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

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

(4) Minimize the burden of the information collection on those who are to respond (such as through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology; e.g., permitting electronic submission of responses).

Estimate of burden: Public reporting burden for this collection of information is estimated to average 43 minutes per response.

Respondents: Mexican exporters and full-time, salaried veterinarians employed by Mexico's Federal animal health protection service.

Estimated annual number of respondents: 15.

Estimated annual number of responses per respondent: 37.

Estimated annual number of responses: 555.

Estimated total annual burden on respondents: 398 hours.

Copies of this information collection can be obtained from: Clearance Officer, OCIO, USDA, room 404-W, 14th Street and Independence Avenue, SW., Washington, DC 20250.

Accordingly, we propose to amend 9 CFR part 94 as follows:

The Nuclear Regulatory Commission received a petition for rulemaking dated November 4, 1999, submitted by Westinghouse Electric Company LLC (petitioner). The petitioner is requesting that Table 1 in 10 CFR part 50, appendix G, be amended by removing requirements related to the metal temperature of the closure head flange and vessel flange regions. Specifically, the petitioner is requesting that footnotes 2 and 6 be removed from Table 1. The removal of these footnotes would eliminate requirements that restrict heat-up and cool-down pressure temperature curves.

In support of its petition, the petitioner has attached a Westinghouse document, WCAP-15315, “Reactor Vessel Closure Head/Vessel Flange Requirements Evaluation for Operating PWR and BWR Plants” (October 1999). The petitioner believes that this document sets forth the technical basis for the proposed modification, the grounds for and interest in the requested action, and the specific issues and facts that support the petition.

On the basis of the information in WCAP-15315, the petitioner has concluded that the requirements pertaining to the reactor vessel closure head flange in 10 CFR part 50, Appendix G, Table 1, are not necessary and believes that removal of these requirements will have no impact on BWRs and could improve plant safety in PWRs. The petitioner requests that the regulations in 10 CFR part 50 be amended by removing footnotes 2 and 6 in Table 1 of Appendix G that pertain to the reactor vessel closure head flange.

The NRC has determined that the petition meets the threshold sufficiency requirements for a petition for rulemaking under 10 CFR 2.802. The petition has been docketed as PRM-50-69. The NRC is soliciting public comment on the petition for rulemaking.

The petitioner notes that requirements pertaining to the reactor vessel closure head flange are contained in 10 CFR part 50, appendix G, Table 1 entitled, “Pressure and Temperature Requirements for the Reactor Pressure Vessel.” These requirements appear in footnotes 2 and 6 of Table 1. These footnotes require that the metal temperature of the closure flange regions must exceed the material unirradiated RT NDT by at least 120° F for normal operation when the pressure exceeds 20 percent of the pre-service hydrostatic test pressure (621 psig for a typical PWR and 300 psig for a typical BWR). The petitioner believes that these requirements are unnecessary and requests that these footnotes be eliminated.

In support of its petition, the petitioner has attached a Westinghouse document, WCAP-15315, “Reactor Vessel Closure Head/Vessel Flange Requirements Evaluation for Operating PWR and BWR Plants' (October 1999) that it believes sets forth the technical basis for the proposed modification, the grounds for and interest in the requested action, and the specific issues and facts that support the petition. The Westinghouse document indicates that the method used to develop pressure-temperature limits on the reactor vessel closure head flange in NRC requirements is based on fracture toughness data from the mid 1970s. Specifically, the margin of 120° F and the pressure limitation of 20 percent of hydrotest pressure were developed using the K IA fracture toughness curve provided in Appendix G to Section XI of the American Society of Mechanical Engineers (ASME) Boiler and Pressure Vessel (B&PV) Code. The petitioner does not specify the editions of the ASME B&PV Code that contain the K IA or the K IC fracture toughness curves. The petitioner believes that improved knowledge of fracture toughness and other factors affecting the integrity of the reactor vessel have led to the recent change to permit the use of the K IC fracture toughness curve, provided in Appendix A to Section XI of the ASME B&PV Code, in the development of pressure-temperature curves as specified in ASME Code Case N640, “Alternative Reference Fracture Toughness for Development of P-T Limit Curves for Section XI, Division 1.”

The petitioner also believes the Westinghouse report demonstrates that a typical heat-up curve for both PWRs and BWRs using the K IC curve provides for a much higher allowable pressure through the entire range of temperatures. The petitioner concludes that the higher specified limits for a typical PWR are negated by the current NRC closure flange requirement. The petitioner contends that the Westinghouse report shows that the use of the K IC curve recently adopted by the ASME for flange considerations will lead to the conclusion that the current flange requirement can be eliminated.

The petitioner contends that the Westinghouse report demonstrates that irradiation effects studies lead to the conclusion that the location of the closure flange region is in an area of the reactor where irradiation levels are very low, meaning that the fracture toughness of the closure head flange is not measurably affected. The Westinghouse report indicates that steady state operation stresses in several PWR designs are not very high, but in other designs the stresses are much higher. Loadings are primarily membrane stress with somewhat lower bending stresses for two PWR designs. In other PWR designs, the bending stresses are approximately twice (or more) the membrane stresses. In BWRs, the membrane stress is very similar to that in PWRs, but the bending stresses are higher in BWR designs, due to the larger diameter and smaller thickness.

The report indicates that the relative impact of these stresses is best addressed through a fracture mechanics evaluation that postulates a semi-elliptic surface flaw at the outer surface of the closure head flange. The petitioner believes the report demonstrates that in both BWRs and PWRs, the stress intensity factors and fracture toughness variables at boltup provide a significant margin of safety and concludes that the integrity of the closure head/flange region is not a concern for any operating plant using the K IC fracture toughness curve. The petitioner also believes the report concludes that there are no known mechanisms of degradation in this region other than fatigue and that the calculated design fatigue usage level is so low that flaws are unlikely to initiate in the closure head/flange region.

The Westinghouse document indicates that for PWRs the boltup temperature ranges from 10° F to 51° F, with a nominal boltup temperature of 60° F. For BWRs the boltup temperature using the K IC fracture toughness curve ranges from 10° F to 66° F, with a nominal boltup temperature of 80° F. The petitioner believes that these comparisons make it clear that no additional boltup requirements are necessary and concludes that the requirements in footnotes 2 and 6 of Table 1 in 10 CFR part 50, appendix G can be eliminated.

The Westinghouse report states that an important safety concern is the narrow operating window at low temperatures forced by the closure flange requirement. Because the flange requirement sets a pressure limit of 621 psi for a PWR (20 percent of hydrotest pressure), the pressure-temperature (P-T) limit curve may be superceded by the flange requirement for temperatures below RT NDT + 120° F. The report also states that although this requirement was originally imposed to ensure the integrity of the flange region during boltup, it is no longer a concern as specified in the “Flange Integrity” analysis section of the report.

The report indicates that the flange requirement can cause severe operational limitations when instrument uncertainties are added to the lower limit (621 psi) for the Low Temperature Overpressure Protection (LTOP) system of PWRs. Because the minimum pressure required to cool the seals of the main coolant pumps is 325 psi, the operating window between minimum system pressure necessary for seal cooling and maximum system pressure to comply with PT limits on the flange sometimes becomes very small. The report states that if the operator allows the pressure to drop below the pump seal limit, the seals could fail and cause the equivalent of a small break loss of cooling accident (LOCA), a significant safety problem. The petitioner believes that elimination of the flange requirement will significantly widen the operating window for most PWRs as stated in the report, reducing the likelihood of such an occurrence.

The Westinghouse report cites the Byron Unit 1 facility as an example of a PWR that the petitioner believes illustrates how elimination of the flange requirement could improve plant safety. According to the report, Byron has LTOP setpoints significantly below the flange requirement of 621 psi, because of a relatively large instrument uncertainty. The setpoints of the two power-operated relief valves (PORVs) are staggered by about 16 psi to prevent a simultaneous activation. Because the two PORVs have different instrument uncertainties, the higher uncertainty is used for conservatism. The report states that:

The report acknowledges that the Byron situation is only one example of the flange requirement's impact. The report also states that although each operating PWR facility will have different parameters, the operational safety will generally be improved by elimination of the flange requirement.

The Westinghouse report further states that elimination of the flange temperature requirement would have no impact on BWRs:

The petitioner has concluded that the NRC requirements governing pressure and temperature limits for the reactor pressure vessel should be amended to eliminate reactor vessel closure head flange requirements. The petitioner has also concluded that the elimination of the flange requirement has no impact on BWRs and could improve plant safety in PWRs. The petitioner requests that the reactor vessel closure head flange requirement be eliminated from the regulations at 10 CFR part 50, appendix G, Table 1 as presented in its petition for rulemaking.

Interested persons are invited to participate in the making of the proposed rule by submitting such written data, views, or arguments as they may desire. Communications shall identify the Rules Docket number and be submitted in triplicate to the address specified above. All communications received on or before the closing date for comments, specified above, will be considered before taking action on the proposed rule. The proposals contained in this notice may be changed in light of the comments received.

Comments are specifically invited on the overall regulatory, economic, environmental, and energy aspects of the proposed rule. All comments submitted will be available, both before and after the closing date for comments, in the Rules Docket for examination by interested persons. A report summarizing each FAA-public contact concerned with the substance of this proposal will be filed in the Rules Docket.

Commenters wishing the FAA to acknowledge receipt of their comments submitted in response to this notice must submit a self-addressed, stamped postcard on which the following statement is made: “Comments to Docket Number 99-NM-358-AD.” The postcard will be date stamped and returned to the commenter.

Any person may obtain a copy of this NPRM by submitting a request to the FAA, Transport Airplane Directorate, ANM-114, Attention: Rules Docket No. 99-NM-358-AD, 1601 Lind Avenue, SW., Renton, Washington 98055-4056.

The Rijksluchtvaartdienst (RLD), which is the airworthiness authority for the Netherlands, notified the FAA that an unsafe condition may exist on certain Fokker Model F.28 Mark 1000, 2000, 3000, and 4000 series airplanes. On July 17, 1996, a Boeing Model 747 series airplane was involved in an accident shortly after takeoff from John F. Kennedy International Airport in Jamaica, New York. Subsequent to the accident, the RLD advises that the manufacturer has conducted a Fuel System Safety Program (FSSP) investigation. This investigation revealed that, on an F.28 “Fellowship” series airplane, the wiring insulation layers of the fuel boost pumps can be damaged during removal and installation of the wiring, or by chafing within the conduits. Additionally, two separate incidents of arcing have been found in the metal conduits of the wiring of the fuel boost pumps. Circumferential cracks were found in the insulation layering of the fuel boost pump wiring. In some cases, the cracks extended down to the conductor of the wiring. This condition, if not corrected, could result in electrical arcing and a possible fuel tank ignition source.

The manufacturer has issued Fokker Service Bulletin SBF28/28-046, dated September 1, 1999, which describes procedures for the following:

• Part 1 of the Accomplishment Instructions: A one-time review of the maintenance records to determine if tripping of the fuel boost pump circuit breakers has been reported, and repetitive visual inspections to detect fuel leakage of the fuel boost pumps.

• Part 2, paragraph D., of the Accomplishment Instructions: Corrective actions for tripping of the fuel boost pump circuit breakers. These actions involve performing a resistance check of the wiring, and, if necessary, installing a new or serviceable fuel boost pump and correcting any system problems between the circuit breaker and the main landing gear (MLG) wheel bay connector, and repairing any fuel leak in the metal conduit of the fuel boost pump. The corrective actions also involve performing one-time inspections (visual and boroscopic) to detect discrepancies ( i.e., arcing, chafing, and cracking) of the insulation layers of the wiring and wiring conduits, and replacing the wiring and repairing the wiring conduits.

• Part 2, paragraph E., of the Accomplishment Instructions: Corrective actions in the event that fuel leakage is detected from the fuel boost pump wiring conduits. The corrective actions involve inspecting the pressure bung for serviceability, and, if necessary, installing a new or serviceable pressure bung. Additionally, the corrective actions involve inspecting (visual and boroscopic) to detect discrepancies ( i.e., arcing, chafing, and cracking) of the insulation layers of the wiring and wiring conduits, and replacing the wiring and repairing the wiring conduits.

• Part 3 of the Accomplishment Instructions: Replacement of the three single wires inside the metal conduit sleeve of the fuel boost pump with new wires protected by a polyamide sleeve. The replacement also involves performing a visual inspection, and, if necessary, a boroscopic inspection of the boost pump wiring to detect discrepancies ( i.e., arcing, chafing, and cracking) of the insulation layers of the wiring and wiring conduits, and replacing the wiring and repairing the wiring conduits. Accomplishment of the replacement eliminates the need for the repetitive inspections.

Accomplishment of the actions specified in the service bulletin is intended to adequately address the identified unsafe condition. The RLD classified this service bulletin as mandatory and issued Dutch airworthiness directive BLA 1999-114, dated September 13, 1999, in order to assure the continued airworthiness of these airplanes in the Netherlands.

This airplane model is manufactured in the Netherlands and is type certificated for operation in the United States under the provisions of section 21.29 of the Federal Aviation Regulations (14 CFR 21.29) and the applicable bilateral airworthiness agreement. Pursuant to this bilateral airworthiness agreement, the RLD has kept the FAA informed of the situation described above. The FAA has examined the findings of the RLD, reviewed all available information, and determined that AD action is necessary for products of this type design that are certificated for operation in the United States.

Since an unsafe condition has been identified that is likely to exist or develop on other airplanes of the same type design registered in the United States, the proposed AD would require accomplishment of the actions specified in the service bulletin described previously.

The FAA estimates that 22 airplanes of U.S. registry would be affected by this proposed AD, that it would take approximately 1 work hour per airplane to accomplish the proposed review of the maintenance records, and that the average labor rate is $60 per work hour. Based on these figures, the cost impact of the review proposed by this AD on U.S. operators is estimated to be $1,320, or $60 per airplane.

It would take approximately 3 work hours per airplane to accomplish the proposed repetitive inspection, at an average labor rate of $60 per work hour. Based on these figures, the cost impact of the proposed inspection by this AD on U.S. operators is estimated to be $3,960, or $180 per airplane, per inspection cycle.

It would take approximately 33 work hours per airplane to accomplish the proposed modification, at an average labor rate of $60 per work hour. Required parts would cost approximately $1,355 per airplane. Based on these figures, the cost impact of the proposed modification by this AD on U.S. operators is estimated to be $73,370, or $3,335 per airplane.

The cost impact figures discussed above are based on assumptions that no operator has yet accomplished any of the proposed requirements of this AD action, and that no operator would accomplish those actions in the future if this AD were not adopted.

The regulations proposed herein would not have a substantial direct effect on the States, on the relationship between the national Government and the States, or on the distribution of power and responsibilities among the various levels of government. Therefore, it is determined that this proposal would not have federalism implications under Executive Order 13132.

For the reasons discussed above, I certify that this proposed regulation (1) is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979); and (3) if promulgated, will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act. A copy of the draft regulatory evaluation prepared for this action is contained in the Rules Docket. A copy of it may be obtained by contacting the Rules Docket at the location provided under the caption ADDRESSES .

Accordingly, pursuant to the authority delegated to me by the Administrator, the Federal Aviation Administration proposes to amend part 39 of the Federal Aviation Regulations (14 CFR part 39) as follows:

In addition to publishing the full text of this document in the Federal Register , the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through FERC's Home Page ( http://www.ferc.fed.us ) and in FERC's Public Reference Room during normal business hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A, Washington, DC 20426.

From FERC's Home Page on the Internet, this information is available in both the Commission Issuance Posting System (CIPS) and the Records and Information Management System (RIMS).

User assistance is available for RIMS, CIPS, and the Website during normal business hours from our Help line at (202) 208-2222 (E-Mail to WebMaster@ferc.fed.us ) or the Public Reference at (202) 208-1371 (E-Mail to public.referenceroom@ferc.fed.us ).

During normal business hours, documents can also be viewed and/or printed in FERC's Public Reference Room, where RIMS, CIPS, and the FERC Website are available. User assistance is also available.

The Federal Energy Regulatory Commission (Commission) proposes to amend its regulations to reinstate provisions for well category determinations. With such determinations, natural gas producers may claim tax credits provided for by section 29 of the Internal Revenue Code (Section 29 tax credit).

The Section 29 tax credits are available only for certain categories of high cost gas. In 1999, the United States Court of Appeals for the Tenth Circuit in True Oil Co. v. Commissioner of Internal Revenue   1 ( True Oil ), held that, in order to obtain the tax credit, there must be a formal determination under the procedures provided by section 503 of the Natural Gas Policy Act of 1978 (NGPA) that the gas is high cost gas. However, after the January 1, 1993 decontrol of wellhead sales of natural gas by the Wellhead Decontrol Act of 1989 (Decontrol Act), 2 the Commission, in 1994, in Order No. 567, 3 deleted its regulations implementing NGPA ceiling prices, including the well category determination procedures under section 503, even though the tax credit was still available for gas produced through the year 2002. The True Oil decision has prompted the Commission to reconsider its prior action. In addition, a number of producers filed a petition requesting the Commission to reinstate the NGPA section 503 well category procedures because at present while producers are entitled to the section 29 tax credit for qualified gas, there is no procedure to obtain the prerequisite determination. 4 The Department of Energy (DOE) filed in support of the producers' petition and requested the Commission to renew the well category section 503 procedures as consistent with the nation's energy policy of increasing the supply of domestically produced natural gas. As a result, the Commission is proposing to reinstate some of these regulations, with modifications, in order to permit qualifying parties to obtain the tax credit provided under section 29 of the Internal Revenue Code (Code). Determinations would be limited to well recompletions commenced after January 1, 1993, and which comply with IRS Revenue Ruling 93-54, as detailed below.

The NGPA established a system of varying price ceilings for different categories of natural gas. Among other things, section 107(b) authorized the Commission to establish incentive prices for various categories of unconventional natural gas. Section 107(c) of the NGPA specifically identified four types of natural gas deemed to be “high-cost natural gas”, which were gas from (a) deep wells, (b) geopressurized brine, (c) coal seams, and (d) Devonian shale. In addition, section 107(c)(5) of the NGPA gave the Commission the authority to include in the term “high-cost natural gas” any natural gas “produced under such other conditions as the Commission determines to present extraordinary risks or costs.” NGPA section 503 set forth the procedures used for determining whether gas qualified as section 107(c) “high-cost natural gas.” Under that section the agency having regulatory jurisdiction with respect to the production of the natural gas in question (the jurisdictional agency)  5 makes the initial determination, and submits it to the Commission. The Commission can either affirm, reverse, remand, make a preliminary finding on, or simply take no action, regarding the agency's determination. If the Commission takes no action within 45 days after receipt of the agency's determination, that determination becomes final. Judicial review is available under section 503 only if the Commission remands or reverses the determination.

In Order Nos. 99 and 99-A, 6 the Commission exercised its authority under NGPA sections 107(b) and (c)(5) to define gas produced from tight formations as high-cost gas, and to establish an incentive ceiling price for that gas, and also set forth procedures for the designation of specific portions of formations as tight formations. After the designation of a portion of a formation as a tight formation, in order for production from a specific well to qualify as tight formation gas, the appropriate state or federal jurisdictional agency was required to make a determination that that well was producing gas from the formation which had been found to be a tight formation, and submit its determination to the Commission. In Williston Basin Interstate Pipeline Co. v. FERC , 7 the Court held that jurisdictional agency tight formation determinations must be reviewed only through the procedural scheme set forth in NGPA section 503.

Two years after passage of the NGPA, Congress enacted section 29 of the Internal Revenue Code as part of the Crude Oil Windfall Profit Tax of 1980. Section 29 allowed taxpayers to claim a credit for qualified fuels (1) which were produced from wells drilled between January 1, 1980 and December 31, 1990, 8 and (2) which were sold before January 1, 2001. The section 29 list of qualified fuels included only the NGPA section 107 (c)(2)-(4) categories, and tight formation gas under section 107(c)(5). 9 Section 29(c)(2)(A) also provided that the determination whether gas falls into a category qualifying for the tax credit “shall be made in accordance with section 503 of the [NGPA].”

The Natural Gas Wellhead Decontrol Act of 1989 repealed all remaining NGPA price controls on wellhead sales of natural gas, as well as NGPA section 503, effective January 1, 1993. The Senate Committee on Energy and Natural Resources' Report on the 1989 Wellhead Decontrol Act stated, “The Committee intends that any incomplete section 503 procedures continue to be carried out by the state agencies and the FERC, so that the necessary determination can be made as to sales of gas delivered before contract expiration and decontrol.”  10 The Senate Report also expressly noted that section 29 of the Code provided for tax credits for certain types of fuels which qualify under the NGPA section 503 procedures. The Senate Report stated that approval of the Decontrol Act, which repealed the NGPA sections referenced in section 29, was “not intended * * * to reflect an adverse judgment by the Committee as to the merits of tax credits for any categories of natural gas production that might be affected by such action.”  11

In February 1990, before full wellhead price deregulation took effect under the Decontrol Act, the Commission issued Order No. 519, terminating the incentive ceiling price for sales of tight formation natural gas produced from wells spudded or recompleted after May 12, 1990. Shortly thereafter, Congress, in the Revenue Reconciliation Act of 1990, extended the Section 29 tax credit so that it would be available for qualified fuels produced from wells drilled before January 1, 1993, and sold before January 1, 2003. That act also revised the terms of eligibility so that tight formation gas would be eligible for the tax credit even though the price for such gas was no longer regulated. However, that act made no change to the provision of Section 29 (c)(2)(A) that the determination of eligibility for the tax credit shall be made in accordance with NGPA section 503.

In Order No. 523, issued April 25, 1990, the Commission amended its regulations to conform them to the Decontrol Act.  12 In that order the Commission recognized its duty to continue processing requests for well category determinations under NGPA section 503 to allow producers to obtain tax credits, even if the determinations no longer affected the price of the gas. After summarizing the statement in the Senate Report on the Decontrol Act that the Act was not intended to reflect an adverse judgment by the Committee as to the merits of tax credits for decontrolled gas, the Commission stated:

Congress' decision in the Revenue Reconciliation Act of 1990 to reinstate the tax credit for tight formation gas even though the price for such gas was no longer regulated necessitated certain technical changes in the standards the Commission used to determine whether gas qualified as tight formation gas. On April 9, 1992, the Commission issued Order No. 539, 14 making the necessary technical changes. In addition, Order No. 539 clarified the Commission's statement in Order No. 523 that it would only continue processing well determination requests until December 31, 1992. A concern had been expressed to the Commission that it would not be practical for the Commission to complete the processing of well determination requests with respect to wells drilled through December 31, 1992 by that same date, since ordinarily such requests are not filed until after the well is drilled. The Commission stated that both the House and Senate committee reports on the Decontrol Act had stated that decontrol on January 1, 1993, would not affect proceedings pending on that date. Therefore, the Commission concluded that Congress did not intend that repeal of NGPA Title I and section 503, would terminate the authority of the Commission to process well category applications filed with the jurisdictional agencies on or before December 31, 1992. Accordingly, the order stated that the Commission would continue to process notices of determination which were filed with the jurisdictional agencies by December 31, 1992, and received by the Commission by June 30, 1993. 15

On July 7, 1992, the Commission issued Order No. 539-A, 16 denying rehearing of Order No. 539. On rehearing, no party contended that the Commission should continue to process well determination requests under NGPA section 503 for wells drilled or recompleted  17 after January 1, 1993. However, parties did seek an extension of the December 31, 1992 date for producers to file applications with applicable jurisdictional agencies for well category determinations for pre-January 1, 1993 wells. The Commission denied that request, explaining that while both the jurisdictional agencies and the Commission have authority to complete the processing of applications for well category determinations under section 503 which were pending on December 31, 1992, there was no authority to commence new proceedings before jurisdictional agencies after that date. The Commission reiterated that the December 31, 1992 deadline was jurisdictional, stating:

However, the Commission extended the date by which jurisdictional agencies could submit their determinations to the Commission until September 30, 1993.

On July 12, 1993, the Commission issued Order 539-C, 19 extending until April 30, 1994, the time for jurisdictional agencies to submit their determinations.  20 The Commission explained that the reason for continuing to review agency determinations for a transition period, was “while NGPA Section 107 well category determinations have no price consequence, they are necessary to obtain the Section 29 tax credit.”  21 However, the Commission reiterated that it “will not accept determinations where the well was spudded or recompletion commenced on or after January 1, 1993.”  22

As discussed above, section 29 of the Code provides that, in order to qualify for the tax credit, gas must be produced from a well drilled before January 1, 1993. During the period the Commission was issuing the above orders, both the Commission and all the parties appear to have assumed that this provision of Section 29 meant that the tax credit would not be available for wells originally drilled before December 31, 1992, that were recompleted after December 31, 1992. In any event, no party raised the issue whether the Commission's refusal to process well determination requests for wells recompleted after December 31, 1992, would improperly prevent producers from obtaining tax credits for such wells.

On August 16, 1993, a month after the Commission issued Order No. 539-C, the IRS issued Revenue Ruling 93-54, 23 which took a different view of the eligibility of recompletions after January 1, 1993 to receive the Section 29 tax credit. The IRS interpreted the provision of Section 29 that states that gas must be produced from a well drilled before January 1, 1993, as permitting tax credits for non-conventional fuels produced from a well that was drilled before January 1, 1993, through a post-January 1, 1993 recompletion in the well, as long as the recompletion does not involve additional drilling to deepen or extend the well. The IRS reasoned that the drilling deadline in Section 29 referred to the date of the initial drilling of the well, and not to the date of any subsequent recompletion in the portion of the well which had already been drilled.

After the IRS Revenue Ruling 93-54, the Commission received jurisdictional agency determinations for recompletions commenced after January 1, 1993. However, the Commission refused to process those submissions relating to those recompletions on the ground that the Decontrol Act's repeal of NGPA section 503 eliminated the Commission's authority to review well determinations for wells recompleted after December 31, 1992. For example, in Railroad Commission of Texas, 24 the Commission returned two well determinations to the jurisdictional agency because they were for well recompletions commenced after January 1, 1993. The Commission observed that regardless of the Commission's action, “the IRS has the responsibility to determine whether production from a well that has not received a determination under NGPA section 503 is eligible for a tax credit.”  25 In Oklahoma Corporation Commission and Oil Conservation Division, 26 the Commission rejected that part of the jurisdictional agency's determination that related to recompletions after December 31, 1992.

Producers sought review of the Commission's action, and argued to the Court that the Commission had misapplied the Commission's own definition of recompletion, and that by refusing to process these determinations, the Commission was improperly denying them the ability to obtain the Section 29 tax credit they were entitled to because the IRS had stated that such a recompletion could receive the tax credit. In Marathon Oil Company versus FERC,   27 ( Marathon Oil ) the Court upheld the Commission's refusal to process the post-December 31, 1992 recompletion determinations. The Court stated the IRS was the agency responsible for granting the tax credit, not the Commission. The Court noted that:

The Court added that the Commission has obviously changed its mind as to the necessity of its role regarding tax credits, because the Commission had previously stated it was continuing to process well determinations after section 503 was repealed to enable parties to get the tax credit.  29 The Court concluded since “the IRS may well simply ignore FERC's determination during its phase-out period” ( i.e. the period after January 1, 1993), “FERC's actions in this case have no necessary legal significance bearing on the IRS' decision whether to grant the tax credit,”  30 and denied the petitions for review.

The Court in Marathon did not directly discuss whether the Commission had the authority to process well determinations for recompletions commenced after the Decontrol Act's effective date. Rather, the Court concluded that there was no injury to the party from the Commission's action of not processing the determination because it did not foreclose the party from obtaining the tax credit from the IRS.

Following the Marathon decision, the Commission continued to decline to process jurisdictional agency determinations for post-December 31, 1992 recompletions. However, since it appeared that the IRS would permit the Section 29 credit for such recompletions without any Commission action, there did not seem to be any need for the Commission to reconsider its position.

In addition, on July 29, 1994, the Commission issued Order No. 567, 31 deleting regulations that were no longer required due to the decontrol of wellhead sales of natural gas. Among the regulations the Commission deleted were those in Part 270 through Part 275 of its regulations which set forth eligibility requirements, filing requirements, and the procedures for making well determinations under section 503 of the NGPA. The Commission concluded that those regulations were no longer needed because the Decontrol Act had repealed NGPA section 503 and the deadline for jurisdictional agency determinations to be filed with the Commission had passed. 32

Thus matters stood from 1994 until the True Oil decision changed the legal landscape.

In 1999, in True Oil v. Commissioner of Internal Revenue , 33 the Tenth Circuit reviewed the IRS's denial of a claim of the Section 29 credit because the producer had not obtained a formal well category determination from the jurisdictional agency or the Commission. The well was completed in 1984, but due to an oversight, no well-category determination application was filed with the jurisdictional agency. There was no issue whether the well could have qualified for the tax credit if there had been a determination. On appeal, the producer asserted that the reference to section 503 of the NGPA in section 29(c)(2)(A) merely incorporated the Commission's substantive definitions of tight formation gas. It contended that for purposes of section 29(c)(2)(A), the taxpayer itself can make the initial determination of whether a well is producing from a tight formation by applying those substantive definitions. The IRS denied the tax credit because there had been no well category determination by any authority authorized to make such determination. The Tax Court upheld the IRS, and the 10th Circuit similarly rejected the producer's contention. The Court held that notwithstanding the D.C. Circuit's decision in Marathon Oil , certain IRS revenue rulings, and the Commission's last position on the lack of a need for a formal well determination under NGPA section 503 to qualify for the tax credit, “[a] producer must obtain a formal well-category determination before it can claim the Section 29 Credit.”  34 The Court stated that, although section 29 has been amended more than once since the repeal of section 503 of the NGPA, Congress has never deleted the reference to section 503 from section 29.

The Court also specifically addressed the potential conflict between (1) the Commission's decision in Order No. 539 not to process well determinations for post-January 1, 1993 recompletions and (2) the IRS' revenue ruling one month later that gas produced from a post-January 1, 1993 recompletion could qualify for tax credits if it was produced in a well initially drilled before January 1, 1993. The producer contended that the IRS' revenue ruling should be interpreted as a finding that a well determination by the Commission was unnecessary for a producer to qualify for a tax credit for post-January 1, 1993 recompletions, since otherwise the revenue ruling would have been meaningless. The Court responded that revenue rulings do not have the force and effect of law and do not control when contrary to statute or the intent of Congress. Therefore, to the extent the revenue ruling could be interpreted to conflict with the requirement in section 29 of the Code for an NGPA section 503 determination, the Court held that it would not give the revenue ruling any weight. The Court then stated:

Thus, under True Oil , unless the Commission's NGPA section 503 procedures are available, the Section 29 tax credit cannot be obtained for post-January 1, 1993 recompletions, despite the IRS' revenue ruling that post-January 1, 1993 recompletions can qualify for the tax credit as long as there is no additional drilling to deepen or extend the well.

After the True Oil decision, a number of producers, supra n.4, filed a petition under Commission Rule 207, 18 CFR § 385.207, requesting that the Commission resume the NGPA section 503 well determination review process. They assert that unless the Commission does so, Congress' will would be thwarted because Congress provided that the producers could claim the Section 29 tax credit for qualified fuels until at least January 1, 2003 but at present there is no procedure to obtain it for gas produced from post-January 1, 1993 recompletions.

The Commission proposes to resume processing jurisdictional agency well category determinations for certain recompletions commenced after January 1, 1993, so the Section 29 tax credit can be claimed for natural gas produced from these qualifying wells. Since the agency responsible for ruling on the Section 29 tax credit, the IRS, will permit the tax credit for certain recompletions after January 1, 1993, and in light of the True Oil decision requiring Commission action under NGPA section 503 procedures for a producer to obtain the Section 29 tax credit, the Commission believes it can, and should, reinstate those procedures for well recompletions commenced after January 1, 1993, in wells initially drilled before January 1, 1993, until the tax credit ends, which is now scheduled to cease on December 31, 2002. Below, the Commission first discusses its legal authority to resume processing jurisdictional agency well category determinations under NGPA section 503. The Commission then discusses the details of its proposal.

The Commission recognizes that, in Order Nos. 539 and 539-A, the Commission stated that the Decontrol Act had terminated the Commission's authority to make well category determinations under NGPA section 503 with respect to all drilling activity after the effective date of decontrol, namely January 1, 1993. However, the Commission now concludes that Congress, in both the Wellhead Decontrol Act and the Revenue Reconciliation Act of 1990, intended to authorize the Commission to continue to review well category determinations under NGPA section 503 after wellhead decontrol, to the extent such determinations are necessary to permit qualifying producers to receive tax credits under section 29 of the Code.

At the time of Order Nos. 539 and 539-A, the Commission did not have to confront the possibility that its interpretation of the Wellhead Decontrol Act as terminating its authority to review well category determinations with respect to all post-December 31, 1992 “drilling activity” would affect the availability of the section 29 tax credit. It was only after Order No. 539-A that the IRS issued Revenue Ruling 93-54, interpreting section 29 of the Code, as amended by the Revenue Reconciliation Act of 1990, as permitting tax credits for post-January 1, 1993 recompletions in wells initially drilled before January 1, 1993, so long as the recompletion does not involve additional drilling to deepen or extend the well. While the Commission continued to refuse to perform well category determinations under NGPA section 503 for post-January 1, 1993 recompletions, the Commission suggested that its refusal to perform well determinations did not necessarily conflict with the IRS's revenue ruling. 36 This was because the Commission believed a formal Commission well determination under NGPA section 503 might not be a prerequisite for a tax credit. Similarly, the D.C. Circuit in Marathon Oil concluded that the Commission's refusal to process well category determinations did not injure producers, because producers might obtain the tax credit from the IRS without a formal NGPA section 503 determination from the Commission. In Marathon Oil , the jurisdictional agency had made the determination that the gas was from a well that met the tight formation requirement. Thus, neither the Commission nor the D.C. Circuit have thus far had to address the question whether Congress intended to permit the Commission to make NGPA section 503 well category determinations with respect to post-December 31, 1992 drilling activity, where such determinations are a necessary prerequisite to obtaining tax credits Congress authorized in Section 29 of the Internal Revenue Code.

The Tenth Circuit's True Oil decision, combined with the IRS' interpretation of section 29 as authorizing tax credits for post-December 31, 1992 recompletions, now squarely presents this question to the Commission. In True Oil , the Court held that section 29 of the Internal Revenue Code requires a formal NGPA section 503 determination to obtain the Section 29 tax credit, since Section 29 states that the tight formation determination shall be made in “accordance with section 503 of the Natural Gas Policy Act of 1978.” Moreover, in True Oil , the Court specifically referred to post-January 1, 1993 recompletions as being subject to its ruling. The Court concluded:

Therefore, unless the Commission recommences processing of requests for well category determinations under NGPA section 503, producers will be unable to obtain tax credits for gas produced from post-January 1, 1993 recompletions that qualify under Revenue Ruling 93-54. This will be true despite the fact the IRS has interpreted Section 29 of the Code, as amended by the Revenue Reconciliation Act of 1990, as authorizing tax credits for such gas. The Commission defers to the IRS's interpretation of Congress's intent in enacting the current version of section 29 as it applies to recompletions. This is because the IRS is the agency that administers the Code, and is responsible for determining whether the section 29 tax credit should be permitted in a particular situation. In light of the IRS' view that Congress intended its amendment of section 29 of the Internal Revenue Code by the Revenue Reconciliation Act of 1990 to permit tax credits for post-January 1, 1993 recompletions, we believe Congress must also have intended the Commission to continue the NGPA section 503 procedures after the decontrol date for those recompletions. Otherwise, the producers could not obtain the very credits the IRS has found Congress intended to authorize.

This conclusion is buttressed by the legislative history of the Decontrol Act. As the Commission found in Order No. 523, supra , that legislative history “indicates that Congress did not intend the Decontrol Act to limit the availability of tax credits for qualified fuels (footnote) * * * .”  38 In particular, there is the statement in the Senate Report accompanying the Decontrol Act that refers to the tax credit for qualifying fuels and states that the repeal in the Decontrol Act of NGPA sections referenced in Section 29 of the Code was not intended to reflect any adverse judgment on the merits of the tax credit. Moreover, the Chairman of the Senate Committee involved in the Decontrol Act had written to the Commission that until the Code was amended to provide a new mechanism for qualification for the gas subject to the section 29 tax credit, the Commission should continue to make the section 503 determination. 39 Since that time the Code has not been amended to provide any other mechanism for obtaining a formal determination even though the Section 29 tax credit is available at least through December 31, 2002.

Also, the Revenue Reconciliation Act of 1990 permitted tight formation gas to qualify for tax credits, even though it was no longer subject to NGPA ceiling prices. The Commission accordingly continued to process requests for well category determinations through April 1994 to aid producers in obtaining the tax credits, even though such determinations were no longer necessary to allow the gas to qualify for NGPA ceiling prices. Thus, despite the fact Congress originally enacted the NGPA section 503 well category determination procedures for the purpose of qualifying gas for NGPA ceiling prices, the Commission has previously recognized that those procedures can continue to be used, even where the determination has no significance for purposes of NGPA ceiling prices. This fact also suggests that the Wellhead Decontrol Act's elimination of all such price ceilings as of January 1, 1993, should not be viewed as requiring the Commission to cease well category determinations for tax credit purposes as of that date. Congress had previously unlinked eligibility for the tax credit from the existence of NGPA ceiling prices in 1990, and expanded the tax credit to tight formation gas.

Enabling producers to receive the tax credit would also be consistent with Congress' desire to encourage, enhance, and expand the United States natural gas supply base, allowing legitimately qualified producers to call upon a tax credit associated with developing and producing gas from formations and wells that otherwise might not have been available to supply consumers.

In summary, since the agency responsible for ruling on the Section 29 tax credit, the IRS, will permit the tax credit for certain recompletions after January 1, 1993, and in light of the True Oil decision which requires Commission action under NGPA section 503 procedures for a producer to obtain the Section 29 tax credit, the Commission believes it can, and should, reinstate those procedures for well recompletions commenced after January 1, 1993, in wells initially drilled before January 1, 1993, until the tax credit ends, which is now scheduled to cease on December 31, 2002. In light of this, the Commission proposes to reinstate these procedures until the later of June 30, 2003, or six months after the tax credit is no longer available for production from any well should Congress further extend the tax credit.

The Commission proposes to accept jurisdictional agency determinations on those post-January 1, 1993 recompletions which satisfy the IRS' definition under Revenue Ruling 93-54, namely, that the recompletion does not involve additional drilling to deepen or extend the well. For this purpose, the Commission proposes to reinstate regulations necessary to (1) define the categories of high cost gas eligible for the tax credit and (2) provide procedures for jurisdictional agencies to file their determinations and the Commission to review those determinations. The Commission's action to provide a mechanism for claiming the section 29 tax credit for gas produced from these recompleted wells should have no consumer price impact. This is because the wellhead ceiling prices were terminated long ago, and therefore the only effect of this proposed rule will be to enable producers to obtain the tax credit. DOE states that the tax credits will help increase the Nation's supply of domestically produced natural gas by permitting unconventional gas wells to continue to operate. In addition to adding to the nation's natural gas supply, DOE states that continued operation of unconventional gas wells will be important in testing the new generation of petroleum technology.

With respect to the tight formation gas category, the Commission action will be limited to reviewing the jurisdictional agency determinations for qualifying recompletions in already designated tight formations. Well determinations for recompletions in coal seams and Devonian Shale will also be accepted. 40 The Commission proposes not to accept determinations with respect to either initial completions in wells spudded before January 1, 1993, or any pre-1993 recompletions. In Order No. 539, the Commission established deadlines for filing applications involving wells that were spudded and/or recompleted prior to January 1, 1993, and the time has long passed when those applications should have been filed. Also, in their petition, producers have not requested that the Commission accept determinations with regard to wells spudded or recompleted before January 1, 1993. However, parties may comment on this matter. Finally, the substantive rulings that the Commission has made previously concerning well determinations and the qualification under these NGPA section 107 category will continue to govern.

The Commission estimates that there are probably at least 4,000 recompletions that were performed between 1993-1999 for which a determination may be sought under the proposed rule, and that another 1,500 recompletions may occur between 2000-2002, when the tax credit is now scheduled to end. 41 The Commission finds the assistance of the State and Federal agencies to be essential to its ability to process the substantial number of new well category determination requests the Commission anticipates will be filed under the proposed rule. NGPA section 503 requires the jurisdictional agencies to make an initial well category determination, unless, as permitted by section 503(e)(2), the Commission enters into an agreement with a State or Federal agency under which the Commission would make the determinations that would otherwise be made by that agency. The Commission intends not to exercise its discretion to enter into any such agreement. Since the Commission's role in the producing area has virtually been eliminated, the Commission's resources in this area have been substantially reduced. Thus, the Commission must rely upon the jurisdictional agencies to develop the full record in these proceedings, and the Commission will limit its role to reviewing initial determinations made by the jurisdictional agencies. The Commission requests comments from the jurisdictional agencies whether they will make initial determinations under NGPA section 503, if this rule is adopted. If the jurisdictional agencies are not prepared to do this, the Commission may not proceed with the proposed rule.

Accordingly, the Commission is proposing to reinstate those portions of its prior regulations, with appropriate modifications, that are necessary to allow producers to obtain well category determinations solely for tax credit purposes. In general, the proposed regulations retain the definitions, the filing and notice requirements, and the review procedures that the Commission promulgated prior to the termination of the regulations due to the Decontrol Act. The significant changes are identified below.

Proposed § 270.101 contains the necessary definitions to implement well determination procedures to receive determinations for tax credit purposes. Definitions for tight formation gas, coal seam gas and Devonian shale gas, three of the types of gas eligible for tax credits, are included. 42 The Commission is not including a definition for gas produced from geopressured brine since our past experience shows that there is no gas likely to qualify for this category given the Commission's definition of geopressured brine and the current state of technology. Comments on this matter are requested.

Proposed § 270.201 limits the availability of the determination procedures to recompletions commenced after January 1, 1993, in wells initially drilled before that date. As discussed above, this reflects the Commission's decision to limit the determination process to correct the situation caused by the True Oil decision, but parties may comment on this matter. Similarly, the Commission is also not proposing any regulations that would allow a jurisdictional agency to designate additional tight formation areas. The designation of additional tight formations would require the Commission to review extensive geologic data. This could place an undue burden on the Commission. Also, it appears likely that most producing formations that qualify as tight formations were designated as such during the decade when such a designation enabled producers to qualify for a higher price ceiling.

Consistent with the Commission's prior NGPA regulations, the Commission is also proposing to revise the delegation authority to the Director of the Office of Markets, Tariffs and Rates (OMTR) or the Director's designee in § 375.307 to include tolling letters advising jurisdictional agencies notices of determination are incomplete. In addition, to facilitate the Commission's review under the reinstated procedures, the Commission is proposing to delegate to the Director of OMTR the authority to issue preliminary findings under the proposed section. However, the Commission is not proposing to delegate the authority to issue a final order to the Director of OMTR.

The Commission is also proposing to revise its regulations by adding § 381.401 to the regulations to specify a filing fee of $115 per well determination. This reflects the last fee ($100) for review of a jurisdictional agency well determination that was in effect prior to the repeal of the determination procedures, adjusted for inflation. It is the Commission's best estimate, at this time, of the cost to the Commission to review well determinations. As in the past, this fee will be revised annually in accordance with § 381.104. In addition, the past billing procedures will apply, whereby the Commission will bill each producer at the end of each billing year based on the number of determinations received during that year for that producer.

The proposed regulations contain no provisions permitting a jurisdictional agency to request alternative filing requirements. The proposed filing requirements are not unduly burdensome and are readily available to producers. However, since the Commission previously approved alternative filing requirements for Devonian shale wells in Michigan based on unique circumstances, the proposed regulations reflect those previously-approved alternate filing requirements.

The Commission is reinstating and revising FERC Form No. 121, which a producer files with an application for determination. This form, a copy of which is attached, identifies the producer filing the application, the type of determination the producer is seeking, and information identifying the well and the completion location of the well. The Commission is considering whether or not to require producers to file this form electronically, to facilitate the Commission's noticing of determinations and requests comments on this issue.

The Commission excludes certain actions not having a significant effect on the human environment from the requirement to prepare an environmental assessment or an environmental impact statement. 43 The instant proposed rule reinstates regulations that were previously in effect, and does not substantially change the effect of the underlying legislation or the regulations being revised. Accordingly, no environmental consideration is necessary.

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-612, requires rulemakings to contain either a description and analysis of the effect that the proposed rule will have on small entities or a certification that the rule will not have a significant economic impact on a substantial number of small entities.

In Mid-Tex Elec. Coop. v. FERC, 773 F.2d 327 (D.C. Cir. 1985), the court found that Congress, in passing the RFA, intended agencies to limit their consideration “to small entities that would be directly regulated” by proposed rules. Id. at 342. The court further concluded that “the relevant ‘economic impact’ was the impact of compliance with the proposed rule on regulated small entities.” Id. at 342.

The instant proposed rule reinstates regulations that were previously in effect, and would enable entities to obtain Internal Revenue Code Section 29 tax credits. There is no reporting requirement, merely the ability to obtain a formal determination that gas qualifies for the tax credit. The Commission certifies that this proposed rule will not have a significant economic impact upon a substantial number of small entities.

The following collections of information pursuant to Part 270 contained in this proposed rulemaking are being submitted to the Office of Management and Budget (OMB) for review under Section 3507(d) of the Paperwork Reduction Act of 1995. 44 These information collection requirements were previously in effect until the removal of the Commission regulations implementing NGPA section 503 and are now proposed to be reinstated.

Comments are solicited on the Commission's need for this information, whether the information will have practical utility, the accuracy of the provided burden estimates, ways to enhance the quality, utility, and clarity of the information to be collected, and any suggested methods for minimizing respondents' burden, including the use of automated information techniques. The burden estimates for complying with this proposed rule are as follows:

Public Reporting Burden: Estimated Annual Burden

Total Annual Hours for Collection (Reporting + Record keeping) = 11,268.

Based on the Commission's previous experience for processing applications for well determinations and completion of the FERC Form 121, it is estimated that about 1800 filings per year will be made over the next three years at a burden of 6.01 hours per filing for the application, .25 hours per filing for the Form 121, for a total of 11,268 hours under the proposed regulations. These two collections of information were eliminated after passage of the Wellhead Decontrol Act of 1989. The Commission is requesting that OMB reinstate these data collections to their inventory. The total hours associated with the proposed rule will be added to the total hours for the Commission's collections of information as well as to OMB's inventory.

Information Collection Costs: The Commission seeks comments on the costs to comply with these requirements. It has projected the average annualized cost for all respondents to be:

Annualized Capital/Startup Costs: $201,425.

Annualized Costs (Operations & Maintenance) $0.00.

Total Annualized Costs: $201,545.

The OMB regulations require OMB to approve certain information collection requirements imposed by agency rule. Accordingly, pursuant to OMB regulations, the Commission is providing notice of its proposed information collections to OMB.

Title: FERC Form 121, Application for Maximum Lawful Price under the Natural Gas Policy Act of 1978, FERC-568, Well Category Determinations.

OMB Control No: 1902-0038 and 1902-0112.

The applicant shall not be penalized for failure to respond to this collection of information unless the collection of information displays a valid OMB control number.

Respondents: Business or other for profit, including small businesses.

Frequency of Responses: On occasion.

Necessity of the Information: The proposed rule reinstates the regulations to establish the procedures for the Commission to make determinations under NGPA Section 503. A determination by the Commission will enable producers of natural gas to claim credits for high cost gas as provided for by Section 29 of the Internal Revenue Code. The 10th Circuit held in a recent decision that a formal section 503 determination is required to obtain the Section 29 tax credit. The implementation of these data requirements will help the Commission to carry out its responsibilities under the NGPA.

Internal Review: The Commission has assured itself, by means of its internal review, that there is specific, objective support for the burden estimates associated with the information requirements. The Commission's Office of Markets, Tariffs, and Rates will use the data submitted by the information collections to determine whether it should affirm, reverse, remand, make a preliminary finding on, or take no action on an initial determination by a jurisdictional agency. The agency's initial determination is as to whether any natural gas produced under extraordinary conditions in terms of risks or costs can be considered as “high-cost natural gas” under Section 107(c) of the NGPA. These requirements have been reinstated as a result of the Court's decision to require well determinations in order to obtain Section 29 tax credits. These tax credits are available for qualified fuels through January 1, 2003 unless Congress should extend the program. These requirements conform to the Commission's plan for efficient information collection and management within the natural gas industry.

Interested persons may obtain information on the reporting requirements by contacting the following: Federal Energy Regulatory Commission, 888 First Street, NE Washington, DC 20426, [Attention: Michael Miller, Office of the Chief Information Officer, Phone: (202) 208-1415, fax: (202) 208-2425, email: mike.miller@ferc.fed.us].

For submitting comments concerning the collection of information(s) and the associated burden estimate(s), please send your comments to the contact listed above and to the Office of Management and Budget, Office of Information and Regulatory Affairs, Washington, DC 20503, [Attention: Desk Officer for the Federal Energy Regulatory Commission, phone: (202) 395-3087, fax: (202) 395-7285.]

Prior to taking final action on this proposed rulemaking, we are inviting written comments from interested persons. The Commission also is notifying each affected State Commission and is giving reasonable opportunity to each State Commission to present its views for our consideration. All comments in response to this notice should be submitted to the Office of Secretary, Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426, and should refer to Docket No. RM00-6-000. An original and fourteen (14) copies of such comments should be filed with the Commission on or before April 10, 2000.

In addition to filing paper copies, the Commission encourages the filing of comments either on computer diskette or via Internet E-Mail. Comments may be filed in the following formats: WordPerfect 8.0 or lower version, MS Word Office 97 or lower version, or ASCII format.

For diskette filing, include the following information on the diskette label: Docket No. RM00-6-000; the name of the filing entity; the software and version used to create the file; and the name and telephone number of a contact person.

For Internet E-Mail submittal, comments should be submitted to “comment.rm@ferc.fed.us” in the following format. On the subject line, specify Docket No. RM00-6-000. In the body of the E-Mail message, include the name of the filing entity; the software and version used to create the file, and the name and telephone number of the contact person. Attach the comments to the E-Mail in one of the formats specified above. The Commission will send an automatic acknowledgment to the sender's E-Mail address upon receipt. Questions on electronic filing should be directed to Brooks Carter at: 202-501-8145, E-Mail address: brooks.carter@ferc.fed.us.

Commenters should take note that, until the Commission amends its rules and regulations, the paper copy of the filing remains the official copy of the document submitted. Therefore, any discrepancies between the paper filing and the electronic filing or the diskette will be resolved by reference to the paper filing.

All written comments will be placed in the Commission's public files and will be available for inspection in the Commission's Public Reference room at 888 First Street, NE, Washington DC 20426, during regular business hours. Additionally, comments may be viewed, printed or downloaded remotely via the Internet through FERC's Homepage using the RIMS or CIPS link. RIMS contains all comments but only those comments submitted in electronic format are available on CIPS. User assistance is available at 202-208-2222, or by E-Mail to rimsmaster@ferc.fed.us.

In consideration of the foregoing, the Commission proposes to amend Part 270, Chapter I, Title 18 of the Code of Federal Regulations, as follows:

1. Part 270 is added to read as follows:

Under section 337 of the Tariff Act of 1930 (19 U.S.C. 1337), the Commission has the authority to conduct investigations into certain alleged unfair practices in import trade. Most complaints filed under this provision involve allegations of patent infringement, trademark infringement, or misappropriation of trade secrets. The Commission may determine that section 337 has been violated or, during the course of an investigation, that there is reason to believe that section 337 has been violated.

If the Commission finds a violation, or reason to believe there is a violation, of section 337, it may direct the Secretary of the Treasury to exclude the subject articles from entry into the U.S.

During the period the Commission' s exclusion order remains in effect, and prior to the date that the Commission's determination of a violation of section 337 becomes final, articles otherwise excluded may be entered under a single entry bond prescribed by the Secretary of the Treasury.

Certain statutory changes to section 337 of the Tariff Act of 1930 were enacted pursuant to the Uruguay Round Agreements Act (URAA), Pub. L. 103-465, 108 Stat. 4809 (December 8, 1994). Paragraphs (e)(1) and (j)(3) of section 337, as respectively amended by sections 321(a)(3) and (6) of the URAA, provide that articles subject to a Commission exclusion order may be entered under bond prescribed by the Secretary of the Treasury in an amount determined by the Commission to be sufficient to protect the complainant from any injury and that if the Commission later determines that the respondent has violated the provisions of section 337, the bond may be forfeited to the complainant.

Customs has determined that the amendments to section 337 effected by section 321 of the URAA, as described above, require changes to the Customs Regulations. It is Customs view that these amendments also warrant inclusion of the text of a special bond that indemnifies a complainant pursuant to the terms of section 337, as amended.

Section 12.39 of the Customs Regulations (19 CFR 12.39) sets forth provisions regarding imported articles involving unfair methods of competition or trade practices. Section 12.39(b)(1) identifies the manner by which such articles may be excluded from entry into the United States. Section 12.39(b)(2) provides that such excluded articles may be entitled to entry under a single entry bond in an amount determined by the Commission.

Section 113.62 of the Customs Regulations (19 CFR 113.62) sets forth basic importation and entry bond conditions. Section 113.62(l) identifies the consequence of default on certain agreements by which merchandise is released conditionally from Customs custody. Section 113.62(l)(1) provides, in pertinent part, that if a principal defaults on an agreement involving merchandise subject to an exclusion order of the Commission under 19 U.S.C. 1337 which has been released before such order becomes final, the obligors agree to pay the amount specified in the order for failure to redeliver such merchandise.

The specific regulatory amendments proposed in this document are explained in more detail below.

As mentioned previously, § 12.39(b)(2) provides that during the period the Commission's exclusion order remains in effect, excluded articles may be entered under a single entry bond in an amount determined by the Commission. This document proposes to amend § 12.39(b)(2) to provide that the bond must be in an amount determined by the Commission to be sufficient to protect the complainant from any injury and, if the Commission later determines that the respondent has violated the provisions of section 337, the bond may be forfeited to the complainant. These proposed changes reflect the amendments to sections 337(e)(1) and (j)(3) of the Tariff Act of 1930 enacted pursuant to sections 321(a)(3) and (6) of the URAA. The statutory amendments were enacted to bring Commission practice with respect to bonding requirements into closer conformity with district court practice. ]

It is further proposed that § 12.39(b)(2) be amended by deleting reference to Customs Form (CF) 301 and to the bond conditions set forth in § 113.62. The deletion of these terms reflects the fact that a CF 301 and § 113.62 pertain to basic importation and entry bonds. The single entry bond contemplated by § 12.39(b)(2), as amended, is a special importation and entry bond, not under cover of basic importation and entry bonds because the bond does not inure to the Treasury, but rather to the complainant, in the event of forfeiture.

It is proposed to add two new paragraphs to § 12.39(b)(2) which set forth the procedures for importing merchandise subject to the bonding requirements of sections 337(e)(1) and (j)(3). The first paragraph, (b)(2)(i), requires that a bond, in the amount determined by the Commission and containing the conditions identified in the text of the newly created special importation and entry bond, set forth in appendix B to part 113 of this chapter, be filed with the port director prior to entry. Paragraph (b)(2)(ii) directs that in the event of a forfeiture of this bond, § 210.50(d) of the United States International Trade Commission Regulations, (19 CFR 210.50(d)), will apply.

Section 113.62 is proposed to be amended by striking that portion of the existing introductory paragraph which reads, “except that a bond taken in the case of merchandise subject to an exclusion order of the International Trade Commission under 19 U.S.C. 1337 shall be a single entry bond.”

Section 113.62(l)(1) is proposed to be amended by striking that portion of the existing text which reads, “except that in the case of merchandise subject to an exclusion order of the International Trade Commission under 19 U.S.C. 1337 which has been released before such order becomes final, the obligors agree to pay liquidated damages in the amount specified in the order for failure to redeliver such merchandise.”

These two proposed amendments reflect that § 113.62 is to pertain only to basic importation and entry bonds and that the bond taken in the case of merchandise subject to an exclusion order of the Commission under 19 U.S.C. 1337 will be a special entry bond. Accordingly, all references to the bond taken out in regard to 19 U.S.C. 1337 are proposed to be removed from § 113.62.

It is proposed to create a new provision at § 113.74 which sets forth that a bond to indemnify a complainant under section 337 of the Tariff Act of 1930, as amended, is contained in appendix B to part 113. Section 113.74 would provide that the bond must be filed in accordance with the provisions set forth in § 12.39(b)(2), must be a single entry bond that contains the conditions listed in appendix B to part 113 and, for the forfeiture or return of the bond, the provisions of 19 CFR 210.50(d) will apply. The bond set forth in appendix B to part 113 is, of course, in addition to any other Customs requirements for the importation of merchandise subject to a section 337 exclusion order.

It is proposed to add an appendix B to part 113 which sets forth the bond conditions for a bond to indemnify a complainant under section 337 of the Tariff Act of 1930, as amended. The introductory paragraph to appendix B to part 113 would state that the provisions contained in §§ 12.39(b)(2) and 113.74 of the Customs Regulations and § 210.50(d) of the U.S. International Trade Commission Regulations will apply.

In consideration of the fact that the regulatory proposals discussed above include documentation requirements for the entry of merchandise covered by a Commission exclusion order, the “(a)(1)(A)” list set forth in the appendix to part 163 of the Customs Regulations (19 CFR part 163) will be modified accordingly if these proposed regulatory changes are adopted as a final rule.

Before adopting this proposal as a final rule, consideration will be given to any written comments timely submitted to Customs. Comments submitted will be available for public inspection in accordance with the Freedom of Information Act (5 U.S.C. 552), § 1.4 of the Treasury Department Regulations (31 CFR 1.4), and § 103.11(b) of the Customs Regulations (19 CFR 103.11(b)), on regular business days between the hours of 9 a.m. and 4:30 p.m. at the Regulations Branch, Office of Regulations and Rulings, U.S. Customs Service, 1300 Pennsylvania Avenue, NW, 3rd Floor, Washington, DC.

Because these proposed amendments to the Customs Regulations regarding bond procedures for articles subject to exclusion orders issued by the Commission merely reflect the terms of the statute, pursuant to the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. , it is certified that, if adopted, the proposed amendments will not have a significant impact on a substantial number of small entities. Further, these proposed amendments do not meet the criteria for a “significant regulatory action” as specified in E.O. 12866.

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507). Comments on the collection of information should be sent to OMB, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503. A copy should also be sent to the Regulations Branch at the address set forth above. Comments should be submitted within the time frame that comments are due regarding the substance of the proposal.

Comments are invited on:

(a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;

(b) The accuracy of the agency's estimate of the information collection burden;

(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d) Ways to minimize the information collection burden on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) Estimates of capital or start up costs and costs of operations, maintenance, and purchase of services to provide information.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The collection of information in these proposed regulations is in appendix B to part 113. The information requested is necessary to enable Customs to permit entry under a bond to indemnify a complainant under section 337 of the Tariff Act of 1930, as amended. The likely respondents are individuals or commercial organizations who seek to import merchandise which is the subject of a section 337 exclusion order into the U.S.

Estimated total annual reporting and/or recordkeeping burden: 25 hours.

Estimated average annual burden per respondent/recordkeeper: 30 minutes.

Estimated number of respondents and/or recordkeepers: 50.

Estimated annual frequency of response: 2.

Part 178 of the Customs Regulations (19 CFR part 178), which lists the information collections contained in the regulations and control numbers assigned by OMB, will be amended accordingly if this proposal is adopted.

The principal author of this document was Suzanne Karateew, Office of Regulations and Rulings, U.S. Customs Service. However, personnel from other offices participated in its development.

For the reasons stated in the preamble, parts 12 and 113 of the Customs Regulations (19 CFR parts 12 and 113) are proposed to be amended as follows:

The collection of information contained in this notice of proposed rulemaking has been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the IRS, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC 20224. Comments on the collection of information should be received by April 10, 2000. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information (see below);

How the quality, utility and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collection of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The collection of information in this proposed regulation is in §§ 1.883-1, 1.883-2, 1.883-3, 1.883-4, and 1.883-5. The information required in these sections will enable a foreign corporation to determine if it is eligible to exclude its income from the international operation of a ship or ships or aircraft from gross income on its U.S. Federal income tax return. The information required in these sections will also enable the IRS to monitor compliance with the provisions of the proposed regulations with respect to the stock ownership requirements of § 1.883-1(c)(2), and to make a preliminary determination of whether the foreign corporation is eligible to claim such an exemption and is accurately reporting income as required under section 6012.

The collection of information and responses to these collections of information are mandatory. The likely respondents are foreign corporations engaged in the international operation of a ship or ships or aircraft that wish to claim an exemption from U.S. tax under section 883, and certain of their shareholders owning (directly or indirectly) a majority of the value of the shares of such corporations.

Estimated total annual reporting/recordkeeping burden on corporations: 1,400 hours.

The estimated annual burden per respondent varies from 30 minutes to eight hours, depending on the circumstances of the foreign corporation, with an estimated average of one hour.

Estimated number of respondents: 1,400.

Estimated annual frequency of responses: Once.

Estimated total annual reporting burden on shareholders: 22,500 hours.

The estimated annual burden per respondent varies from 15 minutes to eight hours, depending on the circumstances of the shareholder or intermediary, with an estimated average of 90 minutes.

Estimated number of respondents: 15,000.

Estimated annual frequency of responses: Once.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Section 883 provides an exemption from gross income for earnings of a foreign corporation derived from the international operation of a ship or ships or aircraft (hereinafter ships or aircraft) if an equivalent exemption from tax is granted by the applicable foreign country to corporations organized in the United States. Section 883 has generally been referred to as the reciprocal exemption provision. Before 1986, section 883 eliminated U.S. tax on earnings from the operation of ships or aircraft derived by foreign persons, including U.S.-controlled foreign corporations, based on whether the country of documentation of the ship or registry of the aircraft provided an exemption to U.S. persons. Section 883 did not require a foreign transportation company to be organized or resident in the country of registration or documentation. Many countries offered various incentives, including no taxation, to non-resident shipping companies that registered ships in that jurisdiction (referred to as flagging-out or documenting ships under flags of convenience). Thus, foreign corporations that documented their ships in such flag of convenience countries could claim a reciprocal exemption from U.S. income tax.

Congress concluded in 1986 that the reciprocal exemption provisions were not meeting their original goal of reserving the right to tax transportation income to the country of residence of the taxpayer (and therefore to eliminate double taxation). In cases where residents of a country with which the United States might desire a reciprocal exemption used vessels or aircraft documented or registered under another flag, the unilateral U.S. concession provided under prior law left the country of residence little incentive to exempt U.S. shippers. Congress was concerned that U.S.-based transportation companies were at a competitive disadvantage because U.S. companies remained potentially subject to tax by the countries in which their foreign competitors were organized and resident.

Congress amended the reciprocal exemption provisions of section 883 to rectify this situation. Tax Reform Act of 1986, section 1212, Public Law 99-514, ((1986-3 C.B. 1) (the 1986 Act)), as amended by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Public Law 100-647 (1988-3 C.B. 1), and by the Omnibus Budget Reconciliation Act of 1989, Public Law 101-239 (1990-1 C.B. 210), (the 1986 Act, as amended). It is now irrelevant under section 883 where a ship is documented or an aircraft is registered. Instead, section 883 provides that a foreign corporation may qualify for the reciprocal exemption only if it is organized in a foreign country that grants corporations organized in the United States an equivalent exemption with respect to income derived from the international operation of ships or aircraft. In addition, more than 50 percent of the value of the stock of the foreign corporation must be owned by individuals who are residents of a foreign country that grants corporations organized in the United States an equivalent exemption. The 50 percent ownership requirement generally does not apply if the corporation is either a qualifying controlled foreign corporation (CFC) or if its stock is primarily and regularly traded on an established securities market in a qualified foreign country or the United States.

Since 1986, the United States and more than 30 foreign countries have entered into reciprocal exemption agreements incorporating the statutory amendments of section 883. In addition, more than 60 countries now provide an equivalent exemption through domestic law or an income tax convention. The current regulations under § 1.883-1, however, have not been amended to reflect the statutory changes enacted since 1986. This document proposes updated rules reflecting the statutory changes.

Section 1.883-1(a) provides the general rule. A foreign corporation engaged in the international operation of a ship or aircraft shall exclude from its gross income for U.S. Federal income tax purposes any income it derives from the international operation of ships or aircraft if such income is qualified income under paragraph (b) and if the corporation is a qualified foreign corporation under paragraph (c).

Section 1.883-1(b) provides that qualified income is income that is properly includible in an income category described in paragraph (h)(2) of this section and that is the subject of an equivalent exemption granted by the foreign country in which the foreign corporation seeking qualified foreign corporation status is organized.

Section 1.883-1(c)(1) describes the general requirements that a foreign corporation must satisfy to be considered a qualified foreign corporation. A qualified foreign corporation is a corporation, as defined in §§ 301.7701-2(b) and 301.7701-3, that is engaged in the international operation of ships or aircraft and that is organized in a qualified foreign country. A qualified foreign corporation must also satisfy one of the three stock ownership tests described in paragraph (c)(2) of this section as well as the substantiation and reporting requirements described in paragraph (c)(3) of this section.

Paragraph (c)(2) describes the three stock ownership tests. Generally, a foreign corporation must be able to demonstrate and document that more than fifty percent of the value of its stock is owned by qualified shareholders, as determined under § 1.883-4 (qualified shareholder stock ownership test). However, a foreign corporation will not be required to demonstrate that it satisfies the qualified shareholder stock ownership test if it can demonstrate either that its stock is primarily and regularly traded on an established securities market in a qualified foreign country or in the United States, as determined under § 1.883-2 (publicly-traded test), or that it is a qualifying controlled foreign corporation as determined under § 1.883-3 (CFC test).

To satisfy the substantiation and reporting requirements described in paragraph (c)(3) of this section, a foreign corporation must include the information set out in that paragraph in its Form 1120F, “U.S. Income Tax Return of a Foreign Corporation,” in such form and manner as the Form 1120F and its accompanying instructions prescribe. The information to be submitted with the return includes information set out in §§ 1.883-2(f), 1.883-3(d) and 1.883-4(e), as applicable, relating to information demonstrating that the foreign corporation satisfies one of the three stock ownership tests. Section 1.883-5(c) provides a transition rule that will require such information to be included in a statement attached to the return until the Form 1120F and its instructions are amended to conform to final regulations under this section.

Paragraph (c)(3)(ii) provides that if the Commissioner requests in writing that the foreign corporation substantiate representations made under paragraph (c)(3)(i) of this section, or under § 1.883-2(f), 1.882-3(d) or 1.883-4(e), the foreign corporation must provide the supporting documentation or substantiation within 60 days following the written request. If the foreign corporation does not provide all of the information requested within the 60 day period but demonstrates that the failure was due to reasonable cause and not willful neglect, the Commissioner may grant the foreign corporation a 30-day extension to provide the supporting documentation or substantiation. Whether a failure to obtain the documentation or substantiation in a timely manner was due to reasonable cause shall be determined by the Commissioner after considering all the facts and circumstances.

Paragraph (c)(4) contains a rule that allows the Commissioner to retain the right to cure any defects in the documentation where the Commissioner is satisfied that the foreign corporation would otherwise be a qualified foreign corporation.

Paragraph (d) defines a qualified foreign country as a foreign country that grants an equivalent exemption to corporations organized in the United States for the relevant category of qualified income earned by the foreign corporation seeking qualified foreign corporation status. A foreign country may be a qualified foreign country with respect to one category of income but not with respect to other categories of income.

Section 1.883-1(e) explains what it means to be engaged in the operation of ships or aircraft for purposes of these proposed rules and provides examples of activities that are not treated as the operation of ships or aircraft. Under the general rule, only a corporation that is an owner, lessor, or lessee of an entire ship or aircraft used to carry cargo or persons for hire can be considered engaged in the operation of ships or aircraft.

The term operation of ships or aircraft, which includes the operation of a single ship or aircraft, means: The carrying of cargo or passengers for hire; the time or voyage charter of a ship or the wet lease of an aircraft, as those terms are defined in the regulations; and the bareboat charter of a ship or the dry lease of an aircraft, as those terms are defined in the regulations. The term also includes active participation by a corporation that is otherwise engaged in the operation of ships or aircraft in a pool, partnership, strategic alliance, joint operating agreement or code sharing arrangement, or other joint venture that is itself engaged in the operation of ships or aircraft.

Paragraph (e)(2) provides as examples that activities of the following will not be considered operation of ships or aircraft: A non-vessel operating common carrier (an NVOCC); a space or slot charterer; a ship management company; a company that obtains ships crews; a ship's agent; a ship or aircraft broker; a freight forwarder; a travel agent; a tour operator; a pure container leasing company; a passive investor in a shipping or aircraft business; or a concessionaire. The proposed rule also provides the definitions of a number of relevant terms.

Section 1.883-1(f) distinguishes international from domestic operation of ships or aircraft. In TAMRA, Congress directed that transportation income derived solely from sources within the United States under section 863(c)(1) should not be granted exemption from U.S. income taxation under section 883. Congress also specified, however, that the reciprocal exemption generally should be available for income from international transport activity that is treated as 50 percent U.S. source income under section 863(c)(2). This is the same type of income on which the gross basis tax of section 887 generally would be imposed. See, S. Rep. No. 100-445, 100th Cong., 2d Sess. 241-242 (1988). However, the reciprocal exemption may not necessarily be available to all types of persons earning that type of income.

To carry out Congress's intent, § 1.883-1(f)(1) defines the term international operation to mean the operation of ships or aircraft on voyages or flights that begin or end in the United States and correspondingly end or begin in a foreign country, determined on a passenger-by-passenger or cargo-by-cargo basis, as discussed below. The term specifically excludes a “cruise to nowhere” that begins in a U.S. port, travels out into open waters beyond the territorial limits of the United States, and then returns to the U.S. port of origin without touching a foreign port during the voyage. The fact that a ship travels beyond United States territorial limits does not, in itself, constitute international operation of ships or aircraft if there is no stop in a foreign country, as determined under paragraph (f)(2). The same rules apply for aircraft.

Paragraph (f)(2) provides rules for determining the beginning and ending points of a voyage for purposes of the definition of the term international operation. Except in the case of a round trip cruise, the carriage of a passenger will be treated as ending at the passenger's final destination even if, en route to the passenger's final destination, a stop is made at a U.S. intermediate point for refueling, maintenance, or other business reasons, provided the passenger does not change aircraft or ships at the U.S. intermediate point. Similarly, carriage of a passenger will be treated as beginning at the passenger's point of origin even if en route to the passenger's final destination, a stop is made at a U.S. intermediate point provided the passenger does not change aircraft or ships at the U.S. intermediate point. Carriage of a passenger will be treated as beginning or ending at a U.S. intermediate point if the passenger changes aircraft or ships at that location. See, H.R. Rep No. 432, 98th Cong., 2d Sess. 1340 (1984); H.R. Rep. No. 861, 98th Cong., 2d Sess. 934 (1984).

The carriage of a passenger on a round trip cruise that begins in the United States and stops at one or more foreign ports for day excursions, maintenance or other business reasons, and returns to the same or another U.S. port will be treated as the international operation of a ship. Pursuant to paragraph (f)(2)(i)(A) such a round trip cruise may also include one or more intermediate stops at a U.S. port or ports for similar purposes.

Carriage of cargo will be treated as ending at the final destination of the cargo even if, en route to that final destination, a stop is made at a U.S. intermediate point, provided that the cargo is transported to its ultimate destination on the same ship or aircraft, or provided the same taxpayer transports the cargo to and from the U.S. intermediate point and the cargo does not pass through customs at the U.S. intermediate point. Similarly, carriage of cargo will be treated as beginning at the cargo's point of origin even if, en route to its final destination, a stop is made at a U.S. intermediate point, provided that the cargo is transported to its ultimate destination on the same ship or aircraft or provided both that the same taxpayer transports the cargo on both legs of the trip and that the cargo does not pass through customs at the U.S. intermediate point. Repackaging, recontainerization, or any other activity involving the unloading of the cargo at the U.S. intermediate point will not change these results. See, H.R. Rep No. 432, 98th Cong., 2d Sess. 1340 (1984); H.R. Rep. No. 861, 98th Cong., 2d Sess. 934 (1984), reprinted in 1984-3 C.B. Vol.2., 1, 188.

Whether income is from international operation is generally to be determined on a passenger-by-passenger and item of cargo-by-item of cargo basis. In the case of income from the bareboat charter of a ship or the dry lease of an aircraft, whether the charter income is derived from international operation is determined by reference to the use of the ship or aircraft by the lowest-tier lessee-operator in the chain of lessees.

A person that is the lessor of a ship under a bareboat charter or of an aircraft under a dry lease will be treated as engaged in the international operation of such ship or aircraft to the extent that the lowest-tier lessee-operator in the chain of ownership uses such ship or aircraft for the international carriage of passengers or cargo for hire during the shorter of the period of the charter or the taxable year. Paragraph (f)(2)(iii) adopts the guidance in section 5.02 of Rev. Proc. 91-12 (1991-1 C.B. 473), for determining the amount of income from the bareboat charter of a ship or the dry lease of an aircraft that is treated as derived from the international operation of the ship or aircraft. The rule provides that a foreign corporation must use a reasonable method for determining the proportion of the charter income that is attributable to such international operation.

One reasonable method, described in § 1.883-1(f)(2)(iii)(A), is based on the proportion of the days in the term of the charter or the taxable year, whichever is shorter, that the ship or aircraft is used in international operation by the lowest tier lessee-operator in its chain of lessees. For this purpose, the number of days during which the ship or aircraft is not generating transportation income, within the meaning of section 863(c)(2) (for example, days during which the ship or aircraft is out of service while being repaired or maintained) should not be included in the numerator of the ratio. Another reasonable method described in paragraph (f)(2)(iii)(B) is based on the proportion of the gross income of the lowest tier lessee-operator of the ship or aircraft derived from the international operation of the ship or aircraft during the taxable year. An allocation based on the net income of such lessee-operator will not be considered reasonable for this purpose due to the administrative difficulties involved in determining and verifying the proper allocation of the operator's expenses.

Some corporations engaged in the operation of ships or aircraft earn income from activities that are so closely related to the primary activity of operation of ships or aircraft that it is appropriate to exclude income from these activities from taxation under section 883 of the Code. By contrast, in cases where the operator's activities are not so closely related to the primary activity of operation of ships or aircraft, it is not appropriate to exclude the income from such activities from taxation.

The purpose of § 1.883-1(g) is to provide rules for determining when a closely related activity is incidental to the business of the international operation of ships or aircraft. Paragraph (g)(1) provides examples of activities that will be considered incidental to the international operation of ships or aircraft. For example, where a ship operator contracts for the international carriage of cargo or passengers on a second operator's ship, the activity may be incidental to the international operation of a ship by the first operator. Other examples are: the temporary investment of working capital funds; the sale of tickets for international travel by a ship operator for another ship operator, or by an air carrier for another air carrier; the rental by the operator of a ship or aircraft of containers and related equipment used in connection with the international operation of its ship or aircraft; and bareboat charter of ships or aircraft normally operated on international voyages or flights but currently not needed by the operator, and that are used for international voyages or flights by the lessee/charterer.

If an operator enters into a contract that requires a concessionaire to provide services onboard during the international operation of the operator's ship or aircraft and if the operator receives income from such services, then the income of the operator is appropriately treated as incidental to the operation of the ship or aircraft by the operator.

Paragraph (g)(2) provides examples of activities that are not considered incidental to the international operation of ships or aircraft. These examples include: the sale of or arranging for train travel, bus transfers, land tour packages, or port city hotel accommodations within the United States or a foreign country; and the sale of airline tickets by a cruise ship operator or cruise tickets by an air carrier. Further examples include the sale or rental of U.S. real property; treasury activities involving the investment of excess funds or funds awaiting repatriation generated by the operation of ships or aircraft; rental of containers for a domestic leg of transportation in connection with international carriage of cargo; mere passive investment in an enterprise engaged in the international operation of ships or aircraft; services performed by the operator for parties other than passengers, consignors or consignees; or the carriage of passengers or cargo on ships or aircraft on domestic legs, not treated as international operation, either by the foreign operator or by a U.S. member of a joint operating agreement, such as a code sharing arrangement, pooling or alliance.

Section 1.883-1(h)(1) addresses the conditions under which a foreign country's exemption of certain categories of income from income tax may constitute an “equivalent exemption” within the meaning of section 883 of the Code. A foreign country will be considered to grant an equivalent exemption if: the foreign country generally imposes no tax on income, including income from the international operation of ships or aircraft; the foreign country specifically provides a domestic law exemption from a tax on income from the international operation of ships or aircraft either by statute, decree, or otherwise; or the foreign country provides for a reciprocal exemption by means of an exchange of diplomatic notes or other agreement with the United States. In addition, solely with respect to determining whether a shareholder is a resident of a qualified foreign country in § 1.883-4 (for purposes of the qualified shareholder stock ownership test), the foreign country may provide a reciprocal exemption with respect to income from the international operation of ships or aircraft by means of an income tax convention with the United States. Paragraph (h)(3) of this section discusses under what circumstances an income tax convention will be considered to provide an equivalent exemption.

Whether a foreign country provides an equivalent exemption is determined separately with respect to each of the following categories of income—

(A) Income from the carriage of cargo and passengers;

(B) Time or voyage (full) charter income;

(C) Bareboat charter income;

(D) Incidental bareboat charter income;

(E) Incidental container-related income;

(F) Any other income that is incidental to the business of operating ships or aircraft; or

(G) Gains of the operator from the sale, exchange or other disposition of a ship, aircraft, container or related equipment or other moveable property used by that operator in international operation.

If an equivalent exemption is not granted by the foreign country for a category of income, income in that category cannot be exempted from U.S. tax regardless of whether the foreign country grants an equivalent exemption for other categories of income. Furthermore, an equivalent exemption may be available for income derived from the international operation of ships even though income derived from the international operation of aircraft may not be exempt, and vice versa.

Section 1.883-1(h)(3) contains a special rule regarding income tax conventions. If a foreign corporation is organized in a foreign country that provides an equivalent exemption only through an income tax convention with the United States, the foreign corporation may claim benefits under section 894 and the income tax convention, but not under section 883. See, H.R. Rep. No. 841, 99th Cong., 2d Sess., (1986); Staff of joint Comm. on Taxation, 100th Cong., 1st Sess., General Explanation of the Tax Reform Act of 1986, 931 (1987). If, however, the foreign corporation is organized in a country that offers an equivalent exemption under an income tax convention and also by some other means, such as by a diplomatic note, the foreign corporation may choose annually whether it will claim an exemption under section 894 and the income tax convention or under section 883 by means of the diplomatic note. Such an election must be made with respect to all income of the foreign corporation from the international operation of ships or aircraft and cannot be made separately with respect to each category of such income. If a foreign corporation elects to be covered under section 883 rather than under the income tax convention, the foreign corporation must satisfy the requirements of this proposed rule, including demonstrating that it satisfies the stock ownership test of paragraph (c)(2) of this section.

Section 1.883-1(h)(4) describes certain foreign residence-based taxation systems that may not satisfy the equivalent exemption requirements of this section. For example, the exemption granted by a foreign country's law or income tax convention must be a complete exemption and not merely a reduction to a non-zero rate of tax levied against corporations organized in the United States engaged in the international operation of ships or aircraft, except in the case of a reduction to a zero rate for an unlimited period of time. An exemption granted by a foreign country's law that reduces the rate of tax to a zero rate for only a limited period of time, such as in the case of a tax holiday, would not be considered a complete exemption for purposes of this rule.

Similarly, many foreign countries impose tax only on the income of ships or aircraft derived from transporting cargoes into, but not out of, the country or vice versa. Such a foreign country will not be treated as granting an equivalent exemption on the non-taxed income. For example, a foreign country that imposes tax only on the transportation of cargo carried out of the country (outbound freight) will not be treated as granting an equivalent exemption for income from the transporting of cargo into that country (inbound freight). Thus, if a corporation organized in such a country derives U.S. source income from voyages that end in the United States, it cannot claim an exemption on the basis of an equivalent exemption granted by the foreign country for inbound freight income. With respect to the carriage of cargo, the foreign country must provide an exemption from tax for income from transporting cargo both inbound and outbound before it will be considered to grant an equivalent exemption.

An equivalent exemption also does not arise where a foreign country only exempts tax on specific types of cargo. Unless a country exempts income from transporting all types of cargo, it will not be considered to grant an equivalent exemption for purposes of this section.

A foreign country that has a territorial tax system will be considered to grant an equivalent exemption only if the tax system treats income from the international operation of ships or aircraft as 100 percent foreign source, and thereby not subject to tax, even if the income is derived from a voyage or flight that begins or ends in that foreign country.

Pursuant to authority provided in section 883(a)(5) of the Code, these rules provide that if a foreign country generally grants an equivalent exemption to corporations organized in the United States, but also imposes a residence-based tax on certain corporations organized in the United States, the foreign country may nevertheless be considered to grant an equivalent exemption and to be a qualified foreign country if the residence-based tax is imposed only on a corporation organized in the United States that is treated as a resident of the other country because its place of management or control, or other comparable standard, is in that foreign country. See, H.R. Rep. No. 247, 101st Cong., 1st Sess. 1415 (1989). If instead the residence-based tax is imposed on a corporation organized in the United States that is not managed and controlled in that foreign country, the foreign country would not be treated as a qualified foreign country and would not grant an equivalent exemption for purposes of this section.

Finally, a foreign country must provide an exemption from tax for all income in a category of income, as defined in paragraph (h)(2) of this section. For example, a country that exempts income from the bareboat charter of passenger aircraft but not the bareboat charter of cargo aircraft does not provide an equivalent exemption for income from bareboat charter of aircraft.

Pursuant to section 872(b)(7), the proposed rule explains in § 1.883-1(i) that a possession of the United States is considered to be a foreign country for purposes of this proposed rule. Thus, a possession on a mirror system is a qualified foreign country and is considered to grant an equivalent exemption to corporations organized in the United States. The term mirror system refers to the general applicability of the Code in the possession with the name of the possession substituted for United States in the Code where appropriate. Therefore, a qualified foreign corporation that is organized in a possession on a mirror system, and that operates a transportation business between the possession and the United States, could exclude its income from the international operation of ships or aircraft from its gross income for purposes of U.S. Federal income tax and such income could be exempt from U.S. income tax. In cases where a possession is not on a mirror system, the possession may nevertheless be a qualified foreign country if, for example, it provides for an equivalent exemption through its internal law.

Section 1.883-1(j) confirms the rule of section 265(a)(1). If a qualified foreign corporation derives income from a non-exempt activity as well as qualified income, and both are effectively connected with the conduct of a U.S. trade or business, the foreign corporation may not deduct from any income derived from the non-exempt activity any amount otherwise allowable as a deduction from qualified income that is excluded from gross income and exempt under this proposed rule.

As provided in § 1.883-1(c)(2), a foreign corporation must satisfy one of three stock ownership tests to be considered a qualified foreign corporation. It must demonstrate that more than fifty percent of the value of its stock is owned by qualified shareholders, as determined under § 1.883-4 (qualified shareholder test) or that its stock is primarily and regularly traded on an established securities market in a qualified foreign country or in the United States, as determined under § 1.883-2 (publicly-traded test), or that it is a controlled foreign corporation as determined under § 1.883-3 (CFC test). Separate reporting and documentation requirements apply to each test. A foreign corporation that satisfies the publicly-traded test or the CFC test and its relevant reporting and documentation requirements does not have to comply with the reporting and documentation requirements of the qualified shareholder test.

The branch profits tax rules under § 1.884-5(d) provide the framework for the publicly traded test due to the strong similarities between the statutory language in sections 883(c) and 884(d)(4)(B) and the fact that both statutes were first enacted as part of the Tax Reform Act of 1986. Section 1.883-2(a) provides that a corporation is a publicly-traded corporation if its stock is primarily and regularly traded on one or more established securities markets in any qualified foreign country or in the United States. The proposed rule generally follows § 1.884-5(d)(2) of the branch profits tax regulations in defining the term established securities market, except that the proposed rule does not require the foreign securities exchange to be the principal exchange in a country. In addition, the proposed rule follows § 1.884-5(d)(3) in defining the term primarily traded, except that in the proposed rule the corporation's stock may be traded in any qualified foreign country or the United States and is not limited to trading only in the country where the corporation is organized or the United States.

Similarly, the proposed rule follows § 1.884-5(d)(4)(i) in defining the general rule for the term regularly traded. Section 1.883-2(d) provides that stock of a foreign corporation is regularly traded if one or more classes of stock of the corporation that, in the aggregate, represent 80 percent or more of the total combined voting power of all classes of stock of such corporation entitled to vote and 80 percent or more of the total value of all classes of stock of such corporation are listed on an established securities market or markets during the taxable year; and, with respect to each class relied on to meet the 80 percent requirement, trades in each such class are effected, other than in de minimis quantities, on such market or markets on at least 60 days during the taxable year (or 1/6 of the number of days in a short taxable year). In addition, the aggregate number of shares in each such class that are traded on such market or markets during the taxable year must be at least 10 percent of the average number of shares outstanding in that class during the taxable year (or, in the case of a short taxable year, a percentage that equals at least 10 percent of the average number of shares outstanding in that class during the short taxable year multiplied by the number of days in the short taxable year, divided by 365).

In addition, if a class of stock of the foreign corporation is traded on an established securities market in the United States, and it is regularly quoted by brokers or dealers making a market in the stock, it can also be treated as meeting the trading requirements, provided that the closely-held exception, described below, does not apply. A broker or dealer makes a market in a stock only if the broker or dealer holds himself out to buy or sell the stock at the quoted price.

A closely-held class of stock, as set out in § 1.883-2(d)(3)(i), cannot be treated as meeting the trading requirements of the publicly-traded stock ownership test. See, § 1.884-5(d)(4)(iii)(A). Section 1.883-2(d)(3)(i) provides that a class of stock is closely held if at any time during the taxable year, one or more 5 percent shareholders own, in the aggregate, 50 percent or more of the value of the outstanding shares of the class of stock at any time during the taxable year. A five percent shareholder is any person who owns at least five percent of the value of the outstanding shares of the class of stock, taking into account stock owned by related persons. See § 1.883-2(d)(3)(iii). See also § 1.884-5(d)(4)(iii)(B).

For this purpose, persons will be treated as related if they are related within the meaning of section 267(b). In determining whether two or more corporations are members of the same controlled group under section 267(b)(3), a person is considered to own stock owned directly by such person, stock owned with the application of section 1563(e)(1), and stock owned with the application of section 267(c). Further, in determining whether a corporation is related to a partnership under section 267(b)(10), a person is considered to own the partnership interest owned directly by such person and the partnership interest owned with the application of section 267(e)(3).

The closely-held test in this proposed rule differs in one significant respect from the rule in the branch profits tax regulations. The proposed rule allows the foreign corporation to look through the five percent shareholders of the closely-held class to the ultimate owners and to demonstrate that such owners are qualified shareholders, provided no shares of stock in the chain of ownership are issued in bearer form. In the proposed rule, a class of stock of a foreign corporation that is otherwise regularly traded but is also closely-held will be treated as regularly traded if the foreign corporation demonstrates that more than 50 percent of the value of that class of stock is owned, or is treated as owned by applying the rules of attribution contained in § 1.883-4(c), by qualified shareholders for more than half of the days of the taxable year. The requirements for being treated as a qualified shareholder are described in § 1.883-4(b). Under this rule, an individual cannot be treated as a qualified shareholder if any corporation in the relevant chain of ownership issues stock in bearer form.

Thus, a foreign corporation with a class of stock that is closely-held may nevertheless count that class as regularly traded provided that the foreign corporation is able to establish that more than 50 percent of the value of the entire class of stock is owned (for example, through a partnership, trust or holding company) by persons who would themselves be qualified shareholders. The branch profits tax regulations do not treat a closely-held class of stock as regularly traded if 50 percent or more of the value of the closely-held block is owned by one or more 5 percent shareholders who are not qualifying shareholders, as defined in § 1.884-5(b)(1) and those regulations do not permit the foreign corporation to look beyond the 5 percent shareholders to the owners. The IRS is considering whether to make conforming changes to § 1.884-5(d)(4)(iii).

Paragraph (d)(4) is similar to § 1.884-5(d)(4)(iv) and provides that trades between related persons described in section 267(b), as modified by § 1.883-2(d)(3)(iii), and trades conducted in order to meet the regularly traded requirements are disregarded. A class of stock shall not be treated as meeting the trading requirements if there is a pattern of trades conducted to meet such requirements. For example, trades between two persons that occur several times during the taxable year may be treated as an arrangement or a pattern of trades conducted to meet the trading requirements of paragraph (d) of this section.

Section 1.883-2(d)(5) provides an example to illustrate the application of the rules regarding regularly traded stock and the closely-held exception.

Section 1.883-2(e) provides that a foreign corporation relying on the publicly-traded stock ownership test to establish that it satisfies the stock ownership test of § 1.883-1(c)(2) must substantiate that it meets such requirements. The proposed rule requires, for example, that if a class of stock of a foreign corporation is closely-held within the meaning of paragraph (d)(3)(i), then the foreign corporation must obtain an ownership statement from each qualified shareholder upon whom it relies to meet the exception to the closely-held test. The ownership statements are described in § 1.883-4(d). In addition, the foreign corporation must maintain and provide to the Commissioner upon request a list of its shareholders of record and any other relevant information.

Section 1.883-2(f) describes the information that the foreign corporation must include in its Form 1120F in order to rely on the publicly-traded stock ownership test to satisfy the stock ownership test of § 1.883-1(c)(2).

Section 1.883-3 provides rules that a foreign corporation must follow if the foreign corporation relies on this section to satisfy the stock ownership test of § 1.883-1(c)(2). A controlled foreign corporation (CFC) satisfies the stock ownership test of § 1.883-1(c)(2) if it is organized in a qualified foreign country, satisfies the income inclusion test of paragraph (b) of this section, and satisfies the documentation and reporting requirements of paragraphs (c) and (d) of this section, respectively (the CFC test). For purposes of these proposed rules, a CFC that fails the income inclusion test may only satisfy the stock ownership test of § 1.883-1(c)(2) if the CFC demonstrates that it meets either the publicly traded test of § 1.883-2 or the qualified shareholder test of § 1.883-4.

To satisfy the income inclusion test of paragraph (b), the foreign corporation must be a CFC as defined in section 957(a) if such section were applied without regard to section 318(a)(4). In addition, more than 50 percent of the CFC's subpart F income (as defined in section 952) derived from the international operation of ships or aircraft must be included, pursuant to section 951, in the gross income of one or more U.S. citizens, individual residents of the United States or domestic corporations for the taxable years of such persons in which the taxable year of the CFC ends. This additional requirement was included in order to prevent inappropriate extension of benefits under section 883. The rule is illustrated by two examples.

Paragraph (c) provides that a CFC relying on this section to satisfy the stock ownership test of § 1.883-1(c)(2) must establish all the facts necessary to satisfy the Commissioner that it qualifies under the CFC stock ownership test. To meet this requirement with respect to the income inclusion test, the CFC must obtain the documentation described in paragraph (c)(2). This documentation includes a copy for the taxable year of the Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations (if otherwise required to be filed) prepared by or on behalf of any U.S. shareholder that is a partnership, estate or trust. In addition, the documentation must include a written statement from each such U.S. shareholder that is a partnership, estate or trust providing the name, address, taxpayer identification number and percentage of interest in the U.S. shareholder held by each partner, beneficiary or other interest owner that is a U.S. citizen, individual resident of the United States or domestic corporation.

Finally, paragraph (d) explains that if a CFC is relying on this section to satisfy the stock ownership test of § 1.883-1(c)(2), it must include certain additional information in its Form 1120F for the taxable year, along with the information required to be included in its return by § 1.883-1(c)(3). This additional information is set out in paragraph (d) and should be current as of the end of the corporation's taxable year.

Section 1.883-4(a) provides that a foreign corporation shall satisfy the stock ownership test of § 1.883-1(c)(2) if more than 50 percent of its stock (by value) is owned, or treated as owned by applying the attribution rules of paragraph (c) of this section, for at least half of the number of days in the foreign corporation's taxable year by one or more qualified shareholders. In addition, a foreign corporation must meet the substantiation and reporting requirements of paragraphs (d) and (e) of this section (qualified shareholder stock ownership test).

Paragraph (b)(1) of this section explains that a shareholder is a qualified shareholder only if the shareholder meets certain criteria. First, the shareholder must be a resident in a country that offers an equivalent exemption for the same type of income as that earned by the foreign corporation. Second, the shareholder must not own its interest in the foreign corporation through bearer shares either directly or by applying the attribution rules of paragraph (c) of this section. Third, the shareholder must provide to the foreign corporation the documentation required in paragraph (d) of this section and the foreign corporation must meet the reporting requirements of paragraph (e) of this section with respect to such shareholder. Finally, the shareholder must be described in one of the following categories of qualified shareholders—

(A) An individual who is not a beneficiary of a pension fund, as described in paragraph (E), and who is a resident of a qualified foreign country, as determined under paragraph (b)(2);

(B) The government of a qualified foreign country (or a political subdivision or local authority of such country);

(C) A foreign corporation that is organized in a qualified foreign country and meets the publicly traded rules of § 1.883-2;

(D) A not-for-profit organization described in paragraph (b)(4) of this section that is not a pension fund as defined in paragraph (b)(5) of this section and that is organized in a qualified foreign country; or

(E) A beneficiary of a pension fund (as defined in paragraph (b)(5)(iv) of this section) administered in or by a qualified foreign country (whose residency is determined under paragraph (d)(3)).

Paragraph (b)(2) of this section explains when an individual is a resident of a qualified foreign country for purposes of this proposed rule. An individual is a resident of a qualified foreign country only if the individual is fully liable to tax as a resident in such country (for example, an individual who is liable to tax only on a remittance basis in a foreign country may not be treated as a resident of that country), and in addition, either: (1) The individual's tax home, within the meaning of paragraph (b)(2)(ii) of this section, is within that qualified foreign country 183 days or more of the taxable year; or (2) the individual is treated as a resident of a qualified foreign country based on special rules pursuant to paragraphs (d)(3) of this section.

Paragraph (b)(2)(ii) explains that for purposes of this section an individual's tax home is considered to be located at the individual's regular or principal (if more than one regular) place of business. If the individual has no regular or principal place of business because of the nature of his business (or lack of a business), then the individual's tax home is located at his regular place of abode in a real and substantial sense. If an individual has no regular or principal place of business and no regular place of abode in a real and substantial sense in a qualified foreign country for 183 days or more of the taxable year, that individual does not have a tax home for purposes of this section and, therefore, is not a qualified shareholder unless either a special rule in paragraphs (d)(3)(ii) through (v) of this section applies or the individual demonstrates that he is fully liable to tax as a resident in such country. If further guidance is needed to determine the tax home of an individual for the purpose of determining whether the individual is a qualified shareholder under this paragraph, the proposed rule anticipates that the foreign corporation would look to published guidance under section 911(d)(3), with the exception of guidance relating to the treatment of itinerants.

Paragraph (b)(3) provides that a shareholder otherwise described in paragraph (b)(1) of this section may be a resident of a foreign country that provides an equivalent exemption for the category of income at issue through an income tax convention with the United States. If the shareholder relies on the convention to demonstrate that the country of residence provides an equivalent exemption and the convention has a requirement in the shipping and air transport article other than residence, such as place of registration or documentation of the ship or aircraft, or in the limitation on benefits article, such as a percentage of resident ownership, the shareholder is not a qualified shareholder unless the corporation seeking qualified foreign corporation status would satisfy any such additional requirement if it were organized in such foreign country. The proposed rule offers two examples to illustrate this rule.

Paragraph (b)(4) explains the requirements for a not-for-profit organization to be a qualified shareholder. This rule generally follows the rules in the first paragraph of § 1.884-5(b)(1)(iv) of the branch profits tax regulations. Similarly, paragraph (b)(5) explains the requirements that a pension fund must satisfy in order for its beneficiaries to be qualified shareholders. The proposed rule addresses both government and non-government pension funds and defines the term beneficiary of a pension fund. This paragraph generally follows § 1.884-5(b)(8)(i) through (iii) of the branch profits tax regulations.

Paragraph (c) of this section contains the rules for determining constructive ownership for purposes of applying the stock ownership test of § 1.883-1(c)(2) and the qualified shareholder stock ownership test of paragraph (a) of this section. Paragraph (c)(1) provides that stock owned by or for a corporation, partnership, trust, estate, or mutual insurance company or similar entity shall be treated as owned proportionately by its shareholders, partners, beneficiaries, grantors, or other interest holders as provided in paragraphs (c)(2)through (6) of this section. The proportionate interest rules of this paragraph apply successively upward through a chain of ownership, and a person's proportionate interest shall be computed for the relevant days or period that is taken into account in determining whether a foreign corporation satisfies the requirements of paragraph (a) of this section. Stock treated as owned by a person by reason of this paragraph shall be treated as actually owned by such person for purposes of this section. An owner of an interest in an association taxable as a corporation shall be treated as a shareholder of such association for purposes of this paragraph (c).

Paragraph (c)(2) explains that a partner shall be treated as having an interest in stock of a foreign corporation owned by a partnership in proportion to the least of three distributive shares: The partner's percentage distributive share of the partnership's dividend income from the stock; the partner's percentage distributive share of gain from disposition of the stock by the partnership; or the partner's percentage distributive share of the stock (or proceeds from the disposition of the stock) upon liquidation of the partnership. This rule generally follows the constructive ownership rules in § 1.884-5(b)(2)(ii) of the branch profits tax regulations. It differs, however, because all qualified shareholders that are partners in a partnership and that are residents of, or organized in, the same qualified foreign country shall be treated as one partner. Thus, the percentage distributive shares of dividend income, gain and liquidation rights of all qualified shareholders that are partners in a partnership and that are residents of, or organized in, the same qualified foreign country are aggregated prior to determining the least of the three percentages set out in paragraph (c)(2)(i) of this section. This divergence was necessary because one country may be a qualified foreign country while another may not and it is necessary for the foreign corporation to identify the value of the stock owned by residents of each country. Several examples illustrate the rules of this paragraph.

Paragraph (c)(3) of this section provides rules for determining the owners of stock owned by or for a trust or estate. These rules generally adopt the rules of § 1.884-5(b)(2)(iii) of the branch profits tax regulations. Similarly, paragraphs (c)(4) and (5) provide rules for determining the owners of stock owned by corporations that issue stock and by mutual insurance companies and similar entities, respectively. These rules adopt the rules of § 1.884-5(b)(2)(iv) and (v) of the branch profits tax regulations, respectively.

Paragraph (c)(6) explains how to compute the beneficial interests of individuals in non-government pension funds. This rule differs from the rule in § 1.884-5(b)(8)(iv) of the branch profits tax regulations in that the proposed rule provides that stock held by a non-government pension fund shall be considered owned by the beneficiaries of the fund equally on a pro-rata basis if certain conditions are met. For example, the trustees, directors or other administrators of the pension fund must have no knowledge, and no reason to know, that a pro-rata allocation of interests of the fund to all beneficiaries would differ significantly from an actuarial allocation of interests in the fund (or, if the beneficiaries' actuarial interest in the stock held directly or indirectly by the pension fund differs from the beneficiaries's actuarial interest in the pension fund, that a pro-rata allocation of interests of the fund to all beneficiaries would differ significantly from the actuarial interests computed by reference to the beneficiaries' actuarial interest in the stock).

The branch profits tax regulations determine such beneficial interests on an actuarial basis. The other conditions that must be satisfied generally follow those set out in § 1.884-5(b)(8)(iv).

Paragraph (d)(1) provides that a foreign corporation that relies on this section to satisfy the ownership requirements of § 1.883-1(c)(2), must establish all the facts necessary to satisfy the Commissioner that more than 50 percent of the value of its shares is owned, or treated as owned by applying paragraph (c) of this section, by qualified shareholders. A foreign corporation cannot meet this requirement with respect to any stock issued in bearer form. A shareholder that holds shares in the foreign corporation either directly or indirectly in bearer form cannot be a qualified shareholder.

Paragraph (d)(2)(i) provides that, except as provided in paragraph (d)(3), a person may only be a qualified shareholder if for the relevant period, the person completes an ownership statement, which is described in paragraph (d)(4) of this section. In the case of a person owning stock in the foreign corporation indirectly through one or more intermediaries (including mere legal owners or recordholders acting as nominees), each intermediary in the chain of ownership between that person and the foreign corporation seeking qualified foreign corporation status must also complete an intermediary ownership statement, which is described in paragraph (d)(4)(v). In addition, the foreign corporation must receive such ownership statements and retain them with the corporate books and records until the close of statute of limitations for the taxable year to which the statements relate.

The ownership statements required in paragraph (d)(2)(i) remain valid until the earlier of the last day of the third calendar year following the year in which the ownership statement is signed or the day that a change of circumstance occurs that makes any information on the ownership statement incorrect. For example, an ownership statement signed on September 30, 2000, remains valid through December 31, 2003, unless circumstances change that make the information of the statement no longer correct.

Paragraph (d)(3) contains special rules for determining the residence of certain shareholders. These rules are intended to simplify and reduce the effort needed by the foreign corporation and its intermediary shareholders to obtain the documentation required to substantiate whether the foreign corporation satisfies the qualified shareholder stock ownership test. If one of these special rules applies, the foreign corporation is not required to obtain an ownership statement from the individual owners covered by that rule.

Paragraph (d)(3)(ii) provides a special rule for registered shareholders owning less than one percent of widely-held corporations. This rule is adopted from § 1.884-5(b)(3)(iii) of the branch profits tax regulations. A foreign corporation with at least 250 registered individual shareholders, that is not a publicly-traded corporation, as described in § 1.883-2, (a widely-held corporation), may not be required to obtain an ownership statement from an individual shareholder owning less than one percent of the widely-held corporation at all times during the taxable year. If such widely-held foreign corporation is the foreign corporation seeking qualified foreign corporation status, or an intermediary that meets the documentation requirements of paragraphs (d)(4)(v)(A) and (B) of this section, relating to ownership statements from widely-held intermediaries with registered shareholders owning less that one percent of such intermediary, the widely-held foreign corporation may treat the address of record in its ownership records as the residence of any less than one percent individual shareholder if the individual's address of record is not a non-residential address, such as a post office box or in care of a financial intermediary or stock transfer agent and the officers and directors of the widely-held corporation neither know nor have reason to know that the individual does not reside at that address.

Paragraph (d)(3)(iii) provides special rules for pension funds. An individual who is a beneficiary of a government pension fund shall be treated as a resident of the country in which the pension fund is administered if the pension fund satisfies the documentation requirements of paragraphs (d)(4)(v)(A) and (C)( 1 ) of this section, relating to ownership statements from pension funds. An individual who is a beneficiary of a non-government pension fund having more than 100 beneficiaries shall be treated as a resident of the country of the beneficiary's address as it appears on the records of the fund, provided it is not a nonresidential address, such as a post office box or an address in care of a financial intermediary, and provided none of the trustees, directors or other administrators of the pension fund know, or have reason to know, that the beneficiary is not an individual resident of such foreign country. This rule applies only if the non-government pension fund satisfies the documentation requirements of paragraphs (d)(4)(v)(A) and (C)( 2 ) of this section.

Paragraph (d)(3)(iv) provides a special rule for publicly-traded corporations owning a direct or indirect interest in the foreign corporation seeking qualified foreign corporation status. Any stock in a foreign corporation seeking qualified foreign corporation status that is owned by a publicly traded corporation will be treated as owned by a person resident in the country where the publicly traded corporation is organized if the foreign corporation receives the statement described in paragraph (d)(4)(iii) of this section from the publicly-traded shareholder along with copies of any relevant ownership statements that the publicly traded shareholder relies on to satisfy the exception to the closely-held class of stock rule of § 1.883-2(d)(3)(ii).

Finally, paragraph (d)(3)(v) provides a special rule for not-for-profit organizations. For purposes of meeting the ownership requirements of paragraph (a) of this section, a not-for-profit organization may rely on the addresses of record of its individual beneficiaries and supporters to determine where such persons are resident, provided that: The addresses of record are not nonresidential addresses such as a post office box or in care of a financial intermediary; the officers, directors or administrators or the organization do not know or have reason to know that the individual beneficiaries or supporters do not reside at that address; and the foreign corporation seeking qualified foreign corporation status receives the statement required in paragraph (d)(4)(iv) of this section from the not-for profit organization.

Paragraph (d)(4) describes the information that must be obtained by a corporation seeking qualified foreign corporation status for each taxable year if the foreign corporation relies on § 1.883-4 to meet the stock ownership requirements of § 1.883-1(c)(2), or to demonstrate that it is not a closely-held corporation. Treasury and the IRS solicit comments with respect to the appropriateness of these information requirements.

Paragraph (d)(4)(i) provides that an ownership statement from an individual shareholder is a written statement signed under penalties of perjury stating certain general information about a shareholder's ownership interest and country of residence. Paragraph (d)(4)(ii) provides additional information that must be included if the shareholder is a foreign government. Paragraph (d)(4)(iii) provides additional information that must be included if the shareholder is a publicly traded corporation. Paragraph (d)(4)(iv) provides additional information that must be included if the shareholder is a not-for-profit organization.

The foreign corporation seeking qualified foreign corporation status must obtain an intermediary ownership statement from each intermediary standing in the chain of ownership between it and the qualified shareholders upon whom it relies to meet the qualified shareholder stock ownership test. Paragraph (d)(4)(v) provides that an intermediary ownership statement is a written statement signed under penalties of perjury by the intermediary (if the intermediary is an individual) or a person who would be authorized to sign a tax return on behalf of the intermediary (if the intermediary is not an individual) stating certain general information about the intermediary's ownership interest and residence. Paragraph (d)(4)(v)(B) provides additional information that must be included if the shareholder is a widely-held intermediary with registered shareholders owning less than one percent of the widely-held intermediary. Paragraph (d)(4)(v)(C) provides additional information that must be included if the shareholder is a pension fund. This paragraph describes the information to be included in the intermediary ownership statement by both government and non-government pension funds and provides that the determinations required to be made under this paragraph (d)(4)(v)(C) shall be made using information shown on the records of the pension fund for a date during the foreign corporation's taxable year to which the determination is relevant.

Paragraph (d)(5) requires the foreign corporation seeking qualified foreign corporation status to retain the documentation described in paragraphs (d)(3) and (4) of this section until the expiration of the statute of limitations for the taxable year of the foreign corporation to which the documentation relates. Such documentation must be made available for inspection by the Commissioner at such place as the Commissioner may request.

A foreign corporation relying on the ownership requirements of this section to demonstrate that it is a qualified foreign corporation for purposes of § 1.883-1(c)(2) must provide the information described in paragraph (e) in addition to the information required in § 1.883-1(c)(3) to be included in its Form 1120F for each taxable year. The information should be current as of the end of the corporation's taxable year. This information is to be based on an analysis of the ownership records of the foreign corporation, as well as on the ownership statements and other documentation that are obtained from its shareholders.

The effective date provisions for the proposed rule are contained in § 1.883-5. The proposed rule applies to taxable years of the foreign corporation ending 30 days or more after the date the proposed rule is published as a final regulation in the Federal Register . When the regulation is final, taxpayers may rely on all the provisions of this section for guidance and may elect to apply all such substantive provisions for any open taxable year beginning after December 31, 1986, and ending before the date the final regulation is effective. Such election will be applicable for the year of the election and for all subsequent taxable years. However, in no event will § 1.883-1(c)(3) (relating to the substantiation and reporting required to be treated as a qualified foreign corporation) or §§ 1.883-2(f), 1.883-3(d) and 1.883-4(e) (relating to additional information to be included in the return to demonstrate whether the foreign corporation satisfies one of three stock ownership tests) apply to any taxable years ending prior to the effective date of this regulation.

Section 1.883-1(c)(3) (relating to the substantiation and reporting required to be treated as a qualified foreign corporation) requires that certain information be included in the foreign corporation's Form 1120F, “U.S. tax Return of Foreign Corporation.” Sections 1.883-2(f), 1.883-3(d) and 1.883-4(e) (relating to information to be included to demonstrate whether the foreign corporation satisfies one of three stock ownership tests) require that additional information also be included in such return. When this regulation becomes generally applicable, and until the taxable year for which the Form 1120F and its instructions are revised to conform to this regulation and the foreign corporation seeking qualified foreign corporation status is otherwise directed by such instructions, the information required in § 1.883-1(c)(3) and § 1.883-2(f), 1.883-3(d) or 1.883-4(e), as applicable, must be included in a written statement signed under penalties of perjury by a person authorized to sign the return, attached to the Form 1120F, and filed with the return.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. An initial regulatory flexibility analysis has been prepared as required for the collection of information in this notice of proposed rulemaking under 5 U.S.C. 603. The analysis is set forth in this preamble under the heading “Initial Regulatory Flexibility Analysis.”

This initial analysis is prepared pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). The objective of the proposed regulations is to provide guidance to foreign corporations engaged in the international operation of a ship or ships or aircraft. This guidance will enable the foreign corporation to determine if it is eligible to exclude its income from these activities from gross income for purposes of its United States Federal income tax. The legal basis for these requirements is section 883. The IRS and Treasury are not aware of any Federal rules that duplicate, overlap, or conflict with the proposed regulations.

The documentation and reporting requirements of the proposed regulations enable the IRS to identify those taxpayers that may or may not be eligible to claim a reciprocal exemption. In addition, analysis of the required shareholder documentation will enable the foreign corporation to correctly file its U.S. Federal income tax return.

There are approximately 1,400 foreign corporations that operate a ship or ships or aircraft on voyages or flights to or from the United States annually. These foreign corporations all have an obligation to file a U.S. Federal income tax return, regardless of whether they are entitled to a reciprocal exemption. However, many of those corporations are organized in qualified foreign countries and may be eligible to exempt their income from the international operation of a ship or ships or aircraft from U.S. tax. Because it is impossible to determine at this time which of these foreign corporations satisfies the ownership requirements of the proposed rule, an estimate of the number of small entities that would be affected by these regulations is unavailable. A foreign corporation that complies with the documentation requirements of these proposed rules should have the information necessary to determine with certainty whether it is eligible for an equivalent exemption. This, in turn, is expected to create the additional benefits of increasing compliance with the filing requirements of the Internal Revenue Code and enabling the IRS to confirm whether the foreign corporation is entitled to an exemption.

None of the significant alternatives considered in drafting these regulations would have significantly altered the economic impact of the collections of information on small entities. In considering the significant alternatives that would be permissible under the Code and would enable the IRS to ensure compliance with the Code, the IRS and Treasury concluded that the alternatives generally would impose equal or greater burdens.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. The IRS and Treasury request comments on the clarity of the proposed rule and how it may be made easier to understand. All comments will be made available for public inspection and copying.

A public hearing has been scheduled for April 27, 2000, at 10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution Ave., NW., Washington, DC. Due to building security procedures, visitors must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to this hearing. Persons who wish to present oral comments at the hearing must submit written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 5, 2000. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal author of these proposed regulations is Patricia A. Bray of the Office of the Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 612 to conform them to the requirements of section 263A. Section 263A was enacted by the Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2085), and amended by the Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647 (102 Stat. 3342).

Under the terms of a lease of mineral property, the lessee acquires, for a stated term, the right and obligation to obtain production of minerals from the property. A lease may provide that for each year that the lessee fails to make efforts to obtain production, the lessee must pay a “delay rental” to the lessor.

Section 1.612-3(c)(1) of the final regulations defines a delay rental as an amount paid for the privilege of deferring development of the property and which could have been avoided by abandonment of the lease, or by commencement of development operations, or by obtaining production. Section 1.612-3(c)(2) of the final regulations provides that since a delay rental is in the nature of rent, it is ordinary income to the payee and not subject to depletion. The payor may at his election deduct the delay rental as an expense, or charge it to depletable capital account under section 266.

Section 263A was enacted subsequent to the issuance of § 1.612-3(c) of the final regulations. The uniform capitalization rules of section 263A generally require the capitalization of all direct costs and certain indirect costs properly allocable to property produced by the taxpayer. Capitalization may be required even though production (development) has not yet begun. § 1.263A-2(a)(3)(ii). In some situations, a delay rental may be required to be capitalized under section 263A. Accordingly, the proposed regulation clarifies that subsequent to the enactment of section 263A, the payor of a delay rental may elect to expense currently the delay rental or charge it to depletable capital account under section 266 to the extent that the delay rental is not required to be capitalized under section 263A and the regulations thereunder.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments that are submitted timely (a signed original and eight copies) to the IRS. The IRS and Treasury request comments on the clarity of the proposed regulations and they may be made easier to understand. All comments will be made available for public inspection and copying.

A public hearing has been scheduled for May 26, 2000, at 10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written comments (a signed original and eight (8) copies) by May 8, 2000. The outline of topics to be discussed at the hearing must be received by May 5, 2000.

A period of 10 minutes will be allotted for each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal author of this proposed regulation is Brenda M. Stewart of the Office of Assistant Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service. However, other personnel from the IRS and Treasury Department participated in its development.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

This section provides background information on the South Coast ozone plan, applicable Clean Air Act requirements, and EPA's proposed action on the plan.

In 1999 the South Coast had the largest number of ozone violations in the country, and trailed only the Houston area in terms of the peak ozone concentration. 1 The South Coast in 1999 recorded 43 days with 1-hour levels at or above the 0.12 parts per million (ppm) NAAQS for ozone. In 1998, the South Coast had the worst ozone levels in the nation, experiencing 12 days with Stage I smog alerts, when 1-hour concentrations reach 0.20 ppm. 2

Ozone causes serious health problems, particularly in children, by damaging lung tissue and sensitizing the lungs to other irritants. Even at very low levels, ozone can cause acute respiratory problems; aggravate asthma; cause temporary decreases in lung capacity of 15 to 20 percent in healthy adults, cause inflammation of lung tissue; lead to hospital admissions and emergency room visits; and impair the body's immune system defenses, making people more susceptible to respiratory illnesses, including bronchitis and pneumonia.

The CAA was substantially amended in 1990 to establish new planning requirements and attainment deadlines for the NAAQS. Under CAA section 107(d)(1)(C) of the Act, areas designated nonattainment prior to enactment of the 1990 amendments, including the South Coast, were designated nonattainment by operation of law.

Under CAA section 181(a), each ozone area designated nonattainment under section 107(d) was also classified by operation of law as either marginal, moderate, serious, severe, or extreme, based on air quality monitoring data. An ozone area with a design value at or above 0.280 ppm was classified as extreme. The South Coast was the only area so classified. Section 181(a) sets attainment deadlines for each class of area. The attainment date for an extreme area is as expeditiously as practicable but no later than November 15, 2010 (20 years after enactment of the CAA Amendments).

CAA section 172 contains general requirements applicable to SIPs for nonattainment areas. Section 182 sets out additional air quality planning requirements for ozone nonattainment areas. The most fundamental of these nonattainment area provisions applicable to the South Coast is the requirement that the State submit by November 15, 1994, a SIP demonstrating how the area would attain the ozone NAAQS by the CAA deadline and how the area would achieve reductions of precursor emissions of 15 percent for the first 6 years and 9 percent for each 3-year period until attainment (rate-of-progress or ROP). This demonstration must be based upon enforceable measures to expeditiously achieve emission reductions leading to emissions at or below the level predicted to result in attainment throughout the nonattainment area.

We have issued a “General Preamble” describing our preliminary views on how we intend to act on SIPs submitted under Title I of the Act. See generally 57 FR 13498 (April 16, 1992) and 57 FR 18070 (April 28, 1992). You should refer to the General Preamble for a more detailed discussion of our interpretations of Title I requirements. In this proposed rulemaking action, we apply these policies to the South Coast ozone SIP submittal, taking into consideration the specific factual issues presented.

SCAQMD adopted an ozone plan on September 9, 1994, as part of the 1994 South Coast Air Quality Management Plan (AQMP). The California Air Resources Board (CARB) supplemented the SCAQMD plan with State measures and submitted it as a proposed revision to the California SIP on November 15, 1994. On July 10, 1996, CARB submitted an extensive revision to the South Coast control measure adoption schedule to adjust for slippage in the plan's initial implementation. On January 8, 1997 (62 FR 1150), we finalized approval of the South Coast ozone plan, including the ozone portions of the 1994 South Coast AQMP, as amended in 1996, and the State measures (“1994 ozone SIP”).  3 The plan also contained “Federal measures,” which the State wished us to adopt and implement in order to reduce emissions from mobile sources.  4

SCAQMD adopted a completely revised plan on November 15, 1996, and the California Air Resources Board (CARB) submitted the revision on February 5, 1997. The 1997 revision was not federally required for ozone, but was adopted by SCAQMD to address, in a comprehensive and consistent fashion, federal and state requirements for particulate matter, carbon monoxide, and nitrogen dioxide (NO2), and state requirements for an ozone plan update.  5

On January 12, 1999 (64 FR 1770), we proposed to find that the revised plan met the CAA section 110(a)(1) procedural requirements for adoption following public notice and hearings. We also proposed to approve the baseline and projected emissions inventory updates under CAA sections 172(c)(3) and 182(a)(1).

Because CAA section 110(l) does not allow us to approve a SIP revision that interferes with any applicable CAA requirement concerning attainment and reasonable further progress or any other requirement of the Act, we proposed to disapprove the 1997 ozone plan as not meeting: (1) the control measure requirements of CAA sections 172(c)(6), and 182(e)(5); (2) the attainment demonstration requirements of CAA section 182(c)(2)(A); and (3) the quantitative milestones and reasonable further progress requirements of CAA section 182(c)(2)(A).

Our proposed disapproval of these provisions was based on our findings that:

(1) the control measures in the 1997 ozone plan were an impermissible relaxation of the 1994 ozone SIP, inasmuch as the plan relaxed, abandoned, or postponed approximately 30 short-term SCAQMD measures, and did not show that this revision meets the expeditious attainment test;

(2) the 1997 ozone plan was inconsistent with the intent of CAA section 182(e)(5), in that it increased, rather than reduced, the proportion of needed SCAQMD reductions that are assigned to conceptual, new-technology measures;

(3) the plan relied on unlawful assignments to the Federal Government to achieve a portion of the reductions needed for attainment; and

(4) the plan relied on commitments to adopt by the end of 1998 23 measures, of which SCAQMD had adopted less than 10, and we may not approve a plan that is not being implemented.

Since our proposed action in this document is an action on both the 1997 ozone plan and the 1999 Amendment to it, we are withdrawing the January 12, 1999 proposed partial approval and partial disapproval of the 1997 ozone plan. Therefore, if you submitted comments on our January 12, 1999 proposal and believe that those comments are relevant to our proposed action on the 1999 ozone plan, you will need to resubmit your comments within the public comment period for today's proposed action.

On July 23, 1999 (64 FR 39923), we approved an update to the South Coast 1994 ozone SIP, reporting on implementation of CARB's control measures in the 1994 SIP and the contribution from Federal mobile source controls undertaken as part of the Public Consultative Process. We also updated our own commitment and approved a new CARB commitment to adopt by December 31, 2001, control measures needed to achieve any additional reductions which are determined to be appropriate for CARB. Please consult this final approval document and our proposed approval (64 FR 30276, June 7, 1999) for more details on the update, the “Federal measures,” the Public Consultative Process on national mobile source measures, and our associated consent decree in Coalition for Clean Air, et al. vs. SCAQMD, CARB, and USEPA , No. CV 97-6916 HLH (C.D. CA.).

SCAQMD adopted an amendment to the 1997 plan on December 10, 1999, to update the District's control measures and to address the deficiencies that formed the basis for our proposed disapproval. The 1999 amendment adds new SCAQMD control measures, revises existing SCAQMD measures, and amends the reasonable further progress, attainment demonstration, and stationary source emissions budget portions of the 1997 plan.  6 The 1999 amendment does not change the emission inventories, modeling, non-SCAQMD control measures, and the non-ozone portions of the 1997 plan. In this proposed rulemaking, we refer to the 1997 plan as amended in 1999 as “the revised ozone plan.” If we approve this revised ozone plan, it will replace the 1994 ozone SIP except for that portion of the SIP that consists of State control measures and EPA's commitment.

The 1999 amendment adds commitments to adopt 8 short-term stationary source control measures, 4 of which are new control measures and 4 of which implement portions of the 1997 plan's long-term control measures. The revised ozone plan now includes 26 short- and intermediate-term control measures and 4 long-term measures. Along with 17 regulations adopted after the 1994 ozone SIP was submitted, these control measure commitments completely replace all SCAQMD control measure commitments in the SIP and greatly reduce the amount of the attainment demonstration dependent upon long-term conceptual measures. SCAQMD long-term VOC control measures in the 1994 ozone SIP were assigned credit for a reduction of 180 tpd; in the 1999 amendment, the long-term reductions amount to only 28 tpd.  7 Neither the 1997 plan nor the 1999 amendment changes the State control measures in the 1994 ozone SIP.

See the information provided in the Direct Final action of the same title which is found in the Rules Section of this Federal Register .

The Federal Emergency Management Agency proposes to make determinations of base flood elevations and modified base flood elevations for each community listed below, in accordance with Section 110 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and 44 CFR 67.4(a).

These proposed base flood and modified base flood elevations, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own, or pursuant to policies established by other Federal, State, or regional entities. These proposed elevations are used to meet the floodplain management requirements of the NFIP and are also used to calculate the appropriate flood insurance premium rates for new buildings built after these elevations are made final, and for the contents in these buildings.

This proposed rule is categorically excluded from the requirements of 44 CFR Part 10, Environmental Consideration. No environmental impact assessment has been prepared.

The Associate Director for Mitigation certifies that this proposed rule is exempt from the requirements of the Regulatory Flexibility Act because proposed or modified base flood elevations are required by the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and are required to establish and maintain community eligibility in the NFIP. No regulatory flexibility analysis has been prepared.

This proposed rule is not a significant regulatory action under the criteria of Section 3(f) of Executive Order 12866 of September 30, 1993, Regulatory Planning and Review, 58 FR 51735.

This proposed rule involves no policies that have federalism implications under Executive Order 12612, Federalism, dated October 26, 1987.

This proposed rule meets the applicable standards of Section 2(b)(2) of Executive Order 12778.

Accordingly, 44 CFR Part 67 is proposed to be amended as follows:

The Federal Emergency Management Agency proposes to make determinations of base flood elevations and modified base flood elevations for each community listed below, in accordance with Section 110 of the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and 44 CFR 67.4(a).

These proposed base flood and modified base flood elevations, together with the floodplain management criteria required by 44 CFR 60.3, are the minimum that are required. They should not be construed to mean that the community must change any existing ordinances that are more stringent in their floodplain management requirements. The community may at any time enact stricter requirements of its own, or pursuant to policies established by other Federal, State, or regional entities. These proposed elevations are used to meet the floodplain management requirements of the NFIP and are also used to calculate the appropriate flood insurance premium rates for new buildings built after these elevations are made final, and for the contents in these buildings.

This proposed rule is categorically excluded from the requirements of 44 CFR Part 10, Environmental Consideration. No environmental impact assessment has been prepared.

The Associate Director for Mitigation certifies that this proposed rule is exempt from the requirements of the Regulatory Flexibility Act because proposed or modified base flood elevations are required by the Flood Disaster Protection Act of 1973, 42 U.S.C. 4104, and are required to establish and maintain community eligibility in the NFIP. No regulatory flexibility analysis has been prepared.

This proposed rule is not a significant regulatory action under the criteria of Section 3(f) of Executive Order 12866 of September 30, 1993, Regulatory Planning and Review, 58 FR 51735.

This proposed rule involves no policies that have federalism implications under Executive Order 12612, Federalism, dated October 26, 1987.

This proposed rule meets the applicable standards of Section 2(b)(2) of Executive Order 12778.

Accordingly, 44 CFR Part 67 is proposed to be amended as follows: