The Bipartisan Campaign Reform Act of 2002, Public Law 107-155, 116 Stat. 81 (2002) (“BCRA”), amended FECA by adding a new term, “Federal election activity,” to describe certain activities that State, district, and local party committees must pay for with either Federal funds or a combination of Federal and Levin funds. 1 See 2 U.S.C. 431(20) and 441i(b)(1). The FEA requirements apply to all State, district, and local party committees and organizations, regardless of whether they are registered as political committees with the Commission. The term also affects fundraising on behalf of tax-exempt organizations. 2

BCRA specifies that voter identification, get-out-the-vote activity (“GOTV activity”), and generic campaign activity (collectively “Type II FEA”)  3 constitute FEA only when these activities are conducted “in connection with an election in which a candidate for Federal office appears on the ballot.” 2 U.S.C. 431(20)(A)(ii). Commission regulations define “in connection with an election in which a candidate for Federal office appears on the ballot” as the period of time beginning on the earliest filing deadline for access to the primary election ballot for Federal candidates in each particular State, and ending on the date of the general election, up to and including any runoff date. See 11 CFR 100.24(a)(1)(i). For States that do not hold primary elections, the period begins on January 1 of each even-numbered year. Id. For special elections in which Federal candidates are on the ballot, the period begins when the date of the special election is set and ends on the date of the special election. See 11 CFR 100.24(a)(1)(ii).

Certain activities by State, district and local parties are exempt from the definition of FEA by BCRA and Commission regulations. See 2 U.S.C. 431(20)(B); 11 CFR 100.24(c). One of these exceptions covers public communications that refer solely to State or local candidates and do not promote, support, attack or oppose a Federal candidate, as long as these communications do not constitute voter registration, voter identification or GOTV activity. See 2 U.S.C. 431(20)(B)(i); 11 CFR 100.24(c)(1). Costs of traditional “grassroots campaign materials” such as buttons, bumper stickers, yard signs and posters that name only State or local candidates are also excluded from the definition of FEA. See 2 U.S.C. 431(20)(B)(iv); 11 CFR 100.24(c)(4).

One of the principal sponsors of BCRA described its FEA provisions as “a balanced approach which addresses the very real danger that Federal contribution limits could be evaded by diverting funds to State and local parties,” while “not attempt[ing] to regulate State and local party spending where this danger is not present, and where State and local parties engage in purely non-Federal activities.” 148 Cong. Rec. S2138 (daily ed. Mar. 20, 2002) (statement of Sen. McCain). Because Type II FEA is limited to activities in connection with an election in which a Federal candidate is on the ballot, the Commission interprets the FEA provisions of BCRA as not regulating voter identification and GOTV activities by State, district, and local political party committees and certain other groups that are exclusively in connection with non-Federal elections.

Some municipalities, counties, and States conduct entirely separate non-Federal elections in even-numbered years that fall within the Type II FEA time periods based on Federal elections held later that year. 4 The Type II FEA time period in some States begins almost a year before the general election, and the start date of this period is likely to extend even farther back into odd-numbered years as many States move up Presidential primaries into the first few months of the Presidential election year. Thus, the potential also exists for more activity by State, district and local parties connected to non-Federal elections held in odd-numbered years to be swept into the FEA restrictions based on the Type II FEA time periods. 5 The effects of the timing of the Type II FEA time period is compounded by recent revisions to the FEA definitions of “GOTV activity” and “voter identification,” which bring non-partisan associations of local candidates within the FEA funding requirements if their activity targets their local election and occurs within the Type II FEA time period. See Final Rules on the Definition of Federal Election Activity, 71 FR 8926, 8931 (Feb. 22, 2006) (“ 2006 FEA Final Rules ”). 6

In light of these considerations, the Commission published an Interim Final Rule on March 22, 2006 refining the definition of “in connection with an election in which a candidate for Federal office appears on the ballot” to specify when activities and communications are in connection with a non-Federal election, instead of a Federal election, and are therefore not Type II FEA. See Interim Final Rule Regarding Definition of Federal Election Activity, 71 FR 14357 (Mar. 22, 2006) (“ Interim Final Rule ”). 7 The Interim Final Rule added new paragraph (a)(1)(iii) to 11 CFR 100.24 to “ensure[] that the FEA requirements do not extend to activities that are solely in connection with these upcoming non-Federal elections and are therefore beyond the scope of FECA.” See Interim Final Rule, 71 FR at 14357. New section 100.24(a)(1)(iii) exempts “any activity or communication that is in connection with a non-Federal election that is held on a date separate from a date of any Federal election” and that refers exclusively to: (1) Non-Federal candidates participating in the non-Federal election, provided the non-Federal candidates are not also Federal candidates; (2) ballot referenda or initiatives scheduled for the date of the non-Federal election; or (3) the date, polling hours and locations of the non-Federal election. See 11 CFR 100.24(a)(1)(iii)(A)(1)-(3); Interim Final Rule, 71 FR at 14359-60.

This rule was promulgated as an Interim Final Rule and expires on September 1, 2007. See 11 CFR 100.24(a)(1)(iii)(B); Interim Final Rule , 71 FR at 14358. The Commission sought public comment on the Interim Final Rule, and received two comments. The comments are available at http://www.fec.gov/law/law_rulemakings.shtml under the heading “Definition of Federal Election Activity.”

The proposed rule would make permanent section 100.24(a)(1)(iii) as added by the Interim Final Rule (with some stylistic and technical changes explained below). The Commission seeks public comment on whether non-Federal candidates and State, district or local party committees conducted voter identification and GOTV activities under the exemption in the Interim Final Rule in the 2006 election cycle, and invites commenters to suggest modifications of the proposed rule based on their experience, if any, with the Interim Final Rule. Would such a rule exclude “purely non-Federal” voter identification and GOTV activities by State, district and local committees? Would such a rule be consistent with Congressional intent?

First, the proposed rule provides that voter identification or GOTV activities that are “ solely in connection with a non-Federal election held on a date separate from any Federal election” are exempt from Type II FEA. See proposed 11 CFR 100.24(a)(1)(iii) (emphasis added). For example, a GOTV program offering to transport voters to the polls on the day of an exclusively non-Federal election would be eligible for the proposed exemption. However, a voter identification program collecting information both about voters' preferences in a non-Federal election in March and a Federal primary election in April would not qualify. Thus, the proposed rule would not exclude all activities by State, district and local parties in the weeks (or months) between the start of the Type II FEA time period and a non-Federal election. The Commission seeks comment on this approach.

In addition, the proposed rule would only apply if the non-Federal election were held on a wholly separate date from any Federal election. See proposed 11 CFR 100.24(a)(1)(iii). This proposed rule is based on the premise that this voter identification and GOTV activity for non-Federal elections held on a different date from any Federal election will have no effect on previous or subsequent Federal elections. The Commission intends the proposed exemption to be narrowly tailored and not to apply to activities that are also in connection with a Federal election. 8 For example, if a GOTV communication provides the date of a non-Federal election and offers transportation to voters for such a non-Federal election, is it likely that such activity would have any effect on voter turnout for a Federal election held on a separate, and perhaps much later, date? The Commission seeks comments, especially in the form of empirical data, on whether voter identification and GOTV efforts in connection with a non-Federal election have a measurable effect on voter turnout in a subsequent Federal election, or otherwise confer benefits on Federal candidates. Are there any relevant data from the 2006 elections to indicate whether activities conducted under the interim rule had any effect on turnout in 2006 Federal elections?

Should the exemption take into account the proximity of the next Federal election? For example, should the rule distinguish between situations where the next Federal election is only six days later, as opposed to six months?

The proposed exemption would not extend to any activities conducted in connection with a non-Federal election held on the same date as a Federal election, even if the activity does not refer to any Federal candidates. Are there certain conditions under which an activity in connection with a non-Federal election held on the same date as a Federal election should also be exempted from the Type II FEA time periods? For example, should the proposed rule apply if both elections were held at the same polling sites but used separate ballots?

The final requirement to be eligible for the proposed exemption is that the voter identification or GOTV activity must involve a communication that refers exclusively to one or more of the following: (1) The non-Federal candidates on the non-Federal election ballot who are not also Federal candidates; (2) ballot initiatives or referenda included in the non-Federal election; or (3) the date, times, or polling locations of the non-Federal election. 9 See proposed 11 CFR 100.24(a)(1)(iii)(A)-(C). This proposed requirement implements proposed section 100.24(a)(1)(iii)'s general restriction that the voter identification or GOTV activity be solely in connection with the non-Federal election. The proposed rule's formulation is also consistent with statutory exclusions from the definition of FEA that are limited to certain types of activity that refer only to State or local candidates, as discussed above. See 2 U.S.C. 431(20)(B)(i) and (iv); 11 CFR 100.24(c)(1) and (4). Should the ballot initiative prong be limited to ballot issues that have no impact on Federal elections?

The Commission seeks comments on whether this proposed list of subjects in proposed section 100.24(a)(1)(iii)(A) through (C) should be expanded or narrowed. Should the Commission require that communications include a reference to the date of the non-Federal election for the proposed exemption to apply? Should the exception be expanded to include communications discussing specific issues that are exclusively a state or local concern? Should “the date, polling hours, or polling locations of the non-Federal election” be defined to include absentee ballot or vote-by-mail information?

With respect to candidate references, the proposed rule would specify that if a non-Federal candidate is also seeking Federal office and satisfies FECA's definition of “candidate,” then the proposed exemption would not apply. See proposed 11 CFR 100.24(a)(1)(iii)(A). The proposed rule would apply to communications containing specific references to non-Federal candidates by name, nickname, photograph or other likeness, as well as to general references to non-Federal candidates by party. For example, assuming that the non-Federal election is held on a date separate from a Federal election, a GOTV phone bank that urges voters to vote for “Smith for Mayor” and that also refers to “the great Democratic team” would qualify under the proposed rule. The proposed exemption would also apply to a communication that otherwise meets the definition of GOTV  10 if such a communication also includes language such as “Vote Republican on May 5” even though no individual non-Federal candidate is mentioned by name, because it refers exclusively to non-Federal candidates on the ballot on the date of the non-Federal election. The Commission seeks comment on this approach. Moreover, should the exception be limited to cover only references to clearly identified non-Federal candidates?

With regard to references to the date or the polling hours or the polling locations of the non-Federal election, this proposed rule would revise the Interim Final Rule to clarify that it is not necessary to include all three categories of information in order to qualify for the proposed exemption. For example, a GOTV communication that refers only the date of the non-Federal election without any information regarding polling hours or locations would satisfy this proposed requirement. The Commission seeks comment on this approach.

As discussed above, three kinds of activity are governed by the Type II FEA time periods in 11 CFR 100.24(a)(1): voter identification, GOTV, and generic campaign activity. See 2 U.S.C. 431(20)(A)(ii). The proposed rule would only apply to voter identification and GOTV activity in connection with non-Federal elections. See proposed 11 CFR 100.24(a)(1)(iii). The Commission seeks comment on this approach. These types of activities, such as identifying voter preferences for updating a voter list or phone calls reminding voters to vote for a particular candidate on Election Day, are usually for the purpose of promoting specific candidates and can be conducted solely in connection with a non-Federal election.

The proposed rule does not exempt generic campaign activity. Generic campaign activity is defined as “a public communication that promotes or opposes a political party and does not promote or oppose a clearly identified Federal candidate or a non-Federal candidate.” See 2 U.S.C. 431(21); 11 CFR 100.25. For example, “Vote for the Democrats on May 4th” could constitute generic campaign activity under this definition. The Commission notes that some generic campaign activity could be presumed to be in connection with both Federal and non-Federal elections. Should the Commission include generic campaign activity in the final rule? How could the Commission draft such a rule to ensure that only generic campaign activity affecting (and made solely in connection with) non-Federal elections is exempted? Does the inclusion of the phrase “on May 4th” in the above example serve to ensure that the communication will affect only the election held on May 4th? Alternatively, should generic campaign activity be excluded from the final rule?

Although voter identification is included in the proposed rule, initial acquisition or purchase of voter lists generally would not meet the requirements of the proposed rule because most State, district and local party committees and organizations will acquire voter lists for use in connection with more than one election. However, if a State, district, or local party committee or organization were able to show that it acquired a voter list to conduct GOTV activities and/or voter identification solely for a non-Federal election held on a date separate from any Federal election, acquisition of the voter list could meet the requirements of the proposed rule. 11

To qualify for the proposed exemption, the voter list must be the closest available to the list of eligible voters in the qualifying non-Federal election. For example, a county-wide voter list may not be the closest matching voter list for some non-Federal elections ( e.g. , a municipal election), unless there were no more specific list available. Choosing a list of voters that goes beyond the voters participating in a municipal election would demonstrate that the voter identification program is not exclusively in connection with the municipal election. Accordingly, the costs of such a voter list would be treated as FEA. Are there situations in which this conclusion would not be warranted? For example, if the smaller voter list were significantly more expensive than the larger list, should acquisition of the larger list be permitted?

Similarly, if a list is acquired and used for a non-Federal election, but is then also used for any activity in connection with a subsequent Federal election, or for a non-Federal election held on the same date as a Federal election, the acquisition of the list would not meet the requirements of the proposed rule and the cost of the voter list would be treated as FEA. Should the party organization be permitted to allocate the cost of the list in proportion to its use in connection with non-Federal and Federal elections?

The Commission seeks comment on this approach to voter list acquisition under the proposed rule. Is it feasible for State, district and local parties to show that the acquisition of a voter list was solely in connection with a non-Federal election by tracking when a certain voter list is “used” in connection with certain elections? Section 100.24(a)(4) states that the date the list was purchased governs whether the costs of the voter list must be treated as FEA, regardless of the party's use of that list. However, the proposed exemption for voter identification would depend upon when and how the party uses a voter list. Is the proposed rule's approach to voter list acquisition inconsistent with the general definition of “voter identification?”

How should the Commission apply the proposed rule to other types of voter identification activities, such as updating a voter list with revised contact information or voter preferences? Should a State, district or local party that expends time and resources to update and add voter information to a list in connection with a non-Federal election be barred from using updated information in subsequent Federal elections, or would the costs be allocated if the list is used in a subsequent Federal election? As an alternative, should the Commission eliminate voter list acquisition and maintenance, i.e. voter identification, from the proposed exemption?

Although voter identification and GOTV activities meeting the requirements of the proposed rule would not be considered FEA, a State, district or local party committee may be required to pay the costs of those activities using a ratio of Federal and non-Federal funds under the Commission's existing allocation rules at 11 CFR 106.7. State, district or local party committees that conduct activities in connection with non-Federal elections, but do not conduct any activity in connection with Federal elections, are not subject to the allocation rules in section 106.7. See 11 CFR 106.7(b). Under the proposed rule and section 106.7, those organizations may continue to pay for the activities described in the proposed rule entirely with non-Federal funds. However, State, district, and local political party committees that make expenditures and disbursements in connection with both Federal and non-Federal elections during an election cycle are required to use an allocable mix of Federal and non-Federal funds to pay for certain expenses that are not FEA pursuant to 11 CFR 100.24. See 11 CFR 106.7(b) and (c). 12

Section 106.7(c) lists five categories of costs which must be allocated between Federal and non-Federal funds according to specific ratios: (1) Certain salaries and wages; (2) administrative costs; (3) exempt party activities that are not FEA (such as slate cards and sample ballots); (4) certain fundraising costs; and (5) certain voter drive activities that are not FEA or party exempt activities. Some voter identification and GOTV activities that are eligible for the proposed exemption may also qualify as allocable voter drive activities under section 106.7(c)(5). Section 106.7(c)(5) requires allocation of certain voter identification, voter registration, GOTV activities, and any other activities that urge the general public to register or vote, or that promote or oppose a political party without promoting or opposing a Federal or non-Federal candidate. Thus, for example, a GOTV communication that exclusively refers to the date and polling location for a non-Federal election held on a date separate from any Federal election would be eligible for the proposed exemption under proposed section 100.24(a)(1)(iii)(C). This GOTV communication would, however, also be considered voter drive activity subject to allocation under section 106.7(c)(5) because it is not FEA or exempt party activity and it encourages the general public to vote without promoting or opposing any Federal or non-Federal candidates.

Thus, even under the proposed rule, use of non-Federal funds would be limited for those voter identification and GOTV activities that are conducted “solely in connection with a non-Federal election,” but also qualify as allocable voter drive activity. The Commission seeks comment on this application of the allocation rules to activities eligible for the proposed exemption.

The Commission certifies that the attached proposed rule, if adopted, will not have a significant economic impact on a substantial number of small entities. The basis for this certification is that the organizations affected by this proposed rule are State, district, and local political party committees, which are not “small entities” under 5 U.S.C. 601. These not-for-profit committees do not meet the definition of “small organization,” which requires that the enterprise be independently owned and operated and not dominant in its field. 5 U.S.C. 601(4). State political party committees are not independently owned and operated because they are not financed and controlled by a small identifiable group of individuals, and they are affiliated with the larger national political party organizations. In addition, the State political party committees representing the Democratic and Republican parties have a major controlling influence within the political arena of their State and are thus dominant in their field. District and local party committees are generally considered affiliated with the State committees and need not be considered separately. To the extent that any State party committees representing minor political parties might be considered “small organizations,” the number affected by this proposed rule is not substantial. Finally, the proposed rule would operate to relieve funding restrictions, which reduces the economic impact on any affected entities.

For the reasons set out in the preamble, the Federal Election Commission proposes to amend Subchapter A of Chapter 1 of Title 11 of the Code of Federal Regulations as follows:

Comments Invited

Interested parties are invited to participate in this proposed rulemaking by submitting such written data, views, or arguments as they may desire. Comments that provide the factual basis supporting the views and suggestions presented are particularly helpful in developing reasoned regulatory decisions on the proposal. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal.

Communications should identify both docket numbers (FAA Docket No. FAA-2007-28134 and Airspace Docket No. 07-ASW-1) and be submitted in triplicate to the Docket Management System (see ADDRESSES section for address and phone number). You may also submit comments through the Internet at http://dms.dot.gov.

Commenters wishing the FAA to acknowledge receipt of their comments on this action must submit with those comments a self-addressed, stamped postcard on which the following statement is made: “Comments to FAA Docket No. FAA-2007-28134 and Airspace Docket No. 07-ASW-1.” The postcard will be date/time stamped and returned to the commenter.

All communications received on or before the specified closing date for comments will be considered before taking action on the proposed rule. The proposal contained in this action may be changed in light of comments received. All comments submitted will be available for examination in the public docket both before and after the closing date for comments. A report summarizing each substantive public contact with FAA personnel concerned with this rulemaking will be filed in the docket.

An electronic copy of this document may be downloaded through the Internet at http://dms.dot.gov. Recently published rulemaking documents can also be accessed through the FAA's web page at http://www.faa.gov, or the Federal Register 's web page at http://www.gpoaccess.gov/fr/index.html.

You may review the public docket containing the proposal, any comments received, and any final disposition in person in the Dockets Office (see ADDRESSES section for address and phone number) between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. An informal docket may also be examined during normal business hours at the office of the Regional Air Traffic Division, Federal Aviation Administration, Central Service Center, 2601 Meacham Blvd. Fort Worth, TX 76137-4298.

Persons interested in being placed on a mailing list for future NPRM's should contact the FAA's Office of Rulemaking, (202) 267-9677, for a copy of Advisory Circular No. 11-2A, Notice of Proposed Rulemaking Distribution System, which describes the application procedure.

As part of the Houston Area Air Traffic System Project, a review of aircraft operations has identified a need to revise the jet route structure over the South Central United States by realigning jet airways J-29 and J-101. The FAA believes this action would allow for more effective utilization of airspace and would enhance the management of aircraft operations over the Houston terminal area. Specifically, the action would segregate departure traffic and facilitate the development of additional departure procedures from the greater Houston terminal area, thereby increasing departure capacity.

The FAA is proposing an amendment to Title 14 Code of Federal Regulations (14 CFR) part 71 to revise J-29 and J-101 over the South Central United States. Specifically, this action proposes to revise J-29 between the Humble, TX, VORTAC and the El Dorado, AR, VORTAC, and revise J-101 between the Lufkin, TX, VORTAC and Little Rock, AR, VORTAC. This action would allow for more effective utilization of airspace and would enhance the management of aircraft operations over the Houston terminal area.

Jet routes are published in paragraph 2004 of FAA Order 7400.9P, dated September 1, 2006 and effective September 15, 2006, which is incorporated by reference in 14 CFR 71.1. The jet routes listed in this document would be published subsequently in the Order.

The FAA has determined that this proposed regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. Therefore, this proposed regulation: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under Department of Transportation (DOT) Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that will only affect air traffic procedures and air navigation, it is certified that this proposed rule, when promulgated, will not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

This proposal will be subject to the appropriate environmental analysis in accordance with FAA Order 1050.1E, Environmental Impacts: Policies and Procedures, prior to any FAA final regulatory action.

In consideration of the foregoing, the Federal Aviation Administration proposes to amend 14 CFR part 71 as follows:

Background

This document contains proposed amendments to §§ 1.199-3(k) and 1.199-7 of the Income Tax Regulations (26 CFR Part 1). Section 1.199-3(k) relates to the definition of qualified film produced by the taxpayer under section 199(c)(4)(A)(i)(II) and (c)(6) of the Internal Revenue Code (Code) and § 1.199-7 involves expanded affiliated groups under section 199(d)(4). Section 199 was added to the Code by section 102 of the American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 1418), and amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 (Pub. L. 109-135, 119 Stat. 25), section 514 of the Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222, 120 Stat. 345), and section 401 of the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432, 120 Stat. 2922).

Section 199(a)(1) allows a deduction equal to 9 percent (3 percent in the case of taxable years beginning in 2005 or 2006, and 6 percent in the case of taxable years beginning in 2007, 2008, or 2009) of the lesser of (A) The qualified production activities income (QPAI) of the taxpayer for the taxable year, or (B) taxable income (determined without regard to section 199) for the taxable year (or, in the case of an individual, adjusted gross income).

Section 199(c)(1) defines QPAI for any taxable year as an amount equal to the excess (if any) of (A) The taxpayer's domestic production gross receipts (DPGR) for such taxable year, over (B) the sum of (i) The cost of goods sold (CGS) that are allocable to such receipts; and (ii) other expenses, losses, or deductions (other than the deduction under section 199) that are properly allocable to such receipts.

Section 199(c)(4)(A)(i) provides that the term DPGR means the taxpayer's gross receipts that are derived from any lease, rental, license, sale, exchange, or other disposition of (I) Qualifying production property (QPP) that was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States; (II) any qualified film produced by the taxpayer; or (III) electricity, natural gas, or potable water produced by the taxpayer in the United States.

Section 199(c)(6) defines a qualified film to mean any property described in section 168(f)(3) if not less than 50 percent of the total compensation relating to production of the property is compensation for services performed in the United States by actors, production personnel, directors, and producers. The term does not include property with respect to which records are required to be maintained under 18 U.S.C. 2257 (generally, films, videotapes, or other matter that depict actual sexually explicit conduct and are produced in whole or in part with materials that have been mailed or shipped in interstate or foreign commerce, or are shipped or transported or are intended for shipment or transportation in interstate or foreign commerce).

Section 199(d)(4)(A) provides that all members of an expanded affiliated group (EAG) are treated as a single corporation for purposes of section 199. Under section 199(d)(4)(B), an EAG is an affiliated group as defined in section 1504(a), determined by substituting “more than 50 percent” for “at least 80 percent” each place it appears and without regard to section 1504(b)(2) and (4).

Section 199(d)(8) authorizes the Secretary to prescribe such regulations as are necessary to carry out the purposes of section 199, including regulations that prevent more than one taxpayer from being allowed a deduction under section 199 with respect to any activity described in section 199(c)(4)(A)(i).

On June 1, 2006, final regulations (TD 9263) under section 199 were published in the Federal Register (71 FR 31268). Subsequent to the publication of the final regulations, the IRS and Treasury Department became aware that the definition of a qualified film produced by a taxpayer as outlined in the final regulations may not be consistent with the statute. Under section 199(c)(4)(A)(i)(II), a taxpayer's gross receipts qualify as DPGR if the receipts are derived from any lease, rental, license, sale, exchange, or other disposition of any qualified film (as defined in section 199(c)(6)) produced by the taxpayer. A film must be both a “qualified film” under section 199(c)(6) and “produced by the taxpayer” under section 199(c)(4)(A)(i)(II) in order for the gross receipts to qualify as DPGR. Section 1.199-3(k)(5) of the final regulations addresses these two requirements by adding “by the taxpayer” to the not-less-than-50-percent-of-the-total-compensation requirement under § 1.199-3(k)(1). However, under the test provided in § 1.199-3(k)(5) of the final regulations, a film that was produced entirely within the United States could fail to qualify for the section 199 deduction if less than 50 percent of the total compensation relating to production was paid “by the taxpayer.”

The proposed regulations more closely follow the statutory language in section 199(c)(6) by revising the fraction in § 1.199-3(k)(5) for determining the not-less-than-50-percent-of-the-total-compensation requirement under § 1.199-3(k)(1). Under the fraction set forth in the proposed regulations, the numerator of the revised fraction is the compensation for services performed in the United States and the denominator is the total compensation for services regardless of where the production activities are performed. The revised fraction essentially compares (in the numerator) the sum of the compensation for services paid by the taxpayer for services performed in the United States and the compensation for services paid by others for services performed in the United States to (in the denominator) the sum of the total compensation for services paid by the taxpayer for services and the total compensation for services paid by others for services regardless of location. The proposed regulations also clarify in § 1.199-8(a) that, for purposes of §§ 1.199-1 through 1.199-9, use of terms such as “payment,” “paid,” “incurred,” or “paid or incurred” is not intended to provide any specific rule based upon the use of one term versus another. In general, the use of the term “payment,” “paid,” “incurred,” or “paid or incurred” is intended to convey the appropriate standard under the taxpayer's method of accounting.

Under § 1.199-3(k)(6) of the proposed regulations, a film that is a qualified film under § 1.199-3(k)(1) will be treated as “produced by the taxpayer” for purposes of section 199(c)(4)(A)(i)(II) if the production activity performed by the taxpayer is substantial in nature within the meaning of § 1.199-3(g)(2). The special rules of § 1.199-3(g)(4) regarding a contract with an unrelated person and aggregation apply in determining whether the taxpayer's production activity is substantial in nature. Section 1.199-3(g)(2) and (4) are applied by substituting the term “qualified film” for QPP and disregarding the requirement that the production activity must be within the United States. Thus, a qualified film will be treated as produced by the taxpayer if the production of the qualified film by the taxpayer is substantial in nature taking into account all of the facts and circumstances, including the relative value added by, and relative cost of, the taxpayer's production activity, the nature of the qualified film, and the nature of the production activity that the taxpayer performs.

The rules provided in § 1.199-3(k)(5) of the proposed regulations closely follow the statutory language in section 199(c)(6) by referencing all compensation for services related to the production as opposed to a more limited “by the taxpayer” compensation test. Commentators have expressed concern over the difficulty of obtaining information related to the compensation paid by others. In response to this concern, the IRS and Treasury Department have provided a safe harbor in § 1.199-3(k)(7) of the proposed regulations provides a safe harbor that will treat a film as a qualified film if not less than 50 percent of the total compensation for services paid by the taxpayer is compensation for services performed in the United States. The safe harbor further provides that a qualified film will be treated as produced by the taxpayer if the taxpayer satisfies the safe harbor in § 1.199-3(g)(3) with respect to the qualified film, which requires that the direct labor and overhead costs incurred by the taxpayer to produce the qualified film within the United States account for 20 percent or more of the total costs of the film.

Similar to § 1.199-3(k)(6) of the proposed regulations, the special rules of § 1.199-3(g)(4) regarding a contract with an unrelated person and aggregation apply in determining whether the taxpayer satisfies § 1.199-3(g)(3). Section 1.199-3(g)(3) and (4) are applied by substituting the term “qualified film” for QPP but not disregarding the requirement that the direct labor and overhead of the taxpayer to produce the qualified film must be within the United States. Thus, a taxpayer will be treated as having produced a qualified film if, in connection with the qualified film, the direct labor and overhead of the taxpayer to produce the qualified film within the United States account for 20 percent or more of the taxpayer's CGS of the qualified film, or in a transaction without CGS (for example, a lease, rental, or license) account for 20 percent or more of the taxpayer's “unadjusted depreciable basis” (as defined in § 1.199-3(g)(3)(ii)) in the qualified film.

After issuance of the final regulations, several commentators noted that § 1.199-7(e), Example 10 , of the final regulations misapplies § 1.1502-13 of the consolidated return regulations. In Example 10 , a member of a consolidated group sells QPP to another member of the consolidated group. Before the QPP is sold to an unrelated party, the purchasing corporation is disaffiliated from the consolidated group. Example 10 provides that neither the selling corporation nor the purchasing corporation has DPGR. After further consideration, the IRS and Treasury Department have determined that Example 10 does not properly apply § 1.1502-13 of the consolidated return regulations and that both the selling corporation and the purchasing corporation have DPGR in the facts described. Accordingly, the proposed regulations remove Example 10 of the final regulations and replace it with a new Example 10 , properly applying § 1.1502-13 of the consolidated return regulations.

In addition, the IRS and Treasury Department discovered a problem concerning the section 199 closing of the books method under § 1.199-7(f)(1)(ii) of the final regulations. A corporation that becomes or ceases to be a member of an EAG during its taxable year must allocate its taxable income or loss, QPAI, and W-2 wages between the portion of the taxable year that it is a member of the EAG and the portion of the taxable year that it is not a member of the EAG. In general, this allocation is made by using the pro rata allocation method described in § 1.199-7(f)(1)(i) of the final regulations. Section 1.199-7(f)(1)(ii) provides that in lieu of the pro rata allocation method, a corporation may elect to apply the section 199 closing of the books method under which a corporation treats its taxable year as two separate taxable years, the first of which ends at the close of the day on which the corporation's status as a member of the EAG changes and the second of which begins at the beginning of the day after the corporation's status as a member of the EAG changes.

In certain situations, the section 199 closing of the books method can create a larger section 199 deduction than is warranted. The facts of the Example in § 1.199-7(g)(3) of the final regulations demonstrate such a situation. In the Example, Corporations X and Y, calendar year corporations, are members of the same EAG for the entire 2007 taxable year. Corporation Z, also a calendar year corporation, is a member of the EAG of which X and Y are members for the first half of 2007 and not a member of any EAG for the second half of 2007. During the 2007 taxable year, Z does not join in the filing of a consolidated return. Z makes a section 199 closing of the books election. As a result, Z has $80 of taxable income and $100 of QPAI that is allocated to the first half of 2007 and a $150 taxable loss and ($200) of QPAI that is allocated to the second half of 2007. In addition to the facts presented in the Example, assume that X and Y each have $60 of taxable income and QPAI in 2007, Z has $170 of taxable income and QPAI in 2008, and that X, Y, and Z each have W-2 wages in excess of the section 199(b) wage limitation for all relevant periods. After applying the section 199 closing of the books method, the EAG has $200 of taxable income and $220 of QPAI in 2007. Accordingly, the EAG will have a section 199 deduction of $12 (6 percent of the lesser of the EAG's $200 of taxable income and $220 of QPAI). Z, as a stand-alone corporation for the second half of 2007, will have both negative taxable income and negative QPAI and therefore will have no section 199 deduction. In 2008, notwithstanding that Z made a section 199 closing of the books election pursuant to which Z is deemed to have a $150 taxable loss for the second half of 2007, for purposes of computing its taxable income in 2008, Z only has a $70 NOL carryover from 2007. Accordingly, Z will have taxable income of $100 in 2008 and will have a section 199 deduction of $6 (6 percent of the lesser of its $100 of taxable income and $170 of QPAI). Because X and Y had a total of $120 of taxable income and Z had total taxable income in 2007 and 2008 of $100, the maximum aggregate section 199 deduction should have been $13.20 (6 percent of the aggregate taxable income of X, Y, and Z of $220), instead of the aggregate $18 deduction derived in the above example because of the use of the section 199 closing of the books method. The section 199 closing of the books method effectively eliminated $80 of Z's losses from being used to offset taxable income for purposes of the section 199 deduction in either 2007 or 2008.

The proposed regulations remove the section 199 closing of the books method and revise the Example in § 1.199-7(g)(3) to apply the pro rata allocation method. However, the IRS and Treasury Department invite comments concerning the necessity for a section 199 closing of the books method and suggestions under which a section 199 closing of the books election would be allowable, provided that the election does not create an unwarranted section 199 deduction nor does it impose an undue burden on either taxpayers or the government.

Sections 1.199-3(k), 1.199-7(e), Example 10 , and 1.199-7(f)(1) are proposed to be applicable to taxable years beginning on or after the date the final regulations are published in the Federal Register . Until the date the final regulations are published in the Federal Register , taxpayers may rely on § 1.199-3(k) and § 1.199-7(e), Example 10 , of the proposed regulations for taxable years beginning after December 31, 2004. However, for taxable years beginning before June 1, 2006, a taxpayer may rely on § 1.199-3(k) of the proposed regulations only if the taxpayer does not apply Notice 2005-14 (2005-1 C.B. 498) (see § 601.601(d)(2)) or REG-105847-05 (2005-2 CB 987) (see § 601.601(d)(2)(ii)( b )) to the taxable year.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. Comments are requested on all aspects of the proposed regulations. In addition, the IRS and Treasury Department specifically request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for October 2, 2007, at 10 a.m. in the auditorium of the 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 30 minutes before the hearing starts. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments by September 5, 2007 and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by September 11, 2007. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal authors of these regulations are Lauren Ross Taylor and David M. McDonnell, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

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

The notice of proposed rulemaking (REG-157711-02) that is the subject of these corrections are under sections 358, 362(e)(2) and 1502 of the Internal Revenue Code.

As published, the notice of proposed rulemaking (REG-157711-02) contains errors that may prove to be misleading and are in need of clarification.

Accordingly, the publication of the notice of proposed rulemaking (REG-157711-02), that is the subject of FR Doc. 07-187, is corrected as follows:

1. On page 2964, column 2, in the preamble, under the paragraph heading “Paperwork Reduction Act”, eighth paragraph of the column, line 3, the language “13(e)(4)(v) and 1.1502-36(d)(7). The” is corrected to read “13(e)(4)(v) and 1.1502-36(d)(6). The”.

2. On page 2964, column 3, in the preamble, under the paragraph heading “Background”, second paragraph of the column, line 10, the language “ v. United States, 255 F.3d 1357 (2001),” is corrected to read “ v. United States, 255 F.3d 1357 (Fed. Cir. 2001),”.

3. On page 2965, column 1, in the preamble, under the paragraph heading “2. The Administrative Response to GU Repeal: § 1.1502-20.”, first paragraph, line 2 from bottom of the paragraph, the language “determine adjustments to member's” is corrected to read “determine adjustments to members ” ‘.

4. On page 2972, column 1, in the preamble, under the paragraph heading “2. Hybrid Tracing-Presumptive Model: Asset Tracing.”, first paragraph, line 3, the language “presumption approach that would” is corrected to read “presumptive approach that would”.

5. On page 2972, column 2, in the preamble, the paragraph heading “3. Presumption-Based Models” is corrected to read “3. Presumptive-Based Models.”.

6. On page 2975, column 1, in the preamble, under the paragraph heading “d. Netting of items from different tax periods.”, first paragraph, line 6, the language, “investments were not. The IRS and” is corrected to read “investment adjustments were not. The IRS and”.

7. On page 2975, column 1, in the preamble, under the paragraph heading “d. Netting of items from different tax periods. ”, second paragraph, line 8, the language, “account by the group. Thus, IRS and” is corrected to read “account by the group. Thus, the IRS and”.

8. On page 2975, column 2, in the preamble under the paragraph heading “e. Summary and conclusions. ”, second paragraph, line 12 from the bottom of the paragraph, the language “administrative and other concerns” is corrected to read “administrative burden and other concerns”.

9. On page 2977, column 1, in the preamble, under the paragraph heading “ E. Noneconomic and Duplicated Loss From Investment Adjustment System. ”, first paragraph, line 2, the language “preamble, IRS and Treasury Department” is corrected to read “preamble, the IRS and Treasury Department”.

10. On page 2978, column 3, under paragraph heading “1. Overview.”, third paragraph of the column, line 4 from the bottom of the paragraph, the language “implement a loss limitation approach” is correct to read “implements a loss limitation approach”.

11. On page 2980, column 1, under paragraph heading “4. The Attribute Reduction Rule.”, second paragraph, lines 16 and 17, the language “the value of all of the S shares. Net the inside attributes generally has the same” is corrected to read “the value of all the S shares. The term net inside attributes generally has the same”.

12. On page 2980, column 1, under paragraph heading “4. The Attribute Reduction Rule.”, third paragraph, last line of the column, the language “stock loss for a later recognition (for” is corrected to read “stock loss for later recognition (for”.

13. On page 2980, column 2, under paragraph heading “4. The Attribute Reduction Rule.”, second paragraph of the column, lines 1 and 2 from bottom of the paragraph, the language “attributes are reduced reflects this principle.” is corrected to read “attributes are reduced reflects these principles.”.

14. On page 2980, column 3, under subparagraph heading “a. Special rules applicable when S holds stock of lower-tier subsidiary. ”, second paragraph, line 16, the language “inside attributes. For example, if P owns” is corrected to read “inside attributes. For example, assume P owns”.

15. On page 2981, column 3, under subparagraph heading “b. Election to reduce stock basis and/or reattribute loss. ”, first paragraph of the column, line 22 from bottom of the paragraph, the language “transaction. Proposed regulations under” is corrected to read “transaction.”

16. On page 2981, column 3, under subparagraph heading “b. Election to reduce stock basis and/or reattribute loss. ”, second paragraph, line 21 from bottom of the paragraph, the language “§ 1.1502-32 treat the reattributed” is corrected and added with new paragraph to read “Proposed regulations under § 1.1502-32 treat the reattributed”.

17. On page 2982, column 1, under subparagraph heading “6. Special Rules for Section 362(e)(2) Transaction.”, second paragraph, lines 1 and 2 from bottom of the column, the language “under section 362(e)(2)(C) been made Similarly, to adjust for distortions” is corrected to read “under section 362(e)(2)(C) been made. Similarly, to adjust for distortions”.

18. On page 2982, column 2, under subparagraph heading “6. Special Rules for Section 362(e)(2) Transaction.”, second paragraph of the column, line 9 from the bottom of the paragraph, the language, “stock basis and net inside attributes that” is corrected to read “stock basis, net inside attributes, and value that”.

19. On page 2983, column 2, under subparagraph heading “2. Suspension of Section 362(e)(2) for Intercompany Transactions.”, last paragraph of the column, line 2 from bottom of the column, the language “investment adjustment system has not” is corrected to read “investment adjustment system has not eliminated”.

20. On page 2984, column 2, under subparagraph heading “4. Application of Section 362(e)(2) to Intercompany Transactions.”, first paragraph of the column, line 7 from the bottom of the paragraph, the language “attributes is applied to proportionately” is corrected to read “attributes is applied proportionately”.

21. On page 2984, column 3, under subparagraph heading “5. Special Allocations Under § 1.1502-32.”, line 7 of the paragraph, the language “entirely to member's shares. In other” is corrected to read “entirely to members” shares. In other”.

22. On page 2986, column 2, under subparagraph heading, “8. Retention of, and Nonsubstantive Revisions to, § 1.1502-80(c).”, third paragraph of the column, line 8 of the paragraph, the language “under the LDR and, since LDR no longer” is corrected to read “under the LDR and, since the LDR no longer”.

23. On page 2986, column 3, under subparagraph heading, “8. Retention of, and Nonsubstantive Revisions to, § 1.1502-80(c).”, first paragraph of the column, line 2 of the column, the language “deduction. See, In re Prudential Lines, ” is corrected to read “deduction. See In re Prudential Lines, ”.

The proposed regulations provide guidance on what portion of a trust is includible in the deceased grantor's gross estate under section 2036 if the grantor retained the right to use property in the trust or the right to receive from that trust an annuity, unitrust, or other income payment for the grantor's life, for any period not ascertainable without reference to the grantor's death, or for any period that does not in fact end before the grantor's death. In addition, the proposed regulations provide guidance on the possible application of section 2039 to trusts in which the decedent has retained the use of property held in the trust or has retained an annuity, unitrust, or other income interest that is includible in the decedent's gross estate under section 2036. These trusts include without limitation certain charitable trusts (collectively CRTs) such as charitable remainder annuity trusts (CRATs) within the meaning of section 664(d)(1), charitable remainder unitrusts (CRUTs) within the meaning of section 664(d)(2) or (d)(3), and charitable remainder trusts that do not qualify under section 664, as well as other trusts established by a grantor (collectively GRTs) such as grantor retained annuity trusts (GRATs), grantor retained unitrusts (GRUTs), and various forms of grantor retained income trusts (GRITs), such as qualified personal residence trusts (QPRTs) and personal residence trusts (PRTs). A CRT is within the scope of these proposed regulations whether or not the CRT meets the qualifications of sections 664(d)(1), (2), or (3) and a GRT is within the scope of these proposed regulations whether or not the grantor's retained interest is a “qualified interest” as defined in section 2702(b). This guidance does not apply to trusts or other contractual arrangements arising by reason of a decedent's employment and generally does not apply to annuities purchased by the decedent, as these types of interests fall within the ambit of section 2039.

Under section 2036(a), a decedent's gross estate includes the value of any interest in property transferred by the decedent in which the decedent retained for the decedent's life, for any period not ascertainable without reference to the decedent's death, or for any period that does not in fact end before the decedent's death, either the possession or enjoyment of the property or a right to the income from the property, or the right (either alone or with another) to designate the persons who may possess or enjoy the property or its income. Section 20.2036-1(a) provides generally that, if the decedent retained or reserved an interest with respect to all of the property transferred by the decedent, the amount to be included in the gross estate under section 2036 is the value of the entire property on the date of death. If the decedent retained a right with respect to only part of the property transferred, the amount to be included in the decedent's gross estate under section 2036 is the corresponding proportionate amount of the corpus. Rev. Rul. 76-273, 1976-2 CB 268, and Rev. Rul. 82-105, 1982-1 CB 133 (See § 601.601(d)(2)), generally provide that the portion of the corpus of a CRUT and CRAT includible in the decedent's gross estate under section 2036 is that portion of the trust corpus necessary to generate a return sufficient to provide the decedent's retained annuity or unitrust payment.

Rev. Rul. 76-273 considers a situation where the decedent created an intervivos trust that provided for a stated unitrust percentage of 6 percent to be paid each year to the decedent during life. At the decedent's death, the remainder is to be paid to a charitable organization. The revenue ruling concludes that, for purposes of section 2036(a), the portion of the value of the trust corpus includible in the decedent's gross estate is the portion necessary to yield (at the then current interest rate specified under the applicable regulations) the amount of the annual unitrust payment in perpetuity. Based upon the valuation rules and interest rate assumptions specified in § 20.2031-10 (the regulations applicable at the time the ruling was issued), the revenue ruling provides the following formula to be used to determine this includible portion of the trust corpus: Equivalent income interest rate divided by the interest rate mandated by the applicable regulations at the date of death, where the equivalent income interest rate = adjusted payout rate/1 minus adjusted payout rate. The result, however, is limited to 100 percent of the trust corpus. (Since the issuance of this revenue ruling, the regulations (§ 20.2031-7(d)(1)) have been changed to instead require the use of the section 7520 interest rate in lieu of the rate specified in § 20.2031-10). The revenue ruling concludes that, because the equivalent income interest of the unitrust payment exceeds the equivalent income interest required to produce that unitrust payment, the grantor retained an interest in the entire corpus of the trust, and thus the entire trust corpus is includible in the deceased grantor's gross estate under section 2036.

Rev. Rul. 82-105 considers a situation where the decedent created an intervivos CRAT, pursuant to which the decedent retained the right to receive a fixed annuity for life. The ruling confirms that the decedent's retained annuity represents the retained right to receive all of the income from all or a specific portion of the trust for purposes of section 2036. That portion of the trust corpus with respect to which the decedent retained a right to receive all of the income is properly includible in the decedent's gross estate under section 2036(a)(1). Under the ruling, the amount of the corpus with respect to which the decedent retained the income is that amount of corpus that would be sufficient to yield the annual annuity based on the assumed rate of return prescribed by the regulations as of the applicable valuation date. The ruling prescribes the following formula for this determination: (Annual Annuity) / (Assumed Rate of Return) = Amount Includible. Assuming a rate of return of 6 percent, as specified under § 20.2031-10 (the regulation applicable at the time the ruling was issued), the ruling concludes that only a portion of the trust's corpus is includible in the deceased grantor's gross estate. (Since the issuance of this revenue ruling, the regulations (§ 20.2031-7(d)(1)) have been changed to instead require the use of the section 7520 interest rate in place of the rate specified in § 20.2031-10.) Rev. Rul. 82-105 expressly qualifies this conclusion by stating that the ruling does not consider the amount, if any, that may be includible in the gross estate under any other provisions of the Code.

Section 2039(a) provides that a decedent's gross estate includes the value of an annuity or other payment under any form of contract or agreement (other than an insurance policy on the decedent's life) receivable by any beneficiary by reason of surviving the decedent if, under the contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or other payment, for the decedent's life or for any period not ascertainable without reference to the decedent's death, or for any period that does not in fact end before the decedent's death.

Section 2039(b) provides, in part, that the amount includible in the decedent's gross estate is limited to that portion of the value of the annuity or other payment receivable under the contract or agreement as is proportionate to the portion of the purchase price of the contract or agreement that was contributed by the decedent. Section 20.2039-1(b)(1) provides, in part, that the term “annuity or other payment,” as used with respect to both the payment receivable by the decedent and by the beneficiary, has reference to one or more payments extending over any period of time, whether the payments are equal or unequal, conditional or unconditional, periodic or sporadic. The term “contract or agreement” includes any arrangement, understanding, or plan, or any combination of them, arising by reason of the decedent's employment. Section 20.2039-1(b)(1).

As is acknowledged in Rev. Rul. 82-105, section 2036 as well as other sections of the Code might apply to the same interest or trust for purposes of the Federal estate tax. Although either section 2036 or section 2039 may be applied to include at least some portion of a trust in the decedent's gross estate if the decedent transfers property during life to a trust and retains the right to use the trust's property or the right to an annuity, unitrust, or other payment from the trust, the amount includible may differ depending upon which section is applied for this purpose.

The proposed regulations amend § 20.2036-1 to incorporate the guidance provided in Rev. Rul. 76-273 and Rev. Rul. 82-105. The proposed regulations provide that, if a decedent transfers property during life to a trust and retains the right to an annuity, unitrust, or other income payment from, or retains the use of an asset in, the trust for the decedent's life, for a period that does not in fact end before the decedent's death, or for a period not ascertainable without reference to the decedent's death, the decedent has retained the right to income from all or a specific portion of the property transferred as described in section 2036. The portion of the trust corpus includible in the decedent's gross estate is that portion of the trust corpus, valued as of the decedent's death (or the alternate valuation date, if applicable) necessary to yield that annual payment (or use) using the appropriate section 7520 interest rate. In this regard, because the specific portion of corpus includible in the gross estate is properly determined as of the decedent's death, the appropriate section 7520 rate is the rate in effect on the decedent's date of death (or on the alternate valuation date, if applicable). The proposed regulations provide both rules and examples for calculating the amount of trust corpus to be included in a deceased grantor's gross estate under section 2036 in such a case.

The IRS and Treasury Department believe that in many cases both section 2036 and section 2039 may be applicable to these annuity and unitrust interests and to such other payments retained by a deceased grantor. Although the language of section 2039 is broad enough to include all or a portion of a trust's corpus if the grantor retains an annuity or unitrust interest in, or other payments from, a trust, the IRS and Treasury Department believe that, in the interest of ensuring similar tax treatment for similarly situated taxpayers, it is appropriate in this circumstance to provide regulatory rules under which only one of these two potentially applicable Code sections (section 2036 and section 2039) will be applied in the future. For the reasons mentioned below, the IRS and Treasury Department have concluded that section 2036 (and therefore, when applicable, section 2035), rather than section 2039, will be applied in the future to these interests. First, section 2039 appears to have been intended to address annuities purchased by or on behalf of the decedent and annuities provided by the decedent's employer. Second, the interests retained by grantors in the types of trusts described in this guidance are more similar in most relevant respects to the interests addressed under section 2036 than those most clearly addressed under section 2039. Accordingly, the proposed regulations also amend § 20.2039-1(b)(1) by providing that section 2039 shall not be applied to an annuity, unitrust, or other payment retained by a deceased grantor in a CRT or GRT.

Although these proposed regulations provide guidance as to which section of the Code (specifically, section 2036 or section 2039) is to be used in certain circumstances when each of those sections applies to the same CRT or GRT, these proposed regulations should not be construed to imply that only one section of the Code may apply to a particular situation or interest. These proposed regulations are not intended to foreclose the possibility that any applicable section of the Code (sections 2035 through 2039, or any other section) properly may be applied in the future by the IRS in appropriate circumstances beyond those described in these proposed regulations. (For example, although section 2039 generally will apply to govern the includability of annuities purchased by or on behalf of the decedent and annuities provided by the decedent's employer in the decedent's gross estate, section 2036 may instead be applied if the facts and circumstances indicate that the annuity constituted a retained interest in the property exchanged for that annuity.)

The first, second, and fourth sentences in § 20.2039-1(a) and the provisions in § 20.2036-1(a)(1), (a)(2), and (c)(1)(i) are applicable to the estates of decedents dying after August 16, 1954. The fifth sentence of § 20.2039-1(a) is applicable to the estates of decedents dying on or after October 27, 1972, and to the estates of decedents for which the period for filing a claim for credit or refund of an estate tax overpayment ends on or after October 27, 1972. The provisions of § 20.2036-1(c)(1)(ii) and (2), § 20.2039-1(e), and the third, sixth, and seventh sentences of § 20.2039-1(a) apply to the estates of decedents for which the valuation date of the gross estate is on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

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

A public hearing has been scheduled for September 26, 2007 in the auditorium Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must use the main building entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For more information about having your name placed on the list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written (a signed original and eight (8) copies) or electronic comments by September 5, 2007 and an outline of the topics to be discussed and the time to be devoted to each topic by September 5, 2007. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

The principal author of these regulations is Theresa M. Melchiorre, Office of Chief Counsel, IRS.

Accordingly, 26 CFR part 20 is proposed to be amended as follows:

The May 8, 2007, proposed rule is a supplemental notice to EPA's October 20, 2005 notice of proposed rulemaking. In the October 2005 notice, we proposed three options to revise the NSR emissions test for existing electric generating units: A maximum achievable hourly emissions test, a maximum achieved hourly emissions test, and an output-based hourly emissions test. The May 2007 notice recast the previously proposed options so that the output-based test becomes an alternative method to implement the maximum achieved or maximum achievable hourly tests, rather than a separate option. It also proposed a new option in which the hourly emissions increase test is added to the existing requirements for computing a significant increase and a significant net emissions increase on an annual basis. It also included proposed rule language and supplemental information for the October 2005 proposal, including an examination of the impacts on emissions and air quality.

Public hearing: The proposal for which EPA is holding the public hearing was published in the Federal Register on May 8, 2007, (72 FR 26202) and is available at: http://www.access.gpo.gov/su_docs/fedreg/a070508c.html . The public hearing will provide interested parties the opportunity to present data, views, or arguments concerning the supplemental rule proposal. The EPA may ask clarifying questions during the oral presentations, but will not respond to the presentations at that time. Written statements and supporting information submitted during the comment period will be considered with the same weight as any oral comments and supporting information presented at the public hearing. Written comments on the proposed rule must be postmarked by July 9, 2007, which is the closing date for the comment period, as specified in the proposal for the rule. However, the record will remain open until July 30, 2007, to allow 30 days after the public hearing for submittal of additional information related to the hearing.

Commenters should notify Ms. Long if they will need specific equipment, or if there are other special needs related to providing comments at the hearing. The EPA will provide equipment for commenters to show overhead slides or make computerized slide presentations if we receive special requests in advance. Oral testimony will be limited to 5 minutes for each commenter. The EPA encourages commenters to provide EPA with a copy of their oral testimony electronically (via e-mail or CD) or in hard copy form.

The hearing schedule, including lists of speakers, will be posted on EPA's Web site http://www.epa.gov/nsr/ . Verbatim transcripts of the hearing and written statements will be included in the docket for the rulemaking.

The EPA has established the official public docket for the supplemental proposed rule entitled “Supplemental Notice of Proposed Rulemaking for Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR): Emission Increases for Electric Generating Units” under Docket ID No. EPA-HQ-OAR-2005-0163.

As stated previously, the proposed rule was published in the Federal Register on May 8, 2007 (72 FR 26202) and is available at http://www.access.gpo.gov/su_docs/fedreg/a070508c.html.

In the final rules section of this Federal Register , EPA is approving the State's SIP submittal as a direct final rule without prior proposal because the Agency views this as a noncontroversial submittal and anticipates no relevant adverse comments. A detailed rationale for the approval is set forth in the direct final rule. If no relevant adverse comments are received in response to this action, no further activity is contemplated. If EPA receives relevant adverse comments, the direct final rule will be withdrawn and all public comments received will be addressed in a subsequent final rule based on this proposed rule. EPA will not institute a second comment period. Any parties interested in commenting on this action should do so at this time. Please note that if EPA receives adverse comment on an amendment, paragraph, or section of the rule, and if that provision may be severed from the remainder of the rule, EPA may adopt as final those provisions of the rule that are not the subject of an adverse comment.

For additional information, see the direct final rule which is located in the rules section of this Federal Register .

On February 5, 2007, the Virginia Department of Environmental Quality (VADEQ) submitted a revision to its State Implementation Plan (SIP) for Open Burning Regulation. The SIP revision consists of regulation amendments to the April 26, 1996 submittal. The SIP revision expands the geographic applicability of the control measure to implement the open burning seasonal restrictions as part of its plans to reduce and maintain volatile organic compound (VOC) emissions in VOC emissions control areas in Virginia. The amendments include: 9 VAC 5-40-5600—Applicability; 9 VAC 5-40-5610—Definitions; 9 VAC 5-40-5620—Open Burning Prohibitions; and 9 VAC 5-40-5630—Permissible Open Burning.

Virginia's Open Burning Regulation (9 VAC 5 Chapter 40) applies to any person who permits or engages in open burning or who permits or engages in burning using special incineration devices.

A special incineration device is a pit incinerator, conical or teepee burner, or any other device specifically designed to provide combustion performance. Modifications of 9 VAC 5 Chapter 40 are made to ensure that the regulation is consistent with the existing incinerator regulations of the board and waste management regulations.

The provisions of this amended regulation are applicable only in the volatile organic emission control areas identified in 9 VAC 5-20-206 of the Virginia Regulations during the months of May, June, July, August and September. The volatile organic emission control areas applicable to this regulation include:

1. Western Virginia Emissions Control Area: Botetourt County, Frederick County, Roanoke County, Salem County and Winchester County.

2. Northern Virginia Emissions Control Area: Arlington County, Fairfax County, Loudon County, Prince William County, Stafford County, Alexandria City, Fairfax City, Falls Church City, Manassas City and Manassas Park City.

3. Hampton Roads Emissions Control Area: James City County, York County, Chesapeake City, Hampton City, Newport News City, Norfolk City, Poquoson City, Portsmouth City, Suffolk County, Virginia Beach City and Williamsburg City.

4. Richmond Emissions Control Area: Charles City County, Chesterfield County, Hanover County, Henrico County, Colonial Heights City, Hopewell City and Richmond City.

5. Fredericksburg Emissions Control Area: Spotsylvania County and Fredericksburg City.

Definitions included in this SIP revision are: Air curtain incinerator, clean burning waste, clean lumber, clean wood, commercial waste, construction waste, debris waste, demolition waste, garbage, hazardous waste, household waste, industrial waste, landfill, local landfill, open burning, open pit incinerator, refuse, salvage operation, sanitary landfill, special incineration device, wood waste, and yard waste.

This SIP revision provides for the control of open burning and use of special incineration devices for destruction of rubber tires, asphaltic materials, crankcase oil, impregnated wood or other rubber or petroleum based materials except when conducting bona fide fire fighting instruction at fire fighting training schools having permanent facilities. This SIP revision also provides for the control of open burning and use of special incineration device for the destruction of hazardous waste or containers for such materials. In addition, this SIP revision provides for the control of open burning and use of special incineration device for the purpose of salvage operation or for the destruction of commercial/industrial waste.

Open burning or the use of special incineration devices is permitted on-site for the destruction of clean burning waste and debris waste resulting from property maintenance, from the development or maintenance of roads and highways, parking areas, railroad tracks, pipelines, power and communication lines, buildings or building areas, sanitary landfills, or from any other clearing operations. Such destruction is prohibited in the VOC emissions control areas (see 9 VAC 5-20-206) during May, June, July, August and September.

Open burning or the use of special incineration devices is also permitted for the destruction of clean burning waste and debris waste on the site of local landfills provided that the burning does not take place on land that has been filled and covered so as to present an underground fire hazard due to the presence of methane gas. Such destruction is prohibited in the VOC emissions control areas (see 9 VAC 5-20-206) during May, June, July, August and September.

In 1995, Virginia adopted legislation that provides, subject to certain conditions, for an environmental assessment (audit) “privilege”' for voluntary compliance evaluations performed by a regulated entity. The legislation further addresses the relative burden of proof for parties either asserting the privilege or seeking disclosure of documents for which the privilege is claimed. Virginia's legislation also provides, subject to certain conditions, for a penalty waiver for violations of environmental laws when a regulated entity discovers such violations pursuant to a voluntary compliance evaluation and voluntarily discloses such violations to the Commonwealth and takes prompt and appropriate measures to remedy the violations. Virginia's Voluntary Environmental Assessment Privilege Law, Va. Code Sec. 10.1-1198, provides a privilege that protects from disclosure documents and information about the content of those documents that are the product of a voluntary environmental assessment. The Privilege Law does not extend to documents or information (1) That are generated or developed before the commencement of a voluntary environmental assessment; (2) that are prepared independently of the assessment process; (3) that demonstrate a clear, imminent and substantial danger to the public health or environment; or (4) that are required by law.

On January 12, 1998, the Commonwealth of Virginia Office of the Attorney General provided a legal opinion that states that the Privilege law, Va. Code Sec. 10.1-1198, precludes granting a privilege to documents and information “required by law,” including documents and information “required by Federal law to maintain program delegation, authorization or approval,” since Virginia must “enforce Federally authorized environmental programs in a manner that is no less stringent than their Federal counterparts. * * *” The opinion concludes that “[r]egarding § 10.1-1198, therefore, documents or other information needed for civil or criminal enforcement under one of these programs could not be privileged because such documents and information are essential to pursuing enforcement in a manner required by Federal law to maintain program delegation, authorization or approval.”

Virginia's Immunity law, Va. Code Sec. 10.1-1199, provides that “[t]o the extent consistent with requirements imposed by Federal law,” any person making a voluntary disclosure of information to a state agency regarding a violation of an environmental statute, regulation, permit, or administrative order is granted immunity from administrative or civil penalty. The Attorney General's January 12, 1998 opinion states that the quoted language renders this statute inapplicable to enforcement of any Federally authorized programs, since “no immunity could be afforded from administrative, civil, or criminal penalties because granting such immunity would not be consistent with Federal law, which is one of the criteria for immunity.”

Therefore, EPA has determined that Virginia's Privilege and Immunity statutes will not preclude the Commonwealth from enforcing its program consistent with the Federal requirements. In any event, because EPA has also determined that a state audit privilege and immunity law can affect only state enforcement and cannot have any impact on Federal enforcement authorities, EPA may at any time invoke its authority under the Clean Air Act, including, for example, sections 113, 167, 205, 211 or 213, to enforce the requirements or prohibitions of the state plan, independently of any state enforcement effort. In addition, citizen enforcement under section 304 of the Clean Air Act is likewise unaffected by this, or any, state audit privilege or immunity law.

In implementing the open burning restrictions, this amended regulation (9 VAC 5 Chapter 40) will reduce and maintain VOC emissions in the volatile organic emission control areas identified in 9 VAC 5-20-206 of the Virginia regulations. EPA is proposing to approve the Virginia SIP revision for the Open Burning Regulation submitted on February 5, 2007. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)). This action merely proposes to approve State law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). This proposed rule also does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it have substantial direct effects 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely proposes to approve a state rule implementing a Federal requirement, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it approves a state rule implementing a Federal standard.

In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this proposed rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation, and provide a clear legal standard for affected conduct. EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the executive order. This proposed rule pertaining to the amendments of Virginia's Open Burning Regulation, does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

Throughout this document whenever “we,” “us,” or “our” is used, we mean EPA.

On February 8, 2007, the PADEP formally submitted a request to redesignate the Altoona Area from nonattainment to attainment of the 8-hour NAAQS for ozone. Concurrently, Pennsylvania submitted a maintenance plan for the Altoona Area as a SIP revision to ensure continued attainment in the Area over the next 11 years. PADEP also submitted a 2002 base-year inventory for the Altoona Area as a SIP revision. The Altoona Area is comprised of Blair County. It is currently designated a basic 8-hour ozone nonattainment area. EPA is proposing to determine that the Altoona Area has attained the 8-hour ozone NAAQS and that it has met the requirements for redesignation pursuant to section 107(d)(3)(E) of the CAA. EPA is, therefore, proposing to approve the redesignation request to change the designation of the Altoona Area from nonattainment to attainment for the 8-hour ozone NAAQS. EPA is also proposing to approve the Altoona maintenance plan as a SIP revision for the Area (such approval being one of the CAA criteria for redesignation to attainment status). The maintenance plan is designed to ensure continued attainment in the Altoona Area for the next 11 years. EPA is also proposing to approve the 2002 base-year inventory for the Altoona Area as a SIP revision. Additionally, EPA is announcing its action on the adequacy process for the MVEBs identified in the Altoona maintenance plan, and proposing to approve the MVEBs identified for volatile organic compounds (VOCs) and nitrogen oxides (NO X ) for the Altoona Area for transportation conformity purposes.

Ground-level ozone is not emitted directly by sources. Rather, emissions of NO X and VOC react in the presence of sunlight to form ground-level ozone. The air pollutants NO X and VOC are referred to as precursors of ozone. The CAA establishes a process for air quality management through the attainment and maintenance of the NAAQS.

On July 18, 1997, EPA promulgated a revised 8-hour ozone standard of 0.08 parts per million (ppm). This new standard is more stringent than the previous 1-hour standard. EPA designated, as nonattainment, any area violating the 8-hour ozone NAAQS based on the air quality data for the three years of 2001-2003. These were the most recent three years of data at the time EPA designated 8-hour areas. The Altoona Area was designated a basic 8-hour ozone nonattainment area in a Federal Register notice signed on April 15, 2004 and published on April 30, 2004 (69 FR 23857), based on its exceedance of the 8-hour health-based standard for ozone during the years 2001-2003.

On April 30, 2004, EPA issued a final rule (69 FR 23951, 23996) to revoke the 1-hour ozone NAAQS in the Altoona Area (as well as most other areas of the country), effective June 15, 2005. See, 40 CFR 50.9(b); 69 FR at 23996 (April 30, 2004); 70 FR 44470 (August 3, 2005).

However, on December 22, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated EPA's Phase 1 Implementation Rule for the 8-hour Ozone Standard. (69 FR 23951, April 30, 2004). See, South Coast Air Quality Management Dist. v. EPA , 472 F.3d 882 (D.C. Cir. 2006) (hereafter “ South Coast .”). The Court held that certain provisions of EPA's Phase 1 Rule were inconsistent with the requirements of the Clean Air Act. The Court rejected EPA's reasons for implementing the 8-hour standard in nonattainment areas under subpart 1 in lieu of subpart 2 of Title I, part D of the Act. The Court also held that EPA improperly failed to retain four measures required for 1-hour nonattainment areas under the anti-backsliding provisions of the regulations: (1) Nonattainment area New Source Review (NSR) requirements based on an area's 1-hour nonattainment classification; (2) Section 185 penalty fees for 1-hour severe or extreme nonattainment areas; (3) measures to be implemented pursuant to section 172(c)(9) or 182(c)(9) of the Act, on the contingency of an area not making reasonable further progress toward attainment of the 1-hour NAAQS, or for failure to attain that NAAQS; and (4) the certain conformity requirements for certain types of federal actions. The Court upheld EPA's authority to revoke the 1-hour standard provided there were adequate anti-backsliding provisions. Elsewhere in this document, mainly in section VI. B. “The Altoona Area Has Met All Applicable Requirements Under Section 110 and Part D of the CAA and Has a Fully Approved SIP Under Section 110(k) of the CAA,” EPA discusses its rationale why the decision in South Coast is not an impediment to redesignating the Altoona Area to attainment of the 8-hour ozone NAAQS.

The CAA, title I, part D, contains two sets of provisions—subpart 1 and subpart 2—that address planning and control requirements for nonattainment areas. Subpart 1 (which EPA refers to as “basic” nonattainment) contains general, less prescriptive requirements for nonattainment areas for any pollutant—including ozone—governed by a NAAQS. Subpart 2 (which EPA refers to as “classified” nonattainment) provides more specific requirements for ozone nonattainment areas. In 2004, the Altoona Area was classified a basic 8-hour ozone nonattainment area based on air quality monitoring data from 2001-2003. Therefore, the Altoona Area is subject to the requirements of subpart 1 of part D.

Under 40 CFR part 50, the 8-hour ozone standard is attained when the 3-year average of the annual fourth-highest daily maximum 8-hour average ambient air quality ozone concentrations is less than or equal to 0.08 ppm (i.e., 0.084 ppm when rounding is considered). See 69 FR 23857 (April 30, 2004) for further information. Ambient air quality monitoring data for the 3-year period must meet data completeness requirements. The data completeness requirements are met when the average percent of days with valid ambient monitoring data is greater than 90 percent, and no single year has less than 75 percent data completeness as determined in Appendix I of 40 CFR part 50. The ozone monitoring data indicates that the Altoona Area has a design value of 0.077 ppm for the 3-year period of 2003-2005, using complete, quality-assured data. Additionally, certified 2006 ozone monitoring data indicates that the Altoona Area continues to attain the ozone NAAQS. Therefore, the ambient ozone data for the Altoona Area indicates no violations of the 8-hour ozone standard.

The Altoona Area consists of Blair County, Pennsylvania. Prior to its designation as an 8-hour ozone nonattainment area, the Altoona Area was a marginal 1-hour ozone nonattainment Area, and therefore, was subject to requirements for marginal nonattainment areas pursuant to section 182(a) of the CAA. See 56 FR 56694 (November 6, 1991). EPA determined that the Altoona Area has attained the 1-hour ozone NAAQS by the November 15, 1993 attainment date (60 FR 3349, January 17, 1995).

On February 8, 2007, the PADEP requested that the Altoona Area be redesignated to attainment for the 8-hour ozone standard. The redesignation request included three years of complete, quality-assured data for the period of 2003-2005, indicating that the 8-hour NAAQS for ozone had been achieved in the Altoona Area. The data satisfies the CAA requirements that the 3-year average of the annual fourth-highest daily maximum 8-hour average ozone concentration (commonly referred to as the area's design value), must be less than or equal to 0.08 ppm ( i.e. , 0.084 ppm when rounding is considered). Under the CAA, a nonattainment area may be redesignated if sufficient complete, quality-assured data is available to determine that the area attained the standard and the area meets the other CAA redesignation requirements set forth in section 107(d)(3)(E).

The CAA provides the requirements for redesignating a nonattainment area to attainment. Specifically, section 107(d)(3)(E) of the CAA, allows for redesignation, providing that:

(1) EPA determines that the area has attained the applicable NAAQS;

(2) EPA has fully approved the applicable implementation plan for the area under section 110(k);

(3) EPA determines that the improvement in air quality is due to permanent and enforceable reductions in emissions resulting from implementation of the applicable SIP and applicable Federal air pollutant control regulations and other permanent and enforceable reductions;

(4) EPA has fully approved a maintenance plan for the area as meeting the requirements of section 175A; and

(5) The State containing such area has met all requirements applicable to the area under section 110 and part D.

EPA provided guidance on redesignations in the General Preamble for the Implementation of Title I of the CAA Amendments of 1990, on April 16, 1992 (57 FR 13498), and supplemented this guidance on April 28, 1992 (57 FR 18070). EPA has provided further guidance on processing redesignation requests in the following documents:

• “Ozone and Carbon Monoxide Design Value Calculations,” Memorandum from Bill Laxton, June, 18, 1990;

• “Maintenance Plans for Redesignation of Ozone and Carbon Monoxide Nonattainment Areas,” Memorandum from G.T. Helms, Chief, Ozone/Carbon Monoxide Programs Branch, April 30, 1992;

• “Contingency Measures for Ozone and Carbon Monoxide (CO) Redesignations,” Memorandum from G.T. Helms, Chief, Ozone/Carbon Monoxide Programs Branch, June 1, 1992;

• “Procedures for Processing Requests to Redesignate Areas to Attainment,” Memorandum from John Calcagni, Director, Air Quality Management Division, September 4, 1992;

• “State Implementation Plan (SIP) Actions Submitted in Response to Clean Air Act (Act) Deadlines,” Memorandum from John Calcagni Director, Air Quality Management Division, October 28, 1992;

• “Technical Support Documents (TSDs) for Redesignation Ozone and Carbon Monoxide (CO) Nonattainment Areas,” Memorandum from G.T. Helms, Chief, Ozone/Carbon Monoxide Programs Branch, August 17, 1993;

• “State Implementation Plan (SIP) Requirements for Areas Submitting Requests for Redesignation to Attainment of the Ozone and Carbon Monoxide (CO) National Ambient Air Quality Standards (NAAQS) on or after November 15, 1992,” Memorandum from Michael H. Shapiro, Acting Assistant Administrator for Air and Radiation, September 17, 1993;

• Memorandum from D. Kent Berry, Acting Director, Air Quality Management Division, to Air Division Directors, Regions 1-10, “Use of Actual Emissions in Maintenance Demonstrations for Ozone and CO Nonattainment Areas,” dated November 30, 1993;

• “Part D New Source Review (part D NSR) Requirements for Areas Requesting Redesignation to Attainment,” Memorandum from Mary D. Nichols, Assistant Administrator for Air and Radiation, October 14, 1994; and

• “Reasonable Further Progress, Attainment Demonstration, and Related Requirements for Ozone Nonattainment Areas Meeting the Ozone National Ambient Air Quality Standard,” Memorandum from John S. Seitz, Director, Office of Air Quality Planning and Standards, May 10, 1995.

On February 8, 2007, the PADEP requested redesignation of the Altoona Area to attainment for the 8-hour ozone standard. On February 8, 2007, PADEP submitted a maintenance plan for the Altoona Area as a SIP revision, to ensure continued attainment of the 8-hour ozone NAAQS over the next 11 years, until 2018. PADEP also submitted a 2002 base-year inventory concurrently with its maintenance plan as a SIP revision. EPA has determined that the Altoona Area has attained the 8-hour ozone standard and has met the requirements for redesignation set forth in section 107(d)(3)(E).

Approval of the redesignation request would change the official designation of the Altoona Area from nonattainment to attainment for the 8-hour ozone NAAQS found at 40 CFR part 81. It would also incorporate into the Pennsylvania SIP a 2002 base-year inventory and a maintenance plan ensuring continued attainment of the 8-hour ozone NAAQS in the Altoona Area for the next 11 years, until 2018. The maintenance plan includes contingency measures to remedy any future violations of the 8-hour NAAQS (should they occur), and identifies the NO X and VOC MVEBs for transportation conformity purposes for the years 2009 and 2018. These MVEBs are displayed in the following table:

EPA is proposing to determine that the Altoona Area has attained the 8-hour ozone standard, and that all other redesignation criteria have been met. The following is a description of how the PADEP's February 8, 2007 submittal satisfies the requirements of section 107(d)(3)(E) of the CAA.

EPA is proposing to determine that the Altoona Area has attained the 8-hour ozone NAAQS. For ozone, an area may be considered to be attaining the 8-hour ozone NAAQS if there are no violations, as determined in accordance with 40 CFR 50.10 and Appendix I of Part 50, based on three complete, consecutive calendar years of quality-assured air quality monitoring data. To attain this standard, the design value, which is the 3-year average of the fourth-highest daily maximum 8-hour average ozone concentrations measured at each monitor, within the area, over each year must not exceed the ozone standard of 0.08 ppm. Based on the rounding convention described in 40 CFR part 50, Appendix I, the standard is attained if the design value is 0.084 ppm or below. The data must be collected and quality-assured in accordance with 40 CFR part 58, and recorded in the Air Quality System (AQS). The monitors generally should have remained at the same location for the duration of the monitoring period required for demonstrating attainment.

In the Altoona Area, there is one ozone monitor, located in Blair County that measures air quality with respect to ozone. As part of its redesignation request, Pennsylvania referenced ozone monitoring data for the years 2003-2005 for the Altoona Area. This data has been quality assured and is recorded in the AQS. The PADEP uses the AQS as the permanent database to maintain its data and quality assures the data transfers and content for accuracy. The fourth-high 8-hour daily maximum concentrations, along with the three-year average are summarized in Table 2.

The air quality data for 2003-2005 show that the Altoona Area has attained the standard with a design value of 0.077 ppm. The data collected at the Altoona Area monitor satisfies the CAA requirement that the 3-year average of the annual fourth-highest daily maximum 8-hour average ozone concentration is less than or equal to 0.08 ppm. EPA believes this conclusion remains valid after review of the certified 2006 data because the design value for 2004-2006 would be 0.074 ppm. The PADEP's request for redesignation for the Altoona Area indicates that the data is complete and was quality assured in accordance with 40 CFR part 58. In addition, as discussed below with respect to the maintenance plan, PADEP has committed to continue monitoring in accordance with 40 CFR part 58. In summary, EPA has determined that the data submitted by Pennsylvania and data taken from AQS indicate that the Area has attained the 8-hour ozone NAAQS.

EPA has determined that the Altoona Area has met all SIP requirements applicable for purposes of this redesignation under section 110 of the CAA (General SIP Requirements) and that it meets all applicable SIP requirements under part D of Title I of the CAA, in accordance with section 107(d)(3)(E)(v). In addition, EPA has determined that the SIP is fully approved with respect to all requirements applicable for purposes of redesignation in accordance with section 107(d)(3)(E)(ii). In making these proposed determinations, EPA ascertained which requirements are applicable to the Altoona Area and determined that the applicable portions of the SIP meeting these requirements are fully approved under section 110(k) of the CAA. We note that SIPs must be fully approved only with respect to applicable requirements.

The September 4, 1992 Calcagni memorandum (“Procedures for Processing Requests To Redesignate Areas to Attainment,” Memorandum from John Calcagni, Director, Air Quality Management Division, September 4, 1992) describes EPA's interpretation of section 107(d)(3)(E) with respect to the timing of applicable requirements. Under this interpretation, to qualify for redesignation, States requesting redesignation to attainment must meet only the relevant CAA requirements that came due prior to the submittal of a complete redesignation request. See also, Michael Shapiro memorandum, September 17, 1993, and 60 FR 12459, 12465-66 (March 7, 1995) (redesignation of Detroit-Ann Arbor). Applicable requirements of the CAA that come due subsequent to the area's submittal of a complete redesignation request remain applicable until a redesignation is approved, but are not required as a prerequisite to redesignation. Section 175A(c) of the CAA. Sierra Club v. EPA, 375 F.3d 537 (7th Cir. 2004). See also, 68 FR at 25424, 25427 (May 12, 2003) (redesignation of St. Louis).

This section also sets forth EPA's views on the potential effect of the Court's ruling in South Coast on this redesignation action. For the reasons set forth below, EPA does not believe that the Court's ruling alters any requirements relevant to this redesignation action so as to preclude redesignation, and does not prevent EPA from finalizing this redesignation. EPA believes that the Court's decision, as it currently stands or as it may be modified based upon any petition for rehearing that has been filed, imposes no impediment to moving forward with redesignation of this area to attainment, because in either circumstance redesignation is appropriate under the relevant redesignation provisions of the Act and longstanding policies regarding redesignation requests.

Section 110(a)(2) of Title I of the CAA delineates the general requirements for a SIP, which includes enforceable emissions limitations and other control measures, means, or techniques, provisions for the establishment and operation of appropriate devices necessary to collect data on ambient air quality, and programs to enforce the limitations. The general SIP elements and requirements set forth in section 110(a)(2) include, but are not limited to the following:

• Submittal of a SIP that has been adopted by the State after reasonable public notice and hearing;

• Provisions for establishment and operation of appropriate procedures needed to monitor ambient air quality;

• Implementation of a source permit program; provisions for the implementation of part C requirements (Prevention of Significant Deterioration (PSD));

• Provisions for the implementation of part D requirements for New Source Review (NSR) permit programs;

• Provisions for air pollution modeling; and

• Provisions for public and local agency participation in planning and emission control rule development.

Section 110(a)(2)(D) requires that SIPs contain certain measures to prevent sources in a state from significantly contributing to air quality problems in another State. To implement this provision, EPA has required certain states to establish programs to address transport of air pollutants in accordance with the NO X SIP Call, October 27, 1998 (63 FR 57356), amendments to the NO X SIP Call, May 14, 1999 (64 FR 26298) and March 2, 2000 (65 FR 11222), and the Clean Air Interstate Rule (CAIR), May 12, 2005 (70 FR 25162). However, the section 110(a)(2)(D) requirements for a State are not linked with a particular nonattainment area's designation and classification in that State. EPA believes that the requirements linked with a particular nonattainment area's designation and classifications are the relevant measures to evaluate in reviewing a redesignation request. The transport SIP submittal requirements, where applicable, continue to apply to a state regardless of the designation of any one particular area in the State. Thus, we do not believe that these requirements are applicable requirements for purposes of redesignation.

In addition, EPA believes that the other section 110 elements not connected with nonattainment plan submissions and not linked with an area's attainment status are not applicable requirements for purposes of redesignation. The Altoona Area will still be subject to these requirements after it is redesignated. The section 110 and Part D requirements which are linked with a particular area's designation and classification, are the relevant measures to evaluate in reviewing a redesignation request. This policy is consistent with EPA's existing policy on applicability of conformity (i.e., for redesignations) and oxygenated fuels requirement. See Reading, Pennsylvania, proposed and final rulemakings (61 FR 53174, October 10, 1996), (62 FR 24826, May 7, 1997); Cleveland-Akron-Lorain, Ohio final rulemaking (61 FR 20458, May 7, 1996); and Tampa, Florida, final rulemaking (60 FR 62748, December 7, 1995). See also , the discussion on this issue in the Cincinnati redesignation (65 FR at 37890, June 19, 2000), and in the Pittsburgh redesignation (66 FR at 53099, October 19, 2001). Similarly, with respect to the NO X SIP Call rules, EPA noted in its Phase 1 Final Rule to Implement the 8-hour Ozone NAAQS, that the NO X SIP Call rules are not “an” ‘applicable requirement' for purposes of section 110(1) because the NO X rules apply regardless of an area's attainment or nonattainment status for the 8-hour (or the 1-hour) NAAQS.” 69 FR 23951, 23983 (April 30, 2004). EPA believes that section 110 elements not linked to the area's nonattainment status are not applicable for purposes of redesignation. As we explain later in this notice, no Part D requirements applicable for purposes of redesignation under the 8-hour standard became due for the Altoona Area prior to submission of the redesignation request

Pursuant to an April 30, 2004, final rule (69 FR 23951), the Altoona Area was designated a basic nonattainment area under subpart 1 for the 8-hour ozone standard. Sections 172-176 of the CAA, found in subpart 1 of part D, set forth the basic nonattainment requirements applicable to all nonattainment areas. Section 182 of the CAA, found in subpart 2 of part D, establishes additional specific requirements depending on the area's nonattainment classification. With respect to the 8-hour standard, the court's ruling rejected EPA's reasons for classifying areas under subpart 1 for the 8-hour standard, and remanded that matter to the Agency. Consequently, it is possible that this area could, during a remand to EPA, be reclassified under subpart 2. Although any future decision by EPA to classify this area under subpart 2 might trigger additional future requirements for the area, EPA believes that this does not mean that redesignation of the area cannot now go forward. This belief is based upon (1) EPA's longstanding policy of evaluating redesignation requests in accordance with the requirements due at the time the request is submitted; and, (2) consideration of the inequity of applying retroactively any requirements that might in the future be applied.

First, at the time the redesignation request was submitted, the Altoona Area was classified under subpart 1 and was obligated to meet subpart 1 requirements. Under EPA's longstanding interpretation of section 107(d)(3)(E) of the Clean Air Act, to qualify for redesignation, states requesting redesignation to attainment must meet only the relevant SIP requirements that came due prior to the submittal of a complete redesignation request. See September 4, 1992 Calcagni memorandum (“Procedures for Processing Requests to Redesignate Areas to Attainment,” Memorandum from John Calcagni, Director, Air Quality Management Division). See also , Michael Shapiro Memorandum, September 17, 1993, and 60 FR 12459, 12465-66 (March 7, 1995) (Redesignation of Detroit-Ann Arbor); Sierra Club v. EPA , 375 F.3d 537 (7th Cir. 2004), which upheld this interpretation. See 68 FR 25418, 25424, 25427 (May 12, 2003) (Redesignation of St. Louis).

Moreover, it would be inequitable to retroactively apply any new SIP requirements that were not applicable at the time the request was submitted. The D.C. Circuit has recognized the inequity in such retroactive rulemaking, See , Sierra Club v. Whitman , 285 F. 3d 63 (D.C. Cir. 2002), in which the D.C. Circuit upheld a District Court's ruling refusing to make retroactive an EPA determination of nonattainment that was past the statutory due date. Such a determination would have resulted in the imposition of additional requirements on the area. The Court stated: “Although EPA failed to make the nonattainment determination within the statutory time frame, Sierra Club's proposed solution only makes the situation worse. Retroactive relief would likely impose large costs on the States, which would face fines and suits for not implementing air pollution prevention plans in 1997, even though they were not on notice at the time.” Id. at 68. Similarly here it would be unfair to penalize the area by applying to it for purposes of redesignation additional SIP requirements under subpart 2 that were not in effect at the time it submitted its redesignation request.

With respect to 8-hour subpart 2 requirements, if the Altoona Area initially had been classified under subpart 2, the first two part D subpart 2 requirements applicable to the Altoona Area under section 182(a) of the CAA would be: A base-year inventory requirement pursuant to section 182(a)(1) of the CAA, and, the emissions statement requirement pursuant to section 182(a)(3)(B).

As stated previously, these requirements are not yet due for purposes of redesignation of the Altoona Area, but nevertheless, Pennsylvania already has in its approved SIP, an emissions statement rule for the 1-hour standard that covers all portions of the designated 8-hour nonattainment area and, that satisfies the emissions statement requirement for the 8-hour standard. See , 25 Pa. Code 135.21(a)(1), codified at 40 CFR 52.2020; 60 FR 2881, January 12, 1995. With respect to the base year inventory requirement, in this notice of proposed rulemaking, EPA is proposing to approve the 2002 base-year inventory for the Altoona Area, which was submitted on February 8, 2007, concurrently with its maintenance plan, into the Pennsylvania SIP. EPA is proposing to approve the 2002 base year inventory as fulfilling the requirements, if necessary, of both section 182(a)(1) and section 172(c)(3) of the CAA. A detailed evaluation of Pennsylvania's 2002 base-year inventory for the Altoona Area can be found in a Technical Support Document (TSD) prepared by EPA for this rulemaking. EPA has determined that the emission inventory and emissions statement requirements for the Altoona Area have been satisfied.

In addition to the fact that Part D requirements applicable for purposes of redesignation did not become due prior to submission of the redesignation request, EPA believes that the general conformity and NSR requirements do not require approval prior to redesignation.

With respect to section 176, Conformity Requirements, section 176(c) of the CAA requires states to establish criteria and procedures to ensure that Federally supported or funded projects conform to the air quality planning goals in the applicable SIP. The requirement to determine conformity applies to transportation plans, programs, and projects developed, funded or approved under Title 23 U.S.C. and the Federal Transit Act (“transportation conformity”) as well as to all other Federally supported or funded projects (“general conformity”). State conformity revisions must be consistent with Federal conformity regulations relating to consultation, enforcement and enforceability that the CAA required the EPA to promulgate. EPA believes it is reasonable to interpret the conformity SIP requirements as not applying for purposes of evaluating the redesignation request under section 107(d) since State conformity rules are still required after redesignation and Federal conformity rules apply where State rules have not been approved. See , Wall v. EPA , 265 F. 3d 426, 438-440 (6th Cir. 2001), upholding this interpretation. See also , 60 FR 62748 (December 7, 1995).

In the case of the Altoona Area, EPA has also determined that before being redesignated, the Altoona Area need not comply with the requirement that a NSR program be approved prior to redesignation. EPA has determined that areas being redesignated need not comply with the requirement that a NSR program be approved prior to redesignation, provided that the area demonstrates maintenance of the standard without Part D NSR in effect. The rationale for this position is described in a memorandum from Mary Nichols, Assistant Administrator for Air and Radiation, dated October 14, 1994, entitled, “Part D NSR Requirements or Areas Requesting Redesignation to Attainment.” Normally, State's Prevention of Significant Deterioration (PSD) program will become effective in the area immediately upon redesignation to attainment. See the more detailed explanations in the following redesignation rulemakings: Detroit, MI (60 FR 12467-12468 (March 7, 1995); Cleveland-Akron-Lorrain, OH (61 FR 20458, 20469-70, May 7, 1996); Louisville, KY (66 FR 53665, 53669, October 23, 2001); Grand Rapids, MI (61 FR 31831, 31836-31837, June 21, 1996). In the case of the Altoona Area the Chapter 127 Part D NSR regulations in the Pennsylvania SIP (codified at 40 CFR 52.2020(c)(1)) explicitly apply the requirements for NSR in section 184 of the CAA to ozone attainment areas within the OTR. The OTR NSR requirements are more stringent than that required for a marginal or basic ozone nonattainment area. On October 19, 2001 (66 FR 53094), EPA fully approved Pennsylvania's NSR SIP revision consisting of Pennsylvania's Chapter 127 Part D NSR regulations that cover the Altoona Area.

EPA has also interpreted the section 184 OTR requirements, including the NSR program, as not being applicable for purposes of redesignation. The rationale for this is based on two considerations. First, the requirement to submit SIP revisions for the section 184 requirements continues to apply to areas in the OTR after redesignation to attainment. Therefore, the State remains obligated to have NSR, as well as RACT, and Vehicle Inspection and Maintenance programs even after redesignation. Second, the section 184 control measures are region-wide requirements and do not apply to the Altoona Area by virtue of the Area's designation and classification. See 61 FR 53174, 53175-53176 (October 10, 1996) and 62 FR 24826, 24830-32 (May 7, 1997).

In its December 22, 2006 decision in South Coast , the Court also addressed EPA's revocation of the 1-hour ozone standard. The current status of the revocation and associated anti-backsliding rules is dependent on whether the Court's decision stands as originally issued or is modified in response to any petition for rehearing or request for clarification that has been filed. As described more fully below, EPA determined that the Altoona Area attained the 1-hour standard by its attainment date (60 FR 3349, January 17, 1995), continues to attain that standard, and has fulfilled any requirements of the 1-hour standard that would apply even if the 1-hour standard is reinstated and those requirements are viewed as applying under the statute itself. Thus, the Court's decision, as it currently stands, imposes no impediment to moving forward with redesignation of the Area to attainment.

The conformity portion of the Court's ruling does not impact the redesignation request for the Altoona Area because there are no conformity requirements that are relevant to redesignation request for any standard, including the requirement to submit a transportation conformity SIP. 1 As we have previously noted, under longstanding EPA policy, EPA believes it is reasonable to interpret the conformity SIP requirements as not applying for purposes of evaluating a redesignation request under section 107(d) because state conformity rules are still required after redesignation and federal conformity rules apply where state rules have not been approved. 40 CFR 51.390. See , Wall v. EPA , 265 F.3d 426 (6th Cir. 2001), upholding this interpretation. See also , 60 FR 62748 (Dec. 7, 1995) (Tampa, Florida redesignation).

With respect to the requirement for submission of contingency measures for the 1-hour standard, section 182(a) does not require contingency measures for marginal areas, and, therefore, that portion of the Court's ruling does not impact the redesignation request for the Altoona Area.

Prior to its designation as an 8-hour ozone nonattainment area, the Altoona Area was designated a marginal nonattainment area for the 1-hour standard. With respect to the 1-hour standard, the applicable requirements of subpart 1 and of subpart 2 of Part D (section 182) for the Altoona Area are discussed in the following paragraphs:

Section 182(a)(2)(A) required SIP revisions to correct or amend RACT for sources in marginal areas, such as the Altoona Area, that were subject to control technique guidelines (CTGs) issued before November 15, 1990 pursuant to CAA section 108. On December 22, 1994, EPA fully approved into the Pennsylvania SIP all corrections required under section 182(a)(2)(A) of the CAA (59 FR 65971, December 22, 1994). EPA believes that this requirement applies only to marginal and higher classified areas under the 1-hour NAAQS pursuant to the 1990 amendments to the CAA; therefore, this is a one-time requirement. After an area has fulfilled the section 182(a)(2)(A) requirement for the 1-hour NAAQS, there is no requirement under the 8-hour NAAQS.

Section 182(a)(2)(B) relates to the savings clause for vehicle inspection and maintenance (I/M). It requires marginal areas to adopt vehicle I/M programs. This provision was not applicable to the Altoona Area because this area did not have and was not required to have an I/M program before November 15, 1990.

Section 182(a)(3)(A) requires a triennial Periodic Emissions Inventory for the nonattainment area. The most recent inventory for the Altoona Area was compiled for 2002 and submitted to EPA as a SIP revision with the maintenance plan for the Altoona Area.

With respect to NSR, EPA has determined that areas being redesignated need not have an approved New Source Review program for the same reasons discussed previously with respect to the applicable part D requirements for the 8-hour standard.

Section 182(a)(3)(B)—This provision of the Act requires sources of VOCs and NO X in the nonattainment area to submit annual Emissions Statements regarding the quantity of emissions from the previous year. As discussed previously, Pennsylvania already has in its approved SIP, a previously approved emissions statement rule for the 1-hour standard, which applies to the Altoona Area.

Section 182(a)(1)—This provision of the Act provides for the submission of a comprehensive, accurate, current inventory of actual emissions from all sources, as described in section 172(c)(3), in accordance with guidance provided by the Administrator. In this proposed rule, EPA is proposing to approve a 2002 base year emissions inventory for the Altoona Area as meeting the requirement of section 182(a)(1). While EPA generally required that the base year inventory for the 1-hour standard be for calendar year 1990, EPA believes that Pennsylvania's 2002 inventory fulfills this requirement because it meets EPA's guidance and because it is more current than 1990. EPA also proposes to determine that, if the 1-hour standard is deemed to be reinstated, the 2002 base year inventory for the 8-hour standard will provide an acceptable substitute for the base year inventory for the 1-hour standard.

EPA has previously determined that the Altoona Area has attained the 1-hour ozone NAAQS by the November 15, 1993 attainment date (60 FR 3349, January 17, 1995), and we believe that the Altoona Area is still in attainment for the 1-hour ozone NAAQS based upon the ozone monitoring data for the years 2003-2005. To demonstrate attainment, i.e., compliance with this standard, the annual average of the number of expected exceedances of the 1-hour standard over a three-year period must be less than or equal to 1. Table 3 provides a summary of the number of expected exceedances for each of the years 2003 through 2005 and three-year annual average.

In summary, EPA has determined that the data submitted by Pennsylvania and taken from AQS indicates that Altoona Area is maintaining air quality that conforms to the 1-hour ozone NAAQS. EPA believes this conclusion remains valid after review of the certified 2006 data because no exceedances were recorded in the Altoona Area in 2006.

All areas in the Ozone Transport Region (OTR), both attainment and nonattainment, are subject to additional control requirements under section 184 for the purpose of reducing interstate transport of emissions that may contribute to downwind ozone nonattainment. The section 184 requirements include reasonably available control technology (RACT), NSR, enhanced vehicle inspection and maintenance, and Stage II vapor recovery or a comparable measure.

In the case of the Altoona Area, which is located in the OTR, nonattainment NSR will be applicable after redesignation. As discussed previously, EPA has fully approved Pennsylvania's NSR SIP revision which applies the requirements for NSR of section 184 of the CAA to attainment areas within the OTR.

As discussed previously in this notice, EPA has also interpreted the section 184 OTR requirements, including NSR, as not being applicable for purposes of redesignation. See , 61 FR 53174, October 10, 1996 and 62 FR 24826, May 7, 1997 (Reading, Pennsylvania Redesignation).

EPA has fully approved the Pennsylvania SIP for the purposes of this redesignation. EPA may rely on prior SIP approvals in approving a redesignation request. Calcagni Memo, p. 3; Southwestern Pennsylvania Growth Alliance v. Browner , 144 F.3d 984, 989-90 (6th Cir. 1998), Wall v. EPA , 265 F.3d 426 (6th Cir. 2001), plus any additional measures it may approve in conjunction with a redesignation action. See , 68 FR at 25425 (May 12, 2003) and citations therein.

EPA believes that the Commonwealth has demonstrated that the observed air quality improvement in the Altoona Area is due to permanent and enforceable reductions in emissions resulting from implementation of the SIP, Federal measures, and other State-adopted measures. Emissions reductions attributable to these rules are shown in Table 4.

Between 2002 and 2004, VOC emissions decreased by 1.3 tpsd from 15.3 tpsd to 14.0 tpsd; NO X emissions decreased by 0.9 tpsd from 18.0 tpsd to 17.1 tpsd. These reductions, and anticipated future reductions, are due to the following permanent and enforceable measures.

EPA believes that permanent and enforceable emissions reductions are the cause of the long-term improvement in ozone levels and are the cause of the Area achieving attainment of the 8-hour ozone standard.

In conjunction with its request to redesignate the Altoona Area to attainment status, Pennsylvania submitted a SIP revision to provide for maintenance of the 8-hour ozone NAAQS in the Area for at least 11 years after redesignation. The Commonwealth is requesting that EPA approve this SIP revision as meeting the requirement of CAA 175A. Once approved, the maintenance plan for the 8-hour ozone NAAQS will ensure that the SIP for Altoona meets the requirements of the CAA regarding maintenance of the applicable 8-hour ozone standard.

Section 175 of the CAA sets forth the elements of a maintenance plan for areas seeking redesignation from nonattainment to attainment. Under section 175A, the plan must demonstrate continued attainment of the applicable NAAQS for at least 10 years after approval of a redesignation of an area to attainment. Eight years after the redesignation, the Commonwealth must submit a revised maintenance plan demonstrating that attainment will continue to be maintained for the 10 years following the initial 10-year period. To address the possibility of future NAAQS violations, the maintenance plan must contain such contingency measures, with a schedule for implementation, as EPA deems necessary to assure prompt correction of any future 8-hour ozone violations. Section 175A of the CAA sets forth the elements of a maintenance plan for areas seeking redesignation from nonattainment to attainment. The Calcagni memorandum dated September 4, 1992, provides additional guidance on the content of a maintenance plan. An ozone maintenance plan should address the following provisions:

(a) An attainment emissions inventory;

(b) A maintenance demonstration;

(c) A monitoring network;

(d) Verification of continued attainment; and

(e) A contingency plan.

(a) Attainment inventory—An attainment inventory includes the emissions during the time period associated with the monitoring data showing attainment. PADEP determined that the appropriate attainment inventory year is 2004. That year establishes a reasonable year within the three-year block of 2003-2005 as a baseline and accounts for reductions attributable to implementation of the CAA requirements to date. The 2004 inventory is consistent with EPA guidance and is based on actual “typical summer day” emissions of VOC and NO X during 2004 and consists of a list of sources and their associated emissions.

The 2002 and 2004 point source data was compiled from actual sources. Pennsylvania requires owners and operators of larger facilities to submit annual production figures and emission calculations each year. Throughput data are multiplied by emission factors from Factor Information Retrieval (FIRE) Data Systems and EPA's publication series AP-42, and are based on Source Classification Codes (SCC). The 2002 area source data was compiled using county-level activity data, from census numbers, from county numbers, etc. The 2004 area source data was projected from the 2002 inventory using temporal allocations provided by the Mid-Atlantic Regional Air Management Association (MARAMA).

The on-road mobile source inventories for 2002 and 2004 were compiled using MOBILE6.2 and Pennsylvania Department of Transportation (PENNDOT) estimates for VMT. The PADEP has provided detailed data summaries to document the calculations of mobile on-road VOC and NO X emissions for 2002, as well as for the projection years of 2004, 2009, and 2018 (shown in Tables 5 and 6 below). The 2002 and 2004 emissions for the majority of non-road emission source categories were estimated using the EPA NONROAD 2005 model. The NONROAD model calculates emissions for diesel, gasoline, liquefied petroleum gasoline, and compressed natural gas-fueled non-road equipment types and includes growth factors. The NONROAD model does not estimate emissions from locomotives or aircraft. For 2002 and 2004 locomotive emissions, the PADEP projected emissions from a 1999 survey using national fuel consumption information and EPA emission and conversion factors. There are no significant commercial aircraft operations (aircraft that can seat over 60 passengers) in Blair County. The Altoona Airport in Blair County supports some air taxi operations that account for a very small amount of emissions. For 2002 and 2004 aircraft emissions, PADEP estimated emissions using small airport operations statistics from http://www.airnav.com, and emission factors and operational characteristics in the EPA-approved model, Emissions and Dispersion Modeling System (EDMS).

More detailed information on the compilation of the 2002, 2004, 2009, and 2018 inventories can be found in the Technical Appendices, which are part of this submittal.

(b) Maintenance Demonstration—On February 8, 2007, the PADEP submitted a maintenance plan as required by section 175A of the CAA. The Altoona maintenance plan shows maintenance of the 8-hour ozone NAAQS by demonstrating that current and future emissions of VOC and NO X remain at or below the attainment year 2004 emissions levels throughout the Altoona Area through the year 2018. A maintenance demonstration need not be based on modeling. See Wall v. EPA, supra; Sierra Club v. EPA, supra. See also 66 FR at 53099-53100; 68 FR at 25430-32.

Tables 5 and 6 specify the VOC and NO X emissions for the Altoona Area for 2004, 2009, and 2018. The PADEP chose 2009 as an interim year in the maintenance demonstration period to demonstrate that the VOC and NO X emissions are not projected to increase above the 2004 attainment level during the time of the maintenance period.

Additionally, the following programs are either effective or due to become effective and will further contribute to the maintenance demonstration of the 8-hour ozone NAAQS:

• The Clean Air Interstate Rule (CAIR) (71 FR 25328, April 28, 2006).

• The Federal NO X SIP Call (66 FR 43795, August 21, 2001).

• Area VOC regulations concerning portable fuel containers (69 FR 70893, December 8, 2004), consumer products (69 FR 70895, December 8, 2004), and architectural and industrial maintenance coatings (AIM) (69 FR 68080, November 23, 2004).

• Federal Motor Vehicle Control Programs (light-duty ) (Tier 1, Tier 2; 56 FR 25724, June 5, 1991; 65 FR 6698, February 10, 2000).

• Vehicle emission/inspection/maintenance program (70 FR 58313, October 6, 2005).

• Heavy duty diesel on-road (2004/2007) and low sulfur on-road (2006); 66 FR 5002, (January 18, 2001).

• Non-road emission standards (2008) and off-road diesel fuel 2007/2010); 69 FR 38958 (June 29, 2004).

• NLEV/PA Clean Vehicle Program (54 FR 72564, December 28, 1999)—Pennsylvania will implement this program in car model year 2008 and beyond.

• Pennsylvania Heavy-Duty Diesel Emissions Control Program. (May 10, 2002).

Based on the comparison of the projected emissions and the attainment year emissions along with the additional measures, EPA concludes that PADEP has successfully demonstrated that the 8-hour ozone standard should be maintained in the Altoona Area.

(c) Monitoring Network—There is currently one monitor measuring ozone in the Altoona Area. PADEP will continue to operate its current air quality monitor (located in Blair County), in accordance with 40 CFR part 58.

(d) Verification of Continued Attainment—In addition to maintaining the key elements of its regulatory program, the Commonwealth will track the attainment status of the ozone NAAQs in the Area by reviewing air quality and emissions data during the maintenance period. The Commonwealth will perform an annual evaluation of Vehicle Miles Traveled (VMT) data and emissions reported from stationary sources, and compare them to the assumptions about these factors used in the maintenance plan. The Commonwealth will also evaluate the periodic (every three years) emission inventories prepared under EPA's Consolidated Emission Reporting Regulation (40 CFR part 51, subpart A) to see if they exceed the attainment year inventory (2004) by more than 10 percent. The PADEP will also continue to operate the existing ozone monitoring station in the Area pursuant to 40 CFR part 58 throughout the maintenance period and submit quality-assured ozone data to EPA through the AQS system. Section 175A(b) of the CAA states that eight years following redesignation of the Altoona Area, PADEP will be required to submit a second maintenance plan that will ensure attainment through 2028. PADEP has made that commitment to meet the requirement section 175A(b).

(e) The Maintenance Plan's Contingency Measures—The contingency plan provisions are designed to promptly correct a violation of the NAAQS that occurs after redesignation. Section 175A of the CAA requires that a maintenance plan include such contingency measures as EPA deems necessary to ensure that the Commonwealth will promptly correct a violation of the NAAQS that occurs after redesignation. The maintenance plan should identify the events that would “trigger” the adoption and implementation of a contingency measure(s), the contingency measure(s) that would be adopted and implemented, and the schedule indicating the time frame by which the state would adopt and implement the measure(s).

The ability of the Altoona Area to stay in compliance with the 8-hour ozone standard after redesignation depends upon VOC and NO X emissions in the Area remaining at or below 2004 levels. The Commonwealth's maintenance plan projects VOC and NO X emissions to decrease and stay below 2004 levels through the year 2018. The Commonwealth's maintenance plan outlines the procedures for the adoption and implementation of contingency measures to further reduce emissions should a violation occur.

Contingency measures will be considered if for two consecutive years the fourth highest 8-hour ozone concentrations at the Blair County monitor are above 84 ppb. If this trigger point occurs, the Commonwealth will evaluate whether additional local emission control measures should be implemented in order to prevent a violation of the air quality standard. PADEP will also analyze the conditions leading to the excessive ozone levels and evaluate which measures might be most effective in correcting the excessive ozone levels. PADEP will also analyze the potential emissions effect of Federal, state, and local measures that have been adopted but not yet implemented at the time the excessive ozone levels occurred. PADEP will then begin the process of implementing any selected measures.

Contingency measures will also be considered in the event that a violation of the 8-hour ozone standard occurs at the Altoona County, Pennsylvania monitor. In the event of a violation of the 8-hour ozone standard, PADEP will adopt additional emissions reduction measures as expeditiously as practicable in accordance with the implementation schedule listed later in this notice and in the Pennsylvania Air Pollution Control Act in order to return the Area to attainment with the standard. Contingency measures to be considered for Altoona will include, but not be limited to the following:

Regulatory measures:

Non-Regulatory measures:

The plan lays out a process to have any regulatory contingency measures in effect within 19 months of the trigger. The plan also lays out a process to implement the non-regulatory contingency measures within 12-24 months of the trigger.

Under the CAA, States are required to submit, at various times, control strategy SIPs and maintenance plans in ozone areas. These control strategy SIPs (i.e., RFP SIPs and attainment demonstration SIPs) and maintenance plans identify and establish MVEBs for certain criteria pollutants and/or their precursors to address pollution from on-road mobile sources. In the maintenance plan, the MVEBs are termed “on-road mobile source emission budgets.” Pursuant to 40 CFR part 93 and 51.112, MVEBs must be established in an ozone maintenance plan. An MVEB is the portion of the total allowable emissions that is allocated to highway and transit vehicle use and emissions. An MVEB serves as a ceiling on emissions from an area's planned transportation system. The MVEB concept is further explained in the preamble to the November 24, 1993, transportation conformity rule (58 FR 62188). The preamble also describes how to establish and revise the MVEBs in control strategy SIPs and maintenance plans.

Under section 176(c) of the CAA, new transportation projects, such as the construction of new highways, must “conform” to (i.e., be consistent with) the part of the State's air quality plan that addresses pollution from cars and trucks. “Conformity” to the SIP means that transportation activities will not cause new air quality violations, worsen existing violations, or delay timely attainment of or reasonable progress towards the NAAQS. If a transportation plan does not “conform,” most new projects that would expand the capacity of roadways cannot go forward. Regulations at 40 CFR part 93 set forth EPA policy, criteria, and procedures for demonstrating and ensuring conformity of such transportation activities to a SIP.

When reviewing submitted “control strategy” SIPs or maintenance plans containing MVEBs, EPA must affirmatively find the MVEB contained therein “adequate” for use in determining transportation conformity. After EPA affirmatively finds the submitted MVEB is adequate for transportation conformity purposes, that MVEB can be used by state and federal agencies in determining whether proposed transportation projects “conform” to the SIP as required by section 176(c) of the CAA. EPA's substantive criteria for determining “adequacy” of a MVEB are set out in 40 CFR 93.118(e)(4)

EPA's process for determining “adequacy” consists of three basic steps: Public notification of a SIP submission, a public comment period, and EPA's adequacy finding. This process for determining the adequacy of submitted SIP MVEBs was initially outlined in EPA's May 14, 1999 guidance, “Conformity Guidance on Implementation of March 2, 1999, Conformity Court Decision.” This guidance was finalized in the Transportation Conformity Rule Amendments for the “New 8-Hour Ozone and PM2.5 National Ambient Air Quality Standards and Miscellaneous Revisions for Existing Areas; Transportation Conformity Rule Amendments—Response to Court Decision and Additional Rule Change” on July 1, 2004 (69 FR 40004). EPA consults this guidance and follows this rulemaking in making its adequacy determinations.

The MVEBS for the Altoona Area are listed in Table 1 of this document for 2009 and 2018, and are the projected emissions for the on-road mobile sources plus any portion of the safety margin allocated to the MVEBs (safety margin allocation for 2009 and 2018 only). These emission budgets, when approved by EPA, must be used for transportation conformity determinations.

A “safety margin” is the difference between the attainment level of emissions (from all sources) and the projected level of emissions (from all sources) in the maintenance plan. The attainment level of emissions is the level of emissions during one of the years in which the area met the NAAQS. The following example is for the 2018 safety margin: The Altoona Area first attained the 8-hour ozone NAAQS during the 2002 to 2004 time period. The State used 2004 as the year to determine attainment levels of emissions for the Altoona Area. The total emissions from point, area, mobile on-road, and mobile non-road sources in 2004 equaled 14.0 tpsd of VOC and 17.1 tpsd of NO X . The PADEP projected emissions out to the year 2018 and projected a total of 10.9 tpsd of VOC and 9.1 tpsd of NO X from all sources in the Altoona Area. The safety margin for 2018 would be the difference between these amounts, or 3.1 tpsd of VOC and 8.0 tpsd of NO X . The emissions up to the level of the attainment year including the safety margins are projected to maintain the area's air quality consistent with the 8-hour ozone NAAQS. The safety margin is the extra emissions reduction below the attainment levels that can be allocated for emissions by various sources as long as the total emission levels are maintained at or below the attainment levels. Table 7 shows the safety margins for the 2009 and 2018 years.

The PADEP allocated 0.4 tpsd VOC and 0.4 tpsd NO X to the 2009 interim VOC projected on-road mobile source emissions projection and the 2009 interim NO X projected on-road mobile source emissions projection to arrive at the 2009 MVEBs. For the 2018 MVEBs the PADEP allocated 0.6 tpsd VOC and 0.5 tpsd NO X from the 2018 safety margins to arrive at the 2018 MVEBs. Once allocated to the mobile source budgets these portions of the safety margins are no longer available, and may no longer be allocated to any other source category. Table 8 shows the final 2009 and 2018 MVEBS for Altoona.

The 2009 and 2018 MVEBs for the Altoona Area are approvable because the MVEBs for VOCs and NO X continue to maintain the total emissions at or below the attainment year inventory levels as required by the transportation conformity regulations.

The MVEBs for the Altoona Area maintenance plan are being posted to EPA's conformity Web site concurrently with this proposal. The public comment period will end at the same time as the public comment period for this proposed rule. In this case, EPA is concurrently processing the action on the maintenance plan and the adequacy process for the MVEBs contained therein. In this proposed rule, EPA is proposing to find the MVEBs adequate and also proposing to approve the MVEBs as part of the maintenance plan. The MVEBs cannot be used for transportation conformity until the maintenance plan and associated MVEBs are approved in a final Federal Register notice, or EPA otherwise finds the budgets adequate in a separate action following the comment period.

If EPA receives adverse written comments with respect to the proposed approval of the Altoona MVEBs, or any other aspect of our proposed approval of this updated maintenance plan, we will respond to the comments on the MVEBs in our final action or proceed with the adequacy process as a separate action. Our action on the Altoona Area MVEBs will also be announced on EPA's conformity Web site: http://www.epa.gov/otaq/stateresources/transconf/index.htm (once there, click on “Adequacy Review of SIP Submissions”).

EPA is proposing to determine that the Altoona Area has attained the 8-hour ozone NAAQS. EPA is also proposing to approve the redesignation of the Altoona Area from nonattainment to attainment for the 8-hour ozone NAAQS. EPA has evaluated Pennsylvania's redesignation request and determined that it meets the redesignation criteria set forth in section 107(d)(3)(E) of the CAA. EPA believes that the redesignation request and monitoring data demonstrate that the Altoona Area has attained the 8-hour ozone standard. The final approval of this redesignation request would change the designation of the Altoona Area from nonattainment to attainment for the 8-hour ozone standard. EPA is also proposing to approve the associated maintenance plan for the Altoona Area, submitted on February 8, 2007, as a revision to the Pennsylvania SIP. EPA is proposing to approve the maintenance plan for the Altoona Area because it meets the requirements of section 175A as described previously in this notice. EPA is also proposing to approve the 2002 base-year inventory for the Altoona Area, and the MVEBs submitted by Pennsylvania for the Altoona Area in conjunction with its redesignation request. EPA is soliciting public comments on the issues discussed in this document. These comments will be considered before taking final action.

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this proposed action is not a “significant regulatory action” and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001). This action merely proposes to approve state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law. Accordingly, the Administrator certifies that this proposed rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ). Because this rule proposes to approve pre-existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). This proposed rule also does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it have substantial direct effects 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, as specified in Executive Order 13132 (64 FR 43255, August 10, 1999), because it merely proposes to approve a state rule implementing a Federal requirement, and does not alter the relationship or the distribution of power and responsibilities established in the Clean Air Act. This proposed rule also is not subject to Executive Order 13045 (62 FR 19885, April 23, 1997), because it approves a state rule implementing a Federal standard. In reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards (VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA, when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the Clean Air Act. Redesignation is an action that affects the status of a geographical area and does not impose any new requirements on sources. Thus, the requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) do not apply. As required by section 3 of Executive Order 12988 (61 FR 4729, February 7, 1996), in issuing this proposed rule, EPA has taken the necessary steps to eliminate drafting errors and ambiguity, minimize potential litigation, and provide a clear legal standard for affected conduct. EPA has complied with Executive Order 12630 (53 FR 8859, March 15, 1988) by examining the takings implications of the rule in accordance with the “Attorney General's Supplemental Guidelines for the Evaluation of Risk and Avoidance of Unanticipated Takings” issued under the executive order.

This rule, proposing to approve the redesignation of the Altoona Area to attainment for the 8-hour ozone NAAQS, the associated maintenance plan, the 2002 base-year inventory, and the MVEBs identified in the maintenance plan, does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq. ).

In FR Doc. 07-1920 of May 3, 2007 (72 FR 24680), there were a number of technical errors that are identified and corrected in the Correction of Errors section of this notice. We issued the fiscal year (FY) 2008 hospital inpatient prospective payment systems (IPPS) proposed rule on April 13, 2007. The FY 2008 IPPS proposed rule appeared in the May 3, 2007 Federal Register .

We recently discovered that an error was made in the calculation of the DRG relative weights presented in the FY 2008 IPPS proposed rule. We have revised the relative weights to correct the error and have recalculated the standardized amounts. These changes increase the standardized amounts slightly and reduce the proposed FY 2008 outlier threshold by $85. Further, these revisions affect the DRG-specific costs thresholds for new technology add-on payments. Therefore, in this notice we are correcting the following:

• Preamble language regarding the methodology used to calculate charge-based and cost-based relative weights.

• Outlier threshold.

• Recalibration, wage and recalibration, geographic reclassification, and rural floor budget neutrality factors.

• Tables 1A through 1D, 2, 4A, 4C, 4J, 5, 10.

• Impact analysis tables (Tables I and II).

In FR Doc. 07-1920 of May 3, 2007 (72 FR 24680), make the following corrections:

1. On page 24711, second column, last paragraph, sixth line from the bottom, the figure “$23,015” is corrected to read “$22,930.”

2. On page 24746, second column,

a. Third full paragraph, line 9, the phrase, “in the FY 2005 MedPAR” is corrected to read “in the FY 2006 MedPAR.”

b. Fifth full paragraph, last line, after the phrase “cost of living adjustment.”, the following sentence is added to read as follows:

“Beginning with FY 2008, because hospital charges include charges for both operating and capital costs, we are proposing to standardize total charges to remove the effects of differences in geographic adjustment factors, large urban add-on payments, cost-of-living adjustment, disproportionate share payments, and IME adjustments under the capital IPPS as well.”

3. On page 24747, first column, third full paragraph, last line, after the phrase “cost of living adjustment.” and before the phrase “Charges were then”, the following sentence is added to read as follows:

“Beginning with FY 2008, because hospital charges include charges for both operating and capital costs, we are proposing to standardize total charges to remove the effects of differences in geographic adjustment factors, large urban add-on payments, cost-of-living adjustment, disproportionate share payments, and IME adjustments under the capital IPPS as well.”

1. On page 24836,

a. First column, second full paragraph,

(1) Line 14, the figure “0.999317” is corrected to read “0.999367.”

(2) Lines 19 and 29, the figure “0.998557” is corrected to read “0.998573.”

b. Second column, first partial paragraph, line 17, the figure “0.991938” is corrected to read “0.991925.”

2. On page 24837, second column, second full paragraph, line 6, the figure “$23,015” is corrected to read “$22,930”.

3. On page 24839, top half of the page, in the table Comparison of FY 2007 Standardized Amounts to Proposed FY 2008 Single Standardized Amount with Full Update and Reduced Update, the figures in the listed entries are corrected to read as follows: