Please refer to Docket ID NRC-2023-0058 when contacting the NRC about the availability of information for this action. You may obtain publicly available information related to this action by any of the following methods:

• Federal Rulemaking Website: Go to https://www.regulations.gov and search for Docket ID NRC-2023-0058.

• NRC's Agencywide Documents Access and Management System (ADAMS): You may obtain publicly available documents online in the ADAMS Public Documents collection at https://www.nrc.gov/reading-rm/adams.html. To begin the search, select “Begin Web-based ADAMS Search.” For problems with ADAMS, please contact the NRC's Public Document Room (PDR) reference staff at 1-800-397-4209, at 301-415-4737, or by email to PDR.Resource@nrc.gov. The draft RIS “Required Assessment of U.S. Department of Energy Laboratories by Licensees, Applicants, and Suppliers to Verify the Effective Implementation of Their Quality Assurance Programs,” is available in ADAMS under Accession No. ML22080A051.

• NRC's PDR: The PDR, where you may examine and order copies of publicly available documents, is open by appointment. To make an appointment to visit the PDR, please send an email to PDR.Resource@nrc.gov or call 1-800-397-4209 or 301-415-4737, between 8 a.m. and 4 p.m. eastern time (ET), Monday through Friday, except Federal holidays.

The NRC encourages electronic comment submission through the Federal rulemaking website ( https://www.regulations.gov ). Please include Docket ID NRC-2023-0058 in your comment submission.

The NRC cautions you not to include identifying or contact information that you do not want to be publicly disclosed in your comment submission. The NRC will post all comment submissions at https://www.regulations.gov as well as enter the comment submissions into ADAMS. The NRC does not routinely edit comment submissions to remove identifying or contact information.

If you are requesting or aggregating comments from other persons for submission to the NRC, then you should inform those persons not to include identifying or contact information that they do not want to be publicly disclosed in their comment submission. Your request should state that the NRC does not routinely edit comment submissions to remove such information before making the comment submissions available to the public or entering the comment into ADAMS.

The NRC staff has received several inquiries from nuclear industry stakeholders on what type of assessment is required for U.S. Department of Energy (DOE) national laboratories that provide basic components to the U.S. nuclear power industry. The NRC is issuing this draft regulatory issue summary (RIS) to clarify the agency's regulatory position regarding the required assessment of U.S. DOE national laboratories by licensees, applicants, and vendors to verify the effective implementation of the laboratories' quality assurance programs.

The NRC issues RISs to communicate with stakeholders on a broad range of matters. It provides guidance to applicants and licensees on the scope and detail of information that should be provided in licensing applications to facilitate NRC review.

As noted in the Federal Register on May 8, 2018 (83 FR 20858), this document is being published in the “Proposed Rules” section of the Federal Register to comply with publication requirements under 1 CFR chapter I.

The NRC is requesting public comments on the draft RIS. All comments that are to receive consideration in the final RIS must still be submitted electronically or in writing as indicated in the ADDRESSES section of this document. The NRC staff will make a final determination regarding issuance of the RIS after it considers any public comments received in response to this request.

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2023-1893; Project Identifier AD-2023-00389-A” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend this proposal because of those comments.

Except for Confidential Business Information (CBI) as described in the following paragraph, and other information as described in 14 CFR 11.35, the FAA will post all comments received, without change, to regulations.gov, including any personal information you provide. The agency will also post a report summarizing each substantive verbal contact received about this NPRM.

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Joseph Zuklic, Aviation Safety Engineer, FAA, 2200 South 216th Street, Des Moines, WA 98198. Any commentary that the FAA receives which is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The FAA received reports of two non-fatal accidents involving airplanes designed and built by Piper that were caused by broken rudder posts that structurally failed above the upper hinge in flight. Both accidents occurred in Anchorage, Alaska. The first accident occurred on June 8, 2020, and involved an FS 2003 Model PA-12 airplane and the second accident occurred on July 23, 2021, and involved an FS 2002 Model PA-14 airplane. Both airplanes sustained substantial damage when the rudder structurally failed.

The National Transportation Safety Board (NTSB) published the report Structural Failure of Piper Part Number 40622 Rudder Posts Made of 1025 Carbon Steel, NTSB/AIR-22/02, dated January 10, 2022, which provides information regarding the NTSB's investigations of these two accidents. The NTSB accident investigation report included a recommendation (Safety Recommendation No. A-22-3) to the FAA to issue an airworthiness directive addressing this unsafe condition. The NTSB report can be found on ntsb.gov.

The NTSB examined the rudders involved in these accidents and determined that the rudder posts fractured above the upper hinge and the top portion of the rudder folded over the upper tail brace wires. The NTSB also determined that the rudder posts were made from 1025 carbon steel and fractured due to fatigue.

Prior to this proposed rulemaking action the FAA issued an Airworthiness Concern Sheet, dated September 4, 2020, that requested information from the aviation community regarding in-flight failure of the rudder just above the upper hinge on all Piper and FS2003 Corp (type certificate previously held by Piper) Model J-5A, J-5B, J-5C, J-5D, AE-1, HE-1, PA-12, PA-12S, PA-14, PA-16, PA-18, L-21, PA-20, and PA-22 airplanes. The responses revealed that there were five additional broken rudder incidents dating as far back as 1979.

Prior to 1974, all rudders installed on Piper model airplanes were equipped with rudder posts manufactured from 1025 carbon steel and starting in 1974, the rudder posts were manufactured from 4130N low-alloy steel (Chromoly). Most parts manufacturer approval rudders are equipped with rudder posts made from 4130N low-alloy steel.

The NTSB determined that the broken rudder incidents resulted from the combination of fatigue loading and corrosion affecting the rudder assemblies made from 1025 carbon steel. This condition, if not addressed, could result in a broken rudder and consequent reduced ability of the flightcrew to maintain the safe flight and landing of the airplane.

The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop on other products of the same type design.

This proposed AD would require replacing any rudder equipped with a rudder post made from 1025 carbon steel with a rudder equipped with a rudder post made from 4130N low-alloy steel.

The FAA estimates that this AD, if adopted as proposed, would affect 30,992 airplanes of U.S. registry.

The FAA estimates the following costs to comply with this proposed AD:

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

The FAA is issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: General requirements. Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

The FAA determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this proposed regulation:

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

(2) Would not affect intrastate aviation in Alaska, and

(3) Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

On May 19, 2011, the Treasury Department and the IRS published final regulations (TD 9526) in the Federal Register (76 FR 28890) under section 367(b) that relate to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving one or more foreign corporations (the Final Regulations). On April 25, 2014, the Treasury Department and the IRS issued Notice 2014-32 (2014-20 IRB 1006), which identified transactions designed to exploit certain aspects of the Final Regulations and announced that regulations would be issued under section 367 to address these transactions. On December 2, 2016, the Treasury Department and the IRS issued Notice 2016-73 (2016-52 IRB 908), which identified other transactions designed to exploit the Final Regulations, as modified by the rules announced in Notice 2014-32, and announced that additional regulations would be issued under section 367. The Treasury Department and the IRS believe that the transactions described in each notice raise significant policy concerns.

This document sets forth the regulations described in Notice 2014-32 and Notice 2016-73, modified as discussed in this preamble. In response to a request for comments in Notice 2016-73, one comment was received and is discussed in this preamble. No comments were received on Notice 2014-32.

Section 367(a)(1) provides that if, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation. Under section 367(a)(5), the Secretary has broad authority to exempt transactions from the application of section 367(a)(1) in order to carry out the purposes of section 367(a).

Section 367(b)(1) provides that, in the case of any exchange described in section 332, 351, 354, 355, 356, or 361 in connection with which there is no transfer of property described in section 367(a)(1), a foreign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes. Section 367(b)(2) provides that the regulations prescribed pursuant to section 367(b)(1) shall include (but shall not be limited to) regulations dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, including regulations providing the circumstances under which gain is recognized currently, amounts are included in gross income as a dividend, or both; and the extent to which adjustments are made to earnings and profits, the basis of stock or securities, and the basis of assets.

Section 367(b) was enacted to help ensure that international tax considerations are adequately addressed when the provisions in chapter 1, subchapter C, of subtitle A of the Internal Revenue Code (the Code) apply to an exchange involving a foreign corporation. Thus, the regulations under section 367(b) require that adjustments or inclusions be made to prevent the material distortions of income that can occur when the subchapter C provisions apply to an exchange involving a foreign corporation.

The legislative history to section 367(b) describes Congress's particular concern with the need “to protect against tax avoidance . . . upon the repatriation of previously untaxed foreign earnings” and its intent to grant the Treasury Department broad authority to promulgate regulations to prevent the avoidance of Federal income taxes. H.R. Rep. No. 94-658, at 241 (1975). Moreover, Congress specifically identified “transfers constituting a repatriation of foreign earnings” as a type of transfer to be covered by such regulations. Id. at 245. The Final Regulations were promulgated in part to address these concerns. More specifically, one of the purposes of the Final Regulations is to require adjustments to address the avoidance of U.S. tax, including the repatriation of foreign earnings without being subject to U.S. tax, through the separation of earnings and profits of a corporation from property distributed by such corporation in connection with certain triangular reorganizations.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA) (Pub. L. 115-97), which added and amended a number of international tax provisions. One effect of these new provisions, and in particular sections 951A and 965, was to increase the amount of foreign earnings or income subject to immediate U.S. taxation. Section 965 imposed a one-time transition tax on certain earnings and profits of foreign corporations, and section 951A subjects certain income of a controlled foreign corporation (CFC) (as defined in section 957(a)) to current U.S. taxation in the hands of the CFC's United States shareholders (as defined in section 951(b)). The TCJA also generally retained the existing anti-deferral rules in subpart F of the Code (sections 951 through 965, as amended), under which, for example, a CFC's passive income, subject to certain exceptions, is similarly subject to current U.S. taxation. The combined effect of sections 951, 951A, and 965 is that an increased amount of foreign earnings and profits will have been subject to U.S. tax regardless of whether the earnings and profits are in fact repatriated. Under section 959, such previously taxed earnings and profits (PTEP) are not again subject to U.S. tax upon their repatriation.

The TCJA also added section 245A to the Code, under which certain United States shareholders of a specified 10-percent owned foreign corporation (SFC) (as defined in section 245A(b)(1)) generally are entitled to a 100-percent dividends received deduction with respect to dividends received from the SFC. As a result of the TCJA, an increased amount of earnings and profits of foreign corporations are thus not taxable when distributed—either because the earnings and profits constitute PTEP or give rise to dividends (including deemed dividends under section 367(b)) that are eligible for the section 245A dividends received deduction.

Although as a result of the TCJA a lesser amount of earnings and profits of foreign corporations may give rise to taxable dividends when distributed, the Final Regulations remain necessary to carry out the policies of section 367(b). The adjustments required by the Final Regulations are intended to ensure that property transfers that are in substance distributions are treated as such, and thus give rise to income, capital gain, or a reduction in basis under section 301(c). Furthermore, incentives to avoid treating property transfers as distributions remain. For example, a taxpayer may seek to avoid distribution treatment because the distribution would not qualify for the section 245A dividends received deduction due to the application of the hybrid dividend rules under section 245A(e) or the extraordinary disposition rules under § 1.245A-5, or because the taxpayer seeks to, for example, preserve PTEP or other earnings and profits to cover a future distribution.

The Final Regulations apply to certain triangular reorganizations in which a subsidiary (S) purchases, in connection with the reorganization, stock or securities of its parent corporation (P) in exchange for property and exchanges the stock or securities of P for the stock or property of a target corporation (T), but only if P or S (or both) is a foreign corporation. The Final Regulations and this preamble refer to such exchange of stock or securities of P for property as the “P acquisition.” This preamble also refers to the P acquisition together with the related triangular reorganization as an “applicable triangular reorganization.”

When applicable, the Final Regulations require that adjustments be made that have the effect of a distribution of property from S to P under section 301 (deemed distribution), followed by a contribution from P to S of an amount equal to the deemed distribution (deemed contribution). The amount of the deemed distribution is the sum of the amount of money transferred by S, the amount of any liabilities that are assumed by S and constitute property, and the fair market value of other property that S transferred to P in the P acquisition. The deemed distribution is treated as a dividend to the extent of S's earnings and profits.

There are several exceptions to the application of the Final Regulations. Under § 1.367(b)-10(a)(2)(iii) (the section 367(a) priority rule), the Final Regulations do not apply to transactions otherwise described in the Final Regulations if the amount of gain that T's shareholders would recognize under section 367(a)(1) is at least equal to the sum of the amount of the deemed distribution that P would treat as a dividend under section 301(c)(1) and the amount of the deemed distribution that P would treat as gain under section 301(c)(3) were the Final Regulations to apply. This preamble refers to the hypothetical amount of gain recognized under section 367(a)(1) and the hypothetical amount of the deemed distribution treated either as dividend or gain under section 301(c) as “section 367(a) income” and “section 367(b) income,” respectively. Section 1.367(a)-3(a)(2)(iv) provides a similar priority rule (the section 367(b) priority rule) that turns off the application of section 367(a)(1) with respect to transactions described in the Final Regulations if the amount of section 367(a) income that T's shareholders would otherwise recognize under section 367(a)(1) (without regard to any exceptions thereto) is less than the amount of section 367(b) income that would result from the deemed distribution. In this way, the priority rules subject an applicable triangular reorganization to whichever section 367 regime would give rise to the most income under section 367.

Section 1.367(b)-10(a)(2)(ii) provides another exception to the application of the Final Regulations. Under this exception, the Final Regulations generally do not apply if S is a domestic corporation and P would not be subject to U.S. tax on a dividend received from S. This preamble refers to this exception as the “no-U.S.-tax exception.”

The Final Regulations also contain a broad anti-abuse rule under which appropriate adjustments are made if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of the Final Regulations. See § 1.367(b)-10(d). The anti-abuse rule contains an example illustrating that the earnings and profits of S may, under certain circumstances, be deemed to include the earnings and profits of a corporation related to P or S for purposes of determining the consequences of the adjustments provided for in the Final Regulations.

Notice 2014-32 identified transactions designed to exploit certain aspects of the Final Regulations. In particular, Notice 2014-32 described transactions in which taxpayers applied the section 367(a) and (b) priority rules and no-U.S.-tax exception in a manner that, contrary to their intended operation, resulted in the taxpayer being subject to the more favorable of the section 367(a) or (b) regimes. Notice 2014-32 accordingly announced that regulations would be issued under section 367(b) to (i) modify the priority rules such that only section 367(b) income that would actually be subject to U.S. tax would be considered and (ii) narrow the scope of the no-U.S.-tax exception. Notice 2014-32 further announced that regulations would be issued to remove the deemed contribution rule in § 1.367(b)-10(b)(2) and clarify the broad application of the anti-abuse rule in § 1.367(b)-10(d).

Notice 2016-73 identified additional transactions designed to exploit the Final Regulations, as modified by the rules announced in Notice 2014-32. The transactions identified in Notice 2016-73 include, as one example, a two-step transaction where an applicable triangular reorganization is followed by a purportedly unrelated inbound nonrecognition transaction to which § 1.367(b)-3 applies.

In that example, USP, a domestic corporation, owns all of the stock of FP, and FP owns all of the stock of FS. Both FP and FS are foreign corporations. USP also owns all of the stock of USS, a domestic corporation, and USS owns all of the stock of FT, a foreign corporation. In step one of the example transaction, FP, FS, and FT engage in an applicable triangular reorganization that is designed to result in no section 367(b) income and only a de minimis amount of section 367(a) income. Specifically, FS acquires newly issued stock of FP for property and transfers the stock of FP to USS in exchange for all the stock of FT in a triangular reorganization described in section 368(a)(1)(B). In addition, USS files a gain recognition agreement with respect to its transfer of the stock of FT. The taxpayer takes the position that the section 367(a) priority rule applies to turn off the Final Regulations with respect to the applicable triangular reorganization and therefore does not treat FP as having received a deemed distribution. Under this position, the effect of this first step of the transaction is a transfer of property from FS to FP without a distribution that would result in a corresponding decrease in the earnings and profits of FS and increase in the earnings and profits of FP associated with that property.

In step two of the example transaction, on a later date FP transfers its assets (including the cash, note, or other property received from FS) to USP or a domestic corporation whose stock is owned directly or indirectly by USP in a nonrecognition transaction described in § 1.367(b)-3. The taxpayer asserts that USP accordingly includes in its income a deemed dividend of the “all earnings and profits amount” (as described in § 1.367(b)-2(d)) with respect to its stock in FP, but, because that amount does not take into account the earnings and profits of lower-tier foreign corporations, the deemed dividend does not include the earnings and profits associated with the property that FP received from FS in the P acquisition (because such earnings and profits remain at FS under the position taken by the taxpayer). The desired effect of the overall transaction is a repatriation of property from FS to USP (or a domestic corporation held by USP) without a corresponding income inclusion attributable to untaxed earnings and profits of FS.

Notice 2016-73 announced that additional regulations would be issued under section 367(b) to address transactions such as these types of two-step transactions. To address step one of the transaction, the regulations would, in addition to the modifications described in Notice 2014-32, prevent the section 367(a) priority rule from applying where T is foreign and instead subject certain T shareholders to rules under § 1.367(b)-4 that could result in an income inclusion or gain recognition with respect to their exchange of T stock. To address step two of the transaction, the regulations would subject any inbound nonrecognition transaction to a new set of “excess asset basis” (EAB) rules to be issued under § 1.367(b)-3 that, for purposes of determining the all earnings and profits amount, would take into account certain earnings and profits of lower-tier foreign corporations. Step two of the transaction was subject to the EAB rules because a taxpayer may have completed an applicable triangular reorganization described in step one (but not yet an inbound nonrecognition transaction described in step two) before the issuance of Notice 2016-73. Such partially completed transactions would go unaddressed if the regulations were limited to modifying the section 367(a) priority rule. Notice 2016-73 further announced that the EAB rules would apply to any inbound nonrecognition transaction, regardless of whether the taxpayer had previously engaged in an applicable triangular reorganization, out of concern that transactions other than applicable triangular reorganizations might also position taxpayers to achieve an improper repatriation of property through a subsequent inbound nonrecognition transaction.

Notice 2016-73 also described a variation of the foregoing two-step transaction where the P acquisition is between FP and USP. In this variation of the transaction, FP (which has no earnings and profits) acquires stock of USP in exchange for nonqualified preferred stock of FP, and FP uses the stock of USP to acquire the stock of FT in an applicable triangular reorganization. After the applicable triangular reorganization, the taxpayer causes FP to redeem its nonqualified preferred stock from USP in exchange for cash or a note. The taxpayer takes the position that (i) the Final Regulations do not apply to FP's transfer of nonqualified preferred stock to USP because nonqualified preferred stock is not “property” under the Final Regulations, and (ii) FP's redemption of the nonqualified preferred stock does not cause USP to have an income inclusion because FP has no earnings and profits. The desired effect of this variation is similarly a repatriation of property from FP to USP at no U.S. tax cost.

To address this type of transaction, Notice 2016-73 announced that future regulations would modify the definition of property in § 1.367(b)-10(a)(3)(ii) to include stock of S that is nonqualified preferred stock (as defined in section 351(g)(2)).

Section 1.367(b)-3 generally applies to an acquisition by a domestic corporation (the domestic acquiring corporation) of the assets of a foreign corporation (the foreign acquired corporation) in a liquidation described in section 332 or an asset acquisition described in section 368(a)(1) (in each case, an inbound nonrecognition transaction). Upon an inbound nonrecognition transaction, § 1.367(b)-3 requires certain shareholders of the foreign acquired corporation to include in income as a deemed dividend the all earnings and profits amount with respect to their stock in the foreign acquired corporation. 1 Under § 1.367(b)-2(d), that amount is generally determined under the principles of section 1248 when computing the amount of earnings and profits attributable to stock, subject to certain adjustments. For example, the all earnings and profits amount does not take into account earnings and profits of subsidiaries of the foreign acquired corporation notwithstanding section 1248(c)(2). See § 1.367(b)-2(d)(3)(ii).

Section 1.367(b)-3 is intended to ensure the appropriate carryover of tax attributes from the foreign acquired corporation to the domestic acquiring corporation. The preamble to proposed regulations issued in 1991 describes the section 367(b) principles relevant to inbound nonrecognition transactions and specifically identifies the prevention of “the repatriation of earnings and profits without tax” as one such principle. 56 FR 41993, 41996. The 1991 proposed regulations accordingly introduced the concept of including in income the all earnings and profits amount, which was intended to reflect “the proper measure of the earnings and profits [of the foreign acquired corporation] that should be subject to tax.” Id. The preamble to final regulations issued in 2000 further explained that the inclusion of the all earnings and profit amount “generally ensures that the section 381 carryover basis reflects an after-tax amount” and describes “the appropriate carryover of attributes from foreign to domestic corporations” as “the principal policy consideration of section 367(b) with respect to inbound nonrecognition transactions.” TD 8862, 65 FR 3589, 3590. Section 1.367(b)-3 therefore ensures that when asset basis is repatriated the basis either reflects after-tax earnings and profits or is accompanied by an income inclusion attributable to the untaxed earnings and profits that gave rise to that basis.

As illustrated in Notice 2016-73 and summarized above in Part I.F of the Explanation of Provisions section of this preamble, there are some circumstances where the earnings and profits of the foreign acquired corporation do not accurately reflect the basis in its assets. In particular, the earnings and profits of the foreign acquired corporation may be insufficient to the extent that earnings and profits that gave rise to the foreign acquired corporation's asset basis reside in lower-tier foreign corporations as a result of an applicable triangular reorganization that does not give rise to a deemed distribution. Because the all earnings and profits amount does not account for the earnings and profits of lower-tier foreign corporations, a deemed dividend of the all earnings and profits amount will not have the intended effect of ensuring the appropriate carryover of asset basis in such cases.

To address this concern, Notice 2016-73 announced that § 1.367(b)-3 would be modified to require certain shareholders of the foreign acquired corporation to adjust their all earnings and profits amount upon an inbound nonrecognition transaction. Specifically, an exchanging shareholder that exchanges stock in a foreign acquired corporation with respect to which there is EAB would increase its all earnings and profits amount by certain earnings and profits of lower-tier foreign corporations, referred to in Notice 2016-73 as “specified earnings.” Notice 2016-73 defined EAB as the amount by which the inside asset basis of the foreign acquired corporation exceeded the sum of its earnings and profits, its outside stock basis, and its liabilities assumed by the domestic acquiring corporation. The EAB concept is in furtherance of a balanced tax-basis balance sheet. In other words, the EAB concept recognizes that the tax basis in a corporation's assets generally is derived from these three sources, with outside stock basis serving as a proxy for contributed capital. While basis derived from contributed capital reflects after-tax amounts (or, in the case of liabilities assumed by the domestic acquiring corporation, is expected to be satisfied by after-tax amounts of the domestic acquiring corporation), basis derived from a foreign corporation's untaxed earnings and profits might not be subject to U.S. tax until those earnings are repatriated. For this reason, a foreign corporation's untaxed earnings and profits are subject to tax via a deemed dividend of the all earnings and profits amount. This deemed dividend inclusion in effect requires that the exchanging shareholder “pay for” the tax basis in repatriated assets before that basis is used within the U.S. tax system.

Specified earnings are defined in Notice 2016-73 as the least of the following amounts: (i) the aggregate earnings and profits of foreign subsidiaries of the foreign acquired corporation attributable to the exchanging shareholder, (ii) the amount of the foreign acquired corporation's EAB attributable to the exchanging shareholder, and (iii) the exchanging shareholder's built-in gain in the stock of the foreign acquired corporation. The addition of specified earnings to the all earnings and profits amount is thereby intended to correct the basis imbalance of the foreign acquired corporation by taking into account certain earnings and profits residing in foreign subsidiaries that are presumed to have given rise to the EAB. Thus, the all earnings and profits amount, after taking into account specified earnings, should more accurately reflect the asset basis of the foreign acquired corporation that is repatriated pursuant to the inbound nonrecognition transaction.

The proposed regulations generally would adopt the rules described in Notice 2016-73, modified as discussed in the remainder of this preamble. This preamble uses the term “EAB rules” to refer collectively to the modifications that are proposed to be made to § 1.367(b)-3.

As described in Notice 2016-73, the EAB rules would apply to any inbound nonrecognition transaction regardless of whether the taxpayer had previously engaged in an applicable triangular reorganization. This scope reflected the possibility that EAB policy concerns could arise as a result of other transactions and that taxpayers may attempt to achieve similar results through such other transactions.

The comment recommended that the EAB rules be applied to a narrower set of transactions, citing, among other reasons, the significant compliance burden that would otherwise be imposed on legitimate business transactions. The comment thus recommended that the EAB rules be applied only to taxpayers that had completed an applicable triangular reorganization before the issuance of Notice 2016-73 that involved a foreign target corporation; did not make adjustments that have the effect of a distribution of property from S to P; and engage in a future inbound nonrecognition transaction. If narrowed in this way, the comment further suggested that the EAB rules apply on only a transitional basis; for example, for the 10-year period following Notice 2016-73. The comment asserted that a broader application of the EAB rules would be unnecessary in light of Notice 2016-73's proposed modification to the section 367(a) priority rule, which, by requiring adjustments for a deemed distribution whenever the target is a foreign corporation, should prevent taxpayers from separating basis from earnings and profits in future transactions. As an alternative, the comment suggested that the EAB rules be applied only to inbound nonrecognition transactions that follow an applicable triangular reorganization or other specifically enumerated transactions.

The Treasury Department and the IRS agree that it would be appropriate to narrow the scope of the EAB rules for the reasons noted in the comment. In general, the proposed regulations accordingly would limit the application of the EAB rules to those inbound nonrecognition transactions where (i) S previously acquired stock or securities of P in exchange for property in connection with a triangular reorganization and (ii) adjustments were not made that have the effect of a distribution of property from S to P under section 301. See proposed § 1.367(b)-3(g)(1)(i). However, to address avoidance situations that would have been subject to the EAB rules under the broad scope announced in Notice 2016-73 (which did not predicate the application of the EAB rules on there having been an applicable triangular reorganization), the proposed regulations would also provide that the EAB rules apply to inbound nonrecognition transactions where EAB was previously created in connection with a transaction other than a triangular reorganization if the principal purpose of such other transaction was to create EAB. See proposed § 1.367(b)-3(g)(1)(ii). This more limited application of the EAB rules is anticipated to relieve taxpayers from the need to comply with the EAB rules with respect to non-tax motivated transactions while still addressing the policy concerns identified in Notice 2016-73.

The proposed regulations would not adopt the comment's suggestion to apply the EAB rules only to situations where an applicable triangular reorganization involving a foreign target was completed before the issuance of Notice 2016-73. The Treasury Department and the IRS are concerned that such a limitation would prevent the application of the EAB rules to future transactions designed to create EAB. For example, a subsequent applicable triangular reorganization could give rise to EAB where the target corporation is domestic because the section 367(a) priority rule continues to apply in that context. EAB could thus arise if the section 367(a) priority rule applies to prevent the application of the Final Regulations and P and S are both foreign corporations. An ongoing application of the EAB rules is also necessary to address the case where the target is a foreign corporation but the taxpayer asserts that its transaction is not subject to § 1.367(b)-10 under a novel or unforeseen theory. For this reason, the proposed regulations also would not condition the applicability of the EAB rules on the taxpayer having participated in an applicable triangular reorganization. The proposed regulations instead would provide that the EAB rules may apply to EAB created by any triangular reorganization (provided that the other conditions described in the preceding paragraph are met—that is, S acquired stock or securities of P for property in connection with the reorganization, and adjustments were not made that have the effect of a distribution of property from S to P under section 301) and to EAB created in other transactions that have a principal purpose of creating EAB. See proposed § 1.367(b)-3(g)(1).

Under Notice 2016-73, all EAB with respect to a foreign acquired corporation is taken into account upon an inbound nonrecognition transaction, regardless of how the EAB arose. However, if the taxpayer could demonstrate that EAB was not attributable to property provided by a foreign subsidiary, then EAB is reduced to the extent of such EAB (the EAB reduction rule).

The comment asserted that the EAB reduction rule amounted to a presumption that all EAB originated from the earnings and profits of foreign subsidiaries. The comment stated that overcoming this presumption would place a significant burden on taxpayers because it would require a comprehensive review of the foreign acquired corporation's historic transactions to determine the extent to which EAB should be reduced. The comment therefore recommended that the EAB rules be revised such that taxpayers be permitted to take into account only the EAB created by an applicable triangular reorganization (or any other specifically identified transaction).

The Treasury Department and the IRS expect that the more limited scope of the EAB rules set forth in the proposed regulations would address the concern reflected in the comment. As proposed in these regulations and discussed in Part II.B of the Explanation of Provisions section of this preamble, the EAB rules would apply only to those inbound nonrecognition transactions that follow certain triangular reorganizations (or other transactions having a principal purpose of creating EAB) as opposed to any inbound nonrecognition transaction. This narrower scope would substantially reduce the burden of complying with the proposed EAB rules by eliminating the need for many taxpayers to determine whether EAB exists with respect to a foreign acquired corporation.

This narrowed scope also would obviate the rationale for the EAB reduction rule, which was intended to provide relief where a taxpayer could demonstrate that EAB was not attributable to an avoidance transaction. Such a relief measure would not be appropriate under the proposed regulations, however, because the proposed regulations would apply only to tax-motivated transactions. The EAB reduction rule would therefore be removed with respect to transactions completed after the issuance of the proposed regulations. But see the EAB reduction rule in proposed § 1.367(b)-3(g)(7)(ii)(C) for certain transactions completed before the issuance of the proposed regulations. The proposed regulations accordingly would provide that a taxpayer subject to the EAB rules by reason of having engaged in a triangular reorganization must take into account all EAB with respect to the foreign acquired corporation, regardless of how that EAB arose and without the ability to reduce EAB to the extent it is not attributable, directly or indirectly, to property provided by a foreign subsidiary of the foreign acquired corporation.

As discussed in Part II.A of the Explanation of Provisions section of this preamble, one element of the EAB computation is the amount of aggregate outside basis in the stock of the foreign acquired corporation. An exchanging shareholder that would be subject to the EAB rules would thus potentially need to identify the outside bases of other, unrelated shareholders of the foreign acquired corporation to calculate the amounts of EAB and specified earnings. The comment asserted that it may not be possible for an exchanging shareholder to obtain this information and accordingly suggested that the outside bases of such unrelated minority shareholders be disregarded (along with any related share of inside basis, liabilities, and earnings and profits) when calculating EAB and specified earnings.

The Treasury Department and the IRS recognize that the presence of unrelated minority shareholders may create some uncertainty but expect that narrowing the application of the EAB rules to only a limited set of inbound nonrecognition transactions would appropriately address the concern reflected in the comment. The transactions of which the Treasury Department and the IRS are aware, and which the proposed regulations are generally intended to address, are typically internal restructurings that by their nature are unlikely to involve unrelated shareholders. See Notice 2016-73, Section 3. Moreover, modifying the EAB rules as the comment suggests would require additional rules to specify how an exchanging shareholder would disregard unrelated minority shareholders, thereby adding complexity to the EAB calculations to accommodate an unlikely fact pattern. Therefore, the proposed regulations would not adopt this suggestion.

As discussed in Part II.A of the Explanation of Provisions section of this preamble, the rules described in Notice 2016-73 seek to correct the basis imbalance of the foreign acquired corporation by increasing an exchanging shareholder's all earnings and profits amount by the amount of “specified earnings.” Specified earnings are limited, in part, to the sum of the earnings and profits with respect to each foreign subsidiary of the foreign acquired corporation that are attributable under section 1248(c)(2) to the stock of the foreign acquired corporation that is exchanged pursuant to the inbound nonrecognition transaction. Accordingly, specified earnings under the notice are not sourced from PTEP of foreign subsidiaries of the foreign acquired corporation because PTEP is not included in earnings and profits for purposes of section 1248. See section 1248(d)(1). In other words, the rules described in Notice 2016-73 would not allow the foreign acquired corporation's basis imbalance to be corrected by a deemed distribution of lower-tier PTEP, even though a taxpayer may have created EAB by separating asset basis from earnings and profits that are characterized as PTEP.

In light of the TCJA, which increased the prevalence of PTEP, the Treasury Department and the IRS are of the view that the policies of the EAB rules are better served if, instead of adjusting an exchanging shareholder's all earnings and profits amount as described in Notice 2016-73, the foreign acquired corporation is treated as receiving a deemed distribution under section 301 from its foreign subsidiaries, and the exchanging shareholder then accounts for the effects of the deemed distribution in the inbound nonrecognition transaction. Such a deemed distribution more accurately addresses the basis imbalance of the foreign acquired corporation because the deemed distribution may be sourced from both PTEP and non-PTEP earnings and profits, reflecting that the basis imbalance may be associated with either type of earnings and profits. A deemed distribution from a foreign subsidiary to the foreign acquired corporation is also more likely to align the EAB rules with the substance of the taxpayer's transaction because EAB generally arises where a taxpayer fails to treat a property transfer as a distribution under section 301. Furthermore, taking into account the effects of a section 301 distribution is consistent with the Final Regulations, which address applicable triangular reorganizations by taking into account the effects of a deemed distribution under section 301 from S to P.

The proposed regulations accordingly would modify the EAB rules by providing that an exchanging shareholder of the foreign acquired corporation computes its all earnings and profits amount after accounting for the effects of a deemed distribution from the foreign subsidiaries of the foreign acquired corporation to the foreign acquired corporation. See proposed § 1.367(b)-3(g)(1). The deemed distribution, which occurs immediately before the inbound nonrecognition transaction, would be equal to the amount of “specified earnings.” The term specified earnings would be defined under the proposed regulations as the lesser of (i) the aggregate earnings and profits of foreign subsidiaries of the foreign acquired corporation (with no exclusion for those earnings and profits characterized as PTEP) (collectively, lower-tier earnings), and (ii) the EAB of the foreign acquired corporation. See proposed § 1.367(b)-2(g)(2)(vii). The limitations on specified earnings described in Notice 2016-73 and Part II.A of the Explanation of Provisions section of this preamble (other than the EAB limitation, which is retained with modification) are removed because those limitations, which were designed in part to approximate a reasonable allocation of EAB among the shareholders of the foreign acquired corporation, are not necessary where the foreign acquired corporation's basis imbalance is addressed by a deemed distribution. Thus, for example, the definition of specified earnings in the proposed regulations would not be limited to the earnings and profits of each foreign subsidiary attributable under section 1248(c)(2) to the stock of the foreign acquired corporation exchanged, but instead would include all of the earnings and profits of lower-tier foreign subsidiaries (and therefore does not exclude PTEP). The proposed regulations would adopt this approach because under the deemed distribution model all such earnings and profits would be available to increase the earnings and profits of the foreign acquired corporation if actually distributed to it through the chain of ownership.

Where specified earnings are drawn from multiple foreign subsidiaries, specified earnings would be drawn from all foreign subsidiaries on a pro rata basis (in proportion to each foreign subsidiary's share of aggregate earnings and profits of the foreign subsidiaries). See proposed § 1.367(b)-3(g)(3). In addition, and consistent with § 1.367(b)-2(e)(2), specified earnings drawn from foreign subsidiaries would be treated as being distributed to the foreign acquired corporation through all tiers of intermediate owners, rather than directly to the foreign acquired corporation. See proposed § 1.367(b)-3(g)(1).

The Treasury Department and the IRS are aware that limiting the amount of the deemed distribution by the amount of lower-tier earnings would preclude the deemed distribution from giving rise to a return of basis under section 301(c)(2) or gain recognition under section 301(c)(3) and in that respect would differ from the deemed distribution described in the Final Regulations. See § 1.367(b)-10(b). The approach taken in the proposed regulations reflects administrability concerns that could arise from adopting a more complete distribution model which could require, for example, rules to allocate the appropriate amount of basis recovery and section 301(c)(3) gain among tiers of foreign subsidiaries. That additional complexity may not be justified when balanced against the limited application of the EAB rules, which apply only where a taxpayer has previously engaged in a transaction described in proposed § 1.367(b)-3(g)(1). The Treasury Department and the IRS continue to study transactions that could give rise to EAB, including whether EAB principles should be applied to other types of inbound nonrecognition transactions.

Notice 2016-73 used, but did not define, the term “foreign subsidiary” when referring to entities held by the foreign acquired corporation for purposes of computing specified earnings and making adjustments to EAB. The proposed regulations similarly use the term “foreign subsidiary” for purposes of the EAB rules and would define the term based, in part, on the ownership rules in section 1248(c)(2)(B). See proposed § 1.367(b)-3(g)(2)(ii).

Notice 2016-73 announced that an anti-abuse rule would address transactions engaged in with a view to avoid the purposes of the EAB rules. As described in Notice 2016-73, the anti-abuse rule would provide for adjustments, including disregarding the effects of transactions, to carry out the purposes of the EAB rules. As one example, the anti-abuse rule stated that a transaction engaged in with a view to reduce EAB would be disregarded for purposes of computing EAB.

The comment requested that the Treasury Department and the IRS clarify the scope of the anti-abuse rule and purpose of the EAB rules. While the comment acknowledged that § 1.367(b)-3 is intended to ensure that a domestic acquiring corporation does not succeed to the asset basis of the foreign acquired corporation unless the earnings and profits associated with such basis have been subject to U.S. tax, the comment asserted that it was unclear if certain transactions that would reduce EAB would violate this purpose. The comment provided several examples of such transactions, including a section 332 liquidation of a foreign subsidiary into the foreign acquired corporation. The comment explained that, if the liquidated subsidiary has high outside basis in its stock but low inside basis in its assets, then the liquidation would reduce the foreign acquired corporation's EAB because the subsidiary's high outside stock basis would be eliminated and replaced with its low inside asset basis.

The Treasury Department and the IRS are of the view that the more limited scope of the EAB rules set forth in the proposed regulations would largely mitigate the concern reflected in the comment, because under the proposed regulations, the EAB rules would apply only where a taxpayer has created EAB in an earlier tax-motivated transaction, thereby significantly narrowing the context in which the anti-abuse rule may apply. With respect to the limited cases that would be subject to the EAB rules, the Treasury Department and the IRS continue to see a need to prevent transactions engaged in with a view to reducing EAB, which could lead to results inconsistent with the purposes articulated in Notice 2016-73 and in Part II.A of the Explanation of Provisions section of this preamble; that is, ensuring the appropriate carryover of tax attributes from the foreign acquired corporation to the domestic acquiring corporation.

The Treasury Department and the IRS are also aware of transactions that may attempt to affirmatively apply the EAB rules to avoid Federal income tax. The proposed regulations accordingly would provide that a taxpayer may not apply the EAB rules to a transaction if the taxpayer created EAB with a principal purpose of avoiding any tax imposed under the Code. See proposed § 1.367(b)-3(g)(5).

Section 1.367(b)-1(c) requires that certain participants to a “section 367(b) exchange” (as defined in § 1.367(b)-1(a)) disclose information concerning such exchange on a statement attached to a timely filed Federal tax return or Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations), as applicable, in the taxable year in which income is realized in the exchange (such statement, the section 367(b) notice). To enhance compliance and administration with respect to the EAB rules, the proposed regulations would require that the section 367(b) notice include certain information related to EAB, including how it arose and how the amount was determined. See proposed § 1.367(b)-1(c)(4)(ix). The proposed regulations also would extend the section 367(b) notice requirement to participants in transactions that implicate § 1.367(b)-10, as discussed in Part III.E of the Explanation of Provisions section of this preamble.

In general, § 1.367(b)-2(j)(2)(ii) provides that, if an exchanging shareholder that is a foreign corporation includes in income a deemed dividend of either the all earnings and profits amount under § 1.367(b)-3 or the section 1248 amount under § 1.367(b)-4, the exchanging shareholder is treated as receiving a deemed distribution of PTEP from the appropriate foreign corporation (deemed PTEP distribution). However, if the exchanging shareholder that has an income inclusion is a United States person, the exchanging shareholder is treated as receiving the deemed PTEP distribution solely for the purpose of computing exchange gain or loss under section 986(c). See § 1.367(b)-2(j)(2)(i). Because the deemed PTEP distribution is created where there is an income inclusion, however, a taxpayer might assert that no exchange gain or loss is recognized under § 1.367(b)-2(j)(2)(i) where the all earnings and profits amount or section 1248 amount is zero, even though the exchange gain or loss would have been recognized had all the earnings and profits or the section 1248 amount been a positive number. The proposed regulations therefore would clarify that there is a deemed PTEP distribution under § 1.367(b)-2(j)(2)(i) regardless of whether the all earnings and profits amount or the section 1248 amount is greater than zero. A similar change would be made to § 1.367(b)-2(j)(2)(ii).

The Treasury Department and the IRS are studying more broadly the treatment of section 986(c) amounts and PTEP in transactions subject to section 367(b) and request comments on the application of § 1.367(b)-2(j)(2) more generally.

The Treasury Department and the IRS are also concerned that in certain exchanges subject to section 367(b), earnings and profits that are characterized as PTEP might not be taken into account for purposes of calculating net investment income (NII) under section 1411. In cases where an exchanging shareholder does not make the election described in § 1.1411-10(g), a distribution that would otherwise constitute a distribution of PTEP under section 959(a)—and thus would not be treated as a dividend for purposes of chapter 1 of the Code under section 959(d)—generally is treated as a dividend for purposes of calculating NII. See § 1.1411-10(c)(1)(i)(A)( 1 ). This rule seeks to preserve the NII tax base, as amounts that are characterized as PTEP will not also have been previously taxed under section 1411 (absent the election in § 1.1411-10(g)) and so should be included in NII.

The NII tax base may not be fully preserved, however, in certain exchanges subject to section 367(b). For example, an inbound asset reorganization subject to § 1.367(b)-3 will eliminate earnings and profits that are characterized as PTEP without creating a deemed distribution of those earnings, because PTEP is excluded from the all earnings and profits amount. See § 1.367(b)-2(d)(2)(ii). An exchanging shareholder would thus never recognize a dividend of those earnings for purposes of calculating NII; further, gain that the exchanging shareholder may recognize on a subsequent sale of stock of the domestic acquiring corporation may be netted against certain losses (as NII includes net gains, but gross income from dividends). Certain foreign-to-foreign transactions described in § 1.367(b)-4, or section 355 distributions described in § 1.367(b)-5, could similarly fail to preserve the NII tax base because PTEP is also excluded from the section 1248 amount. See § 1.367(b)-2(c)(1). For example, while an exchanging shareholder's annual PTEP accounts would not be eliminated as a result of a foreign-to-foreign transaction that results in a loss of section 1248 shareholder or CFC status, an exchanging shareholder could nevertheless distort the character of its NII by selling its stock in the foreign acquiror before its PTEP is distributed. The proposed regulations therefore would modify § 1.1411-10(c)(3) such that (with respect to stock of a foreign corporation for which an election under § 1.1411-10(g) is not in effect) the all earnings and profits amount and the section 1248 amount include PTEP for purposes of section 1411, consistent with how section 1248 is applied in this context. See proposed § 1.1411-10(c)(3)(ii). The proposed regulations also would provide for conforming basis adjustments for purposes of section 1411. See proposed § 1.1411-10(d)(5). 2

As discussed in Notice 2016-73 and summarized in Part I.F of the Explanation of Provisions section of this preamble, the Treasury Department and the IRS are aware of transactions that are designed to repatriate basis without a corresponding repatriation of the earnings and profits associated with that basis. As part of these transactions, the taxpayer exploits the section 367(a) priority rule by filing a gain recognition agreement with respect to all, or all but a de minimis amount, of the foreign target corporation stock exchanged in the applicable triangular reorganization. The taxpayer accordingly recognizes no, or a de minimis amount of, section 367(a) income with respect to the target stock. Because the taxpayer also takes the position that a deemed distribution would not result in any section 367(b) income, the taxpayer applies the section 367(a) priority rule to prevent the application of the Final Regulations. The taxpayer also takes the position that the anti-abuse rule would not apply to cause this transaction to be subject to § 1.367(b)-10 and therefore does not make adjustments that have the effect of a distribution of property from S to P, with the result that S would have transferred property to P without a corresponding transfer of the earnings and profits associated with that property.

Notice 2016-73 announced that future regulations would modify the section 367(a) priority rule such that it would not apply to an applicable triangular reorganization involving a foreign target corporation. Any such applicable triangular reorganization would thus be subject to the Final Regulations with the result that adjustments would be made that have the effect of a distribution of property from S to P under section 301. A similar modification was announced with respect to the section 367(b) priority rule.

The comment supported the proposed modification to the section 367(a) priority rule. As an alternative, the comment suggested that the existing formulation of the section 367(a) priority rule (that is, without taking into account the modifications described in Notice 2014-32 that would limit the “amount” of section 367(a) income to the amount giving rise to U.S. tax) be retained in cases where the target is a foreign corporation. Under that formulation, the “amount” of section 367(a) income is compared to the “amount” of section 367(b) income, regardless of whether such amounts are subject to U.S. tax. The comment asserted that this formulation would cause a greater amount of section 367(b) income to be taken into account, thereby making it more difficult for taxpayers to exploit the section 367(a) priority rule to avoid the Final Regulations.

The Treasury Department and the IRS expect that the modification to the section 367(a) priority rule described in Notice 2016-73 would best address such exploitation by ensuring that adjustments that have the effect of a deemed distribution of property from S to P are made whenever the target is a foreign corporation. This result would reinforce one of the purposes of the Final Regulations by ensuring that property transfers that are in substance distributions are treated as such, thereby preventing the separation of property from the earnings and profits associated with that property. The comment's alternative approach could also, as the comment acknowledged, invite the avoidance of section 301(c)(2) basis reduction in situations where a small amount of section 367(a) income is compared to a large amount of section 301(c)(2) basis reduction. Because a return of basis is not considered section 367(b) income, a small amount of section 367(a) income could be sufficient to trigger the section 367(a) priority rule. Accordingly, the proposed regulations would adopt the modifications to the section 367(a) and section 367(b) priority rules described in Notice 2016-73. See proposed §§ 1.367(a)-3(a)(2)(iv) and 1.367(b)-10(a)(2)(iii).

As discussed in Part I.E of the Explanation of Provisions section of this preamble, Notice 2014-32 announced that the section 367(a) and section 367(b) priority rules would be modified to take into account only the portion of a distribution that would be actually subject to U.S. tax, including the extent to which a distribution would give rise to an inclusion under section 951(a) that would be subject to U.S. tax. In light of the TCJA, the proposed regulations also would modify the priority rules to take into account the extent to which a distribution would give rise to an inclusion under section 951A(a) that would be subject to U.S. tax (even though it is unlikely that a distribution from S to P would give rise to a section 951A(a) inclusion).

Notice 2016-73 announced that regulations to be issued under § 1.367(b)-4 would apply to the exchange of a foreign target corporation's stock that occurs in connection with an applicable triangular reorganization. As described in Notice 2016-73, the regulations under § 1.367(b)-4 would require all shareholders of the target corporation to both include in income as a deemed dividend the section 1248 amount with respect to the target stock exchanged and, after taking into account the increase in basis resulting from such deemed dividend, recognize all realized gain with respect to such stock that would not otherwise be recognized. This treatment would be required only to the extent that the target shareholders exchanged target stock for P stock or securities that S previously acquired for property in the P acquisition (tainted P stock or securities); section 367(a) would continue to apply to the exchange of target stock to the extent the target shareholders did not receive such tainted P stock or securities. The proposed regulations would adopt the rules as described in Notice 2016-73 without significant modification. See proposed § 1.367(b)-4(g).

The comment questioned whether section 367(b) could be applied to an applicable triangular reorganization in a manner that both requires adjustments that have the effect of a distribution of property from S to P and requires the shareholders of a foreign target corporation to recognize the full amount of gain with respect to the target corporation stock that is exchanged for tainted P stock or securities. The comment asserted that this application of section 367(b) effectively achieves the same result as if the applicable triangular reorganization were concurrently subject to taxation under both section 367(b) (with respect to the P acquisition) and section 367(a) (with respect to the target shareholders' exchange of target stock). According to the comment, section 367 may not apply to cause such concurrent taxation because the statutory language in section 367(b)(1) provides that section 367(b) may apply only where there is no transfer of property described in section 367(a). The comment cited to § 1.367(a)-3(b)(2), under which transactions that could be subject to tax under both section 367(a) and (b) are subject to taxation under only one of those sections. The comment also noted that the section 367(a) and (b) priority rules, as currently effective, likewise operate in a manner that results in only one or the other of section 367(a) or (b) applying to an applicable triangular reorganization.

The Treasury Department and the IRS are of the view that the proposed application of § 1.367(b)-4 is appropriate and within section 367's statutory grant of authority. Under section 367(a)(5), the Secretary has broad authority to exempt certain transactions from the application of section 367(a)(1) in order to carry out the purposes of section 367(a). Deliberately failing to file a gain recognition (or filing a partial gain recognition agreement) to exploit the section 367(a) priority rule is inconsistent with the purposes of section 367(a), and section 367(b) is better suited to address these transactions. Accordingly, it is appropriate to exercise the authority in section 367(a)(5) to make the section 367(a) priority rule inapplicable to certain exchanges of target stock. Section 367(b) may therefore apply to the target shareholders' exchange of target stock because the exchange, by virtue of section 367(a)(5), is not described in section 367(a)(1). See section 367(b)(1). Furthermore, section 367(b)(1) is clear that the Secretary may issue any regulations “which are necessary or appropriate to prevent the avoidance of Federal income taxes.” Section 367(b)(2) provides that such regulations “shall include . . . the circumstances under which gain shall be recognized currently, or amounts included in gross income currently as a dividend, or both . . . .” Nothing within this broad grant of rulemaking authority prevents section 367(b) from concurrently applying to both the P acquisition and the exchange of target stock such that both of these components of an applicable triangular reorganization give rise to income or gain.

The comment further asserted that requiring adjustments that have the effect of a distribution of property from S to P where the target is a foreign corporation sufficiently addresses the concerns raised in Notice 2016-73 and thus questioned the rationale in also subjecting the target shareholders to current taxation under § 1.367(b)-4. According to the comment, the target shareholders remain subject to U.S. taxing jurisdiction through their carryover basis in the stock of P and continued indirect equity interest in the target. The comment claimed that historic section 367(b) policy has recognized the permissibility of deferral where U.S. taxing rights remain intact, and in particular where section 1248 amounts are preserved.

The Treasury Department and the IRS maintain that it is appropriate for the proposed regulations to require all target shareholders to recognize the full amount of their gain with respect to the stock of target exchanged for tainted stock or securities of P. As noted above, section 367(b) provides the Secretary with a broad grant of authority to issue regulations applicable to nonrecognition transactions that are subject to section 367(b), and the exercise of this broad rulemaking authority is not conditioned on addressing a particular or historic policy concern. The Treasury Department and the IRS further note that applicable triangular reorganizations have long been identified as tax-motivated transactions, not only with respect to S's acquisition of the stock of P but also with respect to the exchange of stock of T. See Notice 2006-85; Notice 2014-32 (addressing situations where taxpayers attempted to manipulate the section 367(b) priority rule to effectuate an inversion without the T shareholders being subject to § 1.367(a)-3(c)). Moreover, a more limited application of the rules under section 367 has led to repeated attempts by taxpayers to structure around the rules. Requiring all target shareholders to recognize the full amount of their gain in the stock of the target corporation in connection with such transactions limits opportunities to selectively trigger this gain.

Initially proposed in Notice 2007-48 (2007-25 IRB 1428), the deemed contribution rule in § 1.367(b)-10(b)(2) was intended to address the scenario where S purchases P stock or securities from a person other than P (for example, from the public on the open market) instead of directly from P itself. In such cases, the adjustments required by the deemed distribution effectively adopt a “consent dividend” model, which would treat P as receiving a distribution of property from S even though P did not actually receive the property transferred in the P acquisition. The deemed contribution rule, under this model, accounts for P's lack of property by requiring adjustments that have the effect of a contribution of property (with no built-in gain or loss) by P to S in an amount equal to the amount of the deemed distribution. In particular, these adjustments require that P increase its basis in its S stock by the amount of the deemed contribution. Under the Final Regulations, the deemed contribution rule applies regardless of whether S acquires P stock or securities from P or from a person other than P.

As discussed in Notice 2014-32, the Treasury Department and the IRS are aware of transactions designed to avoid U.S. tax by exploiting the deemed contribution rule. In one such transaction, for example, S has no earnings and profits but a high outside stock basis. The taxpayer effects an applicable triangular reorganization where the amount of property transferred to P in the P acquisition is less than the amount of the outside stock basis in S. The taxpayer applies the Final Regulations to make the adjustments required by the deemed distribution, which results solely in a return of the outside stock basis in S under section 301(c)(2). The adjustments required by the deemed contribution rule, however, immediately restore that basis. The applicable triangular reorganization thus does not result in a net reduction to the outside stock basis in S, effectively negating the intended consequences of the deemed distribution. Further, the taxpayer could attempt to repeatedly effect applicable triangular reorganizations to transfer property from S to P with no net reduction to the outside stock basis in S despite each transaction being treated as a deemed distribution. As a result, and consistent with the regulations announced in Notice 2014-32, the proposed regulations remove the deemed contribution rule.

The Final Regulations contain an anti-abuse rule under which appropriate adjustments are made if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of the Final Regulations. See § 1.367(b)-10(d). The anti-abuse rule contains an example illustrating that the earnings and profits of S may, under certain circumstances, be deemed to include the earnings and profits of a corporation related to P or S for purposes of determining the consequences of the adjustments provided for in the Final Regulations.

As illustrated in Notice 2014-32 and Notice 2016-73, taxpayers have taken the position that the anti-abuse rule does not apply to a given transaction under the theory that the one example provided by the anti-abuse rule does not explicitly describe the transaction. Notice 2014-32 accordingly announced that future regulations would clarify that the anti-abuse rule may apply broadly to support a variety of adjustments, including adjusting earnings and profits between previously unrelated corporations. The proposed regulations would implement the clarifications to the anti-abuse rule described in Notice 2014-32.

To illustrate the broad application of the anti-abuse rule, the proposed regulations would include additional examples. First, the proposed regulations would add an example illustrating that the anti-abuse rule may apply to a “downstream” transfer of property made in connection with a triangular reorganization. Because a downstream transfer (whereby property being separated from earnings and profits is initially transferred downstream, rather than upstream from S to P) can be structured so as not to fall within the literal application of the Final Regulations, which equate the P acquisition with a section 301 distribution, taxpayers otherwise might assert that a downstream transfer of property made in connection with a triangular reorganization cannot be subject to the Final Regulations. See proposed § 1.367(b)-10(d)(3) ( Example 2 ). The proposed regulations also would add an example illustrating that certain debt exchanges may implicate the anti-abuse rule. See proposed § 1.367(b)-10(d)(4) ( Example 3 ).

For the avoidance of doubt, the application of the anti-abuse rule is not limited to the particular fact patterns described in the examples. In addition, the proposed regulations would not modify the operative text of the anti-abuse rule, which remains unchanged from the Final Regulations, such that the examples included in the proposed regulations would illustrate transactions subject to the anti-abuse rule.

Notice 2014-32 described transactions designed to avoid the application of the no-U.S.-tax exception in § 1.367(b)-10(a)(2)(ii) and also expressed a concern that taxpayers may attempt to interpret that exception in a narrower manner than was intended or is appropriate. Notice 2014-32 accordingly announced that future regulations would modify the no-U.S.-tax exception, in part to clarify its scope. The proposed regulations would adopt the modifications to the no-U.S.-tax exception described in Notice 2014-32. See proposed § 1.367(b)-10(a)(2)(ii).

As noted above in Part I.F of the Explanation of Provisions section of this preamble, Notice 2016-73 announced that the definition of “property” in § 1.367(b)-10(a)(3)(ii) would be modified to include nonqualified preferred stock of S. The proposed regulations would adopt this rule without modification. See proposed § 1.367(b)-10(a)(3)(ii)(C).

Section 1.367(b)-10(b)(3) provides that the deemed distribution is generally treated as occurring immediately before the P acquisition, and Notice 2016-73 requested comments on whether this rule should be modified in light of the modifications announced in the notice. The comment suggested that the current rule be retained because no reason has been identified to warrant its modification. The Treasury Department and the IRS agree with the comment and therefore no changes would be made with respect to this rule.

The proposed regulations also would modify the reporting requirements under § 1.367(b)-1(c) to require corporations that acquire stock or securities of P in a transaction described in the Final Regulations to disclose such acquisitions by attaching a section 367(b) notice (within the meaning of § 1.367(b)-1(c)) to the corporation's tax return (or Form 5471, as applicable) for the year in which the stock or securities of P are acquired. See proposed § 1.367(b)-1(c)(2)(vi). Under the proposed regulations, corporations would be required to describe the circumstances of the acquisition of stock or securities of P, any related transactions involving the acquired stock or securities, and whether any adjustments were made pursuant to § 1.367(b)-10. See proposed § 1.367(b)-1(c)(4)(viii). The information required to be disclosed would supplement (rather than replace) any information already required to be disclosed in the section 367(b) notice.

With respect to those rules described in Notice 2014-32, the proposed regulations generally would be applicable to transactions completed on or after April 25, 2014, subject to limited exceptions. See proposed §§ 1.367(a)-3(g)(1)(viii) and 1.367(b)-10(e)(2).

With respect to those rules described in Notice 2016-73, the proposed regulations generally would be applicable to transactions completed on or after December 2, 2016. See proposed §§ 1.367(a)-3(g)(1)(viii), 1.367(b)-3(g)(7)(i), 1.367(b)-4(i), and 1.367(b)-10(e)(3). To the extent the proposed regulations contain rules not previously announced in Notice 2016-73, the proposed regulations would be applicable to transactions completed on or after the date the proposed regulations are filed in the Federal Register . See proposed §§ 1.367(b)-3(g)(7)(i), 1.367(b)-6(a)(1)(v) and (vi), and 1.1411-10(i); see also proposed § 1.367(b)-3(g)(7)(ii) for transition rules for certain transactions completed before the issuance of the proposed regulations.

Taxpayers and their related parties (within the meaning of sections 267(b) and 707(b)(1)) may choose to apply the rules of Notice 2014-32 and Notice 2016-73 or the proposed regulations to any open taxable year beginning before the date the proposed regulations are filed as final regulations in the Federal Register , provided that taxpayers and their related parties consistently apply either the entirety of Notice 2014-32 and Notice 2016-73 or the entirety of the proposed regulations for such years and each subsequent taxable year beginning before the date the proposed regulations are filed as final regulations in the Federal Register .

The comment requested that the Treasury Department and IRS reconsider the December 2, 2016, applicability date given that Notice 2016-73 proposed to apply the EAB rules to all inbound nonrecognition transactions, regardless of whether the taxpayer had previously effected an applicable triangular reorganization. The comment did, however, recognize the immediate need for the EAB rules to apply to already-completed applicable triangular reorganizations where the taxpayer did not apply the Final Regulations. Because the proposed regulations would apply the EAB rules only to those inbound nonrecognition transactions that follow certain triangular reorganizations and other transactions designed to create EAB, the Treasury Department and IRS maintain that the December 2, 2016, effective date is appropriate.

No inference is intended regarding the treatment of applicable triangular reorganizations, transactions undertaken with a principal purpose of creating EAB, or subsequent inbound nonrecognition transactions completed before the applicability date of the proposed regulations. Such transactions may be subject to challenge before the applicability dates, for example, under the anti-abuse rule in § 1.367(b)-10(d), applicable Code provisions, or judicial doctrines.

The proposed regulations would, as of the date they are filed as final regulations with the Federal Register , obsolete Notice 2014-32 and Notice 2016-73. Until such time, taxpayers may continue to rely on Notice 2014-32 and Notice 2016-73 as noted in Part IV of the Explanation of Provisions section of this preamble.

Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit.

The collections of information in the proposed regulations are in proposed § 1.367(b)-1(c)(4)(viii) and (ix) and apply to taxpayers that engage in transactions described in § 1.367(b)-3(g) or § 1.367(b)-10. This information is necessary for the IRS's audit and examination purposes, and in particular to identify transactions that should be subject to the proposed regulations. The proposed information collection is a statement by corporations attached to their timely filed Federal tax returns (or Form 5471, as applicable) that describes certain transactions and computations relevant to the proposed regulations. Because such statements have not been required for transactions that predate the proposed regulations, the Treasury Department and the IRS are limited in their ability to estimate how many taxpayers are likely to be affected by the proposed information collection. Based on available data and the profile of taxpayers that have historically undertaken the types of transactions at issue (large, publicly traded corporations), it is estimated that no more than 50 taxpayers would be affected by the proposed information collection in a given year. The likely respondents are foreign and domestic corporations.

Because the collections of information in proposed § 1.367(b)-1(c)(4)(viii) and (ix) are proposed to apply to taxable years ending on or after the date the proposed regulations are filed with the Federal Register , the Treasury Department and the IRS have submitted the collection of information in proposed § 1.367(b)-1(c)(4)(viii) and (ix) to the OMB for review in accordance with the PRA and requested a temporary OMB control number (1545-NEW). After the rulemaking is finalized, burdens associated with the proposed information collection will be incorporated into OMB control number 1545-0123. OMB control number 1545-0123 represents a total estimated burden time for all forms and schedules and regulations for corporations. REG-117614-14 will be included in the future; however, the burden estimates in 1545-0123 will not isolate the estimated burden for the information collection contained in these proposed, and subsequent final, regulations. The Treasury Department and the IRS estimate burdens based on a taxpayer-type basis rather than a provision-specific basis.

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

Commenters are strongly encouraged to submit public comments electronically. Comments and recommendations for the proposed information collection should be sent to www.reginfo.gov/public/do/PRAMain, with electronic copies to the IRS at pra.comments@irs.gov (indicate “REG-117614-14” on the subject line). This particular information collection can be found by selecting “Currently under Review—Open for Public Comments” then by using the search function. Comments can also be mailed to OMB, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies mailed to the IRS, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by December 5, 2023.

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the agency “to prepare and make available for public comment an initial regulatory flexibility analysis” that will “describe the impact of the proposed rule on small entities.” See 5 U.S.C. 603(a). Section 605 of the RFA provides an exception to this requirement if the agency certifies that the proposed rulemaking will not have a significant economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit organization, or small governmental jurisdiction. See 5 U.S.C. 601(3) through (6).

The Treasury Department and the IRS do not have data readily available to assess the number of small entities potentially affected by the proposed regulations. However, the taxpayers affected by the proposed regulations would generally be domestic and foreign corporations that participate in certain triangular reorganizations. The triangular reorganizations at issue represent a narrow set of abusive transactions that have typically been engaged in by large, publicly traded corporations. Such transactions are highly sophisticated and are thus unlikely to involve small domestic entities. Therefore, the Treasury Department and the IRS certify that the proposed regulations would not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS invite the public to comment on the impact of these regulations on small entities.

Pursuant to section 7805(f) of the Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This proposed rule does not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. This proposed rule does not have federalism implications, does not impose substantial direct compliance costs on State and local governments, and does not preempt State law within the meaning of the Executive order.

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed rules. The Treasury Department and the IRS also invite comments on section 367(b) more generally, including whether, and if so, how, any of the existing regulations issued under section 367(b) should be modified in light of the Tax Cuts and Jobs Act. Any electronic or paper comments submitted will be made available at www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

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

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

The additions and revision read as follows:

The additions read as follows:

The additions read as follows:

The revisions and additions read as follows:

The revisions and additions read as follows:

Purpose: This proposed rule would codify processes and standards to govern the internal pre-issuance circulation and review of decisions within the PTAB.

Since May of 2022, the USPTO has been using an interim process for PTAB decision circulation and internal PTAB review to promote consistent, clear, and open decision-making processes at the USPTO. The processes were put in place to support a consistent and clear approach to substantive areas of patent law and PTAB-specific procedures, while maintaining open decision-making processes. The USPTO subsequently issued an RFC seeking public input on these processes. After reviewing feedback received from the public in response to the RFC, the USPTO now seeks to formalize its processes for circulation and review of decisions within the PTAB through notice-and-comment rulemaking.

This proposed rule provides that the USPTO Director, Deputy Director, and Commissioners for Patents and Trademarks are not involved, directly or indirectly, in the decision making of panels of the PTAB prior to issuance of a decision by the panel. In addition, no employee of the Office external to the Board, nor any member of PTAB management, is involved, directly or indirectly, in panel decision-making unless a panel member has requested their input. The adoption of any feedback received by the panel is entirely optional and solely within the discretion of the panel.

This proposed rule also sets forth that, if the Office establishes procedures governing the internal circulation and review of decisions prior to issuance to one or more designated members of the Board, no management judge shall participate in any such review, either directly or indirectly. The adoption of any feedback received pursuant to such review is entirely optional and solely within the discretion of the panel.

Finally, this proposed rule provides that decisions of the Board are expected to comport with applicable statutes, regulations, binding case law, and written agency or Board policy or guidance, and that there is no unwritten agency or Board policy or guidance that is binding on any panel of the Board.

On September 16, 2011, the America Invents Act (AIA) was enacted into law (Pub. L. 112-29, 125 Stat. 284 (2011)). The AIA established the PTAB, which is made up of administrative patent judges (APJs) and four statutory members, namely the USPTO Director, the USPTO Deputy Director, the USPTO Commissioner for Patents, and the USPTO Commissioner for Trademarks. 35 U.S.C. 6(a). The PTAB hears and decides ex parte appeals of adverse decisions by examiners in applications for patents; appeals of adverse decisions by examiners in reexamination proceedings; and proceedings under the AIA, including inter partes reviews, post grant reviews, covered business method (CBM) patent reviews, 1 and derivation proceedings, in panels of at least three members. 35 U.S.C. 6(b), (c). Under the statute, the Director designates the members of each panel. 35 U.S.C. 6(c). The Director has delegated that authority to the Chief Judge of the Board. See PTAB Standard Operating Procedure 1 (SOP1), Assignment of Judges to Panels, https://www.uspto.gov/sites/default/files/documents/SOP%201%20R15%20FINAL.pdf.

The Office recognizes that it is important that the PTAB maintain a consistent and clear approach to substantive areas of patent law and PTAB-specific procedures, while maintaining open decision-making processes. Since May 2022, the USPTO has been using an interim process for PTAB decision circulation and internal PTAB review. See “Interim process for PTAB decision circulation and internal PTAB review,” available at https://www.uspto.gov/interim-process-ptab-decision-circulation-and-internal-ptab-review. That interim process has now been replaced by a new Standard Operating Procedure (SOP4), issued concurrently with this Notice of Proposed Rulemaking. The process set forth in SOP4 is substantially similar to the interim process, except for the change described below to the Circulation Judge Pool (CJP) review. SOP4 further sets forth additional details requested by stakeholders.

Under the prior interim process, certain categories of PTAB decisions were required to be circulated to a pool of non-management APJs (the Circulation Judge Pool, also known as CJP) prior to issuance. These decisions included all AIA institution decisions; AIA final written decisions; AIA decisions on rehearing; inter partes reexamination appeal decisions; designated categories of ex parte appeal, ex parte reexamination appeal, and reissue appeal decisions; and all Board decisions (including AIA and ex parte appeal decisions) following a remand from the Federal Circuit. Judges could, at their option, circulate other types of decisions for CJP review. In response to stakeholder feedback, under the process set forth in SOP4, circulation to CJP is now optional.

The CJP comprises a representative group of non-management APJs who collectively have technical/scientific backgrounds and legal experience representative of the PTAB judges as a whole. The CJP was modeled after both the Federal Circuit's previous circulation to the Senior Technical Assistant and the Federal Circuit's 10-day circulation process for precedential decisions. See United States Court of Appeals for the Federal Circuit, Internal Operating Procedures, Redlined Copy, 18 (Mar. 1, 2022), available at https://cafc.uscourts.gov/wp-content/uploads/RulesProceduresAndForms/InternalOperatingProcedures/IOPs-Redline-03012022.pdf (describing the previous circulation to the Senior Technical Assistant); and United States Court of Appeals for the Federal Circuit, Internal Operating Procedures, 10.5 (Mar. 1, 2022), available at https://cafc.uscourts.gov/wp-content/uploads/RulesProceduresAndForms/InternalOperatingProcedures/IOPs-03012022.pdf (describing the 10-day circulation process for precedential decisions).

The CJP's role is to provide the panel with information regarding potential conflicts or inconsistencies with relevant authority, including PTAB precedential decisions, Director guidance memoranda, and other written agency or Board policies or guidance. The CJP also provides the panel with information regarding potential inconsistencies with informative or routine PTAB decisions and suggestions for improved readability and stylistic consistency. The panel has the final authority and responsibility for the content of a decision and determines when and how to incorporate feedback from the CJP. The APJs are required to apply pertinent statutes, binding case law, and written policy or guidance issued by the Director or the Director's delegate that is applicable to PTAB proceedings. All policies or guidance applicable to PTAB proceedings that the APJs are required to apply are written.

The CJP may have periodic meetings with PTAB Executive Management ( i.e., PTAB Chief Judge, Deputy Chief Judge, Vice Chief Judges, Senior Lead Judges, and those acting in any of the foregoing positions) to discuss issued panel decisions and general areas for potential policy clarification. PTAB Executive Management may discuss these issues or issued decisions that have issued with the Director for the purposes of (i) considering whether to issue new or updated policies or guidance, for example, through regulation, precedential or informative decisions, and/or a Director guidance memorandum; and (ii) considering sua sponte (on the Director's own initiative) Director Review of a decision.

Under the interim process, any panel member, at their sole discretion, could also optionally consult with one or more members of PTAB management ( i.e., PTAB Executive Management and Lead Judges) regarding a decision prior to issuance. If consulted, PTAB management could provide information regarding the consistent application of USPTO policy, applicable statutes and regulations, and binding case law. Adoption of any suggestions provided by PTAB management based on such consultation was optional. Unless consulted by a panel member, PTAB management did not make suggestions to the panel regarding the substance of any pre-issuance decision, either directly or indirectly through the CJP.

The interim PTAB decision circulation and internal review processes promoted decisional consistency and open decision-making processes by reinforcing that the adoption of all CJP and requested PTAB management feedback is optional, that members of PTAB management did not provide feedback on decisions prior to issuance unless they are a panel member or a panel member requests such feedback, and that the PTAB panel had the final authority and responsibility for the content of a decision. Additionally, the processes provided a mechanism by which the Director could be made aware of decisions to consider for sua sponte Director Review, and of areas to consider for issuing new, or modified, USPTO policy to promote the efficient delivery of reliable intellectual property rights.

Furthermore, under both the interim process and SOP4, all consultations are covered by conflict of interest policies. If a member of the CJP or management has a conflict of interest, they are required to notify the other members of their respective team and recuse themselves from any discussion or analysis of that decision. In determining whether a conflict of interest exists, the USPTO follows the guidance set forth in the Standards of Ethical Conduct for Employees of the Executive Branch at 5 CFR part 2635 and will consult with the Department of Commerce Ethics Law and Programs Office, as necessary, to resolve any questions pertaining to conflicts of interest.

On July 20, 2022, the USPTO issued an RFC on Director Review, Precedential Opinion Panel Review, and Internal Circulation and Review of Patent Trial and Appeal Board Decisions (RFC), to obtain public feedback on the interim PTAB decision circulation and internal review processes. See 87 FR 43249-52. The USPTO received over 4,300 comments from a wide range of stakeholders, including individuals, associations, and companies, on all aspects of the RFC including specific responses to question 13 (which asked if any changes should be made to the interim PTAB decision circulation and review process) and question 14 (which asked what other considerations should be taken into account with respect to the interim PTAB decision circulation and internal review process).

Several commenters emphasized the need for judicial independence and review processes that reduce influence by USPTO senior management on PTAB panels. Other commenters emphasized the value of transparency in the PTAB's processes and requested that further details on the CJP be made public. One representative commenter stated that, even when the CJP reviews a decision prior to issuance, it should not discuss the decision with PTAB management until the decision is issued by the panel. Another commenter believed that the value of the CJP may be outweighed by concerns with undue pre-issuance influence by the Director and suggested abandoning the CJP procedure in favor of entrusting the APJs and the Director Review process with maintaining consistency and quality of PTAB decisions.

In view of the comments and the USPTO's further experience with AIA proceedings, the USPTO undertakes this rulemaking to make policy changes to the processes and standards that govern the internal pre-issuance circulation and review of decisions within the PTAB. This rulemaking is consistent with comments received from stakeholders expressing a preference that key policy changes be made and formalized through rulemaking. This proposed rule seeks to promote consistent, clear, and open decision-making processes while protecting judicial independence and increasing transparency of USPTO processes. For example, this proposed rule would prohibit PTAB management review of decisions prior to issuance by the panel (absent a request by a panel member, at the panel member's sole discretion). The proposed rule also provides that, if the Office establishes procedures governing the internal circulation and review of decisions prior to issuance (such as CJP review), no management judge shall participate directly or indirectly in any such review. Adopting the suggestion of stakeholders, this proposed rule further specifies that the group of reviewing non-management judges ( e.g., CJP members) would be prohibited from discussing any reviewed decision with PTAB management prior to issuance.

In response to public feedback requesting additional information on the processes, the USPTO has provided further details regarding the internal circulation process and the structure of the reviewing body of non-management judges (currently embodied by the CJP) by issuing a Standard Operating Procedure (SOP4) concurrently with the publication of this NPRM. The processes set forth in the SOP4 replace the former interim process for PTAB decision circulation described above. The Office may consider further refinements or modifications to the SOP4 in view of the comments received from the public in response to this NPRM.

The USPTO proposes to add part 43, which provides for new regulations governing the pre-issuance circulation and review of decisions within the PTAB. A section-by-section discussion of the new provisions is as follows:

Section 43.1: Proposed § 43.1 would set forth general policy considerations for Part 43 and define the scope of the rules.

Section 43.2: Proposed § 43.2 would set forth definitions for terms used in Part 43.

The proposed definition of Board would refer to the Patent Trial and Appeal Board.

The proposed definition of decision would refer to any decision, order, opinion, or other written work product intended for entry into the record of a Board proceeding.

The proposed definition of Director would refer to the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office or an individual serving as Acting Director or performing the functions and duties of the Director.

The proposed definition of Deputy Director would refer to the Deputy Under Secretary of Commerce for Intellectual Property and Deputy Director of the United States Patent and Trademark Office or an individual serving as Acting Deputy Director.

The proposed definitions of Commissioner for Patents and Commissioner for Trademarks would be the positions defined in 35 U.S.C. 3(b)(2) or an individual acting in the capacity of one of those positions.

The proposed definition of issuance would refer to the entry of a decision into the record of a Board proceeding.

The proposed definition of Management Judge would encompass the Chief Administrative Patent Judge, the Deputy Chief Administrative Patent Judge, a Vice Chief Administrative Patent Judge, a Senior Lead Administrative Patent Judge, and/or a Lead Administrative Patent Judge, including individuals who serve in these positions in an acting capacity. The definition is also intended to capture any other Administrative Patent Judge who, as part of their duties, supervises the work of other Administrative Patent Judges or is responsible for reviewing the performance of other Administrative Patent Judges.

The proposed definition of panel would refer to the members of the Board assigned to a proceeding pursuant to the Board's Standard Operating Procedure 1.

The proposed definition of proceeding would refer to an appeal or contested case under Part 41 or trial proceeding under Part 42.

Section 43.3: Proposed § 43.3 would specify that the Director of the USPTO and other high-level officers are not involved in panel decisions prior to their issuance, either directly or indirectly. The provision ensures the judicial independence of Board panels by insulating panel decision-making from the policy-setting functions of Office leadership.

Proposed § 43.3(a) would prohibit the Director, Deputy Director, Commissioner for Patents, and Commissioner for Trademarks from communicating, directly or indirectly, with any member of a panel regarding a decision, prior to issuance of that decision by the panel.

Proposed § 43.3(b) would provide that paragraph (a) would not apply to any proceeding in which the named individual is a member of the panel and would also specify that when sitting as a member of a panel, the individual is a coequal member of the panel.

Proposed § 43.3(c) would clarify that nothing in § 43.3 shall prevent the Director or their delegate from communicating with a panel as to resource needs or the procedural status of any proceeding. This provision is intended to permit Office leadership to engage in communications of a purely administrative or logistical nature that are necessary to ensure the effective and efficient administration of the Office. Communications with a panel attempting to influence or direct the outcome or reasoning of any decision would not be permitted under this provision.

Proposed § 43.3(d) would specifically delegate to the Chief Administrative Patent Judge the Director's power to designate and re-designate panels of the Board under 35 U.S.C. 6(c). The proposed rule would also prohibit the Director from directing or otherwise influencing the paneling or repaneling of any proceeding prior to issuance of the panel decision. The proposed rule permits the Director to issue generally applicable paneling guidance to be applied to proceedings before the Board, and to direct the repaneling of a proceeding according to that generally applicable guidance when the Director is reviewing or rehearing an issued panel decision.

Section 43.4: Proposed § 43.4 would govern involvement by Board management or Office employees outside the Board in the review and circulation of decisions prior to issuance. The provision ensures judicial independence of Board panels while permitting a panel member to request management input on issues when desired.

Proposed § 43.4(a) would prohibit any Management Judge or employee of the Office external to the Board from initiating communication, directly or through intermediaries, with any member of a panel regarding a decision, prior to issuance of that decision.

Proposed § 43.4(b) would provide an exception to paragraph (a) in the event a member of the panel requests input from a Management Judge prior to issuance of the decision. The proposed rule clarifies that requesting input is optional and the decision to request input is solely within the discretion of an individual panel member.

Proposed § 43.4(c) would specify that it is within the panel's sole discretion to adopt any edits, suggestions, or feedback provided by a Management Judge in response to a request for input, and the panel has the final authority and responsibility for the content of a decision.

Proposed § 43.4(d) would provide that paragraph (a) would not apply to a Management Judge who is a member of the panel and would specify that when sitting as a member of a panel, a Management Judge is a coequal member of the panel and exercises no review authority over the decision.

Proposed § 43.4(e) would clarify that nothing in § 43.4 shall prevent a Management Judge from communicating with a panel as to resource needs or the procedural status of any proceeding. This provision is intended to permit Board management to engage in communications of a purely administrative or logistical nature that are necessary to ensure the effective and efficient administration of the Board. Communications with a panel attempting to influence or direct the outcome or reasoning of any decision would not be permitted under this provision.

Section 43.5: Proposed § 43.5 would govern procedures for circulation of decisions to, and review of decisions by, a designated group of non-Management Judges if the Office sets forth procedures for such circulation. The provision promotes consistent, clear, and open decision-making by permitting peer review of decisions prior to issuance, while respecting the judicial independence of panels by providing that all feedback from such review is optional and at the panel's sole discretion to adopt.

Proposed § 43.5(a) would provide that no Management Judge shall participate in any such circulation and review procedures. The proposed rule further provides that if a decision is circulated to non-Management Judges for review prior to issuance, the reviewing judges will not discuss the substance of the circulated decision with a Management Judge prior to issuance by the panel, except with a Management Judge who is a member of the panel.

Proposed § 43.5(b) would specify that any edits, suggestions, or feedback provided, following circulation and review to a non-Management Judge, are optional and in the sole discretion of a panel to accept. The proposed rule also states that the panel has final authority and responsibility for the content of a decision and determines whether and how to incorporate any feedback provided.

Section 43.6: Proposed § 43.6 would provide that all decisions of the Board are expected to comport with all applicable statutes, regulations, binding case law, and written agency policy or guidance applicable to Board proceedings. This proposed provision would also specifically state that there is no unwritten agency or Board policy or guidance that is binding on any panel of the Board. The proposed provision would further require that all written policy or guidance binding on panels of the Board shall be made public.

A. Administrative Procedure Act: The changes proposed by this rulemaking involve rules of agency practice and procedure, and/or interpretive rules. See Perez v. Mortg. Bankers Ass'n, 135 S.Ct 1199, 1204 (2015) (Interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers.” (citation and internal quotation marks omitted)); Nat'l Org. of Veterans' Advocates, Inc. v. Sec'y of Veterans Affairs, 260 F.3d 1365, 1375 (Fed. Cir. 2001) (Rule that clarifies interpretation of a statute is interpretive.).

Accordingly, prior notice and opportunity for public comment are not required pursuant to 5 U.S.C. 553(b) or (c) or any other law. See Perez, 135 S. Ct. 1199, 1206 (Notice-and-comment procedures are required neither when an agency “issue[s] an initial interpretive rule” nor “when it amends or repeals that interpretive rule.”); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), do not require notice and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”) (quoting 5 U.S.C. 553(b)(3)(A)).

The Office, nevertheless, is publishing this proposed rule for comment to seek the benefit of the public's views on the Office's proposed changes as set forth herein.

B. Regulatory Flexibility Act: For the reasons set forth herein, the Senior Counsel for Regulatory and Legislative Affairs, Office of General Law, United States Patent and Trademark Office has certified to the Chief Counsel for Advocacy of the Small Business Administration that changes set forth in this notice of proposed rulemaking would not have a significant economic impact on a substantial number of small entities. See 5 U.S.C. 605(b).

The changes in this notice of proposed rulemaking are to set forth expressly the rules governing the circulation and review of decisions of the Board prior to issuance by a panel. The changes do not create additional procedures or requirements or impose any additional compliance measures on any party, nor do these changes cause any party to incur additional cost. Therefore, any requirements resulting from these proposed changes are of minimal or no additional burden to those practicing before the Board.

For the foregoing reasons, the proposed changes in this notice of proposed rulemaking would not have a significant economic impact on a substantial number of small entities.

C. Executive Order 12866 (Regulatory Planning and Review): This rulemaking has been determined to be not significant for purposes of Executive Order 12866 (Sept. 30, 1993), as amended by Executive Order 14094 (April 6, 2023).

D. Executive Order 13563 (Improving Regulation and Regulatory Review): The Office has complied with Executive Order 13563 (Jan. 18, 2011). Specifically, the Office has, to the extent feasible and applicable: (1) made a reasoned determination that the benefits justify the costs of the rules; (2) tailored the rules to impose the least burden on society consistent with obtaining the regulatory objectives; (3) selected a regulatory approach that maximizes net benefits; (4) specified performance objectives; (5) identified and assessed available alternatives; (6) involved the public in an open exchange of information and perspectives among experts in relevant disciplines, affected stakeholders in the private sector and the public as a whole, and provided on-line access to the rulemaking docket; (7) attempted to promote coordination, simplification, and harmonization across government agencies and identified goals designed to promote innovation; (8) considered approaches that reduce burdens and maintain flexibility and freedom of choice for the public; and (9) ensured the objectivity of scientific and technological information and processes.

E. Executive Order 13132 (Federalism): This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999).

F. Executive Order 13175 (Tribal Consultation): This rulemaking will not: (1) have substantial direct effects on one or more Indian tribes; (2) impose substantial direct compliance costs on Indian tribal governments; or (3) preempt tribal law. Therefore, a tribal summary impact statement is not required under Executive Order 13175 (Nov. 6, 2000).

G. Executive Order 13211 (Energy Effects): This rulemaking is not a significant energy action under Executive Order 13211 because this rulemaking is not likely to have a significant adverse effect on the supply, distribution, or use of energy. Therefore, a Statement of Energy Effects is not required under Executive Order 13211 (May 18, 2001).

H. Executive Order 12988 (Civil Justice Reform): This rulemaking meets applicable standards to minimize litigation, eliminate ambiguity, and reduce burden as set forth in sections 3(a) and 3(b)(2) of Executive Order 12988 (Feb. 5, 1996).

I. Executive Order 13045 (Protection of Children): This rulemaking does not concern an environmental risk to health or safety that may disproportionately affect children under Executive Order 13045 (Apr. 21, 1997).

J. Executive Order 12630 (Taking of Private Property): This rulemaking will not affect a taking of private property or otherwise have taking implications under Executive Order 12630 (Mar. 15, 1988).

K. Congressional Review Act: Under the Congressional Review Act provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq. ), prior to issuing any final rule, the USPTO will submit a report containing the rule and other required information to the United States Senate, the United States House of Representatives, and the Comptroller General of the Government Accountability Office. The changes in this notice of proposed rulemaking are not expected to result in an annual effect on the economy of 100 million dollars or more, a major increase in costs or prices, or significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets. Therefore, this rulemaking is not a “major rule” as defined in 5 U.S.C. 804(2).

L. Unfunded Mandates Reform Act of 1995: The changes set forth in this notice of proposed rulemaking do not involve a Federal intergovernmental mandate that will result in the expenditure by State, local, and tribal governments, in the aggregate, of 100 million dollars (as adjusted) or more in any one year, or a Federal private sector mandate that will result in the expenditure by the private sector of 100 million dollars (as adjusted) or more in any one year, and will not significantly or uniquely affect small governments. Therefore, no actions are necessary under the provisions of the Unfunded Mandates Reform Act of 1995. See 2 U.S.C. 1501 et seq.

M. National Environmental Policy Ac t: This rulemaking will not have any effect on the quality of the environment and is thus categorically excluded from review under the National Environmental Policy Act of 1969. See 42 U.S.C. 4321 et seq.

N. National Technology Transfer and Advancement Act: The requirements of section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) are not applicable because this rulemaking does not contain provisions which involve the use of technical standards.

O. Paperwork Reduction Act: The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3549) requires that the Office consider the impact of paperwork and other information collection burdens imposed on the public. This proposed rulemaking does not involve an information collection requirement that is subject to review by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3549). This rulemaking does not add any additional information requirements or fees for parties before the Board.

Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to, a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number.

P. E-Government Act Compliance: The USPTO is committed to compliance with the E-Government Act to promote the use of the internet and other information technologies, to provide increased opportunities for citizen access to Government information and services, and for other purposes.

For the reasons set forth in the preamble, the USPTO proposes to amend title 37 as follows:

All comments, including any personally identifiable or confidential business information provided, will be placed in the public docket without change and will be publicly available online at https://www.regulations.gov. Therefore, HHS cautions commenters about submitting information they do not want to be made available to the public.

When submitting comments on this NPRM, the agency requests that commenters explain their rationale and provide any relevant data and information to support their comments or rationale, as applicable.

This preamble is organized as follows:

Interested persons are invited to participate in this rulemaking by submitting written views, opinions, recommendations, and data. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you do not wish to be disclosed publicly. Comments are invited on any topic within the scope of this NPRM.

The primary authority supporting this rulemaking is 42 U.S.C. 289b (section 493 of the Public Health Service Act, as amended). This authority established ORI as an independent entity within HHS and requires the Secretary to issue regulations to define the term “research misconduct” and implement the research misconduct provisions of the statute. To that end, in 2005 HHS issued Public Health Service (PHS) Policies on Research Misconduct (the “2005 Final Rule”) [42 CFR part 93; 70 FR 28370 (May 17, 2005)]. Since the 2005 Final Rule was issued, ORI has gained extensive experience handling all aspects of the HHS research integrity program under 42 CFR part 93. ORI now seeks to capitalize on that experience through the regulatory revision process.

ORI anticipates release of the final rule in the summer of 2024, with implementation to begin a minimum of 4 months afterward. ORI will aim for an effective date of January 1, 2025, to simplify institutional reporting under proposed § 93.302(b). Once this NPRM is finalized, ORI recognizes that some institutions may wish to implement the revised regulation for research misconduct proceedings already underway. As was done with the 2005 Final Rule, ORI intends that for any allegation of research misconduct received by HHS or an institution before the effective date of the revised regulation, regardless of the stage of the research misconduct proceeding, the proceeding will fall under the 2005 Final Rule. ORI seeks comment on aspects to consider if it were to entertain individual requests to apply the revised regulation to a particular ongoing proceeding.

For additional information and an extensive historical background on the origins of ORI and the development of the PHS policies on research misconduct, we direct the public to 69 FR 20778 (Apr. 16, 2004) and to ORI's website at https://ori.hhs.gov/historical-background. A basic tenet of the scientific process is that research constantly evolves as experimental results and analyses inform new hypotheses. Informed debate and the discourse of ideas is a natural part of that process. Institutions must foster a research environment that discourages misconduct in all research and that deals forthrightly with possible misconduct associated with PHS supported research. ORI has recognized that the 2005 Final Rule's complexity and missing definitions may create confusion in some areas. Accordingly, this proposed rule aims to implement revisions that we believe are necessary and appropriate while retaining many of the features of the 2005 Final Rule.

We highlight below the changes in subparts A through E, particularly to draw attention to areas that represent new approaches. Briefly, this NPRM follows the structure of the 2005 Final Rule. Subpart A describes the purpose and fundamental precepts of the regulation. Subpart B provides definitions. Subpart C lists institutional responsibilities, and subpart D describes responsibilities of HHS and ORI. Finally, subpart E covers the process for respondents who wish to contest the ORI findings of research misconduct and HHS administrative actions. We invite public comments on all aspects of this proposed regulation.

Subpart A establishes the responsibilities of HHS, PHS, ORI, and institutions in addressing allegations of research misconduct. ORI proposes refining the language in subpart A to clarify the applicability of the regulation to allegations of research misconduct. Subpart A also addresses HHS coordination with other agencies. In addition, ORI proposes removing reference to evidentiary standards and burden of proof formerly found at § 93.106 because proposed revisions throughout part 93, and specifically at § 93.104, address requirements for a finding of research misconduct, including preponderance of evidence to prove an allegation.

A proposed substantive addition to subpart A includes clarifying language about confidentiality, explaining when and how disclosure may be made to “those who need to know.” In the 2005 Final Rule, the phrase “those who need to know” is not defined in § 93.108, causing uncertainty about what information can be disclosed and to whom. To address this concern, we propose to add new paragraphs in § 93.106 to address the situations in which disclosures may need to occur as well as who is considered as having a “need to know” and in what circumstances. We believe these proposed revisions will balance the rights of all parties while minimizing unnecessary information disclosure.

ORI recognizes that anonymity is a concern for some complainants and witnesses. Institutional, state, or other policies may govern the granting of anonymity to complainants or witnesses in a research misconduct proceeding, so ORI has not proposed language in the NPRM. Instead, ORI proposes to issue guidance on protecting anonymity in transcripts and other materials collected throughout a research misconduct proceeding. ORI is interested in the public's views on maintaining anonymity for complainants or witnesses who request it, including whether to include provisions for such anonymity in the final rule.

The 2005 Final Rule generally applies only to research misconduct occurring within six years of the date HHS or an institution receives an allegation of research misconduct, but it provides a “subsequent use” exception to the six-year limitation in § 93.105(b)(1). From our experience, this “subsequent use” exception has been applied most often to the citation of questioned paper(s) in a researcher's more recent publication or PHS grant application which in turn tolls the six-year time limitation. From our experience the phrase “other use for the potential benefit of the respondent of the research record” also has been viewed as vague and unclear. Therefore, to ensure clarity within the institutional community, we propose that the six-year time limitation be maintained, but we propose revising the “subsequent use” exception at § 93.105(b)(1) to include clarifying information. ORI is interested in public comments on how to further clarify the expectations and/or requirements related to the “subsequent use” exception.

ORI is proposing revisions to definitions in subpart B and introducing new definitions, some of which align with other changes proposed throughout the regulation. In a few cases, regulatory principles appeared in the body of the 2005 Final Rule without definition; these proposed revisions now appear among the 48 proposed definitions provided in subpart B. We propose moving definitions for “research misconduct”, “fabrication”, and “falsification” to subpart B without changes. ORI proposes revising the “plagiarism” definition and moving it to subpart B. We believe having all definitions in one place makes it easier for readers, enabling the text in subpart C to focus on institutional responsibilities. We are interested in public comments on all these definitions, their specific content as well as their inclusion in the listing of definitions in subpart B.

ORI proposes adding some commonly-used terms to the definitions to ensure clarity in usage. These additional terms include “appeal”; “assessment”; “difference of opinion”; “institutional certifying official” and “institutional deciding official”; “research integrity”; “research integrity officer”; and “small institution.” Key points of other proposed definitional changes follow, with more expansive definitions in subpart B. This preamble groups the conceptually related terms versus providing them alphabetically as they appear in subpart B.

Institutional Record. As part of the proposed revisions, we introduce the concept of a robust and required institutional record as part of the research misconduct investigative process. Described in more detail at § 93.223, the proposed institutional record includes the assessment report, inquiry report, investigation report, decision(s) made by the institutional deciding official, and the complete record of any institutional appeal, any other records the institution used for the research misconduct proceeding, documentation related to the determination that records are irrelevant or duplicate and therefore not included, and a single index listing all documents in the institutional record.

Administrative Record. The administrative record described at proposed § 93.202 contains information that would be used by ORI in making findings of research misconduct and identifying administrative actions, in addition to serving as the basis for the Departmental Appeals Board (DAB) Administrative Law Judge (ALJ) review and information considered by the HHS Suspension and Debarment Official (SDO). The proposed administrative record comprises: the institutional record; any information provided by the respondent to ORI, including but not limited to the verbatim transcript of any meetings under proposed § 93.403 between the respondent and ORI, whether in person, by phone, or by videoconference; and correspondence between the respondent and ORI; any additional information provided to ORI while the case is pending before ORI; and any analysis or additional information generated or obtained by ORI. Any analysis or additional information generated or obtained by ORI will also be made available to respondent.

Honest Error. At times, institutions have raised the issue that “honest error” is not defined in the 2005 Final Rule, and that providing a definition would ensure greater consistency and fairness. We propose to define the term “honest error” in subpart B as a mistake made in good faith.

Intentionally, Knowingly, and Recklessly. None of these terms were defined in the 2005 Final Rule. Although “knowingly” and “intentionally” seem to be more commonly understood than “recklessly”, we have received requests through the years to provide explicit definitions for clarity and to ensure uniform application in the research community. We propose definitions based on those used in the ALJ's Recommended Decisions in ORI v. Kreipke, Decision No. CR5109 (May 18, 2018) at page 14 and ORI v. Srivastava, Decision No. 5178 (Sept. 5, 2018) at pages 11-12. We propose that to act “intentionally” means to act with the aim of carrying out the act. To act “knowingly” means to act with awareness of the act. Finally, to act “recklessly” means to act without proper caution despite a known risk for harm. These definitions are found at §§ 93.224, 93.226, and 93.234, respectively.

Accepted Practices of the Relevant Research Community. From our experience, many institutions have requested a definition for the phrase “accepted practices of the relevant research community” to ensure clarity and uniformity in application to research misconduct proceedings. Therefore, we propose to adopt at § 93.200 a revised and extended version of the definition provided in the ALJ's Recommended Decision in ORI v. Kreipke, Decision No. CR5109 (May 18, 2018) at page 17. Specifically, we propose “accepted practices of the relevant research community” to mean those practices established by 42 CFR part 93 and by PHS funding components, as well as commonly accepted professional codes or norms within the overarching community of researchers and institutions that apply for and receive PHS grants. These practices must be consistent with the definition of research integrity at § 93.236.

This Part. Over the years, institutions and government agencies have told us that “this part” is confusing. We propose to define “this part” as meaning 42 CFR part 93 in its entirety, unless otherwise explicitly noted. We further define how to refer to only a portion of the regulation.

Plagiarism. The 2005 Final Rule states that “Plagiarism is the appropriation of another person's ideas, processes, results, or words without giving appropriate credit.” In addition to moving the definition of “plagiarism” to § 93.230, we propose to include new § 93.230(a) and (b). Proposed § 93.230(a) differentiates unattributed text copied verbatim or nearly verbatim from the limited use of identical or nearly-identical phrases which describe a commonly-used methodology. Further, proposed § 93.230(b) addresses self-plagiarism and authorship or credit disputes. Self-plagiarism and authorship disputes do not meet the definition of research misconduct and are outside of ORI's jurisdiction. These issues are better handled at the institutional level.

Compliance and Assurances. Information and guidance for institutions about compliance and research integrity assurances is provided at §§ 93.300 through 304. We propose clarifying the requirements for establishing and maintaining an active research integrity assurance, in addition to providing specific guidance for small institutions.

Conflict of interest. The 2005 Final Rule requires that institutions “ensure that individuals responsible for carrying out any part of the research misconduct proceeding do not have unresolved personal, professional or financial conflicts of interest with the complainant, respondent or witnesses” at § 93.300(b). This requirement has been interpreted by many institutions as a requirement to provide respondents with an opportunity to object to committee members' participation prior to their appointments to an inquiry committee, if one is used, or an investigation committee. This approach to conflict issues is not required by the 2005 Final Rule although some institutions have apparently made it an unwritten standard. We propose to add clarifying language at § 93.305(h)(5) that addresses how an institution may provide respondents or complainants the opportunity to object to the person or to one or more committee or consortium members, chosen to conduct, support, or participate in the research misconduct proceedings. If an institution chooses to provide one respondent in a proceeding the opportunity to object, it must provide all respondents in that proceeding the opportunity to object. If an institution chooses to provide one complainant the opportunity to object in a proceeding, it must provide all complainants the opportunity to object in that proceeding. We believe this is fair and will maintain uniformity in the processing of research misconduct allegations.

Sequestration of research records and other evidence. ORI is aware of concerns that, in the current research environment and with the use of cloud-based storage, it may not be possible to obtain “custody” of the original research records and other evidence that will be needed to conduct a research misconduct proceeding. We propose to move away from the use of the term “custody” and focus on the institution's obligation to obtain and sequester all research records and other evidence that will be needed to conduct the research misconduct proceeding (see §§ 93.305(a), 93.306(c)(2)(ii), 93.307(d), and 93.310(d)). We also propose adding new language at § 93.305(a) indicating that when it is not possible to obtain the original research records or other evidence, an institution may obtain copies of the data or other evidence so long as those copies are substantially equivalent in evidentiary value.

Institutional Assessment. New language is added at § 93.306 to describe the institutional assessment. We have provided criteria for an assessment to proceed to inquiry at § 93.306(1)(i) through (iii), and we have described reporting requirements as well as a timeline for completion of assessments.

Institutional Inquiry. ORI has observed that institutions often convene a committee to conduct a robust, investigation-like process at the inquiry stage. These processes may include interviewing witnesses and reviewing research records, only to repeat them at the investigation stage. ORI plans to issue guidance indicating that an interview conducted at the inquiry phase can be carried forward into investigation and need not be repeated, unless it might reveal further information. We propose a revision at § 93.307(e)(2), to allow institutional discretion in convening committees of experts to conduct reviews at the inquiry stage to determine whether an investigation is warranted. We further provide options for who may do the inquiry review, noting that the institution may use one or more subject matter experts to assist them. For more information on using a committee, consortium, or other person for research misconduct proceedings, see proposed § 93.305(h).

We propose to clarify for institutions in a new section, § 93.307(f)(1)(i), that proceeding to an investigation requires that they have a reasonable basis for concluding that an allegation falls within the definition of research misconduct under 42 CFR part 93 and involves PHS supported biomedical or behavioral research, research training or activities related to that research or research training, as provided in § 93.102. We also propose including language at § 93.309(c) to clearly indicate that institutions are required to keep sufficiently detailed documentation of each inquiry to permit a later assessment by ORI of the reasons the institution decided not to conduct an investigation.

We propose adding new language to §§ 93.307(f)(2)(ii) and 93.307(g)(2) to describe the inquiry results and inquiry report after an inquiry has been conducted. We have learned over time that the phrase “the allegation may have substance” in current § 93.307(d)(2), may lack the clarity an institution would find helpful to delineate an inquiry from an investigation. By nature, an inquiry is preliminary. An inquiry would not be expected to identify sufficient basis for differentiating honest error or difference of opinion from research misconduct committed intentionally, knowingly, or recklessly, absent an admission of research misconduct. We do not believe such a determination can be made at the inquiry phase to support dismissal of an allegation. However, we propose that the institution should note in the inquiry report any evidence of honest error or a difference of opinion, for full consideration at the investigation stage.

Institutional Investigation. From our experience, there has been some confusion about the extent to which institutions must continue to pursue leads at the institutional investigation stage under § 93.310(h). To address this concern, we propose that § 93.310(h) be revised to indicate that, at the investigation stage, the institution may choose to add to or expand the ongoing investigation by including any new allegations pertaining to the same respondent or research records in question ( e.g., manuscripts or funding proposals) that come to the institution's attention during the pendency of the investigation, rather than opening an inquiry to review those new allegations. We believe this will address an institution's administrative efficiency concern(s) while providing that new allegations are addressed as they are identified.

Institutional Record. As defined in proposed § 93.223 and further described at proposed §§ 93.305 through 93.316, ORI proposes that institutions be required to develop, maintain, and provide an institutional record. The institutional record would ultimately be part of a more expansive administrative record that would form the basis of any ORI decision regarding whether research misconduct has occurred, any decision by the Departmental Appeals Board ALJ, or any decision by the HHS Suspension and Debarment Official (SDO). ORI may provide additional guidance on how to organize and submit the institutional record.

ORI proposes changes to its processes that align with changes for institutions in subpart C, specifically how ORI assembles the administrative record of a research misconduct proceeding. Further,

1. We propose to add paragraph (b) in § 93.404 that would provide even more clarity by indicating that the lack of an ORI finding of research misconduct does not overturn an institution's determination that the conduct constituted professional or research misconduct warranting remediation under the institution's policy.

2. We clarify actions ORI may take for institutional noncompliance.

3. We indicate when and how ORI may disclose information about a research misconduct proceeding. We propose, at § 93.410(b), a revision that would permit ORI to publish notice of institutional research misconduct findings and implemented institutional actions. This notice would inform the public and research community that allegations of research misconduct have been addressed under the regulation and help to protect the health and safety of the public, promote the integrity of PHS supported research and the research process, or conserve public funds. ORI is interested in public comment on this proposed change, particularly on the opportunity for a respondent to provide comment or information prior to the posting of such a notice.

From our experience and interactions with institutions and professional organizations, there is a strong desire for a simpler and more expedient appeals process than the approach provided in the 2005 Final Rule. Under the 2005 Final Rule, a Departmental Appeals Board (DAB) ALJ undertakes a de novo review of ORI findings of research misconduct and proposed HHS administrative actions, based on evidence (including witness testimony) presented by ORI and the respondent at a hearing. Therefore, we propose a major revision to 42 CFR part 93, subpart E which will provide a streamlined process for contesting ORI findings of research misconduct and HHS administrative actions. The proposed appeals process would entail ALJ review of the administrative record, which includes all information provided by the respondent to ORI, to determine whether ORI's findings and HHS's proposed administrative actions other than suspension or debarment are reasonable and not based on a material error of law or fact. The proposed appeals process also provides for the possibility of a limited hearing if the ALJ determines that there is a genuine dispute over material fact. There would be no further opportunity to appeal ORI's findings and HHS's proposed administrative actions (other than suspension or debarment) within HHS. This proposal does not change that respondents may request reconsideration of a final debarment decision with the SDO. We believe this approach is advantageous to all parties, providing finality in a more expedient manner. ORI specifically seeks comment on the scope of and need, or lack of need, for the limited hearing in proposed § 93.511, as well as comment on the other proposed revisions to subpart E.

All recipients of PHS biomedical and behavioral research awards must continue to comply with reporting and record keeping requirements in this NPRM. As shown below in the Paperwork Reduction Act analysis, those burdens on institutions encompass essentially all the activities required under the proposed rule.

We have examined the impacts of the proposed rule under Executive Order 12866, Executive Order 13563, Executive Order 14094, and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). Executive Orders 12866, 13563, and 14094 direct us to assess all costs and benefits of available regulatory alternatives and, when regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity). We do not believe that this proposed rule, if finalized, would result in significant effects as described below.

The Unfunded Mandates Reform Act of 1995 (section 202(a)) requires us to prepare a written statement, which includes an assessment of anticipated costs and benefits, before proposing “any rule that includes any Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector, of $100,000,000 or more (adjusted annually for inflation) in any one year.” The current threshold described in Executive Order 14094 is $200 million. This proposed rule, if finalized, would not result in an expenditure in any year that meets or exceeds this amount.

This proposed rule would result in costs associated with covered institutions updating their policies and procedures for responding to allegations of research misconduct; costs associated with covered entities filing an annual statement of assurance (research integrity assurance) and an annual report on allegations received; costs associated with submitting reports and evidence to support their results and conclusions of inquiries or investigations of research misconduct; and costs associated with obtaining all research records and other evidence when there is an allegation of research misconduct and engaging persons to handle the process for addressing the allegations of research misconduct. We anticipate that the proposed rule would likely reduce the burden of compliance by states or other institutions through reduced confusion and uncertainty.

We performed an initial threshold analysis to assess the approximate magnitude of the impacts of the proposed rule to determine whether it would result in significant effects as per section 3(f)(1) of Executive Order 12866. We identified the costs associated with covered institutions updating their policies and procedures for responding to allegations of research misconduct as the largest impact under the proposed rule. For this impact, we anticipate that 5,910 institutions holding research integrity assurances would update their policies and procedures. For the purposes of this threshold analysis, we adopt 16 hours as an estimate for the average time across all covered entities for these tasks. Across all covered entities, this is 94,560 total hours spent updating policies and procedures.

To monetize the change in time use associated with these activities, we adopt an hourly value of time based on the cost of labor, including wages and benefits, and also indirect costs, which “reflect resources necessary for the administrative oversight of employees and generally include time spent on administrative personnel issues ( e.g., human resources activities such as hiring, performance reviews, personnel transfers, affirmative action programs), writing administrative guidance documents, office expenses ( e.g., space rental, utilities, equipment costs), and outreach and general training ( e.g., employee development).”  1

For these tasks, we identify a pre-tax hourly wage for Education Administrators, Postsecondary. According to the U.S. Bureau of Labor Statistics, the mean hourly wage for these individuals is $53.49 per hour. 2 We assume that benefits plus indirect costs equal approximately 100 percent of pre-tax wages, and adjust this hourly rate by multiplying by two, for a fully loaded hourly wage rate of $106.98. We multiply this fully loaded hourly wage rate by the 94,560 total hours across covered entities spent updating policies and procedures and estimate a total cost in the first year of about $10.1 million.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires agencies to prepare a regulatory flexibility analysis describing the impact of the proposed rule on small entities (named “institutions” in the proposed rule), permits agency heads to certify that a proposed rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. The primary effect of this proposed rule would be to require covered institutions to implement policies and procedures for responding to allegations of research misconduct. The Secretary proposes to certify that this proposed rule would not have a significant impact on a substantial number of small entities, as defined by the Regulatory Flexibility Act, based on the following facts.

1. As of March 1, 2023, approximately 30 percent (1,785) of 5,910 institutions holding research integrity assurances are small institutions. The primary impact of the NPRM on covered institutions results from the reporting and record keeping provisions which are analyzed in detail under the heading “The Paperwork Reduction Act.” Significant annual burdens apply only if an institution learns of possible research misconduct and begins an inquiry, investigation, or both.

2. Institutions covered by 42 CFR part 93 reported having conducted a total of 114 inquiries and 101 investigations during the 2021 reporting period. Two inquiries and two investigations were conducted by small institutions. Small institutions may be able to avoid developing and filing the full policies and procedures for addressing allegations of research misconduct required by § 93.304 by filing a Small Institution Statement. Under the 2005 Final Rule, this is called a Small Organization Statement. ORI or another appropriate HHS office will work with small institutions to develop and/or advise on a process for handling allegations of research misconduct consistent with 42 CFR part 93. The burden of filing the Small Institution Statement is .5 hour. Thus, the burden of developing and filing the full policies and procedures for addressing allegations of research misconduct required by § 93.304 will not fall on a substantial number of small entities.

A small entity that files the Small Institution Statement must still report allegations of research misconduct to ORI and comply with all provisions of the proposed rule except as described in § 93.303. The most significant burden that could fall on an entity filing a Small Institution Statement is in addressing allegations of research misconduct which would include obtaining all research records and other evidence when there is an allegation of research misconduct, engaging persons to handle the process for addressing the allegations of research misconduct, and submitting reports and evidence to support the small institution's results and conclusions of inquiries or investigations of research misconduct. The average burden per response is estimated at 40 hours. Based on reports of research misconduct over the last 5 years, fewer than 5 small institutions would have to incur that burden in any year. Based on this analysis, HHS concludes that the regulations set forth in the NPRM will not impose a significant burden on a substantial number of small entities. However, HHS will carefully consider comments on the analysis and conclusion.

ORI currently holds OMB-Control-Number 0937-0198 for the collection of information from institutions. The information is needed to fulfill section 493 of the Public Health Service Act (42 U.S.C. 289b), which requires assurances from institutions that apply for PHS funding for any project or program that involves the conduct of biomedical or behavioral research. In addition, the information is required to fulfill the assurance and annual reporting requirements of 42 CFR part 93. ORI uses the information to monitor institutional compliance with the regulation. Lastly, the information may be used to respond to congressional requests for information to prevent misuse of Federal funds and to protect the public interest. The Institutional Assurance and Annual Report on Possible Research Misconduct, PHS-6349, and the Assurance of Compliance by Sub-Award Recipients, PHS-6315, are covered by OMB 0937-0198. The OMB approvals expire August 31, 2026, and ORI has applied for renewal with only minor changes to language in the forms.

AmeriCorps is proposing changes to its AmeriCorps State and National program regulations based on its desire to address stakeholder feedback on match requirements, be more consistent with other grant programs within the agency, and reduce barriers to grantee organizations specifically designed to provide education and training to members as part of their national service program. AmeriCorps State and National provides grants to states, territories, Indian tribes, public and private nonprofit organizations, local governments, and institutions of higher education to carry out national service programs, offering a wide range of service opportunities. AmeriCorps State and National also provides general operating funding for state service commissions. AmeriCorps is proposing these changes under the authority of the National and Community Service Act, as amended, at 42 U.S.C. 12651c(c).

This proposed rule would make four substantive changes to the AmeriCorps State and National regulations, as described below. In addition, this proposed rule would make nomenclature changes to add a definition for “AmeriCorps” and change “the Corporation” to “AmeriCorps” throughout these regulations to reflect that the Corporation for National and Community Service now operates as AmeriCorps.

The current regulation sets a 20 percent limit to the aggregate total of all AmeriCorps member service hours in a program that may be spent in education and training activities. As a result, each program must have at least 80 percent of the aggregate of all AmeriCorps member hours in service. The proposed rule would allow AmeriCorps to waive this limit under certain circumstances, to allow up to 50 percent of the aggregate AmeriCorps member hours in a program to be spent in education and training activities. The criteria AmeriCorps will consider when deciding whether a waiver is appropriate are whether the AmeriCorps program:

• is a Registered Apprenticeship program, or

• is a job training or job readiness program, or

• includes activities to support member attainment of a GED or high school diploma or occupational, technical, or safety credentials, or

• the AmeriCorps program primarily enrolls economically disadvantaged AmeriCorps members and is designed to provide soft skills or life skills development for those members.

This proposed rule would allow individuals who might benefit from additional education and training, such as those reentering society after incarceration, to participate in national service while acquiring skills and knowledge to ease their transition.

The current regulation creates a significant barrier to entry for workforce development/Registered Apprenticeship programs and results in their participants being unable to get credit for a large portion of their hours. Programs with full-time participants are only able to offer “less than full-time” AmeriCorps member slots, which limits the amount of the education award available to their participants and could limit their participants' access to health care, childcare, and other benefits afforded to members enrolled in full-time slots.

AmeriCorps expects to grant waivers to new and existing Registered Apprenticeship programs, job training or job readiness programs, programs that include activities to support member attainment of a GED or high school diploma or other credentials, or programs that primarily enroll economically disadvantaged AmeriCorps members and are designed to provide soft skills or life skills development for those members. Grantees would request waivers in writing as part of their grant application. Decisions about the waivers would be provided prior to grant award. As most of the programs that would benefit from this waiver have participants who are serving in the program full time but may only serve part-time as AmeriCorps members because of the current limits on in-service educational time, there is no expectation that the level of service provided to communities would decline. While the level of service provided to communities is expected to remain constant under this proposal, participants would benefit because they could count the majority of their existing training hours toward earning a larger education award.

This proposed rule would revise the scale that sets out grantees' program costs not provided by AmeriCorps (known as “match” or “cost share”). The current regulations require a graduated match that incrementally increases each year to a total of 50 percent overall share by the tenth year and for each year afterward without a break in funding of five years or more. The proposed rule would establish a match that gradually increases at the end of each three-year grant period (rather than annually) over a longer period of time to reach a total of 50 percent overall share by the sixteenth year (rather than by the tenth year) and for each year afterward without a break in funding of five years or more.

This proposed change is intended to address the increased difficulty many grantees experience in raising match funds, as evidenced by the increase in waiver requests AmeriCorps receives, and address many of the comments AmeriCorps received in response to the Request for Information from Non-Federal Stakeholders: Grantee Match Requirements (RFI) it published in 2022. See 87 FR 26740 (May 5, 2022). Waiver requests have increased significantly since 2017 and 2018. From March 2022 to March 2023, AmeriCorps received more than 60 requests for full or partial waivers of AmeriCorps State and National match requirements, meaning that requests have been submitted for more than 7 percent of AmeriCorps State and National cost-reimbursement grants. Many of the respondents to the RFI stated that they have difficulty securing match and that current match requirements are a barrier to equity and limit people's ability to serve. These respondents specifically proposed a return to “original Congressional intent” as evidenced by language in the National and Community Service Act of 1990 providing that AmeriCorps' share may not exceed 75 percent. For several years, Congress has, through appropriations laws, provided that AmeriCorps programs receiving grants under the National Service Trust program must meet an overall minimum match of 24 percent for the first three years of receiving funding, and then must meet the overall match requirements in section 2521.60 of the current regulations. See, e.g., Consolidated Appropriations Act, 2022, Public Law 117-103, Section 402. The current regulations at section 2521.60 set out a graduated match schedule in which the required match increases from 26 percent as of the fourth consecutive year they receive a grant to 50 percent as of year 10 and beyond for the total budget. This requires grantees to match the AmeriCorps' investment one-to-one once they reach year 10 and beyond.

AmeriCorps proposes a match that increases more gradually until it reaches 50 percent of the overall program cost by the sixteenth year to replace the current regulations' more abrupt and steep match scale. A match that increases less often (by grant period, rather than annually) would reduce the burden on grantees of raising, tracking, and reporting increasing annual percentages. While some grantees can raise the currently required additional match for years five and beyond (ranging from 30 percent to 50 percent), it is a barrier for other existing grantees that are smaller or in geographic areas where there is not a philanthropic community. It is also a barrier to entry for new applicants that have less capacity and less access to matching funds. Lowering the match amount does not change the cost to run a strong AmeriCorps program. Thus, grantees will continue to have to raise additional funds beyond the required match generally, for the sustainability of their organization, but they will no longer be in danger of having to return AmeriCorps funds at the end of their grants if they fail to raise match that is so far in excess of the 25 percent indicated by statutory text. To the extent they are able, grantees are strongly encouraged to raise funding beyond the required match amount to extend the reach of national service as much as possible.

This proposed rule would revise the criteria that grantees must demonstrate when they request a waiver of the matching requirements. Currently, the regulation requires grantees to demonstrate: (1) a lack of resources at the local level; (2) that the lack of resources is unique or unusual; (3) the efforts the grantee has made to raise matching resources; and (4) the amount of matching resources the grantee has raised or reasonably expects to raise. The proposed rule would instead specify four criteria and require grantees to demonstrate only one of them, and in addition provide supporting documentation and a description of the efforts made to raise match. The proposed waiver criteria mirror the waiver criteria required in AmeriCorps Seniors programs, with one additional criterion to allow waivers for organizations with revenue of less than $500,000. Specifically, under the proposed rule, grantees would have to demonstrate one of the following: initial difficulties in developing local funding sources during the first three years of operations; an economic downturn, natural disaster, or similar event in the grantee's service area that severely restricts or reduces sources of local funding support; the unexpected discontinuation of local support from one or more sources that a project has relied on for a period of years; or an organizational revenue of less than $500,000.

The current regulations' waiver requirements are overly burdensome to grantees and enhance the risk that AmeriCorps funds will not be fully expended because grantees must return AmeriCorps funds at closeout if they do not meet the match requirement or receive a waiver. The proposed waiver criteria reduce this burden. Furthermore, the agency desires to have more consistency between its programs, and the proposed change aligns AmeriCorps State and National's match waiver criteria with AmeriCorps Seniors' match waiver criteria, with one additional criterion. The additional criterion, for organizations with less than $500,000 in revenue (as shown on an IRS Form 990, for example) is intended to encourage new, small organizations and those with programs in underserved communities. The proposed rule would still require a description of efforts made to raise matching resources but clarifies that this description must be provided with the waiver request.

The current regulation provides that individuals who serve in AmeriCorps State and National may receive the benefits offered by AmeriCorps for serving up to, but not more than, four terms. It also includes information on how terms are calculated if an individual is released early under various circumstances. The benefits offered to AmeriCorps members include the AmeriCorps Segal Education Award from the National Service Trust upon successful completion of their terms of service. Benefits during service include a living allowance, financial benefits during an extended term of disaster-related service, childcare, and health care.

Separate regulations at 45 CFR 2525.50 limit participants to receiving no more than the value of two full-time education awards. The proposed rule would remove the four term limit, thus allowing any individual to serve as many terms as necessary to earn the value of two full-time education awards, regardless of whether those terms are served on a full-time, part-time, or reduced part-time basis. This revision removes an artificial barrier on individuals' ability to continue to serve.

In 2010, AmeriCorps established the four-term limit in the current regulations to ensure that there would be opportunities for all interested Americans to serve because, at the time, applications for AmeriCorps far exceeded available positions. See 75 FR 51395, 51406-07 (August 20, 2010). An excess demand for AmeriCorps positions no longer exists to justify this term limit. Even accounting for the possibility that demand will at some point exceed the number of AmeriCorps positions available, the current regulation's term limit is too broad a prohibition. Service terms vary considerably, encompassing full-time, part-time, reduced part-time, quarter-time, and minimum-time terms, as well as any term from which one exits after serving 15 percent of the agreed term of service. Treating each of these terms of service as equivalent for the purposes of a term limit is unfair to those who may have served shorter terms of service but would like to serve more. Individuals should be encouraged, rather than discouraged, from participating in national service. AmeriCorps believes a term limit is unnecessary, as there is already an existing limit to education awards—a significant incentive for participation in national service.

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The Office of Information and Regulatory Affairs in the Office of Management and Budget has determined that this proposed rule is not a significant regulatory action.

As required by the Regulatory Flexibility Act of 1980 (5 U.S.C. 601 et seq. ), AmeriCorps certifies that this rule, if adopted, will not have a significant economic impact on a substantial number of small entities. Most AmeriCorps State and National grantees are State Commissions and organizations that do not meet the definition of a small entity. Therefore, AmeriCorps has not performed the initial regulatory flexibility analysis that is required under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) for rules that are expected to have such results.

For purposes of Title II of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, as well as Executive Order 12875, this regulatory action does not contain any Federal mandate that may result in increased expenditures in Federal, State, local, or Tribal Governments in the aggregate, or impose an annual burden exceeding $100 million on the private sector.

Under the PRA, an agency may not conduct or sponsor a collection of information unless the collections of information display valid control numbers. The application for AmeriCorps State and National grants are authorized under OMB Control Number 3045-0047, which expires September 30, 2026. Applicants for grants who would like to request a waiver under this proposed rule would do so as part of the application process, but the request is exempted from the definition of “information” subject to PRA requirements because it is a simple acknowledgment that the applicant is requesting a waiver based on one of the criteria. See 5 CFR 1320.3(h)(1). Therefore, this proposed rule does not affect require submission of a revision of this information collection.

Executive Order 13132, Federalism, prohibits an agency from publishing any rule that has federalism implications if the rule imposes substantial direct compliance costs on State and local Governments and is not required by statute, or the rule preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rulemaking does not have any federalism implications, as described above.

This proposed rule does not affect a taking of private property or otherwise have taking implications under Executive Order 12630 because this proposed rule does not affect individual property rights protected by the Fifth Amendment or involve a compensable “taking.” A takings implication assessment is not required.

This proposed rule complies with the requirements of Executive Order 12988. Specifically, this rulemaking: (a) meets the criteria of section 3(a) requiring that all regulations be reviewed to eliminate errors and ambiguity and be written to minimize litigation; and (b) meets the criteria of section 3(b)(2) requiring that all regulations be written in clear language and contain clear legal standards.

AmeriCorps recognizes the inherent sovereignty of Indian tribes and their right to self-governance. We have evaluated this rulemaking under our consultation policy and the criteria in Executive Order 13175 and determined that this proposed rule does not impose substantial direct effects on federally recognized Tribes.

We are required by Executive Orders 12866 (section 1(b)(12)), and 12988 (section 3(b)(1)(B)), and 13563 (section 1(a)), and by the Presidential Memorandum of June 1, 1998, to write all rules in plain language. This means that each proposed rule we publish must: (a) be logically organized; (b) use the active voice to address readers directly; (c) use clear language rather than jargon; (d) be divided into short sections and sentences; and (e) use lists and tables wherever possible. If you feel that we have not met these requirements, please send us comments by one of the methods listed in the ADDRESSES section. To help us revise the rule, your comments should be as specific as possible.

For the reasons stated in the preamble, under the authority of 42 U.S.C. 12651c(c), the Corporation for National and Community Service is proposing to amend Chapter XXV, title 45 of the Code of Federal Regulations as follows: