This action, pursuant to 5 U.S.C. 553, proposes to amend regulations issued to carry out a marketing order as defined in 7 CFR 900.2(j). This proposal is issued under Marketing Order No. 930, as amended (7 CFR part 930), regulating the handling of tart cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin. Part 930 (referred to as the “Order”) is effective under the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), hereinafter referred to as the “Act.” The Board locally administers the Order and is comprised of growers and handlers of tart cherries operating within the production area and a public member.

Section 8c(17) of the Act (7 U.S.C. 608c(17)) and the applicable rules of practice and procedure governing the formulation of marketing agreements and orders (7 CFR part 900) authorize amendment of the Order through this informal rulemaking action. The Agricultural Marketing Service (AMS) will consider comments received in response to this proposed rule, and based on all the information available, will determine if Order amendment is warranted. If AMS determines amendment of the Order is warranted, a subsequent proposed rule and notice of referendum would be issued, and producers and handlers would be allowed to vote for or against the proposed amendments. AMS would then issue a final rule effectuating any amendments approved by producers and handlers in the referendum.

AMS is issuing this proposed rule in conformance with Executive Orders 12866, 13563, and 14094. 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, reducing costs, harmonizing rules, and promoting flexibility. Executive Order 14094 reaffirms, supplements, and updates Executive Order 12866 and further directs agencies to solicit and consider input from a wide range of affected and interested parties through a variety of means. This action falls within a category of regulatory actions that the Office of Management and Budget (OMB) exempted from Executive Order 12866 review.

This proposed rule has been reviewed under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, which requires agencies to consider whether their rulemaking actions would have tribal implications. AMS has determined this proposed rule is unlikely to have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes.

This proposal has been reviewed under Executive Order 12988, Civil Justice Reform. This rule is not intended to have retroactive effect.

The Act provides that administrative proceedings must be exhausted before parties may file suit in court. Under section 8c(15)(A) of the Act (7 U.S.C. 608c(15)(A)), any handler subject to an order may file with USDA a petition stating that the order, any provision of the order, or any obligation imposed in connection with the order is not in accordance with law and requesting a modification of the order or to be exempted therefrom. A handler is afforded the opportunity for a hearing on the petition. After the hearing, USDA would rule on the petition. The Act provides that the district court of the United States in any district in which the handler is an inhabitant, or has his or her principal place of business, has jurisdiction to review USDA's ruling on the petition, provided an action is filed no later than 20 days after the date of entry of the ruling.

Section 1504 of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) (Pub. L. 110-246) amended section 8c(17) of the Act, which in turn required the addition of supplemental rules of practice to 7 CFR part 900 (73 FR 49307; August 21, 2008). The amendment of section 8c(17) of the Act and the supplemental rules of practice authorize the use of informal rulemaking (5 U.S.C. 553) to amend Federal fruit, vegetable, and nut marketing agreements and orders. AMS may use informal rulemaking to amend marketing orders depending upon the nature and complexity of the proposed amendments, the potential regulatory and economic impacts on affected entities, and any other relevant matters.

AMS has considered these factors and has determined that the amendments proposed herein are not unduly complex and the nature of the proposed amendments is appropriate for utilizing the informal rulemaking process to amend the Order. This proposed rule encompasses a number of changes that are primarily administrative and modernizing in nature. These changes would clarify regulatory text or align it with current industry practices. Changes would also simplify the administration of seating the Board. In addition, as discussed in the “Initial Regulatory Flexibility Analysis” section below, this proposed rule is not anticipated to impose any new costs on affected entities. The amendments would apply equally to all producers and handlers, regardless of size. The proposed amendments also have no additional impact on the reporting, recordkeeping, or compliance costs of small businesses.

The Board unanimously recommended all the proposed amendments to the Order following deliberations at a public meeting held on February 15, 2022, except one dissenting vote on the method for establishing a member's sales constituency. The Board submitted its formal recommendation to amend the Order through the informal rulemaking process on April 8, 2022. At AMS's request, the Board conducted an additional meeting on December 15, 2022, to publicly clarify its original intent that the sales constituency provisions of the proposal would apply to both growers and handlers, and that sales constituency would be established at the time of nomination. Specifically, the Board adjusted the language of the initial February 15th recommendation for when a member's sales constituency is established from “nomination and appointment” to just at the time of “nomination.” The Board then unanimously voted to clarify that the established sales constituency applies to both handlers and growers for the duration of the term of office. A separate vote to remove the words “and appointment” from the language had one dissenting individual who believed sales constituency should be calculated at the time of appointment. The proposed rule would:

• Modify the method for allocating Board seats to a district so that it is based on the district's maximum volume of production in the most recent five harvests (Proposal 1);

• Change the starting date for the term of office for Board members (Proposal 2);

• Modify the basis for determining a Board member's sales constituency when a member has multiple affiliations (Proposal 3);

• Clarify how sales constituency applies to alternate Board members (Proposal 4);

• Adjust the timeframe for submitting nominations to USDA (Proposal 5); and

• Clarify when districts are subject to the Order's volume regulations (Proposal 6).

Section 930.20 establishes the Board and provides a method for calculating its membership, which is drawn from nine subdivisions (or “districts”) in the production area. Section 930.20(b) states that district representation on the Board is based on the previous three-year average production in the district and may vary depending on the production levels of the district. If the three-year average production in a district changes, so that a different number of seats should be allocated to it, § 930.20(f) states that the Board's membership must be adjusted accordingly. Currently, the Board is required to calculate the three-year average production in each of the nine districts annually. This updated yearly calculation of the three-year average may result in a change to the number of representative seats in a given district.

This method for determining the Board's membership has proved to be inefficient and costly. If the Board's calculation of the three-year average production in a district reduces the number of seats for the district, the members of that district follow the procedures specified in § 930.120 and recommend to the Board who among them should be removed from office. The Board then makes a recommendation to the Secretary for approval of the member and alternate to be removed from the Board. This process is time-intensive and disrupts the continuity of the Board's operations by removing members and alternates from the Board as frequently as every year. If the new three-year average calculation results in an increase to a district's representation on the Board, the Board staff would conduct an election in that district to fill the newly established seat. This process costs the Board significant time and financial resources because it requires conducting additional outreach and nominations annually. Consequently, the Board discussed ways to alter § 930.20 to provide a more sustainable method for calculating its membership.

The Board recommended modifying § 930.20(b) so that district representation on the Board is based on each district's maximum production in the most recent five harvest periods, rather than on the district's average production over the previous three years. The Board further recommended that the proposed calculation would commence from the first season's harvest following implementation of this action. In addition, § 930.20(f) would be revised to specify that each district's maximum production for the most recent five harvests would be determined every five years and as soon as possible after the most recent year's production is known. Production numbers would be calculated after the Board receives final reports in early September. The five-harvest periods for calculating maximum volume for each district would continue in perpetuity until otherwise modified through a Board recommendation and rulemaking. The choice of the five-year period is based on balancing the interests of the industry. A five-year period would provide continuity of district representation on the Board, yet it would also allow trends and/or changes impacting tart cherry production to be accommodated periodically.

The Board also recommended amending § 930.20 to insert two new sections, §§ 930.20(g) and 930.20(h). Section 930.20(g) would further clarify that in the event a district experiences substantial changes requiring reconsideration of the number of seats in the district, the Secretary, based on the Board's recommendation, could allocate a different number of seats to the district. In deciding whether to make any such recommendation, the Board would consider several factors. These factors would include shifts in the tart cherry acreage and/or the number of bearing trees within districts and within the production area during recent years, the volume of tart cherries produced in the district, the importance of either increased or decreased production in its relation to existing districts, the equitable relationship of Board membership and districts, enhanced economies to producers through more efficient administration of Board reapportionments, and other relevant factors.

Additionally, § 930.20(h) would state that no change in the number of seats allocated to a district could become effective less than 30 days prior to the date on which the term of office begins each year, and no recommendation for a change in allocated seats could be made less than six months prior to such date. Current § 930.20(g), (h), and (i) would be redesignated § 930.20(i), (j), and (k), respectively.

The Board considered alternatives to the proposed five-year period for determining a district's maximum production, including 3-year and 10-year periods. The Board assessed each period and cross-compared historical production data to review the hypothetical impact of these options on district representation levels. The Board determined the five-year period calculation as optimal because it induced the least volatility in the seat allocations to each district. Ultimately, the Board believes this proposal would stabilize its composition and improve the efficiency of its operations.

Section 930.22 states that the term of office for Board members and alternates is three fiscal years. Section 930.7 defines a fiscal year as the 12-month period beginning on July 1 of any year and ending on June 30 of the following year. These dates have been used as the beginning and end dates for the term of office since the inception of the Order. Proposal 2 would adjust the term of office to start on June 1 and end on May 31 of the third subsequent year. This change would allow for activities such as Board forecasting, planning, and final recommendations for the optimum supply volume to be conducted by the same membership, which industry believes will improve Board operations. The optimum supply volume is referred to by the Board as the Optimum Supply Formula (OSF).

Under the Order's current marketing policy located in § 930.50, the Board is required to meet on or about July 1 of each crop year to establish a preliminary free market tonnage percentage and a preliminary restricted percentage, and to meet again no later than September 15 to make any modifications to the preliminary percentages based on consideration of actual production data, inventories, and other current economic information. Therefore, the final OSF recommendation incorporates the updated market data, and the Board reviews the preliminary estimates calculated by the prior Board membership during its June meeting (which is when the Board typically holds the meeting required to be held on or about July 1). However, the preliminary recommendation from its June meeting can impact industry operations during harvest in July and August.

Therefore, to establish greater continuity of Board operations that is stabilizing for industry, the Board recommended changing § 930.22 so the term of office would be three years, starting on June 1 and ending on May 31 of the third subsequent year, prior to the start of the crop year. This would allow the same Board members to calculate both the preliminary estimate and the final OSF recommendation.

In addition, the Board usually formulates its budget and assessment rates for the upcoming season at its June meeting. With this change, the newly seated Board would also be making these decisions.

This proposal would clarify how the term “sales constituency” is applied to growers and handlers. As defined in § 930.16, a sales constituency is a common marketing organization, brokerage firm, or individual representing a group of handlers and growers. An organization that receives consignments of cherries but does not direct where the consigned cherries are sold is not a sales constituency. The determination of a Board member's (or prospective Board member's) sales constituency is important because, in a district with multiple Board members, only one member may be from a given sales constituency. This limitation is intended “to achieve a fair and balanced representation on the Board” and “to prevent any one sales constituency from gaining control of the Board” (7 CFR 930.20(g)).

The lack of additional guidance in the Order relating to sales constituency determinations has created significant challenges. First, the lack of guidance has led to confusion in the industry about how these determinations should be made. In addition, under the current regulatory criteria, Board members and nominees may be found to have multiple sales constituencies since many growers and handlers conduct business with several entities at the same time. Further, these business transactions may change year-to-year, or even within a year. The complicated and volatile nature of sales constituency determinations under the current rules means that Board members may become ineligible to serve before their terms expire, and this contributes to high turnover rates among members. These issues have also made it increasingly difficult to identify qualified candidates to serve on the Board, exacerbating the economic conditions that have caused the tart cherry industry to shrink over time.

The proposal would address these problems by simplifying sales constituency determinations and by providing that such determinations, once made at the time of a prospective member's nomination, would remain in place until the end of the member's term of office. Specifically, this proposal would amend § 930.23(b) to provide that a grower's sales constituency is determined by the handler that purchases the “majority of pounds” of the grower's cherries at the time of their nomination. A handler's sales constituency would be the entity that directs the sales of its cherries, which is commonly the handler itself. Sales constituency determinations for growers and handlers would be based on the most recently harvested crop at the time of nomination. This assigned sales constituency would remain in effect throughout the grower's or handler's term of office. Since growers and handlers do business with multiple entities, this clarification would standardize the process for determining sales constituency and ensure that the sales constituency relationship would remain in place throughout a member's three-year term of office. Therefore, the Board recommended this proposal to address industry confusion on how to accurately determine a nominee's sales constituency relationship.

This proposal will help keep the sales constituency static throughout the term of office and stabilize Board membership, thereby reducing turnover interruptions prior to the term of office ending for the member. As explained above, this stability is becoming more important given business attrition and the economic conditions that contribute to the shrinking of the tart cherry industry over time, which has made identifying qualified candidates to serve on the Board increasingly more difficult. In sum, the Board seeks to limit the impact of any single sales constituency and maintain a wide array of perspectives and industry interests while simultaneously incorporating the flexibility to fully seat the Board. This proposal would promote diverse Board representation to reflect industry's business interests while retaining the capacity to seat diverse representation for the entire three-year term of office in each district. This proposal also makes clear that both handlers and growers are subject to sales constituency requirements.

Section 930.28 establishes the criteria to seat an alternate member at a Board meeting during the absence of the member for whom that member serves as an alternate. The current language does not include any provision that incorporates sales constituency with regard to alternate members being seated. This proposal clarifies the interpretation of the regulatory language regarding who may represent a member seat within a district, and the intent of industry on nominating and seating an alternate member. When the Order was initially established, the intent of industry regarding sales constituencies was to permit the seating of alternate members even though they were of the same sales constituency as the member for whom they serve as an alternate. It was understood that members of the same sales constituency could occupy the member and the corresponding alternate seat for that chair on the Board. The proposed amendment would confirm this original interpretation of the sales constituency limitation and clarify when an alternate may serve in place of a member.

Before 2018, the Board's policy was to allow members and their alternates to be from the same sales constituency, even though this practice was not explicitly codified. However, in 2018 a district court issued an order that disapproved of this practice. In Burnette Foods Inc. v. United States Department of Agriculture, the United States District Court for the Western District of Michigan held that CherrCo, Inc., a grower cooperative, was a sales constituency. Burnette Foods, Inc. v. U.S. Dep't of Agriculture, No. 1:16-cv-21, 2018 WL 538583, at *4 (W.D. Mich. Jan. 24, 2018). In connection with this holding, the court issued an order stating that “Not more than one Board member ( including an alternate Board member ) may be from, or affiliated with, CherrCo in those districts having more than one seat on the Board.” Burnette Foods, ECF No. 51 (Mar. 9, 2018) (emphasis added).

USDA's implementation of the district court's order made it difficult to find and seat representatives on the Board who did not have a “constituency conflict” (that is, a shared sales constituency) with other members and alternates on the Board. Under USDA's implementation of the order, sales of cherries by a grower to more than one handler required that all such handler relationships be considered in assessing constituency conflicts. All these grower relationships were compared to all constituencies of other members and alternates serving on the Board from a multi-seat district, including the member holding the seat for which an alternate was standing for nomination and election. With this interpretation, if any conflict existed between a candidate and any other Board representative in the same district, alternates included, the candidate could not be nominated for appointment to the Board.

USDA appealed the district court's decision to the United States Court of Appeals for the Sixth Circuit, which reversed the district court's judgment and remanded the case for entry of judgment in USDA's favor. Burnette Foods, Inc. v. U.S. Dep't of Agriculture, 920 F.3d 461, 464, 470 (6th Cir. 2019). However, because the Sixth Circuit ruled in USDA's favor on a preliminary issue, it did not address the question of whether (or how) the sales constituency limitation in § 930.20(g) applies to alternate members.

To clarify this issue, the Board recommended adding language to § 930.28 to explicitly state how the sales constituency limitation applies to alternate members. Currently, § 930.20(g) provides that any conflict of sales constituency in a district for Board members is not allowed. The current language in § 930.20(g) does not address how an alternate's sales constituency affects a member's qualification to serve. The proposed amendment to § 930.28 would add the necessary language to clarify the Board's intentions when seating alternate members.

As previously mentioned, attrition and difficult economic conditions are shrinking the tart cherry industry. In 2021 and 2022, three tart cherry handling operations closed. The Board also recently had open alternate seats as a result of the lawsuit surrounding the sales constituency clause. Finding and electing candidates to serve has become increasingly more difficult. The current process of determining sales constituency adds to this difficulty, especially when a member's sales constituency may change yearly, and the existing process significantly limits the availability of qualified candidates. To seat a functioning Board that appropriately represents growers and handlers from their corresponding districts, the Board believes that members of the same sales constituency must be allowed to sit as member and alternate on the Board. This was commonly understood by industry as how the Order was originally intended to operate. This is also how industry interpreted the Order until 2018.

This amendment would clarify the regulations and confirm these original intentions and the interpretation of sales constituency for alternates. The proposal would reclassify the original paragraph comprising § 930.28 as § 930.28(a) and add two new paragraphs § 930.28(b) and § 930.28(c). Section 930.28(b) would state that alternate members may be from the same sales constituency as the member for whom they serve as an alternate. It would also provide that, if a member and their alternate are absent from a meeting of the Board, another alternate of a different district may act for the member following the requirements of § 930.28(a), provided this does not create a sales constituency conflict with the other members of that district. Section 930.28(c) would allow the Board, with the approval of the Secretary, to establish rules and regulations necessary and incidental to the administration of § 930.28.

Preparing and completing Board member nomination packages for submission to the Secretary entails several stages of work that require months to complete. The process begins with the issuance of notices of open seats transmitted to industry, followed by the solicitation of nominations in the applicable districts. Grower members and at-large members ( i.e., members in districts with only one seat and who may be growers or handlers) are nominated first, then handler members are nominated. Once this is completed, the Board focuses efforts on the nomination of alternate members, a process that adds several more weeks to the timetable.

Currently, the Board is required to announce the expiration of a member's term of office and solicit nominations for the position at least 180 days before the term expires. Board staff must then complete the above-mentioned steps and submit the nomination package to the Secretary or Board at least 120 days before the term expires, in accordance with § 930.23(b)(7). This means the Board may have as few as 60 days (180 days minus 120 days) to prepare and submit a nomination package that adheres to the 120-day deadline. In practice, the Board staff cannot complete the process by the 120-day deadline. Therefore, the Board has recommended reducing the number of days in advance of a term's expiration that nominations must be submitted from 120 to 60 days. By making the submission date 60 days prior to the end of the term of the outgoing Board member, the Board staff would have an additional 60 days to conduct outreach for nominees and complete the nomination process.

This proposal is an administrative change for the Board. Aside from the proposed change, the Board staff would continue to conduct the nomination and election processes in the same manner as they have been conducted since the inception of the Order. This amendment would adjust by 60 days the deadline for submission of nominations to the Secretary for the selection of the elected members and alternates. This change would not adversely impact the USDA's requirement to carry out the nomination or election processes.

This proposal would change language in § 930.52 to address two industry concerns about how this section establishes which districts are subject to the Order's volume regulations. The first issue involves the number of years that § 930.52(a) considers in determining a district's average production of tart cherries. The second issue involves § 930.52(d)'s exemption from volume regulation based on a district's “processed production,” which is an undefined term. These two issues have created confusion when calculating production in a district.

Section 930.52 establishes which districts in the production area are subject to the Order's volume regulations. Section 930.52(a) states that, as a general rule, the districts in which handlers are subject to the volume regulations are those in which the average annual production of cherries over the prior three years has exceeded six million pounds. Handlers become subject to volume regulation in the crop year that follows any three-year period in which the six-million-pound average production requirement is exceeded in that district.

Currently, the Board uses all tart cherry production for each district in calculating the OSF and for determining whether a district is regulated in any given year. The industry's production information comes from multiple sources. Handlers provide the Board with the amount of fruit that growers deliver to their facilities and from which district produced the fruit. Some growers divert cherries in the field in those years when a restriction is calculated under the OSF. The Board oversees and calculates the volume of cherries diverted from fields by growers. Using all available information, the Board determines the production of tart cherries by district that is used to calculate the OSF for any given year.

Tart cherry production can vary dramatically from year to year, making the production totals extremely volatile over multiple seasons. To make the average calculation for each district less volatile, the Board recommended moving to a five-year average instead of the current three-year average. The additional two years included in the calculation provide a longer window to assess the average production in each district, thereby reducing the weight each season has in determining the average number. The Board further noted that extending the period from three to five years would have a minimal impact on the regulation of the various districts and allow for more consistent averages when calculating the six-million-pound threshold for determining if a district is subject to regulation. Consequently, the Board unanimously recommended changing the period for calculating the average pounds for each district from three to five years in § 930.52(a).

The second issue involves § 930.52(d)'s use of the term “processed production.” Section 930.52(d) exempts a district from volume regulation in a particular year if it produces less than 50 percent of its “average annual processed production” in the previous five years. At present, industry operates with the understanding that in years with volume restriction, grower diverted cherries are subtracted from the district's production when calculating the five-year average. However, since grower diverted cherries represent an insignificant portion of the district's total production, this has a negligible impact on the five-year average. By eliminating the term “processed” from § 930.52(d), it would be clearer to the industry that “production” means all cherries produced in a district when determining the exempt status. Therefore, in years where there is a restriction, all production, including grower diverted cherries, would be part of the production average. This change would simplify the calculation for the Board and keep the calculation consistent in years with and without volume restriction. A district's production average is most impacted by weather conditions from year to year, and not the volume of grower diverted fruit.

Therefore, eliminating the word “processed” from “processed production” would not meaningfully alter the way the industry or the Board are already operating, but it would simply the five-year production average and make the calculation consistent from year to year. Elimination of the term would also make it clearer to the industry to include all tart cherries produced in a district when determining the regulation status of districts. The Board unanimously recommended this proposed change that would remove the term “processed” from § 930.52(d).

Pursuant to requirements set forth in the Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), AMS has considered the economic impact of this action on small entities. Accordingly, AMS has prepared this initial regulatory flexibility analysis.

The purpose of the RFA is to fit regulatory actions to the scale of businesses subject to such actions in order that small businesses will not be unduly or disproportionately burdened. Marketing orders issued pursuant to the Act are unique in that they are brought about through group action of essentially small entities acting on their own behalf.

There are approximately 400 tart cherry growers in the production area and approximately 40 handlers subject to regulation under the Order. At the time this analysis was performed, the Small Business Administration (SBA) defined small agricultural producers of tart cherries as those having annual receipts equal to or less than $3,500,000 (Other Noncitrus Fruit Farming, North American Industry Classification System Code 111339). Small agricultural service firms were defined as those having annual receipts equal to or less than $34,000,000 (Postharvest Crop Activities, North American Industry Classification System Code 115114) (13 CFR 121.201).

The National Agricultural Statistics Service (NASS) reported that the 2021-22 value of the tart cherry crop for processed utilization was approximately $83 million. This tart cherry production was 171.0 million pounds and the season average grower price for processed tart cherries was $0.485 per pound. Dividing the crop value by the estimated number of producers (400) yields an estimated average annual receipts per producer of $207,500 ($83 million divided by 400 producers). This is well below the SBA threshold for small producers.

An estimate of the season average price of $0.94 per pound received by handlers for processed tart cherries was derived from USDA's purchases of dried tart cherries for feeding programs in the 2021-22 season at an average price of $4.70 per pound. The dried cherry price was converted to a raw product equivalent price of $0.94 per pound at an industry recognized ratio of five to one ($4.70 divided by 5 equals $0.94). Multiplying this price by 2021 total processed utilization of 171.0 million pounds results in an estimated handler-level tart cherry value of $160.7 million ($0.94 per pound multiplied by 171.0 million pounds). Dividing this figure by the number of handlers (40) yields estimated average annual receipts per handler of approximately $4.0 million ($160.7 million divided by 40 handlers), which is well below the SBA threshold of $34 million for small agricultural service firms. Assuming a normal distribution, the majority of producers and handlers of tart cherries may be classified as small entities.

This proposed rule would revise multiple provisions in the Order's subpart regulating handling of tart cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin:

• Proposal 1: modify the method for allocating Board seats to a district so that it is based on the district's maximum volume of production in the most recent five harvests;

• Proposal 2: change the starting date for the term of office for Board members;

• Proposal 3: modify the basis for determining a Board member's sales constituency when a member has multiple affiliations;

• Proposal 4: clarify how sales constituency applies to alternate Board members;

• Proposal 5: adjust the timeframe for submitting nominations to USDA; and

• Proposal 6: clarify when districts are subject to the Order's volume regulations.

The proposed changes may be considered either modifications of, or clarifications to existing administrative Board processes, and affect only the Board's activity. AMS does not anticipate that any of the proposed changes will increase costs on producers or handlers. The goal of these proposed changes is to help further standardize and stabilize Board membership and improve Board efficiency and decision making throughout the year.

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the Order's information collection requirements have been previously approved by OMB and assigned OMB No. 0581-0177, Tart Cherries Grown in Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin. No changes in those requirements are necessary as a result of this proposed rule. Should any changes become necessary, they would be submitted to OMB for approval.

This proposed rule would impose no additional reporting or recordkeeping requirements on either small or large tart cherry handlers. As with all Federal marketing order programs, reports and forms are periodically reviewed to reduce information requirements and duplication by industry and public-sector agencies.

AMS is committed to complying 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.

USDA has not identified any relevant Federal rules that duplicate, overlap, or conflict with this proposed rule.

The Board's meetings are widely publicized throughout the tart cherries production area. All interested persons are invited to attend the meetings and encouraged to participate in Board deliberations on all issues. Like all Board meetings, the meetings held on February 15 and December 15, 2022, were public, and all entities, both large and small, were encouraged to express their views on the proposed amendments.

Interested persons are invited to submit comments on the proposed amendments to the Order, including comments on the regulatory and information collection impacts of this action on small businesses.

Following analysis of any comments received on the amendments in this proposed rule, AMS will evaluate all available information and determine whether to proceed. If appropriate, a proposed rule and notice of referendum would be issued, and growers and handlers would be provided the opportunity to vote for or against the proposed amendments. Information about the referendum, including dates and voter eligibility requirements, would be published in a future issue of the Federal Register . A final rule would then be issued to effectuate any amendments favored by growers and handlers participating in the referendum.

A small business guide on complying with fruit, vegetable, and specialty crop marketing agreements and orders may be viewed at: https://www.ams.usda.gov/rules-regulations/moa/small-businesses. Any questions about the compliance guide should be sent to Richard Lower at the previously mentioned address in the FOR FURTHER INFORMATION CONTACT section.

The findings hereinafter set forth are supplementary to the findings and determinations which were previously made in connection with the issuance of Marketing Order 930; and all said previous findings and determinations are hereby ratified and affirmed, except insofar as such findings and determinations may be in conflict with the findings and determinations set forth herein.

1. Marketing Order 930 as hereby proposed to be amended and all the terms and conditions thereof, would tend to effectuate the declared policy of the Act;

2. Marketing Order 930 as hereby proposed to be amended regulates the handling of tart cherries grown in Michigan, New York, Pennsylvania, Oregon, Utah, Washington, and Wisconsin and is applicable only to persons in the respective classes of commercial and industrial activity specified in the Order;

3. Marketing Order 930 as hereby proposed to be amended is limited in application to the smallest regional production area which is practicable, consistent with carrying out the declared policy of the Act, and the issuance of several marketing orders applicable to subdivisions of the production area would not effectively carry out the declared policy of the Act;

4. Marketing Order 930 as hereby proposed to be amended prescribes, insofar as practicable, such different terms applicable to different parts of the production area as are necessary to give due recognition to the differences in the production and marketing of tart cherries produced or packed in the production area; and

5. All handling of tart cherries grown or handled in the production area, as defined in Marketing Order 930, is in the current of interstate or foreign commerce or directly burdens, obstructs, or affects such commerce.

A 60-day comment period is provided to allow interested persons to respond to these proposals. Any comments received on the amendments proposed in this rule will be analyzed. If AMS determines to proceed based on all the information presented, a producer and handler referendum would be conducted to determine the industry support for the proposed amendments. If appropriate, a final rule would then be issued to effectuate the amendments favored by producers and handlers participating in the referendum.

For the reasons set forth in the preamble, the Agricultural Marketing Service proposes to amend 7 CFR part 930 as follows:

The revisions and the additions read as follows:

Table of Contents A. Background and Purpose B. Proposed FEOC Terminology Interpretations I. Foreign Entity II. Government of a Foreign Country III. Subject to the Jurisdiction IV. Owned by, Controlled by, or Subject to the Direction C. Explanation of Proposed Interpretation I. Foreign Entity II. Government of a Foreign Country III. Subject to the Jurisdiction IV. Owned by, Controlled by, or Subject to the Direction a. Control via 25% Interest b. Control via Licensing and Contracting D. Additional Request for Comments E. Public Comment Process F. Confidential Business Information G. Approval of the Office of the Secretary A. Background and Purpose

Section 40207 of BIL (42 U.S.C. 18741) provides DOE $6 billion to support domestic battery material processing, manufacturing, and recycling. Section 40207(b)(3)(C) directs DOE to prioritize material processing applicants that will not use battery material supplied by or originating from a “foreign entity of concern” (FEOC). Similarly, section 40207(c)(3)(C) directs DOE to prioritize manufacturing applicants who will not use battery material supplied by or originating from a FEOC and prioritize recycling applicants who will not export recovered critical materials to a FEOC. FEOC is defined in BIL section 40207(a)(5). The relevant paragraph lists five grounds upon which a foreign entity is considered a FEOC. Subparagraphs (A), (B), and (D) address entities designated as foreign terrorist organizations by the Secretary of State, included on the Specially Designated Nationals and Blocked Persons List (SDN List) maintained by the Department of the Treasury's Office of Foreign Assets Control (OFAC), and alleged by the Attorney General to have been involved in various illegal activities, including espionage and arms exports, for which a conviction was obtained, respectively. Subparagraph (C) states that a foreign entity is a FEOC if it is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as defined in [10 U.S.C. 4872(d)(2)]).” The “covered nations” are the People's Republic of China (PRC), the Russian Federation, the Democratic People's Republic of North Korea, and the Islamic Republic of Iran (10 U.S.C. 4872(d)(2)). BIL section 40207(a)(5) provides no further definition of the term “foreign entity” or of the terms used in subparagraph (C).

Subparagraph (E) of BIL section 40207(a)(5) provides an additional means by which an entity may be designated to be a FEOC: a foreign entity is a FEOC if it is “determined by the Secretary [of Energy], in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.”

In addition to affecting which entities DOE will prioritize as part of its BIL section 40207 Battery Materials Processing and Battery Manufacturing and Recycling Grant Programs, the term is cross-referenced in section 30D of the Internal Revenue Code (IRC) (26 U.S.C. 30D), as amended by the Inflation Reduction Act of 2022 (IRA). Section 30D provides a tax credit for new clean vehicles, including battery electric vehicles. Section 30D(d)(7) excludes from the definition of “new clean vehicle” “(A) any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle (as described in [section 30D(e)(1)(A)]) were extracted, processed, or recycled by a [FEOC] (as defined in section 40207(a)(5) [of BIL] (42 U.S.C. 18741(a)(5))), or (B) any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle (as described in section 30D(e)(2)(A)) were manufactured or assembled by a [FEOC] (as so defined).”

DOE is issuing this proposed guidance regarding which foreign entities qualify as FEOCs as a result of being “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.” DOE considers this proposed guidance to be a proposed interpretive rule for purposes of section 553 of the Administrative Procedure Act (APA) (5 U.S.C. 551 et seq. ) and does not consider this guidance to be a legislative rule subject to the procedural requirements of that section. For the purposes of this document, DOE uses the term “interpretive rule” and “guidance” interchangeably. Subsequent to the issuance of this interpretive rule, DOE intends to promulgate separate regulations implementing the Secretary's “determination authority” contained in BIL section 40207(a)(5)(E) (42 U.S.C. 18741(a)(5)(E)).

In accordance with section 553 of the APA, public notice and opportunity for comment is not required for an interpretive rule. Nevertheless, to get the benefit of input from the public and interested stakeholders, the Department specifically requests comments on its proposed interpretation of the terms discussed herein. This document is intended to solicit public feedback on the DOE interpretation to better understand stakeholder perspectives prior to implementation of finalized guidance. The Department will consider all comments received during the public comment period, and modify its proposed approach, as appropriate, based on public comment.

This proposed guidance proceeds as follows: Section B provides DOE's interpretation of the relevant terms related to whether a foreign entity is a FEOC as the result of being owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation; Section C provides an explanation of DOE's interpretation, along with citations to analogous provisions in other statutory and regulatory contexts that DOE consulted in making its interpretation; and Section D identifies some specific topics on which DOE requests comment from the public.

DOE proposes to clarify the term “foreign entity of concern” by providing interpretations for the following terms within BIL section 40207(a)(5)(C) (42 U.S.C. 18741(a)(5)(C)): “government of a foreign country;” “foreign entity;” “subject to the jurisdiction;” and “owned by, controlled by, or subject to the direction of.” These terms are interpreted separately, recognizing that the terms have unique meaning. DOE also proposes interpretations of additional terms necessary to provide clarity.

For DOE's proposed guidance, an entity is determined to be a FEOC under BIL section 40207(a)(5)(C) if it meets the definition of a “foreign entity,” (Section B.I) and either is “subject to the jurisdiction” of a covered nation government (Section B.III) or is “owned by, controlled by, or subject to the direction of” (Section B.IV) the “government of a foreign country” (Section B.II) that is a covered nation.

DOE proposes to interpret “foreign entity” to mean:

(i) A government of a foreign country;

(ii) A natural person who is not a lawful permanent resident of the United States, citizen of the United States, or any other protected individual (as such term is defined in 8 U.S.C. 1324b(a)(3));

(iii) A partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country; or

(iv) An entity organized under the laws of the United States that is owned by, controlled by, or subject to the direction (as interpreted in Section IV) of an entity that qualifies as a foreign entity in paragraphs (i)-(iii).

DOE proposes to interpret “government of a foreign country” to mean:

(i) A national or subnational government of a foreign country;

(ii) An agency or instrumentality of a national or subnational government of a foreign country;

(iii) A dominant or ruling political party ( e.g., Chinese Communist Party (CCP)) of a foreign country; or

(iv) A current or former senior foreign political figure.

Senior foreign political figure means (a) a senior official, either in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not), or of a dominant or ruling foreign political party, and (b) an immediate family member (spouse, parent, sibling, child, or a spouse's parent and sibling) of any individual described in (a). “Senior official” means an individual with substantial authority over policy, operations, or the use of government-owned resources.

DOE proposes that a foreign entity is “subject to the jurisdiction” of a covered nation government if:

(i) The foreign entity is incorporated or domiciled in, or has its principal place of business in, a covered nation; or

(ii) With respect to the critical minerals, components, or materials of a given battery, the foreign entity engages in the extraction, processing, or recycling of such critical minerals, the manufacturing or assembly of such components, or the processing of such materials, in a covered nation.

DOE proposes that an entity is “owned by, controlled by, or subject to the direction” of another entity (including the government of a foreign country that is a covered nation) if:

(i) 25% or more of the entity's board seats, voting rights, or equity interest are cumulatively held by that other entity, whether directly or indirectly via one or more intermediate entities; or

(ii) With respect to the critical minerals, battery components, or battery materials of a given battery, the entity has entered into a licensing arrangement or other contract with another entity (a contractor) that entitles that other entity to exercise effective control over the extraction, processing, recycling, manufacturing, or assembly (collectively, “production”) of the critical minerals, battery components, or battery materials that would be attributed to the entity.

Cumulatively held. For the purposes of determining control by a foreign entity (including the government of a foreign country), control is evaluated based on the combined interest in an entity held, directly or indirectly, by all other entities that qualify under the above interpretation of “foreign entity.” Additionally, an entity that qualifies as a “government of a foreign country that is a covered nation” enters into a formal arrangement to act in concert with another entity or entities that have an interest in the same third-party entity, the cumulative board seats, voting rights, or equity interests of all such entities are combined for the purpose of determining the level of control attributable to each of those entities.

Indirect control. For purposes of determining whether an entity indirectly holds board seats, voting rights, or equity interest in a tiered ownership structure:

• If a “parent” entity (including the government of a foreign country) directly holds 50% or more of a “subsidiary” entity's board seats, voting rights, or equity interest, then the parent and subsidiary are treated as equivalent in the evaluation of control, as if the subsidiary were an extension of the parent. As such, any holdings of the subsidiary are fully attributed to the parent.

• If a “parent” entity directly holds less than 50% of a “subsidiary” entity's board seats, voting rights, or equity interest, then indirect ownership is attributed proportionately.

Section C, contains multiple scenarios illustrating how to determine when an entity is indirectly controlled under this interpretive rule.

Effective control means the right of the contractor in the contractual relationship to determine the quantity or timing of production, to determine which entities may purchase or use the output of production, or to restrict access to the site of production to the contractor's own personnel; or the exclusive right to maintain, repair, or operate equipment that is critical to production.

In the case of a contract with a FEOC, a contractual relationship will be deemed to not confer effective control by the FEOC if the applicable agreement(s) reserves expressly to one or more non-FEOC entities all of the following rights:

(i) To determine the quantity of critical mineral, component, or material produced (subject to any overall maximum or minimum quantities agreed to by the parties prior to execution of the contract);

(ii) To determine, within the overall contract term, the timing of production, including when and whether to cease production;

(iii) To use the critical mineral, component, or material for its own purposes or, if the agreement contemplates sales, to sell the critical mineral, component, or material to entities of its choosing;

(iv) To access all areas of the production site continuously and observe all stages of the production process; and

(v) At its election, to independently operate, maintain, and repair all equipment critical to production and to access and use any intellectual property, information, and data critical to production, notwithstanding any export control or other limit on the use of intellectual property imposed by a covered nation subsequent to execution.

The term FEOC, as used in both BIL section 40207 and IRC section 30D, is intended to address upstream supply chains of individual entities that may benefit from direct or indirect federal government financial support. As such, the interpretations proposed above are intended to be structured as, to the greatest degree possible, bright-line rules that would allow individual entities to readily evaluate whether their upstream suppliers would or would not be considered FEOCs. In the case of the Battery Manufacturing and Recycling Grants Program in BIL section 40207, a bright-line rule will afford eligible entities using their grants for battery recycling greater clarity in avoiding the export of recovered critical materials to a FEOC.

To be considered a FEOC under BIL section 40207(a)(5) (42 U.S.C. 18741(a)(5)), the statute requires that the entity be a “foreign entity.” However, section 40207 does not define “foreign entity.”

The interpretation of “foreign entity” in this proposed guidance aligns closely with the definition of “foreign entity” contained in the 2021 National Defense Authorization Act (NDAA) (15 U.S.C. 4651(6)), which informs certain Department of Commerce programs related to semiconductors. Both the interpretation proposed in this guidance and the 2021 NDAA definitions define foreign entities to include three main categories of entities: (1) a government of a foreign country and a foreign political party; (2) a natural person who is not a lawful permanent resident of the United States, citizen of the United States, or any other protected individual (as such term is defined in 8 U.S.C. 1324b(a)(3) (addressing unfair immigration-related employment practices)); or (3) a partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country.

DOE's interpretation in this proposed guidance specifically provides that entities organized under the laws of the United States that are subject to the ownership, control, or direction of another entity that qualifies as a foreign entity will also qualify as “foreign entities” for the purposes of BIL section 40207(a)(5)(C). The 2021 NDAA definition of foreign entity allows for U.S. entities to be considered foreign in this way and also provides an additional list of criteria by which such persons may be considered foreign due to their relationship with the three main categories of foreign entities. While these criteria are relevant for the purposes of the Department of Commerce programs at issue, which are primarily concerned with preventing the transfer of semiconductor technology to covered nation governments, DOE assesses that the criteria are not necessary for the purpose of evaluating covered nation-associated risk to the battery supply chains, because the natural persons and corporate entities that are relevant to the battery supply chain are already encompassed in the identified criteria for “foreign entity.” DOE's interpretation ensures that governments of covered nations cannot evade the FEOC restriction simply by establishing a U.S. subsidiary, while otherwise maintaining ownership or control over that subsidiary.

“Government of a foreign country” is a term used to determine whether an entity is “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country.” It is also used in the proposed interpretation of “foreign entity” in paragraph (i) of Section B.I.

The proposed interpretation of the term “government of a foreign country” contained within this notice includes subnational governments, which can have significant ownership or control of firms in the vehicle supply chain. In the covered nations at issue here, there exist many subnational and local government-owned entities, that play a large role in their nation's economies, and local state-owned enterprises (SOEs) are a large driver of regional economies. This term also includes instrumentalities, which include separate legal entities that are organs of a state but where ownership may be unclear, such as a utility or public financial institution. This interpretation aligns with the definition of “foreign government” promulgated by the Department of the Treasury in its regulations implementing the Committee on Foreign Investment in the United States (CFIUS) program (31 CFR 800.221). That definition includes “national and subnational governments, including their respective departments, agencies, and instrumentalities.”

The proposed interpretation of the term “government of a foreign country” also includes senior foreign political figures. This inclusion recognizes the reality of government influence over business entities in covered nations, which is often exercised through individuals representing the government on corporate boards or acting at the direction of the government or to advance governmental interests when serving as an equity owner or through voting interests in an otherwise privately held business. This interpretation aligns with the Defense Department's National Industrial Security Program Operating Manual (NISPOM) regulatory definition of “foreign interest” (32 CFR 117.3) and associated “foreign ownership, control or influence” (FOCI) regulations (32 CFR 117.11), which recognize as FOCI the influence of a representative of a foreign government with the power to direct or decide issues related to a U.S. entity. In addition, in order to deal with the situation in which officials leave their official positions in order to exert the same type of influence on behalf of the government, the interpretation also includes former senior government officials and former senior party leaders. Inclusion of former officials is consistent with regulatory definitions in other contexts. For example, the Bank Secrecy Act (BSA) private banking account regulations (relating to due diligence program requirements for private banking accounts established, maintained, administered, or managed in the United States for foreign persons) administered by the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) include both current and former officials in the definition of “senior foreign political figure” (31 CFR 1010.605(p)). Those regulations provide further interpretation of the term “senior official” that DOE has also included to provide additional clarity.

In the specific context of the CCP in the PRC, DOE considers its interpretation of “government of a foreign country” to include current members of Chinese People's Political Consultative Conference and current and former members of the Politburo Standing Committee, the Politburo, the Central Committee, and the National Party Congress because they qualify as “senior foreign political figures.”

Finally, the inclusion of immediate family members of senior foreign political figures in the interpretation of “government of a foreign country” aligns with the BSA private banking regulation. Those regulations include the immediate family members of a senior foreign political figure in their definition of “senior foreign political figure” (31 CFR 1010.605(p)(1)(iii)). Immediate family members in those regulations mean spouses, parents, siblings, children, and a spouse's parents and siblings (31 CFR 1010.605(p)(2)(ii)).

If an entity is “subject to the jurisdiction” of a government of a foreign country that is a covered nation, the entity is a FEOC. DOE's proposed interpretation provides an objective standard, consistent with the common understanding of “jurisdiction,” rather than a subjective standard that relies upon an individual nation's understanding of its own jurisdictional reach. As such, the interpretation first recognizes that any organization formed under the laws of the government of a covered nation is a national of that nation and therefore subject to its direct legal reach. Cf. 28 U.S.C. 1332(c)(1) (noting that, for the purposes of diversity jurisdiction, “a corporation shall be deemed to be a citizen of every . . . foreign state by which it has been incorporated and of the . . . foreign state where it has its principal place of business”).

Second, DOE's proposal accounts for the fact that several critical segments of the battery supply chain today are predominantly processed and manufactured within covered nation boundaries, 1 and recognizes that a covered nation will be able to exercise legal control (potentially forcing an entity to cease production or cease exports) over an entity with respect to any critical minerals that are physically extracted, processed, or recycled, any battery components that are manufactured or assembled, and any battery materials that are processed within those boundaries, even if the entity is not legally formed under the laws of the covered nation. See Third Restatement (Foreign Relations) (1986) section 402(1) (stating that a state has “jurisdiction to prescribe law with respect to [conduct, persons, and interests] within its territory”). At the same time, DOE's interpretation recognizes that such an entity, which is not legally formed in a covered nation but has production activities inside a covered nation, may also have separate production activities that occur outside the covered nation. In that case, the covered nation does not have jurisdiction over those outside production activities. Therefore, under the proposed guidance, an entity that is not legally incorporated in a covered nation could be nevertheless considered a FEOC under the jurisdiction prong with respect to the particular critical minerals, battery components, or battery materials that are subject to the jurisdiction of a covered nation. But the entity would not be considered a FEOC with respect to its activities related to other critical minerals, battery components, or battery materials that are not subject to the jurisdiction of a covered nation.

Finally, when an entity is a FEOC due to it being “subject to the jurisdiction” of a covered nation, subsidiaries of the FEOC are not automatically considered to also be FEOCs solely based on their parent being a covered nation jurisdictional entity. However, a subsidiary entity would be a FEOC itself if it is also either (1) “subject to the jurisdiction” of the covered nation, pursuant to Section B.III, or (2) “controlled by” a covered nation government, pursuant to Section B.IV.

DOE's interpretation is supported by statutory and regulatory choices made in similar contexts, including: the 2021 NDAA definition of “foreign entity” (15 U.S.C. 4651(6)); and the NISPOM regulatory definition of “foreign interest” (32 CFR 117.3). The above interpretation of “subject to the jurisdiction” provides clarity to original equipment manufacturers (OEM) that removing FEOCs from their supply chain will require removal of any critical minerals, battery components, and battery materials that are directly produced within the boundary of a covered nation.

If an entity is “owned by, controlled by, or subject to the direction” of (hereinafter “controlled by”) a government of a foreign country that is a covered nation, the entity is a FEOC. The term is also used in paragraph (iv) of the proposed interpretation of foreign entity to account for situations where a U.S. entity is sufficiently controlled to be considered foreign. DOE's proposed interpretation provides for both (1) control via the holding of 25% or more of an entity's board seats, voting rights, or equity interest, and (2) control via license or contract conferring rights on a person that amount to a conferral of control.

Not all foreign entities are considered FEOCs. However, if an entity is a foreign entity that is “controlled by” a covered nation government, that entity is a FEOC. A subsidiary of that FEOC is not automatically considered a FEOC itself unless the subsidiary is either (1) “subject to the jurisdiction” of a covered nation government, or (2) “controlled by” a covered nation government (including via direct or indirect control, such as through joint ventures, or via contracts that confer effective control to a FEOC). As such, a FEOC that is controlled by a covered nation government may hold an interest in a subsidiary, even an interest above 25%, and that subsidiary may still not be a FEOC if the covered nation's level of control of the subsidiary falls below 25% ( see scenario 3 below).

DOE's interpretation of control is informed by careful analysis of corporate structure within the battery supply chain. In the battery industry, the primary methods by which a parent entity, including a government of a foreign country, exercises control over another entity is through voting interest, equity ownership, and/or boards of directors. Parent entities may exercise control via majority ownership of shares, voting interest, or board seats, and also through minority holdings. Furthermore, parent entities may act in concert with other investors to combine minority holdings to exercise control. As a result, an effective measure of control is one that considers multiple permutations of majority and minority holdings of equity, voting rights, and board seats that can cumulatively confer control.

While there are several prominent companies within the battery supply chain that are majority-owned by covered nation governments, particularly in the upstream mining segment, the predominant form of state ownership and influence in most segments of the battery supply chain is through minority shareholding, voting rights, or board seats. DOE has evaluated a range of supply chain entities for which covered nation governments and officials with cumulative holdings between 25% and 50% have meaningful influence over corporate decision-making, even in cases of subsidiary entities operating in other jurisdictions and in the case of multiple minority shareholders acting in concert. However, DOE's assessment of the battery supply chain strongly suggests that minority control can attenuate with multiple tiers of separation between the state and the firm performing the covered activity.

DOE recognizes that a bright-line metric for control will be necessary to ensure that OEMs can feasibly evaluate the presence of FEOCs within their supply chains. Informed by empirical evidence in the battery supply chain and choices made in other regulatory contexts, discussed further below, DOE's interpretation establishes a 25% threshold and guidance on calculation of the attenuation of control in a tiered ownership structure. In the case of majority control by a covered nation government, that control is not diluted such that outright ownership (50%+) confers full control. This ensures that a government-controlled company that has majority ownership of a subsidiary passes along control. However, multiple layers of minority control by a government may become so attenuated that an entity would no longer be classified as a FEOC. This bright-line threshold and guidance on how to calculate control will enable an evaluation of battery supply chains and facilitate any required reporting or certification of whether that supply chain includes products produced by a FEOC. This same analysis applies to joint ventures, such that if the government of foreign country that is a covered nation controls, either directly or indirectly, 25% or more of a joint venture, then that joint venture is a FEOC.

DOE's interpretation is supported by choices made in a variety of statutory and regulatory regimes and it has devised a method that accounts for the specific circumstances present in the battery industry. DOE takes a broad approach to the interests that count towards the 25% threshold, considering board seats, voting rights, and equity interest. This is consistent with FOCI regulations, which evaluate ownership based on equity ownership interests sufficient to provide “the power to direct or decide issues affecting the entity's management or operations” (32 CFR 117.11(a)(1)). The interpretation that the interests of two entities with an agreement to act in concert may be combined to establish a controlling interest is similar to concepts in Securities and Exchange Commission rules defining beneficial ownership in instances of shareholders acting in concert (17 CFR 240.13d-5) and CFIUS regulations that consider arrangements to act in concert to determine, direct, or decide important matters affecting an entity as one means by which two or more entities may establish control over another entity (31 CFR 800.208(a)). Different thresholds of control are used in different statutory and regulatory contexts ( see, for example, 26 U.S.C. 6038(e)(2), (3) (defining control with respect to a corporation to mean actual or constructive ownership by a person of stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote or 50% of the total value of shares of all classes of stock of a corporation, and control with respect to a partnership to generally mean actual or constructive ownership of a more than 50% capital or profit interest in a partnership); and 26 U.S.C. 368(c) (defining control with respect to certain corporate transactions to mean the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation)). However, there are a number of analogous regulatory contexts in which a 25% threshold for considering an entity controlled is used. For instance, the Department of Commerce's final rule in Preventing the Improper Use of CHIPS Act Funding, implementing a very similar FEOC provision, uses a 25% threshold with respect to voting interest, board seats, and equity interests (88 FR 65600; Sept. 25, 2023). The State Department, in its International Traffic in Arms Regulation (ITAR) regulations, established a presumption of foreign control where foreign persons own 25% or more of the outstanding voting securities of an entity, unless one U.S. person controls an equal or larger percentage (22 CFR 120.65). FinCEN's BSA private banking account regulations (31 CFR 1010.605(j)(1)(i)) and Beneficial Ownership Reporting Rule (31 CFR 1010.380(d)) also contain 25% ownership thresholds. See also 15 CFR 760.1(c) (defining “controlled in fact” using a 25% threshold for cases where no other person controls an equal or larger percentage of voting securities). In some of these other contexts, the 25% calculation is based on a particular form of control ( e.g., only voting shares). DOE's interpretation broadens the forms of control that are relevant to the 25%, because doing so accords with statutory concerns related to the corporate structure of the battery industry.

DOE's interpretation of indirect control includes guidance on how to calculate the attenuation of control in a tiered ownership structure. In the case of majority control, that control is not attenuated such that outright ownership (50%+) confers full control. The proposed approach recognizes the reality that a parent entity that holds a majority of the voting interest, equity, or board seats in a subsidiary has unilateral control over that subsidiary and can direct that subsidiary's ability to exercise influence and control over its own subsidiaries. However, in the case of multiple tiers of minority control by a government, the actual ability of the government to influence the operations of a subsidiary may become so attenuated that the subsidiary would no longer reasonably be deemed “controlled” by the government. This understanding of how to calculate a parent entity's indirect ownership and control of sub-entities is similar to OFAC's 50% Rule, under which “any entity owned in the aggregate, directly or indirectly, 50% or more by one or more blocked persons is itself considered to be a blocked person.” See U.S. Dept. of the Treasury, Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked (Aug. 13, 2014).

When calculating whether an entity is a FEOC based on whether the government of a covered nation directly or indirectly holds 25% or more of its voting share, equity interest, or board seats, DOE's interpretation would not factor in any voting share, equity interest, or board seats held by an entity that is a FEOC solely by virtue of being subject to the covered nation's jurisdiction.

The following scenarios illustrate indirect control in a tiered ownership structure:

1. If Entity A cumulatively holds 25% of Entity B's board seats, voting rights, or equity interest, then Entity A directly controls Entity B. If Entity B cumulatively holds 50% of Entity C's board seats, voting rights, or equity interest, then Entities B and C are treated as the same entity, and Entity A also indirectly controls Entity C.

○ If Entity A is the government of a foreign country that is a covered nation, Entities B and C are both FEOCs.

2. If Entity A cumulatively holds 50% of Entity B's board seats, voting rights, or equity interest, then Entity A is the direct controlling “parent” of Entity B, and Entities A and B are treated as the same entity. If Entity B cumulatively holds 25% of Entity C's board seats, voting rights, or equity interest, then Entity C is understood to be directly controlled by Entity B and indirectly controlled by Entity A.

○ If Entity A is the government of a foreign country that is a covered nation, Entities B and C are both FEOCs.

3. If Entity A cumulatively holds 25% of Entity B's board seats, voting rights, or equity interest, then Entity A directly controls Entity B. If Entity B cumulatively holds 40% of Entity C's board seats, voting rights, or equity interest, then Entity B directly controls Entity C. However, because Entity A does not hold 50% of the board seats, voting rights, or equity interest of Entity B, and Entity B does not hold 50% of the board seats, voting rights, or equity interest of Entity C, Entity A's indirect control of Entity C is calculated proportionately (25% × 40% = 10%). Based on that proportionate calculation, Entity A will be considered to hold only a 10% interest in Entity C, which is insufficient to meet the 25% threshold for control contemplated under this proposed guidance.

○ If Entity A is the government of a foreign country that is a covered nation, Entity B is a FEOC. But Entity A holds only a 10% interest in Entity C, which is less than the 25% threshold requirement to deem Entity C controlled by Entity A. Therefore, Entity C is not a FEOC via the indirect control of Entity A.

DOE is concerned that if “controlled by” covered only direct and indirect holding of board seats, voting rights, and equity interest by the governments of covered nations, such governments may seek to evade application of the interpretation by instead controlling FEOCs that contract with non-FEOC entities to be the producer of record while the FEOC maintains effective control over production. Because such arrangements would defeat congressional intent, DOE proposes an interpretation of “controlled by” that includes “effective control” through contracts or licenses with a FEOC that warrant treating the FEOC as if it were the true entity responsible for any production.

Many contractual and licensing arrangements do not raise these concerns. Therefore, to provide a reasonably bright-line test for evaluation of upstream battery supply chains that include numerous contracts and licenses, DOE has proposed in Section B.IV a safe harbor for evaluation of “effective control.” A non-FEOC entity that can demonstrate that it has reserved certain rights to itself or another non-FEOC through contract would not be deemed to be a FEOC solely based on its contractual relationships.

DOE also recognizes that even if an entity's contractual relationship with a FEOC confers effective control over the production of particular critical minerals, battery components, or battery materials, the contracting entity would not necessarily be controlled by the government of a covered nation for critical minerals, battery components, or battery materials that were not produced pursuant to that contract or license. Therefore, under the proposed guidance, an entity could be considered a FEOC with respect to the particular critical minerals, battery components, or battery materials that are effectively produced by the FEOC under a contract or license but not with respect to other critical minerals, battery components, or battery materials that are produced by the entity outside the terms of the contract or license with a FEOC.

The concept that an entity can be controlled via contract is supported by choices made in various regulatory contexts, including CFIUS regulations that include an understanding that control can be established via contractual arrangements to determine, direct, or decide important matters affecting an entity (31 CFR 800.208(a)). Further, intellectual property can be licensed restrictively, or even misused, to give the intellectual property owner rights beyond the typical ability to exclude others from making, using, selling, and/or copying the intellectual property for a limited time. In this scenario, ownership of a facility by an entity that does not have 25% voting interest, equity, or board seats held, directly or indirectly, by the government of a covered nation, would not be sufficient if a FEOC licensor or contractor maintains effective control through other mechanisms. Accordingly, DOE has proposed a definition of effective control that identifies criteria that would indicate that a license or contract provides the licensor or contractor with the ability to make business or operational choices that otherwise would rest with the licensee or principal. The criteria selected reflect various known mechanisms in restrictive or overreaching licenses such as lack of access by the licensee or principal to information and data ( e.g., control parameters or specification and quantities of material input for equipment) that are necessary to operate equipment critical to production at necessary quality and throughput levels. This lack of access could be tantamount to the licensor or contractor having effective control over the licensee or principal.

As explained in Section A, DOE requests comment on its proposed interpretations outlined in Section B, as well as the reasoning provided in Section C. Subsequent to the issuance of this interpretive guidance, DOE intends to promulgate separate regulations implementing the Secretary's determination authority contained in BIL section 40207(a)(5)(E). As such, DOE also requests comment on the following.

DOE recognizes that entities could attempt to evade ownership and control restrictions in various ways without materially changing the extent to which they are, in fact, subject to the ownership, control, or direction of a covered nation as defined in this guidance. Section 40207(a)(5)(E) of BIL includes as FEOCs those foreign entities “determined by the Secretary [of Energy], in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.” Accordingly, DOE requests comment on whether use of this determination authority could provide a tool for limiting attempts to evade such restrictions and what DOE may deem “unauthorized conduct.” DOE requests specific comment on whether, in addition to or instead of defining “owned by, controlled by, or subject to the direction of” to include effective control via contractual arrangement, DOE should consider whether a given contractual or licensing arrangement, or operational practice with a contractor or licensor, is a means of evading restrictions on production by a FEOC that would warrant use of its determination authority in BIL section 40207(a)(5)(E). For example, DOE recognizes that even if certain rights are reserved by a non-FEOC licensee in its contractual arrangement with a FEOC, a FEOC licensor may nevertheless compel the licensee through leverage or coercion to not exercise the licensee's contractual rights. DOE could construe any such overt compulsion by a FEOC licensor as unauthorized conduct, potentially subject to the determination authority. DOE requests comment on whether there are any other circumstances related to contractual arrangements between entities and FEOCs that could constitute unauthorized conduct, potentially subject to the determination authority.

In addition, in recognition of the fact that it may be particularly difficult to definitively evaluate the contractual relationships of upstream suppliers, DOE is also considering whether to provide entities with the opportunity to voluntarily request a review of contracts and licensing arrangements by DOE in order to provide additional certainty regarding whether effective control by a FEOC is present. DOE requests comment on whether such a voluntary pre-review process would be beneficial and administrable, including input on what process steps would be reasonable and the types of documents that should be submitted for review.

Comments submitted can be public or confidential.

Do not submit to www.regulations.gov information claimed as CBI. Comments submitted through www.regulations.gov cannot be claimed as CBI. Comments received through the website will waive any CBI claims for the information submitted. For information on submitting CBI, see the Confidential Business Information section.

Pursuant to 10 CFR 1004.11, any person submitting information that he or she believes to be confidential and exempt by law from public disclosure should submit via email two well-marked copies: one copy of the document marked “confidential” including all the information believed to be confidential, and one copy of the document marked “non-confidential” with the information believed to be confidential deleted. Submit these documents via email at FEOCnotice@hq.doe.gov. DOE will make its own determination about the confidential status of the information and treat it according to its determination.

The Secretary of Energy has approved publication of this Notification of proposed interpretive rule; request for comments.

This document of the Department of Energy was signed on November 28, 2023, by Giulia Siccardo, Director, Office of Manufacturing and Energy Supply Chains, pursuant to delegated authority from the Secretary of Energy. That document with the original signature and date is maintained by DOE. For administrative purposes only, and in compliance with requirements of the Office of the Federal Register, the undersigned DOE Federal Register Liaison Officer has been authorized to sign and submit the document in electronic format for publication, as an official document of the Department of Energy. This administrative process in no way alters the legal effect of this document upon publication in the Federal Register .

On October 11, 2023, the FDIC published in the Federal Register a proposal to issue Guidelines as Appendix C to FDIC's standards for safety and soundness regulations in part 364 and make conforming amendments to parts 308 and 364 of its regulations. 1 These Guidelines would apply to all insured state nonmember banks, state-licensed insured branches of foreign banks, and insured state savings associations that are subject to section 39 of the FDI Act with total consolidated assets of $10 billion or more on or after the effective date of the final Guidelines. The Guidelines are intended to set the FDIC's expectations for covered institutions regarding corporate governance, risk management, and oversight by the board of directors. The notice of proposed rulemaking stated that the comment period would close on December 11, 2023. The FDIC has received requests to extend the comment period. An extension of the comment period will provide additional opportunity for the public to consider the proposal and prepare comments, including to address the questions posed by the FDIC. Therefore, the FDIC is extending the end of the comment period for the proposal from December 11, 2023, to February 9, 2024.

Authority for This Rulemaking

The FAA's authority to issue rules on aviation safety is found in title 49 of the United States Code. Subtitle I, section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the FAA's authority.

This rulemaking is issued under the authority described in subtitle VII, part A, subpart III, section 44701. Under that section, the FAA is charged with prescribing regulations providing minimum standards for other practices, methods, and procedures necessary for safety in air commerce. This regulation is within the scope of that authority since flight data recorders are the only means available to account for aircraft movement and flight crew actions critical to finding the probable cause of incidents or accidents, including data that could prevent future incidents or accidents.

This rulemaking effort proposes to amend the cockpit voice recorder (CVR) regulations to increase the recording duration of CVRs. Currently, CVRs are required to retain the last two hours of recorded information. Once this 2-hour limit is reached, a CVR overwrites the oldest data to maintain a rolling 2-hour recording. This proposal would increase the minimum duration of CVR recordings to 25 hours. The proposed change would affect all newly manufactured aircraft operating under title 14 of the Code of Federal Regulations (14 CFR) parts 91, 121, 125, and 135, one year after the effective date of the final rule.

The current 2-hour recording duration requirement does not meet the NTSB's needs for investigations and subsequent safety recommendations. Since the NTSB issued Safety Recommendation A-18-030, it has investigated numerous accidents and incidents where CVR data relevant to the accident or incident has been overwritten because the relevant recording occurred earlier than the available two hours of recording.

Benefits of the proposed rule are expected to stem from a reduction in accident risk and time savings. Specifically, the additional audio of longer duration CVRs would provide authorities with more information on events and procedures undertaken in the flight deck in investigated incidents. This increased data may lead to new or more fully informed FAA recommendations or policy changes that could further enhance safety and reduce the risk that an incident becomes an accident. In addition, updated CVR models have also revamped the CVR interface tools, resulting in time-saving benefits. The simplified and more intuitive tools allow personnel to be trained quicker on operation, retrieve audio data faster, and perform additional diagnostic services to shorten downtime. The FAA currently lacks data to predict the exact reduction in accident risk and labor hours and requests comments on the expected value of these benefits.

The FAA has assessed projected compliance costs using the incremental cost of equipping a 25-hour capable CVR over a comparable 2-hour unit to all applicable newly produced aircraft. Market research indicates that the difference between these units is minimal, ranging from near parity to an upper bound of approximately $4,500. Using that upper bound, the total cost over 20 years is estimated to be $102.42 million at 7 percent present value, with annualized costs of $9.67 million. As operational procedures are expected to be similar between the older 2-hour and newer 25-hour capable models, the FAA anticipates no other notable costs. The FAA invites comments on the cost estimates and assumptions.

The FAA previously has engaged in rulemaking to address past NTSB recommendations concerning CVRs.

Background I. Overview

Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA), amended section 30D of the Internal Revenue Code (Code). Section 30D provides a credit (section 30D credit) against the tax imposed by chapter 1 of the Code (chapter 1) with respect to each new clean vehicle that a taxpayer purchases and places in service. The section 30D credit is determined and allowable with respect to the taxable year in which the taxpayer places the new clean vehicle in service.

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 30D. These proposed regulations supplement a notice of proposed rulemaking (REG-120080-22) published in the Federal Register (88 FR 23370) on April 17, 2023 (April 2023 proposed regulations) that contains initial proposed regulations under section 30D as amended by the IRA, as well as a notice of proposed rulemaking (REG-113064-23) published in the Federal Register (88 FR 70310) on October 10, 2023 (October 2023 proposed regulations) that contains initial and additional proposed regulations under sections 25E, 30D, and 6213 of the Code. This notice of proposed rulemaking does not address written comments that were submitted in response to the April 2023 proposed regulations or the October 2023 proposed regulations. Any comments received in response to this notice of proposed rulemaking will be addressed in the Treasury Decision adopting these regulations as final regulations.

Section 30D was enacted by section 205(a) of the Energy Improvement and Extension Act of 2008, Division B of Public Law 110-343, 122 Stat. 3765, 3835 (October 3, 2008), to provide a credit for purchasing and placing in service new qualified plug-in electric drive motor vehicles. Section 30D has been amended several times since its enactment, most recently by section 13401 of the IRA. In general, the amendments made by section 13401 of the IRA to section 30D apply to vehicles placed in service after December 31, 2022, except as provided in section 13401(k)(2) through (5) of the IRA.

Effective beginning on April 18, 2023, section 30D(b) provides a maximum credit of $7,500 per new clean vehicle, consisting of $3,750 if certain critical minerals requirements are met and $3,750 if certain battery components requirements are met. These requirements are described in section 30D(e)(1) and (2), respectively, and the preamble to the April 2023 proposed regulations.

The amount of the section 30D credit is treated as a personal credit or a general business credit depending on the character of the vehicle. In general, under section 30D(c)(2), the section 30D credit is treated as a nonrefundable personal credit allowable under subpart A of part IV of subchapter A of chapter 1. However, under section 30D(c)(1), so much of the credit that would be allowed under section 30D(a) that is attributable to property that is of a character subject to an allowance for depreciation is treated as a current year general business credit under section 38(b) and not allowed under section 30D(a). Section 38(b)(30) lists as a current year business credit the portion of the section 30D credit to which section 30D(c)(1) applies. The IRA did not amend section 30D(c)(1) or (2).

The IRA amended section 30D(d) regarding the definition of a new clean vehicle. Section 30D(d)(1) defines “new clean vehicle” as a motor vehicle that satisfies the following eight requirements set forth in section 30D(d)(1)(A) through (H) of the Code:

• the original use of the motor vehicle must commence with the taxpayer;

• the motor vehicle must be acquired for use or lease by the taxpayer and not for resale;

• the motor vehicle must be made by a qualified manufacturer;

• the motor vehicle must be treated as a motor vehicle for purposes of title II of the Clean Air Act;

• the motor vehicle must have a gross vehicle weight rating of less than 14,000 pounds;

• the motor vehicle must be propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 7 kilowatt hours, and is capable of being recharged from an external source of electricity;

• the final assembly of the motor vehicle must occur within North America; and

• the person who sells any vehicle to the taxpayer must furnish a report to the taxpayer and to the Secretary of the Treasury or her delegate (Secretary) containing certain specifically enumerated items.

Section 30D(d)(3) defines “qualified manufacturer” as any manufacturer (within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency (EPA) for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq. )) that enters into a written agreement with the Secretary under which such manufacturer agrees to make periodic written reports to the Secretary (at such times and in such manner as the Secretary may provide) providing vehicle identification numbers and such other information related to each vehicle manufactured by such manufacturer as the Secretary may require.

Section 30D(d)(7) excludes from the definition of “new clean vehicle” any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle were extracted, processed, or recycled by a foreign entity of concern (as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5))), or any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle were manufactured or assembled by a foreign entity of concern (as so defined).

No section 30D credit is allowed with respect to a vehicle placed in service after December 31, 2032.

On October 5, 2022, the Treasury Department and the IRS published Notice 2022-46, 2022-43 I.R.B. 302. The notice requested general comments on issues arising under sections 25E and 30D, as well as specific comments concerning: (1) definitions; (2) critical minerals and battery components; (3) foreign entities of concern; (4) recordkeeping and reporting; (5) eligible entities; (6) elections to transfer and advance payments; and (7) recapture. The Treasury Department and the IRS received 884 comments from industry participants, environmental groups, individual consumers, and other stakeholders. The Treasury Department and the IRS appreciate the commenters' interest and engagement on these issues. These comments have been carefully considered in the preparation of the proposed regulations.

On December 12, 2022, the Treasury Department and the IRS published Revenue Procedure 2022-42, 2022-52 I.R.B. 565, providing guidance for qualified manufacturers to enter into written agreements with the IRS, as required in sections 30D, 25E, and 45W, and to report certain information regarding vehicles produced by such manufacturers that may be eligible for credits under these sections. In addition, Revenue Procedure 2022-42 provides the procedures for sellers of new clean vehicles or previously-owned clean vehicles to report certain information to the IRS and the purchasers of such clean vehicles.

On April 17, 2023, the Treasury Department and the IRS published the April 2023 proposed regulations in the Federal Register , which provides proposed definitions for certain terms related to section 30D; proposed rules regarding personal and business use and other special rules; and additional proposed rules related to the critical mineral and battery component requirements.

On October 6, 2023, the Treasury Department and the IRS released Revenue Procedure 2023-33, which was published on October 23, 2023, in Internal Revenue Bulletin 2023-43, to provide guidance for taxpayers electing to transfer credits under section 25E or 30D and for eligible entities receiving advance payments of credits under sections 30D and 25E. This revenue procedure sets forth the procedures under sections 30D(g) and 25E(f) for the transfer of the previously-owned clean vehicle credit and the new clean vehicle credit from the taxpayer to an eligible entity, including the procedures for dealer registration with the IRS, the procedures for the revocation and suspension of that registration, and the establishment of an advance payment program to eligible entities. In addition, this revenue procedure superseded sections 5.01 and 6.03 of Revenue Procedure 2022-42, providing new information for the time and manner of submission of seller reports, respectively. This revenue procedure also superseded sections 6.01 and 6.02 of Revenue Procedure 2022-42, providing updated information on submission of written agreements by manufacturers to the IRS to be considered qualified manufacturers, as well as the method of submission of monthly reports by qualified manufacturers.

On October 10, 2023, the Treasury Department and the IRS published the October 2023 proposed regulations in the Federal Register , which provide guidance for elections to transfer clean vehicle credits under sections 30D(g) and 25E(f). The proposed regulations provide guidance for taxpayers intending to transfer the previously-owned clean vehicle credit and the new clean vehicle credit to dealers who are entities eligible to receive advance payments of either credit. The proposed regulations also provide guidance for dealers to become eligible entities to receive advance payments of previously-owned clean vehicle credits or clean vehicle credits. The proposed regulations also provide guidance for recapturing the credit under sections 30D and 25E. Finally, proposed § 1.6213-2 defines the term “omission of a correct vehicle identification number” (VIN) for purposes of section 6213, under which, in part, the IRS is authorized to make a summary assessment when there has been an omission of a correct VIN on a taxpayer's return when claiming or electing to transfer a credit under section 25E or 30D.

Concurrently with the release of these proposed regulations, the Department of Energy (DOE) is releasing proposed guidance in the Federal Register , which provides proposed interpretations of certain terms used in the definition of “foreign entity of concern” (FEOC) set forth in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (IIJA), 42 U.S.C. 18741(a)(5), and as cross-referenced in section 30D(d)(7). Section 40207(a)(5) of the IIJA defines FEOC to include foreign entities covered by specific designations, inclusions, and allegations by Federal agencies as described in section 40207(a)(5)(A), (B), and (D), as well as foreign entities “owned by, controlled by, or subject to the jurisdiction or direction of a government” of a covered nation under section 40207(a)(5)(C). Covered nations are defined in 10 U.S.C. 4872(d)(2) as the People's Republic of China, the Russian Federation, the Democratic People's Republic of Korea, and the Islamic Republic of Iran as of the date of publication of these proposed regulations. Finally, section 40207(a)(5)(E) of the IIJA provides that a FEOC includes a foreign entity that the Secretary of Energy, in consultation with the Secretary of Defense and the Director of National Intelligence, determines is engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.

The DOE proposed guidance provides an interpretation of section 40207(a)(5)(C) of the IIJA. In particular, the DOE proposed guidance provides definitions for the terms “government of a foreign country,” “foreign entity,” “subject to the jurisdiction,” and “owned by, controlled by, or subject to the direction of.”. In general, an entity incorporated in, headquartered in, or performing the relevant activities in a covered nation would be classified as a FEOC. For purposes of these rules, an entity would be “owned by, controlled by, or subject to the direction” of another entity if 25 percent or more of the entity's board seats, voting rights, or equity interest are cumulatively held by such other entity. In addition, licensing agreements or other contractual agreements may also create control. Finally, “government of a foreign country” would be defined to include subnational governments and certain current or former senior foreign political figures.

Proposed § 1.30D-2(a) is revised to clarify that all definitions in the section apply for purposes of section 30D and the section 30D regulations, including any guidance thereunder. Proposed § 1.30D-2(f) is revised to include in the definition of “section 30D regulations” the provisions of proposed § 1.30D-5 as set forth in the October 2023 proposed regulations and proposed § 1.30D-6 as set forth in these proposed regulations. Proposed § 1.30D-2(k) would provide, consistent with section 30D(d)(3), that “manufacturer” means any manufacturer within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency (EPA) for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq. ) and as defined in 42 U.S.C. 7550(1). If multiple manufacturers are involved in the production of a vehicle, the requirements provided in section 30D(d)(3) must be met by the manufacturer who satisfies the reporting requirements of the greenhouse gas emissions standards set by EPA under the Clean Air Act (42 U.S.C. 7521 et seq. ) for the subject vehicle.

Proposed § 1.30D-2(l) would provide that a qualified manufacturer means a manufacturer that meets the requirements described in section 30D(d)(3). A qualified manufacturer would not include any manufacturer whose qualified manufacturer status has been terminated by the IRS. The IRS may terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence with respect to any requirements of section 30D and the regulations and guidance thereunder, including with respect to the periodic written reports described in section 30D(d)(3) and proposed § 1.30D-2(m) and any attestations, documentation, or certifications described in proposed § 1.30D-3(e) and proposed § 1.30D-6(d), at the time and in the manner provided in the Internal Revenue Bulletin.

Proposed § 1.30D-2(m) would provide that a “new clean vehicle” means a vehicle that meets the requirements described in section 30D(d). A new clean vehicle would not include any vehicle for which the qualified manufacturer does any of the following: (1) fails to provide a periodic written report for such vehicle prior to the vehicle being placed in service, reporting the VIN of such vehicle and certifying compliance with the requirements of section 30D(d); (2) provides incorrect information with respect to the periodic written report for such vehicle; (3) fails to update its periodic written report in the event of a material change with respect to such vehicle; or, (4) for new clean vehicles placed in service after December 31, 2024, the qualified manufacturer fails to meet the requirements of proposed § 1.30D-6(d). For purposes of section 30D(d)(6), the term “new clean vehicle” includes any new qualified fuel cell motor vehicle (as defined in section 30B(b)(3)) which meets the requirements under section 30D(d)(1)(G) and (H). The Treasury Department and the IRS request comment on whether, in the interest of sound tax administration and to provide additional transparency to taxpayers, it would be feasible and helpful for tax administration if qualified manufacturers were to encode eligibility for section 30D through a particular calendar year into the VIN using an alphanumeric combination.

Proposed § 1.30D-3(d) would provide rules regarding excluded entities by reference to proposed § 1.30D-6.

Proposed § 1.30D-3(e) would provide for an upfront review of conformance with the critical minerals requirement and battery components requirement. Specifically, proposed § 1.30D-3(e) would provide that for new clean vehicles placed in service after December 31, 2024, the qualified manufacturer must provide attestations, certifications and documentation demonstrating compliance with the requirements of section 30D(e), at the time and in the manner provided in the Internal Revenue Bulletin. The IRS, with analytical assistance from the DOE, will review the attestations, certifications, and documentations.

The proposed regulations would provide definitions for terms relevant to the excluded entity provision. To the extent many of these terms were defined in the April 2023 proposed regulations, these proposed regulations would provide the same definitions for such terms as is provided in proposed § 1.30D-3(c). The Treasury Department and the IRS intend that terms relevant to both the critical mineral and battery component requirements described in proposed § 1.30D-3 and the excluded entity restrictions described in these proposed regulations are interpreted consistently.

Proposed § 1.30D-6(a)(1) would define “applicable critical mineral” as an applicable critical mineral as defined in section 45X(c)(6). Guidance regarding the definition of applicable critical minerals, including the applicable critical minerals that are used in electric vehicle batteries to facilitate the electrochemical processes necessary for energy storage, would be provided in forthcoming proposed regulations under section 45X.

Proposed § 1.30D-6(a)(2) would define “assembly” as, with respect to battery components, the process of combining battery components into battery cells and battery modules.

Proposed § 1.30D-6(a)(3) would define “battery” as, for purposes of a new clean vehicle, a collection of one or more battery modules, each of which has two or more electrically configured battery cells in series or parallel, to create voltage or current. The term battery does not include items such as thermal management systems or other parts of a battery cell or module that do not directly contribute to the electrochemical storage of energy within the battery, such as battery cell cases, cans, or pouches.

Proposed § 1.30D-6(a)(4) would define “battery cell” as a combination of battery components (other than battery cells) capable of electrochemically storing energy from which the electric motor of a new clean vehicle draws electricity.

Proposed § 1.30D-6(a)(5) would define “battery cell production facility” as a facility in which battery cells are manufactured or assembled.

Proposed § 1.30D-6(a)(6) would define “battery component” as a component that forms part of a battery and that is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. Proposed § 1.30D-6(a)(6) would specify that battery components may include, but are not limited to, a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module. Constituent materials are not a type of battery component, although constituent materials may be manufactured or assembled into battery components. Some battery components may be made entirely of inputs that do not contain constituent materials.

Proposed § 1.30D-6(a)(7) would define “compliant-battery ledger,” for a qualified manufacturer for a calendar year, as a ledger that tracks the number of available FEOC-compliant batteries for such calendar year. A compliant-battery ledger is established under the rules of proposed § 1.30D-6(d), described in part III.D. of this Explanation of Provisions.

Proposed § 1.30D-6(a)(8) would define “constituent materials” as materials that contain applicable critical minerals and that are employed directly in the manufacturing of battery components. Proposed § 1.30D-6(a)(8) would specify that constituent materials may include, but are not limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell.

Proposed § 1.30D-6(a)(9) would define “extraction” to mean the activities performed to harvest minerals or natural resources from the ground or a body of water. Extraction would include, but would not be limited to, operating equipment to harvest minerals or natural resources from mines and wells, or to extract minerals or natural resources from the waste or residue of prior extraction. Extraction would conclude when activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in critical mineral processing. Extraction would include the physical processes involved in refining. Extraction would not include the chemical and thermal processes involved in refining.

Proposed § 1.30D-6(a)(10) would define “foreign entity of concern (FEOC)” to have the same meaning as defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5)) and guidance promulgated thereunder by the DOE.

Proposed § 1.30D-6(a)(11) would define “FEOC-compliant” to mean in compliance with the applicable excluded entity requirement under section 30D(d)(7). In particular, the proposed regulation would provide definitions of FEOC-compliant with respect to a battery component (other than a battery cell), applicable critical mineral, battery cell, or battery. This definition would treat battery cells separately from other battery components because battery cells contain applicable critical minerals (and associated constituent materials) as well as other battery components. Thus, the applicable rules under section 30D(d)(7) must be satisfied for such critical minerals and such components contained in the battery cell as well as the battery cell itself. A battery component (other than a battery cell), with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it is not manufactured or assembled by a FEOC. An applicable critical mineral, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not extracted, processed, or recycled by a FEOC. As described in part III.C.4. of this Explanation of Provisions, in general, the determination of whether an applicable critical mineral is FEOC-compliant would take into account each step of extraction, processing, or recycling through the step in which such mineral is processed or recycled into a constituent material, even if the mineral is not in a form listed in section 45X(c)(6). A battery cell, with respect to a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, is FEOC compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components. A battery cell, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components and applicable critical minerals. A battery, with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it contains only FEOC-compliant battery components (other than battery cells) and FEOC-compliant battery cells.

Proposed § 1.30D-6(a)(12) would define “manufacturing” to mean, with respect to a battery component, the industrial and chemical steps taken to produce a battery component.

Proposed § 1.30D-6(a)(13)(i) would define “non-traceable battery materials” to mean specifically identified low-value battery materials that may originate from multiple sources and are often commingled during refining, processing, or other production processes by suppliers to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such battery materials. Proposed § 1.30D-6(a)(13)(ii), which is reserved, would contain the specific list of identified non-traceable battery materials. Low-value battery materials are those that, like the exemplar materials listed below, have low value compared to the total value of the battery. Where battery materials make up only a very small percentage of the value of the battery as a whole, many industry participants, prior to the passage of the IRA, had little reason to trace the source of these materials. As a result, unlike with higher value battery materials, tracing the source of these low value materials is not immediately feasible, which makes it in turn not feasible for qualified manufacturers to provide the necessary assurance to the IRS that their materials are FEOC-compliant.

The Treasury Department and the IRS, after extensive consultation with the Department of Energy, are considering whether the following applicable critical minerals (and associated constituent materials) may be designated as identified non-traceable battery materials: applicable critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives. These exemplar materials each account for less than two percent of the value of applicable critical minerals in the battery, and the Treasury Department and the IRS understand that industry tracing of these particular applicable critical mineral production processes is uncommon and third-party standards for doing so are underdeveloped. Other materials for inclusion could include, for example, other low-value electrode active materials that are also subject to the traceability difficulties described in part III.A.13. of this Explanation of Provisions. As discussed further below, the Treasury Department and the IRS request comment on: (1) whether other applicable critical minerals (and associated constituent materials) should be designated as identified non-traceable battery materials for the same reasons, and (2) whether an approach other than the proposed list of non-traceable battery materials would better address the traceability issues discussed here. As discussed in part III.B.2. of this Explanation of Provisions, some stakeholders have suggested that the Treasury Department and the IRS adopt a de minimis exception to the excluded entity restrictions based on value, weight, mass, or other considerations. In response to these comments, the Treasury Department and the IRS have proposed a transition rule that would temporarily exclude a specific list of identified non-traceable battery materials from the due diligence requirements of the qualified manufacturers.

The Treasury Department and the IRS request comments on the best approach to addressing low-value battery materials for which tracing to their source is not immediately feasible. The Treasury Department and the IRS request comment on whether the proposed approach is a sound method of accounting for non-traceable battery materials, and whether other criteria should be used to distinguish between traceable and non-traceable battery materials. In particular, the Treasury Department and the IRS request comments that explain whether and why certain battery materials are prohibitively difficult to trace at this time given current supply chains and current broadly available tools and practices for supply-chain tracing in the battery sector, and that explain how the supply chain may be limited by any such difficulty. The Treasury Department and the IRS also request comments explaining how the state of supply chains and tools and practices for supply-chain tracing are expected to evolve in the coming months and years for battery materials that are prohibitively difficult to trace at present. The Treasury Department and the IRS further request comments explaining the state of recordkeeping that is currently used in the industry to trace supply chains, what kind of recordkeeping requirements would facilitate better tracing of supply chains in the coming months and years, how to encourage manufacturers to adopt appropriate tracing systems as soon as practicable, and how these rules incentivize further shifting of supply chains in a manner that will strengthen our energy security, national security, and domestic manufacturing.

In addition, the Treasury Department and the IRS request comment on whether the listed materials are appropriately characterized as non-traceable battery materials. The Treasury Department and the IRS further request comment on whether any other applicable critical minerals, including associated constituent materials, would also be appropriately characterized as non-traceable battery materials because they meet the required criteria. The Treasury Department and the IRS further request comment on whether other criteria should be applied to determine what qualifies as non-traceable battery materials, and what applicable critical minerals, including associated constituent materials, would be appropriately characterized as such materials under the suggested criteria. Finally, the Treasury Department and the IRS seek comment describing alternative approaches to addressing the challenges posed by low-value battery materials that are not currently feasible to trace to their origins.

Proposed § 1.30D-6(a)(14) would define “processing” to mean the non-physical processes involved in the refining of non-recycled substances or materials, including the treating, baking, and coating processes used to convert such substances and materials into constituent materials. Processing includes the chemical or thermal processes involved in refining. Processing does not include the physical processes involved in refining.

Proposed § 1.30D-6(a)(15) would define “recycling” to mean the series of activities during which recyclable materials containing critical minerals are transformed into specification-grade commodities and consumed in lieu of virgin materials to create new constituent materials; such activities result in new constituent materials contained in the battery from which the electric motor of a new clean vehicle draws electricity.

Proposed § 1.30D-6(b)(1) would provide that the qualified manufacturer must conduct due diligence with respect to all battery components and applicable critical minerals (and associated constituent materials) that are relevant to determining whether such components or minerals are FEOC-compliant. This due diligence must comply with standards of tracing for battery materials available in the industry at the time of the attestation or certification that enable the qualified manufacturer to know with reasonable certainty the provenance of applicable critical minerals, constituent materials, and battery components. Such tracing standards may include international battery passport certifications and enhanced battery material and component tracking and labeling. Proposed § 1.30D-6(b)(1) would specify that reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer does not know or have reason to know after due diligence that such supplier attestation or certification is incorrect.

The due diligence must be conducted by the qualified manufacturer prior to its determination of any information to establish a compliant-battery ledger described in proposed § 1.30D-6(d), and on an on-going basis. A battery is not considered FEOC-compliant unless the qualified manufacturer has conducted such due diligence with respect to all such components and applicable critical minerals of the battery and provided required attestations or certifications described in part III.D. of this Explanation of Provisions.

Proposed § 1.30D-6(b)(2) would provide that for any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the due diligence requirement may be satisfied by excluding identified non-traceable battery materials (and associated constituent materials), as defined in proposed § 1.30D-6(a)(13)(ii). In addition, as described in part III.C.3. of this Explanation of Provisions, identified non-traceable battery materials (and associated constituent materials) may be excluded from the determination of whether a battery cell is FEOC-compliant. To use this transition rule, qualified manufacturers must submit a report during the up-front review process described in part III.D. of this Explanation of Provisions demonstrating how the qualified manufacturer will comply with the excluded entity restrictions once the transition rule is no longer in effect and all materials must be fully traced through the entire electric vehicle battery supply chain.

As described in part III.A.13. of this Explanation of Provisions, the Treasury Department and the IRS understand, after extensive consultation with the Department of Energy, that industry has not developed standards or systems for tracing certain low-value materials with precision. This inability to trace is exacerbated by the practice of commingling such materials within the materials processing supply chain. To address this issue, some stakeholders have suggested that the Treasury Department and the IRS adopt a de minimis exception to the excluded entity restrictions based on value, weight, mass, or other considerations. The Treasury Department and the IRS understand the tracing concerns in light of current standards and systems. However, these standards and systems may develop to allow for improved tracing in the future.

The Treasury Department and the IRS therefore recognize the potential need for a transition rule to enable determination of FEOC compliance while detailed tracing practices are being developed to allow for full sourcing and tracing of applicable critical mineral supply chains. The transition rule in proposed § 1.30D-6(b)(2) and (c)(3)(iii) is one option that the Treasury Department and the IRS are considering for such a rule. The Treasury Department and the IRS also are considering and seeking comment on possible alternative approaches for a transition rule that would address low-value materials that cannot be traced under current industry standards and that would be responsive to rapidly changing industry practices regarding specific materials or overall battery composition, or no transition rule at all.

This transition rule in proposed § 1.30D-6(b)(2) is proposed to phase out for any new clean vehicles for which the manufacturer is required to provide a periodic written report after December 31, 2026. The Treasury Department and the IRS request comments on the need for and design of this transition rule, including data or other objective information to support such comments.

The Treasury Department and IRS also request comment on whether the challenges identified in this Explanation of Provisions related to traceability of low-value materials should instead be addressed through an alternative approach. The Treasury Department and the IRS request comment on whether a transition rule that adopts an alternative to the approach of listing materials would better achieve the Treasury Department's and IRS's stated goals and the challenges posed by low-value materials that are not currently feasible to trace. The Treasury Department and the IRS specifically request comment describing alternative approaches to providing a transition rule that accounts for low-value materials that cannot be traced under current industry standards and that is responsive to rapidly changing industry practice, if commenters believe a different approach could better achieve the Treasury Department's and IRS's stated goals. Such alternative approaches, which might include ones that use principle-based criteria instead of the listing of specific non-traceable battery materials in a final regulation, should be narrowly tailored to address the traceability challenges identified, enable effective administration by the IRS, and phase-out on a schedule consistent with the reasonable development of industry standards.

Proposed § 1.30D-6(c)(1) would provide that in the case of any new clean vehicle placed in service after December 31, 2023, the batteries from which the electric motor of such vehicle draws electricity must be FEOC-compliant. A serial number or other identification system must be used to physically track FEOC-compliant batteries to specific new clean vehicles.

The proposed regulation would provide that the determination that a battery is FEOC-compliant is made as follows: First, the qualified manufacturer makes a determination of whether battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant, in accordance with rules for the determination of FEOC-compliant battery components and applicable critical minerals, which are described in part III.C.4. of this Explanation of Provisions. Next, the FEOC-compliant battery components and FEOC-compliant applicable critical minerals (and associated constituent materials) are physically tracked to specific battery cells, in accordance with rules for the determination of FEOC compliant-battery cells, described in part III.C.3. of this Explanation of Provisions. Alternatively, FEOC-compliant applicable critical minerals and associated constituent materials (but not battery components) may be allocated to battery cells, without physical tracking, in accordance the rules for a temporary allocation-based determination for applicable critical minerals and associated constituent materials, described in part III.C.3.a of this Explanation of Provisions. Finally, the battery components, including battery cells, are physically tracked to specific batteries, in accordance with the rules for the determination of FEOC-compliant batteries described in part II.C.2 of this Explanation of Provisions.

Proposed § 1.30D-6(c)(2) would provide that the determination that a battery is FEOC-compliant must be made by physically tracking FEOC-compliant battery components, including battery cells, to such battery. With respect to battery cells, a serial number or other identification system must be used to physically track FEOC-compliant battery cells to such batteries.

Proposed § 1.30D-6(c)(3)(i) would provide that, except as described in part III.C.3.a. of this Explanation of Provisions, the determination that a battery cell contains FEOC-compliant battery components and FEOC-compliant applicable critical minerals and their associated constituent materials must be made by physically tracking FEOC-compliant battery components to specific battery cells and by physically tracking the mass of FEOC-compliant applicable critical minerals and associated constituent materials to specific battery cells.

Proposed § 1.30D-6(c)(3)(ii)(A) would provide that the determination that a battery cell is a FEOC-compliant battery cell may be made through an allocation of available mass of applicable critical minerals and associated constituent materials to specific battery cells manufactured or assembled in a battery cell production facility, without the physical tracking of the mass of applicable critical minerals (and associated constituent materials) to specific battery cells. This allocation-based determination is an exception to the general rule, requiring specific tracking, of proposed § 1.30D-6(c)(3)(ii)(A). As provided in proposed § 1.30D-6(c)(3)(ii)(F), the Treasury Department and the IRS propose that this exception would be a temporary rule for any new clean vehicle for which the qualified manufacturer provides a periodic written report before January 1, 2027.

After extensive consultation with the DOE, the Treasury Department and the IRS understand that certain applicable critical minerals (and associated constituent materials) are commingled prior to delivery to or at the battery cell production facility. Thus, while the qualified manufacturer and its suppliers can trace such minerals through the entire electric vehicle battery supply chain to determine FEOC-compliance, the manufacturer and suppliers cannot physically track specific mass of minerals to specific battery cells or batteries. As a result, the qualified manufacturer cannot determine which battery cells or batteries are FEOC-compliant, absent an allocation-based determination.

The Treasury Department and the IRS anticipate that industry accounting practices may adapt to compliance regimes that require physical supply chain tracking in the future, whether through the acquisition of wholly-compliant supply, the separation of currently-commingled supply chains, the development of physical tracking systems, or some combination thereof. Accordingly, this exception is proposed to phase out for any new clean vehicle for which the qualified manufacturer provides a periodic written report after December 31, 2026. The Treasury Department and the IRS request comments on the need for, design, and duration of this temporary rule, including data or other objective information to support such comments. The Treasury Department and the IRS also request comment on whether industry practices are likely to develop that allow for physical tracking before December 31, 2032, and, if not, whether allocation-based accounting should be included as a permanent compliance approach, rather than as a temporary transition rule.

Proposed § 1.30D-6(c)(3)(ii)(B) would provide that the temporary allocation-based determination rules are limited to applicable critical minerals and associated constituent materials that are incorporated into a battery cell or its battery components. Battery components must be physically tracked.

Proposed § 1.30D-6(c)(3)(ii)(C) would provide that any allocation with respect to the mass of an applicable critical mineral must be made within the type of constituent materials (such as powders of cathode active materials, powders of anode active materials, or foils) in which such mineral is contained. Masses of an applicable critical mineral may not be aggregated across constituent materials with which such applicable critical mineral is not associated, and an allocation of mass of an applicable critical mineral may not be made from one type of constituent material to another. Proposed § 1.30D-6(c)(3)(ii)(C) also provides an example illustrating this rule.

Proposed § 1.30D-6(c)(3)(ii)(D) would provide that any allocation with respect to applicable critical minerals and their associated constituent materials must be allocated within one or more specific battery cell product lines of the battery cell production facility, such that a particular mass of constituent material is not treated as fungible across different battery chemistries and designs.

Proposed § 1.30D-6(c)(3)(ii)(E) would provide that if a qualified manufacturer uses the allocation-based determination rules described in this part III.C.3.a., the quantity of FEOC-compliant battery cells that can result from this allocation may not exceed the number of battery cells for which there is enough FEOC-compliant quantity of every applicable critical mineral. That number will necessarily be limited by the applicable critical mineral that has the lowest percentage of FEOC-compliant supply. For example, if a qualified manufacturer allocates all of applicable critical mineral A, that is 20 percent FEOC-compliant, and all of applicable critical mineral B, that is 60 percent FEOC-compliant, to a battery cell product line, no more than 20 percent of the battery cells in that battery cell product line may be FEOC-compliant.

Proposed § 1.30D-6(c)(3)(ii)(F) would provide that the rules of proposed § 1.30D-6(c)(3)(ii) do not apply with respect to any new clean vehicle for which the qualified manufacturer provides a periodic written report after December 31, 2026.

Proposed § 1.30D-6(c)(3)(iii) would provide that for new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the determination of whether a battery cell is FEOC-compliant under proposed § 1.30D-6(c)(3) may be satisfied by excluding non-traceable battery materials, and their associated constituent materials. To use this transition rule, which is further discussed in part III.B. of this Explanation of Provisions, qualified manufacturers must submit a report during the up-front review process described in proposed § 1.30D-6(d)(2)(ii).

Proposed § 1.30D-6(c)(4) would provide that the determination that battery components and applicable critical minerals (and their associated constituent materials) are FEOC-compliant must be made prior to any determination under proposed § 1.30D-6(c)(2) and (3). In general, the determination of whether an applicable critical mineral is FEOC-compliant would take into account each step of extraction, processing, or recycling through the step in which such mineral is processed or recycled into a constituent material, even if the mineral is not in a form listed in section 45X(c)(6)), such as nickel sulphate that is used in production of a nickel-manganese-cobalt cathode active powder. A constituent material would be associated with an applicable critical mineral if the applicable critical mineral has been processed or recycled into a constituent material, even if that processing or recycling transformed the mineral into a form not listed in section 45X(c)(6). However, an applicable critical mineral would be disregarded for purposes of the determination under proposed § 1.30D-6(c)(4) if it is fully consumed in the production of the constituent material or battery component and no longer remains in any form in the battery, such as certain solvents used in electrode production.

With respect to recycling, applicable critical minerals and associated constituent materials that are recycled would be subject to the determination of whether such mineral is FEOC-compliant if the recyclable material contains an applicable critical mineral, contains material that was transformed from an applicable critical mineral, or if the recyclable material is used to produce an applicable critical mineral at any point during the recycling process. The determination of whether an applicable critical mineral or associated constituent material that is incorporated into a battery via recycling is FEOC-compliant takes into account only activities that occurred during the recycling process. Thus, for example, an applicable critical mineral derived from recyclable material that was recycled by an entity that is not a FEOC would be FEOC-compliant even if such mineral may have been extracted by a FEOC prior to its inclusion in the recyclable material.

Whether an entity is a FEOC is determined as of the time of the entity's performance of the relevant activity, which for applicable critical minerals is the time of extraction, processing, or recycling, and for battery components is the time of manufacturing or assembly. The determination of whether an applicable critical mineral is FEOC-compliant is determined at the end of processing or recycling of the applicable critical mineral into a constituent material, taking into account all applicable steps prior to final processing or recycling. Thus, for example, an applicable critical mineral that is not extracted by a FEOC but is processed by a FEOC is not FEOC-compliant.

Proposed § 1.30D-6(c)(4)(iv) provides examples regarding determinations of FEOC-compliant battery components and applicable critical minerals.

Proposed § 1.30D-6(c)(5) would provide that the determinations under proposed § 1.30D-6(c)(2) through (4) may be made by a third-party manufacturer or supplier that operates a battery cell production facility provided that the manufacturer or supplier performs the due diligence described in proposed § 1.30D-6 and provides the qualified manufacturer of the new clean vehicle information sufficient to establish a basis for the determinations under proposed § 1.30D-6(c)(2) through (4). In addition, the manufacturer or supplier must be contractually required to provide such information to the qualified manufacturer of the new clean vehicle and must be contractually required to inform the qualified manufacturer of any changes in the supply chain that affect determinations of FEOC compliance. In the case of multiple third-party manufacturers or suppliers (such as if a manufacturer contracts with a battery manufacturer, who, in turn, contracts with a manufacturer or supplier who operates a battery cell production facility), the due diligence and information requirements must be satisfied by each such manufacturer or supplier either directly to the qualified manufacturer or indirectly through contractual relationships.

Proposed § 1.30D-6(d)(1) would provide that for new clean vehicles placed in service after December 31, 2024, the qualified manufacturer must determine and provide information to the IRS to establish a compliant-battery ledger for each calendar year, as described in proposed § 1.30D-6(d)(2)(i) and (ii). One compliant-battery ledger may be established for all vehicles for a calendar year, or there may be separate ledgers for specific models or classes of vehicles.

Proposed § 1.30D-6(d)(2)(i) would provide that, to establish a compliant-battery ledger for a calendar year, the qualified manufacturer must determine the number of batteries, with respect to new clean vehicles (as described in section 30D(d) and proposed § 1.30D-2(m)) for which the qualified manufacturer anticipates providing a periodic written report during the calendar year, that it knows or reasonably anticipates will be FEOC-compliant, pursuant to the requirements of proposed § 1.30D-6(b) and (c). The determination would be based on the battery components and applicable critical minerals (and associated constituent materials) that are procured or contracted for the calendar year and that are known or reasonably anticipated to be FEOC-compliant battery components or FEOC-compliant applicable critical minerals, as applicable.

Proposed § 1.30D-6(d)(2)(ii) would provide a process for upfront review of the number of batteries described in the preceding paragraph. Specifically, the proposed rule would provide that the qualified manufacturer must attest to the number of FEOC-compliant batteries determined under proposed § 1.30D-6(d)(2)(i) and provide the basis for the determination, including attestations, certifications and documentation demonstrating compliance with proposed § 1.30D-6(b) and (c), at the time and in the manner provided in the Internal Revenue Bulletin. The IRS, with analytical assistance from the DOE, would review the attestations, certifications, and documentation. Once the IRS has determined that the qualified manufacturer has provided the required attestations, certifications, and documentation, the IRS will approve or reject the determined number of FEOC-compliant batteries. The IRS may approve the determined number in whole or part. The approved number will be the initial balance in the compliant-battery ledger.

Proposed § 1.30D-6(d)(2)(iii) would provide rules for decreasing or increasing the balance of the compliant-battery ledger. Specifically, once the compliant-battery ledger is established with respect to a calendar year, the qualified manufacturer must determine and take into account any decrease in the number of FEOC-compliant batteries for such calendar year, and any of the prior three calendar years for which the qualified manufacturer had a compliant-battery ledger, within 30 days of discovery. In addition, the qualified manufacturer may determine and take into account any increase in the number of FEOC-compliant batteries. Such determinations, and any supporting attestations, certifications, and documentation, must be provided on a periodic basis in the manner provided in the Internal Revenue Bulletin.

The decrease described in the previous paragraph may decrease the compliant-battery ledger below zero, creating a negative balance in the compliant-battery ledger. In addition, if any such decrease is determined subsequent to the calendar year to which it relates, the decrease will be taken into account in the year in which the change is discovered. The remaining balance in the compliant-battery ledger at the end of the calendar year, whether positive or negative, will be included in the compliant-battery ledger for the subsequent calendar year. If a qualified manufacturer has multiple compliant-battery ledgers with negative balances, any negative balance would first be included in the compliant-battery ledger for the same model or class of vehicles for the subsequent calendar year. However, if there is no ledger for the same model or class of vehicles in the subsequent calendar year, the IRS can account for such negative balance in the ledger of a different model or class of vehicles of the qualified manufacturer.

Proposed § 1.30D-6(d)(3) would provide that the compliant-battery ledger for a calendar year must be updated to track the number of available FEOC-compliant batteries of the qualified manufacturer, by reducing the balance of the ledger as the qualified manufacturer submits periodic written reports reporting the VINs of new clean vehicles as eligible for the credit under section 30D, at the time and in the manner provided in the Internal Revenue Bulletin. If the balance of the compliant-battery ledger for a calendar year of the qualified manufacturer is zero or less than zero, the qualified manufacturer would not be able to submit additional periodic written reports with respect to section 30D.

Proposed § 1.30D-6(d)(4) would provide that, after the end of any calendar year for which a compliant-battery ledger is established, the IRS may require a qualified manufacturer to provide attestations, certifications, and documentation to support the accuracy of the number of FEOC-compliant batteries of the qualified manufacturer for such calendar year, including with respect to any changes described in paragraph (d)(3)(iii), at the time and in the manner provided in the Internal Revenue Bulletin.

Proposed § 1.30D-6(e) would provide rules for new clean vehicles placed in service in 2024. This rule may apply to new clean vehicles for which the qualified manufacturer submits a periodic written report in 2024 as well as new clean vehicles for which a qualified manufacturer submitted a periodic written report in 2023. Thus, for example, a vehicle that was anticipated to be placed in service in 2023 that remains unsold at the end of 2023 is subject to these rules if placed in service in 2024.

Specifically, proposed § 1.30D-6(e)(1) would provide that, for new clean vehicles that are placed in service after December 31, 2023, and prior to January 1, 2025, the qualified manufacturer must determine whether the battery components contained in such vehicles satisfy the requirements of section 30D(d)(7)(B) and whether batteries contained in the vehicle are FEOC-compliant under the rules of proposed § 1.30D-6(b) and (c). The qualified manufacturer would be required to make an attestation with respect to such determinations at the time and in the manner provided in the Internal Revenue Bulletin.

However, for any new clean vehicles for which the qualified manufacturer provides a periodic written report before the date that is 30 days after the date these regulations are finalized, provided that the qualified manufacturer has determined that its supply chain of battery components with respect to such vehicles contains only FEOC-compliant battery components: (i) for purposes of the determination of FEOC-compliant batteries and FEOC-compliant battery cells described in parts III.C.2 and III.C.3. of this Explanation of Provisions, the determination of which battery cells or batteries, as applicable, contain FEOC-compliant battery components may be determined without physical tracking; (ii) for purposes of the determination of FEOC-compliant batteries, the determination of which batteries contain FEOC-compliant battery cells may be determined without physical tracking (and without the use of a serial number or other identification system); and (iii) for purposes of the determination that a vehicle contains a FEOC-compliant battery and therefore is a new clean vehicle, as described in part III.C.1. of this Explanation of Provisions, the determination of which vehicles contain FEOC-compliant batteries may be determined without physical tracking (and without the use of a serial number or other identification system).

Under proposed § 1.30D-6(e)(2), the determination that a qualified manufacturer's supply chain of battery components contains only FEOC-compliant batteries may be made with respect to specific models or classes of vehicles.

Proposed § 1.30D-6(f)(1) would provide that if the IRS determines, with analytical assistance from the DOE and after review of the attestations, certifications, and documentation described in part III.D. of this Explanation of Provisions, that a qualified manufacturer provided inaccurate attestations, certifications, or documentation, the IRS may take certain actions against the qualified manufacturer, depending on the severity of the inaccuracy. Such actions would affect new clean vehicles and qualified manufacturers on a prospective basis.

Proposed § 1.30D-6(f)(2) would provide that if the IRS determines that the attestations, certifications, or documentation for a new clean vehicle contain errors due to inadvertence, the following may be required: The qualified manufacturer may cure the errors identified, including by a decrease in the compliant-battery ledger of the qualified manufacturer. However, if the errors are not cured, in the case of a new clean vehicle that has not been placed in service but for which the qualified manufacturer has submitted a periodic written report certifying compliance with the requirements of section 30D(d), such vehicle is no longer considered a new clean vehicle eligible for the section 30D credit. If the errors are not cured, in the case of a new clean vehicle that has not been placed in service and for which the qualified manufacturer has not submitted a periodic written report, the qualified manufacturer may not submit a periodic written report certifying compliance with the requirements of section 30D(d). Finally, if the errors are not cured, in the case of a new clean vehicle that has been placed in service, the IRS may require a decrease to the compliant-battery ledger.

Proposed § 1.30D-6(f)(3) would provide guidance for cases of intentional disregard or fraud. Specifically, the proposed regulations would provide that if the IRS determines that a qualified manufacturer intentionally disregarded attestation, certification, and documentation requirements or reported information fraudulently or with intentional disregard, the IRS may determine that all vehicles of the qualified manufacturer that have not been placed in service are no longer considered new clean vehicles eligible for the section 30D credit. In addition, the IRS may terminate the written agreement between the IRS and the manufacturer, thereby terminating the manufacturer's status as a qualified manufacturer. The manufacturer would be required to submit a new written agreement to reestablish qualified manufacturer status at the time and in the manner provided in the Internal Revenue Bulletin.

Proposed § 1.30D-6(g) would provide examples illustrating the application of the proposed rules regarding excluded entities. Example 1 would provide a general set of facts and analysis. Example 2 would provide an example illustrating the rules for third-party suppliers. Example 3 would provide an example illustrating the general rules for applicable critical minerals. Example 4 would provide a comprehensive example with specified battery components and applicable critical minerals (and associated constituent materials).

Proposed § 1.30D-6(h) would provide that if any provision in this proposed rulemaking is held to be invalid or unenforceable facially, or as applied to any person or circumstance, it shall be severable from the remainder of this rulemaking, and shall not affect the remainder thereof, or the application of the provision to other persons not similarly situated or to other dissimilar circumstances.

Consistent with the April 2023 proposed regulations, previously proposed § 1.30D-2(a) through (h) are proposed to apply to new clean vehicles placed in service on or after January 1, 2023, for taxable years ending after April 17, 2023. Newly proposed § 1.30D-2(j) through (m) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Consistent with the April 2023 proposed regulations, previously proposed § 1.30D-3(a) through (c) and (f) are proposed to apply to new clean vehicles placed in service after April 17, 2023, for taxable years ending after April 17, 2023. Newly proposed § 1.30D-3(d) and (e) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Section 30D(d)(7) provides that the excluded entity provisions apply to vehicles placed in service after December 31, 2023, for battery components, and after December 31, 2024, for applicable critical minerals. Accordingly proposed § 1.30D-6 is proposed to apply to new clean vehicles placed in service after December 31, 2023.

Taxpayers may rely on these proposed regulations for vehicles placed in service prior to the date final regulations are published in the Federal Register , provided the taxpayer follows the proposed regulations in their entirety, and in a consistent manner.

This notice of proposed rulemaking modifies proposed §§ 1.30D-2 and 1.30D-3 of the April 2023 proposed regulations.

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

For purposes of the PRA, the reporting burden associated with the collection of information in proposed § 1.30D-6 regarding excluded entities will be reflected in the PRA Submissions associated with OMB control number 1545-2311. OMB Control Number 1545-2137 covers Form 8936 and Form 8936-A regarding clean vehicle credits, including the new requirement in section 30D(f)(9) to include on the taxpayer's return for the taxable year the VIN of the vehicle for which the section 30D credit is claimed. Revenue Procedure 2022-42 describes the procedural requirements for qualified manufacturers to make periodic written reports to the IRS to provide information related to each vehicle manufactured by such manufacturer that is eligible for the section 30D credit as required in section 30D(d)(3), including the critical mineral and battery component attestation or certification requirements in section 30D(e)(1)(A) and (2)(A). In addition, Revenue Procedure 2022-42 also provides the procedures for sellers of new clean vehicles to report information required by section 30D(d)(1)(H) for vehicles to be eligible for the section 30D credit. The collections of information contained in Revenue Procedure 2022-42 are described in that document and were submitted to the Office of Management and Budget in accordance with the PRA under control number 1545-2137.

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.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary hereby certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on their impact on small business.

The proposed regulations affect qualified manufacturers that must determine their compliance with the excluded entity requirements in order to certify that their new clean vehicles placed in service after December 31, 2023, qualify for the section 30D credit.

While the tracking and reporting of compliance with the excluded entity requirements is likely to involve significant administrative costs, according to public filings, every qualified manufacturer had total revenues above $1 billion in 2022. There are a total of 11 qualified manufacturers that have indicated that they manufacture vehicles currently eligible for the section 30D credit. Pursuant to Revenue Procedure 2022-42, Revenue Procedure 2023-33, and following the publication of these proposed regulations, qualified manufacturers will also have to certify that their vehicles comply with the excluded entity requirement and contain batteries that are FEOC-compliant. The proposed regulations provide definitions and general rules for this purposes. Accordingly, the Treasury Department and the IRS intend that the proposed rules provide clarity for qualified manufacturers for consistent application of the excluded entity requirements. The Treasury Department and the IRS have determined that qualified manufacturers do not meet the applicable definition of small entity. Accordingly, the Secretary certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities. The Treasury Department and the IRS request comments that provide data, other evidence, or models that provide insight on this issue.

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 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 (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 (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 and does not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order.

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.

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to 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 regulations. Any comments submitted will be made available at https://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 also 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 .

Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings will be conducted in person, although the IRS will continue to provide a telephonic option for individuals who wish to attend or testify at a hearing by telephone. Any telephonic hearing will be made accessible to people with disabilities.

Guidance cited in this preamble is published in the Internal Revenue Bulletin and is available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

The principal author of these proposed regulations is the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department, the DOE, and the IRS participated in their development.

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

The Agency is extending the deadline to comment on the proposed rule entitled “Public Health Service Policies on Research Misconduct” published in the Federal Register on October 6, 2023 (88 FR 69583), in response to requests for an extension to allow interested persons additional time to submit comments.

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following website as soon as possible after they have been received: https://www.regulations.gov.

Section 1128B(b) of the Act (42 U.S.C. 1320a-7b(b)), the Federal anti-kickback statute, provides for criminal penalties for whoever knowingly and willfully offers, pays, solicits, or receives remuneration to induce or reward, among other things, referrals for or purchases of items or services reimbursable under any of the Federal health care programs, as defined in section 1128B(f) of the Act (42 U.S.C. 1320a-7b(f)). The offense is classified as a felony and is punishable by a fine of up to $100,000 and imprisonment for up to 10 years. Violations of the Federal anti-kickback statute also may result in the imposition of civil monetary penalties under section 1128A(a)(7) of the Act (42 U.S.C. 1320a-7a(a)(7)), program exclusion under section 1128(b)(7) of the Act (42 U.S.C. 1320a-7(b)(7)), and liability under the False Claims Act (31 U.S.C. 3729-33).

Because of the broad reach of the statute, stakeholders expressed concern that some relatively innocuous business arrangements were covered by the statute and, therefore, potentially subject to criminal prosecution. In response, Congress enacted section 14 of the Medicare and Medicaid Patient and Program Protection Act of 1987, Public Law 100-93 (note to section 1128B of the Act; 42 U.S.C. 1320a-7b), which requires the development and promulgation of regulations, the so-called safe harbor provisions, that would specify various payment and business practices that would not be subject to sanctions under the Federal anti-kickback statute, even though they potentially may be capable of inducing referrals of business for which payment may be made under a Federal health care program. Since July 29, 1991, there has been a series of final regulations published in the Federal Register establishing safe harbors to protect various payment and business practices. 1 These safe harbor provisions have been developed “to limit the reach of the statute somewhat by permitting certain non-abusive arrangements, while encouraging beneficial and innocuous arrangements.”  2 Health care providers and others may voluntarily seek to comply with the conditions of an applicable safe harbor so that they have the assurance that their payment or business practice will not be subject to sanctions under the Federal anti-kickback statute. The safe harbor regulations promulgated by OIG are found at 42 CFR part 1001.

OIG periodically issues Special Fraud Alerts to give continuing guidance to health care industry stakeholders about practices that OIG considers to be suspect or of particular concern. 3 Special Fraud Alerts encourage industry compliance by giving stakeholders guidance that can be applied to their own practices. OIG Special Fraud Alerts are published in the Federal Register , on OIG's website, or both, and are intended for extensive distribution.

In developing Special Fraud Alerts, OIG relies on several sources and consults directly with experts in the subject field including those within OIG, other agencies of HHS, other Federal and State agencies, and those in the health care industry.

Section 205 of HIPAA, Public Law 104-191, and section 1128D of the Act (42 U.S.C. 1320a-7d), requires the Department to develop and publish an annual notification in the Federal Register formally soliciting proposals for developing additional or modifying existing safe harbors to the Federal anti-kickback statute and for issuing Special Fraud Alerts.

In developing or modifying safe harbors under the Federal anti-kickback statute, and in consultation with the Department of Justice, OIG thoroughly reviews the range of factual circumstances that may receive protection by the proposed or modified safe harbor. In doing so, OIG seeks to identify and develop safe harbors that protect beneficial and innocuous arrangements and safeguard Federal health care programs and their beneficiaries from the harms caused by fraud and abuse.

OIG seeks recommendations regarding the development of additional or modified safe harbor regulations and the issuance of new Special Fraud Alerts. A detailed explanation of justifications for, or empirical data supporting, a suggestion for a new or modified safe harbor or for the issuance of a new Special Fraud Alert would be helpful and should, if possible, be included in any response to this solicitation.

In accordance with section 205 of HIPAA, we will consider various factors in reviewing proposals for additional or modified safe harbor provisions, such as the extent to which the proposals may result in an increase or decrease in:

• access to health care services,

• the quality of health care services,

• patient freedom of choice among health care providers,

• competition among health care providers,

• the cost to Federal health care programs,

• the potential overutilization of health care services, and

• the ability of health care facilities to provide services in medically underserved areas or to medically underserved populations.

In addition, we will consider other factors including, for example, the existence (or nonexistence) of any potential financial benefit to health care professionals or providers that may influence their decision whether to: (1) order a health care item or service or (2) arrange for a referral of health care items or services to a particular practitioner or provider.