Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to certain Bombardier, Inc., Model CL-600-2A12 (601) airplanes. The NPRM published in the Federal Register on February 28, 2019 (84 FR 6705). The NPRM was prompted by a report of damage to the anti-rotation tab on an MLG side brace fitting due to the installation of an incorrect side brace fitting shaft. The NPRM proposed to require an inspection of the MLG side brace fitting for damage, a verification of the side brace fitting shaft part number, and replacement of the side brace fitting shaft if necessary. It also proposed to require the installation of an anti-rotation bracket.

We are issuing this AD to address premature cracking of the MLG side brace fitting. This condition, if not corrected, could lead to the collapse of the MLG, resulting in structural damage to the wing spar and fuel tank.

Transport Canada Civil Aviation (TCCA), which is the aviation authority for Canada, has issued Canadian AD CF-2018-19, dated July 20, 2018 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Bombardier, Inc., Model CL-600-2A12 (601) airplanes. The MCAI states:

You may examine the MCAI in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0024.

We gave the public the opportunity to participate in developing this final rule. We received no comments on the NPRM or on the determination of the cost to the public.

We reviewed the relevant data and determined that air safety and the public interest require adopting this final rule as proposed, except for minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for addressing the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

Bombardier has issued Service Bulletin 601-0624, Revision 02, dated January 29, 2018. This service information describes procedures for inspecting the MLG side brace fitting and side brace fitting shaft, installing a replacement side brace fitting shaft if necessary, and installing an anti-rotation bracket.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We estimate that this AD affects 9 airplanes of U.S. registry. We estimate the following costs to comply with this AD:

We estimate the following costs to do any necessary on-condition actions that would be required based on the results of any required actions. We have no way of determining the number of aircraft that might need these on-condition actions:

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

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

This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes and associated appliances to the Director of the System Oversight Division.

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

For the reasons discussed above, I certify that this AD:

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

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

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

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

We issued AD 2018-25-12, Amendment 39-19523 (83 FR 64230, December 14, 2018) (“AD 2018-25-12”), which applied to certain Airbus SAS Model A350-941 airplanes. AD 2018-25-12 required modifying the VTP tension bolts connection by adding sealant and protective treatment to the head of the connection, at the barrel nut cavities, and in the surrounding area. AD 2018-25-12 resulted from a determination that certain holes for the VTP tension bolts connection are not properly protected against corrosion. We issued AD 2018-25-12 to address corrosion of the VTP tension bolts connection, which could reduce the structural integrity of the VTP, and could ultimately lead to reduced controllability of the airplane.

Since we issued AD 2018-25-12, it was determined that the instructions for certain airplanes (Group 2 airplanes as identified in the EASA AD identified below), are unclear for proper accomplishment of the required modification.

The EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2018-0290, dated December 21, 2018 (“EASA AD 2018-0290”) (also referred to as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Airbus SAS Model A350-941 airplanes. The MCAI states:

You may examine the MCAI in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0405.

Although this AD does not explicitly restate the requirements of AD 2018-25-12, this AD retains certain requirements of AD 2018-25-12 with clarified instructions. Those requirements are referenced in EASA AD 2018-0290, which, in turn, is referenced in paragraph (g) of this AD.

EASA AD 2018-0290 describes procedures for implementing the means to protect the section 19 VTP frames connections (by modifying the VTP tension bolts connection by adding sealant and protective treatment to the head of the connection, at the barrel nut cavities, and in the surrounding area). This material is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to our bilateral agreement with the State of Design Authority, we have been notified of the unsafe condition described in the MCAI referenced above. We are issuing this AD because we evaluated all pertinent information and determined the unsafe condition exists and is likely to exist or develop on other products of the same type design.

This AD requires accomplishing the actions specified in EASA AD 2018-0290 described previously, through the incorporation by reference of EASA AD 2018-0290, except for any differences identified as exceptions in the regulatory text of this AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA worked with Airbus and EASA to develop a process to use certain EASA ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. As a result, EASA AD 2018-0290 is incorporated by reference in the FAA final rule. This AD, therefore, requires compliance with the provisions specified in EASA AD 2018-0290, except for any differences identified as exceptions in the regulatory text of this AD. Service information specified in EASA AD 2018-0290 that is required for compliance with EASA AD 2018-0290 is available on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0405.

Since there are currently no domestic operators of this product, notice and opportunity for public comment before issuing this AD are unnecessary. In addition, for the reasons stated above, we find that good cause exists for making this amendment effective in less than 30 days.

This AD is a final rule that involves requirements affecting flight safety, and we did not precede it by notice and opportunity for public comment. We invite you to send any written relevant data, views, or arguments about this AD. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0405; Product Identifier 2019-NM-003-AD” at the beginning of your comments. We specifically invite comments on the overall regulatory, economic, environmental, and energy aspects of this AD. We will consider all comments received by the closing date and may amend this AD based on those comments.

We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We will also post a report summarizing each substantive verbal contact we receive about this AD.

Currently, there are no U.S.-registered airplanes. If an affected airplane is imported and placed on the U.S. Register in the future, we provide the following cost estimates to comply with this AD:

According to the manufacturer, some or all of the costs of this AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all known costs in our cost estimate.

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

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

This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to transport category airplanes and associated appliances to the Director of the System Oversight Division.

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

For the reasons discussed above, I certify that this AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

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

Discussion

The European Union Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Community, has issued EASA AD 2018-0157, dated July 24, 2018 (referred to after this as “the MCAI”), to address an unsafe condition for the specified products. The MCAI states:

You may obtain further information by examining the MCAI in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0338.

The FAA reviewed Rolls-Royce Alert Non-Modification Service Bulletin (NMSB) No. RB.211-72-AJ985, Initial Issue, dated April 17, 2018. The NMSB reduces the current declared cyclic life for the affected LPC shafts.

This product has been approved by EASA and is approved for operation in the United States. Pursuant to our bilateral agreement with the European Community, EASA has notified us of the unsafe condition described in the MCAI and service information referenced above. The FAA is issuing this AD because we evaluated all the relevant information provided by EASA and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This AD requires removal of the affected LPC shafts at a reduced cyclic life limit.

No domestic operators use this product. Therefore, the FAA finds good cause that notice and opportunity for prior public comment are unnecessary. In addition, for the reason stated above, the FAA finds that good cause exists for making this amendment effective in less than 30 days.

This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment. However, the FAA invites you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the ADDRESSES section. Include the docket number FAA-2019-0338 and Product Identifier 2019-NE-10-AD at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this final rule. The FAA will consider all comments received by the closing date and may amend this final rule because of those comments.

The FAA will post all comments received, without change, to http://www.regulations.gov, including any personal information you provide. The FAA will also post a report summarizing each substantive verbal contact received about this final rule.

The requirements of the Regulatory Flexibility Act (RFA) do not apply when an agency finds good cause pursuant to 5 U.S.C. 553 to adopt a rule without prior notice and comment. Because FAA has determined that it has good cause to adopt this rule without notice and comment, RFA analysis is not required.

The FAA estimates that this AD affects 0 engines installed on airplanes of U.S. registry.

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

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

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

This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to engines, propellers, and associated appliances to the Manager, Engine and Propeller Standards Branch, Policy and Innovation Division.

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

For the reasons discussed above, the FAA certifies this AD:

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

(2) Will not affect intrastate aviation in Alaska.

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

The FAA learned of 13 IFSD events on certain IAE PW1100G-JM model turbofan engines beginning in October, 2018. After further analysis, IAE determined that the integrated drive generator (IDG) oil pump drive gearshaft assembly in the MGB assembly fractured during engine operation as a result of high-cycle fatigue. In response, IAE subsequently redesigned the IDG oil pump drive gearshaft assembly in the MGB assembly with an axially thicker gear web, a radially thicker gear rim, and an improved tooth tip relief to improve MGB assembly durability and reliability. IAE also redesigned the EEC software to restrict engine operation to certain parameters. This condition, if not addressed, could result in failure of one or more engines, loss of thrust control, and loss of the airplane. The FAA is issuing this AD to address the unsafe condition on these products.

The FAA reviewed PW Service Bulletin (SB) PW1000G-C-72-00-0129-00A-930A-D, Original Issue, dated April 18, 2019, and PW SB PW1000G-C-73-00-0037-00A-930A-D, Original Issue, dated May 28, 2019. PW SB PW1000G-C-72-00-0129-00A-930A-D, Original Issue, dated April 18, 2019, describes procedures for replacing the IDG oil pump drive gearshaft assembly in the MGB assembly. PW SB PW1000G-C-73-00-0037-00A-930A-D, Original Issue, dated May 28, 2019, describes procedures for replacing the EEC software to incorporate FCS 5.0 software.

The FAA is issuing this AD because it evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This AD requires the removal of the MGB assembly and EEC software and the installation parts and software versions eligible for installation.

These actions are interim actions, and the FAA may do additional rulemaking in the future for removal and replacement of the MGB assembly on the engines that do not operate on 180-minute or 120-minute extended operations (ETOPS) flights.

An unsafe condition exists that requires the immediate adoption of this AD without providing an opportunity for public comments prior to adoption. The FAA has found that the risk to the flying public justifies waiving notice and comment prior to adoption of this rule. Multiple IAE PW1100G-JM model turbofan engines experienced MGB assembly failures recently, which resulted in IFSDs. The MGB assemblies must be removed for ETOPS operators within 90 or 120 days after the effective date of this AD, depending on the length of the operator's ETOPS flights, to ensure the MGB assemblies are replaced before fractures develop that could result in the failure of both MGB assemblies and a dual IFSD event. Therefore, the FAA finds good cause that notice and opportunity for prior public comment are impracticable. In addition, for the reason stated above, the FAA finds that good cause exists for making this amendment effective in less than 30 days.

This AD is a final rule that involves requirements affecting flight safety and was not preceded by notice and an opportunity for public comment. However, the FAA invites you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the ADDRESSES section. Include the docket number FAA-2019-0393 and Product Identifier 2019-NE-14-AD at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this final rule. The FAA will consider all comments received by the closing date and may amend this final rule because of those comments.

The FAA will post all comments received, without change, to http://www.regulations.gov, including any personal information you provide. The FAA will also post a report summarizing each substantive verbal contact received about this final rule.

The requirements of the Regulatory Flexibility Act (RFA) do not apply when an agency finds good cause pursuant to 5 U.S.C. 553 to adopt a rule without prior notice and comment. Because the FAA has determined that it has good cause to adopt this rule without notice and comment, RFA analysis is not required.

The FAA estimates that this AD affects 72 engines installed on airplanes of U.S. registry.

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

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

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

This AD is issued in accordance with authority delegated by the Executive Director, Aircraft Certification Service, as authorized by FAA Order 8000.51C. In accordance with that order, issuance of ADs is normally a function of the Compliance and Airworthiness Division, but during this transition period, the Executive Director has delegated the authority to issue ADs applicable to engines, propellers, and associated appliances to the Manager, Engine and Propeller Standards Branch, Policy and Innovation Division.

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

For the reasons discussed above, I certify that this AD:

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

(2) Will not affect intrastate aviation in Alaska.

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

Background

Section 170(a)(1) generally allows an itemized deduction for any “charitable contribution” paid within the taxable year. Section 170(c) defines “charitable contribution” as a “contribution or gift to or for the use of” any entity described in that section. Under section 170(c)(1), such an entity includes a State, a possession of the United States, or any political subdivision of the foregoing, or the District of Columbia. Entities described in section 170(c)(2) include certain corporations, trusts, or community chests, funds, or foundations, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.

To be deductible as a charitable contribution under section 170, a transfer to an entity described in section 170(c) must be a contribution or gift. A contribution or gift for this purpose is a voluntary transfer of money or property without the receipt of adequate consideration, made with charitable intent. In Rev. Rul. 67-246, 1967-2 C.B. 104, the Internal Revenue Service (IRS) addressed the taxpayer's burden of proof for establishing charitable intent when the taxpayer receives a privilege or benefit in conjunction with its contribution. In this revenue ruling, the IRS set out a two-part test for determining whether the taxpayer is entitled to a charitable contribution deduction under these circumstances. First, the taxpayer has the burden of proving that its payment to the charity exceeds the market value of the privileges or other benefits received. Second, the taxpayer must show that it paid the excess with the intention of making a gift.

In United States v. American Bar Endowment, 477 U.S. 105, 116-18 (1986), the Supreme Court elaborated on the test set out in Rev. Rul. 67-246. The Court interpreted the phrase “charitable contribution” in section 170 as it relates to the donor's receipt of consideration, and stated that the “ sine qua non of a charitable contribution is a transfer of money or property without adequate consideration.” Id. at 118. The Court concluded that “[a] payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return,” ( id. at 116), (hereinafter referred to as the “ quid pro quo principle”). The Court recognized that some payments may have a “dual character”—part charitable contribution and part return benefit. Id. at 117. The Court reasoned that in dual character cases “it would not serve the purposes of section 170 to deny a deduction altogether”; therefore, a charitable deduction is allowed, but only to the extent the amount donated or the fair market value of the property transferred by the taxpayer exceeds the fair market value of the benefit received in return, and only if the excess amount was transferred with the intent of making a gift. Id. See also Hernandez v. Commissioner, 490 U.S. 680, 690 (1989) (stating that Congress intended to differentiate between unrequited payments and payments made in return for goods or services). Because this inquiry focuses on the donor's expectation of a benefit, it does not matter whether the donor expects the benefit from the recipient of the payment or transfer, or from a third party. See, for example, Singer Co. v. United States, 449 F.2d 413, 422-23 (Ct. Cl. 1971); cited with approval in American Bar Endowment, 477 U.S. at 116-17.

In Hernandez, 490 U.S. at 690-91, the Supreme Court reaffirmed the quid pro quo standard articulated in American Bar Endowment. Specifically, the Court held that payments to a charity that entitled the taxpayers to receive an identifiable benefit in return for their money were part of a “quintessential quid pro quo exchange,” and thus, were not contributions or gifts within the meaning of section 170. Id. at 691. In making this determination, the Court noted the importance of examining the “external features of a transaction,” thereby “obviating the need for the IRS to conduct imprecise inquiries into the motivations of individual taxpayers.” Id. at 690-91. Thus, both American Bar Endowment and Hernandez indicate that objective considerations guide the determination of whether the taxpayer purposely contributed money or property in excess of the value of any benefit received in return. In addition, these cases continue to recognize the requirement that the taxpayer have charitable intent. See American Bar Endowment, 477 U.S. at 118; Hernandez, 490 U.S. at 691.

Section 164 generally allows an itemized deduction for the payment of certain taxes, including state and local, and foreign, real property taxes; state and local personal property taxes; and state and local, and foreign, income, war profits, and excess profits taxes. Section 164(b)(6), as added by section 11042 of “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (“the Act”), Public Law 115-97, limits an individual's deduction for the aggregate amount of state and local taxes paid during the calendar year to $10,000 ($5,000 in the case of a married individual filing a separate return). This limitation applies to taxable years beginning after December 31, 2017, and before January 1, 2026. This limitation does not apply to foreign taxes described in section 164(a)(3) or to any taxes described in section 164(a)(1) and (2) that are paid and incurred in carrying on a trade or business or an activity described in section 212.

In response to the new limitation under section 164(b)(6), some taxpayers are seeking to pursue tax planning strategies with the goal of avoiding or mitigating the limitation. These strategies rely on state and local tax credit programs under which states provide tax credits in return for contributions by taxpayers to or for the use of certain entities described in section 170(c). The use of state or local tax credits to incentivize charitable giving has become increasingly common over the past 20 years. Moreover, since the enactment of the limitation under section 164(b)(6), states and local governments have created additional programs intended to work around the new limitation on the deduction of state and local taxes.

The new limitation, and the resulting efforts by states and taxpayers to devise alternate means for deducting the disallowed portion of their state and local taxes, has generated increased interest in the question of whether a state or local tax credit should be treated as a return benefit—a quid pro quo —when received in return for making a payment or transfer to an entity described in section 170(c). The Treasury Department and the IRS did not publish formal guidance on this question before the enactment of the limitation under section 164(b)(6). In 2010, however, the IRS Chief Counsel advised that, under certain circumstances, a taxpayer may take a deduction under section 170 for the full amount of a contribution made in exchange for a state tax credit, without subtracting the value of the credit received in return. See CCA 201105010 (Oct. 27, 2010) (“the 2010 CCA”). IRS Chief Counsel has also taken the position in Tax Court litigation that the amount of a state or local tax credit that reduces a tax liability is not an accession to wealth includible in income under section 61 or an amount realized for purposes of section 1001. In these cases, the Tax Court agreed with the Chief Counsel's position. See, for example, Maines v. Commissioner, 144 T.C. 123, 134 (2015); Tempel v. Commissioner, 136 T.C. 341, 351-54 (2011); aff'd sub nom. Esgar Corp. v. Commissioner, 744 F.3d 648 (10th Cir. 2014).

Upon reviewing the authorities under section 170, the Treasury Department and the IRS questioned the reasoning of the 2010 CCA. On June 11, 2018, the Treasury Department and the IRS issued Notice 2018-54, 2018-24 I.R.B. 750, announcing the intention to propose regulations addressing the federal income tax treatment of contributions pursuant to state and local tax credit programs. On August 27, 2018, the proposed regulations (REG-112176-18) were published in the Federal Register (83 FR 43563).

The proposed regulations generally stated that if a taxpayer makes a payment or transfers property to or for the use of an entity listed in section 170(c), and the taxpayer receives or expects to receive a state or local tax credit in return for such payment, the tax credit constitutes a return benefit, or quid pro quo, to the taxpayer and reduces the taxpayer's charitable contribution deduction. The proposed regulations included a separate rule for state and local tax deductions, providing that they do not constitute a quid pro quo unless they exceed the amount of the donor's payment or transfer. The proposed regulations also included an exception under which a state or local tax credit is not treated as a quid pro quo if the credit does not exceed 15 percent of the taxpayer's payment or 15 percent of the fair market value of the property transferred by the taxpayer. Finally, the proposed regulations would amend § 1.642(c)-3 to provide similar rules for payments made for a purpose specified in section 170(c) by a trust or decedent's estate.

The Treasury Department and the IRS received over 7,700 comments responding to the proposed regulations and 25 requests to speak at the public hearing, which was held on November 5, 2018. Copies of written comments received and the list of speakers at the public hearing are available for public inspection at www.regulations.gov or upon request. The comments and revisions are discussed generally in this preamble. After considering the comments received and the concerns expressed at the public hearing, the Treasury Department and the IRS adopt the proposed regulations with certain revisions explained subsequently.

Additionally, in response to concerns raised in comments, the Treasury Department and the IRS have issued other guidance providing safe harbors on certain issues. On December 28, 2018, the Treasury Department and the IRS issued Rev. Proc. 2019-12, 2019-04 I.R.B. 401, providing a safe harbor under section 162 for certain payments made by a C corporation or specified passthrough entity to or for the use of an organization described in section 170(c) if the C corporation or specified passthrough entity receives or expects to receive a state or local tax credit in return for such payment. On June 11, 2019, the Treasury Department and the IRS will have issued Notice 2019-12, 2019-27 I.R.B., providing a safe harbor for payments made by certain individuals. Under the safe harbor, an individual who itemizes deductions and makes a payment to a section 170(c) entity in return for a state or local tax credit may treat the portion of such payment that is or will be disallowed as a charitable contribution deduction under section 170 as a payment of state or local tax for purposes of section 164. This disallowed portion of the payment may be treated as a payment of state or local tax under section 164 when and to the extent an individual applies the state or local tax credit to offset the individual's state or local tax liability. Notice 2019-12 requests comments for purposes of incorporating the safe harbor into anticipated proposed regulations under section 164. In general, the Treasury Department and the IRS will continue to consider comments and provide additional guidance in this area as needed.

The final regulations generally retain the proposed amendments set forth in the proposed regulations, with certain clarifying and technical changes. First, the final regulations retain the general rule that if a taxpayer makes a payment or transfers property to or for the use of an entity described in section 170(c), and the taxpayer receives or expects to receive a state or local tax credit in return for such payment, the tax credit constitutes a return benefit to the taxpayer, or quid pro quo, reducing the taxpayer's charitable contribution deduction.

Second, the Treasury Department and the IRS have concluded that state tax credits and state tax deductions should be treated differently in light of policy and tax administration considerations identified in the preamble of the proposed regulations. Accordingly, the final regulations retain the rule that a taxpayer generally is not required to reduce its charitable contribution deduction on account of its receipt of state or local tax deductions. However, the final regulations also retain the exception to this rule for excess state or local tax deductions. Specifically, the taxpayer must reduce its charitable contribution deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer's payment or the fair market value of property transferred by the taxpayer.

Third, the final regulations retain the 15-percent exception, under which a taxpayer may disregard state and local tax credits as a return benefit where such credits do not exceed 15 percent of the taxpayer's payment. However, the final regulations clarify that this 15-percent exception applies only if the sum of the taxpayer's state and local tax credits received, or expected to be received, does not exceed 15 percent of the taxpayer's payment or 15 percent of the fair market value of the property transferred by the taxpayer.

Fourth, the final regulations reflect the correction of a typographical error in § 1.170A-1(h)(3)(i) of the proposed regulations. The introductory clause should refer to the 15-percent exception set forth in paragraph (h)(3)(vi), not paragraph (h)(3)(v). In addition, the final regulations clarify the terms used to describe entities that may receive charitable contributions under section 170(c). Specifically, the final regulations refer to entities “described” in section 170(c), rather than entities “listed” under section 170(c).

Finally, the final regulations include the proposed amendments to § 1.642(c)-3 providing that the final rules under § 1.170A-1(h)(3) apply to payments made by a trust or decedent's estate in determining its charitable contribution deduction under section 642(c).

Approximately 70 percent of commenters recommended that the Treasury Department and the IRS finalize the proposed regulations without change. Some commenters characterized state and local tax credit programs as tax shelters and explained how taxpayers could use the programs to generate profits. A substantial number of commenters expressed concerns regarding the effect of these programs on public functions, including public education. Many commenters stated that the proposed regulations apply section 170 fairly. Many commenters noted that the proposed regulations applied to donations to organizations fulfilling both private and public purposes and applied to tax credit programs created both before and after the enactment of the Act. Some commenters stated that state tax credit programs are unfair to individuals who cannot afford to make the contributions and receive the benefit of the credits. Some commenters generally supported the proposed regulations, but provided more substantive comments regarding additional issues posed by the proposed regulations and requested additional guidance on those issues, either when finalizing the proposed regulations or in other guidance.

Many commenters wrote that it was improper for the Treasury Department and the IRS to issue regulations under section 170 in response to the enactment of section 164(b)(6). Commenters stated that any regulations must be issued under section 164 because an amendment to section 164 is driving the regulatory change.

The limitation under section 164(b)(6) is the impetus for the Treasury Department's and the IRS's consideration of the tax treatment of contributions made in exchange for state and local tax credits. Prior to the enactment of that limitation, the proper treatment of such contributions was of limited significance from a federal revenue perspective and tax administration perspective and was therefore never addressed in formal guidance. Upon careful review of the issue, the Treasury Department and the IRS have determined that longstanding principles under section 170 should guide the tax treatment of these contributions. Section 170 provides a deduction for taxpayers' gratuitous payments to qualifying entities, not for transfers that result in receipt of valuable economic benefits. In applying section 170 and the quid pro quo principle, the Treasury Department and the IRS do not believe it is appropriate to categorically exempt state or local tax benefits from the normal rules that apply to other benefits received or expected to be received by a taxpayer in exchange for a contribution. The final regulations are consistent with longstanding principles under section 170 and sound tax policy. Therefore, the regulations are issued under section 170, and not section 164.

Commenters expressed differing views of the proposed regulation's requirement that a taxpayer reduce the taxpayer's charitable contribution deduction under section 170 by the total amount of state and local tax credits received or expected to be received. Many commenters agreed with the Treasury Department and the IRS that the quid pro quo principle should be applied to the receipt or expectation of receipt of state and local tax credits. However, some commenters questioned the application and effect of the quid pro quo principle under section 170 and the tax consequences of such application.

The Treasury Department and the IRS have determined that it is appropriate to apply longstanding principles under section 170 that require a taxpayer to reduce the amount treated as a charitable contribution by the value of the return benefit received. As discussed earlier in this preamble and in the preamble of the proposed regulations, the final regulations are consistent with the principle that a “payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.” American Bar Endowment, 477 U.S. at 116. While the Supreme Court has not addressed the specific issue of contributions in exchange for state or local tax credits, the final regulations are a reasonable interpretation of section 170 that accords with the logic of American Bar Endowment and Hernandez. The final regulations are also supported by important tax policy considerations, including the need to prevent revenue loss from the erosion of the limitation under section 164(b)(6). Thus, the final regulations adopt the rule that the amount otherwise deductible as a charitable contribution under section 170 must generally be reduced by the total amount of state and local tax credits received or expected to be received.

Many commenters noted that the proposed regulations reflect a change in the IRS's treatment of charitable contributions that result in state or local tax credits. The commenters pointed to several CCAs issued by IRS Chief Counsel from 2002 to 2010. See, for example, the 2010 CCA (addressing contributions of money or property to governments or charitable entities under several state tax credit programs); CCA 200435001 (July 28, 2004) (reviewing a program issuing state tax credits in return for contributions to certain child care organizations); CCA 200238041 (July 24, 2002) (considering a program issuing tax credits in return for the transfer of conservation easements). The preamble to the proposed regulations noted that, in each of these CCAs, IRS Chief Counsel recognized the complexity of the federal tax law issues involving the tax treatment of the receipt or expectation of receipt of state tax credits, particularly where the tax credits are granted for transfers to section 170(c) entities. The preamble also noted that two of the CCAs declined to provide specific guidance on the availability of the charitable contribution deduction, and suggested the issuance of formal guidance to address this question. Although CCAs are released to the public under section 6110, they are not official rulings or positions of the IRS, and cannot be cited as precedent. See sections 6110(b)(1)(A) and 6110(k)(3).

The Treasury Department and the IRS acknowledge that the proposed and final regulations depart from the conclusion of the 2010 CCA in important respects. As noted in the Background section of this preamble, the 2010 CCA concluded that a taxpayer may take a deduction under section 170 for the full amount of a contribution made in exchange for a state tax credit, without subtracting the value of the credit received in return. The 2010 CCA, however, failed to persuasively explain why state and local tax credits should not count as return benefits for purposes of applying the quid pro quo principle. The 2010 CCA cited cases in which courts had found that a donor's subjective motivation to minimize taxes is not a basis for disallowing a charitable deduction, but these cases did not specifically address whether the value of state or local tax credits should be treated as a quid pro quo that reduces the amount of the deduction. See McLennan v. United States, 24 Cl. Ct. 102,106 n.8 (1991); Skripak v. Commissioner, 84 T.C. 285, 319; Allen v. Commissioner, 92 T.C. 1, 7 (1989). The 2010 CCA also cited a case in which the value of a tax deduction was not treated as income under section 61, but that case did not address the application of the quid pro quo principle under section 170. See Browning v. Commissioner, 109 T.C. 303 (1997). Furthermore, the analysis in the 2010 CCA assumed that after the taxpayer applied the state or local tax credit to reduce the taxpayer's state or local tax liability, the taxpayer would receive a smaller deduction for state and local taxes under section 164. With the enactment of section 164(b)(6), that assumption no longer holds true for the vast majority of taxpayers. The changes in the tax laws reduce the number of taxpayers who will itemize deductions, and for taxpayers who itemize and have state and local tax liabilities above the new limitation, the use of the tax credit would not reduce the deduction for state and local taxes.

In light of the section 164(b)(6) limitation, the Treasury Department and the IRS have specifically considered the application of the quid pro quo principle to state and local tax credit programs. After careful consideration of comments submitted in response to the proposed regulations, the Treasury Department and the IRS have determined that it is appropriate to treat the receipt or the expectation of receipt of state and local tax credits as return benefits. As discussed previously in this preamble, the final regulations are supported by the Supreme Court's interpretation of the term “charitable contribution” under section 170. In American Bar Endowment, 477 U.S. at 118, the Court stated that the “ sine qua non of a charitable contribution is a transfer of money or property without adequate consideration”—that is, without the expectation of a quid pro quo. Thus, the Court held that a “payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.” Id. at 116. The Supreme Court reaffirmed this principle in Hernandez, 490 U.S. at 690-91, and this principle has been consistently applied by the courts in subsequent decisions. See, for example, Rolfs v. Commissioner, 135 T.C. 471 (2010), aff'd, 668 F.3d 888 (7th Cir. 2012) (holding that taxpayers were not entitled to a charitable contribution deduction for the donation of their lake house because they did not show that the market value of the property they donated exceeded the market value of the benefit (demolition services) they received in return); Triumph Mixed Use Investments III, LLC v. Commissioner, T.C. Memo. 2018-65 (holding that value of real property and development credits transferred by taxpayer to city in return for development plan approvals was not deductible under section 170 because taxpayer expected a return benefit); Pollard v. Commissioner, T.C. Memo. 2013-38 (holding that petitioner's granting of conservation easements to the county was part of a quid pro quo exchange for the county's approval of the taxpayer's subdivision exemption request, a substantial benefit to the taxpayer.

This treatment is consistent not only with the purpose of section 170, but also with the section 164(b)(6) limitation. If the Treasury Department and the IRS were to allow taxpayers to claim a full charitable contribution deduction for contributions made in exchange for state tax credits, this treatment would result in significant federal tax revenue losses that would undermine the limitation on the deduction for state and local taxes in section 164(b)(6). Such an approach would enable taxpayers to characterize payments as fully deductible charitable contributions for federal income tax purposes, while using the same payments to satisfy their state tax liabilities. As a result, the final regulations reject the 2010 CCA's conclusion that the contribution deduction does not need to be reduced by the value of the state and local tax credit received or expected to be received.

Commenters also cited recent cases, such as Maines v. Commissioner and Tempel v. Commissioner, to conclude that the receipt of a state or local tax credit is, for federal tax purposes, a reduction or potential reduction in the taxpayer's state or local tax liability and not a payment includible in the taxpayer's gross income. Maines, 144 T.C. at 134 (citing Randall v. Loftsgaarden, 478 U.S. 647, 657 (1986)); Tempel, 136 T.C. at 350; see also Rev. Rul. 79-315, 1979-2 C.B. 27 (Holding (3) (amounts credited against unpaid tax is neither includible in taxpayer's income nor deductible as a state income tax paid)). The analysis for determining whether an item is included in gross income is separate and distinct from the analysis for determining whether a payment or transfer is a deductible contribution under section 170. Section 61(a) provides that gross income “means all income from whatever source derived” unless otherwise provided in Subtitle A, Income Taxes. In contrast, to be deductible as a charitable contribution under section 170, a transfer to an entity described in section 170(c) must be a contribution or gift, without the expectation or receipt of a return benefit. Neither Maines nor Tempel addressed whether a taxpayer's expectation or receipt of a state or local tax credit may reduce a taxpayer's charitable contribution deduction under section 170, and therefore, these cases are not relevant for purposes of interpreting section 170.

Some commenters cited Arizona Christian School Tuition Organization v. Winn, 563 U.S. 125, 142-44 (2011), to support their position that the regulations should permit a full charitable contribution deduction when amounts are contributed to a charitable organization, even if the donor receives tax credits in return. While that case involved the types of contributions affected by the proposed regulations, the Court did not address whether such contributions are deductible under section 170 or whether the contributors received a substantial benefit in exchange for their contributions.

Some commenters pointed out that the proposed regulations failed to fully address the tax consequences of treating tax credits as quid pro quo benefits and suggested that additional guidance is needed. For example, commenters noted that the proposed regulations did not address the tax treatment of the sale, use, or lapse of the credits. In particular, commenters suggested that additional guidance may be needed to clarify application of the rules under sections 61, 164, 1001, and 1012 to the receipt, expectation of receipt, or use of tax credits. The Treasury Department and the IRS agree with commenters that additional guidance is necessary to address these complex issues.

Regarding the treatment of return benefits under section 164, the Treasury Department and the IRS issued Notice 2019-12 on [Month DD], 2019. As discussed previously in this preamble, Notice 2019-12 provides a safe harbor under section 164 for an individual who itemizes deductions and who makes a payment to a section 170(c) entity in return for a state or local tax credit. The Treasury Department and the IRS will continue to consider comments regarding other tax consequences of treating tax credits as quid pro quo benefits and will provide additional guidance as needed.

Some commenters suggested that the proposed regulations should have relied in whole or in part on the substance over form doctrine rather than the quid pro quo principle. Under a substance over form approach, commenters explained, the proposed regulations could treat contributions to funds established by state or local government entities in exchange for tax credits as, in substance, a payment of taxes to those government entities. These commenters stated that by relying on the substance over form doctrine, the proposed regulations could have been more easily tailored to address only those contributions paid to funds established to assist taxpayers in avoiding the limitation on state and local tax deductions. The commenters also stated that a focus on contributions to funds established by state and local government entities would more directly target the potential revenue loss.

The Treasury Department and the IRS have considered the substance over form doctrine in analyzing the proper tax treatment of contributions in exchange for tax credits, but have ultimately decided that, as a general matter, the application of the quid pro quo principle provides a more sound, comprehensive, and administrable approach. While a payment made to a state (or to an entity designated by the state) in exchange for a tax credit might in some circumstances seem similar to a payment of tax under section 164, the analysis raises additional issues and finds less support under other substance over form authorities. Specifically, this approach would result in the significant expansion in the definition of “tax” under section 164, would raise questions involving the proper timing of deductions for such payments, and would result in different treatments for similarly situated taxpayers. Furthermore, even if the substance over form doctrine were applied to treat payments or transfers to certain organizations as a payment of taxes, the proper treatment of these amounts under section 170, including the application of the quid pro quo principle, would continue to be relevant for taxpayers that make payments or transfers to certain charities in return for tax credits. The Treasury Department and the IRS have determined that the tax laws and sound tax policy support the treatment of a state tax credit as a return benefit that reduces the amount of the taxpayer's charitable contribution deduction under section 170, regardless of whether the entity to which the contribution is made is controlled by a state or local government. The quid pro quo principle is applicable to contributions made to all types of donee entities. Section 170(c) provides an expansive list of the types of entities to which a taxpayer may contribute and receive a charitable contribution deduction. This list includes organizations controlled by state or local governments. If a contribution is made to or for the use of any such entity, the contribution may qualify as a charitable contribution, provided it meets all other requirements.

Moreover, a substance over form approach would not fully address concerns raised by commenters regarding state and local tax credit programs. Such programs can be used to generate tax benefits in excess of the amount the taxpayer contributes to the charitable organization, regardless of whether the contribution is made to an entity controlled by a state or local government. Finally, the Treasury Department and the IRS have serious concerns about the practicability of delineating clear and administrable criteria for distinguishing between state and local government entities and section 170(c)(2) organizations that are closely connected to state and local governments.

Some commenters expressed a belief that under current law a quid pro quo received or expected to be received by a taxpayer does not reduce the taxpayer's charitable contribution deduction if the quid pro quo comes from a party that is not the donee. Based on that belief, these commenters concluded that a tax credit from a state or local government should not reduce the charitable contribution deduction for a payment to a section 170(c)(2) organization. At least one commenter recommended that where contributions are made to section 170(c)(2) entities in exchange for tax credits provided by the state or local government, the benefit should be treated as income to the donor.

In support of this position, many commenters referred to § 1.170A-1(h)(1) (payment in exchange for consideration) and § 1.170A-13(f)(6) (defining “in consideration for” as a donee organization providing goods and services in consideration for taxpayer's payment). One commenter expressed the view that the quid pro quo analysis cannot be applied to contributions to charitable organizations other than state or government entities because when a taxpayer makes a contribution to a charity, but receives consideration from a third party such as the state, the transaction cannot be characterized as a purchase. Commenters suggested that the language in the proposed regulations at § 1.170A-1(h)(3)(iii) creating an exception from the “in consideration for” language of § 1.170A-13(f)(6) for state or local tax credits provided by third parties is evidence that the proposed regulations depart from established law. Commenters suggested, as an alternative, that the final regulations set forth a general rule applying quid pro quo principles to benefits a taxpayer receives from any source, regardless of whether the benefits are provided by the donee or a third party. That rule would be applicable in determining if there is any quid pro quo under section 170 in all contexts, not just when a taxpayer receives state or local tax credits.

Section 1.170A-1(h)(1) provides that no part of a payment that a taxpayer makes to or for the use of an organization described in section 170(c) that is in consideration for (as defined in § 1.170A-13(f)(6)) goods or services (as defined in § 1.170A-13(f)(5)) is a contribution or gift within the meaning of section 170(c) unless the taxpayer (i) intends to make a payment in an amount that exceeds the fair market value of the goods or services; and (ii) makes a payment in an amount that exceeds the fair market value of the goods or services. Section 1.170A-1(h)(2) states that the charitable contribution deduction under section 170(a) may not exceed the amount of cash paid or the fair market value of property transferred to an organization over the fair market value of goods or services the organization provides in return. Section 1.170A-13(f)(5) defines goods or services as cash, property, services, benefits, and privileges, and § 1.170A-13(f)(6) provides that a donee provides goods or services in consideration for a taxpayer's payment if, at the time the taxpayer makes a payment to the donee, the taxpayer receives or expects to receive goods or services in exchange for that payment.

The Treasury Department and the IRS acknowledge that the current regulations do not address situations in which the benefits a donor receives or expects to receive come from a third party. While the proposed regulations modify the existing regulations to address the specific case of payments in exchange for tax credits, the Treasury Department and the IRS intend to propose additional regulations setting forth a general rule for all benefits received or expected to be received from third parties, not just tax credits. In the interim, the final regulations regarding tax credits specify an exception to the existing definition of “in consideration for.” However, the application of the quid pro quo principle to benefits received or expected to be received from third parties is consistent with existing law.

In American Bar Endowment and Hernandez, the Supreme Court made clear that a payment is not a charitable contribution if the donor expects to receive a substantial benefit in return. American Bar Endowment, 477 U.S. at 116-17 (1986); Hernandez, 490 U.S. at 691-92. The source of the return benefit is immaterial from the donor's financial perspective. The quid pro quo principle is thus equally applicable regardless of whether the donor expects to receive the benefit from the donee or from a third party. In either case, the donor's payment is not a charitable contribution or gift to the extent the donor expects a substantial benefit in return.

The Supreme Court in American Bar Endowment and Hernandez did not directly address the question of third party benefits because the return benefits at issue in those cases were provided by the donees. The Court derived its quid pro quo principle in part from a lower court decision and a revenue ruling that had addressed the question. See American Bar Endowment, 477 U.S. at 117 (citing Singer, 449 F.2d 413 (Ct. Cl. 1971) and Rev. Rul. 67-246); Hernandez, 490 U.S. at 691 (citing Singer ). In Singer v. United States, the appellate division of the Court of Claims (the predecessor to the Federal Circuit) held that a sewing machine company was not eligible for a charitable contribution deduction for selling sewing machines to schools at a discount because the company “expected a return in the nature of future increased sales” to students. Singer, 449 F.2d at 423-24. In so holding, the court expressly rejected the company's argument that this expected benefit should be ignored because it came from the students ( i.e., third parties), rather than directly from the schools. Id. at 422-23. The court stated, “Obviously, we cannot agree with plaintiff's distinction.” Id. Similarly, in Rev. Rul. 67-246, Example 11, a local department store agreed to award a transistor radio, worth $15, to each person who contributed $50 or more to a specific charity. The ruling concluded that if a taxpayer received a $15 radio as a result of a $100 payment to the charity, only $85 qualified as a charitable contribution deduction. It did not matter that the donor received the $15 radio from the department store, a third party, rather than from the charity. This understanding guides the IRS's audit practices. See IRS Conservation Easement Audit Techniques Guide (Rev. Jan. 24, 2018, p. 16) (stating that a “quid pro quo contribution is a transfer of money or property partly in exchange for goods or services in return from the charity or a third party”, and “a quid pro quo may be in the form of an indirect benefit from a third party”).

The Treasury Department and the IRS conclude that, under the most logical and consistent application of existing law, a charitable contribution deduction is reduced by any consideration a donor receives or expects to receive, regardless of whether the donee is the party from whom consideration is received or expected to be received. To conclude otherwise would provide incentives for taxpayers, charitable organizations, states, and localities to structure transactions involving third party benefits to bypass the requirements to reduce contribution deductions by the value of benefits received or expected to be received. Accordingly, the Treasury Department and the IRS do not adopt the recommendation of the commenters to limit application of the final regulations to circumstances in which a tax credit is provided by the donee, and as noted previously, the Treasury Department and the IRS intend to propose amendments to the existing regulations to make clear that the quid pro quo principle applies regardless of whether the party providing the quid pro quo is the donee.

A number of commenters stated that the section 164(b)(6) limitation favors low-tax states, is a form of double taxation, or infringes on states' rights. These comments regarding the statutory limitation itself are beyond the scope of the proposed regulations.

A large number of comments from conservation easement donors, land trusts, and government entities involved in conservation easement donations were specific to conservation easements. Conservation easement comments that relate to the applicability date of the regulations are addressed under the “Applicability Dates” heading later in this section. 1

One group of comments relating to conservation easements expressed the view that donations of conservation easements to land trusts should be excluded from the rules in the final regulations because of the importance of land conservation, because Congress has provided extra incentives for contributions of conservation easements over the years, and because easement donations are not intended as section 164(b)(6) workarounds. The Treasury Department and the IRS recognize that conservation easements provide unique and perpetual benefits that are accorded favorable tax treatment by state governments as well as by Congress. Specifically, Congress treats deductions for conservation easement contributions more favorably than other charitable contribution deductions in some contexts, such as the percentage limitation and carryover rules.

The final regulations do not adopt this suggestion. These regulations are based on longstanding rules of general applicability relating to quid pro quo and charitable intent, and there is no authority under section 170 that would void the application of the quid pro quo principle and charitable intent doctrine to donors of conservation easements.

A second group of comments state that determining the value of a conservation easement tax credit may be difficult for donors and also for donees who prepare contemporaneous written acknowledgments. In at least one state, easement donors receive a property tax credit for each of the years that they continue to own the underlying property. Commenters stated that it is unknowable at the time of the donation how many years the donor would be eligible for the property tax credit or how to value a right to a tax credit that could continue many years into the future. Also, an expected credit may not necessarily be granted, may be granted in a subsequent tax year, may be subsequently reduced, or might never be used or transferred. The Treasury Department and the IRS understand that in some cases taxpayers may never receive the maximum credit. Nevertheless, it is well settled that an expectation of a return benefit negates the requisite charitable intent, and the regulations apply that rule. The final regulations at § 1.170A-1(h)(3)(iv) state that the reduction in the amount treated as a charitable contribution is an amount equal to the maximum credit allowable that corresponds to the amount of the taxpayer's payment or transfer. If there is no clear maximum credit allowable, taxpayers may reduce their charitable contribution deduction using a good faith estimate of the value of the credit.

A third group of comments noted that conservation easement donors who sell their credit should get basis in the credit equal to the amount of the reduction in the charitable contribution deduction. A number of states have conservation easement tax credit programs that allow the donor to sell the credit. Under existing case law, an easement donor has no gain or loss on receipt of a credit but recognizes capital gain upon its sale. See, for example, Tempel v. Commissioner, 136 T.C. at 354-55 (concluding that conservation easement donors had no basis in the tax credits that they sold). The Treasury Department and the IRS agree with this comment that this basis issue warrants additional consideration. Although the basis issue is beyond the scope of these regulations, the Treasury Department and the IRS intend to consider this issue for future guidance.

A number of commenters recommended that the Treasury Department and the IRS revise how the proposed regulations apply to taxpayers whose state and local tax deduction is at or below the $10,000 limit in section 164(b)(6). Under the proposed regulations, a taxpayer who itemizes and is not subject to the alternative minimum tax (AMT), and whose state or local tax deduction is at or below $10,000, may have adverse federal tax consequences. This taxpayer may have made a nondeductible contribution (in exchange for state or local tax credits) in lieu of a fully or partially deductible payment of state or local tax. Accordingly, some commenters recommended that taxpayers whose state and local tax liabilities fall at or below the $10,000 limit be allowed to deduct contributions made in exchange for state or local tax credits up to $10,000. Some commenters recommended allowing these taxpayers to deduct the contributions only when the taxpayers' contributions are to the state (as opposed to an entity described in section 170(c)(2)). Other commenters recommended allowing the deduction only when the taxpayers' contributions are to a state or local tax credit program that was in existence as of December 22, 2017, the date of the enactment of the Act. Many commenters cited case law, legislative intent, and general principles of fairness. Several commenters suggested further study or exceptions for taxpayers with state and local tax liabilities below the $10,000 limit. These commenters were concerned that the impact to these taxpayers may be greater than the Treasury Department forecasted. After considering these comments, the Treasury Department and the IRS published a notice of intent to propose regulations, Notice 2019-12, providing a safe harbor, as discussed previously in this preamble.

Some commenters stated that business taxpayers are treated more favorably than others because business taxpayers may be able to claim deductions for payments to section 170(c) entities as ordinary and necessary business expenses under section 162. These commenters are correct that taxpayers engaged in a trade or business may be permitted a section 162 deduction for amounts paid to charitable organizations in some circumstances. See, for example, Marquis v. Commissioner, 49 T.C. 695 (1968) (taxpayer's cash payments to clients that were charitable entities furthered her travel agency business and were therefore not subject to the limitations of section 170). However, some commenters raised questions regarding whether a payment for a tax credit would always bear a direct relationship to a taxpayer's business.

A few commenters opined that the proposed regulations further escalate the disparate treatment of charitable contributions by individual wage earners as compared to similar contributions by passthrough entities and their members who are individuals. These commenters noted that the limitation imposed by section 164(b)(6) does not apply to state or local real or personal property taxes paid or accrued in carrying on a trade or business or an activity described in section 212. As a result of this exception to the limitation under section 164 and the availability of business expense deductions under section 162, commenters stated that a taxpayer-owner of a passthrough entity will continue to receive the benefits of an allocable share of tax credits received by the passthrough entity. In addition, commenters pointed out that several states have enacted or considered enacting legislation that shifts state taxes from individuals to passthrough entities and entitles the owners to claim a credit on the owner's state tax return for the amount of the owner's distributive share of taxes paid by the passthrough entity.

The proposed and final regulations apply to charitable contributions by business taxpayers. Specifically, a business taxpayer, like an individual taxpayer, must reduce the charitable contribution deduction by the amount of any return benefit received or expected to be received. Thus, the commenters' concerns do not result from disparate treatment of business taxpayers under section 170, but rather result from the application of sections 162 and 164, including application of the limitation under section 164(b)(6) to passthrough entities and their owners. The Treasury Department and the IRS recognize that the final regulations may raise additional questions regarding the application of sections 162 and 164 to business entities that make payments to section 170(c) entities and that receive or expect to receive state or local tax credits in return for such payments. In response to these questions, the Treasury Department and the IRS published Rev. Proc. 2019-12, as previously discussed in this preamble, which provides safe harbors under section 162 for certain payments made by C corporations or specified passthrough entities. Neither the final regulations nor the safe harbors in the revenue procedure otherwise affect the availability of a business expense deduction under section 162 for payments that are ordinary and necessary expenses incurred in carrying on a trade or business. The Treasury Department and the IRS will continue to study comments involving the effect of the final regulation on various business entities and will provide additional guidance as needed.

If a taxpayer properly declines receipt of a benefit, the taxpayer will not be treated as receiving or expecting to receive the benefit, and the charitable contribution deduction will not be reduced by the amount of the benefit. See Rev. Rul. 67-246, 1967-2 C.B. 104, 108, Example 3 (taxpayer who wants to support charity, but does not intend to use the ticket offered in return for his donation, may refuse to accept the ticket and receive a charitable contribution deduction unreduced by the value of the ticket). A number of commenters asked for guidance on how a taxpayer may decline receipt of state or local tax credits. Although not specifically stated in the regulations, taxpayers who prefer to claim an unreduced charitable contribution deduction have the option of not applying for a state or local income tax credit where such an application is required in order to receive the credit. Alternatively, taxpayers may apply for a lesser amount of the credit. The Treasury Department and the IRS request comments as to how taxpayers may decline state or local tax credits in other situations.

The proposed regulations include an exception under which a taxpayer may disregard a state or local tax credit if the credit does not exceed 15 percent of the taxpayer's payment or 15 percent of the fair market value of the property transferred by the taxpayer. A number of commenters stated that the 15-percent exception results in an unfair “cliff effect” because credits above 15 percent do not receive the benefit of this exception. The commenters note that this unfairness is most significant where credits only exceed 15 percent by a small amount. A number of commenters suggested that an amount equal to the first 15 percent of all credits should be disregarded. Commenters also noted that the proposed regulations penalized donors of smaller amounts because 15 percent of a large payment results in a much larger amount covered by the exception than 15 percent of a small payment. Commenters also noted that a 15-percent exception would typically permit a deduction for an amount that is more than the amount treated as de minimis under the rules of section 170. See, for example, Rev. Proc. 90-12, 1990-1 C.B. 471 (providing guidelines for determining whether the provision of small items or benefits of token value in return for a contribution have insubstantial value such that the contribution is fully deductible under section 170). On the other hand, some commenters requested that a higher percentage be treated as de minimis.

The suggestion to disregard an amount equal to 15 percent of the donor's transfer or otherwise change the 15-percent exception was not adopted. The 15-percent exception was designed to provide consistent treatment for state or local tax deductions and state or local tax credits that provide a benefit that is generally equivalent to a deduction. The 15-percent exception is intended to reflect the combined benefit of state and local tax deductions, that is, the combined top marginal state and local tax rates, which the Treasury Department and the IRS understand currently do not exceed 15 percent. The Treasury Department and the IRS considered tailoring this exception to the combined marginal state and local tax rates applicable for a taxpayer's particular jurisdiction. The Treasury Department and the IRS determined that using a single rate sufficient to cover the highest existing marginal rates would avoid the complexity and burden that would arise if a taxpayer had to compute the sum of the taxpayer's state and local marginal tax rates to determine whether the tax credit received exceeded the benefit that the taxpayer would have received as a deduction. The exception ensures that taxpayers in states offering state tax deductions and taxpayers in states offering economically equivalent credits are treated similarly. This exception is not intended to be an application of the de minimis standard for insubstantial or inconsequential benefits under Rev. Proc. 90-12, 1990-1 C.B. 471.

Some commenters expressed concern that the proposed regulations do not apply the quid pro quo analysis to state and local tax deductions. These concerns reflect the view that the quid pro quo analysis under section 170 is equally applicable to tax benefits in the form of state or local tax deductions as it is to state or local tax credits. As noted in the preamble to the proposed regulations, the Treasury Department and the IRS believe that considerations of tax policy and sound tax administration do not support the application of quid pro quo principles in the case of dollar-for-dollar state or local tax deductions. The economic benefit of a dollar-for-dollar deduction is limited because it is based on a taxpayer's state and local marginal rate. Therefore, the risk of a taxpayer using such deductions to circumvent section 164(b)(6), and the potential revenue loss, is comparatively low. This is true even in high tax states. In addition, if state and local tax deductions for charitable contributions were treated as return benefits, it would make the accurate calculation of federal taxes and state and local taxes difficult for both taxpayers and the IRS. For example, the value of a deduction would vary based on the taxpayer's marginal state and local tax rates, making for more complex computations and adding to administrative and taxpayer burden. Also, many states use federal taxable income as the starting point for computing state taxable income, and the amount reported as a charitable contribution deduction on a taxpayer's federal tax return is typically the amount of the deduction on the taxpayer's state tax return. Allowing an unreduced federal charitable contribution deduction even though a state provides a similar deduction in measuring state taxable income would avoid administrative complications. Accordingly, a dollar-for-dollar state or local tax deduction does not raise the same concerns as a state or local tax credit, and it would produce unique complications if it were to be subject to the quid pro quo principle. Thus, the final regulations allow taxpayers to calculate their federal tax deductions without regard to their dollar-for-dollar state and local tax deductions. However, the Treasury Department and the IRS are concerned that the granting of state or local tax deductions in excess of the amounts paid or the fair market value of property transferred to an entity described in section 170(c) could result in more substantial economic benefits to the taxpayer and should be treated as a quid pro quo. Accordingly, the final regulations also retain the exception to general rule for excess state or local tax deductions.

Some commenters also contended that the proposed regulations disfavor state and local governments relative to the federal government. These commenters noted that the proposed regulations do not require a taxpayer to reduce the taxpayer's charitable contribution deduction by the value of the federal tax deduction. However, as discussed in the prior paragraph, the final regulations do not treat state charitable contribution deductions any differently than federal charitable contribution deductions. Under the final regulations neither state nor federal charitable contribution deductions are treated as return benefits in determining the taxpayer's charitable contribution deduction under section 170. The economic benefit of a state or federal charitable contribution deduction is limited because both are based on a taxpayer's marginal tax rate. In addition, there is minimal risk that a taxpayer will use either of these deductions to circumvent section 164(b)(6), and the potential revenue loss, in both cases, is comparatively low. Furthermore, unlike state or local governments, Congress would not be motivated to enact a provision enabling an excess charitable contribution to circumvent its other federal tax laws. Thus, the final regulations specifically address the workarounds stemming from taxpayer's use of state and local tax credit programs, but continue to provide parallel treatment of both federal and state charitable contributions deductions.

A small number of commenters expressed the view that the proposed regulations favor payments to foreign charities. Charitable contributions made to foreign organizations generally are not deductible for federal income tax purposes. See section 170(c)(2). Moreover, in the limited situations where these deductions are allowed, taxpayers are treated as if they are making such contributions to entities that are organized in the United States, and accordingly, such contributions would be subject to the rules and regulations under section 170. As a result, while tax credits provided by foreign governments for contributions to foreign charities are outside the scope of the final regulation, if the taxpayer is seeking to deduct such charitable contributions under section 170, the quid pro quo principle set out under section 170 would be equally applicable.

Commenters expressed concerns about the challenges for taxpayers and donees in determining the value of a state or local tax credit. Under the proposed regulations, a taxpayer needs to know the “maximum credit allowable” that corresponds to the amount of the taxpayer's transfer to the donee. This amount would typically be the stated amount of the credit, and unless the 15-percent exception applies, the taxpayer's charitable contribution deduction would generally be reduced by this amount. However, if the credit does not have a clear maximum credit allowable, a taxpayer's good faith estimate of the value will satisfy the rules of the final regulations.

Commenters have also expressed concerns about substantiation of a charitable contribution when the donee does not know whether the donor expects to receive a state or local tax credit. If a donee is not the entity providing the credit, the contemporaneous written acknowledgment rules do not require that the amount of the credit be reported in the acknowledgment. See section 170(f)(8) (stating that a contemporaneous written acknowledgment includes a statement of whether the donee provided goods and services and if so, includes a good faith estimate of the value of those goods or services). Further, under § 1.170A-13(f)(5), goods and services include benefits.

One commenter asked about compliance with section 6115, which generally requires donee disclosures in connection with quid pro quo contributions (as defined in section 6115(b)), and specifically requires section 170(c) organizations (but not section 170(c)(1) entities) to provide donors with a good faith estimate of the value of goods or services they provide. If a section 170(c)(2) organization is not providing the state or local tax credit to the donor, section 6115 does not apply. Accordingly, there is no section 6115 requirement for section 170(c)(2) organizations to disclose information about a tax credit provided by a state or local government.

Some commenters stated that the Regulatory Flexibility Act (5 U.S.C. chapter 6) (“RFA”) applies to the regulations because small tax-exempt organizations and small governmental jurisdictions would be affected by the proposed regulations due to a potential reduction in contributions. These commenters recommended that the final regulations contain a RFA analysis. Other commenters noted that some donors may be small entities affected by the regulation. The Treasury Department and the IRS do not agree that a RFA analysis is required. The organizations and small governmental jurisdictions that receive deductible contributions as part of a state or local tax credit program are not subject to the proposed regulations, and any potential effect on contributions to these organizations is an indirect effect of the regulation. The RFA does not apply to entities indirectly affected by the regulation. See, for example, Cement Kiln Recycling Coalition v. EPA, 255 F.3d 855, 868 (D.C. Cir. 2001); Mid-Tax Elec. Coop v. FERC, 773 F.2d 327 (D.C. Cir. 1985). For small entities that are donors, and potentially subject to the regulations, the regulations do not impose more than nominal costs and do not impose a collection of information requirement.

A large number of commenters expressed concern that the proposed regulations would result in an overall decline in charitable giving. Many of the commenters expressed concern about the impact of the regulations on particular charities or types of charities. A large number of comments were received on tax credit programs that encourage contributions to organizations that help fund public and private school programs. A number of commenters were concerned that the proposed regulations would decrease education opportunities for impoverished and special needs children in grades K-12. Some commenters suggested that the final regulations apply only to contributions to governments or government entities and not to private school organizations, while others suggested postponing the applicability date of final regulations to allow time to study the effects on scholarship granting organizations. A few commenters expressed a concern that the proposed regulations may result in a decrease in donations to scholarship granting organizations and increase the burden on public schools, given that private schools may not be able to provide as many scholarships to low-income students. Other commenters expressed concern that some state or local tax credit programs unfairly incentivize contributions to private organizations, thus diverting resources from public functions, such as public schools.

Other commenters recommended that donations of conservation easements should be exempted from the rules in the regulations. Commenters representing land trusts expressed concern that the regulations would reduce the number of donated conservation easements, thereby reducing the ability of the federal government, state and local governments, and land trusts to conserve in perpetuity significant natural lands, water, and habitats. A commenter noted the needs of struggling farmers and other landowners who might not be able to afford to donate a conservation easement without a state tax credit. Some commenters observed that because of the significance of land conservation, Congress has already provided special incentives for conservation easement donations under section 170, and the commenters suggested the Treasury Department and the IRS follow Congress's lead by making an exception in the final regulations for donations of conservation easements.

Commenters from health care organizations, such as rural hospital foundations, expressed concern that the proposed regulations would reduce charitable giving for health care, reducing the ability of health care organizations to offset rising medical costs and declining patient revenue. Other commenters expressed concerns that the proposed regulations would undermine state programs that offer tax credits for contributions supporting a variety of local initiatives, including public arts, education, health, human services, environment, enterprise zones, and community betterment. Other commenters were concerned about the effect of the regulations on child care programs. A few commenters opined that the proposed regulations would further strain state and local finances that are already adversely impacted by the new limitation on deductions of state or local taxes. The commenters stated that the new limitation would potentially force states and localities to confront difficult choices regarding tax rates and public services. In addition, several commenters suggested that the Treasury Department and the IRS adopt a facts-and-circumstances test to differentiate between tax credit programs that are consistent with state and federal policy goals and those that are designed for tax avoidance.

The Treasury Department and the IRS recognize the importance of the federal charitable contribution deduction, as well as state tax credit programs, in encouraging charitable giving. The final regulations continue to allow a charitable contribution deduction for the portion of a taxpayer's charitable contribution that is a gratuitous transfer, and the regulations also leave unchanged the state-level benefit provided by state tax credits. In combination with Notice 2019-12, the regulations will not alter the charitable giving incentives for the overwhelming majority of taxpayers as compared to the incentives under federal tax law prior to enactment of section 164(b)(6). As discussed previously in this preamble, Notice 2019-12 provides a safe harbor for certain individual taxpayers who itemize deductions and who make payments to a section 170(c) entity in return for a state or local tax credit. Under the safe harbor, these individuals may treat the portion of such payment that is or will be disallowed as a charitable contribution deduction under section 170 as a payment of state or local tax for purposes of section 164. Notice 2019-12 will mitigate the impact of the final regulations on state or local tax credit programs that incentivize giving to all section 170(c) entities, including entities supporting educational scholarship programs, child care, public health, and other important goals. Thus, the impact on taxpayers' choices will be small.

The final regulations apply longstanding principles regarding charitable intent and quid pro quo, and therefore treat all contributions to entities described in section 170(c) similarly. Those principles apply equally to all charitable contributions, regardless of the charitable purpose or type of donee. Accordingly, the final regulations do not adopt a facts-and-circumstances test or a test based on the type of section 170(c) organization.

A large number of commenters suggested that the final regulations exempt tax credit programs that were established before the date of the enactment of section 164(b)(6). The commenters noted that the pre-existing programs could not have been intended as section 164(b)(6) workarounds. Other commenters explained that many taxpayers made payments or transfers to existing programs in anticipation of receiving state or local tax credits as well as deductions, and the regulations would cause financial hardships. Further, some commenters expressed an opinion that the regulations are politically motivated, allegedly targeting states and localities with high tax rates. Commenters also stated that exempting pre-existing programs would not lead to an unanticipated revenue loss because revenue implications were known when the Act was enacted.

The regulations are based on longstanding federal tax law principles that apply equally to all taxpayers. To ensure fair and consistent treatment, the final regulations do not distinguish between taxpayers who make transfers to state and local tax credit programs enacted after the Act and those who make transfers to tax credit programs existing prior to the enactment of the Act. Neither the intent of the section 170(c) organization, nor the date of enactment of a particular state tax credit program, are relevant to the application of the quid pro quo principle. Accordingly, the final regulations apply the rules equally to all state and local tax credit programs, and the final regulations do not adopt commenter recommendations to create exceptions to the general rule for various types of state tax credit programs.

Regarding the comment on revenue implications for pre-existing programs, state and local governments have the ability to change the parameters, including the aggregate dollar amount of credits, of these programs. In addition, as noted previously, some states and taxpayers have pursued tax planning strategies through the use of pre-existing state or local tax credit programs that would have the effect of allowing taxpayers to deduct their payments of state and local taxes in excess of the limitation under section 164(b)(6). These strategies would increase the revenue loss to the federal government beyond estimates when the Act was enacted.

A number of commenters requested a delayed applicability date, or in the alternative, a phased-in implementation of the proposed regulations. The majority of these commenters requested an applicability date of January 1, 2019. Others suggested dates of up to five years after the enactment of the Act, and still others did not propose a specific date. Some commenters requested a delayed applicability date with respect to all tax credit programs, while others requested a delayed applicability date for only certain tax credit programs.

Many commenters requesting a delayed applicability date expressed concern about the adverse impact on state scholarship tax credit programs. Some commenters noted that a phased-in implementation or delayed applicability date may minimize uncertainty for students. Commenters also described the application process for certain state tax credit programs, requesting a delayed applicability date of October 31, 2018, or December 31, 2018, to ensure that states would have sufficient time to inform applicants as to whether their applications were accepted, and to provide applicants with sufficient time to make contributions prior to the date of applicability of the proposed regulations.

Some commenters requested a delayed applicability date of January 1, 2019 or 2020, for conservation easement donations. These commenters stated that donations of conservation easements are unique in that they are time-consuming and costly for donors to plan for and finalize. For example, a conservation easement donor may have to expend tens of thousands of dollars to hire an appraiser, an attorney, a surveyor, and in some jurisdictions, pay an application fee. Also, it takes many months, sometimes more than a year, for the donor to take all the necessary steps to contribute an easement that is deductible under section 170(h) and also creditable under state law, and many easements are donated at the end of the calendar year. The commenters stated that the mid-year applicability date in the proposed regulations has created complexity for taxpayers.

These suggestions were not adopted. The Treasury Department and the IRS continue to believe that the proposed applicability date of August 27, 2018, provides maximum certainty for taxpayers making contributions in exchange for state and local tax credits and minimizes revenue loss. If the proposed applicability date had not been contemporaneous with the proposed regulations, the Treasury Department and the IRS believe that taxpayers would have engaged in significant tax planning in advance of the regulations being finalized, resulting in a significant loss of revenue. Additionally, Notice 2018-54, released May 23, 2018, gave taxpayers timely notice that formal guidance was forthcoming. It would be inequitable to revise the applicability date at this point, as some taxpayers have made decisions regarding their charitable contributions based on the applicability date in the proposed regulations. Finally, any delay in applying the rules of the final regulation would potentially undermine the purposes of the limitation in section 164(b)(6).

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has been designated as subject to review under Executive Order 12866 (E.O. 12866) pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. OMB has determined that the rule is economically significant and therefore subject to review under section 1(c) of the Memorandum of Agreement (MOA). Elsewhere in the Special Analyses, the economic effects of the rule are analyzed in conjunction with Notice 2019-12, which provides a safe harbor that taxpayers may immediately rely upon and that likely diminishes the effects of the rule. OMB has made its determination based only on the economic effects of the rule. This rule is a regulatory action under Executive Order 13771.

The following analysis provides further detail regarding the anticipated impacts of the rule. Part I explains the need for the rule. Part II specifies the baseline for the economic analysis. Part III summarizes the economic effects of the rulemaking, relative to this baseline. Part IV provides illustrative scenarios. Part IV.A describes the tax effects of charitable contributions prior to enactment of the statutory limitation on deductions for state and local taxes under section 164(b)(6) (the “SALT limitation”) in the Act. Part IV.B provides examples comparing the tax effects of charitable contributions after enactment of the SALT limitation, but absent the rule (the baseline) to the tax effects under the rule and notice. Finally, Part V provides a qualitative assessment of the potential costs and benefits of the rule and notice compared to the baseline.

This regulation provides guidance on the deductibility of charitable contributions when a taxpayer receives or expects to receive a corresponding state or local tax credit. The regulation is intended to clarify the relationship between the federal charitable contribution deduction under section 170 and the recently-enacted SALT limitation. Compelling policy considerations reinforce the interpretation and application of section 170 in this context. Disregarding the value of state and local tax credits received or expected to be received in return for charitable contributions would precipitate revenue losses that would undermine the limitation on the deduction for state and local taxes adopted by Congress under the Act.

In this regard, the Treasury Department and the IRS note that the Joint Committee on Taxation (JCT) estimated that the limitation on state and local tax deductions along with certain other reforms of itemized deductions would raise $668 billion over ten years. See Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for H.R. 1, The `Tax Cuts and Jobs Act,' ” JCX-67-17, December 18, 2017, at https://www.jct.gov/publications.html?func=startdown&id=5053. A substantial amount of this revenue would be lost if state tax benefits received in exchange for charitable contributions were ignored in determining the charitable contribution deduction. This estimate is not a revenue estimate of the rule, in part because it includes other reforms of itemized deductions but does not reflect certain other provisions of the Act. In addition, this does not represent an estimate of the non-revenue economic effects of the rule. Still, the JCT estimate provides a rough upper bound of the potential revenue loss and individual contribution choices at stake in this rulemaking.

Prior to the proposed and final regulation, the Treasury Department and the IRS had not issued formal guidance on the deductibility of contributions to entities described in section 170(c) that give rise to state or local tax credits. There was also no guidance, aside from Notice 2018-54, addressing the interaction between section 170 and the newly enacted SALT limitation. As a result, there was a degree of taxpayer uncertainty as to whether state and local tax credits were a return benefit that reduces a taxpayer's charitable contribution deduction, and absent further guidance, taxpayers would likely have taken different filing positions. For informational and analytical purposes, however, this analysis assumes as a baseline that state and local tax credits are generally not treated as a return benefit or consideration and therefore do not reduce the taxpayer's charitable contribution deduction under section 170(a). The illustrative scenarios presented below make use of alternative baseline scenarios to provide clarity on the incremental impacts arising out of the rule and notices.

Section 2 of the MOA stipulates that tax regulations that are likely to have a non-revenue effect on the economy of $100 million or more (identified in section 1(c) of the MOA) will be subject to the analytical requirements applicable to significant regulations under section 6(a)(3)(B) of E.O. 12866, as well as the additional requirements applicable to economically significant regulations under section 6(a)(3)(C) of E.O. 12866. Those requirements entail an assessment of potential costs and benefits of significant regulatory actions. Section 6(a)(3)(C) of E.O. 12866 also states that to the extent feasible, quantitative assessments including the underlying analyses for a non-inclusive list of factors shall be provided for the costs and benefits of rules that have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy or certain aspects of the economy.

At the proposed rule stage, the Treasury Department and the IRS determined that the proposed rulemaking would not result in costs, benefits, or non-revenue transfers in excess of $100 million per year, and thus would not be economically significant. However, the Treasury Department and the IRS acknowledge that there is limited quantitative data available for purposes of evaluating economic effects. Given the level of public interest and engagement, and possible economic and/or behavioral impact, including to individuals' contribution choices, beyond what can be reasonably anticipated with quantitative methods and available data, the final rule has been designated by OMB as economically significant, and it is therefore subject to the analytical requirements for an economically significant rule.

The Treasury Department and the IRS note, however, that the non-revenue impacts of the final rule could be below the economically significant threshold, especially when the potential effects are considered in conjunction with Notice 2019-12, which is to be issued with the final rule. The requirements in the Notice have not been finalized or incorporated into this final rulemaking, but as noted earlier in this preamble, the Treasury Department and the IRS anticipate issuing a proposed rule formalizing the guidance in the Notice shortly after this final rule is issued.

The Treasury Department and the IRS expect that the main effect of this rulemaking with Notice 2019-12 would be to reduce the incentive for individual taxpayers to reallocate state and local taxes from general public funds to funds designated for specific public purposes, solely to generate a charitable gift for federal tax purposes. These transfers from one public fund to another would not be substantive in nature and therefore are not anticipated to generate real economic effects. The rulemaking with Notice 2019-12 would also increase compliance and administrative costs for some taxpayers and charitable entities but decrease them for others. As discussed in Part V of the Special Analyses, the Treasury Department and the IRS expect these effects are likely small and, on net, expect a reduction in compliance burdens (because fewer transactions performed solely for tax avoidance will be undertaken).

The rulemaking with Notice 2019-12 may also marginally reduce the incentive to make contributions to charitable organizations that result in state and local tax credits, which may have the effect of reducing aggregate contributions. But the Treasury Department and the IRS expect this effect to be small. For example, for an individual taxpayer who claims itemized deductions on a Federal income tax return, has more than $10,000 of state and local tax liability, and has a Federal marginal tax rate of 24%, a $1,000 contribution to an organization described in section 170(c) that gives rise to a dollar-for-dollar state tax credit in exchange for the contribution yields a combined $1,240 of tax benefits under the baseline ($240 from the deduction under section 170(a) and $1,000 from the state tax credit). Under the rulemaking with Notice 2019-12, the same $1,000 contribution yields only $1,000 in tax benefits. A substantial incentive to give to the organization still exists (as the cost of giving is $0), though that incentive is reduced because of the rulemaking.

In addition, the direct incentive to make contributions to organizations that do not give rise to state or local tax credits is unchanged by the rulemaking with Notice 2019-12. The reduction in the relative benefit of contributing to organizations that result in state or local credits might induce some taxpayers to contribute to other organizations instead. However, this effect may be modest because the tax benefit of donating to an organization eligible for a large state tax or local credit is still greater than the benefit of donating to another charitable organization. (See column A versus column B for each example in Table 1.) Moreover, transfers between similar charitable organizations (or between the state and a charitable organization generating a state or local tax credit) might have little or no effect on the ultimate beneficiaries of the charitable organizations or on consumers of public goods.

As noted earlier, E.O. 12866 calls for quantitative analysis to the extent feasible. One commenter to the proposed regulations also stated that the analyses should have included quantitative estimates of the costs and benefits of the rule, including estimates of the potential size of state and local tax credits, federal revenue losses, and efficiency losses. The commenter further stated that without quantitative estimates it is not known “whether the potential problem is significant enough to justify this change in tax regulations.”

The Treasury Department and the IRS provide in this Special Analyses an economic analysis, including to the extent feasible, quantitative estimates that offer context regarding the scope of possible impacts arising out of these final regulations. In particular the Treasury Department and the IRS provide examples of how different types of taxpayers would or would not be affected by this rulemaking as well as estimates of the shares of taxpayers potentially affected by the rulemaking with Notice 2019-12. However, because taxpayers do not report whether a charitable donation has given rise to a state or local tax credit, the extent to which states would create new tax credit programs and taxpayers would make contributions to such programs under the baseline or regulations is uncertain, and the extent to which the welfare of the ultimate beneficiaries of such charitable contributions or state spending is uncertain, the Treasury Department and the IRS have not quantified the non-revenue economic effects of the rule.

For the following illustrative scenarios, assume the following facts: Charitable organizations A and B are entities described in section 170(c) and are equally efficient in providing similar public goods. Contributions to charity A are eligible for a dollar-for-dollar state tax credit. Contributions to charity B are ineligible for this credit but are deductible from state taxable income. The taxpayer itemizes deductions, and these itemized deductions in aggregate are at least $1,000 more than the standard deduction. The taxpayer has the choice to contribute $1,000 to charity A, and this $1,000 contribution generates a state tax credit of $1,000. 3 That is, the tax credit is dollar-for-dollar but does not otherwise figure into the calculation of the taxpayer's state tax liability. The taxpayer has more than $1,000 of state tax liability, so that the taxpayer's state tax liability is reduced by the entire $1,000 of the state tax credit. Finally, if the taxpayer makes the $1,000 contribution that generates a state tax credit of $1,000, the taxpayer reduces by $1,000 the withholding and payments of state tax during the taxable year in question. The state tax liability is therefore reduced by the full amount of the state tax credit in the same taxable year as the contribution is made. 4 Further assume a taxpayer is in the 24 percent federal tax bracket, itemizes federal tax deductions, and has a state tax rate of 5 percent. If the taxpayer is subject to the AMT, assume an AMT marginal tax rate of 26 percent.

The Act, this rule, and the safe harbor for certain individuals described in Notice 2019-12 alter the incentives some taxpayers face about whether and how much to give to organizations that receive charitable contributions, as well as to which organizations. This is illustrated in the following scenarios, which are also summarized in Table 1.

The tax effects of contributions prior to enactment of the Act are illustrated in the columns labeled “Prior Law” in Table 1.

Prior to enactment of the Act, if the taxpayer made a $1,000 contribution to charity A that generated a state tax credit of $1,000, the deduction for charitable contributions under section 170(a) increased by $1,000, and the taxpayer's liability for state and local taxes deductible under section 164 decreased by $1,000. The taxpayer's itemized deductions, taxable income, and federal tax liability were unchanged from what they would have been in the absence of the contribution. 5 The taxpayer's state tax liability decreased by $1,000 because of the state tax credit. The combined federal and state tax benefits of the $1,000 contribution were therefore $1,000, and the cost to the taxpayer and to the federal government of making the contribution was $0. This is shown in column A under Prior Law for Example 1 in Table 1 and replicated in the same column for Example 2.

If the taxpayer were subject to the AMT under section 55, however, there was a net benefit to the taxpayer from contributions to charity A, which provided state tax credits. State and local taxes are not deductible in determining taxable income under the AMT, but charitable contributions are deductible in determining taxable income under the AMT. If the taxpayer contributed $1,000, taxable income under the AMT was reduced by $1,000 due to the charitable contribution deduction under section 170, but there was no corresponding reduction in the deduction for state and local taxes. Under an AMT marginal tax rate of 26 percent, the federal tax benefit of this $1,000 contribution would be $260. Because of the dollar-for-dollar state tax credit, the taxpayer received a combined federal and state tax benefit of $1,260 for a $1,000 contribution; that is, the taxpayer received $260 more in tax benefits than the amount of the contribution. This is shown in column A under Prior Law for Example 3 in Table 1.

In combination, state and federal tax laws generally provide a greater incentive to contribute to organizations eligible for state tax credits (charity A) than to other organizations (charity B). The effects of a contribution to charity A are described in Parts IV.A1 and IV.A2 previously.

Prior to enactment of the Act, for a taxpayer not subject to the AMT, a $1,000 contribution to charity B yielded a smaller combined federal and state tax benefit than to charity A. The state tax benefit was $50 ($1,000 multiplied by the 5 percent state tax rate). The taxpayer's itemized deductions at the federal level increased by $950 (the $1,000 charitable contribution deduction less the $50 reduction in state taxes paid). The federal tax benefit of this increase was $228 ($950 multiplied by the 24 percent federal tax rate), resulting in a combined federal and state tax benefit of $278. The net cost to the taxpayer of the $1,000 contribution was $722. This is shown in column B under Prior Law for Example 1 in Table 1 and replicated in the same column for Example 2.

For a taxpayer subject to the AMT, a $1,000 contribution to charity B yielded a combined federal and state benefit of $310—the $1,000 contribution multiplied by the taxpayer's marginal tax rate under the AMT of 26 percent, or $260, plus the value of the deduction from state tax, or $50 ($1,000 multiplied by the 5 percent state tax rate). The net cost to the taxpayer of the $1,000 contribution was $690. This is shown in column B under Prior Law for Example 3 in Table 1.

Contributing to either charity A or charity B reduced the taxpayer's combined federal and state tax liability, but the existence of the state tax credit for contributions to charity A made contributions to that organization more attractive. This is seen by comparing the Total Tax Benefit in column A under Prior Law to the corresponding value in column B for each of the three examples. For taxpayers not subject to the AMT, contributions to charity A yielded a combined federal and state tax benefit of $1,000, compared to a combined federal and state tax benefit of $278 for a contribution to charity B. The AMT increased the disparity for contributions to charity A versus charity B, resulting in a combined federal and state tax benefit of $1,260 for a contribution to charity A versus $310 for a contribution to charity B.

The enactment of the SALT limitation in the Act has, in limited circumstances, altered the federal tax effects of charitable contributions as described in the following examples. These are illustrated in the columns labeled “Baseline” and “Final Rule with Notice 2019-12” in Table 1.

If a taxpayer who has a state tax liability of more than $1,000 above the SALT limitation and is not subject to the AMT makes a $1,000 contribution to charity A, the deduction for charitable contributions under section 170(a) increases by $1,000, but the deduction for state and local taxes paid under section 164 is unchanged. Consequently, itemized deductions increase by $1,000, and taxable income decreases by $1,000. If the taxpayer is in the 24 percent bracket, federal liability will decrease by $240, and state tax liability will decrease by the $1,000 state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $1,240, and the taxpayer receives a $240 net benefit while the federal government has a loss of $240. This is shown in column A under Baseline for Example 1 in Table 1.

If the same taxpayer makes the $1,000 contribution to charity A under the rule with Notice 2019-12, the entire $1,000 contribution is not deductible under section 170(a), and the deduction for state and local taxes paid under section 164 is unchanged due to the SALT limitation. The taxpayer's itemized deductions, taxable income, and federal tax liability are unchanged from what they would be in the absence of the contribution. The taxpayer's state tax liability decreases by $1,000 because of the state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $1,000, or $240 less than under the baseline. This is shown by comparing the Total Tax Benefit in column A under Final Rule with Notice 2019-12 with the corresponding value in column A under Baseline for Example 1 in Table 1. However, the benefit of the contribution for this taxpayer is the same as the taxpayer faced prior to enactment of the Act. This is shown by comparing the Total Tax Benefit under column A under Final Rule with Notice 2019-12 with the corresponding value in column A under Prior Law for Example 1 in Table 1.

Under the baseline and this rule with Notice 2019-12, for a taxpayer with state and local taxes paid over the SALT limitation, the value of a contribution to charity B, that is a contribution that results in a one-for-one state income tax deduction and not a state tax credit, is slightly higher than it was pre-Act. This increase is because the state deduction does not reduce the federal deduction for state and local taxes for a taxpayer above the SALT limitation. As shown in the Total Tax Benefit row under the B columns for Example 1, under the baseline and this rule with Notice 2019-12, the value of a $1,000 contribution to charity B is $290—the charitable contribution deduction from federal tax ($1,000 multiplied by the 24 percent federal tax rate, or $240), plus the value of the deduction from state tax ($1,000 multiplied by the 5 percent state tax rate, or $50)—compared to $278 for contributions under prior law (described in Part IV.A3 previously). By comparison, as shown in the Total Tax Benefit row under the A columns for Example 1, a contribution to charity A, eligible for a state tax credit, yields a $1,240 tax benefit under the baseline and a $1,000 benefit under this rule with Notice 2019-12.

If a taxpayer who has state and local taxes paid below the SALT limitation and is not subject to the AMT makes the $1,000 contribution to charity A, the deduction for charitable contributions under section 170(a) increases by $1,000, and the deduction for state and local taxes paid under section 164 decreases by $1,000. The taxpayer's itemized deductions, taxable income, and federal tax liability are unchanged from what they would be in the absence of the contribution. The taxpayer's state tax liability decreases by $1,000 because of the state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $1,000, and the cost to the taxpayer and to the federal government of making the contribution is $0. This situation is identical to prior law or what the taxpayer faced prior to enactment of the Act. This is shown is column A under Baseline and Prior Law for Example 2 in Table 1.

If the same taxpayer makes the $1,000 contribution to charity A under the proposed rule, the entire $1,000 contribution is not deductible under section 170(a), but the deduction for state and local taxes paid under section 164 still decreases by $1,000 because of the $1,000 state tax credit. If the taxpayer is in the 24 percent bracket, the federal tax liability will increase by $240. The taxpayer's state tax liability decreases by the $1,000 state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $760, or $240 less than the baseline. This is shown by comparing the Total Tax Benefit in column A under Proposed Rulemaking with the corresponding value in column A under Baseline for Example 2. In this case, the proposed rule has the effect of increasing the taxpayer's federal taxable income compared to the baseline if the taxpayer makes a contribution to charity A.

One commenter to the proposed regulations suggested that Example 2 be revised to indicate that the purported donation is a tax for purposes of section 164 if the state is the donee. As noted earlier in the preamble, that issue is outside of the scope of these regulations, but the Treasury Department and the IRS have issued Notice 2019-12, which provides a safe harbor for certain individuals. As described earlier in the preamble, under the safe harbor, an individual who itemizes deductions and who makes a payment to a section 170(c) entity in return for a state or local tax credit may treat the portion of such payment that is disallowed as a charitable contribution deduction under section 170 as a payment of state or local tax for purposes of section 164. This disallowed portion of the payment may be treated as a payment of state or local tax under section 164 when the individual applies the credit to offset the individual's state or local tax liability.

Under the final rule with Notice 2019-12, if the same taxpayer makes the $1,000 contribution to charity A, the entire $1,000 contribution is not deductible under section 170(a), but the deduction for state and local taxes paid under section 164 is unchanged because of the safe harbor. The taxpayer's federal liability is unchanged. The taxpayer's state tax liability decreases by the $1,000 state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $1,000, the same as under prior law and the baseline. This is shown by comparing the Total Tax Benefit in column A under Final Rule with Notice 2019-12 with the corresponding value in column A under Baseline for Example 2.

Under the baseline scenario and this final rule with Notice 2019-12, the tax benefit of charitable contributions to charity B, which are not eligible for a state tax credit but are deductible from both federal and state taxable income, is unchanged from prior law for taxpayers below the SALT limitation. Thus, in this example, the benefit of making a contribution to charity B remains $278, as described previously. This is shown in the Total Tax Benefit row under the B columns for Example 2. By comparison, as shown in the Total Tax Benefit row under the A columns for Example 2, a $1,000 contribution to charity A, eligible for a state tax credit, yields a $1,000 tax benefit under the baseline and under the final rule with Notice 2019-12. Under the final rule with Notice 2019-12 contributions to charity A are less costly than contributions to charity B in the same manner as under prior law for taxpayers with itemized state and local tax deductions of $10,000 or less.

If a taxpayer subject to the AMT makes a $1,000 contribution to charity A, the contribution reduces the taxpayer's taxable income under the AMT by $1,000. Using an AMT marginal tax rate of 26 percent, the federal tax benefit of this $1,000 contribution is $260. Because of the dollar-for-dollar state tax credit, the taxpayer would receive a combined federal and state tax benefit of $1,260 for a $1,000 contribution, or a $260 net benefit. This result is identical to the result under prior law (prior to enactment of the Act). This is shown in the A columns under Baseline and Prior Law for Example 3 in Table 1.

If the same taxpayer makes the $1,000 contribution to charity A under the final rule with Notice 2019-12, the entire $1,000 is not deductible under section 170(a). Therefore, the taxpayer's taxable income and federal tax liability under the AMT would be unchanged from what they would be in the absence of the contribution. The taxpayer's state tax liability decreases by $1,000 because of the state tax credit. The combined federal and state tax benefits of the $1,000 contribution are therefore $1,000, or $260 less than under the baseline and under the law prior to enactment of the Act. This is shown by comparing the A columns of Example 3 in Table 1. However, under the rule, taxpayers subject to the AMT are in the same position as other taxpayers making a $1,000 contribution to charity A. This is shown by comparing the Total Tax Benefit amount under column A for the Final Rule with Notice 2019-12 for Example 3 to that for Examples 1 and 2.

Under the baseline and the final rule with Notice 2019-12, the treatment of charitable contributions that are deductible from both federal and state taxable income is unchanged from prior law for taxpayers subject to the AMT. This is shown in the B columns for Example 3 in Table 1. In this example, the benefit of making a contribution to charity B remains $310, as described previously for contributions under prior law. By comparison, a contribution to a charity A, eligible for a state tax credit, yields a $1,260 tax benefit under the baseline and a $1,000 benefit under the final rule with Notice 2019-12. This is shown in column A under Baseline and Final Rule with Notice 2019-12 for Example 3 in Table 1.

Suppose, for this example only, that contributions to charity A generate a state tax credit with a rate of 10 percent, instead of 100 percent as described in Examples 1 through 3. If a taxpayer makes the $1,000 contribution to charity A under the final rule with Notice 2019-12, the deduction for charitable contributions under section 170(a) increases by $1,000. The deduction under section 170(a) is not reduced by the value of the credit because it does not exceed 15 percent. Thus, the taxpayer's federal tax liability is the same under the final regulations as under the baseline. The result is also the same as it would have been if the taxpayer's marginal state tax rate were 10 percent and the taxpayer were allowed a dollar-for-dollar deduction from state taxable income instead of a credit.

If the taxpayer is above the SALT limitation or subject to the AMT, the taxpayer's taxable income under the regular tax and under the AMT decreases by $1,000. If the taxpayer is not subject to the AMT and is in the 24 percent bracket, federal tax liability will decrease by $240, and state tax liability will decrease by $100. The combined federal and state tax benefits of the $1,000 contribution are therefore $340. If the taxpayer is subject to the AMT and has an AMT marginal tax rate of 26 percent, federal tax liability will decrease by $260, and state tax liability will decrease by $100, yielding a combined federal and state benefit of $360 for the $1,000 contribution.

If the taxpayer is below the SALT limitation, the taxpayer's deduction for state and local taxes treated as paid under section 164 decreases by $100, and the taxpayer's taxable income decreases by $900. If the taxpayer is in the 24 percent bracket, federal tax liability will decrease by $216, and state tax liability will decrease by $100. The combined federal and state tax benefits of the $1,000 contribution are therefore $316.

This regulation likely reduces economically inefficient choices motivated by the potential tax benefits available if this regulation were not promulgated. Under the prior law and baseline scenarios, state and local governments have an incentive to fund governmental activities through entities that are eligible to receive deductible contributions and to establish tax credits. This incentive is particularly strong under a SALT limitation scenario where state and local governments may do so solely to enable some taxpayers to circumvent the SALT limitation. The final rule with Notice 2019-12 substantially diminishes this incentive to engage in economically inefficient tax-avoidance behavior. As a result, it is expected that fewer such credit programs would be established in the future under the rule than under the baseline.

To the extent this result occurs, the Treasury Department and the IRS estimate that this rule would reduce the overall complexity burden for states and for taxpayers who would otherwise make charitable contributions solely for the purpose of reducing their state and local tax liability. In addition, the Treasury Department and the IRS anticipate that the rule will also spare some taxpayers compliance costs associated with complex tax planning designed to avoid the SALT limitation.

In addition, the rule is expected to make the federal tax system more neutral to taxpayers' decisions regarding making donations to state and local tax credit programs versus making donations to other, similar charitable organizations that do not give rise to state or local tax credits. Under the baseline scenarios, the combined federal and state tax benefits favor contributions to organizations that give rise to a state tax credit for taxpayers, particularly for taxpayers above the SALT limitation. Under the final rule and Notice 2019-12, this economic distortion is expected to be reduced.

The proposed regulations requested comments from the public on the potential extent of this expected reduction in economic distortion. One commenter responded that increased neutrality in the treatment of contributions to organizations that qualify for tax credits and those that do not is not a benefit of the rule. The commenter argued that such a conclusion ignores the possibility that tax credit programs provide a social benefit. The conclusion in the proposed regulations does not ignore the social benefits that tax credit programs might provide. The Treasury Department and the IRS have clarified in Part IV previously that their analysis was specific to cases where two organizations, one eligible for tax credits and the other not, are equally efficient in their provision of similar public goods. That is, both provide the same social benefit given the same level of contributions.

Finally, the final rule provides more certainty to taxpayers by clarifying the rules governing the amount that they can claim as a charitable contribution deduction when they receive or expect to receive a state or local tax credit or a state or local tax deduction in exchange for the contribution.

One commenter asserted that increased certainty is not a benefit of this rule because other possible rules could also have provided certainty. While the commenter is correct that rules other than the proposed and final rule could also provide certainty, it remains the case that the proposed and final rule provide the benefit of certainty, relative to the baseline of no regulatory guidance at all.

One commenter suggested that the proposed rule would be beneficial because it would promote more efficient state and local spending decisions by making taxpayers bear more of the true cost of those decisions. The SALT limitation imposed by the Act reduced the federal subsidy of state and local spending, and the rule is consistent with this purpose of the Act provision. The reduction in the subsidy has the potential to make state spending decisions more efficient.

The rule may result in some increase in compliance costs for taxpayers who make contributions that generate state or local tax credits. Under the baseline, for purposes of the charitable contribution deduction under section 170(a), taxpayers did not need to address state or local tax credits received or expected to be received for purposes of claiming a charitable contribution; however, they would know the amount of credits received as part of the filing process for state returns. In contrast, under the final rule with Notice 2019-12, taxpayers making a contribution to an organization described in section 170(c) will need to determine the amount of any state or local tax credits they received or expect to receive in order to reduce their charitable contribution deduction under section 170(a). This additional step will generate some additional compliance costs.

The compliance burden for recipient organizations that directly issue tax credits may increase under the rule. Under section 170(f)(8), in order to take a charitable contribution deduction of $250 or more, a taxpayer must have a contemporaneous written acknowledgment (CWA) from the donee entity, usually provided in the form of a letter. The CWA includes the amount received by the entity or a description of property received. The CWA must also disclose whether the donee provided any goods or services in consideration for the contribution and a description and good faith estimate of the value of those goods or services. State and local tax credits are not generally provided by the donee entity, but there may be situations in which the entity would be providing the credit and would need to disclose the credit amount in the CWA provided to the donor. The proposed regulations requested comments on whether additional guidance is needed on substantiation and reporting requirements for donors and donees making or receiving payments or transfers of property in return for state and local tax credits and the extent to which entities do provide tax credits under certain circumstances. As mentioned earlier in this preamble, some commenters expressed concerns about substantiation of a charitable contribution when the donee does not know whether the donor receives or expects to receive a state or local tax credit. If a donee is not the entity providing the credit, the CWA rules do not require that the amount of the credit be reported in the acknowledgment. This mitigates the compliance burden for these entities.

The proposed regulations requested comments as to how the rule might alter incentives regarding contributions to state and local tax credit programs. As mentioned previously in the preamble, many commenters expressed concern that the rule would result in an overall decline in charitable giving and in declines in charitable giving to entities or causes they deem to be particularly meritorious. One commenter expressed concern about the lack of evidence provided in support of the statement that this rule will have at most a highly limited, marginal effect on taxpayer decisions to donate to tax credit programs, and the statement that most taxpayers have never contributed to such programs. Another commenter asserted that the rule would cause states to drop tax credit programs that support conservation easements. The commenter noted that this was particularly likely to occur in low-tax states, where more taxpayers will have SALT deductions under $10,000. Several other commenters asserted that a substantial share of donors to tax credit organizations would be affected by the rule.

Based on an analysis of confidential taxpayer return data and forecasts using that data, the Treasury Department and the IRS estimate that this rule will leave charitable giving incentives entirely unchanged for the vast majority of taxpayers. The Treasury Department and the IRS estimate that, after passage of the Act (which significantly increased the standard deduction), 90 percent of taxpayers will not claim itemized deductions of any kind. Those taxpayers are entirely unaffected by this rule.

Approximately five percent of taxpayers are projected to claim itemized deductions and have state and local income tax deductions in excess of the SALT limitation. Under the rule and Notice 2019-12, taxpayers in this group who are not subject to the AMT will receive the same federal tax treatment for donating to organizations providing tax credits as they received prior to the Act, as shown in Example 1 in Table 1 of this special analysis.

Approximately five percent of taxpayers are projected to claim itemized deductions and have SALT deductions below the limitation. Taxpayers in this group who are not subject to the AMT would have faced smaller incentives to donate to organizations resulting in state or local tax credits in excess of 15 percent under the proposed rule. However, these taxpayers will receive the same federal tax benefits for cash contributions under the final rule and Notice 2019-12 as they received prior to the Act and under the baseline, as described in Example 2 in Table 1 of this special analysis. 7

It is the case that, for taxpayers subject to the AMT, the cost of giving to state and local credit organizations is higher under the rule with Notice 2019-12 than under the baseline and under prior law. The Treasury Department and the IRS estimate that fewer than 150,000 taxpayers (less than 0.1 percent of taxpayers) will be subject to the AMT and claim itemized deductions after enactment of the Act. These taxpayers could be affected by the final rule, but only if they contribute to programs that entitle them to state and local tax credits of greater than 15 percent. (The tax data do not indicate whether a taxpayer has made a contribution that generated a state or local tax credit.) However, as described in Example 3 in Table 1 of this special analysis, the cost of contributing to an organization resulting in a 100 percent state tax credit will be zero for these taxpayers, as it is for other taxpayers under the final rule with Notice 2019-12.

As noted previously, pursuant to the RFA (5 U.S.C. chapter 6), it is hereby certified that this rule will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the regulations primarily affect individuals. It is possible for a small business donor to be affected by this rule. However, small entities will often be able to claim a business expense deduction instead of a charitable donation, and would therefore be unaffected by the rule. For the very few small entity donors that might nevertheless choose to claim a charitable donation deduction and might be directly affected by the regulation, there is no significant economic impact. The rule would impose only nominal costs of subtracting the amount of the credit from the amount contributed, in order to determine the deduction allowed under section 170. There is no collection of information requirement on small entities. Therefore, a regulatory flexibility analysis is not required. Pursuant to section 7805(f), the proposed regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses, and no comments were received.

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 in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold.

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

The Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget has determined that this is a major rule for purposes of the Congressional Review Act (CRA) (5 U.S.C. 801 et seq. ).

The principal authors of these regulations are personnel from the Office of the Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in their development.

Accordingly, 26 CFR part 1 is amended as follows:

The Coast Guard will enforce the safety zone established in 33 CFR 165.1191 Table 1, Item number 1 for the San Francisco Giants Fireworks Display from 11 a.m. on June 14, 2019 until 12:15 a.m. on June 15, 2019, or as announced via Broadcast Notice to Mariners. The San Francisco Giants Fireworks Display will commence at the conclusion of the San Francisco Giants game, but will not commence later than 11:30 p.m. on June 14, 2019. This notice is issued under authority of 46 U.S.C. 70034, 70051; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5; Department of Homeland Security Delegation No. 0170.1.

The safety zone will extend to all navigable waters of the San Francisco Bay, from surface to bottom, within a circle formed by connecting all points 100 feet out from the fireworks barge during the loading, transit, and arrival of the fireworks barge from the loading location to the display location and until the start of the fireworks display. From 11 a.m. on June 14, 2019 until 5 p.m. on June 14, 2019, the fireworks barge will be loading pyrotechnics from Pier 50 in San Francisco, CA. The fireworks barge will remain at the loading location until its transit to the display location. From 8:30 p.m. to 9 p.m. on June 14, 2019 the loaded fireworks barge will transit from Pier 50 to the launch site near Pier 48 in approximate position 37°46′36″ N, 122°22′56″ W (NAD 83) where it will remain until the conclusion of the fireworks display. Upon the commencement of the 15-minute fireworks display, scheduled to begin at the conclusion of the baseball game, between approximately 10 p.m. and 11:30 p.m. on June 14, 2019, the safety zone will increase in size and encompass all navigable waters of the San Francisco Bay, from surface to bottom, within a circle formed by connecting all points 700 feet out from the fireworks barge near Pier 48 in approximate position 37°46′36″ N, 122°22′56″ W (NAD 83). This safety zone will be in effect from 11 a.m. on June 14, 2019 until 12:15 a.m. on June 15, 2019, or as announced via Broadcast Notice to Mariners.

In addition to this notice in the Federal Register , the Coast Guard plans to provide notification of the safety zone and its enforcement period via the Local Notice to Mariners.

Under the provisions of 33 CFR 165.1191, unauthorized persons or vessels are prohibited from entering into, transiting through, or anchoring in the safety zone during all applicable effective dates and times, unless authorized to do so by the PATCOM or other Official Patrol defined as a federal, state, or local law enforcement agency on scene to assist the Coast Guard in enforcing the regulated area. Additionally, each person who receives notice of a lawful order or direction issued by the PATCOM or Official Patrol shall obey the order or direction. The PATCOM or Official Patrol may, upon request, allow the transit of commercial vessels through regulated areas when it is safe to do so.

If the Captain of the Port determines that the regulated area need not be enforced for the full duration stated in this notice, a Broadcast Notice to Mariners may be used to grant general permission to enter the regulated area.

The National Park Service will be conducting a fireworks display, launched from the West Potomac Park, adjacent to the Upper Potomac River in Washington, DC, between 9:07 p.m. and 9:27 p.m. on July 4, 2019. In the event of inclement weather on July 4th, the fireworks display will be launched from the same location, during those same times, on July 5, 2019. The COTP Maryland-National Capital Region has determined that the display poses a safety concern for anyone within 1,000 feet of the fireworks discharge site—the potential exists for accidental discharge of fireworks, dangerous projectiles, and falling hot embers or other debris. Due to these safety concerns, on April 29, 2019, the Coast Guard published a notice of proposed rulemaking (NPRM), “Safety Zone for Fireworks Display; Upper Potomac River, Washington, DC” (84 FR 17984). There we stated why we issued the NPRM, and invited comments on our proposal to create a safety zone in association with this fireworks display. During the comment period that ended May 29, 2019, we received one comment.

Under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making this rule effective less than 30 days after publication in the Federal Register . Delaying the effective date of this rule would be impracticable and contrary to the public interest because immediate action is needed to respond to the potential safety hazards associated with the fireworks display.

The Coast Guard is issuing this rule under authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231). The Captain of the Port Maryland-National Capital Region (COTP) has determined that potential hazards associated with the fireworks to be used in this July 4, 2019, display will be a safety concern for anyone within 1,000 feet of the fireworks discharge site. The purpose of this rule is to ensure safety of vessels and the navigable waters in the safety zone before, during, and after the scheduled event.

As noted above, we received one comment on our NPRM published April 29, 2019. The comment was in support of the Coast Guard's rulemaking. There are no changes in the regulatory text of this rule from the proposed rule in the NPRM.

This rule establishes a safety zone that the Coast Guard will enforce from 8 p.m. to 10:30 p.m. on July 4, 2019 (or, alternatively, during those same hours on July 5th). The safety zone will cover all navigable waters of the Upper Potomac River, including the Tidal Basin, within 1,000 feet of the fireworks discharge site at West Potomac Park in approximate position latitude 38°53′07.1″ N, longitude 077°02′49.5″ W, located at Washington, DC. The duration of the zone is intended to ensure the safety of vessels and these navigable waters before, during, and after the scheduled fireworks display. No vessel or person will be permitted to enter the safety zone without obtaining permission from the COTP or a designated representative.

We developed this rule after considering numerous statutes and Executive orders related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors.

Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13771 directs agencies to control regulatory costs through a budgeting process. This rule has not been designated a “significant regulatory action,” under Executive Order 12866. Accordingly, this rule has not been reviewed by the Office of Management and Budget (OMB), and pursuant to OMB guidance it is exempt from the requirements of Executive Order 13771.

This regulatory action determination is based on the size, duration, and time-of-day of the safety zone. Vessel traffic will be able to safely transit around this safety zone which will impact a small designated area of the Upper Potomac River for less than 3 hours during the evening when vessel traffic is normally low. Moreover, the Coast Guard will issue a Broadcast Notice to Mariners via VHF-FM marine channel 16 about the zone.

The Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term “small entities” comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard received no comments from the Small Business Administration on this rulemaking. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities.

While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section V.A above, this rule will not have a significant economic impact on any vessel owner or operator.

Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121), we want to assist small entities in understanding this rule. If the rule would affect your small business, organization, or governmental jurisdiction and you have questions concerning its provisions or options for compliance, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section.

Small businesses may send comments on the actions of Federal employees who enforce, or otherwise determine compliance with, Federal regulations to the Small Business and Agriculture Regulatory Enforcement Ombudsman and the Regional Small Business Regulatory Fairness Boards. The Ombudsman evaluates these actions annually and rates each agency's responsiveness to small business. If you wish to comment on actions by employees of the Coast Guard, call 1-888-REG-FAIR (1-888-734-3247). The Coast Guard will not retaliate against small entities that question or complain about this rule or any policy or action of the Coast Guard.

This rule will not call for a new collection of information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).

A rule has implications for federalism under Executive Order 13132, Federalism, if it has a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. We have analyzed this rule under that Order and have determined that it is consistent with the fundamental federalism principles and preemption requirements described in Executive Order 13132.

Also, this rule does not have tribal implications under Executive Order 13175, Consultation and Coordination with Indian Tribal Governments, because it does not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. If you believe this rule has implications for federalism or Indian tribes, please contact the person listed in the FOR FURTHER INFORMATION CONTACT section.

The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) requires Federal agencies to assess the effects of their discretionary regulatory actions. In particular, the Act addresses actions that may result in the expenditure by a State, local, or tribal government, in the aggregate, or by the private sector of $100,000,000 (adjusted for inflation) or more in any one year. Though this rule will not result in such an expenditure, we do discuss the effects of this rule elsewhere in this preamble.

We have analyzed this rule under Department of Homeland Security Directive 023-01 and Environmental Planning COMDTINST 5090.1 (series), which guide the Coast Guard in complying with the National Environmental Policy Act of 1969 (42 U.S.C. 4321-4370f), and have determined that this action is one of a category of actions that do not individually or cumulatively have a significant effect on the human environment. This rule involves a safety zone lasting 2.5 hours that will prohibit entry within a portion of the Upper Potomac River, including the Tidal Basin, in Washington, DC. It is categorically excluded from further review under paragraph L60(a) in Table 3-1 of U.S. Coast Guard Environmental Planning Implementing Procedures 5090.1. A Record of Environmental Consideration supporting this determination is available in the docket where indicated under ADDRESSES .

The Coast Guard respects the First Amendment rights of protesters. Protesters are asked to contact the person listed in the FOR FURTHER INFORMATION CONTACT section to coordinate protest activities so that your message can be received without jeopardizing the safety or security of people, places or vessels.

For the reasons discussed in the preamble, the Coast Guard amends 33 CFR part 165 as follows:

A list of entities that could be affected by this final rule include, but are not necessarily limited to:

This table is not intended to be exhaustive, but rather provide a guide for readers regarding the types of entities that EPA is aware could be involved in the activities affected by this action. However, other types of entities not listed in this table could be affected by this final rule. To determine whether your entity is affected by this action, you should carefully examine the applicability criteria found in § 355.30 of title 40 of the Code of Federal Regulations (CFR). If you have questions regarding the applicability of this action to a particular entity, consult the person listed in the FOR FURTHER INFORMATION CONTACT section.

The EPA is amending the EPCRA emergency release notification regulations to include the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e). In addition, EPA is adding definitions of “animal waste” and “farm” to the EPCRA regulations to delineate the scope of this reporting exemption.

This final rule is being issued under EPCRA, which was enacted as Title III of the Superfund Amendments and Reauthorization Act (SARA) of 1986 (Pub. L. 99-499). EPA finalizes this action under the authority of EPCRA section 304 (42 U.S.C. 11004) and the Agency's general rulemaking authority under EPCRA section 328 (42 U.S.C. 11048).

Section 103 of CERCLA requires the person in charge of a vessel or facility to immediately notify the National Response Center (NRC) when there is a release of a hazardous substance, as defined under CERCLA section 101(14), in an amount equal to or greater than the reportable quantity for that substance within a 24-hour period. In addition to these CERCLA reporting requirements, EPCRA section 304 requires owners or operators of certain facilities to immediately notify state and local authorities when there is a release of an extremely hazardous substance (EHS), as defined under EPCRA section 302, or of a CERCLA hazardous substance in an amount equal to or greater than the reportable quantity for that substance within a 24-hour period.

EPCRA and CERCLA are two separate but interrelated environmental laws that work together to provide emergency release notifications to Federal, state and local officials. Notice given to the NRC under CERCLA serves to inform the Federal government of a release so that Federal personnel can evaluate the need for a response in accordance with the National Oil and Hazardous Substances Contingency Plan (NCP), 1 the Federal government's framework for responding to both oil discharges and hazardous substance releases. Relatedly, notice under EPCRA is given to the State Emergency Response Commission (SERC) for any state likely to be affected by the release and to the community emergency coordinator for the Local Emergency Planning Committee (LEPC) for any area likely to be affected by the release so that state and local authorities have information to help protect the community.

Release reporting under EPCRA depends, in part, on whether reporting is required under CERCLA. 2 Specifically, EPCRA section 304(a) provides for reporting under the following three release scenarios:

• EPCRA section 304(a)(1) requires notification if a release of an EPCRA EHS occurs from a facility at which a hazardous chemical is produced, used or stored, and such release requires a notification under CERCLA section 103(a).

• EPCRA section 304(a)(2) requires notification if a release of an EPCRA EHS occurs from a facility at which a hazardous chemical is produced, used or stored, and such release is not subject to the notification requirements under CERCLA section 103(a), but only if the release:

○ Is not a federally permitted release as defined in CERCLA section 101(10),

○ Is in an amount in excess of the reportable quantity as determined by EPA, and

○ Occurs in a manner that would require notification under CERCLA section 103(a).

• EPCRA section 304(a)(3) requires notification if a release of a substance not designated as an EPCRA EHS occurs from a facility at which a hazardous chemical is produced, used or stored, and such release requires a notification under CERCLA section 103(a).

On March 23, 2018, the President signed into law the Consolidated Appropriations Act, 2018 (“Omnibus Bill”). Title XI of the Omnibus Bill is entitled the “Fair Agricultural Reporting Method Act” or the “FARM Act.” See Fair Agricultural Reporting Method Act, Public Law 115-141, sections 1101-1103 (2018). The FARM Act expressly exempts reporting of air emissions from animal waste (including decomposing animal waste) at a farm from CERCLA section 103. The FARM Act also provides definitions for the terms “animal waste” and “farm.”

The FARM Act amended CERCLA by providing an exemption from reporting air emissions from animal waste at farms. Because these types of releases are exempted under CERCLA, based on the release reporting criteria under EPCRA section 304, these types of releases are also exempt under EPCRA section 304.

Consequently, on November 14, 2018, EPA published a proposed rule to amend the release reporting regulations under EPCRA section 304. The comment period closed on December 14, 2018. EPA received 87,473 comments, of which 87,091 are mass mail campaigns opposing the proposed rule. The remaining were individual letters that either supported or opposed the proposed rule. EPA's response to significant comments are generally addressed below in Section V of this preamble. EPA developed a response to comment document to address all the comments received by the Agency on the proposed rule, which is in the docket EPA-HQ-OLEM-2018-0318 to this final rule. In addition, this rulemaking generally tracks the guidance document EPA had previously issued after enactment of the FARM Act. Thus, EPA formally withdraws the guidance document entitled, “How does the Fair Agricultural Reporting Method (FARM) Act impact reporting of air emissions from animal waste under CERCLA Section 103 and EPCRA Section 304?” dated April 27, 2018.

This final rule amends the release reporting regulations under EPCRA section 304 by adding the reporting exemption in 40 CFR 355.31 for air emissions from animal waste at farms, as proposed. EPA is also adding definitions of “animal waste” and “farm” to the definition section of the EPCRA regulations in 40 CFR 355.61 to delineate the scope of this reporting exemption, as proposed. EPA believes this final rule appropriately reflects the relationship between CERCLA and EPCRA release reporting requirements and is consistent with the statutory text, framework and legislative history of EPCRA, as well as the Agency's prior regulatory actions.

This rulemaking maintains consistency between the emergency release notification requirements of EPCRA and CERCLA in accordance with the statutory text, framework and legislative history of EPCRA, and is consistent with the Agency's prior regulatory actions. Specifically, this rulemaking is based on the relationship of the EPCRA section 304 reporting requirements to the CERCLA section 103 reporting requirements, as recently amended. As previously noted, EPCRA section 304 reporting depends, in part, on whether reporting is required under CERCLA section 103. EPCRA's legislative history further indicates that the EPCRA section 304 reporting requirements are designed to be consistent with the reporting requirements of CERCLA section 103. EPA has thus revised the EPCRA emergency release notification regulations from time to time, as appropriate, to maintain consistency with the CERCLA reporting requirements.

Consistent with the Agency's interpretation of EPCRA section 304 and the Agency's prior regulatory actions, EPA is amending the EPCRA release notification regulations to explicitly exempt air emissions from animal waste at farms from reporting under EPCRA section 304.

EPCRA section 304 provides for release reporting under three scenarios, each of which depends in some way on whether the release requires notice under CERCLA. If a release requires notice under CERCLA section 103(a), the release may be subject to reporting under EPCRA if the release meets the requirements of EPCRA section 304(a)(1) or 304(a)(3). Because the FARM Act exempted air emissions from animal waste at farms from CERCLA reporting, these types of releases no longer require notice under CERCLA section 103(a). If a release is not subject to notification under CERCLA section 103(a), the release may nonetheless be subject to reporting under EPCRA if the release meets the requirements of EPCRA section 304(a)(2). Pursuant to EPCRA section 304(a)(2), a release of an EPCRA EHS that is not subject to notification under section 103(a) of CERCLA need only be reported under EPCRA if the release:

• Is not a federally permitted release as defined in section 101(10) of CERCLA,

• Is in an amount in excess of the reportable quantity as determined by EPA, and

• Occurs in a manner that would require notification under section 103(a) of CERCLA.

A release that is not subject to CERCLA section 103(a) reporting must meet all three criteria in EPCRA section 304(a)(2) to be subject to EPCRA reporting. Here, air emissions from animal waste at farms could meet the first two criteria because such releases are generally not federally permitted and may exceed the applicable reportable quantity. Yet these types of releases do not “occur[ ] in a manner” that would require notification under CERCLA section 103(a) and thus do not meet the third criterion of EPCRA section 304(a)(2). Because air emissions from animal waste at farms do not meet all three criteria under EPCRA section 304(a)(2), and do not fall within the EPCRA section 304(a)(1) or (a)(3) reporting scenarios, these types of releases are not subject to EPCRA reporting. As such, EPA is amending the EPCRA's emergency release notification regulations to clarify reporting exemptions for certain types of releases under EPCRA section 304.

Air emissions from animal waste at farms no longer “occur[ ] in a manner” that would require notification under CERCLA section 103(a) because the FARM Act exempted these types of releases from CERCLA reporting. Importantly, the CERCLA reporting exemption is specifically tied to the nature or manner of these releases rather than to a specific substance. For example, the FARM Act amendment does not exempt specific substances typically associated with animal waste (such as ammonia and hydrogen sulfide) from reporting; rather, it exempts from reporting releases of any substance from animal waste at a farm into the air. Because air emissions from animal waste do not “occur[ ] in a manner” that would require notification under CERCLA section 103(a), these types of releases do not meet the third criterion of EPCRA section 304(a)(2) and are thus not subject to EPCRA reporting.

EPCRA section 304(a)(2) promotes consistency between the reporting requirements of EPCRA and CERCLA by ensuring that only releases that “occur[ ] in a manner” that would require CERCLA notification be reported under EPCRA. Yet, the provision also contemplates scenarios where releases not subject to reporting under CERCLA may still need to be reported under EPCRA, such as releases of substances designated as EHSs under EPCRA but not as hazardous substances under CERCLA. For example, trimethylchlorosilane (Chemical Abstract Service No. 75-77-4) is designated as an EPCRA EHS but not as a CERCLA hazardous substance. Since trimethylchlorosilane is not a CERCLA hazardous substance, its releases are not subject to notification under CERCLA section 103(a) and need only be reported under EPCRA if such releases meet the criteria of EPCRA section 304(a)(2). A trimethylchlorosilane release that (1) is not a federally permitted release as defined in CERCLA section 101(10); (2) exceeds the applicable reportable quantity; and (3) “occurs in a manner” that would require notification under CERCLA section 103(a) would still be subject to EPCRA reporting. In this example, a release of trimethylchlorosilane “occurs in a manner” that would require notification under CERCLA section 103(a) where it is not one of the excluded or exempted types of releases described in CERCLA sections 101(22), 103(e), or 103(f). (See section C of this preamble, for further explanation of these exemptions.) The reason the release is not subject to notification under CERCLA section 103(a) is because trimethylchlorosilane is not a CERCLA hazardous substance, not because there is anything particular about the release that renders it exempt.

As another example, petroleum (including crude oil or any fraction thereof) is expressly excluded from the definition of “hazardous substance” in CERCLA section 101(14). Because of this “petroleum exclusion,” releases of petroleum are not subject to notification under CERCLA section 103(a) and so need to be reported under EPCRA only if such releases meet the criteria of EPCRA section 304(a)(2). Where a petroleum release meets the first two criteria of EPCRA section 304(a)(2), the question becomes whether the release “occurs in a manner” that would require notification under CERCLA section 103(a). Notably, unlike air emissions from animal waste at farms, Congress did not exempt petroleum releases from CERCLA reporting based on the manner or nature of these releases. Instead, Congress exempted these types of releases from CERCLA reporting by excluding petroleum (including crude oil or any fraction thereof) from the definition of “hazardous substance.” See 42 U.S.C. 9601(14). As such, these types of releases still “occur[ ] in a manner” that would require notification under CERCLA section 103(a) and could thus be subject to reporting under EPCRA section 304(a)(2) where the petroleum release contains an EHS. See 52 FR 13378, 13385 (April 22, 1987). In sum, where a CERCLA reporting exemption or the reason a release is not subject to CERCLA reporting is unrelated to the manner in which such releases occur, EPCRA section 304(a)(2) may compel reporting of such releases.

In addition to the statutory text of EPCRA section 304(a)(2), the statutory framework of EPCRA's reporting requirements indicates a desire to maintain consistency between the EPCRA and CERCLA reporting requirements. Indeed, “[i]n drafting the EPCRA reporting requirements, Congress expressly tied them to CERCLA's” such that “all of EPCRA's reporting mandates are piggybacked on the CERCLA mandates in one form or another.” Waterkeeper Alliance v. EPA, 853 F.3d 527, 532 (D.C. Cir. 2017). Under EPCRA sections 304(a)(1) and (a)(3), EPCRA reporting depends on whether a release requires notification under CERCLA section 103(a), and under EPCRA section 304(a)(2), EPCRA reporting depends on whether a release “occurs in a manner” that would require notification under CERCLA section 103(a). Therefore, EPCRA requires reporting only for releases that require notification under CERCLA or occur in a manner that would require notification under CERCLA. Under CERCLA section 103 as amended, air emissions from animal waste at farms do not require notification under CERCLA section 103(a) and do not occur in a manner that would require such notification. As a result, these types of releases are not subject to reporting under EPCRA section 304(a)(1), (a)(2) or (a)(3). Thus, to clarify that these types of releases are not subject to reporting under EPCRA section 304, EPA is amending the EPCRA release notification regulations to exempt air emissions from animal waste at farms from reporting under section 304. In doing so, EPA seeks to avoid inconsistent regulation of these types of releases under EPCRA and CERCLA, in furtherance of the underlying purpose of this statutory framework.

EPA's understanding of EPCRA section 304(a)(2) is informed by the legislative history of EPCRA itself. In 1986, Congress passed EPCRA pursuant to Title III of the Superfund Amendments and Reauthorization Act (SARA). In the committee conference report addressing EPCRA, Congress discussed the three scenarios requiring release reporting under EPCRA section 304. With respect to EPCRA section 304(a)(2), the report states: “This requires notification where there is a release of an extremely hazardous substance that would require notice under section 103(a) of CERCLA but for the fact that the substance is not specifically listed under CERCLA as requiring such notice.” See 99 Cong. Conf. Report H. Rep. 962, October 3, 1986; SARA Leg. Hist. 38 (Section 304 Emergency Notification).

Congress thus expressed its intent that state and local authorities be notified of a qualifying release under EPCRA, even if the substance released is not identified as a hazardous substance under CERCLA, when the release occurs in a manner as the types of releases that require notification under CERCLA section 103(a). Conversely, if the release occurs in a manner that Congress determines does not require notification under CERCLA section 103(a)—such as air emissions from animal waste at farms—then no reporting is required under EPCRA section 304(a)(2) ( i.e., the third criterion of EPCRA section 304(a)(2) has not been met).

The legislative history also reveals that Congress intended EPCRA section 304(a)(2) to operate to exclude continuous releases from EPCRA's immediate notification requirements because such releases do not occur in a manner that requires reporting under CERCLA section 103(a). 3 The committee conference report explains: “[R]eleases which are continuous or frequently recurring and do not require reporting under CERCLA are not required to be reported under [EPCRA section 304].” Rather, continuous releases are subject to reduced reporting requirements pursuant to CERCLA section 103(f). As explained in section C.3. of this preamble, EPA incorporated an alternative for continuous releases into EPCRA and promulgated regulations that allow continuous releases to be reported in a manner consistent with CERCLA's continuous release reporting requirements.

Congress's intent in adopting the three scenarios in EPCRA section 304(a)(1)-(3) was to ensure that when Federal authorities receive notice of a release under CERCLA section 103(a), state and local authorities receive similar notice under EPCRA. Note that CERCLA notification applies to the list of hazardous substances (located in 40 CFR 302.4), while EPCRA notification applies to the lists of both CERCLA hazardous substances and EPCRA EHSs (located in 40 CFR part 355 Apps. A and B). When a substance is not a listed CERCLA hazardous substance (or a federally permitted release and is above the applicable reportable quantity), but is on the EPCRA EHSs list, EPCRA section 304(a)(2) provides for notification only if the release of such substance occurs in a manner as the types of releases that require notification under CERCLA section 103(a). On the other hand, if Congress determines that a release occurs in a manner that does not require notification under CERCLA section 103(a), EPCRA section 304(a)(2) works to logically exclude that release from EPCRA reporting.

As noted, CERCLA release notification was established to alert Federal authorities to a release so that the need for a response can be evaluated and any necessary response undertaken in a timely fashion. EPCRA release notification supplements CERCLA release notification by similarly preparing the community at the state and local level. Based on the criteria for EPCRA section 304 release reporting, and to promote consistency between CERCLA and EPCRA release notification requirements, the Agency has incorporated many of CERCLA's release notification exemptions into the EPCRA release notification regulations through prior rulemakings. Each of these prior regulatory actions are summarized below.

Both CERCLA and EPCRA define the term “release.” Under CERCLA section 101(22), the term “release” generally means “any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment (including the abandonment or discarding of barrels, containers, and other closed receptacles containing any hazardous substance or pollutant or contaminant),” but also includes specific exclusions for workplace releases, vehicle emissions, nuclear material releases and fertilizer application. Similar to the CERCLA workplace exposure exclusion, EPCRA section 304(a)(4) exempts from reporting any release which results in exposure to persons solely within the site or sites on which a facility is located. Though the definition of “release” under EPCRA section 329 mirrors the CERCLA definition, it does not contain three exclusions provided in the CERCLA section 101(22) definition of “release”: (1) Emissions from the engine exhaust of a motor vehicle, rolling stock, aircraft, vessel or pipeline pumping station engine; (2) releases of source, byproduct or special nuclear material from a nuclear incident; and (3) the normal application of fertilizer. However, because the types of releases excluded from CERCLA's definition of “release” do not occur in a manner that would be reportable under CERCLA section 103(a), these types of releases do not meet the reporting requirements under EPCRA section 304. See 52 FR 13381, 13384-85 (April 22, 1987) and related Response to Comments document, April 1987, Docket Number 300PQ. Thus, EPA adopted these statutory CERCLA exclusions into the EPCRA regulations codified at 40 CFR 355.31. 4

There are four types of statutory exemptions from the immediate notification requirements for releases of hazardous substances provided in CERCLA sections 101(10) and 103(e) and (f). Specifically, these statutory exemptions include: (1) Federally permitted releases, as defined in section 101(10); (2) the application of a pesticide product registered under the Federal Insecticide, Fungicide and Rodenticide Act or from the handling and storage of such a pesticide product by an agricultural producer (section 103(e)); (3) certain releases of hazardous wastes that are required to be reported under the provisions of the Resource Conservation and Recovery Act and that are reported to the NRC (section 103(f)(1)); and (4) certain releases that are determined to be continuous under the provisions of section 103(f)(2).

In the final rulemaking on April 22, 1987 (52 FR 13378) for emergency planning and release notification requirements under EPCRA, the Agency adopted exemptions from CERCLA section 103(a) reporting “based on the language in EPCRA section 304(a) which requires that releases reportable under that Section occur in a manner which would require notification under section 103(a) of CERCLA.” 52 FR 13378, 13381 (April 22, 1987).

Although EPA stated in the April 1987 rulemaking that it was incorporating CERCLA reporting exemptions into the EPCRA regulations based on the criteria for EPCRA section 304 release reporting, the Agency inadvertently omitted the exclusion for the “application of a pesticide product registered under the Federal Insecticide, Fungicide, and Rodenticide Act or to the handling and storage of such a pesticide product by an agricultural producer” from the EPCRA section 304 regulations at that time. Thus, in a technical amendment published on May 24, 1989 (54 FR 22543), EPA added a provision to the EPCRA regulations in 40 CFR 355.40(a)(2)(iv) (currently codified at 40 CFR 355.31(c)) providing that releases exempted from CERCLA section 103(a) reporting by CERCLA section 103(e) are also exempt from reporting under EPCRA section 304. In addition, the May 1989 technical amendment clarified the language in paragraph (a)(2)(v) of 40 CFR 355.40 (currently codified at 40 CFR 355.31(d)), explaining that this section exempts from EPCRA section 304 reporting “any occurrence not meeting the definition of release under section 101(22) of CERCLA,” as “[s]uch occurrences are also exempt from reporting under CERCLA section 103(a).” See 54 FR 22543, 22543 (May 24, 1989).

CERCLA section 103(f) provides relief from the immediate notification requirements of CERCLA section 103(a) for a release of a hazardous substance that is continuous and stable in quantity and rate. Instead, continuous releases are subject to a significantly reduced reporting requirement under regulations promulgated pursuant to CERCLA section 103(f). In adopting the implementing regulations for EPCRA in 40 CFR part 355, EPA relied on EPCRA section 304(a)(2) to likewise exclude continuous releases from the immediate notification requirement of EPCRA section 304, reasoning: “Because such releases do not `occur in a manner' which requires immediate release reporting under section 103(a) of CERCLA, they are also not reportable under section 304 of [EPCRA].” See 52 FR 13381, 13384 (April 22, 1987). EPA later promulgated continuous release reporting regulations for EPCRA that cross-reference and follow the CERCLA continuous release reporting regulations, finding that EPCRA release reporting is “closely tied” and “parallel” to CERCLA release reporting. See 55 FR 30169, 30179 (July 24, 1990). At that time, the Agency also reiterated that “[t]o the extent that releases are continuous and stable in quantity and rate as defined by CERCLA section 103(f)(2) . . . , they do not occur in a manner that requires notification under CERCLA section 103(a)” and are thus not subject to the EPCRA section 304 immediate notification requirements. Id. (emphasis added).

The scope of this rulemaking is limited to air emissions from animal waste (including decomposing animal waste) at a farm. The Agency is adding this reporting exemption to the EPCRA section 304 emergency release notification regulations as implemented in 40 CFR part 355, subpart C, entitled “Emergency Release Notification.” The scope of this rulemaking stems from existing requirements under EPCRA section 304(a)(2) and under CERCLA section 103(e), as amended, and is tied to the nature or manner of these releases rather than to a specific substance. In other words, the Agency is not exempting substances typically associated with animal waste (such as ammonia or hydrogen sulfide) from reporting. Rather, this rulemaking codifies EPA's interpretation that air emissions from animal waste at farms are not subject to EPCRA section 304 release reporting by explicitly exempting releases from animal waste into the air at farms from reporting. Thus, the Agency is excluding all releases to the air from animal waste at a farm from reporting under EPCRA section 304.

This rulemaking does not apply to releases of substances from animal waste into non-air environmental media, nor to releases into the air from sources other than animal waste or decomposing animal waste at a farm. For example, a release from animal waste into water ( e.g., a lagoon breach) or a release from an anhydrous ammonia storage tank into the air might trigger reporting requirements if the release exceeds the applicable reportable quantities.

This exemption is added to those currently listed in the EPCRA regulations codified at 40 CFR 355.31, entitled “What types of releases are exempt from the emergency release notification requirements of this subpart?”

To delineate the scope of this exemption, EPA is finalizing, as proposed, the definitions of “animal waste” and “farm” to be consistent with CERCLA section 103(e). See 40 CFR 355.61 for the full text of these definitions.

EPA received comments from various organizations, including the National Association of SARA Title III Program Officials (NASTTPO), agricultural trade associations, farm bureaus, a university research center and environmental groups. EPA also received individual comment letters. This section provides a summary of major comments received and EPA's responses. A detailed summary of the comments and EPA's responses are in the Response to Comments document, a copy of which is in the docket for this rulemaking.

Several commenters, NASTTPO, agricultural trade associations, the Department of Agriculture from West Virginia and North Dakota, farm bureaus and a few private citizens, expressed general support for the proposed amendment to the EPCRA section 304 release reporting regulations to add the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e). In support of the proposed amendment, commenters stated that the proposed rule lays out the proper reading of the law and is consistent with Congress' clear intent that EPCRA section 304 and CERCLA release reporting requirements should be applied consistently except in certain very limited circumstances. Some of the commenters stated that EPCRA was never intended to govern agricultural operations, where emissions from livestock are a part of everyday life and are certainly not emergency situations. The natural breakdown of livestock manure does not constitute an emergency release pursuant to the CERCLA and EPCRA laws. One commenter stated that EPCRA was created to protect citizens from disasters such as 1984 Bhopal tragedy, however, animal agriculture cannot be compared to or included in a similar category designed to address toxic chemicals, hazardous substances and chemical emergencies.

EPA received numerous mass mail campaigns which include anonymous private citizens, citizen & environmental groups opposing the proposed amendment to add the reporting exemption to the EPCRA section 304 emergency release notification regulations for air emissions from animal waste at farms. Several commenters strongly urge the EPA to withdraw the proposed rule, which commenters said would exempt concentrated animal feeding operations (CAFOs) from EPCRA reporting requirements so that reports of hazardous substance releases will be available to the public. Certain members of the Senate Environment and Public Works (SEPW) Committee strongly urged EPA to withdraw the proposed rule and faithfully execute and enforce EPCRA and CERCLA reporting requirements consistent with the laws passed by Congress.

EPA also received individual comment letters opposing the proposed amendment. One commenter stated that it is the job of the EPA to regulate sources of hazardous emissions and protect the population from known sources of these emissions. One commenter asked EPA not to ignore and vacate their right-to-know by exempting the CAFO's responsibility to control and report the toxic emissions they are required to control and report.

EPA's Response: While EPA recognizes commenters' concerns regarding animal waste emissions, this amendment is based on the statutory language in EPCRA section 304 and its relationship to CERCLA section 103 release reporting requirements. The basic purpose of emergency release notification requirements under EPCRA section 304 is for facilities to inform state and local agencies of accidental releases so that these agencies can exercise the local emergency response plan if necessary. This may include, but is not limited to, providing shelter or evacuating the community to prevent acute exposure from accidental releases of chemicals. EPCRA section 304 serves as a notification requirement for chemical accidental releases, it is not intended to regulate emissions.

In their letter to EPA dated June 1, 2017, the members of NASTTPO indicated that the release reports for air emissions from animal waste at farms provide little value to local agencies and first responders, and are generally ignored. NASTTPO states that open dialogue and coordination among farms and local agencies can be more effective than release reporting to address animal waste management at farms. NASTTPO reiterated this principle in its comment to this rulemaking, dated December 14, 2018. In addition, regardless of reporting, EPA can still enforce applicable laws and regulations to address threats to human health and the environment. This rulemaking does not limit the Agency's authority under CERCLA sections 104 (response authorities), 106 (abatement actions), 107 (liability), or any other provisions of CERCLA to address releases of hazardous substances at farms.

EPA requested comments on adding the definitions of “animal waste” and “farm” to the definition section of EPCRA regulations in 40 CFR part 355.

A few commenters supported adding the definitions of “animal waste” and “farm” to EPCRA regulations in 40 CFR part 355. These commenters expressed that the incorporation of the FARM Act's definitions of “animal waste” and “farm” into the ECPRA regulations provides important regulatory clarity to agricultural producers. In their comments, NASTTPO expressed that EPA has crafted a narrow and specific exemption from the reporting of releases from animal waste from farms.

Many commenters as part of mass mail campaigns as well as few individual commenters opposed adding the definitions of “animal waste” and “farm” to the EPCRA regulations in 40 CFR part 355. One of the commenters specifically stated that limiting definitions of what constitutes a farm, or animal waste merely hides problems and that we should be striving for more transparency on issues concerning emissions that affect climate and public health, not trying to limit transparency. Another commenter stated that it is only the large CAFOs that can release sufficient volumes of toxic pollutants, as ammonia and hydrogen sulfide into the air which obviously will then end up in our soil and water.

EPA's Response: On March 23, 2018, the Fair Agricultural Reporting Method (FARM) Act of 2018 amended CERCLA section 103 to exempt the reporting of air emissions from animal waste at a farm. See Fair Agricultural Reporting Method Act, Public Law 115-141 §§ 1101-1103 (2018). The FARM Act includes definitions for “animal waste” and “farm.” On August 1, 2018, EPA promulgated a final rule to incorporate the FARM Act legislation into the CERCLA reporting regulations at 40 CFR part 302 (see 83 FR 37446), including definitions for “animal waste” and “farm.” This amendment is based on EPA's interpretation of EPCRA section 304(a)(2) and its relationship to CERCLA section 103 as amended by the FARM Act. Thus, the Agency believes it is reasonable to promulgate the same definitions for “animal waste” and “farm” into the EPCRA release reporting regulations to maintain consistency between the statutes and to effectuate the exemption under EPCRA.

EPA received comments supporting and opposing the legal rationale for the proposed rule. Below is a summary of the significant comments received and EPA's responses. Details of these comments and the Agency's responses are addressed in the Response to Comments document which can be found in the docket for this rulemaking.

A few commenters state that Congress intended for EPCRA reporting requirements to be consistent with or “linked to” CERCLA reporting requirements, which is evinced by the statutory language in EPCRA section 304(a)(2). Commenters stated that EPA has the authority to amend the EPCRA emergency release notification regulations to include the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e). Commenters also note that an analysis prepared by the Congressional Research Service (CRS) at the request of the Senate Committee on Environment and Public Works (EPW) supports EPA's interpretation as presented in the proposed rule. In sum, commenters state the proposed rule is a sound and lawful codification based on the statutory language in EPCRA and CERCLA.

EPA received comments with a wide range of arguments opposing the Agency's legal rationale for the proposed rule. The following is a brief summary of comments on each topic presented in the preamble to the proposed rule. Details of comments received and the Agency's response can be found in the Response to Comments document at the docket for this rulemaking.

A few commenters argue the proposed rule is in direct contravention of the plain language of EPCRA and CERCLA and is therefore “fundamentally flawed” and “illegal.” One commenter argues that the phrase “occurs in a manner” makes it clear that even if a release is not reported under CERCLA, EPCRA reporting would still be required if the “factual” circumstances of the release would otherwise require CERCLA reporting. The commenter also stated that EPA arbitrarily based its interpretation of “occurs in a manner” on the method or type of release ( i.e., into the air) rather than on the substance emitted. Additionally, this commenter argues that the statute provides no support for such an interpretation. Another commenter expressed that the plain language of EPCRA is unambiguous in that it prohibits EPA from exempting animal feeding operations from EPCRA's reporting requirements; but even if there was some ambiguity in the statute, the proposed rule is arbitrary and capricious because EPA has not provided a reasoned explanation to justify its departure from the statute or supported that explanation with substantive record evidence.

EPA's Response: EPA's interpretation is lawful and based on the plain language of EPCRA and CERCLA. EPA reasonably interpreted the operative language in EPCRA section 304(a)(2) as requiring EPCRA reporting when the release “occurs in a manner” which would require notification under CERCLA section 103(a). Because air emissions from animal waste at farms do not “occur in a manner” that would require notification under CERCLA section 103(a), such releases are not reportable under EPCRA section 304(a)(2).

EPA disagrees with commenters' analysis that reporting of these types of air emissions would still be required under EPCRA so long as they are factually releases under CERCLA. EPA understands these comments to propose that the “occurs in a manner” language in EPCRA section 304(a)(2) means that a release only has to satisfy the definition of a “release” under CERCLA to be eligible for EPCRA reporting. Such a reading is unnecessary as the definition of a “release” in EPCRA already mirrors the definition of a “release” in CERCLA. (see the definition of “release” under EPCRA section 329(8) and CERCLA section 101(22). While the CERCLA definition may focus more on hazardous substances and the EPCRA definition focusses more on extremely hazardous substances and hazardous or toxic chemicals, both definitions list similar types, ways, or manners of a release.

EPA believes it is not a full and fair reading of EPCRA section 304(a)(2) to say that EPCRA reporting would still be necessary if a release to the environment qualifies as a release to the environment under CERCLA, regardless of whether reporting is legally required under CERCLA. An EPCRA release into the environment already follows the definition of a release into the environment under CERCLA. Applied to the present rulemaking, emissions into the air from animal waste at farms already qualify as releases into the environment under both statutes ( i.e., they are “emitting” or “escaping” under the statutory definitions). Further analysis of what factually is a release to the environment does not shed light on the Congressional intent of EPCRA section 304(a)(2) and does not follow the plain language of the statute, which requires, in part, that a release occurs in a manner which would require notification under CERCLA section 103(a).

In enacting the FARM Act, the Senate EPW requested an analysis from the Congressional Research Service (CRS) of the potential effects of the FARM Act's amendments to CERCLA and EPCRA release reporting. The CRS issued two memorandums, March 7, 2018 (an overview of CERCLA and EPCRA release reporting, statutory exemptions, the 2008 CERCLA/EPCRA rule and resulting litigation, etc.) and March 13, 2018 (“Supplemental Analysis: Fair Agricultural Reporting Method Act/FARM Act (S.2421”). CRS agreed with this interpretation in its memorandum dated March 7, 2018, which states:

The next question is whether the release would require notification under CERCLA section 103(a). As discussed earlier, the FARM Act exempted only releases of a certain kind or manner—air emissions from animal waste at farms—from notification under CERCLA section 103(a). Accordingly, these types of releases do not occur in a manner that would require notification under CERCLA section 103(a). Because the third criteria of EPCRA section 304(a)(2) is not met, no reporting under EPCRA is required.

EPA believes its interpretation follows the plain language of the statute and carries out the Congressional intent of EPCRA section 304(a)(2).

Commenters opposing the proposal argue that the legislative history of the FARM Act makes it clear that Congress intended for EPCRA reporting to continue notwithstanding the FARM Act's CERCLA exemption. The letter from certain Senate EPW members cites to testimony by Senators and witnesses explaining that the FARM Act makes no changes to reporting requirements for releases of extremely hazardous substances under EPCRA. Commenters assert that the proposed rule violates the legislative intent of the FARM Act. One commenter argues that EPCRA's legislative history does not support EPA's prior actions exempting certain releases from EPCRA reporting, such as the CERCLA continuous release provision.

EPA's Response: In enacting the FARM Act, Congress amended the CERCLA section 103 reporting requirements; it did not amend the EPCRA section 304 reporting requirements. While the FARM Act legislative history has relevance with respect to the statutory changes to reporting under CERCLA section 103, EPA considered the text of EPCRA section 304 and its legislative history in issuing this rule. As stated throughout the proposed rule, EPA has interpreted EPCRA section 304(a)(2) as carrying over CERCLA reporting exemptions related to the manner or nature of release. In this way, EPCRA section 304(a)(2) promotes consistency between EPCRA and CERCLA reporting. The legislative history of the FARM Act does not address the legislative history of EPCRA, and if Congress wished to ensure that the exemption in the FARM Act did not carry over into EPCRA reporting, it could have expressly enacted such statutory text, but it did not.

The legislative history of the FARM Act is correct to the extent that the amendment does not exempt all releases from animal waste at farms from reporting under EPCRA. Rather, the amendment only exempts certain types of releases, and this rule tracks the FARM Act to provide that a limited type of release, air emissions from animal waste at farms, are not subject to reporting under EPCRA. This rule does not apply to releases of substances from animal waste into non-air environmental media, nor to releases into the air from sources other than animal waste or decomposing animal waste at a farm. For example, a release from animal waste into water ( e.g., a lagoon breach) or a release from an anhydrous ammonia storage tank into the air might trigger reporting requirements if the release exceeds the applicable reportable quantities. This is because the releases occur in a manner that require reporting under CERCLA because they are releases into a non-air media or they are not emissions from animal waste.

The proposed rule also explains how, in the 1986 committee conference report addressing EPCRA, Congress expressed its intent that EPCRA release reporting be aligned with CERCLA reporting. As an example, the committee conference report explains how continuous releases which are not subject to immediate reporting requirements under CERCLA should likewise not be subject to EPCRA reporting. As result, EPA promulgated reduced reporting requirements that cross-reference and follow the CERCLA reduced reporting requirements for continuous releases. In this manner, EPA reasonably followed Congressional intent to state that numerous types of releases are not subject to reporting under EPCRA when reporting wasn't required under CERCLA, including vehicle emissions, the normal application of fertilizer, and the application of registered pesticide products (see the Federal Register notice for the proposed rule for a more detailed discussion).

The legislative history of the FARM Act's amendment to CERCLA did not nullify the statutory text in EPCRA section 304(a)(2). EPA reasonably interpreted that text and the proposed rule is supported by EPCRA's legislative history.

EPA also received adverse comments on the rulemaking and its impact on environment and public health. These commenters expressed that the proposed exemption will prevent local emergency responders from accessing information to protect the community. Some commenters assert that the proposed rule is arbitrary and capricious because the Agency failed to consider environmental justice, the National Environmental Policy Act, and the Endangered Species Act prior to issuing the proposed rule.

EPA's Response: Although these comments are outside the scope of this rulemaking, the Agency's response to these comments are provided in the Response to Comments document, which can be found in the docket to this rulemaking.

Three commenters, a university research organization, mass mail campaign and community group, requested EPA to extend the public comment period for the proposed rule. These commenters stated that the proposed rule may have significant consequences on the ability of local governments and their residents to protect their health and wellbeing, none of which seems to have been considered by EPA during the preparation of the proposed rule. Additionally, these commenters expressed that they need an additional 60 days to collect information from studies on health and environmental impacts of CAFO air emissions on surrounding communities as rulemaking docket does not contain any scientific studies or other documents about toxic emissions from CAFOs and their impact on surrounding communities.

Two groups, mass mail campaigns and community organization, requested public hearings on the proposed rule stating that given the impact that the proposed rule will have on communities across the country, including a disproportionate number of low-income and minority communities, EPA should schedule at least three public hearings in various locations across the country to ensure adequate public participation in the rulemaking process. EPA should hold these hearings in locations near to communities affected by CAFOs, for example, communities in North Carolina, Maryland, Iowa, or Oklahoma, to name a few.

EPA's Response: EPA believes that the 30-day comment period was appropriate. The proposed rule is based on a reasonable interpretation of the statutory language in EPCRA section 304(a)(2) and its relationship with CERCLA section 103 as amended by the FARM Act. EPA's rationale is set out in the Federal Register notice for the proposed rule and all the supporting documents the Agency relied on are available in the associated docket.

The proposed rule is not based on health or environmental risk, so no such associated studies are necessary. Because the proposed rule is based on a statutory interpretation, the record is not extensive, and therefore EPA did not believe such an extension should be granted. EPA also generally set out its statutory interpretation in the guidance document entitled “How does the Fair Agricultural Reporting Method (FARM) Act impact reporting of air emissions from animal waste under CERCLA Section 103 and EPCRA Section 304?” dated April 2018. That guidance document states: “EPA intends to conduct a rulemaking to address the impact of the FARM Act on the reporting of air emissions from animal waste at farms under EPCRA.” Accordingly, the commenters were provided a meaningful opportunity to comment and no extensions were necessary to comment on EPA's statutory interpretation. Similarly, no public meetings or hearing were required or deemed necessary to allow for comment on EPA's interpretation.

Additional information about these statutes and Executive Orders can be found at https://www.epa.gov/laws-regulations/laws-and-executive-orders.

This action is a significant regulatory action that was submitted to the Office of Management and Budget (OMB) for review. Any changes made in response to OMB recommendations have been documented in the docket.

This action is not subject to Executive Order 13771 because this final rule does not result in additional costs.

This action does not impose any new information collection burden under the PRA. The Agency is codifying a provision exempting farms from reporting air releases from animal waste under EPCRA section 304 release notification regulations.

I certify that this action will not have a significant economic impact on a substantial number of small entities under the RFA. In making this determination, the impact of concern is any significant adverse economic impact on small entities. An agency may certify that a rule will not have a significant economic impact on a substantial number of small entities if the rule relieves regulatory burden, has no net burden or otherwise has a positive economic effect on the small entities subject to the rule. Consistent with the Agency's interpretation that air emissions from animal waste at farms are not subject to EPCRA section 304 release reporting, this final rule explicitly exempts these types of releases from EPCRA reporting and would not result in additional costs.

This action does not contain any unfunded mandate as described in UMRA, 2 U.S.C. 1531-1538, and does not significantly or uniquely affect small governments. The action imposes no enforceable duty on any state, local or tribal governments or the private sector. The Agency is amending the EPCRA section 304 release notification regulations to add the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e), as amended.

This action does not have federalism implications. It will not have substantial direct effects on the states, on the relationship between the national government and the states, or on the distribution of power and responsibilities among the various levels of government.

This action does not have tribal implications as specified in Executive Order 13175. The EPA is amending the EPCRA section 304 release notification regulations to add the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e), as amended. Thus, Executive Order 13175 does not apply to this action.

The EPA interprets Executive Order 13045 as applying to those regulatory actions that concern environmental health or safety risks that the EPA has reason to believe may disproportionately affect children, per the definition of covered regulatory action in section 2-202 of the Executive Order. This final rule is not based on health or environmental effect, rather, it is intended to maintain consistency between EPCRA section 304 and CERCLA section 103(a) emergency release notification requirements by exempting reporting of air emissions from animal waste at farms.

This action is not a “significant energy action” because it is not likely to have a significant adverse effect on the supply, distribution or use of energy. The EPA is amending the EPCRA section 304 release notification regulations to add the reporting exemption for air emissions from animal waste at farms provided in CERCLA section 103(e), as amended.

This rulemaking does not involve technical standards.

The EPA believes that this action is not subject to Executive Order 12898 (59 FR 7629, February 16, 1994) because it does not establish an environmental health or safety standard. EPA has no authority under EPCRA to prevent or reduce emissions from certain facilities or their operations. The rule presents a statutory interpretation intended to maintain consistency between EPCRA section 304(a) and CERCLA section 103 release notification requirements and does not have any impact on human health or the environment.

This action is subject to the CRA, and the EPA will submit a rule report to each House of the Congress and to the Comptroller General of the United States. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

For the reasons set forth in the preamble, EPA amends 40 CFR part 355 as follows: