DHS invites all interested parties to participate in this rulemaking by submitting written data, views, comments, and arguments on all aspects of this proposed rule. DHS also invites comments that relate to the economic, environmental, or federalism effects that might result from this proposed rule. Comments must be submitted in English, or an English translation must be provided. Comments that will provide the most assistance to USCIS in implementing these changes will reference a specific portion of the proposed rule, explain the reason for any recommended change, and include data, information, or authority that supports such recommended changes.

Instructions: If you submit a comment, you must include the agency name (U.S. Citizenship and Immigration Services) and the DHS Docket No. USCIS-2018-0001 for this rulemaking. Please note that DHS is also pursuing a separate rulemaking entitled “Asylum Application, Interview, and Employment Authorization for Applicants,” RIN 1615-AC27, DHS Docket No. USCIS-2019-0011 (“broader asylum EAD NPRM”), separate from this NPRM. The two rulemakings include distinct proposals. For this proposed rule, DHS will only consider comments submitted to Docket No. USCIS-2018-0001. Please ensure that you submit your comments to the correct docket.

Regardless of the method used for submitting comments or material, all submissions will be posted, without change, to the Federal eRulemaking Portal at http://www.regulations.gov, and they will include any personal information you provide. Therefore, submitting this information makes it public. You may wish to consider limiting the amount of personal information that you provide in any voluntary public comment submission that you make to DHS. DHS may withhold information provided in comments from public viewing if it determines that it may impact the privacy of an individual or is offensive. For additional information, please read the Privacy and Security Notice, which is available at http://www.regulations.gov .

Docket: For access to the docket and to read background documents or comments received, go to http://www.regulations.gov, referencing DHS Docket No. USCIS-2018-0001. You may also sign up for email alerts on the online docket to be notified when comments are posted or a final rule is published.

DHS is proposing to eliminate the regulation articulating a 30-day processing timeframe for USCIS to adjudicate initial Applications for Employment Authorization (Forms I-765 or EAD applications) for asylum applicants. This change is intended to ensure USCIS has sufficient time to receive, screen, and process applications for an initial grant of employment authorization based on a pending asylum application. This change will also reduce opportunities for fraud and protect the security-related processes undertaken for each EAD application. DHS is also proposing to remove the provision requiring that the application for renewal must be received by USCIS 90 days prior to the expiration of their employment authorization. This change is intended to align existing regulatory text with DHS policies implemented under the Retention of EB-1, EB-2, and EB-3 Immigrant Workers and Program Improvements Affecting High-Skilled Nonimmigrant Workers final rule, 82 FR 82398, 82457 (2017 AC21 Rule), which became effective January 17, 2017.

The authority of the Secretary of Homeland Security (Secretary) for these regulatory amendments is found in various sections of the Immigration and Nationality Act (INA), 8 U.S.C. 1101 et seq., and the Homeland Security Act of 2002 (HSA), Public Law 107-296, 116 Stat. 2135, 6 U.S.C. 101 et seq. General authority for issuing the proposed rule is found in section 103(a) of the INA, 8 U.S.C. 1103(a), which authorizes the Secretary to administer and enforce the immigration and nationality laws and to establish such regulations as she deems necessary for carrying out such authority. Further authority for the regulatory amendment in the final rule is found in section 208(d)(2) of the INA, 8 U.S.C. 1158(d)(2), which states an applicant for asylum is not entitled to employment authorization, and may not be granted asylum application-based employment authorization prior to 180 days after filing of the application for asylum, but otherwise authorizes the Secretary to prescribe by regulation the terms and conditions of employment authorization for asylum applicants.

DHS proposes to remove the requirement to adjudicate initial EAD applications for pending asylum applicants within 30 days. In FY 2017, prior to the Rosario v. USCIS court order, the adjudication processing times for initial Form I-765 under the Pending Asylum Applicant category exceeded the regulatory set timeframe of 30 days more than half the time. However, USCIS adjudicated approximately 78 percent of applications within 60 days. In response to the Rosario v. USCIS litigation and to comply with the court order, USCIS has dedicated as many resources as practicable to these adjudications, but continues to face a historic asylum application backlog, which in turn increases the numbers of applicants eligible for pending asylum EADs. However, USCIS does not want to continue this reallocation of resources as a long-term solution because it removes resources from other competing work priorities in other product lines and adds delays to other time-sensitive adjudication timeframes. USCIS could hire more officers, but has not estimated the costs of this and therefore has not estimated the hiring costs that might be avoided if this proposed rule were adopted. Hiring more officers would not immediately and in all cases shorten adjudication timeframes because (1) additional time would be required to onboard and train new employees, and (2) for certain applications, additional time is needed to fully vet an applicant, regardless of staffing levels.

In addition, USCIS has also not estimated the cost impacts that hiring additional officers could have on the agency's form fees. There is currently no fee for asylum applications or the corresponding initial EAD applications, 1 and the cost to the agency for adjudication is covered by fees paid by other benefit requesters. USCIS is not certain of the actual cost impacts of hiring additional adjudicators to process these EAD applications at this time. USCIS expects that potentially higher fees might be avoidable if the proposed rule is adopted. As a primary goal, USCIS seeks to adequately vet applicants and adjudicate applications as quickly and efficiently as possible. This proposed rule may delay the ability for some initial applicants whose EAD processing is delayed beyond the 30-day regulatory timeframe to work.

The impacts of this rule are measured against a baseline. This baseline is the best assessment of the way the world would look absent this proposed action. For this proposed action, USCIS assumes that in the absence of this proposed rule the baseline amount of time that USCIS would take to adjudicate would be 30 days. USCIS also assumes that if this proposed rule is adopted, adjudications will align with DHS processing times achieved in FY 2017 (before the Rosario v. USCIS court order). This is our best estimate of what would occur if the proposed rule is adopted. USCIS believes the FY 2017 timeframes are sustainable and USCIS intends to meet these timeframes if the proposed rule is adopted. Therefore, USCIS is analyzing the impacts of this rule by comparing the costs and benefits of adjudicating initial EAD applications for pending asylum applications within 30 days compared to the actual time it took to adjudicate these EAD applications in FY 2017.

The impacts of this rule would include both distributional effects (which are transfers) and costs. 2 The distributional impacts would fall on the asylum applicants who would be delayed in entering the U.S. labor force. The distributional impacts (transfers) would be in the form of lost compensation (wages and benefits). A portion of this lost compensation might be transferred from asylum applicants to others that are currently in the U.S. labor force, possibly in the form of additional work hours or overtime pay. A portion of the impacts of this rule would also be borne by companies that would have hired the asylum applicants had they been in the labor market earlier but were unable to find available workers. These companies would incur a cost, as they would be losing the productivity and potential profits the asylum applicant would have provided had the asylum applicant been in the labor force earlier. Companies may also incur opportunity costs by having to choose the next best alternative to immediately filling the job the asylum applicant would have filled. USCIS does not know what this next best alternative may be for those companies. As a result, USCIS does not know the portion of overall impacts of this rule that are transfers or costs. If companies can find replacement labor for the position the asylum applicant would have filled, this rule would have primarily distributional effects in the form of transfers from asylum applicants to others already in the labor market (or workers induced to return to the labor market). USCIS acknowledges that there may be additional opportunity costs to employers such as additional search costs. However, if companies cannot find reasonable substitutes for the labor the asylum applicants would have provided, this rule would primarily be a cost to these companies through lost productivity and profits. USCIS uses the lost compensation to asylum applicants as a measure of the overall impact of the rule—either as distributional impacts (transfers) or as a proxy for businesses' cost for lost productivity. It does not include additional costs to businesses for lost profits and opportunity costs or the distributional impacts for those in an applicant's support network.

The lost compensation to asylum applicants could range from $255.88 million to $774.76 million annually depending on the wages the asylum applicant would have earned. The ten-year total discounted lost compensation to asylum applicants at 3 percent could range from $2,182.68 million to $6,608.90 million and at 7 percent could range from $1,797.17 million to $5,441.62 million (years 2019-2028). USCIS recognizes that the impacts of this proposed rule could be overstated if the provisions in the broader asylum EAD NPRM are finalized as proposed. Specifically, the broader asylum EAD NPRM would limit or delay eligibility for employment authorization for certain asylum applicants. 3 Accordingly, if the population of aliens is less than estimated as a result of the broader asylum EAD rule, the estimated impacts of this rule could be overstated because the population affected may be lower than estimated in this rule.

In instances where a company cannot hire replacement labor for the position the asylum applicant would have filled, USCIS acknowledges that such delays may result in tax losses to the government. It is difficult to quantify income tax losses because individual tax situations vary widely  4 but USCIS estimates the potential loss to other employment tax programs, namely Medicare and social security which have a combined tax rate of 7.65 percent (6.2 percent and 1.45 percent, respectively). 5 With both the employee and employer not paying their respective portion of Medicare and social security taxes, the total estimated tax loss for Medicare and social security is 15.3 percent.  6 Lost wages ranging from $255.88 million to $774.76 million would result in employment tax losses to the government ranging from $39.15 million to $118.54 million. 7 Again, depending on the circumstances of the employee, there could be additional federal income tax losses not estimated here. There may also be state and local income tax losses that would vary according to the jurisdiction.

This proposed rule would result in reduced opportunity costs to the Federal Government. Since Rosario compelled USCIS to comply with the 30-day provision in FY 2018, USCIS has redistributed its adjudication resources to work up to full compliance. If the 30-day timeframe is removed, these redistributed resources could be reallocated, potentially reducing delays in processing of other applications, and avoiding costs associated with hiring additional employees. USCIS has not estimated these avoided costs. Additionally, USCIS does not anticipate that removing the separate 90-day EAD filing requirement would result in any costs to the Federal Government.

The proposed rule would benefit USCIS by allowing it to operate under long-term, sustainable case processing times for initial EAD applications for pending asylum applicants, to allow sufficient time to address national security and fraud concerns, and to maintain technological advances in document production and identity verification. Applicants would rely on up-to-date processing times, which provide accurate expectations of adjudication times.

The proposed technical change to remove the 90-day filing requirement would reduce confusion regarding EAD renewal requirements for pending asylum applicants and ensure the regulatory text reflects current DHS policy and regulations under DHS's final 2017 AC21 Rule. 8

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0675; Product Identifier 2019-NM-068-AD” at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. The FAA will consider all comments received by the closing date and may amend this NPRM 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 NPRM.

Transport Canada Civil Aviation (TCCA), which is the aviation authority for Canada, has issued Canadian AD CF-2019-06, dated February 18, 2019 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain Bombardier, Inc., Model DHC-8-401 and -402 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-2019-0675.

Bombardier has issued the following service information.

• Service Bulletin 84-53-74, dated August 29, 2018. This service information describes procedures for a general visual inspection of the keel and stringer end fittings, repair, and replacement of the keel and stringer end fittings.

• Service Bulletin 84-53-75, dated August 29, 2018. This service information describes procedures for a detailed visual inspection of stringer end fittings and keel fittings, in the passenger compartment at stations X373.15 and X428.50, for loose or working fasteners, signs of wear, and corrosion.

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.

This product has been approved by the aviation authority of another country, and is approved for operation in the United States. Pursuant to a bilateral agreement with the State of Design Authority, the FAA has been notified of the unsafe condition described in the MCAI and service information referenced above. The FAA is proposing this AD because the agency evaluated all the relevant information and determined the unsafe condition described previously is likely to exist or develop on other products of the same type design.

This proposed AD would require accomplishing the actions specified in the service information described previously.

The FAA estimates that this proposed AD affects 1 airplane of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA has received no definitive data that would enable the agency to provide cost estimates for the on-condition replacements specified in this proposed AD.

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

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

This proposed 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.

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

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

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

2. Will not affect intrastate aviation in Alaska; and

3. 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 proposes to amend 14 CFR part 39 as follows:

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2019-0674; Product Identifier 2019-NM-079-AD” at the beginning of your comments. The FAA specifically invites comments on the overall regulatory, economic, environmental, and energy aspects of this NPRM. The FAA will consider all comments received by the closing date and may amend this NPRM based on those comments.

The FAA will post all comments, 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 the agency receives about this NPRM.

The EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2019-0096, dated April 30, 2019 (“EASA AD 2019-0096”) (also referred to as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for certain 328 Support Services GmbH Model 328-100 airplanes. The MCAI states:

EASA AD 2019-0096 describes procedures for an inspection of the landing flap support arms for missing rivets, which includes a special detailed inspection (eddy current) of the landing flap support 2 along the edges and around the rivets for cracks, and corrective actions. Corrective actions include installing rivets and repairing cracks.

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 the FAA's bilateral agreement with the State of Design Authority, the FAA has been notified of the unsafe condition described in the MCAI referenced above. The FAA is proposing this AD because the FAA 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 proposed AD would require accomplishing the actions specified in EASA AD 2019-0096 described previously, as incorporated by reference, except for any differences identified as exceptions in the regulatory text of this AD and except as discussed under “Differences Between this Proposed AD and the MCAI.”

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA initially 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. The FAA has since coordinated with other manufacturers and civil aviation authorities (CAAs) to use this process. As a result, EASA AD 2019-0096 will be incorporated by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2019-0096 in its entirety, through that incorporation, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in the EASA AD does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in the EASA AD. Service information specified in EASA AD 2019-0096 that is required for compliance with EASA AD 2019-0096 will be available on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2019-0674 after the FAA final rule is published.

The applicability of EASA AD 2019-0096, dated April 30, 2019, includes 328 Support Services GmbH Model 328-100 airplanes serial numbers 3032 through 3086 inclusive. However, the applicability of this proposed AD only includes 328 Support Services GmbH Model 328-100 airplanes serial numbers 3032 through 3063 inclusive. The FAA issued AD 98-23-16 to correct the unsafe condition for 328 Support Services GmbH Model 328-100 airplanes serial numbers 3064 through 3086 inclusive.

EASA AD 2019-0096 did not state a corrective action if any cracking is found during the required inspection. This proposed AD would require repair of any cracking.

The FAA estimates that this proposed AD affects 22 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

The FAA estimates the following costs to do any necessary on-condition installation that would be required based on the results of any required actions. The FAA has no way of determining the number of aircraft that might need this on-condition installation:

The FAA has received no definitive data that would enable the FAA to provide cost estimates for the on-condition crack repairs specified in this proposed AD.

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

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

This proposed 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.

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

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

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

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

(3) 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 proposes to amend 14 CFR part 39 as follows:

Background

This document contains proposed amendments to 26 CFR part 1 under section 451(c). On December 22, 2017, section 451(c) was amended by section 13221 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054) (the Act), to provide that a taxpayer using an accrual method of accounting (accrual method taxpayer) with an applicable financial statement (AFS) may use the deferral method of accounting provided in section 451(c) for advance payments. These proposed regulations also provide a deferral method of accounting for taxpayers that do not have an AFS. Unless otherwise indicated, all references to section 451(c) in this preamble are to section 451(c), as amended by the Act.

In general, section 451 provides that the amount of any item of gross income is included in gross income for the taxable year in which it is received by the taxpayer, unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period. Under § 1.451-1, accrual method taxpayers generally include items of income in gross income in the taxable year when all the events occur that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy (the all events test). All the events that fix the right to receive income occur when (1) the required performance takes place, (2) payment is due, or (3) payment is made, whichever happens first. See Revenue Ruling 2003-10 (2003-1 CB 288); Revenue Ruling 84-31 (1984-1 CB 127); Revenue Ruling 80-308 (1980-2 CB 162). Section 451(c) requires an accrual method taxpayer who receives an advance payment to include the amount thereof in income in the taxable year of receipt. Section 451(c) also generally codifies the current deferral method of accounting for certain advance payments for goods, services, and other specified items provided by the IRS under Revenue Procedure 2004-34 (2004-22 IRB 991) by allowing accrual method taxpayers to elect to defer the inclusion of income associated with certain advance payments to the taxable year following the taxable year of receipt if such income also is deferred for AFS purposes.

On April 12, 2018, the Treasury Department and the IRS issued Notice 2018-35 (2018-18 IRB 520) requesting, in part, comments on future guidance under section 451(c). The record of public comments received in response to Notice 2018-35 may be requested by sending an email to Notice.comments@irscounsel.treas.gov . This document provides guidance on the application of section 451(c), taking into account comments that were received regarding section 451(c). The application of section 451(c) is addressed in separate guidance published in the same issue of the Federal Register as these proposed regulations.

These proposed regulations describe and clarify the statutory requirements of section 451(c) by providing new § 1.451-8.

Consistent with section 451(c)(1)(A), these proposed regulations provide that an accrual method taxpayer with an AFS includes an advance payment in gross income in the taxable year of receipt unless the taxpayer uses the deferral method in section 451(c)(1)(B) and proposed § 1.451-8(c) (AFS deferral method). A taxpayer using the AFS deferral method must have an AFS, as described in section 451(b)(1)(A)(i) or (ii). These proposed regulations define the term AFS by reference to the definition of that term in proposed § 1.451-3(c)(1) (REG-104870-18). Under the AFS deferral method, a taxpayer with an AFS that receives an advance payment must include: (i) The advance payment in income in the taxable year of receipt, to the extent that it is included in revenue in its AFS, and (ii) the remaining amount of the advance payment in income in the next taxable year. The AFS deferral method provided in these proposed regulations closely follows the deferral method of Revenue Procedure 2004-34, as modified by Revenue Procedure 2011-14 (2011-4 IRB 330), and as modified and clarified by Revenue Procedure 2011-18 (2011-5 IRB 443), and Revenue Procedure 2013-29 (2013-33 IRB 141) (Revenue Procedure deferral method). Because new section 451(c)(1)(B) was intended to generally codify the Revenue Procedure deferral method, the Treasury Department and the IRS believe that rules similar to the Revenue Procedure deferral method are necessary and appropriate for the proper application of section 451(c). See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.).

Section 451(c)(4)(A) generally defines an advance payment as any payment the full inclusion of which in gross income of the taxpayer for the year of receipt is a permissible method of accounting, any portion of which is included in revenue by the taxpayer in an AFS, and which is for goods, services, or other items identified by the Secretary. One commenter noted that the financial statement requirement within the definition of an advance payment means that the rule in Revenue Procedure 2004-34 that depended on determining when the advance payment was earned was not within the statutory text of section 451(c). The Treasury Department and the IRS have concluded that section 451(c) does not prohibit a deferral method that is otherwise permissible under Revenue Procedure 2004-34. See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.). See also, Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18) at 170-171 (Dec. 20, 2018). Revenue Procedure 2004-34 permitted non-AFS taxpayers to use the Revenue Procedure deferral method based on when the income is earned (earned standard). See section 5.02(3)(b) of Revenue Procedure 2004-34. The Revenue Procedure deferral method using the earned standard is a permissible method of accounting for non-AFS taxpayers and, therefore, these proposed regulations also provide a similar deferral method for non-AFS taxpayers in proposed § 1.451-8(d) (non-AFS deferral method). Under the non-AFS deferral method, an accrual method taxpayer without an AFS that receives an advance payment must include: (i) The advance payment in income in the taxable year of receipt, to the extent that it is earned, and (ii) the remaining amount of the advance payment in income in the next taxable year.

Section 451(c)(4)(A) generally defines advance payment as any payment (i) the full inclusion of which in gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting, (ii) any portion of which is included in revenue by the taxpayer in an AFS (or such other financial statement as the Secretary may specify) for a subsequent taxable year, and (iii) which is for goods, services, or such other items as may be identified by the Secretary.

Proposed § 1.451-8(b)(1)(i) clarifies that the definition of advance payment under the AFS and non-AFS deferral methods is consistent with the definition of advance payment in Revenue Procedure 2004-34, which section 451(c) was meant to codify. See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.). The Treasury Department and the IRS believe this definition of advance payment: (1) Is consistent with section 451(c), (2) minimizes additional tax compliance burden and cost, (3) provides clarity to taxpayers, and (4) uses rules which are familiar to both taxpayers and the IRS.

Two commenters suggested that airline miles be explicitly included in the list of items for which an advance payment may be received. The commenters suggested that airline miles are a unique type of item, generally redeemed for air travel and non-travel rewards. The Treasury Department and the IRS decline to specifically include airline miles in the definition of advance payment because the use of the deferral method under these proposed regulations, to the extent airline miles are redeemable for goods or services, is already permissible. Therefore, these proposed regulations include examples to illustrate that, to the extent certain reward points are treated as separate performance obligations, they may be eligible for the deferral methods provided under these proposed regulations.

Another commenter suggested that progress payments with respect to the sale of an interest in real property should be included in the definition of an advance payment. Revenue Procedure 2004-34 was intended to provide a simplified and consistent deferral period for the sale of goods, services, and other items. However, the definition of advance payment in Revenue Procedure 2004-34 does not include prepayments for interests in real property. These proposed regulations generally provide the same types of items in the definition of advance payment to those items provided in Revenue Procedure 2004-34. However, the Treasury Department and IRS will consider any comments received in determining whether it is appropriate to include additional types of items in the definition of advance payment.

Section 451(c)(4)(B) provides that certain items, except as otherwise provided by the Secretary, are to be excluded from the definition of an advance payment. Pursuant to section 451(c)(4)(B), the term advance payment does not include rent; insurance premiums governed by subchapter L; payments with respect to financial instruments; payments with respect to certain warranty or guaranty contracts; payments subject to section 871(a), 881, 1441, or 1442; payments in property to which section 83 applies; and other payments identified by the Secretary.

Several commenters requested that certain payments for certain types of goods be excluded from the definition of an advance payment under section 451(c)(4)(B). A commenter requested that certain pre-delivery payments for the sale of high-value customer-configured equipment that will be delivered to customers at reasonably certain times not be included in the definition of advance payment. Another commenter requested that an exclusion be provided for goods for which (i) a taxpayer receives a payment in a taxable year with respect to a contract for the sale of goods not properly includible in such taxpayer's finished goods inventory, and (ii) on the last day of such taxable year the taxpayer does not have on hand (or available to it in such year through its normal source of supply) goods of a substantially similar kind and in a sufficient quantity to satisfy the contract during such contract year. This commenter suggested a narrowing of this exclusion could be done according to whether a good is commercially significant or of high-value. A commercially significant good has a useful life equal to or in excess of 10 years and it is developed, marketed, and sold to customers in the aerospace industry. Generally these goods require a significant amount of capital to produce and may require considerable time from development to delivery. Generally, for financial statement purposes, such manufacturers recognize revenue related to these goods when the product is completed and delivered to the customer and title and risk of loss have transferred to the customer.

Proposed § 1.451-8(b)(1)(ii) provides a list of items excluded from the definition of advance payment that is similar to Revenue Procedure 2004-34. An additional exclusion is provided for payments received in a taxable year earlier than the taxable year immediately preceding the taxable year of the contractual delivery date for a specified good, as defined in § 1.451-8(b)(9). In response to the comments received, the Treasury Department and IRS have determined that an exclusion is appropriate for certain goods for which a taxpayer requires a customer to make an upfront payment under the contract if (i) the contracted delivery month and year of the good occurs at least two taxable years after an upfront payment, (ii) the taxpayer does not have the good or a substantially similar good on hand at the end of the year the upfront payment is received, and (iii) the taxpayer recognizes all of the revenue from the sale of the good in its AFS in the year of delivery.

The Treasury Department and the IRS have employed the authority granted to the Secretary in section 451(c)(4)(B)(vii) to exclude certain payments, in a limited manner, that would otherwise constitute advance payments within the meaning of section 451(c)(4)(A), in response to the proposals described in comments already received. In order to fully consider other such potential exclusions, detailed comments that specifically address the following issues are requested:

1. Does the authority granted to the Secretary by section 451(c)(4)(B)(vii) to exclude certain payments from the definition of an advance payment under section 451(c) also permit an exception for those payments from the rules regarding the all events test under section 451(b)?

2. What significance, if any, should the time it takes to manufacture or create an item of property, or such item of property's useful life, be given in determining whether a pre-delivery payment for such item of property should be included in income as an advance payment?

3. Does the authority granted to the Secretary by section 451(c)(4)(B)(vii) authorize rules that change the timing of deductions or provide a safe harbor allowing specified categories of taxpayers to use methods of accounting for recognizing income other than an accrual method under section 451? Is there any particular authority under the Code that would allow changing the timing of deductions in this context under section 451 or another section of Subchapter E?

4. Does the authority granted to the Secretary by section 451(c)(4)(B)(vii) to exclude certain payments from the definition of an advance payment also authorize the imposition of conditions unrelated to an accrual method of accounting with respect to any such exclusions? For example, could the Secretary require that a taxpayer use an alternative method of accounting as a condition for excluding a type of payment from the definition of advance payment?

5. Does the authority granted to the Secretary by section 451(c)(4)(B)(vii) to exclude certain payments from the definition of advance payment also authorize the imposition of a time limit on such exclusion? For example, could an exclusion under section 451(c)(4)(B)(vii) be limited to a specified number of years after which all remaining amounts would have to be recognized in income? If so, what would be an appropriate time limit?

6. Does the authority granted to the Secretary by section 451(c)(4)(B)(vii) allow deferral of income in an amount equal to the estimated future performance costs while requiring current recognition of estimated profits not in excess of the amounts of advance payments? If so, does the authority granted to the Secretary by section 451(c)(4)(B)(vii) permit rules to account for the time value of money for any variances in estimated costs or profits?

7. Would it be inappropriate to reduce the amount a C corporation would be permitted to defer for a given taxable year under a potential exclusion under section 451(c)(4)(B)(vii) by an amount equal to the excess of (i) distributions the C corporation made to its shareholders with respect to its stock, over (ii) the C corporation's taxable income for that taxable year?.

Section 451(c)(3) provides that the deferral method does not apply to an advance payment received by the taxpayer during a taxable year if such taxpayer ceases to exist during (or with the close of) the taxable year. In contrast, Revenue Procedure 2004-34 provides more detailed acceleration rules.

The Treasury Department and the IRS have determined that rules similar to the acceleration rules provided in Revenue Procedure 2004-34 are appropriate for the proper application of the AFS and non-AFS deferral methods. The continued use of the deferral method for an advance payment is not appropriate and should be limited in certain situations, such as when the taxpayer ceases to exist, or when their obligation regarding the advance payment is satisfied or otherwise ends. Accordingly, proposed § 1.451-8(c)(2) and (d)(6) provide rules to ensure the acceleration of an advance payment when a taxpayer either dies or ceases to exist, or when a taxpayer's obligation regarding an advance payment is satisfied or otherwise ends, except in certain circumstances. Consistent with Revenue Procedure 2004-34, the acceleration rules do not apply to a taxpayer that engages in a transaction to which section 381 applies or certain transactions in which section 351 applies in the taxable year in which an advance payment is received.

Section 451(c) does not specifically address whether the deferral method may be used when an amount is earned in the taxable year, but deferred for AFS purposes. The deferral method under section 451(c) is an exception to the requirement to include an amount in income when it is received but is not an exception to the requirement to include an amount in income when it is earned under the all events test. Accordingly, consistent with Revenue Procedure 2004-34, these proposed regulations permit deferral of advance payments received to the extent, in the year of receipt, the amount is not included in revenue in the taxpayer's AFS, and is not otherwise earned in the taxable year of receipt. The amounts not included in gross income in the year of receipt must be included in gross income in the next taxable year.

Section 451(c) does not address the treatment of financial statement adjustments that cause amounts to not be included in income.

Proposed § 1.451-8(c)(3) and (d)(7) provide that a taxpayer that defers inclusion of all or a portion of an advance payment must include the remainder of the advance payment in gross income in the subsequent year, notwithstanding any write-down or adjustment for financial accounting purposes. This provision is consistent with a plain reading of section 451(c)(1)(B) and the rule in proposed § 1.451-3(j), which require that an item of income treated as deferred revenue in a taxpayer's AFS in one year and charged, in whole or part, to a capital account in a subsequent year, is included in revenue in the subsequent year.

A financial accounting adjustment may occur after certain equity acquisitions. For example, after certain equity acquisitions, the acquiring entity may write-down or adjust the target's deferred revenue in the subsequent year under purchase accounting rules. Some taxpayers have asserted that a write-down or adjustment for financial accounting purposes results in a permanent exclusion of income for federal income tax purposes. Proposed § 1.451-8(c)(3) and (d)(7) provide clarification for instances in which a taxpayer defers inclusion of an advance payment and is subsequently acquired in certain equity acquisitions. The Treasury Department and the IRS believe that financial statement write-downs or adjustments to deferred revenue should not be taken into account for federal income tax purposes when determining the proper amount to be included in income under the deferral method. This clarification ensures that a financial statement write-down or adjustment to deferred revenue does not result in a permanent exclusion of income for federal income tax purposes.

Section 451(c) does not provide rules relating to the treatment of short taxable years. Proposed § 1.451-8(c)(4) and (d)(8) use the short taxable year rules of Revenue Procedure 2004-34 for the AFS and non-AFS deferral methods because a rule for short taxable years is necessary to properly implement the deferral method provided in section 451(c)(1)(B).

Sections 451(b) and (c)(4)(D) require that taxpayers with contracts that contain multiple performance obligations must allocate transaction price, and therefore defer (or accelerate) income inclusion, consistent with the transaction price allocation used for AFS purposes. Proposed § 1.451-3(c)(3) (REG-104870-18) defines the term performance obligation to mean a promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. Proposed § 1.451-8(b)(4) defines the term performance obligation by cross-reference to proposed § 1.451-3(c)(3) for purposes of the allocation rule provided in section 451(c)(4)(D).

Proposed § 1.451-8(b)(7) defines the term transaction price by cross-reference to proposed § 1.451-3(c)(6). Proposed § 1.451-3(c)(6) defines the term transaction price to mean the gross amount of consideration to which a taxpayer expects to be entitled for AFS purposes in exchange for transferring promised goods, services, or other property, including amounts referred to in proposed § 1.451-3(i). However, the term transaction price does not include certain items, such as amounts collected on behalf of third parties that are not otherwise income to the taxpayer, increases for consideration to which a taxpayer's entitlement is contingent on the occurrence or nonoccurrence of a future event, and reductions for amounts subject to section 461. Proposed § 1.451-3(c)(6)(ii) presumes that an amount included in the transaction price for AFS purposes is not contingent unless, upon examination of all of the facts and circumstances existing at the end of the taxable year, it can be established to the satisfaction of the Commissioner that the amount is contingent on the occurrence or nonoccurrence of a future event. Proposed § 1.451-3(c)(6)(ii) also provides that certain amounts included in transaction price for AFS purposes, however, will not be treated as contingent on the occurrence or nonoccurrence of a future event.

Comments are requested on allocation of the transaction price (i) to performance obligations that are not contractually based, (ii) for arrangements that include both income subject to section 451 and long-term contracts subject to section 460, and (iii) when the income realization event for federal income tax purposes differs from the income realization event for AFS purposes.

For non-AFS taxpayers, there is a continued need to provide an allocation method consistent with the objective criteria standard in Revenue Procedure 2004-34 because such taxpayers do not have an AFS and cannot use the transaction price allocation used for AFS purposes, as provided in section 451(b)(4). Therefore, proposed § 1.451-8(d)(5) permits a non-AFS taxpayer to allocate the revenue of multiple obligations in a single contract based on how such obligations are separately priced or on any method that may be provided in guidance published in the IRB.

Several commenters discussed the need for a regulatory exception to the existing statutory and regulatory timing rules that apply to liabilities (for example, deductions and offsets for rebates, refunds, and cost of goods sold (COGS) prior to when the liability for such items is incurred under section 461) when advance payments are required to be included in income under section 451(c) prior to the completion of the sale of goods or provision of services (accelerated cost offset). The commenters argued that not providing an accelerated cost offset in the regulations would cause a mismatch of income and expenses and result in the taxation of gross receipts.

An allowance to account for future cost of goods sold, for future estimated costs, or other cost offset is inconsistent with sections 461(h) and, 471, 263A, and the accompanying regulations. Moreover, section 13221 does not change the timing rules provided in sections 461, 471, 263A and elsewhere that apply to liabilities. Section 13221 changes the timing of income for advance payments for goods and generally codifies Revenue Procedure 2004-34. See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.). Revenue Procedure 2004-34 does not include an accelerated cost offset when amounts are included in income prior to the sale of goods or provision of services.

The Conference Report also indicates that section 13221 of the Act is “intended to override any deferral method provided by Treasury Regulation § 1.451-5 for advance payments received for goods.” H.R. Rep. No. 115-466, at 429 n 880 (2017) (Conf. Rep.). Section 1.451-5 includes a deferral method that allows an accelerated cost offset when certain amounts are included in income prior to the sale of goods. See § 1.451-5(c). Section 451(c) does not provide a cost offset, and the Conference Report does not provide any indication that Congress intended to preserve the cost offset rules permitted under § 1.451-5. See also, Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18) at 156-157 and 164-165 (December 20, 2018). Final regulations were published in the Federal Register (84 FR 33691) on July 15, 2019, that withdraw § 1.451-5, consistent with the Act.

The Treasury Department and the IRS believe that Congress intentionally simplified the rules for advance payments by limiting the deferral of advance payments for taxpayers with an AFS to a prescribed statutory method that: (1) Does not include an accelerated cost offset, (2) is consistent with Revenue Procedure 2004-34, and (3) overrides § 1.451-5. See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.). Accordingly, the Treasury Department and the IRS decline to provide an accelerated cost offset in these proposed regulations. The Treasury Department and the IRS do not agree with the contention that changes to the timing of income under section 451 without an accelerated cost offset cause a taxation of gross receipts. Section 451(c) and these proposed regulations merely change the timing of income recognition, do not preclude any associated reduction or deduction for properly incurred liabilities, and are consistent with existing statutory and regulatory timing requirements that apply to liabilities.

Several commenters proposed a cost offset mechanism for manufacturers of certain property and taxpayers with inventoriable goods in order to ensure matching of income and the associated expenses. Commenters made the following suggestions to alleviate the potential mismatch of the acceleration of income recognition with different timing rules for associated costs: (i) Permitting a taxpayer that uses a percentage of completion method for AFS purposes (book PCM), but not subject to section 460, to elect to use their AFS method for tax purposes; (ii) permitting a taxpayer that uses book PCM, but not subject to section 460, to elect to apply section 460 for federal income tax purposes; (iii) expanding the recurring item exception in section 461(h)(3) to permit a taxpayer to offset the portion of the advance payment included in income for the taxable year by the cost of goods sold related to this payment if the goods are completed and shipped to the customer within 8 1/2 months of the end of the taxable year that the advance payment is included in income; or (iv) providing a cost offset for taxpayers that can demonstrate at the time of the purchase agreement that a net operating loss will remain unused for the 5-year period after the taxable year the advance payment is received.

The Treasury Department and the IRS continue to consider whether any such exceptions are an appropriate use of the Secretary's authority under section 461(h) or 460. To facilitate further consideration of such potential exceptions, detailed comments that specifically address the following issues are requested:

1. Under what authority would it be appropriate for the Secretary to permit a taxpayer to use book PCM as its tax method? When inventory is involved, what limitations could be instituted to ensure that book PCM could not be used to recover costs related to inventoriable goods prior to the time when such costs could be recovered under sections 471 and 263A? Under what specific authority would it be appropriate to permit a book PCM method to be used to recover costs related to inventoriable goods?

2. Would elective use of book PCM for tax purposes provide an appropriate cost offset? Would such a method be characterized as one that reports contract revenue according to a taxpayer's book method, while accounting for costs, including nondeductible costs, as deductions under the Code? If not, how would such a method account for costs for federal income tax purposes?

3. Rather than make book PCM elective, would it be appropriate for the definition of “unique item” for purposes of section 460 to be expanded?

4. Section 460 requires use of the look-back method to compensate for improper acceleration or deferral of income under PCM. It also requires that all contract income be reported no later than the year following contract completion. Would elective use of a PCM under section 460 without these provisions invite abuse? If so, how could such abuse be prevented?

Section 451(c)(2) provides that a taxpayer may elect deferral treatment of an advance payment governed by section 451(c), and such election shall be made at such time and manner and with respect to such categories of advance payments as specified by the Secretary. Section 451(c)(2)(B) provides that the deferral method is treated as a method of accounting and the election is effective for taxable years with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to change to a different method of accounting.

The use of the AFS or non-AFS deferral method is the adoption of, or a change in, a method of accounting under section 446. A taxpayer may change its method of accounting to use the deferral methods only with the consent of the Commissioner as required under section 446(e) and the corresponding regulations. The Treasury Department and the IRS intend to issue future guidance that will provide the procedures by which a taxpayer may change its method of accounting to use one of the deferral methods described in these proposed regulations. However, until further guidance for the treatment of advance payments is applicable, a taxpayer may continue to rely on Revenue Procedure 2004-34, as described in Notice 2018-35.

Section 7805(b)(1)(A) and (B) of the Code generally provides that no temporary, proposed, or final regulation relating to the internal revenue laws may apply to any taxable period ending before the earliest of (A) the date on which such regulation is filed with the Federal Register , or (B) in the case of a final regulation, the date on which a proposed or temporary regulation to which the final regulation relates was filed with the Federal Register .

These regulations are proposed to apply to taxable years beginning on or after the date the final regulations are published in the Federal Register . Until the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register , a taxpayer may rely on these proposed regulations for taxable years beginning after December 31, 2017, provided that the taxpayer: (1) Applies all the applicable rules contained in these proposed regulations, and (2) consistently applies these proposed regulations to all advance payments. See section 7805(b)(7).

The IRS notice, revenue ruling, and revenue procedures cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov .

Executive Orders 13771, 13563, and 12866 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, reducing costs, harmonizing rules, and promoting flexibility. The Executive Order 13771 designation for any final rule resulting from these proposed regulations will be informed by comments received. The preliminary Executive Order 13771 designation for this proposed rule is regulatory.

The proposed regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these proposed regulations as significant under section 1(b) of the MOA. Accordingly, OMB has reviewed these proposed regulations.

Under section 451(a) of the Internal Revenue Code, income is “recognized” (that is, included in gross income for tax purposes) in the year in which it is received by the taxpayer, unless it is properly accounted for in a different period under the taxpayer's method of accounting. Because of this latter condition, the tax treatment of certain forms of income depends on the method of accounting a taxpayer is using. For taxpayers using the accrual method of accounting, income is generally recognized in the year in which all events have occurred that fix the right to receive that income and when the amount of income can be determined with reasonable accuracy (the “all events test”). Receipt of payment by the business satisfies the all events test. However, recognition of certain payments for goods or services not yet provided may be deferred to the year following receipt of payment, to the extent that recognition is also deferred for on the taxpayer's Applicable Financial Statement (AFS). Such payments are referred to as “advance payments.”

Prior to the December 22, 2017, enactment of, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Public Law 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), taxpayers were generally permitted to defer the tax on these advance payments; in other words, advance payments could be recognized in a later taxable year. Section 451(c), added by the TCJA, allows accrual-method taxpayers to elect to recognize as income only a portion of such an advance payment in the taxable year in which it is received, and then recognize the remainder in the following taxable year. Section 451(c) essentially codifies the deferral method of accounting for advance payments that was permitted in Revenue Procedure 2004-34. (Joint Committee on Taxation, General Explanation of Public Law 115-97, (Washington, U.S. Government Publishing Office, December 2018), at 167.) New section 451(c), the subject of the proposed regulations, deals with issues around how these advance payments are defined and the timing in which they need to be recognized in the business's income tax.

These proposed regulations provide certainty and clarity to taxpayers affected by statutory changes introduced in section 451(c). The Treasury Department and IRS have received questions and comments regarding the meaning of various provisions in section 451(c) and issues not explicitly addressed in the statute. The Treasury Department and the IRS have determined that such comments warrant the issuance of further guidance.

The proposed regulations provide guidance regarding the new section 451(c). The subsequent economic analysis covers proposed regulations to: (1) Describe and clarify the deferral rules for advance payments for taxpayers without an Applicable Financial Statement (AFS); (2) provide acceleration rules for taxpayers that cease to exist; (3) clarify the treatment of financial statement adjustments for taxpayers that have deferred advance payments; (4) provide rules relating to the treatment of short taxable years for taxpayers deferring advance payments; and (5) define and clarify the treatment of performance obligations.

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations. The following largely qualitative analysis describes the anticipated economic effects of the proposed regulation relative to this baseline.

The proposed regulations provide certainty and consistency in the application of section 451(c) by providing definitions and clarifications regarding the statute's terms and rules. An economically efficient tax system generally aims to treat income and expense derived from similar economic decisions consistently across taxpayers and across activities in order to reduce incentives for businesses to make choices based on tax rather than market incentives. In the absence of the guidance provided in these proposed regulations, the chances that different taxpayers might interpret the statute differently is exacerbated. For example, two similarly situated taxpayers might interpret the statutory provisions pertaining to the definition of advanced payments differently, with one taxpayer pursuing a project that another comparable taxpayer might decline because of a different interpretation of how the income may be treated under section 451(c). If this second taxpayer's activity is more profitable, an economic loss arises. An economic loss might also arise if all taxpayers have identical interpretations under the baseline of the tax treatment of particular income streams but are more conservative (or less conservative) regarding the interpretation than Congress intended for these income streams. In this case, guidance provides value by bringing economic decisions closer in line with the intents and purposes of the statute.

Because the proposed regulations clarify the tax treatment of certain income streams, there is the possibility that investments or other business decisions may change as a result of these regulations. The Treasury Department and the IRS have not made projections of the change in investment patterns that might arise due to the discretionary aspects of the proposed regulations. The Treasury Department and the IRS have also not made projections of any change in compliance costs arising from the proposed regulations, relative to the baseline. The Treasury Department project that changes in investment patterns and compliance costs relative to the baseline may generally be small because the proposed regulations affect a relatively small number of entities and because they largely mirror the rules of Rev. Proc. 2004-34.

The economic consequences of these proposed regulations depend in part on their interaction with other sections of the Code, including section 460, which governs when costs can be recovered under the percentage of completion method, and section 461(h), which governs when costs incurred by a taxpayer satisfy the all events test, including a requirement for economic performance, and are thereby allowed as deductions for Federal income tax purposes. The economic analysis of the final regulations under section 451(c) may address the economic effects of regulatory guidance, if any, under sections 460 and 461(h) or other sections of the Code that interact with section 451(c), that is issued between the proposed and final regulations.

The Treasury Department and the IRS project that approximately 15,000 business entities may be affected by these regulations.

The Treasury Department and the IRS solicit comments on this conclusion and particularly solicit comments that provide data, evidence, or models that would enhance the rigor by which the non-revenue economic effects might be estimated for the final regulations.

The Treasury Department and the IRS solicit comments on the economics of each of the items discussed subsequently and of any other items of the proposed regulations not discussed in this section. The Treasury Department and the IRS particularly solicit comments that provide data, other evidence, or models that could enhance the rigor of the process by which provisions might be developed for the final regulations.

The statute prescribes a particular deferral method for accrual-method taxpayers that have an AFS (AFS taxpayers) but does not explicitly describe a deferral method to be used by taxpayers that do not have an AFS (non-AFS taxpayers). To remedy this gap, the proposed regulations describe and clarify that a method similar to the deferral method available to non-AFS taxpayers under Revenue Procedure 2004-34 will be available to non-AFS taxpayers.

The Treasury Department and the IRS considered and rejected a narrow interpretation of section 451(c) that would have precluded non-AFS taxpayers from using a deferral method similar to that provided in Revenue Procedure 2004-34. Section 451(c) does not explicitly prohibit the use of such a method by non-AFS taxpayers, and the Treasury Department and IRS continue to have authority under the Code to prescribe a deferral method for such taxpayers. Precluding non-AFS taxpayers from using a deferral method similar to that of AFS taxpayers would treat AFS and non-AFS taxpayers quite differently regarding business decisions they might make that are otherwise similar. Such treatment would result in a less economically efficient tax system, which generally treats similar economic decisions similarly.

The Treasury Department and the IRS solicit comments on this decision on the treatment of deferral by non-AFS taxpayers and particularly solicit comments that provide data, other evidence, or models that could enhance the rigor by which the final regulations over non-AFS deferral might be developed.

If a taxpayer ceases to exist by the close of a taxable year in which an advance payment has been received and deferred, then issues may arise as to when or whether the remaining amount of the payment will be recognized as taxable income because there may not be a succeeding taxable year in which such income can be recognized.

Under the statute, if the taxpayer dies or ceases to exist by the close of the taxable year in which the advance payment was received, any remaining untaxed amounts of advance payments must be included in income in the year they were received. The proposed regulations extend this payment “acceleration” rule to situations in which a performance obligation is satisfied or otherwise ends in the taxable year of receipt or in a succeeding short taxable year, a treatment that is consistent with a similar rule in Revenue Procedure 2004-34.

The Treasury Department and the IRS considered not modifying or expanding the acceleration rule contained in section 451(c), but rejected this alternative because of the remaining amount may never be picked up into income risking a permanent exclusion of the amount from taxable income. The possibility of a permanent exclusion of income provides incentives for taxpayers to structure payments in ways that avoid tax liability, thus reducing Federal tax revenue without providing an accompanying general economic benefit. The proposed regulations treat the expanded set of accelerated transactions consistently with similar types of transactions based on the timing and structure of the payments involved.

The Treasury Department and the IRS solicit comments on the proposed regulation's treatment of acceleration and particularly solicit comments that provide data, other evidence, or models that would enhance the rigor by which the treatment of acceleration might be developed for the final regulations.

Under the statute, if a taxpayer counts an advance payment as an item of deferred revenue, under certain conditions (for example, certain acquisitions of one corporation by another), the taxpayer may be required by its system of accounting to adjust that item on the balance sheet in a subsequent year. The item would then not be included in current earnings or AFS revenues. In this case, taxpayers might argue that they can exclude the amount deferred from taxable income because it is never “earned” nor included in revenue under their AFS. If this argument is upheld, taxpayers could convert an income “deferral” amount into an income “exemption” amount. To address this issue and avoid this possibility, the proposed regulations specify that such financial statement adjustments are to be treated as “revenue.”

The Treasury Department and the IRS considered not providing clarity on the treatment of financial statement write-downs, but rejected that approach, because it would have risked an inappropriate permanent exclusion of income. The possibility of a permanent exclusion of income provides incentives for taxpayers to structure payments in ways that avoid tax liability, thus reducing Federal tax revenue without providing an accompanying general economic benefit.

The Treasury Department and the IRS solicit comments on these proposed regulations and particularly solicits comments that provide data, other evidence, and models that would enhance the rigor by which the final regulations dealing with financial statement adjustments might be developed.

Section 451(c) does not provide a rule relating to the treatment of short taxable years. In the absence of such a rule, it will be unclear to taxpayers how they should implement the deferral method provided in section 451(c) in the case of a short taxable year. To address this issue, the proposed regulations provide rules relating to the treatment of short taxable years for advance payments that are generally consistent with Revenue Procedure 2004-34. The Treasury Department and the IRS considered and rejected not providing short taxable year rules because such a decision would have created significant confusion among taxpayers, increased administrative costs for the IRS, and increased compliance costs for taxpayers.

The Treasury Department and the IRS solicit comments on these proposed regulations and particularly solicit comments that would provide data, other evidence, and models that would enhance the rigor by the treatment of short taxable years might be developed for the final regulations.

A performance obligation is a contractual arrangement with a customer to provide a good, service or a series of goods or services that are basically the same and have a routine pattern of transfer. The statute requires that taxpayers with contracts that include multiple performance obligations to allocate the transaction price to each performance obligation in the same manner that revenue is allocated in the taxpayer's AFS. The statute does not, however, specify the allocation rules to be used by non-AFS taxpayers.

To address this issue, the proposed regulations provide allocation rules for non-AFS taxpayers consistent with a similar rule in Revenue Procedure 2004-34. That rule specifies that the transaction price be allocated in a manner that is based on payments the taxpayer regularly receives for an item or items it regularly sells or provides separately. The Treasury Department and the IRS considered not providing allocation rules for non-AFS taxpayers but rejected such an approach because it would have treated similarly situated taxpayers quite differently, and would have led to increased administrative costs for the IRS and increased compliance costs for taxpayers. While the allocation rules for AFS taxpayers and non-AFS taxpayers under the proposed regulations do differ, the chosen solution provides a rule upon which non-AFS taxpayers can rely, while minimizing the differences between AFS and non-AFS taxpayers in this regard within the constraints imposed by the statute.

The Treasury Department and the IRS solicit comments on these proposed regulations and particularly solicit comments that would provide data, other evidence, and models that would enhance the rigor by which final regulations affecting the treatment of performance obligations taxable for non-AFS taxpayers might be developed for the final regulations.

These proposed regulations do not impose any additional information collection requirements in the form of reporting, recordkeeping requirements or third-party disclosure requirements related to tax compliance. However, because the deferral methods described in proposed §§ 1.451-8(c) and (d) are methods of accounting, a portion of affected taxpayers would be required to request the consent of the Commissioner for a change in their method of accounting under section 446(e) and the accompanying regulations. The IRS expects that these taxpayers will request this consent by filing Form 3115, Application for Change in Accounting Method (Parts I, II, IV and Schedule B) . Filing of Form 3115 and statements attached thereto (for taxpayers who are required to do so or who elect to do so as a result of the proposed regulations) is the sole collection of information requirement imposed by the statute and the proposed regulations. See subsequent paragraphs for a description of taxpayers who would be required to change the method of accounting under the statute and the proposed regulations.

For purposes of the Paperwork Reduction Act, the reporting burden associated with the collection of information with respect to section 451(c) will be reflected in the Paperwork Reduction Act submissions for IRS Form 3115 (OMB control numbers 1545-0074 for individual filers, 1545-0123 for business filers, and 1545-2070 for all other types of filers). The IRS may provide streamlined method change procedures which could permit the filing of a statement in lieu of filing a Form 3115, or, in certain cases, no notification (see, for example, the revenue procedure accompanying these proposed regulations).

The Treasury Department and the IRS anticipate that these proposed regulations would require an accrual method taxpayer that receives an advance payment and chooses to make an election to use the deferral method described in proposed § 1.451-8(c) or (d) to file a Form 3115 to change the method of accounting to comply with these proposed regulations. See proposed § 1.451-8(e). The Treasury Department and IRS estimate that 20,000-40,000 taxpayers will be required to file a Form 3115 in order to change to the deferral method described in proposed § 1.451-8(c). a The Treasury Department and the IRS anticipate a certain number of accrual method taxpayers without an AFS that receive advance payments may choose to use the non-AFS deferral method described in proposed § 1.451-8(d). The Treasury Department and IRS plan to provide streamlined procedures for taxpayers to change to the methods of accounting described in proposed § 1.451-8(c) and (d). See the revenue procedure accompanying these proposed regulations.

For a taxpayer with an AFS that uses the deferral method in proposed § 1.451-8(c), a change in the taxpayer's revenue recognition policies for financial accounting purposes requires the taxpayer to seek the consent of the Commissioner under section 446(e) to use the method for federal income tax purposes. See proposed § 1.451-8(e). It is anticipated that the reporting burden associated with the collection of information for a statement in lieu of the Form 3115 would be reflected in the Paperwork Reduction Act Submission associated with Revenue Procedure 2018-31, 2018-22 IRB 637 (or successor) (OMB control number 1545-1551). See the revenue procedure accompanying these proposed regulations.

In 2018, the IRS released and invited comment on a draft of Form 3115 in order to give members of the public the opportunity to benefit from certain specific provisions made to the Code. The IRS received no comments on the forms during the comment period. Consequently, the IRS made the forms available in January 2019 for use by the public. The IRS notes that Form 3115 applies to changes of accounting methods generally and is therefore broader than section 451(c).

The current status of the Paperwork Reduction Act submissions related to the information collections in the proposed regulations is provided in the accompanying table. The overall burden estimates provided for the OMB control numbers below are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information collections in the proposed regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the proposed regulations. These burdens have been reported for other regulations that rely on the same OMB control numbers to conduct information collections under the Paperwork Reduction Act, and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burden that the regulations that cite these OMB control numbers impose. No burden estimates specific to the forms affected by the proposed regulations are currently available. The Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under the proposed regulations. For the OMB control numbers discussed above, the Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Those estimates capture both changes made by the Act and those that arise out of discretionary authority exercised in the proposed regulations (when final) and other regulations that affect the compliance burden for that form.

The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. In addition, when available, drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm . IRS forms are available at https://www.irs.gov/forms-instructions . Forms will not be finalized until after they have been approved by OMB under the PRA.

It is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

The Treasury Department and the IRS have estimated the number of business entities that may be affected by the statute and these proposed regulations. The statute and proposed regulations affect only those business entities that use an accrual method of accounting.

Regarding the accrual method of accounting, the Treasury Department and the IRS estimate that approximately 9 percent of business entities with gross receipts of $25 million or less used an accrual method of accounting in taxable year 2016. Furthermore, section 13102 of TCJA modified section 448 to expand the number of taxpayers eligible to use the cash method. In general, C corporations and partnerships with a C corporation partner are now permitted to use the cash receipts and disbursements method of accounting if average annual gross receipts are $25 million or less (up from $5 million or less in 2016). The Treasury Department and the IRS project that in future years, the number of entities with gross receipts not greater than $25 million that will be using the accrual method will be less than 9 percent of all entities with gross receipts not greater than $25 million.

This document contains proposed amendments to 26 CFR part 1 under section 451(b). On December 22, 2017, section 451(b) was amended by section 13221 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054) (the Act) to provide that, for a taxpayer using an accrual method of accounting, the all events test with respect to any item of gross income (or portion thereof) is not treated as met any later than when the item (or portion thereof) is included in revenue for financial accounting purposes on an applicable financial statement (AFS) or other financial statement specified by the Secretary. The amendments made to section 451(b) do not change the time at which income subject to the all events test is taken into income for accrual method taxpayers without an AFS or other specified financial statement. Unless otherwise indicated, all references to section 451(b) hereinafter are references to section 451(b), as amended by the Act.

In general, section 451 provides that the amount of any item of gross income is included in gross income for the taxable year in which it is received by the taxpayer, unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period. Under § 1.451-1, accrual method taxpayers generally include items of income in gross income in the taxable year when all the events occur that fix the right to receive the income and the amount of the income can be determined with reasonable accuracy (the all events test). All the events that fix the right to receive income occur when (1) the required performance takes place, (2) payment is due, or (3) payment is made, whichever happens first. Revenue Ruling 2003-10 (2003-1 CB 288); Revenue Ruling 84-31 (1984-1 CB 127); Revenue Ruling 80-308 (1980-2 CB 162).

On April 12, 2018, the Treasury Department and the IRS issued Notice 2018-35 (2018-18 IRB 520) requesting, in part, comments on future guidance under section 451(b). The record of public comments received in response to Notice 2018-35 may be requested by sending an email to Notice.comments@irscounsel.treas.gov . This document provides guidance on the application of section 451(b) taking into account comments that were received regarding section 451(b). The application of section 451(c) is addressed in separate guidance published in the same issue of the Federal Register as these proposed regulations.

The proposed regulations describe and clarify the statutory requirements of section 451(b) by providing new § 1.451-3.

Section 451(b)(1) generally provides that, for an accrual method taxpayer with an AFS or other specified financial statement, the all events test with respect to any item of gross income, or portion thereof, is not treated as met any later than when such item, or portion thereof, has been taken into account as revenue in an AFS or other specified financial statement (the AFS income inclusion rule). The AFS income inclusion rule generally increases financial accounting and tax accounting conformity. On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly announced new financial accounting standards for revenue recognition, titled “Revenue from Contracts with Customers (Topic 606).” See ASC Topic 606 and IASB International Financial Reporting Standard (IFRS) 15 (New Standards). Under the New Standards, items of income may be included as revenue in an AFS earlier than they would have been included in income under the all events test prior to the Act.

The proposed regulations clarify how the AFS income inclusion rule applies to accrual method taxpayers with an AFS. Some taxpayers use an accrual method of accounting for all applicable items of income (overall accrual method taxpayers) and others use an accrual method of accounting for only some items of income. Both types of taxpayers (collectively, accrual method taxpayers) compute taxable income, at least in part, under an accrual method. Accordingly, proposed § 1.451-3(b) provides that the AFS income inclusion rule generally applies to accrual method taxpayers with an AFS when the timing of income inclusion for one or more items of income is determined using the all events test.

The proposed regulations do not include special rules regarding the applicability of the AFS income inclusion rule to foreign persons. The Treasury Department and the IRS are aware that applying the AFS income inclusion rule to a controlled foreign corporation (CFC) may create mismatches between the CFC's taxable income for U.S. Federal and foreign tax purposes. As a result, certain taxpayers may lose the ability to credit foreign taxes imposed on a CFC's income, particularly where such taxes relate to amounts includible in gross income under section 951A and are therefore ineligible to be carried back or forward under section 904(c). Comments are requested regarding whether special rules are needed to address the applicability of the AFS income inclusion rule to foreign persons, including whether and how the rules for determining the taxable income of a CFC can be adjusted to better align the U.S. Federal and foreign income tax bases.

Proposed § 1.451-3(d)(1) clarifies that the AFS income inclusion rule applies only to taxpayers that have one or more AFS covering the entire taxable year. This approach is consistent with the exception in section 451(b)(1)(B)(i), which provides that the AFS income inclusion rule does not apply to taxpayers without an AFS for a taxable year. In addition, some accrual method taxpayers may have an AFS in one taxable year and no AFS in another taxable year. To address this situation, the proposed regulations provide that the AFS income inclusion rule applies on a year-by-year basis and, therefore, an accrual method taxpayer with an AFS in one taxable year that does not have an AFS in another taxable year must apply the AFS income inclusion rule in the taxable year that it has an AFS, and does not apply the rule in the taxable year in which it does not have an AFS.

Consistent with section 451(b)(1)(B)(ii), proposed § 1.451-3(d)(2) also provides that the AFS income inclusion rule does not apply to items of income in connection with a mortgage servicing contract. A letter addressed to the Treasury Department indicated that it is unclear whether this exclusion can be applied to income relating to interest rate lock commitments (IRLCs) entered into by mortgage lenders. The proposed regulations do not address this issue because section 475 generally would require mortgage lenders to include income relating to IRLCs in taxable income in accordance with the mark-to-market method of accounting. As a result, a mortgage lender generally would not apply section 451(b) to determine when income relating to IRLCs is includible in income.

Except as provided in proposed § 1.451-3(e), proposed § 1.451-3(e) clarifies that the AFS income inclusion rule does not change the treatment of a transaction for Federal income tax purposes. The treatment of a transaction or event in a taxable year may be different for Federal income tax and AFS purposes. For example, a rental agreement that is treated as a lease for Federal income tax purposes may be treated as a sale or financing for AFS purposes, or vice versa. Similarly, a transaction that is deemed to occur (for example, under a mark-to-market method) for AFS purposes may not be deemed to occur for Federal income tax purposes. The AFS income inclusion rule generally was not intended to require taxpayers to recharacterize a transaction for Federal income tax purposes to conform to the characterization of the transaction in the taxpayer's AFS. As stated in the Conference Report, “The provision does not revise the rules associated with when an item is realized for Federal income tax purposes and, accordingly, does not require the recognition of income in situations where the Federal income tax realization event has not yet occurred.” H.R. Rep. No. 115-466, at 428 fn. 872 (2017) (Conf. Rep.).

However, as also stated in the Conference Report, the AFS income inclusion rule was intended to include unbilled receivables for partially performed services:

Commenters raised concerns about the interaction between sections 61 and 461 with the AFS income inclusion rule. For AFS purposes, taxpayers may be required to include variable consideration when determining the transaction price of a contract. Under the New Standards, variable consideration includes items such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, and other similar items. Variable consideration may also include promised consideration that taxpayers are not yet entitled to under the contract because it is contingent on the occurrence or nonoccurrence of a future event. For Federal income tax purposes, these items of variable consideration may be contingent future income under section 61 or liabilities subject to section 461. Section 451(b) could be read to accelerate the timing of contingent future income and liabilities to match their inclusion in revenue for AFS purposes. However, section 451(b) was intended to change only the timing of income to ensure that those items of income are not included later than when they are included for AFS purposes. See H.R. Rep. No. 115-466, at 428 fn. 874 (2017) (Conf. Rep.) and Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18) at 166 (Dec. 20, 2018). Accordingly, proposed § 1.451-3(c)(6) provides that the transaction price that is used to determine whether an amount has been included in revenue does not include items to which a taxpayer's entitlement is contingent on the occurrence or nonoccurrence of a future event, reductions for amounts subject to section 461 (including allowances, adjustments, rebates, chargebacks, refunds, rewards, and amounts included in the cost of goods sold), and amounts collected for third parties. However, in order to reduce compliance burden and prevent abuse and undue administrative burden, proposed § 1.451-3(c)(6) presumes that an amount included in the transaction price for AFS purposes is not contingent future income unless, upon examination of all of the facts and circumstances existing at the end of the taxable year, it can be established to the satisfaction of the Commissioner that the amount is contingent on the occurrence or nonoccurrence of a future event.

In addition, section 451(b) was intended to accelerate income inclusion when (i) the taxpayer's customer controls the asset that is created or enhanced, or (ii) the taxpayer has a right to partial payment, even when a contract requires delivery, acceptance, and title transfer before a taxpayer can bill its customer. See Examples 2 and 4 of the Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18) at 162-163 (Dec. 20, 2018). Accordingly, proposed § 1.451-3(c)(6)(ii) provides that an amount included in the transaction price for AFS purposes may not be treated as contingent on the occurrence or nonoccurrence of a future event if the taxpayer has been paid or has an equitable, contractual, or other right to partial payment for performance completed to date. Additionally, proposed § 1.451-3(c)(6)(iii) provides that transaction price may not be reduced for amounts subject to section 461, including, in the case of credit card transactions, reward amounts.

Comments are requested on the interaction among sections 61, 461, and 451(b), and specific situations in which future contingent income and liabilities might be included in revenue for AFS purposes. Comments are requested, for example, on the applicability of the proposed rules to escalating rental agreements not subject to section 467, where amounts included in revenue in an AFS as rent for one year of a multi-year rental agreement exceed actual rent received for that year. Specifically, does the excess of the amount included in revenue as rent over the amount of actual rent in a particular year represent a contingency or merely an allocation of the overall transaction price? Comments are requested on the extent to which certain contract terms might affect the result. Comments also are requested on the proposed presumption that the AFS income inclusion rule should apply when an item is included in revenue in an AFS and what a taxpayer should be required to demonstrate in order to successfully rebut the presumption. Finally, comments are requested on how reassessments of variable consideration after the taxable year of the commencement of the contract should be treated for Federal income tax purposes.

Commenters noted that the AFS income inclusion rule may appear to overturn numerous exclusion provisions and adversely affect the treatment of non-recognition transactions in the Code. For example, the AFS income inclusion rule could be read to apply to a transaction that is treated as a sale of property with profit or loss for AFS purposes but that is treated as a reorganization under section 368 for Federal income tax purposes. The proposed regulations clarify that the AFS income inclusion rule does not change the applicability of any exclusion provision, or the treatment of non-recognition transactions, in the Code, the Income Tax Regulations, or other guidance published in the Internal Revenue Bulletin, consistent with Congressional intent that the provision does not revise the rules associated with the time at which an item is realized for Federal income tax purposes. H.R. Rep. No. 115-466, at 428 fn. 872 (2017) (Conf. Rep.) and Joint Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-18) at 166 (Dec. 20, 2018).

Section 451(b)(2) provides that the AFS income inclusion rule does not apply to any item of gross income for which the taxpayer uses a special method of accounting provided under any provision of Chapter 1, other than any provision of part V of subchapter P. Commenters raised questions about the interaction between the AFS income inclusion rule and special methods of accounting. In response, proposed § 1.451-3(b) amplifies the meaning of the term “special method of accounting” and, except as provided in proposed § 1.451-3(b), provides that the AFS income inclusion rule does not apply to any item of income, or portion of an item of income, when the timing of income inclusion is determined under a required or permitted special method of accounting used for Federal income tax purposes. The proposed regulations also clarify that when a taxpayer uses a special method of accounting, the special method of accounting determines the timing of the income inclusion. The proposed regulations provide a non-exclusive list of examples of special methods of accounting. In addition, the proposed regulations make clear that because the AFS income inclusion rule affects the time at which the all events test is met, the rule applies only to items of income that are subject to the all events test. For a discussion of special methods of accounting under the provisions of part V of subchapter P (relating to income from certain debt instruments), see section 7 of this preamble.

Section 451(b) does not address how to apply the AFS income inclusion rule and all events test to a multi-year contract. Proposed § 1.451-3(k) provides that a taxpayer with a multi-year contract applies the all events test by applying a cumulative approach reflecting amounts previously included under section 451 rather than an annualized approach.

An annualized approach would look at payments received in each taxable year in isolation and compare the amounts included in the taxpayer's AFS and under the all events test to determine whether an amount should be included for Federal income tax purposes. This approach would generally result in an overall acceleration of income relative to income included in revenue for AFS purposes, could cause amounts to be included for Federal income tax purposes earlier than under a contract's terms, and could result in double counting of income. Section 451(b)(1) does not require this treatment.

A cumulative approach better reflects the economic reality of a multi-year transaction. Accordingly, the proposed regulations require taxpayers to take into account the cumulative amounts previously included in prior taxable years in determining a given contract year's income inclusions under section 451(b)(1). Comments are requested regarding the treatment of multi-year contracts under the AFS income inclusion rule.

The proposed regulations describe and clarify the definition of AFS under section 451(b)(3). Section 451(b)(3) generally defines AFS to mean financial statements prepared according to generally accepted accounting principles (GAAP financial statements), certain financial statements prepared according to international financial reporting standards (IFRS financial statements), and financial statements filed with certain regulatory or government bodies. Section 451(b)(1)(A)(ii) provides the Secretary with authority to specify other financial statements for purposes of section 451(b)(1).

The list of financial statements qualifying as an AFS under section 451(b)(3) is similar, but not identical, to the list of financial statements in Revenue Procedure 2004-34 (2004-1 CB 991). The general priority for identifying the AFS in section 451(b)(3)(A) through (C) is similar to the priority provided in Revenue Procedure 2004-34. Certain financial statements that have traditionally been treated as AFS under Revenue Procedure 2004-34, such as IFRS financial statements used for (1) credit purposes, (2) reporting to shareholders, partners, or other proprietors or to beneficiaries, and (3) any other substantial nontax purposes, are not expressly included in section 451(b)(3). However, the legislative history indicates that Congress intended for Revenue Procedure 2004-34 to be followed. See H.R. Rep. No. 115-466, at 429 (2017) (Conf. Rep.). Accordingly, proposed § 1.451-3(c)(1) is generally consistent with the list of AFS from Revenue Procedure 2004-34.

The proposed regulations also clarify the financial statements filed with certain regulatory or government bodies that qualify as an AFS under section 451(b)(3)(C), which is similar to section 4.06(3) of Revenue Procedure 2004-34. The proposed regulations clarify that financial statements that are filed with a state government or state agency, or a self-regulatory organization, also qualify as an AFS under section 451(b)(3)(C). For example, the Financial Industry Regulatory Authority and state agencies that regulate insurance companies or public utilities are agencies requiring reports that qualify as an AFS.

Proposed § 1.451-3(h) addresses various issues relating to how financial results are reported for certain taxpayers. These proposed regulations propose rules consistent with the rules provided in § 1.56-1 because Congress indicated a desire for rules similar to those found in Revenue Procedure 2004-34 and the rules in Revenue Procedure 2004-34 follow certain rules in § 1.56-1. See IRS Announcement 2004-48 (2004-22 IRB 998).

Section 451(b)(5) and proposed § 1.451-3(h)(1), (2), and (3) provide that, for purposes of the general rule in section 451(b)(1), if the financial results of a taxpayer are reported on the AFS, as defined in section 451(b)(3), for a group of entities, such statement shall be treated as the AFS of the taxpayer. When a consolidated or combined AFS or other financial statement lists items separately for each member taxpayer, the amount of revenue attributable to a particular taxpayer is determined based on its respective separately stated item. If the amounts are aggregated, however, the taxpayer must rely on the source documents that were used to create the group's AFS to determine its percentage of each aggregated item reported on the consolidated or combined AFS. The source documents should be used to determine the taxpayer's respective share of revenue on the AFS, so as to properly reflect the correct amount of gross income under section 451(b).

Proposed § 1.451-3(h)(4) provides guidance for taxpayers with a financial reporting period that is different than the taxpayer's taxable year. The proposed regulations provide that the taxpayer must use one of three permissible methods in order to determine whether an item of income has been included in revenue on an AFS. Under one method a taxpayer uses the accounting principles used to create its AFS to determine the items of income to be reported in revenue as if its financial reporting period coincided with its taxable year. Under the second method a taxpayer makes a reasonable estimate of revenue for the pro rata portion of the taxable year for which the financial statement year and taxable year do not align. Under the third method, if a taxpayer's financial accounting year ends five or more months after the end of its taxable year, the taxpayer computes revenue based on the revenue reported on the AFS for the financial accounting year ending within its taxable year.

Proposed § 1.451-3(h)(5) provides guidance on a restatement of a taxpayer's financial statements. The rules generally provide that the taxpayer must determine the reason for the restatement of the AFS. For example, if a taxpayer restates revenue on an AFS and such restatement changes the time at which an item of income or a portion thereof is taken into account as revenue on the AFS, the change constitutes a change in method of accounting under section 446. This rule is consistent with current practice regarding the determination of a change in method of accounting.

The regulations under section 6001 require a taxpayer to keep books and records sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown in an income tax return, which includes the identification of items includible in gross income under section 451. This requirement includes any books and records sufficient to establish a taxpayer's calculation of income when its financial results are included in an AFS of a group of entities.

Proposed § 1.451-3(c)(4) defines the term revenue for purposes of section 451(b)(1) broadly to include all items of income under section 61 (gains, profits, and income for Federal income tax purposes). This definition is consistent with the current application of the all events test under § 1.451-1(a) and ensures greater financial accounting and tax accounting conformity.

One commenter discussed the effect of the New Standards on sections 451(b) and (c). The commenter noted that, under the New Standards, certain revenue may be included earlier than under section 451 prior to amendment by the Act. The commenter also noted that an amount booked to retained earnings should be treated as revenue for purposes of section 451(b) even though that amount may not be shown as book revenue for financial accounting purposes. A narrow reading of the term revenue could result in items of income that are taken into account on an AFS and that otherwise would be required to be included in gross income escaping section 451(b) altogether. For example, taxpayers may include items, or portions of items, in other comprehensive income on an AFS that are excluded from the revenue line(s) on the AFS. Accordingly, a broad reading of revenue ensures that the correct amount of income that is taken into account in an AFS is subject to section 451(b).

Multiple commenters proposed allowing a cost offset when income is included under the AFS income inclusion rule. For example, one commenter suggested that, in determining the amount of income to include under section 451(b), taxpayers selling goods should reduce AFS revenue by the cost of goods sold associated with a sale that does not presently reduce AFS revenue. The commenter acknowledged that costs are not taken into account for Federal income tax purposes until the all events test is satisfied, which includes the economic performance rules under section 461. Because of the resulting inconsistency with sections 461 and 471, these regulations do not follow the commenter's suggestion that a cost offset or cost of goods sold reduction should apply without regard to the economic performance rules of section 461 and inventory accounting rules of section 471.

Congress has addressed various cost recovery mechanisms in the past. In 1955, Congress repealed the reserve method for estimated expenses under section 462 of the Code. See An Act to Repeal Sections 452 and 462 of the Internal Revenue Code of 1954, Public Law 84-74, section 1(b) (1955). Section 462 of the Code was a companion to section 452, which allowed taxpayers to report certain types of prepaid income over time. In the Senate Report discussing the repeal of sections 452 and 462, Congress noted that “the problem presented by section 462 is that of the timing of deductions when a taxpayer changes accounting methods.” S. Rep. 84-372, at 4 (1955). The Senate noted that taxpayers would be entitled to the deductions even without section 462. In addition, section 462 increased the possibility of distortions of income because expenses were being deducted when the amount had not yet been incurred.

Thirty years later, Congress repealed the use of the reserve method for determining losses from bad debts under section 166 in the Tax Reform Act of 1986. In repealing the reserve method, Congress noted that this method was inconsistent with the rules for other deductions under the all events test and could result in deductions being allowed for Federal income tax purposes for losses that may never occur. S. Rep. No. 99-313, at 155 (1986). Moreover, “if a deduction is allowed prior to the taxable year in which the loss occurs, the value of the deduction to the taxpayer will be overstated.” S. Rep. No. 99-313, at 155 (1986).

These proposed regulations do not allow a cost offset provision because similar potential distortions of income could result. An allowance to account for future cost of goods sold, for future estimated costs, or other cost offsets also is inconsistent with sections 461 (in particular section 461(h)), 263A, and 471, and the regulations under those sections. In addition, these proposed regulations do not allow a cost offset provision because there is nothing in the statute or legislative history that indicates that in amending section 451 Congress intended to change sections 461, 263A or 471, and the regulations under those sections. See also, General Explanation of Public Law 115-97 (JCS-1-18) at 150-151, and 164-165 (Dec. 20, 2018).

Nevertheless, the Treasury Department and the IRS continue to consider whether any exceptions are an appropriate use of the Secretary's authority under section 461(h) or 460. To facilitate further consideration of any potential exceptions, detailed comments that specifically address the following issues are requested:

1. Under what authority would it be appropriate for the Secretary to permit a taxpayer to use a book percentage-of-completion method (PCM) as its tax method? When inventory is involved, what limitations could be instituted to ensure that book PCM could not be used to recover costs related to inventoriable goods prior to the time when such costs could be recovered under sections 471 and 263A? Under what specific authority would it be appropriate to permit a book PCM method to be used to recover costs related to inventoriable goods?

2. Would elective use of book PCM for tax purposes provide an appropriate cost offset? Would such a method be characterized as one that reports contract revenue according to a taxpayer's book method, while accounting for costs, including nondeductible costs, as deductions under the Code? If not, how would such a method account for costs for Federal income tax purposes?

3. Rather than make book PCM elective, would it be appropriate for the definition of “unique item” for purposes of section 460 to be expanded?

4. Section 460 requires use of the look-back method to compensate for improper acceleration or deferral of income under PCM. It also requires that all contract income be reported no later than the year following contract completion. Would elective use of a PCM under section 460 without these provisions invite abuse? If so, how could such abuse be prevented?

The proposed regulations describe and clarify the allocation of transaction price under section 451(b)(4). Section 451(b)(4) provides that, in the case of a contract with multiple performance obligations, the allocation of the transaction price to each performance obligation shall be equal to the amount allocated to each performance obligation for purposes of including such item in revenue in the AFS of the taxpayer. Consistent with the definition of performance obligation found in the New Standards, proposed § 1.451-3(c)(3) defines “performance obligation” to mean a promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. See ASC Topic 606 and IFRS 15.

Comments are requested on allocation of the transaction price (i) to performance obligations that are not contractually based, (ii) for arrangements that include both income subject to section 451 and long-term contracts subject to section 460, and (iii) when the income realization event for Federal income tax purposes differs from the income realization event for AFS purposes.

Commenters proposed allowing taxpayers that include items of income as revenue in an AFS over a period of time under the New Standards (AFS over-time method) to follow that method for Federal income tax purposes. Allowing taxpayers to follow their AFS over-time method for Federal income tax purposes would potentially defer income beyond what is permitted under section 451(b), section 451(c), and the all events test. The AFS income inclusion rule operates only to accelerate income inclusion; the AFS income inclusion rule can never cause income inclusion to occur later than when the all events test is satisfied. Allowing taxpayers to follow their AFS over-time method for Federal income tax purposes may also affect the treatment of costs in a manner that is inconsistent with sections 461 and 471. However, the Treasury Department and the IRS continue to study the commenters' proposal and request additional comments on this issue. Specifically, additional comments are requested regarding: The size of taxpayers likely to be affected; the industries likely to be affected; the number of taxpayers likely to be affected; the compliance burden and administrative complexity likely to be avoided; and the degree to which an over-time method under the New Standards accelerates or defers income relative to the all events test and the AFS income inclusion rule.

The Treasury Department and the IRS have treated certain credit card fees associated with pools of credit card receivables as creating or increasing original issue discount (OID) on those pools. See Revenue Procedure 2004-33 (2004-1 CB 989) (the IRS will not challenge the treatment of late fees as creating or increasing OID); Revenue Procedure 2005-47 (2005-2 CB 269) (the IRS will not challenge the treatment of cash advance fees as creating or increasing OID); Revenue Procedure 2013-26 (2013-22 IRB 1160) (safe harbor method of accounting for OID on a pool of credit card receivables for purposes of section 1272(a)(6)); and Chief Counsel Notice CC-2010-018 (Sept. 27, 2010) (as a result of the Tax Court's decision in Capital One Financial Corp. and Subsidiaries v. Commissioner, 133 T.C. 136 (2009), the IRS will no longer challenge or litigate the issue of whether interchange fee income creates or increases OID).

With the enactment of section 451(b), however, Congress expressed its intention to overturn the tax treatment of those credit card fees as OID, including the use of the OID timing rules, and subject them to the all events test. The Conference Report to the Act states, “[section 451(b)] directs accrual method taxpayers with an applicable financial statement to apply the income recognition rules under section 451 before applying the special rules under part V of subchapter P . . .” (which includes the OID rules). H.R. Rep. No. 115-466, at 428 (2017) (Conf. Rep.). In particular, the legislative history describes the treatment of credit card late fees, credit card cash advance fees, and interchange fees as creating or increasing OID for Federal tax purposes and lists these fees as examples of amounts to which section 451(b), as amended, would apply. Id. at 427, 429. These three credit card fees are not generally treated as discount for AFS purposes.

Congress clearly expressed its intention to overturn the tax treatment of credit card late fees, cash advance fees, and interchange fees (specified credit card fees) and to subject these fees to the all events test as modified by section 451(b). Id. at 429. The legislative history quoted in the preceding paragraph further suggests that Congress intended that other fees associated with a lending transaction that might otherwise be accounted for in calculating OID are to be subjected to the AFS income inclusion rule before the application of the OID rules. Based on the legislative history, however, taxpayers have stated that section 451(b) was not intended to affect the application of the general OID timing rules to OID other than with respect to items not treated as discount for financial reporting purposes, such as the specified credit card fees. Id. at 427-429. Moreover, taxpayers have stated that the application of section 451(b) to OID other than items not treated as discount for financial reporting purposes would result in significant administrative burden and very little additional tax revenue. The Treasury Department and the IRS agree with commenters on this issue. Therefore, in the absence of a clear indication in the legislative history that Congress intended for section 451(b) to override the general timing rules for OID, and in order to reduce administrative burden, the proposed section 451(b) regulations would not apply to determine the time at which OID generally is includible in income. See § 1.451-3(c)(5)(ix) of the proposed regulations.

The proposed regulations contain two provisions that implement Congressional intent regarding the treatment of fees, including the specified credit card fees. First, under proposed § 1.451-3(i), if a fee is not treated by a taxpayer as discount or as an adjustment to the yield of a debt instrument over the life of the instrument (such as points) in its AFS and the fee otherwise would be treated as creating or increasing OID for Federal income tax purposes (specified fee), then the rules in the proposed regulations under section 451(b) apply before the rules in sections 1271 through 1275 and the regulations thereunder. For example, proposed § 1.451-3(i) applies to the specified credit card fees. Second, proposed § 1.1275-2(l) includes a proposed amendment to the final regulations under section 1275 to clarify that an item of income that is subject to the timing rules in the proposed regulations under section 451(b) (such as the specified credit card fees) is not taken into account in determining the amount of OID (if any) on the debt instrument. Removing specified fees and specified credit card fees from the calculation of OID will permit taxpayers to apply only the rules of section 451(b) to these fees, without also having to apply the rules relevant to OID. In addition, the Treasury Department and the IRS propose to obsolete Revenue Procedure 2004-33, Revenue Procedure 2005-47, Revenue Procedure 2013-26, and Chief Counsel Notice CC-2010-018. The Treasury Department and the IRS request comments on the proposed obsolescence of these documents.

Taxpayers requested guidance as to whether market discount is includible in income under section 451(b). The Treasury Department and the IRS previously announced that proposed regulations would provide that accrued market discount is not includible in income under section 451(b). Notice 2018-80 (2018 IRB 609), issued September 27, 2018.

A bond is generally treated as having market discount when the principal amount of the bond exceeds the holder's basis immediately after it was acquired by the holder. Under section 1276(a), market discount is includible in income only upon disposition of a market discount bond at a gain or the receipt of a partial principal payment, unless the holder of the bond elects otherwise. In each case, the market discount inclusion is limited to accrued market discount as defined in section 1276(b). In general, the timing rules for income inclusion in section 1276 are a codification of the pre-1984 timing rules for market discount and confirm that the all events test generally does not determine when accrued market discount is includible in income. The proposed regulations therefore include the market discount rules on the list of special methods of accounting to which section 451(b) does not apply.

The IRS notices, revenue rulings, and revenue procedures cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov .

These regulations are proposed generally to apply to taxable years beginning on or after the date the final regulations are published in the Federal Register . However, in the case of a specified fee, proposed § 1.451-3(i)(2) is proposed to apply for a taxpayer's first taxable year beginning one year after the date the Treasury decision adopting these regulations as final is published in the Federal Register . In general, this delayed effective date for specified fees is provided because the treatment of these fees is unclear for tax purposes (and in some cases for financial reporting purposes). This additional time will allow the Treasury Department and the IRS to determine the types of fees that should be subject to section 451(b), which will provide taxpayers with more certainty in complying with section 451(b) and will help to minimize controversies with the IRS with respect to fees.

Until the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register , a taxpayer may rely on these proposed regulations (other than the proposed regulations relating to specified fees) for taxable years beginning after December 31, 2017, provided that the taxpayer: (1) Applies all the applicable rules contained in these proposed regulations (other than those applicable to specified fees), and (2) consistently applies these proposed regulations to all items of income during the taxable year (other than specified fees). Until the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register , in the case of specified credit card fees, a taxpayer may rely on these proposed regulations for taxable years beginning after December 31, 2018, provided that the taxpayer: (1) Applies all the applicable rules contained in these proposed regulations for specified credit card fees, and (2) consistently applies these proposed regulations to all items of income during the taxable year (other than specified fees).

Executive Orders 13771, 13563, and 12866 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, reducing costs, harmonizing rules, and promoting flexibility. The Executive Order 13771 designation for any final rule resulting from the proposed regulation will be informed by comments received. The preliminary Executive Order 13771 designation for this proposed rule is regulatory.

The proposed regulation has been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these proposed regulations as significant under section 1(b) of the MOA. Accordingly, these proposed regulations have been reviewed by OIRA.

In plain language, section 451 of the Internal Revenue Code (the “Code”) and the proposed regulations deal with differences between when income is recognized for Federal tax purposes and when it is recognized on businesses' financial accounting statements. The recently enacted section 451(b) more closely aligns the timing rules of the tax system with general financial accounting standards.

Under section 451(a) of the Code, any item of gross income is required to be included as income by the taxpayer (“recognized”) when it is received by the taxpayer unless, under the taxpayer's method of accounting, the income is properly accounted for in a different period. For this purpose, businesses and individuals are generally required to use the accounting method that is used regularly to keep their financial records. This may be a cash receipts and disbursements accounting method, under which income is recognized when payment is actually or constructively received, or it may be an accounting system based on income and expense accrual principles. Certain corporations and some partnerships are required to use an accrual method, and generally taxpayers employing inventories in their trade or business must use an accrual method with regard to purchases and sales of inventory.

Current regulations require taxpayers using an accrual accounting method to report income in the taxable year in which all events that fix the right to receive such income have occurred, provided the amount can be determined with reasonable accuracy. Under IRS guidance, this “all events test” is met upon the earliest of when (i) payment is earned through performance by the taxpayer ( e.g., provision of the contracted goods or services), (ii) payment is due to the taxpayer, or (iii) payment is received by the taxpayer.

In contrast, U.S. generally accepted accounting principles (“GAAP”) and international financial reporting standards (“IFRS”), having different purposes from tax law, may often dictate alternative rules as regards the timing of revenue recognition. Differences between these financial accounting standards and the Code in the timing of revenue recognition may arise for a number of reasons. For example, under certain circumstances, financial accounting rules may require revenue to be recognized when the costs of providing goods or services pursuant to a contract are incurred, while the all events test may not be satisfied until the contract obligation is fulfilled. If meeting the taxpayer's performance obligation occurs over more than a single accounting period, then this timing pattern can result in a disparity between the year in which the associated revenue is booked for financial accounting purposes and the year in which the associated taxable gross income is recognized.

Congress enacted new section 451(b) in part because conformity in the timing of income recognition between the accrual system of accounting and the tax system (“book-tax conformity”) will generally “promote simplification and reduced compliance costs.” See Senate Budget Explanation of the Bill (2017-11-20) at p. 161.

Section 451(b) applies only to taxpayers that use the accrual method and have an Applicable Financial Statement (“AFS”). In plain language, an AFS is a financial statement certified as having been prepared under GAAP or IFRS. All publicly traded U.S. corporations possess an AFS, as do many privately held corporations and partnerships, which may have such certified accounting statements for credit purposes or for shareholder or partner reporting purposes. The income recognition rules for accrual-method taxpayers without an AFS and cash-method taxpayers are not altered by the enactment of section 451(b) or by the proposed regulations. The Treasury Department and the IRS project that there were approximately 3.1 million tax-reporting entities in taxable year 2016 that used an accrual method of accounting. They further project that fewer than 10 percent of these, or approximately 296,000 entities had an AFS, and thus could have been affected by section 451(b) and the proposed regulations had these been in effect in taxable year 2016.

For these taxpayers, Section 451(b) modifies the all-events test by stating that the test is not met for any item of income any later than when it is taken into account as revenue in an AFS or other designated financial statement (the “AFS income inclusion rule”). Thus, this new rule requires taxpayers to recognize income upon the earlier of when the all-events test is met or when the taxpayer includes the amount in revenue (broadly defined) in its AFS (“AFS income inclusion rule”). The AFS income inclusion rule operates only in one direction—to accelerate in time the recognition of gross income for tax purposes. This acceleration occurs in situations where income has been recognized for financial accounting purposes before the all events test has been satisfied.

The proposed regulations deliver certainty and clarity to taxpayers affected by the Act's introduction of the new section 451(b) and allow them to comply with the new statutory provision with a higher level of confidence.

The Treasury Department and IRS published a Notice in April 2018, requesting public comments regarding the application of the AFS income inclusion rule, the meaning of various concepts and terms used in section 451(b), and other implementation issues not explicitly addressed in the statute. As explained earlier in this Preamble, the proposed regulations address the comments and questions subsequently raised by the public.

The proposed regulations include applicability and definitional guidance regarding section 451(b). Specifically, the proposed regulations: (1) Clarify how the AFS inclusion rule applies to multi-year contracts; (2) describe and clarify the definition of an AFS for a group of entities; (3) define the meaning of the term revenue in an AFS; (4) define a transaction price and clarify how that price is to be allocated to separate performance obligations in a contract with multiple obligations; and (5) describe and clarify rules for transactions involving certain debt instruments.

The Treasury Department and the IRS have assessed the benefits and costs of the proposed regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these proposed regulations.

The proposed regulations provide increased certainty, clarity, and consistency in the application of section 451(b) by providing definitions and clarifications regarding the statute's terms and rules. In the absence of such guidance, the chances that different taxpayers would interpret the statute differently would be exacerbated. Similarly situated taxpayers might interpret the statutory provisions pertaining to the recognition of income differently, with one taxpayer pursuing a project that another comparable taxpayer might decline to make because of different interpretations of how the income would be treated under section 451(b). If this second taxpayer's activity were more profitable, an economic loss arises. Even in situations where taxpayers would generally adopt similar interpretations of the Code under the baseline, the lack of guidance increases opportunities for that interpretation to differ from what Congress intended. In this case, guidance provides value by bringing economic decisions closer in line with Congressional intent. In the context of economic activity by businesses that are subject to section 451(b) or that interact with such businesses, the proposed regulations thus help to ensure that similar economic activities, representing similar timing of income, are taxed similarly, thereby improving U.S. economic performance.

The Treasury Department and the IRS have not undertaken quantitative estimates of these possible efficiency gains because any such quantitative estimates would be highly uncertain. For example, the proposed regulations include provisions to clarify how income should be included from multi-year contracts. The Treasury Department and the IRS do not have readily available data or models to determine how businesses might apply the AFS inclusion rule to multi-year contracts in the absence of the proposed regulations or under alternative regulatory approaches. Furthermore, even in the event that most businesses could be presumed to adopt a particular treatment under the baseline, the Treasury Department and the IRS further do not have readily available data or models of the volume or pattern of their multi-year contract payments and they thus cannot project with any degree of precision the differences in tax treatment taxpayers would experience between the proposed regulations and the baseline or alternative regulatory approaches. Such differences are a key component of the marginal effective tax rate that these contracts would experience, which in turn would determine how economic activity would be affected by the proposed regulations relative to the baseline or alternative regulatory approaches.

The Treasury Department and the IRS further project that issuance of the proposed regulations will reduce compliance and enforcement costs relative to the baseline because the enhanced certainty and clarity they provide should make it easier for businesses to calculate their tax liability relative to the baseline. Greater efficiencies should also result from the promulgation of the proposed regulations, relative to the baseline, by reducing taxpayer disputes with the IRS that otherwise would have to be dealt with through sub-regulatory guidance or resolved through increased litigation. By providing greater certainty of how the law will be applied, the Treasury Department and the IRS project that the proposed regulations will reduce these implementation costs. The Treasury Department and the IRS have not made a quantitative estimate of the reduction in compliance and enforcement costs resulting from the proposed regulations. They have not made such an estimate in part because models of compliance cost are not currently available to provide a reasonably precise estimate of compliance costs in the absence of the proposed regulations.

With these limitations in mind, part II.4.C of this Special Analyses section explains the rationale behind the approaches taken by the proposed regulations and qualitatively evaluates the alternatives considered.

The Treasury Department and the IRS solicit comments on the economic effects of the proposed regulations.

The proposed regulations embody certain regulatory decisions that reflect the regulatory discretion of the Treasury Department and the IRS. These decisions specify more fully how the AFS income inclusion rule is to be implemented.

The Treasury Department and IRS solicit comments on the economics of each of the items discussed below and of any other items of the proposed regulations not discussed in this section. The Treasury Department and the IRS particularly solicit comments that provide data, other evidence, or models that could enhance the rigor of the process by which the final regulations might be developed.

The proposed regulations clarify how section 451(b) applies to multi-year contracts. The Treasury Department and the IRS considered two alternative approaches for such contracts: (i) An annualized approach and (ii) a cumulative approach. Under an annualized approach, for each year under the contract a taxpayer would compare the income included as revenue in its AFS for that year and the gross income recognized under the all events test for that same year to determine its gross income inclusion, with the proviso that the total amount of gross income recognized under the contract is not to exceed the total contract price. In contrast, under a cumulative approach, in each year a taxpayer would compare the cumulative amount of revenue included in its AFS up to and including that year with the cumulative amount of gross income recognized under the all events test up to and including that year.

Example 4 of the proposed regulations, the summary table of which is reproduced in the first three rows of the following table, shows the treatment of gross income under a cumulative approach. The fourth row in this table shows the treatment of gross income under the annualized approach.

An annualized approach could accelerate the recognition of taxable income to a greater degree than what is reflected in revenue for AFS purposes. In this example, such an approach would ignore in 2019 the fact that cumulative AFS revenue of $50x had been recognized as taxable gross income in 2018. Accordingly, the annualized approach would require that an additional $25x of income be recognized in 2019, since a payment of that amount was received in that year. In effect, an annualized approach would accelerate the recognition of $25x from 2021 to 2019 relative to gross income recognition under the cumulative AFS income inclusion rule.

The Treasury Department and IRS concluded that the extent of acceleration of income that may occur when using an annualized approach would be excessive relative to the cumulative approach when considered against the intents and purposes of the statute. The proposed regulations therefore adopt the cumulative approach.

The proposed regulations provide rules for taxpayers whose financial results are included on an AFS covering a group of entities. These rules specify that, if a taxpayer's financial results are reported on the AFS for a group of entities, the taxpayer's AFS is the group's AFS. However, if the taxpayer also reports financial results on a separate AFS that is of equal or higher priority, then the separate AFS is the taxpayer's AFS. The rules also specify how a taxpayer using a group AFS is to determine the amount of revenue allocated to the taxpayer. The Treasury Department and the IRS considered as an alternative not providing substantive rules on how taxpayers should apply the AFS income inclusion rule when their financial results are included in an AFS for a group of entities. This alternative was rejected because it would have increased compliance burdens and potentially led to similarly situated taxpayers applying the AFS income inclusion rule differently.

The Code does not specify how the AFS income inclusion rule is to function whenever the AFS accounting period and the taxable year do not coincide. The proposed regulations do not adopt a single, one-size-fits-all approach, but rather provide taxpayers three separate options for addressing this situation. A change from one option to another, however, would be considered a change in method of accounting requiring the permission of the IRS. By providing taxpayers with several options, the proposed regulations will minimize taxpayer compliance costs when dealing with non-congruent tax and financial accounting periods relative to an alternative approach of specifying a single option, with no significant revenue implications or effects on economic decisions.

The proposed regulations describe and clarify the definition of revenue to broadly include all items of income under section 61. Because this definition of revenue is based on tax principles, there may be items of revenue included in this definition that adjust retained earnings on financial statements but are not reflected in the revenue line on such financial statements. The Treasury Department and the IRS considered and rejected a narrower definition of revenue or a definition that was tied to the AFS definition of revenue. The definition of revenue advanced in the proposed regulations is consistent with the current application of the all events test under § 1.451-1(a) and ensures that all financial statement items are taken into account for tax purposes. In contrast, a narrow definition of revenue would allow, or even encourage, taxpayers to avoid the AFS income inclusion rule by not classifying an item as revenue on their financial statement.

Section 451(b)(4) specifies that, in the case of a contract which contains multiple performance obligations, the allocation of the transaction price to each obligation is determined using the allocation used in the AFS. The Code, however, does not define either transaction price or performance obligation, thus the proposed regulation defines these terms. The proposed regulations clarify that a transaction price does not include amounts collected on behalf of third parties. Transaction price also does not include amounts that are contingent on the occurrence or non-occurrence of a future event. Without these exclusions, section 451(b) could be used to override other provisions of the Code concerning the definition of what constitutes gross income. This result would be at odds with the purpose of section 451, which is not to determine the existence or the amount of gross income, but rather to determine the timing of its recognition. Consequently, alternatives to these rules were not considered here.

Amounts included in the transaction price for an AFS are presumed to be not contingent, unless the taxpayer demonstrates otherwise. The Treasury Department and the IRS project that this rule will lead to reduced compliance burden for taxpayers, and reduced administrative costs for taxpayers and IRS and should lead to fewer taxpayer disputes on this issue relative to an alternative presumption regarding possible contingent amounts.

Section 451(b)(2) states that the AFS inclusion rule does not apply to items of gross income for which a taxpayer uses a special method of accounting provided under the Code. However, the Code does not apply this exception to special accounting rules that apply to original issue discount (“OID”), market discount, and certain other items with respect to debt instruments under part V of Subchapter P of the Code.

The proposed regulations implement this provision regarding special methods of accounting, and clarify the effect of section 451(b) on the excepted Subchapter P rules.

The proposed regulations implement this provision by providing a non-exhaustive list of special methods of accounting, and by clarifying how section 451(b) applies to certain credit card receivables. The proposed regulations specifically except from section 451(b) the timing rules for accrued market discount on bonds and the general OID timing rules, as well as the timing rules for OID determined with respect to special debt instruments (contingent payment and variable rate debt instruments, certain hedged debt instruments, and inflation-indexed debt instruments). Nevertheless, following the legislative history of the Act (see Conference Report, p. 276), the proposed regulations provide that credit card late fees, credit card cash advance fees, and interchange fees are subject to the AFS income inclusion rule. The proposed regulations further specify that if these credit card fees are subject to a taxpayer's AFS, they are not to be taken into account in determining whether a debt instrument associated with them has OID. Existing rules continue to apply to these items for taxpayers not possessing an AFS. The Treasury Department and the IRS expect that this treatment will provide a straightforward application of section 451(b) consistent with Congressional intent without unnecessarily complicating OID calculations and adding to taxpayer compliance burdens.

The Treasury Department and the IRS considered and rejected a broader application of the AFS income inclusion rule to include all amounts determined under the OID and market discount accounting methods, even in cases where the items are treated as discount or as an adjustment to the yield of a debt instrument over the life of the instrument in its AFS for financial reporting purposes. The proposed regulations do not subject these amounts to the AFS income inclusion rule because these special accounting methods do not generally rely on the all events test to determine the timing of income inclusion and these current special accounting methods provide workable income-recognition timing rules that appropriately measure income. The Treasury Department and the IRS expect that subjecting these items to the AFS income inclusion rule of section 451(b) would disrupt and complicate current tax accounting practices with no general economic benefit.

These proposed regulations do not impose any additional information collection requirements in the form of reporting, recordkeeping requirements or third-party disclosure requirements. However, because section 451(b) and the proposed regulations provide methods of accounting affecting the timing of income inclusion, the consent of the Commissioner under section 446(e) is required before using such method. The IRS expects that these taxpayers will request this consent by filing Form 3115, Application for Change in Accounting Method . Filing of Form 3115 (for taxpayers who are required to do so or who elect certain methods of accounting described in the proposed regulations) is the sole collection of information requirement imposed by the statute and the proposed regulations. See subsequent paragraphs for a description of taxpayers who would be required to change the method of accounting under the statute and the proposed regulations.

For purposes of the Paperwork Reduction Act, the reporting burden associated with these collections of information will be reflected in the IRS Form 3115 Paperwork Reduction Act Submissions (OMB control number 1545-0074 for individual income tax returns; OMB control number 1545-0123 for business taxpayers). On December 17, 2018, the Treasury Department and the IRS published Revenue Procedure 2018-60, 2018-51 IRB 1045, which provides procedures for taxpayers to make a change in method of accounting to comply with section 451(b)(1)(A) and/or (b)(4). Taxpayers are able to request these section 451 changes using reduced filing requirements, such as by filing a short Form 3115, or for certain taxpayers, by using a streamlined method change procedure that involves not filing a Form 3115. See also the revenue procedure accompanying these regulations for similar simplified method change procedures to make a change in method of accounting to comply with these proposed regulations.

In 2018, the IRS released and invited comment on a draft of Form 3115 in order to give members of the public the opportunity to benefit from certain specific provisions made to the Code. The IRS received no comments on the forms during the comment period. Consequently, the IRS made the forms available in January 2019 for use by the public. The IRS notes that Form 3115 applies to changes of accounting methods generally and is therefore broader than section 451(b).

Additionally, proposed § 1.451-3(h) provides additional methods of accounting that require a taxpayer to request consent of the Commissioner under section 446(e) before using such method. Under proposed § 1.451-3(h)(4)(iii), for a taxpayer with a financial accounting year that is different from its tax accounting year, a change in the method by which the taxpayer computes its revenue is a change in method of accounting. Under proposed § 1.451-3(h)(5), a restatement of an AFS that changes the timing of which an item of income, or portion thereof, is taken into account in revenue on the AFS is also a change in method of accounting. The Treasury Department and the IRS expect that taxpayers will request this consent by filing Form 3115.

For a taxpayer with an AFS required to comply with section 451(b) and/or proposed § 1.451-3, a change in the taxpayer's revenue recognition policies for financial accounting purposes requires the taxpayer to seek the consent of the Commissioner under section 446(e) to use the method for Federal income tax purposes. See proposed § 1.451-3(l). The reporting burden associated with the collection of information for a statement in lieu of the Form 3115 will be reflected in the Paperwork Reduction Act Submission associated with Revenue Procedure 2018-31, 2018-22 IRB 637 (or successor) (OMB control number 1545-1551). See the revenue procedure accompanying these proposed regulations.

The current status of the Paperwork Reduction Act submissions that will be revised as a result of the information collections in the proposed regulations is provided in the accompanying table. As described above, the reporting burdens associated with the information collections in the proposed regulations are included in the aggregated burden estimates for OMB control numbers 1545-0074 (in the case of individual filers of Form 3115), 1545-0123 (in the case of business filers of Form 3115), and 1545-1551 (in the case of filers subject to Revenue Procedure 2018-31). The overall burden estimates associated with the OMB control numbers below are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information collections in the proposed regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden imposed by the proposed regulations. These burdens have been reported for other income tax regulations that rely on the same information collections and the Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burdens imposed by tax provisions prior to the Act. No burden estimates specific to the forms affected by the proposed regulations are currently available. The Treasury Department and the IRS have not estimated the burden, including that of any new information collections, related to the requirements under the proposed regulations. For the OMB control numbers discussed in the preceding paragraphs, the Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Those estimates capture both changes made by the Act and those that arise out of discretionary authority exercised in the proposed regulations (when final) and other regulations that affect the compliance burden for that form.

The Treasury Department and IRS request comment on all aspects of information collection burdens related to the proposed regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. In addition, when available, drafts of IRS forms are posted for comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm . IRS forms are available at https://www.irs.gov/forms-instructions . Forms will not be finalized until after they have been approved by OMB under the PRA.

It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6).

New section 451(b) of the Act requires that an item of income be included in gross income for tax purposes no later than when the item is counted as revenue in an applicable financial statement. This typically moves the recognition of income forward by a year or two compared to previous law. These proposed regulations provide general guidance on the rule, including the scope of the rule, exceptions to the rule, definitions of key terms, and examples demonstrating applicability of the rule.

The Treasury Department and the IRS have estimated the number of small business entities that may be affected by the statute and these proposed regulations. The statute and proposed regulations affect only those business entities that (i) use an accrual method of accounting, and (ii) have an applicable financial statement.

Regarding an accrual method of accounting, many small business entities use the cash receipts and disbursements method of accounting (cash method), as opposed to an accrual method, and thus are not subject to this provision. The percent of returns that use an accrual method of accounting, by entity types and for entities with gross receipts not greater than $25 million, are shown in the accompanying table.

The Treasury Department and the IRS next examined the second condition, that only entities with an Applicable Financial Statement (“AFS”) are affected by the statute and the proposed regulations. The Treasury Department and the IRS do not have readily available data to measure the prevalence of entities with an AFS. However, Schedule M-3, which is used to reconcile an entity's net income or loss for tax purposes with its book income or loss, reports whether an entity has a certified audited income statement. Unfortunately for the current exercise, the Schedule M-3 is required to be filed only by entities possessing at least $10 million of assets. Nevertheless, it is this population that is far more likely to possess an AFS. Furthermore, data are currently available only for electronic filers.

For taxable year 2016, approximately 87 percent of accrual-method entities filing Forms 1120, 1120-S, and 1065 with gross receipts of $25 million or less were filers of electronic tax forms. About 11 percent, or 265,000 of these returns, included a Schedule M-3. About 40 percent of the returns with Schedule M-3, or 106,000, indicated they had a certified audited income statement. 1 Based on the assumption that filers of paper tax forms have the same incidence as electronic filers and that entities that do not file a Schedule M-3 generally do not have an AFS, then the Treasury Department and the IRS estimate that roughly 122,000 (=106,000/0.87) entities with gross receipts of $25 million or less are accrual-method entities that have an AFS. If 5 percent of entities that do not file a Schedule M-3 also have an AFS then approximately 247,000 entities with gross receipts of $25 million or less are potentially affected by the proposed regulations. These estimates of affected filing entities are reproduced in the following table.

This rule would not have a significant economic impact on small entities affected. The costs to comply with these proposed regulations are not significant. Taxpayers needing to make method changes pursuant to section 451(b) or the proposed regulations will be required to file a Form 3115. The Treasury Department and the IRS have provided streamlined procedures for certain taxpayers to change their method of accounting to comply with section 451(b), and plan to provide streamlined procedures for taxpayers to change to the methods of accounting described in these proposed regulations. See Revenue Procedure 2018-60, and the revenue procedure accompanying these regulations. Under the streamlined procedures, certain taxpayers would either complete only a portion of the Form 3115 or would not complete the Form 3115 at all to comply with section 451(b). The streamlined method change procedures are available to taxpayers (other than a tax shelter) who satisfy the gross receipts test under section 448(c) and for taxpayers making such a method change which results in a zero section 481(a) adjustment. (For tax years beginning in 2018, an entity satisfied the gross receipts test if its average annual gross receipts was $25 million or less. For tax years beginning in 2019, this threshold increased to $26 million or less.) In addition, the Treasury Department and the IRS plan to issue a streamlined procedure, using a short Form 3115, for taxpayers using a section 451(b) method who have a change in their AFS for revenue recognition that requires a method change for tax purposes. See the revenue procedure accompanying these regulations.

As noted in the revenue procedure accompanying these regulations, the estimated cumulative annual reporting and/or recordkeeping burden for the statutory method changes described under OMB control number 1545-1551, before publication of the revenue procedure, is 27,336 respondents, and a total annual reporting and/or recordkeeping burden of 30,580 hours. The estimated annual burden per respondent/recordkeeper under OMB control number 1545-1551 before publication of this revenue procedure varies from 1/6 hour to 8 1/2 hours, depending on individual circumstances, with an estimated average of 1 1/4 hours. The estimated cumulative annual reporting and/or recordkeeping burden for the method changes described under OMB control number 1545-1551 after that revenue procedure is accounted for is 27,346 respondents, and a total annual reporting and/or recordkeeping burden is 31,479 hours, leaving the average reporting and recordkeeping burden essentially unchanged. These burdens are essentially unaffected by these proposed regulations.

Notwithstanding this certification, the Treasury Department and the IRS invite comments from the public about the impact of this proposed rule on small entities.

Pursuant to section 7805(f), these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. 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 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.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

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

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

Throughout this document, “we,” “us” and “our” refer to the EPA.

Table 1 lists the rules addressed by this proposal with the dates that they were most recently adopted by MCAQD and approved by the EPA. MCAQD rescinded these rules on December 13, 2017, from the local rulebook, and forwarded the rescissions to the Arizona Department of Environmental Quality (ADEQ) for adoption and submittal to the EPA for approval. On December 18, 2017, ADEQ adopted the rule rescissions and submitted them to the EPA for approval.

On June 18, 2018, the submittal of the rescission of MCAQD Rules 325, 334, and 339 was deemed by operation of law to meet the completeness criteria in 40 CFR part 51 Appendix V, which must be met before formal EPA review.

Emissions of VOCs contribute to ground-level ozone, smog and PM, which harm human health and the environment. Section 110(a) of the CAA requires states to submit regulations that control VOC emissions. Rule 334 and Rule 339 were adopted to meet reasonably available control measures (RACM)/reasonably available control technology (RACT) requirements as a result of the 1990 Clean Air Act Amendments (CAAA), and they address specific, single sources in each rule that were emitting ≥100 tons of VOC/year. The purpose of Rule 334 is to limit VOC emissions from natural and synthetic rubber adhesives used in the manufacture of non-inflatable rubber balls. The source, Penn Racquet Sports, ceased rubber sports ball manufacturing operations in Maricopa County in 2009, and MCAQD closed Penn Racquet Sports' permit in 2009. The purpose of Rule 339 is to limit VOC emissions during the extraction of vegetable oil using solvents. MCAQD closed Western Cotton Services' permit (operated by Anderson Clayton Corp.) in 1999. MCAQD does not anticipate any new sources that would be subject to Rule 334 or Rule 339 to establish operations in Maricopa County. The EPA's technical support document (TSD) has more information about these rules.

Emissions of PM, including PM equal to or less than 2.5 microns in diameter (PM 2.5 ) and PM equal to or less than 10 microns in diameter (PM 10 ), contribute to effects that are harmful to human health and the environment, including premature mortality, aggravation of respiratory and cardiovascular disease, decreased lung function, visibility impairment, and damage to vegetation and ecosystems. Section 110(a) of the CAA requires states to submit regulations that control PM emissions. Rule 325 was adopted to meet the best available control measures (BACM)/most stringent measures (MSM) requirements for all significant sources of PM 10 for the Phoenix planning area of Maricopa County, classified as Serious nonattainment in 1996 for the annual and 24-hour PM 10 national ambient air quality standard (NAAQS). The purpose of Rule 325 is to limit particulate matter emissions from the use of tunnel kilns for curing in brick and structural clay products (BSCP) manufacturing processes. The source, Phoenix Brick Yard, ceased manufacturing operations in Maricopa County in 2012 and its air quality permit from MCAQD was closed in 2012. MCAQD does not anticipate any new sources that would be subject to Rule 325 to establish operations in Maricopa County. The EPA's TSD has more information about this rule.

Once a rule has been approved as part of a SIP, the rescission of that rule from the SIP constitutes a SIP revision. To approve such a revision, the EPA must determine whether the revision meets relevant CAA criteria for stringency, if any, and complies with restrictions on relaxation of SIP measures under CAA section 110(l), and the General Savings Clause in CAA section 193 for SIP-approved control requirements in effect before November 15, 1990.

Stringency: Generally, SIP rules must require RACT for each category of sources covered by a Control Techniques Guidelines (CTG) document as well as each major source of VOCs in ozone nonattainment areas classified as Moderate or above (see CAA section 182(b)(2)). The MCAQD regulates an ozone nonattainment area classified as Moderate for the 2008 8-hour NAAQS (40 CFR 81.303). 1

Additionally, SIP rules must implement BACM, including Best Available Control Technology (BACT), in Serious PM 10 nonattainment areas (see CAA section 189(b)(1)(B)). The MCAQD regulates a PM 10 nonattainment area classified as Serious for the PM 10 NAAQS (40 CFR 81.303).

Plan Revisions: States must demonstrate that SIP revisions would not interfere with attainment, reasonable further progress or any other applicable requirement of the CAA under the provisions of CAA section 110(l). Therefore, consistent with CAA section 110(l) requirements, MCAQD must demonstrate that the rescission of Rules 325, 334, and 339 would not interfere with attainment and reasonable further progress (RFP) of the NAAQS or any other applicable CAA requirement.

General Savings Clause: CAA section 193 prohibits the modification of any control requirement in effect, or required to be adopted by an order, settlement agreement or plan in effect before November 15, 1990, in areas designated as nonattainment for an air pollutant unless the modification ensures equivalent or greater emission reductions of the relevant pollutant.

Guidance and policy documents that we used to evaluate enforceability, revision/relaxation and rule stringency requirements for the applicable criteria pollutants include the following:

We have concluded that MCAQD Rules 325, 334, and 339 are appropriate for rescission, given that the sources for which the rules were originally developed have shut down and no longer perform manufacturing operations in the Phoenix-Mesa area, as evidenced by the surrender of their operating permits. 2 3 4 In addition, we find no other sources subject to these rules in Maricopa County, as evidenced by our review of the Maricopa County emissions inventories for PM 10 and VOCs. 5 MCAQD also documented 6 7 8 that these three rescissions will not result in any changes to allowable or actual emissions from existing sources of ozone precursors or particulate matter, and will not interfere with the attainment or maintenance of the applicable NAAQS in the Phoenix-Mesa area. We agree with MCAQD that no such changes or interference would result from the subject rule rescissions. Lastly, we note that Rules 325, 334, and 339 were SIP-approved post-1990; therefore, CAA section 193 does not apply to this action.

As authorized in section 110(k)(3) of the Act, the EPA proposes to approve the rescission of MCAQD Rules 325 (Brick and Structural Clay Products (BSCP) Manufacturing), 334 (Rubber Sports Ball Manufacturing) and 339 (Vegetable Oil Extraction Processes) from the Maricopa County portion of the Arizona SIP because they are no longer necessary to meet any CAA requirement and because rescission would not interfere with reasonable further progress or attainment of any of the NAAQS. We will accept comments from the public on this proposal until October 9, 2019. If we take final action to approve the rule rescissions, our final action will remove these rules from the federally enforceable SIP.

Under the Clean Air Act, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, the EPA's role is to approve state choices, provided that they meet the criteria of the Clean Air Act. Accordingly, this proposed action merely proposes to approve state law as meeting federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:

• Is not a “significant regulatory action” subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the Clean Air Act; and

• Does not provide the EPA with the discretionary authority to address disproportionate human health or environmental effects with practical, appropriate, and legally permissible methods under Executive Order 12898 (59 FR 7629, February 16, 1994).

In addition, the SIP is not approved to apply on any Indian reservation land or in any other area where the EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the proposed rule does not have tribal implications and will not impose substantial direct costs on tribal governments or preempt tribal law as specified by Executive Order 13175 (65 FR 67249, November 9, 2000).

The New Source Review (NSR) program is a preconstruction permitting program that requires certain stationary sources of air pollution to obtain permits prior to beginning construction. The NSR permitting program applies to new construction and to modifications of existing sources. New construction and modifications that emit “regulated NSR pollutants” over certain thresholds are subject to major NSR requirements, while smaller emitting sources and modifications may be subject to minor NSR requirements.

Major NSR permits for sources that are located in attainment or unclassifiable areas are referred to as Prevention of Significant Deterioration (PSD) permits. Major NSR permits for sources located in nonattainment areas and that emit pollutants above the specified thresholds for which the area is in nonattainment are referred to as NNSR permits.

A new stationary source is subject to major NSR requirements if its potential to emit (PTE) a regulated NSR pollutant exceeds certain emission thresholds. If it exceeds the applicable threshold, the NSR regulations define it as a “major stationary source.” An existing major stationary source triggers major NSR permitting requirements when it undergoes a “major modification,” which occurs when a source undertakes a physical change or change in method of operation ( i.e., a “project”) that would result in (1) a significant emissions increase from the project, and (2) a significant net emissions increase from the source. See, e.g., 40 CFR 52.21(b)(2)(i) and 40 CFR 52.21(b)(52). Georgia Rule 391-3-1-.03(8)— Permit Requirements contains the State's NNSR permitting requirements and identifies the counties subject to those requirements.

Effective January 6, 1992, EPA designated 13 counties surrounding Atlanta, Georgia, as nonattainment for the 1-hour ozone NAAQS and classified them as a “serious” nonattainment area (hereinafter referred to as the Atlanta 1-hour Ozone Area). 1 See 56 FR 56694 (November 6, 1991). Effective January 1, 2004, the Atlanta 1-hour Ozone Area was reclassified as a “severe” nonattainment area. See 68 FR 55469 (September 26, 2003). This classification requires, among other things, that a “major source” and a “major stationary source” be defined to include certain sources that emit or have the potential to emit 25 tons or more of nitrogen oxides (NO X ) or volatile organic compounds (VOC) and that emissions offsets apply at a ratio of at least 1.3 or 1.2:1 (depending on the criteria in CAA section 182(d)(2)). 2 EPA redesignated the Atlanta 1-hour Ozone Area to attainment for the 1-hour ozone NAAQS, effective June 14, 2005. See 70 FR 34660 (June 15, 2005). Effective June 15, 2005, EPA revoked the 1-hour ozone NAAQS. See 69 FR 23951 (April 30, 2004) and 70 FR 44470 (August 3, 2005).

Effective June 15, 2004, 20 counties surrounding Atlanta were designated as nonattainment and classified as a “marginal” nonattainment area for the 1997 8-hour ozone NAAQS (hereinafter referred to as the Atlanta 1997 8-hour Ozone Area). 3 See 69 FR 23858 (April 30, 2004). Effective April 7, 2008, the Atlanta 1997 8-hour Ozone Area was reclassified as a “moderate” nonattainment area. See 73 FR 12013 (March 6, 2008). This classification requires, among other things, that a “major source” and a “major stationary source” be defined to include certain sources that emit or have the potential to emit 100 tons or more of NO X or VOC and that emissions offsets apply at a ratio of at least 1.15:1. The Atlanta 1997 8-hour Ozone Area was redesignated to attainment, effective January 1, 2014. See 78 FR 72040 (December 2, 2013). Effective April 6, 2015, EPA revoked the 1997 8-Hour Ozone NAAQS. See 80 FR 12264 (March 6, 2015).

Effective July 20, 2012, 15 counties surrounding Atlanta were designated as nonattainment and classified as a “marginal” nonattainment area for the 2008 8-hour ozone NAAQS (hereinafter referred to as the Atlanta 2008 8-hour Ozone Area). 4 See 77 FR 30088 (May 21, 2012). This classification requires, among other things, that a “major source” and a “major stationary source” be defined to include certain sources that emit or have the potential to emit 100 tons or more of NO X or VOC and that emissions offsets apply at a ratio of at least 1.1:1. The Atlanta 2008 8-hour Ozone Area was redesignated to attainment, effective June 2, 2017. See 82 FR 25523 (June 2, 2017).

Approximately one year later, on June 4, 2018, EPA published a Federal Register notice announcing that seven counties surrounding Atlanta were designated as nonattainment and classified as a “marginal” nonattainment area for the 2015 8-hour ozone NAAQS (hereinafter referred to as the Atlanta 2015 8-hour Ozone Area). 5 See 83 FR 25776 (effective August 3, 2018). As discussed above, the “marginal” classification requires that a “major source” and a “major stationary source” be defined to include certain sources that emit or have the potential to emit 100 tons or more of NO X or VOC and that emissions offsets apply at a ratio of at least 1.1:1.

Due to the redesignations identified above and the nonattainment designation for the 2015 8-hour ozone NAAQS, the ozone nonattainment area surrounding Atlanta now consists of seven counties—Bartow, Clayton, Cobb, DeKalb, Fulton, Gwinnett, and Henry. Via a letter dated July 2, 2018, GA EPD provided a SIP revision to EPA to modify the NNSR requirements in Rule 391-3-1-.03(8)— Permit Requirements as discussed below. 6 In this proposed action, EPA is proposing to approve the changes to Georgia's Rule 391-3-1-.03(8) because these changes are consistent with the CAA. EPA's analysis is provided below.

EPA is proposing to approve changes to NNSR permitting requirements in Rule 391-3-1-.03(8) that remove the NNSR provision specific to the counties that were part of the Atlanta 1-hour Ozone Area and remove references to that provision, and apply permitting requirements to certain electric generating units (EGUs) located in counties in the maintenance area for the 1997 8-hour ozone NAAQS. 7 Specifically, Georgia is removing Rule 391-3-1-.03(8)(c)(13)— Additional Provisions for Ozone Non-Attainment Areas for Counties that were Formerly Part of the 1-hour Ozone Non-Attainment Area; revising and renaming Rule 391-3-1-.03(8)(c)(14)— Additional Provisions for Ozone Non-Attainment Areas for Counties that were Not Formerly Part of the 1-hour Ozone Non-Attainment Area; revising Rule 391-3-1-.03(8)(c)(15)— Additional Provisions for Electrical Generating Units Located in Areas Contributing to the Ambient Air Level of Ozone in the Metropolitan Atlanta Ozone Non-Attainment Area and removing references to Rule 391-3-1-.03(8)(c)(13) located at Rule 391-3-1-.03(8)(c)(12)(iv) and Rules 391-3-1-.03(8)(g)(2)(i), (5)(i), and (6)(i). These changes have the effect of applying the NNSR permitting requirements of Rule 391-3-1-.03(8)(c)(14) to the counties located in the Atlanta 2015 8-hour Ozone Area and to the counties located in the maintenance area for the 2008 8-hour ozone NAAQS.

Rule 391-3-1-.03(8)(c)(13) applies “severe” ozone nonattainment area NNSR requirements to the counties formerly included in the Atlanta 1-hour Ozone Area. Among other things, Rule 391-3-1-.03(8)(c)(13) defines “major source” and “major stationary source” to include certain sources that emit or have the potential to emit at least 25 tons per year of VOC or NO X ; identifies the net emissions increase triggering the permitting requirement as a result of a physical or operational change at a major stationary source; and sets an emissions offset ratio of at least 1.3:1.

As mentioned above, EPA redesignated the Atlanta 1-hour Ozone Area to attainment on June 14, 2005 (70 FR 34660) and revoked the 1-hour standard on August 4, 2005 (70 FR 44470). EPA has also redesignated the Atlanta 1997 8-hour Ozone Area and Atlanta 2008 8-hour Ozone Area to attainment and revoked the 1997 8-hour ozone standard. EPA is proposing to approve the removal of Rule 391-3-1-.03(8)(c)(13), thereby eliminating “severe” ozone nonattainment area NNSR requirements for the counties formerly included in the Atlanta 1-hour Ozone Area.

Rule 391-3-1-.03(8)(c)(14), among other things, defines “major source” and “major stationary source” to include certain sources that emit or have the potential to emit at least 100 tons per year of VOC or NO X ; identifies the net emissions increase triggering the permitting requirement as a result of a physical or operational change at a major stationary source; and sets an emissions offset ratio of at least 1.15:1 ( i.e., the rule applies “moderate” ozone nonattainment area NNSR requirements to the counties listed therein). The revised rule adds the 13 counties from Rule 391-3-1-.03(8)(c)(13), ( i.e., the counties that comprised the Atlanta 1-hour Ozone Area) and removes five counties (Barrow, Carroll, Hall, Spalding, and Walton) so that Rule 391-3-1-.03(8)(c)(14) applies to all of the counties in the 2008 ozone NAAQS maintenance area and the Atlanta 2015 8-hour Ozone Area. 8 The revision also changes the title of the rule to “Additional Provisions for Ozone Non-Attainment Areas.”

The “Additional Provisions for Electrical Generating Units Located in Areas Contributing to the Ambient Air Level of Ozone in the Metropolitan Atlanta Ozone Non-Attainment Area” at Rule 391-3-1-.03(8)(c)(15), among other things, define “major source” and “major stationary source” to include certain sources that emit or have the potential to emit at least 100 tons per year of VOC or NO X ; identify the net emissions increase threshold triggering the permitting requirement as a result of a physical or operational change at a major stationary source; require Best Available Control Technology for the units subject to the permitting requirement; and set an emissions offset ratio of at least 1.1:1. The revision adds the five counties (Barrow, Carroll, Hall, Spalding, and Walton) removed from Rule 391-3-1-.03(8)(c)(14). 9 None of the counties listed in Rule 391-3-1-.03(8)(c)(15) are part of the Atlanta 2015 8-hour Ozone Area or the maintenance area for the 2008 ozone NAAQS.

Lastly, the submission requests removal of references to Rule 391-3-1-.03(8)(c)(13) at Rule 391-3-1-.03(8)(c)(12)(iv) and Rules 391-3-1-.03(8)(g)(2)(i), (5)(i), and (6)(i).

EPA is proposing to approve the changes described in Georgia's July 2, 2018, SIP revision because it is no longer necessary for the State to retain either the NNSR provisions developed to address the former severe nonattainment area for the 1-hour ozone NAAQS or the NNSR program for the five counties removed from Rule 391-3-1-.03(8)(c)(14) that are part of the maintenance area for the 1997 ozone NAAQS and are designated as attainment for all ozone NAAQS. These changes are acceptable under the ozone implementation rules for the 1997 and 2008 ozone NAAQS because the anti-backsliding provisions contained therein do not apply. 10 The changes are also acceptable under CAA section 110(l), which prevents EPA from approving a SIP revision that would interfere with any applicable requirements concerning attainment and reasonable further progress or any other applicable CAA requirement, for the following reasons. 11 First, NSR only applies to new sources and to existing sources that undergo a physical change or change in the method of operation ( i.e., it is a prospective permitting program). Therefore, the conditions in the NNSR permits issued in the counties within the former Atlanta ozone nonattainment areas, along with any associated emissions offsets, will remain in effect. Second, EPA's NSR permitting rules and Georgia's SIP-approved regulations implementing those requirements prohibit the State from issuing permits to new or modified stationary sources if such construction or modification would interfere with attainment or maintenance of any NAAQS. 40 CFR 51.160 requires each state's SIP to contain enforceable procedures that prevent the permitting of new sources or modifications that would interfere with the attainment or maintenance of a NAAQS, and Georgia's SIP contains such a provision at Rule 391-3-1-.03(8)(a). 12 These two rules are applicable to all NSR programs—minor NSR, PSD, and NNSR. Third, new major sources and major modifications covered under the NNSR program in Rule 391-3-1-.03(8)(c)(14) that are located in counties formerly within the Atlanta 1-hour Ozone Area must still obtain emissions offsets at an emissions reduction to emissions increase ratio greater than one, thereby ensuring that any future new sources and major modifications will result in a net decrease in ozone precursor emissions.

In this document, EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, EPA is proposing to incorporate by reference Georgia Rule 391-3-1-.03(8)— Permit Requirements, which revises the State's permit rules, state effective June 18, 2018. EPA has made, and will continue to make, these materials generally available through www.regulations.gov and at the EPA Region 4 office (please contact the person identified in the For Further Information Contact section of this preamble for more information).

EPA is proposing to approve the aforementioned changes to the Georgia SIP, submitted in a letter dated July 2, 2018, because they are consistent with the CAA and federal regulations.

Under the CAA, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. See 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the CAA. This action merely proposes to approve state law as meeting Federal requirements and does not impose additional requirements beyond those imposed by state law. For that reason, this proposed action:

• Is not a significant regulatory action subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Is not an Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory action because SIP approvals are exempted under Executive Order 12866;

• Does not impose an information collection burden under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Is certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Does not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Is not an economically significant regulatory action based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Is not a significant regulatory action subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Is not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and

• Does not provide EPA with the discretionary authority to address, as appropriate, disproportionate human health or environmental effects, using practicable and legally permissible methods, under Executive Order 12898 (59 FR 7629, February 16, 1994).

The SIP is not approved to apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, the rule does not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will it impose substantial direct costs on tribal governments or preempt tribal law.

Parallel processing refers to a process that utilizes concurrent state and Federal proposed rulemaking actions. Generally, the state submits a copy of the proposed regulation or other revisions to EPA before conducting its public hearing and completing its public comment process under state law. EPA reviews this proposed state action and prepares a notice of proposed rulemaking under Federal law. In some cases, EPA's notice of proposed rulemaking is published in the Federal Register during the same time frame that the state is holding its public hearing and conducting its public comment process. The state and EPA then provide for concurrent public comment periods on both the state action and Federal action. If, after completing its public comment process and after EPA's public comment process has run, the state changes its final submittal from the proposed submittal, EPA evaluates those changes and decides whether to publish another notice of proposed rulemaking in light of those changes or to proceed to taking final action on its proposed action and describe the state's changes in its final rulemaking action. Any final rulemaking action by EPA will occur only after the final submittal has been adopted by the state and formally provided to EPA.

In the instant case, however, EPA's and Florida's processes have not been perfectly concurrent. The State submitted its first SIP revision for the Area to EPA in December 2017. Then, on February 15, 2019, Florida submitted proposed SIP revisions related to the 2010 1-hour SO 2 standard for the Hillsborough-Polk Area, including an amendment to the December 2017, SIP revision, along with proposed requests to redesignate the Hillsborough-Polk and Mulberry Areas. These submittals were noticed for public comment by the State on February 15, 2019, and have not yet been submitted in final form. The State's public comment period closed on March 18, 2019. The State only received comments from EPA which are provided in the docket for this proposed rulemaking. Florida requested that EPA parallel process these proposed submittals while the State waits for the multi-unit permit limits to become state-enforceable on August 31, 2019. The State's intention is to submit its final SIP revisions and redesignation requests in early September 2019. After Florida submits these formal SIP revisions and requests (including responses to EPA's comments), EPA will evaluate the submittals. If the State changes the formal submittals from the proposed submittals, EPA will evaluate those changes for significance. If EPA finds any such changes to be significant, then the Agency intends to determine whether to re-propose the actions based upon the revised submissions or to proceed to take final action on the submittals as changed by the State. Although EPA was unable to have a concurrent public comment process with the State, Florida's request for parallel processing allows EPA to begin to take action on the State's proposed submittals in advance of formal, final submissions.

EPA is proposing to take the following seven separate but related actions: (1) Approve and incorporate the SO 2 permit limits and associated compliance and monitoring parameters for Mosaic New Wales and Mosaic Bartow into the SIP; (2) approve the base-year emissions inventory pursuant to Clean Air Act (CAA or Act) section 172(c)(3) for the Hillsborough-Polk Area and incorporate it into the SIP; (3) concur with Florida's certification pursuant to CAA section 172(c)(5) that its existing NNSR requirements apply to the Hillsborough-Polk Area; (4) determine that the air quality modeling submitted by the State demonstrates that the Hillsborough-Polk Area will have attained the 2010 SO 2 NAAQS as a result of compliance with the multi-unit permit limits at Mosaic New Wales and Mosaic Bartow; (5) approve Florida's plan for maintaining the 2010 1-hour SO 2 NAAQS in the Hillsborough-Polk Area through 2032 and incorporate it into the SIP pursuant to section 175A of the CAA; (6) redesignate the Hillsborough-Polk Area to attainment for the 2010 1-hour SO 2 NAAQS; and (7) redesignate the Mulberry Area to attainment/unclassifiable for the 2010 1-hour SO 2 NAAQS based on air quality modeling. Because attainment of the SO 2 NAAQS is dependent on making the multi-unit permit limits and associated compliance and monitoring parameters for Mosaic New Wales and Mosaic Bartow permanent and enforceable measures, EPA cannot take final action on items 4-7, above, unless it finalizes its proposal to approve and incorporate these limits and parameters into the SIP. 1

The Hillsborough-Polk Area is comprised of the portion of Hillsborough and Polk Counties encompassed by the polygon with the vertices using Universal Transverse Mercator (UTM) coordinates in UTM zone 17 with datum North American Datum 83 (NAD83) as follows: 390,500 E, 3,073,500 N; 390,500 E, 3,083,500 N; 400,500 E, 3,083,500 N; 400,500 E, 3,073,500 N. The Hillsborough-Polk Area contains one major point source for SO 2 emissions—Mosaic New Wales.

The Mulberry Area is that portion of Hillsborough and Polk Counties encompassed by the polygon with the vertices using UTM coordinates in UTM zone 17 with datum NAD83 starting with the Northwest Corner and proceeding to the Northeast as follows: 390,500 E, 3,083,500 N; 410,700 E, 3,091,600 N; 412,900 E, 3,089,800 N; 412,900 E, 3,084,600 N; 400,500 E, 3,073,50 N; 400,500 E, 3,083,500 N. The Mulberry Area is directly adjacent to the Hillsborough-Polk Area and contains one major point source for SO 2 emissions—Mosaic Bartow. In addition, there are two major SO 2 point sources located within 10 kilometers (km) of the Hillsborough-Polk Area and the Mulberry Area—Mosaic's South Pierce facility and Tampa Electric Company's (TECO's) Polk Power Station.

On June 2, 2010, EPA revised the primary SO 2 NAAQS, establishing a new 1-hour SO 2 standard of 75 parts per billion (ppb). See 75 FR 35520 (June 22, 2010). Under EPA's regulations at 40 CFR part 50, the 2010 1-hour SO 2 NAAQS is met at a monitoring site when the 3-year average of the annual 99th percentile of daily maximum 1-hour average concentrations is less than or equal to 75 ppb (based on the rounding convention in 40 CFR part 50, appendix T). See 40 CFR 50.17. Ambient air quality monitoring data for the 3-year period must meet a data completeness requirement. A year meets data completeness requirements when all four quarters are complete, and a quarter is complete when at least 75 percent of the sampling days for each quarter have complete data. A sampling day has complete data if 75 percent of the hourly concentration values, including state-flagged data affected by exceptional events which have been approved for exclusion by the Administrator, are reported. 2 The 2010 1-hour SO 2 standard is violated at an ambient air quality monitoring site (or in the case of dispersion modeling, at an ambient air quality receptor location) when the 3-year average of the annual 99th percentile of the daily maximum 1-hour average concentrations exceeds 75 ppb, as determined in accordance with Appendix T of 40 CFR part 50.

Upon promulgation of a new or revised NAAQS, the CAA requires EPA to designate as nonattainment any area that does not meet (or that contributes to ambient air quality in a nearby area that does not meet) the NAAQS. Effective on April 9, 2018, EPA designated the Hillsborough-Polk Area as nonattainment based on air dispersion modeling and designated the Mulberry Area as unclassifiable for the 2010 1-hour SO 2 NAAQS. 3 See 83 FR 1098 (January 9, 2018). Under the CAA, SO 2 nonattainment areas must attain the NAAQS as expeditiously as practicable but not later than five years after the April 9, 2018, effective date of the designation. See CAA section 192(a). Therefore, the Hillsborough-Polk Area's applicable attainment date is no later than April 9, 2023.

EPA's nonattainment designation for the Hillsborough-Polk Area triggered an obligation for Florida to develop a nonattainment area SIP revision addressing certain requirements under CAA title I, part D, subpart 1 (hereinafter “Subpart 1”), and to submit that SIP revision to EPA in accordance with the deadlines in title I, part D, subpart 5 (hereinafter “Subpart 5”). 4 Subpart 1 contains the general requirements for nonattainment areas for criteria pollutants, including requirements to develop a SIP that provides for the implementation of reasonably available control measures (RACM), requires reasonable further progress (RFP), includes base-year and attainment-year emissions inventories, a SIP-approved NNSR permitting program that accounts for growth in the area, enforceable emission limitations and other such control measures, and provides for the implementation of contingency measures. This SIP revision is due within 18 months following the April 9, 2018, effective date of designation ( i.e., October 9, 2019). 5 See CAA section 191(a).

The CAA provides the requirements for redesignating a nonattainment area to attainment. Specifically, section 107(d)(3)(E) of the CAA allows for redesignation provided that the following criteria are met: (1) The Administrator determines that the area has attained the applicable NAAQS; (2) the Administrator has fully approved the applicable implementation plan for the area under section 110(k); (3) the Administrator determines that the improvement in air quality is due to permanent and enforceable reductions in emissions resulting from implementation of the applicable SIP and applicable federal air pollutant control regulations, and other permanent and enforceable reductions; (4) the Administrator has fully approved a maintenance plan for the area as meeting the requirements of section 175A; and (5) the state containing such area has met all requirements applicable to the area for purposes of redesignation under section 110 and part D of the CAA.

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

EPA's SO 2 Nonattainment Area Guidance discusses the CAA requirements that air agencies need to address when implementing the 2010 SO 2 NAAQS in areas designated as nonattainment for the standard. The guidance includes recommendations for air agencies to consider as they develop SIPs to satisfy the requirements of sections 110, 172, 175A, 191, and 192 of the CAA to show future attainment and maintenance of the 2010 SO 2 NAAQS. Additionally, the SO 2 Nonattainment Area Guidance provides recommendations for air agencies to consider as they develop redesignation requests and maintenance plans to satisfy the requirements of sections 107(d)(3)(E) and 175A.

EPA has evaluated and is proposing to approve the base-year nonattainment emissions inventory and concurs with FDEP's certification that its existing SIP-approved NNSR permitting program applies to the Hillsborough-Polk Area because they satisfy the requirements of CAA sections 172(c)(3) and 172(c)(5), respectively. As discussed in greater detail in Section VI of this notice, EPA is also proposing to approve and incorporate the SO 2 permit limits and associated compliance and monitoring parameters for Mosaic New Wales and Mosaic Bartow into the SIP. In addition, EPA is proposing to determine that the air quality modeling submitted by the State demonstrates that the Hillsborough-Polk Area will have attained the 2010 SO 2 NAAQS as a result of compliance with the permit limits at Mosaic New Wales and Mosaic Bartow and that the Area will meet the requirements for redesignation as set forth in section 107(d)(3)(E), including the maintenance plan requirements under section 175A of the CAA, provided that the state submits a final SIP consistent with that outlined above, including the permit limits, parameters, and related information, and EPA approves the SIP.

Also, as a result of the compliance with the multi-unit permit limits at Mosaic New Wales and Mosaic Bartow, EPA proposes to determine that the Mulberry Area will have attained the 1-hour SO 2 NAAQS and thus will meet the requirements for redesignation from unclassifiable to attainment/unclassifiable.

Florida's December 1, 2017, source-specific SIP revision includes SO 2 multi-unit permit limits and associated compliance and monitoring provisions from air construction permits for Mosaic New Wales (Permit No. 1050059-106-AC) and Mosaic Bartow (Permit No. 1050046-050-AC). The SIP revision also includes modeling to demonstrate that the Hillsborough-Polk Area will attain the SO 2 NAAQS as a result of compliance with these multi-unit permit limits. Florida's February 15, 2019, draft SIP submittal contains changes to this modeling and administrative corrections to the aforementioned permits.

Mosaic New Wales and Mosaic Bartow are phosphate fertilizer manufacturing plants that employ a process of reacting phosphate rock with sulfuric acid to produce phosphoric acid, which is then converted into several different fertilizer products and animal feed ingredients. The sulfuric acid needed for the process is produced by sulfuric acid plants (SAPs), which are the largest SO 2 emitting units at these sites. Both facilities are sulfur burning, double conversion, and double absorption plants of Leonard-Monsanto design. 6 The SAPs burn sulfur with dried atmospheric oxygen to produce SO 2 , which is catalytically oxidized to sulfur trioxide (SO 3 ), which is then absorbed in sulfuric acid.

To reduce SO 2 emissions from the SAPs, Mosaic has replaced the vanadium catalysts with more efficient catalysts to enable Mosaic New Wales and Mosaic Bartow to meet the new SO 2 permit limits. Mosaic Bartow and Mosaic New Wales began installation of the catalyst replacements in 2016 and 2017, respectively, and completed installation in April 2019. 7 The new catalysts allow for more SO 2 to be captured for process purposes rather than being emitted into the atmosphere.

On October 30, 2017, FDEP issued Permit No. 1050059-106-AC for Mosaic New Wales requiring compliance with a SO 2 multi-unit permit limit of 1,090 pounds per hour (lb/hr) across all five SAPs (Nos. 1 through 5) based on a 24-hour block average and with associated specific compliance and monitoring provisions. On July 3, 2017, FDEP issued Permit No. 1050046-050-AC for Mosaic Bartow requiring compliance with an SO 2 multi-unit permit limits of 1,100 lb/hr across all three SAPs (No. 4, No. 6 and No. 5) based on a 24-hour block average and with associated compliance and monitoring provisions. Mosaic is required to comply with these permit conditions no later than August 31, 2019. 8 The construction permits impose the new limits for scenarios where any number of units are operating at each respective facility while retaining the current individual unit limits as shown in Tables 1 and 2.

The potential to emit for SAPs 1-5 at Mosaic New Wales and SAPs 4-6 at Mosaic Bartow was previously 10,750 tons per year (tpy) and 5,694 tpy, respectively. With the new multi-unit permit limits implemented at Mosaic New Wales and Mosaic Bartow, FDEP expects the potential to emit to be 4,774 tpy and 4,818 tpy, respectively. This is approximately a 42-percent drop in total allowable emissions for both facilities, combined. At maximum production, with all SAPs in operation, overall SO 2 emissions are expected to be reduced by approximately 5,930 tpy at Mosaic New Wales and 876 tpy at Mosaic Bartow. FDEP projects that actual SO 2 emissions will decrease by 36 percent from 2016 to 2020.

On January 11, 2019, FDEP issued Administrative Permit Corrections to the air construction permits identified above. These corrections are contained in Permit No. 1050059-114-AC for Mosaic New Wales and Permit No. 1050046-063-AC for Mosaic Bartow and do not modify the multi-unit permit limits or the associated compliance and monitoring provisions. The notices associated with these permits state that the corrections merely remove unnecessary and confusing language from the permit provisions that contain the emissions caps. 9 Florida's February 15, 2019, draft SIP revisions ask EPA to incorporate the corrections from Permit Nos. 1050059-114-AC and 050046-063-AC into the SIP.

On March 22, 2019, Florida submitted a letter to EPA explaining the administrative corrections and clarifying which permit conditions that it would like EPA to incorporate into the SIP. 10 FDEP is requesting that EPA incorporate the following conditions from Permit Nos. 10500046-106-AC and 1050046-050-AC:  11 (1) Section III, Subsection A, Specific Condition 3 (as corrected by Permit Nos. 1050059-114-AC and Permit No. 1050046-063-AC)—establishing the five-unit permit limit of 1,090 lb/hr for Mosaic New Wales and the three-unit permit limit of 1,100 lb/hr for Mosaic Bartow, each based on 24-hour block average, and applicable during all periods of operation;  12 (2) Section III, Subsection A Specific Condition 4—requiring the facilities to use certified SO 2 continuous emissions monitoring system (CEMS) data to demonstrate initial compliance with the new SO 2 permit limit; and (3) Section III, Subsection A, Specific Condition 5—requiring the facilities to keep records of the initial compliance demonstration that include the SO 2 CEMS data and sulfuric acid production rate (in tons per hour) during the demonstration.

The Mosaic New Wales and Mosaic Bartow air construction permits include specific conditions regarding initial compliance with the SO 2 permit limits using CEMS. Florida's SIP-approved regulations for SAPs, at Rule 62-296.402, Florida Administrative Code (F.A.C.), require the owner or operator of a SAP to install and operate CEMS according to appendix B of 40 CFR part 60, and Chapter 62-297, F.A.C., which specifies how stationary sources demonstrate compliance with the applicable permit limits. 13 These applicable requirements require compliance with the permit limits on an ongoing basis. For each SAP at each source, a CEMS will be used to determine compliance with the 24-hour average permit limit for SO 2 . The CEMS shall be calibrated, maintained and operated as specified in 40 CFR 60.84.

The December 1, 2017, SIP revision includes an air dispersion modeling analysis to show attainment of the 2010 SO 2 NAAQS in the Hillsborough-Polk Area. The modeling used 1-hour emission rates calculated from final multi-unit permit limits of 1,090 lb/hr and 1,100 lb/hr for New Wales and Bartow, respectively, using adjustment factors derived following the procedures in EPA's SO 2 Nonattainment Area Guidance. Florida's draft February 15, 2019, SIP revision updated this modeling. FDEP's modeling complied with all applicable EPA rules and guidance, including Appendix W to 40 CFR part 51: The Guideline on Air Quality Models (Appendix W) and the SO 2 NAAQS Designations Modeling Technical Assistance Document. 14 For more information on the modeling analysis, see section VII.C of this notice and the Air Modeling Technical Support Document (TSD). 15 For details on how Florida established the 24-hour multi-unit SO 2 permit limits, see the longer term averaging (LTA) TSD. 16 EPA included both TSDs in the docket for this proposing rulemaking.

Based on a review of Florida's December 1, 2017, SIP revision, as modified through its February 15, 2019, draft SIP revision, EPA believes that the 24-hour block average SO 2 multi-unit permit limits described above provide an appropriate alternative to establishing a 1-hour average permit limit for each unit at Mosaic New Wales and Mosaic Bartow. The State has used a suitable database and has derived adjustment factors that yielded permit limits that have comparable stringency to the 1-hour average limits that would otherwise have been necessary to provide for attainment. While the 24-hour block average allows for occasions in which emissions may be higher than the level that would be allowed with the 1-hour limit, the State's caps compensate by requiring average emissions to be lower than the level that would otherwise have been required by 1-hour average limits. For more information on how Florida established the SO 2 permit limits, please refer to the LTA discussion presented in TSD. For reasons discussed in the LTA TSD and explained in more detail in EPA's SO 2 Nonattainment Area Guidance, EPA believes that appropriately set longer term average limits provide a reasonable basis by which permit limits may provide for attainment. Based on its review of this information as well as the information in the State's 2017 and 2019 SIP revisions, EPA is proposing to find that the 24-hour average limits for Mosaic New Wales and Mosaic Bartow provide for attainment of the SO 2 standard.

Regarding the Hillsborough-Polk Area and in accordance with the CAA, EPA proposes to: (1) Approve and incorporate the SO 2 permit limits and associated compliance and monitoring parameters for Mosaic New Wales and Bartow into the SIP; (2) approve the base-year emissions inventory pursuant to Clean Air Act (CAA or Act) section 172(c)(3) for the Hillsborough-Polk Area and incorporate it into the SIP; (3) concur with Florida's certification pursuant to CAA section 172(c)(5) that its existing NNSR requirements apply to the Hillsborough-Polk Area; (4) determine that the air quality modeling submitted by the State demonstrates that the Hillsborough-Polk Area will have attained the 2010 SO 2 NAAQS as a result of compliance with the multi-unit permit limits at Mosaic New Wales and Bartow; (5) approve Florida's plan for maintaining the 2010 1-hour SO 2 NAAQS in the Hillsborough-Polk Area through 2032 and incorporate it into the SIP pursuant to section 175A of the CAA; and (6) redesignate the Hillsborough-Polk Area to attainment for the 2010 1-hour SO 2 NAAQS. Because attainment of the SO 2 NAAQS is dependent on making the multi-unit permit limits and associated compliance and monitoring parameters for Mosaic New Wales and Bartow permanent and enforceable measures, EPA cannot take final action on items 4-7, above, unless it finalizes its proposal to approve and incorporate these caps and parameters into the SIP.

States are required under section 172(c)(3) of the CAA to develop comprehensive, accurate, and current inventories of actual emissions from all sources of the relevant pollutant or pollutants in the nonattainment area. These inventories provide a detailed accounting of all emissions and emission sources by precursor or pollutant. In addition, these inventories are used in air quality modeling to demonstrate that attainment of the NAAQS is as expeditious as practicable. The SO 2 Nonattainment Area Guidance states that the emissions inventory should be consistent with the Air Emissions Reporting Requirements (AERR) at subpart A to 40 CFR part 51. 17 The SO 2 Nonattainment Area Guidance notes that the base-year inventory should include all sources of SO 2 in the nonattainment area as well as any sources located outside the nonattainment area which may affect attainment in the area.

Florida elected to use 2017 as the base year. To develop the base-year emission inventory, Florida reviewed and compiled county-level actual SO 2 emissions for all source categories ( i.e., point, area, and mobile (nonroad and onroad)) in Hillsborough and Polk Counties and then utilized county and partial county nonattainment area population and land use data to determine estimated SO 2 emission inventories for sources of SO 2 in the Hillsborough-Polk Area. Emissions from Mosaic New Wales, the largest point source of SO 2 in the Area, as well as nearby Mosaic Bartow, a point source located outside of the Area, were included in the inventory.

Pursuant to Florida's SIP-approved regulations at Rule 62-210.370, F.A.C., paragraph (3), FDEP collects annual operating reports (AORs). Florida used these AORs to satisfy the AERR and to develop the base year inventory for actual emissions for point sources. FDEP utilized EPA's 2014 NEI, Version 2 to obtain estimates of the area and nonroad sources. For onroad mobile source emissions, FDEP utilized EPA's Motor Vehicle Emissions Simulator (MOVES2014). A more detailed discussion of the emissions inventory development for the Hillsborough-Polk Area can be found in Florida's February 15, 2019, draft SIP submittal.

Table 3, below, shows the level of emissions in the Hillsborough-Polk Area for the 2017 base year by emissions source category. The point source category includes 2017 emissions from the Mosaic New Wales and Mosaic Bartow AORs (6,877 tons and 4,001 tons, respectively). Area and nonroad emissions are based on 2014 NEI data for Hillsborough County and Polk County. Florida projected the 2014 emissions for the area and nonroad categories to 2017 based on the increase in the Hillsborough County and Polk County population from 2014 to 2017, and then allocated to the Hillsborough-Polk Area based on the Area's fraction of land area within each county. Florida estimated onroad emissions for the area using MOVES2014a and then allocated them to the Hillsborough-Polk Area based on the Area's fraction of land area within each county.

EPA has evaluated Florida's 2017 base-year emissions inventory for the Hillsborough-Polk Area and has made the preliminary determination that this inventory was developed consistent with EPA's guidance. Therefore, pursuant to section 172(c)(3), EPA is proposing to approve Florida's 2017 base-year emissions inventory for the Hillsborough-Polk Area and incorporate it into the SIP.

CAA section 172(c)(5) requires source permits for the construction and operation of new and modified major stationary sources anywhere in a nonattainment area. In its February 15, 2019, draft SIP revision, Florida certifies that it has a SIP-approved NNSR permitting program, outlined in Chapters 62-210 and 62-212, F.A.C., to address any new major stationary sources or source modifications in the Hillsborough-Polk Area. The SIP-approved program applies to nonattainment areas for all NAAQS, including the 2010 1-hour SO 2 standard. Florida also states that it is unaware of and does not anticipate any future development within the Area that would increase SO 2 emissions. EPA has previously approved Florida's SIP-approved NNSR program, including the NNSR regulation at 62-212.500, F.A.C., 18 and is therefore proposing to concur with Florida's section 172(c)(5) certification that its program requires NNSR in the Hillsborough Polk Area for so long as the Area is designated nonattainment. 19

The five redesignation criteria provided under CAA section 107(d)(3)(E) are discussed in greater detail for the Hillsborough-Polk Area in the following paragraphs.

For redesignating a nonattainment area to attainment, the CAA requires EPA to determine that the area has attained the applicable NAAQS (CAA section 107(d)(3)(E)(i)). As discussed in section VIII.A of the SO 2 Nonattainment Area Guidance, there are generally two components needed to support an attainment determination for SO 2 , which should be considered interdependently. 20 The first component relies on air quality monitoring data. For SO 2 , any available monitoring data would need to indicate that all monitors in the affected area are meeting the standard as stated in 40 CFR 50.17 using data analysis procedures specified in 40 CFR part 50, Appendix T. The second component relies on air quality modeling data. If there are no air quality monitors located in the affected area, or there are air quality monitors located in the area, but analyses show that none of the monitors are located in the area of maximum concentration, 21 then air quality dispersion modeling will generally be needed to estimate SO 2 concentrations in the area. Such dispersion modeling should be conducted to estimate SO 2 concentrations throughout the nonattainment area using actual emissions and meteorological information for the most recent three calendar years. However, EPA may also make determinations of attainment based on the modeling from the attainment demonstration  22 for the applicable SIP for the affected area, eliminating the need for separate actuals-based modeling to support a redesignation request. A demonstration that the control strategy in the SIP has been fully implemented (compliance records demonstrating that the control measures have been implemented as required by the approved SIP) would also be relevant for making the determination, and as noted above, Florida is providing emissions data to demonstrate compliance with the SO 2 permit limits in its final SIP submittal. Areas which were designated nonattainment based on modeling will generally not be redesignated to attainment unless an acceptable modeling analysis indicates attainment. See 1992 Calcagni Memorandum.

As discussed above, Florida's December 1, 2017, SIP revision, as modified through its February 15, 2019, draft SIP revision, contains a modeling analysis to demonstrate that the Area will attain the 2010 1-hour standard as a result of compliance with the comparably stringent 24-hour SO 2 emissions caps at Mosaic New Wales and Mosaic Bartow. When EPA designated the Hillsborough-Polk Area as a nonattainment area for the 2010 1-hour SO 2 NAAQS, EPA determined that Mosaic New Wales was the primary cause of the 2010 1-hour SO 2 NAAQS violations in the Hillsborough-Polk Area. However, Florida included nearby Mosaic Bartow in its modeling because it determined that emissions from Mosaic Bartow also had the potential to contribute to elevated concentrations within the Hillsborough-Polk Area.

Because there are no air quality monitors located in the Hillsborough-Polk Area, EPA's proposed approval of Florida's draft redesignation and maintenance plan SIP for the Hillsborough-Polk Area is based on this modeled demonstration and related information. Details regarding the modeling analysis are summarized in the following paragraphs. A more detailed discussion of FDEP's modeling, including changes in the February 19, 2019, draft SIP revision, can be found in EPA's Air Modeling TSD.

FDEP's modeling analysis was developed in accordance with EPA's Guideline on Air Quality Models (Modeling Guideline)  23 and the SO 2 Nonattainment Area Guidance, and was prepared using EPA's preferred dispersion modeling system—the American Meteorological Society/Environmental Protection Agency Regulatory Model (AERMOD)—consisting of the AERMOD (version 18081) model and multiple data input preprocessors as described below. FDEP used regulatory default options and the rural land use dispersion option in the AERMOD modeling.

The pre-processors AERMET (version 16216) and AERMINUTE (version 14337) were used to process five years ( i.e., 2012-2016) of 1-minute meteorological data from the Winter Haven Municipal Airport National Weather Service (NWS) surface level site, based on FDEP's land use classifications, in combination with twice daily upper-air meteorological information from the Ruskin, FL NWS station. The Winter Haven Municipal Airport is located approximately 38 km northwest from the Hillsborough-Polk Area.

The AERMOD pre-processor AERMAP (version 18081) was used to generate terrain inputs for the receptors, based on a digital elevation mapping database from the National Elevation Dataset developed by the U.S. Geological Survey. FDEP used AERSURFACE to generate direction-specific land-use surface characteristics for the modeling.

The stack heights used in the modeling meet the Good Engineering Practice stack height criteria, and the Building Profile Input Program for Plume Rise Model Enhancements preprocessor was used to generate direction-specific building downwash parameters. FDEP developed two overlapping Cartesian receptor grids to fully encompass the entire nonattainment area and the unclassifiable area, with 100-meter (m) spacing out to 2.5 km from Mosaic New Wales and Mosaic Bartow, 200 m spacing from 2.5 km to 5 km, and 500 m spacing from 5 km to 7.5 km from the facilities, to ensure maximum concentrations were captured in the analysis.

FDEP selected a background SO 2 concentration based on monitoring data from the Sydney monitor (AQS ID: 12-057-3002), for the period January 2014 to December 2016. The monitor is approximately 23 km from Mosaic New Wales and 31 km from Mosaic Bartow. The background concentration from this ambient air monitor is used to account for SO 2 impacts from all sources that are not specifically included in the AERMOD modeling analysis. The ambient monitoring data was obtained from the Florida Air Monitoring and Assessment System. Due to its close proximity to the modeled facilities, monitored concentrations at this station are strongly influenced by their emissions. As a result, and as allowed by EPA's Modeling Guideline, the data were filtered to remove measurements where the wind direction could transport pollutants from these facilities to the monitor. More specifically, the data were filtered to remove measurements where hourly wind directions were between 85° to 175°. FDEP elected to use a temporally varying approach, based on the 99th percentile monitored concentrations by hour of day and season or month. The resulting temporally varying background concentration ranged from 0.67-7.33 ppb.

The State used the emissions caps for each of the SO 2 emissions units at Mosaic New Wales and Mosaic Bartow in the modeling demonstration. As discussed in Section VI, FDEP's construction permits require Mosaic New Wales to comply with a 1,090 lb/hr SO 2 permit limit for its five SAPs and Mosaic Bartow to comply with a 1,100 lb/hr for its three SAPs, each on a 24-hour block average, no later than August 31, 2019. To determine the level of these permit limits, the State initially performed exploratory modeling, consisting of over 300 AERMOD modeling runs, to determine the CEVs for Mosaic New Wales and Mosaic Bartow on an hourly basis. This modeling was performed to determine the highest aggregate hourly emission rate that, regardless of its distribution among any combination of SAPs at the facilities, would result in modeled concentrations at or below the level of the 1-hour NAAQS ( i.e., the CEV). The analysis resulted in CEVs of 1,118 lb/hr and 1,163 lb/hr for Mosaic New Wales and Mosaic Bartow, respectively. Following the procedures in EPA's SO 2 Nonattainment Area Guidance, Florida calculated comparably stringent 24-hour emissions caps using adjustment factors calculated by the ratio of each source's historic 99th percentile one-hour average emissions rate to its 99th percentile longer-term average emissions rate, which resulted in 24-hour adjusted emission caps of 1,100 lb/hr for New Wales and 1,138 lb/hr for Bartow. The details of the adjustment factor calculation are provided in the LTA TSD for this action. To provide for a margin of safety in the final modeling demonstration, Florida slightly lowered the 24-hour adjusted emission caps to establish final multi-unit permit limits of 1,090 lb/hr and 1,100 lb/hr for New Wales and Bartow, respectively. For the final modeling run to show compliance with the NAAQS, Florida applied the adjustment factors to back-calculate 1-hour emission rates (1,108 lb/hr for New Wales and 1,124 lb/hr for Bartow) from the final 24-hour multi-unit permit limits of 1,090 lb/hr and 1,100 lb/hr for New Wales and Bartow, respectively.

Table 4 shows that the maximum modeled 99th percentile daily maximum 1-hour SO 2 concentration averaged across all five years of meteorological data (2012-2016) is less than or equal to the 2010 1-hour SO 2 NAAQS of 75 ppb using the in 1-hour equivalent emission rates.

The final modeling resulted in a highest predicted 99th percentile daily maximum 1-hour concentration of 74.4 ppb with no modeled violations of the 1-hour SO 2 NAAQS in ambient air locations in the Hillsborough-Polk Area or in the Mulberry Area. The details of the modeling are provided EPA's Air Modeling TSD for this action. EPA believes that the modeled demonstration described above is consistent with CAA requirements, EPA's Modeling Guideline, and the SO 2 Nonattainment Area Guidance. Therefore, EPA proposes to determine that the air quality modeling and related information that will be submitted by the State in its final submission (consistent with the current proposed SIP) demonstrates that the Hillsborough-Polk Area will have attained the 2010 1-hour SO 2 NAAQS as a result of compliance with the permit limits at Mosaic New Wales and Mosaic Bartow. EPA cannot take final action to determine that the Area has attained the NAAQS unless it receives the final SIP submittal containing that information and finalizes its proposal to approve and incorporate these permit limits, associated compliance and monitoring parameters, and other related information into the SIP.

For redesignating a nonattainment area to attainment, the CAA requires EPA to determine that the state has met all applicable requirements under section 110 and part D of title I of the CAA (CAA section 107(d)(3)(E)(v)) and that the state has a fully approved SIP under section 110(k) for the area (CAA section 107(d)(3)(E)(ii)). EPA proposes to find that Florida has met all applicable SIP requirements for the Hillsborough-Polk Area under section 110 of the CAA (general SIP requirements) for purposes of redesignation. Additionally, EPA proposes to find that the Florida SIP satisfies the criterion that it meets applicable SIP requirements for purposes of redesignation under part D of title I of the CAA in accordance with section 107(d)(3)(E)(v). Further, EPA proposes to determine that the SIP is fully approved with respect to all requirements applicable for purposes of redesignation in accordance with section 107(d)(3)(E)(ii). In making these proposed determinations, EPA ascertained which requirements are applicable to the Area and, if applicable, that they are fully approved under section 110(k). SIPs must be fully approved only with respect to requirements that were applicable prior to submittal of the complete redesignation request.

General SIP elements and requirements are delineated in section 110(a)(2) of title I, part A of the CAA. These requirements include, but are not limited to, the following: Submittal of a SIP that has been adopted by the state after reasonable public notice and hearing; provisions for establishment and operation of appropriate procedures needed to monitor ambient air quality; implementation of a source permit program; provisions for the implementation of part C requirements (Prevention of Significant Deterioration (PSD)) and provisions for the implementation of part D requirements (NNSR permit programs); provisions for air pollution modeling; and provisions for public and local agency participation in planning and emission control rule development.

Section 110(a)(2)(D) requires that SIPs contain certain measures to prevent sources in a state from significantly contributing to air quality problems in another state. To implement this provision, EPA has required certain states to establish programs to address the interstate transport of air pollutants. The section 110(a)(2)(D) requirements for a state are not linked with a particular nonattainment area's designation and classification in that state. EPA believes that the requirements linked with a particular nonattainment area's designation and classifications are the relevant measures to evaluate in reviewing a redesignation request. The transport SIP submittal requirements, where applicable, continue to apply to a state regardless of the designation of any one particular area in the state. Thus, EPA does not believe that the CAA's interstate transport requirements should be construed to be applicable requirements for purposes of redesignation.

In addition, EPA believes that other section 110(a)(2) elements that are neither connected with nonattainment plan submissions nor linked with an area's attainment status are not applicable requirements for purposes of redesignation. The area will still be subject to these requirements after the area is redesignated. The section 110(a)(2) and part D requirements which are linked with a particular area's designation and classification are the relevant measures to evaluate in reviewing a redesignation request. This approach is consistent with EPA's existing policy on applicability ( i.e., for redesignations) of conformity and oxygenated fuels requirements, as well as with section 184 ozone transport requirements. See Reading, Pennsylvania, proposed and final rulemakings (61 FR 53174-53176, October 10, 1996), (62 FR 24826, May 7, 2008); Cleveland-Akron-Loraine, Ohio, final rulemaking (61 FR 20458, May 7, 1996); and Tampa, Florida, final rulemaking at (60 FR 62748, December 7, 1995). See also the discussion on this issue in the Cincinnati, Ohio, redesignation (65 FR 37890, June 19, 2000), and in the Pittsburgh, Pennsylvania, redesignation (66 FR 50399, October 19, 2001). Nonetheless, EPA has approved Florida's SIP revisions related to the section 110 requirements for the 2010 SO 2 NAAQS, with the exception of the interstate transport elements at section 110(a)(2)(D)(i)(I). See 81 FR 67179 (September 30, 2016).

Subpart 1 of part D, comprised of CAA sections 171-179B, sets forth the basic nonattainment requirements applicable to all nonattainment areas. All areas that were designated nonattainment for the SO 2 NAAQS were designated under Subpart 1 of the CAA in accordance with the deadlines in Subpart 5. For purposes of evaluating this redesignation request, the applicable Subpart 1 SIP requirements are contained in section 172(c)(1)-(9), section 176, and sections 191 and 192. A thorough discussion of the requirements contained in sections 172(c) can be found in the General Preamble for Implementation of Title I. See 57 FR 13498 (April 16, 1992).

Section 172 requires states with nonattainment areas to submit plans providing for timely attainment and meeting a variety of other requirements. EPA's longstanding interpretation of the attainment-related nonattainment planning requirements of section 172 is that once an area is attaining the NAAQS, those requirements are not “applicable” for purposes of CAA section 107(d)(3)(E)(ii) and therefore need not be approved into the SIP before EPA can redesignate the area. In the 1992 General Preamble for Implementation of Title I, EPA set forth its interpretation of applicable requirements for purposes of evaluating redesignation requests when an area is attaining a standard. See 57 FR 13498, 13564 (April 16, 1992). EPA noted that the requirements for RFP and other measures designed to provide for attainment do not apply in evaluating redesignation requests because those nonattainment planning requirements “have no meaning” for an area that is attaining the standard. Id. This interpretation was also set forth in the Calcagni Memo. EPA's understanding of section 172 also forms the basis of its Clean Data Policy, articulated with regard to the 2010 1-hour SO 2 NAAQS in the SO 2 Nonattainment Area Guidance, which suspends a state's obligation to submit most of the attainment planning requirements that would otherwise apply. Therefore, these section 172(c) nonattainment planning requirements are not applicable for purposes of evaluating Florida's redesignation request if EPA finalizes its proposal to incorporate the permit limits and associated compliance and monitoring parameters into the SIP once they become enforceable at the state level on August 31, 2019. Specifically, the RACT/RACM requirement under 172(c)(1); the RFP requirement under section 172(c)(2), which is defined as progress that must be made toward attainment; the requirement under section 172(c)(6) that the SIP contain control measures necessary to provide for attainment of the standard; and the requirement to submit section 172(c)(9) contingency measures, which are measures to be taken if the area fails to make reasonable further progress to attainment, would not be applicable.

Section 172(c)(3) requires submission for approval of a comprehensive, accurate, and current inventory of actual emissions. As discussed in Section VII.A, EPA is proposing to approve Florida's base-year emissions inventory for the Hillsborough-Polk Area.

Section 172(c)(4) requires the identification and quantification of allowable emissions for major new and modified stationary sources to be allowed in an area, and section 172(c)(5) requires source permits for the construction and operation of new and modified major stationary sources anywhere in the nonattainment area. EPA has a longstanding interpretation that because NNSR is replaced by PSD upon redesignation, nonattainment areas seeking redesignation to attainment need not have a fully approved part D NNSR program in order to be redesignated. See Nichols Memorandum. Florida currently has a fully-approved PSD and part D NNSR program in place in Chapters 62-204, 62-210, and 62-212 of the Florida Administrative Code. Florida's PSD program will become effective in the Area upon redesignation to attainment. Nonetheless, as discussed above, Florida has certified that its SIP-approved NNSR program meets the requirements of section 172(c)(5) for the Hillsborough-Polk Area and EPA is proposing to concur with that certification.

Section 172(c)(7) requires the SIP to meet the applicable provisions of section 110(a)(2). As noted above, EPA believes that Florida's SIP meets the requirements of section 110(a)(2) applicable for purposes of redesignation.

Finally, section 172(c)(8) allows a state to use equivalent modeling, emission inventory, and planning procedures if such use is requested by the state and approved by EPA. Florida has not requested the use of equivalent techniques under section 172(c)(8).

Section 176(c) of the CAA requires states to establish criteria and procedures to ensure that federally supported or funded projects conform to the air quality planning goals in the applicable SIP. The requirement to determine conformity applies to transportation plans, programs, and projects that are developed, funded, or approved under title 23 of the United States Code (U.S.C.) and the Federal Transit Act (transportation conformity) as well as to all other federally supported or funded projects (general conformity). State transportation conformity SIP revisions must be consistent with federal conformity regulations relating to consultation, and enforceability that EPA promulgated pursuant to its authority under the CAA.

EPA believes that it is reasonable to interpret the conformity SIP requirements  24 as not applying for purposes of evaluating the redesignation request under section 107(d) because state conformity rules are still required after redesignation and federal conformity rules apply where state rules have not been approved. See Wall v. EPA, 265 F.3d 426 (upholding this interpretation) (6th Cir. 2001); See 60 FR 62748 (December 7, 1995). Furthermore, due to the relatively small, and decreasing, amounts of sulfur in gasoline and on-road diesel fuel, EPA's transportation conformity rules provide that they do not apply to SO 2 unless either the EPA Regional Administrator or the director of the state air agency has found that transportation-related emissions of SO 2 as a precursor are a significant contributor to a SO 2 or fine particulate matter (PM 2.5 ) nonattainment problem, or if the SIP has established an approved or adequate budget for such emissions as part of the RFP, attainment, or maintenance strategy. See 40 CFR 93.102(b)(1), (2)(v); SO 2 Nonattainment Area Guidance. Neither of these conditions have been met; therefore, EPA's transportation conformity rules do not apply to SO 2 for the Area. For these reasons, EPA proposes to find that Florida has satisfied all applicable requirements for purposes of redesignation of the Hillsborough-Polk Area under section 110 and part D of title I of the CAA.

EPA has fully approved the applicable Florida SIP for the Hillsborough-Polk Area under section 110(k) of the CAA for purposes of redesignation. EPA may rely on prior SIP approvals in approving a redesignation request ( see 1992 Calcagni Memorandum at p. 3, Southwestern Pennsylvania Growth Alliance v. Browner, 144 F.3D 984, 989-90 (6th Cir. 1998); Wall, 265 F.3d 426) plus any additional measures it may approve in conjunction with a redesignation action. See 68 FR 25426 (May 12, 2003) and citations therein.

For redesignating a nonattainment area to attainment, the CAA requires EPA to determine that the air quality improvement in the area is due to permanent and enforceable reductions in emissions resulting from implementation of the SIP, applicable Federal air pollution control regulations, and other permanent and enforceable reductions (CAA section 107(d)(3)(E)(iii)). As discussed above, EPA proposes to determine that the modeled attainment in the Hillsborough-Polk Area will be due to emission reductions resulting from compliance with the SO 2 permit limits at Mosaic New Wales and Mosaic Bartow. These limits will become permanent and enforceable measures if EPA finalizes its proposal to approve and incorporate them into the SIP. See section VI, above, for more discussion on these permit limits, the permit conditions proposed for approval and incorporation into the SIP, and the emissions reductions resulting from the limits.

For redesignating a nonattainment area to attainment, the CAA requires EPA to determine that the area has a fully approved maintenance plan pursuant to section 175A of the CAA. See CAA section 107(d)(3)(E)(iv). In conjunction with its request to redesignate the Hillsborough-Polk Area to attainment for the 2010 1-hour SO 2 NAAQS, Florida submitted a draft SIP revision to provide for the maintenance of the 2010 1-hour SO 2 NAAQS for at least 10 years after the effective date of redesignation to attainment. EPA is proposing to determine that this maintenance plan meets the requirements for approval under section 175A of the CAA; however, EPA cannot take final action to approve the maintenance plan unless it finalizes its proposal to approve and incorporate the SO 2 permit limits into the SIP.

Section 175A of the CAA sets forth the elements of a maintenance plan for areas seeking redesignation from nonattainment to attainment. Under section 175A, the plan must demonstrate continued attainment of the applicable NAAQS for at least 10 years after the Administrator approves a redesignation to attainment. Eight years after the redesignation, the state must submit a revised maintenance plan demonstrating that attainment will continue to be maintained for the 10 years following the initial 10-year period. To address the possibility of future NAAQS violations, the maintenance plan must contain contingency measures as EPA deems necessary to assure prompt correction of any future 2010 1-hour SO 2 violations. The 1992 Calcagni Memorandum provides further guidance on the content of a maintenance plan, explaining that a maintenance plan should address five requirements: The attainment emissions inventory; maintenance demonstration; monitoring; verification of continued attainment; and a contingency plan. As is discussed more fully below, EPA is proposing to determine that Florida's maintenance plan includes all the necessary components and is thus proposing to approve it as a revision to the Florida SIP.

An attainment inventory identifies a level of emissions in the area that is sufficient to attain the NAAQS. As discussed above, modeled attainment of the SO 2 NAAQS in the Hillsborough-Polk Area will be due to emissions reductions resulting from compliance with the SO 2 permit limits at Mosaic New Wales and Mosaic Bartow. Because the permit limits are not state-enforceable until August 31, 2019, Florida based its attainment emissions inventory on projected emissions from the year after the permit limits become state-enforceable ( i.e., 2020) rather than on actual emission levels that reflect complete implementation of the emission reduction measures. 25

The largest point sources of SO 2 in or near the Hillsborough-Polk Area are Mosaic New Wales and Mosaic Bartow, which combined, account for over 99 percent of the SO 2 emissions in or near the Area. Florida projected emissions from both sources to 2020 by first analyzing the average utilization factors ( i.e., the ratios of historical actual to allowable emissions rates) for the SAPs from 2012-2016. Over this time period, both sources emitted between approximately 60 percent and 75 percent of each facility's total allowable emissions rate. FDEP selected the high end of this range (75 percent) as the utilization factor and then applied it to the 2020 allowable emissions rate of 4,774 tpy and 4,818 tpy for Mosaic New Wales and Mosaic Bartow, respectively, to project 2020 actual emissions for both Mosaic sources. Tables 5 and 6 below provide for the historic emissions data ( i.e., actuals, allowables, and the average percentage of allowables) for both facilities as well as 2020 allowables and 2020 projected actuals. The projected 2020 actual emissions for Mosaic New Wales and Mosaic Bartow are 3,581 tpy and 3,614 tpy, respectively, resulting in total point source projected actual emissions of 7,195 tons.

Table 7 includes the complete inventory of all source categories for the 2020 attainment year. A discussion of the development of the 2020-2032 projections is found in the next section.

Maintenance of the 2010 1-hour SO 2 standard is demonstrated either by showing that future emissions will not exceed the level of the attainment emissions inventory year or by modeling to show that the future mix of sources and emission rates will not cause a violation of the NAAQS. As discussed in the SO 2 Nonattainment Area Guidance, an EPA-approved demonstration of attainment that relies on air quality dispersion modeling using maximum allowable emissions, such as Florida's modeling, can generally be expected to demonstrate that the standard will be maintained for the requisite 10 years and beyond without regard to any changes in operation rate of the pertinent sources that do not involve increases in maximum allowable emissions. 26 EPA believes that the Hillsborough-Polk Area will continue to maintain the 2010 1-hour SO 2 standard through year 2032 because the relevant sources are required to comply with the permit limits that air quality modeling shows will maintain the standard.

To evaluate maintenance through 2032 and satisfy the 10-year interval required in CAA section 175A, Florida elected to prepare projected emissions inventories for 2020-2032. The emissions inventories are composed of the following general source categories: point, area, non-road mobile, and on-road mobile. The emissions inventories were developed consistent with EPA guidance and are summarized in Table 8.

Florida estimated 2020 point source emissions as discussed above and held those emissions steady through 2032 because it is not aware of and does not anticipate any future development within the Hillsborough-Polk Area that would increase SO 2 emissions. Furthermore, following achievement of the emission levels that Florida demonstrated yield attainment, actual emissions from Mosaic New Wales and Mosaic Bartow must remain at or below these levels.

Florida estimated on-road mobile emissions utilizing the most recent version of EPA's Motor Vehicle Emission Simulator (MOVES2014a). The State developed MOVES inputs for the 2017 base year using county-level traffic modeling from the Florida Department of Transportation and vehicle population information from the Florida Department of Highway Safety and Motor Vehicles (FLDHSMV). Where county-level data was not available, FDEP used MOVES default data. To develop MOVES inputs for future years, FDEP calculated the linear trend of vehicle population growth using FLDHSMV data from 2008 to 2018 and projected it to future years. FDEP apportioned the Hillsborough County and Polk County results of the MOVES2014a model runs for each year to the Hillsborough-Polk Area by using the fraction of the county land area contained within the boundaries of the Hillsborough-Polk Area. 27

Estimates for the projected future emissions inventories for area and non-road categories were calculated by multiplying the area and non-road 2014 NEI data  28 by the projected increase in population in Hillsborough and Polk Counties in 2020 and each interim year. The population data for 2014 and 2017 were obtained from the US Census Bureau. Population projections for 2020 through 2032 were developed by the Florida Bureau of Economic and Business Research. For years where projections were not available, the projections were interpolated. 29 County level emissions were apportioned to the Hillsborough-Polk Area using the fraction of the county land area within the Hillsborough-Polk Area boundary.

Florida compared projected emissions for the final year of the maintenance plan (2032) to the 2020 projected actuals emissions inventory and compared interim years to the 2020 projected actuals inventory to demonstrate continued maintenance of the 2010 1-hour SO 2 standard. For additional information regarding the development of the projected inventories, see Florida's February 15, 2019, draft SIP submittal.

In situations where local emissions are the primary contributor to nonattainment, such as the Hillsborough-Polk Area, if the future projected emissions in the nonattainment area remain at or below the baseline emissions in the nonattainment area, then the related ambient air quality standards should not be violated in the future. Florida has projected emissions as described previously, and these projections indicate that emissions in the Hillsborough-Polk Area will remain at nearly the same levels as those in the attainment year inventory for the duration of the maintenance plan. While these projections include a very small increase in area and nonroad emissions from 2020 to 2032 (3.25 tons), the increase is negligible when compared to the total emissions inventory, and EPA does not believe that this projected increase should cause a violation of the 2010 1-hour SO 2 NAAQS through 2032. This belief is supported by the fact that Florida does not anticipate any future development within the Hillsborough-Polk Area that could potentially increase SO 2 emissions and the fact that any increases in actual emissions from Mosaic New Wales or Mosaic Bartow must remain below their permitted levels. Furthermore, any potential future SO 2 emissions sources that may locate in or near the Area would be required to comply with the FDEP's approved NSR permitting programs to ensure that the Area will continue to meet the NAAQS.

As noted above, the Hillsborough-Polk Area was designated nonattainment based on air dispersion modeling; there is no ambient air monitor in the Area. Therefore, the maintenance plan does not contain provisions for continued operation of air quality monitors to verify attainment status. As discussed in the following section, Florida will verify continued attainment using emissions data from Mosaic New Wales and Mosaic Bartow and an evaluation of air dispersion modeling inputs.

The State of Florida, through FDEP, has the legal authority to enforce and implement all measures necessary to attain and maintain the NAAQS. Section 403.061(35), Florida Statutes, authorizes the Department to “exercise the duties, powers, and responsibilities required of the state under the federal Clean Air Act.” This includes implementing and enforcing all measures necessary to attain and maintain the NAAQS.

Because there is no ambient air SO 2 monitor in the Hillsborough-Polk Area, Florida will verify continued attainment of the 2010 1-hour SO 2 standard through an annual review of emissions data and air dispersion modeling inputs and assumptions for Mosaic New Wales and Mosaic Bartow. Florida will use emissions data from the required AOR submittals from both facilities to verify continued compliance with the permitted limits used to model attainment of the NAAQS in the Area. Actual emissions must remain below permitted levels, which will be made permanent and federally-enforceable if EPA finalizes its proposal to approve and incorporate the permit limits into the SIP.

Florida will evaluate the inputs and assumptions used to model attainment by assessing emissions data and basic air dispersion inputs for the Area on an annual basis. Prior to each annual review, FDEP will contact EPA to discuss the emissions data and air dispersion modeling inputs and assumptions necessary for evaluation. FDEP will verify attainment using the emissions data and air dispersion modeling inputs and assumptions identified by EPA as a result of coordination with FDEP. FDEP anticipates that the inputs and assumptions may include stack parameters for all modeled sources; significant changes to land use in the area; a limited review of meteorology; changes in operation that lead to a temporal or spatial distribution of emissions; onsite construction that change building configuration/ dimensions or add new buildings; changes in fuel that would alter emissions; and changes in ambient background concentrations used in the cumulative modeling analysis.

Based on its review of source emissions data and air dispersion modeling inputs and assumptions, FDEP will provide an annual report to EPA on or before July 1st that certifies whether the Hillsborough-Polk Area is continuing to attain the 2010 1-hour SO 2 NAAQS. This annual report will provide: (1) The status of ongoing compliance with the SO 2 permit limits for Mosaic New Wales and Mosaic Bartow; (2) a review of annual emissions data for these facilities; (3) a review of the air dispersion modeling inputs and assumptions identified by EPA as a result of coordination with FDEP; (4) a certification that there are no changes in the air dispersion modeling inputs and assumptions that could result in a modeled violation; and (5) all supporting documentation and data evaluated by FDEP to prepare its annual report.

If FDEP certifies that there are no changes in the modeling inputs and assumptions that could result in modeled violations, and EPA concurs, no additional action or information is necessary to verify continued attainment. If FDEP or EPA identifies a change in the modeling inputs and assumptions that could cause a modeled violation, FDEP, in coordination with EPA, will further evaluate the modeling inputs and assumptions and complete this evaluation no later than 30 days after identifying the changes. If this evaluation continues to indicate that a modeled violation could occur, FDEP will conduct air dispersion modeling no later than 30 days after completing the evaluation. If the revised model does not produce a modeled violation, then no additional action or information is necessary to verify continued attainment. If the revised model produces a modeled violation of the 2010 1-hour SO 2 standard within the nonattainment area, the State will implement the relevant contingency measures as discussed below.

Section 175A of the CAA requires that a maintenance plan include contingency measures as EPA deems necessary to assure that the state will promptly correct a violation of the NAAQS that occurs after redesignation. The maintenance plan should identify the contingency measures to be adopted, a schedule and procedure for adoption and implementation, and a time limit for action by the state. In cases where attainment revolves around compliance of a single source or a small set of sources with emissions limits shown to provide for attainment, EPA interprets “contingency measures” to mean that the state agency has a comprehensive program to identify sources of violations of the SO 2 NAAQS and to undertake aggressive follow-up for compliance and enforcement, including expedited procedures for establishing enforceable consent agreement pending the adoption of revised SIPs. 30 A state should also identify specific indicators to be used to determine when the contingency measures need to be implemented. The maintenance plan must include a requirement that a state will implement all measures with respect to control of the pollutant that were contained in the SIP before redesignation of the area to attainment in accordance with section 175A(d).

The contingency plan included in the maintenance plan contains triggers to determine when contingency measures are needed and what kind of measures should be used. The Title V operating permits for Mosaic New Wales and Mosaic Bartow require the facilities to report any non-compliance with permit conditions or limitations. 31 Upon receipt of such a report from Mosaic New Wales and/or Mosaic Bartow that identifies noncompliance with the SO 2 permit limits, FDEP will immediately begin a 30-day evaluation period to diagnose the cause of noncompliance. This will be followed by a 30-day consultation period with Mosaic New Wales and/or Mosaic Bartow to develop and implement operational changes identified during the consultation period to prevent any future noncompliance with the SO 2 permit limits. These changes could include, but would not be limited to, physical or operational reduction of production capacity, as appropriate. Any necessary changes would be implemented as soon as practicable, with at least one measured implemented during the full system audit implemented within 18-24 months of the noncompliance with the SO 2 permit limits, in order to bring the Area into attainment as expeditiously as possible.

FDEP would rely on its authority outlined in Rule 62-4.080, F.A.C., which expressly authorizes FDEP to require the permittee to conform to new or additional conditions if there is a showing of any change in the environment or surrounding conditions that requires a modification to conform to applicable air quality standards. Depending on the present circumstances, FDEP would exercise this authority to work expeditiously with Mosaic New Wales and Mosaic Bartow to make necessary permit modifications. If a permit modification is deemed necessary, FDEP would issue a final permit within the statutory timeframes in Sections 120 and 403, Florida Statutes, and any new permit limits required by such a permit would be submitted to EPA as a SIP revision.

If revised air dispersion modeling performed during the verification of continued attainment process produces a violation of the 2010 1-hour SO 2 standard due to changes in modeling inputs and assumptions, FDEP will immediately begin a 30-day evaluation period to diagnose the cause of the modeled violation, including consultation with any emission source(s) that FDEP believes may be a cause of the modeled violation. At the completion of this evaluation period, FDEP will begin to take necessary measures to remedy the modeled violation of the 2010 1-hour SO 2 standard, which may include mandating physical or operational changes at emission sources. Any necessary changes would be implemented as soon as practicable, with at least one measure implemented within 18-24 months of the modeled violation, in order to bring the area into modeled attainment as expeditiously as possible.

EPA has preliminarily concluded that the maintenance plan adequately addresses the five basic components of a maintenance plan: The attainment emissions inventory; maintenance demonstration; monitoring; verification of continued attainment; and a contingency plan. Therefore, EPA proposes to determine that the maintenance plan for the Area meets the requirements of section 175A of the CAA and proposes to incorporate the maintenance plan into the Florida SIP. EPA cannot take final action to approve the maintenance plan unless it finalizes its proposal to approve and incorporate the SO 2 permit limits into the SIP.

On January 9, 2018 (effective April 9, 2018), EPA designated the Mulberry Area as unclassifiable for the 2010 1-hour SO 2 NAAQS. See 83 FR 1098. EPA designated the Area as unclassifiable based on uncertainty regarding the potential for SO 2 emissions from Mosaic Bartow to contribute to the Hillsborough-Polk Area. EPA's rationale for this designation is outlined in the TSD associated with EPA's designation for the Mulberry Area. 32

Section 107(d)(3) of the CAA provides the framework for changing the area designations for any NAAQS pollutants. Section 107(d)(3)(A) provides that the Administrator may notify the Governor of any state that the designation of an area should be revised “on the basis of air quality data, planning and control considerations, or any other air quality-related considerations the Administrator deems appropriate.” The Act further provides in section 107(d)(3)(D) that even if the Administrator has not notified a state Governor that a designation should be revised, the Governor of any state may, on the Governor's own motion, submit a request to revise the designation of any area, and the Administrator must approve or deny the request.

When approving or denying a request to redesignate an area, EPA bases its decision on the air quality data for the area as well as the considerations provided under section 107(d)(3)(A). 33 For the 1-hour SO 2 NAAQS, EPA may also base its decision on relevant modeling analyses as discussed in section VII.C, above. In keeping with section 107(d)(1)(A), areas that are redesignated to attainment/unclassifiable must meet the requirements for attainment areas and thus must meet the relevant NAAQS. 34 In addition, the area must not contribute to ambient air quality in a nearby area that does not meet the NAAQS.

As noted above, EPA designated the Mulberry Area as unclassifiable due to uncertainty regarding the potential contribution of emissions from Mosaic Bartow to the Hillsborough-Polk Area. After EPA finalized the designation, FDEP established permits requiring catalyst installation and compliance with the SO 2 permit limits for Mosaic New Wales and Mosaic Bartow. As discussed above, EPA has reviewed the modeling based on CEVs which, when adjusted, provide for the 24-hour adjusted emission caps of 1,100 lb/hr and 1,138 lb/hr for New Wales and Bartow, respectively. To provide for an additional margin of safety in its air dispersion modeling, Florida slightly lowered the maximum 24-hour emission caps to establish final multi-unit permit limits of 1,090 lb/hr and 1,100 lb/hr for New Wales and Bartow, respectively. EPA believes that the modeling results relying on the slightly lowered permit limits appropriately characterize the air quality in the Mulberry Area and that this modeling demonstrates that the Mulberry Area will have attained the 1-hour SO 2 standard as a result of compliance with these limits at Mosaic New Wales and Mosaic Bartow. Therefore, EPA proposes to redesignate the Mulberry Area to attainment/unclassifiable for the SO 2 NAAQS. EPA cannot redesignate the Mulberry Area to attainment/unclassifiable unless it finalizes its proposal to approve and incorporate the permit limits and associated compliance and monitoring parameters into the SIP.

Approval and incorporation of the Mosaic New Wales and Mosaic Bartow permit conditions described in Section VI, above, into the SIP would make them permanent and federally enforceable.

Approval of the base-year emissions inventory would satisfy the requirements of CAA section 173(c)(3) for the Hillsborough-Polk Area and incorporate that inventory into the SIP. Concurrence with Florida's certification that prior EPA rulemaking has approved NNSR rules that require NNSR for the Hillsborough-Polk Area for so long as the Area is designated nonattainment would satisfy CAA section 173(c)(5).

Approval of Florida's redesignation request for the Hillsborough-Polk Area would change the legal designation of the portions of Hillsborough and Polk Counties that are within the Hillsborough-Polk Area, as found at 40 CFR part 81, from nonattainment to attainment for the 2010 1-hour SO 2 NAAQS. Approval of Florida's associated maintenance plan SIP revision would incorporate a plan for maintaining the 2010 1-hour SO 2 NAAQS in the Hillsborough-Polk Area through 2032 into the SIP.

Lastly, approval of Florida's redesignation request for the Mulberry Area would change the legal designation of the portion of Polk County that is within the Mulberry Area, as found at 40 CFR part 81, from unclassifiable to attainment/unclassifiable for the 2010 1-hour SO 2 NAAQS.

EPA is proposing to include in a final EPA rule regulatory text that includes incorporation by reference. In accordance with requirements of 1 CFR 51.5, EPA is proposing to incorporate by reference into Florida's SIP the following conditions from Permit No. 1050046-050-AC issued by FDEP to Mosaic Bartow with an effective date of July 3, 2017: (1) Section III, Subsection A, Specific Condition 3 (as administratively corrected by Permit No. 1050046-063-AC with an effective date of January 11, 2019);  35 (2) Section III, Subsection A, Specific Condition 4;  36 and (3) Section III, Subsection A, Specific Condition 5. 37 In accordance with requirements of 1 CFR 51.5, EPA is also proposing to incorporate by reference into Florida's SIP the following conditions from Permit No. 1050059-106-AC issued by FDEP to Mosaic New Wales with an effective date of October 30, 2017: (1) Section III, Subsection A, Specific Condition 3;  38 (2) Section III, Subsection A, Specific Condition 4 (as administratively corrected by Permit No. 1050059-114-AC with an effective date of January 11, 2019);  39 and (3) Section III, Subsection A, Specific Condition 5. 40 EPA has made, and will continue to make, these materials generally available through www.regulations.gov and at EPA Region 4 office (please contact the person identified in the FOR FURTHER INFORMATION CONTACT section of this preamble for more information).

EPA is proposing to approve SIP revisions provided by Florida related to the 2010 1-hour SO 2 NAAQS. Specifically, EPA is proposing to approve Florida's December 1, 2017, SIP revision (as supplemented through the February 15, 2019, draft SIP revision) which includes SO 2 permit limits and associated compliance and monitoring provisions for Mosaic New Wales and Mosaic Bartow. The December 1, 2017, SIP revision also includes a modeling analysis to demonstrate that the Hillsborough-Polk Area will attain the SO 2 NAAQS as a result of compliance with these permit limits.

EPA is also proposing to approve, through parallel processing, a draft February 15, 2019 request to redesignate the Hillsborough-Polk Area to attainment for the SO 2 NAAQS and associated SIP revision containing the State's plan for maintaining attainment of the 2010 1-hour SO 2 standard in that Area. Florida also submitted draft SIP revisions on February 15, 2019, to revise the modeling analysis in the 2017 SIP revision, provide a base-year emissions inventory for the Area, and certify that the Area meets NNSR requirements. In addition, EPA is proposing to approve, through parallel processing, Florida's draft February 15, 2019 request to redesignate the Mulberry Area to attainment/unclassifiable for the 2010 SO 2 NAAQS.

EPA is proposing to approve these requests and SIP revisions because the Agency has made the preliminary determination that they meet the requirements of the CAA.

Under the CAA, redesignation of an area to attainment and the accompanying approval of a maintenance plan under section 107(d)(3)(E) as well as the redesignation of an area to attainment/unclassifiable are actions that affect the status of a geographical area and do not impose any additional regulatory requirements on sources beyond those imposed by state law. A redesignation to attainment or to attainment/unclassifiable does not in and of itself create any new requirements, but rather results in the applicability of requirements contained in the CAA for areas that have been redesignated to attainment or attainment/unclassifiable, respectively. Moreover, the Administrator is required to approve a SIP submission that complies with the provisions of the Act and applicable Federal regulations. See 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in reviewing SIP submissions, EPA's role is to approve state choices, provided that they meet the criteria of the CAA. Accordingly, these proposed actions merely propose to approve state law as meeting Federal requirements and do not impose additional requirements beyond those imposed by state law. For this reason, these proposed actions:

• Are not significant regulatory actions subject to review by the Office of Management and Budget under Executive Orders 12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21, 2011);

• Are not Executive Order 13771 (82 FR 9339, February 2, 2017) regulatory actions because redesignations and SIP approvals are exempted under Executive Order 12866;

• Do not impose information collection burdens under the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq. );

• Are certified as not having a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et seq. );

• Do not contain any unfunded mandates or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4);

• Do not have Federalism implications as specified in Executive Order 13132 (64 FR 43255, August 10, 1999);

• Are not economically significant regulatory actions based on health or safety risks subject to Executive Order 13045 (62 FR 19885, April 23, 1997);

• Are not significant regulatory actions subject to Executive Order 13211 (66 FR 28355, May 22, 2001);

• Are not subject to requirements of Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272 note) because application of those requirements would be inconsistent with the CAA; and

• Will not have disproportionate human health or environmental effects under Executive Order 12898 (59 FR 7629, February 16, 1994).

These proposed actions do not apply on any Indian reservation land or in any other area where EPA or an Indian tribe has demonstrated that a tribe has jurisdiction. In those areas of Indian country, these proposed actions do not have tribal implications as specified by Executive Order 13175 (65 FR 67249, November 9, 2000), nor will they impose substantial direct costs on tribal governments or preempt tribal law.

On May 3, 2019, we published a proposed rule (84 FR 19013) to reclassify the American burying beetle as a threatened species under the Act (16 U.S.C. 1531 et seq. ) and to adopt a rule under section 4(d) of the Act (a “4(d) rule”) to provide for the conservation of the species. The proposed rule had a 60-day public comment period, ending July 2, 2019. During the comment period for the proposed rule, we received a request for a public hearing. We are, therefore, reopening the comment period on our proposed rule to reclassify the American burying beetle as a threatened species and to adopt a 4(d) rule for the species for 30 days (see DATES , above), to hold a public informational meeting and a public hearing and to allow the public an additional opportunity to provide comments on our proposal.

For a description of previous Federal actions concerning the American burying beetle, please refer to the May 3, 2019, proposed rule (84 FR 19013).

We will accept comments and information during this reopened comment period on our proposed rule to reclassify the American burying beetle as a threatened species and to adopt a 4(d) rule to provide for the conservation of the species. We will consider information and recommendations from all interested parties. We intend that any final action resulting from the proposal will be based on the best scientific and commercial data available and will be as accurate and as effective as possible. Our final determination will take into consideration all comments and any additional information we receive during all comment periods on the proposed rule. Therefore, the final decision may differ from the May 3, 2019, proposed rule, based on our review of all information we receive during the comment periods.

If you already submitted comments or information on the May 3, 2019, proposed rule, please do not resubmit them. Any such comments are incorporated as part of the public record of the rulemaking proceeding, and we will fully consider them in the preparation of our final determination.

Comments should be as specific as possible. Please include sufficient information with your submission (such as scientific journal articles or other publications) to allow us to verify any scientific or commercial information you assert. Please note that submissions merely stating support for, or opposition to, the action under consideration without providing supporting information, although noted, will not meet the standard of best available scientific and commercial data. Section 4(b)(1)(A) of the Act directs that determinations as to whether any species is endangered or threatened must be made “solely on the basis of the best scientific and commercial data available.”

You may submit your comments and materials by one of the methods listed in ADDRESSES . We request that you send comments only by the methods described in ADDRESSES . You may also provide your comments through verbal testimony during the public hearing (see DATES , ADDRESSES , and Public Hearing in this document).

If you submit information via http://www.regulations.gov, your entire submission—including your personal identifying information—will be posted on the website. If your submission is made via a hardcopy that includes personal identifying information, you may request at the top of your document that we withhold this information from public review. However, we cannot guarantee that we will be able to do so. We will post all hardcopy submissions on http://www.regulations.gov.

Comments and materials we receive, as well as supporting documentation we used in preparing this proposed rule, will be available for public inspection on http://www.regulations.gov at Docket No. FWS-R2-ES-2018-0029, or by appointment, during normal business hours at U.S. Fish and Wildlife Service, Oklahoma Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT ).

Our final determination concerning the proposed action will take into consideration all written comments we receive during the open comment periods, and comments received during the public hearing. These comments will be included in the public record for this rulemaking, and we will fully consider them in the preparation of our final determination.

We are holding a public informational meeting followed by a public hearing on the date listed in DATES at the location listed in ADDRESSES . We are holding the public hearing to provide interested parties an opportunity to present verbal testimony (formal, oral comments) or hand-deliver their prepared written comments regarding the May 3, 2019 (84 FR 19013), proposed rule to reclassify the American burying beetle as a threatened species and to adopt a 4(d) rule to provide for the conservation of the species. A public hearing is not, however, an opportunity for dialogue with the Service or its contractors; it is a forum for accepting formal verbal testimony. In the event there is a large attendance, the time allotted for oral statements may be limited. Therefore, anyone wishing to make an oral statement at the public hearing for the record is encouraged to provide a prepared written copy of their statement to us at the hearing. Speakers can sign up at the hearing if they desire to make an oral statement. Oral and written statements receive equal consideration. There are no limits on the length of written comments submitted to us.

Persons with disabilities requiring reasonable accommodations to participate in the public hearing should contact the Oklahoma Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT ). Reasonable accommodation requests should be received at least 3 business days prior to the hearing to help ensure availability. Please direct all requests for sign language interpreting services to the Oklahoma Ecological Services Field Office (see FOR FURTHER INFORMATION CONTACT ) by close of business September 18, 2019.

The primary authors of this document are the Ecological Services staff of the Southwest Regional Office, U.S. Fish and Wildlife Service.

The authority for this action is the Endangered Species Act of 1973, as amended (16 U.S.C. 1531 et seq. ).